Q4 2022 SiteOne Landscape Supply Inc Earnings Call
Greetings and welcome to cite one landscape supply fourth quarter 2022 earnings call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your Tech.
The phone keypad as a reminder, this conference is being recorded it is now my pleasure to introduce your host John Guthrie Executive Vice President and Chief Financial Officer. Thank you Sir you may begin.
Thank you and good morning, everyone, we issued our fourth quarter and full year 2022 earnings press release. This morning, and posted a slide presentation to the Investor relations portion of our website at investors outside 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 filing with the Securities and Exchange Commission. Additionally.
Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance a reconciliation.
<unk> 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.
Thank you John .
Good morning, and thank you for joining us today.
We achieved another year of double digit growth in organic daily sales net sales and adjusted EBITDA in 2022 on top of the record growth in 2021.
I'm very proud of our terrific teams, who continue to get stronger every year and who adapted well to the challenges of continued high inflation tight labor and reduced product volume last year.
We were also very pleased to add a record 16, new high performing companies decide one during the year.
All of these companies have talented teams and strong 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 our acquisition strategy.
We continue to build the same one as world class market leader for the long term.
Delivering consistent performance and growth in the.
Near term.
As we faced softer markets in 2023.
Our well balanced business strong balance sheet exceptional teams improved capabilities.
Bus acquisition pipeline have us well positioned to navigate the year ahead and achieve continued success.
I will start today's call with a brief overview of our unique market position and our strategy for long term performance and growth.
But by some highlights from 2022.
John Guthrie will then walk you through our fourth quarter and full year financial results in more detail.
And provide an update on our balance sheet and liquidity position.
Scott Salmon will discuss our acquisition strategy and then I will come back to address our latest outlook and guidance for 2023 before taking your questions.
Yeah.
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 four times the size of our nearest competitor yeah. We estimate that we only have about a 16% share.
Very fragmented 25 billion.
Sale of landscaping products distribution market.
Accordingly, our future growth opportunity remains significant.
We have a balanced mix of business with 65% focused on maintenance repair and upgrade.
21% focused on new residential construction.
And 14% 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.
I would note that our balanced business mix will be very important as we navigate through an uncertain 2023.
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 superior value to our customers and suppliers.
We've come a long way in building side, one executing our strategy but.
But we are relatively early in our development as a true World Class company.
Accordingly, we remain highly focused on our commercial and operational initiatives to further build our capability to create value for all our stakeholders.
These initiatives are complemented by our acquisition strategy, which fills in our product portfolio moves us into new geographic markets and that's terrific new talent the same 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 our strong track record of performance and growth over the last seven years when consistent.
<unk> organic and acquisition growth and good EBITDA margin expansion.
We've done this while investing heavily in our teams and in new systems and technology used to build the foundation for a second 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 also know that we've now completed 80 acquisitions across all key product lines since 2014.
We leveraged our expanded development team to increased acquisition activity this past year and our pipeline of potential deals remains robust.
All of these companies are high performers and so they strengthen our company.
Excellent talent and new ideas for our performance and growth.
Given the fragmented nature of the industry and our modest market share.
We have significant opportunity to continue growing through acquisition for many years to come.
Yeah.
Slide seven shows the long runway that we haven't had in filling in our product portfolio.
Which we aim to do primarily through acquisition, especially in the nursery and Hardscape and landscape supplies categories.
We're well networked with the best companies in our industry.
To continue filling in these markets systematically over the next decade.
I will now discuss some of our 2022 performance highlights as shown on slide eight.
We achieved 16% net sales growth in 2022 with 11% organic daily sales growth.
And 5% net sales growth added through acquisition.
The organic daily sales growth was driven by 18% price inflation.
Actually offset by a 7% volume decline.
It follows the approximately 30% organic daily sales growth.
17% volume growth that we saw in 2020 and 2021 combined.
We experienced the most significant volume declines and the northern markets and then our maintenance products.
As customers temporarily adjusted their use of our products to meet their fixed budgets.
Accordingly, we believe that there's some upside in maintenance demand in 2023.
Overall, we believe that we outperformed the market in 2022.
Gross profit increased 17% and our gross margin increased 50 basis points to a very healthy 35, 4%.
With the continued high inflation during the first half of 2022.
We were able to once again take advantage of the large price realization benefit which was slightly less than the extraordinary gain we achieved in the second half of 2021.
We will lose this benefit in 2023.
Gross margin also benefited from our Hardscape and landscape supplies acquisitions, which operate with a higher gross margin and higher SG&A percentage.
On the SG&A side, our operational initiatives and disciplined cost management.
Offset by lower volume.
Contribution from acquisitions elevated.
Elevated fuel and wage expenses and our continued investments in marketing digital and operational excellence.
Accordingly, SG&A as a percent of net sales increased by 140 basis points to two.
27, 3%.
The combination of good organic sales and a solid contribution from acquisitions.
