Q3 2023 SiteOne Landscape Supply Inc Earnings Call

Greetings.

Welcome to the St. One landscape supply third quarter 2023 earnings call.

At this time all participants are in a listen only mode.

<unk> and answer session will follow the formal presentation.

And once you require operator assistance during the call. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded at this time I would like to hand, the call over to John Guthrie Executive Vice President and Chief Financial Officer. Thank you may begin.

Thank you and good morning, everyone. We issued our third quarter 2023 earnings press release, this morning, and posted a slide presentation to the Investor Relations portion of our website at investors that site one dot com.

I'm joined today by Doug Black, our chairman and Chief Executive Officer, and Scott Salmon Executive Vice President strategy and development.

Before we begin I would like to remind everyone that today's press release slide presentation and the statements made during the call include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.

Such risks and uncertainties include the factors set forth in the earnings release and in our filings with the Securities and Exchange Commission.

Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance.

A reconciliation of these measures can be found in our earnings release and in the slide presentation.

I would now like to turn the call over to Doug Black.

Thanks, John.

Good morning, and thank you all for joining us today.

We were pleased to see end market demand remained resilient in the third quarter, which allowed us to achieve positive sales volume growth.

That said deflation and select commodity products like PVC pipe grass seed and fertilizer was stronger than we expected, which had a negative impact on organic daily sales and on both gross margin and adjusted EBITDA margin during the quarter.

We expect these negative deflationary effects to continue during the fourth quarter, but moderate in 2024 as commodity prices stabilize.

In the current challenging environment, our teams executed well by gaining market share driving positive organic sales volume growth.

Managing through the price deflation.

Acquisitions also contributed 6% net sales growth during the quarter.

We were very pleased to add six new high performing companies that represent approximately $230 million in trailing 12 month sense, just like one during the quarter.

Through the execution of our commercial and operational initiatives and our acquisition strategy. We continue to build side. One is a world class market leader for the long term, while managing through the near term market challenges.

We remain confident that our well balanced business strong balance sheet exceptional teams improved capabilities and robust acquisition pipeline position us well to achieve strong performance and growth over the coming years.

I will start today's call with a brief overview of our unique market position and our strategy followed by some highlights from the quarter.

John Guthrie will then walk you through our third quarter financial results in more detail.

And provide an update on our balance sheet and liquidity position.

Scott Solomon, who will discuss our acquisition strategy and then I will come back to address our latest outlook before taking your questions.

As shown on slide four of the earnings presentation, we have grown our footprint to more than 690 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 we estimate that we only have about a 16% share of the very fragmented 25 billion wholesale landscaping products distribution market.

Accordingly, our long term growth opportunity remains significant.

We have a balanced mix of business with 65% focused on maintenance repair and upgrade.

100% 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 further strengthens this balance over time.

Overall, our end market mix broad product portfolio and good geographic coverage offer us multiple avenues to grow and create value for our customers and suppliers, while providing important resiliency in softer markets.

Unknown Attendee: Welcome to the SiteOne Landscape Supply 3rd Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.

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.

Unknown Attendee: If anyone should require obriter assistance during the call, please press star zero and your telephone keypad. As a reminder, this conference is being recorded.

All in support of our talented experienced and entrepreneurial local teams to consistently deliver superior value to our customers and suppliers.

John Guthrie: At this time, I would like to hand the call over to John Guthrie, executive vice president and chief financial officer. Thank you, maybe again. Thank you and good morning, everyone. We entered our 3rd quarter 2023 Earnings Press releases morning and posted a slide presentation to the investor relations portion of our website at investors.siteOne.com. I'm joined today by Doug Black, our chairman and chief executive officer and Scott Salmon, executive vice president, strategy and development.

We've come a long way in building site won and executed on our strategy well.

But we have more work to do as we develop into 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 adds terrific new talent to <unk>.

John Guthrie: Before we begin, I would like to remind everyone that today's press release slide presentation and the statements made during the call include forward-looking statements within the meeting of the private securities litigation reform act of 1995. These statements are subject to risk 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-gap measures, which we believe can be useful in evaluating our performance. A reconciliation of these measures can be found in our earnings release and in this slide presentation.

Taken all together 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 with consistent organic and acquisition growth and EBITDA margin expansion.

We have done this while investing heavily in our teams and the new systems and technologies to build the foundation for <unk>, 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.

Doug Black: I would now like to turn the call over to Doug Black. Thank you, John.

As previously discussed 2023 is a reset year for gross margin and adjusted EBITDA margin.

Doug Black: Good morning and thank you all for joining us today. We were pleased to see end-market demand remain resilient in the 3rd quarter, which allowed us to achieve positive sales volume growth. That said, depletion and select commodity products like PVC pipe, grass seed and fertilizer were stronger than we expected, which had a negative impact on organic daily sales and on both gross margin and adjusted EBJ margin during the quarter. We expect these negative deflationary effects to continue during the 4th quarter but moderate in 2024 as commodity prices stabilized.

Due to the extraordinary price benefits that we received in 2021 and 2022.

We are now experiencing significant commodity price deflation, which causes a temporary negative impact on organic daily sales gross margin and adjusted EBITDA margin.

We expect this negative impact to subside in 2024, which will provide a tailwind as we look to expand our adjusted EBITDA margin toward our long term goal of 13% to 15%.

We remain confident in our strategy to drive revenue growth, while expanding gross margin and achieving SG&A leverage to reach our longer term business performance objectives.

Doug Black: In the current challenging environment, our teams executed well by gaining market share, driving positive organic sales volume growth and managing through the price deflation. Acquisitions also contributed 6% net sales growth during the quarter. We were very pleased to add six new high-performing companies that represent approximately 230 million and trailing 12 month sales to site one during the quarter. Through the execution of our commercial and operational initiatives and our acquisition strategy, we continue to build site one as a world-class market leader for the long term while managing through the near-term market challenges. We remain confident that our well-balanced business, strong balance sheet, exceptional teams, improved capabilities and robust acquisition pipeline position as well to achieve strong performance and growth over the coming years.

We have now completed 90 acquisitions across all key product lines since 2014.

We expanded our development team in 2021 and leverage them to increased acquisition activity in 2022.

Resulting in a record 16 acquisitions last year and a record 300 million trailing 12 month's acquired revenue from the 10 acquisitions, we have completed so far this year.

Our pipeline of potential deals remains robust.

And we expect to continue adding and integrating increased number of new companies to support our growth.

These companies strength inside one with excellent talent and new ideas for performance and growth.

Given the fragmented nature of our industry and our modest market share we have a significant opportunity to continue growing through acquisition for many years to come.

Doug Black: I will start today's call with a brief overview of our unique market position and our strategy followed by some highlights from the quarter. John Guthrie will then walk you through our third quarter financial results in more detail and provide an update on our balance sheet and liquidity position. Scott Salmon will discuss our acquisition strategy and then I will come back to address our latest outlook before taking your questions. As shown on slide four of the earnings presentation, we have grown our footprint to more than 690 branches and four distribution centers across 45 U.S, states and six Canadian provinces.

Slide seven shows the long runway that we have ahead and filling in our product portfolio, which we aim to do primarily through acquisition, especially in the nursery <unk> and landscape supplies categories.

We are well networked with the best companies in our industry and expect to continue filling in these markets systematically over the next decade.

I will now discuss some of our third quarter performance highlights as shown on slide eight.

We achieved 4% net sales growth with 6% growth added through acquisition, partially offset by a 2% decline in organic daily sales.

Doug Black: We are the clear industry leader over four times the size of our nearest competitor yet we estimate that we only have about a 16% share of the very fragmented 25 billion wholesale landscaping products distribution market. Accordingly, our long-term 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.

As mentioned, we were pleased to achieve 2% sales volume growth during the quarter, but this was more than offset by a 4% price decline, which was slightly more than expected.

Commodity price deflation increased sequentially during the quarter and we believe that we have reached a bottom in September and October.

We expect price deflation to began to moderate as we enter 2024.

Organic daily sales were well balanced with a 2% decline in both agronomic products and landscaping products, despite the deflation being more pronounced and agronomic products.

You will recall that agronomic product volume was very weak last year as contractors reduced their application rates in reaction to the steep price increases and fertilizer and grass seed.

Doug Black: Our strategy to fill in our product lines across the U.S, and Canada both organically and through acquisition further strengthens this balance over time. Overall, our end-market mix, broad product portfolio and good geographic coverage offer us multiple avenues to grow and create value for our customers and suppliers while providing important resilience feed and softer markets.

In the third quarter, we saw just the opposite with significant deflation in fertilizer and seed mitigated by very strong volume.

We were very pleased to see contractors and end users returned to more normal levels of application in the maintenance end market.

Gross profit was flat during the quarter, while gross margin contracted by 130 basis points to 33, 9%.

Doug Black: 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 have come a long way in building site one and executing our strategy, but we have more work to do as we develop into a true world-class company.

Commodity deflation was stronger than we expected, which negatively impacted gross margin as purchased inventory and PVC pipe grass seed and fertilizer are sold at lower prices during the height of the fall season.

Our teams have executed very well in this extremely challenging environment by keeping inventory low reacting with discipline the market prices and by continuing to drive our gross margin improvement initiatives.

Doug Black: Accordingly, we remain highly focused on our commercial and operational initiatives that 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 adds terrific new talent to site one. Taking all together, our strategy creates superior value for our shareholders through organic growth, acquisition growth and EBDA margin expansion.

We remain very confident that once commodity price deflation runs its course, we can resume our gross margin improvement trend from a solid foundation.

