Earnings Call: Q1 2019

May 1, 2019

Greetings. Welcome to SiteOne's First Quarter 2019 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, John Guthrie, CFO. Mr. Guthrie, you may begin. Thank you, and good morning, everyone. We issued our Q1 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 these slides during our call. 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 release and in our filings with the Securities and Exchange Commission. Additionally, during today's call, we will discuss non GAAP measures, which we believe can be useful in evaluating our performance. A reconciliation of these measures can be found in our earnings release and in the slide presentation. I would now like to turn the call over to Doug Black. Good morning, and thank you for taking the time to join us today. During the Q1, we delivered solid organic sales growth, double digit growth in overall revenue and strong gross margin expansion. Adjusted EBITDA in the quarter was dampened by the addition of acquisitions that are traditionally loss making in the Q1 and by the timing of other costs and investments during our slowest revenue period. Through April, we also added 4 more terrific companies to SiteOne. Overall, we are off to a good start, and we expect 2019 to be a successful year of performance and growth. 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 the quarter. John Guthrie will then walk you through our Q1 financial results in more detail, and Scott Salmon will address our acquisition strategy. It is my pleasure to welcome Scott to his first earnings call as SiteOne's new Executive Vice President of Strategy and Development. Scott's transition to this critical leadership role has been seamless, and he will update you later in the call on our recent acquisitions and his activity to help grow and convert our large pipeline of opportunities. At the end of the call, I will discuss the trends that we are seeing in our markets so far in 2019 and address our outlook for the year. As shown on Slide 4 of the earnings presentation, we have grown our footprint as the largest and only national wholesale distributor of landscaping products to over 5.40 branches and 3 major distribution centers in the United States and Canada. We entered 2019 with approximately 11% share of the wholesale landscaping products distribution market, which is 4x larger than our nearest competitor and larger than 2 through 10 combined. As a wholesale distributor, we benefit from the fact that the landscape market is quite fragmented, with over 3,000 suppliers trying to reach approximately 500,000 residential and commercial landscaping contractors. Our size and scale, entrepreneurial and customer focused culture, broad product range and balanced mix of business across the maintenance, repair and upgrade and new construction end markets give us agility in the landscaping market and provide multiple avenues for profitable growth. We continue to expand our full product line offerings and build our commercial and operational capabilities, which increase the value we provide to customers and suppliers and give us significant competitive advantage. Turning to Slide 5. Our strategy combines the scale, resources and capabilities of a large world class company with the passion, deep knowledge and entrepreneurialism of our local teams in order to deliver superior value to our customers and suppliers. We further drive this strategy by acquiring leading local and regional companies to fill in our product portfolio, add terrific talent to our teams and expand our branch network across the U. S. And Canada. We believe the combination of these efforts will allow to gain market share both organically and inorganically in order to accelerate our growth and profitability. To fully realize the benefits of our strategy, we must have best in class commercial and operational capabilities. To do this, we are focused on 6 initiatives. Of these initiatives, category management and pricing are the most advanced, supply chain and sales force performance are in the middle innings, and marketing and e commerce and operational excellence are still in the very early innings. We expect our commercial and operational initiatives to help improve the value that we deliver to our customers and suppliers, expand our margins and accelerate our organic growth throughout the cycle. Slide 6 shows SiteOne's history and the results from our strategy so far. We are proud of our track record of performance and growth over the past several years even as we have been investing heavily in our IT, category, marketing, supply chain, finance, operational excellence and acquisition teams as well as in our underlying systems infrastructure, including e commerce. We expect these investments to yield results in 2019 and over the next several years even as we continue to invest for the longer term. And so we remain well positioned to make steady progress toward our stated midterm adjusted EBITDA margin goal of 10% plus. Turning to Slide 7. We 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 acquisition. 