Allowed us to deliver adjusted EBITDA growth of 12% despite the SG&A headwinds.
Adjusted EBITDA margin declined 30 basis points to 11, 6% following our 230 basis point increase in adjusted EBITDA margin achieved in 2021.
Overall, we have meaningfully expanded the profitability of the company since our IPO and.
We remain focused on driving continued improvement.
Our adjusted EBITDA margin goal of 13% to 15%.
In terms of our initiatives, we made good progress in 2022.
On the gross margin side, we continue to grow with small customers drive private label growth and improve our inbound freight costs.
Our transportation management system or Tms initiative.
Yeah.
Do we expect gross margin to reset during 2023 without the benefit of extraordinary price realization, 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 automate our branch transaction, while allowing our associates to serve customers from anywhere on the branch side.
We can serve customers quicker and more accurately, especially in our larger nursery and hardscape sites.
And our branch associates are more efficient a win win.
Enhance the functionality of the mobile pro in 2022 and continue to roll it out across the company.
Dispatch track allows us to manage our outbound deliveries to customers and proactively update customers on their delivery status by text.
We now have over 60% of our deliveries going through dispatch track and our customer feedback has been very positive.
We expect to have all parts of the site one fully utilizing this new capability by the end of 2023.
And can now leverage dispatch track to make our deliveries more efficient and achieve higher fleet utilization in each market.
2022, we 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 better serve our medium to large customers.
We conducted our 2023 account planning and CRM.
And now we'll be able to leverage this new capability to deliver more value to our customers and drive more intentional and consistent market share gains.
With our over 600 outside sellers and almost 200 inside sales support and associates.
During the last two years, we significantly strengthened our digital team and they in turn have accelerated our progress beside one dot com.
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 continue to add features to sign 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 isolate pinpoints and develop and implement operational solutions across the company.
These solutions improve our associate efficiency and our customer experience to help drive organic sales and adjusted EBITDA growth along with improved adjusted EBITDA margin.
Overall, we are excited about our opportunities to improve our customer experience and increase our operating efficiency in the years to come.
On the acquisition front, we had a record performance in 2022.
And in 16 high performing companies to our family.
These companies provide us with excellent new talent and capability for growth in their respective markets.
While adding approximately $240 million in trailing 12 month sales decided one.
Our development teams remain very active and we expect to continue adding strong companies decide one and 2023.
An experienced an expanded team.
And deep relationships with the best companies.
<unk> 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've made great progress in 2022 and beliefs like one as a company of excellence.
And that creates exceptional value for our associates customers suppliers shareholders and communities and remains resilient for the longer term.
Few highlights for the year included launching site, one cares, which is our grant assistance program help take care of our associates and their times of need.
We added a fifth associate resource group inspire for our Asian and Pacific Island Associates.
We increased the diversity of our leadership and the overall diversity of slides, one and 2022.
During that we have the strongest and most diverse T impossible to drive success.
And finally, we continued to enhance our supply chain and improve our fleet efficiency.
Overall, we are pleased with our progress and look forward to continuing to build site one for the benefit of all our stakeholders.
Summary, 2022 was a strong year of performance and progress in building side one.
We remain confident in our ability to navigate through challenging market conditions outperform the market and continue 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 slides 10, and 11 with some highlights from our fourth quarter.
We reported a net sales increase of 11% $890 million in the quarter.
It was 60 selling days in the fourth quarter, which is one less day than we had in the fourth quarter of 2021.
For the full year net sales increased 16% to 4 billion.
We had 252 selling days in fiscal year 2022, compared to 253 selling days in fiscal year 2021.
In fiscal year 2023 we will again have 252 selling days, but we will have one less day in the first quarter and one more day in the fourth quarter.
Organic daily sales increased by 7% in the fourth quarter and 11% for the full year.
Organic daily sales growth for both the quarter and the full year was primarily attributable to price inflation driven by product cost increases from our suppliers, partially offset by lower volume, resulting from higher prices and softening economic conditions.
Price inflation contributed approximately 12% organic daily sales growth for the quarter and 18% for the full year we.
We saw a price inflation across all product lines, this year, but higher levels and commodity products like PVC pipe and fertilizer.
Starting to see price inflation moderate as we comp the price increases from 2022.
Price inflation for December was just under 10%, which is the first month under 10% since the second quarter of 2021.
So far in 2023, we are seeing price increases for many suppliers, we're still trying to catch up with their rising costs as well as price decreases for certain commodity products like PVC pipe.
Currently we are projecting low single digit price inflation for 2023 with the majority of that expected in the first half of the year.
Ted will provide more detail when we discuss our outlook for 2023.
Volume declined 5% for the fourth quarter of 2022, and 7% for the full year.
Economic conditions moderate in response to higher interest rates, we have seen volume decreased from the peak levels, we experienced following the COVID-19 shutdown.
In addition, higher prices have reduced demand for products like fertilizer and grass seed as our customers deal with constrained maintenance budget.
