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

Okay. Let's get started. Thanks, everyone, for being here. This is the SiteOne presentation. Ryan Merkel from William Blair's research department. Before we begin, I need to remind you that a complete disclosures and conflicts of interest is available on our website. With us today is Doug Black, Chairman and CEO. We also have John Guthrie, CFO. SiteOne is the largest distributor of landscape supplies in the U.S., serving over 600 branches that serve residential and commercial contractors. Our opinion, SiteOne is still early validation story to roll up the industry with M&A and share gains. With that, let me turn it over to Doug.

Ryan. Good morning. Appreciate your interest in SiteOne. We're excited about our company and happy to tell you about it today. So as Ryan mentioned, we are the largest and only national player in [indiscernible] products, [indiscernible] landscaping products. It's a very fragmented space. We have about 1,000 [indiscernible] thousands of suppliers, about 0.5 million [indiscernible]. So it's a fragmented space. And just to annotate that $23 billion space overall, we're 5x larger than #2 and larger than [indiscernible] how fragmented it is. So that's the opportunity to continue to grow our presence. We serve residential and commercial and professional landscapers. So we are not DIY. We're serving the professional, the landscaping market. And it's more than just products [indiscernible] services. We're a business partner [indiscernible] customer and add tremendous value that way and thus lock in [indiscernible] relationship [indiscernible] over 135,000 SKUs and we have [indiscernible] location and four major distribution [indiscernible]. One of the great things about our business is it's a balanced [indiscernible], balance here across our product lines. Again, we are a full product line provider. And you can see the balance across maintenance, new construction and repair and upgrade. And that balance becomes important. We're in good markets today, but go into challenging markets that maintenance [indiscernible] upgrade [indiscernible] quite important. So we like our balanced mix. We grow the company [indiscernible] seek to maintain. We've got a great growth history, and we're only just getting started [indiscernible]. We can grow both organically, but also by acquisition because there's 1,000 of distributors out in the market, instead of greenfielding across the country, we used to do deals. We found it to be a much more value-added. Basically, partner up with these smaller companies [indiscernible] family and build our locations, our talent and our breadth that way. So build in our product lines, add new talent, new locations [indiscernible] SiteOne all at the same time. And you can see that strategy has paid off for us as we've grown our sales. That's a combination of organic growth. Historically, our organic growth had been in the kind of 5% range. Our acquisition growth is [indiscernible] 10% annual range. Going forward, we like that organic growth to be in the high single range. Acquisition growth, as we become a big company will drop a bit, still maintain that kind of [ 15 ] trajectory. And you can see our profitability on our margins as we've grown and we've still got an opportunity going forward. So we're almost -- this year, we'll be close to a $4 billion company but think of us as a really big start-up [indiscernible] to build the company and to add talent and capabilities, which I'll talk about in a second. And so our growth trajectory, we're only at the beginning of a long [indiscernible], help consolidate the market and build a world-class company. So these are the product lines traditionally in landscaping. There were four major verticals. Irrigation, and a lot of distributors that do just irrigation and lighting. Agronomics, there's a lot of distributors that just do agronomics. Nursery distributor and to be its own vertical and hardscapes, hardscape [indiscernible], right? And so what we -- and landscape supplies are things like soil and molds and tools and other accessories that go along. That's the breadth of products. Traditionally, landscapers would buy from different companies in each vertical. What we've done at SiteOne is put those all together so we offer kind of the full package. Gives us a deeper relationship with that contractor, makes us more important and allows us to add more value to them [indiscernible] doing their takeoffs. We can help them do [indiscernible] the site for them, do a lot of things that we get that critical [indiscernible] of products to customers. So we are #1 in all of those verticals. And of course, a fair lead #1 all the way across. And you can see our mix, 30% irrigation, 20% agronomics. In the past, hardscapes would have been 2% or 3%. Nursery would have been 2% or 3%. That's where we've been doing a lot of our growing, hardscapes and nursery to kind of bring up [indiscernible] level of the other product line. So through acquisition, we're creating a broad but very balanced product mix. I described the market, but this is a market that lends itself to wholesale distribution. We have 3,000 or 4,000 suppliers trying to reach 0.5 million customers. So the wholesale distributor plays a very important role. And this was a very unsophisticated business. 