Greetings, and welcome to the SiteOne Landscape Supply Second Quarter 2022 Earnings Call. [Operator Instructions]. I would now like to turn the conference -- the call over to you, Mr. John Guthrie, Executive Vice President and Chief Financial Officer for SiteOne Landscape Supply. Thank you. You may begin.

Thank you, and good morning, everyone. We issued our second quarter 2022 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 the 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. 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.

Thanks, John. Good morning, and thank you for joining us today. We were pleased to continue our positive momentum during the second quarter with solid growth in sales and profits, despite strong comparable growth from last year and spring weather headwinds in our northern markets. Weaker volume in these markets was more than offset by stronger price realization across all markets, coupled with good contribution from acquisitions. We are also very pleased to add 7 new high-performing companies to SiteOne over the last 4 months through acquisition, building our foundation for future performance and growth. As we enter the second half of the year, we expect prices to contribute less to organic daily sales growth and volume to improve versus the first half of the year against weaker comparisons. Taken all together, with our strong teams, improved capabilities and robust acquisition pipeline, we expect to continue gaining market share and achieve another very good year of performance and growth in 2022, while building our company for the future. I will start today's call with a brief overview of our unique market position and our strategy for long-term performance and growth, followed by some highlights from the quarter. John Guthrie will then walk you through our second 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 will 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 620 branches and 4 distribution centers across 45 U.S. states and 6 Canadian provinces. We are the clear industry leader over 5x the size of our nearest competitor, yet we estimate that we only have about a 15%…

Thanks, Doug. I'll begin on Slide 9 with some highlights from our second quarter results. We reported a net sales increase of 12% to $1.22 billion in the quarter. There were 64 selling days in the second quarter, which is consistent with the prior year period. Organic daily sales increased by 8% in the quarter, driven by price inflation in response to rising product costs, partially offset by dampened volumes resulting from higher prices, moderating economic conditions and unfavorable weather in our northern markets. Acquisitions continued to perform well, contributing approximately $45 million or 4% to our second quarter net sales growth. Scott will provide more details regarding our acquisition strategy later in the call. Geographically, we saw a wide variation in organic sales growth in the second quarter. In the Sun Belt market, we saw solid organic daily sales growth of 17%, but in northern markets, stretching from the Pacific Northwest to the East Coast, we saw no organic daily sales growth. These markets, which faced a tough 24% comp from last year, were negatively impacted by the slow start to the spring and unfavorable weather compared to the prior year. Overall, 7 out of our 9 regions, including all northern markets, had more rain in Q2 2022 compared to a very dry Q2 2021. Organic daily sales for agronomic products, which includes fertilizer, control products, ice melt and equipment, increased 7% for the second quarter due to strong price inflation resulting from rising product costs, partially offset by reduced volumes from unfavorable weather and higher prices. Prices for agronomic products like fertilizer and grass seed have risen dramatically over the past year. And while price inflation has been an overall net positive to sales growth, we believe the higher prices for products like fertilizer have reduced the short-term…

Thanks, John. As shown on Slide 11, we acquired 6 companies during the second quarter and 1 company since the end of the second quarter, bringing our total to 8 for 2022, with a combined trailing 12-month net sales of approximately $125 million. Since 2014, we have acquired 72 companies with approximately $1.35 billion in trailing 12-month net sales added to SiteOne. Turning to Slides 12 through 18, you will find information on our most recent acquisitions. On April 22, we acquired BellStone Masonry Supply with a single location serving the Fort Worth, Texas market. BellStone distributes hardscapes and bulk landscape supplies and builds upon our December 2020 acquisition of Alpine Materials, which also supplies hardscapes products. On April 28, we acquired Preferred Seed, a leading supplier of agronomics products to landscape contractors in Upstate New York with 1 location in Buffalo. On June 17, we completed our acquisition of Across the Pond, a wholesale distributor of hardscapes and bulk landscape materials with 1 location in Huntsville, Alabama. This acquisition expands our current presence in the market and our product offering to include hardscapes and bulk landscape supply. We completed our acquisition of Yard Works, an industry leader in the distribution of bulk mulch and soil on June 22. With 13 locations across Central Virginia, the addition of Yard Works extends the strong market position we established earlier this year in Northern Virginia with the acquisition of JK Enterprises. On June 30, we acquired Prescott Dirt, a distributor of landscape supplies and hardscapes with 2 locations in Prescott and Prescott Valley, Arizona. On July 1, we acquired ¦ A&A Stepping Stone, a leading wholesale distributor of hardscapes and landscape supplies with 4 locations in Sacramento, California. The addition of A&A establishes a leading hardscapes and landscape supplies platform in the…

