SITE - NYSE

Greetings and welcome to the SiteOne Landscape Supply Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Guthrie, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you and good morning, everyone. We issued our first quarter 2023 earnings press release this morning and posted a slide presentation to the Investor Relations portion of our website at investors.siteone.com. I am 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 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. 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.

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 first quarter, 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 two new high-performing companies to SiteOne during the first quarter. These companies have talented teams and strong customer relationships and expand our product lines and market presence in their respective markets. To the execution of our commercial and operational initiatives and our acquisition strategy, we continue to build SiteOne as a world class market leader for the long-term while delivering consistent performance and growth in the near-term. As we face softer markets, we remain confident that our well-balanced business, strong balance sheet, exceptional teams, improved capabilities and robust acquisition pipeline, position us well to navigate the current environment and achieve continued success. I will start today’s call with a brief 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 first 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 for 2023 before taking your questions. As shown on Slide 4 of the earnings presentation, we have grown our footprint to more than 640 branches and 4 distribution centers across 45 U.S. states and 6 Canadian provinces. We are the clear industry leader over 4x 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 future growth opportunities remain 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 and full product line wholesale distributor in the market, we also have an excellent balance across our product lines as well as geographically. Our strategy to fill in our product lines across the U.S. and Canada both organically and through acquisition strengthens and reinforces this balance over time. Overall, our balanced end market mix, broad product portfolio and good geographic coverage offer us multiple avenues to grow and create value for our customers and suppliers while 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. From 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. 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 altogether, 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 have 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. 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. We have now completed 82 acquisitions across all key product lines since 2014. We leveraged our expanded development team to increase acquisition activity this past year, and our pipeline of potential deals remains robust. All these companies are high performers and so they strengthened our company with excellent talent and new ideas for performance and growth. Given the fragmented nature of our industry and our modest market share, we have significant opportunity to continue growing through acquisition for many years to come. Slide 7 shows the long runway that we have ahead in building in our product portfolio, which we aim to do primarily through acquisition, especially in the nursery hardscapes 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 first quarter performance highlights as shown on Slide 8. We achieved 4% net sales growth in the first quarter 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 first quarter of 2021, largely driven by volume and grew 17% in the first quarter of 2022, largely driven by price inflation. So in terms of sales, Q1 is our toughest comparable for 2023. Accordingly, we were pleased that the organic daily sales decline was only 2%, driven by 6% price inflation, which 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. Where 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 first quarter. We’ve also seen the spring season kick in the gear during April, which has increased our year-to-date organic daily sales growth to approximately 1% through the first 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. The loss of the extraordinary price realization benefit achieved during the first quarter of 2022 was more than offset by our hardscapes and landscape supplies acquisitions, which carry a higher gross margin and by lower fuel costs 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&A as a percentage of net sales increased by 620 basis points year-over-year to 34.8%, which is a 60 basis point increase compared to the fourth quarter of 2022. Acquisitions had the largest effect on SG&A as a percentage of net sales as the same hardscapes and landscape supplies acquisitions that increased our gross margin also increased our SG&A. Additionally, several of these acquisitions were in the West and Northern where poor weather and a late spring call us further deleveraging in the quarter. Lower volume and continued labor inflation were also factors contributing to the higher SG&A as a percent of net sales. Adjusted EBITDA for the quarter declined 41% to $39.8 million, and adjusted EBITDA margin declined by 360 basis points to 4.8% as the combination of lower volume and higher SG&A yielded a more typical first quarter adjusted EBITDA outcome. Note that adjusted EBITDA during the first quarter of 2022 had increased 97% from the first quarter of 2021, reflecting strong organic sales and elevated gross margin. Overall, adjusted EBITDA in the first quarter was in line with our expectations. In terms of initiatives, we are pleased with our progress as we enter the busiest time of our year. We 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 MobilePro and dispatch track 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. Taken all together, we have significantly improved our capability to perform through the potential headwinds of 2023. On the acquisition front, we added two high-performing companies to our family so far this year, adding approximately $40 million of 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 reputation, 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. 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?

