SiteOne Landscape Supply, Inc. Q1 FY2025 Earnings Call

Greetings and welcome to the SiteOne Landscape Supply, Inc. First Quarter 2025 Earnings Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. This conference is being recorded. It's now my pleasure to introduce your host, John Guthrie, Executive Vice President and Chief Financial Officer. Mr. Guthrie, you may begin.

Thank you, and good morning, everyone. We issued our first quarter 2025 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 now like to turn the call over to Doug Black.

Thanks, John. Good morning, and thank you for joining us today. We are pleased to achieve a solid start to 2025 with 4% net sales growth and 6% growth in adjusted EBITDA during the traditionally slower first quarter. Despite the challenging weather and later spring season than last year, our teams executed well and we benefited from our strong cost control actions in 2024. We also benefited from the continued moderation of price deflation as our overall price decline improved from negative 3% in the fourth quarter of 2024 to negative 1% in the first quarter of this year. Finally, we continue to execute our acquisition strategy by adding two excellent companies to SiteOne year-to-date, strengthening our teams and further expanding our full product line capability. Overall, with strong teams, a winning strategy and excellent execution of our commercial and operational initiatives, we continue to be in a good position to navigate through the market uncertainties and deliver solid performance and growth in 2025 and over the coming years. I will start today's call with a brief overview of our unique market position and our strategy, followed by some highlights from the quarter. John Guthrie will then walk you through our first 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 and address our latest outlook before taking your questions. As shown on slide four of the earnings presentation, we have a strong footprint of more than 690 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 two through ten combined. Yet we estimate that we only have about an 18% share of a 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 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 us multiple avenues to grow and create value for our customers and suppliers while providing important resilience in softer markets. Turning to slide five. 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 have 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. In the current challenging market environment, we are adopting new processes and technologies faster 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 builds in our product portfolio, moves us into new geographic markets and adds terrific new talent to SiteOne. Taken all together, we believe our strategy creates superior value for our shareholders through organic growth, acquisition growth and EBITDA margin expansion. On slide six, you can see our strong track record of performance and growth over the last eight years. 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 a great strategic fit. And from our other focus branches, as a result of the post-COVID market headwinds. We are continuing to evaluate the potential impact of recently announced tariffs, but now expect pricing to go from a strong headwind in 2024 to a slight tailwind in 2025, driven by price increases from our suppliers. Furthermore, with Pioneer systems fully integrated and operations restructured under new local management, and with progress on our focused branches, we expect to achieve solid performance improvement in 2025 that is not reliant on market growth. We are pleased to have completed our 100th acquisition in March with over $2 billion in acquired revenue added since the start of 2014. These milestones demonstrate the strength and durability of our acquisition strategy. Our pipeline of potential deals remains robust, and we expect to continue adding 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 seven shows the long runway we have ahead in filling in our product portfolio, which we aim to do primarily through acquisition, especially in Nursery, Hardscapes and Landscape Supplies categories. We are well connected with the best companies in our industry, and we expect to continue filling in these markets systematically over the next decade. I will now discuss some of the first quarter highlights as shown on slide eight. We achieved 4% net sales growth in the first quarter with an organic daily sales decline of 1%, offset by 5% growth due to acquisitions. Organic sales volume was flat during the first quarter, which we see as a good result given the early spring season and 5% volume growth that we experienced in the first quarter of last year. Weather this year has been challenging, but our volume growth turned positive in March and that momentum has continued into April. We believe that we are outperforming the market consistently through our commercial initiatives, and our end markets, though softer have remained resilient. Additionally, as I mentioned, pricing was only down 1% in the first quarter, and we expect this to flatten out and turn positive during the remainder of the year as price declines in PVC pipe and grass seed are more than offset by price increases in our other