Pool Corp (POOL) 2009 Q2 法說會逐字稿

Good morning. My name is Kim and I will be your conference operator today. At this time, I would like to welcome everyone to the Pool Corporation second-quarter 2009 earnings 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.

Mr. Joslin, you may begin your conference.

Thank you, Kim. Good morning, everyone, and welcome to our second-quarter 2009 call.

As usual, I would like to remind our listeners that our discussion, comments and responses to questions today may include forward-looking statements, including management's outlook for 2009 and future periods. Actual results may differ materially from those discussed today. Information regarding the factors and variables that could cause actual results to differ materially from projected results is discussed in our most recent Form 10-K as filed with the SEC.

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

Thank you, Mark. Thank you all for joining us today.

I will first review our progress to date on our priorities in 2009, given the challenging market environment that we are facing. Our first priority is cash flow generation. Year-to-date, we are tracking $71 million ahead of 2008 given our focus on working capital management, especially the internal rebalancing of inventories. This progress has enabled us to reduce our debt by $108 million in the past 12 months. In a market environment where cash is king, I believe we have done well and anticipate that we will surpass 2008's record cash flow generation in 2009.

Number two is sales and market share. While sales are not where we would like for them to be, we believe that we are continuing to capture profitable market share. Here, it's important to clarify that low margin and high credit sales are not profitable, and we specifically work to avoid those kinds of transactions. This consideration has had greater importance over the past several years, given the market conditions in our industry.

Number three -- margin management. We continue to make progress but today's market dynamics make that difficult. The reality is, in 2009, virtually all irrigation and landscape distributors and a good many swimming pool products distributors are realizing operating losses. In these cases, rational pricing behavior is sometimes nonexistent. We address these situations on a case-by-case basis to protect profitable market share, understanding that our service levels and value-added programs enable us to generally price at a premium, as well as our operating efficiency and purchasing power enable us to sell at a profit when others cannot.

Just like it would be silly for an independent retailer to try to gain sales by underpricing Wal-Mart, the same silliness sometimes applies in our industry. The only time I have seen that work is when there are going out of business sales -- but then they are out of business. Logically, we generally don't respond to going out of business sales.

Number four -- expense control. We have made good progress rightsizing our organization for today's business volumes, but have not in any way compromised our ability to grow effectively again once the market recovers. In fact, we believe that we can support over a 30% increase in sales without adding a facility or professional staff. This provides us significant operating and working capital leverage for several years into the future.

To translate all of the above for 2009, we expect our sales rates versus 2008 to remain similar to the second-quarter rate in the third quarter with modest improvement in the fourth quarter, given easier comps. Gross margins will be similar to 2008 in the third quarter with potentially modest falloff in the fourth quarter, given tougher margin comps.

The rate of expense reduction versus 2008 will moderate in the second half as we lap some of the adjustments made last year. Altogether, this should result in EPS of $1.00 to $1.05 for the year with cash from operations approaching $100 million.

In terms of sales by major market, the Horizon or green business was down over 30%, both in the second quarter and year-to-date, given the weighting of new construction with negligible variation from market to market. We remain confident that we are doing what we need to do in this area to grow share, manage margins and control expenses. While the volatility of new construction is certainly greater than anticipated by us, we are taking advantage of opportunities to improve the business and enhance our market position.

Our SCP Superior or blue business sales were down 11% in the quarter and 13% year-to-date. The largest market, California, was down 10% in the quarter and 14% year-to-date.

Now, for good news, the second-largest market, Florida, was flat. Yes, it was flat in the quarter and down 5% year-to-date. These results in Florida are despite new pool sales being down over 40% from already record low levels.

Going on to other states, the third-largest market, Texas, had sales declines of 14% both in the quarter and year-to-date. After holding up relatively well in 2007/2008, the Texas market began to feel the adverse market factors late in 2008 and through this year.

All other markets were down 12% in the quarter and 14% year-to-date.

Two additional external factors to note are that weather had been unfavorable this pool season, which probably cost us 2% to 3% in missed sales, especially in Northeast and Midwest markets, and with the stronger dollar results in another 2% impact on sales from the conversion of international sales.

Now, mitigating the certainly adverse impacts of lower new construction and discretionary replacement sales, our chemical sales were up 9% year-to-date with Pool Corp.-branded chemical sales being up 16%. Despite adverse weather and deferred pool openings in certain markets, parts sales were also up in the first half of 2009.

