Pool Corp (POOL) 2009 Q1 法說會逐字稿

Good morning, my name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pool Corporation's 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).

I'd now like to turn the call over to Pool Corporation's Chief Financial Officer. Mr. Joslin, you may begin your conference.

Thank you, Sarah. Good morning, everyone, and welcome to our first quarter 2009 call. As usual, I'd like to remind our listeners that our discussion, comments and responses to questions today may include forward-looking statements, including management's outlook for 2009 and future periods. Actual results may differ materially from those discussed today.

Information regarding the factors and variables that could cause actual results to differ materially from projected results is discussed in our most recent Form 10K as filed with the SEC.

Now, I'll turn the call over to our President and CEO, Manny Perez De La Mesa.

Manny Perez De La Mesa: Thank you, Mark. Today, I'll start by restating our focus and priorities in this market environment. Our first focus is cash flow generation. The keys here are the balancing of our inventory investment, while ensuring excellent customer service, together with credit and collections discipline. We've made very good progress this year and expect that progress to continue.

Our second focus is on sales, specifically sales execution, coupled with a rollout of several initiatives to further our market position. These initiatives include our Turbo-Charge Program to stimulate more replacement and higher end product sales, our expansion of tile-stocking centers to capitalize on our MPT investment made last year, our parts stocking initiative to make us the source for the service trade, and the continuation of programs such as the Backyard Place to enhance the competitive positioning of retail customers. The impact from these initiatives is largely ahead of us.

Our third focus is on margin management, continuing the work started years ago and accentuated in 2008. Many elements contribute to these efforts and we still have much to do.

Our fourth focus is rightsizing our organization for the current sales expectations without compromising service levels or our ability to succeed when the market turns around.

I will now provide more color on how we expect 2009 to develop. Starting with sales, we are certainly being challenged with new construction below previously recorded levels and discretionary replacement products, like heaters, being deferred. These components of our sales mix weigh heaviest in the fourth and first calendar quarters, while non-discretionary maintenance and repair product sales weigh heaviest in the second and third quarters.

Deferred customer early-buy shipments also reduced first quarter sales with these products expected to be shipped in the second quarter based on their natural demands.

For these reasons, plus the largely deferred impact of price inflation to date, and easier year-on-year sales comparisons, we expect that our sales trends of the past two quarters will moderate. Yet, despite this moderation, our sales in 2009 could very well be down low double-digit percent versus 2008.

The Horizon business, which is weighed more toward new construction and discretionary products, is expected to be down well over 20%, while the SCP Superior business is likely to be down in the high single digits. In this unprecedented sales market environment, our focus is on executing on our initiatives and capturing profitable share without falling into the trap of making unprofitable or uncollectable sales.

Moving on to gross margins -- we expect moderation in the year-to-year improvement as we move through the year, given product sales mix changes, progressively tougher comps and not enjoying the first quarter benefit from pre-price increase purchases made in 2008. We do however expect to continue to see improvement for the balance of the year.

The same factors that we've referenced before continue to benefit, including improved pricing and purchasing discipline, better sales execution, communicating and capturing our value add, the gradual transition of sales to more profitable Pool core branded and preferred vendor products and a better product sales mix, given the reduction of new construction and deferred discretionary products.

Our operating expenses have been adjusted commensurate with our sales expectations without adversely affecting customer service levels. For the year, expenses should be down 8 to 10%, given our sales expectations. To the extent that our sales are better or worse than expenses -- than expected, expenses will adjust in the same direction, but to a lesser degree.

Interest expenses will also decrease, given both lower average debt outstanding, as well as lower average interest rates. Talking about debt levels, we have realized a year-on-year $79 million reduction in inventory, as we've worked to rebalance inventories in order to ensure excellent customer service, while operating more efficiently from an inventory investment standpoint.

The bottom line is that our debt has already peaked in 2009 and it will begin to decrease six to eight weeks earlier than normal, as we strive to beat 2008's record free cash flow in 2009.

Turning now to our sales by major market and channel -- our overall base business sales were down by over 18% in the SCP Superior channel, and by over 30% in the Horizon channel. On the Blue side of our business or the SCP Superior side of our business, our best performing market, in a relative stance, was Florida, down almost 11%, followed by Texas, down almost 15% and then California, down over 18%.

We believe that this relative performance is primarily due to the weighting of maintenance and repair products as Florida, for example, has the flattest annual sales distribution, given its higher average temperatures. The relative sales performance in markets outside of the above three states were down by over 20%. As noted previously, we expect sales trends to moderate, given the higher weighting of maintenance and repair products in the second and third quarters, as well as the contributions from our sales initiatives.

