SiteOne Landscape Supply, Inc. (NYSE: SITE) Second Quarter 2022 Earnings Conference Call August 3, 2022 8:00 a. m. m. ET
Participating companies
John Guthrie, Executive Vice President, Chief Financial Officer and Deputy Secretary
Doug Black – President and Chief Executive Officer
Scott Salmon – Executive Vice President, Strategy and Development
Conference Call Participants
Ryan Merkel-William Blair
Stephen Volkmann – Jefferies
David Manthey – Robert W. Baird
Michael Dahl – RBC Capital Markets
Damian Karas – UBS
William Carter – Stifel, Nicholas
Jeffrey Stevenson – Loop Capital Markets
Matthew Bouley – Barclays Bank
Keith Hughes – Truist Values
Operator
Greetings and welcome to SiteOne Landscape Supply’s 2022 quarter earnings call. [Operator Instructions].
Now I’d like to talk about the convention: the call to you, Mr. John Guthrie, Executive Vice President and Chief Financial Officer of SiteOne Landscape Supply.
Thank you. You can get started.
Jean Guthrie
Thank you and good morning everyone. This morning, we issued our press release on the timing effects of the quarter of 2022 and published a slideshow in our Investor Relations segment in inverter. siteone. com.
With me are Doug Black, our president and CEO; and Scott Salmon, executive vice president of strategy and development.
Before we begin, I would like to remind everyone that today’s press release, slideshow, and statements caused the call to come with forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements relate to risks and uncertainties that may cause actual effects to differ materially from our expectations and projections. These risks and uncertainties come with the points set forth in the earnings release and in our filings with the Securities and Exchange Commission.
In addition, in today’s call, we will talk about non-GAAP measures, which would possibly be useful in evaluating our performance. A reconciliation of these measures can be discovered in our effects statement and in the slideshow.
Now I’d like to call Doug Black.
black doug
Thank you, Jean. Hello and thank you for joining us today. We are pleased to continue our positive momentum in the current quarter with forged sales and earnings expansion, despite strong expansion comparable to last year and spring headwinds in our northern markets.
Lower volumes in those markets were more than offset by higher value realization across markets, along with a smart contribution from acquisitions. We are also very excited to upload 7 new high-performing corporations to SiteOne in the last four months through acquisitions, laying the foundation for our functionality and long-term growth.
As we enter the time of year portion, we expect costs to contribute less to the daily biological expansion of sales and volume compared to the first part of the year compared to weaker comparisons. Overall, with our strong teams, enhanced features and a strong acquisition portfolio, we expect to continue to gain market share and achieve another very smart year of functionality and expansion in 2022, as we build our business for the future.
I will begin today’s call with a brief review of our unique market position and long-term functionality and expansion strategy, followed by some highlights from the quarter. John Guthrie will then explain in more detail our current quarterly monetary effects and provide an update on our balance sheet and liquidity position. Scott Salmon will talk about our acquisition strategy, and then I’ll talk again about our final prospects before answering your questions.
As shown on slide four of the effects presentation, we have expanded our presence to more than 620 branches and four distribution centers in forty-five U. S. states. We are the undisputed industry leader with more than five times the length of our nearest competitor, yet we estimate that we own approximately 15% of the highly fragmented market for wholesale distribution of landscaping products. of $23 billion.
Therefore, our long-term expansion opportunity is significant. We have a balanced mix of activities with 64% focused on maintenance, repair and upgrade, 21% focused on new residential structure and 15% on new advertising and recreational structure.
As the only national wholesale distributor of a complete diversity of products on the market, we also have a perfect balance between our product levels and geographically. Our strategy to complement our product lines in the U. S. The U. S. and Canada, either organically or through acquisitions, reinforces and reinforces this balance over time. Overall, our balanced end-market mix, broad product portfolio, and smart geographic policy provide us with expansion opportunities and more tactics to create prices for our consumers and suppliers, while offering significant resilience in weaker markets.
Let’s move on to slide 5. Our strategy is to leverage the scale, resources, functional ability, and functions we have as the largest company in our industry, all while supporting our trained, experienced, and entrepreneurial local groups to consistently deliver more than our competitors. to our consumers and suppliers.
We have come a long way in building SiteOne and executing our strategy over the past 6 years, but we are still in the third or fourth round of our overall progress as a world-class de facto company. Therefore, we remain firmly focused on our commercial and operational projects to improve our features and embellish the price we deliver to our consumers and suppliers.
These projects are complemented through our acquisition strategy, which builds on our product portfolio, takes us into new geographic markets, and adds super new skills to SiteOne. Overall, our strategy creates incredible for our shareholders through biological expansion, expansion of acquisitions and expansion of EBITDA margin.
If you turn to slide 6, you can see that we have built a strong track record of functionality and expansion over the past 6 years with steady, biological and acquisition expansion and EBITDA margin expansion.
Please note that we have done this while investing heavily in our groups and in new systems and technologies to lay the foundation for SiteOne and create amazing features for our consumers and suppliers. We continue to build and invest, and we remain confident in our ability to gain market share and continue to advance our 3 price creation levers.
