Earnings Transcript for SITE - Q4 Fiscal Year 2024

Operator: Greetings, and welcome to the SiteOne Landscape Supply Inc. Fourth Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Guthrie, Executive Vice President and Chief Financial Officer. Thank you, sir. You may begin.

John Guthrie: Thank you, and good morning, everyone. We issued our fourth quarter in full year 2024 earnings press release this morning and posted a slide presentation to the Investor Relations portion of our website at investors.siteone.com. I'm joined today by Doug Black, our Chairman and Chief Executive Officer, and Scott Salmon, Executive Vice President, Strategy and Development. Before we begin, I would like to remind everyone that today's press release slide presentation and the statements made during this call include forward-looking statements within the meeting 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 filing 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: Thanks, John. Good morning and thank you for joining us today. We were pleased to finish a challenging year in 2024 with positive momentum as we achieved 1% organic daily sales growth in the fourth quarter against a 3% price deflation headwind. We have seen organic daily sales consistently improve from negative 3% in the second quarter and negative 1% in the third quarter of 2024 as price deflation moderates and as our commercial and operational initiatives drive increasing sales volume growth. Coupled with the strong cost production actions that we took in the second half of 2024 include 22 consolidations and closures and with Pioneer fully integrated, we entered 2025 in a good position to drive positive daily organic sales growth and solid operating leverage. We also added seven excellent companies to SiteOne in 2024 with $200 million in trailing 12-month revenue and recently added our first acquisition of 2025 in January. All of these companies have talented teams and strong customer relationships and we expect them to contribute to our performance and growth in 2025 and beyond in their respective markets. As we move into 2025, we are seeing price deflation continue to normalize as price decreases in products like PVC pipe are offset by price increases in our other product line. We are also seeing steady demand in our end markets, though the overall macro environment remains uncertain due to a number of factors that include interest rates, potential tariffs and labor supply. Taken all together with stronger teams, a more cost-effective branch network, momentum with our commercial and operational initiatives and a robust pipeline of potential acquisitions, we feel confident in our ability to achieve solid performance and growth in 2025 and to continue building SiteOne to deliver strong long-term value for our shareholders. I will start today's call with a brief review of our unique market position and our strategy, followed by some highlights from 2024. John Guthrie will then walk you through our fourth quarter and full year financial results in more detail and provide an update on our balance sheet and liquidity position. Scott Salmon will discuss our acquisition strategy and then I will come back to address our outlook and guidance for 2025 before taking your questions. As shown on Slide 4 of the earnings presentation, we have a strong footprint of more than 690 branches and 4 distribution centers across 45 U.S. states and 6 Canadian provinces. We are the clear industry leader, over 3 times the size of our nearest competitor and larger than 2 through 10 combined, yet we estimate that we only have about an 18% share of the very fragmented 25 billion wholesale landscaping products distribution market. Accordingly, our long-term opportunity to grow and gain market share remains significant. We have a balanced mix of business with 55% focused on maintenance, repair and upgrading, 21% focused on new residential construction and 14% on new commercial and recreational construction. As the only national full product line wholesale distributor in the market, we also have an excellent balance across our product lines as well as geographically. Our strategy to fill in our product lines across the U.S. and Canada both organically and through acquisition further strengthens this balance over time. Overall, our end-market mix, broad product portfolio and geographic coverage offer us multiple avenues to grow and create value for our customers and suppliers while providing important resiliency in softer 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 superior value to our customers and suppliers. We've come a long way in building SiteOne and executing our strategy, but we have more work to do as we develop into a truly world-class company. Current challenging market conditions require us to adopt new processes and technologies faster and to be even more intentional in driving organic growth, improving our productivity and mastering the unique aspects of each of our product lines. Accordingly, we remain highly focused on our commercial and operational initiatives to overcome the near-term headwinds, but more importantly to build a long-term competitive advantage for all our stakeholders. 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. On Slide 6, you can see our strong track record of performance and growth over the last 8 years with consistent organic and acquisition growth. From an adjusted EBITDA margin perspective, we benefited from extraordinary price realization due to rapid inflation in commodity products during 2021 and 2022. In 2023 and 2024, we experienced significant headwinds as those commodity prices have come down. In 2024, we also experienced further adjusted EBITDA dilution from the acquisition of Pioneer, a large turnaround opportunity with great strategic fit, and from our other focus branches as a result of the post-COVID market headwinds. We expect to experience less commodity price deflation in 2025, which will be offset with modest price increases in most of our products. Furthermore, with Pioneer fully integrated and restructured under new local management and with progress on our focus branches, we expect to achieve significant performance improvement in 2025. We believe that we have consistently outperformed the market in terms of organic sales volume growth in 2023 and 2024, and we continue to have ample opportunities to drive sales growth, increase our gross margin, and improve our operating leverage through our commercial and operational initiatives. In summary, we expect our earnings growth going forward to be enhanced with steady adjusted EBITDA margin expansion as we recover from the post-COVID headwinds and drive forward toward our longer-term objectives. We now have completed 99 acquisitions across all product lines