Earnings Call: Q2 2017

Aug 9, 2017

Greetings, and welcome to the SiteOne Landscape Supply Second Quarter 20 17 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. Thank you. You may begin. Thank you. Good morning, everyone. We issued our 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 slide during this call. I am joined today by Doug Black, our Chairman and Chief Executive Officer and John Guthrie, our Chief Financial Officer. Before we begin, I would like to remind everyone that during this call, SiteOne Management may make certain statements that constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about future expectations, anticipation, beliefs, estimates, forecasts, plans and prospects. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in the company's earnings release posted on the website and provided in our Form 10 Q for the fiscal quarter ended July 2, 2017, as filed with the Securities and Exchange Commission. The company does not undertake any duty to update such forward looking statements. Additionally, during today's call, the company will discuss non GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of adjusted EBITDA to net income calculated under GAAP and other non GAAP measures can be found in our earnings release, which is posted on the website and in our Form 10 Q, which we filed with the SEC today. 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 time to join us today. Our progress continued in the Q2 as we grew our business both organically and through acquisitions and generated improved profitability. We also made important investments in the business to support our growth initiatives, to build our company and to strengthen our competitive positioning. I will start today's call with a review of our unique market position, our strategy to deliver superior long term performance and growth and some highlights from our progress so far this year. John Guthrie will then walk you through our 2nd quarter financial results in more detail. Pascal will provide an update on our acquisition strategy. And finally, I will come back to discuss our outlook for the year before taking your questions. I'll start on Slide 4 of the earnings presentation. SiteOne is the largest and only national industry leader with a 10% share of the $17,000,000,000 wholesale landscape distribution market. We have grown our footprint to 4 77 branches across 45 U. S. States and 5 Canadian provinces. The market remains highly fragmented and we see a long runway to continue to expand our both organically and through acquisition in the years ahead. Our business is well balanced between maintenance, new construction and repair and upgrade. These end markets are all healthy and growing and each of them has unique demand drivers, which provide us with a good level of diversification and balance through the construction cycle. The breadth of our product offering and the depth of our value added services further set us apart in the industry and provide significant competitive advantage and growth opportunities. Turning to Slide 5, our strategy leverages the advantages of being both large and local. As a large world class company, we can leverage economies of scale, resources, functional talent and operational capabilities that are difficult for our competitors to replicate. At the same time, our entrepreneurial local teams leverage their deep market knowledge and strong customer relationships along with these large company capabilities to deliver superior value to our customers and to our suppliers. We remain highly focused on executing our 5 commercial and operational initiatives covering category management, pricing, supply chain, sales force performance and marketing. These initiatives have contributed to our strong performance in recent years and provide the foundation to expand margins further and accelerate organic growth over the next several years. Finally, we have built a tremendous capability to attract and integrate leading local and regional companies through acquisition. These acquisitions provide additional revenue and profit growth as we expand our product lines in existing markets to better serve our customers and broaden our geographic reach to new markets. Just as importantly, the leading regional and local companies that join SiteOne bring tremendous talent and new best practices that we quickly assimilate across our company, further strengthening our competitive advantage. While we have made significant progress during the past few years, we remain in the early stages of building our company and executing our strategy. Turning to Slide 6, we reported strong results for the Q2 of 2017. We grew our top line, expanded our gross margin and generated strong adjusted EBITDA growth. I'm pleased to report that our performance was also consistent with the selected preliminary results that we released ahead of the secondary offering, which closed on July 26. This offering of 5,400,000 shares represented the remaining ownership stake of our sponsors. On behalf of the company, I would like to thank Clayton, Dubliere and Rice and John Deere for their terrific guidance and support of our vision to build a world class company. I would also like to highlight that we successfully transitioned to a broad shareholder base in just 14 months through our IPO and three secondary offerings. We have a self funding growth model that generates strong cash flow, which allowed us to go public and support our growth initiatives and acquisitions without issuing any primary shares. On the acquisition front, we continued