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spk02: Greetings and welcome to Site 1 Landscape Supply fourth quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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. Thank you, sir. You may begin.
spk07: Thank you, and good morning, everyone. We issued our fourth quarter and full year 2022 earnings press release this morning and posted a slide presentation to the investor relations portion of our website at investors.site1.com. I'm joined today by Doug Black, our Chairman and Chief Executive Officer, and Scott Salmon, Executive Vice President, Strategy and Development. Before we begin, I would like to remind everyone that today's press release, slide presentation, and the statements made during this call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act 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 released and in our filing 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.
spk09: Thank you, John. Good morning, and thank you for joining us today. We achieved another year of double-digit growth in organic daily sales, net sales, and adjusted EBITDA in 2022, on top of the record growth in 2021. I'm very proud of our terrific teams who continue to get stronger every year and who adapted well to the challenges of continued high inflation, tight labor, and reduced product volume last year. We were also very pleased to add a record 16 new high-performing companies to SiteOne during the year. All these companies have talented teams and strong customer relationships, and they 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 the long term, while delivering consistent performance and growth in the near term. As we face softer markets in 2023, our well-balanced business, strong balance sheet, exceptional teams, improved capabilities, and robust acquisition pipeline have us well-positioned to navigate the year ahead and achieve continued success. I will start today's call with a brief overview of our unique market position and our strategy for long-term performance and growth, followed by some highlights from 2022. John Guthrie will then walk you through our fourth quarter and full year 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 and guidance for 2023 before taking your questions. As shown on slide four of the earnings presentation, we have grown our footprint to more than 630 branches and four distribution centers across 45 U.S. states and six Canadian provinces. We are the clear industry leader over four times the size of our nearest competitor. 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 opportunity remains significant. We have a balanced mix of business with 65% focused on maintenance, repair, and upgrade, 21% focused on new residential construction, and 14% on new commercial and recreational construction. As the only national full product line wholesale distributor in the market, we also have an excellent balance across our product lines as well as geographically. Our strategy to fill in our product lines across the US 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 more ways to create value for our customers and suppliers while providing important resiliency in softer markets. I would note that our balanced business mix will be very important as we navigate through an uncertain 2023. Turning to slide five, our strategy is to leverage the scale, resources, functional talent, and capabilities that we have as the largest company in our industry, all in support of our talented, experienced, and entrepreneurial local teams to consistently deliver superior value to our customers and suppliers. We have come a long way in building 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 Site 1. Taken all together, our strategy creates superior value for our shareholders through organic growth, acquisition growth, and EBDA margin expansion. If you turn to slide six, you can see our strong track record of performance and growth over the last seven years with consistent organic and acquisition growth and good EBDA margin expansion. We've done this while investing heavily in our teams and in new systems and technologies to build the foundation for Site 1 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. You will also note that we've now completed 80 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 strengthen our company with excellent talent and new ideas for performance and growth. Given the fragmented nature of the 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 filling in our product portfolio. 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 2022 performance highlights as shown on slide 8. We achieved 16% net sales growth in 2022 with 11% organic daily sales growth and 5% net sales growth added through acquisitions. The organic daily sales growth was driven by 18% price inflation, partially offset by a 7% volume decline, which follows the approximately 30% organic daily sales growth and 17% volume growth that we saw in 2020 and 2021 combined. We experienced the most significant volume declines in the northern markets and in our maintenance products. as customers temporarily adjusted their use of our products to meet their fixed budgets. Accordingly, we believe that there is some upside in maintenance demand in 2023. Overall, we believe that we outperformed the market in 2022. Gross profit increased 17%, and our gross margin increased 50 basis points to a very healthy 35.4%. With the continued high inflation during the first half of 2022, we were able to, once again, take advantage of the large price realization benefit, which was slightly less than the extraordinary gain we achieved in the second half of 2021. We will lose this benefit in 2023. Gross margin also benefited from our hardscapes and landscape supplies acquisitions, which operate with a higher gross margin and higher SG&A