Q1 2021 SiteOne Landscape Supply Inc Earnings Call
Greetings and.
Welcome to the site one landscape supply incorporated first quarter 2021 earnings call. At this time, all participants are in a listen only mode of <unk>.
And the answer session will follow the formal presentation of the financials require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to your host John Guthrie Joni you may begin.
And good morning, everyone.
We issued our first quarter 2021 earnings press release, this morning, and posted a slide presentation to the Investor Relations portion of our website at investors site, one Doug Com.
I'm joined today by Doug Black, our chairman and Chief Executive Officer, Scott Salmon Executive Vice President of strategy and development.
Before we begin I would like to remind everyone that today's press release slide presentation and the statements made during this 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 projections.
Such risks and uncertainties include the factors set forth in the earnings release and in our filings with the Securities and Exchange Commission <unk>.
Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance.
A reconciliation of these measures can be found in our earnings release and in the slide presentation.
Now I'd like to turn the call over to Doug Black.
Thanks, John.
Good morning, and thank you for joining us today for.
Following a very strong fourth quarter and an excellent year in 2020, we were very pleased to report even stronger results in the first quarter of 2021.
Do you think that's off to a tremendous start for the year.
We have seen the stay at home and outdoor living trends continue to benefit landscape in repair and upgrade our cup.
Coupled with the stronger housing market and steady commercial activity all supporting robust demand for professional landscaping services.
At the same time, our exceptional teams continue to overcome the labor and product supply challenges associated with the very strong market.
Delivering better value to our customers and suppliers than ever before.
We believe this has allowed us to gain market share on top of the overall market growth.
Further we continue to add terrific companies the site one of.
All local market leaders with the best teams in the industry.
As a result, we are delivering outstanding value to all of our stakeholders and gaining strength at the same time.
Stronger together works.
I could not be prouder of our team for a more confident about our future.
I will start today's call with a brief review of our unique market position and our strategy for long term performance and growth.
Followed by some highlights from the quarter.
John Guthrie will then walk you through our first quarter financial results in more detail.
And provide an update on our balance sheet and liquidity position.
Scott Salmon will discuss our acquisition strategy and the.
Then I will come back and review some of the trends that we're seeing on our end markets and address our outlook for the remainder of the year before taking your questions.
As shown on slide four of the earnings presentation, we have grown our footprint to more.
More than 580 branches and three major distribution centers across 45 U S States and six Canadian provinces.
We are the clear industry leader, yet we estimate the we only have about 13% share of the very fragmented 20 billion wholesale landscaping products distribution market.
Accordingly, our remaining growth opportunity is significant.
We have a balanced mix of business with 59% focused on maintenance repair and upgrade.
27% focused on new residential construction and.
And 14% on new commercial construction.
We are also the only national full product line wholesale distributor in the market.
Our balanced end market mix broad product portfolio and geographic spread gives us multiple avenues to grow.
And more ways to add value for our customers and suppliers.
Providing important resiliency in softer market.
Turning to slide five our large and local strategy combines the scale resources and capabilities of a large world class company.
With the passion deep knowledge and entrepreneurial of them of our local team in order to deliver superior value and differentiate us from the competition.
Well, we have come a long way in building type one we're still on the early to middle innings of developing our full capabilities across all of our product line and so we remain highly focused on our commercial and operational initiatives.
Build our capabilities and improve the value that we deliver to customers and suppliers.
These initiatives are complemented by our acquisition strategy, which builds on our product portfolio moves us into new geographic markets and adds terrific new talent the site one.
Taken altogether, our strategy creates superior value for our shareholders through organic growth.
EBITDA margin expansion and acquisition growth.
If you turn to slide six you will see that our strategy is working.
Over the last five years, we've been able to deliver consistent organic growth.
Strong acquisition growth.
And solid EBITDA margin expansion.
The heavily in SG&A.
The build our I T <unk>.
The management supply chain finance marketing operational excellence and acquisition teams as well as our underlying systems infrastructure, including our digital capability.
While work remains to be done on building our systems infrastructure.
Of support teams are largely in place and each year, our teamwork and synergies of cross site one improved.
Along with our ability to leverage our infrastructure investments.
We can see the and our increased market share gains and organic growth and in our improved operating leverage.
Going forward, we will continue to build and leverage our capabilities to accelerate performance for all stakeholders.