You will also notice that we have now made 72 acquisitions in the irrigation, lighting, agronomy, nursery, landscaping and landscaping product lines in the last 8 years, 8 of which have been completed so far in 2022. We only gained well-run business, so all those acquisitions were already successful corporations before signing up for SiteOne. Once you sign up with us, collectively we enjoy the benefits of our combined operational and advertising capabilities.
Acquisitions are also a key source of new skills and ideas and, as a result, are our competitive merit as we grow. We started the year well and our acquisition portfolio remains strong with a significant prospect of continued expansion through acquisitions. for many years to come.
Slide 7 shows the long road ahead of us to complete our product portfolio, which we are targeting primarily through acquisitions, specifically in the nursery, landscaping and landscaping materials categories. We are well connected to the corporations in our industry and plan to continue to occupy those markets systematically over the next decade.
I will now talk about some of our highlights of the current quarter’s performance, as shown on slide 8. We achieved a net sales expansion of 12% in the current quarter with a daily biological sales expansion of 8% and a net sales expansion of 4% aggregated through acquisitions. Organic expansion in daily sales driven by a value realization of 19%, partially offset by an 11% reduction in volumes. With daily biological sales expanding by 26% in the first part of last year, driven primarily by volume, we expected volume expansion to be negative for the first part of this year.
In addition, we had less favorable weather situations in our northern markets this year than last year, which particularly affected our expansion in those markets. As a result, the expansion of daily biological sales remained strong during the quarter in our northern markets, extending from the Northeast to the Pacific Northwest, adding Canada.
Gross margin advanced through 210 core issues to 37. 9% for the quarter as we continue to take advantage of proactive stock control in this era of peak inflation. During the first part of the year, gross margin also increased through 210 core issues to 36. 1%. As a reminder, in the past we had the idea that gross margin would be minimized this year without the advantages of achieving the costs we basically received in the third and fourth quarters of last year. We still expect gross margin to minimize in the current part of the year than last year, but given our strong start and continued inflation, we now expect a slight improvement in gross margin for the full year 2022.
On the SG side
As a result, general and administrative expenses as a percentage of net sales increased through 160 foundation issuances to 22. 4%. We expect SG leverage
Overall, we remain focused on our adjusted EBITDA margin as we grow through the execution of our commercial and operational projects and leverage synergies with acquisitions.
In terms of initiatives, we have continued to make smart progress this year. In terms of gross margin, we continue to grow with small customers, driving the growth of personal labels and our inbound freight prices through our transportation control formula or TMS initiative.
As value realization continues this year, we expect those projects to allow us to continue to improve gross margin for years to come. We also have several projects aimed at improving the experience of our visitors and making our groups more efficient, thus expanding biological expansion. and improving our SG leverage.
MobilePro is helping automate transactions at the branch, while also enabling our subsidiaries to serve consumers from anywhere on the branch site. win-win. We recently advanced the capability of MobilePro and fixed some of the connectivity issues. Therefore, our progress in implementing this on SiteOne has accelerated. By mid-2023, MobilePro is expected to be widely deployed on SiteOne.
Recently, we are also implementing DispatchTrack, which allows us to manage our outbound deliveries to consumers and proactively inform consumers about their SMS delivery status. DispatchTrack is a huge improvement to the delight of our visitors and has allowed us to start managing our outbound fleet more successfully. within MSA. We expect to reap advantages from those efficiencies in 2023 and beyond.
In addition, we continue to make wonderful strides with siteone. com, as we have added really extensive new features and functions to the site. As a result of those improvements, we’re seeing increased visitor adoption and increased activity as we enter the current part of the year.
Finally, we execute many other operational excellence projects aimed at improving the experience of our visitors and improving the power of our associates. These projects range from how we answer our phones at peak times of the day to how we organize and equip how we bid and cite commercial projects. We now have a full-time team on each and every major business line, working with the box to isolate weak issues and then expand and enforce responses across the enterprise.
Overall, we have enough opportunity to improve our visitors’ experience and increase our operational effectiveness and efficiency, while also expanding gross margin in the coming years. quarter and 1 more since the end of the quarter, bringing the total to 8 so far this year. These companies provide us with new skills and expansion functions in their respective markets, while adding approximately $125 million in sales over the past 12 months. Our progression groups remain very active in 2022 and we plan to continue adding strong corporations to SiteOne in the coming months.
With an experienced and recently expanded team, broad and deep relationships with the most productive companies, a strong balance sheet and a fair reputation as a preferred customer, we remain well placed to grow through acquisition this year and for many years to come. . In short, we act strongly in the existing environment to strengthen our teams, execute our initiatives, offer prices to our consumers and suppliers, generate new business and achieve the right functionality and growth. year, we are confident of our ability to achieve another strong year in 2022.
More broadly, as we look ahead to 2023, which is likely to be a more challenging year, we remain very confident in our ability to navigate all market situations and plan to outperform the market and, thanks to our strong Leaf balance, continue to grow our business. For the future.
Now, John will check you out about the quarter in more detail. John?
