Greetings. Welcome to SiteOne Landscape Supply fourth quarter and full year 2017 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. I would now like to turn the conference over to your host, Pascal Convers, Executive Vice President of Strategy and Development.
Thank you. 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. 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 the 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. Finally, I will come back to provide comments on our guidance and outlook before taking your questions.
I'll start on slide four 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 U.S. and Canada, and a 10% share of this $18 billion highly fragmented market. We are more than four times larger than our next largest competitor and larger than the next 10 combined. You will note from the map on slide four that we now have three 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.
The landscaping products market has thousands of suppliers trying to reach almost a half a million customers, so it lends itself to a strong world-class wholesale distributor to connect them. Turning to slide five, 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 the 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 five 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 three 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 three of these areas to create significant value for many years to come.
Slide six shows the history of our company and our strategy in action. Following the spin-out 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 developed a detailed strategy to do this, leveraging our industry leadership position and the uniquely attractive aspects of the landscaping wholesale distribution market. After three 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 three 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%-8.4%.
We remain on track towards our stated milestone of 10% plus adjusted EBITDA margin. Turning to slide seven, 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 continued 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 2.9 times, which falls within our target range of two to three times. We accomplished this while investing in the business and completing eight 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 two recent acquisitions. I would like to thank all of our associates for doing a terrific job with our customers and suppliers in making these results happen.
I am 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 eight 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 in 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 31st, 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 one-time 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 nine. 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 fourth 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 2.9 times our trailing 12 months adjusted EBITDA, which is within our targeted range of two to three times. 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 four in 2015, to six in 2016, to eight in 2017, and now two more through the first month and a half of 2018. The hardscapes and nursery acquisitions we completed in 2017 are a very good strategic fit for SiteOne as they complement our irrigation and 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 three years, we've 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. 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 two we completed more recently in the first quarter of 2018.
In October, we closed the acquisition of Harmony Gardens, a leader in the distribution of nursery and related products to landscape professionals with two 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 our existing irrigation, agronomics, hardscapes, and landscape lighting product 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 operation with a 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 two 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 two 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. With two 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. 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 the 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.
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. 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.
Thank you. At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from David Manthey with Robert W. Baird. Please proceed with your question.
Thank you. Good morning, guys.
Good morning.
Good morning, Dave.
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 like it's a little bit of an easier comp and maybe you get some tailwinds here. Could you give us an idea? Are you assuming the same organic growth rate overall for the company in 2018 versus 2017 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. 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, thank you. Another component there might be price, given that pricing was flat in 2017 and we're hearing inflation and price increases creeping in various product categories, any hope that we get a little bit of positive traction on the pricing front in 2018?
Yes, 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. 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 an inflection point where we started to see, the last several months of the year, we started to see a positive pickup in inflation. We expect that to continue. Most price increases occur in the first quarter of this year.
Very good. Thank you.
Great. Thanks, David.
Thank you, David.
Our next question is from Ryan Merkel with William Blair & Company. Please proceed with your question.
Thanks. Good morning, everyone.
Good morning, Ryan.
Morning.
I wanted to start with the SG&A leverage for 2018. You mentioned that you thought you'd do a little bit better there, get some operating leverage. What is a good range that we should be thinking about for our models?
It starts with our base business leverage. If you look at the base business, we expect that we get about 16% or so incremental EBITDA on every dollar of organic sales. From that, we look at the investments that we're going to make. 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. 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. Of course, acquisitions come in, depending on what kind of acquisitions. If they're 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 profits.
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. When you put it together, we'll see some leverage, not a full leverage of a mature company reflecting the investments that we're still making. 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'll be a nice change.
Got it. That's helpful. Moving on to free cash flow. I can understand the extra inventory for the supply chain upgrade this year. Just help us with next year, because I think that reverses. 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 as we transitioned out, we should start seeing a leverage as we work through the DCs and our supply chain initiative will largely be done in the first half of the year. We should be able to leverage that going forward.
Got it. Just lastly, if I could, the weather has been a little bit more normal this year in the Midwest and Northeast, with the snow. I've had a lot of questions from investors. Does this help you, does this hurt you, or is this indifferent? That would be helpful, I think. Thanks.
Right. If you remember last year, we had a very mild winter in the South. We had weather that was okay, let's say, in the North, in the West it was very wet. We really didn't do anything in the West last year. This year we're seeing the West is fine, 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 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. When you take it all together, we would call it a normal winter. We're seeing about what we thought we would see.
Again, that highlights the benefit of us being in 45 states and now all six Canadian provinces that we average out quite well, unless it's an extreme winter, which we had in 2016. Overall puts and takes, some up, some downs. Overall, we'd call it about normal.
Very good. Thank you.
Thanks, Ryan.
Thank you.
