Earnings Call: Q2 2018

Aug 1, 2018

Greetings, and welcome to the SiteOne Landscape Supply Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Pascal Converse, Executive Vice President of Strategy and Development and Investor Relations for SiteOne Landscape Supply. Please go ahead, sir. Thank you, and good morning, everyone. We issued our 2nd quarter earnings press release this morning and posted a slide presentation to the Investor Relations portion of our website at investors. Siteone.com. We will be referencing the slides during this call. I'm joined today by Doug Black, our Chairman and Chief Executive Officer and John Guthrie, our Chief Financial Officer. Before we begin, I would like to remind everyone that today's press release, the slide presentation and statements made during this call include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Such risks and uncertainties include the factors set forth in the earnings release and in our filing with the Securities and Exchange Commission. Additionally, during today's call, the company will discuss non GAAP measures, which we believe can be useful in evaluating our performance. A reconciliation of these measures can be found in our earnings release and the slide presentation on our website. I would now like to turn the call over to our Chairman and CEO, Doug Black. Thanks, Pascal. Good morning, and thank you for taking time to join us today. I am pleased with the progress we made in the Q2 as we accelerated our organic growth following the prolonged winter and were able to quickly adjust to a step up in cost inflation. We also continued to add terrific companies to SiteOne during the quarter and in July. Lastly, we made good progress on our investments in the future by completing the pilot of our new e commerce platform during the quarter and beginning our company wide rollout. Overall, we are well positioned to take advantage of the current market tailwinds and deliver performance and growth in 2018 and beyond. I will start today's call with a review of our unique market position, our strategy to deliver long term performance and growth and our progress over the past 4 months. John Guthrie will then walk you through our Q2 financial results in more detail, and Pascal O'Convers will address our acquisition strategy. Finally, I will discuss our outlook for 2018 before taking your questions. I'll start on Slide 4 of the earnings presentation. SiteOne is the largest and only national wholesale distributor of landscaping products with a footprint of 5 47 branches and 3 major distribution centers in the U. S. And Canada, comprising approximately 10% share of this $18,000,000,000 highly fragmented market. We are 4x larger than our nearest competitor and larger than 2 through 10 combined. Our size and scale, our agile culture and our full product line capability give us competitive advantage and provide a nice balance across the maintenance, new construction and repair and upgrade end markets. Turning to Slide 5. Our large and local 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 us to gain market share both organically and inorganically in order to accelerate our growth and profitability. Our strategy is enhanced through the execution of our 5 commercial and operational initiatives listed here, which help us to improve our value to customers and suppliers, expand our margins and accelerate organic growth. Overall, our market position, capabilities and strategy allow us to create value for our shareholders in 3 complementary ways: through organic growth, margin expansion and acquisition growth. Since we are still in the early innings of implementing our strategy, we believe that we can leverage all three of these areas to create significant value for many years to come. Slide 6 illustrates SiteOne's history and our strategy in action. Following the spin out from Deere and Company at the end of 2013, we developed a vision and a strategy to be a company of excellence for our associates, customers, suppliers, shareholders and communities. Since then, we have been hard at work building our company, transforming our culture and executing our strategy. As you can see from our financial results, our strategy is working with strong organic and inorganic sales growth over the past 3 years and solid operating leverage with a 17% top line compound annual growth rate translating into a 29% compounded annual growth rate for adjusted EBITDA. We remain on track toward our stated adjusted EBITDA margin goal of 10% plus. Turning to Slide 7. We are still at the very beginning, and we have only just begun to implement our strategy. This includes filling in our product line capability in every major U. S. And Canadian market. The graph shows that we only have a full line capability today in approximately 45 of our targeted 225 major markets, primarily due to the lack of nursery and or hardscape branches. We plan to add the majority of these branches through acquisition in order to also bring in local talent and both the customer and supplier relationships required to win in these markets. Additionally, we will continue to penetrate new markets and improve our market position in irrigation and agronomics through acquisition. I will now shift to our 2nd quarter performance on Slide 8. We achieved 13% overall sales growth with good contribution from acquisitions, complementing growth in