Pool Corp (POOL) 2009 Q4 法說會逐字稿

Greetings and welcome, ladies and gentlemen, to the Pool Corporation year-end 2009 earnings release conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Mark Joslin, Vice President and Chief Financial Officer of Pool Corporation. Thank you. Mr. Joslin, you may begin.

Thank you, Everett. Good morning, everyone, and welcome to our year-end 2009 call. 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 2010 and future periods. Actual results may differ materially from those discussed.

Information regarding the factors and variables that could cause actual results to differ materially from projected results is discussed in our most recent quarterly filings with the SBC and will be included in our 10-K which we expect to file March 1.

Now I will turn the call over to our President and CEO, Manny Perez de la Mesa. Manny?

Thank you, Mark, and good morning to all. While 2009 marked the most challenging year in the history of our young industry, it seemed like every conceivable external factor went against us, the economy, real estate market, consumer financing availability, consumer confidence and even the weather went against us with virtually no summer in the northern markets. Despite these adverse external factors, the resiliency of our business and the dedication of our people were readily apparent.

The results speak for themselves, record cash flow from operations of $113 million and free cash flow of $106 million. A $79 million reduction of bank debt. Significant improvement in working capital management with record low stock outs while reducing inventories and lowering DSO and with bad debt expense cut in half. Market share gains with sales increases in maintenance and repair product segments including chemicals and parts. Record high gross margins realized from improved purchasing and sales execution despite the extremely competitive market conditions.

We also completed the acquisition of General Pool Supply in October to further strengthen our market-leading position in northern California.

2009 also marked the end of our equity interest investment in Latham, as Latham went through a prepackaged bankruptcy as part of a restructuring process to deleverage the business. As noted in the release, we know longer have an equity interest in Latham although they remain a valued supplier and the largest manufacturer of packaged and fiberglass pool products in the industry.

Turning to the seasonally slow fourth quarter, our results were pretty much as expected. Excluding the non-cash charges and the seasonal loss from the GPS acquisition; we had a loss of $0.25 per basic share. Our base business sales rate remained consistent with the second and third quarters. Our margin remained intact and our expenses decreased as expected.

In terms of base business sales by channel, our SCP Superior sales were down 8% in the quarter compared with 12% year to date with similar trends as the past two quarters while the Horizon channel was down over 30% in both the quarter and year to date. Also for those that are on the call perhaps for the first time, it is important to note that the Horizon channel has greater weighting in the second half of the year in contrast to the first half of the year.

Entering 2010, we are cautiously optimistic about the year. While the weather has not been good in the first six weeks with many markets in the West already having their typical annual rainfall and Florida with record low temperatures, we believe the worst in new construction and deferred replacement is behind us. While we don't anticipate any kind of significant recovery in 2010, not having those strong headwinds going against us for the first time in several years is certainly welcomed.

Our earnings projection for 2010 assumes essentially moderating market conditions similar to 2009 at the low end and some modest recovery at the high end. We anticipate lower sales in gross margin in the first part of 2010 with gradual recovery during the year including positive sales and earnings comps in the second half.

Our priorities for 2010 remain the same, strong cash flow generation, profitable market share gains, margin improvement and expense control. We know that the market will eventually revert to normal with replacement activity anticipated to recover first and new construction to recover slower and later. We also know the stability of the maintenance and repair segments provide us the resiliency to succeed through these challenging market conditions.

And finally, we also know that our competitive advantages enable us to gain profitable share while continuing to invest in our people, our systems, our programs, our product lines and new locations as we look to grow our business for many years into the future.

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

Thank you, Manny. My comments will focus primarily on our full-year results starting with operating expenses. You can see from the addendum to our release that our base business operating expenses which exclude acquired and closed sites were down 10.3% from 2008 to $346 million in 2009 and were down 10.7% if you exclude non-cash charges. Even though base business sales were down 15%, this expense reduction took more work to achieve than it may seem as our costs are primarily driven by the number of sales centers we have and this was largely the same year to year.

Our focus has been on growing our market share and preserving opportunities for the future so our cost reductions reflect the actions of employees throughout the organization to drive efficiencies and process improvements.

