Earnings Call Transcript - SITE Q2 2025

Operator, Operator

Greetings and welcome to the SiteOne Landscape Supply Second Quarter 2025 Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Guthrie, Executive VP and Chief Financial Officer. Thank you. You may begin.

John T. Guthrie, CFO

Thank you and good morning, everyone. We issued our second 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 am joined today by Doug Black, our Chairman and Chief Executive Officer; 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.

Doug Black, CEO

Thanks, John. Good morning and thank you for joining us today. We are pleased to achieve continued solid results during the second quarter with 3% net sales growth and 8% growth in adjusted EBITDA, despite broader economic uncertainty and softness in our end markets. Our teams are executing our initiatives well, yielding excellent SG&A leverage, good gross margin improvement and meaningful market share gains. We also benefited from a more favorable price cost environment with overall flat pricing for the quarter. Finally, we added 2 excellent companies to SiteOne in July, expanding our full product line capability in those local markets. Overall, with strong teams, a winning strategy, and excellent execution of our commercial and operational initiatives, we are delivering solid performance and growth in 2025, despite softer end markets and are in a strong position to accelerate our performance and growth in 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 second 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 a strong footprint of more than 680 branches and 4 distribution centers across 45 United States and 6 Canadian provinces. We are the clear industry leader over 3 times the size of our nearest competitor and larger than the second through tenth combined. Yet we estimate that we only have about an 18% share of the very fragmented $25 billion wholesale landscaping products distribution market. Accordingly, our long-term opportunity to grow and gain market share remains significant. We have a balanced mix of business with 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 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 have come a long way in building SiteOne and putting the teams and systems in place to fully execute our strategy at a high level across each of our product lines. In the current challenging market environment, we are making good progress in leveraging our capabilities to drive tangible results with consistent market share gains, improved SG&A leverage, and steady gross margin improvement. Through our commercial and operational initiatives, we believe that we are delivering industry-leading value for our customers and suppliers and solid performance improvement and growth for our shareholders this year. Importantly, we are gaining momentum for continued success in the years to come. These initiatives are complemented by our acquisition strategy, which fills in our product portfolio, moves us into new geographic markets, and adds terrific new talent to SiteOne. Taken all together, we believe our strategy creates superior value for our shareholders through organic growth, acquisition growth, and EBITDA margin expansion. On Slide 6, you can see our strong track record of performance and growth over the last 8 years. 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 margin dilution from the acquisition of Pioneer, a large turnaround opportunity with great strategic fit and from our other focus branches, as a result of the post-COVID market headwinds. We expect pricing to transition in 2025 from a negative 1% in the first quarter to a positive 1% to 2% in the fourth quarter, setting us up for more normal inflation and price realization in 2026. Furthermore, we are achieving excellent progress with Pioneer and our other focus branches year-to-date and expect to continue achieving improvements over the next several years as we bring their performance up to the SiteOne average. In summary, we are positioned to drive good adjusted EBITDA margin improvement in 2025 and in the coming years, as we execute our initiatives and as the market headwinds turn to tailwinds. We 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 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 second quarter highlights, as shown on Slide 8. We achieved 3% net sales growth in the second quarter with flat organic daily sales and 3% growth due to acquisitions. Organic sales volume was flat during the second quarter, reflecting broader end market softness, offset by continued share gains. Pricing was also flat, which was in line with expectations as we benefited from a more favorable price/cost dynamic as the quarter progressed. As expected, the growth in maintenance-related