Pool Corp (POOL) 2010 Q1 法說會逐字稿

Greetings and welcome to the Pool Corporation first-quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Mark Joslin, Pool Corporation Chief Financial Officer. Thank you, Mr. Joslin. You may begin.

Thank you, LaTonya. Good morning, everyone, and welcome to our first-quarter 2010 conference 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 2010 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 10-K.

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

Thank you, Mark. Good morning to all on the call. In investor meetings, the most pressing question that I get from those that know the Company well is whether I have seen a turn from the headwinds of the past four years. The answer now is that I believe we have.

After a weak first two plus months this year where Sunbelt markets were battered with much colder weather than normal, in mid-March it seemed like the sun came out and our daily sales rate rebounded. By month end, we had recovered the ground lost in the first part of March to end with flat year-on-year sales for the month excluding the benefit of one additional sales day.

This momentum has carried over into April, where we are realizing a positive sales comp for the first time in several years. At this juncture, every indication is that we will have a positive sales comp in the second quarter and the balance of 2010.

While looking at our business, the major headwinds of the last several years have been the 70% to 80% decline in new construction and the deferral of discretionary replacement/remodel activity. We anticipate that new construction will be roughly flat and there will be a modest recovery in replacement/remodel activity in 2010. We expect to continue to grow market share in all segments including the nondiscretionary maintenance and repair segment as we have realized historically.

With respect to the first quarter where we had a 4.6% year-on-year decrease in base business sales, our blue business sales were down 2.8% while our green business was down almost 19%. There were no significant differences by market within each of our blue and green business performance. In all cases, there was notable improvement in March, with the blue business having a positive sales comp and the green business having less of a sales decrease.

Moving to gross margins, the year-on-year decrease was expected given the benefits realized in last year's first quarter from the purchases made in late 2008 in anticipation of price increases. But the gross margin decrease was, frankly, greater than expected as irrational pricing became more prevalent than normal in the first quarter.

Here it is important to note that we have significant competitive advantages including lower product costs, lower support costs as a percentages of sales, a better inventory stock position to provide better customer service, more marketing programs and technology tools to help our customers with their businesses, more business development and product specialist resources than the rest of the industry, more locations to rebalance inventory sufficiently, more management, training, and development programs to enhance the caliber, depth, and strength of our team. Essentially I think you all understand, yet some competitors use price as their only means to compete. This tactic on their part is very shortsighted in my opinion.

In addition, by lowering prices in individual markets, the adverse impact weighs proportionately much more on them. Be that as it may, we could have some extended drag in the short term on margins.

Independently, we continue to make progress on our sales, purchasing, and pricing execution, including a growing percentage of POOLCORP-branded products, more exclusive products, less pricing errors, and more pricing discipline, all in order to continuously improve our gross margins.

For the balance of 2010, I expect the that the year-on-year performance in gross margins will improve versus the first quarter as we are already realizing in April. But we may not get to see an improvement for the year given the uncertainty of competitors' pricing practices.

Turning to expenses, these were pretty much as expected as the continuous efficiency programs for the past several years offset the additional cost of the General Pool Supply acquisition in October of 2009. From a sales network standpoint, it is essentially unchanged as we consolidated several centers over the winter, while also opening new centers in markets where we had no physical presence.

As many of you know, we are constantly looking at enhancing our market position with both new openings and acquisitions, and have the financial ability to execute on opportunities that makes sense.

Our progress on working capital management continues, as evidenced by our having lower stock outs with less inventory and a reduction in our DSOs. Cash flow used in operations was as expected in the quarter, with our debt having already seasonally peaked. Overall, we are on track to increase earnings in 2010, while continuing to invest in our foundation for market share and earnings growth for many years into the future.

Our objectives for 2010 remain intact, as communicated in our last conference call. Those are strong cash flow generation, profitable market share gains, margin improvement, and an expense control.

With that, I will turn the call over back to Mark for his financial commentary.

Thank you, Manny. Manny has already provided you with color on the sales margins so I will start with operating expenses and move on from there.

