Q2 2023 SiteOne Landscape Supply Inc Earnings Call
Good day and welcome to the site one landscape supply Inc Conference call.
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I would now like to turn the conference over to John Guthrie. Please go ahead.
Thank you and good morning, everyone. We issued our second quarter 2023 earnings press release, this morning, and posted a slide presentation. The Investor relations portion of our website at investors <unk> 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 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, we believe can be useful in evaluating our performance.
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.
Thanks, John .
And thank you for joining us today.
We're pleased to see end market demand remained resilient in the second quarter, which allowed us to achieve solid organic daily sales growth and record operating cash flow. Despite the continued normalization of our gross margin and EBITDA margin.
Our strong teams executed well and gaining market share driving positive organic sales volume growth and.
In managing through price deflation and select products.
We were also pleased to add three new high performing companies to find one.
During the quarter and then July .
Terrific talent to our team and expanding our customer relationships and our full product line capability in their respective markets.
Through the execution of our commercial and operational initiatives and our acquisition strategy. We continue to build Taiwan as a world class market leader for the long term, while delivering consistent performance and growth in the near term.
As we move into the second half of the year, we remain confident that our well balanced business strong balance sheet exceptional teams improved capabilities and robust acquisition pipeline position us well to navigate the current environment 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.
Followed by some highlights from the quarter.
John Guthrie will then walk you through our second quarter financial results in more detail and provide an update on our balance sheet and liquidity position.
Pharma and we'll discuss our acquisition strategy.
And then I will come back to address our current outlook for 2023 before taking your questions.
As shown on slide four on the earnings presentation, we have grown our footprint to more than 650 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 on the very fragmented 25 billion dollar wholesale 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.
1% focused on new residential construction.
And 14% focused 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 out 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.
Create value for our customers and suppliers, while providing important resiliency in softer markets.
Turning to slide five our strategy is to leverage the scale 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 site, one and executing our strategy.
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 stakeholders.
These initiatives are complemented by our acquisition strategy, which fills in our product portfolio moves us into new geographic markets and as terrific new talent the sidewalk.
Taken altogether, our strategy creates superior value for our shareholders.
Our 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 with consistent organic and acquisition growth and EBITDA margin expansion.
We have done this fall investing heavily.
And our teams and our new systems and technologies to build the foundation for Sy, one and create superior capabilities for our customers and suppliers.
We are still building and investing and.
And we remain confident in our ability to gain market share and continue driving all three of our value creation levers going forward.
We have now completed 85 acquisitions across all key product lines.
Since 2014.
We expanded our development team in 2021.
And then leverage them to increased acquisition activity in 2022.
<unk> and a record 16 acquisitions last year.
Our pipeline of potential deals remains robust.
We expect to continue adding and integrating an increased number of new companies to support our growth.
All of these companies are high performers.
And so they strengthen our company with excellent talent and new ideas from our performance and growth.
Given the fragmented nature of our industry and our modest market share we have 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 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 second quarter performance highlights as shown on slide eight.
We achieved 11% net sales growth.
4% organic daily sales growth and 7% growth added through acquisition.
Price inflation continuing to moderate we were very pleased to achieve 3% organic daily sales volume growth during the second quarter.
Furthermore, organic sales growth was more balanced in the second quarter across our product lines and regions and in the first quarter.
As expected price inflation continued to decline and was negative in June driven by deflation and select products like fertilizer grass seed and PVC pipe.
Price inflation was 1% during the quarter compared to 6% in the first quarter.
And 19% in the second quarter of last year.
We expect prices to be down in the second half an inflation for the full year 2023 to be roughly flat.
Gross profit increased 6%, while gross margin contracted by 170 basis points to 36, 2% as we expected.
The loss of the extraordinary price realization benefit achieved during the second quarter of 2022 was partially offset by our hardscape and landscape supplies acquisition, which carry a higher gross margin.
And also by lower freight cost are.
Our teams continued to maintain competitive pricing, while managing the price versus cost well <unk>.
Despite the challenges of commodity related deflation.
We have now fully lapped the extraordinary price realization achieved during 2021 and 2022 and.
And we expect gross margin in the second half of 2023 to be similar to the second half of 2022.
SG&A as a percent of net sales increased by 130 basis points year over year to 20.
23, 7%.
Acquisitions had the largest effect on SG&A as a percent of net sales as the same hardscape and landscape supplies acquisition that benefited gross margin also increased our SG&A.
