SiteOne Landscape Supply, Inc.

Greetings and welcome to the SiteOne Landscape Supply second quarter 2020 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, John Guthrie, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you and good morning, everyone. We issued our second quarter 2020 earnings press release this morning and posted a slide presentation to the investor relations portion of our website, investors.site1.com. I'm joined today by Doug Black, our Chairman and Chief Executive Officer, and Scott Salmon, Executive Vice President, Strategy and Development. Before we begin, I would like to remind everyone that today's press release, slide presentation, and the statements made during the call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Such risks and uncertainties include the factors set forth in the earnings release and in our filings with the Securities and Exchange Commission. Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. A reconciliation of these measures can be found in our earnings release and in the slide presentation. I would now like to turn the call over to Doug Black.

Thank you, John. Good morning and thank you for joining us today. Overall, we are very pleased with our results for the quarter and for the year thus far. I'm so proud of our tremendous Site 1 team as they have continued to deliver outstanding results for all our stakeholders in the face of extraordinary challenges related to COVID-19. Our strong culture of teamwork, service, and commitment to excellence is shining during this time of crisis, and we are gaining strength versus our competition as we build our capabilities and execute our strategy. Accordingly, we are well positioned to deliver outstanding performance and growth for the long term and achieve our vision of excellence for our associates, customers, suppliers, shareholders, and communities. I will start the call by updating you on development since our first quarter call and discussing our actions to successfully navigate the rest of the year and beyond. John Guthrie will then walk you through our second quarter financial results in more detail and provide additional information on our balance sheet and liquidity position. Scott Solomon will discuss our acquisition strategy and then I will come back and review some of the trends that we are seeing in our end markets and address our outlook before taking your questions. Before I talk about developments and actions, let me first say that our thoughts and prayers continue to go out to all those who have been impacted by COVID-19. With the recent surge in positive cases, we are well aware that this pandemic is far from over and is still resulting in tragic loss of life, social isolation and significant economic hardship for many. While we have certainly not escaped the many challenges associated with this pandemic, we feel very fortunate to be here at Site One. We are a financially strong industry leader, and as it turns out, our industry is benefiting from the renewed focus on the home due to COVID-19. As a reminder, residential maintenance, repair and upgrade, and new construction comprise about two-thirds of the industry and our business. Despite the drag created by high unemployment, the broad social distancing requirements designed to stop the spreading of COVID-19 have spurred homeowners to invest in their homes and, in particular, in their outdoor living spaces. At the same time, new residential construction has recovered strongly with low interest rates and increased demand from young couples and families who are seeking a home. All in all, We have been pleasantly surprised by the strong and seemingly sustained resurgence of demand in the residential market. Further, I cannot tell you how proud I am of the Site 1 team. As I mentioned during our last call, our team adapted very quickly in March and April and stepped up to achieve our four near-term operational goals, which were to keep everyone safe in a COVID-19 environment, serve our customers better than anyone else, Manage our business to a lower demand and take care of each other along the way. The stress of this challenge soon transformed into the stress of serving customers during a very busy and compressed spring season in May and June. To add to this challenge, some of our key suppliers, including our irrigation suppliers, have struggled to keep up with market demand as COVID-19 affected their operations in Mexico, as well as their global supply chains for key components. This has caused our supply chain associates and branch teams to work overtime to ensure that our customers are served well. Taken all together, it has been a tough year, but the SiteOne team has worked stronger together with our suppliers and customers to overcome all challenges and deliver excellent results. I have never felt better about our team and our ability to compete in the landscape industry and I do right now. Slide five summarizes our actions, trends and highlights from the second quarter. As COVID-19 continues spreading in our communities, we keep evolving our operations in order to operate safely and successfully. In addition to implementing the CDC guidelines, we have added screening processes in our branches designed to prevent associates who are sick from coming to work. We continue to allow all associates who are sick to stay home and be paid without using their paid time off or PTO. We have also required all associates to wear face coverings in our branches and offices to better protect each other and our customers. Finally, we continue to restrict travel, meetings, events, supplier visits, and we continue to have our field support associates work from home. In summary, we are now well-grooved into operating safely in a COVID-19 environment while also adopting new measures that can help to prevent the spreading of this virus. As I mentioned, our markets have recovered across the country