SiteOne Landscape Supply, Inc. (NYSE: SITE) Third Quarter 2022 Results Conference Call November 2, 2022 8:00 AMm. ET
Participating companies
John Guthrie, Executive Vice President and Chief Financial Officer
Doug Black – President and Chief Executive Officer
Scott Salmon – Executive Vice President, Strategy and Development
Conference Call Participants
David Manthey-Baird
Stephen Volkmann – Jefferies
Matthew Bouley – Barclays
Ryan Merkel-William Blair
Mike Dahl – RBC Capital Markets
Keith Hughes – Truist
Jeff Stevenson – Loop Capital
Andrew Carter – Stifel
Operator
Greetings and welcome to SiteOne Landscape Supply, Inc. ‘s Third Quarter 2022 earnings call. [Operator Instructions] As a reminder, this convention is being recorded lately. Now I introduce you to your host, John Guthrie, Executive Vice President and Chief Financial Officer. Thank you, John, you can start.
Jean Guthrie
Thank you and good morning everyone. This morning, we issued our press release on third quarter 2022 earnings and a slideshow in our inverter. siteone. com’s Investor Relations segment.
With me are Doug Black, our president and chief executive officer, and Scott Salmon, executive vice president of strategy and development.
Before we begin, I would like to remind everyone that today’s press release, slideshow, and statements made this call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to dangers and uncertainties. which may cause actual effects to differ materially from our expectations and projections. These dangers and uncertainties come with the points set forth in the earnings release and in our filings with the Securities and Exchange Commission.
In addition, on today’s call, we’ll talk about non-GAAP measures, which would possibly be useful for comparing our performance. A reconciliation of those measures can be discovered in our earnings release and slideshow.
Now I would like to call Doug Black.
Black Doug
Thank you, Jean. Good morning and thank you for joining us today. We are pleased to continue our positive momentum in the third quarter, with net sales forged and adjusted EBITDA expansion despite the strong comparable expansion and oversized gross margin gains we achieved. in the current part of last year. We are also excited to upload 7 new successful corporations to SiteOne in the last four months, bringing the total number of acquisitions completed since the beginning of the year to 14. All of those corporations have talented groups and appropriate visitor relationships, and we are expanding our product lines and our presence in their respective markets.
Through the execution of our business and operational initiatives, and acquisitions, we continue to position SiteOne as a long-term, world-class market leader and deliver consistent functionality and expansion in the near term. While we are seeing the first signs of a slowdown in the residential market, we are confident that we will finish 2022 well and start 2023 from a strong position with our well-balanced business, strong balance sheet, exceptional teams, enhanced features and strength. Acquisition channel.
Overall, we expect to continue to gain market share and functionality and expansion forged in the coming years.
I’ll start today’s call with a brief review of our exclusive market position and long-term functionality and expansion strategy, followed by some highlights from the quarter. John Guthrie will then set out our third quarter monetary effects in more detail and provide an update on our balance sheet and liquidity position. He will also comment on our recently announced percentage buyback authorization. Scott Salmon will talk about our acquisition strategy, and then I’ll come back to talk about our latest perspective before answering your questions.
As shown on slide four of the effects presentation, we have expanded our footprint to more than 630 branches and four distribution centers in forty-five U. S. states. We are the undisputed leader in the industry, more than five times the duration of our nearest competitor, yet we estimate that we have about 15% of the highly fragmented wholesale landscaping distribution market of $23 billion. Therefore, our long-term expansion opportunity is important. We have a balanced mix of activities, with 64% focused on maintenance, repair and upgrade, 21% focused on the new residential structure and 15% on the new advertising and recreational structure.
As the only national wholesale distributor of a full diversity of products in the market, we also have a perfect balance between our product lines and geographically. Our strategy to complement our product lines in the U. S. The U. S. -Canada policy, either organically or through acquisitions, strengthens and strengthens this balance over time. Overall, our balanced end-market mix, broad product portfolio, and smart geographic policy provide us with opportunities for expansion and more pricing tactics for our consumers and suppliers, while offering significant resilience in weaker markets. I like to emphasize that our balanced business mix will be very vital as we sail into 2023 and look to triumph over the expected weakness in new residential construction.
Let’s move on to slide 5. Our strategy is to leverage the scale, resources, functional ability and functions we have as the largest company in our industry, all in aid of our skilled, experienced and enterprising local groups to consistently offer more price than our competitors to our consumers and suppliers. We’ve come a long way in building SiteOne and executing our strategy over the past 6 years, but we’re still in the third or fourth round of our overall progress as a truly world-class company. As a result, we remain strongly focused on our commercial and operational projects to enhance our functions and decorate the price we deliver to our consumers and suppliers. These projects are complemented through our acquisition strategy, which complements our product portfolio, takes us to new geographic markets and adds super new skills to SiteOne.
Overall, our strategy creates something incredible for our shareholders through biological expansion, acquisition expansion and EBITDA margin expansion.
