SiteOne Landscape Supply Inc (SITE) 2017 Q4 法說會逐字稿

Greetings, and welcome to SiteOne Landscape Supply Fourth Quarter and Full Year 2017 Earnings Call. (Operator Instructions)

I would now like to turn the conference over to your host, Pascal Convers, Executive Vice President of Strategy and Development.

Thank you, and good morning, everyone. We issued our earnings press release this morning and posted a slide presentation to the Investor Relations portion of our website at investors.siteone.com. We will be referencing the slides during this call. I'm joined today by Doug Black, our Chairman and Chief Executive Officer; and John Guthrie, our Chief Financial Officer.

Before we begin, I would like to remind everyone that today's press release and the presentations 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, the company 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 the slide presentation on our website.

I would now like to turn the call over to our Chairman and CEO, Doug Black.

Thank you, Pascal. Good morning, and thank you for taking the time to join us today. We had another very good year of progress in 2017, both in building our company and in delivering solid financial results. Since we are still a young company in early stages of our development, I would like to start today's call with a review of our unique market position and our strategy to deliver superior long-term performance and growth. I will then cover the progress that we achieved on our initiatives in 2017 and the highlights of our 2017 fourth quarter and full year financial results. John Guthrie will then walk you through our financial results in more detail. Pascal Convers will provide an update on our acquisition strategy. And finally, I will come back to provide comments on our guidance and outlook before taking your questions.

I'll start on Slide 4 of our earnings presentation. SiteOne is the largest and only national wholesale distributor of landscaping products with a footprint of more than 500 branches across the United States and Canada and a 10% share of this $18 billion highly fragmented market. We are more than 4x larger than our next largest competitor and larger than the next 10, combined.

You will note from the map on Slide 4 that we now have 3 major distribution centers to complement our branches, and those give us additional product and logistics advantages. Also, we are the only distributor of scale to provide the full range of products and services that professional landscape contractors and maintainers need. This full-line capability gives us competitive advantage and provides a nice end-market balance between maintenance, new construction, and repair and upgrade.

Lastly, the landscaping products market has thousands of suppliers trying to reach almost 0.5 million customers, so it lends itself to a strong world-class wholesale distributor to connect them.

Turning to Slide 5. Our strategy combines the scale, resources and capabilities of a large world-class company with the passion, deep knowledge and entrepreneurialism of our local teams in order to deliver superior value to our customers and suppliers. As mentioned, we do this across the full range of products with scale advantage, both nationally and locally, and with value-added services and business assistance that is unmatched in the industry.

We further drive this strategy by acquiring leading local and regional companies to fill in our product portfolio, add terrific talent to our teams and expand our branch network across U.S. and Canada. Note that our large and local culture and deep acquisition experience allow us to assimilate these family companies, while maintaining and leveraging their entrepreneurial spirit and local secret sauce. We believe the combination of these efforts will allow us to gain market share, both organically and inorganically, in order to accelerate our growth and profitability.

Our strategy is enhanced through the execution of our 5 commercial and operational initiatives covering category management, pricing, supply chain, sales force performance and marketing. These initiatives help to expand our margins and accelerate organic growth.

Overall, our market position, capabilities and strategy allow us to create value in 3 complementary ways through organic growth, margin expansion and acquisition growth. We are still in the early innings of implementing our strategy and believe that we can leverage all 3 of these areas to create significant value for many years to come.

Slide 6 shows the history of our company and our strategy in action. Following the spinout from Deere & Company in 2013, we developed a vision to become a company of excellence, delivering superior value to our associates, customers, suppliers, shareholders and our local communities. We then developed a detailed strategy to do this, leveraging our industry leadership position and the uniquely attractive aspects of the landscaping wholesale distribution market.

After 3 years of building the team, transforming the culture and building the company, both organically and through acquisition, we are now more convinced than ever that our strategy is working and that it has enormous potential to deliver future performance and growth.

Over the last 3 years, our efforts have also resulted in significant financial improvement. Since then, we have grown net sales by 58% and adjusted EBITDA by 113%, while expanding our EBITDA margin from 6.3% to 8.4%. We remain on track towards our stated milestone of 10%-plus adjusted EBITDA margin.

