SiteOne Landscape Supply Inc (SITE) 2016 Q1 法說會逐字稿

Greetings, and welcome to the SiteOne Landscape Supply first quarter 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, Pascal Convers, Executive Vice President of Strategy and Development. Thank you, you may now begin.

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, anticipation, 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 final prospectus 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 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 and net loss calculated under GAAP can be found in our earnings release, which is posted on our website and in our Form 10-Q, which we filed with the SEC today.

I would now like to turn the call over to our CEO, Doug Black.

Thank you, Pascal. Good morning, and thank you for taking the time to join us on today's call. We're excited to be hosting our first earnings call as a publicly traded Company, following the successful completion of our initial public offering in May. This offering was the result of a lot of hard work and dedication, and I would like to take the time to thank all of those involved in the process. We look forward to this next chapter in the story of SiteOne Landscape Supply, as we execute our strategy on the behalf of our new shareholders.

I would like to start today's call by providing a brief overview of our business and our strategy for any listeners that may be new to the SiteOne story, followed by some highlights of our first-quarter results. I'll then pass the call along to John Guthrie, who will walk through our financial results in more detail. Pascal Convers will then provide an update on our corporate development initiatives. Finally, I will come back to provide some comments on our outlook, and then make some closing remarks before opening up the line for your questions.

Turning to slide 3, you can see that we are the largest and only national wholesale distributor of landscape supplies in the US. We hold an approximate 9% share of the highly fragmented $16 billion landscaping products distribution market, and we are about four times the size of our closest competitor.

The market is expected to grow meaningfully faster than GDP in the coming years, driven by ongoing maintenance of landscapes, which comprises approximately 45% of our sales, as well as robust investment in landscape remodeling, and the ongoing commercial and residential new construction recovery. Our customers are professional landscape contractors and maintainers, who are typically small to mid-size regional or local companies, and we serve them through our footprint of 466 stores in 45 US states, and five Canadian provinces.

Slide 4 highlights the fragmented nature of the market and the key role that we play in the value chain. The landscape supply market lends itself to wholesale distribution, with thousands of suppliers trying to reach hundreds of thousands of customers. We serve as a one-stop shop in a market which is unique, and are able to meet our customers' needs in ways that retailers and small competitors cannot.

Additionally, we are critical business partner for both our suppliers and our customers. For our suppliers, we provide an unrivaled conduit to the market, while assisting them in growing their business and deploying new products and new technologies. For our customers, we provide not only the full breadth of products and services, but also critical business assistance to help them solve problems, find and bid projects, train their employees, and win in the market place.

Slide 5 shows the range of our product offering. Our key product categories include irrigation, fertilizer, control products, nursery material, landscape accessories, hardscapes, and outdoor lighting. Across these categories, we offer approximately 100,000 SKUs, and are the number one wholesale distributor in each of these seven major product lines.

Our ability to provide the full breadth of landscaping products gives us important synergies and competitive advantages while providing a nice balance across maintenance, remodel, and new construction, as well as across customers and construction sectors -- residential, commercial, and recreational. I would like to also highlight that we own the LESCO brand, which is the number one maintenance brand for industry professionals, and comprises over 20% of our total sales.

Turning to slide 6, we are executing a strategy that we believe provides distinct opportunities to grow our business and expand our profitability, both in the near term and over the long term. We combine the scale advantages and the capabilities of a large Company with our passionate and entrepreneurial local teams in order to deliver superior value to our customers and our suppliers. This allows us to gain market share and achieve consistent superior organic growth and profitability. We complement our organic growth with acquisitive growth to achieve strong results for our stakeholders while expanding our lead over the competition.

In addition to organic and acquisition growth, we also have the opportunity to expand our EBITDA margin as we execute our commercial and operational excellence initiatives. We are in the early innings of these initiatives, covering pricing, category management, supply chain, sales force performance, and marketing. These initiatives contributed a robust 320 basis points of gross margin expansion in 2015, and as you can see from our first quarter numbers, we are continuing to see good results from our initiatives in 2016.

Turning to slide 7, we are pleased with our financial and operational performance in the first quarter, as we delivered strong results for the three months ended April 3, 2016. Net sales increased by 45% year over year. We generated significant organic revenue growth of 23%, while acquisitions contributed another 22% of revenue growth. Our organic growth was certainly aided by the favorable weather in February and March. However, it also reflects a strong underlying market, and our continued execution.

