Q3 2022 SiteOne Landscape Supply Inc Earnings Call
Greetings and welcome to the site one landscape quite Inc. Third 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. If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Reminder, this conference is being recorded it is now my pleasure to introduce your host John Guthrie Executive Vice President and Chief Financial Officer.
John you may begin.
Thank you and good morning, everyone. We issued our third quarter 2022 earnings press release, this morning, and posted a slide presentation to the Investor relations portion of our website and 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 this call include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.
Such risks and uncertainties include the factors set forth in the earnings release and in our filings with the Securities and Exchange Commission.
Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance.
A reconciliation of these measures can be found in our earnings release and in the slide presentation.
I would now like to turn the call over to Doug Black.
Thank you John .
Good morning, and thank you for joining us today.
We are pleased to continue our positive momentum during the third quarter with solid growth in net sales and adjusted EBITDA. Despite the strong comparable growth and outsized gains in gross margin that we achieved in the second half of last year.
We were also very pleased to add seven new high performing companies to cite one over the last four months.
Bringing our total number of acquisitions completed year to date to 14.
All of these companies have talented teams and terrific customer relationships.
And they expand our product lines and market presence in their respective markets.
Through the execution of our commercial and operational initiatives and through acquisition. We continue to build site one as a world class market leader for the long term.
And deliver consistent performance and growth in the near term.
While we are seeing some early signs of softness in the residential market.
We feel confident that we will finish 2022, well and enter 2023 from a position of strength.
With our well balanced business strong balance sheet exceptional teams improved capabilities and robust acquisition pipeline.
Overall, we expect to continue gaining market share and achieving strong performance and growth in the years ahead.
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 third quarter financial results in more detail and provide.
An update on our balance sheet and liquidity position.
He will also comment on our recently announced share repurchase authorization.
Scott Salmon 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 630 branches and 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 yeah. We estimate that we only have about a 15% share of the 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.
1% 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 offers multiple avenues to grow and more ways to create value for our customers and suppliers.
While providing important resiliency in softer markets.
I would note that our balanced business mix will be very important as we navigate through 2023 and seek to overcome the expected softness in new residential construction.
Turning to slide five our strategy is to leverage the scale 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 to consistently deliver more value than our competitors to our customers and suppliers.
We've come a long way in building site one in executing our strategy over the last six years, but we were still in the third or fourth inning of our overall development as a truly world class company.
Accordingly, we remain highly focused on our commercial and operational initiatives to further build our capabilities in.
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 cite one.
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've 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're 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'll also note that we've now completed 78 acquisitions across the irrigation lighting agronomics nursery, our escapes and landscape supplies product lines. Since 2014 with 14 completed so far in 2022.
We only acquire well run companies and so all of these acquisitions were already high performing companies before joining <unk>.
After they join US read together enjoy the benefits of our combined commercial and operational capabilities.
Acquisitions are also a key source of new talent and ideas and therefore, the enhanced our competitive advantage as we grow.
We're having a good year this year on the acquisition front and our pipeline of potential deals remains robust with significant opportunity to continue growing through acquisition for many years to come.
Slide seven shows the long runway, 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 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 our third quarter performance highlights as shown on slide eight.
We achieved 18% net sales growth in the third quarter with 12% organic daily sales growth and 6% net sales growth added through acquisition.
The organic daily sales growth was driven by 17% price inflation.
We offset by a 5% volume decline, which was an improvement from our 11% volume decline in the second quarter.
Price inflation has proven to be more durable than we had previously expected.
Though it has begun to steadily decline over the last four months.
At the same time, our volume improved during the quarter and is down low single digits in October .
Overall, we believe that we are outperforming the market in terms of sales volume with our strong teams and focused initiatives.
Gross profit increased 14% and our gross margin declined 120 basis points to a very healthy 35, 2% as we did not repeat the exceptional gains from last year when prices were rising rapidly.
We expect gross margin to be lower than last year again in the fourth quarter, but modestly improved for the full year due to our strong gains achieved in the first half of this year.
As we move into 2023, we will face gross margin headwinds like those we had originally expected for this year.
However, we expect to achieve underlying improvements in gross margin through our initiatives to mitigate some of those headwinds.
On the SG&A side, our operational initiatives and disciplined cost management were offset by lower volumes.
Elevated fuel and wage expenses and our continued investments in marketing digital and operational excellence.
Our acquisitions of Hardscape and landscape supplies companies.
Also contributed to the SG&A increase as a percent of sales.
As these businesses operate with a higher gross margin and higher SG&A percentage.
Accordingly, SG&A as a percentage of net sales increased by 110 basis points to 26, 2%.
The combination of good organic sales growth.
And a solid contribution from acquisitions allowed us to deliver adjusted EBITDA growth of 6%. Despite the gross margin and SG&A headwinds that we faced during the quarter.
Adjusted EBITDA margin declined by 140 basis points to 12, 3% during the quarter, reflecting these challenges.