You will also note that we have now completed 60 acquisitions across the irrigation agronomics nursery and Hardscape product line during the last seven years with for so far in 2021.
We only acquire well run companies.
And so all of these acquisitions are already high performing companies before joining the site one.
With them, we added significant capability in tremendous talent.
And we have learned many lessons that can be applied to future acquisitions.
Our acquisition pipeline remains very robust and we have significant potential to continue growing through acquisition for many years to come.
In summary, our strategy is working we are still early in our execution and you will see us get stronger every year as on.
The key initiatives gain more traction.
Slide seven shows the long runway, we have ahead and filling out our product portfolio, which we aim to do primarily through acquisition.
Especially in the nursery and Hardscape categories.
Nursery and Hardscape for the operations require larger sites and significant local expertise and so these product lines cannot just be added the most of our existing branch location.
We are well network with the best companies in our industry.
And expect to continue filling in these markets systematically over the next decade.
I will now discuss some of the first quarter performance highlights as shown on slide eight.
We delivered a record 41% net sales growth in the first quarter with 32% organic daily sales growth.
And 7% net sales growth added through acquisition.
We're seeing very robust demand so far in 2020 on across all of our product line customer segments and geographies supported by very strong residential repair and remodeling activity.
On a strong new residential construction market.
Interestingly commercial activity has been solid so far this year and seems to have stabilized.
On top of the market growth. We believe we are gaining share in all of our product categories as our category management operational excellence sales.
As for performance marketing and digital initiatives gained strength.
Through these initiatives, we are improving our product portfolio customer.
Customer service.
Partnership capabilities, and our customers' awareness of our capabilities.
As a result, we are attracting new customers and gaining wallet share with existing customers.
As I had mentioned we have seen the strong sales continued so far in the second quarter the only.
Expect the rate of growth to moderate during the remainder of the year.
You can imagine with this kind of growth our suppliers are struggling to keep up with demand.
And product supply is very tight across most product categories.
Additionally, there is an acute shortage of trucking capacity to bring product to market.
All of these factors have put a lot of strength on the industry supply chain.
Fortunately this is an area, where we have built significant strength.
And I'm very proud of the site, one supply chain and transportation teams for <unk>.
Overcoming these challenges and keeping our branches well supply so far the support our growth and enable us to gain market share.
Our gross margin was down 10 basis points during the quarter as we built up inventory for the year worked through the supply chain and transportation constraints and manage the cost inflation and pricing.
We saw a particularly high inflation and freight and then a few product lines like PVC pipe and copper wire during the quarter.
That said our teams did a great job managing product costs relative to the market and.
And we saw a minimal negative impact on our gross margin.
We remain confident in our ability to improve gross margin for the full year with private label growth.
The growth with small to midsized customers and the continued execution of our supply chain and category management initiatives.
On the SG&A side, we achieved fantastic leverage as our teams worked hard to service the strong demand.
So on managing cost exceptionally well.
Like most companies in our industry, we are challenged in ramping up our field teams. This year and so our associates have had to be very productive and created and serving our customers.
In this environment, our recent investments in mobile pro.
Our transportation management system or Tms.
And insight on Dot com are paying off.
We remain focused through our operational excellence initiatives on helping our associates to be more productive through better systems and technology.
So that they have more time to do what they do best.
Help our customers to win.
I would also comment that our field support associates, who are working from home have been tremendous.
And we have learned a lot about how to help them be more productive while also supporting their work life balance.
As we return to the office environment in the coming months, we believe that we can develop of hybrid work structure that will be a win win win for our associates, our customers and for site one.
In this way Ironically, the COVID-19 experience has made us the stronger company.
Overall, we will continue to invest in our systems and processes to create a better place to work for our associates.
The old competitive advantage with our customers and suppliers and increase our SG&A leverage in the coming years.
The combination of strong organic sales excellent SG&A leverage and good contribution from acquisitions.
How'd us to deliver record adjusted EBITDA growth for the first quarter and improve our adjusted EBITDA margin by 610 basis points.
We are excited that we now expect to achieve our 10% adjusted EBITDA margin milestone for the full year in 2021.
On the acquisition front, we are off to a great start with two deals in the first quarter and two deals completed so far in the second quarter.
These companies are high performers and give us excellent talent and capability for growth in their respective markets.
While adding approximately $80 million or about 3% to our annual sales.
With an experienced team.
