Greetings and welcome to SiteOne Landscape Supply Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Guthrie, Executive Vice President and Chief Financial Officer. Thank you, sir. You may begin.

Thank you, and good morning, everyone. We issued our fourth quarter and full year 2022 earnings press release this morning and posted a slide presentation to the Investor Relations portion of our website at investors.siteone.com. I’m joined today by Doug Black, our Chairman and Chief Executive Officer and Scott Salmon, Executive Vice President, Strategy and Development. Before we begin, I would like to remind everyone that today's press release, slide presentation and the statements made during this call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Such risks and uncertainties include the factors set forth in the earnings release and in our filings with the Securities and Exchange Commission. Additionally, during today's call, we will discuss non-GAAP measures, 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.

Thank you, John. Good morning and thank you for joining us today. We achieved another year of double-digit growth in organic daily sales, net sales and adjusted EBITDA in 2022 on top of the record growth in 2021. I'm very proud of our terrific teams, who continue to get stronger every year and who adapted well to the challenges of continued high inflation, tight labor and reduced product volume last year. We were also very pleased to add a record 16 new high-performing companies to SiteOne during the year. All these companies have talented teams and strong customer relationships, and they expand our product lines and market presence in their respective markets. Through the execution of our commercial and operational initiatives and our acquisition strategy, we continue to build SiteOne as a world-class market leader for the long-term, while delivering consistent performance and growth in the near-term. As we face softer markets in 2023, our well-balanced business, strong balance sheet, exceptional teams, improved capabilities and robust acquisition pipeline have us well positioned to navigate the year ahead and achieve continued success. I will start today's call with a brief overview of our unique market position and our strategy for long-term performance of growth, followed by some highlights from 2022. John Guthrie will then walk you through our fourth quarter and full year 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 and guidance for 2023 before taking your questions. As shown on slide 4 of the earnings presentation, we have grown our footprint to more than 630 branches and four distribution centers across 45 US states and six Canadian provinces. We are the clear industry…

Thanks, Doug. I'll begin on Slides 10 and 11, with some highlights from our fourth quarter. We reported a net sales increase of 11% to $890 million in the quarter. There were 60 selling days in the fourth quarter, which is one less day than we had in the fourth quarter of 2021. For the full year, net sales increased 16% to $4 billion. We had 252 selling days in fiscal year 2022, compared to 253 selling days in fiscal year 2021. In fiscal year 2023, we will again have 252 selling days, but we will have one less day in the first quarter and one more day in the fourth quarter. Organic daily sales increased by 7%, in the fourth quarter and 11% for the full year. Organic daily sales growth for both the quarter and the full year, was primarily attributable to price inflation, driven by product cost increases from our suppliers, partially offset by lower volume resulting from higher prices and softening economic conditions. Price inflation contributed approximately 12% to organic daily sales growth for the quarter, and 18% for the full year. We saw price inflation across all product lines this year, but higher levels in commodity products like PVC pipe and fertilizer. We're starting to see price inflation moderate, as we comp the price increases from 2022. Price inflation for December was just under 10%, which is the first month under 10% since the second quarter of 2021. So far in 2023, we are seeing price increases from many suppliers who are still trying to catch-up with their rising costs, as well as price decreases for its own commodity products like PVC pipe. Currently, we are projecting low single-digit price inflation for 2023, with the majority of that expected in the first half of the…

