Pool Corp (POOL) 2015 Q4 法說會逐字稿

Good morning and welcome to the Pool Corporation fourth-quarter and year-end 2015 results conference call. All participants will be in listen-only mode. (Operator Instructions)

After today's presentation there will be an opportunity to ask questions. Please note this event is being recorded.

I would now like to turn the conference over to Mark Joslin, Senior Vice President and Chief Financial Officer. Please go ahead.

Thank you, good morning, everyone, and welcome to our year-end 2015 earnings call. 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 2016 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 which will be updated in the next couple of weeks.

At this point, I'll turn the call over to our President and CEO, Manny Perez de La Mesa.

Thank you, Mark, and good morning to everyone on the call. 2015 marked another strong year of performance accentuated by a mild fall and delayed winter, which helped drive sales to a very strong fourth-quarter finish.

On a constant currency basis in 2015, we realized 7% sales and gross profit growth, 15% operating profit growth and 20% diluted earnings per share growth. As stewards of the capital entrusted to us, our trailing 12-months return on invested capital was 19.6%. Our cash flow from operations was 114% of net income and we returned $140 million of capital to shareholders in the form of dividends and share repurchases.

All in all, a strong year in a challenging external market environment.

In October 2015, we celebrated 20 years as a public company. As many of you know, the complexity and distractions inherent in being public have increased over the past 20 years, yet we remain focused on creating shareholder value by emphasizing what we refer to internally as the value creation fundamentals -- organic profit growth, return on invested capital and cash flow generation.

Apparently investors understand and appreciate what we do and have rewarded us with a 25% compounded annual growth rate in our total shareholder returns over the course of 20 years. As a point of reference, $1 invested in POOL at our IPO in 1995 would be worth over $100 today, including the reinvestment of dividends.

These results are only possible because of the commitment of our people throughout the Company to execute on our mission of providing exceptional value to our customers and suppliers as we strive to realize our vision of being the best distributor of outdoor lifestyle products. Our people genuinely care about our customers, our suppliers and especially each other.

This caring sentiment channels their talent and time to promoting the growth of the industry, the growth of our customers' businesses and to continually strive to operate more effectively.

In reviewing 2015 by market performance, in the blue business in Florida and Arizona, each increased base business sales by 10% as the recovery of remodeling and replacement activity continues. And we continue to increase share in focused product and customer categories. California increased sales by 7% for many of the same reasons although, on a relative basis, external factors weren't quite as positive as they were in Florida and Arizona.

Texas increased same-store sales by 5%, despite the adverse impact of very high rainfall during 2015, especially in the second quarter. The rest of the markets increased sales on a constant currency basis by 6.5%, reflecting the same drivers of market recovery and share gains.

On the green side of our business, our sales were flat year on year primarily due to our discontinuing several product lines, although our bottom line increased with operating profit increasing 14% and significantly improved both our operating margins and return on invested capital, demonstrating the validity of our decisions.

On the products side of sales, building materials continue to lead the way in 2015 with 13% growth while commercial had 10% growth. With the recovery of pool equipment replacement activity over the past five years, growth was 9% in that category. The growth in these product categories reflect both the ongoing recovery in the remodel and replacement sectors of our business as well as our consistent market share gains.

The retail products side of our business increased by 4% 2in 015 as the installed base of pools grew by 1% with virtually no inflation and our performance, once again, reflecting market share gains. The nondiscretionary maintenance and repair portions of our business represent the majority of our sales and are extremely resilient as was evident during the 2007, 2009 market downturn but are also dependent on the growth of the installed base and inflation to grow at a faster rate than what we realized in 2015.

During the course of 2015, we continued to selectively expand our networks through both new sales center openings as well as acquisitions. Our process in each case is very similar as we look at ways to enter new markets for expanding share and accelerate in existing markets. In markets where we have grown organically through a strong share position, our best return on invested capital is typically realized with continued organic share growth.

We also complemented our networks with ongoing investments in expanding sales centers, our additions to our delivery fleet and both new and enhanced technology to further distinguish our value proposition in the marketplace. As anticipated, our gross margins were essentially flat for the year, and we maintained our normal discipline and expense management.