Looking at the major expense drivers, personnel related costs contributed the most to our cost savings for the year and were down $15 million or 7% with year-end headcount down 8.5% from 2008 excluding the impact of adding GPS in October. We also overcame a 9% increase in employee healthcare costs despite the headcount reduction as we experienced more high dollar medical claims in 2009 than in the past.

In what I call our general operating cost category, which includes operating supplies, insurances, [T&E], telecom and other odds and ends, we were able to lower our cost $11 million or 12% for the year. We continue to push many initiatives to reduce these costs further but expect more modest results here in 2010.

Delivery costs, net of cost rebilled to customers were down over $6 million for the year and we benefited from improved efficiencies and lower gas prices. Our bad debt expense was down over $5 million for the year, most of this coming in the second half of the year as the rate of customer issues has fallen from the peek at the end of the 2008 season.

Facility lease costs, which are up slightly for the year, included non-cash exit costs of $1.1 million and should come down some in 2010 as we continue to aggressively negotiate rates to current market conditions.

Let me comment here on our base business expenses for the year -- or I'm sorry for the quarter -- which in contrast to the 10% decline for the year were down a more modest 4% for the quarter. In the fourth quarter, we began to lap some of the cost reduction initiatives undertaken in the second half of 2008 and didn't benefit to the same degree from lower fuel costs experienced in earlier months.

The higher healthcare costs I mentioned earlier were also more pronounced in the fourth quarter. We also had some reserve adjustments primarily in Q4 2008 to both management incentives and bad debts which largely offset each other in terms of the year-over-year impact in the fourth quarter.

In all, we continue to make adjustments that will benefit us as we move into 2010 and expect that we will end the year with expenses flat to down modestly with declining gains as the year progresses.

Moving down the P&L, our interest expense was down more than at $9 million for the year as we benefited from lower interest rates and a 17% decline in average debt levels from 2008. Included in this line is a currency gain of nearly $2 million that we recognized from foreign currency transactions. While this was a positive currency related benefit, we also had a nearly equivalent negative impact from currency that is embedded in our results compared to 2008 due to unfavorable currency fluctuations.

Our press release covers Latham in some detail so all that I will add here is a reminder that we won't have the same drag on our earnings in 2010 that we had in 2009. Excluding the impact of the Latham impairment charge, we recorded $2.2 million or $0.05 per share in equity losses on Latham in 2009. Adding this to our $0.95 adjusted EPS for 2009 gets you to $1.00 which should be your starting point when building your projections for us for 2010 and is the bottom of our 2010 guidance range.

Moving onto the balance sheet, our net receivables declined $19 million or 17% for the quarter reflecting our lower sales as well as the continued greater mix of cash to credit sales that we've driven all year. As I commented previously, we continued to see improvements here from the end of the 2008 season as we've tightened our credit practices in this environment and customers who have been hard hit hardest by the decline in the construction and replacement markets have either adjusted or left the business.

Our DSO for the year decreased from last year to 34.9 days compared to 36.3 days at the end of 2008. As mentioned in the press release, our inventories excluding inventory acquired with GPS were down 14% for the year as we did an excellent job of rebalancing inventories throughout the year. In the fourth quarter, we absorbed most of the inventory that we bought on favorable terms in the third quarter which I discussed during our third-quarter call is the reason why inventories were down just 8% year-over-year at that point.

Looking ahead, we continue to aggressively manage working capital to maximize our return and each dollar invested and we still see opportunities to do this.

Turning to cash flow, we are obviously very happy with our results here in 2009. This was one of our top goals and focus areas for the year. As stated in our press release and worth repeating here, we had record cash flow from operations in 2009 even after making an extra tax payment, generating cash from operations of $113 million.

Adjusting for the extra tax payment, we surpassed the 2008 record cash flow results by $76 million. We used this cash for capital asset purchases, payment of dividends and to make the GPS acquisition and pay down $79 million in debt through the year.

With the debt repayments, our leverage improved as we ended the year with leverage of 2.87 down sequentially from 2.93 at the end of Q3 while our fixed charge coverage ratio of 2.42 was unchanged from the third quarter.

