Apr 23, 2009
Executives
Mark W. Joslin - Vice President, Chief Financial Officer Manuel J.
Perez de la Mesa - Director, Chief Executive Officer and President
Analysts
Kathryn I. Thompson - Avondale Partners LLC Tom Hayes - Piper Jaffray Anthony C.
Lebiedzinski - Sidoti & Company, LLC David M. Mann - Johnson Rice & Co.
LLC Brent Rakers - Morgan Keegan & Company, Inc. Keith Hughes - SunTrust Robinson Humphrey Joel K.
Havard - Hilliard Lyons
Operator
Good morning. My name is Sarah, and I will be your conference operator today.
At this time, I would like to welcome everyone to the Pool Corporation's First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise.
After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).
I'd now like to turn the call over to Pool Corporation's Chief Financial Officer. Mr.
Joslin, you may begin your conference.
Mark W. Joslin
Thank you, Sarah. Good morning everyone and welcome to our first quarter 2009 call.
As usual, I'd like to remind our listeners that our discussion, comments, and responses to questions today may include forward-looking statements, including management's outlook for 2009 and future periods. Actual results may differ materially from those discussed today.
Information regarding the factors and variables that could cause actual results to differ materially from projected results is discussed in our most recent Form 10-K as filed with the SEC. Now, I'll turn the call over to our President and CEO, Manny Perez De La Mesa.
Manuel J. Perez de la Mesa
Thank you Mark. Today I'll start by restating our focus and priorities in this market environment.
Our first focus is cash flow generation. The keys here are the balancing of our inventory investment, while ensuring excellent customer service together with credit and collections discipline.
We've made very good progress this year and expect that progress to continue. Our second focus is on sales.
Specifically sales execution coupled with the rollout of several initiatives to further our market position. These initiatives include our turbo charge program to stimulate more replacements and higher end product sales, our expansion of tile stocking centers to capitalize on our NPT investment made last year, our tough stocking initiatives to make us the source for the service trade and the continuation of programs such as Backyard Place to enhance the competitive positioning of retail customers.
The impact on these initiatives is largely ahead of us. Our third focus is on margin management, continuing to work started years ago and accentuated in 2008.
Many elements contribute to ease our efforts and we still have much to do. Our fourth focus is rightsizing our organization for the current sales expectations without comprising service levels or our ability to succeed when the market turns around.
I will non provide more color on how we expect 2009 to develop. Starting with sales, we are certainly being challenged with new construction below previously recorded levels and discretionary replacement products like Keegers (ph) being differed.
These components of our sales mix weigh heaviest in the fourth and first calendar quarters while non-discretionary maintenance and repair product sales weigh heaviest in the second and third quarters. Differed customer early by shipments also reduced first quarter sales, where these products expected to be shipped in the second quarter based on their natural demands.
For these reasons plus the largely differed impact of price inflation to date, and easier year-on-year sales comparisons, we expect that our sales trends of the past two quarter were moderate. Yet despite this moderation, our sales in 2009 could very well be down low double-digit percent versus 2008.
The horizon business, which is weighed more toward new construction and discretionary products is expected to be down well over 20% while the SCP Superior business is likely to be down in the high single digits. In this unprecedented sales market environment, our focus is on executing on our initiatives and capturing profitable share without falling into the trap of making unprofitable or uncollectible sales.
Moving on to gross margins; we expect moderation and the year-to-year improvement as we move though the year given product sales mix changes progressively tougher comps and not enjoying the first quarter benefit from three price increase purchases made in 2008. We do however expect to continue to see improvement for the balance of the year.
The same factors that we've referenced before continues to benefit including improved pricing and purchasing discipline, better sales execution, communicating and capturing our value adds, the gradual transition of sales to more profitable Pool Corp. branded and preferred vendor products and a better product sales mix given the reduction of new construction and deferred discretionary price.
Our operating expenses have been adjusted commensurate with our sales expectations without adversely affecting customer service levels. For the year, expenses should be down 8 to 10% given our sales expectations.
To the expense that our sales are better or worse than expenses than expected, expenses will adjust in the same direction, but to a lesser degree. Interest expenses will also decrease, given both lower average debt outstanding as well as lower average interest rates.
Talking about debt levels. We've realized a year-on-year $79 million reduction in inventory as we work to rebalance inventories in order to ensure excellent customer service while operating more efficiently from an inventory investment standpoint.
The bottom line is that our debt has already peaked in 2009, and it will begin to decrease six to eight weeks earlier than normal as we strive to beat 2008 record free cash flow in 2009. Turning now to our sales by major marketing channels.
Our overall business... base business sales were down by over 18% in the SCP Superior channel and by over 30% in the horizon channels.
On the blue side of our business or the SCP Superior side of our business, our best performing market in the relative sense was Florida, down almost 11% followed by Texas, down almost 15% and then California down over 18%. We believe that this relative performance is primarily due to the waiting of maintenance and repair products as Florida for example has the flattest annual sales distribution given its higher average temperatures.
The relative sales performance in markets outside of the above three states were down by over 20%. As noted previously, we expect sales trends to moderate, given the higher waiting of maintenance and repair products in the second quarter and third quarters as well as the contributions from our sales initiatives.