At this point, we are beginning to see anecdotal evidence that 2009 could very well be the worst year in what is now the fourth year that new construction has declined and the third year that the overall pool market and irrigation markets were contracted. When this perfect storm of adverse external factors abates, we believe Pool Corporation will have improved its competitive position and be poised to resume growing again.

We've learned many lessons over the past several years and have become a stronger and better company in the process. With that, I'll turn the call over -- back to Mark for his financial commentary.

Thank you, Manny. I'll start by commenting on our operating expenses. As we've mentioned many times in the past, operating expense reductions have been, and continue to be, a major focus for us, as we adjust for current and anticipated market conditions without sacrificing our key longer term objective of growing our market share. As evidenced by our results, we continue to make good progress here with total base business expenses down 11% year-over-year with essentially the same number of sales centers as in 2008.

Our largest cost category, labor and related costs, was down 9% from 2008, as we pared back on labor throughout the business. Our employee count is down 10% from March '08 and 3% from December '08 as we continue to adjust our support structure to market conditions. We will make further adjustments here as needed as the year progresses, and expect to benefit from the wage freeze for all employees that we established in the first quarter.

Our next largest cost category, facility costs, were essentially flat year-over-year and should drop as the year progresses, as we proactively adjust our least costs to current local real estate market conditions. To date this year, we have negotiated over 3 million in rent reductions, which will be recognized over the remaining term of these leases.

Delivery costs, which are more closely tied to sales volumes, are the next largest cost category and fell 21% year-over-year, in line with our sales decrease. All other operating costs were down 11% from last year.

The bottom line is that we are aggressively managing our cost structure without sacrificing our market positions. We expect that at least the fixed part of our SG&A cost structure will be down 8 to 10% compared to 2008 and that should continue throughout this year.

Turning to the balance sheet and starting with accounts receivable, our net receivables declined 46 million or 22% for the quarter. Our past due receivables have improved some from year end, as we would normally expect at this time of year and we have kept our allowance for uncollectable receivables flat from year end at 13 million.

Our GSO at the end of the quarter, as measured on a trailing 12 months of receivables, was 36 days which was unchanged from Q1 2008. In this environment, we remain challenged to extend credit and facilitate sales to creditworthy customers, while aggressively managing past due accounts.

Moving onto inventories -- as we discussed on our last call, working inventory level is down as a component of our focus on cash flow is a key initiative for us in 2009, and we made excellent progress here in the first quarter. Our quarter end inventory of 398 million is down 79 million or 17% from 2008 as we reduced inventory levels across product classes without sacrificing customer service. We have a number of initiatives in place that we expect will yield further results here ahead.

Looking at our accounts payable, you'll see that this declined 132 million year-over-year. In addition to the $79 million decline in inventories, we also moved payments that would have normally been made in Q2 '09 ahead to the fourth quarter of 2008, as we discussed on our last call, and also to Q1 2009 to take advantage of opportunities available to us. This will result in significantly improved cash flow in Q2 '09 versus Q2 '08.

Speaking of cash flow, this is our top priority for 2009 and our goal is to exceed the record cash flow results we had in 2008. While our first quarter use of cash increased by 30 million due to the 2008 tax payment we made, our inventory reductions and prepayments set us up for excellent cash flow results in the second quarter and the rest of the year.

Our debt levels at the end of Q1 were 381 million, down 15 million from Q1 '08. We expect our debt levels to drop sequentially beginning in Q2 this year and on average, be lower than last year. We remain in compliance with covenants on our debt, which includes leverage of 2.92 compared to the covenant of 3.25 and the fixed charge coverage ratio of 2.49 which needs to be above 2.25.

As mentioned on our year end call, we expect our ratios to tighten some this year, but our expectation is that we will remain in compliance throughout the year.

One of the components of our capital structure is our receivable securitization facility. This facility, which provides largely backup capacity, has a 364 day term and is set to expire in May. At this point, we expect to renew or replace this facility when it expires.

That concludes my prepared remarks, so I'll turn the call back over to our operator to begin our question-and-answer period. Sarah?

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Kathryn Thompson from Avondale Partners. Your line is now open.

Hi, thank you. Could you give us the D&A and cap ex guidance for fiscal '09?

Manny Perez De La Mesa: I'm sorry, Kathryn, could you repeat the question?

Could you give us cap ex and D&A guidance for fiscal '09?

Manny Perez De La Mesa: Sure. D&A will be modestly less than last year as some amortization expense has been -- some items have been fully amortized (inaudible) intangibles. So D&A will be modestly less than last year and cap ex for the year will also be modestly less than last year. I'm talking in both cases about $2 million or so less than last year.