to gain momentum with the acquisition of Evergreen Partners during the quarter, followed by South Coast Supply just this Monday. These companies expand our full line offering in the Carolinas and in Southern California and bring us excellent new geographic locations in those markets. In total, we have now completed 6 acquisitions in 2017 with approximately $105,000,000 in annualized revenue. On the corporate governance side, I'm very pleased with the development of our Board of Directors as we have added 5 exceptionally talented, experienced and diverse independent members over the last 15 months. Recently, I was appointed Chairman of the Board and Bill Douglas was appointed as our Lead Independent Director. All of our Board committees are now comprised entirely of independent directors, and we look forward to continuing to build a world class Board to support SiteOne in the years to come. To summarize, we are excited about our progress in the second quarter and through the first half of the year. Our end markets remain healthy, and we continue to execute our successful strategy. Now I will let John Guthrie walk you through the details for the quarter. John? Thanks, Doug. I'll begin on Slide 7 with the income statement walk for our 2nd quarter results. We reported a net sales increase of 19 percent to $609,000,000 in the second quarter. There were 64 selling days in the quarter, which were unchanged from last year. Organic daily sales grew 8% as we experienced strong growth across all major product categories. We benefited from a return to a more normal spring this year following the early spring last year when we experienced unusually strong organic daily sales growth of 22% in the Q1 and correspondingly weaker organic daily sales growth of negative 2% in the 2nd quarter. For the first half of twenty seventeen, organic daily sales grew by a healthy 5%. Agronomic products recovered nicely during the quarter with organic daily sales growth of 9%. For the first half of the year, agronomic sales are up 1 Construction related products like irrigation, nursery and hardscapes grew 8% during the quarter and 6% for the 1st 6 months. Sales for these products benefited not only from the seasonal shift, but also strong demand in the construction and repair and upgrade end markets. Pricing for all products is down 1% for both the quarter and the first half of the year, reflecting a continued low inflation environment. Acquisitions in the 2nd quarter contributed approximately $54,000,000 of net sales growth or an additional 10% to our growth rate. Gross profit increased 20% to $202,000,000 in the second quarter. Gross margin was 33.3 percent for the quarter, an improvement of 50 basis points over the prior year. Our category management initiatives were the primary driver of this improvement. Product mix had a slightly negative impact on gross margin of approximately 20 basis points for both the quarter and the first half of the year. Selling, general and administrative expenses, or SG and A, increased by 7% to $127,000,000 in the 2nd quarter. The increase in SG and A was primarily attributable to additional staff and operating costs associated with our growth initiatives and our acquisitions. SG and A as a percentage of sales decreased to 20.8%, an improvement of 220 basis points for the quarter. The reduction in operating expenses expressed as a percentage of sales was primarily driven by the non recurrence of 11,000,000 dollars of costs incurred in the Q2 of 2016 related to our IPO and term loan refinancing. On an adjusted basis, we achieved modest SG and A operating leverage of approximately 10 basis points. We recorded net income of $44,200,000 for the 2nd quarter compared to net income of $26,900,000 for the prior year period. The increase in net income was primarily caused by the higher net sales, gross margin improvement and the absence of the costs related to the IPO and refinancing. The effective tax rate was 37.3 percent for the 2nd quarter compared to 40.2% for the prior year period. The change in the effective tax rate was primarily due to the adoption of ASU 20 sixteen-nine in the Q1 of 17. Adjusted EBITDA was $92,300,000 for the 2nd quarter compared to $75,000,000 for the same period in the prior year. The improvement reflects our strong top line growth and our ability to expand gross margin. Now I'd like to provide a brief update on our balance sheet and cash flow statement as shown on Slide 8. Net working capital increased to 409,000,000 dollars at the end of the Q2 as compared to $342,000,000 last year. The increase in networking capital reflects an increase in inventory, primarily attributable to acquisitions, product line expansions and higher stocking levels. As we mentioned on our last call, we are transforming our supply chain with a new JDA replenishment system and new distribution centers. During the transition, we are carrying more inventory to reduce the risk of disruption. As we optimize our new process over the second half of the year, we expect working capital to return to more normalized levels. Over the long term, we expect that both JDA and the DCs will enable us to generate efficiencies in our operations, including higher inventory turns, lower working capital and improved customer service. Net debt at the end of the quarter was $471,000,000 and leverage was 3.2x our trailing 12 months adjusted EBITDA of $148,000,000 which is consistent with the prior year period. During the quarter, we amended and repriced our $299,000,000 term loan facility, and we were able to achieve 100 basis points improvement in our borrowing rate or approximately $3,000,000 interest savings on an annualized basis. Cash flow from operations was $23,000,000 for the Q2 compared with $2,000,000 in the prior year period. The change in operating cash flow primarily reflected our increased earnings for the quarter. For the first half of twenty seventeen, cash used in operations was 32,000,000 dollars compared to $11,000,000 of cash provided from operations in the first half of twenty sixteen. This difference is attributable to the temporary increase in working capital previously mentioned. We made cash investments of $6,000,000 during the quarter, including $3,000,000 for capital expenditures. 