Broad and deep relationships with the best companies in the industry.
A very strong balance sheet and an exceptional reputation for being a good home for the local companies.
We remain well positioned to grow through acquisition for many years to come.
Overall I am very proud of how our team has performed in this extraordinary environment.
To keep everyone safe serve and support our customers deliver outstanding financial results and create tremendous value for all of our stakeholder.
We remain excited about both the short and long term opportunities to drive excellent performance in growth with our strong team and winning strategy.
Now John will walk you through the quarter in more detail.
John.
Thanks, Doug I'll begin on slide nine with some of the highlights from our first quarter results.
We reported a net sales increase of 41% to $650 million in the quarter.
There were 65 selling days this quarter compared to 64 in the prior year period.
Organic daily sales increased by a record 32% for the quarter due to strong demand as consumers are spending more time at home and investing in their outdoor living spaces.
Organic daily sales for landscaping products, which include irrigation nursery and Hardscape outdoor lighting and landscape accessories was strong again this quarter, increasing 29% compared to the prior year.
Landscaping products or the products most closely tied to the repair and remodel end market, which is benefiting from homeowners upgrading their backyards and patio.
Organic daily sales for agronomic products, which includes fertilizer control products I smelt and equipment grew 39% this quarter.
Agronomic products benefited from increased demand in residential maintenance and early start for the spring selling season strong sales of ice melt in response to more of a winter storms and increased sales of less co products through the retail home Center channel.
Geographically all regions achieved double digit organic daily sales growth.
As Doug mentioned, we continue to see strong sales growth in the second quarter as our customers remain very busy.
As a reminder, last year due to the impact of COVID-19 related restrictions, we saw negative organic daily sales growth in April and only 3% organic daily sales growth in the second quarter.
But then sales recovered and we achieved double digit organic daily sales growth in the second half of last year.
So we have of less challenging sales comp for the second quarter and tougher sales comps in the third and especially fourth quarter.
Prices increased 3% for the first quarter, which was at the high end of our previously expected range of 2% to 3%.
The cost increases from our suppliers throughout the quarter with products like PVC pipe copper wire and fertilizer, all reaching multi year high.
We are managing through the cost volatility and have adjusted our pricing accordingly for the full year, we are increasing our expectation for price inflation, two 3% to 5% as we were getting indications that some suppliers they pushed through additional price increases.
Acquisition sales, which reflect the sales attributable to acquisitions completed in both 2020, and 2021 contributed approximately $33 million for 7% to the overall first quarter growth rate.
We were pleased with the performance of our acquisitions and our overall deal pipeline Scott will provide more details regarding our acquisition strategy later in the call.
Gross profit increased 41% to $202 million for the first quarter for gross margin decreased 10 basis points to 31%.
We were pleased with how we maintained gross margin throughout the quarter, despite product cost inflation and greater material handling expense, including almost $1 million of nursery losses, resulting from the Texas Winter storm, which represents approximately 15 basis points of negative impact on our gross margin this quarter.
Selling general and administrative expense or SG&A increased 15% to $192 million for the first quarter.
SG&A as a percentage of net sales decreased 670 basis points to 29, 6%.
The reduction in SG&A as a percentage of net sales reflects our excellent organic sales growth combined with solid cost management.
We expect the amount of SG&A leverage to moderate somewhat as we move into the primary selling season.
For the first quarter, we reported an income tax benefit of $2 5 million compared to an income tax benefit of $13 5 million in the prior year period.
The decrease in the income tax benefit is attributable to the increase in net income before taxes and the decrease in the amount of excess tax benefits from stock based compensation.
For 2021, we expect our effective tax rate will be between 25, 5% and 26, 5% excluding discrete items such as excess tax benefit.
We reported net income for the first quarter of $7 4 million compared to a net loss of $17 5 million for the prior year period the.
The improvement was primarily driven by our strong sales growth and SG&A leverage.
Our weighted average diluted share count was $45 7 million compared to $41 8 million in the prior year period.
This increase was primarily attributable to our August six 2020 equity operating and the impact reporting net income for the first quarter. This year and a net loss for the first quarter last year.
Adjusted EBITDA for the first quarter was $34 5 million compared to a loss of $3 6 million for the same period in the prior year adjusted.
Adjusted EBITDA margin, reflecting our SG&A leverage increased 610 basis points to five 3%.
