Good morning, everyone, and welcome to the SiteOne presentation. I'm Ryan Merkel with William Blair's research department. Before we begin, I need to remind you that a complete list of disclosures and conflicts of interest is available on our website. With us today is Doug Black, Chairman and CEO. We also have John Guthrie, CFO. SiteOne is the largest distributor of landscape supplies in the U.S. It operates over 600 branches, serving residential and commercial contractors. The company is still early in its journey to consolidate the market, with only 17% market share. With that, let me turn it over to Doug.
Thanks, Ryan. Great to be here. Like Ryan said, we're the largest and only national player in the landscaping supply market. You can see the statistics there. You know, we're larger than, you know, two through or one through four combined, larger than number four and larger through the top 10 combined, but we only have 17% market share, right? So it's a very fragmented market. And, you know, we're building a world-class company. In that market, we serve residential, commercial, landscape contractors, and maintainers. You can see the SKUs, and we've got a good balance across product categories in terms of new construction, repair and remodel, and commercial. And then our product portfolio also gives us balance across the country, and you can see our locations. We're quite proud of our growth history.
You know, we're high growth. We grow both organically and through our acquisition. The organic piece is very important, but the acquisition tops that up, and we are consolidating the market, but more importantly, we're building our company. You can see our growth record. Through the ups and downs of COVID, we've been a consistent grower, and you can see the acquisitions along the bottom that have allowed us to build our company. If you look at our product segments, about a third or about a quarter of our business is irrigation. About a quarter of our business is agronomics, which is fertilizers, chemicals, control products for turf care. You can see over to the right, hardscapes comprises about a quarter of our business, and then the rest would be nursery and landscape supplies.
Again, we're number one in all the categories, so we are by far the market leader, and we leverage that with our supplier partners to gain synergies and advantage in the fragmented landscape market. You know, part of the secret of our success is that we've got thousands of suppliers, which are very fragmented in themselves trying to reach, you know, hundreds of thousands of customers. And so we play a critical role as a wholesale distributor in the middle. And you can see our business is quite balanced on the customer side with small customers, medium customers, and large customers. One of the things about SiteOne that you should know is that we are under-indexed, if you will, with the small customer.
We think the small customer segment is about half of the landscaping market on the contractor side, so we've got room to grow there in terms of market share with the small customer, which obviously is accretive to our margins as we grow. One of the reasons why we're confident we can grow our margins as we continue to grow. We're the largest in the space. We provide a critical partnership between supplier and contractor and a good long-term value creation position. Our strategy is simply to take the best of being a large company with the resources and people that we have to support our local businesses, 'cause landscaping is a very local business. Then we drive our performance through our initiatives. Category management, which is working with our suppliers, supply chain.
We've got four major DCs. Later this year, we'll be putting in a 5th DC, so we have a quite sophisticated supply chain. You know, sales force performance in terms of driving our performance, marketing, digital, all the things that a world-class company can do in a very fragmented space. And you'll see the results will be organic growth, which again is very important to us to create that organic growth engine. EBITDA margin expansion, as we you know, leverage our SG&A and grow our gross margin, and then acquisition growth. So we have really three levers for growth that we can pull going forward, which makes it a nice growth story. The team, we're very proud of the team.
On the left-hand side here is our field team, of which you can see most of these leaders used to be our customer, so used to be in the landscape trade, installation trade. So we know our customer. We're very local, got a lot of experience there. In the middle, our leadership team, and you can see the companies that the leadership teams come from. And then on the right is our functional support, which again, we pull people from all kinds of world-class companies into that to support our fast and flexible field. So we're building the team to execute our strategy.
We kind of call it the large local strategy, where we have the best in the world in terms of marketing, in terms of category and supply chain, supporting a fast, flexible store field that knows the customer, and a lot of them used to be the customer, so they know the customer very well. 'Cause we compete with small companies, and we have to match that in the field. And you can see that we've, on the acquisition side, we've been a consolidator. We've done over 90 deals in the last 10 years. We figure that there's about 200-300 companies out there that we want to fill in our portfolio across the country.
It's like puzzle pieces, and, you know, those puzzle pieces fall when they're ready to sell, not when we're ready to buy. So we cultivate that, you know, target list, if you will, and then when they're ready to sell, we bring them on to SiteOne. We've got a great team out there that focuses on acquisitions. Our field is focused on acquisitions as well, and, you know, we do 10-15 deals a year. It's a steady source of growth for us. Very creative, you know, reasonable margins, folding into the kind of the master puzzle, if you will, to put together our product lines across the country. Our goal is to be the leader in every local market, in every product category, and so we've got a ways to go to fill that out.