It's important to point out here that over 80% of the basic maintenance of pools is done by the pool owners with our sales to the professional trade, that being service companies for repair and maintenance companies for sanitation and upkeep, together with the independent specialty retailers altogether enable us to participate in the largely nondiscretionary portion of the pool industry.

As this year develops, we are gaining increasing confidence that 2009 will mark the low point in this market contraction. Industry new pool and irrigation sales are down already 75% to 80% from peak-year levels, and industry replacement product sales are down roughly 40% from peak-year levels. We believe that replacement product sales will recover first and recover faster, given the lower cost to consumers and the reality that the pools and equipment can only be patched up for so long before replacement becomes inevitable.

We also believe that new pool and irrigation sales will lag the recovery and recover slower, as the higher consumer costs and the much greater dependency on real estate values and consumer financing will push out industry volume recoveries to normal levels.

Given the above market expectations, we remain focused on the same four priorities -- cash flow generation, profitable market share gains, margin management, and expense control. In the process we will continue to grow in strength as a company, taking full advantage of operating and working capital leverage opportunities while addressing whatever network and product line extension opportunities become available. Ultimately, we will continue growing our share position and providing attractive returns on invested capital.

Now, I will turn the call over to Mark for his financial commentary.

Thank you, Manny. My comments this morning will address our operating expenses, our equity investment in Latham, working capital, cash flow and debt starting with operating expenses.

As has been the case throughout the last two years, managing our operating expenses in line with the external environment has been a major focus for us, one that has gained momentum as time has progressed. With expenses down in the quarter 15% year-over-year on essentially the same sales center base, we continue to make excellent progress on this objective.

Now for some of the highlights, excluding the impact of employee incentive costs, which can vary quarter to quarter depending upon our actual and expected profitability and other factors, our operating expenses were down over 11% year-over-year for the quarter with labor and related costs being the largest contributor to this reduction, also falling 11%.

Going into the pool season, we had largely made all of the necessary headcount adjustments to manage our anticipated reduced volume. Along with close management of the discretionary aspects of labor, including overtime and seasonal help, this was a major factor in lowering our cost base this quarter.

In what I would call our miscellaneous cost category, which combined makes up the next-largest group of costs, our expenses were down 12% year-over-year. This includes things like travel costs, phones and computer equipment, supplies, administrative vehicle costs, advertising, insurance and nonincome-based taxes. Employees throughout the Company have undertaken initiatives to drive these costs down 12% this year, on top of the reduced spending levels achieved in 2008.

Our next largest cost category, facilities costs, were actually up 6% for the quarter compared to last year, as required GAAP adjustments for future rent increases drove the accounting costs higher. This is an area of ongoing focus and opportunity for us, given the soft real estate market.

Delivery costs, which are also a significant cost for us and are more closely tied to sales volume, fell 28% year-over-year as lower fuel costs and 10% fewer delivery vehicles added to our savings.

All in all, we believe the efforts undertaken by all our employees to actively reduce our operating cost structure without sacrificing our strategic initiatives has been very successful. For the year, we believe that, while we may not continue at a 15% rate of expense decline, we will end the year with at least a 10% lower cost base compared to 2008.

Moving on to our equity investment results, you will recall that our investment here, primarily our 38% share in Latham International, which is the leading North American manufacturer of packaged pool and component products. Given the decline in pool construction generally and the relatively poor weather in northern markets where packaged pools are more predominant, this business has experienced a sharper decline in results in 2009. Year-to-date, we've recorded equity losses of $1.4 million from this business, which we expect could grow to as much as $3 million to $4 million for the full year, excluding any potential one-time charges.

Turning to the balance sheet and starting with Accounts Receivable, our net receivables declined $45 million or 16% for the quarter, with the expected improvement taking place in our sequential aging. Our allowance for uncollectible receivables is down $900,000 from Q1, primarily due to write-offs taken but up nearly $2 million from second quarter of last year. Our DSO at the end of the quarter, as measured on a trailing 12-months of receivables, was 36.1 days, which was a bit better than the 36.4 days we had Q2 of 2008.

Overall, we are happy with our performance here as our team seeks to strike that balance between taking acceptable credit risk and avoiding or cutting off unwarranted risk. As we enter the seasonal slowdown over the next few months, we will continue to closely manage our customers' progress in meeting their payment obligations in this extremely challenging environment.

