Feb 19, 2009
Pool Corporation (POOL)
Executives
Mark Joslin – VP and CFO Manny Perez De La Mesa – President and CEO
Analysts
Tom Hayes – Piper Jaffray Kathryn Thompson – Avondale Partners Anthony Lebiedzinski – Sidoti & Co. David Manthey – Robert W.
Baird David Mann – Johnson Rice Keith Hughes – SunTrust Robinson Humphrey Brent Rakers – Morgan Keegan
Operator
Good morning. My name is Sarah and I will be your conference operator today.
At this time, I would like to welcome everyone to the Pool Corporation’s fourth quarter 2008 earnings call. All lines have been placed on mute to prevent any background noise.
After the speakers’ remarks there will be a question-and-answer session. (Operator instructions).
At this time, I would like to turn the call over to the Company's Vice President and Chief Financial Officer, Mr. Mark Joslin.
Mr. Joslin, you may begin your conference.
Mark Joslin
Thank you, Sarah. Good morning everyone and welcome to our year-end conference call.
As usual, I’d like to remind our listeners that our discussion, comments, and responses to questions today may include forward-looking statements, including management’s outlook for 2009 and future periods. Actual results may differ materially from those discussed today.
Information regarding the factors and variables that could cause actual results to differ materially from projected results is discussed in our most recent Form 10-K as filed with the SEC, which by the way we’ll be putting a new K out there for 2008 in just under two weeks. Now, I’ll turn the call over to our President and CEO, Manny Perez De La Mesa.
Manny?
Manny Perez De La Mesa
Thank you, Mark. Well, we are certainly being challenged.
Not only are the dynamics that have affected new pool and irrigation construction impacting our business, but the liquidity crisis and economic meltdown are also impacting some replacement activity as well. Yet, through it all we continue to persevere and continuously look for ways to increase cash flow generation and earnings.
That the industry has weathered an unprecedented 60% plus decline in new pool and irrigation construction since 2005 while we were realizing our biggest year in cash flow from operations is a testament to the resiliency of our business model and the capability of our team. Overall, our earnings decreased by 8% or $0.11 per diluted share in 2008 when excluding the change in equity earnings from our investment in Latham and 2008 acquisitions, again, despite the meltdown all around us.
Cash flow from operations reached new high, surpassing $93 million. In 2007, we entered an unprecedented time in the history of our young industry.
Since then, we have focused on five areas that would optimize our position for both the short and long term. One, continued focus on the customer to ensure that we continue to distinguish ourselves as a value-added distributor intent on promoting the growth and success of our customers’ businesses, which has become increasingly important in these challenging times.
Two, increased gross margins to capture just compensation for the value provided through improved pricing discipline and enhanced sales, sourcing, and purchasing execution. Three, to rationalize expenses commensurate with market demand without compromising our ability to serve or participate in a market recovery.
Already being frugal by most corporate standards, we still found ways to economize and adjust. Four, to use credit wisely to facilitate sales, but with the checks and balances necessary to properly balance risk and potential return.
And five, to maximize cash flow through judicious management and allocation of capital. In addition, we continue to evaluate opportunities for future growth with strategic and opportunistic transactions like the NPT acquisition completed in the first quarter of 2008.
In these respected, we succeeded in 2008, yet using EPS as the metric we still fell short as our overall base business sales decreased 9%, which decrease we could not quite make up for with our gross margins and lower expenses. In the blue or SCP Superior portion of our business, our base business sales were down 16% in the fourth quarter and down 8% for the year.
Of the larger markets, Texas held up the best in 2008, with a decline of only 1% for the year although weakness was evident in the fourth quarter when sales declined by 11%. Florida began to reflect the resiliency in a market where new pool construction has decreased by 75% since 2005 as sales declined by 9% for the year, but only 8% in the quarter.
California had similar results with a sales decline of 11% for the year and 12% in the quarter. Arizona, the youngest market in terms of the age of the installed base, had a sales decrease of 16% for the year and 24% in the quarter.
A colder fourth quarter in the rest of the markets coupled with all of the known economic and political distractions resulted in a sales decline of 22% in the quarter to bring the year down in these markets to a 7% decline. Turning to the green or Horizon side of our business, the sales decreases were accentuated by a business mix that is more weighted toward new construction.
Here, base business sales declined by 21% in the quarter and 18% for the year. Similar to SCP Superior, Texas held up best, declining 4% for the year and the same 11% in the quarter while California, Arizona, and the rest of the markets declined 18% to 26% for the year and 21% to 21% for the quarter.
Evidence of success in our sales execution despite the above declines is the sales growth realized in chemicals, parts, and maintenance items, which unit sales growth exceeded the 2% to 3% growth in the installed base. Altogether, we estimate that maintenance, repair, and replacement product sales represented at least 80% of our total sales in 2008.
This high proportion of our sales in non-discretionary and partially discretionary products should continue to mitigate the adverse external environment. For 2009, we anticipate that it will continue to be a very challenging environment.
While we work to grow market share, expand gross margins, reduce expenses, and maximize cash flows, we fully appreciate that times are tough. In the very near term we see a lot of caution on the part snowed out customers that are choosing to stock their stocks when it warms up as opposed to in anticipation of pool openings.