Now I'd like to provide a brief update on our balance sheet and cash flow statement as shown on slide 10.
Net working capital at the end of the first quarter was $539 million compared to $521 million for the prior year period.
The increase in net working capital is attributable to additions from new acquisitions, and higher receivables, resulting from our strong sales growth cash.
Cash used in operations decreased to $46 million for the quarter compared to cash used in operations of 66 million for the prior year period.
The improvement was primarily driven by our increased profitability.
We made cash investments of $46 million for the quarter compared to 51 million for the same quarter last year.
The decrease in cash investments reflects slightly lower spend on acquisitions this quarter compared to the prior year period.
Net debt at the end of the quarter was approximately $355 million compared to $650 million at the end of the prior year period.
Reduction in net debt reflects proceeds from our August 2020 equity offering and our strong operating cash flow.
Leverage at the end of the quarter decreased to one two times, our trailing 12 months adjusted EBITDA.
Third the three two times at the end of the first quarter of 2020 the.
The lower leverage reflects a reduction of net debt as well as our improved profitability.
Our target net debt to adjusted EBITDA leverage range at the year end is one to two times.
As a reminder, we lowered our target leverage range from two to three times to one to two times to increase our financial flexibility and allow us to execute our acquisition strategy in all market environments.
During the quarter, we took advantage of our strong financial position lower leverage and favorable market conditions to refinance our term loans.
And the refinancing we extended the maturity of the term loan to 2028 and reduced the interest rate by 75 basis points to LIBOR, plus 200 basis points.
At the end of the quarter, we had liquidity of approximately $377 million, which consisted of approximately $33 million cash on hand, and approximately 344 million the available capacity under our ABL facility.
In summary, our priority from a balance sheet perspective, and to maximize our financial strength and flexibility without sacrificing long term growth or market opportunity.
I will now turn the call over to Scott for an update on our acquisition strategy. Thanks, John That's shown on slide 11, we acquired two companies in the first quarter and two more companies since the quarter finished with combined trailing 12 month net sales of approximately $80 million.
Since 2014, we have acquired 60 companies with over $1 1 billion and trailing 12 month net sales.
Turning to slides 12 through 15, you will find information on our most recent acquisition.
On February 17th we acquired Lucky landscape supply of wholesale distributor of nursery products the landscape contractors, serving the greater Houston market on a single location.
This is our fourth dedicated nursery branch in Houston and expands our full line capabilities in this important market.
On April 1st we acquired Arizona Stone and solstice, establishing a leading hardscape platform with nine locations across the rapidly growing Arizona and Nevada markets.
This complements our existing lines of business and doubled our footprint in Arizona.
On April 30, we acquired timber wall landscape of masonry products, expanding our leading hardscape position in the greater Minneapolis market established in Q4 of 2020, when we acquired hedberg supply.
Also on April 30, we acquired Melrose irrigation supply extending our leading irrigation presence in Florida by adding six locations across the South Florida.
Melrose brings a great team and excellent new locations to serve the growing Florida market.
Summarizing on slide 16, our acquisition strategy continues to create significant value for <unk> and our pipeline is strong and expanding across all geographies and lines of business.
We are excited to be partnering with the highest performing companies in the industry and bringing the outstanding new talents of site one of.
Our field and functional support leaders along with our strategy and development team continued to build strong personal relationships every day with the many entrepreneur. So we hope to bring into our family when the timing is right for them.
The decision to sell a family business may only happened once in a lifetime and we are truly honored and humbled each and every time, an owner chooses to join our family.
I want to thank all of the highly successful entrepreneur, who have joined site one as well as the entire <unk> team.
Their passion and commitment to making site one of Great company continues to be the key ingredient, which allows us to successfully add terrific new companies and associates and provide tremendous value to our customers suppliers and communities.
I will now turn the call back to Doug.
Thanks Scott.
Wrapping up on slide 17.
As mentioned, we've seen very strong demand trends continue in April across all product lines customer segments and geographies.
Given our customers current backlog of work and the underlying positive development that we see in the economy and in residential construction, we expect favorable demand trends to continue through the remainder of the year.
As a reminder, last year, we had negative growth in April which was heavily impacted by COVID-19 restrictions.
As the restrictions were removed we saw some recovery in May and then very strong double digit growth in June through December.
As such we expect our current growth the began to moderate in May and then settle into a much lower growth rate in June through the end of 2021.
