Earnings Call: Q1 2016

Jun 22, 2016

Greetings, and welcome to the SiteOne Landscape Supply First Quarter 2016 Earnings Call. At this time, all participants are in a listen only mode. A brief 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, Pascal Converse, Executive Vice President of Strategy and Development. Thank you. You may now 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 slides during this call. I'm joined today by Doug Black, our 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 providing 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 and net loss calculated under GAAP 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 CEO, Doug Black. Thank you, Pascal. Good morning and thank you for taking the time to join us on today's call. We're excited to be hosting our first earnings call as a publicly traded company following the successful completion of our initial public offering in May. This offering was a result of a lot of hard work and dedication and I would like to take the time to thank all of those involved in the process. We look forward to this next chapter in the story of SiteOne Landscape Supply as we execute our strategy on the behalf of our new shareholders. I would like to start today's call by providing a brief overview of our business and our strategy for any listeners that may be new to the SiteOne story, followed by some highlights of our Q1 results. I'll then pass the call on to John Guthrie, who will walk through our financial results in more detail. Pascal Commerce will then provide an update on our corporate development initiatives. And then finally, I will come back to provide some comments on our outlook and then make some closing remarks before opening up the line for your questions. Turning to Slide 3, you can see that we are the largest and only national wholesale distributor of landscape supplies in the U. S. We hold an approximate 9% share of the highly fragmented $16,000,000,000 landscaping products distribution market and we are about 4 times the size of our closest competitor. The market is expected to grow meaningfully faster than GDP in the coming years, driven by ongoing maintenance of landscapes, which comprises approximately 45% of our sales, as well as robust investment in landscape remodeling and the ongoing commercial and residential new construction recovery. Our customers are professional landscape contractors and maintainers, who are typically small to midsize regional or local companies, and we serve them through our footprint of 4 66 stores in 45 U. S. States and 5 Canadian provinces. Slide 4 highlights the fragmented nature of the market and the key role that we play in the value chain. The landscape supply market lends itself to wholesale distribution with thousands of suppliers trying to reach hundreds of thousands of customers. We serve as a one stop shop in a market which is unique and are able to meet our customers' needs in ways that retailers and small competitors cannot. Additionally, we are a critical business partner for both our suppliers and our customers. For our suppliers, we provide an unrivaled conduit to the market while assisting them in growing their business and deploying new products and new technologies. Our customers, we provide not only the full breadth of products and services, but also critical business assistance to help them solve problems, find and bid projects, train their employees and win in the marketplace. Slide 5 shows the range of our product offering. Our key product categories include irrigation, fertilizer, control products, nursery material, landscape accessories, hardscapes and outdoor lighting. Across these categories, we offer approximately 100,000 SKUs and are the number one wholesale distributor in each of these 7 major product lines. Our ability to provide the full breadth of landscaping products gives us important synergies and competitive advantages, while providing a nice across maintenance, remodel and new construction as well as across customers and construction sectors, residential, commercial and recreational. I'd like to also highlight that we own the LESCO brand, which is the number one maintenance brand for industry professionals and comprises over 20% of our total sales. Turning to Slide 6, we're executing a strategy that we believe provides distinct opportunities to grow our business and expand our profitability both in the near term and over the long term. We combine the scale advantages and the capabilities of a large company with our passionate and entrepreneurial local teams in order to deliver superior value to our customers and our suppliers. This allows us to gain market share and achieve consistent superior organic growth and profitability. We complement our organic growth with acquisitive growth to achieve strong results for our stakeholders while extending our lead over the competition. 