At this point, we are beginning to see anecdotal evidence that 2009 could very well be the worst year and what is now the fourth year that new construction has declined and the third year that the overall Pool market and irrigation markets were contracted. When this perfect storm of adverse external factors abates, we believe Pool Corporation will have improved its competitive position and be poised to resume growing again.
We've learned many lessons over the past several years and have become a stronger and better company in the process. With that, I'll turn the call over back to Mark for his financial commentary.
Mark W. Joslin
Thank you, Manny. I'll start by commenting on our operating expenses.
As we've mentioned many times in the past, operating expense reductions have been and continue to be a major focus for us as we adjust for current and anticipated market conditions without sacrificing our key longer-term of objective of growing our market share. As evidenced by our results, we continue to make good progress here with total base business expenses down 11% year-over-year with essentially the same number of sales centers as in 2008.
Our largest cost category labor and related costs was down 9% from 2008 as we pair back on labor throughout the business. Our employee count is down 10% from March '08 and 3% from December '08 as we continue to adjust our support structure to market conditions.
We'll make further adjustments here if needed as the year progresses and expect to benefit from the weight risk (ph) for all employees that we established in the first quarter. Our next slide is cost category.
Facility costs were essentially flat year-over-year and should drop as the year progresses as we proactively adjust our least cost to current local real estate market conditions. To-date this year, we have negotiated over 3 million in rent reductions, which will be recognized over the remaining term of these leases.
Delivery costs, which are more closely tied to sales volumes are the next largest cost category, and fell 21% year-over-year inline with our sales decrease. All other operating costs were down 11% from last year.
The bottom line is that we are aggressively managing our cost structure without sacrificing our market positions. We expect that at least the fixed part of our SG&A cost structure will be down 8 to 10% compared to 2008 and that should continue throughout this year.
Turning to balance sheet and starting with accounts receivable, our net receivables declined 46 million or 22% for the quarter. Our cash due receivables have improved some from year end.
As we would normally expect at this time of year, and we have kept our allowance for uncollectible receivables flat from year end at 13 million. Our DSO at the end of the quarter has measured on a trailing 12 months of receivables was 36 days, which was unchanged from Q1 2008.
In this environment, we remain challenged to extent credit and facilitate sales to creditworthy customers while aggressively managing past due accounts. Moving on to inventories, as we discussed on our last call, working inventory level is down as a component of our focus on cash flow is a key initiative for us in 2009.
And we made excellent progress here in the first quarter. Our quarter end inventory of 398 million is down 79 million or 17% from 2008, as we reduced inventory levels across product classes without sacrificing customer service.
We have a number of initiatives in place that we expect will yield further results year ahead. Looking at our accounts payable, you'll see that this decline, 132 million year-over-year.
In addition to the $79 million decline in inventories, we also moved payments that would have normally been made in Q2 09 ahead to the fourth quarter of 2008 as we discussed on our last call and also to Q1 2009 to take advantage of opportunities available to us. This will result and significantly improve cash flow in Q2 '09 versus Q2 '08.
Speaking of cash flow, this is our top priority for 2009 and our goal is to exceed the record cash flow results we had in 2008. While our first quarter use of cash increased by 30 million due to the 2008 tax payment we made, our inventory reductions and prepayments set us up for excellent cash flow results in the second quarter and the rest of the year.
Our debt levels at the end of Q1were 381 million, down 15 million from Q1 '08. We expect our debt levels to drop sequentially beginning in Q2 this year, and on average to be lower than last year.
We remain in compliance with covenants on our debt, which includes leverage of 2.92 compared to the covenant of 3.25 and a fixed charge coverage ratio of 2.49, which needs to be above 2.25. As mentioned on our year-end call, we expect our ratios to tighten some this year, but our expectation is that we will remain in compliance throughout the year.
One of the components of our capital structure is our receivables securitization facility. This facility, which provides largely backup capacity, has a 364 day term and is set to expire in May.
At this point, we expect to renew or replace this facility when it expires. That concludes my prepared remarks.
So I'll turn the call back to our operator to begin our question-and-answer period. Sarah?
Kathryn Thompson - Avondale Partners LLC
Hi, thank you. Could you give us D&A and CapEx guidance fiscal '09?
Manuel J. Perez de la Mesa
I'm sorry. Kathryn, can you restate the question?
Kathryn Thompson - Avondale Partners LLC
Could you give us CapEx and D&A guidance for fiscal '09?
Manuel J. Perez de la Mesa
Sure. D&A will be modestly less than last year as some amortization expense has been...
fully amortized some of the intangibles. So D&A will be modestly less than last year.
And CapEx for the year will also be modestly less than last year. I'm talking in both cases about $2 million or so less than last year.
Kathryn Thompson - Avondale Partners LLC
Okay. Also on just delving into your SG&A, just to reconfirm.
Is labor still about 50% of your overall costs? Also how much do you...
Manuel J. Perez de la Mesa
When you add all the cost related to labor including benefits and everything else; in fact, labor is closer to 60% as well as travel and whatever.
Kathryn Thompson - Avondale Partners LLC
Okay.