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, acquisitions play a key role within our overall growth strategy. As shown on Slide 9, over the last 12 months, we have acquired 10 companies that added 29 branches to SiteOne and contribute $116,000,000 in sales on a trailing 12 months basis. Now as we turn to Slide 10, you can see some detail on the acquisition of Evergreen Partners in the 2nd quarter, which is a leading nursery platform in the Carolinas. Evergreen Partners strengthens our nursery position in Raleigh and gives us the number one position in Myrtle Beach, allowing for a full product line offering to our customers and meaningful cross selling opportunities. This month, we also closed the acquisition of Southcoast Supply, a leading Southern California hardscapes company with 2 locations, which is another great example of our ability to identify and acquire local market leaders. South Coast Supply further expands our full line offering in Orange County, presents significant cross selling opportunities and should also allow us to accelerate our hardships growth in the West. Our acquisitions are contributing meaningfully to the performance of SiteOne as many of these companies have been fully integrated into our organization and are delivering clear value as we realize our planned synergies. As we turn to Slide 11, we continue to see a significant opportunity to grow profitably through acquisitions, which allows 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 6 acquisitions year to date, which is as many as we acquired for the full year 2016, 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 attract the best company to join us in the future. While the timing of acquisitions cannot be fully predicted, we have additional acquisitions that we expect to close during the remainder of the year and contribute nicely to our growth in 2017 and beyond. And with that, I'd like to turn the call back over to Doug to discuss our outlook. Thanks, Tesco. Overall, we are pleased with the 2nd quarter results and excited about our momentum as we progress to the rest of 2017. We see continued positive underlying market trends with good growth in residential and commercial construction, solid demand in repair and upgrade and steady demand in maintenance. Our customers' backlogs remain strong and we anticipate that the market growth this year will be comparable to what we saw 2016. With the market tailwinds at our back, we continue to build our organic growth capabilities through our sales force performance and marketing initiatives. All of these factors support our belief that we will achieve improved organic growth in the full year 2017 versus the full year 2016. As Pascal stated, our acquisition program is also gaining momentum, and we see good activity, which should produce additional acquisitions in the second half of the year. The companies we have added this year are performing well and will continue to contribute to our overall results in 2017 and beyond. We expect further gross margin improvement in the second half and modest SG and A leverage, both of which will result in EBITDA margin expansion and base business EBITDA growth. Taken altogether, we are reiterating our full year 2017 expectation for adjusted EBITDA to be in the range of $155,000,000 to $165,000,000 representing growth of 15% to 23% over 2016. In closing, I would like to acknowledge all of the SiteOne associates who have worked tirelessly serving our customers and who have made us successful to this point. 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 Our first question comes from the line of David Manthey with Baird. Please proceed with your question. Hi, good morning guys. Good morning, Devin. First off on the pricing, you noted that you're still seeing down slightly. And I know that previously you've mentioned that pricing through 2016 moderated as we move to the back half of the year. Does that imply that you can possibly get to flat by the second half of twenty seventeen? Or given that some of the inputs are trending lower again, are we still looking at down slightly, do you think? Yes, David. Good question. So we did moderate last year. We started out around 2% in the Q1 in 'sixteen and that flattened out. We ended up 1% last year. We're lapping that comp. So we were negative 1% in the first quarter, negative 1% in the second quarter, though slightly less negative. And so we do see some slight moderation. And we do expect pricing to kind of continue to moderate, although slowly, leaving us roughly flat at the end of the year. And the dynamics there are we're seeing the negative really in our agronomics and our fertilizer where costs are down quite a bit versus last year. And the remaining products, it's a low inflation environment and they're roughly flat. But we do expect that to continue to moderate, leaving us with flat overall at year end. John, do