SiteOne Landscape Supply, Inc. (NYSE:SITE) Q3 2023 Earnings Call Transcript

SiteOne Landscape Supply, Inc. (NYSE:SITE) Q3 2023 Earnings Call Transcript November 1, 2023

SiteOne Landscape Supply, Inc. misses on earnings expectations. Reported EPS is $1.25 EPS, expectations were $1.48.

Operator: Greetings. Welcome to the SiteOne Landscape Supply Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to John Guthrie, Executive Vice President, and Chief Financial Officer. Thank you. You may begin.

John Guthrie: Thank you, and good morning, everyone. We issued our third quarter 2023 earnings press release this morning, and posted a Slide presentation to the Investor Relations portion of our website at investors.siteone.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 this 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.

A farmer standing in a field with a modern irrigation system in the background.

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.

Doug Black: Thanks, John. Good morning and thank you all for joining us today. We were pleased to see end market demand remain resilient in the third quarter, which allowed us to achieve positive sales volume growth. That said, deflation in select commodity products like PVC pipe, grass seed, and fertilizer, was stronger than we expected, which had a negative impact on organic daily sales and on both gross margin and adjusted EBITDA margin during the quarter. We expect these negative deflationary effects to continue during the fourth quarter, but moderate in 2024 as commodity prices stabilize. In the current challenging environment, our teams executed well by gaining market share, driving positive organic sales volume growth, and managing through the price deflation.

Acquisitions also contributed 6% net sales growth during the quarter. We were very pleased to add six new high performing companies that represent approximately $230 million in trailing 12-month sales to SiteOne during the quarter. 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 managing through the near-term market challenges. We remain confident that our well-balanced business, strong balance sheet, exceptional teams, improved capabilities, and robust acquisition pipeline, position us well to achieve strong performance and growth over the coming years. I’ll start today’s call with a brief overview of our unique market position and our strategy, followed by some highlights from the quarter.

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Q&A Session

John Guthrie will then walk you through our third 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’ll come back to address our latest outlook before taking your questions. As shown on Slide 4 of the earnings presentation, we have grown our footprint to more than 690 branches and four distribution centers across 45 US States and six Canadian provinces. We are the clear industry leader, over four times the size of our nearest competitor, yet we estimate that we only have about a 16% 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 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 5, 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’ve come a long way in building SiteOne and executing our strategy, but we 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 complimented by our acquisition strategy, which fills in our product portfolio, moves us into new geographic markets, and adds terrific new talent to SiteOne. Taken altogether, our strategy creates superior value for our shareholders through organic growth, acquisition growth, and EBITDA margin expansion. If you turn to Slide 6, you can see our strong track record of performance and growth over the last seven years, with consistent organic and acquisition growth and EBITDA margin expansion.

We have done this while investing heavily in our teams and in new systems and technologies to build the foundation for SiteOne and to create superior capabilities for our customers and suppliers. We are still building and investing, and we remain confident in our ability to gain market share and continue driving all three of our value creation levers going forward. As previously discussed, 2023 is a reset year for gross margin and adjusted EBITDA margin. Due to the extraordinary price benefits that we received in 2021 and 2022, we are now experiencing significant commodity price deflation, which causes a temporary negative impact on organic daily sales, gross margin, and adjusted EBITDA margin. We expect this negative impact to subside in 2024, which will provide a tailwind as we look to expand our adjusted EBITDA margin toward our long-term goal of 13% to 15%.

We remain confident in our strategy to drive revenue growth while expanding gross margin and achieving SG&A leverage to reach our longer-term business performance objectives. We have now completed 90 acquisitions across all key product lines since 2014. We expanded our development team in 2021 and leveraged them to increase acquisition activity in 2022, resulting in a record 16 acquisitions last year and a record $300 million trailing 12 months acquired revenue from the 10 acquisitions we have completed so far this year. Our pipeline of potential deals remains robust, and we expect to continue adding and integrating increased number of new companies to support our growth. These companies strengthen SiteOne 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 networked with the best companies in our industry, and expect to continue filling in these markets systematically over the next decade. I’ll now discuss some of our third quarter performance highlights as shown on Slide 8. We achieved 4% net sales growth, with 6% growth added through acquisition, partially offset by 2% decline in organic daily sales. As mentioned, we were pleased to achieve 2% sales volume growth during the quarter, but this was more than offset by a 4% price decline, which was slightly more than expected.

Commodity price deflation increased sequentially during the quarter, and we believe that we have reached the bottom in September and October. We expect price deflation to begin to moderate as we enter 2024. Organic daily sales were well balanced, with a 2% decline in both agronomic products and landscaping products, despite the deflation being more pronounced in agronomic products. You’ll recall that agronomic product volume was very weak last year as contractors reduced their application rates in reaction to the steep price increases in fertilizer and grass seed. In the third quarter, we saw just the opposite, with significant deflation in fertilizer and seed, mitigated by very strong volume. We were very pleased to see contractors and end users return to more normal levels of application in the maintenance end market.

Gross profit was flat during the quarter, while gross margin contracted by 130 basis points to 33.9%. Commodity deflation was stronger than we expected, which negatively impacted gross margin as purchased inventory in PVC pipe, grass seed, and fertilizer, were sold at lower prices during the height of the fall season. Our teams have executed very well in this extremely challenging environment by keeping inventory low, reacting with disciplined to market prices, and by continuing to drive our gross margin improvement initiatives. We remain very confident that once commodity price deflation runs its course, we can resume our gross margin improvement trend from a solid foundation. SG&A as a percent of net sales increased by 100 basis points basis to year-over-year to 27.2%.

Acquisitions had the largest effect on SG&A as a percent of net sales, as the same Hardscapes and Landscape Supplies acquisitions that benefited gross margins slightly, also increased our SG&A. SG&A for our base business was 1% lower than prior year for the third quarter, but did not match the 2% decline in organic daily sales. We are highly focused on operating leverage and expect to see benefits from our productivity initiatives as inflation normalizes and as we return to positive organic daily sales growth. Adjusted EBITDA for the quarter declined 12% to approximately $120 million, and adjusted EBITDA margin declined by 180 basis points to 10.5%, with lower gross margin. We expect the year-over-year decrease in adjusted EBITDA margin to moderate further in the fourth quarter, providing a foundation for expansion in 2024.