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

Just going to get started. Good morning, everyone, and welcome to the SiteOne presentation. I'm Ryan Merkel with William Blair's Research Department. Before we begin, I need to remind you that a complete list of 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. It operates over 600 branches serving residential and commercial contractors. The company is still early in its journey to consolidate the market with only 17% market share. With that, let me turn it over to Doug.

Thanks, Ryan. Great to be here. Like Ryan said, we're the largest and only national player in the landscaping supply market. You can see the statistics there. We're larger than 2 through -- or 1 through 4 combined, larger than #4, largely through the top 10 combined, but we only have 17% market share, right? So it's a very fragmented market. And we're building a world-class company. In that market, we serve residential and commercial landscape contractors and maintainers. You can see the SKUs. And we've got a good balance across product categories in terms of new construction, repair and remodel and commercial. And then our product portfolio also gives us balance across the country and you can see our locations. We're quite proud of our growth history, our high growth, we grow both organically and through our acquisition. The organic piece is very important, but the acquisition tops that up. And we are consolidating the market, but more importantly, we're building our company. You can see our growth record through the ups and downs of COVID, we've been a consistent grower. And you can see the acquisitions along the bottom that have allowed us to build our company. If you look at our product segments, about 1/3 or about 1/4 of our business is irrigation. About 1/4 of our business is agronomics, which is fertilizers, chemicals, control products for turf care. You can see over to the right hardscapes, comprises about 1/4 of our business and then the rest would be nursery and landscape supplies. Again, we're #1 in all the categories. So we are, by far, the market leader, and we leverage that with our supplier partners to gain synergies and advantage in the fragmented landscape market. Part of the secret of our success is that we've got thousands of suppliers, which are very fragmented in theirselves, trying to reach hundreds of thousands of customers. And so we play a critical role as a wholesale distributor in the middle. And you can see our business is quite balanced on the customer side with small customers, medium customers and large customers. One of the things about SiteOne that you should know is that we are under indexed, if you will, with a small customer. We think the small customer segment is about half of the landscaping market on the contractor side. So we've got room to grow there in terms of market share with a small customer which obviously is accretive to our margins as we grow. And one of the reasons why we're confident we can grow our margins as we continue to grow. But we're the largest in the space. We provide a critical partnership between supplier and contractor and a good long-term value creation position. Our strategy is simply to take the best of being a large company with the resources and people that we have to support our local businesses because landscaping is a very local business. And then we drive our performance through our initiatives, category management, which is working with our suppliers, supply chain. We've got 4 major DCs. Later this year, we'll be putting in a fifth DC. So we have a quite sophisticated supply chain, sales force performance in terms of driving our performance marketing, digital, all the things that a world-class company can do in a very fragmented space. And you'll see the results will be organic growth, which again is very important to us to create that organic growth engine, EBITDA margin expansion as we leverage our SG&A and grow our gross margin and then acquisition growth. So we had really 3 levers for growth that we can pull going forward, which makes it a nice growth story. The team are very proud of the team. On the left-hand side here is our field team, which you can see most of these leaders used to be our customer. So used to be in the landscape trade, installation trade we know our customer. We're very local. We've got a lot of experience there. In the middle, our leadership team, and you can see the companies that the leadership teams come from. And then on the right is our functional support, which, again, we pull people from all kinds of world-class companies into that to support our fast and flexible field. So we're building the team to execute our strategy. We call it the large local strategy where we have the best in the world in terms of marketing, in terms of category and supply chain, supporting a fast, flexible field that knows the customer, and a lot of them used to be the customer. So they know the customer very well. So because we compete with small companies, and we have to match that in the field. And you can see that we -- on the acquisition side, we've been a consolidator. We've done over 90 deals in the last 10 years. We figure that there's about 200 to 300 companies that we want to fill in our portfolio across