Pool Corporation (POOL) Q3 2008 Earnings Report, Transcript and Summary

Good morning, my name is Katie and I'll be your conference operator today. At this time, I would like to welcome everyone to the Pool Corporation third quarter earnings conference call. (Operator Instructions) I will now turn the call over to Mr. Mark Joslin, the company's Chief Financial Officer. You may begin your conference.

Thank you, Katie. Good morning and welcome everyone. 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 the remainder of 2008 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. Now, I’ll turn the call over to our President and CEO, Mannie Perez De La Mesa. Mannie?

Thank you, Mark. The calendar third quarter marks the end of the 2008 Pool season. It was certainly challenging but we succeeded nonetheless. Our people did an outstanding job of managing the business in these difficult times. Their energy, enthusiasm, and dedication are contagious. It is very gratifying to be associated with such a talented and committed team. As noted previously, our results are also a reflection of the resiliency inherent to our industry perhaps best measured by the 80% of our sales being currently derived from maintenance, repair, and replacement activity. With that background, I will now review the sales results by network and major market all on a base business basis excluding acquisitions. On the blue or SEP Superior side of our business, sales were down 7% in the quarter and year to date, versus being down 2% in the third quarter and flat year to date last year. Overall, we estimate that new pool construction was down at least 30% in the quarter and year to date while maintenance, repair, and replacement sales continue to grow. Over 80% of sales on the blue side are currently being derived from maintenance, repair, and replace activity. On the green or Horizon side of our business, sales were down 16% on top of last year’s 10% decrease in the quarter. Year-to-date green sales were down 18% compared to down 2% last year. As many of you know, the green side of our business is more closely tied to new construction, and these results are evidence of that. We believe that in all channels, we continue to gain market share, albeit we believe that our share gains in 2008 are modest as we have been more deliberate extending credit and taking fewer lower margin sales than in previous years. Specifically, our chemical and part sales were up 6%. Now turning to our performance by major market, I'll start with California, the largest market. Here, our sales in the quarter were down 12% on the blue side and 18% on the green side, in contrast to our sales being down 6% and 16% last year. Year to date, our sales in California were down 11% on the blue side and 17% on the green side, in contrast to being up 2% and down 5% in 2007. As mentioned previously, the California market began to weaken in mid-2007 as the real estate and financial markets started their correction. Moving on to Florida, the second largest market, our sales were down 8% in the quarter on top of last year's 12% decline. The reason for the moderation is that Florida started its decline in new construction in the second half of 2006 and we are now beginning to lapse somewhat easier (inaudible 00:05:35). Year-to-date Florida sales were down 9% versus 12% in 2007. By the way, all of Florida's sales are on the blue side of our business as we currently have no green presence in Florida. Now onto Texas. There, our sales were down 2% on the blue side and up 4% on the green side, in contrast to last year being up 3% on the blue side. Here it's a case of a more resilient new construction market although it is still down, plus clear evidence of our gain in market share. In addition, the green side is benefiting from our complementary products initiative with landscape, power equipment and specialty products complementing the traditional irrigation products offering. Year-to-date Texas sales were up 2% on the blue side and down a modest 2% on the green side, in contrast to 2007's 2% increase. Arizona is the market most affected by the current environment, with sales down 14% on the blue side and 21% on the green side, on top of last year's 7% and 8% declines. Here, the weight of new construction is greater as there is proportionately a smaller install base to mitigate the impact from the decline in new construction. Year-to-date sales are down 15% on the blue side and 21% on the green side, in contrast to being down 3% and 8% in 2007. In the rest of our markets, our sales were down 6% on the blue side and 20% on the green side, versus being up 2% and down a percent last year. Year-to-date sales were also down 6% on the blue side and 25% on the green side, versus being up 4% and 10% in 2007. Turning to gross margins, the improvements realized through the first half continued with better discipline and improved execution throughout. To realize improvement in this kind of challenging environment is truly outstanding performance by our team. In addition, as vendors start to pass on their raw material cost increases to us in the form of higher prices, we are being disciplined by using replacement cost as the basis for our pricing. Some of you may appreciate some of our competitors don't know how to properly price for increases and don't understand the economic loss incurred when pricing off historical cost. This puts some transitionary pressure on us in the marketplace as price increases are passed through. Expenses are clearly in good control as headcount is down 7% year-on-year excluding acquisitions to offset higher real estate, fuel and other costs. Again, it's a credit to our team that we flexed our organization while our service levels continued to improve. Our asset management is progressing very well with receivables and inventory at appropriate levels, again, without compromising service as stock outs this year are lower than ever before, which is critical for defining value for the (inaudible 00:09:19). In the case of inventory, the increase also includes our buying in to certain of the recent vendor price increases. For the rest of calendar 2008, I anticipate continued softness in new construction and some deferral of discretionary replacement/refurbishment activity as we've seen for the past 12 to 18 months. In addition, we will be particularly deliberate with trade credit especially with lower margin customers. At this juncture, my assessment is that new construction will be down 30% to 40% in 2008, which is worse than I or many in the industry had expected early in the year. Certainly, the events of the past two months haven't helped matters. Fortunately, our performance in this period, which is very positive and very resilient, speaks for itself. All of us can speculate as to when the real estate market and financial markets will revert to a so-called normal environment and when that happens, we will certainly benefit with tremendous operating leverage. But in the interim, we will continue to execute by capturing share while maximizing earnings and cashflow. In addition, we continue to improve every facet of our business, implementing initiatives that provide progressively more value for our customers and for our vendors. With that, I'll turn the call over to Mark for his financial commentary.