Turning to Slide 7. Our performance and growth achieved in 2017 is a further reflection of our successful strategic execution. We achieved 13% overall net sales growth despite the headwinds created by Hurricanes Harvey and Irma in the third quarter and the lack of price inflation throughout the year. Our net sales growth was a healthy balance of 5% daily organic growth, which increased from 4% daily organic sales growth in 2016, and 8% sales growth added through acquisitions. The increased daily organic sales growth was helped by further implementation of our sales force performance and marketing initiatives.

We expanded gross margin by 70 basis points to 32% in 2017 as we continue to benefit from our category management initiative. We remain excited about our ability to expand gross margin going forward as we move volume to our preferred suppliers and ultimately benefit from the major investments that we are making in our supply chain. We also have opportunities to further improve our gross margin as we expand our private label product offering.

As we highlighted on our last call, we made important investments to upgrade our IT infrastructure, install our new distribution centers, improve our sales force structure and develop a world-class SiteOne e-commerce platform. We believe that these investments and others we are making to build our company will deliver tremendous competitive advantage in our fragmented market and support accelerated performance and growth for years to come. While we continue to invest in the business, we expect to start leveraging our SG&A, thereby contributing positively to our adjusted EBITDA margin in 2018 and beyond.

Adjusted EBITDA grew a healthy 17% to $157 million for the full year 2017, and our adjusted EBITDA margin improved 30 basis points to 8.4%. We achieved a net debt-to-adjusted EBITDA ratio of 2.9x, which falls within our target range of 2 to 3x. We accomplished this while investing in the business and completing 8 acquisitions during the year.

In summary, I am very pleased with our progress in 2017 and in the way our team met the various challenges and executed our initiatives throughout the year. We closed the year with a strong fourth quarter result and are moving into 2018 with a stronger company and excellent momentum, including our 2 recent acquisitions.

I would like to thank all of our associates for doing a terrific job with our customers and suppliers and making these results happen. I'm very excited about where we are as a company and our opportunities ahead.

Now I will let John walk you through the details for the quarter and the year in more detail. John?

Thanks, Doug. I'll begin on Slide 8 with the income statement for our fourth quarter results. We reported a net sales increase of 15% to $416 million in the fourth quarter. Net sales for the fiscal year 2017 increased by 13% to $1.86 billion. We had 61 selling days in the quarter, which was unchanged compared to the fourth quarter of last year.

Organic daily sales grew 7% in the fourth quarter and 5% for the fiscal year. Organic daily sales for construction-related products, like irrigation, nursery and hardscapes, grew 9% for the quarter and 7% for the year as we continued to benefit from strong demand in the construction and repair and upgrade end markets. Organic daily sales grew 2% for agronomic products for both the quarter and the year, driven by improved sales to the golf end-market.

Pricing for all products was flat, both for the quarter and the year, reflecting a continued low-inflation environment. Acquisitions contributed $31 million of net sales growth in the fourth quarter and $135 million for the full year. For both the quarter and the year, acquisitions contributed 8% to our sales growth.

Gross profit increased 18% to $132 million in the fourth quarter, and gross margin increased 80 basis points to 31.7%. For the full year, gross profit increased 15% to $596 million, and gross margin increased 70 basis points to 32%. Our category management initiatives were the primary drivers of the gross margin improvement for both the quarter and the year.

Product mix had a negligible impact on gross margin during both the quarter and the year. Selling, general and administrative expenses, or SG&A, increased by 15% to $134 million in the fourth quarter, and SG&A as a percentage of sales increased 10 basis points to 32.2%. The increase in SG&A was primarily attributable to the contribution from acquisitions.

For the full year, SG&A increased by 12% to $502 million, and SG&A as a percent of sales declined by 10 basis points to 27% due in part to the IPO costs incurred in 2016. On an adjusted EBITDA basis, SG&A as a percentage of sales increased 40 basis points for the year, primarily due to acquisitions and our investments in the sales force, our B2B e-commerce solution and marketing initiatives.

We recorded an income tax benefit of $11 million in the fourth quarter of 2017 compared to an income tax benefit of $4 million in the prior year period. The effective tax rate was 154% for the fourth quarter, compared to 42.3% for the prior year period. The adoption of ASU 2016-09 and the enactment of the 2017 Tax Act were the primary drivers of the increased income tax benefit and the effective tax rate.

For the year ended December 31, 2017, our effective tax rate was 24.8% as compared to 41.0% for the 2016 fiscal year. The decrease in the effective tax rate was due primarily to a $6.8 million benefit related to ASU 2016-09 and a $3.2 million benefit related to the 2017 Tax Act. We have not finalized our accounting for the tax effects of the 2017 Tax Act, but have provided a reasonable estimate. As a reminder, the 2017 Tax Act required us to remeasure certain deferred tax assets and liabilities at the reduced U.S. corporate income tax rate of 21% and to also record a onetime transition tax related to the unremitted earnings of our Canadian subsidiary.

