Pool Corp (POOL) 2008 Q1 法說會逐字稿

Good afternoon. My name is Janice and I will be your conference operator today. At this time, I would like to welcome everyone to the Pool Corporation first-quarter results conference 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)

Thank you. Now I would like to turn today's conference over to Mark Joslin, Chief Financial Officer. Please go ahead, sir.

Thank you, Janice. Good morning and welcome, everyone. To start things off this morning, 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 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, Manny Perez de la Mesa. Manny?

Manny Perez de la Mesa: Thank you, Mark. Welcome. The first-quarter results speak for themselves. To provide more perspective, I will review the activity in each of the larger markets. But first, let me cover two very important principles.

First, we are managing our business to ensure that our ability to serve our customers and suppliers is not affected by the current market downturn. What this means is that the difference in value and service level between us and our competitors' value and service level is greater today than ever before. This is critical, because we should continue to gain market share at accelerated rates in this environment.

Second, our toughest sales comp of 2008 has just passed. Last year we had positive 4% comps through March, and, by the way, as well as through May, with negative comps from June through December. Given the weighting of business in the first quarter to the markets most affected by the construction slowdown, the rest of the year's comps should get easier. In addition, the more predictable maintenance, repair and replacement products are weighted heavier in the second and third quarters of the year and less in the first and fourth quarters.

Now to the activity by each of our major markets. In the blue side of our business, our overall base business sales were down 8%. This decrease is due primarily to the continued softness in new pool construction, as well as a later start to the pool season. The softness in new pool construction is concentrated primarily in the markets which had the greatest run-up in real estate values from the year 2000 to the year 2006. Lower real estate values in these markets and the present credit market contraction are the main reasons for the construction slowdown.

Ironically, consumers' desire for improving the quality of their home life with the addition of a pool or irrigation system remains healthy, with the primary constraint being consumers' ability to secure financing. It is in times like these where the smart financial institutions can capture profitable market share by not overreacting in the typical short-term herd mentality that most institutions ascribe to.

The bottom line is that new pool construction in the quarter was down 30% to 50% in the California, Florida, Arizona and Nevada markets from the already depressed 2007 levels, and down 60% to 80% from the peak 2005, 2006 levels. Texas and the rest of the markets are mixed, with the overall construction market modestly down versus 2007. In most of these other markets, pools have a lower overall market penetration and typically represent a smaller percentage of the home value, which mitigates the impact from the external real estate and credit market environment.

In the largest pool market, California, we had a 10% decrease in sales from the first quarter of 2007 to the first quarter of 2008. The external market influences impacted primarily where new construction is more pervasive. The more established residential areas were impacted less, as the lion's share of our sales in these areas are in maintenance, repair and replacement products.

In Florida and Arizona, the second and fourth largest markets, respectively, both had an 11% decrease in sales in the quarter, with very similar market characteristics as in California.

In Texas, the third-largest market, we saw a 3% increase in the quarter, with new pool construction not as affected as in the other large markets, as well as a better weather comp, with no ice storms this year.

Outside of these four markets, sales were down 9%, primarily because of the later pool openings, given the extended wet and cold winter. Expectations are that as it warms up, sales comps in these other markets will improve as they will in the most affected markets due to the business mix mentioned previously.

Turning to the green side of our business, our overall base business sales were down 23%. As many of you are aware, this is due to a heavier weighting of new construction -- over 50%, in contrast with the blue side, where new construction is closer to 30%. With the exception of Florida, here the larger markets are going up against the same headwinds, with California down 20%, Arizona down 26% and Texas down 16%, with the rest of the markets down 29%.

An area that we continue to spend a lot of time on is margin management. Our progress is apparent, based on the results to date, despite the ongoing difficult market environment, including instances of irrational and sometimes desperate pricing. The keys here for us are continued superior execution in both the sales and operations functions, as well as strong discipline and management controls.

As communicated previously, we had adjusted our expense structure in this new market environment such that expenses should not exceed last year's level despite the greater number of locations without a commensurate increase in sales and profitability.

