SiteOne Landscape Supply Inc

NYSE:SITE

Earnings Call Transcript 2019-Q4

[Operator]

Greetings. Welcome to the SiteOne Landscape Supply Fourth Quarter and Full-Year 2019 Earnings Call. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to John Guthrie, Executive Vice President and Chief Financial Officer. Thank you. You may begin.

[John Guthrie, Chief Financial Officer]

Thank you, and good morning, everyone. We issued our fourth quarter and full-year earnings press release this morning and posted a slide presentation to the Investor Relations portion of our website at investors.siteone.com. I am joined today by Doug Black, our Chairman and Chief Executive Officer; and Scott Salmon, Executive Vice President, Strategy and Development.

Before we begin, I would like to remind everyone that today’s press release, slide presentation and the statements made during the call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Such risks and uncertainties include the factors set forth in the earnings release and in our filings with the Securities and Exchange Commission. Additionally, during today’s call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. A reconciliation of these measures can be found in our earnings release and in the slide presentation.

I would now like to turn the call over to Doug Black.

[Doug Black, Chairman and Chief Executive Officer]

Thanks, John. Good morning and thank you for joining us today. I will start today's call with a brief review of our unique market position, our strategy to deliver long-term performance and growth and some highlights from 2019. John Guthrie will then walk you through our fourth quarter and full-year financial results in more detail, and Scott salmon will cover our acquisition strategy. At the end of the call, I will discuss some trends that we are seeing in our markets and address our outlook for 2020 before taking your questions.

As shown on Slide 4 of the earnings presentation, we've grown our footprint to more than 550 branches and three major distribution centers across 45 U.S states and 6 Canadian provinces. At the end of 2019, we estimate that we had approximately 12% share of the wholesale landscaping products distribution market. We are 4x larger than our nearest competitor and larger than 2 through 10 combined.

We have a very balanced mix of business with 59% focused on maintenance, repair and upgrade, 26% focused on new residential construction and 15% on new commercial construction. We are also the only national full product line wholesale distributor in the market. Our balanced end market mix, broad product portfolio and geographic spread give us multiple avenues to grow and provide important resiliency in softer markets.

Turning to Slide 5, our large and local 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. It is important to note, however, that we're still in the early to middle innings of building our company and still have a long way to go in order to fully execute our strategy and reach our full potential.

Accordingly, we remain highly focused on our commercial and operational initiatives to build our capabilities and improve the value that we deliver to our customers and suppliers. These initiatives are complemented by our acquisition strategy, which fills in our product portfolio, moves us into new geographic markets and adds terrific new talent to SiteOne. Taken all together, our strategy creates superior value for our shareholders through organic growth, EBITDA margin expansion and acquisition growth.

Slide 6 shows SiteOne's history and the results from our strategy over the past six years. Over this period, we've been able to deliver consistent organic growth, strong acquisition growth and solid EBITDA margin expansion, while investing heavily in SG&A to build our IT, category management, marketing, supply chain, finance, operational excellence and acquisition teams as well as our underlying systems infrastructure, including e-commerce.

While we have not finished building our systems infrastructure, our field support teams are firmly established and we will continue to leverage these teams to accelerate our performance going forward.

You will also note that we completed almost 50 acquisitions across the irrigation, agronomics, nursery and hardscapes product lines during the last six years with 10 of these added in 2019. Through these acquisitions we have added significant capability and developed many lessons learned, which now can be applied to future acquisitions.

Our acquisition pipeline remains very robust and with only 12% market share, we have significant potential to continue growing through acquisition in the years to come. Finally, you will note that we regained our EBITDA margin expansion momentum in 2019. With fully staffed field support teams, several new systems in place and significant muscle added through acquisition, we are more confident than ever in our ability to achieve 10% plus adjusted EBITDA margin in the medium-term.

I will now discuss some performance highlights for our full-year 2019 as shown on Slide 8. We delivered 12% sales growth in 2019 with a very healthy balance of 5% organic daily sales growth and 7% contribution from acquisitions. Given the very unfavorable weather in the first half of 2019, yielding only 2% organic growth through June, I was particularly proud of our teams performance and catching up during the second half and achieving the 5% organic daily sales growth.

This is also a good example of how the weather can move demand from quarter-to-quarter, but in most cases we will even out during the full-year. Organic growth during the year benefited from strength across our product portfolio led by our hardscapes and landscape supplies product segments. Adjusted EBITDA grew 14% in 2019 to $201.1 million and adjusted EBITDA margin increased 20 basis points to 8.5% compared to the prior year.

