SiteOne Landscape Supply, Inc. Q1 FY2020 Earnings Call

Greetings, and welcome to the SiteOne Landscape Supply First Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Mr. John Guthrie, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you, and good morning, everyone. We issued our first quarter 2020 earnings press release this morning and posted a slide presentation to the investor relations portion of our website at investors.siteone.com. I'm joined today by Doug Black, our Chairman and Chief Executive Officer; and Scott Salmon, Executive Vice President, Strategy and Development. Before we begin, I would like to remind everyone that today's press release, slide presentation, and the statements made during the call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to the 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, we 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 in the slide presentation. I would now like to turn the call over to Doug Black.

Good morning and thank you for joining us today. In light of the COVID-19 impact, we are going to modify the format of this call versus our typical earnings call. I will start with a review of how we responded to COVID-19 and discuss the initial impact we've seen on our business, as well as our strategy for navigating through the year. John Guthrie, will then walk you through our first quarter financial results in more detail and provide additional information on our balance sheet and liquidity position. Scott Salmon will discuss the new companies we've added in the first quarter and how we plan to navigate the short-term challenges from an acquisition standpoint. And at the end of the call, I will discuss some of the trends that we are seeing in our specific end-markets and address our outlook before taking your questions. Before I jump into our actions, let me first say that our thoughts and prayers go out to all of those who have been impacted by COVID-19. This is a terrible pandemic unlike anything we've ever seen. And the effects on people across the world and on our communities and economy have been unprecedented. Given that, we feel very fortunate to be here at SiteOne. We are a financially strong, industry leader and part of an industry that has been deemed essential to the maintenance, safety, and welfare of our communities during this pandemic. Further, I cannot tell you how proud I am of the SiteOne team and our culture of teamwork, service, and commitment to excellence. In this time of crisis, our team is shining and playing a real role in the continued safety and success of their fellow associates, our customers, our suppliers, and our communities. The team has adapted very quickly and is clearly stepping up to the challenge. And I believe we are having a significant positive impact on all stakeholders during this crisis. I also believe that we will be a stronger team and business when we come through this challenging time. I'll start on slide 5, to walk you through our actions to manage through the COVID-19 challenges. In the very early stages, when COVID-19 was becoming an issue in China our supply chain team leveraged our national distribution center network to proactively secure ample quantities of products sourced from overseas. We also created heavy inventory positions in general as we anticipated a very strong spring season. Accordingly, we are in good shape on inventory with only minor product shortages, despite the disruptions in both the global and U.S.-based supply. As COVID-19 spread rapidly in the U.S., we quickly rallied our team around four fundamental near-term objectives. First, keep everyone safe in a coronavirus world. This includes obviously our own associates and their families, but also our customers, our suppliers, and our communities. Second, serve and support our customers better than anyone else in the industry. Third, manage our business to the lower short-term demand. And fourth, make sure that we're taking care of all of our associates all along the way. All four objectives are critically important in order to successfully manage through this crisis, while protecting our culture and continuing to build our company for the future. Let me describe the actions we are taking to accomplish these objectives. To keep everyone safe in a coronavirus world we pivoted rapidly to implement all the CDC guidelines and preventative measures. We have canceled all large meetings, events, and most air travel. We have educated our associates on the basic social distancing and hygiene measures, and then executed these in our offices and branches. We are leveraging our supply chain to ship and replenish supply of disinfectants, hand sanitizer, paper goods, and face coverings to all our facilities. We have also modified our time-off policies in order to accommodate associates who are potentially exposed or high-risk. With these modified policies, we are being very aggressive about having associates stay home if they have symptoms or are potentially exposed until it is clear that they are not infected with the virus. We have created a paid time-off or PTO donation bank which has allowed over 250 associates to donate over 6,000 hours of PTO to support over 60 associates who need PTO to take care of their children at home due to the school closing. This is SiteOne teamwork at its best. We have stepped up our communication both to our associates through videos our Internet and our HR services team and through our customers with regular COVID-19 email and by providing information for them on siteone.com. We have instructed our suppliers to not visit our branches, but instead communicate with us virtually or by phone. And finally, all our field support associates who can work from home are doing so in order to reduce the coronavirus risk in our field support offices. In terms of branch operations, we quickly modified our branches in order to maintain the 6-foot social distancing standard. In many cases this meant closing our showrooms and/or reorganizing the branch layout. Thankfully, we have just rolled out our barcoding capability with our MobilePro scanners for the spring which allows us to check out customers anywhere in the branch or yard. This has been a terrific tool to help with social distancing. We also have advertised online solutions and increased our training for customers on how to use siteone.com which has given customers another avenue for ordering along with e-mail or phone without coming into the branch. Lastly, our teams are practicing good hygiene techniques at our locations to include constant cleaning of high-touch and high-traffic areas. Today all branches remain open and are providing excellent service and support to our customers, while ensuring a safe environment for ourselves, our customers, and our suppliers. In terms of demand, our sales were very strong through the first two weeks of March but began to decelerate in the third week and went negative in the final week of March as COVID-19 spread and federal state and local safety measures and restrictions were put in place. As I mentioned earlier, our customer services are deemed essential both nationally by the Department of Homeland Security and by most state and local authorities. However, based on the severity of state and local safety measures and restrictions certain aspects of our customer services have been prohibited in some markets. As a result of these restrictions, our organic daily sales growth has been down approximately 11% in April. In fact, that trend has been very consistent from the last week of March through the first full weeks of April with organic daily sales down 10% to 15% in each week. Furthermore, the restrictions vary significantly by region with a corresponding variance in demand. In the four regions from Texas across the South, including Florida and up to the Carolinas we are seeing organic daily sales growth of 5% to 15% with strong markets and limited restrictions for landscaping. In the three most highly restricted regions in the Northeast and Upper Midwest sales in April were down 25% to 30%. The three regions in the west and central plains are showing declines in organic daily sales that range from 5% to 20%. Accordingly, we have been aggressive, but very targeted in adjusting our business to the lower demand. With the aid of the CARES Act, we have chosen to use furloughs in order to reduce our staffing in the heavily affected areas and in the associated field support team. In this way we can take care of our associates by keeping them on our benefits while they collect unemployment and receive additional funds from the CARES Act. If demand returns, assuming an eventual loosening or removal of restrictions we can quickly bring our associates back to meet the additional demand and provide our customers with outstanding service. In addition to the staffing, we reduced all other controllable expenses while also tightening capital spending. Our team is seasoned and we've all been through downturns. And so, I've been very pleased with the quick action that we have taken to manage our expenses in a declining sales environment. Through all these actions we are tightly managing our business and taking care of our associates to include those who are on furlough. We took proactive steps to enhance our cash position and increased our financial flexibility by borrowing approximately $100 million on our $375 million asset-based lending facility. We have not used these new funds other than for seasonal investments and working capital. We now have approximately $122 million of cash on hand and approximately $47 million in available capacity under our ABL facility. We also postponed the closing of pending acquisitions to further enhance our financial strength and flexibility. When you're in a period of extreme uncertainty like we are today, it is not in the best interest of the buyer or the seller and their associates to complete an acquisition. Additionally, because our deals are primarily negotiated and based on long-term relationships there is a foundation of trust which allows us to put things on hold and wait for a better time to complete the deal. Accordingly, our strategy is to wait until the future is more predictable and then resume our acquisition activity. We expect this to be at the very earliest in the second half of 2020. Despite the temporary pause, we remain very committed to our acquisition strategy as a critical means of building our company for the long term. To summarize, I am very proud of how our team has performed in this extraordinary environment to keep everyone safe, serve and support our customers, manage our business to the lower near-term demand, and take care of each other along the way. Given the difficulty in predicting the severity and duration of the COVID-19 impact, we are withdrawing our previously provided 2020 guidance. However, as the leading distributor to an essential industry, we believe SiteOne remains well positioned to support our customers and navigate this challenging period for the benefit of all stakeholders. We are closely monitoring the trends and adjusting as necessary to perform in the short term, while continuing to build for the long term.