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 by acquisition 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 Q1 performance as shown on Slide 8. We achieved 12% overall sales growth in the Q1 with a nice balance of 5% organic sales growth and 8% contribution from acquisitions. Weather was difficult during February early March, but the season ramped up nicely in the last 2 weeks of March, supporting a solid organic sales outcome for the quarter. Agronomics product growth, which was strong in 2018, continued to be very strong with 7% organic daily sales growth achieved in the Q1. Geographically, we saw stronger growth in the East and weaker growth in the West, particularly in California, where we experienced exceptional amounts of rain and faced a tougher comparable sales growth during the Q1 of last year. We have seen good momentum in sales continue into April. And based on conversations with customers and suppliers, we believe that steady demand supports our mid single digit sales growth forecast for the year. In terms of gross margin expansion, we are very pleased to be off to a great start to the year with a 200 basis point improvement to 31.2%. While some of this was due to an easy comparable in 2018 and from acquisitions, the underlying improvement is on track to support our EBITDA margin improvement target for the year. Our ability to manage price versus cost and our opportunistic inventory buys, which were enabled by the 3 DCs, were key drivers in our favorable gross margin outcome. In terms of SG and A, we continue to invest in our company. And although the increase in spend is high in percentage terms, we are essentially on track to achieve our planned spend for the year. Keep in mind that most of the acquisitions that we add, which are not in the Sunbelt, will traditionally lose money in the Q1. With Atlantic being our largest acquisition last year, our acquisitions in total increased our 1st quarter loss. Additionally, we continued to invest in our initiatives, including e commerce and operational excellence. Operational excellence is a new initiative that we launched last year focused on making SiteOne as efficient and effective as possible across all interactions with our suppliers and customers for each of our major product lines. As a part of this initiative, we rolled out barcoding to over 40 branches during the Q1. We are very excited about the customer and supplier benefits of operational excellence in addition to the expected gains in organic growth, SG and A reduction and gross margin improvement from this initiative. Finally, we continue to execute on our acquisition strategy with the addition of 2 companies during the quarter and 2 more so far during the Q2. We are excited to bring aboard these high performing companies, which add terrific talent to SiteOne and expand our product offering and footprint. In summary, we are pleased with our progress and momentum as we continue to increase the value we create for our customers and suppliers, deliver strong financial results and invest in our capabilities for the future. Now John will walk you through the quarter in more detail. John? Thanks, Doug. I'll begin on Slide 9 with the income statement for our first quarter results. We reported a net sales increase of 12% to $417,000,000 in the Q1. During the quarter, we had 64 selling days, which was unchanged compared to the prior year period. Organic daily sales grew 5% in the Q1 driven by strength in our agronomics product line. Organic daily sales for agronomic products, which includes fertilizer, control products, seed, ice melt and equipment, grew 7% for the quarter aided by continued strength in the economy and price increases in response to cost inflation. Organic daily sales for landscaping products, which includes irrigation, nursery, hardscapes, outdoor lighting and landscape accessories grew 3% for the quarter. With good demand, the markets that performed well in the Q1 were those where weather allowed for landscape installations. We saw good growth in the Southeast up through the Mid Atlantic and weakness out west in California due to wet weather and in the mountain states, which are experiencing a much later spring this year. Pricing during the quarter increased 4% as we pass through price increases from our suppliers. We expect 3% to 4% price inflation for the full year. Acquisitions contributed approximately $30,000,000 or 8% to net sales growth for the quarter. Gross profit increased 20% to $130,000,000 in the Q1, while gross margin expanded 200 basis points to 31.2%. The improvement in gross margin was attributable to improved pricing, opportunistic purchases of inventory preceding supplier price increases and contributions from acquisitions. While we are certainly pleased with the gross margin results this quarter, we want to temper expectations for the rest of the year. We are working our way through inventory purchased on opportunistic buys, and it is important to remember that gross margin decreased 90 basis points in the Q1 of last year. It wasn't until the Q2 of last year that pricing stabilized in the marketplace. Product mix negatively impacted gross margin by approximately 10 basis points during the quarter. Selling, general and administrative expenses or SG and A increased by 18% to 150 $6,000,000 in the