Pool Corp (POOL) 2008 Q4 法說會逐字稿

Good morning, my name is Sarah and I will be your conference operator today. At this time I would like to welcome everyone to the Pool Corporation's fourth-quarter 2008 earnings 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). At this time I'd like to turn the call over to the Company's Vice President and Chief Financial Officer, Mr. Mark Joslin. Mr. Joslin, you may begin your conference.

Thank you, Sarah, good morning, everyone, and welcome to our year-end conference call. As usual 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 2009 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 which, by the way, we'll be putting a new K out there for 2008 in just under two weeks. Now I'll turn the call over to our President and CEO, Manny Perez de la Mesa. Manny?

Thank you, Mark. Well, we are certainly being challenged. Not only are the dynamics that have affected new pool and irrigation construction impacting our business, but the liquidity crisis and economic meltdown are also impacting some replacement activity as well. Yet through it all we continue to persevere and continuously look for ways to increase cash flow generation and earnings.

That the industry has weathered an unprecedented 60% plus decline in new pool and irrigation construction since 2005 while we were realizing our biggest year in cash flow from operations is a testament to the resiliency of our business model and the capability of our team.

Overall, our earnings decreased by 8% or $0.11 per diluted share in 2008 when excluding the change in equity earnings from our investment in Latham and 2008 acquisitions. Again, despite the meltdown all around us. Cash flow from operations reached a new high, surpassing $93 million.

In 2007 we entered an unprecedented time in the history of our young industry. Since then we have focused on five areas that would optimize our position for both the short- and long-term.

One, continued focus on the customer to ensure that we continue to distinguish ourselves as a value added distributor intent on promoting the growth and success of our customers' businesses which has become increasingly important in these challenging times.

Two, increase gross margins to capture just compensation for the value provided through improved pricing discipline and enhanced sales, sourcing and purchasing execution.

Three, to rationalize expenses commensurate with market demand without compromising our ability to serve or participate in a market recovery. Already being frugal by most corporate standards we still found ways to economize and adjust.

Four, to use credit wisely to facilitate sales, but with the checks and balances necessary to properly balance risk and potential return.

And five, to maximize cash flow through judicious management and allocation of capital.

In addition, we continue to evaluate opportunities for future growth with strategic and opportunistic transactions like the NPT acquisition completed in the first quarter of 2008. In these respects we succeeded in 2008 yet using EPS as the metric we still fell short as our overall base business sales decreased 9%, which decrease we could not quite make up for with our higher gross margins and lower expenses.

In the Blue, or SCP Superior portion of our business, our base business sales were down 16% in the fourth quarter and down 8% for the year. Of the larger markets Texas held up the best in 2008 with a decline of only 1% for the year, although weakness was evident in the fourth quarter when sales declined by 11%.

Florida began to reflect the resiliency in a market where new pool construction has decreased by 75% since 2005 as sales declined by 9% for the year but only 8% in the quarter. California had similar results with a sales decline of 11% for the year and 12% in the quarter. Arizona, the youngest market in terms of the age of the install base, had a sales decrease of 16% for the year and 24% in the quarter.

A colder fourth quarter in the rest of the markets, coupled with all the known economic and political distractions, resulted in a sales decline of 22% in the quarter to bring the year down in these markets to a 7% decline.

Turning to the Green or Horizon side of our business, the sales decreases were accentuated by a business mix that is more weighted toward new construction. Here base business sales declined by 21% in the quarter and 18% for the year. Similar to SCP Superior Texas held up best, declining 4% for the year and the same 11% in the quarter while California, Arizona and the rest of the market declined 18% to 26% for the year and 21% to 21% (sic) for the quarter.

Evidence of success in our sales execution, despite the above declines, is the sales growth realized in chemicals, parts and maintenance items, which unit sales growth exceeded the 2% to 3% growth in the install base. Altogether we estimate that maintenance repair and replacement product sales represented at least 80% of our total sales in 2008. This high proportion of our sales in nondiscretionary and partially discretionary products should continue to mitigate the adverse external environment.

For 2009 we anticipate that it will continue to be a very challenging environment. While we work to grow market share, expand gross margins, reduce expenses and maximize cash flow we fully appreciate that times are tough. In the very near term we see a lot of caution on the part of snow belt customers that are choosing to stock their stores when it warms up as opposed to in anticipation of pool openings. Logically with consumer financing largely unavailable, interested pool players are on hold which will result in another drop in new pool construction in 2009.