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 in the early innings of these initiatives covering pricing, category management, supply chain, sales force performance and marketing. These initiatives contributed a robust 320 basis points of gross margin expansion in 2015. And as you can see from our Q1 numbers, we are continuing to see good results from our initiatives in 2016. Turning to Slide 7, we are pleased with our financial and operational performance in the Q1 as we delivered strong results for the 3 months ended April 3, 2016. Net sales increased by 45% year over year. We generated significant organic revenue growth of 23%, while acquisitions contributed another 22% of revenue growth. Our organic growth was certainly aided by the favorable weather in February March. However, it also reflects a strong underlying market and our continued execution. Gross margin expanded by 3 50 basis points to 29.5 percent as we continue to benefit from our operational and commercial initiatives that I mentioned earlier. Adjusted EBITDA increased to $4,500,000 compared to a loss of $5,700,000 a year ago. The first quarter is typically our weakest quarter from a seasonal standpoint, both in terms of revenue and profitability. So I'm very pleased with the strong results that we delivered. I'd like to go into a little more detail about how the weather impacts our business and specifically how the unusually favorable weather impacted our Q1 results in 2016. Temperatures across the United States were warmer than usual in February March, which allowed the season to start earlier and thereby increased the demand for our products. Landscape construction contractors were able to start working on projects earlier, particularly in the northern markets, and the early spring resulted in fertilizer and combination product Q1, some sales were pulled forward from the Q2 to the Q1. Weather is something that we certainly pay close attention to and the weather does tend to move demand around from month to month and from quarter to quarter during the year. However, barring any highly unusual events, things tend to balance themselves out over the course of a full year. During the Q1, we continued to execute on our acquisition strategy. We acquired HydroScape Products in January and BlueMax Materials at the start of the Q2 in April. These Pascal will get Pascal will get into additional details on these later in the call. We're very focused on building the best team in the industry, which is an important advantage for SiteOne Landscape Supply. And I'm pleased that we continue to strengthen our talent in 2016 with key hires in HR, IT, supply chain, pricing and in the field. And finally, as I mentioned before, we are excited to have successfully completed our initial public offering in May, a true team effort involving SiteOne and our many partners. We are very proud to be listed on the New York Stock Exchange and involved with all of our new investor partners. With that, I will turn over the call to John Guthrie to walk through our financials in detail. Thanks, Doug. Now turning to Slide 8 and our Q1 2016 results. We are pleased with our performance as we reported strong results for the quarter with net sales of $328,500,000 up 45% compared to the $225,800,000 in the prior year. As Doug mentioned, we generated tremendous organic growth of 23%, while acquisitions contributed $51,000,000 or an additional 22% of our growth rate. Underlying growth was driven by the favorable weather conditions, strong demand and good execution of our commercial initiatives. With regards to the weather, certain products like pre emergent fertilizers are applied every spring to get your lawn in shape. Ideally, they are applied after the snow is gone, but before the soil temperature is warm enough for weeds to grow. When spring comes early like this year, the products are applied earlier in the season and correspondingly the products are purchased earlier. In this case, they were purchased in the Q1. Additionally, since almost all landscape construction work is done outdoors, warm spring weather is beneficial because it provides landscape contractors with more working days. In Q1, contractors were able to start projects in February early March, which is quite unusual. This drove strong growth in the sale of construction related products. The impact of the weather is best seen when you look at some of our geographic regions. Sales in our Great Lakes region grew 48% during the quarter, whereas sales in a warm climate region like Southern California grew 7%. Gross profit increased 66 percent to $97,000,000 compared to $58,600,000 during the same period last year. Gross margin was 29.5 percent for the Q1 of 2016 compared to 26.0 percent for the same period in 2015, a 3 50 basis point expansion. Similar to the drivers in 2015, we benefited from pricing initiatives, category management and reduced logistics costs. Mix did not play a significant role in our Q1 gross margin improvement. It is also important to note that our commercial and operational initiatives were in the very early stages in the Q1 of 2015, which is why we are seeing such a significant year over year improvement in Q1 2016. That said, we feel great about the potential for significant further improvement in gross margins going forward. Selling, general and administrative expenses increased to 104 point $6,000,000 from $73,100,000 in the same period last year. The increase was primarily attributable to our acquisitions, incremental expenses to support the increased sales volume and the investments in people, systems and processes that we made to support our initiatives that Doug also highlighted earlier. With strong sales, SG and A as a percentage of sales declined slightly from 32.4 percent in Q1 2015 to 31.8% this quarter. The net loss for the Q1 was $5,600,000 on a reported basis compared to a loss of $9,800,000 during the same period from the prior year. The net loss is reflective of the seasonality of our business. If you look at our quarterly results for 2014 2015, you will see that we record the majority of our net income in the 2nd and third quarters and recorded a loss in the Q1 of both years. Adjusted EBITDA increased to 4 point $5,000,000 