SiteOne Landscape Supply, Inc. (NYSE:SITE) Q4 2022 Earnings Call Transcript

SiteOne Landscape Supply, Inc. (NYSE:SITE) Q4 2022 Earnings Call Transcript February 15, 2023

Operator: Greetings and welcome to SiteOne Landscape Supply Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Guthrie, Executive Vice President and Chief Financial Officer. Thank you, sir. You may begin.

John Guthrie: Thank you, and good morning, everyone. We issued our fourth quarter and full year 2022 earnings press release this morning and posted a slide presentation to the Investor Relations portion of our website at investors.siteone.com. I’m joined today by Doug Black, our Chairman and Chief Executive Officer and Scott Salmon, Executive Vice President, Strategy and Development. Before we begin, I would like to remind everyone that today’s press release, slide presentation and the statements made during this call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.

Such risks and uncertainties include the factors set forth in the earnings release and in our filings with the Securities and Exchange Commission. Additionally, during today’s call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. A reconciliation of these measures can be found in our earnings release and in the slide presentation. I would now like to turn the call over to Doug Black.

Doug Black: Thank you, John. Good morning and thank you for joining us today. We achieved another year of double-digit growth in organic daily sales, net sales and adjusted EBITDA in 2022 on top of the record growth in 2021. I’m very proud of our terrific teams, who continue to get stronger every year and who adapted well to the challenges of continued high inflation, tight labor and reduced product volume last year. We were also very pleased to add a record 16 new high-performing companies to SiteOne during the year. All these companies have talented teams and strong customer relationships, and they expand our product lines and market presence in their respective markets. Through the execution of our commercial and operational initiatives and our acquisition strategy, we continue to build SiteOne as a world-class market leader for the long-term, while delivering consistent performance and growth in the near-term.

As we face softer markets in 2023, our well-balanced business, strong balance sheet, exceptional teams, improved capabilities and robust acquisition pipeline have us well positioned to navigate the year ahead and achieve continued success. I will start today’s call with a brief overview of our unique market position and our strategy for long-term performance of growth, followed by some highlights from 2022. John Guthrie will then walk you through our fourth quarter and full year financial results in more detail and provide an update on our balance sheet and liquidity position. Scott Salmon will discuss our acquisition strategy, and then I will come back to address our latest outlook and guidance for 2023 before taking your questions. As shown on slide 4 of the earnings presentation, we have grown our footprint to more than 630 branches and four distribution centers across 45 US states and six Canadian provinces.

We are the clear industry leader over four times the size of our nearest competitor, yet we estimate that we only have about a 16% share of the very fragmented $25 billion wholesale landscaping products distribution market. Accordingly, our future growth opportunity remains significant. We have a balanced mix of business with 65% focused on maintenance, repair and upgrade, 21% focused on new residential construction and 14% on new commercial and recreational construction. As the only national full product line wholesale distributor in the market, we also have an excellent balance across our product lines as well as geographically. Our strategy to fill in our product lines across the US and Canada, both organically and through acquisition, strengthens and reinforces this balance over time.

Overall, our balanced end market mix, broad product portfolio and good geographic coverage offer us multiple avenues to grow and more ways to create value for our customers and suppliers, while providing important resiliency in softer markets. I would note that our balanced business mix will be very important as we navigate through an uncertain 2023. Turning to Slide 5. Our strategy is to leverage the scale resources functional talent and capabilities that we have as the largest company in our industry all in support of our talented, experienced and entrepreneurial local teams to consistently deliver superior value to our customers and suppliers. We have come a long way in building SiteOne and executing our strategy, but we are relatively early in our development as a true world-class company.

