Earnings Call: Q1 2018

May 2, 2018

Greetings, and welcome to the SiteOne Landscape Supply Inc. 1st Quarter 2018 Earnings Call. At this time, all participants are in a listen only mode. Question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Pascal Converse, Executive Vice President of Strategy and Development and Investor Relations. Thank you, sir. 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 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 filings with the Securities and Exchange Commission. Additionally, during today's call, the company will discuss non GAAP measures, which we believe can be useful in evaluating our performance. A reconciliation of these measures can be found in our earnings release and the slide presentation on our website. I would now like to turn the call over to our Chairman and CEO, Doug Black. Thank you, Pascal. Good morning, and thank you for taking the time to join us today. Though the start of our spring season has been delayed this year from March to April, we are seeing it come through now and remain optimistic about the underlying market demand and the strength of our company as we build on the progress that we made in 2017. 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 Q1 financial results in more detail, and Pascal 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 more than 500 branches across the United States and Canada and a 10% share of this $18,000,000,000 highly fragmented market. We now have 3 major distribution centers up and running to support our branch network with product and logistical advantages. We are the only distributor of scale who provides the full range of products and services that professional landscape contractors and maintainers need. This full line product capability gives us competitive advantage and provides a nice balance across maintenance, new construction and repair and upgrade end markets. 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 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 helped 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 to be a company of excellence for our associates, customers, suppliers, shareholders and communities. We then developed a detailed strategy to do this, leveraging our industry leadership position and the uniquely attractive aspects of the wholesale distribution market for landscaping products. Since then, we've 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 adjusted EBITDA margins that remain on track toward our stated milestone of 10% plus. Turning to Slide 7. An important part of our story is that we are still at the very beginning and we have only just begun to implement our strategy. This includes filling in our full product line capability in every major U. S. And Canadian market. The graph shows that we only have the full line capability today in 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 the 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. In total, we have approximately 250 high quality acquisition targets identified among the over 1,000 estimated wholesale distributors in the market in order to help build our company and increase our market share over the next 10 to 15 years. This acquisition growth will complement our organic market share gains. Within the context of our strategy and evolution, I will now shift to our Q1 performance on Slide 8. We achieved 11% overall net sales growth in the quarter despite adverse weather conditions that delayed the start of the spring season by approximately 3 to 4 weeks. We would typically see the season start during the second half of March. This March, we experienced more snow, rain and colder weather than last year in all of our key markets except California, Arizona and Florida. Through February, our organic daily sales growth was 6% with pricing up 1%, a very healthy start to the year. With the delay in spring, however, March organic daily sales were down 2%, and so we only achieved 3% organic daily sales growth for the full quarter. As we look into the Q2, the adverse weather trends from March continued through the first half of April, but we have seen spring kick into full gear in the second half of April. With a strong underlying market, we expect sales for the remainder of Q2 and the rest of the year to be robust. Our gross margin contracted by 90 basis points to 29.2% in the first quarter due to a combination of the new revenue recognition standard, expenses related to our distribution center rollouts and a slightly less favorable product mix driven by the spring season delay. We expect these three factors to be tailwinds during the rest of the year. Our ongoing initiatives to improve gross margin remain on track, and we are optimistic about our ability to improve gross margin as we look out over the full year. On the initiatives front, I am pleased to announce that we achieved 2 operational milestones since our last call. First, all three of our distribution centers are now up and running and successfully supporting our branches. The last of these 3, our DC in Carlisle, Pennsylvania, just outside of Harrisburg, started serving branches in March. 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. 2nd, in March, we launched the pilot of our new e commerce platform, the newsitewone.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 development for over 18 months, and we are very excited that it has gone live in select test markets. We plan to pilot the new site and then begin a countrywide rollout during the second half of this year. We believe this new capability will position SiteOne as the clear leader in service efficiency for our customers and suppliers. We believe that these investments and others that we are making to build our company will deliver tremendous competitive advantage in our fragmented market and support accelerated performance and growth for years to come. Adjusted EBITDA was a negative $5,000,000 for the quarter compared to $1,200,000 in the Q1 of last year, driven primarily by the delayed spring season and reduced gross margin. SG and A, which includes acquisitions and key investments, is on plan. On the acquisition front, we have gotten off to a great start in 2018 with 3 excellent acquisitions closed during the Q1 and one company added in April. Among these was the strategically important Atlantic Irrigation acquisition, which significantly strengthens our irrigation business along the East Coast. 