As I mentioned in our release, our base business operating expenses were down 3% or nearly $3 million for the quarter as we have continued to maintain our focus on expense control. Excluding the GPS acquisition, our headcount is down 5% year-over-year, which drove a reduction in our largest cost category, employee-related costs. We have also benefited from lower facility lease costs, the result of renegotiated leases and some facility consolidations.

Another area with favorable trends is our bad debt expense, which benefited from improved collection activity as I will discuss further in a few minutes.

Our objective this year on expenses is to continue to push targeted reductions, which along with leveraging the infrastructure we have in place should allow us to lower expenses as a percent of sales throughout the remainder of the year. The rest of the P&L is pretty straightforward, so I will move onto the balance sheet and begin with a discussion on accounts receivables.

As I discussed in the last two quarters, we continue to see improved results here as we have become more disciplined and as our customers adjusted their businesses to market conditions. Our net receivables of $158 million declined 2% from last year, which is in line with sales. Our percentage of current receivables to total receivables improved by over 6 percentage points year-over-year, with our percentage of greater than 60 days past due receivables to total receivables declining by over 4 percentage points.

For reference here, looking at just our domestic blue business, the percentage of current receivables to total receivables is 86% at the end of March, compared to 81% last March. As a result, our DSO improved fairly dramatically year-over-year from 36.3 days at 2009 to 34.2 days in 2010. Obviously we are pleased with these results and expect continued positive trends in the months ahead.

Inventory is another bright spot as excluding inventory acquired with GPS, inventories were down 6% year-over-year to $382 million. As Manny mentioned, our stock out levels were a record low in the quarter, indicative of effective ordering and stock management.

Turning to cash flow, our cash used in operations in the first quarter improved to $25.3 million from $46 million last year. Excluding the impact of the $30 million tax payment we made in the first quarter of 2009, our cash used was up from last year by about $9 million, which was expected given the significant working capital reductions we were able to make in 2009.

Our goal here for 2010, as I stated in our year-end call, is for cash from operations to exceed net income for the year, which we are on target for at this point in the dear.

Finally, I will take a few minutes to review where we are on our debt levels. At the end of March, which is pretty close to peak annual debt levels for us, given our seasonal need to fund working capital, we had $278 million in outstanding debt. This is down $103 million from the $381 million in debt outstanding at the end of March, 2009.

We also had nearly $100 million in unused debt capacity currently available to us despite winding down our $75 million asset-backed borrowings facility last year and paying down approximately $17 million on our term loan. We will pay down the remaining $36 million on our term loan over the next three quarters, $12 million a quarter.

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

(Operator Instructions) Mark Rupe, Longbow Research.

Good morning. It's great to hear that you have started to see a turn in the business. I was hoping you could talk a little bit more though about the price environment that you are seeing. You know, what kinds of products you are seeing or what lines of products are most competitive and the impact that it had in the first quarter? And also kind of the expectation of how that might impact the full year?

Sure. Two areas. First, probably if you look at products or product categories, the one that has been the most competitive is chemicals, particularly on the service sizes, which are sold in either 50 pound buckets or 25 pound buckets in most markets.

In those cases, those are as some call it the milk and eggs of our industry and therefore are the ones that are most heavily used or foot-balled in order to create store traffic. So those are -- that individually -- chemicals with an emphasis on a couple of SKUs are the most prevalent.

There has also been cases where some competitors in order to address some of their cash flow needs have tried or have served to balance inventories or rebalance their inventories, better said, by basically dumping certain products that they are long on in order to buy products that they are short on. And that's also depressed the pricing of those product categories and that varied from market to market and competitor to competitor.

Okay, that's helpful. And then sort of the impact that it had on gross margin this quarter and if you could qualify the expectations for the full year.

Sure, when you look at -- the biggest delta for the quarter is really driven by the fact that we did not get the benefit this year that we had last year in terms of the purchase made in late 2008 ahead of vendor price increases. So therefore, just to walk through the map there for a second, in 2008, manufacturers announced price increases. We bought long, given our financial wherewithal to do so. We bought long on those in anticipation of those increases and have that inventory in. We raised our prices in early '09, as did the rest of the industry, while we still had products that were bought pre-price increase.