since the start of 2014. Our pipeline of potential deals remains robust, and we expect to continue adding and integrating more companies in 2025 to support our growth. These companies strengthen SiteOne with excellent talent and new ideas for performance and growth. Given the fragmented nature of our industry and our modest market share, we have a significant opportunity to continue growing through acquisition for many 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 acquisition, especially in the nursery, hardscapes, and landscape supplies categories. We are well connected 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 full-year 2024 performance highlights as shown on Slide 8. We achieved 6% net sales growth in 2024 with an organic daily sales decline of 1%, offset by 7% growth due to acquisitions. Organic sales volume grew 2% during the year as our teams continued to gain market share in softer market conditions. Sales volume improved throughout the year with 0%, 2%, and 4% volume growth achieved during the second, third, and fourth quarters of 2024 respectively. We believe that this positive trend reflects a stabilizing repair and upgrade market along with improved execution of our commercial initiatives. Pricing declined 3% in 2024, driven primarily by double-digit declines in PVC pipe and grass seed, while the prices of most of our other products remained flat with the prior year. We expect the rate of commodity price deflation to moderate in 2025 and balance with modest price increases in most other products, creating a more stable pricing environment. Gross profit increased 5% driven by our acquisitions, and our gross margin decreased by 30 basis points to 34.4%. Base business gross margin was down approximately 50 basis points as lower price realization more than offset gains from our gross margin improvement initiatives. Our acquisitions, which were primarily nursery and hardscape businesses, operated a higher gross margin but also operate with higher SG&A. Our SG&A as a percent of net sales increased 130 basis points to 30.5% due to our acquisitions. SG&A for the base business was flat compared to 2023 as we continued to closely manage our labor and expenses in relation to sales volume. In terms of acquisitions, Pioneer represents an ongoing significant SG&A reduction opportunity as we completed the system integration during the fourth quarter of 2024 and optimized staffing. We expect the improvement in Pioneer to contribute to our overall SG&A leverage in 2025. Adjusted EBITDA in 2024 decreased 8% year-over-year to $378.2 million, and adjusted EBITDA margin for the year declined by 120 basis points to 8.3% due to negative organic growth, the absence of price realization, and the dilutive effect of acquisitions. As I mentioned after the third quarter, our acquisitions typically perform at a similar adjusted EBITDA margin as the base business, but with the addition of Pioneer with approximately $150 million in annual sales, operating well below our adjusted EBITDA margin, we experienced meaningful adjusted EBITDA margin dilution from acquisitions this past year. We are confident in our ability to improve the profitability of Pioneer to match the SiteOne average over the coming years. In terms of initiatives, we continue to increase sales with our small customers faster than our company average, drive growth in our private label brands, and improve inbound freight costs through our transportation management system. These initiatives help to mitigate the gross margin decline that we experienced in 2024 and to contribute to expanding gross margin in the future. We continue to increase our percentage of bilingual branches from 58% to 63% in 2024, and are executing focused Hispanic marketing programs to create awareness among this important customer segment. We're also making great progress in our Salesforce productivity as we leverage our CRM and establish more disciplined, revenue-generating habits among our over 600 outside sales associates. Continued adoption of MobilePro and DispatchTrack allows us to offer better customer service while increasing the productivity of our branch staff and delivery fleet. The acquisition of Pioneer has allowed us to develop new functionality in bulk material delivery and in our point-of-sale system, which we plan to further leverage with our existing businesses. We grew our digital sales by 180% in 2024, while cultivating thousands of new regular users of SiteOne.com. The growth in digital sales is encouraging as it increases the connectivity with our customers, helping them to be more efficient and helping us increase market share while making our associates more productive, a true win-win. Customers who purchase online are growing their total business with SiteOne significantly faster than our company average, thereby contributing to our outperformance of the market. During our last earnings call, we mentioned that we are intentionally managing our underperforming branches or focus branches to ensure that they have the right teams, the right support, and are executing our best practices to bring their performance up to or above the SiteOne average. As a part of these aggressive efforts, we consolidated or closed 22 locations in 2024 to strengthen our operations and better serve our customers at a reduced cost. Overall, we expect to gain a meaningful, adjusted EBITDA margin lift for SiteOne in the coming years as we improve the performance of these focus branches. Taken all together, we made good progress in 2024 and are continuing to improve our capability to drive organic growth, increase gross margin, and achieve operating leverage through our commercial and operational initiatives in 2025 and beyond. On the acquisition front, as I mentioned, we added seven excellent companies to our family in 2024, with over $200 million in trailing 12-month sales added to SiteOne. These additions include Devil Mountain, a large, high-performing nursery distributor based in California, which provides an exciting new platform for nursery growth in the West. With an experienced acquisition team, broad and deep relationships with the best companies, strong balance sheet, and an exceptional reputation, we remain well- positioned to grow consistently through acquisition for many years. In summary, while we certainly are not pleased with our profitability in 2024, our teams did a good job of managing through the headwinds, leveraging our many opportunities for improvement, and creating strong momentum as we move into 2025. We are excited about our future as we continue to develop our company and create superior value for our customers, suppliers, and shareholders for the long term. Now, John will walk you through the quarter and full year in more detail. John?