Our gross margin improved by 70 basis points with 50 basis points of this improvement coming from acquisitions. Our acquisitions which were comprised largely of hardscapes and landscape supply businesses also increased our SG&A as a percent of sales. Overall, we were pleased to move our EBITDA margin forward in 2019, although we would expect a higher pace of improvement in the coming years towards our 10% milestone.

From a balance sheet perspective, we began to reap the benefits of our distribution centers and JDA replenishment system as we reduced slow-moving inventory and improved our inventory turns from 3.5x to 3.7x based on the year-end inventory. We also did a great job managing our trade receivables during the year.

Accordingly, our cash provided by operating activities improved 67% to a record $131 million allowing us to reduce our net debt to adjusted EBITDA ratio from 3.2x at the end of 2018 to 2.6x at the end of 2019. We expect to make continued progress increasing our inventory turns over the next 2 to 3 years.

On the operations front, we made a lot of progress with siteone.com in 2019. Based on our customers feedback, we’ve improved our product data and our search capabilities, while also adding the ability to customers to pay their accounts online. Finally, we have created a Spanish version of siteone.com. With these improvements and others in process, we expect to accelerate our customer adoption of siteone.com in 2020.

We made significant investments in 2019 to improve our customer experience and get our customers in and out of our branches faster. We now have bar coding and counter scanners in over 500 branches. Additionally, we have rolled out our associate mobility platform, MobilePro, to over 100 branches, allowing our associates to input orders and checkout our customers anywhere in the branch or in the material yard. This is particularly helpful in our larger nursery and hardscapes branches.

We plan to have MobilePro in 250 branches by the spring selling season this year. We expect MobilePro will help us increase our associate productivity, while also allowing us to gain market share with a superior customer experience. We continue to make good progress with our new transportation management system or TMS during the second half of 2019. We have already begun to achieve savings on our inbound freight to the branches and we expect TMS to contribute to our gross margin expansion in 2020.

Additionally, we are underway with the pilot of our new local customer delivery system, which will allow us to more effectively coordinate and manage customer delivery across branches. We're very excited about the potential cost savings and customer service benefits from TMS, which will give us yet another advantage over our competitors. Altogether, 2019 was a great year of progress in building the foundation for SiteOne.

On the acquisition front, we continue to add terrific companies to SiteOne with 10 companies comprising approximately $100 million and trailing 12-month sales added in 2019, and three more so far this year. Our acquisitions are performing well and we continue to have a strong pipeline of potential deal as we move in to 2020. Finally, in 2019, we were able to further strengthen our leadership team. We brought on Scott Salmon to lead our acquisition team and then consolidated our Pricing and Category teams under Greg Weller, who also runs our supply chain.

As we announced on Friday, we're thrilled to welcome Shannon Versaggi, who is our new Chief Marketing Officer. Shannon comes to us with a terrific track record in all aspects of marketing from Lowe's and adds critical expertise and experience as we more fully leverage our digital capability and seek to further build out our brand and enhance our customer experience. I’m personally very excited about the strength of our leadership as we move in 2020.

In summary, 2019 was a year in which we continue to execute our strategy and demonstrated the momentum of our long-term growth story. We improved our results, strengthened our team and balance sheet and made meaningful progress on our systems infrastructure. Accordingly, we are in great position to continue our momentum and increase the value that we deliver for all of our stakeholders in 2020.

Now, John, will walk you through the quarter and the full-year in more detail. John?

[John Guthrie, Chief Financial Officer]

Thanks, Doug. I will begin on Slide 9 with the income statement for our fourth quarter results. We reported a net sales increase of 13% to $535 million in the fourth quarter. For the full-year, net sales increased 12% to $2.36 billion. During the quarter, we had 61 selling days, which was unchanged compared to the prior year period. For the full-year, we had 252 selling days, which was also unchanged from the prior year.

In 2020, we will pick up a 53rd week in fiscal December and our selling days will increase to 256. Organic daily sales increased 8% in the quarter and 5% for the full-year. Geographically, 10 out of 11 regions had positive sales growth in the quarter with the strongest sales growth occurring in the South.

Organic daily sales for landscaping product, which includes irrigation, hardscapes, nursery and landscape accessories finished strong, growing 10% during the quarter and 5% for the year. Landscaping product sales in the quarter benefited in part from pent-up demand that resulted from the challenging weather we had in the first half of the year.

Organic daily sales for agronomic products, which includes fertilizer, control products, seed, ice melt and equipment remained steady, growing 5% for the quarter and 4% for the year. Prices increased 1% in the quarter and 3% for the year compared to the same period in 2018 as cost increases from suppliers were passed through by the market.

A number of price increases was put in place in the fourth quarter of 2018, and as a result, price inflation for the quarter was less than the full-year. For 2020, we are forecasting moderate price inflation of 1% to 2%. Acquisition sales growth, which reflected sales growth attributable through the acquisitions completed in 2018 and 2019 was $25 million or 5% of the overall fourth quarter growth rate.

