Greetings, welcome to the SiteOne Landscape Supply second quarter 2016 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Pascal Convers, Executive Vice President of Strategy and Development. Thank you, sir. You may begin.
Thank you. Good morning, everyone. We issued our earnings press release this morning 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'm joined today by Doug Black, our Chief Executive Officer, 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 other factors are set forth in the company's earnings release posted on the website provided in our final prospectus 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 can be found in our earnings release, which is posted on the website in the Form 10-Q, which we filed with the SEC today. I would now like to turn the call over to our CEO, Doug Black.
Good morning, thank you for taking the time to join us today. I would like to start today's call by briefly reviewing our strategy, followed by the highlights of our second quarter results. I will then pass the call along to John Guthrie, who will walk you through our financial results in more detail. Pascal Convers will cover the update on our acquisition activities, finally, I will come back to provide comments on our outlook before opening up the line for your questions. I'll start with slide four of the earnings presentation. We continue to make progress executing our strategy, which we believe provides distinct opportunities to grow our business and create significant value for all stakeholders, both in the near term and over the longer term.
As we explained during our last earnings call, our strategy combines the scale advantages and capabilities of a large company with the passion, deep knowledge, and entrepreneurialism of our local teams in order to deliver superior value to both our customers and our suppliers. This allows us to gain market share and achieve consistent, superior organic growth and profitability. At the half point in the year, we have achieved 7% organic net sales growth, which is a reflection of our strategy. We complement our organic growth with acquisitive growth to achieve strong results for our stakeholders while extending our lead over the competition. This was once again highlighted by our recent acquisition of Bissett earlier this month. In addition to organic and acquisition growth, we also have the opportunity to expand our EBITDA margin as we execute our commercial and operational excellence initiatives.
We are still in the early innings of these initiatives covering pricing, category management, supply chain, Salesforce performance, and marketing. In the second quarter, SiteOne once again realized the benefits of these initiatives, expanding our gross margin by 220 basis points. Turning to slide five, we are pleased with our financial and operational performance in the second quarter as we delivered solid results for the three months ended July 3rd, 2016, despite the pull forward of organic sales into the first quarter. I am particularly proud of our ability to execute during a period when we completed both our IPO and a debt recapitalization. A lot of time and hard work by our team resulted in well-executed transactions. With the IPO behind us and a strong capital structure in place, we are laser-focused on executing our strategy, growing SiteOne, and delivering strong results for all stakeholders.
Net sales increased by 7% year-over-year in the quarter, reflecting good contributions from our acquisitions. Organic revenue declined by 2% in the quarter but was balanced with 23% organic growth in Q1, resulting in a 7% overall increase for the first six months of 2016. Our organic growth for the second quarter was negatively impacted by the pull forward of sales into the first quarter due to the early spring and resulting very strong demand. In addition, as we mentioned on last quarter's call, weather conditions in April and May were unusually wet and therefore unfavorable, followed by some improvement in June. As you have heard us say before, our business can be impacted by weather both positively and negatively in the short term, but this tends to normalize over the course of the full year.
That is exactly what we experienced if you look at our combined organic growth results for the first half of the year. Now let me address the previous forecast of 8%-9% organic sales growth for the half year versus the 7% that we achieved. There were two reasons for this. First, we had an issue with our forecasting process. We provide seed to blenders who then bag the seed and ship it back to us to be sold to our end customers. During our build up to the forecast, we incorrectly included some of that seed volume to blenders in our estimates for the second quarter sales. Note that this issue had no effect on our forecast for EBITDA. We identified the issue and have since fixed our forecasting process to exclude this volume going forward.
Second, we did expect June to be a stronger month for our agronomic and nursery products. However, the hot and dry weather came early in June and dampened the quarter end sales for these product lines. Aside from these two issues, we feel good about delivering 7% organic sales growth and 19% total sales growth for the first six months, which reflects our growing market and our continued ability to gain market share, both organically and through acquisitions. Gross margin expanded by 220 basis points to 32.8% in the second quarter as we continued to benefit from our operational improvements, primarily in pricing and category management. We are still in the early innings and will continue to see benefits from our commercial and operational initiatives for the next several years. Adjusted EBITDA increased by 12% to $74.9 million, and margin increased by 80 basis points to 14.6%.