products. Gross profit increased 3% driven by our acquisitions, while our gross margin decreased by 30 basis points to 33% due to lower price realization and higher freight costs more than offsetting gains from our gross margin improvement initiatives. Note that the higher freight was partially due to early purchases of inventory into our distribution centers in anticipation of tariff-driven price increases. Our acquisitions, which were primarily Nursery and Hardscape businesses operate at a higher gross margin, but also operate with higher SG&A. Our SG&A as a percentage of net sales increased 30 basis points to 36.5%, due to our acquisitions, which have a larger effect on the traditionally low revenue first quarter. SG&A for the base business was down 3% as we realized the benefits of cost control actions taken in 2024, including those with Pioneer and our focus branches. We expect to achieve solid SG&A leverage on an adjusted basis in 2025, even with modest organic growth. Adjusted EBITDA for the quarter increased 6% to $22.4 million and adjusted EBITDA margin improved 10 basis points to 2.4%, due to higher net sales and improved SG&A leverage, partially offset by the absence of price realization and the dilutive effect of acquisitions. In terms of initiatives, we are executing specific actions to improve our customer excellence, accelerate organic growth, expand gross margin and increase SG&A leverage. For gross margin improvement, 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 not only improve our gross margin but also add to our organic growth as we gain market share in the small customer segment, as well as across product lines with our competitive private label products like Pro-Trade, Solstice Stone and portfolio. Collectively, these three brands grew 30% in the first quarter. To further drive organic growth, we continue to increase our percentage of bilingual branches from 63% to 65% during the first quarter and are executing Hispanic marketing programs to create awareness among this important customer segment. We are also making great progress with our sales force productivity as we leverage our CRM and establish more disciplined revenue-generating habits and processes among our inside sales associates and over 580 outside sales associates. Our outside sales force is covering approximately 10% more revenue this year than in 2024 with no additional headcount, allowing us to economically achieve higher organic sales growth. Our digital initiative with siteone.com is also helping us to drive organic daily sales growth as customers who are engaged with us digitally grew significantly faster than those who are not. We grew our digital sales by 140% in the first quarter on top of the 180% growth achieved in 2024. We continue to cultivate thousands of new regular users of siteone.com, helping customers to be more efficient and helping us to increase market share while making our associates more productive, a true win-win-win. Through siteone.com and our other digital tools, we are accelerating organic growth, and we believe outperforming the market. With the benefit of DispatchTrack, which allows us to more closely manage our customer delivery, we are now able to improve both associate and equipment efficiency in our customer delivery operations. We believe that we can significantly lower our delivery expense while improving the experience for our customers. This is a major initiative, and we expect to make significant progress this year in the next two to three years. Last year, we mentioned that we are intensely managing our underperforming branches or 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 consolidated or closed 22 locations in 2024, to strengthen our operations and better serve our customers at a reduced cost. In the first quarter, we achieved good progress with our focused branches, and we expect to gain a meaningful adjusted EBITDA margin lift for SiteOne in the coming years as we improve the performance of these branches. Taken all together, we are continuing to improve our capability to drive organic growth, increase gross margin and achieve operating leverage through our initiatives. On the acquisition front, as I mentioned, we added two excellent companies to our family since the beginning of the year with $20 million in trailing 12-month sales added to SiteOne. We are having conversations with a lot of companies, but many are focused on managing the current market uncertainties, and we are being careful given the unclear economic outlook. Accordingly, 2025 may be a lighter than normal year in terms of acquired revenue, even as we aggressively cultivate key targets for future years. Short-term challenges aside, we remain well positioned to grow consistently through acquisition for many years with an experienced acquisition team, broad and deep relationships with the best companies in the industry, strong balance sheet and an exceptional reputation for being a great long-term home for companies in our industry. In summary, our teams are doing a good job of managing through the near-term market environment leveraging our many opportunities for improvement, prudently adding new companies to SiteOne through acquisition and building our company for the long term. Now John will walk you through the quarter in more detail.