Although we are still evaluating the impact of the 2017 Tax Act, we currently expect our 2018 effective tax rate will be between 26% and 27%, excluding ASU 2016-09 and other discrete items.

Now turning to Slide 9. We recorded net income of $4.0 million for the fourth quarter, compared to a net loss of $5.6 million for the prior year period. Net income for the 2017 fiscal year increased to $54.6 million, compared to $30.6 million in 2016. The increase in net income for both the quarter and the year was primarily caused by higher net sales, gross margin improvement and the income tax benefit.

Our diluted share count increased by 950,000 shares sequentially to 42.2 million shares due to the impact of ASU 2016-09, the increased stock price and employees' option exercises. Adjusted EBITDA was $15 million for the quarter, compared to $11 million for the same period in the prior year. For the full year, adjusted EBITDA increased 17% to $157 million, compared to $134 million in the prior year. The improvement reflects our strong top line growth and our ability to expand gross margin.

Now I'd like to provide a brief update on our balance sheet and the cash flow statement, as shown on Slide 10. Net working capital increased 30% year-over-year to $396 million at the end of the fiscal 2017. Growth in net working capital primarily reflected an increase in inventory and receivables attributable to growth in our business, both organically and through acquisitions. In addition, we are carrying additional inventory as a precaution as we transition to our new supply chain, including our new distribution centers. While this is currently resulting in higher inventory levels, we expect longer term that this strategy will enable us to generate efficiencies in our operations, including higher inventory turns and lower working capital.

We generated positive cash flow from operations of $31 million in the fourth quarter, compared to $64 million in the prior year period. The reduction in operating cash flow for the quarter was primarily attributable to accounts receivable, which decreased less year-over-year due to the stronger sales in the fourth quarter of 2017, especially in December when we saw sales growth of 22% year-over-year. We also saw a change in customer mix with greater sales to the commercial and golf markets, both of which have longer payment terms.

For the year, we saw a decrease in operating cash flow to $16 million from $73 million in the prior year due to changes in working capital previously discussed. We view many of these fluctuations as temporary, and we expect them to self-correct. In 2018, we expect free cash flow, operating cash flow less CapEx, to exceed net income as it has historically.

We made cash investments of $22 million for the quarter and $99 million for the year, compared with $12 million and $75 million for the prior year period. The increased investment to support our growth strategy reflected $18 million more from acquisitions and $6 million more in capital expenditures in 2017. Net debt at the end of the year was $459 million, and the leverage was 2.9x of trailing 12 months adjusted EBITDA, which is within our targeted range of 2 to 3x.

In summary, our capital structure continues to provide us with the flexibility to execute our growth strategy, including the funding of our acquisitions.

I will now turn the call over to Pascal for an update on SiteOne's acquisition strategy.

Thank you, John. As Doug mentioned earlier, acquisitions play a key role within our overall growth strategy.

As shown on Slide 11, we've now acquired 24 companies since the beginning of 2014. They added 157 branches to SiteOne and contribute $640 million in sales on a trailing 12 months basis. We've made good progress accelerating our pace of acquisitions from 4 in 2015, to 6 in 2016, to 8 in 2017 and now 2 more through the first 1.5 months of 2018.

The hardscapes and nursery acquisition we completed in 2017 are very good strategic fit for SiteOne as they complement our irrigation agronomics product lines, enable our customers to have access to a full one-stop shop offering and also benefit from strong outdoor living growth trends.

In the last 3 years, we have increased our full product line coverage from 25 to 45 markets via hardscapes and nursery acquisitions. The opportunity for SiteOne to grow and provide a one-stop shop offering remains very large as there are about 80 markets where we're still missing both hardscapes and nursery product lines. It is important to note that many of these acquisitions have been fully integrated into the SiteOne organization and are delivering clear value as we realize our planned synergies.

Now as we turn to Slides 12 through 15, you will be able to find information on the acquisition we completed in the fourth quarter and the 2 we completed more recently in the first quarter of 2018.