Thanks, John. As shown on Slide 14, we acquired three companies in the fourth quarter bringing our total to 16 for 2022 with a combined trailing 12-month net sales of approximately $240 million. Since 2014, we have acquired 80 companies with approximately $1.5 billion and trailing 12-month net sales added to SiteOne. Turning to Slides 15 through 17, you will find information on our most recent acquisitions. On October 13, we acquired Madison Block & Stone, a wholesale distributor of hardscapes in Madison Wisconsin. This acquisition establishes a leading hardscapes position in the Madison market and expands the range of landscape products and services we provide to our customers. On December 16, we acquired Telluride Natural Stone, a wholesale distributor of hardscapes located in Phoenix, Arizona. Telluride extends our leading hardscapes presence across the Phoenix market. Also on December 21st, we acquired Whittlesey Landscape Supplies, a wholesale distributor of landscape supplies and hardscapes with seven locations serving the Austin, Texas market. Whittlesey establishes a landscape supplies and hardscapes platform to serve Central Texas and expand the products and services we offer our customers. By teaming up with these three high-performing companies, we continue to deliver on our strategy to expand the products, services and overall value we offer our customers across all markets. Summarizing on slide 18, our acquisition strategy continues to create significant value for SiteOne with a strong balance sheet and a robust pipeline across all lines of business and geographies we are confident that we will be able to add many more outstanding companies to SiteOne in 2023. We are honored and excited that so many owners continue to choose SiteOne as a great home for their family businesses and continue to thrive in leadership positions across our company. These strong leaders and innovators are a powerful force within SiteOne as they help us improve the value that we deliver to customers and suppliers. They bring fresh ideas and entrepreneurial agility and we support them and their teams with the resources and flexibility to pursue both their personal and professional passions. Ultimately, we all win stronger together. I want to thank the entire SiteOne team for their passion and commitment to making SiteOne a great place to work and for welcoming the newly acquired teams when they joined the SiteOne family. I am confident in our ability to keep adding more outstanding new companies through acquisitions in 2023, creating terrific value for all our stakeholders. I will now turn the call back to Doug.

Thanks, Scott. I'll wrap up on slide 19. As we look ahead into 2023, we expect inflation to continue moderating as we lap the steep increases from the last two years. For the full year, we expect low single-digit inflation with most of this occurring during the first half of the year. In terms of end markets, we expect new residential construction, which comprises 21% of our sales, to decline approximately 20% compared to 2022, as consumers adjust to high home prices and mortgage rates. We expect a more stable environment in the new commercial and recreational construction, which represents 14% of our sales. With good backlogs and healthy bidding, we believe this market could grow slightly versus the prior year. Major repair and remodel, which comprises 29% of our sales, is expected to be relatively flat. Typically in a downturn, major repair and remodel has proven to be more durable than new construction and we expect that to be the case again in 2023. Note that low unemployment and high home values, both support the major repair and remodel market, though lower home turnover could be a headwind. Finally, the maintenance end market, which comprises 36% of our sales, has typically been steady in past downturns. Maintenance dollar demand from our customers has remained steady and we expect that to continue in 2023 with much lower inflation translating into reasonable volume. In total, we expect industry sales to decline in 2023 and with our ability to gain market share we would expect our organic daily sales to be flat to down mid-single-digits with modest price inflation being offset by reduced volumes. We expect our gross margin to normalize this year without the substantial benefit that we saw from strategic inventory purchases ahead of rapid inflation in 2021 and 2022.…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from David Manthey with Baird. Please proceed with your question.

Yeah. Thank you. Good morning everyone. First question, when you're talking about the guidance here we can back into your estimated EBITDA which looks like about 10%. And then, what you just said, Doug about SG&A, as a percentage of sales being slightly higher, I guess, we can impute a gross margin that looks like maybe 34.5%. First of all, I'd just like to see if that's in the ballpark. And then, at that level, it implies that SG&A is up just a couple percent. And could you just talk about your confidence interval around both the gross margin at that level? And then, how you plan on keeping SG&A sort of in that range? What are the moving parts from year-to-year?

Yeah. So that's the ballpark. We expect gross margin to fall somewhere between 34% and 34.5%, so your estimate there is ballpark. And then on the SG&A side, we're just going to -- we're going into the year with confidence in our team that we're going to be able to outperform the market. We've got a lot of terrific momentum with our sales force and with our customer experience et cetera. But we're going to monitor the market very closely. As spring comes in March and April, we know what we would expect to see. And if we find ourselves in a tougher situation one of the benefits of SiteOne is we're decentralized, right? We have our field support at the center and the field is very fast and very flexible. And they can pullback very quickly to the demand that they're seeing. And we can do that in each market. So if markets are strong those two teams can stay on offense. If we have parts of the country that are weak, we'll pull in those markets very fast. So that's how we'll manage SG&A, because we know we're in a tougher environment. And the management of the SG&A, so that we don't get a significant amount of deleverage will be very important for us in 2023.

