SITE - NYSE

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

Thank you, and good morning, everyone. We issued our first quarter 2025 earnings press release this morning and posted a slide presentation to the Investor Relations portion of our website at investors.siteone.com. I'm joined today by Doug Black, our Chairman and Chief Executive Officer; and Scott Salmon, Executive Vice President, Strategy and Development. Before we begin, I would like to remind everyone that today's press release, slide presentation and the statements made during this call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Such risks and uncertainties include the factors set forth in the earnings release and in our filings with the Securities and Exchange Commission. Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. A reconciliation of these measures can be found in our earnings release and in the slide presentation. I would now like to turn the call over to Doug Black.

Thanks, John. Good morning, and thank you for joining us today. We are pleased to achieve a solid start to 2025 with 4% net sales growth and 6% growth in adjusted EBITDA during the traditionally slower first quarter. Despite the challenging weather and later spring season than last year, our teams executed well and we benefited from our strong cost control actions in 2024. We also benefited from the continued moderation of price deflation as our overall price decline improved from negative 3% in the fourth quarter of 2024 to negative 1% in the first quarter of this year. Finally, we continue to execute our acquisition strategy by adding two excellent companies to SiteOne year-to-date, strengthening our teams and further expanding our full product line capability. Overall, with strong teams, a winning strategy and excellent execution of our commercial and operational initiatives, we continue to be in a good position to navigate through the market uncertainties and deliver solid performance and growth in 2025 and over the coming years. I will start today's call with a brief overview of our unique market position and our strategy, followed by some highlights from the quarter. John Guthrie will then walk you through our first quarter financial results in more detail and provide an update on our balance sheet and liquidity position. Scott Salmon will discuss our acquisition strategy, and then I will come back and address our latest outlook before taking your questions. As shown on slide four of the earnings presentation, we have a strong footprint of more than 690 branches and four distribution centers across 45 U.S. states and six Canadian provinces. We are the clear industry leader over 3 times the size of our nearest competitor, and larger than two through 10 combined. Yet we estimate that we only have about an 18% share of a very fragmented $25 billion wholesale landscaping products distribution market. Accordingly, our long-term opportunity to grow and gain market share remains significant. We have a balanced mix of business with 65% focused on maintenance, repair and upgrade, 21% focused on new residential construction and 14% on new commercial and recreational construction. As the only national full product line wholesale distributor in the market, we also have an excellent balance across our product lines, as well as geographically. Our strategy to fill in our product lines across the U.S. and Canada, both organically and through acquisition, further strengthens this balance over time. Overall, our end market mix, broad product portfolio and geographic coverage offer us multiple avenues to grow and create value for our customers and suppliers while providing important resilience in softer markets. Turning to slide five. Our strategy is to leverage the scale, resources, functional talent and capabilities that we have as the largest company in our industry, all in support of our talented, experienced and entrepreneurial local teams to consistently deliver superior value to our customers and suppliers. We have come a long way in building SiteOne and executing our strategy, but we have more work to do as we develop into a truly world-class company. In the current challenging market environment, we are adopting new processes and technologies faster driving organic growth, improving our productivity and mastering the unique aspects of each of our product lines. Accordingly, we remain highly focused on our commercial and operational initiatives to overcome the near-term headwinds, but more importantly, to build a long-term competitive advantage for all our stakeholders. These initiatives are complemented by our acquisition strategy, which builds in our product portfolio, moves us into new geographic markets and adds terrific new talent to SiteOne. Taken all together, we believe our strategy creates superior value for our shareholders through organic growth, acquisition growth and EBITDA margin expansion. On slide six, you can see our strong track record of performance and growth over the last eight years. From an adjusted EBITDA margin perspective, we benefited from extraordinary price realization due to rapid inflation in commodity products during 2021 and 2022. In 2023 and 2024, we experienced significant headwinds as those commodity prices have come down. In 2024, we also experienced further adjusted EBITDA dilution from the acquisition of Pioneer, a large turnaround opportunity with great strategic fit. And from our other focus branches, as a result of the post-COVID market headwinds. We are continuing to evaluate the potential impact of recently announced tariffs, but now expect pricing to go from a strong headwind in 2024 to a slight tailwind in 2025, driven by price increases from our suppliers. Furthermore, with Pioneer systems fully integrated and operations restructured under new local management, and with progress on our focused branches, we expect to achieve solid performance improvement in 2025 that is not reliant on market growth. We are pleased to have completed our 100th acquisition in March with over $2 billion in acquired revenue added since the start of 2014. These milestones demonstrate the strength and durability of our acquisition strategy. Our pipeline of potential deals remains robust, and we expect to continue adding more companies in 2025 to support our growth. These companies strengthen SiteOne with excellent talent and new ideas for performance and growth. Given the fragmented nature of our industry and our modest market share, we have a significant opportunity to continue growing through acquisition for many years to come. Slide seven shows the long runway we have ahead in filling in our product portfolio, which we aim to do primarily through acquisition, especially in Nursery, Hardscapes and Landscape Supplies