Q2 2021 SiteOne Landscape Supply Inc Earnings Call
Greetings and welcome to cite 1 landscape supply Inc. Second quarter 2021 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 and.
Your telephone keypad as a reminder, this conference is being recorded I would now like to turn the conference over to your host Mr. John Guthrie Executive Vice President and Chief Financial Officer. Please go ahead Sir.
Thank you and good morning, everyone. We issued our second quarter 2021 earnings press release, this morning, and posted a slide presentation to the Investor relations portion of our website at investors Dot 1 dot com.
I'm joined today by Doug Black, our chairman and Chief Executive Officer, and Scott Salmon, and executive Vice President strategy and 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 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 expectation and projected.
Such risks and uncertainties include the factors set forth and the earnings release and in our filings with the Securities and Exchange Commission and.
Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance.
Conciliation of these measures can be found in our earnings release and in the slide presentation I would now like to turn the call over to Doug Black.
Thank you John.
Good morning, and thank you for joining us today.
We were very pleased to continue our excellent momentum during the second quarter with outstanding growth and sales and profits.
We have seen the robust demand for professional landscaping services continue with.
With strong residential repair and upgrade and new home construction.
Increasing commercial activity and steady maintenance growth.
And this environment are terrific teams have continued to perform well.
And superior value to our customers and suppliers, while overcoming and rapid product cost inflation select supply shortages and ongoing and freight and labor constraints.
As a result, we are continuing to steadily win market share on top of the underlying market growth.
Lastly, we made great progress on our commercial and operational initiatives during the quarter, while adding 3 high performing companies to our family through acquisition.
2021 is shaping up to be a breakthrough year for <unk> as we continued to build a great company and execute our long term strategy.
And we'll start today's call with a brief review of our unique market position and our strategy for long term performance and growth for.
I would buy some highlights from the quarter.
John Guthrie will then walk you through our second 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 then I will come back and review some of the trends that we're seeing and our end markets and address our outlook for the remainder of the year before taking your questions.
And as shown on slide 4 of the earnings presentation, we have grown our footprint to more than 590 branches and 3 major distribution centers across 45 U S States and 6 Canadian provinces.
We are the clear industry leader, Yeah, we estimate that 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.
7 per cent focused on new residential construction.
And 14% on new commercial construction.
We are also the only national full product line wholesale distributor and the market.
Our balance and market mix and broad product portfolio and geographic spread gives us multiple avenues to grow and more ways to add value for our customers and suppliers, while providing an important resiliency and softer markets.
Turning to slide 5 our large and local strategy combines the scale resources and capabilities of a large world class company with the passion deep knowledge and entrepreneur Elysium.
And our local teams in order to deliver superior value and differentiate us from our competition.
While we have come a long way and building side..1 we are still in the early to middle innings of developing our full capabilities across all our product lines.
And so we remain highly focused on our commercial and operational initiatives to build our capabilities and improve the value that we deliver to customers and suppliers.
These initiatives are complemented by our acquisition strategy, which feels and our product portfolio moves us into new geographic markets and adds terrific new talent to site per month.
Taken altogether, our strategy creates superior value for our shareholders through organic growth.
EBITDA margin expansion and acquisition growth.
If you turn to slide 6 you'll see that our strategy is working.
Over the last 5 years, we've been able to deliver consistent organic growth strong acquisition growth and solid EBITDA margin expansion.
And investing heavily and SG&A to build our I T and category management supply chain finance marketing and operational excellence and acquisition teams.
As well as our underlying systems infrastructure, including our digital capabilities.
While work remains to be done and building our systems infrastructure. Our field support teams are largely in place and.
And each year, our teamwork and synergies across site, 1 improve along with our ability to leverage our infrastructure investments.
We can see this and our increased market share gains and organic growth and.
And the improved operating leverage and we're continuing to achieve and 2021.
Going forward, we will build and leverage our capabilities further to accelerate performance for all stakeholders.
You'll also note that we have now completed 61 acquisitions across the irrigation agronomics nursery and Hardscape and product lines. During the last 7 and a half years with 5 completed so far and 2021.
We only acquire well run companies and so all of these acquisitions were already high performing companies before joining site work.
With them, we have added significant capability and tremendous talent and.
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 and our execution and you will see us get stronger every year as our key initiatives gained more traction.
Slide 7 shows the long runway that we have ahead and filling our product portfolio, which we aim to do primarily through acquisition, especially and the nursery and hardscape and categories.