The resulting leverage enabled us to increase our base business operating margin by 87 bps from 8.4% to 9.3%, a record for us despite new pool construction still being down roughly 70% from peak levels. Our base business EBITDA margin likewise increased to 10.4% in 2015.

As we look toward 2016, we are mindful of the fact that weather in the September to December period of 2015 was extremely favorable and that is unlikely to recur in 2016. In addition, we continue to read about general economic retrenchment and, while we are not seeing it in our business, we anticipate that we will not be completely absolved of its impact.

With all this in mind, we established our 2016 guidance as a reasonable expectation in terms of diluted earnings per share premised on organic market share growth, ongoing leverage of infrastructure with continuous process improvements to realize operating margin expansion, cash flow from operations equal to or greater than [net] income and return on invested capital to surpass 20%.

A footnote to our return on invested capital, it is calculated on a trailing 12-months basis after tax and includes goodwill and other intangible assets in the denominator.

We are extremely fortunate to be involved in a business where every day we help people realize their dreams of a better home life, while simultaneously assisting over 100,000 customers realize success. Your continued confidence in our team is never taken for granted and we are fully aware of the opportunities entrusted to us.

We look forward to making 2016 another successful year as we continue to create exceptional value.

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

Thank you, Manny. First a few comments on our expense management for 2015. As we noted in our press release and as Manny highlighted, we had a great year in terms of expense management in 2015, which resulted in us expanding our operating margin by a substantial 70 basis points to a record 9.1%. Our previous high operating margin of 8.8% was set in 2006.

Just to remind you here that our goal on expenses is to leverage our infrastructure over time by growing operating expenses at a rate that is lower than the rate of our gross profit growth with a target of 50% to 60% of the rate of our gross profit growth.

Doing this will result in operating margin expansion. This is something we have been able to do relatively consistently over time although with a better than usual performance in 2015. By comparison, for the five-year period from 2010 to 2015, our gross profit growth was 43.4% while our operating expense growth was 24.2% or about half of gross profit growth. Over that time, our operating margin grew from 6.3% to 9.1%.

Looking at the major components of our cost, I'd note first that our year-over-year headcount growth was 2% and just 1% if you exclude additions from acquisitions. As labor and labor-related costs account for nearly 60% of our total average cost the trailing headcount is key to meeting our objectives. One of the ways we are able to do this is by investing in technology which brings efficiencies as well as improved customer service and is an area where we continue to boost spending.

We also absorbed $2.5 million in higher incentive costs in 2015, given our better performance relative to 2014.

One area that hurt us overall in 2015 but helped us on the expense line was exchange and the approximately 20% strengthening of the US dollar, relative to the basket of currencies we operate in outside the US. This resulted in about $8.5 million or 2% lower costs on a constant currency basis.

With further strength in the US dollar, it appears that currency will continue to be a headwind for us in 2016 though at present the impact is less significant.

One other though less impactful benefit on our expense line in 2015 came from the decline in fuel prices which helped offset the general increasing costs of product transport, as we've discussed in the past.

I'll take a moment now to comment on taxes before moving on to the balance sheet. We ended 2015 with an effective tax rate of 38.5% for the year, which was 40 basis points better than the 38.9% we realized for 2014 and which resulted in approximately $0.02 of our EPS growth for the year.

This lower rate was primarily due to the improved performance of our international business and our expectation is that we'll continue to benefit from this in 2016, resulting in a similar tax rate to 2015.

We also ended 2015 with a strong balance sheet where we benefited from very good working capital results. The favorable weather, which helped fourth-quarter sales, also reduced inventories so our year-over-year inventory growth was just under 2% and comprised primarily of high-quality, high-velocity items.

One measure of our inventory performance for the year is inventory turns which improved 3% from 2014 to 3.5 times for the year.

Our net receivables also continue to be very well-managed as days sales outstanding or DSO was consistent with 2014 at 29 days at year-end, which is really a best in class performance. These results, along with our growth and earnings, enabled us to set a new high water mark of 19.6% return on invested capital for the year, which compares to 18% ROIC for 2014.

