Pool Corp (POOL) 2017 Q4 法說會逐字稿

Good day, everyone, and welcome to the Pool Corporation Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions) And please note that today's event is being recorded.

And 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 2017 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 2018 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, the latest version of which should be available in the next 2 weeks.

In addition, we may make references to non-GAAP financial measures in our comments. A description and reconciliation of our non-GAAP financial measures is posted to our corporate website in our Investor Relations section.

Now I'll 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.

As reported, we had a solid 2017 with 7.5% base business growth, including 13.3% base business sales growth in the fourth quarter.

Base business benefited from modestly favorable weather for the year, although this level of growth is primarily a reflection of the resiliency and positive characteristics inherent to our business, together with our team's ability to provide exceptional value.

For perspective, our 5-year base business average sales growth is 6.4% despite the modest recovery of new pool construction.

Our 2017 base business sales growth in our 4 largest markets, California, Florida, Texas and Arizona, was 8%, and in the rest of the markets, it was 7%. Also, our base business sales results include our green business, which had a 5% base business sales increase despite the exit of a product line which adversely impacted sales.

On the product side of sales, building materials and related outdoor living products continued its strong performance with 13% growth in 2017, despite the disruption of the storms. Commercial had 10% sales growth in 2017, excluding the Lincoln acquisition that we closed in the second quarter. Pool equipment growth was also 10% in 2017. The growth in these product categories reflects both the ongoing recovery in the remodel and replacement sectors of our business, as well as our consistent market share gains.

The retail product side of our business was up 3% in 2017, despite the challenging comps from the longer 2016 pool season. Our sales to the online market increased by a like amount as that channel has matured in the pool industry.

Our bright -- base business gross margins were up 10 bps, which is very good given the adverse product mix impact from the faster growth of equipment and commercial sales. For perspective, our base business gross profits have increased at a 6% average growth rate over the past 5 years despite the product mix headwind. Base business expenses increased by 5.5% in 2017, decreasing by 40 bps as a percentage of sales. The 5-year base business expense growth rate is 3.2%, or approximately 1/2 of the rate of our sales and gross profit average growth rates.

Altogether, our base business operating income increased by 11.8%, with our base business operating margin expanding by 40 bps to 10.4%. This growth compares to a 5-year base business operating income average growth rate of 13.3%. Our base business contribution margin was 15.8% in 2017, consistent with our expectations.

Our diluted earnings per share, excluding tax and accounting changes, increased by 15% in 2017, with our 5-year EPS growth CAGR being 16.6%. In addition, our after-tax ROIC was 24.7% in 2017, excluding the impact of tax changes.

When all is said and done, truly a solid year. These results are a tribute to our people who genuinely care about our business and the exceptional value they provide to our customers and suppliers. Every year, we have challenges, and 2017 certainly had its challenges. But our people persevered with many individuals' special qualities coming through with their contributions to their fellow employees and their communities, as well as to our business.

For 2018, we expect another year of solid operating profit growth plus the benefits of tax reform to realize $225 million to $235 million in operating cash flow, or $5.36 to $5.61 in diluted earnings per share. This expectation includes $0.13 in EPS and the additional share count associated with ASU 2016-09.

Of course, our results are only possible because of the commitment of our people throughout the company to our customers, our suppliers and each other. We're 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 120,000 customers realize success.

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

Thank you, Manny. I'll begin with a few highlights of our annual performance, followed by a brief discussion of our Q4 performance, then I'll cover taxes and our share forecast before finishing with a general observation on industry valuation metrics.

As noted, we had good top line growth in 2017 with 8% total and 7% base business growth. Gross profit grew a shade more than sales as we were able to post 10 basis points of gross margin improvement in the year.

We've discussed the various factors that go into our gross margins in the past, including a more detailed discussion at our Investor Day meeting last September. I won't repeat those comments here, other than to say that we do expect those same factors to continue to influence our gross margins going forward.

