Q2 2022 SiteOne Landscape Supply Inc Earnings Call
Okay.
Greetings and welcome to the sites one landscape supply second quarter 2022 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this call is being recorded I would now like to turn the conference call over to you Mr. John Gunn.
St 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 second quarter of 2022 earnings press release. This morning, and posted a slide presentation to the Investor Relations portion of our website at investors that 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 the call include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and project.
Such risks and uncertainties include the factors set forth in the earnings release and in our filings with the Securities and Exchange Commission. Additionally, during today's call. We will discuss non-GAAP measures, which we believe can be useful in evaluating our performance a.
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.
Yeah.
Thanks, John .
Good morning, and thank you for joining us today.
We were pleased to continue our positive momentum during the second quarter with solid growth in sales and profit despite strong comparable growth from last year.
Spring weather headwinds in our northern markets.
Weaker volume in these markets was more than offset by stronger price realization across all markets.
Coupled with a good contribution from acquisitions.
We were also very pleased to add seven new high performing companies decide one over the last four months through acquisition.
Building, our foundation for future performance and growth.
As we enter the second half of the year, we expect prices to contribute less to organic daily sales growth and volume to improve versus the first half of the year against weaker comparisons.
Taken altogether with our strong teams improved capabilities and robust acquisition pipeline, we expect to continue gaining market share and achieve another very good year of performance and growth in 2022, while building our company for the future.
I will start today's call with a brief overview of our unique market position and our strategy for long term performance and growth.
Followed by some highlights from the quarter.
John Guthrie will then walk you through our second 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 to address our latest outlook before taking your questions.
As shown on slide four of the earnings presentation, we have grown our footprint to more than 620 branches.
Four distribution centers across 45 U S States and six Canadian provinces.
We are the clear industry leader over five times the size of our nearest competitor.
We estimate that we only have about a 15% share that's a very fragmented 23 billion wholesale landscaping products distribution market.
Accordingly, our future growth opportunity is significant.
We have a balanced mix of business with 64% focused on maintenance repair and upgrade.
21% focused on new residential construction and 15% on new commercial and recreational construction.
As the only national full product line wholesale distributor in the market. We also have an excellent balance across our product lines as well as geographically.
Our strategy to fill in our product lines across the U S and Canada, both organically and through acquisition strengthens and reinforces this balance over time.
Overall, our balanced end market mix broad product portfolio and good geographic coverage offer us multiple avenues to grow and more ways to create value for our customers and suppliers, while providing important resiliency in softer markets.
Turning to slide five our strategy is to leverage the scale and resources functional talent and capabilities that we have as the largest company in our industry.
All in support of our talented experienced and entrepreneurial local teams consistently deliver more value than our competitors to our customers and suppliers.
We've come a long way in building site, one and executing our strategy over the last six years.
But we are still in the third or fourth inning of our overall development is a truly world class company.
Accordingly, we remain highly focused on our commercial and operational initiatives to further 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 moves us into new geographic markets and adds terrific new talent to <unk>.
Taken altogether, our strategy creates superior value for our shareholders through organic growth acquisition growth and EBITDA margin expansion.
If you turn to slide six you can see that we have built a strong track record of performance and growth over the last six years with consistent organic and acquisition growth and good EBITDA margin expansion.
Note that we have done this while investing heavily in our teams.
And in new systems and technologies to build the foundation for site, one and to create superior capabilities.
For our customers and suppliers.
We are still building and investing.
And we remain confident in our ability to gain market share and continue driving all three of our value creation levers going forward.
You will also note that we've now completed 72 acquisitions across the irrigation lighting, agronomics nursery and Hardscape and landscape supplies product lines during the last eight years with.
With eight completed so far in 2022.
We only acquire well run companies and so all of these acquisitions were already high performing companies before joining site one.
After they join Us REIT.
We together enjoy the benefits of our combined commercial and operational capabilities.
Acquisitions are also a key source of new talent and ideas and therefore to enhance our competitive advantage as we grow.
We're off to a strong start to the year and our acquisition pipeline remains robust with 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 aim to do primarily through acquisition, especially in the nursery and hardscape and landscape supplies categories.
We are well network with the best companies in our industry and expect to continue filling in these markets systematically over the next decade.
I will now discuss some of our second quarter performance highlights as shown on slide eight.
We achieved 12% net sales growth in the second quarter with 8% organic daily sales growth and 4% net sales growth added through acquisition.
The organic daily sales growth was driven by 19% price realization.
Actually offset by an 11% volume decline.
With 26% organic daily sales growth in the first half of last year, driven primarily by volume, we expected volume growth to be negative for the first half of this year.
In addition, we had less favorable weather in our northern markets this year than last year, which significantly affected our growth in those markets.
Accordingly, organic daily sales growth were flat during the quarter and our northern markets stretching from the northeast across to the Pacific Northwest, including Canada.
Gross margin improved 210 basis points to 37, 9% for the quarter as we continued to benefit from proactive inventory management during this high inflation period.
For the first half gross margin is also about 210 basis points to 36, 1%.
As a reminder, we had previously thought that gross margin will decline this year without the benefits of price realization that we achieved primarily in the third and fourth quarters of last year.
We still expect gross margins to be lower in the second half than last year, but given our strong start and the persistent inflation. We now expect modest improvement in gross margin for the full year 2022.
