Mark Joslin - CFO Manny Perez De La Mesa - President and CEO.

Matt Duncan - Stevens Inc. Ryan Merkel - William Blair David Manthey - Robert W. Baird David Mann - Johnson Rice Anthony Lebiedzinski - Sidoti & Company Anjali Walia - Wunderlich Securities.

Good morning, and welcome to the Pool Corporation’s First Quarter 2014 Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Mark Joslin. Please go ahead. .

Thank you. Good morning, everyone, and welcome to our 2014 first quarter earnings call. I would like to remind our listeners that our discussion, comments and responses to questions today may include forward-looking statements, including management's outlook for 2014 and future periods. Actual results may differ materially from those discussed today.

Information regarding the factors and variables that could cause actual results to differ materially from projected results is discussed in our 10-K. Now I'll turn the call over to our President and CEO, Manny Perez De La Mesa. .

Thank you, Mark, and good morning, to everyone on the call. We had a solid first quarter with sales heavily weighted by the Euro markets. One item highlighted in our release was the increase in customer early buys. These early buys are primarily directed to help our customers, especially retailers position themselves for the upcoming season.

The year-to-year net increase of $8 million in customer early buys represents sales recognized in February-March this year that are typically recognized and were recognized in April-May of last year.

Building material sales again increased by over 20%, reflecting the ongoing recovery in remodeling activity are capturing a greater share of this business and ongoing broadening of applied offering. Building materials gross margins are comparable to our overall company gross margins.

Equipment sales increased by almost 13% in the quarter reflecting primarily the ongoing recovery in replacement activity, equipment gross margins are lower than our overall company gross margins and the increase of equipment in our sales mix since 2011 represents an important factor in a decline of our gross margins since then.

Given first quarter activity and our visibility for the balance of the year, we continue to believe that mid to upper single digit percentage sales and gross profit growth is a reasonable expectation for 2014.

Of course no business is taken for granted, as we start each year with zero market share just like in most sports start with a zero-zero score. During the course of the year we earn our customers’ businesses or business by providing exceptional value with a value proposition unique to the needs of each customer in each unique market.

Our people are the ones who provide both our customers and suppliers a value which is unique within our industry. Part of the value we provide our customers are trading events, like our retail summit, with many such events held in the first quarter. These events have evolved over time.

More and more customers are attending, reflecting positively once again on the value being provided. At this juncture of the year our daily sales are increasing consistently and we look forward to another successful year. With that, I’ll turn the call over to Mark for his financial commentary. .

Thank you, Manny. I’ll start with a few comments on our SG&A costs. As I mentioned on past calls, our goal here for 2014 and over the long term is to grow our operating expenses at about half the rate of our gross profit growth.

We can do this by taking advantage of underutilized capacity in our workforce and facilities, leveraging our gross profit growth and a greater operating income growth.

A challenge that we face in 2014 in meeting this goal is the growth in our management incentive, which is inherent in our performance expectation for the year after the relatively weaker performance here in 2013.

We expect our 2014 performance based pay will be $4 million to $5 million higher than in 2013 with most of that being booked in the second and third quarters. This makes achieving our 50% of GP growth goal a bit more challenging this year. One other P&L comment is on our interest expense line which was up about $300,000 from last year.

This increase was actually the result of exchange losses on settlement of foreign currency purchases in the quarter and not through interest expense which was down slightly year-over-year. Our average debt for the quarter of $278.2 million was up 13% from last year while our effective interest rate on debt was down from 2.6% in 2013 to 2.2% in 2014.

We continue to have ample debt capacity with leverage of 1.44 on a trailing 12 months basis at the end of the quarter.

Turning to our balance sheet and cash flow, you can see that our total net receivables grew 12% year-over-year, which was roughly in line with our sales growth, while our inventories grew at a more modest 7% rate with nothing of note to discuss here.

Our cash flow goal for the year, as it is every year is to generate cash from operations that meet or exceed net income. At this point, we see no issues in achieving in 2014. Moving on to share repurchases and share count, we repurchased a total of 484,000 shares in the quarter at an average price of $54.56 for a total use of cash of $26.4 million.

