Greetings and welcome to the SiteOne Landscape Supply, Inc. Second Quarter 2019 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, Mr. John Guthrie. Thank you. Please go ahead.

Thank you, and good morning, everyone. We issued our second quarter 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'd 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 the 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'd now like to turn the call over to Doug Black.

Thanks, John. Good morning, and thank you for taking the time to join us today. The second quarter turned out to be very challenging from a weather standpoint. After a good start in April, we experienced increased rains in May and June versus the prior year in 8 of our 11 regions, and in particular in Texas, New England and the Midwest. The combination of bad weather and site labor inhibited our organic sales growth. We also faced tough year-ago comparables as May and June were our strongest growth months in 2018 with 8% and 9% organic daily sales growth respectively. As a result, we achieved only 1% organic daily sales growth for the quarter. With that backdrop, I was very pleased that we continued to expand our gross margin and our EBITDA margin during the quarter, while adding three more terrific companies and producing excellent cash growth from operations. These results demonstrate both the excellent execution by our team and the resiliency of our business model. With a healthy underlying market, a continued robust pipeline of acquisitions and easier organic growth comparables in the second half, we expect to achieve our performance and growth objectives for the year. 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 the quarter, including how our initiatives are contributing to our results. John Guthrie will then walk you through our second quarter financial results in more detail and Scott Salmon will cover our acquisition strategy. At the end of the call, I will discuss the trends we are seeing in our markets and address our outlook for the second half of the year. As shown on Slide 4 of the earnings presentation, we’ve grown our footprint…

Thanks, Dough. I will begin on Slide 9 with the income statement for our second quarter results. We reported a net sales increase of 9% to $752 million in the second quarter. During the quarter, we had 64 selling days, which was unchanged compared to the prior year period. Organic daily sales grew 1% in the second quarter as unfavorable weather negatively impacted sales volume. Organic daily sales for agronomic products, which includes fertilizer, control products, seed, ice melt and equipment, grew 2% for the quarter and 4% year-to-date. Agronomic product sales remained steady due to a strong economy and price increases. Organic daily sales for landscaping products, which includes irrigation, nursery, hardscapes, outdoor lighting and landscape accessories, grew 1% for the quarter and 1% year-to-date. As Dough mentioned, 8 out of 11 regions experienced more rain this quarter compared to the prior year period, with the greatest impact in Texas, New England and the Midwest. The Southeast, including Florida, had a slightly dryer spring and generated solid results. Prices increased 3% year-over-year for both the quarter and year-to-date as cost increases from suppliers have been passed through by the market. We expect year-over-year pricing to increase approximately 2% during the second half of the year as we will be lapping some of the price increases from last year. With regards to tariffs and the impact on the second half pricing, we’ve seen a few midyear price increases from suppliers, but nothing substantial. Acquisitions contributed approximately $58 million or 8% to net sales growth for the quarter. Gross profit increased 12% to $258 million in the second quarter, while gross margin expanded 90 basis points to 34.3%. The improvement in gross margin was attributable to acquisitions which are carrying higher gross margins than our base business, opportunistic purchases of inventory…