John Guthrie: Thanks, Doug. I'll begin on slides 9 and 10 with some highlights from our fourth quarter and full year results. We reported a net sales increase of 5% to $1.01 billion for the fourth quarter of 2024, and net sales increase of 6% to $4.54 billion for fiscal year 2024. There were 61 selling days in the fourth quarter and 252 selling days in fiscal year 2024, both were the same as the prior year period. In fiscal year 2025, we will again have 252 selling days, with the selling days the same each quarter as fiscal year 2024. Organic daily sales increased 1% in the fourth quarter compared to the prior year, driven by 4% growth in volume, partially offset by 3% price deflation. For the full year, organic daily sales decreased 1% due to 3% price deflation, partially offset by 2% volume growth. Price deflation continues to be driven by commodity products like PVC pipe, which was down approximately 21% in the fourth quarter, and grass seed, which was down approximately 15%. As we communicated on our third quarter call, price deflation is trending in the right direction, but stickier than we originally forecast, due primarily to additional price reductions for PVC pipe and grass seed. Our current outlook for 2025 is for prices to be flat to down 1%. That reflects continued deflation in PVC pipe and grass seed, though not to the magnitude that we experienced in 2024, offset by modest price increases in the rest of the business. This outlook does not incorporate the impact of tariffs, which we expect would be passed through by the market in the form of higher prices. Organic daily sales for agronomic products, which includes fertilizer, control products, ice melt, and equipment, increased 6% for the fourth quarter and 4% for the full year due to strong volume growth resulting from lower prices, solid end market demand, and share gains, which more than offset the continued price deflation for products like grass seed. In the fourth quarter, we achieved solid sales growth for ice melt and grass seed, despite the pricing headwind, as well as pest control, where we continue to expand our market presence. Organic daily sales for landscaping products, which includes irrigation, nursery, hardscapes, outdoor lighting, and landscape accessories, decreased 1% for the fourth quarter due to commodity price deflation. For the full year, organic daily sales for landscaping products decreased 3% due to price deflation and weaker demand in the repair and upgrade end market. Geographically, five out of our nine regions achieved positive organic daily sales growth in the fourth quarter. We achieved solid growth in northern markets with strong agronomic sales. We experienced the sales decline in southeast markets due to price deflation, tough comps, and the impact of hurricanes Helene and Milton. Acquisition sales, which reflect sales attributable to acquisitions completed in 2023 and 2024, contributed approximately $43 million or 4% to net sales growth. For fiscal year 2024, acquisition sales contributed approximately $286 million or 7% to net sales growth. Scott will provide more details regarding our acquisition strategy later in the call. Gross profit for the fourth quarter was $338 million, which was an increase of 3% compared to the prior year period. Gross margin for the fourth quarter contracted 50 basis points to 33.3% due to higher freight costs, customer discounts, and a negative impact from acquisitions. The negative acquisition impact was primarily driven by the Pioneer integration and the consolidation and closure of seven Pioneer locations. For fiscal year 2024, gross profit increased 5% and gross margin decreased 30 basis points to 34.4%. The decrease in gross margin reflects lower price realization, partially offset by the positive impact from acquisitions. Selling, general, and administrative expenses, or SG&A, increased 10% to approximately $365 million for the fourth quarter. SG&A as a percentage of net sales increased 150 basis points in the quarter to 36%. The increase in both SG&A and SG&A as a percentage of net sales primarily reflects the impact of acquisitions, consolidations, and closures. We consolidated or closed 15 locations in the base business and 22 locations in total during the fourth quarter. The SG&A impact of closures was approximately $16 million in total, of which approximately $4.5 million is included in our adjusted EBITDA results. As a reminder, in most cases with consolidations and closures, we expect to service customers from other branches in the same market and therefore expect to retain the majority of the sales. Our base business SG&A grew approximately 1% during the quarter, excluding the impact of consolidations and closures. For the full year, SG&A increased 10% to approximately $1.4 billion, and SG&A as a percentage of net sales increased 130 basis points to 30.5%. The higher SG&A as a percentage of net sales primarily reflects the impact of acquisitions with higher SG&A and the deleveraging resulting from our organic sales decline. For the full year, SG&A for the base business was flat compared to the prior year, excluding the impact of branch consolidations and closures. Our effective tax rate for fiscal year 2024 was 22.4% compared to 22.3% for fiscal year 2023. The increase in the reported tax rate was primarily due to a decrease in excess tax benefits from stock-based compensation. Excess tax benefits of 3.3 million were recognized for the 2024 fiscal year as compared to $5.9 million for the 2023 fiscal year. We expect the 2025 fiscal year effective tax rate will be between 25% and 26%, excluding discrete items such as excess tax benefits. We recorded a net loss attributable to SiteOne of $21.7 million for the fourth quarter of 2024 compared to a net loss of $3.4 million for the prior year period. The net loss was attributable to our higher SG&A and reduced gross margin. The net income attributable to SiteOne for fiscal year 2024 decreased to $123.6 million from $173.4 million in fiscal year 2023 due to the negative impact of deflation and lower price realization. Our weighted average diluted share count was $45.6 million for the 2024 fiscal year compared to the 2023 fiscal year diluted share count of $45.7 million. We repurchased approximately 223,000 shares for $30 million in the fourth quarter and 366,000 shares for $51.6 million for the 2024 fiscal year. Adjusted EBITDA decreased 20% to $31.8 million for the fourth quarter compared to $39.9 million for the prior year period. Adjusted EBITDA margin contracted 100 basis points to 3.1%. For the full year, Adjusted EBITDA decreased 8% to $378.2 million compared to $410.7 million for the 2023 fiscal year. Adjusted EBITDA margin decreased 120 basis points to 8.3% for the 2024 fiscal year. Adjusted EBITDA includes the adjusted EBITDA attributable to a non-controlling interest of $0.8 million and $2.5 million for the fourth quarter and full year respectively. The non-controlling interest reflects the 25% share of equity in Devil Mountain retained by its President. Now I would like to provide a brief update on our balance sheet and cash flow statement as shown on Slide 11. Working capital at the end of the 2024 fiscal year was approximately $909 million compared to $827 million at the end of the prior year. The increase in working capital is primarily due to the additional working capital from acquisition. Cash flow from operation increased to approximately $119 million in the fourth quarter compared to approximately $108 million in the prior year period. The increase in cash flow from operations primarily reflects improved working capital management. Cash flow from operation is for the full year was approximately 283 million compared to approximately $298 million in the prior year. The decrease in cash flow from operation is primarily reflects the decrease in net income partially offset by improved working capital management. We made cash investments of approximately $37 million for the fourth quarter compared to approximately $17 million for the same period in 2023. The increase reflects greater acquisition investment in the fourth quarter of 2024. For fiscal year 2024, we made cash investments of $177 million compared to $226 million in fiscal year 2023. The decrease reflects less acquisition investment in fiscal year 2024 compared to fiscal year 2023. Capital expenditures for the quarter were approximately $10 million compared to $8 million for the prior year period. Capital expenditures for fiscal year 2024 were approximately $41 million compared to $32 million for fiscal year 2023. The increase in fiscal year 2024 capital expenditures reflects increased investment in branch improvements and information technology. Net debt at the end of the 2024 fiscal year was approximately $412 million compared to approximately $382 million at the end of the prior year. Leverage increased to 1.1 times or trailing 12 months adjusted EBITDA compared to 0.9 times at the end of the prior year. As a reminder, our target year-end net debt-to-adjusted EBITDA leverage is 1 to 2 times. At the end of the year, we had available liquidity of approximately $688 million, which consisted of approximately $107 million cash on hand and approximately 581 million available capacity under our ABL facility. On Slide 12, we highlight our balanced approach to capital allocation. Our primary goal regarding capital allocation is to invest in our business, including the execution of our acquisition strategy. We are also committed to maintaining a conservative balance sheet as demonstrated by our target leverage ratio. To the extent we have excess capital after achieving these objectives, the share repurchase authorization provides us the mechanism to return capital to our shareholders. Fiscal year 2024, we execute our capital allocation strategy. We made 183 million in CapEx and acquisition investments and conservatively maintained leverage at 1.1 times net debt-to-adjusted EBITDA. This allowed us to complete our share repurchases of approximately $52 million. I will now turn the call over to Scott for an update on our acquisition strategy.

