SiteOne Landscape Supply, Inc. (SITE) Q1 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to SiteOne Landscape Supply Inc First Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. I would now like to turn the conference over to your host, Pascal Convers, Executive Vice President of Strategy and Development and Investor Relations. Thank you, sir, you may begin.

Thank you and good morning, everyone. We issued our first quarter 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 these slides during this call. I am joined today by Doug Black, our Chairman and Chief Executive Officer; and John Guthrie, our Chief Financial Officer. Before we begin, I would like to remind everyone that today's press release, the slide presentations and statements made during this call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Such risks and uncertainties include the factors set forth in the earnings release and in our filings with the Securities and Exchange Commission. Additionally, during today's call, the company will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. A reconciliation of these measures can be found in our earnings release and the slide presentation on our website. I would now like to turn the call over to our Chairman and CEO, Doug Black.

Thank you, Pascal. Good morning and thank you for taking the time to join us today. The start of our spring season has been delayed this year from March to April, we’re seeing it come through now and remain optimistic about the underlying market demand and the strength of our company as we build on the progress that we made in 2017. I’ll start today's call with a review of our unique market position, our strategy to deliver superior long-term performance and growth and our progress over the past four months. John Guthrie will then walk you through our first quarter financial results in more detail and Pascal will provide an update on our acquisition strategy. Finally, I will discuss our outlook for 2018 before taking the questions. I’ll start on slide four of the earnings presentation. SiteOne is the largest and only national wholesale distributor of landscaping products with a footprint of more than 500 branches across the United States and Canada and a 10% share of this $18 billion highly fragmented market. We now have three major distribution centers up and running to support our branch network with product and logistical advantages. We are the only distributor of scale to provide the full range of products and services that professional landscape contractors and maintainers need. This full line product capability gives us competitive advantage and provides a nice balance across maintenance, new construction, and repair and upgrade end markets. Turning to slide five, our strategy combines the scale, resources and capabilities of a large world-class Company, with a passion, deep knowledge, and entrepreneurialism of our local teams in order to deliver superior value to our customers and suppliers. We further drive this strategy by acquiring leading local and regional companies to fill-in our product portfolio, add terrific talent to our team and expand our branch network across the U.S. and Canada. We believe the combination of these efforts will allow us to gain market share both organically and inorganically in order to accelerate our growth and profitability. Our strategy is enhanced through the execution of our five commercial and operational initiatives listed here, which helps to improve our value of the customers and suppliers, expand our margins and accelerate organic growth. Overall our market position, capabilities and strategy allow us to create value for our shareholders in three complementary ways, through organic growth, margin expansion and acquisition growth. Since we are still in the early innings of implementing our strategy, we believe that we can leverage all three of these areas to create significant value for many years to come. Slide 6 illustrates SiteOne’s history and our strategy in action. Following the spin out from Deere & Company at the end of 2013, we developed a vision to be a company of excellence for our associates, customers, suppliers, shareholders, and our communities. We then developed a detailed strategy to do this, leveraging our industry leadership position and the uniquely attractive aspects of the wholesale distribution market for landscaping products. Since then, we have been hard at work, building our Company, transforming our culture, and executing our strategy. As you can see from our financial results, our strategy is working with strong organic and inorganic sales growth over the past three years and adjusted EBITDA margins that remain on track toward our stated milestone of 10% plus. Turning to slide seven, an important part of our story is that we are still at the very beginning and we have only just begun to implement our strategy. This includes filling in our full product line capability in every major U.S. and Canadian market. The graph shows that we only have the full line capability today in 45 of our targeted 225 major markets. Primarily due to the lack of nursery and our hardscape branches. We plan to add the majority of these branches through acquisition in order to also bring in the local talent and both the customer and supplier relationships require to win in these markets. Additionally, we will continue to penetrate new markets and improve our market position in irrigation and agronomics through acquisition. In total, we have approximately 250 high-quality acquisition targets identified among the over 1000 estimated wholesale distributors in the market in order to help build our company and increase our market share over the next 10 to 15 years. This acquisition growth will complement our organic market share gains. Within the context of our strategy and evolution, I will now shift to our first quarter performance on slide 8. We achieved 11% overall net sales growth in the quarter despite adverse weather conditions, the delayed start of the spring season by approximately 3 to 4 weeks. We were typically see the season start during the second half of March. This March, we experienced more snow rain and colder weather than last year in all of our key markets except California, Arizona and Florida. Through February, our organic daily sales growth was 6% with pricing up 1%, a very healthy start to the year. With the delay in spring however, March organic daily sales were down 2% and so we only achieved 3% organic daily sales growth for the full quarter. As we look into the second quarter, the adverse weather trends from March continue to the first half of April, where we have seen spring pick into full year in the second half of April, with the strong underlying market, we expect sales for the remainder of Q2 and the rest of the year to be robust. Our gross margin contracted by 90 basis points to 29.2% in the first quarter due to a combination of the new revenue recognition standard, expenses related to our distribution center rollouts and a slightly less favorable product mix driven by the spring season delay. We expect these three factors to be tailwinds during the rest of the year. Our ongoing initiatives to improve gross margins remain on track and we are optimistic about our ability to improve gross margin as we look out over the full year. On the initiatives front, I am pleased to announce that we achieved two operational milestones since our last call. First, all three of our distribution centers are now up and running and successfully supporting our branches. The last of these three are DC and Pennsylvania just outside of [Pearisburg] started serving branches in March. We are very pleased with the performance of our DCs and I need to mention that they have added to SiteOne in terms of product availability and logistical performance. Our supply chain teams and field associates have done a fantastic job ramping these up and we look forward to ripping the rewards for many years to come. Second, in March, launched the pilot of our e-commerce platform the new SiteOne.com, which allows our customers to order product and schedule pickup or delivery all from their phone, tablet or computer. As you are aware, our e-commerce portal has been in development for over 18 months, and we are very excited that it is going live in select test markets. We planned to pilot the new site and then begin a countrywide rollout during the second half of this year. We believe this new capability will position SiteOne as the clear leader and service efficiency for our customers and suppliers. We believe that these investments and others that we are making to build our company will deliver tremendous competitive advantage in our fragmented market and support accelerated performance and growth for years to come. Adjusted EBITDA was a negative 5 million for the quarter compared to 1.2 million in the first quarter of last year, driven primarily by the delayed spring season and reduced gross margin. SG&A which includes acquisitions and key investments is on plan. On the acquisition front, we’ve gotten off to a great start in 2018 with three S1 acquisitions close during the first quarter and one company added in April. Among these was the strategically important Atlantic irrigation acquisition which significantly our irrigation business along the east coast. Overall, our acquisition activity continues to ramp up nicely and you can expect to see more deals closed during the remainder of the year. In summary, as we have mentioned before, the timing of our spring and fall seasons can swing sales between quarters and with our broad product and geographic diversification, these swings typically average out during the full year. While managing through this challenging quarter, I’m very pleased with how we have moved the foundation of the company forward to support strong performance and growth in 2018 and beyond. Now, John Guthrie will walk you through the financial results for the quarter in more detail. John.