Thank you, John. As shown on Slide 11, 41 companies have joined the SiteOne family since the beginning of 2014. They added 216 branches to SiteOne and represent approximately $853 million in sales on a trailing 12-month basis. We’ve made good progress accelerating our pace of acquisitions over the past 5 years and have closed six acquisitions through early July, representing approximately $73 million in trailing 12-month sales. Now as we turn to Slides 12 through 15, you will be able to find information on our four most recent acquisitions. On April 5, we acquired Landscape Depot Supply, a leading distributor of hardscapes and landscape supplies with three locations in the Greater Boston and Massachusetts markets. Landscape Depot Supply complements our existing branch network in the Greater Boston market and significantly strengthens our hardscape and landscape supply business there. On April 24, we acquired Fisher's Landscape Depot, a leading distributor of hardscapes and landscape supplies with two locations in Western Ontario. Fisher's Landscape Depot was a natural fit with SiteOne as they add hardscapes and landscape supplies to our existing product offerings in Ontario. On May 22, we completed the acquisition of Stone & Soil Depot with three branches in the Greater San Antonio market. Stone & Soil Depot bolsters our product offering in Central Texas by adding natural and manufactured stone products as well as landscape supplies to our existing irrigation, agronomic, nursery and landscape lighting product lines in that region. And in the third quarter, on July 3, we acquired the wholesale distribution business of LH Voss Materials Dublin and its affiliates, Mt. Diablo Diablo Landscape Centers and Clarks Home & Gardens, with five locations across the East Bay in Northern California focused on the distribution of hardscapes and landscape supplies to landscape professionals. As we turn to Slide 16, we continue to see a significant opportunity to grow profitably through acquisitions, which allows us to move into new markets, expand our presence in existing ones, broaden our product offerings and add outstanding talent to our team. Our pipeline remains robust, and with six acquisitions year-to-date, our M&A strategy has solid momentum and we continue to build our reputation as the buyer of choice in the industry. We would like to thank all the leaders of SiteOne, who continue to be great ambassadors, working hand-in-hand with our development team to help SiteOne attract the best companies to join us in the future. While the timing of acquisitions cannot be fully predicted, we expect to close additional acquisitions throughout the year, which should contribute to our growth in 2019 and beyond. And with that, I would like to turn the call back over to Doug to discuss our outlook.

Thanks, Scott. I will wrap up on Slide 17. We continue to see 2019 as a year where we bring together many of our initiatives that we’ve been working on in order to accelerate our market share gains, adjusted EBITDA margin expansion and cash flow generation even as we continue to launch new exciting initiatives like e-commerce and operational excellence. We will also continue to add terrific companies to our family through acquisition. The second quarter was certainly challenging from a weather standpoint, which limited our organic growth. However, through solid execution, we are still well positioned to achieve our 2019 objectives with reasonable weather during the rest of the year. Our team is stronger than we have ever been, and as we face various headwinds and market challenges, we continue to gain experience and strength. In terms of markets, we’re still seeing good demand across all of our end markets and our customer backlogs are robust, especially given the limited work days this spring. We anticipate that the market will be steady during the remainder of the year. Our customers remain very constrained on labor and so as we stated at the beginning of the year, the number of work days available will be an important factor in our organic sales growth during the second half. Overall, given our balanced mix of business and broad geographic coverage across the U.S. and Canada, coupled with our improving capabilities to gain market share, we believe that we can achieve mid single-digit organic daily sales growth in the second half of 2019. This level of organic daily sales will support EBITDA margin expansion for the year. In terms of acquisitions, Scott and his team have done an excellent job building and converting our pipeline and we feel good about our ability to add more companies during the remainder of the year. Taken all together, we reaffirm our adjusted EBITDA guidance for the year to be in the range of $193 million to $207 million, which represents 10% to 18% year-over-year adjusted EBITDA growth. In closing, I would like to acknowledge all of the SiteOne associates, who continue to create significant value for our customers and suppliers. We have a tremendous team and it is an honor to be joined with them as we build a company of excellence for all of our stakeholders. Operator, please open the line for questions.

Thank you. [Operator Instructions] Your first question comes from David Manthey from Baird. Please go ahead.

Thank you. Good morning, guys. First off, I was wondering if could tell us the organic daily sales growth in May and June and any early read on what the trends look like in July?

Obviously a significant weather impact there. We have seen the weather normalize in July. Right now, in July, we are running at about 4%, but that is increasing as we've gone through the month. So, we feel good that we're seeing that mid single-digit level come back to us and that’s what we think we will see during the second half.

Okay. Doug, I think you cut out there at the beginning. What did you say for May and June?

Yes, May and June were flat -- slightly negative in May and flat in June.

