Q3 2024 SiteOne Landscape Supply Inc Earnings Call
Greetings and welcome to the site one landscape supply in 3rd quarter 2024 earnings call.
Speaker Change: At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. Should anyone require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded.
Speaker Change: It is now my pleasure to introduce your host, John Guthrie, Executive Vice President and Chief Financial Officer. Thank you, you may begin.
John Guthrie: Thank you and good morning everyone. We issued our third course 2024 earnings press releases morning and posted a slide presentation to the investor relations portion of our website at investors.site1.com
John Guthrie: I'm joined today by Doug Black, our chairman and chief executive officer and Scott Salmon, Executive Vice President Strategy and Development.
John Guthrie: Before we begin, I would like to remind everyone that today's press release, slide presentation, and the statements made during this call include forward-looking statements within the meeting of the private securities litigation reform Act of 1995.
John Guthrie: These statements are subject to risks and uncertainties that could cause actual results to different materialy from our expectations and projections.
John Guthrie: Such risks and uncertainties include the factors set forth in the earnings released and in our filings with the Securities and Exchange Commission.
John Guthrie: Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance.
John Guthrie: A reconciliation of these measures can be found in our earnings release and in the slide presentation.
Speaker Change: I would now like to turn the call over to Doug Black.
Doug Black: Thanks, John.
Doug Black: Good morning, and thank you for joining us today. During the third quarter, we continue to experience significant market headwinds.
Doug Black: including commodity price deflation, reduced repair and upgrade and market demand, and the effects of Hurricane Helene, all negatively impacting our sales growth, gross margin, adjusted EVDA growth, and adjusted EVDA margin.
Doug Black: Against these headwinds, we were pleased to achieve sales volume growth of 2%, partially offsetting the 3% price decline.
Doug Black: We also added 7% sales growth from acquisitions and welcomed one additional company to SiteOne during the quarter.
Doug Black: We expect the challenging headwinds to continue through the fourth quarter, including the impact of Hurricane Milton.
Doug Black: Dampening the Full-Year Financial Outcome for Site 1
Doug Black: However, we remain encouraged by the underlying progress that we are achieving this year.
Doug Black: Our teams are executing our commercial and operational initiatives well.
Doug Black: and driving organic sales volume growth above the market while achieving gross margin improvements that have mitigated some of the decline.
Doug Black: At the same time, we have streamlined our base business teams.
Doug Black: are in the final stages of integrating Pioneer.
Doug Black: and are taking actions to improve the performance of our focus branches.
Doug Black: Finally, we expect commodity prices to slowly normalize and anticipate a more stable pricing environment in 2025.
Doug Black: All of these factors set us up for improved performance and growth next year and in the years to come.
Doug Black: while we manage through the short-term headwinds.
Doug Black: We are building our underlying capabilities.
Doug Black: strengthening our teams, and optimizing our branch network to serve our customers with the full range of landscaping products across the U.S. and Canada.
Doug Black: With our well-balanced business, strong balance sheet, exceptional teams, improved capabilities, and a robust acquisition pipeline, we remain confident in our ability to execute our strategy and create superior value for our stakeholders.
Doug Black: I will start today's call with a brief review of our unique market position and our strategy.
Doug Black: followed by some highlights from the quarter.
Speaker Change: will then walk you through our third quarter financial results in more detail and provide an update on our balance sheet and liquidity position.
Speaker Change: will discuss our acquisition strategy, and then I will come back to address our latest outlook before taking your questions.
Speaker Change: As shown on slide 4 of the earnings presentation, we have grown our footprint to more than 700 branches and 4 distribution centers across 45 U.S. states and 6 Canadian provinces.
Speaker Change: We are the clear industry leader over three times the size of our nearest competitor and larger than two through ten combined
Speaker Change: Yet, we estimate that we have only about a 17% share of the very fragmented $25 billion wholesale landscaping products distribution market.
Speaker Change: Accordingly, our long-term growth opportunity remains significant.
Speaker Change: We have a balanced mix of business with 65% focused on maintenance, repair, and upgrade.
Speaker Change: 21% focused on new residential construction.
Speaker Change: and 14% on new commercial and recreational construction.
Speaker Change: 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.
Speaker Change: our strategy to fill in our product lines across the U.S. and Canada.
Speaker Change: both organically and through acquisition further strengthens this balance over time.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: All in support of our talented, experienced, and entrepreneurial local teams.
Speaker Change: to consistently deliver superior value to our customers and suppliers.
Speaker Change: We've come a long way in building SiteOne and executing our strategy, but we have more work to do as we develop into a truly world-class company.
Speaker Change: The current challenging market conditions require us to adopt new processes and technologies and to be more intentional in driving organic growth, improving our productivity, and mastering the details of our business across all our product lines.
Speaker Change: Accordingly, we remain highly focused on our operational and commercial initiatives to overcome the near-term headwinds, but more importantly, build a long-term competitive advantage for all our stakeholders.
Speaker Change: 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.
Speaker Change: Taken all together, our strategy creates superior value for our shareholders through organic growth, acquisition growth, and EBITDA margin expansion.
Speaker Change: On slide six, you can see our strong track record of performance and growth over the last eight years.
Speaker Change: with consistent organic and acquisition growth.
Speaker Change: From an adjusted EBITDA margin perspective,
Speaker Change: We benefited from the extraordinary price realization due to rapid inflation in 2021 and 2022.
Speaker Change: In 2023, and now in 2024, we are experiencing headwinds as commodity prices come down.
Speaker Change: In 2024, we are also experiencing anticipated adjusted EVDA dilution.
Speaker Change: of the Large Pioneer Acquisition.
Speaker Change: which currently underperforms our average adjusted EBDA margins.
