Q3 2019 Earnings Call
Greetings and welcome to the site one landscapes supply Inc. third quarter 2019 earnings call.
At this time all participants are a listen only mode. A question answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to your hosts John Guthrie Chief Financial Officer. Please go ahead Sir.
Thank you and good morning, everyone. We issued our third quarter earnings press release, this morning, and posted a slide presentation to the Investor Relations portion of our website, that's there's stuff like one dot com.
I'm joined today by Doug Black, our chairman and Chief Executive Officer, Scott Saumen Executive Vice President strategy in development.
Before we begin I would like remind everyone that todays press release slide presentation and the statements made during the call include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and project.
Such risks and uncertainties include the factors set forth in the earnings release and in our filings with the Securities and Exchange Commission.
Additionally, during today's call will discuss non-GAAP major which we believe can be useful in evaluating our performance.
A reconciliation of these measures can be found in our earnings release and in this slide presentation.
I would now like to turn the call over two dozen black.
Thanks, John .
Good morning, and thank you for joining us today.
As we expected the good weather in the third quarter balanced with a very challenging weather in the second quarter, providing our customers with increased workdays.
And allowing them to complete some of their backlog of job.
Accordingly, we were able to deliver a strong 7% organic daily sales growth.
Puts us on track to deliver mid single digit organic daily sales growth for the full year.
Further we achieved good EBITDA margin expansion and strong free cash flow during the quarter as our teams continued to execute our initiatives and as our acquisitions performed to plan.
Finally, we added two more terrific companies to decide weren't family and another one at the start of the fourth quarter.
Overall, it was a solid quarter and the results demonstrate both the excellent execution by our team.
And the strength of our business model.
The healthy underlying market continued execution and a strong contribution from acquisition, we expect to achieve our performance and growth objectives for the year.
I will start todays call with a brief overview of our unique market position our strategy to deliver long term performance and growth and some highlights from the quarter.
John Guthrie will then walk you through a third quarter financial results in more detail and Scott Solomon will cover our acquisition strategy.
At the end the call I will discuss some of the trends that we're seeing in our markets and address our outlook for the balance of the or.
As shown on slide four or the earnings presentation, we have grown our footprint as the largest and only national wholesale distributor of landscaping products with more than 550 branches and three major distribution centers and the United States in Canada.
We began the year with approximately 11% chair of the wholesale landscape in product distribution market.
And our four times larger than our nearest competitor and larger than two to 10 combined.
As a wholesale distributor we benefit from the fact that the landscape market is quite fragmented with over 3000 suppliers trying to reach approximately 500000 residential and commercial landscaping contractor.
We serve the market with a robust offering of approximately 120000 product SK use.
Our size and scale entrepreneurial and customer focused culture broad product range and balanced mix of business across the maintenance repair and upgrade and new construction end markets.
<unk> agility, and the landscaping market and provide multiple avenues for profitable growth.
We continue to expand our full product line offerings across our M.S.A. and build our commercial and operational capabilities, which increased the value we provide to customers and suppliers.
And give us significant competitive advantage.
Turning to slide five our strategy combines the scale resources and capabilities of a large world class company with a passion deep knowledge and entrepreneurism of our local teams in order to deliver superior value to our customers and suppliers.
We further drive this strategy by acquiring leading local regional companies to fill in our product portfolio and excellent talent to our team and expand our branch network across the U.S. in Canada.
We've acquired eight businesses. So far this year, all of which have expanded our product lines and increased our talent and capabilities in those markets.
We believe the combination of these efforts will allow us to gain market share both organically and inorganically in order to accelerate our growth and improved profitability.
The fully realize the benefits of our strategy, we must have best in class commercial and operational capabilities.
To do this we are focused on six initiatives.
These initiatives.
Category management and pricing or the most advanced.
Supply chain, and Salesforce performance or in the middle and and marketing an E Commerce and operational excellence are still in the early and we.
We expect our commercial and operational initiatives to help improve the value that we delivered to customers and suppliers.