For the full-year, acquisition sales growth was $152 million or 7% of the overall growth rate. Gross profit increased 14% to $170 million in the fourth quarter and gross margin increased 50 basis points to 31.8%. The improvement in gross margin for the quarter was primarily attributable to higher supplier incentives and product mix, which positively impacted margin by 20 basis points.

Both these areas benefited from our strong growth in landscaping products compared to the prior year period. For the year, gross profit increased 14% and gross margin increased 70 basis points to 32.8%. The improvement in gross margin for the year reflects the contribution from acquisitions, strategic inventory purchases ahead of price increases.

Selling, general and administrative expense or SG&A increased 11% to $167 million in the fourth quarter. SG&A as a percent of sales decreased 40 basis points to 31.2%. The reduction in SG&A as a percentage of sales reflects operating leverage and a reduced impact of acquisitions. For the full-year, SG&A increased 13% to $654 million and SG&A as a percentage of sales increased 40 basis points to 27.8%.The increase primarily reflects the impact of acquisitions with higher SG&A as a percentage of sales.

For the fourth quarter of 2019, we recorded an income tax benefit of $5.6 million, which was the same as the prior year period. For the full-year, income tax expense was $13.8 million compared to $1.3 million for the 2018 fiscal year and our effective tax rate was 15.1% compared to 1.7% for the prior year. The increase in effective tax rate was primarily due to a decrease in the amount of excess tax benefit from ASU 2016-09. Excess tax benefit of $9.6 million were recognized for the 2019 fiscal year as compared to $16.3 million for the 2018 fiscal year.

Net income for the fourth quarter was $2.5 million compared to a net loss of $2.1 million during the prior year period. Our net income improvement this quarter was primarily attributable to our strong sales growth. Our weighted average diluted share count was 42.8 million for the fiscal 2019 compared to 42.6 million for fiscal year 2018.

Adjusted EBITDA increased by 23% to $22.2 million for the fourth quarter compared to $18.1 million for the same period in the prior year. For the full-year, adjusted EBITDA increased 14% to $201.1 million compared to $176 million for the prior year. The improvement reflects solid top line growth and improved margin.

Now I would like to provide an update on our balance sheet and cash flow statement as shown on Slide 10. As a reminder, we adopted the new lease accounting standard during the first quarter of 2019. Total operating lease liabilities at the end of the year were approximately $235 million with corresponding right-of-use asset. Of the total operating lease liabilities, $49 million are reported as current liabilities and are reflected in net working capital.

Net working capital at the end of the year was $455 million compared to $483 million at the end of 2018. Excluding the current lease liabilities, working capital for the quarter would have been $504 million, a 4% increase over 2018. The increase is attributable to the working capital added with our 2019 acquisition.

Cash flow from operations increased 82% to $66 million for the quarter and 67% to $131 million for the full-year 2019, an improvement of $53 million over 2018. The increase was primarily attributable to improved turns of inventory and receivable. We were especially pleased with our teams accomplishment in reducing working capital tied up in our supply chain and in improving the asset efficiency of the company.

We made cash investments of $28 million for the quarter compared to $24 million for the same quarter last year and $92 million for the 2019 fiscal year compared to $164 million in 2018. The decrease for the full fiscal year reflects less acquisition investment in 2019 compared to 2018 due in part to a reduction in the size of the completed deals.

Net debt at the end of the year was $529 million, which is down from $556 million at the end of last year. Net debt decreased to $2.6x our trailing 12-month adjusted EBITDA compared to 3.2x at the end of 2018. The lower leverage reflects our increased profitability combined with a reduced year-over-year debt levels driven by strong cash flows and reduced investment in acquisition.

We're pleased to be comfortably within our long-term year-end leverage target of 2x to 3x net debt to adjusted EBITDA. In summary, our capital structure continues to provide us with the flexibility to execute our growth strategy, including the funding of our acquisition.

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

[Scott Salmon]

Thank you, John. As shown on Slide 11, 48 companies have joined the SiteOne family since the beginning of 2014. They added 230 branches to SiteOne and represent approximately $915 million in sales on a TTM basis. In 2019, we acquired 10 outstanding companies, bringing approximately $100 million in TTM sales as we continue to be the first choice for entrepreneurs seeking up their valuation, excellent opportunities for their associates and a long-term partnership with the industry leader.

Now as we turn to Slides 12 through 17, you'll be able to find information on our 6 most recent acquisitions. On September 30, we acquired Design Outdoor Incorporated, which serves the greater Reno/Lake Tahoe market from a single location focused on the distribution of hardscapes products to landscape professionals. The Reno/Lake Tahoe market is a new market for us and we are very excited to add the Design Outdoor team as part of the SiteOne family.