Okay. And John, could you tell us the number of selling days in the third and fourth quarter just for the math?

Yes, I believe it's 63 and 61.

Okay.

63 in Q3 and 61 in Q4.

Got it. And then on OpEx. Just to confirm, you said you can get leverage on SG&A in the third and fourth quarters. You also referenced some one-time costs I believe in the second quarter. Could you give us some more detail on that?

Well, there's two one-time costs and we were referencing really the first half of the year. On an adjusted EBITDA basis, we did have a legal settlement we mentioned in Q1. That was a one-time that wouldn't be repeated. And then on a GAAP basis, in addition, in the second quarter, we had a one-time increase in stock comp that obviously wouldn't be reflected on adjusted EBITDA, but did impact our GAAP earnings.

Okay. But leveraging both 3Q and 4Q you're saying?

Yes, we’ve a forecast in both of those. And I think it's important to remember is what really hit us in Q2 was the organic growth. Our SG&A on an adjusted basis was less than 3% growth in the base business in Q2 and it would have only been 1% if we wouldn't experience higher -- a large increase in health care cost during Q2. So we feel comfortable that with organic growth coming back down -- or increasing and maintaining what we’ve been doing in our base business that we will be able to achieve SG&A leverage in the second half.

Sounds great. Thank you.

Thanks, David.

Thank you. Your next question comes from Damian Karas at UBS. Please go ahead.

Hey, good morning, guys.

Good morning.

I would like to ask you about the gross margins. I think you made some similar comments to the first quarter that you kind of realized most of the gross margin improvement for the year, but second quarter came in obviously above your expectations there. Just wondering if you could maybe parse out the relative impacts of -- on the gross margin side, you had mentioned acquisition, the opportunistic inventory buys and the improved pricing. And why you kind of think you flat by now this time?

So a little over a half a bit is due to acquisitions. And then the remaining is really kind of price/cost, which I would lump together in the opportunistic buys and with regards to the pricing. I mean we think we will be roughly flat rest of the year. Acquisitions could contribute positively. We had a really strong Q3 in gross margin last year with regards to that. So we feel -- we saw some acquisitions coming in as we discussed, that could move that up or down. But, in general, we feel definitely kind of the early buys had played themselves out really through -- midway through the second quarter most of those gains were complete.

And just a comment. In the second half if acquisitions do increase that number, it tends to increase the SG&A as well, right, so as we see it today, we're calling it flat. We think we will get good SG&A leverage if acquisitions come in the hardscapes and the nursery acquisitions tend to be at higher gross margin, higher SG&A. You can see those figures move, but overall, the EBITDA improvement is the important part and that’s the important part of the forecast.

Okay. That’s helpful. And then just touching back on the daily organic sales and the underlying growth. It seems like volumes must have been kind of down low singles if you're still realizing about 3 to 4 points of price and you alluded to that kind of being about plus 2 points of price in the back half. So is that the right way to think about it? You probably had about a mid single-digit weather impact in the second quarter from a volume standpoint and now you are looking at more sort of low single-digit volumes and plus the 2 points of price the rest of the year?

I think that's a fair characterization of it. And the volume is really -- if you really think about it, a lot of that we believe will be a potential catch up on the demand that wasn't satisfied in the second quarter.

Okay. And it sounded like from Doug's comments that, that catch up, you just kind of expect it to be gradual and you are not really seeing sort of pent up resurgence here in early 3Q?

That’s correct. I mean, we believe it will be steady. The demand is there, but it's not going to pop, if you will, given the constraints with regards to our customers and their labor.

Okay, great. Helpful. Thanks for the help, guys.

Thank you.

Thank you. Your next question comes from Stephen Volkmann from Jefferies. Please go ahead.