We do however expect the growth to be positive in the second half supported by higher inflation and solid demand.
In terms of end markets, we would expect maintenance, which comprises 41% of our business.
To be steady during the remainder of the year with low to mid single digit growth.
We had terrific capability and great momentum and maintenance with our market leading less co brand.
And so we are confident in our ability to perform kind of steady market.
Residential new construction and major repair and upgrade which comprise 27% and 18% of our business respectively.
Are expected to remain very strong.
While growth will certainly moderate against higher comparable sales our customers have deep backlog and residential and do not plan the slowdown.
These markets will be constrained by labor.
<unk> and possible supply shortages.
Lastly, the commercial market, which represented 14% of our business has remained surprisingly solid this year so far.
And the weakness that we anticipated earlier in the year has not developed.
Our project services group is bidding on more jobs than they did at this time last year.
And our customers' backlogs are solid.
Both supporting growth in the second half.
Accordingly, we believe that we will see a stronger commercial market.
We had originally forecast for the second half of the year.
Taken altogether, we expect to achieve low double digit organic daily sales growth for the full year 2021.
Which would be a record level of growth for site one.
Additionally, we will continue to execute our commercial and operational initiatives, which we believe will yield good gross margin improvement and SG&A leverage leading to solid adjusted EBITDA growth and margin expansion.
We are excited in that we now expect to achieve our 10% milestone for adjusted EBITDA margin in 2021.
In terms of acquisitions as Scott mentioned, we currently have a very strong pipeline of high quality companies and look forward to adding more of these through the site one family over the remainder of the year.
Our acquisitions are performing very well and we continue to improve our ability to integrate them into our company improve.
To improve our customer value and create synergies together.
Accordingly, we expect acquisitions to contribute strongly to our performance and growth in 2021 and the years ahead.
Taken altogether, we are raising our fiscal 2021, adjusted EBITDA guidance to be in the range of 300 million to $320 million.
Which represents year over year growth of 15% to 23%.
This range does not factor any contribution from unannounced acquisitions.
This compares to our prior estimate.
Of $275 million the $292 million.
In closing I would like to sincerely. Thank all of our site when the associated with.
We continue to amaze me with their passion commitment teamwork and selfless service.
We have a tremendous team and it is an honor to be joined with them as we deliver increasing value for all our stakeholders.
I would also like to thank our suppliers for supporting us so strongly and our customers for allowing us to be their partner.
Operator, please open the line for questions.
Thank you at this time well be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad. The confirmation tone will indicate your line is another question for you.
You May press star two if he likes for a move your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star.
Please limit to one question and one follow up question.
The first question is from Ryan Merkel with William Blair. Please proceed with your question.
Thanks, and very nice quarter all.
Hi, good morning first off.
Morning.
First off EBITDA this quarter was well above even the most optimistic expectations, you usually breakeven or lose a little money in this quarter. So Doug help us understand how you made $35 million. This quarter and then was there any revenue pulled forward from the second quarter.
Yes, I think of it just gets down to the organic growth when you see organic growth like that.
Ends up looking like.
Like a second or third quarter and so it just gets down to the the rapid growth that we saw really across all regions and all product lines.
And the other thing is that our teams we are struggling to ramp up if you will labor wise.
We fill out our teams as spring hits.
And it's a battle out there are customers of five net net and we're funded net and so you get the combination of really good leverage on a let's call it of a thinner team.
And then the strong sales not our teams will fit out and we will get less leverage as we go through the year, but those are the big factors and having that profitable a strongly profitable first quarter in terms of pull forward, we really don't feel like.
That's the big factor.
It's been spring did hit a little early on the weather was favorable.
We did have the storms and the <unk>.
Winter. So we sold a lot of ice melt so you saw on maintenance product.
Very strong.
And so we really don't feel like that's a big factor it could always be somewhat of a factor, but it wouldn't be of a huge factor that we think would.
Tier of the effect the second and.
Third quarter, John John anything to add to that no I think you've hit on it.
You hit the key points Greg.
Okay.
And then secondly, you mentioned April is tracking well I know, it's an easy comp if I just use normal seasonal lift in the <unk> I get mid teens or better organic growth is there any reason that we wouldnt see typical seasonality into Q2, and then even through the whole year.
Yes, we feel like we will get the.
The usual seasonality so that's a good assumption.
Okay.
Got it I'll pass it on Texas.
