SiteOne Landscape Supply, Inc. (SITE) Earnings Call Transcript & Summary

Good morning, and thanks for joining us at our 2021 RBC Global Industrials Conference. We are still virtual this year, but hope to see all of you again soon. We're thankful to be joined this morning by Doug Black, Chairman and CEO of SiteOne; and John Guthrie, CFO of SiteOne. I'm going to turn it over to Doug for a couple of quick opening comments, and then I'll moderate Q&A after that. A reminder to the audience, please feel free to participate via the Q&A chat function. I'll be happy to ask any questions that come through. Thanks. And over to you, Doug.

Great. Thanks, Michael. And as Michael introduced, Doug Black with SiteOne; joined here with John Guthrie, our CFO. SiteOne, we're the largest and only national wholesale distributor in the landscaping industry. We've got a terrific position. We're #1 in the industry. We're 5x larger than #2, and we only have about 13% market share. So it's a fragmented space, and it's one where we're already national and have a great footprint, but we're growing our business both organically and through acquisition to build a great company. We're a full-line provider. Landscape industry has typically been in verticals: agronomics, which is fertilizer; control products; irrigation products; hardscapes, which is pavers and walls, et cetera; nursery products; and then landscape supplies. Typically, distributors are focused in each one of those sectors, and we're broadly across all of those product lines. And so that makes us unique. The fact that we're national makes us unique. And our strategy is to be the best of a large company, but the best of a local company. We run our areas very decentralized, and they are local. And with the landscapers, there's about 0.5 million landscapers, and landscapers tend to be small and very local, but then we have the benefits of a big company. We're now on $3 billion. We've been growing quite rapidly both organically and through acquisition. And so as a larger, fast-growing company with a strong balance sheet, we can bring tools and technologies and resources and products to bear for our customers that our local competitors have a hard time matching. So our space, COVID has been a big challenge for us over the last couple of years in terms of keeping everybody safe and, of course, doing business in the COVID environment. But fortunately, for our industry, it's been a big benefit of people staying at home. The trends have been in our favor, and so we've had a good couple of years in 2020 and 2021. And I think, more importantly, we're still continuing to build our company, build our capabilities and make sure that for the long term, SiteOne is going to be a great company and a major player and a grower for the long term in this terrific segment. So with that as a quick intro, Mike, I guess, we'll get into some Q&A.

Great. Thanks for that, Doug.

Yes. So I guess let's just pick up on the COVID dynamics. It's obviously unfortunate the way that this has unfolded and the challenges for everyone and yourselves in terms of keeping the team safe. But to your point, it's been a tremendous boon to the top and bottom line as people are focused more on home. I think your organic daily sales on a trailing basis might be up close to 20% on a trailing 12-month basis, really exceptional growth. I know on the last call, you mentioned that June and July had remained in kind of a low double-digit growth rate. Your guide was a little bit more conservative as you get later in the year. How are you thinking about that? And any update to what you're seeing kind of post quarter on daily organic and as we've trended through and into later in the third quarter?

Yes. Well, we really -- we don't want to give another update. We'll wait until our earnings call to do that. But as you mentioned, very high comps against the weaker comps earlier in the year. And as we mentioned in our call for the second quarter, what was really interesting to us is how those would hold up against really strong comps. And so we saw last year, the sales really started to recover in June and July. And we did see those -- in June and July this year, we saw a double-digit -- low double-digit comps against those. So that gave us a good indicator of how we're going to perform against the stronger comps in the second half of the year. I would say, and we pointed this out, that the fourth quarter of last year was particularly strong. And so that's reflected in our -- what you might think is more conservative guidance, but that's -- the growth in the fourth quarter was, I think, it was 19% last year versus 11% in the third quarter. And so we don't expect to continue the current comps or the comps that we saw in June and July in that fourth quarter. But we feel good about the second half. And the trends are still, I mean, strong, having double-digit against last year's double-digit comps. The backlogs, as we mentioned, strong with our suppliers. They have a shortage of labor. So they're having a hard time getting to the work, which means that the work is being pushed into 2022. So we not only feel good about the second half, but we, as we mentioned on the call, are feeling good about 2022 as well because you've got work that's just being pushed, both commercial and residential, into the first and second quarter of next year. So all things together looks like it will be a great year for us this year.

Good. Okay. And I know that in your guidance and in your business, there's always some element of weather dynamics that can push around sales from a quarter or for a couple of quarters. I think some of that was contemplated potentially in the fourth quarter. Third quarter, we have had a couple of major storm events across much of the Eastern part of the country. We've also had a variety of events out West as well. How should we be thinking about potential for weather impacts, a, in terms of, first, any potential disruptions, but then in the past, when you've seen major storms, particularly when there's this level of flooding in a lot of areas, presumably, there's a need for additional landscaping to come in and during the rebuild process. How does that lag typically play out?

