Earnings Call Transcript - SITE Q1 2024

Operator, Operator

Good morning, and welcome to the SiteOne Landscape Supply First Quarter 2024 Earnings Call. Please note this event is being recorded. I would now like to turn the conference over to John Guthrie, CFO. Please go ahead.

John Guthrie, CFO

Thank you, and good morning, everyone. We issued our first quarter 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 the call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Such risks and uncertainties include 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. During the first quarter, our teams continued to execute well, overcoming persistent commodity price deflation and poor weather in our stronger construction markets to achieve positive organic daily sales growth and good overall growth in net sales. So our near-term adjusted EBITDA results were dampened during the traditionally slower first quarter, we believe that we will be able to expand our adjusted EBITDA margin for the full year as we move through the selling season and lap the price declines experienced during the second half of 2023. We were also pleased to add two high-performing companies to SiteOne in April, including Devil Mountain, which is an exciting new platform for growth in our nursery product line in the Western United States. Both companies have talented teams and strong customer relationships, and expand our product lines and market presence in their respective markets. Through our acquisition strategy and our commercial and operational initiatives, we continue to build SiteOne for the long term as a world-class market leader, while delivering consistent performance and growth in the near term. With our well-balanced business, strong balance sheet, exceptional teams, improved capabilities and robust acquisition pipeline, we remain confident in our ability to navigate the current environment, and achieve continued success in 2024 and beyond. 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 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 690 branches and 4 distribution centers, across 45 U.S. states and 6 Canadian provinces. We are the clear industry leader over 3 times the size of our nearest competitor, and larger than 2 through 10 combined. Yet we estimate that we only have about 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. At the only national full product line wholesale distributor in the market, we also have 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 offers multiple avenues to grow and create value for our customers and suppliers while providing important resiliency in softer markets. Turning to Slide 5. Our strategy is to leverage the scale, resources, functional talent and capabilities that we have as the largest company in our industry, all in support of our talented, experienced and entrepreneurial local teams, to consistently deliver superior value to our customers and suppliers. We've come a long way in building SiteOne and executing our strategy. We have more work to do as we develop into a true world-class company. Accordingly, we remain highly focused on our commercial and operational initiatives to further build our capability to create value for all our stakeholders. These initiatives are complemented by our acquisition strategy, which fills in our product portfolio, moves us into new geographic markets and adds terrific new talent to SiteOne. Taken all together, our strategy creates superior value for our shareholders through organic growth, acquisition growth, and EBITDA margin expansion. If you turn to Slide 6, you can see our strong track record of performance and growth over the last eight years with consistent organic and acquisition growth and solid EBITDA margin expansion. We have done this while investing heavily in our teams and in new systems and technologies to build the foundation for SiteOne and to create superior capabilities for our customers and suppliers. Shifting to current conditions, we are experiencing commodity price deflation, which causes a temporary negative impact on organic daily sales growth, gross margin and adjusted EBITDA margin. We expect this negative impact to subside in the second half of 2024. Longer term, we have ample opportunities to increase our gross margin and improve our operating leverage through our commercial and operational