Yeah, makes sense. And then, just a quick one, John, could you tell us what's the current expected 2023 contribution from acquisitions that have been with the company for four full quarters by your convention?

Well, I would point to the numbers in the presentation with regards to the actual sales from those businesses this year. I believe we are carrying over $85 million of revenue for the 2021 acquisitions into 2023 -- or the 2022 acquisition. So I mean just ballpark math they are about roughly $220 million in run rate and we recognize about $85 million in revenues this year from those acquisitions.

Got it. Okay. Thanks very much.

Our next question comes from Ryan Merkel with William Blair. Please proceed with your question.

Hi. Good morning. Thanks for taking the question. I wanted to ask about first quarter 2023. I know you don't want to give quarterly guidance, but just given it's a really big comp, I was just hoping for a little help in how to think about sales and gross margins. Should we think about organic sales down kind of low single-digits? And then gross margin is I think typically seasonally a little bit below where 4Q comes in. Is that the right way to think about it?

I think that's fair. We did have a very strong first quarter last year so we will be facing -- I mean some of the -- I'll just highlight some of the moving parts. We did have a very strong first quarter last year with -- from a volume perspective. Especially, kind of, January and February started off strong from that standpoint. Going into this quarter first quarter, we will have one less selling day from that standpoint. On the positive side price inflation was probably strongest in the first quarter of this year from that perspective. And in general our gross margins are lower in the first quarter than they are in the remaining quarters from that standpoint.

Got it. Okay. That's helpful. And then I was a little surprised that repair and upgrade is assumed to be flattish in 2023. I was a little worried that during the pandemic that part of the business saw kind of a big boost and might normalize. What are you hearing from contractors on this part of the business in '23?

Right. We're still hearing from our contractors, it's really gone to where they just had too much work to do to where they have a reasonable amount of work. And most of our contractors are telling us that they can see a good amount of work through the first half of the year. Repair and remodel doesn't have a long lead time so they don't have tremendous backlogs there traditionally. Now they did during the COVID years but -- so we'll see when we get into the second half. But they're saying things are good for the first half. And then we would remain somewhat optimistic that that market would hold up in the second half. If you remember the professional side of repair and remodel was highly constrained by labor all through COVID. And so we didn't see the big run-up that -- as you saw on the retail side. And so we have less -- there was less pull forward if you will. So what we're hearing from our contractors is they see a good amount of work for the first half of the year. We'll see --the visibility is less clear for the second half but we'll see how that develops.

Makes sense. Pass it on. Thanks.

Thank you.

Our next question comes from Mike Dahl with RBC Capital Markets. Please proceed with your question.

Hi. Thanks for taking my questions and the color so far. Just a follow-up on some of the end market commentary. When you talk about new res down 20, the stable commercial Ryan just asked about R&R. Just to clarify are those volume assumptions or are those all-in assumptions? And I appreciate that you gave kind of low single-digit price inflation. But those are all-in numbers. Can you help us understand if there's any differences in kind of the volume assumptions by end market?

Yes. When we think about those markets we kind of think about them as all in. I mean, it's really hard to dissect volume. So when we're making those comments that would be kind of an all-in.

Yes. I don't think -- it's primarily like obviously resi is going to be driven by volume. But I don't think there's -- I think the trend we would expect would be similar across that price would not vary that significantly by end market. So while we're talking all in in those numbers specifically volume is what's really driving the differences, yes.

Yes. Okay. That makes sense. And then just on the price trajectory it's helpful color in terms of the December commentary. Could you comment at all about January? And then when you talk about price low single digits in 2023, with the majority in the first half. Do you actually anticipate that as you get into the second half, we see a net headwind on price, or are you envisioning just a flatter environment on price, as you go through the year?