Q1 due to operating expenses from acquisitions and investments to support our growth. SG and A as a percentage of sales increased 180 basis points to 37.3%, primarily due to increased SG and A in our seasonally lowest sales volume quarter. Acquisitions accounted for approximately 120 basis points of the SG and A increase. The acquisitions we have made over the past year have contributed positively to our gross margin that have also carried higher SG and A. The seasonally low sales volume in the Q1 magnified the impact of the increased SG and A on our results. The seasonally low sales volume also accentuates the impact of increased SG and A on the base business results. Our investments in e commerce and operational excellence contributed to the growth in SG and A as well as an increase in health care costs. We remain committed to achieving our SG and A goals for 2019 as we expect the impact from acquisitions and base business spending will be much more balanced against our revenue over the course of the full year. We recorded an income tax benefit of $9,600,000 in the Q1 of 2019 compared to a benefit of $10,200,000 in the Q1 of 2018. For the Q1 of 2019, our effective tax rate was 28.5% as compared to 37.5 percent for the Q1 of 2018. The change in the effective tax rate due primarily to a decrease in the amount of excess tax benefits from stock based compensation. Excess tax benefits of $800,000 were recognized for the Q1 of 2019 as compared to $3,000,000 for the Q1 of 2018. We currently expect our 2019 effective tax rate will be between 26% 27%, excluding discrete items such as excess tax benefits. We recorded a net loss of $24,100,000 in the quarter compared to a net loss of $17,000,000 in the prior year. The net loss was driven by higher SG and A and interest expense. Our weighted average basic share count was 41,000,000 for the Q1 of 2019 compared to 40,100,000 for the Q1 of 2018. The increase reflects option to exercise activity during the last 12 months. Adjusted EBITDA decreased to a loss of $5,900,000 compared to a loss of $5,100,000 for the prior year period. Now I'd like to provide a brief update on our balance sheet and cash flow statement as shown on Slide 10. First off, we adopted the new lease accounting standard during the Q1 of 2019. The adoption of standard resulted in the recognition of operating lease liabilities of $204,000,000 with corresponding right of use on our consolidated balance sheet as of March 31. Of the operating lease liabilities, $45,000,000 is reported as a current liability and is reflected in our net working capital, which was $483,000,000 for the quarter. Excluding the lease liability, working capital for the quarter would have been $528,000,000 a $68,000,000 or 15% increase with the prior year's Q1 results. The increase in working capital primarily reflects inventory and receivables attributable to our acquisitions and a reduction in accounts payable due to the timing of our inventory purchases this quarter. Cash used in operations was $49,000,000 in the Q1 compared to a use of $41,000,000 in the prior year period. The change in cash used in operations was primarily attributable to the reduction in accounts payable. We made cash investments of $19,000,000 for the quarter compared to $55,000,000 for the prior year period. We spent less on acquisitions in the first quarter of 2019 compared to 2018, primarily because of Atlantic Irrigation, our largest acquisition of last year, occurred in the Q1. Net debt at the end of the quarter was $627,000,000 and leverage was 3.6x our trailing 12 month adjusted EBITDA, which is down from 3.7 times at the same point last year. The modest decrease in leverage reflects our increased profitability combined with less investment in acquisitions in the Q1 of 2019. Our long term year end leverage target is 2 to 3 times net debt to adjusted EBITDA. We expect leverage to be in the upper half of that range at year end. 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 Scott for an update on SiteOne's acquisition strategy. Thank you, John. To start off, I'm excited to be here and I look forward to getting to know many of you. I have been very impressed with the development team and the infrastructure in place at SiteOne, which supports integration of our acquisitions. In the 7 weeks that I've been here, we've closed 2 deals and I've participated in 4 formal offers and been directly engaged in initial discovery with more than 10 prospects. That level of activity right from the beginning speaks to the skill and experience of the development team, the robust sourcing engine which heavily leverages the local expertise of our field leadership and to the maturity of the acquisition capability here at SiteOne. As shown on Slide 11, we have now acquired 39 companies since the beginning of 20 14. They added 208 branches to SiteOne and contributed approximately $822,000,000 in sales on a trailing 12 month basis. Have made good progress accelerating our pace of acquisitions over the past 5 years and are off to a solid start to 2019 with 4 acquisitions through the 1st 4 months of the year, representing $42,000,000 in trailing 12 month sales. Now as we turn to Slides 12 through 15, you