Overall aside from the short term fluctuations, we remain focused on driving underlying improvement in our adjusted EBITDA margin with the goal of 13% to 15%.
In terms of our initiatives, we have continued to make good progress this year.
On the gross margin side, we continue to grow with a 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 and in 2023.
We expect to improve gross margin through these initiatives in the years to come.
We 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 us automate our branch transactions.
While allowing our associates to serve customers from anywhere in the branch site.
We can serve customers quicker and more accurately, especially at our large nursery and hardscape sites in.
And our branch associates are more efficient a win win.
We enhanced the functionality of mobile pro this year and have accelerated our rollout.
By the end of 2023 mobile pro should be broadly deployed across site, one and part of the way that we do business.
Dispatch track allows us to manage our outbound deliveries to customers and proactively update customers on the delivery status by text.
Our customer feedback on dispatch track has been very positive and we expect all parts of site wanted to be fully utilizing this new capability before the spring season next year.
We have also recently completed the two year development and rollout of our new Salesforce customer relationship management system, which is designed to help our outside sales and sales support associates.
To better serve our medium to large customers.
Going into next year, we plan to leverage this new capability to deliver more value to our customers and drive more intentional and consistent market share gains through our sales force.
During the last two years, we significantly strengthened our digital team and they in turn have accelerated our progress with <unk> Dot com.
Our field associates and customers are becoming more comfortable with the site as we have improved the ease of use and functionality to help landscape contractors run their business more efficiently.
We will.
<unk> to add features decided one dot com and are excited to leverage it more fully in 2023 and beyond to bring market leading value to our customers and gain market share.
In addition to our technology driven initiatives. We also now have a full time operational excellence team in each major line of business.
Working with the field and with our newly acquired companies to isolate pain points and develop and implement operational solutions across the company.
These solutions improve our associated efficiency and our customer experience to help us achieve adjusted EBITDA growth and improved adjusted EBITDA margin.
Overall, we have ample opportunity to improve our customer experience and increase our operational effectiveness and efficiency, while expanding adjusted EBITDA margin in the years to come.
On the acquisition front, we matched our record performance from the prior quarter, adding six high performing companies to our family during the third quarter and one more since the quarter closed, bringing the total to 2014, so far this year.
These companies provide us with excellent new talent and capability for growth in their respective markets, while adding approximately $175 million and trailing 12 months sales to cite 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.
Broad and deep relationships with the best companies strong balance sheet and an exceptional reputation as the acquirer of choice.
We remain well positioned to grow consistently through acquisition this year and for many years in the future.
Moving to slide nine we are pleased to publish our third annual ESG report.
Which highlights the progress that we're making in delivering value to all our stakeholders.
It is important to understand that our objective here at site. One is to build a company of excellence one that creates exceptional value for our associates customers suppliers shareholders and communities.
So we do not view ESG as a separate initiative.
To the contrary these ESG enhancements are fully aligned with our overall vision and so they come naturally to us.
Overall, we are pleased with our progress, but as mentioned before we still have a lot of opportunity to improve across all facets of our business over the coming years.
In summary, we continue to execute our initiatives and deliver excellent performance in growth, despite the near term headwinds and uncertain economic outlook.
As we look ahead to 2023, we now believe that inflation will be more persistent which will help mitigate the softer residential market and continued pressure on volume.
Overall, we remain confident in our ability to navigate through any market conditions outperform the market and continued to build our company both organically and through acquisition.
Now John will walk you through the quarter in more detail.
John .
Thanks, Doug I'll begin on slide 10, with some highlights from our third quarter results. We reported a net sales increase of 18% to $1 1 billion in this quarter.
There were 63 selling days in the third quarter, which is consistent with the prior year period.
As a reminder, we have 60 selling days in the fourth quarter of this year, which is one less than the fourth quarter of last year.
Organic daily sales increased by 12% in the quarter driven by price inflation, resulting from product cost increases from our suppliers, partially offset by lower volume, resulting from higher prices and softening economic conditions.
Acquisitions continued to perform well contributing approximately $57 million or 6% to a third quarter net sales growth.
Scott will provide more details regarding our acquisition strategy later in the call.
Organic daily sales for landscaping products, which includes irrigation nursery hardscape outdoor lighting and landscape accessories increased 15% for the third quarter due to price inflation as prices for products like PVC pipe and drainage remain elevated compared to the prior year.
Organic daily sales for agronomic products, which includes fertilizer control products ice melt and equipment increased 5% for the third quarter due to price inflation, resulting from rising product costs, partially offset by reduced volumes from higher prices.
Prices for agronomic products like fertilizer and grass seed remain elevated and we believe these higher prices have reduced short term demand as our customers deal with constrained maintenance budget.
Geographically, we continued to see variation across markets in the Sunbelt, we saw solid organic daily sales growth of 15%, while our northern more seasonal market, we saw organic daily sales growth of only 8%.
