High Tide Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2023

There are 10 speakers on the call.

Operator

Greetings, and welcome to the SiteOne Landscape Supply Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, John Yatry, Executive Vice President and Chief Financial Officer.

Operator

Please go ahead.

Speaker 1

Thank you, and good morning, everyone. We issued our Q1 2023 earnings press release this morning and posted a slide presentation and Scott Salmon, Executive Vice President, Strategy and Development. Before we begin, I would like to remind everyone that today's press release, Slide presentation and the statements made during the call include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Such risks and uncertainties include the factors set forth in the earnings press release and in our filings with the Securities and Exchange Commission.

Speaker 1

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. Would now like to turn the call over to Doug Lapp.

Speaker 2

Good morning and thank you for joining us today. Against the headwinds of a very strong prior year period, poor weather in the West and North and moderating market demand, We executed well in the Q1, delivering top line growth and gross margin expansion along with a solid EBITDA outcome in this traditionally low volume quarter. We are also very pleased to add 2 new high performing companies to SiteOne during the Q1. These companies have talented teams and strong customer relationships and expand our product lines and market presence in their respective markets. Through the execution of our commercial and operational initiatives and our acquisition strategy, we continue to build SiteOne as a world class market leader for long term, while delivering consistent performance

Speaker 3

and growth in the near term.

Speaker 2

As we face softer markets, We remain confident that our well balanced business, strong balance sheet, exceptional teams, improved capabilities Our robust acquisition pipeline position us well to navigate the current environment and achieve continued success. I'll start today's call with a brief review of our unique market position and our strategy for long term performance and growth, followed by some highlights from the quarter. John Guthrie will then walk you through our Q1 financial results in more detail and provide an update on our balance sheet and liquidity position. Scott Solomon will discuss our acquisition strategy and then I will come back to address Our latest outlook for 2023 before taking your questions. As shown on Slide 4 of the earnings presentation, we have grown our footprint to more than 6 40 branches and 4 distribution centers across 45 U.

Speaker 2

S. States and 6 Canadian provinces. We are the clear industry leader over 4 times the size of our nearest competitor. Yet, we estimate that we only have about a 16% share of the very fragmented $25,000,000,000 wholesale landscaping products distribution market. Accordingly, our future growth opportunities remain significant.

Speaker 2

We have a balanced mix of business with 65% focused on maintenance, repair and upgrade 21% focused on new residential construction and 14% on new commercial and recreational construction. As the only national full product line wholesale distributor in the market, We also have an excellent balance across our product lines as well as geographically. Our strategy to fill in our product lines across the U. S. And Canada, both organically and through acquisition, strengthens and reinforces this balance over time.

Speaker 2

Overall, our balanced end market mix, Broad product portfolio and good geographic coverage offer us multiple avenues to grow and create value for our customers And suppliers are providing important resiliency in softer markets. Turning to slide 5. Our strategy is to leverage the scale, resources, Functional talent and capabilities that we have as the largest company in our industry, all in support of our Talented, experienced and entrepreneurial local teams to consistently deliver superior value to our customers and suppliers. We've come a long way in building SiteOne and executing our strategy, but we are relatively early in our development as a true world class company. Accordingly, we remain highly focused on our commercial and operational initiatives to further build our capability to create value for all our stakeholders.

Speaker 2

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 SiteOne. 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 6, You can see our strong track record of performance and growth over the last 7 years with consistent organic and acquisition growth and EBITDA margin expansion. We've done this while investing heavily in our teams and in new systems and technologies to build the foundation for SiteOne And to create superior capabilities for our customers and suppliers. We're still building and investing, and we remain confident in our ability to gain market share and continue driving all three of our value creation levers going forward.

Speaker 2

We have now completed 82 across all key product lines since 2014. We leveraged our expanded development team to increase acquisition activity this past year and our pipeline and potential deals remains robust. All these companies are high performers, so they strengthened our company with excellent talent and new ideas for performance and growth. Given the fragmented nature of our industry In our modest market share, we have significant opportunity to continue growing through acquisition for many years to come. Slide 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, hardscapes and landscape supplies categories.

Speaker 2

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 Q1 performance highlights as shown on slide 8. We achieved 4% net sales growth in the Q1 as the 7% net sales growth added through acquisition Was partially offset by an organic daily sales decline of 2%. Note that organic daily sales grew 32% in the Q1 of 2021, largely driven by volume and grew 17% in the Q1 of 2022, largely driven by price inflation. So in terms of sales, Q1 is our toughest comparable for 2023.