percentage. On the SG&A side, our operational initiatives and disciplined cost management were offset by lower volume, contribution from acquisitions, elevated fuel and wage expenses, and our continued investment in marketing, digital, and operational excellence. Accordingly, SG&A as a percent of net sales increased by 140 basis points, 27.3%. A combination of good organic sales and a solid contribution from acquisitions allowed us to deliver adjusted EBDA growth of 12%, despite the SG&A headwinds. Adjusted EBDA margin declined 30 basis points to 11.6%, following our 230 basis point increase in adjusted EBDA margin achieved in 2021. Overall, we have meaningfully expanded the profitability of the company since our IPO and remain focused on driving continued improvements toward our adjusted EBDA margin goal of 13% to 15%. In terms of our initiatives, we made good progress in 2022. On the gross margin side, we continue to grow with small customers, drive private label growth, and improve our inbound freight costs through our Transportation Management System, or TMS, initiative. Though we expect gross margin to reset during 2023 without the benefit of extraordinary price realization, we expect to improve gross margin through these initiatives in the years to come. We have several initiatives aimed at improving our customer experience while making our teams more efficient. thereby increasing organic growth and improving our SG&A leverage. MobilePro helps automate our branch transactions while allowing our associates to serve customers from anywhere on the branch site. We can serve customers quicker and more accurately, especially at our larger nursery and hardscape sites. And our branch associates are more efficient, a win-win. Enhancing the functionality of MobilePro in 2022 and continue to roll it out across the company. DispatchTrack allows us to manage our outbound deliveries to customers and proactively update customers on their delivery status by text. We now have over 60% of our deliveries going through DispatchTrack and our customer feedback has been very positive. We expect to have all parts of SiteOne fully utilizing this new capability by the end of 2023. and can now leverage dispatch track to make our deliveries more efficient and achieve higher fleet utilization in each market. In 2022, we completed the two-year development and rollout of our new Salesforce Customer Relationship Management System, which is designed to help our outside sales and sales support associates better serve our medium to large customers. We conducted our 2023 account planning in the CRM, and now we'll be able to leverage this new capability to deliver more value to our customers and drive more intentional and consistent market share gains with our over 600 outside sellers and almost 200 inside sales support associates. During the last two years, we significantly strengthened our digital team, and they, in turn, have accelerated our progress with SiteOne.com. Field associates and customers are becoming more comfortable with the site as we have improved the ease of use and functionality to help landscape contractors run their business more efficiently. We will continue to add features to SiteOne.com and are excited to leverage it more fully in 2023 and beyond to bring market-leading value to our customers and gain market share. In addition to our technology-driven initiatives, we also now have a full-time operational excellence team in each major line of business, working with the field and with our newly acquired companies to isolate pain points and develop and implement operational solutions across the company. These solutions improve our associate efficiency and our customer experience to help drive organic sales and adjusted EBDA growth, along with improved adjusted EBDA margin. Overall, we are excited about our opportunities to improve our customer experience and increase our operating efficiency in the years to come. On the acquisition front, we had a record performance in 2022, adding 16 high-performing companies to our family. These companies provide us with excellent new talent and capability for growth in their respective markets, while adding approximately $240 million in trailing 12-month sales to Site 1. Development teams remain very active, and we expect to continue adding strong companies to Site 1 in 2023. An experienced and expanded team, broad and deep relationships with the best companies, a strong balance sheet, and an exceptional reputation as the acquirer of choice, we remain well-positioned to grow consistently through acquisition this year and for many years in the future. Moving to slide nine, we've made great progress in 2022 in building Site 1 as a company of excellence, one that creates exceptional value for our associates, customers, suppliers, shareholders, and communities, and remains resilient for the longer term. A few highlights for the year included launching Site 1 CARES, which is our grant assistance program to help take care of our associates in their times of need. We added a fifth associate resource group, Inspire, for our Asian and Pacific Island associates. We increased the diversity of our leadership and the overall diversity of Site 1 in 2022, ensuring that we have the strongest and most diverse team possible to drive success. And finally, we continued to enhance our supply chain and improve our fleet efficiencies. Overall, we are pleased with our progress and look forward to continuing to build Site 1 for the benefit of all our stakeholders. In summary, 2022 was a strong year of performance and progress in building Site 1. We remain confident in our ability to navigate through challenging market conditions, outperform the market, and continue to build our company both organically and through acquisitions. Now, John will walk you through the quarter in more detail. John?
spk07: Thanks, Doug. I'll begin on slides 10 and 11 with some highlights from our fourth quarter. We reported a net sales increase of 11% to $890 million in the quarter. There were 60 selling days in the fourth quarter, which is one less day than we had in the fourth quarter of 2021. For the full year, net sales increased 16%, We had 252 selling days in fiscal year 2022 compared to 253 selling days in fiscal year 2021. In fiscal year 2023, we will again have 252 selling days, but we will have one less day in the first quarter and one more day in the fourth quarter. Organic daily sales increased by 7% in the fourth quarter and 11% for the full year. Organic daily sales growth for both the quarter and the full year was primarily attributable to price inflation driven by product cost increases from our suppliers, partially offset by lower volume resulting from higher prices and softening economic conditions. Price inflation contributed approximately 12% to organic daily sales growth for the quarter and 18% for the full year. We saw price inflation across all product lines this year, but higher levels in commodity products like PVC pipe and fertilizer. We're starting to see price inflation moderate as we count the price increases from 2022. Price inflation for December was just under 10%, which is the first month under 10% since the second quarter of 2021. So far in 2023, we are seeing price increases from many suppliers. We're still trying to catch up with their rising costs, as well as price decreases for some commodity products, like PVC pipe. Currently, we are projecting low single-digit price inflation for 2023, with the majority of that expected in the first half of the year. Doug will provide more detail when we discuss our outlook for 2023. Volume declined 5% for the fourth quarter of 2022 and 7% for the full year. As economic conditions moderate in response to higher interest rates, we have seen volume decrease from the peak levels we experienced following the COVID shutdown. In addition, higher prices have reduced demand for products like fertilizer and grass seeds as our customers deal with constrained maintenance budgets. While we did see volume decline in 2022, it is important to note that we remain above the 2019 levels and the secular growth trend of people investing more in their outdoor living spaces remains in place. Organic daily sales for landscaping products, which includes irrigation, nursery, hardscapes, outdoor lighting, and landscape accessories, increased 8% for the fourth quarter and 12% for the full year. Organic daily sales growth for agronomic products, which includes fertilizer, control products, ice melt, and equipment, was also solid, increasing 5% for the quarter and 7% for the full year. Price inflation was the primary driver of growth for both the quarter and the year, as almost all product lines experienced the impact of rising costs. The negative impact of higher prices on volume growth was most pronounced in agronomic products, and as a result, volume growth was lower when compared to landscaping products. Geographically, we continue to see stronger growth in the Sun Belt markets. Organic daily sales in Sun Belt markets grew approximately 10% for the fourth quarter, compared to approximately 4% for northern or seasonal markets. Sunbelt markets have benefited from not only stronger new construction growth, but also a smaller percentage of agronomics in their product mix. We were pleased with the performance of our acquisitions in fiscal year 2022. Acquisition sales, which reflect the sales attributable to acquisitions completed in both 2021 and 2022, contributed approximately $42 million or 5% to net sales growth for the quarter and $187 million or 5% to net sales growth for the full year. Scott will provide more details regarding our acquisition strategy later in the call. Gross profit increased 7% to $303 million for the fourth quarter and gross margin decreased 110 basis points to 34.0%. Similar to the third quarter of 2022, Our gross margin for the fourth quarter was impacted by the absence of the large price realization benefit we realized in the fourth quarter of 2021. For the year, gross profit increased 17% and gross margin increased 50 basis points to 35.4%. The increase in gross margin for the full year reflects the contribution from new acquisitions, supplier programs, and the benefit of supply chain initiatives, including strategic inventory buys ahead of supplier cost increases. As Doug will discuss in the outlook, we expect gross margin to reset in 2023 as our gross margin improvement initiatives are more than offset by the loss of the price realization benefit we saw in the first half of 2022. Selling, general, and administrative expense, or SG&A, increased 23% to $305 million for the fourth quarter. SG&A as a percentage of net sales increased 350 basis points in the quarter to 34.2%. The increase in SG&A as a percentage of net sales primarily reflects the impact of acquisitions, cost inflation, and increased investment in operating expenses supporting our growth. Acquisitions accounted for almost 200 basis points of the difference as we incurred higher SG&A expense from the acquisitions without the corresponding sales benefit due to seasonality. For the full year, SG&A increased 22% to $1.1 billion, and SG&A as a percent of net sales increased 140 basis points to 27.3%. During the year, we experienced the impact of inflation on SG&A as the cost of wages, fuel, travel, and general branch operations all increased. In addition, our acquisitions have positively impacted our gross margin, but also negatively impacted SG&A due to their higher operating cost structure. For the fourth quarter, we recorded an income tax benefit of $4.6 million compared to an income tax expense of $2.7 million in the prior year period. For the full year, income tax expense was $67.7 million compared to $56.1 million in the prior year period. Our effective tax rate was 21.6% for the 2022 fiscal year compared to 19% for the 2021 fiscal year. The increase in the effective tax rate was due primarily to a decrease in the amount of excess tax benefits from stock-based compensation. Excess tax benefits of $10.4 million were recognized for the 2022 fiscal year as compared to $20.2 million for the 2021 fiscal year. 