Greetings, and welcome to the SiteOne Landscape Supply Second Quarter 2024 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. At this time, I would like to hand the call over to John Guthrie, Executive Vice President and Chief Financial Officer. Thank you, sir. You may begin.

Thank you, and good morning, everyone. We issued our second quarter 2024 earnings press release this morning and posted a slide presentation to the Investor Relations portion of our website at investors.siteone.com. I'm joined today by Doug Black, our Chairman and Chief Executive Officer; and Scott Salmon, Executive Vice President, Strategy and Development. Before we begin, I would like to remind everyone that today's press release, slide presentation and the statements made during the call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Such risks and uncertainties include 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 announced in early-June, we are experiencing softer demand driven by a weak repair and upgrade end market and more persistent commodity price deflation in select products like grass seed and PVC pipe. We now believe that these trends will continue through the full year and will have a negative effect on our organic sales growth and adjusted EBITDA margin. Against these headwinds, we were pleased to achieve solid results for the second quarter with only a 3% organic daily sales decline and adjusted EBITDA that was comparable to last year. We were also pleased to add 4 high-performing companies to SiteOne during the quarter and one in July, including Devil Mountain, which is an exciting new platform for growth in our nursery product line in the Western U.S. These companies have talented teams and strong customer relationships and expand our product lines and market presence in their respective markets. Through our commercial and operational initiatives and our acquisition strategy, we continue to build SiteOne for the long term as a world-class market leader. While we manage through the short-term headwinds, we're also building and perfecting our underlying capabilities, strengthening our teams and expanding our branch network to serve our customers with a full range of landscaping products across the U.S. and Canada. With our well-balanced business, strong balance sheet, exceptional teams, improved capabilities and robust acquisition pipeline, we remain confident in our ability to execute our strategy and create superior value for our stakeholders. I will start today's call with a brief review of our unique market position and our strategy, followed by some highlights from the quarter. John Guthrie will then walk you through our second quarter financial results in more detail and provide an update…

Thanks, Doug. I'll begin on Slide 9 with some highlights from our second quarter results. We reported a net sales increase of 4% to $1.41 billion for the quarter. There were 64 selling days in the second quarter, which is the same as the prior year period. Organic daily sales declined 3% compared to the prior year period due to price deflation and flat volumes. As we reported in our 8-K filing on June 4, organic daily sales started the second quarter soft, trending down 4% to 5% on price deflation and volume declines. As we progressed through June, we saw volume recover somewhat due in part to drier weather, which allowed us to finish the quarter with organic daily sales down only 3%. Price deflation in the second quarter was driven by commodity products like PVC pipe, which was down approximately 23% grass seed and fertilizer, which were down 14% and 6%, respectively. Fertilizer pricing is starting to stabilize with a lower decline in the second quarter than in prior quarters. Price deflation is trending in the right direction, but it's proven stickier than we originally forecasted due to additional price reductions for certain products like PVC pipe and grass seed. We now expect price deflation to persist throughout 2024 and expect price deflation for the full year to be approximately 3%. Organic daily sales for agronomic products which includes fertilizer, control products, ice melt and equipment, decreased 1% due to price deflation, which more than offset positive volume growth. Organic daily sales for landscaping products, which includes irrigation, nursery, hardscapes, outdoor lighting and landscape accessories decreased 4% for the second quarter primarily due to price deflation and weakness in the repair and remodel end market. Geographically, only 3 of our 9 regions achieved positive organic daily sales growth…