The lower sales growth in the northern markets is attributable to the less favorable weather and a greater percentage of agronomic product sales.
Price inflation continues to play a major role in organic daily sales growth for both landscaping products and agronomic products.
We estimate price inflation contributed 17% to our organic daily sales growth for the quarter as we continued to see elevated prices on a year over year basis.
We expect as we comp last year's price increases the impact of price inflation, our organic daily sales growth will moderate through the remainder of 2022.
However, based on the cost increases already made this year and the anticipated cost increases from some key suppliers in the fourth quarter. We believe pricing will remain a positive contributor to growth through the remainder of this year and into 2023.
On the volume side of the growth equation results for the third quarter were negative but improved in comparison to the second quarter.
Volume growth was negative 5% for the third quarter compared to negative 11% for the second quarter as we benefited from more favorable weather and more reasonable comps.
For the remainder of fiscal year 2022, we expect volume to continue to improve they will remain negative.
Gross profit increased 14% to 389 million for the third quarter consistent with our expectation gross margin decreased 120 basis points to 35, 2% as the large price realization benefits achieved in the third quarter of 2021 were not repeated.
Selling general and administrative expense or SG&A increased 23% to $289 million for the third quarter.
SG&A as a percentage of net sales increased 110 basis points to 26, 2% due to increased operating expenses supporting our growth cost inflation and the impact of acquisitions.
We are experiencing the impact of inflation on SG&A as the cost of wages fuel travel and general branch operations have all increased this year in.
In addition, our acquisitions have positively impacted our gross margin, but also negatively impacted SG&A due to their higher operating cost structure.
The impact of acquisitions accounted for most of the increase in SG&A as a percentage of net sales this quarter.
For the third quarter, we recorded income tax expense of $22 9 million compared to $19 1 million in the prior year period.
The effective tax rate was 23, 8% compared to 19, 3% for the third quarter of 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 $1 9 million in excess tax benefits in the third quarter compared to $6 5 million for the prior year period.
We recorded net income for the third quarter of $73 3 million compared to $80 million for the prior year period. The decline in net income was primarily due to the lower gross margin and higher SG&A expense.
Our weighted average diluted share count for the third quarter was $45 8 million, which was comparable to the prior year period.
Adjusted EBITDA increased by 6% to $136 million for the third quarter compared to 128 million for the same period in the prior year.
Adjusted EBITDA margin, reflecting a lower gross margin decreased 140 basis points to 12, 3%.
Now I'd like to provide a brief update on our balance sheet and cash flow statement as shown on slide 11.
Net working capital at the end of the third quarter was $869 million compared to $715 million at the end of the same period in the prior year.
The increase in net working capital is primarily attributable to higher receivables, resulting from our strong sales growth and increased inventory due to cost inflation supply chain uncertainty and strategic inventory buys ahead of price increases.
In the third quarter, we saw inventory start to come down due to improved product supply and normal seasonality as product availability and lead times from our suppliers have improved we no longer need to carry as much inventory in our distribution centers and branches.
We expect this trend to continue in the fourth quarter and into next year.
Net cash provided by operating activities during the quarter increased to $136 million compared to $67 million for the prior year period.
The improved cash flow was primarily due to the actions we took in the third quarter to reduce working capital.
We made cash investments of $66 million for the quarter compared to $15 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 $377 million compared to $208 million at the end of the prior year period. The increase in net debt reflects higher borrowings to fund our acquisition investments and increased working capital.
On July 20, <unk>, we amended our asset based loan or ABL facility by extending the maturity to July 2027 from February 2024, and increasing the size to $600 million from $375 million. As a result, we increased our liquidity at the end of the quarter to $515 million.
Which consisted of $63 million of cash and approximately $452 million and available capacity under the ABL facility.
Leverage at the end of the third quarter increased to <unk> eight times, our trailing 12 months adjusted EBITDA compared to <unk> five times at the end of the third quarter of 2021 to.
The higher leverage reflects our increased borrowings, resulting from acquisition investment and increased working capital or.
Our long term year end target net debt to adjusted EBITDA leverage range remains one to two times.
On October 22022, our board of directors approved a share repurchase authorization for up to $400 million of our common stock the.
The share repurchase authorization does not have an expiration date and may be amended suspended or terminated by the board at any time.
As shown on slide 12, we believe this new repurchase program complements and provide balance to our existing capital allocation strategy.
Our primary goal with regards to the capital allocation is to invest in our business, including the execution of our acquisition strategy.
We are also committed to maintaining a conservative balance sheet as demonstrated by our target leverage ratio to.
To the extent, we have excess capital after achieving these objectives the share repurchase authorization.
<unk> the mechanism to return capital to our shareholders.
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'll now turn the call over to Scott for an update on our acquisition strategy.
Thanks, John .