Accordingly, we remain highly focused on our commercial and operational initiatives to further build our capability to create value for all our stakeholders. These initiatives are complemented by our acquisition strategy, which fills in our product portfolio, moves us into new geographic markets and adds terrific new talent to SiteOne. Taken all together, our strategy creates superior value for our shareholders through organic growth, acquisition growth and EBITDA margin expansion. If you turn to Slide 6, you can see our strong track record of performance and growth over the last seven years with consistent organic and acquisition growth and good EBITDA margin expansion. We’ve done this while investing heavily in our teams and in new systems and technologies to build the foundation for SiteOne and to create superior capabilities for our customers and suppliers.

We are still building and investing and we remain confident in our ability to gain market share and continue driving all three of our value creation levers going forward. You will also note that we’ve now completed 80 acquisitions across all key product lines since 2014. We leveraged our expanded development team to increase acquisition activity this past year and our pipeline and potential deals remains robust. All of these companies are high performers and so they strengthen our company with excellent talent and new ideas for performance and growth. Given the fragmented nature of the industry and our modest market share, we have significant opportunity to continue growing through acquisition for many years to come. Slide 7 shows the long runway that we have ahead in filling in our product portfolio, which we aim to do primarily through acquisition, especially in the nursery, hardscapes and landscape supplies categories.

We’re well networked with the best companies in our industry and expect to continue filling in these markets systematically over the next decades. I will now discuss some of our 2022 performance highlights as shown on Slide 8. We achieved 16% net sales growth in 2022 with 11% organic daily sales growth and 5% net sales growth added through acquisition. The organic daily sales growth was driven by 18% price inflation partially offset by a 7% volume decline, which follows the approximately 30% organic daily sales growth and 17% volume growth that we saw in 2020 and 2021 combined. We experienced the most significant volume declines in the Northern markets and in our maintenance products, as customers temporarily adjusted their use of our products to meet their fixed budgets.

Accordingly, we believe that there is some upside in maintenance demand in 2023. Overall, we believe that we outperformed the market in 2022. Gross profit increased 17% and our gross margin increased 50 basis points to a very healthy 35.4%. With the continued high inflation during the first half of 2022, we were able to once again take advantage of the large price realization benefit which was slightly less than the extraordinary gain we achieved in the second half of 2021. We will lose this benefit in 2023. Gross margin also benefited from our hardscapes and landscape supplies acquisitions, which operate with a higher gross margin and higher SG&A percentage. On the SG&A side, our operational initiatives and disciplined cost management were offset by lower volume, contribution from acquisitions, elevated fuel and wage expenses and our continued investment in marketing, digital and operational excellence.

Accordingly, SG&A as a percent of net sales increased by 140 basis points 27.3%. The combination of good organic sales and a solid contribution from acquisitions allowed us to deliver adjusted EBITDA growth of 12% despite the SG&A headwinds. Adjusted EBITDA margin declined 30 basis points to 11.6% following our 230 basis point increase in adjusted EBITDA margin achieved in 2021. Overall, we have meaningfully expanded the profitability of the company since our IPO and remain focused on driving continued improvements toward our adjusted EBITDA margin goal of 13% to 15%. In terms of our initiatives, we made good progress in 2022. On the gross margin side, we continue to grow with small customers, drive private label growth and improve our inbound freight costs through our Transportation Management System, or TMS initiatives.

Though we expect gross margin to reset during 2023 without the benefit of extraordinary price realization, we expect to improve gross margin through these initiatives in the years to come. We have several initiatives aimed at improving our customer experience, while making our teams more efficient thereby increase in organic growth and improving our SG&A leverage. MobilePro helps automate our branch transactions, while allowing our associates to serve customers from anywhere on the branch side. We can serve customers quicker and more accurately, especially, at our larger nursery and hardscape sites and our branch associates are more efficient a win-win. Enhance the functionality of MobilePro in 2022 and continue to roll it out across the company.