Thanks, Doug. I’ll start with some highlights from our first quarter results. We had 64 selling days in the first quarter, which is the same as last year. Organic daily sales dropped 1% compared to the same quarter last year, mainly due to cold weather that delayed the spring selling season, a softer repair and remodel market, and lower prices for commodity products. Overall, we experienced flat volume and 1% price deflation, with the deflation largely driven by commodities like PVC pipe, which decreased around 21%, and grass seed, which fell approximately 10%. As noted in the last call, we estimate our exposure to tariffs is around 10% to 15% of sales. Though our first quarter results weren't affected, we are beginning to see some cost increases related to tariffs from suppliers, which we anticipate the market will pass on. Therefore, our updated forecast for pricing in 2025 is flat to up 1%, a 100 basis point increase from last quarter. This outlook is based on current prices and announced increases from suppliers. Because of the evolving tariff landscape, we face higher than usual uncertainty in our outlook. For agronomic products, which include fertilizer, control products, ice melt, and equipment, organic daily sales rose 7% in the first quarter thanks to strong demand and volume growth for ice melt and pest control products. Conversely, organic daily sales of landscaping products, which encompass irrigation, nursery, hardscapes, outdoor lining, and landscape accessories, fell 4% due to lower prices, a softer repair and remodel market, and cold weather in many regions. Across our nine regions, four achieved positive organic daily sales growth in the first quarter, with weather conditions and challenging comparisons being the main factors differentiating regions. Sales from acquisitions made in 2024 and 2025 contributed about $45 million or 5% to our net sales growth. Gross profit rose 3% to approximately $310 million for the first quarter, compared to about $301 million last year. Gross margin for the first quarter contracted by 30 basis points to 33% because of lower price realization and higher freight costs, somewhat offset by positive contributions from acquisitions. Selling, general, and administrative expenses increased 5% to around $343 million for the first quarter, with SG&A as a percentage of net sales rising 30 basis points to 36.5%. The increase in SG&A and its percentage of net sales is primarily due to acquisitions. Base business adjusted SG&A actually decreased about 3% this quarter, thanks to last year's actions to rightsize our operations for the current market. For the first quarter, we noted an income tax benefit of approximately $9 million, down from roughly $10 million in the prior year. The effective tax rate was 25.5% for this quarter, compared to 33.4% previously. This decrease was mainly due to a reduction in excess tax benefits from stock-based compensation. We still project that the effective tax rate for the 2025 fiscal year will fall between 25% and 26%, excluding discrete items. We reported a net loss attributable to SiteOne of $27.3 million for the first quarter, up from $19.3 million the previous year. This increase was chiefly due to higher SG&A expenses, though it was partially offset by increased net sales. Our weighted average diluted share count was roughly 45.1 million for the three months ending March 30, 2025, down from about 45.3 million a year earlier. We repurchased about 29,000 shares for $3.4 million in the first quarter and bought an additional 142,000 shares for $16.6 million after the quarter ended. Adjusted EBITDA grew 6% to $22.4 million, compared to $21.1 million last year, with the adjusted EBITDA margin improving by approximately 10 basis points to 2.4%. This includes adjusted EBITDA attributable to non-controlling interest of $0.3 million for the quarter. Now, I’ll briefly update you on our balance sheet and cash flow statement. Working capital at the end of the first quarter was around $1 billion, up from $910 million at the same time last year, mainly due to increased working capital from acquisitions and higher inventory purchases in anticipation of potential tariffs. Cash used in operating activities rose about $30 million to around $130 million in the first quarter, primarily reflecting early inventory purchases. We made cash investments of around $21 million this quarter, compared to approximately $7 million for the same period in 2024, reflecting higher investment in acquisitions and capital expenditures. Capital expenditures for the quarter were approximately $15 million versus about $9 million for the previous year due to increased spending on branch equipment and improvements. Net debt at the end of the quarter stood at approximately $580 million, compared to about $508 million at the end of last year’s first quarter. Leverage increased to 1.5 times our trailing 12-month adjusted EBITDA, up from 1.3 times last year. As a reminder, we are aiming for a year-end net debt to adjusted EBITDA leverage ratio between 1 and 2 times. At the end of the quarter, we had available liquidity of about $524 million, which included approximately $57 million in cash and around $468 million in available capacity under our ABL facility. Our focus regarding our balance sheet and funding is to maintain financial strength and flexibility to support our growth strategy in any market conditions. I’ll now hand 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 first quarter and one post quarter for a combined trailing 12-month net sales of approximately $20 million year-to-date. Since 2014, we have acquired 100 companies with approximately $2 billion in trailing 12-month net sales added to SiteOne. Turning to slides 12 and 13, you will find information on our most recent acquisitions. On January 2, 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. On March 31, we acquired Green Trade Nursery, a single location wholesale distributor of nursery products in Jasper, Georgia. The addition of Green Trade extends our leading nursery position further into the fast-growing North Atlanta markets, providing our customers in these markets with greater access to high-quality nursery products. Summarizing on slide 14, 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. As Doug mentioned, the ongoing macroeconomic uncertainty tends to have a dampening effect on acquisition activity. Accordingly, our acquired revenue may be lower this year. That said, we have a large pipeline of potential deals that we are actively cultivating and significant runway to grow and create value through acquisitions this year and in the years to come. As always, 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.