SG&A as a percent of net sales increased by 100 basis points year over year to 27, 2%.

Acquisitions had the largest effect on SG&A as a percent of net sales as the same hardscape and landscape supplies acquisitions that benefited gross margin slightly also increased our SG&A.

Doug Black: 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 EBDA margin expansion. We have done this while investing heavily in our teams and in new systems and technologies to build a foundation for site one and to create superior capabilities for our customers and suppliers. We are still building and investing and we remain confident in our ability to game market share and continue driving all three of our value creation levers going forward.

SG&A for our base business was 1% lower than prior year for the third quarter, but did not match the 2% decline in organic daily 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 12% to approximately 120 million and.

Doug Black: As previously discussed, 2023 is a reset year for gross margin and adjusted EVDA margin due to the extraordinary price benefits that we received in 2021 and 2022. The price deflation which causes a temporary negative impact on organic daily sales, gross margin and adjusted EVDA margin. We expect this negative impact to subside in 2024 which will provide a tailwind as we look to expand our adjusted EVDA margin for our long term goal of 13% to 15%.

And adjusted EBITDA margin declined by 180 basis points to 10, 5% with lower gross margin.

We expect the year over year decrease in adjusted EBITDA margin to moderate further in the fourth quarter, providing a foundation for expansion in 2024.

In terms of initiatives, we continue to grow our small customers significantly higher than our average while also driving growth in our private label brands and improving our inbound freight costs through our transportation management system.

All helping us to mitigate the gross margin decline in these challenging times and expand gross margin, but normal inflation.

Doug Black: We remain confident in our strategy to drive revenue growth while expanding gross margin and achieving SGNA leverage to reach our longer term business performance objectives. We have now completed 90 acquisitions across all key product lines since 2014. We've expanded our development team in 2021 and leveraged them to increase acquisition activity in 2022, resulting in a record 16 acquisitions last year and a record 300 million, trailing 12 months acquired revenue from the 10 acquisitions we have completed so far this year.

Year to date, we've increased our partners program membership by approximately 70% to 42000 members. Most of these new members are small to midsized customers.

We have increased our percentage of bilingual branches from 56% to 59% in 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.

Doug Black: Our pipeline of potential deals remains robust and we expect to continue adding and integrating increased number of new companies to support our growth. These companies strengthen site one with excellent talent and new ideas for performance and growth. Given the fragmented nature of our industry and our modest market share, we have a significant opportunity to continue growing direct position for many years to come.

The continued rollout of mobile pro and dispatch track allows 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 onsite, one dot com this year, which help us increase market share, while allowing our associates to focus more on creating value for customers and less on transactional activity.

Doug Black: Flight 7 shows the long runway that we have ahead in filling in our product portfolio which we aim to do primarily through acquisition, especially in the nursery, our escapes 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.

And finally, we are seeing some of the early benefits from our operational excellence teams are.

Systematically spreading best practices in each line of business across site, one to drive value for our customers suppliers and company.

Doug Black: I will now discuss some of our third quarter performance highlights as shown on slide 8. We achieved 4% net sales growth with 6% growth added through acquisition, partially offset by 2% decline in organic daily sales. As mentioned, we were pleased to achieve 2% sales volume growth during the quarter, but this was more than offset by a 4% price decline which was slightly more than expected. Modeling price deflation increased sequentially during the quarter and we believe that we have reached the bottom in September and October.

Taken altogether, we're continuing to improve our capability to drive organic growth increased gross margin and achieve operating leverage even as we fight through the challenges in 2023.

On the acquisition front, we've added 10 high performing companies to our family so far this year.

With approximately $300 million in trailing 12 month sales added decided one.

With an experienced team broad and deep relationships with the best companies.

Doug Black: We expect price deflation to begin to moderate as we enter 2024. Organic daily sales were well balanced with a 2% decline in both agronomic products and landscaping products, despite the deflation being more pronounced in agronomic products. You will recall that agronomic product volume was very weak last year as contractors reduced their application rates in reaction to the steep price increases in fertilizer and grassy. In the third quarter we saw just the opposite, with significant deflation and fertilizer and seed mitigated by a very strong volume.

Strong balance sheet and an exceptional reputation we remain well positioned to grow consistently through acquisition this year and for many years to come.

In summary, we are facing a number of challenges in 2023, including softer markets.

Commodity product deflation.

Operating cost inflation and a gross margin reset from the extraordinary price gains in 2021 and 2022.

Our teams have done a terrific job of managing through these challenges and even as we reset financially we continued to gain momentum in our commercial and operational initiatives and in building the foundation of our company both organically and through acquisition.

Doug Black: We were very pleased to see contractors and end users return to more normal levels of application in the maintenance and market. Gross profit was flat during the quarter, while gross margin contracted by 130 basis points to 33.9%. Modeling deflation was stronger than we expected, which negatively impacted gross margin as purchased inventory and PVC pipe, grass seed and fertilizer were sold at lower prices during the height of the fall season. Our teams have executed very well in this extremely challenging environment by keeping inventory low, reacting with discipline to market prices, and by continuing to drive our gross margin improvement initiatives.

We remain confident in our strategy and then 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 third quarter results. We reported a net sales increase of 4% to $1. One 5 billion for the quarter. There were 63 selling days in the third quarter, which is the same as the prior year period.

Organic daily sales decreased 2% compared to the prior year period, primarily due to lower prices from commodity products, partially offset by volume growth on modest market demand.

Doug Black: We remain very confident that once commodity price deflation runs its course, we can resume our gross margin improvement trend from a solid foundation. SGNA as a percent of net sales increased by a 100 basis points year over year to 27.2%. Acquisitions had the largest effect on SGNA as a percent of net sales, as the same hard skates and landscape supply of acquisitions that benefit a gross margin slightly also increased our SGNA.

Price deflation for the quarter was approximately 4%, which was slightly greater than expectations.

The price deflation was driven by our commodity products like PVC pipe, which was down 20% year over year grass seed, which was down 17% and fertilizer, which was down 16% we.

We expect price deflation to be a headwind for the remainder of the year and into the beginning of 2024 until we fully lap the price decreases that started in Q4 of last year.

Doug Black: SGNA for our base business was 1% lower than prior year for the third quarter, but did not match the 2% decline in organic daily sales. We are highly focused on operating leverage and expect to see benefits from our productivity initiatives as inflation normalizes and as we return to positive organic daily sales growth. SGNA for the quarter declined 12% to approximately 120 million and adjusted EBDA margin declined by 180 basis points to 10.5% with lower gross margin.

Fortunately, we were able to partially offset the price deflation with 2% volume growth for the third quarter.

Volume growth was driven by share gains and modest end market demand, while negatively impacting some northern markets weather did not have a major impact on our overall sales for the quarter.

Organic daily sales for agronomic products, which includes fertilizer control products ice melt and equipment decreased 2% due to lower prices, partially offset by increased volume for those products.

Doug Black: We expect the year over year decrease and adjusted EBDA margin to moderate further in the fourth quarter providing a foundation for expansion in 2024. In terms of initiatives, we continue to grow our small customers significantly higher than our average, while also driving growth in our private label brands and improving our inbound freight costs for our transportation management system. All helping us to mitigate the gross margin decline and these challenging times and expand gross margin with normal inflation.

Daily sales for landscaping products, which includes irrigation nursery, our escapes outdoor lighting and landscape accessories also decreased 2% for the third quarter due to slightly lower prices and moderating end market demand.

Geographically five out of our nine regions achieved positive organic daily sales growth with the greatest growth in southern markets, the northeast and Midwest markets had the weakest sales performance as they were impacted by a combination of wet weather and a sales mix more heavily weighted towards fertilizer and grass seed.

Doug Black: You today, we have increased our partners program membership by approximately 70% to 42,000 members. Most of these new members are small to many size customers. We have increased our percentage of bilingual branches from 56% to 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 Salesforce productivity as we leverage our CRM and establish more disciplined revenue generating habits among our over 900 inside and outside sales associates.

We are pleased with the performance of our acquisitions in the third quarter acquisition sales, which reflect the sales attributable to acquisitions completed in both 2022, and 2023 contributed approximately $65 million or 6% to net sales growth.

Scott will provide more details regarding our acquisition strategy later in the call.

Gross profit for the third quarter was $388 million, which was largely unchanged compared to the prior year.

Gross margin decreased 130 basis points to 33, 9%, primarily due to lower prices and the absence of that price realization benefit realized in the prior year, partially offset by the positive impact of acquisitions and lower freight costs.

Doug Black: We continue to roll out a mobile pro and dispatch track that allows 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 company-wide, and we continue to see usage and benefit increase across the company. We make good progress in growing our digital sales and customer activity on SiteOne.com this year, which help us increase market share while allowing our associates to focus more on creating value for customers and less on transactional activity.

As Doug mentioned gross margin was weaker than expected, primarily due to commodity product deflation coming in greater and more rapidly than our forecast.

Just as we benefited from the rapid rise in market prices relative to our lower inventory costs on the way up the rapid drop in market prices relative to our higher inventory costs creates a temporary headwind on the way down.

We are managing through this headwind, but we expect it to continue for the remainder of the year.

Doug Black: 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 SiteOne to drive value for our customers, suppliers, and company. Taking all together, we are continuing to improve our capability to drive organic growth, increase growth margin, and achieve operating leverage even as we fight through the challenges in 2023.

Selling general and administrative expense or SG&A increased 8% to $312 million for the third quarter.