compared to a loss of $5,700,000 in the prior year. It's important to note that we are defining adjusted EBITDA as excluding pre acquisition acquired EBITDA. If we had included pre acquisition acquired EBITDA as we did in the S-one, our results for the Q1 of 2016 would have been 0 $700,000 higher and our results for the Q1 of 2015 would have been $1,000,000 less. The improvement in net income and adjusted EBITDA reflects our strong sales growth and our gross margin improvement. Now, I'd like to provide a brief update on our balance sheet and cash flow statement as shown on Slide 9. Net working capital was $289,000,000 for the Q1 versus a year end value of $277,000,000 This increase in net working capital reflects both our seasonal build and the HydroScapes acquisition. Cash flow from operations was $10,000,000 versus a net use of $15,200,000 in 2015. The improvement in operating cash flow is reflective of the smaller net loss and a smaller working capital build resulting from both our stronger sales volume and the timing on our vendor payments. We made investments of $33,000,000 in the Q1 with $31,000,000 of that for acquisitions and $1,900,000 for capital expenditures. This compares to $56,700,000 in the Q1 of 2015 when we made the larger Shemin acquisition. Subsequent to the end of the quarter and before our IPO, SiteOne raised $275,000,000 through a new term loan facility that matures in 2022. Our net debt before recapitalization was $199,000,000 at the end of the quarter. Pro form a for the new capital structure, including IPO costs, net debt at the end of the quarter was $403,500,000 for a leverage ratio of 3.5x our LTM adjusted EBITDA. The leverage ratio would have been 3.2x under our previous definition of adjusted EBITDA, which is used in our debt covenant calculations. Our capital structure and our ability to generate cash provides us the flexibility to execute our growth strategy, including the funding of our acquisitions. We continue to work towards our longer term leverage ratio target of 2 to 3 times adjusted EBITDA. I will now turn over the call to Pascal for an update on SiteOne's acquisition strategy. Thank you, John. As Doug mentioned earlier, acquisitions play a key role within our overall growth strategy. We 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 products offering, consolidate a fragmented market and also, very importantly, add market leading talent to our team. We also realized significant synergies given our scale as the industry leader and our expertise integrating these companies and add real value capturing best practices that we can implement across all large organizations. Slide 10 highlights our recent track record. We closed 4 acquisitions in 2014, adding 18 locations and closed another 4 acquisitions in 2015, which added 50 locations. So far in 2016, we have closed 2 acquisitions, which have added 22 locations to SiteOne. The common theme across this transaction is that they move SiteOne into the number one position in certain in in the Northeast, the Southeast, the Midwest and Texas. The Green Resource acquisition gave us the number one position in fertilizers and control products in the Carolinas. On Slide 11, we show the 2 most recent acquisitions: HydroScape Products and Bluemax Materials. HydroScape Products added 17 locations to our existing footprint of 18 stores in Southern California and makes us number 1 in irrigation there. Bluematch Materials added 5 locations to our existing footprint of 26 stores in the Carolinas and makes us number 1 in hardscapes there. Both acquisitions further expand our product and customer breadth in these key markets. They also bring significant synergies and very talented local teams to SiteOne. On Slide 12, I'll highlight again that we only have a 9% market share today, and we believe that number has the potential to increase significantly over time, similar to consolidation that has taken place with distributors in other verticals. Our pipeline remains robust and is expanding as we continue to build our reputation as the buyer of choice in the industry. While the timing of acquisitions have been locked, we feel good about our start of the year and our ability to complete additional deals during the remainder of the year and in the years to come. And with that, I'd like to turn the call back over to Doug to discuss our outlook. Thanks, Pascal. In terms of our outlook, we're off to a strong start to the year with very favorable first quarter results. The underlying demand trends remain positive and we anticipate solid full year results. Additionally, our commercial and operational initiatives for 2016 are on track and continue to deliver good gross margin and EBITDA margin improvements. While we benefited from favorable weather trends in the Q1, which we believe pulled forward some revenue from the Q2, we have seen unfavorable weather in April May. In June, we have seen the weather return to normal with a corresponding increase in our organic sales growth. As I mentioned before, the weather tends to balance during the year and we have certainly seen that in the first half of twenty sixteen. In total, we are forecasting an organic sales growth for the first half of the year of approximately 8% to 9%, which puts us on track to reach our internal target for the full year. As Pascal mentioned, we have several ongoing discussions with acquisition targets and we feel confident that we will close more deals in the second half of 2016 in order to fuel our growth for 2017 beyond. For the full fiscal year 2016, we expect