For 2010, while we are still very focused on cash generation, there will be less opportunity to make the kind of working capital reductions we had in 2009. So I would expect cash from operations to be close to our net income for the year and our leverage to be less than 2.5 to 1.

That concludes my prepared remarks so I will turn the call over to our operator to begin our question-and-answer period. Everett?

Thank you, sir. (Operator Instructions) Tom Hayes, Piper Jaffray.

Great, good morning, gentlemen, thanks for taking my call. I guess my first question is on the General Pool acquisition. I was just wondering if you could comment on the integration, is that done, in progress or your expected thoughts when that would be wrapped up?

Sure. Good morning, Tom.

Good morning, Manny.

There were 10 locations that came with that acquisition. We have done several I believe it was four that we have consolidated by this point. And then the others remain intact. And that part of it is done.

In terms of the back office side, some of that work has been transitioned over and we have garnered some efficiencies and there are some that will be done after the 2010 season. But essentially that is progressing pretty much as scheduled and in fact some of the lease exit costs that we booked in the fourth quarter were related to the GPS transaction, which according to new accounting pronouncements are expensed -- when the decision is made.

Okay. My next question, you guys have done a great job on balance sheet issues. I guess two quick questions. One, can I get your thoughts on how you feel you are positioned as far as inventory levels? You had mentioned in the release that January and maybe part of February is a little slower.

And then just secondly, on your comments of moving more customers towards kind of a cash transition base with your tighter credit terms. Are you seeing different order levels on your customers have been kind of transitioned to a cash basis versus your more traditional credit customers?

Well, let me just clarify that just to make sure there is no misunderstanding. We still provide credit terms to the lion's share of our customers. What we have been doing is we have been -- two things have happened. One is, there has been a business shift over time in the last several years as new construction has become a smaller part of our total business. The day-to-day maintenance and repair type customers, which may not have credit terms become a bigger part of our total business.

Secondly, we have been very judicious in terms of enforcement of credit terms given the current environment and have provided less latitude than perhaps three years ago in terms of those customers that fell behind on their terms and therefore putting them on COD.

You guys have done a great job at that. So just a follow up then on the inventory levels. Do you feel well positioned heading into the second quarter?

Yes. The inventory levels at this juncture -- we are probably -- not probably -- we are definitely better balanced than we have been at any time in our history in terms of how we start the year. Also the quality and caliber of our regional inventory managers throughout our operations in our eight countries is better than ever before.

We have significantly enhanced the training and the programs and the tools to enable them to do a much better job and that is showing through clearly as evidenced by the results in 2009.

Great, thanks. Good luck for the year.

Thank you, Tom.

David Manthey, Robert W. Baird.

Good morning. This is actually Kyle O'Meara in for Dave. Just in terms of your 2010 guidance, you called out the unfavorable weather trends. Could you quantify how much that impacted your 2010 guidance?

Sure. Not that we use whether as a factor in terms of long-term, but the first six weeks have been pretty lousy in terms of weather with very, very wet conditions and cold conditions -- colder than normal conditions in markets like Florida. And therefore, a lot of the consumables that would normally be sold in those Sunbelt markets were not sold to the same degree. So therefore, that impacted us and it is probably -- it could be $0.02 or $0.03 in terms of that impact.

If you look at it over the course of a year and you think that these things will normalize and when it rains a lot or it's abnormally cold, that maybe a month or two later it will be abnormally warm. If that happens, then we will pick that up. But we are not counting on it. So therefore, that is the basis for our guidance.

All right, great, thanks. And you kind of called out your expectations for the new pool and irrigation construction kind of going forward in 2010 and 2011. Could you talk about what you guys are expecting in the major refurbish, repair? Do you expect that to be a similar drag or could we actually see some growth in those end markets in 2010?

In terms of the underpinnings of our guidance, on the pool side of our business, the blue side of our business, we are expecting new construction to be relatively flat year on year. On the green side, we see some ongoing drag in terms of new construction. They tend to lag on the green side about six to 12 months the blue side. So therefore, we see some drag there and some modest decreases for the year.

