Pool Corp (POOL) 2010 Q2 法說會逐字稿

Greetings and welcome to Pool Corporation's second quarter 2010 earnings release 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, Mark Joslin, Vice President and Chief Financial Officer for Pool Corporation. Thank you. Mr. Joslin, you may begin.

Thank you Melissa. Good morning everyone, and welcome to our second quarter 2010 conference call. I would like to once again remind our listeners that our discussion, comments, and responses to questions 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

Thank you Mark, and good morning to all. I am very pleased to report that the impact from the headwinds of the past several years, that have reduced industry new construction by almost 80%, and replacement refurbishment activity by over 30% below normalized levels have subsided. This enables the stable and growing maintenance and repair segments of the market to be more apparent and visible in our results. We, however, are not out of the woods yet from an industry standpoint, as external market factors like single family home values, consumer confidence, employment, consumer financing and economic growth remain at depressed levels.

It is in this environment that we are realizing profit growth as our talented and dedicated team address the opportunities available to us. These opportunities are resulting in sales and market share growth, through new service, product, and program initiatives complemented by our commitment to the industry and our customers. In the second quarter, our Blue business sales were up 5.4%,while our Green business sales were down 7.5%. Within the Blue business, cooler temperatures than normal in the West, resulted in California sales declining by 5%, while in Florida and Texas we realized 7% and 9% sales growth respectively, as these markets had relatively normal weather in the quarter. We also realized 8% sales growth in the other markets, with generally favorable conditions in a number of Northeast and mid-Atlantic markets where we realized sales increases well into the double-digit percentage-wise offset partially by unfavorable conditions in the Pacific Northwest.

For 2010, we anticipate that the industry will realize a modest recovery in replacement refurbishment activity, and flat to modest growth in new pool construction. The maintenance and repair segments represented by retail, service, and maintenance customers will remain stable, as they have throughout the past several years. Overall, we expect that our sales growth will be in the low to mid-single digit percent for the balance of the year.

Gross margins were slightly below last year's second quarter, given the intensely competitive market conditions, coupled with the lagging positive impact on 2009 gross margins from our preprice increase inventory buys in the second half of 2008. In contrast with a few of our competitors that use price as their lead and only selling tool, we focus on customer service, coupled with providing our customers unparalleled business support programs and resources, all of which serve to help our customers grow their sales and profitability.

Mark will give you a few more of the details on the expense side, but needless to say, these are in control and reflect the actions taken during the course of the past three years, as we have extracted a combined $70 million of expense from our business. To have made this kind of expense reduction with very little change in our core infrastructure while also simultaneously strengthening the depth and caliber of our organization, is a real testament to the talent and commitment of our team. As such, that our only significant expense increase is our accrual for incentive compensation is I believe very appropriate.

Our cash generations continues very strong as we continue to improve on every facet of working capital management. This capital generation has enabled us to realize significant debt and interest expense reductions in the past year. We anticipate that cash flow generation will exceed net income again this year, as we are now in the major cash flow positive months of the year.

Overall, 2010 is proving to be the pivotal transition year that we anticipated. While we expect that external market conditions will not lead to a significant market recovery in the near term, we do anticipate that we can grow diluted earnings per share by the mid-teens percent per year, with only a modest recovery in replacement and refurbishment activity and new construction activity. Once external market conditions really improve from the presently depressed levels and return to more normalized levels, and the industry begins a genuine recovery, then our realizing 20% or greater diluted earnings growth becomes realistically attainable.

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

Thank you, Manny. I will start with a few comments on our SG&A costs, and then move on to the balance sheet and cash flow. For the quarter our SG&A costs were down as a percentage of sales, but up in dollars excluding acquisitions by $2 million, or 2%. The primary driver here, as noted in our press release and Manny's comments, was the higher incentive comp costs reflecting the improvement in our expected performance from earlier in the year. Since we book our incentive costs in the quarters we are profitable, it is likely we will also have this issue in Q3 but not in Q4.

Excluding the incentive comp costs our SG&A overall reflects the work we have put in throughout the organization over the last three years to maintain an efficient cost structure, including a reduced head count, lower facility costs, and numerous other cost reduction initiatives, which we expect to continue to benefit from in the quarters ahead. The response and focus of our people in this area has really been tremendous.

Moving on to the balance sheet and beginning with Receivables, what you see here is a reflection of the greater discipline we have exercised, as well as improved market condition for our customers, resulting in total net Receivables up 2% overall, but down 1% excluding acquired businesses, compared to our 5% growth in sales for the quarter. As a percentage of total receivables, our current receivables improved by 550 basis points year-over-year, while our greater than 60 day past due receivables declined by over 250 basis points.