Thanks, John. As shown on Slide 11, we acquired 4 companies in the second quarter, plus an additional 1 in July for year-to-date combined trailing 12-month net sales of approximately $155 million. Since 2014, we have acquired 96 companies with approximately $1.9 billion in trailing 12-month net sales added to SiteOne. Turning to Slides 12 through 16. You will find information on our most recent acquisitions. On April 26, we acquired Eggemeyer, a single location wholesale distributor of bulk landscape supplies. The acquisition of Eggemeyer complements our recent acquisitions of Whittlesey Landscape and Adam's wholesale, allowing us to provide bulk landscape supplies to our customers in the high-growth markets of San Antonio and Austin, Texas. On April 30, we acquired a 75% ownership interest in Devil Mountain Wholesale Nursery, a wholesale distributor and grower of nursery products with 14 locations across the state of California. The addition of Devil Mountain makes SiteOne the leader in wholesale nursery distribution in California and completes our full product line offering for our customers in the state. Devil Mountain is a high-performing company with a terrific team. Devil helps spearhead our nursery growth not only in California, but also across the Pacific Northwest and Mountain states where we currently have a very low nursery market share. The transaction includes put and call options, whereby we can acquire the remaining ownership interest in future years. On May 31, we acquired Hardscape.com a wholesale distributor of premium porcelain papers with 4 locations in South and Central Florida. The acquisition of Hardscape.com expands our ability to provide Hardscape products to our Florida customers and is a great addition to our existing premium hardscapes offering nationally. On June 7, we acquired Cohen & Cohen, a single-location wholesale distributor of hardscapes in Ottawa, Canada. The acquisition of Cohen & Cohen marks our entry into the growing Ottawa market and expands the range of products we are able to provide to our customers from Ottawa to Montreal. And lastly, on July 1, we acquired Millican Nurseries, a wholesale distributor of nursery products located near Concord, New Hampshire. The addition of Millican extends our already strong nursery position in the Northeast to better serve the Greater Boston and New Hampshire markets. Our acquisitions continue to add terrific talent to SiteOne and move us forward toward our goal of providing a full line of landscape products and services to our customers in all major U.S. and Canadian markets. Summarizing on Slide 17, our acquisition strategy continues to create significant value for SiteOne. With a strong balance sheet and a robust pipeline across all lines of business and geographies, we are confident that we will be able to continue adding more outstanding companies to SiteOne this year. I want to thank the entire SiteOne team for their passion and commitment to making SiteOne a great place to work and for welcoming the newly acquired teams when they joined the SiteOne family. I will now turn the call back to Doug.

Thanks, Scott. I'll wrap up on Slide 18. We are now halfway through 2024. And year-to-date, our organic daily sales have declined 2% with 1% volume growth, offset by a 3% decline in pricing. Looking into the second half of 2024, we expect our sales volume to be flat to slightly down with softer end markets as our teams continue to gain market share. As mentioned, we expect price deflation to continue in the second half with prices down approximately 2% to 3%. In terms of end markets, we expect new residential construction, which comprises 21% of our sales to be roughly flat in 2024. Despite higher interest rates, builders are optimistic for the full year capitalizing on the continued shortage of homes and solid home demand. This should support stable demand for landscaping products in this end market in the second half. New commercial construction, which represents 14% of our sales, has continued to be solid in 2024, and we believe it will remain steady for the full year. Bidding activity from our project services teams continues to be slightly positive compared to the prior year, which is a good indicator of continued demand. Our customer backlogs remain solid, and we believe the commercial end market will be flat this year. The repair and upgrade market, which represents 31% of our sales, continues to be soft this year, and we expect this end market to be down high single digits in 2024. Lastly, we've seen good volume growth in the maintenance category, which represents 34% of our sales. However, the maintenance category is where we have seen significant price deflation in certain products like fertilizer and grass seed. Accordingly, while we believe sales volume and maintenance will be positive, we expect overall sales growth to be negative due to…

[Operator Instructions]. Our first question comes from Ryan Merkel with William Blair.

I wanted to start with the outlook for price deflation. I think you said 2% to 3% down in the second half. I guess, Doug, how did you think about that guide. We've been chasing that lower for a while now. And I'm just wondering, did you try to kitchen sink it? Or did you just extrapolate the prices that you're seeing today into the second half?

Good question, Ryan. Obviously, we've learned a bit as we've gone. And like we said, pipe has taken another leg down. It seemed to stabilize. But there's obviously uncertainty there. Fertilizer has stabilized. So that's a good thing. It's still lower than last year, but it's at a kind of a firm base, we think. And then seed went down roughly 15% to 20%, but the seed price is the seed as it was in 2020. So it's kind of returned to where it was pre-COVID. And so I think we factored in some uncertainty on that. Certainly, it could go a bit further south. And that's why we're saying down 2% to 3%. 2% I would be I'd say, kind of current trend, 3% would be something new.