One key takeaway from our margin discussion was that, while we have historically had some gross margin volatility by quarter, margins have been and should continue to remain relatively flat on an annual basis. Where we do expect to gain leverage, as we've done historically, is in operating margins. For 2017, after a challenging start, we improved expense management each quarter throughout the year, and ended the year in good position.

While we fell short of our stretch target of growing expenses at 50% of the rate of gross profit growth, we did, as Manny noted, gain 40 basis points of base -- business operating margin improvement for the year, which was at the high end of our 20 to 40 basis point improvement forecast for the year discussed in our Q2 and Q3 results calls.

Growing our operating expenses at 50% of the rate of gross profit growth remains our stretch goal for the future, and we believe this is achievable given our recent history. Over the last 5 years, we've averaged 6.3% gross profit improvement compared to 3.2% growth in our operating expenses, so right at about that 50% mark.

The main challenges here going forward are effectively managing people and facility costs in tight labor and real estate markets. However, we continue to see significant opportunity to leverage our existing infrastructure, and this remains a major focus for many of our investments and operating initiatives.

Moving down the P&L, I'll skip tax commentary for a moment and jump to our fully diluted share count. Our adoption of ASU 2016-09 increased our diluted share count by 550,000 shares. Adjusting for this, we were down just over 1 million shares for the year, as a reduction in our share count from our share repurchase program far outpaced share dilution from equity compensation.

During the year, we repurchased 1.3 million shares at an average price of $108, which used $143 million in cash for the year. In addition to share repurchases, we increased our return of excess cash to shareholders in 2017 through dividends. As noted at the bottom of our income statement, we paid dividends of $1.42 per share for the year, which was an increase of 19% over 2016, and in total, used $58 million in cash for the year.

Combined, we returned total cash to shareholders through dividends and share repurchases for the year of $201 million, which was 114% of our 2017 cash flow from operations. Despite this, we ended the year with leverage of 1.6x, which was at the low end of our target range of 1.5 to 2x.

Moving on to the balance sheet and cash flow statement. The growth in our net working capital for the year was relatively consistent with our business growth with both collections and receivables and management of inventories on par with our strong historical results.

As many of you know, the seasonality of the pool industry has resulted in advanced purchase opportunities, referred to as early buys. These early buy purchases can result in year-to-year inventory and payable fluctuations at year-end. A change in the timing of one of those programs resulted in our falling modestly short of our cash flow from operations goal of exceeding net income for the year after adjusting for tax changes. We view this as a timing issue that should be self-correcting in 2018.

Further down the cash flow statement, you can see that included in our cash used for investing activities is a decline in acquisition spending offset by an increase in capital expenditures. On acquisition, despite the decline in cash payments, we completed a higher-than-normal 5 business purchases in a variety of markets during the year, which added 9 new locations. These acquisitions were all relatively modest in size, with each bringing us opportunities to add share in markets where we were underrepresented.

Historically, we have been able to add significant value to acquired businesses over time by bringing all of our tools and resources to the acquired business service teams, which ultimately helps them better serve their local customer base.

On capital expenditures, these were up in 2017 compared to 2016 due to the timing of fleet vehicle replacements. We expect our capital spending will come down in 2018 from 2017 and be closer to our 2016 level.

Moving on to highlights of our seasonally slower fourth quarter results, overall we had very strong performance for the quarter. As has been the case for a number of times over the past few years, we were able to take advantage of generally favorable weather conditions and greater available capacity in our networks to deliver both strong sales growth and high operating margin growth.

In this case, base business sales growth was 13%, which was pretty consistent across markets. Gross margins declined 20 basis points in the quarter, as anticipated and discussed on our Q3 call, while base business expenses grew just 6%. This led to a 150 basis point margin improvement in -- I'm sorry, this led to a 150 basis point improvement in base business operating margins and nearly 90% growth in operating income for the quarter. This was a great finish to 2017, which gives us confidence about both our opportunities and our execution as we turn the page to 2018.

