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Edited Transcript of SITE.N earnings conference call or presentation 24-Feb-21 1:00pm GMT

·44 min read

Q4 2020 SiteOne Landscape Supply Inc Earnings Call ROSWELL Feb 24, 2021 (Thomson StreetEvents) -- Edited Transcript of SiteOne Landscape Supply Inc earnings conference call or presentation Wednesday, February 24, 2021 at 1:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Doug Black SiteOne Landscape Supply, Inc. - Chairman of the Board & CEO * John T. Guthrie SiteOne Landscape Supply, Inc. - Executive VP, CFO & Assistant Secretary * Scott Salmon SiteOne Landscape Supply, Inc. - Executive VP of Strategy & Development ================================================================================ Conference Call Participants ================================================================================ * Ashley Kim Barclays Bank PLC, Research Division - Research Analyst * Christopher Frank Kalata RBC Capital Markets, Research Division - Assistant VP * David John Manthey Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst * Keith Brian Hughes Truist Securities, Inc., Research Division - MD * Ryan James Merkel William Blair & Company L.L.C., Research Division - Research Analyst * Stephen Edward Volkmann Jefferies LLC, Research Division - Equity Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Greetings, and welcome to the SiteOne Landscape Supply, Inc. Fourth Quarter and Full Year 2020 Conference 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, Executive Vice President and Chief Financial Officer. -------------------------------------------------------------------------------- John T. Guthrie, SiteOne Landscape Supply, Inc. - Executive VP, CFO & Assistant Secretary [2] -------------------------------------------------------------------------------- Thank you, and good morning, everyone. We issued our fourth quarter and full year 2020 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. -------------------------------------------------------------------------------- Doug Black, SiteOne Landscape Supply, Inc. - Chairman of the Board & CEO [3] -------------------------------------------------------------------------------- Thank you, John. Good morning, and thank you for joining us today. We are very pleased to report our strong results for the fourth quarter, capping off an excellent year of performance and growth for SiteOne in 2020. The COVID-19 global pandemic brought on many challenges during 2020 in operating safely, serving our customers, taking care of our associates, working with our suppliers and managing our business. As the year developed, the stay-at-home trend associated with COVID-19 also brought about opportunities as more emphasis was put on homeownership, with increased investment in outdoor living spaces. With terrific passion, determination and teamwork, our SiteOne team worked hard to overcome every challenge and move quickly to capture opportunities during the year while taking care of each other and serving and supporting our customers better than ever before. As a result, we delivered tremendous value to all of our stakeholders. On top of that, we made critical investments during the year and strengthened our business on all fronts while continuing to add great companies and talent to SiteOne. Overall, I'm very proud of our team and excited to see our strong culture shine during these toughest times. Moving forward, we have a stronger team, stronger systems, a stronger balance sheet and even more capability to execute our strategy, achieve excellence and deliver superior long-term performance and growth. I will start today's call with a brief overview of our unique market position and our strategy for long-term performance and growth, followed by some highlights from 2020. John Guthrie will then walk you through our fourth quarter and full year financial results in more detail and provide additional information on our balance sheet and liquidity position. Scott Salmon will discuss our acquisition strategy, and then I will come back and review some of the trends that we are seeing in our end markets and address our outlook for 2021 before taking your questions. As shown on Slide 4 of the earnings presentation, we have grown our footprint to more than 570 branches and 3 major distribution centers across 45 U.S. states and 6 Canadian provinces. We are the clear industry leader, more than 5x larger than our nearest competitor and larger than 2 through 10 combined. At the same time, we estimate that at the end of 2020 we had only 13% share of the very fragmented $20 billion wholesale landscaping products distribution market. Accordingly, our remaining growth opportunity is significant. We have a very balanced mix of business, with 59% focused on maintenance, repair and upgrade; 27% focused on new residential construction; and 14% on new commercial construction. We are also the only national full product line wholesale distributor in the market. Our balanced end-market mix, broad product portfolio and geographic spread give us multiple avenues to grow and more ways to add value to our customers and suppliers while providing important resiliency in softer markets. Turning to Slide 5. Our large and local strategy combines the scale, resources and capabilities of a large world-class company with the passion, deep knowledge and entrepreneurialism of our local team in order to deliver superior value and differentiate ourselves from the competition. It is important to note, however, that we are still in the early to middle innings of building our company and our capabilities and still have a long way to go in order to fully execute our strategy and reach our full potential. Accordingly, we remain highly focused on our commercial and operational initiatives to build our capabilities and improve the value that we deliver to customers and suppliers. These initiatives are complemented by our acquisition strategy, which fills in our product portfolio, moves us into new geographic markets and adds terrific new talent to SiteOne. Taken all together, our strategy creates superior value for our shareholders through organic growth, EBITDA margin expansion and acquisition growth. Slide 6 shows SiteOne's history and the results from executing our strategy over the past 5 years. Over this period, we have been able to deliver consistent organic growth, strong acquisition growth and solid EBITDA margin expansion while investing heavily in SG&A to build our IT, category management, supply chain, finance, marketing, operational excellence and acquisition teams as well as our underlying systems infrastructure, including our digital capabilities. While we have not finished building our systems infrastructure, our field support teams are firmly established. And you can see in our 2020 results the operating leverage that we are beginning to achieve with these strong teams. We will continue to leverage and build on our