U.S. Markets open in 1 hr 53 mins

Edited Transcript of SITE earnings conference call or presentation 15-Mar-17 12:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 SiteOne Landscape Supply Inc Earnings Call

ROSWELL Oct 23, 2017 (Thomson StreetEvents) -- Edited Transcript of SiteOne Landscape Supply Inc earnings conference call or presentation Wednesday, March 15, 2017 at 12:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Pascal Convers

SiteOne Landscape Supply, Inc. - EVP, Strategy & Development

* Doug Black

SiteOne Landscape Supply, Inc. - CEO

* John Guthrie

SiteOne Landscape Supply, Inc. - EVP, CFO & Assistant Secretaray

================================================================================

Conference Call Participants

================================================================================

* Bob Wetenhall

RBC Capital Markets - Analyst

* David Manthey

Robert W. Baird - Analyst

* Nishu Sood

Deutsche Bank - Analyst

* Mike Dahl

Barclays Capital - Analyst

* Ryan Merkel

Wiliam Blair - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings and welcome to the SiteOne Landscape Supply, Inc. fourth-quarter and full-year 2016 earnings call. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Pascal Convers, Executive Vice President of Strategy, Development and Investor Relations for SiteOne. Thank you. You may begin.

--------------------------------------------------------------------------------

Pascal Convers, SiteOne Landscape Supply, Inc. - EVP, Strategy & Development [2]

--------------------------------------------------------------------------------

Thank you. Good morning, everyone. We issued our earnings press release this morning and posted a slide presentation to the Investor Relations portion of our website at investors.siteone.com. We will be referencing the slides during this call.

I'm joined today by Doug Black, our Chief Executive Officer and John Guthrie, our Chief Financial Officer.

Before we begin, I would like to remind everyone that, during this call, SiteOne management may make certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about future expectations, anticipations, beliefs, estimates, forecasts, plans and prospects.

Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in the Company's earnings release posted on the website and provided in our Form 10-K for the fiscal year ended January 1, 2017 as filed with the Securities and Exchange Commission. The Company does not undertake any duty to update such forward-looking statements.

Additionally, during today's call, the Company will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP.

A reconciliation of adjusted EBITDA to net income calculated under GAAP and other non-GAAP measures can be found in our earnings release, which is posted on the website and in our Form 10-K, which we filed with the SEC today. I would now like to turn the call over to our CEO, Doug Black.

--------------------------------------------------------------------------------

Doug Black, SiteOne Landscape Supply, Inc. - CEO [3]

--------------------------------------------------------------------------------

Thank you, Pascal. Good morning and thank you for taking the time to join us today. We had a very good year in 2016 during our first year as a public company and we look forward to sharing our progress with you.

Before I cover our 2016 results, I would like to start today's call with a reflection on our unique market position, our strategy to deliver superior long-term performance and growth and our progress during the last three years.

In this context, I will cover our specific 2016 results. John Guthrie will then walk you through our fourth-quarter and full-year financial results in more detail. Pascal Convers will provide an update on our acquisition strategy and finally, I will come back to provide comments on our guidance and outlook before taking your questions.

Slide 3 of the earnings presentation shows an overview of SiteOne and our industry. As a reminder, we are the largest and only national wholesale distributor of landscaping supplies in the $17 billion highly fragmented market. We believe that we are over 4 times larger than our next competitor and larger than number 2 through number 10 combined; yet we only have 10% marketshare.

Importantly, we are the only distributor of scale who provides the full range of products and services that professional landscape contractors and maintainers need.

Lastly, our market has approximately 3000 manufacturing suppliers trying to reach almost half a million customers, so the market lends itself to a strong world-class wholesale distributor to connect them.

And turning to slide 4, our strategy combines the scale, resources and capabilities of a large world-class company with the passion, deep knowledge and entrepreneurialism of our local teams in order to deliver superior value to our customers and suppliers. We do this across the full range of products with scale advantage both nationally and locally and with value-added services and business assistance that are unmatched in the industry.

We further drive this strategy by acquiring leading local and regional companies that fill in our product portfolio, add terrific talent to our teams and expand our branch network across the US and Canada. We believe the combination of these efforts will allow us to gain marketshare both organically and inorganically in order to accelerate our growth and profitability.

Our strategy is enhanced through the execution of our five commercial and operational initiatives covering category management, pricing, supply chain, salesforce performance and marketing. These initiatives help us to expand our margins and accelerate organic growth.

Slide 5 shows the history of our Company. As you are aware, I came to the Company three years ago in April of 2014 right after John Deere sold 60% of the Company to CD&R. What I found was a terrific platform with an unrivaled leadership position, talented field associates and enormous potential to be a world-class industry leader in this fragmented distribution market.

So we set to work developing a clear vision and strategy, building our leadership team and our functional teams, rebranding the Company to SiteOne, driving our commercial and operational initiatives and launching our acquisition program. All of these focused on delivering superior value to our associates, our customers, our suppliers, our shareholders and our local communities in which we serve.

And I'm proud to say that we've made tremendous progress in three years, both transforming the Company and performing along the way. Over the last two years, we have grown net sales by 40% and adjusted EBITDA by 82% while producing $125 million of free cash flow.

Our EBITDA margin has expanded from 6.3% to 8.1%, on track toward our stated milestone of 10% plus. During the same period, we successfully rebranded the Company and built the culture and the functional and field muscle to win in the marketplace long term.

In 2016 alone, we installed a new talent management system, a new replenishment system and a new financial system. We completed our corporate buildout of talent, took the Company public, refinanced our debt and completed a secondary offering.

We also continue to evolve our salesforce performance and marketing initiatives, which we believe has set us up to generate stronger organic growth in 2017 and beyond.