Okay. Also, on -- just delving into your SG&A, just to reconfirm, is labor still about 50% of your overall cost? Also, could you --

Manny Perez De La Mesa: When you include on all the costs related to labor, including benefits and everything else -- in fact, labor is closer to 60%, as well as travel and whatever.

Okay.

Manny Perez De La Mesa: So total labor cost, in essence, all together are closer to 60% of our total cost.

Okay, perfect. How much do you expect in labor cost production for fiscal '09, either in a percentage or on a dollars basis?

Manny Perez De La Mesa: About 8 to 10% versus last year.

So it's still in line with what you were seeing in the first quarter?

Manny Perez De La Mesa: Yes.

And also, just overall for SG&A, I think that you've stated in the past, you were hoping to see flat to down on a dollar basis for fiscal '09. Is that still within your expectations?

Manny Perez De La Mesa: Well, given how we have resized our business for the current environment, our overall SG&A in absolute dollars will be down 8 to 10% versus what it was in '08.

Um-hum, okay, perfect. Do you also still expect a 4 to 5 million year-over-year decline in interest expense?

Manny Perez De La Mesa: Yes. Kathryn, what I'd like to do is -- yes, we expect -- due to both lower average borrowings, as well as lower average interest rates, we expect interest expense to be down about 4 to $5 million versus last year. And Kathryn, before you ask the next question --

Sure.

Manny Perez De La Mesa: -- I could just maybe let somebody else come in and ask their questions.

Sure, and I'll just jump back in the queue. Thank you.

Manny Perez De La Mesa: Thank you, Kathryn.

Your next question comes from the line of Tom Hayes from Piper Jaffray. Your line is now open.

Thanks. You had previously stated on some of the calls that your view on the replacement business obviously showed some stability, but now you're -- you had mentioned that some of that's deferrable. I was just wondering if you could provide some thoughts on what percent of that may be deferrable.

Manny Perez De La Mesa: Sure. I would say prior to about a year and a -- a year or so ago, I think toward -- through the end of 2007, we had not seen any evidence of replacement activity being deferred by consumers. Beginning in 2008, we began to see consumers deferring certain items of replacement products. If you look at the equipment pad, the number one product that has been deferred has been heaters.

As you can probably figure out from a logical standpoint, heaters are mostly sold in the fourth and first quarters when the water temperature is normally colder. And what we have seen, in contrast to pumps and filters, which are necessary to either repair or replace to keep the pool functioning, in the case of heaters, in this economic environment, some consumers are postponing or deferring the replacement of the heater when it breaks down, and simply not swimming as much in their pool when the water is colder.

Okay. And then, you had -- I guess if you could just give us your thoughts on -- as far as the inventory sell-through of the prepriced inventory, how long that will last? Is that pretty much sell-through?

Manny Perez De La Mesa: Sure. As indicated, when we did our year end conference call for 2008 a couple of months ago, most of the prepriced increased inventory that we bought or ordered back in the August-September time frame, most of that inventory was sold through in the first quarter.

Okay.

Manny Perez De La Mesa: There are still some modest remnants of that that will largely be sold -- well, will essentially be sold through by the end of April.

Great, thank you.

Manny Perez De La Mesa: Um-hum.

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

A couple of questions here. As far as your ability to cut costs, most of that is for labor, and you said that you've been able to renegotiate some of the leases for your sales centers. Are there any other avenues that you're pursuing as far as cutting costs? Can you give us some flavor for that?

Manny Perez De La Mesa: Sure. Well, I'll put it -- I'll start this way, Anthony. Unlike government, we actually have a zero-base budgeting process and here, we look at and try to see if there's justification for any kind of expenditure. And so we look and challenge everything as part of our budgeting process, and then after the budgeting process is done, depending on business conditions. For example, Mark referenced the fact that freight is down commensurate with sales. That's freight out expense, basically.

But we also have our fleet. For our delivery vehicles, we have a year-round fleet which we have trimmed back fairly -- a fair amount from what it was last year, as well as we have a seasonal fleet component and the seasonal fleet needs are obviously challenged in terms of when do we actually need to bring those on, and how long we need to keep them.

So when you go across every element of cost, we try to say and challenge, are they absolutely necessary and what's the impact if we don't do them? And if the net is a net negative to eliminate the expense, then we keep the expense. If it's a net positive to eliminate the expense, then we eliminate it.

Um-hum, okay. And also, you mentioned heaters as being a category where people are deferring purchases. Can you give us any other examples of any products that you're seeing that people are deferring?