Jean Guthrie
Thank you, Doug. I’ll start with slide nine with some highlights of our quarter results right now. We reported a 12% increase in net sales to $1220 million in the quarter. There were 64 days of sales in the quarter so far, which corresponds to last year’s era.
Organic sales increased 8% in the quarter, driven by price inflation in reaction to higher product costs, partially offset by declining volumes as a result of higher values, moderate economic situations and adverse weather in our northern markets.
Acquisitions continued to perform well, contributing approximately $45 million or 4% to our net sales expansion in the current quarter. Scott will provide more important points related to our acquisition strategy later in the call.
Geographically, we saw a large variation in the expansion of biological sales in the current quarter. In the Sun Belt market, we saw an expansion of forged biological sales of 17%, but in the northern markets, which stretch from the Pacific Northwest to the East Coast, it did not see a biological expansion in sales. These markets, which faced a difficult festival of 24% compared to last year, were negatively affected by the slow start to spring and adverse weather situations compared to last year. Overall, 7 of our nine regions, adding up all northern markets, had more rain in the second quarter of 2022 compared to a very dry second quarter of 2021.
Organic daily sales of agronomic products, which come with fertilizers, control products, ice melting and equipment, increased 7% in the current quarter due to inflation of higher values product product costs, partially offset by decreased volumes due to adverse weather situations and higher prices of agronomic products, like fertilizers and grass seeds, they have increased dramatically over the past year. And while price inflation has been positive overall for sales growth, higher prices for products like fertilizers have reduced demand in the short term, as our consumers feel faced with limited maintenance budgets.
In addition, some of our largest agronomic markets are located in the north and the combination of rainy weather and last spring has led some lawn care operators into agronomic product application cycles.
Daily organic sales of landscaping products, including irrigation, nursery, landscaping, lighting and landscaping fixtures, increased 9% in the current quarter, basically due to price inflation, keeping the prices of products such as PVC pipes and drainage in the top places compared to last year.
Price inflation continues to play a major role in the biological expansion of daily sales, whether for landscaping and agronomic products. We estimate that value inflation contributed 19% to our biological expansion of daily sales for the quarter. While we have begun to see symptoms of relaxation for some of our most volatile products such as fertilizer and copper wire, price inflation has been more potent and more persistent than expected in the first place. We still expect price inflation to moderate in the current part of 2022 as we begin to offset last year’s value to increase, however, we expect the magnitude of the relief to be less than we originally anticipated.
On the contrary, we expect volume, while still healthy, to be lower than we expected, as we appear to have exceeded peak levels due to the combination of weather, emerging costs, and overall economic uncertainty. For the rest of the year, we expect those trends to continue.
Gross profit increased 19% to $461 million in the current quarter, and gross margin increased 210 core issues to 37. 9%. gross margin in the current part of 2022, as our gross margin improvement projects, such as personal etiquette and small visitor expansion, are more than offset by the loss of value realization merit we experienced last year. However, the amount of relief will be less than our initial expectations due to persistent price inflation.
Selling and administrative expenses, or SG
We continue to invest in our initiatives, adding marketing, virtual and MobilePro, which we believe will improve the visitor experience and enhance the power of our operations. We’re also seeing the effect of inflation on general and administrative expenses, as prices for wages, fuel, travel, and overall branch operations have risen this year.
Finally, our last peak acquisitions had a positive effect on our gross margin, but also had a negative effect on general and administrative expenses due to their superior operating cost structure.
At the moment, we recorded a profit tax expense of $44. 8 million compared to $36. 8 million at the same time last year. The effective tax rate was 24. 2%, compared to 23% for the 3 months ending July 4, 2021. The increase in the effective tax rate is basically due to a reduction in the amount of additional tax benefits of stock-based compensation. We obtained $2. 4 million in additional tax benefits for the three months ended July 3, 2022, compared to $4. 8 million for the 3 months ended July 4, 2021.
We recorded a net revenue stream of $140. 7 million for the current quarter, compared to $123. 5 million in the prior-year period. This improvement is basically due to the strong expansion of sales and the increase in gross margin.
Our weighted average number of diluted shares for the current quarter is 45. 8 million, which is comparable to last year’s era. Adjusted EBITDA increased 16% to $222 million in the current quarter, compared to $191 million for the same was last year. Adjusted EBITDA margin, reflecting the improvement in our gross margin, higher through 60 foundation issues at 18. 2%.
Now I would like to get a brief update of our balance and statement, as shown on slide 10. Net current capital at the end of the current quarter was $885 million, compared to $624 million at the end of the same period. The accumulation in net current capital is basically due to the accumulation of accounts receivable as a result of a strong expansion in our sales and an accumulation in inventory, reflecting supply chain uncertainty, charge inflation and strategic purchases in anticipation of the accumulation of charges from our suppliers.
Net cash flow from operating activities in the current quarter was $95 million, compared to $138 million for the same period last year. The reduction is basically due to the accumulation of current capital to help our growth. We made investments of $104 million for the quarter, compared to $36 million for the same quarter last year. The accumulation of monetary investments reflects our acquisition and increased construction activity in the quarter.