SG&A as a percentage of net sales increased to 100 basis points in the quarter to 27, 2% the increase in both SG&A and SG&A as a percentage of net sales is primarily due to the impact of acquisitions, excluding acquisitions SG&A for our base business decreased 1% during the quarter.

Doug Black: On the acquisition front, we've added 10 high performing companies to our families so far this year, with approximately 300 million and 12 month sales added to SiteOne. With an experienced team brought in deep relationships with the best companies, a strong balance sheet, and an exceptional reputation, we remain well positioned to grow consistently through acquisition this year and for many years to come.

As we have taken steps to align our SG&A spend with our lower sales.

For the third quarter, we reported an income tax expense of approximately $18 million compared to $23 million in the prior year period the.

The effective tax rate was 23, 4% for the third quarter of 2023 compared to 23, 8% for the prior year period.

Doug Black: In summary, we are facing a number of challenges in 2023, including software markets, commodity product deflation, operating cost inflation, and a growth margin reset from the extraordinary price gains in 2021 and 2022. Our teams have done a terrific job of managing through these challenges, and even as we reset financially, we continue to gain momentum in our commercial and operational initiatives and in building the foundation of our company both organically and through acquisition. We remain confident in our strategy and in our ability to deliver increased value to our customers and suppliers while outperforming the market.

The decrease in the effective tax rate was primarily due to an increase in the amount of excess tax benefits 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 third quarter 2023 decreased to $57 million compared to $73 million for the same period in the prior year as our 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.

John Guthrie: Now, John will walk you through the quarter in more detail. John? Thanks, Doug.

Adjusted EBIT da decreased 12% to approximately $120 million for the third quarter compared to $136 million for the same period in the prior year.

John Guthrie: I'll begin on slide 9 with some highlights from our third quarter results. We reported a net sales increase of 4% to 1.15 billion for the quarter. There were 63 selling days in the third quarter, which is the same as the prior year period. Organic daily sales decreased 2% compared to the prior year period, primarily due to lower prices from commodity products, partially offset by volume growth on modest market demand. Price depletion for the quarter was approximately 4%, which was slightly greater than expectations.

Adjusted EBITDA margin decreased 180 basis points to 10, 5%, reflecting the lower gross margin.

Now I'd like to provide a brief update on our balance sheet and cash flow statement as shown on slide 10.

Net working capital at the end of the third quarter was $919 million compared to $869 million at the end of the prior year period.

The increase in networking capital, primarily attributable to an increase in accounts receivable, resulting from our sales growth including acquisitions.

John Guthrie: The price depletion was driven by our commodity products, like PVC pipe, which was down 20% year over year, grass seed, which was down 17%, and fertilizer, which was down 16%. We expect price depletion to be a headwind for the remainder of the year and into the beginning of 2024 until we fully left the price decreases that started in Q4 of last year. Fortunately, we were able to harshly offset the price situation with 2% volume growth for the third quarter.

Inventory levels were flat with prior year and inventory turns improved as we continue to make progress on our supply chain initiatives.

Operating cash flow decreased approximately 47 million to $89 million for the third quarter of 2023 compared to approximately 136 million for the prior year period.

The decrease in operating cash flow, primarily reflects timing as we started our seasonal inventory reduction earlier in 2023 compared to 2022.

Year to date operating cash flow increased $77 million to approximately $190 million and 69% increase.

John Guthrie: Volume growth was driven by share gains and modest end-market demand. While negatively impacting some northern markets, whether did not have a major impact on our overall sales for the quarter. Organic daily sales for agronomic products, which includes fertilizer, control products, ice melt, and equipment, decreased 2% due to lower prices partially offset by increased volume for those products. Organic daily sales for landscaping products, which includes irrigation, nursery, arts capes, outdoor lighting, and landscape accessories, also decreased 2% for the third quarter due slightly lower prices and moderating end-market demand.

It reflects our improved management of working capital.

We made cash investments of approximately $134 million for the third quarter compared to approximately 66 million for the same quarter in 2022.

The increase reflects our acquisition investments made during the quarter Scott will provide additional details on the acquisitions later in the call.

Capital expenditures were $8 million for the quarter compared to $4 million in the prior year period due to greater investment in branch improvements, including relocations.

John Guthrie: Geographically, five out of our nine regions achieved positive organic daily sales growth with the greatest growth in southern markets. The Northeast and Midwest markets had the weakest sales performance as they were impacted by a combination of wet weather and a sales mix more heavily weighted toward fertilizer and grass seed.

In July we borrowed an additional $120 million on our term loan and used the proceeds to reduce borrowings on our ABL facility.

As a result at the end of the quarter, we had liquidity of approximately $588 million, which consisted of approximately $75 million cash on hand, and approximately $513 million and available capacity under our ABL facility.

John Guthrie: We were pleased with the performance of our acquisitions in the third quarter. Acquisition sales, which reflect the sales attributable to acquisitions completed in both 2022 and 2023, contributed approximately 65 million or 6% to net sales growth.

Net debt at the end of the quarter was approximately $446 million compared to approximately $377 million at the end of the third quarter of 2022 to.

The higher net debt reflects our increased acquisition investments.

John Guthrie: Scott will provide more details regarding our acquisition strategy later in the call. Growth profit for the third quarter was 388 million, which was largely unchanged compared to the prior year. Growth margin decreased 130 basis points to 33.9%, primarily due to lower prices and the absence of the price realization benefit realized in the prior year, partially offset by the positive impact of acquisitions and lower freight costs. As I mentioned, growth margin was weaker than expected, primarily due to commodity product deflation coming in greater and more rapidly than our forecast.

Leverage at the end of the third quarter was one one times, our trailing 12 months adjusted EBITDA compared to 0.8 times in the prior year period.

As a reminder, our target year end net debt to adjusted EBITDA leverage range is one to two times.

Our priority from a balance sheet and funding perspective is to 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 six companies in the third quarter for a combined trailing 12 month net sales of approximately $230 million, bringing our year to date total to 10 companies acquired and approximately $300 million in trailing 12 months net sales.

John Guthrie: This is we've benefited from the rapid rise in market prices relative to our lower inventory costs on the way up. The rapid drop in market prices relative to our higher inventory costs creates a temporary headwind on the way down.

Since 2014, we have acquired 90 companies with approximately $1 8 billion in trailing 12 month net sales added to cite one.

John Guthrie: We are managing through this headwind, but we expect it to continue for the remainder of the year. Selling general and administrative expense or SGNA increased 8% to 312 million for the third quarter. SGNA is a percentage of net sales increased 100 basis points in the quarter to 27.2%. The increase in both SGNA and SGNA is a percentage of net sales is primarily due to the impact of acquisitions.

Turning to slides 12 through 17, you will find information on our most recent acquisitions.

On July three we acquired Hickory Hill farm in Garden, a single location wholesale distributor of irrigation nursery and landscape supplies. The acquisition of Hickory Hill complements our existing business and the Lego County, Georgia area, allowing us to provide the full line of landscaping products to landscape professionals in this high growth local market.

John Guthrie: Excluding acquisitions, SGNA for a base business decreased 1% during the quarter as we have taken steps to align our SGNA spend with our lower sales. For the third quarter, we reported an income tax expense of approximately 18 million compared to 23 million in the prior year period. The effective tax rate was 23.4% for the third quarter of 2023 compared to 23.8% for the prior year period. The decrease in the effective tax rate was primarily due to an increase in the amount of excess tax benefits from stock-based compensation.

On August 11th we acquired New England silica single location wholesale distributor of Hardscape.

The addition of new England silica strengthens our leading hardscape position in Connecticut.

On August 25th we acquired Timothy Center for gardening, a single location distributor of Hardscape and landscape supplies and nursery products expanding the products, we offer our customers in new Jersey in the Delaware Valley.

On August 25th we also acquired pioneer landscape centers with 34 bulk landscape supplies distribution sites across Colorado and Arizona.

John Guthrie: We expect the 2023 fiscal year effective tax rate will be between 25 and 26 percent, including discrete items such as excess tax benefits. Net income for the third quarter 2023 decreased to 57 million compared to 73 million for the same period in the prior year. As their higher net sales were more than offset by our lower gross margin and increased S-GNA expense. Our weighted average deluded share account was 45.7 million compared to 45.8 million for the prior year period.

This strategic acquisition establishes <unk> as the leading bulk landscape supplies distributor in two of the 10 fastest growing states in the U S.

Also on August 25th we acquired Regal chemical a wholesale distributor of agronomics products with one location in the Atlanta market.

The addition of Regal significantly expands our portfolio of agronomics products and services across the southeast.

And lastly on August 28, we acquired J M J organics with five distribution locations.

<unk>, our leading landscape supplies and nursery presence across the greater Houston area.

John Guthrie: Adjusted EBITDA decreased 12 percent to approximately 120 million for the third quarter compared to 136 million for the same period in the prior year. Adjusted EBITDA margin decreased 180 basis points to 10.5 percent reflecting the lower gross margin.

Our acquisitions continue to add terrific talent to <unk> 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 18, our acquisition strategy continues to create significant value for <unk>.

John Guthrie: Now I'd like to provide a brief update on our balance sheet and cash flow statement as shown on slide 10. Networking capital at the end of the third quarter with 919 million compared to 869 million at the end of the prior year period. The increase in networking capital is primarily attributable to an increase in accounts receivable resulting from our sales growth, including acquisitions. Inventory levels were flat with prior year and inventory turns improved as we continue to make progress on our supply chain initiatives.

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 continue adding more outstanding companies to cite one over the coming years.