capabilities to accelerate our performance going forward. You will also note that we now have completed 57 acquisitions across the irrigation, agronomics, nursery and hardscapes product lines during the last 7 years, with 11 of these added in 2020 and 1 so far in 2021. We only acquire a well-run company, and so all of these acquisitions were already high-performing companies before joining SiteOne. With them, we have added significant capability and tremendous talent, and we have learned many lessons that can be applied to future acquisitions. I would like to highlight that we still have over 50 former owners from these companies with us as well as many of their sons and daughters and long-time leaders, helping us to stay agile and building our entrepreneurial spirit and local ownership. Our acquisition pipeline remains very robust. And with only 13% market share, we have significant potential to continue growing through acquisitions for many years to come. In summary, our strategy is working. We are still early in our execution, and you will see us get stronger every year as our key initiatives gain more traction. Slide 7 shows the long runway that we have ahead in filling in our product portfolio which we aim to do primarily through acquisitions, especially in the nursery and hardscapes categories. Nursery and hardscapes operations require larger sites and significant local expertise. And so these product lines cannot just be added to most of our existing branch locations. We are well networked with the best companies in our industry and expect to continue filling in these markets systematically over the next decade. I will now discuss some of the 2020 performance highlights as shown on Slide 8. We delivered 15% net sales growth in 2020 with a nice balance between 9% organic sales growth, which includes an extra week in December, and 6% net sales growth through acquisitions. Organic daily sales growth was 8%. The market recovery that began during the second quarter has continued through year-end and into the new year so far. The increase in the number of families who are working and/or attending school from home due to COVID-19 has spurred additional investments in outdoor living. Currently, the new residential construction market has fully recovered with low interest rates and a renewed focus on home ownership. These factors, along with our internal growth initiatives, contributed to our strong organic net sales growth. Geographically, we saw our highest full year sales growth in the South and West, where COVID-19 restrictions had less impact on landscaping. All regions finished strongly in the fourth quarter and currently have good momentum. At this point, the market is being constrained by labor availability for our customers. We achieved a 50 basis point improvement in gross margin during the year with contributions from our supply chain and category management initiatives. During the late spring through fall, several of our suppliers suffered from production interruptions due to COVID-19, which limited their ability to fulfill surging market demand. With our 3 distribution centers and talented supply chain team, we were able to keep our branches supplied, which resulted in good market share gains during the year. Additionally, through our new transportation management system, or TMS initiative, we were able to continue reducing our inbound freight costs relative to the market. We also benefited from excellent private-label product growth. Lastly, our recent acquisition of hardscapes and nursery companies which operate at a higher gross margin than the base business also contributed to our gross margin improvement. On the SG&A side, we achieved excellent operating leverage in 2020 as we tightly managed our business through the use of associate furloughs, avoiding discretionary travel and expenses and benefited from COVID-19-related trends, such as lower health care costs. We achieved this leverage even as we continue to invest in MobilePro, our digital capabilities, TMS and our marketing and operational excellence teams, all of which are increasing our capability to better serve our customers, grow organically and achieve higher operating leverage in the future. One indicator of our progress is the fact that our customer Net Promoter Score continued to improve in 2020, moving from 71 to 75 during the year. We also invested in our associates, allowing them to stay at home when they were sick or exposed, without using their paid time off, or PTO, creating a PTO bank to support associates in need and paying special thank you bonuses to our frontline associates. These are in addition to the record annual performance bonuses earned by our associates as they achieved a truly exceptional year. We expect to continue making investments in 2021 to serve our customers better while leveraging our prior investments to drive organic growth and achieve further SG&A leverage. The combination of strong organic sales, gross margin improvement, good SG&A leverage and excellent acquisition performance allowed us to deliver 29% adjusted EBITDA growth and expand our adjusted EBITDA margin by 110 basis points for the year to 9.6%. We are excited about the great progress that we made in 2020 toward our midterm milestone of 10% adjusted EBITDA margin. On the acquisition front, our team did a great job of getting us off to a strong start with 4 deals in the first quarter, then pausing our acquisitions from March to July, but keeping our prospects warm while we assess the impact of COVID-19 and then picking back up in the second half of the year by closing 7 additional deals. Our acquisitions performed well, and we added 8% of trailing 12-month sales to SiteOne through acquisitions in 2020, setting us up for strong growth through acquisitions in 2021. The year 2020 was also an important year for SiteOne from a balance sheet perspective. We maintained strong liquidity throughout the COVID-19 crisis and then seized the opportunity to reduce our net debt leverage by executing a $262 million equity offering in August. Through this offering, we reinforced and expanded our strong base of shareholders and provided them an excellent return on their new investment in SiteOne. At the same time, when coupled with our very strong free cash flow, we reduced our net debt leverage by over 1 turn. And ended the year with a net debt to adjusted EBITDA ratio of 1.0x compared to 2.6x at the end of 2019. We are now in a great position with maximum flexibility to execute our strategy, including continued acquisitions in good times and tougher times. Lastly, I will remind you that we published our first SiteOne responsibility report on siteone.com, which outlines all of the terrific work that our teams do to ensure that SiteOne is a great place to work for our associates and a good neighbor in our communities. Environmental, social and governance best practices are already part of our DNA, and we are happy to introduce