Greetings and welcome to Siteone Landscape Supply, Inc. Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. John Guthrie, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you and good morning, everyone. We issued our third quarter 2020 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.

Thank you, John. Good morning and thank you for joining us today. We are very pleased with our results for the quarter and year-to-date. I'm so proud of our tremendous team at SiteOne as they have continued to deliver outstanding results for all our stakeholders in the face of extraordinary challenges related to COVID-19. Our strong culture of teamwork, service and commitment to excellence is shining during this time of crisis, and we are gaining strength versus our competition as we build our capabilities and execute our strategy. Additionally, we are benefiting from the consumers' renewed focus on the home due to COVID-19 restrictions, coupled with homeowners' continued desire to enjoy their outdoor living spaces, which has been a trend over the last decade. SiteOne is well positioned to take advantage of these trends in the medium term while building our company of excellence for all stakeholders and delivering outstanding performance and growth for the long term. I will start by revisiting our industry position and our strategy for long-term performance and growth, followed by a brief update on recent developments, highlights from the third quarter and actions we have taken since our last call. John Guthrie will then walk you through our third quarter financial results in more detail and provide additional information on our balance sheet and liquidity position. Scott Salmon will discuss our acquisition strategy, and then I will come back and review some of the trends that we are seeing in our end markets and address our outlook before taking your questions. As we continue to navigate through the operating challenges associated with COVID-19, we feel very fortunate to be here at SiteOne. As you can see from slides 4 and 5 in our investor presentation, we are a financially strong industry leader and primary consolidator…

Thanks, Doug. I'll begin with some highlights from our third quarter results on Slide 9. We reported a net sales increase of 15% to $752 million in the third quarter. During the quarter, we had 63 selling days, which were unchanged compared to the prior year period. Organic daily sales increased 11% in the third quarter compared to the 7% we experienced in the third quarter of last year. We saw solid demand across product lines as consumers continued to invest in their home and outdoor living spaces. Geographically, we saw strong sales across the country with 7 out of 10 regions achieving double-digit growth. Organic daily sales for landscaping products, which includes irrigation, nursery, hardscapes, outdoor lighting and landscape accessories, grew 11% during the quarter. Hardscapes again experienced very strong growth as consumers continued to upgrade their backyards and patios. Organic daily sales for agronomic products, which includes fertilizer, control products, ice melt and equipment, also increased 11%, reflecting strong demand for lawn maintenance products and, we believe also, some solid market share gains. As Doug mentioned, the positive trend for organic daily sales has continued into October. But sales have moderated somewhat the last 2 weeks. In addition, we faced a strong organic daily sales comp of 8% in the fourth quarter, including double-digit growth in November of last year. We also have an additional 4 days this year in the month of December, and because of the seasonally low sales projected for that week, we expect it to negatively impact organic daily sales growth for the quarter by 3 to 4 percentage points. To provide further context, our 8% organic daily sales growth in the fourth quarter of 2019 would have been reduced to approximately 4% if we had the additional 4 days in December with the…

Thanks, John. In August, we resumed our acquisition strategy after a 4-month pause as we saw more stability in our end markets and gained confidence in our ability to serve our customers while keeping everyone safe. The work conducted by our strategy and development teams during the pause paid dividends as we were able to seamlessly pick up where we left off and add 4 excellent companies with trailing 12-month net sales of approximately $111 million. As shown on Slide 11, year-to-date, we have acquired 8 companies with trailing 12-month net sales of approximately $154 million. And since 2014, we have acquired more than 50 companies and surpassed $1 billion in acquired net sales. Turning to slides 12 through 15, you will find information on our 4 most recent acquisitions. On August 17, we acquired Alliance Stone, expanding our leading hardscapes and landscape supplies position in the greater Atlanta metropolitan area. On August 18, we acquired Modern Builders with 2 locations in the greater San Diego market, significantly enhancing our leading hardscapes and landscaping products position in Southern California. In the fourth quarter, on October 1, we acquired - BURNCO Landscape Centres with 12 locations across 3 Western Canadian provinces, establishing a leading hardscapes and landscaping products platform, which complements our growing irrigation and agronomics business there. And finally, on October 5, we acquired Hedberg Supply with 2 locations in the greater Minneapolis metro area, which establishes yet another leading hardscapes and landscaping products platform. Our pipeline continues to be deep and ever-expanding. And more importantly, the quality of our target companies is very high, as evidenced by the tremendous new partners who have joined our family since we restarted our M&A activities. Summarizing on Slide 16. We remain confident in our strategy, our teams, our acquisition pipeline and our approach. I want to thank the entire SiteOne team, from the many entrepreneurs who have joined us over the years and continue promoting and executing our strategy to the dozens of field and field support leaders, who build unbreakable relationships in our communities every day. Together, you make us the acquirer of choice and a truly great place to work. We look forward to continuing to attract new, dynamic leaders and their companies who will make the SiteOne team stronger, expand our product capability, help us to better serve our customers and support further performance and growth. I will now turn the call back to Doug.

Thanks, