Yahoo Finance

John Guthrie

Thanks, Doug. I'll begin on slide 9 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 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 3 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 noncontrolling 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 (inaudible) 1.5x our trailing 12-month adjusted EBITDA compared to 1.3x for the same period prior year. As a reminder, our target year-end net debt to adjusted EBITDA leverage range is 1x to 2x.
At the end of the quarter, we had available liquidity of approximately $524 million which consisted of approximately $57 million cash 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.

Scott Salmon

Thanks, John. As shown on slide 11, we acquired 1 company in the first quarter and 1 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 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 US 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 joined the SiteOne family. I will now turn the call back to Doug.

Doug Black

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. (inaudible) 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. 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.

Question and Answer Session

Operator

(Operator Instructions) David Manthey, Baird.

David Manthey

Thank you. Good morning, everyone. First question. Doug, you mentioned dispatch track 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?

Doug Black

Yes. So we've got significant efforts on both of those, as you know, taking dispatch track 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 could also not by 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.

David Manthey

Yes. 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?

Doug Black

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 (inaudible) 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 welcome 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 in the 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 all of those, and that's how we can outperform the market consistently.

David Manthey

That all sounds great, Doug. Thanks very much.

Operator

Ryan Merkel, William Blair.

Ryan Merkel

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.

John Guthrie

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 for 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. 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.

Ryan Merkel

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?

John Guthrie

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.

Doug Black

It tends to be irrigation and lighting, some landscape supplies like drainage, et cetera.

Ryan Merkel

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

John Guthrie

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

Operator

Damian Karas, UBS.

Damian Karas

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?

John Guthrie

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?

Damian Karas

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?

John Guthrie

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.

Damian Karas

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

Operator

Charles Perron, Goldman Sachs.

Charles Perron-Piché

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 on telling 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?

John Guthrie

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 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, so we can service our customers with that product.

Charles Perron-Piché

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.

John Guthrie

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.

Operator

Mike Dahl, RBC Capital Markets.

Michael Dahl

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.

John Guthrie

Yes. So our flatter margin, 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 prepurchasing 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 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 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.

Michael Dahl

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?

Doug Black

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.

Operator

Matthew Bouley, Barclays.

Matthew Bouley

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?

Doug Black

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 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.

Matthew Bouley

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?

John Guthrie

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.

Matthew Bouley

Okay, thanks. Good luck, guys.

Operator

Andrew Carter, Stifel.

Andrew Carter

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 ends a little weaker? And I guess, I would also argue Home Depot, now Heritage kind of the largest competitor, they've already kind of been aggressive. Any risk think through there?

Doug Black

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.

John Guthrie

I would also say our suppliers are very in tune with that. Also, they now are looking closely at demand and are not 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 increase in (inaudible)

Doug Black

And 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.

Andrew Carter

Second one, I'll ask since you're on the front line, and it's been brought up less and less on calls and tariffs. The kind of labor kind of issue and kind of the risk to that, is there anything you 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.

Doug Black

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's 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 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.

Andrew Carter

Thanks, I'll pass it on.

Operator

Colin Verron, Deutsche Bank.

Colin Verron

Good morning, thank you for taking my question. 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 market softens more than you were expecting right now, how much of those cost actions are stainable, and what does the decremental margin look like in the underlying business?

John Guthrie

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.

Doug Black

Yes. And just to comment if markets soften further, then we have the ability to pull in -- labor is our biggest 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 (inaudible) decremental margin hard to -- 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.

Colin Verron

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

John Guthrie

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 a year and it plays out is we are are going to make sure we give 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 up relative to last year, excluding the impact of potentially having a little bit more inventory just to service the customer.

Operator

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.

Doug Black

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.

Operator

Thank you. This concludes our conference for today. We thank you for your participation. You may now disconnect your lines at this time, and have a wonderful day.