SiteOne Landscape Supply, Inc. Q3 FY2024 Earnings Call

Greetings and welcome to the SiteOne Landscape Supply, Inc. Third 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. 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. You may begin.

Thank you and good morning, everyone. We issued our third quarter's 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 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 like to turn the call over to Doug Black.

Thanks, John. Good morning and thank you for joining us today. During the third quarter, we continued to experience significant market headwinds, including commodity price deflation, reduced repair and upgrade end market demand and the effects of Hurricane Helene, all negatively impacting our sales growth, gross margin, adjusted EBITDA growth and adjusted EBITDA margin. Against these headwinds, we were pleased to achieve sales volume growth of 2%, partially offsetting the 3% price decline. We also added 7% sales growth from acquisitions and welcomed one additional company to SiteOne during the quarter. We expect the challenging headwinds to continue through the fourth quarter, including the impact of Hurricane Milton, dampening the full year financial outcome for SiteOne. However, we remain encouraged by the underlying progress that we are achieving this year. Our teams are executing our commercial and operational initiatives well and driving organic sales volume growth above the market while achieving gross margin improvements that have mitigated some of the decline. At the same time, we have streamlined our base business teams and are in the final stages of integrating Pioneer, taking actions to improve the performance of our focused branches. Finally, we expect commodity prices to slowly normalize and anticipate a more stable pricing environment in 2025. All of these factors set us up for improved performance and growth next year and in the years to come. While we manage through the short-term headwinds, we are building our underlying capabilities, strengthening our teams and optimizing our branch network to serve our customers with a full range of landscaping products across the U.S. and Canada. With our well-balanced business, strong balance sheet, exceptional teams, improved capabilities and a robust acquisition pipeline, we remain confident in our ability to execute our strategy and create superior value for our stakeholders. I will start today's call with a brief review of our unique market position and our strategy, followed by some highlights from the quarter. John Guthrie will then walk you through our third quarter 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 latest outlook before taking your questions. As shown on Slide 4 of the earnings presentation, we have grown our footprint to more than 700 branches and four distribution centers across 45 U.S. states and six Canadian provinces. We are the clear industry leader, over three times the size of our nearest competitor and larger than companies two through ten combined. Yet we estimate that we have only about a 17% share of the very fragmented $25 billion wholesale landscaping products distribution market. Accordingly, our long-term growth opportunity remains significant. We have a balanced mix of business, with 65% focused on maintenance, repair and upgrade, 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 multiple avenues to grow and create value for our customers and suppliers while providing important resilience 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 and to be even more intentional in driving organic growth, improving our productivity and mastering the details of our business across all our product lines. Accordingly, we remain highly focused on our operational and commercial initiatives to overcome the near-term headwinds but, more importantly, build a long-term competitive advantage for all our stakeholders. These initiatives are complemented by our acquisition strategy which builds 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 eight years with consistent organic and acquisition growth. From an adjusted EBITDA margin perspective, we benefited from the extraordinary price realization due to rapid inflation in 2021 and 2022. In 2023 and now in 2024, we are experiencing headwinds as commodity prices come down. In 2024, we are also experiencing anticipated adjusted EBITDA dilution from the large Pioneer acquisition, which currently underperforms our average adjusted EBITDA margin. We believe that commodity price deflation will be reduced in 2025 and be balanced with modest price increases in most of our products. Furthermore, we expect to make significant progress with the performance of Pioneer as we will be fully integrated and rightsized in 2025. We are consistently outperforming the market in terms of organic growth and we continue to have ample opportunities to increase our gross margin and improve our operating leverage through our commercial and operating initiatives. In summary, we expect our earnings growth going forward to be enhanced with steady adjusted EBITDA margin expansion as we recover and drive