Jul 23, 2009
Executives
Manny Perez de la Mesa - President & Chief Executive Officer Mark Joslin - Vice President & Chief Financial Officer
Analysts
Michael Cox - Piper Jaffray Kyle O’Meara - Robert W. Baird Jeff Germanotta - William Blair Anthony Lebiedzinski - Sidoti Brent Rakers - Morgan Keegan Keith Hughes - SunTrust Joel Havard - Hilliard Lyons David Mann - Johnson Rice & Company Joan Storms - Wedbush Kathryn Thompson - Thompson Research
Operator
Good morning. My name is Kim and I’ll be your conference operator today.
At this time, I would like to welcome everyone to the Pool Corporation’s second quarter 2009 Earnings Call. All lines have been placed on mute to prevent any background noise.
After the speakers remarks, there will be a question-and-answer session. (Operator Instructions).
Thank you. Mr.
Joslin, you may begin your conference.
Mark Joslin
Thank you Kim, good morning everyone and welcome to our second 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 the actual results to differ materially from projected results is discussed in our most recent Form 10-Q as filed with the SEC.
Now I’ll turn the call over to our President and CEO, Manny Perez de la Mesa. Manny?
Manny Perez de la Mesa
Thank you, Mark. Thank you all for joining us today.
I will first review our progress today on our priorities in 2009 given the challenging market environment that we are facing. Our first priority is cash flow generation.
Year-to-date we are attracting $71 million ahead of 2008, given our focus on working capital management especially the internal rebalancing of inventories. This progress has enabled us to reduce our debt by $108 million in the past 12 months.
In a market environment where cash is king, I believe we have done well and anticipate that we’ll surpass 2008’s record cash flow generation in 2009. Number two, the sales and market share.
While sales are not where we’d like for them to be, we believe that we are continuing to capture profitable market share. Here it’s important to clarify that low margin and high credit sales are not profitable and which specifically work to avoid those kinds of transactions.
This consideration has a greater importance over the past several years given the market conditions in our industry. Number three, margin management.
We continue to make progress, but today’s market dynamics make that difficult. The reality is that in 2009 virtually all irrigation and landscape distributors and a good many swimming pool product distributors are realizing operating losses.
In these cases, rationale pricing behavior is sometimes non-existent. We address these situations on a case-by-case basis to protect profitable market share understanding that our service levels and value added programs enable us to generally price at a premium as well as our operating efficiency and purchasing power enable us to sell at a profit when others cannot.
Just like it would be silly for an independent retailer to try to gain sales by under pricing Wal-Mart, the same silliness sometimes applies in our industry. The only time I’ve seen that work is when they are going out of business sales but then they are out of business.
Logically, we generally don’t respond to going out of business sales. Number four, expense control, we’ve made good progress right-sizing our organization for today’s business volumes but have not in any way compromise our ability to grow effectively again once the market recovers.
In fact, we believe that we can support over a 30% increase in sales without adding a facility or professional staff. This provides us significant operating and working capital leverage for several years into the future.
To translate all of the above for 2009, we expect our sales rate versus 2008 to remain similar to the second quarter ‘08 in the third quarter with modest improvement in the fourth quarter given easier comps. Gross margins will be similar to 2008 in the third quarter with potentially modest fall off in the fourth quarter given tougher margin comps.
The rate of excess reduction versus 2008 will moderate in the second half as we lack some of the adjustments made last year. Altogether, this should result in EPS of a $1 to $1.5 for the year with cash from operation approaching a $100 million.
In terms of sales by major market, the horizon or green business was down over 30% both in the second quarter and year-to-date, given the waiting of new construction with negligible variation from market-to-market. We remain confident that we are doing what we need to do in this area to grow share, manage margins and control expenses.
While the volatility of new construction is certainly greater than anticipated by us, we are taking advantage of opportunities to improve the business and enhance our market position. Our SCP Superior or blue business sales were down 11% in the quarter and 13% year-to-date.
The largest market, California was down 10% in the quarter and 14% year-to-date. Now for good news, the second largest market, Florida was flat.
Yes it was flat in the quarter and down 5% year-to-date. These results in Florida are despite new pool sales being down over 40% from already record low levels.