Manuel J. Perez de la Mesa
So cost in essence all together are closer to 60% of our total costs.
Kathryn Thompson - Avondale Partners LLC
Okay, perfect. How much do you expect in labor cost production since fiscal '09?
Either on a percentage or on a dollars basis?
Manuel J. Perez de la Mesa
About 8 to 10% versus last year.
Kathryn Thompson - Avondale Partners LLC
So still inline with what you were seeing in the first quarter?
Manuel J. Perez de la Mesa
Yes.
Kathryn Thompson - Avondale Partners LLC
And also just overall for SG&A, I think that you've stated in the past you were hoping to see flat to down on a dollars basis for fiscal '09. So still within your expectations?
Manuel J. Perez de la Mesa
Well, given how we have resized our business for the current environment, our overall SG&A in absolute dollars will be down 8 to 10% versus what it was in '08.
Kathryn Thompson - Avondale Partners LLC
Okay, perfect. Do you also still expect a 4 to 5 million, year-over-year decline in interest expense?
Manuel J. Perez de la Mesa
Yes, Kathryn what I like to do is, yes we expect due to both lower average borrowings...
Kathryn Thompson
Sure.
Manuel J. Perez de la Mesa
As well as lower average interest rates, we expect interest expense to be down about 4 to $5 million dollars versus last year. And Kathryn before you ask the next question...
Kathryn Thompson - Avondale Partners LLC
Sure.
Manuel J. Perez de la Mesa
I can just maybe let somebody else come in and ask their questions.
Kathryn Thompson - Avondale Partners LLC
Sure, and I'll just jump back in the queue, thank you.
Manuel J. Perez de la Mesa
Thank you, Kathryn.
Operator
Your next question comes from the line of Tom Hayes from Piper Jaffray. Your line is now open.
Tom Hayes - Piper Jaffray
Piper Jaffray:} Thanks. You had previously stated on some other calls that your view on the replacement, this is with some obviously showing some stability, but now you are...
you had mentioned that some of that is deferrable. I was just wondering if you could provide some thoughts on what percent of that maybe deferrable?
Manuel J. Perez de la Mesa
Sure. I would say prior to about a year or so ago, I think through the end of 2007, we have not seen any evidence of replacement activity being deferred by consumers.
Beginning in 2008, we began to see consumers deferring certain items of replacement products. If you look at the equipment pad, the number one product that has been deferred has been heaters.
As you can probably figure out from a logical standpoint, heaters are mostly sold in the fourth and first quarters, when water temperature is not normally colder. And we what we have seen in contrast with pumps and filter, which are necessary to either repair or replace to keep the pool functioning in the case of heaters in this economic environment, some consumers are postponing the...
or deferring the replacement of heater when it breaks down, and simply not swimming as much in their pool when the water is colder.
Tom Hayes - Piper Jaffray
Okay. And then I guess if you could just give us your thoughts on as far as the inventory shelter of the pre-priced inventory, how long that would last?
Is that...
Manuel J. Perez de la Mesa
Sure. As indicated, we did our year end conference call for 2008 couple of months ago.
Most of the pre-price increase inventory that we bought or ordered back in the August, September timeframe, most of that inventory was sold through in the first quarter.
Tom Hayes - Piper Jaffray
Okay.
Manuel J. Perez de la Mesa
There are still some modest reminisce of that that will largely be sold... essentially be sold through by the end of April.
Tom Hayes - Piper Jaffray
Great, thank you.
Operator
Your next question comes from the line of Anthony Lebiedzinski from Sidoti & Company. Your line is now open.
Anthony Lebiedzinski - Sidoti & Company, LLC
Couple of questions here. As far as your ability to cut costs, most of that is for labor and you said that you've been able to renegotiate some of the leases for your sale centers.
Are there any other avenues that you're pursuing as far as cutting costs... can you give us some flavor for that?
Manuel J. Perez de la Mesa
Sure. Well, I'll put it...
I'll start this way Anthony: unlike government, actually have a zero base budgeting process. And here we look at and try to adjust and try to see if there are justification for any kind of expenditure.
And so we look and challenge everything as part of our budgeting process. And then after the budgeting process is done depending on business conditions.
For example, Mark referenced to fact that freight is down commensurate with sales or that's freight out expense, basically. But we also have our fleet for our delivery vehicles.
We have a year round fleet, which we have trimmed back fair amount from what it was last year. As well as we have seasonal fleet component and the seasonal fleet needs are obviously challenged in terms of when do we actually need to bring those on and how long we need to keep them.
So when you go across every element of costs, we try to say... challenge are they absolute necessary and what's the impact if we don't do them.
And the netis a negative to eliminate the expense and we keep the expenses to net positive to eliminate the expense than we eliminate it.
Anthony Lebiedzinski - Sidoti & Company, LLC
Okay. And also you mentioned heaters as being a category, where people are deferring purchases.
Can you give us any other examples of any products that you're seeing that people are deferring?
Manuel J. Perez de la Mesa
Sure. In the case of the things in or around the POOL that have been sold for many, many years, the second part of category would be the lighting category would come to mind.