Thank you, Mannie. I'll start with a few comments on our operating expense management before moving onto the balance sheet and cashflow. As you can see from our press release, we are on track with the goal we discussed in our previous calls of holding base business expenses flat year over year on a dollar basis. As noted in the supplementary schedule, our base business expenses this year were $1 million below last year for the third quarter and $5 million less year to date. The nine month period includes management incentives and bad debt losses, which are $2.5 million less than year-to-date 2007. Our net savings this year comes from reduced head count, which excluding acquisitions was down 7% this year and targeted variable expense reductions offset somewhat by inflationary increases in other areas. As we complete our 2009 plans in the coming weeks, we will continue to emphasize a cost structure that recognizes the ongoing difficult external market. On the balance sheets, our net receivables of $179 million decreased 11% from 2007 due to a combination of our sales decline and tighter credit and collection policies. Recognizing the stress on our customer base of the current market conditions, we seek to balance the risk of credit losses with an ever more valuable traditional distributor function of extending trade credit. Overall, I think we've done a good job in achieving that balance at this point. Our allowance for (audible 00:12:40) accounts of $10.6 million at the end of September was excluding NPT of $1.3 million over September 2007, reflecting a modest increase in our receivables aging over last year. Our DSO at the end of September was 36.4, which is a slight increase from our 36.1 DSO at September of 2007. As we enter the off season, we will continue to try to strike that appropriate balance on the extension of credit while aggressively pursuing collection on past due accounts. Moving onto inventories, as we have said on past calls, this is an area where we can use our financial strength to gain competitive advantage and make opportunistic purchases ahead of vendor price increases. At the end of September, our total inventory of $346 million were up $29 million and acquired business inventories of $18 million, were up $11 million or 3% over last year. This increase, almost all of which is in our fastest moving inventory classes, reflects some opportunistic spying as Mannie mentioned as well as a slowdown n sales in the quarter. As noted in our press release and discussed on previous calls, our cashflow generation has been strong this year, reflecting both the impact on working capital from our shift out of the sales center expansion mode we've been in in the last two years and our tighter credit and collection management practices. Excluding the $28 million federal tax deferral referenced in our press release, which will be paid in January 2009, our cashflow from operations improved $15 million this year while free cashflow was up $19 million. We did have some minimal share repurchase activity during the quarter as we used $2 million to repurchase roughly 88,000 shares, at an average price of $22.45 per share. This leaves our open authorization at $53 million today. Given the credit market situation, I believe it is appropriate at this time to comment on a subject normally relegated to our SEC filings, which is our debt structure and liquidity position. At the end of September, we had total debt outstanding of $338 million, compared to $406 million last year in September. This debt is comprised of both term and flex components, with our term debt coming in the form of a bank loan with a 26 month remaining term and a pride of placement with a 40 month remaining term, which combined totaled $155 million at the end of the quarter. The remaining $183 in our quarter end debt comes from our two flex debt instruments which are our bank revolver and AR securitization. The securitization flexes around our eligible trade receivables base which peeks in the late spring and early summer, while the revolver is capped at $240 million, of which $114 million was unused and available at the end of September. Our revolver agreement was renewed last December, with a five year term, so we have just over four years remaining on the current agreement while our securitization is up for renewal annually in May. With that continuous stable funding from these instruments throughout the credit crisis, and we'd certainly expect that to continue, with the only issues being the run-up in LIBOR, which raised our borrowing cost under these facilities in the short term. The main covenants that we need to comply with under these agreements are leverage as measured on a average debt to trailing 12 months adjusted EBITDA basis, and a fixed charge coverage ratio. The securitization also has some trigger ratios based on receivables quality measures. We are in compliance with all our covenants at the end of the quarter. The bottom line here is we don't anticipate any covenant issues on our debt and overall we believe we have a very sound capital position that will meet our needs for the foreseeable future. Now, I'll turn the call back over to our Operator to begin our question and answer session.