Nursery and Hardscape operations require larger sites and significant local expertise and so these product lines cannot just be added to most of our existing branch locations.
We were well network with the best companies and our industry and expect to continue filling in these markets systematically over the next decade.
And we'll now discuss some of the second quarter performance highlights are shown on slide 8.
We delivered 33% net sales growth and the second quarter with 22% organic daily sales growth and.
And 11% net sales growth added through acquisition.
We are continuing to see elevated levels of demand across all our product lines and customer segments and geographies and supported by very strong residential repair and upgrade activity and a robust new residential construction market.
Commercial activity and sustaining a healthy rebound so far this year after stabilizing and the first quarter off the prior year loans.
On top of the market growth. We believe we are gaining share and all of our product categories as we execute our category management.
Operational excellence sales force performance and marketing initiatives.
We are especially pleased with our progress in attracting new smaller and midsize customers, Besides 1 and increasing our market share among Hispanic customers.
These segments offer tremendous growth opportunities for site 1 over the next several years.
Overall, our initiatives are improving and our product portfolio and customer service partnership value and our customers' awareness of our capabilities.
As a result, we are now attracting new customers and gaining wallet share with existing customers on a consistent basis.
Our positive organic daily sales momentum has continued so far and the third quarter, although at lower levels than the second quarter.
As we start to compare against stronger sales from last year.
If you recall, we saw double digit sales growth last year, beginning in June and sustaining through the remainder of the year.
Accordingly, we expected our sales growth to moderate significantly.
However, we are encouraged by what we've seen so far and June and July.
With the strong demand and ongoing COVID-19 challenges, we are continuing to see select product shortages as well as very tight trucking capacity and most parts of the country.
Additionally, labor constraints have made it difficult for our customers to work through their backlogs and take on additional work.
These market dynamics and tested and highlighted our supply chain capabilities.
And have reinforced our value added partnerships, which help our customers to operate more efficiently and effectively.
Our terrific functional and field teams have executed our strategy stronger together and world class fashion, which has given us a distinct advantage over our competition.
And it has been the case and other industries, we've also seen rapid inflation and landscaping products and and transportation.
Now from 3% and the first quarter, 2.8% and the second quarter.
We have worked hard with our suppliers and our customers to manage these cost increases and proactively communicate them to minimize the impact on our customers' operations and profitability.
We anticipate that this higher than usual inflation will continue through the end of the year contributing positively to our organic daily sales growth.
Gross margin improved 80 basis points to 35, 8% and the second quarter as we grew significantly and with smaller customers.
Private label sales.
Managed freight cost increases and proactively leveraged our supply chain and category management capabilities.
We are confident and our ability to continue executing these initiatives and improve our gross margin during the remainder of the year and beyond.
On the SG&A side, we achieved good leverage as our teams worked very hard to service the strong demand, while also managing costs exceptionally well.
We saw strong cost efficiency benefits from the now widespread adoption of mobile pro and our new transportation management system for Tms.
Which we rolled out and 2019 and 2020.
These 2 deployment and highlight the power of investing and new technologies.
And your customer service benefits and increased operating leverage.
And we plan to continue and making these types of investments and the future.
The combination of strong organic sales.
Solid gross margin improvement and good SG&A leverage and strong contribution from acquisitions and allowed us to deliver adjusted EBITDA growth of 44 per cent for the second quarter and improve our adjusted EBITDA margin by 140 basis points.
We now have clear line of sight this year to surpassed the milestone that we set during our 2016 I P O a 10% adjusted EBITDA margin.
We have significant capability to further improve our EBITDA margin and the years to come and we'll enjoy setting a new target. After we celebrate at year end.
In addition to mobile pro and Tms, we continued to make progress on other important investments during the second quarter to build our capabilities for the future.
We added several new members to our operational excellence team and have continued to codify our operating best practices and each of our major lines of business irrigation and lighting agronomics nursery hardscape and landscape supply.
And we make these best practices more systematic and cross site 1 we.
And we can improve the value that we bring to both suppliers and customers and accelerate organic sales and profit growth.
We also began the rollout of our new sales force customer relationship management system or CRM.
Which will help our over 400 outside sellers bring better value to our customers and drive new business through new customers and increase share of wallet.
We reinforced our digital team and the first and second quarters with new leadership and additional resources to speed progress and executing our digital strategy.