For the first six months of the year, we generated adjusted EBITDA growth of 30%. Lastly, we continue to execute our acquisition strategy with the addition of Blue Max Materials in the Carolinas in April and Bissett in Long Island, N.Y. earlier this month, which provide us with leading positions in their respective markets. With that, I will now turn the call over to John to walk through the financials in more detail.
Thanks, Doug. Now turning to slide six in our second quarter 2016 results. We reported solid results for the quarter, with net sales of $513 million, up 7% compared to $482 million in the second quarter of the prior year. We experienced a decline in organic sales of 2% for the quarter, but an increase of 7% for the first six months of 2016. Organic sales for the second quarter were negatively impacted by the pull forward of sales into the first quarter due to the early spring. As Doug mentioned, we reported 23% organic growth in the first quarter. Acquisitions in the second quarter contributed $42 million, or an additional 9%, to our growth rate.
Looking at our organic growth in a little more detail, we saw the sale of our irrigation, lighting, nursery, landscape accessories, and hardscapes grew 2% in the second quarter and 10% for the first six months of the year. These products continue to benefit from the economic recovery in residential and commercial construction and a strong repair and remodel market. Sales were, however, impacted by the Q1 pull forward and the wet weather in April and May. We saw a good recovery in organic sales, however, in June. Our agronomic products, which include fertilizers, control products, and other lawn care products, experienced a decrease of approximately 11% during the second quarter following the 21% growth in the first quarter.
These products, which account for approximately one-third of our annual sales, were more heavily impacted by the pull forward as contractors applied pre-emergent fertilizers and control products earlier in the season in response to the warmer temperatures. For the first six months of the year, organic growth of our agronomic products was 1%. Gross profit increased 14% to $168.5 million, compared to $147.5 million during the same period last year. Gross margin was 32.8% for the second quarter 2016, compared to 30.6% for the same period in 2015, a 220 basis point expansion. We benefited from ongoing operational improvements in pricing and category management. Product mix had a slight negative impact on margin of approximately 20 basis points. Last quarter, we talked about these initiatives being their early innings. You're seeing that progress continue in the second quarter.
We feel confident in our ability to execute our strategy and expand gross margins further in the years ahead. Selling, general, and administrative expenses increased to $118 million from $91.3 million in the same period last year, while SGA as a percentage of net sales increased to 23% compared to 19% for the same period a year ago. The increase was primarily attributable to the acquisitions, expenses related to our IPO and debt recapitalization, and higher labor expense to support our growth initiatives. The impact from the expenses related to the IPO and debt recapitalization was $11.2 million, which increased our SG&A as a percent of sales by 220 basis points. Net income in the second quarter was $26.9 million on a reported basis, compared to $33.2 million during the same period last year.
The decline in net income for the second quarter was attributable to the IPO and debt recapitalization costs of $7.4 million on an after-tax basis and higher interest expense of $2.3 million after tax. Net loss attributable to common shares was $88.6 million for the second quarter, which resulted in a corresponding loss of $3.18 per share, the loss as a result of the $115.5 million preferred stock dividend recognized prior to the IPO. The weighted average for the common shares outstanding used in the earnings per share calculation was 27.9 million. The total common shares outstanding at the end of the second quarter was 39.5 million. The lower weighted average share number in the EPS calculation reflects a lower share count as a result of the conversion of the preferred stock to the common stock on May 16.
These common shares are included in the weighted average common shares outstanding from that day forward. Adjusted EBITDA increased 12% to $74.9 million compared to $66.6 million for the prior year period. The improvement in adjusted EBITDA reflects our strong gross margin performance and a good contribution from acquisitions. As a reminder, we define adjusted EBITDA as excluding pre-acquisition acquired EBITDA. Now I'd like to provide you a brief update on our balance sheet and cash flow statement, as shown on slide seven. Net working capital increased to $342 million for the six months ended July 3rd, 2016, versus $297 million as of January 3rd, 2016. This increase in net working capital reflects both our seasonal build and the impact of our acquisitions. Net debt at the end of the quarter was $397 million, which yields a leverage ratio of 3.2 times our LTM adjusted EBITDA.