No shares have been repurchased since the end of the March.

Our share count forecast by quarter, which is based on repurchases to-date and which are fully diluted shares, except for Q4 which are basis is as follows; for Q2, 46,409,000 shares; Q2 year-to-date 46,303,000 shares; Q3 46,636,000 shares; Q3 year-to-date 46,510,000 shares; for Q4 basic 45,638,000 shares; and for the full year 2014, 46,596,000 shares.

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

Eddie?.

Thank you. We will now begin the question and answer session. (Operator Instructions) Our first question comes from Matt Duncan from Stevens Inc. Please go head..

Manny, I’m curious if you can talk a little bit about why you think maybe your customers were buying products in February and March that they normally would have bought in April and May? What is that you think they’re seeing that caused them to make those earlier buys?.

Well, I think that when you look at last year; last year and particularly in the seasonal markets was a very late start and given that late start, the expectation, general sentiment started toward the end of the year and reflected in our stronger growth as we finish the year.

I think there’s a sense of optimism regarding ’14 and in mid cases of them matter of a few weeks in terms of when they decide to receive their orders and get their stores full stocked up. So that’s really largely a reflection I think of optimism, particularly given last year’s very late season..

Okay, that helps. And then just looking at your revenue growth for a minute here, it seems as though it’s being driven primarily by refurbishment and obviously some replacement activity.

You guys have added a lot in terms of building materials products to your portfolio over the last five years and I guess there’s been this thought there’s a lot of pent up demand over refurbishment activity.

How much more of that market do you think you are now in position to participate in because of how much you’ve broadened your product portfolio of building materials price? They’re used in the refurbishment of existing pools?.

Great question, Matt. When you look at 2013, the building materials product segment represented approximately 10% of our sales. And we see that segment growing at a much greater rate, much higher rate than our overall business over the next five years at least. And that’s -- several factors play into that.

One is what you mentioned in terms of the gradual recovery of the discretionary spend, where some deferred refurbishment activity is now taking place. A second factor is our increasing our bandwidth in terms of product offering to further be a complete supplier of anything and everything for the outside.

And third is our increase rollout of showrooms where we now have over 80 such locations in North America.

So when you couple the breadth of offering with the ability to help our customers sell that breadth of offering through our new and expanded showrooms and then the overall macro-environment, I think the very powerful statement for the opportunities that exist in building materials..

And our next question comes from Ryan Merkel from William Blair. Please go ahead..

So what was the growth rate for the maintenance products in the quarter, and then you gave some color I think on some of the discretionary product but as you define that category what was the growth rate there too?.

In the maintenance category which we include chemicals and accessories and parts, you’re talking about sub 3% growth..

And then discretionary products, is that up double-digits?.

Yes, discretionary product, the two primary product categories there Ryan would be building materials which were up just over 20 and equipment which was up almost 13..

And I think, maybe it was last quarter, we talked about -- the outlook for the year was that the discretionary business would be up kind of high single-digits and the maintenance business would be up mid-single digits.

Is that a still fair characterization?.

Yes, I think that once the season kicks in, that’s when a lot of the maintenance items are sold and therefore I think that’s in fact still the case..

Okay. And then coming into the quarter here, there’s a lot of discussion of weather and how that might hurt the quarter. I didn’t hear you talk about that in the prepared remarks.

Did weather have an impact at all?.

Not significantly, no. When you look at the markets I mean and I know you in Chicago have had a very long winter - a great weekend, last weekend. The real bad weather pools are basically closed. So there is no real impact.

I think the weather impact is in the seasonal markets more in the shoulders of the season and that really is March and April; March, April, May and then as you come out September, October and November. When you look at that and we look at March activity, March was really not - it was very similar to last year. So no impact there.

So it’s really April and May on the com in terms of what that looks like..

Got you. And last one from me.

Do you still expect gross margins this year to be flattish?.

Yes, I think the fact that if you back out early buys or the change in early buys year-on-year, the actual margins in the first quarter were flat. I think that provides me certainly a lot more confidence and frankly some of these proceeding in April, the fact that we’ll be flat for the year is I think a very fair statement..