So therefore, that garnered a gain and contributed pretty significantly to our improvement in the first quarter of 2009, where we realized I believe it was a 120 bps improvement in gross margin year-on-year. So therefore this year not having that same benefit, obviously that was the main reason why we had a shortfall in the first quarter.

As the year progressed in 2009 and we had to replenish our stock based on -- with the products at the higher prices, our average cost went up and therefore the improvement year-on-year in margin during 2009 eroded in every subsequent quarter given that we didn't have that benefit any longer. So that is the main reason for the drag.

The second reason is the reason that I mentioned earlier, which is more irrational behavior this year than in last year certainly. And again, that is driven in part by occasional issues where vendors use price as their only means to create attention to themselves, or alternatively where they are trying to rebalance inventories and they don't have the wherewithal that we do of redistributing with neighboring locations fairly efficiently. They don't have that opportunity to do that officially, so they end up dumping product in the marketplace.

I anticipate that -- first of all, the issue with the prepurchase and everything else goes away. It was more of a first-quarter issue, relatively speaking, much more -- much less significant issue in the second quarter from a comp standpoint.

So really it gets back to what our competitors do. Will they be a little bit more disciplined, given the fact that the natural demand in the second and third quarters particularly will be reasonable? Or will they still look to aggressively rebalance or have cash flow needs that pressure them to do things that are not necessarily the most rational thing in the long term?

That's helpful, thank you for the color. And then I was also wondering if you could talk a little bit more about what you are seeing with new construction. I know we have heard in Florida that permits are up. I don't know if that's just the only market where we're seeing that or if you could talk kind of about the different markets and what you are seeing?

Sure, we have now had several months year-on-year, for example as you mentioned where Florida has been up in terms of new pool permits. And the only caution I'd give you, it's on very, very low numbers, numbers that are 80% below what they were in 2005. And numbers that -- you have to go back 40 years plus to have seen those levels. But nonetheless, the are still on the positive side, they are still up modestly year-on-year.

There are markets where its modestly down, for example, Texas is on a three-month trend, last three months modestly down. Arizona is modestly up. Vegas is modestly down. So you've got to go market by market.

But what it does appear on an aggregate basis is that the floor has been reached and therefore the expectation, as I mentioned in my opening comments, are that new construction on the pool side this year should be approximately flat year-on-year versus last year. If there is a bias, it would be that it would be modestly positive, but I would say at this juncture it would be essentially flat.

Great, thank you. Good luck.

Kyle O'Meara, Robert W. Baird.

Good morning. Could you just -- I didn't think I heard you say this. Could you just talk about -- qualify what the pricing impact was for the quarter and your expectation for the year?

Sure. You are talking about the -- it would be less than half of the shortfall in the quarter is due to the pricing environment. The main reason for the shortfall in the quarter is due to the year-on-year difference of not having the benefit of -- that we had last year. So that's essentially that.

And then we expect that obviously to -- first-quarter benefit of 2009 and carried a little bit into the second quarter of 2009 but was pretty much gone by the second quarter. That is going away and therefore that makes the comps easier as we go through the year.

So kind of a pricing in terms of the headwind on the revenue side bottoming here and moderating as we move through the year against easy comparisons?

That's correct, and the point here is we may not -- depending on how competitors behave particularly in the second quarter, we may not get back the shortfall of the first quarter by the end of the year, so therefore when you are modeling for a year, we could very well be a little short on last year.

Okay, just to clarify when you were talking about gross margin -- through the rest of the year. Is what you were saying -- obviously the shortfall this quarter with the inventory and pricing, were you still implying though that the gross margin we should see a year-over-year improvement in that margin as we go forward or that there is the potential for that? Is that what you were saying?

Well, we have a number of initiatives which are in fact improving our margins in certain product segments, and certain product categories, and that improvement is matched by these other comparatively speaking adverse factors.