But what's also happening is, for example, pool retrofits, where people re-plaster the pools to provide a refreshed look and a better feel and everything else. Some consumers are deferring those as well.
So if you think about it logically, again this affects consumers on the margin. There are some consumers that are fine, and they're behaving pretty much normal.
There are other consumers that are pinched or concerned about in the current environment, and they are saying well, what do I absolutely have to do or not absolutely have to do? If a pump breaks, they have to either repair or replace to keep the pool going.
On the other hand, if a heater breaks or putting a new liner in the pools, those kind of expenditures that that are not actually necessarily be done rightly then and there and could be differed for six months or a year. That was taking place.
Anthony Lebiedzinski - Sidoti & Company, LLC
Okay. And my last question is what are your thoughts on your dividend now?
You have increased than years past. It seems like the recent trend from many companies has to actually be reducing dividends.
So what's the Board's thinking now on the dividend?
Manuel J. Perez de la Mesa
Well, that's a topic that comes up since the Board reviews that every quarter. And it will be again reviewed in next Board meeting in May in a couple of weeks.
So that's something that is discussed every quarter. And I'll leave that up to the Board to make that decision, and just run the vehicles (ph).
Anthony Lebiedzinski - Sidoti & Company, LLC
Okay. And what is your vote?
Manuel J. Perez de la Mesa
I'd rather not state my vote, but so therefore, I'll just leave it to the Board to make the decision.
Anthony Lebiedzinski - Sidoti & Company, LLC
Okay, fair enough. Thank you.
Manuel J. Perez de la Mesa
Thank you, sir.
Operator
Your next question comes from the line of David Mann from Johnson Rice. Your line is now open.
David Mann - Johnson Rice & Co. LLC
Yes, thank you. Good morning Manny and Mark.
Manuel J. Perez de la Mesa
Good morning.
David Mann - Johnson Rice & Co. LLC
On the cost issue, can you just clarify the incremental change if any from the sort of commentary guidance you are implying in the last conference call in terms of the SG&A components?
Manuel J. Perez de la Mesa
On the SG&A's component, it's... the order of magnitude of the reduction is a little greater and in parts, because the sales are little weaker.
So that would be... but not significantly so.
David Mann - Johnson Rice & Co. LLC
And that would be the only thing that's really different from before there are no other deeper cuts in labor?
Manuel J. Perez de la Mesa
No, no, nothing significant.
David Mann - Johnson Rice & Co. LLC
And I think on the last call, you kind of intimated that by the fourth quarter, the cost savings would sort of anniversary some of them. Is that still the case or do you still expect there to be some bigger benefit or year-over-year decline in Q4?
Manuel J. Perez de la Mesa
Right, there will continue to be declines throughout the year. But for example on a base business level, our expenses were down 11% in the first quarter.
You're going to see something, I'll say, similar to that in the second quarter, and then that will moderate as we get into the third and fourth quarter given the fact that given the adjustments made in the latter half of last year. So overall, that's why our feelings are that it maybe be more like 8 to 10% for the year although in the first half of the year the year-on-year reductions will be greater.
Mark Joslin
Yeah, and just to clarify, David, our guidance in terms of what we are doing there hasn't changed. But we have continued to make reductions.
So as I mentioned, since year-end, our headcount is down in additional 3%. So throughout the first quarter, through some selective layoffs and attrition and so forth, we've continued to reduce our headcounts, and that will continue throughout the year.
David Mann - Johnson Rice & Co. LLC
And then in terms of the inflation that you're seeing in the sector, I guess maybe you can comment across the product categories especially in chemicals with... in light of the Cantor (ph) bankruptcy?
Manuel J. Perez de la Mesa
Sure, that's a very good point. Thank you for bringing it up.
In fact I should have included that in my initial comments. At the outset of the year and late last year, we were looking at mid to marginally higher than mid single-digit price increases.
Effectively, very little of those increases, I'd say 2 to 3% have come into play so far this year. The reasons for that...
are that we were not unique in terms of buying into, buying products ahead of the price increases. So therefore, although I tried to drive behavior to price of replacement costs, we're not the only ones in the market.
So therefore to the extent that people were still pricing up historical costs. It delayed the implementation of those price increases to a degree.
And therefore the bigger impact from those increases will be felt essentially from the second quarter on. And that speaks to chemicals as well as everything else.
David Mann - Johnson Rice & Co. LLC
Can you just comment... if I could ask one more question about what you see as the sort of structural inflation rate?
I mean I get a lot of questions about whether this inflation will abate at some point obviously? You see where crude is now and some other inputs.
How do you see sort of the structural inflation, let's say, playing out in 2010 beyond?
Manuel J. Perez de la Mesa
Okay. This industry, if you go back 20 years had to speak out very, very nominal rate of inflation, I'd say averaging one to two percent collectively and...
for the year. And the reasons for that were that the industry was growing, and as many...
although manufactures over that course of 20 years realized raw material increases sporadically over that course of time, their volumes were increasing and therefore they were gradually becoming more efficient from a manufacturing standpoint in terms of their ability to absorb fixed costs as well as their costs improvement that they were making over the course of time. So given that, they were able to despite very nominal price increases overtime, they were able to continue to maintain their gross margins over a long period.