Inflation across all categories, except for freight also contributed to the higher SG&A as a percent of net sales.
We are highly focused on operating leverage and expect to see benefits from our productivity initiatives as inflation normalizes and as we returned to positive organic daily sales growth.
Adjusted EBITDA for the quarter declined 5% to $211 2 million.
And adjusted EBITDA margin declined by 260 basis points to 15, 6%.
What's the normalized price realization benefit.
And with higher SG&A yielded lower adjusted EBITDA.
Adjusted EBITDA and adjusted EBITDA margin are on track with our expectation so far this year and we expect the decreases in both to moderate significantly in the second half.
In terms of initiatives, we continue to grow with our small customers significantly higher than our average while also driving growth in our private label brands and improving our inbound freight cost for our transportation management system.
All helping us to expand gross margin.
Year to date, we have increased our partners program members by approximately 50% to 36000 members.
Most of the new members are small to midsized customers.
We have increased our percentage of bilingual branches from 56%, 59%. This year and are continuing to focus on Hispanic marketing to create awareness among this important customer segment.
Lastly, we are making great progress in our sales force productivity as we leverage our CRM and establish more disciplined revenue generating habits, among our over 900 inside and outside sales associates.
The continued rollout of mobile pro and dispatch track allow us to offer better customer service, while also increasing the productivity of our branch staff and delivery fleet.
Both of these capabilities are now deployed companywide and we continue to see usage and benefit increase across the company.
We made good progress in growing our digital sales and customer activity on <unk> dot com during the second quarter, which helps us increase market share.
While allowing our associates to focus more on creating value for our customers and less on transactional activity.
And finally, we are seeing some of the early benefits from our operational excellence teams, who are systematically spreading best practices in each line of business across site, one to drive value for our customers suppliers and company.
As an example over the past year, we had driven changes in key aspects of our nursery business.
Terms of staffing sales assortment and procurement.
As a result, our nursery product line has outperformed all other lines of business. This year inorganic growth profit improvement and improved inventory turns.
Taken altogether, we are continuing to improve our capability to drive organic growth and achieve operating leverage even as we fight through the challenges in 2023.
On the acquisition front, we have added five high performing companies to our family. So far this year with approximately $75 million in trailing 12 month sales added to Taiwan.
Following a record number of acquisitions in 2020 to our expanded development team remains very active and engaged with a robust pipeline of targets.
And we expect to have another good acquisition year in 2023.
With an experienced team broad and deep relationships with the best companies strong balance sheet and an exceptional reputation we remain well positioned to grow consistently through acquisition this year and for many years to come.
Summary, we are pleased with our progress at the halfway mark and navigating through the challenging market conditions in 2023.
While end market demand remains resilient and we will continue to be challenged with commodity product deflation.
Cost inflation and overall economic uncertainty in the second half.
In the face of these headwinds we have solid momentum with our key commercial and operational initiatives.
And remain confident in our ability to deliver increased value to our customers and suppliers, while outperforming the market.
Now John will walk you through the quarter in more detail John .
Thanks, Doug I'll begin on slide nine with some highlights from our second quarter results.
We reported a net sales increase of 11% to 135 billion for the quarter.
There were 64 selling days in the second quarter, which is the same as the prior year period.
Organic daily sales increased 4% compared to the prior year period, primarily due to volume growth and solid end market demand.
Pricing, placing contributed approximately 1% organic daily sales growth during the period.
As Doug mentioned, we are seeing less price inflation as we comp the large price increases of the last year and the cost for products like fertilizer grass seed and PVC pipe decrease.
We now expect price inflation to be roughly flat for the full year, which implies price deflation and low single digits in the second half of this year.
Organic daily sales volume increased 3% for the second quarter as we experienced solid demand from our end markets. In addition in comparison to both the second quarter of 2022, and the first quarter of 2023, whether had its much smaller impact on sale.
Organic daily sales for landscaping products, which includes irrigation nursery and hardscape outdoor lighting and landscape accessories grew 5% for the second quarter, primarily due to price inflation, resulting from rising product costs.
Organic daily sales for agronomic products, which includes fertilizer control products I smell and equipment grew 2% due to volume growth, resulting from solid demand and improved weather in key northern markets.
The strong volume growth was partially offset by lower prices for products like fertilizer and grass seed.
We were pleased with the performance of our acquisitions in the second quarter acquisition sales, which reflect sales attributable to acquisitions completed in both 2022, and 2023 contributed approximately $86 million or 7% net sales growth Scott.