Speaker 2

Accordingly, we were pleased that the organic daily sales decline was only 2%, driven by 6% price inflation, which This was offset by an 8% volume decline. We experienced the most significant volume declines in our Western markets that had record rainfall and in our northern markets where spring came later than in 2022. As the weather was more favorable in the Southeast, Mid Atlantic and Florida, we saw high single digit to low double digit organic daily sales growth during the Q1. We've also seen the spring season kick into gear during April, which has increased our year to date organic daily sales growth to approximately 1% through the 1st 4 weeks in April. Gross profit increased 7% and our gross margin increased 90 basis points to a very healthy 34.3% even as inflation continued to moderate through the quarter.

Speaker 2

The loss of the extraordinary price realization benefit achieved during the Q1 of 2022 was more than offset by our hardscapes and landscape supplies acquisitions, which carry a higher gross margin And by lower fuel cost and some price cost benefit. Despite the strong start with gross margin in the quarter, We continue to expect gross margin for the full year to be lower than in 2022, but perhaps stronger than we had thought at the beginning of the year. Our SG and A as a percentage of net sales increased by 6 20 basis points year over year to 34.8%, which is a 60 basis point increase compared to the Q4 of 2022. Acquisitions had the largest effect on SG and A as As the same Harvest Caves and Landscape Supplies acquisitions that increased our gross margin also increased our SG and A. Additionally, several of these acquisitions were in the West and North where poor weather and the late spring caused further deleveraging in the quarter.

Speaker 2

Lower volume and continued labor inflation were also factors contributing to the higher SG and A as a percent of net sales. Adjusted EBITDA for the quarter declined 41 percent to $39,800,000 and adjusted EBITDA margin declined by 360 basis points to 4.8%, as the combination of lower volume and higher SG and A yielded a more typical first quarter adjusted EBITDA outcome. Note that adjusted EBITDA during the Q1 of 2022 had increased 97% The Q1 of 2021, reflecting strong organic sales and elevated gross margin. Overall, adjusted EBITDA in the Q1, in line with our expectations. In terms of initiatives, we are pleased with our progress as we enter the busiest time of our year.

Speaker 2

Continue to grow with our small and medium customers, Drive private label growth and improve our inbound freight costs through our transportation management system, all helping us to expand gross margin. We are driving organic growth through our enhanced partners program, our Hispanic marketing initiatives And as we leverage our recently installed Salesforce CRM to drive stronger sales and better productivity From our team of more than 900 inside and outside sellers. Continued rollout of Mobile Pro and DispatchTrak Allows us to offer better customer service, while also increasing the productivity of our branch staff and delivery fleet. Continue to ramp up our digital sales and other customer activities through siteone.com, which makes our customers and associates more productive and helps us to gain market share. Finally, our operational excellence teams are systematically spreading best practices In each line of business across SiteOne to drive value for our customers, suppliers and company.

Speaker 2

Taken altogether, we have significantly improved our capability to perform through the potential headwinds of 2023. On the acquisition front, we added 2 high performing companies to our family so far this year, adding $40,000,000 on trailing 12 month sales to SiteOne. Following a record number of acquisitions in 2022, Our expanded development team remains very active and engaged with our pipeline of targets, and we expect to have another robust acquisition year in 2023. With an experienced team, broad and deep relationships with the best companies, a strong balance sheet and an exceptional We remain well positioned to grow consistently through acquisition this year and for many years to come. In summary, we are off to a good start in navigating the more challenging market conditions in 2023.

Speaker 2

I'm pleased with our progress and remain confident in our ability to execute our initiatives and deliver increased value to our customers and suppliers while outperforming the market. Now, John will walk you through the quarter in more detail. John?

Speaker 1

Thanks, Doug. I'll begin on Slide 9 with some highlights of our Q1 results. We reported a net sales increase of 4% To $837,000,000 for the quarter. There were 64 selling days in the Q1, which is one less day than we had in the Q1 of 2022. Organic daily sales decreased by 2% in the Q1 as sales volume was negatively impacted by weather and moderating economic conditions.

