Good day, and welcome to the SiteOne Landscape Supply Inc Conference Call. 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. Please go ahead.

Thank you, and good morning, everyone. We issued our second 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. 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. 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're pleased to see end market demand remain resilient in the second quarter, which allowed us to achieve solid organic daily sales growth and record operating cash flow despite the continued normalization of our gross margin and EBITDA margin. Our strong teams executed well in gaining market share, driving positive organic sales volume growth and managing through price deflation and select products. We were also pleased to add 3 new high-performing companies to SiteOne during the quarter and in July, bringing terrific talent to our team and expanding our customer relationships and our full product line capability in their respective markets. 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 delivering consistent performance and growth in the near term. As we move into the second half of the year, we remain confident that our well-balanced business, strong balance sheet, exceptional teams, improved capabilities and robust acquisition pipeline, position us well to navigate the current environment and achieve continued success. 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 current outlook for 2023 before taking your questions. As shown on Slide 4 of the earnings presentation, we have grown our footprint to more than 650 branches and 4 distribution centers across 45 U.S. states and 6 Canadian provinces. We…

Thanks, Doug. I'll begin on Slide 9 with some highlights from our second quarter results. We reported a net sales increase of 11% to $1.35 billion for the quarter. There were 64 selling days in the second quarter, which is the same as the prior year period. Organic daily sales increased 4% compared to the prior year period primarily due to volume growth on solid end market demand. Price inflation contributed approximately 1% to organic daily sales growth during the period. As Doug mentioned, we are seeing less pricing inflation as we comp the large price increases of the last year and the cost for products like fertilizer, grass seed and PVC pipe decrease. We now expect price inflation to be roughly flat for the full year, which comprise price deflation in low single digits in the second half of this year. Organic daily sales volume increased 3% for the second quarter as we experienced solid demand from our end markets. In addition, in comparison to both the second quarter of 2022 in the first quarter of 2023, weather had a much smaller impact on sales. Organic daily sales for Landscaping products, which includes Irrigation, Nursery, Hardscapes, Outdoor Lighting and Landscape Accessories, grew 5% for the second quarter, primarily due to price inflation resulting from rising product costs. Organic daily sales for Agronomic products, which includes Fertilizer, Control Products, Ice Melt and Equipment, grew 2% due to volume growth resulting from solid demand and improved weather in key northern markets. The strong volume growth was partially offset by lower prices for products like fertilizer and grass feed. We were pleased with the performance of our acquisitions in the second quarter, acquisition sales, which reflects sales attributable to acquisitions completed in both 2022 and 2023 contributed approximately $86 million or 7%…

Thanks, John. As shown on Slide 11, we acquired 2 companies in the second quarter and 1 in July with a combined trailing 12-month net sales of approximately $35 million. Since 2014, we have acquired 85 companies with approximately $1.5 billion in trailing 12-month net sales added to SiteOne. Turning to Slides 12 through 14, you will find information on our most recent acquisitions. On May 8, we acquired Adams Wholesale Supply with 3 locations focused on providing Agronomics and Landscape Supplies with San Antonio, Dallas/Fort Worth and Houston, Texas markets. On May 26, we acquired Link Outdoor Lighting with 4 locations providing Landscape Lighting, the Landscape Contractors in the Orlando and Naples, Florida markets as well as in Houston, Texas and Nashville, Tennessee. On July 3, we acquired Hickory Hill Farm & Garden, single-location wholesale distributor of Irrigation, Nursery and Landscape Supplies. The acquisition of Hickory Hill complements our existing business in the Lake Oconee Georgia area, allowing us to provide the full line of landscaping products and supplies to landscape professionals in this high-growth local market. Our acquisitions continue to add terrific talent to SiteOne and move us forward toward our goal of providing a full line of landscape products and services to our customers in all major U.S. and Canadian markets. Summarizing on Slide 15, our acquisition strategy continues to create significant value for SiteOne. With a strong balance sheet and a robust pipeline across all lines of business and geographies, we are confident that we will be able to add many more outstanding companies to SiteOne during the year. I want to thank the entire SiteOne team for their passion and commitment to making SiteOne a great place to work and for welcoming the newly acquired teams when they joined the SiteOne family. I am confident in our ability to keep adding more outstanding new companies through acquisition as we move through 2023, creating excellent value for all our stakeholders. I will now turn the call back to Doug.