Thanks, Scott. I'll wrap up on slide 15. There remains significant macroeconomic uncertainty associated with tariffs, inflation and interest rates that could negatively affect consumer confidence and the demand in our end 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. As John mentioned, with the recently announced increases from suppliers due to tariffs, we currently expect prices to be flat to up 1% for the full year 2025. This is an increase from our beginning of the year outlook. In terms of end markets, our current outlook is a bit more pessimistic compared to the beginning of the year. We continue to expect new residential single-family completions, which comprise 21% of our sales to be roughly flat in 2025. Continued high interest rates, elevated home values and lower consumer confidence are constraining demand. But with inventory being low, builders are continuing to build new homes. Feedback from our customers in this segment is mixed, and we expect stable demand for landscaping products in this end market during the remainder of the year. New commercial construction, which represents 14% of our sales was solid in 2024, and we believe it will remain steady in 2025. Bidding activity from our project services teams continues to be positive compared to 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 30% of our sales, was our weakest end market in 2024 with high-single-digit volume declines. During the second half of last year, we saw this end market stabilize, but we are off to a soft start with repair and upgrade in 2025. With lower consumer confidence, reduced existing home sales and high economic uncertainty, we believe that repair and upgrade will be down low single digits in 2025. Lastly, in the maintenance end market, which represents 35% of our sales, we achieved good sales growth in the first quarter as our teams gained profitable market share. We expect the maintenance end market to continue growing steadily in 2025. Taken all together, we expect our end markets to be flat to slightly down for the full-year. This backdrop and with the benefit of our commercial initiatives, we expect sales volume to be positive in 2025. When coupled with modest price inflation, we expect low-single-digit organic daily sales growth for the full-year 2025. Our current sales volume through April so far supports this trend. We expect gross margin in 2025 to be similar to 2024, driven by our initiatives and the contribution from acquisitions offsetting higher freight costs. With strong actions taken in 2024 to reduce SG&A and continued focus on branch improvement, sales productivity and delivery efficiency, we expect to achieve operating leverage in 2025, yielding solid improvement in our adjusted EBITDA margin. In terms of acquisitions, as Scott mentioned, we expect to add more excellent companies to the SiteOne family during the remainder of the year, though potentially less acquired revenue compared to 2024. With all these factors in mind, we continue to 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 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.

Thank you. We'll now be conducting a question-and-answer session. Our first question today comes from David Manthey with Baird. Please proceed with your questions.

Thank you. Good morning, everyone. First question, Doug, you mentioned DispatchTrack and your focused branch efforts. I was just wondering if you could define and kind of give us recent wins in each of those, just to give us an idea of how those are progressing and what we might expect going forward?