Speaker Change: We believe that commodity price deflation will be reduced in 2025 and be balanced with modest price increases in most of our products.
Speaker Change: Furthermore, we expect to make significant progress with the performance of Pioneer as we will be fully integrated and right-sized in 2025.
Speaker Change: We are consistently outperforming the market in terms of organic growth and we continue to have ample opportunities to increase our gross margin.
Speaker Change: and improve our operating leverage through our commercial and operating initiatives.
Speaker Change: In summary, we expect our earnings growth going forward to be enhanced with steady adjusted EBITDA margin expansion as we recover and drive forward toward our longer-term objective of 13% to 15%.
Speaker Change: We now have completed 96 acquisitions across all product lines since the start of 2014.
Speaker Change: Our pipeline of potential deals remains robust.
Speaker Change: and we expect to continue adding and integrating more new companies this year to support our growth.
Speaker Change: These companies strengthen SiteOne with excellent talent and new ideas for performance and growth.
Speaker Change: Given the fragmented nature of our industry and our modest market share, we have significant opportunity to continue growing through acquisition for many years to come.
Speaker Change: Slide seven shows the long runway we have ahead in filling in our product portfolio, which we aim to do primarily through acquisition.
Speaker Change: especially in the nursery, hardscapes, and landscape supplies categories.
Speaker Change: We are well connected with the best companies in our industry and expect to continue filling in these markets systematically over the next decade.
Speaker Change: I will now discuss some of our third quarter highlights as shown on slide 8.
Speaker Change: We achieved 6% net sales growth in the third quarter with an Organic Day sales decline of 1%, offset by 7% growth due to acquisitions.
Speaker Change: Organic sales volume grew 2% during the quarter, as our teams continued to gain market share in softer market conditions.
Speaker Change: Pricing declined 3% for the quarter, consistent with our expectations, and in line with the second quarter.
Speaker Change: stabilizing from the 4% decline that we experienced in the first quarter.
Speaker Change: Price decline continues to be driven primarily by double-digit declines in PVC pipe and grass seeds, while the prices of most other products remain flat with last year.
Speaker Change: We expect the rate of commodity price declines to moderate in 2025.
Speaker Change: and be balanced with modest price increases in most other products, creating a more stable pricing environment.
Speaker Change: So it's profit increased 6% driven by acquisitions.
Speaker Change: Our base business gross margin was down approximately 50 basis points as lower price realization more than offset gains from our gross margin improvement initiatives.
Speaker Change: are acquisitions which are primarily nursery and hardscapes.
Speaker Change: operate at a higher gross margin but also operate with higher SG&A.
Speaker Change: SG&A as a percentage of net sales increased 170 basis points to 28.9% due to our acquisitions.
Speaker Change: SG&A for the base business increased 1% as we continue to closely manage our labor and expenses in relation to sales volume.
Speaker Change: In terms of acquisitions, Pioneer represents an ongoing significant SG&A reduction opportunity as we complete the systems integration over the next two months and optimize staffing while gaining sales and delivery synergies.
Speaker Change: Accordingly, Pioneer provides SG&A leverage upside on a year-over-year basis in 2025.
Speaker Change: Just the DBDA for the quarter decreased 4% year over year to $114.8 million.
Speaker Change: An adjusted EBDA margin for the quarter declined by 100 basis points to 9.5% due to the negative organic growth, the absence of price realization, and the dilutive effect of acquisitions.
Speaker Change: As I mentioned after the second quarter, our acquisitions typically perform at a similar adjusted EBGA margin as the base business.
Speaker Change: With the addition of Pioneer last year with approximately $150 million in annual sales operating well below our adjusted EVDA margins, we will experience meaningful adjusted EVDA margin dilution from acquisitions this year.
Speaker Change: In terms of initiatives, we continue to increase sales with our small customers faster than our company average.
Speaker Change: drive growth in our private label brands, and improve inbound freight costs through our transportation management system.
Speaker Change: 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.
Speaker Change: We continue to increase our percentage of bilingual branches from 58% to 63% this year and are executing focused Hispanic marketing programs to create awareness among this important customer segment.
Speaker Change: We're also making great progress in our Salesforce productivity as we leverage our CRM and establish more disciplined revenue-generating habits among our over 600 outside sales associates.
Speaker Change: The continued adoption of MobilePro and DispatchTrack allows us to offer better customer service while increasing the productivity of our branch staff and delivery fleet.
Speaker Change: And the acquisition of Pioneer has allowed us to develop new functionality in our bulk material delivery and in our point of sale system.
Speaker Change: which we plan to further leverage with our existing businesses.
Speaker Change: We continue to make good progress in growing our digital sales, now up over 170% year-to-date, while cultivating thousands of new regular users of SiteOne.com.
Speaker Change: Growth in digital sales is encouraging to see as it increases connectivity with the customer, helping us increase market share while allowing our associates to focus more on creating value for our customers and less on transactional activity at the branch.
Speaker Change: Customers who purchase online are growing their total business with SiteOne significantly faster than our company average, thereby contributing to our outperformance of the market.
Speaker Change: During our last earnings call, we mentioned that we are intensely managing our underperforming branches or focus branches.
Speaker Change: 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 Site 1 average.
Speaker Change: As a part of these aggressive efforts, we plan to consolidate or close 16 branches during the fourth quarter to strengthen our operations and better serve our customers at a reduced cost.
Speaker Change: John will discuss the near-term financial impact of these actions in more detail later in the call.
Speaker Change: Overall, we expect to gain a meaningful adjusted EBDA margin lift for Site 1 as we improve the performance of these focus branches.
Speaker Change: Taken all together, we are continuing to improve our capability to drive organic growth.
Speaker Change: increase gross margin and achieve operating leverage through our commercial and operational initiatives.