Thanks Doug. I’ll begin on slide 9 with the income statement for our first quarter results. The reported net sales increase of 11% to 371 million in the first quarter. During the quarter, we had 64 selling days which was unchanged compared to the prior year. As Doug mentioned earlier, organic daily sales grew 3% in the first quarter. Organic daily sales were directly impacted by the snow, rain and colder weather in most of our markets. Five out of our 10 geographic regions experienced negative organic sales growth due to the weather. We saw weaker sales not only in the northern markets due to snow but also in the southeast due to colder temperature and more rain this year compared to last year. Organic daily sales for landscaping projects which includes irrigation, nursery, hardscapes, outdoor lighting and landscape accessories grew 4% as the fundamental demand in the repair and upgrade in new construction end markets remains strong. The western market saw especially strong growth in irrigation products which benefitted from both the strength in the economy and the drier conditions. Nursery sales which are primarily located in eastern half of the United States were down significantly due to the late spring. Organic daily sales for agronomic products which include fertilizers control products, ice snow and equipment grew 1% in the first quarter driven by strong sales of ice snow which were up almost 70%. Organic sales for February were up significantly due to the snow and the resulting increased demand for ice snow. However, in this no events were still occurring in late March and customer had the delay their first care application sales of agronomic products declined. Pricing increased by 1% year-over-year driven by cost inflation in our products. We expect this trend will continue and be a minor tailwind of 1 to 2% for the rest of the year. Acquisitions contributed 28 million through net sales in the first quarter or approximately 8% to our growth rate. Gross profit increased 8% to 109 million in the first quarter while gross margin decreased 90 basis points to 29.2%, gross margin contracted year-over-year as a result of higher supply chain costs from the rollout of the distribution centers, the adoption of the new revenue recognition standard and some negative changes in product mix brought on by the late spring. Supply chain costs increased approximately $3 million or 70 basis points driven by the startup with the new distribution centers and increased freight costs. These results were in line with plans and with the startup behind this, we expect the new DCs will positively contribute to performance going forward. The adoption of the revenue standard resulted in an approximately negative $2 million or 50 basis points impact to gross margin in the quarter due to the timing on the recognition of the revenue and expenses associated with our customer loyalty reward program. The revenue and expenses we recorded this period would historically have been spread out over the course of the full year. The late spring caused the shift in product mix which negatively impact the gross margin by approximately 10 basis points. We saw strong sales growth of [ice snow] which has a lower gross margin and weaker sales in nursery product which have higher gross margin. Selling, general and administrative expenses or SG&A increased by 16% to a $132 million in the first quarter and SG&A as a percentage of sales increased 160 basis points to 35.5%. The increase in SG&A as a percentage of sales was primarily attributable to our growth from acquisition combined with the seasonally lower sales volume in the first quarter. In addition, we are continuing to make investments in the Company to support the rollout of our e-commerce platform. We recorded a net loss of $17 million for the first quarter comparing to a net loss of $10.5 million for the prior year period. Our net loss for the quarter is attributable to the seasonality of the business, as well as the continued investments in the Company. We’ve recorded an income tax benefit of $10 million in the first quarter of 2018, compared to an income tax benefit of $8 million in the prior year period. The effective tax rate was 37.5% for the first quarter compared to 42% for the prior year period. The enactment of the 2017 Tax Act was the primary drive of the lower effective tax rate, which was partially offset by an increase in the excess tax benefit pursuant to ASU 2016-09. We currently expect our 2018 effective tax rate will be between 26% and 27%, excluding ASU 2016-09 and other discrete items. Our weighted share count was 40 million shares an increase of 452,000 shares year-over-year due to the employee option exercises. Adjusted EBITDA was negative $5 million for the first quarter compared to $1 million for the same period in the prior year, on an adjusted EBITDA basis, we normally record a loss through February and the strength of March large determined whether we post the profit for the quarter in both 2014 and 2015, we have recorded losses during the first quarter. In 2016 we had a very mild winter and recorded a profit, and last year we were basically breakeven. The weather this year was worse than last year and as a result our first quarter looks more like 2014 and 2015. Now, I’d like to provide a brief update on our balance sheet and cash flow statement as shown on slide 10. Networking capital increased 16% from the end of last year to $460 million as of April 1 2018. The growth in networking capital primarily reflects the increase in inventory and receivables attributable to the seasonality of our business, the roll out of the new distribution centers and our acquisitions. Cash used in operations was $41 million in the first quarter compared to $55 million in the prior year period. The improvement in operating cash flow for the quarter was primarily attributable to increased collection of accounts receivable. During last quarter’s call, we mentioned how the timing in terms of our fourth quarter sales resulted in an increase in year-over-year receivable. The pick-up in this quarter reflects the collection of those receivables. We made cash investments of 55 million for the quarter compared to 59 million for the prior year period. The reduction reflects a slightly smaller investment and acquisitions during the quarter. Net debt at the end of the quarter was 559 million and leverage was 3.7 times our trailing 12 months adjusted EBITDA which is flat with the prior year period. As a reminder, our leverage typically peaks at the end of the first quarter due to the working capital build prior to the spring selling season. Our leverage target for the end of the year is two to three times net debt to EBITDA. In summary, our capital structure continues to provide us with the flexibility to execute our growth strategy including the funding of our acquisitions. I will now turn the call over to Pascal for an update on SiteOne’s acquisition strategy.

