SiteOne Landscape Supply, Inc. (SITE) Earnings Call Transcript

Greetings, and welcome to the SiteOne Landscape Supply, Inc. Third Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Eric Elema, Chief Financial Officer. Please go ahead.

Thank you, and good morning, everyone. We issued our third quarter 2026 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 Daniel Laughlin, SVP, Strategy and Development. Before we begin, I would like to remind everyone that today's press release, slide presentation and the statements made during this call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Such risks and uncertainties include the factors set forth in the earnings release and in our filings with the Securities and Exchange Commission. Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. A reconciliation of these measures can be found in our earnings release and in the slide presentation. I would now like to turn the call over to Doug Black.

Thanks, Eric. Good morning, and thank you all for joining us today. We delivered a solid third quarter performance with 3% growth in net sales, 8% growth in adjusted EBITDA and 60 basis points of adjusted EBITDA margin expansion compared to the prior year period despite continued softness in underlying market demand and the delayed fall season. Our teams made good progress on our commercial and operational initiatives and maintain strong cost discipline in the face of lower sales volume. Our acquisitions continue to perform well, and we were able to add another excellent company to SiteOne through acquisition during the quarter. We also continue to leverage our strong cash flow and balance sheet to take advantage of our recent share price weakness and returned over $62 million to shareholders during the quarter through our share repurchase program. Our Board recently increased our share repurchase authorization by $500 million, and we plan to continue returning capital to shareholders opportunistically in the coming years. While we expect market conditions to be challenging in the near term, we remain focused on the opportunities within our control to gain market share, improve productivity and strengthen our competitive position. These self-help opportunities, combined with our strong cash flow and acquisition strategy, enable us to drive sustained performance and growth for our shareholders this year and in the years to come. I will start today's call with a brief review of our unique market position and our strategy, followed by highlights from the third quarter. Eric will then walk you through our third quarter financial results in more detail, and provide an update on our balance sheet and liquidity position. Daniel will discuss our acquisition strategy, and then I will come back to address our outlook and guidance for 2026 before taking your questions. As shown on Slide 4 of the earnings presentation, we have a strong footprint of more than 690 branches and 5 distribution centers across 45 U.S. states and 5 Canadian provinces. We are the clear industry leader approximately 3x the size of our nearest competitor, yet we estimate that we only have about a 13% share of the very fragmented $36 billion wholesale landscaping products distribution market. Accordingly, our long-term opportunity to grow and gain market share remains significant. We have a balanced mix of business with 66% focused on Maintenance, Repair & Upgrade, 20% focused on New Residential Construction and 14% on New Commercial & Recreational Construction. As the only nationwide full product line wholesale distributor in the market, we also have an excellent balance across our product lines as well as geographically. Our strategy to fill in our product lines across the U.S. and Canada both organically and through acquisition further strengthens this balance over time. Overall, our end market mix broad product portfolio and geographic coverage offers us multiple avenues to grow and create value for our customers and suppliers while providing important resiliency in softer markets, like the market we are in today. Moving to Slide 5, our strategy remains straightforward and unchanged. We leveraged the strength of both our large nationwide organization and our very experienced and highly entrepreneurial local teams. Our goal is to fully utilize our scale, resources and capabilities in support of local execution to deliver superior value to our customers and suppliers in every market we serve. We do this through our focused commercial and operational initiatives which not only build a long-term competitive advantage for all our stakeholders, but also help us overcome the near-term headwinds. These initiatives are complemented by our acquisition strategy, which filled in our product portfolio, moves us into new geographic markets and adds terrific new talent to SiteOne. Taken all together, we expect our strategy to create superior value for our shareholders through organic growth, acquisition growth and EBITDA margin expansion. At our Investor Day in June, we described our strategy and initiatives in detail and outline our financial targets through 2030. With the current challenging end markets, we believe the execution of our strategy allows us to outperform the market organically while leveraging acquisition growth and EBITDA margin expansion to deliver solid financial progress. We expect our progress to accelerate as end markets return to normal growth. Accordingly, we remain highly focused on executing our commercial and operational initiatives, strengthening the business and continuously improving areas that are within our control. On Slide 6, you can see our strong track record over the last 10 years with consistent organic and acquisition growth. As mentioned, we expect to continue driving organic and acquisition growth while [indiscernible] and expanding our EBITDA margin significantly over the coming years. You can see from the slide that we expanded our adjusted EBITDA margin last year and expect to make further progress this year despite soft markets and significant headwinds. Our ability to deliver EBITDA margin expansion in both soft and healthy market conditions is expected to yield attractive