will be able to find information on our 2019 acquisitions to date. On January 8, we acquired Cutting Edge Sand and Rock, which is a leading distributor of hardscape and landscape supplies in Phoenix, Arizona. The Cutting Edge acquisition expands our hardscapes and natural stone presence across the Greater Phoenix Metropolitan area. On February 28, we completed the acquisition of All Pro Horticulture, which has one location on Long Island, New York, it's a leading distributor of agronomics and erosion control products in the Metro New York market. This acquisition aligns with our mission to be the best full line distributor to landscape professionals and represents our 1st large agronomic hub in the State of New York. On April 5, we acquired Landscape Depot Supply, a leading distributor of hardscape and landscape supplies with 3 locations in the Greater Boston, Massachusetts market. Landscape Depot Supply complements our existing branch network in the Greater Boston market and significantly strengthens our hardscape and landscape supply business there. On April 24, we acquired Fisher's Landscape Depot, a leading distributor of hardscapes and landscape supplies with 2 locations in Western Ontario. Fishers Landscape Depot is a natural fit with SiteOne as they add hardscapes and landscape supplies to our existing product offerings in Ontario. 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 offering and also very importantly add outstanding talent to our team. Our pipeline remains robust and with 4 acquisitions year to date, our M and A strategy has solid momentum and we continue to build our reputation as the buyer of choice in the industry. We would like to thank all the leaders of SiteOne who are great ambassadors, 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 expect to close additional acquisitions throughout the year, which should contribute nicely to our growth in 2019 and beyond. And with that, I'd like to turn the call back over to Doug to discuss our outlook. Thanks, Scott. I'll wrap up on Slide 17. As I mentioned on our call in February, we view 2019 as a year when we bring together many of our initiatives that we have been working on in order to accelerate our market share gains, adjusted EBITDA margin expansion and cash flow generation even as we continue to launch new exciting initiatives like e commerce and operational excellence. We will also continue to add terrific companies to our family through acquisition. In terms of markets, we are seeing continued steady demand in maintenance, which comprises approximately 40% of our business with a good economy and price inflation. Further, we are steadily gaining market share in this category with our strong WESCO brand and an improved team and capabilities. We are also seeing good demand in repair and remodel, which comprises approximately 20% of our business and is benefiting from the strong economy, low unemployment and strong growth in jobs and wages. Both the commercial and residential new construction markets are steady, and our customers still have good backlogs, especially in new commercial construction. We continue to operate in a labor constrained market, so the number of construction days available will be an important factor in our growth in these end markets throughout the year. Overall, given our balanced mix of business and broad geographic coverage across the United States and Canada, coupled with our improved capabilities to gain market share and with the benefit of 4 months behind us, we still believe that we can achieve organic daily sales growth in the mid single digits for 2019. In terms of acquisitions, as Scott mentioned, we have a strong pipeline of potential deals, and our current activity is robust. Accordingly, we believe that we will continue to add terrific companies to SiteOne during the remainder of 2019. Taken all together, we reaffirm our adjusted EBITDA guidance for the year to be in the range of $193,000,000 to $207,000,000 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 good about our momentum so far in 2019 as we realize the benefits from our initiatives and leverage our stronger company to deliver performance and growth. 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. At this time, we will be conducting a question and answer Our first question is from Nishu Sood with Deutsche Bank. Thank you. I wanted to start out by asking you about the pricing environment. You're expecting the 3% to 4% pricing to continue and we are getting to the year over year overlap with when pricing accelerated last year. Can you talk about the trends as they've developed? The inflation that started to come around last year seems to be persisting. So just wondering if you could talk about the development of what areas of the business that has continued in and what's anchoring that outlook for the pricing to continue in 2019? What we saw a number of our suppliers at the beginning of this year, really at the start of the calendar year put in place price increases, reflecting their increased costs last year primarily. And the market seems to have passed most of those through. We would expect those to really persist for the remainder of the year. And