Net debt at the end of the quarter of approximately $436 million, compared to $257 million at the end of last year’s period. Net debt accumulation reflects increased indebtedness to finance current capital accumulation and our acquisition investments.
Leverage at the end of the current quarter increased our 12-month adjusted EBITDA to 0. 9x from 0. 7x at the end of the current quarter of 2021. The upper leverage reflects the accumulation of net debt. Our target diversity of net debt relative Year-end adjusted EBITDA is 1x to 2x.
At the end of the quarter, we had $228 million in cash, consisting of $50 million in cash and approximately $178 million in capacity under our asset-based loan or ABL line. On July 22, following the close of our current quarter, we moved our ABL facility expanding the length from $375 million to $600 million and extending adulthood through July 2027 beginning in February 2024. With this expansion, we have increased liquidity through another $225 million.
In short, our priority of a balance sheet attitude is our monetary strength and flexibility without sacrificing long-term expansion or market opportunities.
I’ll now turn to Scott for an update on our acquisition strategy.
scott salmon
As shown on slide 11, we have acquired 6 corporates in the current quarter and 1 corporate since the end of the current quarter, bringing our total to 8 by 2022, with combined 12-month sales of approximately $125 million. Since 2014, we have acquired 72 corporations with approximately $1. 35 billion in 12-month sales added to SiteOne.
As for slides 12 through 18, you’ll learn about our most recent acquisitions. On April 22, we acquired BellStone Masonry Supply with an exclusive location serving the Fort Worth, Texas market. Acquisition in 2020 of Alpine Materials, which also manufactures materials for landscaping products.
On April 28, we acquired Preferred Seed, a leading supplier of agronomic products to landscaping contractors in upstate New York with 1 in Buffalo.
On June 17, we finalized our acquisition of Across the Pond, a wholesale distributor of bulk landscaping and landscaping fabrics with 1 location in Huntsville, Alabama. This acquisition expands our presence in the existing market and the supply of products for landscaping and bulk landscaping.
We completed our acquisition of Yard Works, an industry leader in bulk mulch and earth distribution, on June 22. With thirteen locations in Central Virginia, the addition of Yard Works expands the strong market position we established earlier this year in Northern Virginia with the acquisition of JK Enterprises.
On June 30th we acquired Prescott Dirt, a landscaping and landscaping distributor with 2 sites in Prescott and Prescott Valley, Arizona.
On July 1st, us ¦ A
And finally, on July 22, we acquired River Valley Horticultural, a wholesale distributor of nurseries, landscaping and irrigation with a unique location in Little Rock, Arkansas. River Valley establishes a nursery platform for SiteOne in central Arkansas.
These acquisitions bring great skill to SiteOne and move us forward toward our purpose of offering a complete diversity of landscaping products to our customers in all major U. S. markets. USA and Canada.
In summary on slide 19, our acquisition strategy continues to create meaning for SiteOne. The recent expansion of our team has enhanced our ability for full studies and acquisitions and has also improved the quality and power of our integration of those new corporations and teams. .
Our team of over 60 former owners, combined with our experienced leadership in the field, creates an unprecedented realistic culture and truth at SiteOne, making us the go-to customer for family circle businesses. Our laser focuses on horizontal distribution gives marketers great confidence that when they sign up for SiteOne, they will sign up for the long-term market leader that will provide their affiliates with solid and nearly endless opportunities for career expansion and good fortune in North America.
As we approach the current part of 2022, we are pleased with our M&A momentum and the continued strength of our portfolio. We have a highly professional team, a reputation and a strong track record to fund our acquisition strategy under strong and challenging market conditions. .
Taken together, those elements give us confidence that we will upload more exceptional businesses to SiteOne in the U. S. In the U. S. and Canada in 2022 and for many years to come, as we strengthen SiteOne’s ability to deliver more pricing to our consumers and suppliers.
I need to thank the entire SiteOne team for their hobby and commitment to welcoming the newly acquired groups when they joined SiteOne. His leadership and efforts are key to our long-term good fortune in building our business.
Now I will call Doug back.
black doug
Thanks Scott. Je will conclude on slide 20. After our spring season, which, as we mentioned, was particularly affected by weather conditions, we developed a dynamic forged summer and our vital autumn season.
Volume was less negative in July than in the current quarter and sales expansion remained in double digits due to continued realization of value. we expect the volume of growth to strengthen relative to a less difficult comparable expansion from 2021 onwards. Our clients continue to have a large backlog, and we expect them to remain busy at the end of the year. Overall, the market will be waiting to provide us with a moderate environment to execute our commercial and operational projects and drive sales and profit expansion in the current part of the year.
In terms of finishing markets, we are starting to see some slowdown in new residential construction, which accounts for 21% of our sales. With home value inflation and higher interest rates, builders see less demand and are more cautious in terms of new housing. Begins. We expect this softness to continue with moderate declines from last year.
On the contrary, the new advertising structure, which accounts for 15% of our sales, was maintained with healthy bidding activity and giant order books. Also keep in mind that the shortage of first phase fabrics in concrete and structural pieces has delayed the landscaping phase of new advertising projects. , which, in turn, has slowed down activity in the short term, but has increased the portfolio of paints for our customers.