In terms of the replacement, refurbishment side, we are looking at flat to modestly up. The flat is more built into our dollar type number. The modestly up is factored into the higher end of the range.

And are you still expecting a 1% to 2% drag from pricing in --?

No, we expect no pricing benefit this year. There was a fair amount of inflation in 2008 going into 2009 as manufacturers sought to recover a number of the cost increases they incurred in 2007 and through 2008. And there was no such -- with the economic contraction and everything else, prices have been more material prices and the rest all the rest input from manufacturers have remained pretty well intact. So therefore, there are some price adjustments positive and negative across the board but net net, it is virtually flat.

All right, great. Thanks.

Thank you, sir.

Anthony Lebiedzinski, Sidoti & Company.

Yes, good morning. Just a couple of questions. When you guys gave your guidance in October, were you factoring these non-cash charges and also foreign currency swings as well?

No, we were not.

Got you, okay. And also just to clarify, I think I heard you say that you and expect for the first half of this year for sales and margins to be down? So we should think about the back-end loaded recovery?

Yes. Certainly the first quarter I would anticipate it being down particularly given the first six weeks of the year and the weather conditions in the -- affecting that part of the first quarter.

In terms of the second quarter I would guess it's going to be speculated at this point, it will be pretty close to a wash vis-a-vis last year -- you know, maybe modestly up or very modestly down. And then certainly by the third quarter, we expect that we should have positive comps.

Okay. And what gives you confidence that you can actually have positive base business sales?

When we look at all the underlying dynamics where we look at pool permits being pulled in the larger markets and where those are trending at this juncture versus where they were last -- you know, last year at the same time frame. And the fact that they are flattening out. When new construction is flattening out and that is certainly the most discretionary component to demand, that I think speaks volumes about the opportunity for a flat [and] recovery.

And also can you tell us in 2009, how much were your maintenance and repair sales up?

In terms of certain product categories, for example, chemical sales were up 6%; parts sales were up I believe close to 3%. And those are the two largest categories. In fact, those two categories represent almost collectively almost one-third of our sales in the SCP Superior channels.

Okay and my last question, what do you think is the -- what are you estimating as far as impact of higher fuel prices now versus last year on your business?

We are really not looking at higher fuel prices in any significant way. That could certainly effect our freight cost net by $1 million to $2 million on one end of the spectrum or the other. But we are not looking at $4.00 gas prices like we experienced in 2008.

Okay. All right, thank you.

Thank you.

David Mann, Johnson Rice.

Yes, thank you, good morning. Manny, can you talk about in terms of the irrigation business, what was the extent of the operating loss in 2009? How much did that change from 2008 and how do you -- how are you looking to reduce that drag as I think you talked about in the past in 2010?

Sure. The impact in terms of change in EBIT or EBITDA from the green business was north of $12 million from 2008 to 2009 as that business, the sales in that business were down over 30% not only for the quarter but also for the year. In terms of industry checks that we have done there with major manufacturers, that is pretty much along the lines of what the industry is down overall. So we are not alone in that respect.

We have and we did take very aggressive actions during the course of the year, in fact, in most cases doing that ahead of many of our competitors. So our costs in that business were down $13 million -- operating costs were down $13 million year on year as we began to take actions in late 2008 and then during the course of 2009.

We also in that side of the business adjusted our inventories and net net provided record cash flows over all but unfortunately, we did have a $12 million plus hit from an EBIT standpoint year on year.

The level of the loss in 2009 and how do look to improve it in 2010?

Some of the loss, I can't remember the exact number here, but let's say it's north of $5 million.

Okay.

And we have -- there are certain expenses that -- and actions we took during again from starting in 2008 through 2009 which will result in about a $5 million reduced expense base for 2009 -- excuse me for 2010 from the 2009 levels. So that will mitigate to some degree some further market adverse market conditions that we anticipate in the first part of 2010.

And again as I mentioned earlier, we expect and have seen over time that that tend to lag the blue side of our business by about six to 12 months. So we are anticipating a moderating of that segment a little later in the year. And again, we are also looking at -- take market share and improve our execution as well like we do everywhere throughout the Company. So as that happens, we expect to bring that business back to a breakeven type level for 2010.