On the other hand, there are positives as well. The year round southern California and Florida peninsula markets are tracking at sales rates close to last year's January/February, perhaps a sign of what the other market will be like when it warms up. In addition, the so-called stimulus and financial capitalization programs will presumably find their way to the consumer at which point some deferred replacement retrofit activity should take place.

While we currently don't anticipate that our earnings will be significantly different in 2009, we should have a much better gauge of what 2009 will look like when we report our first-quarter earnings in April.

Before concluding my remarks I'd like to recognize that we have the most talented and dedicated team of employees in the industry. It is my humble privilege to serve as their leader. I believe that these challenging times will, in the long run, be very good for our industry and especially good for our company. With that I'll turn the call over -- back to Mark for his financial commentary.

Thank you, Manny. First I'd like to reiterate a point that we made in our press release related to our EPS for the year. Included in our reported EPS of $1.18 was a $0.06 change in EPS from the results of our equity investment in Latham as well as $0.02 of dilution from our first-quarter acquisitions. Excluding these changes our full-year EPS would have been $0.08 higher, the majority of that impact occurring in the fourth quarter.

Now I'd like to comment on our operating expenses. As we've mentioned on past calls, in our release and in Manny's comments, operating expense reductions have been and continue to be a major focus for us as we adjust for current and anticipated market conditions without sacrificing a key long-term objective of growing our market share.

Looking at the make-up of our cost structure, labor-related costs are the largest component accounting for 52% of our total 2008 operating expenses and is the area where you have the greatest ability to make meaningful adjustments. Our total labor-related costs, excluding acquisitions, declined 6% for the year and 12% in Q4. These costs are largely headcount driven and include wages, benefits and incentive compensation.

As noted in our press release, we have made good progress on reducing our headcount over the last two years through attrition and selective layoffs which is a process that has continued throughout 2008 and into 2009. So we expect further cost savings here as 2009 progresses, although not at the same Q4 '08 rate which had some nonrecurring benefits. We have also frozen salaries across the board in 2009, from Manny on down, which will result in approximately $5 million annualized cash benefits to the Company.

The next largest component of our operating cost structure is facility costs which were 15% of our 2008 cost structure and, excluding acquisitions, grew by 4% in 2008 over 2007, 2% for just the fourth quarter. The higher 2008 costs reflect the carryover of facilities added in 2007 as well as rent escalation and higher pass-through costs.

Here we've chosen to largely ride out the soft economic conditions by maintaining existing profitable facilities which continue to serve markets that are attractive in the long-term. We have been negotiating lease concessions in many instances which is a process that will continue in 2009 and help offset some cost inflation in this area.

Delivery costs net of customer charges were 6% of our 2008 operating expenses and were down 5% for the year from 2007. These costs are, of course, impacted by sales volume as well as gas prices and the number of vehicles we lease. As we've reduced our vehicle lease commitments given the market conditions and expect lower average gas prices in 2009, we expect to see cost savings benefits in this area throughout the year.

On the remainder of our operating cost we have been very aggressive about looking for ways to lower nearly every component. Some of these costs, like computers, phones and travel as examples, are headcount driven so we get an additional indirect benefit here by lowering our headcount. This should provide a better understanding of what we're doing in the area of expense management. While we may not have a headline expense reduction target specifically, I can assure you we have been and will continue to take actions which we believe will have very concrete results.

Now I'll take a few minutes to comment on Latham International. As most of you know, we hold a 38% equity investment in this company which is the largest manufacturer of packaged pools and related products. This business, with primary markets in central and northern geographies, is naturally more seasonal in nature and has seen a less severe market impact since it has less exposure to California, Florida and Arizona.

There is also a higher construction and replacement versus maintenance mix to this business, and given our expectation for continued weakness in the pool construction market in 2009, we believe our equity earnings can be negatively impacted by as much as $500,000 more in 2009 than in 2008, which would impact us most likely primarily in the third quarter.

Turning to the balance sheet, starting with accounts receivable. Our net receivables declined $26 million or 18% for the year. This reflects our slowdown in sales in Q4, a higher allowance for doubtful accounts, and a shift in emphasis from credit to more cash sales as necessitated by our customers' credit worthiness.

Our DSO at year end is measured on a trailing 12 months of receivables with 36.3 days, which was unchanged from 2008. This is quite remarkable given market conditions and speaks volumes about the balance we are achieving between extending trade credit and risk of collection losses.

As we turn the corner on the pool season we believe the majority of the 2008 collection issues are behind us as customers will begin paying off past-due balances as their seasonal business grows. Given our expectations for another year of declining consumer discretionary expenditures that will impact the industry, we remain very focused here on extending credit to those customers with the ability to repay us while aggressively pursuing past due accounts.