initiatives. Accordingly, we remain confident in our strategy to drive revenue growth, both organically and through acquisition, while expanding our adjusted EBITDA margin towards our longer-term objective of 13% to 15%. We have now completed 93 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 that 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 first quarter highlights as shown on Slide 8. We achieved 8% net sales growth in the first quarter with organic daily sales growth of 1% and 7% added through acquisition. Organic sales volume grew by 5% as our teams continued to gain market share to supplement the sluggish market demand. Overall, pricing declined 4% for the quarter as double-digit deflation in commodity products like fertilizer, seed and PVC pipe more than offset very modest cost increases in our other product lines. Gross profit increased 5% driven by our acquisitions and our gross margin decreased 100 basis points to 33.3%. This result was in line with our expectations as the ongoing price deflation in commodity products continues to drive a near-term headwind to gross margin. Additionally, in the first quarter of 2023, we were still enjoying significant price inflation which aided gross margin, thereby providing a tougher comparable. Acquisitions increased our gross margin in the first quarter as our mix of acquired companies operate with a higher gross margin and higher SG&A. Our SG&A as a percentage of net sales increased by 140 basis points to 36.2%. This increase was driven by our acquisitions and by a significant increase in our healthcare costs in the base business. We expect the healthcare costs to stabilize during the remainder of the year, and we expect to gain good SG&A leverage on our base business as we move through the main selling season in the second and third quarters. As a result, we expect to achieve SG&A operating leverage for the full year 2024. We have a significant opportunity to achieve further SG&A leverage over the coming years as we implement our commercial and operational initiatives and grow our company. Adjusted EBITDA for the quarter declined 47% to $21.1 million, and adjusted EBITDA margin declined by 250 basis points to 2.3%. As the combination of lower organic daily sales, lower gross margin and higher seasonal SG&A from acquisitions affected our short-term financial results. I would note that despite the reduction in adjusted EBITDA for the quarter, our operating cash flow improved by $53 million versus the first quarter of 2023, with the benefit of our supply chain initiatives and good overall working capital management. In terms of initiatives, we continue to grow our small customers faster than our average, while also driving growth in our private label brands improving 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 biolegal branches now at 60%, and are executing focused Hispanic marketing programs to create awareness among this important customer segment. We are 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 rollout of MobilePro and dispatch tracking allows us to offer better customer service while also increasing the productivity of our branch staff and delivery fleet. The acquisition of Pioneer has allowed us to gain new functionality in both delivery and in our point-of-sale system, which we plan to develop further and leverage with our existing business. During the quarter, we continued to make good progress in growing our digital sales and cultivating regular users of siteone.com. This helps us increase market share while allowing our associates to focus more on creating value for our customers and less on transactional activity. We continue to introduce new functionality for siteone.com and are ahead of our goal to double sales online in 2024. 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 after the quarter with approximately $120 million in trailing 12-month sales added to SiteOne. With an experienced team, broad and deep relationships with the best companies, strong balance sheet and exceptional reputation, we remain well positioned to grow consistently through acquisitions for many years. In summary, our teams are doing a good job of managing through the near-term headwinds, leveraging our many opportunities for improvement and building our company for the long term. Now John will walk you through the quarter in more detail. John?