Going on to other states, the third largest market, Texas had declines, sales declines of 14% both in the quarter and year-to-date. After holding up relatively well in 2007 - 2008, the Texas market began to feel the adverse market factors late in 2008 and through this year.
All other markets were down 12% in the quarter and 14% year-to-date. Two additional external factors to note are that weather has been unfavorable this full season which probably cost us 2% to 3% missed sales, especially in North East and Mid-West markets.
And with the stronger dollar results in another 2% impact on sales from the conversion of international sales. Now mitigating the certainly adverse impacts of lower new construction and discretionary replacement sales, our chemical sales were up 9% year-to-date with POOLCORP branded chemical sales being up 16%.
Despite adverse weather and deferred pool openings in certain markets, part sales were also up in the first half of 2009. It’s important to point out here that over 80% of the basic maintenances of pools is done by the pool owners with our sales to the professional trade.
That being service companies for repairs and maintenance companies for sanitation and upkeep together with the independent specialty retailers altogether enabled us to participate in the largely non-discretionary portion of the pool industry. As this year develops, we are gaining increasing confidence that 2009 will mark the low point in this market constructions.
Industry, new pool and irrigation sales are down already 75 to 80% from peak year levels and industry replacement product sales are down roughly 40% from peak year levels. We believe that replacement product sales will recover first and recover faster given the lower cost to consumers and the reality that the pools and the equipment can only be patched up for so long before replacement becomes inevitable.
We also believe that new pool and irrigation sales will lag the recovery and recover slower as the higher consumer costs and the much greater dependency on real estate values and customer financing will push out industry volume recoveries to normal levels. Given the above market expectations, we remain focused on the same four priorities, cash flow generation, profitable market share gains, margin management and expense control.
In the process, we will continue to grow in strength as a company, taking full advantage of operating and working capital leverage opportunities while addressing whatever network and product line expansion opportunities become available. Ultimately, we will continue growing our share position and providing attractive returns on invested capital.
Now I’ll turn the call over to Mark for his financial commentary.
Mark Joslin
Thank you, Manny. My comment this morning will address our operating expenses, our equity investment in Latham, working capital, cash flow and debt.
Starting with operating expenses. As has been the case throughout the last two years, managing our operating expenses in line with the external environment has been a major focus for us, one that has gain momentum as time has progressed.
With expenses down in the quarter 15% year-over-year on essentially the same sales center base, we continue to make excellent progress on this objective. Now for some of the highlights.
Excluding the impact of employee incentive costs which can vary quarter-to-quarter depending upon our actual and expected profitability and other factors, our operating expenses were down over 11% year-over-year for the quarter with labor and related costs being the largest contributor to this reduction also following 11%. Going into the pool season, we have largely made all the necessary headcount adjustments to manage our anticipated reduced volume and along with close management of the discretionary aspects of labor, including overtime and seasonal help, this was the major factor in lowering our cost base this quarter.
In what I would call our miscellaneous cost category which combined makes up the next largest group of costs, our expenses were down 12% year-over-year. This includes things like travel costs, phones and computer equipments, supplies, administrative vehicle costs, advertising, insurance and non-income based taxes.
Employees throughout the company have undertaken initiatives to drive these costs down 12% this year on top of the reduced spending levels achieved in 2008. Our next largest cost category, facility costs, were actually up 6% for the quarter compared to last year as required GAAP adjustments for future rent increases drove the accounting costs higher.
This is an area of ongoing focus and opportunity for us given the soft real estate market. Delivery costs which are also a significant cost for us and are more closely tied to sales volumes, fell 28% year-over-year as lower fuel costs and 10% fewer delivery vehicles added to our savings.
All in all, we believe the efforts undertaken by all our employees to actively reduce our operating cost structure without sacrificing our strategic initiatives, has been very successful. For the year, we believe that while we may not continue at a 15% rate of expense decline, we will end the year with at least a 10% lower cost faced compared to 2008.
Moving on to our equity investment results, you will recall that our investment here primarily are 38% share in Latham International which is the leading North American manufacturer of packaged pool and component products. Given the decline of pool construction generally and relatively poor weather in northern markets where packaged pools are more predominant, this business has experienced a sharper decline in results in 2009.
