Q3 2021 SiteOne Landscape Supply Inc Earnings Call
Greetings and welcome to the site one landscape supply third 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 on your telephone keypad and.
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 for site, one landscape supply. Thank you.
You may begin.
Thank you and good morning, everyone. We issued our third quarter 2021 earnings press release, this morning, and posted a slide presentation to the Investor Relations portion of our website at investors site, one dot com.
I'm joined today by Doug Black, our chairman and Chief Executive Officer, and Scott Salmon 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 this call include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 two.
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 our filings with the Securities and Exchange Commission.
Additionally, during the call 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.
I would now like to turn the call over to Doug Black.
Thank you Darren.
Good morning, and thank you for joining us today.
We were pleased to continue our excellent momentum during the third quarter with strong growth in sales and profits.
We have seen demand for professional landscaping products continue to be healthy as we lap the stronger growth months from last year.
In this environment our teams have continued to perform well.
Executing our commercial and operational initiatives and delivering superior value to our customers and suppliers.
Overcoming and rapid product cost inflation select supply shortages.
Ongoing freight and labor constraints.
As a result, we believe that we are steadily gaining market share on top of the underlying market growth.
Furthermore, our recent acquisitions performed strongly and we added another high performing company to our family during the quarter.
Accordingly, we are pleased to once again be raising our financial guidance for the year.
It is clear at this point that 2021 will be a breakthrough year for <unk> as we continued to build a great company and execute our long term strategy.
I will start today's call with a brief overview of our unique market position and our strategy for long term performance and growth.
Slowed by some highlights from the quarter.
John Guthrie will then walk you through our third quarter financial results in more detail.
And provide an update on our balance sheet and liquidity position.
Scott Sullivan, who will discuss our acquisition strategy and then I will come back 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 than 590 branches and four major distribution centers across 45 U S States and six Canadian provinces.
We are the clear industry leader, yes, we estimate that we only have about a 13% share that's a 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 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 coverage gives us multiple avenues to grow and more ways to add value for our customers and suppliers, while providing important resiliency in softer markets.
Turning to slide five while we have come a long way in building site. One we're still 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 fills in our product portfolio.
Us into new geographic markets and adds terrific new talent at 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 have been able to deliver consistent organic growth.
Long acquisition growth and solid EBITDA margin expansion, while investing heavily.
Heavily in SG&A to build our IP category management supply chain finance marketing operational excellence and acquisition teams as well as our underlying systems infrastructure, including our digital capabilities.
While work remains to be done building our systems infrastructure.
Our field support teams are largely in place and each year, our teamwork and synergies across site, one improve along with our ability to leverage our infrastructure investments.
We can see this in our increased market share gains organic growth and.
And the improved operating leverage that we are continuing to achieve in 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 62 acquisitions.
The irrigation agronomics nursery and Hardscape and landscape supplies product line during the last seven and a half years.
With six so far in 2021.
We only acquire well run companies and for all of these acquisitions are already high performing companies before joining <unk>.
After they join US we together enjoying the benefits of our combined commercial and operational capabilities.
Acquisitions are a key source of new talent and ideas and therefore, they enhance our competitive advantage as we grow.
Our acquisition pipeline remains very robust and we have significant potential to continue growing through acquisition for many years to come.
Slide seven shows the long runway that we have ahead and filling in our product portfolio, which we aimed to do primarily through acquisition, especially in the nursery and hardscape and landscape supplies categories.
We are well networked 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 third quarter performance highlights as shown on slide eight.
We delivered 25% net sales growth in the third quarter with a nice balance of 15% organic daily sales growth.
And 10% net sales growth added through acquisition.
As expected, we saw our organic volume growth level off against the very high volume growth that we experienced in the third quarter of last year.
Accordingly, our organic sales growth in the third quarter was driven mainly by price inflation as we worked with our suppliers and customers to pass through the extraordinary product cost inflation that has occurred in the market.
We have seen this trend of lower volume growth and significant inflation continue in the fourth quarter, So far and we expect inflation will remain higher than normal due.
Through the first half of next year.
Due to ongoing product constraints and rising manufacturer input costs.
On top of the market growth.
We believe that we are gaining share in all of our product categories. As we execute our category management operational excellence sales force performance and marketing initiatives.
We're especially pleased with our progress in attracting new smaller and midsized customers decided one and increasing our market share among Hispanic customers.
These segments are growing faster with us than our average and they offer tremendous growth opportunities for <unk> over the next several years.
Overall, our initiatives are improving our product portfolio.
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 more consistent basis.