EBITDA growth and improve return on invested capital in the coming years. Finally, with our strong cash flow, we can support our strategy and return capital to shareholders through our share repurchase program. Overall, we believe that we are well positioned to create solid value for our shareholders in 2026 and significant value over the longer term. We have completed 109 acquisitions across all product lines since the start of 2014, adding approximately $2.2 billion in trailing 12-month sales to SiteOne, which demonstrates the strength and durability of our acquisition strategy. Our pipeline of potential deals remains robust, and we expect to continue adding and integrating more companies in 2026 to support our growth. Given the fragmented nature of our industry and our current modest market share, we believe that we can add over $2 billion of acquired trailing 12 months revenue to SiteOne over the next 10 years. Slide 7 shows the long runway that we have ahead in filling in our product portfolio, which we aim to do primarily through acquisition, especially in the Nursery and Hardscapes lines of business. We are well connected with the best companies in our industry and expect to continue filling in these markets systematically over the next decade. I will now discuss some of our third quarter performance highlights as shown on Slide 8. Net sales increased 3% to $1.29 billion compared to the prior year period, while Organic Daily Sales decreased 1%. Higher price contribution was more than offset by lower sales volume amid continued softness in underlying market demand, while acquisitions continued to contribute to growth. Note that we experienced hot and dry weather in key markets during August and September, which pushed some of the fall season into October. We are encouraged to see those sales come through this month, with Organic Daily Sales growth of approximately 2% so far in October, yielding modest organic daily sales growth of flat to up 1% for the 4-month period of July and through October. Gross profit increased 5% to approximately $459 million, and gross margin improved by 80 basis points to 35.5%, reflecting strong price realization and continued execution of our commercial initiatives. SG&A as a percentage of net sales increased 20 basis points to 28.6% as lower sales volume and higher fuel and health care costs more than offset the benefits of our operational initiatives and strong overall cost control. Note that increased fuel costs added approximately 15 basis points to SG&A as a percentage of sales, while our fuel surcharges added an offsetting 15 basis points to gross margin. Adjusted EBITDA increased 8% to $138.3 million, and adjusted EBITDA margin improved by 60 basis points to 10.7%. Overall, we were pleased to expand adjusted EBITDA margin despite the challenging demand environment and organic daily sales decline. In terms of initiatives, we continue to make solid progress during the quarter despite the lower end market demand, executing specific actions to improve our customer experience, drive organic sales expand gross margin and control SG&A. For organic sales and gross margin expansion, we achieved good Organic Daily Sales growth with our small customers and grew our Pro-Trade, Solstice and Portfolio private brand products collectively by 23% during the quarter and over 35% year-to-date. Our percentage of branches with bilevel capability is nearly 70% and despite adding 12 Reinders branches earlier this year without this capability. We continue to execute our Hispanic marketing strategy to drive growth in this important customer segment. We increased our digital sales on siteone.com by over 45% year-to-date versus the prior year period, while also increasing our regular active users by approximately 35%. We believe we are gaining market share with the customers who are engaged with us digitally as we achieved strong positive total sales growth with these customers during the quarter. siteone.com helps customers to be more efficient and helps us increase market share while making our associates more productive through win-win-win. On the SG&A front, we continued to lower our net delivery expense during the third quarter with increased efficiency, along with improved pricing. As mentioned, our teams have done a good job of working with our customers to pass through fuel surcharges to mitigate the significant near-term increases in fuel cost. We have reduced net delivery expense by over 35 basis points year-to-date and expect to drive additional improvements in 2026 and for the next several years, as we execute our local market delivery strategy and best practices. We also continue to achieve improved profitability with our underperforming branches or focused branches during the quarter. though they were also negatively affected by low organic daily sales growth. We expect to drive steady improvement with these branches in 2026, which should accelerate with normal end market demand in the coming years. In total, our ability to execute our commercial and operational initiatives, we believe enables us to outperform the market and deliver EBITDA margin expansion despite lower end market demand. Furthermore, we expect these initiatives to help us drive organic growth and expand our adjusted EBITDA margin over the next several years toward our 2030 targets. On the acquisition front, we have added 3 companies to our family so far in 2026 with approximately $125 million in trailing 12-month sales. Our latest acquisition, Patterson Nursery, not only expands our high-performing Devil Mountain business but will help us provide high-quality West Coast nursery material to customers across the entire country. We continue to have an active pipeline of additional companies, and we expect to close more acquisitions during the remainder of the year. With an experienced acquisition team, broad and deep relationships with the best companies a strong balance sheet and an exceptional reputation as the acquirer of choice. We remain well positioned to grow consistently through acquisition for many years in our very fragmented market. Now Eric will walk you through the third quarter in more detail. Eric?