Gross margin expanded by 350 basis points to 29.5%, as we continue to benefit from our operational and commercial initiatives that I mentioned earlier. Adjusted EBITDA increased to $4.5 million, compared to a loss of $5.7 million a year ago. The first quarter is typically our weakest quarter from a seasonal standpoint, both in terms of revenue and profitability, so I'm very pleased with the strong results that we delivered.

I'd like to go into a little more detail about how the weather impacts our business, and specifically how the unusually favorable weather impacted our first-quarter results in 2016. Temperatures across the United States were warmer than usual in February and March, which allowed the season to start earlier, and thereby increased the demand for our products. Landscape construction contractors were able to start working on projects earlier, particularly in the northern markets. The early spring resulted in fertilizer and combination product applications going down earlier when compared to the prior year.

As a result of the positive weather conditions in our first quarter, some sales were pulled forward from the second quarter to the first quarter. Weather is something that we certainly pay close attention to, and the weather does tend to move demand around from month to month and from quarter to quarter during the year. However, barring any highly unusual events, things tend to balance themselves out over the course of a full year.

During the first quarter, we continued to execute on our acquisition strategy. We acquired Hydro-Scape products in January, and Blue Max Materials at the start of the second quarter in April. These acquisitions move us into a leading position in irrigation for southern California, and in hardscapes for the Carolinas. Pascal will get into additional details on these later in the call.

We are very focused on building the best team in the industry, which is an important advantage for SiteOne Landscape Supply. I am pleased that we continued to strengthen our talent in 2016 with key hires in HR, IT, supply chain, pricing, and in the field.

Finally, as I mentioned before, we are excited to have successfully completed our initial public offering in May, a true team effort involving SiteOne and our many partners. We are very proud to be listed on the New York Stock Exchange, and involved with all of our new investor partners. With that, I will turn over the call to John Guthrie to walk through our financials in detail.

Thanks, Doug. Now turning to slide 8 and our first quarter 2016 results. We are pleased with our performance, as we reported strong results for the quarter, with net sales of $328.5 million, up 45% compared to the $225.8 million in the prior year. As Doug mentioned, we generated tremendous organic growth of 23%, while acquisitions contributed $51 million, or an additional 22% of our growth rate.

Underlying growth was driven by the favorable weather conditions, strong demand, and good execution of our commercial initiatives. With regards to the weather, certain products like pre-emergent fertilizers are applied every spring to get your lawn in shape. Ideally, they are applied after the snow is gone, but before the soil temperature is warm enough for weeds to grow. When spring comes early like this year, the products are applied earlier in the season, and correspondingly the products are purchased earlier. In this case, they were purchased in the first quarter.

Additionally, since almost all landscape construction work is done outdoors, warm spring weather is beneficial, because it provides landscape contractors with more working days. In Q1, contractors were able to start projects in February and early March, which is quite unusual. This drove strong growth in the sale of construction-related products.

The impact of the weather is best seen when you look a some of our geographic regions. Sales in our Great Lakes region grew 48% during the quarter, whereas sales in a warm climate region like southern California grew 7%.

Gross profit increased 66% to $97 million, compared to $58.6 million during the same period last year. Gross margin was 29.5% for the first quarter 2016, compared to 26% for the same period in 2015, a 350-basis-point expansion. Similar to the drivers in 2015, we benefited from pricing initiatives, category management, and reduced logistics costs. Mix did not play a significant role in our first-quarter gross margin improvement.

It is also important to note that our commercial and operational initiatives were in the very early stages in the first quarter of 2015, which is why we are seeing such a significant year-over-year improvement in Q1 2016. That said, we feel great about the potential for significant further improvement in gross margins going forward.

Selling, general, and administrative expenses increased to $104.6 million, from $73.1 million in the same period last year. The increase was primarily attributable to our acquisitions, incremental expenses to support the increased sales volume, and the investments in people, systems, and processes that we made to support our initiatives that Doug also highlighted earlier. With strong sales, SG&A as a percentage of sales declined slightly from 32.4% in Q1 2015 to 31.8% this quarter.

The net loss for the first quarter was $5.6 million on a reported basis, compared to a loss of $9.8 million during the same period from the prior year. The net loss was reflective of the seasonality of our business. If you look at our quarterly results for 2014 and 2015, you will see that we record the majority of our net income in the second and third quarter, and recorded a loss in the first quarter of both years.