NPT, or National Pool Tile, the leading distributor of pool tile and component pool finishes in the country, became part of Pool in March, with a negligible loss in the month and the quarter.

In terms of our outlook for the rest of 2008, we continue to envision a difficult market environment, with our continuing to gain market share but yet realizing only essentially flat sales from the second through the fourth quarter. Gross margins are the main earnings variable, with our endeavoring to sustain the first-quarter improvement while keeping base business expenses in check and essentially flat with last year.

These are not the types of results that we are used to, although they are much better than the external market would indicate. It is remarkable and reflective of the level of talent and commitment that exist throughout our organization that we are able to produce these kinds of results in these unprecedented times.

In good times, it's easy for everyone to do well. But it is in difficult times like these that people and organizations are tested, and when the true top performers shine through.

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

Thank you, Manny. As we highlighted in our press release and in Manny's comments, our selling and administrative costs were down about 2% from Q1 2007. This comes despite the increased cost from the new sales centers that we added in 2007 and the addition of NPT expenses for the month of March. We've been able to offset these cost increases in addition to higher product delivery costs and inflation and wages and other costs by managing discretionary expenditures down and making selective branch consolidations and personnel reductions over the last six to nine months.

At the same time, we continued to fund the many initiatives that we believe set our business model apart from our competitors and will set the stage for future growth as the current downturn subsides. Our expectation, as Manny mentioned, is that with the exception of management incentives that will vary with our success, we will be able to maintain roughly flat base business selling and administrative expenses compared to 2007 for the rest of the year.

Turning to our balance sheet, you can see that our receivables are down in line with our sales decline in the quarter. We continue to see some slowdown in payments from our customers, particularly those most directly affected by the soft construction market, and have increased our reserves for potential write-offs accordingly from last year's first quarter. While up from last year, our bad debt reserve at the end of the quarter is in line with our year-end reserve.

Our inventories at the end of the quarter of $477 million include $17 million of inventory acquired with acquisitions. Excluding this, inventories were up 11% year-over-year due to the slower sales environment in the quarter. Approximately 98% of the increase in Q1 inventory levels is attributable to our North American pool operations, and of this, 97% of the increase came from increases in product classes 1 to 5, our highest velocity items.

Being fully stocked is a competitive advantage that helps us gain market share and margins in a market where our competitors lack the working capital flexibility we have. We will be working inventory levels down throughout the season and should show progress on this objective in the second quarter.

Our combined short- and long-term debt level at the end of March was $396 million, an increase of 10% from last year. This increase is primarily due to the 2.4 million in shares, or 76 million in dollars, that we repurchased in the second through fourth quarters of 2007 and to fund the NPT acquisition.

Our average interest rate on our debt has dropped 70 basis points year-over-year to 5.2% this quarter and should fall further as we take advantage of declining short-term borrowing rates on the roughly 60% of our debt that is floating.

As for the share repurchases we made in 2007, while we expect they will be accretive for the year, they did add 0.02 to our loss in this seasonally slow earnings quarter.

Finally, I'd like to take a moment to share with you some of the perspectives we've gained through our involvement in Poolcorp Financial and how we see the dramatic changes in the home equity market over the last six to nine months impacting the pool construction business. As a reminder, Poolcorp Financial is the mortgage brokerage business that we started over a year ago to help match homeowners with secured pool purchase financing.

Let me take a step back a moment and state a couple of facts that we believe to be true about our industry. First, the long-term, underlying demand for pool and irrigation systems is healthy and growing, driven by the favorable demographic and socioeconomic factors that we regularly discuss. A short-term factor impacting that long-term underlying demand is housing turnover. Demand is enhanced by stable or growing housing turnover, with new and, more importantly, existing homes creating the impetus for homeowners to upgrade their outdoor living space. One of the main enablers for this demand to result in an inground pool purchase is financing, and more specifically in most cases, second mortgage financing.