DispatchTrack allows us to manage our outbound deliveries to customers and proactively update customers on their delivery status by text. We now have over 60% of our deliveries going through DispatchTrack and our customer feedback has been very positive. We expect to have all parts of SiteOne fully utilizing this new capability by the end of 2023, and can now leverage DispatchTrack to make our deliveries more efficient and achieve higher fleet utilization in each market. In 2022 we completed the two-year development and rollout of our new Salesforce customer relationship management system, which is designed to help our outside sales and sales support associates better serve our medium to large customers. We conducted our 2023 account planning in the CRM, and now we’ll be able to leverage this new capability to deliver more value to our customers and drive more intentional and consistent market share gains with our over 600 outside sellers and almost 200 inside sales support associates.

During the last two years we significantly strengthened our digital team and they in turn have accelerated our progress with siteone.com. Sales associates and customers are becoming more comfortable with the site as we have improved the ease of use and functionality to help landscape contractors run their business more efficiently. We will continue to add features to siteone.com and are excited to leverage it more fully in 2023 and beyond to bring market-leading value to our customers and gain market share. In addition to our technology-driven initiatives, we also now have a full-time operational excellence team in each major line of business working with the field and with our newly acquired companies to isolate pain points and develop and implement operational solutions across the company.

These solutions improve our associate efficiency and our customer experience to help drive organic sales and adjusted EBITDA growth along with improved adjusted EBITDA margin. Overall, we are excited about our opportunities to improve our customer experience and increase our operating efficiency in the years to come. On the acquisition front, we had a record performance in 2022 adding 16 high-performing companies to our family. These companies provide us with excellent new talent and capability for growth in their respective markets while adding approximately $240 million and trailing 12-month sales to SiteOne. Development teams remain very active and we expect to continue adding strong companies to SiteOne in 2023. An experienced and expanded team, broad and deep relationships with the best companies, a strong balance sheet and an exceptional reputation as the acquirer of choice, we remain well positioned to grow consistently through acquisition this year and for many years in the future.

Moving to Slide 9. We’ve made great progress in 2022, in building SiteOne as a company of excellence, one that creates exceptional value for our associates, customers, suppliers shareholders and communities and remains resilient for the longer term. A few highlights for the year, included launching SiteOne CARES, which is our Grant Assistance Program to help take care of our associates in their times of need. We added a fifth Associate Resource Group, Inspire, for our Asian and Pacific Island associates. We increased the diversity of our leadership, and the overall diversity of SiteOne in 2022, ensuring that we have the strongest and most diverse team possible to drive success. And finally, we continue to enhance our supply chain and improve our fleet efficiency.

Overall, we are pleased with our progress and look forward to continuing to build SiteOne for the benefit of all our stakeholders. In summary, 2022 was a strong year of performance and progress in building SiteOne. We remain confident in our ability to navigate through challenging market conditions, outperform the market and continue to build our company both organically and through acquisition. Now, John, will walk you through the quarter in more detail. John?

John Guthrie: Thanks, Doug. I’ll begin on Slides 10 and 11, with some highlights from our fourth quarter. We reported a net sales increase of 11% to $890 million in the quarter. There were 60 selling days in the fourth quarter, which is one less day than we had in the fourth quarter of 2021. For the full year, net sales increased 16% to $4 billion. We had 252 selling days in fiscal year 2022, compared to 253 selling days in fiscal year 2021. In fiscal year 2023, we will again have 252 selling days, but we will have one less day in the first quarter and one more day in the fourth quarter. Organic daily sales increased by 7%, in the fourth quarter and 11% for the full year. Organic daily sales growth for both the quarter and the full year, was primarily attributable to price inflation, driven by product cost increases from our suppliers, partially offset by lower volume resulting from higher prices and softening economic conditions.

Price inflation contributed approximately 12% to organic daily sales growth for the quarter, and 18% for the full year. We saw price inflation across all product lines this year, but higher levels in commodity products like PVC pipe and fertilizer. We’re starting to see price inflation moderate, as we comp the price increases from 2022. Price inflation for December was just under 10%, which is the first month under 10% since the second quarter of 2021. So far in 2023, we are seeing price increases from many suppliers who are still trying to catch-up with their rising costs, as well as price decreases for its own commodity products like PVC pipe. Currently, we are projecting low single-digit price inflation for 2023, with the majority of that expected in the first half of the year.