Our days sales outstanding, or DSO, improved substantially year-over-year, dropping from 36 days in 2009, to 33 days in 2010. Consequently we reduced our bad debt reserves and recorded $1.3 million lower bad debt expense for the quarter, $2.2 million year-to-date. Inventory management continues to be another positive story for us this year, as our inventories excluding acquired inventory were down 2% year-over-year, despite the increase in our sales. Our days inventory on hand at the end of the quarter was 114 days, down from 119 days at the end of Q2 2009.

Our improvements in receivables and inventories as well as our increase in net income all benefited our cash flow performance. Our cash flow from operations at the end of June was $29 million, down a little from last year's record level when we were able to pare inventory significantly, but still very positive. Over the last year we have deployed excess cash to pay down debt, lowering our outstanding debt by $68 million year-over-year, to $266 million at the end of June.

With the decline in debt and improved earnings, our leverage has come down to 2.36 at the end of June from 2.73 at the end of first quarter, and 2.97 a year ago. We also used some of that cash flow to make a small acquisition of a company by the name of Metrinox in April. Metrinox is a distributor with locations in Montreal and Quebec City, and the results are included in the excluded column of our base business addendum, along with the General Pool Supply acquisition results.

One additional area I would like to comment on is our shares outstanding at the end of the quarter. This seems to be an area of confusion from time to time, but even more so in the current quarter judging by what most analysts used in their models. As a reminder, under Generally Accepted Accounting Principles we are required to report our earnings per share on both a basic and fully diluted share basis. However, if we report a loss as we normally do in the seasonally slower first and fourth quarters, we must use basic shares only in our reported EPS.

For informational purposes, we report what our fully diluted share count would have been in these loss quarters in a footnote to our financial statements. This number as reported in our first quarter 10-Q was 49.8 million shares, including the effect of stock options and restricted stock awards granted and exercised, as well as changes in our stock price, our fully diluted shares grew to 50.4 million shares at the end of Q2. There are a number of assumptions that go into forecasting shares outstanding, and while I don't want to put any of our analysts out of work, I thought it might be helpful to give you our best guess at this point in time, as to what we see for future shares outstanding assuming no share repurchases.

For Q3 2010, we estimate fully diluted shares to be 50.6 million shares outstanding. For Q4 2010 when we expect to report a loss for the quarter, we estimate basic shares to be 49.9 million shares. For the full year of 2010, we estimate fully diluted shares to be 50.4 million shares, and for the full year 2011, we estimate fully diluted shares to be 51.4 million shares.

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

Thank you, we will now be conducting a Q&A session. (Operator Instructions). Our first question is from Tom Hayes with Piper Jaffray. Please proceed with your question.

Thank you. Good morning, Manny.

Good morning.

I was just wondering if you could remind us, it seems like with the permit activity improving, the timing gap between the time the permit is actually posted at the municipal level, and what you guys typically see the purchases flow through your stores?

Sure. The typical timeframe from permit to actual purchase and install of the pool is typically within 60 to 90 days.

Okay.

And by the way, just to follow up on your comment, there are a number of markets, for example, Florida, on a consolidated basis, and Texas on a consolidated basis, do show modest increases year-to-year in permit activity, California is still down a bit, and overall at least nationally the numbers appear to be flat to modestly up overall.

Great. Could you comment possibly on the gross margin profile on products that are typically associated with the new pool construction, versus the maintenance side of the business?

Sure. From a product profile standpoint, the overall margins are really very similar. In fact, when you look at equipment, pumps, filters, heaters, cleaners, et cetera, those products are primarily sold for replacements on existing pools, the inventory of, or the installed base of over 5 million in-ground pools and over 3 million above-ground pools, so therefore the margins on a product basis are very similar. The variance really comes into play with the size of the customer. Typically the larger customers in each of the local markets have some price advantage or cost advantage, versus the smaller customers that buy more impulse items. It is really not driven so much by the products themselves, but more so by the size of the customer in each of the markets.

Okay, great, thanks. Just one last question. I was wondering if you could maybe provide a little bit of outlook or your thoughts on the market this year for the irrigation business?