Speaker 1

Price inflation contributed approximately 6% to organic daily sales growth for the quarter. As we discussed last quarter, We are seeing less price inflation as we comp the large price increases of last year and the cost for products like fertilizer and PVC pipe decrease. For the full year, we continue to expect price inflation in the low single digits with the majority of it realized in the first half of the year. Volume declined 8% for the Q1 as cold and rainy weather in our Western and Northern markets reduced demand. Western markets, and especially California, were negatively impacted by unprecedented precipitation during the quarter.

Speaker 1

Organic daily sales for California, one of the largest landscaping markets in the U. S, were down 21%. Organic daily sales in our northern markets were also negatively impacted by weather as the late start to spring, delayed fertilizer applications And limited snow and ice events reduce demand for ice melt. Fortunately, we have a geographically diverse customer base And the negative sales growth in Western and Northern markets was partially offset by solid growth in our Southern markets. As Doug mentioned, We have seen a sales pickup in April with drier conditions in the West and the start of spring in the North.

Speaker 1

Organic daily sales for landscaping products, which includes irrigation, nursery, hardscapes, outdoor lighting and landscape accessories Grew 1% for the Q1 as price inflation and strong sales in southern markets more than offset the reduced volume resulting from the unfavorable weather and moderating economic conditions. Organic daily sales growth for agronomic products, which includes fertilizer, control products, ice melt and equipment decreased 9% for the quarter due to the slow start to spring, Moderating economic conditions and reduced sales of ice melt products. We are pleased with the performance of our acquisitions in the Q1. Acquisition sales, which reflects the sales attributable to acquisitions completed in both 20222023, contributed 57,000,000 or 7 percent to net sales growth. Scott will provide more details regarding our acquisition strategy later in the call.

Speaker 1

Gross profit increased 7 percent to $287,000,000 for the Q1 compared to $269,000,000 for the prior year period. Gross margin increased 90 basis points to 34.3% as lower freight costs and contributions from acquisitions with higher gross margins Offset the absence of the larger price realization benefit we realized in the Q1 of 2022. The gross margin benefit from acquisitions was over 100 points this quarter as many of our recent acquisitions specialize in higher gross margin products like mulch and bulk landscape supplies. However, these products also carry more SG and A due to increased handling and transportation costs. As expected, gross margin for our base business was down this quarter as the large price realization benefit in the Q1 of last year was not realized again.

Speaker 1

Selling, general and administrative expense or SG and A increased 26% to $291,000,000 for the Q1. The increase in SG and A reflects the impact of acquisitions, cost inflation and incremental investments in operating expenses to support our growth. Acquisitions accounted for over half of the increase in SG and A this quarter. SG and A as a percentage of net sales Increased 620 basis points in the quarter to 34.8%. The increase in SG and A as a percentage of net sales primarily reflects Increased SG and A investment combined with the low sales and the seasonally slow Q1.

Speaker 1

For the Q1, we reported an income tax benefit of $2,700,000 compared to income tax expense of $4,600,000 in the prior year period. The effective tax rate was 37.5 percent for the Q1 of 2023 compared to 12.5% for the prior year period. The change in the effective tax rate was primarily due to a decrease in net income before taxes to a net loss before taxes And a decrease in the amount of excess tax benefits from stock based compensation. Excess tax benefits of $800,000 We're recognized for the Q1 of 2023 compared to $5,000,000 for the prior year period. We expect the 2023 fiscal year Effective tax rate will be between 25% 26%, excluding discrete items such as excess tax benefits.

Speaker 1

We recorded a net loss of $4,500,000 for the Q1 of 2023 compared to net income of $32,300,000 for the prior year period, as higher net sales and gross margin were offset by the increased net SG and A expense. Our weighted average diluted share count was 45,000,000 compared to $45,900,000 for the prior year period. The shares used in the calculation of diluted EPS this quarter Do not give effect to any diluted securities as the inclusion would decrease the net loss per common share. Adjusted EBITDA decreased by 41 percent to $39,800,000 for the Q1 compared to $67,800,000 for the same period in the prior year. Adjusted EBITDA margin decreased 360 basis points to 4.8%.

