Greetings, and welcome to the SiteOne Landscape Supply, Inc. Third Quarter 2019 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, John Guthrie, Chief Financial Officer. Please go ahead, sir.

Thank you, and good morning, everyone. We issued our third quarter earnings press release this morning and posted a slide presentation to the Investor Relations portion of our website, investors.siteone.com. I am joined today by Doug Black, our Chairman and Chief Executive Officer; and Scott Salmon, Executive Vice President, Strategy and Development. Before we begin, I would like to remind everyone that today’s press release, slide presentation and the statements made during the call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Such risks and uncertainties include the factors set forth in the earnings release and in our filings with the Securities and Exchange Commission. Additionally, during today’s call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. A reconciliation of these measures can be found in our earnings release and in the slide presentation. I would now like to turn the call over to Doug Black.

Thanks, John. Good morning, and thank you for joining us today. As we expected, the good weather in the third quarter, balanced with a very challenging weather in the second quarter, providing our customers with increased workdays and allowing them to complete some of their backlog of jobs. Accordingly, we’re able to deliver a strong 7% organic daily sales growth, which puts us on track to deliver mid-single-digit organic daily sales growth for the full year. Further, we achieved good EBITDA margin expansion and strong free cash flow during the quarter as our teams continued to execute our initiatives and as our acquisitions performed to plan. Finally, we added two more terrific companies to the SiteOne family and another one at the start of the fourth quarter. Overall, it was a solid quarter and the results demonstrate both the excellent execution by our team and the strength of our business model. With a healthy underlying market, continued execution and a strong contribution from acquisition, we expect to achieve our performance and growth objectives for the year. I will start today’s call with a brief overview of our unique market position, our strategy to deliver long-term performance and growth and some highlights from the quarter. John Guthrie will then walk you through our third quarter financial results in more detail, and Scott Salmon will cover our acquisition strategy. At the end of the call, I will discuss some of the trends that we are seeing in our markets and address our outlook for the balance of the year. As shown on Slide 4 of the earnings presentation, we have grown our footprint as the largest and only national wholesale distributor of landscaping products with more than 550 branches and three major distribution centers in the United States and Canada. We began…

Thanks, Doug. I’ll begin on Slide 9 with the income statement for our third quarter result. We reported a net sales increase of 13% to $653 million in the third quarter. During the quarter, we had 63 selling days, which was unchanged compared to the prior year period. Organic daily sales increased 7% in the quarter and 4% year-to-date. Organic daily sales for landscaping products, which includes irrigation, hardscape, nursery and landscape accessories was strong, growing 8% during the quarter and 4% year-to-date. Landscaping product sales benefited from favorable weather and strong demand due in part from the backlog of work, resulting from the challenging weather we had in the first half of the year. In a reversal of last quarter’s results, nine of 11 geographic regions had fewer rain days in the third quarter of 2019 compared to the third quarter of 2018. Organic daily sales for agronomic products, which includes fertilizer, control products, seed, ice melt and equipment remained steady, growing 3% for the quarter and 4% year-to-date. Prices increased 2% in the quarter compared to the same period in 2018 and 3% year-to-date as the cost increases from suppliers have been passed through by the market. We expect year-over-year pricing to increase 1% to 2% for the fourth quarter, resulting in a 2% to 3% increase for the full year. With regards to tariffs and pricing, we do not expect to see any additional impact during the rest of the year. Acquisitions contributed $39 million or 7% to net sales growth for the quarter. Gross profit increased 13% to $215 million in the third quarter. Gross margin remained flat at 33% for the quarter, which was in line with expectations. We faced a tough comparison to Q3 last year and most of the improvement from pricing in…