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 $0.9 million for the fourth quarter of 2022 compared to net income of $27.5 million for the prior year period. The net loss was attributable to our lower gross margin and higher SG&A. Net income for the fiscal year 2022 increased to $245.4 million, or 3%, compared to $238.4 million for the fiscal year 2021. The increase in net income for the year was attributable to our sales growth and improved gross margin. Our weighted average diluted share count was $45.8 million for the 2022 fiscal year, which is consistent with the prior year number. Adjusted EBITDA decreased by 37% to $38.9 million for the fourth quarter, compared to $61.8 million for the same period in the prior year. For the full year, adjusted EBITDA increased 12% to $464.3 million compared to $415.1 million for the 2021 fiscal year. Adjusted EBITDA margin decreased 30 basis points to 11.6% for the 2022 fiscal year. Now I'd like to provide a brief update on our balance sheet and cash flow statement as shown on slide 12. Networking capital at the end of the 2022 fiscal year was $760 million compared to $616 million at the end of the 2021 fiscal year. The increase in networking capital is primarily attributable to higher receivables resulting from our strong sales growth and an increase in inventory resulting from cost inflation, new acquisitions, and our decision to increase stocking levels to mitigate supply chain disruptions. While inventory levels remain higher than we would like, as product lead times come down and supply chain uncertainty decreases, we are making significant progress reducing excess inventory from our branches. Cash flow from operations increased to approximately $105 million in the fourth quarter compared to approximately $51 million in the prior year period. The improvement in cash flow was primarily driven by our inventory reduction efforts. Cash flow from operations increased to approximately $217 million for the full year compared to approximately $211 million in the prior year. The improvement was primarily attributable to our increased profitability. We made cash investments of $73 million for the fourth quarter compared to $85 million for the same quarter in 2021 and $284 million for fiscal year 2022 compared to $182 million for fiscal year 2021. The increase in cash investments reflects greater acquisition activity in fiscal year 2022 compared to fiscal year 2021. In October, our board approved a $400 million share repurchase authorization, and during the fourth quarter, we returned $25 million of capital to shareholders through our repurchase activity. Net debt at the end of the 2022 fiscal year was approximately $380 million compared to approximately $247 million at the end of the prior year. Leverage increased to 0.8 times for trailing 12 months adjusted EBITDA compared to 0.6 times at the end of the 2021 fiscal year. The higher leverage primarily reflects our increased borrowings for acquisition investment. While our leverage increased in fiscal year 2022 compared to fiscal year 2021, we're still below our target net debt to adjusted EBITDA leverage range of one to two times. At the end of the year, we had available liquidity of approximately $516 million, which consisted of approximately $29 million of cash on hand and approximately $487 million in available capacity under our ABL facility. On slide 13, we highlight our balanced approach to capital allocation. Our primary goal with regards to capital allocation is to invest in our business, including the execution of our acquisition strategies. We are also committed to maintaining a conservative balance sheet as demonstrated by our target leverage ratio. To the extent we have excess capital after achieving these objectives, the share repurchase authorization provides us the mechanism to return capital to our shareholders like we did last quarter. Our priority from a balance sheet and capital allocation perspective is to maintain our financial strength and flexibility without sacrificing long-term growth or market opportunities. I now will turn the call over to Scott for an update on our acquisition strategy.
spk06: Thanks, Sean. As shown on slide 14, we acquired three companies in the fourth quarter, bringing our total to 16 for 2022 with a combined trailing 12-month net sales of approximately $240 million. Since 2014, we have acquired 80 companies with approximately $1.5 billion in trailing 12-month net sales added to site one. Turning to slides 15 through 17, you will find information on our most recent acquisitions. On October 13th, we acquired Madison Block and Stone, a wholesale distributor of hardscapes in Madison, Wisconsin. This acquisition establishes a leading hardscapes position in the Madison market and expands the range of landscape products and services we provide to our customers. On December 16th, we acquired Telluride Natural Stone, a wholesale distributor of hardscapes located in Phoenix, Arizona. Telluride extends our leading hardscapes presence across the Phoenix market. Also, on December 21st, we acquired Whittlesea Landscape Supplies, a wholesale distributor of landscape supplies and hardscapes with seven locations serving the Austin, Texas market. Whittlesea establishes a landscape supplies and hardscapes platform to serve Central Texas and expands the products and services we offer our customers. By teaming up with these three high-performing companies, we continue to deliver on our strategy to expand the products, services, and overall value we offer our customers across all markets. Summarizing on slide 18, our acquisition strategy continues to create significant value for Site 1. 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 Site 1 in 2023. We are honored and excited that so many owners continue to choose SiteOne as a great home for their family businesses and continue to thrive in leadership positions across our company. These strong leaders and innovators are a powerful force within SiteOne as they help us improve the value that we deliver to customers and suppliers. They bring fresh ideas and entrepreneurial agility, and we support them and their teams with the resources and flexibility to pursue both their personal and professional passions. Ultimately, we all win. Stronger together. 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 new companies through acquisition in 2023, creating terrific value for all our stakeholders. I will now turn the call back to Doug. Thanks, Scott. I'll wrap up on slide 19.