Scott will provide more details regarding our acquisition strategy later in the call.
Gross profit increased 6% to $489 million for the second quarter compared to $461 million for the prior year period.
Gross margin decreased 170 basis points to 36, 2% as lower freight costs and contributions from acquisitions with higher gross margin were more than offset by the loss the price realization benefit realized in the second quarter of 2022.
As we've discussed in prior quarters, we are expecting gross margin to normalize in 2023, as we transition to a more traditional pricing environment.
Selling general and administrative expense.
Our SG&A increased 18% to $321 million for the second quarter.
The increase in SG&A, primarily reflects the impact of acquisitions.
SG&A as a percentage of net sales increased 130 basis points in the quarter to 23, 7%.
The increase in SG&A as a percentage of net sales was primarily due to the impact of acquisitions continued cost inflation and incremental investments to support our growth.
For the second quarter, we recorded an income tax expense of $40 million compared to 45 million in the prior year period.
The effective tax rate was 24, 4% for the second quarter of 2023 compared to 24, 2% for the prior year period.
The increase in the effective tax rate was primarily due to a decrease in the amount of excess tax benefit from stock based compensation.
We expect the 2023 fiscal year effective tax rate will be between 25, and 26% excluding discrete items such as excess tax benefit.
Net income for the second quarter of 2023 decreased 12% to $124 million compared to 141 million for the same period in the prior year as.
As higher net sales were more than offset by a lower gross margin and increased SG&A expense.
Our weighted average diluted share count was $45 7 million compared to $45 8 million for the prior year period.
Adjusted EBITDA decreased by 5% to $211 2 million for the second quarter compared to $222 million for the same period in the prior year.
Adjusted EBITDA margin, reflecting the lower gross margin decreased 260 basis points to 15, 6%.
I would like to provide a brief update on our balance sheet and cash flow statement as shown on slide 10.
Net working capital at the end of the second quarter was $903 million compared to 885 million at the end of the prior year period.
The increase in net working capital is primarily attributable to an increase in accounts receivable, resulting from our sales growth.
While total inventory was flat compared to the same period last year inventory turns increased as we reduced our staffing levels with improved product supply.
Net cash provided by operating activities increased to $254 million for the second quarter compared to approximately $95 million for the prior year period.
The record operating cash flow reflects our progress in reducing inventory levels that we increased in prior periods in response to supply chain uncertainty.
We made cash investments of approximately $35 million for the second quarter compared to approximately $104 million in the same quarter in 2022.
Decrease reflects a decline in the acquisition investments made during the quarter.
Scott will provide additional details on our acquisition pipeline later in the call.
Capital expenditures were $9 million for the quarter, which was flat with prior year period.
Net debt at the quarter was approximately $385 million compared to approximately $436 million at the end of the second quarter of 2022.
Lower net debt reflects our strong operating cash flow and lower acquisition investment.
Leverage at the end of the second quarter was 0.9 times, our trailing 12 month adjusted EBITDA.
It's the same as the prior year period.
As a reminder, our target year end net debt to adjusted EBITDA leverage range is one to two times.
At the end of the quarter, we had liquidity of approximately $524 million, which consisted of approximately $70 million cash on hand, and approximately $454 million and available capacity under our ABL facility.
On July 12, 2023, we further increased our liquidity by borrowing an additional $120 million on our term loan and using the net proceeds to increased ABL availability.
Priority from a balance sheet and funding perspective maintain our financial strength and flexibility. So we can execute our growth strategy in all market environments.
I will now turn the call over to Scott for an update on our acquisition strategy.
Thanks, John as shown on Slide 11, we acquired two companies in the second quarter and one in July with combined trailing 12 month net sales of approximately $35 million.
Since 2014, we acquired 85 companies with approximately $1 5 billion and trailing 12 month net sales added to cite one.
Turning to slides 12 through 14, you will find information on our most recent acquisitions.
On May eight we acquired Adams wholesale supply with three locations focused on providing agronomics and landscape supplies, San Antonio Dallas, Fort Worth and Houston, Texas markets.
On May 26, we acquired link outdoor lighting with four locations, providing landscape lighting the landscape contractors in the Orlando in Naples, Florida markets as well as in Houston, Texas, and Nashville, Tennessee.
On July three we acquired Hickory Hill Farm and guard single location wholesale distributor of irrigation nursery and landscape supplies.
