POOL
#No, it would be very simi<UNK>r.
And really what you're talking about is order of magnitude.
So, therefore, what it trans<UNK>tes to is if that grows 1% to 2% less, right, that sector which impacts our overall sales growth by, let's say, 1% ---+ well, that's what you're talking about.
Yes, sure.
Yes, no discernible difference there.
(<UNK>ughter) By the way, we do do that.
We do review cell phone contracts and we do shut off the lights at night.
And our warehouses are ---+ a good majority of them have automatic timers set on the lighting in the warehouse.
So we are conscious of all of that and we have all sorts of agreements on trash removal and things of that nature.
So we try to look for every nickel we can find.
Really, the impact on exchange in terms of expenses was about 2%.
So it is just being judicious.
We have had ---+ when <UNK> talked about the fact that excluding acquisitions our headcount was only up 1%, what that does when you factor into that, we continue to incur productivity gains and that's through process improvements.
And while we make investments in IT and to drive ---+ to help support some of those process improvements, at the end of the day, we're looking for return on that capital.
So and the paradigm is the same there as we do for investing in a new location or a new market.
So when it's all said and done, all of these things more than pay for themselves.
If not, we wouldn't do them.
So, does that answer the question or help answer the question.
If it were one or two, I'd be remiss.
But let me just ---+ because in distribution there's seldom one silver bullet.
You've got to have many, many bullets and you've got to keep on firing continuously to drive performance improvement and raise the service level at the same time.
If I were to highlight a few, certainly our B2B portal that enables customers to do a lot of stuff and, in fact, we have linked that in with a number of customers and their businesses to enable automatic replenishment.
Those kind of tools are very efficient for our customers, enhance our service level and provide some efficiencies for us.
When I look at, for example, how we pick orders and our facilities and the fact that we have <UNK>rgely converted domestically to what we refer to internally as paperless pick, which is basically using automation and saving on paper costs but, more importantly, really enabling us to be much more efficient in the pick process is another tool.
I mean when you look at our DCs, for example, a few years ago we went to voice pick and on average when we did the study in our first location ---+ this was about four or five years ago ---+ we were saving $0.07 per pick.
So, I mean I'm just giving you some color and context of different things that we continue to do and work on to drive a higher service level, as well as reduce mistakes, as well as do it all more efficiently.
Incremental.
There, <UNK>, we have two areas that are kind of going in different directions.
I'll speak about the negatives first.
What we have there is from a product ---+ and this is mainly product mix revenue.
From a product mix standpoint, when you're looking at remodeling a rep<UNK>cement activity those are typically bigger ticket items.
And by virtue of them being bigger ticket, generally speaking, the margin percents are smaller than on smaller ticket items where the cost to serve is logically much higher than as a percentage of the product being sold.
So that's factor number one kind of going against us.
Factor number two going against us is that manufacturers have progressively been investing in innovation and ---+ as a result of that innovation ---+ providing products are developing and coming to market with new products that are either much more efficient and/or provide a greater aesthetic value.
In both cases, the products are sold for a higher price.
And what drives there is some of the same logic but because of them being a higher price, generally speaking, we get more GP dol<UNK>rs but typically a smaller percent.
So those are the two drivers against us.
On the other side of the equation going against that, we continue to improve our service level by what we just covered earlier.
That there's efficiency gains but there's also service level gains.
If I talk to you about our in-stock position, the stock outs or fill rates that we have.
And the fact that they continue to improve every single year and even enabled us to do that with greater turns, I mean that's just part of the equation.
But factor number one is improve service levels of the customer; and then secondly, we have to sell that so improve sales execution.
And then third, improve sourcing.
So to mitigate the impact the adverse impact of product mix in both the forms I described earlier, improve service levels, improve sales execution, improve sourcing execution should approximately negate that.
So our expectations are that gross margins prospectively should be about f<UNK>t in terms of percent.
But there are efficiencies being gained by virtue of the fact that our cost to serve proportionately is less when we are selling higher value products.
Or whether it be in aggregate dol<UNK>rs or by virtue of the fact that it's a variable speed pump or it's a single speed pump or LED lighting versus fluorescent lighting or whatever.
We didn't communicate that, but in the fourth quarter the green business increased at a rate faster than our blue business.
That's a great question, <UNK>.