our programs, practices and metrics to communicate and benchmark our actions and results going forward. I would also note that 2020 was our safest year ever as we reduced our recordable and days away incident rates by 40% and 58%, respectively, versus the prior year. Based on our benchmarking, SiteOne is among the safest industrial distributors in the world. To summarize, I am very proud of how our team performed in this extraordinary environment to keep everyone safe, serve and support our customers, deliver outstanding financial results and take care of each other all along the way. In the end, 2020 was a strong year, during which we continued to execute our strategy and demonstrated the momentum of our long-term growth story. Despite the challenges of COVID-19, we made significant progress in building our company and strengthening our team. We remain excited about both the short-term and the long-term opportunities to deliver exceptional value to all stakeholders. Now John will walk you through the quarter in more detail. John? -------------------------------------------------------------------------------- John T. Guthrie, SiteOne Landscape Supply, Inc. - Executive VP, CFO & Assistant Secretary [4] -------------------------------------------------------------------------------- Thanks, Doug. I'll begin on Slide 9 with some highlights from our fourth quarter results. We reported a net sales increase of 26% to $675 million for the fourth quarter. For the full year, net sales increased 15% to $2.7 billion. During the quarter, we had 65 selling days compared to 61 selling days in the prior year period, where the extra days were a drag on our overall organic daily sales growth due to the timing of year-end holidays, we finished the year strong with net sales growth coming in better than anticipated. For the full year, we had 256 selling days compared to 252 days in the prior year. In 2021, as detailed in the 2021 organic daily sales reconciliation schedule attached to the press release, we have 253 selling days. Organic daily sales increased 12% in the quarter and 8% for the full year as the stay-at-home trends associated with COVID-19, combined with low interest rates, fueled demand for new home construction and increased investment in existing homes and outdoor living spaces. Organic daily sales for landscaping products, which includes irrigation, nursery, hardscapes, outdoor lighting and landscape accessories was strong again this quarter, increasing 16% compared to the prior year. For the full year, landscaping products grew 9%. The landscaping products are the products most closely tied to the repair and remodel end market, which is benefiting from homeowners upgrading their backyards and patios. Organic daily sales growth for agronomic products, which includes fertilizer, control products, ice melt and equipment, remained steady with 3% organic daily sales growth for both the quarter and the year. Due to the continued strong demand resulting from the stay-at-home trend as well as favorable weather, our fourth quarter sales exceeded expectations despite the strong comps from the prior year period. Geographically, all regions achieved positive organic daily sales growth during the quarter, with 6 out of 10 regions achieving double-digit organic daily sales growth. As Doug mentioned, we are seeing the strong demand continue into the first quarter. And while weather, like we saw last week, can negatively impact sales, it's fair to say that, when they can work, our customers are busy. Prices increased 2% for the fourth quarter and 1% for the year compared to 2019. For the full year 2021, we expect price to contribute between 2% and 3% to our overall sales growth. We are not currently seeing the strong inflationary pressure in landscaping products that you may be seeing in other building product categories. Acquisition sales, which reflect the sales attributable to acquisitions completed in both 2019 and 2020, contributed approximately $41 million or 8% to the overall fourth quarter growth rate. For the full year, acquisition sales contributed $136 million or 6% to the overall growth rate. We are pleased with the performance of our acquisitions and our overall deal pipeline as we saw healthy reacceleration in deals closed in the fourth quarter. Scott will provide more details regarding our acquisition strategy later in the call. Gross profit increased 31% to $222 million in the fourth quarter, and gross margin expanded 110 basis points to 32.9%. The improvement in gross margin for the quarter was primarily due to higher supplier incentives attributable to our increased sales volume, along with a favorable customer mix and lower freight costs. For the year, gross profit increased 17%, and gross margin increased 50 basis points. Selling, general and administrative expense, or SG&A, increased 22% to $203 million in the fourth quarter. SG&A as a percentage of net sales decreased 120 basis points to 30%. Reduction in SG&A as a percentage of net sales reflects operating leverage resulting from our excellent organic sales growth combined with solid cost management. For the full year, SG&A increased 11% to $728 million, and SG&A as a percentage of sales decreased 90 basis points. For the fourth quarter, we reported income tax expense of $1.6 million compared to an income tax benefit of $5.6 million in the prior year period. For the full year, income tax expense was $27.5 million compared to $13.8 million in the prior year, and our effective tax rate was 18.5% compared to 15.1% for the prior year. The increase in the effective tax rate was primarily due to a decrease in the excess tax benefits resulting from option exercises relative to income before taxes compared to the prior year. Excess tax benefits of $10.9 million were recognized for the 2020 fiscal year as compared to $9.6 million for the 2019 fiscal year. In 2021, we expect our effective tax rate will be between 25.5% and 26.5%, excluding discrete items such as excess tax benefits. We recorded net income for the fourth quarter of $11.5 million compared to $2.5 million for the prior year period. The improvement was primarily driven by our strong sales growth, SG&A leverage and gross margin improvement. Net income for fiscal 2020 was $121.3 million compared to $77.7 million for fiscal 2019. Our weighted average diluted share count was 44.1 million for fiscal year 2020 compared to 42.8 million for fiscal year 2019. The increase was primarily attributable to our equity offering completed in August. Adjusted EBITDA increased by 98% to $43.9 million for the fourth quarter compared to $22.2 million for the same period in the prior year. For the full year, adjusted EBITDA increased 29% to $260.2 million compared to $201.1 million for 2019. Adjusted EBITDA margin, reflecting our SG&A leverage and gross margin improvement, increased 110 basis points to 9.6% compared to fiscal '19. Now I'd like to provide a brief update on our balance sheet