forward toward our longer-term objective of 13% to 15%. We now have completed 96 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 new companies this year 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 third quarter highlights as shown on Slide 8. We achieved 6% net sales growth in the third quarter with an organic daily sales decline of 1%, offset by 7% growth due to acquisitions. Organic sales volume grew 2% during the quarter as our teams continue to gain market share in softer market conditions. Pricing declined 3% for the quarter, consistent with our expectations and in line with the second quarter, stabilizing from the 4% decline that we experienced in the first quarter. Price decline continues to be driven primarily by double-digit declines in PVC pipe and grass seed, while the prices of most other products remained flat with last year. We expect the rate of commodity price declines to moderate in 2025 and be balanced with modest price increases in most other products, creating a more stable pricing environment. Gross profit increased 6% driven by acquisitions and our gross margin improved 10 basis points to 34%. Our 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 are primarily nursery and hardscapes, operate at a higher gross margin but also operate with higher SG&A. SG&A as a percentage of net sales increased 170 basis points to 28.9% due to our acquisitions. SG&A for the base business increased 1% as we continue 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 complete the systems integration over the next two months and optimize staffing while gaining sales and delivery synergies. Accordingly, Pioneer provides SG&A leverage upside on a year-over-year basis in 2025. Adjusted EBITDA for the quarter decreased 4% year-over-year to $114.8 million, and adjusted EBITDA margin for the quarter declined by 100 basis points to 9.5% due to the negative organic growth, the absence of price realization and the dilutive effect of acquisitions. As I mentioned, after the second quarter, our acquisitions typically form at a similar adjusted EBITDA margin as the base business. But with the addition of Pioneer last year, with approximately $150 million in annual sales operating well below our adjusted EBITDA margin, we will experience meaningful adjusted EBITDA margin dilution from acquisitions this year. 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 improved inbound freight costs through our transportation management system. These initiatives are helping to mitigate the gross margin decline that we are experiencing in 2024 and should contribute to expanding gross margin in the future. We continue to increase our percentage of bilingual branches from 58% to 63% this year and are executing focused Hispanic marketing programs to create awareness among this important customer segment. We're also making great progress in our sales force 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. And the acquisition of Pioneer has allowed us to develop new functionality in our bulk material delivery and in our point-of-sale system, which we plan to further leverage with our existing businesses. We continue to make good progress in growing our digital sales, now up over 170% year-to-date, while cultivating thousands of new regular users of siteone.com. Growth in digital sales is encouraging to see as it increases connectivity with the customer, helping us increase market share while allowing our associates to focus more on creating value for our customers and less on transactional activity at the branch. During our last earnings call, we mentioned that we are intensely managing our underperforming branches, our focused 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 plan to consolidate or close 16 branches during the fourth quarter to strengthen our operations and better serve our customers at a reduced cost. John will discuss the near-term financial impact of these actions in more detail later in the call. Overall, we expect to gain a meaningful adjusted EBITDA margin lift for SiteOne as we improve the performance of these focused branches. Taken all together, we are continuing to improve our capability to drive organic growth, increased gross margin and achieve operating leverage through our commercial and operational initiatives. On the acquisition front, we added Millican Nurseries to our family during the quarter and year-to-date have completed acquisitions with approximately $155 million in trailing 12-month sales. With an experienced team, broad and deep relationships with the best companies, a strong balance sheet and an exceptional reputation, we expect to close more deals this year and remain well positioned to grow consistently through acquisition for many years. In summary, while we are certainly not pleased with our profitability in 2024, our teams are doing a good job of managing through the near-term headwinds, leveraging our many opportunities for improvement and building our company to create superior value for our customers, suppliers, and shareholders for the longer term. Now, John will walk you through the quarter in more detail. John?