Adjusted EBITDA increased to $4.5 million, compared to a loss of $5.7 million in the prior year. It's important to note that we are defining adjusted EBITDA as excluding pre-acquisition acquired EBITDA. If we had included pre-acquisition acquired EBITDA, as we did in the S-1, our results for the first quarter of 2016 would have been $0.7 million higher, and our results for the first quarter of 2015 would have been $1 million less. The improvement in net income and adjusted EBITDA reflects our strong sales growth and our gross 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 was $289 million for the first quarter, versus a year-end value of $277 million. This increase in net working capital reflects both our seasonal build and the Hydro-Scapes acquisition.

Cash flow from operations was $10 million, versus a net use of $15.2 million in 2015. Improvement in operating cash flow is reflective of the smaller net loss and a smaller working capital build, resulting from both our stronger sales volume and the timing on our vendor payments. We made investments of $33 million in the first quarter, with $31 million of that for acquisitions, and $1.9 million for capital expenditures. This compares to $56.7 million in the first quarter of 2015, when we made the larger [Sherman] acquisition.

Subsequent to the end of the quarter and before our IPO, SiteOne raised $275 million through a new term loan facility that matures in 2022. Our net debt before re-capitalization was $199 million at the end of the quarter. Pro forma for the new capital structure including IPO costs, net debt at the end of the quarter was $403.5 million, for a leverage ratio of 3.5 times our LTM-adjusted EBITDA. The leverage ratio would have been 3.2 times under our previous definition of adjusted EBITDA, which is used in our debt covenant calculation.

Our capital structure and our ability to generate cash provides us the flexibility to execute our growth strategy, including the funding of our acquisitions. We continue to work towards our longer-term leverage ratio target of two to three times adjusted EBITDA.

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

Thank you, John. As Doug mentioned earlier, acquisitions play a key role within our overall growth strategy. We see a significant opportunity to create superior value for SiteOne through acquisitions, which allow us to move into new markets, expand our presence in existing ones, broaden our products offering, consolidate a fragmented market, and also very importantly, add market-leading talent to our team. We also realize significant synergies given our scale as the industry leader and our expertise integrating these companies, and add real value capturing best practices we can implement across our larger organization.

Slide 10 highlights our recent track record. We closed four acquisitions in 2014, adding 18 locations, and closed another four acquisitions in 2015, which added 50 locations. So far in 2016, we have closed two acquisitions which have added 22 locations to SiteOne.

The common theme across these transactions is that they move SiteOne into the number one position in certain product categories within each local market. For example, the Sherman acquisition gave us a number one position in nursery in the northeast, the southeast, the midwest, and Texas. The Green Resource acquisition gave us the number one position in fertilizers and control products in the Carolinas.

On slide 11, we show the two most recent acquisitions, Hydro-Scape products and Blue Max Materials. Hydro-Scape products added 17 locations to our existing footprint of 18 stores in southern California, and makes us number one in irrigation there. Blue Max Materials added five locations to our existing footprint of 26 stores in the Carolinas, and makes us number one in hardscapes there.

Both acquisitions further expand our product and customer breadth in these key markets. They also bring significant synergies and very talented local teams to SiteOne.

On slide 12, I'll highlight again that we only have a 9% market share today. We believe that number has the potential to increase significantly over time, similar to the consolidation that has taken place with distributors in other verticals.

Our pipeline remains robust, and is expanding as we continue to build a reputation as the buyer of choice in the industry. While the timing of acquisitions can be lumpy, we feel good about our start of the year, and our ability to complete additional deals during the remainder of the year and in the years to come.

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

Thanks, Pascal. In terms of our outlook, we are off to a strong start to the year, with very favorable first-quarter results. The underlying demand trends remain positive, and we anticipate solid full-year results. Additionally, our commercial and operational initiatives for 2016 are on track, and continue to deliver good gross margin and EBITDA margin improvements.

While we benefited from favorable weather trends in the first quarter, which we believe pulled forward some revenue from the second quarter, we have seen unfavorable weather in April and May. In June, we have seen the weather return to normal, with a corresponding increase in our organic sales growth.

As I mentioned before, the weather tends to balance during the year, and we have certainly seen that in the first half of 2016. In total, we are forecasting an organic sales growth for the first half of the year of approximately 8% to 9%, which puts us on track to reach our internal target for the full year.

