Greetings, and welcome to the SiteOne Landscape Supply Fourth Quarter and Full Year 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. 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 for SiteOne Landscape Supply. Thank you. You may begin.

Thank you. And good morning, everyone. We issued our fourth quarter and full-year 2021 earnings press release this morning and posted a slide presentation to the Investor Relations portion of our website at investors.siteone.com. I am joined today by Doug Black, our Chairman and Chief Executive Officer, and Scott Selman, 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. We were pleased to continue our excellent momentum during the fourth quarter, finishing 2021 with tremendous growth in sales and profitability. Despite the overall economic uncertainty, the market demand for professional landscaping services has remained healthy. In this environment, our teams performed very well, executing our commercial and operational initiatives and delivering superior value to our customers and suppliers while overcoming COVID-19 challenges, rapid product cost inflation, select supply shortages, and ongoing freight and labor constraints. As a result, we believe that we are steadily gaining share on top of the underlying market growth. Furthermore, our recent acquisitions performed well, and we added eight more high-performing companies to our family during the year. In total, 2021 was an exceptional year in which the power of SiteOne, Stronger Together, was on full display. With stronger teams, even more capability helping underlying demand, and a good backlog of potential acquisition targets, we enter 2022 with significant momentum and look forward to another year of outstanding performance and growth. I will start today's call with a brief review of our unique market position and our strategy for long-term performance and growth, followed by some highlights from 2021. John Guthrie will then walk you through our fourth-quarter and full-year financial results in more detail and provide an update on our balance sheet and liquidity position. Scott Selman will discuss our acquisition strategy, and then I will come back to address our outlook for 2022 before taking your questions. As shown on Slide 4 of the earnings presentation, we have grown our footprint to more than 590 branches and four distribution centers across 45 U.S. states and six Canadian provinces. We are the clear industry leader, over five times the size of our nearest competitor, yet we estimate that we only have about a 15% share of the very fragmented $23 billion wholesale landscaping products distribution market. Accordingly, our remaining growth opportunity is significant. We have a balanced mix of business with 64% focused on maintenance, repair, and upgrade, 21% focused on new residential construction, and 15% on new commercial and recreational 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 coverage give us multiple avenues to grow and more ways to create value for our customers and suppliers while providing important resiliency in soft markets. Turning to Slide 5, our strategy is to leverage the scale, resources, functional talent, and capabilities that we have as the largest company in our industry, all in support of our talented, experienced, and entrepreneurial local teams to consistently deliver more value than our competitors to our customers and suppliers. We have come a long way in building SiteOne and executing our strategy over the last six years. We are still in the third or fourth inning of our overall development as a truly world-class company. Accordingly, we remain highly focused on our commercial and operational initiatives to continue building 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, acquisition growth, and EBITDA margin expansion. If you turn to Slide 6, you will see that our strategy is working. Over the last six years, we have been able to deliver consistent organic growth, strong acquisition growth, and excellent 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 to include our digital capabilities. You will note that over the last five years, we grew our sales by over 100% and our adjusted EBITDA by over 200%. This shows the power of our three value-creation levers: organic sales growth, acquisition growth, and EBITDA margin expansion. Given that we're still relatively early in our development, we feel confident in our ability to continue driving all three of these levers going forward. We have much work to do in building our systems infrastructure and our digital capabilities across SiteOne, in addition to executing the more advanced phases of our commercial and operational initiatives. Accordingly, we will continue to invest heavily in these. Our field and field support teams, who play a big part in leveraging our investments and facilitating our initiatives, are largely in place. And so each year our teamwork, experience, and synergies get stronger across SiteOne. We can see this in the increased market share gains, organic growth, and improved operating leverage that we achieved in 2021. Going forward, we will build and leverage our capabilities further to accelerate performance for all stakeholders. You will also note that we have now completed 64 acquisitions across the irrigation, agronomics, nursery, hardscapes, and landscape supply product lines during the last eight years, with eight completed in 2021. We only acquire well-run companies, and so all of these acquisitions were already high-performing companies before joining SiteOne. After they join us, we together enjoy the benefits of our combined commercial and operational capabilities. Acquisitions are a key source of new talent and ideas, and therefore they enhance our competitive advantage as we grow. Our acquisition pipeline remains very robust, and we have significant potential to continue growing through acquisition for many years to come. As a final note on Slide 6, we are very pleased in 2021 to achieve an 11.9% adjusted EBITDA margin, exceeding the 10% adjusted EBITDA margin milestone that we set for ourselves at the time of our IPO in 2016. Back in 2016, we knew that we had extraordinary potential for improvement in our return on sales, and so 10% represented a reasonable milestone for the mid-term. Six years later, we have learned a great deal and achieved many improvements. However, we also realize that we have the potential to continue improving our profitability as we deliver even higher value to our customers and suppliers in the future. Long-term, with full execution of our commercial and operational initiatives, we believe that SiteOne should be able to consistently gain market share while operating with an adjusted EBITDA margin of between 13% and 15%. Through our three value creation levers: organic growth, acquisition growth, and EBITDA margin expansion; we will continue to provide superior returns to our shareholders in the years to come. Slide 7 shows the long runway we have ahead in filling in our product portfolio, which we aim to do primarily through acquisitions, especially in the nursery, hardscapes, and landscape supplies categories. 