Thanks, John. As shown on Slide 11, 43 companies have joined the SiteOne family since the beginning of 2014. They added 218 branches to SiteOne and represent approximately $865 million in sales on a TTM basis. We have made good progress accelerating our pace of acquisitions over the past five years and have closed 8 acquisitions so far this year, representing approximately $85 million in TTM sales. Now as we turn to Slides 12 through 14, you’ll be able to find information on our three most recent acquisitions. On July 3, we acquired Voss Materials with five locations across the East Bay in Northern California, focused on the distribution of hardscapes and landscape supplies to landscape professionals. On August 30, we acquired Trendset Concrete Products, a leading distributor of hardscapes products with a single location in the greater Seattle market. Trendset is a great fit with SiteOne, expanding our already strong hardscape business in Seattle. And in the fourth quarter, on September 30, we acquired Design Outdoor, a hardscape distributor with a single location in the greater Reno, Lake Tahoe market. This is a new market for us, and we are very excited to add them as part of the SiteOne family. As we turn to Slide 15, we continue to see a significant opportunity to grow profitably through acquisitions, which allow us to move into new markets, expand our presence in existing ones, broaden our product offering and add outstanding talent to our team. Our pipeline remains very deep, and we continue to build our reputation as the buyer of choice in the industry. With eight acquisitions year-to-date, more than a dozen current letters of intent and offers in negotiation and dozens of active nondisclosure agreements, our M&A strategy has solid momentum. 95% of our deal activity this year has involved exclusive negotiations with sellers. We believe the growing number of successful entrepreneurs who have joined the SiteOne family are a vital element to our continued success and position us to drive growth for many years across what remains a highly fragmented 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 during the remainder of the year. And with that, I’d like to turn the call back over to Doug to discuss our outlook.

Thanks, Scott. I’ll wrap up on Slide 16. We are pleased with our third quarter results and remain well positioned to achieve our 2019 objectives. Our teams are executing well and our initiatives are producing good results as we work to increase the value that we deliver to our customers and suppliers, accelerate our market share gains, expand our adjusted EBITDA margins, increase our cash flow and build our company for the future, both organically through new systems, processes and talent and through acquisition. We continue to benefit in the short-term from a solid underlying market and expect the market will remain steady during the remainder of the year, supporting mid-single-digit growth. Keep in mind that our customers remain very constrained on labor, and so the number of workdays available will be an important factor in our organic sales growth during the fourth quarter. So far, in October, the weather has been good, supporting our outlook for mid-single-digit organic sales growth. In terms of acquisitions, Scott and his team along with our field leaders, have done an excellent job in building and converting our pipeline of high-quality companies. As he mentioned, we currently have a very strong backlog of deals and feel good about our ability to add more companies during the remainder of the year and into 2020. Taken all together, as we enter the fourth quarter, we are maintaining the midpoint of our adjusted EBITDA guidance for the year at $200 million, but tightening the range from our original $193 million to $207 million to our new range of $197 million to $203 million, which represents a 12% to 15% year-over-year growth or 14% growth at the midpoint. 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 the line of David Manthey with Baird. Please proceed with your question.

Terrific. Thanks, guys. First of all, so we understand the P&L dynamic ahead. I assume that you expect most of your operating leverage to come from SG&A from this point forward. Could you talk a little bit about your expectations on gross margin? I’m thinking over the next couple of years here, could gross margin, depending on pricing and mix, actually flatten out or go down a little bit in future years? Just some thoughts on the complexion of the P&L.

We think there is still opportunity available on gross margin. As Doug mentioned, with regards to TMS, one of our initiatives with regards to it. Private label, another initiative we have going there is future opportunities. Certainly, if you look over our past history, gross margin has been a primary driver of our growth, but – and we certainly think it will be much more balanced going forward. But there is still opportunity on the gross margin front going forward.

Yes. Specifically, if you’re looking at the fourth quarter kind of finishing out this year, we’re probably more in the flattish, like we were in the third quarter, given the strength of the first half. But if you look ahead into future years, there is – yes, we expect our EBITDA margin expansion to be pretty well balanced between gross margin improvement and SG&A leverage.

Okay. Okay. And then just quickly on acquisitions, the Trendset acquisition. Am I right in assuming that was about $2 million in contribution this quarter. And then Trendset and Design Outdoor, those – both roughly that $5 million, $6 million, $7 million in annualized revenues.

Yes. I think if you take them together, it was $10 million – $10 million to $15 million of annualized revenue. And so you can do the math. Those are – they’re up in the upper northwest. And so you’re going to get some seasonal aspects, not much contribution in the fourth and first quarter, most of their business in the second and third quarter.

Great. Thanks, guys.

Thank you.

Your next question comes from the line of Ryan Merkel with William Blair. Please proceed with your question.

Thanks. A couple of questions. So first off, I just want to pick up on the October commentary, Doug. So is October tracking sort of 5% plus, just given you have good weather, and I think the comparison is still fairly easy. So maybe just a little color there.

Yes. I mean, as we mentioned, October has gone well for us. So we think, as we stated, we’re set up to hit that mid-single digit. September, as the third quarter evolved, September was the strongest month of the third quarter. We would probably anticipate that October would be the stronger month of the fourth quarter. So – but overall, we’re very confident that we can finish out the year strongly on organic sales.