Thanks, Doug. I'll begin with some highlights from our first quarter results on slide 6 and 7. We reported a net sales increase of 10% to $460 million in the first quarter. During the quarter, we had 64 selling days which was unchanged compared to the prior year period. Organic daily sales increased 5% in the quarter. We saw strong growth throughout the quarter until the end of March, when the impact of the restrictions and safety measures resulting from the COVID-19 pandemic started impacting sales. Geographically, nine out of 10 regions had positive sales growth in the quarter. Organic daily sales for landscaping products, which include irrigation, nursery hardscapes, outdoor lighting, and landscape accessories, grew 9% during the quarter due to favorable weather and strong demand in our end-markets. We saw good growth in irrigation and lighting products, especially in western markets as contractors were able to complete projects with drier weather than last year. Organic daily sales for agronomic products were down 1% relative to the prior year, due to a significant decline in the sales of ice and snow and associated equipment resulting from the warm winter in the northern market. As Doug mentioned, daily organic sales through fiscal April month to date are down approximately 11% with the greatest impact being in those markets with more restricted shelter-in-place orders. Prices were up 0.4% in the quarter compared to the same period in the prior year. For 2020, we now expect limited price inflation of 0% to 2%. Acquisition sales, which reflect the sales attributable to acquisitions completed in both 2019 and 2020 contributed $21 million or 5% to the overall first quarter growth rate. As a reminder, in order to maintain maximum financial strength and flexibility, we have temporarily postponed all pending acquisitions. Gross profit increased 10% to $143 million in the first quarter and gross margin decreased 10 basis points to 31.1%. The slight decline in gross margin for the quarter reflects less benefit from opportunistic inventory buys ahead of price increases. More specifically, at the end of fiscal year 2018, we bought ahead of some relatively large price increases from our suppliers. At the end of 2019 and during the first quarter of 2020, those opportunities were much less prevalent. Selling, general, and administrative expenses or SG&A increased 7% to $167 million in the first quarter. SG&A as a percentage of net sales decreased 100 basis points to 36.3%. The reduction in SG&A as a percentage of net sales reflects operating leverage, resulting from the combination of our solid organic sales growth combined with good expense management. As Doug mentioned, we have taken steps to align our cost structure with our current sales volume. We have put in place a hiring freeze, cut back on overtime and temporary labor, completed the planned consolidation of seven branch locations, and furloughed employees in those markets with declining sales volumes. We also expect to see savings in advertising, trade shows, events, travel and entertainment, and other discretionary spend areas. These intentional actions are in addition to the natural levers like incentive compensation, credit card fees, vehicle expenses, and fuel costs. While some of these actions will continue for the full year, we are looking forward to ramping back up and bringing our associates back when the sales volume returns. In the first quarter of 2020, we recorded an income tax benefit of $13.5 million compared to a benefit of $9.6 million in the prior year period. The change in income tax benefit was due primarily to an increase in the amount of excess tax benefits associated with stock-based compensation. We recorded a net loss for the first quarter of $17.5 million compared to a net loss of $24.1 million during the prior year period. The improvement was primarily attributable to solid sales growth and the increased income tax benefit. A weighted average diluted share count was 41.8 million for the first quarter compared to 41 million a year ago. Adjusted EBITDA for the quarter improved by 39% to a loss of $3.6 million compared to a loss of $5.9 million for the same period in the prior year. The improvement reflects solid top-line growth and SG&A leverage. Now I'd like to provide a brief update on our balance sheet and cash flow statement as shown on Slide 8. Net working capital at the end of the quarter was $521 million compared to $483 million at the end of the first quarter of 2019. The increase is primarily attributable to increased inventory levels that support a spring selling season and the working capital added with new acquisitions. Cash used in operations increased to $66 million compared to $49 million in the prior year period. The increase was primarily attributable to the working capital build in preparation for spring selling season. As a reminder, due to the seasonality of our business, we typically have negative cash flow from operations in the first quarter and positive cash flow from operations in the second, third and fourth quarters. In addition, we are adjusting inventory levels to reflect revised sales expectations. We made cash investments of $51 million during the quarter compared to $19 million for the same quarter last year. The increase in cash investments reflects increased acquisition activity in the first quarter of 2020 compared to the first quarter of 2019. Net debt at the end of the quarter was $650 million compared to $627 million at the end of the first quarter last year. Leverage decreased to 3.2 times trailing 12 months adjusted EBITDA compared to 3.6 times at the end of the first quarter 2019. The lower leverage primarily reflects our improved profitability. As a reminder, we have no debt maturities until 2024. As Doug previously mentioned, on April 1, we proactively took steps to enhance our cash position and increase our financial flexibility by borrowing approximately $100 million under our ABL facility. We believe that this measure combined with the action we have taken to reduce our operating expenses and postpone capital expenditures including acquisition, gives us liquidity and financial strength to manage through these challenging times. As of April 27, we had liquidity of approximately $169 million, made up of approximately $122 million of cash on hand and $47 million in available capacity under our ABL facility, a $6 million increase since we borrowed on April 1. In summary, our priority from a balance sheet perspective is to maximize our financial strength and flexibility during these uncertain times without sacrificing long-term growth or market opportunities.