Scott Salmon: Thanks, John. As shown on Slide 13, we acquired two companies in the fourth quarter, bringing our total for the year to seven for a combined trailing 12-month net sales of approximately $200 million in 2024. Additionally, we acquired one company subsequent to the end of fiscal year 2024. Since 2014, we have acquired 99 companies with approximately $2 billion in trailing 12-month net sales added to SiteOne. Turning to slides 14 through 16, you will find information on our most recent acquisitions. On December 12th, we acquired OakStreet Wholesale Nursery, a single-location wholesale distributor of nursery products in Dallas, Texas. The addition of OakStreet makes us the leading wholesale nursery provider in the fast-growing Dallas-Fort Worth market. On December 20th, we acquired Custom Stone, a wholesale distributor of hardscape products with six locations across Texas. The addition of Custom Stone extends our leading hardscape presence in Houston, Austin, and Dallas-Fort Worth. And finally, on January 2nd, Devil Mountain, SiteOne's majority-owned joint venture acquired Pacific Nurseries, a single-location wholesale distributor of nursery products in Colma, California. This acquisition improves our capability to serve our customers in the San Francisco Bay Area and extends our leading wholesale nursery presence in California. This is the first acquisition for Devil Mountain since we joined forces in April 2024, and we anticipate more opportunities to expand this strong wholesale nursery platform going forward. Summarizing on Slide 17, our acquisition strategy continues to create significant value for SiteOne by adding excellent talent and moving us forward toward our goal of providing a full line of landscape products and services to our customers in all major U.S. and Canadian markets. With a strong balance sheet and a robust pipeline across all lines of business and geographies, we are confident in our ability to continue adding outstanding companies to SiteOne for years to come. 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 join the SiteOne family. I will now turn the call back to Doug.