Moving on to inventories, our year-end inventory investment of $406 million was up 7% from 2007 or 2% excluding acquired inventories of $17 million. As we discussed in our third-quarter call, higher than normal vendor price increases prompted us to use our financial strength to make meaningful purchase commitments ahead of these price increases mostly on normal 30-day payment terms. While this reduced our operating cash flow performance at the end of 2008 we believe this will add significant value to our business in the first half of 2009.

As we move into 2009 you should know that working our inventory levels down is the key initiative for us. We have been making great progress on this so far and expect this improvement to accelerate as the season picks up. We will update you on this in two months when we release our first quarter 2009 results when I'd expect to see inventory levels below Q1 2008 levels.

As noted, our cash flow generation in 2008 was excellent and we expect similar favorable cash flow results in 2009. Although we benefited from a $30 million deferral of federal taxes due to the Gulf hurricanes, we also had the major investment in lower price inventories during the year as discussed above leading to our cash flow from operations of $93 million, up from $72 million in 2007.

We also pared back capital expenditures in 2008 by $4 million giving us $100 million in free cash flow which we used to make acquisitions, pay dividends, buy back a little stock and significantly pay down $23 million in debt by year end. Interest in our debt for the year averaged 4.8% compared to a 6% average in 2007. Currently we're paying approximately 3.5% average interest expense on our outstanding debt which we believe will certainly benefit us as we move into 2009.

Our year-end leverage and fixed charge coverage ratios, which are our two main debt covenants, remained in compliance. Our leverage ended the year at 283 -- 2.83 compared to our 3.25 covenant while our fixed charge coverage ratio of 2.48 was above our 2.25 covenant as it should be. While we expect this to tighten up over the next two quarters as we reach our normal seasonal working capital high, we expect to remain in compliance throughout this period and the rest of the year.

As reported in early January, we did amend our accounts receivable securitization agreement which was necessitated by our lower fourth-quarter credit sales and longer aging. This amendment gives us more room under some of the asset-based covenants embedded in the securitization agreement. We also lowered our maximum commitment under the agreement to $75 million from $95 million as we had no use for the additional $20 million commitment between January and the expiration of the agreement in May 2009. This is a 364 agreement and we expect to renew it again in May.

That concludes my prepared remarks. I'll turn the call over to our operator to begin our question-and-answer period.

(Operator Instructions). [Tom Hayes], Piper Jaffray.

Thank you. Good morning, gentlemen. A couple questions. One, you called out in the release some improvements you've been making as far as the product mix, especially on the private-label product line. I was just wondering if you'd give some color as to the impact that you thought that had in the quarter and as well as going forward?

In terms of the year that impact was probably in the nature of 20 to 30 bps and that comes from two fronts. One front is migration to our own branded products, which have logically higher margins. And secondly to our focus to drive more sales to our preferred vendors. And -- or the sales of preferred vendor products, and therefore that's the other component.

Okay. I think Mark mentioned in his prepared comments that the vendor price increases you saw were higher than expected or higher than normal. Could you give some magnitude to that?

Sure. Historically in this industry, Tom, the order of magnitude or inflation had been very, very modest, probably running to the tune of 1% to 2% over the long-term. Given two factors -- given the material cost increases that took place after manufacturers established their 2008 pricing in the beginning of the fall of 2007 through the better part of 2008, manufacturers had to absorb significant increases in raw material costs.

Secondly, given the contraction of the industry manufacturers now have much higher fixed costs in their structure, so when you take that to a product cost level given the lower volumes they have a higher overhead cost per unit. So therefore those two components really put significant pressure on manufacturers to raise their prices given their higher cost.

And to that end, the nature of the increases are in the -- overall in the mid-single digits to even, in some cases, higher than that. And so when those were announced we had the opportunity to buy in before the price increases were in effect given the normal 30 day or so notice period. And so we did that.

Okay. And just a quick follow-up on that one. I think you mentioned on the last call that the vendors were still trying to catch up on the price increases that you just kind of spelled out. So you think that with this last round of increases they've pretty much caught up?

In the case of chemicals there was -- there were in fact three increases that were rolled out beginning in late summer, fall and then effective January 1st. In the case of equipment manufacturers, those increases were done basically in the fall timeframe. My expectation is that that should largely be it.

Okay. And last one and I'll get back in the queue. You had mentioned that you increased the allowance for doubtful accounts and maybe tightened up your credit standards. Just any magnitude on that increase in the allowance and potential impact on sales from the tighter credit? Thank you.