We're envisioning a flatter number on price throughout the year. So, relatively our -- built into our assumptions is relatively flat price in Q4. And really, what we're going to see is kind of the tail off of the -- I mean, there's some price increases going in right now. As I mentioned, there's some commodities actually came down. So those prices that are going in right now, would carry throughout the year and then be offset by the commodities coming down. But we will have a runoff, of kind of the price -- a lot of the larger price increases that happened last year throughout the year.

And it's a pretty steady decline, in the first quarter to the second, to the third, to the fourth and consider the fourth flat – John, correct me if I'm wrong, but it's a pretty steady decline in inflation through those quarters.

Got it. Okay. Thanks a lot. Thanks, John.

Our next question comes from Matthew Bouley with Barclays. Please proceed with your question.

Hi, good morning. Thanks for taking the questions. I wanted to go back to the SG&A question one more time. It was helpful color you gave there in an earlier response. Just thinking about sort of the specifics around labor and some of the growth investments you've been making, obviously, you guys are guiding to the sort of modest deleveraging in 2023. Just curious, if you can kind of pick apart some of the details there on the SG&A side, because it does seem like pretty important component there to achieving your EBITDA guide for the year. Thank you.

Yes. Well, we went into this year, I guess just broadly, we made a lot of great investments last year and kind of one of the things we're trying to do this year, is harvest those investments. So it's more of -- we made investments, we want and drive kind of the results from those investments we made last year, with regard to -- having said that, we still do face challenges like everybody else in the marketplace, that wage inflation isn't going away right now And so, we're going to pay our people from that standpoint. And so we'll be managing those costs with regards to it throughout the year. As Doug mentioned, it's very dynamic and can be done locally. But I would say, probably less new investment this year, more a harvest of last year's investments and then moderating as we go throughout the year SG&A to demand.

And when John talks about harvesting, we think of all the work we've done on siteone.com MobilePro, DispatchTrack, our CRM that we put on the sales force, those all have the potential to drive better productivity in our branch associates and our sales associates, et cetera. And so we're really -- that's what we're extremely focused on, is getting those productivity improvements because this is the year that that's going to be very important. So, that's just a little more color on top of what John said.

Got you. And are you able to disclose, a dollar figure or any type of quantification around those investments that sort of were there that may be ramping down this year?

Not beyond the general guidance that we'll have some modest deleveraging, with the sales flat to slightly down, or flat to down mid-single digits. And you can do the math there. With wage inflation, that's going to take some productivity improvement. Our investment dollar amount is not that material quite frankly, in terms of, savings for 2023. What's much more important is that we get the productivity and harvest the benefit of those investments.

Got you. Okay. Thank you. And then just the second one is back on the pricing side, that was also certainly very helpful color you gave in the prior question. But just any color around the commodity piece of the business, and what you're seeing around fertilizer inputs and PVC and things like that, sort of what's assumed on the commodity side, specifically within your low single-digit price inflation guide? Thank you.

Those -- each commodity is different, obviously, we have a negative -- we've already seen negative growth specifically on fertilizers going into the spring, where we buy there and -- from the peaks, I should say. And then similarly, we've already seen price decreases on PVC pipe. I mean, it's difficult to express everyone because the commodities are different. But for instance, I think we saw going into the fourth quarter. I haven't got an updated number, but it was like 10% to 15% decreases on PVC pipe, but that is a relatively small component of a large basket of products. So...

Got it. All right. Thanks, John. Thanks, Doug. Good luck guys.

Thank you.

Our next question comes from Keith Hughes with Truist Securities. Please proceed with your question.

Thank you. Question is on the share repurchase program. I'm sure there's an opportunistic aspect of this given the stock price and where we are at this point. But is this going to be a longer-term change where share repurchase is going to be part of capital allocation in addition to the acquisition activity? I'm sure you're going to continue longer term.

