Q2 2020 SiteOne Landscape Supply Inc Earnings Call
Greetings and welcome to the site one went steep supply second quarter 2020 earnings call.
At this time all participants are in a listen only mode. A question and 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.
Now, let's turn the conference over to your hosts John Guthrie Executive Vice President and Chief Financial Officer. Please go ahead.
Thank you and good morning, everyone. We issued our second quarter 2020, <unk> earnings press release. This morning posted a slide presentation to the Investor relations portion of our website doctors and stuff like one dot com.
I'm joined today by does Black, our chairman and Chief Executive Officer, Scott Solomon Executive Vice President strategy in development.
Before we begin I would like to remind everyone that today's press release slide presentation and the statements made during the call include forward looking statement within the meaning of the private Securities litigation reform at 1995.
These statements are subject to risks and uncertainty that could cause actual results to differ materially from our expectation.
And projection.
Such risks and uncertainties include the factors set forth in the earnings release in our filings with the Securities and Exchange Commission.
Additionally, during today's call will discuss non-GAAP major.
We believe could be useful in evaluating our performance.
A reconciliation of these major can be found in our earnings release and in the slide presentation.
I would now like to turn the call over the Douglas.
Thank you John.
Good morning, Thank you for joining us today.
Overall, we're very pleased with our results for the quarter.
For the year, thus far.
I'm, so proud of our tremendous site weren't.
They continued to deliver outstanding results for all our stakeholders.
Based of extraordinary challenges related to go Goodnight.
Our strong culture of <unk>.
Urban and commitment to excellence is joining during this current prices.
We are gaining strength versus our competition as we build our capabilities and execute our strategy.
Accordingly, we are well positioned to deliver outstanding performance and growth.
The long term.
To achieve our vision of back front for hurt your customer supplier shareholders and amenities.
I will start the call by updating you on development, that's our first quarter call.
Just interaction that definitely navigate the rest of year and beyond.
John Gottfried will then walk you through our second quarter financial results in more detail.
And provide additional information on our balance sheet and liquidity position.
Got foam and we'll discuss our acquisition strategy and then I will come back and reduce some of the terms that we're seeing in our end markets and address our outlook before taking your questions.
Before I talk about developments in accident, let me first say that her thoughts and prayers continued to go out to all those that have been impacted my coded 19.
With the recent burden in positive cases, we're well aware that this pandemic spark. Moreover.
Bill, resulting in tragic loss of life.
Social isolation.
And significant economic hardship for men.
Well, we have certainly not escape the many challenges associated with it and then if we feel very fortunate to be here.
Europe, and actually strong industry leader and as it turns out our industry is benefiting from the renewed focus on the home beauty covered 19.
As a reminder, residential maintenance repair and upgrade and new construction comprised about two thirds of the industry and our business.
Despite the drag created by high unemployment.
So definitely requirement designed to stop the spreading up over 19.
Bird homeowners and best in their home and in particular and their outdoor living spaces.
At the same time, new residential construction has recovered strongly with low interest rate and increased demand from young couples and family. We're speaking.
Oh, no we have been pleasantly surprised by the strong and seemingly sustaining resurgence of demand in the residential market.
Further I cannot tell you how proud I am other site one thing.
As I mentioned during our last call our team adapted very quickly in March and April.
That's a good keep our board near term operational goals, which were to keep everyone based on a go that 19 environment.
We have our customers better than anyone else.
Manage our business through a lower demand and take care of each other on the way.
The strength of this town been transformed into this is Brad berning customers during a very busy and compressed spring season in May and June.
Add to this balance some of our key suppliers, including our irrigation suppliers have struggled to keep up with market demand at Kirby 19 affected their operations in Mexico as well as their global supply chain for key component.
This is caused our supply chain associate and branch team to work overtime to ensure that our customers are served well.
Taken altogether it has been a tough year, but the site. One team has worked stronger together with our suppliers and customers to overcome all challenges.
And deliver excellent results.
I've never felt better about our team and our ability to compete in the landscape industry than I do right now.
Slide five summarizes our action trends and highlights from the second quarter.
As curbing 19 continue spreading in our community.
Evolving our operation in order to operate safely and successfully.
In addition to implementing the CDC guidelines.
Added screening processes in our branches designed to prevent associates, who are sick from coming to work.
We continue to allow all 32 are sick to stay home and be paid without using their paid time off or piece here.
We have also required all associated where base covered in our branches and offices.
To protect each other and our customer.
Finally, we continue to restrict travel meeting event supplier to them and we continue to have appeal Board associates work from home.
In summary, where now well group into operating safely and it goes <unk> 19 environment.
Well also adopt the new measures that can help to prevent the spreading of this virus.
As I mentioned, our markets have recovered across the country, but the lending to stay at home restriction.
Additionally, the strong outdoor living the man has added to our customer backlog.
And has enabled us to achieve strong growth with our small and midsize customer.
At this point in the market has now been constrained by the lack of labor availability, Dod customers and by supplier product shortages.
Most severe product shortages or in the irrigation product line.
Fortunately, our supply chain team proactively anticipated shortages and leveraged our distribution centers mitigate the situation as much as possible.
Once again, our size and scale, coupled with a three large distribution centers and excellent supply chain team provided important competitive advantage to site one you're in a tough times.