categories. We are well connected with the best companies in our industry, and we expect to continue filling in these markets systematically over the next decade. I will now discuss some of the first quarter highlights as shown on slide eight. We achieved 4% net sales growth in the first quarter with an organic daily sales decline of 1%, offset by 5% growth due to acquisitions. Organic sales volume was flat during the first quarter, which we see as a good result given the early spring season and 5% volume growth that we experienced in the first quarter of last year. Weather this year has been challenging, but our volume growth turned positive in March and that momentum has continued into April. We believe that we are outperforming the market consistently through our commercial initiatives, and our end markets, though softer have remained resilient. Additionally, as I mentioned, pricing was only down 1% in the first quarter, and we expect this to flatten out and turn positive during the remainder of the year as price declines in PVC pipe and grass seed are more than offset by price increases in our other products. Gross profit increased 3% driven by our acquisitions, while our gross margin decreased by 30 basis points to 33% due to lower price realization and higher freight costs more than offsetting gains from our gross margin improvement initiatives. Note that the higher freight was partially due to early purchases of inventory into our distribution centers in anticipation of tariff-driven price increases. Our acquisitions, which were primarily Nursery and Hardscape businesses operate at a higher gross margin, but also operate with higher SG&A. Our SG&A as a percentage of net sales increased 30 basis points to 36.5%, due to our acquisitions, which have a larger effect on the traditionally low revenue first quarter. SG&A for the base business was down 3% as we realized the benefits of cost control actions taken in 2024, including those with Pioneer and our focus branches. We expect to achieve solid SG&A leverage on an adjusted basis in 2025, even with modest organic growth. Adjusted EBITDA for the quarter increased 6% to $22.4 million and adjusted EBITDA margin improved 10 basis points to 2.4%, due to higher net sales and improved SG&A leverage, partially offset by the absence of price realization and the dilutive effect of acquisitions. In terms of initiatives, we are executing specific actions to improve our customer excellence, accelerate organic growth, expand gross margin and increased SG&A leverage. For gross margin improvement, we continue to increase sales with our small customers faster than our company average, drive growth in our private label brands and improve inbound freight costs through our transportation management system. These initiatives not only improve our gross margin, but also add to our organic growth as we gain market share in the small customer segment, as well as across product lines with our competitive private label products like Pro-Trade, Solstice Stone and portfolio. Collectively, these three brands grew 30% in the first quarter. To further drive organic growth, we continue to increase our percentage of bilingual branches from 63% to 65% during the first quarter, and are executing Hispanic marketing programs to create awareness among this important customer segment. We are also making great progress with our sales force productivity as we leverage our CRM and establish more disciplined revenue-generating habits and processes among our inside sales associates and over 580 outside sales associates. Our outside sales force is covering approximately 10% more revenue this year than in 2024 with no additional headcount, allowing us to economically achieve higher organic sales growth. Our digital initiative with siteone.com is also helping us to drive organic daily sales growth as customers, who are engaged with us digitally grew significantly faster than those who are not. We grew our digital sales by 140% in the first quarter on top of the 180% growth achieved in 2024. We continue to cultivate thousands of new regular users of siteone.com, helping customers to be more efficient and helping us to increase market share while making our associates more productive, a true win-win-win. Through siteone.com and our other digital tools, we are accelerating organic growth, and we believe outperforming the market. With the benefit of DispatchTrack, which allows us to more closely manage our customer delivery, we are now able to improve both associate and equipment efficiency in our customer delivery operations. We believe that we can significantly lower our delivery expense while improving the experience for our customers. This is a major initiative, and we expect to make significant progress this year in the next two to three years. Last year, we mentioned that we are intensely managing our underperforming branches or focused branches to ensure that they have the right teams, the right support and are executing our best practices to bring their performance up to or above the SiteOne average. As a part of these aggressive efforts, we consolidated or closed 22 locations in 2024, to strengthen our operations and better serve our customers at a reduced cost. In the first quarter, we achieved good progress with our focused branches, and we expect to gain a meaningful adjusted EBITDA margin lift for SiteOne in the coming years as we improve the performance of these branches. Taken all together, we are continuing to improve our capability to drive organic growth, increase gross margin and achieve operating leverage through our initiatives. On the acquisition front, as I mentioned, we added two excellent companies to our family since the beginning of the year with $20 million in trailing 12-month sales added to SiteOne. We are having conversations with a lot of companies, but many are focused on managing the current market uncertainties, and we are being careful given the unclear economic outlook. Accordingly, 2025 may be a lighter than normal year in terms of acquired revenue, even as we aggressively cultivate key targets for future years. Short-term challenges aside, we remain well positioned to grow consistently through acquisition for many years with an experienced acquisition team, broad and deep relationships with the best companies in the industry, strong balance sheet and an exceptional reputation for being a great long-term home for companies in our industry. In summary, our teams are doing a good job of managing through the near-term market environment leveraging our many opportunities for improvement, prudently adding new companies to SiteOne through acquisition and building our company for the long term. Now John will walk you through the quarter in more detail. John?