Year-to-date, we’ve recorded equity losses of $1.4 million from this business which we expect could grow to as much as $3 million to $4 million for the full year excluding any potential one-time charges. Turning to the balance sheet and starting with accounts receivable, our net receivables declined $45 million or 16% for the quarter with the expected improvement taking place in our sequential aging.
Our allowance for uncollectible receivables is down 900,000 from Q1 primarily due to write-offs taken but up nearly $2 million from second quarter of last year. Our DSO at the end of the quarter, as measured on a trailing 12 months of receivables was 36.1 days, which was bit better than 36.4 days we had in Q2 of 2008.
Overall, we are happy with our performance here as our team seeks to straight that balance between taking acceptable credit risk and avoiding or cutting off unwanted risk. As we enter the seasonal slowdown over the next few months, we will continue to closely manage our customers’ progress and meeting their payment obligations in this extremely challenging environment.
The other large asset class we’ve been keenly focused on this year from a management perspective is inventory. Our quarter end inventory of $325 million was down $60 million or 16% from 2008 as we were able to maintain lower inventory levels with high customer service.
This look for us to be an area of continued focus for us throughout the remainder of the year, although as in the past we will take advantage of buying opportunities as they present themselves. We will update you with our expectations on our third quarter call.
Turning to cash flow; as I commented on our last call, this is our top priority for 2009 with our goal being to exceed the record cash flow result we had in 2008. We noted that we expected good cash flow results in Q2 and we are happy to report this has been the case.
As Manny mentioned our $36 million of positive cash flow year-to-date at the end of Q2 exceeded last year’s result by $71 million including the Q1, $30 million of tax payment deferred from 2008. Adjusted for this our business cash flow improved by more than 100 million compared to last year, as the decline in our inventory and accounts receivable as well as inventory pre-payments made last year benefited our cash generation this year.
With six months to go, we expect to hold our gain this year and then the year with record cash flow generation. The impact of this cash generation on our debt level is evident with quarter end debt levels of $334 million, down $108 million from Q2, 2008.
This frees up additional debt capacity for us, lowers our interest cost and helps maintain our debt covenants at comfortable levels. When is the quarter with our leverage level at 2.97 which as expected was higher than our Q1 leverage at 2.92, but only modestly so and well below our cap of three in a quarter.
Our fixed charge coverage ratio was 2.43 at the end of the quarter which also was slightly worse than our 2.49 as reported at the end of Q1, but comfortably ahead of our minimum of 2.25. Our expectations going forward there are comment ratios will be similar to or improved from current levels with ongoing improvement throughout 2010.
That concludes my prepared remarks. So, I’ll turn the call lover to our operator to begin our question-and-answer period.
Kim?
Operator
Your first question comes from the line of Michael Cox - Piper Jaffray.
Michael Cox - Piper Jaffray
My first question is what you are seeing thus far in the month of July. I know you commented the 3Q sales decline will be similar to that of 2Q but with weather transferring a little bit more favorable I just was curious what you are seeing now.
Mark Joslin
In the first month of the quarter, it’s really trending very similar to the 13% that we saw for the second quarter overall so.
Michael Cox - Piper Jaffray
Okay. On the gross margin side I know you commented that the gains are going to be slowing here.
I was just wondering if you could just talk a little bit about some of the dynamics there.
Mark Joslin
Well two elements. First as you can well imagine a number of competitors are having higher levels of stress and as they do that some have a greater urgency to convert some of that inventory to cash.
We surely want to protect the profitable market share but we are not going to chase every deal that’s out there. So there is going to be situations where there’s going to be some level of guess that we have to make but on the other hand we will very judicious on how we do that.
Michael Cox - Piper Jaffray
Okay that’s helpful and my last question is just prioritizing cash flow. You have done a great job of bringing the debt balances down.
As you look forward and obviously still an uncertain market but seems to be showing some signs of improvement here. How do you prioritize the use of cash on a go forward basis here?