Thanks, Doug. I will begin on Slide 9 with some highlights of our first quarter results. We reported a net sales increase of 4% to $837 million for the quarter. There were 64 selling days in the first quarter, which is 1 less day than we had in the first quarter of 2022. Organic daily sales decreased by 2% in the first quarter as sales volume was negatively impacted by weather and moderating economic conditions. 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 first quarter 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. 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 reduced 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 sales pick up in April with drier conditions in the West and the start of spring in the North. Organic daily sales for landscaping products, which includes irrigation, nursery, hardscapes, outdoor lighting and landscape accessories, grew 1% for the first quarter 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 first quarter, acquisition sales, which reflect the sales attributable to acquisitions completed in both 2022 and 2023, contributed approximately $57 million or 7% to net sales growth. Scott will provide more details regarding our acquisition strategy later in the call. Gross profit increased 7% to $287 million for the first quarter compared to $269 million 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 large price realization benefit we realized in the first quarter of 2022. The gross margin benefit from acquisitions was over 100 basis points this quarter, as many of our recent acquisitions specialized in higher gross margin products like mulch and bulk landscape supplies. However, these products also carry more SG&A due to increased handling and transportation costs. As expected, gross margin for our base business was down this quarter as a large price realization benefit in the first quarter of last year was not realized together. Selling, general and administrative expense or SG&A increased 26% to $291 million for the first quarter. The increase in SG&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&A this quarter. SG&A as a percentage of net sales increased 620 basis points in the quarter to 34.8%. The increase in SG&A as a percentage of net sales primarily reflects increased SG&A investment combined with the low sales in the seasonally slow first quarter. For the first quarter, we reported an income tax benefit of $2.7 million compared to income tax expense of $4.6 million in the prior year period. The effective tax rate was 37.5% for the first quarter 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 $0.8 million were recognized for the first quarter of 2023 compared to $5 million for the prior year period. We expect the 2023 fiscal year effective tax rate will be between 25% and 26%, excluding discrete items such as excess tax benefits. We recorded a net loss of $4.5 million for the first quarter of 2023 compared to net income of $32.3 million for the prior year period as higher net sales and gross margin were offset by the increase in SG&A expense. Our weighted average diluted share count was $45 million compared to $45.9 million for the prior year period. The shares used in the calculation of diluted EPS this quarter to negatively impact to any dilutive securities as the inclusion would decrease the net loss per common share. Adjusted EBITDA decreased by 41% to $39.8 million for the first quarter compared to $67.8 million for the same period in the prior year. Adjusted EBITDA margin decreased 360 basis points to 4.8%. 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 first quarter was $960 million compared to $788 million at the end of the prior year period. The increase in net working capital is primarily attributable to our seasonal build in inventory in preparation for the spring selling season, new acquisitions and the impact of inflation. Cash used in operations increased to approximately $153 million in the first quarter compared to approximately $118 million 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 million for the first quarter compared to approximately $41 million for the same quarter of 2022. The decrease reflects a small decline in acquisition investment in the first 3 months of 2023 compared to the same period of 2022. Net debt at the end of the quarter was approximately $586 million compared to approximately $417 million at the end of the first quarter of 2022. Leverage increased to 1.3x our trailing 12-month adjusted EBITDA compared to 0.9x at the end of the first quarter 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 2x. At the end of the quarter, we had available liquidity of approximately $330 million, which consisted of approximately $40 million of cash on hand and approximately $273 million in available capacity under our ABL facility. I will now turn the call over to Scott for an update on our acquisition strategy.

Thanks, John. As shown on Slide 11, we acquired two companies in the first quarter with a combined trailing 12-month net sales of approximately $40 million. Since 2014, we have acquired 82 companies with approximately $1.5 billion in trailing 12-month net sales added to SiteOne. Turning to Slides 12 and 13, you will find information on our most recent acquisitions. On March 14, we acquired J&J Materials with five 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 Cod Stone. On March 28, we acquired Triangle Landscape Supplies with four locations providing bulk landscape supply and hardscapes to landscape contractors in the Raleigh-Durham market. 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 sheet and a robust pipeline across all lines of business and geographies. We are confident that we will be able to add many more outstanding companies to SiteOne during the year. 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 joined 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.

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. 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. Good backlogs and healthy bidding, we believe this market, which 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. We expect our gross margin to normalize this year without the substantial benefit that we saw from strategic inventory purchases ahead of rapid inflation in 2021 and 2022. Additionally, with flat to declining sales, we expect SG&A as a percentage of sales for our base business to increase modestly. We expect acquisitions to benefit gross margin but also increased SG&A as a percent of net sales. Decrease in gross margin and increased SG&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 SiteOne family in 2023. Our acquisitions are performing well, and we continue to improve our ability to integrate them into our company. Accordingly, we expect acquisitions to contribute strongly to our performance and growth during the year. With all these factors in mind, we are maintaining our full year guidance and anticipate our fiscal 2023 adjusted EBITDA to be in the range of $395 million to $425 million. This range does not factor any contribution from unannounced acquisitions. In closing, I would like to sincerely thank all 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 and our customers for allowing us to be their partner. Operator, please open the line for questions.