Logically, with consumer financing largely unavailable, interested pool buyers are on hold, which will result in another drop in new pool construction in 2008 – excuse me, in 2009. On the other hand, there are positives as well.
The year round Southern Californian and Florida Peninsula markets are tracking at sales rates close to last year’s January, February, perhaps a sign of what the other markets will be like when it warms up. In addition, the so-called stimulus and financial capitalization programs will presumably find their way to the consumer at which point some deferred replacement retrofit activity should take place.
While we currently don’t anticipate that our earnings will be significantly different in 2009, we should have a much better gauge of what 2009 will look like when we report our first quarter earnings in April. Before concluding my remarks, I’d like to recognize that we have the most talented and dedicated team of employed in the industry.
It is my humble privilege to serve as their leader. I believe that these challenging times will in the long run be very good for our industry and especially good for our Company.
With that, I will turn the call over back to Mark for his financial commentary.
Mark Joslin
Thank you, Manny. First I’d like to reiterate points that we made in our press release related to our EPS for the year.
Included in our reported EPS of $1.18 was a $0.06 change in EPS from the results of our equity investment in Latham as well as $0.02 of dilution from our first quarter acquisitions. Excluding these changes, our full year EPS would have been $0.08 higher, in fact, the majority of that impact occurring in the fourth quarter.
Now, I would like to comment on our operating expenses. As we mentioned on past calls, in our release, and in Manny’s comments, operating expense reductions have been and continue to be a major focus for us as we adjust for current and anticipated market conditions without sacrificing a key long term objective of growing our market share.
Looking at the make-up of our cost structure, labor-related costs are the largest component, accounting for 52% of our total 2008 operating expenses and are the area where you have the greatest ability to make meaningful adjustments. Our total labor-related costs, excluding acquisitions, declined 6% for the year and 12% in Q4.
These costs are largely headcount driven and include wages, benefits, and incentive compensation. As noted in our press release, we have made good progress on reducing our headcount over the last two years through attrition and selective layoffs, which is a process that has continued throughout 2008 and into 2009.
So, expect further cost savings here as 2009 progresses, although not at the same Q4 ’08 rate, which had some non-recurring benefits. We have also frozen salaries across the board in 2009 for Manny and down, which will result in approximately $5 million annualized cash benefits to the Company.
The next largest component of our operating cost structure is facility costs, which were 15% of our 2008 cost structure and excluding acquisitions, grew by 4% in 2008 over 2007, 2% for just the fourth quarter. The higher 2008 costs reflect the carryover of facilities added in 2007 as well as rent escalation and higher pass-through costs.
Here, we have chosen to largely ride out the soft economic conditions by maintaining existing profitable facilities, which continues to serve markets that are attractive in the long term. We have been negotiating lease concessions in many instances, which is a process that will continue in 2009 and help offset some cost inflation in this area.
Delivery costs, net of customer charges, were 6% of our 2008 operating expenses, and were down 5% for the year from 2007. These costs are of course impacted by sales volume as well as gas prices and the number of vehicles we leased.
As we have reduced our vehicle lease commitments given the market conditions and expect lower average gas prices in 2009, we expect to cost savings benefits in this area throughout the year. On the remainder of our operating costs, we have been very aggressive about looking for ways to lower nearly every component.
Some of these costs, like computers, phones, travel, as examples, are headcount driven, so we get an additional indirect benefit here by lowering our headcount. This should provide a better understanding of what we are doing in the area of expense management.
While we may not have a headline expense reduction target specifically, I can assure you, we have been and will continue to take actions, which we believe will have very concrete results. Now, I will take a few minutes to comment on Latham International.
As most of you know, we hold a 38% equity investment in this company, which is the largest manufacture of packaged pools and related products. This business, with primary markets in Central and Northern geographies, is naturally more seasonal in nature, and has seen a less severe market impact since it has less exposure to California, Florida, and Arizona.
There is also a higher construction and replacement versus maintenance mix to this business and given our expectation for continued weakness in the pool construction market in 2009, we believe our equity earnings can be negatively impacted by as mush as $0.5 million in 2009 than 2008, which would impact us, most likely primarily in the third quarter. Turning to the balance sheet, starting with accounts receivable, our net receivables declined $26 million or 18% for the year.
This reflects our slowdown in sales in Q4, a higher allowance for doubtful accounts, and the shift in emphasis from credit to more cash sales as necessitated by our customers’ creditworthiness. Our DSO at year-end as measured on a trailing 12 months of receivables was 36.3 days, which was unchanged from 2008.
This is quite remarkable given market conditions and speaks volumes about the balance we are achieving between extending trade credits and risk of collection losses. As we turn the corner on a full season, we believe the majority of the 2008 collection issues are behind us as customers will begin paying off past due balances as their seasonal business grows.
Given our expectations for another year of declining consumer discretionary expenditures that will impact the industry, we remain very focused here on extending credit to those customers with the ability to repay us while aggressively pursuing past due accounts. Moving on, inventories, our year-end inventory investment of $406 million was up 7% from 2007 or 2% excluding acquired inventories of $17 million.