Doug will provide more detail, when we discuss our outlook for 2023. Volume declined 5% for the fourth quarter of 2022 and 7% for the full year. As the economic conditions moderate in response to higher interest rates, we have seen volume decrease from the peak levels, we experienced following the COVID shutdown. In addition, higher prices have reduced demand for products like fertilizer and grass seed, as our customers deal with constrained maintenance budgets. While we did see volume decline in 2022, it is important to note, that we remain above the 2019 levels and the secular growth trend of people investing more in their outdoor living spaces remains in place. Organic daily sales for landscaping products, which includes irrigation, nursery, hardscapes outdoor lighting and landscape accessories, increased 8% for the fourth quarter and 12% for the full year.

Organic daily sales growth for agronomic products, which includes fertilizer, control products, ice melt and equipment, was also solid, increasing 5% for the quarter and 7% for the full year. Price inflation was the primary driver of growth for both the quarter and the year, as almost all product lines experienced the impact of rising costs. The negative impact of higher prices on volume growth with most pronounced in agronomic products, and as a result, volume growth was lower when compared to landscaping products. Geographically, we continue to see stronger growth in the Sun Belt markets. Organic daily sales in Sun Belt markets grew approximately 10% for the fourth quarter, compared to approximately 4% for Northern more seasonal markets. Sun Belt markets have benefited from not only stronger new construction growth, but also a smaller percentage of agronomics in their product mix.

We were pleased with the performance of our acquisitions in fiscal year 2022. Acquisition sales, which reflect the sales attributable to acquisitions completed in both 2021 and 2022, contributed approximately $42 million or 5% to net sales growth for the quarter, and $187 million or 5% to net sales growth for the full year. Scott will provide more details regarding our acquisition strategy later in the call. Gross profit increased 7% to $303 million for the fourth quarter, and gross margin decreased 110 basis points to34.0%. Similar to the third quarter of 2022, our gross margin for the fourth quarter was impacted by the absence of the large price realization benefit we realized in the fourth quarter of 2021. For the year, gross profit increased 17% and gross margin increased 50 basis points to 35.4%.

The increase in gross margin for the full year reflects the contribution from new acquisitions, supplier programs and a benefit of supply chain initiatives, including strategic inventory buys ahead of supplier cost increases. Doug will discuss in the outlook, we expect gross margin to reset in 2023, as our gross margin improvement initiatives are more than offset by the loss of the price realization benefit, we saw in the first half of 2022. Selling, general and administrative expense, or SG&A, increased 23% to $305 million for the fourth quarter. SG&A as a percentage of net sales increased 350 basis points in the quarter to 34.2%. The increase in SG&A as a percentage of net sales primarily reflects the impact of acquisitions, cost inflation and increased investment in operating expenses supporting our growth.

Acquisitions accounted for almost 200 basis points of the difference, as we incurred higher SG&A expense from the acquisitions without the corresponding sales benefit due to seasonality. For the full year, SG&A increased 22% to $1.1 billion, and SG&A as a percent of net sales increased 140 basis points to 27.3%. During the year, we experienced the impact of inflation on SG&A as the cost of wages, fuel, travel and general branch for operations all increased. In addition, our acquisitions have positively impacted our gross margin, but also negatively impacted SG&A due to their higher operating cost structure. For the fourth quarter, we recorded an income tax benefit of $4.6 million compared to an income tax expense of $2.7 million in the prior year period.