Thank you. Our next question comes from David Manthey with Robert W. Baird. Please go ahead..

The shift in early buy timing, this was just customers deciding to do this? There was nothing that you did from your end?.

We typically sell early buys. We start selling early buys to customers in the fourth quarter, proceeding and then the customer then make the decision in terms of when they take delivery and basically coordinate that with us. You also got to figure that it’s I think a mutual decision. It’s not our one hard -- no, it’s their call or our call.

It’s usually a mutual decision as to when they receive the product. The payment terms for early buys typically are May, June timeframe. So in a manner of course they are aware of that and if they take delivery a few weeks earlier, that’s all good and fine..

Okay.

And the reason that the reported gross margin was a little bit lower than what the core would have been at flat, is that because of the discounts that you are giving to your customers based on those purchases?.

Yes, exactly. In fact when we do early-buys, David, instead of providing our customers onesie-twosie type needs to replenish their stock at their stores, in a number of categories we provide solid quantities and with those solid quantities comes a little bit lower price..

Okay. And then to close the loop on this, was there any related change or shift in your buying behaviour to support that.

It doesn’t sound like there was, but anything in terms of the timing or level of the rebates that you get from your suppliers related to this change at all?.

Not at all, zero..

No, okay, great. And then just the last question in terms of the large expenditure and sort of the replacement remodel activity. It clearly seems like there’s some element of catch up to it in terms of some of the big ticket items that have been deferred when consumers were feeling as good about the economy.

But when you look at the demand trends you’re seeing today, you feel these are sustainable.

There might be a pent up demand component to it but you’re feeling better about the underlying demand trends that they can continue long term just because of the economic cycle, where we are today?.

Yes, specifically for example to building materials, building materials growth, which is primarily for refurbishing at this juncture has been growing at a similar type, around 20% rate for the past now two or three years.

Equipment which is primarily driven for replacement activity has been growing on a double-digit right now for the past two-three years. So those are the two big elements in terms of refurbishment and replacement and that’s been strong now for the past two or three years and we don’t see that changing any time soon.

New construction has really not recovered to any significant degree. That’s really -- that's where the real big ticket is. And at this juncture we are not seeing any significant movement from a recovery of new pool construction..

And you would have seen that -- or you would be seeing that right now in terms of as you’re talking with your customers, they are taking order for pools for the season by now right?.

Yes, certainly. I mean, and by the way when I saying there is no significant recovery, as the numbers are creeping up, that’s an order of magnitude standpoint how that translates to our sales, the big driver in terms of both build materials and equipment have been related to refurbishment and replacement..

(Operator Instructions) Our next question comes from David Mann of Johnson Rice. Please go ahead..

In terms of the green business, can you comment, just an update on how that business performed in the quarter and any change in that outlook for the year?.

Appreciate your bringing the horizon network data. Sales were solid at 8% up for the quarter, operating profit was up nicely. So I think that business is performing at expectations.

And they are also benefitting given the waiting of that - of the product you saw that -- and that network is weighted towards the recovery of new construction and we are beginning to see some level of new construction activity, recovery and although the national statistics aren’t as positive given the delay in the weather, we’re experiencing some level of recovery there in what we’re selling.

And also like they were gaining some share without having to compromise margins..

Great. In terms of expense growth, can you quantify the couple of items that you mentioned in the release, the professional fees and the marketing event and then also Mark, I thought that I heard on the last all read in the K that you seem to have expected growth at about -- expense growth at about half of the sales for GP growth rate.

Is there something going on now to give you little more -- point back a little bit from that kind of guidance for the year next to what are those, what’s that issue..

Yes, David, just on the expense growth; as I said in the prepaid remarks, our target here is the rate of growth would be about half of the rate of GP growth. And we feel good about being able to achieve a little bit of pressure from the incentive cost. First quarter, is a little bit of an anomaly because the sales are lower and has a bigger impact.

So to get the half of the rate of GP growth from the first quarter, our expenses were only up about $2 million beyond what it would have been if they have grown a half rate of GP growth.