Thanks, Scott. I'll wrap up on Slide 16. As mentioned, we are pleased to have achieved 2% organic daily sales growth in the first half of 2023. So far, the year is playing out as we had expected, with durable demand and moderating price growth due to commodity price deflation. As we look forward to the second half, as John mentioned, we expect price inflation to be negative, resulting in flat pricing for the year. In terms of volume growth, we remain optimistic that end market demand will remain durable as we continue to execute our commercial and operational initiatives to grow faster than the market. In terms of end markets, we expect the decline in new residential construction, which comprises 21% of our sales to continue during the second half. Note that builders have become more bullish in terms of housing starts in the second half, which could lead to sales growth for landscaping products in the new residential construction market late in the year or in 2024. New commercial construction, which represents 14% of our sales, has remained solid and based on our current bidding and customer backlogs, we expect continued growth in this market throughout 2023. The repair and upgrade market, which represents 29% of our sales, has been mixed so far this year across geographic markets and we now expect this market to be flat. Lastly, we expect sales volume in the maintenance category, which represents 36% of our sales to remain steady with modest growth. With this backdrop, we expect our organic daily sales to be down slightly in the second half, driven by a decline in prices. For the full year 2023, we expect organic daily sales to be approximately flat. We expect gross margin in the second half to be similar to the…

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

Thanks for all the help on guidance for the year. My first question is on the price deflation that you mentioned, and it's a 2-parter. I'm curious, what is the source of the deflation? Is it simply just passing through lower costs? Or is there also excess supply of some of these items? And then do you think prices are going to stabilize in the second half? Or could continue to go lower as we look into 2024?

We would -- we think it is primarily just reorienting the prices for lower cost is what's going on, were the market prices if you've seen some of the commodities like fertilizer have come down. It's not from an oversupply and increased competition for business. The demand is -- it's actually improved this year. We showed good volume growth in Agronomics and Agronomics is the primary area where we are seeing deflation. I think our crystal ball isn't great, but I think we've seen -- we're aware with the pricing that's going to happen in the second half, and we've incorporated that into our guidance right now from that perspective. So we -- there were some price increases, grass seed and fertilizer that have gone in recently and feel pretty good about those holding on through the fall selling season.

And then maybe just a question on sales trends. What are you seeing in July? Is that consistent with organic sales down low single digits? And what is the feedback from contractors? Are they still quoting and booking new work? Or are they sort of bleeding backlog at this point?

July has been a solid month in line with our guidance. And our customers are, I'd say, solid to maybe even a little optimistic. The builders have become more optimistic, which has some of our larger customers feeling -- kind of feeling better about spec data at the late part of the second half. And then the commercial market has remained strong. So backlogs have remained or bidding is still in a growth mode versus prior year. And so I would call -- and so -- the backlog has got very long during COVID and those certainly have come down to normal. Contractors are certainly having to work harder to find work. But we don't see any kind of panic or customers that can't find the work. There's simply kind of normal backlogs to pre-pandemic levels, I guess, is how we would call it.

The next question comes from David Manthey with Baird. Please go ahead.

To build on that last question, last quarter, you were a little slow out of the gate on the year, and then April rebounded for you. Can you talk about the trends that you saw through the quarter, were they pretty stable? And related to that, this extreme heat situation, is that actually a negative for your business net?

So we saw volume, as you mentioned, picking up through the quarter. Of course, price came down. And so those 2 factors have kind of worked in tandem. And so I'd say it's been pretty kind of consistent through the spring and the second quarter, though the total organic growth would have kind of dropped sequentially from April to June, though still positive in June. In terms of the weather, we benefited this year from the weather in the northern kind of Great Plains across the top end of the U.S., which had very poor weather last year in the spring, had better weather this year. So that was a benefit to us. Obviously, it was weather in Texas and some of the Southern California, Arizona, Texas, Florida, which kind of worked against us. We would call that maybe a push in the second quarter in terms of weather. And when you take the heat, the heat helps us to some degree in terms of they're going to have to treat the lawns, irrigation tends to do better in the hotter weather. However, in some of the extreme heat markets, we're seeing customers kind of cut their afternoon hours and do some things there that might clip demand. So overall, I think it would be a fairly neutral effect. We haven't seen a large negative effect from the extreme heat at least to date. The summer months in June and August tend to be a bit of a low -- anyway as people are taking vacations before school, et cetera. And we certainly have seen that same trend, but nothing that's different from prior years.

And building on this pricing question, it sounds like pricing levels in your commodity products Agronomics from the start of the year, have declined slightly, but it also -- I believe, John, you said that there's a price increase, you feel like maybe those are stabilizing. Just correct me if I'm wrong on that. And then second, any commentary on non-commodity products, pricing trends? Are they stable? I know there's a wraparound effect from last year, and there's obviously year-over-year comps. But as you look from the beginning of the year to today, if you could just talk about trends in those 2 categories.