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 our 2021 performance highlights as shown on Slide 8. We delivered 29% net sales growth in 2021 with 20% organic sales growth and 9% net sales growth added through acquisition. Organic daily sales growth was an exceptional 22%, and was evenly divided between 11% volume growth and 11% price inflation. We are particularly pleased that we achieved excellent organic volume growth across all product lines, all geographies, and across all sizes of customers, reflecting the healthy underlying end market demand and our ability to gain market share. This result also reflects our investments in marketing to better reach small customers, especially small Hispanic customers, and attract them to SiteOne. In total, our net organic customer count increased by 8,400 customers, or approximately 3% in 2021. Gross margin improved by 160 basis points to 34.9% for the year, as we benefited significantly from our proactive inventory management during this high inflation period. I would note that we would not expect some of this gain to repeat in 2022. On the pricing front, rapid cost inflation was a challenge, and we were very pleased with the ability of our local teams to work closely with our suppliers and customers to pass through the extraordinary product cost inflation that occurred in the market. We also continued to execute our initiatives with private label products and small customers, both of which grew faster than our average. On the SG&A side, our operational initiatives and disciplined cost management offset the higher variable expenses associated with the strong organic sales volume and our continued investments in marketing and digital. Accordingly, SG&A as a percentage of net sales decreased by 100 basis points to 25.9%. We achieved good cost efficiency benefits from Mobile Pro, which allows mobile branch transactions, and from our transportation management system, or TMS, both of which we began rolling out in 2019. These two deployments highlight the power of investing in new technologies to improve customer service and increase operating leverage. We will continue to broaden the use of Mobile Pro and TMS across SiteOne while making more of these types of investments through our operational excellence teams in the future. The combination of strong organic sales, impressive gross margin improvement, and good contribution from acquisitions allowed us to deliver adjusted EBITDA growth of 60% for the year and expand adjusted EBITDA margin by 230 basis points to 11.9%. We're extremely proud of this achievement, as we exceeded our 10% adjusted EBITDA margin milestone. As I mentioned before, we will now set our sights on improving our adjusted EBITDA margin further to the 13% to 15% range in the coming years. In addition to Mobile Pro and TMS, we continue to make progress on our other important investments during 2021, to build our capabilities for the future. We opened our fourth distribution center near Dallas, Texas, in the third quarter, and it's now fully operational and supporting our growing company. During the last two years, our distribution centers have proven to be critical in managing supply chain challenges and navigating periods of rapid inflation. The DCs also allow us to expand our private label brands and increased efficiencies with our suppliers. In 2021, we made great progress with the roll-out of our new Salesforce customer relationship management system, or CRM, which will help our over 400 outside sellers bring increased value to our current customers and drive growth through new customers and increased share of wallet. We expanded and strengthened our digital team and made good progress with siteone.com in 2021 as we used the learnings gained from our Tampa, Florida and Los Angeles, California pilots to further improve the content, features, and service capabilities of our eCommerce platform. We have also significantly improved our product data on siteone.com with better images and descriptions over more of our product catalog. We have achieved higher usage of siteone.com in these test markets and are now launching a more aggressive rollout across SiteOne in 2022. We expect to make great progress in online usage this year. At the same time, we are connecting directly with our larger customers through their business management software, and/or through EDI, to facilitate their ability to secure jobs and easily order from SiteOne. We will continue to invest aggressively to ensure that SiteOne is the digital leader in the professional landscaping services market. Lastly, we made further strategic marketing investments during 2021 to increase the awareness of SiteOne and to drive organic sales growth in our targeted customer and product segments. We are excited with the results that we achieved with increased awareness, growth among Hispanic customers, and good growth from our product marketing efforts. The marketing team also completed a review of our partners program and will be piloting changes in 2022 to further improve customer benefits and loyalty in the coming years. We are very optimistic that our investments in digital and marketing can create significant competitive advantages for SiteOne. Overall, through our strategic investments and initiatives, we will remain focused on providing world-class tools, processes, training, and technologies, to deliver value to our customers and suppliers and help our associates be more productive so that they can better help our customers win. On the acquisition front, we added eight high-performing companies to our family during the year, all of which provide us with excellent new talent and capability for growth in their respective markets while adding approximately $155 million entailing 12-month sales to SiteOne. Our acquisitions performed very well during 2021, contributing significantly to our growth in adjusted EBITDA. Our development teams remain active and we expect a busy 2022. To ensure that we continue to drive attractive acquisition growth as we become a larger company, we expanded our development team during the year under Scott Selman, including the addition of a senior leader focused solely on integrating our new companies. We expect our expanded team to drive even higher growth through acquisition in the next several years. With an experienced team, broad and deep relationships with the best companies, a strong balance sheet, and an exceptional reputation, we remain well-positioned to grow consistently through acquisition. As a final recent achievement, we are excited to publish our 2021 ESG report in early October. In this report, we shared our vision to become a true company of excellence, which we define with five objectives. These objectives are: 1. Be a great place to work for our associates, 2. Deliver superior value to our customers, 3. Be the distributor of choice for our suppliers, 4. Deliver attractive performance and growth to our shareholders, and 5. Be a good neighbor in our communities. The 2021 report includes expanded disclosures of our team's progress across these objectives. We look forward to updating you on our progress annually and continuing to enhance our disclosures going forward. In summary, 2021 was a breakthrough year in many respects. And we are excited about the significant momentum that we carry into 2022. I could not be prouder of our teams and the way in which they worked through the many challenges that we faced in 2021, and yet executed our strategy at a very high level. To take care of each other, serve and support our customers, and deliver tremendous value for our suppliers, shareholders, and communities. The passion, commitment, and teamwork across SiteOne is second to none. And we remain excited about both the short and long-term opportunities to achieve excellent performance and growth for all our stakeholders. Now John will walk you through the quarter and full year in more detail.