Our next question is from Nishu Sood with Deutsche Bank. Please proceed with your question.
Thank you. 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 2016 to 2017, but I wanted to understand resi versus commercial. What sorts of projects are driving that and really how that's shaping up as the construction recovery goes on here?
Nishu, we're seeing just a good steady flow of demand. On the commercial side, our customers' backlogs are still very strong. They're still quite a ways out in projects. Of course, we bias toward more of the retail office, those kind of commercial projects that have a lot of landscaping. 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. The maintenance has been quite good. Our maintenance products last year up 2%. That's right on the bullseye. If you recall, there was a bit of price deflation in maintenance, the volume growth would've been a bit higher than that, which we think reflects our ability to pick up share there.
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. It is encouraging on the commercial side, where the backlogs are longer out, that we're still strong in terms of our customers' backlogs. 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. We don't see it today.
Got it. 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 2018?
Right. Well, labor is a constant battle, 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 in terms of our picking up our associates to staff our branches. 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, some of our tools that allow them to make their crews more efficient. I think that the customers are using more equipment to help themselves be more productive. I think our customers tend to be small, mid-size.
They're finding different ways to better utilize their labor and fighting through. 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. Just on acquisitions and your debt level, obviously 3x is your limit, and you're bumping up right against that. I think as of the end of 4Q was 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'll be stronger free cash flow, the lower tax rate helps. Is there a governor here now with your leverage where it is on acquisitions for the remainder of 2018?
No, we don't view it as a governor from the standpoint of, practically, we have plenty of availability to execute on the acquisition, there's really no limit there. I think one of the important things to remember, most of the acquisitions we're buying are profitable. We fully expect the acquisitions to contribute to the EBITDA and our leverage in addition to the stronger free cash flow. We're not holding back right now on acquisitions with regards to that due to the leverage issue.
Okay.
Just adding that we expect to be within our range at the end of the year, even with the modeled acquisitions.
Yeah, just a reminder. With the size of our company, we can spend about $150 million-$180 million on acquisitions a year and still de-lever or the leverage not go up. If you take 50% on sales, that's a lot of acquisition. We're still full steam ahead on acquisitions.
Got it.
Yeah.
Thanks, appreciate it.
Our next question is from Michael Eisen with RBC Capital Markets. Please proceed with your question.
Good morning, and congrats on a great year. Just following up on some of Ryan's questions around the SG&A leverage. When I'm thinking about 2018 and 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? Do you think it's possible that we see that 16% level come through before the end of the year in any of the given quarters?
Right. No, 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, bar coding, et cetera. When you run the numbers on a, let's say, a roughly $2 billion company, you can see that works against us, right? 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. 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. 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 years away from having, let's say, a steady state SG&A leverage. We also have gross margin that's improving, that helps. The two will work together in 2018 to give us a good, strong move ahead on the EBITDA margin expansion.
Got it. Really helpful. Kind of transitioning over to the M&A platform. The Atlantic integration is one of the larger deals that you guys have done. 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?
Good question, Mike. On the M&A pipeline, as Doug and John alluded to, 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 that we acquired in 2015 and 2016 respectively. There's still quite a few larger companies out there, as well as a lot of small and mid-size. You'll see last year we acquired eight companies. We've got a good start with two in the first six weeks. We would expect to probably do more than eight acquisitions this year, right? We're 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. There's lot. As far as multiples, they're completely in line with what we've seen historically.
The Atlantic multiple is in line with the Hydro-Scape. Hydro-Scape was about $80 million in revenues. Shemin was $140 million. 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.
Thank you, gentlemen.
Thank you.
Thank you.
Our next question is from Keith Hughes with SunTrust Robinson Humphrey. Please proceed with your question.
Thank you. First, just a clarification on the guidance. Does the guidance include the two announced deals, and does it include any-
Yes, the guidance includes the two announced deals, but it wouldn't include any additional deals.
You had discussed on the EBITDA contribution margin, coming out a little bit lighter here in terms of the investments you're making. I assume that you're referring to SG&A investments. What does that look like for 2019? Will you head to a more steady state on that in 2019?
Yes, that's a good question. We will continue to make investments in 2018. We'll always be building the company, but we would expect in 2019 that that would be a bit less. We've spent roughly $5 million or so in 2017 on, let's say, additional investments. When you look at our sales force, probably higher than that. We're going to spend same amount this year. We won't have the people build, we're a bigger company, 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 bar coding, our phone systems will be upgraded. We should see more SG&A leverage in 2019 than we will see in 2018.
Back to the working capital, which you talked about on the introduction. Working capital, I assume, will be a pretty nice source of cash for 2018 if you're successful in your plan.
Yes. We expect the free cash flow to contribute significantly to both funding our strategy, including acquisitions in 2018.