Mark Joslin
Well Michael it’s a good question and really fundamentally the first priorities are intact and that those being certainly investing in our business internally for organic opportunities whether it be product line expansion which is more of an opportunity currently I’ll say than necessarily facility expansion but internal opportunities is always number one. Acquisitions to further expand our reach in network has been and continues to be number two, then we have a dividend commitments to shareholders and that is point number three and then the last two which should be either debt repayment or share buyback, we’ve kind of sliced back and forth.
Given our current debt levels and everything else we probably would still keep debt repayment ahead of share buyback but certainly when we deliver a bit more, that quarter may shift and share repurchase may come back. But we are not talking in the near term; we are talking out sometime in the future.
Operator
Your next question comes from the line of Kyle O’Meara - Robert W. Baird.
Kyle O’Meara - Robert W. Baird
Could you talk about the overall impact of pricing in the quarter?
Mark Joslin
In terms of price inflation on our sales?
Kyle O’Meara - Robert W. Baird
Correct.
Mark Joslin
At beginning of the year, we were looking at mid single digits and that obviously is occurring gradually during the course of the year. I think when its all said and done for the whole year we’ll be close to that level.
It was more modest than that in the first quarter and probably not fully there in the second quarter but certainly gaining, getting closer as price increases there were announced by manufacturers last year work and sell through the system. So I would say, we’re probably in the second quarter close to mid single digits, we’re probably on the low end of that.
Maybe instead of being four to six, it would be probably closer to four in the second quarter and then probably migrating more to like the four to six range in the second half of the year.
Kyle O’Meara - Robert W. Baird
Great, that’s helpful. You said improved gross margins on private label, your POOLCORP private label, what percentage of your overall sales is that today and where do you ultimately think that could go?
Mark Joslin
We are running 20 - 21% of our sales currently in private label and that is growing at a rate of 1 to 2% a year. That’s been the case now for the better part of the last 10 years and we’ll continue to do that on a calculated basis, ensuring first and foremost that in no way, former fashion we adversely impact our ability to serve our customers.
So we have to make sure that we have the right product quality and have the right sources in place to make sure that we have the right service levels to our customers and then gradually implement that to make sure again that its seamless throughout the whole supply chain.
Kyle O’Meara - Robert W. Baird
Then, thanks great. Finally, I guess knowing gross margins are higher on the private label, is there any difference in the EBIT margin between branded and private label?
Mark Joslin
Difference in gross margin would come down all the way.
Operator
Your next question comes from the line of Jeff Germanotta - William Blair.
Jeff Germanotta - William Blair
It sounds like you’re feeling a little more optimistic that we’ve hit the low watermark here. Are you seeing anything in the early part of July that helps reaffirm that thought?
Manny Perez de la Mesa
Nothing overwhelming. I think one of the points here to stress is the fact that couple of things, certainly new pool construction levels can’t be any lower, to speak of, they are already so low.
I mean people are patching up, but that’s going to start coming back soon. Then you go to Florida, as an example, Florida, as you know Jeff and many on the call know, was the first market to begin to feel the effects of the real estate market.
The consequential impact on our business as well as those discretionary figures, and the fact that sales were flat in the second quarter is I think a strong sentiment, it is the first market also coming back as well. So, I think that bodes well.
Jeff Germanotta - William Blair
When you think to next year, is it the recovery of the deferred maintenance component that gives you optimism more so than new construction or you’re feeling a little bit better about both elements of the business?
Manny Perez de la Mesa
Just to clarify, there isn’t really any deferred maintenance, it will be deferred replacement. And I try to distinguish because the maintenance side has been pretty steady and case in point being, our chemical sales being up 9% for the year is evidence of the fact that maintenance is maintenance and there’s really little discretionary only impact they really speak of is weather.
In terms of replacement, I see that coming back first, and I see that beginning to come back really next year now and we wont come back necessarily to the levels that we were three or four years ago in 2010. I anticipate that will come back probably over the course of the next couple to the rest three years.
Jeff Germanotta - William Blair
Okay. And then the new construction component, how do you think about that for 2010 and beyond?
Manny Perez de la Mesa
Well new construction is more of a wild card. The levels there are already depressed, very depressed.
I don’t see those coming down or coming off anymore than they are now. But I see that coming back slower and really a lot of it depends on the real estate markets stabilizing.