Expand our margins.
And accelerate our organic growth throughout the cycle.
Slide six shows type one history and the results from our strategy so far.
We are proud of our track record of performance the growth over the past several years, even as we have been investing heavily in our ice tea category marketing supply chain finance operational excellence and acquisition teams as well as in our underlying systems infrastructure, including ecommerce.
We are seeing these investments yield results in 2019, and we expect to see benefit from our initiatives over the next several years, even as we continue to invest for the long term.
Overall, we are still in the middle in early stages of many of our initiatives and so we remain well positioned to make steady progress toward our stated mid term adjusted EBITDA margin goal of 10%.
Turning to slide seven we remain focused on the large opportunity that we have to fill in our full product line capability in every major U.S. and Canadian market.
At the graph shows we have the full product line capability today and only approximately 50.
Of our targeted 230 major markets.
Merely due to the lack of nursery and or Hardscape branches.
We will continue to fill these end by acquisition, while also penetrating new markets and improving our market position through the acquisition of well run irrigation and agronomic distributors.
I will now discuss some highlights from our third quarter performance as shown on slide eight.
Overall, we grew net sales by 13% and the third quarter with a nice balance of 7% organic daily sales growth.
And 7% growth from acquisitions.
Our organic sales growth strengthened throughout the quarter with September being our strongest month.
Furthermore, we saw good organic daily volume growth come through at 5% with the remaining 2% due to price inflation.
We have mentioned before that the weather moves volume around from quarter to quarter, but tends to average out during the full year.
The second and third quarters of this year are a good example of this.
On a year to date basis, we're now at 4% organic daily sales growth.
Our gross margin in the quarter was flat at 33%.
On a year over year basis, which was inline with our stated expectation given the very strong gross margin outcome in the third quarter of 2018.
Year to date, our gross margin is up 80 basis points with solid base business improvement and significant benefit from acquisitions.
We continue to see benefit from our gross margin initiatives, which include pricing category management and supply chain.
We expanded our adjusted EBITDA margin by 40 basis points in the third quarter.
Due to strong organic growth.
It has DNA leverage and good acquisition performance.
I was very pleased that for the second quarter in a row, our base business Espina increased by only 3% on an adjusted EBIT da basis, Despite our ongoing investment inside one dot com Barcoding and our new transportation management system.
On a reported basis, we achieved 90 basis points of SDMA leverage as a percentage of net sales.
Going forward the side, one dot com Barcoding and operational excellence, all expected to improve our SDN a productivity.
We believe that we can continue to achieve SGN, a leverage with reasonable organic sales growth.
Even with the strong sales growth in September and higher inventory levels to support a robust fall season, we achieved excellent free cash flow in the quarter by further leveraging our DC.
In improving our inventory efficiency.
At this point, we expect free cash flow to exceed net income for the full year.
We also made good progress on our initiatives during the quarter.
Besides one dot com, we successfully piloted pay online with our customers and are in the process of rolling this improved capability out across the country.
We also made further progress on our images and data and on the Spanish version.
Outside one dotcom, which we plan to complete by the end of year.
For Barcoding, we're continuing to roll this out and now have mobile customer checkout capability and 60 branches.
We are achieving excellent efficiency improvements for our customers and our associates with Barcoding and plan to aggressively implement mobile checkout and another 150 branches before this spring season starts next year.
Finally, we moved into full development mode with our transportation management system. During the third quarter and are excited about the inbound freight savings and the outbound customer delivery benefits that we expect to achieve with this new system in 2020.
We expect all of these initiatives to increase the value that we delivered to customers and suppliers, while helping us to expand our adjusted EBITDA margin and drive organic sales growth in 2020 and beyond.
We continue to execute on our acquisition strategy with the addition of two companies during the third quarter and one company at the very beginning of the fourth quarter.
We're excited to bring aboard these high performing companies, which add outstanding talent the site, one and expand our product offering and footprint.
Note that our acquisitions year to date have been smaller in size.