Thanks, Doug. I'll begin on slide nine with some highlights from our first quarter results. There were 64 selling days in the first quarter, which is the same as the prior year period. Organic daily sales decreased 1% in the first quarter, compared to the prior year due to colder weather, which resulted in a later start to the spring selling season, a softer repair and remodel end market and lower prices for commodity products. Overall, we saw flat volume and 1% price deflation. Price deflation continues to be driven by commodity products like PVC pipe, which was down approximately 21% in the first quarter and grass seed, which was down approximately 10%. As mentioned on the last call, we estimate our exposure to tariffs is approximately 10% to 15% of sales. While our first quarter results were not impacted, we are starting to see some tariff-related cost increases from suppliers, which we expect the market to pass through. As a result, our revised 2025 outlook for pricing is flat to up 1%, which is a 100 basis point increase from last quarter. Our revised outlook reflects current prices and announced increases from suppliers. Given the changing nature of tariffs, there is greater uncertainty than normal in our outlook. Organic daily sales for agronomic products, which includes fertilizer, control products, ice melt and equipment, increased 7% for the first quarter due to solid demand and strong volume growth for ice melt and pest control products. Organic daily sales for landscaping products, which includes irrigation, nursery, hardscapes, outdoor lining and landscape accessories decreased 4% for the first quarter due to lower prices, a softer repair and remodel end market and colder weather across most regions. Geographically, four out of our nine regions achieved positive organic daily sales growth in the first quarter with weather and tough comps being the primary differentiator between regions. Acquisition sales -- which reflect sales attributable to acquisitions completed in 2024 and 2025, contributed approximately $45 million or 5% to net sales growth. Gross profit increased 3% to approximately $310 million for the first quarter of 2025, compared to approximately $301 million for the prior year period. Gross margin for the first quarter contracted 30 basis points to 33%, due to lower price realization and higher freight costs, partially offset by a positive impact from acquisitions. Selling, general and administrative expenses, or SG&A, increased 5% to approximately $343 million for the first quarter, SG&A as a percentage of net sales increased 30 basis points in the quarter to 36.5%. The increase in both SG&A and SG&A as a percentage of net sales primarily reflects the impact of acquisitions. Base business adjusted SG&A decreased approximately 3% this quarter, reflecting the actions we took last year to rightsize our business for the current market environment. For the first quarter, we reported an income tax benefit of approximately $9 million compared to approximately $10 million for the prior year period. The effective tax rate was 25.5% for the first quarter of 2025, compared to 33.4% for the prior year period. The decrease 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 2025 fiscal year effective tax rate will be between 25% and 26%, excluding discrete items such as excess tax benefits and tax deficiencies. We recorded a net loss attributable to SiteOne of $27.3 million for the first quarter of 2025 compared to $19.3 million for the prior year period. The increase in the net loss was primarily attributable to higher SG&A expense, partially offset by higher net sales. Our weighted average diluted share count was approximately 45.1 million for the three months ended March 30, 2025, compared to approximately 45.3 million for the prior year period. We repurchased approximately 29,000 shares for $3.4 million in the first quarter. In addition, we purchased an additional 142,000 shares or $16.6 million subsequent to quarter end. Adjusted EBITDA increased 6% to $22.4 million for the first quarter, compared to $21.1 million for the prior year