Yahoo Finance SiteOne Landscape Supply, Inc. (NYSE:SITE) Q1 2024 Earnings Call Transcript
SiteOne Landscape Supply, Inc. (NYSE:SITE) Q1 2024 Earnings Call Transcript May 1, 2024
SiteOne Landscape Supply, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to the SiteOne Landscape Supply First Quarter 2024 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to John Guthrie, CFO. Please go ahead.
John Guthrie: Thank you and good morning, everyone. We issued our first quarter 2024 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 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 for joining us today. During the first quarter, our teams continued to execute well overcoming persistent commodity price deflation and poor weather in our stronger construction markets to achieve positive organic daily sales growth and good overall growth in net sales. Though our near-term adjusted EBITDA results were dampened during the traditionally slower first quarter, we believe that we will be able to expand our adjusted EBITDA margin for the full year as we move through the selling season and lap the price declines experienced during the second half of 2023. We were also pleased to add two high-performing companies to SiteOne in April, including Devil Mountain, which is an exciting new platform for growth in our nursery product line in the western United States.
Both companies have talented teams and strong customer relationships and they expand our product lines and market presence in their respective markets. Through our acquisition strategy and our commercial and operational initiatives, we continue to build SiteOne for the long term as a world-class market leader while delivering consistent performance and growth in the near term. With our well-balanced business, strong balance sheet, exceptional teams, improved capabilities and robust acquisition pipeline, we remain confident in our ability to navigate the current environment and achieve continued success in 2024 and beyond. I will start today's call with a brief overview of our unique market position and our strategy, followed by some highlights from the quarter.
John Guthrie will then walk you through our first 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 690 branches and four distribution centers across 45 U.S. states and six Canadian provinces. We are the clear industry leader over three times the size of our nearest competitor and larger than two through ten combined. Yet, we estimate that we only have about a 17% 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. At the only national full product line wholesale distributor in the market, we also have excellent balance across our product lines as well as geographically. Our strategy to fill in our product lines across the U.S. and Canada both organically and through acquisition further strengthens this balance over time. Overall, our end market mix, broad product portfolio and 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. 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 complemented by our acquisition strategy which fills in our product portfolio, moves us into new geographic markets and adds terrific new talent to SiteOne. Taken all together, 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 eight years with consistent organic and acquisition growth and solid 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. Shifting to current conditions, we are experiencing commodity price deflation which causes a temporary negative impact on organic daily sales growth, gross margin and adjusted EBITDA margin. We expect this negative impact to subside in the second half of 2024. Longer term, we have ample opportunities to increase our gross margin and improve our operating leverage through our commercial and operational initiatives. Accordingly, we remain confident in our strategy to drive revenue growth both organically and through acquisition, while expanding our adjusted EBITDA margin toward our longer term objective of 13% to 15%.
We have now completed 93 acquisitions across all product lines since the start of 2014. Our pipeline of potential deals remains robust and we expect to continue adding and integrating more new companies this year to support our growth. These companies strengthened 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-connected with the best companies in our industry and expect to continue filling in these markets systematically over the next decade.
I will now discuss some of our first quarter highlights as shown on Slide 8. We achieved 8% net sales growth in the first quarter with organic daily sales growth of 1% and 7% added through acquisition. Organic sales volume grew by 5% as our teams continued to gain market share to supplement the sluggish market demand. Overall pricing declined 4% for the quarter as double-digit deflation in commodity products like fertilizer, seed and PVC pipe more than offset very modest cost increases in our other product lines. Gross profit increased 5% driven by our acquisitions and our gross margin decreased 100 basis points to 33.3%. This result was in line with our expectations as the ongoing price deflation in commodity products continues to drive a near-term headwind to gross margin.