Yes. I think what we've talked about at the beginning of the year is still holds. I look at our product lines, we're still showing increases in and almost every kind of -- for the quarter in almost every of our major product lines other than Agronomics, but Hardscapes, Nursery prices have held up very well. Irrigation other than PVC pipe and drip tubing has held up very well. So in general, I think our thesis with regards to pricing has come out that the 80% kind of our business that's non-commodity-related roughly has maintained pricing and then the commodities has come down. Maybe some of the commodities have come down a little bit faster. We were probably low single digits, now we're roughly flat for the year. I would say that trend. But I think directionally and kind of the model we have continues to hold from what we've talked about in prior calls.

The next question comes from Damian Karas from UBS. Please go ahead.

Nice to see you guys getting back to volume growth. Congrats on that. I had a question kind of specific to the maintenance side of your business because I recall from last year that, that was unexpectedly weak as a lot of your contractors were rationalizing supply because of inflation. I'm assuming that, that was a nice tailwind for you in the second quarter? And just curious what kind of customer behavior you're seeing now in the maintenance side? Are budgets sort of acclimated to today's pricing and you're getting back to kind of like normal quantity of product being applied?

Yes. In general, that's what we're seeing. We're seeing strong volumes and Agronomics. And the prices are down, obviously, which mitigates that. But that's played out as we expected. We didn't expect customers to kind of come back to normal application rates. In terms of like the golf industry, they've got nice revenues. And so their budgets are fairly fixed or increased. Prices are coming down. They're able to use more product. So yes, we're pleased that, that trend in Agronomics has played through, and we expect that to continue to play through into the second half.

And would you be able to give us a sense for what -- how you think you're performing year-to-date in terms of share gains or losses? Any perspective on kind of what the industry performance has been?

We do feel like we're gaining share consistently. And each market has the puts and takes, but across the country, we're gaining market share in really all of our product lines. And so we feel good about that. We stay -- there's not a lot of good industry data, but we stay in close contact with our suppliers. And so we know what's going on with ourselves relative to our competitors, et cetera. We're very pleased with our small customer efforts, as we have stated before. We've got less share with smaller customers than we do with the larger customers. It's just the way that we were -- we developed early on in our history. And so that's a big target for us. And we see that small customer growth that is far ahead of the industry, if you will. And so we feel like we're making particular progress there with the smaller customer segments, which is great to round us out as a company. We already have significant share with the larger customers, we've been holding on to that. Obviously, that's a lot of where the fighting is in these types of markets is for that large customer business. We're holding our own there, but we're picking up kind of significant share in the small -- medium to small customer segment, which is part of our strategy.

The next question comes from Mike Dahl with RBC Capital Markets. Please go ahead.

And just a follow-up, one more kind of clarification or quantification on the pricing side. So it sounds like pretty stable on non-commodity. Can you just help us understand kind of in terms of quantifying then how much commodity prices are down? And then when you think about if commodity prices are stabilizing here or whatever your market's kind of telling you for the second half, how that would impact the beginning of 2024 as well? I know it's early, but just if commodities continue to track here, what would that mean for net pricing in '24?

I don't have exact numbers on 2024 yet. We'll have to see -- see how that plays out. But I think it would be fair to say, at least in Q1, we probably face a little bit of a headwind because of commodities since we did -- if we look at the quarters, we had 6% in Q1, and that will be the tough comp from that standpoint. We'll have to see that kind of the rest of 80% of the business, if that offsets that 6% number from that standpoint. Percent of commodity? Yes. I mean we have some commodities that are, I would say, kind of -- of fertility, which is primarily fertilizer. Quantifying that, probably we're about -- at our current run rate, low double digits in the low teens at a combined basis, down year-over-year on pricing. I would expect piping would be similar. Those are the ones that we've called out and grass seed, and we have a pretty big grass seed season in Q3 would be the 3 that will probably be down low double digits. So that blends together. And as we alluded to on the call, we've got that -- the rest of the business that's out there and much more modest or price increases, and that gives us the low single-digit headwind on the second half.

And then my second question is on [Indiscernible]. Last quarter, you outlined the continued expectation for gross margins to normalize down to 34.5 to 35. If we look at the 2Q upside and then kind of put in flat year-on-year in the second half, it seems like you get to a little north of 35. So I'm wondering just how much of that is still kind of timing related versus the internal initiatives or M&A potentially driving kind of some structural uplift to how you're now viewing gross margins?