Great. Good morning, guys. A couple of quick ones here. I guess I'm just trying to think about the impact of the acquisitions coming in with higher growth margins and higher SG&A and it sounds like, Doug, what you are saying is that the potential acquisitions in the pipeline have similar dynamic in terms of higher gross margin and higher SG&A. So I just wanted to kind of confirm that. And then just -- if you could just explain, would you expect the majority of your acquisitions to kind of come in that way? And why would they have higher gross margins than your base business kind of an ongoing basis?

All right. Yes, great question. We’ve different types of business that comprises SiteOne. The irrigation and agronomics side of our business tends to run at kind of reasonable gross margins and lower SG&A. And then you’ve the nursery and hardscape side of our business, which is heavier trucks, more labor intensive in the yards, has higher operating cost. And so those businesses tend to run at higher gross margin and higher SG&A. And if you look at our acquisitions -- and more our fill-in is occurring across the country. We do acquisitions in irrigation and agronomics and we've done those this year, but the majority of our backlog and the majority of our fill-in is at nursery and hardscapes. So they’re actually coming at about the same EBITDA level. And in the second quarter we saw that, that acquisitions were -- slightly improved our EBITDA margin. So they're right there with us, a little bit ahead. But because they were mostly nursery and hardscapes, they come in at the higher gross margin and higher SG&A. So we will continue to see that as we build out our nursery and hardscapes. We feel like we can improve that SG&A over time. They join our family and we create efficiencies there. We also feel like we can improve the gross margin, but the nature of those businesses is higher on both sides of that equation. It tends to be very similar when you come down to the adjusted EBITDA level.

Okay, great. That’s helpful. Thanks. And then can you just give us a quick sort of feel for the 50 end markets where you have the full product line offering? How did those perform in the quarter relative to growth and margin? And just what good looks like -- how good was that during the quarter?

Right. Good question. In general, our full product line markets tend to be our higher performers in terms of putting the full package together, leveraging in the full might of SiteOne, getting efficiencies out of our branch associates and our area associates, sales and management. And so they tend to run at a higher EBITDA margin and they tend to be our good -- the better performers. In a quarter like we had in the second quarter, it's really about weather. So, in general, that's true, but the weather really affected the second quarter. So we saw on the second quarter is areas of the country that had normal weather, the Southeast, etcetera, they performed quite well and those tend to be more of our full product line markets. Areas of the country where -- the eight regions where we had really tough weather, whether it's a full product line market or still is not built out really didn't matter. They had a tough time growing. But, in general, when we see that full product line come together, it just gives us the full synergies and allows us to operate at a more profitable, more successful level.

Okay. Thank you.

Thank you. Your next question comes from Ryan Merkel at William Blair. Please go ahead.

Hey, good morning. Thank you. So my first question, Doug, maybe just remind us about the comparison in August and September because my memory is the comparisons get a little bit easier.

Yes. I think John can pull up the specific figures. But really the strongest month last year were May, June and let's call the first half of July. And so as you get into August and September …

It is 5% and 3%.

Yes, they settle down to 5% and 3%, respectively. So if you remember, September was interrupted by a couple of hurricanes. October and September were kind of -- were weather affected last year. So we do feel like the comparables are quite reasonable and we'd expect with reasonable weather this year to be in that mid single-digit level of growth for the second half.

Okay. That’s what I thought. And then I just wanted to follow-up on the gross margin outlook for the second half. Do you -- are you meaning to say that you expect gross margins to be flat sequentially for the rest of the year from the second quarter, or are you talking year-over-year you expect gross margins to be flat?

We expect year-over-year gross margins to be flat. So …

And then just lastly on 2019 guidance. Should we be thinking more towards the midpoint or do you still think the high end is achievable at this point?

We always craft for guidance towards the midpoint being the mean expected. Obviously, there's a lot of things that could sway that to the high-end, there's things that could sway it to the low-end. So I think the best read would be midpoint and that's the way we think about it.

Okay. Great. Thanks. I will pass it on.

Thank you. Your next question comes from Keith Hughes at SunTrust Robinson Humphrey. Please go ahead.