On the SG&A side, our operational initiatives and disciplined cost management were offset by lower volumes higher.
Higher than expected fuel and wage expense.
And our continued investments in marketing digital and operational excellence.
Our recent acquisitions of Hardscape and landscape supply companies also contributed to the SG&A increase as a percent of sales as these businesses operate with a higher gross margin and a higher SG&A percentage.
Accordingly, SG&A as a percentage of net sales increased by 160 basis points to 22, 4%.
We expect SG&A leverage to improve in the second half.
The combination of good organic sales growth.
Gross margin improvement and solid contribution from acquisitions allowed us to deliver adjusted EBITDA growth of 16% for the quarter.
And expand adjusted EBITDA margin by 60 basis points to 18, 2%.
Overall, we remain focused on improving our adjusted EBITDA margin as we grow by executing our commercial and operational initiatives and capturing synergies with acquisitions.
In terms of our initiatives, we have continued to make good progress this year.
On the gross margin side, we continue to grow with small customers drive private label growth and improve our inbound freight costs through our transportation management system or Tms initiative.
As price realization runs its course this year, we expect these initiatives to allow us to continue driving steady gross margin improvement in the years to come.
We also have several initiatives aimed at improving our customer experience, while making our teams more efficient, thereby increasing organic growth and improving our SG&A leverage.
Mobile pro helps automate branch transactions, while allowing our associates to serve customers from anywhere on the branch site.
We can serve customers quicker and more accurately, especially at our larger nursery and Hardscape sites and our branch associates are more efficient a win win.
We have recently enhanced the functionality of mobile pro and solve some of the connectivity problems. So our progress in rolling this out across site one is accelerated.
By mid 2023 mobile growth should be broadly deployed across the segment.
We also are currently rolling out dispatch track, which allows us to manage our outbound deliveries to customers and proactively update customers on their delivery status by text.
<unk> is a terrific improvement to our customer experience and has set us up to start managing our outbound fleet more efficiently within each MSA.
We expect to benefit from these efficiencies in 2023 and beyond.
Additionally, we continue to make great progress with site, one dot com as we have added substantial new functionality and capabilities to the site.
With these improvements we are seeing improved customer adoption and increased activity as we move into the second half of the year.
Finally, we are executing numerous other operational excellence initiatives that are focused on enhancing our customer experience and improving our associated efficiency.
These projects range from how we entered our phones during the busy parts of the day to how we organize and staff our branches to how we bid and quote commercial projects.
We now have a full time team in each major line of business working with the field isolate pain points, and then develop and implement solutions across the company.
In total we have ample opportunity to improve our customer experience and increase our operating effectiveness and efficiency, while expanding gross margin in the years to come.
On the acquisition front, we added a record six high performing companies to our family during the quarter and.
And one more since the quarter closed, bringing the total to eight so far this year.
These companies provide us with excellent new talent and capability for growth in their respective markets, while adding approximately $125 million in trailing 12 month sales. Despite one.
Our development teams remain very active in 2022, and we expect to continue adding strong companies to cite one in the coming months.
With an experienced and recently expanded team.
Rod and deep relationships with the best companies strong balance sheet and an excellent reputation as the acquirer of choice, we remain well positioned to grow consistently through acquisition this year and for many years in the future.
In summary, we're executing strongly in the current environment to build our teams execute our initiatives deliver value to our customers and suppliers.
Add new companies and achieved excellent performance and growth.
As we look ahead to the second half we are confident in our ability to deliver another strong year in 2022.
More broadly as we look ahead to 2023, which will likely be a tougher year.
We remain very confident in our capability to navigate through any market conditions.
And expect to both outperformed the market and with our strong balance sheet continue to build our company for the future.
Now John will walk you through the quarter in more detail John .
Yes.
Thanks, Doug I'll begin on slide nine with some highlights from our second quarter results.
We reported a net sales increase of 12% to $1 2 billion in the quarter.
There were 64 selling days in the second quarter, which is consistent with the prior year period.
Organic daily sales increased by 8% in the quarter driven by price inflation in response to rising product costs, partially offset by dampen volumes, resulting from higher prices.
<unk> economic conditions and unfavorable weather in our northern markets.
Acquisitions continued to perform well contributing approximately $45 million or 4% to a second quarter net sales growth.
<unk> will provide more details regarding our acquisition strategy later in the call.
Geographically, we saw wide variation inorganic sales growth in the second quarter in the Sunbelt market, we saw solid organic daily sales growth of 17%, but in northern markets stretching for the Pacific Northwest to the East Coast, We saw no organic daily sales growth.
These markets, which faced a tough 24% comp from last year were negatively impacted by the slow start to the spring.
And unfavorable weather compared to the prior year.
Overall, seven out of our nine regions, including all northern markets had more rain in Q2 2022 compared to a very dry Q2 2021.
Organic daily sales for agronomic products, which includes fertilizer control products I smell and equipment increased 7% for the second quarter due to strong price inflation, resulting from rising product costs.
Partially offset by reduced volumes from unfavorable weather and higher prices.
Prices for agronomic products like fertilizer and grass seed have risen dramatically over the past year and while price inflation has been over an overall net positive to sales growth. We believe the higher prices for products like fertilizer have reduced the short term demand as our customers deal with constrained maintenance budgets.