John Guthrie, CFO

Thanks, Doug. I'll begin on Slide 9 with some highlights from our first quarter results. We reported a net sales increase of 8% to $905 million for the quarter. There were 64 selling days in the first quarter, which was the same as the prior year period. Organic daily sales increased 1% in the first quarter compared to the prior year period, as volume growth of 5% more than offset price deflation for commodity products. Consistent with prior quarters, price deflation in the first quarter was driven by commodity products like PVC pipe, which was down 20% and fertilizer and grass fleet, which were down 13% and 15%, respectively. We expect price deflation to be a headwind but moderate through the third quarter of 2024 as we fully lap the price decreases of 2023. For the full year fiscal 2024, we now expect price deflation at the high end of our 1% to 2% range. Organic daily sales for agronomic products, which include fertilizer, control products, ice melt, and equipment, increased 10% for the first quarter due to strong volume growth resulting from lower prices, solid end market demand, market share gains, more snow events, and an earlier start to spring in many key northern markets. We saw double-digit volume growth for ice melt, equipment, fertilizer, and control products, which more than offset the price deflation in many of those same products. Organic daily sales for landscaping products, which include irrigation, nursery, hardscapes, outdoor lighting and landscape accessories decreased 2% for the first quarter due to lower prices for products like PVC pipe and unfavorable weather in many key construction markets. Geographically, 5 out of our 9 regions achieved positive organic daily sales growth in the first quarter. We saw double-digit organic sales growth in the Midwest, which benefited from solid demand, less rain, and an earlier start to the spring season. Conversely, we saw organic sales declines in Southeast markets due to tough comps and less favorable weather. Acquisition sales, which reflect sales attributable to acquisitions completed in 2023, contributed approximately $62 million or 7% in net sales growth. Scott will provide more details regarding our acquisition strategy later in the call. Gross profit for the first quarter was $301 million, which was an increase of 5% compared to the prior year period. Gross margin decreased 100 basis points to 33.3%, primarily due to lower price realization, partially offset by the positive impact from acquisitions. We benefited from a rapid rise in market prices relative to our lower inventory costs on the way up. The drop in market prices relative to our higher inventory cost has created a temporary headwind on the way down. We are managing through the headwinds and expect year-over-year gross margin comparisons to improve as we move into the selling season. The first quarter of 2023 should be our CapEx gross margin comp for fiscal year 2024. Selling, general and administrative expenses, or SG&A increased 12% to $328 million for the first quarter. SG&A as a percentage of net sales increased 140 basis points in the quarter to 36.2%. The increase in both SG&A and SG&A as a percentage of net sales is primarily due to the impact of acquisitions. Excluding acquisitions, SG&A for our base business increased 2%, with most of that increase attributable to an increase in healthcare costs. For the first quarter, we recorded an income tax benefit of approximately $10 million compared to a benefit of approximately $3 million in the prior year period. The effective tax rate was 33.4% for the first quarter of 2024 compared to 37.5% for the prior year period. The change in the effective tax rate was primarily due to an increase in the amount of excess tax benefits from stock-based compensation. Excess tax benefit of $2.3 million was recognized for the first quarter of 2024 compared to $0.8 million for the prior year period. 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. We recorded a net loss of $90.3 million for the first quarter of 2024, compared to a net loss of $3.4 million for the prior year period. The net loss was attributable to our higher SG&A and reduced gross margin, partially offset by our increase in net sales. Our weighted average diluted share count was $45.3 million compared to $45.0 million for the prior year period. The shares used in the calculation of diluted EPS this quarter do not give any effect to any dilutive securities as inclusion would decrease the net loss per common share. Adjusted EBITDA decreased 47% to $21.1 million for the first quarter of 2024 compared to $39.8 million for the prior year period. Adjusted EBITDA margin decreased 250 basis points to 2.3%. Now I'd 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 first quarter was $910 million compared to $960 million at the end of the prior year period. The decrease in net working capital was primarily attributable to our supply chain initiatives. Inventory turns increased due to an improved replenishment and reduction of excess inventory. Cash used in operations decreased to approximately $99 million in the first quarter compared to approximately $153 million in the prior year period. The decrease in cash used in operations was primarily due to a lower seasonal inventory build resulting from improved replenishment capabilities. We made cash investments of approximately $7 million for the first quarter compared to approximately $40 million for the same quarter in 2023. The decrease reflects the decline in acquisition investments in the first 3 months of 2024 compared to the same period of 2023. Net debt at the end of the quarter was approximately $508 million, compared to approximately $586 million at the end of the first quarter of 2023. Leverage at the end of the first quarter was 1.3x our trailing 12-month adjusted EBITDA, which was flat with our prior year period. As a reminder, our target year-end net debt to adjusted EBITDA leverage range is 1 to 2x. At the end of the quarter, we had available liquidity of approximately $539 million, which consisted of approximately $41 million cash on hand, and approximately $498 million in available capacity under our ABL facility. 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 two companies in April for a combined trailing 12-month net sales of approximately $120 million. Since 2014, we have acquired 93 companies with approximately $1.9 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 April 26, we acquired Eggemeyer, a single location wholesale distributor of bulk landscape supplies. The acquisition of Eggemeyer complements our recent acquisitions of other Landscape Supplies and Adams Wholesale, allowing us to provide bulk landscape supplies to our customers in the high-growth markets of San Antonio and Austin, Texas. On April 30, we acquired a 75% interest in Devil Mountain Wholesale Nursery, a wholesale distributor and grower of nursery products with 14 locations across the state of California. The addition of Devil Mountain makes SiteOne the leader in wholesale nursery distribution in California, and completes our full product line offering for our customers in the state. Devil Mountain is a high-performing company with a terrific team that will help spearhead our nursery growth not only in California but also across the Pacific Northwest and Mountain states where we currently have a very low nursery market share. The transaction includes put and call options for the remaining interest in future years. 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 14, 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 are confident that we will be able to continue adding more outstanding companies to SiteOne this year. 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.