In addition, we recently conducted 2 more in depth pilots, a site <unk> dot com and Tampa, Florida, and Los Angeles, California to properly test new content features and service capabilities, including a new customer app.
Finally, we made important investments and marketing and during the second quarter to drive further market awareness of <unk>, 1 and to drive organic sales of targeted product and customer segments.
Overall for our strategic investments, we remain focused on providing world class tools processes and technologies to deliver value to our customers and suppliers and to help our associates be more productive.
They have more time to do what they do best help our customers to win.
On the acquisition front, we completed 3 deals during the second quarter, bringing our total company's added year to date to 5.
These 5 companies are all high performers and provide us with excellent new talent and capability for growth and their respective markets, while adding approximately $90 million and trailing 12 month sales per site 1.
Our development teams remain very active with numerous attractive target companies and.
And we should see additional deals being completed during the remainder of the year.
With an experienced team broad and deep relationships with the best companies.
Oh and balance sheet, and and exceptional reputation we remain well positioned to grow through acquisition for many years to come.
In summary, I'm very proud of our team as we are keeping everyone safe, serving and supporting our customers and delivering outstanding financial results and this extraordinary environment.
We remain excited about both the short and long term opportunities to drive excellent performance and growth for all our stakeholders.
Now John will walk you through the quarter and more detail.
John.
Thanks, Doug I'll begin on slide 9 with some highlights for my second quarter results. We reported a net sales increase of 33% to $1.1 billion and in the quarter.
There were 64 selling days this quarter consistent with the prior year period.
Organic daily sales increased by 22% for the quarter due to strong demand as consumers continue to invest and their outdoor living spaces.
Organic daily sales for landscaping products, which includes irrigation nursery hardscape outdoor lighting and landscape accessories was strong again this quarter, increasing 24 per cent compared to the prior year period.
We saw strong growth and the repair and remodel and market, which is benefiting from home and wonder is upgrading their backyards as well as the residential construction and market, which is benefiting from strong demand for new housing.
Organic daily sales for agronomic products, which includes fertilizer and control products ice melt and equipment grew 17% this quarter due to the stay at home trend as homeowners are also spending more on maintaining their loans.
Geographically all regions achieved double digit organic daily sales growth.
And as Doug mentioned, our customers remain very busy and we continue to see strong sales growth and July though at a slower pace due to the higher accounts.
As a reminder, organic daily sales growth increased from 3% and the second quarter of last year to 11, and 12 per cent and the third and fourth quarters respectively.
So we anticipate solid growth for the remainder of the year, but not at the growth rate seen in the second quarter.
Prices increased 8% for the second quarter and 6% for the first 6 months, which exceeded our previously communicated range of 3% to 5%.
We saw supplier costs continue to increase during the quarter with the greatest increases for irrigation products like PVC pipe and copper wire as.
And as well as the agronomic products like grass seed and fertilizer.
All products have also been impacted by increases in freight, although our strategic initiatives and supply chain and help mitigate the impact.
We are managing through these cost increases and the market for the most part it's passing them through and higher prices we.
We do not see these cost increases abating anytime soon and are increasing our expectation for price inflation for the full year to 6 to 8 per cent.
Acquisition sales.
It reflects the sales attributable to acquisitions completed in both 2000, and 2020 'twenty 1.
Contributed approximately $90 million or 11% for the overall second quarter growth rate.
We are pleased with the performance of our acquisitions and our overall deal pipeline, Scott who will provide more details regarding our acquisition strategy later in the call.
Gross profit increased 36% for $388 million for the second quarter and gross margin increased 80 basis points to 35, 8%.
The gross margin improvement reflects the execution of our supply chain initiatives favorable pricing and a more favorable customer mix due to continued growth with smaller customers.
With regards to the supply chain initiatives, we have benefited from the previously mentioned initiatives and freight.
As well as some strategic buys ahead of supplier price increases.
Selling general and administrative expenses or SG&A increased 29% to $226 million for the second quarter.
SG&A as a percentage of net sales decreased 60 basis points to 28%.
The reduction in SG&A as a percentage of net sales reflects a strong organic daily sales growth combined with solid cost management.
For the second quarter, we recorded income tax expense of $36.8 million compared to $25.6 million and the prior year period.
The effective tax rate for the quarter was 23 per cent compared to 24, 5% for the prior year period.
The decrease and the effective tax rate was due primarily to an increase and 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 benefits.
We recorded net income for the second quarter of $123.5 million compared to $79.1 million for the prior year period.