Sure. In terms of the irrigation business, that is very closely aligned or tied to new home construction, and the dynamics that feed that business are somewhat different from new pool construction, or for that matter the replacement remodel sectors of the pool market. So we believe that we are reaching the point now in fact that our year-on-year sales declines were only 7.5% in that segment, that is very positive, given the headwinds that that part of our business has had for the last two or three years. We believe that will be stabilizing as we proceed through the year, and gradually recovering in future years, following by six to 12 months the behavior, and if you look at a leading indicator, probably you would be looking at new home construction as a leading indicator there.

Great, I appreciate the color. Thank you.

Thank you, Tom.

Thank you. Our next question is from Mark Rupe with Longbow Research.

This is Leah Villalobos in for Mark this morning. I was hoping you could give us some more color on the demand drivers in the quarter? You mentioned a couple in the press release, the discretionary purchases, the broader product offering, favorable weather. Kind of which of those drove the demand as well as what you saw in the overall pool market during the quarter in the first half of the year?

I would say from a priority standpoint although the numbers are not that big, I would say the first factor is market share growth, through the efforts of our people to provide really exceptional service to our customers. That is the first and leading factor. Second, I would say that there has been some modest recovery in the remodel replacement activity. For example, product categories like in-ground liner replacements, and heaters and lighting products, which are primarily geared for replacement on existing pools, were up a little bit more than normal.

And third, I would say we had favorable weather in a few of the, particularly Northeast and surrounding area markets, although the West was really adverse so it is certainly favorable in certain markets, but it is also unfavorable in others, that is why I put it down as number three. Then fourth I would say that the installed base of pools still increased, although the rate of new pool construction is extremely depressed, at levels that haven't been captured and records that have been now been running for well over 40 years, the installed base still grew, it still grew by a fraction of 1% percent, but it still grew, so that would be the fourth factor.

That is helpful, thank you. Also in the release you mentioned that most major product categories grew. Where are you still seeing some weakness?

Really, of the major product categories that we look at, I don't think there is anything of significance that didn't grow. I am just thinking through. Chemicals were up nicely. I mentioned equipment overall led by heaters and lighting products were up. Accessories were up. Parts sales were up. So I think that we only put most of the disclaimer because really the top 20 were all fine.

Okay, great. And then just lastly, on the competitive pricing environment in the second quarter relative to the first quarter, did you see any kind of incremental pricing, has it been fairly stable, did you see any kind of change throughout the quarter?

Well, when you look at the quarter and some markets are more, I will call it I was going to say irrational, that is not probably the proper term, because it is competitive everywhere, certainly. But I think in some cases when you are in the off season, and you have time on your hands, and you have inventory, and you may have pressures to make payroll, you do have some irrational behaviors that sometimes takes place. As the season unfolds some of that irrational behavior gets put on the sidelines because everybody is busy.

For example the West Coast, which has started the season later than normal given the very cool weather over there, there was a lagging impact, adverse impact from that competitive to irrational behavior, and that happens in certain pockets. I would say that overall, in the busy time of the year, everybody is busy and the key and what is most important to everyone is to get the work done, and capture the sales opportunity at the consumer level that our customers have first and foremost, and service is very important.

So I think that is kind of a reflection of the competitive environment. I mean everywhere it is competitive. We have multiple competitors in every market, and again, really some of that is driven by how we have to react to the competition. We, as I mentioned in my prepared remarks, we focus on providing exceptional value to our customers, and to the extent that we do that, and to the extent that our customers recognize and appreciate it, we can capture a certain premium in price. To the extent that our competitors behave irrationally, then we have to react in part to their behavior. But again, we don't have to react and often times do not react to that behavior, because it is not profitable business.

Sure. Thank you.

Okay.

Thank you. Our next question is from Anthony Lebiedzinski with Sidoti & Company. Please proceed with your question.

Good morning. Just wanted to see if you could quantify the sales increase of chemicals perhaps, and also just a little bit more maybe color on the maintenance, repair replacement product sales, how those trended so far in the first half of this year?

Sure. Good morning, Anthony. The chemical sales were up very similar to base business sales growth for the quarter, as were accessories and replacement parts. And if you look at our business, Anthony, you know our business very well, basically that is the lion's share of our sales, so you are not going to have a lot of separation when those are several of the main categories, particularly with chemicals being the largest product category that we sell.

Okay. That is what I thought. Just wanted to see if you could clarify that. Also what is your expectation for pricing pressures in the second half of the year?

I believe, as everything will remain competitive, as is normal, that we have a seasonal benefit in the second and to a lesser degree the third quarter, as there are more impulse items sold, and as we edge the third quarter and going to the fourth quarter, there is some inventory cleanup that takes place on the part of the marketplace. And that leads to sometimes lower margins, but I think that what you will find is the spread that we reported in the second quarter, in terms of our being a little short of last year's numbers, that will probably be very similar to what happens in the second half of the year.