Thank you, John. As Doug mentioned earlier, acquisitions play a key role moving our overall growth strategy as we continue to see a feel a significant white space. As shown on slide 11, we have now acquired 26 companies since the beginning of 2014. We added 162 branches to SiteOne and contributed $650 million in sales on a trailing 12 months basis. We’re off to a great start this year and have a good progress accelerating our pace of acquisitions from four in 2015 to six in 2016 to eight in 2017 and now four more through the first four months of 2018 representing a 100 million in last 12 months sales. Now as we turn to slide 12 through ’15, you will be able to find information, the acquisition we completed so far this year. In January we acquired Peter Rose, a leader om distribution of stone and hardscape materials in one location in the Greater Richmond Virginia market. The Peter Rose dedicated hardscape to complement our existing operations with a full range of irrigation, agronomics and nursery products and allowed SiteOne to offer complete one-stop shop to Richmond customers. In February, we completed the highly strategic acquisition of Atlantic irrigation which is a leading supply of irrigation products along the East Coast with 33 locations in 12 US states and two Canadian provinces. Atlantic irrigation brings a talented team to SiteOne with an excellent reputation and a strong history of customer focus and growth. The combination of our two companies makes it a clear irrigation leader in the East and provides good purchasing synergies as well as cross selling opportunities. In March, we closed the acquisition of Village Nurseries. The leader in the distribution of nursery and related products to landscape professionals and location in the greater Orange, Huntington Beach and Sacramento California markets. Through Village Nurseries, SiteOne adds nursery products which we did not have in those markets to our existing irrigation agronomics hardscapes and landscape product lines and allows SiteOne to offer complete one stop shop for our customers in California. In April, we acquired Terrazzo & Stone Supply, the leader into distribution of natural stone and hardscape materials with locations in Belview and [indiscernible] Washington. Terrazzo adds natural stone and hardscapes to our existing irrigation agronomics and landscape lighting product offerings in the Seattle metro market. As we turn to slide 16 we continue to see a significant opportunity to grow profitably through acquisitions which allow us to move into the markets, expand our presence in existing ones, broaden our product offering and also very importantly add outstanding talent to our team, our pipeline remains robust and with four acquisitions year-to-date our M&A strategy is gaining momentum, and we continue to build a reputation as the buyer of choice in the industry. We will also like to thank all the leaders of SiteOne who are great ambassadors, working hand-in-hand with our development team to help SiteOne attract the best companies to join us in the future. While the timing of acquisitions cannot be fully predicted we have strong momentum and expect to close additional acquisitions in the next few months, which will contribute nicely to our growth in 2018 and beyond. And with that I’d like to turn the call back over to Doug, to discuss the outlook.