Cash flow for operations was $2.2 million for the quarter and $12.2 million for the first six months, compared to $27.8 million and $12.6 million for the same periods in 2015. The change in operating cash flow for the second quarter reflects the timing differences in our working capital resulting from the early spring. We made investments of $13 million for the quarter, including $10.5 million for acquisitions and $2.5 million for capital expenditures. This compares to $10.7 million in the second quarter of 2015, of which $8.8 million was for acquisitions and $1.9 million was for capital expenditures. Our capital structure and our ability to generate cash provide us the flexibility to execute our growth strategy, including the funding of our acquisitions.
Our balance sheet remains strong as we made progress this quarter, lowering our leverage ratio to 3.2x adjusted EBITDA from 3.5x pro forma for the first quarter. Ultimately, working towards our longer-term leverage ratio target of 2x-3x. I will now turn the call over to Pascal for an update on SiteOne's acquisition strategy.
Thank you, John. As many of you know, acquisitions play a key role within our overall growth strategy. As shown on slide eight, we have now acquired 11 companies over the past two years, we continue to see a significant opportunity to create superior value for SiteOne through acquisitions, which allow us to move into new markets, expand our presence in existing ones, broaden our product offering, and also, very importantly, add market-leading talent to our team. As explained on our last earnings call, we acquired Blue Max Materials in April. Blue Max added five locations to our existing footprint of 26 stores in the Carolinas and makes us number one in hardscapes there. The Blue Max team will also be instrumental in helping execute superior hardscape best practices across SiteOne. As we turn to slide nine. Earlier this month, we were very pleased to add another strong company to SiteOne.
On August 1st, we acquired Bissett Nursery and Bissett Equipment Company, which complement very well our existing business in the agronomic, irrigation, and outdoor lighting product lines. We believe makes us the largest and only supplier of a full landscaping product line to green industry professionals in the Long Island, N.Y., and New York City markets. These are large and attractive markets, we're now the number one professional landscape distributor in those markets. The acquisition of Bissett also brings good purchasing and fixed cost synergies. Our pipeline remains robust and is expanding as we continue to build a reputation as the buyer of choice in the industry. Year-to-date, we have completed three acquisitions which contribute $140 million in annualized sales to SiteOne.
While the timing of acquisitions cannot be fully predicted, we anticipate closing more acquisitions in the remainder of the year that will contribute nicely to our 2017 growth. With that, I'd like to turn the call back over to Doug to discuss our outlook.
Thanks, Pascal. Overall, we are very pleased with our results for the first half of 2016. We executed an IPO, reset our capital structure, added three very strategic acquisitions, strengthened our team with key functional and field new hires, and demonstrated how our business can balance out significant swings in weather and still deliver market-leading organic sales growth, excellent margin expansion, and good overall growth in sales and profits. In terms of the outlook shown here on slide 10, the underlying trends in the market remain positive. Organic sales growth has recovered nicely for our construction and repair and remodel-oriented products. These include irrigation, lighting, nursery, landscape accessories, and hardscapes. The hot and dry weather is good for irrigation products and also facilitates more construction days.
That said, our agronomic products have seen a continued lull in the market, driving lower overall organic sales growth so far in the third quarter. Note that the summer months of June, July, and August are typically slower months for agronomic product, along with the nursery product line. The month-to-month organic growth rates during these months for these products tend to be less meaningful than predicting the full year. Demand for these products will typically pick up in early September through October during the fall application and planting season. Overall, we feel good about the positive drivers in demand, which support continued organic growth in the second half of 2016. We will have more visibility in September and early October as to how the year will finish up for our agronomic products, which are typically very consistent year to year with low single-digit organic growth.
In addition to organic growth, we anticipate continued benefits from our commercial and operational initiatives, which will drive our gross margin and EBITDA margin improvements.
We feel good about our momentum with these initiatives, which, as we have stated before, are still in the early stages of development. Lastly, the acquisitions that we have completed to date are performing well, and we expect them to contribute strongly to our second half sales and profit growth. As Pascal mentioned, we have a robust pipeline of strategic acquisition targets and believe that we will close more acquisitions than the remainder of the year, which will set us up nicely for further growth in 2017 and add terrific talent and new capabilities to our company. For the full fiscal year 2016, we reiterate our guidance and expect adjusted EBITDA to be in the range of $132 million-$140 million, representing year-over-year growth of 24%-31%. As we turn to slide 11, I remain very excited about the opportunities ahead for SiteOne as a public company.
