SiteOne Landscape Supply, Inc.

Greetings and welcome to the Site One Landscape Supply fourth quarter 2023 earnings call. At this time, all participants are in a listen-only mode. A brief 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. It is now my pleasure to introduce your host, John Guthrie, Executive Vice President and Chief Financial Officer. Thank you, sir. You may begin.

Thank you, and good morning, everyone. We issued our fourth quarter and full year 2023 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, 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 meeting 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 finished 2023 with a strong fourth quarter as our teams achieved good sales volume growth, which mostly mitigated commodity product price declines. We achieved a modest increase in adjusted EBITDA with 8% growth in net sales, recovering gross margin, and good SG&A management balanced with the seasonal dilution of recent acquisitions. Overall, 2023 was a tough year where we faced many challenges, including softer markets, operating cost inflation, gross margin normalization, and commodity price deflation. Against these headwinds, we continued to execute our initiatives and work through the challenges to achieve 7% net sales growth, adjusted EBDA, which was just above our guidance range, and record operating cash flow, We were also pleased to add 11 new excellent companies to Site 1 during the year, with a record $320 million in trailing 12-month revenue. All these companies have talented teams and strong customer relationships, and they expand our product lines and market presence in their respective markets. Through the execution of our commercial and operational initiatives, and our acquisition strategy, we continue to build SiteOne as a world-class market leader for the long term, while delivering consistent performance and growth in the near term. As we move into 2024, we are optimistic about our end markets and excited about our stronger teams and improved commercial and operational capabilities. We coupled with our well-balanced business, strong balance sheet, and robust acquisition pipeline, We expect to resume adjusted EBITDA growth in 2024 and make good progress toward our longer-term performance and growth objectives. I will start today's call with a brief overview of our unique market position and our strategy, followed by some highlights from 2023. John Guthrie will then walk you through our fourth quarter and full-year financial results in more detail and provide an update on our balance sheet and liquidity positions. Scott Solomon will discuss our acquisition strategy and then I will come back to address our outlook and guidance for 2024 before taking your questions. As shown on slide four of the earnings presentation, we have grown our footprint to more than 690 branches and four distribution centers across 45 U.S. states and six Canadian provinces. We are the clear industry leader over three times the size of our nearest competitor. yet we estimate that we only have about a 17% share of the very fragmented $25 billion wholesale landscape products distribution market. Accordingly, our long-term growth opportunity remains significant. We have a balanced mix of business with 65% focused on maintenance, repair, and upgrade, 21% focused on new residential construction, and 14% 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, further strengthens this balance over time. Overall, our end market mix broad product portfolio and good geographic coverage offer us multiple avenues to grow and create value for our customers and suppliers, while providing important resiliency in softer 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 superior value to our customers and suppliers. We have come a long way in building Site 1 and executing our strategy, but have more work to do as we develop into a true world-class company. Accordingly, we remain highly focused on our commercial and operational initiatives to further build our capability to create value for all our stakeholders. 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 EBDA margin expansion. If you turn to slide six, you will see our strong track record of performance and growth over the last seven years, with consistent organic and acquisition growth and EBDA margin expansion. 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. 2023 was a reset year for gross margin and adjusted EBDA margin, as we did not repeat the extraordinary price benefits that we received in 2021 and 2022. We are now experiencing commodity price deflation, which causes a temporary negative impact on organic daily sales growth, gross margin, and adjusted EBDA margin. We expect this negative impact to subside in the second half of 2024, and we continue to have significant opportunities to increase our gross margin and improve our operating leverage through our commercial and operating initiatives. Accordingly, we remain confident in our strategy to drive revenue growth, both organically and through acquisition, while expanding our adjusted EBDA margin toward our longer-term objective of 13% to 15%. We now have completed 91 acquisitions across all product lines since the start of 2014. We expanded our development team in 2021, leveraged them to increase acquisition activity in 2022 and completed 11 acquisitions for a record 320 million trailing 12 months acquired sales in 2023. Our pipeline of potential deals remains robust, and we expect to continue adding and integrating more new companies