demand remained steady in Q2 and with the benefit of market share gains, we achieved 7% organic daily sales growth with our agronomic products. The repair and upgrade market remained soft as expected and the new residential construction market was also down, especially in markets that were strong last year, like Texas, Florida, Arizona, and California. Accordingly, our landscaping products were down 1% for the quarter, which we also believe reflects some market share gains. Overall, we believe that we are continuing to outperform the market consistently through our commercial initiatives, which with the recovery in pricing will allow us to achieve positive organic daily sales growth for the remainder of the year, even in a down market. Gross profit increased 4% and gross margin improved by 30 basis points to 36.4% due to higher price realization, gains from our initiatives, and contributions from acquisitions. Our acquisitions, which were primarily nursery and hardscapes businesses, operate at a higher gross margin but also operate at a higher SG&A. Our SG&A as a percent of net sales decreased 40 basis points to 23.9% compared to the prior year period. For the base business, SG&A as a percent of net sales on an adjusted basis decreased approximately 60 basis points, demonstrating our strong execution and follow-through on key initiatives, despite the flat organic daily sales. With disciplined expense management, improved operating leverage, and good progress with our focus branches, we were able to achieve meaningful leverage in our business. We're excited to continue gaining leverage through our initiatives aided in the second half by improved pricing and expected positive organic daily sales growth. Adjusted EBITDA for the quarter increased 8% to $226.7 million and adjusted EBITDA margin improved 60 basis points to 15.5% due to higher net sales, improved gross margin, and increased SG&A leverage. With pricing continuing to normalize and with our commercial and operational initiatives yielding stronger results, we are pleased to resume adjusted EBITDA margin expansion this year and expect continued improvement in the coming years. 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 improved 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 brands like Pro-Trade, Solstice Stone, and Portfolio. Collectively, these 3 brands grew by over 30% in the first half of this year. To further drive organic growth, we continued to increase our percentage of bilingual branches from 63% to 67% during the first half of the year 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 our over 590 outside sales associates. This year, our outside sales force is covering approximately 10% more revenue than in 2024 with no additional headcount, allowing us to achieve higher organic sales growth at a lower cost. Our digital initiative with siteone.com is also helping us to drive organic daily sales growth as customers who are engaged with us digitally grow significantly faster than those who are not. We've grown digital sales by over 130% in the first half of 2025. 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 we are 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 for delivery, while more accurately pricing this service. We believe that we can significantly lower our net delivery expense while improving the experience for our customers. So far this year, we have reduced our net delivery expense by over 40 basis points on delivered sales, which represents approximately 1/3 of our total sales. This is a major initiative and we expect to make significant progress this year and in the next 2 to 3 years. Last year, we mentioned that we are intensely managing our underperforming branches or focus branches to ensure that they have the right teams, 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 half, we improved the adjusted EBITDA margin of our focused branches by over 200 basis points 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 gaining momentum with our commercial and operational initiatives, which are improving our capability to drive organic growth, increase gross margin and achieve operating leverage. On the acquisition front, as I mentioned, we added 2 excellent companies to our family in July and have added 4 companies and approximately $30 million in trailing 12-month sales to SiteOne so far in 2025. We're having conversations with a lot of companies but many of the more advanced discussions are with smaller companies. So we expect that 2025 will be a lighter than normal year in terms of acquired revenue, even as we are aggressively cultivating key targets for future years. 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 and a 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.