Okay. Sounds good. And also, as far as your comments about the sales growth that you expect, in terms of the guidance which is now higher a little bit, were you referring to a base business sales growth or overall top line?

Base business sales, yes.

All right, thank you.

Okay.

Thank you. Our next question is from David Mann with Johnson Rice & Company. Please proceed with your question.

Thank you. Congratulations. Good afternoon, good morning.

Good morning.

Quick follow-up on the last question. It seems to me on the last conference call you all had intimated that the back half gross margin would perhaps be flat to up. Is that just a change in terms of how you just answered the last question?

Well, it is not a change of, a major change. I think that we have closed the gap from what we had in the first quarter, and we see the trend improving, but it also remains a question mark, given the pressures that some of our competitors are on in a few markets, so I am not going to say that we are going to necessarily beat last year's third and fourth quarter from a comp standpoint, because I think there is a little bit of a cloud there, given what some of the pressures that our competitors have.

And that is all coming from pricing pressure the outlook on that?

Yes.

And is it predominantly California, or more than just that market?

It is more than just that market.

Okay. Going back to some of the questions on the improvement in let's say major ticket purchases like equipment, can you just drive a little deeper in terms of regional differences, perhaps in Texas and Florida where overall you did better, was there a more robust market for that kind of a purchase, and what does that mean as we look longer into next year's season?

In the case of equipment specifically, for example, most of those sales are for replacement. And when you have normal weather conditions like you did in the second quarter in Florida and Texas, the pools are used more often, and the pumps and filters and heaters, well heaters not so much but pumps and filters certainly, are used more often, and therefore that drives wear and tear, and ultimately replacement or repair. And more often than not replacement. In California, where it didn't really break 70 until June, and didn't break 80 until July, it is a different state, and therefore the wear and tear is logically lower, and therefore those replacements are lower.

What you see if you look underneath the covers is that product categories, the more significant product categories, plus or minus a couple of percent, were very similar to the overall base business sales growth rate from a company standpoint. But then when you look at it by market the same holds true. So for example, logically chemical sales would be up more in Texas and California, as would equipment sales in Texas and Florida, and not as much so in California, because again those are some of the major categories and it can't be too far off base.

Okay. That is very helpful. In terms of the sequential trend in the base business across the three months, can you just talk about that and also compare how that trend compares to what is going on thus far in July?

Sure. April was the strongest from a year-on-year standpoint. And then May and June were fine. And again, it is all order of magnitude, but basically April was the strongest from a year-on-year comparison. And then July was very similar, we are going finish somewhere in the low to mid-single digit growth year-on-year base business-wise in terms of sales.

So in terms of June and July in a lot of other parts of retail and consumer, and especially home side of the business, since the end of the tax credit, it sounds like you have not seen a major deterioration in your business over the last several weeks the way other consumer businesses maybe have?

No, we have not.

Okay. Very helpful, thank you Manny.

Thank you, David.

Our next question is from Luke Junk with Robert W. Baird. Please proceed with your question.

Good morning.

Good morning.

Looking hopefully in the early stages of recovery here, seeing some modest growth in the refurbish and replace activity, maybe pool construction is still a little lackluster. Could you talk about how in the early stages of recovery things would be tracking, relative to the medium term outlook that you outlined at your Analyst Day last fall?

We are, compared to our Analyst Day expectations, I think what we talked about then was more of a longer term five year time horizon.

Yes.

Because, as I mentioned, mentioned then and say repeatedly, I am not smart enough to figure out when the recovery actually begins in earnest, and from an external standpoint, and therefore affecting our business. So in that sense, it is really nothing significant of note from a five year time horizon, what we communicated then was that we believe that remodel and replacement activity would recover back to normalized levels first, and that would begin in a modest way in 2011, that is essentially what is happening.

So far we are right. And again, I think that will happen, so that within the five year time horizon that will revert back to normalized levels.

In the case of new construction we were not quite as optimistic, our perception on new construction is that the external factors, particularly real estate values and consumer financing are going to be difficult at least in the near term in the next year or two. And believed that then. And that would recover slower, and that in fact, in a five year time horizon we were looking at recovery levels back to what they were, or halfway back to normalized levels, which is kind of what they were in the early to mid 80s timeframe just from a perspective standpoint, and that really a full recovery in new pool construction could very well take seven to 10 years to get back to normalized levels, and those were the assumptions that we used in our Investor Day presentation which we incorporate as well, since then have incorporate in our standard Investor presentation which is available on our website, and that is really pretty much on par with what we are tracking to date.