This, too, we believe is a best in class result with our class or peers that we benchmark against being comprised of other publicly traded wholesale distributors.

Cash flow generation is, of course, an area of emphasis for us and was another area of record results in 2015 because we ended the year with cash flow from operations of $146.1 million, which was a 20% increase from 2014. This was driven by our growth in net income as well as our strong working capital management.

This cash was used in part to pay dividends which, at $43 million, were up 15% over 2014 and to buy back shares. Open market repurchases in 2015 totaled $92 million, which bought 1.3 million shares at an average price of $68.57. This includes 100,000 shares purchased in Q4 at an average price of $78.41 a share. Since year end, we've purchased an additional 749,000 shares at an average price of $76.44 a share for use of cash so far in the first quarter of $57 million.

As has been the case, over the last few years we expect to repurchase [100 million to 150 million] in shares in 2016 while keeping our financial leverage in the range of 1.5 to 2 times.

This is a good time to give you our fully diluted share count forecast for 2016, which includes all shares repurchased to date. I'll give you both quarter and year-to-date expectations.

First quarter, year-to-date quarter the same. Obviously, 43,000,395 shares is our forecast. Second quarter for the quarter, we forecast 43,355,000 shares with the year-to-date forecast of 43,415,000 shares. Third quarter, our quarter forecast is for 43,445,000 shares. Our year-to-date forecast is 43,462,000 shares, and for the fourth quarter we forecast 43,592,000 shares with a full-year forecast of 43,515,000 shares.

One final point before starting the Q&A relationship to distribution of our quarterly results in 2016. Early indicators are that we will once again have a strong early buy season.

4As a reminder, our customers, primarily in the pool and spa retail business, place orders with us early in the season on favorable terms which allows them to fully stock shelves in anticipation of seasonal demand.

The impact to us is that, similar to last year, meaningful sales volumes will shift out of the second quarter and into the first quarter, which is something those modeling our results should account for.

And at this point, I'll turn the call back over our operator to begin our question-and-answer session.

(Operator Instructions) Matt Duncan, Stephens.

Good morning, guys, and congrats on a great quarter and great year.

Thank you.

Thank you, Matt.

Manny, the first question I have and I understand it's probably difficult to quantify but you guys have mentioned weather in both in the press release and a few times on the call.

Is there any way to look at the weather impact, what it may have been in the fourth quarter? Can you quantify how much you think it might've helped revenue?

You are correct in that it's hard to quantify but, I think for context, if you're looking to EPS, it's probably about $0.05 in terms of the impact. Again, it's hard to quantify and there are various factors that play into it but we believe it's about $0.05.

Was there any discernible difference in the growth that you saw in year-round versus seasonal markets? Is that maybe another way to look at it?

No, I mean what happens here is, first of all, in the more seasonal markets the numbers are just a lot smaller. So therefore, when you look at those numbers the fact that they would have been a little stronger than they were during the first three quarters of the year, I think, is just reflective of the fact that there was some activity versus very little to no activity.

In terms of the year-round markets, they were also strong in the fourth quarter. So net-net, I mean, it was all across the board. And part of it is also the fact that the psychology was generally positive as well in terms of there was demand and people were trying to just fill that demand.

Okay, another way to look at this may be if you look at the growth in the first and fourth quarters, it was north of 10%. The middle two quarters in the summer, strong part of the season, was a little lower. Is that maybe an indication of the strength that you're seeing in the refurbishment business assuming that people would rather get that done in those seasonal markets in the off season?

I understand, obviously, that pre-buy helped a little bit. It sounds like it's going to again in the first quarter of 2016. But -- and I know you laid out sort of the different growth rates between remodel and retail but is that maybe another part of what's driving those shoulder seasons growing a little faster than the typical strong part of the year for you guys?

Yes, definitely remodel and replacement activity is strong and to the extent that, weather permitting, that work gets done. So that applies across the board. And that's reflected in the strong fourth quarter saleswise, which was across the board, Sun Belt and Snow Belt.