Thanks, Doug. I'll begin on Slide 9 with some highlights from our fourth-quarter results. We reported a net sales increase of 19% to $805 million in the quarter. There were 61 selling days in the fourth quarter, which is four fewer days than the 65 days we had in the fourth quarter of 2020. This translates into roughly $41 million in reduced sales in the fourth quarter of 2021 compared to 2020. For the full year, net sales increased 29% to $3.5 billion. We had 253 selling days in 2021 compared to 256 selling days in 2020. Organic daily sales increased by 21% in the fourth quarter and 22% for the full year. Organic daily sales continued to benefit from robust residential and commercial new construction, as well as the stay-at-home trend in which homeowners are spending more on maintaining and upgrading their outdoor living spaces. Like last quarter, our organic daily sales growth benefited from strong price inflation resulting from rising product costs. Price inflation contributed approximately 18% to the organic daily sales growth for the quarter. While price inflation played a large role in the quarter, we were pleased with 3% volume growth despite some very challenging comps from last year, where we saw volume growth of 11% and price inflation of 11%. The strong volume growth for the year is indicative of not only the strength of the market but also our ability to gain share. We experienced double-digit growth across all major product lines and geographic regions. We were also pleased that we achieved strong growth with our professional contractors, as opposed to the DIY customers who contributed significantly in 2020. Organic daily sales for landscaping products, which includes irrigation, nursery, hardscape, outdoor lighting, and landscape accessories, was strong again this quarter, increasing by 18% in the fourth quarter and 21% for the full year. Organic daily sales growth for agronomic products, which includes fertilizer, control products, ice-melt, and equipment, was also strong, increasing 28% for the quarter and 24% for the full year. Both landscaping products and agronomic products were significantly impacted by cost inflation, as the prices for products like fertilizer, grass seed, and PVC pipe remained elevated relative to 2020. We expect this trend to continue through the first half of 2022 and then moderate when we start to comp the higher prices that we are now seeing in the market. Acquisition sales, which reflect the sales attributable to acquisitions completed in both 2020 and 2021, contributed approximately $44 million or 7% to the overall fourth-quarter growth rate. For the full year, acquisitions contributed $242 million in net sales or 9% to the overall growth. We are pleased with the performance of our acquisitions. Scott will provide more details regarding our acquisition strategy later in the call. Gross profit increased 27% to $282 million for the fourth quarter, and gross margin increased 220 basis points to 35.1%. Similar to the third quarter, our gross margin was positively impacted by supply chain initiatives, price realization, and increased supplier incentives. With regards to the supply chain initiatives, we benefited from our proactive management of freight costs as well as strategic inventory purchases ahead of the supplier cost increases. Supplier incentives contributed for a little over 80 basis points of the improvement in the fourth quarter with the remaining improvement primarily attributable to the combination of price realization and strategic inventory purchases. For the year, gross profit increased 35% and gross margin increased 160 basis points to 34.9%, primarily attributable to our supply chain initiatives and price realization. We do not expect a rapid price inflation to repeat this year, and so we do not expect to get the same gross margin benefit from price realization in 2022. As Doug will discuss in the outlook, we expect a modest gross margin reduction in 2022 as our gross margin improvement initiatives, like private label and small customer growth, are more than offset by the loss of the price realization benefit. Selling, general and administrative expense, or SG&A, increased 22% to $247 million for the fourth quarter. SG&A as a percentage of net sales increased 70 basis points to 30.7%. The increase in SG&A as a percentage of net sales primarily reflects increased investment in our strategic initiatives and higher marketing and administrative costs. For the full year, SG&A increased 24% to $901 million and SG&A as a percent of sales increased to 100 basis points to 25.9%. The improvement in SG&A as a percentage of net sales was primarily due to operating leverage resulting from our strong organic sales growth combined with disciplined expense management. For the fourth quarter, we recorded income tax expense of $2.7 million compared to $1.6 million in the prior year period. For the full year, income tax expense was $56.1 million compared to $27.5 million in the prior year. Our effective tax rate was 19% for the 2021 fiscal year, compared to 18.5% for the 2020 fiscal year. The increase in the effective tax rate was due primarily to an increase in net income before taxes, partially offset by an increase in the amount of excess tax benefits from stock-based compensation. Excess tax benefits of approximately $20 million were recognized for the 2021 fiscal year, as compared to approximately $11 million for the 2020 fiscal year. We expect the 2022 fiscal year effective tax rate will be between 25.5% and 26.5%, excluding discrete items such as excess tax benefit. We recorded net income for the fourth quarter of $27.5 million, compared to $11.5 million for the prior year period. The improvement was primarily driven by our strong sales growth and gross margin improvement. Net income for the 2021 fiscal year grew 97% to $238.4 million, compared to $121.3 million for the 2020 fiscal year, primarily driven by higher sales, gross margin, and SG&A leverage. Our weighted average diluted share count was 45.8 million for the 2021 fiscal year compared to 44.1 million for the 2020 fiscal year. The increase in the weighted average diluted share count was primarily attributable to our equity offering completed in August 2020. Adjusted EBITDA increased by 41% to $61.8 million for the fourth quarter compared to $43.9 million for the same period in the prior year. For the full year, adjusted EBITDA increased 60% to $415.1 million compared to $260.2 million for the 2020 fiscal year. Adjusted EBITDA margin reflecting our SG&A leverage and gross margin improvement increased 230 basis points to 11.9% for the 2021 fiscal year. Now I'd like to provide a brief update on our balance sheet and cash flow statement as shown on Slide 11. Networking capital at the end of the year was $616 million compared to $483 million at the end of the 2020 fiscal year. The increase in net working capital is primarily attributable to higher receivables resulting from our strong sales growth and an increase in inventory resulting from cost inflation and increased safety stock. We are carrying more inventory to mitigate the risk of supply chain disruptions and ensure that we can satisfy our customer's demand. In addition, in the third quarter of 2021, we opened a new DC in the Dallas area and started the relocation of our Atlanta area DC to a new larger facility. As I mentioned last quarter, we believe the new DC will increase the efficiency of our network by bringing inventory closer to market, as well as reduce our freight expense. In the short term, we're also carrying additional inventory in our DC to reduce the potential risk of disruption caused by the transition. Cash flow from operations increased to approximately $51 million in the fourth quarter of 2021 compared to approximately $49 million in 2020. The increase in cash flow was primarily driven by our increased profitability. Cash flow from operations decreased to approximately $211 million for the full year 2021, compared to approximately $229 million in the prior year. The decrease was primarily attributable to our increased investment in working capital. We made cash investments of $85 million for the quarter, compared to $97 million in the same quarter last year, and $182 million for the 2021 fiscal year, compared to $184 million in the 2020 fiscal year. The decrease in cash investments reflects slightly lower spend on acquisitions in 2021 compared to 2020. Net debt at the end of the 2021 fiscal year was approximately $247 million compared to approximately $250 million at the end of the prior year period. Leverage decreased 0.6 times our trailing 12 months adjusted EBITDA compared to one time at the end of the 2020 fiscal year. The lower leverage reflects our improved profitability. Our target net debt to adjusted EBITDA range is one to two times at year-end but it's dependent upon our investment in acquisitions for a given year. At the end of the year, we had available liquidity of $418 million, which consisted of approximately $54 million of cash on hand and approximately $364 million in available capacity under our ABL facility. In summary, a priority from a balance sheet perspective is to maintain our financial strength and flexibility without sacrificing long-term growth or market opportunities. I will now turn the call over to Scott for an update on our acquisition strategy.

