SITE - NYSE

Greetings, and welcome to the SiteOne Landscape Supply Second Quarter 2024 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. At this time, I would like to hand the call over to John Guthrie, Executive Vice President and Chief Financial Officer. Thank you, sir. You may begin.

Thank you, and good morning, everyone. We issued our second 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 the factors set forth in the earnings release and in our filings with the Securities and Exchange Commission. Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. A reconciliation of these measures can be found in our earnings release and in the slide presentation. I would now like to turn the call over to Doug Black.

Thanks, John. Good morning, and thank you for joining us today. As we announced in early-June, we are experiencing softer demand driven by a weak repair and upgrade end market and more persistent commodity price deflation in select products like grass seed and PVC pipe. We now believe that these trends will continue through the full year and will have a negative effect on our organic sales growth and adjusted EBITDA margin. Against these headwinds, we were pleased to achieve solid results for the second quarter with only a 3% organic daily sales decline and adjusted EBITDA that was comparable to last year. We were also pleased to add 4 high-performing companies to SiteOne during the quarter and one in July, including Devil Mountain, which is an exciting new platform for growth in our nursery product line in the Western U.S. These companies have talented teams and strong customer relationships and expand our product lines and market presence in their respective markets. Through our commercial and operational initiatives and our acquisition strategy, we continue to build SiteOne for the long term as a world-class market leader. While we manage through the short-term headwinds, we're also building and perfecting our underlying capabilities, strengthening our teams and expanding our branch network to serve our customers with a full range of landscaping products across the U.S. and Canada. With our well-balanced business, strong balance sheet, exceptional teams, improved capabilities and robust acquisition pipeline, we remain confident in our ability to execute our strategy and create superior value for our stakeholders. I will start today's call with a brief review of our unique market position and our strategy, followed by some highlights from the quarter. John Guthrie will then walk you through our second quarter financial results in more detail and provide an update on our balance sheet and liquidity position. Scott Salmon will discuss our acquisition strategy, and then I will come back to address our latest outlook before taking your questions. As shown on Slide 4 of the earnings presentation, we have grown our footprint to more than 710 branches and 4 distribution centers across 45 U.S. states and 6 Canadian provinces. We are the clear industry leader over 3x 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. As 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 offer us 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, I wanted support of our talented, experienced and entrepreneurial local teams, consistently deliver superior value to our customers and suppliers. We have come a long way in building SiteOne and executing our strategy, but have more work to do as we develop into a true world-class company. The current challenging market conditions require us to adopt new processes and technologies and to be even more intentional in driving organic growth, improving our productivity and mastering the details of our business across all our product lines. Accordingly, we remain highly focused on our commercial and operational initiatives to overcome the near-term headwinds, but more importantly, build a long-term competitive advantage. 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 8 years, with consistent organic and acquisition growth and solid EBITDA margin expansion. From a return on sales perspective, we benefited from extraordinary price realization due to the rapid inflation in 2021 and 2022. In 2023 and now in 2024, we are experiencing headwinds as commodity prices come down. We believe that commodity prices will stabilize as we move into 2025. We also believe that we are consistently outperforming the market in terms of organic growth. and we continue to have ample opportunities to increase our gross margin and improve our operating leverage through our commercial and operational initiatives. As mentioned earlier, the short-term challenges are helping us to accelerate our adoption of new processes and technologies, including digital, which we believe will further improve organic growth, and adjusted EBITDA margin for the long term. We have now completed 96 acquisitions across all our 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 our second quarter highlights as shown on Slide 8. We achieved 4% net sales growth in the second quarter with an organic daily sales decline of 3%, offset by 8% growth due to acquisitions. Organic sales volume was flat compared to the prior year period as our teams continued to gain market share, offsetting soft end market demand. Overall, pricing declined 3% for the quarter, a slight improvement from the 4% decline that we experienced in the first quarter. The price decline continued to be driven by double-digit declines in select commodity products like PVC pipe and grass seed, while the prices of most of our products remained flat with last year. We have previously expected commodity prices to normalize in the second half of the year as we lap the declines from last year. The PVC pipe has dropped further and grass seed has declined significantly going into our important fall seed season. Accordingly, we now expect prices to be down approximately 2% to 3% in the second half. We expect sales volume to be flat to slightly down in the second half as we consistently outperform the market. Gross profit increased 4% driven by our acquisitions and our gross margin decreased 10 basis points to 36.1%. This was in line with our expectations at the ongoing price deflation in commodity products continues to be a near-term headwind to gross margin. This was partially offset by our gross margin initiatives and a positive impact from acquisitions, which operate at a higher gross margin and higher SG&A. Our SG&A as a percent of net sales increased 60 basis points to 24.3% due to our acquisitions. With strong cost control, we achieved modest operating leverage in our base business despite the organic sales decline. With organic sales continuing to be negative, we now expect SG&A as a percent of sales for the full year 2024 to be higher than the prior year, primarily driven by our acquisitions. Adjusted EBITDA for the quarter was $210.5 million, which was comparable to the adjusted EBITDA for the second quarter of 2023 of $211.2 million. Adjusted EBITDA margin for the quarter declined 70 basis points to 14.9% due to negative organic growth, lower gross margin and only modest SG&A leverage in the base business combined with the dilutive effect of acquisitions. Our acquisitions typically perform at a similar adjusted EBITDA margin as the base business. However, with the addition of Pioneer last year with over $150 million in annual sales, operating well below our adjusted EBITDA margin, we will experience meaningful adjusted EBITDA margin dilution from acquisitions this year. We are executing a systematic turnaround plan for Pioneer and we expect to improve the profitability of this business to match SiteOne over the coming years. In terms of initiatives, we continue to grow sales with our small customers faster than our company average while also driving growth in our private label brands and 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 bilingual branches now at 60% and are executing focused in 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 amongst our over 600 outside sales associates. The continued adoption of MobilePro and DispatchTrack 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 bulk material delivery and in our point-of-sale system, which we plan to develop further and leverage with our existing businesses. During the quarter, we continued to make good progress in growing our digital sales and cultivating regular users of siteone.com. The growth in digital sales is encouraging to see as it increases connectivity with our customers, 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. We continue to introduce new functionality for siteone.com and are ahead of our goal to double online sales in 2024. Finally, with the near-term headwinds that we have experienced over the last 2 years, we have branches within SiteOne that are underperforming. We are intensely managing these focused branches to ensure that they have the right teams, the right support and are executing our best practices to bring their performance up to or above the SiteOne average. We expect to gain a meaningful return on sales lift as a company as we turn these branches around. Taken all together, we are continuing to improve our capability to drive organic growth, increase gross margin and achieve operating leverage through our initiatives over time. On the acquisition front, as I mentioned, we added four excellent companies to our family during the quarter and one in July with approximately $155 million and trailing 12-month sales added to SiteOne. With an experienced team, broad and deep relationships with the best companies and a strong balance sheet and an 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?