On December 20, we acquired Dirt Doctors, a leading New England distributor of hardscapes and landscaping products with three locations. This acquisition expands upon our 2018 and 2019 acquisitions of Landscape Express and Landscape Depot.

On December 27, we acquired Daniel Stone Incorporated, which serves the Greater Austin Texas market from a single location. Daniel Stone represents the third hardscape and landscape supplies acquisition we've made in Texas since July 2018.

We’ve continued our momentum into 2020 by adding three more excellent companies, Wittkopf Landscape Supplies, Empire Supplies, and The Garden Dept. These acquisitions have allowed us to extend our hardscapes product offerings into both the greater Spokane Valley area in Washington as well as the Newark-Union metro-area, New Jersey. In addition, we significantly expanded our already leading nursery and landscape supplies presence in Long Island.

As we turn to Slide 18, 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 offerings and add outstanding talent to our team. Our pipeline remains very deep. Thanks to the strong efforts of our development professionals, field leaders and the leaders of previously acquired companies.

Together they’ve earned an outstanding reputation for helping newly acquired teams to successfully join the SiteOne family of companies. 95% of our deal activity in 2019 involve exclusive negotiations with sellers. With nearly 50 companies added since 2014, we have a growing number of successful entrepreneurs who have joined the SiteOne family. Many of these leaders have stayed on to help drive our success and act as terrific ambassadors for SiteOne.

We would like to thank all of our SiteOne associates for helping us to attract the best companies to join us in the future. While the timing of our acquisitions cannot be fully predicted, we’re pleased with our current pipeline of deals and confident that we will continue to add strong companies to SiteOne 2020 and beyond.

[Doug Black, Chairman and Chief Executive Officer]

Thanks, Scott. I will wrap up on Slide 19. We're optimistic about 2020 as we see steady markets providing another year for SiteOne to continue to execute our strategy and achieve good performance and growth. With the stronger team, new system capabilities and good momentum on our initiatives, we expect to accelerate our market share gain and adjusted EBITDA margin expansion, while continuing to produce excellent cash flow in 2020. We will also continue to add companies to SiteOne through acquisitions.

Before we get into our 2020 guidance, I would like to provide an update on the trends we are seeing across our end markets, and how those trends impact our organic sales growth prospects for 2020. The maintenance end market represents 42% of our business and we are seeing good growth in this segment due to a strong economy, steady price inflation and our improved ability to gain market share.

As mentioned, our agronomics business, which is primarily maintenance grew 4% last year and we would expect similar growth in 2020. Similarly, the repair and upgrade end market, which comprises approximately 17% of our business is still benefiting from a strong economy, low unemployment and good consumer spending.

Additionally, we benefit from two trends in repair and upgrade. First, there is the ongoing focus on outdoor living, which involves making the backyard a living space, particularly, with hardscapes and lining. Second, there is the increased scrutiny on stormwater management, which is driving double-digit growth in our drainage and stormwater category. We expect these two trends to continue for many years.

Accordingly, we expect growth in repair and upgrade to remain healthy in the mid-single digits in 2020. The new commercial construction market, which is approximately 15% of our business has been very strong now for several years. While our current customer backlogs are solid, we would expect growth in this market to moderate to low single digits during the full year 2020.

The new residential construction end market accounts for 26% of our business. Right now builders are very bullish about 2020 and we have seen a tick up in new residential backlogs with our customers. Overall, we expect this market to be solid with mid-single-digit growth in 2020.

Lastly, we would expect overall price inflation to be in the 1% to 2% range, down from 3% in 2019. Taken all together, we would expect to achieve mid-single-digit growth again in 2020 with slightly lower price inflation and slightly higher volume growth. In terms of acquisitions, Scott and his team along with our field leaders have done an excellent job in building and converting our pipeline of high-quality companies. As he mentioned, we currently have a strong backlog of deals and feel good about our ability to add more companies during the remainder of 2020.

Turning to our guidance for 2020. We expect adjusted EBITDA to be in the range of $213 million to $228 million, which represents year-over-year growth of 6% to 13%. This range does not factor any contribution from unannounced acquisitions. Furthermore, this range incorporates an extra week that we will have in 2020 versus 2019.

Unfortunately, this extra week occurs in fiscal December during a very slow sales period, and as a result, will reduce our daily organic sales growth rate by approximately 100 basis points and will reduce our adjusted EBITDA by $2 million to $3 million with the extra week of SG&A

Overall, we feel very good about our momentum going into 2020 as we continue to realize the benefits from our initiatives and leverage our stronger company to deliver performance and growth.