Your first question comes from the line of Michael Cox from Piper Jaffray. Your line is open.

Congratulations on the quarter, guys. Piper Jaffray & Co.: Congratulations on the quarter, guys.

Thank you.

My first question is on the gross margin. I was hoping you could potentially quantify the impact of selling and replacement costs versus the input costs that were flowing through your cost-of-goods-sold in the quarter? Piper Jaffray & Co.: My first question is on the gross margin. I was hoping you could potentially quantify the impact of selling and replacement costs versus the input costs that were flowing through your cost-of-goods-sold in the quarter?

That's a good question, Michael, and in fact I'm glad you brought it up. In the quarter and year-to-date the impact there is relatively minor. The lion's share of the vendor price increases are coming through now, and therefore that's more of a impact will be seen over the course of the next several months as those increases roll through. But really in the third quarter, that impact was relatively nominal.

Okay. That's helpful. And as you look at the pre-buy opportunities since the price increases are coming through now, are they less attractive than what we've seen in prior years? Piper Jaffray & Co.: Okay. That's helpful. And as you look at the pre-buy opportunities since the price increases are coming through now, are they less attractive than what we've seen in prior years?

The nature of the price increases this year are a little greater than in years past, so given warehouse capacity and the merits of the individual case-by-case basis, our purchasing operations team look and evaluate those individually and then provide a ranking based on the opportunity. So they would be a little bit greater than in years past but then we also have to factor in the key component there is time as well as warehouse capacity. And in that regard, we can't go out too far because then it becomes – it negates the value.

Okay, that's helpful. And then my last question, recognizing there's a lot of uncertainty in the market, but if you could maybe share your sort of initial '09 expectations from a Pool construction standpoint that would be helpful. Piper Jaffray & Co.: Okay, that's helpful. And then my last question, recognizing there's a lot of uncertainty in the market, but if you could maybe share your sort of initial '09 expectations from a Pool construction standpoint that would be helpful.

Sure. Well, certainly given the events of the last two, three years, pool construction and irrigation for that matter have declined to such a degree that it becomes less and less significant in terms of our overall business. When you look at our business collectively, our domestic pool business in '08 will be 85% or so related to maintenance, repair and replace, and logically the irrigation side as well as our international business is a little bit more weighted towards construction and that brings the number down closer to 80. So it's certainly a less significant factor. The numbers, by the way, just as a matter of reference, the industry domestically on the pool side where we have decent statistics is that new pool construction went from somewhere north of 200,000 pools in 2005 down to roughly 200,000 pools in 2006. And this year it will be less than 100,000. So it's very dramatic with an aggregate decrease of about 60% from the peak point in 2005. In terms of 2009, I don’t see anything positive in the near term that would turn that around. Some of the factors there are first of all the stability of the real estate market in terms of price stability and secondly the financial markets with the ability of banks to lend money to middle-of-the-road consumers. When that happens then we will see some recovery in new pool construction as well as new irrigation construction, but until that time, my expectation it will be no better than we're currently seeing and perhaps even modestly worse. But again it's also a factor of it's less and less significant in an overall business so it's less and less consequential.