Manny Perez De La Mesa: Sure. In the case of the things in or around the pool that have been sold for many, many years, the second product category would be -- the lighting category would come to mind, but what's also happening is, for example, pool retrofits where people replaster the pools to provide a refreshed look and a better feel and everything else. Some consumers are deferring those as well. So if you think about it logically, I mean -- and again, this affects consumers on the margin.

There are some consumers that are fine and they're behaving pretty much normal. There are other consumers that are pinched or concerned in the current environment and they're saying, well, what do I absolutely have to do or not absolutely have to do? If a pump breaks, they have to either repair or replace it to keep the pool going. On the other hand, if a heater breaks or putting a new liner in the pool, those kind of expenditures that are not absolutely necessary to be done right then and there, and could be deferred for six months or a year, that's what's taking place.

Okay. And my last question also is what are your thoughts on your dividend now? You have increased that in years past. It seems like the recent trend from many companies is to actually be reducing dividends, so what's the Board's thinking now on the dividend?

Manny Perez De La Mesa: Well, that's a topic that comes up since the Board reviews that every quarter and it'll be again reviewed at the next Board meeting in May in a couple of weeks. So that's something that is discussed every quarter and I'll leave that up to the Board to make that decision. I'm just one of the eight votes.

And what is your vote going to be?

Manny Perez De La Mesa: I'd rather not state my vote, but so therefore, I'll just leave it to the Board to make the decision.

Okay, fair enough. Thank you.

Manny Perez De La Mesa: Thank you, sir.

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

Yes, thank you. Good morning, Manny and Mark.

Manny Perez De La Mesa: Good morning.

On the cost issue, can you just clarify the incremental change, if any, from the sort of commentary guidance you were implying on the last conference call in terms of the SG&A components?

Manny Perez De La Mesa: On the SG&A's components, it's -- the order of magnitude of the reduction is a little greater in part because the sales are a little weaker, so that would be -- but not significantly so.

And that would be the only thing that's really different from before? There are no other deeper cuts in labor?

Manny Perez De La Mesa: No, no, no, nothing significant, no.

And I think on the last call, you kind of intimated that by the fourth quarter, the cost savings would sort of anniversary some of them. Is that still the case or do you still expect there to be some bigger benefit or year-over-year decline in Q4?

Manny Perez De La Mesa: Right, there will continue to be declines throughout the year, but for example, on a base business level, our expenses were down 11% in the first quarter. You're going to see something, say, similar to that in the second quarter and then that'll moderate as we get into the third and fourth quarter, given the fact that given the adjustments we made in the latter half of last year. So overall, that's why our feelings are that it's going to be more like 8 to 10% for the year, although in the first half of the year, the year-on-year reductions will be greater.

Yes, and just to clarify, David, we -- our guidance in terms of what we're doing there hasn't changed, but we have continued to make reductions. So as I mentioned, since year end, our headcount is down an additional 3%, so throughout the first quarter through some selective layoffs and attrition and so forth, we've continued to reduce our headcount and that will continue throughout the year.

And then in terms of the inflation that you're seeing in the sector, I guess maybe you can comment across the product categories, especially in chemicals, with -- in light of the Chemtura bankruptcy?

Manny Perez De La Mesa: Sure. That's a very good point. Thank you for bringing it up. In fact, I should have put that in my initial comments. At the outset of the year and late last year, we were looking at mid to modestly higher than mid-single-digit price increases. Effectively very little of those increases -- I'll say 2 to 3% -- have come into play so far this year. The reasons for that are that we were not unique in terms of buying into -- buying product ahead of the price increases, so therefore, although I try to drive behavior to drive off replacement cost, we're not the only one in the market.

So therefore, to the extent that people were still pricing for historical cost, it delayed the implementation of those price increases to a degree. And therefore, the bigger impact of those increases will be felt essentially from the second quarter on and that speaks to chemicals, as well as everything else.

Can you just comment -- if I could ask one more question -- about what you see as the sort of structural inflation rate? I get a lot of questions about whether this inflation will abate at some point. Obviously, you see where crude is now and some other inputs. How do you see sort of the structural inflation, let's say, playing out in 2010 and beyond?

Manny Perez De La Mesa: Okay. This industry, if you go back 20 years, had to speak of very, very nominal rates of inflation, I'd say averaging 1 to 2% collectively and per year. And the reasons for that were that the industry was growing and as many -- although manufacturers over that course of 20 years realized raw material increases sporadically over that course of time, their volumes were increasing. And therefore, they were gradually becoming more efficient from a manufacturing standpoint in terms of their ability to absorb fixed costs, as well as their process improvements that they were making over the course of time.