Okay. That is helpful. And then as we look to hopefully the beginning of the recovery here, I know that lots of distributors were able to weather the downturn, like you mentioned earlier, driving down inventory levels, taking cash flow off the balance sheet. Would you expect an uptick in consolidation activity, assuming the recovery continues here or have the companies that have survived, kind of made it through the darkest of the storm, and probably come through okay on the other end?

Sure. From a distribution standpoint the real stress test is not so much in the downturn, but in the recovery. Given the working capital benefits that normally take place in a downturn from both reduced receivables as well as reduced inventories, that cash flow generation in many cases offsets operating losses. So the real stress test on our competitors is really coming up, and that is without the benefit of reduced receivables and reduced inventories, particularly if there is not a recovery in earnest, both in terms of profitability as well as the financing capacity, or ability to secure financing, that puts a significant stress. I think that the real stress is up ahead, and that is not unique to our space, but I think every sector in distribution.

Okay. Thanks, guys.

Okay.

Thank you. Our next question is from Kathryn Thompson with Thompson Research Group. Please proceed with your question.

Good morning everyone. This is actually Jamie Baskin on the line for Kathryn. First question, Could you discuss the possibility of acquisitions, especially in line of Leslie's Poolmart being put up for sale?

Leslie's is a retailer, and they are the largest independent retailer in the industry with over 600 locations. They are a customer of ours. We, although they do self-distribute, they have five distribution centers, and they auto-replenish on a weekly basis their individual stores, they do buy certain products from us, particularly products that have lower velocity at the store level. They compete very directly with several thousand independently-owned retail stores that we serve on a regular basis, and so they are there, and I am very familiar with their business obviously, as a very significant competitor of many of our customers, and to a smaller degree a customer of ours.

In terms of acquisition activity for us, our focus is as you all know distribution , and therefore in that vein we particularly look at company or markets where we have a nominal or small share, and look at acquisitions as an alternative to increasing our presence in the marketplace, and we have done that as well as open up 100, well over 100 new locations in markets, and we look at again new locations versus acquisitions all of the time, and have a priority list and a pecking order from a market standpoint that we review on a regular basis.

I don't see anything of note there, certainly can't comment on anything that hasn't been announced. But again, I think we are always in communication with several, at least several prospects, and it has to make sense. Earlier this year as Mark mentioned in his comments in April we closed on a two-location distributor in Quebec that complements our existing presence there, and we are constantly in dialogue with a number of people, and that is, we do what makes sense, and if it doesn't we

Okay. Just two final short little questions. Will there be pre-opportunities in the fall? And can you give an update on just commodity pricing trends that you see?

There are a number of commodities costs that have gone up. We track that for a multitude of reasons, including our own sourcing, as well as some of our buys that we do. But for example, copper is up, certain raw materials that are used in, for example self chlorinators are up, and so we expect that there will be in contrast to this year where effectively there were no price increases, we expect modest price increases for 2011, and I think my expectation is that as manufacturers, develop their plans for 2011 they will incorporate those raw material increases to the extent they impact their product line or not, into their plans and probably announce increases in the fall some time. But at this juncture very prematurely I am looking at modest increases, price increases for next year.

Okay. All right, well, that is all I have. Thank you very much.

Thank you.

Thank you. Our next question is from Joel Havard with Hilliard Lyons. Please proceed with your question.

Thank you. Good morning, everybody. Manny, I know it is a step removed from you all directly, but what sense are your customers sharing with you about the improvement or not in credit? Particularly on the new build side?

That is a significant hurdle. And if credit were where I would say at normalized levels, are available at normalized levels for consumers, in other words where consumers could borrow up to 80% of their home value, based on current home values, the rate of new pool construction would be much greater than the current depressed levels. Albeit it would still be depressed from a relative standpoint, but it could be up probably at 50%, maybe 100% even from the current depressed levels. And that is the hurdle. I mean the interest is there from consumers, and it is just a matter of financial institutions currently, when they look at these things, they look at them and typically for these kinds of home improvement type loans, are looking for usually 30% or greater equity. And that is an inhibiting factor for many consumers.

Obviously I am trying to set that up for a more strategic or long-term view from your part. Are you aware of any third-party efforts, I seem to recall, go back a few cycles when some specialized home improvement lending groups would emerge. Is there anything like that bubbling that you are aware of?