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, as we have mentioned before, the timing of our spring and fall seasons can swing sales between quarters. But with our broad product and geographic diversification, these swings typically average out during the full year. While managing through this challenging quarter, I'm very pleased with how we have moved the foundation of the company forward to support strong performance and growth in 2018 and beyond. Now, John Guthrie will walk you through the financial results for the quarter in more detail. John? Thanks, Doug. I'll begin on Slide 9 with the income statement for our Q1 results. We reported a net sales increase of 11% to $371,000,000 in the Q1. During the quarter, we had 64 selling days, which was unchanged compared to the prior year. As Doug mentioned earlier, organic daily sales grew 3% in the Q1. Organic daily sales were directly impacted by the snow, rain and colder weather in most of our markets. 5 out of our 10 geographic regions experienced negative organic sales growth due to the weather. We saw weaker sales not only in the northern markets due to snow, but also in the southeast due to colder temperatures and more rain this year compared to last year. Organic daily sales for landscaping products, which includes irrigation, nursery, hardscapes, outdoor lighting and landscape accessories grew 4% as the fundamental demand in the repair and upgrade in new construction end markets remained strong. The Western market saw especially strong growth in irrigation products, which benefited from both the strength in the economy and the drier conditions. Nursery sales, which are primarily located in the eastern half of the United States, were down significantly due to the late spring. Organic daily sales for agronomic products, which includes fertilizers, control products, ice melt and equipment grew 1% in the 1st quarter, driven by strong sales of ice melt, which were up almost 70%. Organic sales through February were up significantly due to the snow and the resulting increased demand for ice of care applications, sales of agronomic products declined. Pricing increased by 1% year over year, driven by cost inflation in our products. We expect this trend will continue and be a minor tailwind of 1% to 2% for the rest of the year. Acquisitions contributed $28,000,000 to net sales in the Q1 or approximately 8% to our growth rate. Gross profit increased 8% to $109,000,000 in the Q1, while gross margin decreased 90 basis points to 29.2%. Gross margin contracted year over year as a result of higher supply chain costs from the rollout of the distribution centers, the adoption of the new revenue recognition standard and some negative changes in product mix brought on by the late spring. Supply chain costs increased approximately $3,000,000 or 70 basis points driven by the start up of the new distribution centers and increased freight costs. These results were in line with plan and with the start up behind us, we expect the new DCs will positively contribute to performance going forward. The adoption of the new revenue standard resulted in an approximately negative $2,000,000 or 50 basis points impact to gross margin in the quarter due to the timing on the recognition of the revenue and expenses associated with our customer loyalty reward program. The revenue and expenses we recorded this period would historically have been spread out over the course of the full year. The late spring caused a shift in product mix, which negatively impacted gross margin by approximately 10 basis points. We saw strong sales growth of ice melt, which has a lower gross margin and weaker sales of nursery products, which have higher gross margins. Selling, general and administrative expenses or SG and A increased by 16% to $132,000,000 in the 1st quarter and SG and A as a percentage of sales increased 160 basis points to 35.5%. The increase in SG and A as a percentage of sales was primarily attributable to our growth from acquisitions combined with the seasonally lower sales volume in the Q1. In addition, we are continuing to make investments in the company to support the rollout of our e commerce platform. We recorded a net loss of $17,000,000 for the Q1 compared to a net loss of $10,500,000 for the prior year period. Our net loss for the quarter is attributable to the seasonality of the business as well as the continued investments in the company. We recorded an income tax benefit of $10,000,000 in the Q1 of 2018 compared to an income tax benefit of $8,000,000 in the prior year period. The effective tax rate was 37.5 percent for the Q1 compared to 42% for the prior year period. The enactment of the 2017 Tax Act was the primary driver of the lower effective tax rate, which was partially offset by an increase in the excess tax benefit pursuant to AFU 20 sixteen-nine. We currently expect our 2018 effective tax rate will be between 26% 27%, excluding ASU 20 sixteen-nine and other discrete items. Our weighted average share count was 40,000,000 shares, an increase of 452,000 shares year over year due to the employee option exercises. Adjusted EBITDA was negative $5,000,000 for the Q1 compared to $1,000,000 for the same period in the prior year. On an adjusted EBITDA basis, we normally record a loss through February and the strength of March largely determines whether we post a profit for the quarter. In both 2014 and 2015, we recorded losses during the Q1. In 2016, we had a very mild winter and recorded a profit. And last year, we were basically breakeven. The weather this year was worse than last year and then as a result, our Q1 looks more like 20142015. 