8 years ago, when I joined the company, we didn't have barcoding [indiscernible]. And no one in the industry had barcoding. This is very [indiscernible]. So as we bring digital products and overlap and high connectivity to the market, the small local contractors and our local branches, we can really bring this industry up [indiscernible] mega player but a differentiated player in this market, and that's what we're working on. Strategy is working. So we boil that down to -- we call our strategy the large local strategy. So we don't want to be just the Costco, or Walmart where everything looks the same. It's a lot different. Landscaping is done a lot differently here in Chicago as it is [indiscernible] Dallas, Texas, Los Angeles or even Boston. But we have strong local teams that fit those markets. We do acquisitions, we bring companies on in those local markets. Then we support them with the best technology that only a large company [indiscernible] talent, functional expertise, technologies, the best products. And so that friendly kind of homey local team armed with all the best products and technologies because of the dynamite combination [indiscernible] of course, acquisition is part of that. We're a very entrepreneurial company. We let the local businesses run. We have high expectations of how they're going to operate. But we let them run [indiscernible] them a lot of ability to act on [indiscernible]. And then we drive our performance through these initiatives. Our category management is obviously, we purchased -- we're the largest purchaser of all the products that [indiscernible]. We have great teams at the center that work with [ Rain Birds ] on irrigation or they work with the -- supplies and agronomics, make sure we have the best products, et cetera, so that's our category management. And private label is a big part of that. Supply chain. In this COVID environment over the last 2 years where the supply chains were all out of whack worldwide, having those four DCs being able to bring product in, well in advance, manage inflation has been huge strategic advantage for SiteOne. And we've gained market share. Our smaller competitors couldn't get product, we had the product in our DC. Salesforce performance. We have a large sales force. We have over 450 outside sellers that are out there in with their customers. Operational excellence, that's something that's just gotten around to really as a company to drive and then, of course, marketing and digital. We're still very embryonic in digital, less than a couple of percent. Sales is digital today for SiteOne. But we would see ourselves, if we look at some of our peers in other industries like Watsco, Pool, et cetera, we would see that would be 30% or 40%, right? And we can already see contractors get them on board [indiscernible] using that tool. So there's a lot of capability that we're building that will leverage [indiscernible] to drive really three things: Organic growth, which we have a very high focus on even though we're a highly acquisitive company. We're very focused on organic growth. Margin expansion, which we've expanded our EBITDA margins. When I first got here in 2014, we were about 5%. At IPO, we're about 8%. Last year, we were close to 12% [indiscernible] sales as kind of the EBITDA margin player. And then acquisition growth [indiscernible] company. So we had three levers there. We're pulling all three of those levers very hard. And we're again, [indiscernible] baseball analogy, we'd be in the third inning, possibly not in the seventh inning. Still, got a lot of things that we need to develop, lot of ways to grow our margin, and to fortify and increase the capabilities of our company. We are a very active acquirer. We're the lead consolidator. There are a few others that are trying to play the game, but we've got a big head start many years. And we do acquisitions pretty much as we run the business. We have a central acquisition team. Scott Salmon, who reports to me, who has 20 years experience in doing acquisitions. He's got a team of six Directors of development that are out there with the local field, sourcing and doing deals. And we have 80 -- we have two presidents and RVPs and about 50 area leaders that are also out there developing [ relationships ]. These are long-term relationships, checking in on a regular basis with the owner. We're getting them excited about SiteOne. And then when they're ready to sell, we're ready to buy. So most of our acquisitions are negotiated sales, and we do participate in a few auctions [indiscernible] but our strategy is to get to know those owners. Get them excited about [indiscernible] they could do with their company [indiscernible] SiteOne and be there as a buyer when they're [indiscernible]. Sellers sell when they're ready to sell, right, not when they're ready to buy. So we believe in long-term relationships will take that same [indiscernible] over time. We're very disciplined acquirers. And because of that, you figure there's 1,000 distributors out there. We only want to buy the best distributors. We don't want to buy the fixer uppers. So we focus very heavily on the top 250 to 300 distributors, talking to them all the time. Naturally, a good bit of them come due every year. That's where we get our 10, 15 or 20 deals a