I want to thank the entire site one team for their passion and commitment to making <unk> a great place to work and for welcoming of the newly acquired teams when they joined the <unk> family.

It's the stronger together culture that continues to attract our industry's best entrepreneurs and we are genuinely honored when they choose to have their family join ours.

John Guthrie: I've heard in cash flow decreased approximately 47 million to 89 million for the third quarter 2023 compared to approximately 136 million for the prior year period. The decrease in operating cash flow primarily reflects timing as we started our seasonal inventory reduction earlier in 2023 compared to 2022.

I am confident we can continue adding more outstanding new companies through acquisition and drive excellent value for all our stakeholders I will now turn the call back to Doug.

Thanks Scott.

I'll wrap up on slide 19.

Our outlook for organic daily sales in the fourth quarter is that it will be similar to the third quarter with positive sales volume more than offset by commodity price deflation.

John Guthrie: Here today, operating cash flow increased 77 million to approximately 190 million. The 69 percent increase reflects our improved management of working capital. We made cash investments of approximately 134 million for the third quarter compared to approximately 66 million for the same quarter in 2022. The increase reflects our acquisition investments made during the quarter.

We expect customer demand to remain resilient and we expect to continue gaining market share with our strong teams executing our commercial and operational initiatives.

In terms of end markets, we expect new residential construction, which comprises 21% of our sales to continue to be soft for the remainder of the year with high interest rates constraining home buying.

John Guthrie: Scott will provide additional details on the acquisitions later in the call. Capital expenditures were 8 million for the quarter compared to 4 million in the prior year period due to greater investment in branch improvements including relocations. In July, we borrowed an additional 120 million on our term loan and used the proceeds to reduce borrowings on our AVL facility. As a result, at the end of the quarter, we had liquidity of approximately 580 million which consisted of approximately 75 million cash on hand and approximately 513 million in available capacity on our AVL facility.

While builders have become more bullish in terms of single family housing starts we will not see the benefit of this until 2024.

New commercial construction, which represents 14% of ourselves has remained solid and based on our current customer backlogs, we expect to finish well in this market in 2023.

The repair and upgrade market, which represents 29% of our sales has also remained resilient and we expect demand to be flat to slightly down during the fourth quarter.

Lastly, we expect sales volume in the maintenance category, which represents 36% of our sales to remain strong as contractors and end users to take advantage of lower commodity prices and restore application rates from the depressed levels of last year.

John Guthrie: Net debt at the end of the quarter was approximately 446 million compared to approximately 377 million at the end of the third quarter of 2022. The higher net debt reflects our increased acquisition investments. Leverage at the end of the third quarter was 1.1 times or trailing 12 months adjusted EBTA compared to 0.8 times in the prior year period. As a reminder, our target URA net death with adjusted EBTA leverage range is 1 to 2 times.

With this backdrop, we expect our organic daily sales to be down low single digits in the fourth quarter driven by price deflation.

For the full year of 2023, we expect organic daily sales to be approximately flat.

As mentioned, we expect gross margin and adjusted EBITDA margin to be lower in the fourth quarter than the prior year period.

John Guthrie: Our priority from a balance sheet and funding perspective is to maintain our financial strength and flexibility so we can execute our growth strategy in all market environments.

Although the year over year decline will be less than in the third quarter.

We also expect the acquisitions completed in the third quarter to have a dilutive effect on adjusted EBITDA in the fourth quarter given the seasonality of these companies.

Scott Salmon: I'll now turn the call over to Scott for an update on our acquisition strategy. Thanks, John. As shown on slide 11, we acquired six companies in the third quarter for a combined trailing 12 months net sales of approximately 230 million, bringing our year-to-date total to 10 companies acquired and approximately 300 million in trailing 12 months net sales.

With reasonable future demand, we expect to resume expanding adjusted EBITDA margin in 2024 and beyond.

In terms of acquisitions as Scott mentioned, we have a strong pipeline of high quality companies some of which may join the <unk> family and the remainder of 2023.

Scott Salmon: Since 2014, we have acquired 90 companies with approximately 1.8 billion in trailing 12 months net sales added to SiteOne. Turning to slides 12 through 17, you will find information on our most recent acquisitions. On July 3, we acquired Pickery Hill Farm in Garden, a single location wholesale distributor of irrigation, nursery, and landscape supplies. The acquisition of Pickery Hill compliments our existing business in the Lake of Coney, Georgia area, allowing us to provide the full line of landscaping products to landscape professionals in this high growth local market.

Our acquisitions are performing well and we continue to improve our ability to integrate them into our company.

With all of these factors in mind, we are lowering the top end of our guidance range and now expect our fiscal 2023 adjusted EBITDA to be towards the low end of our updated range of 400 million to $410 million.

This range does not factor any contribution from unannounced acquisitions.

Scott Salmon: On August 11, we acquired New England Silica, a single location wholesale distributor of hardscapes. The addition of New England Silica strengthens our leading hardscapes position in Connecticut. On August 25, we acquired Timothy's Center for Gardening, a single location distributor of hardscapes, landscapes supplies, and nursery products, expanding the products we offer our customers in New Jersey and the Delaware Valley. On August 25, we also acquired Pioneer Landscape Centers with 34 bulk landscape supplies distribution sites across Colorado and Arizona.

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 an honor to be joined with them as we deliver increasing value for all our stakeholders.

I would also like to thank our suppliers for supporting us so strongly and our customers for allowing us to be their partner.

Operator, please open the line for questions.

Thank you we will now be conducting a question and answer session.

I would like to ask a question. Please press star one on your telephone keypad.

Scott Salmon: This strategic acquisition establishes SiteOne as the leading bulk landscape supply distributor in two of the 10 fastest growing states in the U.S. Also in August 25, we acquired Regal Chemical, a wholesale distributor of agronomics products with one location in the Atlanta market. The addition of Regal significantly expands our portfolio of agronomics products and services across the southeast. And lastly, on August 28, we acquired JMJ Organics with five distribution locations, extending our leading landscape supplies and nursery presents across the greater Houston area. Our acquisitions continue to add tourism talent to SiteOne 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.

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Our first questions come from the line of David Manthey with Baird. Please proceed with your questions.

Thank you good morning, guys.

First off John when you were talking about the segments, you said landscape supplies.

Down, 2% with slightly lower prices moderating demand, which sounds like.

Scott Salmon: Summarizing on slide 18, our acquisition strategy continues to create significant value for SiteOne. 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 continue adding more outstanding companies to SiteOne over the coming years. I want to thank the entire SiteOne team for their passion and commitment to making SiteOne a great place to work and for welcoming the newly acquired teams when they join the SiteOne family.

Sort of an ongoing situation and Doug in your closing remarks, you mentioned that demand remains resilient I know.

Splitting atoms here, but could you square those thoughts for me what what the messages here as it relates to volume demand in the fourth quarter and beyond.

Well.

We can say with regards to the landscaping products, we were down negative 2% organic daily sales growth that was slightly lower price price was about negative one on on landscaping products.

Scott Salmon: It's this stronger together culture that continues to attract our industry's best entrepreneurs, and we are genuinely honored when they choose to have their family join ours. I am confident we can continue adding more outstanding new companies through acquisition and drive excellent value for all our stakeholders.

And we are about negative one on volume for the quarter.

Yeah in terms of the second part of your question David.

We see the fourth quarter being much like a third we are seeing continued positive volume overall.

Doug Black: I will now turn the call back to Doug. Thanks, Scott.

Doug Black: I'll wrap up on slide 19. Our outlook for organic daily sales in the fourth quarter is that it will be similar to the third quarter with positive sales volume more than offset by commodity price deflation. We expect customer demand to remain resilient and we expect to continue gaining market share with our strong teams, executing our commercial and operational initiatives in terms of end markets. We expect new residential construction which comprises 21% of our sales.

As we mentioned you know agronomic volume was very strong.

Balancing the very deep deflation in fertilizer and seed where kind of solid and landscaping products, which has less impact from price.

Deflation, but when you when you put it all together, we expect volume to continue to be positive.

Going through the fourth quarter, and then you know.

It's too early to call 2024.

But I'd say overall, we would see it shaping up to be kind of assault at least a solid start in 'twenty four.

Doug Black: You continue to be soft for the remainder of the year with high interest rates, constraining home buying. While builders have become more bullish in terms of single family housing starts, we will not see the benefit of this until 2024. New commercial construction which represents 14% of our sales has remained solid and based on our current customer backlogs, we expect to finish well in this market in 2023. The repair and upgrade market which represents 29% of our sales has also remained resilient and we expect demand to be flat to slightly down during the fourth quarter.

We think the market will use the word resilient and will continue to be resilient.

Going forward.

Okay, and then thanks for that and second on.

Operating expenses that were very well managed this quarter I think this is the first quarter in your public history, where third quarter SG&A dollars were lower than second quarter SG&A dollars, you've mentioned that you've taken steps to.

With that could you give us a little detail on what those steps are.

Doug Black: Lastly, we expect sales volume in the maintenance category which represents 36% of our sales to remain strong as contractors and end users take advantage of lower commodity prices and restore application rates from the depressed levels of last year. With this backdrop, we expect our organic daily sales to be down low single digits in the fourth quarter given by price deflation. For the full year 2023, we expect organic daily sales to be approximately flat.

And that allowed that in the context of adding acquisitions and still investing for the future.

Right well I think there was an adjustment.

From.

The high growth.

During the Covid years, and the strong continued growth in 2022 to a more modest.

Growth.

In 2023, and obviously deflation and so we've been able to manage our teams our teams are very.

