SiteOne Landscape Supply, Inc. (SITE) Q1 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to SiteOne Landscape Supply First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now turn the conference over to Mr. Pascal Convers, Executive Vice President of Strategy, Development and Investor Relations. Thank you, Mr. Convers. 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 Relation portion of our website at investors.siteone.com. We will be referencing the slides during this call. I am 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 in our Form 10-K for the fiscal year ended January 1, 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 our 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.

Good morning and thank you for taking the time to join us today. We're off to a good start in 2017 with strong underlying market demand and good momentum, as we continue to mold and develop our company and build on the progress that we made in 2016. 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 on our progress during the first quarter. John Guthrie will then walk you through our Q1 financial results in detail. Pascal Convers will provide an update on our acquisition strategy. And finally, I will come back to discuss our outlook for 2017 before taking your questions. Slide 4 of the earnings presentation shows an overview of SiteOne and our industry. We are the largest and only national wholesale distributor of landscape supplies over 4x larger than our number two competitor and larger than two through 10 combined. Though we are the mega leader, we have only 10% share of this $17 billion fragmented market in the U.S. and Canada, and so we had extensive room to grow for many years to come. Our end market exposure is well-balanced between maintenance, new construction and repair & upgrade, each enjoying attractive growth characteristics. And the landscape supplies market lends itself to wholesale distribution, with over 3,000 suppliers trying to reach half a million customers. SiteOne plays a critical role in helping both our suppliers and our customers to grow as we are the only wholesale distributor of scale that provides a full range of products and services that professional landscape installers and maintainers need. Our unique position in the industry is a significant competitive advantage and allows for rapid growth, both organically and through acquisition. Turning to Slide 5. Our strategy boils down to being both large and local. As a large world-class company, we can leverage economies of scale, resources, functional talent and operating capabilities that are difficult for our smaller competitors to replicate. We deploy these capabilities through our passionate experienced and entrepreneurial local teams, who have deep market knowledge and excellent customer relationships in order to deliver superior value to our customers and our suppliers. Our strategy is enhanced through the execution of our five 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, yet we are still in the early innings of implementation across most of them. Accordingly they provide the foundation to expand margins and accelerate organic growth over the next several years. Finally we have built a tremendous capability to attract, close and integrate leading local and regional companies through acquisition. We only acquire market-leading companies and so they add to our performance from day one and accelerate our growth and capabilities over time. With all of these positives, I would remind you that we are still in the early stages of building our company and executing our strategy. So although, we performed very well in 2015 and 2016, we will continue to gain strength as a company each year, and are much stronger today than we were a year ago when we completed our initial public offering. Turning to Slide 6. You can see that we performed well in the first quarter of 2017. This is a seasonally week period for our industry, given the slower winter months, and we were up against an unusually challenging comparison. Recall that we reported 45% net sales growth and 22% organic daily sales growth in the first quarter of 2016, as we benefited from very favorable weather conditions. Given that, I'm especially pleased to report that during the quarter, we grew our top line, expanded our gross margin and generated positive adjusted EBITDA during a period when it is typically negative. In mid-April, we provided select preliminary results for our first quarter, in conjunction with our filing for secondary offering. I'm also pleased to report that our results came in above the midpoint of the range for net sales, adjusted EBITDA and net loss. We closed the secondary stock offering on May 1, 2017. The offering was upsized from 8.5 million shares to 10 million shares and the underwriters exercised their over-allotment option, bringing the total offering to 11.5 million shares. Lastly we continued to gain momentum on the acquisition front with the completion of four acquisitions during the quarter. All of these acquisitions are very well-run companies, with terrific teams and excellent customer relationships in their respective markets. To summarize, we are excited about our progress so far this year and the underlying strength that we see in both the market and in our company. Our results came in better than expected during a seasonally week period, and our acquisition program continues to accelerate and contribute strongly to our performance to grow. Now I will let John walk you through the details for the quarter. John?