Virgin approximately 10 million in sales speech.
The average revenue for companies currently in our pipeline of potential deal is 15 million to 20 million and so like the whether we would expect this to average out overtime.
Our current backlog of deals would support this belief.
In summary, we delivered strong results from third quarter and are pleased with our progress on many important fronts.
We continue to work hard to increase the value for our customers and suppliers, while delivering strong financial results and investing in our capabilities for the future.
Now John will walk you through the quarter in more detail.
John .
Thanks, Doug I'll begin on slide nine with the income statement for our third quarter results.
We reported a net sales increased 13% to 653 million in the third quarter.
During the quarter, we had 63 selling days, which was unchanged compared to the prior year period.
Organic daily sales increased 7% in the quarter and 4% year to date.
Organic daily sales for landscaping product, which includes irrigation hardscape nursery and landscape accessories with strong growing 8% during the quarter and 4% year to date.
Landscaping products sales benefited from favorable weather and strong demand due in part from the backlog of work, resulting from the challenging weather we had in the first half of the year.
In a reversal last quarter's result, nine of 11 geographic regions had fewer rain days in the third quarter 2019, compared to the third quarter of 2018.
Organic daily sales were agronomic products, which includes fertilizer control products seat I smell and equipment remained steady growing 3% for the quarter and 4% year to date.
Prices increased 2% in the quarter compared to the same period in 2018, and 3% year to date as the cost increases from suppliers have been passed through by the market.
We expect year over year pricing to increase 1% to 2% for the fourth quarter, resulting in at a 2% to 3% increase for the full year.
With regards to tariffs and pricing, we do not expect to see any additional impact during the rest of the year.
Acquisitions contributed 39 million or 7% to net sales growth for the quarter.
Gross profit increased 13% to 215 million in the third quarter gross margin remained flat at 33% for the quarter, which was inline with expectation.
We faced a tough comparison to Q3 last year and most of the improvement from pricing in early buys were fully realized in the first half of the year.
Product mix did not impact gross margins during the quarter.
Year to date, we've increased gross margin 80 basis points to 33.1%.
Selling general and administrative expenses or that's DNA increased 9% to 165 million into third quarter.
The increase in operating expenses was primarily attributable to acquisition as Sta growth for our base business was only 3% year over year on an adjusted EBITDA basis.
That's DNA as a percentage of sales decreased 90 basis points to 25.3%, reflecting good expense management and operating leverage.
For the third quarter of 2019, our effective tax rate was 21.9% as compared to 7.4% for the third quarter 2018.
The increase in effective rate was primarily due to a decrease in the amount of excess tax benefit from stock based compensation.
Excess tax benefits at 2.2 million were recognized for the third quarter of 2019 compared to 6.3 million for the third quarter of 2018.
We expect our 2019 effective tax rate will be between 26, and 27% excluding discrete items that kids excess tax benefit.
Net income was 34.6 million in the quarter up approximately 16% compared to the prior year.
The increase was primarily attributable to the sales growth and improved profitability.
Partially offset by increased income tax expense.
Weighted average diluted share count was 42.8 million for the third quarter compared to 42.7 million for the third quarter the prior year.
The increase reflected after an exercise activity during the last 12 month.
Adjusted EBITDA increased 18% to 70.5 million compared to 60 million for the prior year period.
Adjusted EBITDA margin was 10.8% a 40 basis point improvement from prior year.
Now I'd like to provide a brief update on our balance sheet and cash flow statement as shown on slide 10.
As a reminder, we adopted the new lease accounting standard during the first quarter of 2019.
Total operating lease liabilities that the ended the third quarter, what 228 million with corresponding right of use asset.
The total operating lease liabilities 47 million our reported its current liabilities and are reflected in networking capital, which was 560 million for the quarter.
Excluding these lease liabilities working capital for the quarter would have been 563 million, a 50 million or 10% increase over prior years third quarter amount.
The increase primarily reflected the additional working capital associated with our acquisition.