Wanted to update you on some of the current trends. You know, it's been a choppy year. We are very pleased with our first quarter result, where we had 5% volume, which more than compensated for the 4% down in price. We do have about 20% of our products are commodities, like fertilizer, PVC pipe, and grass seed, for example, and we've seen those prices that went way up in COVID are coming down, and they've caused our overall price to come down. So we fought that a little bit last year. We're fighting the deflation headwind this year. We think it's something that normalizes. Usually, we're very steady on price, and so we've seen that headwind. In the first quarter, we forecast that that headwind was going to abate slowly through the year.
It's been a little stickier than we thought, and so we wanted to update you on Q2, that price deflation has been a little stickier. On the volume side, where we saw that 5% volume growth in Q2, so far we've seen 1% volume decline. It's been choppy. You know, April started out weaker, then gained strength in the second half of April. May's been back down. We think the softness is largely around the remodel market. Commercial still seems to be strong. Residential, we haven't seen the kind of residential increase yet. Builders are talking about the back half of the year, so we'll see how that develops. Maintenance has been steady, but the remodel market is clearly soft, and we're seeing that in May. We're not prepared to update guidance for the full year or address that.
We'll do that when we report earnings at the end of July. We'll have a couple more months and be able to see the trends, but just wanted to give a heads-up that the quarter two has started off softer than we had forecasted. So what are we doing about that? We're continuing to drive our initiatives, right? Part of our strategy is to drive SG&A leverage, to drive gross margin. On the growth margin side, I mentioned small customers. We're also driving private label. Also, our mix is, you know, drives margin improvement, so we're driving margin improvement on the organic side, you know, with siteone.com, with digital, our sales force performance, and a lot of our initiatives focused on organic market share gains so that we can outperform the market.
So as we see those market headwinds, we can fight upstream. We are adjusting our SG&A. You know, softer markets, we can pull in SG&A in the field and our field support to kinda match demand, so we're doing that as a short-term lever. Pioneer was an acquisition that we did, late last year. It's, most of our acquisitions are high performers. Pioneer was an underperformer, kind of a larger acquisition, about $160 million in sales. We're hard into the, you know, integration of Pioneer, which we'll, you know, we'll integrate systems in August. We're learning from Pioneer, but it's, it's a terrific long-term play for us. In the short term, you know, executing that strategy is important. Continuing to add high-performing acquisitions. We've done three acquisitions so far this year.
The highlight of those three would've been Devil Mountain, which was a large nursery acquisition that we did in California. Devil Mountain's performing very well. It's a, it's a high performer. It gives us, y ou know, it's over $100 million in sales. Gives us a, a platform for nursery growth in the West that we didn't have before. Most of our nursery is East Coast-based, so we're excited. Now we have a platform. We can grow off of that. So, you know, we're gonna continue to do value-added acquisitions, part of our strategy. And then cash flow, I hadn't mentioned, but our cash flow is, is quite strong. We with, with COVID kind of resettling in, we're able to regain our inventory turns and drive cash flow really ahead of our, our profits, and so we're leveraging that.
So those are some of the short-term things that we're doing because, you know, we're a very strong growth company. We're gonna battle through the short-term headwinds and continue our growth trajectory for the long term. So just to sum up, you know, we're well on our way. We're not a fully developed, mature company. We're still, you know, putting the pieces together. We're still growing in terms of our capability in digital, Salesforce, et cetera. So there's a long way to go to get where we wanna be, but we're seeing a lot of success. We benefited from COVID. We're seeing some of the headwinds of post-COVID that we're fighting through.
But even fighting through that's, you know, made us stronger in terms of our initiatives and focus on the customer and our ability to drive organic growth, margin improvement, for the long term. So we feel good about where we are. We've got a great team, and, you know, we welcome your questions about the company and what we're doing.
Well, Doug, maybe I'll just start off. So you mentioned the update was mostly about residential RNR. Could you just give us some examples of some of the product categories where you're seeing the slowdown be a little bit bigger?
Yes, we're seeing it pretty broadly across categories, but in particular, you know, hardscapes and lighting, which traditionally have been, you know, terrific growers for us. So, you know, kind of our remodel products. We're seeing, you know, we're seeing softness there. Agronomics is holding up, but that's where a lot of the inflation is, you know, with seed, fertilizer, et cetera. So that's, that would still be negative with inflation. But really, the, the remodel products, I'd say, is where we're seeing the greatest softness. Geographically, it's pretty broad-based. So, you know, we do think it's the, you know, that remodel market where you had the discretionary spending, interest rates are high, you know, housing turnover is low, things that drive remodel.