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 16% from the end of last year to $460,000,000 as of April 1, 2018. The growth in networking capital primarily reflects the increase in inventory and receivables attributable to the seasonality of our business, the rollout of the new distribution centers and our acquisitions. Cash used in operations was $41,000,000 in the Q1 compared to $55,000,000 in the prior year period. The improvement in operating cash flow for the quarter was primarily attributable to increased collection of accounts receivable. During last quarter's call, we mentioned how the timing and terms of our 4th quarter sales resulted in an increase in year over year receivables. The pickup in this quarter reflects the collection of those receivables. We made cash investments of $55,000,000 for the quarter compared to $59,000,000 for prior year period. The reduction reflects a slightly smaller investment in acquisitions during the quarter. Net debt at the end of the quarter was 559,000,000 dollars and leverage was 3.7x our trailing 12 month adjusted EBITDA, which is flat with the prior year period. As a reminder, our leverage typically peaks at the end of the Q1 due to the working capital build prior to the spring selling season. Our leverage target for the end of the year is 2x to 3x net debt to 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, acquisition is within our overall growth strategy as we continue to fill a significant white space. As shown on Slide 11, we have now acquired 26 companies since the beginning of 2014. They added 162 branches to SiteOne and contribute $650,000,000 in sales on a trailing 12 months basis. We're off to a great start this 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 4 more through the 1st 4 months of 2018, representing $100,000,000 in last 12 months sales. Now as we turn to Slide 12 through 15, you will be able to find information on the acquisition we completed so far this year. In January, we acquired Pete Rose, a leader in the distribution of natural stone and hardscapes materials in one location in the Greater Richmond, Virginia market. The Pitwell's dedicated hardscape center complements our existing operations with a full range of irrigation, agronomics and nursery products and allows SiteOne to offer a complete one stop shop to Richmond customers. In February, we completed the highly strategic acquisition of Atlantic Irrigation, which is a leading supplier of irrigation products along the East Coast with 33 locations in 12 U. S. States and 2 Canadian provinces. Atlantic Irrigation 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 East and provides good purchasing synergies as well as cross selling opportunities. In March, we closed the acquisition Village Nurseries, a leader in the distribution of nursery and related products to landscape professionals with location in the Greater Orange, Huntington Beach and Sacramento, California markets. Through village nurseries, SiteOne adds nursery products, which we did not have in those markets to our existing irrigation, agronomic, hardscape and landscape lighting product lines and allows SiteOne to offer a complete one stop shop to our customers in California. In April, we acquired Terazolone Stone Supply, a leader in the distribution of natural stone and hardscape materials with locations in Bellevue and Marysville, Washington. Terrazzo add natural stone and hardscapes to our existing irrigation, agronomics and landscape lighting product offerings in the Seattle Metro market. 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 had outstanding talent to our team. Our pipeline remains robust and with 4 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 2018 and beyond. And with that, I'd like to turn the call back over to Doug to discuss the outlook. Thanks, Pascal. I'll wrap up on Slide 17. Overall, we are confident that we can deliver another year of excellent 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, as Pascal mentioned, our acquisition pipeline remains very active, and we anticipate 2018 being a good year in terms of adding great companies to SiteOne. Accordingly, we continue to expect adjusted EBITDA to be in the range of $180,000,000 to $192,000,000 in 2018. 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. Ladies and gentlemen, at this time, we will be conducting a question and answer session. Our first question is coming from the line of David Manthey with Robert W. Baird. Please proceed with your question. All right. Thank you. Good morning, everyone. Hey, good morning, David. Good morning, David. Good morning. First question for John on the gross margin. The change in accounting seemingly pulled expenses into the Q1. So are we to assume that all else equal that change would have a positive impact on the gross margin percentage in quarters 2 through 4? That is correct. The dollar amount over the course of the year, the change in accounting for the full annual year will have no impact at all on our performance. It's just really accelerating certain expense in the Q1 and that leads 2, 3 and 4 as improvement. Okay. And then just to close the loop on the gross margin, the inventory level you show on the balance sheet now, I assume, reflects the 2 distribution centers being fully stocked. And could you talk about any potential impact there from better rebates or purchase discounts, freight in and other things that you'll get benefits from? And should we just continue to assume that you'll have a more balanced year between gross margin improvement and SG and A leverage overall? I think in general, just to speak on the supply chain that we really view this as a positive going forward. And really there's three things that we're really trying to accomplish here with our new supply chain strategy. 1 is we're taking control of the freight. So we know all know what's going on in the freight market and by managing it directly and contracting directly with suppliers or with freight providers in our markets, we can better negotiate the contracts. 