While the trends in housing turnover worked against us for the last two years or so, the pullback in the mortgage-backed financing market over the last six to nine months has also had an impact. The issues started by the subprime markets have resulted in a broad pullback by the banking industry from the mortgage-backed financing markets. As a part of this, many lenders have scaled back or exited the second mortgage market altogether, abandoning attractive business segments within this market. I've been told by more than one senior bank leader that had participated in this market for years that the pool financing segment of their home improvement lending business was the best-performing in their portfolio.

This overreaction has created a void and unfilled demand for mortgage-backed loans in our industry, which is being met by local, regional and specialty lenders, to some extent. Many see this as an opportunity and are attracted to it, but it will no doubt take time for the banking industry to regroup and fully address this market demand. In the meantime, we know that the construction market will reach bottom at some point and then begin to rebound with the assistance of a healthier bank market.

Now I'll turn the call back over to our operator, Janice, to begin the question-and-answer session.

Thank you, sir. (OPERATOR INSTRUCTIONS) Jeff Germanotta with William Blair.

Good morning, gentlemen. Your earnings guidance range of $1.20 to $1.50 is a little wider than usual. Could you perhaps shed a little insight into some of the key assumptions on the low side, some of the key assumptions on the high side?

Manny Perez de la Mesa: Sure, Jeff. There are three overwhelming or big variables here. One of those three variables we have pretty much in check, and that is the expense side. So if you put that aside, the other two variables would be sales and gross margins. In the context of sales, the range is from flat to down 5% for the year.

And again, the logic here is twofold. One is, relatively speaking, easier comps from June forward; and second, the mix of business being weighted more towards maintenance, repair and replacement in the second and third quarters of the year. So that is one variable.

The other variable is gross margin. And as you know, based on the reported results, we had 50 bps of pickup for the year. But in the difficult market environment, we're striving to sustain that as the year progresses, but that is the other second variable.

When you put those variables together, it leads to exponentially a greater range than we would normally have. And again, we're dealing in unprecedented times, and those two factors play together, given these unprecedented times, in terms of how the market behaves in terms of our competitors' ability and needs to move product to meet their ongoing capital needs.

And with respect to the gross margin, have you seen much in terms of a reaction from manufacturers --- in terms of support for distribution and retail?

Manny Perez de la Mesa: You know, what's interesting is manufacturers, I think, are by and large cognizant of the fact that there is very limited price elasticity. And therefore, they are not going to sell more pumps, or for that matter more chemicals, because of the price being a little bit lower. So, therefore, frankly, they would be giving money away if they were to lower their prices. So, no there is really little to no movement on that part, and it would not make any sense for them to do so.

Thank you.

Anthony Lebiedzinski with Sidoti & Company.

Can you talk about your maintenance, repair, replacement business, how did that perform in the first quarter and what you are seeing so far here in the second quarter? I know it's kind of early in the quarter.

Manny Perez de la Mesa: Sure. Good morning, Anthony. That is a very predictable component of the business. In the Sunbelt, that pretty well performed as expected, and I think the best indicator there is the chemicals, where our sales were up year-on-year. So that's pretty well --

How much were they up?

Manny Perez de la Mesa: They were up in the low to mid single digits. On the other hand, what happened in the snowbelt this year is that pool openings are taking place a little bit later than they did last year. And when pools are opened a couple of weeks later and that couple of weeks is end of March versus middle of March, that affects some of those maintenance and repair and replace products.

Overall, though, as we get into April, that is trending pretty much as expected, and that is a very predictable component of the business, with the only real variable there being the opening and closing of pools in the northern markets.

Okay. So you mentioned that chemicals sales were up low to mid single digits. What about if you take the entire business for maintenance, repair, replacement? How did that perform in the first quarter?

Manny Perez de la Mesa: Well, as I said --

You said as expected, but what -- if you could just quantify what that means.

Manny Perez de la Mesa: What that means is in the sunbelt, it would up in the low to mid single digits. And in the snowbelt, it is flat to -- no, it would be up in the sunbelt mid to high single digits; in the snowbelt, it is down a little bit because of the later pool openings.