In addition, some of our largest agronomic markets are in the north and the combination of the wet weather and a late spring resulted in some lawn care operators, reducing rounds of agronomic product applications.
Organic daily sales for landscaping products, which includes irrigation nursery hardscape outdoor lighting and landscape accessories increased 9% for the second quarter due primarily to price inflation as prices for products like PVC pipe and drainage remained elevated compared to the prior year.
Price inflation continues to play a major role in the organic daily sales growth for both landscaping products and agronomic products.
We estimate price inflation contributed 19% to our organic daily sales growth for the quarter.
While we have started to see signs of relief in some of our most volatile products like fertilizer and copper wire price inflation has been greater and more persistent than we originally expected.
We still expect price inflation to moderate in the second half of 2022, as we start to comp last year's price increases.
We expect the magnitude of the reduction to be less than we originally forecast.
Conversely, we expect volume, while still healthy to be less than we originally expected as it appears to have come off peak levels due to the combination of weather higher prices and general economic uncertainty.
As we look out to the rest of the year, we expect these trends to continue.
Gross profit increased 19% to $461 million for the second quarter and gross margin increased 210 basis points to 37, 9%.
Gross margin during the quarter was positively impacted by the supply chain initiatives price realization and contributions from acquisitions. We continue to expect a gross margin decline in the second half of 2022 is there a gross margin improvement initiatives, such as private label and small customer growth or more than offset by the loss of the <unk>.
This realization benefit that we experienced last year.
However, the amount of the reduction will be less than our original expectations due to the persistent price inflation.
Selling general and administrative expense or SG&A increased 21% to $273 million for the second quarter.
SG&A as a percentage of net sales increased to 160 basis points to 22, 4% due to increased operating expenses supporting our growth cost inflation and the impact of acquisition.
We continue to make investments in our initiatives, including marketing digital and mobile growth, which we believe will enhance the customer experience and improve the efficiency of our operations.
We are also seeing the impact of inflation and SG&A as costs for salary fuel travel and general branch operations have all the increase this year.
Finally, our most recent acquisitions have positive liberally impacted our gross margin, but also negatively impacted SG&A due to their higher operating cost structure.
For the second quarter, we recorded income tax expense of $44 8 million compared to $36 8 million in the prior year period.
The effective tax rate was 24, 2% compared to 23% for the three months ended July four 2021.
The increase in the effective tax rate was due primarily to a decrease in the amount of excess tax benefits from stock based compensation.
We realized $2 4 million in excess tax benefits for the three months ended July <unk> 2022, compared to $4 8 million for the three months ended July four 2021.
We recorded net income for the second quarter of $140 7 million compared to $123 5 million for the prior year period.
The improvement was primarily driven by our strong sales growth and gross margin improvement.
Our weighted average diluted share count for the second quarter was $45 8 million, which is comparable to the prior year period.
Adjusted EBITDA increased by 16% to $222 million for the second quarter compared to 191 million for the same period in the prior year.
Adjusted EBITDA margin, reflecting our gross margin improvement increased by 60 basis points to 18, 2%.
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 $885 million compared to $624 million at the end of the same period prior year the.
The increase in net working capital is primarily attributable to higher receivables, resulting from our strong sales growth and an increase in inventory, reflecting supply chain uncertainty cost inflation and strategic purchases ahead of cost increases from our suppliers.
Net cash provided by operating activities during the second quarter was $95 million compared to $138 million for the prior year period.
The decrease is primarily due to the increase in working capital to support our growth.
We made cash investments of $104 million for the quarter compared to $36 million for the same quarter last year. The increase in cash investments reflects our increased acquisition activity during the quarter.
Net debt at the end of the quarter was approximately $436 million compared to $257 million at the end of the prior year period the.
The increase in net debt reflects higher borrowings to fund the increase in working capital and our acquisition investments.
Leverage at the end of the second quarter increased to <unk> nine times, our trailing 12 months adjusted EBITDA compared to <unk> seven times at the end of the second quarter of 2021.
Higher leverage reflects the increased net debt our target net debt to adjusted EBITDA leverage range at the end of the year is one to two times.
At the end of the quarter, we had liquidity of $228 million, which consisted of $50 million of cash and approximately $178 million in available capacity under our asset based loan or ABL facility.
On July 22nd after the close of our second quarter, we amended our ABL facility, increasing the size of the $600 million from $375 million and extended the maturity to July 2027 from February 2024.
With this amendment, we increased liquidity by in it.
Additional $225 million.
In summary, our priority from a balance sheet perspective is to maintain our financial strength and flexibility without sacrificing long term growth our market opportunities.
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 six companies during the second quarter and one company since the end of the second quarter, bringing our total to eight for 2022 with a combined trailing 12 month net sales of approximately $125 million.
Since 2014, we have acquired 72 companies with approximately $135 billion in trailing 12 month net sales added to cite one.
Turning to slide 12 to 18, you will find information on our most recent acquisitions.
On April 20, <unk>, we acquired Bell stone masonry supply with a single locations, serving the Fort worth Texas market <unk>.
Bell stone distributes hardscape and bulk landscape supplies and built upon our December 2020 acquisition of Alpine materials, which also supplies hardscape products.