Movement was primarily driven by our strong sales growth gross margin improvement and SG&A leverage.
Our weighted average diluted share count for the second quarter was $45.8 million compared to $43.1 million for the prior year period.
This increase was primarily attributable to our August 6.2020 equity offering.
Adjusted EBITDA for the second quarter was $190.6 million compared to $132.1 million for the same period and the prior year.
Adjusted EBITDA margin, reflecting our gross margin improvement and SG&A leverage increased to 140 basis points to 17, 6%.
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 second quarter was $624 million compared to 584 million for the prior year period the.
The increase in net working capital is attributable to higher receivables, resulting from our strong sales growth.
And our decision to operate with higher inventory levels, given the supply chain disruption and the strong sales environment.
Cash provided by operations decreased to $138 million for the quarter compared to $185 million for the prior year period.
The decrease was primarily driven by the increase in working capital and we made cash investments of $36 million for the quarter compared to 5 million and for the same quarter last year. The increase in cash investment reflects the higher spend on acquisitions this quarter compared to the prior year period.
Net debt at the end of the quarter was approximately $257 million compared to $477 million at the end of the prior year period the.
And the reduction in net debt reflects proceeds from our August 2020 equity operating and a strong operating cash flow.
Leverage at the end of the second quarter decreased to 0.7 times, our trailing 12 months adjusted EBITDA compared to 2.2 times at the end of the second quarter of 2020.
The lower leverage reflects a reduction in net debt as well as our improved profitability.
<unk> target net debt to adjusted EBITDA leverage range at the year and it's 1 to 2 times.
As a reminder, we lowered our target leverage range from 2 to 3 times to 1 to 2 times to increase our financial flexibility and allow us to execute our acquisition strategy and all market environment.
At the end of the quarter, we had liquidity of 472 million, which consisted of 108 million of cash on hand, and approximately $364 million and available capacity under our ABL facility and.
In summary, our priority for our balance sheet perspective is to maximize our financial strength and flexibility without sacrificing our long term growth or market opportunities I will now I'll turn the call over to Scott for an update on our acquisition strategy.
Thanks, John as shown on Slide 11, we acquired 3 companies and the second quarter and our total 5 year to date with combined trailing 12 month net sales of approximately $90 million.
Since 2014, we have acquired 61 company with over $1.1 billion and trailing 12 month net sales.
Turning to slides 12 through 14, and you will find information on our most recent acquisition.
On April 30, we acquired timber wall landscape and masonry products, expanding our leading hardscape and physician and the greater Minneapolis market established and 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 6 locations across South Florida malware.
Melrose brings a great team and excellent new locations to serve the growing Florida market.
And on May 7 we acquired rock and block Hardscape supply expanding our leading hardscape and presence in southern California Rock and block serves the San Diego, Southern Orange County, and inland Empire market and California from 2 locations focused on the distribution of Hardscape and landscape supply.
Summarizing on slide 15, our acquisition strategy continues to create significant value for site 1.
Our pipeline remains strong and expanding across all geographies and lines of business and we are excited to be partnering with the highest performing companies and the industry and bringing outstanding new talent to cite 1.
These innovative leaders bring new ideas to cite 1 and help us realize our vision of being stronger together.
We are honored that so many of these entrepreneur choose to continue their careers for site 1.
Long after they sold their family business. They are helping the site 1 family provide outstanding value to our customers suppliers and communities.
Once the thanks for your entire site 1 team for their passion and commitment to making site 1 and a great place to work. This continues to be the driving force, which allows us to add terrific new companies and associate and I am confident and our ability to deliver value to all of our stakeholders through further acquisitions and 2021 and beyond I will now turn the call back to Doug.
Thanks Scott.
I'll wrap up on slide 16.
As mentioned, we are seeing the demand trends moderate somewhat in June and July from the first 5 months of the year against the higher comparable sales growth and 2020, which started in June.
With the tailwind of higher inflation, we are seeing continued organic sales growth across all product lines and customer segments and geographies.
Overall sales growth has held up better than we had expected.
Given our customers current backlog of work.
And the underlying positive developments that we see and the economy and in both residential and commercial construction and we expect to see solid organic sales growth for the remainder of the year.
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 have terrific capability and great momentum and maintenance with our market, leading less co brand and so we are very confident and our ability to perform and a steady market.
Residential new construction and repair and upgrade which comprised 27% and 18% of our business respectively are expected to remain very strong through the end of the year and likely into 2022.