The change in the allowance is noted on the footnote to the balance sheet on the press release. In terms of the impact on sales, the answer is yes. I don't have a quantification of what that would be, but certainly to the extent that we have a customer that is behind on payment and we put them on COD, in some cases those customers may go to a competitor and try to buy there and logically run up their credit line at the other distributor in the interim.

And some of that does happen. And by the way, that also happens the other way as well. We try to be very judicious in that process and our objective is not that the customer goes elsewhere and, frankly, that the customer -- that we have (inaudible) COD is almost like a last resort. So we try to work and communicate with our customers to help them grow and succeed in their businesses and to the extent we can help them become successful and manage through the environment, then they stay as loyal customers for us.

all right, thank you.

Kathryn Thompson, Avondale Partners.

Great, thank you. A couple of different questions for starting on the top line. Could you clarify what type of maintenance revenue trends you are seeing in states that are still in the pool season like California and Florida?

Maintenance types of products, Kathryn, were up in 2008 and they're still up now. That's products like chemicals and parts and accessories. Those type items were all up nicely in units in 2008. And although it's very early in the year that's one of the reasons that southern California and the Florida peninsula, which are the most year-round markets, our best reference is to year-round markets overall despite the fall of in new construction are still close to last year's sales levels.

Okay. That's helpful. Moving to your gross margins -- had some nice year-over-year improvement in the quarter. How much of that was company specific initiatives and any clarification on gross margins for the quarter will be helpful? And also what you see trends for at least early (technical difficulty) '09?

Okay. In terms of gross margins, you have two components -- you have the annual benefit that we had in gross margins and that's all the items that were covered in the top portion of the release when we talk about the year end -- full year information. The Delta is primarily driven by the buy-in for inventory ahead of price increases.

What you would see is that in the first quarter of 2009 you'll continue to see the benefit, in fact probably through April or so, you will continue to see the benefits of the pre-price increase purchases that we made back in August/September. So that will continue to ripple through.

The benefits as you saw, if you looked at our gross margin improvement during the course of 2008, it improved every quarter. And although we did a lot of work in the fall of 2007 in anticipation of the 2008 year, the actual practices and changes of behavior were not all made in one night or one day, they happened gradually.

So therefore what you have is as you proceed or progress through 2009 you will see net higher margins, but you will see the rate of improvement vis-a-vis 2008 moderate. One is because of the improvements that were already -- or changes in behavior that were made during 2008 being analyzed; and second, because after about March/April time frame the benefits from the pre-price increase purchases will basically disappear.

Okay. And that really hits -- that benefit disappears once you get to May basically?

Yes, certainly by May. Depending on the nature of the buy in, those inventories are largely consumed by February/March and there are some that slip into April, but by the end of March most of that will be behind us.

Okay. Moving to SG&A, any thoughts on SG&A for fiscal '09 given your staff reductions, particularly those made in Q4? And also, I know you quantified in your prepared remarks the impact of lower -- or not increasing your pay. But if you could couple that along with your staffing reductions and a general idea of where SG&A should trend for '09 based off of those two things?

Much like the behavior changes that took place in gross margins took place gradually during the course of '08; the same applies to the changes in structure and the resizing that we did during the course of 2008 with respect to expenses. So therefore what you'll have there is that we are starting the year at a lower expense base than we started 2008. And provided that we don't see any uptick in market activities of significant then our overall expenses for 2009 will be lower than they were in 2008.

Okay. And just to clarify, SG&A on an annual basis, looking at it on a dollars basis in 2007 ended around 397 and just ended up around 400 for '08. So on a dollars basis there was an increase year-over-year while you're right, in Q4 on a dollar basis it was down about $2 million year-over-year. But what you're suggesting is that from '08 to '09 you'll see at least flat on a dollar's basis if not down SG&A. Am I interpreting that correctly?

You're interpreting that correctly and I'll just give you a little bit more color. We had almost $400 million in 2007 and then we made two acquisitions in the first quarter at the end of February, which added close to $20 million of expense base or they came with almost $20 million of expense base.

So therefore -- and then we also had some locations that we had opened in the first part or earlier part of 2007 that we have the full year impact for in 2008. So when you look at the number, the real reference number on a call it pro forma one and we dropped that down. And much like you saw in the fourth quarter from an expense standpoint, even when you include the acquisitions in there we were still overall down. And therefore our run rate on expenses is in fact less than our total for '08.

Yes, just a reminder, Kathryn, we have that base business schedule attachment to our press release.