In October, we closed the acquisition of Harmony Gardens, the leader in the distribution of nursery and related products to landscape professionals, with 2 locations in the Greater Denver and Fort Collins, Colorado, markets. Through Harmony Gardens, SiteOne adds nursery products, which we did not have in that market, to existing irrigation, agronomics, hardscapes and landscape lighting products lines in Colorado.

In January, we acquired Pete Rose, a leader in the distribution of natural stone and hardscape materials with one location in the Greater Richmond, Virginia, market. The Pete Rose dedicated hardscape center complements our existing operations with the full range of irrigation, agronomics and nursery product offerings in the Virginia markets.

More recently, in February, we completed the highly strategic acquisition of Atlantic Irrigation, which is a leading supplier of irrigation products along the East Coast with 33 locations in 12 U.S. states and 2 Canadian provinces. Atlantic Irrigation brings a talented team to SiteOne, with an excellent reputation and a strong history of customer focus and growth. The combination of our 2 companies makes us the clear irrigation leader in the East and provides good purchasing synergies as well as cross-selling opportunities.

As we turn to Slide 16, we continue to see a significant opportunity to grow profitably through acquisitions, which allow us to move into new markets; expand our presence in existing ones; broaden our product offering; and also, very importantly, add outstanding talent to our team. Our pipeline remains robust; and, with 2 acquisitions year-to-date, our M&A strategy is gaining momentum. And we continue to build a reputation as the buyer of choice in the industry.

We would also like to thank all the leaders of SiteOne who are great ambassadors, working hand-in-hand with our development team to help SiteOne select the best companies to join us in the future. While the timing of acquisitions cannot be fully predicted, we have additional acquisitions that we expect to close in the next few months and contribute nicely to our growth in 2018 and beyond.

And with that, I'd like to turn the call back over to Doug to discuss the outlook.

Thank you, Pascal. Overall, we are pleased with our fourth quarter and full year results for 2017 and excited about the momentum that we carry into 2018. We continue to see positive underlying market trends with good growth in residential and commercial construction, solid demand in repair and upgrade, and steady demand in maintenance. Our customers have strong backlogs, and we anticipate that market growth this year should be comparable to what we saw in 2017.

Building off of this market growth, we will continue to execute our sales force performance and marketing initiatives, which should further support our organic daily net sales growth. We also expect to achieve additional gross margin improvement through our category management and supply chain initiatives. Additionally, we are planning to gain SG&A leverage in 2018, which will now contribute to the expansion of our adjusted EBITDA margin. And finally, as Pascal stated, our acquisition program is off to a good start in 2018, and we expect to acquire more companies during the rest of the year.

Overall, we are confident that we can deliver another year of excellent performance and growth. And for the full year 2018, we expect adjusted EBITDA to be in the range of $180 million to $192 million.

In closing, I would like to acknowledge all of the SiteOne associates who have worked tirelessly with our suppliers to serve our customers and who have made us successful to this point. We have a tremendous team, and it is an honor to be joined with them as we build a company of excellence for all of our stakeholders.

Operator, please open the line for questions.

(Operator Instructions) Our first question is from David Manthey with Robert W. Baird.

First off, Doug, you mentioned it right at the end here, your organic growth assumption that's embedded in your guidance. You said the market growth would be about the same as last year. It seems, I guess, a little bit of an easier comp, and maybe we get some tailwinds here. Could you give us an idea? Are you assuming the same organic growth rate, overall, for the company in '18 versus '17 in your guidance?

Reflected in our guidance is we would expect to do a bit better than last year. We think the market will be the same. We've got a stronger sales force, and we're further down the road in terms of our marketing. So without giving any specific numbers, I'd say, slightly -- our objective and what we feel we can do in 2018 would be slightly better than what you saw in 2017.

Okay. And then another component there might be price. And given that pricing was flat in 2017 and we're hearing inflation and price increases creeping in, in various product categories, any hope that we get a little bit of positive traction on the pricing front in '18?

Yes. We really think we'll get -- our guess would be that we'll get about 1% of price inflation, which we didn't get any price inflation last year. We see our vendors are raising prices, and we pass those through and work with our customers on that. So what we're seeing right now, we would estimate about 1%, which would be a nice additional lift, which was a headwind last year for our organic growth.

Just at the end of last year, we did see a kind of an inflection point where we started -- last several months of the year, we started to see a positive pickup in inflation. So we expect that to continue. Most price increases occur in the first quarter of this year.

Our next question is from Ryan Merkel with William Blair & Company.