So given that, they were able to -- despite very nominal price increases over time, they were able to continue to maintain their gross margins over a long period. In the current environment, the current environment being the last two years, when you had a market contraction coupled with a spike in raw material costs, that put pressure on them, and they've had to, in this case, raise prices.

My expectation, as we get out of this period that we're in, and the market begins to recover to more normal levels, they'll begin to accrue the benefit of leverage and the absorption of fixed costs. And with a normalization of raw material prices, I would see prospectively a very modest level of inflation on a go-forward basis, more along the lines of historical levels, again, taking the short-term '09 impact as an adjustment in that long-term trend.

Okay, great. Thank you very much.

Manny Perez De La Mesa: Um-hum.

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

Good morning. Just maybe if I can follow-up a little bit about the timing of the potential price increases -- Manny, you seemed to suggest that a lot of the competitors in the industry also pre-bought and as a result, did not raise prices in Q1 to the degree that you would like. I guess as we go into the busy season of the year, what is to stop the competitors from still not increasing the prices, and with the possibility that these higher costs would now flow through?

Manny Perez De La Mesa: Well, two things, Brent -- one is that -- and their way of -- and the way of managing your business and looking at historical cost and historical cost is the basis for pricing. What's in essence happening is that by the March and April time frame, a lot of that pre-bought inventory has been consumed. So their current cost position, or historical -- their current historical cost position is really the new cost position. So therefore, they would have significant margin contraction if they were not to change their prices, and we've seen evidence already that most of the market is beginning to adjust in the last 30 to 45 days.

Okay. That's great. And let me switch gears back to some of the employee compensation and the reductions at the end of the year, Mark, you said you'd cut, I guess, 3% since December. Could you give us -- remind me as to a sense of what the normal seasonal hiring pattern would be December to March?

Manny Perez De La Mesa: Typically, December to March, there is very, very little change in headcount. The seasonal headcount really begins to play in order of magnitude, really in May. There's a little bit in April, very little, but it really plays May through July and that begins to wind down as we go -- as the season -- August and September.

Okay. And then just lastly then, on those seasonal hires, I seem to recall the old number used to be about 500 seasonal hires.

Manny Perez De La Mesa: Sure.

As you go into that, what kind of number are you looking at this year?

Manny Perez De La Mesa: Well, I think the number this year will be more modest certainly. And the other factor there is that in years past, the issue, given the scarcity of labor in this country specifically, the issue was lining up the people ahead of time and we would err on the side of having people on board. Given the current environment and the availability of labor, it is very easy for us to be reactive in this current environment, so there will be some natural savings there.

Okay. Thank you.

Manny Perez De La Mesa: Um-hum.

Your next question comes from the line of Keith Hughes from SunTrust. Your line is now open.

Thank you. There have been some kind of anecdotal reports on some of your hardest hit markets that home sales, at least, have picked up, maybe foreclosed homes, but there's some activity going on. Have you seen any kind of rate change in terms of the businesses in places like South Florida and the Southwest, either in the Blue or the Green business?

Manny Perez De La Mesa: Okay. The effect there is different. Keith, on the Blue business, which is primarily driven by maintenance, repair and replacement, on that side of the business, the drivers there are modestly different. And therefore, what we are seeing, for example, Florida, where sales were down 10, 11% -- in the case of Florida, it's because of the weighting of maintenance, repair and replacement, not so much because the rate of new pool construction is recovering. In fact, new pool construction in Florida is down about 50% from where it was first quarter-on-first quarter.

The numbers are very modest and therefore, those numbers weigh a lot less on the overall Florida sales equation than they did two or three years ago.

The second part is on the Green side of the equation is, since they're driven more by new construction, the impact there is still a lot of headwinds. And that's because new construction, although there has been some evidence of increasing turnover of existing homes, there's still a lot of inventory of homes available, and in fact, that turnover of existing homes, by and large, is below the cost to build a new home. So therefore, new home construction has yet to recover.

Okay, thank you.

Your next question comes from the line of Mark Rupe from Longbow Research. Your line is now open.

Good morning. This is Leah [Viala] for Mark. Just a quick question on the replacement sales. Did you say how much they're down year-over-year?

Manny Perez De La Mesa: No, I did not, Leah, and the reason is that we don't have a hard number just yet for that. We have very good information in terms of what new construction is. That lagged a bit, but we have that information, and then the default becomes replacement. What we do know is that new construction, generally speaking, was down about 50% year-on-year for the first quarter against the first quarter of last year. And we know that, for example, certain product categories may be down 10, 12%, and other product categories are down 22, 24%. And the ones that are down more like 22, 24, are because replacement is down -- as opposed to the ones that are down 10 to 12, they would be down 10 to 12 because of new construction being down and not so much replacement.