2, and that really allows and the DCs really play a major role in this is it allows us to pick the best mode of transportation. Previously everything went over the road and now we can go intermodal because we have larger quantities shipping into the DCs. And I think the 3rd item and really kind of the real value created by the DCs is the fact that we can consolidate loads and overall reduce our freight costs. And think of it as all of these suppliers originally shipping directly to half truckloads or pallet quantities to our stores. By them shipping directly to our DCs and that's us almost cross stocking and shipping back full truckloads out to our stores, we really optimize the overall freight cost in that we experience. So our whole supply chain strategy is really allowing us to gain better control and rather than being a cost taker, really managing this cost directly. And so just to play on top of that, so what you're seeing in the Q1 is the dilution effects of ramping up the DCs, charging them with product. You also see that in inventory levels. The remainder of the year that becomes a tailwind, right, in terms of helping us to achieve better gross margin, but also on the inventory side to be able to work our inventory throughout the system. So and to address the second part of your question, so we still see very good EBITDA margin expansion in 2018, primarily driven by gross margin, though we expect to see some SG and A leverage as we go through the full year and as our SG and A gets leveraged through our more meaningful quarters, which are 2 and 3 and then part of 4. Perfect. Thanks very much guys. Thank you, Dave. Thank you. The next question is coming from the line of Ryan Merkel with William Blair. Please with your question. Hey, good morning, everyone. Good morning, Ryan. Good morning, Ryan. So I want to start with a couple of questions on sales. So it sounds like April is tracking well. Doug, I think you said sales are robust. Could you just give us a little more color there? Yes. So in the first half of April, we saw the same adversity that we saw in March, quite frankly. But in the second half, we've really seen now that the season kick into gear. And as you know, we're still snowing up till mid April in North and Midwest. But we're seeing the season start. It's kicking into full gear. And we really do the underlying market is quite strong. Our contractors have very large backlogs. They've got lots of work. They were itching to get out of the year. Now that the year has really begun, we can see the growth coming through. So we do think we'll make up those sales that got pushed and end up with a good solid year for organic growth. And just to follow-up on that, just help us how does it work? Do you make up most of the loss sales in the Q2 or do you make that up over the course of the year? We think due to the fact that the delay was so long as 3 to 4 weeks that some of that makeup will probably still into quarter 3, but we would expect the majority of that makeup to be in the Q2. So it will play out during the full year. As you know, labor is tight and so there's some constraints there. But we would expect the majority of that to be made up in Q2. But some of it will we would predict move into Q3 as well. And then just lastly, I'll pass it on. Is anything lost for the season when you get a slow start like this? It really depends kind of how the season develops, kind of when the summer starts, etcetera. But we have and I've been here 4 years, John Guther has been here a long time. These weather delays or swings really do tend to average out. And so there's nothing that we see today that would cause us to feel we've lost any year. I mean the treatments are going in, the contractors are optimistic. And they some a lot of contractors take vacation in the summer. A lot of them have already taken their vacation. While the season was slow and they don't plan to take vacation in the summer. So they can move things around to adapt to the year. And we feel at this point, looking at the year, we would predict that we'll get those sales back. Perfect. Thank you. Thank you, Ryan. Thank you, Ryan. Thank you. Our next question is coming from the line of Keith Hughes with SunTrust. Please proceed with your question. Thank you. Let me ask a little bit of a longer term question. On Slide 7, it shows a good representation of where you are. I believe there's 45 markets where you are in full line product offering. But within those 45, how many markets are you structured with the market presence in all 4 major product groups that you want to be and it's kind of a model for what the other big MSAs would look like? Right. That's a very good question, Keith. We have a full line in those 45 markets. However, there's nuances to the lines of business. For instance, in agronomics, while we're in the market, we really want to be in the market in 2 different ways in the major markets, let's say the top 80, 80 to 100 markets. We have our smaller stores, we call bold stores that are out in the neighborhoods. But we also benefit from having agronomic hubs, big locations in the metro area like Atlanta or Dallas, Fort Worth or Charlotte, North Carolina, where we can do full truckload in and out on an agronomic basis and we can also house erosion control products and other products that are bigger and bulkier. So that's a nuance to the agronomic coverage in a market. If you take all the nuances together, we have structurally what we need in only a handful of markets, let's call it 3 to 5 markets where we have all the pieces. We have full coverage in 45. So actually the opportunity structurally is a bit more than we're showing here. It's kind of complicated nuances. But to answer your question specifically, if we said how many markets do we have, everything that we want, it would be a handful. So there's tremendous opportunity, I think, is the punch line for us to build out and create that kind of optimal structure to be the one stop shop in the market, significant competitive advantage over all of our competitors with the tools