Okay. Thank you.
And then-
Yeah.
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 three to four years. That should be a good source of cash in 2019, 2020, and beyond as we move our turns up more to best in class from where they are today.
Okay. Thank you.
Thank you, Keith.
Our next question is from Mike Dahl with Barclays. Please proceed with your question.
Morning. Thanks for taking my questions.
Morning, Mike.
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. The market is kind of tough to call. We'll go across many verticals, but we think the market grew at, say, 3%-4%. Again, that growth was impacted by the lack of inflation. Normally, our market would be, say, 4%-5% blended growth, but without the inflation, a bit lower. We figure that we picked up kind of point or two 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. We're quite happy with the progress we've made there. That's how we would call the market on a blended basis.
Got it. That's helpful. Two 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?
Yeah. If you look at Atlantic, it's about $80 million in revenues. Their EBITDA margin, let's say, is in line with our business. We didn't acquire it on January 1st. There's a bit of a stub element into it. There's always some short-term integration cost that come with an acquisition. I would be a little conservative there, not include the full 12 months in there. That's in line with our profitability, actually.
Okay. Makes sense. The 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. Assume that's, well, A, is that a function of kind of the suite of products? 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's suite of products and what that could contribute?
Yeah, great question. If you look at Atlantic, it's very focused on irrigation. The product lines have the higher revenue per branch, obviously, a nursery. You can have 10 acres. Some of those locations have $15 million, $20 million, $25 million of revenues. We're not in that category, of course. Hardscapes also, I mean, you can easily find a one location with $10 million in revenues. Pete Rose is a good example, is close to 10. Irrigation and agronomics are the smaller numbers. If you compare it to a Hydro-Scape, Hydro-Scape had 17 locations, about the same revenues. Here it's 33. I think it's a factor as well of when you look at the North and the Northeast, there's more density of branches. There's a little more traffic around, so the locations and the footprint are smaller.
Hydro-Scape actually had some decent hardscapes, outdoor living concept, which drive the revenues up. Yeah, 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. They cover 22 markets from Canada all the way down to Georgia. Our team's 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 showroom, et cetera. It's going to be a lot about agronomics and landscape accessories. One thing I'd like to mention is Atlantic has a small, but it's an exposure to the equipment business, which we have seen with companies like Hydro-Scape and Bissett, for instance.
They sell trenchers and trimmers and blowers and things like that. They carry great brands like STIHL and Toro. I think that'll continue to push SiteOne in the reverse synergy of can we sell more equipment across the nation over time. Very nice cross-selling opportunities with Atlantic, for sure.
Okay, great. That's helpful. Thank you.
As a reminder, if you would like to ask a question, it is star one on your telephone keypad. Our next question is from Chris Belfiore with UBS. Please proceed with your question.
Good morning, guys. Thanks. Just to go back a little bit to M&A. I understand that the multiples have been steady with past deals, 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 increases are fair and reasonable. There's no really reason for that to change. Obviously, we are quite a larger company. We're national, et cetera. We carry the seven product lines. The companies we tend to bring into the SiteOne family tend to be very focused on one product line. No, we haven't seen that. It's completely consistent with what was communicated during the IPO roadshow, et cetera. Yeah.
Okay.
One of the-
Sorry. Go ahead, sorry.
Just to add on what Pascal said. Obviously our goal is to build a company of excellence and also to build the best home for family companies. The way we integrate companies and the way we work with the owners and keep the secret sauce and make sure that the essence of that company survives and continues with SiteOne makes us an attractive acquirer. 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 number 1 team going forward. So those work together to make sure that the prices that we pay are fair for both sides.
Yeah. I think, Doug, that's a great adder, right? Because the sellers look for price and monetizing their investment, but they really look for their employees, which is really their family, quote-unquote, to be well taken care of. At Paul Castle, we learned 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. I think that's a fairly big differentiator if there is some hesitation between us and someone else. To tell you the truth, Chris, in the vast majority of the transactions, we are still exclusive. Yeah.
I have some follow-up questions on the organic side. Last quarter, you mentioned there was some impact from the hurricanes. Did you have any positive impact this quarter from deferred sales or market activity that would've otherwise fallen in the third quarter?
We think we got a bit of catch up 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. 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. A small lift in the fourth quarter, we feel did come from the hurricane balancing the third quarter.
Okay. Then if I could just have one last one. On the price cost side, this might not be as large an effect for you guys, but you're moving to the hub and spoke model with the distribution centers. Have you guys seen any impact from the increased freight costs, or do you expect freight to be an issue going forward?
The freight market, obviously, it's heating up, so 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 cost. By switching to this method in our supply chain, we're directly involved in helping manage those costs down. 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 two years ago.
Okay, thanks a lot.
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. Thank 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. Thank you, 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.