Greetings and welcome to SiteOne Landscape Supply Fourth Quarter and Full Year 2018 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Pascal Convers, Executive Vice President Strategy, Development and Investor Relations. Thank you. You may begin.

Thank you and good morning, everyone. We issued our fourth quarter and full year earnings press release this morning and posted a slide presentation to the Investor Relations portion of our website at investors.siteone.com. We will be referencing the slides during this call. I am joined today by Doug Black, our Chairman and Chief Executive Officer and John Guthrie, our Chief Financial Officer. Before we begin, I would like to remind everyone that today’s press release, the slide presentation and 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, the company 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 our Chairman and CEO, Doug Black.

Thank you, Pascal. Good morning and thank you for taking the time to join us today. I will start today’s call with a brief review of our unique market position, our strategy to deliver long-term performance and growth and some highlights from 2018. John Guthrie will then walk you through our fourth quarter and full year financial results in more detail and Pascal will address our acquisition strategy. Finally, I will discuss the trends that we see in our markets as well as our outlook for 2019 before taking your questions. I’ll start on Slide 4 of the earnings presentation. We have grown our footprint to over 550 branches and 3 major distribution centers in the United States and Canada. At the end of 2018, we estimate that we had approximately 11% share of the wholesale landscaping products distribution market. We are more than 4x larger than our nearest competitor and larger than 2 through 10 combined. We have a balanced mix of business with 60% focused on maintenance and repair and upgrade, 25% focused on new residential construction and 15% on new commercial construction. This balanced mix and broad product portfolio gives us important resiliency in softer markets. Turning to Slide 5, as we look out over the cycle, we remain committed to executing on our key value creation levers of organic growth, margin expansion and growth through acquisitions. Importantly, we expect our commercial and operational initiatives to help improve the value that we deliver to customers and suppliers, expand our margins and accelerate organic growth through the cycle. We have been hard at work in executing these initiatives, while also building the infrastructure of our company over the last several years. While we have made great progress, we have a long way to go in terms of achieving…

Thanks, Doug. I will begin on Slide 9 with the income statement for our fourth quarter results. We reported a net sales increase of 14% to $475 million in the fourth quarter. For the full year, net sales increased 13% to $2.11 billion. During the quarter, we had 61 selling days, which was unchanged compared to the prior year quarter. For the full year, we had 252 selling days, which was unchanged from the prior year. In 2019, we will also add 252 selling days, with each quarter the same as 2018. Organic daily sales grew 4% in the fourth quarter and for the full year. Organic daily sales for agronomic products, which includes fertilizer control products, seed, ice melt and equipment, grew 17% for the quarter and 7% for the year. Organic daily sales for agronomic products for the year benefited from strength in the economy, strong selling seasons for grass seed and ice melt and price increases in response to cost inflation. In the fourth quarter, we saw strong sales of grass seed, a portion of which was pushed from the third quarter. Good sales of ice melt from the early winter and increased sales into the golf market. Organic daily sales for landscaping products, which includes irrigation, nursery, hardscapes, outdoor lighting and landscape accessories declined 1% for the quarter and grew 3% for the year. Recall that in the fourth quarter of 2017, we posted organic sales growth for landscaping products of 9% due to pent-up demand in our western markets and more favorable weather, especially in November and December. In 2018, we saw more normalized sales in western markets and a lot of rain in the south, which negatively impacted our customers’ installation days. Despite the challenges during the fourth quarter, our customers continue to indicate…

Thank you, John. As Doug mentioned earlier, acquisitions play a key role within overall growth strategy as we continue to fill significant white space. As shown on Slide 11, we have now acquired 37 companies since the beginning of 2014. They added 203 branches to SiteOne and represent approximately $805 million in sales on a TTM basis. We had a strong year by adding a good balance of irrigation, nursery and hardscapes companies and made good progress accelerating our pace of acquisitions from 8 in 2017 to 13 in 2018. We started 2019 with good momentum, as we announced 2 acquisitions in the first 1.5 months of this year. Now as we turn to Slides 12 through 15, you will be able to find information on the four acquisitions we announced in the last 4 months. On October 19, we completed the acquisition of C&C Sand & Stone. C&C served the Colorado market with 4 wholesale centers and 2 showrooms focused on distribution of hardscapes and landscape utilized products to landscape professionals. C&C is a great fit to SiteOne as it expands our geographical presence and hardscapes capability in Colorado, allowing us to provide a full line of landscaping products to our customers. On December 6, we completed the acquisition of All Around landscape supply, which serves the greater Santa Barbara County market with 4 locations focused on the distribution of irrigation, hardscapes and landscape supplies to landscape professionals. All Around is a great fit to SiteOne as it expands our geographical presence in California to Santa Barbara County, and it is aligned with our mission to be the best full-line distributor in all markets we serve. On January 8, 2019, we completed the acquisition of Cutting Edge Curbing Sand & Rock, a leading distributor of hardscapes and landscape supplies…