Okay. In the past few quarters, you have given us an update on a market-by-market performance and base business sales. Can you give us that but again for Florida, California, Texas and Arizona?

Yes, I don't have those numbers with me right now, David. But I will tell you that they are basically largely intact in terms of the trends I think there were no significant changes and that's why I didn't incorporate it in my prepared comments. But really nothing significant there. Just very similar to the third quarter.

Great, thank you very much.

Thank you.

Mark Rupe, Longbow Research.

Hi, good morning. This is Leah Villalobos in for Mark. I was wondering if you could talk a little bit more about how long consumers are able to defer replacement purchases and rehabs? Are you expecting some of the replacement purchases from 2009 to come back this year? Could they continue to defer them this year?

That is a very good question, Leah, and that varies all over the place depending on the nature of what is needed. In some cases, take a pump for example, there is really virtually no discretion. If a pump breaks, you would have to repair or replace it. If not, you have a problem very shortly thereafter. Same thing can be said about the filter.

There are other items whether it be the pool [finish] needing replaster and retiled, the heater, certain controls that can be deferred. And really it is anyone's guess. We estimate from an industry standpoint that replacement activity was down about 30% in 2009 from the 2008 levels. So therefore, at some point we are going to get that back.

I don't necessarily see that happening in a major way in 2010. I do see a flat environment versus 2009 with some level of recovery. Until such time as consumer confidence, unemployment, some of those other factors began to bolster consumer confidence and they have the willingness to spend to do those kind of things, it is not -- these are not major extraordinary expenses in terms of requirings, financing and things of that nature.

But they do involve taking amount of some money set aside for a rainy day type of perspective and being utilized and again, I think in the current environment until people see to the other side, we won't see a mass recovery.

Okay, that is helpful. And then just a quick follow-up on GPS. I know you consolidated -- I think you said four locations --

Yes.

-- and when you did the acquisition, I think the run rate with about $40 million in sales. Should we still be looking at that same incremental amount?

Yes, with the caveat being that some of those sales were realized in the fourth quarter. So I can't remember the exact number but the actual net incremental for 2010 would be in the low to mid 30s.

Okay, great. Thank you very much. Good luck.

Thank you.

Brent Rakers, Morgan Keegan.

Good morning. Maybe first, Manny, just a clarification on the (technical difficulty) green business. You are talking about getting that business back to break even for the full year 2010? Is that the target?

Yes.

And then I guess looking at that on the base guidance, in order to get to the starting point you are using, doesn't that then imply at the low end that the pool business is going to weaken year over year? At the low-end of the guidance range?

Well -- what it implies, yes, a good point, Brent. That implies basically that two things. A, that the recovery isn't at all existent and therefore we don't get to break even because of continuing weakness on the green side. And then also on the blue side of our business, that there is basically adverse weather conditions persist for a little while longer.

Great, that --.

If you think about it another way, instead of using the low end or the high end, take the midpoint, right, and that is kind of like our normalized basis and then we have a fudge factor on either side.

Okay, fair enough. And then if I could maybe if Mark could provide a little bit more currency commentary. I can obviously see the amount in -- I guess in the other expense line. But you also mentioned an offsetting negative impact of currency embedded in the other portion of the results. I am assuming, Mark, in SG&A but maybe you could explain that a little more in detail.

Yes, Brent, it is really just translating foreign currency sales and earnings back into dollars. So, obviously our foreign operations primarily in Europe transact business in euros and we had a loss on the translation of those earnings back into US dollars that is in our US dollar statements. So that doesn't happen in one transaction. It happens through just the translation on the financial statements versus the gain that we recorded, that was on the transfer of cash that was at a different base rate than what we transferred it into.

Okay. And then approximately how much of Pool's total business now on the revenue side is international whether it be Canada or Europe?

Approximately 12%.