Speaker 1

Now I'd like to provide a brief update Our balance sheet and cash flow statement is shown on Slide 10. Net working capital at the end of the Q1 was 916,000,000 compared to $788,000,000 at the end of the prior year period. The increase in net working capital is primarily attributable to our seasonal build in inventory in In preparation for the spring selling season, new acquisitions and the impact of inflation, cash used in operations increased to approximately $153,000,000 in the Q1 compared to approximately $118,000,000 in the prior year period. The increase in cash used in operations was primarily due to our decline in net income and a higher seasonal investment in working capital. We made cash investments of approximately $40,000,000 for the Q1 compared to approximately $41,000,000 for the same quarter of 2022.

Speaker 1

The decrease reflects a small decline in acquisition investment in the 1st 3 months of 2023 compared to the same period of 2022. Net debt at the end of the quarter was approximately $586,000,000 compared to approximately $417,000,000 at the end of the Q1 of 2022. Leverage increased to 1.3 times our trailing 12 month adjusted EBITDA compared to 0.9 times at the end of the Q1 last year. The higher leverage primarily reflects increased borrowings to fund our investment in acquisitions and increased working capital. As a reminder, our target year end net debt to adjusted EBITDA leverage range is 1 to 2 times.

Speaker 1

At the end of the quarter, we had available liquidity of approximately $330,000,000 which consisted of approximately $40,000,000 of cash on hand and approximately $273,000,000 in available capacity under our ABL facility. I will now turn the call over to Scott for an update on our acquisition strategy.

Speaker 3

Thanks, John. As shown on Slide 11, We acquired 2 companies in the Q1 with a combined trailing 12 month net sales of approximately $40,000,000 Since 2014, we have acquired 82 companies with approximately $1,500,000,000 in trailing 12 month net sales added to SiteOne. Turning to Slides 1213, you will find information on our most recent On March 14, we acquired J and J Materials with 5 locations focused on providing hardscapes and bulk landscape supplies To the Rhode Island and Southeastern Massachusetts markets. This acquisition complements our prior acquisition of another regional hardscape leader, Cape Codstone. On March 28, we acquired Triangle Landscape Supplies with 4 locations providing bulk landscape supplies and hardscapes Landscape contractors in the Raleigh Durham market.

Speaker 3

These acquisitions add terrific 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. Summarizing on Slide 14, our acquisition strategy continues to create significant value for SiteOne. With a strong balance And a robust pipeline across all lines of business and geographies, we are confident that we will be able to add many more outstanding companies to SiteOne during the year.

Speaker 3

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. I am confident in our ability to keep adding more outstanding companies through acquisition as we move through 2023, creating terrific value for all of our stakeholders. I will now turn the call back to Doug.

Speaker 2

Thanks, Scott. I'll wrap up on Slide 15. Our outlook for 2023 remains largely the same as it was during our last earnings call in February. As John mentioned, we have seen inflation continue to moderate, and we expect that to continue with flat prices in the second half yielding low single digit inflation for the full year. In terms of end markets, we continue to expect a decline in new residential construction, which comprises 21% of our sales.

Speaker 2

That is offset by flat to modest growth in the more resilient maintenance, Repair and upgrade and new commercial construction end markets. Note that we have not yet seen any negative effects on commercial construction driven by the recent banking crisis. With backlogs and healthy bidding, we believe this market represents 14% of our sales, Could grow slightly versus the prior year. In total, we expect industry sales to decline in 2023. And with our ability to gain market share, we would continue to expect our organic daily sales to be flat to down mid single digits With modest price inflation being offset by reduced volume.

Speaker 2

We expect our gross margin normalize this year without the substantial benefit that we saw from strategic inventory purchases ahead of rapid inflation in 2021 and 2022. Additionally, with flat to declining sales, we expect SG and A as a percentage of sales for our base business to We expect acquisitions to benefit gross margin, but also increase SG and A as a percent of net sales. Decreasing gross margin and increased SG and A as a percent of net sales, we expect adjusted EBITDA margin to normalize in 2023, providing the foundation for further improvement over the longer term. In terms of acquisitions, as Scott mentioned, we have a strong pipeline of high quality companies and look forward to adding more of these to the CyOne family in 2023. Our acquisitions are performing well and we continue to improve our ability to integrate them into our company.