Yes, we have made significant progress in both areas. Starting with DispatchTrack, we have installed it at SiteOne over the past couple of years. This tracking software helps us monitor our trucks and their routes, and it allows us to notify customers about their delivery timings, enhancing our customer service. While we have seen customer service benefits, we are also working on consolidating our last leg of delivery. This involves shifting from dispatching from each branch to a centralized dispatch in key markets to optimize the efficiency of trucks and drivers. We monitor our delivery expenses, which are a substantial part of our SG&A, and we are seeing progress in reducing those costs. In the first quarter, we made good strides in lowering that expense, and this is part of a multi-year effort to improve SG&A leverage for the business. Regarding our focus branches, we are very pleased with the advancements made in the first quarter, particularly with Pioneer, where we consolidated and closed 22 branches, significantly reducing overhead. As we compare against last year, we are now experiencing the benefits of those overhead savings. We reported that base business overhead was down 3%, which can largely be attributed to Pioneer. There were also reductions in SG&A from our focus branches. As we look at the work completed in 2024 compared to last year, we are observing positive results there as well. The focus branches are also designed to enhance customer service, drive revenue growth, and improve gross margins, making this a comprehensive turnaround effort. While it is challenging to see organic sales and margin improvements early in the year, we are realizing SG&A improvements thus far.

Yes. Thanks for that. Sounds good. I believe you have about 430,000 customers. I know you're always trying to get more, and you're trying to get additional lines cross sold into those customers. But beyond that, could you talk about what efforts you're targeting in the coming year to try to get a larger share of wallet of those customers?

We are consistently working to increase our market share through two key strategies. First, we aim to enhance the spending of our existing customers by introducing additional product lines. Second, we are focused on attracting new clients, especially in the small customer segment where we currently have limited reach. Our overall market share stands at 18%, and while our share among large customers is considerably higher, our share with small customers is in the high single digits. This segment shops at various competitors, including Home Depot and Lowe's, but we have observed steady growth in these small customer accounts, which is outpacing our company's average growth. We believe that over time, we can raise this high single digit share closer to our average 18%, although this is a long-term goal that will not be achieved within the year. Additionally, we are focusing on expanding our reach among midsize and larger customers by improving our sales force productivity. We have segmented our sales approach, with key account managers handling large existing accounts while our business development managers seek new business opportunities. These BDMs have shown remarkable success in driving growth, aided by enhancements in our CRM system and sales management practices. Last year, our sales force covered 62% of sales, and this year that figure has risen to 72%, all without increasing headcount. Sales driven by our sellers tend to expand faster than the overall average at SiteOne, indicating positive progress as we enhance both coverage and training for our BDMs. Another initiative involves our inside sales associates, who serve two main purposes. Firstly, they contact new customers to welcome them and understand their business needs for better service—a process we previously handled at the branch level. This dedicated outreach allows us to be more effective in onboarding new clients. Secondly, these associates reach out to former customers to address their concerns and win them back. We have seen promising outcomes from these efforts, which help to improve customer retention and reduce turnover, ultimately supporting our goal to capture more market share. All of these initiatives underline our organic strategies to grow our share and consistently outperform the market.

That all sounds great, Doug. Thanks very much.

Our next question comes from the line of Ryan Merkel with William Blair. Please proceed with your question.

Hey, everyone. Good morning. I wanted to start with your expectation for organic sales growth in the second quarter. It was great to hear that April, I think, is positive. And I'm curious, can you do low-single-digit organic growth in the second quarter just based on what you see today? And it would also be helpful to know how much price you expect to see in the second quarter?

We believe we can achieve low-single-digit organic growth in the second quarter. As Doug mentioned earlier, the trends are leaning that way, especially as we enter the spring season. In terms of pricing, we anticipate it to be approximately negative 1% to flat for the second quarter. Many of the supplier increases due to tariffs are likely to take effect around the middle of the second quarter, with more expected in the latter half of the year. For now, our estimate for pricing in the second quarter is that it will be relatively flat.