Okay, great. And then going into the summer, are you expecting less of an impact from the deferral of replacement products, since there was -- since you were saying that the heaters were the number one thing impacting sales this quarter?

Manny Perez De La Mesa: Right, in terms of -- yes, given the mix, the items -- if you look at pumps and filters, they are replaced most often in the second and third quarters and that's not really very discretionary.

Right.

Manny Perez De La Mesa: In the case of heaters, those are replaced most often in the fourth and first quarters and they are much more discretionary.

Okay, great. And then did you say how much Arizona was down in sales? Did I miss that?

Manny Perez De La Mesa: Arizona would have been down over 20% like the rest of the markets.

Okay. And do you know what's going on there, sort of that's different from Florida, Texas and California?

Manny Perez De La Mesa: Sure. The Arizona market is a newer market. It doesn't have the aged base of installed pools that particularly Florida and California have, so therefore, the weighting there of new construction is heavier proportionately.

Okay. Thank you very much.

Manny Perez De La Mesa: Thank you, Leah.

Your next question comes from the line of Luke Junk from Robert Baird. Your line is now open.

Just got a question on gross margin. In terms of the pre-buy benefit you had in the first quarter here, could you estimate what portion of year-over-year improvement was due to that pre-buy?

Manny Perez De La Mesa: No, we don't have that quantified just yet. It's obviously a fraction of the -- a small fraction of the 1.2.

Okay.

Manny Perez De La Mesa: And in part there, it's because we weren't the only ones that did that, so --

Okay. And then earlier on the call, you talked a little bit about how gross margin lines would be moved through the year, do you expect continued improvement there? Are you thinking about that on a year-over-year basis or is that sequentially?

Manny Perez De La Mesa: Year-over-year.

Okay, that's what I thought. I just wanted to make sure. And then second on inventory, I know in the release, you mentioned the success of your inventory balancing process and on the call now, you mentioned that you still have other initiatives in place to draw down inventories maybe a little further, you know, enhance the cash flow there. How comfortable do you feel with current inventory levels, or do you feel like there's quite a bit further to go there?

Manny Perez De La Mesa: There's further to go in the absolute sense. Typically, just for perspective, we typically ramp up inventories and inventories usually peak in the March-April time frame and then wind down. Our season winds down and hit a low usually in September or October. There will be a wind down this year. Given our efforts in the first quarter, the basis for that wind down, or the starting points for that wind down, are a bit lower, but there are opportunities along the way.

You will not see a $79 million difference in June, as you did in the first quarter. There will be a difference, but it will be a little bit more modest than that because of the natural wind down that took place. In a relative sense, it may still be down 16%, but it wouldn't be 79 million again, given the change in inventories from quarter to quarter.

Okay. That helps a lot. Thanks, guys.

Manny Perez De La Mesa: Um-hum.

Your next question comes from the line of Jacob [Strumwasser] from BCC. Your line is now open.

Can you give me clarity on maintenance revenue?

Manny Perez De La Mesa: In terms of what the products are or in terms of proportionate more business?

No, in terms of like what the existing maintenance revenue is, so that I don't have to guess about kind of what new homes are adding and that way, I can kind of understand what can happen next quarter, plus or minus people's decision to kind of add pool services or take away pool services.

Manny Perez De La Mesa: Okay. Well, the way we capture that, Jacob, is we capture the products that are discretely associated with the basic maintenance and operation of a pool, independent of whether we sell it to the service trade or sell it to the retail trade. Chemicals is the number one product category in that mix and chemicals are obviously sold both to the service side that maintain pools on behalf of consumers, as well to the retail side.

When you look at it in the aggregate, all of the products that we sell on the maintenance and repair side, when you put that in aggregate, represent over 50% of our -- or represented over 50% of our total sales last year. And that number will increase this year, given the fall -- and the mix of the total business, given the falloff in new construction and deferred replacement.

Right, that makes sense. Are you able to tell me what that's going to increase to in terms of mix of business?

Manny Perez De La Mesa: Not at this juncture because it would be premature for me to answer that because I don't know to what degree and how the season will play out in its entirety. I am optimistic that we will begin to see some loosening up on the financial side and at least more of a flattening of new construction -- not quite flattening, but less decrease of new construction as we work ourselves through the year, as well as by the time we get to the fourth quarter, hopefully, the economy is beginning to be on the other side of the downturn, and consumers will be more inclined to replace that heater that they deferred replacing this winter.