Okay. I was wondering also if you guys have seen anything in terms of pool owners in the past, let's say, hypothetically people would hire a pool-service company to come and clean their pools and take care of them. Have you perhaps maybe seen some actually pool owners saying that they will do the work themselves and then not get the pool-service company? Have you seen anything like that?

Manny Perez de la Mesa: No.

Also, can you just briefly touch on your international business?

Manny Perez de la Mesa: Sure. The international business, we -- in fact, we are looking to open -- in the process of opening one location in Portugal, and we also did a small acquisition in Ontario in the quarter. So, that continues to grow modestly in the context of the overall business, but it is obviously something that we are building on over time. And that continues to do well. Sales on the international side of our business were in fact modestly up for the year -- for the first quarter.

Okay. All right, thank you.

Michael Cox with Piper Jaffray.

Good morning, guys. My first question is on the inventory side. Mark, you had mentioned we should expect to see some improvement as we move through the course of the year. I was wondering if you could comment on the broader industry, if you could give your assessment as to where inventory levels are and what your expectations of what that might cause from a pricing situation as you move into the heart of the pool season.

Manny Perez de la Mesa: Let me answer that in two different parts. First, in terms of our inventories, when we were buying -- had been buying in the latter part of 2007 and early part of 2008, we have built into the parameters for replenishment essentially flat sales, which we consider conservative in the current environment from the ability and the importance that we have in leveraging our financial strength to ensure that we provide a very high level of service, which distinguishes us then again vis-a-vis our competition. So that is the fundamental driver for our number.

And as the year progresses, given the mix of products changing more towards maintenance, repair, replace, which is more predictable, what will happen is we will be closer to our assumption and those inventory levels naturally will correct themselves.

On the other hand, from a competitive standpoint, it is all over the board. I know of a number of competitors that, given their working capital constraints, have had to hone in and limit their purchases going into the season. On the other hand, there are others that are absolutely fine and business as usual.

When you look at inventory overall in the channel, I would say that overall, it is largely unchanged versus what it would normally be, with us being a little higher than normal and the rest of the market being net-net a little bit less than normal.

Okay, that is helpful. And then I was hoping that you could -- just to clarify, when you referenced flat sales to down 5% for your guidance variable, that includes the NPT business, is that correct? Or is that on a base business --?

Manny Perez de la Mesa: Base business.

That is on a base business. Okay. And then my next question is in terms of cost reductions, are there any other plans to implement at this point or potential branch closures as we look to the balance of the year?

Manny Perez de la Mesa: We went through that process in the latter part of 2007. And here let me digress for a second, because it is important and I think you have picked up -- understand the point. We -- a good part of our business and our cost structure is based on the number of locations we have -- or essentially the size of our network. And we went through that process in the third quarter of last year, and made decisions that we implemented largely in the fourth quarter and carry over a little bit to the first quarter of this year.

At this point, it would not behoove us to close anything down for the pool season. But there are a handful of locations that we decided to defer that decision when we went through that six to nine months ago, and we will be making those decisions later on this year. So you could see potentially several more closures, but those will be done in the latter part of the year after the season has taken place.

Almost universally, in the peak of the season, every location is profitable; it's hard not to be. It's when you look at the profit contribution for the full 12 months and the expectations for the next two or three years that you make a determination -- or we make a determination in terms of closure or consolidation versus nonconsolidation.

Okay. That is very helpful. And my last question is on complementary product sales. The year-over-year decline was more significant than what we've seen in the past couple of quarters. Is that a reflection of not having as many new products that you are introducing in that market or is it really more a reflection of the market getting softer?

Manny Perez de la Mesa: It's reflective of two things. First, the point you mentioned, it is the softer market environment, with obviously, as I mentioned in my comments, new pool construction in the major markets of California, Florida, Arizona and Nevada being down 30% to 50% from last year's first-quarter levels. That is one key factor.

And the other key factor is the weighting that those markets have, being greater than the weighting for the whole year, have your weighting in the fourth and first quarters.