Doug Black: Thanks, Scott. I'll wrap up on Slide 18. As we move into 2025, there's much macro uncertainty with interest rates, potential tariffs, and labor supply that could affect our markets. Against this backdrop, we expect commodity price deflation to continue moderating in 2025 with declines in products like PVC pipe and grass seed mitigated by price increases across our other products. Overall, we expect prices to be flat to down 1% for the full year 2025. In terms of end markets, we expect new residential construction, which comprises 21% of our sales, to be roughly flat in 2025. Continued high interest rates and elevated home values are constraining demand, but with new home inventory being low, builders are continuing to build new homes. Accordingly, we expect stable demand for landscaping products in this end market. New commercial construction, which represents 14% of our sales, was solid in 2024, as we believe it will remain steady in 2025. Feeding activity from our project services teams continues to be positive compared to the prior year, which is a good indicator of continued demand. Our customer backlogs remain solid, and we believe that the commercial end market will be flat this year. The repair and upgrade market, which represents 30% of our sales, was our weakest end market in 2024, with high single-digit volume declines. Over the past few quarters, we have seen this end market stabilize, and we believe that repair and upgrade will be flat to down slightly in 2025. Lastly, in the maintenance end market, which represents 35% of our sales, we achieved good sales volume growth in 2024, as our teams gained profitable market share. We expect the maintenance end market to continue growing steadily in 2025. With this backdrop, and with the benefit of our commercial initiatives, we expect sales volume to more than offset price deflation, yielding low single-digit organic daily sales growth for the full year 2025. We expect gross margin in 2025 to be higher than 2024, driven by our initiatives and the contribution from acquisitions. Strong actions taken in 2024 to reduce SG&A, integrate Pioneer, and address our focus branches, we expect to achieve good operating leverage in 2025, yielding solid improvement in our adjusted EBITDA margin. In terms of acquisitions, as Scott mentioned, we have a good pipeline of high-quality targets, and we expect to add more excellent companies to the SiteOne family during the remainder of the year. All these factors in mind, we expect our full-year adjusted EBITDA for fiscal 2025 to be in the range of $400 million to $430 million. This range does not factor in 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 a true 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. Operator, please open the line for questions.

Operator: At this time, we will be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from David Manthey with Baird. Please proceed with your question.

David Manthey: Thank you. Good morning. Guys, I'm wondering, regardless of market demand and pricing and acquisitions and everything, are the focus branches and Pioneer the most impactful cost initiatives on the docket for 2025? And if so, is there any way you can dimensionalize the impact of those two efforts in a vacuum?

Doug Black: Yes, I would say, broadly, David, we are doing a good job of managing SG&A across the company, and we will continue to do that in 2025. Pioneer and the focus branch -- branches make a big difference. As we've done a lot of work in 2024 on those branches, we saw a little bit of financial benefit from that. But mostly put a lot of foundation in place there to cause them to perform. So we're looking for good solid results out of that, and certainly that shows up in terms of SG&A leverage. So John, I don't have the numbers yet.

John Guthrie: Without being too specific on the numbers, I would say just in general, most of the improvement in margin that you're seeing this year is going to be achieved by SG&A leverage and not -- and while we do expect gross margins to be up slightly, most of the what's embedded in our guidance is a reflection of the SG&A leverage we're getting from those two initiatives, specifically the focus branches and Pioneer from that perspective.

David Manthey: Okay, thank you. And then second, a couple of the risk factors would be, it sounds like grass seed is still a factor and then labor supply of your customers. Are you hearing anything from your customers already about intensifying labor issues? And then, I don't know if you have a Clarence Speaks type preview on the grass seed market, but either of those factors or both, will we not know what those look like until we get into the season or are you starting to see some initial signs?

Doug Black: I'll take the labor and John can take grass seed. No, we haven't yet seen any impact. Obviously, there's a lot of talk about it. I think some of our customers we've heard are concerned, but they have not seen significant impacts yet. Now it's early in the year, so I think we'll see in the spring. So we'll see fairly quickly. I believe this is going to be a big issue. I just would say that labor constraints has been an issue for our customers for a long time and landscapers seem to be pretty agile in working around that. And of course, we at SiteOne can help them with those issues in the way that we serve them and the products, et cetera. So we'll work together with our customers to get through, but I think it'll be later in the spring before we see, if we're going to see impact, any meaningful impact, haven't seen that impact yet. And John, do you want to address grass seed?

John Guthrie: With regards to grass seed, just in the first half of the year, we're just going to get rollover of the existing deflation, which was 15% this past quarter. We won't know for certain, really, until probably April, May timeframe, have a perspective on where it's going to be in the second half of the year. I think our general thought is it could be down slightly, less so than this year, but we'll really have to see where supply and demand flows based upon the spring selling season.

David Manthey: All right. Thanks, guys. Good luck.

Doug Black: Thanks, David.

Operator: Our next question comes from Damian Karas with UBS. Please proceed with your question.

Damian Karas: Hey, good morning, everyone.

Doug Black: Good morning.

John Guthrie: Morning.