given the pretty strong demand out there, we don't see anybody dropping their prices throughout the year. Got it. And second, I wanted to ask about SG and A leverage. Obviously, there was a lot of focus on it last year. This year, you've laid out that you expect to see SG and A leverage this year. Clearly, acquisitions, your pace of acquisitions could have some impact on that. The more acquisitions you have, it would seem to make SG and A leverage harder. The timing of expenses in 1Q, I mean, if that reverses, could obviously give some boost. So at this point with the acquisitions that you've made, do we still anticipate SG and A leverage on a whole year basis for 2019? And what are the factors that might influence that? We're still planning on SG and A leverage for the rest of the year. With regards to that, we should see leverage, especially in our base business the remainder of this year. We did accelerate in Q1, $1,000,000 of expense that we had in our plan for the rest of the year. And that should be a benefit with regards to the plan for the remainder of the year. And in addition, I think what would possibly go negatively, depending upon the timing of our acquisition pace. Really, you don't get much SG and A leverage, a lot of acquisitions on in really the 3rd and 4th quarters. In fact, there is somewhat of a just because of the timing, that would be a negative. But right now, given the outlook of where we think we are, we're still planning on SG and A leverage. Yes. And Nishu, just a follow in there. The acquisitions that we've done were net loss making in the Q1, right? So obviously, that makes the impact more accentuated. That will smooth out. And we had a fair amount of acquisitions in the 4th quarter or the second half of last year, right? So assuming and we had a strong acquisition year last year. So assuming that this year kind of matches that, then that's that puts, I guess, a normal drag. But we do we're highly focused on getting leverage in the base business that would be slightly more than the deleverage of the acquisitions coming in. And again, the acquisitions coming in as nursery and hardscape acquisitions, those are the ones that provide the deleverage or the headwind in SG and A. So all told, we still feel good about our ability to manage those 2 and come in net positive, although small net positive for the year. Okay, great. Thanks for the details. Our next question is from Keith Hughes with SunTrust Robinson Humphrey. Your comment on moving the leverage to the high range of the 2x to 3x, historically, we've seen you spend most of your free cash flow acquisitions. Is there something different going on that's going to bring that down a pretty dramatic amount? Are you going to be seeing less in acquisitions? Is there some other source of cash? Can you just elaborate on that? As we modeled out the year, free cash flow roughly equal to net income with regards to that and then some base amount of acquisitions. We believe the increased cash flow that we'll do this year combined with last year was a very heavy year with regards to acquisitions that we should be able to achieve it in the upper half of the range. Historically, we've run 2.8%, 2.9% at the end of the year. I think our current plan is to be in that range again. Yes. And just to remind you, Keith, last year, we came in with cash flow at 0.8, 0.85 of net income. We expect to do better than that this year. And the acquisitions bring their own EBITDA as well, right? We're buying profitable companies. So when you do the math when we do the math, we with a normal let's call it a normal acquisition year, gets us solidly in that kind of high the high end of that range. Okay. When we hit when we approach the end of the year, will the debt balance be below what we saw at the end of 'eighteen or is it going to be this EBITDA that's going to drive the deleverage? It will be a we don't expect the year end debt level to be less. It will be primarily on the EBITDA side. Okay. All right. And I guess second question, you talked about how your business has expanded to end the quarter and into April. You're not alone in my universe talking about that. Has the business gotten better than this mid single digit growth or just kind of gotten in more consistently in that range? Well, the quarter developed, obviously, February early March were very tough, right? So the last 2 weeks of March were strong, let's call it strong double digits, right. I mean there was makeup there as the spring season hits. And if you remember, April of last year was weak in the 1st couple of weeks. We had the snow through mid April, right? So you would have seen that trend continue. But as the weather came last year, our comparables get tougher and it more normalizes. So I think that's what we're seeing. What we're seeing overall is basically, if you can call it a more normal spring. And again, we're off to the best start we've been over the last several years. So we feel good about how spring is developing, but that's the dynamic. There was a weak period in the earlier part of the quarter. There was a catch up at the end of the quarter, catch up in early April, smoothing out as we go through the Q2. Got