Cash flow from operations was 76 million into third quarter and improvement of 6 million over the prior year period. The increase in cash from operations was primarily attributable to improve working capital management.
We made cash investments of $16 million for the quarter compared to 62 million for the prior year period. The change reflected a reduction in acquisition investment during the quarter due in part to the smaller size of our acquisition.
Net debt at the ended the quarter was 566 million and leverage was 2.9 times, our trailing 12 month adjusted EBITDA.
Which is an improvement compared to last year's third quarter leverage of 3.3 time.
The decrease in leverage reflected our increased profitability combined with flat year over year debt level.
Our long term year end leverage target is two to three times net debt to adjusted EBITDA. We continue to expect leverage to be in the upper half of that range at year end.
In summary, our capital structure continues to provide us with the flexibility to execute our growth strategy, including the funding of our acquisition.
I will now turn the call over to Scott for an update on site ones acquisition strategy.
Thanks, John as shown on Slide 11, 43 companies that joint the site one family since the beginning of 2014.
We added 218 branches to site, one and represent approximately 865 million in sales on a TTM basis.
We have made good progress accelerating our pace of acquisitions over the past five years and upload eight acquisitions. So far this year, representing approximately 85 million in TTM sales.
Now as we turn to slide 12 to 14, you'll be able to find information on our three most recent acquisition.
On July 3rd we acquired boss materials with five locations across the East Bay in Northern California focused on the distribution of Hardscape and landscape applied to landscape professionals.
On August Thirtyth, we acquired trends that concrete products, leading distributor of Hardscapes product with a single location in the greater Seattle market.
Instead, it's a great that was site one expanding our already strong hardgoods business in Seattle.
And in the fourth quarter on September Thirtyth, we acquired design outdoor hardscape distributor with a single location in the greater Reno Lake Tahoe market.
This is a new market for us than we were very excited to add that as part of the site one family.
As we turn to slide 15, we continue to see a significant opportunity to grow profitably through acquisitions, which allow us to move into new markets expand our president and existing ones.
And our product offering and that outstanding talent to our team.
Our pipeline remains very deep and we continue to build our reputation as the buyer of choice in the industry.
With eight acquisitions year to date more than a dozen front letters of intent and offers in negotiation and dozens of active nondisclosure agreements, our M&A strategy has solid momentum.
95% of our deal activity this year as involve exclusive negotiations with sellers. We believe the growing number of successful entrepreneur, who joined the site. One family are vital element to our continued success and position us to drive growth for many years across what remain highly fragmented industry.
We would like to thank all the leaders of site Wonder continued to be great ambassadors working hand in hand, with our development team to help site one attract the best companies to join us in the future.
While the timing of acquisitions to not be fully predicted we expect to close additional acquisitions during the remainder of the year and with that I'd like to turn the call back over to Doug to discuss our outlook.
Thanks Scott.
Ill wrap up on slide 16.
We are pleased with our third quarter results and remain well positioned to achieve our 2019 objective.
Our teams are executing well and our initiatives are producing good result, as we worked to increase the value that we delivered to our customers and suppliers.
Accelerate our market share gain expand our adjusted EBITDA margin increase our cash flow.
And build our company for the future both organically through new systems processes and talent and through acquisition.
We continue to benefit in the short term from a solid underlying market and expect the market will remain steady during the remainder of the year supporting mid single digit growth.
Keep in mind that our customers remain very constrained on labor and so the number of work days available will be an important factor in organic sales growth during the fourth quarter.
So far in October the weather has been good supporting our outlook for mid single digit organic sales growth.
In terms of acquisition, Scott and his team along with our field leaders have done an excellent job and building and converting our pipeline of high quality companies.
As he mentioned that we currently have very strong backlog of deals and feel good about our ability to add more companies during the remainder of the year and into 2020.
Taken altogether as we entered the fourth quarter, we're maintaining the midpoint of our adjusted EBITDA guidance for the year at 200 million.
But tightening the range from our original 193 million to 207 million.