Okay and the last thing, and I'll hop back in the queue, just in terms of the revenue growth assumption within your earnings guidance. You know, what type of revenue growth rate are you expecting at the midpoint of the earnings guidance? And then, how much of that is market growth versus market share?

We're looking at about mid-single digits would be the topline growth and we are looking at the market this year to grow maybe a shade over half of that; maybe about -- a weighted basis about 3%.

Okay, all right. That helps. I appreciate it, Manny, thank you.

Thank you.

Ken Zener, KeyBanc.

Manny, you'd cited your awareness of macro concerns and you said you would not be unaffected by that. It sounded like it was more theoretical but could you give us a little context for -- you know, if these headwinds developed further. Could you give us context of how your Company might be sensitive in terms of earnings vis-a-vis the sensitivity your Company had in 2007, 2008, which you guys made the decisions that probably exacerbated the leverage? But could you just give us little context for, you know, if these headwinds are happening what you would expect to see so investors could have some concept of how this cycle might treat you differently? Thank you.

Yes, sure. So let's take the business in pieces. The basic maintenance and repair, which is the majority of our business, very resilient, very low growth but very resilient and will continue to grow independent of the macro environment.

New construction is still extremely depressed. Still down about 70% versus what it was in the peak of 2005, 2006 time period. So I don't see that being impacted at all. So, therefore, what we get to is remodeling and replacement activity.

And remodeling and replacement activity domestically in the blue side of our business is about 29% of our business and that has recovered very nicely in a very consistent basis beginning in 2011.

So, to that end, what happens here and this is to pause that to the extent that anybody perceives any concerns, they could delay some of that remodeling activity or more discretionary replacement activity. And that's the area that again could slow down its level of growth.

So when you look at our overall weighted numbers, when you factor in that maintenance repair is growing at low single digits for us virtually nil for the industry, then what you're left with is that's the factor that's going to drive it. And again, we've seen no evidence of that to date and you can see that in the strong fourth-quarter results.

So we are just -- it's out there and again we haven't felt anything just yet but we are cautious in that regard and the impact of our earnings, it's factored into our guidance.

Absolutely and I do appreciate that, Manny. Would it be since the hardscapes, it sounds like kind of what we're talking about there in part where you've done some acquisitions. Would the operating leverage for any change in sales there be really different than your kind of 15%, 20% incremental EBIT that you kind of guide us to generally?

No, it would be very similar. And really what you're talking about is order of magnitude. So, therefore, what it translates to is if that grows 1% to 2% less, right, that sector which impacts our overall sales growth by, let's say, 1% -- well, that's what you're talking about.

Thank you very much.

Yes, sure.

David Manthey, Robert W. Baird.

First off, Manny, in your monologue, you mentioned sort of this flatness because of the installed pool basin lack of inflation in the minor maintenance and repair business. Should we assume that fourth quarter and full year were both pretty much flat in that segment?

Yes, no discernible difference there.

Okay. And then on SG&A, if you look even on a constant currency basis if you were up 3% and I guess some of that would be acquisition, relative to a 14% EBITDA increase, you mentioned some of the incentives and technology expenses being up offset by tight expense control. But given that your labor being the largest component of your SG&A cost stack, there must be something more than just cell phone contracts and making sure you shut the lights off at night.

(laughter) By the way, we do do that. We do review cell phone contracts and we do shut off the lights at night. And our warehouses are -- a good majority of them have automatic timers set on the lighting in the warehouse. So we are conscious of all of that and we have all sorts of agreements on trash removal and things of that nature. So we try to look for every nickel we can find.

Really, the impact on exchange in terms of expenses was about 2%. So it is just being judicious. We have had -- when Mark talked about the fact that excluding acquisitions our headcount was only up 1%, what that does when you factor into that, we continue to incur productivity gains and that's through process improvements.

And while we make investments in IT and to drive -- to help support some of those process improvements, at the end of the day, we're looking for return on that capital. So and the paradigm is the same there as we do for investing in a new location or a new market.