Thanks Doug. I'll begin on Slide 7 with the income statement walk for our first quarter results. We reported a net sales increase of 2% to $335 million in the first quarter, compared to $329 million during the prior year. We had 64 selling days in the first quarter of 2017, compared to 65 selling days in the prior year. Organic daily sales contracted by 2% for the quarter against a tough comp of 22% growth in the first quarter of 2016, as Doug previously mentioned. In the first quarter, we saw strength in our nursery, irrigation, hardscapes, outdoor lighting and landscape accessory product lines, reflecting continued strong growth in both the new construction and the repair and upgrade end markets. Organic daily sales for these products grew 3% for the quarter despite the challenging comparison to last year. Organic daily sales for agronomic products declined by 8% for the quarter, as the application of fertilizer and control products were pushed to the second quarter. Pricing of our construction products was flat to up slightly for the quarter. Pricing of our agronomic products, which includes fertilizer and control products, was down 2% due to decreases in the purchase cost of these materials. Pricing across all product lines was down 1% for the quarter. Acquisitions in the first quarter contributed approximately $16 million of sales growth or an additional 5% to our growth rate. Gross profit increased 4% to $101 million in the first quarter, compared to $97 million in the prior year. Gross margin was 30.1% for the quarter, an improvement of 60 basis points over the prior year. Our category management initiative was the primary contributor to this improvement. Product mix had a slight negative impact on margin of approximately 15 basis points. Selling, general and administrative expenses, or SG&A, increased by 9% to $114 million in the first quarter compared to the same period last year. The increase in SG&A was primarily attributable to labor and operating costs from our acquisitions. SG&A as a percentage of sales increase to 33.9% as compared to 31.8% in the prior year period. As we grow the business, SG&A as a percentage of sales will increase in the first and fourth quarters when we have lower sales volumes. Over the course of the year, we would expect that to even out. We expect to reduce SG&A as a percentage of sales for the full-year in 2017. We recorded a net loss for the first quarter of $10.5 million or $0.26 cents per share, compared to a loss of $5.6 million or $0.85 cents per share during the prior year period. The increase in net loss was primarily caused by higher interest expense and SG&A attributable to our acquisitions. The effective tax rate was 42.0% for the first quarter of 2017, as compared to 37.8% for the prior year period. The change in the effective tax rate was primarily due to the adoption of ASU2016-09 in the first quarter of 2017. Adjusted EBITDA was $1.2 million for the first quarter, compared to $4.5 million for the same period in the prior year. The decline reflected the tough comparison from a year ago, but as Doug mentioned, we were pleased to report a positive EBITDA during the seasonally weak period. Now I'd like to provide a brief update on balance sheet and cash flow statement as shown on Slide 8. Networking capital increased to $369 million at the end of the first quarter, as compared to $310 million last year. The increase in networking capital primarily reflects an increase in inventory relative to the prior year. Approximately half of that increase is attributable to acquisitions and the remainder is primarily due to the timing of our spring belts [ph]. We proactively brought in inventory earlier this year compared to last year in preparation for another early spring. In addition, we made some major enhancements to our supply chain this spring with the rollout of the JDA Replenishment System and with the addition of our first distribution hub. While both rollouts have been successful, we brought in additional inventory to reduce our risk and ensure a smooth transition. We expect working capital to return to more normalized levels over the next couple of quarters. Over the long-term, we expect JDA and the DCs will enable us to generate efficiency in our operations, including higher inventory turns and improved customer service. Net debt at the end of the quarter was $485 million and leverage was 3.7x our trailing 12 months adjusted EBITDA of $131 million. The increase in our leverage relative to our year-end leverage of 2.8x times adjusted EBITDA, reflects the normal seasonal increase in working capital and the completion of four acquisitions in the first quarter. As a reminder, our reported EBITDA leverage ratio does not reflect the annualized EBITDA contribution of the acquired companies. We expect our leverage to return to our target range of 2x to 3x EBITDA by year-end even with additional acquisitions expected to close during the remainder of the year. Cash flow from operations was the use of $55 million for the first quarter, compared to a source of $10 million in the year ago quarter. The change in operating cash flow primarily reflects the change in working capital previously mentioned. We made investments of $59 million during the quarter, which consisted of $56 million for acquisitions and $3 million 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 many of you know, acquisitions play a key role within our overall growth strategy. As shown on Slide 9, since our IPO a year ago, we have now acquired eight companies that added 25 branches to SiteOne and contributed $140 million in sales on a trailing 12 months basis. Now as we turn to Slide 10 and 11, you can see that the four acquisitions we completed in the first quarter; Aspen Valley, Stone Forest, Angelo's and AB Supply, all have a strong hardscapes component. This is perfectly aligned with our strategy to bring a full suite of products to our customers in every market where we have a presence. It is important to know that hardscapes product enjoy a strong market growth, as they are critical part of the outdoor living concept and are still penetrating the U.S. market in a robust way. We're pleased with our integration efforts, as many of these acquisitions have been fully integrated into the SiteOne organization and are delivering clear value as we realize or plan synergies. We continue to see a significant opportunity to grow profitably through acquisitions, which allow company 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. We would also like to thank all the leaders that come from our acquisitions as they have become great ambassadors, working hand-in-hand with our development and local teams to help SiteOne select the best companies to join us in the future. Our pipeline remains robust and our M&A strategy is accelerating as we continue to build a reputation as the buyer of choice in the industry. While the timing of acquisition cannot be fully predicted, we have additional acquisitions that we expect to close toward 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 Pascal. Overall we are pleased with our first quarter results and excited about our momentum as we progress through 2017. We see continued positive underlying market trend with good growth in residential and commercial construction, solid demand in repair and upgrade and steady demand in maintenance. Our customers' backlogs are strong, and we continue to anticipate that the market growth this year will be comparable to what we saw in 2016. While we reported slightly negative organic sales growth in Q1 against the very challenging comp, we are seeing strong growth so far in Q2 and expect our organic sales in the remaining quarters to balance out the first quarter. Again, though it is hard to predict quarter-to-quarter swings, which can be impacted by weather, we anticipate healthy overall market growth for the year. Building off of the market growth, we are confident that our ability to gain market share has improved and should yield stronger organic sales growth results than in 2016. This, coupled with continued gross margin expansion and modest SG&A leverage, should yield another year of progress in EBITDA margin expansion and base business EBITDA growth. Lastly as Pascal stated, our acquisition program is gaining momentum and we expect to see continued activity during the rest of the year along with good contributions from the companies that we've added so far in 2017. Overall we are confident that we can deliver another year of excellent performance and growth, and for the full year 2017, we are reiterating our expectation for adjusted EBITDA to be in the range of $155 million to $165 million, representing a growth of 15% to 23% over 2016. In closing, I would like to acknowledge all of the SiteOne associates who 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 the company of excellence for all of our stakeholders. Operator, please open the line for questions.