Damian Karas: You mentioned that tariffs are not factored into your guidance. Could you just give us a sense for how much of your product is coming out of China and Mexico? And you also said that industry would likely pass through this price. Would you expect to be able to do that relatively quickly, or could there potentially be some lag in terms of raising your sales prices versus your inventory cost?

John Guthrie: We would generally pass through prices relatively quickly when it gets announced from our suppliers. From that perspective, I mean, there will be certain orders outstanding that we'll honor from that perspective. But historically, the market, it's not just a SiteOne, has passed through price increases like this relatively quickly. We estimate 10% to 15%, let's say, kind of use the midpoint of 13% of sales if you go to Mexico, China, and Canada. We're not buying directly, but have a sourcing component. And that's not to say all of that, if there was a tariff passed through, our suppliers would pass all of that through. But if it was considered long term, you would probably expect that. But let's say 13% is kind of ballpark number where we think with the majority of that being Mexico and then China.

Damian Karas: That's helpful. Thanks. And obviously, California is an important state for you. And there's been the devastating wildfires out there. I was wondering if that's something that you're seeing an impact on your business to date and just your thoughts on any potential near term as well as longer term implications for your business?

Doug Black: Yes. Well, we're all sad to see the devastating fires going in California. Obviously, it has impacted a lot of lives. But in terms of our business, our business in California is largely new construction. We have a maintenance component, but it's much smaller than most of the country. And so the impacts on our business have been marginal, I would say. Obviously, as homes are rebuilt, landscapes will go in, but that's more of a long term benefit. But in the short term, I'd say, minor headwind, nothing major. And over time, obviously, we'll participate with the rebuilding of those communities. In terms of our facilities, luckily, we had none that were affected. We had some associates who we were taking care of that were impacted. But luckily, nobody was hurt. And our facilities were not disrupted and the business was not disrupted in the short term.

Damian Karas: We're glad to hear that. Thanks for your insight. We'll pass it along.

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

Keith Hughes: Thank you. You had talked earlier about some of the branch rationalization. I think it was $4.5 million that affected fourth quarter EBITDA. I just want to make sure that's correct. And I assume that's something that doesn't reoccur in 2025?

John Guthrie: That's correct. The $4.5 million is the right number. That's a one-time charge for the closure of those branches. And we would not expect that to repeat in 2025.

Keith Hughes: Okay. And if you could give us some of the ballpark number of the products that have been so troublesome with deflation, the PVC pipe and that grassy, as a percentage of sales, what are those down to now?

John Guthrie: I mean, PVC pipes came down from I think down to in the 20s and then grass seed is at 15%. So we would expect grass seed to continue for a couple more quarters. We think potentially PVC pipe embedded in that and our pricing guidance is potential additional reductions this year. And then those reductions, I should say not to the magnitude of the 20 plus percent that we're seeing right now, but we still think there could be pressure. We don't have that finalized or really kind of announced in the marketplace, but we do think there's a risk there and that's embedded in the 0% to 1% or negative 1% number reference on the call.

Keith Hughes: As a percentage of your sales, what are these products now that they have to be followed?

John Guthrie: Percentage of our sales, I apologize.

Keith Hughes: You answered my next question already, so thank you for that. What is the percentage of your sales?

John Guthrie: We do roughly $150 million in grass seed sales and PVC pipe is roughly 4% of our sales.

Keith Hughes: 4%, okay. Thank you.

Operator: Our next question comes from Stephen Volkmann with Jeffries. Please proceed with your question.

Stephen Volkmann: Great, thank you guys. Curious if you can provide a little bit more detail relative to the focus stores and also what you're doing with Pioneer. Certainly appreciate closing locations, that's sort of obvious. But what do you do in the rest of the stores to get those margins up to the corporate average and how long do you think that takes?

Doug Black: I'll take Pioneer first. As we mentioned before, Pioneer was a bit of a turnaround opportunity, highly strategic, and so the first order of business was to get it integrated on our system, which is now fully integrated. In fact, we were able to upgrade our systems with some of the things that Pioneer did that we wanted to copy, quite frankly. And then staffing, there were significant staffing opportunities to downsize. Pioneer is now under new local management with a leader that we have on board that's run our bulk business in Arizona quite successfully. And so, the team has been restructured, if you will. The staffing has been right sized. And the next was trucking, too many trucks and freight costs that was not where it needed to be, and that's all been kind of right sized. So a lot of cost out on the SG&A side, cost out on the delivery side. As we mentioned, we consolidated six of the branches to make the network efficient. And so we feel like we're kind of locked and loaded, if you will, to go into '25 and really perform. When you look at the focus branches broadly, and again, this is the bottom kind of 20% of our branches, a lot of it is leadership, quite frankly. And so that heavy lifting has been done. And then there's a bit of right sizing. There's product mix. There's sales and service issues that have to be resolved. And so as we go into '25, again, a lot of the heavy lifting has been done. We got a little bit of financial benefit in 2024, but we expect to marshal significant benefit in '25. For the broad set of focus branches and for Pioneer, quite frankly, it's a multi-year. It won't all come through in '25, right? We'll get a good amount of benefit in '25 and '26. But let's say by '27, we expect those branches and Pioneer to be performing up where we expect them to perform. So it gives us some extra juice, if you will, in terms of profit growth. You'll see a lot of it come through, as John mentioned, in SG&A leverage. And obviously, on the EBITDA front, we expect our adjusted EBITDA margin to move significantly with the improvement in those over not just next year or this year, but over this year and next year.