Thanks, John. As Doug mentioned earlier, we have taken a prudent step to reduce our near-term capital spending by postponing our pending acquisitions. As the COVID-19 situation unfolded, we were very open and transparent with the owners of each company with which we were in various stages of due diligence or negotiation. Like us, they are focused intently on maintaining the health and safety of their associates, customers, and their businesses during this extraordinary time. Accordingly, they understand the risks and potential negatives of closing an acquisition now. They also understand our strong desire to eventually join forces with them and our steadfast commitment to M&A as an important way to build our company. We continue to have a deep pipeline of potential acquisitions and we'll monitor the situation closely so that we are ready to reengage when the market stabilizes. With that said, we were pleased to bring four companies into the SiteOne family during the first quarter of 2020 as shown on Slide 9. Now if you turn to Slide 10 through 13, you will find information on our four most recent acquisitions. On January 2, we acquired Wittkopf Landscape Supplies which serves the Greater Spokane Washington market from two locations focused on the distribution of hardscape and landscaping products to landscape professionals. The addition of Wittkopf completes our full product offering in the region and provides cross-selling opportunities and purchasing synergies. On January 7, we acquired Empire Supplies which serves the greater Newark-Union metro area of New Jersey from three hardscapes and landscaping product locations. This acquisition establishes a leading hardscape platform for SiteOne in northern New Jersey. On January 14, we acquired the Garden Department, which served the Long Island market with three locations focused on the distribution of nursery and landscaping products to landscape professionals. This acquisition further expands our leading nursery presence on Long Island and fortifies our full product line offering in the market. And finally, on March 6th, we acquired Big Rock Natural Stone & Hardscapes, which serves the greater Greenville South Carolina market with a single location focused on the distribution of hardscapes and landscape supply. The Big Rock acquisition fills an important gap in our hardscapes coverage completing our full product line offering in the Greenville-Spartanburg market. Given the pause in acquisition activity our development team has taken the opportunity to do a thorough review of our acquisition and integration processes. The goal of this effort is to confirm what is working well and identify opportunities for improvement from early negotiation through three years post-acquisition. We are excited to have this unique opportunity to focus on fully capturing lessons learned and fine-tuning our approach for the future. We look forward to creating even more value through our acquisition growth and performance in the coming years. I will now turn the call back to Doug.