organic sales. As we mentioned on our Q1 earnings call, the spring season did not kick in until mid April, which is very late compared to a normal start in March. Accordingly, April organic daily sales growth was quite muted. However, the strength that we saw in late April did carry through to May June where we achieved 8% to 9% organic daily sales growth, yielding 5% organic growth for the full quarter. Importantly, we are seeing good organic daily sales growth in July against tougher comparable growth rates in 2017. Price inflation, which was very low last year, is more of a tailwind this year and was 3% in the second quarter. We expect this trend to continue in the second half and now believe we will see approximately 3% price inflation for the full year. The construction markets healthy and growing and continued contribution from acquisitions, we expect good sales growth in the remainder of Q3 and for the rest of the year. On the gross margin side, we saw a step up in cost inflation in the Q2, which we have not seen for several years, driven by increased material, freight and labor costs. Our teams worked hard with our suppliers and customers to pass these costs through in a responsible manner. As you can imagine, this takes time and so we achieved only a modest amount of gross margin expansion during the quarter, which, like organic daily sales, improved as the quarter progressed. We are now well positioned to achieve gross margin improvement in the second half with the benefit of our category management and supply chain initiatives. Our adjusted EBITDA grew 12% in the quarter, which reflects good contribution from acquisitions and growth in the base business. Adjusted EBITDA was slightly dampened by the late spring, cost pass through and planned investment in our strategic initiatives during the quarter. With our current trends in organic sales and gross margin and with SG and A spending on plan, we remain confident that we will see good EBITDA margin expansion for the full year. On the initiatives front, we continue to make progress integrating our 3 distribution centers to successfully support our branches. We are very pleased with the performance of our DCs and the new dimension that they have added to SiteOne in terms of product availability and logistical performance. Our supply chain teams and field associates have done a fantastic job ramping these up, and we look forward to reaping the rewards for many years to come. Last quarter, we discussed the pilot launch of our new e commerce platform, the newsiteone.com, which allows our customers to order product and schedule pickup or delivery all from their phone, tablet or computer. As you are aware, our e commerce portal has been in the development for nearly 2 years now and we are very excited that it has gone live in select markets. We made progress in the quarter rolling out to new markets and the site is now live in 6 of our 11 regions. We now expect to complete our rollout of the site by the end of September. We are seeing a solid response to the new siteone.com and believe that this new capability will position SiteOne as the clear leader in service efficiency for our customers and suppliers. Overall, we are still in the early innings of building our company and believe that our investments will deliver tremendous competitive advantage in our fragmented market and support accelerated performance and growth for years to come. Our acquisition strategy continues to be successful and complements our organic growth. We have completed 11 acquisitions year to date, 4 of those this quarter and 4 more recently in July. Combined, these acquisitions comprised approximately $195,000,000 of trailing 12 month revenue. Pascal will go into more detail regarding these acquisitions later on the call. Overall, our acquisition activity continues to ramp up nicely and you can expect to see more deals closed during the remainder of the year. In summary, I am very pleased with our team's ability to navigate through the various challenges in the Q2 and post a record result while keeping us on track to deliver strong results for the full year. Now, John Guthrie will walk you through the quarter in more detail. John? Thanks, Doug. I'll begin with on Slide 9 with the income statement for our 2nd quarter results. We reported a net sales increase of 13% to $688,000,000 in the Q2. During the quarter, we had 64 selling days, which was unchanged compared to the prior year. As Doug mentioned earlier, organic daily sales recovered nicely and grew 5% in the 2nd quarter and 4% for the first half. We started the 1st few weeks in April with negative sales growth due to the late start of the season, but spring eventually came and sales growth accelerated starting in mid April and continued through May June where we posted organic daily sales growth of 8% to 9%. We are seeing solid organic daily sales growth in July. Geographically, we saw broad growth across the country with strength in the Sunbelt markets. Organic daily sales for landscaping products, which includes irrigation, nursery, hardscapes, outdoor lighting and landscape accessories grew 5% for the quarter and 5% for the first half as the fundamental demand in the repair and upgrade and new construction end markets remain strong. We believe the broader recovery from the late season was constrained by labor shortages and a limited number