I wanted to start with SG&A leverage for 2018. You mentioned that you thought you'd do a little bit better there and get some operating leverage. What is a good range that we should be thinking about for our models?

Well, it starts with our base business leverage. If you look at the base business, we expect that we'd get about 16% or so incremental EBITDA on the -- on every dollar of organic sales. And then from that, we look at the investments that we're going to make, and we are continuing to invest in our business. We're investing in e-commerce. We're investing in barcoding. We're investing in our phone system. So we're still a young company investing. The people investment in terms of the build for the head office is largely behind us, so we don't have that headwind. And then, of course, acquisitions come in -- depending on what kind of acquisitions -- if they are nursery and hardscapes they tend to be a lot higher SG&A than our normal base business. They carry higher gross margin, by the way, so they have good operating profit.

So when you mix all that together, we'll see some SG&A leverage in 2018. That's our plan, and that's what we're working for. It won't be the full leverage you would see with a mature company because of those investments that we're making. We're investing over $5 million in those e-commerce, barcoding, those initiatives that I talked about. So when you put it together, you'll see -- we'll see some leverage, not full leverage of a mature company, reflecting the investments that we're still making. But we're happy that we'll finally have the SG&A as a percent of sales working for us in our march toward 10% EBITDA, and that will be a nice change.

Got it. That's helpful. Okay. And then moving on to free cash flow. I can understand the actual inventory to supply chain upgrade this year, but just help us with next year because I think that reverses. So what kind of free cash flow to net income conversion should we think about for 2018?

We're expecting free cash flow to exceed net income again. Next year, we view the inventory investment here kind of as we transitioned out, we should start seeing a leverage as we work through kind of the DCs. And our supply chain initiatives would largely be done in the first half of the year, and then we should be able to leverage that going forward.

Got it. And then just lastly, if I could. The weather has been a little bit more normal this year in the Midwest and Northeast with the snow. So just I've had a lot of questions from investors. Does this help you? Does this hurt you? Or is this indifferent? That will be helpful, I think.

Right. No. So if you remember last year, we had a very mild winter in the South. And then we had weather that was okay, let's say, in the North. And then in the West, it was very, very wet. And so we really didn't do anything in the West last year. So this year, we're seeing the West is fine, and so we're seeing strong growth there. We are having, let's say, a normal winter in the North, which provides some snow events. We're selling more ice melt. That's a lower margin product, but it is -- we are seeing those sales. In the South, we're comping -- we would be down versus last year because of the comp against the mild winter last year.

So when you take it all together, we would call it a normal winter. We're seeing about what we thought we would see. And again, that highlights the benefit of us being in 45 states -- and now all 6 Canadian provinces -- that we average out quite well, unless it's an extreme winter, which we had in 2016. So overall, puts and takes; some ups, some downs. Overall, we'd call it about normal.

Our next question is from Nishu Sood with Deutsche Bank.

I wanted to ask first about the new construction categories, strong 9% in the fourth quarter, 7% for the year. How has that been developing? Now obviously, there was a weather fluctuation from '16 to '17. But I wanted to understand, resi versus commercial, what sorts of projects are driving that? And really how that's shaping up as construction recovery goes on here.

Yes. So Nishu, we're seeing just a good, steady flow of demand on the commercial side. Our customers' backlog are still very strong. They're still quite a ways out in projects. And of course, we bias toward more of the retail, office, those kind of commercial projects that have a lot of landscaping. And then on the residential side, just good, steady growth we're seeing in residential market. Again, our landscapers are busy. Repair and remodel, which is 20% of our business, has been very strong, so we've been happy with that. And then the maintenance has been quite good. Our maintenance products last year, up 2%. That's right on the bull's eye. If you recall, there was a bit of price deflation in maintenance. And so the volume growth would have been a bit higher than that, which we think reflects our ability to pick up share there.

So steady as it goes. We see no wavering in demand. We don't see any heat up or acceleration; just good steady growth in the new construction markets, both commercial and residential. And it is encouraging on the commercial side, where the backlogs are longer out, that we're still strong in terms of our customers' backlog. So it doesn't imply any imminent slowdown in commercial, which would be the area we would expect to kind of slow first if we were looking at any kind of market downturn. So we don't see it today.

Got it. And are you concerned about, obviously, the widely reported labor issues, which have been felt a little bit more significantly on the construction side? Are you concerned about those, and what effect those might have for '18?