and cash flow statement as shown on Slide 11. Net working capital at the end of the year was $483 million compared to $455 million at the end of 2019. The increase is primarily due to a $36 million increase in our cash on hand. In response to market uncertainty resulting from the COVID-19 pandemic, we increased our cash on hand to enhance our financial flexibility. As markets stabilized, we started the process of deploying our cash on hand by paying down our outstanding debt and investing in the business. During the fourth quarter, we lowered our cash on hand by $219 million to $55 million; reduced our outstanding debt, including finance leases, by $164 million to approximately $305 million; and invested $97 million in new acquisitions and capital expenditures. Excluding available cash on hand, net working capital at the end of fiscal 2020 decreased $8 million compared to the end of fiscal 2019, reflecting increased asset efficiency resulting from our improvement in both inventory and receivable turns. Cash flow from operations decreased 27% to $49 million for the quarter, but increased 75% to $229 million for the full year 2020, an improvement of $99 million over 2019. The increase was primarily attributable to higher net income and improved working capital management. We made cash investments of $97 million for the quarter compared to $28 million for the same quarter last year and $184 million for 2020 fiscal year compared to $92 million in 2019. The increase in cash investments reflects our increased acquisition activity compared to the prior year period. Net debt at the end of the year was approximately $250 million compared to $529 million at the end of 2019. Leverage decreased to 1x our trailing 12-month adjusted EBITDA compared to 2.6x at the end of 2019. The lower leverage reflects the repayment of our debt with proceeds from our August equity offering and our strong operating cash flow as well as our improved profitability. Our target net debt to adjusted EBITDA range is 1 to 2x at year-end. As a reminder, we reduced our target net debt to adjusted EBITDA range to 1 to 2x from 2 to 3x. This allows us to increase our financial flexibility, allowing us to execute our acquisition strategy in all market environments. End of the year, we had liquidity of approximately $418 million, which consisted of approximately $55 million cash on hand and approximately $362 million in available capacity under our ABL facility. Finally, as a reminder, we have no debt maturities until 2024. In summary, our priority from a balance sheet perspective is to maximize our financial strength and flexibility during this uncertain time without sacrificing long-term growth or market opportunities. I'll now turn the call over to Scott for an update on our acquisition strat. -------------------------------------------------------------------------------- Scott Salmon, SiteOne Landscape Supply, Inc. - Executive VP of Strategy & Development [5] -------------------------------------------------------------------------------- Thanks, John. In August, we began to close deals again after a 5-month pause. We were pleased to regain our momentum quickly and add 7 outstanding companies over the remainder of the year, with 5 of those in the fourth quarter alone. As shown on Slide 12, for the full year 2020, we acquired 11 companies with trailing 12-month net sales of approximately $191 million or a little over 8% of 2019 net sales. Since 2014, we acquired 57 companies with more than $1 billion in acquired net sales. Turning to Slide 13 through 18, you will find information on our most recent acquisitions. On October 1, we acquired BURNCO Landscape Centres with 12 locations across 3 Western Canadian provinces, establishing a leading hardscape and landscape supplies platform, which complements our growing irrigation and agronomic business there. On October 5, we acquired Hedberg Supply with 2 locations in the Greater Minneapolis metro area, which establishes yet another leading hardscapes and landscape supplies platform. On December 9, we acquired Alpine Materials with a single location serving the Greater Dallas-Fort Worth, Texas market through the distribution of mulches, soils, hardscapes and landscape supplies to landscape professionals. This is our first dedicated hardscape center in Dallas-Fort Worth and gives us a full product line in that market. On December 30, we acquired Dirt & Rock, which served the Lake Oconee, Georgia market just east of the Atlanta metro area. Dirt & Rock is focused on the distribution of hardscapes, natural stone and landscape supplies to landscape professionals. This acquisition extends our leading hardscapes position in the Greater Atlanta metro, complements our existing branch network, strengthening our capability to provide the full line of products and services in Georgia. Finishing off 2020, we acquired Stone Center of Virginia on December 31, 2020, with 2 locations focused on the distribution of hardscapes, natural stones and landscape supplies to landscape professionals in the Richmond and Fredericksburg markets. This addition strategically builds upon our 2018 acquisition of the Stone Center of Virginia's foundational site in Manassas, Virginia. And for our first acquisition of 2021, we acquired Lucky Landscape on February 17. Lucky Landscape is a wholesale distributor of nursery products to landscape contractors serving the Greater Houston market from a single location. This is our fourth dedicated nursery branch in Houston and expands our full-line capabilities in this important market. Summarizing on Slide 19, our acquisition strategy continues to create significant value for SiteOne, and our pipeline is strong and continually expanding across all geographies and lines of business. More importantly, the quality of the companies that are joining SiteOne is very high, bringing terrific expertise and exciting new talent to our fast-growing company. But building relationships and joining with excellent companies is only one element of our success. The other key element comes from our outstanding and experienced teams in the field and functional support areas who warmly welcome our new associates to the SiteOne family and are just as eager to learn from them as they are to share the winning culture we have built here at SiteOne. As Doug mentioned, we have over 50 former owners who are now part of the SiteOne team, and I want to thank all of these highly successful entrepreneurs and the whole SiteOne team who together built unbreakable relationships with our customers, our suppliers and our communities every day. Together, we will continue to bring on new dynamic leaders and the best companies in the green industry to expand our product capability, help us to better serve our customers and achieve further performance in growth. I will now turn the call back to Doug. -------------------------------------------------------------------------------- Doug Black, SiteOne Landscape