Doug Black, CEO

Thanks, Scott. I'll wrap up on Slide 15. With 4 months of 2024 behind us, our outlook for our end markets has not significantly changed, and we expect to continue gaining market share with our strong teams, executing our commercial and operational initiatives. In terms of end markets, we continue to expect new residential construction, which comprises 21% of our sales to grow modestly in 2024. Despite higher interest rates, builders are busy and optimistic for the full year, capitalizing on the continued shortage of homes and solid home demand. This should produce growth for landscaping products in this end market, especially in the second half. 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, which is a good indicator of continued demand. Our customer backlogs remain solid, and we believe that the commercial end market will be flat to slightly up this year. The repair and upgrade market, which represents 31% of our sales, continues to be soft but seems to have stabilized at lower levels of demand. Accordingly, we expect repair and upgrade demand to be slightly down this year. Lastly, we have seen strong volume growth in the maintenance category, which represents 34% of our sales. We expect this market to grow in the low single digits in 2024, as contractors and end users take advantage of lower commodity prices and continue to restore application rates from the depressed levels in 2022 and 2023. In terms of pricing, commodity price deflation has been a bit more persistent this year than we had previously expected, resulting in an overall 4% price decline for the first quarter. That said, as John mentioned, we still expect commodity price deflation to moderate in the second half as we lap the price decreases in 2023. Overall, we now expect prices to be down approximately 2% in 2024. This backdrop, we still expect our organic daily sales growth to be in the low single digits for the full year 2024, with steady volume growth more than offsetting the 2% expected price decline for the year. We now expect gross margin in 2024 to be similar to 2023, with the negative effect of price deflation offset by our initiatives and the impact of acquisitions. We expect to achieve SG&A leverage as we drive productivity improvements in the base business, more than offsetting the negative impact of higher SG&A in our acquisitions. Accordingly, we expect to improve our full year adjusted EBITDA margin in 2024. In terms of acquisitions, as Scott mentioned, we have a strong pipeline of high-quality targets and we will continue to add excellent companies to the SiteOne family as we move through the year. All these factors in mind, we continue to expect our full year adjusted EBITDA for fiscal 2024 to be in the range of $420 million to $455 million. This range does not factor any contribution from unannounced acquisitions. While this does include the positive contribution from the two recent acquisitions, we are continuing to take a conservative approach as we navigate deflationary pressures and an uncertain macroeconomic environment. 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 like to also 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

The first question comes from Ryan Merkel with William Blair.

Ryan Merkel, Analyst

I wanted to start off just getting some context on the first quarter miss relative to the Street. It looks like it's SG&A and then also price deflation. I'm curious, did you guys expect SG&A as heavy as it was in the first quarter? And then put the price deflation in some context, because it sounds like it's only a little worse than you expected. But correct me if I'm wrong on that.

John Guthrie, CFO

SG&A came in as we anticipated for the year when considering the acquisitions. In our base business, it grew only 2%, which was expected. However, we experienced higher health insurance claims, which were somewhat unexpected and amounted to several million dollars. Overall, SG&A aligned closely with our expectations. It's worth noting that this is a shoulder quarter, meaning we typically have lower sales, as it occurs before the spring season, which significantly increases operating leverage.

Doug Black, CEO

In terms of pricing, the deflation was slightly more persistent than we anticipated. We expected a gradual decrease in the first quarter, but that hasn’t happened. PVC pipe prices declined further in some commodities, but we now see stabilization at this lower level in our forecast as we begin to compare to that. We expect improvements starting in the second quarter, with a more significant rebound in the second half of the year. We project full-year pricing to decrease by 1% to 2%, and I believe it will actually be down 2%, reflecting the ongoing deflation we experienced in the first quarter. This situation impacts our gross margin, especially since we faced a difficult comparison from last year when we were still seeing inflation and benefiting from material balance in the first quarter. As the year progressed, that environment shifted negatively. Thus, not only are we facing declines, but we're also comparing against the toughest period of the year. Overall, I would say the gross margin was affected more than we had expected. For the entire year, we anticipate that the overall gross margin will be similar to what it was in 2023.

Ryan Merkel, Analyst

Okay. That's helpful context. When I saw the headline, I was surprised you didn't lower the full year guide, but now that you've explained that, it makes sense. Let me just ask on gross margins then. I think, John, you said it would increase in the selling season. Should we interpret that as 2Q? You should have gross margins flat year-over-year, maybe up and just speak to the drivers.

John Guthrie, CFO

Yes. I think we'll be much closer to flat than the 100 basis points we saw right this quarter. And I think the primary driver is we're getting into the selling season even as we went through the quarter, when we started getting selling into kind of our normal product lines, gross margins improved, we also would see kind of more of a normal seasonal increase in gross margins. Last year, as we mentioned, Q1 was very high. And then in Q2, we started to see the impact of deflation hit our gross margins. So this year, we're expecting that to be kind of a more normal and so we'll be more rather than the 100 basis points we put in this will be closer to flat in the second quarter.