the country. It's like puzzle pieces. And those puzzle pieces fall when they're ready to sell, not when we're ready to buy. So we cultivate that target list, if you will. And then when they're ready to sell, we bring them on to SiteOne. We've got a great team out there that focuses on acquisitions. Our field is focused on acquisitions as well. And we do 10 to 15 deals a year. It's a steady source of growth for us, very accretive, reasonable margins, folding into the kind of the master puzzle, if you will, to put together our product lines across the country. Our goal is to be the leader in every local market in every product category. So we've got ways to go to fill that out. I wanted to update you on some of the current trends. It's been a choppy year. We are very pleased with our first quarter result where we had 5% volume, which more than compensated for the 4% down in price. We do have about 20% of our products are commodities like fertilizer, PVC pipe and grass seed, for example. And we've seen those prices that went way up in COVID are coming down, and have caused our overall price to come down. So we fought that a little bit last year. We're fighting the deflation headwind this year. We think it's something that normalizes. Usually, we're very steady on price. And so we've seen that headwind. In the first quarter, we forecast that, that headwind was going to abate slowly through the year. It's been a little stickier than we thought. And so we wanted to update you on Q2 that price deflation has been a little stickier. On the volume side, where we saw that 5% volume growth, in Q2 so far, we've seen 1% volume decline. It's been choppy. April started out weaker then gained strength in the second half of April. May has been back down. We think the softness is largely around the remodel market. Commercial still seems to be strong. Residential, we haven't seen the kind of residential increase yet. Builders are talking about the back half of the year so we'll see how that develops. Maintenance has been steady, but the remodel market is clearly soft, and we're seeing that in May. We're not prepared to update guidance for the full year, or address that. We'll do that when we report earnings at the end of July, we'll have a couple more months and be able to see the trends, but I just wanted to give a heads up that the quarter 2 has started off softer than we had forecasted. So what are we doing about that? We're continuing to drive our initiatives, right? Part of our strategy is to drive SG&A leverage, to drive gross margin. On the gross margin side, I mentioned small customers. We're also driving private label. Also our mix is -- drives margin improvement. So we're driving margin improvement on the organic side, with siteone.com and digital, our sales force performance and a lot of our initiatives focused on organic market share gains so that we can outperform the market. So as we see these market headwinds, we can fight upstream. We are adjusting our SG&A. In softer markets we can pull in SG&A in the field and our field support to kind of match demand. So we're doing that as a short-term lever. Pioneer was an acquisition that we did late last year. It's -- most of our acquisitions are high performers. Pioneer was an underperformer kind of a larger acquisition, about $160 million in sales. We're hard into the integration of Pioneer, which we'll integrate systems in August. We're learning from Pioneer, but it's a terrific long-term play for us. In the short term, executing that strategy is important. Continuing to add high-performing acquisitions. We've done 3 acquisitions so far this year. The highlight of those 3 would have been Devil Mountain, which was a large nursery acquisition that we did in California. Devil Mountain is performing very well. It's a high performer. It gives us -- it's over $100 million in sales, gives us a platform for nursery growth in the West that we didn't have before. Most of our nursery is East Coast based. So we're excited. Now we have a platform we can grow off of that. So we're going to continue to do value-added acquisitions as part of our strategy. And then cash flow, I had mentioned, but our cash flow is quite strong. We -- with COVID kind of resettling in, we're able to regain our inventory turns and drive cash flow really ahead of our profits. And so we're leveraging that. So those are some of the short-term things that we're doing because we're a very strong growth company. We're going to battle through the short-term headwinds and continue our growth trajectory for the long term. So just to sum up, we're well on our way. We're not a fully developed mature company. We're still putting the pieces together. We're still growing in terms of our capability in digital, sales force, et cetera. So there's a long way to go to get where we want to be. But we're seeing a lot of success. We benefited from COVID. We're seeing some of the headwinds of post-COVID that we're fighting through. But even fighting through that made us stronger in terms of our initiatives and focus on the customer and our ability to drive organic growth, margin improvement for the long term. So we feel good about where we are. We've got a great team, and we welcome your questions about the company and what we're doing.