The other large asset class that we have been keenly focused on this year from a management perspective is inventory. Our quarter-end inventory of $325 million was down $60 million or 16% from 2008, as we were able to maintain lower inventory levels with high customer service. This will of course be an area of continued focus for us throughout the remainder of the year although, as in the past, we will take advantage of buying opportunities as they present themselves. We will update you on our expectations on our third-quarter call.

Turning to cash flow, as I commented on our last call, this is our top priority for 2009 with our goal being to exceed the record cash flow results we had in 2008. We noted that we expected good cash flow results in Q2 and we are happy to report this has been the case. As Manny mentioned, our $36 million of positive cash flow year-to-date at the end of Q2 exceeded last year's results by $71 million, including the Q1 $30 million tax payment deferred from 2008. Adjusted for this, our business cash flow improved by more than $100 million compared to last year as the decline in our inventory and Accounts Receivable, as well as inventory prepayments made last year, benefited our cash generation this year. With six months to, we expect to hold our gains this year and end the year with record cash flow generation.

The impact of this cash generation on our debt levels is evident with quarter-end debt levels of $334 million, down $108 million from Q2 2008. This frees up additional debt capacity for us, lowers our interest costs, and helps maintain our debt covenants at comfortable levels. We ended the quarter with our leverage level at 2.97 which, as expected, was higher than our Q1 leverage of 2.92, but only modestly so, and well below our cap of 3.25. Our fixed-charge coverage ratio was 2.43 at the end of the quarter, which also was slightly worse than our 2.49 as reported at the end of Q1, but comfortably ahead of our minimum of 2.55.

Our expectations going forward are that our covenant ratios will be similar to or improved from current levels with ongoing improvement throughout 2010.

That concludes my prepared remarks. So I will turn the call over to our operator to begin our question-and-answer period. Kim?

(Operator Instructions). Michael Cox, Piper Jaffray.

Thanks and congratulations on a great quarter, guys. My first question is on just what you're seeing here. My first question is what you are seeing thus far in the month of July. I know you commented that 3Q's sales decline would be similar to that of 2Q, but with the weather trends turning a little bit more favorable, I just was curious what you are seeing now.

In the first month of the quarter, it is really trending very similar to the 13% that we saw for the second quarter overall.

Okay. On the gross margin side, I know you commented that the gains are going to be slowing here. I was wondering if you could just talk a little bit about some of the dynamics there.

Well, two elements -- first, as you can well imagine, a number of competitors are having higher levels of stress. As they do that, some have a greater urgency to convert some of that inventory to cash. We certainly want to protect profitable market share but we are not going to chase every deal that's out there.

So there are going to be situations where there's going to be some level of give that we have to make. But on the other hand, we will be very judicious in how we do that.

Okay, that's helpful. My last question is just prioritizing cash flow, you've done a great job of bringing the debt balances down. Just as you look forward -- and obviously still an uncertain market but it seems to be showing some signs of improvement here -- how do you prioritize the use of cash on a go-forward basis here?

Well, Michael, it's a good question. Really fundamentally, the first priorities are intact and those being certainly investing in our business internally for organic opportunities, whether it be product line expansion, which is more an opportunity currently I'll say, then necessarily facility expansion, but internal opportunities is always number one.

Acquisitions to further expand our reach and network has been and continues to be number two. Then we have a dividend commitment to shareholders, and that would be number three. Then the last two, which would be either our debt repayment or share buyback, we've kind of flexed back and forth. Given our current debt levels and everything else, we probably would still keep debt repayment ahead of share buyback. But certainly, when we delever a bit more, that order may shift and share repurchase may come back. But that may be -- we are not talking in the near term; we are talking out sometime in the future.

All right, very good. Keep up the great work, guys.

Kyle O'Meara, Robert W. Baird

Good morning, guys. Could you talk about the overall impact of pricing in the quarter?

In terms of price inflation on our sales?

Correct.

Yes, at the beginning of the year, we were looking at mid-single digits. That obviously is occurring gradually during the course of the year.

I think, when it is all said and done, for the full year, we will be close to that level. It was more modest than that in the first quarter, and probably not fully there in the second quarter but certainly getting closer as price increases that were announced by manufacturers last year worked themselves into the system. So, I would say we are probably, in the second quarter, close to mid single digits but probably on the low end of that. Maybe instead of being 4 to 6, it would be closer to 4 in the second quarter, and then probably migrating more to like the 4 to 6 range in the second half of the year.

