SiteOne Landscape Supply, Inc.

Greetings and welcome to the Site One Landscape Supply second quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this call is being recorded. I would now like to turn the call over to you, Mr. John Guthrie, Executive Vice President and Chief Financial Officer for Site One Landscape Supply. Thank you. You may begin.

Thank you and good morning, everyone. We issued our second quarter 2022 earnings press release this morning and posted a slide presentation to the investor relations portion of our website at 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.

Thanks, John. Good morning, and thank you for joining us today. We were pleased to continue our positive momentum during the second quarter. with solid growth in sales and profits despite strong comparable growth from last year and spring weather headwinds in our northern markets. Weaker volume in these markets was more than offset by stronger price realization across all markets, coupled with good contribution from acquisitions. We're also very pleased to add seven new high-performing companies to Site 1 over the last four months through acquisition. building our foundation for future performance and growth. As we enter the second half of the year, we expect prices to contribute less to organic daily sales growth and volume to improve versus the first half of the year against weaker comparisons. Taken all together with our strong teams, improved capabilities, and robust acquisition pipeline, we expect to continue gaining market share and achieve another very good year of performance and growth in 2022 while building our company for the future. I will start today's call with a brief overview of our unique market position and our strategy for long-term performance and growth, followed by some highlights from the quarter. John Guthrie will then walk you through our second quarter financial results in more detail and provide an update on our balance sheet and liquidity position. Scott Solomon will discuss our acquisition strategy, and then I will come back to address our latest outlook before taking your questions. As shown on slide four of the earnings presentation, we have grown our footprint to more than 620 branches and four distribution centers across 45 US states and six Canadian provinces. We are the clear industry leader, over five times the size of our nearest competitor, Yet we estimate that we only have about a 15% share of the very fragmented $23 billion wholesale landscaping products distribution market. Accordingly, our future growth opportunity is significant. We have a balanced mix of business with 64% focused on maintenance, repair, and upgrade, 21% focused on new residential construction, and 15% on new commercial and recreational construction. As the only national full product line wholesale distributor in the market, we also have an excellent balance across our product lines, as well as geographically. Our strategy to fill in our product lines across the US and Canada, both organically and through acquisition, strengthens and reinforces this balance over time. Overall, our balanced end market mix, broad product portfolio, and good geographic coverage offer us multiple avenues to grow and more ways to create value for our customers and suppliers while providing important resiliency in software markets. Turning to slide five, our strategy is to leverage the scale, resources, functional talent, and capabilities that we have as the largest company in our industry, all in support of our talented, experienced, and entrepreneurial local teams to consistently deliver more value than our competitors to our customers and suppliers. We have come a long way in building Site 1 and executing our strategy over the last six years, but we are still in the third or fourth inning of our overall development as a truly world-class company. Accordingly, we remain highly focused on our commercial and operational initiatives that further build our capabilities and improve the value that we deliver to customers and suppliers. These initiatives are complemented by our acquisition strategy, which fills in our product portfolio, moves us into new geographic markets, and adds terrific new talent to Site 1. Taken all together, our strategy creates superior value for our shareholders through organic growth, acquisition growth, and EBITDA margin expansion. If you turn to slide six, you can see that we have built a strong track record of performance and growth over the last six years, with consistent organic and acquisition growth and good EBITDA margin expansion. Note that we have done this while investing heavily in our teams and in new systems and technologies to build the foundation for Site 1 and to create superior capabilities for our customers and suppliers. We are still building and investing, and we remain confident in our ability to gain market share and continue driving all three of our value creation levers going forward. You will also note that we have now completed 72 acquisitions across the irrigation, lighting, agronomics, nursery, hardscapes, and landscape supplies product lines during the last eight years, with eight completed so far in 2022. We only acquire well-run companies, and so all these acquisitions were already high-performing companies before joining Site 1. After they join us, we together enjoy the benefits of our combined commercial and operational capabilities. Acquisitions are also a key source of new talent and ideas, and therefore they enhance our competitive advantage as we grow. We are off to a strong start to the year, and our acquisition pipeline remains robust with significant potential to continue growing through acquisition for many years to come. Slide 7 shows the long runway that we have ahead in filling in our product portfolio which we aim to do primarily through acquisition, especially in the nursery, carscapes, and landscape supplies categories. We are well-networked with the best companies in our industry and expect to continue filling in these markets systematically over the next decade. I will now discuss some of our second quarter performance highlights as shown on slide 8. We achieved 12% net sales growth in the second quarter with 8% organic daily sales