If you take a look at slide 6, you can see that we have built a strong track record of functionality and expansion over the past 6 years, with consistent biological and acquisition expansion and smart EBITDA margin expansion. Keep in mind that we’ve done this while investing heavily in our groups and in new systems and technologies to lay the foundation for SiteOne and create amazing features for our consumers and suppliers. Our 3 price creation levers.
You will also notice that we have now finalized 78 acquisitions in the irrigation, lighting, agronomy, nursery, landscaping and landscaping materials product line since 2014, adding 14 acquisitions so far in 2022. We only won well-run businesses, and so all those acquisitions were already successful businesses before I signed up for SiteOne. Once they register with us, together we enjoy the benefits of our combined operational and advertising capabilities. Acquisitions are also a key source of new skills and concepts and, as a result, are our competitive merit as we grow. We are having a smart year this year on the acquisitions front, and our pipeline of potential transactions remains strong, with a significant opportunity to continue to grow through acquisitions for many years to come.
Slide 7 shows the long road ahead to complete our product portfolio, which we target primarily through acquisitions, specifically in the nursery, landscaping and landscaping material categories. We are well connected to the corporations in our industry and plan to continue to occupy those markets systematically over the next decade.
Now I’ll talk about some of our third-quarter functionality highlights, as shown on slide 8. We achieved net sales expansion of 18% in the third quarter, with a biological daily sales expansion of 12% and a net sales expansion of 6% aggregated through acquisition. The expansion of daily organic sales was driven by value inflation of 17%, partially offset by a 5% decrease in volumes, an improvement from our 11% decline in volumes in the current quarter. Price inflation turned out to be more durable than expected, although it has begun to decline over the past four months. At the same time, our volume took a step forward during the quarter and dropped to single digits in October.
Overall, we outperform the market in terms of sales volume thanks to our strong groups and targeted initiatives.
Gross profit increased by 14% and our gross margin decreased through 120 foundation issues to a very smart point of 35. 2%, as we did not repeat last year’s providence earnings when costs were rapidly emerging. We expect gross margin to be lower than last year, in the fourth quarter, but it took a step forward throughout the year due to our strong earnings in the early part of this year. As we approach 2023, we will face headwinds in gross margin as we originally forecast for this year. However, we expect to achieve underlying innovations in gross margin as a result of our projects to mitigate some of those obstacles.
On the SG side
The combination of a smart expansion of organic sales and a strong contribution from acquisitions enabled us to achieve an adjusted EBITDA expansion of 6% despite SG gross margin and difficulties.
In terms of projects, we continue to make smart progress this year. On the gross margin side, we continue to grow with our smaller customers, driving the expansion of personal labels and our inbound freight pricing through our transportation control system, or TMS initiative. The achievement of the awards continues this year and in 2023, we expect a gross margin through those projects in the coming years.
We have several projects for the experience of our visitors, while making our groups more efficient, thus expanding biological expansion and improving our SG leverage.
This year we advanced the capability of MobilePro and accelerated our deployment. By the end of 2023, MobilePro is expected to be widely deployed on SiteOne and be a component of the way we do business. Shipment tracking allows us to manage our outbound deliveries for consumers and proactively inform consumers about the prestige of delivery via SMS. Our visitors’ feedback on Dispatch Track has been very positive and we expect all parts of SiteOne to make full use of this new capability before spring next year.
We also recently completed the 2-year progression and implementation of our new Salesforce CRM system, which is designed to help our third-party sales reps and sales affiliates better serve our midsize and giant customers.
Over the next year, we plan to leverage this new capability to deliver more to our consumers and drive more intentional and consistent market percentage gains through our sales force.
Over the past 2 years, we have particularly strengthened our virtual team and, in turn, accelerated our progress with siteone. com. Our affiliates and Box customers are adapting more comfortably to the site as we move into ease of use. and ability to help landscaping contractors run their business more efficiently. We will continue to load features on siteone. com and are excited to leverage them further in 2023 and beyond to offer state-of-the-art pricing to our consumers and gain market share.
In addition to our technology-driven initiatives, we now also have a full-time operational excellence team across each and every major line of business, working with the cashier and our newly acquired corporations to isolate problem issues and expand and operationalize operational responses across the enterprise. These responses leverage the power of our affiliates and visitors to help us achieve adjusted EBITDA expansion and improved adjusted EBITDA margin.
Overall, we have ample opportunities for our visitors to enjoy and build our operational effectiveness and efficiency, as we expand adjusted EBITDA margin in the coming years. On the acquisitions front, we matched our record functionality from last quarter, adding 6 successful corporations to our family circle in the third quarter and 1 more since the end of the quarter, bringing the total to 14 so far this year. These corporations bring us wonderful new skills and ability to expand in their respective markets, while adding approximately $175 million in sales over the past 12 months to SiteOne. Our progression groups remain very active in 2022 and we plan to continue adding strong corporations to SiteOne in the coming months.
With an experienced and recently expanded team, broad and deep relationships with the most productive companies, a strong balance sheet and an exceptional reputation as a preferred customer, we remain well placed to grow through the acquisition this year and for many years into the future. .