Thanks, Doug. I'll begin on Slide 9 with some highlights from our second quarter results. We reported a net sales increase of 4% to $1.41 billion for the quarter. There were 64 selling days in the second quarter, which is the same as the prior year period. Organic daily sales declined 3% compared to the prior year period due to price deflation and flat volumes. As we reported in our 8-K filing on June 4, organic daily sales started the second quarter soft, trending down 4% to 5% on price deflation and volume declines. As we progressed through June, we saw volume recover somewhat due in part to drier weather, which allowed us to finish the quarter with organic daily sales down only 3%. Price deflation in the second quarter was driven by commodity products like PVC pipe, which was down approximately 23% grass seed and fertilizer, which were down 14% and 6%, respectively. Fertilizer pricing is starting to stabilize with a lower decline in the second quarter than in prior quarters. Price deflation is trending in the right direction, but it's proven stickier than we originally forecasted due to additional price reductions for certain products like PVC pipe and grass seed. We now expect price deflation to persist throughout 2024 and expect price deflation for the full year to be approximately 3%. Organic daily sales for agronomic products which includes fertilizer, control products, ice melt and equipment, decreased 1% due to price deflation, which more than offset positive volume growth. Organic daily sales for landscaping products, which includes irrigation, nursery, hardscapes, outdoor lighting and landscape accessories decreased 4% for the second quarter primarily due to price deflation and weakness in the repair and remodel end market. Geographically, only 3 of our 9 regions achieved positive organic daily sales growth in the second quarter. We saw modest growth in some southern markets like Texas, but weakness more broadly especially in northern markets, which outperformed in the first quarter due in part to an earlier spring. Acquisition sales, which reflect sales attributable to acquisitions completed in 2023 and 2024, contributed approximately $103 million or 8% to net sales growth volume. Doug, will provide more details regarding our acquisition strategy later in the call. Gross profit for the second quarter was $510 million, which was an increase of 4% compared to the prior year period. Gross margin decreased 10 basis points to 36.1% due to lower price realization, partially offset by the positive impact from acquisitions. Price deflation continues to be a headwind to gross margin, so its negative impact is decreasing each subsequent quarter. Selling, general and administrative expenses, or SG&A, increased 7% to $344 million for the second quarter. SG&A as a percentage of net sales increased 60 basis points in the quarter to 24.3%. The increase in both [indiscernible] and SG&A as a percentage of net sales reflects the impact of acquisitions. Excluding acquisitions, SG&A for our base business decreased approximately 3% on an adjusted EBITDA basis, reflecting the actions we have taken in response to our lower sales. For the second quarter, we recorded an income tax expense of $40 million, which is the same as the prior-year period. The effective tax rate was 24.9% for the second quarter of 2024 compared to 24.4% for the prior-year period. The increase in the effective tax rate was primarily due to a decrease in the amount of excess tax benefits from stock-based compensation. We continue to expect the 2024 fiscal year effective tax rate will be between 25% and 26%, excluding discrete items such as excess tax benefits. Net income attributable to common shares for the second quarter of 2024 decreased 3% to $120.2 million due to increased SG&A expense from acquisitions and lower gross margin. Our weighted average diluted share count was approximately $45.6 million for the 3 months ended June 30, 2024, compared to $45.7 million for the prior year period. We repurchased approximately 129,000 shares for approximately $20 million in the second quarter. Adjusted EBITDA decreased $0.7 million to $210.5 million for the second quarter of 2024 compared to $211.2 million for the prior year period. Adjusted EBITDA margin decreased 70 basis points to 14.9%. Adjusted EBITDA for the quarter includes adjusted EBITDA attributable to a noncontrolling interest of $0.9 million. Noncontrolling interest reflects the 25% share of equity in Devil Mountain retained by its President and minority owner. Scott will provide more details on the Devil Mountain acquisition later in the call. 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 second quarter was approximately $1 billion compared to $903 million at the end of the prior year period. The increase in working capital is primarily due to the additional working capital from acquisitions. Excluding the impact of acquisitions, we were pleased to see inventory turns for our base business continue to increase due to improved replenishment and reductions in excess inventory. Net cash provided by operating activities was approximately $147 million for the second quarter compared to approximately $254 million for the prior year period. The decrease in operating cash flow primarily reflects seasonal timing differences in working capital. We made cash investments of approximately $113 million for the second quarter compared to approximately $35 million for the same quarter in 2023. The increase reflects higher acquisition investment compared to the same period in 2023. Net debt at the end of the quarter was approximately $524 million compared to approximately $385 million at the end of the second quarter of 2023. Leverage at the end of the second quarter was 1.3x our trailing 12-month adjusted EBITDA compared to 0.9x in the prior-year period. As a reminder, our target year-end net debt to adjusted EBITDA leverage range is 1x to 2x. At the end of the quarter, we had available liquidity of approximately $543 million, which consisted of approximately $72 million cash-on-hand and approximately $471 million in available capacity under our ABL facility. On July 2, subsequent to the end of the second quarter, we took advantage of favorable market conditions and refinanced our term loan extending the maturity by 2 years to March 2030, reducing the interest rate by 25 basis points to terms over plus 175 basis points and increasing the size by $25 million to approximately $393 million. Our priority from a balance sheet and funding perspective is to maintain our financial strength and flexibility, so we can execute our growth strategy in all market environments. I will now turn the call over to Scott for an update on our acquisition strategy.