Speaker Change: On the acquisition front, we added Millikan nurseries to our family during the quarter.
Speaker Change: and year-to-date have completed acquisitions with approximately $155 million in trailing 12-month sales.
Speaker Change: with an experienced team, broad and deep relationships with the best companies.
Speaker Change: A strong balance sheet and an exceptional reputation.
Speaker Change: We expect to close more deals this year and remain well positioned to grow consistently through acquisition for many years.
Speaker Change: In summary, while we are certainly not pleased with our profitability in 2024, our teams are doing a good job of managing through the near-term headwinds.
Speaker Change: leveraging our many opportunities for improvement and building our company to create superior value for our customers, suppliers, and shareholders for the longer term.
Speaker Change: Now John will walk you through the quarter in more detail. John?
John Guthrie: Thanks, Doug. I'll begin on slide 9 with some highlights from our third quarter results.
John Guthrie: We reported a net sales increase of 6% to $1.21 billion for the quarter.
John Guthrie: There were 63 selling days in the third quarter, which is the same as the prior year period.
John Guthrie: Organic daily sales declined 1% compared to the prior year period due to a 3% price deflation and partially offset by 2% growth in value.
John Guthrie: Price deflation continues to be driven by commodity products like PVC pipe.
John Guthrie: which was down approximately 22% in the third quarter, and grass seed, which was down approximately 15%.
John Guthrie: As we communicated on our second quarter call, price deflation is trending in the right direction but has proven stickier than we originally forecast at the beginning of the year, primarily due to additional price reductions for PBC Pipe and Grass Seed.
John Guthrie: We expect price deflation to persist throughout 2024, and expect price deflation for the full year to be approximately 3%.
John Guthrie: Organic deli sales for agronomic products.
John Guthrie: concludes Fertilizer, Control Products, Ice Melt, and Equipment increased 2% due to strong volume growth resulting from lower prices, solid end market demand, and share gains which more than offset the continued price deflation.
John Guthrie: Organic daily sales for landscaping products, which includes irrigation, nursery, hardscapes, outdoor lining, and landscape accessories, decreased 2% for the third quarter due to price deflation and weakness in the repair and remodel and market.
John Guthrie: Geographically, five out of our nine regions achieved positive organic daily cells growth in the third quarter.
John Guthrie: We saw modest growth in the Midwest and Northeast due to strong agronomic sales.
John Guthrie: Additionally, Texas continued to benefit from strong demand in the construction and markets.
John Guthrie: We estimate that Hurricane Helene negatively impacted sales in the Southeast by approximately 7 million during the last week of the third quarter.
John Guthrie: We were fortunate to have less than $500,000 in estimated damages.
John Guthrie: All locations were opened in the second week of October and we estimate the negative impact to sales from both Hurricane Helene and Milton in the fourth quarter will be an additional eight million dollars.
John Guthrie: Scott will provide more details regarding our acquisition strategy later in the call.
John Guthrie: Gross profit for the third quarter was $411 million, which was an increase of 6% compared to the prior year period.
John Guthrie: The gross margin for the third quarter improved 10 basis points to 34% due to the positive impact from acquisitions.
John Guthrie: Gross margin for our base business, however, was down approximately 50 basis points due to lower price realization.
John Guthrie: We expect the current pricing environment to last through the rest of 2024, and gross margin to be down slightly for the remainder of the year.
John Guthrie: Selling General and Administrative Expenses, or SG&A, increased 12% to $349 million for the third quarter.
John Guthrie: SG&A as a percentage of net sales increased 170 basis points a quarter to 28.9%.
John Guthrie: The increase in both SG&A and SG&A as a percentage of net sales primarily reflects the impact of acquisitions.
John Guthrie: Approximately 34 million out of our 37 million in SG&A growth was attributable to acquisitions, with the majority of that due to the addition of Pioneer and Devil Mountain.
John Guthrie: Excluding acquisitions, SG&A for our base business increased approximately 1% on a gap basis and 2% on an adjusted EBITDA basis.
John Guthrie: We expect to incur a one-time charge to adjusted EBITDA of approximately $5 million in the fourth quarter related to the consolidation or closure of 16 branches.
John Guthrie: Since most of these are branch consolidations, we expect to retain a significant portion of the branch revenue.
John Guthrie: These actions stem from our FOCUS branch initiative and the optimization of our branch footprint.
John Guthrie: The charge does not include non-recurring integration costs for the Pioneer business.
John Guthrie: which we expect will be elevated over the next two quarters following the system merger.
John Guthrie: For the third quarter, we recorded income tax expense of approximately $16 million compared to $18 million for the prior year period.
John Guthrie: The effective tax rate was 26.2% for the third quarter of 2024 compared to 23.4% for the prior year period.
John Guthrie: The increase in the effective tax rate was primarily due to a decrease in the amount of excess tax benefits from stock-based compensation.
John Guthrie: We continue to expect the 2024 fiscal year effective tax rate will be between 25-26% excluding discrete items such as excess tax benefits.
John Guthrie: Net income attributable to SiteOne for the third quarter decreased $12.9 million to $44.4 million, reflecting the organic sales decrease and the reduced gross margin in our base business.
John Guthrie: Our weighted average diluted share count was approximately 45.6 million for the three months ended September 29, 2024, compared to 45.7 million for the prior year period.
John Guthrie: We repurchased approximately 14,000 shares, or approximately 1.8 million in the third quarter.
John Guthrie: Adjusted EBITDA decreased 4% to $114.8 million for the third quarter, compared to $119.8 million for the prior year period.
John Guthrie: Adjusted EBITDA margin decreased 100 basis points to 9.5 percent.
John Guthrie: Adjusted EBITDA for the third quarter includes adjusted EBITDA attributable to non-controlling interest of $0.8 million.