Doug Black: As mentioned, we expect gross margin and adjusted EBDA margin to be lower in the fourth quarter than the prior year period, although the year over year decline will be less than in the third quarter. We also expect the acquisitions completed in the third quarter to have a dilutive effect on adjusted EBDA in the fourth quarter given the seasonality of these companies. With reasonable future demand, we expect to resume expanding adjusted EBDA margin in 2024 and beyond.

Flexible and can move fast in individual markets.

We've had markets that have been weather affected and so we've pulled in in the field and also we continue to drive our initiatives, which are helping to improve our productivity.

From our Salesforce CRM with the Salesforce to mobile pro one dot com et cetera, right and so we're going to continue to work those hard.

And we're excited about what we're seeing we were pleased also to be able to achieve.

Doug Black: In terms of acquisitions, as Scott mentioned, we have a strong pipeline of high quality companies, some of which may join the site one family and the remainder of 2023. Our acquisitions are performing well and we continue to improve our ability to integrate them into our company. With all of these factors in mind, we are lowering the top end of our guidance range and now expect our fiscal 2023 adjusted EBDA to be towards the low end of our updated range of 400 million to 410 million. This range does not factor any contribution from unannounced acquisitions.

Achieve that in the third quarter and I think we'll look for more of that and as we enter 2024.

I think we've got an opportunity to continue to get more productive as we move forward and obviously as part of our long term.

EBITDA margin expansion.

Objective, we plan to work both the SG&A leverage side and the gross margin side to achieve that long term goal. So a lot of room for improvement over the over the years to come there.

That's very clear thanks, a lot Doug Thank you both.

Thank you.

Thank you. Our next question is coming from the line of Ryan Merkel with William Blair. Please proceed with your questions.

Doug Black: In closing, I would like to sincerely thank all our SiteOne associates who continue to amaze me with their passion, commitment, teamwork, and selfless service. We have a tremendous team and is an honor to be joined with them as we deliver increasing value for all our stakeholders. I would also like to thank our suppliers for supporting us so strongly and our customers for allowing us to be their partner.

Hey, good morning, Thanks for taking the questions.

Wanted to start off with the deflation Doug in your comments you mentioned that you thought deflation hit bottom.

September and October just unpack for US why you think that's the case and then can you confirm that in the fourth quarter price.

Price deflation will be about 4% same as thank you.

Unknown Attendee: Operator, please open the line for questions. Thank you.

Yeah. So what we saw is priced deflation accelerated as we went through kind of July August September.

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And now in October we've seen a level similar to September with a slight.

The back half of October has shown a slight improvement over the first half of October so we see signs.

The.

Prices started dropping last year during the fourth quarter.

And so we're starting to lap lap that.

And so we believe that stair step down during the third.

David Manthey: Our first questions come from the line of David Matthew with Baird. Please proceed with your questions. Thank you.

We believe it will stair step back up yielding up about the same amount.

David Manthey: Good morning, guys. First off, John, when you were talking about the segments, you said landscape supplies ADS down 2% with slightly lower price and moderating demand, which sounds like sort of an unwilling situation, and Doug, in your closing remarks, you mentioned that demand remains resilient. I know I'm splitting atoms here, but could you square those thoughts for me what the message is here? Is it related to volume demand in the fourth quarter and beyond?

Or similar.

To the third quarter and then as we go into 'twenty, four obviously will completely lap those price decreases and things will return to normal. So John did you have something to add to that yeah, I think 4% to 5% is probably a good estimate for the fourth platform.

Okay. Thanks for that.

And then just high level.

Debate about higher interest rates and the impact to your business can you just comment on the potential impacts I'm thinking M&A and maybe some more more discretionary purchases.

David Manthey: We can say with regards to landscaping products, we were down negative 2% on organic daily sales growth. That was slightly lower price with about negative 1 on landscaping products, and we about negative 1 on volume up for the quarter. Yeah, in terms of the second part of your question, David, we see the fourth quarter being much like the third. We are seeing continued positive volume overall. As we mentioned, you know, aeronomic volume was very strong.

Just where do you think he'd seen impact over the next six to 12 months.

Well I think that the largest impact would be you know in new residential.

But when we look at new residential.

Because of the housing shortage.

I think <unk> got people getting used to interest rates you have builders that are.

Using incentives and buying down rates and so at least the builders seem to be bullish that single family new residential will be up next year and so.

David Manthey: Kind of balancing the deep deflation and fertilizer and seed. We're kind of solid in landscaping products, which has less impact from price deflation, but when you put it all together, we expect volume to continue to be positive going through the fourth quarter. And then, you know, we're too early to call 2024, but I'd say overall, you know, we would see it's shaping up to be kind of a solid start in 24. And, you know, we think the markets will use the word resilient. We'll continue to be resilient going forward. Okay, and then thanks for that.

We're optimistic about that and the remodel market.

You know certainly it affects things, but we're not seeing a.

A big negative effect, so far in that remodel market, it's been very resilient and we think it'll continue to be there still strong forces and remodel work from home and outdoor living that are underlying.

For model market.

Our cash from H IRI are that there'll be growth in my model next year or so we see that.

Being fairly resilient.

In commercial you know there were series that it would start to affect the commercial market will have to say commercial has remained strong.

David Manthey: In second, on operating expenses that were very well managed this quarter, I think this is the first quarter in your public history, where third quarter, SGNA dollars were lower than second quarter SGNA dollars. You mentioned that you've taken steps to accomplish that. Could you give us a little detail on what those steps are that allowed that in the context of adding acquisitions and still investing for the future? Right. Well, I think there's an adjustment from the high growth during the COVID years and the strong continued growth in 2022 to more modest growth in 2023 and obviously deflation.

We watched the Abi index, obviously that went below 50, so we're watching that closely.

And then the maintenance market, we don't really think there's there's any effect. There. So we'll have to see but we believe that our our markets when we take them altogether.

Especially with the maintenance market.

Our solid let's say give us a good foundation for growth.

Okay. Thank you.

Thank you.

Thank you our next questions come from the line of Steve Volkmann with Jefferies. Please proceed with your questions.

Hi, Good morning, guys. Thank you.

I guess my question is around share gains Doug I think you mentioned that in your prepared remarks.

Much do you think the sort of underlying end markets grew and serve relative to you guys to sort of address that share gain question.

David Manthey: And so we've been able to manage our teams. Our teams are very flexible and can move fast in individual markets. We've had markets that have been weather-affected. And so we pulled in in the field and also we continue to drive our initiatives which are helping to improve our productivity from our Salesforce ERM with the Salesforce to Mobile Pro, SiteOne.com, etc. Right. And so we're going to continue to work those hard. And we're excited about what we're seeing.

Well, we would say that the end markets.

We would guess that they were slightly down.

Flat to slightly down when you take it all together.

And you know our volumes were positive so.

You can do the math there.

It's hard it's hard to put a.

Specifically calculated share gain but we are.

In touch with all of our suppliers, we have a good sense of what's going on in the different markets.

David Manthey: We were pleased also to be able to achieve that in the third quarter. And I think, you know, we'll look for more of that. And as we enter 2024, you know, I think we've got an opportunity to continue to get more productive as we move forward. And obviously it's part of our long-term EBDA margin expansion objective. We plan to work both the SCNA leverage side and the gross margin side to achieve that long-term goal. So a lot of room from improvement over the years to come there. That's very clear. Thanks a lot, Doug. Thank you both. Thank you.

Do get to see a few.

You know horizons performance et cetera.

And we feel pretty confident that were.

We're gaining share and that's consistent across product lines. So we're going to continue to drive that going forward.

Okay, and I think you said you are adding new customers right in the sort of small and medium size category.

We are were growing faster in that category than we are with our larger customers and that's intentional.

Effort that we've got with our Hispanic marketing with our teams we've created inside sales that are specifically, calling on small customers.

Ryan Merkel: Our next questions come from the line of Ryan Merkel with William Blair. Please proceed with your questions. Hey, good morning. Thanks for taking the questions. I wanted to start off with the deflation. Doug, in your comments, you mentioned that you thought deflation had bottom in September and October. Just unpack for us why I think that's the case. And then can you confirm that in the fourth quarter price deflation will be about 4 percent?

So we've got a lot of exciting initiatives going on there and we're seeing the results of that so that that helps us.

Both.

From a sales growth standpoint, but also from a gross margin standpoint.

Great and then just finally on SG&A do you think you'll get back to SG&A leverage next year, given sort of the investments that you've been making.

I think it's really too early to give guidance with with regards to that how are the acquisitions going to filter in but.

Ryan Merkel: Same as 3Q. Yeah, so what we saw is, you know, price deflation accelerated as we went through kind of July, August, September. And now in October, we've seen a level similar to September with a slight, you know, the back half of October has shown slight improvement over the first half of October. So, you know, we see signs the prices started dropping last year during the fourth quarter. And so we're starting to lap that.

We're certainly working towards working towards that.

Yes.

Yeah, just in the long term context, certainly that would be the case, we would expect to get.

SG&A leverage over the next two.

Two to three years.

Understood. Thank you I'll pass it up.

Thank you our next questions come from the line of Damian Karas with UBS. Please proceed with your questions.

Hey, good morning, everyone.

We are in the morning.

Ryan Merkel: And so we believe that, you know, it's stair step down. During the third, we believe it'll stair step back up. You'll need about the same amount. Or, you know, similar to the third quarter. And then, you know, as we go into 24, obviously we'll completely lap those price decreases and things will return to normal.

So thanks for the details around price in the third quarter and the cadence.

Now that youre expecting from here.