Thank you. We would now be conducting a question-and-answer session. [Operator Instructions]. Our first question is from Mike Dahl of Barclays. Please go ahead.

Hi. Thanks for taking my questions. Doug, just to pick up on some of those closing comments. I was hoping you could give us a little more color on just what the organic daily sales growth in April was and how we should think about the cadence throughout the year, understanding that by the end of the year you'll net out what you - the slight declines you saw in 1Q. But how should we think about acceleration through the year?

Thanks Mike. Good question. So keep in mind that the first quarter sales are about 17% of our sales overall, so that in the slight negative in the first quarter could even get bounced out through the remaining quarters. What you should expect to see is good strong growth. You remember last year we had negative 2% organic growth in Q2, and we're seeing good strong growth that - against that easier comp. And then that negative figure that we saw in the first quarter gets averaged out primarily in Q2, but in Q2 and certainly by Q3. So what we're seeing in April is good demand. We're very pleased with the sales that we're seeing. If you recall, the maintenance line was most affected in Q1 and that's progressing very nicely in Q2. And so what we see so far in April has a quite positive on what we'll see for the remaining of the second quarter and the rest of the year toward our overall annual growth targets. So, so far in April very good results.

Okay, great. And then my second question is on the pricing and mix front. It seems like a few moving pieces there and some of it, I guess, you have cost related on some of the pricing pressures. But how should we think about pricing going forward through the year both between construction products and agronomics? And then also the comment on some of the agronomics getting pushed out into 2Q and that impacting margins from a mix standpoint? Similarly how do you think mix will contribute to the full year?