So when it's all said and done, all of these things more than pay for themselves. If not, we wouldn't do them. So, does that answer the question or help answer the question?

Yes, I was just trying to get some comfort around your ability to continue to find those areas to reduce costs, given that the performance of such that it does indicate that your incentive pay should continue to rise as your profitability goes up. So -- . But it sounds like you have a number of things going on there.

Maybe related to that also, Manny, in terms of technology which you mentioned as a productivity enhancement tool, could you just refresh us on maybe the one or two things that you think are having the biggest impact on the technology front right now?

If it were one or two, I'd be remiss. But let me just -- because in distribution there's seldom one silver bullet. You've got to have many, many bullets and you've got to keep on firing continuously to drive performance improvement and raise the service level at the same time.

If I were to highlight a few, certainly our B2B portal that enables customers to do a lot of stuff and, in fact, we have linked that in with a number of customers and their businesses to enable automatic replenishment. Those kind of tools are very efficient for our customers, enhance our service level and provide some efficiencies for us.

When I look at, for example, how we pick orders and our facilities and the fact that we have largely converted domestically to what we refer to internally as paperless pick, which is basically using automation and saving on paper costs but, more importantly, really enabling us to be much more efficient in the pick process is another tool.

I mean when you look at our DCs, for example, a few years ago we went to voice pick and on average when we did the study in our first location -- this was about four or five years ago -- we were saving $0.07 per pick. So, I mean I'm just giving you some color and context of different things that we continue to do and work on to drive a higher service level, as well as reduce mistakes, as well as do it all more efficiently.

That's very helpful; thanks a lot, Manny.

Thank you.

David Mandell, William Blair.

The nickel you cited from the better weather in 4Q, do you think that's incremental sales in earnings profitability or do you think that that's a nickel that came out of pulled forward from first quarter of 2016?

Incremental.

And then, as far as looking at 2016, on the gross margin line, what is your outlook there and what are some of the puts and takes?

There, David, we have two areas that are kind of going in different directions. I'll speak about the negatives first.

What we have there is from a product -- and this is mainly product mix revenue. From a product mix standpoint, when you're looking at remodeling a replacement activity those are typically bigger ticket items. And by virtue of them being bigger ticket, generally speaking, the margin percents are smaller than on smaller ticket items where the cost to serve is logically much higher than as a percentage of the product being sold.

So that's factor number one kind of going against us. Factor number two going against us is that manufacturers have progressively been investing in innovation and -- as a result of that innovation -- providing products are developing and coming to market with new products that are either much more efficient and/or provide a greater aesthetic value.

In both cases, the products are sold for a higher price. And what drives there is some of the same logic but because of them being a higher price, generally speaking, we get more GP dollars but typically a smaller percent. So those are the two drivers against us.

On the other side of the equation going against that, we continue to improve our service level by what we just covered earlier. That there's efficiency gains but there's also service level gains. If I talk to you about our in-stock position, the stock outs or fill rates that we have. And the fact that they continue to improve every single year and even enabled us to do that with greater turns, I mean that's just part of the equation.

But factor number one is improve service levels of the customer; and then secondly, we have to sell that so improve sales execution. And then third, improve sourcing.

So to mitigate the impact the adverse impact of product mix in both the forms I described earlier, improve service levels, improve sales execution, improve sourcing execution should approximately negate that. So our expectations are that gross margins prospectively should be about flat in terms of percent.

But there are efficiencies being gained by virtue of the fact that our cost to serve proportionately is less when we are selling higher value products. Or whether it be in aggregate dollars or by virtue of the fact that it's a variable speed pump or it's a single speed pump or LED lighting versus fluorescent lighting or whatever.

And then my last question within the quarter, do you guys have the growth rates for the blue and green businesses just in the fourth quarter?

We didn't communicate that, but in the fourth quarter the green business increased at a rate faster than our blue business.

All right. Thanks for taking my questions.

Thank you.

David Mann, Johnson Rice.

Congratulations on the year and the 20 years.

Thank you.

It's been fun to watch.