Yes, John, do you want to take that one?

Sure, sure. So the dynamic would be if there was a major storm that went, it can -- generally, people are unable to work or heavy rains for an extended period of time, especially on the construction side of the business, that can negatively impact the ability of contractors to get out and work. Long term, as you said, it can have a positive effect. I would say, for instance, as an example, the winter storm in Texas shut down business for several weeks as a result of that. But ultimately, as an example, there was a lot of landscaping damage and over time, probably a positive overall to the business there in Texas. With regards to kind of comps year-over-year, third quarter last year was slightly more rain, but I -- but we didn't have a big hurricane, I would say, that hit the metropolis. This year, probably so far, while in certain markets, it's been very, very disruptive, especially in kind of the Northeast, I would say, it's -- it hasn't had a huge impact on our businesses and won't be the story so far. But the real caution is, as Doug mentioned, Q4 and really the early start to the weather -- early start -- the slow start to the winter last year versus kind of a more of a normal year.

Right, right. Okay, got it. That is helpful. And then the other big topic across virtually everything right now is price cost. Obviously, as a distributor, you benefit from an inflationary environment over time, but it can be -- there can be some volatility along the way. You've done, seems like, a very efficient job of passing through inflationary pressures so far this year. I think your guide right now is for 6% to 8%, which went up compared to your prior guide. We've continued to see inflation pick up across a number of things that I think would impact your business. How would you characterize what you've seen over the past month or a couple of months coming into or out of the second quarter into the third quarter relative to what you had expected?

I think I would characterize this as probably a very inflationary market. Certainly, over the last 10 to 20 years, probably the most inflationary market we've seen. No, we haven't seen as aggressive as maybe the lumber industry in building products. But certainly, we've seen a consistent increase in prices, whereas, I would say, historically, for most of our business, you would see price increases set in the first quarter and then you would kind of fold all year, maybe one other one. And certainly, we've seen more inflation this year and extending out further with regards to it. So that's why we increased our forecast at the second quarter, and prices have continued to increase.

In terms of dealing with that, Michael, our teams have done a great job. Our industry tends to be pretty efficient at cycling those through. And then keep in mind that demand is high and capacity is short on our customer side. So certainly, that's an environment that's conducive for them to pass-through price increases to the end customer. So, so far, as we have mentioned, after the second quarter, we've seen a nice efficient move-through of those prices. And as you said, it's benefiting us on the organic sales side, obviously. But we've had typical challenges in passing those through. But all in all, we've done a good job with that.

Okay. Good. And then on the actual -- some of the constraints, I mean, have you -- how would you characterize the material constraints? I know you talked about some of the labor constraints. Are you seeing any issues in terms, from a material standpoint, in terms of your ability to actually serve the customer?

Yes. So there are constraints right across the product lines. But I would say, I would call them manageable from our end. We do have the 3 large DCs. We have a great supply chain team. It's been a strength of SiteOne. This year, it's caused us to gain market share because we've been able to outperform our competitors in terms of product availability. And so I think, again, things are getting pushed from a customer standpoint kind of into next year from a -- because they can't handle the demand. But in terms of us keeping up with our customers and supplying them with the products that they need, we've been -- it's been manageable. We've done a pretty good job. I know some of the other trades have been a lot worse. And so we haven't seen constraints that have caused us to delay a job 6 months and things that are happening in some of the other trades. So I would call it challenging but manageable. Certainly, it's a strength of SiteOne to be able to manage through supply shortages, and we've done a great job in getting through that challenge this year.

Okay. And I guess, more specifically, when we think about the impacts of Hurricane Ida, it does seem to have disrupted certain parts of the supply chain really across a few verticals, one of them, and this is also a question from the audience, one of those being fertilizer manufacturers. Are you seeing any supply issues pop up that are incremental post Hurricane IDA specific to fertilizers? Or what are your thoughts there?

I think it's still a little too early to assess that. From our standpoint, right now, haven't heard -- there are small disruptions, but haven't heard of anything that we would think would be significant to us being able to supply our customers, maybe a little bit longer lead times.

Got it. Okay. And the other question around kind of supply constraints, I guess, goes to more back to the labor side. We're now seeing some of the extended unemployment benefits lapse and so some stimulus is coming off. And there's been speculation that this would kind of help ease some of the labor supply challenges. What are you hearing from the field in terms of whether or not your teams think that this will kind of have -- be able to help your customers in a way that allow us to get through some of the backlog of work?