you want to add to that? No, I think you've hit it. I mean, agronomic products are down between 2% and 3%. The rest of the products are flat to up slightly. And you get that blended number where we're slightly negative for the year and we're moving towards flat. Okay. And then just seasonally, is there anything that you're seeing here early in the Q3 that gives you an indication that the normal second quarter to Q3 seasonality would be any different this year? We really don't see a big difference. We're off to a solid start in the Q3. July was a good month for us. So and as we noted, this year has been more of a normal year. Obviously, you've had some months that are rainier than others, but we're diversified across the 45 states and in Canada. And so that tends to average itself out. So, so far, we're seeing a fairly normal we saw a fairly normal spring and we're seeing things develop quite nicely for the fall. So nothing we see now gives us some sense that the fall would be materially different than last year. Thank you. Our next question comes from the line of Bob Wettenaw with RBC Capital Markets. Please proceed with your question. Good morning and congratulations on the secondary. I would like to say it's a surprising quarter, but with the pre release, it really isn't. Thank you, Bob. Thank you. I wanted to ask you, Pascal has been busy on the M and A front. You've added $20,000,000 of acquired revenues since posting your 2017 guidance. And some of Doug's commentary about the underlying demand trends and John's commentary about organic growth rising by 8% is certainly encouraging. So we're seeing this top line momentum and it looks like your EBITDA margin exceeding 15% during the quarter is terrific. So when I put the growth together with the margin strength, I just wanted to ask is your guidance on the back half of the year potentially conservative given the momentum you've outlined in 1H? Well, we obviously when we look at the year, we still have a happy year left. So there's a lot of year left. We have another season. So we have to see how that develops. But certainly, given the Q2, it gives us more confidence in that range. And so whether you call it conservative or not, we craft our range around a midpoint that we expect. But as we go through the year and we see more strength, obviously, we get more confidence in that range. So that's the best way I would describe it is we have more confidence after this quarter in that range than we had after the Q1. And as the Q3 is developing in July, that confidence would be further increasing. Got it. And then when you're talking about the M and A program you guys have, I think your targets coming out of the gate were about $100,000,000 per year and it looks like you've already got there and we're only 6 months into 2017 and in 2015 you had bought $230,000,000 last year you bought in 2016 $150,000,000 and you're already at a super fast clip this year. Should we be thinking that your ability to generate acquired revenues like you're doing in California is in excess of the $100,000,000 is a better run rate to think about the growth runway somewhere closer to $150,000,000 or $200,000,000 Yes. I mean, I guess when you look at the last couple of years, Bob, we've exceeded that. We feel very good about our pipeline, where we've got LOIs. We've got a lot of NDAs. We're making offers as we speak. We've got line of sight on quite a few deals to close before the end of the year. So you can't really predict, right, when those guys are going to show up, sellers sell when they're ready to sell and the size. But I think the numbers that you mentioned are aspirational and we're trying to get to those kind of numbers. So we're already about 120 contributions for the year and we think we're going to do better when we're done in 2017. That's encouraging. And final question and then I will pass it over. The EBITDA margin was extremely strong in the quarter and came in well ahead of what we were looking for and everybody else we know. I think it's a very fine print. I wanted to ask, when you're talking about kind of where you are and I think this is really question is for Doug. Can you just touch on your aspirational targets? It seemed like the margin progression you're making this year is very robust in a short period of time. How should we be thinking about long term profitability given the recent improvement that's coming in ahead of expectations? Thanks and good luck. It's a very fine quarter. Thank you, Bob. Yes, when we look at our EBITDA margin expansion and we look at where we're at and where we're headed for this year, we're on track to make good progress this year. And as you know, our milestone that we're headed toward is a 10% EBITDA to net sales. We expect it to get there in 2018, 2019. And so we do think we'll make good progress in the range that we have expecting reflects that progress that we're making. So, yes, we're pleased with the 2nd quarter. We don't take any one quarter and wait it more than the other, right? So we still have a year to deliver. But overall, the further we get in the year, the more confidence we feel that we're on track. And the 10% to us is a while it's a few years out, it's still a very we feel it's a very doable milestone, and we don't expect to necessarily see that as a cap or stop there. But feel good about reaching that goal. Makes sense. Good luck. Thank you. Thank you. Our next question comes from the line of Keith Hughes with SunTrust Robinson Humphrey. Please proceed with your question. Thank you. Just kind of building on one of