year that we're able to do with a great team. So this is something -- I'm from DRH and Old Castle where I spent 18 years doing acquisitions there. Another 8 here. We've got a very experienced team. And now SiteOne, after 60-plus deals, has a tremendous amount of experience and muscle comes to not only doing deals [indiscernible] easy part, but integrating them, making them work [indiscernible] our part. We are very experienced [indiscernible] and to a nice rhythm that we can continue to mine going [indiscernible]. So we're excited about the acquisition opportunity at SiteOne. And so just 2022, we've had a good start to the year, our first quarter results that we announced. The markets, I know there's a lot of consternation or nervousness about a recession happened to the markets in particular construction markets. But the fact is that the fundamentals of the residential market and the commercial market are pretty solid, right, certainly going this year. So housing star, there's still a demand-supply imbalance, homes -- not enough homes and chasing it. Rates going up and home prices going up. Obviously, we expect demand to moderate somewhat, but can't forget that supply is still chasing demand not the other way around. Formally this [indiscernible]. Commercial market is strong. Our first quarter bidding was up versus the prior year. We have a project service we do the takeoffs. We do the bidding for the contractor. And then we'll help them do estimate [indiscernible] they can [indiscernible] with our help. And so that project services group is constantly bidding projects across the U.S. and their bidding activity [indiscernible] that tells you the commercial market, which tends to bids, lag the actual production by 9 months. The repair remodel market also strong. You had the COVID bump on the do-it-yourself side, which we call on the retail. By the way, there's only about 2% of our business. So that bump went up and went up 30%, 40%, right, folks that were outside of landscaping products [indiscernible] people [indiscernible]. That wave has come back down, but the professional wave got constrained by labor. So it was never able to [indiscernible] awesome as high as the [indiscernible] have that constrained. And if you [indiscernible] as the supply [indiscernible] contractors [indiscernible] crews as much as they could. So that demand was [indiscernible]. Now you have a situation [indiscernible] retail demand [indiscernible]. But the stay-at-home trend is still there of hybrid, of a strong clinical [indiscernible] base tends to be per side of home. And so our contractors [indiscernible] backlog [indiscernible] how things develop. But as far as we could tell [indiscernible] we're forecast to continue to grow [indiscernible] continue [indiscernible] drive. Certainly, we have a pipeline [indiscernible] few deals [indiscernible] that may. And we're going to continue to build our company. We're excited about our digital, excited about our enhancements [indiscernible] excellence. So dispatch track [indiscernible] worked on the inbound part of our freight [indiscernible] now [indiscernible] factors hit that wind and offer better service and our cost. Still a lot of initiatives we're working on. We're working on the small customer. We have higher share with the larger customers [indiscernible] with the small customers [indiscernible] the way we were built over time, companies we acquired. So we're putting a lot of emphasis in marketing, finding the customer. There's still a lot of landscapers [indiscernible] that don't know who [indiscernible]. We got to reach those customers [indiscernible] bring them in SiteOne [indiscernible]. So off to a good start [ 2022 ]. We don't know what the outlook is for '23 and beyond, but we have a very strong balance sheet. We operate around 1x net debt to EBITDA, do that on purpose because if there is a recession, we want to be able to continue build, continue to do the acquisition requirements. So we have strengthened our balance sheet. IPO was about [ 3.5x ], work debt down now to [indiscernible]. We're going to operate in that 1 to [indiscernible] balance sheet [indiscernible] leverage [indiscernible] have the strategic flexibility to do whatever we want in a tough market. So I think that kind of wraps it up. I mean just in summary, we're the market leader, we're the mega leader in the market. We've got a growth strategy at the three levers that we can pull, and we'll continue to pull. Very focused on operational excellence, the best customers [indiscernible] be the best place to work and to be the highest productivity company [indiscernible] industry. Got lots of value creation opportunity [indiscernible] acquisitions, lots of small [indiscernible] accretive from day 1. Management team that we built over time that both [indiscernible] tremendous functional expertise, marketing, digital, category leader supply chain, but also in the field that [indiscernible] that has a 30-year experience. Many of the fields have been contracted. So we've got strength -- functional strength, but also local customer. And this [indiscernible] for many years to [indiscernible] on game [indiscernible] value creation [indiscernible] in an industry that [indiscernible]. So with that, I mean, John and I would be happy to take questions about SiteOne.