to support our growth. These companies strengthen Site 1 with excellent talent and new ideas for performance and growth. Given the fragmented nature of the industry and our modest market share, we have a significant opportunity 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, hardscape, 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 2023 performance highlights as shown on slide eight. We achieved 7% net sales growth in 2023 with flat organic daily sales and 7% net sales growth added through acquisition. Organic sales volume was flat as our teams continued to gain market share to offset softer markets. Additionally, commodity products like fertilizer, seed, and PVC pipe experienced significant deflation during 2023, which balanced with normal cost increases in our other product lines to yield overall flat pricing for the year. Gross profit increased 5% driven by our acquisitions, and our gross margin decreased 70 basis points to 34.7%. This result was in line with our expectations as we did not repeat the significant price realization benefits achieved in 2021 and 2022. In fact, the rapid price deflation that we experienced during the third quarter of 2023 created an additional near-term headwind to gross margin. Acquisitions benefited gross margin in 2023 as our mix of acquired companies operate with a higher gross margin and higher SG&A. Our SG&A as a percentage of net sales increased 190 basis points to 29.2%. This increase was driven by our acquisitions and by the combination of flat organic sales, operating cost inflation, and continued investment in our initiatives in digital and operational excellence. The timing of our largest acquisition, Pioneer Landscaping Centers, during the second half of the year also contributed to the increase in SG&A as a percent of net sales. Going forward, we expect to gain significant SG&A leverage as we continue to grow. Flat organic growth and a reset in gross margin led to a 12 percent decline in our adjusted EBITDA for the full year. Adjusted EBDA margin declined 210 basis points to 9.5%. We are encouraged to have this reset year behind us and look forward to driving continued improvement in adjusted EBDA margin in 2024 and making steady progress toward our long-term goal of 13% to 15%. In terms of initiatives, we continue to grow our small customers faster than our average. while also driving growth in our private label brands and improving our inbound freight costs through our transportation management system. These initiatives helped to mitigate the gross margin decline in 2023 and will contribute to expanding gross margin in the future. During the year, we enhanced our partners program and were able to increase our membership by almost 50% to approximately 37,000 customers. Most of the new members are small to mid-sized customers. Partners Program customers grow faster than non-members as they benefit from the full Site 1 value proposition. We increased our percentage of bilingual branches from 56% to 58% in 2023 and are continuing to focus on Hispanic marketing to create awareness among this important customer segment. We're making great progress in our Salesforce productivity as we leverage our CRM and establish more disciplined revenue-generating habits among our over 600 outside sales associates. The continued rollout of MobilePro and DispatchTrack allows us to offer better customer service while also increasing the productivity of our branch staff and delivery fleet. Both capabilities are now deployed company-wide, and we continue to see usage and benefit increase across the company. For example, DispatchTrack is now used for over 93% of all customer deliveries across SiteOne. We made good progress in growing our digital sales and cultivating regular users of SiteOne.com in 2023, which helps us increase market share while allowing our associates to focus more on creating value for our customers and less on transactional activity. And finally, we achieved meaningful benefits from our operational excellence teams who are helping to systematically spread best practices in each product line of business across Site 1 to drive value for our customers, suppliers, and company. For example, we significantly improved the procurement and inventory management of our nursery line of business in 2023, leading to low double-digit sales growth and higher inventory turns. We believe that there are significant opportunities to improve our hardscapes and landscape supplies lines of business in a similar fashion. Taken all together, we are continuing to improve our capability to drive organic growth, increase gross margin, and achieve operating leverage through our initiatives. On the acquisition front, as I mentioned, we added 11 excellent companies to our family in 2023. with over $320 million in 12-month sales added to Site 1. With an experienced team, broad and deep relationships with the best companies, a strong balance sheet, and an exceptional reputation, we remain well-positioned to grow consistently through acquisition for many years. In summary, our teams did a good job of managing through the many challenges in 2023, adjusting to a lower growth environment, yet continuing to gain momentum on many of our key initiatives to drive long-term growth and profitability. We are excited to move into 2024 with increased capabilities to add more value to our customers and suppliers, to grow faster than the market, and to drive attractive performance and growth. Now, John will walk you through the quarter in more detail. John?