Thanks, Doug. I'll begin on Slide 9 with some highlights of our third quarter results. Net sales increased 3% to approximately $1.29 billion during the quarter compared to approximately $1.26 billion for the third quarter last year. Organic daily sales decreased 1% driven by lower sales volume with continued softness in underlying market demand and a delay in fall applications, as Doug mentioned, which more than offset higher price inflation. Acquisition sales, which include sales attributable to acquisitions completed in 2025 and 2026, contributed approximately $40 million or 3% to our net sales growth during the quarter. From a demand perspective, conditions remain challenging with sales volume declining approximately 5% more than offsetting price contribution of 4%. We believe that the delayed start of the fall season reduced the third quarter organic daily sales growth rate by approximately 70 basis points. Pricing strengthened during the quarter and was positive across all product categories, including grass seed and PVC pipe where prices were up 6% and 2%, respectively. For the first time since the first quarter of 2023, we did not experience deflation in grass seed, PVC pipe or fertilizer products in the quarter. Price contribution is expected to continue to track near 4% for the fourth quarter as inflationary pressures are likely to keep prices elevated. Pricing for the full year is expected to be up approximately 4%. From a regional perspective, performance continued to vary. The Central region remained our strongest performer, with organic sales growth of approximately 7%, supported by solid underlying market performance and our stronger market position following the Reinders acquisition earlier this year. California also improved meaningfully from the first half of the year with organic sales up approximately 1% for the quarter, driven by share gains and the performance of our Devil Mountain Nursery business within that market. Organic sales declined in three of our other regions during the quarter due to the later start of the fall application season. However, these regions have recovered with positive organic sales growth so far in October. Sunbelt markets, such as Texas and Arizona continue to face headwinds due to weak new residential construction and repair and upgrade demand. Organic daily sales for Agronomic products, which include fertilizer, control products, [indiscernible] and equipment, decreased 1% during the third quarter due primarily to the delayed fall applications. We also believe the higher prices for certain Agronomic products like fertilizer continue to weigh on volume in the short term as our customers deal with fixed maintenance budgets. Organic daily sales for Landscaping products, which includes irrigation, nursery, hardscapes, outdoor lighting and landscape accessories, were flat in the third quarter compared to the prior year period, reflecting weakness in new residential construction and softer repair and upgrade activity, offset by price inflation for certain product categories such as the Irrigation, Landscape Accessories and Outdoor Lighting. Gross profit increased 5% to approximately $459 million, and gross margin expanded 80 basis points to 35.5%. The improvement was driven primarily by strong price realization, including the benefit of fuel surcharges and continued execution of our commercial initiatives. These benefits were partially offset by higher freight distribution costs resulting from fuel inflation and the addition of our fifth distribution center, which wasn't operational in the third quarter last year. Selling, general and administrative expenses increased to approximately $369 million from $357 million for the same period last year. SG&A as a percentage of net sales increased approximately 20 basis points to 28.6%. Higher health care and fuel costs were the primary headwinds while our operational initiatives and continued cost control efforts helped partially offset these higher costs as well as the deleverage effect of lower sales volume for the quarter. As Doug mentioned, fuel inflation represented approximately 15 basis points of pressure on SG&A, which was effectively recovered through fuel surcharges and gross margin. SG&A in the base business on an adjusted basis increased approximately 0.5% compared to the prior year period. The modest increase in base business SG&A was due primarily to the higher health care and fuel expenses, partially offset by the benefits of our cost reduction actions. The effective tax rate was 26.0% for the third quarter compared to 20.4% for the same period last year, due mainly to a decrease in excess tax benefits year-over-year. There were no excess tax benefits recognized in the third quarter compared to $4 million in the prior year period. We continue to expect the effective tax rate for fiscal 2026 will be between 25%, 26%, excluding discrete items such as excess tax benefits. Net income attributable to SiteOne increased 8% to $63.9 million compared with $59.1 million in the prior year period. The improvement for the quarter primarily reflects gross margin expansion, partially offset by lower sales volume, higher SG&A and an increase in the effective tax rate. Our weighted average diluted share count was approximately $43.8 million for the third quarter compared to approximately $45.0 million for the same period last year. During the third quarter, we repurchased approximately 646,000 shares for approximately $62 million at an average price of $96.29 per share. In addition, as Doug previously covered, our Board of Directors approved an increase of $500 million to our share repurchase authorization post quarter end. We also have approximately $38.3 million remaining for repurchases under the prior authorization. We plan to continue executing opportunistic share repurchases, considering the lower stock price. Adjusted EBITDA increased approximately 8% to $138.3 million for the third quarter compared with $127.5 million in the prior year period, and adjusted EBITDA margin improved 60 basis points year-over-year to 10.7%. We are pleased with the margin expansion for the quarter given the lower demand environment and the delayed start of the fall application season. I'll now provide a brief update on our balance sheet and cash flow statement as shown on Slide 10. Working capital at the end of the quarter was approximately $1.09 billion compared to $1.06 billion at the end of the same period last year. Cash provided by operating activities decreased $3 million to approximately $126 million, primarily due to working capital changes, partially offset by higher net income. We made cash investments of approximately $24 million for the third quarter compared to approximately $16 million for the same period last year. Capital expenditures for the third quarter were approximately $17 million compared to $10 million for the same period last year due to increased investments in our branch locations and branch equipment. Net debt at quarter end was approximately $523 million compared to $423 million at the end of the third quarter last year. Net debt to trailing 12-month adjusted EBITDA was 1.2x which is within our target leverage range of 1x to 2x and compares to 1x at the same time last year. Available liquidity at the end of the quarter totaled approximately $566 million consisting of $88 million of cash on hand and $478 million of available borrowing capacity under our ABL Facility. As a reminder, our priority from a balance sheet and liquidity perspective is to maintain our financial strength and flexibility, so that we can execute our growth strategy and complete opportunistic share repurchases in all market environments. I will now turn the call over to Daniel for an update on our acquisition strategy.