Our suppliers are working very hard to recover and meet the current market demand and we expect to supply situation has improved significantly over the next two month.
Taking may and June together, we achieved double digit organic daily sales growth.
Combined with the negative 8% organic daily sales growth in April resulted in 3% organic daily sales growth, what a quarter and 4% year to date.
We have seen strong organic daily sales growth continuing July with positive growth across all regions and all product categories.
With the solid organic sales growth, we're seeing good improvement in gross margin as we continue to execute our operational initiatives and supply chain category management and pricing.
During the quarter, we benefited from lower freight cost an excellent growth in our private label products.
Additionally, our recent acquisitions operate at a higher gross margin then the base business.
Attributed to our improvement.
On the yesterday side, we achieved excellent operating leverage as we tightly managed our business.
Avoided discretionary traveling expenses and benefited from the cobot 19 related trends such as lower health care costs.
Keep in mind, we continue to invest in our operational initiatives during the second quarter.
Prudent investments in fact, one dotcom mobile pro or new transportation management system working on that.
As I mentioned during the last call mobile pro has been extremely useful in facilitating social distance and.
At our branches and getting our customers in and out of our branches faster.
We have also seen a strong pick up in the usage of about one dot com, which further improve our state interaction with our customers.
Our implementation of Tms was slowed due to cope with 19 travel restrictions.
But the benefit from our prior work was evident in our favorable freight cost outcome in the quarter and for the year.
Overall I was very pleased that our team was able to achieve strong leverage despite these ongoing investment.
And the fact that recent acquisitions operated at a higher SDMA than our base business.
Our acquisitions performed very well during the second quarter and for the first half of the year contributing strongly through our adjusted EBITDA growth and margin improvement.
Many of our recent acquisitions had been in hard gate and bulk landscape supplies as we fill in our capabilities and these product categories across the rest in Canada.
The company that benefited from the strong outdoor living trends.
Lastly, we achieved record cash flow in the quarter with strong profit combined with good working capital management.
Our supply chain strategy is focused not only on freight and logistics cost reduction.
But also on inventory productivity.
During the first half a year, we've continued to improve our stock terms as we reduce slow moving inventory and maximize the utilization of our distribution centers.
That said part of our working capital damage due to product shortages.
Which will hopefully be reversed.
In the third quarter.
Overall, we're pleased with our fundamental underlying improvement inventory productivity so far this year.
Our strong cash flow resulted in a meaningful improvement in our liquidity.
And a good reduction in our net debt to adjusted EBIT da ratio.
Moving from 3.3 times in the prior year period.
2.2 times at the ended the quarter.
Maintaining a strong balance sheet is critical to our strategy to invest in our capabilities and grow through acquisition.
In terms of acquisitions, we had suspended our activities in April in order to better understand the impact of covered 19.
And the direction of the economy and our end markets.
There's still a considerable amount of uncertainty in the second half of 2020 and going into 2021.
Some of the key questions are how fast will covert 19 continued to spread.
When we'll have proven vaccine be available.
And we'll we enter into an economic recession in 2021.
That said, we do take comfort in the current positive trends in residential and we believe that our end market risk is manageable in the near to midterm.
Accordingly, we have made the decision to resume our acquisition activities.
Scott Bowman and the development team had done a terrific job maintaining discussions with potential targets.
We anticipate being able to close additional deal in the coming on.
While continuing to build our backlog of excellent companies, who may wish to join site ones in 2021 and beyond.
To summarize I'm very proud of heart team has performed in this extraordinary environment to keep every month they.
There have been support our customers manage our business and take care of each other along the way.
We still have a long way to go and building the full set of capabilities that site worn.
And achieving consistent accident for all our stakeholders.
However, we have made great progress building our company this year, even as we have battled the short term challenges.
We are closely monitoring the trend and adjusting as necessary to perform in the short term.
Continuing to build our company of excellent for the long term.
Now John will walk you through the quarter in more detail.
Huh.
Thanks, Doug I'll begin with those highlights from our second quarter results on slide six.
We reported a net sales increase of 9% to 818 million in second quarter.
During the quarter, we had 60 board selling days, which were unchanged compared to the prior year period.
Organic daily sales increased 3% in the second quarter.
Again, it daily sales started the quarter slowly declining 8% in April as a result of the adverse market impact from cold with 19.
Organic daily sales recovered during May and June as many state and local restrictions worried and demand returned to those heavily impacted markets.
Geographically seven out of the 10 region had positive sales growth in the quarter with only those region hardest hit like the cobot 19 shut down not able to pull themselves out of the whole.
Organic daily sales for landscaping products, which include irrigation nursery hardscapes outdoor lighting and landscape accessories grew 4% during the quarter due to strong demand in our end markets and drier weather compared to the second quarter up 2019th.
We saw strong growth in Hardscape, it's consumers are spending more time at home and choosing to upgrade their backyards and patios.
Organically sales for agronomic products, which includes fertilizer control products I smell and equipment were up 1% for the quarter due to the negative impact of code 900 shutdown in some key economic market during the critical spring selling season.
As Doug mentioned the positive trend for organic daily sales has continued into the third quarter.
It should be noted however, the organic daily sales comp in the second quarter of 2019 was only 1%.
Does it organic daily sales comps in the third and fourth quarter or 7% and 8% respectively.