And once those markets stabilize and existing home values begin to recover pushing the cost of new homes then I think bank will begin to lend again against home values. And there will be some ability in the part of the consumers then to begin to invest but I see that lagging and 2010 in my mind not being significantly different than 2009.
Jeff Germanotta - William Blair
And then once again looking a little longer term as earnings recovery or cash flow strong, you continue to gain cushion on your debt service covenants. How and when do you see acquisitions becoming again part of the grow story?
Mark Joslin
Well acquisitions continue to be part of the grow story. We haven’t deferred or [passed] on acquisition.
When we went through the priority list, it still remains up there and I mean in fact is very high. It has to make sense obviously we maintain the same discipline in terms of return on invested capital and obviously the main driver there is the ability to expand the reach of our network and take advantage of operating efficiencies wherever possible.
So that’s the driver there and if the right acquisition is available at the right valuation today, we will be executing today. And by the way, we would have done that three or six months ago as well.
So I think there is obviously been two elements that impact back. One is where we have a high share of market and I’ll just elaborate here but this is important for people to appreciate.
Well we have a high share of market, the value of an acquisition is less then we only have a low share market and a logic there is when we have high share of market given the nature our business been very local. We already serving the lion share of the competitors in that market, always the customers in that market.
So therefore we don’t gain any new customer relationship per se out of the equation and that’s not to say that we don’t do those but in those cases the valuation is different. On the other hand, what we have a situation where we have limited to no market presence and we are looking at our the alternative of opening a new location versus an acquisition when we map one against the other in those cases, often times, an acquisition is more attractive given that it saves us at least several years of operating losses that we’d incur as we quite establish our presence in that market.
Operator
Your next question comes from the line of Anthony Lebiedzinski - Sidoti.
Anthony Lebiedzinski - Sidoti
A couple of questions. First you mentioned in your remarks and in your press release that you did have a pick up in sales of maintenance repair products because of some regulatory changes, governing pool and spa safety.
I was wondering if you could just quantify that and also talk about the sustainability of that trend.
Manny Perez de la Mesa
Anthony as usual you are extremely absurd. The order of magnitude there is similar to the impact of currency and which is in both cases of about 2% of sales.
So, therefore there is still a majority by every indications of the pools, commercial pools out there that are in noncompliance. So to the extent that those pools whether be through mandates on the part of the Consumer Product Safety Commission and it just taken by states or municipalities to enforce the law.
We anticipate that will continue, that revenue stream will continue for at least the next 12 to 24 months as that’s put in place. The order of magnitude maybe a little different but that’s the fair expectation there.
And the author of that was currency and I can’t really project currency. Hopefully though it won’t be adverse in the future as it is and as it was in the quarter and year-to-date.
Anthony Lebiedzinski - Sidoti
Okay, got it. As far as your expense structure, you’ve done a good job right-sizing your cost structure now.
Once we see an improvement in the economy and you guys start growing revenues. Would you say that the expenses then will grow at a slower rate than your sales?
Manny Perez de la Mesa
Yes. It’s a good point.
As indicated in my comments, we can do over 30% more sales from our existing facilities and with the existing professional staff. So, therefore to the extent that where that sales grow then we, certainly we’ll need to add cost particularly in the form of individuals working in our warehouse, more drivers, more trucks, more inside sales support, those kind of costs but the contribution margins at that point will be 20% or better.
So, therefore logically there’s a lot to be had there in terms of an opportunity.
Anthony Lebiedzinski - Sidoti
Okay. And you mention that your competitors in the irrigation landscape business are suffering as they are undercutting with their pricing.
Do you see that as an opportunity later down the road for you guys to make acquisitions there or some weakened competitors?
Manny Perez de la Mesa
Yes. When you dissect that business, I don’t believe there is any distributor in the U.S.
that’s in the irrigation space that will be profitable this year. In fact I also when you go through those same numbers I believe a good many of the swimming pool distributors will also not be profitable this year.
But logically the irrigation space given the fact it’s tied more towards new construction is more adversely impacted than the pool side that has a component of maintenance that’s nondiscretionary. So, acquisition opportunities will become available yes.