So the biggest adverse factor goes away, the other one is still there. And at the end of the day, I'm not sure if the positive things we are doing on one side compensates fully for the other.

Okay, great. And then finally just on the competitive environment, as we moved through the winter months here, did you see any evidence of some of your competing distributors dropping by the wayside or shuttering at all?

Surprisingly, they haven't yet. There have been certainly a number of cases where they have reduced the number of locations, which makes sense. There have been cases where they have skinnied down product offerings or product lines they stock and sell, and that certainly makes sense. We have seen cases where they haven't done either one of those two things and have had service issues, which has opened doors for us from a competitive standpoint. And that is obviously not good for them.

So they have the benefit of working capital reductions over the last three years, whether it be the reduction of receivables by -- with lower sales, or having need for less inventory given lower sales. And that -- those working capital benefits help offset or compensate for operating losses from a cash flow standpoint.

As the market stabilizes in this year and then progressively on to '10 and '11 and '12 is when they're going to be frankly under the greatest amount of financial stress from a cash flow standpoint particularly given how tight the financial markets are still for business in terms of business borrowings.

So therefore, that's the expectation and again, they are under stress, but we haven't seen any fallout of notice at this juncture.

Okay, great. Thank you.

Anthony Lebiedzinski, Sidoti & Company.

Good morning. I wanted to follow up on the previous question about chemicals. You said that those you have seen the greatest margin pressures. Now as we enter the peak pool season now and chemicals are at their greatest usage, wouldn't you say that the gross margin pressure would be actually more so?

Well, not really. The logic here is in the off-season when there is more idle time from an industry standpoint, in order to create traffic in the individual centers, whether it be us or the competition, there are various things that are done to do that. And again, having limited alternatives, they use price and high-profile items to do that.

Once you get into the season, the logical thing to do would be no longer to have a need to do that because there's natural traffic. It's kind of like a restaurant that is naturally busy on Friday, Saturday nights having specials during the week, weekdays, to create some traffic. You know, on Friday and Saturday when you're full, you don't need to do that. So that's the logic that would be rational for the pool industry in terms of not having to discount as much or do anything extraordinary to create traffic when traffic is naturally there in the heat of the summer.

Okay and as far as the impact on sales from the regulatory changes from last year, can you remind us what that was last year in the first and second quarters, please?

Mark, do you have some of those numbers?

Yes, it was about $8 million each quarter, Anthony.

In the first quarter and the second --?

And the second quarter each, yes.

In terms of your cost structure, you've cut some costs down now. As far as the business coming back, where do you see costs coming back, whether -- I would imagine that you would be putting in more people in your sales centers. So can you just talk about how you see the cost structure now trending?

Sure. First of all with positive sales comps, there's a certain amount that we can handle without having to add people. I think that the stress really gets into -- first, you're going to with existing resources do whatever you can at a certain amount of capacity, not a lot but a certain amount of capacity you can do with existing resources.

There is a seasonal nature to some part of our workforce that come in and work in the peak months. That's more accentuated in the snow belt markets. So that would involve either seasonal employees as well as employee overtime. So that's -- there will be some variation there, but again it all depends on the order of magnitude of the positive comps.

If the positive comps are relatively speaking modest, then that would be very efficient for us. As it becomes more so, then again overtime kicks in and temporary workers kick in more so.

Okay, thank you.

Kathryn Thompson, Thompson Research.

Thank you so much. Just first focusing on a few topline questions. Can you attribute the moderating sales declines or in some cases improving sales to new construction or better maintenance trends? How do you see that progressing throughout 2010?

The positive sales in the latter part of March, which got us to flat on a daily sales rate basis for the month of March as well as April is not due to construction. Construction is relatively flat. It would be due to in my mind two primary points. One is the beginnings of a recovery in replacement/remodel activity, which has been deferred. And that deferral was much more so in 2009. It was more modest in '07 and '08. It was much more significant in 2009 and some beginning of that recovery to normalized levels.

