Pool Corp (POOL) 2013 Q3 法說會逐字稿

Good morning, and welcome to the Pool Corporation third-quarter 2013 results conference call. All participants will be in listen-only mode. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Mark Joslin, Vice President and Chief Financial Officer. Please go ahead.

Thank you, Laura. Good morning, everyone, and welcome to our 2013 third-quarter earnings call. 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 2013 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 10-K.

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 everyone on the call. After the slow start to 2013 reported last quarter, business was pretty normal in the third quarter as evidenced by our 9% increase in base business sales and 7% increase in gross profits. These increases are weighted to lower-margin percent, higher-margin dollar discretionary product sales, with variable speed pumps, pool heaters, and LED lighting all being prime examples and all of which increased by roughly twice the Company's overall sales growth.

On the other hand, sales of higher-margin percent, lower-margin dollar, nondiscretionary items like parts, consumer-size chemicals, and pool accessories were up less than one-half the Company's overall sales growth. The bottom line is that we realized the gross profit that we expected, but the customer and product mix was a bit different. This logic applies even more so to irrigation landscape products, given the greater weighting of discretionary spending.

The sales by focus customer and product segments further illustrates this point, with building materials sales up 27% in the quarter while retail product sales were up only 3% in the quarter. Needless to say, I am very pleased with how we have executed both in terms of embracing new opportunities in building materials, as well as battling back from the slow seasonal start.

Two weeks ago, we launched our 2014 season for our North America blue business at our international sales conference with approximately 1300 participants. The material covered included extensive training on new product sales opportunities as well as how to continuously improve every facet of our execution. I am confident that our people are focused and better prepared to utilize all of the tools and resources available to them than ever before. Over the past 20 years, we have captured a majority of the market share that we have organically given our investments in people, products, programs, and technology.

Turning to expenses, overall, our base business expense to sales were down 73 bps in the quarter and 65 bps year to date as we continue to leverage our infrastructure while continuing to make investments, including the opening of 9 new sales centers this year and 18 new centers over the past 2 years. While our year-to-date base business contribution margin is only 12%, this statistic has been affected by product customer mix and its impact on gross margin.

Alternatively, our $15.5 million year-to-date increase in base business gross profit, base business operating income increased $10.3 million, or 66% of the gross profits increase, with expenses up only $5.2 million year to date or 1.7% versus last year.

Two items of interest to many of you are our green and European businesses. For context, our green business will approach 10% of our total business this year with gradually improving results and operating income up $3.7 million year to date. Our European business represents 5% of our total business. Although in the third quarter operating income in Europe was flat versus last year, it is still down $1.2 million in terms of operating income year to date, primarily due to the adverse weather impact felt similar to the seasonal markets of North America.

Mark will provide additional financial commentary, but before closing my prepared remarks, I believe it's important to step back and appreciate what we've accomplished, not only in 2013 but throughout the 20-year history of our Company. From a disparate aggregation of local and regional distribution businesses, we have transformed our Company into the industry's premier value-added distributor while more than doubling our market share organically. Given the talent and commitment of our people, I am confident in our future.

All right. Areas that I will touch on include our SG&A costs, interest and taxes, our balance sheet, cash flow, debt, and share repurchases.

First, as noted in our press release, our SG&A costs grew at a higher rate in the quarter due to the impact of variable expenses from the higher revenue growth rates and due to the extra sales day in the quarter compared to last year. Our goal here for the year was to have modest year-over-year expense growth well below the rate of sales and GP growth, and we remain on track to achieve that. Our year-to-date base business expense growth is under 2% which meets our expectations for Q4 and the year.

Moving on to the interest and tax lines, these were both favorably impacted by a tax reserve adjustment. Like most companies, we adjust our tax reserves and any related accrued interest when we file our federal return as we did in Q3. This resulted in a slightly lower tax rate and interest charge in the quarter than in previous quarters, both of which will revert to normal in Q4. For the year, we expect to report an effective tax rate of approximately 38.5%, which is a bit below normal due to the favorable adjustment we took back in the first quarter.

Turning to our balance sheet and cash flow, our major asset categories -- receivables and inventories -- are both in good shape in terms of quantity and quality of these assets with the balances here growing at about half the rate of our rate of revenue growth for the quarter. The year-over-year declines in our accounts payable and accrued expense balances reflect both the 2012 deferral of our federal tax payment in Q4 of 2012, as mentioned in our press release, as well as timing differences with last year on our vendor payments. These should largely normalize by year end. As mentioned on previous calls, we expect that cash flow from operations for the year to be roughly in line with our annual net income.