Great, that's helpful. You said improved gross margins on private label, your POOLCORP private label. What percentage of your overall sales is that today, and where do you ultimately think that could go?

We are running 20% to 21% of our sales currently in private label, and that is growing at a rate of 1% to 2% a year. That's been the case now for the better part of the last ten years, and we will continue to do that on a calculated basis, ensuring first and foremost that in no way, form or fashion we adversely impact our ability to serve our customers. So we have to make sure that we have the right product quality and have the right sources in place to make sure that we have the right service levels to our customers, and then gradually implement that to make sure, again, that it is seamless throughout the whole supply chain.

Thanks, great. Finally, gross margins are higher on the private label. Is there any difference in the EBIT margin between branded and private label?

The difference in gross margin would come down all the way.

Jeff Germanotta, William Blair.

Congratulations on a nice quarter. It sounds like you are feeling a little more optimistic that we have hit the low water mark here. Are you seeing anything in July, the early part of July, that helps reaffirm that thought?

Nothing overwhelming. I think one of the points here to stress is the fact that -- a couple of things. Certainly new pool construction levels can't be any lower to speak of. They are already so low. Replacement sales, people are patching up but that's going to start coming back soon.

Then you go to Florida. As an example, Florida, as you know, Jeff, and many on the call know, was the first market that began to feel the effects of the real estate market, and the consequential impact on our business as well as other discretionary expenditures. That market, the fact that sales were flat in the second quarter is I think a strong sentiment; it is the first market also coming back as well. So I think that bodes well.

Now, when you think to next year, is it the recovery of the deferred maintenance component that gives you optimism more so than new construction, or you are feeling a little bit better about both elements in the business?

Well, just to clarify, there isn't really any deferred maintenance; it will be deferred replacement. I try to distinguish because the maintenance side has been pretty steady and case in point being our chemical sales being up 9% for the year is evidence of the fact that maintenance is maintenance and there is really little discretion there. The only impact there really to speak of is weather. But in terms of replacement, I see that coming back first, and I see that beginning to come back really next year. Now, it won't come back necessarily to the levels that we were three or four years ago in 2010. I anticipate that it will come back probably over the course of the next couple to perhaps three years.

Then the new construction component, how do you think about that for 2010 and beyond?

Well, new construction is more of a wild card. The levels there are already depressed, very depressed. I don't see those coming down or coming off any more than what they are now. But I see that coming back slower. Really a lot of it depends on the real estate markets stabilizing. Once those markets stabilize and existing home values begin to recover to costs of new -- approaching the cost of new homes, then I think banks will begin to lend again against home values and there will be some ability on the part of consumers then to begin to invest. But I see that lagging, and 2010, in my mind, not being significantly different than 2009.

Then once again looking a little longer term, as earnings recover, your cash flow is strong; you continue to gain cushion on your debt service covenants. How do you see -- how and when do you see acquisitions becoming, again, part of the growth story?

Well, acquisitions continue to be part of the growth story. We haven't deferred or passed on an acquisition, period. That remains -- as I -- when we went through the priority list, still remains up there and in fact is very high.

It has to make sense. Obviously, we have maintained the same discipline in terms of return on invested capital and obviously the main driver there is the ability to expand the reach of our network and take advantage of operating efficiencies wherever possible. So that's the driver there, and if the right acquisition is available at the right valuation today, we would be executing today.

By the way, we would have done that three or six months ago as well. So I think there, Jeff, there have obviously been two elements that impact that. One is where we have a higher share of market. I will just elaborate here because it is important for people to appreciate. Where we have a high share of market, the value of an acquisition is less than when we have a low share of market. The logic there is if we have high share of market, given the nature of our business being very local, we are already serving the lion's share of customers in that market. So therefore, we don't gain any new customer relationships, per se, out of the equation. That is not to say that we don't do those, but in those cases, the valuation is different.

On the other hand, where we have a situation where we have limited to no market presence and we are looking at the alternative of opening a new location versus an acquisition, when we map one against the other, in those cases oftentimes an acquisition is more attractive, given that it saves us at least several years of operating losses that we would incur as we try to establish a presence in that market.

Anthony Lebiedzinski, Sidoti.

A couple of questions -- first, you mentioned in your remarks and in your press release that you did have a pickup in sales of maintenance repair products because of some regulatory changes governing pool and spa safety. I was wondering if you could just quantify that and also talk about the sustainability of that trend.