Thanks, Scott. I'll wrap up on Slide 20. Following our spring season, which, as we mentioned, was significantly weather affected, we've developed solid momentum as we move through the summer and into our important fall season. Volume has been less negative in July than in the second quarter, and sales growth has remained in the double digits due to continued price realization. As we lap last year, as John mentioned, we expect price realization to moderate, but we also expect volume to strengthen versus easier comparable growth from 2021. Our customers continue to have solid backlogs of work, and we expect them to remain busy through the end of the year. Overall, the market should provide a reasonable environment for us to execute our commercial and operational initiatives and drive further growth in sales and profits in the second half. In terms of end markets, we are beginning to see some slowdown in residential new construction, which comprises 21% of our sales. With home price inflation and higher interest rates, homebuilders are seeing less demand and are being more cautious in terms of new starts. We would expect this softness to continue with moderate declines versus prior year. On the contrary, new commercial construction representing 15% of our sales, has remained strong with healthy bidding activity and large backlogs. Note also that early phase material shortages in concrete and building components have delayed the landscaping phase of new commercial projects, which, in turn, has dampened near-term activity but increased the backlog of work for our customers. Major repair and remodel, which comprises 27% of our sales, has also remained strong with only a few parts of the country developing some softness. Typically, in a downturn, major repair and remodel has proven to be more durable than new construction, and we…

[Operator Instructions]. The first question comes from the line of Ryan Merkel with William Blair.

I wanted to start with the comments that higher price is hurting growth. Can you just unpack what you mean there?

Yes. I think there, Ryan, we're referring particularly to the maintenance piece of our business. As we described earlier, the maintenance budgets are fairly fixed, both maintaining facilities, et cetera. And when prices go up to the extent they have, they use some short-term tactics to get through and save here and pinch there, seed, fertilizer, et cetera. When prices revert back, they come back and go back to maintaining the long-term health of their properties, right? So there is some price elasticity in that market. And given the significant run-up in prices, we're seeing some of that softness. So that's what we're referring to in terms of kind of price-driven demand dynamics.

Okay. Saying that will correct itself as some of the commodity prices come down?

Right. That's traditionally what we see is that, prices come back down, they're able to spend and use the volume that they need to maintain what they're trying to maintain. So that tends to correct. So you could call that an upside for possibly for next year on the volume side.

Got it. And just to be clear, weather was the biggest impact to growth in the quarter or was it the higher prices because you listed that first in the press release, so I just wanted to clear that up?

Yes. Yes. I mean the price is kind of a more minor component. Obviously, the weather was a big impactor. And we saw that improve. April and May were particularly difficult. And we exited the quarter at 8%. The volume was down 11% for the quarter. We exited at 8% down. We're seeing kind of 5% to 6% down in July. So that's kind of corrected. And really, all of that dynamics going on in those northern markets from the Northeast across to the Pacific Northwest, including Canada, as we mentioned, those were flat, while we saw a 17% growth in the Sun Belt. So -- and when I say flat, flat overall, including the price increase. So it was a pretty difficult spring versus a very good -- the weather was very good last year. So we had that dynamic going on.