Thanks, John. As shown on Slide 11, we acquired 4 companies in the second quarter, plus an additional 1 in July for year-to-date combined trailing 12-month net sales of approximately $155 million. Since 2014, we have acquired 96 companies with approximately $1.9 billion in trailing 12-month net sales added to SiteOne. Turning to Slides 12 through 16. 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 Whittlesey Landscape and Adam's 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% ownership 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. Devil helps 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, whereby we can acquire the remaining ownership interest in future years. On May 31, we acquired Hardscape.com a wholesale distributor of premium porcelain papers with 4 locations in South and Central Florida. The acquisition of Hardscape.com expands our ability to provide Hardscape products to our Florida customers and is a great addition to our existing premium hardscapes offering nationally. On June 7, we acquired Cohen & Cohen, a single-location wholesale distributor of hardscapes in Ottawa, Canada. The acquisition of Cohen & Cohen marks our entry into the growing Ottawa market and expands the range of products we are able to provide to our customers from Ottawa to Montreal. And lastly, on July 1, we acquired Millican Nurseries, a wholesale distributor of nursery products located near Concord, New Hampshire. The addition of Millican extends our already strong nursery position in the Northeast to better serve the Greater Boston and New Hampshire markets. Our acquisitions continue to add terrific talent to SiteOne and move us forward toward our goal of providing a full line of landscape products and services to our customers in all major U.S. and Canadian markets. Summarizing on Slide 17, 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. I will now turn the call back to Doug.