Gross margin improved 310 basis points to 36, 4% in the third quarter as we benefited significantly from our proactive inventory management. During this high inflation period, and as we earn higher supplier incentives with strong year to date organic sales.
And we worked through our inventory during the remainder of the year and as inflation normalizes in 2022.
We expect this dynamic to be less pronounced.
However, we are confident in our ability to continue executing our commercial and operational initiatives.
And expect to drive further improvements in gross margin over the next several years.
Yeah.
On the SG&A side, our operational achievements and disciplined cost management were more than offset by higher variable compensation expense as our teams worked very hard to service our customers and achieved strong sales and profit results for the quarter.
Accordingly, SG&A as a percent of net sales increased by 70 basis points to 25, 1%.
We continue to achieve cost efficiency benefits from mobile pro and from our new transportation management system or Tms.
Which we began rolling out in 2019 and 2020.
These two deployment highlights the power of investing in new technologies to achieve customer service benefits and increased operating leverage.
We will continue to broaden the use of mobile pro and Tms across site, one or making more of these types of investments through our operational excellence teams in the future.
The combination of strong organic sales and impressive gross margin improvement and good contribution from acquisitions allowed us to deliver adjusted EBITDA growth.
A 46% for the third quarter and improve our adjusted EBITDA margin by 200 basis points.
As mentioned on our second quarter earnings call, we expect to surpass the 10% adjusted EBITDA margin milestone this year.
We have significant capability to further improve our EBITDA margin in years to come and expect to provide some new longer term targets. When we report our fourth quarter results.
In addition to mobile pro and Tms.
We continued to make progress on our other important investments during the third quarter to build our capabilities for the future.
During the third quarter and into October we established our fourth major distribution center in Dallas, Texas.
Support our growing company and continue achieving competitive advantage with our world class supply chain capabilities.
The Dallas DC will support our business in the middle of the United States and help optimize our overall inventory and freight management strategies.
During the quarter, we continued the development and rollout of our new sales force customer relationship management system or CRM.
Which will help our over 400 outside sellers bring increased value to our customers and drive new business through two new customers and increase share of wallet.
We continued to make progress with site one dot com as we used the learnings gained from our Tampa, Florida, and Los Angeles, California pilots to further improve the content features and.
And service capabilities of our E Commerce platform.
We are seeing the usage of site, one dot com start to ramp up at a higher rate in these select markets and we look forward to expanding the rollout of these improvements to the rest of the site, one and 2022 and beyond.
At the same time, we are continuing to connect directly with our larger customers to facilitate their ability to secure jobs and easily order from site one.
We will continue to invest to ensure that site. One is the digital leader in the professional landscaping services market.
Lastly, we made further strategic investments in marketing during the third quarter the increased awareness of site one.
And to drive organic sales growth in our targeted customer and product segments.
The marketing team also initiated a complete review of our partners program to further improve customer benefits and loyalty in the coming years.
Overall through our strategic investments, we remain focused on providing world class tools processes and technologies to deliver value to our customers and suppliers and help our associates be more productive so that they can better help our customers to win.
On the acquisition front, we completed the acquisition of Green Brothers earthworks.
During the quarter.
Bringing our total company's added year to date to six.
These six companies are all high performers and provide us with excellent talent and capability for growth in their respective markets, while adding approximately $100 million in trailing 12 months sales to cite one.
Our development teams remain active with several attractive target companies and we expect to complete additional deals during the remainder of the year.
To ensure that we continue to drive attractive acquisition growth.
As we become a larger company.
We recently expanded our development team under Scott Solomon, including the addition of a senior leader focused solely on integrating our new companies.
We plan for our expanded team to drive even higher growth through acquisition in the next several years.
With an experienced team broad and deep relationships with the best companies, a strong balance sheet and an exceptional reputation we remain well positioned to grow consistently through acquisition.
As a final recent achievement, we were excited to share our 2021 ESG report that was published in early October.
In this report we share our vision to become a true company of excellence, which we define with five objectives.
These objectives are one the a great place to work for our associates two.
To deliver superior value to our customers.
Three would be the distributor of choice for our suppliers.
Or deliver attractive performance and growth to our shareholders and find a good neighbor and our communities.
For 2021 report includes expanded disclosure of our team's progress across these objectives.
And we look forward to updating you on our progress annually and continuing to enhance our disclosures going forward.
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 in 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 in more detail.
John.
Thanks, Doug I'll begin on slide nine with some highlights from our third quarter results.
We reported a net sales increase of 25% two $936 million in the quarter.
There were 63 selling days this quarter, which is consistent with the prior year period.