This is probably a good place to note the recent changes in our debt facilities which took place in Q3. Our revolving credit facility, which had $430 million of capacity and a remaining 3-year term was upsized to $465 million and extended to a new 5-year term. We also simplified and reduced our pricing grid on this facility. Soon after completing this, we closed on an accounts receivable securitization facility which is noted in the press release, gives us between $80 million and $160 million of additional debt capacity at attractive pricing with the capacity fluctuations tied to our seasonal accounts receivables balances. The net impact of this is we now have more borrowing capacity at a lower cost which will serve our needs well in the years ahead.

Before we began our Q&A, I will comment on our share repurchases. During the quarter, we repurchased 786,000 shares on the open market at an average price of $53.17 per share for a total use of cash of $41.8 million. We also repurchase 99,000 shares so far in October which leaves us with $29.3 million available under our current Board authorization. Year to date, we have repurchased 1,080,000 shares at average price of $52.34 for a total use of cash of $56.5 million.

That concludes my prepared remarks so I will turn the call back over to our operator so we can begin our question-and-answer session. Laura.

(Operator Instructions) Garik Shmois, Longbow Research.

Just first off, I was wondering if you can elaborate a little bit on the improving margin trends that you mentioned in the release. And just given the context, the incrementals were lower than trend and absolute gross margins declined in the quarter. I'm just wondering where you are seeing, in a little bit more detail, the improving margin trends in the business.

Well, in the release we talk about the fact that gross margins were down year on year. And that is product mix is by far the biggest factor. Specifically, as I mentioned in my prepared remarks, a good bit of it, significant share of it, is due to the differences in terms of -- the fact that we are selling a lot more discretionary products and the fact those rates of growth are more in the high teens versus some of the nondiscretionary items that are higher margins that were very, very low growth this year.

When we talk about, in the first paragraph when we talk about improving margin trends, we're talking about here the fact that are selling margins are little better. And that is something that has gradually improved during the year given the fact that geographic mix was more a factor earlier in the year. And that has kind of abated as we went through the year. It still a little bit of a factor in July, but less so in August and September.

Okay, thank you. And just switching toward the mix with respect to discretionary versus nondiscretionary, you did have a bit of a catch-up in the quarter with respect to discretionary sales continuing to come back. And I'm just wondering how sustainable you think that the discretionary growth is, given the context of some of the macro data points that have shown some big-ticket discretionary items starting to ease a little bit here into the fourth quarter.

Sure. That is a great question. And I think, got to put things in context. The product categories here that we are talking about and what we have anticipated for the last several years is first, that recovery and pool refurbishment, or remodeling, will come back first. Typically that could be done in pieces. We're talking about lower price points. And in fact, from the industry being down well north of 30% versus normal behavior, we have seen that coming back gradually since 2011. This is the third year of that recovery. We, in fact, are still -- from a consumer behaviors standpoint in terms of existing pool owners, replacing equipment or refurbishing, remodeling their pools -- that behavior is still below normal behavior. And we don't anticipate that that will be back to normal until about 2018.

This year our expectations are that -- again, we haven't finished the year -- but it will be roughly 25% below normal behavior. So the context there is that while the macroeconomic environment may have fits and starts and we're not smart enough to figure out exactly how it's going to come back every year, our expectation is that will come back gradually as it has for the last several years.

The second element of discretionary spend is tied to new pool construction. And when you look at new pool construction, that rate is still down 70% from the peak rate of 2005/2006. And it has come back a bit from the depths of 2009, but still very, very depressed by historical standards. We expect that that will come back gradually. We believe that recovery will lag the recovery of replacement and remodeling activity. And we don't expect that to get back to normalized levels, the levels that existed in the late 1990s until perhaps 2020 to 2022.

So that is the context there. Having said all that, it's very reasonable to have realized double-digit percent growth in discretionary spend dollars over the next five years as the recoveries take place. And that is, I think, a reasonable expectation. We have exceeded that, in part, given our growth being faster than the marketplace. And that logic in terms of growing faster than the market place is not unique to discretionary items. It is across the board. But obviously, it is more readily visible in the equipment and building materials-type categories.

Okay, thanks for all that. Just lastly, just touching upon organic growth in the quarter was strong as you did see some catch-up in Q3. Just wondering how you are viewing organic growth in the fourth quarter. I believe your prior guidance indicated somewhere around 5% to 7% organic growth in the back half of the year; appeared that it obviously was outsized in Q3. Should we think that the growth rates tend to come down in 4Q organically relative to your guidance back in line to that 5% to 7%? Or could we see some outperformance relative to the back-half guidance in Q4 given what you are seeing in the market?