period. Adjusted EBITDA margin improved approximately 10 basis points to 2.4%. Adjusted EBITDA includes adjusted EBITDA attributable to a non-controlling interest of $0.3 million for the first quarter. Now I would like to provide a brief update on our balance sheet and cash flow statement as shown on slide 10. Working capital at the end of the first quarter was approximately $1 billion compared to $910 million at the end of the same period prior year. The increase in working capital is primarily due to the additional working capital from acquisitions and increased purchases of inventory ahead of potential tariffs Cash used in operating activities increased approximately $30 million to approximately $130 million in the first quarter. The increase primarily reflects our early purchases of inventory ahead of potential tariffs. We made cash investments of approximately $21 million for the first quarter compared to approximately $7 million for the same period in 2024. The increase primarily reflects higher acquisition investment and capital expenditures. Capital expenditures for the quarter were approximately $15 million compared to approximately $9 million for the prior year period due to increased investment in branch equipment and branch improvement. Net debt at the end of the quarter was approximately $580 million, compared to approximately $508 million at the end of the first quarter of last year. Leverage increased to 1.5 times our trailing 12-month adjusted EBITDA compared to 1.3 times for the same period prior year. As a reminder, our target year-end net debt to adjusted EBITDA leverage range is 1 times to 2 times. At the end of the quarter, we had available liquidity of approximately $524 million which consisted of approximately $57 million cash on hand and approximately $468 million in available capacity under our ABL facility. Our priority from a balance sheet and funding perspective is to maintain our financial strength and flexibility 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 1 company in the first quarter and one post quarter for a combined trailing 12-month net sales of approximately $20 million year-to-date. Since 2014, we have acquired 100 companies with approximately $2 billion in trailing 12-month net sales added to SiteOne. Turning to slides 12 and 13, you will find information on our most recent acquisitions. On January 2, Devil Mountain, SiteOne's majority-owned joint venture acquired Pacific Nurseries, a single location wholesale distributor of nursery products in Colma, California. This acquisition improves our capability to serve our customers in the San Francisco Bay Area and extends our leading wholesale nursery presence in California. This is the first acquisition for Devil Mountain since we joined forces in April 2024 and we anticipate more opportunities to expand this strong wholesale nursery platform going forward. On March 31, we acquired Green Trade Nursery, a single location wholesale distributor of nursery products in Jasper, Georgia. The addition of Green trade extends our leading nursery position further into the fast-growing North Atlanta markets, providing our customers in these markets with greater access to high-quality nursery products. Summarizing on slide 14, our acquisition strategy continues to create significant value for SiteOne by adding excellent talent and moving us forward toward our goal of providing a full line of landscape products and services to our customers in all major U.S. and Canadian markets. As Doug mentioned, the ongoing macroeconomic uncertainty tends to have a dampening effect on acquisition activity. Accordingly, our acquired revenue may be lower this year. That said, we have a large pipeline of potential deals that we are actively cultivating and significant runway to grow and create value through acquisitions this year and in the years to come. As always, I want to thank the entire SiteOne team for their passion and commitment to making SiteOne a great place to work and for welcoming the newly acquired teams when they join the SiteOne family. I will now turn the call back to Doug.