Okay, that makes sense. Thank you very much.

David Mann with Robert W. Baird.

Manny, can you hear me? We are still with Johnson Rice. At least last I checked.

My question relates to -- I think on these calls you'd given some semblance of what you see the backlog in new pool construction to be. I know it seems to be shrinking each quarter. But can you give a sense, now that you have a little bit of visibility on the season, what are some of your dealers telling you and what kind of percentage decline might you might be ascribing to this year's pool construction?

Manny Perez de la Mesa: Sure. Well -- and there's almost like two different pictures. There is the picture that you see in the California, Arizona, Nevada, Florida market. And there is a different picture --consolidated different picture in the rest of the country, including Texas.

In the most affected markets, the numbers are what they are. I mean, I mentioned 30% to 50% from last year's first quarter; down 60% to 80% from the '05, '06 levels. I will tell you that two years ago, there are many builders that didn't return phone calls for weeks at a time because they were so busy. And now, if you call them to build a pool, they will be there the next day digging the hole. So, it is certainly a very different environment in these markets.

In Texas, the rest of the country, and, for that matter, Europe, there are pockets of softness, and overall the market will probably be modestly down net-net in terms of new construction. But nowhere near as affected as in the Florida, California, Arizona and Nevada markets.

Overall, if you look at a big picture of US pool builds, US pool builds were down about 25% in our estimates, in 2007, which was down again from the 5 or so percent that it was down in 2006. We could very well see another like type decrease in 2008. So therefore, new pool construction could be down another -- could very well be another 20%, 30% this year.

Now interestingly enough, you are reaching base levels that have not been seen in well over a generation. And what is interesting is how it comes back. And (inaudible) it will, and as Mark mentioned in his comments, a key constraint there currently is the financing environment. As the financing environment begins to clear up -- and whether it be local, regional banks or specialty branch or institutions begin to address this void that has been created, as some have walked away, universally across every home improvement type of loan, as that happens, it will kick back up. Because it's interesting that the demand continues to be very healthy on the consumer level. And therefore, whether it's 2009, 2010, it will revert back and obviously it will be very favorable for us then.

And when you talk about the demand being healthy, how are you measuring that?

Manny Perez de la Mesa: One of the factors we are looking at, interestingly, is -- and we have various anecdotal points. One anecdotal point is our visits to our websites. Second one is the desire for consumers to have builders calling on them in terms of leads generated. And the third window that we have into that visibility is those that actually apply for financing.

And I don't have the statistics -- maybe Mark does -- but where perhaps a year or 18 months ago, 70%, 80% of those that were applying for financing for that home improvement loan, for let's say a pool, were getting approved, now the percentage of approvals are significantly more modest -- maybe 20%, 30%. And therefore, the fact that they are still applying, the fact that they are still interested, the fact that they are still looking at this stuff, is very healthy. It's just a matter of consumers' ability or certain consumers' ability to get the financing to make that investment.

Very good. In terms of the maintenance side of your business, can you give some visibility on how the mix of goods might be changing between pure equipment sales and parts sales, as people may be trying to put off the bigger purchases?

Manny Perez de la Mesa: Really, we have not seen any shifting to speak of there. Part sales are up, as are chemical sales. So we have not really seen any impact to speak of in that vein.

Okay. And then lastly, Mark, I think in the past you've given a sense of what the delinquencies have been -- what the over 30 days has looked like. Can you update us on that?

Yes, I don't have that right in front of me, David. I can get that for you though.

Okay. I will call you later. Thank you, guys.

Brent Rakers with Morgan Keegan.

Good morning, this is [Nicky Prather] for Brent Rakers. I have one housekeeping question real quick. You gave the weighted average cost of debt in the quarter. I was wondering if rates stayed the same, what kind of number we'd be looking at for Q2?

We would probably be down in the 50 basis point range from where we are at the end of the first quarter.

Okay. That is helpful, thank you. Also the inflation outlook as far as price increases in the quarter. Did you all see a lot of that? Are you all expecting some? Is there any announced?