Through our new range of 197 million to 203 million.
Which represents a 12% to 15% year over year growth or 14% growth at the midpoint.
In closing I would like to acknowledge all of the side, one associates, who continue to create significant value for our customers and suppliers.
We have a tremendous team and it isn't honored to be joined with them as we build a company of excellence for all of our stakeholders.
Operator, please open the line for questions.
Thank you at this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question Q.
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Your first question comes from the line of David Manthey with Baird. Please proceed with your question.
Terrific. Thanks, guys.
First of all so we understand the piano dynamic ahead I assume that you expect most of your operating leverage to come from Ash DNA.
At this point forward could you talk a little bit about your expectations on gross margin I'm thinking over the next couple of years here could gross margin, depending on pricing and mix actually flatten out or go down a little bit in in future years, just some thoughts on the complexity of the piano.
We think there's still opportunity available on gross margin.
As Doug mentioned with regard to Tms one of our initiatives with regards to it private label. Another initiative. We have gone. There is there is future opportunities certainly if you look over our past history gross margin has been a primary driver of our growth and we certain.
I think it will be much more balance going forward, but there's still.
Opportunity on the on the gross margin front going forward.
Yes, specifically, if you're looking at the fourth quarter kind of finishing out this year, we're probably more in the flattish like we were in the third quarter given the strength of the first half, but if you look ahead into future years. There's yes, we expect our EBITDA margin expansion to be pretty well balanced between gross margin improvement.
And and as DNA leverage.
Okay.
Okay, and then just quickly on acquisitions, the the trends set acquisition am I right in assuming that was about 2 million in contribution this quarter and then trendsetting design outdoor those both roughly that 567 million in annualized revenues.
Yes, I think if you take them together. It was 10 10 to 15 of annualized revenue and so you can do the math.
Those are they're up in.
The upper northwest and so you're going to get some seasonal aspects not not much contribution in the fourth and first quarter most of their business and the.
In the second and third quarter.
Okay, great. Thanks, guys.
Thank you.
Your next question comes from the line of Ryan Merkel with William Blair. Please proceed with your question.
Hi, Thanks, a couple of questions. So first off just want to pick up on the October commentary, Doug. So is October tracking sort of 5% plus you know just given you have good weather and I think the comparison is still fairly easy so maybe just a little color there.
Yeah, I mean, we as we mentioned October has has gone well for us. So we think as we stated we're set up to the hit that mid single digits.
You know September as the third quarter evolve September was the strongest month of the third quarter.
We would probably anticipate that October would be the stronger month of the fourth quarter, So but overall, we're very confident.
That weekend finish out the year strongly on organic sales.
Got it Okay, and then secondly, 7% organic growth is a pretty solid number just wondering why is this mostly boosted by an easy comparison last year or did you see some pent up demand from the bad weather, we had last quarter and then maybe initiatives are starting to kick in and maybe there's an extra extra share gains and this quarter just kind of I understood.
And that strong, 7% a little bit better.
Right no great question, and it's difficult to bifurcate it completely but we really think the underlying market that we're in right. Now is the is a mid single digit market.
So you know to the extent that we outperform that theres a bit of catch up whether wise as we mentioned in the weather was net better in the third quarter. This year than it was last year and then there is a bit of a share gain we feel good about.
How we're evolving as a team we get stronger every year and we're gaining more market share. This year than we did last year, we expect to gain more market share next year than we did this year. So I think thats, how we think about at the more we dissect the numbers underlying market is a is mid single digit and whether can move that.
Around up or down and then on top of that we have have some share gain going on.
Got it that's helpful. Let me just sneak one more in on gross margin just to clarify I think fourth quarter has an easier comparison and so should we expect margins still flat year over year is that what you're saying or is there still is there a chance at margins could be up year over year.
Just a little color there would be helpful.
Oh I think we would we would we would say that we think there will be roughly flat I mean, there could be a little upside on that with regard. It as Q4 is not as tougher comparison as as as Q3 was so there may be up some upside but.