adjusted EBITDA to be in the range of $132,000,000 to $140,000,000 representing a year over year growth of 24% to 31%. Before I turn the call over to the operator, I would like to reiterate that 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 and 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. And finally, we have a tremendous team in place to execute our plans. In summary, we are well positioned to deliver significant value to all stakeholders in both the short and the long 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. And once again, we welcome and appreciate the support of our new shareholders. Operator, please open the line for questions. Thank you. Thank you. Our first question comes from the line of Nishu Sood with Deutsche Bank. Please proceed with your questions. Thank you and congrats on a good start and the IPO. Thank you. So first question I wanted to ask, clearly there's been a lot of focus on weather and you gave a lot of good details. So we appreciate that color. You I thought you did a good job of describing how if the season starts earlier, it leads to some extra sales and also some pull forward. You also discussed in the Q2 so far there has been some adverse weather conditions. Can you discuss for us a little bit when it happens a little bit later in the season, bad weather, how does that tend to play through for the rest of the year? You mentioned you still feel confident with your outlook, your growth prospects for 16.0. Just wondering if you could dig into that in a little more detail, please. All right. Terrific. Good question, Nishu. Yes, essentially, the weather, as we mentioned, it moves demand around. But what we found over the last several years in this business, it really doesn't materially affect the weather for the year. So this first half has been unusual on 2 extremes. You had the unusually favorable weather in the Q1, which pulled forward some demand. And then you had the wet weather, which tended in April May, which tended to even things out. The biggest effect obviously, that affects all our product lines, but the biggest effect, the most pronounced effect is on our maintenance products. But between the two, we really do not feel like we've lost any applications or we've lost any business for the year. It really has just been a shell game between quarters. So we feel good about our run rate. We feel good that the market's kind of normalized when you take the half year, we're set up to have a very good year. So we do not feel like we lost any win for the full year and feel good about the forecast going forward. Got it. Got it. And you gave the EBITDA guidance for the year. In terms of margins and your cost savings initiatives, how are those coming in relative to your expectations? Are those coming in line with your expectations, better than your expectations? How have those been looking so far this year? Right. I would call them in line to better. We're very pleased with the progress we see. If you remember, we went to list down pricing in the Q1. That's gone very well, which has given us more flexibility category initiatives are going quite well. So we feel very good about our initiatives. They're on track. If anything, slightly positive, slightly ahead of where we think we're going to end up. And so we feel good about those overall. Got it. And one last quick one. On free cash flow, appreciate the color there. I was just wondering if you could give us some sense of with the working capital initiatives and with the margin initiatives, what type of free cash flow conversion from your EBITDA guidance can we expect for this year? Well, we think about it from a net income standpoint and we should be exceeding our net income with regards to conversion to free cash flow. So our free cash flow should exceed our net income. Great. Thanks for the color. Thank you. Our next question is from Dave Manthey with Robert W. Baird. Please proceed with your question. Good morning. This is actually Luke on for Dave this morning. First question, maybe one for John. As we think about the 23% organic growth buildup this quarter, is there anything you can give us there regarding growth in each of the 3 end markets, so maintenance, repair and upgrade and new construction, either directionally or in absolute terms to help understand how that builds up? And then within those three categories, would you say that the weather benefit was roughly balanced across all three of those? I guess that's what it sounded like based on the prepared remarks. We don't aren't disclosing the specific maintenance in that segment, but I think it's we have disclosed in the 10 Q some of the products that correspond with those. And we're seeing good organic growth across the board. If you look at, say, our irrigation in those products in the Q1, we saw organic growth of 26%. And if you look at the growth of the maintenance products, that was like fertilizer, that was like a 21% number. Between the 2 of them, you get the strong overall organic growth. And so the favorable weather basically helped both categories. And what we've seen is that spread that we see between if you looked at our historical growth in those categories relative to the historical, we're continuing to see that overall in the Q1. And then follow-up maybe for Pascal. In the slides you talk about the M and A pipeline being deep and expanding. Just wondering if there's any color you can share relative to areas of focus near term or maybe ways to size the number of companies you're looking at or revenues at a very high