Okay. That's helpful. And then it looks like volumes will be down low single digits, maybe mid-single digits in the second half, which is an improvement. So is that -- well, improvement from 2Q. Is that just easier to compare and weather more normal?

Right. If you look at last year, the first half was driven almost, primarily by volume of our growth. And remember, we had 22% growth for the full year, 11% volume growth, pretty much all that volume was in the first half. And then the second half was flat to slightly up last year. And so obviously, you've got that easier comp. And so we would expect to -- volumes to continue to strengthen, be less negative, if you will, in the second half as we move through the third and fourth quarter.

Got it. Maybe just lastly on gross margin. The guidance implies a run rate of about 34% in the second half. I know you're not guiding to '23, but is 34% a fair run rate as we look forward, there's a lot of questions out there and distribution land about where gross margins will settle out in '23 and when inventory profits come out of the numbers? Any help there would be appreciated.

I think if you look at our guidance in the beginning of the year, it had kind of a baseline of 34%. I think that, that certainly will give more as we get closer, but that certainly was in our guidance at the beginning of the year from that standpoint.

And that was the low end, I mean, we guided 34% to 34.5%. And that's where we thought it would reset this year, Ryan, and that's probably where we think it would go when you get -- when the price piece goes out. Keep in mind, however, that every year, we do acquisitions, and we're doing a lot of hardscapes and landscape supplies acquisitions. Those come in at a higher gross margin, also higher SG&A, similar EBITDA range. So you've got that factor. So if you take a couple of years of that, you got to factor in some improvement there just through acquisitions when it comes to gross margin.

The next question is from Stephen Volkmann with Jefferies.

My question is around your comment, Doug, that '23 is setting up to be a tougher year. So I guess maybe that's something around residential, but I don't want to put words in your mouth. So maybe just a little bit of detail about sort of big picture how you're thinking about '23? And then the follow-on there at the same time is what's the playbook for a tougher year? Is there work you can do on SG&A or do you think acquisition activity can accelerate? Is there inventory reduction? Just kind of what are the moving pieces in a "tougher year?"

Right. No, thanks for the question. The context of a tougher year, I'll take it market by market. Obviously, let's start with new residential is 21% of our sales. It's likely that new residential could be softer than it is this year, right, and that would be a headwind. If we look at new commercial, new commercial has been strong. The backlogs are good. The bidding activity is good. So we actually feel pretty solid about new nonresidential and that's 15% of our sales. We model 27% of our sales, our model has been strong. We expect that to be, I'd call it, solid, but the growth could be less than this year. We don't know, but we'd expect it, it could be a little bit softer. And then we look at maintenance, maintenance tends to be steady in any kind of market. And in fact, as I mentioned, volume-wise, there might even be a little upside if commodity prices come down, think of it as maintenance budgets in a dollar sense are stable, right? So if commodity prices come down, then volumes could come up and offset. So when you take all that together, we're not here to call to 2023 yet, but we think it certainly is -- it doesn't look like it's going to be a terrible year, but being cautious and realistic it could be more difficult than this year. The other thing that's happening in this year is obviously we have this price realization, right? And we don't expect that next year, right? So in essence, we'll have to deal with the missing price realization. You've got gross margin that we thought was going to reset this year, that would happen next year. So those dynamics are going on. So when you add that up,…

Got it. Okay. That's super helpful. Just a quick follow-on, on the pricing, since you mentioned it. Do we get positive impact of carryover pricing in '23 or do you think that sort of deflation in certain kind of products might kind of offset that? Just how should we think about inflation in '23?

Well, we'll have to see. Obviously, it's been more persistent this year than last year. We were, if you remember, in our original guidance, in the second half of this year, we were thinking some of the commodities that might come off more dramatically. I think, still just looking long-term, there is the potential for that what we will call roughly 20% of our business that reprices fairly regularly. Some of that may come down in the future, might be expected with regards to fertilizer and PVC pipe to the ones we've talked about a lot. We don't -- some, I think, fertilizer in the second half of this year will come off of its peak, but they'll be elevated at a pretty high level kind of compared to where we were 2 years ago. We're seeing copper wire come off, some of those prices weaken a little bit right now. But how far they come down I think we're going to have to see as we get closer to the year. But there's certainly -- some of the items peaked, I think, in the second quarter and are coming down a little bit, and that's built into some of our guidance.