John T. Guthrie, CFO

Thanks, Doug. I'll begin on Slide 9 with some highlights from our second quarter results. There were 64 selling days in the second quarter, which is the same as the prior year period. Organic daily sales were flat in the second quarter compared to the prior year period as solid growth in the maintenance end market was offset by softer demand in the new residential construction and repair and upgrade end markets. Overall, we saw both flat volume and flat pricing for the quarter. This was the first time since the second quarter of 2023 that price deflation did not negatively impact sales. Pricing improved sequentially from a 1% deflation in the first quarter to flat in the second quarter due to tariff-related supplier price increases and as we lapped some of last year's price decreases. We estimate our exposure to tariffs is approximately 10% to 15% of sales and in those products, we saw manufacturers start to pass through the tariff cost with higher prices. Price deflation for commodity products like PVC pipe and grass seed, which account for approximately 7% to 8% of annual sales continued to negatively impact sales growth, though the impact was smaller than in prior quarters. In the second quarter, pricing for PVC pipe was down approximately 15% year-over-year and pricing per grass seed was down approximately 9% year-over-year. We expect grass seed prices to decline further in the third quarter and be down 10% to 20% over the year for the remainder of the year. Taken all together, our revised outlook for pricing for the full year is approximately flat. We expect pricing to be flat in the third quarter due to seed deflation and up 1% to 2% in the fourth quarter. Given the changing nature of tariffs, there is greater uncertainty than normal in our output. Organic daily sales for agronomic products, which includes fertilizer, control products, ice melt, and equipment, increased 7% for the second quarter due to solid demand in the maintenance end market and market share gains. Organic daily sales for landscaping products, which includes irrigation, nursery, hardscapes, outdoor lighting and landscape accessories, decreased 1% for the second quarter due to softer demand in the new residential construction and the repair and upgrade end markets. Rainy weather across the Sun Belt and East Coast also contributed to the weaker landscaping products volume. Geographically, 5 out of our 9 regions achieved positive organic daily sales growth in the second quarter. Regions with a larger mix of agronomic products performed better. Texas, which was our strongest sales growth market last year, is facing significant headwinds this year due to the softer new construction end market. Acquisition sales, which reflect the sales attributable to acquisitions completed in 2024 and 2025, contributed approximately $41 million or 3% to net sales growth. Gross profit increased 4% to approximately $531 million for the second quarter compared to approximately $510 million for the prior year period. Gross margin for the second quarter expanded 30 basis points to 36.4% due to improved price realization, gross margin improvement initiatives, and a positive contribution from acquisitions with higher gross margins. Selling, general and administrative expenses, or SG&A, increased 2% to approximately $349 million for the second quarter. SG&A as a percentage of net sales decreased 40 basis points in the quarter to 23.9%. The SG&A leverage improvement reflects our actions to increase efficiency and better align operating costs with current market demand. For the second quarter, we recorded an income tax expense of approximately $45 million compared to approximately $40 million in the prior year period. The effective tax rate was 25.4% for the second quarter compared to 24.9% 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 2025 fiscal year effective tax rate to be between 25% and 26%, excluding discrete items such as excess tax benefits. Net income attributable to SiteOne for the second quarter increased 7% to $129 million due to increased net sales, improved gross margin, and SG&A leverage. Our weighted average diluted share count was approximately 45.1 million for the 3 months ending June 29, 2025 compared to 45.6 million for the prior year period. We repurchased approximately 466,000 shares for $54.3 million in the second quarter. This was our largest share repurchase quarter since we initiated the plan in October 2022. Adjusted EBITDA increased 8% to $226.7 million for the second quarter compared to $210.5 million for the prior year period. Adjusted EBITDA margin improved approximately 60 basis points to 15.5%. Adjusted EBITDA includes adjusted EBITDA attributable to noncontrolling interest of $1.8 million for the second quarter of 2025, compared to $0.9 million for the second quarter of 2024. 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 second quarter was approximately $1.06 billion compared to $1.01 billion at the end of the same period prior year. The increase in working capital is primarily due to increased purchases of inventory ahead of tariffs. Net cash provided by operating activities was approximately $137 million for the second quarter compared to approximately $147 million for the prior year period. The decrease in operating cash flow primarily reflects the higher inventory purchases. We made cash investments of approximately $17 million for the second quarter compared to approximately $113 million for the same period prior year. The decrease reflects reduced acquisition investment compared to the same period last year. Capital expenditures for the quarter were approximately $14 million compared to approximately $12 million for the prior year period. The increase reflects a real estate investment at one of our branches. Net debt at the end of the quarter was approximately $532 million compared to approximately $524 million at the end of the second quarter of the prior year period. Leverage was 1.3 times our trailing 12-month adjusted EBITDA, which is consistent with the prior year period. As a reminder, our target year-end net debt to adjusted EBITDA leverage range is 1 to 2 times. At the end of the quarter, we had available liquidity of approximately $578 million, which consisted of approximately $79 million cash on hand and approximately $499 million in available capacity under our ABL facility. Our priority from a balance sheet and funding perspective is to maintain our financial strength and flexibility that 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.

Scott Salmon, EVP, Strategy and Development

Thanks, John. As shown on Slide 11, we acquired 1 company in the second quarter and 2 more post-quarter bringing the total to 4 acquisitions year-to-date with a combined TTM net sales of approximately $30 million. Since 2014, we have acquired 102 companies with approximately $2 billion in TTM net sales added to SiteOne. Turning to Slides 12 through 14, you will find information on our most recent acquisitions. 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. On July 24, we acquired Grove Nursery, a single location wholesale distributor of nursery products in Northwest Minneapolis, Minnesota. The addition of Grove Nursery now enables us to provide a full range of products to our customers in the Twin Cities. Also on July 24, we acquired Nashville Nursery, a single location wholesale nursery in Northwest Nashville, Tennessee. Joining forces with Nashville Nursery further strengthens our position as the leading wholesale distributor of nursery products in Central Tennessee. Summarizing on Slide 15, 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 we noted during our first quarter earnings call, our acquired revenue may be lower this year but we have a large pipeline of deals in process and we are actively building relationships with many others. We have 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.