Prices were up 1% in the quarter and 1% year to date compared to the prior year period, where 2020, we are expecting price inflation between zero and 2%.
Acquisition sales, which reflects the sales attributable that acquisitions completed in both 2019 and 2020 contributed 43 million for 6% to the overall second quarter growth rate.
Scott will provide more details regarding our acquisition strategy in the current environment.
Gross profit increased 11% to 286 million into second quarter gross margin expanded 70 basis points to 35.0%.
The increase in gross margin for the quarter was driven by lower freight costs and the contributions from acquisition, which carry higher gross margin.
Selling general and administrative expense or seen a increased 5% 275 million in the second quarter.
SDMA as a percentage of net sales decreased 80 basis points to 21.4%.
The reduction in SDMA as a percentage of net sales reflects operating leverage resulting from the combination of our solid organic sales growth combined with tight cost management.
Last quarter, we highlighted a number of actions taken to align our cost structure with ourselves volume, including a hiring freeze furloughs of associates and cutbacks in discretionary spending.
It was action benefited a second quarter results, but as sales have rebounded or branches have gotten very busy we brought associates back from for though it's every hiring new associates to meet increased demand.
For the second quarter 2020, we recorded an income tax expense of 25.6 million compared to 19.3 million in the prior year period.
The effective tax rate for the quarter was 24.5% compared to 23.0% for the prior year period.
Increasing the effective tax rate was primarily due to a decrease in excess tax benefits attributable to stock based compensation.
We recorded net income for the second quarter of 79 million compared to 65 million during the prior year period.
The improvement was primarily driven by the strong sales growth that's DNA leverage in gross margin improvement.
Our weighted average diluted share count was 43.1 million for the second quarter compared to 42.7 million for the same period last year.
Adjusted EBITDA for the second quarter improved by 16% 232 million compared to 114 million for the same period in the prior year.
The improvement reflects a solid topline growth gross margin improvement in eschewing they love it.
Now I'd like to provide a brief update on our balance sheet and cash flow statement as shown on slide seven.
Net working capital at the ended the quarter with 584 million compared to 536 million at the end of the second quarter 2019.
The increase is primarily attributable to our decision to increase our cash on hand to enhance our financial flexibility in response to the market uncertainty brought on by Cobot 19.
Markets has stabilized we have started the process of reducing our cash on hand, and paying down our outstanding debt.
Excluding the cash on hand, net working capital decreased 18% to 420 million compared to the prior year period.
Receivable collections have held up well in this challenging environment and inventory levels are lower than last year due in part to some supply challenges caused by the coated 19 pandemic.
That's a fire partners are working tirelessly to reduce the outstanding order backlog, we expect the supply disruptions to resolve themselves in the second half of the year.
Cash provided by operations increased to 185 million in the second quarter compared to 37 million in the prior year period.
The increase was primarily attributable to our management of working capital.
Yes, we expect to catch up on or inventory purchases in the second half of the year. We expect some of the operating cash flow improvement in the second quarter will reverse itself in the second half.
We made cash investments of 5 million during the quarter compared to 29 million for the same quarter last year.
The decrease in cash investments reflects a decision to postpone acquisition activity in response to the uncertainty brought on by public 19.
That said at the ended the quarter with 177 million compared to 622 million at the end of the second quarter in 2019.
Leverage decreased to 2.2 times, the trailing 12 month adjusted EBITDA compared to 3.3 time at the end of the second quarter of 2019.
The lower leverage primarily reflects our increased profitability and strong cash flow.
As a reminder, we have no debt maturities until 2024.
We ended the second quarter, we had liquidity of 351 million made up of approximately 164 million cash on hand in 187 million in available capacity under our ABL facility.
In summary, our priority from a balance sheet perspective is to maximize their financial strength and flexibility. During this uncertain time without sacrificing long term growth where market opportunities.
I'll now turn the call over to Scott for an update.
On a 2020 acquisition strategy.
Thanks, John.
As we explained on our last earnings call Hope at 19 brought about significant uncertainty in terms of the economy, our customers' ability to operate and our end market demand.
Accordingly, we took the necessary steps to reduce our near term capital spending which included temporarily pausing the closing of any acquisitions.
We were transparent and communicated this to the owners of each company. We're in negotiations with at the time.
They appreciated our direct an honest style, which also respected there need to focus on leading their own businesses through the uncertainty while reaffirming our strong desire to eventually joined forces with them.
Our strategy and development teams took advantage of the pause to conduct a review of many of our past deals.
The objective was to identify consistent theme best practices and lessons learned and then modify or supporting cross functional acquisition processes as needed.
We also standardize and enhance the documentation of our processes from end to end the better communicate and train new leader on our robust approach.
With this important objective achieved we're now restarting our due diligence activities and anticipate closing acquisitions again sometime in Q3.
Thankfully because we have over 80 associates continually connecting with potential acquisition.
We could seamlessly restart our acquisition engine without delay.
Our pipeline is deep and our commitment its steadfast to execute our M&A strategy and build upon the strong growth history shown on slide eight.
While we obviously didn't close any deals in Q2 I want to thank our field and functional support associates for demonstrating the power of our site one teamwork and our local markets every day. They are excellent leadership passion for type, one and obsession with helping our customers succeed really shines through and sets our company apart.