The acquisition of Hickory Hill complements our existing business in the Lake of Pone, Georgia area, allowing us to provide the full line of landscaping products and supplies.
Escape professional in this high growth local market.
Our acquisitions continue to add terrific 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 15, 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 during the year I want to thank the entire site team for their passion and commitment.
To making <unk>, a great place to work and for welcoming the newly acquired teams when they joined the <unk> family.
I am confident in our ability to keep adding more outstanding new companies through acquisition as we move through 2023 rating excellent value for all our stakeholders.
I will now turn the call back to Doug.
Thanks Scott.
To wrap up on slide 16.
Mentioned, we're pleased to have achieved 2% organic daily sales growth in the first half of 2023.
So far the year is playing out as we had expected with durable demand and moderating price growth due to commodity price deflation.
As we look forward to the second half as John mentioned, we expect price inflation to be negative, resulting in flat pricing for the year.
In terms of volume growth, we remain optimistic that end market demand will remain durable as we continue to execute our commercial and operational initiatives to grow faster than the market.
In terms of end markets, we expect the decline in new residential construction.
It comprises 21% of our sales to continue during the second half.
Note that builders have become more bullish in terms of housing starts in the second half.
Which could lead to sales growth for landscaping products and the new residential construction market.
In the year or in 2024.
New commercial construction, which represents 14% of our sales has remained solid and based on our current bidding and customer backlogs. We expect continued growth in this market throughout 2023.
The repair and upgrade market, which represents 29% of our sales has been mixed so far this year across geographic markets and we now expect this market to be flat.
Lastly, we expect sales volume in the maintenance category, which represents 36% of our sales to remain steady with modest growth.
With this backdrop, we expect our organic daily sales to be down slightly in the second half driven by declining prices.
For the full year of 2023, we expect organic daily sales to be approximately flat.
We expect gross margin in the second half to be similar to the prior year period, and adjusted EBITDA margin to be slightly lower year over year basis.
Given reasonable demand, we would expect to resume expanding adjusted EBITDA margin in 2024 and beyond.
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 increase in 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 apartment.
Operator, please open the line for questions.
Thank you.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
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If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then too.
We request that you. Please limit your questions to one main question and one follow up question.
At this time, we both paused momentarily to assemble odd roster.
The first question comes from.
Brian mucus with William Blair.
Hey, good morning, and thanks for all the.
Help and guidance for the year.
First question is on the price deflation that you mentioned and it it's a two parter.
What is the source of the deflation is it simply just passing through lower.
Or is there also access supply of some of these items and then do you think prices are gonna stabilize in the second half or continue.
Continue to go lower as we look into 2024.
Thanks, Ryan we would we think it is primarily just.
Reorienting the prices.
Lower cost is what what's going on and where.
The market prices have you seen some of the commodities like fertilizer have come down it's not from a oversupply.
And and increased competition for.
For business the demand is actually improve this year.
We showed good volume growth and agronomics, an agronomics is is the primary uhm area, where we are seeing deflation.
I think I think you know.
<unk> is a great, but I I think we've seen were aware of with the pricing that's gonna happen in the second half of them. We've incorporated incorporated that into our guidance right now from that perspective. So so we would there were some price increases you know grass seed and fertilizer to that have gone in recently and feel pretty.
Good about those holding onto to the through the fall selling season.
Okay. That's helpful.
<unk> maybe.
Maybe just a question on sales trends what are you seeing in July is that consistent with organic sales down low single digits and.
What is the feedback from contractors at eight still quoting and booking new work or are they sort of bleeding backlog at this point.
Alright.
July is has been a solid mass.
With our guidance and our customers are I'd say.
<unk>, two maybe even a little optimistic.
You know the pillars have become more optimistic protests some of our larger customers feeling.
Kind of feeling better about especially the late part of the second half and then you know the commercial market has remained strong. So backlogs have remained are beating.
Is still <unk> versus the prior year.
And so I would I would call and so you know the backlogs got very long [laughter].
Covid and I certainly have come down to normal contractors are certainly after having to work harder to find work, but we don't see any kind of panic or.
Customers that can't find them or you know.
<unk> simply kind of normal backlogs.
To prevent freedom pandemic levels I guess is how we would we would call it.
Very helpful. Thank you.
Thanks, Ron.
Thank you.
The next question comes from David Manthey with bad.
Please go ahead.