Thanks, Scott. I'll wrap up on slide 15. There remains significant macroeconomic uncertainty associated with tariffs, inflation and interest rates that could negatively affect consumer confidence and the demand in our end markets. Against this backdrop, we expect commodity price deflation to continue moderating in 2025 with declines in products like PVC pipe and grass seed mitigated by price increases across our other products. As John mentioned, with the recently announced increases from suppliers due to tariffs, we currently expect prices to be flat to up 1% for the full year 2025. This is an increase from our beginning of the year outlook. In terms of end markets, our current outlook is a bit more pessimistic compared to the beginning of the year. We continue to expect new residential single-family completions, which comprise 21% of our sales to be roughly flat in 2025. Continued high interest rates, elevated home values and lower consumer confidence are constraining demand. But with inventory being low, builders are continuing to build new homes. Feedback from our customers in this segment is mixed, and we expect stable demand for landscaping products in this end market during the remainder of the year. New commercial construction, which represents 14% of our sales was solid in 2024, and we believe it will remain steady in 2025. Bidding activity from our project services teams continues to be positive compared to prior year, which is a good indicator of continued demand. Our customer backlogs remain solid, and we believe the commercial end market will be flat this year. The repair and upgrade market, which represents 30% of our sales, was our weakest end market in 2024 with high-single-digit volume declines. During the second-half of last year, we saw this end market stabilize, but we are off to a soft start with repair and upgrade in 2025. With lower consumer confidence, reduced existing home sales and high economic uncertainty, we believe that repair and upgrade will be down low single digits in 2025. Lastly, in the maintenance end market, which represents 35% of our sales, we achieved good sales growth in the first quarter as our teams gained profitable market share. We expect the maintenance end market to continue growing steadily in 2025. Taken all together, we expect our end markets to be flat to slightly down for the full-year. This backdrop and with the benefit of our commercial initiatives, we expect sales volume to be positive in 2025. When coupled with modest price inflation, we expect low-single-digit organic daily sales growth for the full-year 2025. Our current sales volume through April so far supports this trend. We expect gross margin in 2025 to be similar to 2024, driven by our initiatives and the contribution from acquisitions offsetting higher freight costs. With strong actions taken in 2024 to reduce SG&A and continued focus on branch improvement, sales productivity and delivery efficiency, we expect to achieve operating leverage in 2025, yielding solid improvement in our adjusted EBITDA margin. In terms of acquisitions, as Scott mentioned, we expect to add more excellent companies to the SiteOne family during the remainder of the year, though potentially less acquired revenue compared to 2024. With all these factors in mind, we continue to expect our full-year adjusted EBITDA for fiscal 2025 to be in the range of $400 million to $430 million. This range does not factor in any contribution from unannounced acquisitions. In closing, I would like to sincerely thank all our SiteOne associates who continue to amaze me with their passion, commitment, teamwork and selfless service. We have a tremendous team, and it is an honor to be joined with them as we deliver increasing value for all our stakeholders. I would also like to thank our suppliers for supporting us so strongly and our customers for allowing us to be their partner. Operator, please open the line for questions.