Okay. Got it. And then as it relates to the guide on margins, it's coming in a little lower than I thought. And I'm trying to figure out the main source. Would you say that the update to EBITDA margins for the year did you have a bigger negative impact from SG&A deleverage? Or are you taking down gross margins?

I would say we take -- both of them have been impacted. I would -- it's primarily the takedown has been -- it's primarily sales related. We have taken SG&A expense out more than we had in the original guide. But we haven't been able to completely offset the drop in sales. Margins are still trending in the right direction. We would probably expect that margins with acquisitions would probably be positive in the second half. But I would say, going into the year, we thought they would be more positive than they are right now. Still that stickiness of the price is delaying. It's going in the right direction, but it's delaying getting where we originally thought we were going to be.

Our next question comes from David Manthey, Baird.

Thank you. Good morning, everyone. My question is on the organic SG&A, Doug, in your monologue, I think you said the company achieved leverage on organic SG&A and that would imply that if organic average daily sales was minus 3, then your core SG&A was down more than 3. #1, did I hear that right? That's pretty remarkable, if so.

Yes, you heard that right. We were very pleased to get leverage in the base business. It was just a little bit of leverage. So not a lot, kind of, call it, 3-plus a bit. But one thing to consider as we go into the second half, I mean, we really started pulling back significantly last year. So the second half comp for SG&A in order to beat it is tougher than the first half. And so we're assuming that we delever a little bit. With the sales continuing to be down, most of that is driven by price. We're going to keep the screws as tight as we can on the base business to get ourselves through the second half. But we're expecting a slight deleverage in the base business in the second half. And we'll see if we can beat that, but that's what we would have built into our guidance.

Yes. I mean it's tough to do in a declining market. So it's an achievement anyway. Could you talk about Pioneer. It sounds like the -- operationally, the issues here are related to acquisitions, namely Pioneer. If you could talk about the magnitude and time line of improvement there. And then maybe just a related one for Scott. Are EBITDA margins consistently better for older acquisitions? Like if you look back through the rings of the tree, how far back to you to go to see consistent double-digit EBITDA margins among a tranche of acquisitions done in a given year?

Right. I'll take the first half, touch on the second half and then Scott can jump in. So yes, Pioneer, we purchased that late last year because of the timing of that purchase it lost money in the fourth quarter last year and for the year. Coming into this year, we expected a significant improvement in that. And two things have happened, and we're still getting an improvement. So we're actually happy with the pace, but they're suffering from the same kind of market headwinds that we are. And so that's dampened what we thought we were going to get. The other thing is Pioneer has a terrific point-of-sale system for the bulk materials that quite frankly, we wanted for us. And so we are building their point of sale into our system. And so in instead of integrating, say, in February, we're integrating in September. It's just taking us longer to do all that IT development. When we get that done, we can take out another tranche of SG&A. We can certainly get a lot more efficient than we are now in that kind of tweener stage. So a couple of things that have impacted. One is a long-term play to build our business and then the other short-term headwinds. So we're not getting as much improvement, but we're very happy with the deal. And over the next couple of years, we see it going up to the average. In terms of acquisitions, certainly, yes, they do. If you look at return on sales and if you look at return on invested capital, those both improve with age like wine. So I would say, in general, that's the case, Scott, anything to add to that?

No, I was going to say the same thing that's within each tranche or a year, there's maybe, what, between 8 and 16 acquisitions that you're looking at in a class. So you're going to see some variance in performance, but certainly, the trend that is most visible is the longer they're with SiteOne, the better they perform.

Our next question comes from Keith Hughes with Truist Securities.

Out of the plastics market, just been some signals that PVC resin producers are trying to raise price. Are any of your pipe suppliers seeing that? Or are they talking about maybe an attempt of a price increase later in the year?

We haven't heard that. We do believe PVC price from what we're hearing from our pipe suppliers. We haven't seen as much on pressure upwards are pressured down as we did this time last year. So a big thing with regards to PVC pipe will just be getting pass the price decreases that happened in the third and fourth quarters and even filtered into our business and into the first half of this year. But certainly, the level of consistently dropped quarter-to-quarter that we were seeing last year, we're seeing a much more stable market on PVC pipe this year. and looking forward to getting past on that volatility.