Well, you know that mix had a negative 15 basis points impact in Q1. So again what we've seen is that our mix is comparable - our margins are comparable across product categories. So since I've been here for three years, mix has had a marginal effect on our overall gross margin outcome. And in terms of pricing, what we saw last year is we had - pricing was up 2% in the first quarter, that moderated through to the year, flattened out in the second half as we expected with some of the commodity costs going down, and we ended up 1%. This year we started off a negative 1%, that's really driven by agronomics. Our construction products are flat to slightly positive. We expect that construction products to continue to be up modestly through the year. The underlying cost for agronomics has stabilized. We actually expect those to either be flat or to go up through the year. And so we would expect our agronomic product pricing to flatten out during the year. Overall we expect flat to up 1% in terms of overall inflation on our product lines by year-end.

All right, that's helpful. Thanks and good luck.

Thank you.

Thank you. The next question is from Nishu Sood of Deutsche Bank. Please go ahead.

Thanks. I wanted to ask about SG&A. You folks have laid out clearly that in the past couple of years, the investment component of SG&A and clearly obviously we're seeing the results of those come through. Now that we're at the point where the investment in SG&A is inflecting, how should we think about the normal incremental SG&A that this business would show in the coming years? And you're just at the inflection point, at what point will the investment be done and those normal incrementals would begin to flow through?

Well, we're at the, I would say, the inflection point but we still are investing in the business. We'll probably spend $4 billion on e-commerce this year in preparation for the rollout. And so while we are expecting to start to realize that operating leverage, I don't think we're not still investing in the business. But in general, we would expect incremental margins of 15% to 16% range, so that's where - when we get stable and we're just leveraging volume where were we would be at.

Got it. Okay. And in terms of the supply chain initiatives, the distribution hubs, obviously there is a ton of benefits you can drive from that, as you implemented. It also is a process that's a little bit of risk, obviously the inventory build that you were discussing. Can you take us through your thoughts on some of the points of risk? How you're perceiving those? How you've managed to pass those? Where you see yourself in that process? And yet, just to hear your thoughts around that please.

Sure, Nishu. Well, first of all, we're very pleased. When you do supply chain transformations, there is a degree of risk. We've taken a very careful approach where we've had backups and backups to the backups along the way to make sure that we don't have any hiccups with our customers. And so where we're at today - there was two things, two major items that we had to accomplish. One was to put in our JDA Replenishment System and that manages our forecasting and inventory replenishment, and then put in the DCs in order to smooth out our logistics and lower our transportation costs. So in terms of JDA, JDA I would call it 80% percent complete. We've got it across the entire company now. We're still putting certain product lines into the system. We carried extra inventory, as we mentioned on the call, to make sure that if there were any hiccups, we had backups etcetera. And that has gone very well so far. We've had no material hiccups. Obviously there is little bugs here and there, but we've already seen the customer service benefits of JDA. It just does a much better job than our old system, which was 30 years old in terms of predicting demand and keeping the stores well stocked, and also reducing transfers across stores, which we also use as backups for inventory. So JDA, I would call it, 80% percent complete. So far it's going very well. The DCs, we plan to put in three DCs over the course of the 18 months. Our first DC in Fairburn, Georgia, which is Atlanta Metro, Georgia went in there in December and January. We now have that DC supplying over 150 stores. And once again, we're seeing immediate benefits. There has been no significant issues. We carry extra inventory. Again, we have backup systems to get inventory for our vendors, etcetera, as we go along. But that's gone very well and we are moving ahead full steam to put in DCs number two and number three. The second will go in Southern California. The third will go up in the northeast in the Northeast Ohio area. And we're ambivalent about the timing of those. We're parallel pathing both of those and depending on how quick we can get the real estate and those things resolved, you'll see DCs two and three go in really over the course of the summer and before the busy season next year. So, so far knock on wood. Our supply chain transformation has gone very well. We'll see the inventory gains and benefits from that later this year and on into 2018 and 2019, but full steam ahead, no problems and we're seeing actually benefits that are ahead - I'll just call it ahead of our expectations so far.

Got it. That's great detail. And one final just clarification question. The push of the agronomics products into the - sales into the second quarter, is that a function of year-over-year comps because obviously looking back to '16 the agronomic sales were pulled into 1Q. So on a year-over-year basis that would make higher agronomics on a year-over-year basis and in 2Q, or is that something particular to 2017 that is happening that you're trying to point out?