On Slide 13, we acquired six companies during the third quarter and one company since the end of the third quarter, bringing our total to 14 for 2022, so far with a combined trailing 12 month net sales of approximately $175 million.
Since 2014, we have acquired 78 companies with approximately $1 $4 billion in trailing 12 month net sales added to cite one.
Turning to slide 14 through 'twenty, you will find information on our most recent acquisition.
On July 20, <unk>, We acquired River Valley Horticultural, a wholesale distributor of nursery and Hardscape and irrigation products with a single location in little rock, Arkansas.
River Valley establishes a nursery platform for site one in central Arkansas.
On August 11th we acquired Cape Cod Stone, a wholesale distributor of Hardscape products with one location in Orleans, Massachusetts.
Cape Cod expands our natural stone product offering to our new England customers.
On August 12, we acquired Lynn Zelle, distributing a wholesale distributor of outdoor lighting and landscape supplies with one location in Hamilton, Ontario, Canada.
The addition of Linzess expands our product offering with our eastern Canadian customers.
On August 18th we acquired Gemstone company of Louisiana, a wholesale distributor of natural stone and other hardscape products gemstones three locations extend site one's hardscape product offerings across all southern Louisiana.
On August 30, <unk>, we acquired stone plus a wholesale distributor of Hardscape and landscape supplies with three locations in northeast, Florida significantly expanding in these product lines into new markets in Florida.
Also on August 31, we acquired <unk> landscape supply a wholesale distributor of nursery products with one location in Naperville, Illinois.
Suburb West of Chicago.
<unk> further strengthens our growing nursery presence in the Chicago market.
And most recently on October 13th we acquired Madison Block and stone, a wholesale distributor of natural stone Pavers and landscape supplies with one location in Madison, Wisconsin the.
The addition of Madison extends our hardscape product offering into a new market.
These acquisitions led by strong entrepreneurs at excellent talent to cite one 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 21, our acquisition strategy continues to drive significant value for site one our team of over 70, former owners together with our experienced field leadership.
A dynamic and exciting culture, which makes us even more attractive to owners considering a transition of their family business.
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.
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.
We are confident that we will add more outstanding companies to cite one across the U S and Canada throughout the rest of 2022 and for years to come as we build site once capability to provide more value to our customers and suppliers.
Want to thank the entire site one team for their passion and commitment and welcoming the newly acquired teams when they joined site one.
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.
Wrap up on slide 22.
As we finish 2022, we expect price inflation to remain resilient, while continuing to moderate during the remainder of the year and into 2023.
As mentioned, we are currently seeing low single digit volume declines, reflecting the softer residential market.
We expect organic daily sales growth to moderate along with price inflation as we move into 2023.
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 in 2023 versus prior year.
In contrast, new commercial construction, representing 15% of our sales has remained strong with a healthy bidding activity and good backlogs.
We expect this market to continue to be healthy in 2023.
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 typically been steady in past downturns.
Accordingly, the maintenance dollar demand for our customers has remained steady and.
And we expect that to continue in 2023.
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. We now expect to achieve low double digit organic daily sales growth for the full year 2022.
Mostly driven by price inflation.
As mentioned, we continue to expect our gross margin for the full year to be slightly higher than last year offset by SG&A, which will also be higher than last year as a percent of sales.
We expect our adjusted EBITDA margin to be slightly below our record 2021 level.
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 site one family during 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 the remainder of 2022 and the years ahead.
With all of these factors in mind, we are increasing our expectation for fiscal year 2022, adjusted EBITDA to be in the range of 455 million to $470 million.
Which represents year over year growth of 10% to 13%.
This range does not factor any contribution from unannounced acquisitions.
In closing I would like to sincerely. Thank all of our <unk> associates, who continue to amaze me with their passion commitment teamwork and selfless service.
We have a tremendous team and it's 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 we will now be conducting a question and answer session.
I'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue.
You May press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
In the interest of time, we ask that participants limit themselves to one question and one follow up one.
One moment, please while we poll for questions.
Okay.
Thank you. Our first question is from David Manthey with Baird. Please proceed with your question.
Thank you and good morning, everyone.
Doug when you were referring to gross margin in 2023, you said you expect underlying improvement I just want to press on that word underlying quickly.
See what you mean by that relative to overall and then it sounds like Youre, saying that you feel the benefits from price cost has rolled through your inventories in our.
Complete at this time.
With stable pricing ahead.
You are saying that we shouldnt see downside to gross margin, but if we do see more softness than you expect we could see lower gross margin overall, just any thoughts you could share there.
Yes, well I'll start off and then maybe have John .
Add in when I'm talking about underlying improvement we have the outsized gains that we achieved through price realization in 2021.
We've actually in 2022 repeated those gains essentially and as you know our gross margin, we expected kind of a reset of gross margin in 'twenty two.
And we Didnt really realize that based on a really strong first half of this year. We're seeing gross margins now that are lower than last year. So we will end up the full year 'twenty two slightly ahead of.