Could you just maybe help us wrap our heads around what gross margins could look like in 2024.

Based on your price expectations.

Yes, I think again, it's a little too early to be fall in 2024, and we'll do that after we finish the fourth quarter.

Ryan Merkel: So, John, did you have something to add to that? Yeah, I think 4 to 5 percent is probably a good estimate. Okay, thanks for that. And then, just the high level, you know, there's the bait about higher interest rates and the impact to your business. Can you just comment on the potential impacts? I'm thinking M&A and maybe some more more discretionary purchases. Just where do you think you'd see an impact, you know, over the next six, 12 months?

But you know.

Our <unk>.

Experiencing the reset aside we're experiencing that an additional headwind with the price deflation.

We expect that as we mentioned to subside in 2024.

And provide a bit of a tailwind.

For 2024, which is which is terrific.

And then with acquisitions and are.

Ryan Merkel: Well, you know, I think that the largest impact would be, you know, a new residential. But when we look at new residential because of the housing shortage, you know, I think you've got people getting used to, you know, interest rates, you have builders that are using incentives and buying down rates. And so at least the builders seem to be bullish that, you know, single-family new residential will be up next year. And so, you know, we're optimistic about that.

Our initiatives around gross margin. So we certainly would expect.

Improvement next year, but putting a number around that or quantifying that would be a little bit too early to do that.

Understood.

What are you expecting for cash flow and what that looks like in the fourth quarter. I mean, if you look at the first three quarters are up pretty considerably this year.

Any headwind are lining up well for the fourth quarter, we should be aware.

Ryan Merkel: And the remodel market, you know, you know, certainly it affects things but we're not seeing, you know, a big negative effect so far. And that remodel market has been very resilient. We think it'll continue to be. There's still strong forces in remodel. You know, work from home and, you know, outdoor living that are underlying, you know, the remodel market, you know, forecast from HRI or that, you know, they'll be growth in remodel next year.

No we would expect this would be a normal.

Fourth quarter, what you saw this quarter is we probably pulled some of the we do it's really a timing issue. We had such a strong Q2, I think we realize kind of the we started the inventory pulled out.

So the difference between Q3 Q. This year over last year is primarily what was recognized in Q2. So far this year. So on a year to date basis, we're well up and our inventory position is very similar to last year at this point and so we would expect kind of normal seasonality.

Ryan Merkel: So, you know, we see that being fairly resilient. In commercial, you know, there was theories that it would start to affect the commercial market. We'll have to see, commercial has remained strong. You know, we watched the ABI index obviously that went below 50, so we're watching that closely. And in the maintenance market, we don't really think there's any effect there. So, you know, we'll have to see. But we believe that our markets, when we take them all together, especially with the maintenance market are, you know, solid, let's say, give us a good foundation for growth.

Ryan Merkel: Okay. Thank you.

For cash flow in the fourth quarter.

Got it thanks, very much I'll pass it along.

Thank you our next questions come from the line of Mike Dahl with RBC capital markets. Please proceed with your questions.

Good morning, Thanks for taking my questions.

Just a follow up I know you don't want to get into the 2004 details, but maybe asked a different way on the margin side.

Can you quantify more specifically in your <unk> and <unk> gross margins how much of a headwind is the price deflation.

Steve Volkman: Our next questions come from the line of Steve Volkman with Jeffries.

Steve Volkman: Please proceed with your questions. Hi. Good morning, guys. Thank you. I guess my question is around share gains. I think you mentioned that in your prepared remarks. How much do you think the sort of underlying end markets grew and sort of relative to you guys to sort of address that share gain question? Well, we would say that the end markets, you know, we would guess that they were, you know, slightly down, you know, flat to slightly down.

Component.

Hum.

I would say you know, it's there's a lot of things going on that going into the gross margin from that same with regards to Q3.

If you kind of said.

We were probably talking you know 50 basis 50 to 70 basis points to kind of a number out there and that would be kind of comparable to what kind of what we would normally expect so.

Steve Volkman: When you take it all together, and, you know, our volumes were positive. So, you know, you can do the math there. It's hard to specifically calculate share gain, but we're in touch with all of our suppliers. We have a good sense of what's going on in the different markets. You know, we do get to see a few horizons, performance, et cetera. And we feel pretty confident that we're gaining share. And it's consistent across product lines.

So.

That's kind of where I would I would say kind of we were at in Q3 and that would be kind of that's kind of if you will we talked about a lot over what's gone over the last couple of years and as many of you have asked questions about kind of the price realization benefit. So that was in effect. What we're seeing here is that was that.

That was a benefit we talked about it with many of you how that was kind of a one time gain now that prices are going in the opposite direction.

Steve Volkman: So, we're going to continue to drive that going forward. Okay. And I think you said you are adding new customers right in the sort of small and medium size category. We are we're growing faster in that category than we are with our larger customers. And that's, you know, intentional effort that we've got with our expanded marketing with our teams. We've created insight sales that are specifically, you know, calling on small customers. So we've got a lot of exciting initiatives going on there. And we're seeing the results of that. So that helps us.

What youre seeing is a little bit of of a one time kind of not.

Steve Volkman: You know, both from a sales growth standpoint but also from a gross margin standpoint.

On a negative headwind if you will as a result of that.

In the 50 to 70 basis points is kind of what we would kind of estimate.

That's kind of the potential headwind, where we're at right now relative to what I would call it a more normal market.

Okay, Yeah that makes sense.

There's a lot of different pieces there so I appreciate it.

Trying to split that out.

And then relatedly.

You know what.

When we think about the deceleration that you've seen let's assume that the stabilization holds.

Steve Volkman: Great and then just finally on SGNA. Do you think you'll get back to SGNA leverage next year, given sort of the investments that you've been making? I think it's really too early to give guidance with regards to that, you know, how are the acquisitions going to filter in, but, you know, we're certainly working towards working towards that. Yeah, just in the long term context, certainly that would be the case. We would expect to get SGNA leverage over the next two to three years. Understood.

Get that just given the comps it seems clear that.

Youre pricing headwinds subside when you get to the second half.

Next year, the first half we're still comping.

What's the price from 2003 and two in particular and in <unk>. So do you think we'll start off the year with these kind of mid single digit right.

Price headwinds.

Yes, again, I know you don't want to get it.

I think it's too early to say how it flows through on the gross margin line I think it is fair to say Hum.

Steve Volkman: Thank you, I'll pass it on. Thank you.

Damian Karas: Our next questions come from the line of Damian Karas with UBS. Please proceed with your questions. Hey, good morning, everyone. Morning, morning. So thanks for the details around price in the third quarter and the cadence that you're expecting from here.

On the revenue side and it will still be a headwind from that standpoint in the first half.

And so we'll have to see that is on the flip side as you know.

California, which makes up a lot of a lot of Q1 sales got killed glass held this year on.

Damian Karas: Could you just maybe help us wrap our heads around what gross margins could look like in 2024 based on your price expectations? Yeah, I think again, it's a little too early to be falling 2024. You know, we'll do that after we've discussed the fourth quarter. But, you know, we are experiencing the other reset aside, we're experiencing an additional headwind with the price deflation. And we expect that as we mentioned a sub sign and 24 and provide a bit of a tailwind for 2024, which is, which is terrific. And then with acquisitions and our, you know, our initiatives around gross margin, you know, so we certainly we expect, you know, improvement next year.

In Q1, so that'll be a positive for that and we'll get more into that as we go but but.

Realistically in the until we lap these price increases a lot of them came in in the first half and we.

We will will be will be a little bit of a headwind some of that will be offset we do expect you know some of the other products, we'll see price increases at the beginning of the year. So.

That dynamic that we saw this year will play out a little bit into next year. We're also the other factor is stair stepped down.

October and November December we expect to kind of stair step ups as we go into the first quarter.

It would be.

We would expect it to be less than say the third or fourth in terms of that deflation then you have the.

Damian Karas: But, you know, putting a number around that or quantifying that would be a little bit too early to do that. Understood.

Other practices that are.

We will start kicking in and sit in the second quarter.

So, yes, it will be a headwind but.

Damian Karas: What are you expecting for cash flow and what that looks like in the fourth quarter? I mean, if you look at the first three quarters, you're up pretty considerably this year. So there are any headwinds lining up for the fourth quarter, we should be aware of. No, we would expect this would be a normal fourth quarter. What you saw this quarter is we probably pulled some of the, we do. It's really a timing issue.

Likely John not as steep as the headwind in <unk>.

Last at the last two quarters, the third and fourth quarter of this year.

Okay. Okay.

Okay, great. Thanks, a lot thanks, Sean.

Thank you our next questions come from the line of Keith Hughes with true Securities. Please proceed with your questions.

Well. Thank you could you give us some sort of feel of the magnitude of the price declines of about three products that are causing the deflation we've talked about so much in this call.

Damian Karas: We had such a strong Q2. I think we realized kind of that we started the inventory pulled out. So the difference between Q3 and Q, use this year over last year is primarily what was recognized in Q2 so far this year. So on a year-to-day basis, we're well up and our inventory position is very similar to last year at this point. So we would expect kind of normal seasonality for cash flow in the fourth quarter. God, and thanks very much. I'll pass it along.

Mike Dahl: Thank you.

Yes.

Oh, well we talked about.

Hum.

With regards.

In the in the in the numbers, we've talked about 20% year.

Year over year in Q4.

<unk> was down 20% year over year.

And fertilizer and grass seed, we're down into the teens at 17 15.