Right. Well, labor is a constant battle, and it's been a battle for the last couple of years. Our customers struggle mightily to keep their crews staffed or to grow their crews. We struggle to, in terms of our picking up our associates, to staff our branches. But we seem to have been finding a way to fight through it and still grow. We work with our customers constantly on their productivity, which we can help them with both our products; like, for instance, our LESCO slow-release products, which allow them to treat yards every other month or every third month instead of every month. And some of our tools that allow them to make their crews more efficiency -- more efficient.

And so I think that the customers and their customers are using more equipment to help themselves be more productive. So I think our customers tend to be small or mid-sized. They're finding different ways to better utilize their labor and fighting through it. So we do believe labor is a governor on growth. It's holding us back, if you will. But it's still allowing us to achieve an overall growth in those new construction markets in the mid- to high single digits.

Got it. Got it. And just on acquisitions and your debt level. Obviously, 3 -- 3x is your kind of a limit, and you're bumping up right against that. I think, as of the end of 4Q, [what's that] stat? And that doesn't include obviously the significant Atlantic acquisition. Does that restrict you now for the remainder of the year in terms of acquisitions? Obviously, there will be stronger free cash flow; the lower tax rate helps. So is there a governor here now with your leverage where it is on acquisitions for the remainder of '18?

No, we don't view it as a governor from the standpoint of -- well, practically, we have plenty of availability to execute on the acquisition, so there's really no limit there. And then I think one of the important things to remember, most of the acquisitions we're buying are profitable. So we fully expect the acquisitions to contribute to the EBITDA and our leverage, in addition to the stronger free cash flow. So we're not holding back right now on acquisitions with regard to that due to the leverage issue. And just adding that we expect to be within our range at the end of the year, even with the modeled acquisitions.

Yes, just a reminder: the size of our company, we can spend about $150 million to $180 million on acquisitions a year and still kind of delever, or the leverage not go up. So that's -- if you take 50% on sales, that's a lot of acquisitions. So we're still full steam ahead on acquisitions.

Our next question is from Michael Eisen with RBC Capital Markets.

Just following up on some of Ryan's questions around the SG&A leverage. When I'm thinking about 2018 and kind of the progression towards those milestones you talked about, Doug, the 16% incremental EBITDA margins and some of the longer-term targets you've talked to about, double-digit EBITDA. Can you help us maybe understand when the timing of these incremental investments are going to come into play throughout the year? And do you think it's possible that we see kind of that 16% level come through before the end of the year in any of the given quarters?

Right. So no, I mean, the 16% on the SG&A side won't come through, and it's because of the investments we're still making. As I mentioned, we're spending over $5 million on e-commerce, barcoding, et cetera. And when you run the numbers on a, let's say, roughly $2 billion company, you can see that, that works against us, right? So I think you have to factor that in that we'll achieve some EBITDA leverage in 2018, but it will be diluted a bit by our investments. And so the way we see it is we're still marching toward 10%. We're 8.4% on an adjusted EBITDA basis in 2017. We think we can reach that 10% over the next couple of years. And to date, you've seen gross margin contributing SG&A going up slightly.

In 2018, you'll see more of a balanced contribution into that EBITDA margin expansion. Gross margin will continue to expand, but SG&A will start to contribute, though not at the full leverage that we're talking about. We're still probably a couple of years away from having a, let's say, a steady-state SG&A leverage, but we also have gross margin that's improving. So that helps. So the 2 will work together in 2018 to give us a good strong move ahead on the EBITDA margin expansion.

Got it. Really helpful. And then kind of transitioning over to the M&A platform. The Atlantic integration is pretty much -- it's one of the larger deals that you guys have done. And just thinking about the strength of the current pipeline, you talked about a few deals ready to close in the next few months. Can you help us think about as you guys continue to grow, the potential for larger deals coming into play? And how the purchase prices are changing over time with the success you are having?

Yes, good question, Mike. So on the M&A pipeline, as Doug and John alluded to, it's a -- there's still more companies out there, right? We're looking at about 250 potential targets. Atlantic was one of the top 15, right? With Shemin and Hydro-Scape[s] that we acquired in 2015 and 2016, respectively, but there's still quite a few larger companies out there as well as a lot of small and mid-sized. So you'll see -- last year, we acquired 8 companies. We've got a good start with 2 in the first 6 weeks. We would expect to probably do more than 8 acquisitions this year, right? We'll pedal to the metal every time we acquire a company that leads to a new pipeline. And we think that Ed Santalone and his team at Atlantic will be great ambassadors.