Anthony, as usual, you are extremely observant. The order of magnitude there is similar to the impact of currency, which is about, in both cases, about 2% of sales. So therefore, there is still a majority, by every indication of the pools, commercial pools out there, that are in noncompliance. So to the extent that those pools, whether it be through mandates on the part of the Consumer Product Safety Commission, or initiatives taken by states or municipalities to enforce the law, we anticipate that will continue -- that revenue stream will continue for at least the next 12 to 24 months as that is put in place. The order of magnitude may be a little different, but that's the expectation there. The opposite of that was currency, and I can't really project currency.

Hopefully, though, it won't be adverse in the future as it was in the quarter and year-to-date.

Okay, got it. As far as your expense structure, you've done a good job of rightsizing your cost structure now. Once we see an improvement in the economy and you guys start growing revenues, would you say that expenses then will grow at a slower rate than your sales?

Yes, there will be -- good point. As indicated in my comments, we can do over 30% more sales from our existing facilities and with the existing professional staff. So therefore, to the extent that sales grow, then we certainly will need to add costs, particularly in the form of individuals working in our warehouse, more drivers, more trucks, more inside sales support, those kind of costs. But the contribution margins at the point would be 20% or better. So therefore logically there is a lot to be had there in terms of an opportunity.

Okay. You mentioned that your competitors in the irrigation and landscape business are suffering as they are undercutting with their pricing. Do you see that as an opportunity, later down the road, for you guys to make acquisitions there or some weakened competitors?

Yes. In terms of when you dissect that business, I don't believe there is any distributor in the US that is in the irrigation space that is profitable, that will be profitable this year. In fact, when you go through those companies' numbers, I believe that many of the swimming pool distributors will also not be profitable this year. But logically, the irrigation space, given the fact that it is tied more towards new construction, is more adversely impacted than the pool side that has a component of maintenance that is nondiscretionary.

So acquisition opportunities will become available, yes. There has been ongoing dialogue with distributors in a number of markets for the last several years, and those will continue. It's just a matter of the right situation, the right opportunity, the right valuation all coming together.

Brent Rakers, Morgan Keegan.

Yes, good morning. I wanted to start first, Manny, with your comments about price inflation, and then understand how to reconcile that with I think it was Mark's comments earlier about gross margins in the second half. I mean, with the fact that costs on products have already been increased to you guys but you still expect to get another percent up in price in the second half, why would that not boost the gross margins during the second half of the year?

The reason is that, when you look at quarter-on-quarter, we still had, in our weighted average costs in the early part of the second quarter, a lower weighted average cost than we currently have. The reason for that is because, while the lion's share of the inventory purchase pre-price increase was sold by the end of the first quarter, there was still some lingering impact. That's the 1% that roughly that we're talking about.

Okay, perfect. So the match is running pretty clean through these price increases.

Yes, yes.

Secondly, could you give me a sense of what the employee numbers increased during the quarter, and maybe the impact -- I know you focused real hard on the seasonal hires -- what the cost savings attributable to your lesser seasonal hires this year versus last year might have been to the SG&A savings?

Okay, specifically, I will tell you that, in terms of our employee base in total, we had 10% less employees in total at the end of first quarter. We also have 10% less employees at the end of June. In terms of temp labor, specifically, well, temp labor is only one small factor. That is only, on a year-to-date basis, a difference of about $0.5 million. But really the savings come from reduced number of employees in the warehouses and inside sales support and drivers.

One point that Mark made was the fact that our fleet is down, delivery fleet is down 10%, and that includes both vehicles as well as drivers.

Keith Hughes, SunTrust.

Thank you. Your Florida data point was one of the best I've heard in several years in any product category in that state. Can you give me any sort of feel for what part of Florida was better than others -- products? Any sort of detail would be great.

Not really. I mean, certainly what I will tell you is that the areas in Florida that were more affected by new construction are still feeling those headwinds, whereas those markets where we have a larger installed base of pools, those are the ones that are more positive.

So for example, if you take in aggregate southeast Florida, which would be West Palm, Broward and Miami-Dade counties, those areas have a very large installed base of pools, and those areas did relatively fine or more positive.

You take the greater Tampa Bay area, going from let's say fringing on Bradenton in the south up through Clearwater-Largo in the north. Those areas held up better. On the other hand, the areas that are more inland or newer development areas, I will call it like Port St. Lucie County, Polk County, those areas are more affected since, again, more of that business there is tied to new construction proportionately; it is a younger pool market. A lot of the pools there were put in the last six, seven years and therefore their needs are not as great.