Additionally, in the first quarter of 2023, we were still enjoying significant price inflation which aided gross margin thereby providing a tougher comparable. Acquisitions increased our gross margin in the first quarter as our mix of acquired companies operate with a higher gross margin and higher SG&A. Our SG&A as a percentage of net sales increased by 140 basis points to 36.2%. This increase was driven by our acquisitions and by a significant increase in our healthcare costs in the base business. We expect the healthcare costs to stabilize during the remainder of the year and we expect to gain good SG&A leverage on our base business as we move through the main selling season in the second and third quarters. As a result, we expect to achieve SG&A operating leverage for the full year 2024.
We have a significant opportunity to achieve further SG&A leverage over the coming years as we implement our commercial and operational initiatives and grow our company. Adjusted EBITDA for the quarter declined 47% to $21.1 million and adjusted EBITDA margin declined by 250 basis points to 2.3% as the combination of lower organic daily sales, lower gross margin and higher seasonal SG&A from acquisitions affected our short-term financial results. I would note that despite the reduction in adjusted EBITDA for the quarter, our operating cash flow improved by $53 million versus the first quarter of 2023 with the benefit of our supply chain initiatives and good overall working capital management. In terms of initiatives, we continue to grow our small customers faster than our average while also driving growth in our private label brands and improving inbound freight costs through our transportation management system.
These initiatives are helping to mitigate the gross margin decline that we are experiencing in 2024 and should contribute to expanding gross margin in the future. We continue to increase our percentage of bilingual branches now at 60% and are executing focused Hispanic marketing programs to create awareness among this important customer segment. We are also making great progress in our sales force productivity as we leverage our CRM and establish more disciplined revenue generating habits among our over 600 outside sales associates. Continued rollout of MobilePro and Dispatch Track allows us to offer better customer service while also increasing the productivity of our branch staff and delivery fleet. Acquisition of Pioneer has allowed us to gain new functionality in bulk delivery and in our point-of-sale system which we plan to develop further and leverage with our existing business.
During the quarter, we continued to make good progress in growing our digital sales and cultivating regular users of siteone.com. This helps us increase market share while allowing our associates to focus more on creating value for our customers and less on transactional activity, continue to introduce new functionality for siteone.com and are ahead of our goal to double sales online in 2024. Taken altogether, we are continuing to prove our capability to drive organic growth, increase gross margin and achieve operating leverage through our initiatives. On the acquisition front, as I mentioned, we added two excellent companies to our family after the quarter with approximately $120 million in trailing 12 month sales added to SiteOne. With an experienced team, broad and deep relationships with the best companies, strong balance sheet and exceptional reputation, we remain well positioned to grow consistently through acquisitions for many years.
In summary, our teams are doing a good job of managing through the near-term headwinds, leveraging our many opportunities for improvement and building our company for the long term. 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 first quarter results. We reported a net sales increase of 8% to $905 million for the quarter. There were 64 selling days in the first quarter, which is the same as the prior year period. Organic daily sales increased 1% in the first quarter compared to the prior year period as volume growth of 5% more than offset price deflation for commodity products. Consistent with prior quarters, price deflation in the first quarter was driven by commodity products like PVC pipe, which was down 20%, and fertilizer and grass seed, which were down 13% and 15%, respectively. We expect price deflation to be a headwind but moderate through the third quarter of 2024 as we fully lap the price decreases of 2023.
For the full year, fiscal 2024, we now expect price deflation at the high end of our 1% to 2% range. Organic daily sales for agronomic products, which includes fertilizer, control products, ice melt and equipment, increased 10% for the first quarter due to strong volume growth resulting from lower prices, solid end market demand, market share gains, more snow events and an earlier start to spring in many key Northern markets. We saw double-digit volume growth for ice melt equipment, fertilizer and control products, which more than offset the price deflation in many of those same products. Organic daily sales for landscaping products, which includes irrigation, nursery, hardscapes, outdoor lighting and landscape accessories decreased 2% for the first quarter due to lower prices for products like PVC pipe and unfavorable weather in many key construction markets.