Finally, we accelerated our acquisition strategy with six more acquisitions in 2016 and a very strong pipeline. In total, 2016 was a tremendous year of foundation building for SiteOne following an equally transformative year in 2015.

Turning to slide 6, you see that we also performed well in 2016 as we grew our net sales by 14% to $1.65 billion, driven by both organic growth and acquisitions. Our gross margin for the year increased 170 basis points to 31.3%, which reflects the continued execution of our commercial and operational initiatives. We generated good profit conversion as our adjusted EBITDA grew by 26% to $134.3 million, which was right in line with our guidance range while adjusted EBITDA margin increased by 80 basis points to 8.1%.

We also had a strong year converting our profits into cash. We generated free cash flow defined as cash from operations less CapEx of $64.1 million in 2016, which was 209% of net income.

To summarize, 2016 was yet another year of great progress as we continued the work that we began in late 2014 to build the Company's capabilities while driving excellent financial results. I am proud of our accomplishments in 2016 and would like to thank all of our terrific associates for making these results happen.

I'm even more excited about the opportunity ahead for SiteOne as we further mold and develop our teams, our systems and our processes to create value for all stakeholders.

With that, I will now turn the call over to John Guthrie to walk through the financials in more detail.

--------------------------------------------------------------------------------

John Guthrie, SiteOne Landscape Supply, Inc. - EVP, CFO & Assistant Secretaray [4]

--------------------------------------------------------------------------------

Thanks, Doug. Before I begin, I wanted to highlight a new table in the press release and 10-K that reconciles net sales, organic sales and a new metric, organic daily sales, which we define as organic sales divided by the number of selling days in the relevant reporting period. We find that metric useful and plan on using it to help explain sales trends going forward.

Now turning to slide 7, for our fourth-quarter and full-year 2016 results, we reported a net sales increase of 6% to $362 million in the fourth quarter compared to $340 million in the fourth quarter of the prior fiscal year. Net sales for the fiscal year 2016 increased by 14% to $1.65 billion compared to $1.45 billion for fiscal 2015.

We had 61 selling days in the fourth quarter of 2016 compared to 65 selling days in the fourth quarter of 2015. Organic sales declined by 3% for the quarter, but organic daily sales increased 3%.

For the year, organic sales increased 3% and organic daily sales reflecting three less selling days increased 4%. In both the fourth quarter and for the year, we saw strength in our irrigation, hardscapes, nursery, lighting and landscape accessory products, reflecting continued strong growth in both the new construction and repair and remodel end markets. Organic daily sales for these products grew 8% for the quarter and 7% for the year.

Nursery sales, which we called out last quarter as being weaker than the other productlines, saw a nice recovery experiencing 7% organic daily sales growth for the quarter and 5% for the year. Organic daily sales of our agronomic products, like fertilizer and control products, declined by 3% for the quarter and were flat for the year.

Over the course of both the quarter and the year, organic growth for these products was negatively impacted by modest price inflation, weakness in the sales of ice melt products and branch closures and consolidations.

With respect to that last point, as part of our ongoing process to optimize our branch footprint, we closed and/or consolidated approximately 19 of our smaller, primarily agronomic, branches during the end of 2015 and through the first half of 2016. We estimate that these actions had a negative impact of approximately 2 percentage points on the annual organic growth for our agronomic products.

Most of these branch closings or consolidations are the combination of two small branches in a market or the consolidation of a smaller branch into a larger branch. For example, in upstate New York, we combined a branch in Albany with a similar branch in Clifton Park.

Acquisitions play a role in this and our acquisition of Shemin in 2015 provided several of these opportunities. Overall, these actions increased our EBITDA, but they tend to negatively impact organic sales.

Pricing across all productlines was flat for the quarter and contributed approximately 100 basis points for the year. Acquisitions in the fourth quarter contributed approximately $30 million of sales growth or an additional 9% to our growth rate. For the full year, acquisitions contributed $157 million of sales growth or 11% to our overall growth rate.

Gross profit increased 7% to $112 million in the fourth quarter compared to $105 million in the fourth quarter of the prior year. Gross margin was 30.9% for the quarter and 30.8% in the same period of the prior year. The flat margin in the fourth quarter primarily reflects a tough comp in 2015.

For the full year, gross profit increased 20% to $516 million driven primarily by our organic and acquisition sales growth. Gross margin for the year increased by 170 basis points to 31.3% compared to 29.6% for the full year 2015. Our initiatives in category management and pricing with the primary contributors to the increase each accounting for approximately half of the improvement.

Mix did not have a significant impact on gross margin for the quarter or the year. Acquisitions had a negligible impact on gross margin in the quarter and a negative 30 basis points impact on the gross margin for the year.

Selling, general and administrative expenses, or SG&A, increased to $116 million in the fourth quarter from $111 million in the same period last year. The increase in SG&A was primarily attributable to our growth through acquisitions, partially offset by fewer selling days. SG&A as a percentage of net sales decreased to 32.1% from 32.6% over this same time period.

In 2016, we benefited from normal levels of marketing expense and professional fees following our brand launch and IPO preparation expense in 2015.

For the full year, SG&A increased to $447 million from $373 million in 2015. SG&A as a percentage of net sales increased to 27.1% for the 2016 fiscal year as compared to 25.7% for the 2015 fiscal year. The increase in SG&A was primarily attributable to our acquisitions, transition costs associated with becoming a public company and our debt refinancing and higher personnel costs as we completed the buildout of our functional teams.

We recorded a net loss for the fourth quarter of $5.6 million or $0.14 per share compared to a loss of $5.9 million or $1.39 per share during the same period last year. Net income for 2016 fiscal year was $30.6 million compared to $28.9 million in 2015. The increase was primarily attributable to our growth in net sales and gross margin partially offset by higher SG&A and interest expense.