Speaker 2

Accordingly, we expect acquisitions to contribute strongly to our performance and growth during the year. With all these factors in mind, we are maintaining our full year guidance and anticipate our fiscal 2023 adjusted EBITDA to to be in the range of $395,000,000 to $425,000,000 This range does not factor any contribution from unannounced Acquisition. 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 it's an honor to be joined with them As we deliver increasing value for all our stakeholders. I would also like to thank our suppliers for supporting us so strongly

Operator

It may be necessary to pick up your headset before pressing the star key. Please limit yourself And our first question comes from David Mende with Baird.

Speaker 4

Yes. Thank you. First off, a clarifying question. You said that average daily sales were down 2% in the Q1. But then I think you said that year to date through April, they were plus 1.

Speaker 4

I just want to be clear on that.

Speaker 2

Yes, that's correct.

Speaker 4

Okay. And so I mean April sales volumes would be higher than January, February, March, but that's still an encouraging sign. I guess that leads to the question here that sometimes inclement weather leads to sales that are completely missed. And then Other times, these sales are just simply delayed, pushed to the right. Could you characterize the Q1 weather affected Geographies and the nature of those sales?

Speaker 4

Yes.

Speaker 2

So, you're correct. In the first and second quarter kind of Spring starts at the end of the Q1 and rolls into the second. So often, you can get more sales into the first or less And Warren to the second. And we would characterize the weather dynamic is mostly that. In our northern markets, for instance, where spring kind of came later than in 2022, we're seeing the robust sales come in, The fertilizer applications get done and we don't think we missed anything.

Speaker 2

And as we mentioned, As a company as a whole, we've kind of largely made that up. One area where we might not make it up is California in the West. It's been very wet. That's an all weather market. And so there's been several months of just really record Rainfall and we probably won't make all of that back up.

Speaker 2

But in the scheme of things, the weather has moved sales around, But we think it's still all to play for this year.

Speaker 4

Okay. That's helpful. Thank you. And then second on the gross margin guidance back February of this year, you said 34 to 34.5. Now you're saying higher than previously thought.

Speaker 4

Given that you're not changing your EBITDA guidance, I guess that Naturally assumes higher SG and A. Could you talk about the sources of upside to operating expenses?

Speaker 1

Yes. With regards to SG and A and just SG and A in general, I think what we've seen is kind of the rolling of these acquisitions that have higher SG and A. That's one kind of a mix issue that's driving our SG and A. I think also if you look at kind of year over year, the increase in Q1 is especially accentuated as a percentage of Sales, obviously, because of the low sales volume. But also, most of the hiring that we're seeing in the comp is was really over year, the difference goes down.

Speaker 1

We've also taken in certain markets, we've already taken actions to Address some of the challenges that we're having with sales. And then also, I would say, in general, We're not doing any hiring even much hiring across the board at all, given the uncertainty in the marketplace. So certainly areas where we can take actions, I'm pleased with the sales growth that we're seeing in April, but monitoring it closely.

Speaker 4

Okay. Thanks very much.

Operator

Our next question comes from Ryan Merkel with William Blair.

Speaker 5

Hey, guys. Two questions from me, one on sales and then one on gross margin. So first on sales, can you just tell us what April organic Growth was. And then I'm curious when you talk to contractors, the resi contractors, what are they telling you in terms of backlog and bookings? Because It feels to me like things are tracking pretty well and maybe there's a bit of upside to guidance for sales.

Speaker 2

Yes. So in April, we're kind of in high single digits in terms of sales in April. So we're pleased with that. In terms of the builders, we're still calling the market to be down. But We would agree that the builders, they seem to be a bit more confident than they say it

Speaker 1

would have

Speaker 2

been 3 to 6 months And we'll see how it plays out. But it seems like that market could be a little more resilient than we thought it was going to be. And the builders, they're still again, we're still calling that market down, but I'd say net net there probably is a little more confidence than again we would have seen or we would have heard from them 3 to 6 months ago.

Speaker 5

And as it relates to the maintenance part of the business for resi, I think last year you said inflation was sort of impacting budgets a bit. Have you seen that sort of normalize?

Speaker 1

I wouldn't say, we've really seen that yet. We are seeing, That's been one of the growth areas here in April. The weather played a major role in Q1 with regards to kind of our agronomic sales. Monitoring it closely, but and we have seen obviously a recovery in April. But whether year over year we're going to be up Or down, watching that right now.

Speaker 5

Got it. Okay. And then on gross margins, Can you just unpack the freight upside? Is that lower fuel? Is it supply chains normalizing so that's helping costs?