Yes. It's a long-term process. It's not a quarter-by-quarter process as we think about it, as we describe our capital allocation waterfall. Our number one priority is to invest in acquisitions and grow the business and invest there. So that is number one. And if we use all of our capital to do that, we'll be very happy if we can deploy it that way. But in so much as we maintain our conservative balance sheet, and acquisitions are very choppy, and we find that we have excess capital, we would expect to deploy some of that to share repurchases as a way to return back to our shareholders. So, I guess the only other thing just to kind of clarify that and maybe give some reality is the fact that here we are beginning of the year, we've got a full pipeline of acquisitions going forward. We're very optimistic about that. We're starting a new year from that standpoint. So kind of from our frame of mind, we don't feel obligated to go out and purchase capital, because we're primarily focused on investing it right -- purchasing shares, investing it right at this moment. But each year, as we go throughout the year, we'll evaluate that and looking at our opportunities.

Okay. Given the -- just building on that question, given the amount of spend of acquisitions in '22, it seems as though with -- even in a down year coming through in '23, you would have the capital particularly the debt ratio is to do both. I guess my question is, is there a capital allocation plan in '23 to get the debt -- the debt to leverage more to the least the midpoint of your range, utilizing both acquisitions as well as share repurchase?

We -- certainly, we can do share repurchases. And as John mentioned, as we get toward the mid to the second half of this year and see how things are going and there's a little more certainty on how things are going to workout, that would be a lever that we can pull. One of the things we want to keep in mind, though, is we're heading into a down cycle potentially. Whether it's a pause or a longer cycle, we don't know. And we want the strategic flexibility to do even any larger deals that might come down the pike. We don't typically do large deals, but there are a few that are out there that could be in the $250 million, $300 million even $400 million range in particular companies were for sale. So, we want to make sure that we don't get the leverage to such a point, especially going into a tougher waters that we wouldn't be able to do those deals strategically. So that's part of our thought process in evaluating the strength of our balance sheet and where we should be from a target standpoint. We still think the one to two is a good target. But at this point, with the uncertainty ahead, it's -- we feel it's prudent to be maybe a little below that range at this point.

Okay. Thank you.

Our next question is from Damian Karas with UBS. Please proceed with your question.

Hi, good morning everyone.

Good morning, Damian.

I wanted to ask you about your free cash flow expectations for the year. I think you made the comment, you are making progress on reducing excess inventory. But I think free cash flow conversion, a little bit lighter this year just like about everybody else out there. Could you maybe give us a sense on this year how you're thinking about free cash flow?

We think we'll still -- we will -- our objective every year is to hit net income on free cash flow. We think this year, as -- we're hopeful to achieve that this year. We think this year as a result of -- kind of not having the supply chain issues. We think we can make good progress on our inventory levels. We were very pleased with -- going into kind of the first quarter we had quite a bit of a hole this year. We're very pleased by the team's efforts in the second half of this year to still post the positive growth on free cash flow after the large hole we earn after the first quarter. And as I said we think there's still opportunity to continue to improve that next year as supply chains get less uncertain, lead times come down on an opportunity to improve turns even further next year, which would put us at or above kind of our average free cash flow goal.

Got it. And you all have been very busy on the deal execution front. Just curious if anything related to market conditions or site-specific factors have helped drive that higher volume of deals or is it just more random timing? And kind of second part related to these deals, our math kind of suggests that cost of them has maybe gone up from kind of 0.5 turn of sale -- half a turn to one turn on sales, now maybe approaching 1.5 times, even though public equity valuations are down. So just curious if that's kind of related to the mix of deals you guys are doing or if you've actually seen the deal space getting more competitive or anything like that?