Thanks Pascal. I'll wrap up on slide 17. Overall, we are confident that we can deliver another year of excellent performance and growth for the full year 2018 as we move pass our seasonally weakest period. The underlying market trends remain positive across residential and commercial, new construction, repair and upgrade and maintenance. We continue to execute our commercial operational initiatives which we believe will allow us to gain market share, achieve good organic growth, and further expand our adjusted EBITDA margin. Lastly, as Pascal mentioned, our acquisition pipeline remains very active and we anticipate 2018 being a good year in terms of adding great companies to SiteOne. Accordingly, we continue to expect adjusted EBITDA to be in the range of $180 million to $192 million in 2018. In closing, I would like to acknowledge all of the SiteOne associates who continue to create significant value for our customers and suppliers. We have a tremendous team and it is an honor to be joined with them as we build a company of excellence for all of our stakeholders. Operator, please open the line for questions.

Thank you. [Operator Instructions]. Our first question is coming from the line of David Manthey with Robert W. Baird. Please proceed with your questions.

First in for John, on the gross margin, the change in accounting seemingly pulled the expenses into the first quarter so, are we to assume that all else equal, that change would have a positive impact on the gross margin percentage in quarters two through four?

That is correct. The dollar amount over the course of the year, between accounting for the annual year will have no impact at all on our performance, it's just really accelerating certain expense in the first quarter and that leaves two, three and four as improvement.

Okay. And then just to close the loop on the gross margin, the inventory level you show on the balance sheet now I assume reflects the two new distribution centers being fully stocked and could you talk about any potential impact there from better rebates or purchase discounts, freight in or other things that you’ll get benefits from. And shouldn’t we just continue to assume that you’ll have a more balanced year between gross margin improvement and SG&A leverage overall?

I think in general, just to speak on the supply chain, that we really view this as a positive going forward and really there is three things that we’re really trying to accomplish here with our new supply chain strategy. One is we’re taking control of the freight, so we know what’s going on in the freight market and by managing it directly and contrasting directly with suppliers or with freight providers in our markets we can better negotiate the contracts. Two, and this that really allows us and the DC is really playing a major role on this is it allows us to pick the best mode of transportation, previously everything one over the roads and now we can go intermodal because we have larger quantity shipping into the DCs. And I think the third item and really kind of the real value created by the DCs is the fact where we can consolidate loads and overall reduce our freight cost and think of it as all of the suppliers originally shipping directly to half truckloads or palette quantities to our stores by then shipping directly to our DCs and that is almost cross stocking and shipping back full truckloads out to our stores, we’re really optimizing the overall freight cost that we experienced. So, our whole supplies trade change strategies really allowing us to gain better control rather than being a cost taker really managing this cost directly.

And so, this is the plan on top of that, so what you’re seeing in the first quarter is the dilution effects of ramping up the DCs charging the product you also see that at the inventory levels. The remainder of the year that becomes a tailwind in terms of helping us to achieve better gross margin but also on inventory side that we ‘ll be able to work our inventory down throughout the system. So, and to address the second part of your question, so we still see very good EBITDA margin expansion in 2018 primarily driven by gross margin where we expect to see some SG&A leverage as we go through the full year and you know as our SG&A gives leverage through our more meaningful quarters which are two and three and then part four.

Thank you. And our next question is coming from the line of Ryan Merkel with William Blair. Please proceed with your question.

I wanted to start with a couple of questions on sales, so it sounds like April is tracking well, Dough I think you said sales are robust, could you just give us a little more color there?

Yeah, so in the first half of April we saw the same adversity that we saw in March quite frankly, but in the second half we’ve really see now that the season kick in the year and as you know we’re still smelling up to mid-April and North in Midwest but we’re seeing the season start, its kicking in to full gear and we really do, the underlying market is quite strong. Our contractors have very large backlogs, they’ve got lots of work. They are itching to get out of the year, now that the year has really begun, we can see the growth coming through, so we do think we'll make up those sales that got pushed and end up with a good solid year of organic growth.

And just a follow up on that, just help us, how does it work, you make up most of the lost sales in the second quarter or do you make that up over the course of the year?

We think due to the fact that the delay was so long, there's three to four weeks that some of that makeup will probably still in to quarter three, but we would expect the majority of that makeup to be in the second quarter so it'll play out during the full year as you know, labor is tight and so there's some constraints there. But you know, we would expect the majority of that to be made up in Q2. But some of it will, we would predict, move into a Q3 as well.