the last questions is, as you start looking out particularly into 2018 as you ramp these margins up, do you think more of the growth in margin 2018 will come from SG and A or will it still be led by gross margin like we'll see this year? Yes, Keith. Great question. We do expect 2018 to be much more balanced between gross margin and SG and A. As you know, this year, we're still lapping a build from last year, which means we're at a slightly higher run rate at the corporate level from last year. We're investing in our supply chain. We're investing in e commerce. We're investing in marketing and sales. So we're still making significant investments, and that's why we've guided that in 2017, we're only going to see a very modest SG and A leverage. However, in 2018, a lot of those initiatives come through, the build's behind us. You'll see more of the gearing coming from acquisitions that we acquired 2 years ago. And so we expect greater SG and A leverage. Gross margin will continue. We still have supply chain. We still have category. We still have initiatives focused on improving our gross margin, but you'll see a much more balanced contribution between those 2, keeping overall pace when we play it all down to the adjusted EBITDA margin. Final question, you've given us in the past the number of markets where you have all lines offered, I think 43 was the last number I heard out of 380 odd MSAs. Can you give us an update on where you are, where you'll be at the end of this calendar year on that metric? I mean, when you look at the acquisition in South Coast and Evergreen, they give us more full product line in those metros. So we are making progress, right? When we came, it was about 30, right? And then we've done quite a few deals, like 20 over the last 3 years. It's now 43. So I would expect some progress. But again, it depends on when you close those deals in which metro, but it's going to be a very long runway, right? There's 80 markets where we don't have neither nursery or hardscapes, right? So there is a lot of opportunity. We'll continue to mine that. If you look at the last 10 deals, it's been 5 hardscapes, 5 nursery and that's again contributing to that one stop shop value proposition that we have for our customers. So I can't tell you exactly what the number is going to be, but it's going to be much higher. Thank you. Thank you. Our next question comes from the line of Nishu Sood with Deutsche Bank. Please proceed with your question. Thank you. So since we don't have to talk about weather as much this year, I thought I would dig into some of the underlying market trends. So just over half of your sales are from residential. I wanted to get your thoughts on the progression of demand you're seeing out of residential. John obviously mentioned, I think, the 8% growth in the construction, the discretionary categories that you sell. So the housing recovery is changing. Obviously, the entry level is the big theme that folks are talking about. How are you seeing the changes in the housing recovery? And obviously, there's a little bit more confidence as well. How are you seeing that affect your sales? And would the entry level maybe depress the rate of growth a little bit because there may be some less discretionary spend versus the move up? Or have you seen similar trends as the recovery has progressed? Yes, Nishu, great question. So, I would call, residential, we're seeing good steady growth out of residential. Of course, it's different in different parts of the country. The South or the Sunbelt is quite strong. If you get up in the Midwest and Northeast, the markets aren't quite as strong. But taken altogether, we're seeing similar trends in landscaping that you're seeing in other materials related to residential. It's been good steady growth, high single digit type of growth. Commercial has been similar. And so those markets have been steady. The remodel market, which is an important market for us, has also been steady. We would call that again, we would expect mid single digits and that's what we think we're seeing in terms of overall market growth. And then again, the maintenance is steady as you go. So I would call residential steady growth continuing from 'sixteen on into 'seventeen. Got it. So the entry level, we shouldn't take it that the entry level of the housing market spends less on landscaping than the move up or luxury end of the market? Well, if you look at the per home dollars, obviously, the larger the home typically, the more in the higher end the home, the more goes into it. But your starter home still have lots of landscaping that go in, nursery. Some in some areas of the country, the starter package includes irrigation. And certainly hardscapes and other products penetrate at all levels. So we see and one of the trends again that we benefit from is there is increased regulation and rigor around stormwater and that product line continues to be a double digit grower for us. So we are seeing that and that really works its way on down to the starter homes as well. Got it. And a question on the synergies and acquisitions, You folks have made quite a bit of progress in the last year or 2. And so obviously around category management and pricing. Does that mean that when you make an acquisition now versus let's say 2 years ago, that you can get more synergies out of it just because the advancement of your own science? Not really. I mean, I think that's a good question. Purchasing is we get that immediately and that's the same 2 years ago that was the case as well. And when you look at the other and