Thanks, Eric. As shown on Slide 12, we completed the acquisition of Patterson Nursery Sales through our Devil Mountain business in the third quarter. Patterson is a leading grower and distributor of premium Oregon nursery products serving customers coast to coast. The acquisition expands our nursery product line into the Pacific Northwest, and strengthens our ability to distribute high-quality West Coast nursery products efficiently across the country. This is our third acquisition of the year and brings our combined trailing 12 months acquired net sales to approximately $125 million year-to-date. Since 2014, we have acquired 109 companies approximately $2.2 billion and trailing 12-month net sales added to SiteOne. Summarizing on Slide 13, our acquisition strategy continues to create significant value for SiteOne by adding excellent talent and moving us forward towards our goal of providing a full line of landscape products and services to our customers in all major U.S. and Canadian markets. We continue to drive steady acquisition growth with a focus on building strong relationships with potential [indiscernible] that lead to negotiated deals when they are ready to sell. We have several letters of intent currently and expect to close more deals in the remaining months of 2026 and in 2027. Overall, we remain confident in the long-term acquisition opportunity in front of us. Our pipeline is active, our relationships remain strong, and our competitive advantage as a buyer continue to resonate with prospective sellers. We believe SiteOne remains uniquely positioned by a strong role in consolidating our industry for many years to come. I will now turn the call back to Doug.