We're we're we're thinking you know compare to definitely relative to what you saw on the and the in the beginning of this year that margins will be I'm, a little little Reno, we'd be up a minor if it is up.
Relative to what we saw the per se.
Great I'll pass out thanks.
Perfect. Thanks, Ron.
Your next question comes from the line of the Matthew Bouley with Barclays. Please proceed with your question.
Hi, This is Kristina Q on from Matt.
My first question is on what you're expecting in acquisitions from fourth quarter, noting that year to date acquisition 85 million or a bit later than previous guidance, that's comprising roughly 70% to 13% of annual revenue.
Yeah, we wouldn't see via the pace is slowing we had a very strong backlog.
And we still expect to close more deals in 2019 historically as you said, we've we've acquired seven at 13% ppm sales and we'd anticipate being on the low end and 2019. However.
As with the weather and a lot of things seasonally that would we'd expect that to balance out over the years and in 2020.
Gotcha, and then just operationally given their focus on M&A leverage.
Stage are you tracking on your investments in supply chain and marketing and for the branches that have seen the rollout have customers receive some of these investments and do you have an idea of the long term effects.
No great question in terms of our overall investment we're now on kind of uneven even pace a year to year, we're making investments Constantine building the business, but we made investments last year and.
In the year before and so so we're tracking along with those.
In terms of the benefits were seeing very nice benefits.
With our.
With our Barcoding you don't have any mobile checkout, we're getting customers in and out faster that makes our customers more efficient and it makes us more efficient. So so that's a the early signs of that are very good and keep in mind that we're still kind of in the pilot early rollout phase so not enough data to be able to say hey, we know they never.
The branch is going to be able to achieve X, but were let's say, we're very optimistic given what we've seen in the early start parts of those pilots.
In terms of the benefits Taiwan Dot Com were also still in early phase so hard to tell specifically.
We're excited about the the specific efficiencies, we see as customers adopt that and put that into their routine.
For them and for us so still in the early stages quite optimistic we are tracking along to the plan.
And and we feel we feel very good that in 2000 2020 122.
Those types of initiatives won't help transform our company.
And with that give us terrific leverage on the US DNA side and also help us to be a more consistent and more successful market share gainer on our organic basis.
Thank you.
Your next question comes through a line of Damian carriers will you be yes. Please proceed with your question.
Hi, good morning, guys.
Good morning Bottomline.
So John you talked about.
October often solid start so far pretty favorable weather.
Could you remind us how much of the fourth quarter is indeed concentrated in October historically and thinking about the 7% daily organic sales growth from the past quarter would you be able to give us perhaps a little bit of a regional walk across the country on how that looks.
Yeah, well, we gather the data other specific numbers on on on the on the on the first question. Let me just has set the second question.
So.
I will say geographically every region that was up across the country.
The probably the strongest geographic regions were here in the south.
Partly because we did we did based some inclement weather, especially in and and Inox in September of last year.
So from that standpoint, but we were pleased that you know there wasn't any any on any problems with any region being down during the quarter and so we were pleased with good geographically.
Our growth across the bank with regards to the that the amount about 40, 550% of our sales is in October typically.
I would fourth quarter.
Great that's really helpful.
And a follow up question is on SGN, a so you guys mentioned, the 90 basis points of leverage during the third quarter.
And did talk a little bit about kind of longer term, how you're thinking about that.
But looking at the fourth quarter, a is that kind of 90 basis points or thereabouts, how we should be thinking about as the.
Yes, yes, gionee leverage.
Or are there any specific factors I think you're expecting out of this year <unk> related take comps last year that would.
Perhaps suggest otherwise.
Well I think you can kind of back into the number from from our prior guidance I'm, Oh, but I think 90 basis points is in general I'm going to be a little more difficult to achieve just given the fact that we have a northern markets in November and December .
You have below sales volume.
So you're really trying to manage that cost and a little over the uncertainty in the into fourth quarter is really when the winter begins in the northern markets.