As a reminder, I want to highlight that we will have 61 selling days in the fourth quarter, which is for fewer than the 65 days, we had in the fourth quarter of 2020.
This translates into roughly $41 million and reduced sales for the fourth quarter of 2021.
Organic daily sales increased 15% in the third quarter compared to the 11% we saw in the same quarter last year.
Organic daily sales benefited from the continuation the stay at home trend as consumers spend more on maintaining and upgrading their outdoor living spaces.
In addition, organic daily sales benefited from price inflation, resulting from rising product costs.
Prices increased 15% for the third quarter and 9% year to date as we saw supplier cost increases across all major product lines.
Irrigation products were significantly impacted by increases in PVC pipe and plastic resin, resulting from the supply disruption caused by winter storm, Yuri and Hurricane Ida as well as strong industrial demand.
Agronomic products were significantly impacted by cost increases and fertilizer and grass seed.
The primary ingredient in fertilizer has increased from approximately $450 per ton at the beginning of the third quarter two over $700 per tonne currently is higher energy costs and strong demand from the agricultural market and proving up prices.
All products have also been impacted by increased freight and shipping costs.
Fortunately, our strategic initiatives and supply chain have helped mitigate the impact.
We're managing through the cost increases and the market is passing the increases through and higher practice.
We do not see the product cost inflation abating anytime soon and as a result, we are increasing our full year price increased forecast, 210% to 11%.
Organic daily sales for landscaping products, which includes irrigation nursery hardscape outdoor lighting and landscape accessories was strong again this quarter, increasing 14% compared to the prior year period.
Organic daily sales for agronomic products, which includes fertilizer control products ice melt and equipment was also strong and grew 19% for the quarter.
Landscaping and agronomic products benefited from the stay at home trend and price inflation.
Geographically all regions were up with the greatest growth in the Sunbelt markets.
While price played a large role in the growth for the quarter. We were pleased that the sales volumes were maintained despite the tough comparison with last year. When we saw sales volumes increased following the reopening of our market.
We are also seeing stronger growth this year with our targeted professional contractor compared to the DIY consumer.
As Doug mentioned, we expect organic daily sales growth remained healthy for the remainder of fiscal 2021.
<unk> sales, which reflects the sales attributable to acquisitions completed in both 2020, and 2021 contributed approximately $74 million or 10% to the overall third quarter growth rate.
We are pleased with the performance of our acquisition Scott will provide more details regarding our acquisition strategy later in the call.
Gross profit increased 36% to $341 million for the third quarter and gross margin increased 310 basis points to 36, 4%.
The gross margin improvement reflects the execution of our supply chain initiatives or favorable pricing and increased supplier incentives.
With regards to the supply chain initiatives, we have benefited from the previously mentioned trade initiatives.
As well as the strategic inventory purchases and higher inventory stocking levels ahead of the supplier cost increases.
Selling general and administrative expense or SG&A increased 28% to $235 million for the third quarter.
SG&A as a percentage of net sales increased 70 basis points to 25, 1%.
The increase in SG&A as a percentage of net sales primarily reflects increased incentive compensation, resulting from our strong performance.
Without the increased incentive compensation, we would've achieved SG&A leverage again this quarter.
For the third quarter, we recorded income tax expense of $19 1 million compared to $13 8 million in the prior year period.
The effective tax rate for the quarter was 19, 3% compared to 22, 3% for the prior year period.
The decrease in the effective tax rate was due primarily to an increase in the amount of excess tax benefits from stock based compensation.
For 2021, we expect our effective tax rate will be between 25, five and 26, 5% excluding discrete items such as excess tax benefits.
We recorded net income for the third quarter of $80 million compared to $48 2 million for the prior year period the.
The improvement was primarily driven by our strong sales growth and gross margin improvement.
Our weighted average diluted share count for the third quarter was $45 8 million compared to $44 6 million for the prior year period.
This increase was primarily attributable to our August six 2020 equity offering.
Adjusted EBITDA for the third quarter was $128 million compared to $88 million for the same period in the prior year.
Adjusted EBITDA margin, reflecting our gross margin improvement increased 200 basis points to 13, 7%.
Now I would 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 third quarter was $715 million compared to $710 million for the prior year period.
The increase in networking 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 strong sales environment.
The increase in receivables and inventory was partially offset by less cash on the balance sheet as we have deployed the cash for acquisitions and debt reduction.
Cash provided by operations increased to $67 million for the quarter compared to $62 million for the prior year period.
The increase was primarily driven by our increased profitability, partially offset by the increase in working capital.