2021, and so we do expect that reset in price realization now in 2023 my point on underlying improvement is that reset aside the underlying gross margin, we expect to continue to make gains.
But that will be overcome and we will have a gross margin headwind in terms of the reset that we that we expected for this year and didn't get this year, John you want to add to that no.
Thank you hit on the key points there.
So really the next three quarters I mean this quarter you saw that and then really into the first half of next year.
Where that kind of the outsized gains from the that price realization.
We have a more stable <unk>.
Pricing environment more typical.
We will those will face a tough comp from a comp perspective.
And but then we are trying to offset that with the with the initiatives that Doug referenced.
Got it okay. So yes, if we look back to like 2019, clearly there is improvement once we cancel out all the noise from the pricing. Okay. And then my second question is.
Are you surprised that landscape product volumes are holding up better than agronomics right now.
Anything about the market Youre seeing today does it change your view on maintenance holding up through a garden variety downturn.
No great Great question.
I wouldn't say, we're surprised but we're pleased obviously that the landscape.
Products volumes are are are less negative essentially are kind of improving.
Maintenance.
What's going on with the maintenance market.
Is that when you think about maintenance that dollar budgets are pretty fixed and I think about Gulfport golf course budgets or city budgets or anybody's maintenance budgets does get fixed at the year. So the rapid price increases.
Really put pressure on our customers and our customers' customers and we do see some dialing back of ore.
Moving to lower cost products dialing back of.
Usage.
Think fertilizer and seed where they can kind of get by with less and so we do see kind of less demand driven by that.
We think that will smooth that smooths out over time.
Because they've got to get back to you know keeping the grass green in and kind of full usage at some point and so that's kind of what we see going on the weather.
We are having a maintenance up in the northern markets.
There hasnt been.
<unk> cooperative in those markets as well so we got a couple of other things going on there, but we feel very good about.
Think about the dollar demand as prices kind of level out or as budgets reset this.
This year going into next year to accommodate the increased inflation et cetera.
Thank you usage, there might be even a little bit of upside for next year in terms of our volume perspective for the for.
For the maintenance market. So those are those are the trends that we're seeing in maintenance.
Sounds good thanks, Doug.
Sure.
Thank you almost question is from Stephen Volkmann with Jefferies. Please proceed with your question.
Great. Good morning, everybody. Thanks for taking the question, maybe just to drill down a little more on this price staying Doug because that seems like it has sort of changed a little bit.
Is there any reason not to expect at least kind of mid single digit pricing in 'twenty three sort of from all the carryover even if nothing else gets done there's been so much in 'twenty two I assume the carryover.
Kind of gets you there.
We would say that carryover right now is low to mid single digits.
Right now in <unk> and what we're seeing right now we're seeing some additional price increases much smaller than this year and then potential risk on the commodity so I think we're really not ready to completely.
Finalize where pricing is going to be right now, but but.
I would say current current forecast for carryover into next year and obviously this will be more higher in the beginning of the year than in the end of the year.
Would be probably.
Sure.
Low low to mid single digits.
Okay, Alright, thanks, guys.
And maybe sort of the corollary to that what percent of your.
A product do you think is sort of.
Potentially going to see price declines so youll have to sort of.
Pass through.
We think it is about 20% of our products that is has a commodity component to it.
Some of it you know is already.
I'm seeing some.
Decreases from the very peaks I mean on a year over year basis, but like.
PVC pipe starting to see the first of those decreases.
I mean, thats, a small a much less than 5% of our sales, but still still.
Something that we're watching closely so.
As we as we will monitor those those those components.
Flow through in next year honestly, we on the 80%.
We're not saying that's going to be even flat I mean, I don't think we will see kind of the large increases we saw this year, but there's still maybe some price upwards on debt that specific product.
With some potential downside.
The 20% commodities.
Got it Okay and then just finally on I'll pass it on SG&A is there an opportunity in a.
Sort of slower or maybe more normal environment is there an opportunity to get at some of the SG&A or <unk>.
Maybe that just as the investment you need to keep growing.
Yes, well, we managed SG&A closely while while making investments.
But certainly if certain markets are down.
Then we can pull back the majority of our SG&A.
As you know.
People cost and and we can staff appropriately.
For the market that were given in certain markets, we run our business very locally from that standpoint. So we have a lot of flexibility to adjust to specific market conditions as they come up and come around so.
The broad answer is yes, we can we can manage SG&A as we see the demand trends.
Developing and any any particular market.
Johnny Thank you Ed.
Alright.
Thank you.
Thanks, guys.
Thank you our next call.
Matthew Bouley.
Barclays. Please proceed with your question.
Hey, good morning, everyone. Thanks for taking the questions.
So I guess on the new buyback authorization.
I have to ask the question of sort of what that signals around.
The M&A program.
Anything if that signals.
