Greetings and welcome to SiteOne Landscape Supply Fourth Quarter and Full Year 2018 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Pascal Convers, Executive Vice President Strategy, Development and Investor Relations. Thank you. You may begin..

Thank you and good morning, everyone. We issued our fourth quarter and full year earnings press release this morning and posted a slide presentation to the Investor Relations portion of our website at investors.siteone.com. We will be referencing the slides during this call.

I am joined today by Doug Black, our Chairman and Chief Executive Officer and John Guthrie, our Chief Financial Officer.

Before we begin, I would like to remind everyone that today’s press release, the slide presentation and statements made during this call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Such risks and uncertainties include the factors set forth in the earnings release and in our filings with the Securities and Exchange Commission.

Additionally, during today’s call, the company 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 our Chairman and CEO, Doug Black..

Thank you, Pascal. Good morning and thank you for taking the time to join us today. I will start today’s call with a brief review of our unique market position, our strategy to deliver long-term performance and growth and some highlights from 2018.

John Guthrie will then walk you through our fourth quarter and full year financial results in more detail and Pascal will address our acquisition strategy. Finally, I will discuss the trends that we see in our markets as well as our outlook for 2019 before taking your questions. I’ll start on Slide 4 of the earnings presentation.

We have grown our footprint to over 550 branches and 3 major distribution centers in the United States and Canada. At the end of 2018, we estimate that we had approximately 11% share of the wholesale landscaping products distribution market. We are more than 4x larger than our nearest competitor and larger than 2 through 10 combined.

We have a balanced mix of business with 60% focused on maintenance and repair and upgrade, 25% focused on new residential construction and 15% on new commercial construction. This balanced mix and broad product portfolio gives us important resiliency in softer markets.

Turning to Slide 5, as we look out over the cycle, we remain committed to executing on our key value creation levers of organic growth, margin expansion and growth through acquisitions.

Importantly, we expect our commercial and operational initiatives to help improve the value that we deliver to customers and suppliers, expand our margins and accelerate organic growth through the cycle. We have been hard at work in executing these initiatives, while also building the infrastructure of our company over the last several years.

While we have made great progress, we have a long way to go in terms of achieving our ultimate commercial and operating objectives.

During 2018, we faced a challenging market with significant price-driven inflation in the first half of the year and poor weather that reduced our construction days in both the spring and fall seasons across most regions.

With this backdrop, we achieved solid organic daily sales growth driven by our agronomic product line, and we had a strong year for M&A activity.

We did not make progress on our adjusted EBITDA margin for the year, but we did regain our momentum in the second half by improving our adjusted EBITDA margin approximately 50 basis points for the last 6 months of 2018 versus the second half of 2017. We feel good about our longer term margin potential and expect improvement in 2019.

Slide 6 highlights our strong track record of performance and execution with good organic and inorganic sales growth over the past 4 years and solid operating leverage.

As you know, we have been building the company, which involves heavy SG&A investments to establish our IT, category, marketing, supply chain, finance, operational excellence and acquisition teams as well as our underlying systems infrastructure, including e-Commerce.

While certain investments will continue, we expect to benefit by leveraging these investments over the next several years. Accordingly, we remain well positioned to achieve our stated mid-term adjusted EBITDA margin goal of 10% plus.

Turning to Slide 7, it’s important to remain focused on the large opportunity that we have to fill in our full product line capability in every major U.S. and Canadian market through acquisitions.

As the graph shows, we have the full product line capability today in only approximately 50 of our targeted 230 major markets, primarily due to the lack of nursery and/or hardscape branches.

We will continue to fill these in, while also penetrating new markets and improving our market position through the acquisition of well-run irrigation and agronomic distributors. I will now discuss some highlights from our 2018 performance on Slide 8.

For the full year, SiteOne once again delivered double-digit overall top line and adjusted EBITDA growth despite the market challenges. I would highlight that our agronomic organic daily sales growth was 7% in 2018, which partially made up for our more weather-affected landscaping product sales.

This was the strongest growth that we have achieved in the agronomic product line in 10 years. We have refreshed and revitalized our LESCO brand with new products, and our e-Commerce platform has proven to be especially beneficial in the golf segment.

Strength in our maintenance-oriented agronomics business is an important part of our growth strategy, as we face potentially softer construction markets in the future. In total, our organic daily sales grew by 4% in 2018, which we believe outpaced the industry average. Adjusted EBITDA grew 12% in 2018 to $176 million.