There has been ongoing dialog with distributors in a number of markets for the last several years and those will continue and it’s just a matter of the right situation, the right opportunity, the right valuation all coming together.
Operator
Your next question comes from the line of Brent Rakers - Morgan Keegan.
Brent Rakers - Morgan Keegan
Yes, good morning. I wanted to start first Manny with your comments about price inflation and then understand how to reconcile that with I think it was Mark’s comments earlier about gross margins in the second half and with the fact that costs on products have already been increased to you guys but you still expect to get another percent up in price in the second half.
Why would that not boost the gross margins during the second half of the year?
Manny Perez de la Mesa
The reason is that when you look at quarter-on-quarter, we still had in our weighted average costs in the early part of the second quarter, a lower weighted average cost than we currently have. The reason for that is because, while the lion’s share of the inventory purchase pre-price increase was sold by the end of the first quarter, there are still some lingering impact and that’s the 1% that roughly they were talking about.
Brent Rakers - Morgan Keegan
Okay perfect. So, the match is running pretty clean through these price increase?
Manny Perez de la Mesa
Yes. Yes.
Brent Rakers - Morgan Keegan
Secondly, can you give me a sense of what the employee numbers increased during the quarter and maybe the impact I know you focused real hard on the seasonal hires, what the cost savings attributable to your lesser seasonal hires this year versus last year might have been to the SG&A savings.
Manny Perez de la Mesa
Okay. Specifically I’ll tell you that in terms of our employee base in total, we were -- we had 10% less employees in total at the end of the first quarter and we also have 10% less employees at the end of June.
And in terms of temp labor specifically, now temp labor is only one small factor that’s only on a year-to-date basis a difference of about $1.5 million. But really the savings come from reduced number of employees in the warehouses and onsite sales support and drivers.
One point that Mark made was the fact that our fleet is down. Delivery fleet is down 10% and that includes both vehicles as well as drivers.
Operator
Your next question comes from the line of Keith Hughes - SunTrust.
Keith Hughes - SunTrust
Thank you. Your Florida data point was one of the best I’ve heard in several years in any product category in that state.
Can you give any sort of feel for was it, what part of Florida was better than others, products, any sort of detail will be great.
Manny Perez de la Mesa
Not really. I mean certainly what I will tell you is that the areas in Florida that were more affected by new construction are still feeling those headwinds, whereas those markets where you have a larger installed base of pools, those are the ones that are more positive.
So for example, if you take in aggregate, Southeast Florida which would be West Palm, Broward and Miami Dade County, those areas have a very large installed base of pools and those areas are relatively fine or more positive. You take The Greater Tampa Bay area going from lets say a fringing on Brighton on the south up through Clearwater Largo in the north.
Those areas held up better. On the other hand, the areas that are more inland or newer development areas.
I will call like Port St Lucie County, Polk County. Those areas are more affected; again, more of that business there was tied to new construction proportionately.
It’s a young group pool market. A lot of the pools there were put in the last 6, 7 years and therefore they’re needs are not as great.
Operator
You’re next question comes from the line of Joel Havard - Hilliard Lyons.
Joel Havard - Hilliard Lyons
I appreciate the earlier comment on the headcount reduction. I wanted just one quick elaboration on that.
Was the 10% Q1 versus Q4 followed by another 10% reduction Q2 versus Q1?
Manny Perez de la Mesa
No, I’m sorry. To clarify, it’s 10% versus same month last year.
Joel Havard - Hilliard Lyons
It’s remained there, okay, good. Then to put some additional quantification or at least a sense of proportion on that.
The payroll reduction, the biggest piece followed by the incentive, I guess accrual reduction followed by transport or how would you describe that? This is as you cited it in the release this morning.
Manny Perez de la Mesa
You’ve got that. It’s all right.
The miscellaneous cost category after payroll and incentives such as miscellaneous cost category being the next largest cost category where we had a 12% reduction. That would be in front of the freight.
Freight is a smaller part. It’s about 7% to 8% of our total SG&A cost even though the savings there are in the 27%, 28% range, the smaller piece.
So I put that as a final list.
Joel Havard - Hilliard Lyons
I’m presuming you guys are hoping for increased incentive compensation next year. You’re thoughts on transport.