Renovations and main maintenance, which account for 27% of our sales, also remained strong, and only a few regions of the country showed some weakness. Overall, in times of recession, major maintenance and renovations have proven to be more sustainable than new construction, and we expect that to be the case this year and in 2023. Keep in mind that low unemployment and higher home values are the primary market for maintenance and renovations.
Finally, the final maintenance market, which accounts for 37% of our sales, remained stable. Again, as John mentioned, our end consumers have constant budgets for maintenance. And so, with the immediate inflation of the value of products like fertilizers and seeds, maintenance consumers have the ability to reduce their expenses anywhere they can to get through the year.
In the future, as the costs of those products decrease and budgets are adjusted, we expect volume to increase and consumers to focus on the long-term fitness of their gardens. Overall, the demand for dollars for maintenance has remained stable and we are waiting for this to continue.
Overall, we expect our end markets to provide us with a moderate foundation to execute our strategy and gain market share as we provide higher costs to our consumers and suppliers. Biological expansion in sales for the whole year 2022, mainly due to value inflation.
As mentioned, we now expect our gross margin to be higher than last year, offset by general and administrative expenses, which will also be higher than last year as a percentage of sales.
As a result, we expect our adjusted EBITDA margin to be similar to that of 2021. In terms of acquisitions, as Scott mentioned, we have a strong portfolio of high-quality businesses and look forward to adding more to SiteOne’s circle of family members over the course of the year.
Our acquisitions are working very well and we continue our ability to integrate them into our business. As a result, we expect acquisitions to contribute particularly to our functionality and expansion for the remainder of 2022 and beyond. Given these points, we are expanding our expectations for fiscal 2022 adjusted EBITDA between $440 million and $460 million, representing a year-over-year expansion of 6% to 11%. This diversity does not take into account the contribution of unannounced acquisitions.
In closing, I would like to sincerely thank all of our SiteOne affiliates who continue to amaze me with their passion, commitment, teamwork and selfless service. We have a wonderful team and it is an honor to subscribe to them while we develop price to all our stakeholders.
I would also like to thank our suppliers for supporting us so strongly and our consumers for allowing us to be their partners.
Operator, please open the line for questions.
Q&A session
Operator
[Operator Instructions]. The first comes from Ryan Merkel’s lineage with William Blair.
ryan merkel
I tried to start with the comments that emerging costs are hurting growth. Can you decompress what you mean there?
black doug
Oui. Je I think here, Ryan, we are referring specifically to the maintenance component of our company. As we described above, maintenance budgets are fixed, either for the maintenance of the facilities, etc. And when costs go up as much as they did, they use short-term tactics to get ahead and save here and there, seeds, fertilizer, and so on.
When values return, come back and start over with the long-term fitness of their homes, don’t they?So, there is a sure elasticity of value in this market. And given the significant increase in values, we’re seeing some of that sweetness. . So that’s what we mean in terms of the type of value-induced dynamic call.
ryan merkel
To say that this will be corrected as the costs of some commodities fall?
black doug
Historically, this is what we see, is that, costs are transmitted, they can spend and use the volume they want for what they are looking for Array, so it has a tendency to the right type. So, we can call this a merit for maybe next year on the volume side.
ryan merkel
And to be clear, weather was the biggest impact on expansion during the quarter or it was the increase in costs because you discussed it first in the press release, so I just wanted to explain that?
black doug
Oui. Oui. Je means that the value is a minor component type. Obviously, the weather has a big impact. And we’ve noticed that it’s improving. April and May were especially challenging. And we ended the quarter at 8%. Volume decreased by 11% in the quarter. We came out with an 8% drop. We see a decrease from 5% to 6% in July. Therefore, it is a fixed rate.
And really, all this dynamic that’s happening in those markets from the Northeast to the Pacific Northwest, adding Canada, as we mentioned, remained stable, while we saw a 17% expansion in the Sun Belt.
So, and when I say flat, flat in general, the sum of the value increases. So, it was a complicated spring rather than a very smart one – the weather was very smart last year. So we had this dynamic.
ryan merkel
It is ok. It’s useful. And then it looks like volumes will go down from single digits, to an average single digit in the current part of the year, which is an improvement. So this is, well, an improvement over the second quarter. Is it simply less difficult to compare, and is the time more normal?
black doug
Droit. Si you see last year, the first part was almost basically driven by the volume of our expansion. And remember, we had a 22% expansion for the whole year, an 11% volume expansion, almost all of that first part of the year. And then the part of the moment was flat until last year. And obviously, you have this composition easier. Therefore, we expect volumes to continue to strengthen, to be less negative, so to speak, in the current part of the year as we go through the third and fourth quarters.
ryan merkel
they gave it to me maybe just in spite of everything in the gross margin. Forecasts mean an implementation rate of around 34% in the current part of the year. Going forward, there are many questions and distribution grounds where gross margins will settle at 23 and when stock market earnings will come out of the numbers. Any help would be appreciated.