We made cash investments of $15 million for the quarter compared to $31 million for the same quarter last year, a decrease in cash investments.
Less acquisition spend this quarter compared to the prior year period.
Net debt at the end of the quarter was approximately $208 million compared to $195 million at the end of the prior year period.
Leverage at the end of the third quarter decreased 220.5 times, our trailing 12 months adjusted EBITDA compared to 0.8 times at the end of the third quarter of 2020.
This lower leverage reflects our improved profitability.
Our target net debt to adjusted EBITDA leverage range at year end is 1% to two times.
We expect to be at or below our target leverage range, depending upon the amount of acquisition investment in the fourth quarter.
At the end of the quarter, we had liquidity of $522 million, which consisted of $158 million of cash on hand, and approximately $364 million and available capacity under our ABL facility.
As a result of our strong operating performance low leverage and disciplined financial policy Moody's upgraded our corporate debt rating to <unk> two this quarter.
This follows a similar upgrade from S&P to a double b rating earlier this year.
In summary, our priority from a balance sheet perspective is to maintain our financial strength and flexibility without sacrificing long term growth our market opportunity.
I will now turn the call over to Scott for an update on our acquisition strategy.
Thanks, John as shown on Slide 11, we acquired one company in the third quarter, bringing our total to six year to date with a combined trailing 12 month net sales of approximately $100 million.
Since 2014, we have acquired 62 companies with approximately $1 2 billion and trailing 12 months net sales added to cite one.
Turning to slide 12, you will find information on our most recent acquisition.
On August 23, we acquired Green brothers earthworks strengthening our landscape supplies and Hardscape the presence in the Atlanta market.
Summarizing on slide 13, our acquisition strategy continues to create significant value for <unk>, our pipeline remains strong and growing with three handshake deal 10 active negotiations and over 20 additional companies in early discussions.
We expect to have a strong finish this year and have good momentum going into 2022.
We are humbled that so many entrepreneurs are choosing <unk> as the new home for their family business and are continuing to grow their companies with us we provide them with the resources and flexibility to pursue both their personal and professional passion and we are excited to have over 50, former owners today, helping to drive our growth.
These innovative leaders bring new ideas to cite one and help us realize our vision of being stronger together.
We are also excited as Doug mentioned to be expanding our strategy and development team to enable both greater acquisition capacity and increased leadership for world class integration.
Providing an outstanding integration experience for the newly acquired companies delivered two very powerful outcomes.
First it accelerates our ability to create value for our customers and suppliers and second it create many motivated and passionate ambassadors for site, one who help us attract other high performing companies.
I want to thank the entire <unk> team for their passion and commitment to making <unk> a great place to work and for welcoming the new teams when they joined the <unk> family I.
I am confident in our ability to deliver value to all of our stakeholders through further acquisitions in 2021 and beyond.
I will now turn the call back to Doug.
Thanks Scott.
I'll wrap up on slide 14.
As mentioned, we are seeing the strong organic sales growth that we experienced in the third quarter continue in October.
October represents approximately 50% of our fourth quarter sales.
And so we now anticipate healthy sales growth for the fourth quarter in total.
Keep in mind that the weather was particularly warm last year in November and December and our organic daily sales growth for the fourth quarter last year was very strong at 12%.
Accordingly, we have built some moderation of sales growth into our forecast for the last two months of the year.
In terms of end markets. We are currently seeing solid demand trends in all our end markets maintenance repair and upgrade and both residential and commercial new construction are.
Our contractors remain busy and have strong backlogs to carry them through the remainder of the year and into 2022.
Taken altogether, we expect to achieve healthy organic daily sales growth in the fourth quarter and record sales growth for the full year 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 for the full year, leading to solid adjusted EBITDA growth.
And margin expansion exceeding 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 before the end of the year.
Our acquisitions are performing very well and we continue to improve our ability to integrate them into our company.
Accordingly, we expect acquisitions to contribute strongly to our performance and growth in 2021 and the years ahead.
With all of these factors in mind, we are raising our fiscal 2021, adjusted EBITDA guidance to be in the range of 380 million to 400 million, which.
Which represents year over year growth of 46% to 54%.
This range does not factor any contribution from unannounced acquisitions.
This compares to our prior estimate of 335 million to $365 million.
In closing I would like to sincerely. Thank all of our site <unk> Associates, who continue to amaze me with their passion and commitment.
Work and self 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, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
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Interest of time, we ask that you each keep to one question and one follow up thank you.
Our first question comes from the line of Ryan Merkel with William Blair. Please proceed with your question.
Thanks, and good morning, everyone.
Alright and floating rate.