Thanks, John. As shown on Slide 12, we acquired two companies in the fourth quarter, bringing our total to eight for 2021, with the combined trailing 12 months net sales of approximately $155 million. Since 2014, we have acquired 64 companies with approximately $1.2 billion in trailing 12-month net sales added to SiteOne. Turning to Slides 13 and 14, you will find information on our most recent acquisition. On November 12th, we acquired Semco Stone, one of the largest natural stone distributors in the Midwest, with four wholesale locations across Ohio and Missouri. This acquisition further expands the number of markets in which we provide a full range of landscaping products and services to our customers. Also, on December 1st, we acquired Seffner Rock & Gravel located in Tampa, Florida. Seffner establishes our first hardscape and bulk landscape materials location in the Florida market. By teaming up with these two high-performing partners, we continue to deliver on our strategy to expand the products, services, and overall value we offer our customers across all of our markets. Summarizing on Slide 15, our acquisition strategy continues to create significant value for SiteOne. Our pipeline remains strong across all lines of business and geographies, giving us confidence that we will be able to add many more outstanding companies to SiteOne in 2022. We are pleased that many owners continue to choose SiteOne as a great home for their family businesses. These strong leaders and innovators are a powerful force within SiteOne as they help us to improve the value that we deliver to customers and suppliers. As they bring us fresh ideas and help us to grow and improve. We provide the resources and flexibility for them and their teams to pursue both their personal and professional passions. Ultimately, we all win. Stronger together. I want to thank the entire SiteOne team for their passion and commitment to making SiteOne a great place to work and for welcoming the newly acquired teams when they joined the SiteOne family. I am confident in our ability to keep adding more outstanding new companies through acquisitions in 2022, creating terrific value for all our stakeholders. I will now turn the call back to Doug.