and resources that our associates need to win. And you talked in the release about the opening of the 2 distribution warehouse. I think that brings you to 3 now. Is that going to be enough or let me ask it this way, as you look at your growth plans in the future, how long will you be able to how many years will you be able to support the business out of 3 or are we going to see more of those come out at some point in the future? Right. Great question. We really think the 3 get us out to the next 3 to 5 years. I mean, it's a it does cover us and it covers us very well. I think as we become a bigger and bigger company, let's say, a $5,000,000,000 or $6,000,000,000 company, We might add a 4th, say, in Dallas, Fort Worth or somewhere in the center of the country. But we clearly don't need a dozen of these. If anything, we'll add a 4th in the next 3 to 5 years. But the 3 really get us where we need to be. And just to clarify, these DCs are very large. They support the whole business. The economic hubs that I was talking about before that we need in the various markets are quite a bit smaller. And we would put them in kind of as the market develops over time. Okay. Thank you. Thank you, Keith. Thank you. The next question is coming from the line of Nishu Sood with Deutsche Bank. Please proceed with your question. Thank you. So the 70 bps of distribution center impact in gross margins, Could you please just go into that a little bit more specifically, how much of that was just a part of the launch process and how much of it might be recurring on an ongoing basis? We do not expect on a bps basis that for the rest of the year that it will be a negative drag. I mean, when we looked at our plan, we saw kind of the rollout this year to over the course of the full year to be a slight negative on gross margin, but that was all really realized in Q1. And over the rest of the year, really the advantages what we did in Q1 should play out with regards to that. Got it. Got it. Okay. So the 70 bps was really mainly a 1Q event, it sounds like. Okay. Yes. The distribution centers, obviously, in the past and we've spoken about this before, there's risk associated with the implementation of distribution centers. And I know obviously you folks have planned and obviously well aware of that. Where are we at in the risk spectrum at this stage? With the opening of the Pennsylvania Center, are we now past that kind of risk zone? Is it smooth sailing from here? Or is there still further work to be done in terms of making sure everything goes smoothly? That's a great question, Nishu. Obviously, smooth sailing is all a relative term, but we are well past the high risk base. When we did the first DC last year at Fairburn, we used that to work out most, if not all, the bugs in the system. And if you remember, we also implemented our JDA replenishment system at the same time. So last year would have been the year where things were going to go wrong or we're going to have big problems, we would have those. We like any new implementations, we overcame minor struggles and it's new, so we had to do a lot of training with the field, etcetera. But we really worked all that out last year. We did a lot of retraining this winter, which was very valuable. And I would say that the California and the Pennsylvania DC, those startups have gone very, very well. And so we're quite pleased with where we are. I think we're in a zone now of fine tuning and reaping the rewards and substantially past the risk phase, which was really last year. Got it. Got it. Good to hear. And just finally, on inflation, John, you mentioned to expect 1% to 2% inflation effect. I believe you were referring to revenues in terms of that. Clearly, across the broader building and construction space, inflation has been a dominant theme. Can you just kind of dig into that a little bit more? What are you folks specifically seeing? I mean, obviously, your exposure is to the traditional sorts of inflation that a lot of other companies in the construction sector are seeing are different. So what are you folks specifically seeing? Freight might be the one that folks might be kind of cross apply to you folks as well. So maybe if you could dig into that a little more, please. We're passing along in the revenue numbers most of the cost inflation that we're seeing. And so when I say 1% to 2% on the revenue line, that's also representative on somewhat of the cost line. And so our plan is and I think the market is pricing that prices that into our business. And so if we a lot of other industries in building products are seeing much higher inflation rates. If we and we're not expecting that or forecasting that. If we did see something like that, I think we would raise our pricing revenue number to cover that. But right now, the 1% to 2% covers what we're expecting on cost inflation also. Just to be specific about freight, obviously freight costs are going up. Freight is up about 10%. For us, it's about 5% to 6% of our sales. So if you take it on the total or 5% of our cost, I'm sorry. So if you've taken on the total, that's about a half, that's 50 basis points on cost. So that gives you a feel for how much of that 1% to 2% is freight. So freight is a significant factor. As John mentioned, we're now in control of more of our freight. And I think what you're seeing with us is that we're managing freight down as freight isn't flating. And so our the impact of freight to SiteOne is a bit lower than, say, other more mature players because we've got all these new ways of making freight more efficient. And so it certainly is a headwind and it's a part of our overall forecast of costs, but we also have ways of mitigating that. Got it. Thank you. Thanks, Nishu. Thank you, Nishu. Thank you. The next question is coming from the line of Samuel Eisner with Goldman Sachs. So maybe just following up on that freight point. I just want to better on maybe just go back to John your comments, you're saying that the DC investments, the 70, 80 basis points associated from that are kind of