Now let me take a couple of minutes to address the impact of tax reform on our 2017 and future results, as well as the ongoing impact of the accounting changes from ASU 2016-09.

As noted in our release, U.S. tax reform added to our 2017 results and will provide us with a significant benefit going forward. On our year-end balance sheet, we had net deferred tax liabilities that, prior to tax reform, were predicating on paying federal taxes at a 35% federal tax rate. The tax law change allows us to revalue these liabilities at the new 21% federal rate, resulting in a benefit in our 2017 tax expenses of $12 million, which in turn resulted in a $0.29 EPS benefit.

Going forward, excluding the impact of ASU 2016-09, we will have a lower corporate effective tax rate on earned income, though we expect to approximate 25.5%, which is down 13% from the roughly 38.5% we reported for the last several years. This benefit is included in our 2018 earnings guidance range.

As discussed multiple times over the last year, we adopted ASU 2016-09 in 2017, which resulted in accounting changes impacting both our tax expense line and our diluted share count. We will continue to highlight the impact of this ASU on our results, given the relatively significant and difficult to predict volatility it adds to our earnings.

For 2017, employee option exercises and vesting of restricted stock grants that appreciated in value since issuance, resulted in our recording of a tax benefit of $12.6 million under the ASU, which also increased our diluted share count by approximately 550,000 shares, which resulted in an EPS benefit of $0.24 for the year, including $0.12 for the fourth quarter.

Going forward, as we've done now for 2018, we will include in our projections only the benefit we know will occur based on the expected exercise of expiring options and restricted stock vesting which is set to occur during the year. These and any other benefits we record in the period will be called out by us as they occur.

We believe this will be the best and most transparent way to handle this on a go-forward basis. As such, based on our 12/31/17 share price, we have included in our 2018 earnings guidance range an ASU tax benefit of $5.4 million and an EPS benefit of $0.13, which would all be recorded in the first quarter of 2018.

For those of you that would like some guidance on our expected share count for 2018, including only share repurchases completed to date, I'll cover that now. Our forecast is for Q1, 41.9 million shares; Q2, for the quarter, 42.1 million; year-to-date Q2, 42.0 million; Q3, 42.2 million shares; Q3 year-to-date, 42.0 million shares; Q4, 42.3 million shares; and for the full year of 2018, 42.1 million shares.

Finally, I'm going to change gears a minute and comment on valuation metrics, which is a topic that has gotten some deserved attention in this post-tax reform period. I broach this topic because I've looked at a number of sell-side reports, following earnings releases for other wholesale distributors in recent weeks, and seen a diversity of approaches to this topic.

I'll comment specifically on a widely used valuation metric, enterprise value divided by EBITDA, and my belief that, because of tax reform, this metric has gone through a significant but, as yet, under-recognized dislocation. The dislocation of this metric, similar to a dislocated shoulder, should result in it being taking off the field and placed on injured reserve, so that it can rest and rehabilitate before getting back in the game.

This is particularly important when applied to wholesale distributors, an industry group with historically some of the highest corporate tax rates. By definition, the enterprise value of the EBITDA metric fails to recognize the value-add of the lower corporate tax rate. In fact, the companies who benefited the most from tax reform, companies that investors have rightly recognized as being more valuable post-tax reform, will appear to be the most overvalued on an enterprise to EBITDA basis when compared to their historic norms.

This can also be a problem, though to a lesser extent, when using this as a relative valuation metric in comparison to other companies, as there is uneven benefit from tax reform from company to company giving -- given their differing tax profiles.

In our case specifically, we expect tax reform to result in roughly $40 million of annual cash flow benefit in 2018, which should grow over time and would, on a discounted cash flow basis, be valued currently at around $1 billion. Investors should evaluate how much of that value is being captured in their financial modeling.