For the full year, income tax expense was $67.7 million, compared to $56.1 million in the prior year period. Our effective tax rate was 21.6% for the ’22 fiscal year, compared to 19% for the 2021 fiscal year. The increase in the effective tax rate was due primarily to a decrease in the amount of excess tax benefits from stock-based compensation. Excess tax benefits of $10.4 million were recognized for the 2022 fiscal year, as compared to $20.2 million for the 2021 fiscal year. We expect the 2023 fiscal year effective tax rate will be between 25% and 26%, excluding discrete items, such as excess tax benefits. We recorded a net loss of $0.9 million for the fourth quarter of 2022, compared to net income of $27.5 million for the prior year period.

The net loss was attributable to our lower gross margin and higher SG&A. Net income for the fiscal year 2022 increased to $245.4 million or 3% compared to $238.4 million for the fiscal year 2021. The increase in net income for the year was attributable to our sales growth and improved gross margin. Our weighted average diluted share count was 45.8 million for the 2022 fiscal year, which is consistent with the prior year number. Adjusted EBITDA decreased by 37% to $38.9 million for the fourth quarter, compared to $61.8 million for the same period in the prior year. For the full year, adjusted EBITDA increased 12% to $464.3 million compared to $415.1 million for the 2021 fiscal year. Adjusted EBITDA margin decreased 30 basis points to 11.6% for the 2022 fiscal year.

Now I’d like to provide a brief update on our balance sheet and cash flow statement as shown on Slide 12. Net working capital at the end of the 2022 fiscal year was $760 million, compared to $616 million at the end of the 2021 fiscal year. The increase in net working capital is primarily attributable to higher receivables, resulting from our strong sales growth and an increase in inventory resulting from cost inflation, new acquisitions and our decision to increase stocking levels to mitigate supply chain disruptions. While inventory levels remained higher than we would like as product lead times come down and supply chain uncertainty decreases, we are making significant progress reducing excess inventory from our branches. Cash flow from operations increased to approximately $105 million in the fourth quarter compared to approximately $51 million in the prior year period.

The improvement in cash flow was primarily driven by our inventory reduction efforts. Cash flow from operations increased to approximately $217 million for the full year, compared to approximately $211 million in the prior year. The improvement was primarily attributable to our increased profitability. We made cash investments of $73 million for the fourth quarter compared to $85 million for the same quarter in 2021 and $284 million for fiscal year 2022 compared to $182 million for fiscal year 2021. The increase in cash investments reflects greater acquisition activity in fiscal year 2022, compared to fiscal year 2021. In October, our Board approved a $400 million share repurchase authorization and during the fourth quarter, we returned $25 million of capital to shareholders through our repurchase activity.

Net debt at the end of the 2022 fiscal year was approximately $380 million, compared to approximately $247 million at the end of the prior year. Leverage increased to 0.8x for trailing 12 months adjusted EBITDA, compared to 0.6x at the end of the 2021 fiscal year. The higher leverage primarily reflects our increased borrowings for acquisition investment. While our leverage increased in fiscal year 2022 compared to fiscal year 2021, we are still below our targeted net debt to adjusted EBITDA leverage range of 1x to 2x. At the end of the year, we had available liquidity of approximately $516 million, which consisted of approximately $29 million of cash on hand and approximately $487 million in available capacity under our ABL facility. On Slide 13, we highlight our balanced approach to capital allocation.

Our primary goal with regards to capital allocation is to invest in our business including the execution of our acquisition strategy. We are also committed to maintaining a conservative balance sheet as demonstrated by our target leverage ratio. To the extent we have excess capital after achieving these objectives the share repurchase authorization provides us the mechanism to return capital to our shareholders like we did last quarter. Our priority from a balance sheet and capital allocation perspective is to maintain our financial strength and flexibility without sacrificing long-term growth or market opportunity. I now will turn the call over to Scott for an update on our acquisition strategy.