Stephen Volkmann: Great. Okay. Thank you. That's helpful. And then sort of switching gears, you bought back, I think, $30 million in stock in the quarter. And you're sort of, I guess, the stock's kind of trading at the low end of its recent range. Is there any chance that you kind of focus a little bit more on buybacks versus M&A, given the stock price where it is?

John Guthrie: I think our number one focus is on growing the business and investing in the business. And M&A is part of our growth strategy. So I don't think we're going to pull back on M&A, good M&A investments and opportunities to just repurchase shares. That's not to say there won't be opportunity to repurchase shares like we did in Q4, but our number one is making a great business and growing the business.

Doug Black: Yes. And just to add to that, we're still building -- we're in the building and growth mode, SiteOne. And so, both investing in the existing business, but also investing in acquisitions is strategic for us. And so, if a seller's ready to sell their business, and if it's with SiteOne, we're going to obviously acquire it if we can get to an agreement. And so that's number one. And so we tend to look at it, okay, let's invest in the business. We're growing the business, building the business. But we have strong cash flow. And if we have excess cash flow, then the next opportunity is to purchase shares and give those funds back to the shareholders. So that's the clear order we see it in. And so, we'll see how 2025 goes. But purchasing of shares comes always after investment and growing and building our business.

Stephen Volkmann: All right. Very clear. Thank you.

Operator: Our next question comes from Charles Perron-Piche with Goldman Sachs. Please proceed with your question.

Charles Perron-Piche: Good morning. Thank you for taking my question. First, it's great to see that commercial initiatives are coming through and are expected to drive further market share gains in 2025. Can you maybe unpack some of the initiatives supporting that between Partners Program, Private Label, and others? And where do you see the biggest opportunity for further share gains this year and beyond?

Doug Black: Yes. So, there's a lot of things that go into our share gain. And I'll start with the front end. We have a very significant opportunity to grow with small customers. We mentioned, our small customer efforts. Evidence of that is we had 24,000 new members of our Partners Program. That's up to 71,000 now. Most of those are small customers. And so, we're really -- and we're underweight with small customers in general. If you look at our 18% market share, we would be significantly below that with the smaller customers and significantly above that with the large customers. So there's a long way to go there. And that's driving some of our growth. It also helps drive our gross margin improvement. A part of that small customer is our Hispanic customers. And we have a very targeted Hispanic marketing program. We mentioned our bilingual branches are up from 58% to 63%. We want to continue to drive that up. We gained an unaided awareness with our Hispanic customer base, 6 percentage points last year. So we're excited about that. So our marketing is working. And so those initiatives are our terrific ways to grow. We also are growing in our product categories, right? Our private label products, pro-trade, spans across lighting, tools, into fittings and other parts of the erosion control, synthetic turf. Those are high growth areas for SiteOne to grow our product lines with a competitively priced but higher margin types of products. And then, hardscapes, lighting, we continue to grow in those categories. And that's really just a super fragmented market. We're by far the largest with our product portfolio, our product lines, and our sales ability. We're able to drive growth in those product lines. For maintenance, we're growing in pest control, which is kind of an offshoot of maintenance. And we're driving a lot of good growth there. And then I'd say, in general, with our Salesforce, we installed the Salesforce CRM about two years ago. It's really becoming mainstay today. And it's helping our Salesforce get much more focused on specific opportunities that they're going after. The final is digital. Digital has been a big enabler for us. We're ramping up digital. We were up 180% this year. We now have 6,400 regular purchasers online, and that's double what it was the year before. We have about over 50,000 customers that use digital to check pricing and to pay their bills, et cetera. And so, because we're a leader in digital in the space, those things cause customers to move more of their business to us. It makes doing business easier for them. It makes them more efficient. And so we're excited to see the impact that digital has. So, a lot of different arrows in our quiver, if you will. And we're pushing them all. And we're excited about the success we've had over the last couple of years. We think that'll continue to ramp up in 2025.

Charles Perron-Piche: Got it. That's good color, Doug. And maybe more, a little bit more high level. Obviously, 2024 was a challenging year in terms of the macro and deflation driving the EBITDA margins at just over 8%. And I think we all recognize a limited visibility on the outlook when looking ahead. So I guess against that, it's encouraging to hear that you're expecting the margin to improve in 2025 with the ongoing initiative in place. But when you look at the business, let's say, over the next three years, how confident are you that SiteOne can return to a double-digit adjusted EBITDA margin? Should demand conditions remain relatively similar to what they are today? And in other words, how much could organic initiatives drive the gross margin, maybe both particularly the SG&A average, both in terms of the volume gains and cost reduction effort? And where do you see the most improvement, opportunity for improvement?