Two things -- the comp was an easier comp in the third quarter. We also had an additional sales day in the third quarter, so I think the 5% to 7% for the fourth quarter is more reasonable.

Great. Thanks so much for your help.

Thank you.

Ken Zener, KeyBanc Capital Markets.

I wonder if you are able to perhaps breakout some of the monthly sales trends that you saw and if there was anything there relative to these concerns that we have had around the consumer brought on by, initially, Fed tapering. And within those monthly sales trends. Are you seeing the capital markets or banks willingness to lend or people take out loans to build a pool? Do you see any change in the credit market or the credit cycle?

First, with respect to by month, the daily sales rates by month on a daily sales rate basis was not significantly different July, August, or September. We had plus 1 day, minus 1 day versus last year so I adjusted to a daily sales rate basis. And the growth rates were very similar all three months.

With respect to consumer discretionary, what we have seen coming back, as I mentioned just a minute ago, it is primarily weighted toward the lower-dollar items. So for example, not the consumer putting in a $35,000 pool -- that has come back a little bit, but not very much -- the bigger factor is the existing pool owner that may have not replaced their heater a year ago or two years ago now stepping up and replacing that heater. Or that consumer instead of replacing their pump with a single-speed pump, replacing it with a variable-speed pump, realizing that they are going to get the energy efficiency and that will pay for the pump inside of two years in most cases. That is the behavioral switch that we have begun to see over the last several years and continuing through this year.

Okay. And Mark, if you guys would not mind just refreshing us how you target or think about your leverage ratios, given that you have given yourself some more liquidity here with the terms and the securitization. Could you refresh us like where you going target to be? Obviously your leverage ratios at the year end and what your long-term targets are so we can understand the ongoing share repurchase program. Thank you very much.

Sure. Yes, generally we look to be somewhere in the 1.5 to 2.0 range on leverage. That is net debt to EBITDA. And given the seasonality we do that on a trailing 12-month net debt basis. So that is our long-term target. We are little light at this point. We will end the year probably below the 1.5, but that is long term. With share repurchases, we expect to get back up into that range.

Thank you.

Sure.

Ryan Merkel, William Blair.

So want to start with gross margin. The impact of mix makes sense. I'm wondering, what is the gross margin delta between discretionary products and the maintenance products?

Well, just to give you an example, Ryan, when we talk about variable speed pumps, heaters, and higher-end lighting products, our gross margins there all in are less than 20%.

When we talk about parts, consumer-size chemicals and ancillary items -- typically low-dollar items -- our gross margin percents are well into the high 30s, low 40s.

Okay.

So, when we talk about the fact that for example, just in heaters, pumps, and lighting products, our sales in the quarter were north of $110 million. That is a big change when that is growing at close to 20%. And on the other hand, you have the other product categories growing 2%, 3%. That is a big spread.

Got it. And then that delta, is that also true at the EBIT margin line as well? Or do you make a little bit better EBIT margin with some of those discretionary products?

That is a great question. The cost to serve is proportionately higher on lower-dollar items, whether you are -- if you think of it simplistically, if you are pulling a box and you are invoicing a box and it is a $10 box, the cost to provide that service versus pulling a box that is a $1000 box. Now, the $1000 box may weigh a little more, but it is still easily handled by one individual. The cost to serve is not significantly higher in absolute terms but as a percentage of the items, significantly less for the $1000 item.

And that is essentially what happens. And the marketplace factors that in in terms of what the pricing is. So low-dollar items tend to have higher gross margin percents then higher-dollar items.

Got it. Makes sense, okay. So following the line of thinking here, was the maintenance products up in the quarter about 3%, 4%? Is that the right number?

Yes, up 2%, 3%.

2%, 3%.

Yes.

And is the primary reason that this market is growing at this low-single-digit rate, is that because the installed base hasn't grown that much the last five, six years? Or is there anything else?

First of all, it is driven entirely by the installed base. It is driven -- because those products were never deferred. Maintenance and repair activity continued normal during the great recession. So, for example, chemicals, part sales, ancillary items, accessories, all that grew -- our sales of those products grew in 2007, 2008, 2009, and certainly 2010. And they grew a little bit this year. The growth is -- the installed base is up perhaps 1% this year and with very little inflation.