Great. Thanks, Brian.
Thank you. Our next question is from David Manthey with Baird. Please proceed with your question.
Thank you good morning, guys.
Good morning, Good morning, Larry.
So yeah. The following under Ryan's question.
Typically the first quarter is breakeven or loss on an EBITDA basis.
Clearly really strong results here, and then relative to the guidance, which looks like it's up 25% to $28 million.
Should we assume that when you put up the initial guide.
Our guidance range in your mind, you had already assumed there was EBITDA.
The EBITDA profitability in that first quarter on it I guess, what I'm asking here is are you increasing the outlook for the second through fourth quarters or are you just upping the guidance for the first quarter beat and then mostly maintaining the outlook for the remainder of the year.
I think I would characterize it as the ladder, we we were.
The increase in guidance, primarily reflects the outperformance in Q1.
There's still a lot of the season to play.
And we're really going into the selling season on why.
I think we're probably more optimistic now than we were at on when.
When we gave initial guidance, we have not substantially changed our outlook other than for the the first quarter beat.
Yeah, Okay. Thank you for that and then.
Second on gross margin you noted the <unk>.
Underling expense.
The increase could you talk about CMS and update US there and then discuss private label and the mix of nursery Hearts gauged the usual suspects as it relates to gross margin I think previously you had said you expect to increase gross margin for the full year 2021 of them just check.
And on the puts and takes there.
We still think of we're very optimistic of of that we're going to continue to expand gross margin this year the.
The major items and we were actually very pleased with how we ended up for the quarter only being down 10 basis points.
We did lose the $1 billion of nursery product.
Texas other.
This year, that's about 15 basis points.
Obviously, I think one of the things that different is is price inflation was stronger than we originally thought so we managed through that I think we've got a good handle on it now but.
But there was there was that it was.
It was the battle for our teams throughout the quarter as they're both honoring our customer commitments, but also seeing.
The cost increases.
Exceed what we had originally forecast on top of that David We're seeing very strong private label growth. We're extremely happy with that we're seeing really good growth with our small and mid sized customers.
Not just sales, but the customer count going up so.
And then the other category initiatives, as we're driving nursery and Hardscape and higher.
On a gross margin products.
All of those are on track and so we feel.
What gives us confidence in addition to the.
Feel like we're in good shape on price cost the.
The other factors are still full steam ahead for this year.
Sounds great. Thanks, a lot guys.
Thank you. Thank you.
Thank you. Our next question is for Matthew Bouley with Barclays. Please proceed with your question.
Good morning, Congrats on the results and thanks for taking the questions.
I just wanted to follow up on the margin side actually because I think.
If I'm doing the math right. The guide implies a decline in EBITDA margins just for the balance of the year.
Following the strong start and you just touched on gross margins.
The improving year over year. So basically if you if you could reconcile that is it just that moderation in SG&A leverage you spoke to perhaps pulling in some.
Extra investments sort of all of the above or just what else can you give us on reconciling that thank you.
We have uncompleted what I would say given up on on on achieving EBITDA margin growth, we are going to face on.
Some higher expenses in SG&A, as Doug mentioned, where we're staffing up to it.
To.
The realized the increased demand.
Demand, we do expect to.
Gross margins to improve in the in the in.
In the second half.
And then then there will potentially you know it depends on how Q4 of those on.
That will be the probably the most challenging just from our standpoint also.
We are facing a tough comp.
From a from a sales perspective in Q4.
Okay. Thanks for that John.
The second one on the M&A side.
I look at the Phoenix and South Florida.
Obviously large construction and housing markets on the slide I mean, it seems like you have a pretty healthy scale on those markets that are are those type of markets, where you've got 10 or 15 branches. The does that get you near the kind of desired local market share with with the full line offering or is there still even more to come in places like those.
Markets and just.
What are you thinking on on <unk>.
Just kind of the next areas of white space Youre looking to sell thank you.
Yeah, I think you bring up the good point, if you look at our for acquisitions year to date. It shows the diversity and strength of the pipeline with two hardscape distributors of irrigation of the nursery and all the across the country, but that's always a factor Matthew the debt.
The market share we have on any in any market but.
There are still parts of Florida, where we have where we have very strong market share on irrigation, but there is still pockets, where we might be able to grow and Arizona, and Nevada, where we Arizona stone was such a fast growing market as well that I still believe we have opportunities.