John Guthrie: Yes, I mean, we're very confident to get back to double digits. And as you know, our objectives are above that. We've stated the long-term objectives of 13% to 15%. But first order of business, as you mentioned, is get back to double digits. And we see a clear path from here to there over the next couple of years. And it will be more of the same. Our initiatives are designed around making our business more productive and continuing to improve our gross margin. And of course, organic growth drives that. And our acquisitions, when they come in, they enhance it. So, we have many years of improvement. When you look inside SiteOne, we have regions and large areas that are up where that long-term objective is. And so we see clearly where we need to be. It's just a matter of getting the whole organization there. And then again, the focus branch efforts are going to be big in that as well, right? As we bring up our bottom branches, that sends us toward that longer-term objective. So very confident to get back to double digits. You should see a steady path there, but not stopping at that point, continuing to improve the profitability of the company, where we know we can be longer-term.

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

Matthew Bouley: Hey, good morning, everyone. Thank you for taking the questions. I wanted to ask about the price increases you mentioned on some of the finished goods and the timing around all that. I guess kind of now here in mid-February, have you started to pass through any of those price increases yet on the finished goods? Or I guess typically, kind of when would these non-commodity price increases begin to flow through for SiteOne? Thank you.

John Guthrie: We're putting those in right now. It's a rollout, but our 2025 pricing is going across the country and will be in by mid-February.

Matthew Bouley: Perfect. Okay. Thanks for that, John. And then secondly, just back on the gross margin side, I think you talked about slight improvement. For the year, I just wanted to touch on the cadence of that a little bit. Obviously, Q4 kind of exited still a little bit down from the prior year. Given the cadence of inflation and all that and everything else you're seeing, would we be looking at gross margins kind of flat or still down in the first half, and then you see improvement later in the year, or is it a little bit more evenly spread in terms of that slight improvement? Thank you.

John Guthrie: Yes. I think it could be a little pressure in Q1. I would say in general, Q1, knowing that we benefited from an early spring last year, Q1 numbers could be a little weaker from that perspective. But really, most of the business should be running full off-cylinders in Q2, Q3, and that's where we expect to make almost the majority of our improvements for the full year.

Matthew Bouley: Got it. Thanks, John. Good luck, guys.

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

Unidentified Analyst: Hi. This is Chris on for Mike. Just going back to the pricing this quarter, you guys saw a down three in the price. So I was hoping if you guys maybe give a little more color on what you expect pricing to look like for the course of the year? Should we expect similar magnitude of decline in the first half and improving in the second and then within your flat-to-down slightly guide. Could you break out specifically what you're assuming for commodity deflation and what you're expecting to pass through on non-commodity?

John Guthrie: Well, we'll split it out there, but we would expect kind of price deflation overall to be around negative 2% in Q1 and then moving up to negative 1 in Q2 and then, you know, be slightly positive in the second half of the year.

Unidentified Analyst: That's helpful. And then maybe similarly on volumes, when you blend up your end-market expectations, how are you thinking about kind of first half, second half in terms of volume growth?

John Guthrie: We don't think -- if you do first half and second half, I don't think we think there is a measurable difference in the -- we don't have built into our guidance a strong economic recovery. Doug talked about a resilient market. And so it's not -- we're not expecting a huge recovery in the business. It's, the market's going to be kind of where it's at for the remainder of the year, and we're planning on hitting our numbers through our initiatives. I guess the only thing I will call, I just mentioned on the last one, is there could be a swing between Q1 and Q2, because we do believe with the early spring last year, we pulled sales from Q2 into Q1. And that was the 5% volume growth that we saw in Q1.

Unidentified Analyst: Great.

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

Jeffrey Stevenson: Hi, thanks for taking my questions today. So it sounds like you saw a nice sequential improvement in repair and upgrade demand during the fourth quarter. I just wondered if you could provide any more details on how demand and bidding activity has trended. And what gives you confidence that in-market demand will be flat next year, or this year?

Doug Black: Yes. So when we look at our products that are tied to remodel, like hardscapes and lighting, we saw a nice sequential improvement, say, from the second quarter to the third quarter to the fourth quarter. And so it seems as though the market has kind of stabilized. I mean, it was weak last year, for sure, but it was certainly weaker in the first half than it was in the second half. And so we see that kind of continuing into next year. And then talking to our customers, we think it could be, you know, I think we called it flat to slightly down. We think it could be slightly down next year, but we don't feel it'll be down as much as it was this year. We think it works behind the remodel.

Jeffrey Stevenson: Understood. Now that's helpful, Doug. Thank you for that. And then the M&A pipeline, sounds robust after another strong year of acquisitions. Have you seen any significant changes in seller expectations as you progress through last year, if things remain largely pretty status quo in the industry?

Doug Black: Yes, I would say while it's kind of boring, it would be pretty status quo. No significant changes in terms of expectations or market demand. And we still have a very strong pipeline, as you mentioned, and expect to continue to be able to close and add new companies in this year and going forward.

Jeffrey Stevenson: Great. Thank you.

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

Doug Black: Okay. Thank you all for joining us today. We very much appreciate your interest in SiteOne and look forward to speaking to you again at the end of the next quarter. Again, a big thank you to our associates, our customers and suppliers, it's a team sport and we certainly are honored to be joined with them in building our great company. Take care.

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