This makes type one easily the most attractive option in our industry for entrepreneurs, who want to ensure a legacy of excellence for their associates.
Summarizing on slide nine we're confident in our strategy our team.
Our acquisition pipeline and dollar approach.
We're looking forward to once again, bringing on new dynamic partners, who will make the site one team stronger.
Bandar product capability and support further performance and growth.
I will now turn the call back to Doug.
Thanks Scott.
I'll wrap up on slide 10.
First and foremost we will continue to ensure the safety of our associates customers suppliers and communities as we operate in the current virus environments.
This is a fiercely contagious virus and we are monitoring the trends and implementing best practices as they are developed.
As a country works to overcome this pandemic, we believed that our ability and the ability of our customers and suppliers to operate safely will be critical to us all having a successful 2020.
And frame in our outlook for the remainder of the year, Let me remind you of the trends from last year.
We had a very weather affected spring season last year, the negative organic growth in May and June and only 2% organic growth at the half year.
Then as John mentioned, we had to 7% and 8% organic daily sales growth in the third and fourth quarters, respectively.
To end the year at 5% organic growth.
Our big month for growth last year, where September October and November.
8% to 10% growth.
July August in December we're in the 5% to 6% growth rate.
So we had some big month last year in the fall, where we caught up from earlier weakness.
Accordingly, though we are seeing strong sales growth in July we will not likely see strong growth during September through November even if the underlying markets are positive.
Overall, we are cautiously optimistic for the second half and would expect organic daily sales growth to be similar or slightly lower than our first half given the trends from last year.
In terms of end market, assuming significant stay at home restrictions are not reintroduced in the second half, we would expect maintenance, which comprises 42% of our business to remain steady with low single digit growth.
Residential new construction, which comprises 26% of our business looks to be solid in the second half as builders work to create new home inventory to meet demand.
As we mentioned repair and upgrade which is 17% of our business.
It's very strong with significant backlogs to care customers through the end of the here and on into 2021.
Finally, we expect the commercial end market to be study in the near term, where some weakness going into 2021 as businesses and commercial builders Pare back project to adjust to the impacts.
In the restaurant entertainment retail and hospitality sector.
Taking all these factors together, we would expect the market to support solid organic growth in the second half a year.
Against this backdrop, we will continue to operate safely and efficiently with tight management of our discretionary expenses until we get passed the cobot 19 van den.
We will also continue to drive our commercial and operational initiatives and supplies in.
Category management pricing Salesforce performance marketing and operational excellence.
We expect these initiatives to allow us to gain market share in support of organic growth.
And improve our gross margin.
We will also continue to make investments in key capabilities for the future.
Include site, one dot com and CMS.
Considering all these factors.
Expect to achieve good progress in our adjusted EBITDA margin this year.
In terms of acquisition as Scott mentioned, we have restarted due diligence on active deals.
And then conversations with potential prospects, who are interested in exploring the sale of their company at this time.
We expect to add additional companies the site one in the second half and are excited about our ability to fill in our product portfolio.
I had terrific talent and help build our company through acquisition going forward.
Keep in mind at acquisitions added in the second half of the year will not contribute meaningfully to our adjusted EBITDA growth this year.
Are we believe will set us up for strong growth in 2021 and beyond.
With the increased visibility that we have on our end markets. We are pleased to reintroduce our adjusted EBITDA guidance brain for 2020.
We would expect adjusted EBITDA for 2020 to be in the range of 205 million to 225 million.
This is a wider range than typical due to the considerable uncertainty associated with the development of covert 19, and the corresponding impact on our end markets.
Keep in mind. This range includes an extra lossmaking read in December as compared to 2019, which reduces our adjusted EBITDA by approximately two to 3 million.
And reduces organic daily sales growth by approximately one percentage point.
Additionally, while our range includes economic uncertainty. It does not include any broad reinstatement of stay at home restriction that would limit landscaping services.
Overall, we are cautiously optimistic that 2020 will end up in a tough year.
But also year tremendous success for site, one as we pressure test our strategy and take our company through the next level in terms of performance and growth for all stakeholders.
In closing I'd like to sincerely. Thank all our site one associates, who continues to amaze made with their passion commitment teamwork and selfless service.
We have a tremendous team and as honored to be joining with them.
As we overcome adversity and deliver value for all our stakeholders.
I would also like to thank our supplier partners for supporting us are strongly and our customers for allowing us to be their partner.
Our tagline a stronger together and this has proven to be a tremendous strategy. During these challenging times.
Operator, please open the line for questions.
Thank you at this time, we will be conducting a question answer session. If you'd like to ask a question. Please press star one on your telephone keypad a confirmation total indicate your line is in the question Q you May press star to if you'd like to remove your question from the Q.
Our kids since using speaker equipment in may be necessary to pick up your handset before pressing the star Keith one moment, please while we poll for questions.
Your first question comes from line of a Ryan Merkel with William Blair. Please proceed with your question.
Hey, Thanks, good morning off.
Good morning learning.
So first off a second half guidance, a low single digit organic growth it feels a little conservative just given the outdoor living trends. So what we're looking at levels that you see in June and July and then just clarify is it primarily the tough comps in September which in November that gives you the pause because it sounds like you pick the industry will still grow.
Oh during the second half.