Thanks, Scott. I'll wrap up on Slide 18. We are now halfway through 2024. And year-to-date, our organic daily sales have declined 2% with 1% volume growth, offset by a 3% decline in pricing. Looking into the second half of 2024, we expect our sales volume to be flat to slightly down with softer end markets as our teams continue to gain market share. As mentioned, we expect price deflation to continue in the second half with prices down approximately 2% to 3%. In terms of end markets, we expect new residential construction, which comprises 21% of our sales to be roughly flat in 2024. Despite higher interest rates, builders are optimistic for the full year capitalizing on the continued shortage of homes and solid home demand. This should support stable demand for landscaping products in this end market 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 compared to the prior year, which is a good indicator of continued demand. Our customer backlogs remain solid, and we believe the commercial end market will be flat this year. The repair and upgrade market, which represents 31% of our sales, continues to be soft this year, and we expect this end market to be down high single digits in 2024. Lastly, we've seen good volume growth in the maintenance category, which represents 34% of our sales. However, the maintenance category is where we have seen significant price deflation in certain products like fertilizer and grass seed. Accordingly, while we believe sales volume and maintenance will be positive, we expect overall sales growth to be negative due to price deflation. With this backdrop, we now expect our organic daily sales growth to be down low single digits for the full year 2024 with price deflation of approximately 3%. We now expect gross margin in 2024 to be slightly lower than 2023, with the negative effect of price deflation more than offsetting our initiatives and the impact of acquisitions. We expect SG&A as a percent of sales to be higher for the full year as acquisitions, including Pioneer, dilute our operating leverage. Accordingly, we expect our adjusted EBITDA margin in 2024 to be lower than 2023. 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. With all these factors in mind, we now expect our full year adjusted EBITDA for fiscal 2024 to be in the range of $380 million to $400 million. This range does not factor any contribution from unannounced acquisitions. In closing, I would like to sincerely thank all our SiteOne associates, who continue to amaze me with their passion, commitment, teamwork and selfless service. We have a tremendous team, and it is an honor to be joined with them as we deliver increasing value for our stakeholders. I would also like to thank our suppliers for supporting us so strongly and our customers for allowing us to be their partner. Operator, please open the line for questions.

[Operator Instructions]. Our first question comes from Ryan Merkel with William Blair.

I wanted to start with the outlook for price deflation. I think you said 2% to 3% down in the second half. I guess, Doug, how did you think about that guide. We've been chasing that lower for a while now. And I'm just wondering, did you try to kitchen sink it? Or did you just extrapolate the prices that you're seeing today into the second half?

Good question, Ryan. Obviously, we've learned a bit as we've gone. And like we said, pipe has taken another leg down. It seemed to stabilize. But there's obviously uncertainty there. Fertilizer has stabilized. So that's a good thing. It's still lower than last year, but it's at a kind of a firm base, we think. And then seed went down roughly 15% to 20%, but the seed price is the seed as it was in 2020. So it's kind of returned to where it was pre-COVID. And so I think we factored in some uncertainty on that. Certainly, it could go a bit further south. And that's why we're saying down 2% to 3%. 2% I would be I'd say, kind of current trend, 3% would be something new.