Thanks, Scott. I'll wrap up on slide 14. As I mentioned earlier, given the severity of COVID-19 and the uncertainty that it has created, we are withdrawing our previously provided adjusted EBITDA guidance for 2020. We cannot predict how long this pandemic will last nor the timing and degree of any demand recovery. However, we will continue to take strong actions to achieve the best possible result for our stakeholders. First and foremost, we will continue to ensure the safety of our associates, customers, suppliers, and communities as we operate in a coronavirus environment. As our country works to overcome this pandemic, we believe that our ability and the ability of our customers and suppliers to operate safely will be critical to successfully beating COVID-19 even if state and local governments open the economy. Fortunately, our customers work outdoors and can work safely in all aspects of their business in the coronavirus environment by following the CDC guidelines. As a leader in the landscaping industry, SiteOne can be a positive force in achieving a safe transition over the coming months. In terms of demand outlook, let me first address the impact of COVID-19 safety measures and restrictions. It is very clear that a significant portion of the recent drop in demand is directly related to the severity of state and local safety measures and restrictions. For example, in the Upper Midwest, we have two contiguous areas, one that includes Indiana, Kentucky, and Southwest Ohio, and the other area that includes Northeast Ohio and the entire state of Michigan. Our business in Indiana, Kentucky, Southwest Ohio, is down 1% in April. And our business in Michigan and Northeast Ohio is down 52% in April, which is directly related to the tighter restrictions that applied across the state of Michigan. Fortunately, on Friday of last week, the governor of Michigan announced that landscaping would be allowed to resume. So we're confident that we will see a significant positive impact in that important state. We are encouraged that other state and local government leaders with very tight safety measures and restrictions are also considering some loosening of restrictions in May. And we believe if state and local restrictions can safely be reduced or lifted, organic daily sales will start to recover. Assuming that restrictions are loosened or removed in May and June, we would expect our maintenance end markets which represent 42% of our business to remain steady. For the residential construction end-market which comprises 26% of our business, we are hearing that builders are seeing a sharp near-term decrease in home sales, which will eventually translate in declining demand for landscaping in this market. Even if home sales recovered later this summer, we would expect demand from the residential construction end-market to be down for the year. For the commercial construction end-market comprising 15% of our business, we would expect demand to continue to be solid, as our customer backlogs are still full. And while we have seen projects postponed, we have not seen many commercial projects canceled. Finally, we would expect the repair and remodel end-market to be dampened somewhat, based on the near-term unemployment and its impact on consumer sentiment and spending. Given all of these factors, we expect our sales trend to improve somewhat in May from the levels we are seeing now, and then recover further during the remainder of the year. Against this backdrop, we will continue to operate across our network to serve our customers safely, while carefully managing staff and expenses and tightly controlling capital expenditures. We will also wait until we can more clearly see the post-pandemic market trend in the second half, and then carefully and selectively resume our growth through acquisitions. We believe that all of these actions will ensure that we successfully manage our business through this crisis and preserve our liquidity throughout the year. Lastly, we will continue to make progress on our initiatives to include the assimilation of MobilePro, the rollout of siteone.com and the rollout of our transportation management system or TMS. We will also continue to achieve ongoing improvements in our sales force performance, operational excellence, and our marketing under our new Chief Marketing Officer. Finally, as Scott mentioned, we will be fine-tuning our acquisition and onboarding processes during this temporary pause in acquisition activity. We see this challenging time as an opportunity to make good progress on our initiatives while further strengthening our commercial and operational capabilities for the future. In closing, I would like to sincerely thank all of our SiteOne associates who continue to create significant value for our customers and suppliers during such a challenging period. We have a tremendous team and it is an honor to be joined with them as we overcome adversity and deliver value for all of our stakeholders. Operator, please open the line for questions.