Got it. Okay. And then secondly, 7% organic growth is a pretty solid number. Just wondering, was this mostly boosted by an easy comparison last year? Or did you see some pent-up demand from the bad weather we had last quarter? And then maybe initiatives are starting to kick in and maybe there is an extra share gains in this quarter? Just trying to understand that strong 7% a little bit better.

Right. No, great question. And it’s difficult to bifurcate it completely, but we really think the underlying market that we’re in right now is a mid-single-digit market. So to the extent that we outperform that, there is a bit of catch up. Weather wise, as we mentioned, the weather was net better in the third quarter of this year than it was last year. And then there is a bit of a share gain. We feel good about how we’re evolving as a team. We get stronger every year, and we’re gaining more market share this year than we did last year. We expect to gain more market share next year than we did this year. So I think that’s how we think about it. The more we dissect the numbers, underlying market is mid-single digit, and weather can move that around up or down. And then on top of that, we have some share gain going on.

Got it. That’s helpful. Let me just sneak one more in on gross margin, just to clarify. I think fourth quarter has an easy comparison. And so should we expect margins still flat year-over-year? Is that what you’re saying? Or is there still – is there a chance that margins could be up year-over-year? Just a little color there would be helpful.

I think we would say that we think they’ll be roughly flat. I mean there could be a little upside on that with regards to it as Q4 is not as tough a comparison as Q3 was. So there may be some upside, but we’re thinking – compared to – especially relative to what you saw in the beginning of this year that margins will be a little – it would be a minor, if it is up relative to what we saw in the first half.

Great. I’ll pass it on. Thanks.

Thanks, Ryan.

Your next question comes from the line of Matthew Bouley with Barclays. Please proceed with your question.

Hi. This is Christina Chiu on for Matt. My first question is on what you’re expecting in acquisitions for the fourth quarter, noting that year-to-date acquisitions of $85 million are a bit lighter than previous guidance, comprising roughly 7% to 13% of annual revenue.

Yes. We wouldn’t see the pace as slowing. We have a very strong backlog, and we still expect to close more deals in 2019. Historically, as you said, we’ve acquired 7% to 13% of TTM sales, and we’d anticipate being on the low end in 2019. However, as with the weather and a lot of things seasonally, that would – we’d expect that to balance out over the years and in 2020.

Got you. And then just operationally, given your focus on SG&A leverage, at what stage are you tracking on your investments in supply chain and marketing? And for the branches that have seen the rollout, have customers received some of these investments? And do you have an idea of the long-term effect?

No, great question. In terms of our overall investment, we’re now on kind of an even pace year-to-year. We’re making investments constantly in building the business, but we made investments last year and in the year before. And so we’re tracking along with those. In terms of the benefits, we’re seeing very nice benefits with our barcoding, have the mobile checkout. We’re getting customers in and out faster that makes our customers more efficient, and it makes us more efficient. So that’s – the early signs of that are very good. Keep in mind that we’re still kind of in the pilot early rollout phase, so not enough data to be able to say, hey, we know – and every branch is going to be able to achieve X, but we’re – let’s say, we’re very optimistic given what we’ve seen in the early parts of those pilots in terms of the benefits. Siteone.com, we’re also still in the early phase, so hard to tell specifically. But we’re excited about the specific efficiencies we see as customers adopt that and put that into their routine for them and for us. So still in the early stages, quite optimistic. We are tracking along to plan, and we feel very good that in 2020, 2021, 2022, those types of initiatives will help transform our company and with that, give us terrific leverage on the SG&A side and also help us to be a more consistent and more successful market share gainer on an organic basis.

Thank you.

Your next question comes from the line of Damian Karas with UBS. Please proceed with your question.

Good morning, guys.

Good morning.

So John, you talked about October off to a solid start so far, pretty favorable weather. Could you remind us how much of the fourth quarter is, indeed, concentrated in October historically? And thinking about the 7% daily organic sales growth from the past quarter, would you be able to give us perhaps a little bit of a regional walk across the country on how that looked?

Yes. Well, we gather the data – the specific numbers – on the first question, let me just – the second question. So I will say geographically, every region that was up across the country, the – probably the strongest geographic regions were here in the south, partly because we did face some inclement weather, especially in September of last year. So from that standpoint, but we were pleased that there wasn’t any problems with any region being down during the quarter. And so we were pleased with good geographic growth across the base. With regards to the amount, about 45% to 50% of our sales is in October typically.