level? And then connected to that with the associates that you do have out there, scouting deals for you, I think you said 60 or so in the slides. Can you maybe talk about what role those folks serve and how they've helped so far in sourcing deals? Yes. Thanks, Luc. So we see the pipeline as being pretty robust. As you know, it's very hard to predict when those deals are closed at the end of the day. But we've got very good visibility and line sight on a few acquisitions that we expect to close in the second half of this year, right? And when you look at the product lines, at the end of the day, it's across the board. We're looking at irrigation companies, madness companies, hardscapes and nursery, right? So, we're not really putting a preference over any product lines. When you look at the scaling and the way we try to source deals, we've got the regional vice presidents, you've got the dividend presidents, you've got the area managers. We've got all those guys in the field helping us. They're building relationships at the end of the day with their peers and their competitors. Then the development team is working with them to make sure that we take those deals to the finish line. So, we've got a very wide net that we've cast, thanks to the presence and the footprint that we have in the U. S. Great. Thank you. The next question comes from the line of Samuel Eisner with Goldman Sachs. Please proceed with your question. Yes. Good morning, everyone. Good morning. So, going back to the weather question, I was wondering if you could either put a dollar amount or even a percentage basis on how much weather was a benefit in the Q1? And maybe of last year? And how much of that may have been pulled into that Q1 of this year? Right. Well, I think it's the way we think about it is percentage and kind of organic growth. And so if you look at the Q1, 23% organic growth. And again, that was across pretty much all products were in the 20s, right? So we had a nice even blend of growth across all our product lines. Those will normalize down to their what we figure are more reasonable growth rates for the year. And again, if you look at maintenance products in general, they tend to grow at 2% to 3% overall kind of GDP level growth. So you can do the math there. And then our construction related products would be up in the low double digits, which is a blend of high single digits, low double digits, which is a blend of the remodel and the new construction. So as you take those 20% to 25% growth rates and you normalize down, you can do the math and figure out how much that is in dollars for the pull forward. Got it. How much did the market grow in the Q1 on a kind of geographic neutral basis? I mean, obviously, you guys growing 23%. I presume that there are some share gains or outgrowth on that's embedded in there. So I'm curious how much of your 23% was driven by outgrowth? How much is just pure market growth? Right. Well, we think of course, it's hard to tell when you get that much growth what the market is actually doing. But we think the market fundamentally is growing at a blended rate of 5%. And again, that's an average of the maintenance, the repair, remodel and the new construction. And as we look at the market, we still believe that's the case, that the market is growing at a blended 5%, plus or minus. And then our growth, we aim to pick up a couple of percentage points on top of the market as we execute our commercial initiatives as we gain share and use our advantage in the marketplace. So but we do still feel fairly confident in that 5% plus or minus market growth underlying both quarters so far this year. Got it. If I just transition to the profit growth, so profit gross profits are up nearly $40,000,000 on a year over year basis. You called out in your Q that pricing and category management added about 2.40 bps to the margin that's roughly $8,000,000 So if I exclude pricing category management, you're off 30. I'm just wondering if you can help me bridge from what you reported last year to what you reported this year in gross profits. If I include that 8,000,000 dollars of pricing category management, what's the remaining $30,000,000 If you can break out volume, if you were in acquisition, that would be very helpful for us. Right. Well, if you take the overall acquisition growth was 22% on sales, right? And obviously, those acquisitions delivered kind of our normalized gross margin. And then the additional growth on the organic 20%, 23%, I would apply our normal gross margin to that as well, right? So the main sources of gross margin outperformance were the improvement in the gross margin percentage, the additional organic sales and then the acquisition added revenue with, let's say, the normalized gross margin. That's helpful. And then just lastly, if I just think about the Q2 here, you commented about April May being weaker for because of weather. How should we about your monthly sales? Is it roughly a third, a third, a third between I think about just the full quarter between April, May June? Are you guys heavily weighted to June? Just curious if I'm thinking about the blend, what the mix would be on a month by month basis for that second quarter? Thanks. Yes. I think if you look at the 3 months of April, May June, they're all important months. John, do you mind coming to the To a certain extent, we have an extra week in April. But if you looked on a daily sales growth basis, they're relatively close, June with April probably being slightly higher than May June on a daily sales basis. So I mean