So a lot of good news in this report I wanted to focus on gross margins can you break out the impact of supply chain price and supplier incentives in terms of year over year impact and then we'll speak to sustainability kind of focusing on <unk> right now, but also supply chain, how much more margin expansion.
And do you expect to see from that.
So we would say it was roughly.
Kind of.
One third of the improvement year over year would be.
Probably the quarter two was due to incentives.
With the remainder of kind of supply chain early buys combination drive driving that.
And what was your follow up question then right.
Yes, the sustainability into two <unk> in terms of gross margins I think seasonally you that goes down a little shall we expect to see that.
We would still expect we're forecasting continued.
Positive growth in gross margin in the fourth quarter, we think it'll be another a strong quarter we expect.
<unk>.
The pricing that we're seeing now to carry through the fourth quarter.
So it will be another good quarter also with regards to gross margin.
Got it okay.
And then pricing up 15% that was a little bigger than I was thinking for the quarter what was the big surprise fertilizer in the quarter or is there something else and then how should we think about the next few quarters on price I know, you're not giving guidance, but I'm just curious how it sort of trends you can help us there and then heavier suppliers raise prices yet for 2002.
So we we're following the market so similar to our R. R.
What we're seeing with our other competitors so with regards to the.
The quarter, we think in general I would break it down the following ways, we think kind of this current.
Increase with fertilizer PVC.
PVC pipe those those increases that really kind of accelerated at the.
And really August and September.
We think those will carry two at least through the first half of the rest of this year and through probably the first half of next year with.
With regards to when we start comping the higher ones. There then there may be.
<unk>.
We have some some commodity component there may be some fluctuation with regards to that we know also in the beginning of 2022 there are some.
Flyers, who haven't put in the full.
Cost increases that they're seeing in their raw materials. So we do expect a second wave to kind of come through at the beginning of next year of price inflation.
From our suppliers so in general at least for the for the foreseeable future we expect.
Price will.
On a historical basis relatively large.
Alright, so putting that in my own words, probably strong double digit price at least through first half of 'twenty. Two and then there is still inflation suppliers are still going to raise prices. So still above normal for second half 'twenty two based on what we know right now.
Yes.
We will be Comping. This year in the second half of 'twenty, two but certainly through the first step I think that's fair or what.
We're seeing right now.
Great. Thanks for the comments great quarter pass it on.
Thank you. Our next question comes from the line of Stephens Volkman with Jefferies. Please proceed with your question.
Hi, Good morning, guys. Thanks for taking the question I'm going to stick with the gross margin topic. If that's all right because I'm not quite sure I understood sort of how to think about maybe 2022 in 2003 because on the one hand, you talked about further opportunities as you work through your internal.
Initiatives.
But at the same time, I think theres, probably some temporary benefits here.
Relative to some of the trends that you mentioned so.
Should I think about 2022 sort of pulling back a little bit but then.
Longer term it can still expand or where are you actually trying to say that 2022 could actually see expansion.
Well I think as John mentioned, we've got a commodity component which is.
The PVC pipe fertilizer put seed in there.
What's driving a little under half of the the.
The inflation in that.
Commodity component will likely at some point in 2022 come off in May actually revert revert back right or Oregon were negative at the same time you have the rest of the inflation, which is more kind of keeping up with costs on all of the other products. It also includes freight.
That's more sustainable and as John mentioned of the manufacturers really haven't passed all of their costs through yet and so we expect another wave on that that piece and let's call that a little over half and so in 2022, you have the dynamic of the let's call. It the standard inflation.
Continuing to move upward.
The commodity inflation that may tail downward.
Through 2022, and so the mix of those you still end up with positive inflation.
In 2022, a stronger first half.
Not as much in the second half.
And that's the dynamic we expect obviously a lot can happen between now and then but that's basically the trend John you want to yes.
Well, we're not we're not totally giving guidance right now but I.
I would I think if we were to characterize the quarter. You said there is probably some temporary component on gross margin. There is also a temporary component on SG&A.
That that somewhat.
So longer term, we believe kind of the initiatives are driving it.
Our driving.
Performance.
<unk>, which we believe long term will take it so so.
We're not we're not giving EBITDA guidance or 2022 guidance today, we will give more at the end of next quarter.
But I will just to say there'll be puts and takes next.
Next year and we have built.
A positive on the outlook.
Great. That's good color I appreciate it.
And then one thing I was little surprised that you didn't talk too much about it because we've been hearing it everywhere else is just bottlenecks with respect to availability of product. So maybe thats not as big a deal for you guys, but im thinking about that in terms of are you do you think youll be able to add in sort of your normal fourth quarter inventory build.