spk09: As we look ahead into 2023, we expect inflation to continue moderating as we lap the steep increases from the last two years. For the full year, we expect low single-digit inflation, with most of this occurring during the first half of the year. In terms of end markets, we expect new residential construction, which comprises 21% of our sales, to decline approximately 20% compared to 2022, as consumers adjust to high home prices and mortgage rates. We expect a more stable environment in the new commercial and recreational construction, which represents 14% of our sales. With good backlogs and healthy bidding, we believe this market could grow slightly versus the prior year. Major repair and remodel, which comprises 29% of our sales, is expected to be relatively flat. Typically in a downturn, major repair and remodel has proven to be more durable than new construction, and we expect that to be the case again in 2023. Note that low unemployment and high home values both support the major repair and remodel market, though lower home turnover could be a headwind. Finally, the maintenance end market, which comprises 36% of our sales, has typically been steady and pass downturns. Maintenance dollar demand from our customers has remained steady, and we expect that to continue in 2023 with much lower inflation translating into reasonable volume. In total, we expect industry sales to decline in 2023, and with our ability to gain market share, we would expect our organic daily sales to be flat to down mid-single digits. with modest price inflation being offset by reduced volumes. 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 to increase modestly. Accordingly, we also expect adjusted EBDA margin to normalize in 2023, providing a 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 anticipate our fiscal 2023 adjusted EBDA 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 is a true 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.
spk02: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. Please press 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. We ask that you limit yourself to one question and a follow-up so that others may have the opportunity to ask questions. you may re-enter the queue by pressing star 1. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from David Manthe with Baird. Please proceed with your question.
spk08: Yeah, thank you. Good morning, everyone. The first question, when you're talking about the guidance here, we can back into your estimated EBITDA, which looks like about 10%. And then what you just said, Doug, about SG&A as a percentage of sales being slightly higher, I guess we can impute a gross margin that looks like maybe 34.5%. First of all, I'd just like to see if that's in the ballpark. And then at that level, it implies that SG&A is up just a couple percent. Could you just talk about your confidence interval around both the gross margin at that level and then how you plan on keeping SG&A sort of in that range? What are the moving parts from year to year?
spk09: Yeah, so that's the ballpark. We expect gross margin to fall somewhere between 34 and 34.5, so your estimate there is ballpark. And then on the SG&A side, we're going into the year with confidence in our team that we're going to be able to outperform the market. We've got a lot of terrific momentum with our sales force and with our customer experience, etc., but we're going to monitor the market very closely. You know, as spring comes in and March and April, you know, we know what we would expect to see. And if we find ourselves, you know, in a tougher situation, one of the benefits of Site 1 is we're decentralized, right? We have our field support at the center, and the field is very fast and very flexible, and they can pull back very quickly to the demand that they're seeing. And we can do that in each market. So if markets are strong, you know, those two teams can stay on offense. If we have parts of the country that are weak, you know, we'll pull in those markets very fast. So that's how we'll manage SG&A because we know we're in a tougher environment and, you know, management of the SG&A so that we don't get a significant amount of deleverage will be very important for us in 2023. Yeah, makes sense.
spk08: And then just a quick one, John, could you tell us what's the current expected 2023 contribution from acquisitions that have been with the company for four full quarters by your convention?
spk07: Well, I would point to the numbers in the presentation with regards to the actual sales from those businesses this year. I believe we're carrying over $85 million of revenue for the 2021 acquisitions into 2023, or the 2022 acquisitions. So, I mean, just ballpark math, you know, there were about roughly $220 million in run rate, and we recognized about $85 million in revenues this year from those acquisitions.
spk08: Got it. Okay. Thanks very much.
spk02: Our next question comes from Ryan Merkel with William Blair. Please proceed with your question.
spk12: Hey, good morning, and thanks for taking the questions. I wanted to ask about first quarter 23. I know you don't want to give quarterly guidance, but just given it's a really big comp, I was just hoping for a little help in how to think about sales and gross margins. Should we think about organic sales down kind of low single digits, And then gross margin is, I think, typically seasonally a little bit below where 4Q comes in. Is that the right way to think about it?
spk07: I think that's fair. We did have a very strong first quarter last year, so we will be facing – I mean, I'll just highlight some of the moving parts. We did have a very strong first quarter last year from a volume perspective. especially kind of January and February started off strong from that standpoint. Going into this quarter, first quarter, we will have one less selling day from that standpoint. On the positive side, price inflation will probably be strongest in the first quarter of this year from that perspective. And in general, our gross margins are lower in the first quarter than they are in the remaining quarters from that standpoint.
spk12: Got it. Okay. That's helpful. And then I was a little surprised the repair and upgrade is assumed to be flattish in 23. I was a little worried that during the pandemic that part of the business saw kind of a big boost and might normalize. What are you hearing from contractors on this part of the business in 23?