of construction days. And as a result, the recovery will likely extend into Q3. Organic daily sales for agronomic products, which includes fertilizer, control products, ice melt and equipment, grew 6% for the quarter to 4% for the first half. Organic daily sales for agronomic products in the quarter benefited from a later spring selling season and price increases in response to cost inflation. In addition, organic daily sales for agronomic products for the first half of the year also benefited from the strong sales of ice melt due to the extended winter. Pricing increased 3% for the quarter and 2% for the first half of the year. This was a measurable increase over the 1% increase in 2016 and no increase in 2017. The price inflation is being driven by increases in our costs for material, freight and labor. We expect this trend to continue and price inflation for the full year to be approximately 3%. We are not factoring tariffs in our price inflation forecast. We do not believe the initial $50,000,000,000 of Chinese tariffs directly impacted many of our products. The more recent $200,000,000,000 lift could have a larger impact as some products like lighting and control products have components sourced from China. Having said that, we have a broad product line, potentially effective products make up less than 20% of our sales, and if the tariffs were enacted, we would expect to pass through the associated costs. Additionally, given the timing of the tariffs and the seasonality of our business, we would not expect to see much change until 2019. Acquisitions contributed approximately $48,000,000 to net sales in the 2nd quarter or 8% to our growth rate. For the year, acquisitions contributed approximately $76,000,000 or 8% to our overall growth rate. Gross profit increased 14% to $230,000,000 in the 2nd quarter, while gross margin expanded 10 basis points to 33.4%. Category management was the largest driver of the margin increase as we continued to benefit from partnering with leading manufacturers and suppliers in our industry. The price increases previously mentioned largely offset the cost increases in the margin calculation. Product mix did not have a significant impact on gross margin in either the quarter or the 1st 6 months of the year. Selling, general and administrative expenses or SG and A increased by 15% to $145,000,000 in the second quarter and SG and A as a percentage of sales increased 30 basis points to 21.1%. The increase in SG and A as a percentage of sales was attributable to our growth from acquisitions and our planned investments in critical strategic initiatives like e commerce and supply chain. We recorded income tax expense of $14,700,000 in the Q2 of 2018 compared to $26,300,000 in the prior year period. The effective tax rate was 18.9% for the Q2 compared to 37.3% for the prior year period. The decrease in the effective tax rate was due to the reduction of the U. S. Corporate income tax rate from 35% to 21% as a result of the 2017 Tax Act and an increase in excess tax benefits pursuant to ASU 20 sixteen-nine. We continue to expect our 2018 effective tax rate will be between 26% 27%, excluding the excess tax benefits associated with ASU 20 sixteen-nine and other discrete items. Net income increased 43% to 63 point $1,000,000 for the Q2 compared to $44,200,000 for the prior year period. The increase in net income for the quarter is attributable to higher organic sales, contributions from acquisitions and a lower tax rate. Our weighted average diluted share count was 42,600,000 shares for the Q2 of 2018 as compared to 42,500,000 for the Q4 of 2017. The increase reflects both the increase in our stock price and our equity grants. Adjusted EBITDA increased 12% to $103,000,000 for the 2nd quarter compared to $92,300,000 for the same period in the prior year. Now I'd like to provide a brief update on our balance sheet and cash flow statement as shown on Slide 10. Net working capital increased approximately 26% from prior year period to $517,000,000 as of July 1, 2018. The growth in networking capital primarily reflects the increase in inventory and receivables attributable to acquisitions, strong organic growth and the rollout of the new distribution centers. Cash flow from operation was approximately $12,000,000 in the second quarter compared to $23,000,000 in the prior year period. The reduction in cash flow relative to prior year is primarily attributable to growth in accounts receivable caused by acquisitions, accelerating organic growth and supplier programs. For the first half of the year, cash used in operations improved $3,000,000 to $28,000,000 due to our higher earnings. Free cash flow for the 1st 6 months was essentially flat to the prior year period. We made cash investments of $23,000,000 for the quarter compared to $6,000,000 for the prior year period, primarily reflecting our increased acquisition activity during the quarter. Net debt at the end of the quarter was $571,000,000 and leverage was 3.5x of trailing 12 months adjusted EBITDA, which is up from 3.2 times last year. The increase in leverage primarily reflects increased borrowing to fund our acquisition strategy. Our leverage target for the end of the year is 2x to 3x net debt to adjusted EBITDA. In summary, our capital structure continues to provide us with the flexibility to execute our growth strategy, including the funding of our