While we did see volume decline in 2022. It is important to note that we remain above the 2019 levels and the secular growth trend people investing more in their outdoor living spaces remains in place.
Organic daily sales for landscaping products, which includes irrigation nursery and hardscape outdoor lighting and landscape accessories increased 8% for the fourth quarter and 12% for the full year.
Organic daily sales growth for agronomic products, which includes fertilizer control products I stopped equipment was also solid increasing 5% for the quarter and 7% for the full year.
Price inflation was the primary driver of growth for both the quarter and a year, it's almost all product lines experienced the impact of rising costs.
The negative impact of higher prices and volume growth was most pronounced in agronomic products and as a result volume growth was lower when compared to landscaping products.
Geographically, we continue to see stronger growth in the sunbelt markets.
Anecdotally cells in Sun belt markets grew approximately 10% for the fourth quarter compared to approximately 4% or northern or seasonal markets.
Send up markets have benefited from not only stronger new construction growth, but also a smaller percentage of agronomics and their product mix.
We were pleased with the performance of our acquisitions in fiscal year, 2022 acquisition sales, which reflect the sales attributable to acquisitions completed about 2021 and 2022 contributed approximately $42 million or 5% to net sales growth for the quarter and $187 million.
5% to net sales growth for the full year.
Scott will provide more details regarding our acquisition strategy later in the call.
Gross profit increased 7% to 303 million for the fourth quarter and gross margin decreased 110 basis points to 34.0%.
<unk> to the third quarter of 2022, our gross margin for the fourth quarter was impacted by the absence of a large price realization benefit we realized in the fourth quarter of 2021.
For the year gross profit increased 17% and gross margin increased 50 basis points to 35, 4%.
The increase in gross margin for the full year reflects the contribution from new acquisition, So fire programs and the benefit of supply chain initiatives, including strategic inventory buys ahead of supplier cost increases.
We'll discuss in the outlook, we expect gross margin to reset in 2023, sorry gross margin improvement initiatives are more than offset by the loss of the price realization benefit we saw in the first half of 2020 two.
Selling general and administrative expense or SG&A increased 23% to $305 million for the fourth quarter.
SG&A as a percentage of net sales increased 350 basis points in the quarter to 34, 2% the increase in SG&A as a percentage of net sales primarily reflects the impact of acquisitions cost inflation and increased investment in operating expenses supporting our growth.
Acquisitions accounted for almost 200 basis points of the difference.
We incurred higher SG&A expense from the acquisitions without the corporate spending sales benefit due to seasonality.
For the full year, SG&A increased 22% to $1 1 billion and SG&A as a percent of net sales increased 140 basis points to 27, 3%.
During the year, we experienced the impact of inflation on SG&A as a cost of wages fuel travel and general branch for operations all increased.
In addition, our acquisitions have positively impacted our gross margin, but also negatively impacted SG&A due to their higher operating cost structure.
For the fourth quarter, we recorded an income tax benefit of $4 6 million compared to an income tax expense of $2 7 million in the prior year period for the full year income tax expense was $67 7 million compared to $56 1 million in the prior year period.
Our effective tax rate was 21, 6% for the 'twenty two fiscal year compared to 19% for the 2021 fiscal year the.
The increase in the effective tax rate was due primarily to a decrease in the amount of excess tax benefits from stock based compensation.
Excess tax benefits of $10 4 million were recognized for their 22, any two fiscal year as compared to $20 2 million for the 2021 fiscal year.
We expect the 2023 fiscal year effective tax rate will be between 25, and 26% excluding discrete items such as excess tax benefits.
We recorded a net loss of 0.9 million for the fourth quarter of 2022 compared to net income of $27 5 million for the prior year period.
Net loss was attributable to a lower gross margin and higher SG&A.
Net income for the fiscal year, 2022 increased to $245 4 million or 3% compared to $238 4 million for the fiscal year 2021. The increase in net income for the year was a tramp as well to our sales growth and improved gross margin.
Our weighted average diluted share count was $45 8 million for the 2022 fiscal year, which is consistent with the prior year number.
Adjusted EBITDA decreased by 37% to $38 9 million for the fourth quarter compared to $61 8 million for the same period in the prior year.
For the full year, adjusted EBITDA increased 12% to $464 3 million compared to $415 1 million for the 2021 and fiscal year adjusted EBITDA margin decreased 30 basis points to 11, 6% for the 2022 fiscal year.
Now I would like to provide a brief update on our balance sheet and cash flow statement as shown on slide 12.
Net working capital at the end of the 2022 fiscal year was $760 million compared to $616 million at the end of the 2021 fiscal year.
The increase in net working capital is primarily attributable to higher receivables, resulting from our strong sales growth and an increase in inventory, resulting from cost inflation, new acquisitions, and our decision to increase staffing levels to mitigate supply chain disruptions.