spk09: Right. We're still hearing, you know, from our contractors, it's really gone to where they just had too much work to do to where they have a reasonable amount of work. And, you know, most of our contractors are telling us that they can see, you know, a good amount of work through the first half of the year. You know, repair or remodel doesn't have a long lead time, so, you know, they don't have, you know, tremendous backlogs there. Now, they did during the COVID years. So, you know, we'll see when we get into the second half. But they're saying things are good for the first half. And then, you know, we would remain somewhat optimistic that that market would hold up in the second half. You know, if you remember, the professional side of repair remodel was highly constrained by labor all through COVID. And so, you know, we didn't see the big run-up that you saw on the retail side. And so, you know, we have less, you know, there was less pull forward, if you will. So what we're hearing from our contractors is they see, you know, a good amount of work, you know, for the first half of the year. We'll see the visibility is less clear for the second half, but we'll see how that develops.
spk12: Makes sense. We'll pass it on. Thanks. Thank you.
spk02: Our next question comes from Mike Dahl with RBC Capital Markets. Please proceed with your question.
spk11: Hi, thanks for taking my questions in the color so far. It's just a follow up on some of the end market commentary. You know, when you talk about new res down 20, the stable commercial, Ryan just asked about R&R. Just to clarify, are those volume assumptions or are those all in assumptions? And, you know, appreciate that you gave kind of a low single digit price inflation, but If those are all-in numbers, can you help us understand if there's any differences in kind of the volume assumptions by end market?
spk09: Yeah, when we think about those markets, we kind of think about them as all-in. I mean, it's really hard to dissect volume. So when we're making those comments, that would be kind of an all-in.
spk07: Yeah, I don't think, it's primarily like obviously resi is going to be driven by volume, but I don't think there's a, I think the trends we would expect would be similar across the price would not vary that significantly by end market. So, while we're talking all in, in those numbers specifically, volume is what's really driving the differences.
spk11: Got it. Okay. That makes sense. And then just on the price trajectory, it's helpful color in terms of the December commentary. Could you comment at all about January? And then when you talk about price low single digits in 23 with the majority in the first half, do you actually anticipate that as you get into the second half, we'd see a net headwind on price? Or are you envisioning just a flatter environment on price as you go through the year?
spk07: We're envisioning a flatter number on price throughout the year. So relatively, built into our assumptions is relatively flat price in Q4. And really what we're going to see is kind of the tail off. I mean, there's some price increases going in right now. As I mentioned, there's some commodities that actually came down. So those prices that are going in right now would carry throughout the year and then be offset by the commodities coming down. But we will have runoff of kind of a lot of the larger price increases that happened last year throughout the year. And it's a pretty steady decline.
spk09: consider the fourth flat. John, correct me if I'm wrong, but it's a pretty steady decline in inflation through those quarters.
spk11: Got it. Okay. Thanks, Doug. Thanks, John.
spk02: Our next question comes from Matthew Boulet with Barclays. Please proceed with your question.
spk05: Hey, good morning, everyone. Thanks for taking the questions. I wanted to go back to the SG&A question one more time. It was a helpful color you gave there in an earlier response. You know, just thinking about sort of, you know, the specifics around, you know, labor and some of the growth investments you've been making, and obviously you guys are guiding to the sort of, you know, modest deleveraging in 2023. Just curious if you can kind of pick apart some of the details there on the SG&A side, because it does seem like a pretty important component there to achieving your EBITDA guide for the year. Thank you.
spk07: Yeah, well, we went into this year just broadly. We made a lot of great investments last year, and kind of one of the things we're trying to do this year is harvest those investments. So it's more of we've made investments. We want to drive kind of the results from those investments we made last year with regard to it. Having said that, you know, we still do face challenges like everybody else in the marketplace that, you know, wage inflation isn't going away right now. And so we're going to pay our people. from that standpoint. And so we'll be managing those costs with regards to it throughout the year. And, you know, as Doug mentioned, it's very dynamic and can be done locally. But I would say probably less new investment this year, more harvest of last year's investments, and then moderating as we go throughout the year SG&A to demand.
spk09: And when John talks about harvesting, you know, we think of all the work we've done on SiteOne.com, MobilePro, DispatchTrack, our CRM that we put on the Salesforce. You know, those all have the potential to drive better productivity in our branch associates, in our sales associates, et cetera. And so we're really, that's what we're extremely focused on is getting those productivity improvements because this is the year that that's going to be very important. So that's just a little more color on top of what John said.
spk05: Gotcha. And are you able to disclose a dollar figure or any type of quantification around those investments that sort of were there that may be ramping down this year?
spk09: Not beyond the general guidance that we'll have some modest leveraging with the sales. flat to slightly down or flat to down mid-single digits. You can do the math there. With wage inflation, that's going to take some productivity improvement. Our investment dollar amount is not that material, quite frankly, in terms of a savings for 2023. What's much more important is that we get the productivity and harvest the benefit of those investments.