Okay. Thank you very much. Piper Jaffray & Co: Okay. Thank you very much.

Thank you, Michael.

Your next question comes from the line of Anthony Lebiedzinski from Sidoti & Company. Your line is open.

Yes, good morning. You guys have done a good job with reducing your expenses. Do you see further opportunities to reduce your cost structure? Sidoti & Company: Yes, good morning. You guys have done a good job with reducing your expenses. Do you see further opportunities to reduce your cost structure?

Good morning, Anthony. We have made a number of changes and that's something we continue to look at. When you look at 2009 to the extent that units are different, we have to flex accordingly as you've seen that we've done over the course of this past year. So there are some continuing improvements there to be had if units stay flat or decrease further.

And also in your press release you highlighted an increase in sales of your Pool Corp brands. Just wondering if you can quantify how much is private label now versus a year ago and do you see further opportunities to expand that? Sidoti & Company: And also in your press release you highlighted an increase in sales of your Pool Corp brands. Just wondering if you can quantify how much is private label now versus a year ago and do you see further opportunities to expand that?

Sure. The answer to the latter part of your question is an overwhelming yes. That's been an initiative in place for a number of years and we've been gradually looking at that as an opportunity for increasing our margins as well as capturing share. But it's also a very deliberate process because as a distributor the last thing we would want to do is do anything that in any way adversely impacts our service to our customers. So yes, we are continuing to that and we'll continue to grow that. From like '07 to '08, as a percentage of our total sales it's up in the neighborhood of 2 to 3% from year-to-year.

So how much is it now? Sidoti & Company: So how much is it now?

It is close to 20% right now.

20%, okay. Also could you comment on your international markets? I know overall the company has 7& of your sales coming from international markets. Can you just tell us – Sidoti & Company: 20%, okay. Also could you comment on your international markets? I know overall the company has 7& of your sales coming from international markets. Can you just tell us –

Sure. For international we are doing about 8% of our total business is currently international. And that business, if you take out the small transaction that we did in Canada earlier in the year is similar to our overall pool business in terms of performance. The European marketplace has some of the same headwinds that the U.S. market has in terms of new construction, but we continue to progress and are capturing there share as we have in the United States.

Okay, all right. Well, thanks for your help. Sidoti & Company: Okay, all right. Well, thanks for your help.

Thank you, Anthony.

Your next question comes from the line of Brent Rakers. Your line is open.

Good morning, Manny. This is actually Nicky Prather. Just another quick follow-up on the gross margins. How much would you term inventory profits in the quarter versus what is company-specific initiatives that that will be able to be sustained going forward? Morgan Keegan & Co., Inc.: Good morning, Manny. This is actually Nicky Prather. Just another quick follow-up on the gross margins. How much would you term inventory profits in the quarter versus what is company-specific initiatives that that will be able to be sustained going forward?

Nicky, in the quarter and year-to-date, it's largely – put it this way, there are very few so-called inventory profits per say. There are some modest numbers in there, but very, very modest. And the reason for that is that while there were a few price increases that came into place in the spring going into the third quarter, most of the price increases really came into place in September and October and therefore to the extent that we rolled or adjusted our pricing most of that took place really in October. And therefore, and will be again during the course of the first quarter and into the first quarter. So really there is really very little inventory profits per say in the third quarter.

Thank you, that's very helpful. Also ,what would you say would the contribution from price increases in the quarter to your revenue, and then also what is your outlook for inflation from suppliers as recently we've had a bunch of commodity deflation? Morgan Keegan & Co., Inc.: Thank you, that's very helpful. Also ,what would you say would the contribution from price increases in the quarter to your revenue, and then also what is your outlook for inflation from suppliers as recently we've had a bunch of commodity deflation?