And really all of our lines of business.
And looking forward I think what you'd see is the.
The continued the go forward pipeline is similarly diverse just like our acquisitions year to date and across geographies and lines of business now I would just add to that like the fill in if you look at Arizona.
We have several locations, but we still we still have of ways to grow there in market share and irrigation because you know horizon is very strong there of healing is very strong there and so it might look like.
We've got great coverage, and where we're number one but that's actually a market that we've got a lot of room to grow.
In both irrigation and Agronomics, Arizona stone.
<unk> two are.
On the acquisition, we did previously and now we're the leader and Hardscape and landscape supplies. There. So we're very happy and that's kind of.
A good example of our strategy, how we kind of build out over time these leadership positions.
And the acquisitions are key to doing that.
Well it makes sense that is a great color. Thanks, everyone and good luck this year.
Thank you.
Thank you. Our next question is from Keith Hughes with true of Securities. Please proceed with your question.
Thank you of course, it's on inflation it raised here.
Got it saw that earlier on the call.
In terms of passing through the pricing are you at the point now we don't see of drag associated with the inflation coming into your businesses have you gotten ahead of the curve I guess is my question, Doug we had in the second quarter.
We do feel as if we were ahead of the.
The curve there, especially.
Okay.
As we went through the first quarter, we put in place new pricing to reflect the the increases coming from our suppliers and we've done I think we got ahead of it.
At the end of the quarter on and are well positioned for the rest of the year.
And the final question, Doug you talked about.
Raise expectations on the commercial business.
Do you expect that to be solidly positive.
Year over year on the second half of the year or is this quotation activity that is more focused on by 'twenty two.
Yeah, well you know when we started the year.
We thought commercial will be down.
And given what we're seeing now we actually do think it will be slightly positive in the second half.
We base that on the activity that we see we of a project services group that does bids for our contractors debt.
They're bidding is higher than it was at.
At this rate last year.
Last year of dipped in April, but then it came back in May.
And but we're still looks like we're tracking above last year's rate and the other thing is just talking to our customers or commercial customers feel good about their backlogs.
Debt they have going into the second half of the year on some of them actually feel good going into 2022, which is interesting. So we think that the commercial market.
Seems to be lagging and but slowly following a very strong residential market.
And.
As you think about the suburbs, where the residential are happening that kind of commercial business lends itself more to landscape and then that may be inner city commercial which has been strong over the last couple of years. So the mix is good for us as well so long long story short we expect to be.
Slightly up in the second half in commercial which is which is terrific.
And more positive than what we would of thought about three months ago.
Okay. Thank you.
Thank you.
Thank you. Our next question is for Mike Dahl with RBC capital markets. Please proceed with your question.
Good morning, Thanks for taking my questions.
My first question.
That's kind of a follow up on on the guidance on.
I think you mentioned that you still expect.
Positive growth in the second half despite the tough comp. So I was wondering if you could clarify do you expect.
Positive growth in each of the <unk> and <unk> I know you've got the selling day impact in for Q and also specifically on volumes you expect positive volume growth in each of the <unk> within the guide.
We're not we're not specifying debt that level of detail.
I would say we will say we are we are more optimistic. The later you go into the year.
More uncertainty is for key was going to be the toughest comp.
It's also the.
The smallest of smaller then obviously three Q.
And in addition, one thing just the model allowed us as you saw on pure organic basis, not accounting for the extra days, we do lose a few days of sales in the.
In the fourth quarter, so Q4 will be more more.
More challenging than Q3, but we're not specifically calling out the difference between the two.
Okay got it.
Helps.
And then I think you talked about some of the moving pieces around <unk>.
Margins I was wondering if you could kind of specify maybe with respect to free specifically.
How much of a headwind.
Do you expect freight to be and have you started to implement anything like surcharges on.
On trade.
We think.
We're trying to capture the freight costs like all costs.
In the cost of our product.
From that standpoint, we're trying to manage it through it.
Maybe a slight headwind I would say relative to where we thought we would be at the beginning of the year or what we've talked about with regards to gross margin. We think we can overcome it.
But it could be a slight headwind we are not implementing any additional.
Freight surcharges or anything for our customers most of our freight cost is actually our deliberate cost <unk>.
Two customers.
But we're trying to we're trying to do.
Manage through that.
But slight headwind I guess in summary, we think we can still achieve gross margin improvement and.