We do think that the other 80% will be -- kind of be solid, and it will hold, we might get additional price increases there, but we feel good about that other 80% being kind of solid, holding. Obviously, manufacturers will continue to monitor costs and -- but the other 80% really has been in catch-up mode, and we would expect that to continue.

The next question comes from the line of David Manthey with Baird.

First off, John, I don't know if you gave it, but price and volume breakdown across agronomics and landscape products, if you could provide that to us?

We don't split it out completely like that. I think it would be fair to say based upon what Doug mentioned, what we're seeing with regards to agronomic products that it's greater in that line than it is in the landscape products and what I mentioned is kind of the fixed volume component.

Okay. Yes, fair enough. And then definitionally here, when you talk about the 27% that's major repair and remodel what do you think in terms of discretionary versus nondiscretionary in that business? How much of that is sort of responding to something? And how much of it is just deciding you want to do a project? And related, when you talk about new construction specifically, are you talking about selling into a structure that was just built or could that also be someone who's putting in a new outdoor kitchen that never had one before. Just definitionally, if you could help us with those?

Right. So to take the latter, new construction is a home that's just built, right? The new kitchen in the backyard, that's major repair and upgrade. We would classify those major repair and upgrade. When you look at the major repair and upgrade, we get asked a lot, what's discretionary and what's nondiscretionary? I think that's -- we could debate that all day. But I think what's more important and what drives it. And typically, what drives it is jobs, home equity and those kind of things. And there is a degree of housing turnover, right, that when new homes are sold or whatever the new owner comes in, wants to do something different, right? So those are the drivers. And it's actually a strange, when we're talking about next year and maybe new res going down and a recession, et cetera, but with low unemployment, I haven't been in many recessions with low unemployment. And with housing, so it is a strange situation because there's low unemployment, everybody's got jobs. You still have this stay-at-home effect is in place. So you have a lot of white -- it's particularly white collar workers that are fully employed. They're living at home, they still want to do stuff at their home. Their home value is up, so they've got plenty of home equity. So those typically drive strong repair and remodel. And so we'll have to see how it goes. But we're cautiously optimistic that repair and remodel will stay strong because of those factors, which I think -- we think are the drivers of that market. So we'll have to see. But certainly, the foundation is there, and we'll see how the market goes.

[Operator Instructions]. The next Question is from the line of Matthew Bouley with Barclays.

Can I ask on the SG&A side? Yes, I know you mentioned several factors that drove sort of the deleveraging in the quarter despite the strong, I guess, price inflation you had. I'm curious, I guess, number one, if you sort of quantify those pieces that drove the deleverage and maybe if there's anything additional perhaps on the weather and staffing and incentive side that plays into that? And obviously, what I'm really getting at is sort of your view to the second half of the year and the ability to sort of improve the leverage side with SG&A?

Yes. So with regards to some of that SG&A, first, I'll say, acquisitions of the 160 basis points probably accounted for 40 to 60 of that increase in SG&A. Those are businesses that are coming in with higher basis. And about 20 basis points of that, I would say, is -- would be removed on an adjusted basis. We had some onetime costs with regards to that. So I would say 40 kind of more through run rate on acquisitions and then 20 of it was the basis point. Then with regard to it, I mean, wages probably made up of the remaining 90 to 100. Wages made up probably half of it, but we're seeing higher cost with regard to fuel in our delivery fleet. We've continued to invest in IT. We've continued to get our people out. Travel budgets are up with regards to that. So I would say those were the primary components. Fuel, I see some of our -- the investments in our initiatives and then just overall kind of wage inflation combined has driven up SG&A. We do not think, in the second half, while we will say some, we're right now would be forecasting it to be not as great an impact as what you saw in the first half, though the acquisition component will probably carry, if not expand, with some of the -- our flurry of activity we've had most recently.