Yes, there are. There are a few sources that are beginning to participate, but again the equity thresholds are higher than they were 3 to 5 years ago, 7 years ago certainly, and higher than they were 10 or 15 years ago. So, I would look at 10 to 15 years ago as being more normal than 5 years ago.

You anticipated my question. When you used normal in your first comments, I was wanting to follow-up with what might then be the new normal?

I think there is a couple of other things, and again I am not in banking and everything else, but I do know that there are from some of the things that I have read, I can't remember whether the number was $3 trillion or $4 trillion of outstanding commitments that are not funded, and that is primarily on the corporate side, but also rippling over to the consumer side, where banks have made commitments for a period of time, and those commitments are not drawn.

An example in our case being that we have, for example, over $100 million of available debt capacity. Those commitments expire over the course of time, and as they expire I would anticipate that banks will then have more funds available to deploy to profitable means. But that would take time. That is not going to happen overnight.

That is a great point. That is all I have got. Thanks. Good luck.

Thank you.

Thank you. (Operator Instructions). Our next question is from David Mann with Johnson Rice & Company. Please proceed with your question.

Yes, thank you. Manny, going back to the issue of the pricing environment. Can you talk about how the internet sort of channel, is that having any effect there, because it seems from some of our checks that might be part of the price competition out there?

The internet channel, and that is internet retailers have been in this industry now for 12 years. They are a very small segment of the total industry, but they have grown as a share of the industry. They were less than 1% of the industry call it 10 years ago, they may be up now to 4% or so of the industry. It certainly impacts the numbers to some degree, but when you look at it from a macro level the impact is not that significant overall. And as I say that, I mean what I am looking at is that there are certain products that have more traction on the internet and certainly in those product categories I will use suction cleaners as an example.

In the case of suction cleaners, that whatever manufacturer specials and programs are in place are very quickly made available nationally through a number of internet retailers and whereas, for example, perhaps five years ago or ten years ago, a store front retailer may have pocketed those programs, benefits of both of those program discounts they are now compelled to put them out there, because the internet guys put them out there. But when you look at the overall scheme of things and all of the products sold, I think that the impact is diluted significantly, and not really a factor in our margins in distribution.

Got you. And then in terms of inventory buying opportunities, do you get any sense now whether there will be a meaningful inventory prebuy opportunity, and if so, how would that compare to what you did last fall?

Sure. Let me just make another comment on the internet question. I think the impact has been on store front retailers more so than distribution, or for that matter, the builders or remodelers or service companies. I think that is really where, if you talk to store front retailers they will make the note that they have been, their margins have been somewhat affected by internet retailers, but not the other customer segments, and therefore not us so much overall.

In terms of buy opportunities, really those happen a little bit later on. At this juncture, we are in July, I expect that manufacturers will look at their plans and look at what they, how they need to balance everything out. So I don't expect anything unusual. If you go back, for example, into 2008, they had incurred, manufacturers had incurred significant raw materials price increases that they were going pass on after the 2008 season, and then we bought into those, which actually helped us in particularly the first quarter of 2009, and to a lesser degree the second quarter of 2009. We don't anticipate significant price increases, so therefore I don't see anything really out of the box there at this juncture. It would be more of a normalized, my expectation right now which is early, would be pretty much a normal buy in the latter half of the year.

Okay. And then one last question for Mark. Can you talk a little bit about your expense outlook for the year, and also is there anything, any other callouts for third and fourth quarter other than the bonus, the way the bonus lays out that you would also call out?

Yes, just going back to the comments we made last quarter, our outlook for the second half of the year was to be relatively flat and maybe up a little bit, flat overall for the year, and that depended a little bit on sales volume and as we saw sales picked up a little bit in the quarter, and our expectations are a little higher for the year. So the impact from that is the higher bonus expense second and third quarter, and a little bit more variable costs maybe in some other areas. So up a little bit for the second half, not substantially. And we will probably still have some offsets from cost initiatives, cost reduction initiatives that were taken throughout the organization. Horizon for example had their headcount is down let's call it double digits going into the second half of the year, and that was one initiative among many, where we are still working on cost reduction efforts.

Great. Thank you.

All right. Thank you, David.

Thank you. Mr. Perez de la Mesa there are no further questions at this time. I would like to turn the floor back over to you for closing comments.

Thank you, Melissa and thank you all again for listening to our second quarter results conference call. Our next call is scheduled for Thursday, October 21, when we will discuss our third quarter results. Thank you again.

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