And then just lastly, I'll pass it on. Is there anything lost for the season when you get a slow start like this?

No, it really depends, kind of how the season develops. Kind of when the summer starts, etcetera. But we have and I've been here four years. John Guthrie has been here a long time. These weather delays or swings really do tend to average out and so there's nothing that we see today that would cause us to lost any year. I mean the treatments are going in, the contractors are optimistic and they, some large contractors take vacation in the summer, a lot of them have already taken their vacation, while the season the slow and they don't plan to take vacation in the summer so they can move things around to adapt to the year. And we feel at this point looking at the year, we would predict that we'll get those sales back.

Thank you. Our next question is coming from the line of Keith Hughes with SunTrust. Please proceed with your question.

Thank you. Let me ask you a little bit of a longer-term question. On slide seven, shows a good representation of where you are, I believe it says 45 markets where you are in full on product offering, but within those 45, how many markets are you structured with the market presence in all four major product groups that you want to be and it's kind of a model for what the other big site would look like?

, : Where you can do full truck loading and out on an agronomic basis and we can also have a corrosion control products and other products that are, that are bigger and bulkier. So that's a nuance to the agronomic coverage in the market, if you take all the nuances together, we have structurally what we need and only a handful of markets, what's called three to five markets where we have all the pieces, your full coverage of 45. So actually, the opportunity structurally is a bit more than we are showing here. You know it's kind of complicating nuances but to answer this question specifically if we should in how many markets do we have everything that we want, it would be a handful. So, there is tremendous opportunity I think is the punch line for us to build out and create that kind of optimal structure to be the one stop shop in a market in a significant competitor advantage over all of our competitors with the tools and resources that our associates need to win.

And you’re talking in relation about the opening of the two-distribution warehouse, I think that brings you to three now. Is that going to be enough, or let me ask you this way, as you look at your growth plans in the future, how long will you be able to, how many years will be able to support the business at three or we’re going to see more of this will come now sometime in the future?

Yeah, great question. We really think the three data sets in the next three to five years, I mean it goes cover and it covers us very well, we become a bigger and bigger company let’s say 5 or $6 billion company, we might add a fourth say in Dallas Fort Worth or some incentives that kind of treat but we clearly don’t need dozens of these. If anything, we will add a fourth in the next three to five years but the three really gets us where you did to be. And just to clarify, the DCs are very large, they support the whole business, the economic hubs that I was talking about before, that we need in the various markets are quite a bit smaller and we would put them in kind of as the market develops overtime.

Thank you. The next question is coming from the line of Nishu Sood from Deutsche Bank. Please proceed with your question.

Thank you. So, the 70 bps of distribution center impact in gross margins, could you please just going to add a little bit more specifically how much of that was just a part of the launch process and how much of it might be recurring on an ongoing basis?

We do not expect on a bps basis that for the rest of the year that it will be negative drag, I mean within our plan we saw kind of the rollout this year to over the course of the full year and to be slight negative on gross margin but that was all really realized in Q1 and over the rest of the year really the advantages of what we did in Q1 should play out with regards to that.

Got it, so the 70 bps was really mainly a 1Q it sounds like this, okay. The distribution centers obviously in the past and we’re spoken about this before that there is risk associated with the implementation, distribution centers and I know obviously you folks have planned and obviously are well aware of that, where are we at in the risk spectrum at this stage, you know would the opening of the Pennsylvania center, are we now past the kind of risk zone, is it smooth sailing from here or is there still further work to be done in terms of making sure everything goes smoothly?

Yeah, it’s a great question Nishu. Obviously smooth sailing is all a relative term. But we are well past the high-risk base. When we did the first DC last year, Fairburn, we used that to work out most if not all the bugs in the system. And if you remember, we also implemented in our JDA replenishment system at the same time. So last year would've been the year where the things we're going to go wrong or we're going to have big problems we would have those, we like any new implementations we overcame minor, minor struggles and its news, so we had to do a lot of training with the field, et cetera. But we really worked all that out last year and we did a lot of retraining this winter, which was very valuable and I would say that the California and the Pennsylvania, do you see those startups had gone very, very well and so we're quite pleased with where we are, I think we’re in a zone now of fine tuning and reaping rewards and substantially past the risk phase which was really last year.

Got It, good to here. And just finally on inflation. John, you mentioned to expect 1% to 2% inflation effect. I believe you're referring to revenues in terms of that. Clearly across the broader building and construction space, inflation has been a dominant theme. Can you just kind of dig into that a little bit more. What are you folks specifically seeing, I mean obviously your exposures to the traditional sorts of inflation that a lot of other companies in the construction sector seeing are different. So, what are you folks specifically seeing, freight might be the one that you know folks might folks might be tenant credit cross apply to you folks as well. So maybe you could dig into that a little more, please?