On a per-share basis, we recorded a loss of $3.01 for the year. The results for the year reflect the extraordinary dividend paid to the preferred shareholders. Excluding that payment, we would've reported a gain on a per-share basis. The weighted average common shares outstanding used in the earnings-per-share calculation were 39.6 million for the fourth quarter and 30.3 million for the full year.

The effective tax rate for the quarter was 42.3% as compared to 31.4% for the fourth quarter of 2015. This change is due primarily to the impact of state income taxes in fiscal 2016. The effective tax rate for the full year was 41.0% as compared to 40.3% for the prior year. The increase in the effective tax rate was primarily due to nondeductible transaction costs related to our 2016 stock offerings.

Adjusted EBITDA decreased slightly to $11.2 million for the fourth quarter compared to $11.9 million for the same period in the prior year. For the year, adjusted EBITDA increased 26% to $134 million compared to $107 million in the prior year. Adjusted EBITDA margin increased by 80 basis points to 8.1%. Our adjusted EBITDA improvement primarily reflects our continued sales growth and margin improvement.

Now I'd like to provide a brief update on our balance sheet and cash flow statement as shown on slide 9. Net working capital increased to $305 million at the end of 2016 fiscal year as compared to $297 million at the end of the 2015 fiscal year. The increase in net working capital reflects the continued growth of our business.

As a percentage of sales, however, net working capital decreased to 19% of sales compared to 20% of sales in 2015. This reflects early improvements coming through from our supply chain initiatives.

Net debt at the end of the year was $370 million and leverage at the end of the year was 2.8 times our annual adjusted EBITDA of $134 million. In our IPO registration statement, we presented a pro forma balance sheet for year-end 2015, which yielded a leverage ratio of 3.3 times our annual adjusted EBITDA of $106.5 million.

Our strategy is to continue to grow through acquisition while keeping our leverage at a manageable level. I am pleased to say with our strong cash flow, which includes good performance from the acquired companies, we accomplished that in 2016 and our leverage is now within our long-term target range of 2 to 3 times adjusted EBITDA.

Cash flow from operations was $73 million for the 2016 fiscal year compared to $71 million for the 2015 fiscal year. The improvement in operating cash flow reflects our growth in EBITDA partially offset by the increase in interest expense and working capital.

Free cash flow, which is defined as cash flow from operations minus CapEx, was $64 million and was 209% of net income. We made investments of $75 million during the year, including $66 million for acquisitions and $9 million for capital expenditures. This compares to $111 million of investments in 2015, including $101 million for acquisitions and $10 million for capital expenditures.

We invested less in acquisitions in 2016 primarily because we did not have a single acquisition as large as Shemin, one of the largest companies in this industry.

In summary, our capital structure and our ability to generate cash provide us with the flexibility to execute our growth strategy, including funding of our acquisitions.

I will now turn the call over to Pascal for an update on SiteOne's acquisition strategy.

--------------------------------------------------------------------------------

Pascal Convers, SiteOne Landscape Supply, Inc. - EVP, Strategy & Development [5]

--------------------------------------------------------------------------------

Thank you, John. As many of you know, acquisitions play a key role within the overall growth strategy. As shown on slide 10, we have now acquired 18 companies since the beginning of 2014 that added 112 branches to SiteOne and contributed $500 million in sales on a trailing 12-month basis.

We've made good progress accelerating our pace of acquisitions from four in 2015 to six in 2016 and now four more through the first 2.5 months of 2017. And it is important to note that many of these acquisitions have been fully integrated into the SiteOne organization and are delivering clear value as we realize our planned synergies.

We continue to see a significant opportunity to grow profitably through acquisition, which allow a company to move into new markets, expand our presence in existing ones, broaden our product offering and also very importantly add outstanding talent to our team.

The Company will acquire leaders in their own rights and they will have the recipe for winning in the local marketplace. At SiteOne, we spend a lot of time and energy to understand our acquisition secret sauce and also share our best practices so that we become stronger together and ultimately continue to better serve our customers and suppliers.

We talked on the last call about our acquisition of Loma Vista Nursery, which has two landscape distribution centers in the Kansas City market with a focus on nursery products and hardscapes. Loma Vista establishes SiteOne as the number one supplier of nursery products in the Kansas City market and enables SiteOne to offer a full suite of products to our Kansas City customers.

Now as we turn to slide 11, you can see some details on our acquisition of East Haven in December of last year, which strengthens our number one nursery position in New Haven, Connecticut. In January of this year, we acquired Aspen Valley, which is the number one distributor of landscape accessories and the number two distributor of hardscape products in the Chicago Metro and complements very well SiteOne's expertise in irrigation, agronomics and nursery products.

As we turn to slide 12, you can see some details on our acquisition of Stone Forest, which closed in early February and strengthens our position as the number one hardscapes distributor in the Atlanta Metro. It also gives SiteOne an opportunity to cross-sell the full suite of products to our customers.

This month, we closed the acquisition of Angelo's Supply, which gives us the number one hardscape position in the Detroit Metro and is also recognized for its expertise in snow mitigation allowing us to provide bulk ice melt products and snow removal equipment to our customers. Angelo's is a great complement to our number one position in Detroit as a wholesale distributor of supplies to landscape contractors.

As we turn to slide 13, you can see some details on another terrific acquisition that we finalized this month. AB Supply has 12 locations and has a very attractive hardscape platform in Southern California and Las Vegas, which is another great example of our ability to identify and acquire local market leaders.

AB Supply makes SiteOne the number one supplier of hardscape products in Southern California, presents significant cross-selling opportunities and should also allow us to grow hardscapes at a faster rate in the West.