episodic or one time yet Doug you just said that the freight inflation is about 10% year on year. I calculate that as being 30 basis points of a headwind. So I'm just trying to understand what's actually episodic versus actually ongoing impact of the gross margins going forward? Well, I think from a gross margin standpoint, if a normal inflation is passed along in price offsetting it. And so it's not necessarily a headwind from a gross margin percentage basis. What you saw in Q1 was a lot of excess extra costs related to the start up combined with the seventy basis points is we're in a very low sales volume period with before the spring. So that plays into it from a percentage standpoint. But we plan on the cost of our supply chain to be it has a minor headwind for the full year and that was really built into our plan at the beginning of the year and most of that cost was really incurred in the Q1, where I would say a negative headwind to our margin targets. So just to re summarize, the normal freight inflation that we're seeing, the 10% inflation, we're passing that on and we just see that as normal course and we pass that on into the market. The freight was front loaded. The DC cost or dilution was kind of front loaded into the Q1 and that becomes a tailwind for the rest. It kind of balances out through the year to become a net, very slight headwind, but you call it net breakeven. And those are the things that are going on with gross margin. Got it. That's helpful. And maybe following up on some of the comments on the full line offering, it sounds like there's a pretty large opportunity there. I was wondering if you could talk through some of the examples that you guys have had of actually creating full line offerings when you add hard tapes, when you add nursery? What how big do customer wallets grow from is it 2x, is it 3x, is it only up 10%, 20%? Just trying to Right. Well Right. Well, we've been filling in markets. I think when we first got here, the number of markets where we had full line was about 25. And so we've actually filled in about 20 markets. We've been at it 2 or 3 years, so you can see the rate. It takes a while to get the markets filled in. And if you think about a typical contractor that's doing construction, you look at the market, nursery is 40% on the market and hardscapes is with 15%, maybe 15%, 20% of the market, irrigation 15%, 20% agronomics, etcetera. And so if you look at the product mix of the market, that mimics what our contractors are using. So when you add nursery and hardscapes, which are big parts of the market, you become a much more important supplier to that customer. If you're only providing them irrigation or even irrigation and agronomics before, you maybe had, let's say, kind of 20% to 30% or 40% of their share of wallet when you add nursery and hardscapes, now you become a much bigger player for that customer. So it's a powerful effect. We see in our full line markets that we're more profitable than our other markets, partly because you become more important for those customers, you become more of an important partner and more intimate, you get to know them better, they get to know us better and we can add more value to them, But also because you have economies of scale that are local in a market, so your sales force, your general manager, your area infrastructure, if you will, is spread out now over a lot more sales and it gives you those local economies that give you that higher EBITDA percentage. So it works both for the customer, but also for the economics of our business. Okay. And maybe just lastly on the e commerce pilot, just any sort of cost that you guys are putting in that we should be aware of, any early successes? I mean, it sounds like, obviously, maybe it hasn't even been rolled out, so we're not sure of the efficacy yet. But any sort of expenses that we should be anticipating here in the back half of the year as you roll this out? Well, we call Last year, we spent $2,000,000 to $3,000,000 I think it's $3,000,000 total on e commerce, so it's kind of a couple of million more. That year over year spend was $1,000,000 in the Q1, more than last year. So you look at the remaining part of the year, let's call it $4,000,000 against $3,000,000 So we'll have an additional $1,000,000 spend versus what we spent last year on e commerce during the remainder of the year. So the biggest effect of that additional investment was in the Q1 where we had the least amount of sales, you'll see the rest of the year have much less dilution. And the pilot is going very well. We're fulfilling orders. We're seeing the customers use the site to do their quotes and to check pricing and all the things that we would expect them to do. It's still early, early days. But so far, it's been a smooth pilot, and we're very, very excited to spread this across the country and take our service to a new level for the customers and with our relationship with our suppliers. So we're really excited. It's finally in action, and we're able to use it to start gaining market share. Very helpful. Thanks so much. Thank you, Tim. Thank you. The next question is coming from the line of Michael Eisen with RBC Capital Markets. Please proceed with your question. Good morning, gentlemen. Good morning, Michael. Good morning. Just wanted to follow-up on that previous question. When we're thinking about broader picture, the different buckets you guys are using to generate towards that double digit margin performance, how should we think about any incremental spending across the different categories coming through? And then should we think of a step down before a material step up from things like the distribution center and the e commerce platform going forward? No, great question. No, we don't see a step down this year at all. We will our plan and our forecast would be to continue to march our EBITDA percentage upward. Last year, we were 8.3%, 8.4%. We're headed toward 10%. We think we'll achieve 10% -plus in 2019, 2020. And as we mentioned on the gross margin side, we do expect