We’re passing along in the revenue numbers. Most of the cost inflation that we're seeing. And so, when I say 1% to 2% on a revenue line, that's also representative on somewhat of the cost line. And so, our plan is, and I think the market is pricing that prices into our business and so if we a lot of other industries in building product they see a much higher inflation rates if we, -- and we're not expecting that or forecasting that. If we did see something like that, I think we would raise our pricing revenue number to cover that. But right now, the 1% to 2% coverage what we're expecting on cost inflation also.

Just to be specific about freight, obviously freight costs are going up, freight is up about 10% for us, it's about 5% to 6% of our sales, so it'd be taken on a total -- 5% of our costs I am sorry -- so if taken on a total that's about a half 50 basis points on costs. So that gives you a feel for how much of that, you know, 1% to 2% is freight, so freight is a significant factor. As John mentioned, we're now in control of more of our freight and what you're seeing with us is that we're managing freight down as freight isn't inflating, and so our -- the impact freight to SiteOne is a bit lower than say other more mature players because we've got all these new ways of making freight more efficient. And so, it certainly the headwind and it's a part of our overall forecast as costs, but we also have ways of mitigating that.

Thank you. The next question comes from the line of Samuel Eisner with Goldman Sachs. Please proceed with your question.

So maybe just following up on that breakpoint, I just want to better maybe just go back to John your comments, you’re saying that the DC investments, the 70, 80 basis points associated from that are kind of episodic or one time. Doug you just said that the freight inflation is about 10% year-on-year. I calculated that as being 30 basis points of the headwinds. So, I’m just trying to understand what's exactly episodic versus actually ongoing impact of the gross margins going forward?

Well I think from a gross margin standpoint if a normal inflation is passed around and price offsetting it and so it's not necessarily a headwind from a gross margin percent basis. What you saw in Q1 was a lot of access extra cost related to the startup combined with the 70 basis points we’re in a very low sales volume period before the spring. So that plays from a percentage standpoint, but you know we plan on the cost of our supply chain to be a minor headwind for the full year and that was really built into our plan at the beginning of the year and most of that cost was really incurred in the first quarter, where I would say a negative headwind to our margin targets.

So just to re-summarize, the normal -- the freight inflation that we’re seeing is the 10% inflation, we’re passing that on and we just see that as normal course and we’ve passed that on into the market. The freight was frontloaded in the DC cost the dilution was kind of front loaded into the first quarter and that becomes a tailwind for the rest to kind of balances out through the year to become a net but very slight headwind but you call it net breakeven and those are the things that are going on with those margins.

Got it, that’s helpful and maybe following up on some of the comments on the full line offering, it sounds like there is a pretty large opportunity there. I was wondering if you could talk through some of the examples that you guys have had of actually creating full line offerings when you add hardscapes, when you add nursery. How big do customers wallet grow from, you know is it 2x, is it 3x is it only up 10%, 20%. Just trying to understand really the kind of one plus one equals to something larger than two equating for when you guys open from single item multi-line?

Right, well we’ve been filling in markets I think when we first got here the number of markets where we had full line was about 25 and so we’ve actually filled in about 20 markets. We’ve then added two or three years so you can see the rates, it takes a while to get the markets filled in and if you think about a typical contractor that’s doing construction, you look at the market, nursery is 40% of the market and hardscapes is 15%, maybe 15 to 20% in the market irrigation, 15 to 20% agronomics et cetera. And so, if you look at the product mix of the market, that mimics what our contractors are using. So, when you add nursery and hardscapes which are big parts of the market, you become a much more important supplier to that customer. If you’re only providing them irrigation, or even irrigation and agronomics before you maybe have let’s say kind of 20 to 30 or 40% of their share of wallet when you add nursery and hardscapes, now you become a much bigger player for that customer. So, it's a powerful effect, we see in our full line markets that were more profitable than our other markets partly because you become more important for those customers, you become more of an important partner and more intimate and you get to know them better, they get to know us better and we can add more value to them. But also, because you have economies of scale that are local in the market, so your salesforce, your general manager, your area infrastructure, if you will spread out now over a lot more sales and it gives you those local economies that give you that higher EBITDA percentage. So, it works both for the customer but also for the economics of our business.

Okay. And maybe just lastly on the e-commerce pilot, just any sort of - cost, that you guys are putting in that we should be aware of any early successes. I mean, it sounds like obviously I've been rollouts, so we’re not sure of the, the efficacy, but any sort of expenses that we should be anticipating here in the back half of the year as you roll this out?

Well, we call that out, I think in our fourth quarter call that we're going to spend about $5 million on e-commerce this year, last year we spent $2 million to $3 million, I think it was $3 million in total on e-commerce does kind of a couple million more. That year-over-year spend was a $1 million in the first quarter more than last year, so you look at the remaining part of the year let's call it $4 million against $3 million, so we'll have an additional $1 million spend versus what we spent last year on e-commerce during the remainder of the year. So, the biggest effect of that additional investment was in the first quarter where we have the least amount of sales you'll see the rest of the year had much less dilution. And the products are going very well, you know, we're fulfilling orders we’re seeing the customers use the site to do their quotes and to check pricing and all the things that we would expect them to do it certainly still early, early days. But so far, it's been a smooth pilot and we're very, very excited to spread this across the country and take our service to a new level for the customers and with our relationship with our suppliers. So, we're really excited, it's finally in action and we're able to use it to start gaining market share.