That said, I'll now turn the call over to our operator to begin our question-and-answer session. William?

(Operator Instructions) And the first questioner today will be David Manthey with Baird.

First off, Mark, just to clarify. So the ASU 2016-09, you're saying $0.13 in the first quarter, and you're assuming nothing for the rest of the year. But that doesn't mean that there won't be anything, you're just saying that maybe next quarter, you'll give us an update on what you think it will be for the second quarter and so forth, is that right?

That is mostly right, yes. That's all we've included in our forecast. And rather than trying to forecast it on a quarter-to-quarter basis, as it occurs we'll just call it out. But yes, there should be additional benefit, most likely on a quarterly basis going forward. And then, we'll have additional exploration of options in 2019. So as we get closer to when those occur, we will specifically call those out and include that in our guidance.

Okay. And then on the fourth quarter base business strength, was there any catch-up from the hurricanes there, either blue or green? And I guess, as we're looking forward, I believe you have 1 extra selling day in the fourth quarter of 2018, which against that strong comparison will allow for some thought there as well. Could you just verify the selling days are equal in the first through third quarters, and then any commentary on hurricane catch-up?

David, we'll get back to you on the selling days. But with respect to the fourth quarter specific, the -- there was certainly some catch-up in Florida from the lost activity in September. To a lesser degree, there was catch-up in Houston Metro from the storm in August, although a lot of that catch-up happened in case of Houston, in the month of September.

So there's certainly some -- that certainly played into the number a bit, but universally, that was not the case, because other markets that were not affected by the storm were also very strong throughout the fourth quarter.

Some of that was due to just the natural demand that exists and the limited capacity on the part of the contractor base. So for example, in seasonal markets, to the extent that they could, they continued working a little longer and that certainly contributed to the overall results.

Okay. And just one more, if I could. Could you talk about pricing in 2018? It looks like the BLS chlorine prices are up year-over-year now. What is your outlook for chemicals and other pricing in 2018?

Taking chemicals aside, the overall increase would be more like the 1% or so that we've seen the last -- almost 7 or 8 years of weighted.

In the case of chemicals, you're very perceptive there. Apparently, you have very good sources. But yes, there is a constraint in stabilizer or asset out of China. They are the primary manufacturer of that product on a worldwide basis, and some of those plants have been shut down.

So there is a reduced capacity and, as a result of that, we expect at some point for that tighter supply of stabilizer to translate into overall chemical, because that goes into a number of other product -- end-products, to work itself through the system. Whether that happens in the middle of this year or later this year or next year, that is still to be defined. But yes, there is a possibility of a little bit more inflation in chemicals that we haven't had in over 10 years to come through later on this year.

And the next questioner today will be Ryan Merkel with William Blair.

So for me, first question. Just want to ask about the 2018 outlook. Should we be thinking about 6% to 8% base business growth in that outlook, Manny?

I would say, in that number, you've got a -- base business 6% to 7%.

6% to 7%. Got it. And then how much will acquisitions add to the top line in '18? Obviously just acquisitions you've already completed.

The annualized impact will be -- a shade less than 1%. Call it 1% with no bottom line contribution.

Okay, got it. And then can you just update us on -- are you seeing a normal pre-buy here in the first quarter? I don't know if it's too early to comment on that, but just given that that can move around a little bit year-to-year, just want to calibrate 1Q '18 top line for everyone.

Sure. Again, most of our customers, the lion's share of our customers don't have -- don't stock inventory. The only exception to that would be the retail side of our business. And we have made an effort in the last few years to get as many of those retail stores properly stocked and ready for the season earlier when we have, I'll call it, more available capacity from a trucking and labor standpoint.

So we're continuing those efforts this year. Now when you look at the overall top line, how much does that play into the overall number for the quarter? At this juncture, it's a little bit early to say because, again, the customer may push out a delivery from March 25 to April 5, and that could just easily swing from end of the first quarter to beginning of the second.