acquisitions. I will now turn the call over to Pascal for an update on SiteOne's acquisition strategy. Thank you, John. As Doug mentioned earlier, acquisitions play a key role within our overall growth strategy as we continue to fill the significant white space. As shown on Slide 11, we have now acquired 33 companies since the beginning of 2014. We added 193 branches to Site 1 and contribute $745,000,000 in sales on a TTM basis. We're having a strong year and have made good progress accelerating our pace of acquisitions from 4 in 2015 to 6 in 2016 to 8 in 2017 and now 11 more through the 1st 7 months of 2018, representing $195,000,000 in LTM sales. Now as we turn to Slide 12 through 15, you will be able to find information on the 8 acquisitions we completed in the last 4 months. In April, we acquired Terrazzo and Stone Supply, a leader in the distribution of natural stone and hardscape materials with location in Bellevue and Marysville, Washington. Sorezzo adds natural stone and hardscapes for existing irrigation, agronomics and landscape lighting product offerings in the Seattle market. In May, we acquired Landscapers Choice, a leader in the distribution of nursery and related products to landscape professionals with locations in the Naples and Bonita Springs, Florida markets. Through Landscapers Choice, SiteOne had nursery products, which we did not have in those markets, to existing irrigation, agronomics, hardscapes and landscape lighting product lines and allow SiteOne to have a full product line to our customers in Southwest Florida. On June 1, we completed the acquisition of Autorain, which is a leading supplier of irrigation and related products to LandCare professionals in the Spokane Valley market with 5 locations in the states of Washington and Idaho. AutoN is a natural fit with SiteOne as it helps expand our geographic footprint into a new market where we did not have a presence before. On June 26, we acquired All American Stone and College Station, which is a leading supplier of hardscapes and landscape supplies in the East Texas market. All American is a great strategic fit adding hardscapes, landscape supplies natural stone products to our existing irrigation, agronomics, nursery and landscape lighting product lines in East Texas. On July 2, we completed the acquisition of Landscape Express, which is a leading distributor of hardscapes and landscape supplies with 4 locations in the Boston Metro area. The Landscape Express acquisition complements our existing operation with a full range of irrigation, agronomics and nursery products and allows SiteOne to a full product line to our Boston customers. On July 25, we acquired Kirkwood Material Supply, which is a leading hardscapes, nursery and related landscape supply with 8 locations in the Greater St. Louis market. Through Kirkwood, SiteOne adds products which we did not have to existing irrigation, agronomic and landscape lighting product lines and last Site 1 to a full product line to our customers in St. Louis. On July 27, we completed the acquisition of Stone Center Virginia, which is a leading distributor of hardscapes, landscape supplies and outdoor lighting in the Washington D. C. Metro. Stone Centers Manassas, Virginia location is a perfect complement to our current irrigation, agronomics and nursery product businesses and allows us to provide a full product line to our customers in Northern Virginia and Southern Maryland. On July 30, we made the strategic acquisition of Central Pro, which is a leading supplier of irrigation and related products with 10 locations and 1 distribution center in Central and Eastern Florida. Central Pro brings a talented team to SiteOne with an excellent reputation and a strong history of customer focus and growth. Combination of our 2 companies makes us the clear irrigation leader in the state of Florida and provides good purchasing synergies as well as cross selling opportunities. 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 11 acquisitions year to date, our M and A strategy is gaining momentum and we continue to build a reputation as the buyer of choice in the industry. We would also 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 have strong momentum and expect to close additional acquisitions in the next few months, which should contribute nicely to our growth in 2019 and beyond. And with that, I'd like to turn the call back over to Doug to discuss our outlook. Thanks, Pascal. I'll wrap up on Slide 17. Overall, as we look toward the second half of the year, we are confident that we can deliver another year of excellent performance and growth for the full year 2018. The underlying market trends remain positive across residential and commercial new construction, repair and upgrade and maintenance. We continue to execute our commercial and operational initiatives, which we believe will allow us to gain market share, achieve good organic growth and further expand our adjusted EBITDA margin. Lastly, our acquisitions are contributing strongly. And as Pascal mentioned, our pipeline of potential companies remains very active. Accordingly, we continue to expect 2018 adjusted EBITDA to be in the range of $180,000,000 to $192,000,000 for the full year. 