Inventory levels remain higher than we would like this product lead times come down and supply chain uncertainty decreases we are making significant progress reducing excess inventory from our branches.
Cash flow from operations increased to approximately $105 million in the fourth quarter compared to approximately $51 million in the prior year period improve.
The improvement in cash flow was primarily driven by our inventory reduction efforts.
Flow from operations increased to approximately $217 million for the full year compared to approximately $211 million in the prior year.
The improvement was primarily attributable to our increased profitability.
We made cash investments of 73 million for the fourth quarter compared to $85 million for the same quarter in 2021 and 284 million for fiscal year 2022, compared to 182 million for fiscal year 2021.
The increase in cash investments reflects greater acquisition activity in fiscal year 2022, compared to fiscal year 2021.
October our board approved a $400 million share repurchase authorization and during the fourth quarter, we returned $25 million of capital to shareholders through our repurchase activity.
Net debt at the end of the 2022 fiscal year was approximately $380 million compared to approximately $247 million at the end of the prior year.
Leverage increased to 0.8 times, our trailing 12 months adjusted EBITDA compared to 056 times at the end of the 2021 fiscal year.
The higher leverage primarily reflects our increased borrowings for acquisition investment.
Well, our leverage increased in fiscal year 2022, compared to fiscal year 2021 were still below our target net debt to adjusted EBITDA leverage range of one to two times at.
At the end of the year, we had available liquidity of approximately $560 million, which consisted of approximately $29 million of cash on hand, and approximately $487 million and available capacity under our ABL facility.
Slide 13, we highlight our balanced approach to capital allocation. 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 the extent, we have excess capital after achieving these objectives the share repurchase authorization provides us the mechanism to return capital to our shareholders like we did last quarter.
Our priority from a balance sheet and capital allocation perspective is to maintain our financial strength and flexibility without sacrificing long term growth our market opportunity.
I now will turn the call over to Scott for an update on our acquisition strategy.
Thanks, Sean as shown on Slide 14, we acquired three companies in the fourth quarter, bringing our total to 16 for 2022 with a combined trailing 12 month net sales of approximately $240 million.
2014, we acquired 80 companies with approximately one 5 billion and trailing 12 month net sales added to cite one.
Turning to slide 15 through 17, you will find information on our most recent acquisitions.
On October 13th we acquired Madison Block and stone, a wholesale distributor of Hardscape and Madison, Wisconsin.
This acquisition establishes a leading hardscape physician in the Madison market and expands the range of landscape products and services, we provide to our customers.
On December 16th we acquired Telluride natural stone, a wholesale distributor of Hardscape located in Phoenix, Arizona.
Telluride extends our leading hardscape presence across the Phoenix market.
Also on December 21st we acquired we don't see landscape supplies, a wholesale distributor of landscape supplies and hardscape with seven locations, serving the Austin, Texas market.
We don't see establishes a landscape supplies and hardscape platform to serve central Texas and expand the products and services, we offer our customers.
By teaming up with these three high performing companies, we continue to deliver on our strategy to expand the products services and overall value we offer our customers across all markets.
Summarizing on slide 18, our acquisition strategy continues to create significant value for site, one with a strong balance sheet and a robust pipeline across all lines of business and geographies. We are confident that we will be able to add many more outstanding companies to cite one in 2023.
We are honored and excited that so many owners continue to choose site. One is a great home for their family businesses and continue to thrive in leadership positions across our company.
Strong leaders and innovators are a powerful force within sight, one as they help us improve the value that we deliver to customers and suppliers, they bring fresh ideas and entrepreneurial agility and we support them and their teams with the resources and flexibility to pursue both their personal and professional passions.
Ultimately, we all win stronger together.
I want to thank the entire site one team for their passion and commitment to making site one a great place to work and for welcoming the newly acquired teams when they joined the site one family I.
I am confident in our ability to keep adding more outstanding new companies through acquisition in 2023, creating terrific value for all our stakeholders.
Now I'll turn the call back to Doug.
Thanks Scott.
Keep up on slide 19.
We look ahead into 2023.
Inflation to continue moderating as we lap the steep increases from the last two years.
For the full year, we expect low single digit inflation with most of this occurring during the first half of the year.
In terms of end markets, we expect new residential construction, which comprises 21% of our sales to decline approximately 20% compared to 2022.
As consumers adjust to high home prices and mortgage rates.
We expect a more stable environment, and the new commercial and recreational construction, which represents 14% of our sales.
With good backlogs and healthy bidding we believe this market could grow slightly versus the prior year.
Major repair and remodel which comprises 29% of ourselves is.
<unk> to be relatively flat.
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 again in 2023.
Nope that low unemployment and high home values, both support the major repair and remodel market, so lower home turnover could be a headwind.
Finally, the maintenance end market, which comprises 36% of our sales has typically been steady in past downturns.
Maintenance dollar demand from our customers has remained steady and we expect that to continue in 2023.