Got it. That's great color. And then just a second quick one, just on customers and inventories. I guess this is kind of skewing to the medium-sized and larger sized customers. But I guess, to what degree are your customers able to hold sort of excess inventory? And do you suspect over these past few months that there was any overordering going on at customers that could now result in some destocking?

No. I mean the capacity for them the whole inventory is not great. You do get some buying. We have EOP programs and stuff that were combined, can move around, but that's particularly in the early part of the year. So at this point, we wouldn't have a sense that there's significant inventory that our customers are holding or are sitting on. So yes, they're going to continue to buy kind of hand to mouth as they go through the rest of the year.

The next question is from the line of Keith Hughes with Truist.

Yes. I just wanted to go back to some of the pricing questions. You talked about declines coming in some of the agronomic products. Are you starting to see prices in sprinkler pipe? Is it starting to come off and how quickly is...

We're not -- we are not seeing that in, I would say, irrigation, hardscape. We're not seeing really a significant reduction in our cost or anything being passed through to the industry right now.

Okay. And that would -- would that apply hardscapes as well?

That would imply hardscapes as well. Almost all of our product lines other than the specifics on copper wire, I know is one that we've seen, and I think for fertilizer will be less of those two.

The next question comes from the line of Mike Dahl with RBC.

Doug, just wanted to ask on the second half volumes a little bit more. So less negative in the second half. It sounded like 2Q is the biggest issues were in the northern markets, but as you've gotten into July and then your expectations were still negative volume in the second half, has that broadened out across your markets in terms of volumes turning negative? Or is that still a broad comment around just not seeing the recovery in those northern markets?

Yes. I think the northern markets have come back some, but they certainly aren't matching the strength we see in the Sun Belt. So we're just being cautious. Now it could be more positive, right, as things continue to develop because as I mentioned before, volumes last year were kind of flat to slightly up. And we'll see how we do, right? We like the trends we see so far, as I mentioned, through June to July. We'll see how that continues. But the trend of the kind of the northern markets being softer than the south of the Sun Belt have continued, though we've seen some recovery in the northern markets. The southern markets have remained pretty steady in that kind of strong mode.

Okay. And my second question, just a follow-up on Matt's question around inventories. It seems like there's some destocking going on in the retail channel around certain products, obviously, retail would carry -- you carry a lot more in different products, but when you're looking at your inventory balances up a bit, some of that's M&A, some of that's inflation, but how are you thinking about managing your inventory as you go into year-end against what you've characterized us and discussed about potentially seeing a tougher 2023 trends?

We think our inventories will be coming down, just normal seasonality. I think one big thing to realize is it's because of the uncertainty in the supply chains and the lead time that were coming from the suppliers, every distributor, and ourselves included, had to bring in more inventory just because we weren't -- so there was so much great uncertainty on when we could restock. It's not a type of product issue, it's just we are carrying more because we didn't know when the next ship was coming or the next delivery was coming from our suppliers. And so if we could get it, we wanted within our DCs or in our stores. What we've seen most recently is that those requirements and those lead times from suppliers will not -- nobody would say all supply chain issues have resolved themselves, but they're getting significantly better, almost across the board. So what we -- we normally have a seasonal takedown. But in addition to what we're doing is we're taking out those extra lead times that cause that extra safety stock and that allows us to pull down inventories to more kind of what I would call our normal stocking level that is necessary to replenish our stores and our customers.

The next question is from Jeff Stevenson with Loop Capital.

Congrats on the nice quarter.

Thank you.

So with eight acquisitions year-to-date, that's in line with the total number you did last year. And I'm just wondering what's driving the increased pace of acquisitions? Is there more motivated sellers in the market or is it some of the internal initiatives you guys have been doing?