Okay. Got it. And then as it relates to the guide on margins, it's coming in a little lower than I thought. And I'm trying to figure out the main source. Would you say that the update to EBITDA margins for the year did you have a bigger negative impact from SG&A deleverage? Or are you taking down gross margins?

I would say we take -- both of them have been impacted. I would -- it's primarily the takedown has been -- it's primarily sales related. We have taken SG&A expense out more than we had in the original guide. But we haven't been able to completely offset the drop in sales. Margins are still trending in the right direction. We would probably expect that margins with acquisitions would probably be positive in the second half. But I would say, going into the year, we thought they would be more positive than they are right now. Still that stickiness of the price is delaying. It's going in the right direction, but it's delaying getting where we originally thought we were going to be.

Our next question comes from David Manthey, Baird.

Thank you. Good morning, everyone. My question is on the organic SG&A, Doug, in your monologue, I think you said the company achieved leverage on organic SG&A and that would imply that if organic average daily sales was minus 3, then your core SG&A was down more than 3. #1, did I hear that right? That's pretty remarkable, if so.

Yes, you heard that right. We were very pleased to get leverage in the base business. It was just a little bit of leverage. So not a lot, kind of, call it, 3-plus a bit. But one thing to consider as we go into the second half, I mean, we really started pulling back significantly last year. So the second half comp for SG&A in order to beat it is tougher than the first half. And so we're assuming that we delever a little bit. With the sales continuing to be down, most of that is driven by price. We're going to keep the screws as tight as we can on the base business to get ourselves through the second half. But we're expecting a slight deleverage in the base business in the second half. And we'll see if we can beat that, but that's what we would have built into our guidance.

Yes. I mean it's tough to do in a declining market. So it's an achievement anyway. Could you talk about Pioneer. It sounds like the -- operationally, the issues here are related to acquisitions, namely Pioneer. If you could talk about the magnitude and time line of improvement there. And then maybe just a related one for Scott. Are EBITDA margins consistently better for older acquisitions? Like if you look back through the rings of the tree, how far back to you to go to see consistent double-digit EBITDA margins among a tranche of acquisitions done in a given year?

Right. I'll take the first half, touch on the second half and then Scott can jump in. So yes, Pioneer, we purchased that late last year because of the timing of that purchase it lost money in the fourth quarter last year and for the year. Coming into this year, we expected a significant improvement in that. And two things have happened, and we're still getting an improvement. So we're actually happy with the pace, but they're suffering from the same kind of market headwinds that we are. And so that's dampened what we thought we were going to get. The other thing is Pioneer has a terrific point-of-sale system for the bulk materials that quite frankly, we wanted for us. And so we are building their point of sale into our system. And so in instead of integrating, say, in February, we're integrating in September. It's just taking us longer to do all that IT development. When we get that done, we can take out another tranche of SG&A. We can certainly get a lot more efficient than we are now in that kind of tweener stage. So a couple of things that have impacted. One is a long-term play to build our business and then the other short-term headwinds. So we're not getting as much improvement, but we're very happy with the deal. And over the next couple of years, we see it going up to the average. In terms of acquisitions, certainly, yes, they do. If you look at return on sales and if you look at return on invested capital, those both improve with age like wine. So I would say, in general, that's the case, Scott, anything to add to that?

No, I was going to say the same thing that's within each tranche or a year, there's maybe, what, between 8 and 16 acquisitions that you're looking at in a class. So you're going to see some variance in performance, but certainly, the trend that is most visible is the longer they're with SiteOne, the better they perform.

Our next question comes from Keith Hughes with Truist Securities.

Out of the plastics market, just been some signals that PVC resin producers are trying to raise price. Are any of your pipe suppliers seeing that? Or are they talking about maybe an attempt of a price increase later in the year?

We haven't heard that. We do believe PVC price from what we're hearing from our pipe suppliers. We haven't seen as much on pressure upwards are pressured down as we did this time last year. So a big thing with regards to PVC pipe will just be getting pass the price decreases that happened in the third and fourth quarters and even filtered into our business and into the first half of this year. But certainly, the level of consistently dropped quarter-to-quarter that we were seeing last year, we're seeing a much more stable market on PVC pipe this year. and looking forward to getting past on that volatility.