Yes. I think we talked about [34.5] to [35], as you say, kind of our guidance, what we talked about on the call is going to put us at the high end of that number. A lot of that will be -- will be kind of, I think, some freight and the acquisitions will be positive with regard to that, though, year-over-year, some of the kind of the larger high gross margin acquisitions we're starting to comp those also from that standpoint. So -- so rest of the year, we are at the high end, more 35-ish for that, if you do the math. And then -- and a lot of that due to kind of as we work through all these kind of onetime kind of benefits kind of rolling off and then -- and then kind of structurally, we think this is kind of where we start as our baseline for future years.

Next question comes from Keith Hughes with Truist. Please go ahead.

The unit growth in the quarter and the projection here is, I mean, a good bit better than must every one of your peers on both the manufacturer and distribution side. So I guess my question, is there any one market that's outperformed even your expectations as we come through this kind of turbulent period?

Well, the strength of our has been in the South Florida, the Southeast, it's kind of been -- has been very strong. It's been traditionally strong for us. But if you want to -- if you're asking where our strongest area would be that it would be kind of Florida and the Southeast. Obviously, our weakest area would have been California and where we had really, really poor weather. Texas has had poor weather. So those have been markets that are traditionally strong that have been a little weaker, and it all kind of blends out. But that's been our strength. We've been very pleased with kind of the Southeast U.S. performance so far this year.

And from an end-user market perspective, is there any one of those that have just -- not going to hit as much as you would have anticipated?

That's not going to hit as much?

That has not been so far as weak as maybe you would have thought at the beginning of the year?

Well, we're a little bit surprised that the residential market is -- seems to be more -- the builders are more bullish for the second half. Now we kind of haven't seen it yet, but we were thinking there would be a longer negative trend in new residential construction. And it just seems like the builders are more optimistic than we would have thought that would have been. Commercial has held up well. We thought commercial was going to be solid. It's probably been a little better than we thought. The model has been kind of as expected and maintenance really has been as expected. So I'd say the new residential construction but we haven't seen it. The future looks better there later in the second half and in '24 than we would have thought coming into 2023.

The next question comes from Joe Ahlersmeyer with Deutsche Bank. Please go ahead.

Just wanted to follow up on that last point about New Residential. Can you clarify if that late second half benefit that you think you may get this year versus next year, is that included even at the high end of your guidance? Or are you still sort of pushing that out to next year?

We haven't included anything with regards to that into our guidance at all from that standpoint. I mean that would be kind of more of a '24 [indiscernible], is what we think. And our guidance is based on conversations and what we're seeing with contractors today in the marketplace.

And then the comment about returning to margin expansion next year. I assume that's more on the volume leverage and the cost side and less so from the gross margin if we're stabilizing there. Could you maybe just talk about the sort of expectation of what drives the margin expansion from here? If it is more volume or if it's further productivity on the cost side? And then if I could just sneak another one in, just any plans on how to trend the inventory into next year?

I'll take the first one. I'll let John take the second one. So no, we feel like it will still be the balanced going forward. Once we -- this is a reset year, when we finished the year in kind of a stable situation, we see reasonable demand going forward. We do expect continued gross margin improvement both organically through our initiatives with small customers, our private label brand initiatives and then or just operating freight and some of our initiatives there. We also will get mix benefits from acquisitions going forward in terms of gross margin. But then on the SG&A side that you mentioned, we do expect to get operating leverage and we have a lot of initiatives focused on productivity that we expect to pay off. So we see both of those contributing to our EBITDA margin expansion as we head toward our range of 13% to 15% adjusted EBITDA margin. We expect that improvement to come from both SG&A as a percent of sales and also gross margin. And then, John, you talked to inventory?

Yes. We would expect inventory turns to continue to improve next year. I mean I don't know if Q2 especially was obviously very strong. This would be kind of more of a normal from a standpoint. We hope to go into next year with less inventory and then kind of be more specific on the build in the first quarter. That will still be there kind of, I would say, more flattish in the second half before they kind of trend down at the end of the year. So I think kind of this quarter, because we -- over the -- really the last 12 months have been working off some of the excess inventory that we brought in to kind of address the supply chain challenges during the COVID period. So this was an especially strong quarter for that. I would say we're going to go back to more historical quarters. But we do expect kind of next year and go forward to continue to improve our inventory turns. We're still not -- if -- where we project at the end of this year, we're still not where we completely were right before COVID and there's still opportunities going forward.

The next question comes from Jeffrey Stevenson with Loop Capital.

Congrats on the nice quarter. I just wanted to first comment on Repair & Upgrade, where you're expecting demand to be flattish this year. Doug, you mentioned that demand is mixed by region. And you called out the Southeast as being one of the stronger markets, but could you provide any more color on some of the areas that maybe are a little more challenged than other?