Our customers have deep backlogs and residential and do not plan to slow down.
These markets will continue to be constrained by labor, whether and possible supply shortages.
The new commercial construction market, which represents 14% of our business has been the biggest surprise this year.
Commercial activity has continued to be positive and we see encouraging developments and the Abi index.
And in our own commercial bidding activity, which would support further growth ahead.
We now expect commercial construction to be solid through the remainder of the year.
Taken altogether, we expect to achieve solid organic daily sales growth and the second half of the year and.
And record sales growth for the full year of 2021.
Additionally, we will continue to execute our commercial and operational initiatives, which we believe will yield good gross margin improvement and SG&A leverage and leading to strong adjusted EBITDA growth and margin.
And expansion.
As mentioned, we now expect to exceed our 10% milestone for adjusted EBITDA margin in 2021.
In terms of acquisitions and Scott mentioned, we currently have a very strong pipeline of high quality companies and look forward to adding more of these to the <unk> 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 our customer value and create synergies together.
Accordingly, we expect acquisitions to contribute strongly to our performance and growth and 2021 and the years ahead.
Taken altogether, we are raising our fiscal 2021, adjusted EBITDA guidance to be and the range of 335 million to $365 million.
Which represents year over year growth of 29% to.
And to 40%.
This range does not factor any contribution from unannounced acquisitions.
This compares to our prior estimate of 300 million to $320 million EBITDA.
In closing I would like to sincerely. Thank all of our site 1 associates, who continue to amaze me with their passion and commitment teamwork and self service.
We have a tremendous team and it is and the honor to be joined with them as we deliver increasing value for all of 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, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star 1 on your telephone keypad, a confirmation tone will indicate your line is and the question queue. You May press star 2 if you'd like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your hand.
Debt before pressing the star keys, 1 moment, please while we poll for questions.
Your first question comes from the line of Ryan Merkel with William Blair. Please proceed with your question.
Thanks, Good morning, everyone and very nice quarter.
Thanks, Brian.
So first off on M&A, it's been quiet since May and my sense is you expected 21 was going to be as big as 2020. So has there been any change and targets desire to sell or is this just maybe some timing pushing back a bit.
Yes, Thanks, Bryan I would say, it's just a matter of timing.
We we still feel confident that we can deliver a solid year of acquisition and <unk>.
You recall last year, although we were at a COVID-19 pause we were at about $40 million and acquired sales and ended at 190, so feel still very confident about our.
Our pipeline definitely about our team and our valuation processes. So.
You know I wouldn't be concerned about it.
Perfect Alright, that's great to hear and then our gross margin very nice execution, given the backdrop some of the drivers and with it are they sustainable for the second half and should we expect gross margins to expand year over year during the second half for 'twenty 1.
Yes, we feel we're in good shape.
As we indicated.
And last quarter with regards to gross margin.
For the I would say, we saw more cost inflation, but the market is passing that through and general so that has not been we feel good about that also with regards to our team to supply chain initiatives.
And we think there'll be positive, though so we and and the customer mix.
As Ben has been a positive positive growth also with a smaller and smaller customers. So in general.
Still optimistic on a positive gross margin outlook for the second half of this year year over year improvement.
It's great to hear alright, that's enough.
Thanks.
Your next question comes from the line of David Manthey with Baird. Please proceed with your question.
Thank you and good morning, everyone.
First off John could you I'm not sure. If you mentioned the price realization in the quarter could you give us that as well as breakdown by agronomics and landscape products.
Oh, it was 8% for the quarter.
We're seeing a hold on.
Give you the exact numbers a little bit right now.
Hold on here AG.
Agronomics was was a 3% to 4% with the balance being and landscaping products, we're seeing the greatest.
Increases and probably the irrigation product line.
And PVC pipe copper wire Reza and that goes into a lot of other products is driving a lot of debt and then but EBIT EBIT and agronomic products and you know Theres Selim.
<unk> products that are seeing price inflation fertilizer rates are up or fertilizer prices and costs are up <unk>.
Feed costs are up and in general also kind of freight costs are increasing overall. So we are we did see more of this.
This quarter, but fortunately.
The market market is suggesting theres always some transition through but the market is adjusting to the new new costs.
Yeah, It makes sense and.
And second how do you gauge your.
Customer backlogs and is that all anecdotal conversations with the branches or do you have some quantitative indicators you look at and related to that I'm wondering you talked about the.