Let’s move on to slide 9. We are pleased to release our third annual ESG report, which highlights the progress we are making in offering pricing to all our stakeholders. It’s vital to realize that our purpose here at SiteOne is to build a company of excellence, one that creates exceptional pricing for our associates, customers, suppliers, shareholders, and communities. Therefore, we don’t see ESG as a separate initiative. On the contrary, those ESG innovations are completely aligned with our overall vision and come naturally to us. , we are satisfied with our progress. But as discussed above, we still have a lot of room for improvement in all aspects of our business in the coming years.
In short, we continue to execute our projects and provide robust functionality and expansion despite near-term headwinds and a dubious economic outlook. As we look ahead to 2023, inflation will now be more persistent, helping to mitigate the residential market. Deceleration and continuous volume pressure. Overall, we remain confident in our ability to navigate all market conditions, outperform the market, and continue to grow our business, either organically or through acquisitions.
Now, John will explain the quarter to you in more detail. John?
Jean Guthrie
Thank you, Doug. Je will start with slide 10 with some highlights of the third quarter results. We reported an 18% increase in net sales to $1100 million in the quarter. There were 63 days of sales in the third quarter, which is consistent with last year’s period. As a reminder, we have 60 days of sales in the fourth quarter of this year, 1 less than in the fourth quarter of last year.
Daily sales of biologics increased 12% in the quarter due to price inflation, product of higher costs of the products of our suppliers, offset by lower volumes product of higher values and better economic conditions.
Acquisitions continued to develop well, contributing approximately $57 million or 6% to our net sales expansion in the third quarter. Scott will provide more important points related to our acquisition strategy later in the call.
Daily organic sales of landscaping products, including irrigation, nursery, landscaping, outdoor lighting and landscaping fixtures, increased 15% in the third quarter due to value inflation, with product values such as PVC pipes and drainage remaining at a high compared to last year. Daily biological sales of agronomic products, including fertilizers, products, melting ice and equipment, increased 5% in the third quarter due to value inflation due to higher product costs, partially offset by decreased volumes due to higher values.
Prices for agronomic products, such as fertilizers and grass seeds, remain high, and we have reduced demand for those higher costs in the short term, as our consumers face a limited maintenance budget. Geographically, we continue to see diversification between markets. In Sun Belt, we recorded a forged organic daily sales expansion of 15%, while in the more seasonal northern market, we recorded an organic daily sales expansion of only 8%. The decrease in sales expansion in the northern markets was due to less favorable weather situations and a higher percentage of sales.
Price inflation continues to play a major role in biological expansion in daily sales, whether for landscaping and agronomic products. We estimate that value inflation contributes 17% to our daily organic sales expansion for the quarter, as we continue to see strong values for the year. Throughout the year. As we offset last year’s price increases, we expect the effect of price inflation on the biological growth of our daily sales to moderate by the end of 2022. However, based on the price increases already made this year and if price increases are expected from some key suppliers in the fourth quarter, we believe that the values will continue to contribute definitively to growth until the end of the year and until 2023.
On the volume side of the expansion equation, the effects of the third quarter were negative, but they advanced compared to the current quarter. Negative volume expansion of 5% in the third quarter, compared to -11% in the current quarter, as we benefited from more favorable weather and more moderate rates. For the remainder of fiscal 2022, we expect volume to continue to improve, even if it remains negative.
Gross profit rose 14% to $389 million in the third quarter. In line with our expectations, gross margin decreased through 120 core issues to 35. 2% as the significant value realization gains achieved in the third quarter of 2021 were repeated.
Selling and administrative expenses, or SG
We obtained additional tax benefits of $1. 9 million in the third quarter, compared to $6. 5 million in the prior year period. We recorded a net revenue source of $73. 3 million for the third quarter, compared to $80 million in the prior year period. The reduction in the net source of income is basically due to minimizing gross margin and increasing promotion and administration expenses.
Our weighted average number of diluted shares for the third quarter was 45. 8 million, which is comparable to the prior year period.
Adjusted EBITDA increased 6% to $136 million in the third quarter, to $128 million for the same time last year. Adjusted EBITDA margin, which reflects our decreasing gross margin, decreased through 140 core issues to 12. 3%.
Now I would like to get a brief update on our balance sheet and statement, as shown on slide 11. Net current equity at the end of the third quarter was $869 million, compared to $715 million at the end of the previous quarter. year. The accumulation in net current capital is primarily due to higher accounts receivable as a result of our strong sales expansion and inventory accumulation due to charge inflation, supply chain uncertainty, and strategic stock purchases prior to value accumulation.
In the third quarter, we saw inventories begin to decline due to improved product sourcing and overall seasonality. Since product availability and delivery times for our suppliers have improved, we no longer want to have as much stock in our distribution centers and branches. We expect this trend to continue in the fourth quarter and into next year.
Net money provided through operating activities in the quarter increased to $136 million from $67 million for the prior fiscal year. The improvement in cash flow is basically due to the measures we took in the third quarter to reduce current capital. We earned money investments of $66 million for the quarter, compared to $15 million for the same quarter last year. The accumulation of monetary investments reflects our acquisition activity and construction growth in the quarter.