12% okay. Just a couple other questions on the SG&A. You referenced healthcare costs and specifically called them out as a problem in the fourth quarter if maybe you can address that. And then I guess on the other side, maybe address bad debt expense on a year-over-year or even on a sequential basis for Q4 as well.

Mark?

Sure. Healthcare, as I mentioned, we experienced in 2009 what I call a higher number of large claims. And we look at large claims as claims over $10,000 in a month. And there was a greater number of those which I think was more of an anomaly in 2009. And in the fourth quarter in particular, our costs were up year-over-year there, it was about $1.5 million for the quarter. So I don't expect that to recur in 2010.

And I think we have also made some changes in our plans, which I think will help us going into 2010 in the future.

And then the bad debt expense in the quarter was that close to zero possibly in the fourth quarter?

Oh, in terms of the amount that we recorded?

Yes.

It wasn't zero but it was down significantly. The year-over-year change was significant because we had a big uptick in bad debt reserve in the fourth quarter of 2008. So the impact of that in the quarter on the year-over-year basis was a pretty positive for us, $2 million, $3 million. But that was really offset by a reserve change in management incentives, 2008 versus 2009. So net net, those two things offset each other.

Can I have just one more question. I think, Mark, last time you talked and I think you actually gave the year impact of payroll year over year. Could you give us a sense -- I know there is obviously a lot of seasonality but maybe what the payroll did sequentially Q3 to Q4?

Well, payroll sequentially if you just look at payroll itself, salary expense was down similar -- a little bit less than what we have seen early in the year let's call it 8% or so, 7%, 8%.

And that is a year-over-year in Q4, right?

That is year-over-year, yes,

Okay, thank you.

(Operator Instructions) Jeff Germanotta, William Blair.

Good morning. In the year past, you have done several small acquisitions. Can you talk first talk to us about the strategy there? And then secondly as it translates to SG&A expense, the base business is down about $3.5 million year-over-year. That is mitigated to some degree by recent acquisitions. Is there more expense reduction in the acquisitions to come?

And how should we think about what part of SG&A expense reductions have been permanent versus what we should expect in terms of variable cost recovery going forward?

Jeff, you are testing my memory with the question.

Well, let's start with the strategy on the acquisitions first.

First, on the acquisitions. As many of you know, we look at each individual market and look at our position in those markets and then look at how we can enter and participate in all the medium to larger markets. And look at that versus we open up our own locations and we have opened up over 100 locations over the course of time. Or whether we enter those markets vis-a-vis an acquisition. And those are constantly evaluated alternatives and we continue to do that today.

There is a pecking order in terms of priorities that we update on a regular basis in terms of markets and how we enter those markets or enhance our position in those markets. And that applies to whether we are looking at a regional distributor or at a local distributor to serve that objective. And that continues on an ongoing basis.

There is almost inevitably dialogue going on with one, two or three, four different people at any point in time. And that continues. So that strategy as well as, for example, our opening in markets where we had no presence before, that also continues. And we continue to do both.

In fact, in 2010, we have opened one location in a new market for us, which is Wichita, Kansas. We are also looking to open in a second market which is new for us which is Guadalajara, Mexico. So we continue to do these things on a very focused market-by-market basis.

And from an acquisition standpoint, we have run the gamut in terms of evaluating the Company, what that Company brings to the table and what we believe we can do with it since we look at an acquisition as a starting point, not as an endpoint. In fact, the work begins after the transaction is closed.

Depending on the transaction, depending on the situation, depending on the market, we look at adding to that infrastructure to grow share of market or in some cases where we do have some existing presence and when we evaluate the market conditions, we look at garnering certain efficiencies by doing some consolidations.

So that is case-by-case situation-by-situation. There are some -- a number of situations, a great many that we haven't done anything other than added to it. In fact, adding expense to it as an investment to grow share of market. And then of course, we have the opposite as well.

So that is that part of the question. And refresh my memory on the second part of the question.

Okay. Well, now let's just aggregate your SG&A expense. The base business year-over-year was down about -- your SG&A expense was down about $3.5 million. Your other businesses or your acquired businesses, SG&A year-over-year was up about $1.6 million.