Right. Two things. In terms of effective price increases in the quarter, again the numbers there are relatively modest in the overall scheme of things. there are certain products that went up based on a few price increases in the spring, but the lion's share of that is really going to happen for 2009, not so much 2008 year-to-date. In terms of inflation, there have been some commodity price decreases recently, but as we pour through what's taking place for manufacturers in the course of 2008, what we've seen is that they had, during the course of '08, absorbed significant raw material increases. As we go through and kind of reverse engineer the cost of some of their major products, the higher-velocity products and understand what goes into them and what drives those numbers, we know that they took it on the chin in terms of the fact that they largely held price during the course of the 2008 season or business year. So therefore they are in a deficit position from that standpoint. So they are in a recovery mode and while there's been some relief provided recently on certain commodities, they're still nowhere near the baselines that manufacturers used for their cost base in '08. So we are looking at mid-single digit type price increases with some products increasing into double digits and others being relatively flat.

That's perfect. Thank you. Morgan Keegan & Co., Inc.: That's perfect. Thank you.

Thank you.

Your next question comes from the line of Kathryn Thompson from Avondale Partners. Your line is open.

Great, thanks. I have two different questions. First from the top line, based on conversations Avondale Partners: Great, thanks. I have two different questions. First from the top line, based on conversations Kathryn I. Thompson – Avondale Partners: Great, thanks. I have two different questions. First, on the top line, based on conversations we’ve had with people in the field, we’re getting early indications that you’re seeing a slowdown, modest slowdown in your maintenance revenue. How much are you hearing about a similar type trend? It’s nothing huge, but it’s just on the fringes, some people opting out on certain, for instance, end of the season closing of Pool. What are you hearing on those trends, and any color on top line trends in fourth quarter would be helpful. Thank you.

Sure. Do you have a second question, Kathryn? Kathryn I. Thompson – Avondale Partners: The second one is (inaudible 00:28:45) trends, we’re hearing up 10-12% on average, could you confirm that, and any color on that? And, finally, thoughts on SG&A, I know that ex-acquisitions, you previously said, and I think Mark referred to it earlier, you’re looking to keep that flat going into ’08, and do you still expect that to be the case and ’09?

Okay. First, on terms of sales trends, we have not seen anything on the maintenance and repair side. What we have seen is some deferral of replacement and refurbishment. (inaudible 00:29:24) it would be on items like, for example, the refurbishing or resurfacing of a pool, or alternatively a replacement of a heater. So, that’s what we have seen, some evidence of deferral there. The basic maintenance and the basic repair components, we have not seen any signs of weakness there. And, probably, the best evidence of that is that our chemical and parts sales, which tie directly to repairs and maintenance, are up nicely in the quarter and year to date. Kathryn I. Thompson – Avondale Partners: And, I guess, what I want to clarify is this is really a trend that we’ve found through the quarter end. So, maybe the last week of a quarter, so it wouldn’t be reflected in the quarter. So, that the question’s really, what’s happened since then, are you seeing anything since then?