Thank you. The next question is coming from the line of Michael Eisen with RBC Capital Markets. Please proceed with your question.

Just wanted to follow up on that previous question. When we're thinking about kind of broader picture, the different buckets you guys are using to generate towards that double-digit margin performance, how should we think about any incremental spending across the different categories coming through and then should we think of a step down before a material step up from things like the distribution center and e-commerce platform going forward?

No, great question. No, we don't see a step down this year at all. We will -- our plan and our forecast would be to continue to march our EBITDA percentage upward. You know last year we were 8.3, 8.4, we’re heading towards 10, we think we will achieve 10% - in kind of 2019 2020. And as we mentioned on the gross margin side, we do expect gross margins to expand this year and on the SG&A side, even though we are investing in the company, we’re also reaping the economies of scale on the base business and that's enough to cover and give us some SG&A leverage for this year which will increase in 2019 and 2020 and just to remind you we’ve been building the head office and the corporate center and the field support teams and largely that build is complete and so you know we’re starting to get the leverage on that as well. So we’re still diluting ourselves, building the company, making important investments for the future, e-commerce is one of those, barcoding is another one that we’re going to invest this year but now we’re now we are at a where the operating leverage of the business can cover, we can still get operating leverage on the SG&A side, we’re still going to expand gross margins and keep our steady pace to the 10% plus and hopefully beyond as we continue to garner new efficiencies, gain market share and perfect what we’ve started.

Understood and that’s very encouraging. And then just transition quickly to the M&A side of the business. I am thinking about your ability to execute the strategy, how should we think about the pace and kind of the human resource capacity you guys have as the business continues to go and then additional when you’re looking at some of the conversations you’re having here today has anything changed in the market place, whether it be asking multiples what you guys are seeing as interest rate concerns or any increased competition on the bidding front out in the market?

On the M&A side, Michael we see a good acceleration like we did at acquisitions last year and would say we should expect 10 to 12 this year and we’ve had a really good start while we’ve done four deals in 12 months of about 100 million [indiscernible] which is our goals, sub goals for the full years. So, if you look at the full year I would say, you know we did a 115% in 2016, we did 230 million in 2015. We would expect the year to finish somewhere in between, so we’ve got really good momentum, we got several LOIs in place, we’re making more offers, the pipeline is basically getting bigger you know quarter-after-quarter as expected. So, it's a normal acceleration, the team is built to handle more than that, one as you know the probably slightly we used to do more than 8 to 12 yields a year. So, we’ve built a team that could probably handle as many as 15, we didn’t expect 15 acquisitions a year but that’s the capacity that we have today. If we have to move to 20 yields a year, we have to add some resources incrementally. And then so you know very good momentum, better momentum at this point this year than we had last year and on a multiple, we haven’t seen any shift and remain the natural consolidator for the industry. The vast majority of our deals are exclusive and I think when we look at the 20 executives in the 2.5 years and we were planning to make it in the next few months, they really see that one of the great home. So, it's not just about the multiple that kind of thing, we are making sure that you can integrate correctly and we thought we’ve got a secret sauce as far as integrating small mid-size companies into size one. So really good momentum on that front.

If I can sneak in just one more clarifying question, your guys are reiterating the full year guide does not include any of those LOIs or the idea of additional M&As throughout the course of the year, is that correct?

That’s correct, it does not include future deals.

Thank you. Our next question is coming from the line of Matthew Bouley with Barclays. Please proceed with your question.

Good morning this is actually Marshall [indiscernible] on for Matt. Thanks for taking the questions. On private label products, I don't think any real mention today. I was just curious, where does that initiative stand?

Yeah, so we announced our launch of our pro-trade private label lighting brand, which obviously we have our LESCO private label brand in agronomics, we have Green Tech in irrigation. We're excited to launch Pro-trade in the lighting space. It is going well. We did a couple of million in sales last year getting started. We've already done over $2 million in sales in pro-trade and we would anticipate that we'll do say $10 million to $12 million of that this year, so that's a nice new line for us that's doing quite well known and very well received in the market and then we're planning other private label launches as we go through the year to be announced as we make them available to the market. But it's, it's definitely a strategy that going well. We have some nice brands and a lot of tailwinds and private label tends to be a nice accretive initiative in terms of gross margin and EBITDA margins. So, we're pleased with that as well.

Great. Thank you. That's helpful. And then maybe one for Pascal, just another one on M&A. How do you, when you're in the market for deals, how do you think about balancing entering new MSAs or markets versus kind of back filling your footprint to address what you want to do to fill out product suites in given markets?