On April 28, we acquired preferred feed a leading supplier of agronomics products to landscape contractors in upstate New York with one location in Buffalo.
On June 17th we completed our acquisition of across the pond, a wholesale distributor of Hardscape and bulk landscape materials with one location in Huntsville, Alabama.
This acquisition expands our current presence in the market and our product offering to include Hardscape and bulk landscape supply.
We completed our acquisition of yard works and industry leader in the distribution of bulk mulch and soil on June 20 <unk>.
With 13 locations across Central Virginia. The addition of yard works extends the strong market position. We established earlier this year in northern Virginia with the acquisition of JK enterprises.
On June 30, we acquired Prescott dirt, a distributor of landscape supplies and Hardscape with two locations in Prescott and Prescott Valley, Arizona.
On July one we acquired <unk> stepping stone, a leading wholesale distributor of Hardscape and landscape supplies with four locations in Sacramento, California. The addition of <unk> established as a leading hardscape and landscape supplies platform and the growing Sacramento market.
And lastly on July 20, <unk>, We acquired River Valley Horticultural, a wholesale distributor of nursery hardscape and irrigation products with a single location in little rock, Arkansas.
River Valley establishes a nursery platform for site one in central Arkansas.
These acquisitions add terrific talent to Taiwan and move us forward toward our goal of providing a full line of landscape products and services to our customers in all major U S and Canadian markets.
Summarizing on slide 19, our acquisition strategy continues to create significant value for site one of.
The recent expansion of our team has both improved our capacity to source and complete acquisitions and also improve the quality and effectiveness of our integration of these new companies and teams.
Our team of over 60, former owners together with our experienced field leadership create an unrivaled down to Earth and make it happen culture at site, one which in turn makes us the acquirer of choice for family businesses.
Our laser focus on landscape distribution gives these entrepreneurs tremendous confidence that when they joined site. One they are joining the long term market leader, who will provide their associates with strong support and nearly endless opportunities for career growth and success across North America.
Heading into the second half of 2022, we are pleased with our M&A momentum and the ongoing strength of our pipeline, we have a highly capable team and excellent reputation and a strong balance sheet to fund our acquisition strategy in both strong and challenging market conditions.
Together these elements gives us confidence that we will add more outstanding companies decide one across the U S and Canada throughout the rest of 2022 and for many years to come as we build site one's capability to provide more value to our customers and suppliers.
I want to thank the entire <unk> team for their passionate commitment and welcoming the newly acquired teams. When they joined site won their leadership and efforts are the key to our long term success and building our company.
I will now turn the call back to Doug.
Thanks, Scott I'll wrap up on slide 20.
Following our spring season, which as we mentioned was significantly weather affected we have developed a solid momentum as we move through the summer and into our important fall season.
Volume has been less negative in July than in the second quarter and sales growth has remained in the double digits due to continued price realization.
As we lap last year as John mentioned, we expect price realization to moderate but we also expect volume to strengthen versus easier comparable growth from 2021.
Our customers continue to have solid backlogs of work and we expect them to remain busy through the end of the year.
Overall, the market should provide a reasonable environment for us to execute our commercial and operational initiatives and drive further growth in sales and profits in the second half.
In terms of end markets, we are beginning to see some slowdown in residential new construction, which comprises 21% of our sales.
With home price inflation and higher interest rates homebuilders are seeing less demand and are being more cautious in terms of new starts.
We would expect this softness to continue with moderate declines versus prior year.
On the contrary new commercial construction represented 15% of our sales has remained strong with healthy bidding activity and large backlogs.
Note also that early phase material shortages and concrete and building components have delayed the landscaping phase.
New commercial projects, which in turn has dampened near term activity, but increased the backlog of work for our customers.
Major repair and remodel which comprises 27% of our sales is also remained strong with only a few parts of the country developing some softness.
Typically in a downturn major repair and remodel has proven to be more durable than new construction and we expect that to be the case, both this year and in 2023.
Note that low unemployment and high home values, both support the major repair and remodel market.
Finally, the maintenance end market, which comprises 37% of our sales has remained steady.
Again, as John mentioned, our end customers have somewhat fixed dollar budgets for maintenance.
So with the rapid price inflation in products like fertilizer and seed maintenance customers tend to cut back wherever they can get through the year.
Looking forward as prices in these products come down and budgets are adjusted.
We should expect volume to recover as customers focus on the longer term health of their landscaping.
Overall maintenance dollar demand has remained steady and we expect that to continue.
In total we expect our end markets to provide a reasonable foundation for us to execute our strategy and gain market share as we deliver higher value to our customers and suppliers.
Accordingly, we continue to expect to achieve high single digit organic daily sales growth for the full year of 2022, mostly driven by price inflation.
As mentioned, we now expect our gross margin to be slightly higher than last year offset by SG&A, which will also be slightly higher than last year as a percent of sales.
Accordingly, we expect our adjusted EBITDA margin to be similar to 2021.
In terms of acquisitions as Scott mentioned, we have a strong pipeline of high quality companies and look forward to adding more of these to the <unk> family during the year.
Our acquisitions are performing very well and we continue to improve our ability to integrate them into our company occur.