We would like to thank all the leaders who have come from our acquisitions as they have become great ambassadors for SiteOne while they help us select the best companies that will join us in the future. Our pipeline remains robust and our M&A strategy is accelerating as we continue to build a reputation as the buyer of choice in the industry.

While the timing of acquisitions cannot be fully predicted, we have additional acquisitions that we expect to close throughout the year and contribute nicely to our growth in 2017 and beyond.

And with that, I'd like to turn the call back over to Doug to discuss our outlook.

--------------------------------------------------------------------------------

Doug Black, SiteOne Landscape Supply, Inc. - CEO [6]

--------------------------------------------------------------------------------

Thanks, Pascal. Overall, we are pleased with our fourth-quarter and full-year 2016 results and excited about the momentum that we carry into 2017. We see continued positive underlying market trends with good growth in residential and commercial construction, solid demand in repair and remodel and steady demand in maintenance. All in all, our customers' backlogs are strong and we anticipate market growth this year to be comparable with what we saw in 2016.

I would remind you that our busy season during the spring falls into both the first and second quarters. In many parts of the country, the spring application season typically starts in the third and fourth weeks of March. Last year, the season started much earlier in March than normal and when combined with the very strong growth in January and February resulted in 23% organic sales growth for the first quarter of 2016.

This was balanced with the negative 2% organic growth in the second quarter, which resulted in 7% organic sales growth for the first half of 2016. Although we are off to a good start in January and February, which are traditionally slower months, we do not see the season starting early this year and therefore do not expect our organic sales growth in the first quarter to be positive against a very difficult comparison.

We do expect strong growth in the second quarter to balance out the first quarter. Again, though it's hard to predict quarter-to-quarter swings, which can be impacted by weather, we anticipate healthy overall market growth for the year.

Building off of this market growth, our salesforce performance and marketing initiatives are gaining momentum and are expected to accelerate marketshare gains for SiteOne in 2017. We expect continued gross margin expansion, though at a more moderate rate as compared to 2016. We also expect to achieve modest SG&A leverage in 2017 with our functional team build now completed; though we are still investing significantly in important initiatives for the future such as in e-commerce.

Lastly, as Pascal stated, our acquisition program is gaining momentum and we expect to acquire more companies during the rest of the year.

Overall, we are confident that we can deliver another year of excellent performance and growth and for the full year 2017, we expect adjusted EBITDA to be in the range of $155 million to $165 million.

In closing, I would like to acknowledge all of the SiteOne associates who have worked tirelessly serving our customers and who have made us successful to this point. We have a tremendous team and it is a true honor to be joined with them as we build a company of excellence for all of our stakeholders.

Operator, please open the lines for your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions). Bob Wetenhall, RBC Capital Markets.

--------------------------------------------------------------------------------

Bob Wetenhall, RBC Capital Markets - Analyst [2]

--------------------------------------------------------------------------------

Congratulations on a fantastic first year and thanks for all the detailed information. Doug, I was hoping you could talk a little bit about year-to-date performance. You mentioned the challenging comparison in the first quarter. I was hoping you could give a little color how you see things unfolding in the first half of the year. I noted your commentary about a later start to the spring planting season and I was hoping you could provide a little view on your thinking about the pace and cadence of demand year-to-date and what you're seeing in terms of pricing initiatives across the portfolio.

--------------------------------------------------------------------------------

Doug Black, SiteOne Landscape Supply, Inc. - CEO [3]

--------------------------------------------------------------------------------

Okay, great, Bob. And thank you for the compliment on the year. Yes, in terms of what we have seen year-to-date, we are pleased with how the year has unfolded so far. Obviously, we are early in the year. January and February were good months, positive for us on difficult comps from last year.

We are seeing very strong markets in the South, strong markets in the North. We have been inhibited in the West by the rain. I think you guys are aware of that. But all in all, the demand in the West is quite robust and we think when the rains subside, we will have good demand out there.

So we like what we are seeing. I made the comment about the seasons. The season makes a big difference. Just to give you a feel, the difference in daily sales between a traditional March, early March month and a late March season breaking month is $1 million to $2 million in sales a day. So it's a significant difference. And of course, last year, the season broke early in March and the whole month was busy. This year, we are seeing a more traditional March where you can see the weather that we are having this week and we feel like once that's over the normal seasonal break, we will see the growth, but it's going to spill more into April versus March.

So fundamentally, we see a strong underlying market. We are pleased with where we are at today. The season will dictate whether the sales in the next 30 days fall into first quarter or second quarter, but we are pleased.

In terms of pricing, it's early in the year. Manufacturers are pushing through price increases. It's early to tell where inflation is going to go, but the fundamentals are there. We have a very strong pricing team and we are right on top of all the trends in the market. So we feel good overall in what we are going to be able to do this year in terms of being competitive for our customers, but also making sure that we drive prices responsibly in the marketplace.

--------------------------------------------------------------------------------

Bob Wetenhall, RBC Capital Markets - Analyst [4]

--------------------------------------------------------------------------------

Does that hold true as well for the fertilizer category?

--------------------------------------------------------------------------------

Doug Black, SiteOne Landscape Supply, Inc. - CEO [5]

--------------------------------------------------------------------------------

Fertilizer, as you know, there were deflationary pressures last year. We ended up flat to slightly up in fertilizer prices, so we managed that well. Going into this year, there's still -- we are seeing costs that are stabilized. There could be additional price deflation, but we will manage that and work our way through the year. So we are okay in terms of fertilizer. John, do you want to comment on that?

--------------------------------------------------------------------------------

John Guthrie, SiteOne Landscape Supply, Inc. - EVP, CFO & Assistant Secretaray [6]

--------------------------------------------------------------------------------

Yes, I think this first quarter you will see some -- a little year-over-year deflation on fertilizer, but the downward trend has pretty much stabilized, so there's a little bit of a negative trend in Q1, but that will flatten out over the course of the year.