Okay, got it. And then just lastly, what is your expectations for growth in the green business for 2018? And then just comment on current irrigation demand drivers, if you could.

Sure. The irrigation sector is more weighted to new home construction. And that continues to be strong in terms of growth year-on-year, not strong in the absolute sense, since the numbers are still very depressed vis-à-vis historical levels. But I would think that the green business will grow faster than the overall business in 2018. And as it did in 2017, if you ex out the exit of a product line that we did in Arizona.

It sounds like a continuation from strong performance in 2017 into 2018.

Yes.

And the next question today will be from Matt Duncan with Stephens.

So Manny, I want to go back to the discussion on the fourth quarter revenue growth rate. You mentioned that the growth was -- it sounds like similar in year round markets and seasonal markets in the fourth quarter. Can you tell us what those growth rates were? How different were they? Or were they just basically the same as the base business growth in both places?

Yes. I mean, for example, Arizona. Arizona wasn't affected by any storms in the fourth quarter, and they were right there, 13 and change for the quarter. And that's a combination of both blue and green with both running at about the same level year-on-year.

You go to California. California was also 13 and change for the quarter. So when you look at this -- and, again, those were not affected by the storms and the recovery of the storms. That just gives you 2 of the other larger markets. When you look at the rest of the markets overall, they were up 15% quarter-on-quarter. So...

Yes. The rest excluding Florida...

Yes. The rest of -- the big 4 states. So that gives you a kind of a -- it's pretty widespread.

So Manny, that begs the question that what's driving that level of growth? And I guess where I'm coming at this from is I wonder if maybe what we're seeing is when we get out of the busy season that pool contractors have more time to do remodel work, have more time to do new build work. We know labor has been probably a constraint on growth at times during the busier times of year. So what is your perspective on that?

Yes. I think you hit the nail on the head. The constraint to the level of growth is labor. The demand is there, right, particularly with our customers as given the marketing and everything, the support that we provide them to help keep them busy. So the drive is there and the demand is there.

Now in the second and third quarters, the natural demand, right, basically limits the ability for those guys to do more. So in the slower times of the year, the fall/winter, that they continue working to the extent that they physically can and address it there.

There's a couple of other plays here in the equation. We have done a lot, building materials is a key element, to broaden the offering and obviously -- and continue to gain share in that regard. And that has enabled us to not only sell more products and grow our business that way, but from a customer standpoint, they're able to sell more pool and raise the average ticket. And again, it's all feeding that base.

But I think the core is -- in the second and third quarters, we can only -- our customers can only do so much. And when they have some more available time in the fourth and first, that they are using that to the extent they can weather-wise.

By the way, just to answer a previous question from Dave Manthey. It was the number of selling days. We do have 1 additional selling day in the fourth quarter of this year compared to 2017. So factor that into your model.

So then, Manny, if we look at 2017, right, 8.5% growth rate. It was obviously much faster than that in the fourth quarter. The organic growth appears to have been just a shade over 7%, I believe, if I'm doing my math right. I know...

That's 7.5%.

7.5%, right. Your target is 6% to 9%, so you're right in the middle of that range. Is that -- should that be our starting point for 2018? Is that what's baked into your guidance? This kind of 7.5% base growth plus the acquisition growth?

Yes. And let me -- the essence in my response earlier to Ryan of 6% to 7% is that I presume average weather, right? And 2016 had very good weather. 2017 was a bit above average, not as good as '16, but still good. And this is, again, affects more mainly the seasonal markets.

So assuming average whether in the seasonal markets, the season won't be quite as long. So even though the demand may be there, right, in the fall of next year, they -- you may have significant storms in the north and things shut down 2, 3 weeks earlier than they did this year.