Are you kind of flat lining it from here? Are you allowing for some additional inflationary pressure on fuel well as you think about the second half and into ‘10?.
Manny Perez de la Mesa
If we look at the second half, really, we are not seeing any significant or just been any significant differences on the freight side. There could be a component of fuel increase but again year- on-year we anticipate overall the savings will be similar.
On that segment and to the hinders or variation as Mark mentioned that’s a smaller component to the total. The reason that the drastic improvement falls off in the second half is because of the changes and adjustments we’ve made in the August, September, timeframe of last year.
And as we lack those in the second half of this year certainly that mitigates that benefit.
Operator
Your next question comes from the line of David Mann - Johnson Rice & Company.
David Mann - Johnson Rice & Company
In terms of the expense guidance that you gave, can you just compare to the first quarter? I guess you said the first quarter you thought it would be down 8 to 10% now, 10% plus, what’s driving that difference?
Where are you doing better?
Mark Joslin
On the initiatives undertaking by our people throughout the organization on working aspect every possible and just being creative and finding new ways to manage the business, taking a great degree of ownership and treating it as if they were where their own money that was being spent and not from third parties.
David Mann - Johnson Rice & Company
And in terms of the bonus item, can you quantify how much the bonus benefited year-over-year?
Mark Joslin
The adjustment there is about of several million dollars in term of the quarter number.
David Mann - Johnson Rice & Company
Closer to five or three or…
Mark Joslin
Yes, in the four to five range. Four for the quarter and five for the year, I guess little bit of guidance in terms of expense reduction excluding the bonus being 11% so.
David Mann - Johnson Rice & Company
Okay. The $5 million you are saying is the year-to-date number?
Mark Joslin
Year-to-date number. Yes.
David Mann - Johnson Rice & Company
Okay. How much in the guidance do you think bonus will be down?
When you are talking about doing about five, how much year-over-year decline in bonus?
Mark Joslin
It maybe less than that because if we actually come through and then we certainly expect to do so with $5, there would be some recovery in bonus in the second half of the year.
David Mann - Johnson Rice & Company
Okay. Then Manny on the last call you talked about how a lot of the retail customers.
There was deferred inventory buying behavior going on in the first quarter. Can you just comment on how that played out into the second quarter and just what do you think in terms of the general health of some of those retail customers that you service?
Manny Perez de la Mesa
Right. It’s good that you guys keep good notes and all the stuff.
Just for all you guys on the call, typically our retail store customers stock up before the season starts in order to be fully ready for following the market hits. A lot of that as we did towards chemical products as well as various accessories, leaf net, brushes those kind of things.
Those product categories define and that’s why I reference in terms of chemical sales specifically the fact that we are up 9% year-to-date. We were not quite running at that rate in the first quarter because of those retailers who were working closer to divest going into the season and essentially the market, we’ve done well.
Now and there logically there’s some gain in share but still we’ve done well. Their financial health is fine, if those that are strictly retail should be doing no problem.
The issue really from a stress on customers is more on those that are more heavily weighted towards new construction and to the extent that they’ve altered their business model and taking cost out and certainly change their personal lifestyles, those guy fine. For those that are still living as if it were 2005 or 2006, those guys are certainly in distress and probably no longer customers.
Operator
Your next question comes from the line of Joan Storms - Wedbush.
Joan Storms - Wedbush
Hi. Thank you for taking my question and so nice to see it, finally a stabilization in the marketplace.
All right, Mark I was wondering if you could, I don’t have this right in front of me and I apologize but there’s a couple of different pieces to your debt and I was wondering what the next piece is that’s coming due, have big is it and what’s your preliminary thinking on refinancing there?
Mark Joslin
Sure. I’m sorry Joan, just the last part of your question again?
Joan Storms - Wedbush
What was your preliminary thinking on refinancing that piece?
Mark Joslin
Okay. Yes.
We have a piece to our capital structure and the asset backed receivables securitization facility. That piece was up for renewal in May and we extended the term for three months, so that expires in mid to late August.
That’s a $25 million facility. We’ve brought our borrowing down on that.