And I think here what impacts that is a little bit of math because of the exchange.
As you know, and many on the call know, exchange cost us approximately 2% in terms of topline and certainly benefited us on the expense side.
But what happens here is, if you do on a constant currency analysis and you assume that we would have call it round numbers, $40 million more in sales than the improvement in terms of operating or contribution margin is inside our normal 15% to 20% range.
If I may, <UNK>, I just want to c<UNK>rify something.
I misspoke a second ago in answering the green versus the blue.
I was looking at the wrong line on my chart.
The green business grew a little slower than the blue business but both had very strong growth in the fourth quarter.
For the past 15 years, we typically have between 50 to 75 projects underway; and as those projects could accomplished, new ones are added to the list.
And the list is as robust now as it was 15 years ago.
Although obviously, we've accomplished a lot over that period of time.
No, if you look at it, really again I think you have got to p<UNK>y the impact of currency into the mix.
So, if you add $40 million in sales and you add also the associated expenses, right, you still get the ---+ not quite the same but a simi<UNK>r operating profit improvement and the leverage, while it may have been a little higher, it wasn't exceptionally higher than previous years.
You know what, there's two parts to the answer.
First, when you look at Texas ---+ Texas has a very diversified economy and as a result has proven to be very resilient.
When you look at our results in 2015, Houston, which is our fourth <UNK>rgest market, the one you would think would be affected the most ---+ Houston had a very, very solid year, very strong growth in every important line other than expenses that had more modest growth.
So Houston did very well.
So, that's part one.
And if you look at markets like Dal<UNK>s and Austin, extremely robust, very little dependency on energy.
In fact, you can easily make the argument that particu<UNK>rly North Texas suffered with heavy rainfalls during the course of 2015.
Where we are ---+ so, that's part one, and by the way just to support that, our growth in Texas in the fourth quarter, both blue and green, was a little bit above the Company average, okay.
So that gives you context there.
What we anticipate is that the markets that are going to be most affected with the energy situation are more East and West Texas as well as neighboring states like Ok<UNK>homa and the western portions of Louisiana.
We believe those are the ones that really will feel the impact more so than Dal<UNK>s Metroplex, Houston Metroplex, Austin or San Antonio.
Hey, <UNK>, if I could add one comment on to your question about expenses and how we ---+ 2015 was a little unusual.
If you look at our growth by quarter, most of our growth for the year came in the first quarter and the fourth quarter, which are generally seasonally lower volumes for us and so to the extent that people aren't quite as busy as they are during the second and third quarter, there are able to do more and pick up that volume without adding headcount and <UNK>bor.
So if that growth was in the second, third quarter, it would be a different story.
So that I think helped in terms of the leverage that we realized in 2015, unusual and probably not something we're going to certainly look to do every year.
And that's an excellent point and that just confirms part of the rationale for why we're making sure that our retail customers have our stock ahead of the season and get that activity done as early as possible when we have can't say idle time but more avai<UNK>ble time then we do as we get into the season.
Thank you, sir.
I have to do the math here.
So just bear with me a second, <UNK>.
Do you have another question.
Texas represented approximately 14% of our sales <UNK>st year.
And just for context, California is our biggest state overall, and Florida and Texas are very simi<UNK>r.
They're not nowhere near as significant as the first three, obviously, and even when you look at it, those are ---+ we do business and we have locations in Lafayette, Shreveport, Longview, and now we opened recently in Lubbock.
So there are markets that we serve and we also serve a number of them remotely from other centers.
But in the big picture when you look at when you look at the overall Company, you're talking about, again, fractions of 1% in terms of the anticipated impact on the overall business.
Our base business sales growth would have been about the same as our domestic blue business.
Two things, or a two-part answer.
The first-part answer is the major drivers there were delivery vehicles and, secondly, IT.
And in terms of going forward, I would look for that to be 1% to 1.5%.
Years ago, we would lease most of our vehicles and a few years ago, we shifted over to buying those vehicles instead of leasing.
Sure, first from a use of cash is internal needs, which is both in the form of CapEx as well as working capital.
CapEx being delivery fleet, IT and leasehold improvements on facilities.
In terms of working capital, that's driven to support growth both on the AR side as well as on the inventory side, for existing business as well as working capital to support the opening of new locations.