Thank you. You had talked earlier in the prepared comments about some SG&A leverage in the second half. Is that going to come from leveraging acquisitions, cost cuts? Any sort of feel and any kind of magnitude of what you think that will look like?

I think it's going to come from just managing our expenses closely, as we really did in the second quarter. And then the fact that we expect SG&A leverage on kind of just -- we continue to manage our expenses at the low levels in our base business and there is some recovery in organic growth, but we should be able to achieve pretty meaningful SG&A leverage.

Yes, in terms of cost out of acquisitions, it takes two to three years to really -- I mean in the first year of an acquisition, you keep the team. It's business as usual, welcome to SiteOne. You get them acclimated to our company, etcetera. And then in years two and three is when you really start taking that SG&A out. So there's a -- SG&A take out of acquisitions would have been acquisitions we did last year. So there's some of that. But acquisitions we're doing this year, that SG&A doesn't get affected until years two and three.

Okay. Thank you.

Thank you. Our next question comes from Michael Eisen from RBC Capital Markets. Please go ahead.

Good morning. Thanks for taking the questions. Just following up on some of that SG&A commentary you just provided and thinking of the back half of the year some of the investments you guys are making, when can we start to see a more meaningful improvement of SG&A on some of the investments like bar coding, the transportation systems, the mobile app? And what level of growth do you guys need to see in the back half of the year to be able to get that SG&A leverage?

Well, starting with the second question first, the mid single-digit that we've signaled, that we think we are going to get mid single-digit organic growth is what we are expecting and we are expecting SG&A leverage with that. So that's the level. Obviously, if it comes in low single-digit as it did in the second quarter, we won't get that leverage. In terms of the initiatives, they are all ongoing this year. And if you remember -- our initiatives in the past have been more gross margin focused. The ones that you mentioned, the e-commerce, the bar coding and the TMS, those are going to really impact our SG&A. But we're looking at next year before we start to see the full benefits of that. Obviously, we will be rolling out bar coding this year and next year, but we will get the benefit of that next year. TMS we will be rolling out right at the end of this year and in the next year, so we will get some benefit, but not the full benefit of that. Siteone.com, we're very excited about the improvements we're making there. It's allows customers to now pay on account online, the Spanish version. And so we expect the adoption of that to increase as we really push that hard toward the end of this year and in the next year and that will help. So we expect to see benefits of those showing up in SG&A next year and obviously for the next several years after that. That’s when we really start to drive it down significantly.

Got it. Helpful. And then transitioning over to -- the cash flow you guys generated in the quarter was definitely stronger than we anticipated. I mean it looks like a lot of it from working capital management. Can you talk to what some of the initiatives you guys are driving there and what you expect to be -- where you expect to be able to improve in the back half of the year?

We're going to -- we've been working hard at improving our inventory turns, I'd say with regards to focusing on the key SKUs that drive our business and very judicious in our inventory levels with regards -- have plenty of those inventories that have been also moving out or moving SKUs. I think we've also been better at buying relative to last year with regards to buying the right amount of inventory and the payment of those terms with regard to that inventory improving year-over-year. Receivables continue to be relatively strong. The business is still good. Bad debts still very good. So expect to see some improvement there also this year.

Great. Thanks, guys.

Thank you. Our next question comes from Matthew Bouley from Barclays. Please go ahead.

Good morning. Thank you for taking my questions. So I wanted to ask just on the volume side. Obviously, you guys have been having success on the pricing side and then volumes were a bit softer, which you attributed to weather. But you’ve been pushing price and you've seen some additional inflation from the tariffs. I mean are you sensing that the competition is pushing price as well? And accordingly, what's your sense of kind of your share position and volumes versus the market at this point in light of these price increases that you're pushing? Thank you.