As we manage it down so so.
The guidance kind of gets what where we're at whereas DNA will be and then and then from that the from that perspective, it's tougher to as Youve seen a leverage without the sales volume in in the northern markets.
Understood. Thanks for your time.
Thank you.
Your next question comes from the line of Mike Dahl with.
RBC capital markets. Please proceed with your question.
Hi, This is actually Chris on for Mike Thanks for taking my questions.
So my first question can you just talked to some of the puts and takes here for Q guide given the performance this quarter.
O'clock I would think that would imply some upside there.
You could do a could you ask that again, we were cutting in and out.
Sure do you hear me now.
Yes, much done.
Okay.
My first question could you just talked to some of the puts and takes to your Fourq you guide given the performance this quarter and M&A backlog I would think that would imply some upside there.
Yeah, well you know the at this point of year, it's really about organic sales. So you know upside would be stronger sales.
Downsides would be a.
Would be less sales. So that's the that's the real factor that would provide any variance.
In the fourth quarter, we've got pretty good line of side or on our SDMA and and on our gross margin.
In terms of acquisitions when you add acquisitions. This late in the year in the fourth quarter, especially if they're in the north they could they could lose money right because they move into loss making months in December .
During the south they'll contribute a bit so we never count on any kind of contribution will they'll contribute sales.
And working capital, but in terms of profits you're not going to give much contribution.
Late in the year from acquisitions.
Got it that makes sense and then just for my second question just on your pricing outlook. It looks like you're expecting a sequential decline next quarter.
So I was wondering if I had some additional details on what's driving that and then separately looks like that department of Labor recently increased.
National salary or climate for exempt employees. So I was wondering if you could you touch on that you're expecting are seeing any impacted demand or or pricing power as a result.
No winter in terms of pricing I think we're thinking 1% to 2% Yeah. I mean, we've been running a you know we started the year at three and then it would come down to kind of too and it's been trending down I mean, what I bet, we've been I think between like 1.9.
Honestly and in September and and the general trend is because in Q4 of last year.
We saw some major price increases and and we're starting to come across the upper account with regards to that and that's all that that's driving driving that down. So we were really honestly really pleased this quarter because of the fact that you know the 7% was largely on a volume growth.
And not not just price.
And just to clarify that's 2% up not yet not yet person yeah, we're not going down but sequentially. The increases is going from two between one and 2% is what would the expectation is.
Got it appreciate the color.
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Your next question comes from line of Alex Roadshow with Birenberg. Please proceed with your question.
Hey, Good morning, guys. Just a couple from me so typically seen in the past first margins get a slight uptick from these hardscapes acquisition [laughter]. However year over year any were flat and you still had some hardscapes acquisitions in Q3 was there anything pushing that gross margin number down in the quarter.
I think the biggest thing was we faced.
A tougher comp I mean, it acquisitions did have a slight positive contribution.
But we had slight negative contribution from customer mix and and and some of the incentive.
From a a supplier with all expected home.
With what what we were.
What would you know without with our outlook even from the beginning of the year. Yeah, just add to contest remember in 2018, we got behind in the base business on margin in the first half than we had a significant catch up.
In the second half so we're comping against that this year, we had no significant improvement in the base business.
As John mentioned, we were slightly negative in the in a third quarter fourth quarters, a bit easier comp and so the acquisitions are what caused that to be flat going forward, we still expect acquisitions to.
To increase our gross margin given the mix of the Hardscapes and.
And nursery acquisitions.
Okay, Great I don't make sense and then I was just interested to see that the hallmark, it's kind of your first new marketing over a year or nearly a year either do you think its you'll be looking to acquire more in that market organically in fill it and then how are you approaching some of these other greenfield markets around the country.
Well I mean, good question, yes, we always a prefer to go into a new market with an acquisition and so obviously, we cover most of the markets today and we've got a lot of fill in the do within our existing markets.
But we're quite happy when I'm in new markets come off if you remember we did acquisition.