that's about 2 third by the way of our synergies. The other third, which is a split between cross selling fixed cost, branch consolidation, we did the same 2 years ago. I don't think there's a change. Having said that, I would say Ross Danker and his team in category management have done a phenomenal job getting even better deals that we had 2 years ago in category management. So you could, I guess, assume that there's a little extra gap between where we are and where the targets are. But I think overall, it's about the same from a synergistic standpoint. Yes. And if you just add to that, we as we build our capabilities, the synergies will get better. I don't think it's something that fills into the models and it's a slow capability build, but it is a factor that works for us, right? There may be other challenges in the market that come up, but we certainly as we grow and as we add more companies and as our corporate teams get more developed, that turns into running our operations better, better execution of our initiatives and those translate to acquisitions. I would also advertise that every time we do an acquisition, we hit a great team and we get some secret sauce or a new idea and that becomes part of our playbook. So that also helps us to get stronger. And in that way, the next acquisition would benefit from that. So over time, we will gain strength in how deep we can go in an acquisition to help them to perform. Great. Thank you. Thank you. Our next question comes from the line of Chris Belfiore with UBS. Please proceed with your question. Good morning, guys. Good morning. So I just wanted to go back to the EBITDA margin a little bit. So in the second half if the second half expectations kind of will prove to be somewhat conservative and you get to that 10% close to that 10% number earlier than that 2018, 2019 timeframe. What should we expect to see kind of like a pullback or a slowdown in the margin expansion that we've seen? And if there was another leg up from that level, like what would drive that? Well, let me just reiterate, if you look at our guidance, we're not expecting a huge increase or ramp up in the pace for 2017. I mean, I think it's a good steady pace. We're on track. But we are still in the second, 3rd inning of developing our company. These initiatives, again, you were kind of only a couple of years old in terms of transforming the former John Deere Landscapes into SiteOne. And one of the things we focused on is a good steady pace of our initiatives and how we layer them in and how they build on each other because we don't we're not out just to make one particular year. We're out to build a world class company for the long term. And so, I think reflective in that and we're also diluting a bit in terms of investments in SG and A, etcetera, as we go along. So, I think reflective in that, you'll see a continued good steady pace onward into that 10% and we would aspire to continue afterwards. But in that, I wouldn't expect any pullback or the number may move around from quarter to quarter, but on an annual basis, we wouldn't expect any pullback. John, you might add? Yes. We wouldn't expect that. It's a steady pace that we're tracking to. Okay. And then just in other quarters, you guys have mentioned that labor shortage. And I'm just kind of curious how trends what trends are how that's going right now? And if that's having any effect kind of on just like the pricing environment that from your customer standpoint and being able to kind of Right. So the labor shortage continues to be real. Right. So the labor shortage continues to be real. It is a governor on growth. If you look at the commercial space in particular, a lot of projects are still being delayed and there's a good backlog partly because it's harder and harder for all trades to get these projects done. So that the labor is tight and naturally that does give our customers good opportunities to pass through price increases, to be more profitable. And so there is a positive in the market for our customers. And certainly, we support that and a lot of our tools and consultive selling is around helping our customers to be more profitable, both through product expansion and also by charging higher price and getting more out of the market. So, you see some of that still competitive market, but we do think the trends are favorable for our customers to do well in this type of market. Thank you. Thank you. Thank you. Our next question comes from the line of Mike Dahl with Barclays. Please proceed with your question. Hi, thanks for taking my questions. I wanted to start, I guess, just a follow-up to one of Nishu's earlier questions. I know it's difficult to peg down just given you've got a lot of exposures, but what do you estimate your blended underlying market growth actually was for 2Q relative to your 8% organic growth? Right. As you said, that's hard to track down, a lot of moving parts, a lot of product lines. But we do feel like we gained we're at a place now in our company where we are gaining market share fairly consistency. It's not a massive amount of share, but we are gaining some market share. So we would peg the market growth in 2Q as slightly below the growth that we posted, which was 8%. And again, that's a reflection of new construction, repair, remodel and maintenance. Yes, I would just add that it's important to remember that 2Q was aided by the swing in the quarter. So really what if you look it up really over the blended rate, what Doug mentioned is we were at a 5% for the first half of the year. We believe that shows some