Some of the fundamentals are under pressure, and we think the consumer, we're seeing that with the consumer, so...
Yeah. Sounds like maybe some delays of some discretionary projects, just given the environment.
Right. We still feel, I mean, the remodel market long term is very robust. I mean, you still have the stay-at-home effect, but even before that, you know, the outdoor living effect has been, you know, in force for the last 10 or 15 years. You know, we're gonna take advantage of that, but I think in the short term, you know, with interest rates high and the housing market, you know, folks are just pinched and, you know, with consumer spending, you know, remodel tends to fluctuate with that.
Okay. Maybe I'll just ask one on price, too. So the message was deflation is a little stickier. I have two questions. First off, is it PVC and seed that maybe took a leg lower recently? Is that right?
Yeah, John.
I'll take that one. Yeah, the trend is still there, what we've talked about. But, as we've been updating our forecast, we expect that see the slower consumer spend and a pretty good supply on market will come under pressure this year, and we'll see a second leg down there. And then we have seen some recent additional drops in PVC pipe. I would say just the general trend, though, you know, at the end of the first quarter, we talked about as we account for the lower prices to be slightly positive in the fourth quarter.
I think the trend is going there, it's just a little stickier, and it may take just a little bit longer than we had originally forecast.
Got it. Any questions from the audience? Otherwise, I can keep going. Go ahead.
What extent is private equity in the market competing for acquisition?
Maybe repeat.
Yeah, yeah. The question was, what do you see in terms of private equity in the market for acquisitions? You know, we've seen private equity over the last several years. Obviously, you know, SRS with Leonard Green and Berkshire Partners was in the market. They started their landscape division, what, back in 2016 or so. And so they've, you know, they've been out there and been active. Their outdoor living is a PE-backed in the hardscape space, which has been active. So we've seen two or three PEs out in the market. You know, still 80%-90% of our deals are negotiated, so, you know, we have long-term relationships, we leverage those.
And so, you know, it only affects kind of that 10%-20% of deals that come around, and, you know, we'll get our fair share of those as well. So I would say, you know, it's a tougher space for PEs to operate because it's so fragmented, you know, it's hard to find the right platform for growth. So, you know, those two or three that have platforms are, y ou know, we know them, they know us. What we look to do is just have those deep relationships, and if you look at those PEs, they're all gonna sell to somebody else. Well, obviously, SRS is, you know, positioned to sell to Home Depot. Outdoor Living will sell to somebody else eventually. You know, SiteOne, we're already public, we're gonna be here for the longer term.
You know, we're the safe home for the really high-performing, you know, companies that are out there, and so that's why we get more than our fair share, if you will, of those deals. Yeah, Dan?
So just your decision to bring the full year unchanged in the context of trends that you see as simply as your earnings is expected to be up slightly for the full year, but it was pretty significant back half at this point.
Right.
Can you comment on that a little?
Yes, I mean, we simply want the next two months to address that. I mean, it's choppy, and we haven't seen a trend. I mentioned, you know, January and February were soft. March was a really good month for us. The first half of April was soft, the back half of April was good, and I'm talking on volume basis. You know, the pricing has been negative. Pricing has been pretty consistent, and now May has been down. So we really don't, you know. Part of that's weather, part of that's market, and we feel it's best, you know, to let everybody know kind of what we're seeing to date. But wait till July to see how the trends develop over the next couple of months, and then we'll address guidance.
Obviously, you know, slower sales will affect that, but we want to wait to address that to where we have a little more of the year. Because, you know, in landscaping, things move around, you know, with weather and, you know, month to month, etc. And so we want to make sure we have a good grasp on the trends, but, but wanted to be forthcoming that, you know, things haven't gone as well as we had hoped in the first two months of quarter two. We do get easier comps in quarter three and quarter two. You know, quarter two are kind of the tougher comps of the year, right? So that plays into it as well, right? So it's just kinda, w hen it combines, there's still a lot of uncertainty in how the year is gonna play out.
We are, though, taking strong action, you know, to, to deal with what we're facing and, you know, kind of deal with a tough year, if you will. Because more importantly, we want to be set up and, you know, deliver in 2024, but also in 2025, 2026, 2027, be able to, you know, continue our, our vision and keep moving forward as a company. So we're taking those strong actions to for the long term and the short term. Yeah.
What's your worst case scenario for deflation for the things that you're still seeing? Do you see it getting back to 2020 levels, 2019 levels or?