Okay. And just around the topic of deflation on the grass seed market. Is that just a situation of just supply greater than demand? Or what's continuing to cause the pressure there?

It's been a combination of both. I think there is probably a little too much supply grown. And frankly, there was a high -- a good year this year as opposed to the past couple of years for growing grass seeds, so supply has increased and demand is probably -- I think if you actually looked at, we would probably say we're going to sell more grass seed in tons of product this year. So the market is taking it, but probably supply is where they're probably a little heavy now which has caused back to kind of go back to normal. And actually, the pullback in kind of the market for the growth of grass seed is probably is adjusting from kind of the go-go years of -- right around COVID.

Next question comes from Matthew Bouley with Barclays.

On the deflation outlook, the 2% to 3% in the second half very helpful color there on kind of what you're seeing in terms of current trends and baking in some conservatism there. But I'm just trying to understand the kind of cadence in the third quarter and fourth quarter, if you're kind of looking at it similarly at this point. And what I'm really trying to understand is given the exit rate in the fourth quarter, is there any risk that deflation at this point kind of persists into first quarter of '25 or first half of '25.

We wouldn't think it would be a big '25 issue. Obviously, I just talked about PVC pipe, which has been the primary -- the largest driver has stabilized and fertilizer. But obviously, we'll have to see. With regards to Q3 and Q4, I would expect Q3 would be at the higher end of that range and Q4 would be lower still, maybe even less than 2%. From that standpoint, I mean, fall is the next 90 days is when we sell most of our grass seed. So that's really a big Q3 event, and we'll be working through that inventory during that time.

Yes. John, I want to weigh in. One other factor that's going on here is that the rest of our products prices are flat this year. So we're not getting any help from our -- the other 80%, 90% of products. And we feel like '25, those manufacturers will go for price increases. So one factor to think about is '24 has been commodity deflation with everything else flat. We expect a lot less going into the, let's say, the first quarter of next year. of commodities and then we expect kind of normal price increases from the rest of our products.

Yes, perfect. That's very helpful. And then secondly, just looking at the R&R end market, I think you said that now you think it will be down high-single-digits this year. I guess the question is, I mean, what do you think is driving that? Is it kind of lack of existing home turnover, is it just consumer confidence, pull-forward activity some combination of all 3. Because what I'm trying to get at is as you, if it's kind of slipping further here into the middle of the year, does it look like that end market might still be a headwind in early 2025 and kind of what it would take to turn that corner?

Yes. I think it's all the factors. It's consumer confidence. I think inflation has got the consumer pinch and they're deferring projects. Interest rates are high. So housing turnover certainly impacts that negatively with less housing turnover. And so really, it's all of those factors at work. And so -- and don't -- this is something that we flagged back in early June. I mean the spring, as we went through April and May, really for that remodel market didn't develop. So we saw the softness really through the spring, which we singled in early June, and it's kind of continued, right? So I think lower interest rates will help the situation, inflation coming under control will help us. All these things for the future of our remodeling, remodeling is a terrific market and is usually very robust. And we think it will be in the future. It's just right now, there's a lot of elements coming at the consumer. And what we see is that the high end of remodel is solid. It's the middle income part of remodel that's really kind of taking the hit this year.

Our next question comes from Andrew Carter with Stifel.

First thing I want to ask is in terms of, I think you said underlying SG&A down 3%, volume was flat. How sustainable is that? And I guess, how long a lead time do you have to put in place to plan? Is it real time? Are there kind of a lot of things happen variable? Or is it just a really big shift to move to get that kind of leverage it's tough to react to the environment.

Yes, I'll take a first shot at that. I mean we have fast and flexible local teams, right? And so they move depending on what's going on in the market. And so it is -- and most of our SG&A is associates, right? So there's a field element that can be very flexible. Where we have to be intentional is on kind of some of the field support and some of the functional teams, where we've got to keep them at the right size for the markets we've got. And we're looking at that all the time to make sure that we're playing that. So I think we can continue to be flexible. What we don't want to do is damage our long-term growth for a short-term gain, right? And we won't do that. So we'll get to a size that as good as we can for the current market conditions, but we're still building for the future, and that's very important.