Okay. Makes sense. And then last, just a couple of quick numbers questions and I'll hop back in the queue. One, Mark, did you have any catch-up in incentive comp in the fourth quarter? I think some people were thinking maybe you'd have a little more operating leverage on that level of revenue outperformance.

And then two, the receivables again this quarter grew faster than revenue growth. Second quarter in a row that's happened. Anything to read into that at all?

On the incentive comp, it was relatively flat year-over-year. So no to that. On the receivables, that really reflects a little bit stronger December sales. So we have more of December sales open at year-end than the quarter overall. So nothing to read into that. Collections were good. Past dues were very consistent year-over-year. So no issues on collections there.

We also had 2 acquisitions that closed earlier in the quarter that are incorporated in the receivables number.

and our next questioner today will be Anthony Lebiedzinski with Sidoti & Company.

So just wanted to follow up as far as the 2018 guidance. Mark, what is your assumption for your base business expense growth in 2018?

Well, as I said, we start out with that stretch goal of expense growth at half the rate of gross profit growth, and Manny gave you his sales growth numbers and assuming flat gross profits. And you can say that's our stretch goal for 2018 is in that half of the 6% to 7% base business revenue growth.

Got it. Okay. That makes sense. Can you also remind us please as to what was the -- how much of the impact on your green business was because of this product line exit?

The impacted sales, GP and expenses and the bottom line impact was less than $0.01. It was more of a return on capital aspect.

And Manny, what is your outlook for new pool construction?

New pool construction. We estimate domestically there were about 75,000 pools built in 2017. The numbers haven't been finalized yet. All the sources coming together, but it will be about 75,000. My expectation is it will be about 10% growth year-on-year. Demand is more than that. I don't know that builder capacity can do much more than that in terms of annual growth at this juncture.

Got it. Okay. And anything on the -- your international segment, anything notable to call out there?

International business continues to hum along. In Europe, our sales for the year were just 11% in euros year-on-year. Canada also grew year-on-year. So we're continuing to build our international business. And the tough thing there is that when you look at our overall international business, it's 8% and change of our total business. And even if they outperform the domestic business by a couple of percent, it's tough to get from 8% to 9% of our total business.

And our next questioner will be Garik Shmois with Longbow Research.

I wanted to ask about the pace of M&A that picked up in the end of the fourth quarter. I guess what contributed to the acquisitions that you closed on in December and what the outlook is for M&A into 2018?

Okay, Two parts. One is, as Mark noted, we did 5 transactions in the course of the year. Two were, I'll call it, from our conjecture on the medium size. They were about $20 million in sales. One that was closed in the spring, and the other one that closed in December. And then the 3 other ones were smaller that would be in the order of less than $10 million in sales. And so collectively, they'll add close to 1% annualized to our sales in 2018.

Now these businesses are, by and large, basically breakeven businesses, as is the case with a good many distributors. So therefore, it takes a little while for the tools and resources that we have to be utilized effectively in the marketplace to grow sales and to operate internally the business more efficiently.

So the ramp-up in profitability there really takes place over time as opposed to right out of the box. So that -- that's the element there, and that bottom line impact is -- will be less than $0.01 in terms of EPS this year.

Okay. And then just on OpEx growth in 2018, labor and freight have been headwinds for some time. Recognizing your stretch goal of OpEx at half of revenue growth, just wondering directionally what you're seeing in freight labor, if that expense is accelerating and how you can mitigate that.

Right. There's -- in terms of freight, there's 3 elements: one is the actual fleet cost, I'll call it, the depreciation of our fleet. Second is the ongoing expenses related to that fleet, whether it'd be gas, oil changes, tire replacements, things of that nature. And then the third is third-party freight.

Now for us, the third-party freight is an important part, and that's the one that's most volatile from a year-to-year standpoint to change. But it's -- but the overall impact is mitigated by the other two, especially as we work progressively to better utilize the trucks that we have and do a better job in their ongoing maintenance and repair.