Okay. That's helpful. And then you mentioned 10% to 15%, I think that was the direct impact from tariffs. So that's what you're directly importing. Just can you give us a few more details there? What products are you importing, where are they coming from? And how much price is included now in '25 guide from tariffs specifically?

The 10% to 15% figure mainly comes from indirect sourcing through suppliers, rather than direct imports. Our direct importing accounts for less than 1% or 2%. We understand that our suppliers have strong sourcing connections in places like Mexico and China, which are the two largest sources. This is primarily what we are seeing. The portion of our business that involves direct importing where we incur tariffs is very minimal, typically under 1%. Regarding price increases, most of them are below 10%, usually ranging from 4% to 8%. These increases often target specific lines sourced from overseas through those suppliers. While there are a few exceptions, they represent a relatively small part of our business. Overall, the majority of price increases are likely single-digit percentages.

It tends to be irrigation and lighting...

Lighting would be some impact.

Some landscape supplies, but irrigation, lighting and some landscape supplies like drainage, etc.

Okay. And you're passing on the price with your margin? That's my last question. I just want to make sure.

We plan on doing it. We expect the market historically has priced that way.

Our next question is from the line of Damian Karas with UBS. Please proceed with your question.

Hey, good morning everyone. Just a follow-up question on the tariffs. So correct me if I'm wrong, but I think like not an insignificant chunk of your supplies are coming from Mexico, that 10% to 15%. I think it's a decent amount of coming from there. So I'm just curious, like, do you know if a lot of those are meeting like the USMCA certification? Or is it kind of like the 25% tariff being applied to the majority of that?

We don’t directly pay or import anything from Mexico. I believe our suppliers have a mix, and what we receive is a combination as they try to gauge that.

Okay. All right. Well, I guess just thinking about the gross margin outlook now that you are seeing commodity prices stabilize and you're actually getting some positive prices elsewhere in the business. How are you thinking about that outlook for your gross margins?

It hasn't changed much for the year yet. We expect it to remain steady for the full year, with more positive positions expected in pricing compared to last year. However, as Doug mentioned, there will be some offsets in freight costs. Most of the improvement this year will likely come from SG&A leverage, and we will have to monitor how gross margins evolve throughout the year.

Understood. All right. Well, good luck. Thanks so much.

Our next question comes from the line of Charles Perron-Pich with Goldman Sachs. Please proceed with your question.

Thank you. Good morning, everyone. First, I want to talk about the inventory levels at the end of the quarter. I think you alluded that they were higher as you're preparing for some price increases across the different products. Can you talk about your approach to inventory management when you're reconciling this inflationary pressure against the willingness to pull forward some of that versus the uncertainty on the macro backdrop and managing that inventory for that?

We've been selective in identifying areas early on that we thought were at risk and specific products to try to get supply in at lower cost, but also even risk of disruption in the supply chain. So especially, for example, on products that potentially come from China to try to buy ahead on those specific items where possible. It's not always possible to get everything ahead, but certainly, we've been trying to be selective and be smart about getting inventory in so we can service our customers with that product.

Okay. That's helpful. And maybe second, you alluded to a softer M&A pipeline potentially this year given the macro environment. Again, just how do you balance your building cash to fund your future acquisition pipeline over time relative to using some of that for share repurchases and other uses of capital allocation in light of the recent stock performance?

It's always a balance. We are very selective. Our primary focus remains on the growth of this business and making good investments in acquisitions. However, when the stock performs well, it allows us to buy more and repurchase shares. We have a very strong balance sheet and will continue to maintain it while deploying our capital. At this current stock price level, share repurchases become more attractive and we support that approach.

Our next question is from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question.

Good morning. Thanks for taking my questions. I want to follow up on the gross margin discussion. I know it's kind of a slight downshift, but last quarter, I think you talked about gross margins being up year-on-year and now you're saying similar trying to understand the moving pieces a little bit better. It sounds like you think you can pass through the pricing with your normal margin and pricing turning positive. The freight dynamic, I would think if some of that's kind of preloading then that normalizes out over the course of the year. But maybe just help us a little bit more with how you're thinking about the kind of pros and cons of the flatter margin guide.