I think is earlier in the air and it last year auto rain in Spokane that was our first move into Spokane. So every year, we're going to hit a we're going to catch a couple new markets when sellers are ready to sell and those markets and it's certainly a certainly part of our strategy in terms of Arena Lake Tahoe, that's it that's a pretty hot market.
A lot of folks moving in and so that's it that's a terrific market to get into to help our overall organic growth and it also helps us expand not just it's a hardscapes location, but also opportunity to tap into those customers and also expand on the irrigation bright and me on agronomic side right. Yeah. That's good point, John I mean, that's the beauty.
He said we carry all the product line. So do you get into a market with one of the product line.
You can follow with the others.
And increased synergies there.
Okay, great. Thanks, a lot guys.
Thank you.
Your next question comes from line of Keith Hughes with Suntrust Robinson Humphrey. Please proceed with your question.
Thank you this is GT American for Keith Hughes.
And 20 <unk> it looks like you had a fairly steady pace with your acquisitions and there are mostly like Hardscapes with high gross margin terrorists DNA.
Would you can expect a.
Leverage benefits unless you need to kind of work off a steady pace next year or is that just more of a factor the timing kind of made the diverse locations. These acquisitions.
Yes, just have the dynamic to.
Yeah. So so as we you know.
Hardscapes and nursery companies run at a higher gross margin and a higher as DNA. So.
As we acquire though a lot of our fill in his nursery and hardscapes and so as we acquire those types of businesses and bringing them into the company.
The as when we get asked you nay leverage on the base business that SDN <unk> leverage will be mitigated because you bring in higher asking any company. So on the gross margin side. Our gross margin improvement is improved because you're bringing in higher gross margins. So if you take the base business and you're getting a certain amount as DNA leverage certain amount of gross.
Pardon improvement.
You add hardscapes and nursery, you're asking a leverage is going to look less and your gross margin improvement is going to.
Be greater and so thats the dynamic that we're seeing this year and that's the dynamic actually we would expect in the next couple of years as we as we gain market share and fill in more aggressively with nursery and hardscapes. The good part is they're all equally profitable and so on EBIT da percentage basis a margin.
Bases.
Theres really no effect in fact, the companies that were buying are right in line of where we are so we're not diluting. The overall business. We're just changing the the nature of how to get there.
Got it I understand that and then just your comments he said and most of the ones this year around.
Roughly about 10 million sales at the pipeline send me a little bit bigger is that more just back or whats available out there that you're seeing and or just sort of timing and what you're looking at for next year.
So it really has to do with the timing of when sellers want to sell up we we feel very confident about our backlog and you know everything from offers a negotiation to the number of in Da's. We have out. We're we're again, we don't see any slowing the pace or any change in the.
The structure of the competition or anything over 95% of our deals that weve been working in 2019 have been exclusively negotiated.
Yeah. So what are you seeing this year.
As I mentioned in the in the earlier comments the average companies that we bought so far this year or a 10 million, that's unusual and and so and it's all about timing. So it'll average I'd just like the whether that'll average out. So if you look at our backlog today, we think the average company in our backlog is about 15 to 20 million.
We're going to be acquiring so lets say 17 18 million should be our average if you look at our average.
Backlog today that we have you know handshakes or otherwise.
It's net above that average and we would expect that to average.
The average won't stay 10, it will it will average back to the let's call. It the 16 to 18 million over a period of you know a couple of years or 18 months. So yes. Our backlog today is net above average, which is which is a logical balanced out with whats actually come through so.
So far this year.
That's helpful. Thanks, a lot.
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Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Mr., Doug Black for closing remarks.
Okay, well. Thank you very much for joining us today, we very much appreciate your interest in sight, one and a very excited about our long term growth and profitability potential.
For our company I would like to take one more opportunity to thank our a terrific associates that are that make everything possible. There are doing a great job and we look forward to serving our customers growing our suppliers.
And I'd be enforcing the landscape industry for many years.
Thank you very much.
This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.
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