SiteOne Landscape Supply, Inc.

Greetings and welcome to the Site 1 Landscape Supply second quarter 2024 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 the star zero on your telephone keypad. As a reminder, this conference is being recorded. At this time, I would like to hand the call over to John Guthrie, Executive Vice President and Chief Financial Officer. Thank you, sir. You may begin.

Thank you, and good morning, everyone. We issued our second quarter 2024 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. As we announced in early June, we are experiencing softer demand driven by a weak repair and upgrade end market and more persistent commodity price deflation in select products like grass seed and PVC pipe. We now believe that these trends will continue through the full year and will have a negative effect on our organic sales growth and adjusted EBITDA margin. Against these headwinds, we were pleased to achieve solid results for the second quarter with only a 3% organic daily sales decline and adjusted EBITDA that was comparable to last year. We were also pleased to add four high-performing companies to Site 1 during the quarter and one in July, including Devil Mountain, which is an exciting new platform for growth in our nursery product line in the western U.S. These companies have talented teams and strong customer relationships, and they expand our product lines and market presence in their respective markets. Through our commercial and operational initiatives and our acquisition strategy, we continue to build Site 1 for the long term as a world-class market leader. While we manage through the short-term headwinds, we're also building and perfecting our underlying capabilities strengthening our teams, and expanding our branch network to serve our customers with the full range of landscaping products across the US and Canada. With our well-balanced business, strong balance sheet, exceptional teams, improved capabilities, and robust acquisition pipeline, we remain confident in our ability to execute our strategy and create superior value for our stakeholders. I will start today's call with a brief review of our unique market position and our strategy. 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 Salmon 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 710 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 and larger than two through ten combined. Yet we estimate that we only have about a 17 percent share of the very fragmented 25 billion wholesale landscaping 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 excellent balance across our product lines as well as geographically. Our strategy to fill in our product lines across the U.S. and Canada, both organically and through acquisition, further strengthens this balance over time. Overall, our end market mix, broad product portfolio, and 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, consistently deliver superior value to our customers and suppliers. We've come a long way in building SiteOne and executing our strategy, but have more work to do as we develop into a true world-class company. The current challenging market conditions require us to adopt new processes and technologies and to be even more intentional in driving organic growth, improving our productivity, and mastering the details of our business across all our product lines. Accordingly, we remain highly focused on our commercial and operational initiatives to overcome the near-term headwinds, but more importantly, build a long-term competitive advantage. 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 our strong track record of performance and growth over the last eight years with consistent organic and acquisition growth and solid EBITDA margin expansion. From a return on sales perspective, we benefited from extraordinary price realization due to the rapid inflation in 2021 and 2022. In 2023 and now in 2024, we are experiencing headwinds as commodity prices come down. We believe that commodity prices will stabilize as we move into 2025. We also believe that we are consistently outperforming the market in terms of organic growth, and we continue to have ample opportunities to increase our gross margin and improve our operating leverage through our commercial and operational initiatives. As mentioned earlier, the short-term challenges are helping us to accelerate our adoption of new processes and technologies, including digital, which we believe will further improve organic growth and adjusted EBDA margin for the long term. We have now completed 96 acquisitions across all product lines since the start of 2014. Our pipeline of potential deals remains robust, and we expect to continue adding and integrating more new companies this year to support our growth. These companies strengthen Site 1 with excellent talent and new ideas for performance and growth. Given the fragmented nature of our 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, hardscapes, and landscape supplies categories. We are well connected with the best companies in our industry and expect to continue filling in these markets systematically over the next decade. I will now discuss our second quarter highlights as shown on slide eight. We achieved 4% net sales growth in the second quarter with an organic daily sales decline of 3% offset by 8% growth due to acquisitions. Organic sales volume was flat compared to the prior year period as our