We don't think that it'll go all the way back to those levels. When in our numbers that we're seeing, I would say, in general, other than the few commodity items that we've been monitoring, less price changes this year than we did last year. And even the magnitude of those changes, even with PVC pipe, I think the last one that's going in right now is, you know, 3%-6% down. But, you know, if you look at cumulatively, year-over-year, where PVC pipe is, it's down 20%, for instance, in May. But I think it's also important to remember, you know, PVC pipe is roughly 4% of our sales, so-
So, it's a relatively small component. This business in general, historically, has, for you know, really 2014 to 2020, was 1%-3% price inflation per year, every year. And then, you know, price inflation got kind of crazy in 2022, and what you're seeing is really just a giveback of that. But in general, you know, manufacturers have higher labor, so that's kind of raising the bar, if you will, on the overall price.
Yeah, the non-commodity this year is more flattish. You know, normally, you know, that'd be 2%-3% up, so you're getting a combination of commodities moving back to normal, if you will, and then the non-commodity kind of holding. But, you know, we're not seeing degradation in that core kind of 80%, which is positive.
And I think it's also important that even if you look at where we're at on a year-over-year basis, you know, Q4 last year was - 5%, Q1 was - 4%. So we are rolling off now. Q2, we're at 3%-4%. Still a little stickier than we'd originally expected.
Doug, maybe talk about commercial, which I think is holding up a little bit better, and maybe for people newer to the story, just talk about what commercial looks like for you.
Right. So commercial, new commercial is about 14%-15% of our mix, so it's an important segment. And we've seen that remain solid. I mean, we know the ABI index has dropped to kind of below 50, and so that would forecast, you know, a slowness in commercial, but we have not seen that yet, and we still forecast commercial to be strong for this year. You know, don't know about 2025, but our customers in commercial have good backlogs. Our project services team, so we bid commercial jobs, and we have a project services team that does takeoffs for our contractors and estimates for our contractors. That project services team has continued to be, although it's been choppy, you know, slightly positive year to date.
And so all the signals we see tell us that commercial is gonna be solid this year. We haven't, t hat's not where we've seen the slowdown. It's really been in the kind of the remodel side, and then lack of residential uplift, which we would expect with starts and permits kinda going up, you know, late last year and early this year. We lag about six to nine months, you know, when a home's being built, we go in last, and so our builders are still telling us that they expect a pickup in the second half. We'll see, we'll believe it when we see it, but we haven't seen that yet. And then again, maintenance volume has been solid.
I also wanted to ask about AI. How are you thinking about it? Are you testing use cases? Where are you at?
Yeah, yeah. We obviously, you know, interesting development. We're looking at how that applies to our business. I think one of the first applications that we're using is in our product descriptions, you know, on siteone.com. We're able to use that, you know, to make those descriptions more accurate and be more efficient. We've got a lot of SKUs, and it's a very fragmented market, and, you know, for instance, nursery products, you call it nine different names across the country. I mean, you know, it's not a uniform. And so AI has been useful in kinda getting that right, so that we have that accurate information. So we're using it in some of our content for siteone.com and our marketing.
John, you may know of other uses, but the rest, we're just kinda looking and seeing what others are doing and seeing how it applies, so that we can take advantage of any other benefits that it will give us.
I wanna ask about SG&A as well. That's been a source of frustration, I think, as you know, for investors, not really leveraging SG&A since the IPO. It sounds like going forward, that's a focus for you. Do I have that right, and what are you doing to show SG&A leverage?
Yeah, it's a high focus of ours. You know, I mean, as we were investing in our early stages, it was very difficult to achieve SG&A leverage, you know, as we're building our marketing team, and building our IT team, and building digital, et cetera, et cetera. You know, we've got those built. And so our go-forward is to harvest those investments and really, really get leverage. And so, you know, obviously, organic growth is an important part of that. You know, with deflation headwind, you know, there's headwinds to that this year. But we feel confident that we can improve our SG&A leverage, you know, over the coming years, let's say, because we've got the team built, we've got our tools built, and, you know, those tools include Salesforce.com in our cer...
You know, in our Salesforce. It includes our DispatchTrack, which is our last-mile delivery system, Blue Yonder, which is our purchasing system, you know, the DCs, etc., right? So we've, y ou know, this is a-- when we took this over in 2014, coming out of John Deere Landscapes, you know, there were no systems there. So we've had to build it all, but the fun part is that's built, and now we can leverage it going forward. We also have more experience in hardscapes, we've got more experience in nursery. You know, some of the product lines that we've built up over the last several years. We're developing experience, by the way, in bulk materials, you know, mulch and aggregates, etc., so, you know, Pioneer is part of that.