--------------------------------------------------------------------------------

Bob Wetenhall, RBC Capital Markets - Analyst [7]

--------------------------------------------------------------------------------

Got it. You guys have talked repeatedly and very consistently about being in the early innings of achieving operational and commercial excellence and some of the levers you highlighted have included category management, pricing, supply chain improvements, salesforce performance and marketing. Those seem like the big five levers you are pulling on to drive the sizable amount of margin expansion you are anticipating. Can you tell us as we think about profitability in 2017 which will be the most predominant levers that will make the greatest contribution to EBITDA growth?

--------------------------------------------------------------------------------

Doug Black, SiteOne Landscape Supply, Inc. - CEO [8]

--------------------------------------------------------------------------------

Sure. So in taking the five, we start with category. Category we feel like we are about half through with what we can do there. The early parts we're just making better deals with our suppliers, syncing up with our preferred suppliers and then trimming some of those suppliers that weren't preferred. We are now into reducing our number of SKUs. We are consolidating volume and moving that to preferred suppliers and so we are halfway into the opportunity. We've got good line of sight in 2017 for more progress there.

Pricing is, I would say, 60% to 70% along in terms of what we are doing there. So pricing will not contribute as much this year as it has in years past. Supply chain is early on and so supply chain has really contributed very little in 2015 or 2016. We are going to see that come on in 2017 with some good contribution and then, in 2018, we expect supply chain efforts to really kick in in terms of margin improvement.

And then in terms of salesforce and marketing, those are really around driving organic sales, which obviously gives us leverage on SG&A. We are quite pleased at where we are this year to start the year versus last year. We've done a lot of work with our salesforce. We've reorganized our salesforce so that we are covering our customer segments better and we've lined up our marketing behind our salesforce. We just built our marketing team in the end of last year, but we've got some good initiatives in marketing on social media and using our vendor co-op more effectively to go after all market segments, especially the small customer segment where we've got more firepower now in terms of sales and marketing.

So that's kind of where we are. A lot left to go on supply chain. A lot left to go on salesforce and marketing and then category and pricing still contributing over the next year or so.

--------------------------------------------------------------------------------

Bob Wetenhall, RBC Capital Markets - Analyst [9]

--------------------------------------------------------------------------------

Understood. And one final question, then I will turn it over. On the M&A side, you've been incredibly active year-to-date with 18 acquisitions for $85 million. So you have roughly done half of what you spent last year in just two months, so it seems like a pretty torrid pace. What's the anticipated EBITDA contribution year-to-date from these acquisitions? What kind of multiples did you pay and do you -- look into the pipeline, do you see the pace slowing down?

Finally, where is net leverage after this? Have you been financing this off the balance sheet? How have you paid for this? Thanks and congratulations on a great year and good luck in 2017.

--------------------------------------------------------------------------------

Pascal Convers, SiteOne Landscape Supply, Inc. - EVP, Strategy & Development [10]

--------------------------------------------------------------------------------

Great questions on the M&A side. I will start with the multiple. If you look at the multiple, it's been consistent since we started doing the acquisitions in 2014. There is really no difference pre-synergies or post-synergies, so it's completely consistent and the fact that we are public is actually giving us a little more visibility out there. I think there's more people aware of what the Company is about, our team, our performance and eventually wants to join the team here. So we think it's a positive.

If you look at the EBITDA contribution, I think similar to what we said over the last couple of years, it's really about the average where we are. A 7% to 8% EBITDA I think is the right number to use for those acquisitions going forward. And of course, as we extract the synergies, be it purchasing, fixed cost, cross-selling and trying to learn about their secret sauce and sharing best practices, eventually we can ramp up the EBITDA from there.

If you look at the pipeline, it's extremely healthy. We've got a few LOIs in place that we plan to close in 2017. We've got a growing number of NDAs. We've got to keep in mind that we've had an M&A team in place for only a couple of years, so it's still the very early days of the acquisition program and when you combine that with the fact that we only have a 10% marketshare nationally, there's still a lot of markets, but 75% of the markets where we are, we are missing either nursery or hardscapes or both.

So there's a tremendous amount of white space, which creates that deep pipeline and I will add to also the fact that every time we make an acquisition, it leads to a few more. Bissett was a follow-on to Shemin. East Haven also was a follow-on to Shemin over there in Connecticut. So every time we do an acquisition, there's more to come, so we feel very strong about the pipeline, Bob.

--------------------------------------------------------------------------------

John Guthrie, SiteOne Landscape Supply, Inc. - EVP, CFO & Assistant Secretaray [11]

--------------------------------------------------------------------------------

With regards to the leverage, we are planning financing these acquisitions using our existing facilities. We had plenty of borrowing capabilities in our capital structure. Last year, we did a term loan and we have an ABL facility up to $325 million, so we have plenty of capacity to execute our strategy with regards to that.

With regards to leverage, leverage normally will go up in the springtime just because of our normal spring and we will be able to fund that through our ABL facility, but if you look at this year, we were able to do $66 million in acquisitions and still delever the Company from net debt over adjusted EBITDA and we would expect that trend to continue, primarily funding these through cash flow from operations to continue maintaining leverage within our 2 to 3 times net debt over EBITDA range.

--------------------------------------------------------------------------------

Operator [12]

--------------------------------------------------------------------------------

David Manthey, Robert W. Baird.