I guess, first question, sort of along the same lines of some of these about the SG&A line is, the flow through for the year was to EBIT was in the 23% range for the Company and maybe 28% on the base business. I think in the past you had kind of talked in the mid-to-higher teens as a flow-through rate. How should we think about that going forward in 2016 and beyond?

That's a great question, David. And I think here what impacts that is a little bit of math because of the exchange. As you know, and many on the call know, exchange cost us approximately 2% in terms of topline and certainly benefited us on the expense side.

But what happens here is, if you do on a constant currency analysis and you assume that we would have call it round numbers, $40 million more in sales than the improvement in terms of operating or contribution margin is inside our normal 15% to 20% range.

Okay, great, that's helpful.

If I may, David, I just want to clarify something. I misspoke a second ago in answering the green versus the blue. I was looking at the wrong line on my chart. The green business grew a little slower than the blue business but both had very strong growth in the fourth quarter.

Very good. On the comments you have made about technology, can you give us a sense on where you are in terms of some of the initiatives? It sounds like you have numerous initiatives.

I mean, where are you in terms of harnessing some of that to drive some of this ceiling on headcount, if you will. Was last year sort of the inflection or do we still have a decent amount of that efficiency to come?

For the past 15 years, we typically have between 50 to 75 projects underway; and as those projects could accomplished, new ones are added to the list. And the list is as robust now as it was 15 years ago. Although obviously, we've accomplished a lot over that period of time.

I guess the question I'm asking and it seems like it was asked earlier in different ways is, why was this year perhaps more beneficial in terms of harnessing that some of that productivity? You know given that you've been doing it and I've heard you've talked about doing it over the last 15 years. So what was different this year and will 2016 be differential as well or would it not necessarily see as much headcount benefit?

No, if you look at it, really again I think you have got to play the impact of currency into the mix. So, if you add $40 million in sales and you add also the associated expenses, right, you still get the -- not quite the same but a similar operating profit improvement and the leverage, while it may have been a little higher, it wasn't exceptionally higher than previous years.

Got you. One other question, Texas gets a lot of discussion in terms of what's going on there in terms of a slowing economy and the effect of the energy price decline. Can you give a sense on how you're looking at Texas and this guidance you've given for 2016? And how much caution or expectation you have in there for that?

You know what, there's two parts to the answer.

First, when you look at Texas -- Texas has a very diversified economy and as a result has proven to be very resilient. When you look at our results in 2015, Houston, which is our fourth largest market, the one you would think would be affected the most -- Houston had a very, very solid year, very strong growth in every important line other than expenses that had more modest growth. So Houston did very well.

So, that's part one.

And if you look at markets like Dallas and Austin, extremely robust, very little dependency on energy. In fact, you can easily make the argument that particularly North Texas suffered with heavy rainfalls during the course of 2015.

Where we are -- so, that's part one, and by the way just to support that, our growth in Texas in the fourth quarter, both blue and green, was a little bit above the Company average, okay? So that gives you context there.

What we anticipate is that the markets that are going to be most affected with the energy situation are more East and West Texas as well as neighboring states like Oklahoma and the western portions of Louisiana. We believe those are the ones that really will feel the impact more so than Dallas Metroplex, Houston Metroplex, Austin or San Antonio.

Hey, David, if I could add one comment on to your question about expenses and how we -- 2015 was a little unusual. If you look at our growth by quarter, most of our growth for the year came in the first quarter and the fourth quarter, which are generally seasonally lower volumes for us and so to the extent that people aren't quite as busy as they are during the second and third quarter, there are able to do more and pick up that volume without adding headcount and labor.

So if that growth was in the second, third quarter, it would be a different story. So that I think helped in terms of the leverage that we realized in 2015, unusual and probably not something we're going to certainly look to do every year.

And that's an excellent point and that just confirms part of the rationale for why we're making sure that our retail customers have our stock ahead of the season and get that activity done as early as possible when we have can't say idle time but more available time then we do as we get into the season.

Thank you, good luck in 2016.

Thank you, sir.

Anthony Lebiedzinski, Sidoti & Company.