with the lifting of stay-at-home restrictions. Additionally, the strong outdoor living demand has added to our customer backlogs and has enabled us to achieve strong growth with our small and mid-sized customers. At this point, the market is now being constrained by the lack of labor availability to our customers and by supplier product shortages. The most severe product shortages are in the irrigation product line. Fortunately, our supply chain team proactively anticipated shortages and leveraged our distribution centers to mitigate the situation as much as possible. Once again, our size and scale, coupled with our three large distribution centers and excellent supply chain team provided important competitive advantage to Site 1 during a tough time. Our suppliers are working very hard to recover and meet the current market demand, and we expect the supply situation to improve significantly over the next two months. Taking May and June together, we achieved double-digit organic daily sales growth. When combined with the negative 8% organic daily sales growth in April, resulted in 3% organic daily sales growth for the quarter and 4% year-to-date. We have seen strong organic daily sales growth continue in July with positive growth across all regions and all product categories. With the solid organic sales growth, we are seeing good improvement in gross margin as we continue to execute our operational initiatives in supply chain, category management, and pricing. During the quarter, we benefited from lower freight costs and excellent growth in our private label products. Additionally, our recent acquisitions operate at a higher gross margin than the base business, which contributed to our improvement. On the SD&A side, we achieved excellent operating leverage as we tightly managed our business, avoided discretionary travel and expenses, and benefited from the COVID-19-related trends, such as lower health care costs. Keep in mind that we continue to invest in our operational initiatives during the second quarter, including investments in SiteOne.com, MobilePro, and our new Transportation Management System, or TMS. As I mentioned during the last call, MobilePro has been extremely useful in facilitating social distancing at our branches and getting our customers in and out of our branches faster. We have also seen a strong pickup in the usage of SiteOne.com which further improves our safe interaction with our customers. Our implementation of TMS was slowed due to COVID-19 travel restrictions, but the benefit from our prior work was evident in our favorable freight cost outcome in the quarter and for the year. Overall, I was very pleased that our team was able to achieve strong leverage despite these ongoing investments and the fact that recent acquisitions operate at a higher SDNA than our base business. Our acquisitions performed very well during the second quarter and for the first half of the year, contributing strongly to our adjusted EBDA growth and margin improvement. Many of our recent acquisitions have been in hardscapes and bulk landscape supplies as we fill in our capabilities in these product categories across the U.S. and Canada. These companies have benefited from the strong outdoor living trends. Lastly, we achieved record cash flow in the quarter with strong profits combined with good working capital management. Our supply chain strategy is focused not only on freight and logistics cost reduction, but also on inventory productivity. During the first half of the year, we have continued to improve our stock terms as we've reduced slow-moving inventory and maximized the utilization of our distribution centers. That said, part of our working capital gain was due to product shortages, which will hopefully be reversed in the third quarter. Overall, we are pleased with our fundamental underlying improvement in inventory productivity so far this year. Our strong cash flow resulted in a meaningful improvement in our liquidity and a good reduction in our net debt to adjusted EBDA ratio, moving from 3.3 times in the prior year period the 2.2 times at the end of the quarter. Maintaining a strong balance sheet is critical to our strategy to invest in our capabilities and grow through acquisitions. In terms of acquisitions, we had suspended our activities in April in order to better understand the impacts of COVID-19 and the direction of the economy and our end markets. There is still a considerable amount of uncertainty in the second half of 2020 and going into 2021. Some of the key questions are how fast will COVID-19 continue to spread? When will a proven vaccine be available? And will we enter into an economic recession in 2021? That said, we do take comfort in the current positive trends in residential, and we believe that our end market risk is manageable in the near to midterm. Accordingly, we have made the decision to resume our acquisition activities. Scott Thalman and the development team have done a terrific job of maintaining discussions with potential targets, and we anticipate being able to close additional deals in the coming months while continuing to build our backlog of excellent companies who may wish to join Site 1 in 2021 and beyond. To summarize, I'm very proud of how our team has performed in this extraordinary environment to keep everyone safe, serve and support our customers, manage our business, and take care of each other along the way. We still have a long way to go in building the full set of capabilities at Site 1 and achieving consistent excellence for all our stakeholders. However, we have made great progress in building our company this year, even as we have battled the short-term challenges. We are closely monitoring the trends and adjusting as necessary to perform in the short term while continuing to build our company of excellence for the long term. Now, John will walk you through the quarter in more detail. John?