you. Thanks very much. Our next question is from Ryan Merkel with William Blair and Company. Hey, thanks. Just want to follow-up on that last question. Is it fair to assume the recent pickup has been driven by landscaping ramping back up and, of course, recovery in the West as well? Well, we're still seeing strength in maintenance. But yes, the pickup would be a combination of maintenance staying strong and the construction related products, the landscaping products kicking in with the better weather. Yes, that would be true. Okay. And then just to give us a sense on the West and maybe specifically California, what kind of growth rates did you see there in the Q1? And then more recently, what sort of growth rates you're seeing? Is it a pretty strong snapback, I guess, is what I'm getting at now that the weather has improved? Yes. If you look at California, last year, it was kind of a very strong first quarter and first half and they had kind of a weaker second half. So it was weak in California. I mean, we were net negative in the Q1 in California and we see a comeback. I wouldn't call it a roaring back. I think it's going to take the full year and I personally believe that California is going to be a second half weighted performance. We feel good about the business there. We've got strong teams and we see it coming back, but we think it's going to be a full year kind of come back for California and we should have a very good second half, which matched with the weaker second half last year. Okay. That's helpful. And then moving to gross margins, I just want to make sure I heard the message on the So margins So margins the rest of the year could be flat, maybe up a little. Is that what I'm hearing? And the reason is the timing of price cost was just favorable in the Q1 and then the comparisons were easy. So some of that will normalize the rest of the year. I think that's a fair characterization of what we expect for the rest of the year. Flat to up slightly for the rest of the year, but we won't have a repeat of Q1. Got it. Okay. Thanks. I'll pass it on. Our next question is from David Manthey with Baird. Yes. Hey, good morning, everyone, and welcome, Scott. First question on just to flesh out the pricing here. Based on the comparison from the year ago period where the Q1 was less than 1%, I think the rest of the year was 3% or more in quarters 2 through 4. Does the 3% to 4% for the full year, does that along with that fact pattern imply that the remaining 3 quarters of the year might be more like 2% to 3%, is that what I'm getting from you? Yes. I think that's fair. We were at the 4%. So I think we'll be we're at 4 now and it may come down a little in the second half. But I would I do want to reiterate the fact that in the Q1 of there have been a number of price increases that went in at the beginning of this year, and those will persist throughout the year. So it's not as if we're comping against the 0. That will carry out throughout the rest of the year. And John, correct me if I'm wrong, but it's pretty broadly based. So we're seeing price increases kind of across the industry, which actually gives it more stability as it goes through the year. So but it's done with a 4% and ending up with a 3% to 4% means that Q2, Q3, it will ramp down steadily throughout the year would be our forecast. Okay. Doug, by saying that, are you implying that the pricing across both agronomics and landscape products is comparable then? It would be a little higher on the agronomic side than the landscape products, but would be broadly based across all our product categories. Okay. And then finally, you made the comment earlier that SG and A through the remainder of the year would be more balanced versus revenues. Is that to imply that SG and A growth will be more closely aligned with top line growth? Is that what you're saying there? Well, if you look at our SG and A as a percent, obviously, it's high. Q1 is a low revenue quarter and the SG and A, as we described with investments, acquisitions, a little bit of pull forward is high. So we expect that, yes, the growth of SG and A versus the growth in sales to moderate significantly through the year. And again, we aim to at the year end have a slight amount of leverage even including acquisitions in SG and A. So given the math and where we are now and how we plan to end the year, we should get some nice leverage in the busy time, which is now 2nd and third quarter. Yes. And the one clarifying point, when we're talking about primarily the focus here on SG and A with regards is on an adjusted EBITDA basis. So the impact, the amortization of that doesn't necessarily factor in the amortization of any new acquisitions that are coming on board. Yes. Got it. All right, guys. Thank you. Thank you. Our next question is from Matthew Bouley with Barclays. Hi. This is actually Christina Chiu on for Matt. Thanks for taking the questions. My first question is, can you discuss the progress on the barcoding rollout during the early spring and if you've seen any tangible benefits? Great, Christine. Great question. Yes, so we launched barcoding this year. We have over 540 branches. We were able to put barcoding in 40 branches before