Thanks, Doug. I'll begin on Slide 9 with some highlights from our third quarter results. We reported a net sales increase of 6% to $1.21 billion for the quarter. There were 63 selling days in the third quarter, which is the same as the prior year period. Organic daily sales declined 1% compared to the prior year period due to a 3% price deflation, partially offset by 2% growth in volume. Price deflation continues to be driven by commodity products like PVC pipe, which was down approximately 22% in the third quarter and grass seed, which was down approximately 15%. As we communicated on our second quarter call, price deflation is trending in the right direction but has proven stickier than we originally forecast at the beginning of the year, primarily due to additional price reductions for PVC pipe and grass seed. We expect price deflation to persist throughout 2024 and expect price deflation for the full year to be approximately 3%. Organic daily sales for agronomic products, which includes fertilizer, control products, ice melt and equipment, increased 2% due to strong volume growth resulting from lower prices, solid end market demand and share gains, which more than offset the continued price deflation. Organic daily sales for landscaping products, which includes irrigation, nursery, hardscapes, outdoor lighting and landscape accessories, decreased 2% for the third quarter due to price deflation and weakness in the repair and remodel end market. Geographically, five out of our nine regions achieved positive organic daily sales growth in the third quarter. We saw modest growth in the Midwest and Northeast due to strong agronomic sales. Additionally, Texas continued to benefit from strong demand in the construction end markets. We estimate that Hurricane Helene negatively impacted sales in the Southeast by approximately $7 million during the last week of the third quarter. We were fortunate to have less than $500,000 in estimated damages. All locations were opened in the second week of October, and we estimate the negative impact to sales from both Hurricane Helene and Milton in the fourth quarter will be an additional $8 million. Acquisition sales, which reflects sales attributable to acquisitions completed in 2023 and 2024, contributed approximately $77 million or 7% to net sales growth. Scott will provide more details regarding our acquisition strategy later in the call. Gross profit for the third quarter was $411 million, which was an increase of 6% compared to the prior year period. Gross margin for the third quarter improved 10 basis points to 34% due to the positive impact from acquisitions. Gross margin for our Base Business, however, was down approximately 50 basis points due to lower price realization. We expect the current pricing environment to last through the rest of 2024 and gross margin to be down slightly for the remainder of the year. Selling, general and administrative expenses, or SG&A, increased 12% to $349 million for the third quarter. SG&A as a percentage of net sales increased 170 basis points in the quarter to 28.9%. The increase in both SG&A and SG&A as a percentage of net sales primarily reflects the impact of acquisitions. Approximately $34 million out of our $37 million in SG&A growth was attributable to acquisitions, with the majority of that due to the addition of Pioneer and Devil Mountain. Excluding acquisitions, SG&A for our base business increased approximately 1% on a GAAP basis and 2% on an adjusted EBITDA basis. We expect to incur a one-time charge to adjusted EBITDA of approximately $5 million in the fourth quarter related to the consolidation or closure of 16 branches. Since most of these are branch consolidations, we expect to retain a significant portion of the branch revenue. These actions stem from our focused branch initiative and the optimization of our branch footprint. The charge does not include nonrecurring integration costs for the Pioneer business, which we expect will be elevated over the next two quarters following the system merger. For the third quarter, we recorded income tax expense of approximately $16 million compared to $18 million for the prior year period. The effective tax rate was 26.2% for the third quarter of 2024 compared to 23.4% for the prior year period. The increase in the effective tax rate was primarily due to a decrease in the amount of excess tax benefits from stock-based compensation. We continue to expect the 2024 fiscal year effective tax rate will be between 25% and 26%, excluding discrete items such as excess tax benefits. Net income attributable to SiteOne for the third quarter decreased $12.9 million to $44.4 million, reflecting the organic sales decrease and the reduced gross margin in our base business. Our weighted average diluted share count was approximately 45.6 million for the three months ended September 29, 2024, compared to 45.7 million for the prior year period. We repurchased approximately 14,000 shares for approximately $1.8 million in the third quarter. Adjusted EBITDA decreased 4% to $114.8 million for the third quarter compared to $119.8 million for the prior year period. Adjusted EBITDA margin decreased 100 basis points to 9.5%. Adjusted EBITDA for the third quarter includes adjusted EBITDA attributable to non-controlling interest of $0.8 million. 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 10. Working capital at the end of the third quarter was approximately $992 million compared to $919 million at the end of the prior year period. The increase in working capital is primarily due to the additional working capital from acquisitions. Excluding the impact of acquisitions, we are pleased to see inventory turns for our base business continue to improve due to better inventory management. Net cash provided by operating activities was approximately $116 million for the third quarter compared to approximately $89 million for the prior year period. The increase in operating cash flow primarily reflects seasonal timing differences in working capital. We made cash investments of approximately $21 million for the third quarter compared to approximately $134 million for the same period in 2023. The decrease reflects less acquisition investment in the third quarter of 2024 compared to the same period in 2023. Net debt at the end of the quarter was approximately $449 million compared to approximately $446 million at the end of the third quarter of 2023. Leverage at the end of the third quarter was 1.2x trailing 12-month adjusted EBITDA compared to 1.1x in the prior year period. As a reminder, our target year-end net debt to adjusted EBITDA leverage range is 1x to 2x. At the end of the quarter, we had available liquidity of approximately $647 million, which consisted of approximately $86 million of cash on hand and approximately $561 million in available capacity under our ABL facility. On July 2, we took advantage of favorable market conditions and refinanced our term loan, extending the maturity by two years to March 2030 and reducing the interest rate by 25 basis points to term SOFR plus 175 basis points and increasing the size by $25 million to approximately $393 million. Our priority from a balance sheet and funding perspective is to maintain our financial strength and flexibility so we can execute our growth strategy in all market environments. I will now turn the call over to Scott for an update on our acquisition strategy.