Thank you for taking the question. So just a follow-up on Texas, can you give us a sense as to what percentage of your sales was attributable to Texas last year?

I have to do the math here. So just bear with me a second, Anthony. Do you have another question?

Not a problem, yes so, and if you could just give us a sense -- you mentioned also, Manny, about Oklahoma and some parts of Louisiana as well. Just wanted to see how should we think about this kind of going forward as far as the impact of lower oil prices and some of the job losses in the energy sector?

Texas represented approximately 14% of our sales last year. And just for context, California is our biggest state overall, and Florida and Texas are very similar.

Got it. Okay (multiple speakers). As far as you had mentioned that the other portions like Oklahoma and Western Louisiana, are those significant markets for you in the big scheme of things or how should we think about that?

They're not nowhere near as significant as the first three, obviously, and even when you look at it, those are -- we do business and we have locations in Lafayette, Shreveport, Longview, and now we opened recently in Lubbock. So there are markets that we serve and we also serve a number of them remotely from other centers.

But in the big picture when you look at when you look at the overall Company, you're talking about, again, fractions of 1% in terms of the anticipated impact on the overall business.

Got it, okay, thanks for that. And then also looking at the green business, I think you had mentioned that it was essentially, I think, flat for the year because of the fact that you discontinued some product lines. So just to put things in perspective, if you were to exclude the discontinued product lines, what would your base business sales growth be?

Our base business sales growth would have been about the same as our domestic blue business.

Okay got it. And then lastly, I did notice that your CapEx in 2015 was a bit higher than normal. I think usually you guys target 0.75% to 1% of your sales for CapEx. It was higher than that so what was that mostly for and how should we think about that going forward?

Two things, or a two-part answer. The first-part answer is the major drivers there were delivery vehicles and, secondly, IT. And in terms of going forward, I would look for that to be 1% to 1.5%.

Years ago, we would lease most of our vehicles and a few years ago, we shifted over to buying those vehicles instead of leasing.

Got it, okay, thank you very much.

Yes.

Garik Shmois, Longbow.

Good morning, guys, this is Mark Zikeli on for Garik Shmois. Congratulations on a good year, guys.

Thank you.

Yes, just starting off really good cash flow generation. Just wondering if you could talk a little bit about your uses of cash heading into 2016 as far as new store openings, and acquisitions. Just give us a general sense of progression. You know the first part of the year and how much of anything is embedded in the guidance?

Sure, first from a use of cash is internal needs, which is both in the form of CapEx as well as working capital. CapEx being delivery fleet, IT and leasehold improvements on facilities.

In terms of working capital, that's driven to support growth both on the AR side as well as on the inventory side, for existing business as well as working capital to support the opening of new locations. And we have a handful of new locations targeted for this year as we do most years.

Generally speaking, new locations don't add anything to the bottom line in their first year to speak of, but it basically provides us a platform for growth as we grow share in those markets over the course of time. That's number one.

Number two is -- or are acquisitions. Same methodology in terms of return on invested capital drivers that we have and everything else -- filters as we have everything else. And to that end, that number is going to not going to be super material in the big picture over the course of time. Most of the acquisitions that we do are relatively small for our size and they basically are focused on markets where we have little to no presence as a way to enter the market.

And we do that and always play that off against opening our own new locations. And over the last 15 years or so, we've done a lot of both. In fact, if anything more opening our own then acquisitions. That's number two.

Number three is dividends. Dividends, we target a payout rate of 35% of net income 3-5% of net income and that is reviewed every year by the Board. And the Board will do that at the May Board meeting and determine the go-forward dividend for the next four quarters. And that's number three in terms of priority.

Then after that, it depends where we are from a capital structure standpoint or where we are on debt vis a vis our targeted capital structure. Our targeted capital structure is 1.5 to 2 times debt to EBITDA. So provided we are below 2 times the debt to EBITDA, we are buying shares.

And as Mark mentioned earlier, we are targeting to buy at least $100 million to $150 million worth. In a typical year, that number will, over the course of time, grow with our profitability; but $100 million to $150 million is a reasonable number to expect.