<unk>, maybe even a little bigger than normal given what's going on with inflation just two.
Talk about that dynamic if you would as we sort of shift into 'twenty two.
Alright, so yeah, and we have been facing the supply chain.
Issues and bottlenecks and delays really for the last two years.
Luckily we have a great supply chain team, that's a strength of ours, we have three distribution centers.
And Georgia, California, and Pennsylvania, We noted that we're putting in the fourth and Dallas, Texas, which gives us significantly more square footage.
And through that supply chain team in those Dcs and are over 600 branches.
We do plan to continue to go heavy on inventory, we did that this year and it insulated us a lot from a lot of the supply chain challenges.
And so we're going to continue that strategy going forward and we have even more capacity two.
To execute that strategy.
Going forward.
You have constraints in nursery and Hardscape state them go through the D C, but there again our teams.
Stay out in front of the market.
And we've been able so far two battle our way to keep.
Stock and be able to supply our customers.
We feel will continue to be able to.
To manage the supply chain shortages.
And both those <unk> related products and locally procured products arent into 2022.
Great. Thanks, guys I'll pass it on I appreciate it.
Thank you.
Thank you. Our next question comes from the line of Matthew Bouley with Barclays. Please proceed with your question.
Hey, good morning, everyone. Thanks for taking the questions.
Sticking with the pricing topic, I know you called out sort of the commodity component versus the more sticky component of your different categories.
In that scenario that you just mentioned, Doug where commodity prices.
If you saw a normalization.
I'm just curious how the mechanics would work it in such a scenario would you still see gross margin percentage expansion is kind of an offset to the dollar headwind is there a working capital benefit how does that all come together, if you did see that type of scenario.
No. Good question, obviously, we follow the market we remain competitive in the market.
As commodities go up and as commodities go down.
And so we're always.
Working to.
Make that in a minimum gross margin neutral in terms of how we pass that on in the market.
And then obviously you know as a working capital that they are having higher inflation, it's going to make your working capital higher.
And if that drops down.
Your working capital will be a little lower but so so well sales.
So those are the dynamics, but we have very good teams, we have great relationships with our customers.
We're able to work through those ups and downs.
And still maintain our gross margin and then of course, we have our initiatives that are designed to improve our gross margin with that as a basis.
Got it okay. No that's helpful color there.
And secondly, the commentary on gaining market share.
It sounds like you're both taking wallet share and winning new customers. There's obviously a lot of the investments you're making alongside that.
Any any specifics.
Potentially call out that you're doing to kind of hold on to those share gains.
Think about 2022, thank you.
Well, we're going to continue to focus.
On the smaller customers, where we have less share than we do with our larger customers and of course, we serve all our customers and are focused on wallet share.
We are making gains there.
With in terms of market share overall market share is 13% it tends to be more towards the 20% to 25% of the larger customers more six to 6% to 8% with a small customers. So we have a long way to go with small customers in terms of gaining share.
We're feeling good about our progress this year, just as a specific or overall customer count on the base is up two 5%. So with all the moving parts, we are winning new customers and we feel like we're winning wallet share with the with the larger customers. So we're going to continue to stay focused.
We do this really by improving the customer experience, we've got our operational excellence teams who've got Tms, We've got mobile CRO with guys like <unk> Dot com those are tools, we're using to do that.
We focus our marketing efforts on the smaller customer on the Hispanic customer on those groups and then with our sales force we're continuing to work on our sales force performance we.
We have a new CRM that we've that we're rolling out across our sales force and Thats really designed to gain more wallet share with those medium to larger customers. We can also hook and directly with our larger customers.
Digitally.
And that helps us to provide stickiness and gain wallet share with those larger customers. So we have multi.
Initiatives going after the same thing, which is we want to win new customers and people and we want to earn greater wallet share and keep that and we feel like we're making progress.
The measurement of that is always tricky, but the information we're getting back from our suppliers and what we kind of see and can measure in the field tell us that we're gaining market share more consistently than say, we would have two or three years ago and we aim to continue that going forward.
Great well, thank you, Doug and good luck everybody.
Thank you.
Thank you. Our next question comes from the line of Quinn Fredrickson with Baird. Please proceed with your question.
Hey, good morning, guys. Thanks for taking the question.
Good morning wanted to start off with.
Wanted to start off with a question on Opex and just what you see as transitory.
I know you mentioned the variable compensation, but just with the strong sales results labor inflation, and then the new Dallas PVC.