Manny Perez de la Mesa: Sure. Overall from an industry standpoint, price increases and inflation versus last year collectively is probably in the very low single digits. Certain products have had no increases, and if anything, modest decreases, whereas some products have had 3% to 5% type increases. So, it's all over the map, but I would say that probably when it is all weighted out, it is very low single digits.

Okay, thank you.

David, if you are still listening, just to answer your question on AR, a couple of statistics. One, our average collection period DSO is at 36.4 versus 35.3, so just over a point higher there --

Manny Perez de la Mesa: A day.

Yes, a day higher. And on the aging, current aging is 83% versus 87% last year first quarter.

Curt Woodworth with JPMorgan.

Good morning. Manny, looking to the second quarter, I think just based on seasonality -- and you have obviously a higher proportion of your mix in the aftermarket, would you expect kind of a normal increase sequentially in the gross margins for the Company?

Manny Perez de la Mesa: Yes.

Okay. And quarter to date, can you give us a sense for how gross margins and sales are tracking?

Manny Perez de la Mesa: Sure. In April, with a week to go, we are tracking about mid single digits down versus April last year. And so far, the gross margin improvements that were reported in the first quarter, we're still seeing that we're able to retain that so far -- three weeks into April.

In terms of the year-over-year benefit?

Manny Perez de la Mesa: Correct.

Okay. On the expense side, you said last quarter your headcount was down 5% year-on-year and you are potentially looking at sales being down 5% this year. Why wouldn't you see better leverage on SG&A?

Manny Perez de la Mesa: (Inaudible) By the updated number, our headcount is down 6% year-on-year as of March. But you do have facilities -- we have opened new locations this year which will be in place for all of this year, and they were only in place for most of last year.

Secondly, we also expanded facilities during the course of '07 which we have a full-year brunt of that higher lease expense for the year, as well as just built-in lease increases that we have. We have some components of expense, for example, fuel cost as part of our freight. Given the increase in fuel costs, that component of our cost is up year-on-year.

So when you look at those components, despite our headcount being down -- and by the way, people did get increases this year as well in terms of their salary levels -- so you have some components going one way and then you have components going the other way. And net-net, we are managing to frankly a little bit less than flat expenses. But conservatively, I think flat expenses is -- on the base business side of the equation -- is a reasonable expectation for the year.

Okay. And then with the inclusion of NPT, would you anticipate that SG&A in absolute numbers would be up?

Manny Perez de la Mesa: Yes.

Okay.

Manny Perez de la Mesa: You have an expense base there for that business that obviously we cannot completely encapsulate within our infrastructure.

What is your target margin level for NPT? I know it -- I think didn't make money last year. Where do you think the profitability should be?

Manny Perez de la Mesa: Well, when we made the announcement of the transaction, what we communicated then was that the bottom-line contribution would be negligible. Now, factoring into that there is the operating profitability and we expect it to be, on the operating profit side, profitable. Not significantly, but marginally so. Enough to pay for the amortization of certain noncompetes and things of that nature that we amortized over a five-year life or whatever. As well as the interest expense that we will incur on the $30 million or so that we paid for it.

Okay. And kind of going forward in the out years, can you give us a sense of what the margin structure could look like?

Manny Perez de la Mesa: Oh, sure. I mean, that business has the potential in a normalized environment to be as profitable as the overall Pool Corp business is. So therefore, to get to high single digit operating margins is very reasonable in a normalized environment.

Great. And in terms of other acquisition opportunities, given that a lot of these smaller companies are in more distress, will that create any opportunities for you to acquire some of these businesses? And would you have interest, I guess?

Manny Perez de la Mesa: Yes, let me answer the question in two ways. First, from a panoramic standpoint, in terms of how we view acquisitions, historically and to date -- today, I'm sorry. The motivation for an acquisition was an alternative way in lieu of opening of a new location, a greenfield, to enter a market or expand our share in a market. So when you look at the marketplace today and you look at the panorama -- and I'm going to describe three scenarios here.