And we have a handful of new locations targeted for this year as we do most years.
Generally speaking, new locations don't add anything to the bottom line in their first year to speak of, but it basically provides us a p<UNK>tform for growth as we grow share in those markets over the course of time.
That's number one.
Number two is ---+ or are acquisitions.
Same methodology in terms of return on invested capital drivers that we have and everything else ---+ filters as we have everything else.
And to that end, that number is going to not going to be super material in the big picture over the course of time.
Most of the acquisitions that we do are re<UNK>tively small for our size and they basically are focused on markets where we have little to no presence as a way to enter the market.
And we do that and always p<UNK>y that off against opening our own new locations.
And over the <UNK>st 15 years or so, we've done a lot of both.
In fact, if anything more opening our own then acquisitions.
That's number two.
Number three is dividends.
Dividends, we target a payout rate of 35% of net income 3-5% of net income and that is reviewed every year by the Board.
And the Board will do that at the May Board meeting and determine the go-forward dividend for the next four quarters.
And that's number three in terms of priority.
Then after that, it depends where we are from a capital structure standpoint or where we are on debt vis a vis our targeted capital structure.
Our targeted capital structure is 1.5 to 2 times debt to EBITDA.
So provided we are below 2 times the debt to EBITDA, we are buying shares.
And as <UNK> mentioned earlier, we are targeting to buy at least $100 million to $150 million worth.
In a typical year, that number will, over the course of time, grow with our profitability; but $100 million to $150 million is a reasonable number to expect.
It could be higher.
Last year it was a shade lower.
We finished at $92 million but, again, the target in the current level is approximately $100 million to $150 million.
If there's an acquisition or something else that pops up that gets us over 2 times debt to EBITDA, we would probably still buy shares but at a more modest rate.
Thank you.
Yes, it sure was, <UNK>.
Chemicals are for basic pool maintenance.
And the chemical sector ---+ I'll give you the industry information first ---+ modestly up because of the <UNK>te season but very modestly up, I'm talking about 1 to 2%.
Our own chemical sales were up a little more than that and chemicals as you can well imagine is an important, very important product category within our retail ---+ the retail portion of our business.
You know what, that's ---+ I'm optimistic that some of that will begin to kick in.
We are still ---+ let me start with a positive.
We began to see <UNK>st year financing begin to open up where you had appraisals and banks willing to lend close to 80% loan to value on, call it, current appraisal values as opposed to very conservative appraisal values when you're doing a remodeling.
So that's beginning to open up.
Frankly, I believe that higher interest rates are going to help us there.
As banks are able to realize return, they will be inclined to take a little bit more risk than being as selective as they have been for the past seven years where basically they have only been lending to pristine credits whether it be on the commercial or consumer side.
Sure, in terms of inf<UNK>tion, negligible.
I think the market vo<UNK>tility, the energy costs being what they are, I think there's going to be negligible price increases.
There is going to be a higher, I'll call it a better mix of products from manufacturers from an innovation standpoint.
But in terms of more the commodity type products, there will be no inf<UNK>tion there to speak of.
In terms of the recovery, let me just first address remodeling and rep<UNK>cement.
That ---+ as I mentioned earlier, that recovery we believe began in earnest in 2011 and have continued to date.
Our expectations were that on a dol<UNK>r-weighted basis that sector was down almost 40% at the trough from normalized behavior.
We believe that, by <UNK>st year, that behavior was about 15% ---+ midteens percent below normalized behavior; and we believe that that recovery will continue such that probably by 2018 ---+ at the <UNK>test, 2019 ---+ behavior will be back to normal.
And in that, there's been some recovery component as well from some of that deferred activity, so that's number one.
In terms of new Pool construction, new Pool construction is still down about 70%.
For that to really kick back in and really gather significant momentum, we need financing to be avai<UNK>ble for the middle-of-the-road homeowner from a credit standpoint.
And that middle tier homeowner, single-family homeowner is really the key target as they look to improve the quality of their home life.
About $20 million.
Thank you, by the way, you can presume re<UNK>tively modest, very modest earnings contribution the first year.
Yes.
Thank you, Andrew, and thank you all for listening.
Our next conference call is scheduled for April 21, mark your calendars, when we will discuss our first-quarter 2016 results.
Have a great day.
Thank you.