spk05: Gotcha. Okay, thank you. And then just the second one is back on the pricing side. That was also certainly a very helpful color you gave in the prior question, but just any color around the commodity piece of the business and what you're seeing around fertilizer inputs and PVC and things like that, sort of what's assumed on the commodity side specifically within your low single-digit price inflation guide. Thank you.
spk07: Those Each commodity is different. Obviously, we have negative, we've already seen negative growth specifically on fertilizers going into the spring where we buy there from the peaks, I should say. And then similarly, we've already seen price decreases on PVC pipe. I mean, it's difficult to express everyone because The commodities are different, but for instance, I think we saw going into the fourth quarter, I haven't got an update number, but it was like 10% to 15% decreases on PVC pipe, but that is a relatively small component of a large basket of products.
spk05: Got it. All right. Thanks, John. Thanks, Doug. Good luck, guys. Thank you.
spk02: Our next question comes from Keith Hughes with True Securities. Please proceed with your question.
spk10: Thank you. Questions on the share repurchase program. I'm sure there's an opportunistic aspect of this, given the stock price and where we are at this point. But is this going to be a longer-term change where share repurchase is going to be part of capital allocation in addition to the acquisition activity? I'm sure you're going to continue longer term.
spk07: Yeah, it's a long-term process. It's not a quarter-by-quarter process as we think about it, you know, as we described our capital allocation waterfall. Our number one priority is to invest in acquisitions and grow the business and invest there. So that is number one. And if we use all of our capital to do that, we'll be very happy if we can deploy it that way. But in so much as we maintain our conservative balance sheet and acquisitions are very choppy and we find that we have excess capital, we would expect to deploy some of that to share repurchases as a way to return back to our shareholders. So I guess the only other thing, just to kind of clarify that and maybe give some reality, is the fact that, you know, here we are beginning of a year. We've got a full pipeline of acquisitions going forward. We're very optimistic about that. We're starting a new year from that standpoint. So kind of from our frame of mind, you know, we don't feel obligated to go out and purchase capital because we're primarily focused on investing it right, purchasing shares, investing it right at this moment. But, you know, each year as we go throughout the year, we will evaluate that and looking at our opportunities.
spk10: Okay. You know, given the, just building on that question, given the amount of spend of acquisitions in 22, it seems as though with even in a, you know, down year coming up here in 23, you would have the capital, figure where the debt ratio is to do both. I guess my question is, is there a capital allocation plan in 23 to get the debt, the debt, the leverage up more to the, at least the midpoint of your range, utilizing both acquisitions as well as share repurchase?
spk09: You know, we certainly, we can do share repurchases. And as John mentioned, as we get toward the, you know, mid to the second half of this year and see how things are going and there's a little more certainty on how things are going to work out, you know, that would be a lever that we can pull. One of the things we want to keep in mind, though, is, you know, we're heading into a down cycle potentially, whether it's a pause or a longer cycle, we don't know. And we want the strategic flexibility to do even any larger deals that might come down the pike. I mean, we don't typically do large deals. But there are a few that are out there that could be in the $250, $300, even $400 million range if particular companies were for sale. So we want to make sure that we don't get the leverage to such a point, especially going into tougher waters, that we wouldn't be able to do those deals. be from a target standpoint. We still think the one to two is a good target, but at this point with the uncertainty ahead, we feel it's prudent to be maybe a little below that range at this point.
spk10: Okay. Thank you.
spk02: Our next question is from Damian Cross with UBS. Please proceed with your question.
spk04: Hi. Good morning, everyone. Morning, Damien. I wanted to ask you about your free cash flow expectations for the year. I think you made the comment. You are making progress on reducing excess inventory. But, you know, I think free cash flow conversion a little bit lighter this year, just like about everybody else out there. Could you maybe give us a sense on this year, you know, how you're thinking about free cash flow?
spk07: We think we will. Our objective every year is to hit net income on free cash flow. We think this year, as we're hopeful to achieve that this year, we think this year as a result of kind of not having the supply chain issues, we think we can make good progress on our inventory levels. We were very pleased with, you know, going into kind of the first quarter, we had quite a bit of a hole this year. We were very pleased by the team's efforts in the second half of this year to still post the positive growth on free cash flow after the large hole we were in after the first quarter. And as I said, we think there's still opportunity to continue to improve that. Next year, as supply chains get less uncertain, lead times come down, an opportunity to improve turns even further next year, which would put us at or above kind of our average free cash flow goal.
spk04: Got it. And you all have been very busy on the deal execution front. Just curious if anything related to market conditions or site-specific factors have helped drive that higher volume of deals, or is it just more random timing? And kind of second part related to these deals, you know, RMF kind of suggests that, you know, that cost of them has maybe gone up from, you know, kind of half a turn of sale, half a turn to one turn on sales. now maybe approaching one and a half times, even though public equity valuations are down. So just curious if that's kind of related to the mix of deals you guys are doing or if you've actually seen the deal space getting more competitive or anything like that.