You've got the traditional or legacy pool business, pool distribution business. In the legacy pool distribution business, we have something approaching a 40 share of the US market. And within that, we have something close to a 45 plus share in the Sunbelt. So, there are pockets of opportunities, certainly, where we have very low or no share on the blue side of our business domestically, but there aren't that many.

So therefore, once we have a certain share of market, the value of an acquisition is significantly less. Because, again, the primary motivation for the acquisition was to enter a market or enhance a low share in a market.

In the other two parts of our business, in the international side, as well as in the irrigation side of our business, in those sides, obviously there is a lot of room from an acquisition standpoint. And that is a separate opportunity. That is part one.

So, when it you have a situation where you have a struggling distributor, if we already have a high share of market, there is no real motivation for us to acquire them. They will just go out of business and that is it. So, that is one case.

The other factor is when you look at this business or our industry, whether it be irrigation or pool, we have a pretty broad mix of competitors. There are a number of competitors that have been around for 20, 30 years, that have managed their finances very conservatively. And they're very well able to weather this kind of market environment.

So a guy that maybe was -- had sales of $30 million, $25 million, and was making $1 million a year in a normalized environment, well, he used that $1 million to pay off the building that he operates out of, pay off whatever debt the man had in their business. And they can weather this storm pretty well even if they are not making any money or even losing a little bit of money. So that is one scenario. And therefore, they wouldn't be desperate to do anything.

On the other side of the spectrum, obviously, there are a number of cases where they have not managed their businesses that conservatively or their finances that conservatively, and therefore they may be stretched more. And those are the ones that are most vulnerable. But again, the only case where that falls into our spectrum is where we have little to no share. And therefore, that is where our paths cross. And again, there are some opportunities like that that will come available, and we will take advantage of them. But in the overall scheme of things, it isn't like it's going to be a wide open type of environment.

Okay, that is helpful. And then in terms of the sales guidance again, of down 5 versus flat. I mean do you feel that the flat high end of the guidance, is that viewed as a stretch goal. Do you think that that is realistic?

Manny Perez de la Mesa: I don't know that I would view it as a stretch goal. But I would certainly look at it in the context of there is a certain amount of uncertainty here. Everything from the weather in the shoulder of the season in the fall in the snowbelt markets, to the recovery or the opening of financing opportunities for consumers that want to make an investment in their home, to the real estate market finding some level of traction in housing turnover.

So all of those factors play into that scenario, as well as logically our ability to execute -- that's probably the most important -- our ability to execute and gain market share. All of that plays into that scenario. I would say that is the upper end of -- the realistic upper end of the opportunity for this year. But I wouldn't necessarily called it a stretch goal.

Got it. Great. Thanks very much.

(OPERATOR INSTRUCTIONS) Keith Hughes with SunTrust.

Thank you. Just real quickly on the gross margin, which was very good in the quarter, was there some prebuy activity on products heading into the season that you took advantage of that accounts for the inventory as well as the good gross profit?

Manny Perez de la Mesa: Nothing unusual, Keith. In fact, the early buy parameters that we established in September, October of last year were pretty well consistent what we had done in the prior year. So, nothing unusual there to speak of.

It was more on two factors. One is our sales execution factor, as well as our pricing discipline.

And when you say sales execution, what exactly do you mean there?

Manny Perez de la Mesa: Sales execution is when a customer communicates that he is able to buy the product at 5% less elsewhere. Our sales person or manager is able to convey the fact that there is a different value proposition that is being provided, and therefore is able to retain that differential.

All right. Thank you, Manny.

There are no further questions at this time. I'd like to turn the conference back over to Mr. Perez for any closing remarks.

Manny Perez de la Mesa: Janice, thank you very much. Thank you all again for listening to our first-quarter 2008 results conference call. Our next call is scheduled for Thursday, July 24th, my wife's birthday, when we will review our second-quarter results. And as you well know, that is a very important quarter in our year. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.