Thank you. [Operator Instructions] And our first question comes from David Manthey with Baird.

Yes. Thank you. First off, a clarifying question. You said that average daily sales were down 2% in the first quarter. But then I think you said that year-to-date through April, they were plus 1%. I just want to be clear on that.

Yes, that’s correct.

Okay. And so I mean April sales volumes would be higher than January, February, March, but that’s still an encouraging sign. And 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 first quarter weather-affected geographies and the nature of those sales?

Yes. So you’re correct in the first and second quarter kind of split, spring starts at the end of the first quarter and rolls into the second. So often you can get more sales into the first or less and more into the second. And we would characterize that 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. 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 and the West. It’s been very wet. That’s an all-weather market. And so there is been several months of just really record rainfall, and we probably won’t make all of that go. But in the scheme of things, the weather has moved sales around, but we think it’s still all to play for this year.

Okay. That’s helpful. Thank you. And then second, on the gross margin guidance back in February of this year, you said 34% to 34.5%. Now you’re saying higher than previously thought. Given that you’re not changing your EBITDA guidance, I guess that naturally assumes higher SG&A. Could you talk about the sources of upside to operating expenses?

Yes. With regards to SG&A and just SG&A in general, I think what we’ve seen is kind of the roll-in of these acquisitions that have higher SG&A. That’s one kind of a mix issue that’s driving our SG&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 value, but also most of the hiring that we’re seeing in the comp is – was really done last spring in 2022. So as we start comping year-over-year, the difference goes down. 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 and 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 by monitoring it closely.

Okay, thanks very much.

Thank you.

Our next question comes from Ryan Merkel with William Blair.

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 is a bit of upside to guidance for sales.

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 would have been 3 to 6 months ago. And we will 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 are still – again, we’re still calling that market down. But I would 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.

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

I wouldn’t say we’ve really seen that yet. We are seeing, obviously, that’s been one of the growth areas here in April. The weather paid 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 weather year-over-year, we’re going to be up or down, watching that right now.

Got it. Okay. And then on gross margins, could you just unpack the freight upside? Is that lower fuel? Is it supply chain normalizing, so that’s helping costs? And then how much do you think freight will end up helping you for the year relative to what you thought 3 months ago?

So in general, it’s a combination of both. I think we’re managing our freight better from that standpoint is 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. 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.

Got it. Helpful. Thank you.

Our next question comes from Matthew Bouley with Barclays.

Hey, good morning, guys. Thanks for taking the question. Just on the gross margin, again, I guess I want to clarify point. I think you said that acquisitions contributed 100 basis points to the gross margin in the quarter. I’m just curious if you could unpack that a little bit, just given that I think you had something like $55 million to $60 million of acquired sales? So it seems like a big margin would be applied to those. And 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.

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 in and higher gross margins and higher SG&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 and transportation is very high. Thinking about the SG&A, but actually, product margin is relatively high, which is driving what we’re seeing here. With regards to for the full year, we previously talked 34% to 34.5%, we’re probably 34% to 35% now would probably be a better full year number. As a top previously pointed out, our EBITDA margin, our guidance hasn’t really changed. So there may be some slightly higher SG&A coming along with that.

Got it. Okay. Thank you for that. And then so I guess on that point, following to the SG&A side, so it sounds like you’re kind of shifting 50 basis points towards gross margin and away from SG&A. I think on a dollar basis, SG&A was up something like $60 million in the quarter. You said acquisitions were more than half of that. How should we think about kind of the dollar spend on SG&A as we as we run through the year. Is that kind of $60 million per quarter the right run rate, or presumably you are expecting that to decelerate meaningfully? So, how – a little more color on what you are doing to kind of decelerate that SG&A spending increase? Thank you.

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

And John, when we are talking about acquisitions, we are talking about acquisitions that were completed in 2022 and through 2023, right.

Right. You get the whole set there, which brings that higher SG&A into the company.

Alright. Thanks Dough. Thanks John.

[Operator Instructions] And our first question comes from Mike Dahl with RBC Capital Markets.

Hi. This is actually Chris calling 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?

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 is still year-over-year on a percentage basis, they are – there is still an – on a year-over-year basis, there is 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 down.

Got it. Thanks for that. And just going back to the organic daily sales comments in April, how much of 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 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?

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. There is some catch-up from the first quarter. So, if you look at the 1% year-to-date, that’s probably a better number to index on. And there is some inflation on that balanced with net negative volume growth. And so by nature, the April number would be less inflation, more volume to get to that 1%, which is a combination of the two.