The biggest factor in the fact that our growth is, call it, a shade less than 3% in those product categories is the fact that although the market has grown 1% and inflation has been negligible, you would expect us to grow market share little faster than 1%, 2% delta. But the season got off to a very late start, and in fact, even through July it was cool in a number of markets. So therefore, there's still some seasonal impact which is why our year-round markets grew at a faster rate than our seasonal markets. I think that is in part reflective of the fact that the seasonal markets didn't have a particularly good weather year, and you, living in Chicago, probably have first-hand experience in that regard.

That's right. Okay, so getting to the punchline of where I am going with all this, incremental margins this year will be about 11%, 12%. We were looking for 20%. The two biggest drivers have been the negative weather you had in 2Q, also sounds like July was also not great. And then we've got this gross margin mix. So for next year to do 18% you need to see the maintenance stuff grow more in line with the discretionary products, and we need a more normal weather year. Is that essentially the outlook?

I would not stretch to the point of saying that maintenance products need to grow with the discretionary products because there's going to be a spread there. But it should be a lot more than less than 3%. It should be more in the 5%, 6% range.

Okay. Great. Thanks, I will get back in line.

Thank you, Ryan.

David Manthey, Robert W. Baird.

Along the same lines with the prior question, in terms of the contribution margin you are guiding to to 2014 at 15% to 20%, what was your assumption for gross margin there? Or Manny, you mentioned that -- I think you said 5% or 6% growth in maintenance and repair would do it, but you also said that the discretionary, the new pools and the major refurbishment, could grow double digits for 5 to 7 years. Could you help us understand what your assumptions are under that 15% to 20% contribution margin?

Sure. Two parts -- one is the weighting of our businesses still heavily weighted toward maintenance and repair. So when we talk about 5%, 6% there and call it 10% to 12% on everything else, that probably averages out to closer to 7% in the overall number. So that is item one.

Item two is to make that happen really the biggest variable outside of our control was weather. And I hate to talk about weather, but that's certainly affected the seasonal markets this year. The results are what they are paid it's pretty -- not unique to us. So therefore that is what it is. So therefore with that, we get that lift. And the other side of the equation is again, when you look at our expense, our basic expenses are up only 1.7%. And that is -- not to say that we're going to be at 1.7% of our sales and GP dollars grow 7% next year. But certainly we will get significant lift and operating leverage that this year we haven't gotten. When our gross profits are only up in the 4% range for the year, base business, that is really the real hit that we have had.

Okay. So again, not to rely too much on weather, but what you are saying is effectively the low amount of maintenance and repair products to some extent might have been impacted by the weather which also impacted the overall, and that led to the 11% or 12% . And under normal conditions with normal growth and maintenance and minor repair, you probably would have been closer to the 15% to 20% target range.

Clearly, yes.

Okay.

Because from an incremental cost-to-serve standpoint, we are primed for that basic maintenance and repair item. And the incremental cost would have been negligible had we had another, call it, $30 million to $40 million of those type product sales this year.

Okay. And just quickly on pricing, you mentioned that your gross margins were pretty much as expected across the board. Are you seeing any pricing pressure across any categories specifically? Or maybe if there's any with positive pricing, any outliers one way or the other at all?

Sure. Well, we always have pricing pressure but nothing extraordinary. Typically the biggest churn there happens in the first quarter of the year as people are trying to position themselves for the season. But once the season starts, the service level is what carries today. So nothing unusual from a pricing pressures standpoint. Again, skirmishes in different markets, but that happens every year. And the biggest factor here affecting us in terms of margin this year, jumps out is product mix; and then to a second degree, customer mix; and in the quarter, this quarter, third, would be geography. Geography was more of a hit in the first half of the year but came down in importance -- still a factor, but came down in importance in the third quarter. So product mix the biggest factor overall.

Got it. All right. Thanks, Manny.

Thank you, sir.

[Jill Nelson], Johnson Rice.

Just following up on the last question with the pricing pressure, could you talk about the Internet? It seems to have an immaterial impact so far on your business. But could you talk about some factors there and maybe the outlook for that?

Sure. There is an Internet retail segments in the industry, not unlike just about every industry. They compete primarily against storefront retail, again, not unlike other industries. There is a little bit of an arbitrage play there in that Internet retailers, given their volume, are able to capture what I will refer to as Sun Belt pricing and sell that to Snow Belt consumers. So they have a little bit of an advantage there versus a Snow Belt storefront. They also have the benefits of taxes that, in most cases, are not collected on behalf of the state governments.