Thanks, Pascal. I’ll wrap up on Slide 17. We continue to be optimistic about 2019 as we see steady markets providing a base for SiteOne to achieve improved results with a stronger company. We view 2019 as the year when we bring together many of the initiatives that we have been working on in order to accelerate our market share gains, adjusted EBITDA margin expansion and cash flow generation. We will also continue to add terrific companies to our family through acquisition. Before we get to our 2019 guidance, I would like to provide an update on the trends that we are seeing across our end markets and how those trends impact our organic sales growth prospects for 2019. The maintenance end market represents 41% of our business, and we are seeing very good growth in this segment due to a strong economy, price inflation and our improved ability to gain market share. As I mentioned before, our agronomics business, which is primarily maintenance, grew 7% this past year, which is the strongest growth that we have seen in a decade. We expect the current trend of steady market growth, good share gains and positive inflation to continue in 2019. Similarly, the repair and remodel end market, which comprises approximately 19% of our business, is benefiting from the strong economy, low unemployment and good consumer spending. We’re also benefiting from 2 major trends in repair and remodel. First, there is the ongoing focus on outdoor living, which involves making the backyard a living space, particularly with hardscapes and lighting. Second, there is increased scrutiny on stormwater management, which is driving double-digit growth in our drainage and stormwater categories. We expect these 2 trends to continue for many years. Accordingly, we expect growth in repair and remodel to remain healthy in…

Thank you. [Operator Instructions] Our first question is from Ryan Merkel with William Blair. Please proceed with your question.

Hi thanks. Good morning, everyone.

Good morning Ryan.

So, first on 2019 outlook, what are you assuming for EBITDA margin expansion? And then, is that split equally between gross margin and SG&A leverage?

So, we expect to make good progress on the EBITDA margin. Obviously, 2018 was a bit of a hold period with the challenges that we had. We I’ll just say good progress, and we expect that to be driven by both gross margin and SG&A leverage. Given the acquisitions that we’ve had and anticipate doing its probably more gross margin than SG&A, but that would be our plan for 2019.

Got it. Okay. And then secondly, on free cash flow, are you targeting 100% conversion in 2019 and might there be some benefits from selling through some of the inventory you pre-bought and then also the supply chain?

We are expecting our target is to achieve a 100% conversion this year. And you’re right, we did make the investments in supply chain. And we expect those to benefit in our free cash flow in 2019.

Okay thanks a lot. I will pass it on.

Thank you, Ryan.

Our next question is from David Manthey with Baird. Please proceed with your question.

Hi good morning everyone.

Good morning.

The first off, Pascal, it’s been a pleasure working with you. Best of luck. Second, if we look at these organic growth rates, agronomics up 17% in the fourth quarter, I think that implies construction and R&R down maybe 3-ish percent. Can you give us just some additional details? I think you mentioned grass seed and ice melt, but can you talk about what led to that result? And then you mentioned a little bit about your expectation into 2019. Can you just talk broadly about those 2 categories? And maybe what your expectations are for growth across those 2 major segments?

Yes. I’ll take the first question and then Doug can talk about the outlook. Yes, it’s the grass seed and was partly driven by a push from Q3. Weather and some delays in supply switched sales really, it’s really only from September to October. But when you have a small base number with regards to grass seed, it makes a big difference. And then ice melt, I think, tough winter last year. People and an early winter here in November. That drove really good sales in the month of November with regards to ice melt. And the third category I would add is, is we had a really good Q4 on sales into the golf market, with a good EOP program where a significant amount of sales to the golf industry are done. And underlying all this is pretty strong price inflation of about 4%, which we saw throughout the full year.