That’s the fourth quarter.

The fourth quarter.

Great. That’s really helpful. And a follow-up question is on SG&A. So you guys mentioned the 90 basis points of leverage there in the third quarter and did talk a little bit about kind of longer term, how you’re thinking about that. But looking at the fourth quarter, is that kind of 90 basis points or thereabouts, how we should be thinking about the SG&A leverage? Are there any specific factors that you’re expecting out of this year related to comps last year that would, perhaps, suggest otherwise?

Well, I think you can kind of back into the number from our guidance. But I think 90 basis points is, in general, going to be a little more difficult to achieve, just given the fact that we have, in northern markets, in November and December, you have a low sales volume. So you’re really trying to manage that cost and a little of the uncertainty in the fourth quarter is really when the winter begins in the northern market as we manage it down. So the guidance kind of gives where SG&A will be and then from that perspective. It’s tougher to do SG&A leverage without the sales volume in the northern markets.

Understood. Thanks for your time.

Thank you.

Your next question comes from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question.

This is actually Chris calling on for Mike. So my first question, could you just talk to some of the puts and takes to your 4Q guide, given the performance this quarter and M&A backlog. I would think that would imply some upside there?

Could you ask that again. You were cutting in and out.

Sure. Can you hear me now?

Yes, much better.

Okay. So my first question, could you just talk to some of the puts and takes to your 4Q guide, given the performance this quarter and the M&A backlog. I would think that would imply some upside there?

Yes. Well, at this point of the year, it’s really about organic sales. So upside would be stronger sales, downsides would be less sales. So that’s the real factor that would provide any variance in the fourth quarter. We’ve got pretty good line of sight on our SG&A and on our gross margin. In terms of acquisitions, when you add acquisitions this late in the year in the fourth quarter, especially if they’re in the north, they could lose money, right? Because they move into loss-making months in December. There in the south, they’ll contribute a bit. So we never count on any kind of contribution. We’ll – they will contribute sales and working capital, but in terms of profits, you’re not going to get much contribution late in the year from acquisitions.

Got it. That makes sense. And then just for my second question, just on your pricing outlook. It looks like you’re expecting a sequential decline next quarter. So I was wondering if you could provide some additional details on what’s driving that? And then separately, it looks like the Department of Labor recently increased the national salary requirements for exempt employees. So I was wondering if you could, maybe touch on that. And if you’re expecting or seeing any impact to demand or pricing power as a result of that?

No. In terms of pricing, I think, we’re thinking 1% to 2%.

Yes. We’ve been running – we started the year at 3% and then it would come down to 2%, and it’s been trending down. I mean we’ve been, I think, between like 1.9%, honestly in September. And the general trend is because in Q4 of last year, we saw some major price increases, and we’re starting to come across a tougher comp with regards to that, and that’s all that’s driving that down. So we were, honestly, really pleased this quarter because of the fact that the 7% was largely a volume growth and not just price.

And just to clarify, that’s 2% up, not 2% down.

Yes. Yes. We’re not going down 2%, but sequentially, the increase is going from 2% – between 1% and 2% is what the expectation is.

Got it. Appreciate the color.

[Operator Instructions] Your next question comes from the line of Alex Maroccia from Berenberg. Please proceed with your question.

Good morning, guys. Just a couple for me. So typically, you’ve seen in the past, gross margins get a slight uptick from these hardscape acquisitions. However, year-over-year, you were flat, and you still had some hardscapes acquisitions in Q3. Was there anything pushing that gross margin number down in the quarter?

I think the biggest thing was we faced a tougher comp. I mean acquisitions did have a slight positive contribution, but we had a slight negative contribution from customer mix and some incentives from our suppliers, all expected with what we were – with our outlook even from the beginning of the year.

Yes. Just to add to context, remember, in 2018, we got behind in the base business on margin in the first half, and we had a significant catch up in the second half. So we’re comping against that. This year, we had a significant improvement in the base business. As John mentioned, we were slightly negative in the third quarter. Fourth quarter is a bit easier comp. And so the acquisitions are what caused that to be flat. Going forward, we still expect acquisitions to increase our gross margin, given the mix of the hardscapes and nursery acquisitions.

Okay. Great. That all makes sense. And then I was just interested to see that the Tahoe market, kind of your first new market over a year, nearly a year out here, do you think it’s – you’ll be looking to acquire more in that market or organically in-fill it? And then how are you approaching some of these other greenfield markets around the country?