Thanks, John. As shown on Slide 11, we acquired one company in the third quarter for year-to-date combined trailing 12-month net sales of approximately $155 million. Since 2014, we have acquired 96 companies with approximately $1.9 billion in trailing 12-month net sales added to SiteOne. Turning to Slide 12. You will find information on our most recent acquisition. On July 1, we acquired Millican Nurseries, a wholesale distributor of nursery products located near Concord, New Hampshire. The addition of Millican extends our already strong nursery position in the Northeast to better serve the greater Boston and New Hampshire markets. Our acquisitions continue to add terrific talent to SiteOne and move us forward toward our goal of providing a full line of landscape products and services to our customers in all major U.S. and Canadian markets. Summarizing on Slide 13, our acquisition strategy continues to create significant value for SiteOne. With a strong balance sheet and a robust pipeline across all lines of business and geographies, we expect to welcome additional outstanding companies to SiteOne this year and in the 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 joined the SiteOne family. I will now turn the call back to Doug.

Thanks, Scott. I'll wrap up on Slide 14. We are now three quarters of the way through 2024. Year-to-date, our organic daily sales have declined 2% with 1% volume growth, offset by a 3% decline in pricing. We expect this trend to continue through the fourth quarter, with price declines more than offsetting sales volume growth, yielding low single-digit organic daily sales decline. In terms of end markets, we expect new residential construction, which comprises 21% of our sales to be roughly flat for 2024. 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 are seeing stable demand for landscaping products in this end market. New commercial construction, which represents 14% of our sales, has continued to be solid in 2024 and we believe it will remain steady for the full year. Bidding activity from our project services teams continues to be slightly positive compared to the prior year, which is a good indicator of continued demand. Our customer backlogs remain solid and we believe the commercial end market will be flat this year. The repair and upgrade market, which represents 31% of our sales, continues to be soft this year and we expect this end market to be down high single digits in 2024. Lastly, we have seen good volume growth in the maintenance category, which represents 34% of our sales. Our teams have done a terrific job gaining profitable market share in the maintenance category, overcoming significant price deflation in grass seed and achieving positive overall sales growth. This backdrop, we now expect our organic daily sales growth to be down 1% to 2% for the full year 2024 with price deflation of approximately 3%. We expect gross margin in 2024 to be slightly lower than 2023, with lower price realization more than offsetting our initiatives and the impact of acquisitions. We expect SG&A as a percentage of sales to be higher for the full year, with a decrease in organic daily sales and as acquisitions, including Pioneer, dilute our operating leverage. Additionally, as John has mentioned, we expect to take a charge of approximately $5 million to adjusted EBITDA from the consolidation or closure of 16 branches in the fourth quarter. Accordingly, we expect our adjusted EBITDA margin in 2024 to be lower than 2023. 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. With all these factors in mind, we now expect our full year adjusted EBITDA for fiscal 2024 to be in the range of $370 million to $380 million. This range includes the affected $5 million charge for branch consolidations and closures. The 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. Operator, please open the line for questions.

The first question is from Ryan Merkel from William Blair.

Thanks for the question. I guess, first off, I wanted to ask about sales. If I add back the hurricane impact, organic sales is coming in a good bit better than you thought in 3Q and 4Q. So Doug, can we view this as signs of stabilization in the end markets and perhaps doing a better job on market share gains?