--------------------------------------------------------------------------------

David Manthey, Robert W. Baird - Analyst [13]

--------------------------------------------------------------------------------

So given where we are in March and Doug, you gave us some good information there in terms of the $1 million to $2 million per day. If we do the math on that and run it out, I'm just trying to figure out what the magnitude of the ADS decline should look like in the first quarter. And if I run $1.5 million a day times 20 days last year, I'm coming up with like $30 million of incremental sales, which might be a mid-teens type contribution. So is it safe to assume that in the first quarter we could see a low double-digit type decline this year?

--------------------------------------------------------------------------------

Doug Black, SiteOne Landscape Supply, Inc. - CEO [14]

--------------------------------------------------------------------------------

Given our start, David, we wouldn't expect that dramatic of a decline. I think we are talking a couple of weeks here and not the full month. So yes, I would cut in half your math there and that's what we might be at here. Obviously, the month has got to finish itself, so we are likely to have a good couple weeks in ending the month, but we just don't know right now. But the swing there is more 10 days than 20 normally.

--------------------------------------------------------------------------------

David Manthey, Robert W. Baird - Analyst [15]

--------------------------------------------------------------------------------

Okay. All right. But then for the first half in aggregate, you should assume that's all stabilized and be at a mid-single digit type organic growth rate?

--------------------------------------------------------------------------------

Doug Black, SiteOne Landscape Supply, Inc. - CEO [16]

--------------------------------------------------------------------------------

Exactly. The good part is it will completely balance. With the second quarter, we are just really talking between March and April and so it doesn't affect our growth rate and again, last year, just to remind you, we had a 23% average with a negative 2% and we ended up at 7%. So this year, we won't be as dramatic on either end of those spectrum because we have started well in January and February so we had that going for us in the first quarter, but you'll see a negative in the first quarter balanced by a very, very strong positive in the second quarter for a good growth rate for the half-year.

--------------------------------------------------------------------------------

David Manthey, Robert W. Baird - Analyst [17]

--------------------------------------------------------------------------------

Okay. That's great. And then thinking about the cost structure today and what it looks like in 2017, are there any step function type expenses that we should expect in 2017? When we look at the contribution margin over the last couple of years, they've been 12% and 14% is what we calculate. All else being equal, should we expect something in that range in 2017 as well?

--------------------------------------------------------------------------------

Doug Black, SiteOne Landscape Supply, Inc. - CEO [18]

--------------------------------------------------------------------------------

Well, in terms of our EBITDA leverage, normal gearing is for every incremental dollar we'd normally put down about 15% to the adjusted EBITDA line. That assumes no gross margin improvement and no SG&A build.

As we go into 2017, we are going to have some annualization of the SG&A build and we will have some investments that we are making. We are investing about $4 million in e-commerce and so we are building that capability. So that expense is there. However, we do expect continued gross margin improvement and we do expect, with our organic growth and acquisitions, that we will get net leverage on the SG&A line. So we do feel like we will have good expansion on our EBITDA margin and so that will give us good operating leverage in terms of converting sales to EBITDA growth.

--------------------------------------------------------------------------------

David Manthey, Robert W. Baird - Analyst [19]

--------------------------------------------------------------------------------

Sounds good. All right, Doug. Thank you.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

Nishu Sood, Deutsche Bank.

--------------------------------------------------------------------------------

Nishu Sood, Deutsche Bank - Analyst [21]

--------------------------------------------------------------------------------

So going back to November when we talked about the outlook for flattish daily sales in 4Q and then ending up up 3%, obviously a nice surprise. Considering that 4Q is mostly driven by what happens in October, what was able to drive the daily sales positive? So what happened as the quarter progressed and obviously there's been some discussion already of 1Q, but did any of those factors bleed over into 1Q?

--------------------------------------------------------------------------------

Doug Black, SiteOne Landscape Supply, Inc. - CEO [22]

--------------------------------------------------------------------------------

Yes, it's a great question, Nishu. What we saw basically was we were predicting a more normal end to the construction season, which would have been late November, early December and we did see an extension of the construction season, not as good as 2015, but it was an extension there and we saw a nice recovery in our nursery productline and again, nursery had been constrained, if you remember, in the third quarter by the hot, dry weather that went way into September and we had a constrained season there.

With the season being extended, we saw our nursery come through and our construction products in general were just stronger. So really that was the difference is the construction season went a little longer than we thought it was going to go and we always talked about that the underlying growth was there and so we saw that underlying growth come through and particularly we were pleased with the nursery productline, which ended up with nice growth for the quarter and 5% overall for the year, which was good.

--------------------------------------------------------------------------------

Nishu Sood, Deutsche Bank - Analyst [23]

--------------------------------------------------------------------------------

Got it. That's helpful. Looking at the margins and you discussed a little bit earlier pricing and category management, their effect petering out in 2017, supply chain picking up. So if we think about the gross margin line first, basically flat year-over-year in 4Q 2016. So how are those -- how much leverage -- if you are already getting to the stage where it's kind of flattening out and obviously off very, very impressive gains in the last four or five quarters or so, or six quarters really, how much impact could those have in 2017? And I don't want to make too much of just one quarter, but it does -- since the trend is flattening out -- so how should we expect those to play out?

--------------------------------------------------------------------------------

Doug Black, SiteOne Landscape Supply, Inc. - CEO [24]

--------------------------------------------------------------------------------

Right. Good question. We wouldn't read too much into the fourth quarter. It was a tougher comp in 2015 and so -- but you are correct; we are not going to have a pace of 170 basis points. So we would see gross margin, the combination of gross margin expansion and SG&A leverage will keep us on track on an EBITDA basis. We've gone from 6% to 7% to 8% and we are heading toward 10% plus over the next couple of years, so we feel like we will make good progress, similar progress on EBITDA. Some of that, a slight bit of that, will be SG&A leverage. The rest will be gross margin expansion. So that's the way to think about it.