Jean Guthrie
I think if you take a look at our forecast at the beginning of the year, they had a kind of benchmark of 34%. Point of view.
doug black
And that the lower end, I mean, we guide from 34% to 34. 5%. And that’s where we think it’s going to restart this year, Ryan, and that’s probably where we think it will happen when you get there, when the value runs out. However, keep in mind that each and every year we make acquisitions, and we do a lot of landscaping acquisitions and landscaping supplies.
These come with a higher gross margin, also higher general and administrative expenses, a similar EBITDA range. So you have that factor. So if it takes a few years of that, you have to improve there only through acquisitions as far as gross margin is concerned.
Operator
The next one is from Stephen Volkmann with Jefferies.
Stephen Volkman
My query relates to your comment, Doug, that the 23rd is going to be a tougher year. So I guess it’s a residential thing, but I don’t need to put words in your mouth. So just a little detail about some kind of review of how do you think about 23?
And then the follow-up there at the same time is what’s the playbook for a more complicated year?Is there any painting I can do at ILI?
black doug
Correcto. No, thank you for the question. The context of a more complicated year, I will analyze from market to market. Of course, let’s start with the new residential, which accounts for 21% of our sales. Most likely, the new residential will be softer than it is this year. , that, and that would be a headwind.
If we take a look at the new classified ads, the new classified ads have been strong. Delays are good. The bidding activity is good. So we feel pretty forged in the new non-residential and that’s 15% of our sales. We design 27% of our sales, our style has been solid. We hope it will be, I would say, forged, but expansion may be less than this year. We don’t know, but we’d be expecting it, it can be a little softer.
And then we take a look at maintenance, maintenance tends to be solid in any type of market. And in fact, as I mentioned, in terms of volume, there might even be a small advantage if the costs of raw curtains go down, think about how solid are dollar maintenance budgets, right?
So if commodity costs fall, volumes can increase and compensate. So when you take all of this together, we’re not here yet to call 2023, but we think it is, it doesn’t look like it’s going to be a terrible year. , but being careful and realistic, it can be more complicated than this year.
The other thing that’s going down this year is notoriously that we have this awards achievement, right?And we don’t expect that next year, do we?So, in essence, we will have to deal with the lack of realization of prices. It has a gross margin that we plan to restore this year, it would take place next year. So, that dynamic continues. So when you go up that, it would be a tougher year than our record year this year. I mean we’re going through a wonderful year that we had last year.
How can we deal with that? When we enter markets or periods where, for example, volumes might be low or we have headwinds, we will continue to present our commercial operating projects that will help our gross margin. In addition, they will help our SG leverage effect.
We’ll be careful if markets are weak in some parts of the country, which it probably is, probably not some kind of general easing, so we’re going to know how to pull back in the markets. . We can: Hard work is an important component of our overall and administrative costs, and we can reduce the team and avoid hiring and do well in terms of relieving and onboarding the team.
And then, of course, we have acquisitions, which you talked about, that we plan to continue to invest in all kinds of markets. So that will fill some of that. This is how we would see the end markets. We have a final market, about 21% of our business, that is probably weaker.
The others look solid. And then we have a lot, I guess, arrows in our quiver to respond to those kinds of markets, the headwinds that we find. And acquisitions will be there to keep us in growth form, continue to build the foundation, and mitigate some of that. Therefore, we are satisfied with our company and our ability to achieve anything, regardless of the market reaction next year.
Stephen Volkmann
they gave it to me Okay. It is very useful. Just a quick follow-up, about the price, as he discussed it. Do we have a positive effect on transfer costs in 23 or do you think this kind of deflation in certain types of products?How do you deserve us to think about inflation in ’23?
Jean Guthrie
Well, we’re going to have to see. Obviously, it has been more persistent this year than last year. If you remember, in our initial forecasts, in the current part of this year, we were thinking about some of the commodities that could fall most dramatically.
I think, in the long run, there’s a chance of what we’ll call about 20% of our business being re-evaluated regularly. Some of that may fall in the future, one would expect when it comes to PVC fertilizers. and pipes, which we have talked about a lot.
I think some fertilizers in the current part of this year will come out of their peak, however, they will rise to a higher point compared to what we were 2 years ago. We’re looking at copper wires coming out, some of the costs are weakening a bit right now.
But I think we have to see how much they’re transmitted downwards as we approach the year. and that’s built into part of our guide.
black doug
We believe that the remaining 80% will be counterfeited and kept, we may get more value increases there, but we are pleased that the remaining 80% will be falsified and maintained. Obviously, brands will continue to monitor prices and yet the remaining 80% has actually been in recovery mode, and we expect this to continue.
Operator
The next one comes from David Manthey’s lineage with Baird.
david manthey
First of all, John, I don’t know if you gave it, but the distribution of costs and volumes between agronomic and landscape products, can you provide it for us?