Yes, I mean, that's that characterize it I mean, we're seeing strong growth in July as we as we did in a in May and June.
However, as we outlined we've got some tough comps we were really catching up.
Last year.
In September October.
Which is the heart of our fall season.
There weren't any hurricanes meaningful hurricanes. So you know we had a good year from that standpoint.
And so the combination of tough Comparables and the fact that Theres just a lot of uncertainty right I mean, covance 19 is still spreading.
We still don't know how this is going to go so yeah, we were enjoying the strong trends.
Today, we don't think those outdoor living trends by the way will change. So we think that strength will carry through.
But you know we think it's it's better to be a you know to be cautious in an environment, where you've got too much uncertainty.
Yep makes sense, okay. So it's both comps and just an uncertain outlook.
Let me the conservative makes sense okay.
Okay.
And then second margins were better than I was thinking this quarter the outlook seems to be for more flattish EBITDA margins. During the second half I don't know if he said this but at well I think you said as she now you're gonna be adding back is there anything else that that hits the margins in second half.
Oh, we think a on the gross margin line and it will be flattish from the perspective of Oh.
We don't have necessarily built in and to some of the some of this strong growth we saw in margin in the first quarter and the second quarter I should say and then as you mentioned a few ne.
As long as we're continuing to be as busy as we are we expect to be a full labor.
We're also expecting items like 'em, we benefited from lower health care costs in the first Chris path and we would expect those to potentially normalized in the second half of them and there were some some deferral of some expenditure that week that we did that we expect to probably happened second now so.
Will be managing it looking do a odd to continue to continue to improve our EBITDA margins, but but those are the things that we have built into our outlook.
And if I could just follow up why the flat gross margins is the Tms not going to continue or is or is there anything else.
Oh, we would we would expect a the benefit on freight to continue. It also is that some of the benefit from acquisitions to continue we think incentive maybe slightly lower as because we're trying to catch up.
On the full year on numbers and then we've also kind of both <unk> and just in pricing and selling margin flattish numbers, where we're going to slow down slightly in the <unk> in the us in the first half the year, but the two big drivers will continue but I would say incentives may.
Offset some of that given given the lower sales volumes.
Got it makes sense alright, thanks, that's it.
Thanks Ryan.
Your next question comes from one of the Stephen Volkmann with Jefferies. Please proceed with your question.
Hi, Good morning, guys I'm I'm wondering if we can talk a little bit more about the M&A pipeline that it's good to see that sort of restarting and I'm curious maybe Scott is there you know a scenario, where there's some sort of pent up demand. Some deals that were close that can get done fairly quickly.
Or does this restarts kind of more slowly I guess, a as we go through year end.
Yeah, I would say you know we've got a a good pipeline that we that we paused on so.
As we restart the engine I think I feel good about our prospect I wouldn't expect a flurry per se.
But I also don't think it's going to take a significant amount of time to to restart acquisition activities and like I said, we had we did have some in progress so.
Hopefully we can move forward with those.
And any commentary around what you're seeing relative to valuation expectations.
Yeah, No real change at this point I think most people are probably discounting.
The last several months as sort of one off there's so many factors that have occurred with coated that I don't think too much weight as being placed on the near term.
Got it I understood. Thank you I'll pass it on.
Thank you.
Your next question comes from mine of that David Manthey with Baird. Please proceed with your question.
Thank you good morning, guys.
Today, the first question back to the the guidance and what it implies for second half EBITDA.
The midpoint is if my math is correct down 7% and that sounds a little harsh relative to low single digit growth that you seem to be assuming and when I look at the type of contribution margins you've been putting up lately.
19% in the first half.
It seems a little low I mean, if you assume sort of a 15 or even a 10% contribution margin in the fourth quarter, you probably would be at the high end or above your guidance range. So I'm just trying to to divide any color. We can get here as it relates to.
Cost expectations, John I think you mentioned a couple of those things, but just any any additional color that'll give us some.
Information relative to the outlook, which seems again, a little bit I'm on the low side.
Right, well I think I think sort of stopped I want to make sure everybody.
Considers the extra week as Doug mentioned that is a two to 3 million dollar Oh.
Oh law.
Uh huh.
Actually impact organic sales growth for the full year by almost 100 basis points, because we are picking up a week when we really don't have that much. So in this period.
But wouldn't with regard to <unk> expenses going forward in it and and and gross margins I mean, there's there's still a lot of unknown out there from that from that perspective, I would say you know from a from on the upside if it's if that trend continue to the last couple of.
A month, we would be doing very well, but we are the interface or some tough headwinds with strong sales in the fourth quarter that that's driving driving that on the on the S. DNA side, we are going to add a well lay.
Where there will be probably some pickup incentive costs. I'm, then you know who as we've built out our outlook as I mentioned there are some some cost that we have on that were deferred in the first half that we expect that maybe continue into into the second half.
Good so those are the numbers from from from our perspective Uh-huh.
We hope to see them from that perspective.
Yeah, just add onto that I mean, we're still full steam ahead with our initiatives right and so.
You know, we think will continue to benefit from the Tms a we worked.
Fry prior to this year in early this year on the inbound side of our transportation management system and that's that's paying off this year will continue obviously must continue to work on a category management. Our pro trade brand is growing quite well or Alesco brand is going quite well. So we have some some nice.
Upsides that were that were mining.