Supply, Inc. - Chairman of the Board & CEO [6] -------------------------------------------------------------------------------- Thanks, Scott. I'll wrap up on Slide 20. Before I jump into the outlook, I would like to recognize the entire SiteOne team for their continued leadership and commitment to excellence during the COVID-19 pandemic. We are all excited to see the number of positive cases dropping and look forward to widespread vaccination. However, the daily battle against the spread of COVID-19 goes on and will likely continue during the next several months. Our thoughts and prayers go out to all of those who have been negatively impacted by COVID-19. And we, at Siteone, will continue to do our part to help fight the spread of this terrible virus. In terms of demand outlook, we have seen the trend in the fourth quarter continue into January and February, with sales performing above seasonal expectations so far. Overall, we expect to achieve strong organic daily sales growth in the first half of the year, with strong demand and weaker comparable sales. We expect growth to moderate in the second half of the year against stronger comparable sales. As John mentioned, we expect price inflation to be in the 2% to 3% range in 2021, as compared to about 1% in 2020, which will support higher organic daily sales growth. In terms of end markets, we would expect maintenance, which comprises 41% of our business, to remain steady with low to mid-single-digit growth. We have terrific capability in maintenance with our market-leading LESCO brand, and so we are very confident in our ability to perform in a steady market. Residential new construction, which comprises 27% of our business, should remain strong as builders work to create new home inventory to meet higher demand. Interest rates are forecast to remain low, and we believe that the new focus on home ownership will continue post COVID-19, so we would anticipate mid- to high single-digit growth in new residential demand. By contrast, the new commercial construction market, which represents 14% of our business, is expected to be weak in 2021. Our commercial customers remain busy but are also wary of declining demand during the second half of the year, so we would expect low to mid-single-digit drop in commercial demand for the full year. Lastly, the repair and upgrade market, which is 18% of our business, remains very strong, driven by the stay-at-home trend and increased investment in outdoor living. We expect this trend to moderate through the year as widespread vaccination reduces the spreading of COVID-19 and as spending on travel and entertainment rebound. That said, we do expect the positive outdoor living trend to continue as it has for the last 10 to 15 years. Taken together, we would expect mid- to high single-digit growth in repair and upgrade. In summary, we expect mid-single digit overall growth in our markets for 2021, which will provide a solid platform for us to continue executing our strategy, growing our business and expanding our adjusted EBITDA margin. In terms of acquisitions, as Scott mentioned, we currently have a very strong pipeline of high-quality companies and believe that 2021 will be a good year for acquisition growth. Additionally, our ability to integrate acquisitions and achieve synergies improve each year, and so we expect our acquisitions to perform well in the coming year. Taken altogether, we expect fiscal 2021 adjusted EBITDA to be in the range of $275 million to $292 million, which represents year-over-year growth of 6% to 12%. This range does not factor any contribution from unannounced acquisitions. In closing, I would like to sincerely thank all of our SiteOne associates who continue to amaze me with their passion, commitment, teamwork and selfless service. We have a tremendous team, and it is a true honor to be joined with them as we overcome adversity and deliver value for all stakeholders. I would also like to thank our suppliers for supporting us so strongly and our customers for allowing us to be their partner. Operator, please open the line for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question is with David Manthey with Baird. -------------------------------------------------------------------------------- David John Manthey, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2] -------------------------------------------------------------------------------- So to start off here, there were a lot of positives, clearly, in 2020 and in fourth quarter, but fourth quarter trend is not super representative necessarily of anything going forward. As you look at 2021 and think about the key initiatives that you're undertaking, Doug, what are you most excited about? I mean is there anything new? Are there any of these levers that you're leaning on a little harder into 2021 that we should focus on? -------------------------------------------------------------------------------- Doug Black, SiteOne Landscape Supply, Inc. - Chairman of the Board & CEO [3] -------------------------------------------------------------------------------- Well, I think one of the levers that we're going to lean harder on in '21 that we haven't in the past is marketing. As you know, we hired a new Chief Marketing Officer, Shannon Versaggi, in February of last year. She's been able to build her team and create a plan. We did -- we also did a study of our customer excellence to see what our customer experience looked like and things that we need to work on there. And we also did some brand studies to see where SiteOne was with different areas of the market. And so armed with that, we're going to go heavier on marketing in 2021. For example, we're less well known with the Hispanic customer than with our regular customers. And so we're going to be aggressive there in advertising why SiteOne is a great place for Hispanic customers, our bilingual capability, et cetera. And so that's just one example. We're going to put a lot more marketing behind our product lines like LESCO and PRO-TRADE, which we saw really good growth in '21 -- or in '20, but we expect more in '21. And so that's the new marketing team, and our new capability there is one of the things that we're working on. In addition to that, we're putting in a new CRM for our sales force. I think we've come a long way with our sales force. We have an older homegrown CRM. We're going to replace that with the Salesforce CRM, so that's becoming more advanced. And then just our overall customer excellence. Our operational excellence group has been in place for a while. We've been really working on our customer experience. That involves MobilePro. It also involves TMS in terms of the dispatch track, which is our way of tracking deliveries in the local market and informing customers when things are on their way. So I know some of those we've been working on for a while, but it really -- we feel it coming together and excited about it. The last one I would say is our