Yes. Good question, Jeff. This is Scott. I don't think there's been any specific macro drivers that are pushing sellers to the exits. I think it has more to do, as we mentioned a few quarters ago, we intentionally strengthened our team to both increase our capacity to source and close deals. But equally as importantly, to improve our focus and execution of integrating companies after closing. And those actions have played out very well for us on both fronts. Acquisitions, by their nature, can't be neatly forecasted, and so you can get some, call it, hot streaks and dry spells. But I think the bottom line for SiteOne is we have better capacity than we've ever had, and we feel really good about our strong momentum going into the second half and moving into 2023.

Yes. And it is amazing how as we've added capacity of our quarters that go out and kind of find and talk to companies that, that we're still discovering as big we are and as ubiquitous as we are, we're still discovering great companies that kind of hidden gems, if you will. And it's just when you've got more folks out there, you tend to turn up more activity and so we're seeing some of that as well, as Scott mentioned.

The next question is from the line of Andrew Carter with Stifel.

One thing I wanted to ask about is you kind of, over time, mentioned that the hardscape locations nursery, the higher SG&A, but they're also higher margin. How do those items kind of index towards kind of the more discretionary aspects, new construction? And from a mix perspective, if you had some weakness in new construction, would that be difficult to kind of overcome kind of at the EBITDA level?

No, great question. I'll take hardscapes first, which -- most -- if you noticed, most of our acquisitions are hardscapes and landscape supplies, that's very much pointed at the repair -- major repair and remodel market. The landscape supplies part of that is really more maintenance, if you will, molds, soil, et cetera. So we love the fact that we're growing in those areas because they're really pointed at the more durable parts of the market. Nursery would be kind of more new construction. So that's a line there. But that's how those product lines play out.

The next question is from Damian Karas with UBS.

Lot of ground covered. I appreciate all the details. Just a few follow-ups. Doug, you mentioned earlier, major remodels been more stable in past market downturns compared to new construction. I guess just thinking about trends from the last few years, hasn't repair and upgrade actually been a bit more of a growth driver than new construction for you? And I would think that, maybe just opposed to what you've seen in prior cycles?

Right. No, I mean the professional repair and remodel market has been very strong, right? I mean there's no doubt about it. It's been a big driver of growth. My comment was on a traditional market and a traditional downturn. So if you go back to the great downturn or typical downturns, repair and remodel is going to come down roughly half of new construction. But I don't think we're in a typical market, right? As I mentioned, we're in a low unemployment market and with high home values. And so those typically drive repair and remodel. So we'll have to see, but it certainly is a market that we embrace. The outdoor living trend is real. COVID put real emphasis on that, but it's going to continue long term, stay-at-home lends itself to repair and remodel. So lot of things pointed at that sector that caused it to drive long-term growth. And so we like it, and we're going to continue to build that as a part of our end market portfolio.

Understood. And just a follow-up on the price-sensitive portion of maintenance you spoke to. I would think you could only defer maintenance activity so long. So I guess, regardless of whether some of these prices -- ag prices start coming down, is there pent-up demand that simply needs to happen? I mean how long can those short-term tactics last?

Right. No, you're right. And we would think on an annual basis that there is some pent-up demand there and some need to kind of catch up and go back to normal. So yes, we think there's potential upside there as we look forward possibly in the second half but into next year. The spring, we did lose some rounds, I think, as John mentioned, and you don't get that back, but it's upside for the next year because if the weather is more normal next year, those applicators are going to go do those rounds. So yes, but I think there's some potential upside there that we'll see how it plays out, but that -- while it hurts us this year, there could be some upside for next year.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Doug Black for any closing remarks.

Okay. Great. I know we're running over, but thank you all for joining us today. We really appreciate your interest in SiteOne. We're excited about our company, and we look forward to building it and working with you as we go forward. And we look forward to speaking with you again next quarter. A final thank you to our great associates for doing such a great job of helping us build SiteOne. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.