As Pascal mentioned, we have several ongoing discussions with acquisition targets, and we feel confident that we will close more deals in the second half of 2016 in order to fuel our growth for 2017 and beyond. For the full FY16, we expect adjusted EBITDA to be in the range of $132 million to $140 million, representing a year-over-year growth of 24% to 31%.

Before I turn the call over to the operator, I would like to reiterate that I remain very excited about the opportunities ahead for SiteOne as a public Company. We have a very attractive industry that is well balanced and growing, and which lends itself to wholesale distribution. We are the clear leader in the industry, and the only national industry consolidator with significant competitive advantage.

We have a compelling strategy to grow organically, expand our margins, and grow through acquisition. Finally, we have a tremendous team in place to execute our plans. In summary, we are well positioned to deliver significant value to all stakeholders in both the short and the long term.

In closing, I would like to acknowledge all the SiteOne associates who have worked tirelessly serving our customers, and who have made us successful to this point. Once again, we welcome and appreciate the support of our new shareholders.

Operator, please open the line for questions.

Thank you. At this time we'll be conducting a question-and-answer session.

(Operator Instructions)

Thank you. Our first question comes from the line of Nishu Sood with Deutsche Bank. Please proceed with your questions.

Thank you, and congrats on a good start and the IPO.

Thank you.

First question I wanted to ask, clearly there's been a lot of focus on weather, and you gave a lot of good detail, so we appreciate that color. I thought you did a good job of describing how if the season starts earlier, it leads to some extra sales and also some pull-forward. You also discussed in the second quarter so far there has been some adverse weather conditions. Can you discuss for us a little bit when it happens a little bit later in the season, bad weather, how does that tend to play through for the rest of the year? You mentioned you still feel confident with your outlook, your growth prospects for 2016. I was wondering if you could dig into that in a little more detail, please?

All right, terrific. Good question, Nishu. Essentially the weather, as we mentioned, it moves demand around. But what we found over the last several years in this business, it really doesn't materially affect the weather for the year. This first half has been unusual on two extremes. You had the unusually favorable weather in the first quarter, which pulled forward some demand. Then you had the wet weather, which tended -- in April and May -- which tended to even things out.

The biggest effects -- obviously (inaudible - technical difficulty) affect all our product lines, but the biggest effect, the most pronounced effect, is in our maintenance products. But between the two, we really do not feel like we've lost any applications, or we've lost any business for the year. It really has just been a shell game between quarters.

We feel good about our run rate. We feel good that the market's normalized when you take the two together. Obviously with the strong overall 8% to 9% at the half year, we're set up to have a very good year. We do not feel like we lost any wind for the full year, and feel good about the forecast going forward.

Got it, got it. You gave the EBITDA guidance for the year. In terms of margins and your cost savings initiatives, how are those coming in relative to your expectations? Are those coming in line with your expectations, better than your expectations? How have those been looking so far this year?

Right, I would call them in line to better. We're very pleased with the progress we see. If you remember, we went to list-down pricing in the first quarter. That's gone very well, which has given us more flexibility by market and by product. Category initiatives are going quite well. We feel very good about our initiatives. They're on track. If anything, slightly positive, slightly ahead of where we think we're going to end up. We feel good about those overall.

Got it. One last quick one. On free cash flow, appreciate the color there. I wondering if you could give us some sense of -- with the working capital initiatives and with the margin initiatives, what type of free cash flow conversion from your EBITDA guidance can we expect for this year?

Well, we think about it from a net income standpoint, and we should be exceeding our net income with regards to conversion to free cash flow. Our free cash flow should exceed our net income.

Great. Thanks for the color.

Thank you. Our next question is from Dave Manthey with Robert W. Baird. Please proceed with your question.

Good morning. This is actually Luke on for Dave this morning. First question, maybe one for John. As we think about the 23% organic growth build-up this quarter, is there anything you can give us there regarding growth in each of the three end markets -- maintenance, repair and upgrade, and new construction -- either directionally or in absolute terms, to help understand how that builds up? Then within those three categories, would you say that the weather benefit was roughly balanced across all three of those? I guess that's what it sounded like, based on the prepared remarks.

We don't -- aren't disclosing the specific maintenance in that segment, but I think it's -- we have disclosed in the 10-Q some of the products that correspond with those. We're seeing good organic growth across the board. If you look at, say, our irrigation and those products in the first quarter, we saw organic growth of 26%.