Speaker 5

And then how much do you think freight will end up helping you for the year relative to what you saw 3 months ago?

Speaker 1

So in general, it's a combination of both. I think we're managing our freight better from that standpoint. When we talk about this, it is primarily inbound freight from that perspective. Year to date, in Q1, it was approximately a 40 basis point positive pickup year over year in our Q1 results. We're optimistic that Going into the year, without being that freight will be a positive.

Speaker 1

We had some of that built into kind of Our existing numbers, but we would expect for the full year, I think the market has even gotten better since we gave original guidance.

Speaker 5

Got it. Helpful. Thank you.

Operator

Our next question comes from Matto Boley with Barclays.

Speaker 6

Hey, good morning guys. Thanks for taking the question. Just on the gross margin, again,

Speaker 1

I guess,

Speaker 6

I want a clarifying point. I think you said that acquisitions attributed a 100 basis points to the gross margin in the quarter. I'm just curious if you could unpack that a little bit, just given I think you had something like $55,000,000 to $60,000,000 of acquired sales. So it seems like a big margin would be applied To those end, just more broadly, if you can just kind of step back and kind of update us on where you expect gross margin to settle out for the full year? Thank you.

Speaker 1

Yes. So what we're seeing with regards to some of the acquisitions, it's really kind of a product mix Issue these acquisitions, say, for instance, bring And higher gross margins and higher SG and A, I would think on an adjusted EBITDA basis, not Too much of an issue. But for certain products, like mulch for Existence, relatively low cost. So the cost of handling is very high. Thinking about the SG and A, but actually product margin is relatively high, which Driving what we're seeing here.

Speaker 1

With regards to for the full year, we previously talked 34 to 34.5 percent to 35 percent now would probably be a better Full year number. As was previously pointed out in our SG and A, our EBITDA margin, Our guidance hasn't really changed. So there may be some slightly higher SG and A coming along with that.

Speaker 6

Got it. Okay. Thank you for that. And then, so I guess on that point, following to the SG and A side, So it sounds like you're kind of shifting 50 basis points towards gross margin and away from SG and A. I think on a dollar basis, SG and A was up something like $60,000,000 in the quarter.

Speaker 6

You said acquisitions were more than half of that. How should we think about kind of the dollar spend on SG and A as we run through the year? Is that kind of 60,000,000 Per quarter the right run rate or presumably you're expecting that to decelerate meaningfully. So how A little more color on what you're doing to kind of decelerate that SG and A spending increase? Thank you.

Speaker 1

Yes. So the and all this is predicated on us not the Future acquisitions that will obviously contribute to this. But all things considered, we would expect the $60,000,000 As we start to comp on some of the acquisitions we did last year, that would probably be potentially 50% The increase for the full year, and that would go down quarter by quarter with regards to it. Sequentially, we always Q2 is always higher than Q1, but Q2, Q3 and Q4 historically have been Relatively flat with regards to SG and A from a historical basis. And We're relative we're forecasting a similar number, relatively flat

Speaker 2

after this quarter. Gentlemen, we're talking about acquisitions, we're talking about acquisitions that were completed in 2022 and through 2023, right? Right. You get the whole set there, which brings that higher SG and A into the company.

Operator

And our first question comes from Mike

Speaker 7

This is actually Chris Quad on for Mike. Thanks for taking our questions. Just moving over to the pricing side, how much of a headwind was lower PVC and fertilizer pricing for you this quarter? And how are you guys thinking about the magnitude of that headwind On a year over year basis evolving through the rest of the year?

Speaker 1

Well, it will be a headwind for the Rest of the year, I mean, both of those items contributed were negative year over year in Q1 And March was a greater. There's still year over year on a percentage basis, there's still in On a year over year basis, there's still, I would say, mid to low single digits down Contribution? So from that standpoint, but I think if you look Sequentially, it would be greater than that because prices rose throughout the year last year. So, so far this year, negative growth, But on a year over year basis in Q1, they were Low to mid single digits style.

Speaker 7

Got it. Thanks for that. And just going back to the organic Daily sales comments in April,

Speaker 6

how much of

Speaker 7

the high single digit growth was price versus volume? And is there a way To think about how much of the volume contribution of that high single digit was just kind of weather delayed projects versus Yes, just non weather impacted. And then just lastly on that, is 15% of sales still kind of a good number to use in terms of April's contribution to full year sales?