Not really, at least not through the first several weeks of October. In terms of recent phenomena, we haven’t seen anything uniquely different than what we’ve seen in the past 12 to 18 months, from a sales trends standpoint. We haven’t seen any pickup to speak of in the new construction sector and everything else is pretty well stable. The one point, though, is that we are being deliberate, very deliberate, on the credit side. And, just to give you an appreciation there, when we have a customer that we understand, given the market dynamics, have a full backlog of business; whether they be a repairman, or service contractor, or a retail store, or a builder, or remodeler, we are able to more confidently extend credit. On the other hand, when we know that, and we believe, we know that in the case of a builder or perhaps a remodeler, some of that backlog is down significantly. In those cases we have to be a little bit more cautious, in terms of our extending credit. For that reason, we are more deliberate, and also the onus and the message inside the company is that while we, from an accounting standpoint, we report sales when we ship goods and all that type of stuff, in my mind the sale’s not complete and the profit’s not realized until the money is deposited into our accounts. So, therefore, that message is well understood and people, our people, are purposely being guarded. And, not that they’re going to shortchange any good paying customer, but if anybody starts slipping they’re going to be very, very cautious as to how they ride that customer, versus how that may have been addressed in, let’s say, in a more robust environment. In terms of OEM pricing, you mentioned 10, 12%, there are some selective cases were you do have, in fact, double digit price increases. That is the exception. Chemicals, probably, being the main highlighted exception, with certainly double digit price increases taking place there. In the case of mainline equipment, the numbers are single digits, and in cases of some product categories they are very little, it’s flat. When we get to a mid single digit type of number, we’re looking at the weighted average from year on year, from ’09 versus ’08, with ’08 having, relatively speaking, modest price increases, 2 or 3% type of number effectively, when you weigh everything out together. And, in the last item, I think you mentioned, it was SG&A and expenses. Yes, our agenda was, in a base business, excluding acquisitions, for ’08, was for our expenses to be essentially flat. Where we would absorb the inflationary price increases inherent in facility leases, wage increases, whenever, essentially absorb those by making reductions and/or adjustments elsewhere. And we are, in fact, well on track to do that, with expenses down both in the quarter as well as year-to-date. Kathryn I. Thompson – Avondale Partners: Well, the question was really more – I understand for the current year, but for next fiscal year.

For next year, if one were to assume roughly flat units, we would look at having the same thing, roughly flat expenses. Where, again, we would try to capture productivity improvements and to offset any wage increases in the form of the payroll sector, and in terms of all the other expenses. And, reduce enough of the other expenses to compensate whatever price increases roll through, or inflationary increases roll through, on the other areas. Kathryn I. Thompson – Avondale Partners: Okay, and finally, just to clarify on OEM, because you, earlier in the call, had said that some of the price increases were higher than expectations. Still, on average, for the total products, pricing is ahead of this year versus last, and price increases are effective this fall as opposed to January 1.

Yes, the price increases being charged to the industry by the manufacturers, depending on manufacturer, have come into place at different intervals during the course of the fall period. There’s, logically, some notice period that we provide to our customers, and then we in turn raise our prices and have begun doing that. For example, for the increases that we got in August, September, those, by and large, when up a few weeks ago in October, and we’ll continue to do that during the course of the fourth quarter and into the first quarter. And, yes you are right, these are taking place about three months earlier than they normally would be taking place in previous years. Kathryn I. Thompson – Avondale Partners: Okay, great. Thank you very much.

Thank you, Kathryn.

Your next question comes from the line of David Mann from Johnson Rice. Your line is open.

Yes, thank you. You mentioned in your release about the weather impact. Can you just talk a little bit about where weather helped or hurt you, and just give us a sense on what the opportunity is, with repair, with hurricane Ike? Johnson Rice & Company: Yes, thank you. You mentioned in your release about the weather impact. Can you just talk a little bit about where weather helped or hurt you, and just give us a sense on what the opportunity is, with repair, with hurricane Ike?

Okay. In terms of whether, generally speaking, July was fine. In the case of August, September, we had, on average, both cooler and wetter weather conditions than normal. That was particularly the case, basically, from Texas east, all the way through to the East Coast of the United States. The West Coast was generally fine during the entire third quarter, but Texas – and I’m not saying just Texas, but Texas, you just drop a line north south and that two-thirds of the country east or what are and cooler in August and September. And there was, logically, a little bit more disruption this year with the hurricanes. As I’ve mentioned, I think, in previous calls, the hurricanes have a short term adverse impact, which we tend to recover all over the next 60 to 90 days, or so. And, certainly, in the case of the most recent hurricane in Texas that, in effect, went right up through Galveston, Ike, as you mentioned, David, that caused some disruption for about a better part of the week. And, we’ll have some recovery there, of that lost week, in the course of the fourth quarter, but nothing overwhelmingly significant one way or the other.

How much weaker was September than the previous two months, especially with the credit issues? Johnson Rice & Company: How much weaker was September than the previous two months, especially with the credit issues?

August and September, David, were similarly weak and, in both cases, weaker than July, given the adverse weather impact. And, it’s a matter of 2 or 4%, so if, on the Pool side, we average down 7% for the quarter, that would mean that it’s a little better than that in July, and a little bit worse than that on a daily sales rate basis in August and September.