Yeah, the [indiscernible] opportunities, if you go back to that slide seven, that we referred too earlier is with the new product lines product filling I mean there's 80 markets where we’re going to be seeing both hardscapes and nursery. So, for an M&A guide its 160 deals potentially, so it is pretty bright and then if you look, there's another 50 are missing either. So, there's about 200 acquisitions potentially to be done with the product healing, which is a very big priority. However, we still need right as Doug was alluding to earlier to get a stronger position even in the core product lines like irradiation and agronomics, so you'll see some consolidation like we did with Atlantic this year hydroscope 2016, Green Resource in 2016 great agronomics company that joined us. So new MSAs is probably when you look at those two priority, it will be probably the last. Because if you look at our footprint in the 180 plus MSAs where we are it covers a fairly big piece of the population. However, you know from time to time and as you buy a larger company they might have branches in and they said where we don't have a presence so that are competent. And also, I mean we’re exploring a few deals where you don't have a presence in MSA and the companies do really well, very profitable, et cetera. So yeah, we'll probably go from 180 plus all the way to 225 or something like that over time. But the priority is product filling [ph] and making sure we've got the perfect structure to serve our customers in those naturals. And it takes a lot of moves by several pieces of the puzzle you need to put together to get that perfect structure or that great structure that we have for example today in Charlotte and Atlanta or Dallas from other metros.

Thank you. And I guess just kind of piggybacking on that, your roll out of the distribution center footprint help. If you do start to enter these new MSAs that are kind of off of your footprint now or I guess are you better able to serve those as we make those the process easier?

Yeah, I would say that DC has supported our entire business to include acquisitions, so and just as one bit of color to add what Pascal said, normally if your Greenfield and you’re going into a new market its dilutive and its somewhat risky. Since we’re acquiring into the new markets, we’re acquiring the team, the relationships, the supplier relationships, et cetera. So, we get the same synergies that we get in an existing market like you pointed out with the DC, with our purchasing power et cetera. And we can already maintain and that’s been in that market for 30 years. And so, our acquisition strategy actually allows us to move into new markets quite readily where teams are out with the right company which gives us really good synergies but the risk is no greater for us and we filling in the existing markets. So that’s an important factor as we think that plays to our advantage with our acquisition strategy filling in these markets.

Thank you. Our next question is coming from the line of Chris Belfiore with UBS. Please proceed with your question.

I’ll keep it brief, so just curious if you can kind of provide some color, how you think the e-commerce and some other initiatives you guys are working on, I think there was stuff in terms of like feel the way you guys collect the payment and taking orders out in the field. So how that might begin to offset some of the SG&A build as you continue to execute the acquisition strategy and then just kind of tied to that with regards to the cost [indiscernible] that then you guys laid out a few years ago where are we there I mean in terms of like what aiming are we in and what’s left to go there?

So, to the first question, e-commerce yes, we are excited that that will aid us in becoming more efficient by the way will make our customers a lot more efficient and our suppliers a lot more efficient. So, it’s a win, win, win but if you think about our SG&A 65% or 70% of SG&A is people related and the majority of that is in the field 80% of that is out in the field. So these tools that we deploy to include e-commerce that can make our store associates more efficient allow them to serve customers better and spend less time on administrative type of stuff looking at pricing and those kinds of things is a huge facilitator and a huge enabler for us to drive our SG&A and that’s why we’re so confident, I mean we’re making investments right now that are dilutive and we’ve not yet seen the benefit of the things that we’ve been working on to really drive SG&A efficiency. When we look out to 2019 and 2020 with e-commerce in place with our operational excellence initiatives down the road a bit our full team here has already been built where we can see very nice accretive operating leverage on our SG&A for many, many years to come. So we’re in that period as we said we’re now in a year where we can overcome the dilution of investments and new tools with the efficiency of things that we’ve done over the last three years and with our team in place and that will be accretive to EBITDA margin as we go out in '19 and '20 with the SG&A will be much more of an added to our EBITDA expansion, we're up in about 23.5% in terms of SG&A to sales on an adjusted EBITDA basis, you know, we see driving that down into the low 20s. So, there's a lot of leverage there to be had. You're not going to see a huge move in 2018, you’re see going to see a small but over the over the next three to five years you’ll see us drive that cost efficiency in our business. So, this is really kind of the beginning, we're just piloting the tool, will get - and implemented in the second half, but look forward to reaping the rewards of that and the other thing that we're doing, supply chain and otherwise for many years to come.

It appears we have no additional questions at this time, so I'd like to pass the floor back over to management for any additional concluding comments.

Okay, thank you and thank you all again for joining us today. We very much appreciate your interest in SiteOne. Just to thank again all of our associates for doing a tremendous job helping us build the company and get us to where we are today. We'd like to thank our customers and our suppliers we’re highly intense on causing our customers and suppliers to win as we grow our company. But for our investors and shareholders, we appreciate your answers we’re excited about our long-term growth and profitability and we look forward to our next goal at the end of the second quarter.

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