[indiscernible]

Right. Yes, we've seen the average multiple table. And most of our -- there is competition. There's a few new competitors that have come in that are doing deals in the space. But the space is such a big space. There's thousands of [indiscernible]. Most of our sales have a few auctions and tested. Most of our deals and term [indiscernible] competition. And then [indiscernible] one other thing is we're kind of the only peer you can [indiscernible] they've got other [indiscernible] those thing create uncertainty [indiscernible] landscaping [indiscernible] that long [indiscernible] take that reputation [indiscernible] our whole focus will require [indiscernible]. We're very slow to actually integrate. We actually don't do anything with [indiscernible] payroll. You just learn. They're already high [indiscernible] . We just learn from them. And then we allow them to learn from us [indiscernible] be doing like benefit [indiscernible] watch [indiscernible] sometimes [indiscernible] and then to the other [indiscernible] what to change, what to add. We're very careful how we ramp. We've done over 60 deals. We still have over [ five owners ] [indiscernible] industry [indiscernible] a lot of people [indiscernible] prospective company [indiscernible] thinking about all [indiscernible] figure out, what was it really [indiscernible] like seen on that heart [indiscernible]. Yes, if an owner just wants the higher dollar, whatever [indiscernible].

[indiscernible]

Yes. So taking an order. Obviously, the consumer or end consumer is take housing in general and take the upper half of housing, but that's the market that [indiscernible] over end of housing, which would be most affected by inflation [indiscernible] doing their own [indiscernible]. So consumer, the end consumer or customer -- our customer is doing pretty well today. Inflation obviously [indiscernible] income [indiscernible] working from home a lot more than they were [indiscernible] talking about professional white-collar work, probably spending 2 or 3 days at home, a couple of days in the office where they used [indiscernible] office [indiscernible]. So they're very interested in having a [indiscernible] and this backyard, fire pit and [indiscernible]. So consumer, believe it or not, isn't [indiscernible]. The -- what was [indiscernible], inflation. Inflation is proving to be stickier than [indiscernible] talked about that. Obviously, we've seen strong inflation, seeing very high inflation and some of them are -- we hate to call them commodity products, but [indiscernible] type [indiscernible] hire and [indiscernible] pay up [indiscernible]. So we would have thought that those would have kind of come off. The other products, inflation has been manageable and we think it's stickier. But those commodities, at some point, that's kind of what we [indiscernible]. It looks like with Crane and some of the other disruptions that drops going to be later [indiscernible]. In terms of supply situation, it's still tough for a lot of disruptions. And so our supply chain team has been very busy. We have been able to shield ourselves [indiscernible] and by [indiscernible] some cases [indiscernible] we've been able to shield ourselves from the shock. So we've been able to [indiscernible] in shock. In fact, we pick up market share. All our competitors [indiscernible] shock. And those supply chain disruptions [indiscernible] they tend to be different products and they move around, no broad kind of [indiscernible] certain products are very hard to get [indiscernible]. 2020 was [indiscernible] and 2021, I think was slightly [indiscernible] 2022 feels [indiscernible] but I can tell you that [indiscernible] natural [indiscernible] hard at work. But there hasn't been a massive shift or trend, but the whole outdoor living, there's been an outdoor living trend [indiscernible] for the last 10 [indiscernible] testing. People are invest in homes, kitchen, in the family area, right? They're investing in the backyard. That's been the case. That's going to be the case. [indiscernible] ESG initiative. Just they compliment that [indiscernible] like a massive [indiscernible] I think so. [indiscernible] average [indiscernible] really complements [indiscernible] landscaping is a very healthy market. One of the reasons I jumped [indiscernible] it's got great [ funnel ]. We got some fast-growing [indiscernible] outdoor [indiscernible]. Real easy way to get [indiscernible] look to the market [indiscernible] it was up nursery, landscape products. Certainly, we [indiscernible] digital [indiscernible] wholesale distributor [indiscernible] nice healthy market [indiscernible].

[indiscernible] Yes. Yes. In general, our industry is relative [indiscernible] rational with regards to that, almost all in [indiscernible] market. So when there's a 15% increase in some products, in our cost structure, us and most of the industry in general will just automatically increase it. And ultimately, it just shows the demand has been so strong from the homeowners that we really haven't seen an [indiscernible] volume with regards to that, and they've been willing -- as somebody who's remodeling my home right now, I'm remodeling my kitchen, I can speak to the increases in price of building products [indiscernible] come through [indiscernible].

And just to give you another [indiscernible] so product inflation by itself [indiscernible] is not [indiscernible] deal, quite a bit on the installed [indiscernible] bigger factor in that [indiscernible]. So one of the things we can do as distributors is help our customers [indiscernible] put a lot of emphasis [indiscernible] make their [indiscernible]. Right. Yes. No, it's a great point. We've been in a labor construction market now [indiscernible] contractors are definitely [indiscernible] equipment. So they found that they can spend [indiscernible] but they can't grow [indiscernible] focused on it, and we're using product technology and [Audio Gap]. Thank you.