the spring season. And it's important to note that when we do initiatives like barcoding that are very invasive on the branches that we need to do it in the slow seasons, right? So in the winter, then we leave the branches alone in the heavy spring. Then in the summer, we can do more installations. Then we leave them alone in September October, and then we come back in the winter and go at it again. So we put it in 40 branches. We're seeing the benefits of those. We wouldn't have we're not far enough along to provide any numbers or stats, But barcoding significantly increases the time or improves the time of service for our customers. So it gets our customers in and out of the branches much faster. And then obviously, it makes our associates much more productive. So we're very excited about it. With the 40 branches, we'll be able to learn and adapt to anything that needs to be adjusted, etcetera, and then we'll continue to roll out across the company. But this is part of our operational excellence initiative, which is designed to improve our customer service, improve the productivity of our primarily our branch employees, which is where we have 60% of our wages and make our interactions with our suppliers through our customers that are streamlined and as effective as possible. So, this is kind of the launch of that. We have a team of 5 people now that are doing time studies and are helping us to optimize various aspects of our operations to include local procurement that we're quite excited about. So, but that's our progress on barcoding. Got it. Thank you. And then my second question is, how does the change in tariffs as in not going to 25% on March 1 impact your cost expectations? And what is the implication for for pushing for further price increases? We believe that the fact that our manufacturers, our suppliers would have potentially had to do additional price increases if the additional 25% tariffs had went into effect. They and granted it's only on a select number of products. So we're not hearing any noise that prices are going up or down throughout the year. I think most manufacturers or suppliers put in the price increases at the beginning of the year and they were planning on holding those throughout the year. And then if additional tariffs would have come into place, they would have assessed at that time on whether a second round of price increases would have had to go into plan would have had to have happened. Got it. Thank you. Our next question is from Michael Eisen with RBC Capital Markets. Good morning. Thank you guys for taking the questions. Just wanted to start off, if I'm thinking about the different items you talked through for top line drivers and then taking that into account with your EBITDA guidance range, there's a pretty wide range on what your expectations are for EBITDA margins. Can you talk to what some of the things are that get you to the high end or the low end of margin expansion? Well, we feel good about price cost. We feel good about the early buys that have gotten us off to a good start. And so those factors we feel very good about. Towards the higher end of the range, it could be a stronger market. If the market is stronger, if the weather is better, there's going to be stronger organic sales. That obviously helps both the gross margin as we sell more and it also helps the SG and A obviously significantly. We have line of sight on SG and A. We feel good about gross margin. So at this point in time, we feel good about our ability to expand our EBITDA margins in a solid fashion in the year. It gets down to weather could be extremely good and the market could be stronger, which would help you get to the higher end of the range. Weather could be very poor and the market could be weaker. We could see some softness develop, which we don't see today, which could get us to the lower end of that range. I think those are the primary factors in that equation. Got it. That's very helpful. And then, Scott, welcome aboard. Maybe a quick question for you on some of the original deals you've been a part of, the offers that you said in the meetings you've had so far. Can you give us a sense on what you're hearing from your team in terms of competition in the M and A front? Are these competitive bids that are going on? Are you still able to source deals exclusively and what you're hearing from your team and what your expectations are going forward? Sure, Michael, and thank you. So far, all the deals that I've been a part of, all the offers have been exclusive with us negotiated. There's always competitors out there for M and A, but in the deals that I've been involved in so far and in speaking with the team, we haven't observed any difference in what we've seen in the past in terms of the competitive structure. Got it. That's helpful. Thank you. Our next question is from Damian Harris with UBS. Hi, good morning everyone. Good morning. Good morning, Damian. So obviously you've got a range that you're thinking about in terms of growth here for the Q2 based on the sales momentum you've seen since late March and through April. Is there any reason we shouldn't think just based on sort of the up double digits growth that you