Jean Guthrie
We absolutely don’t divide it like that. I think it would be fair to say, based on what Doug discussed, what we are seeing with respect to agronomic products, which is superior in this line than in gardening products and what I discussed is a kind of constant volume component.
david manthey
It is ok. Yes, fair enough. And so, by definition, here, when you talk about 27% of primary maintenance and reforms, what do you think of discretionary versus non-discretionary in this sector?And to what extent does this only do you do a project?And related, when you communicate about a particular new design, you communicate about the promotion in a design that has just been built or it may be that someone is setting up a new outdoor kitchen that you’ve never had one before. Just by definition, could you help us with that?
black doug
So, taking the latter, a new structure is a space that has just been built, right?The new kitchen in the garden is a major repair and upgrade. We would classify those major maintenances and upgrades.
When you take a look at maintenance and major updates, we’re asked what’s discretionary and what’s not. I think it is; we may debate it all day. it’s jobs, justice in the house and that kind of thing.
And there’s a degree of home turnover, it’s rarely very important, that when selling new homes or whatever, the new owner needs to do something different, right?So it’s the pilots. And it’s weird, when you communicate about the next year and maybe the fall of new resolutions and a recession, et cetera, but with a low unemployment rate, I haven’t been in a lot of recessions with a low unemployment rate.
And with housing, it’s a strange scenario because there’s a low unemployment rate, everyone has a job. You still have this effect of staying at home. So there are a lot of whites, they’re usually white-collar workers. staff who are fully employed. They live in the house, they need to do things in the house.
The price of their house is increasing, so they have a lot of real capital. So, that results in additional maintenance and renovations. Then, we’ll have to see how it goes. But we are cautiously confident that repair and renovation will remain strong because of those factors, which I think are the drivers of this market. So we’re going to have to see. But certainly, the foundation is there and we’re going to see how the market evolves.
Operator
[Operator Instructions]. The next is from Matthew Bouley’s lineage with Barclays.
Matthieu Bouley
Can I ask on the SG side?
Jean Guthrie
Yes. So when it comes to some of those SS
And I would say about 20 basic problems from that would be eliminated on an adjusted basis. We’ve had unique prices in that regard. So I would say 40 more through the procurement execution rate, and then 20 of that was the fundamental point.
So in terms of that, I mean, the salaries were the other 90 to 100. Salaries were part of that, however, we are seeing an increase in the fuel charge in our delivery fleet. We continue to invest in IT. We keep taking our other people out. Travel budgets are higher compared to this. So I would say that the ones are the main components. Fuel, I see some of our investments in our initiatives, and then the general rate of combined wage inflation has increased overhead and administrative expenses.
We don’t think in the current part of the year, although we’re going to say something, lately we expect the impact to not be as big as you saw in the first part, although the acquisition component will be more likely to continue, if not expand, with some of our business wave that we’ve had recently.
Matthieu Bouley
they gave it to me It’s a beautiful color. And then just a quick second, just on consumers and inventories. I guess it’s a bit biased for medium and giant consumers. But I guess, to what extent can your consumers hold some kind of excess inventory?In recent months there have been higher orders from consumers that can now lead to stock clearance?
black doug
Non. Je means that the capacity for them of the total stock is not very large. You get purchases. We have EOP systems and things that have been combined, they can move, but it’s especially at the beginning of the year. So at this point, we wouldn’t feel like there’s significant stock that our consumers have or sit on. So, yes, they will continue to buy products day by day throughout the year.
Operator
Next is from Keith Hughes’ line with Truist.
Keith Hughes
Oui. Je only looked to get back to some of the pricing issues. You talked about the upcoming falls in some agronomic products. Are you starting to see the prices of lawn hoses?Is it starting to break off and how fast. . .
Jean Guthrie
I would say we don’t see that in irrigation, landscaping. We don’t see significant relief in our prices or anything happening to the industry right now.
Keith Hughes
It is ok. And would that also be for hard surfaces?
Jean Guthrie
This would also involve hardscapes. Almost all of our product lines, apart from the specific ones of copper cables, I know this is a sight, and I think for fertilizers there will be less of the two.
Operator
The next one comes from Mike Dahl’s line with RBC.
michel dahl
Doug, I just wanted to ask a little more about the volumes of the middle of the moment. So less negative in the middle of the moment. It seemed that the second quarter was the biggest challenge in the northern markets, however, given that it arrived in July and its expectations were still negative in the middle of the moment, did it make its markets bigger in terms of volumes that have turned negative?Or is it still a general comment about not seeing the recovery in those northern markets?
black doug
Oui. Je I think the northern markets have recovered, but they don’t actually fit the strength we see in sun belt. Now, it can be more positive, right? as things continue to grow because, as I mentioned before, last year’s volumes were pretty solid or up.
And let’s see how we do it, right? We like the trends we see so far, as I mentioned, from June to July. We’ll see how this continues. But the trend that the northern markets are weaker than those in the south of the Sun Belt has continued, we have noticed some recovery in the northern markets. Southern markets have remained fairly strong in this type of strong form.
michel dahl
It is ok. And my query at the moment, just a continuation of Matt’s query on inventories. It turns out that a stock clearance is occurring in the retail channel around certain products, obviously, retail would ship: it brings a lot more into other products, however, when you take a look at your stock balances a little bit, component of that is M
Jean Guthrie
We believe that our stocks will decrease, just because of the general seasonality. I think one vital thing to keep in mind is that because of the uncertainty of supply chains and the delivery time of suppliers, each distributor, and us included, had to bring in more stock just because we weren’t, so there’s so much uncertainty about when we can restock. It’s not a kind of problem with the product, it’s just that we bring more because we didn’t know when the next shipment or the next delivery would arrive. it would come from our suppliers.