--------------------------------------------------------------------------------

Nishu Sood, Deutsche Bank - Analyst [25]

--------------------------------------------------------------------------------

Got it. And just a final one for me. In the discretionary product categories, can you give us some sense now, now that 2016 has come to a close, which of the discretionary product categories have you seen better growth in? Is that something that you continue to think to (technical difficulty), obviously leaving aside the agronomics where I think you discussed that pretty well.

Nursery you mentioned toward the end of the year, obviously some of the construction season effects, but just generally what categories have you seen more growth on and less growth on the discretionary side?

--------------------------------------------------------------------------------

Doug Black, SiteOne Landscape Supply, Inc. - CEO [26]

--------------------------------------------------------------------------------

That's a great question. One good measure of discretionary growth, if you will, is hardscapes because hardscapes tend to be bigger ticket remodel. Obviously, they go into new construction as well, but they are parts of redoing your back lawn and more big-ticket remodel.

We saw a 12% organic growth in hardscapes last year and we don't see that slowing down. That's a good growth category, but I think it's also a barometer of consumer confidence and direct discretionary spend.

So the hardscapes line is a good indicator that the market is healthy, confidence is up, the jobs are improving and so that lends itself to that repair/remodel. And we are happy to be filling in across the country by the way in hardscapes as we fill out our portfolio and become a full-on provider in all markets. That's a nice high growth category to fill in.

So that would be a good example. We've seen high growth, good growth in lighting. We've seen good growth in storm water, which I don't know if that's necessarily discretionary, but that is really driven by higher standards and codes. But there's a good underlying growth in hardscapes, which is a good indicator of discretionary spend.

--------------------------------------------------------------------------------

Nishu Sood, Deutsche Bank - Analyst [27]

--------------------------------------------------------------------------------

Okay. Thanks.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

Mike Dahl, Barclays.

--------------------------------------------------------------------------------

Mike Dahl, Barclays Capital - Analyst [29]

--------------------------------------------------------------------------------

Just a follow-up, I guess, Doug, to partially follow up to that last response regarding hardscapes and then also a question earlier around what's embedded in the guidance. If I look at the $85 million in sales that you guys outlined for trailing 12-month contribution from the 2017 acquisitions, just want to get a little more color on how we should think about that for a go-forward number because clearly with something like an AB Supply solidifying your hardscapes platform in California, it seems like there would be a really good opportunity for cross-selling. So just wondering how to think about the sales contribution and level of growth that we can expect on some of those numbers.

--------------------------------------------------------------------------------

Doug Black, SiteOne Landscape Supply, Inc. - CEO [30]

--------------------------------------------------------------------------------

I will take that and maybe Pascal can add some color. So on acquisitions, we've given you the annual, the trailing-12 month annual sales. When we bring acquisitions on, we get immediate synergies in terms of purchasing that go right in.

The cross-selling, that takes kind of 18 months to get those going and the acquisition has to get settled. We get them on board. We get them integrated on our system. We get the purchasing synergies and then we start to work on cross-selling and fixed overhead types of synergies.

So you would expect that the trailing annual sales to be what gets contributed, prorated for the stub year in which we buy them, but really in years two and three, we would start to see that increased sales.

In terms of AB Supply specifically, they bring a great expertise to the West that we would hope would provide a little more immediate benefits to our teams in the West because they can quite frankly teach us really how to sell hardscapes out there in those markets. But normally it takes a while before we get the cross-selling synergies to come in. Pascal, do you want to add anything to that?

--------------------------------------------------------------------------------

Pascal Convers, SiteOne Landscape Supply, Inc. - EVP, Strategy & Development [31]

--------------------------------------------------------------------------------

No, I think you covered it very well. The only thing to say, of course, hardscapes grows a little bit faster, Mike, than let's say the chemicals. So naturally the [full] growth or sales for the Company will be higher than if you acquire a company which is involved in agronomics. And as Doug said, we think they are going to contribute to our growth of existing hardscapes and also [Phil Dole] and his team have been really terrific at adding a few acquisitions to the Company, so we think it's going to be a nice platform, but it takes a while before we identify the right target and we bring that onboard. It could be several months; it could be a couple of years, but there will be probably some inorganic growth coming from AB Supply as well.

--------------------------------------------------------------------------------

Mike Dahl, Barclays Capital - Analyst [32]

--------------------------------------------------------------------------------

Got it. That's helpful. And then when you look at some of the LOIs that you have out and the other discussions that are taking place in the overall pipeline, can you give us an update on just relative size of the opportunities and not the overall pie, but just how many targets are similar to or larger than an AB Supply, or how many are the one to two locations and specifically those that are most likely to close in 2017?

--------------------------------------------------------------------------------

Pascal Convers, SiteOne Landscape Supply, Inc. - EVP, Strategy & Development [33]

--------------------------------------------------------------------------------

Good question, Mike. It's a combination, really. I think the average size of $25 million in revenues is still very relevant, right? You'll have a few smaller, like an East Haven, one location, less than $10 million in revenue and then you'll have AB Supply, which is a little bit larger, obviously, 12 locations.

Shemin that happened in 2015 clearly was on the very high end. It was number four in the industry. So we've got a bit of both for 2017 as far as LOIs. But I think the average of $25 million is still good out there. You still have to take them to the finish line, but the number is growing, so we can pick and choose what are the right fit for us in 2017. We feel pretty optimistic.

--------------------------------------------------------------------------------

Mike Dahl, Barclays Capital - Analyst [34]

--------------------------------------------------------------------------------

Okay, thanks. And then last one from me, just since this new metric is going to be something that you focus on going forward in terms of the daily sales growth, can you just give us what the selling days will be each quarter in 2017 just so we have a good comparison to model off of?