With much lower inflation translating into reasonable volume.
In total we expect industry sales to decline in 2023.
And with our ability to gain market share, we would expect our organic daily sales to be flat to down mid single digits with modest price inflation being offset by reduced volumes.
We expect our gross margin to normalize this year without the substantial benefit that we saw from strategic inventory purchases ahead of rapid inflation in 2021 and 2022.
Additionally, with flat to declining sales, we expect SG&A as a percentage of sales to increase modestly.
Accordingly, we also expect adjusted EBITDA margins to normalize in 2023, providing a foundation for further improvement over the longer term.
In terms of acquisitions and as Scott mentioned, we have a strong pipeline of high quality companies and look forward to adding more of these to the side one family in 2023.
Our acquisitions are performing 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 during the year.
So all these factors in mind.
We anticipate our fiscal 2023, adjusted EBITDA to be in the range of 395 million to $425 million.
This range does not factor any contribution from unannounced acquisitions.
In closing I would like to sincerely. Thank all of our site when associates, who continue to amaze me with their passion commitment teamwork and selfless service.
We have a tremendous team and it is true 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 that so strongly.
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 would like to ask a question. Please press star one on your telephone keypad.
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One moment, please while we poll for questions.
Our first question is from David Manthey with Baird. Please proceed with your question.
Yeah. Thank you good morning, everyone.
The first question.
When when you're talking about the guidance here, we can back into your.
Estimated EBITDA, which looks like about 10%.
And then what you just said Doug about SG&A as a percentage of sales being slightly higher.
I guess, we can impute, a gross margin it looks like maybe 34 and a half first of all I just like to see if that's in the ballpark and then.
That level it implies that SG&A is up just a couple of percent could.
Could you just talk about your confidence interval around both the gross margin at that level.
And then how you plan on keeping SG&A sort of in that are in that range. What are the moving parts from year to year.
Yeah. So that's the ballpark you know, we expect gross margin to fall somewhere between 34, and 34 and a half. So your estimate there is there's ballpark and then on the SG&A side. You know, we're just going to we're going into the year with you know confidence in our team that were.
We're gonna be able to outperform the market got a lot of terrific.
No our momentum with our sales force and with our customer experience et cetera.
We're going to monitor the market very closely you know as as spring comes in in March and April .
You know and we know what we would expect to see and if if if we find ourselves you know in a in a tougher.
Situation when one of the benefits of save money, where we're just centralized right. We have our field support at the center and in the field is very fast and very flexible and they they can pull back.
Very quickly to the demand that they're seeing and we can do that in each market. So if markets are strong you know those two teams can stay on offense.
We have parts of the country that are weak you know, we'll pull in those markets very fast.
So that's that's how we'll manage SG&A because we know we're in a tougher environment.
And you know the management of the SG&A. So that means we don't get a significant amount of deleverage will be very important for us a 2023.
Yes, It makes sense and then just a quick one John could you tell us what's the current expected 2023 contribution from acquisitions that have been with the company for four full quarters by your convention.
Hum.
Well I would I would point to the the numbers in the in the in the.
And then in the in the presentation with regards to with regards to the actual sales from those those businesses. This year I believe were carrying over $85 million of revenue for the 2021 acquisitions into 2023, alright there.
2022 acquisition. So I mean, just ballpark math, you know there were about roughly $220 million and run rate and and we recognized about $85 billion in revenues this year from those acquisitions.
Got it okay. Thanks very much.
Our next question comes from Ryan Merkel with William Blair. Please proceed with your question.
Hey, good morning, Thanks for taking the question I wanted to ask about first quarter 'twenty. Three I know you don't want to give quarterly guidance, but just given it's a really big comp I was just hoping for a little help in how to think about the sales and gross margins.
Should we think about organic sales down kind of low single digits and then gross margin.
Typically seasonally a little bit below where for Q comes in.
Right way to think about it.
I think that's fair a we did have a very strong first quarter last year, so we won't be facing.
Some of the I'll just highlight some of the moving parts.
Oh, we did have a very strong first quarter of last year with them from a volume perspective, especially kind of January and February started off strong from from that standpoint.
Going into this quarter first quarter, we will have one less selling day from that standpoint on the positive side price inflation I'll, probably strongest in the first quarter.
Of this year, Oh from that perspective, and in general our our gross margins are lower in the first quarter than they are and and the remaining are in the remaining quarters are from that standpoint.
Got it okay.
That's helpful. And then I was a little surprised the repair and upgrade is assumed to be flattish in 'twenty three.
A little worried that during the pandemic that part of the business saw kind of a big boost and I normalize what are you hearing from contractors on this part of the business in 'twenty three.
Right. We're still here in Oh, you know from our contractors, it's really gone to where they just had too much work to do.
To where they have a reasonable amount of amount of work and you know most of our contractors are telling us that they can see you know a good amount of work through the first half of the year.