Well, I mean, good question. Yes, we always prefer to go into a new market with an acquisition. And so obviously, we cover most of the markets today, and we’ve got a lot of fill in to do within our existing markets. But we’re quite happy when new markets come up. If you remember, we did acquisition, I think, it was earlier in the year and if last year, Auto-Rain in Spokane, that was our first move in to Spokane. So every year, we’re going to hit – we’re going to catch a couple of new markets when sellers are ready to sell in those markets, and it’s certainly part of our strategy. In terms of Reno, Lake Tahoe, that’s a pretty hot market. Lot of folks moving in, and so that’s a terrific market to get into to help our overall organic growth.

And it also helps us expand that just – it’s hardscapes location, but also an opportunity to tap into those customers and also expand on the irrigation and agronomics, right?

Yes. That’s a good point, John. I mean that’s the beauty that we carry all the product lines. So if you get into a market with one of the product lines, you can follow with the others and create synergies there.

Okay, great. Thanks a lot guys.

Thank you.

Your next question comes from the line of Keith Hughes with SunTrust Robinson Humphrey. Please proceed with your question.

This is Judy Merrick on for Keith Hughes. In 2019, it looks like you had a fairly steady pace with your acquisitions, and they were mostly like hardscapes with higher gross margin, higher SG&A. Would you kind of expand the leverage benefits and SG&A to kind of work off the study pace next year? Or is that just more of a factor of the timing kind of made the diverse locations of these acquisitions?

Yes. Just the dynamic is – yes, so as we – hardscapes and nursery companies run at a higher gross margin and higher SG&A. So as we acquire those – a lot of our fill-ins is nursery and hardscapes. And so as we acquire those types of businesses and bringing them into the company. When we get SG&A leverage on the base business, that SG&A leverage will be mitigated because you’re bringing in a higher SG&A company. So on the gross margin side, our gross margin improvement is improved because you’re bringing in higher gross margin. So if you take the base business, and you’re getting a certain amount of SG&A leverage, certain amount of gross margin improvement. If you add hardscapes and nursery, your SG&A leverage is going to look less, and your gross margin improvement is going to be greater. And so that’s the dynamic that we are seeing this year, and that’s the dynamic, actually, we would expect in the next couple of years as we gain market share and fill in more aggressively with nursery and hardscapes. But the good part is they’re all equally as profitable. And so on a EBITDA, percentage basis, margin basis, there is really no effect. In fact, the companies that we’re buying are right in line with where we are. So we’re not diluting the overall business. We’re just changing the nature of how to get there.

Got it. I understand that. And then just in your comments, you said most of the ones this year around – roughly around $10 million sales, that the pipeline is maybe a little bit bigger. Is that more just a factor of what’s available out there that you’re seeing? Or just sort of timing of what you’re looking at for next year in the size?

It really has to do with the timing of when sellers want to sell. We feel very confident about our backlog and everything from offers and negotiation to the number of NDAs we have out. We’re – again, we don’t see any slowing in the pace or any change in the structure of the competition or anything. Over 95% of our deals that we’ve been working in 2019 have been exclusively negotiated.

Yes. And so what you’re seeing this year, as I mentioned in the earlier comments, the average companies that we’ve bought so far this year are $10 million. That’s unusual, and so it’s all about timing. So it will average out just like the weather that will average out. So if you look at our backlog today, we think the average company in our backlog is about $15 million to $20 million that we’re going to be acquiring. So let’s say, $17 million, $18 million should be our average. If you look at our average backlog today than we have handshakes or LOIs, it’s net above that average, and we would expect that to average – the average won’t stay $10 million. It will average back to the, let’s call it, the $16 million to $18 million over a period of a – couple of years or 18 months. So – but yes, our backlog today is net above average, which is logical balanced out with what’s actually come through so far this year.

Okay. That’s helpful. Thanks a lot.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Mr. Doug Black for closing remarks.

Okay. Well, thank you very much for joining us today. We very much appreciate your interest in SiteOne and are very excited about our long-term growth and profitability potential for our company. I would like to take one more opportunity to thank our terrific associates that make everything possible. They’re doing a great job, and we look forward to serving our customers, growing our suppliers and be enforced in the landscape industry for many years. Thank you very much.

This does conclude today’s conference. You may disconnect your lines at this time. Thank you for your participation.