Around or what youre seeing around private multiples excuse me.
What that means around organic growth investment.
Really just are either of those kind of reaching a stage of shifting to a lower gear or really is this just a reflection of the balance sheet kind of now having capacity to do all of the above thank you.
Yes, it's very much the ladder are as we mentioned our strategy is in full gear.
Acquisition program is quite robust.
And we're continuing to invest in the business, but.
But as you know, we're running our target ranges of debt.
EBITDA to net debt is one to two and we're running below below the one and so it's prudent to think that we might.
Use our flexibility of the share repurchase.
Authorization to return some capital if in fact, we have excess capital but.
We become a more profitable company as we manage our supply chain and things settle down from the Covid in our cash flows we anticipate will be quite strong. So it is simply bringing on that flexibility to make those decisions.
As they come up but still very exciting.
Third or fourth inning of our development as a company and our strategy is.
We are accelerating our <unk> strategy if anything at this point in terms of investment and certainly think that the.
The future pipeline of acquisitions is quite attractive.
Got it that's really helpful color. Thanks for that Doug and then I guess second one just zooming into the near term that the commentary around an improving volume trends. So Q3 down less in Q2 was in October I guess, improving down to low single digits.
Could you I guess number one remind us if the comps.
Were any easier kind of how that played into it.
I know you mentioned a few comments around share gains.
A view on how that how your growth is looking relative to the market.
Or really just kind of any additional color on what sort of supporting that lessening volume decline. Thank you.
Right.
Yes, so definitely the comps.
On a volume standpoint were easier this year in the second half than they were in the first half.
So thats contributing.
Not necessarily easier than in the fourth quarter than they were in the third quarter. So the fact that.
We improved from second to third.
Makes sense from a comp standpoint, the fact that we're still kind of seeing that improvement.
It's very pleasing to us because.
That's more of our performance and less around comps.
We're confident we continue to build our capabilities to gain market share and we track ourselves with.
Information from our suppliers and looking at our competitors.
And we feel confident that we're gaining market share and we think our ability to gain market share is going to continue to to improve as we go forward with our new technologies with we mentioned the CRM with our sales force with our initiatives around small customers. We just have a lot of levers to get out there and gain market share.
Our our private label brands <unk> and <unk>.
And so we feel pretty good about our ability to do that and certainly as we go into 2023, which we know will likely be a tougher year.
We're going to be full guns, a blazing too.
When market share through a better customer experience and through just better value to our customers.
So we're excited about that we.
We do feel that we are gaining market share and running a bit ahead of where the market is and we're going to continue to try to accelerate that.
<unk> capability going forward.
Great. Thanks, Doug Good luck everyone.
Thank you. Our next question is from Ryan Merkel with William Blair. Please proceed with your question.
Hey, guys. Good morning, Thanks for taking the questions.
Hey, Ryan.
I wanted to follow up on the volume declines in <unk> is the main driver slower new residential construction and if thats. The case, how much is it tracking down right now.
Well, it's tough for us.
To tell exactly how.
Far down its tracking you can get the reports in terms of starts et cetera being down versus last year.
But it is primarily that.
The residential new construction market is where we're starting to see softness.
We're still at good levels, there, but we're seeing builders being more conservative in our customers that serve builders.
There are less busy than than they used to be as mentioned the other markets, though are very solid.
And if we take our customers altogether they are still busy.
And they have backlogs going into next year I mentioned, the commercial market. Our project services teams that does commercial bidding is still.
Adding more now than they did at this time last year.
And we've got good backlogs commercials, where we can see further in the future and we've got very good backlogs going into next year on the commercial side. So.
We feel right now that going into 2023, the main softness will be in <unk>.
Residential new construction.
And as I mentioned, we're planning to with our full product line and across all customer segments to work hard to try to gain market share to overcome.
Some of that.
Softness.
Yeah.
Got it as a follow up are you seeing a consumer pullback on upgrade projects like patios fire pits outdoor lighting, that's something you expect in 'twenty three.
Well, there's two parts to the consumer side, the retail do it yourself side, which is a very small part of our business, but it is part of our business.
We definitely see that that market is softer and so those sales are down a couple percent of our business, but you can see it being down on the professional side. The professional side is still still solid.
Folks have projects.
As you know our folks that do.
Professional and repair and remodel the bigger backyard jobs that they're doing it for the customer.
They haven't been able to they've had backlogs that they couldnt get to for a long time.
They are still busy and so we're still seeing good demand in that side of the market. The professional side of the market and if you look at the HR.
H I R I.
Predictions, they're continuing to predict that next year in 2023, the professional side of remodel is going to be stronger than the do it yourself side. So that gives us some hope I guess that that will continue to to.
To be strong.
That's helpful last one for me just back on the gross margin question is there any way to help us ring fence. What you think the highest cost timing get back will be in 'twenty. Three I think maybe you said 90 to 100 basis points in the past, but it'd be helpful to get a little clarity there so thinking about our 2023 models.