And your share of wallet and the customers and so forth, yes metrics on.
Same store customer accounts or average revenue per customer or anything like that.
So in terms of backlog David.
It is largely anecdotal.
In constant communication with our customers we do have.
And outlook through our project services bidding group. So we do commercial bidding and certainly we can track the number of bids.
And we are.
And we're submitting the win rate and et cetera, and.
So we've got a lot of more detail there, but commercial is a smaller part of our business. So on the residential side.
It's mostly just customer conversations and anecdotal.
And then in terms of wallet share customer count growth with different customer segments.
We do segment and our customers by size by by business type and.
So we you know we track all of that we're getting more sophisticated on wallet share with our new CRM going and that we're putting in and that will get a lot tighter.
But we certainly can see number of customers, whether we're growing and transactional Lee.
And by customer et cetera, and.
And those metrics by and large are positive as we mentioned on the call we're growing faster with the smaller customer.
Actually growing faster with the Hispanic customer segments.
And then we are on average and that's a targeted strategy because our.
Our share is lower with the smaller customers and it is with the with the larger customers just by the nature of how we've grown in the past and so theres a big opportunity there and we see positive indicators that our strategies are working our new marketing efforts are starting to work.
Our teams are doing a great job and.
And thats good profitable growth for Taiwan.
Good to hear Doug Thank you.
Thanks, David.
Okay.
Your next question comes from line of Matthew Bouley with Barclays. Please proceed with your question.
Hey, good morning, Congrats and there's I'll say you for taking the questions.
I wanted to ask about the long term EBITDA margin target it sounds like theres going to be a new.
And I guess sort of official wanted to come maybe at the end of the year. So we don't get too far ahead of ourselves but.
Conceptually, assuming that target will be higher what might be the path.
From here that we can look forward to between SG&A leverage just other drivers of gross margin expansion.
What are some of the guideposts, we can look out for thank you.
Alright, well, thanks, Matthew Yeah.
Yes, we're pleased to be passing that milestone that we set several years ago, and we have always positioned that as a milestone and we think our EBITDA potential is.
Is significantly higher.
And so we will but we'll be setting that mark as we reported for full year.
For the next year in terms of opportunities.
Sterile and the early to middle innings of building our company and so if you look at our digital capabilities and what we expect to do there.
Our operating best practices across our branches.
And then just overall.
Pay off of our infrastructure and field support investments.
We think we can drive SG&A down further over the next 3 to 5 years. So there's quite a bit of runway there and then on the gross margin side.
And we haven't quite a bit of runway as well I mentioned, the small customer growth.
We still private label is around 15, 17% of our business, we'd like it to be double that and.
That brings on profitable growth.
And we have more room to go on our supply chain efficiencies.
Our category management with our suppliers and those initiatives still have legs day run so.
<unk> and <unk>.
And the third inning and on the 9 inning game and we've got a lot of runway on both sides SG&A.
SG&A and gross margin to make Taiwan and more profitable company.
Wonderful and that's great color. Thank you for that Doug second 1 just on the EBITDA Guide I.
I guess sort of a $30 million range is a little larger than you've given historically at this point and the year maybe.
And maybe part of that is you're just a bigger company now.
But maybe if you can speak to kind of what are the areas of uncertainty around that guide kind of drivers of the high and low and thank you.
Yeah.
Yes, I'll take that and then John May have some comments.
It's really around organic growth I mean, we feel we feel good about our gross margin and opportunities there.
We know what we got in and spent and spend in terms of investment and our teams and our initiatives et cetera.
And so it gets down to organic growth.
As we mentioned the growth has been strong against tougher comps in June and July we.
We expect the third quarter due to do well and the third quarter. It's really the fourth quarter that has more variability last year, we had extremely good weather.
As well as a very strong market and so.
And we're cautious of how we would perform against.
And that we are subject to weather and the fourth quarter, it's a smaller quarter and.
And Thats, probably where the variability is and that that defines our range.
Primarily the other factors, we feel pretty pretty good about John anything to add for that.
No I think you hit it it's organic growth, primarily variability and uncertainty and the fourth quarter and addition in the fourth quarter, we do lose a week of sales, but but obviously thats built into the guide.
From that standpoint, but it's the uncertainty and Q4.
That gets you a top or bottom.
Alright understood well, thanks for the details and congrats on the results again.
Thanks Matthew.
Your next question comes from the line of Keith Hughes with Truest. Please proceed with your question.