We have a very attractive industry that is well-balanced and growing, which lends itself to wholesale distribution. We are the clear leader in the industry and the only national industry consolidator with significant competitive advantage. We have a compelling strategy to grow organically, expand our margins, and grow through acquisition. Finally, we have a tremendous team in place to execute our plan. In summary, we're well-positioned to deliver significant value to all stakeholders in both the short and the longer term. 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. Operator, please open the line for questions.
Thank you. We will now be conducting a question and answer session. Due to time constraints, we ask that all callers limit themselves to one question and one follow-up. If you have additional questions, you may re-queue, and those questions will be addressed, time permitting. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question comes from the line of David Manthey with Robert W. Baird. Please proceed with your question. Mr. Manthey, your line is live. Perhaps you have yourself on mute.
Yeah. Thank you. Good morning, guys.
Morning.
Morning.
Thanks for clarifying on the forecast and outlining. It sounds like the end of June and into July and August were in line with your expectations, qualitatively at least, so that's fine. Could you give us an update on mainly the pricing and category management margin enhancement efforts? Given the upside we saw in gross margin this quarter, should we assume that you're further along than you had initially planned, or are you seeing more opportunity in those areas?
Yes, great question, David. I think we're where we thought we would be. Obviously, we came in a bit stronger in the second quarter with those particular initiatives. Going into the second half, we feel good about those continuing. If you remember, we're kind of in the mid-stages of both pricing and category. We're in the early stages, obviously, of supply chain, which we would look to start really kicking in in 2017. Salesforce and marketing are also in the earlier stages. In terms of pricing and category, we're happy with our progress. We've got strong momentum. We've got terrific teams in place that are working both sides of that equation. One thing to remember is that obviously we saw big improvements in 2015.
As we lap those improvements, the pace of improvement in our gross margins will moderate, but we still see positive improvement in the second half.
Okay. That's encouraging. Second, as it relates to acquisitions, are you seeing any increase in competition there, or does pricing remain in a constant band as you've seen historically? Where you do see competition, is it just strategic players? Are there any PE buyers out there? Could you help us with that?
Yeah. Good morning, David. Well, the multiples remain the same. We don't see much changes. Most of the acquisition, we're doing are exclusive discussions. Here and there, we'll see. You saw that Pool Horizon acquired one company, but they'll do that every two to three years.
I would say so far, pretty much the same story. Reasonable multiples.
That's great. All right. Thanks, guys.
Our next question comes from the line of Bob Wetenhall with RBC. Please proceed with your question.
Hey, good morning, and congrats on making that nice EBITDA number. Hey, I was hoping you guys could step me through the drivers, kind of like the relative contribution on the 220 basis points of gross margin improvement. I also wanted to understand how we should think about gross margin as you shift from hot weather to cold weather. How does gross margin track as you have a product mix shift going through the back part of the year?
Okay. Good question, Bob. Good morning. In terms of the mix, we don't disclose specific metrics around each component. As we stated, the main drivers of margin growth right now are both our pricing and our category. Pricing to value for the various product lines. Obviously, we remain competitive with our customers, but we're pricing to those products that carry more value than others. Categories, working with our suppliers to create win-wins. As we push more volume to our preferred suppliers, then they reward us with better deals. Those two efforts are ongoing and working well for us. Can you remind me of the second half of your question? No, I'm sorry.
No, it's just.
It was hot and cold. Yeah, let me address the second question, was hot and cold products. Our product lines have a fairly similar band of gross margin across. Effects of different weather and shift of different mix tends not to dramatically affect our product lines. You saw that the mix effect in Q2 was a slight negative, I think 20 basis points. John, you might have more comment on that, but mix as it ranges from different cold or hot weather events tends not to shift dramatically.
Well, seasonally, you will see our gross profit margins really kind of peak in the second quarter and then go down from there. Just looking at prior year, you'll see a couple basis points or percentages dropping quarter to quarter. I think it's important to remember, though, that the improvements in our initiatives kind of go across all product lines, though. While the mix changes the overall number, the improvement year over year, I think our efforts are across all products.