Yes. So just to comment on 2019, we’re really if you start with maintenance, which again is 40% of our business, we had some great momentum there. If you remember, we brought on a new leader for our maintenance category, John Gertz over a year ago. He’s done a great job of revitalizing our LESCO brand and our LESCO program. We have 4 brand-new products that are out in the market as a part of LESCO. As John mentioned, we got great momentum in the golf area. Our e-Commerce is coming in very handy for golf course during superintendents so just all in all, we’ve got some good momentum in maintenance. We expect demand the underlying demand to be steady, and then we expect inflation to be 3% to 4%. So, when you put those all together in maintenance, we should see another good strong year. New construction on the commercial side, it’s really just as much as our contractors can get labor to do projects they happen to do, right? And some of those got pushed out of the fourth quarter due to lever weather but there is really strong demand in commercial, good backlogs, and we expect that market to contribute nicely to 2019. And then you have residential and again, recall that the growth is moderating in the residential. So, we would expect that in the lower kind of lower single digits in terms of the residential market. So, when you put all that together and when you factor in the fact that weather in 2018, probably took between 100 and 200 basis, off our growth. We’ve are at a minimum in ‘19. We wouldn’t see any downside in terms of weather and most likely, there’s a bit of upside there. So, when you take all that together, that’s what gives us good confidence in that mid-single digit’s growth in 2019.

Okay thank you. And my follow-up is also on cash flow. Are you expecting free cash flow to be 100% of net income in 2019? And I think your target for M&A loosely is 10% incremental revenues. Is that achievable? And is there some level of leverage that starts to constrain your ability to move to that level?

Yes. So, let me start with the acquisitions. We do have a target that’s 10% of sales to acquire. We would call that a range of, say, 7% to 13%. If you look at our history, our low has been 8% and our high has been, I think, 16% to 18%. So that will vary year and year. But given the small bite-size deals that we have, we should be in that range. Given that, John, talk about the balance sheet.

Yes. As we modeled out cash flow and leverage on next year in our plans, we see the ability to achieve acquisitions in that range and then maintain cash flow. The combination of the cashflow primarily driving most of that and really hitting the leverage target and in between 2 to 3x adjusted EBITDA.

And just to add on the cash side, as mentioned, we do have some tailwinds there in terms of working down inventory, but we expect our EBITDA margins to expand which will add to that and good contribution from acquisitions.

Alright thanks again best of luck.

Thank you, David.

Our next question is from Nishu Sood with Deutsche Bank. Please proceed with your question.

Thank you. This is Marcus in for Nishu. And my first question, do you anticipate any lag in price cost this year? Or is the better visibility allowing you to increase prices at the same time as the costs are coming in?

No. When you look at our situation in terms of cost and pricing, we’ve now had an inflation in the 3% or 4% range for 9 months. And so, our teams are quite Attune to it, the market is quite Attune to it. And we feel like we’re in good shape in going into 2019 in terms of maintaining the cost price balance in the marketplace. So, we feel good about our ability to manage the inflation in 2019.

And my second question, are there any SG&A investments for 2019 that you’d like to highlight?

Well, the major investments, we’ll continue to work on our e-Commerce. We have our platform out there. It’s a terrific platform. We’re going to continue to build on that, add capabilities to that. We also plan to install barcoding within SiteOne in 2019. That’s a significant investment. So those are the 2 biggest investments. We’re always investing in the business in terms of our operational excellence and our phone systems and other types of infrastructure, but those will be the big 2 this year, similar, slightly down from our investments in 2018.

Right thank you.

Thank you.

Our next question is from Steve Volkman with Jefferies. Please proceed with your question

Hi good morning guys. Can you just say a little bit more about the supplier incentives impact on the gross margin this quarter? I guess I might have thought they’d be a little higher if you’re adding in some inventory, but maybe I don’t have that dynamic right.

I think, well, supplier incentives are realized on sales and I think what we saw is going into Q4 2017, we really saw an acceleration in sales. And in Q4 of 2018, at least in the landscaping products, there was a little bit of a deceleration. And so, our numbers came in just slightly less with regards to that.

Okay. Alright thanks. And then, is there anything you want to add relative to sort of the cadence of the quarters in 2019? And I guess, what I’m thinking about is, I’m assuming maybe you’ll have somewhat favorable price cost if you pre-bought a little bit in the first quarter or 2 and then maybe not as good in the second half, but just any other dynamics that you want us to sort of keep in mind relative to the cadence of the quarters would be great?