growth and 4% net sales growth added through acquisition. The organic daily sales growth was driven by 19% price realization, partially offset by an 11% volume decline. With 26% organic daily sales growth in the first half of last year, driven primarily by volume, we expected volume growth to be negative for the first half of this year. In addition, we had less favorable weather in our northern markets this year than last year. which significantly affected our growth in those markets. Accordingly, organic daily sales growth were flat during the quarter in our northern markets, stretching from the northeast across to the Pacific Northwest, including Canada. Gross margin improved 210 basis points to 37.9% for the quarter, as we continued to benefit from proactive inventory management during this high inflation period. For the first half, gross margin is also up 210 basis points to 36.1%. As a reminder, we had previously thought that gross margin would decline this year without the benefits of price realization that we achieved primarily in the third and fourth quarters of last year. We still expect gross margin to be lower in the second half than last year. But given our strong start and the persistent inflation, We now expect modest improvement in gross margin for the full year 2022. On the SG&A side, our operational initiatives and disciplined cost management were offset by lower volumes, higher than expected fuel and wage expense, and our continued investments in marketing, digital, and operational excellence. Our recent acquisitions of hardscapes and landscape supply companies also contributed to the SG&A increase as a percent of sales, as these businesses operate with a higher gross margin and a higher SG&A percentage. Accordingly, SG&A as a percentage of net sales increased by 160 basis points to 22.4%. We expect SG&A leverage to improve in the second half. The combination of good organic sales growth, gross margin improvement, and solid contribution from acquisitions allowed us to deliver adjusted EBDA growth of 16% for the quarter and expand adjusted EBDA margin by 60 basis points to 18.2%. Overall, we remain focused on improving our adjusted EBDA margin as we grow by executing our commercial and operational initiatives and capturing synergies with acquisitions. In terms of our initiatives, we have continued to make good progress this year On the gross margin side, we continue to grow with small customers, drive private label growth, and improve our inbound freight costs through our Transportation Management System, or TMS, initiative. As price realization runs its course this year, we expect these initiatives to allow us to continue driving steady gross margin improvement in the years to come. We also have several initiatives aimed at improving our customer experience while making our teams more efficient. thereby increasing organic growth and improving our SG&A leverage. MobilePro helps automate branch transactions while allowing our associates to serve customers from anywhere on the branch site. We can serve customers quicker and more accurately, especially at our larger nursery and hardscape sites, and our branch associates are more efficient, a win-win. We have recently enhanced the functionality of MobilePro and solve some of the connectivity problems. So our progress in rolling this out across Site 1 has accelerated. By mid-2023, Mobile Pro should be broadly deployed across Site 1. We also are currently rolling out Dispatch Track, which allows us to manage our outbound deliveries to customers and proactively update customers on their delivery status by text. Dispatch Track is a terrific improvement to our customer experience and has set us up to start managing our outbound fleet more efficiently within each MSA. We expect to benefit from these efficiencies in 2023 and beyond. Additionally, we continue to make great progress with SiteOne.com as we have added substantial new functionality and capabilities to the site. With these improvements, we are seeing improved customer adoption and increased activity as we move into the second half of the year. Finally, we are executing numerous other operational excellence initiatives that are focused on enhancing our customer experience and improving our associate efficiency. These projects range from how we answer our phones during the busy parts of the day to how we organize and staff our branches to how we bid and quote commercial projects. We now have a full-time team in each major line of business working with the field to isolate pain points and then develop and implement solutions across the company. In total, we have ample opportunity to improve our customer experience and increase our operating effectiveness and efficiency while expanding gross margin in the years to come. On the acquisition front, we added a record six high-performing companies to our family during the quarter and one more since the quarter closed, bringing the total to eight so far this year. These companies provide us with excellent new talent and capability for growth in their respective markets, while adding approximately $125 million in trailing 12-month sales to Site 1. Our development teams remain very active in 2022, and we expect to continue adding strong companies to Site 1 in the coming months. With an experienced and recently expanded team, broad and deep relationships with the best companies, a strong balance sheet, and an excellent reputation as the acquirer of choice, we remain well positioned to grow consistently through acquisition this year and for many years in the future. In summary, we're executing strongly in the current environment to build our teams, execute our initiatives, deliver value to our customers and suppliers, add new companies, and achieve excellent performance and growth. As we look ahead to the second half, we are confident in our ability to deliver another strong year in 2022. More broadly, as we look ahead to 2023, which will likely be a tougher year, we remain very confident in our capability to navigate through any market conditions and expect to both outperform the market and, with our strong balance sheet, continue to build our company for the future. Now, John will walk you through the quarter in more detail. John?