Yes. I'll hit the second one first. I think that that's probably a misleading way to look at -- or not the way we would look at it. We're valuing off of earnings. And so the profitability of the businesses that we're partnering with, really drives that sales multiple that you're talking about. So it's not a way that we typically would look at the valuation. So I wouldn't read too much into that in terms of increased competition or anything like that. I think it's been quite steady. And we've been pretty consistent in saying that certainly there are other folks out there that are running their acquisition playbook. But there's a lot, lot of white space. And quite honestly, more often than not the majority of our deals are still exclusively sourced. So we feel very good about continuing that. And then in terms of M&A, I think it's just a consistent effort on our part. We stay very close through our field contacts over the years and our strong M&A team. So the deal flow when these entrepreneurs are ready to transition their family business, we believe that we're consistently their first choice. And so we expect there to be continued deal flow in 2023. It's more just a continued momentum. It obviously can be very choppy but we feel very good about going into 2023. I don't know if there's any specific market factor that is pushing people dramatically, although certainly the potential for a softer market could push a few people into the more likely to sell side. If they were on the short end of 2022 -- if they had a short window, during which they were ready to sell anyway, that may push them a little upward in that window.

Great. Makes a lot of sense. Thanks guys. Best of luck.

Thank you.

Our next question comes from Andrew Carter with Stifel. Please proceed with your question.

Hey, thanks. Good morning. I'll just take one. Kind of built on the last question, I guess I want to go a different way with it. Certainly, looking at the sales multiple, if you're buying on higher earnings, how much certainty do you go out there and look at your M&A targets now, knowing we're at the tail end of the cycle, knowing that they probably benefited just like you in terms of their EBITDA margin, in terms of sales? Can you go out this year and approach their numbers with "Hey there's a certainty we can pay you on that?" Or is there any possibility that if things deteriorate further, you start to say "No we're going to take a step back and potentially not lean on M&A as heavily." Just want to understand how you're thinking through that potential wrinkle?

Yeah. We're not looking to step back in any fashion at all. I think we just have to continue with our disciplined process of how we value businesses. And we often look at the -- we're looking at the sustained earnings. So we don't look at just the last 12 months. We look at the last several years. And certainly, there has been a bump in some businesses due to -- whether it's inflation or COVID or various factors. And we consider those. Because we are long-term investors, we're looking for the best companies that are going to perform over a full cycle. So we try not to get too dramatically swayed by say the last 12 months being slightly up or slightly down. But -- so I don't think that that will impact our ability to do acquisitions or appetite for them.

The other thing that we do is we do a lot of earn outs, where we disagree on the future and the owner thinks it's going to be stronger and we think it's going to be weaker. We just do a one to three year earn out where we can kind of place a reasonable bet and then share in the benefit or the risk together with those owners. And we do that quite a bit just for the very reason you're talking about that things are uncertain. And so that's another way that we manage that uncertainty of the future earnings and are able to pay fair prices but reasonable prices. And most owners are quite happy to do that together.

Thanks. Thanks guys. I'll pass it on.

Thank you.

Our next question comes from Jeffrey Stevenson with Loop Capital Markets. Please proceed with your question.

Hi. Thanks for taking my questions. First, I was wondering if you could give any more color on your different assumptions at the low and high-end of your fiscal 2023 guidance?

I mean the great uncertainty here is sales from that standpoint. And I mean, that's what we're going to be managing to. And I don't think it's not a dynamic where sales will drive SG&A and these things are all linked together. But certainly, there's a great uncertainty next year is kind of how this slowdown is actually going to play out.

So you can take the top end of our sales guidance in the bottom end and that's the major driver of the 395 to 425 outcome.

Got it. Okay, no that helps. And then I just wanted to ask how you're thinking about DIY versus professional in 2023. And more specifically with prices moderating, could there be some opportunity for improvement on the DIY side this year?

Yeah. DIY is a very small part of our business 2% or so. So we -- we're very oriented towards the professional side so we don't really -- whatever happens in DIY would not have a meaningful impact on our business.

Okay. Thank you.

We have now reached the end of our question-and-answer session. I would like to turn the floor back over to Doug Black for closing comments.

Okay. Well thank you everyone for joining us today. We very much appreciate your interest in SiteOne and we look forward to speaking with you again after the first quarter. I'd also like to thank our amazing associates for doing such a great job and our customers for allowing us to be their partner and our suppliers for supporting us so strongly as we build our company. Thank you very much.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.