And then the second, in terms of the focus branches you mentioned, could you give us a scope of kind of how many are kind of in focus there, if there's any kind of potential opportunity associated with building the margin? Is it just cost? Is it sales improvements? And also, could it be working capital? And I know you noted that goal to move that continually lower.

Yes. I guess I'll take the first shot there. John can add. It tends to be a lot of factors. Just to give you a scope, it's -- we're focused on the 20% bottom end of our branches. And it could be that those branches don't have the right leader. We may consolidate some of those branches into other branches just to get the synergies of a larger branch. It could be lack of organic sales or product mix is not the right mix. So it's really focused around team, mix, and driving organic growth and getting those branches up speed. It could be SG&A reduction -- their SG&A is just too high and they need to rightsize. They've been slower to do that. So it's a number of factors. We've created a white hot light on them. And we really think that there's no reason we can't get these branches up to our average and in that raise the whole company. And it really -- during COVID times, everybody tended to look good as we come through these headwinds, we see some branches that have not performed as well, and we're taking strong action on those.

Our next question comes from Mike Dahl with RBC Capital Markets.

I'll stick with a couple on margins. I think you mentioned that the negative headwind to gross margin from the deflation has been lessening. Can you just quantify kind of what the gross margin headwind was in the second quarter? And what your guide assumes in the second half as far as the negative gross margin impact from deflation?

We don't fully break that out from that standpoint. We will share for the fact that in the second quarter, we got roughly a pickup in gross margin from acquisitions of about 40 basis points. And the difference is primarily due to the negative is due to the price impact.

Okay. Yes. That's still helpful. And that kind of dovetails into my second question, which is -- and this is rough math, but I think at the high end of your full year guide, you'd have to have second half's EBITDA margins about flat year-on-year, which you've articulated a lot of the moving pieces, which on the organic side are still some headwinds. So in terms of getting to that 400 or getting for the full year getting to second half EBITDA margins flat year-on-year. Just walk us through kind of the -- what has to happen to drive that versus, say, the midpoint or lower, which just stems tough with deflation continuing and in SG&A to get enough leverage there.

I mean, I think what's going to drive it is the market, if we have positive upside in volume in the second half of the year, that's what will be the primary driver. SG&A is well we're evaluating it. I think we pulled a lot of the levers there. We're continuing to evaluate items. But the primary area of focus for us is continuing to gain more market share. and potential upside in the market itself, and that would come through primarily in volume, which would bring us to the high end of the guidance.

Our next question comes from Jeff Stevenson with Loop Capital Markets.

So as the pickup in June volumes you experienced from earlier in the quarter continued into July due to any benefit from pent-up weather-related demand?

Yes. The trend we've seen in July is similar. Sales are down, call it, 3% to 4%. They were down 3%, obviously, for the quarter. So it's been a little less. And this year has been very choppy, where we've had -- March was a good month, April, May, not so good, June, good July in the average, I guess. So that's the trend we're seeing in July.

Okay. No, that's helpful. And then I'm trying to get a better idea of the variance between your original positive organic volume growth expectations this year and your current assumption of flat to down low single-digit organic volume declines in the back half. Is it solely due to softer R&R demand? Or are any other end markets coming in softer than your prior expectations?

Yes. No, great question. It really -- it's softer remodel, but it's also flat residential. We thought at the beginning of the year, the way the bullishness of the builders and housing starts were up we felt like that was going to give us some upside in the second half of the year, and we're really seeing more of a flat residential market, and we think that's going to continue. So the market softness, I'd say, has been in residential, new residential that's flat instead of up in the second half and then remodel, which is much weaker. And then obviously, there's the price factor that has been much more sticky and has lasted into the -- well into the -- we think will last through the full year as opposed to taper way off in the third and fourth quarter. So those 3 elements are really the elements that have caused us to have weaker sales for the full year.

We have now reached the end of our question-and-answer session. I would now like to turn the floor back over to Doug Black for closing comments.

Okay. Thank you all for joining us today. We very much appreciate your interest in SiteOne and look forward to speaking to you again in the next quarter. I'd like to also thank our associates, who continue to fight hard in these tough times. And certainly, our customers and our supplies for being partners with us as we work through 2024. Take care.