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

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

Yes. So we've got significant efforts on both of those, as you know, taking DispatchTrack first. DispatchTrack, we installed over the last couple of years at SiteOne, it's our tracking software where we can track our trucks and route, et cetera. We can also notify customers when their deliveries are coming, and it's a great customer service tool. We've gotten the customer service benefit out of it. But in terms of really consolidating our last leg of delivery, we're continuing to move forward there in terms of going from a Dispatch from each branch to a central Dispatch in a main market and driving the efficiency of those trucks and the drivers associated with them. So we've got -- we track our delivery expense. And without specific numbers, we can see the progress that, it's a significant part of our SG&A. We can see the progress that we're making in the first quarter. We made good progress in driving that expense down. And so that's a multiyear effort to get SG&A leverage out of the business. The second one, our focus branches, we've talked about that, we're very pleased with the progress we made in the first quarter. Obviously, Pioneer was a big part of that. We consolidated and closed the 22 branches. We've taken a lot of overhead out of Pioneer. And now we're comping against last year, we're seeing that overhead savings come through. We mentioned the base business overhead was down 3%. And A big part of that is Pioneer. Another part of that is the focus branches, right? We consolidate or close some of those focus branches, but there is some SG&A takeout in those focused branches, and we're seeing that work that was done in '24 come through comping against our year last year. So with the focus branches, a big part of that also is just improving the customer service, driving more revenue growth, improving the gross margin. So it's more of a total turnaround situation. But certainly, SG&A was a part of that. And early in the year, it's harder to see the organic sales and margin improvement, but the SG&A improvement is coming through so far.

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

Right. Well, we're constantly driving to gain share. We've got two ways to do that. One is that existing customers, we increased their share of wallet by adding product lines and two, going after new customers that we don't have to divide that up, we're underserved with a small customer. If you look at our market share, 18% overall our large customer share would be significantly above that. Our small customer share would be high single digits. And that segment shops all over -- the shops in Home Depot, Lowe's, shops at our competitors, et cetera. And we've seen steady gains with that where the growth of those small customers is significantly higher than our company average that continued into the first quarter. And so that's a big area to gain share. We can take that high single digit that small customer up to our average which is 18%. And that won't happen this year. Obviously, it will happen over multi years. That's a huge growth engine for SiteOne. Our Hispanic marketing and our bilingual branches, by the way, are a part of that, right, because a lot of those customers are Hispanic. On the other side, gaining share with kind of, call it, our midsize and larger customers, we've really focused on our sales force productivity, where we divide our sales into kind of 2 sets. We have our key account managers that manage large books of business, our existing customers, and they're working to gain share with those customers. But we have business development managers that we deploy to go after new business, and they're kind of the big game hunters, if you will. They have smaller books, they're highly trained and they go after new business. We've seen increasing success with those BDMs and driving our growth. And we have our CRM now. We have better sales management, and so we're seeing increased productivity out of those. And I mentioned on the call, we're now covering more sales with our sales force than we did before. Last year, we covered 65% of our sales. This year, we're covering 72% of our sales with our sales force with no added -- I'm sorry, 52% or 62% last year, 72% this year with no added headcount, right? And so -- and our sales that are covered by sellers tends to grow faster than the average at SiteOne. And so that's a great progression as we're getting more coverage, but also as we're training and getting more out of those BDMs. Last initiative I'll talk about is, we have an initiative with our inside sales associates, which we have a force that is inside that does two things: One, it calls customers and welcomes them when they join SiteOne, kind of get to know their business profiles so that we can serve them better. That's new. We've typically done out of the branch, but the branch associates are busy. And so we found now that calling them with a separate individual that's tied to that local market does a better job of welcoming them. And then those inside sales associates also go and call customers that have left us or are leaving us to win them back, find out what their issue is, solve that issue and win them back. And so we're seeing some success there in welcoming and getting more new customers in, having them stick, having less turnover with those customers and going and winning back customers. So I know that's a lot, but it just gives you the breadth of efforts that we're using organically to go gain share and we're making gain with all of those, and that's how we can outperform the market consistently.

That all sounds great, Doug. Thanks very much.

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

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

We think we can hit a low-single-digit organic growth in the second quarter. Certainly, things, as Doug alluded to on the call, things are trending in that direction, really as we've started to hit the spring season. With regards to price, I would expect it would be roughly negative 1% to flat from the second quarter. A lot of the -- as Doug alluded to, some of the supplier increases as a result of tariffs are going into effect probably, made way through the second quarter and probably we'll see more of those in the second-half of the year, but flattish would probably be our estimate for right now for price in the second quarter.