While we were disappointed that we did not expand margins year-over-year, we feel good about our current momentum and our ability to manage the inflationary trends in 2019.

In terms of SG&A, we did achieve leverage on the base business, but the overall leverage for the company was dampened by the acquisition of hardscape and nursery businesses in both 2017 and 2018 that have higher SG&A.

As we fully integrate these businesses, we believe that there is good opportunity to accelerate our SG&A leverage in the years to come. On the operations front, we rolled out our new e-Commerce platform, which allows our customers easier access at their fingertips to meet their needs anytime and anywhere.

We are still in the early period of e-Commerce deployment but are pleased to have signed up over 10,000 customers so far on the site. We will continue to refine and enhance our e-Commerce platform in order to help improve our customer experience, drive sales to the site and gain market share.

In the fourth quarter of 2018, we launched the pilot of our new barcoding capability, which allows our associates to check out customers anywhere in the branch or in the product storage yards.

Barcoding provides significant speed of service and efficiency benefits for our customers and for our associates, especially in our larger nursery and hardscapes facility. We plan to have barcoding installed in over 40 of our larger locations by the beginning of the spring season in order to have real impact in 2019.

We expect to complete 50% of our locations, representing 70% of our business by the end of the year. Finally, all three of our distribution centers became fully operational in 2018, which has helped us reduce transportation cost, improve customer service and expand our private label brand.

All-in-all, 2018 was a strong year in building our foundation for success. On the M&A front, we had a very good year in 2018, as we added 13 excellent companies, with roughly $230 million in trailing 12 months net sales to SiteOne. Collectively, these acquisitions helped to broaden our product mix and expand our exposure in many key regions.

So in summary, 2018 was a challenging year in which we still delivered good growth in sales and profit. We also gained momentum in building our foundation to grow faster organically and to fill in our product line capability through acquisitions, which ultimately should result in market share gains.

Now John will walk you through the quarter and the full year in more detail.

John?.

Thanks, Doug. I will begin on Slide 9 with the income statement for our fourth quarter results. We reported a net sales increase of 14% to $475 million in the fourth quarter. For the full year, net sales increased 13% to $2.11 billion. During the quarter, we had 61 selling days, which was unchanged compared to the prior year quarter.

For the full year, we had 252 selling days, which was unchanged from the prior year. In 2019, we will also add 252 selling days, with each quarter the same as 2018. Organic daily sales grew 4% in the fourth quarter and for the full year.

Organic daily sales for agronomic products, which includes fertilizer control products, seed, ice melt and equipment, grew 17% for the quarter and 7% for the year.

Organic daily sales for agronomic products for the year benefited from strength in the economy, strong selling seasons for grass seed and ice melt and price increases in response to cost inflation. In the fourth quarter, we saw strong sales of grass seed, a portion of which was pushed from the third quarter.

Good sales of ice melt from the early winter and increased sales into the golf market. Organic daily sales for landscaping products, which includes irrigation, nursery, hardscapes, outdoor lighting and landscape accessories declined 1% for the quarter and grew 3% for the year.

Recall that in the fourth quarter of 2017, we posted organic sales growth for landscaping products of 9% due to pent-up demand in our western markets and more favorable weather, especially in November and December.

In 2018, we saw more normalized sales in western markets and a lot of rain in the south, which negatively impacted our customers’ installation days. Despite the challenges during the fourth quarter, our customers continue to indicate that they have good backlogs and are optimistic for 2019.

Pricing increased 3% for the quarter and 3% for the full year. This is a measurable acceleration over the 1% increase in 2016, no increase in 2017 and even the 1% we saw at the beginning of 2018. Price inflation is being driven by increases in material and freight cost. For 2019, we are forecasting prices will also increase 3%.

This forecast incorporates the first round of cost increases from our suppliers and reflects the impact of the existing tariff. Acquired sales growth was $42 million in the fourth quarter or 10 percentage points of our overall growth rate.

For the full year, acquired sales growth was approximately $172 million or 9 percentage points of our overall growth rate. Gross profit increased 13% to $149 million in the fourth quarter, while gross margin declined 40 basis points to 31.3%.

Gross margin during the quarter was primarily impacted by lower supplier incentives and product mix, which negatively impacted margin by approximately 20 basis points. For the year, gross profit increased 14% and gross margin increased 10 basis points to 32.1%.

The slight increase in gross margin was primarily attributable to acquisitions as increases in our pricing largely offset increases in product and freight costs throughout the year. Over the course of the year, product mix did not have a significant impact on gross margin.