Got it. So from those comments, I'm effectively looking at the Company to be making a bet on the resurgence or this lessening of a decline of new home builds, rather than an inflection point where kind of the Company sees business actually flat-lining or improving at all off of the bottom for next quarter, which is the big quarter. Is that kind of accurate?

Manny Perez De La Mesa: Yes, we don't see anything right now, Jay, that new construction will turn up. We expect that maintenance and repair is very steady and that's not an issue, but we expect new construction to continue to be soft and we expect replacement on the higher ticket, deferrable items, there still be some fallout (sic) there. And that's all baked into our expectations for the year.

Okay. And there's no -- and are you -- rather than talking about forward expectations, can we look at this past quarter and you tell me what mix the maintenance revenue and repair was of revenue?

Manny Perez De La Mesa: Oh, it's a much more modest level because if you look at Snowbelt states, pools were closed, so very little was sold, to speak of, in the Snowbelt. Even when you get to markets in the southeast part of the country, Georgia, Tennessee, the Carolinas, while a number of pools there are open, with water temperature down 50, 60 degrees, there's a very limited need for chemicals to maintain water sanitation.

Got it. Okay. Thank you, guys.

Manny Perez De La Mesa: Thank you, Jacob.

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

Hi, thank you. Manny, I just wanted to walk through a couple of things you talked about earlier with SG&A and gross margin expectations for the year.

Manny Perez De La Mesa: Um-hum.

You've given some pretty clear guidance on interest expense and on SG&A. you expect an 8 to 9% decline year-over-year.

Manny Perez De La Mesa: 8 to 10.

8 to 10, and also expect improvement in your gross margins, but (inaudible) slow as the year progresses with comps being a little more difficult. When I run that through my model, I find it challenging to get to a $0.95 number and I want to know what am I missing in that analysis?

Manny Perez De La Mesa: Well, let's do two things, Kathryn. One is --

In fact, when I push the numbers, I'm getting -- even if I had a flat year-over-year gross margin and an 8% decline in SG&A, I'm still getting a number that's well above the $0.95.

Manny Perez De La Mesa: Okay. Let's do this, okay? Why don't you call Mark or Craig after the call, so we can walk through the model, one of them, in detail?

Sure.

Manny Perez De La Mesa: But I mean, just to restate, I feel that the consensus estimate of 95 currently is reasonable. That doesn't say that if you put the numbers out, depending on what your estimates are for sales and your estimates are for gross margin, you may not get to a modestly greater or maybe even a lower number. But certainly, the $0.95 number is a reasonable expectation for the year, given where we are right now.

Yep, okay. And also, just one quick follow-up. You may know the answer to this, the tax guidance for the fiscal year?

Manny Perez De La Mesa: Taxes would be the same rate. That, I believe, is just a shade over 39%.

Okay, great. Thanks so much. Appreciate it.

Manny Perez De La Mesa: Thank you, Kathryn.

Your next question comes from the line of Joel Havard from Hilliard Lyons. Your line is now open.

Thank you, good afternoon. Manny, I wonder if you could give us a little insight with your experience on how Q1 demand, recognizing the geographic or regional difference, where you're really just talking the Deep South yet, but as you think about how that has historically -- your experience translated into sort of Q2, Q3 installation trends as spring moves north?

Manny Perez De La Mesa: Well, it's different aspects of the business and take it state by state. If you look at it across the board, again, maintenance repair is very seasonally weighted. Weather is a big factor there as to when it gets hot and people begin to use the pools more often when the water temperature in the pool goes up. That results in not only needing more chemicals to maintain proper levels of sanitation, but also it increases the run on the equipment and the taxing of the equipment, which inevitably leads to more repairs and replacements. So that's one factor.

I'm sorry, Manny, I was specifically getting to installation trends.

Manny Perez De La Mesa: Oh, like new pools?

Yes, sir.

Manny Perez De La Mesa: Oh, in terms of new pools, at this juncture, I mean, what we're seeing, or what we've seen, is the first quarter, we're generally speaking about half in the major markets of what they were in the first quarter of last year.

Right.

Manny Perez De La Mesa: I see that the delta year-on-year shrinking and the reason I say that is that the financing markets adjusted in late 2007, early 2008, so there were a number of consumers that had second mortgages or equity lines approved in the latter part of 2007 that actually built their pool in the first quarter of 2008. pretty much by the end of the first quarter, those sources of financing were largely tapped out, so therefore, given that, for the rest of 2008 -- again, those financing sources by and large not being available, those consumers that built pools were those that didn't have to go there from a financing standpoint to do that. Now, that's one perspective.