Thank you. At this time we will be conducting a question-and-answer session. As a reminder, please limit to one question and one follow-up question. Then rejoin the queue for any additional questions. Your first question comes from the line of Ryan Merkel with William Blair. Please proceed with your question.

Hey. Thanks. Good morning, everyone. Nice quarter and hope everyone is staying safe.

Good morning.

Thanks, Ryan.

So, first off, on organic sales, staying consistent through April is a bit better than I expected. I know you hit on the geographies but what do you think is driving this consistency? And then, you mentioned that commercial projects really haven't seen delays or cancellations. Why do you think that is?

Yes. So the consistency really is driven by the restrictions. I think the restrictions were put in place in late March and kind of evolved through April. And the drop-off happened then. And since then, the restrictions really haven't moved. And so, the demand is kind of, let's call it, stuck where it is. We're seeing those being lifted. We mentioned Michigan got lifted on Friday. And fortunately as those get lifted, you can see the demand come back. So we really feel like the overall trend right now in sales is really being driven by the safety measures and restrictions, which we certainly understand those. And we believe, as those are lifted, we'll see a comeback of sales accordingly. So that's what's really driving the consistency. In terms of the commercial market, we haven't seen any cancellations. We have seen jobs pushed, obviously, during this very extraordinary time. And with restrictions, jobs have gotten pushed. But we haven't seen a lot of cancellations. That's not to say they won't come, but we haven't seen it. And our project services group that bids on projects for our contractors, et cetera, they saw a drop-off in projects that they were bidding on, but they've seen that come back a bit. So we do feel like the commercial market is still solid, the projects are still there. In those areas that don't have restrictions, we're seeing commercial continue to be strong. So we feel like those projects are underway. Remember, we lag significantly in commercial. So projects are long and we're at the back end of that. So I think folks doing commercial projects want to finish the projects they started. And there still are sectors in the economy that are healthy enough to go ahead and complete projects.

Got it. Okay. That's encouraging. And then my second question is on M&A. And you mentioned you could see a pickup in M&A maybe second half 2020. That's maybe a little earlier than I was thinking. And so, I'm curious, in uncertain times like this, don't sellers sort of pull back for a while, and wait for EBITDA to expand and higher prices, or are you getting indications that, hey, as soon as things sort of stabilize, we'll come to the table and sell? Just flush that out a little bit more.

Yes, I'll address the kind of strategy and then let Scott talk on the specific dynamics with sellers. We stayed specifically at the earliest in the second half. So we don't know how long this period of uncertainty is going to last. And, again, it could last a lot longer. Or it could be short. So at the earliest, it's the second half. Really the marker there is, when we can see what's really driving demand other than these restrictions, and we get comfortable, that's when we'd be comfortable with, okay, now we know where we're kind of have some normal view of where we're going in the future. That view is, obviously, never perfect, but let's call it normal uncertainty. And that's when we can pick back up discussions with sellers. And it works both ways, they want some surety of the future too when they're selling the company, and we want surety when we're buying. So that's really the marker. Again, I don't want to imply that we have a crystal ball and can be very specific. We know it won't happen over the next couple of months. It'll be, at the earliest, sometime in the fall, perhaps winter, when that kind of clear view is there. Scott, you might want to talk about just the dynamic with the color.

Yes. Regarding the discussions we've had with people we were already negotiating with or had agreements with, I believe they remain committed to selling their business. For others, it depends on their outlook on future developments. We are still in talks with potential sellers, and many express their readiness to sell when the economy stabilizes. Ultimately, it will be a case-by-case situation, depending on where they are in their decision-making process.