I think the most important thing with regards to Q1 is to remember that we generally operated in a loss in that period. Last year, we lost $5 million in – on an adjusted EBITDA basis, there was minus $5 million. I mean, we might see similar type numbers this year. Part of the dynamic also is, when we do acquisitions, say, for instance, our largest acquisition last year was Atlantic Irrigation. In the New York Metro, in the New York Metro, you really aren’t going to – you make your money really April through October. And so as we’ve gotten bigger, some of those in the first month, some of the headwinds of acquisitions actually are to the negative with regards to Q1. So – and then the final thing to add, I – just to highlight, if you look historically, last year, we did change our timing because of revenue recognition and we moved about $1 million to $2 million of expense into Q1. So, all those are kind of – are really our year is going to be when spring breaks March, but then also really Q2 is when where you get the full benefit of the company’s results.

Okay. Thank you.

Thank you.

Our next question is from Keith Hughes with SunTrust. Please proceed with your question.

Thank you. I had two questions. First, there was some news from a competitor who announced about a week or so ago about looks like another grow up sort of strategy within your space. Doug, if you can just comment about the size of the space? And if there was another large consolidator with that, how big an impact would that have on your business?

Right. No, we expect other folks to come in and do deals and there’s plenty of room in this market for other consolidators. Just to remind you, we have 11% share. We’re 4 times larger than number 2, larger than 2 through 10, but we only have 11% market share. So that tells you that it’s a very fragmented market. It’s a very large market, $19 billion, and there’s lots of opportunities out there for deals. We can’t do them all, obviously, not all fit with SiteOne. And so some competition for deals or other consolidators, there’s plenty of room. I would say even with the recent announcements and activity that we see from time to time from others, 90% of our deals are negotiated, and we’ve got 60 people out developing relationships. We’ve been at this as a team in a big way for 4 years, 5 years. And so our relationships run deep and wide and our reputation and after 37 deals of companies joining our family is very strong. So, we feel great about our acquisition opportunities. We’ve got a great pipeline. We’re going to continue to mine that and let others compete on the fringe, but we plan to stay the lead consolidator and plenty of room for that to happen.

Okay. Thank you. And just a quick numerical question, on the tax rate for ‘19, yours is always kind of hard to figure out. Can you give me the guidance on what the tax rate will look like for next year?

Our base tax rate is between 26% and 27%. Obviously, the excess tax benefit drove that significantly lower right now. We’re not forecasting that type of benefit next year and we’re not excessively forecasting that activity. So, I mean, we build our model around 26%, 27%, and if it’s something else that’s really kind of upside.

Okay. Thank you.

Thank you, Keith.

Our next question is from Alex Maroccia with Berenberg. Please proceed with your question.

Hi, guys. Thanks for taking my question. Just looking at the product segments, you mentioned future strength in agronomic specifically, but can you touch a bit on activity within the other segments specifically irrigation given the slowing revenue construction market?

No, yes, we feel good about our other landscaping products. Again, we think we took some hits in 2018 based on weather that we feel provides some upside in those categories. But just to take them one at a time, irrigation and lighting, we have strong presence. We did some really nice acquisitions in 2018 and we feel good about again repair and remodel and the commercial side of that’s going to be very strong. Our hardscape and nursery product lines, we’re gaining strength in those as we acquire terrific companies in the hardscapes space and so we expect that to be strong. And again, hardscapes is more impacted by the outdoor living trend, which gives us an extra boost. And then nursery, nursery was hit hard with the weather and the hurricanes. We’re doing lot of our nursery in the South and Southeast and Carolinas, which was particularly hard hit. We feel very good actually about our ability to grow our nursery product line in 2019. So, we highlight the maintenance because maintenance is 40% of our business. It’s a underlying buoy as we go through any kind of soft markets, but we feel good about the other product lines as well in 2019.

Okay, great. And then the follow-up, working capital increased a bit. Can you describe the desired inventory and AR levels going forward?

We think kind of we have opportunity with regards to inventory turns. We want to get up, we think best-in-class is 5.5, we’re honestly in the low 3s right now. So, there’s opportunity in the relatively near-term to improve that by potentially half a turn and then continue going forward from there. AR, we’re pretty pleased with regards to our AR turns. I would expect some improvement in that, but we will fundamentally trade AR. It continues to be strong and reflecting the good economy. So, our focus is going to be getting best-in-class on inventory to further improve working capital.

Okay, great. That’s helpful.

Yes. Let me just remind the audience that we just completed our supply chain rollout in the first and second quarter of last year. So, we do have that now fully in place and we bought up inventory at the end of the year. So, we have a significant opportunity in inventory not just in 2019, but over the next 3 years to 5 years to add to our cash flow through that lever.

Good. Thank you.

Thank you.