Yeah. Thank you good morning, everyone.
To build on that last question last quarter, you were a little slow out of the gate on the year and then April rebounded for you can you talk about the trends that you saw through the quarter with a pretty stable and related to that this extreme heat situation.
Is that actually a negative for your business.
So you know we saw volume as you mentioned picking up through the corner of course.
Price K.
Came down and and so that those two factors of kind of worked in tandem and so I'd say, it's been it's been pretty consistent.
<unk> the spring in the second quarter.
The total organic growth would have you know kind of dropped sequentially from April to June .
Still still positive in June .
In terms of the weather you know we benefited this year from the weather in the northern kind of great plains across the top end of the U S, which had very poor weather last year in the spring you know had better weather. This year. So that was a benefit to US obviously it was wetter in Texas and some of the southern.
You know, California, Arizona, Texas, Florida, which kind of worked against us.
We would call that may be a push in the second quarter.
In terms of whether and when you take the heat you know the heat helps us to some degree in terms of you know, they're gonna have to treat the lawns irrigation tend to do better in the hotter weather, however, and some of the extreme heat markets. We're seeing you know customers you know kind of cut there.
Afternoon hours and do some things in there that that might click demand. So overall I think it would be a fairly neutral.
We haven't seen a large negative effect from the extreme heat at least at least today.
The summer months in June and August tend to be a bit of a law.
Anyway, I just people are taking vacations before school et cetera.
And we certainly have seen that same trend, but nothing nothing that's different from prior years.
Okay. Thanks for that Doug and building on this pricing question.
It sounds like pricing levels in the in your commodity products agronomics from the start of the year.
Have declined slightly but it also I believe John you said that there's a price increase you feel like maybe those are stabilizing just correct me if I'm wrong on that and then second any commentary on the non commodity products pricing trends are they stable I know, there's a wrap around it.
Fact from last year and was obviously you're over your comps, but as you look from the beginning of the year to today. If you could just talk about trends in those two categories.
Yeah.
I think what we've talked about it at the beginning of the year. It is still holds you know I look at our product lines were still showing.
Increases in you know.
And almost every kind of as if for the quarter in almost every of our major product lines other than agronomics Hardscapes nursery prices have held up very well irrigation other than PVC pipe <unk> has held up very well. So in general I think I think our thesis.
With regards to.
Pricing has come out that the 80 per cent of our businesses that's nine.
A commodity related roughly has has has has maintained pricing and then the commodities.
Come down now you.
You know maybe some of their commodities have come down a little bit faster, we were probably low single digits now we're roughly flat Ah for the year I would say that that trend, but I think directionally and kind of kind of the model. We have continues to hold from what we've talked about prior calls.
Oh.
Thank you.
The next question comes from Damien Karras.
Mm UBS please spell it.
Hey, good morning, everyone.
I'm wondering what on.
I used to see you guys getting back the volume growth congrats on that.
I have a question kind of specific to the <unk>.
And inside of your business because that would call from last year that that was unexpectedly weak as a lot of your car.
Contractors were rationally rationalizing supply because of inflation.
Assuming that that was a nice tailwind for you in the second quarter and just curious what kind of customer behavior, you're seeing now in the in the maintenance side, you know our our our budget sort of acclimated to day pricing and you're getting back to kind of like normal quantity of a product being applied.
Yes in general that's what we're seeing we're seeing strong volumes and agronomics.
And you know the prices are down, obviously, which which mitigates that but that that's played out as we expected we didn't we didn't.
Expect customers kind of come back to normal application rates.
In terms of like the golf industry, you know they've got nice revenues and so you know their budget certain.
Fairly fixed or increased.
Prices are coming down there are able to to use more products. So yes, we're pleased with that trend and agronomics as played through.
And we expect that to continue to play true.
Into the into the second half.
Great and would you be able to give us a sense for.
You know what how you think you're performing year to date in terms of that you know share gains or losses, any any prospective all kind of what the industry performance has been.
Right Yeah, we we do feel like we're gaining share consistently.
And you know each market you know has the puts and takes bud across.
Across the country, we're gaining market share and and really all of our our product lines and so.
So we we feel good about that we stayed you know there's not a lot of good industry data, but we stay in close contact with our suppliers and so you know we know what's going on with ourselves relative to our competitors et cetera, we're very pleased with our.
Our small customer.