Mike Dahl: Our next questions come from the line of Mike doll with RBC capital markets. Please proceed with your questions. Good morning. Thanks for taking my questions. Just to follow up, I know you don't want to get into the 24 details, but maybe ask a different way on the margin side. Can you quantify more specifically in your 3Q and 4Q gross margins? How much of a headwind is the price deflation component? Um, I would say, you know, there's a lot of things going on that going into, into Rose Margin from that same.

In front of me, but.

But.

They're there they're in.

Those are the those are the type of size that we're talking about.

Right.

<unk> really began late summer or is that about.

Right.

Did you say it was.

With pipe began in Q4 of last year I would say most of the agronomic ones.

<unk> came in.

In the first half of this year and that really stood out is grass seed was really a Q3 item.

Seed season is really starting in Q3.

Mike Dahl: With regards to Q3, if you kind of said, um, you're probably talking, you know, 50 basis, 50 to 70 basis points, um, kind of, number out there, um, and that would be kind of comparable to kind of what we would normally expect. So, so, you know, that's kind of where I would say, kind of where we're at in Q3. And that would be kind of, that's kind of, if you will, um, you know, we talked about a lot, um, over what's gone over the last couple of years is, and many of you have asked questions about, um, kind of the price realization benefit.

Like to think about it but it does it.

What I mentioned on the call with 17% to 70% proceed and 16% for fertilizer down.

Thank you very much.

Thank you our next questions come from the line of Joe <unk> with Deutsche Bank. Please proceed with your questions.

Hey, good morning, everybody. Thanks for the questions.

Good morning in your end market discussion you talked about new commercial remaining solid finishing well. This year just curious if you feel like maybe this end market is the one where there's the most most volume risk into next year. I know you are later in the construction cycle, there, but just anything.

Mike Dahl: So that was, in effect, what we're seeing here is that was, that was a benefit. We talked about it, um, with many of you, um, how that was kind of a one-time gain. Um, now that prices are going in the opposite direction, um, what you're seeing is, is a little bit of, of, of a one-time, kind of not, um, a negative headwind, if you will, as a result of that. And, and, you know, the 50 to 70 basis points is kind of what we would kind of estimate, um, um, as kind of the potential headwind, uh, where we're at, right now relative kind of what I would call a, some more normal market. Okay. Yeah, that makes sense. I understand that there's a lot of pieces there, so appreciate, um, trying to split that out.

You're hearing either on the bidding side or just hearing generally on new commercial construction it would be helpful.

Yes. So we don't you know our our bidding has been pretty good this year.

As well as you know obviously the customer we look at customer backlogs and the work they have in front of them, but we do lag the market right.

If you look at the Abi index that went below 50, so we'll have to see if that stays below 50. So it's really hard to tell at this point I mean, we wouldn't be able to call next year I think.

Mike Dahl: Um, and then, relatedly, um, you know, I, when we think about the deflation that you've seen, let's assume that the stabilization holds, I get that, you know, just given the comps, it seems clear that you, you're, you're pricing headwinds with some side when you get to the second half of next year, the, the first half, you're still comping positive price from 23 and, in particular, and in one queue, so do you think we'll still start off the year with these kind of mid-single digit price headwinds, um, yeah, again, I know you don't want to get pulled on, I think it's, I think it's too early to say how it flows through on the gross margin line. I think it is fair to say, um, um, on the revenue side, it'll still be a headwind, um, from that standpoint, um, in the first half, um, um, and, and so we'll have to see that is, on the flip side is, you know, um, uh, California, which makes up a lot of, uh, a lot of queue one sales, um, uh, got killed last, killed this year on, uh, in queue one, so that'll be a positive that, and we'll get more into that as we go, but, but, you know, just, realistically, in the, until we lap these, the price increases that a lot of them came in, you know, in the first half, and, and, um, we will, we'll, we'll, we'll be, we'll be a little bit of a headwind.

Because we lag we think the first half of next year is likely to be pretty pretty solid and commercial hard to tell about the second half.

Unless we see kind of more trends develop over the next two to three months.

So we don't have any better information probably than you have.

On that because we lag.

You know the commercial starts if you will.

Right No. That's helpful about the front half. The other question I had also sort of related to the front half or the front half of the front half is how did the weather impact your last first quarter. Just so we make sure we understand the lapping dynamics around the colder northeast.

First quarter of this year and the rain in California, just to make sure we've got in our models correctly.

Uh huh.

A pretty big numbers, if you look at the especially in California, I think California was down almost 20%.

In the first quarter I mean, we put.

A nail it daily organic of of negative 2%.

Roughly in the first quarter, but that was I think 6% price increases so we're down like negative 8% on volume in Q1.

Mike Dahl: Some of that will be offset, we do expect, you know, some of the other products, we'll see price increases at the beginning of the year. So, um, uh, so that, that dynamic that we saw this year, um, um, um, will play out a little bit into next year also. Yeah, the other factor is, you know, it's stair step down, um, October and November December, we expect to kind of stair step up, so, you know, as we go into the first quarter, You know, it would be, we would expect it to be less than say the third or fourth in terms of that deflation.

Mike Dahl: Then, you know, you have the other prices that we'll start picking in in the second quarter. So yeah, we're gonna, it will be a headwind but likely John, not as steep as the headwind in the last, you know, the last two quarter or the third and fourth quarter of this year. Okay. Great. Thanks. Thanks John. Thank you.

Keith Hughes: Our next question has come from the line of Keith Hughes with truest securities. Please proceed with your questions. Thank you.

Keith Hughes: Could you give us some sort of a feel on the magnitude of the price of clients with three products that are causing the deflation we talked about so much in this call. Well, we talked about with regards in the numbers. We talked about 20% year over year in Q4. You know, I was down 20% year over year. And fertilizer and grass seed were down in the teens, I think 17 and 15, I don't know, probably about some, but, you know, they're, they're in, those are the, those are the types of the size that we're talking about.

Mmm.

It can be a while I I think there's a couple of things that you need to consider one is you know it's not just the commodities have to flow out of the way through so you know you've ever commodity price. It's gotta go to a supplier aspire, it's going to make inventory over over over over over a month and then.

And then and then we buy it Ah carry you know we do you know three to four turns out of inventory Ah Ah Ah Ah year, and so so that that would be the way it was closer to that and just as an example, even this year.

Keith Hughes: Okay. And the, the stock really began, what light summer was that timing about right? The same with, with pipe began in Q4 of last year. I would say most of the agronomic ones came in in the first half of this year. And the really what stood out is grass seed was really a Q3 item. It's a seed season is really starting in Q3 as we like to think about it. And those numbers that's what I mentioned on the call were 17 and 17% for seeding, 16% for fertilizer down. Okay. Thanks very much. Thank you.

We saw some like a PVC pipe Ah prices start coming down this year, but if you actually just where to look at the cost of P. B C. Ah resident if you well I think I think the the the lead time on that was quite a bit.

Ah Ah Ah Ah Ah earlier and was actually those decreases were occurring last year or so so commodities or general indicators. There is there was lags in between there.

Also just to I, then I guess just to get to the structural gross margin I know that last quarter is 35.1, you felt that that was kind of normalized for pricing benefits. This quarter. You added 230 million subsequent to the quarter of annual M&A is that a higher.

Joe Ahlersmeyer: Our next questions come from the line of Joe Ailer's Meyer with Deutsche Bank. Please proceed with your questions. Good morning, everybody. Thanks for the questions. Morning. In your end market discussion, you talked about new commercial remaining solid finishing well this year. Just curious if you feel like maybe this end market is the one where there's the most, most volume risk. Into next year, I know you are later in the construction cycle there, but just anything you're hearing either on the bidding side or just hearing generally on new commercial construction would be helpful.

Margin kind of so what's I guess I'm getting at is what is kind of the structural gross margin for this business. All things considered all prices are are matching on another et cetera that we should be thinking about going forward. Thanks.

We've had kind of this as the base year for gross margin. So you know if you went back to the beginning of the year, our our guidance when like 34.5% things went pretty strongly in the first half of the year. So we kind of started going back.

Joe Ahlersmeyer: Yeah. So, you know, we don't, you know, our bidding has been, you know, pretty good this year. As well as, you know, obviously, we look at customer backlogs and the work they have in front of them, but we do lag the market, right? You know, if you look at the AVI index, you know, that went below 50. So we'll have to see if that stays below 50. So it's really hard to tell at this point.

Up to this more of the the high end of that range, we're probably going to be more at the low end of the range as we reset this year, yeah, the range being 34 and a half to 35.

Joe Ahlersmeyer: I mean, we would be able to call next year, I think, because we lag, we think the first half of next year is likely to be pretty solid and commercial, hard to tell about the second half, unless we see, you know, kind of more trends developed over the next two or three months. So, you know, we don't have any better information probably than you have on that, because we lag the, you know, the commercial starts.

So okay.

And just last question you said minus one S. D N a kind of <unk>, how much of that was kind of driven by Frank.

Most of our frayed is is in cost of goods sold so it's it's a it's a it's primarily there and we do have some <unk> for the last like for our own trucks, but that's that's not really what's driving the primary.

The primary thing is Doug alluded to and the actions we've taken as it really on on staffing Ah Tomorrow match in our labor cost more match the sales value.

Joe Ahlersmeyer: That's helpful about the front half. The other question I had also related to the front half or the front half of the front half is how did the weather impact your last first quarter, just so we make sure we understand the lapping dynamics around the colder northeast first quarter of this year, and the rain in California just to make sure we've got in our models correctly. I had a pretty big number of people look at the, especially in California, I think California was done almost 20% in the first quarter.