That's a very helpful clarification. For my second question, your revenues came in light of your initial forecast, but your profitability came in ahead. If your second half results are consistent with your initial forecast as well as your profitability, is my math correct that puts you then at the high end of guidance within that $132 billion-$140 billion range, just based on the fact that your profitability on a lower sales number in 1H is ahead of your expectations. If you make 2H in line with the guide, you should be at the high end of the EBITDA range. Thanks, very nice quarter. Good luck.
Yeah. Thank you, Bob Wetenhall. Just to address that, I think it's too early to call. We feel confident about our guidance range. Too early to call where we are in that range. Obviously, we craft that toward the midpoint at this stage. In terms of market outlook, we are seeing good comeback in our construction-related products. As we mentioned, we are in a bit of a lull with our agronomics and nursery products. This is a slow time of year, kind of hard to call those growth rates. The big season for those products comes in the fall. In terms of predicting the market going forward, we feel like the underlying drivers are there. We feel like it's going to be a good market, it'd be too early to call within that range.
We should be able to tighten that up or give more insight, obviously, when we do our third quarter earnings release.
Makes sense. Good luck, gentlemen.
Thanks.
Our next question comes from the line of Nishu Sood with Deutsche Bank. Please proceed with your question.
Thanks. I wanted to dig into the sales trends and just to understand a little bit better about what you're seeing from 2Q into 3Q. call it the more construction or discretionary sensitive portfolio, the irrigation, lighting, nursery accessories, et cetera, hardscapes, I think you said up 2% in the second quarter and 10% for the first six months of the year. That's a business with the positive construction trends, high single digits sounds like it's pretty possible for that business. Are we back to that now? It sounded like your comments of so far in the third quarter, that business has been performing well. It sounds like maybe the pull forward on that side of the business is past us. Is that the right way to think about it, based on your comments about the third quarter so far?
Yes, Nishu, that's a good way to think about it. We saw a good recovery in June. June would've been on the higher end of that average for Q2. In July, we've seen even more recovery, kind of back toward normal levels for the construction-related products. We think, the pull-forward effects, et cetera, have abated, and we're back to kind of a normal trajectory in those products.
On the agronomic side, that business longer term, the low single digits, more stable generally, but probably more weather sensitive, as you were pointing out. What do you think is causing the continued weakness of that into the third quarter? It was down quite a bit, I think you mentioned in the second quarter. Has it improved since what we've been seeing in the second quarter? What do you think accounts for that? I mean, is it unusually hot? We've had some. The rains have settled down a bit in the third quarter, it looks like. Is it the heat or what do you think is driving that? What's the trigger, as you mentioned, I think in the fall season, you mentioned the pre-applications for the winter.
What would be the trigger point to kind of get that back on track?
Right. A great question. First of all, for our agronomic product, it's important to note that about almost 50% of that product goes in the four months of April, May, and September, October. All right? Those are very seasonal. As you mentioned, they are weather affected, and there's all different types of effects. For some things, hot and dry weather is good. You have more fungus, and we sell more fungicides and control products. The planting abates, and you have less fertilizer. The agronomic products do tend to move around month to month, quarter to quarter. Over a full course of a year, they do tend to average out to a very consistent level. We're seeing that. We had a huge swing in Q1 to the positive. We had that pull forward reflected in our Q2.
We have certainly improved versus the -11% Q2 growth rate, but we're into that summer lull. I would say the nursery product line also is quite seasonal. You have your spring plantings, then you have a bit of a lull during the summer, and then you have a big fall season. Those product lines can bounce around during the summer. It's hard to tell if it's softness or just lull or weather. As we get into the fall, we do expect, given the nature of construction and the inherent stable nature of maintenance, that those products will pop back, and we'll end up with those same growth rates that we expect for the full year. John, you have anything to add?
I would just say, it seems like if you look at our associates, they go from the fall season where they're going 1,000 miles an hour, then there's a lull. There's still some sales of fertilizer products, but even now in their mind, they're really gearing up for the seed season and the fall fertilizer season. They're starting their planning, the programs, and the design right now to do that. That really kicks off end of August and September, when they start going 1,000 miles an hour again. That's kind of the flow of activity with our associates.