Operator, Operator

The next question comes from David Manthey with Baird.

David Manthey, Analyst

On this gross margin issue, the Street had gross margins up 70 basis points in the first quarter. But I believe, John, you told us last quarter, it would be lower. So setting that mismodeling issue aside, could you give us a magnitude of just like how far off relative to your expectations were gross margin? Clearly, the Street had it wrong, but where were they relative to how you were thinking about it?

John Guthrie, CFO

We were probably about 30 to 40 basis points lower than we thought. Most of that realized really in the first 2 months of the year in January and February, from that perspective. But we've had it down pretty significantly already in our analysis.

David Manthey, Analyst

Yes. And speaking of the months, I think you said in January, you were down mid-single digits and then you finished up 1% for the quarter overall, which would imply a slight acceleration through the quarter. Can you maybe comment on April trends or anything else, any comp base we should be thinking about looking ahead?

Doug Black, CEO

Looking at April, it started off a bit weak but improved throughout the month, and we are pleased with the current trend. When we consider the entire year and the seasonal patterns, we are optimistic about achieving the volume growth necessary to more than offset inflation. We are still projecting low single-digit organic growth for the year, which we feel confident about. The teams are performing well. As mentioned, we anticipate around 2% inflation or deflation for the year, leading us to a low single-digit positive organic growth. When we analyze March and April together, we feel fairly positive about the year ahead.

Operator, Operator

The next question comes from Damian Karas with UBS.

Damian Karas, Analyst

You shared some of your numbers around the PVC and fertilizer price impacts you saw in the first quarter. Could you just give us a sense for thinking about the down 2 points price expectation for the year in entirety, what are you kind of factoring in for the 80% non-commodity product versus all the commodities? Could you just kind of break that out for us?

John Guthrie, CFO

I don't have the specific breakdown, but what we have done is taken our current prices and the known price changes expected for the season. Most of the price changes for non-commodity products are already included in our model, as these generally occur once a year. We use these prices and extend them based on volumes for the remainder of the year to make our comparisons. This year, we haven't seen many significant price decreases, except for PVC pipe; fertilizer prices have remained stable, and we haven't observed any declines in that area. This is how we arrive at our figures, incorporating known price changes into our system and projecting them for the rest of the year.

Damian Karas, Analyst

Got it. That makes total sense. And then obviously, there's been a lot of investor questions related to your largest competitor getting acquired by Home Depot, is it fair to assume that you're going to see more competition on the M&A front? Maybe you could just more generally share with us your thoughts on that ownership change and how you see it impacting your business?

Doug Black, CEO

Yes, there are many questions about that. To start, SRS, which owns Heritage, our competitor, has been in the market for 3 or 4 years and has been very aggressive. They were aiming to build a division and expand their landscaping segment quickly. They have been actively competing for several years. In terms of organic competition, Heritage is also known for being one of the more aggressive players in the market regarding pricing and other competitive factors. We have been competing with them for several years, and we don’t anticipate that dynamic changing as they are already on the aggressive end of the spectrum. On the M&A front, 80% to 90% of our deals are negotiated and not auction-based. We know the owners and they want to join SiteOne, which gives us an advantage since we are fully focused on landscaping and are building a strong company. Some owners find that appealing, so we are confident in our M&A efforts. Regarding organic growth, given their nature, we expect that to continue. Home Depot has indicated that they will operate them as a standalone entity, and we believe they have a solid team that will continue to run the business in a way that maximizes value. They were supported by strong private equity funding before, and those sponsors worked hard to create as much value as possible with the business. We think Home Depot will do the same.

Operator, Operator

The next question comes from Keith Hughes with Truist.

Keith Hughes, Analyst

Just getting back to the SG&A issue, you mentioned the possibility of gaining some leverage this year. Will we begin to see that in the second quarter? Is the timeframe sufficient to start witnessing the leverage, or is it more of a second-half issue?

John Guthrie, CFO

Certainly, weighted towards the second half of the year, we'll be in a much better position once we get into the selling season, where it could be flattish to slightly some slight leverage in the second quarter.