As we look forward and we think about the businesses beginning to hopefully grow again, what part of that change should we view as permanent structural cost reduction? What part of it should we view as likely to be subject to variable expense recovery as sales grow?

Sure, great, okay. Generally speaking, it is about 50-50. There are a number of things whether it be process improvements, efficiencies, that we have put in place over the past two to three years in this current market environment that should stay intact permanent. So when you look at our business and you look at the fact that we reduced our costs by approximately $40 million on a base business level from year to year from 2008 2009 and on a base business level by approximately $20 million from 2007 to 2008, that is $60 million. About half of that would remain intact, period, going forward.

The other half will come back in two forms. It will come back and certainly the variable piece that would come back from a service to the customer standpoint whether it be additional trucks with additional drivers, additional warehouse workers, things of that nature. So that is one variable piece.

And hopefully as the market recovers or as our earnings recover, also the incentive side of compensation would also recover as well. So those pieces will come back and that is about half of the total that we have cut back over the last two or three years.

Thank you.

David Mann, Johnson Rice.

Yes, thank you. Manny, can you talk a little bit about some of the gross margin initiatives such as the private label expansion and how that will impact 2010?

That continues to be, David, a great opportunity for us. That continues to evolve and we continue to evaluate products. And not only with private label where we use our own PoolCorp brands but also where we have exclusives to certain products whether it be on a certain geography or national or throughout our system basis. And those tend to be a growing share of our business.

In fact, Craig Hubbard was doing some work on capturing updated data there for us. But that continues to grow and that has been a big part again both PoolCorp branded products as well as exclusives in helping us gradually increase our gross margins over time.

We have a long ways to go there. But we -- it's important for us, as I mentioned in previous calls, to do that in a very judicious fashion because there are two things that we are very wary of. First and foremost, we never want to upset the customer. We want to make sure that from a customer's perspective, the products are equal to or better than what they are buying before. And therefore, and that includes not only the quality of the product but also having all the logistics and everything in place to make sure that it doesn't in any way adversely impair our ability to serve the customer from a service standpoint, having the stock at the right place at the right time.

A second factor is also we are very cognizant of existing vendor partner relationships and making sure that we are not disruptive in that sense. And in a number of cases, we work hand in hand with existing vendor partners to develop some of those products to enable us to provide some distinction in terms of our offering vis-a-vis the competition.

And to clarify how margins should progress in 2010, is it going to be similar to what you said on the base business revenues in terms of perhaps some pressure in the first quarter, flattish second quarter, and improving in the back half?

It -- in fact, I'm glad you brought that up. Just to refresh everyone's memory, at the end of 2008 there was a fair amount of inflationary price increases that manufacturers put forth. We bought into those increases and that helped us garner very significant - -or contributed to our garnering significant gross margin improvements in particularly the first quarter of 2009.

In a market environment where there is essentially net zero price increase, net net in that kind of environment, the opportunity to buy in is negated and therefore those buy in benefits that we garnered in the first quarter of last year are not being -- won't be there this year.

Independent of that, we do see ongoing improvement. But from a financial reporting standpoint, you would see gross margins softer in the first quarter and then modestly improving as we progress during the year.

Very good. And then one last question. Obviously you have got really solid cash flow to support the dividend. But I am curious on your thoughts on the dividend outlook or any changes there given sort of that payout ratio covenant that you have in your debt.

We at this juncture don't anticipate any change to our dividend rate. That is something that the Board looks at at least once a year. But given the current environment, given where we are, given our dividend rate as related to our stock price and our earnings, I would anticipate that our dividend rate in terms of $0.13 per quarter, $0.52 per year will remain intact.

Great. Thank you so much. Good luck.

Thank you, sir.

Thank you. Ladies and gentlemen, at this time, we have no time for further questions. I would like to turn the floor back to management for closing comments.

Everett, thank you. And thank you all for listening to our fourth-quarter and full-year 2009 results conference call. Our next call is scheduled for Thursday, April 22, 2010 when we will discuss our first-quarter results. Thank you again and have a great day.

Ladies and gentlemen, this concludes today's teleconference and you may disconnect your lines at this time. Thank you for your participation.