Well Doug, maybe I'll just start off. So you mentioned the update was mostly about residential R&R. Could you just give us some examples of some of the product categories where you're seeing the slowdown be a little bit bigger?

Yes, we're seeing it pretty broadly across categories, but in particular, hardscapes and lighting, which traditionally have been terrific growers for us, so kind of our remodel products. We're seeing softness there. Agronomics is holding up, but that's where a lot of the inflation is. It's seed, fertilizer, et cetera. So that's -- that would still be net negative with inflation. But really, the remodel products, I'd say, is where we're seeing the greatest softness. Geographically, it's pretty broad-based. So we do think it's that remodel market where you had the discretionary spending, interest rates are high. Housing turnover is low, things that drive our model, some of the fundamentals are under pressure, and we think the consumer -- we're seeing that with the consumer, so.

Yes. It sounds like maybe some delays of some discretionary projects just given the environment.

Right. We still feel -- I mean the remodel market long term is very robust. I mean, you still have the stay-at-home effect. But even before that, the outdoor living effect has been in force for the last 10 or 15 years, we're going to take advantage of that. But I think in the short term, with interest rates high and the housing market folks are just pinched and with consumer spending, remodel tends to fluctuate with that.

Okay. Maybe I'll just ask one on price too. So the message was deflation is a little stickier. I have 2 questions. First off, is it PVC and seed that maybe took a leg lower recently? Is that right?

Yes, John.

Yes. The trend is still there, what we've talked about, but we have seen, as we're updating our forecast, we expect that seed with its lower consumer spend and a pretty good supply market will come under pressure this year, and we'll see a second leg down there. And then we have seen some recent additional drops in PVC pipe. I would say just the general trend, though, at the end of the first quarter, we talked about as we comp the lower prices to be slightly positive in the fourth quarter. I think the trend is going there. It's just a little stickier and it may take just a little bit longer than we had originally forecast.

Got it. Any questions from the audience? Otherwise, I can keep going. Go ahead.

What extent is private equity in the market keen for acquisition...?

Maybe repeat.

Yes. Yes. The question was, what do you see in terms of private equity in the market for acquisitions? We've seen private equity over the last several years. Obviously, SRS with Leonard Green and Berkshire Partners was in the market. They started their landscape division what back in 2016 or so. And so they've been out there and been active. Their outdoor living is a PE backed in the hardscape space, which has been active. So we've seen 2 or 3 PEs out in the market. Still 80% to 90% of our deals are negotiated. So we have long-term relationships. We leverage those. And so it only affects kind of that 10% to 20% of deals that come around. And we'll get our fair share of those as well. So I would say it's a tougher space for PEs to operate because it's so fragmented. It's hard to find the right platform for growth. So those 2 or 3 that have platforms are -- we know them, they know us. What we look to do is just have those deep relationships and if you look at those PEs, they're all going to sell to somebody. Obviously, SRS is positioned to sell to Home Depot. Outdoor Living will sell to somebody else eventually. SiteOne, we're already public. We're going to be here for the longer term. We're the safe home for the really high-performing companies that are out there. And so that's why we get more than our fair share, if you will, of those deals.

Yes, Dan?

Just your [indiscernible].

Right. Yes. I mean we simply -- we want the next 2 months to address that. I mean, it's choppy, and we haven't seen a trend I mentioned January and February were soft. March was a really good month for us. The first half of April was soft, the back half of April was good. And I'm talking on a volume basis, the price -- negative price has been pretty consistent. And now May has been down. So we really don't -- part of that's weather, part of that's market, and we feel it's best to let everybody know kind of what we're seeing to date. But wait till July to see what -- how the trends develop over the next couple of months, and then we'll address guidance. Obviously, slower sales will affect that. But we want to wait to address that to where we have a little more of the year because in landscaping, things move around with weather and month-to-month, et cetera. And so we want to make sure we have a good grasp on the trends, but we wanted to be forthcoming that things having gone as well as we had hoped in the first 2 months of the quarter 2. We do get easier comps in quarter 3 and quarter 2 are kind of the tougher comps of the year, right? So that plays into it as well, right? So it's just kind of when it combines, there's still a lot of uncertainty in how the year is going to play out. We are, though, taking strong action to deal with what we're facing and kind of deal with a tough year, if you will, because more importantly, we want to be set up and deliver in '24, but also in '25, '26, '27 be able to continue our vision and keep moving forward as a company. So we're taking those strong actions to -- for the long term and the short term.