As we discussed in our third quarter call, higher than normal vendor price increases prompted us to use our financial strength to make meaningful purchase commitments ahead of these price increases mostly on normal 30-day payment terms. While this reduced our operating cash flow performance at the end of 2008, we believe this will add significant value to our business in the first half of 2009.
As we move into 2009, you should know that working our inventory levels down is a key initiative for us. We have been making great progress on this so far and expect this improvement to accelerate as the season picks up.
We will update you on this in two months when we release our first quarter 2009 results, when as expected the inventory levels – below Q1 2008 levels. As noted, our cash flow generation in 2008 was excellent.
And we expect similar favorable cash flow results in 2009. Although we benefited from a $30 million deferral of federal taxes due to the Gulf hurricanes, we also had the major investment in lower-priced inventories during the year as discussed above leading to our cash flow from operations of $93 million, up from $72 million in 2007.
We also par [ph] back capital expenditures in 2008 by $4 million, giving us $100 million in free cash flow, which we used to make acquisitions, pay dividends, buyback a little stock, and significantly pay down $23 million in debt by year-end. Interest in our debt for the year averaged 4.8% compared to a 6% average in 2007.
Currently, we are paying approximately 3.5% average interest expense on our outstanding debt, which we believe will certainly benefit us as we move into 2009. Our year-end leverage and fixed charge coverage ratios, which are our two main debt covenants, remained in compliance.
Our leverage ended the year at 2.83 compared to our 3.25 covenant while our fixed charge coverage ratio of 2.48 was above our 2.25 covenant as it should be. While we expect this tighten up over the next few quarter as we reach our normal seasonal working capital highs, we expect to remain in compliance throughout this period and the rest of the year.
As recorded in early January, we did amend our accounts receivable securitization agreement, which was necessitated by our lower fourth quarter credit sales and longer aging. This amendment gives us more room under some of the assets based covenants embedded in the securitization agreement.
We also lowered our maximize commitment under the agreement to $75 million from $95 million as we had no use for the additional $20 million commitment between January and the expiration of the agreement in May 2009. This is a 364-day agreement, and we expect to renew it again in May.
That concludes my prepared remarks. I will turn the call over to our operator to begin our question-and-answer period.
Operator
(Operator instructions) Your first question comes from the line of Tom Hayes from Piper Jaffray. Your line is now open
Tom Hayes – Piper Jaffray
Great, thank you, good morning gentlemen.
Manny Perez De La Mesa
Good morning.
Tom Hayes – Piper Jaffray
A couple of questions, one, you called out in the release some improvements you have been making as far as the product mix, especially on the private-label product line. I am just wondering if you give some color as to the impact that you thought that had in the quarter and as well as going forward?
Manny Perez De La Mesa
In terms of the year, that impact was probably in the nature of 20 bps to 30 bps and that comes from two fronts, one front is migration to our own branded products, which have logically higher margins, and secondly to our focus to drive more sales to our preferred vendors and – or the sale of preferred vendor products. And therefore that’s the other component.
Tom Hayes – Piper Jaffray
Okay. I think Mark mentioned in his prepared comments that the vendor price increases you saw were higher than expected or higher than normal.
Could you give maybe some magnitude to that?
Manny Perez De La Mesa
Sure. Historically, in this industry, Tom the order of magnitude of inflation had been very, very modest, probably running to the tune of 1% to 2% over the long term.
Tom Hayes – Piper Jaffray
Okay.
Manny Perez De La Mesa
Given the – given two factors – given the raw materials cost increases that took place after manufacturers established their 2008 pricing in the beginning of the fall of 2007 through the better part of 2008, manufacturers had to absorb significant increases in raw material costs. Secondly, given the contraction of the industry, manufacturers now have much higher fixed costs in their structure, so when you take that to a product cost level given the lower volumes they have a higher overhead cost per unit.
So, therefore, those two components really put significant pressure on manufacturers to raise their prices given their higher cost. And to that end the nature of the increases are in the overall in the mid-single digits to even in some cases higher than that.
And the – so when those were announced, we had the opportunity to buy in before the price increases were effect given the normal 30-day or so notice period and so we did that.
Tom Hayes – Piper Jaffray
Okay. Just a quick follow-up on that one, I think you mentioned in the last call that the vendors were still trying to catch up on the price increase that you just kind of spelt out.
Do you think that with these last round of increases you pretty much caught up?
Manny Perez De La Mesa
In the case of chemicals, there was – there were in fact three increases that were rolled out beginning in late summer, fall, and then effective January 1st. In the case of equipment manufacturers, those increases were done basically in the fall timeframe and my expectation is that that should largely be hit.
Tom Hayes – Piper Jaffray
Okay. And last one, I will just get back in the queue, you had mentioned that you increased the allowance for doubtful accounts and maybe tightened up your credit standards.
Just any magnitude on that increase in the allowance and potential impact on sales from the tighter credit? Thank you.
Manny Perez De La Mesa
Well the change in the allowance is noted on the footnote to the balance sheet on the press release. In terms of the impact on sales, the answer is yes, I mean I don’t have a quantification of what that would be, but certainly to the extent that we had a customer – we have a customer that is behind on payment and we put them on COD if – in some cases those customers may go to a competitor and try to buy there, and logically run up their credit line at the other – at the other distributor in the interim.