Accordingly, we expect acquisitions to contribute strongly to our performance and growth in the remainder of 2022 and the years ahead.
With all of these factors in mind, we are increasing our expectation for fiscal 2022, adjusted EBITDA to be in the range of $440 million to $460 million.
Which represents year over year growth of 6% to 11%.
This range does not factor any contribution from unannounced acquisitions.
In closing I would like to sincerely. Thank all of our site one associates, who continue to amaze me with their passion commitment teamwork and southwest 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.
Okay.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
You are using a speakerphone please pick up your handset before pressing the keys.
But anytime Youre question has been addressed and you would like to withdraw your question. Please press Star then queue. At this time, we will pause momentarily to assemble our roster.
Okay.
The first question comes from the line.
Ryan Merkel with William Blair. Please go ahead.
Hey, guys. Good morning, I wanted to start with a comment that higher price. It's hurting growth can you just unpack what you mean there.
Yes, I think there Ryan.
Were referring particularly to the maintenance piece.
Piece of our business.
As we described earlier.
Maintenance budgets are fairly fixed.
Folks maintaining facilities et cetera, and when prices go up to the extent they have.
They use some short term tactics.
To get through.
Save here and pinch their seed fertilizer et cetera.
When prices revert back they come back in and go back to maintaining the long term health of their properties right. So there is some price elasticity in that market and given the significant run up in prices, we're seeing some of that softness. So that's what we're referring to in terms of.
Kind of price driven.
<unk>.
Dynamics.
Okay, Okay, and that will correct itself as kind of some other commodity prices come down.
Right. That's traditionally what we see is that.
Prices come back down.
They are able to spend and use the volume that they need to maintain what they are trying to maintain so that tends to correct.
So you could call that an upside for possibly for next year on the volume side.
Got it and just to be clear, whether it was the biggest impact to growth in the quarter or was at the higher prices. Because you listed that first in the press release, So I just wanted to clear that up.
Yes, yes, the price is kind of a more minor component.
Obviously, the weather was a big impact and we saw that improve in April and May were particularly.
Difficult.
And.
We exited the quarter at 8% you know the volume was down 11% for the quarter.
We exited at 8% down.
Seeing kind of 5% to 6% down in July .
It's kind of corrected.
And really all of that dynamics going on in those northern markets from the northeast across to the Pacific Northwest, including Canada.
We mentioned those were were flat, while we saw a 17% growth.
In the Sunbelt.
When I say flat flat overall, including the price increase so it was it was a pretty difficult spring versus a very good. The weather was very good last year. So if you have that dynamic going on.
Okay. That's helpful.
And then it looks like volumes will be down low single digits, maybe mid single digits in the second half, which is an improvement so is that.
Is that while improvement from <unk> is that just easier compares and weather and more normal.
Right. If you look at last year. The first half was driven almost primarily by volume of our growth and remember we had 22% growth for the full year, 11% volume growth.
Pretty much all of that volume was in the first half and then the <unk>.
Half was.
Flat to slightly up last year, and so obviously, you've got that easier comp and so we would expect to.
Volumes to continue to strengthen.
Be less negative if you will.
And the.
Half as we move through the third and fourth quarter.
Got it maybe just lastly on gross margin guidance implies a run rate of about 34% in the second half.
I know youre not guiding to 'twenty, three but it's 34% a fair run rate as we look forward.
And a lot of questions out there in distribution land about where gross margins will settle out in 'twenty, three and when inventory profits come out of that come out of the numbers any help there would be appreciated.
I think if you look at our guidance.
In the beginning of the year it had kind of a baseline of 34.
I think thats it.
Certainly we will give more as we as we get closer but that's that.
That certainly was in our guidance at the beginning of the year.
From that standpoint, and that was the low end I mean, we guided 34% to 34, and a half and Thats, where we thought it would reset this year.
Ryan and that's probably where we think it would go when you when you get the price.
Piece goes out keep in mind, however that every year, we do acquisitions.
And we're doing a lot of hardscape and landscape supplies acquisitions those come in at a higher gross margin also higher SG&A similar.
Similar EBITDA range. So you get that factor. So if you take a couple of years of that.
Got to factor in some improvement there just through just through acquisitions when it comes to gross margin.
Good point, Okay very helpful. Thank you.
The next question is from Stephen Volkmann with Jefferies. Please go ahead.
Hi, good morning, gentlemen, thank you.
My question is around your comment Doug that 'twenty three is setting up to be a tougher year. So I guess maybe.
Maybe that's something around residential but I don't want to put words in your mouth. So maybe just a little bit of detail about sort of big picture, how youre thinking about 'twenty three and then the follow on there at the same time is what's the playbook for a tougher year is their work you can do on SG&A or do you think acquisition.
<unk> can can accelerate is there inventory reduction just kind of what are the moving pieces in a quote unquote tests a year.
Right.
For the question.
Context of a tougher year I'll take a market by market.
Obviously.
Let's start with new residential was 21% of our sales.
It's likely that new residential.
Could be softer than it is this year right.
And that would be a headwind if.
If we look at.
New <unk>.
Commercial.
New commercial has been strong the backlogs are good the bidding activity is good.
So we actually feel pretty solid about.
<unk>.
New nonresidential and that's 15% of our sales remodel 27% of our sales remodel has been strong.