Well, we're not ready to give full.
Guidance on 'twenty, three yet, but but.
That 90 to 100 basis points that we kind of talked about going into this year.
That's probably a pretty good start.
Hum.
For next year.
Because it's kind of the dynamic that we had in our model at the beginning of this year has really been at least pushed.
Into next year.
From that perspective, because of the strong price that happened in the first half of this year.
Thank you.
Thanks Ryan.
Thank you. Our next question is from Mike Dahl with RBC capital markets. Please proceed with your question.
Good morning, Thanks for taking my questions.
Doug.
Just wanted to ask too much on.
Three volumes, but.
I wanted to ask a couple more questions there.
Thank you termed it as maybe moderate.
Declines in new construction and clearly the builder order trends are down fairly meaningfully starts are falling so any way you could just give us a little I know, it's early but a little of sense. So just when you think about moderate declines.
Park, what that means to you and is that.
Potentially less meaningful because you're coming in late.
Finishing stage so.
With a lag.
Around that would be good in the bigger picture part of that is when I kind of add your comments together it sounds like you're planning for a flattish market. Maybe next year initially, but maybe you can comment on that that blended.
Volume what your initial thoughts there.
Yeah, well again, we're not we're not given the full guidance for next year.
But when we when I say moderate.
Declines.
That can be a range, we do we do lag.
Starts right. So we're going to we're going to do.
Get less of a.
It starts or.
Go down further next year et cetera, we do lag that.
Three to six months, so that will.
That will soften I guess.
One effect in 2023.
And but.
New res is going to be down right.
Debate.
The wording, but we don't we don't we don't plan to experience any different trends than you are reading in terms of starts et cetera, except that we will lag those.
Put a three to six month lag on those numbers.
And then the other markets, we will see how it goes but we expect them to be calm solid. So I don't know if that comes up to flat or slightly down we will talk about that when we get to the end of the year, but the one thing that we will do is make sure that we're equipped to to.
To gain share and outperform whatever market.
Devolves and 2023, and we do feel confident that we can do that so when you put all that together.
We'll talk about at the end of the year, where we think that.
Ends up for the full year, but those would be the factors and that lag on starts.
We would correlate more with completions and starts so you can use those numbers to predict next year.
Okay, Okay fair enough.
And then my second question, maybe just on the commodity pricing.
I'm trying to gauge.
The dynamics there I think.
Okay.
Comment on pricing you've seen some steady declines now over the past four months and any way you can quantify on the commodity side.
Yes, how much prices have come off over the past four months and what that means.
Where commodities are sitting on it on a year on year basis today.
Well.
I think.
I think it's a little premature to break that completely down I mean, what we can say is it.
Is kind of price inflation.
Peaked at the Q1 of this year.
When we were at about <unk>.
A little over 20%.
We were 17% this quarter.
And we were exiting the year.
Just on a year over year basis, still double digits, but significantly less than the 17% as we talked about moderating.
<unk>.
So so in Q4.
We'll have to see but we'll be we'll be in the.
Low to mid teens.
Four four.
Price realization and a lot of that is is comping last year's prices, but also some of the some of the commodities coming off.
Got it okay. Thanks, John Thanks, Bob.
Thank you.
Thank you. Our next question is from Keith Hughes with curious. Please proceed with your question.
Thank you and our previous question maybe was in the intro you talked about you're still getting some price increases coming in I think they are pretty small, but can you just talk about what products.
Our raising price now since your comments on PVC about a rolling over if you give any kind of magnitude of what you've seen so far on that.
So where we know theres going to be some price increases in.
For some irrigation parts.
And then we know there is also going to be some price increases and for certain chemicals.
These are not the commodity products, but but more high end.
Our products that maybe haven't realized the full benefits will increases as is.
They haven't gone up as fast.
Those would be two examples of things, we'll have to see really a lot of pricing goes in in Q1 of next year. So we'll have to see but I don't think anybody's talking from from our team Nobody's talking about as larger increases as we saw this year, but more modest more typical type of increases.
I wanted to say PVC pricing is.
This is you can probably go online and see a better but my number that we might see 10% to 15% decreases.
<unk> and PVC.
That's kind of Newport.
And Thats Thats occurring right now is that correct.
Yes.
Okay. Thank you.
Thank you. Our next question is from Jeff Stevenson with loop capital. Please proceed with your question.
Hi, Thanks for taking my questions and congrats on a nice quarter.
Thank you.
So I just wanted to talk more about the opportunity for inventory Destocking moving forward now that material availability challenges have improved would you expect this largely occur in the fourth quarter or could destocking continuing into early next year.
I think I think it'll it'll it'll transfer into next year are somewhat I mean, there is normal destocking that will happen in the seasonality of the fourth quarter. So you would expect kind of that to happen in normal course, I think it will be accelerated because we.