Selling, general and administrative expenses, or SG&A, increased 12% to $150 million in the fourth quarter and SG&A as a percentage of sales decreased 60 basis points to 31.6%. The improvement in SG&A leverage was primarily attributable to lower operating cost for the base business.

For the full year, SG&A increased by 15% to $579 million and SG&A as a percent of sales increased by 40 basis points to 27.4%, primarily due to the impact of acquisitions.

As Doug mentioned, the hardscapes and nursery acquisitions we have been doing to fill in our footprint, typically have higher SG&A, which has diluted our progress in achieving SG&A leverage. Excluding the impact of acquisitions, SiteOne achieved approximately 20 basis points of operating leverage on an adjusted EBITDA basis during the year.

We recorded an income tax expense of $1.3 million in fiscal 2018 as compared to $18 million for 2017 fiscal year. For the full year 2018, our effective tax rate was 1.7% as compared to 24.8% for the 2017 fiscal year. The decrease in the effective tax rate was due primarily to the reduction in the U.S.

corporate income tax rate from 35% to 21% as a result of the 2017 Tax Act and an increase in the amount of excess tax benefit pursuant to ASU 2016-09. For the 2018 fiscal year, we recognized excess tax benefit of $16.3 million as compared to $6.8 million for the 2017 fiscal year.

For the fourth quarter of 2018, we recorded an income tax benefit of $5.6 million compared to $11.4 million in the fourth quarter of 2017. This was driven by less benefit from the 2017 Tax Act and fewer excess tax benefit. We recorded a net loss of $2.1 million for the fourth quarter compared to a net income of $4 million for the prior year period.

The net loss was driven by higher interest expense and a lower income tax benefit. Our weighted average diluted share count for fiscal 2018 was 42.6 million compared to 42.2 million for fiscal year 2017. The increase reflects option exercise activity during the year.

Adjusted EBITDA increased 18% to $18 million for the fourth quarter compared to $15 million for the same period in the prior year. For the full year, adjusted EBITDA increased 12% to $176 million compared to $157 million in the prior year. The improvement reflects a strong top line growth.

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 increased approximately 22% year-over-year to $483 million as of December 30, 2018. The growth in net working capital primarily reflects the increase in inventory and receivables attributable to our acquisitions.

In addition, in the fourth quarter of 2018, we made additional inventory purchases ahead of announced manufacturers’ price increases. Cash flow from operations was approximately $78 million in 2018 compared to $16 million in 2017.

The improvement in cash flow relative to prior year is primarily attributable to increased earnings and improved working capital management. We made cash investments of $164 million for the year compared to $99 million in 2017. The increase primarily reflects our larger investment in acquisitions.

Net debt at the end of the year was $556 million and leverage was 3.2x our trailing 12 months adjusted EBITDA, which is up from 2.9x at the end of the prior year. This modest increase in leverage primarily reflects increased borrowings to fund our acquisition strategy.

At the end of 2019, we expect our net debt to adjusted EBITDA leverage to be within our long-term target range of 2 to 3x. On February 1, we amended our asset-based lending facility increasing lender commitments to $375 million from $325 million and extending the maturity to February 2024.

We have now extended the maturity date for both our ABL and term loan facilities out to 2024, securing our expected financing needs for the next 5 years. In summary, our capital structure continues to provide us with the flexibility to execute our growth strategy, including the funding of our acquisitions.

I will now turn the call over to Pascal for an update on SiteOne’s acquisition strategy..

Thank you, John. As Doug mentioned earlier, acquisitions play a key role within overall growth strategy as we continue to fill significant white space. As shown on Slide 11, we have now acquired 37 companies since the beginning of 2014. They added 203 branches to SiteOne and represent approximately $805 million in sales on a TTM basis.

We had a strong year by adding a good balance of irrigation, nursery and hardscapes companies and made good progress accelerating our pace of acquisitions from 8 in 2017 to 13 in 2018. We started 2019 with good momentum, as we announced 2 acquisitions in the first 1.5 months of this year.

Now as we turn to Slides 12 through 15, you will be able to find information on the four acquisitions we announced in the last 4 months. On October 19, we completed the acquisition of C&C Sand & Stone.

C&C served the Colorado market with 4 wholesale centers and 2 showrooms focused on distribution of hardscapes and landscape utilized products to landscape professionals.