teams continued to gain market share, offsetting soft and market demand. Overall pricing declined 3% for the quarter, a slight improvement from the 4% decline that we experienced in the first quarter. The price decline continued to be driven by double-digit declines in select commodity products like PVC pipe and grass seed, while the prices of most of our products remained flat with last year. We had previously expected commodity prices to normalize in the second half of the year as we lapped the declines from last year. The PVC pipe has dropped further, and grass seed has declined significantly going into our important fall seed season. Accordingly, we now expect prices to be down approximately 2% to 3% in the second half. We expect sales volume to be flat to slightly down in the second half as we consistently outperform the market. Gross profit increased 4 percent driven by our acquisitions, and our gross margin decreased 10 basis points to 36.1 percent. This was in line with our expectations as the ongoing price deflation in commodity products continues to be a near-term headwind to gross margin. This was partially offset by our gross margin initiatives and a positive impact from acquisitions which operate at a higher gross margin and higher SG&A. Our SG&A as a percent of net sales increased 60 basis points to 24.3% due to our acquisitions. With strong cost control, we achieved modest operating leverage in our base business despite the organic sales decline. With organic sales continuing to be negative, we now expect SG&A as a percent of sales for the full year 2024 to be higher than the prior year, primarily driven by our acquisitions. Adjusted EBDA for the quarter was $210.5 million, which was comparable to the adjusted EBDA for the second quarter of 2023 of $211.2 million. Adjusted EBDA margin for the quarter declined 70 basis points to 14.9% due to negative organic growth, lower gross margin, and only modest SG&A leverage in the base business combined with the dilutive effect of acquisitions. Our acquisitions typically perform at a similar adjusted EBDA margin as the base business. However, with the addition of Pioneer last year with over 150 million in annual sales operating well below our adjusted EBDA margin, we will experience meaningful adjusted EBDA margin dilution from acquisitions this year. We are executing a systematic turnaround plan for Pioneer, and we expect to improve the profitability of this business to match Site 1 over the coming years. In terms of initiatives, we continue to grow sales with our small customers faster than our company average, while also driving growth in our private label brands and improving inbound freight costs through our transportation management system. These initiatives are helping to mitigate the gross margin decline that we are experiencing in 2024 and should contribute to expanding gross margin in the future. We continue to increase our percentage of bilingual branches, now at 60%, and are executing focused Hispanic marketing programs to create awareness among this important customer segment. We're also making great progress in our Salesforce productivity as we leverage our CRM and establish more disciplined revenue-generating habits amongst our over 600 outside sales associates. The continued adoption of MobilePro and DispatchTrack allows us to offer better customer service while also increasing the productivity of our branch staff and delivery fleet. The acquisition of Pioneer has allowed us to gain new functionality in bulk material delivery and in our point-of-sale system, which we plan to develop further and leverage with our existing businesses. During the quarter, we continue to make good progress in growing our digital sales and cultivating regular users of SiteOne.com. The growth in digital sales is encouraging to see as it increases connectivity with our customers, helping us increase market share while allowing our associates to focus more on creating value for our customers and less on transactional activity at the branch. We continue to introduce new functionality for SiteOne.com and are ahead of our goal to double online sales in 2024. Finally, with the near-term headwinds that we've experienced over the last two years, we have branches within Site 1 that are underperforming. We are intensely managing these focus branches to ensure that they have the right teams, the right support, and are executing our best practices to bring their performance up to or above the Site 1 average. We expect to gain a meaningful return on sales lift as a company as we turn these branches around. Taken all together, we are continuing to improve our capability to drive organic growth, increase gross margin, and achieve operating leverage through our initiatives over time. On the acquisition front, as I mentioned, we added four excellent companies to our family during the quarter and one in July, with approximately $155 million in trailing 12-month sales added to Site 1. With an experienced team, broad and deep relationships with the best companies, and a strong balance sheet, and an exceptional reputation, we remain well positioned to grow consistently through acquisitions for many years. In summary, our teams are doing a good job of managing through the near-term headwinds, leveraging our many opportunities for improvement, and building our company for the long term. Now, John will walk you through the quarter in more detail. John?