Efforts as we have stated before we've got less share with smaller customers than we do with the larger customers is just the way that we were we developed early on in our history and so that's a big target for us and we and we see that small customer growth. You know that is far ahead of the industry. If you will and so.
We feel like we're making a particular progress there with the smaller customer segments, which is which is great around us out as as a company we already have significant share with the larger customers. We've been holding onto that obviously, that's a lot of where the fighting is in these types of markets as for that large customer business, where are holding our own there but we're.
Picking up you know kind of significant share in the in the small medium to small customer segment, which is part of our strategy.
That's great. Thank you very much I'll pass it along.
Thanks Damien.
Thank you.
The next question comes from Mike Doll with RBC capital markets. Please go ahead.
Good morning, Thanks for taking my questions.
Just a follow up what one more coffee.
The condition or a qualification on the pricing side, so it sounds like pretty stable on noncommodity.
Can you just help us understand kind of in terms of quantifying then.
How much commodity prices.
Are down and then when you think about maybe if if commodity prices are.
Dave Wising here or whatever your markets kind of telling you for the second half.
Yeah, how that would.
Impact the beginning of 2024 as well I know, it's early but just.
<unk> continued to track here, what would that mean for net pricing and 24.
Don't have exact numbers on on on 2024, yet we'll have to see see how that plays out but I I think it would be fair to say at least in Q1 would probably face a little bit of a of a headwind because of commodities. Since we did now if we look at the at the quarters.
We had 6% in Q1 and that that'll be the tough comp from that standpoint, and we'll have to see that.
Kind of the rest of that 80% of the business that offsets that that 6% number [noise].
From that standpoint.
Mmm.
Per cent of commodities yeah.
Yeah, I mean, I mean, we have some.
Commodities that are you know I would say kind of utility which include which was primarily fertilizer you know Ah quantifying that probably where whereabouts at our current run right you know low double low done.
Will digits you know in the in the low teens at a combined basis down your over a year on pricing I would expect piping would be similar those those are the ones that would call that in grass seed and we have a pretty big graphs eight season in Q3.
It would be the three that old probably be down I'm low double digits. So that that blends together as we alluded to on the call. You know we got that the rest of the business that's out there and.
A much more modest or price increases and that gives us the low low single digit headwind on the second half.
Okay. That's helpful. John and then my second question is March.
Last quarter, you outlined the continued expectation for gross margins normalized down to 34 and a half to 35.
If if we look at the two Q upside and then kind of plug in flat year on year in the second half.
It seems like you get to you a little north of 35, So I'm wondering how much of that is still kind of timing related versus.
The internal initiatives are M&A.
Potentially drive it kind of some structural uplift to how you're now viewing gross margins.
Yeah, I I think you know we talk about 34 and a half to 35 as you say kind of our our our guidance what we talked about and on the call is gonna put us at the high end of that that that that that number.
A lot of that will be as.
Will be kind of I think you know some some freight and the acquisitions well, we positive with regards to that though year over year. Some of the kind of a larger high gross margin acquisitions were starting to count those also from that standpoint. So so rest of the year. We are at the at the <unk>.
Hi, and more more 35 ish Ah Ah Ah Ah for that if.
If you do the math is and then and and a lot of that's due to kind of as we walked while we work through all these kind of one time kind of benefits kind of rolling off and then and then you know kind of structurally. We we think this is kind of where we start as a baseline for future years.
Great. Okay. Thank you.
Thank you.
The next question comes from Keith fused with the Truest. Please go ahead.
Oh, Thank you the unit growth in the quarter and the projection here is I mean, a good bit better than bust every one of your peers.
Both manufacturer distributions. So I guess my question.
Is there any one market that's outperformed even your expectations would you have gone through this kind of turbulent period.
Well you know the the strikes.
Of already has been in you know on the South Florida.
The southeast you know, it's kind of been it's been very strong that's.
It's been traditionally strong for us.
But if you Wanna you know if you're asking what our strongest area would be that'd be it would be kind of Florida and the southeast.
Actually our weakest area, what domain, California, and where we had to really really poor weather.
You know, Texas has had poor weather so.
Ben you know market, Sir traditionally strong there have been a little weaker and all kinds of plans out, but that's that's been our strength.
We've been very pleased with.
Kind of in the southeast U S performance, so far this year.
And an appropriate unusual market perspective is there any one of those but it's just not just not gonna hit as much as you would've been Pittsburgh.
That's not gonna hit as much.
That has not been so far is as weak as maybe you would've thought that you need a year.