Net debt at the end of the quarter of approximately $377 million, compared to $208 million at the end of the prior year period. The accumulation of net debt reflects increased borrowing to finance our investments in acquisitions and current capital creation. On July 22, we expanded our asset-based loan or ABL line by extending adulthood from February 2024 to July 2027 and extended the duration from $375 million to $600 million. As a result, we increased our liquidity at the end of the quarter to $515 million, consisting of $63 million and approximately $452 million of available capacity under the ABL facility. Leverage at the end of the third quarter increased to 0. 8x our 12-month adjusted EBITDA, compared to 0. 5x at the end of Q3 2021.
Higher leverage reflects the accumulation of our loans as a result of acquisitions investments and current capital accumulation. Our year-end long-term net debt target relative to adjusted EBITDA leverage diversity remains 1-2x. On October 20, 2022, our Board of Directors approved a percentage buyback authorization of up to $400 million of our non-unusual percentages. The percentage repurchase authorization has no expiration date and may be modified, suspended or terminated at any time through the Meeting. As shown on slide 12, this new buyback program complements and balances our existing capital allocation strategy.
Our primary capital allocation objective is to invest in our business, adding the execution of our acquisition strategy. We are also committed to maintaining a prudent balance sheet, as evidenced by our target leverage ratio. Achieving these objectives, the percentage buyback authorization will provide us with the mechanism to return capital to our shareholders.
In short, our balance sheet priority is our monetary strength and flexibility without sacrificing long-term expansion or market opportunities. I will now pass the word to Scott to update our acquisition strategy.
Scott Salmon
As shown on slide 13, we acquired 6 corporations in Q3 and 1 corporate since the end of Q3, bringing our total to 14 by 2022 so far, with combined 12-month net sales of approximately $175 million. Since 2014, it acquired 78 corporations with approximately $1. 4 billion in 12-month net sales added to SiteOne.
For slides 14 through 20, you’ll find data on our most recent acquisitions. On July 22, we acquired River Valley Horticultural, a wholesale distributor of nursery, gardening and irrigation products with a separate location in Little Rock, Arkansas. River Valley was established as a nursery for SiteOne in central Arkansas. On August 11, we acquired Cape Cod Stone, a wholesale distributor of landscaping products, with 1 location in Orleans, Massachusetts. On January 12, we acquired Linzel Distributing, a wholesale distributor of lighting and landscaping materials with 1 location in Hamilton, Ontario, Canada. The addition of Linzel expands our product supply to our consumers in Eastern Canada. On August 18, we acquired Jim Stone Company of Louisiana, a wholesale distributor of herbal stones and other garden products.
Jim Stone’s 3 locations augment SiteOne’s gardening product offerings in Southern Louisiana. On August 31, we acquired Stone Plus, a wholesale distributor of gardening and gardening materials with 3 locations in Northeast Florida, particularly expanding those product lines to new markets in Florida.
Also on August 31, we acquired Kaknes Landscape Supply, a wholesale nursery distributor with a location in Naperville, Illinois, a suburb west of Chicago. Kaknes further strengthens our developing nursery presence in the Chicago market.
And at most recently, on October 13, we acquired Madison Block.
Summarized on slide 21, our acquisition strategy continues to generate a significant price for SiteOne. Our team of over 70 former homeowners, coupled with our experienced leadership in the field, creates a dynamic and exciting culture, making us even hotter with homeowners contemplating a transition from their family business circle. Our laser focus on landscape distribution gives marketers great confidence that when they sign up with SiteOne, they sign up as the long-term market leader that will provide their affiliates with tremendous support and nearly endless opportunities for expansion. professional and success. in North America. We are pleased with our M&A momentum and the continued strength of our portfolio. We have a highly professional team, a fair reputation and a strong balance sheet to fund our acquisition strategy in strong and challenging market conditions. We are confident that we will upload more exceptional business to SiteOne in the United States and Canada in 2022 and beyond as we strengthen SiteOne’s ability to deliver more value to our consumers and vendors. Array
I need to thank the entire SiteOne team for their hobby and commitment to welcoming newly acquired groups when they joined SiteOne. His leadership and efforts are key to our long-term good fortune in building our business.
Now I will call Doug back.
Black Doug
Thanks Scott. I’ll wrap up on slide 22. Going into 2022, we expect growth value inflation to remain resilient while continuing to moderate through the rest of the year and into 2023. As mentioned, we’re seeing a single-digit volume decline lately. , reflecting the weakness of the residential market. We expect bio-sales growth to slow and be worth inflation as we head into 2023. In terms of end markets, we are starting to see some slowdown in new residential construction, which accounts for 21% of our sales. With space value inflation and higher interest rates, homebuilders are seeing less demand and are more cautious in terms of new home starts. We expect this weakness to continue with modest declines in 2023 compared to the prior year. On the other hand, new listing construction, which accounts for 15% of our sales, remained forged by healthy auction activity and smart order books. We expect this market to continue to be healthy in 2023. Maintenance and major renovations, which represent 27% of our sales, also remained strong, with only a few regions of the country showing any softness.
Typically, recessions, primary maintenance, and renovations have proven to be more durable than new construction, and we expect this to be the case this year and in 2023. Keep in mind that low unemployment and high home values help the primary market for maintenance and renovations.