Our next question is from Michael Eisen with RBC Capital Markets. Please proceed with your question.

Good morning, gentlemen. Thank you for taking the questions.

Good morning.

I just want to start off thinking of the guide that you guys have put out for next year EBITDA, what are the things that are embedded in that, that gets you to either the high or the low end, and what other factors that we should be considering to that?

Well, obviously, you have weather variance, which is – could be worse or better. As we described, we feel that’s probably a net upside going into next year. You also have the markets in general, we think we have good line of sight on the markets, but obviously, those markets could change. We’d remind that we still are in a labor-constrained world with our contractors. So, we’re hoping that we get a good HCV program this year and that will continue to help our customers fight through their labor challenges. Beyond that, we have pretty good line of sight on our own operational spending. So, we feel good about that. We feel good about gross margin. So, I would say, in a nutshell, sales – organic sales is the main swing factor plus or minus depending on the market and the weather. John, do you want to add?

No, I was just going to say, we spent a lot of time. One of our initiatives has been sales force effectiveness and increasing the talent of our sales force. And I think we’re more optimistic there going into this year than we’ve ever been before. Highly aligned teams out there in the field, which we believe will help increase sales organically and capture market share right.

So, we would feel when we said a range, we always think of the upsides and downsides. We would hope that the upsides are higher than the downsides in this particular year given all the things that we’ve been able to pull together, but we’ll see as the year develops.

Got it. That’s really helpful. And then following up on a few of those comments. And Doug, I think you had a few comments earlier on the call just talking about the pace of organic growth and organic market share gains. Do you feel that you guys are at a position to start regularly reporting organic growth above the market or is there going to be puts and takes on the timing of that with the M&A strategy? How should we think about organic share gains?

Yes, we really do. I mean, of course, we’ve been at this several years and we’ve been working on our sales force, e-Commerce was an important piece, our marketing programs, et cetera dialing in. And quite frankly, we’ve learned from the acquisitions that we’ve acquired. We’ve acquired some tremendous companies in all those spaces quite frankly, agronomics, irrigation, hardscapes and nursery. And we’ve learned from all of them in terms of best practice in those particular segments. So, we do feel like now we’ve got the ability. And as John mentioned, we really have our sales force dialed in this year better than we ever had before. So, we feel like we’re in a position now where we can consistently take share in the market from the weaker players that are out there and that will add meaningfully to our organic growth potential. Again, we’ve been building the company. We’re 3 years, 4 years in. Now we expect to start to show our stuff in terms of consistent organic growth, which we plan to sustain from here on out.

Fantastic. Thanks again for all the color. 11 [indiscernible] congratulations.

Thank you.

Thank you, Mike.

[Operator Instructions] Our next question is from Matthew Bouley with Barclays. Please proceed with your question.

Hi, this is actually Christine Cho on for Matt. Thank you for taking the questions.

Thank you.

How are you thinking about tariffs in your numbers right now, and which products or categories are most exposed to a potential increase in tariffs.

We feel – there’s a lot of noise about the first round of tariffs that went in place. We don’t pay tariffs ourselves, but it works as well for the supply chain and that was actually reflected in the 3% number. So, you see relative to our total cost of sales, it’s relatively mild. And in general, we think just ballpark, let’s say, 5% to 10% of our cost of goods sold is impacted by tariffs, so if there’s an additional 10%, you’re talking, maybe 50 basis points to 200 basis points increase because of tariffs. I think 200 basis points would probably be on the very high side, so – if there was future tariffs. But the – embedded in our numbers, we’ve gotten from all our manufacturers and suppliers what the impact of the first round of tariffs were and that they were already having built into our 3% guidance.

Got it. And then also could you talk about your organic daily sales growth throughout the quarter and potentially what you’ve seen month – between the months during the quarter?

So, we’re off to a solid start in 2019, and we feel good about again, our overall guide for the year is the mid-single digits and we’re off to a solid start this early on. Just a reminder that 50% of the Q1 sales are in March and the season really takes off in March. Last year, we had a longer winter, so reasonable comp there, but we are off to a solid start so far.

Thank you.

Thank you, Christine.

Great.

Thank you. We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Okay, great. Well, thanks to everyone for joining us today. We very much appreciate your interest in SiteOne, and we’re excited about the company that we’re building and the long-term growth and potential for the company and we’re excited about 2019. Thank you very much.

Thank you. This concludes today’s conference. You may disconnect your lines at this time and thank you for your participation.