And, it sounds like that’s kind of the trends that you’re implicitly guiding for the fourth quarter based business growth? Johnson Rice & Company: And, it sounds like that’s kind of the trends that you’re implicitly guiding for the fourth quarter based business growth?

Yes, but with the additional caveat at that we are being that we’re being very delivered on credit sales.

Can you give a sense when you started to tighten more aggressively on credit and how much revenue growth you think you did not have because of that? Johnson Rice & Company: Can you give a sense when you started to tighten more aggressively on credit and how much revenue growth you think you did not have because of that?

That’s a tough, tough number to put your arms around and I can’t speculate. I mean, that’s not our intention, our intention is that our customers pay within terms, and if they do that then there’s no issue.

Let me ask you a different. What percentage of your customers are you tightening credit on? Johnson Rice & Company: Let me ask you a different. What percentage of your customers are you tightening credit on?

On approximately 10 to 20% of our customers.

Okay and, can you just clarify, when you said you were tightening credit on lower margin customers and, what does that mean a particular? Johnson Rice & Company: Okay and, can you just clarify, when you said you were tightening credit on lower margin customers and, what does that mean a particular?

Sure, when we look at trade credit implicitly we’re taking a risk, and we look at margin as part of that equation. So, if you have a very low margin customer, our willingness to take risk is very contained, it has to be, because it’s a lower margin customer inherently. So, given the current environment, particularly if their tied to pool building, we have to be very cautious. And, in that vein, if it’s a low margin customer we can’t really accept or afford to have very much slippage.

Okay, one last question. In the past calls you’ve had some visibility from backlog and your customers, in terms of Pool build, what is the latest view you have there? Is it just totally dried up, is there any latent demand, or has that been, from your sense, basically extinguished by the negative wealth effect. Johnson Rice & Company: Okay, one last question. In the past calls you’ve had some visibility from backlog and your customers, in terms of Pool build, what is the latest view you have there? Is it just totally dried up, is there any latent demand, or has that been, from your sense, basically extinguished by the negative wealth effect.

Well, it used to be, let’s say 2005 and prior, where a typical builder in the sunbelt would work on a two or three month backlog. To the point that, in many cases, if they had a three month backlog they wouldn’t return phone calls until they worked into it enough that they could see some time opening up out in the future. That was not particularly good from a consumer standpoint, and consumer service standpoint, but that was the reality of 2005 and prior. In the course of the slowdown in the new pool construction sector, and the new irrigation construction sector, in the last three years, there’s a lot loss backlog. Now, there are some markets where they are still working on a one to two month backlog, but in other cases I know of situations where there’s a contract sign and financing secured, if there’s financing involved, which isn’t very often, frankly, and within a week they are digging the hole, and that would have been very unusual two or three years ago.

Okay, thank you, very helpful, Manny. Johnson Rice & Company: Okay, thank you, very helpful, Manny.

Thank you, David.

Your next questions comes from the line of Curt Woodworth from JPMorgan, your line is open. Warren Chang – JPMorgan Chase & Co.: Hi, Manny, this is Warren Chang on for Curt Woodworth.

Hey, Warren. Warren Chang – JPMorgan Chase & Co.: Could you quantify, just on the revenue side, the impact of weather on (inaudible 00:42:03)?

It’s tough to speculate as to what that was, but could it have been a couple of percent? And, the answer is an overwhelming yes, but I’m just speculating there on what that impact would have been. And the impact would have been, just to give you a perspective in how that ties in, if you have cooler temperatures in August, September, that means the water temperature would have been a little cooler, and the water temperature being a little cooler means they burn less chemicals. In the case of the precipitation, when you have higher levels of precipitation what tends to happen is that some of the repair activities, and to an extent the remodeling or building activities, are obviously affected, and, to a degree, modestly deferred. It’s not a huge number in the overall scheme of things, but could it have been a couple of percent? Sure. Warren Chang – JPMorgan Chase & Co.: Okay, and, is there also an aspect to that of where, in some of the more cooler geographies in the north with cooler weather, they actually shut down earlier in the season, and in the warmer geographies where people keep their pools open year round, it’s less of an impact? Is that one of the dynamics at play?