Finally, the maintenance finishes market, which accounts for 37% of our sales, has remained solid beyond recessions. As a result, demand for maintenance dollars for our consumers has remained strong, and we expect this to continue through 2023.
Overall, we expect our end markets to provide us with a moderate basis to execute our strategy and gain market share as we provide higher cost to our consumers and suppliers. Daily sales expansion for the full year 2022, basically due to value inflation. As mentioned, we continue to expect our full-year gross margin to be higher than last year, offset by general and administrative expenses, which will also be higher than last year as a percentage of sales.
We expect our adjusted EBITDA margin to be lower than our record 2021 level.
In terms of acquisitions, as Scott mentioned, we have a strong portfolio of high-quality businesses and look to the future to add more to SiteOne’s family circle over the course of the year. Our acquisitions are working very well and we continue our skill. to integrate them into our business. As a result, we expect the acquisitions to contribute particularly to our functionality and expansion for the remainder of 2022 and beyond. With all those points in mind, we are elevating our direction for fiscal 2022 adjusted EBITDA to between $455 million and $470 million, representing year-over-year expansion of 10% to 13%. This diversity does not come with the contribution of unannounced acquisitions.
In closing, I would like to sincerely thank all of our SiteOne affiliates who continue to amaze me with their passion, commitment, teamwork, and selfless service. We have a wonderful team and are honored to subscribe as we provide expanding services. Price to all our stakeholders. I would also like to thank our suppliers for supporting us so strongly and our consumers for allowing us to be their partners.
Operator, please open the line for questions.
Q&A session
Operator
[Operator Instructions] The first is by David Manthey with Baird.
David Manthey
Doug, when talking about gross margin in 2023, said he expected an underlying improvement. I just need to temporarily emphasize that underlying word just to see what he means by that in relation to the whole. And then it turns out like saying you think the benefits of value prices have gone through your inventories and are complete at this point.
With solid costs looming, you say we shouldn’t see a decline in gross margin. But if we see more weakness than expected, we may see an overall decline in gross margin. It only matters what percentage is there.
Black Doug
Oui. Eh, well, I’ll start and then maybe ask John to charge. When I talk about the underlying improvement, we have the oversized gains we made through the realization of the value in 2021. In fact, in 2022, we repeat those gains essentially. And as you know, our gross margin: we were expecting some kind of gross margin reset at 22, and we didn’t realize that, based on a very smart first part of this year, we’re seeing gross margins now that are lower than last year. Therefore, we will finish the whole year 22 a little before 2021. My point on the underlying improvement is this reset aside, the underlying gross margin that we will be expecting to continue making gains, but that will be exceeded, and we will have a headwind in gross margin in terms of restart that we expected for this year and that we haven’t had this year. John, do you need to upload something?
Jean Guthrie
Non. Je I think he’s touched on the key issues here. For the next 3 quarters. I mean, this quarter, you noticed, and then in the early part of next year, where the kind of oversized gains from this realization pays off if we have a more stable and more typical pricing environment. We will – they will face this difficult festival from a competitive point of view. And yet we try to compensate for that with the projects that Doug referred to.
David Manthey
they gave it to me It’s okay. So yes, if we look back like in 2019, there’s clearly an improvement once we’ve cancelled out all the price noise. Very well. And then my question at the moment is, are you surprised that the volumes of landscaping products are holding up longer than those of agronomy at this time?And whatever you see on the market today, does it replace your maintenance in the event of a slowdown in the lawn?varieties?
Black Doug
No, wonderful, wonderful question. I wouldn’t say we’re surprised. We are pleased, of course, that the volumes of landscaping products are less negative, necessarily improving. fixed. Think golf course budgets or city budgets or anyone’s maintenance budgets, they are set throughout the year. So immediate value increases actually put pressure on our consumers and our consumers’ consumers. And we’re seeing a regression of, or a shift to, lower-cost products, a decline in usage. Those fertilizers and seeds where they can pass with less. And so we see a kind of less demand driven through that.
We think that will decrease, decrease over time because they have to go back to keeping the lawn green and some kind of full use at some point. And that’s what we see happening over time. We have maintenance in northern markets. The weather is also not as cooperative in those markets. So, we have some other things happening there. But we feel very smart thinking about the call of the dollar as costs stabilize or budgets stabilize or restart this year for next year to adjust for emerging inflation, et cetera. We believe the use might even have a small merit for next year in terms of volume outlook for the maintenance market. Those are the trends we see in maintenance.
Operator
Next is from Stephen Volkmann with Jefferies.
Stephen Volkmann
Great. Maybe just to dig a little deeper into this pricing problem, Doug, because it turns out to have replaced a bit. Is there any explanation for why you should expect at least some kind of single-digit average value in 23 types of all?The remnant, even if nothing else is done, there has been so much in 22, I guess the kind of remnant takes you there.