No, it's really the 2016 anomaly, if you will. Normally the agronomic products go down in the last week of March and fully in April, and that's when especially in the Northern and Midwestern territories that the soils are warming up and the climate is warming up to put those first applications in. In 2016, those applications started in early March, and so you had it and it's a difference of a couple of million dollars a day when the season kicks. And so that was really just an anomaly of 2016. What we've seen in 2017, if you can call it normal, is it is a very normal winter in the Northeast and Midwest. And so our progression of agronomic products look much more like 2015 and are right on track.

Great. Thanks for the color.

Thank you.

Thank you. The next question is from David Manthey of Robert W. Baird. Please go ahead.

Thank you. Good morning.

Good morning.

John, first off, could you just confirm that Hydro-Scape's moved from the acquisition bucket into the organic bucket this quarter?

That's correct. Hydro-Scape is in the organic bucket.

Okay. Second, you pick-up an extra selling day in the third quarter of this year, is that right? You go from 63 to 64 in the third quarter but the other quarters are equivalent year-over-year?

We lose a selling day. We lost a selling date this quarter in Q1. We lose a selling day in Q2. We pick up a selling day in Q3, and Q4 is the same. So over the course of the year, we will lose one selling day.

Got it. Okay. And then finally, thinking about the progression through the year, it looks like typical quarter-to-quarter organic revenues are often as much as 80% higher in 2Q than 1Q. I know last year they were only about 50% higher, and I think for obvious reasons we've talked about here the pull-forward and so forth. Is there any reason to expect that organic revenues wouldn't increase at least that 70%, 80% percent sequentially this year? And I'm just asking if there is any differences that you see out there in terms of so far weather or your current mix of products or geographies?

I will take that one. Now in terms of organic growth, John maybe you did the math. But the Q1 - if you remember last year, Q1 and Q2 averaged out with 22% in Q1 that negative 2%. And when you do the math, Q1 is 17% of our sales. Q2 is normally 33% percent of our sales, right. And so we really expect the same this year, as for those two quarters to average out. It might not be exactly that way. It depends on weather. What we're seeing today is that's occurring. And so it's just - I don't know the specific math percentages of those growth rates, but you can just look at it as by the half year, we should be on track for a regular annual growth rate by the half year.

Yes, the half year would be - we would normally do 50% percent and 51% in the first half of the year.

Right.

For that, with regard to that. I think daily sales will be a little less than the 80% number. But I think you are thinking about it is correct.

Right. So think of it as half of the sales in the first, half in the second half, growth rates should be similar between the two.

Got it. Thanks very much.

Thank you, David.

Thank you.

Thank you. The next question is from Keith Hughes of SunTrust. Please go ahead.

Thank you. Wanted to follow-up on the question on the DC rollout. In terms of rationalizing vendors, is that a process that needs to occur after you rolled out your - the DC network as planned, or can that be going on concurrently while that happened?

Yes, good question, Keith. Yes, we've been, if you call, rationalizing vendors now for over a year, and so that's something that very much can be done without the DCs. Obviously the DCs benefit our vendors because they can send full truckloads across the country and that makes doing business with us easier, and it allows us both to achieve savings in terms of freight etcetera. But in terms of taking our vendors down in terms of number and moving volume to preferred vendors, that's decoupled from the DC.

Okay. And what types of products will be a DC product and what type of products will still be shipped directly to the branches from suppliers?

Right. In general, it's the smaller packaged products that the DC - that would be DC types of products, so irrigation, chemicals, tools, those types of products. Our heavy-bagged fertilizer or hardscapes, mulches, nursery products, those would not go through the DC. Those would go still direct to our store sites.

Okay. Thank you.

Thank you.

The next question is from Robert Wetenhall of RBC Capital Markets. Please go ahead.

Good morning, gentlemen. This is actually Michael Eisen on for Bob this morning. Congrats on a great quarter. Following up on the DC conversations, I think a lot of the original plans were looking for benefits starting in the back half of this year. Sounds like things are going ahead of plan. You guys are ahead of schedule. What kind of benefit can we expect to see to margin performance this year and can this help push you guys closer to 10% range by 2018?