And again for all on the call, those are items that there is some level of discretion on the part of the consumer as to when they do that. They ultimately have to do that for their pool and again, it's just a matter of when. Given the environment last year, consumers in general deferred what they could and therefore when we looked at the remodel/replacement rates that was in the industry in 2009, we estimate that it was at least 30% below normalized levels. And again, I think that together with market share gains are what would be driving our positive comps in the latter part of March and into April.

So if you were to actually see new pool constructions, that is just gravy for overall trends?

Definitely.

What are your projections for new pool construction as a whole for 2010?

Yes, for this year, we expect new pool construction again to be essentially flat year-on-year. So there would be no positive contribution from that. There would be no headwind either as we've had, but there would be no positive contribution. So there would be -- in terms of our having positive sales, again, I think it's in part the recovery of the remodel/replace, and market share gains.

Could you talk a little bit about -- a little bit more granularity to your three biggest markets, Texas, California, and Florida? I know in your prepared comments, you talked a little bit about what you are seeing and then Florida seeing positive. Texas and California, you had some color. But since the quarter end, could you talk a little bit about what types of trends you are seeing from those states and as you think about the year from those three key states?

Sure, if you look at how we did in the quarter on the blue side of our business, on the blue side of our business we were down 2.8% in sales for the quarter and in fact had positive sales comps in March. And again in terms of overall by markets, no significant differences.

In the case of what we are seeing in April, and again it's three weeks, but we are seeing continuation of the positive trends in Florida and Texas. I am not sure if you've been to California recently, but it's still -- the weather there has not been particularly favorable the last several weeks with colder than normal temperatures. So they haven't really gotten out of the funk of the winter yet. So it's colder and wetter over there. So they have not -- I will call it recovered to the same degree as Florida and Texas, that are now kind of in springtime.

And therefore in the short-term, abbreviated last three or four weeks haven't seen the same level of benefit, but we expect that as the weather recovers there to more normal levels, then we will be -- have the same type of results there as we are witnessing in Texas and Florida.

Okay, moving over the cost side, it didn't have as much of the benefit this year from pre-buy activity and we have seen some commodity pricings just across the board rising. What are your expectations for commodity pricing trends, particularly the chemicals, because it is your most important? And how are you planning your business going forward this year with the possibility of rising commodity prices?

You are right. In certain product categories we have seen raw material costs going up for our manufacturers, for our suppliers. We have not yet seen of note significant increases across the board. In the case of chemicals, at this juncture I don't anticipate from a supply standpoint any increases for the pool season. In case of equipment, again I don't anticipate any increases for the pool season. And for the package pool products, I don't anticipate any increases for the pool season.

So therefore when I look at it overall companywide, essentially we are looking at essentially zero inflation for the year. There are some products, as you mentioned, that have gone up, and there are a few others that have gone down and overall, we expect those to pretty much wash.

Okay. Finally just some housekeeping guidance for interest expense in 2010 and D&A and CapEx guidance.

Essentially D&A would be very similar to last year and interest would be modestly lower, lower by when it's all said and done by several million dollars versus last year, given the fact that our average debt is down roughly $100 million year on year.

And CapEx?

CapEx would be modestly lower than last year, somewhere in the neighborhood of 5 or so -- $5 million to $6 million.

Okay, great. Thank you so much.

Keith Hughes, SunTrust Robinson.

Thank you. You gave some comments earlier on the strategic landscape. I was wondering if you could break that down particularly on the green business how it compares to the blue in terms of competitors? And are you still in the market to do acquisitions in that arena?

The answer to the last question is yes. In terms of the competitive dynamics, similar. In that industry in fact, yes, I would say very much the same. I was going to say that there is something even more irrational stuff taking place there as one particular competitor is also going out with very long terms in order to secure business. But by and large the dynamics are very similar with the more local competitors having some service issues and also using -- dumping products or just selling at irrational lower pricing. But there's also one competitor in that arena that is using extraordinary long terms as well as a way to carry some of their construction customers.

So you haven't seen a wholesale departure of a lot of distribution in the green zone? Is that (multiple speakers)

No, not yet. They have had the same benefit, Keith, as on the blue side from a working capital standpoint of the reductions in receivables and inventories, which compensate for their operating losses.

