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

In terms of initiatives, we continue to grow our small customers significantly higher than our average, while also driving growth in our private label brands and improving our inbound freight costs through our transportation management system, all helping us to mitigate the gross margin decline in these challenging times and expand gross margin with normal inflation. Year-to-date, we’ve increased our partners program membership by approximately 70% to 42,000 members. Most of these new members are small to mid-sized customers. We have increased our percentage of bilingual branches from 56% to 59% this year, and are continuing to focus on Hispanic marketing to create awareness among this important customer segment. Lastly, we are making great progress in our sales force productivity as we leverage our CRM and establish more disciplined revenue-generating habits among our over 900 inside and outside sales associates.

The continued rollout of MobilePro and DispatchTrack allows us to offer better customer service while also increasing the productivity of our branch staff and delivery fleet. Both of these capabilities are now deployed companywide, and we continue to see usage and benefit increase across the company. We made good progress in growing our digital sales and customer activity on SiteOne.com this year, which helped us increase market share, while allowing our associates to focus more on creating value for customers and less on transactional activity. And finally, we are seeing some of the early benefits from our operational excellence teams who are systematically spreading best practices in each line of business across SiteOne to drive value for our customers, suppliers, and company.

Taken altogether, we’re continuing to improve our capability to drive organic growth, increase gross margin, and achieve operating leverage, even as we fight through the challenges in 2023. On the acquisition front, we’ve added 10 high performing companies to our families so far this year, with approximately $300 million in trailing 12-month sales added to SiteOne. With an experienced team, broad and deep relationships with the best companies, a strong balance sheet, and an exceptional reputation, we remain well positioned to grow consistently through acquisition this year and for many years to come. In summary, we are facing a number of challenges in 2023, including softer markets, commodity product deflation, operating cost inflation, and a gross margin reset from the extraordinary price gains in 2021 and 2022.

Our teams have done a terrific job of managing through these challenges, and even as we reset financially, we continue to gain momentum in our commercial and operational initiatives, and in building the foundation of our company, both organically and through acquisition. We remain confident in our strategy and in our ability to deliver increased value to our customers and suppliers, while outperforming the market. Now, John will walk you through the quarter in more detail. John?

John Guthrie: Thanks, Doug. I’ll begin on Slide 9 with some highlights from our third quarter results. We reported a net sales increase of 4% to $1.15 billion for the quarter. There were 63 selling days in the third quarter, which is the same as the prior year period. Organic daily sales decreased 2% compared to the prior year period, primarily due to lower prices from commodity products, partially offset by volume growth on modest market demand. Price deflation for the quarter was approximately 4%, which was slightly greater than expectations. The price deflation was driven by our commodity products like PVC pipe, which was down 20% year-over-year, grass seed, which was down 17%, and fertilizer, which was down 16%. We expect price deflation to be a headwind for the remainder of the year and into the beginning of 2024 until we fully lap the price decreases that started in Q4 of last year.

Fortunately, we were able to partially offset the price deflation with 2% volume growth for the third quarter. Volume growth was driven by share gains and modest end market demand. While negatively impacting some northern markets, weather did not have a major impact on our overall sales for the quarter. Organic daily sales for agronomic products, which includes fertilizer, Control Products, Ice Melt, and Equipment, decreased 2% due to lower prices, partially offset by increased volume for those products. Organic daily sales for landscaping products, which includes Irrigation, Nursery, Hardscapes, Outdoor Lighting, and Landscape Accessories, also decreased 2% for the third quarter due to slightly lower prices and moderating end market demand.

Geographically, five out of our nine regions achieve positive organic daily sales growth, with the greatest growth in southern markets. The Northeast and Midwest markets had the weakest sales performance, as they were impacted by a combination of wet weather and a sales mix more heavily weighted toward fertilizer and grass seed. We were pleased with the performance of our acquisitions in the third quarter. Acquisition sales, which reflect the sales attributable to acquisitions completed in both 2022 and 2023, contributed approximately $65 million or 6% to net sales growth. Scott will provide more details regarding our acquisition strategy later in the call. Gross profit for the third quarter was $388 million, which was largely unchanged compared to the prior year.

Gross margin decreased 130 basis points to 33.9%, primarily due to lower prices and the absence of the price realization benefit realized in the prior year, partially offset by the positive impact of acquisitions and lower freight costs. As Doug mentioned, gross margin was weaker than expected, primarily due to commodity product deflation coming in greater and more rapidly than our forecast. Just as we benefited from the rapid rise in market prices relative to our lower inventory costs on the way up, the rapid drop in market prices relative to our higher inventory costs, creates a temporary headwind on the way down. We are managing through this headwind, but we expect it to continue for the remainder of the year. Selling, general, and administrative expense, or SG&A, increased 8% to $312 million for the third quarter.