Okay. And just around the topic of deflation on the grass seed market. Is that just a situation of just supply greater than demand? Or what's continuing to cause the pressure there?

It's been a combination of both. I think there is probably a little too much supply grown. And frankly, there was a high -- a good year this year as opposed to the past couple of years for growing grass seeds, so supply has increased and demand is probably -- I think if you actually looked at, we would probably say we're going to sell more grass seed in tons of product this year. So the market is taking it, but probably supply is where they're probably a little heavy now which has caused back to kind of go back to normal. And actually, the pullback in kind of the market for the growth of grass seed is probably is adjusting from kind of the go-go years of -- right around COVID.

Next question comes from Matthew Bouley with Barclays.

On the deflation outlook, the 2% to 3% in the second half very helpful color there on kind of what you're seeing in terms of current trends and baking in some conservatism there. But I'm just trying to understand the kind of cadence in the third quarter and fourth quarter, if you're kind of looking at it similarly at this point. And what I'm really trying to understand is given the exit rate in the fourth quarter, is there any risk that deflation at this point kind of persists into first quarter of '25 or first half of '25.

We wouldn't think it would be a big '25 issue. Obviously, I just talked about PVC pipe, which has been the primary -- the largest driver has stabilized and fertilizer. But obviously, we'll have to see. With regards to Q3 and Q4, I would expect Q3 would be at the higher end of that range and Q4 would be lower still, maybe even less than 2%. From that standpoint, I mean, fall is the next 90 days is when we sell most of our grass seed. So that's really a big Q3 event, and we'll be working through that inventory during that time.

Yes. John, I want to weigh in. One other factor that's going on here is that the rest of our products prices are flat this year. So we're not getting any help from our -- the other 80%, 90% of products. And we feel like '25, those manufacturers will go for price increases. So one factor to think about is '24 has been commodity deflation with everything else flat. We expect a lot less going into the, let's say, the first quarter of next year. of commodities and then we expect kind of normal price increases from the rest of our products.

Yes, perfect. That's very helpful. And then secondly, just looking at the R&R end market, I think you said that now you think it will be down high-single-digits this year. I guess the question is, I mean, what do you think is driving that? Is it kind of lack of existing home turnover, is it just consumer confidence, pull-forward activity some combination of all 3. Because what I'm trying to get at is as you, if it's kind of slipping further here into the middle of the year, does it look like that end market might still be a headwind in early 2025 and kind of what it would take to turn that corner?

Yes. I think it's all the factors. It's consumer confidence. I think inflation has got the consumer pinch and they're deferring projects. Interest rates are high. So housing turnover certainly impacts that negatively with less housing turnover. And so really, it's all of those factors at work. And so -- and don't -- this is something that we flagged back in early June. I mean the spring, as we went through April and May, really for that remodel market didn't develop. So we saw the softness really through the spring, which we singled in early June, and it's kind of continued, right? So I think lower interest rates will help the situation, inflation coming under control will help us. All these things for the future of our remodeling, remodeling is a terrific market and is usually very robust. And we think it will be in the future. It's just right now, there's a lot of elements coming at the consumer. And what we see is that the high end of remodel is solid. It's the middle income part of remodel that's really kind of taking the hit this year.

Our next question comes from Andrew Carter with Stifel.

First thing I want to ask is in terms of, I think you said underlying SG&A down 3%, volume was flat. How sustainable is that? And I guess, how long a lead time do you have to put in place to plan? Is it real time? Are there kind of a lot of things happen variable? Or is it just a really big shift to move to get that kind of leverage it's tough to react to the environment.

Yes, I'll take a first shot at that. I mean we have fast and flexible local teams, right? And so they move depending on what's going on in the market. And so it is -- and most of our SG&A is associates, right? So there's a field element that can be very flexible. Where we have to be intentional is on kind of some of the field support and some of the functional teams, where we've got to keep them at the right size for the markets we've got. And we're looking at that all the time to make sure that we're playing that. So I think we can continue to be flexible. What we don't want to do is damage our long-term growth for a short-term gain, right? And we won't do that. So we'll get to a size that as good as we can for the current market conditions, but we're still building for the future, and that's very important.