Well, certainly in terms of our line of sight to the 10%, we think of that as '17 and '18 together, and supply chain will contribute. The contribution in '17 will be - it will still be marginal as compared to say category some of our pricing. That still will come through, but it will be a positive benefit in 2017. Hard to call. I mean, it really does depend on the timing of DC two and three. And remember, when we put the DCs in, those are obviously slightly dilutive events, right. So we're looking at a net contribution for the year. And we do think the net contribution from supply chain will be positive but it won't be as powerful as it will be in '18 when we don't have any dilution. We're full speed ahead, and we've gotten the full benefit from that initiative. We are excited about what we see in '18 from supply chain.

Very helpful. And then looking at the M&A platform, you guys announced four deals. I think it was called for $85 million of revenues from those deals. Can you talk to where you are in contribution for fiscal year '17? How that tracks to the $100 million targets, and what M&A is embedded in that EBITDA target of $155 million to $165 million?

Yes, if you look at the M&A actually and you take the carry-over from 2016 and the 27 deals that we've closed, we've already actually exceeded the $100 million contribution target. So we are off to a good start with those four deals that we closed in the first four months. As far as the contribution, I'll let John maybe.

We gave our original guidance after when we completed those four deals, so that is provided in our number.

But we don't break down the EBITDA that you get from acquisitions versus what we get from the base. However they tend to contribute at the 7% to 8% EBITDA of sales today. If you averaged out the hardscapes deal, the irrigation deals, irrigations, you'll get to 7% to 8%

But just to be clear, we haven't factored in any additional acquisitions into our guidance, so that the guidance reflects what we've done to-date. We do obviously expect to do more acquisitions and depending on when they timed for the year, obviously could give us some additional EBITDA for 2017.

Yes, we only include the stuff that we've closed. Just to give you a little more color, we have made some good progress on current LOIs that we have and we expect to close this year. Since our last call, we've signed actually a few more NDA and we also have line of sight on the few LOIs to be signed, right, in the next few months. So the M&A pipeline continues to accelerate and we are off to a good start. Four deals in four months versus last year, you can see the acceleration.

Extremely helpful. Just what we are looking for. And then if we could sneak in one more, kind of bigger picture. Thinking of the macro backdrop, we have a lot of homebuilders talking about strength of the housing market. It seems like a really good spring selling season. So thinking of that and where we are in the economy. Do you guys help us think about the growth rates for the maintenance products and the more discretionary products in a growing macro environment?

Right. So maybe it's as steady as you go. It doesn't lift up with the new construction but it also doesn't go down when new construction falls off, so that's why we like it. We would look for normal growth in maintenance to be around 2%, 3% versus the new construction, like you said, with commercial and residential is quite robust. We would call that more in the 6%, 7% range. Repair remodels in the middle in mid-single digits 4% to 5%. That's our best guess at the end markets. But maintenance would be steady 2% to 3%. And those are nominal figures for us.

Of course, appreciate all the color. Thanks. Good luck.

Thank you, Mike.

Great. Thank you, Michael.

Thank you. The next question is from Chris Belfiore of UBS. Please go ahead.

Good morning.

Good morning, Chris.

So I just wanted to start to go back to the gross margin really quick, and it could just be just semantics maybe with last year's comments versus this year's comments. But last year, I think maintenance products were up by 20% in the first quarter but mix did not play a significant role in terms of the gross margin. That was the comments from last year. And so but this year maintenance did not - was not as strong but mix was like a 50 basis point headwinds. So I'm just trying to reconcile the two, and it could just be - just some moving parts that I'm not - that we're not seeing but just some color there if possible?

Yes, there is a lot of moving parts and it's not just maintenance. For instance, nursery was quite strong for us this year because the south part of our business had good weather and we have a lot of nursery in the south, and nursery tends to carry a slightly higher gross margin than the rest. So there is balancing across all the products but - so you shouldn't make that parallel just to the maintenance in less strong this year and more strong last year.

Okay. And then just a follow-on to the last question before me. I guess just in terms of what you guys are seeing and less so from the spring season earnings trend [ph], but more so in terms of like where interest rates are heading and people trying to extract equity of their house to bigger projects. What you're seeing there and if it's setting up any expectations for the summer this season?