In closing, I would like to acknowledge all of the SiteOne associates who continue to create significant value for our customers and suppliers. 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]

Thank you. [Operator Instructions] Our first question is from David Manthey with Baird. Please proceed.

[David Manthey, Robert W. Baird & Co.]

Hi. Good morning. Thank you. Doug, you said you expect a higher pace of adjusted EBITDA margin improvement in coming years, but when we look at the midpoint of the range for 2020, it's looking like maybe 10 basis points of improvement, which is in line or less than what we’ve seen since the IPO. Could you talk about the major cost factors or mix factors that are preventing you from getting more EBITDA margin expansion in t 2020, specifically?

[Doug Black, Chairman and Chief Executive Officer]

Yes. Thanks, David. So we craft the range around a myriad of scenarios in terms of sales and performance. But overall, our expectation would be that we would see more improvement in 2020 than we saw in 2019. And we've got a bit of ahead win on the gross margin side with the -- we had the early buys in '18, helping us in '19. But we've got plenty of initiatives to overcome that and still achieve some margin improvement. We’ve got the blocking and tackling in category. We’ve got -- privately, we’ve got some excellent private label initiatives that are well advanced. We talked about the TMS and we would expect freight logistics savings, and we are still growing faster with a small and medium customer than we are overall. So those all give us good avenues to improved gross margin. And then on the SG&A side, our teams more fully builds and with good organic growth and some of our initiatives, social mobility and some of our efficiency initiatives and lack of some one-time hits that hit us in 2019, we think we will have good SG&A leverage as well. So put those together, we think we are in stronger position this year to achieve EBITDA margin expansion in 2020 than we were in '19. And acquisitions will affect that, but they seem to be coming in at the same EBITDA percent level as we are. And of course, we get some synergies there. So all told, range aside, we expect to get to -- more EBITDA margin improvement in '20 than in '19.

[David Manthey, Robert W. Baird & Co.]

Okay. Thank you for that. That’s helpful. Could you characterize 2019 just to baseline us on weather quickly. I know second quarter was really tough for you, but third quarter seem nearly perfect and I know it's always a combination of factors that lead you to the mid-single-digit growth. But how would you characterize 2019 as a year? I mean with the -- with those two quarters, would you say it was roughly normal, and then as you mentioned you got non-res maybe coming off a bit, price coming off a little bit and maybe weather a little bit better to get you back to the mid-single-digit. Is that how you’re thinking about the comparison with last year?

[Doug Black, Chairman and Chief Executive Officer]

Yes, that’s -- you got it. The second quarter was tough. And so we were at 2% organic growth at the half year, last year. The fall was a good season, right, weather was good, we didn't have any major hurricanes interrupt us in the South. And so, weather does tend to balance. And in 2019, we saw some of that balance come through. We got less price inflation than we had going into last year, but we feel better quite frankly. If you remember last year, the residential market was a bit stalled and there were some question marks there. Residential is two-thirds of our business and residential market feels stronger. The builders are more bullish this year and even our customers we’ve seen a tick up in projects that they’ve had there. So we think altogether, it balances and we will get a similar market in 2020, altogether than we had in 2019 and we're more advanced on our organic growth initiatives than we were last year. So that all brings us back to about the same place, which is that mid-single-digit growth. And that assumes a -- kind of a balancing year in 2020. We don’t know which season will be affected. We know probably one of them will -- if we have very, very terrible weather, could be lower than that and if we have great weather through the year, it could be higher than that.

[David Manthey, Robert W. Baird & Co.]

That’s perfect. Thanks, Doug.

[Doug Black, Chairman and Chief Executive Officer]

Thank you.

[Operator]

Our next question is from Ryan Merkel with William Blair. Please proceed.

[Ryan Merkel, William Blair & Company, L.L.C.]

Hey, good morning and nice quarter.

[Doug Black, Chairman and Chief Executive Officer]

Good morning, Ryan.

[John Guthrie, Chief Financial Officer]

Good morning.

[Scott Salmon]

Good morning.

[Ryan Merkel, William Blair & Company, L.L.C.]

Just want to follow-up on weather, if I could. We had pretty mild weather in the fourth quarter and even in January. And I just want to get a better understanding of how much this helps you, or is the impact more muted because we're in the off season, just in context there.

[Doug Black, Chairman and Chief Executive Officer]

The impact is somewhat muted. I would say, in Q3, weather had a bigger impact on the business than in Q4. But it was a positive. It was a tailwind. I would say, in Q1, the weather has less of an impact until you really get to March when spring breaks. So I would say it was a nice tailwind this year, but and how all obviously relative to the beginning of the year we had we had a backlog of work that was out there that could -- that -- the weather allowed us to move forward with.