I guess is the right way to think about it the variable comp portion of that is more transitory and then the rest is kind of the opportunities to leverage the.
The growth over that that level of expenses is that the right way to think about it.
That's right.
If we hadn't had kind of the.
Hum.
The incentive comp for our associates, we would have actually achieved SG&A leverage this quarter.
With regards to that we achieved good leverage on.
The traditional traditional kind of our operations.
We were basically the only things that we did in where kind of the things that were one time last year.
If you will.
<unk> care, a little bit more travel and expense, but relatively minor amounts in and those were.
Significant contributors to.
Our our overall opex. So we still feel very good about what we're doing in achieving the leverage obviously, when we have a big quarter like that we want to reward our associates and Thats, what youre seeing on the opposite.
Opex side.
Okay makes sense.
And then secondly, just on demand specifically within the commercial side and just interesting to hear the strength. There would you say, that's mostly maintenance and upgrades versus new construction or is it pretty pretty broad base, there and just what verticals are you seeing the most strength within commercial.
Yes, so I would call it broad based.
And you can see that really reflected in the Abi index, which is going up we see that in our own project services group, which is which are bidding on and those would be primarily new.
Commercial construction projects that bidding has accelerated really in the fall.
Of this year.
And so I would say, it's broad based we have our typical maintenance.
And upgrades on commercial properties, but the new commercial construction seems to be robust and it's really the type of commercial that follows residential.
Retail.
Education.
Et cetera, those types of.
Commercial projects.
And some of it also is kind of apartment.
Apartments, and those types of properties.
Really.
Quite strong right now, which is which is interesting, but I think it reflects the strength in residential and the fact that you've got now with with folks kind of working remotely in and companies go into hybrid scenarios.
That supports more neighborhood growth on the outskirts of the of the metro areas and when you when you put in.
Neighborhood, you need to put in shopping in grocery and gas stations and other commercial.
Properties to keep up with that growth and that's what we're seeing.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Judy Merrick with two Securities. Please proceed with your question.
I think yes, Judy in for Keith Hughes.
Most of my questions have been asked but is there anything else that you can add some deposits you saw from either a customer mix you mentioned, some smaller customers or any impact from expanding private label.
Well, we didn't talk about private label, what we are achieving a lot of success there.
We have our let's go.
<unk>, which is our private label Agronomics brand, which we've got a lot of new products out with Wesco.
Driving more or less go equipment, spreader, sprayers et cetera, and so we're just excited that the growth of the Wesco brand is very healthy.
And we're excited about progress there appropriated is our is our other private label brand Thats more for lighting and tools then.
<unk> landscape supplies and pro trade has seen significant growth.
So with private label products, obviously R.
Great and that they bring us expanded margins and they allow us to kind of grow and take share and so we are quite happy with the progress on private label and we're going to continue to push that going forward.
Okay, great. Thank you.
Thank you. Our next question comes from the line of Mike Dahl with RBC capital markets. Please proceed with your question.
Hi, Thanks for taking my questions also just a couple of clean up ones first with respect to.
The D. C can you just give us any more detail on how to think about.
The financial impact whether it's on.
On cost with the ramp or any.
Associated.
Top line benefit just how should we be thinking about that over the next couple of quarters.
Yeah, I'll touch on it I mean, essentially we're adding a DC in Dallas, It's a larger D. C is about 340000 square feet.
We're also expanding our R&D distribution center in Georgia, we're adding 130.
<unk> thousand square feet two to that so.
If you take our overall.
Had prior which is about 600000 square feet of space.
We're now creating significant capacity for the future.
We leased the facilities and we have a third party operator, the Dcs so that the ramp cost is.
Pretty reasonable, we'll spend about $2 5 million in Dallas.
And about a million and a half in fairburn, Georgia.
That expansion.
That really.
Some of that capital and then some of that goes into the kind of the gross margin cost of goods.
We're managing that do you see those costs would go into the ultimate product costs.
And be more of an effect on gross margin, but we expect that.
The Dallas DC to ramp up nicely this year and be a contributor.
In 2022, so our overall success John.
Two two additional things.
And we'll give more guidance at the end of the quarter for next year's numbers, it's not a significant contributor to.
Two either expense or gross profit.
You'd probably see maybe couple of million dollars of additional capital this year, but really kind of a justification of why we're doing it and we've gotten now significant enough size.
Where we're historically kind of the Texas market a lot of that product actually is coming from the west coast. So if you will you think.
We ship it comes from let's say, California.
All the way across two Atlanta, and then we have to ship it back.
Two Texas, we've now got sufficient volume with our growth as a company, we're where instead of shipping it and shipping it back we will actually achieve freight savings by two is shipping it to the Dallas market directly.