Joel Havard, Hilliard Lyons.

I appreciate the earlier comment on the headcount reduction. I wanted just one quick elaboration on that -- was the 10% Q1 versus Q4 followed by another 10% reduction Q2 versus Q1?

No, I'm sorry. To clarify, 10% is versus the same month last year.

It has remained there? Okay, good.

Then to put some additional quantification or at least sense of proportion on that, was the payroll reduction the biggest piece followed by the incentive I guess accrual reduction, followed by transport or how would you describe that? This is as you cited it in the release this morning.

You've got that about right. You know, the miscellaneous cost category, after payroll and incentives, I said miscellaneous cost category being the next-largest cost category where we had 12% reduction. That would be in front of the freight. Freight is a smaller part, about 7% or 8% of our total SG&A costs, even though the savings there were in the 27%, 28% range, the smaller piece, I would put that at the bottom of the list.

I'm presuming you guys are hoping for increased incentive compensation next year.

Your thoughts on transport, I mean are you kind of flatlining it from here, or are you allowing for some additional inflationary pressure on fuel? (technical difficulty) as you think about the second half and into 2010? Sorry.

If we look at the second half, really we are not seeing any significant or anticipating any significant differences on the freight side. There could be a component of fuel increase, but again, year-on-year, we anticipate overall the savings will be similar on that segment. To the extent there is a variation, as Mark mentioned, that's a smaller component of the total.

The reason that the improvement, relative improvement, falls off in the second half is because of the changes and adjustments we made in the August-September timeframe of last year. As we lap those in the second half of this year, certainly that mitigates that benefit.

Okay. Sorry, I will jump back in line. Thanks. Good luck.

David Mann, Johnson Rice.

In terms of the expense guidance that you gave, can you just compare it to the first quarter? I guess you said, the first quarter, you thought it would be down 8% to 10%, now 10% plus. What's driving that difference? Where are you doing better?

On the initiatives undertaken by our people throughout the organization on working every aspect possible and just being creative and finding new ways to manage the business, taking a greater degree of ownership and treating it as if it were their own money that was being spent and not some third party's.

In terms of the bonus item, can you quantify how much the bonus benefited year-over-year?

The adjustment there is about several million dollars in terms of the quarter number.

Closer to $5 million or $3 million or --?

Yes, in the $4 million to $5 million range, $4 million for the quarter, $5 million for the year. I guess, you know, a little bit of guidance in terms of expense reduction, excluding the bonus being 11%.

Okay, and the $5 million you are saying is the year-to-date number?

Year-to-date number, yes.

Okay. How much in the guidance do you think bonus will be down?

For --?

For the year?

Like when you're talking about doing $1.00, $1.05, how much year-over-year decline in bonus?

It may be less than that because, if we actually come through, and we certainly expect to do so, with $1.00, $1.05, there would be some recovery in bonus in the second half of the year.

Okay. Then Manny, on the last call, you talked about how a lot of the retail customers, that there was deferred inventory buying behavior going on in the first quarter. Can you just comment on how that played out into the second quarter, and just what are you seeing in terms of the general health of some of those retail customers that you service?

It's good that you guys keep good notes on all this stuff. Just for all the others on the call, typically our retail store customers stock up before the season starts in order to be fully ready for when the market hits. A lot of that is weighted towards chemical products, as well as various accessories, leaf nets, brushes, those types of things, and pool toys. Those product categories did fine. That's why I referenced, in terms of chemical sales specifically, the fact that we are up 9% year-to-date. We were not quite running at that rate in the first quarter because of those deferred -- those retailers were placing -- working closer to the vest going into the season and essentially the market is -- we've done well. Now, logically there is some gain in share, but still we've done well.

Their financial health is fine. Those that are strictly retail should have no problem. The issue really from stress on customers is more on those that are more heavily weighted towards new construction. To the extent they've altered their business model and taken cost out and certainly changed their personal lifestyles, those guys are fine. For those that are still living as if it were 2005 or 2006, those guys are certainly in distress and probably no longer customers.

Great, thank you.

Kyle O'Meara, Robert W. Baird.

Thanks. All of my questions have been answered.

Joan Storms, Wedbush.

It's so nice to see finally a stabilization in the marketplace.