John Guthrie: A non-controlling interest reflects the 25% share of equity in Devil Mountain retained by its president.
Speaker Change: Now I would like to provide a brief update on our balance sheet and cash flow statement as shown on slide 10.
Speaker Change: Working capital at the end of the third quarter was approximately $992 million, compared to $919 million at the end of the prior year period.
Speaker Change: The increase in working capital is primarily due to the additional working capital from acquisitions.
Speaker Change: Excluding the impact of acquisitions, we are pleased to see inventory returns for our base business continue to improve due to better inventory management.
Speaker Change: Net cash provided by operating activities was approximately $116 million for the third quarter, compared to approximately $89 million for the prior year period.
Speaker Change: The increase in operating cash flow primarily reflects seasonal timing differences in working capital.
Speaker Change: We made cash investments of approximately $21 million for the third quarter compared to approximately $134 million for the same period in 2023.
Speaker Change: The decrease reflects less acquisition investment in the third quarter of 2024 compared to the same period in 2023.
Speaker Change: Net debt at the end of the quarter was approximately $449 million compared to approximately $446 million at the end of the third quarter of 2023.
Speaker Change: Leverage at the end of the third quarter was 1.2 times trailing 12-month adjusted EVTA compared to 1.1 times in the prior year period.
Speaker Change: As a reminder, our target year-end net test to adjust the EBITDA leverage range is one to two times.
Speaker Change: At the end of the quarter, we had available liquidity of approximately $647 million, which consisted of approximately $86 million of cash on hand and approximately $561 million in available capacity under our ABL facility.
Speaker Change: Extending the maturity by two years to March 2030, reducing the interest rate by 25 basis points to term SOFR plus 175 basis points, and increasing the size by $25 million to approximately $393 million.
Speaker Change: Our priority from a balance sheet and funding perspective is to maintain our financial strength and flexibility so we can execute our growth strategy in all market environments.
Speaker Change: I will now turn the call over to Scott for an update on our acquisition strategy.
Scott Salmon: Thanks, John. As shown on slide 11, we acquired one company in the third quarter for year-to-date combined trailing 12-month net sales.
Scott Salmon: of approximately $155 million. Since 2014, we have acquired 96 companies with approximately $1.9 billion in trailing 12-month net sales added to site one.
Scott Salmon: Turning to slide 12, you will find information on our most recent acquisition.
Scott Salmon: On July 1st, we acquired Millikan Nurseries, a wholesale distributor of nursery products located near Concord, New Hampshire.
Scott Salmon: The addition of Millikan extends our already strong nursery position in the Northeast to better serve the greater Boston and New Hampshire markets.
Scott Salmon: 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.
Scott Salmon: Summarizing on slide 13, our acquisition strategy continues to create significant value for Site One, with a strong balance sheet and a robust pipeline across all lines of business and geographies.
Scott Salmon: We expect to welcome additional outstanding companies to site one this year and in the years to come
Scott Salmon: 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.
Speaker Change: I will now turn the call back to Doug.
Doug Black: Thanks, Scott.
Doug Black: I'll wrap up on slide 14.
Doug Black: We are now three quarters of the way through 2024.
Doug Black: And year-to-date, our organic daily sales have declined 2%, with 1% volume growth offset by a 3% decline in pricing.
Doug Black: We expect this trend to continue through the fourth quarter with price declines more than offsetting sales volume growth.
Doug Black: yielding low single-digit organic daily sales decline.
Doug Black: In terms of end markets, we expect new residential construction, which comprises 21% of our sales, to be roughly flat for 2024.
Doug Black: Continued high interest rates and elevated home values are constraining demand.
Doug Black: But, with new home inventory being low, builders are continuing to build new homes.
Doug Black: Accordingly, we are seeing stable demand for landscaping products in this end market.
Doug Black: 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.
Doug Black: Meeting activity from our project services teams continues to be slightly positive compared to prior year.
Doug Black: which is a good indicator of continued demand.
Doug Black: Our customer backlogs remain solid, and we believe the commercial end market will be flat this year.
Doug Black: The Repair and Upgrade market, which represents 31% of our sales, continues to be soft this year and we expect this end market to be down high single digits in 2024.
Doug Black: Lastly, we have seen good volume growth in the maintenance category, which represents 34% of our sales.
Doug Black: Our teams have done a terrific job gaining profitable market share in the maintenance category, overcoming significant price deflation in grass seed, and achieving positive overall sales growth.
Doug Black: With this backdrop, we now expect our organic daily sales growth to be down 1-2% for the full year of 2024 with price deflation of approximately 3%.
Doug Black: We expect gross margin in 2024 to be slightly lower than 2023, with lower price realization more than offsetting our initiatives and the impact of acquisitions.
Doug Black: We expect SG&A as a percentage of sales to be higher for the full year, but the decrease in organic daily sales and of acquisitions, including Pioneer, dilute our operating leverage.
Speaker Change: Additionally, as John has mentioned, we expect to take a charge of approximately $5 million to adjusted EBDA from the consolidation or closure of 16 branches in the fourth quarter.
Speaker Change: Accordingly, we expect our adjusted EVDA margin in 2024 to be lower than 2023.
Scott Salmon: In terms of acquisitions, as Scott mentioned, we have a good pipeline of high-quality targets.
Scott Salmon: And we expect to add more excellent companies to the SiteOne family during the remainder of the year.
Scott Salmon: With all these factors in mind, we now expect our full year adjusted EBDA for fiscal 2024 to be in the range of $370 million to $380 million.
Scott Salmon: This range includes the expected $5 million charge for branch consolidations and closures.
Scott Salmon: The range does not factor any contribution from unannounced acquisitions.
Scott Salmon: In closing, I would like to sincerely thank all our SiteOne associates.