And what was the second question?

What was the second question?

Yes. Just it’s – 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 kind of affected that at all?

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

Got it. Appreciate all the color.

And our next question comes from Keith Hughes with Truist Securities.

Thank you. So, we have talked a lot about SG&A in this call. And some of the statements, I am trying to hard kind of direct sales, let me just ask it this way, as a percentage of sales under your guidance, what do you think SG&A will look like by the end of the year?

What do we think SG&A will look like – look like how, could you clarify that?

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

Well, we are not going to specifically forecast out SG&A as a percentage of sales. I mean we think it will de-lever. So, it will be higher than previously. I would kind of back into that number from our EBITDA guidance. Yes.

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

Well, we have seen a lot of deflation. I don’t know the people are thinking that there will be additional. But obviously, if you look at raw material prices right now, they are down significantly. I think they are at even pre-COVID levels. So, there the fertilizer prices have come down a lot from that standpoint. I think kind of we feel as if kind of where they are at now, it’s kind of where we would carry them forward. But we will have to see, obviously, that’s a commodity and highly volatile.

Okay. Thank you.

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

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

So, we are – our customers are busy. We mentioned that the commercial market is holding up well as our – the repair and remodel and maintenance markets. And so our customers are busy. They are – I would say, the extraordinary backlogs that we saw during COVID had normalized. And I would say net-net, customers are cautiously optimistic about the second half. 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 would say they are cautiously optimistic about what they are 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 of percent. So, that gives us good – another kind of read into the commercial market. The repair and remodel market is not as backlog-driven. It’s more kind of you get the jobs as you go. So, it’s harder to get some visibility into the second half in that market. But in terms of commercial, we feel pretty good about how the year is developing.

Okay. Great. That’s helpful. And then the M&A pipeline still sounds active. Are you expecting a similar inorganic growth contribution as this past year?

Well, obviously, it’s impossible to predict that exactly. But last year, at this time, we were sitting at three acquisitions and $50 million in trailing 12 months acquired. This year, we are at two and $40 million. Last year, we had a very strong pipeline. And this year, 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 to overall for SiteOne. I can’t predict it precisely though.

Great. Thank you.

And our next question comes from Joe Ahlersmeyer with Deutsche Bank.

Yes. Good morning. Thanks for taking my questions.

Good morning.

So, my first question is on the gross margin. I know we have talked about it a bit. But if I am 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 as we move from 1Q to 2Q to 3Q and 4Q, you are not going to really see a sequential tick down in margins? We should probably just be sort of steady through the remainder of the year to get to that full year expectation.

I don’t know if that’s exactly the case. We have – we are going to have a roll off of 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 have talked about. In addition, 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 total on a consolidated basis higher. We did see negative gross margins in the base business because of that roll off of the inventory profits, if you will, over that price realization benefit we saw last year. That will continue into Q2. I would say, in general, also freight came a little bit higher than expectations 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 are 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 kind of falling more into expectations. 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, we will be in a better position as we have talked about previously.

Okay. Great. Thanks so much for that additional detail. My second question, if we go back to the organic sales commentary, I imagine you didn’t give April necessarily for us to extrapolate, but maybe just to contextualize the first quarter weather impact. So, is the 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?

Yes. I think as the year, it’s – the second and third quarters are typically at $30 a piece, kind of $60, and then you get $20 and $20 , roughly in the first – or the first and fourth.

Right, roughly.

Right, plus or minus.

Okay. Thanks a lot guys.

Our next question comes from Stephen Volkmann with Jefferies.

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?

Yes. So, we went into this year, we did bring in more inventory – a little bit more inventory. Obviously, price is contributing to that up. I think it’s probably 4% or 5% of that increase year-over-year in our base business is due to price. And then the other thing from – and I am primarily thinking of 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 and 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 store is fully stocked to kind of – this is kind of a game time, if you will, for our branches and our customers, and we want to be there with the product. 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.

Great. Thank you for that. And then, Doug, you mentioned in your prepared remarks some comments around credit availability and you are 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&A targets could potentially have some issues. So, maybe both of those topics, I wonder if those are any concern for you?

We really haven’t run into that, at least to-date. Obviously, effects of that could be delayed and roll-in in the second half, etcetera. But so far, our commercial customers are continuing to do work, and they have got backlogs and 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. The companies out there that have issues are probably not on our target list because they are 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.

Super. Thanks. I will pass it on. Appreciate it.

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

Okay. Well, thank you again for joining us today. We very much appreciate your interest in SiteOne 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.