So there's -- as far as multiples, they are completely in line with what we've seen historically. So the Atlantic multiple is in line with the Hydro-Scape. Hydro-Scape is about $80 million in revenues, Shemin with $140 million. But again, multiples are the same. We don't see any change there. We remain the lead industry consolidator out there, and probably the best home for family companies to join over time.

Our next question is from Keith Hughes with SunTrust Robinson Humphrey.

First, just a clarification on the guidance. Does the guidance include the 2 announced deals? And does it include any future deals that you've anticipated to close?

Yes, the guidance includes the 2 announced deals, but it wouldn't include any additional deals.

Okay. And you had discussed on the EBITDA contribution margin coming a little bit lighter here in terms of the investments you're making. I assume that you're referring to SG&A investments. And what does that look like for '19? Will you head to a more steady state on that in '19?

Yes, that's a good question. So we will continue to make investments in 2018. We'll always be building the company. But we would expect in '19 that, that would will be a bit less. When we've spent roughly $5 million or so in 2017 on, let's say, additional investments. When you look at our sales force, it's probably higher than that. We're going to spend the same amount this year. We won't have the people build and we're a bigger company so that the math works in our favor on that. In 2019, we'll see a reduced level of dilution, let's say, on the SG&A side just because we'll have our e-commerce platform in; we'll be down the road on barcoding; our phone systems will be upgraded. So we should see more SG&A leverage in '19 than we will see in 2018.

Okay. And the -- back to the working capital, which you talked about on the introduction. Working capital, I assume, would be a pretty nice source of cash for 2018 if you're successful on your plans?

Yes, we expect free cash flow to contribute significantly to both funding our strategy, including acquisitions, in 2018.

Okay. And then, yes, just building on that, of course, our supply chain is a long-term strategy where we look to drive our inventory turns up over the next 3 to 4 years. So that should be a good source of cash in '19, '20 and beyond as we move our turns up more to best in class from where they are today.

Our next question is from Mike Dahl with Barclays.

First one, I just actually wanted to go back to the discussion around organic growth. And maybe if you could help us drill down a little bit more. What do you think your blended market growth was? Just trying to get a sense of kind of your share gains in 2017 versus what the market actually grew.

Right. Good question. So the market, it's kind of tough to call. We'll go across many verticals. But we think the market grew at, say, 3% to 4%. And again, that growth was impacted by the lack of inflation. So normally, our market would be, say, 4% to 5% blended growth, but without the inflation, a bit lower. And then we figure that we picked up kind of 1 point or 2 of share. We had a very good year where we saw the fruits of our efforts on the sales force and the marketing start to kick in, and we're quite happy with the progress we've made there. So that's how we would call the market on a blended basis.

Got it. That's helpful. And then 2 questions on Atlantic. The first is you mentioned it's included in the guide. Could you help us maybe quantify what the contribution is for the full year of 2018?

Yes. If you look at Atlantic, well, it's about $80 million in revenues. Their EBITDA margin, let's say, is in line with our business, right? But we didn't acquire it on January 1; there's a bit of a stub element into it. There's also -- there's always some short-term integration costs, right, that comes with an acquisition. So I would be a little conservative there, not include the full 12 months in there. But that's in line with our profitability, actually.

Okay. Makes sense. And second one on Atlantic is if we think about this Atlantic's mix of business versus some of your prior acquisitions in irrigation, it looks like revenue per branch is a bit lower than what we've seen. I assume that's -- well, a, is that a function of kind of the suite of products? And then, b, to the extent it is, how should we think about the revenue opportunity over the next 12 to 24 months in terms of broadening out Atlantic suite of products and what that could contribute?

Yes, good question. Yes, if you look at Atlantic, it's very focused on irrigation, right? There's no -- the product line had the higher revenue per branch, obviously, on nursery, right? If you can have 10 acres, some of those locations are $15 million, $20 million, $25 million of revenues, right? So we're not in that category, of course. Hardscapes also, and you can easily find one location with $10 million in revenue. Pete Rose is a good example; it's close to $10 million. Irrigation and agronomics are the smaller numbers, right? But if you compare it to Hydro-Scape, Hydro-Scape had 17 locations, about the same revenues here; it's $33 million. I think it is as a factor as well of when you look at the north and the northeast, there's more density of branches, right? There's a little more traffic around, so the locations and the footprint are smaller. And Hydro-Scape actually had some decent hardscapes outdoor living concept, which drive the revenues up.