C&C is a great fit to SiteOne as it expands our geographical presence and hardscapes capability in Colorado, allowing us to provide a full line of landscaping products to our customers.

On December 6, we completed the acquisition of All Around landscape supply, which serves the greater Santa Barbara County market with 4 locations focused on the distribution of irrigation, hardscapes and landscape supplies to landscape professionals.

All Around is a great fit to SiteOne as it expands our geographical presence in California to Santa Barbara County, and it is aligned with our mission to be the best full-line distributor in all markets we serve.

On January 8, 2019, we completed the acquisition of Cutting Edge Curbing Sand & Rock, a leading distributor of hardscapes and landscape supplies in Phoenix, Arizona. Cutting Edge expands our geographical presence across the Greater Phoenix metropolitan area and also brings a new product line to our customers.

On February 13, 2019, we announced a definitive agreement to acquire All Pro Horticulture in Long Island, New York. All Pro has significant expertise in agronomics and erosion controls for existing full product line businesses in the New York Metro market and also represent our first large agronomic hub in the State of New York.

As we turn to Slide 16, we continue to see a significant opportunity to grow profitably through acquisitions, which allow us to move into new markets, expand our presence in existing ones, broaden our product offerings and also, very importantly, add outstanding talent to our team. Our pipeline remains robust.

And with 13 acquisitions in 2018 and now 2 acquisitions announced year-to-date, we continue to strengthen our reputation as the buyer of choice in the industry.

We would like to thank all of our main SiteOne field leaders who are great ambassadors and deal scouts working hand in hand with our development team to help SiteOne attract the best companies to join us in the future.

While the timing of acquisitions cannot be fully predicted, we have strong momentum and expect to close additional acquisitions in the next few months, which should contribute nicely to our growth in 2019 and beyond.

Before I turn the call back over to Doug, I want to take the opportunity to thank all the SiteOne team members with whom I’ve had the pleasure to work with during my tenure here. I’m leaving behind a deep and talented M&A team, which will continue to thrive under the strong leadership of Scott Salmon, our new Strategy and Development leader.

Scott, a warm welcome to SiteOne, it has truly been a rewarding and exciting learning experience being part of the successful team and working very closely with our important partners, shareholders. I will miss you all. I want to personally thank Doug Black, our Board of Directors and the other members of management for this unique opportunity.

I have no doubt that SiteOne will remain the leading landscape supply distributors for many years to come and will continue to create superior value for its various stakeholders. And with that, I’d like to turn the call back over to Doug to discuss the outlook..

Thanks, Pascal. I’ll wrap up on Slide 17. We continue to be optimistic about 2019 as we see steady markets providing a base for SiteOne to achieve improved results with a stronger company.

We view 2019 as the year when we bring together many of the initiatives that we have been working on in order to accelerate our market share gains, adjusted EBITDA margin expansion and cash flow generation. We will also continue to add terrific companies to our family through acquisition.

Before we get to our 2019 guidance, I would like to provide an update on the trends that we are seeing across our end markets and how those trends impact our organic sales growth prospects for 2019.

The maintenance end market represents 41% of our business, and we are seeing very good growth in this segment due to a strong economy, price inflation and our improved ability to gain market share.

As I mentioned before, our agronomics business, which is primarily maintenance, grew 7% this past year, which is the strongest growth that we have seen in a decade. We expect the current trend of steady market growth, good share gains and positive inflation to continue in 2019.

Similarly, the repair and remodel end market, which comprises approximately 19% of our business, is benefiting from the strong economy, low unemployment and good consumer spending. We’re also benefiting from 2 major trends in repair and remodel.

First, there is the ongoing focus on outdoor living, which involves making the backyard a living space, particularly with hardscapes and lighting. Second, there is increased scrutiny on stormwater management, which is driving double-digit growth in our drainage and stormwater categories. We expect these 2 trends to continue for many years.

Accordingly, we expect growth in repair and remodel to remain healthy in the mid-single digits in 2019. The new commercial construction end market, which is approximately 15% of our business, also looks strong going into 2019 based on reports of our customers current robust backlog of projects.

Many projects, especially in the South, were pushed into 2019 due to excessive rain days in the fourth quarter of last year, and so we expect to get off to a strong start in 2019 in commercial volume. Lastly, the new residential construction end market accounts for approximately 25% of our business.

As we mentioned at the end of last year, we are aware of the slowing trends in new residential construction though we had not yet seen the effects of this slowdown in terms of landscaping product demand. We are prepared for this end market to soften during the second half of 2019 and have factored that into our overall forecast.