It could be higher. Last year it was a shade lower. We finished at $92 million but, again, the target in the current level is approximately $100 million to $150 million.

If there's an acquisition or something else that pops up that gets us over 2 times debt to EBITDA, we would probably still buy shares but at a more modest rate.

All right. Thank you for that, guys, good luck.

Thank you.

(Operator Instructions) Brent Rakers, Thompson Research Group.

I just wanted to start on the guidance for this year. I think in a typical year, Manny or Mark, you exclude future share repurchases from that EPS guidance level. And I guess given the pretty significant buybacks year to date, I was wondering if that was included in that number or not?

Yes, it sure was, Brent.

Okay, great. And then, obviously, you've talked a lot about the weather dynamic in Q4 and a lot of talk has been about extending season in some of these markets. With that comment, I was wondering how the chemicals category might've been impacted by that?

Chemicals are for basic pool maintenance. And the chemical sector -- I'll give you the industry information first -- modestly up because of the late season but very modestly up, I'm talking about 1 to 2%. Our own chemical sales were up a little more than that and chemicals as you can well imagine is an important, very important product category within our retail -- the retail portion of our business.

And then, many, I guess any time you extend a season this way and you certainly get this much optimism among your customers, I was wondering if that was translating at all to maybe sparking some interest in new pool construction, given the longer season this year?

You know what, that's -- I'm optimistic that some of that will begin to kick in. We are still -- let me start with a positive.

We began to see last year financing begin to open up where you had appraisals and banks willing to lend close to 80% loan to value on, call it, current appraisal values as opposed to very conservative appraisal values when you're doing a remodeling. So that's beginning to open up.

Frankly, I believe that higher interest rates are going to help us there. As banks are able to realize return, they will be inclined to take a little bit more risk than being as selective as they have been for the past seven years where basically they have only been lending to pristine credits whether it be on the commercial or consumer side.

Great, and then I guess maybe, well, two other quick questions. One, if you could maybe comment on what your outlook is for product price inflation this year and then secondly, you talked a lot over the last several years about this recovery in kind of deferred remodeling replacement spending.

I think you started talking about that in 2010, 2011. Maybe wondered how far along do you think you are to reaching those original recovery goals and maybe how much more legs is for that piece of the recovery story?

Sure, in terms of inflation, negligible. I think the market volatility, the energy costs being what they are, I think there's going to be negligible price increases. There is going to be a higher, I'll call it a better mix of products from manufacturers from an innovation standpoint. But in terms of more the commodity type products, there will be no inflation there to speak of.

In terms of the recovery, let me just first address remodeling and replacement. That -- as I mentioned earlier, that recovery we believe began in earnest in 2011 and have continued to date. Our expectations were that on a dollar-weighted basis that sector was down almost 40% at the trough from normalized behavior. We believe that, by last year, that behavior was about 15% -- midteens percent below normalized behavior; and we believe that that recovery will continue such that probably by 2018 -- at the latest, 2019 -- behavior will be back to normal.

And in that, there's been some recovery component as well from some of that deferred activity, so that's number one.

In terms of new Pool construction, new Pool construction is still down about 70%. For that to really kick back in and really gather significant momentum, we need financing to be available for the middle-of-the-road homeowner from a credit standpoint. And that middle tier homeowner, single-family homeowner is really the key target as they look to improve the quality of their home life.

Great, thank you, Manny.

Matt Duncan, Stephens.

Just a real quick housekeeping item. It looks like you made a couple of smallish acquisitions this quarter. Mark, what is the combined annual revenue for those two businesses?

About $20 million.

About $20 million okay, thank you, Manny.

Thank you, by the way, you can presume relatively modest, very modest earnings contribution the first year.

Okay, thanks.

Yes.

This concludes our question-and-answer session. I would like to turn the conference back over to Manny J. Perez de La Mesa, President and CEO for any closing remarks.

Thank you, Andrew, and thank you all for listening. Our next conference call is scheduled for April 21, mark your calendars, when we will discuss our first-quarter 2016 results. Have a great day. Thank you.

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