Operator: Our next question is from Damian Karas with UBS. Please proceed with your question.
Damian Karas: Hi, good morning everyone.
John Guthrie: Good morning, Damian.
Damian Karas: I wanted to ask you about your free cash flow expectations for the year. I think you made the comment, you are making progress on reducing excess inventory. But I think free cash flow conversion, a little bit lighter this year just like about everybody else out there. Could you maybe give us a sense on this year how you’re thinking about free cash flow?
John Guthrie: We think we’ll still — we will — our objective every year is to hit net income on free cash flow. We think this year, as — we’re hopeful to achieve that this year. We think this year as a result of — kind of not having the supply chain issues. We think we can make good progress on our inventory levels. We were very pleased with — going into kind of the first quarter we had quite a bit of a hole this year. We’re very pleased by the team’s efforts in the second half of this year to still post the positive growth on free cash flow after the large hole we earn after the first quarter. And as I said we think there’s still opportunity to continue to improve that next year as supply chains get less uncertain, lead times come down on an opportunity to improve turns even further next year, which would put us at or above kind of our average free cash flow goal.
Damian Karas: Got it. And you all have been very busy on the deal execution front. Just curious if anything related to market conditions or site-specific factors have helped drive that higher volume of deals or is it just more random timing? And kind of second part related to these deals, our math kind of suggests that cost of them has maybe gone up from kind of 0.5 turn of sale — half a turn to one turn on sales, now maybe approaching 1.5 times, even though public equity valuations are down. So just curious if that’s kind of related to the mix of deals you guys are doing or if you’ve actually seen the deal space getting more competitive or anything like that?
Scott Salmon: Yes. I’ll hit the second one first. I think that that’s probably a misleading way to look at — or not the way we would look at it. We’re valuing off of earnings. And so the profitability of the businesses that we’re partnering with, really drives that sales multiple that you’re talking about. So it’s not a way that we typically would look at the valuation. So I wouldn’t read too much into that in terms of increased competition or anything like that. I think it’s been quite steady. And we’ve been pretty consistent in saying that certainly there are other folks out there that are running their acquisition playbook. But there’s a lot, lot of white space. And quite honestly, more often than not the majority of our deals are still exclusively sourced.
So we feel very good about continuing that. And then in terms of M&A, I think it’s just a consistent effort on our part. We stay very close through our field contacts over the years and our strong M&A team. So the deal flow when these entrepreneurs are ready to transition their family business, we believe that we’re consistently their first choice. And so we expect there to be continued deal flow in 2023. It’s more just a continued momentum. It obviously can be very choppy but we feel very good about going into 2023. I don’t know if there’s any specific market factor that is pushing people dramatically, although certainly the potential for a softer market could push a few people into the more likely to sell side. If they were on the short end of 2022 — if they had a short window, during which they were ready to sell anyway, that may push them a little upward in that window.
Damian Karas: Great. Makes a lot of sense. Thanks guys. Best of luck.
Doug Black: Thank you.
Operator: Our next question comes from Andrew Carter with Stifel. Please proceed with your question.
Andrew Carter: Hey, thanks. Good morning. I’ll just take one. Kind of built on the last question, I guess I want to go a different way with it. Certainly, looking at the sales multiple, if you’re buying on higher earnings, how much certainty do you go out there and look at your M&A targets now, knowing we’re at the tail end of the cycle, knowing that they probably benefited just like you in terms of their EBITDA margin, in terms of sales? Can you go out this year and approach their numbers with “Hey there’s a certainty we can pay you on that?” Or is there any possibility that if things deteriorate further, you start to say “No we’re going to take a step back and potentially not lean on M&A as heavily.” Just want to understand how you’re thinking through that potential wrinkle?
Scott Salmon: Yeah. We’re not looking to step back in any fashion at all. I think we just have to continue with our disciplined process of how we value businesses. And we often look at the — we’re looking at the sustained earnings. So we don’t look at just the last 12 months. We look at the last several years. And certainly, there has been a bump in some businesses due to — whether it’s inflation or COVID or various factors. And we consider those. Because we are long-term investors, we’re looking for the best companies that are going to perform over a full cycle. So we try not to get too dramatically swayed by say the last 12 months being slightly up or slightly down. But — so I don’t think that that will impact our ability to do acquisitions or appetite for them.
Doug Black: The other thing that we do is we do a lot of earn outs, where we disagree on the future and the owner thinks it’s going to be stronger and we think it’s going to be weaker. We just do a one to three year earn out where we can kind of place a reasonable bet and then share in the benefit or the risk together with those owners. And we do that quite a bit just for the very reason you’re talking about that things are uncertain. And so that’s another way that we manage that uncertainty of the future earnings and are able to pay fair prices but reasonable prices. And most owners are quite happy to do that together.
Andrew Carter: Thanks. Thanks guys. I’ll pass it on.
Doug Black: Thank you.
Operator: Our next question comes from Jeffrey Stevenson with Loop Capital Markets. Please proceed with your question.
Jeffrey Stevenson: Hi. Thanks for taking my questions. First, I was wondering if you could give any more color on your different assumptions at the low and high-end of your fiscal 2023 guidance?
John Guthrie: I mean the great uncertainty here is sales from that standpoint. And I mean, that’s what we’re going to be managing to. And I don’t think it’s not a dynamic where sales will drive SG&A and these things are all linked together. But certainly, there’s a great uncertainty next year is kind of how this slowdown is actually going to play out.
Doug Black: So you can take the top end of our sales guidance in the bottom end and that’s the major driver of the 395 to 425 outcome.
Jeffrey Stevenson: Got it. Okay, no that helps. And then I just wanted to ask how you’re thinking about DIY versus professional in 2023. And more specifically with prices moderating, could there be some opportunity for improvement on the DIY side this year?
Doug Black: Yeah. DIY is a very small part of our business 2% or so. So we — we’re very oriented towards the professional side so we don’t really — whatever happens in DIY would not have a meaningful impact on our business.
Jeffrey Stevenson: Okay. Thank you.
Operator: We have now reached the end of our question-and-answer session. I would like to turn the floor back over to Doug Black for closing comments.
Doug Black: Okay. Well thank you everyone for joining us today. We very much appreciate your interest in SiteOne and we look forward to speaking with you again after the first quarter. I’d also like to thank our amazing associates for doing such a great job and our customers for allowing us to be their partner and our suppliers for supporting us so strongly as we build our company. Thank you very much.
Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.