Well, we're a little bit surprised that the residential market is seems to be more you know the the builders are more bullish for the second half now you know we kind of haven't seen it yet, but we we were thinking there would be a bit longer.
You know negative trend in new residential construction and it just seems like the builders are are more optimistic then we would've thought they would've been commercial has held up well you know we thought commercial was gonna be a solid and it's probably been a little better than we thought remodel.
<unk> has been kind of as expected and and maintenance really as bad as expected.
So I'd say that new residential construction, so we haven't seen as a future looks better there lay.
Later in the second half and and 24, then we would've thought coming in to 2023.
Okay. Thank you.
Thank you. Thank you.
The next question comes from Joe Alice Smile.
She'll Bank. Please go ahead.
Good morning, everybody.
Just one more to follow up on that last point about new residential can you clarify if that late second half benefit that you think you may get this year versus next year is that included even at the high end of your guidance are you still sort of pushing that up to the next year.
We we haven't included anything with regards to that into our guidance at all.
That standpoint, I mean that would be kind.
Kind of more of a 24th and is what <unk>, what what we think and you know our guidance is based on conversations and what we're seeing with contractors today in the marketplace.
Place.
Understood. Okay, and then the comment about returning to margin expansion next year.
I assume that's more on the volume leverage and the cost side unless so from the gross margin for stabilizing there. So could you maybe just talk about the the sort of expectation of what drives the margin expansion from here. If it is more volume or if it's further productivity on the cost side and then if I could just.
Another one and just any plans on how to turn the inventory in the next year.
I'll take the first of all John type a second one so no. We we feel like it'll it'll still be very balanced ER going forward. Once we this is a reset your you know when we finish the year and kind of a stable situation, we see reasonable demand going forward, we we do expect <unk>.
<unk> gross margin improvement.
Both organically through our initiatives with small customers are private label brands.
Initiatives.
And then are just you know operating afraid and.
And some of our initiatives. There. We also will get mixed benefits from acquisitions going forward in terms of gross margin.
But then on the SG&A side that you mentioned, we do expect to get operating leverage.
And we have a lot of initiatives focused on productivity that we expect to pay off so well.
Will we see both of those <unk>.
Contributing to our EBIT margin expansion.
As we head toward R. R a range of 13% to 15%.
Even adjusted EBITDA margin, we expect you know that improvement to come from above SG.
<unk> as a percent of sales and also gross margin.
And then John you talked to inventory Yeah. We we would expect that you've been through returns to continue to improve our next year I mean, I don't know if you know Q2, especially was obviously a very strong this would be kind of more of a normal from a standpoint, we hope to go into the next.
With less inventory and then kind of be more Ah specific on the build in the first quarter that will still be there kind of I would say more laddish and the second half before they kind of trend down at the end of the year. So so I think I think kind of this this quarter.
Because we you know overdone really the last 12 months have been working up some of the excess inventory that we brought in to kind of address his supply trains challenges during the Covid period. So this was an especially strong quarter for that I would say it would be.
We're gonna go back tomorrow in store called quarters, but we will do expect kind of next year and go forward to continue to improve our inventory turns you know we're still not even if we were we projected at the end of this year, we're still not where we completely we're right report COVID-19 and there's still.
Opportunities going forward.
Got it thanks very much.
Thank you.
The next question comes from Jeffrey Stevenson.
With Luke capital. Please go ahead.
Hi, Thanks for taking my questions today, and congrats on my legs quarter.
It's one of the first comment on repair and upgrade or your expect them to me and to be <unk>.
Doug you mentioned that demand is mixed by region and you called out the southeast as being one of the stronger markets, but could you provide any more color on some of the areas that may be a little more challenged with others.
Well, we've we've been a little more challenged in the west in general.
Then the east and.
You know part of that whether you know, it's kind of hard to tell how much of that is whether in market.
But that that's that's where we would have seen you know where we think that the market maybe is not as strong as is.
As you know we mentioned the southeast in the Eastern General in terms of what what's going on in the remodel market you know obviously.
They're the head when would be you know the low housing turnover you know existing home sales are down and you know existing home sales always drive you know a good remodel activity, including you know kind of professional remodel and then we have seen you know some as the uncertainty and the.
The economy has has kind of set in you know some I call it and that kind of middle range projects that are just a little slower than they were right I mean.
You know keep in mind that we were coming off of a kind of a torrid pace [laughter] before and so maybe we got spoiled, but you know we're we're certainly seeing those backlogs come down that means said, we're still we're still good.