Yes. So it's anecdotal, Michael, but it does seem in those states because a lot of the states had already cut off the benefits. And so -- and some are rolling off today. It does seem in those states where they cut off the benefits that the labor constraints are a bit better. Still tight labor market. And we're working hard, obviously, to attract people into the landscaping industry. But we certainly are glad that those benefits are rolling out. We think it's appropriate because there's a high demand for jobs and people to get into jobs in our industry and other industries in the construction sector. So it will help. Dramatically affect volumes? No, we don't think so, but every little bit helps.

Okay. Got it. Okay, that's helpful. So you touched on how you've kind of managed through this, and some of your core strengths revolve around really effectively managing through some of these challenging environments to begin with, which has enabled you to take share. I'm pretty sure I've asked you this in the past, and it's hard to quantify at any given point in time, but this really does seem like the prime type of environment for your organic share gain initiatives to take hold. Do you have any way of quantifying what your share is kind of year-to-date versus what you've been taking in the past couple of years?

Yes. No, I mean it's -- we can't pin it down with a fine 2 decimals, et cetera, because the tracking in this industry is very difficult. But we think we're picking up a couple of hundred basis points of our growth is share gain, right? And obviously, if you're growing 20%, that's -- it's a small part of it. But if you're growing 5% and spot can become 7%, then that's kind of our vision. So we do think we're picking up a meaningful amount of share. And as I mentioned, we're 13% market share overall. That number is going to continue to go up as we gain market share organically, but also as we acquire companies. And so we have a long way to go. We see ourselves eventually being a 30%, 40% share player in this industry. And so plenty of market share to pick up both organically and through acquisition. But if we had to quantify it, that's -- we would quantify it as a couple of hundred basis points of our growth this year.

Okay. That's helpful. And I know -- I mean we're definitely going to touch on M&A, but your organic growth initiatives, I mean, there are a variety of initiatives that you've got, one of them being kind of product category expansion and filling some of the geographies. Could you give us an update on that? One of the things that I was kind of struck by when I was looking through some presentations was, I think, how you've outlined your product line over the past couple of years. It seems like you've got the full product line in about 20% of your markets. And that number has actually held pretty steady for a few years, which to me suggests that that's still -- you're still early in some of those -- some of the initiatives there. But how should we really be thinking about that part and the pace of expansion in some of your existing markets?

Yes. So we've got 2 challenges. One is where we have a full product line continuing to gain share in those, become the #1 player in each of those product lines in the market. And then we have markets where we're missing product lines. And really, the product lines that we're missing are either nursery or hardscapes because there are different types of facilities that are needed, different types of companies, quite frankly, that are needed to serve those product lines versus our traditional irrigation, agronomics, lighting, landscape supplies. So our strategy is focused on growing existing positions through our product initiatives, be that private label, proprietary products on the agronomic side, through our marketing and sales initiatives, through our customer excellence initiatives. We have lots of initiatives with MobilePro and siteone.com that are focused on growing existing positions in existing markets. And then really, it's our acquisition program that fills in the markets that we're missing with nursery and hardscapes because instead of going into a market and greenfield in a nursery location where we don't have a nursery presence, we could do that, but it's very risky. And it's tough to get the customers. It's tough on the supply chain side because a lot of local -- a lot of procurement for nursery and hardscapes are local. So you have local relationships. So being a sizable player, you think it'll help you, and it does help, but it's better to buy that well-run market leader in the market in hardscapes and nursery and then build off of that platform. So that's what we're doing, and they're available, and we're patient on that side. And so you see in our acquisition strategy, we're going to be filling in those markets over time. It does move the needle slowly, but you'll see that 25% go to 30%, go to 35%, go to 40%. And over time, obviously, we want 100% of our markets to be filled in with nursery and hardscapes. And that drives a lot of our acquisition growth is filling in, in those markets. And the thing that's the beauty of that is we get a fully developed team, we get a great business, we get a great position to start from. And then that company leads us forward in that local market on an organic basis to take market share. And so that's why it's so critical that we're patient, and we wait for the best companies to be for sale. We're not going to buy a fixer-upper in a market. We're going to buy the best one, and then we're going to build off of that. So that's our strategy. And you'll see that in action both in our organic numbers, but also in the acquisition that we do.

Okay. Got it. And your pace of M&A has definitely picked up over the past, I guess, now it's about 12 months coming out of summer of last year. What is it that you think is driving the acceleration? Is it your team? Or is it something in terms of the market and catalysts from a seller standpoint that are leading some of these companies to engage with you more or cross the finish line with you?