In the current environment, the current environment being the last two years, when you had a market contraction coupled with a spike in raw material costs, that put pressure on them and they've had to in this case raise prices. My expectation as we get out of this period that we're in and the market begins to recover to a more normal levels, they'll begin to accrue the benefit of leverage and the absorption of big task.
And with a normalization of our material prices, I would see prospectively a very modest level of inflation on a go-forward basis more along the lines of historical levels, again taking the short-term '09 impact as an adjustment in that long-term price.
David Mann - Johnson Rice & Co. LLC
Okay, great. Thank you very much.
Operator
Your next question comes from the line Brent Rakers from Morgan Keegan. Your line is now open.
Brent Rakers - Morgan Keegan & Company, Inc.
Good morning. Just maybe if I can follow-up a little bit about the timing of the potential price increases, Manny, you seem to suggest that the a lot of the competitors in the industry also pre-bought and as a result did not raise prices in Q1 to the degree that you would like.
I guess as we go into the busy season of the year, what is to stop the competitors from still not increasing their prices and with the possibility that these higher costs would now flow through?
Manuel J. Perez de la Mesa
Well, two things, Brent; one is that in the way of managing their business and looking at historical costs and historical costs is the basis for pricing, what in essence is happening is that by the March and April timeframe a lot of that pre-bought inventory has been consumed. So their current cost position or historical...
their current historical cost position is really the new cost position. So therefore they would have significant margin contraction if they were not to change their prices.
And we've seen evidence already that most of the market is beginning to adjust in the last 30 to 45 days.
Brent Rakers - Morgan Keegan & Company, Inc.
Okay. That's great.
And let me switch gears, back to some of the employee compensation and reductions at the end of the year, Mark, you said you cut I guess 3% since December. Can you give us a sense...
remind me as to a sense of what the normal seasonal hiring pattern would be December to March?
Mark Joslin
Typically December to March, there is very, very little change in headcount. The seasonal headcount really begins to play in order of magnitude really in May.
There is a little bit in April, very little, but really it plays May through July and that begins to run down as we go at the season in August and September.
Brent Rakers - Morgan Keegan & Company, Inc.
Okay. And then just lastly then on those seasonal hires, there seem to recall the old number used be about 500 seasonal hires?
Manuel J. Perez de la Mesa
Sure.
Brent Rakers - Morgan Keegan & Company, Inc.
As you going into that, what kind of number you're looking at this year?
Manuel J. Perez de la Mesa
Well, I think the number here will be a more... in this year will be more modest certainly.
And the other factor there is that in years passed, the issue given the scarcity of labor in this country specifically. The issue was lining up the people ahead of time and we would urge on the side of having people on board.
Given the current environment and the availability of labor, it is very easy for us to be reactive in this current environment. So there'll be some natural savings there.
Brent Rakers - Morgan Keegan & Company, Inc.
Okay, thank you.
Operator
Your next question comes from the line of Keith Hughes from SunTrust. Your line is now open.
Keith Hughes - SunTrust Robinson Humphrey
Thank you. There have been some kind of anecdotal reports to some of your hardest hit markets that homes sales at least have picked up, maybe foreclosed homes, but met some activity going on.
Have you seen any kind of rate change in terms of businesses in place like South Florida in the South West. They were in the blue or the green business?
Manuel J. Perez de la Mesa
Okay. The effect there is different, Steve.
On the blue business, which is primarily driven by maintenance repair and replacement. On that side of the business, the drivers there are modestly different.
And therefore, what we are seeing for example Florida, where sales were down 10 or 11%. In the case of Florida, it's because of the waiting of maintenance repair and replace, not so much, because the rate of new pool construction is recovering.
In fact new pool construction in Florida is down about 50% from where it was first quarter-on-quarter on first quarter. The numbers are very modest and therefore those numbers weigh a lot less on the overall Florida sales equation than they did two or three years ago.
And by the way, I apologize Keith for calling you Steve a minute ago. The second part is on the green side of the equation is since they're driven more by new construction.
The impact there is still a lot of headwinds. And that's because new construction although there have been some evidence of increasing turnover of existing homes.
There's still a lot of inventory of homes available and in fact that turnover of existing homes by and large is below the cost to build a new home. So therefore, new home construction has yet to recover.
Keith Hughes - SunTrust Robinson Humphrey
Okay, thank you.
Operator
Your next question comes from the line of Mark Rupe from Longbow Research. Your line is now open.
Unidentified Analyst
Hi, good morning. This Leah Viello Wilson (ph) for Mark.
Just a quick question on the replacement sales; did you say how much they're down year-over-year?
Manuel J. Perez de la Mesa
No, I did not Leah. And the reason is that we don't have a hard number just yet for that.
Unidentified Analyst
Okay.
Manuel J. Perez de la Mesa
We have very good information in terms of what new construction is; that lagged a bit. But we have that information and then the default becomes replacement.
What we do know is that new construction generally speaking was down about 50% year-on-year for the first quarter against the first quarter of last year. And we know that, for example, certain product categories may be down 10, 12%.