Oh, thank you.
And made some positive comments on June and July.
Gross margin kind of hit double digit growth can you give us sort of a feel for what the comps looking at what the comps coming in and out of these numbers as we get these.
Pick up of business last year.
Yeah.
Yes.
We were 11% and 12% and Q3 and Q4. So that is what we're comping at Q4, especially was.
It was a strong in November and December because they were especially warm.
So those are those are the those are the comps we're running against as opposed to we were comping against that 3%.
And so about roughly 10% increase and comps.
And from that from that perspective.
Okay. So for June and July are you what are you running up mid single digits versus I mean, it was double digits in June and July of last year is that roughly what were looking at or can you give us and they feel all non.
Yeah, I think you'd be a little stronger than that.
We're still.
Were still strong and June and July.
But it would be and.
The low double digits.
And those months.
And inflation is probably running a little bit hotter than what it was and the second quarters.
A fair statement.
And while we still got price for this company correct.
Yes, I would say, it's similar to the second quarter, maybe slightly higher.
Okay.
And then your comments and commercial and a very interesting.
Any day.
Any sort of feel for what parts of the commercial market are the strongest.
And.
And what would it still be next year, but for that business would really see kind of boots on the ground.
And.
And a strong demand scenario.
You know we are seeing the strength kind of come through and it's the type of commercial debt net follows residential.
Retail fast food.
And those types of obviously.
It's not the office side of the market et cetera.
And when you look at kind of inner city or high rise that net.
It doesn't have a lot of landscape and so.
What we're seeing is strong residential and then commercial following.
Following that as you need to build out and support those expanding neighborhoods.
Okay. Thank you.
Thank you Keith.
Your next question comes from the line of Mike Dahl with RBC capital markets. Please proceed with your question.
Hi, Thanks for taking my questions.
John I appreciate it.
Color so far I wanted to stick with the second half guide and China, and you're down a little bit more it sounds like just based on the price inflation guide if pricing is yes, 6 to maybe 10% and <unk>.
And for the back half of the year, which gives you a nice tailwind on organic and can you give us just a better sense of from a volume standpoint.
And what you expect the volume contribution to be and the second half and.
And then the split between <unk> <unk> to your point, Amit the comps and <unk>.
Well, we're not we're not giving specific guidance.
With regards to the volume.
With regards we think Q, we are saying that Q3, we expect to be significantly stronger than Q4.
And what's built into our guide and if you've looked at the EBITDA guidance.
Guidance range, it's really it's really.
Round the variation with regards to Q4 with regards to.
Where we end up.
Okay understood and.
And then just.
Back on a prior question around and wallet share and market share overall, but it.
It seems like the environment, where you are.
Logistics supply chain your scale all of that and in a constrained environment strong demand and it.
It seems like it lines up pretty well for accelerated share gains and so when.
And anything more specific on on what you think the market has grown up and the and the first half of this year compare to your gross organically and how youre thinking about.
And whether or not the share gains are accelerating through.
Through this year or if it's still just kind of steady and.
Taking share thanks.
Yes, well you know, it's very hard to pin down because there is no. There is no good industry.
And sources for activity broadly and we can get snapshots and certain areas.
So we lean on information from our suppliers and.
And how we track with our customers.
But all indications are that we are accelerating our share gains and you nailed it really has to do with our strength.
We've been working obviously hard on the FERC side in terms of serving customers. Our NPS scores continue to go up our sales force is getting more.
And capable and more focused and.
And we've got now marketing firepower that we're using on the on the front end.
We really have a shine through on the back and in terms of having product and stock when its been in short supply leveraging our supply chain.
Areas like and nursery where.
And your size gives you the capability to partner with growers and be a first mover.
And to get product and into the branches and so based on all those factors together, we do feel strongly that our market share gains have accelerated specifically how much of the growth and when everything is growing and the market is really strong.
Hard to figure out exactly how much of that is share gains, but we know.
It's higher than it was last year, and and it's getting stronger and our capabilities.
To sustain that are getting stronger.
Okay, I appreciate that and get to you.
Yes.
Thank you.
Your next question comes from the line of Damian Paris with UBS. Please proceed with your question.
Hey, good morning, guys congrats on another solid quarter.
Good morning.
Thank you so we've covered a lot of ground here.
Maybe just a follow up question on pricing.
And I alluded to the.
The incremental inflation.
Over the last few months and and the 8% or so.