Fortunately, we are well diversified across end markets. And taking all the markets together, we expect to see steady organic sales growth in 2019, even if new residential demand softens. Further, as I mentioned earlier, we have improved our ability to more consistently gain market share.

In terms of our acquisition strategy, as Pascal mentioned, we have a strong pipeline of opportunities and a very capable team to bring these companies successfully into SiteOne.

We are also excited that Pascal will be able to hand the M&A baton off to our new EVP of Strategy and Development, Scott Salmon, who will be joining us in the coming weeks as recently announced. Scott is a terrific leader who was brought up in the same system as Pascal and me at Oldcastle.

I am confident that Scott is up to the task and will move us strongly and seamlessly forward on the acquisition front. Turning to guidance for 2019. We expect adjusted EBITDA to be in the range of $193 million to $207 million, which represents 10% to 18% year-over-year adjusted EBITDA growth.

This range does not factor any contribution from unannounced acquisitions. As mentioned, we feel very good about our momentum going into 2019, as we realize the benefits from our initiatives and leverage our stronger company to deliver performance and growth.

Before I wrap up, I’d like to personally and on behalf of SiteOne, thank Pascal for his hard work and dedication to the company over the past 5 years. He’s been an important asset in making SiteOne the leading landscape supply distributor in North America through our M&A and strategy accomplishment.

He will truly be missed, and we wish him the best of luck in his future endeavors. In closing, I would like to acknowledge all of the SiteOne associates who continue to create significant value for our customers and suppliers.

We have a tremendous team and it is an honor to be joined with them as we build a company of excellence for all of our stakeholders. Operator, please open the line for questions..

Thank you. [Operator Instructions] Our first question is from Ryan Merkel with William Blair. Please proceed with your question..

Hi thanks. Good morning, everyone..

Good morning Ryan..

So, first on 2019 outlook, what are you assuming for EBITDA margin expansion? And then, is that split equally between gross margin and SG&A leverage?.

So, we expect to make good progress on the EBITDA margin. Obviously, 2018 was a bit of a hold period with the challenges that we had. We I’ll just say good progress, and we expect that to be driven by both gross margin and SG&A leverage.

Given the acquisitions that we’ve had and anticipate doing its probably more gross margin than SG&A, but that would be our plan for 2019..

Got it. Okay.

And then secondly, on free cash flow, are you targeting 100% conversion in 2019 and might there be some benefits from selling through some of the inventory you pre-bought and then also the supply chain?.

We are expecting our target is to achieve a 100% conversion this year. And you’re right, we did make the investments in supply chain. And we expect those to benefit in our free cash flow in 2019..

Okay thanks a lot. I will pass it on..

Thank you, Ryan..

Our next question is from David Manthey with Baird. Please proceed with your question..

Hi good morning everyone..

Good morning..

The first off, Pascal, it’s been a pleasure working with you. Best of luck. Second, if we look at these organic growth rates, agronomics up 17% in the fourth quarter, I think that implies construction and R&R down maybe 3-ish percent.

Can you give us just some additional details? I think you mentioned grass seed and ice melt, but can you talk about what led to that result? And then you mentioned a little bit about your expectation into 2019.

Can you just talk broadly about those 2 categories? And maybe what your expectations are for growth across those 2 major segments?.

Yes. I’ll take the first question and then Doug can talk about the outlook. Yes, it’s the grass seed and was partly driven by a push from Q3. Weather and some delays in supply switched sales really, it’s really only from September to October. But when you have a small base number with regards to grass seed, it makes a big difference.

And then ice melt, I think, tough winter last year. People and an early winter here in November. That drove really good sales in the month of November with regards to ice melt.

And the third category I would add is, is we had a really good Q4 on sales into the golf market, with a good EOP program where a significant amount of sales to the golf industry are done. And underlying all this is pretty strong price inflation of about 4%, which we saw throughout the full year..

Yes. So just to comment on 2019, we’re really if you start with maintenance, which again is 40% of our business, we had some great momentum there. If you remember, we brought on a new leader for our maintenance category, John Gertz over a year ago. He’s done a great job of revitalizing our LESCO brand and our LESCO program.

We have 4 brand-new products that are out in the market as a part of LESCO. As John mentioned, we got great momentum in the golf area. Our e-Commerce is coming in very handy for golf course during superintendents so just all in all, we’ve got some good momentum in maintenance.