The other side is if you look at our current communications from all over the country, frankly, it's a mixed bag. The general indication in terms of new pool construction is that it is softer than it was last year overall, but there are pockets where they are seeing a spike-up of activity which will result in new pools, one, two months downstream, and there are others that have not seen any change in behavior and in fact, see it very, very soft. But overall, I would say that probably the range of expectations for new installations is probably in the neighborhood of down 30 to 50% for '09 versus '08.

So a range that shades a bit worse than last year. Is it your belief yet that this is more a sentiment or credit constrained?

Manny Perez De La Mesa: It is both and I'm not smart enough to figure out which one is more than the other.

Thanks for the insight there. One other follow-up, if I may, and that's maybe for Mark, but if you all could paint us a picture of where the Company's borrowing capacity is at quarter end.

Manny Perez De La Mesa: At quarter end, our borrowing capacity was about 65, $70 million and given the fact that we've begun to reduce our debt load earlier this year than really ever before, it is a little higher than that now.

That would be unused capacity.

Manny Perez De La Mesa: Unused capacity, yes.

All right. Thanks, guys, good luck.

Manny Perez De La Mesa: Thank you.

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

Yes, just a couple of follow-ups. I haven't heard, Manny, either of you guys just talk about what the trends are earlier in April, and I guess most specifically, some of the retailers that possibly had deferred some orders in March and maybe until the season got going a little bit more. Can you give any insight on the April trends?

Manny Perez De La Mesa: Sure. As most everybody knows, the first couple weeks of April were a little cooler than normal, so that slowed things down a bit, but where we are right now, we're sitting at a sales rate that's, as expected, better than we had in the first quarter. And that should continue to improve as we proceed through the quarter, given the higher mix of maintenance and repair.

In terms of the recovery of those early-buy shipments to our customers that normally stock their retail stores ahead of the pool season, and this year are more basing their purchases on natural demands, that really hasn't kicked in yet. That will kick in more, again, as the water temperatures increase and the season kicks in more, which will be more so between now and Memorial Day.

Great. And then Manny, just one last question. You've talked a lot about how the difference in maintenance demand, as a component of the whole, is going to improve as you get into Q2 and Q3, but don't the comparisons in terms of the states that become more active, some of the northern markets that actually were still performing better last year, doesn't that challenge also come up as you get into the middle quarters?

Manny Perez De La Mesa: Yes, but the proportion of pool construction in those northern states is a lot more modest. Take a market like New York. The market -- in the case of like a market like New York, they have been -- and pools have been built in New York State as long as they were built (inaudible) in California. The difference is, given the weather, the penetration of pools is nowhere near as extensive in New York State as it is in California and there -- and the rate of building per year is proportionately less. So you have an older market in terms of a fairly mature level on an installed basis standpoint, with incrementally, a smaller proportion of new pools.

Great, thank you.

Manny Perez De La Mesa: thank you.

(OPERATOR INSTRUCTIONS). And your next question comes from the line of David Mann from Johnson Rice. Your line is now open.

Manny, at the beginning, you talked about several initiatives to help boost sales. Can you just give a sense on what kind of numbers you might be penciling in as an impact there? And which of those initiatives would you expect the biggest impact?

Manny Perez De La Mesa: Well, what I would rather do, David, is -- I've mentioned them up front this time in terms of -- as we kick those off and have kicked those off for the past several months. I'd rather report on the actual results as we go through the year, and the reason I say that is -- well, certainly, we've got headwinds in the environment and I may say, well, this will generate another 10 million in sales or 15 million in -- whatever the number is, but that may get lost against something else. So I'll just capture those as we see the results happening through the year.

Okay. I think on the last call, Mark, you may have made some comments on how you thought Latham would perform this year. It seems like the first quarter performance was a little bit worse. Can you just give an update on how you think that will trend?

Sure. As we mentioned last time, David, Latham is a -- this is more focused on the construction market in terms of a heavier weighting of their business in construction. They also, being a packaged pool provider, supplier, have a heavier weighting in what's called central and northern markets than in the south. And given the more significant downturn on the construction side, they're going to be pressured this year in terms of their results, so we may look at results from them being a little bit softer than the guidance that we gave on the last quarter call. And we'll see some of that impact in the first quarter here.

Okay. Thank you very much.

Okay. Sarah, I think that's all we have time for this morning.

There are no further questions at this time.

Manny Perez De La Mesa: Thank you all again for listening to our first quarter 2009 results conference call. Our next call is scheduled for Thursday, July 23rd, when we will discuss our seasonally most important second quarter results. Thank you again.

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