And some of that does happen. And by the way that also happens the other way as well.
We tried to be very judicious in that process. And our objective is not that the customer goes elsewhere, and frankly that the customer that we had – the customer COD is almost like last resort.
So we try to work and communicate with our customers to help them grow and succeed in their businesses and to the extent that we can help them become successful in manage through the environment then they stay as loyal customers for us.
Tom Hayes – Piper Jaffray
Alright. Thank you.
Operator
Your next question comes from the line of Kathryn Thompson from Avondale Partners. Your line is now open.
Kathryn Thompson – Avondale Partners
Okay, thank you. A couple of different questions, first starting on the top line, could you clarify what type of maintenance revenue trends you are seeing in states that are still in the pool season like California and Florida?
Manny Perez De La Mesa
Maintenance-type products, Kathryn, are – were up in 2008, and they are still up now. So that’s products like chemicals and parts and accessories those type items were all up nicely in units in 2008.
And although it’s very early in the year that’s one of the reasons that Southern California and the Florida peninsula, which are the most year round markets or best references to year-round markets. Overall, despite the fall-off in new construction we are still close to last year’s sales levels.
Kathryn Thompson – Avondale Partners
That’s helpful. And moving to your gross margins, had some nice year-over-year improvement in the quarter, how much of that was Company-specific initiatives?
And any clarification on the gross margins for the quarter will be helpful. And also what you see trends for at least early ’09.
Manny Perez De La Mesa
Okay. In terms of gross margins, you have two components, you have the annual benefit that we had in gross margins and that’s the – all the items that were covered in the top portion of the release when we talk about the year-end – full year information.
That delta is primarily driven by the buy in for – of inventory ahead of price increases. And what you would see is that in the first quarter of 2009 you will continue to see the benefit, in fact probably through April or so you will continue to see the benefits of the pre-price increase purchases that we made back in August-September.
So, that will continue to ripple through. The benefits as you saw, if you look at our gross margin improvement during the course of 2008, it improved every quarter.
And although we did a lot of work in the fall of 2007 in anticipation of the (inaudible) year, the actual practices and changes in behavior were not all made in one night or one day, they happened gradually. So, therefore, what you have is, as you proceed or progress through 2009, you will see net higher margins, but you will see the rate of improvement vis-à-vis 2008 moderate, one is because of the improvements that were already – or changes in behavior that were made during 2008 being annualized and second because after about March-April timeframe the benefits from the pre-price increase purchases will basically disappear.
Kathryn Thompson – Avondale Partners
Okay. And that really hits – that benefit disappears once you get to May, basically?
Manny Perez De La Mesa
Yes, certainly by May. It’s – depending on the nature of the buy in those inventories are largely consumed by February-March and there is some that slip into April, but by the end of March, most of that will be behind us.
Kathryn Thompson – Avondale Partners
Okay. Moving to SG&A, any thoughts on SG&A for fiscal ’09 given your staff reductions, particularly those made in Q4?
And also I know you quantified in you prepared remarks the impact of lower or not increasing you pay, but if you could couple that along with your staffing reductions and you know idea of where SG&A should trend for ’09 based off of those two things?
Manny Perez De La Mesa
Much like the behavior changes that took place in gross margins took place gradually during the course of ’08, the same applies to the changes in structure and the resizing that we did during the course of 2008 with respect to expenses. So therefore what you have there is that we are starting the year at a lower expense base than we started 2008.
And provided that we don’t see any uptick in market activities of significance then our overall expenses for 2009 will be lower than they were in 2008.
Kathryn Thompson – Avondale Partners
Okay. And just to clarify, SG&A on a annualized basis looking on a dollars basis, I know ’07 ended around 397 and just ended up around 400 for ’08, so on a dollars basis there is an increase year-over-year.
While you are riding Q4 on a dollars basis it was down about $2 million year-over-year. What you are suggesting is that from ’08 to ’09 must be at least flat on a dollars basis if not down SG&A.
Is that – am I interpreting that correctly?
Manny Perez De La Mesa
You are interpreting that correctly and just give you a little bit more color. We had almost $400 million in 2007 and then we made two acquisitions in the first quarter at the end of February, which added close to $20 million of expense base or they came with almost $20 million of expense base.
So therefore – and then we also had some locations that we had opened in the first part or earlier part of 2007 that we have the full year impact for in 2008. So, when you look at the number the real reference number on a – call it pro forma what-if basis for ’07 was closer to 420, and we dropped that down.
And much like you saw in the fourth quarter, from an expense standpoint even when you include the acquisitions in there we were still overall down. And therefore our run rate on expenses is in fact less than our total for ’08.
Mark Joslin
Yes, just a reminder, Kathryn, we have that base business schedule attachment to our press release.
Kathryn Thompson – Avondale Partners
Yes, absolutely.
Mark Joslin
Yes, that’s a good place to look at the operating expense trend there.
Kathryn Thompson – Avondale Partners
Yes, I just wanted to make sure that we are just on the same page in terms of the dollars and not on a percentage basis.
Manny Perez De La Mesa
Yes.
Kathryn Thompson – Avondale Partners
You gave some clarification on your slowdown in tables, you talked about some of those in the previous quarter and touched on it some on your prepared comments today and you seem to have some confidence that you won't see anymore meaningful slowdown in payables and saw the bulk of that last year.