Repair remodel doesn't have a long lead time, so they don't have tremendous backlogs there traditionally now they did during the COVID-19 years, but.
So you will see when we get into the second half, but they're they're saying things are are good for the first half and then you know we would remain somewhat optimistic that that market would hold up.
It could have been you know if you remember the professional side of repair remodel was highly constrained by labor Altra Covid.
And so you know we didn't see the big run up that as you saw on the retail side and so you know we have less you know there was less pull forward. If you will so what we're hearing from our contractors as they they see.
A good amount of work you know for the first half of the year.
We'll see if the visibility is less clear for the second half and we'll see how that develops.
It makes sense to pass it on thanks.
Thank you.
Our next question comes from Mike Dahl with RBC capital markets. Please proceed with your question.
Hi, Thanks for taking my questions a car so far.
Just a follow up on some of the end market commentary.
When you talk about new wrote down 20, the stable commercial Ryan just asked about R&R.
To clarify are those are those volume assumptions are all are those all in assumptions and.
You know I appreciate that you gave kind of a low single digit price inflation, but.
Those are all in numbers can you help us understand if theres any differences in kind of a volume assumptions by end market.
Yeah, when we think about those markets, we kind of think about them as all in I mean, you know, it's really hard to dissect.
Volume. So you know when we're making those comments that that would be kind of an all in yeah.
Yeah, I don't think.
It's primarily like obviously, whereas he is going to be driven by by volume, but I don't think there's a I think the trends will we would expect would be similar across that price would not varied significantly by end market. So so while we're talking all in are in those numbers specifically.
Volume is what's really driving the.
The differences.
Yeah, Okay that makes sense.
Then just on the price trajectory it's helpful color.
In terms of the the December commentary.
Could you comment at all about January and then when you when you talk about price low single digits in 'twenty three with the majority in the first half do you actually anticipate that as you get into the second half we'd see a net headwind on price or are you envisioning just a flat environment on prices.
Oh, where we're envisioning a flatter flat or a number on price throughout throughout the year. So relatively are built into our assumptions is relatively flat pricing and in Q2 for and and really what your where he's going.
It's kind of a tail off of the I mean, there are some price increases going in right now as I mentioned there are some commodity these actually came down so those prices that are going in right now when would carry throughout the year and then be offset by the commodities coming down, but we will have run off.
Kind of a price a lot of the larger price increases that happened last year up throughout the year and it's a it's a pretty steady decline you know the first quarter to the second to the third to the fourth.
Consider the fourth flat.
You know it too.
John Correct me, if I'm wrong, but it's a pretty steady decline in inflation through through those quarters.
Got it okay. Thanks, a lot thanks, Sean.
Yeah.
Our next question comes from Matthew Bouley with Barclays. Please proceed with your question.
Hey, good morning, everyone. Thanks for taking the questions I wanted to go back to the SG&A question. One more time. It was helpful. Color. You gave there are in the earlier response.
You know just just thinking about sort of you know.
The specifics around you know labor and some of the growth investments you've been making and obviously you guys are guiding to the sort of you know modest deleveraging in 2023, just curious if you can kind of pick apart some of the details there on the SG&A side, because it does seem like a pretty important component there too to achieving your.
EBITDA guide for the year. Thank you.
Yeah, well, we went into this year I guess, just broadly we made a lot of great investments last year and kind of one of the things. We're trying to do this year as harvest those investments. So so it's more of we made investments we want we want to drive the kind of the results from those investments.
We made last year with regard to having said that you know we still do face challenges like everybody else in the marketplace that.
That debt Oh, you know wage inflation isn't going away.
Now and so Oh, we're going to pay our people from from that standpoint, and and so what will be managing those costs with regards to it throughout the year and you know it doesn't matter mentioned, it's very dynamic and can be done locally, but I would say probably.
Less new investment this year or harvest of last year's investments and then then my moderating as as we go throughout the year, our SG&A due to demand.
And when John talks about harvesting you know we think of all the work we've done on type one dot com mobile pro dispatch track, our our CRM that we'd put it on the sales force you know those those all have the potential to drive better productivity and our and our branch associates in our <unk>.
Associates et cetera, and so we're really that's what we're extremely focused on is getting those productivity improvements.
Yeah. Because this is the year that that's going to that's going to be very important. So that's just a little more color on top of what what John said.
Gotcha and I are are you able to disclose you know.
A dollar figure or any type of quantification around those investments that sort of war there that maybe you know ramping down this year.
Not beyond the general guidance that will have some modest deleveraging you know with the sales.
Flat flat to slightly down or flat to down mid single digits.
You can do the math there with wage inflation, that's that's going to take.
Some productivity improvement are our investment dollar amount.
This is not that material you know quite frankly.
In terms of savings for 2023, what's much more important is that we get the productivity and harvest the benefit of that.
So those investments.
Gotcha. Okay. Thank you and then just the second one is back on the pricing side that that was also you know certainly very helpful. Color you gave in the prior question but.