Right. That's contrasted with the construction product lines, which go right through the summer. Hot and dry weather actually is good for irrigation. We sell more products there, then construction days add up in the summer, and we do good business in those other product lines. Once again, given our breadth across the country, our full range and breadth of product line, we tend to be able to balance out those weather events or various weather trends, and like we did at the half year, you end up with a full year good organic growth rate that reflects the underlying strength in the market.
Great. Thanks for the color.
Our next question comes from the line of Shannon O'Callaghan with UBS. Please proceed with your question.
Morning, guys.
Morning, Shannon.
Morning.
Hey, Doug, maybe just on the forecasting issue, maybe just explain that a little further, and just overall, how are you feeling about your forecasting methodology and your visibility in terms of guidance?
Right. Yeah. Well, seed is a very specific and somewhat complicated product line within our maintenance product line, that has less of our focus. We had an issue, we caught it, we fixed it. We're constantly reviewing all of our processes. As a company that's still building and developing, obviously we're improving processes, not just forecasting, but across the company. We're excited about the team that we've built, and we are excited about the fine-tuning that we're doing. We have better forecasting capability today than we had literally two or three months ago. I think that will continue as we go through this first year and tighten up our processes. It was an issue. We caught it. We've obviously scanned all of our processes now, we feel good about them and feel good about our ability to give good, accurate guidance going forward.
Okay, thanks. Maybe just a little more help on the second half, we have the agronomic pressure still in 3 Q, but then we have a pretty tough comp also in 4 Q. Could you help us a little bit more in terms of gauging what you're thinking for organic growth for 3 Q and 4 Q?
We would probably see balance across Q3 and Q4. It's hard to tell because the season really hits in September, October, and that's the split. It gets split between the two quarters. We do have a tougher comp in Q4, we would be naturally forecasting a little bit lower Q4 organic growth than Q3, but it all depends on how the season hits in September and October.
We're back to growth in 3 Q and then a little softer in 4 Q?
We would expect that at this point in time. One trend I'd like to just make sure you guys are aware of. We saw on the pricing side in the first half, normal inflation of about 100-150 basis points. We do see that some raw materials have dropped, and we'll see less price inflation in the second half which could affect some of the organic growth rates, right? We would expect, and we've seen some flattening in pricing. If it flattens 50-100 basis points, we still have opportunity to make good gross margin gains, given our size and the way we've been pushing on those initiatives. In terms of organic growth, that could clip a bit off the back side of the year.
Okay, thanks.
Our next question comes from the line of Ryan Merkel with William Blair. Please proceed with your question.
Thank you. Just to follow up on the last point, the inflation point, which raws are you referring to that are lower? What % of your products would you expect to see prices fall, second half from first half?
Yes. We've seen inflation broadly across most of our product lines. It's been relatively equal. It's not that we see prices falling, but we see prices flattening out. I think probably the most of the pressure would be in the agronomics category. John, you want to add to that?
Agronomics are going to be a little down, relative to other products. In general, I would say we've seen We're talking single digits here, when we look at the broad mix, but more what we're seeing will be flattening, as we go to the second half of the year.
Right. That's a good point. We're not looking at huge swings here. We're talking half and 1%, types of movements. Fairly small movements in the scheme of things.
Got it. Okay. A lot of puts and takes on sales, maybe it's coming at it a different way. Are you still expecting to see industry growth for the year up 5%? Is that still your target?
I think that would be dampened a bit by that price deflation, right? Generally, we see that kind of underlying market. If you take 3%-4% and you add some inflation, in the second half, if you take that inflation away, that's what we would expect. We'll see how the year develops, but we still do see a strong underlying market. Again, that's an average of Agronomics, which is very low single digits and the constructions, that's more as you mentioned, the higher single digits.
Okay. Then is there a typical seasonality that we can think of from two Q to three Q, to help us with modeling for the core business?
John, why don't you take that one?
Could you elaborate a little bit more on what you're specifically doing?
Yeah. You talked about a lot of your products being seasonal in nature, I'm just wondering, just as a rule of thumb, is there a decline, I guess, or an increase from two Q to three Q, typical normal seasonality that we can think about to help us with modeling?
Yeah. Q2 is higher as far as our daily sales are greater in Q2 than they would be in Q3. I would think, just from a modeling standpoint, if you looked at last year's historical numbers, you would get a relatively good mix as far as the way the seasons will follow.