They just have to be balanced with the fact that we're up against some pretty significant comps and there's just a lot of uncertainty coming at us and that combined with the extra week.
And other things caused us caused us to be more flattish.
Got it okay.
And is it correct that April normally represents 40% to 45% of your second quarter revenues, but July August and September our or more evenly split.
Uh huh.
Well.
Has historically any July the big month for us it would be it would be similar to two to June oh on a like for like basis.
August September.
Are slightly less than than than July.
From that perspective actually if you look on a weekly basis or July has five weeks.
It's about the same with September being slightly more than August so.
So I was just we have five weeks you five weeks in July.
As opposed to four in August and September if you look on a weekly basis, they're relatively similar.
Okay, but April is your the biggest month of the year.
It is it is significantly higher than every other month, yes.
Okay.
Great. Thanks, a lot guys.
Thank you thanks, Dave.
Your next question comes from line of Matthew Bouley with Barclays. Please proceed with your question.
Hey, good morning, everyone. Thanks for taking the questions Doug anymore color on on the impacts of the supply chain disruptions. You mentioned is should we expect that the suppliers would actually you know raise prices as a result or is this more of just a temporary volume issue.
No. This is a temporary a volume issue I mean they.
Our here again, it really is impacted our irrigation suppliers all the we have a few other suppliers that have run tight.
It's one way it's a good problem half is because volume is very strong right. So first of all its.
We have very strong demand in irrigation.
Those suppliers all three of them really have operations in Mexico that were disrupted with coded that in employee issues and you know the plants.
Capacity was lowered pretty significantly the other thing is they have components that are sourced around the world that there's been some shortages and those component supply chains were in very close comp communication with our suppliers. They are working hard on at their capacity is increasing and so they're catching back up we feel like.
It will probably be tight for the next couple of months, but we won't be any there won't be any long term.
I guess.
Results from this and certainly this would not be a great time to to come in to raise prices. So we don't expect that.
Got it Okay. That's helpful. And then secondly, just back on the M&A side I know you mentioned.
What you're seeing on the multiples earlier, but it is I guess that the size of the pipeline kind of status quo versus pre pandemic or has that changed at all in terms of.
Oh availability of targets and and honestly just given how residential and commercial markets are evolving from your perspective as it has it changed at all the type of.
Products focuses that that you guys are looking for in your pipeline. Thank you.
I'll answer the second part first I guess.
No I think just given our market share you'll continue to see a predominance of landscape supply and Hardscapes you, possibly some nursery as well.
Sales as we go forward.
And then as far as the pipeline size, Matt It continued to grow as Doug mentioned, you know we continued.
Our our contact of potential targets throughout our pause and just through the normal course of events new companies are willing to sell I wouldn't say it you know exploded at summit projected that there'd be a lot of a financial distress pushing people to sell but it did continue to grow so new interest.
I'd say, it's continued at a historically normal pace.
Yeah, Let me just play on top of that you know strategically just to remind you that.
We have we're working to fill out our product line across the country. We have about 200 or so am assays that were interested in and we only has a full product line in about 50 of those so we have a long way to go and what we're missing the most is nursery and hardscapes them. So those.
You know the be a lot of hardscapes and nursery deals.
There are still terrific irrigation companies that we'd love to join us and great agronomic companies as well so.
But the mix would obviously be biased toward.
Our sticks and nursery and you know it's in today's day and age, but the outdoor living trend being revved up if you will those.
Especially the Hardscapes Alaskan supplies.
Those are companies that are that are going to do well in the near term and.
And obviously, we <unk>, we feel though do that's a great product line for us for the long term.
Got it thanks for the details.
Thank you. Your next your next question comes from line of Keith Hughes with Suntrust Robinson Humphrey. Please proceed with your question.
Oh, Yes, you talked about some labor restrictions.
For into your own labor restrictions put.
Well, Jim a question about your contractors, where where do they stand now labor and.
Particularly larger jobs involving irrigation landscapes as the quote cross as many long dated from lack of labor virus or just above the bodies around.
Yeah, well you know a you know before the spend nemec labor was tight.
There's obviously been a lot of people you know kind of laid off in the process of the pandemic, but that it doesn't seem to be a large supply that are looking to get into a landscaping and you know as you implied with Corona virus, you're constantly you have people that made that are sick that you need.
To stay home and your your quarantine people expect or so it does actually affect.
The the supply of labor that being said our customers are very innovative there they're fighting through it as they always do obviously, they're growing you can see that in our numbers and their numbers and there's new landscapers that get into the business every year and so.
You know, we're able to turn out some growth, but it has.
Yes, exactly exasperated the a the situation.
That already existed before now that we have now that we have grown of ours.
You know that you know on top of that we in the industry.
Our being very aggressive, but you know attracting people to the landscape industry et cetera. So you take all that together, it's tight I wouldn't say its net you know substantially tighter than it was before but it remains it remains very tight.
In terms of delay of jobs or what I really don't think.
We've seen that I mean, we've seen some commercial jobs delayed because.
No owners are developers are cautious but.
But not necessarily due to a any any.
Significant additional shortages to the the trade.
Okay. Thank you.
Your next question comes from line of Mike Dahl with RBC capital markets. Please proceed with your question.
Hi, Thanks for taking my questions.