Thanks, Scott. I'll wrap up on Slide 16. As mentioned, we are carrying a significant amount of momentum into 2022 and are cautiously optimistic about the year despite the tough comparisons that we faced from last year. As John mentioned, we expect high inflation to continue through the first half of the year and then moderate in the second half as we start to comp the higher prices that we're experiencing now and as some of our commodity product prices return to more normalized levels. Combined with the healthy underlying demand for professional landscaping services, the market should provide a reasonable environment for us to execute our commercial and operational initiatives and drive further growth in sales and profits in 2022. In terms of markets, we are currently seeing solid demand trends in all of our end markets: maintenance, repair and upgrade, and both residential and commercial new construction. Our contractors remain busy and have strong backlogs to start 2022. We understand that there is currently a lot of economic uncertainty associated with inflation, but we have not yet seen this translate into lower demand. Furthermore, we expect to gain market share as we deliver higher value to our customers and further execute our customer and product growth strategies, including our marketing and digital initiatives. Taken together with the anticipated inflation, we would expect to achieve high single-digit organic daily sales growth for the full year 2022. As John discussed, we do not expect to repeat the significant price realization benefits that we achieved last year with the rapid run-up in inflation. However, we expect to mitigate this reduction in price realization with our gross margin improvement initiatives. Overall, we would expect gross margin to be in the range of 34% to 34.5% in 2022. While we will be able to achieve some SG&A leverage, we expect our adjusted EBITDA margin to decline modestly in 2022. In terms of acquisitions, as Scott mentioned, we currently have a strong pipeline of high-quality companies and look forward to adding more of these to the SiteOne family during the year. Our acquisitions are performing very well, and we continue to improve our ability to integrate them into our company. Accordingly, we expect acquisitions to contribute strongly to our performance and growth in 2022 and the years ahead. With all of these factors in mind, we anticipate our fiscal 2022 adjusted EBITDA to be in the range of $430 million to $450 million, which represents year-over-year growth of 4% to 8%. This range does not factor any contribution from unannounced acquisitions. In closing, I would like to sincerely thank all our SiteOne associates who continue to amaze me with their passion, commitment, teamwork, and selfless service. We have a tremendous team, and it is an honor to be joined with them as we deliver increasing value for all our stakeholders. I would also like to thank our suppliers for supporting us so strongly and our customers for allowing us to be their partner.