digital product, siteone.com. We've been working hard on that to get it to kind of a world-class level. We're very close. We're launching some pilots early this year to really go after that aggressively with kind of a great new product and do some marketing behind it. And assuming that goes well, you'll see us roll that out more aggressively in the year. So I know that's a list of things, but those are the things that would have us excited that we can drive organic growth despite what the market is likely to be in our favor in the first half, it might be tougher in the second half, but we want to be able to swim downstream and upstream faster as a company. -------------------------------------------------------------------------------- David John Manthey, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [4] -------------------------------------------------------------------------------- Yes. That all sounds great. I guess the final question here is, how concerned should we be with the labor shortage issue? Are you -- is there any data out there as you look at business formation of landscapers or visa issuance or anything else that might help alleviate the tightness issue in 2021? -------------------------------------------------------------------------------- Doug Black, SiteOne Landscape Supply, Inc. - Chairman of the Board & CEO [5] -------------------------------------------------------------------------------- Yes. So it's going to continue to be with us. But I would just keep in mind, tight labor has been an issue for the last 3 or 4 years. And so it's no worse in 2021. We're all working on it. Our customers, ourselves, our trade associations, I think we're making some headway there in terms of getting people into landscaping and making it known that landscape is an attractive industry. But no magic bullet, and so we'll continue to be tight. I think our customers are getting more productive. We're helping with that. We're getting more productive with things like MobilePro and siteone.com, so we'll be able to fight through and deliver a good year of growth despite the tight market, but it will still be with us all year, for sure. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Our next question is with Stephen Volkmann with Jefferies. -------------------------------------------------------------------------------- Stephen Edward Volkmann, Jefferies LLC, Research Division - Equity Analyst [7] -------------------------------------------------------------------------------- I know you don't really have a big build-out for the 2021 forecast, but I'm wondering, just sort of broad brush, can we talk a little bit about how you're feeling relative to puts and takes for gross profit and SG&A next year? Do you expect continued leverage on both or maybe just on the SG&A side? And just any kind of unusual items or rebates or things that we should sort of keep in mind as we try to model out '21 would be great. -------------------------------------------------------------------------------- John T. Guthrie, SiteOne Landscape Supply, Inc. - Executive VP, CFO & Assistant Secretary [8] -------------------------------------------------------------------------------- We do expect continued growth in EBITDA margins, EBITDA margin expansion next year. There will be some combination of gross profit and SG&A. With regards to gross profit, we think -- one of the things we saw was a customer mix benefit. What we're seeing right now from that perspective, we're seeing more growth of the small residential-focused customers and less growth in the large commercial jobs. That's a slight benefit, we think, we really saw it in Q4. We think that will continue on certainly next year also. And then with SG&A, while, obviously, everybody is aware, there are certain things that will pick up next year, we're going to go back to traveling, we're going to have some sales and marketing, which are budgeted higher next year. But at the same time, with regards to us, we won't have certain -- some of the incentives will probably normalize and also with regard to some of the costs that's just running in the COVID world probably won't reoccur either. So there'll be puts and takes. We expect a gross margin improvement. I don't think there was any major onetime things. As we've alluded to before, it's kind of a grind forward on all fronts. And we expect to continue to make progress next year. -------------------------------------------------------------------------------- Stephen Edward Volkmann, Jefferies LLC, Research Division - Equity Analyst [9] -------------------------------------------------------------------------------- Okay. Great. And just as a quick follow-up on the SG&A specifically in the fourth quarter. Saw kind of a nice bump up from the run rate earlier in the year. Is that where the incentive comp sort of showed up, John? Is that sort of an unusual bump up there? Or is that just sort of taking advantage of strong markets to increase investment? -------------------------------------------------------------------------------- John T. Guthrie, SiteOne Landscape Supply, Inc. - Executive VP, CFO & Assistant Secretary [10] -------------------------------------------------------------------------------- We did see an increase in incentive comp, plus we did have an extra week in the fourth quarter. So -- and I would say then you also have the additional nonseasonal kind of as sales start trailing down. So those are the 3 items. But especially, I would say, the extra week is probably the largest component when you look year-over-year from that perspective, but then incentive comp was obviously accelerating as we had outperformed -- exceeded expectations in the fourth quarter also. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- Our next question is with Ryan Merkel with William Blair. -------------------------------------------------------------------------------- Ryan James Merkel, William Blair & Company L.L.C., Research Division - Research Analyst [12] -------------------------------------------------------------------------------- Congrats on a nice finish to the year. So my first question is on the outlook. Mid-single-digit organic growth in '21 feels a little conservative to me, just given the backdrop is pretty good and you're going to have 2 to 3 points of price. So I guess a two-part question. Where might there be upside to your market guide above mid-single digit? And then secondly, are you including share gains in your outlook? -------------------------------------------------------------------------------- Doug Black, SiteOne Landscape Supply, Inc. - Chairman of the Board & CEO [13] -------------------------------------------------------------------------------- Yes. When we talk about -- we talk about the market, we talk about our own sales. We would still classify that as mid-single digit. Upsides would be the first half could be stronger maybe than we think. And the second half, it's