And that was really the magnitude between the two items that you mentioned there that we brought up in the press release on the sales meeting retail conference as well as professional fees. So they’re kind of about half each..

And then one last question. Manny, you talked about the trend in April thus far as it pertained to margins.

Any comment you can make about how sales are going this quarter relative to sort of that annual growth rate you’re talking about?.

Sure. I mean -- I’ll just for in the month-to-date, I think we’re tracking pretty well along the lines of what we did in the first quarter, adjusting out the early buys..

As our next question comes from Anthony Lebiedzinski of Sidoti & Company. Please go ahead..

Just a follow-up on the gross margin. So last year you guys talked about, a lot about the some mix shift changes to lower margin categories.

As we look at the first quarter and for the balance of 2014 is that no longer the case or how should we think about the fact that more buying variable speed pumps and another higher priced but lower margin items..

Anthony, we still have the headwinds -- probably the shift as I mentioned in my remarks for equipment.

And the fact the equipment margins are lower, that our Company average, and secondly within the context of equipment what you just mentioned in terms of LED lighting, variable speed pumps, high efficiency heaters, all of those kind of products which are higher ticket items do drive our growth margins percent down, although they generate more GP dollars.

There are two factors that play favorably for us this year. One factor, having taken just yet to speak off is the geography mix.

Last year the seasonal markets, which tend to have a little bit higher gross margin given slightly higher operating costs as a percentage of sales in the year around markets, they, last year were a little bit lower as a percentage of our overall company mix than the normal and therefore as they become a bigger part of our overall mix, this year back to normal, that will be a little bit of a geography mix benefit that we get this year.

The other is as we look at our business, we’re constantly searching for ways to improve every facet of our business. And certainly the pressure -- not the pressure per se but the margin reductions that we’ve seen in the last two years is something that has moved up as a priority.

So we have invested significant resources internally as well as some external to really address margins and find ways to improve our basically pricing management as we look at our business. .

Okay, thanks for the clarification for that. And in response to I think the first caller, Manny you talked about the fact that you now have 80 showrooms with an expanded product offering.

Potentially down the road, like three to five years from now, where could the number of showrooms go up to?.

It would be roughly around a 100 in terms of North America. The emphasis there was always to have one in every major market, certainly don’t need as many as we have shipping locations but certainly we intend to be in every market of any significance. .

And can you comment on your international business?.

Sure, Canada is digging out of its snow and Europe has a decent first quarter in terms of year-on-year. They are weighted towards the north as you well know, and this year was a more normal weather year than last year, which was a little bit on the cold side. So therefore they are off to a good start from a sales standpoint. .

Okay, got you, and lastly, as you’re doing more of these retail marketing events, I think one of the issues in years past was that the, a lot of the independent pool retailers were either closed on weekends or they had a -- their operating hours were shorter than with most customers would like to.

Have you been able -- have you seen any changes in terms of how the independent pool retailers are operating their stores? Can you just comment on that?.

You have very good notes, Anthony. One of the items that certainly I have been preaching and a number of others in the industry have been preaching is the fact that store front retailers need to be open when customers need to buy. And over the course of the past 15 plus years, we have seen a gradual shift to expanded hours when customers are buying.

Sunday remains a big void in my mind but certainly a good many more retailers are opening on Saturdays and in many cases full day on Saturday. So that wave is happening, certainly not at the pace that I believe is appropriate and they are customers. They’re not part of Pool Corp.

So they are customers and they have their own businesses and some listen and reap the benefits and some listen and don’t do -- don’t make any changes and they suffer the consequences.

The reality is that those that have listened have extended their hours, have made sure to enhance their store merchandizing, their point of sale activity, bolster their plans in terms of positioning and rotation and that’s together with us in marketing to drive store traffic.

All of those retailers are succeeding in doing very well and those that still continue to practice as they did in the 60s and 70s are certainly under pressure. .

(Operator Instructions) Our next question comes from Anjali Walia of Wunderlich Securities. Please go ahead. .