Do are have some.
Some excess inventory.
We're a very seasonal business.
Some of the products that were heavy in really won't won't sell until spring of next year. So.
There'll be it'll it'll flow out probably over the next 12 months.
We work through this but we made progress this quarter, we will continue to make progress next quarter and I think.
Our goal is to get to.
$4 five inventory turns.
And in the short term to get back to <unk>.
I don't think is.
As an unrealistic goal for a step for us to achieve.
Next year.
From that perspective.
Understood. That's very helpful. And then since you mentioned that I just wanted.
Get an update on the progression of site <unk> Dot com, obviously, you've seen it as an opportunity to gain shares with small and midsized customers, maybe you weren't as in <unk>.
Front of previously and just wondering how successful that has been over the last last year and kind of your expectations as we move into 2023 of the potential share gain opportunities.
Say, one dot com.
Okay.
Yes.
One of the one of the tools that we're using to differentiate ourselves from our competitors.
We've worked on.
<unk> and the ease of use and kind of dialing in the tool with our customers. We're pleased with our progress there we're seeing.
Increased we've doubled.
The activity in sales that we've had this year is still from a very low base.
But we're excited that we're going to be able to kind of use that to a more aggressively in 2023.
To gain share.
With the smaller customers. It's also a great tool for our larger customers as we integrated with their systems.
And then they can just seamlessly order with US we're now connect connected into Quickbooks from an accounting standpoint. So the numbers go straight in from our invoices into their Quickbooks financial system. So there's just some neat developments that we've been able to achieve this year.
Which which push us forward strongly in terms of having it be a tool that we can use to differentiate ourselves. So we've made good progress. This year 2023, we expect that to accelerate.
Given the team we've got in the tool that we now have.
Great. Thank you.
Thank you. Our next question is from Andrew Carter with Stifel. Please proceed with your question.
Hey, Thanks, Good morning, I did want to ask I don't know if you were willing to parse it out but could you give the pricing of like structural items versus index pricing items in the quarter and I'm just wondering given how pricing has come in so strong and I get it you come in at a lag, but urea PVC assume other indexes are pretty deflationary.
Is there a potential that some of this kind of massive kind of index cycle pricing actually could be held as you and your competitors have structural considerations and I would assume your competitors follow you in terms of pricing. Thanks.
I don't think we have that we have the specific breakdown by byproduct that that level of detail.
On the call right now.
I think it's more of a blended number.
From a from a structural perspective, I think you know I.
I don't think we are well I'd like to think we could say that I think we have to beat we're competitive in the marketplace. I think on the end to think especially with the commodities that we would be able to maintain.
<unk>.
I think <unk>.
Significantly higher and hold price win.
Commodities going down I don't think thats realistic.
The market is market's very orderly.
On both on the upside and downside from that standpoint, and so I think I think that the expectation that that would be that would be we have to be competitive with regards to those products and from a pricing. So if the price in the market in general is going down we'll have to be there.
On that perspective.
Thanks, and just one final one.
If I'm correct your $15 million of variance in the fourth quarter, that's 25% EBITDA year over year anything kind of specific to that variance and you didn't mention at all but it did did the hurricane did the.
Florida Hurricane create any near term disruption or any disruption in the fourth quarter or also any opportunities. Thanks.
I'm not exactly sure the variance you're talking about.
But with regards to the hurricane it's probably I mean, we did have to shut down their stores in Florida.
Roughly a little less than a week.
But probably the impact overall was $5 million to $6 million.
For that some of that ultimately we would maybe catch back up with.
But but.
We see most importantly, none of our all of our employees were in survived the hurricane in reasonable shape.
Our stores also.
Have any damage, but obviously, we took precautions from a safety perspective, yes.
Yes.
I think you were talking about the variance in our <unk>.
<unk> for the fourth quarter and what's out there in the street and just to remind that the fourth quarter is one of our lower sales quarter of the year lot of things can happen in the fourth quarter. It can be weather impacted.
Trends in gross margin like price realization, our outsized in the fourth with the smaller amount of sales so no theres no.
Long term trend.
Our performance in the fourth quarter, we feel like we'll finish the year.
Solidly.
We have to be cautious around predictions when it comes to kind of weather and.
And margin et cetera.
And then we will enter 2023 from a position of strength to really.
Outperformed the market and.
And deliver good.
Good performance so.
Nothing to read into I think the differences in our outlook and what's out there.
Thanks Pascal.
Yes.
Thank you there are no further questions at this time I would like to turn the floor back over to Doug Black for any closing comments.
Okay. Thank you.
Thank you everyone for joining us today.
Certainly appreciate your interest in <unk> and look forward to speaking with you again at the end of the year at the end of next quarter, we'd like to take one last opportunity to thank our associates.
Our customers and suppliers.
Really a pleasure to.
To be in business with such a great team and we're excited about our future.
Thank you very much.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.