Good business out there you know wish there's still a big market for us we feel good about it we just think it's softer than it was it.
He was in high growth mode. It went to a you know reasonable growth mode. Now you know, it's it's called Flatties slightly up.
And you know we think we'll see how it goes.
But you know.
Puts it tastes of the economy, we we we liked the fact that we see consumer confidence coming up because certainly consumer confidence impacts remodel.
You know, we think that the the the sticker shock and the and the headwind existing home sales has kind of already been played in and so we we would look for that to be solid perhaps improving as we as we look into 24 and beyond.
Right now, we're calling it flat.
Understood that's helpful color and then <unk>.
Commercial it seems like you've got really good visibility to the remainder of the year, but it's just on bidding activity have you seen any impact from where there'll be the regional banking crisis or higher interest rates and just set a high level kind of how you were thinking of that and mark that as we head into 24.
Right.
Yeah, there was I guess Oh.
Worry in general that that would be haven't happening and in fact, the banking crisis on commercial we haven't seen it you know.
The building has been.
Been solid it's been consistent our customers are busy.
So.
It looks like that that's that's not gonna affect that market given what we see with our customers and in the activity that we're seeing we really have seen no no slow down there at all so we're encouraged by that.
Great. Thank you.
Thank you.
The next question comes from Matthew building.
With luck. Please please call him [noise].
Good morning, everyone. Thank you for taking the questions I'll ask on SG&A, I think he called out acquisitions and cost inflation and growth investments is impacting that.
It looks like on a per branch basis, SG&A might've been up roughly 15% in the first half of the year and I think the guide is implying it gets a lot closer to flat year over year. So just kind of any color on on what you're doing to sort of manage down SG&A here in the second half. Thank you.
Well I I think two things one is a lot of the increase came in at at during the second half of last year. So we are going to kind of a higher higher numbers than in addition.
Looking closely and managing all SG&A expense, we're looking at our staffing models to make sure that they are following along with with demand from that standpoint.
And keeping a close eye on on continuing to kind of I'll watch watch on focus spend on the things that are gonna drive volume growth. This year and next but also taking a kenai to the to the items that you know.
What won't won't have that benefit from that standpoint.
And just to build on that [noise], you know, we we respond as the market.
Is the market plays out and so you know in markets that have a tougher headwinds either in terms of market or whether we pullback significantly on labor appropriately right to serve the lower demand in other markets, you know, where you know being a growth mode because of a stronger market. So.
One of the one.
One of the benefits of our the way we run our company and it'd be very decentralized way is it more flexible for each market to kind of match, what's going on in that market. So we're certainly working that hard.
This year because demand is you know it's different across the country.
And so.
That's how are we imagine as John mentioned were lapping kind of increases from from last year. So we we feel good that that.
That will as the as the growth comes back as soon as we move into next year that we've got opportunities to get a good operating leverage across across the company.
Gotcha. Okay. Thanks, guys for that I'm very helpful. And then secondly on the gross margin. Obviously, you had the and inflation benefit previously and now that's rolling off like you mentioned earlier that you know you're kind of managing price versus cost in spite of this commodity D.
<unk>. So my question is.
You actually benefitting it all off from that spread you know with commodities coming down or do you sort of have to pass through that deflation immediately.
And you know what does deflation actually ended up doing to the gross margin.
Thank you.
We're fortunate that the in general the industry both on the good side and bad side follows the cost of the suppliers. So so in general as raw material costs come through kind of the market will go we'll go with it and we will.
Be able to especially from a commodity products, where we're bidding on on PVC pipe jobs or or or on it for a fall fertilizer application you know our while the percentage of margin.
Will hold are are are kind of the.
The dollar gross profit dollars will decrease with that and that's kind of the headwind we've talked about with regards to the sales side, but the market's relatively rational as far as from that standpoint, and kind of prices up of a margin basis, rather than and so.
As we go down.
In general what we're thinking is we're going to be able to maintain the margin, but but the price will come down with it.
Gotcha, alright, thanks, John Thanks Duck.
Thank you.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Doug Black foreclosed closing remarks.
Okay. Thank you all for joining us today very much appreciate your interest in sight. One we're excited about our company and strategy and we look forward to speaking to you again on our next earnings call a big. Thank you two are terrific associates also our suppliers and and.
Customers.
Thank you and have a great day.
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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