Well, we've been a little more challenged in the West in general than the East. And part of that is we -- it's kind of hard to tell how much of that is weather and market but that's where we would have seen -- where we think that the market maybe is not as strong as we mentioned the Southeast and the East in general. In terms of what's going on in the remodel market, obviously, the headwind would be the low housing turnover. Existing home sales are down and existing home sales always drive good remodel activity, including kind of professional remodel. And then we have seen some -- as the uncertainty in the economy has kind of set in, some, I'd call it, not kind of middle range projects that are just a little slower than they were, right? I mean keep in mind that we are coming off of a kind of a [Indiscernible] pace before. And so maybe we got spoiled, but we're certainly seeing those backlogs come down. That being said, we're still -- good business out there, which is still a big market for us. We feel good about it. We just think it's a bit softer than it was. It was in the high-growth mode. It went to a reasonable growth mode. Now it's, call it, flat to slightly up. And we think -- we'll see how it goes. But the puts and takes of the economy, we like the fact that we see consumer confidence coming up because certainly, consumer confidence impacts remodel. We think that the sticker shock and the -- and the headwind of existing home sales has kind of already been played in. And so we would look for that to be solid, perhaps improving as we look into '24 and beyond. Right now, we're calling it flat.

And then in commercial, it seems like you got really good visibility through the remainder of the year. But just on bidding activity, have you seen any impact from whether it be the regional banking crisis or higher interest rates? And at a high level, kind of how you're thinking of that end market as we kind of head into '24?

Right. Yes, there was -- I guess, worry in general that, that would have it happening. And in fact, the banking price is on commercial. We haven't seen it. The bidding has been solid. It's been consistent. Our customers are busy. So it looks like that that's not going to affect that market, given what we see with our customers and the activity that we're seeing. We really have seen no slowdown there at all. So we're encouraged by that.

The next question comes from Matthew Bouley with Barclays. Please go ahead.

I'll ask on SG&A. I think you called out acquisitions and cost inflation and growth investments is impacting that. It looks like on a per branch basis, SG&A might have been up roughly 15% in the first half of the year. And I think the guide is implying it gets a lot closer to flat year-over-year. So just kind of any color on what you're doing to sort of manage down SG&A here in the second half.

Well, I think 2 things. One is we -- a lot of the increase came in at -- during the second half of the last year. So we are in the comp -- higher numbers. But in addition, we're looking closely and managing all SG&A expense. We're looking at our staffing models to make sure that they're following along with demand from that standpoint and keeping a close eye on continuing to kind of watch on -- focus -- spend on the things that are going to drive volume growth this year and next, but also taking a keen eye to the items that won't have that benefit from that standpoint.

And just to build on that, we respond as the market -- as the market plays out. And so in markets that have a tougher headwinds, either in terms of market or weather, we pulled back significantly on labor appropriately, right, to serve the lower demand in other markets, we would be in a growth mode because of a stronger market. So one of the -- one of the benefits of our -- the way we run our company and in a very decentralized way that we're flexible for each market to kind of match what's going on in that market. So we're certainly working at hard this year because demand is -- it's different across the country. And so that's how we're managing. And as John mentioned, we're lapping kind of increases from last year. So we feel good that will -- as the growth comes back, as we move into next year, that we've got opportunities to get good operating leverage across the company.

And then secondly, on the gross margin, obviously, you had the inflation benefit previously and now that's rolling off. Think you mentioned earlier that you're kind of managing price versus cost in spite of this commodity deflation. So my question is, are you actually benefiting at all from that spread with commodities coming down? Or do you sort of have to pass through that deflation immediately? And what does deflation actually end up doing to the gross margin?

We're fortunate that the -- in general, the industry, both on the good side and bad side follows the cost of the supplier. So in general, as raw material costs come through kind of the market will go with it. And we won't be able to, especially for commodity products where we're bidding on PVC pipe jobs or for fertilizer application. Our while the percentage of margin will hold, our kind of -- the dollar of gross profit dollars will decrease with that. And that's kind of the headwind we've talked about with regards to the sales side. But the market is relatively rational as far as from that standpoint and kind of prices up of a margin basis rather than -- and so, as we go down, I guess, in general, what we're thinking is we're going to be able to maintain the margin, but the price will come down with it.

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

Okay. Thank you all for joining us today. We very much appreciate your interest in SiteOne. We're excited about our company and strategy, and we look forward to speaking to you again on our next earnings call. Thank you to our terrific associates, also our suppliers and customers. Thank you, and have a great day.

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