Scott Salmon: Thanks, John. As shown on Slide 14, we acquired three companies in the fourth quarter bringing our total to 16 for 2022 with a combined trailing 12-month net sales of approximately $240 million. Since 2014, we have acquired 80 companies with approximately $1.5 billion and trailing 12-month net sales added to SiteOne. Turning to Slides 15 through 17, you will find information on our most recent acquisitions. On October 13, we acquired Madison Block & Stone, a wholesale distributor of hardscapes in Madison Wisconsin. This acquisition establishes a leading hardscapes position in the Madison market and expands the range of landscape products and services we provide to our customers. On December 16, we acquired Telluride Natural Stone, a wholesale distributor of hardscapes located in Phoenix, Arizona.

Telluride extends our leading hardscapes presence across the Phoenix market. Also on December 21st, we acquired Whittlesey Landscape Supplies, a wholesale distributor of landscape supplies and hardscapes with seven locations serving the Austin, Texas market. Whittlesey establishes a landscape supplies and hardscapes platform to serve Central Texas and expand the products and services we offer our customers. By teaming up with these three high-performing companies, we continue to deliver on our strategy to expand the products, services and overall value we offer our customers across all markets. Summarizing on slide 18, our acquisition strategy continues to create significant value for SiteOne with a strong balance sheet and a robust pipeline across all lines of business and geographies we are confident that we will be able to add many more outstanding companies to SiteOne in 2023.

We are honored and excited that so many owners continue to choose SiteOne as a great home for their family businesses and continue to thrive in leadership positions across our company. These strong leaders and innovators are a powerful force within SiteOne as they help us improve the value that we deliver to customers and suppliers. They bring fresh ideas and entrepreneurial agility and we support them and their teams with the resources and flexibility to pursue both their personal and professional passions. Ultimately, we all win stronger together. I want to thank the entire SiteOne team for their passion and commitment to making SiteOne a great place to work and for welcoming the newly acquired teams when they joined the SiteOne family. I am confident in our ability to keep adding more outstanding new companies through acquisitions in 2023, creating terrific value for all our stakeholders.

I will now turn the call back to Doug.

Doug Black: Thanks, Scott. I’ll wrap up on slide 19. As we look ahead into 2023, we expect inflation to continue moderating as we lap the steep increases from the last two years. For the full year, we expect low single-digit inflation with most of this occurring during the first half of the year. In terms of end markets, we expect new residential construction, which comprises 21% of our sales, to decline approximately 20% compared to 2022, as consumers adjust to high home prices and mortgage rates. We expect a more stable environment in the new commercial and recreational construction, which represents 14% of our sales. With good backlogs and healthy bidding, we believe this market could grow slightly versus the prior year. Major repair and remodel, which comprises 29% of our sales, is expected to be relatively flat.

Typically in a downturn, major repair and remodel has proven to be more durable than new construction and we expect that to be the case again in 2023. Note that low unemployment and high home values, both support the major repair and remodel market, though lower home turnover could be a headwind. Finally, the maintenance end market, which comprises 36% of our sales, has typically been steady in past downturns. Maintenance dollar demand from our customers has remained steady and we expect that to continue in 2023 with much lower inflation translating into reasonable volume. In total, we expect industry sales to decline in 2023 and with our ability to gain market share we would expect our organic daily sales to be flat to down mid-single-digits with modest price inflation being offset by reduced volumes.

We expect our gross margin to normalize this year without the substantial benefit that we saw from strategic inventory purchases ahead of rapid inflation in 2021 and 2022. Additionally, with flat to declining sales, we expect SG&A, as a percentage of sales, to increase modestly. Accordingly, we also expect adjusted EBITDA margin to normalize in 2023, providing a foundation for further improvement over the longer term. In terms of acquisitions, as Scott mentioned, we have a strong pipeline of high-quality companies and look forward to adding more of these to the SiteOne family in 2023. Our acquisitions are performing well. And we continue to improve our ability to integrate them, into our company. Accordingly, we expect acquisitions to contribute strongly to our performance and growth during the year.