really uncertain as COVID -- as the virus tails off and as vaccines become more widely used and people start spending again on entertainment and travel, et cetera. What happens in our market, we still think there'll be a strong outdoor living. We think new residential will still be strong. Commercial is a question mark. So when you put those puts and takes, there's just a lot of uncertainty in the second half, but upside there could be that we do better in the second half than we think. We didn't think we were going to do as well in the fourth quarter on strong comps from last year in '20, and we did. All that said, there's downsides as well. Weather can do anything during the year, as you know, so we have to be careful. Share gains is another one. We could do better than we think. We're always, I think, prudent there in terms of what we budget, but we're hoping we would outdo that with all the initiatives and firepower that we're bringing to bear in 2021, and we're excited about it. So those will be the upsides. You have weather and you have market, which could provide downsides as well. We think, at this point, mid-single digits makes sense as a reasonable assumption. -------------------------------------------------------------------------------- Ryan James Merkel, William Blair & Company L.L.C., Research Division - Research Analyst [14] -------------------------------------------------------------------------------- Yes. All right. That makes sense. 2020 was a great weather year, so certainly understand that. All right. And then as we think about modeling fourth quarter '21, how much do you think mild weather boosted 4Q? I know that's hard to answer, but I'm just looking for any guidepost you can provide as we think about 4Q '21. -------------------------------------------------------------------------------- Doug Black, SiteOne Landscape Supply, Inc. - Chairman of the Board & CEO [15] -------------------------------------------------------------------------------- Yes. John? -------------------------------------------------------------------------------- John T. Guthrie, SiteOne Landscape Supply, Inc. - Executive VP, CFO & Assistant Secretary [16] -------------------------------------------------------------------------------- Yes. So always difficult bifurcating that. I would say -- well, first off, when you model '21, take out a week of sales from that standpoint, but this is somewhat -- is it a couple of points of growth on top of that? I would -- potentially, I would say, from weather with regards to that. I think we saw, of our 10 regions, 8 out of the 10 were drier in Q4, especially out West, which was really positive to sales growth. And then in general, it was warmer, from that perspective, which allowed people to work a little bit more. The one side thing we did see about our agronomic sales would have actually been stronger, but we did see nobody was buying ice melt in the fourth quarter. So there was a little bit of a -- we went backwards $5 million or $6 million just because of that. So -- but in general, I guess I would probably say 2 to 3 points, but that is an estimate. It's very difficult to bifurcate it. -------------------------------------------------------------------------------- Ryan James Merkel, William Blair & Company L.L.C., Research Division - Research Analyst [17] -------------------------------------------------------------------------------- Yes. I understand that. Okay. I'll pass it on. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- Our next question is with Matthew Bouley with Barclays. -------------------------------------------------------------------------------- Ashley Kim, Barclays Bank PLC, Research Division - Research Analyst [19] -------------------------------------------------------------------------------- This is Ashley Kim on for Matt this morning. So I just -- I guess just digging more into the guide for moderation and growth in the back half. Are you talking about flatter trends? Or are you actually anticipating to turn negative off of the tough comps? -------------------------------------------------------------------------------- Doug Black, SiteOne Landscape Supply, Inc. - Chairman of the Board & CEO [20] -------------------------------------------------------------------------------- Yes, I think you're going to see, like we said, strong Q1, Q2, Q3 moderates. The fourth quarter, as John mentioned, a lot of things going on in '21, almost all of them positive in the fourth quarter. So there is a chance that our organic growth could be negative in the fourth quarter. So if you look at the second half overall, we would be somewhere around flat, could be plus, could be minus. It's really hard to call at this point, but we wouldn't expect the third quarter to be a negative. The fourth quarter could very well be a negative in terms of organic growth. -------------------------------------------------------------------------------- Ashley Kim, Barclays Bank PLC, Research Division - Research Analyst [21] -------------------------------------------------------------------------------- Okay. That's helpful color. And then I just -- I hear you on the inflationary pressures generally being less than what we've heard across building products. But can you just comment on what you've seen specifically in freight inflation so far and maybe quantify some potential impacts to margins there? -------------------------------------------------------------------------------- John T. Guthrie, SiteOne Landscape Supply, Inc. - Executive VP, CFO & Assistant Secretary [22] -------------------------------------------------------------------------------- We are -- we've seen an increase really in the second half of this year and especially in the first quarter, we expect it to be a mild headwind with regards to our margin -- gross margin improvement. We think because of the initiatives we've done with the transportation management and how we're managing it smarter, we think we're going to be able to mitigate that some. And then in the second half of the, I would say, when we start comping against the second half of this year, we would expect the second half of the year, some of the pressure to relieve. But minor, we would say, minor headwind to gross margin improvement, but we're still overall hopeful that we will be able to still achieve margin improvement this year. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- Our next question is with Keith Hughes from Truist. -------------------------------------------------------------------------------- Keith Brian Hughes, Truist Securities, Inc., Research Division - MD [24] -------------------------------------------------------------------------------- Question on the acquisitions you talked about on the slides. You talked about in one of the slides in the acquisitions that there was 11 deals, $191 million in trailing 12-month sales. Given the timing of the deal, how much of that spills over into '21? How much in acquisition revenue in rough numbers do you have kind of in the bag, if you will, for '21? -------------------------------------------------------------------------------- Scott Salmon, SiteOne Landscape Supply, Inc. - Executive VP of Strategy & Development [25] -------------------------------------------------------------------------------- Well, I think if you actually look at our earnings announcements this year, the acquisitions we did in the first half of the year are largely built into the numbers. So I would say the pre-COVID acquisitions, there's not a lot of revenue growth with regards to those. The post-COVID ones, you probably have about half the year with regards to additional revenue with regards to those. So if you look at our acquisitions, going into next year, the 2020 acquisitions contributed $75 million in revenue this year. And so going into it, the balance would be still a contributor to overall revenue growth. -------------------------------------------------------------------------------- Keith Brian Hughes, Truist Securities, Inc., Research Division - MD [26] -------------------------------------------------------------------------------- So -- but I can't do $190 million minus $75 million. That's -- I think I'm missing [something]. -------------------------------------------------------------------------------- Scott Salmon, SiteOne Landscape Supply, Inc. - Executive VP of Strategy & Development [27] -------------------------------------------------------------------------------- $115 million, $115 million. -------------------------------------------------------------------------------- Keith Brian Hughes, Truist Securities, Inc., Research Division - MD [28] -------------------------------------------------------------------------------- Is that where we're heading? Is that kind of what you expect? -------------------------------------------------------------------------------- Scott Salmon, SiteOne Landscape Supply, Inc. - Executive VP of Strategy & Development [29] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Keith Brian Hughes, Truist Securities, Inc., Research Division - MD [30] -------------------------------------------------------------------------------- Okay. I won't [drag] on the time. That answers the question. And I guess one final question on your commercial business. You had talked in the guidance numbers about weak commercial construction. I understand that. You have some commercial maintenance and a little bit of remodeling. Any sort of view on what the trends are on that heading into early '21? -------------------------------------------------------------------------------- Doug Black, SiteOne Landscape Supply, Inc. - Chairman of the Board & CEO [31] -------------------------------------------------------------------------------- Yes. The maintenance is stable. I mean the commercial properties continue to be maintained. So low single-digit. And then remodel, it's just not a big -- there is some. It's very small, but we would also expect that. I mean the maintenance of properties if the property needs to be remodeled. Certainly, in a tougher market, that becomes almost essential, right, to remodel a property, stay competitive, et cetera. So yes, those will continue to be steady and healthy. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- Our next question is with Mike Dahl with RBC Capital Markets. -------------------------------------------------------------------------------- Christopher Frank Kalata, RBC Capital Markets, Research Division - Assistant VP [33] -------------------------------------------------------------------------------- This is actually Chris on for Mike. My first question is just on the -- your inflation outlook for this year. I know you guys ticked up your pricing outlook to 2% to 3%. Are you embedding any cost inflation looking out to full year '21 from your supplier base? -------------------------------------------------------------------------------- John T. Guthrie, SiteOne Landscape Supply, Inc. - Executive VP, CFO & Assistant Secretary [34] -------------------------------------------------------------------------------- That 2% to 3% is primarily cost inflation from our supplier base. So we -- our marketplace, you generally see most of the cost inflation is passed on. And so we're seeing that from our supplier base, and we're passing it on or we would expect that to be reflected in higher prices to the market in general. -------------------------------------------------------------------------------- Christopher Frank Kalata, RBC Capital Markets, Research Division - Assistant VP [35] -------------------------------------------------------------------------------- Got it. That makes sense. And I guess, just for my second question, any color you could provide today on what impact the cold weather, the recent cold weather in the country and power outages in Texas has impacted you and whether that's embedded at all in your guidance for '21? -------------------------------------------------------------------------------- Doug Black, SiteOne Landscape Supply, Inc. - Chairman of the Board & CEO [36] -------------------------------------------------------------------------------- Yes. So obviously, we've had a tough time in Texas. That's affected everybody. But it's 1 week. The weather is back. Their sales have come back. And an event like that, it doesn't become material because it was only a week. It was -- we had obviously snow across the country, but that's normal. But it was only one state, although Texas is a big state. That's something that they can make up through the year, assuming normal weather the rest of the year. And in fact, the repairs of nursery or even irrigation pipe and backflows that get frozen and damaged might give you a little pickup to help that catch up. So it was a tough event. Our folks -- our associates are all safe and well. Our branches are back open. They were closed for 3 or 4 days, but back up and running. And in the scheme of the year, it wouldn't make a material difference. -------------------------------------------------------------------------------- Operator [37] -------------------------------------------------------------------------------- Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back over to Doug Black for closing remarks. -------------------------------------------------------------------------------- Doug Black, SiteOne Landscape Supply, Inc. - Chairman of the Board & CEO [38] -------------------------------------------------------------------------------- Okay. Great. Well, thank you all for joining us today. We very much appreciate your interest in SiteOne. I'd like to once again thank our terrific associates for all they're doing to make us a great company, our suppliers and our customers. And we look forward to updating you again when we report our first quarter results. Thank you. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.