market share gain on top of where the blended market was. Is that great? Right. Okay. That's helpful. And then as a follow on to that, is there any additional color you can give us either quantitatively or anecdotally around kind of how much of the growth that you're seeing is above the market is coming from kind of I don't know if you characterize it from better cross selling through existing locations or any specifics around some of your more recent initiatives in terms of outreach to smaller contractors? Right. So, we did a of work this winter to restructure our sales force. We've built our marketing team. And so we have a much more intentional approach. We're very happy with where we are there. We're still developing that. And as you mentioned, part of that outreach was to gain share with the smaller customer, which was which we were under penetrated in that market. That is going quite well. We're seeing growth with the smaller customers at a higher rate than our overall average growth. So that initiative so far has been quite successful. So taken all together, we still have lots of room to improve. Our sales force continues to get stronger literally every quarter. Our marketing initiatives are just starting to kick in. Our small customer efforts, we just launched them this spring. So those are in the early days. But we like what we see in the early parts of this year and we would expect that to continue on into the second half of twenty seventeen. I would add that we also are investing in the future. Going to spend about $3,000,000 between $3,000,000 or $4,000,000 on e commerce this year and that will be a great new tool for our customers that they've asked for to not only allow them to order product, but it allows them to do takeoffs and to do job costing and all kinds of things that landscapers need. And they can do that when they're at home at night, which a lot of our customers use those types of tools when the day is done, and it's very convenient. And so we have new tools that we're going to deploy, which will certainly allow us to further reach small customers and better serve our midsize and larger customers that we're quite excited about. So we're by no means done, but our initiative is focused on share gain, but we're seeing more consistent results this year than we saw last year already. That's great to hear. Thanks. And final one from me, just clarification. I know you commented that from a working cap standpoint and you've said this earlier in the year as well, just some of the temporary increases in inventory, which are expected to normalize in the second half of the year. Could you just give us a sense of kind of quarterly cadence of how to expect these decreases and do you think is kind of the normal run rate once you're kind of rolled out on your ERP and the distribution centers? Sure. Let me just start by saying we are undergoing a transformation here really with the supply chain, with the installation of JDA and the DCs. And our number one goal in this whole process, especially in the first half of the year, was to not disrupt the customer experience. And with that regard, our customer service levels are up. So it's been a big success from that standpoint. But as we mentioned, there is really 2 items that we know we need to work on in the second half. One is we brought in excess safety stock to in case there was a disruption during this process. And then the other item would be to optimize the inventory levels and really our procurement, which hasn't been fully optimized now that we have this new great state of the art system. So with regards to the cadence, we would be expecting, I think in the second half, we're not going to give formal, but our goal is to not really be in the inventory turns similar to what we were last year. In that ballpark, I think is where we're headed. We will be rolling out the 2nd DC and so there may be a little noise in that, but certainly, we expect to improve on where we are at this year in the second half relative to the first half. Okay. Thank you. And I would expect that we see that somewhat evenly, but probably significantly in the Q4. Let me just add let me just add that, obviously, we're transforming our supply chain to both lower our costs and to improve our service levels while lowering our increasing our inventory turns. And we do expect that that will contribute on a gross margin basis next year. And in 2018, 2019, 2020, we're very excited about the working capital benefit that we can get through those lower inventory, more efficient supply chain. So we will eventually that will turn into a nice cash generator, but we're managing it very intently. And the supply chain team and John and the finance team, I think, are doing a terrific job. We've kind of accomplished a mission in the first half. Now, we want to optimize and get it down back to normal through the second half. That's great. Thanks for that detail. Thank you. Thank you. Mr. Black, there are no further questions at this I'll turn the floor back to you for any final remarks. Okay, great. Well, thank you all again for joining us today. We very much appreciate your questions and your interest in SiteOne. We're pleased with our performance in the second quarter and the first half, and we're even more excited about the longer term growth and potential of SiteOne as we continue to build a world class company. Again, I'd like to thank all of our associates that worked so hard to help us get here. And thank you for your interest in our company. Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.