With all these factors in mind, we anticipate our fiscal 2023 adjusted EBITDA to be in the range of $395 million to $425 million. This range does not factor any contribution from unannounced acquisitions. In closing, I would like to sincerely thank, all our SiteOne associates who continue to amaze me with their passion, commitment, teamwork and selfless service. We have a tremendous team. And it is a true honor to be joined with them, as we deliver increasing value for all our stakeholders. I would also like to thank our suppliers for supporting us so strongly and our customers for allowing us to be their partner. Operator, please open the line for questions.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. Our first question is from David Manthey with Baird. Please proceed with your question.

David Manthey: Yeah. Thank you. Good morning everyone. First question, when you’re talking about the guidance here we can back into your estimated EBITDA which looks like about 10%. And then, what you just said, Doug about SG&A, as a percentage of sales being slightly higher, I guess, we can impute a gross margin that looks like maybe 34.5%. First of all, I’d just like to see if that’s in the ballpark. And then, at that level, it implies that SG&A is up just a couple percent. And could you just talk about your confidence interval around both the gross margin at that level? And then, how you plan on keeping SG&A sort of in that range? What are the moving parts from year-to-year?

Doug Black: Yeah. So that’s the ballpark. We expect gross margin to fall somewhere between 34% and 34.5%, so your estimate there is ballpark. And then on the SG&A side, we’re just going to — we’re going into the year with confidence in our team that we’re going to be able to outperform the market. We’ve got a lot of terrific momentum with our sales force and with our customer experience et cetera. But we’re going to monitor the market very closely. As spring comes in March and April, we know what we would expect to see. And if we find ourselves in a tougher situation one of the benefits of SiteOne is we’re decentralized, right? We have our field support at the center and the field is very fast and very flexible. And they can pullback very quickly to the demand that they’re seeing.

And we can do that in each market. So if markets are strong those two teams can stay on offense. If we have parts of the country that are weak, we’ll pull in those markets very fast. So that’s how we’ll manage SG&A, because we know we’re in a tougher environment. And the management of the SG&A, so that we don’t get a significant amount of deleverage will be very important for us in 2023.

David Manthey: Yeah, makes sense. And then, just a quick one, John, could you tell us what’s the current expected 2023 contribution from acquisitions that have been with the company for four full quarters by your convention?

John Guthrie: Well, I would point to the numbers in the presentation with regards to the actual sales from those businesses this year. I believe we are carrying over $85 million of revenue for the 2021 acquisitions into 2023 — or the 2022 acquisition. So I mean just ballpark math they are about roughly $220 million in run rate and we recognize about $85 million in revenues this year from those acquisitions.

David Manthey: Got it. Okay. Thanks very much.

Operator: Our next question comes from Ryan Merkel with William Blair. Please proceed with your question.

Ryan Merkel: Hi. Good morning. Thanks for taking the question. I wanted to ask about first quarter 2023. I know you don’t want to give quarterly guidance, but just given it’s a really big comp, I was just hoping for a little help in how to think about sales and gross margins. Should we think about organic sales down kind of low single-digits? And then gross margin is I think typically seasonally a little bit below where 4Q comes in. Is that the right way to think about it?

John Guthrie: I think that’s fair. We did have a very strong first quarter last year so we will be facing — I mean some of the — I’ll just highlight some of the moving parts. We did have a very strong first quarter last year with — from a volume perspective. Especially, kind of, January and February started off strong from that standpoint. Going into this quarter first quarter, we will have one less selling day from that standpoint. On the positive side price inflation was probably strongest in the first quarter of this year from that perspective. And in general our gross margins are lower in the first quarter than they are in the remaining quarters from that standpoint.

Ryan Merkel: Got it. Okay. That’s helpful. And then I was a little surprised that repair and upgrade is assumed to be flattish in 2023. I was a little worried that during the pandemic that part of the business saw kind of a big boost and might normalize. What are you hearing from contractors on this part of the business in ’23?