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'll be conducting a question and answer session. Our first question comes from the line of Ryan Merkel with William Blair. Please proceed with your question. Hey, thanks. Good morning, everyone. Good morning, Ron. Good morning. So first of all, I'm curious on product price cost in the quarter. It sounds like you weren't able to pass along the full cost increase. So did I hear that right? And if so, can you quantify what the impact was in the quarter? So not exactly, Ryan. We did pass through. It just took the quarter to get that accomplished. The inflation started to hit us at the beginning of the quarter. And again, 3% is steeper than we've seen in several years, right? So as that came through, obviously, we went to work with our customers and our suppliers to responsibly pass that through. There's a couple of month lag there to get that done, which obviously creates a headwind and is dilutive to gross margin. But as we went through the quarter, we were able to pass those costs through. And that's where we are today and what we're seeing in July is the full pass through is in effect. And that allows our initiatives in category management and supply chain to be accretive to gross margin. So we feel like we're in good shape for the rest of the year, call it a couple of month lag where we had to work through the pass through. But we certainly have gotten to the end of that. And of course, the 3% creates a nice tailwind for organic growth. So we'll take the benefit of that and we feel good about the rest of the year and how it will play out and average out for the full year for gross margin. Okay, Doug. So if I heard you right, if there was a little bit of a lag, It did weigh on the margins a little bit, but you're all caught up. And then as it relates to gross margin expansion in the second half, pricecost, freight and category management are all going to be positive drivers? That's correct. Got it. Okay. And then I wanted to ask about organic growth in the quarter at 5%. You had 3% inflation, so that implies about 2% volume growth. Just wondering, is that 2% volume growth, is that below your expectations? Because I was thinking more like 4% to 5%. And then if so, is the big issue just the slow start given the weather? Right. No, great question. Yes, the 3% obviously would add to organic growth and that's exactly what we saw in May June. I mean April was kind of a half a month. I mean we were underwater in mid April. The season hadn't started and again this is a big season And when it goes, it goes, it's quite powerful. So we started to see the lift in the second half of April. And then in May June, we saw that come through. By the way, as I talked about, the pricing inflation worked its way through in the quarter as well. So the quarter is an average of a very slow start, a long prolonged winter and then a really strong kind of second half May June or second 2 thirds, let's call it. And so we do expect that 3% to add to organic growth as a tailwind. We're seeing that as we speak. Got it. Okay, thanks. I'll pass it on. Thanks, Ron. Thanks. Thank you. Our next question comes from the line of David Manthey with Robert W. Baird. Please proceed with your question. Hi, guys. Good morning. Hey, good morning, David. First off, in a normal year, when you look at the distribution of 2nd quarter revenues by month, What are the percent of revenues that typically would come through in April May versus June? Is there a weighting to one end or the other, 1 month or the other? You would generally see April as the biggest selling month, I would say. I don't have the specific, but let's say, April would typically be 15% of our sales for the year and May June would be roughly 9% to 10%. Okay. And then as we look at the Q3 trend, does it go the opposite of that? Does it start out higher and decline into September or is it more evenly dispersed there? July August are relatively July starts off August is the slowest month and it starts ramping back up in September October. September would be roughly equal to July. October would be greater than July and that's really when the season ends. So you really get a kind of fall run up in September October. July August is the slowest month before the end of the year. Okay. That's helpful. Thank you. David, one point to make is you can see our agronomic growth in the Q2 was good. The construction market growth was the one that really got constrained and that happens because when you lose when you get that slow start and the season cranks up, there is a labor cap and a number of days cap and how much catch up. And we called that out when we released our Q1 results that it would really take Q2 and Q3 to kind of catch up on the construction side and that's what we're seeing as well. So we would expect the Q3 to benefit on the construction side from the lag we saw in Q1 and Q2. Okay. And then as it relates to the growth going forward, if you're getting 3% price and let's say something in the mid single digit organic growth, I wouldn't think that high single digit organic growth in the back half of the year would be too much of a stretch. But let's just assume you're able to get to that level of organic growth. Is your expectation for contribution margin still in the mid teens kind of range? I think your guidance implies that. I just wanted to clarify though. That would be right. That would be in the mid teens for incremental margins. Okay. Perfect. Thank you. Thank you, David. Thank you. Our next question comes from the