Yes. Our guidance for flatter margins reflects some changes that have already occurred. In January and February, our price realization was slightly lower than expected. As you noted, freight costs are still anticipated to be somewhat higher this year, likely affected by pre-purchasing during the quarter. We do plan to pass most of the price increases through. Overall, a rise of just 100 basis points signifies that price increases are not significant, especially when compared to two or three years ago. In general, our forecast remains relatively flat, with no major contributions from new acquisitions expected in the second half of the year. Initial projections showed a slight increase at the start of the year, but it is now more stable, and we will need to monitor how it develops over the rest of the year.

Got it. Okay. And then just shifting gears to the end market commentary. The new residential market is expecting mostly flat completions, and starts have certainly decreased year-to-date. Builders appear to be adjusting based on weaker order trends, and closing guides have lowered. So could you provide more insight into your underlying assumptions about starts, even though your focus is more on completions? How are you approaching this, and how has your perspective evolved as the year has progressed so far?

Yes, we are experiencing steady demand. Starts have been relatively flat, showing a year-over-year increase in March, but the trend has been uneven. We are receiving mixed signals for the second half of the year; some builders anticipate a decrease in completions, while others remain optimistic. Overall, it feels flat to us, but there is significant uncertainty in both residential and commercial markets. We are monitoring the situation closely. There hasn't been a major decline yet, and the information we are receiving indicates a mix of conditions. While there is potential for downside, we are confident in our ability to gain market share, supported by a solid maintenance and commercial market. Therefore, our guidance is for results to be flat or slightly down, which represents our current best outlook.

Got it. Okay, thanks, Doug.

Our next question is from the line of Matthew Bouley with Barclays. Please proceed with your question.

Hey, morning everyone. Thanks for taking the questions. So I guess sticking on the end market side, it sounds like your guidance change is reflecting kind of what you've seen to date and obviously, customer feedback as you've just mentioned. My question is to what degree is that also thinking about kind of the elasticity coming from these incremental price increases. I'm curious if there's any either historical context or just general thoughts on how volume could react to these 4% to 8% type price increases on those type of products?

One thing to consider is that in an installed landscaping job, the material cost accounts for only about 10% to 25% of the total expenses. The majority of that cost is attributed to contractor labor and their operating expenses. Therefore, a 4% or 5% price increase translates to only about a 1% increase in overall job costs. Material price fluctuations do not significantly affect demand because they represent a smaller portion of the total expenses. Instead, demand in landscaping is more influenced by labor cost inflation and similar factors. Historically, we have not observed that price increases dampen demand. The more significant risk to demand stems from market uncertainty and consumer confidence, which we believe is impacting the remodeling market. This poses a greater risk for us than material price increases, particularly at the levels we are currently seeing.

Okay. Got it, Doug. And then secondly, going down to the commodity products, maybe we just take them kind of one by one. It sounded like PVC was maybe down year-over-year, similar to what you saw in Q4. Fertilizer, I didn't hear you call out and then grass seed, maybe was down a little bit less. So I guess, just what are you seeing on a sequential basis across those three categories? And specifically, how are you thinking the grass seed part of it may turn out as that gets repriced this year? Thank you.

We have incorporated our expectations into our guidance. In relation to both of those items, there hasn't been much change since the first quarter. We do anticipate a single-digit decline in grass seed within our guidance. For PVC, we expect some additional decreases this year in PVC pipe, which is also reflected in our guidance. Currently, we're seeing a 20% decrease year-over-year specifically in PVC. However, we don't anticipate seeing an additional 20% decline by the end of this year. Overall, both of these items are likely to be deflationary for the entire year.

Okay. Thanks, John. Good luck, guys.

Thank you. The next question is from the line of Andrew Carter from Stifel. Please proceed with your question.