Scott Salmon: who continue to amaze me with their passion, commitment, teamwork, and selfless service.
Scott Salmon: We have a tremendous team and it is an honor to be joined with them as we deliver increasing value for all our stakeholders.
Scott Salmon: 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.
Speaker Change: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.
Speaker Change: for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: One moment, please, while we poll for questions.
Speaker Change: The first question is from Ryan Merkle from William Blair. Please go ahead.
Ryan Merkle: Thanks, good morning and thanks for the question. I guess first off I wanted to ask about sales. You know, if I add back the hurricane impact, organic sales is coming in a good bit better than you thought in 3Q and 4Q.
Ryan Merkle: So Doug, can we view this as signs of stabilization in the end markets and perhaps doing a better job on market share gains?
Doug Black: Yeah, I think it's a bit of both, Ryan. You know, as we mentioned, we're still seeing a weakish repair and remodel market. That really hasn't changed.
Doug Black: And so we're seeing the volumes down there. But across our portfolio, we are getting more consistent on gaining market share.
Doug Black: And I think that's helping us to outperform the market. And I do believe, you know, our maintenance and really the new construction markets are pretty resilient. I mean, we see those as being flat.
Doug Black: But, you know, when you take together our market share ability, you know, we've been working on this for several years. We feel we're at a higher level now than we were, you know, last year and years prior, so that's certainly helping us.
Speaker Change: John Guthrie, John Guthrie, John Guthrie,
Speaker Change: Got it, okay.
Speaker Change: and then Doug you said something interesting you know during your remarks you said growth you thought could be enhanced going forward and you listed off a few things can you just unpack that a little bit more and what you mean by seeing growth enhanced
Doug Black: Right, well obviously we're focused on strong organic growth, but that comment was related to our EBDA growth.
Doug Black: Because, you know, if you look at our adjusted EBDA margin, obviously, we peaked in the COVID years. And we know that was...
Doug Black: That was helped by you know extraordinary price realization, but you know some of that was real
Doug Black: improvement as
Doug Black: As that's come off, you know, where we're going to land this year is going to be similar to where...
Doug Black: We were in 2019, but we've got some real headwinds, you know, with price deflation.
Doug Black: Deletion from Pioneer, et cetera, that are pulling us down below, maybe where we should be at this time if you take away those factors. And so I think as we move into 25 and 26,
Doug Black: We're going to see that material variance or price realization that we've lost with deflation.
Doug Black: You know come back to us You know unclear on the time of that, but that will come back to us
Doug Black: We're very confident we'll turn Pioneer around, which has been deluded. And, you know, our focus branch is...
Doug Black: which we had less of those going into COVID, we've had more, you know, coming out.
Doug Black: with the dynamics that have happened in our market, we feel pretty confident that those will turn. And so when you take that, and you add it to our normal ability to improve gross margin, which is private label, small customer, et cetera, and our normal
Doug Black: leverage that we get on the base business as we grow organically.
Doug Black: Then you get, you know, maybe a juicier EBDA margin growth because the margin expansion comes back and, you know, we drive toward our longer-term objective. So that's my comment there. Going forward, we'll outperform in growth in EBDA versus...
Doug Black: in our sales growth because of those factors of recovering but also continuing to expand our EBDA margin.
Speaker Change: Got it. Okay, so a bit of under-earning on margins this year, but that could turn around. Thanks so much. I'll pass it on.
Speaker Change: and John Guthrie. Thank you. Thank you.
Speaker Change: The next question is from David Manthe from Baird. Please go ahead.
David Manthe: Thank you. Good morning, everyone. First off, John, can you isolate the impact of price on agronomics products versus landscaping products?
John Guthrie: On agronomic products, I think it was negative 8%.
Speaker Change: So we put together a stronger result as a result of that and then
Speaker Change: Price on Nano was negative one percent.
Speaker Change: Thank you.
Speaker Change: for landscaping products.
Speaker Change: You made the comment that it's trending in the right direction, but it's sticky. Now, if I heard that, I would...
Speaker Change: read that as prices are flattening or flat sequentially, but they're not flattening or going up as fast as you might like.
Speaker Change: but are still down year over year. I'm just, if you could put a finer point on that and then based on current prices that you're seeing for those, for the grass seed and PVC specifically.
Speaker Change: When would we sort of get to flat year over year at current prices?
Speaker Change: Well, actually, let me just correct two things. On landscape products, we were negative 2% and actually rounded up to negative 2% on price, so we're actually flat on volume.
Speaker Change: for the quarter. And similarly, on agronomics, it was 2% growth and negative 8% price on agronomics. So in effect, we grew 10% volume on the quarter.
Speaker Change: from that perspective.
Speaker Change: You know, our outlook right now, obviously, there's been a lot of volatility with regards to those two items. I think going into next year, we would expect potentially weakness in those items, but then it potentially offset by positive with the remaining, you know.
Speaker Change: Those two, grass seed and PVC pipe, make up about 8% of our sales, and so it's the remaining portion modest increases somewhat offset the carryover and potential negative impact of those two items.
Speaker Change: Okay, so just a minor lift in everything else could offset that pretty quickly. Okay.
Speaker Change: Can we talk about the branch closures and is this a one-time thing or is this part of a more focused ongoing approach to managing that because
Speaker Change: When we look at the number of branches you have, and Doug, we've talked about this before, I mean, 700 locations is a lot.
Speaker Change: If you look at revenues per location, you're pretty far below most of the other branch-based distributors that you'd comp against. So, I mean, just if you could talk about that structurally, can you close the gap? Is that something you're focused on or is this kind of just a one-off thing while you continue to consolidate the market?
Speaker Change: Right, well as we've done acquisitions of our history, we're routinely consolidating
Speaker Change: So, you know, that's kind of a normal thing, you know.