Yes, remember just to remind you that we buy very well-run companies; we buy the top companies in the market. So we're not buying companies that would be desperate in these types of times or fix-up, right? So the companies we buy tend to have strong teams and they're going to weather the storm as well as we are. And so we wouldn't expect to pick up deals kind of out of desperation. It's just all what's the right time, and these uncertain times are not the right time to do a deal.

Makes sense. Very helpful. I will pass it on.

Great. Thanks.

Your next question comes from the line of David Manthey with Baird. Please proceed with your question.

Hey. Good morning, everyone. First off, I'm interested in the divergence by geography. Doug, when you talk about restrictions, are those restrictions specifically on landscaping/construction activities of your customers in those areas where you saw them?

Yes, the restrictions primarily affect our customers. The extent of these restrictions varies. In some areas with tighter regulations, no construction, including landscape installation, is permitted. There are also a few locations where even landscape maintenance is not allowed. Overall, the restrictions differ significantly by state and local jurisdiction. However, landscaping is generally considered essential in most states and at the federal level, meaning landscaping services can continue to be provided. Even in these areas, while maintenance or landscaping might be allowed, new installations like hardscapes or nursery work may not be permitted. So, the restrictions primarily impact what our customers can do, not us.

Yes, yes. So your locations were open. But you're saying that the restrictions where they were the most strict were on specifically landscaping activities and therefore that hurt your business. And then as they ease up into construction and get even less, there was less of an impact on your business. I'm also curious about the south. You mentioned you saw some really strong growth there. I understand the weather was good. But that's got to be encouraging for you that in areas where there aren't restrictions that you're seeing much stronger levels of customer activity. Can you expand on that a little bit?

Well, yes, I mean we are encouraged there in those areas. In those areas the states and local jurisdictions have followed basically the Homeland Security Guidelines, which landscaping is essential for safety and maintenance. And you can do landscaping. And so the customers are hard at work. The markets are strong. The demand is there. And so we're seeing good activity. One thing I would remind you though in those areas is that a portion of that work is residential new build. And as we mentioned, new home sales have fallen off, but we're still busy completing the homes that were already sold or already started. And so I wouldn't say we need to be careful when we look into the second half because in those aggressive builder markets especially in the south we do expect that demand to drop third quarter. And then who knows how long that will be if people start to resume buying homes in July and then maybe that's a short period of time etc. So yes, it's strong. Yes, we are encouraged by that. But we also can't be too confident as we look into the second half or stronger sales comps and especially with builders having home sales drop is going to be a negative for our demand in those markets in the second half.

Got it. Thanks a lot, Doug. Appreciate it.

Thank you.

Your next question comes from the line of Stephen Volkmann with Jefferies. Please proceed with your question.

Good morning. I have a question regarding costs. You mentioned various strategies to manage costs, and I am trying to understand how to evaluate decremental margins. While we can make our own assessments about the top-line, I would like to know how to approach gross margin and SG&A performance during this period of negative growth. Thank you.

Yeah. Obviously, we're taking actions to get our cost in line. About approximately 65% of our cost is labor cost, and there is a component of that is related to kind of incentives so that goes away. But in general, our strategy is to manage the – our labor through the volume, and the first step is really kind of I would say hunkering down overtime temporary, labor, managing hours of operations to do that. Incentive comp already automatically, so it's coming down. And then as necessary things like the works very drastic now in very targeted markets. We would actually have to do furloughs like we are currently. So that's the strategy. And then with regards to over the course of this, I think you're going to see kind of I would say, ballpark range of 60-40 type of number with regards to the variable versus fixed over the range that we're talking about with regards to variance on sale.

Okay. All right. That's helpful. And then how do I think about the fact that you laid in a little extra inventory here? I don't know, if that gave you any better pricing or rebates or anything like that. I mean, is there anything to think about relative to sort of gross margin because of that?

I would say gross margin, I think – I can think that really this story on gross margin is going to be what happens in the second half of the year with regards to the sales volume. There's probably two components. We could receive some pressure on pricing and selling margin, if volumes come down. And similarly, I would say, we have some incentive structures with manufacturers and we'll have to see with regard to that where those come in. I think in general, it'll be relatively small, but could come under some pressure in the second half depending upon how volumes go with regards to gross margin also.

Okay. Great. And then maybe just a quick one for Scott. Once we do start acquisition activities again do we make up for the lost time, or do we just sort of go back to the cadence that we were running at before?