Our capacity excluding that facility is more than adequate for our needs in the current period. So as we get into next year, when we look at working capital build and our needs there, we may look at some additional capacity.
We will look at it but we may not add it. So, that would be kind of our current consideration going into the season or whether we need some short term capacity there.
Longer term, the private placement, well we have a term loan, $60 million term loan. The original value is amortized down to about $51 million now.
That is amortized through the end of 2010 and then following that is a private placement $100 million which comes due in 2011 or early 2012 and the revolver is due in late 2012.
Operator
Your next question comes from the line of Kathryn Thompson - Thompson Research Group.
Kathryn Thompson - Thompson Research
Hi. Thank you.
Just on the maintenance. Could you give your D&A and CapEx guidance for the year and also remind us of the overall interest expense target for the year?
Mark Joslin
Sure. In terms of D&A, we can essentially take from the cash flow statements and essentially double the year-to-date number as the D&A expectation for the year.
Kathryn Thompson - Thompson Research
And CapEx …
Mark Joslin
Which would be approximately $11.5 million to $12 million and then there is another $6 million on share based compensation. So, the total will be more like $17 million to $18 million.
Okay. What was your second part of your question?
In terms of interest expense, it would be a little bit more modest in the second half of the year than the first half given the fact that we have lower average borrowings in the second half.
Kathryn Thompson - Thompson Research
Okay. Going back to the bonus contribution in the quarter and save that $4 million for the quarter and $5 million for the year and so in your last conference call you said about 95% was not too far off.
Mark Joslin
Right.
Kathryn Thompson - Thompson Research
We are sure what the street number was in terms of guidance. But it appears that a little over half of essentially the raise guidance is can be contributed to your lower bonus contribution.
Is that a correct way to think about this?
Mark Joslin
No. Because what happened there last year, Kathryn was that we were over accrued in the first half of the year given where the actual year ended up.
What happens is that we make a projection in terms of what our earnings will be. A good portion of our incentive compensation is whether it be the local, regional division or my level, it’s directly or indirectly tied to earnings.
So therefore as the earnings base eroded during the year. We had to make adjustments during the year.
So, in the second half of the year in fact we had to reduce the bonus accrual because of that erosion of earnings and then therefore we through the first half retrospectively were over accrued. This year we are looking at the numbers for the year and if it comes out the way we expected then our accruals will map close to operating profits realized during the year.
Therefore the current accrual is more accurate to the extent that we exceed $1 to a $1.5. The incentive comp would be even greater than we estimate to the extent we fall short of $1, $1.5 the final incentive comp accrual for the year will obviously be less.
Kathryn Thompson - Thompson Research
Thanks. But still year-over-year, year-to-date it’s $5 million lower?
Mark Joslin
Yes.
Kathryn Thompson - Thompson Research
Okay. Just in closing, any inventory targets for the year?
Mark Joslin
To maintain the same level of change as you have seen in the June numbers which are mid-teens type of percent change year-on-year.
Kathryn Thompson - Thompson Research
Okay.
Mark Joslin
So that’s a reasonable expectation at this juncture.
Operator
Your next question comes from the line of [Jacob Shrum] with [Inaudible].
Unidentified Participant
Hi guys. Do you agree with free cash flow this year came in at $42 million, last year at $52 million, just want to make sure I have my numbers are right?
Mark Joslin
You’re saying for this year’s free cash flow?
Unidentified Participant
Yes this quarter, just net income plus D&A, less CapEx was $42 million versus last year at $52 million?
Mark Joslin
That’s on a year-to-date.
Operator
There are no further questions at this time. I turn the call back over to you.
Manny Perez de la Mesa
Thank you, Kim, Jacob if you are still on the line if you could get back with Craig and reconcile the numbers I’m not sure what the numbers you were referring to were coming from. Thank you all again for listening to our second quarter 2009 results conference call.
Our next call is schedule for Tuesday, October 27. There is a slight change in our schedule since I won’t be available on the normal Thursday that we have our call in October but so we are putting it out to Tuesday, October 27, 2009 when we will discuss our third quarter results conference call.
Thank you again for listening, bye.
Operator
This concludes today’s conference call. You may now disconnect.