line of Keith Hughes with SunTrust Robinson Humphrey. Please proceed with your question. Thank you. So in the second half, per the last question, we should hit the guidance, we should see some good margin improvements. What would be the rough mix of that between gross margin and SG and A in your plan? So the majority of our improvement plan for this year is gross margin, right, when we talk about the EBITDA margin improvement. And we still feel that's the case. And again, that reflects that we're still investing in the business, etcetera. We do have line of sight to get a little bit of SG and A leverage, right? One of the things about the first half is when you look at our investments, they're really first half weighted versus last year. Last year, our investments tended to be second half weighted. This year, they're more evenly spread. And so what we see is about a 20 basis kind of delta versus last year just on investments in the first half. We won't see that in the second half, so that becomes a tailwind, right? So when you take it all together in the year, we're still on plan with our SG and A. We see organic growth being solid. Gross margins, as we explained, will reflect the pass through that we've accomplished in our strategic initiatives. We end the year getting EBITDA improvement. The majority of that would be gross margin, a little bit on the SG and A. As we move into 2019 2020, we would expect SG and A leverage to increase meaningfully and it'd be more of an even contribution between SG and A leverage and gross margin. But in 2018, the majority of it is going to be gross margin. Okay. And as you had discussed, seeing more inflation this year than in several years. Can you kind of tick off the top couple of categories where prices are going up the most? The 2 product categories we're seeing it most is in agronomics. And then the other category we're seeing it is in nursery. Nursery driven by short demand for product has been in shortage for the last several years. And then on agronomics, it's a combination of demand. There's a bigger freight component of those products that is driving up the price. Okay. Thank you very much. Thank you. Thank you. Our next question comes from the line of Michael Eisen with RBC Capital Markets. Please proceed with your question. Good morning, gentlemen. Thank you for taking the questions. Good morning. Just wanted to start and thinking of these the new acquisitions that you guys have announced and given more color on today, when thinking of the branches? No. I mean, the EBITDA margin of those deals that we've done recently is pretty much in line with where we are on average, right? As you can see, it's a combination of irrigation, hardscapes and nursery. And so all in all, it's in line. I mean, as you know, the hardscapes and nursery companies tend to have a little higher gross margin and also a little bit higher SG and A. But overall, at the EBITDA level, they're all contributing at the average of the company. Okay. And then when thinking about the pace of deals accelerating, how should we think about the incremental dollars that are going to come into from an SG and A standpoint in the near term? And then from what you guys are paying standpoint, have you seen any change in the multiples that are being asked at this point, just given the size and scale of your success? The multiples are the same, right? We're consistent over the last 4 years. We haven't seen any change. If you look at the pace of deals, I mean, for us, it's not really a surprise. It's the normal acceleration that we expected, right? We did 4 deals 3 years ago and then 6 and then 8 last year. And then year to date, we're at 11. I mean, we expect to do 10 to 12 acquisitions this year. So we're slightly ahead of schedule, no doubt. The pipeline is very strong, but that's the result of all the hard work of our guys, right? The S and D team has done a terrific job and then working hand in hand with our guys in the field. We've got 70 scouts. So everybody is looking for more opportunities and the pipeline is bigger. So for us, as you know, our midterm goal is to get to, let's call it, 25 acquisitions a year, right, to a month. So we're ramping up to that level over time. And yes, we have line of sight for more deals in the next 5 months, no doubt, sellers sell when they're ready to sell. So we still expect to do a few more acquisitions. It'd be hard to break down, right, going back to your earlier question, Mike, about the SG and A impact in the last 5 months coming from the base versus acquisitions. I think Doug summarized it very well. The comp for the second half is better for us than the first half when it comes to SG and A, and we still expect to leverage SG and A slightly this year. Yes, one point just to follow-up with Pascal on that. The timing does factor into that. So acquisitions that we do say in the second half of the year, we just did a bunch in July here. You can imagine they've missed the big part of the season. And so just in terms of the phasing, SG and A tends to be fairly fixed throughout the year and sales tends to be a little more front end weighted than back end weighted. So the specific SG and A to sales, the later in the season we acquire, the more kind of dilutive it would be as kind of SG and A to sales. I mean they're all very profitable and we don't try to time. We do the acquisitions when