the difference between 5% higher on a daily sales basis. So something closer to like 40, 30, 30 for the 3 months? I think that would be correct. Great. Thanks so much guys. Our next question is from the line of Chris Belfort with UBS. Please proceed with your question. Hey guys. Congrats on a solid quarter in the IPO. Thank you. Yes, no problem. So the first question just kind of going back to the gross margin a little bit. You guys you mentioned that mix wasn't a big issue. Was that just because there was the you just like kind of like you said the organic growth is kind of very similar across all different product categories. I just I thought from a margin kind of standpoint, like things like fertilizer might be a little bit more have a little more richer margin than other products that you would sell in the winter months that you didn't sell this year? Yes. I mean, that's intuitively. There's some truth to that. I mean, something like melt is typically a slightly lower margin. But when we looked at actually did the math and actually looked at the different components, both with and without acquisitions, the math worked out that it just balanced out exactly to be a very small variance between the 2. And Chris, I would just add, I think that's a function of 2 things. One is that there is a fairly tight shot group across our major product lines in terms of margin, So within major product lines, things like ice melt would be lower and etcetera. But across the products themselves, it's a fairly tight shot group. The other impact is that we saw broad strength across all the product lines, right, with the exception of a few smaller ones within product groups. So those two factors together, it just didn't meaningfully change the mix or add any benefit or any negative aspects in terms of mix. Okay. And then just one follow-up. Just kind of in terms of weather, I know we had good weather in the Q1, said the weather was kind of a little bit challenging in May April. What about just like extreme kind of differences in the other direction in terms of like heat? Like in the Southwest, the weather has been very, very hot. It's only been a couple of weeks, but how does that affect you guys? And if that were to be a trend for a majority of the summer, how would that affect you guys? Is it positive, negative? Or how does that work? Yes. And I think that's where we have the breadth of product line that kind of works in our favor and that it's positive and negative. And I know that sounds like an unclear answer, but the heat will affect nursery and that as the planting season as the heat kicks in, the planting season for nursery products will pull back. But the heat will benefit irrigation. As the heat dries out the grass, that spurs our irrigation. It also helps some of our maintenance products, etcetera. So the heat doesn't necessarily isn't necessarily a negative or a positive. It's actually both. And part of the benefit of SiteOne being across all the product lines means that the puts and takes tend to average their sales out, and we end up with a solid overall growth. Great. Thank you. Thank you. Our next question is from the line of Robert Wittenhall with RBC. Please proceed with your questions. Good morning. This is actually Michael Eisen on for Bob this morning. Just wanted to follow-up a quick question on margin improvements. You guys had meaningful improvement in the Q1 and it seems like that's expected to continue based on your commentary of being ahead of plan. Can you talk about some of the key initiatives that you guys are have at the top of your list and kind of what expectation do you have for margin improvement and the timeframe for those top key initiatives? Thank you. Yes. So our key initiatives really are in 2 buckets. We have initiatives that are focused on margin, expansion and initiatives that are focused on revenue generation. The initiatives focused on margin expansion are pricing. And that's we need to make sure that we're competitive in pricing, but we're also doing everything we can to price smartly in the marketplace. And so we have a lot of initiatives around pricing to maximize our pricing benefit. On the category management side, we're working with our suppliers continuously to align with our preferred suppliers and win together. And so as we push volume to our preferred suppliers, it helps our costs. It benefits our suppliers. And that's a major initiative of ours that we've seen great benefits from and that we're going to continue to see great benefits from. And then finally, in margin expansion, we have our supply chain initiatives. Supply chain is something that we've been working on for the last year. We're installing a new replenishment system, a new state of the art KDA replenishment system. And we're moving our logistics to more of a hub and spoke logistics network as opposed to direct to store. And so as we do that, we're going to see good benefit from that, primarily showing up in some in 2016, but that's really a benefit for 2017 2018. So if you put those together, as we've stated before, we expect our EBITDA margins to we expect to move to 10% -plus on an EBITDA basis, adjusted EBITDA basis. And we see good line of sight of getting there over the next, say, 3 years. And 10% is certainly not a cap, but it's a milestone that we're heading toward. I want to mention 2 other initiatives, our sales force performance and our marketing initiatives. Those are focused on gaining market share and making sure that we have solid organic revenue growth. We're working with our sales