Well, I would just say we see positive signs. We see the big ticket remodel projects continuing, and that obviously helps our hardscapes, our storm water and other products, the nursery products that would be a part of that. We're seeing good demand in the new construction. Obviously labor is out there is a governor, so it's hard when - if weather events cause delays, it's hard to catch up, but there is very strong underlying demand in the new construction market. And then I mentioned maintenance is steady as you go. But remodel, coming back to that, seems to be quite strong at this point. We think there is good depth to the market in terms of backlogs and our customers. We stay very close to our customers, their excitement and optimism. And so it seems like there is depth for this market. It doesn't look like there is any falloff coming in the second half. Still early in the year, but we certainly see the depth of the market is there.

Thank you.

Thank you, Chris.

Thanks Chris.

Thank you. The next question is from David Mann with Johnson Rice. Please go ahead.

Yes, good morning. Thanks for taking my question. Doug, in your closing comments, you talked a little bit - it sounded like that market share gains might be accelerating. Can you clarify, if I heard you correctly, and why - and if that's the case, why you think you're getting a little more traction?

Great question, David. We do think we're getting better and that will accelerate market share gains. We did a lot of work with our sales force in the latter part of 2016 and early 2017. In terms of restructuring our sales force, we put them in different roles where we have key account managers that are focused on existing customers, maintaining that business and growing share of wallet. And then we created a new role of the business development managers, specifically designed to go after new customers to attract them to SiteOne. We also have customer acquisition specialists on the market focused on small customers, which we had less focus on that last year, and we feel like there is good opportunity to gain share. We're underway with the very small customers, and it's because they just don't know of SiteOne. And so we're out there with a more aggressive sales effort. We're out there with marketing more aggressively and we can see the early signs of those benefits. The other part is we're pushing adjacent product lines in our stores. We're just more advanced in our capability to execute those. So this is all part of our evolution as a company. We've made a lot of changes over the last two years. In 2016, we really got around to really working on our organic growth capabilities and we're much stronger today than we were a year ago. And so that shows up through gaining market share, gaining those customers, better protecting our existing customers, better growing share of wallet with our existing customers. We're a one-stop shop, and a lot of times, we only have one or two product lines with customers that are using all of the product lines. And so it takes time to convince them that they can move that other business to us and we're seeing gains on that. So all the work that we've done, we're quite pleased with what we see. And that should translate into stronger organic sales in 2017 than we had the capability to achieve in 2016.

That's very helpful. A follow-up on your acquisition program. When you look at the deals you've recently signed and the ones you're working on, I think, one of the attractions to the story has been the fact that folks - you're potentially the only acquirer out there. Just curious if you still feel like, in most of these deals you've done and the ones you're working on, that that's still the case?

Yes, I mean, great question. No change. About 90% of the deals we work on are exclusive, right. So it's still a fairly favorable environment overall, and yet there is not much consolidation view on SiteOne right now as we look at the pipeline. And I don't anticipate any changes in 2017 and beyond.

That's great. And then one last question on the Partners Program. I believe you did a relaunch or some changes to it as you started the year. Can you just give us a sense where you are now in terms of maybe the number of customers that are participating in that and what penetration in sales you're seeing, and is that traction accelerating?

Yes, so in general, we made some changes to our Partners Program really mid-last year, and we made it available to smaller customers or that we lowered the hurdle and we made that more robust with double points for moving share of wallet to SiteOne. We're quite happy with the participation on that. I don't have the specific figures. We can get back to you on that, but the Partners Program I know covers a significant amount of our revenue. I think it's over 50% of our revenue, and we have seen that metric growing as well as the customer count within the Partners Program. But we can get back to you on that specific figures there. It's a great program. It's really unrivaled in the industry, and we're using it more effectively today than we did a year ago to capture that market share.

Great. Thank you for the answers and good luck on the year.

I think it's 48% of sales.

48% of sales. Okay. That was close.

Thank you.

Thank you, David.

Thank you. The next question is from Samuel Eisner of Goldman Sachs. Please go ahead.