So they have gradually every year grown at a rate a bit faster. This is the past 15 years that I have been in the industry, grown at a rate a bit faster than the overall industry growth. And that is no different this year.

In context, that sector of the overall industry is relatively small. The product segments that they have affected the most is equipment, but their play in terms of chemical products, accessories, parts, products like that, the impact has been pretty negligible because of the nature of the products and how they are sold and how they are shipped and everything else. And the bulky nature of many of those products. So really the impact has been mainly on equipment. So, overall, that is there but that has not really been a significant factor in our margins. The ones that have felt a little bit more -- have felt more pressure have been storefront retail. And again, that's -- part is arbitrage between Sun Belt and Snow Belt, and part of that is the fact that many of the Internet retailers are not collecting sales taxes like the storefront retailers have to do.

Okay, thank you. And then a quick follow-up on the building materials. I mean, the strength year to date on the sales side of that category has been very strong. Could you talk about maybe some factors that you are doing internally to drive that category just beyond the industry strength and recovery of the remodel business?

Sure. Thank you for asking the question because that is really one of our major successes. Building materials, by the way, it's not factor on margin, our overall margin in building materials is very similar to the Company average. So that is not a factor on margin. But it is reflective of what is happening in that market place. And the fact that are building materials growth is far greater than even the growth of equipment -- heaters and things of that nature -- is I think reflective of the gains in market share that we have been able to realize.

There's a lot of work that goes into it, everything from a product management standpoint, determining what is best for the marketplace and going throughout the world to identify and source those products; bringing them efficiently to our local centers; and then our execution to work with our customers to help them sell that in the marketplace.

We again, have been very successful. It's an investment on our part because we believe that we have a unique opportunity here to add value as well as broaden our customer base. So add value to existing customers by enabling them to sell more complete outdoor lifestyle experience in the marketplace as well as work with tangential contractors and other sectors that are also working in the outside of a home in providing them products to sell there.

So again, great success, a lot of work. The product menu continues to grow. At our International Sales conference, a good bit of our training of our people was on those product categories and some of the salient opportunities we have to build our presence in the marketplace. So again, success -- very successful this year and, in part, the market, but it's primarily us and the team that we have. At every level, we're going to make that happen.

I appreciate the insight. Thank you.

Anthony Lebiedzinski, Sidoti & Company.

Just a follow-up on the previous question. So, when you look at building materials, can you just remind us what percentage of your total sales that is right now?

That's a good question. Hold on one second.

Do you have another question, Anthony, do you want to --?

Sure. So as far as the number of sales centers, I think you mentioned that you opened nine in 2013. What is your outlook for 2014? And are most of those sales center openings taking place as a result of your hub-and-spoke strategy to open more sales centers in surrounding areas to service your customers better?

Okay. Before I forget, Anthony, the answer to your first question, it represents about 10% of our total business today.

Thank you.

In terms of sales centers, we are in the process of evaluating those now. I've already approved several for next year and probably will finish with between five and seven new openings for 2013 -- for 2014, I'm sorry, on top of the nine we opened this year and the nine we opened the prior year.

The lion's share of all those are yes, in fact part of our hub-and-spoke where we are, for those on the call that may not be aware of it, what happens here is when we reach capacity in existing locations -- and this is especially the case in the year-round markets where there is a much higher pool density and where because of that higher pool density there is much greater specialization on the part of our customer base. So there are a number of customers that either do just to strictly maintenance or strictly repair. And therefore for them, since essentially they are selling their labor, the convenience of our locations is key or wherever they are buying, convenience is key.

In those cases when we reach capacity in existing locations, as leases come up, we evaluate whether to open in adjacent areas, and we look at what the incremental market share gains will be by providing that heightened level of service by having those more convenient locations. And to that end, as we evaluate those we make those decisions and make that investment, year one, there is a negligible benefit because we just long to recover the incremental overhead that we have invested in terms of expense. But as we grow share over time, then that should -- and GP dollars -- then we began to leverage our overhead investment and get a little bit of an incremental benefits and years two and then by years three and four we should be more in line with normal.

That is the game plan and yes, it is primarily geared towards more of a hub-and-spoke in those year-round markets.

Got it. Yes, thanks for that. And also, what is your outlook for acquisitions? You've done some minor acquisitions here recently. So as you look towards 2014 and beyond, should we expect some tuck-in acquisitions to continue?

Yes. We are always in dialogue. Our bias there is in markets where we have little to no share. So that would be weighted more towards the green business first. And that's really the overriding bias is the green business. There are a select few opportunities on the blue side of our business, both domestically and internationally, but the bias in terms of building our network going forward, if we do it with acquisitions, would be on the green business.