We expect demand the underlying demand to be steady, and then we expect inflation to be 3% to 4%. So, when you put those all together in maintenance, we should see another good strong year.

New construction on the commercial side, it’s really just as much as our contractors can get labor to do projects they happen to do, right? And some of those got pushed out of the fourth quarter due to lever weather but there is really strong demand in commercial, good backlogs, and we expect that market to contribute nicely to 2019.

And then you have residential and again, recall that the growth is moderating in the residential. So, we would expect that in the lower kind of lower single digits in terms of the residential market. So, when you put all that together and when you factor in the fact that weather in 2018, probably took between 100 and 200 basis, off our growth.

We’ve are at a minimum in ‘19. We wouldn’t see any downside in terms of weather and most likely, there’s a bit of upside there. So, when you take all that together, that’s what gives us good confidence in that mid-single digit’s growth in 2019..

Okay thank you. And my follow-up is also on cash flow. Are you expecting free cash flow to be 100% of net income in 2019? And I think your target for M&A loosely is 10% incremental revenues.

Is that achievable? And is there some level of leverage that starts to constrain your ability to move to that level?.

Yes. So, let me start with the acquisitions. We do have a target that’s 10% of sales to acquire. We would call that a range of, say, 7% to 13%. If you look at our history, our low has been 8% and our high has been, I think, 16% to 18%. So that will vary year and year. But given the small bite-size deals that we have, we should be in that range.

Given that, John, talk about the balance sheet..

Yes. As we modeled out cash flow and leverage on next year in our plans, we see the ability to achieve acquisitions in that range and then maintain cash flow. The combination of the cashflow primarily driving most of that and really hitting the leverage target and in between 2 to 3x adjusted EBITDA..

And just to add on the cash side, as mentioned, we do have some tailwinds there in terms of working down inventory, but we expect our EBITDA margins to expand which will add to that and good contribution from acquisitions..

Alright thanks again best of luck..

Thank you, David..

Our next question is from Nishu Sood with Deutsche Bank. Please proceed with your question..

Thank you. This is Marcus in for Nishu.

And my first question, do you anticipate any lag in price cost this year? Or is the better visibility allowing you to increase prices at the same time as the costs are coming in?.

No. When you look at our situation in terms of cost and pricing, we’ve now had an inflation in the 3% or 4% range for 9 months. And so, our teams are quite Attune to it, the market is quite Attune to it. And we feel like we’re in good shape in going into 2019 in terms of maintaining the cost price balance in the marketplace.

So, we feel good about our ability to manage the inflation in 2019..

And my second question, are there any SG&A investments for 2019 that you’d like to highlight?.

Well, the major investments, we’ll continue to work on our e-Commerce. We have our platform out there. It’s a terrific platform. We’re going to continue to build on that, add capabilities to that. We also plan to install barcoding within SiteOne in 2019. That’s a significant investment. So those are the 2 biggest investments.

We’re always investing in the business in terms of our operational excellence and our phone systems and other types of infrastructure, but those will be the big 2 this year, similar, slightly down from our investments in 2018..

Right thank you..

Thank you..

Our next question is from Steve Volkman with Jefferies. Please proceed with your question.

Hi good morning guys. Can you just say a little bit more about the supplier incentives impact on the gross margin this quarter? I guess I might have thought they’d be a little higher if you’re adding in some inventory, but maybe I don’t have that dynamic right..

I think, well, supplier incentives are realized on sales and I think what we saw is going into Q4 2017, we really saw an acceleration in sales. And in Q4 of 2018, at least in the landscaping products, there was a little bit of a deceleration. And so, our numbers came in just slightly less with regards to that..

Okay. Alright thanks.

And then, is there anything you want to add relative to sort of the cadence of the quarters in 2019? And I guess, what I’m thinking about is, I’m assuming maybe you’ll have somewhat favorable price cost if you pre-bought a little bit in the first quarter or 2 and then maybe not as good in the second half, but just any other dynamics that you want us to sort of keep in mind relative to the cadence of the quarters would be great?.

I think the most important thing with regards to Q1 is to remember that we generally operated in a loss in that period. Last year, we lost $5 million in – on an adjusted EBITDA basis, there was minus $5 million. I mean, we might see similar type numbers this year.

Part of the dynamic also is, when we do acquisitions, say, for instance, our largest acquisition last year was Atlantic Irrigation. In the New York Metro, in the New York Metro, you really aren’t going to – you make your money really April through October.