Doug Black, CEO

Thanks, Scott. With continued market uncertainty, elevated interest rates, weak consumer confidence, and low existing home sales, we expect the end market demand for landscaping products in total to be slightly down year-over-year in the second half of 2025. That said, as John mentioned, we expect pricing to continue to improve as deflation in grass seed and PVC pipe is more than offset by price increases in other products. We also expect to continue achieving market share gains through our commercial initiatives, which should contribute to our organic sales growth during the remainder of the year. In terms of end markets, we are seeing a decline in new residential demand this year, especially in the high-growth markets across the Sun Belt. Accordingly, we expect the demand for landscaping products for new residential construction, which comprise 21% of our sales to be down during the remainder of 2025. Continued elevated interest rates, housing affordability challenges, and lower consumer confidence are constraining demand. We expect this end market to be weak until some of these factors improve. The new commercial construction end market, which represents 14% of our sales, has remained resilient in 2025 so far and we believe it will be flat for the remainder of the year, though our customers have smaller backlogs. Bidding activity from our project services teams continues to be slightly positive. But with the ABI index remaining below 50 there is uncertainty in new commercial construction future demand. The repair and upgrade end market, which represents 30% of our sales has been soft again this year and with weak consumer confidence, low existing home sales, and economic uncertainty, we believe that repair and upgrade will continue to be down in 2025. Lastly, in the maintenance end market, which represents 35% of our sales, we achieved good sales volume growth in the first half as our teams gained market share. We expect the maintenance end market to continue growing steadily in 2025. Taken all together, we expect our end markets to be slightly down for the full year. Despite this backdrop, we expect sales volume to be slightly positive in the second half of 2025, with the benefit of our commercial initiatives. When coupled with modest price inflation, we expect low single-digit organic daily sales growth during the remainder of the year. Our sales growth in July so far supports this trend. We expect gross margin during the remainder of the year to be slightly improved compared to the same period in 2024, driven by our initiatives, improved price realization, and the contributions from acquisitions. With strong actions taken in 2024 to reduce SG&A and continued focus on branch improvement, sales productivity, and delivery efficiency, we expect to continue achieving excellent operating leverage during the remainder of the year. We expect solid adjusted EBITDA margin expansion for the full year 2025. In terms of acquisitions, as mentioned earlier, we expect to add more excellent companies to the SiteOne family during the remainder of the year, though we expect to add less revenue for the full year 2025 compared to 2024, due to the smaller average acquisition size. 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.

Operator, Operator

First question comes from David Manthey with Baird.

David John Manthey, Analyst

Doug, I think you mentioned that you expect to see continued SG&A leverage in the second half of the year, which is great to hear. Could you provide us with an update on whether the majority of the Pioneer integration is largely complete? Additionally, are there other significant efforts or consolidations in the latter half of the year that will contribute to that leverage? Given the scarcity of acquisitions and low activity levels, it's encouraging to see you prioritizing SG&A. Can you share some insights on what the main drivers are?

Doug Black, CEO

Yes. To address your first question, Pioneer is fully integrated and has become an established part of SiteOne. We are beginning to see the benefits of merging the branches and introducing new product lines in some of them. We've successfully reduced a significant amount of SG&A at Pioneer, and we are noticing the positive results. Therefore, Pioneer is progressing well and is included in our overall focus on underperforming branches. Currently, we have approximately 140 to 150 branches that we are working on to improve, and we have achieved an increase of over 200 basis points in those branches, partly due to efficient SG&A management. We are pleased with the progress made so far, and we expect this momentum to continue into the second half of the year and throughout the next couple of years as we enhance these branches, including Pioneer, to reach the SiteOne average. Additionally, we are making strides in our delivery efficiency, and that trend will persist. We are also increasing our sales force productivity, allowing us to cover more ground with a similar number of sellers. The impact of our website on organic growth supports our SG&A efficiency, and we are confident we can maintain our gains not only through the second half of 2025 but for the next several years as well.

David John Manthey, Analyst

That's great to hear. And second, on the share repurchase as a use of cash here, while things are slow and acquisitions are skewing smaller and fewer. I think $117 average price this quarter, the second quarter is going to age pretty well. But could you update us on what's left on the authorization? And then given you have a $0.5 billion of borrowing, capacity could we continue to see a more aggressive share repurchase through the remainder of 2025 as a use of cash?

John T. Guthrie, CFO

Yes, we have about $250 million in available capacity under the current authorization. As we've mentioned, if we're not using the cash for other purposes, such as acquisitions, one way we can return value to our shareholders is through share repurchase.