In spite of that one of the things that gives us confidence. There is we just have a very good.
Transportation team that does a phenomenal job of.
Working with our with our freight partners.
Managing costs.
And but.
But more importantly, securing capacity.
Of this kind of strong market with the shortages so.
We've got of Barry that would be the strength of side one.
And so that gives us the confidence that we can we can manage that and then on the on the pricing side as John mentioned, we're on top of the movements and obviously working.
Feel good about our ability to pass pass on.
And the increases.
Okay.
That helps thanks, Doug.
Thank you. Our final question is from Alex <unk> with Baird. Please proceed with your question.
Good morning, Thanks for taking my questions. My first one is on acquisitions did you notice an uptick in calls from distributors looking to sell following the recent discussions around capital gains tax increases.
I would say is there's.
So many factors that go into that decision that that is one of many I think I've heard it discussed some but I wouldn't say that that is somebody who wasn't thinking of selling at all.
The uncertainty of the tax change hasnt driven them to full sell mode, but it is I would say it adds momentum within their decision process already.
Okay understood and then second one is on the back half of the year guidance taking into consideration of the three items you outlined as potential sources of second half of weakness so labor whether on supply of shoes, which one do you think could provide the best upside if it doesn't come to fruition.
Yeah, it's really.
Yeah, I would just characterize them as labor, we know as a constraint. It's been a constraint of continues to be of constrained. So I think that's a more predictable one.
And one net that we and our customers seem to seem to always figure out how to overcome and get some get some growth.
The supply shortages, we have strong suppliers, they're working hard.
We do a great job.
You know kind of making sure that we secure volume for our for our company and so that one I think is of risk.
But also somewhat manageable risks whether is the one that's not.
In our control right. So if we if we got shorter for hurricanes or of winter comes early debt that could be a probably a more material factor. So I would probably put that one.
A factor in our industry.
And.
So the of the three that's probably the one to watch watch more for.
Okay, great. Thank you guys.
Thank you. Our final question is from Damien Carey with UBS. Please proceed with your question.
Hey, good morning, guys.
On a follow up question on the really strong profitability in the first quarter.
Just curious to what extent.
The one week shift in the calendar kind of stretch.
The stretching into April.
More of the spring season have an impact on the on the first quarter profitability.
I don't think it would be a huge impact I mean, we've talked about a little bit, especially on the maintenance being an early spring, but we believe kind of the strong sales.
We saw throughout the quarter.
From that standpoint, and and so on.
Maybe on the margin a little bit, but not not huge with regards to the overall.
Performance of the quarter.
Okay, Great and then just on the.
The capital allocation, how youre thinking about the balance sheet targeting sort of the 1% to two times.
Last year, you made that decision kind of.
On an environment, where there were still of lot of economic uncertainty out there just.
Where we are today.
Just wondering how you guys are thinking about that 1% to two times in and whether you have more flexibility to kind of.
Above those levels.
From here.
Oh.
We do not anticipate that at all we think the one to two times is a good range to operate in we think weird the strong cash flow, we're generating from the business.
We've got great opportunities on acquisitions. So so we don't see ourselves.
Going outside of that one to two times.
Anytime soon whether this year or even over the next couple of years, Yes perspective, where we're going to try to manage through there.
And execute our strategy and we think we're in good position from that perspective, yes that being said, if we had a large opportunity.
There's not many large opportunities in the.
And the landscape is very fragmented.
Or for some reason we did more.
<unk>.
<unk>.
The one to two is designed debt we could go above that if we needed to strategically right. It gives us strategic flexibility is also designed if we hit it in the future of if we hit a day.
Recession, we want to continue to be able to do deals so the.
The strategic flexibility is important for us we would go above it to make important strategic moves or to continue investing in acquisitions, if the times were tougher.
But assuming normal times and the good solid market and kind of normal course.
Thats a good range for us.
Got it makes sense thanks, guys.
Yeah.
Thank you. Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session I will now turn the call over to Doug Black for closing comments.
Thank you and thank you all for joining US again day, it's such an honor to be able to to build type one and we appreciate your interest and support as we move forward of our company I do want to before we close just highlight the COVID-19 is still with us and our thoughts and prayers go out to all of those that have been negatively impacted.
<unk> by COVID-19.
And we look forward to updating you.
Again during our call in August.
Thank you.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation and have a great day.
Okay.