Speaker Change: you know, one or two, a quarter, et cetera, or if we do an acquisition like an Atlantic or, you know, say a Pioneer, et cetera, you know, we're going to have some redundancy and we're going to consolidate those branches.
Speaker Change: I think what we've done in the near term, or what we're doing now, is we've really taken a hard look at these focus branches that are underperforming, and we're being more aggressive in the consolidation.
Speaker Change: of the branches, that when we look at it hard, our field likes to keep branches.
Speaker Change: and keep them going and try to make them work as we've taken a harder look.
Speaker Change: We're taking a more aggressive
Speaker Change: So in that case, it is kind of a one-time, let's call it a catch-up, if you will. And then going forward, you know, we'll continue to consolidate, but we'll probably be a little more aggressive about that going forward on an ongoing basis. But this is kind of a one-time, let's say, catch-up for us to, you know, kind of get the network right.
Speaker Change: And then as we move forward, we're constantly looking for opportunities, and those will certainly come up as we do additional acquisitions.
Speaker Change: All right, that sounds great. Thank you.
Speaker Change: The next question is from Damian Karras from UBS. Please go ahead.
Damian Karras: Hey, good morning, everyone.
Speaker Change: Morning, everyone.
Damian Karras: I was wondering if you could maybe talk a little bit more.
Damian Karras: about these branch closure decisions, you know, so you've got some 700 branches out there. You know, how did you arrive at 16 as the right number? Could you maybe just share some details, like regionally are they concentrated in one part of the country or another, or more tilted towards any product category? Any details around that would be helpful.
Damian Karras: You know, when you kind of just piece it all together, how should we be thinking about the sales and bottom line impacts in 2025 from, you know, the combination of these branch closures as well as the pioneer actions that you're taking?
Speaker Change: Yes, well, first of all, most of them are consolidations, and so we do plan to keep the majority of the sales involved in these branches. And second, they're really pretty spread out across product lines.
Speaker Change: across geographies. Think kind of a little in each region, you know, we have nine regions.
Speaker Change: And, you know, there's a couple in each region that we've taken a hard look at and we feel that we can serve those customers and serve those sales without those branches.
Speaker Change: Pioneer has its own set of
Speaker Change: branch consolidations that are part of, you know, kind of the
Speaker Change: the right sizing, I guess, of that business. But Pioneer, we expect to gain momentum in sales.
Speaker Change: and Pioneer, as we've been able to now integrate.
Speaker Change: We're in the final stages. We're kind of called half integrated.
Speaker Change: You've got Colorado and Arizona, Arizona's.
Speaker Change: Now, fully integrated from a system perspective, in the next few weeks, Colorado will be...
Speaker Change: on the new system and Pioneer had a very strong point of sale and delivery system that we've integrated with our system now that we can take and apply to our other businesses that are in bulk. So we've gotten some value that we can backward integrate on that, but we now can...
Speaker Change: you know, fully merge our teams.
Speaker Change: maximize now our synergies across our sellers and branches and really, really go after it with Pioneer. So we're excited to be able to...
Speaker Change: to grow Pioneer and right-size the SG&A there and have it become a much stronger performer next year. So, in terms of closures, our goal, obviously, is to get to a lower-cost network.
Speaker Change: keep the sales. In terms of Pioneer, we'll be accelerating the sales there because of our ability to work together on an integrated system.
Speaker Change: That's really helpful, thanks. I'm just curious why you guys decided to leave the one-time restructuring charges in your adjusted EBITDA?
Speaker Change: guidelines on what we what we treat as adjusted from that standpoint.
Speaker Change: Since these were items that really did not pertain to recent acquisitions, we felt it was kind of more in line with those guidelines, since a lot of them are in the base business.
Speaker Change: that we not treat them as that and instead call out so you can see what we're doing.
Speaker Change: Okay, got it
Speaker Change: Thanks, I'll get back in the queue.
Speaker Change: Thank you for watching. Bye.
Speaker Change: The next question is from Keith Hughes from Truist. Please go ahead. Thank you. We talked about Pioneer a lot on this call. Is it still negative EBITDA at this point? I think it was when you bought it. What kind of negative impact is it going to have for the full year 24 against some of the struggles?
Speaker Change: We're not giving specific, but it is a very low contributor.
Speaker Change: Let's just say that from that standpoint, and it is measurably diluting kind of our overall.
Speaker Change: on EBITDA return on sales.
Speaker Change: Okay, with the, I think you said the base business, SG&M, a quarter was up 100 basis points year-over-year. The branch consolidation that we've been discussing, it's a limited number.
Speaker Change: Did that make a significant dent in the bat, or it just doesn't seem like a that big a move? But I'll let you kind of fill me in on the details.
Speaker Change: Yeah, I don't think we're, you know, we're not looking to, you know.
Speaker Change: Drive
Speaker Change: you know.
Speaker Change: Obviously with that
Speaker Change: It's a in the scheme of things. It's not going to drive our SG&A, you know Leverage, you know for next year going forward, but it's just a contributor. I mean, you know, we're looking under every rock As you've seen in the base business We've been tightly managing that SG&A and we're going to continue to type in it tightly manage the SG&A of the base business going forward These branch consolidations just help that
Speaker Change: Right, and so, you know, we can you can probably do the math on How that helps us, but you know, it's it's it all adds up And so that's just another piece of the puzzle as we move into Next year and we aim to expand our margins
Speaker Change: by improving our gross margin, by gaining SG&A leverage, and then by layering in good acquisitions. Turning around pioneers is also part of that piece of the puzzle, which could contribute.
Speaker Change: you know, strongly to next year's results.
Speaker Change: Okay, thank you.
Speaker Change: The next question is from Charles Perron-Pichet from Goldman Sachs. Please go ahead.