gross margin to expand this year. And on the SG and A side, even though we are investing in the company, we're also reaping the economies of scale on the, let's say, the base business. And that's enough to cover and give us some SG and A leverage for this year, which will increase in 2019 and 2020. And just to remind you, we've been building the head office and the corporate center and the field support teams and largely that build is complete. And so we're starting to get the leverage on that as well. So we're still diluting ourselves, building the company, making important investments for the future. E commerce is one of those, barcoding is another one that we're going to invest in this year. But now we're at a point where the operating leverage of the business can cover. We can still get operating leverage on the SG and A side. We're still going to expand gross margins and keep our steady pace to the 10% plus and hopefully beyond as we continue to garner new efficiencies, gain market share and perfect what we've started. Understood. And that's very encouraging. And then just transitioning quickly to the M and A side of the business. When thinking about your ability to execute the strategy, how should we think about the pace and kind of the human resource capacity you guys have as the business continues to go? And then additionally, when you're looking at some of the conversations you're having here today, has anything changed in the marketplace, whether it be asking multiples, what you guys are seeing as interest rate concerns or any increased competition on the bidding front out in the market? Yes. On the M and A side, Michael, we see a good acceleration, right? We did 8 acquisitions last year, and I would say we should expect 10 to 12 this year. We've had a really good start, right? We've done 4 deals in 4 months, about 100,000,000 TTM, which is our goal, sub goal for the full year. So if you look at the full year, I would say, we did $115,000,000 in 2016. We did $230,000,000 in 2015. We would expect the year to finish somewhere in between, right? So we've got really good momentum. We got several LOIs in place. We're making more offers. The pipeline is basically getting bigger quarter after quarter as expected. So it's a normal acceleration. The team is built to handle more than that. As you know, Doug and I, Private Life used to do a lot more than 8 to 12 yields a year. So we've built a team that could probably handle as many as 15, right? We don't expect to do 15 acquisitions a year, but that's the capacity that we have today. If we had to move to 20 deals a year, we would have to add some resources incrementally. And then so very good momentum, better momentum at this point this year than we had last year. And on a multiple, we haven't seen any chance, right? I mean, we remain the, I guess, the natural consolidator for the industry. The vast majority of our deals are exclusive. And I think when you look at the 26 acquisitions we've made over the last 3.5 years and the ones we're planning to make over the next few months, they really see SiteOne as a great home. So it's not just about the multiple, that kind of thing. Also making sure that you can integrate correctly. And we've got, we think, a secret sauce as far as integrating small and midsized family companies into SiteOne. So really good momentum on that front, Mike. And then if I can sneak in just one more clarifying Your guys reiterating of the full year guide does not include any of those LOIs or the idea of additional M and A throughout course of the year. Is that correct? That's correct. It does not include future deals. Awesome. Appreciate all the color and good luck. Thank you. Thank you. Thank you. Our next question is coming from the line of Matthew Bouley with Barclays. Please proceed with your question. Good morning. This is actually Marshall Metz on for Matt. Thanks for taking the questions. Good morning, Marshall. On private label products, I don't think any real mention today. I was just curious, where does that initiative stand? Yes. So we announced our launch of our Pro Trade private label lighting brand, which obviously we have our LESCO private label brand in agronomics. We have Green Tech in irrigation. We're excited to launch ProTrade in the lighting space. It has gone well. We did a couple of 1,000,000 in sales last year getting started. We've already done over 2,000,000 dollars in sales on pro trade, and we would anticipate that we'll do, say, dollars 10,000,000 to $12,000,000 of that this year. So that's a nice new line for us that's doing quite well. It's been very well received in the market. And then we're planning other private label launches as we go through the year to be announced as we make them available to the market. But it's definitely a strategy. It's going well. We have some nice brands and a lot of tailwinds. And private label tends to be a nice accretive initiative in terms of gross margin and EBITDA margin. So we're pleased with that as well. Great. That's helpful. And then maybe one for Pascal, just another one on M and A. How do you when you're in the market for deals, how do you think about balancing entering new MSAs or markets versus kind of backfilling your footprint to address what you want to do to fill out product suites in given markets? Yes. The largest opportunity, if you go back to that Slide 7 that Doug referred to earlier, is with the new product lines, the product filling, right? I mean, there's 80 markets where we're missing both hardscapes and nursery. So for an M and A guy, it's 160 deals potentially. Your eyes are pretty bright. And then if you look, there's another 50 we're missing either. So there's about 200 acquisitions potentially to be done with the product fill in, which is a very big priority. However, we still need, right, as Doug was alluding to earlier, to get a stronger position even in the core product lines like irrigation and agronomics. So you'll see some consolidation like we did with Atlantic this year, HydroScapes 2016, Green Resource in 