Pick for first time, and I guess, just touching on that commercial.
Comment and what you're talking about at the end the opening remarks, as well I'm talking about commercial study, but some weakness into 21 on somebody's.
Delays just wondering can you just kind of size up the impact that you're seeing on on your backlog or hearing from your customers and and whether that shows up also any in Fourq you as you're contemplating the guide.
And tied into that you know on debt maintenance component that would be related to commercial as the work from home.
Environment continues to kind of push out are you seeing any slippage on on that side.
Yeah I'll take the last one first on the main it's it tends to be very steady, but both residential and commercial.
Of course, it's kind of two thirds residential but create commercial maintenance will continue I mean folks that have offices, even even without employees coming to work in the short term are going to maintain their their landscaping around those offices. So that's that's been steady in terms of what we see in terms of jobs, we have seen some.
Job delays.
And Weve certainly seen the growth dampened, we have a project services group that bid.
For our contractors as a service we provide.
And we'll take the bid and do the take off and provided to them. So that they can go bid the and get the work so.
That project services team at mean had seen a steady improvement in bidding.
Kind of last year in coming into this year that has flattened out and if you take.
Really may June July they're bidding activity has been flattish.
And so that gives you and so it certainly has slowed down.
You can look at the IB a baby I index and that's below 15, though it's improving from you know the but you know significant fall off. So you know those put together and just talk into our customers, they're seeing less less projects to bid. So we don't anticipate that it will heavily effect.
2020, but going into 2021, it feels like the commercial.
It's going to.
Be dampened you know next year.
So that's what we're seeing keep in mind that we lag the trends landscape is the last thing to go in and.
In a commercial project and so we're we're a lagging indicator of what's going on.
Okay that on the positive.
Board the our expectation is that residential though will be stronger.
Our next year and there's obviously a bigger part of our business right now given that were two thirds residential.
If we had our choice we'd have the current trend, which is you know commercial.
Weakening, but residential looks like it's kinda gaining strength.
And certainly outdoor living.
As a just a very strong and we'll continue to be strong so.
Kind of some break for a balancing.
Trends there.
Okay and the second question just on the back on the SGN, a I understand that some some costs that came out in Twoq you are kind of temporary in nature.
And come back and in the second half, but then presumably some things like you know TNT and and certain things that that would be normal course of course business pre pandemic me may or may not come back.
I mean, maybe not even next year, yes, depending on how things play out but.
In terms of that potential support from.
From an.
And that's Shannay standpoint, and any quantification you could provide on.
On what like TNT and some other components that may continue to remain subdued.
Represent.
So yes, that's true a t. and he is down a so probably this year from that perspective. It was reflected in our Q2 numbers from that perspective.
I guess, where we're not talking a huge dollar amount, though we're talking probably a million to 2 million dollar reduction year over year from from that perspective, so that that would that would be our the positive what we've seen what.
We will continue going forward.
Got it thanks.
Your next question comes from line No Seldon Clarke with Deutsche Bank. Please proceed with your question.
[noise] Seldon Clarke your line is not alive. Please proceed with your question.
Hey, good morning. Thanks, a question I'm just thinking back on the last question have you identified any any structural costs in the recent months that you know you mentioned to you need but anything else that could potentially help you run a little bit more efficiently efficiently going forward, whether it be from site consolidations.
Andrew procurement or anything along those lines and then.
That same contacts are there any temporary costs that you're seeing as it relates to either you know pp ur cobot related cleaning costs that.
Mike reverse next year so.
[noise] Oh I.
Basically those those items or we would expect <unk>. So on the positive side I think I think some items that will reverse in those from the first have to the second half or maybe next year I think I think health insurance costs are probably one.
In item that will probably people haven't gone to the hospital.
That will be one item that would reverse itself next year or Andy and potentially in the into second half a travel expenses as I mentioned is running lower I don't know that's or on the on the on the positive side may reverse itself.
But but there are other options, we think we've become a much leaner <unk> as an organization I'm on the positive sign obviously labor and inefficiency. There is one of the critical items that we would've been able to operate.
And we think that will be a carryforward oh going forward. In addition, I would I would say on just kind of our utilization of our fleet has become much more efficient from that perspective on a go forward basis and that's another one of our larger costs or.
That so we're learning throughout here and and we expect to come out of the a lean organization going forward and more efficient yeah. Keep in mind. We also have initiatives around for instance, salesforce performance, which should make our we have a large salesforce.
400, sellers and to make them more productive is a significant.
Aid to its been a leverage and then also our branch operational excellence, where we're kind of hitting starting to hit a new stride and that initiative.
She is also focused on efficiency and we certainly gained in in this pandemic.
It's been kind of forced if you will as we you know you end up short handed in the branch and to figure out how to serve the customers and we've got mobile pro that now you know almost fully deployed across the network.
That's our Barcoding system, and that's made our associates more efficient. So my underlying there are some good underlying.
Trends in initiatives that we're certainly pushing hard.
To try to be you know beat what we put out there.
You know all those are on the calm, but we're excited about them to offset some of these others like health care et cetera that could come back against does that work you know that were lower than normal due to a due to kobin.
Okay. That's helpful and I know there a lot of moving pieces here, but you're updating guidance.
Our EBITDA at the midpoint is only about 3% below pre cold and guidance, which.