Ryan James Merkel, Analyst

My first question, Doug, is on the outlook. At this point in the year, would you point us to the midpoint of the adjusted EBITDA outlook? And what are the risks for the second half that you see? I know it's murky out there but if there were some specifics that you could point to, that would be helpful.

Doug Black, CEO

Yes, our guidance is a range, and we are confident that we will remain solidly within it. The markets are indeed soft, but we are outperforming the market and believe we can continue to do so. The main risk is related to the market's performance. We are concerned about whether it will deteriorate further or if there will be factors that lead to worse demand than anticipated. We feel we have a good understanding of the current market conditions. The maintenance market is expected to be stable, which is positive. However, new construction and repair and remodel sectors are declining, and we expect that trend to continue. The commercial sector has shown resilience. Overall, while our insights are strong, any unexpected downturn in the market could impact our organic growth, which is our main concern. We are optimistic about our initiatives and operational actions, but the risk still chiefly lies with market conditions. July showed encouraging signs, although it's just one month out of six, making the market risk significant.

Ryan James Merkel, Analyst

Fair enough. Regarding my second question, I was pleased to see the leverage in the quarter, and it's clear that you are focused on SG&A. As we consider the long-term target, Doug, that EBITDA margin target of 13% to 15%, could you provide insight on where you expect gross margins to fall within that range? Additionally, what are your thoughts on SG&A as a percentage of sales?

Doug Black, CEO

Yes, I would say that both aspects will contribute to our progress. We anticipate more leverage from SG&A than from gross margin improvements. You'll notice a balance as we work on our current improvements. These initiatives will continue to focus on small customers, private labels, and similar areas. We are optimistic about this. We expect SG&A leverage to play a bigger role as we align with our focus branches and implement our plans for associate productivity and delivery. Overall, it will be a combined effort, leaning more toward SG&A leverage, but both areas will help us move forward. We believe we will make significant progress this year, which we expect to sustain over the next couple of years, aiming for double-digit growth. However, this is not the limit of our potential. We are confident we can continue to improve margins over the next 5 to 7 years by solidifying best practices and gaining additional synergies from our acquisitions.

Damian Mark Karas, Analyst

So I think sales were a lot better than some investors had feared just given the tough market backdrop. And Doug, you've talked a few times about market share gains and outperforming the broader market. If you had to pinpoint the commercial initiatives that are really driving that outperformance, what would you point to? And how much visibility do you think you have kind of in that continuing into the back half of the year here?

Doug Black, CEO

Yes. In terms of market share visibility, the data in this industry is limited, but we receive positive feedback from our vendors and customers. We believe we are gaining market share. The initiatives driving this include a significant ramp-up in digital, which positions us at the forefront of the industry. Our website, siteone.com, enhances our engagement with customers, making us a market leader that fosters growth and customer loyalty. We are optimistic about the continued growth of digital for the next several years. Our sales force and customer excellence initiatives are improving our service consistency and driving new market share growth. Additionally, our private label initiatives ensure we remain competitive with good margins, thus gaining market share. We are also expanding into adjacent product lines where we currently hold a small market share, such as synthetic turf, erosion control, pest control, and equipment on the agronomic side. We have several product categories with single-digit market share that we can penetrate, and we are taking advantage of those opportunities. Those are the main drivers of our market share gains.

Damian Mark Karas, Analyst

That's really helpful. And then I just wanted to take a step back, thinking about the industry structure. Immigration numbers into the U.S. are down quite a bit, the first half year under the new federal administration. I'm curious what you've been hearing from your customers in terms of any impacts they might be seeing? And how are you thinking about further intensification, if you will, of labor scarcity and how SiteOne is prepared for it?

Doug Black, CEO

We maintain a close relationship with our customers regarding labor issues. Essentially, our customers are finding ways to get their work done. While there have been some effects from deportation on customers here and there, they are quite adaptable and can locate workers through various means. We collaborate with trade associations to attract individuals to the industry. Ultimately, they are managing to find the personnel necessary to complete their tasks. It's important to note that this industry has faced labor constraints for several years, peaking during the COVID period. As the market has softened, there has been some relief in labor scarcity. However, overall, our customers have what they need to perform their work, and we don't see labor as a significant barrier to the market right now. We believe the current constraint is more about market demand.

Stephen Edward Volkmann, Analyst

Doug, I wanted to go back to the focus branch initiative. I think you said 200 basis points. I assume that's kind of a year-over-year improvement. Is that the right pace to think about the next couple of years? And remind us the gap between those and kind of the rest of the company?