So the bottom line is that there is an impact, but it's, again, muted by virtue of the fact that we have a fairly significant fleet and our own elements of -- better ways to manage that. As a percentage of sales, I don't think it's going to be significantly different in 2018. And part of that is because of better utilization of our fleet. That's mitigating the impact -- largely mitigating the impact from the third-party freight services.

In the case of labor, that is a -- as we all know, it's a very tight market. We are basically in the U.S. We could certainly use another 5 million people with varying skill sets. They would be employed immediately. And so that's a situation that...

Not all by us.

Not all by us, but certainly -- we could certainly use a few. The -- so that's the dynamic there. And there's pressure there. Mark's reference, we strive in long term. I think that 50% is a reasonable number. I think that in the near term, that may be a little stretched. So I would think that we'll be probably more like 60% of our sales number as opposed to 50% of our sales number in '18. And that's all reflected in our guidance.

(Operator Instructions) And our next questioner today will be Ken Zener with KeyBanc.

So I have -- just listening to you guys and looking out my window where it's sunny and warm once again, two structural items appear to be happening. And if could respond to this.

So the first thing, potentially, it looks like your seasonality of your business might be changing. Demand is there, supply and labor is tight. So stuff is bleeding into 4Q and 1Q a little more, which is interesting. And I can understand that, but Manny, you talked about your base business having normal weather assumptions, which -- I was just looking at the Noah graphics for basically the fourth quarter, and it was anywhere from above average to much above average in October and November.

So -- I don't want to talk about global warming, but we've had no weather, snow, rain out here. And so even though -- it's just -- is that a reasonable assumption? I mean, if things are warmer, can you just structurally see more business in 1Q and 4Q, which is good considering you're absorbing your fixed costs.

And then as -- when do we think about what is normal, because 1Q and certainly, California looks poised to be very robust just because of the weather we've had so far. And how does that change your business model?

Right (multiple speakers). Great points, Ken. First of all, my assumptions are regarding '18. '17, as you noted, was above average, and '16 was well above average from a weather standpoint. So the question here, and your point is, should above-average be the new norm for having milder winters in the seasonal markets. And the answer is -- I'd rather run the business instead of predict the weather.

Yes, ditto. I get that, but it's really impressive if you do the last 2- or 3-year averages versus a 20-year average. And certainly, what we're experiencing right now.

You're right. And to the extent the weather in the first quarter and fourth quarter are milder than normal. There could certainly be a little upside to our expectations for the year. And that's why we provide a range. And that would be closer to the higher end of the range as opposed to the lower end of the range.

Okay. It is going to be interesting. I know you guys aren't a global warming shop. It appears though that you're a really good indicator of it.

My second question -- the 4 large states that you highlighted in the fourth quarter versus -- again, base business, seem to be very persistent. It was good everywhere. But when you take a step back, they did 8% versus your total company 7% for FY '17, I believe if I got that? Which means the dispersion, obviously, those other states would be lower.

What is causing, not in the fourth quarter, but just in general, such higher base growth rates in these core states? Is it because they are in higher price appreciation markets? Is it because there's more pent-up demand from those older owners as they build equity? Can you just comment structurally on why we see higher growth base rates in those 4 states?

Okay. I'll tell you the fundamental point is that that 7% and the rest of the markets outside of the largest 4 markets are weighted by the seasonal markets. And in 2016, the seasonal markets, as we talked earlier, the weather was really good, and it was a much longer season.

So the 7% is on top of a tougher comp in the 4 larger markets outside of an event like the hurricanes that happened in Texas and Florida and Puerto Rico this year. Outside of those weather events, which typically we recover from fairly quickly, on an annual basis, they are not as significantly affected by weather on a year-on-year basis.

And there look to be no further questions at this time. So this will 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.

William, thank you very much, and thank you all for listening. Our next conference call is scheduled for April 19, when we will be discussing our first quarter 2018 results. Thank you, again, and have a great day.

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