Charles Perron-Pichet: Thank you. Good morning, everyone.
Charles Perron-Pichet: I want to go back first to your Organic Volume Up performance this quarter. Can you help us understand the underlying market contraction that you've been seeing through the third quarter and how much are you performing your peers due to your commercial initiative?
Charles Perron-Pichet: And as you look into 2025, you have seen several initiatives in place with, you know, a loyalty program, the digital, the private label that are ramping. Would you expect this outperformance to expand as you look into 2025?
Speaker Change: Yeah, so I think if you look at the market and you look at the...
Speaker Change: The construction markets are roughly flat, new construction markets are roughly flat, maintenance is flat-ish, and repair remodel being 30% or a little over 30% of our mix down high single digit, you can do the math and say, okay, there's where the market is.
Speaker Change: which would be down. And so then if you look at our volume growth, you know, being up 2%, that's the level of outperformance. And so we're quite...
Speaker Change: Encouraged by that
Speaker Change: You know, and we do expect that to gain strength.
Speaker Change: as we move into next year. We're continuing to drive our private label.
Speaker Change: Our digital, we've had a very good year, digital up 170%. You know, it was more than doubled last year from the year prior.
Speaker Change: almost tripled, if you will, from last year. So that's gaining strength. We're working with our sales force, with our new sales force CRM.
Speaker Change: We've got dispatch track on the delivery side, which we've now fully rolled out. We're leveraging that. So we have a lot of...
Speaker Change: A lot of initiatives that are starting to go into harvest mode, from build mode. And so we think as that happens, that will continue to add to our strength and ability to gain market share. So, we're excited about the future for sure.
Speaker Change: Got it. That's good color, Doug. And on the hurricanes, first, thank you for providing the details on the impact for your results, but I would like to get your perspective on the potential for recouping those cells maybe next year as repair work is completed, and maybe more higher level, what could be the impact these will have on the regional supply chain across the Southeast? You know, we've heard from several growers that have seen important damages to their, you know, production, and you know, how could influence pricing dynamic maybe regionally in some parts of the Southeast.
Doug Black: You know, to take the last first, we don't think it'll impact the dynamic, you know, the supply chain is pretty resilient, folks get back up to speed quickly and...
Doug Black: And so we don't think there's any...
Speaker Change: We believe that we get some of it back and it's typically, with landscaping, it's typically delayed.
Speaker Change: you know, three months or so, you know, we're kind of the last thing that people go after to repair. And so, we think we'll get some of that back next year. Not all of it, you know, it's not an equal, you know, you lose some just in terms of timing. It just gets pushed.
Speaker Change: And so we think we'll get some of it back. Could be a little bit of upside for next year. But we could have a hurricane next year as well, right? So we don't really look at it as tremendous upside, but say maybe modest upside for next year in the first half.
Speaker Change: All right, thank you for the time, guys.
Speaker Change: The next question is from Mike Dahl from RBC Capital Markets. Please go ahead.
Mike Dahl: Morning, thanks for taking my questions.
Mike Dahl: I wanted to also ask one on Pioneer. I guess now we're kind of a year post-acquisition. It still seems like it's fairly dilutive.
Mike Dahl: Relative to your internal expectations, I know you always underwrite these, thinking that there's gonna be a ramp to get things back to your target or your average, but this maybe from the outside seems like it's gone slower than planned and now maybe more costly than planned. Can you elaborate a little bit more on versus your initial expectations, how this feels performing?
Speaker Change: Yes, well one of the things that it I would say it's gone slower than planned and but but that was an intentional decision.
Speaker Change: When we got into Pioneer
Speaker Change: We really liked their point-of-sale system for bulk.
Speaker Change: and the way they link that into their delivery. And it was, for that reason,
Speaker Change: We decided that hey, we're going to take this and and integrate it back into our system. You know normally we replace systems
Speaker Change: with our system.
Speaker Change: But in this case, we had to kind of merge our systems together and create, you know, kind of let's call it a combined system for For both point of sale and delivery that we think is going to be dynamite and that just it took time
Speaker Change: Once you get integrated, then you can drive out all the SG&A that's redundant. You can really get the best efficiency out of your teams and branches.
Speaker Change: And you can then start really putting the pedal down on organic growth. So, that's been delayed. It was an intentional delay.
Speaker Change: It's taken us a year to get ourselves integrated, but we're at a point now where we can really go. So for that reason, say it was slower than say we would have thought going into the deal.
Speaker Change: But we're still just as excited about the potential of the deal, and we feel like over the next couple of years, it's going to be a good ramp-up to that.
Speaker Change: you know, to the site one average and be a big contributor. Remember, we're in Arizona and Colorado. These are two of the highest growth markets in the country.
Speaker Change: And we have existing businesses that surround Pioneer, so we think we're uniquely able to get the synergies out of the deal. One last thing is, Pioneer is an exception.
Speaker Change: We virtually always buy well-run companies that are at our average and we take them and make them better.
Speaker Change: We decided to go for Pioneer, which was a significant underperformer, and looking back at it, we're very happy with that decision.
Speaker Change: We are by far the leader in those markets now and will be forever and so We're excited about it
Speaker Change: into next year. You talked about the end markets into year-end. I mean as you go into your business planning cycle for
Speaker Change: for next year. I know it's early to have a crystal ball, but, you know, any early thoughts on how you see the end market dynamics at a macro level playing out in 2025?
Speaker Change: Yeah, I hate to make that call.
Speaker Change: this early. We'd rather wait until after.
Speaker Change: after our next call and after this year's finished up.