Clearly incorporated the same comp issues in 2019, but obviously, we're in a little bit the different place going we are six months ago. So can you just help us a bridge the delta here as it relates to you know either revenue and profitability.
And maybe where first half results came in versus initial expectations are we expect you to age to shake out I'm, just relative to where you thought things with progress.
Back in January.
Yeah, well, if you I'll I'll take a stab then John could follow as you as you look at last year last year, we had a very you know whether constrain first half and then we had a very strong second half. So our plan would have been.
You know to have significant.
Growth in the first half and then more tempered growth in the second half worsen at the half year at 4%. So we so it is.
It is a tied to organic growth.
We would have expected that have higher given the way last year shaped out and so going into the second half of the question is is that you know the outdoor living trend, which is clearly stronger than we would've thought it we've been.
That is really carrying us right now how powerful is that going to continue to be as we go into that that second year comp. So so that's how broadly described we expected higher growth in the first half and lower growth in the second half.
Given given the way last year worked out.
What we're saying now is the growth in the second half is going to be about the same as the first half, which is you know which is different and we'll see how it goes.
John you want to add yeah, I would say if you look oh over the course of the where we were before and were where after I think I think probably the largest delta is still on revenue because and and we've been able to through what we've done in the in the second quarter.
Make up for that through through primarily asked DNA.
And also if it's a little bit gross margins come in higher.
We don't have right now and our outlook necessarily that that that.
Continued outperformance on an island that's DNA because we are we are building some of that back in and gross margin. We're cautious on both would open the outlook and tech math I'm certainly there's opportunities there we're going to try to do that on both revenue and is on the side and the margin side.
But that's what the primary difference is going in to the if I were to Bridget I'd say if it for the full year there would be revenue would be the biggest decreased relative to that said that that forecast.
Okay. That's helpful appraisal.
Thank you.
Your next question comes from one of Damian Caracas would you be US. Please proceed with your question.
Good morning, gentlemen, very solid execution during this challenging time.
Thank you Vic.
Yeah. So you mentioned that yet each all positive sales growth during the quarter in seven of your can regions similar to how you had done last quarter. I was just wondering if you could maybe put a range around that.
Net three regions, where you are declining versus shop.
Where youre experiencing higher growth could you maybe just what the numbers around the range that you saw.
Sure.
Go continue on.
And I was going to see that's it.
I was going actually also specifically just thinking about top you don't Florida, and Texas two key regions.
Wondering if you saw any fluctuations in your activity.
Given that there has been a little bit of a resurgence darrin indications or do you see strong consistent demand in those two regions.
Oh with regard to the quarter I think I think what we gave no the in prior period quarter with.
In Q1 respond to that is really kind of the story.
We saw weakness a negative sells the three regions would I would say starting kind of from.
Delaware to Boston and then when you go over to the Midwest those were those those regions were.
Heavily impacted.
By by the co bid in the restriction and actually had negative sales growth in the in the quarter continued you see strength.
In the South east and and all the way through to through the through the Texas.
With regard to going forward or we have not necessarily in a huge drop off the result of the the Hum increase in coated cases, I mean, obviously, we're here in Georgia, which is which is kind of a hot spot with it and work continues.
But obviously, everybody, including our associates and our customer there are being much more caution.
With regards to them.
Yeah, I would say I was just.
To a pile onto that I would.
The results were seeing in say July our strong pretty much across the board across the board and across regions and across.
Got it categories, So which would include you know, Texas and Florida.
And those that are struggling you know current and Georgia struggling with coated right now yeah. If you look at June and July we would expect all regions to be showing positive.
Okay, great great to hear that's very helpful.
And then Doug you mentioned earlier, you're gaining straight for this person to competition I'm just curious.
It does look at the 3% daily organic sales growth in the quarter. Just wondering if you guys had how how did that compared to kind of your underlying underlying markets and it doesn't mean anything else that you might add that it just gives you.
You know a a conviction that you are indeed are gaining strength.
Yeah, well, we're you know we're continuing even through the pandemic.
When I say, we're gaining strength I mean, we feel good about our performance would be on we talk to our suppliers all the time and that's primarily where we get the best information about our competitors are doing and we feel good really across our all our product lines.
That we that we are gaining strength, we're picking up talent nice talent a in the field, even though we've been obviously managing our expenses tightly when when talented people in this industry want to join site, one would bring them on and we've been picking up talent.
There was the reason you know just pool, obviously in horizon reported we benchmark that we performed slightly better than down in those markets. So we feel good about that so any kind of benchmarks that we can find tell us that were yeah, there were performing well.
In the toughest times, so that's how we get our information and we feel pretty good about that.
Okay, great. Thanks for the time good luck gentlemen.
Thank you ladies ladies and gentlemen, we have reached the end of the question answer session and I would like to turn the call back to Doug Black for closing remarks.
Okay, great well I'd like to thank you everybody today, we really appreciate your interest in sight, one we feel great about our company in our team I'd like to think that side. One associates, one more time and also our suppliers and customers you know together, we're making it through this pandemic and we feel good about the rest of 2020 and building.
In our company for the future.
Orla thoughts go out to a any anyone that's affected by Koby 19, we look forward to updating you.
After our third quarter.
Thank you.
This concludes todays conference you may disconnect your lines at this time. Thank you for your participation.
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