Thank you. At this time, we'll be conducting a question-and-answer session. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. In the interest of time, we ask that you each keep to one question and one follow-up. Thank you. Our first question comes from the line of Ryan Merkel with William Blair. Please proceed with your question.

Thanks. Good morning and congrats on the strong finish to 2021.

Thanks, Ryan.

Doug, first half on the sales guide for '22, can you just break out price versus volume? And then I'm also curious about your estimate for industry growth in '22.

Yes. So as we look out in '22, as we mentioned, our customers have good backlogs. They're busy. We think that the economy will hang in there. Residential is probably going to be slower than this year, but still some growth. New commercial, we think, will be very solid. Then repair and remodel right now on the professional side is pretty robust. So our guide of high single digits, we do expect high inflation to continue as we mentioned through the first half, it will moderate in the second half. We would say that the majority of that will be inflation, but we'll still get a little bit of volume growth. We think, again, the market's going to be fairly solid. And there should be some growth in the market, although we're cautious about that. We feel like we'll pick up our consistent 1 or 2 points of growth through market share gains, as we add more value across the product portfolio. But for the total growth for the year, you should consider most of that inflation with some volume growth.

Got it. That's helpful and I think makes sense after such a strong FY '21. And then just turning to gross margin, I guess a couple of questions there. How much did the strategic inventory buys help gross margins in FY '21? And then how should we think about the cadence of gross margins, maybe more flattish year-over-year in the first half '22, and then down slightly second half?

Well, if you look in Q4, price and the strategic inventory buys were about 130 basis points, and our guide going forward with the 34% to 34.5% really has us going backwards on that component of the gross margin. So it is somewhere in that range. With regards to the cadence for next year, we would expect it would go down similarly to what Doug reflected in his discussion about price, and really kind of Q1 will probably still be a positive margin outlook, and then tailing off as we go out throughout the year with Q3 and Q4. In Q3, we were up 310 basis points, and a significant portion of that was, one, was the price realization. A significant portion of the gross margin beat was due to price realization. What we have going forward is those two pickups trailing off and not necessarily repeating. We don't think the opportunity for that benefit will occur again next year.

Okay. Got it. So it sounds like a little bit more of a decline second half, first sort of my comment about modest as what you're saying.

Yes.

All right. Great, guys. I'll pass it on. Thanks.

Thanks, Ryan.

Thank you. Good morning, everyone.

Good morning.

So to start here, Doug, maybe you could orient us on contribution margins as we move toward that 13 to 15 goal. In 2020, you ran about 17% and that was before the unusual uptick in pricing that we saw last year. So once gross margin is normalized here in 2022, as you look out to the first, say, 1 to 3 years, re-accelerating toward that new 13% to 15% EBITDA goal. What are you thinking in terms of contribution margins at least early in that curve?

Yes. I think you should see contribution margins that are typical for us as we were going from 8.5% up through, let's call it 11.5%. We're obviously 11.9% this year but there were some extra gains in there. And through that period, John, correct me if I'm wrong, we would normally be in kind of 17% to 18% incremental EBITDA on sales. We think we should be able to be in that range, maybe call it 15% or 16% to 18%, gets down to the bottom line once we get settled this year going forward.

No, I think those are the numbers. And we should be able to continue to increase our move forward on our overall EBITDA. If EBITDA margins have to reset this year.

Okay. And then, second in terms of acquisitions, since the IPO, you've averaged about high single-digit growth contribution. The first few years were low double-digit, lately it's been more mid-single to high-single. And, I think, in the monologue, Doug, you mentioned you expected higher growth via acquisition. And so I'm trying to parse out that definition. Do you mean higher than the mid-single digit growth contribution we've seen in the last few years or something else? I'm trying to get a finer point on what you mean by higher growth via acquisition?