spk06: Yeah, I'll hit the second one first. I think that that's probably a misleading way to look at it, not the way we would look at it. We're valuing off of earnings. And so the profitability of the businesses that we're partnering with really drives that sales multiple that you're talking about. So it's not a way that we typically would look at the valuation. So I wouldn't read too much into that in terms of increased competition or anything like that. I think it's been quite steady. And we've been pretty consistent in saying that certainly there are other folks out there that are running their acquisition playbook. but there's a lot, a lot of white space, and quite honestly, more often than not, the majority of our deals are still exclusively sourced, so we feel very good about continuing that. And then in terms of M&A, I think it's just a consistent effort on our part. We stay very close through our field contacts over the years and our strong M&A team, so the deal flow when these entrepreneurs are ready to transition their family business you know, we believe that we're consistently their first choice. And so we expect there to be continued deal flow in 2023. It's more just a continued momentum. It obviously can be very choppy, but we feel very good about, you know, going into 2023. I don't know that there's any specific market factor that is pushing people dramatically. Although, you know, certainly the the more likely to sell side. If they were on the short end of ready to, if they had a short window during which they were ready to sell anyway, that may push them a little upward in that window.
spk04: Great. Makes a lot of sense. Thanks guys. Best of luck. Thank you.
spk02: Our next question comes from Andrew Carter with Steeple. Please proceed with your question.
spk03: Hey, thanks. Good morning. I'll just take one. Kind of built on the last question, I guess I want to go a different way with it. Certainly looking at the sales multiple, if you're buying on higher earnings, how much certainty do you go out there and look at your M&A targets now, knowing we're at the tail end of the cycle, knowing that they probably benefited just like you in terms of even a margin in terms of sales? Can you go out this year and approach their numbers with, hey, this is certainty, we can pay you on that? Or is there any possibility that if things deteriorate further, you start to say, no, we're going to take a step back and potentially not lean on M&A as heavily. I want to understand how you're thinking through that potential wrinkle.
spk06: Yeah. We're not looking to step back in any fashion at all. I think we just have to continue with our disciplined process of how we value businesses. We're looking at the sustained earnings, so we don't look at just the last 12 months. We look at the last several years and certainly there has been a bump in some businesses due to whether it's inflation or COVID or various factors. And we consider those, you know, because we are, you know, long-term investors, we're looking for the best companies that are going to perform over a full cycle. So we try not to get too dramatically swayed by say the last 12 months being slightly up or slightly down, but yeah, So I don't think that that will impact our ability to do acquisitions or our appetite for them.
spk09: The other thing that we do is, you know, we do a lot of earnouts where, you know, we disagree on the future and the owner thinks it's going to be stronger and we think it's going to be weaker. You know, we just do, you know, a one to three year earnout where we can kind of place a reasonable bet and then share in the benefit or the risk together with those owners. And we do that quite a bit. just for the very reason you're talking about, that things are uncertain. And so that's another way that we manage that uncertainty of the future earnings and are able to pay fair prices but reasonable prices. And most owners are quite happy to do that together.
spk03: Thanks. Thanks, guys. I'll pass it on.
spk09: Thank you.
spk02: Our next question comes from Jeffrey Stevenson with Loop Capital Markets. Please proceed with your question.
spk01: Hi, thanks for taking my questions today. First, I was wondering if you could give any more color on your different assumptions at the low and high end of your fiscal 23 guidance.
spk07: I mean, the great uncertainty here is sales. from that standpoint. And I mean, that's what we're going to be managing to. And I don't think it's not a dynamic where sales will drive SG&A and these things are all linked together. But certainly, there's a great uncertainty next next year is kind of how this slowdown is actually going to play out.
spk09: So you can take the top end of our sales guidance and the bottom end, and that's the major driver of the 395 to 425 outcome. Got it. Okay.
spk01: Now that helps. And then I just wanted to ask how you're thinking about DIY versus professional in 2023. And more specifically, with prices moderating, could there be some opportunity for improvement on the DIY side this year?
spk09: Yeah, DIY is a very small part of our business, you know, 2% or so. So we, you know, we're very oriented toward the professional side. So we don't really, you know, whatever happens in DIY would not have a meaningful impact on our business.
spk03: Okay, thank you.
spk02: We have now reached the end of our question and answer session. I would like to turn the floor back over to Doug Black for closing comments.
spk09: Okay. Well, thank you, everyone, for joining us today. We very much appreciate your interest in Site 1, and we look forward to speaking with you again after the first quarter. I'd also like to thank our amazing associates for doing such a great job and our customers for allowing us to be their partner and our suppliers for supporting us so strongly as we build our company. Thank you very much.
spk02: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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