Geographically, five out of our nine regions achieved positive organic daily sales growth in the first quarter. We saw double-digit organic sales growth in the Midwest, which benefited from solid demand, less rain and an earlier start to the spring season. Conversely, we saw organic sales declines in Southeast markets due to tough comps and less favorable weather. Acquisition sales, which reflect sales attributable to acquisitions completed in 2023 contributed approximately $62 million or 7% to net sales growth. Scott will provide more details regarding our acquisition strategy later in the call. Gross profit for the first quarter was $301 million, which was an increase of 5% compared to the prior year period. Gross margin decreased 100 basis points to 33.3% primarily due to lower price realization partially offset by the positive impact from acquisitions.
Just as we benefited from a rapid rise in market prices relative to our lower inventory costs on the way up, the drop in market prices relative to our higher inventory cost has created a temporary headwind on the way down. We are managing through the headwind and expect year-over-year gross margin comparisons to improve as we move into the selling season. The first quarter of 2023 should be our toughest gross margin comp for fiscal year 2024. Selling, general and administrative expenses or SG&A increased 12% to $328 million for the first quarter. SG&A as a percentage of net sales increased 140 basis points in the quarter to 36.2%. The increase in both SG&A and SG&A as a percentage of net sales is primarily due to the impact of acquisitions.
Excluding acquisitions, SG&A for our base business increased 2% with most of that increase attributable to an increase in healthcare costs. For the first quarter, we recorded an income tax benefit of approximately $10 million compared to a benefit of approximately $3 million in the prior year period. The effective tax rate was 33.4% for the first quarter of 2024 compared to 37.5% for the prior year period. The change in the effective tax rate was primarily due to an increase in the amount of excess tax benefits from stock-based compensation. Excess tax benefits of $2.3 million were recognized for the first quarter of 2024 compared to $0.8 million for the prior year period. We continue to expect the 2024 fiscal year effective tax rate will be between 25% to 26%, excluding discrete items such as excess tax benefits.
We recorded a net loss of $19.3 million for the first quarter of 2024 compared to a net loss of $3.4 million for the prior year period. The net loss was attributable to our higher SG&A and reduced gross margin partially offset by our increase in net sales. Our weighted average diluted share count was 45.3 million compared to 45.0 million for the prior year period. The shares used in the calculation of diluted EPS this quarter do not give any effect to any dilutive securities as inclusion would decrease the net loss per common share. Adjusted EBITDA decreased 47% to $21.1 million for the first quarter of 2024 compared to $39.8 million for the prior year period. Adjusted EBITDA margin decreased 250 basis points to 2.3%. Now I'd like to provide a brief update on our balance sheet and cash flow statement as shown on Slide 10.
Working capital at the end of the first quarter was $910 million compared to $960 million at the end of the prior year period. The decrease in net working capital is primarily attributable to our supply chain initiatives. Inventory turns increased due to an improved replenishment and reduction of excess inventory. Cash used in operations decreased to approximately $99 million in the first quarter compared to approximately $153 million in the prior year period. The decrease in cash used in operations was primarily due to a lower seasonal inventory build resulting from improved replenishment capabilities. We made cash investments of approximately $7 million for the first quarter compared to approximately $40 million for the same quarter in 2023.
The decrease reflects the decline in acquisition investments in the first three months of 2024 compared to the same period of 2023. Net debt at the end of the quarter was approximately $508 million compared to approximately $586 million at the end of the first quarter of 2023. Leverage at the end of the first quarter was 1.3 times our trailing 12 month adjusted EBITDA which was flat with our prior year period. As a reminder, our target year-end net debt to adjusted EBITDA leverage range is 1 times to 2 times. At the end of the quarter, we had available liquidity of approximately $539 million, which consisted of approximately $41 million cash on hand and approximately $498 million in available capacity under our ABL facility. I will now turn the call over to Scott for an update on our acquisition strategy.