My first question is, we’ve had two very tough second quarters over the past two years now for a variety of weather related reasons and it seems like April had some interesting weather dynamics, such as snow throughout the Midwest.

Can you talk about your expectations for the timing of the start to the pool season this year and more specifically would you mind discussing the status of pool season openings on a regional basis?.

Sure. Typically what happens is there are two factors here at play.

One is, if you are in the pool business and you open pools on behalf of the pool owners, typically you have already circulated some communication to your customers to get those pools open and typically those communications begin in February and early March and then depending on the response from those communications, that prompts opening typically in March, April and May and obviously it’s earlier as you are further south, call it in Tennessee, maybe April as you go a little bit further north into Kentucky, southern Ohio and then maybe early May as you get into the rest of the country and Canada.

That’s on the ones that are open by a third party. In the case of the pool owners that open up their own pools, in those cases, typically what prompts that is two, three days, four days of good weather. And whenever that hits that happens.

For example, I mentioned earlier when Ryan Merkel was asking a question; since he lives in Chicago, Chicago had a very nice weekend. It broke 70, both Friday and Saturday. Unfortunately Sunday turned cold again, and Monday was cold again.

Instead of two days -- and that lasted three or four days, that would have promoted pool owners in Chicago to open up their pools. And again it’s almost market-by-market and while I can’t give you blow-a-blow, I think if you look at having four days of 70 plus weather that basically does it.

And at that point there is a mass opening of pools in the marketplace..

Okay and would you mind discussing some trends that you’ve observed in some of the larger states that you’re in and as a follow-up to that as well, could you maybe discuss if there has been any impact on demand from water shortages in Texas and California by any chance?.

Sure. Larger markets, I’ll start with California. California, all the news about the drought and the lack of rainfall is certainly an issue. It’s more accentuated in Northern California than Southern California.

And at this juncture -- and again it’s more of an isolated case but in northern California what that has translated to is a reduced rate or a slowdown in the issuance of permits for new pools, has not really effected the existing pools to any degree because they still are open and need to be maintained.

But it has reflected some slowdown in the issuance of new pool permits in certain isolated municipalities. Haven’t seen that in southern California, which is a much bigger market than Northern California. Texas to speak of at this juncture, haven’t heard or seen anything of note and then with respect to Florida, Florida is fine.

In fact if anything, it’s too wet. And Arizona, its desert as a matter of course and with a strong base of water underneath. So Arizona has no issues on water..

Okay and then lastly. Gross margins have increased sequentially from Q1 to Q2 by 60 basis points in the last three years and even more in the past.

Can you talk about what that normal is? What the primary drivers behind that lift are? And what really would make 2014 different from prior years?.

Two factors play into that. One is geography and the other one is increase sale of nondiscretionary products. So what happens here is if you look for example at our first quarter; our first quarter is heavily weighted by the big four states California, Florida, Texas, and Arizona.

Those four states in the quarter represent close to -- not quite but close to two-thirds of our total sales in the quarter. When you go to full year, those four states represent just over 50% of total sales.

So what happens is that from a geographic mix, those four states become much smaller percentage of the total mix in the second and third quarters of the year.

There is as I mentioned before, in the seasonal market, seasonal markets are obviously not having a flat or almost a flat sales curve, have some in essence built inefficiencies by virtue of the fact that your staffing, your facilities are all geared towards serving the market in then peak season.

So because of that your operating expenses as a percentage of sales are higher than the big four states and that’s the market. And the market that captures that with little higher average prices in those seasonal markets than in the big four states, with similar operating margins when it’s all said and done. So that’s factor number one.

Factor number two is, what I mentioned earlier, which is the fact that you have, when basically every pool is open, call it by the end of May, June, July, in those months you’re consuming a lot of product. These are maintenance and repair type products, low dollar, non-discretionary and because of that, the gross margin percentage are high..

And this concludes our question-and-answer session. I would like to turn the conference back over to Manny Perez De La Mesa for any closing remarks..

Thank you, Betty and thank you all for listening to our first quarter results conference call. Our next call is scheduled for Thursday, July 17th, when we’ll discuss our second quarter 2014 results. Have a great day..

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your phones..