Keith Hughes, Analyst

Okay. And then on the SG&A in the quarter, was there any 1 or 2 specific deals that drove a pretty significant increase in the period?

Doug Black, CEO

The nature of some of the acquisitions that we did, especially, let's say, the Pioneer acquisition added a more seasonal mix to our business. So the answer would be, yes. When you take Pioneer and then a couple of the larger deals that we had up in the north, those are heavily weighted toward their profits all happen in the kind of the summer and fall or they're a later spring season and kind of summer and fall. So yes, that had an impact. The other impact on the base business was that the healthcare claims. We had some unusual claims that kind of hit and that was $3 million or $4 million in a shoulder quarter that has a bigger effect. So we had a couple of things going on there.

Keith Hughes, Analyst

Yes. To your point on Pioneer, is Pioneer and some of the acquisitions you're a pretty heavy seasonal business? Are they even more seasonal than the rest of SiteOne?

Doug Black, CEO

Yes. They would be more seasonal, yes.

Operator, Operator

Next question comes from Mike Dahl with RBC Capital Markets.

Michael Dahl, Analyst

First one, just on the pricing side, I think you said maybe you saw another step down in some commodities. And then I wasn't clear if you were saying you have already seen signs of bottoming and sequential improvement or that that's still your expectation in the months ahead. So maybe could you just clarify what you've seen on pricing on a sequential basis kind of into and exiting April?

John Guthrie, CFO

Yes. We've seen it improve on a year-over-year basis in April so far. If we were 4%, we would be expecting to be closer to a 3% number in Q2. And then 1 to 2 in Q3 and then kind of probably positive pricing in the fourth quarter.

Michael Dahl, Analyst

And that down 3%, is that effectively flat sequentially, if you're down 3% year-on-year?

John Guthrie, CFO

Yes, I believe it will remain relatively stable from that perspective. Overall, there are two main factors at play. First, we are not experiencing significant deflation this year. Second, there are fewer price increases occurring. We noticed that many suppliers implemented flat to very low single-digit price increases. The only notable change sequentially was a substantial decline in PVC pipe sales, which saw another drop.

Operator, Operator

Got it. Okay. Shifting gears, I apologize for focusing on SG&A, but it seems like it may not have differed as much from your expectations as ours or the Street's. Starting out this way and now bringing in what appears to be a sizable deal makes it seem challenging to achieve leverage on SG&A, especially if your overall organic sales growth is constrained by pricing. Could you share more about how you see the year progressing and discuss the potential leverage you could generate in the second and third quarters? Additionally, could you elaborate on any added costs from the recent M&A or actions you might take to better manage SG&A in your core business?

Doug Black, CEO

We have strong control over our core business and expect significant leverage from it. While we noted additional healthcare costs in the first quarter, these shorter-term expenses have a greater impact compared to the full year. We understand our base business well and see opportunities to achieve substantial leverage in our SG&A. As we incorporate acquisitions, we anticipate some challenges, but we are confident in our ability to manage these and still gain SG&A leverage due to the improvements in our core operations. We've implemented measures to enhance labor productivity based on last year's initiatives, giving us a stronger starting point this year. The seasonal nature of our acquisitions can affect performance, particularly in the first quarter, leading to a temporary spike in costs. However, we are optimistic about managing the typical challenges from acquisitions and achieving our leverage goals by year-end.

Operator, Operator

The next question comes from Matthew Bouley with Barclays.

Matthew Bouley, Analyst

Following up on Mike's question there on OpEx. I guess two parts. I mean, number one, is the assumption on the base business SG&A that you would be to hit the guide sort of modeling an outright decline going forward, assuming you get past these healthcare issues here from Q1, and then I think Mike had mentioned this, but if you could put a little more color on the Devil Mountain margin profile and how that will play into it as well?

John Guthrie, CFO

We anticipate that the remainder of the year will show a slight increase in our base business compared to the previous year. While we have incorporated the EBITDA from Devil Mountain into our guidance, we have not fully accounted for its impact in our gross margin or SG&A discussions, as we just finalized the details yesterday.