Doug Black, CEO

I'll let John handle this.

John T. Guthrie, CFO

Yes. We defined any branches or businesses with EBITDA below 6% as part of our focus for branch improvement. Currently, the group is showing low single-digit performance. We believe this is a reasonable expectation for growth moving forward. Naturally, the progress may be inconsistent, as some initiatives can be completed quickly within a year, while others may require several years. Overall, I think we're well-positioned to continue this trajectory for many years ahead.

Stephen Edward Volkmann, Analyst

Okay. Great. That's helpful. And then maybe just on the acquisition front. I can't remember if you've explained this, so I apologize. But why is it that the bigger deals are sort of on the back burner? Is there something about this environment that makes those folks want to hold off or just what's that dynamic that's driving that?

Scott Salmon, EVP, Strategy and Development

Yes, this is Scott. The key factor is that sellers determine their timing to sell. It's possible that, with the market being softer, larger players may recognize that their values have declined over the past couple of years. However, we still have a robust pipeline of companies across various sizes, and we feel very confident in our position as the preferred acquirer in the industry. We reached our 100th acquisition in March and are satisfied with our M&A team and the ongoing relationships we are developing with companies of all sizes. Therefore, we anticipate continuing to acquire companies of different sizes throughout the rest of the year and into the coming years.

Stephen Edward Volkmann, Analyst

Okay, I guess that's kind of what I was trying to get at, Scott. Is it like do we need to wait for the industry to improve a little before those things sort of reaccelerate? Or is this just maybe more random period of weakness? I don't want to say weakness but lull.

John T. Guthrie, CFO

I would describe it as a small sample size rather than a trend long term with regards to the size of the deals.

Doug Black, CEO

Yes, I would agree with that. It's really just a matter of timing. Sellers choose to sell when they are ready, not necessarily when we are ready to buy. This creates some unpredictability as deals come together and people move forward. I think you're observing that trend. We could have a large deal or a series of medium-sized deals come our way just as easily as we have seen this one. However, we are aware of the opportunities we're currently discussing in more advanced stages. Therefore, we anticipate that this year will be lighter than usual, but it could be offset by a more substantial year in the future. We cannot predict if that will be next year or in 2027 or later. However, we know that the average size of deals within our target group remains consistent with the past decade.

Matthew Adrien Bouley, Analyst

I wanted to inquire about the new residential construction market. You mentioned some softer trends, particularly in the second half of the year. Could you provide some insight into how you are performing in the new residential sector? It appears that the market is gradually weakening, and SiteOne typically experiences a bit of a delay in its response. It would be helpful to gain a clearer understanding of your position in that cycle and any additional details on your tracking in this area.

Doug Black, CEO

Yes. First of all, it's more down in those high-growth markets like Florida, Texas, Arizona, and California, which were previously strong. Overall, we believe the decline will be in the low single digits. It’s a bit difficult to estimate precisely, but our best guess for the total market across the U.S. and Canada is a low single-digit decrease.

Collin Andrew Verron, Analyst

Great execution in a challenging market environment. I wanted to discuss the new commercial market, which you expect to remain flat for the year. Can you provide any insights on how it has trended in the first half of the year? You mentioned some weaknesses earlier. Do you have any expectations on when that might start to show up in your backlog? Additionally, why do you think it hasn't appeared yet?

Doug Black, CEO

Yes, this aligns with what we've observed in the first half of the year, which has been relatively stable. The commercial sector tends to follow residential trends, and since residential has been declining, we anticipate that commercial will see a downturn at some point. We're monitoring this closely. Our project services group is actively bidding for commercial jobs, and their activity remains slightly positive. When we engage with our customers, they indicate they have work lined up for the remainder of the year, though their backlogs are smaller. Some of the high-growth commercial markets are seeing declines, but this situation varies across the country. We foresee potential challenges for the commercial sector, but we believe it will remain stable for the rest of the year, with future developments largely hinging on the performance of new residential sectors. This is our current outlook. Thank you, everyone, for being here today. We truly appreciate your interest in SiteOne. I want to acknowledge our associates for their excellent work in making us a great company, along with our suppliers and customers. We are very pleased with our current position and future direction, and we look forward to updating you next quarter after the third quarter.

John T. Guthrie, CFO

Thank you.

Operator, Operator

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