[Ryan Merkel, William Blair & Company, L.L.C.]

Okay. It's kind of what I thought. And then, secondly, you mentioned an increased ability to take market share in 2020. I know you listed a bunch of the initiatives, but can you just tell us how much do you aim to outgrow the market, or put some numbers or context to that comment, please?

[Doug Black, Chairman and Chief Executive Officer]

Yes, we would hope to outperform the market kind of 1% to 2%, if you will. And we’ve probably been on the lower end of that range. And in 2020, we feel like we should have a stronger chance to be on the higher end of that range. But that would be roughly what we expect to get at this point in our development.

[Ryan Merkel, William Blair & Company, L.L.C.]

Okay. And then just lastly, if I can sneak this in. The outlook for moderating commercial construction, I don’t know if you hit on it, but what metrics are you looking at, or what conversations are you having that shapes that view?

[Doug Black, Chairman and Chief Executive Officer]

Well, yes, our primary metrics we have two sources of, let's say, data on that. One is our customers themselves and what kind of backlogs they have. Our customers do have solid backlogs, but they’re not as long as they used to be. I mean, this time last year they had all of 2019 locked up. This year they just have a little less, right? So chances are they will pick more backlog up, but it just feels a little less strong than it going in the last year. The other lens we have is our project services group. We have a group that bids commercial jobs ourselves and assist our customers in doing takeoffs. And that group is looking out forward. And it's the same, they’re still seeing a steady flow of projects. But it seems to just be a tick lower than what they had seen in the past. So those are the reasons we would be a bit cautious there. We are not raising the red flags, but we’re just -- we are cautious, especially given the strength of commercial over the last several years that have some likelihood of slowing down and the -- particularly in the back half of 2020.

[Ryan Merkel, William Blair & Company, L.L.C.]

Makes sense, Doug. Thanks.

[Doug Black, Chairman and Chief Executive Officer]

Thank you.

[Operator]

Our next question is from Stephen Volkmann with Jefferies. Please proceed.

[Stephen Volkmann, Jefferies LLC]

[Technical difficulty]

[Doug Black, Chairman and Chief Executive Officer]

I’m sorry, Stephen, you are breaking up.

[Stephen Volkmann, Jefferies LLC]

[Technical difficulty]

[Doug Black, Chairman and Chief Executive Officer]

Yes, we couldn’t catch that. Could you try to get a better connection?

[Operator]

Okay. Our next question will be from Mike Dahl with RBC Capital Markets. Please proceed.

[Christopher Kalata, RBC Capital Markets]

Hi. It's actually Chris on for Mike. Thanks for taking my questions. So first, it looks like pricing in this quarter came in at a low end of your guidance, it's just up 1%, and your outlook hasn’t moderating through 2020. So I was wondering if you could just touch on, has anything changed in the market as far as your pricing power or your customers willingness to take on additional price increases? And then I’ve a follow-up.

[Doug Black, Chairman and Chief Executive Officer]

I think it's more a reflection of what’s going on with our suppliers in the markets, in general. Going into this year and really in the back half of 2018, we had some impact from tariffs. In addition, there is strong pricing coming from our suppliers. And a lot of year-over-year, a lot of those price increases went into place in -- in Q4 of 2018. So we were comping against the price increases. What we're seeing with regards to 2020, we’re seeing some prices increase is coming from suppliers, better than much more modest compared to what we saw going into 2019. So I don't think necessarily it's a backlash relative to kind of where the market is at, but just kind of issues like tariffs etcetera are not on the board this year compared to last year.

[Christopher Kalata, RBC Capital Markets]

Got it. Thanks for that. And then just my second question, can you just give an update on your M&A backlog currently? I know deal sizes were a little bit smaller this year -- or last year versus the average. So how does -- how do current average deal sizes look to you guys?

[Doug Black, Chairman and Chief Executive Officer]

Yes, you’re right. Our 2019 deal size at $10 million was below our average over the last four years, which would be more around $17 million. But if I look at the backlog, we definitely have a significant number of medium and larger sized companies as well. So we would anticipate kind of reverting back to the norm somewhere probably between $15 million to $20 million average.

[Christopher Kalata, RBC Capital Markets]

Got it. Appreciate the color.

[Operator]

Our next question is from Matthew Bouley with Barclays. Please proceed.

[Christina Chiu, Barclays Investment Bank]

This is Christina Chiu on for Matt. I’m just wondering, in addition to what was already said in the prepared comments, how did organic growth breakout between your two products group in agronomics and landscaping?

[Doug Black, Chairman and Chief Executive Officer]

Landscaping products grew 10% for the quarter and agronomics grew 5% for the quarter.