Yes, I think it's a bit of both, Ryan. As we mentioned, we're still seeing a weak repair and remodel market. That really hasn't changed. And so we're seeing the volumes down there. But across our portfolio, we are getting more consistent on gaining market share. And I think that's helping us to outperform the market. I do believe our maintenance and really the new construction markets are pretty resilient. I mean we see those as being flat. But when you take together our market share ability, we've been working on this for several years. We feel we're at a higher level now than we were last year and years prior. So that's certainly helping us.

Got it. Okay. And then, Doug, you said something interesting during your remarks, you said growth you thought could be enhanced going forward and you listed off a few things. Can you just pack that a little bit more and what you mean by seeing growth enhanced?

Right. Well, obviously, we're focused on strong organic growth. But that comment was related to our EBITDA growth. Because if you look at our adjusted EBITDA margin, obviously, we peaked in the COVID years and we know that was helped by extraordinary price realization. But some of that was real improvement. As that's come off, where we're going to land this year is going to be similar to where we were in 2019, but we've got some real headwinds with price deflation, dilution from Pioneer, etc., that are pulling us down below maybe where we should be at this time if you take away those factors. I think as we move into 2025 and 2026, we're going to see that material variance of price realization that we've lost with deflation come back to us. Unclear on the timing of that, but that will come back to us. We're very confident we'll turn Pioneer around, which has been dilutive. And our focus branches, which we had less of those going into COVID, we've had more coming out with the dynamics that have happened in our market. We feel pretty confident that those will turn. When you take that and you add it to our normal ability to improve gross margin, which is private label, small customers, etc., and our normal leverage that we get on the base business as we grow organically, then you get maybe a juicier EBITDA margin growth because the margin expansion comes back and we drive toward our longer-term objective. So that's my comment there. Going forward, we'll outperform in growth in EBITDA versus our sales growth because of those factors of recovering but also continuing to expand our EBITDA margin.

Got it. Okay. So bit of under-earning on margins this year but that could turn around.

The next question is from David Manthey from Baird.

First off, John, can you isolate the impact of price on agronomics products versus landscaping products?

Sure. The price for agronomic products decreased by 8%. Despite that, we achieved a strong result. The price for landscaping products saw a decline of 1%.

You mentioned that it's trending in the right direction but it's sticky. From that, I understand that prices are either flat or not increasing as quickly as desired, while still being down compared to last year. Could you clarify that? Additionally, based on the current prices for grass seed and PVC, when might we expect to see year-over-year prices stabilize?

I would like to clarify a couple of points. For our landscape products, we experienced a 2% decline, which actually rounds up to a 2% drop in price. Therefore, our volume for the quarter remained flat. In agronomics, we saw a 2% increase in growth but an 8% decrease in price. Overall, we achieved a 10% growth in value this quarter. We expect to see normalization in grass seed pricing around June or July next year, and a similar trend is anticipated for PVC pipe, due to market rollover. Currently, there is considerable volatility regarding these two products. Looking ahead to next year, we expect potential weakness in those areas, which could be balanced by positive performance in others. Grass seed and PVC pipe represent approximately 8% of our total sales, so modest gains in the remaining products may help mitigate the carryover effects and possible negative impacts from these two categories.

Okay. So just a minor lift in everything else could offset that pretty quickly. Can we talk about the branch closures? And is this a one-time thing? Or is this part of a more focused ongoing approach to managing that? Because when we look at the number of branches you have and Doug, we've talked about this before, I mean, 700 locations is a lot. If you look at revenues per location, you're pretty far below most of the other branch-based distributors that you'd comp against. So I mean, just if you could talk about that structurally, can you close the gap? Is that something you're focused on? Or is this kind of just a one-off thing while you continue to consolidate the market?

Right. Well, as we've done acquisitions over our history, we're routinely consolidating branches. That's kind of a normal thing; one or two a quarter, etc., or if we do an acquisition like Atlantic or, say, a Pioneer, we're going to have some redundancy and we're going to consolidate those branches. I think what we've done in the near term or what we're doing now is we've really taken a hard look at these focused branches that are underperforming, and we're being more aggressive in the consolidation of the branches that when we look at it hard, our field likes to keep branches and keep them going and try to make them work. As we've taken a harder look, we're taking a more aggressive approach. In that case, it is kind of a one-time, let's call it a catch-up, if you will. And then going forward, we'll continue to consolidate but we'll probably be a little more aggressive about that on an ongoing basis. But this is kind of a one-time, let's say, catch up for us to kind of get the network right. As we move forward, we're constantly looking for opportunities and those will certainly come up as we do additional acquisitions.