We expect that to be I would call it solid but the growth could be less than this year.
<unk>.
We don't know, but we would expect it could be a little bit softer and then when we look at maintenance maintenance tends to be steady.
Any kind of market and in fact, as I mentioned volume wise, there might even be a little upset if commodity prices come down you know think of it is maintenance budgets are in a dollar sense are stable right. So as commodity prices come down.
Then volumes could come up and offset so when you take all of that together.
We're not here to call to 2023, yet, but we think.
It.
It certainly isn't it doesn't look like it's going to be a terrible year, but.
Being cautious.
And realistic it could be more difficult than this year. The other thing thats happening in this year, because obviously we have.
Price realization right and we don't expect that next year right. So.
In essence, we will have to deal with the missing price realization you got gross margin that we thought was going to reset this year.
That would happen next year. So those dynamics are going on so when you add that up it will.
Would be a more challenging year than than our record year. This year I mean, we're going up on a terrific year that we had last year, how we deal with that when we go into.
Markets or in periods, where say volumes might be declining or things we've got headwinds.
We're going to still drive through with our commercial operational initiatives, which are going to help improve our gross margin also theyre going to help our SG&A leverage right. So that's a natural benefit for us we're going to be prudent about if markets are soft in particular parts of the country, which is likely to be it's likely not to be a kind of a broad.
Softening.
Know how to pull back in those markets. We can labor is a big part of our SG&A and we can trim the team.
Stop hiring and do fine in terms of training the team and.
You can add in.
And then of course, we've got acquisitions, which you mentioned, which we plan to continue to invest in all types of markets. So that's going to fill in some of that so that's how we would see the end markets.
We really have one end market.
Roughly 21% of our business, that's that's likely to be softer the others seem solid.
And then we've got lots of.
I guess arrows in our quiver to respond to those market types headwinds that we get and acquisitions are always going to be there to kind of keep us.
Keep us growing keep building the foundation and mitigate some of that so we feel good about our company and our ability to perform really whatever however, the market.
Reacts next year.
Got it Okay. That's super helpful. Just a quick follow on on the pricing since you mentioned it do we get positive impact of carryover pricing in 'twenty, three or do you think that sort of deflation in certain kind of products might kind of offset that just how should we think about inflation in 'twenty three.
Well, we'll have to see obviously, it's been more persistent this year than last year.
You'll remember in our original guidance and the <unk>.
Second half of this year, we were we were thinking some of the commodities might come off more dramatically.
I think still just looking long term.
There is the potential for that.
What we will call it roughly 20% of our business that that re prices.
Fairly regularly.
Some of that May come down in the future might be expected with regards to fertilizer.
In PVC pipe to the ones, we've talked about a lot.
We don't some I think fertilizer in the second half of this year will come off of its peak.
But there'll be elevated at a pretty high level kind of compared to where we were two years ago and we are seeing copper wire come off.
Some of those prices weaken a little bit right now.
But.
How far they come down and I think we're gonna efficacy as we get closer to the to the year, but there are certainly some of the some of the items peaked I think in the second quarter.
And they're coming down a little bit and that's built into some of our guidance, we do think that the other 80%.
<unk> will be kind of be solid and it will hold.
We might get additional price increases there, but we feel good about that other 80% being kind of solid holding obviously manufacturers will continue to.
Monitor cost and but the other 80% really has been in catch up mode.
We would expect that to continue.
Thank you guys.
Thank you.
The next question comes from the line of David Manthey with Baird. Please go ahead.
Thank you and good morning, everyone.
First off John I don't know, if you gave it but price and volume breakdown across agronomics and landscape products. If you could provide that to us.
We don't split it out completely like that I think it would be fair to say based upon led.
Doug mentioned, what we're seeing with regards to the agronomic products that it's greater than that line.
Then in it than it is in the in the in the landscape products.
But what I mentioned is kind of the fixed.
Volume component.
Mhm, Okay fair enough and then.
That's initially here when you talk about the 27% that's major repair.
What do you think in terms of discretionary versus non discretionary in that business. How much of that is sort of responding to something and how much of it is just deciding we want to do a project and related when you talk about new construction, specifically are you talking about selling into a structure.
That was just builds or could that also be someone is putting in a new outdoor kitchen that never had one before just Jeff initially if you could help us with those.
Right so to take the ladder, new construction as a home Thats just built right.
The new kitchen in the backyard, that's major repair and upgrade we would classify those major repair and upgrade.
When you look at the major repair and upgrade we get asked a lot what's discretionary non discretionary I think that's.
We can debate that all day, but I think what's more important and what drives it.
Typically what drives it is jobs.
Home home equity.
And those kind of things and there is a degree of housing turnover right.
You know when new homes are sold or whatever the new owner comes in and wants to do something different right. So those are the drivers.
It's a it's actually a strange when we're talking about next year.
And maybe new rates going down in a recession et cetera, but with low unemployment.
I haven't been in many recessions with low unemployment.
And with housing with housing so it is a strange situation because there's low unemployment everybody's got jobs you still have the stay at home effect is in place. So you have a lot of.
White is particularly white collar workers that are fully employed they are living at home they still want to do stuff with their home their.
Their home value is up so they've got plenty of home equity so those typically drive strong.