I would expect probably not to make up for lost time, but probably to step back into the cadence. It will start off more cautiously and selectively. And then as we gain more confidence and sellers gain more confidence as well then I would expect it to ramp-up, but I wouldn't expect to sort of make up for lost ground.

Got it. Thank you so much. Appreciate it.

Your next question comes from the line of Damian Karas with UBS. Please proceed with your question.

Hey, good morning, everyone. Doug, appreciate all the color you've been able to provide on the variance in demand that you're seeing across different markets because of the restrictions. I was wondering, if you could maybe give us some numbers around that. Thinking about the 11% decline run rate that you're seeing right now, how does that sort of break out between the buckets of maintenance versus the construction? And I'd be particularly curious on the regions where you are seeing the steeper declines the restrictions like in the Northeast and Upper Midwest, where I think you said they were down 25%. How do those two – those buckets break out?

Yeah. That's a great question. We've actually seen a pretty uniform effect on the sector the different product lines that we provide from the landscaping products to the maintenance products. And so it's been pretty broad and it's been pretty even, because the restrictions tend to affect kind of everybody and it affects all parts of our business. And so that's what we've seen so far. We'll see if things are – as things are loosened up how that affects different product lines. In general, we still expect and we're seeing the maintenance product line is the steady as you go product line. And then the bigger variance tends to happen to the landscaping products. But I'd say, the effects specifically are pretty broad and pretty uniform across the product lines so far what we've seen both going down and coming back. John, you want to –

I would add that what we're observing in terms of maintenance is consistent and stable compared to construction, which is influenced by the economy and the market. During a shutdown like this, all product lines are affected. Looking at northern markets, both maintenance and construction businesses are being uniformly impacted. Additionally, these are significant maintenance markets. Right now, we are not seeing an economic-driven decline across every product line in April.

Okay. That's helpful. And then on the inventory situation, it sounds like you guys are ahead of the curve and you bought for the spring season, which seems like a prudent decision. But just thinking about should some of these restrictions persist, which in some regions it seems like that's likely based on what you're seeing today, do you are there any shortages in supply that you're potentially foreseeing going forward?

Our supply chain team is one of our strengths, and having our distribution centers manage our inventory is a significant advantage. We are experiencing minor shortages on niche products for which we have substitutes. Overall, there are no material issues, and we do not expect to face any. We maintain constant communication with our suppliers. When they encounter issues, we ensure our stock levels remain high. Where we have confidence in our suppliers, we adjust our inventories accordingly to match demand. Thus far, we have not faced any challenges. Initially, we were uncertain about potential problems later in the summer, but with the reopening overseas and our suppliers' stability, we do not expect any inventory issues for the remainder of the year.

Okay. That's great. Thanks guys. Good luck.

Thank you.

Thank you.

Your next question comes from the line of Mike Dahl with RBC. Please proceed with your question.

It's actually Chris on for Mike. Thanks for taking my question. Maybe just asking the trends by end-market question a different way, I mean, given maintenance tends to be a more defensive category, do you guys have any numbers or quantifications you provide on how that category, has trended in April, and maybe some of your less impacted markets like Texas and Florida, or how that split looks like across your end-markets? Just trying to get a sense of the core demand change versus the impact of the regulatory framework.

If we were to look at the maintenance, we would see in those markets that are not impacted that the maintenance business is doing significantly better than the 11% that we're seeing in across the company.

Yeah, normally we would expect maintenance to be a low single-digit performer and we're not seeing anything different from that trend in those markets that are less affected.

Okay. No that's helpful. Thanks. And then just for my second question, I mean you guys spoke to delays in the commercial pipeline. Any chance you could provide some quantification around that, I mean, how much of the pipeline you've seen that would help.

Yeah, no, we wouldn't be able to get that granular. We're just working off of general. Obviously, there's a lot of complexities in the market. But in talking to our customers and looking at what we're doing with our own bidding and quoting, we feel fairly good about the commercial business, but we wouldn't be able to wrap any specific numbers around that at this point. Possibly later in the summer as things evolve from COVID.

Okay. No, it’s understandable. Thanks.

Your next question comes from the line of Matthew Bouley with Barclays. Please proceed with your question.

Hi, good morning. This is Ashley Kim on for Matt. So the first thing I wanted to ask was on credit or customer credit and receivables. What are you, kind of, seeing and expecting in terms of customer creditworthiness in this environment?