So if we only get it, we look for it in our distribution centers or in our stores. What we’ve noticed most recently is that those supplier requirements and deadlines might not be; no one would say that all the problems of the origin chain have been solved, but they are improving dramatically, to the maximum in each and every one of the areas. So, we have a seasonal decommissioning.
But in addition to what we’re doing, we’re the only additional delays that result in that extra protection stock and allow us to reduce the stock to more than what I would call our general garage point that is needed to fill our retail outlets and customers.
Operator
The next one is from Jeff Stevenson of Loop Capital.
Jeffrey Stevenson
Congratulations on the neighborhood.
black doug
Thank you so
Jeffrey Stevenson
So with 8 acquisitions since the beginning of the year, that’s the total number it made last year. And I wonder what motivates the acceleration of the speed of acquisitions. Are there more motivated sellers in the market or are some of the internal projects taken?
scott salmon
Yes. Good consultation, Jeff. I’m Scott. I don’t think there is any express macro point that pushes dealers out. our ability to locate and close deals. But just as important, for our focus and execution of business integration after closing.
And those moves have gone very well for us on both fronts. Acquisitions, by their nature, cannot be as they should be predicted, so you can have, call it, hot sequences and periods of drought. But I think the back line for SiteOne is that we have greater capacity than ever before, and we felt really smart about our strong momentum at the beginning of the current part and into 2023.
black doug
Oui. Et, it’s amazing to see how, although we’ve increased the capacity of our neighborhoods that pass, locate, and communicate to businesses we still find as big as we are and as ubiquitous as we are, we’re still finding great businesses that are hidden gems, so to speak. And it’s just when there are more people out there, you tend to be more active and we also see some of that, as Scott mentioned.
Operator
Next is Andrew Carter’s lineage with Stifel.
William Carter
One thing I wanted to ask you is that, over time, we discussed that hardscape’s location nursery, the SG.
black doug
No, wonderful question. First I’ll take the hardscapes, which, at most, if you notice, most of our acquisitions are hardscapes and landscape supplies, which are very repair-oriented: the main repair and renovation market.
Part of the landscape provides more maintenance, so to speak, of mold, soil, and so on. So we appreciate the fact that we are expanding in those areas as they are targeting the most sustainable market segments. The nursery would be a type of new construction. So it’s a line there. But that’s how those product lines work.
Operator
The next one is from Damian Karas with UBS.
Damian Karas
Lots of covered ground. I appreciate all the details. Just a few follow-ups. Doug, as you discussed earlier, primary renewals have been stronger beyond market downturns than the new structure. I guess thinking about the trends of recent years, haven’t maintenance and innovations been a little more of a driving force of expansion than a new structure for you?And I would think so, perhaps just the opposite of what you’ve noticed in subsequent cycles?
black doug
Correcto. No, I mean the professional repair and renovation market has been very strong, right?I mean, there’s no doubt about that. This has been a wonderful engine of growth. My comment on a classic market place and a classic recession. Therefore, if you return to the big slowdown or typical slowdowns, maintenance and renovations will represent a part of the new construction.
But I don’t think we’re in a typical market, do we?As I mentioned, we are in a market where unemployment is low and home value is high. And that results in maintenance and renovations. see, however, it is indeed a market place that we embrace. The trend of outdoor living is very real.
COVID has focused on this, but it will continue in the long term, the house lends itself to repairs and renovations. So many things targeted this sector that led it to drive long-term growth. And that’s why we love it, and we’re continuing to expand it as a component of our end-market portfolio.
Damian Karas
Entendu. Es just a follow-up of the price-sensitive component of the maintenance you talked about. I think you can postpone the maintenance activity for so long. So, I guess, regardless of the fact that some of those costs, agricultural costs are starting to be passed on, is there a suppressed call for that to have to happen?I mean, how long can those tactics last in the short term?
black doug
Correcto. No, you’re right. And we would think on an annual basis that there’s a repressed call there and that we have to catch up and get back to normal. So, yes, we think there’s a positive outlook there as we look into the moment. part still next year.
In the spring, we lost some tours, I think, as John mentioned, and that won’t recover, but it’s positive for next year because if the weather is more general next year, those applicators will stop making those sleeves. So yes, though, I think there’s a positive outlook that we’re going through to see how it happens, however, even if it hurts us this year, there may be merit for next year.
Operator
This concludes our question and answer session. I would like to speak with Mr. Doug Black for any final comments.
black doug
It’s bien. Súper. Je I know we’re overcoming, but thank you all for being with us today. We appreciate your interest in SiteOne. We are excited about our business and look forward to developing and running it with you as we move forward. go ahead and talk to you next quarter.
One last thank you to our wonderful affiliates for doing such a wonderful task to build SiteOne. Thanks a lot.
Operator
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