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

10% to 15% is primarily indirect from suppliers, not that we're directly importing. Our direct importing is probably less than 1% or 2% from that standpoint. But we know our suppliers have sourcing relationships in Mexico, China, for instance, would be the two largest by far. And that's what we're starting to see primarily coming through. So our direct importing where we're paying tariffs is a very, very small component of our business, honestly, less than 1%. And the price increases -- yes, the price increases we're seeing, most of them are less than 10%, probably more in the 4% to 8%. It's a lot of it is targeted at specific lines that have our source from overseas from those suppliers. There are a couple of outliers, but it's relatively small business from that standpoint. But so I would say almost everything primarily single digit would be the bulk of the volume.

It tends to be irrigation and lighting...

Lighting would be some impact.

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

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

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

Awesome. All right. Thanks, pass it on.

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

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

We -- so we don't directly pay any, or I would say, bring in import stuff from Mexico. So I think my guess is suppliers are -- have a mixture, and what's coming through to us is a blend of those as they try to estimate that?

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

It hasn't changed that much for the year yet. I mean, I think we said we expect kind of steady for the full year. So we would expect -- there's some going to be more positive position. I would think pricing relative to last year. But as Doug alluded to, there is some offset in freight. So most of the improvement this year, as we've talked about, is going to come on the SG&A leverage line from that. And we'll have to see where -- as gross margins progress throughout the year.

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

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

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

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

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

Well, it's always a balance. We're very selective. Well, obviously, we think growth of this business and good investments in acquisitions is still our primary focus. But certainly, when the stock performance is there, it lends itself to buying more and repurchasing shares from that standpoint. So we do have -- we have a very strong balance sheet. We will continue to maintain a strong balance sheet, and deploy our capital right now. Certainly, at this level of the stock price, share repurchases obviously become more attractive, and supporting that from that perspective.

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

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

Yes. So our flatter margin guide, I would say some of that's already been realized. I would say January and February pricing came in -- our price realization was a little less. I think some of the things you pointed out are correct from the standpoint that freight. We still expect it to be up somewhat throughout the year, but maybe some of the -- it was a little bit higher, probably because of pre-purchasing in the quarter. And then we plan on passing through most of the price increases. I mean in the scheme of things going from a only up 100 basis points, we're not seeing a huge increase in price relative to certainly in comparison to what we saw two or three years ago from that standpoint. So in general, I think our forecast is relatively flat. We don't have a big input from new acquisitions right now coming in, in the second half of this year to drive it. So it's relatively flat. I think most of kind of -- it was slightly up going into the year. It's now relatively flat, and we'll have to see how it plays out throughout the rest of the year.

Got it. Okay. And then just shifting gears to the end market commentary. The new residential, in particular, expecting kind of flattish completions, starts are certainly down year-to-date. The builders seem to be recalibrating based on weaker order trends, closing guides have come down. So help us understand a little bit more how you're thinking about -- like there's got to be an underlying start assumptions even though you're tied more to completion. So how are you thinking about that? And how has that progressed as the year has gone on so far?

Yes. Well, we're seeing kind of steady demand. I mean, starts that have been flattish. I mean they were up year-over-year in March. So that's been choppy. Quite frankly, we're getting mixed feedback for the second half. I mean some builders are saying they're going to be down. They're going to put less in -- less completion, some are staying up. And so it feels flattish to us. But we -- there's high uncertainty, both in that and the commercial markets. So we're watching it closely. We haven't seen a significant drop yet and the information we're getting is mixed, it's not all down. We're getting mixed information. So a lot of uncertainty. Certainly, there's potential downside there. We feel with our ability to gain share and with the balancing strength of the maintenance and the commercial market that seems very solid. There's puts and takes. And overall, our guidance is flat to down slightly. That's our best outlook for right now.

Got it. Okay, thanks, Doug.