Speaker 2

Yes. Well, on the first question. I think the way to think about it is April has been built into that high single digit growth is some catch up From the Q1, so if you look at the 1% year to date, that's probably a better number to index on. And there's some inflation on that balanced with net negative volume growth. And By nature, the April number would be less inflation, more volume To get to that 1%, which is a combination of the 2.

Speaker 2

What was the second question?

Speaker 7

Yes. Just if I think in the past you said kind of April monthly contribution to full year sales is around 15%. Is that still kind of a good number to use or has I'm not affected at all.

Speaker 1

Yes, I would say it's probably 13% to 15%.

Operator

Question comes from Keith Hodes with Trust Securities.

Speaker 4

So we've talked a lot about SG and A in this call. And some of the statements, I'm trying to hard time to reconcile. Let me just ask it this way. As a percentage of sales under your guidance, What do you think SG and A will look like by the end of the year?

Speaker 1

What do we think SG and A will It looks like Howard, could you clarify that?

Speaker 4

As a percentage of sales in the guidance range you've given, what roughly do you think we're looking at?

Speaker 1

Well, we're not going to specifically forecast out SG and A as a percentage of sales. I mean, we think it will delever. So It will be higher than previously. I would kind of back into that number from our EBITDA guidance.

Speaker 4

Okay. Let me switch over to the previous question about fertilizer. What are you hearing from suppliers in terms of do we have a lot more deflation coming than we've already seen? What's the market thinking on that?

Speaker 1

Well, we've seen a lot of deflation. I don't know if There are people are thinking that there will be additional, but obviously, if you look at raw material prices right now, They're down significantly. I think they're even pre COVID levels. So their fertilizer prices have come down a lot from that standpoint. I think kind of we feel as if Kind of where they're at now is kind of where we would carry them forward, but we'll have to see.

Speaker 1

Obviously, that's a commodity and Highly volatile.

Speaker 4

Okay. Thank you.

Operator

Our next question comes from Jeff Stevenson with Loop Capital Markets.

Speaker 6

Hi. Thanks for taking my questions today. So at a high level, can you talk about the residential R and R bidding environment and what you've been hearing from customers about demand expectations through the back half of the year?

Speaker 2

So, we're our customers are busy. We mentioned that the commercial market is holding up well as are the repair and remodel And maintenance markets. And so our customers are busy. I'd say the Backlogs that we saw during COVID have normalized. And I'd say net net customers are Cautiously optimistic about the second half.

Speaker 2

They don't have the second half already loaded up in their backlogs, which they would have had in the last couple of years. But I'd say they're cautiously optimistic about what they're seeing in terms of Bidding jobs today and what's coming down the pike. We have a project services group that bids. We do put together bids for our customers in the commercial space and that bidding has been net positive this year versus prior year, Up a couple percent. So that gives us good another kind of read into the commercial market.

Speaker 2

The Repair and remodel market is not is backlog driven. It's more kind of you get the jobs as you go. So it's harder to get some visibility in the happen in that market. But in terms of commercial, we feel pretty good about how the year is developing.

Speaker 6

Okay, great. That's helpful. And then the M and A pipeline still sounds active. Are you expecting a similar inorganic Growth contribution as this

Speaker 3

past year? Well, obviously, it's impossible to predict that exactly. But last year at this time, we were 3 acquisitions and $50,000,000 in trailing 12 months acquired. This year, we're at $2,000,000 and $40,000,000 Last year, we had a very strong pipeline and this I would say our pipeline is as good or better. So we feel a good level of confidence that we can contribute a strong amount Overall for SiteOne, you can't predict it precisely though.

Speaker 6

Great. Thank you.

Operator

Our next question comes from Joy Ellesmere with Deutsche Bank.

Speaker 8

Yes, good morning. Thanks for taking my question.

Speaker 2

Good morning.

Speaker 8

So my first question is On the gross margin, I know we've talked about it a bit. But if I'm thinking about it correctly, your expectations last quarter would have already assumed some of the mix From acquisitions, probably most of the mix benefit year over year. And so you were also expecting the inventory profits to roll off And it seems like that probably happened in the quarter offset by the freight benefit. So is it right to think Probably just be sort of steady through

Speaker 1

the remainder of the year to get

Speaker 4

to that full year expectation.