All right. Thank you very much.

Thank you, Anthony.

(Operator Instructions) Brent Rakers, Wunderlich Securities.

To follow up on an earlier question about the new branches, I believe you've got about 11 new openings year over year. Could you maybe talk about it? I know you talked about the profit margin profile of that and when the profitability turns. But could you also talk about how the additional incremental costs run through? Roughly how much per branch? And then also if you can maybe comment on what the year-over-year change in headcount may have been.

Sure. First, typically the base level of investment of a new location is the facility itself plus one professional staff. In just about all cases, there is some transfer of business from another nearby location just from a sheer convenience, and with that, there is some transfer of headcount.

So for example, if we open a satellite location B a half an hour from base location A, we may transfer one guy in the warehouse, one guy inside sales. That is a transfer of headcount plus one professional that would be the satellite manager, satellite location manager. So, basically, the cost profile typically runs where we are adding $300,000 to $400,000 of incremental expense to the Company. And generally speaking, we are looking for a little bit north of incremental $1 million-plus in sales to breakeven the first year.

And then the logic, of course, is that is not where it stops. The logic is that our incremental sales growth would be at a rate faster than it would have been from just having location A so that in aggregate we capture a greater share of the market.

And when you step back and you look at how we have grown over time and the fact that you go back to the acquired market share historically to our share today, and that is well more -- far more than doubled from what we acquired. Some markets quintupled when we acquired. We may have acquired a 10 share of market and now have 50. That growth of 40% share organically over the course of time has been certainly realized through execution, utilizing all our resources and everything else. But in Sun Belt markets that is also come about from our opening of satellites to better serve the marketplace.

Great. And the headcount year over year? And then I also had a gross margin question, as well.

Sure. In terms of overall headcount, it's up about 2% year on year.

Okay, great. And then extending the gross margin discussion, when you go back historically, Manny, I think between 2004 and 2008 when discretionary products were at a significantly higher level than they are currently relative to the overall business, the gross margins were in that 28% to 28.5% or so range. This year I think we're going to end up pretty close to the top end of that range despite a much more favorable mix, I would say. Could you maybe differentiate the situation now versus what it was back in the middle part of the last decade question and why those gross margins today aren't significantly higher because of a better mix?

The one difference is that during part of that timeframe, we owned a manufacturing business that the lion's share of their sales were internal. So therefore because of that we basically captured the double profit. And that was a factor that contributed to the overall nut. So that is one consideration. That plays into part of that time period that you reference.

When you look at 2007, 2008 to date, essentially our margins are essentially flat. And you are right, I think if -- I think also part of that is also our geographic weighting. When you look at our business, our growth has been more weighted toward the Sun Belt over that period of time. And therefore that is where we have on average lower margins given the nature of the year-round markets having, on average, lower costs as a percentage of sales than seasonal markets given a logical seasonality and the impact on inhibiting the ability to take full advantage of efficiencies like the year-round markets can.

And Manny, I guess my last -- my follow-on question to that, as you go out let's say 5 to 10 years and you get the full cyclical recovery both on the new construction and also with the repair and maintenance side of the business, where would you see the evolution of gross margins going once you restore 150,000 to 200,000 pools a year and once you get that retrofit business back to a more normal curve?

Certainly on a go-forward basis, whether that is five, seven years, given the growth rate of discretionary spend being greater than the growth rate of nondiscretionary, there's going to be a little bit of a headwind.

Having said that, we have opportunities in terms of how we position our products; how we execute on sourcing; how we execute on purchasing; and how we execute on sales at particularly the ongoing evolution toward our own branded products. That should mitigate a good bit of that. Is it going to mitigate it every single year? No. In fact, some years we could very well have a down year in margin, not to the extent we have had this year. This year is really bad from our context because of the impact of seasonality and everything else. But putting normal weather in the equation, just mixed by market and things of that nature, we could be a little bit down some years, a little bit up some years.

But overall, I think given our initiatives internally we should be able to be able to sustain the level we are at today.

Okay, great. Thank you, Manny.

Thank you, Brent.

And this does conclude our question-and-answer session. I would like to turn the conference back over to Manny Perez de la Mesa for any closing remarks.

Thank you, Laura, and thank you all again for listening to our third-quarter results conference call. Our next call will be on February 13, 2014, when we will discuss our full-year 2013 results and at that time provide our initial guidance for 2014. Thank you, and have a great day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.