The next question is from Damian Karas from UBS.

I was wondering if you could maybe talk a little bit more about these branch closure decisions. So you've got some 700 branches out there. How did you arrive at 16 is the right number? Could you maybe just share some details, like regionally, are they concentrated in one part of the country or another, more tilted towards any product category? Any details around that would be helpful. And when you piece it all together, how should we be thinking about the sales and bottom line impacts in 2025 from the combination of these branch closures as well as the Pioneer actions that you're taking?

Yes. Well, first of all, most of them are consolidations. And so we do plan to keep the majority of the sales involved in these branches. And second, they're really pretty spread out across product lines and across geographies. I think kind of available in each region, we have nine regions and there's a couple in each region that we've taken a hard look at and we feel that we can serve those customers and serve those sales without those branches. Pioneer has its own set of branch consolidations that are part of kind of the rightsizing, I guess, of that business. By Pioneer, we expect to gain momentum in sales in Pioneer as we've been able to now integrate. We're in the final stages. We're kind of, call it, half integrated. You've got Colorado and Arizona. Arizona is now fully integrated from a system perspective. In the next few weeks, Colorado will be on the new system. Pioneer had a very strong point of sale and delivery system that we've integrated with our system now; we can take and apply to our other businesses that are in bulk. So we've gotten some value that we can backward integrate on that. But we can now fully merge our teams, maximize the synergies across our sellers and branches, and really go after it with Pioneer. So we're excited to be able to grow Pioneer and rightsize the SG&A there and have it become a much stronger performer next year. So in terms of closures, our goal, obviously, is to get to a lower-cost network, keep the sales. In terms of Pioneer, we'll be accelerating the sales there because of our ability to work together on an integrated system.

That's really helpful. I'm just curious why you guys decided to leave the one-time restructuring charges in your adjusted EBITDA?

We have clear criteria for what we consider adjusted. Since these items were not related to recent acquisitions, we thought it was more appropriate to categorize them differently since many of them are part of the core business. You can see what actions we are taking.

The next question is from Keith Hughes from Truist.

We talked about Pioneer a lot on this call. Is it still negative EBITDA at this point? I think it was when you bought it? And what kind of negative impact is it going to have for the full year '24 given some of the struggles?

We're not giving specifics but it is a very low contributor. Let's just say that from that standpoint and it is measurably diluting on kind of our overall EBITDA return on sales.

Okay. I believe you mentioned that the base business SG&A in the quarter increased by 100 basis points compared to last year. Regarding the branch consolidation we’ve been discussing, it’s a limited number. Will that have a significant impact, or does it not seem like a major change? I'd like to hear any details you can provide.

Yes. We're not focusing on driving significant SG&A leverage for next year, but it's a contributing factor. We're thoroughly exploring all options. As you've observed, we've been closely managing SG&A in our base business, and we will continue to do so. The branch consolidations will assist with this, and you can likely see how that positively impacts us. Every bit contributes, making it another piece of the overall strategy as we advance into next year. Our goal is to enhance our margins by improving our gross margin, achieving SG&A leverage, and integrating strong acquisitions. Revitalizing Pioneer is also an important part of this strategy and could significantly impact next year's performance.

The next question is from Charles Perron-Piché from Goldman Sachs.

I want to go back first to your organic volume outperformance this quarter. Can you help us understand the underlying market contraction that you've been seeing through the third quarter? And how much are you outperforming your peers due to your commercial initiatives? And as you look into 2025, you have seen several initiatives in place with a loyalty program, the digital, the private label that are ramping. Would you expect this outperformance to expand as you look into 2025?