Yes, absolutely.

That's a place to look at the operating expense trends there.

Yes. I just wanted to make sure that we're just on the same page in terms of the dollars and not on a percentage basis.

Yes.

You gave some clarification on a slowdown in payables; you talked about some of those in the previous quarter and touched on it on your prepared comments today. And you seem to have some confidence that you won't see any more meaningful slowdown in payables and you saw the bulk of that last year.

Yes, one clarification, Kathryn. It's slowdown in receivables, not payables.

I'm sorry, I misspoke -- receivables.

I don't want to (multiple speakers) concern our vendors.

That would be a great (multiple speakers) I'm going to say receivables, excuse me for that. Clarify why -- where your confidence is in that and just give a little bit (multiple speakers)?

Well, normally -- I mean, we're in a very seasonal business. Once you get to March/April timeframe our customers' cash flows naturally improve. And again, given the seasonality, once you get into the fall and winter our customers' cash flows naturally get worse. So, therefore, we're now in mid February, we have another month or so before -- after that point in time we would naturally expect our customers' personal cash flows to begin to prove us it starts getting warmer and they start getting busier.

So that's the nature of that comment. Historically when we've looked at our receivables, basically the worst time is the November/December/January period, again reflecting customer cash flows. And the best period normally is in July/August timeframe, kind of at the tail end of the season before people begin to close down their pools. And after that obviously their cash flow begins to erode significantly through the winter.

So basically trends that you've seen to date November through January are a little bit better than your expectation or (inaudible) seeing some flattening of trends and that gives you confidence?

Right, together with our own disciplines and our practices from both parts of line management as well as credit management working together to communicate with customers and work through whatever issues there may be to resolve and move forward.

And just to clarify, Kathryn, as Manny said, it's really a seasonal timing (multiple speakers) there that we're making. 2008 we've seen the worst of 2008 collections. Moving into 2009 we will be improved during the first couple of quarters and then 2009's second half we'll see similar trends most likely to what we saw in 2008.

Okay. All right, that makes sense. That's helpful. And then the final question. Manny, this is just really kind of reaching back and looking at some comments from a couple years ago or in some past time. We just talked about guidance in general. I think at one point in time you made the comment that by April you have about 70% to 80% visibility for the year in terms of guidance. Does that case still hold true given the current environment and what are your thoughts in terms of visibility and how you put together your guidance as we prepare for the Q1 call?

The industry has changed significantly over the past three years. Prior to 2006 the builder segment of our customer base was basically at capacity. So when you have that portion of the customer base at capacity and you are -- certainly have an install base of pools that drives maintenance repair and replacement activity naturally, usually -- not usually, every year by April you had a very good sense of what was going to happen.

What's happened in specifically 2007/2008 is that in fact given that builders were certainly nowhere near their capacity that visibility -- that component of visibility basically went to the wayside. And that's the dynamic that applies today. So in contrast to prior to 2007 we don't necessarily have -- we certainly don't have the same level of visibility. And I'll use 2008 as an example.

When we were looking at 2008 early in the year our builder customers had contracts that they had signed where consumers had secured financing at some point in the fall or winter, early winter of 2007 and therefore they had a decent backlog going into the 2008 year. Given the contraction of the consumer credit markets during the course of 2008 the ability for consumers to get financing for home improvements like a pool basically almost disappeared.

So therefore the number of viable contracts that came aboard for our builder customers as the season progressed was not like in years past. And that's an aberration which again began to reflect itself in 2007 in markets like Florida and California, Arizona and then more spread throughout the country during the course of 2008. And that's why the new pool build volumes have declined by over 60% over the past three years.

So that's a dynamic that has definitely changed. The much more predictable component is the maintenance and repair component. But again, we will have to wait a while before we get to our builders being in capacity again.

Okay. And just any thoughts -- given that there has been such a sharp decline in new pool builds that obviously won't have an immediate impact on the maintenance and repair, but it could have more mid- to long-term impact. How do you think those sharp declines in new pool builds impacts your overall mid- to long-term revenue run for maintenance?

What those serve to do is add to the install base. So in contrast to three years ago where the install base was growing at about a 4% rate per year, when you look at last year's number it's less than 2%. Therefore that's the -- in terms of the impact is that the install base grows at a more modest than it did historically. That is what I view a relatively speaking short-term dynamic.

Going beyond the current environment the expectation is at some point things will revert to more normalized capital markets, financial markets, consumer markets, etc. And as that happens then the build rate for pools over the course of two, three, four, five years will increase gradually back to more historical levels and then the addition of pools and the addition to the install base would grow at a more normal 4% type rate as you go out beyond five years.