Speaker 1

I don't know if That's exactly the case. We have we're going to have a roll off The inventory profits in Q2 also from that standpoint. So that will be somewhat of a That will be a headwind in Q2, as we've talked about. In addition, if I were if we were to talk about our gross margin, I think acquisitions, obviously, played the largest component of the our outperformance this quarter and drove the company as a Total on a consolidated basis, higher. We did see negative gross margins in the base business because of that roll off of the The inventory profits, if you will, or that price realization benefit we saw last year, that will continue into Q2.

Speaker 1

I would say in general also freight came a little bit higher than expectations and up in Q1. Some of that may continue to Q2. Price cost was also a little bit better, not obviously enough to Overcome the price realization benefit in the base business. But In Q2, some of that may as we get into the season, some of that outperformance Kind of on the positive side, I think we're seeing a little of that kind of go back to where we thought it was going to be. So that will be not a headwind, but Falling more into expectations.

Speaker 1

So I think Q2 could still be a very challenging quarter for us on a year over year basis And a gross margin, I would say in general the second half of the year will be in a better position as we've talked about previously.

Speaker 8

Okay, great. Thanks so much for that additional detail. My second question, if we go back to the organic the first quarter weather impact. So is a better way to kind of get there to think about the second quarter as roughly being 30% or so of your full year dollar sales, is that sort of in the range of your expectations for 2Q?

Speaker 2

Yes. I think as the year the

Speaker 1

2nd and

Speaker 2

third quarters are typically at 30 a piece, kind of 60 and then you get 20 20 roughly In the first and second or the first and fourth. Right. Roughly, right, plus or minus.

Speaker 8

Okay. Thanks a lot, guys.

Operator

Our next question comes from Stephen Volkmann with Jefferies.

Speaker 9

Hi, good morning guys. John, I think you mentioned a little bit more seasonal inventory build this year, surprised me a little bit. Can you just comment on that a little bit more?

Speaker 1

Yes. So we went into this year. We did bring in more inventory, a little bit more inventory. Obviously, price is contributing to that. I think it's probably 4% or 5% of that increase year over year in our base business It's due to price.

Speaker 1

And then the other thing from and I'm primarily thinking this from a cash flow perspective. The other thing that's playing into there, obviously, we brought it in. Those sales in the north were delayed from that perspective. So our Spring load, those weather induced resulted in slightly higher than I think our original plan was because of those sales were delayed. But in general, I think our goal is to be have our stores fully stocked This is kind of game time, if you will, for our branches and our customers, and We want to be there with the product.

Speaker 1

But it also allows us, as we get into the second half of the year, the opportunity to optimize that Better and we think there is an opportunity over the course of the full year to improve Our inventory turns and our working capital.

Speaker 9

Great. Thank you for that. And then Doug, you mentioned in your prepared remarks Some comments around credit availability and you're not really seeing any issues. I was hoping I could pull on that a little bit because I could imagine That some of your contractor customers might have some issues with credit possibly in this type of environment. And then secondarily, I can imagine maybe that some of your M and A targets could potentially have some issues.

Speaker 9

So Maybe both of those topics, I wonder if those are any concern for you?

Speaker 2

We Really haven't run into that, at least to date. Obviously, effects of that It could be delayed and roll in, in the second half, etcetera. But so far, our commercial customers Are continuing to do work, and they've got backlogs and new projects seem to be coming in. In terms of acquisitions, We court and target strong companies that are high performers. And so they aren't the ones that end up with issues.

Speaker 2

The companies out there that have issues are probably not on our target list because they're the weaker performers in the market. And so we haven't seen that as well. And as Scott mentioned, the deal flow has been steady and consistent. We haven't seen any rush To us, and we haven't seen any fall off having to do with higher interest rates or credit.

Operator

We are closing our question and answer session. Now, I would like to turn the floor back over to Dov Black for closing comments. Please go ahead.

Speaker 2

Okay. Well, thank you again for joining us today. We very much appreciate your interest Insight 1 and look forward to speaking to you again in our next quarterly earnings call. I would like to give another special thanks To our terrific associates for the great job that they do, our customers for allowing us to be their partner and our suppliers for supporting us so well. Thank you, and have a nice day.

Operator

This concludes today's conference call.

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Earnings Conference Call
Waste Management Q1 2023
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