talked about earlier. Is there any reason we shouldn't be expecting above mid single digit growth in the second quarter? I would be cautious there. I mean, when I referenced the double digit that was in kind of the catch up mode, which was last 2 weeks of March, let's say 1st week or 2 in April, the Q2 is April, May, June, right? So I wouldn't get carried away. I think we still feel mid single digits is a doable outcome for the year. And so prediction would be that the Q2 would be we were at 5% in the Q1. The 2nd quarter should be somewhere in that ballpark, plus or minus. Okay. Makes sense. And just a follow-up on the there's opportunistic inventory buys getting ahead of some of the supplier price hikes benefit the gross margins in the quarter. Has that could you just maybe give a little color on that? And has that fully worked itself through? Or should we still expect some carryover on the margin front? A lot of that has worked its way through. I would think really we're probably 2 thirds of the way through and the rest would be passed through this month. And so we don't expect it to carry through to Q3 at all. Pretty much everything is most of it's carried through in a mild improvement, a small amount in really April, and then we're pretty mixed through. Okay. That's helpful. Thanks for taking our questions. Thank you. Our next question is from Alex Maroccia with Berenberg. Good morning and thanks for taking my questions. You said some of the margin strategies are reaching maturity and others are just beginning. Can you break out the potential margin uplift from some of these strategies, specifically the latter stages of cat management and pricing as well as newer e comm? Yes. So the pricing and category management are in the later stages. We'll continue to work that in especially category management and we expect some margin lift there. If you look at the supply chain being in the middle innings, that is that's as that matures, that will continue to improve gross margin. The operations of our DCs and all those costs go into the cost of goods. So as we streamline our logistics and create synergies there, we'll make our branches more efficient, which helps our SG and A, but those will help gross margin. Sales force performance, which is in the middle innings, that's also a gross margin driver, right? It's primarily focused on driving organic sales. But as we've mentioned before, we're underweight with a small customer and we're overweight with the larger customers in the market. And as we perfect our selling and market share gains with the smaller customer, which we feel good about the momentum there, that improves our gross margin. Let me go back to category. We also have prior label opportunities in the category initiatives left and that improves gross margin. And then as we get into the e commerce and operational excellence, we think those are more drivers of organic growth and SG and A, quite frankly. Those will make us more efficient and more effective, but our customers help us to gain market share and should help us reduce increased productivity in our system and reduce our SG and A. So that's how we would see those initiatives coming about. And so as you can see, the most advanced are gross margin focused. The middle innings are a combination gross margin, organic growth. The latter 2 are more kind of organic growth drivers and SG and A reduction initiatives, which give us all balanced improvement in our EBITDA margin and drives our organic growth. Okay, great. That's helpful. And then secondly, it looks like inventory was fairly stable compared to prior years as a percentage of sales despite the opportunistic purchases. However, when you're looking at the full year and beyond, do you expect these purchases to affect networking capital levels? We would expect just, I would just say, for year end inventory, some improvement over the course of the year in inventory turns as a result of the last 2 years have really been a buildup of 2017, there's quite a bit of buildup as we really established the DC strategy. This year, we're going to start going in the opposite direction, getting much more efficient with our inventory, and we should see inventory turns improve over the course of the year. And as John mentioned, the early buys will be kind of gone as of May. So that won't have any effect on the year end. Got it. And do you think that's going to decrease some of these rebates that are hitting AR and artificially driving it? I don't think that I don't think that will be a big, big impact. Okay. Got it. Thanks guys. Appreciate the color. We have reached the end of the question and answer session. And I will now turn the call over to management for closing remarks. Okay. Thank you. Well, thanks, everyone, for joining us today. We appreciate your interest in SiteOne. I want to once again thank all of our associates making things happen for all of our stakeholders. We're excited about our long term growth and potential for organic share gain with our customers, bringing more value to our suppliers and increasing our own growth and profitability as we move forward. Thank you very much. Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.