All right, great. Thank you so much, Manny.

And just a note to the callers, if you could limit your questions to one question and a follow up so we can get through as many as possible. And then if you have additional questions just get back in the queue please. Thank you.

Anthony Lebiedzinski, Sidoti & Co.

I'll try to be brief with my questions. Could you guys quantify what the maintenance, repair replacement sales were in the fourth quarter and 2008? A follow-up -- I wanted to get more information about the opportunistic buys, how much of the inventory increase was because of the opportunistic buys?

Okay, in terms of the numbers, the maintenance and repair component covers a myriad of products, Anthony. But I will tell you that if you look at the SCP Superior side of our business and you look at just two product categories that are maintenance and repair, chemicals and parts, between chemicals and parts for SCP Superior domestic that number is almost or approximately 30% of our SCP Superior sales -- or were almost 30% of our SCP Superior sales in 2008. That number, obviously in the case of the Horizon side, or for that matter international, would be a more modest component. But that gives you a little flavor for what's involved.

We believe that overall the basic maintenance and repair represents at least 50% of our total sales. And what I'm throwing in there besides chemicals and parts us all the maintenance accessories that are sold to existing pool owners. So that's the lion's share of our total business mix. And then you follow that with replacement and then you follow that in the current environment with products tied to new construction whether it be new pools, new irrigation systems, whatever. And that represents in our estimation -- represented less than 20% of our total sales in 2008.

Okay. And as far as the -- when you look at the opportunistic buys that you had in the fourth quarter, how much of the inventory increase -- I may have missed this, but did you guys quantify how much of the inventory increase was because of the opportunistic buys?

By the end of the year, I don't have an exact number for you because some of that inventory obviously was sold in the fourth quarter. But it was -- the total purchases made when you add up all the vendors was well north of $40 million that we bought in the August/September time period ahead of vendor price increases. And again, some of that was sold in the fourth quarter and the lion's share of the balance will be sold in the first.

Okay. And last question if I could squeeze that in also. How much of your sales are now coming from private label products and can you give us a historic perhaps where you think you can have that in 2009?

Sure. Several years ago that was running about 15% of our business back in 2005 or so time frame. I don't believe we have a final tabulation for 2008, but that number I believe is over 20% currently. And growing by 1 to 2 percentage points of our total sales per year.

Okay, all right, thank you.

David Manthey, Robert W. Baird.

Manny, could you talk about the increase in gross profit margin in the current quarter that was related to the pre-buy? I think you said something before about the delta being related to the pre-buy. But I'm just trying to get a grip on maybe in percentage points or basis points what was, all else being equal, the increase in fourth-quarter GDP because of the pre-buy do you think?

It would be somewhere in the tune of at least 130 bps to closer to 150 bps.

Okay. And then just a follow up question. If you excluded the inventory pre-buy and you excluded the benefits of mix on your business, which clearly with new construction falling off a map, you're benefiting from that. Could you talk about gross margin trends within the business or within the segments? For example, where you talked about the 30% of your revenues coming from chemicals and parts. Could you talk about what are the gross margin trends in a representative basket of those products irrespective of mix or pre-buy?

Let me just look at 2008 as a reference for the year. If you look at 2008 for the year mix had a, relatively speaking, small play in the number. And the reason for that is that although the builder segment was less in a number of markets, particularly northern markets, those builders are also retailers and service companies and therefore they and the overall aggregate still represented a decent share of our business and therefore, by being the larger customers, typically have the better prices in the local market.

So given that dynamic the overall mix benefit was not significant. And again, the impact from pre-price increase purchases, while they benefited certainly in the fourth quarter, and you take it on the annualized number, the impact was certainly diluted by the fact that it really didn't play into the first three quarters of the year where we did upwards of 80% of our total business.

Okay, so from the sound of it, it looks like maybe 100 basis points of the year-to-year improvement in the annual number was process improvements and better purchasing and product pricing and that sort of thing?

And shift to preferred vendors and strategically sourced products, at least 100 bps, yes.

Got it. Okay, thanks, Manny.

David Mann, Johnson Rice.

Thank you, good morning. Manny, at the beginning of your comments you talked about some of the impact of the environment on replacement activity. Can you just talk whether anecdotally or any specifics on what you're seeing and hearing about changes in the end customer behavior, whether it be in terms of deferring maintenance or going towards do-it-yourself?

