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Article Excerpt
MANUEL PEREZ, PRESIDENT & CEO, POOL CORPORATION: Thank you, Joan. We'll get started. The objective here is to give you an overview of the Company, give you some perspective in terms of what the opportunities are and then also be able to answer any questions you may have.
Our first -- to start, you are familiar with our forward-looking statements. You have seen this many times. This is probably very similar to others. So this part of the presentation is probably not unique to us.
In terms of history, we have been very fortunate over the context of a number of years to continue to perform in various kinds of market conditions and what you see reflected here are sales gross profits and operating profit and how we have done over a 10-year period of time. And again, this includes '07 in the numbers and in another quarter, it will include '08, but what you can see is that despite a severe adjustment in the real estate market, much more severe than we are seeing in the overall economy in the course of the past two, three years, we are still weathering the storm fairly well.
Going through the P&L, the net income and then diluted earnings per share, strong record over the course of time and then return on equity, which is a key consideration for us in terms of how we have done and what we continue to do.
One important factor when it all plays out is that we really run our business based on cash flow and use of that cash flow over an extended period of time and the fact that our cash flow from operations is approximately equivalent to net income despite the growth of the business in terms of working capital to distributor is I think a reflection of our performance there.
You have some statistics here. You are probably familiar with a good many of them. Obviously, the pool industry, particularly with respect to new pool construction, has been adversely impacted over the past two, three years from the fallout that has taken place. And although we are not directly tied to new home construction in the sense that very few new pools go into new homes, many of the same factors that play favorably or unfavorably, for that matter, for new home construction and other like major discretionary expenditures play like for us.
But despite that, in our business, we have been, again, weathering the storm and providing some stability overall. Our sales on a year-to-date basis for September and by the way for those of you that don't follow the Company, our biggest two quarters of the year are the second and third quarters of the year. The fourth and first quarters are, relatively speaking, very modest quarters as pool use is a lot less in the winter than it is in the summer.
But basically our sales on a year-to-date basis for September are down 6%. We captured some of that shortfall with higher gross margins and therefore our gross profits are down only 2.5%. Our SG&A is up a modest 1.5% and in fact, taking out a, relatively speaking, small acquisition that we did earlier in the year, our actual same-store base business SG&A, in fact, is down year-on-year. And then operating income is down a little bit over 10%. EPS is down 7% and most importantly, our cash flow from operations is up for the year.
By the way, it is important also to note that many companies in the industry have an October 1 through September 30 year and the reason they do that is because that is really the pool season. We still maintain a calendar year from a financial reporting basis, but a lot of our own internal statistics are on a pool year basis. So September 30 for us essentially marked the end of the 2008 pool season.
Now in terms of our customer base and our business, first, I am going to describe what we refer to internally as the blue business. The blue business here domestically represents approximately 80% of our total business. And what is important to appreciate here is that a strong proportion of our business is comprised of products used in the maintenance and repair of existing pools.
Again, and I will mention it again later, the biggest driver for us in terms of sales is the existing installed base of pools, be it in-ground or above-ground. And here, what we have is that approximately 60% of our sales go to either the retail sector or the service and maintenance sector and these kinds of customers are basically selling products and services to take care of existing pools, basic maintenance-type products and non-discretionary.
A third component are the replacement and remodeling of existing pools. That represents approximately 25% of our sales and here, some of that is discretionary. Depending on the product, depending on the issue, some items are more discretionary than others. For example, a pump. If a pump breaks, the consumer basically has two choices -- either repair or replace the pump. Usually based on the age of the pump, that drives a decision. So a pump that may be eight or 10 years old is more likely to be replaced where a pump that may be only two or three years old is more than likely to be repaired. But the pump has to be there and it has to -- as a way of circulating the water. So that is almost nondiscretionary.
On the other hand, within the context of replacement, you have heaters. Many people use a heater to extend their pool season and a heater is much more discretionary. You certainly don't have to have a heater on your pool. We would like everybody to have a heater, obviously, but it is certainly not a requirement. And a good many pools don't have heaters today.
But having said that, if somebody has a heater on a pool and that pool heater breaks down, they could certainly defer that replacement. So within the context of some discretion, that basically that covers the gamut in terms of some items that are, in fact, postponed like a heater and...
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