We have some customers who are affected, and our goal is to assist them. Customer relationships are crucial to us. That said, we are pleased with credit quality performance so far this year, which indicates that many markets are currently doing well and those customers have not been significantly affected. Even in markets that have been hit hard, they have not yet started their season; for instance, in places like Michigan or the New York Metro area, COVID impacted the spring season before it could begin. As a result, many have remained closed during that time. We are monitoring the situation closely, aware that some customers will face challenges, and we will support them. Overall, our credit performance has been reasonable up to this point.

I would also add that our customers are taking advantage of the payroll protection program, which has indirectly helped us on the receivables side because they have used those forgivable loans to continue operating during this challenging time. This program has been beneficial for our customers.

Great. That's helpful. And then for my second question, kind of as you think about when M&A will tick back up, can you comment on any thoughts that you have around resulting valuation multiples in a recessionary environment? Thank you.

Yes, as we consider the timing for when activity will resume, we need to gain more clarity on the economic instability and the status of end-markets. I cannot predict any particular changes to multiples or valuations. Ultimately, both buyers and sellers need to reach a mutual understanding regarding forward earnings, so they must agree on this matter. Therefore, I do not anticipate any specific underlying changes.

Got it. Thank you very much.

Your next question comes from Alex Maroccia with Berenberg. Please proceed with your question.

Hi, good morning. Thanks for taking my questions. Are you seeing any shifts in residential maintenance away from your customers and towards homeowners given their increased time at home? And then similarly, how are you thinking about the maintenance end-market for the impending recession and both residential and commercial?

Yes, for the first question, not significantly. The people who are staying home are engaged in many activities. While there might be occasional instances of this happening, overall, our customers remain active and have experienced very few cancellations of their services in residential maintenance. Could you please repeat the second part of your question?

Yes, how does the shift change between residential and commercial in the maintenance end-market during recessionary periods?

Maintenance remains quite consistent in both residential and commercial sectors. For example, during the last downturn when new construction declined by 50%, maintenance only saw a decrease of 5% to 8%. There will be some effects, and John, you may want to add that the decline was fairly uniform across both residential and commercial.

Right. Yes, I think in general, you would expect commercial, you really don't have a choice. So it's probably a little bit more stable. But I would say you're talking a pretty minor variation between the two.

Right. So in most downturns, maintenance is going to hold out in both sectors and that's what we're seeing today quite frankly is maintenance is holding up well in both commercial and residential.

Okay. Got you. And then the second question is on the material cost side of things. So the company is obviously a much bigger player today than it was back in 2008 and I feel it would give you some procurement benefits leading into next year given your volume. So is this a possibility and what products could see the biggest cost benefit?

I don't know if there will be a significant impact on cost benefits regarding that. We have a long-term relationship with our supplier, and we collaborate during both high and low volume periods. While we want to leverage our size, we must remain aware of these long-term relationships and our cooperation when volumes fluctuate. Although there may be occasional opportunities, our strategy focuses on maintaining these long-term partnerships.

We always collaborate with our suppliers to ensure we receive the best costs in the industry, leveraging our size consistently. However, as John mentioned, this does not necessarily improve, and we maintain this approach during both favorable and challenging times.

Okay. Got you. And if I could just sneak one more in there, can you talk a bit about how your revamped e-com platform has benefited you since the shutdown started?

Right. No, it's been a great tool. We've seen some acceleration in our tickets are up significantly in April versus last year and we're doing a lot of training with our customer. So when this started to hit, it was actually great advertising for online tools, so we are doing our best to take advantage of that and advertise that as a much safer way to interact with us. Customer typically comes in the branch and looks around the branch and gets their goods and then checks out. It's much better for them and us, now that we're restricted at the branches somewhat in terms of where they can go and interactions to put that order in online, so that we can pull it together for them they can drive up in their truck and we can lift their load them up without them even having to get out of the truck if they want. And I would say having our barcoding MobilePro scanners also allows us to do that out in the yard or outside of the branch showroom. So both siteone.com and MobilePro have given us important flexibility and we're taking advantage of that obviously in this crisis and we're trying to train our customers to take advantage of that. And then we hope those habits stick once this crisis goes away we hope those habits stay and we have new permanent users of siteone.com.

All right. great. Thanks for the answers and stay safe.

Thank you.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I'd like to turn the call back to Mr. Doug Black for closing remarks.

Okay. Well thank you for joining us today. We very much appreciate your interest in SiteOne. I'd like to repeat our thoughts and prayers go out to all that have been impacted by COVID-19. And I'd like to take the opportunity once again to thank our SiteOne associates for being such a terrific team during this tough period and helping us get through in great shape and great style. So, thank you, and we'll talk to you again after the second quarter.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.