Sure. I'll give you various points there. First, in terms of the replacement activity as distinguished from repair activity, in the case of replacement activity there have been some deferrals particularly with products that are more discretionary, and I'll site heaters us an example. Heaters serve to extend the pool season. And a number of consumers have chosen when their heater breaks and repair is not the right answer but replacement is, they've just decided to put that off much like they would decide to put off buying a new TV set when they already have three or four in the house.

In the case of pumps and filters, on the other hand, we have seen very little if any deferral activity because those are more call it necessary for the proper functioning and operation of a pool and water sanitation and all that good stuff.

And with respect to repair activity, we really haven't seen anything of note. In fact, I was talking to a customer yesterday and one reason that their business is doing reasonably well is the fact that they have contracted with a number of banks and are providing service for foreclosed -- pools in foreclosed homes, which is a pretty normal type of dynamic that banks do in order to keep the homes in salable condition.

So really the repair maintenance business hasn't really been affected to speak of. But we have seen some deferral activity taking place in the more discretionary components of replacement like heaters.

Thank you. In terms of the big picture I guess, you've got the two brands in the blue part of the business. And you basically said you're not looking at opening any centers. But I guess the question I would ask is if this environment extends for a longer period than some are thinking, what would it take for you to consider collapsing the two brands and also what would it take for you to consider to consolidate more centers given that consumer behavior may be changing and construction may continue to go down?

I'm glad you brought up the question because it bears mention for all. The fact that we have two brands in no way represents the fact that we have any redundancy. Because in fact when we have locations in a market we have basically certain capacity to serve and certain positions in the market to capture the greater share. And therefore there's really no redundancy by having two brands; we would have the same number of locations if we had one brand accepting that we would have just less share so we'd have less volume and that wouldn't make any business sense. So that's one part of the answer.

The other part is we have looked hard at markets and particularly locations that have lower volumes to see if we could consolidate where we would be both short-term and long-term by doing some consolidations. And we've done a number of those in the last 15 months. But the issue we have, and this is a bad issue, and the issue we have is that we have very, very few centers that are not profitable. And that's part one.

And part two is we have very, very few cases where we have the capacity at a nearby center to consolidate the weaker center into. So I might just use a quick example -- we have two centers that are doing $10 million and both have a very reasonable profit contribution, and we have a good share of the marketplace, for us to go and consolidate those two into one, first of all, we don't have the capacity to do so. And by doing so we believe that in aggregate we would make less money than we do by having the two locations at $10 million. So that's the dynamic that we have in the lion's share of our cases, so therefore the opportunities are in fact very, very few.

Thank you very much.

Keith Hughes, SunTrust.

My question is on Latham. In the fourth quarter was there some type of write-down associated with the results they put up or was this just the impact of weak business?

I'll answer the first part and then Mark can provide you with a little more color. There are two parts to that. One is the Latham business is certainly more weighted towards new construction than the Pool Corp. business, as Mark mentioned.

And secondly, given how new construction slowed down during the year, particularly in the second half as the backlog for builders was consumed, the fourth quarter -- their fourth-quarter sales were logically significantly lower than previous year. And that was a significant factor in the swing. Mark, you want to give some color commentary on the accounting side?

Sure. Keith, that's a very perceptive question. We did have a change in our accounting for Latham that impacted the fourth quarter. We had been deferring their results due to the fact that we buy a significant quantity of their sales, we defer the profit that's in our inventory at the end of the period into the following period.

And we've changed our estimation process for how much of that profit would flow into a future period which resulted in us recognizing a higher loss in the fourth quarter; it was about a $1 million more loss in the fourth quarter than we would have recognized under our previous method of deferral.

So going forward what that means in 2009 is we're -- first quarter from the way their profit and loss is distributed in our earnings, first quarter will look a lot like last year, second quarter will look a little bit better with a little bit more profit because we won't be deferring that to the third quarter. Third quarter will look a little bit worse and then fourth-quarter will look much like it did in 2008.

All right, thank you very much. That answers it.

David Mann, Johnson Rice.

Thank you. Mark, I think you mentioned there was a one-time expense saving in Q4. Can you just clarify that?

Yes, it wasn't exactly one time. But I would say expense savings that wouldn't necessarily reoccur. A couple of the things that I was talking about there was the change in our bonus estimation, we have fairly high management incentives in our compensation structure. And year-over-year there was a change there lowering that more than we did last year. So that's one component.

Another was during the year we had some savings in our -- some of our benefit plans, medical cost savings that I wouldn't necessarily expect to reoccur. So from a run rate standpoint our savings going forward will be less certainly than what we saw in the fourth quarter, which was -- I think 12% was the percentage. Somewhere less than half of that would be a more normalized expectation.