Jean Guthrie
We would say that the remnant right now is low to middle digits to single right now. And what we’re seeing right now, we’re seeing much smaller value increases than this year. And then the potential threat to the products. So, I think we’re not in a position to fully finalize where the values will be at the moment, but I would say that the existing forecast for the carryover to next year, and obviously, will be higher at the start of the year than it is at the end of the year, would probably be low to medium single digits.
Stephen Volkmann
It is ok. It is ok. And sort of a corollary of that, what percentage of your product do you think is potentially happening to see value drops happening to have to happen?
Jean Guthrie
We believe that it is around 20% of our product that has a fundamental component. Some of them are already experiencing declines from the peaks themselves, I mean, year over year, however, as PVC pipes, we’re starting to see the first of them decrease. I mean it’s a little, much less than 5% of our sales, but it’s still something we keep a close eye on. Therefore, we will monitor those parts as we move forward. And next year, honestly, 80%, we’re not saying it will even be flat. I mean, I don’t think we’re going to see the kind of significant increases that we’ve noticed this year, but there’s likely still going to be a price increase in that rapid product, balanced with a possible drop in 20% of commodities.
Stephen Volkmann
they gave it to me It’s okay. And then in spite of everything and I pass it, in SG
Black Doug
Oui. Eh well, we largely handle overhead and administrative expenses while making investments. But surely, if some markets are down, then we can take out most of our overhead and administrative expenses and we can hire staff for the market that is provided. to us in certain markets. From that point of view, we run our business very locally. Therefore, we have a lot of flexibility to adapt to express market situations as they arise. So, I think the general answer is, yes, we can manage overhead and administrative pricing, as we see, demands that trends expand in a specific market. John, do you have anything to add?
Operator
Next up is from Matthew Bouley of Barclays.
Matthieu Bouley
So, I guess in the new purchase authorization, I have to ask which firm around the mergers and acquisitions program. Anything if you sign, or what you see around personal multiples, excuse me, what does it mean around bio-expansion investments, really just one or the other of those guys to get to a lower level of change or, really, is it just a mirrored picture of the balance sheet to now have the ability to do all of the above?
Black Doug
Yes. That last one is very good. Our, as we mentioned, our strategy is to accelerate thoroughly. The acquisition program is quite physically powerful and we continue to invest in the business. But as you know, we manage, our diversity of debt targets, EBITDA to net debt is 1% to 2%, and we’re below 1%. So it’s safe to think that we can use our buyback authorization flexibility to recover capital if, in fact, we have excess capital. But as we become a more successful business, we manage our supply chain and things calm down from COVID. We expect our money to be quite strong. So, it’s just about offering that flexibility to make decisions as they arise. But still very excited. We are in the 3rd or fourth circular of our progression as a company. And our strategy is. . . We are accelerating our strategy, if any, at this point in terms of making an investment and indeed we think the long-term acquisition portfolio is quite attractive.
Matthieu Bouley
they gave it to me No, it’s a really useful color. And then, I guess the moment you just focus on the short term, the comment about getting better volume trends. So, the third quarter fell less than the second quarter, and then October, I guess, improving to a subdigit subdigit. I mean, May just you, I guess, #1, remind us if the compositions were easier, how did that work?I know you discussed some comments about equity gains. the market? Or really just some sort of additional color in that supports this reduction in volume drop.
Black Doug
So, definitely, the compositions from the point of view of volume were less difficult this year in the part of the moment than in the first part. Therefore, it does not necessarily provide a smoother contribution to the fourth quarter than to the third. quarter. So the fact that we’ve improved from the moment to the 3rd makes sense from the festival perspective. The fact that we see this improvement pleases us very much, because it’s more about our performances and less about the compositions. We are confident, we continue to strengthen our functions to gain the percentage of places in the market, and we ourselves stick to the data of our suppliers and read about our competitors. And we are convinced that we are gaining the percentage of seats in the market. And we believe that our ability to win the percentage of seats in the market will continue to improve as we move forward with our new technologies, with. we discuss CRM with our sales force, with our projects around small customers.
We simply have many levers to faint and gain a percentage of place in the market, our personal labels, LESCO and PRO-TRADE. And we feel pretty smart about our ability to do that. And certainly, going into 2023, which we know will likely be a more challenging year, we’re moving into full speed to gain a percentage of market place through a greater visitor experience and a higher price for our visitors. So we’re excited about that. We feel that we are gaining a percentage of place in the market and we are a little ahead of the market place. And we’re going to keep looking to increase that capacity in the future.
Operator
Next is from Ryan Merkel with William Blair.
Ryan Merkel
I sought to maintain the fall in volumes in Q4. Is the slowdown in new housing construction the main driving force?And if so, how many are you tracking right now?
Black Doug
Well, it’s hard for us to say precisely how far it goes. You can get reports on housing starts, etc. below last year. But it is above all in the market for new residential structures where we begin to see the softness. I mean we’re still in smart degrees there, but we see developers being more conservative and our consumers serving developers less busy than before. As discussed, the other markets, however, are very strong. And if we take all of our consumers together, they are busy. And they have arrears for next year. I discussed the ad market. Our allocation facilities team that conducts advertising bids continues to bid more now than last year. And we have smart order books. Commercial is where we may see more going forward, and we have very smart order books for next year on the advertising side. So lately we think that going into 2023, the biggest weakness will be in the new residential structure. And as I mentioned, we plan, with our entire product line and across all of our, all of our hard-to-see paint visitor segments to gain market share to triumph over some of these weaknesses.