Yes. So I think if you look at the market and you look at the construction markets, they're roughly flat; the new construction market is roughly flat; maintenance is flattish; and the repair remodel, being 30% or a little over 30% of our mix down high single digits. You can do the math and say, okay, there's where the market is which would be down. So then, if you look at our volume growth being up 2%, that's the level of outperformance. We're quite encouraged by that, and we do expect that to gain strength as we move into next year. We're continuing to drive our private label. Our digital, we've had a very good year in digital, up 170%. It was more than doubled last year from the year prior. Now almost tripled, if you will, from last year. So that's gaining strength. We're working with our sales force, with our new sales force CRM. We've got kind of dispatch track on the delivery side which we've now fully rolled out. We're leveraging that. So we have a lot of initiatives that are starting to go into harvest mode from build mode. We think as that happens, that will continue to add to our strength and ability to gain market share. So we're excited about the future for sure.

Got it. That's good color, Doug. And on the hurricanes, first, thank you for providing the details on the impact for your results. But I would like to get your perspective on the potential for recouping those sales maybe next year as repair work is completed. And maybe more high level, what could be the impact these will have on the regional supply chain across the Southeast? We've heard from several growers that have seen important damages to their production. And how could influence pricing dynamics, maybe regionally in some parts of the Southeast?

To address your question, we don't believe it will affect the overall dynamic significantly. The supply chain is quite resilient, and operations usually ramp up quickly. We anticipate no lasting impact or notable changes in pricing. In terms of volume recovery, we expect to regain some of it, typically with landscaping, there’s a delay of about three months. We tend to be the last area addressed during repairs, so we expect to recover some sales next year, though not all of it. There will be a loss, mainly due to timing; it just gets postponed. We foresee some potential upside for next year, although it could be modest, particularly in the first half, and factors like the possibility of a hurricane could influence that.

The next question is from Mike Dahl from RBC Capital Markets.

I wanted to also ask one on Pioneer. I guess now we're kind of a year post-acquisition. It still seems like it's fairly dilutive. Just relative to your internal expectations, I know you always underwrite these thinking that there's going to be a ramp to get things back to your target or your average. But this maybe from the outside seems like it's gone slower than planned and now maybe more costly than planned. Can you elaborate a little bit more on versus your initial expectations how this deal is performing?

Yes. Well, one of the things I would say is that it's gone slower than planned, but that was an intentional decision. When we got into Pioneer, we really liked their point-of-sale system for bulk and the way they link that into their delivery. For that reason, we decided that, hey, we're going to take this and integrate it back into our system. Normally, we replace systems with our system. But in this case, we had to kind of merge our systems together and create a combined system for bulk point of sale and delivery that we think is going to be dynamite. And that just took time. We're just now integrating. In a normal acquisition, we would have integrated back in January or February. Once you get integrated, then you can drive out all the SG&A that's redundant. You can really get the best efficiency out of your teams and branches, and you can then start really putting the pedal down on organic growth. So that's been delayed. It was an intentional delay. It's taken us the year to get ourselves integrated, but we're at a point now where we can really go. For that reason, say it was slower than we would have thought going into the deal. But we're still just as excited about the potential of the deal. We feel like over the next couple of years, it's going to be a good ramp-up to the SiteOne average and be a big contributor. Remember, we're in Arizona and Colorado, these are two of the highest growth markets in the country. We have existing businesses that surround Pioneer, so we think we're uniquely able to get the synergies out of the deal. One last thing is, Pioneer is an exception. We virtually always buy well-run companies that are at our average and we take them and make them better. We decided to go for Pioneer which was a significant underperformer. Looking back at it, we're very happy with that decision. It's just we've become the leader in those markets now and will be forever. We're excited about it.

Okay, got it. Yes, that's helpful. And then, Doug, you did offer some comments and John offered some comments around at least from a pricing standpoint, some of the moving pieces into next year. You talked about the end markets into year-end. I mean, as you go into your business planning cycle for next year, I know it's early to have a crystal ball, but any early thoughts on how you see the end market dynamics at a macro level playing out in '25?

Yes. I hate to make that call this early. We'd rather wait until after our next call and after this year is finished up. I think if you talk to customers and suppliers, there would be some optimism around next year. But obviously, we'll have to see what happens with interest rates. A lot will happen between now and, say, January, February. I'll hold on that. But I would say, generally, it seems like our customers and suppliers are optimistic. We would naturally be optimistic as well. So I'd just leave it at that, but a lot of moving parts there, as you know, and I think too early to call.