2015, Grid Agronomics Company that joined us. So new MSAs is probably when you look at those two priorities, it will be probably the last because if you look at the footprint, the 180 plus MSA where we are, it covers a fairly big piece of the population. However, from time to time, I mean, as you buy a large company, they might have branches in MSA where we don't have a presence, so that accommodates. And also, I mean, we're exploring a few deals where we don't have a presence in the MSA, and the company is doing really well, very profitable, etcetera. So yes, we'll probably go from 180 plus all the way to 225 or something like that over time. But the priority is a product fill in and making sure we've got the perfect structure to serve our customers in those metros. And it takes a lot of moves, right, several pieces of the puzzle you need to put together to get that perfect structure or that great structure that we have, for example, today in Charlotte, Atlanta or Dallas, some other metros. Thank you. And I guess just kind of piggybacking on that, does your rollout of the distribution center footprint help if you do start to enter these new MSAs that are kind of off of your footprint now? Or I guess, are you better able to serve those as it make the process easier? Yes. I would say that the DCs support our entire business to include acquisitions. So and just one bit of color to add to what Pascal said. Since we're normally if you're greenfielding and you're going into a new market, it's dilutive and it's somewhat risky. Since we're acquiring into these new markets, we're acquiring the team, the relationship, the supplier relationships, etcetera. So we get the same synergies that we get in an existing market like you pointed out with the DC, with our purchasing power, etcetera. But we get a ready made team that's been in that market for 30 years. And so our acquisition strategy actually allows us to move into new markets quite readily teamed up with the right company, which gives us really good synergies. But the risk is no greater for us than if we're filling in an existing market. So that's an important factor that we think that plays to our advantage with our acquisition strategy filling in these markets. Great. That's all very helpful. Thanks and good luck. Thank you. Thank you. Thank you. Our next question is coming from the line of Chris Belsior with UBS. Please proceed with your question. Good morning, guys. Hey, good morning, Chris. I'll keep it brief. So just curious if you can kind of provide some color how you think the e commerce and some other initiatives you guys were working on? I think there was some stuff in terms of like field, the way you guys are collecting payment and taking orders out in the field. So how that might begin to offset some of the SG and A build as you continue to execute the acquisition strategy? And then just kind of tied to that, with regards to the cost takeout plan that you guys laid out a few years ago, where are we there? I mean, in terms of like what anything are we in? And like what's left to go there? So to the first question, e commerce, yes, we are excited that that will aid us in becoming more efficient. By the way, it will make our customers a lot more efficient and our suppliers a lot more efficient. So it's a win, win, win. But if you think about our SG and A, 65 percent or 70% of our SG and A is people related, and the majority of that is in the field, 80% of that's out in the field. So these tools that we deploy to include e commerce that can make our store associates more efficient, allow them to serve customers better and spend less time on administrative type of stuff, looking at pricing and those kind of things is a huge facilitator and a huge enabler for us to drive our SG and A now. And that's why we're so confident. I mean, we're making investments right now that are dilutive and we've not yet seen the benefit of the things that we've been working on to really drive SG and A efficiency. When we look out to 2019 2020 with e commerce in place, with our operational excellence initiatives down the road a bit, our full team here has already been built. We can see very, very nice accretive operating leverage on our SG and A for many, many years to come. So we're in that period. As we've said, we're now in a year where we can overcome the dilution of investments and new tools with the efficiency of things that we've done over the last 3 years and with our team in place. And that will be accretive to EBITDA margin. As we go out in 2019 2020, you're going to see the SG and A side be much more of an adder to our EBITDA expansion. We're up in above 23.5% in terms of SG and A to sales on an adjusted EBITDA basis. We see driving that down into the low 20s. So there's a lot of leverage there to be had. You're not going to see a huge move in 2018. You're going to see a small move. But over the next 3 to 5 years, you'll see us drive that cost efficiency in our business. So this is the kind of the beginning. We're just piloting the tool. We'll get it settled in and implemented in the second half, but look forward to reaping the rewards of that and the other things that we're doing supply chain and otherwise for many years to come. Great. Thank you. Okay. Thank you. Thank you. It appears we have no additional questions at this time. So I'd like to pass the floor back over to management for any additional concluding comments. Okay. Thank you. And thank you all again for joining us today. We very much appreciate your interest in SiteOne. Just to thank again all of our associates for doing a tremendous job helping us build the company and get us to where we are today. We'd like to thank our customers and our suppliers. We're highly intent on causing our customers and suppliers to win as we grow our company. But for our investors and shareholders, we appreciate your interest. We're excited about our long term growth and profitability, and we look forward to our next call at the end of the Q2. Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.