If you look at the growth of the maintenance products, that was -- like fertilizer, that was like a 21% number. Between the two of them, you get the strong overall organic growth. The favorable weather basically helped both categories. What we've seen is that spread that we see between -- if you looked at our historical growth in those categories relative to the historical, we're continuing to see that overall in the first quarter.

Then a follow-up maybe for Pascal. In the slides, you talk about the M&A pipeline being deep and expanding. Just wondering if there's any color you can share relative to areas of focus near term, or maybe ways to size the number of companies you're looking at, or revenues at a very high level. Then connected to that, with the associates that you do have out there scouting deals for you, I think you said 60 or so in the slides, can you maybe talk about what role those folks serve, and how they've helped so far in sourcing deals?

Yes, thanks, Luke. We see the pipeline as being pretty robust. As you know, it's very hard to predict when those deals are going to close at the end of the I day. We've got very good visibility and line of sight on the few acquisitions that we expect to close in the second half of this year. When you look at the product lines, at the end of the day it's across the board. We're looking at irrigation companies, maintenance companies, hardscapes, and nursery. We're not really putting a preference over any product lines.

When you look at the scaling and the way we try to source deals, we've got the regional vice presidents, you've got the division presidents, you've got the area managers. We've got all those guys in the field helping. They're building relationships at the end of the day with their peers and their competitors. Then the development team is working with them to make sure that we take those deals to the finish line. We've got a very wide net that we've cast thanks to the presence and the footprint that we have in the US.

Great, thank you.

Our next question comes from the line of Samuel Eisner with Goldman Sachs. Please proceed with your question.

Good morning, everyone.

Good morning.

Going back to the weather question, I was wondering if you could either put a dollar amount or either a percentage basis on how much weather was a benefit in the first quarter? Maybe secondarily to that, you called out this pre-emergent fertilizer product. Can you talk about how much revenue that generated in the second quarter of last year, and how much of that may have been pulled into that first quarter of this year?

Right, well, I think it's -- the way we think about it is percentage and organic growth. If you look at the first quarter of 23% organic growth -- again, that was across -- pretty much all products were in the 20%s. We had a nice even blend of growth across all our product lines. Those will normalize down to their -- what we figure are more reasonable growth rates for the year.

Again, if you look at maintenance products in general, they tend to grow at 2% to 3% overall, kind of GDP-level growth. You can do the math there. Then our construction-related products would be up in the low double digits, which is a blend of high single digits, low double digits, which is a blend of the remodel and the new construction. As you take those 20% to 25% growth rates and you normalize down, you can do the math and figure out how much that is in dollars for the pull-forward.

Got it. How much did the market grow in the first quarter on a geographic-neutral basis? Obviously, you guys growing 23%, I presume there are some share gains or out-growth that's embedded in there. I'm curious how much of your 23% was driven by out-growth, how much was just pure market growth?

Well, we think -- of course, it's hard to tell when you get that much growth what the market's actually doing. We think the market fundamentally is growing at a blended rate of 5%. Again, that's an average of the maintenance, the repair/remodel, and the new construction.

As we look at the market, we still believe that's the case, that the market's growing at a blended 5%, plus or minus. Then our growth, we aim to pick up a couple percentage points on top of the market as we execute our commercial initiatives, and as we gain share and use our advantage in the market place. But we do still feel fairly confident in that 5% plus or minus market growth underlying both quarters so far this year.

Got it. If I just transition to the profit growth, so profit, gross profits, are up nearly $40 million on a year-over-year basis. You called out in your Q that pricing the category management added about 240 bips to the margin. That's roughly $8 million. If I exclude pricing and category management, you were up $30 million. I'm just wondering if you can help me bridge from what you reported last year to what you reported this year in gross profits. If I include that $8 million of pricing in category management, what's the remaining $30 million? If you could break out volume, if you could break out acquisition, that would be very helpful for us?

Right, well if you take the overall acquisition growth was 22% on sales. Then obviously those acquisitions delivered our normalized gross margin. Then the additional growth on the organic 23%, I would apply our normal gross margin to that, as well. The main sources of gross margin out-performance were the improvement in the gross margin percentage, the additional organic sales, and then the acquisition-added revenue, with let's say the normalized gross margin.

That's helpful. Lastly, if I just think about the second quarter here, you commented about April and May being weaker because of weather. How should we think about your monthly sales? Is it roughly a third, a third, a third, between -- if I think about just the full quarter between April, May, and June? Are you guys heavily weighted to June? Just curious if I'm thinking about the blend, what the mix would be on a month-by-month basis for that second quarter? Thanks.