they're ready to be done because we're taking the full year benefit in the following year. But pay attention to the timing, the ones in the back half on an EBITDA basis wouldn't be delivering as much as the ones that we would have done earlier in the year. That's really helpful. Thank you, guys. Thank you, Mike. Thank you. Thank you. Our next question comes from the line of Nishu Sood with Deutsche Bank. Please proceed with your question. Thank you. On the cost inflation acceleration, how much of it was in the products that you're selling and how much of it was on your cost structure side, I. E, the labor and transport that you called out? When we're talking about the cost inflation, the majority of it was on the product side. And by product, I would say both materials and freight included on that side. SG and A, as we're talking about cost inflation in that reference point, is really reflecting more in the SG and A line. But it is contributing as we evaluate that. Got it. Got it. So you're saying that the it was inbound freight you were trying to call out? Yes, inbound freight. But you bring up a point on even on SG and A. We do have a component of our SG and A is our delivery fleet. So we are seeing some cost inflation there also. Got it. So sorry, go ahead. I was just going to reiterate that the majority is in the product cost. Got it. Got it. And thinking about the acquisition pace and the accelerated pace of deals so far this year, What as you kind of take a step back has driven that? What are the conditions? Has it been just that obviously the targets you're acquiring, I'm sure their financials have improved. So obviously, it's a better point for them to sell. Is it just the efforts to develop the pipeline? Is it just obviously, the deals come when they come? Is it just there's some element of clustering? Is there anything that on a broad basis, if you take a step back though that you would identify as kind of driving the conditions the conditions to accelerate the pace of acquisitions? Yes. No, it's what you said in the middle, which is all the efforts that the team has put, right? Again, we're trying to get to 25 a year. So 11 year to date is very good, right, ahead of schedule, but we're not where we want to be mid term. The team has been complete since, I think it was the 4th of 2015, right? We've got 5 people full time on the M and A side, plus 15 to 20 people on the integration side working hand in hand with the guys in the field. So normal acceleration, all the results of the effort, we don't think that there is any relationship, if you will, with the cycle at the end of the day. Easier sell probably for someone when you're in an expansion as opposed to a downturn. However, a lot of those companies behave fairly well also in the downturn depending on the product lines that they have, right? A lot of regions are not boom to bust. So nothing really unusual or unexpected, a lot of great work from many people in the company to get there. Just to play on that, keep in mind that we have 250 to 300 targets of acquisitions, right. So as Pascal said, it's taken time to get to know them, them to get to know us. It's taken time for our reputation to spread as a good home for companies. These are big decisions. These are all entrepreneurs and majority have negotiated sales. So Pascal and the team have been hard at work and we've built our integration capability to responsibly ramp up. So I think you're just seeing that ramp up. We wouldn't expect I mean, we're not going to replicate July and do 4 months, right? I mean, so they do actually come in clusters within the year. But if you look at the ramp up from 6 to 8 to kind of let's call it this year, 10 to 12 still, to next year, 15, etcetera, etcetera, as we become a bigger company, we get a bigger capacity to add great companies. And the terrific thing is that these are we are acquiring the best companies in the market. These are high performing companies. They fill an essential gap in our geographic network to fill in our product line. So we're not just buying companies, we're filling in and building our company as we do it. And so it's a natural ramp up and we would aim to continue to ramp up going forward, as Pascal said. Okay. Thanks. Appreciate the color. Thank you, Nishu. Thank you. Our next question comes from the line of Steven Whittaker with UBS. Please proceed with your question. Thanks and good morning. Good morning. I'd just like to start on the M and A front a little bit more. So as these layer in through 2018, the 11 acquisitions, what's your go forward 2019 layer, but just incremental next year, what should we think about bottom line for all of these? I don't think we are ready to give the guidance for next year yet with regards to the acquisition. So then I guess the question is what is the full year run rate? I mean, you've done these what's the ROIC on the group that you're averaging that in your plan? Well, I think as Pascal as we've laid out with regards to them, what the revenues are and as Pascal indicated earlier, what the EBITDA would be. And the multiples have been similar to what we've done in the past. So you're not okay. So then let me go to cash flow and operating cash flow and free cash flow, I guess, of $6,000,000 in the quarter. You indicated the working capital build, the higher CapEx. Can you talk about when we should expect that to normalize at the new size of the organization, what the drivers are and what you're doing to sort of create better efficiencies around operating cash flows as well? Yes. So, two things. 