Thank you. Good morning. My first question is about tariffs. How sophisticated is your organization in evaluating supplier price increases and understanding their origins? This knowledge could enable you to push back if necessary, especially considering the importance of attracting customers in the current market. Are you noticing any increased sensitivity to pricing now that demand seems to be weaker? Additionally, with Home Depot acquiring Heritage, which is a major competitor, are there any risks we should consider?

Yes. I think we manage our suppliers as aggressively as anybody. Obviously, we're the leader in the industry. We're significantly larger than everybody else. And so we're very in tune to their input costs. And when they announce increases, we negotiate accordingly. So just that's an ongoing strength of ours.

I would also say our suppliers are very aware of the situation. They are closely monitoring demand and are carefully considering price increases, being mindful of the current economic environment. Our partnerships are long-standing, and our suppliers have extensive experience in this industry.

And then the Home Depot and Lowe's, I mean, obviously, there are titans in retail, but the Heritage division of that is, we're significantly larger than them, and our suppliers are serving the professional landscape industry. There's certainly a different route to market than the retail to the consumer.

I'll ask since you're on the front line, and it's been mentioned less frequently on calls due to tariffs. Regarding labor issues and the associated risks, are you observing any new uncertainties from your customers or their challenges? Additionally, if conditions become tighter, do you view that as an opportunity because of the time savings you provide, or more as a risk that affects everyone? Thank you.

Yes. No, good question. I mean we have not seen significant labor disruption in the market. Our customers have labor. Labor has always been tight in landscaping, and it continues to be so. So that gives us the ability to help our customers be more efficient and add value. So we take advantage of that. But in terms of dep portion and having an impact. We haven't seen it today. Our customers seem pretty confident that they're going to be able to sustain their work and continue to grow without an unusual constraint of labor. I don't want to say labor has always been, again, tight in the industry and it's a constant constraint. And so we work with our customers to help them be more productive.

Thanks. I'll pass it on.

The next question is from the line of Collin Verron with Deutsche Bank. Please proceed with your question.

Good morning. Thank you for taking my questions. I just wanted to concentrate a little bit on the cost actions you're taking. I'd be curious as to how much of a benefit you're expecting from those cost actions like your concentration on the underperforming branches in '25, and if the end market softens more than you were expecting right now, how much of those cost actions are still attainable? And what does the decremental margin look like in the underlying business?

A lot of that is already included in our guidance. If you look closely, you'll see that most of the improvement is reflected in our expectations. As Doug mentioned, our gross margin is anticipated to remain steady year-over-year. The improvement you see in our guidance mainly comes from effective management of SG&A and gaining higher leverage from it. It's also important to note that we're still facing wage inflation, which means employee costs are rising. However, the efforts we have made with our focused branches and various initiatives to enhance productivity are significantly helping to offset these costs this year.

Yes. If market conditions worsen, we can reduce labor, which is our largest SG&A expense. We also have other SG&A costs that are more flexible and will naturally decrease. We can adjust labor according to the market; if sales decline in certain areas, we will reduce staff there while maintaining support in regions that are experiencing growth. We believe we can enhance our profitability this year, and if the market softens, we are prepared to adapt and still achieve our goals.

That's helpful color. Thank you. And I guess just pivoting to free cash flow generation. Just any guardrails on how you're thinking about that for 2025?

No. We expect to keep improving cash flow. The only difference this year may be that we want to ensure we have enough inventory to handle any potential supply chain disruptions and to meet our customers' needs. Otherwise, we anticipate continued efficiency improvements in cash flow, similar to last year, though we may hold slightly more inventory to better serve our customers.

All right. Thank you for taking my questions.

Thank you. This now concludes our question-and-answer session. I'd like to turn the floor back over to Doug Black for closing comments.

Okay. Thank you all for joining us today. We very much appreciate your interest in SiteOne. We look forward to speaking to you again after the second quarter. I just want to take one more opportunity to thank our tremendous associates for all they do for our company and our stakeholders. Thank you.

Thank you. This concludes our conference for today. We thank you for your participation. You may now disconnect your lines at this time, and have a wonderful day.