Manny Perez De La Mesa
Just one clarification, Kathryn, it’s slowdown of receivables, not payables.
Kathryn Thompson – Avondale Partners
I am sorry. I missed out receivable.
Manny Perez De La Mesa
I don’t want to–
Kathryn Thompson – Avondale Partners
That would be a great (inaudible) excuse me for that. Clarify why – where you confidence is in that and just–
Manny Perez De La Mesa
Well, normally, I mean we are in a very seasonal business. And once you get to March-April timeframe our customers’ cash flows naturally improve.
And again given the seasonality once you get into the fall winter our customers’ cash flows naturally get worse. So therefore we are now in mid-February.
We have another month or so and before that – you know, from – after that point in time, we would naturally expect our customers’ personal cash flows to begin to improve as the – as it starts getting warmer and they start getting busier. So, that’s the nature of that comment.
Historically, when we’ve looked at our receivables basically the worst time is the November, December, January period, again, reflecting customer cash flows. And then – and the best period normally is in the July-August timeframe kind of at the tail end of the season before people begin to close down their pools and after that obviously their cash flow begins to erode significantly through the winter.
Kathryn Thompson – Avondale Partners
So, basically trends that you’ve seen and – to-date November to January are a little bit better than your expectation or are you seeing some flattening of trends and that gives you confidence?
Manny Perez De La Mesa
Right, together with our own disciplines and our practices on the – both part of line management as well as credit management working together to communicate with customers and work through whatever issues there may be to resolve and move forward.
Kathryn Thompson – Avondale Partners
Okay.
Mark Joslin
And just to clarify, Kathryn, is – as Manny said, it’s really a seasonal timing confidence there that we are making. 2008 we’ve seen the worst of 2008 collections.
Beginning 2009 we will be improved there in the first couple of quarters and then 2009 second half will see similar trends most likely with what we saw in 2008.
Kathryn Thompson – Avondale Partners
Okay. Alright.
That makes sense. That’s helpful.
And then final question, Manny, this is just really kind of reaching back and looking at some comments from a couple of years ago or in some past times. When we just talked about guidance in general, I think at one point in time you made the comment that by April you have about 70% to 80% visibility for the year in terms of guidance.
Does that case still hold true given the current environment? And what are your thoughts in terms of visibility and how you put together your guidance as we prepare for the Q1 call?
Manny Perez De La Mesa
The industry has changed significantly over the past three years. Prior to 2006, the builder segment of our customer base was basically at capacity.
So, when you have that portion of the customer base at capacity and you are certainly – have an installed base of pools that drives maintenance, repair, and replacement activity, naturally – usually – no, not usually, every year by April you had a very good sense of what was going to happen. What’s happened in specifically 2007-2008 is that in fact given that builder (inaudible) nowhere near their capacity, that visibility, that component of visibility basically went to the wayside.
And that’s the dynamic that applies today. So, in contrast to prior to 2007, we don’t – not necessarily have – we certainly don’t have the same level of visibility.
And I will use 2008 as an example. When we were looking at 2008 early in the year, our customers had contracts that they had signed, where consumers had secured financing at some point in the fall or winter – early winter of 2007.
And therefore they had a decent backlog going into the 2008 year. While given the contraction of the consumer credit markets during the course of 2008, the ability for consumers to get financing home improvements like a pool basically almost disappeared.
So, therefore the number of viable contracts came aboard for our builder customers as the season progressed was not like in years past. And that’s an aberration, which again began to reflect itself in ’07 in markets like Florida, and California, Arizona, and then more spread throughout the country during the course of 2008.
And that’s why the build – the new pool build volumes have declined by over 60% over the past three years. So, that’s a dynamic that has definitely changed.
The predictable – the much more predictable component is the maintenance and repair component. And – but again, we will have to wait a while before we get to our builders being at capacity again.
Kathryn Thompson – Avondale Partners
Okay. And just any thoughts given that there has been such a sharp decline in new pool builds that obviously won't have an immediate impact on the maintenance and repair, but it could have a more mid-to-long term impact.
How do you think those sharp declines in new pool builds impacts your overall mid-to-long term revenue run for maintenance?
Manny Perez De La Mesa
What those serve to do is add to the installed base. So, in contrast to three years where the installed base was growing at about a 4% rate per year, when you look at last year’s number, it’s now less than 2%.
So, therefore, that’s the – so, in terms of the impact it is that the installed base grows at a more modest rate than it did historically. That is what I view a relatively speaking short term dynamic.
Going beyond the current environment, the expectation is at some point things will revert to more normalized capital markets, financial markets, consumer markets, et cetera. And as that happens, then the build rate for pools over the course of two, three, four, five years, will increase gradually back to more historical levels and then the addition of pools and the addition to the installed base would grow at a more normal 4% type rate, as you go out beyond five years.
Kathryn Thompson – Avondale Partners
Alright, great, thank you so much, Manny.
Manny Perez De La Mesa
Thank you.
Mark Joslin
And just a note to the callers, if you could limit your questions to one question and a follow-up, so we can get through as many as possible and then if you have additional questions, just get back in the queue please. Thank you.