--------------------------------------------------------------------------------

John Guthrie, SiteOne Landscape Supply, Inc. - EVP, CFO & Assistant Secretaray [35]

--------------------------------------------------------------------------------

Sure. I know in the very first quarter, it's going to be -- we lose one day, so it will be 64 selling days in there and it's 252 days for the year. Let me pull up Q2, 3 and 4 and I can provide that.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

(Operator Instructions). Ryan Merkel, William Blair.

--------------------------------------------------------------------------------

Ryan Merkel, Wiliam Blair - Analyst [37]

--------------------------------------------------------------------------------

So we've covered a lot of ground, but just at a high level for modeling purposes, it sounds like you are expecting 4% to 6% organic daily growth and that's weighted a little bit more to the second half versus the first half. Is that fair?

--------------------------------------------------------------------------------

Doug Black, SiteOne Landscape Supply, Inc. - CEO [38]

--------------------------------------------------------------------------------

Ryan, I think we wouldn't give specific estimates, but certainly that is ballpark and in terms of weighted first half or second half, we would tend to think that the second half would be a bit stronger than the first half; that's correct.

--------------------------------------------------------------------------------

Ryan Merkel, Wiliam Blair - Analyst [39]

--------------------------------------------------------------------------------

Okay. And then at a high level by product category in terms of the outlook, can you just give us a sense of what you are thinking and if you want to keep the answer to just construction products and agronomics, I think that's fine?

--------------------------------------------------------------------------------

Doug Black, SiteOne Landscape Supply, Inc. - CEO [40]

--------------------------------------------------------------------------------

Yes, well, agronomics tend to be GDP-level growth and that's obviously dependent on inflation. Given what we see today, it might be a bit lower than that with the pricing constrained.

In terms of construction products, those tend to run with construction and be up in the high single digits and we wouldn't see any change there. So that would be the flavor of the two categories.

--------------------------------------------------------------------------------

Ryan Merkel, Wiliam Blair - Analyst [41]

--------------------------------------------------------------------------------

So it's looking pretty similar to what you saw in 2016 for the most part?

--------------------------------------------------------------------------------

Doug Black, SiteOne Landscape Supply, Inc. - CEO [42]

--------------------------------------------------------------------------------

Yes, we are calling it similar. As you know, in 2016, we had very volatile weather. Who knows if this will be more or less, but it was pretty volatile last year, so we wouldn't expect it to be worse this year.

And then inflation overall, we came in at 1%. We are normally at 2% kind of market. Again, we don't know whether this will be better or worse, but 1% would have been on the lower end in 2016 of what we normally see.

So, yes, we are calling it a similar market and those are the two flex points that could move around on us.

--------------------------------------------------------------------------------

Ryan Merkel, Wiliam Blair - Analyst [43]

--------------------------------------------------------------------------------

Got it. And then just lastly, I think this was asked earlier, but I just wanted to clarify. It looks to me that M&A will probably add about $10 million, $11 million to EBITDA in 2017. That's already completed M&A. Is that about right?

--------------------------------------------------------------------------------

Pascal Convers, SiteOne Landscape Supply, Inc. - EVP, Strategy & Development [44]

--------------------------------------------------------------------------------

I would be more conservative than that. If you look at the $85 million and you put the percentage that we mentioned, 7% to 8%, that's a lower number, and then for the first quarter, keep in mind that, though they bring revenues, that's the slow season, especially companies in the north like Aspen Valley and Angelo's and East Haven. EBITDA-wise that can be slightly negative first quarter, but I think for the full-year number, it is too high. You put a percentage of 7% to 8% on $85 million, you will get the number.

--------------------------------------------------------------------------------

Ryan Merkel, Wiliam Blair - Analyst [45]

--------------------------------------------------------------------------------

And I was thinking there was carryover from last year too that would be (multiple speakers).

--------------------------------------------------------------------------------

Pascal Convers, SiteOne Landscape Supply, Inc. - EVP, Strategy & Development [46]

--------------------------------------------------------------------------------

Carryover from last year, I don't have the math for you. We will get back to you with that one, right, John? I don't know if you have a quick number, but, yes, if you carry over 2016 plus 2017, you're probably there, yes. John, do you have the number? We will get back to you offline on that one.

--------------------------------------------------------------------------------

Ryan Merkel, Wiliam Blair - Analyst [47]

--------------------------------------------------------------------------------

Yes, that would be great. I think roughly what you are guiding to is double-digit organic EBITDA growth is really what I am getting at, which is pretty healthy and pretty encouraging.

--------------------------------------------------------------------------------

Pascal Convers, SiteOne Landscape Supply, Inc. - EVP, Strategy & Development [48]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Ryan Merkel, Wiliam Blair - Analyst [49]

--------------------------------------------------------------------------------

Okay. Great. Thanks so much.

--------------------------------------------------------------------------------

John Guthrie, SiteOne Landscape Supply, Inc. - EVP, CFO & Assistant Secretaray [50]

--------------------------------------------------------------------------------

Just to follow up on Dave's question. It's 64, 63, 64 for Q3 and 61 for Q4. So 252 days next year from a modeling perspective. We lose one day relative -- we had 253 days this year.

--------------------------------------------------------------------------------

Operator [51]

--------------------------------------------------------------------------------

Thank you. This concludes our question-and-answer session. I'd like to now turn the floor back to management for any final remarks.

--------------------------------------------------------------------------------

Doug Black, SiteOne Landscape Supply, Inc. - CEO [52]

--------------------------------------------------------------------------------

Thank you. Again, thanks for everyone for joining us today. We very much appreciate the questions and we appreciate your interest in SiteOne. We are very pleased with our performance and we are excited about our longer-term growth and profitability potential for our Company going forward. Thank you.

--------------------------------------------------------------------------------

Operator [53]

--------------------------------------------------------------------------------

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