Yes, when we raise prices, it's with the market. And it is very important for us to be competitive and we are competitive out there and our competition is also out there and so we go head-to-head with them, but we remain very competitive at all times. The market in general is pretty rational, pretty responsible about passing through manufacturer price increases and I think that’s what you're seeing. Manufacturers raise price, they did at the end of last year and early this year. Those were well announced and those went into the market. We took advantage of early buys obviously to -- using the DCs to enable us to improve our gross margin. But in terms of taking care of our customers and keeping the price competitive in the market, we do that market-by-market and that's a must in order for us to gain market share and be the supplier choice for our customers.

Okay. Thank you for that. And then secondly, as kind of you just alluded to, I think you also said earlier that there was some modest increases from the suppliers related to the tariffs, but not significant. Is there any additional opportunity there for -- or have already seen it for -- have you guys to have some of that pre-buying benefit like we saw in the first half again? Thank you.

With regard to midyear price increases, they've been so minimal. I would not expect them to materially impact what we are -- what's going on in the market. We will have to watch towards the end of this year to see where most of the suppliers and manufacturers in the marketplace would push through prices at the beginning of the calendar year. And we will -- as we get closer, we will see where our tariffs are heading and whether there's going to be additional price increases next year. But with regards to suppliers pushing through right immediately additional midyear price increases, we aren't seeing that other than a couple of handful, which are not material.

Okay. I will leave it there. Thank you very much.

Thank you. [Operator Instructions] Our next question comes from Alex Maroccia from Berenberg. Please go ahead.

Hey. Good morning, guys.

Good morning.

Good morning.

I'm just having some trouble reconciling the adjusted EBITDA guidance you put out. Last quarter you mentioned that to hit the high-end of that target, you would need high demand and good weather for the remainder of the year. But given that the weather didn't hold up in Q2 and EBITDA came in a bit lighter than expected -- and additionally, EBITDA is typically about two-thirds of the first half EBITDA if you look at second half EBITDA historically -- what's going to be providing this $100 million bridge between H1 EBITDA and the high end of the guidance?

Yes, I'm not sure -- we will have to go back and check the math there. But if you look at the shortfall in Q2, it was $4 million, $5 million in EBITDA in dollar terms. And so we were quite -- and so to have 1% organic growth and being able to hit EBITDA, that's only -- that much of a miss to us was quite pleasing to see. And so it's all the [indiscernible] for the rest of the year with reasonable mid single-digit growth, as we mentioned, gross margins that are similar to last year with good SG&A leverage and acquisitions coming in quite frankly and performing quite well, we certainly feel the range is quite doable.

Certainly, the high-end of the range requires -- what would require a complete recovery, which we haven't, of the sales volume that we’ve missed in the first half of the year to get to the top end of the range, which isn't -- we're not [indiscernible].

Yes. No, that makes sense. And then the second question is more for Scott. What geographies are you targeting in the acquisition pipeline currently and should we expect a greater number of hardscapes in the latter part of the year similar to the first half? I'm just trying to think about the GM benefit we might see and conversely the increase in SG&A.

Right. Well, I guess I will start -- our overarching strategy is to look at the top 200 MSAs across the country and trying to build out our product line across those. And when you factor in the -- the timing of any specific acquisition can't be determined. We are not targeting any specific geographies other than executing on that strategy of filling out our product line across MSAs. As Doug had mentioned earlier, our market share in hardscapes and nursery is lower. So statistically speaking, our pipeline has more of those opportunities available. So it's more likely they’re not that we will do more hardscape and nursery acquisitions going forward. But also as Doug mentioned, we continue to find good irrigation and agronomic opportunities in the marketplace.

Okay. Awesome. Thanks a lot, guys.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Doug Black for closing comments.

Okay, great. And thank you all for joining us today. We very much appreciate your interest in SiteOne. I would like to thank again our team for all the good work in the second quarter and for being a terrific team to work with as we move forward and build a company of excellence. We appreciate everyone's interest in SiteOne and we're excited about the longer-term growth and profitability that we can achieve as a company. Thank you very much.