Repair and remodel and so we'll have to see how it goes but we're we're cautiously optimistic that repair and remodel will stay strong because of those factors, which I think we think are the drivers.
Of that market. So we will have to see but.
Certainly the foundation is there.
And we will see how the market goes.
Thank you I appreciate it.
Thank you.
Okay.
Okay.
As a reminder, please limit yourself to one question per participant.
Hugh.
The next.
Question is from the line of Matthew Bouley with Barclays. Please go ahead.
Hey, Thanks, good morning, everyone.
Can I ask on the on the SG&A side.
Yes, I know you mentioned several factors that drove sort of the deleveraging in the quarter.
Despite the strong I guess price inflation you had.
I'm curious I guess number one sort of quantify those pieces.
That drove the deleverage and maybe if there's anything additional perhaps on the on the weather and staffing and incentive side that plays into that and obviously, what I'm really getting at is sort of your view to the second half of the year and the ability to sort of.
Improve the leverage side with SG&A. Thank you.
Yes, so with regards to <unk>.
Some of that SG&A.
First I'll say acquisitions of the 160 basis points, probably accounted for 40% to 60.
Of that increase in SG&A.
Those are those are businesses that are coming in.
With higher higher basis, and about 20 basis points of that I would say is.
Would be removed any related adjusted basis, we had some.
Onetime costs with regard with regards to that I would say 40 kind of more of as a run rate on acquisitions in the 20th. It was was the was the basis point then with regard to it I mean, our wages probably made up of the remaining.
90 to 100 wages made up probably half of it but.
Being higher cost.
With regard to.
Fuel and our delivery fleet.
We've continued to invest in it.
We've continued to.
Get our people out travel budget.
<unk>.
With regards to that so I would say those were the primary components fuel.
Some of the investments in our initiatives and then just overall kind of wage inflation.
Combined.
It has driven driven driven up SG&A.
Do not think in the second half well, while we will face some.
Right now it would be forecasting it to be not as great an impact as what you saw in the first step, though the acquisition component will probably Cambria if not expand.
With some of the.
Flurry of activity, we've had most recently.
Got it that's great color. Thank you for that John and then just a second quick one just on customers and inventories I am I guess this is kind of skewing to the medium sized and larger sized customers, but to what degree are your customers able to hold sort of excess inventory.
Do you suspect over these past few months that there was any over ordering going on at customers that could now resulted from destocking. Thank you.
No.
The capacity for them to hold inventory is not great.
You do get some some buying we have ERP programs and stuff that were combined can move around.
But that's particularly in the early part of the year.
At this point.
We wouldn't have a sense that there is that there is significant inventory.
That our customers are holding or are sitting on so yes, they're going to they're going to continue to buy.
And in the house as they go through the rest of the year.
Great. Thanks, Doug Thanks, Sean.
Thank you.
The next question is from the line of Keith Hughes with Jefferies. Please go ahead.
Yes, let me go back to some of the pricing questions you talked about declines coming in.
<unk> products are you starting to see prices and sprinkler pipe.
Is it starting to come.
Come off and how quickly.
We're not we're not we are not seeing that and I would say irrigation hardscape.
We're not seeing.
A significant reduction in our cost.
Or anything being passed through to the to the industry.
Three right now.
Okay, now with or without a plot of arts groups as well.
That would imply escapes as well.
Alright, Thank you for almost all of our product lines.
Other than the specifics on copper wire <unk> is one that we've seen and I think a bulk fertilizer there'll be less those too.
Okay alright, thank you.
The next question comes from the line of Mike Dahl with RBC. Please go ahead.
Hi, Thanks for taking my questions.
So I just wanted to ask.
On the second half volumes, a little bit more so less negative in the second half it sounded like <unk>.
The biggest issues were in the northern markets, but as <unk> gotten into July and then your expectations for still negative volume in the second half is that broadened across your market your markets in terms of <unk>.
Volumes, turning negative or is that still.
A broad comment around just not seeing the recovery in those northern markets.
Yeah, I think the northern markets have come back some but certainly arent matching the strength, we see in the <unk>.
The Sun belt. So we're just being cautious now it could be more positive right and as things continue to develop.
Because as I mentioned before.
Volumes last year were kind of flat to slightly up.
We'll see how we do right.
We like the trends, we see so far as I mentioned through June to July we'll see how that continues.
But.
The trend of kind of the northern markets being softer than the south of the sunbelt.
Continued though we've seen some some recovery.
In the northern markets Southern markets have remained pretty pretty.
Steady and that kind of strong mode.
Okay. Thanks, and my second question, just a follow up on Matt's question around inventories.
It seems like there is some destocking going on in the retail channel around certain products. Obviously, the retail of carry you do carry a lot more on different products, but when youre looking at your inventory balances uptick a bit.
Some of Thats M&A some of that is inflation, but how are you thinking about managing here.
Our inventory as you go into it into year end against what you've characterized us and discussed about potentially seeing tougher.
2023 times.
We think our inventory will be coming down just normal seasonality.
One big thing to realize is it's because of the uncertainty in the supply chains and the lead times.
That were coming from the suppliers every distributor ourselves included had to bring in more inventory because we werent.
So much greater uncertainty on when we could restock.
<unk>.