And other product categories are down 22, 24%. And the ones that are down more like 20 to 24 are because replacement is down as opposed to the ones that are down 10 to 12 they will be done 10 to 12 because of new construction being down and not so much replacement.
Unidentified Analyst
Okay, great. And then going into the summer, are you expecting less of an impact from the deferral of replacement products since you were saying that the heaters were the number one thing impacting sales this quarter?
Manuel J. Perez de la Mesa
Right. In terms of...
yes, given the mix, the items... if you look at pumps and filters, they are replaced most often in the second and third quarters, and that's not really very discretionary.
Unidentified Analyst
Right.
Manuel J. Perez de la Mesa
And the case of heaters, those are replaced most often in the fourth and first quarters, and they are much more discretionary.
Unidentified Analyst
Okay, great. And then did you say on how much Arizona was down in sales?
Did I miss that?
Manuel J. Perez de la Mesa
Arizona would have been down over 20% like the rest of the markets.
Unidentified Analyst
Okay. And do you know what's going on there?
Sort of it's different from Florida, Texas and California?
Manuel J. Perez de la Mesa
Sure. The Arizona market is a newer market.
They don't have the aged base of installed pools that particularly Florida and California has. So therefore, the waiting there, new construction is heavier proportionately.
Unidentified Analyst
Okay. Thank you very much.
Manuel J. Perez de la Mesa
Thank you Leah.
Operator
Your next question comes from the line of Luke Jank (ph) from Robert Baird. Your line is now open.
Unidentified Analyst
Just had a question on gross margin. In terms of the pre-buy benefit you had in the first quarter here, the estimate what portion of the year-over-year improvement was due to that pre-buy.
Manuel J. Perez de la Mesa
No, we don't have that quantified just yet. It's obviously a fraction of the...
a small fraction of the 1.2
Unidentified Analyst
Okay.
Manuel J. Perez de la Mesa
And in part there, is because we weren't the only, who did that, so...
Unidentified Analyst
And then earlier in the call, you talked a little bit about how gross margin lines removed to the year, you expect in a continuing improvement there. Are you thinking about that on a year-over-year basis or is that sequentially?
Manuel J. Perez de la Mesa
Year-over-year.
Unidentified Analyst
Okay. That's what I thought, just wanted to make sure.
And then second on inventory and on the reviews you mentioned, the success of your inventory balancing process and on the call now, you mentioned, you still have other initiatives in place seeing draw down inventories maybe a little further. And hands for cash flow there.
How comfortable if you feel this current inventory levels or do you feel like there is equipment further to go there.
Manuel J. Perez de la Mesa
There's further to go on the absolute sense. Typically, just for perspective...
we typically ramp up inventories and inventories usually peak in the March, April timeframe and then wind down... seasons winds down and hit a low usually in September, October.
There will be a wind down this year given our efforts in the first quarter, the basis for that wind down or the starting point for that wind down are a bit lower. But there are opportunities along the way.
You will not see a $79 million difference in June as you did in the first quarter. There'll be difference, but it will be a little more modest than that, because of the natural wind down that took place.
In a relative sense, it may still be down 16%, but it wouldn't be 79 million again given the change on inventories from quarter-to-quarter.
Unidentified Analyst
Okay, that's helpful. Thanks guys.
Operator
Your next question comes from the line of Jacob Schumaker from BPC (ph). Your line now is open.
Unidentified Analyst
Can you give me clarity on maintenance revenue?
Manuel J. Perez de la Mesa
In terms of what the products are or in terms of our portion of our business?
Unidentified Analyst
No, in terms of like, what the existing maintenance revenue is, so that I don't have to guess about kind of what new homes are adding, and that way I can kind of understand what can happen next quarter plus or minus people's decision to kind of add pool services or take away pool services?
Manuel J. Perez de la Mesa
Okay. Well, the way we calculate that, Jacob is, we capture the products that are discreetly associated with the basics...
maintenance and operations of a pool, independent of whether we sell it to the service trade or sell it to the retail trade. Chemicals is the number one product category in that mix.
And chemicals are obviously sold both to the service side that maintain pools on behalf of consumers as well to the retail side. When you look at in an aggregate, all of the products that we sell on the maintenance and repair side, when you put that in aggregate, represents over 50% of our or represented over 50% of our total sales last year.
And that number will increase this year given the fall off... at the mix of the total business given the fall off in new construction and deferred replacement.
Unidentified Analyst
Right, that makes sense. Are you able to tell me what that's going to increase to in terms of mix of business?
Manuel J. Perez de la Mesa
Not at this juncture, because it will be premature for me for to answer that, because I don't know to what degree and how the season will play out in its entirely, I mean I am optimistic that we will begin to see some loosening up on the financial side and at least more, but flattening of new construction, not like flattening, but less decrease of new construction as we work ourselves through the year as well as by the time we get to the fourth quarter, hopefully the economy is beginning to be on the other side of the downturn and consumers will be more inclined to replace that either that they deferred replacing this winter.
Unidentified Analyst
Got it. So from those comments, I'm affectively looking at the company to be making a bet on the resurgence or this lessening of a decline of new home builds rather than in inflection point, where kind of the company sees business actually flat lining or improving at all off of the bottom for next quarter, which is the big quarter.