Mark, I was wondering if you could -- I don't have this right in front of me and I apologize. But there are a couple of different pieces to your debt. I was wondering what the next piece is that's coming due, how big is it and what is your preliminary thinking on refinancing there?

Sure. I'm sorry, Joan, just the last part of your question again?

What was your preliminary thinking on refinancing that piece?

Oh, okay. Yes, we had a piece to our capital structure, an asset-backed receivable securitization facility. That piece was up for renewal in May, and we extended the term for three months. So that expires in mid to late August. That's a $25 million facility. We have brought our borrowing down on that, and our capacity, excluding that facility, is more than adequate for our needs in the current period. So as we get into next year and we look at working capital build and our needs there, we may look at some additional capacity. We will look at it, but we may not add it. So that would be kind of our current consideration going into the season and whether we need some short-term capacity there.

Longer term, the private placements -- well, we had a term loan, $60 million term loan. The original value is amortized down to about $51 million now. That is amortized through the end of 2010, and then following that is a private basement, $100 million which comes due in 2011 or early 2012, and the revolver is due in late 2012.

Kathryn Thompson, Thompson Research Group.

Just on maintenance, could you give your D&A and CapEx guidance for the year, and also remind us your overall interest expense target for the year?

Sure. In terms of D&A, you can essentially take from the cash flow statement and essentially double the year-to-date number as the D&A expectation for the year, which would be approximately $11.5 million, $12 million. Then there's another $6 million on share-based compensation, so the total would be more like $17 million, $18 million. Okay?

In terms of -- what was the second part of your question? In terms of interest expense. It would be a little bit more modest in the second half of the year than the first half, given the fact that we have lower average borrowings in the second half.

Okay. Going back to the bonus contribution in the quarter, you said it was about $4 million for the quarter and $5 million for the year. Essentially, a lot of your -- in your last conference call, you said about $0.95 was not too far off.

Right.

(inaudible) what the Street number was in terms of guidance. But it appears that a little over half of essentially the raised guidance can be contributed to your lower bonus contribution. Is that a correct way to think about this?

No, because what happened there last year, Kathryn, was that we were over-accrued in the first half of the year, given where the actual year ended up. What happens is that we make a projection in terms of what our earnings will be. A good portion of our incentive compensation is, whether it be at the local, regional division or at my level, it is directly or indirectly tied to earnings.

So therefore, as the earnings base eroded during the year, we had to make adjustments during the year. So in the second half of the year in fact, we had to reduce the bonus accrual because of that erosion of earnings. Therefore, we through the first half retrospectively were over-accrued.

This year, we are looking at the numbers for the year and if it comes out the way we expect it to, then our accruals will match close to operating profits realized during the year. Therefore, a current accrual is more accurate.

To the extent that we exceed the $1.00 to $1.05, the incentive comp would be even greater than we estimate. To the extent we fall short of $1.00 to $1.05, the final incentive comp accrual for the year will be obviously less.

Okay. It is still year-over-year, year-to-date, it is $5 million lower?

Yes.

Okay. Just in closing, any inventory targets for the year?

To maintain the same level of change as you've seen in the June numbers, which are mid teens type of percents change year-on-year, so that is a reasonable expectation at this juncture.

(Operator Instructions). Brent Rakers, Morgan Keegan.

Thanks. My follow-up has been answered.

Jacob Strumwasser, Braham Capital.

Hey guys.

How are you? Go ahead. Operator, we lost Jacob, so maybe if he comes back?

Yes, most definitely. (Operator Instructions)

Kim, why don't we ahead and close out the Q&A, if you would?

Actually, Mr. Strumwasser has just queued up. Would you like to take his question?

Sure, go ahead.

Do you agree with free cash flow this year came in at $42 million, last year at $52 million? I just want to make sure I have my numbers right.

If you are saying for this year's free cash flow --

Yes, this quarter and just net income plus D&A less CapEx was $42 million versus last year at $52 million.

You're talking year-to-date?

There are no further questions at this time. I turn the call back over to you.

Thank you, Kim. Jacob, if you're still on the line, if you can get back with Craig and reconcile the numbers, I'm not sure where the numbers you are referring to were coming from.

Thank you all again for listening to our second-quarter of 2009 results conference call. Our next call is scheduled for Tuesday, October 27. That's a slight change in our schedule, since I won't be available on the normal Thursday that we have our call in October, so we are putting it out to Tuesday, October 27, 2009, when we will discuss our third-quarter results conference call.

Thank you again for listening. Bye.

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