Operator
Your next question comes from the line of Anthony Lebiedzinski from Sidoti & Co. Your line is now open.
Anthony Lebiedzinski – Sidoti & Co.
Okay, I will try to be brief with my questions. Could you guys quantify what the maintenance, repair, replacements sales were in the fourth quarter and as an follow-up I wanted to get more information about the opportunistic buys, how much of the inventory increase was because of the opportunistic buys?
Manny Perez De La Mesa
Okay. In terms of the numbers, the maintenance and repair component covers a myriad of products, Anthony.
But I will tell you look at the SCP Superior side of our business, and you look at just two product categories that are maintenance and repair, chemicals and parts, between chemicals and parts for SCP Superior domestic, that number is almost or approximately 30% of our SCP Superior sales or were almost 30% of our SCP Superior sales in 2008. And that number obviously in the case of the Horizon side or for that matter international it would be a more modest component.
That gives you a little flavor for what’s involved. We believe that overall, the basic maintenance and repair represents at least 50% of our total sales.
And what I am throwing in there besides chemicals and parts is all the maintenance accessories that are sold to existing pool owners. So that’s the lion’s share of our total business mix.
And then you follow that with replacement, and then you follow that in the current with products tied to new construction whether it be new pools, new irrigations systems, whatever. And that represents, in our estimation, less than – represented less than 20% of our total sales in 2008.
Anthony Lebiedzinski – Sidoti & Co.
Okay. And as far as the – when you look at the opportunistic buys that you had in the fourth quarter, how much of the inventory increase – I may have missed this, but did you guys quantify how much of the inventory increase was because of the opportunistic buys?
Manny Perez De La Mesa
By the end of the year, I don’t have an exact number for you because some of that inventory obviously was sold in the fourth quarter, but it was – the total purchases made when you add up all the vendors was well north of $40 million that we bought in the August-September time period ahead of vendor price increases. And again some of that was sold in the fourth quarter and the lion’s share of the balance we sold in the first.
Anthony Lebiedzinski – Sidoti & Co.
Okay. And last question if I could squeeze that in also.
How much of your sales are now coming from private-label products? And can you give us a historical perspective where that number was and perhaps where you think you can have that in 2009?
Manny Perez De La Mesa
Sure. Several years ago, that was running about 15% of our business back in that 2005 or so timeframe.
I don’t believe we have a final calculation for 2008, but that number I believe is over 20% currently and growing by one to two percentage points of our total sales per year.
Anthony Lebiedzinski – Sidoti & Co.
Okay. Alright, thank you.
Manny Perez De La Mesa
Thank you, Anthony.
Operator
Your next question comes from the line of David Manthey from Robert W. Baird.
Your line is now open.
David Manthey – Robert W. Baird
Manny, could you talk about the increase in gross profit margin in the current quarter that was related to the pre-buy? I think you said something before about the delta being related to the pre-buy, but I am just trying to get a grip on – maybe in percentage points or basis points what was, all else being equal, the increase in fourth quarter GP because of the pre-buy do you think?
Manny Perez De La Mesa
It would be somewhere in the tone of at least 130 to closer to 150 bps.
David Manthey – Robert W. Baird
Okay. And then just a follow-up question.
If you excluded the inventory pre-buy and you excluded the benefits of mix on your business, which clearly with new construction fallen off the map, you are benefiting from that, could you talk about gross margin trends within the business or within the segments, for example, when you talked about the 30% of your revenues coming from chemicals and parts, could you talk about what are the gross margin trends in representative basket of those products irrespective of mix or pre-buy?
Manny Perez De La Mesa
The – let me just look at 2008 as a reference for the year. If you look at 2008 for the year, mix had a relatively speaking small play in the number.
And the reason for that is that although the builder segment was less in a number of markets particularly northern markets those builders are also retailers and service companies and therefore they in the overall aggregate still represented a decent share of our business. And therefore by being the larger customers typically have the better prices in the local market.
So, given that dynamic the overall mix benefit was not that significant. And again the impact from the pre-price increase purchase, while they benefited certainly in the fourth quarter, when you take it on the annualized number, the impact was certainly dilutive by the fact that it really didn’t play into the first three quarters of the year when we did upwards of 80% of our total business.
David Manthey – Robert W. Baird
Okay. So, from the sound of it, it looks like maybe 100 basis points of the year-to-year improvement in the annual number was process improvements and better purchasing and product pricing and that sort of thing?
Manny Perez De La Mesa
And shift to preferred vendors and strategically sourced products, at least a 100 bps, yes.
David Manthey – Robert W. Baird
Got it. Okay, thanks, Manny.
Manny Perez De La Mesa
Thank you.
Operator
Your next question comes from the line of David Mann from Johnson Rice. Your line is now open.
David Mann – Johnson Rice
Yes, thank you. Good morning.
Manny, at the beginning of your comments, you talked about some of the impact of the environment on replacement activity. Can you just talk whether anecdotally or any specifics on what you are seeing and hearing about changes in the end customer behavior whether it be in terms of deferring maintenance or – and going towards yourself?
Manny Perez De La Mesa
Sure. I will give you various points there.
First, in terms of the replacement activity as distinguished from repair activity, in the case of replacement activity, there have been some deferrals particularly with products that are more discretionary. And I will cite heaters as an example.