Okay. That's helpful.
With the exception of Q4 last year was a bit stronger. It might be a bit more movement there-
Right
between Q3 and Q4.
Then just lastly, could you just discuss your list down price change? I know that really started in the first quarter. Did that build into the second quarter in terms of its relevance and impact? Then can you quantify for us what % of your year-over-year gross margin improvement was from this change to the list down? I am just trying to get a sense for how meaningful it is as a part of the whole equation here.
Right. We did execute the list down in really Q1 and part of Q2. That is complete. It settled in. Two reasons to do that. One is to make sure that our products are priced to value. We talked about pricing some of the tail SKUs and making sure our products are priced to value, from the cost up approach, which tended to constrain our local market leaders of having the pricing that was appropriate for that market. It also make the pricing more consistent for our customers, so we could add more value there. That has been fully implemented. As I mentioned before, we really combine that with category as the two main contributors to that Q2 and they are both solid contributors to the Q2 improvement.
Okay. Thank you very much.
Our next question comes from the line of Keith Hughes with SunTrust. Please proceed with your question.
Thank you. You had referred in a previous answer about second half of the year, 4-ish% organic growth. I guess that was the industry comment. I know for you have a very difficult comparison to the fourth quarter with the very advantageous weather in that quarter. Is that gonna skew what we see from you for the second half of the year? Just any sort of comments you give us on the shape of third and fourth quarter in terms of organic growth would be helpful.
Well, yes. Like we said before, it's a bit hard to call, right? You have two months that split the big season. Last year, our September was a little weaker, and obviously December was stronger. You would naturally think there would be some shift from the fourth quarter to the third quarter. Again, that's hard to tell. Weather, seasonality, et cetera. It's hard to call at this point, but the natural inclination would be that we would have a slightly softer on a percent basis Growth in the fourth quarter and a slightly stronger in the third quarter. John, you have anything to add to that?
That's exactly right.
Yep.
Yeah. Can you just tell us where we stand quarter to date in terms of same-store sales or organic growth?
We're not going to quote any specific metrics. As we said before, construction products are headed nicely toward norm, and we're still in a lull with the agronomics. On the agronomic side, as well as our nursery, the growth rates in the summer tend to be less meaningful than the ones in the season. We'll just leave it with that guidance, and as we get more into the third quarter, again, we'll have a lot more visibility as we head into the busier part of the season.
Okay, thank you.
Our next question is from the line of Bob Wetenhall with RBC. Please proceed with your question.
Hey, thanks for taking the question. Hey, Doug, or it's either for Doug or Chris Stout, jump ball. I just wanted to see if you guys are as confident in SiteOne's ability to continue gaining market share. You've been doing a lot of acquisitions, but I was really trying to understand the organic growth prospects with the large local strategy, if you still feel as excited about that as you did at the time of the IPO. Any comments on that would be really helpful. Not really looking for anything quarterly. I want to move beyond that and just really talk high level strategic. Is that scheme still intact? Thanks and good luck.
Yeah. Thanks, Bob. No, we were very excited about our ability to gain market share, we will build. We're already gaining market share, we're still in the early days of building our great company. The large local strategy is a very effective one. It takes time to build that. We've had to build the large side of that, which is the capability here at the center. That capability's largely a year or two old, so it's in its infancy, if you will. Our field is extremely experienced, passionate, driven. They know the customers well. As we sync those two up and combine those two, it's a very powerful combination. We have good confidence in it. We have our initiatives designed to support that.
As you see those unfold, they will not only help us expand our margin, but when we get into the Salesforce performance and the marketing, as well as the supply chain, now you'll see even more weapons for our local field to go out there and gain share by adding compelling value to our customer, better ideas, better tools, better products, and better services. We are just as excited, maybe more excited now than we were a year ago, or obviously three or four months ago during the IPO.
Cool. Thanks, guys. Good luck.
Thank you.
We have reached the end of the question and answer session. I would now like to turn the floor back over to management for closing comments.
Okay, thank you all for joining us today. We appreciate the questions and certainly appreciate your interest in SiteOne. We're very pleased with the strong start to the year that we've had. We're excited about the longer-term growth and profitability potential of our company, and we look forward to updating you again on our third quarter results in November. Thank you.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.