Yes, I think if you look at the three months of April, May, and June, they're all important months. John, (inaudible multiple speakers) --

To a certain extent we have an extra week in April. But if you looked on a daily sales growth basis, they're relatively close, June -- with April being probably slightly higher than May and June on a daily sales basis -- the difference between 5% higher on a daily sales basis.

So something closer to like 40%, 30%, 30%, for the three months?

I think that would be correct.

Great. Thanks so much, guys.

Our next question is from the line of [Chris Velfuer] with UBS. Please proceed with your questions.

Hi, guys. Congrats on a solid quarter and the IPO.

Thank you.

Yes, no problem. The first question, going back to the gross margins a little bit. You mentioned that mix wasn't a big issue. Was that because there was -- like you said, the organic growth was very similar across all different product categories? I thought from a margin standpoint, things like fertilizer might be a little bit more -- have a little more richer margin than other products that you would sell in the winter months, that you didn't sell this year?

Yes, intuitively, there's some truth to that. Something like ice melt is typically a slightly lower margin. But when we looked at -- actually did the math and actually looked at the different components, both with and without acquisitions, the math worked out that it just balanced out exactly to be a very small variance between the two.

Chris, I would just add, I think that's a function of two things. One is that there is a fairly tight shot group across our major product lines in terms of margin. Within major product lines, things like ice melt would be lower and et cetera. But across the products themselves, it's a fairly tight shot group. The other impact here is that we saw broad strength across all the product lines, with the exception of a few smaller ones within product groups. Those two factors together, it just didn't meaningfully change the mix, or add any benefit, or any negative aspects in terms of mix.

Okay, then just one follow-up. In terms of weather, I know we had good weather in the first quarter. Further weather was a little bit challenging in May and April. What about extreme differences in the other direction, in terms of like heat, like in the southwest, the weather's been very, very hot. It's only been a couple weeks, but how does that affect you guys? If that were to be a trend for a majority of the summer, how would that affect you guys? Is it positive, negative, or how does that work?

Yes, I think that's where we have the breadth of product line that works in our favor, and that it's positive and negative. I know that sounds like an unclear answer, but the heat will affect nursery. As the planting season -- as the heat kicks in, the planting season for nursery products will pull back; but the heat will benefit irrigation. As the heat dries out the grass, that spurs our irrigation. It also helps some of our maintenance products, et cetera. The heat doesn't necessarily -- isn't necessarily a negative or a positive, it's actually both. Part of the benefit of SiteOne being across all the product lines means that the puts and takes tend to average their selves out, and we end up with a solid overall growth.

Great, thank you.

Thank you. Our next question is from the line of Robert Wetenhall with RBC. Please proceed with your questions.

Good morning. This is actually Michael Eisen on for Bob this morning. I wanted to follow up a quick question on margin improvement. You guys had meaningful improvement in the first quarter, and it seems like that's expected to continue based on your commentary of being ahead of plan. Can you talk about some of the key initiatives that you guys have at the top of your list, and what expectations do you have for margin improvement in the time frame for those top key initiatives? Thank you.

Yes, our key initiatives really are in two buckets. We have initiatives that are focused on margin expansion, and initiatives that are focused on revenue generation. The initiatives focused on margin expansion are pricing. That's -- we need to make sure that we're competitive in pricing, but we're also doing everything we can to price smartly in the market place. We have a lot of initiatives around pricing to maximize our pricing benefit.

On the category management side we're working with our suppliers continuously to align with our preferred suppliers and win together. As we push volume to our preferred suppliers it helps our costs, it benefits our suppliers. That's a major initiative of ours that we've seen great benefits from, and that we're going to continue to see great benefits from.

Finally, in margin expansion we have our supply chain initiative. Supply chain is something that we've been working on for the last year. We're installing a new replenishment system, a new state-of-the-art JDA replenishment system. We're moving our logistics to more of a hub-and-spoke logistics network, as opposed to direct-to-store. As we do that, we're going to see good benefit from that, primarily showing up -- some in 2016, but that's really a benefit for 2017 and 2018.

If you put those together, as we stated before, we expect our EBITDA margins to -- we expect to move to 10% plus on an EBITDA basis, adjusted EBITDA basis. We see good line of sight of getting there over the next, say, three years. 10% is certainly not a cap, but it's a milestone that we're heading toward.