Okay, that's helpful. And then could you or Manny talk a little bit about the competitive landscape? Obviously a tough environment may be putting more pressure on some of the smaller distributors, what are you seeing there? And what is their pricing strategy looking like?

Two parts, the lion's share of those distributors are hanging on. By every indication they're able -- they're going to, in most cases, limp into the 2009 season. What we have seen though is that we have seen logically, given the financial pressures on them, we have seen them make cutbacks whether it be in inventories and the breadth of products that they carry in stock. Or alternatively in their expense structure given their urgency to address their more immediate needs. That's one component.

In terms of pricing, I think the industry learned a lesson in 2007 when the industry realized that if you drop the price of a product that doesn't mean you sell any more because, in fact, that doesn't apply. I mean, the amount of chemicals sold in this industry are going to be the same whether they're 5% lower or 5% higher. And the same applies to pretty much the lion's share of what the industry has to sell.

So they understand that as a general rule that pricing or using pricing to generate sales is a fool's game. And therefore I think a more rational business-like environment applies.

Okay. Manny, can you just clarify your prepared comment about California and Florida in January and February, were you saying that the base business trend there is overall very similar to the way it was last year --?

Sales dollars are similar to where they are, GP dollars are similar to where they are in the -- similar in the case of GP dollars is a little better. But sales are close and GP dollars are similar.

Okay, thank you.

Brent Rakers, Morgan Keegan.

Good morning, hopefully a couple of easy ones here to finish off. I never heard what the specifics were in terms of price contribution to revenue growth in the fourth quarter. And then I'd also like some insight in terms of what you expect, a little bit more specifically maybe what pricing to be up in 2009?

Thank you, Brent. In the quarter the weighted impact is probably in the tune of 2% to 3% if that. While we did certainly realize some margin increases -- a lot of the products that did not change in price, those increases really rolled in January as opposed to rolling in the fourth quarter. So the weighted impact may be 2 or 3% in the quarter by itself. And in terms of -- I must be getting tired here. In terms of the second part of your question which can you remind me what that was?

Yes, Manny. Just in terms of what you expect that number to be up in 2009 for the year?

At this point I would say mid single digits, it could be a little higher than that depending on the mix of products sold. The product category that had the greatest increase, double-digit type increases, was chemicals. And certainly that's one that will -- we expect our sales of chemicals to go up both in units and obviously much more so in dollars in 2009.

But then there are commodities like the rebar and cement and those type products which are, again, weighted more towards new construction and those are down in the current environment. So it depends on the mix of our business mix and what happens with new construction, how far down it is in the year vis-a-vis 2008.

To the extent that new construction is up -- I mean is down less, that means that the overall inflation would be more modest. To the extent that new construction is down more, which means that the weighting of those products that are lower in cost weigh less than the overall mix, then the overall price inflation would be a little bit higher.

And Manny, maybe just one follow-up to that. Given the announced price increases, but maybe also given some of the turn down in some of the raw materials inputs for those, can you maybe talk a little bit about both the chemicals and the equipment side in terms of what has occurred maybe over the last six months in terms of maybe the various input costs into producing those products?

Sure. And I think one of the keys here is not so much what's happened in the last six months, but what's happened in the last 18 months. And when manufacturers, whether they be chemicals or equipment manufacturers, establish pricing for the 2008 season back in the July or so timeframe of 2007, a certain cost bases that they used and those cost bases included not only raw material costs but also overhead absorption rates and things of that nature.

As the industry contracted in '08 and as raw material costs skyrocketed, the manufacturers in those two specific areas absorbed or weathered that storm during the course of 2008. And then they set out to become to try to recover that in part in 2009 with their price increases that they announced in the August/September timeframe. So that's that dynamic there.

While raw material costs have moderated from the highs of the spring and summer of '08 in many cases they're still at or above, depending on the raw material, at or above where they were in the June/July timeframe of 2007. And certainly, given the volume contraction of the industry, their absorption of overhead costs, factory overhead costs is obviously that as a per unit basis is a higher cost.

So They still have a lot of cost pressures on them. And therefore -- while we don't expect any further increases for the '09 season, I think it's wait and see as to what happens for 2009.

Thank you, Manny.

Let me -- Sarah, if I may -- thank you all for listening to our fourth 2008 results conference call. Our next call is scheduled for Thursday, April 23rd, when we'll discuss our first-quarter 2009 results. Thank you all again for listening. Have a good day.

This concludes today conference call. You may now disconnect.