SiteOne Landscape Supply, Inc.

Greetings and welcome to Site One Landscape Supply, Inc. Third 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, Mr. John Guthrie, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you, and good morning, everyone. We issued our third quarter 2020 earnings press release this morning and posted a slide presentation to the investor relations portion of our website at investors.site1.com. I am 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. We're very pleased with our results for the quarter and year to date. I'm so proud of our tremendous team at Site 1 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. Additionally, we are benefiting from the consumer's renewed focus on the home due to COVID-19 restrictions. coupled with homeowners' continued desire to enjoy their outdoor living spaces, which has been a trend over the last decade. SiteOne is well positioned to take advantage of these trends in the medium term while building our company of excellence for all stakeholders and delivering outstanding performance and growth for the long term. I will start by revisiting our industry position and our strategy for long-term performance and growth followed by a brief update on recent developments, highlights from the third quarter, and actions we have taken since our last call. John Guthrie will then walk you through our third quarter financial results in more detail and provide additional information on our balance sheet and liquidity position. Scott Salmon 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. As we continue to navigate through the operating challenges associated with COVID-19, we feel very fortunate to be here at Site 1. As you can see from slides 4 and 5 in our investor presentation, we are a financially strong industry leader and primary consolidator in a very fragmented and attractive market. The landscaping products distribution market has a very nice balance between maintenance, new construction, and Repair and Upgrade with an attractive construction sector mix of approximately two-thirds residential and the remainder divided between commercial and recreational facilities. As you turn to slide six, our strategy is to combine the financial strength, talent, resources and technology capabilities of a large company with the fast, flexible and entrepreneurial capabilities of our local businesses to deliver superior value to our customers and our suppliers while providing better growth opportunities for our associates. We are building the capability to provide a full line of landscaping products in all our markets, which makes us very unique in our industry and gives us more ways to help our customers win. We complement our strategy with six commercial and operational initiatives, which we believe will allow us to steadily improve our performance for all stakeholders. Finally, given the fragmented nature of our industry with over 1,000 other distributors, we are building SiteOne by adding the best local and regional companies to our team through acquisition, filling in our product lines, expanding our reach, and adding terrific talent along the way. Overall, our strategy is designed to deliver strong organic growth, expanded EBITDA margin, and growth through acquisition. While we have made great progress over the past five years, I would remind you that we are only in the third or fourth inning of building our company and developing our full capabilities to achieve excellence for our stakeholders. For example, slide seven shows that we have a full product line offering in only 21% of our market. That is why you see us continuing to invest in the good times and the challenging times, both in building our internal capabilities and in adding terrific companies to Site 1 to expand and strengthen our full product line position. I would also like to emphasize that although we are seeing strong end market demand, COVID-19 is still spreading in our communities and so we must continue to keep the safety and welfare of our associates, customers and suppliers as our top priority. Our execution of the CDC guidelines, wearing a face covering, and Daily Associates Screenings are now well-grooved. We also continue to take care of our associates by allowing them to stay home if they are sick without using their paid time off or PTO. In August, we took this a step further and provided a one-time special bonus for all frontline associates as a way of thanking them for the extra burden that they have carried while providing exceptional service and support to our customers during the spring and summer. This was a $1.8 million investment in them. Finally, we continue to have our field support associates work from home and limit nonessential air travel in order to keep our exposure to COVID-19 as low as possible. I would like to thank every one of our Site 1 associates for their tremendous commitment to our customers and our company this year and for producing terrific results. Slide 8 summarizes the highlights from the third quarter. The market recovery that we reported during the second quarter continued into the third quarter and through October so far. The increase in the number of families who are working and or attending school from home due to COVID-19 has spurred additional investments in outdoor living. Concurrently, the new residential construction market has fully recovered with low interest rates and a renewed focus on home ownership. These factors, along with our internal growth initiatives, helped us to achieve our first double-digit organic daily sales growth quarter since going public, on top of the 7% organic daily sales growth that we had in the third quarter of 2019. Additionally, the growth in the third quarter was very broad-based, both geographically and across product categories. At this point, the market is now being constrained by the lack of labor availability for our customers, and by select supplier product shortages, though our product supply situation has improved significantly in October. We also continued to drive good improvements in gross margins during the third quarter with contributions from our supply chain, category management, and pricing initiatives. We were able to continue lowering freight costs through our new transportation management system, and we benefited from excellent private label product growth. Additionally, our recent acquisition of Hardscape and Nursery companies, which operate at a higher gross margin than the base business, also contributed to our gross margin improvement. On the SG&A side, we once again achieved excellent operating leverage as we tightly managed our business, avoided discretionary travel and expenses, and benefited from COVID-19-related trends such as lower healthcare costs. We achieved this leverage even as we continue to invest in MobilePro, SiteOne.com, and TMS, all of which are increasing our capability to serve customers better, grow organically, and achieve better operating leverage in the future. I would like to highlight that we have achieved an increase in our net promoter score this year from 71 in December of 2019 to 74 currently. Our NPS was in the low 60s three years ago. This increase reflects our continuous improvement in providing consistent and excellent service to our customers of all sizes and segments. The combination of strong organic daily sales growth, good gross margin improvement, and solid SG&A leverage allowed us to deliver 25% adjusted EBDA growth and expand our adjusted EBDA margin by 90 basis points. Year-to-date, we have also expanded EBDA margin by 90 basis points. and are making great progress toward a mid-term milestone of 10%. I am very pleased that we were able to restart our M&A program during the third quarter, picking up with deals that we had put on hold back in April. Over the last three months, we were able to add four market-leading companies focused on hardscapes and bulk landscape supplies. Like Site 1, these companies are benefiting from the powerful short- and long-term trends in outdoor living. As we mentioned during our last call, our acquisition pipeline is very active and we expect to continue closing deals in 2020 while carrying a healthy backlog of potential deals into 2021. Very importantly, the companies that we added last year and earlier this year are performing well and contributing to our strong results. We were also pleased to execute our equity offering during the third quarter in order to strategically reduce our net debt to adjusted EBDA ratio from the two to three times range down to the one to two times range. The uncertainty brought on by COVID-19 along with the continued robust pipeline of acquisitions spurred us to make this move in order to ensure that we could continue to invest in acquisitions without leverage constraints during an economic downturn. This equity offering, along with our outstanding year-to-date operating cash flow, has reduced our net debt to adjusted EBITDA ratio to 0.8 times at the end of the third quarter from 2.9 times at the end of the prior year period. We are now set up with maximum flexibility to execute our strategy in good times and tougher times. Lastly, we were very pleased to recently publish our first Site 1 Responsibility Report on Site1.com, which outlines all of the terrific work that our teams do to ensure that Site 1 is a great place to work for all associates and a good neighbor in our communities. Environmental, social, and governance best practices are already a part of our DNA, and we are happy to introduce our programs, practices, and metrics to communicate and benchmark our actions and results going forward. To summarize, I am very proud of how our team has performed in this extraordinary environment to keep everyone safe, serve and support our customers, deliver outstanding financial results and take care of each other all 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 our stakeholders. However, we are having a great year and have made significant progress in building our company in 2020, even as we have battled the short-term operating challenges associated with COVID-19. We remain excited about both the short- and long-term opportunities to drive excellent performance and growth with our strong team and winning strategy. Now, John will walk you through the quarter in more detail. John?