[Christina Chiu, Barclays Investment Bank]

Got you. And then also can you help quantify some of the benefits that you’ve seen thus far from some of these operational investments in delivery and transportation, IT and marketing? And how customers kind of being receiving some of these upgrades?

[Doug Black, Chairman and Chief Executive Officer]

Yes, what we -- going back, we made a lot of progress just in the overall customer experience in terms of being consistent with our customers, having the right product assortment, having the right pricing, having the associates, kind of trained and able to serve them. We've augmented with the siteone.com. So we've customers that are adopting our new online portal in order to not only do quotes and bids, but also order their products in advance so that when they come in it's already formed. And then recently we’ve rolled out the barcoding and associate mobility, in MobilePro, which allows our associates in our larger facilities and nursery and hardscape centers to check customers out in the yard to be able to scan and get pricing out in the yard and around the branch. And this dramatically improves the speed at which the customers can get in out of our facilities and therefore improve their customer experience. On the transportation side, we’re still early on in that. Most of our transportation work today has been on inbound freight coming into our branches. We are now running a pilot in the Coastal Carolina's to coordinate our outbound deliveries to customer, in that way we can coordinate across branches, we can have a centralized dispatching and we can get shipments there quicker and faster and at a lower cost. So that’s having a significant impact for those customers in those markets, and that's something that we plan to rollout across the country during 2020. So, all of these are aimed at the touch points of our customers, making things easier, making things faster. And when you do that, time is money for our landscapers. Their most precious resource is their labor. And their second most precious resource is their own time, because they’re all entrepreneurs and they’re busy. And so if you can save them time, give them a good competitive price and have it be an easy experience, they will come to us, right. And we’ve seen that in the early stages and that’s what gives us confidence we can outperform the market as we just provide a faster, more efficient superior customer experience than our competitors. So still in the middle innings there. We’ve seen good progress and we’ve seen the growth start to tick up, but lost more room there to improve as we roll all these out across the country and lock them in as the way we do business for the long-term. Does that answer your question?

[Christina Chiu, Barclays Investment Bank]

Yes. I think that covers it. Thank you.

[Doug Black, Chairman and Chief Executive Officer]

Okay. Perfect.

[Operator]

Our next question is from Keith Hughes with SunTrust. Please proceed.

[Judy Merrick, SunTrust Robinson Humphrey]

Thanks. This is Judy Merrick in for Keith Hughes. Just a follow-up on the -- let's talk about the acquisitions kind of picking up -- maybe in more -- return to medium or large. Is there anything else you see that’s different, just the type of products or adjacencies or anything else that you're looking at for the acquisitions?

[Doug Black, Chairman and Chief Executive Officer]

I would say nothing significantly changing. We are still seeing an overwhelming number of the deals are exclusively negotiated. I think you will still see us leaning more towards hardscapes and nursery type acquisitions, simply because of our filling out our map and our strategy to get our full product line offering across all of our target MSAs. So by and large, I think there's been very little change. The pipeline is strong. And again, still vast majority exclusively negotiated. When we talked about adjacencies like equipments and other facets of landscaping products that we can go into, but we have a robust pipeline in our traditional vertical and really until we get further down the road on that, we don’t think it's the time to start adding adjacencies and making our business more complex. So right now we'd like to keep -- we are working across nursery, hardscapes, agronomics and irrigation and that business has its own complexity. We like to stick to that in the near-term and keep those other adjacencies for down the road in our evolution to go after.

[Judy Merrick, SunTrust Robinson Humphrey]

Okay, great. Thank you.

[Doug Black, Chairman and Chief Executive Officer]

Thank you.

[Operator]

Our next question is from Seldon Clarke with Deutsche Bank. Please proceed.

[Seldon Clarke, Deutsche Bank]

Hey, guys. Thanks for the question. Could you just give a little bit more color around the cadence of your organic growth target for this year? And whether it implies any acceleration in any market, in particular, in the back half?

[John Guthrie, Chief Financial Officer]

So I think in general from an organic growth, if we were to think next year is going to be a normal year, I think you would see probably -- we felt we had because of weather impacted the second quarter. We would expect to have probably the strongest quarter throughout the year and potentially the third quarter kind of moderate the opposite way, because second quarter is our most important quarter of the year. So it will be nice to hit there. In general, I think the growth geographically probably we're all across the country. So for instance, in the first half of this year, probably Southern California was somewhat negatively impacted, a lot of rain. You might see a recovery there. The south had a very good year. So I mean, we're somewhat -- one of the great things about being so geographically diverse is there's always one market where it's probably down a down year and in another it's offset. But generally, I would say in general, the south was pretty strong this year. Obviously, there's good economic trends there, also the west, at least the first half of last year faced some wet weather.