Right. I mean, good question. Obviously, we got the law of big numbers going on here as we approach $4 billion and $5 billion. We need to be able to do more dollar acquisitions to stay in that range of 7% to 13%. And so that's what I was referring to is that we've added a couple of key members to Scott's team in order to up our sourcing of deals and also to take the integration burden off of our acquisition professionals so that they can focus on courting and finding and getting deals done. And so we still feel that the 7% to 13% range is a solid range. To hit the high part of that range, you would have to have a bigger deal. There is probably a dozen companies out there that are 100 million or north of $100 million. We'd need one of those to drop to be in the upper part of that range. But without that, we feel we can be in the 12% to 7% to 10% range with a normal cadence of acquisitions, without that larger deal that will come every couple of years. Does that make sense? We need to up the dollar amount of acquisitions that we're doing and integrating. And quite frankly, if we look back over the last four to five years, there were times where our ability to integrate and digest deals were the things that were holding us back. And so we've alleviated some of those bottlenecks so that we can keep up with our growth.

All right. Thanks, Doug. Appreciate it.

Okay. Thank you.

Hi. Good morning, everyone. I wanted to revisit the gross margin for a moment and discuss some of the variables involved. Do you think there are specific categories of items that might actually decrease in price in 2022? If that occurs, I assume it would likely involve some of the chemicals. Would you then reduce your prices, or do you typically maintain your prices in that situation? How does that dynamic function?

Well, there is a component of our business that has a commodity nature to it, say, for instance, fertilizer. And if raw ingredients play a large component of what that price is. So as prices drop, we would follow the market down. Eventually, there may be timing issues both on the up and down. But in general, the market will settle out at a lower price with regards to where we are at right now. We have some of that built into our model, into our guidance that for those components that have really risen over the past year, especially in the second half that they actually may go down and maybe come in slightly negative year-over-year.

Okay. Thank you. And then anything to call out on the commercial side of the business? Does that grow more quickly in '22 or are there just any trends there?

We're seeing good growth in commercial as we have had, starting I think, a year and a half ago. The market is strong and our customers have good backlogs. We have a project services group that bids on those types of projects for our customers. So we provide bids for our customers in that group, so that the numbers are up in the fourth quarter versus last year. We do anticipate that there will be growth in the commercial side. It's a smaller part of our business, 15% when you combine that with recreational. That's commercial new construction. But we do think it will be healthy this year.

Thank you.

Hey, good morning. This is Ashley Kim on for Matt. So my first question is just are you hearing anything from customers on constrained labor capacity within their own operations? And then any concerns there that could cap growth even if demand remains supportive?

We've been hearing about labor constraints for about three years. It's been an issue. It's going to continue to be an issue. And it does cap growth in the short term. In other words, if the weather's particularly good, or you have a hot market like we've had over the last couple of years, and repair and remodel, there's only so much the contractors can do. So, yes. We anticipate that constraint, but it's not anything that we haven't seen. Our customers are finding ways to grow. When you look at an annual basis, as they automate their business as they use more equipment, and quite frankly, some of our services and products are aimed at helping them to be more efficient and get more done with fewer people. So they're continuing to get more productive. They manage that constraint, but yes, there's constraints there. It's tough to find labor for everyone. And we don't feel that that's going to go away in 2022. But it's nothing that we haven't seen in the last couple of years.

Thanks for that. And then are you seeing any relief in supply or are you still finding yourself operating in a pretty tight backdrop?

It's still tight, and we've seen it across specific products for the past 18 months or since the COVID ramp in 2020. We've launched our fourth distribution center, which helps us mitigate supply chain disruptions. Our category and purchasing teams have been proactive in managing this situation. The supply chain constraints remain, and we anticipate they will continue for most of the year. SiteOne is equipped to handle these challenges, which provides us with a strategic edge over smaller regional competitors. Additionally, our inventory is well-stocked for the year, as we've expected these constraints and are ready to grow despite them.

Thanks for that and good luck.

Thank you.

Hey, guys. This is Ryan Frank on for Mike. Question on the long-term EBITDA guide. I think previously you guys have said gross margins in the mid-30s and SG&A in roughly low-20s. Gross margins, basically there given the guide that you said this year and you've done a good job leveraging SG&A, but it sounds like you're going to continue to invest in the near-term. I guess my question is, what drives the SG&A leverage over time, and when do you really think you guys can start seeing those significant benefits again?