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

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

Yes. Well, one thing to keep in mind is that when you're looking at an installed landscaping job, the material cost of that is only about 10% to 25% of that job. Most of that is your contractor labor and their operating expense, et cetera, right? So if you take a 4% increase -- a 5% increase, that's going to turn into a 1% inflation on that total job. So the material movements don't tend to impact demand just because it's has a smaller impact on that. Demand and landscaping is more impacted by labor inflation and those kind of things. So that's been our history. We haven't seen price increases like this dampen demand. I think the more important risk to demand is the uncertainty that's in the market, consumer confidence, et cetera. And we do think that's affecting the remodel market as we had mentioned. And that's the bigger risk for us, not material price increases, especially the magnitude of the increases we're seeing announced.

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

We have built into our guidance. And this -- with regards to both of those items, it does not -- hasn't really changed from the first quarter from that standpoint. We do have single digit decrease in grass seed built into our guidance. And then PVC, we do expect some additional decreases this year in PVC pipe, and that's still in our guidance. Maybe not -- we're running on PVC specifically down 20% year-over-year. I don't think exiting this year, you would expect to see an additional 20% down. But certainly, those two items would probably be deflationary for the full-year.

Okay. Thanks, John. Good luck, guys.

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

Hey, thank you. Good morning. First question I wanted to ask is kind of in terms of the tariffs. I mean where are you right now in terms of sophistication as an organization to kind of look at your suppliers when they come to you with increases and kind of know where they're coming from and therefore, be able to push back if you want to because given -- I know you said that the end market, but it's your customers that you have to attract? Do you have -- do you see any incremental sensitivity to pricing, especially in this round when demand is a little weaker? And I guess, I would also argue Home Depot now own Heritage, kind of the largest competitor, they've already kind of been aggressive. Any risk to think through there?

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

I would also say our suppliers are very in tune with that. Also, they now are looking closely at demand and are not -- they're -- our partnerships are long and deep and they've been in this industry for a long time, and they're not -- they're very cognizant of the current economic environment and are thinking very carefully on the price increases when they're are coming.

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

Second one, I'll ask since you're on the front line, and it's been brought up less and less on calls given tariffs. The kind of labor kind of issue and kind of the risk to that, is there anything you're incremental seeing out there in terms of uncertainty from your customers or just -- or their pain points? And just remind us if things get tighter, do you see that as an advantage given the time savings you do or just a risk that goes to everybody? Thanks.

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

Thanks. I'll pass it on.

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

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

Well, a lot of that is already built into our guidance. From that standpoint, if you actually look at what our guidance reflects most of that improvement. As Doug alluded to, most of our gross margin is going to be steady year-over-year. And so most of what you're seeing with regards to the improvement and what's built into our guidance is a result of managing SG&A and achieving higher leverage as a result of the SG&A. And it's important to remember, we're still subject to wage inflation. So there is -- the cost per employee is going up, and the efforts we've taken with our focused branches and delivering a number of different initiatives to try to improve productivity is really helping to offset those costs this year.

Yes. And just to comment if markets soften further, then we have the ability to pull in -- labor is our biggest SG&A item. We do have some other SG&A items that tend to be more variable or semi-fixed, if you will, that will obviously will come in. But we can pull in labor and not only pulling labor, but do it appropriate to the market because if we have less sales, it's likely to be in certain regions, we're going to pull those in, in other regions where it might be growing, we're going to obviously, continue to support those. So yes, we do have the ability to pull in John decremental margin, really hard to calculate. We feel confident in our ability to improve our profitability this year given the market, if it's softer, we can react and still get there.

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

No. I mean, we expect to continue to improve cash flow. I guess the only thing that would be different than normal and probably by year-end, it plays out is we are going to make sure we give them potential supply chain disruptions that we have sufficient inventory to service our customers this year. But Otherwise, we would -- we expect to continue to improve efficiency from a cash flow perspective, but very similar incremental improvements up relative to last year, excluding the impact of potentially having a little bit more inventory just to service the customer.

All right. Thank you for taking my questions.

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

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