Is that kind of accurate?
Manuel J. Perez de la Mesa
Yeah, we're not... we don't see anything right now, Jacob, that would say that new construction will turn up.
We expect that maintenance and repairs is very steady and that's not an issue. But we expect new construction to continue to be soft and we expect replacement on the higher ticket deferrable items, there'll still be some fall off there.
And that's all based into our expectations for the year.
Unidentified Analyst
Okay. And there is no...
are you for the rather than talking about forward expectations, can we look at this past quarter and you tell me what mix the maintenance revenue and repair was of revenue?
Manuel J. Perez de la Mesa
It's much more modest level, because if you look at Snow Belt stakes pools are closed. So very little so to speak up in the Snow Belt.
Even when you get to market in the Southeast part of the country, Georgia, Tennessee the Carolina's, well a number of pools that are open with water temperature down 50-60 degrees, there are very there is limited need for chemicals to maintain water sanitation.
Unidentified Analyst
Got it. Okay, thank you guys.
Manuel J. Perez de la Mesa
Thank you Jacob.
Operator
Your next question comes from the line of Kathryn Thompson from Avondale Partners. Your line is now open.
Kathryn Thompson - Avondale Partners LLC
Hi, thank you. Manny, I just wanted to walk through a couple of things you talked about earlier with SG&A and gross margin expectations for the year.
Give us some pretty clear guidance on interest expenses and on SG&A, you would expect 8 to 9% decline year-over-year.
Manuel J. Perez de la Mesa
8 to 10.
Kathryn Thompson - Avondale Partners LLC
8 to 10. And also expect improvement in your gross margin, but the momentum slowing as the year progresses was comps becoming a little bit more difficult.
When I went that through my model, I find it challenging to get to a 95% number. And I want to know what am I missing in that analysis?
Manuel J. Perez de la Mesa
Well, back to two things Kathryn; one is...
Kathryn Thompson - Avondale Partners LLC
In fact, when I push the numbers, I'm getting, even if I had a flat year-over-year gross margin and 8% decline in SG&A, I'm still getting a number that's well above the 95%.
Manuel J. Perez de la Mesa
Okay, let's do this. Okay, why don't you call Mark or Craig after the call so we can walk through the model one of them in detail?
Kathryn Thompson - Avondale Partners LLC
Sure.
Manuel J. Perez de la Mesa
But I mean, just to restate, I feel that the consensus estimate of 95 currently is reasonable. That doesn't say that if you put the numbers out depending on what your estimates are for sale and your estimates are for gross margin may not get to a modestly greater or maybe a lower number, but certainly the $0.95 number is a reasonable expectation for the year given where we are right now.
Kathryn Thompson - Avondale Partners LLC
Yup. Okay and also just one quick follow up, you may know answer to this.
The tax guidance for this fiscal year?
Manuel J. Perez de la Mesa
Taxes will be at the same rate. I believe it's just a shade over 29%.
Kathryn Thompson - Avondale Partners LLC
Okay, great. Thanks so much.
I appreciate it.
Manuel J. Perez de la Mesa
Thank you Kathryn.
Operator
Your next question comes from the line of Joel Havard from Hilliard Lyons. Your line is now open.
Joel Havard - Hilliard Lyons
Thank you. Good afternoon.
Manny, I wonder if you could give us a little insight with your experience on how Q1 demand recognizing the geographic or regional difference, where you're really just talking the Deep South yet. But as you think how that has historically, your experience translated into sort of Q2, Q3 insulation trends as spring moves north.
Manuel J. Perez de la Mesa
Well, it's different aspects of the business. And take it state by state.
If you look at it across the board, again maintenance repair is very seasonally waited, weather is a factor there as to when it gets hot and people begin to use the pools more often when the water temperature in the pool goes up. That results in not only being more chemicals to maintain proper levels of sanitation.
But also it increases the run on the equipment and the taxing of the equipment, which inevitably leads to more repairs and replacements, so that's one factor.
Joel Havard - Hilliard Lyons
I'm sorry, Manny, I was specifically getting to installation trends.
Manuel J. Perez de la Mesa
Like new pools?
Joel Havard - Hilliard Lyons
Yes sir.
Manuel J. Perez de la Mesa
In terms of new pools, at this juncture, I mean... what we're seeing or what we've seen is the first quarter we're generally seeking about half...
Joel Havard - Hilliard Lyons
Right.
Manuel J. Perez de la Mesa
...in the major markets of what they were in the first quarter of last year. I see that the delta year-on-year shrinking and the reason I say that is that the financing markets adjusted in late 2007 early 2008.
So there were a number of consumers that had second mortgages or equity lines approved in the latter part of 2007 that actually built their pool in the first quarter of 2008. Pretty much by the end of the first quarter, those sources of financing were largely packed out.
So therefore given that for the rest of 2008 with... again that financing still financing wasn't enough by and large not being available those consumers have built pools were those that didn't have go there from a financing standpoint to do that.
Now, that's one perspective. The other side is if you look at our current communications from all over the country, frankly it's a mix bag.