We expect to improve our EBITDA margin in the future on both fronts. Gross margin should continue to improve, although we anticipate reaching a limit eventually. On the SG&A efficiency side, there are still many ways to enhance our field operations. Our new CRM has just been implemented, and as we leverage it more effectively, it should enhance efficiency for both our customers and ourselves. In terms of digital capabilities, we are just starting out, and as we develop these, it will also improve efficiency for everyone involved. Additionally, tools like TMS and Mobile Pro are focused on enhancing customer experience while also boosting productivity in our field. We are continually refining these tools, incorporating upgrades as we learn and grow. Looking back at 2014, our revenue was $2.9 million per branch, and now we're approaching $6 million per branch. We plan to keep raising revenue per branch, which will create economies of scale locally. Overall, we expect to significantly reduce SG&A as a percentage of sales, and we will be focusing on this for the next five to seven years.

Got it. And then would it be safe to say that maybe less leverage in the next one to two years and probably more leverage further out, or is it even spread?

I think it would be fairly even. If you look at this year, we're investing heavily still. We're also working hard to make sure that we have full staffing. And I would add the final thing is that we're seeing labor inflation that's in excess of what we've seen before. And so those factors work against leverage. We'll still get SG&A leverage this year, but it will probably be lower than we would anticipate getting in '23 and beyond. But in the large scheme of things, we think it should be fairly well spread out.

I think one of the things that as we approach improving margins, each year we look at improving the business and identifying different things that are going to add efficiency, improve either gross margin or SG&A leverage. And so there's not one big, I would say, cliff out there. That's going to do it. But as we continue to expand in private label each year, as we continue to increase our share with small customers, each one of those things has an incremental growth. And as we get better and better with digital, driving additional organic sales growth, the natural gearing of the business comes through. I don't think that we're awaiting for some year where it just jumps; obviously, that's what happened this year. But more so that distribution to grind in every year where you look at and making incremental improvements in your business that drive out 30 basis points of EBITDA margin improvement.

Got it. That's very helpful. Congrats on the quarter, and I'll pass it on. Thank you.

Thank you.

Good morning, everyone. Congrats on the great year.

Thank you, Damian.

I had a follow-up question on price. Would you guys maybe be able to provide a little bit of color on where the incremental price is coming from since the third quarter, which product categories? And what's the timing of your most recent price actions you've taken? And just curious if there's any conversation around whether there's any possible further price inflation from here.

We observed what you observed. In the second half of last year, prices increased significantly, particularly in the first quarter of this year. Many manufacturers experienced price increases in items like PVC pipe and fertilizers, which were routinely re-priced. In the first quarter of this year, we continued to see price rises, especially in more specialized manufactured products, where suppliers adjusted their prices for the year. Currently, we are witnessing some of that trend, and prices have remained stable, likely continuing into the first quarter. However, as Doug mentioned, in the second half of the year, we will begin to compare these higher prices, and some commodity items, like fertilizer and PVC pipe, may see slight decreases year-over-year. For about 80% of our business, which includes more stable products, prices have not fluctuated as drastically as others; we anticipate that the pricing at the start of 2022 will hold throughout the year.

Okay. That's really helpful. And then I just want to ask you about free cash flow. I think you alluded to some working capital investments maybe led to a little bit lower than 75% net income conversion. How are you thinking about free cash flow this year? What are your expectations there?

We typically aim for a 100% conversion of net income to free cash flow. Our three-year average is around 110%, and last year was exceptionally high at about 170%, which was somewhat inconsistent. This year, our investments and working capital are preparing us for the DC transition. Additionally, the costs of our inventory purchases have risen significantly compared to last year, and the inflation affecting those purchases towards the end of the year also had a negative impact on our cash flow. Overall, while we assess cash flow over multiple years, our annual goal remains a 100% conversion of net income.

Understood. Thanks, guys. Best of luck.

Thank you.

Thank you.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I will turn the floor back to Mr. Black for any final comments.

Thank you. And thank you all again for joining us today. We appreciate your interest in SiteOne. We're excited about where we are today and where we're going. And we look forward to speaking to you again after our first quarter of 2022. I'd like to take this opportunity again to thank our tremendous associates for all that they do for us and our customers and suppliers. It's really been a great partnership as we've navigated in the landscape industry. Have a great day.

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