Just any color around the commodity piece of the business and you know what you see around you know fertilizer inputs in PVC and things like that or sort of what's assumed on the commodity side, specifically you know within your low single digit price inflation guide. Thank you.
Those each commodity is different obviously, we have a negative we've already seen negative growth specifically on an on on fertilizers going into the spring, where we will we buy they're in it from the peaks I should say you know I'm not and then.
Similarly, we've already seen price decreases on on on PVC pipe I mean, it's difficult to express every one of US is the commodities are different but but you know for instance, I think Oh, we saw going into the fourth quarter I haven't gotten an update number but it was like 10% to 15% decreases.
On you know PVC pipe, but that is a relatively small component of you know.
A large basket of products so.
Got it alright, thanks, John Thanks, Doug Good luck guys.
Okay. Thank you.
Our next question comes from Keith Hughes with two Securities. Please proceed with your question.
Thank you a question on the share repurchase program I'm sure, there's an opportunistic aspect of this.
Given the stock price, where we are at this point, but is is this going to be a longer term change where share repurchases gotta be part of capital allocation. In addition to the acquisition activity I'm sure you're going to continue longer term.
Yeah, it's it's a long term process, it's not a quarter by quarter processes as we as we think about it.
You know as we described at our capital allocation waterfall are our number one priority instead invest in acquisitions in and grow the business and invest there. So that is number one and and if we use all of our capital to do that they'll all be very happy if we if we can deploy it that way but.
And so much as you know, we maintain a conservative balance sheet and and and you know acquisitions are very choppy and we and we find that we have access capital. We would we would expect to deploy some of that too to to to share repurchase as a way to reach.
Turn back to our shareholders. So I guess the only other thing just kind of clarify that and maybe give some reality is the fact that you know here. We are a beginning of a year a we've got a full pipeline of acquisitions.
Forward and very optimistic about that we're starting up a new new year from that standpoint, so kind of from our frame of mind. You know, we don't feel obligated to go out and purchase capital because we're primarily focused on investing in it right.
Saint shares investing it right at this moment, but you know each year as we go throughout the year, we will well evaluate that and theyre looking at our opportunities.
Okay.
You have given the just building on that question given the amount of spend of acquisitions in 'twenty two.
It seems as though with the with even in a down year coming up here in 'twenty three.
The capital figure with a debt ratio is to do both I guess my question is is there a capital allocation plan in 20th Great.
To get the debt the debt the leverage up more to the mid point of your range utilizing both acquisitions as well as share repurchase.
You know, we we certainly we can do share repurchases and as John mentioned as we get toward the mid.
Mid to the second half of this year and see how things are going and there's a little more certainty on how things are going to work out.
That would be a lever that we can pull.
One of the things we want to keep in mind, though as you know we're heading into a down cycle potentially whether it's a pause or a longer cycle, we don't know.
And we want the strategic flexibility to do.
Even even any larger deals that might come down the pike and we don't typically do large deals, but there are a few that are out there.
That could be in the you know.
200, 5300, and even 400 million range at particular companies you know we're for sale. So we want to make sure that we don't get the leverage to such a point.
Especially going into a tougher waters.
That we wouldn't be able to do those deals strategically so that that's part of our thought process and evaluating the strength of our balance sheet and where we should be from a target standpoint.
We still think the one to two is a good target, but at this point with the uncertainty ahead. It's it's we feel it's prudent to be maybe a little below that range.
You know at this point.
Okay. Thank you.
Yeah.
Our next question is from Damien Cross with UBS. Please proceed with your question.
Hi, good morning, everyone.
Morning, Jamie.
So I wanted to ask you about your free cash flow expectations for the year I think you made the comment you.
You are making progress on reducing excess inventory, but you know I think our free cash flow conversion a little bit lighter to here just just like not everybody else out there could you maybe give us a sense on order here you know how youre thinking about the free cash flow.
Well, what we think will start we will you know our objective in every year isn't a hit net income on free cash flow. We think this year as as we will we were we're hopeful to achieve that this year. We think this year as a result of I'm kind of not.
Having the supply chain issues, we think we can make good progress on on on on our inventory levels. We were very pleased with you know going.
Going into this kind of the first quarter, where we had quite a bit of a hole. This year. We were very pleased by the team's efforts in the second half of this year. It has still post a positive growth on on free cash flow. After after the large hole, we learned after the first quarter and and and as we as I said, we think there's still opportunity.
<unk> to improve that next year as as as supply chains get get less uncertain lead times come down an opportunity to improve turns even even further next year, which would put us hum at or above kind of our.
Our average free cash flow goal.
Got it.
And you all have been very busy on the deal execution front I'm, just curious if anything related to market conditions or site specific factors have helped drive that higher volume of deals or is it just more random timing and kind of second part related to the deal you know our math kind of suggests that you know.
That cost of them has maybe gone up from you know what kind of happened.