Doug Black, CEO

The Devil Mountain deal is a high-performing nursery business that we consider to be excellent. It will involve higher selling, general and administrative expenses as well as higher gross margins. Many of our previous acquisitions, as noted, have also operated with higher SG&A and gross margins, particularly in hardscapes and nursery sectors. We anticipate strong contributions from this acquisition and are enthusiastic about it. This deal not only allows us to achieve complete coverage of California, but also provides us with leadership and a team capable of expanding our nursery operations into the Mountain states and the Pacific Northwest. This is promising for us because our market share in nursery in those regions is very low. We are hopeful for significant organic growth as well as growth through acquisitions with Devil Mountain as a platform. They bring a profitable business to SiteOne, and we believe it will positively influence our results in 2024. As John mentioned, we have not yet adjusted our guidance since we just completed the deal, but we certainly expect Devil Mountain to have a favorable impact on our full year profit outcomes.

Matthew Bouley, Analyst

Got it. Okay. That's helpful. And then secondly, just back up to the end markets. I think you mentioned the repair and upgrade side to be slightly down, if I heard you correctly. Obviously, there's been a progression of interest rates here over the past few weeks and maybe a little less recovery potential and existing home turnover, of course. So just any finer point on what you're seeing with the sort of more discretionary repair and upgrade portion of the landscaping business?

Doug Black, CEO

Yes. I think the repair and upgrade. What we've seen is it kind of stable? Is it lower levels? Obviously, last year, that market was down coming into this year. We think it's been kind of I'd call it, sluggish but stable. And so we feel like it will continue to be kind of consistent at low levels. If you do the math, it ends up slightly down. We don't see it dropping further. It's stable at the lower levels, I guess, is how I would sum it up.

Operator, Operator

The next question comes from Andrew Carter with Stifel.

W. Andrew Carter, Analyst

Wanted to ask about the weather overall for the quarter. Was it a net tailwind? Because you mentioned it helped the maintenance. It hurt in the South in terms of the precipitation, but you also had heavy precipitation. And then absent the top line, did the kind of weather mix, I think, more into maintenance products hurt the gross margin as well this quarter? And if so, how much of the 100 basis points was that if you have an estimate?

John Guthrie, CFO

We don't have a specific estimate. I haven't bifurcated by weather. You hit on the important things. I would say in landscape products, weather, Florida here in the Southeast were negatively impacted, and they were also coming up very strong last year in the Midwest, specifically in Northeast, they had pretty strong marches because of somewhat warmer weather. So we don't have it. There was a little bit of a mix, but it's honestly very difficult to bifurcate a quarter like this before the selling season by weather that way.

W. Andrew Carter, Analyst

I have a second question regarding the M&A activity. You've recently acquired Devil Mountain, which is a platform valued at over $100 million. You also completed the acquisition of Pioneer, which I believe was around $170 million. That's two significant platforms you've integrated within a year. Do you have the capacity to manage this? Will Devil Mountain operate independently for a longer period? What is your capacity for pursuing additional deals? Are these acquisitions limited to smaller bolt-ons, or could you consider another platform of similar size in the near future?

Doug Black, CEO

Yes, that's a great question. It's interesting to see that both smaller and larger deals require similar integration efforts. Last year, we successfully integrated 16 companies, which has enhanced our capabilities. Specifically, the Pioneer integration is progressing well; we have a strong focus on that and have a great team supporting us, particularly from their southern business. As for Devil Mountain, it will operate independently for a while, which is our standard practice. This allows both parties to learn from each other. While we'll take a lighter touch initially, there are significant synergies we plan to capture immediately. Overall, it's manageable within our system. We're capable of integrating around 10 to 15 companies at a time—larger ones may equate to a smaller number in terms of effort, but it's still quite manageable. We're confident in our ability to handle this. Additionally, we plan to integrate Pioneer system-wise this year, and while we may not integrate Devil Mountain for several years, operating together as partners will still be effective. Everything remains manageable.

Scott Salmon, EVP, Strategy and Development

One other thing I'd add is they're also in different geographies with different leadership and different lines of business. So our leadership is very well versed in integrating these. So there's no overlap there, which helps ease it as well.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Doug Black for any closing remarks.

Doug Black, CEO

Okay. Thank you, and thank you all again for joining us. We very much appreciate your interest in SiteOne, and look forward to speaking to you again after the next quarter. I want to, again, thank our terrific associates for all they're doing, our customers and our suppliers for helping us to be successful. Thank you.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.