Exactly, yes, you’ve got it to a T. Warren Chang – JPMorgan Chase & Co.: Okay, great, and also, just to go into a bit more detail on the SG&A figure for the quarter, SG&A was up 3 million, with sales down 34 million, and you mentioned the base business was just down 1. Can you just comment on the moving pieces there and if in ’09 we’re in a flat to negative environment, what are the levers that you could poll on the SG&A side?

Sure, the difference there is strictly related to the MPT and the small acquisition Canada (inaudible 00:43:58). Okay, so, basically the difference between being down 1 on a base business level versus being 3 overall. Okay? In terms of ’09, if we are flat to modestly down in units, we’ll continue to flex and he if you look at our SG&A structure, over half of that expense base is tied to the payroll or payroll related costs. So, therefore, we will flex the organization as we need to. We are in the midst right now of developing our individual plans by market for ’09, and to the extent there’s a market which is more heavily weighted towards new construction, obviously, we’re going to take a more modest perspective there. To the extent the market is more heavily weighted towards maintenance, repair, and replace, then it really doesn’t matter as much, but we will certainly not be looking at making any headcount additions to speak of for 2009. Warren Chang – JPMorgan Chase & Co.: Okay, and last question, do you have any preliminary views on branch count for 2009? The

It would be approximately the same as we have currently. We are looking at two or three new locations, but we’re also looking at reducing two or three locations, so net, it’s basically the same. Warren Chang – JPMorgan Chase & Co.: Thank you.

Your next question comes from the line of Kyle O’Meara from Robert W. Baird, your line is open. Kyle O’Meara – Robert W. Baird & Company, Inc.: Hi, good morning, just another gross margin question for you, kind of in the release (00:45:38), the three buckets improve, price, and management, private label and increased mix of MRR. I was wondering if you could break out the (00:45:45) improvement into those buckets there.

Kyle, no we can’t, but I will tell you that they’re in order in which we estimate the impact. So, to the extent that – you have the number for the quarter, and you have a date as well, they’re very similar, that’s how we estimate the order of importance. Kyle O’Meara – Robert W. Baird & Company, Inc.: Okay, good, thanks.

Thank you.

(Operator instructions) Your next question comes from the line of Keith Hughes from SunTrust, your line is open. Keith Hughes – SunTrust: Thank you, my question’s been answered.

Thank you, my question’s been answered.

That was easy.

Your next question comes from the line of Joan Storms from Wedbush, your line is open. Joan Storms – Wedbush: Hi, good morning. I just want to make sure I have the base of the forecast right. If you originally have been projecting a downsize for the year, and now you’ve tightened up your credit, will we be looking for a similar down based business number in the fourth quarter as we saw in the third quarter?

Hi, good morning. I just want to make sure I have the base of the forecast right. If you originally have been projecting a downsize for the year, and now you’ve tightened up your credit, will we be looking for a similar down based business number in the fourth quarter as we saw in the third quarter?

That’s correct. Particularly new irrigation and new pool construction, given all the external factors didn’t get any better even though we had easier comps and, it continued to go down and we expect that side of the business to be down 30 to 40% from an industry standpoint. So, you’re looking for similar results in the fourth quarter as you’ve seen here today. Joan Storms – Wedbush: Okay, and just on the center count, just to clarify, is that for ’09? The two to three new and two to three consolidated?

Okay, and just on the center count, just to clarify, is that for ’09? The two to three new and two to three consolidated?

Yes. Joan Storms – Wedbush: Okay, perfect.

Okay, perfect.

So, essentially, the store count or sale center count will basically be the same from now through the next 12 months, barring any acquisitions.

There are no further calls at this time. I would like to turn the call over to Mr. Perez De La Mesa for closing remarks.

Thank you, Katie, and thank you all for, again, listening to our third quarter results conference call. Our next call to discuss the fourth quarter and full year 2008 is scheduled for Thursday, February 19, 2009. Thank you very much and have a good day.

This concludes today’s conference call. You may now disconnect.