Speaker Change: I think you know if you talk to customers and suppliers I think there would be some optimism around next year, but obviously we'll have to see what happens with registrates
Speaker Change: You know a lot will happen between now and say January, February, so I'll hold on that, but I would say generally it seems like our customers and suppliers are Optimistic we would naturally be optimistic as well so I just leave it at that but a lot of a lot of moving parts there as you know and
Speaker Change: and I think too early to call.
Speaker Change: Okay, thank you.
Speaker Change: The next question is from Andrew Carter from Stiefel. Please go ahead.
Andrew Carter: Hey, thank you. Good morning. First question is in terms of the pricing, I know you mentioned, you know, confident in return next year, the index prices, they are what they are. But in terms of structural prices, what have you heard from your suppliers thus far next year? Are they taking pricing? And this year, net-net, it was year where they took it off. Is there a risk that could happen next year as well? Thanks.
Speaker Change: Yeah, I mean, you are correct. This year, they took the year off in terms of pricing, and that's one of the things, the deflation hit us, but there was no inflation with the other products to balance that. What we're hearing is that there will be modest inflation.
Speaker Change: or that on that other non-commodity products that manufacturers are going to try to push through a little bit of price. So we don't expect...
Speaker Change: You know.
Speaker Change: you know we would expect low single-digit
Speaker Change: pricing to be you know brought forward by our manufacturers and you know you never know what's going to take or stick but that's the that's the communication that we've heard so far with with all the other products.
Speaker Change: Thank you.
Speaker Change: that we work with.
Speaker Change: Second question on the gross margin. Within that 50 basis points gross margin decline, number one, how much was the spread between what you're selling things at and what is in inventory? And the second one's agronomics volume up 10, landscaping up flat. How much of a headwind to your gross margin was that kind of mixed headwind? I assume it was a headwind because you quantified it. Thank you.
Speaker Change: So, it's the maturity of kind of that, when we talk about price visualization, the year over year.
Speaker Change: I would say...
Speaker Change: Significant portion of that is due to kind of this this price-cost relationship with inventory cost and where we're at. Maybe small component is is just a little bit more aggressive pricing out in the marketplace. So that that's that's the primary driver over the year over year 50 basis point reduction in the base business from that standpoint.
Speaker Change: Thank you. Bye-bye.
Speaker Change: And the second question was...
Speaker Change: It was on the mix between agronomic volume and landscaping volume.
Speaker Change: That probably isn't a huge year-over-year difference. I mean, I would say seed, the lower prices in seed, and this is the seed quarter, so we sell a significant more portion right now. I would say the lower prices.
Speaker Change: had somewhat of an anticipated decrease in our margin a result of that.
Speaker Change: Was a benefit for part of that volume growth is the market there is some Elasticity is what we're seeing with regards to that and and after kind of a week
Speaker Change: spring season, the rebound and the lower prices resulted in some of the volume growth from that standpoint but probably at a lower margin also as we float that and I'm speaking specifically at the seed.
Speaker Change: Thanks, I'll pass it on.
Speaker Change: The next question is from Jeffrey Stevenson from Loop Capital Markets. Please go ahead.
Jeffrey Stevenson: Hey, thanks for taking my questions today.
Jeffrey Stevenson: Have you seen any signs of improvement in R&R bidding activity over the last 90 days that gives you optimism domain could improve as we move into next year? And then also have you heard from customers that elevated interest rates have delayed R&R project work this year, which could move forward as rates move lower?
Speaker Change: So, no, we haven't seen any improvement. What we've seen really all year is that the higher end of remodel
Speaker Change: and customers that can pay cash is actually strong.
Speaker Change: It's that middle range remodeling where folks would normally take out a loan
Speaker Change: or do a home equity loan.
Speaker Change: And that's where the softness is. And so, yes, that's related to interest rates. And just like people are holding...
Speaker Change: to buy a home on Interstate, so I think people are holding projects.
Speaker Change: that they want to do, but they don't want to go out and borrow money at the...
Speaker Change: at six, seven percent, and so...
Speaker Change: We do feel like when interest rates, you know, if...
Speaker Change: If interest rates come down, that will help support a rebound in activity in the remodel market as it will with existing home sales. Part of the remodel market softness is that existing home sales are way down.
Speaker Change: And you know for the same reason, you know home pricing and interest rates if interest rates come down and people start, you know
Speaker Change: Interest rates are still relatively high.
Speaker Change: Okay, now that's very helpful, Doug. And then ...
Speaker Change: It seems like you've seen an acceleration of maintenance volumes as the year progressed with previously delayed projects moving forward with commodity deflation that you've seen. Do you believe these in-market demand tailwinds will continue into 2025, or do you believe most of these delayed projects from the past few years have been worked off this year?
Speaker Change: No, I think there's still pent-up demand, I believe, in the remodel market. In the maintenance market, the maintenance market is pretty steady, and we think it's going to continue to be steady. As John mentioned, we see prices coming way down.
Speaker Change: When seed prices went way up, the volumes shrunk. There was some degradation because the contractors are just going to use less seed. Now that seed prices have come back down, they're back to kind of normal.
Speaker Change: spread rates, and that's driven some of the volume there. We also had, as John mentioned, a weaker spring seed season, which is...
Speaker Change: You know been balanced with a fairly strong fall seed season So those are the dynamics going on in maintenance, but outside of seed the the maintenance volume is pretty steady and we we Think that will continue to be steady
Speaker Change: going forward.
Speaker Change: Understood. Thank you.
Speaker Change: There are no further questions at this time. I would like to turn the floor back over to Doug Black for closing comments.
Doug Black: Thank you all for joining us today. We very much appreciate your interest in SiteOne and look forward to speaking with you again after the next quarter. I want to send another big thank you to our terrific associates, our suppliers and customers for supporting us and for supporting the development of a world-class company here at SiteOne.
Doug Black: Thank you.
Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Speaker Change: [music]