I want to mention two other initiatives, our sales force performance and our marketing initiatives. Those are focused on gaining market share and making sure that we have solid organic revenue growth. We're working with our sales force, both on territory alignment, on restructuring the sales force, to move to an inside-out structure which will benefit us.

On the marketing side, we're putting in capability to do digital marketing using social media -- we're doing that this year, which will really benefit us in 2017 -- and online capability, where our customers can go online and see their pricing, see inventory, and even order online. We're working on some exciting initiatives there that will make sure we continue the strong organic revenue growth. Those are the five initiatives. They are all in good shape. They're on track, ahead of the game slightly. We feel good about them the rest of the year and beyond.

Appreciate the additional color. Good luck.

Thank you.

Our next question is from the line of Ryan Merkel with William Blair. Please proceed with your questions.

Great, thanks. My first question, could you just tell us how the irrigation market is performing in California? Secondly, should the drought concerns lead to more irrigation demand long term in California?

In terms of irrigation in California, we're having solid results overall. We have obviously -- the impact of the drought has impacted us in terms of mix. We're seeing some mix change, say from sprinkler systems to drip-type irrigation. We are seeing some [terrut] removal in California, which is a negative for irrigation. But on the other hand, we're seeing a move to more sophisticated smart waters systems, which is a positive. What we've seen so far out of the drought in California is puts and takes, negatives and positives. Together, we've seen solid performance overall in California -- not spectacular. I would call it solid in the irrigation space.

Got you, okay. Secondly, I know improving your supply chain is a big initiative. Could you update us on where you are with that, and what is left to do?

Right. As I mentioned before, we're installing a new state-of-the-art JDA system. We bought that system in late 2015. We are installing it as we speak. We have data that we're doing trial runs as we speak. We would see implementing that system fully in quarter three and quarter four of this year, so that we get the benefit of that in 2017. Again, we think that will benefit us not only on a cost basis, but also in terms of our stock turns, we expect some improvement there, as we can better manage our inventory.

In terms of the hub-and-spoke logistics network, that's something that you want to do very carefully and very slowly. We are planning to put in our first distribution center. That will be a third-party operated DC. Those plans are under way. Those will happen in the fourth quarter of the year. That might spill into the first quarter of 2017.

We are experimenting with local market hubs. We have a local market hub now in New Jersey, and we're replenishing our stores and delivering to customers out of that hub. If you remember, we acquired a company, Green Resources, in the Carolinas last year. They are a hub-based provider, and they've given us good market intelligence. We're taking that concept, and we're rolling that out as we speak.

Again, we would see ourselves with say 15 or so local market hubs. That's something that we'll do incrementally over time, over the next two or three years, as we build out our network. That's the progress report. Things are on track. We feel very, very good about our team and our progress on the supply chain side.

Great. Thanks very much.

Our next question comes from the line of Judy Merrick with SunTrust. Please go ahead with your question.

Great. This is Judy on for Keith Hughes. On your acquisition pipeline, is there anything else that you can tell us about any particular geographies that you're looking at?

Thanks. Actually, really not. We're looking for product lines. We're looking at all geographies. We're not -- we've done more deals on the eastern part of the states so far, but (inaudible - technical difficulty) Hydro-Scape in the early part of this year, which is southern California. We'll probably do more deals in the west. There's no real preference from that standpoint.

Okay, thank you.

I would add to that, that we look at acquisitions on a local market basis. We have -- we operate in some 130 metros, major metros across the US. Each one of those Metro areas has puzzle pieces that we would like to have to fill in our market. We basically use our local relationships, and the relationships that we have with Pascal and his team and here at the center, to cultivate or nurture targets across all those local markets.

Sellers sell when they're ready to sell and when the timing is right. It tends to happen across the country, market by market, with no particular regional focus. Over time, we expect it to balance out both geographically and across product lines.

Okay, great. Thanks.

Thank you. At this time, I'll turn the floor back to Management for closing remarks.

Okay, well thank you. Thank everybody for joining us today. We very much appreciate your questions, and appreciate your interest in SiteOne. We're very pleased with the way we've started the year. We're excited about the future. We're excited both about the -- not only about 2016, but our longer term growth, and our ability to continue to grow organically, grow through acquisition, and expand our profitability going forward. We look forward to updating you again when we release our second-quarter results in August. Thank you very much.

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