What's your worst case scenario for deflation for the things that you're saying. Do you getting back to 2020 level, 2019 levels...?

We don't think that it will go all the way back to those levels. Let's -- in our numbers that we're seeing, I would say, in general, other than the few commodity items that we've been monitoring less price changes this year than we did last year. And even the magnitude of those changes, even with PVC pipe I think the last one that's going in right now is 3%, 6% down. But if you look at cumulatively year-over-year where PVC pipe is it's down 20% for instance, in May. But I think it's also important to remember PVC pipe is roughly 4% of our sales. So it's a relatively small component. This business, in general, historically has for really 2014 to 2020, was 1% to 3% price inflation per year every year. And then price inflation got kind of crazy in '22 and what you're seeing is really just a give back of that. But in general, manufacturers have higher labor. So that's kind of raising the bar, if you will, on the overall price.

Yes, the noncommodity this year is more flattish. Normally, they'd be 2%, 3% up. So you're getting a combination of commodities moving back to normal, if you will. And then the non-commodity kind of holding, but we're not seeing degradation in that core kind of 80%, which is positive.

And I think it's also important that even if you look at where we're at on a year-over-year basis, Q4 last year was negative 5%. Q1 was negative 4%. So we are rolling off now Q2, we're at 3% to 4%. It's still a little stickier than we'd originally expected.

Doug, maybe talk about Commercial, which I think is holding up a little bit better. And maybe for people newer to the story, just talk about what Commercial looks like for you.

Right. So commercial, New commercial is about 14%, 15% of our mix. So it's an important segment. And we've seen that remain solid. I mean we know the ABI Index has dropped to kind of below 50, and so that would forecast slowness in Commercial, but we have not seen that yet. And we still forecast Commercial to be strong for this year. I don't know about 2025, but our customers and commercial have good backlogs. Our project services team. So we bid commercial jobs, and we have a project services team that does takeoffs for our contractors and estimates for our contractors. That project services team has continued to be, although it's been choppy, slightly positive year-to-date. And so all the signals we see tell us that Commercial is going to be solid this year. We have -- that's not where we've seen the slowdown. It's really been in the kind of the remodel side. And then lack of residential uplift, which we would expect with starts and permits kind of going up late last year and early this year, we lag about 6 to 9 months when homes are being built, we go in last. And so our builders are still telling us that they expect to pick up in the second half. We'll see -- we'll believe it when we see it. But we haven't seen that yet. And then again, maintenance volume has been solid.

I also wanted to ask about AI. How are you thinking about it? Are you testing use cases? Where are you at?

Yes. Yes. We obviously -- interesting in development. We're looking at how that applies to our business. I think one of the first applications that we're using is in our product descriptions on siteone.com. We're able to use that even today to make those descriptions more accurate and be more efficient. We've got a lot of SKUs and it's a very fragmented market and for instance, nursery products, you call it 9 different names across the country. I mean it's not a uniform. And so AI has been useful in kind of getting that right so that we have that accurate information. So we're using it in some of our content for siteone.com and our marketing. John, you may know of other uses. But the rest, we're just kind of looking and seeing what others doing and seeing how it applies, so that we can take advantage of any other benefits that it would give us.

I want to ask about SG&A as well. That's been a source of frustration, I think, as you know, for investors, not really leveraging SG&A since the IPO. It sounds like going forward, that's a focus for you. Do I have that right? And what are you doing to show SG&A leverage?