Ryan Merkel
As a follow-up, do you see consumer recall in upgrade projects like patios, fireplaces, lighting?Is this something you expect in 23?
Black Doug
Well, there are 2 parts to the customer aspect. There’s retail, the DIY aspect, which is a very small component of our business, but it’s a component of our business. Sales are down, that’s a small % of our business, but you can see they’re down. On the professional side, the professional aspect is solid. People have plans. As you know, our other people who make professionals stay and, the bigger garden paintings they do for the client. They couldn’t, they had backlogs that they haven’t been able to access for a long time, they’re still busy. And so we see an intelligent demand in this aspect of the market, the professional aspect of the market. And if you look at HIRI’s predictions, they keep predicting that next year in 2023, the professional aspect of transformation will be more powerful than the DIY aspect. That gives us some hope, I suppose, that it will remain strong.
Ryan Merkel
It’s useful. It is ok. For me, the last 1, I go back to the gross margin factor. Is there a way to tell this [closing] what you think the price/cost schedule will be at 23?I think I would possibly have said 90 to a hundred base issues in the past, but would it be helpful to have some clarity there as we think about our 2023 models?
Jean Guthrie
We are not yet in a position to give full indications on the 23rd. But the 90 to 100 basic topics we’ve talked about this year. It’s probably a very smart start to next year just because the momentum we have in our style earlier this year has been boosted at least in the next year from that point of view because of the superior value that occurred in the early part of this year.
Operator
Next up is Mike Dahl of RBC Capital Markets.
Mike Dahl
Doug, I just didn’t want to talk much about the volumes, but I wanted to ask a few more questions there. I think you called it a moderate decrease in the new structure. And clearly, the trends of order of the structure have dropped significantly. to another. So, anyway, you can give us a little: I know it’s early, but a little concept of when you’re thinking about moderate declines, pretty much what that means for you?And is it potentially less significant because it goes further?due to the completion stage. So, you may only have a delay, anything that is pleasant. And the most is that when I write your reviews together, it turns out that you’re making plans for a flat market maybe next year initially, but maybe you can comment on that combined volume, what are your first thoughts?
Black Doug
Yes. Well, back, we’re not going to give the full guideline for next year. But when we when I say moderate drops, actually, that could be a diversity where we start with a delay, right? So we’re going to have less — housing starts are — going down next year and so on, we’re 3 to 6 months behind schedule. So, I guess, that will mitigate the effect of site 1 in 2023. And yet the new solution will be down, okay, and we can debate the wording, but we don’t expect to see any other trfinish of yours. . reread in terms of starting etc. , unless we’re going to stop those who put a 3-6 month lag on unit numbers. And then in the other markets, we will see how it goes, but we hope that they will be calm and firm. So I don’t know if it comes back flat or down. We will communicate about it at the end of the year. But all we’re going to do is make sure that we can gain market share and outperform no matter how the market moves in 2023, and we’re confident we can do that. So when I put it all together, we’ll communicate it at the end of the year, where we think the whole year wraps up. But the ones would be the factors. And this delay in the beginning would be more correlated with the completions than with the beginnings. So you can use those numbers to look forward to next year.
Mike Dahl
Yes well. Pretty fair. Who helps. And then my question for now, maybe just about commodity costs and looking to gauge the dynamics there. I think the comment on costs: you’ve noticed steady declines over the last four months. Can you quantify, on the commodity side, the decrease in costs over the past four months?And what does this mean for the existing commodity scenario from one year to the next?
Jean Guthrie
Well, I think it’s a bit inopportune to break it down completely. I mean, what we can say is that value inflation peaked in the first quarter of this year, when we were at around 20%. We were at 17% this quarter, and we left the year only year after year, still in double digits, but particularly below 17%, because we talk about moderation, less than 17%, because we talk about moderation. So in it we will have to see the fourth quarter, however, we will be in the middle and middle of adolescence for the realization of the awards. And much of that offsets last year’s values, but also some of the commodities that stand out. .
Operator
Next is from Keith Hughes of Truist.
Keith Hughes
A previous query about perhaps in the introduction. You said you were still getting increases in value. I think they’re pretty low, but can you tell us about the products that are increasing in value lately?And I’m interested in your comments about PVC about their relationship, if you give any scope to what you’ve noticed so far about it?
Jean Guthrie
So, we know that it will be worth building on some parts of the irrigation. And then we know that it will also be worth building on some chemicals. It is not the basic products, but the high-end products. that they might not have learned the full accumulation of benefits because they haven’t grown that fast. Those would be two examples of things. We will have to see many values enter in the first quarter of next year. So we’re going on to have to see. But I don’t think anybody is talking about our team, no one is talking about constructions as big as the ones we’ve seen this year, but more modest and typical constructions. I mean the value of PVC is. . . I mean, it’s is: I can probably go online and see it better, however, my calculation is that we can also see a minimum of 10% to 15% in PVC. . .