force, both on territory alignment, on restructuring the sales force to move to an inside out which will benefit us. And then on the marketing side, we're putting in capabilities to do digital marketing using social media. We're doing that this year, which will really benefit us in 2017. And online capability, where our customers can go online and see their pricing, see inventory and even order online. So we're working on some exciting initiatives there that will make sure that we continue the strong organic revenue growth. So those are the 5 initiatives. They are all in good shape. They're on track, ahead of the game slightly, and we feel good about it in the rest of the year and beyond. Appreciate the additional color. Good luck. Thank you. Our next question is from the line of Ryan Merkel with William Blair. Please proceed with your questions. Great, thanks. My first question, could you just tell us how the irrigation market is performing in California? And then secondly, should the drought concerns lead to more irrigation demand long term in California? So in terms of irrigation in California, we're having solid results overall. And we have obviously, the impact of the drought has impacted us in terms of mix. We're seeing some mix change, say, from sprinkler systems to drip type of irrigation. We are seeing some turf removal in California, which is a negative for irrigation. But on the other hand, we're seeing a move to more sophisticated smart water systems, which is a positive. So what we've seen so far out of the drought in California is kind of puts and takes, negatives and positives. Together, we've seen kind of solid performance overall in California. Not spectacular. I would call it solid in the irrigation space. Got you. Okay. And then secondly, I know improving your supply chain is a big initiative. Could you just update us on where you are with that? And what is left to do? Right. So as I mentioned before, we're installing a new state of the art JDA system that we bought that system in late 2015. We are installing it as we speak. We have data that we're doing trial runs kind of as we speak, and we would see implementing that system fully in quarter 3 quarter 4 of this year so that we get the benefit of that in 2017. And again, we think that will benefit us not only on a cost basis but also in terms of our stock turns. We expect some improvement there as we can better manage our inventory. In terms of the hub and spoke logistics network, that's something that you want to do very carefully and very slowly. So we are planning to put in our first distribution center. That will be a 3rd party operated DC. And so that those plans are underway. Those will happen in the Q4 of the year. That might spill into the Q1 of 2017. We are experimenting with local market hubs. We have a local market hub now in New Jersey, and we're replenishing our stores and delivering to customers out of that hub. If you remember, we acquired a company, Green Resources, in the Carolinas last year. They are a hub based provider, and so they've given us good market intelligence. And we're taking that concept, and we're rolling that out as we speak. Again, we would see ourselves with, say, 15 or so local market hubs. So that's something that we'll do incrementally over time over the next 2 to 3 years as we build out our network. So that's the progress report. Things are on track. We feel very, very good about our team and our progress on the supply chain side. Our next question comes from the line of Judy Merrick with SunTrust. Please go ahead with your question. Great. This is Judy on for Keith Hughes. Just on your acquisition pipeline, is there anything else that you can tell us about any particular geographies that you're looking at? Yes. Thanks. And actually, really not. We're looking like for the product lines, we're looking at all geographies. We're not we've done more deals on the eastern part of the state so far, but we did hydro escapes in the early part of this year, which is Southern California. We'll probably do more deals in the west. So there's no real preference from that standpoint. Okay. Thank you. Yes. I would just add to that that we look at acquisitions on a local market basis. So we have we operate in some 130 metros major metros across the U. S. Each one of those metro areas has puzzle pieces that we would like to have to fill in our market. And so we basically use our local relationships and the relationships that we have with Pascal and his team and here at the center to cultivate or nurture targets across all those local markets. And then sellers sell when they're ready to sell and when the timing is right. And so it tends to happen across the country, market by market with no particular regional focus. And over time, we expect it to balance out, both geographically and across product lines. Okay, great. Thanks. Thank you. At this time, I will turn the floor back to management for closing remarks. Okay. Well, thank you. Thank you, everybody, for joining us today. We very much appreciate your questions and appreciate your interest in SiteOne. We're very pleased with the way we started the year. We're excited about the future. We're excited both about the not only about 20 16, but our longer term growth and our ability to continue to grow organically, grow through acquisition and expand our profitability going forward. And we look forward to updating you again when we release our 2nd quarter results in August. Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect your lines at this time.