A sale of half a turn to one turn on sales now maybe approaching one and a half times, even though you know public equity valuations are are down. So just curious if that is kind of related to the mix of deals you guys are doing or if you've actually seen you know the deal space getting more competitive or anything like that.
Yeah I'll hit the second one first.
I I think that that's probably up a misleading way to look at it or not the way we would look at it we were valuing off of our earnings.
And so you know the profitability of the businesses that we're partnering with really drives that that sales multiple that you're talking about so it's not a way that we typically would look at the valuation. So I wouldn't read too much into that in terms of increased competition or anything like that I think it's been a quite steady.
And we've been pretty consistent in saying that certainly there are other folks out there that are running their acquisition playbook, but there's a lot a lot of white space and quite honestly more often than not the majority of our deals are still exclusively sourced. So we feel very good about continuing that and then in terms of our M&A.
Hey, I think it's just a consistent effort on our part we stay very close through our field contacts over the years and are a strong M&A team.
So the deal flow when when are these often ores are ready to transition their family business. We believe that we're consistently either their first choice and so we expect there to be continued deal flow in 2023, it's more just that continued momentum. It obviously can be very choppy, but.
We feel very good about you know going into 2023, I don't know that there's any specific market factor that is pushing people dramatically.
Although you know certainly the potential for a softer market could push a few people into the.
More likely to sell side if there if they were on the short end of ready to if they had a short window during which they were ready to sell anyway that may push them, a little upward in that window.
Right makes a lot of sense, thanks, guys best of luck.
Thank you.
Our next question comes from Andrew Carter with Stifel. Please proceed with your question.
Hey, Thanks, Good morning, I'll, just take one kind.
Kind of built in the last question I guess, so I guess I'm Gonna go a different way with it certainly looking at the sales multiple if you're buying and higher earnings how much certainty do you go out there and look at your M&A targets now knowing we're at the tail end of the cycle knowing that they probably benefiting just like you in terms of the EBITDA margin in terms of sales can you go out this year in approach.
Their numbers with Hey, this is certainty we can pay on that or is there any possibility that if things deteriorate. Further you start to say now we're going to take a step back and potentially not lean on M&A is heavily just wondering I wonder when I understand how you're thinking through that potential wrinkle.
Yeah, you know, we're not looking to step back in any fashion at all I think we just have to.
To continue with our disciplined process of how we value value businesses and we often look at that we're looking at the sustained earnings. So we we don't look at just the last 12 months. We look at you know the last several years and certainly there has been a bump in some businesses due to whether it's inflation or COVID-19 or various fact.
And we consider those.
Because we are.
Long term investors, where we're looking for the best companies that are going to perform over a full cycle. So we try not to get too dramatically swayed by say in the last 12 months being slightly up or slightly down but.
So I don't think that that will impact our ability to do acquisitions or our appetite for them. The other thing that we do as you know we do a lot of earn outs.
As you know we disagree on the future and the owner thinks there's going to be stronger and we think it's gonna be weaker you know we just we just do.
One to three year earn out where we can we can kind of place a reasonable bet and then share in the benefit or the risk together with those owners and we do that quite a bit just for the very reason you were talking about that you know things are uncertain and so that's that's another way that we manage.
That uncertainty of the future earnings and are able to pay fair prices, but a reasonable prices.
And most owners are are quite happy to do that together.
Thanks, guys I'll pass it on.
Thank you.
Our next question comes from Jeffrey Stevenson with loop capital markets. Please proceed with your question.
Hi, Thanks for taking my questions today.
First I was wondering if he could give any more color on your different assumptions at the low and high end of your fiscal 'twenty three guidance.
I mean are the great uncertainty here.
As our sales are from that from that standpoint, and and Ah I mean, that's that's what where we're going to be managing to and and I don't think it's not a it's not a dynamic where our sales will drive.
SG&A and [laughter] and these things are all linked together, but certainly this is a great uncertainty next next year is kind of how how how this slowdown is it accurately kind of play out right. So you can take the top end of our sales guidance.
And the bottom end and that that's the major driver.
The $3 95 to $4 25.
Got it okay.
Well that helps and.
I just wanted to ask how you're thinking about DIY versus perpetual in 2023 of them and more specifically with prices moderating could there be some opportunities for improvement on the DIY side this year.
Yeah, DIY is a very small part of our business you know two 2% or so so we.
You know, we're very oriented towards the professional side. So we don't really.
You know whatever happens in DIY, it would not have a meaningful impact on our on our business.
Because it doesn't.
We have now reached the end of our question and answer session I would like to turn the floor back over to Doug Black for closing comments.
Okay, well. Thank you everyone for joining us today, we very much appreciate your interest inside one and look forward to speaking with you again after after the first quarter I also like to thank our amazing associates for doing such a great job and our customers for allowing us to be their partner and our suppliers for support and are so strongly as we build our company.
Thank you very much.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Okay.
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