Price.
Its youre looking at pass through for the year.
And just curious as you know supply chain issues and eventually start easing.
Yeah, and we get some a little bit about.
Easing of the.
Freight conditions and and raw materials.
Would you be expecting GAAP.
Some of that price back that's driving some of the daily organic sales growth. This year, maybe you could just talk about how we should think about.
And package could end up looking like next year.
I wouldn't expect Hum and general debt debt, we would see much price deflation I think the market and is pricing up given the increased demand there will be certain items.
We can identify some of the more commodity items, but and.
In general we think.
Most of this price.
After years of very low price and placed and the fact that the demand is driving it from our suppliers.
We don't expect.
Hum.
A major decrease or decreases and costs coming to us significantly I mean, we can all be easily identify certain items of more commodity related debt would do that but if you look at the overall picture I don't think.
Debt that we would see we would be putting in and negative number.
And next next year from that point.
Just just to reinforce that remember that we operate across a very broad product range.
Irrigation products that are driven by resins et cetera, chemicals, which have their own drivers fertilizer nursery and hardscape and landscape supplies like solar and a malls. So when you take that altogether, it's typically a very stable.
No.
Portfolio.
Products that debt.
They tend to average out and so we have seen elevated levels, but we think that will settle back down, but it's not likely to go negative in terms of the whole portfolio together, it's likely just to settle down to a typical kind of a lower number.
Okay.
Okay, Great that's really helpful.
And then if you don't if you wouldn't mind just clarifying.
And as it relates to the guide and how much contribution from acquisitions, you're assuming for that full year.
We don't split out acquisitions, but we have not included any new acquisitions that we haven't already closed so it would be incremental EBIT.
Potentially.
For additional acquisitions at the same time.
We closed in November December debt.
And there could be losses.
Due to the seasonality and but neither no no acquisitions debt that havent been announced or closed are included in our current guidance.
Fair enough I appreciate the time best of luck guys.
Thank you. Thank you.
Your next question comes from the line of Jeffery Stevenson with loop capital. Please proceed with your question.
Hi, Thanks for taking my questions and congrats on the strong quarter.
Thank you.
So were there any deferred sales and the quarter due to product shortages that will be a tailwind and then to the third quarter and then also do you think we could see and extended.
Construction season, given the labor constraints for the fourth quarter seasonality won't be as pronounced this year.
Yeah, just to address the first part of the question, we don't see any deferred sales I mean, the market is tight.
Supply chains are constrained.
But we've tended to find a way to get products for our customers and so.
We're fighting through and don't.
I don't feel like there will be any deferred benefit later.
And.
In terms of the could you repeat the with regards to the fourth quarter I think.
And our customers are still busy now that theyre working as much as they can.
But if it's raining, but snow snow on the ground there.
They're not going to be able to work and that those shutdowns and so so I don't think it will extend the season, where there is.
Trumps demand and and what it's really doing is if we get and early spring and those projects will push early winter those projects will Polish and most likely push out to 2022.
Yes, but we are.
We are in a constrained environment in terms of labor. So it is.
As John mentioned.
There is work that's there that the contractors just can't get to because because they don't have the workers and so like John mentioned that will push into 2022, and so that does bode well.
And for for next year, and so it extends the sten and season into the following year essentially.
Okay, Great and then just following up on residential and is there any concern about the recent deceleration and new construction or is there a long runway and given the historical lag between landscaping and new starts.
And there is a lag obviously between starts and when we actually do the landscape units.
At 6 months or so.
But we see a strong residential market and quite frankly, I think that those trends are here for a while and when you think about the whole stay at home.
Situation that we've been and over the last year and a half and now the fact that a lot of companies are going to more hybrid work arrangements, where there and people are coming in 2 days and home 3 days or some combination of being at work and being at home.
It really accentuates the need for homes and the desire to have a home and lessens the net commute to work and so all those factors are working together to drive new home sales and that's a trend that we feel is going to be.
Here not just this year, but into next year and possibly beyond so we feel really good about the residential market and of course, our business is primarily residential and so that bodes well for Taiwan.
Great. Thank you.
Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Mr. Doug Black for closing remarks.
Well, thank you and thank you again for joining US today, we appreciate your interest and site 1 and we're very excited about our long term opportunities for performance and growth and the potential of our company and we look forward to touching base again at the end of the third quarter.
This concludes today's conference you may disconnect your lines at this time. Thank you all for your participation.
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