Thanks, Daniel. I'll wrap up on Slide 14. We believe that the ongoing energy volatility, higher interest rates, weak consumer confidence and increased macroeconomic uncertainty are collectively having a negative effect on the already weak new residential construction end market and the typically more resilient Repair & Upgrade end market. These trends are more than offsetting a more resilient Maintenance and new Commercial Construction end markets. Pricing continues to be positive, and we believe that pricing will contribute approximately 4% to net sales growth for the full year. Overall, with the benefit of our commercial initiatives and with the 53rd week reducing organic daily sales by 80 basis points, we expect full year organic daily sales to be flat to down 1%. In terms of end markets, we are experiencing significant weakness in new residential construction demand, which comprises 20% of our sales, and we expect this market to be down double digits for the full year 2026 in line with lower new home completions. New commercial construction demand, which represents 14% of our sales, has been solid so far, and we believe it will remain approximately flat in 2026. We believe the Repair & Upgrade market, which represents 30% of our sales, was down in 2025 and has taken another step down this year with higher interest rates and inflation continued weak consumer confidence in existing [indiscernible] sales. While the long-term fundamentals for this end market are strong, we believe that Repair & Upgrade demand will continue to be down through the remainder of this year. Lastly, in the Maintenance end market, which represents 36% of our sales, we achieved excellent sales volume growth in 2025 as our teams gained profitable market share on top of steady demand growth. We have seen steady demand so far this year, though there has been some near-term volume reduction in response to higher fertilizer prices where customers' maintenance budgets are fixed for the year. Overall, we expect Maintenance end market to be flat in 2026. In total, we expect end market demand to be down this year, driven by weakness in new residential construction and Repair & Upgrade. We expect gross margin to be higher through the remainder of the year and for the full year 2026 compared to the same periods of 2025, driven by price realization and our commercial initiatives partially offset by higher freight and logistics costs supporting our growth. Given the lower sales volume, higher fuel and health care costs and the negative effect of the 53rd week, we expect SG&A as a percentage of net sales to be up for the full year as these factors more than offset our operational initiatives and actions to reduce SG&A. We are managing SG&A tightly, and make necessary changes to optimize our cost structure in anticipation that 2027 will continue to be challenging from a demand perspective. Accordingly, we plan to reduce our workforce and consolidate or close brands in the fourth quarter and incur corresponding charge to adjusted EBITDA of approximately $6 million to $8 million. Despite this charge and the negative effect of the 53rd week, which we anticipate will reduce adjusted EBITDA by an additional $4 million to $5 million in the fourth quarter. We expect to expand adjusted EBITDA margin slightly in fiscal 2026. In terms of acquisitions, as Daniel mentioned, we have a good pipeline of high-quality targets and we expect to add more excellent companies to the SiteOne family during the remainder of the year. With all these factors in mind, we expect our full year adjusted EBITDA for fiscal 2026 to be in the range of $425 million to $440 million. This range does not factor in any contribution from unannounced acquisitions. In closing, I would like to sincerely thank all our SiteOne associates who continue to amaze me with their passion, commitment, teamwork and selfless service. We have a tremendous team, and it is an honor to be joined with them as we deliver increasing value for all our stakeholders. I would also like to thank our suppliers for supporting us so strongly and our customers for allowing us to be their partner. Operator, please open the line for questions

[Operator Instructions] Our first question comes from David Manthey with Baird.

Thank you, and good morning, everyone. First of all, on the actions that you're taking here. Were any of these contemplated when you were going through your self-help items on that Slide 108 from the Investor Day where you waterfalled to 2030 EBITDA? And second and related, does this represent a change in your view on 2027, I think at Investor Day, you expected the market to be flat.

Yes, good question, David. We're always kind of monitoring where we're at and where we need be. We have seen the markets kind of weaken as we've gone through this year. And we've been taking actions to reduce SG&A. When we look into next year, we haven't necessarily changed our outlook, but we felt like there were additional actions that we could take to not only prepare us for next year to perform, but also in line with that long-term goal. We have target for where we want SG&A to be longer term. And this is all -- these are all just steps to make progress toward that. So we identified additional workforce reductions that we can make and they're throughout the company kind of targeted in certain areas. And then we've identified other branches largely kind of struggling branches that we've been able to -- that we're able to consolidate into other branches to improve the performance and the cost structure of the network. And so yes, so it prepares us for next year. It's not that we've changed our outlook. We expect next year is similar to this year, but it also [indiscernible] us toward our long-term target, which is important.

Great. That's helpful. And then second, on the M&A pipeline, as we look back here, you described it as solid and healthy and now you're saying it's very active. I'm just trying to get a read on if you realistically are looking at your funnel right now, is the current pipeline -- is it moving in the right direction? Is it getting materially better than it was 90 days ago or a year ago? Or is it just -- it's good, solid, and we don't know when something will turn into a transaction?

No, David, this is Daniel. I think it's consistent with the story where we've operated. If we land some of the LOIs that we have under LOI right now, we should deliver towards the bottom end of that range, we said at Investor Day, which was between $200 million and $300 million. We should sort of be in excess of what the average has been in the last 12 years. So we feel good about where we're going to end this year. And then the active conversations that we have going on should trickle into delivering a hopefully improved year in 2027, but at least in line with that $200 million to $300 million that we've been quoting for a while.

Next question comes from Ryan Merkel with Williams Blair.

I wanted to start with a revenue question. Can you talk about or quantify the impact of the shift in the fall application from 3Q to 4Q? And then with the increase in interest rates, have you guys seen a slowdown in housing or big-ticket R&R?

Yes. I think we quantified that the impact was about 80 basis points.

70 basis points. On the Q3 rate.