Thanks, I'll pass it on.

Thank you. Our next question has come from the line of Matthew Boule with Barclays. Please proceed with your questions.

Hey, good morning, Thanks for taking the questions just back on the comment around driving higher margins. In 24, you know if you do still have some deflation flowing into the first half of 24.

You know and it may be given some of those comments you made earlier dug on on the on the end markets next year <unk>.

Joe Ahlersmeyer: I mean, we put a daily organic of negative 2%, roughly in the first quarter, but that was, I think, on 6% price increases. So, we were down like negative 8% on volume in Q1, and now kind of volumes are kind of labeled out. So, I don't want to get too optimistic there, but, and specifically address everything with regards to the weather, but it was certainly the primary of things this year was the primary driver of Q1.

Question is you wouldn't you need higher volumes and 24 in order to grow margins and 24 or maybe set another way you know what would happen to margins of volumes or.

A flatter and 2024 thank you.

Yeah, I think in terms of gross margin it wouldn't have a.

A significant impact.

You know, obviously and SG&A leverage is where you you know for for many but hey margin standpoint.

You know positive volume is better than [laughter] than flat.

Joe Ahlersmeyer: Yeah, you've got to be careful because weather can bad weather can be. So, but certainly last first quarter was not was was not favorable terms weather. Right. It just to follow up maybe on that was there also because that's the daily sales number. Was there a margin impact from product mix or anything around the northeast just to be aware? And no, I mean, I would say I wouldn't call that out as a driver what's going on with the business overall. Okay, understood. Thanks a lot.

And and so we're focused on both but in terms of gross margin.

Joe Ahlersmeyer: Thank you.

Like I said with the deflation kind of abating in the first half.

I'd say, a slightly lower level than.

C N N the second.

Second half of this year should get a bit of a table in there and then our margin improvement initiatives, we should see some benefit from so and and those aren't highly obviously, there's extremes, but those aren't.

Those would be impacted significantly between.

You know a couple of 1% volume.

Got it okay that that's helpful. Their dog. Thank you for that and then secondly, just on the repair and upgrade and market I'm curious.

Andrew Carter: Our next questions come from the line of Andrew Carter with steeple please proceed with your questions. Thanks. Just some kind of questions on the commodity just to make sure you do price to gross margin rate. How often do you reprice at the branches to adjust for commodities and for the commodity categories like 20% how long are your inventory positions?

How do you think about you know the leverage of your business to existing home turnover, which clearly.

Andrew Carter: Exactly. Therefore, how much of the mismatch could it be? Thanks. It can be a while.

Move in interest rates seems like there is having a bit more of an outsize impact to that part of the housing market. How do you guys think about your exposure there and what that could mean to repair and upgrade thank you.

Yeah, I'll I'll start with the the longterm trend is.

Is there a door living people are you know invest in their backyards enjoy the outdoor living space spaces, and there's more people are working from home that that's driving growth. There. So that's a solid trend. It's interesting that housing turnover had normally been a dry.

Andrew Carter: I think there's a couple times that you need to consider. One is, you know, it's not just the commodities have to flow all the way through. So, you know, you have a commodity price. It's kind of go to a supplier. The supplier is going to make inventory over over over over months and then and then we buy it. Carry, you know, we do, you know, three to four turns of inventory a year.

Andrew Carter: And so, so that would that would be the way it would flow through that. And this is an example. So, even this year, we saw some of like the PVC pipe prices start coming down this year. But if you actually just were to look at the cost of PVC resin, if you will, I think the lead time on that was quite a bit earlier. And was actually those decreases were occurring last year. So, so commodities are general indicators. There is there is a lag in between there. Thanks.

Favor of of remodel.

New person moves and I want to redo, the backyard or and that that would be business for US you got a lot of people that are sitting on my interest rates that are selling their home. So.

<unk> home turnover.

It is lower however, now you got the opposite effect since I'm going to stay here I'm Gonna do the project that I was putting off because I was gonna move so it's interesting how those too I'm not sure if they completely balance, but there's certainly puts and takes their overall, we think the remodel market is going to be solid longterm. The remodel market is gonna be.

A strong growth driver for us going forward.

Yep Nope, that's fair to say, thank you for that and just just quickly on the SG&A was there anything in that Q3 number in terms of you know incentive com relative to cue to any kind of true ups of accruals uhm, yeah, any kind of little details in there that sort of help the SG&A number. Thank you.

Andrew Carter: Also just I then I guess just to get to the structural gross margin, I know that last quarter is 35.1. You felt that that was kind of normalized for pricing benefits. This quarter you added 230 million subsequent to the quarter of annual M&A. Is that a higher margin kind of so what's I guess I'm getting at is what is kind of the structural gross margin for this business. All things considered all prices are matching.

Certain I'll say instead of accomplished certainly less this year and will be you know you know our commissions are based on sales growth. So they're gonna be less this year year over year than they were last year.

Alright, Thanks, John Thanks, Doug Good luck.

Thank you.

Thank you we have reached the end of our question and answer session I would now like to turn the floor back over to Doug Black for any closing comments.

Andrew Carter: One or another, etc, that we should be thinking about going forward. Thanks. We said kind of this is a base year for a gross margin. So, you know, if you went back to the beginning of the year, our guidance was like 34.5%. Things went pretty strongly in the first half of the year. So we kind of started going back up to the more that the high end of that range. We're probably going to be more at the low end of the market. The range as we reset this year. Yeah, the range means 34.5 to 35.

Andrew Carter: So okay.

Okay. Thank you all for joining US today, we certainly appreciate your interest in Taiwan and look forward to speaking to you again after the fourth quarter.

I would like to take one more opportunity to thank our terrific associates for all they do to help build site, one our suppliers and our customers.

Have a great day.

Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines with this time enjoy the rest of your day.

Andrew Carter: Just last question, you said minus one S.G.A, kind of core S.G.A. How much of that was kind of driven by freight? Most of our freight is in cost of goods sold. It's primarily there. We do have some freight costs. For the kind of last leg for our own trucks, but that's not really what's driving on the primary. The primary thing is Doug alluded to and the actions we've taken is really on staffing some more match in our labor costs, some more match on the sales value. Thanks. I'll pass it on.

[music].

Matthew Bouley: Thank you.

Matthew Bouley: Our next question has come from the line of Matthew Boulet with Barclays.

Matthew Bouley: Please proceed with your questions. Hey, good morning. Thanks for taking the questions. Just back on the comment around driving higher margins in 24. If you do still have some deflation flowing into the first half of 24, and maybe given some of those comments you made earlier, Doug, on the end markets next year. The question is, would you need higher volumes in 24 in order to grow margins in 24, or maybe set another way?

Matthew Bouley: What would happen to margins of volumes or say flatter in 2024? Thank you. I think in terms of gross margin, it wouldn't have a significant impact. You know, obviously an SG&A leverage is where you get, you know, from an EBDA margin standpoint, positive volume is better than flat. And so we're focused on both. But in terms of gross margin, like I said, with the deflation kind of abating in the first half, you know, say a slightly lower level than we've seen in the second half of this year, should you get a bit of a tailwind there?

Matthew Bouley: And then our margin improvement initiatives we should see some benefit from. So, and those aren't highly, obviously there's extremes, but those aren't. Those wouldn't be impacted significantly in between, you know, a couple of percent volume. Got it. Okay, that's helpful there, Doug. Thank you for that.

Matthew Bouley: And then secondly, just on the repair and upgrade and market. I'm curious. You know, how do you think about, you know, the leverage of your business to existing home turnover, which, you know, clearly the move and interest rate seems like there's having a bit more of an outsized impact to that part of the housing market. How do you guys think about your exposure there and what that could mean to repair an upgrade?

Matthew Bouley: Thank you. Yeah, I'll start with the long term trend is, is there outdoor living people are, you know, invest in their vacuards, enjoy their outdoor living spaces, spaces. And, you know, as more people are working from home, that's driving growth there. So that's a solid trend. It's interesting that housing turnover had normally been a driver of remodel. You know, a new person moves in, they want to reduce the backyard and that that would be business for us.

Matthew Bouley: You've got a lot of people that are sitting on low interest rates that are selling their homes. So, you know, home turnover is lower. However, now you get the opposite effect that, you know, since I'm going to stay here, I'm going to do the project that I was putting off because I was going to move. So it's interesting how those two, I'm not sure if they completely balance. But there certainly puts in taste there. Overall, we think the remodel market is going to be solid. Long term, the remodel market is going to be a strong growth driver for us. You know, going forward. Yep.

Matthew Bouley: No, that's fair. Thank you for that. And just quickly on the S-GNA, was there anything in that Q3 number in terms of, you know, incentive comp relative to Q2 and the kind of true ups of accruals. Any kind of little details in there that, that sort of helped the S-GNA number? Thank you. Sir, I'll say incentive comp has certainly less this year and will be, you know, our commissions are based on sales growth. So they're going to be less this year, year over year than they were last year. All right. Thanks, Sean. Thanks, Doug. Good luck, guys. Thank you.

Doug Black: We have reached the end of our question and answer session. I would now like to turn the floor back over to Doug Black for any closing comments. Okay. Thank you all for joining us today. We certainly appreciate your interest in S-I-1 and look forward to speaking to you again after the fourth quarter. We'd like to take one more opportunity to thank our terrific associates for all they do to help build S-I-1, our suppliers and our customers. Have a great day. Thank you.

Unknown Attendee: This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines with this time. Enjoy the rest of your day.

Unknown Attendee: [inaudible]