Yes, thanks so much. And just following up on the acquisition pipeline. It does look like the multiples that you guys are paying on a sales basis are starting to creep up a little bit. I think what you've announced through the first quarter or through the first four months of the year, you're paying about 0.6x sales. I think historically people were thinking closer to half a turn. So just curious, are those negotiations - is there anything different about these acquisitions, or sellers ultimately expecting a little bit more? Maybe you can just help us understand why the number is creeping up a little bit?

Yes, good questions. I mean, the multiple of the EBITDA is not changing. It just happens that those companies were a little more profitable as a percentage of sales that some of the other deals. But on average throughout the year, I think, what you've seen in '15 and '16 should be about the same in 2017.

Got it. And maybe…

Go ahead.

So just maybe on the - just the ability to fund transactions. I think some investors are thinking that you guys can fund this all out of free cash flow, given the inventory build for this year and the expenses that you have put through in for the first quarter, do you still anticipate that you can fund acquisitions via free cash flow? Do you think you have to use some of your lines? Just curious how you think about it for '17 and then beyond.

We will primarily fund it out of free cash flow. I mean, that's our number one source. We have availability under our lines to go above free cash flow, and we will do that. But that availability - these are positive EBITDA contribution entities, so from a leverage standpoint, even though we maybe using slightly more than our line - of our line, we'll have availability or our actual leverage ratio. We expect to continue to delever while we grow the business.

Sam, just to give you a feel, we can spend about a - at this size of where we are today, we could spend about $150 million of funds on acquisitions and still be a mutual leverage to slightly delevering. So we ended the year at 2.8x. We spent $56 million to-date, so roughly $90 million more to end back up at the 2.8x or so, and obviously we could go further than that, but that's a lot of acquisitions. So we feel like we can fund it and still have good leverage in that target of 2x to 3x.

Got it. And maybe just a last one. In terms of moving from single-line to multi-line through a lot of your branches, where do we stand on that process? If you can maybe give an update either as a percentage of the number of stores or the number of storefronts that you've been able to move from single-line to multi-line, how has that impacted organic growth over the last two, three quarters here and what's the anticipation for the remainder of 2017? Thanks.

Right. Where we stand today is we have a little over 80 of our call, full-line stores that had nursery hardscapes, all the lines, I think, it's 83 is a specific count. We now have 24 hardscapes service centers, so we've done a lot of hardscapes acquisitions and we'll be moving some of our product lines into those to round them up. The remainder are branches tend to be multi-line. We only have a very small handful that are single-line. Those tend to be single-line agronomic stores. But the rest would carry agronomics, irrigation, some landscape supplies, tools, equipment etcetera. And so we feel very good about how we're building out our network but we still have a long way to go. Pascal, you might comment on how many markets we have full-line coverage versus still lack the full product line.

Yes, we only have a full-line coverage in 43 MSAs or markets out of 177, right, so it's about 24%. So there is 75% plus opportunity and that's why you see us buying hardscapes and nursery companies beyond the irrigation and agronomics in order to provide that full product line. So the runway is enormous. As far as having all the lines, when you acquire, for example, a hardscape or a nursery company, you can do some cross-selling but it's not immediate, right. I mean, immediately you get the purchasing synergies. You can have some fixed cost, branch consolidation but the cross-selling takes about a year or two before you get in the mode, okay, now you have access to all those product lines, right. We don't change the nature of the company immediately. But that's an opportunity that we're seeing and we're starting to take off. And if we were where we have a branch that tends to be focused on the one product line, they used to be called goals, I guess, under the previous management, referring to what they were seeing about the agronomics, we still have a few of those and we're going the change that. We're going to make sure that we start selling irrigation, potentially hardscapes nursery, as you know, takes six to eight acres. So you can't put a nursery unless you have a lot of space. But we think there is a lot of progress going on with the new sales force that we have and the management leadership that we have [ph].

Got it. Thanks so much.

Thank you. There are no further questions in queue at this time. I'd like to turn the conference back over to management for closing remarks.

Yes, great. Well, thank you again everyone for joining us today. We very much appreciate the questions and your interest in SiteOne. We're pleased with our performance so far. We feel good about the year. And more importantly, we're very excited about our longer term growth and profitability as a company. I'd like to once again, thank all of the SiteOne associates for a terrific job so far in 2017, and we're proud to be working together to deliver a good year for our shareholders. Thank you for being on the call.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.