Q3, rate. So you can kind of add that to the Q3 rate subtracted to what we're calling the run rate in October of 2%. And when we make that shift and when we look at kind of the 4 months of July through October, absent the 53rd week effect. We're flat to up 1% is where we would be. So that's the shift. I forget the second part of the question.

Yes, just in markets in volume.

Increase in rates and if you've seen an impact since that?

Yes. We've just seen that and if you track completions, they've deteriorated all year in terms of residential completions from last year to this year, completions are now going to be down 10 full percent. And so yes, we think that rate increases the consumer confidence, the inflation with fuel. I mean, these factors affect not only home completions, but the [indiscernible] market as well, the repair and upgrade Again, the top end of repair and upgrade is strong. [indiscernible] the paying cash. But in terms of that middle -- those mid projects, they've really been, I think, affected significantly by some of the things going on including interest rates. And so we'll see how things develop. Hopefully, we're seeing kind of a bottom here, but we'll see how it develops going through the fourth quarter and into next year.

Okay. But to be clear, you haven't seen a step down in activity in the last 2 months? Call it.

Not in the last 2 months, but I mean, we've certainly seen it through the year.

Certainly the overall macro conditions have gotten worse, but we're kind of trending in where we've been in the last couple of months.

Yes, from third and fourth quarter we're seeing the same trend if you will.

Okay. And then second question, gross margins. That was a nice result. Was that mostly price cost? And can you quantify how much price cost lifted margins year-over-year. And I'd also be curious for '26 now how much price cost will lift gross margins?

Yes. We called out the fuel surcharge impact. So that's 15 basis to that 80 basis points and then elevated price maybe in the 10 basis points to 20 basis points range, a little better, stronger. There's just overall price cost where normally runs and our commercial initiatives together is about 20 to 30 basis points, maybe even a little stronger. So it's probably, I don't know, 30-plus basis points incremental right now. Looking forward into the fourth quarter, we still expect gross margins to be up year-over-year. So continuing benefit through the rest of the year.

Our next question comes from Mike Dahl with RBC Capital Markets.

This is Chris on for Mike. Just on pricing, I was hoping you guys could flush out with the 4% in 4Q you guys assuming how that looks between commodity, non-commodity, and when we think about exit rates on the commodity side in particular, what that implies for [indiscernible] for next year?

Yes. exit rate, I think approximately around 3%. On the commodity side, we disclosed [indiscernible] in the third quarter was in the mid-single-digit range. That will continue through the first half of next year. So through the fourth quarter this year as well. PVC pipe, it's finally positive, but low single digits. There's pressure in the softer demand environment. If that holds up, there could be some pressure on that in the first part of next year. And then fertilizer is volatile. So it's kind of hard to call, but it's kind of -- it's been elevated through the third quarter, and we expect that to kind of remain through the end of the year. We will lap the significant fertilizer price increases in the second quarter. So we would expect that year-over-year to flatten out, maybe step down. So exit rate, like I said, around 3% for this year into the first quarter, and then we'll start comping in the second quarter, the more significant increases. Finished goods that's run up a little higher this year, with inflationary pressures, but I would expect next year to be kind of low single-digit price increases perhaps in the 1% to 2% range.

And then just for my second question on SG&A and some of the cost -- underlying cost there, health care, fuel. How are you guys thinking about that for -- as you exit this year into next year. [indiscernible] you want to comment on that?

Yes. Health care has been elevated the last couple of quarters, a little bit of higher run rate but also kind of episodic expense. And we'd expect that to run a little lower going forward, but it's been an elevated SG&A overall, you can see the actions that we're taking to take cost out. that's going to benefit us next year. We're planning on the continuation of these current market conditions. So we're working hard to get SG&A in a position where it doesn't grow next year, on a base business rate. And you can see in the third quarter, base business SG&A was only up 0.5%. So that's the high-level thinking -- was there another part of your question, I didn't address?

It's about fuel.

Fuel. Yes. Fuel is going to continue to be a headwind right now, the elevated pricing, diesel up what, 70% year-over-year. We have effectively passed that on to keep that net neutral on an EBITDA basis, but it's been running about 15 basis a quarter deleverage impact, but a corresponding benefit in gross margin.

Our next question comes from Charles Perron with Goldman Sachs.

First, I just want to talk about pricing a little bit more. With the factors you just highlighted, Eric, and the outlook potentially for '27. How do you approach the potential for testing price elasticity with certain end markets and customers considering the weaker micro backdrop that you're seeing out there?

Missed the first part. Did you say testing?

Yes. testing the price elasticity.