And this is kind of as is.
As <unk> inventory and stocking.
Enable us overall to be able to service those markets better quicker, we won't have to we will be able to get product to market faster. So were just real excited about kind of now that we've grown large enough to kind of justify the additional cost the benefits that we'll see going forward.
Okay, Yes.
That's great very helpful. And then my second question is just.
One more back on the <unk> guide when you talked about kind of the healthy.
Better daily growth.
But some of the dynamics continuing in terms of price versus volume.
And any further quantification you'd give us on how to think about volume I guess, if it was flat.
The quarter and three two a flattish is it flat again on a daily basis in two <unk> are you embedding actual declines off a tougher comp.
Okay.
Oh no.
We would expect similar performance I mean volume, we will lose a week of sales so that.
Well, we will impact of volume and sales in general the exact split between price and volume.
What we're seeing right now.
Through October is very similar to what we saw.
In Q3.
Got it.
It should be the one thing I guess, the one thing that two two look at is is.
December was especially warm.
Last year.
Even in northern markets the business continued on.
We're not certain so when the winter shutdown comes if you will that could cause some quite a bit of variability with regards to sales.
Sales in the fourth quarter.
So I guess that would be the other call out with regards to our fourth quarter.
Right Alright, Okay got it thanks John.
Thank you.
Thank you. Our next question comes from the line of Jeff Stevenson with loop capital markets. Please proceed with your question.
Hi, Thanks for taking my questions and congrats on the strong quarter.
My first question was just on the M&A environment. So the pipeline continues the sterile.
But the pace of acquisitions is a little slower than we've seen from you guys. In the past. This is primarily a timing issue is there anything else we should take note of.
Yes, Jeff it's exactly a timing issue.
As we noted the pipeline is very full.
And we don't see anything structurally within the markets that would cause us to believe.
Anything different in terms of our ongoing ability to acquire companies. So we still feel very confident about that.
Okay great.
And then just a quick question on DIY versus professional have you seen DIY demand kind of moderate back kind of closer to normalized levels of shelter in place, but decelerated here this year.
Okay.
I wouldn't say, it's gone back it's still at an elevated rate what we have seen though is kind of <unk>.
Last year was it was really hot if you will.
And on a on a on the general what we've seen is a stronger recovery this year of the professional contractor.
So we're at last year I would say it was more heavily weighted to the small customers and DIY.
This year our growth on a relative basis is probably what we're seeing is our target customer the professional contractor.
Israelis and its strong strong position right now.
Very helpful. Thanks, guys.
Thank you.
Thank you.
Next question comes from the line of Damian Karas with UBS. Please proceed with your question.
Hey, good morning, guys congrats on the solid execution.
Thanks, Steven obviously.
Sure thing, obviously, you've covered a lot of ground.
Just a follow up question on the.
Organic daily sales growth.
Being driven by kind of mid teens.
Price and more flattish volumes.
Just wondering if you get the sense that.
Some of this price inflation is starting to have an impact on incremental demand or do you just think that the industry kind of.
Baxter out now in terms of capacity.
Yes, it's more of the ladder.
The labor constraint is still very real you read about it everyday.
The news and our contractors are really struggling two two.
Two keep crews full and to hire new associates.
And so what you see is that they still have very strong backlogs.
But have a challenging time getting to them and we really feel that's the constraint.
Price inflation.
Is high but you have to keep.
Keep in mind that when you look at.
Ah landscaping project the majority of that is labor.
And.
The material cost ranges from 10% to 20% of that overall job labor and equipment and other costs are going to be more drivers now there has been labor inflation for our customers and they're passing that through to the end user, but we really havent perceived a falloff or a negative effect.
On demand, there's always a limit to everything right. So we're keeping an eye on that but so far the demand seems to be very robust.
For our customers.
Having a hard time getting to it at this point.
Got it makes.
And you did mention the backlog carrying over into 2022.
Just curious if you could offer any more visibility into that weather.
For the spring or.
Or possibly even through all of 2022, how much visibility do you have into that project backlog.
Yes, we would rather wait until we report our final results to two.
Talk specifically about 2022, but suffice to say our customers are busy and they have good backlog. So if we.
Certainly we'd be optimistic at this point.
About about next year based on what we see but.
We'll get into more specifics when we report our fourth quarter.
And we've got better visibility.
Understood appreciate the color thanks, guys.
Great. Thank you.
Thank you ladies and gentlemen. This concludes our question and answer session I will turn the floor back to Mr. Black for any final comments.