And when you also look at it, they have to figure out what they need to do and sometimes in these businesses not having the systems and discipline in place, it's tough to really appreciate what the actions need to be taken. And by and large similar to the poolside, we see competitive actions being taken, whether it be to address the receivables management or address their inventory management or to address their cost position. We see that lagging us by a season to more than a season.

Okay, thank you.

(Operator Instructions) David Mann, Johnson Rice.

Thank you. Congratulations. I see a little bit of sunshine in the business. Earlier you were talking about April versus March for the blue business. Can you clarify, did April accelerate from March in terms of sales trend?

The April positive is similar to what we saw the second half of March.

Okay, great. And then in terms of SG&A, I think on the last call you talked about the SG&A dollars being flat to down modestly from last year on a full-year basis. Is that something that you still ascribe to with let's say modest positive comp?

Yes, if our positive comps are very modest, then the SG&A would be relatively speaking flat.

Okay, great. On the irrigation business, also your outlook for this year was I guess coming close to eliminating the operating loss from last year. Can you just give us an update on what you think about that?

We believe that to be reasonable. There were still, as I mentioned, heavier sales declines on the green side of our business than -- much heavier than the blue side, as that lags by six months to a year. But we are seeing that -- the negative comps decreasing and also the cost reductions that we made take hold.

Okay, great. On the credit and extension side of your business, with the improving bad debt trend and also what seems to be a nice improving demand outlook, are you taking or look at taking a different stance on credit extension?

Well, yes. That's an active process, but you are right. From a practical standpoint, we are very conscious and we work with customers in terms of providing trade credit and logically the key there in that environment is if we have no credit losses, that means we didn't take enough risk. If we have too many, I think we took too much risk. And it's tough to find the right balance.

But the fact that we are seeing a more positive industry environment generally means that we will take a little bit more -- not risk, that is not a proper term -- but we will be more -- we will be granting credit a little freer than perhaps when we were seeing a demise.

But that is really, David, very customer-specific. Because if we see -- it depends on the behavior of that individual customer. If we see that customer with the right behavior and the right attitude in terms of how they run their business as well as how they treat us from a supplier standpoint, you know, we take one position whether --. And if they have a different perhaps philosophy on their business and a different attitude towards us, then we take a more risk-averse perspective.

With what you are seeing in terms of the acceleration in sales over the last several weeks, are you taking a more aggressive position on that -- on inventory on sort of that competitive in stock position? And what do you think in terms of your competitors' inventory positions, are they constrained that if demand does accelerate, does that further make that competitive advantage even a greater one?

Well, the first part of your question from how we drive inventories, we've always continued to drive them and we haven't been affected by anything to drive -- to have progressively better and better customer service. For example last year, we had a major initiative with parts which proved to be very successful and is proving to be more successful as we go into 2010, where we significantly expanded by somewhere between 300 and 800 SKUs the number of parts stocked in each one of our centers. We did that to provide better customer service on lower velocity items to our customers.

We also have an initiative that we started last year continue to this year of expanding the breadth of offering on certain products that are tied to building materials but which apply to new construction but also even more so apply to existing pools, the remodeling of existing pools. And those initiatives to provide again better service have always continued. The reason that we had lower inventories and were able to lower inventories last year was because of the fact that there was less demand. So we are constantly trying to serve and provide the ultimate service to our customers. And really it is a testament to our entire group on the operations side as well as sourcing and purchasing to work in collaboration throughout the organization to provide better service at the point of sales again, more efficiently.

And given our financial strength, we can do that pretty much with no -- nothing holding us back. It's a matter of just simple execution.

On the competitive side, a number of our competitors do have limitations in that regard and that again is an opportunity for us, it opens doors for us every day.

Great, thank you. Good luck this summer.

There are no further questions in queue at this time. I would like to turn the call back over to management for closing comments.

Thank you all for listing to our first-quarter conference call. Our next call is scheduled for Thursday, July 22, where we will discuss our seasonally most important second-quarter results. Again, thank you all for listening and have a good day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.