So, yes, the bottom line here is, yes, there is a great opportunity to continue to cross-sell and increase the revenues at the branches. We look at it market by market, right? I mean, they cover 22 markets from Canada all the way down to Georgia. So our teams are already talking, communicating, and we'll see if we can add some agronomics. You can't add the nursery product line, why? Because it takes a big footprint. Hardscapes, it takes also some footprint. You have [a Shemin], et cetera. So it's going to be a lot about agronomics and landscape accessories.

One thing I'd like to mention is Atlantic has -- got a small, but it's an exposure to the equipment business, which we have seen with companies like Hydro-Scape[s] and Bissett, for instance. They sell trenchers and trimmers and blowers and things like that. They carry great brands like STIHL and Toro. So I think that will continue to push SiteOne in a reverse synergy of can we sell more equipment across the nation over time. But really nice cross-selling opportunity with Atlantic, for sure.

(Operator Instructions) Our next question is from Chris Belfiore with UBS.

Just to kind of go back a little bit to the M&A. I understand that the multiples have been steady with past, past yields. But are you seeing any pushback from prospective targets as your strategy becomes more well-known in a marketplace which appears to be like a very strong kind of environment right now?

Not really, we haven't seen that. We believe that the reasonable, Chris, are fair and reasonable. There's no really reason for that to change. Obviously, we are a quite larger company. We're national, et cetera. We carry the 7 product lines. The companies we tend to bring into the family, the SiteOne family, tend to be very focused on one product line. So we haven't seen that. It's completely consistent with what was communicated during the IPO roadshow, et cetera. Yes.

Just to add on what Pascal said. One of our -- obviously, our goal is to build a company of excellence and also to build the best home for family companies. And the way we integrate companies and the way we work with the owners and keep the secret sauce and get -- make sure that the essence of that company survives and continues with SiteOne makes us an attractive acquirer. And so it's a balance of we pay fair value and we reward for building great companies. But also we're attracting companies to SiteOne who want to join us and be kind of the #1 team going forward. And so those work together to make sure that the prices that we pay are fair for both sides.

Yes. And I think, Doug, that's a great add because the sellers look for price and monetizing their investment, but they really look for their employees, which is really their "family", right, to be well taken care of. And at Oldcastle we learn to trade over more than 100 acquisitions. And that also creates a reputation; people know that. Obviously, the hardscapes companies, since we came from that world on the manufacturing side, know that. And I think that, that's a fairly big differentiator if there is some hesitation between us and someone else. But to tell you the truth, Chris, in the vast majority of the transactions, we are still exclusive here.

Okay. And then just kind of some follow-up questions on the organic side. You guys -- last quarter, you mentioned there were some impacts from hurricanes. Did you have any positive impact this quarter from like deferred sales or market activity that would have otherwise fallen in the third quarter?

We think we got a bit of catch up in the -- in our sales in the fourth quarter, but we were also very strong in areas where we did not have the hurricane. We were strong in the West. We were strong up in the Northeast. So yes, I think it came back to us a bit. We don't plan that, that will be a big adder to 2018. A lot of that business just got kind of deferred, if you will; and the shortage of labor kind of keeps you from catching up quickly. But a small lift in the fourth quarter, we feel, did come from the hurricane balance in the third quarter.

Okay. And then, I guess, I just have one last one. On the price cost side, this might not be as large an effect for you guys. But you are moving to the hub-and-spoke model with the distribution centers. Have you guys seen any impact from like the increased freight costs? Or do you expect freight to be an issue going forward?

The freight market, obviously, it's a bit heating up and so there are -- we are expecting a somewhat higher cost in freight this year. I think one thing, though, the hub-and-spoke model actually allowed us to manage that better. Previously, we were primarily -- the manufacturers controlled the freight costs. And by switching to this method in our supply chain, we're directly involved in helping manage those costs down. So while the overall market, I think, we expect there may be some increases in the marketplace, I think we feel as if we're better positioned than ever to handle those and manage those costs better than we were previously, even less than 2 years ago.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back over to management for closing remarks.

Okay. Thank you, and thank you, everybody, for joining us today. We very much appreciate your interest in SiteOne, and we're very excited about our long-term growth and profitability potential for our company. I'd like to again thank our associates for doing a tremendous job in 2017 and for all the work they do for us. We have a terrific team, and we have a special company here. Thanks, everyone. Have a good day.

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

Thank you.