Well, we don't really see it. We did pause last year -- was it last year or the year before? I can't remember. Yes, it was last year that we paused our program for COVID, right? There was a lot of uncertainty. And sellers and us, as buyers, it was not a good time to be bringing on companies. And so I think what you saw is, once we resumed, that we had a lot of companies on hold that we just -- that we easily closed and we had the deal agreed, and we picked right back up. So since then, it's been a pretty steady pace. Actually, we are having a lot of conversations. It's interesting COVID has had an effect on some sellers that it's gotten them to kind of speed up their process because they're having a good year and they realize the risk. But with others, they're having a good year. Some is delayed. So the effect has been, I think, balanced in terms of the influence on sellers. Everybody is waiting to see what's going to go on from a tax standpoint, but there's so much uncertainty there that, that really hasn't been a driver. So I think the drivers of timing are the same as they've always been. It's deal by deal. Individual owners, they all have different reasons for selling. We get to know them well, and we get close to them. And so when they're ready to sell, we're there. But we're also very patient. We don't try to speed them up artificially. We don't use price as an accelerator. We're patient, long-term strategic buyers. So I would call the deal flow and the conversations actually pretty steady over the last 18 months.

Okay. And I know there -- I mean there are -- obviously, there's not a ton of insight yet as to what may -- what some of the specifics that get across in any potential package maybe with respect to tax consequences. But do you think -- I mean when you're having these conversations or your teams are having these conversations, do you see that as historically a large driver of seller decisions? Or does that still tend to be a little secondary compared to just is it the right time for me and what I want to do with my life for legacy?

Right. It tends to be secondary. The only time -- and I forget the year, there was a year when I was back at Oldcastle, we were doing deals, and it was locked down that the taxes were going to go up January 1. Capital gains were going up. That certainty drove a lot of people closing before the end of the year. So in my professional opinion in doing deals for 25 years, there has to be a certain -- there has to be a line in the sand and an increase coming that will influence people. And I guess if it was a decrease, it would influence people to wait as well. But until the negotiations are done and the marker is down, everybody assumes that gridlock will prevail. So...

It could be an interesting fourth quarter for you guys.

Yes, exactly.

So we've got a few minutes left. I wanted to shift gears and talk about one of the more recent nuggets that you dropped on the last call was just the long-term EBITDA margin target, which obviously you're well on track to exceed your -- comfortably exceed your 10% prior EBITDA margin goal this year. How -- I know you're going to roll out a more formal target later in the year, but how should we be thinking about the kind of buckets for further improvement and whether it's on gross margin or SG&A? And just realistically, where can you really drive some of those margin targets?

Yes. So I'll talk overall and then maybe throw it to John to fill in some of the specifics. But going forward, we think it's going to continue to be a balanced approach with gross margin improvement and SG&A reduction. There's opportunities for both. We have a set of -- you know who our peers are, Pool and Watsco, and we feel like we're going to be a great company. We're certainly not where they are today. We're building ourselves toward that. But in terms of EBITDA percentages, we certainly can run with that crowd, if you will, longer term. We're behind them 10 or 15 years in our development. But -- so we have a long way to go. We're excited about our opportunities, but they would be on both the gross margin and the SG&A side. And so in that way, we don't compare well with Pool. Pool was more last year. I think they were 29%, minus 16%, equals 13%, right? Our formula is going to be more mid-30s, minus low 20s, gets you to those types of numbers, right? And so that's -- our business is more complex than the dynamics, et cetera, but it commands a higher gross margin. So our formula will be different, but we've got room on both sides. And John, do you want to...

Yes, just to get on some of the specific things, I think each year, we look at ways to improve the business. On the gross margin front, I mean just some things that we're working on getting better at are we're expanding our product mix. We're using more products like private label that carry with them higher gross margins. On the sales and marketing front, we're really focused on expanding our market share with smaller customers, which generally carry a higher gross margin with them also. And then each year, we think we can get more and more efficient as we get more and more sophisticated on our supply chain, for example, with regards to that and take more freight costs out of the system. So those would be 3 examples. And then kind of on the SG&A leverage, it's really for us about organic growth because we know we can leverage our fixed cost at branches and labor in the branches by expanding SG&A -- our organic growth. And items like e-commerce, our growth are really kind of -- it's building out our marketing function are going to drive that organic growth from there. And the final thing I would say is just kind of operational improvements at the branch. We've got kind of an OpEx team that's focused on kind of creating better processes. An example would be kind of MobilePro digital checkout that which enables people in the branch to process people faster, which has both the benefit of improved customer service, but also the benefit of greater efficiency of our labor. So there's lots of things that we're continually working on, which will ultimately expand margins beyond just kind of price, if you will, where that one, I would say, is somewhat further along in the development was maybe earlier, we got more sophisticated on our pricing. And -- but there's lots of other levers that we can -- we do and look at pulling to get better and better margins going forward and sustainable margins also.

All right. Great. That's very helpful. And we are at time. So with that, Doug, John, thank you so much for your time. Audience, thank you for your time. And we'll leave it there.

Appreciate it. Thank you.

Thanks, Michael.