And so as we’ve gotten bigger, some of those in the first month, some of the headwinds of acquisitions actually are to the negative with regards to Q1.

So – and then the final thing to add, I – just to highlight, if you look historically, last year, we did change our timing because of revenue recognition and we moved about $1 million to $2 million of expense into Q1.

So, all those are kind of – are really our year is going to be when spring breaks March, but then also really Q2 is when where you get the full benefit of the company’s results..

Okay. Thank you..

Thank you..

Our next question is from Keith Hughes with SunTrust. Please proceed with your question..

Thank you. I had two questions. First, there was some news from a competitor who announced about a week or so ago about looks like another grow up sort of strategy within your space.

Doug, if you can just comment about the size of the space? And if there was another large consolidator with that, how big an impact would that have on your business?.

Right. No, we expect other folks to come in and do deals and there’s plenty of room in this market for other consolidators. Just to remind you, we have 11% share. We’re 4 times larger than number 2, larger than 2 through 10, but we only have 11% market share. So that tells you that it’s a very fragmented market.

It’s a very large market, $19 billion, and there’s lots of opportunities out there for deals. We can’t do them all, obviously, not all fit with SiteOne. And so some competition for deals or other consolidators, there’s plenty of room.

I would say even with the recent announcements and activity that we see from time to time from others, 90% of our deals are negotiated, and we’ve got 60 people out developing relationships. We’ve been at this as a team in a big way for 4 years, 5 years.

And so our relationships run deep and wide and our reputation and after 37 deals of companies joining our family is very strong. So, we feel great about our acquisition opportunities. We’ve got a great pipeline.

We’re going to continue to mine that and let others compete on the fringe, but we plan to stay the lead consolidator and plenty of room for that to happen..

Okay. Thank you. And just a quick numerical question, on the tax rate for ‘19, yours is always kind of hard to figure out.

Can you give me the guidance on what the tax rate will look like for next year?.

Our base tax rate is between 26% and 27%. Obviously, the excess tax benefit drove that significantly lower right now. We’re not forecasting that type of benefit next year and we’re not excessively forecasting that activity. So, I mean, we build our model around 26%, 27%, and if it’s something else that’s really kind of upside..

Okay. Thank you..

Thank you, Keith..

Our next question is from Alex Maroccia with Berenberg. Please proceed with your question..

Hi, guys. Thanks for taking my question.

Just looking at the product segments, you mentioned future strength in agronomic specifically, but can you touch a bit on activity within the other segments specifically irrigation given the slowing revenue construction market?.

No, yes, we feel good about our other landscaping products. Again, we think we took some hits in 2018 based on weather that we feel provides some upside in those categories. But just to take them one at a time, irrigation and lighting, we have strong presence.

We did some really nice acquisitions in 2018 and we feel good about again repair and remodel and the commercial side of that’s going to be very strong. Our hardscape and nursery product lines, we’re gaining strength in those as we acquire terrific companies in the hardscapes space and so we expect that to be strong.

And again, hardscapes is more impacted by the outdoor living trend, which gives us an extra boost. And then nursery, nursery was hit hard with the weather and the hurricanes. We’re doing lot of our nursery in the South and Southeast and Carolinas, which was particularly hard hit.

We feel very good actually about our ability to grow our nursery product line in 2019. So, we highlight the maintenance because maintenance is 40% of our business. It’s a underlying buoy as we go through any kind of soft markets, but we feel good about the other product lines as well in 2019..

Okay, great. And then the follow-up, working capital increased a bit.

Can you describe the desired inventory and AR levels going forward?.

We think kind of we have opportunity with regards to inventory turns. We want to get up, we think best-in-class is 5.5, we’re honestly in the low 3s right now. So, there’s opportunity in the relatively near-term to improve that by potentially half a turn and then continue going forward from there. AR, we’re pretty pleased with regards to our AR turns.

I would expect some improvement in that, but we will fundamentally trade AR. It continues to be strong and reflecting the good economy. So, our focus is going to be getting best-in-class on inventory to further improve working capital..

Okay, great. That’s helpful..

Yes. Let me just remind the audience that we just completed our supply chain rollout in the first and second quarter of last year. So, we do have that now fully in place and we bought up inventory at the end of the year.

So, we have a significant opportunity in inventory not just in 2019, but over the next 3 years to 5 years to add to our cash flow through that lever..

Good. Thank you..

Thank you..

Our next question is from Michael Eisen with RBC Capital Markets. Please proceed with your question..