The general indication in terms of new pool construction is that it is softer than it was last year, that's overall. But there are pockets, where they are seeing a spike up of activity, which will result in new pools, one, two months downstream, and there are others that have not seen any change in behavior and in fact see a very good result.
But overall, I would say that probably the range of expectations for new installations is probably in the neighborhood of down 30 to 50% for '09 versus '08.
Joel Havard - Hilliard Lyons
A range that shades a bit worst than last year, is it your belief yet that this more sentiment or credit constrained?
Manuel J. Perez de la Mesa
It is both, and I'm not smart enough to figure out which one is more than the other.
Joel Havard - Hilliard Lyons
Thanks for the insight there. One another follow up if I may and that's may be for Mark.
But if you all contain us a (ph) picture of where the company's borrowing capacity is at quarter end?
Mark Joslin
At quarter end, our following capacity was about 65, $70 million, and given the fact that we begun to reduce our debt load earlier this year than really ever before. It is a little higher than that now.
Manuel J. Perez de la Mesa
Yeah, that will be unused capacity.
Mark Joslin
Unused capacity, yes.
Joel Havard - Hilliard Lyons
All right. Thanks guys, good luck.
Mark Joslin
Thank you.
Operator
Your next question comes from the line of Brent Rakers from Morgan Keegan. Your line is now open.
Brent Rakers - Morgan Keegan & Company, Inc.
Yeah, just a couple of follow ups; I haven't heard, Manny, either you... either of you guys just talk about what the trends are early in April, and I guess more specifically some of the retailers that possibly had deferred some orders in March and maybe to the season that going a little bit more.
Can you give us an insight on the April trends?
Manuel J. Perez de la Mesa
Sure. As almost everybody knows, the first couple weeks of April were little cooler than normal.
So that slowed things down a bit. But where we are right now, we are sitting at a sales rate tax that has expected better than we had in the first quarter.
And that should continue to improve as we proceed through the quarter, given the higher mix of maintenance and repair. In terms of the recovery of those early buy shipments to our customers that normally stock their retail stores ahead of the pool season.
And this year are more basing their purchases on natural demands. That really hasn't kicked in yet, that'll kick in more again as the water temperatures increase and the season kicks in more, which will be more so between now and Memorial Day.
Brent Rakers - Morgan Keegan & Company, Inc.
Great. And then Manny, just one last question.
You've talked a lot about how the difference in maintenance demand as a component of the whole is going to improve as you get into Q2 and Q3; but don't the comparisons in terms of the states have become more active, some of the Northern markets that actually were still performing better last year. Doesn't that challenge also come up as you get into the middle quarters?
Manuel J. Perez de la Mesa
Yes, but the proportion of pool construction in those Northern states is a lot more modest. Take a market like New York.
In a case of like a market like New York, they have been and pools have been being built in New York state as long as they were built, call it, in California. The difference is given to whether, the penetration of pools is nowhere near as extensive in New York state as it is in California.
And the rate of building per year is proportionately less. You have and all their market from the...
in terms of fairly mature level from an install base standpoint with incrementally a smaller proportion of new pools.
Brent Rakers - Morgan Keegan & Company, Inc.
Great, thank you.
Manuel J. Perez de la Mesa
Thank you.
Operator
(Operator Instructions). And your next question comes from the line of David Mann from Johnson Rice.
Your line is now open.
David Mann - Johnson Rice & Co. LLC
At the beginning, you talked about several initiatives to help boost sales. Can you just give a sense on what kind of numbers you might be penciling in as an impact there, and which of those initiatives would you expect the biggest impact?
Manuel J. Perez de la Mesa
Well, what I'd rather do, David, is I've mentioned upfront this time in terms of... as we kick those off and have kicked those off for the past several months.
I'd rather report on the actual results as we go through the year. And the reason I say that is, now certainly we've got headwinds in the environment.
And I may say well, this will generate another 10 million in sales or 15 million or whatever the number is. But that may get lost against something else.
So I'll just capture those as we see the results happening through the year.
David Mann - Johnson Rice & Co. LLC
Okay. I think on the last call, Mark, you may have made some comments on how you thought Latham (ph) would perform this year.
It seems like the first quarter performance was a little bit worse. Can you just give an update on how you think that will trend?
Mark Joslin
Sure, as we mentioned last time David, Latham is a... this is more focused on construction market in terms of a heavier waiting of their business in construction.
They also... being a package pool provider, supplier, have a heavier waiting in central and Northern markets in the South.
And given the more significant downturn on the construction side, they're going to be preferred this year in terms of their results. So we may look at results from that being a little softer than the guidance that we gave on the last quarter's call, and we see that some of that impact in the first quarter here.
David Mann - Johnson Rice & Co. LLC
Okay. Thank you very much.
Mark Joslin
Okay. Sarah, I think that's all we have time for this morning.
Operator
And there are no further questions at this time.
Manuel J. Perez de la Mesa
Thank you all again for listening to our first quarter 2009 results conference call. Our next call is scheduled for Thursday, July 23rd when we will discuss our seasonally most important second quarter results.
Thank you again.
Operator
This concludes today's conference call. You may now disconnect.