Keith Hughes
And that’s going down right now, is that correct?
Jean Guthrie
Yes, I did.
Operator
The following is from Jeff Stevenson for Loop Capital.
Jeff Stevenson
Congratulations on the beautiful neighborhood. I just wanted to communicate more about the opportunity to liquidate stocks now that curtain availability issues have improved. Do you expect this to happen largely in the fourth quarter or may stock clearance continue early next year?
Jean Guthrie
I think that will move a little bit next year. That is, there is an overall reduction in stocks that will take place in the seasonality of the fourth quarter, so you expect that to happen overall. I think it will increase because we have excess stocks. But we are a very seasonal company. Some of the products that were heavy may not be sold until spring of next year. So there will be, it will probably play out over the next 12 months as we work on it. But we made progress this quarter. We will continue to make progress in the coming quarter. And I think our purpose is to succeed in four,5 stock rotations, and in the short term to go back to four rotations, I don’t think it’s an unrealistic purpose for us to succeed in the next year from that point of view.
Jeff Stevenson
I heard. This is very useful. And then, as you discussed, I just looked to have an update on the progress of siteone. com. Obviously, you saw this as an opportunity to gain percentage with small and medium clients, maybe you were not as much in front as before. ? And I was wondering how successful it has been over the last year and its expectations as we enter 2023 on potential opportunities to win siteone. com.
Black Doug
Oui. Eh, well, it’s one of the teams we use to differentiate ourselves from our competitors. We work on the functionality, ease of use and type of composition of the tool with our customers. We are satisfied with our progress there. We’re seeing a buildup: we’ve doubled the sales activity we’ve had this year, even from a very low base. But we’re excited to use this tool more aggressively in 2023 to gain percentage with smaller customers.
It’s also a wonderful tool for our largest consumers as we integrate with their systems and then they can place orders seamlessly with us. We are now connected to QuickBooks from an accounting perspective, so the numbers pass directly from our invoices to your QuickBooks monetary system. Therefore, we have only made some attractive advances this year, which strongly push us to turn it into a tool that we can use to differentiate ourselves. So we’ve made smart progress this year. 2023, we hope to accelerate, given the team we have and the tool we have now.
Operator
Next is from Andrew Carter with Stifel.
Andre Carter
I wanted to ask you, I don’t know if you could analyze it, but you can give the value of similar structural items compared to the value items of the quarter index. And I’m just wondering, given the way stocks have become so strong, and I understand it’s coming in with a lag, however, PVC urea, I guess other indices are pretty deflationary. Really keep up, since you and your competition have structural considerations?And I guess your competition sticks to you in terms of value.
Jean Guthrie
I don’t think we have the express breakdown through that detail point on the call at this point. I think it’s more of a combined number. From a structural point of view, I think, I don’t think we are, well, I like to think that we can just say that. I think we want to be more competitive in the market. I think, especially with commodities that we should keep, I think the value is particularly high and the value is maintained when the commodity is going down, I don’t think it’s realistic. up and down from this point of view. So, I think the expectation is that it would be: we have to be competitive when it comes to those products of a value. So if the value of the overall market place is going down, we’ll have to be there from that point of view.
Andre Carter
Why, if I’m here, is the $15 million change in the fourth quarter an EBITDA of 25% year-over-year?Anything related to this gap? And he didn’t mention it at all, but did the hurricane, or the Florida hurricane create a short-term disruption or a disruption in the fourth quarter or also opportunities?
Jean Guthrie
I’m not exactly sure what variation you’re talking about. But as far as the hurricane is concerned, it’s likely that. . . I mean, we had to close our retail stores in Florida for about a week. But the overall effect was probably $5 million to $6 million for that. Part of that, in the end, we could catch up, but notoriously, most importantly, none of our, not all of our workers survived the hurricane in moderate conditions and our retail stores took nothing. Injured either, however, we were notoriously taking precautions from a protection perspective.
Black Doug
Oui. Je I think you’re talking about the variation of our estimate for the fourth quarter and what’s going on on the street. And just to remind you that the fourth quarter is one of our weakest sales quarters of the year. Much can take place in the fourth trimester. This can be the effect of weather conditions, gross margin trends and value realization are disproportionate in the fourth, with the lowest sales volume. So no, there is no long-term trend. in our functionality in the fourth trimester. We feel we will finish the year well. We have to be careful with the forecast in terms of the type of weather and margin, etc. And then we’ll enter 2023 in a position of strength to really outperform the market and achieve smart functionality. So there is nothing to read, I think, the differences between our perspectives and what exists.
Operator
There are no more questions at this time. I would like to pass the floor to Doug Black for any final remarks.
Black Doug
It is ok. So thank you all for joining us today. In fact, we appreciate their interest in SiteOne and look to the future to see them back at the end of the year, at the end of the next quarter. I would like to take this opportunity to thank our partners, consumers and suppliers. In fact, it’s exciting to be in business with such a wonderful team, and we’re excited about our future. Thanks a lot.
Operator
This concludes today’s conference. You can disconnect your at this time. Thank you for your participation.