And then the second, in terms of the focus branches you mentioned, could you give us a scope of kind of how many are kind of in focus there, if there's any kind of potential opportunity associated with building the margin? Is it just cost? Is it sales improvements? And also, could it be working capital? And I know you noted that goal to move that continually lower.

Yes. I guess I'll take the first shot there. John can add. It tends to be a lot of factors. Just to give you a scope, it's -- we're focused on the 20% bottom end of our branches. And it could be that those branches don't have the right leader. We may consolidate some of those branches into other branches just to get the synergies of a larger branch. It could be lack of organic sales or product mix is not the right mix. So it's really focused around team, mix, and driving organic growth and getting those branches up speed. It could be SG&A reduction -- their SG&A is just too high and they need to rightsize. They've been slower to do that. So it's a number of factors. We've created a white hot light on them. And we really think that there's no reason we can't get these branches up to our average and in that raise the whole company. And it really -- during COVID times, everybody tended to look good as we come through these headwinds, we see some branches that have not performed as well, and we're taking strong action on those.

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

I'll stick with a couple on margins. I think you mentioned that the negative headwind to gross margin from the deflation has been lessening. Can you just quantify kind of what the gross margin headwind was in the second quarter? And what your guide assumes in the second half as far as the negative gross margin impact from deflation?

We don't fully break that out from that standpoint. We will share for the fact that in the second quarter, we got roughly a pickup in gross margin from acquisitions of about 40 basis points. And the difference is primarily due to the negative is due to the price impact.

Okay. Yes. That's still helpful. And that kind of dovetails into my second question, which is -- and this is rough math, but I think at the high end of your full year guide, you'd have to have second half's EBITDA margins about flat year-on-year, which you've articulated a lot of the moving pieces, which on the organic side are still some headwinds. So in terms of getting to that 400 or getting for the full year getting to second half EBITDA margins flat year-on-year. Just walk us through kind of the -- what has to happen to drive that versus, say, the midpoint or lower, which just stems tough with deflation continuing and in SG&A to get enough leverage there.

I mean, I think what's going to drive it is the market, if we have positive upside in volume in the second half of the year, that's what will be the primary driver. SG&A is well we're evaluating it. I think we pulled a lot of the levers there. We're continuing to evaluate items. But the primary area of focus for us is continuing to gain more market share. and potential upside in the market itself, and that would come through primarily in volume, which would bring us to the high end of the guidance.

Our next question comes from Jeff Stevenson with Loop Capital Markets.

So as the pickup in June volumes you experienced from earlier in the quarter continued into July due to any benefit from pent-up weather-related demand?

Yes. The trend we've seen in July is similar. Sales are down, call it, 3% to 4%. They were down 3%, obviously, for the quarter. So it's been a little less. And this year has been very choppy, where we've had -- March was a good month, April, May, not so good, June, good July in the average, I guess. So that's the trend we're seeing in July.

Okay. No, that's helpful. And then I'm trying to get a better idea of the variance between your original positive organic volume growth expectations this year and your current assumption of flat to down low single-digit organic volume declines in the back half. Is it solely due to softer R&R demand? Or are any other end markets coming in softer than your prior expectations?

Yes. No, great question. It really -- it's softer remodel, but it's also flat residential. We thought at the beginning of the year, the way the bullishness of the builders and housing starts were up we felt like that was going to give us some upside in the second half of the year, and we're really seeing more of a flat residential market, and we think that's going to continue. So the market softness, I'd say, has been in residential, new residential that's flat instead of up in the second half and then remodel, which is much weaker. And then obviously, there's the price factor that has been much more sticky and has lasted into the -- well into the -- we think will last through the full year as opposed to taper way off in the third and fourth quarter. So those 3 elements are really the elements that have caused us to have weaker sales for the full year.

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

Okay. Thank you all for joining us today. We very much appreciate your interest in SiteOne and look forward to speaking to you again in the next quarter. I'd like to also thank our associates, who continue to fight hard in these tough times. And certainly, our customers and our supplies for being partners with us as we work through 2024. Take care.

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