Scott Salmon: Thanks, John. As shown on Slide 11, we acquired two companies in April for a combined trailing 12-month net sales of approximately $120 million. Since 2014, we have acquired 93 companies with approximately $1.9 billion in trailing 12-month net sales added to SiteOne. Turning to Slide 12 and 13, you will find information on our most recent acquisitions. On April 26, we acquired Eggemeyer, a single-location wholesale distributor of bulk landscape supply. The acquisition of Eggemeyer complements our recent acquisitions of Whittlesey Landscape and Adams Wholesale allowing us to provide bulk landscape supplies to our customers in the high-growth markets of San Antonio and Austin, Texas. On April 30, we acquired a 75% interest in Devil Mountain Wholesale Nursery, a wholesale distributor and grower of nursery products with 14 locations across the state of California.
The addition of Devil Mountain makes SiteOne the leader in wholesale nursery distribution in California and completes our full product line offering for our customers in the state. Devil Mountain is a high-performing company with a terrific team that will help spearhead our nursery growth not only in California but also across the Pacific Northwest and mountain states where we currently have a very low nursery market share. The transaction includes put and call options for the remaining interest in future years. 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 14, 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 continue adding more outstanding companies to SiteOne this 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 join the SiteOne family. I will now turn the call back to Doug.
Doug Black: Thanks, Scott. I'll wrap up on Slide 15. With four months of 2024 behind us, our outlook for our end markets has not significantly changed and we expect to continue gaining market share with our strong teams executing our commercial and operational initiatives. In terms of end markets, we continue to expect new residential construction, which comprises 21% of our sales to grow modestly in 2024. Despite higher interest rates, builders are busy and optimistic for the full year capitalizing on the continued shortage of homes and solid home demand. This should produce growth for landscaping products in this end market, especially in the second half. New commercial construction, which represents 14% of our sales has continued to be solid in 2024 and we believe it will remain steady for the full year.
Bidding activity from our project services teams continues to be slightly positive, which is a good indicator of continued demand. Our customer backlogs remain solid and we believe that the commercial end market will be flat to slightly up this year. The repair and upgrade market which represents 31% of our sales continues to be soft but seems to have stabilized at lower levels of demand. Accordingly, we expect repair and upgrade demand to be slightly down this year. Lastly, we have seen strong volume growth in the maintenance category, which represents 34% of our sales. We expect this market to grow in the low single digits in 2024 as contractors and end users take advantage of lower commodity prices and continue to restore application rates from the depressed levels in 2022 and 2023.
In terms of pricing, commodity product deflation has been a bit more persistent this year than we had previously expected resulting in an overall 4% price decline for the first quarter. That said, as John mentioned, we still expect commodity price deflation to moderate in the second half as we lap the price decreases in 2023. Overall, we now expect prices to be down approximately 2% in 2024. This backdrop we still expect our organic daily sales growth to be in the low single digits for the full year 2024 with steady volume growth more than offsetting the 2% expected price decline for the year. We now expect gross margin in 2024 to be similar to 2023 with the negative effect of price deflation offset by our initiatives and the impact of acquisitions.
We expect to achieve SG&A leverage as we drive productivity improvements in the base business more than offsetting the negative impact of higher SG&A in our acquisitions. Accordingly, we expect to improve our full-year adjusted EBITDA margin in 2024. In terms of acquisitions, as Scott mentioned, we have a strong pipeline of high-quality targets and we will continue to add excellent companies to the SiteOne family as we move through the year. With all these factors in mind, we continue to expect our full-year adjusted EBITDA for fiscal 2024 to be in the range of $420 million to $455 million. This range does not factor any contribution from unannounced acquisitions. While this does include the positive contribution from the two recent acquisitions, we are continuing to take a conservative approach as we navigate deflationary pressures and an uncertain macroeconomic environment.
In closing, I would like to sincerely thank all our SiteOne associates who continue to amaze me with their passion, commitment, teamwork and selfless service. We have a tremendous team and it is an honor to be joined with them as we deliver increasing value for all our stakeholders. I would like to also thank our suppliers for supporting us so strongly and our customers for allowing us to be their partner. Operator, please open the line for questions.
Operator: [Operator Instructions] The first question comes from Ryan Merkel with William Blair. Please go ahead.
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