Heaters serve to extend the pool season. And a number of consumers have chosen, when their heater breaks, and repair is not the right answer, but replacement is, they have just decided to put that off much like they would just like to put off a – buying a new TV set when they already have three or four in the house.
In the case of pumps and filters, on the other hand, we have seen a very little, if any, deferral activity because those are more call it necessary for the proper functioning and operation of a pool, and water sanitation and all that stuff. And with respect to repair activity, we really haven’t seen anything of note.
In fact, I was talking to a customer yesterday and one reason that their business is doing reasonably well is the fact that they have contracted with a number of banks and are providing service for foreclosed – pools in foreclosed homes, which is pretty normal type of dynamic that banks do in order to keep the homes in saleable condition. So, really the repair and maintenance business hasn’t really been affected to speak of and – but that we have seen some deferral activity taking place in the more discretionary components of replacement like heaters.
David Mann – Johnson Rice
Thank you. In terms of the big picture, I guess, you’ve got these – you’ve got the two brands in the blue part of the business, and you basically said you are not looking at opening any centers.
But I guess the question I would ask is if this environment extends for a longer period than some are thinking, I mean what would it take for you to consider collapsing the two brands? And also what would it take for you to consider to consolidate more centers given that consumer behavior may be changing and construction may continue to go down?
Manny Perez De La Mesa
I’m glad you brought out the question because it bears mention for all. The fact that we have two brand in no way represents the fact that we have any redundancy because in fact when we have locations in a market, we have basically certain capacity to serve in a certain positions in the market to capture the greater share.
And therefore there is really no redundancy by having two brands. We would have the same number of locations if we had one brand, excepting that we would have just less share, so we would have less volume, and that wouldn’t make any business sense.
So, that’s one part of the answer. The other part is we have looked hard at markets in particularly the locations that have lower volumes to see if we could consolidated where we would be both short term and long term by doing some consolidations.
And we have done a number of those in the last 15 months. But the issue we have – and this is a good and bad issue – and the issues we have is that we have very, very few centers that are not profitable.
And that’s part one. And part two is we have very, very few cases where we have the capacity at a nearby center to consolidate the weaker center into.
So, if I just use a quick example, if we have two centers that are doing $10 million and both are – have a very reasonable profit contribution, and we have good share in the marketplace, we can – for us to go and consolidate those two into one, first of all, we don’t have the capacity to do so. And by doing so, we would believe that in aggregate we would make less money than we do by having the two locations at $10 million.
So, it really – that’s the dynamic that we have in the lion’s share of our cases, so therefore the opportunities are in fact very, very few.
David Mann – Johnson Rice
Thank you very much.
Manny Perez De La Mesa
Thank you, David.
Operator
Your next question comes from the line of Keith Hughes from SunTrust. Your line is now open.
Keith Hughes – SunTrust Robinson Humphrey
My question is on Latham. In the fourth quarter was there some type of write-down associated with the results you put up or was this just the impact of weak business?
Manny Perez De La Mesa
The – I will answer the first part, and then Mark can provide you more color. There are two parts to that.
One is the Latham business is certainly more weighted towards new construction than the Pool Corp. business, as Mark mentioned.
And secondly, given how new construction slowed down during the year, particularly in the second half as the number – as the backlog for builders was kind of consumed, the fourth quarter – their fourth quarter sales were logically significantly lower than previous year, and that was a significant factor in the swing. Mark, do you want to give some color – commentary on the accounting side?
Mark Joslin
Sure. Yes, Keith, it’s a very perceptive question.
We did have a change in our accounting for Latham that impacted the fourth quarter. We had been deferring their results due to the fact that we buy significant quantity of their sales.
We deferred a profit that’s in our inventory at the end of the period into the following period. And we have changed our estimation process for how much of that profit would flow into a future period, which resulted in us recognizing a higher loss in the fourth quarter; it’s about $1 million more loss in the fourth quarter than we would have recognized under our previous method of deferral.
So, going forward, what that means in 2009 is we are – first quarter – from the way their profit and losses is distributed in our earnings first quarter will look a lot like last year, second quarter will look a little bit better with a little bit more profit because we won't be deferring that to the third quarter. Third quarter will look a little bit worse and then fourth quarter will look much like it did in 2008.
Keith Hughes – SunTrust Robinson Humphrey
Alright. Thank you very much for the answers.
Mark Joslin
Sure.
Operator
Your next question comes from the line of David Mann from Johnson Rice. Your line is now open.
David Mann – Johnson Rice
Yes, thank you. Mark, I think you’ve mentioned there was a one-time expense saving in Q4, can you just clarify that?
Mark Joslin
Yes, it wasn’t exactly one-time, but I would say expense savings that wouldn’t necessarily reoccur. Couple of things that I was about was the change in our bonus estimation.
You know we have a fairly management incentives in our compensation structure. And year-over-year there was a change there, lowering that to more than we did last year.
So, that’s one component. Another was during the year we had some savings in our – some of our benefit plans, medical cost savings that I wouldn’t necessary expect to reoccur.
So, from a run rate standpoint, our savings going forward would be less certainly than what we saw in the fourth quarter, which was like 12% was the percentage, somewhere kind of less than half of that would be more normalized expectation.