The next question is from Andrew Carter from Stifel.

First question is about pricing. I know you mentioned being confident in a return next year. The index prices are set, but regarding structural prices, what feedback have you received from your suppliers about next year? Are they increasing prices? This year, they reduced prices overall. Is there a chance that could happen again next year?

Yes. I mean, you are correct; this year, they took the year off in terms of pricing, and that's one of the things that the deflation hit us, but there was no inflation with the other products to balance that. What we're hearing is that there will be modest inflation. Manufacturers are going to try to push through a little bit of price. We don't expect it to be drastic, but we would expect low single-digit pricing to be brought forward by our manufacturers. You never know what's going to take or stick, but that's the communication that we've heard so far with all the other products that we work with.

Then second question on the gross margin. Within that 50 basis point gross margin decline, number one, how much was the spread between what you're selling things at and what is in inventory? And then the second one is agronomics volume up 10%, landscaping up was flat. How much of a headwind to your gross margin was that kind of mix headwind? I assume it was a headwind. Could you quantify it?

The majority of the year-over-year price realization can be attributed to the relationship between pricing and inventory costs. There is also a small factor of slightly more aggressive pricing in the marketplace. This is the main reason for the 50 basis point reduction in the base business from that perspective. What was the second question?

Yes. It was on the mix between agronomic volume and landscaping volume that...

I would say that there probably isn't a significant year-over-year difference. The lower prices in seed contributed to this, especially since this is the seed quarter when we sell a much larger portion. The decrease in our margin was somewhat anticipated due to these lower prices, but they also aided in our volume growth, as there is some elasticity in the market. Following a weak spring season, the combination of a rebound and lower prices led to the volume growth, although likely at a lower margin. I'm specifically referring to the seed segment.

The next question is from Jeffrey Stevenson from Loop Capital Markets.

Have you seen any signs of improvement in R&R bidding activity over the last 90 days that gives you optimism demand could improve as we move into next year? And then also, have you heard from customers that elevated interest rates have delayed R&R project work this year which could move forward as rates move lower?

Right. So no, we haven't seen any improvement. What we've observed all year is that the high-end remodeling segment and customers who can pay cash are actually doing well. The middle-range remodeling market, where people typically take out loans or use home equity loans, is where we see weakness. This is indeed related to interest rates. People are hesitant to buy homes due to high-interest rates, and similarly, they are postponing projects because they don't want to borrow money at 6% or 7%. We believe that if interest rates decrease, it could support a rebound in remodeling activity, just as it would for existing home sales. Part of the softness in the remodeling market is due to a significant drop in existing home sales, driven by home prices and interest rates. If interest rates fall and more people start moving with existing homes, it would also lead to increased remodeling activity. These are the factors at play, but we haven't seen any signs of improvement yet, as interest rates remain relatively high.

Okay. No, that's very helpful, Doug. And then it seems like you've seen an acceleration of maintenance volumes as the year progressed with previously delayed projects moving forward with commodity deflation that you've seen. Do you believe these end market demand tailwinds will continue into 2025? Or do you believe most of these delayed projects from the past few years have been worked off this year?

No, I think there's still pent-up demand, I believe, in the remodel market. In the maintenance market, the maintenance market is pretty steady and we think it's going to continue to be steady. As John mentioned, we see prices coming way down. When seed prices went way up, the volumes shrunk. There was some demand degradation because the contractors are just going to use less seed. Now that seed prices have come back down, they're back to kind of normal spread rates, and that's driven some of the volume there. We also had, as John mentioned, a weaker spring seed season which has been balanced with a very strong fall seed season. So those are the dynamics going on in maintenance. But outside of seed, the maintenance volume is pretty steady, and we think that will continue to be steady going forward.

There are no further questions at this time. I would like to turn the floor back over to Doug Black for closing comments.

Okay. Well, thank you all for joining us today. We very much appreciate your interest in SiteOne and look forward to speaking with you again after the next quarter. I want to send another big thank you to our terrific associates, our suppliers and customers for supporting us and for supporting the development of a world-class company here at SiteOne. Thank you.

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