1 is remember that we are a seasonal business and really the first half of the year is a cash flow, a build of cash flow and then we really become cash flow positive in the second half of the year. With regards to the improving cash flow, I think one of the things that you're really going to see and that's really an enabler is our new distribution strategy. It actually has been a headwind in the past as we rolled it out and kind of built up inventories. But really, it's allowed us to be much more surgical in how we buy and how we be more efficient with regards to our operating cash flow and that inventory build. So, this has been kind of an evolution. We've always thought that our goal was to get upwards of 5 times on inventory turns and really kind of the first enabling step was the distribution and kind of restatement of where we're going with regards to inventories. Yes. So just to play on that, so you've seen an inventory build and we talked about that in the quarter. That's continued in the Q2 with the DCs and you're doubling up a bit. But we have clear line of sight to work that down in the second half and we will see improved turns in the second half. We'll see inventory get down to kind of normal levels. And then in 2019 beyond, we'll be able to drive inventory in relation to sales lower and achieve the turn improvement. And we have a plan. We also have incentives in the field with an inventory charge so that the field and we are all aligned in achieving the inventory efficiency. And you'll see that in the second half of the year. Okay. All right. That's helpful. Thank you. Thank you. Our next question comes from the line of Matthew Bouley with Barclays. Please proceed with your question. Hi. Thank you for taking my questions. Following up on the earlier question around deal acceleration, do you suspect that any of the guess, increasing challenges in the market, whether it's freight or labor or the cost inflation are playing into the availability of targets at this point? Just how do you think about kind of the availability of targets changing at different points in the cycle more broadly? Thank you. Good question. As Doug said, right, we've got a pipeline of 2 50 companies. That pipeline keeps expanding. We find new names and new targets. Every time you acquire a company, they have their own list actually of targets that they would have liked to acquire. So that keeps getting bigger. We don't anticipate inflation, freight or those kind of matters to play a role in the acquisition. Again, we've done it for many, many years in our past life, and we're sustainable at 20 to 25 deals a year through the downturn as well, right? So I would not expect those, I guess, short term kind of noise to play a role in a long term recurrent acquisition strategy. So we say we would do 10 to 12 this year. We're ahead of schedule. Next year, we were thinking that probably getting to 15 would be a good target. After that, you go to 20, 25. So the acceleration will be there. The targets are there. We've got various serious discussions at all times with 35 to 40 companies. At any time, you've got between 10 15 NDAs, right? And at any time, you've got between 2 to 5 handshakes, LOIs. And that continues to be the case and will continue. So we'll get busier. We're already pretty busy and it's a nice thing to see. So very happy with the future here. Okay. That's helpful. Thank you. And then just on the guidance, you added the $95,000,000 in annualized revenues since the last quarter, but left the full year guide unchanged. Is that presumably just the cost inflation lag you mentioned as the main offset or also some of the maybe the second half deal timing means there really isn't much contribution from the deals. Just how should we think about some of the puts and takes within that guide? Thank you. Right. No, that's a good question. When we put our guidance out, of course, we had Atlantic, which was one of the big ones in the first half. And yes, we've added quite a few, but they've been late in the Q2 and then they've been obviously 4 more in July, which comprised $75,000,000 of sales, which is quite a bit. And as we mentioned, when you're buying acquisitions in the back half, they just don't contribute as much. So overall, they're contributing strongly. When we look at the numbers, we're still within the range, 180 to 192. And we feel comfortable with that and we feel good about the acquisitions. But it's largely around the timing of when these acquisitions come on and what they deliver, especially the ones in the back half. Okay. That's clear. Thank you very much. Thank you. Thank you. Mr. Black, there are no further questions at this time. I'll turn the floor back to you for any final comments. Okay, terrific. Well, thank you all again for joining us today. We very much appreciate your interest in SiteOne and are excited about our long term opportunities for profitability and growth. I want to thank again our associates that have done a tremendous job and are a great part of our company. And we look forward to catching you up at the end of the Q3 on our progress during the remainder of the year. Thank you. Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.