Yes. It's a high focus of ours. I mean as we were investing in our early stages, it was very difficult to achieve SG&A leverage. We're building our marketing team and building our IT team and building digital, et cetera, et cetera. We've got those built. And so our go forward is to harvest those investments and really get leverage. And so obviously, organic growth is an important part of that with deflation headwind. There's headwinds to that this year. But we feel confident that we can improve our SG&A leverage over the coming years, I'd say, because we've got the team built. We've got our tools built and those tools include sales force.com in our sales force. It includes our DispatchTrack, which is our last leg delivery system, Blue Yonder, which is our purchasing system, the DCs, et cetera, right? So we -- this is a -- when we took this over in 2014 coming out on the landscape, there were no systems there. So we've had to build it all. But the fun part is that's built and now we can leverage it going forward. We also have more experience in hardscapes, we've got more experience in nursery some of the product lines that we've built up over the last several years. We're developing experience, by the way, in bulk materials, molds and aggregates, et cetera. So Pioneer is part of that. Pioneer a good example where, although they are an underperformer, they have a pretty sophisticated point-of-sale system for bulk materials that ties in the scales and all that. And so we're copying that system into ours. That's one of the reasons it's taken us a little longer to integrate Pioneer. So -- but I think the fact is, is we've got these systems built, we've got our teams in place. And going forward, we can really streamline and leverage what we've got, drive organic growth, integrate acquisitions, which we've become after 90-plus acquisitions, we've become very proficient at doing that. So we think we've got the formula down to really get to the next mile. And if you look at our company inside our company, we have regions that are already up in that kind of 13% to 15% range solidly and have been there for a long time, and they're fully loaded with all the SiteOne company charge, if you will. So we see where we need to go or wherever we want to go within SiteOne. It's just a matter of getting there broadly.

I have time for maybe one or two more.

[indiscernible].

Yes, we would think in the longer term, if you look at it to the adjusted EBITDA line that our gross margin would be, let's say, 37% and SG&A should be in the low 20s, right, let's say, kind of 22% to 23% SG&A all in to the adjusted EBITDA line. That's not a GAAP figure. And that's what gives you that kind of 13% to 15%. And so that's where we're targeted. And again, we see internally, we're there already. We just got to get there more broadly as we streamline, leverage our team and move forward. So that's the formula. Yes. So we're a different formula -- we're a little heavier -- we're heavier SG&A than say a Pool or Watsco, et cetera, because we've got nursery and hardscape. But we're also higher gross margin, right, because of those same products, bulk materials, nursery hardscapes carry a higher margin than the other products. So that's the formula we're heading toward.

Maybe just the last question then, Doug, SRS and HD getting together. I know you've been asked that quite a few times in the past couple of months, but maybe I'll come at it a little differently. Maybe why, number one, do you think HD bought SRS? What are they after? And then two, how is HD's landscape business currently, how is that different from your Pro Distributor landscape business?

Repeat the second part of the question.

HD has a small nursery and landscape supplies at their store. How is that how is your Pro assortment and service is different? Just I want to be clear about how those markets are different?

So first of all, their strategy, I think they want a larger total addressable market. They've had their eye on the contractor for some time with their Pro business. And just like with HD Supply, SRS is a ways to go reach that contractor. The pick is SRS has a strategy very much like our own to reach that contractor, where they buy local companies, they stay very local. It's large supporting local and I think it's important for Home Depot, and they stated that they'll keep the SRS formula. I mean, SRS is a high-performing, and they play in roofing, they play in landscape and they play in pools. I think it's important for them to keep that secret formula and play the SRS way with Home Depot's support, right? And so to that degree, for us, we have the same competitor that we've had, right, which is a good competitor, right? They're very price -- I mean they're very competitive in the market, let's say, they do acquisitions. They're very acquisitive and they play hard. So we respect them as a competitor. But I think Home Depot will use them to address the market and work through them to address the market and then that gives us a similar competitive. How are the stores different from our? It's just like night and day. I mean, nursery, they don't carry -- I mean, they -- a contractor can't do a complete job -- shop in a Home Depot, right? The small contractors, a small lawn care or small odds and ends job, et cetera, possibly. But a significant -- or a contractor that is out there to do install real maintenance, et cetera, et cetera. Irrigation, agronomics, nursery hardscapes, it's not anywhere near the product breadth or depth or pricing, et cetera, that they need to be successful and Home Depot knows that, right? That's why they're not -- they've been going after the Pro, let's say, lightly, especially in landscaping, but they can't do it with their existing stores. That's why they're buying SRS to go after them in kind of a real way, right? So yes, so that's the strategy, and we respect Home Depot, but it really doesn't change our strategy, and we think there are some things that could benefit SRS or it seems that it could be negative against SRS in that match. We'll see how it goes, but we still feel confident we're the market leader and we're going to continue to be the market leader.

Perfect. We're out of time. Thanks, everyone.

Thank you.