[Seldon Clarke, Deutsche Bank]

Okay. That's helpful. And then are you hearing anything from your suppliers in terms of disruption related to the coronavirus that we need to be thinking about?

[Doug Black, Chairman and Chief Executive Officer]

We’ve heard some -- we get about 10%, 15% of our cost of goods from China either as input components or whole components. And it mostly affects our chemical business, some of our landscape accessories and lighting [ph]. And so we’ve obviously been in communication with those. The disruptions to date have not been major. There are potential reduction -- disruptions down the road, and so we've been doing some buying into our DCs and other things to mitigate that. We have secondary suppliers in the United States that we can use for these products and we can also buy forward into our DCs to -- as a shock absorber against any kind of disruption. So we feel good about our ability to kind of manage through any developments. And we're watching like everyone else. But to date, no major disruptions and we feel our plan is going to allow us to navigate any disruptions that we develop in the future.

[Seldon Clarke, Deutsche Bank]

Great. I appreciate the questions. Thanks.

[Doug Black, Chairman and Chief Executive Officer]

Thank you.

[Operator]

[Operator Instructions] Our next question is from Alex Maroccia from Berenberg Capital Markets. Please proceed.

[Alexander Maroccia, Joh. Berenberg, Gossler & Co.]

Hey. Good morning, guys. Thanks for taking the questions. So it's been a strong start to the year in the acquisition pipeline. I guess, why did people wait until the start of the year to sell? And what are you guys thinking you will add this year as a percentage of revenues?

[Doug Black, Chairman and Chief Executive Officer]

I will take the second one first, I guess. We would still target our 7% to 13% TTM sales in terms of what we’re looking forward to add in terms of M&A. And then on the timing, I don’t think anyone is specifically waiting. I mean, there's a small psychological edge, so I guess for some people or benefit to finishing at the end of the year, but more or less it just comes down to when people are ready to sell in the due diligence process and how long that takes. So I don't think there's any particular force that’s pushing people towards the end of the year, which is sort of timing for us in this year.

[John Guthrie, Chief Financial Officer]

And if you look at it, we did three deals in Q4. So they’re kind of -- they’re falling -- they just all fell towards the end of the year, some through the Q4, some flipped over to the -- at the end of the year. And there's a little bit of an effect to a seller's mind share that they’ve to be able to invest in an acquisition process if they're in season they have a look -- from March to June, they’ve a little bit harder time to focus on it. So it naturally pushes it sometimes to H2.

[Alexander Maroccia, Joh. Berenberg, Gossler & Co.]

Got it. That’s helpful. And then second one is just seeing Shannon come in as CMO. She's got the big company background. Can you give us an understanding of how you are trying to change your marketing strategy, and if we can expect a significant uptick in marketing spend?

[Doug Black, Chairman and Chief Executive Officer]

Great question. So we’re thrilled to have Shannon joining. Marketing has been one of our strategic initiatives for some time now. Yes, we're really still in the early stages of using marketing as a major lever to drive organic growth. We’ve made some solid progress over the last couple of years. What we love about Shannon is, she's got experience in all aspects of marketing. She was the VP with Lowe's and she has got kind of proven track record, especially as we move into the digital age and we started using all of our weapons, digital and otherwise in an integrated fashion to communicate with our customers, to improve the customer experience and to grow organically. We think, Shannon is uniquely prepared to take us through world-class, and that’s what we are very excited. In terms of marketing spend, we're not a big company and she understands that. And so we will be steady as you go going forward. We will obviously make investments in market. We've been making investments in marketing. So that won't end. I don’t see that being a huge tick up, but if we see levers to pull we will certainly make those investments and we will expect high returns from those investments. So we will have to see. I think invariably, as we get bigger, our spend will increase, but we're not looking for any kind of massive strategic pivot here. We are just really looking for Shannon to take the investments that we made already, perhaps smarter and better ones going forward to continue to drive organic growth. We are excited about her joining.

[Alexander Maroccia, Joh. Berenberg, Gossler & Co.]

Got it. All right. Thanks a lot, guys.

[Doug Black, Chairman and Chief Executive Officer]

Thank you.

[Operator]

We have reached the end of our question-and-answer session. I'd like to turn the conference back over to Doug for closing remarks.

[Doug Black, Chairman and Chief Executive Officer]

Okay. Thank you and thank all of you for joining us today. We very much appreciate your interest in SiteOne. We are very excited about our long-term growth potential and profitability potential. And I'd like to once again just thank all the terrific SiteOne associates for helping us get to where we are today and for all their hard work and commitments in building a world-class company. Thank you very much and we will look forward to communicating with you again after the first quarter.

[Operator]

Thank you. This does conclude today's conference. You may disconnect your lines at this time and have a wonderful day.