It's not a type of product issue is just we are carrying more because we didn't know when the next ship was coming over the next delivery was coming from our suppliers and so if we could get it we wanted in our dcs or in our stores.
What we've seen most recently is that those requirements.
And those lead times from suppliers will not nobody would say that all supply chain issues resolve themselves, but theyre getting significantly better.
Almost across the board.
<unk>.
We normally have a seasonal take down but in addition to what we're doing is we're taking out those extra.
Lead times that that caused that extra safety stock and that.
Allows us to pull down inventories.
To more kind of what I would call our normal stocking level that is necessary to replenish our stores and our customers.
That's very helpful. Thanks, John .
Yeah.
The next question is from Jeff Stevenson with loop capital. Please go ahead.
Hey, Thanks for taking my question and congrats on a nice quarter.
Thank you.
The acquisitions year to date, that's in line with the total number you did last year and I'm just wondering what's driving the increased pace of acquisitions is there more motivated sellers in the market or is it some of the internal initiatives you guys have been doing.
Yes. Good question, Jeff This is Scott.
I don't think theres been any specific macro drivers that are pushing sellers.
To the exits I think it has more to do.
As we mentioned a few quarters ago, we intentionally strengthened our team.
To both increase our capacity to source and close deals but.
Equally as importantly to improve our focus and execution of integrating companies after closing and those actions have played out very well for us on both fronts.
Acquisitions by their nature can't be neatly forecasted and so you can get some color.
All it hot streak in dry spells, but I think the bottom line for site one is.
We have better capacity than we've ever had and we feel really good about our strong momentum going into <unk>.
The second half and moving into 2023 and it is amazing how.
As we've added capacity of our quarters that go out.
Fine and talk to companies.
We're still discovering.
Is big and we are in is ubiquitous.
Ubiquitous as we are we're still discovering.
Great companies that Youre kind of hidden gems, if you will and.
When you've got more folks out there.
You tend to turn up more activity and so.
We're seeing some of that as well as Scott mentioned.
Great. Thank you.
The next question is from the line of Andrew Carter with Stifel. Please go ahead.
Hey, Thanks. Good morning, one thing I wanted to ask about is you've kind of overtime mentioned that the hardscape locations nursery to higher SG&A, but they're also higher margin how do those items kind of index towards kind of the more discretionary aspects new construction.
And from a mix perspective, if you had some weakness in new construction would that would be difficult to kind of overcome kind of at the EBITDA level. Thanks.
No great question take Hardscape first which most of you noticed most of our acquisitions of Hardscape and landscape supplies.
That's very much pointed at.
At the repair of major repair and remodel market.
The landscape supply as part of that is really more maintenance. If you will mulch soil et cetera. So we love. The fact that we're growing in those areas because they really they're really pointed at them more durable parts of the market.
Nursery would be kind of more new construction.
So that's aligned there.
But.
Yes, that's how those.
Those product lines.
Play out.
Thanks ill pass it on.
Thank you.
Okay.
The next question is from Damian Karas with UBS. Please go ahead.
Hi, good morning, everyone a lot of ground covered I appreciate all the details.
Just a few follow ups.
Doug you mentioned earlier, a major remodels been more stable in past market downturns compared to new construction I.
I guess just thinking about trends from the last few years has it repair and upgrade actually been a bit more of a growth driver than new construction for you and I would think that maybe.
Maybe just opposed to what <unk> seen in prior cycles.
Right.
The professional repair and remodel market has been very strong right I mean.
There is no doubt about it it's been a big driver of growth.
My comment was on a traditional market than our traditional downturn. So if you go back to the great downturn typical downturns.
Fair and Remodels going to come down roughly half of new construction, but I don't think we're in a typical market right as I mentioned, we're in a low unemployment.
Market and with higher home values and so.
Those typically drive repair and remodel so we'll have to see but it certainly is a market that we embrace the outdoor living trend is real.
Covid put real emphasis on that but it's going to continue long term stay at home lends itself to repair and remodel so a lot of things pointed at that sector.
Sector that.
Cause it to drive long term growth.
And so we we like it and we're going to continue to build that as a part of our.
End market portfolio.
Understood.
And just a follow up on the price sensitive portion of maintenance you spoke to.
I would think you can only defer maintenance activity so long.
So I guess, regardless of whether some of these.
Prices AG prices start coming down is there pent up demand it.
Simply need to happen I mean, how long can do short term tactics slashed.
Right.
You are right.
I think on an annual basis that there is some pent up demand there and some need to kind of catch up and go back to normal.
So yes, we think there is potential upside there as we look forward.
Possibly in the second half but into next year.
The spring we did lose some rounds I think as John mentioned and you don't get that back, but it's upside for the next year because it's.
The weather is more normal next year those those applicators are going to go do those rounds.
Yeah, I think there is some potential upside there that we will see how it plays out but that.
While it hurts us this year.
It could be some upside for next year.
I appreciate the color best of luck guys.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Mr. Doug Black for any closing remarks.
Okay, Great I know, we're running over but thank you all for joining US today, we really appreciate your interest in <unk>.
We're excited about our company and.
We look forward to building it and working with you as we go forward.
And we look forward to speaking with you again next quarter.
A final thank you to our great associates for doing such a great job of helping us build side one.
Thank you very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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Yes.
Yes.
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