Good morning, gentlemen. Thank you for taking the questions..

Good morning..

I just want to start off thinking of the guide that you guys have put out for next year EBITDA, what are the things that are embedded in that, that gets you to either the high or the low end, and what other factors that we should be considering to that?.

Well, obviously, you have weather variance, which is – could be worse or better. As we described, we feel that’s probably a net upside going into next year. You also have the markets in general, we think we have good line of sight on the markets, but obviously, those markets could change.

We’d remind that we still are in a labor-constrained world with our contractors. So, we’re hoping that we get a good HCV program this year and that will continue to help our customers fight through their labor challenges. Beyond that, we have pretty good line of sight on our own operational spending. So, we feel good about that.

We feel good about gross margin. So, I would say, in a nutshell, sales – organic sales is the main swing factor plus or minus depending on the market and the weather.

John, do you want to add?.

No, I was just going to say, we spent a lot of time. One of our initiatives has been sales force effectiveness and increasing the talent of our sales force. And I think we’re more optimistic there going into this year than we’ve ever been before.

Highly aligned teams out there in the field, which we believe will help increase sales organically and capture market share right..

So, we would feel when we said a range, we always think of the upsides and downsides. We would hope that the upsides are higher than the downsides in this particular year given all the things that we’ve been able to pull together, but we’ll see as the year develops..

Got it. That’s really helpful. And then following up on a few of those comments. And Doug, I think you had a few comments earlier on the call just talking about the pace of organic growth and organic market share gains.

Do you feel that you guys are at a position to start regularly reporting organic growth above the market or is there going to be puts and takes on the timing of that with the M&A strategy? How should we think about organic share gains?.

Yes, we really do. I mean, of course, we’ve been at this several years and we’ve been working on our sales force, e-Commerce was an important piece, our marketing programs, et cetera dialing in. And quite frankly, we’ve learned from the acquisitions that we’ve acquired.

We’ve acquired some tremendous companies in all those spaces quite frankly, agronomics, irrigation, hardscapes and nursery. And we’ve learned from all of them in terms of best practice in those particular segments. So, we do feel like now we’ve got the ability.

And as John mentioned, we really have our sales force dialed in this year better than we ever had before. So, we feel like we’re in a position now where we can consistently take share in the market from the weaker players that are out there and that will add meaningfully to our organic growth potential. Again, we’ve been building the company.

We’re 3 years, 4 years in. Now we expect to start to show our stuff in terms of consistent organic growth, which we plan to sustain from here on out..

Fantastic. Thanks again for all the color. 11 [indiscernible] congratulations..

Thank you..

Thank you, Mike..

[Operator Instructions] Our next question is from Matthew Bouley with Barclays. Please proceed with your question..

Hi, this is actually Christine Cho on for Matt. Thank you for taking the questions..

Thank you..

How are you thinking about tariffs in your numbers right now, and which products or categories are most exposed to a potential increase in tariffs..

We feel – there’s a lot of noise about the first round of tariffs that went in place. We don’t pay tariffs ourselves, but it works as well for the supply chain and that was actually reflected in the 3% number. So, you see relative to our total cost of sales, it’s relatively mild.

And in general, we think just ballpark, let’s say, 5% to 10% of our cost of goods sold is impacted by tariffs, so if there’s an additional 10%, you’re talking, maybe 50 basis points to 200 basis points increase because of tariffs. I think 200 basis points would probably be on the very high side, so – if there was future tariffs.

But the – embedded in our numbers, we’ve gotten from all our manufacturers and suppliers what the impact of the first round of tariffs were and that they were already having built into our 3% guidance..

Got it.

And then also could you talk about your organic daily sales growth throughout the quarter and potentially what you’ve seen month – between the months during the quarter?.

So, we’re off to a solid start in 2019, and we feel good about again, our overall guide for the year is the mid-single digits and we’re off to a solid start this early on. Just a reminder that 50% of the Q1 sales are in March and the season really takes off in March.

Last year, we had a longer winter, so reasonable comp there, but we are off to a solid start so far..

Thank you..

Thank you, Christine..

Great..

Thank you. We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks..

Okay, great. Well, thanks to everyone for joining us today. We very much appreciate your interest in SiteOne, and we’re excited about the company that we’re building and the long-term growth and potential for the company and we’re excited about 2019. Thank you very much..

Thank you. This concludes today’s conference. You may disconnect your lines at this time and thank you for your participation..