Pioneer is a good example where although they were an underperformer, they have a pretty sophisticated, you know, point-of-sale system for bulk materials, you know, that ties into the scales and all that, and so we're copying that system into ours. That's one of the reasons it's taken us a little longer to integrate Pioneer. So, but I think the fact is, is we've got these systems built, we've got our teams in place, and going forward, we can really streamline and, and leverage what we've got, drive organic growth, you know, integrate acquisitions, which we've become, you know, after 90+ acquisitions, we've become very proficient at, at doing that. So we, we think we've got the formula down to really get to the next mile.
If you look at our company, inside our company, we have regions that are already up in that kind of 13%-15% range solidly and have been there for a long time, and they're fully loaded with all the SiteOne, you know, company charge, if you will. So we see where we need to go or where we wanna go within SiteOne. It's just a matter of getting there broadly.
Have time for maybe one or two more.
Do you have a target for that too?
Yes, we would think in the, you know, the longer term, if you look at it to the adjusted EBITDA line, that our gross margin would be, let's say, you know, 37%. And SG&A should be in the low 20%s, right? You know, let's say, you know, kinda 22%-23%, SG&A all in to the adjusted EBITDA line. That's not a GAAP figure. And that's what, you know, gives you that kinda 13%-15%, and so that's where we're targeted. And again, we see internally where we're there already. We just gotta get there more broadly, as we streamline, leverage our team, and move forward. So that's the formula. Yeah, so we're a different form, you know, we're a little heavier SG...
Or, you know, not, but we're heavier SG&A than, say, a Pool or a Watsco, et cetera, because we've got nursery and hardscape, but we're also a higher gross margin, right? Because of those same products. You know, bulk materials, nursery, hardscapes carry a higher margin than the other products. So that's the formula we're heading toward.
Maybe just the last question then, Doug. SRS and HD getting together, I know you've been asked that quite a few times in the past couple of months, but maybe I'll come at it a little differently. Maybe why, number one, do you think HD bought SRS? You know, what are they after? And then, you know, two, how is HD's landscape business currently, how is that different from your pro distributor landscape business?
Repeat the second part of the question again.
HD has a small nursery and landscape-
Oh.
Supplies at their store.
Yeah.
How is that-
Oh.
How is your pro-
Yeah
Assortment and service different? Just, I want to be clear about-
Yeah
how those markets are different.
Right. So first of all, their strategy, you know, I think they want a larger total addressable market. They've had their eye on the contractor, you know, for some time with their pro business. And, you know, just like with HD Supply, you know, SRS is a ways to go to reach that contractor. The trick is SRS has a strategy very much like our own to reach that contractor, where they, you know, they buy local companies, they stay very local. It's large, supporting local, and I think it's important for Home Depot, and they've stated that they're that they'll keep the SRS formula. I mean, SRS is a high-performing, and they play in roofing, they play in landscape, and they play in pools.
I think it's important for them to keep that secret formula, and play, you know, the SRS way with Home Depot's support, right? And so to that degree, for us, we have the same competitor that we've had, right? Which is a good competitor, right? They're very, you know, price, I mean, they're very competitive in the market, let's say. They do acquisitions, they're very acquisitive, and they play hard. So we respect them as a competitor, but I think Home Depot will use them to address the market and work through them to address the market, and then that, you know, gives us a similar competitive. How are the stores different from our, you know, it's just like night and day. I mean, you know, nursery, they don't carry...
I mean, a contractor can't do a complete job, you know, shopping at Home Depot, right? The small contractor, small lawn care or a small odds and ends, you know, job, et cetera, possibly, but a significant contractor that is out there to do install, you know, real maintenance, et cetera, you know, irrigation, agronomics, nursery, hardscapes, it's you know, not anywhere near the product breadth or depth or pricing, et cetera, that they need to be successful, and Home Depot knows that, right? That's why they're not. They've been going after the pro, let's say, lightly, especially in landscaping, but they can't do it with their existing stores. That's why they're buying SRS, to go after them, you know, in kind of a real way, right?
Yeah, that's the strategy, and we respect Home Depot, but it really doesn't change our strategy, and we think, you know, there's some things that could benefit SRS, there's things that could be negative against SRS in that match. We'll see how it goes, but we still feel confident we're the market leader, and we're gonna continue to be the market leader.
Perfect. We're out of time. Thanks, everyone.
Thank you.