David Mann – Johnson Rice
Okay. That’s helpful.
And then could your or Manny talk a little bit about the competitive landscape. Obviously, tough environment, maybe putting more pressure on some of the smaller distributors.
What are you seeing there and what is their pricing strategy looking like?
Manny Perez De La Mesa
Two parts. The lion’s share of those distributors are hanging on.
By every indication they are able – they are going to – in most cases went into the 2009 season. And what we have seen though is that we have seen logically, given the financial pressures on them, we have seen them make cutbacks whether it be in inventories and the breadth of products that they carry and stock or alternatively in their expense structure given their urgency to address their more immediate needs.
That’s one component. In terms of pricing, I think the industry learned a lesson in 2007 when the industry realized that if you drop price of a product that doesn’t mean you sell anymore because in fact that doesn’t apply.
I mean the amount of chemicals sold in this industry are going to be the same whether they are 5% lower or 5% higher. And the same applies to pretty much the lion’s share of what the industry has to sell.
So, they understand that as a general rule that pricing or using pricing to generate sales is a fool’s game. And therefore, I think a more rational business-like environment applies.
David Mann – Johnson Rice
Okay. Manny, can you just clarify your prepared comment about California and Florida in January and February?
Where you saying that there the base business trend there is overall very, very similar to the way it was last year or–?
Manny Perez De La Mesa
Yes, sales dollars are similar to where they are, GP dollars are similar to where they are in the similar – in the case of GP dollars it’s a little better, but sales are close and GP dollars are similar.
David Mann – Johnson Rice
Okay. Thank you.
Operator
We have reached our allotted time. Your last question comes from the line of Brent Rakers from Morgan Keegan.
Your line is now open.
Brent Rakers – Morgan Keegan
Good morning. A couple of easy one here to finish off, I never heard what the specifics were in terms of price contribution to revenue growth in the fourth quarter?
And then I would also like some insight in terms of what the – what you expect, a little bit more specifically maybe what pricing to be up in 2009?
Manny Perez De La Mesa
Thank you, Brent. In the quarter, the weighted impact is probably in the tune of 2%-3% if that – well we did certainly realize some margin increases, the – a lot of the products that did not change in price, those increases really rolled in January as opposed to rolling in the fourth quarter.
So the weighted impact maybe 2% or 3% in the quarter by itself. And in terms of – I must be getting tired here – in terms of the second part of your question, which – can you remind me what that was?
Brent Rakers – Morgan Keegan
Yes, Manny, just in terms of what you expect that number to be up in 2009 for the year?
Manny Perez De La Mesa
At this point I would say mid-single digit. It could be a little higher than that depending on the mix of products sold.
The product category that had the greatest increase, double-digit type increases was chemicals. And certainly that’s one that will – we expect our sales of chemicals to go up, both in units and obviously much more so in dollars in 2009.
But then there are commodities like the rebar and cement and those type of products, which are again weighted more towards new construction and those are down in the current environment. So, it depends on the mix – of our business mix and what happens when new construction how far down it is in the year vis-à-vis 2008 to the extent that new construction is up – I mean not up, but is down less.
That means there are – that the overall inflation would be more modest to the extent that new construction is down more, which means that the weighting of those products that are lower in costs weigh less than the overall mix then the overall price inflation will be a little bit higher.
Brent Rakers – Morgan Keegan
And Manny, maybe just one follow-up to that. I mean given the – and the announced price increases and maybe also given some of the turn down in some of the raw material’s inputs for those, could you maybe talk a little bit about both the chemicals and the equipment side in terms of what has occurred maybe over the last six months in terms of maybe the various inputs costs into producing those products?
Manny Perez De La Mesa
Sure. And I think one of the keys here is not so much what’s happened in the lat six months versus what happened in the last 18 months.
And when manufacturers, whether it be chemicals or (inaudible) manufacturers establish pricing for the 2008 season back in the July or so timeframe of 2007 they had certain cost basis that they used and those cost basis included not only for material cost, but also overhead absorption rates and things of that nature. As the industry contracted in ’08 and as raw materials costs skyrocketed those – many factors – and those two specific areas absorbed or weathered that storm during the course of 2008 and then they set out to begin to try to recover that in part in 2009 with their price increases that they announced in the August-September timeframe.
So, that’s the dynamic there. While raw material costs have moderated from the highs of the spring and summer of ’08, in many cases they are still at or above – depending on the raw material – at or above where they were in the June-July timeframe of 2007.
And certainly given the volume contraction of the industry, their absorption of overhead costs, factory overhead costs is – obviously that as a per unit basis is that’s a high cost – so they still have a lot of cost pressures on them and therefore while we don’t expect any further increases for the ’09 season. I think it’s a wait-and-see as to what happens for 2010.
Brent Rakers – Morgan Keegan
Thank you, Manny.
Manny Perez De La Mesa
Thanks, sir. Let me – Sarah, if I may – than you all for listening to our fourth 2008 results conference call.
Our next call is scheduled for Thursday, April 23, when we will discuss first quarter 2009 results. Thank you all again for listening.
Have a good day.
Operator
This concludes today’s conference call. You may now disconnect.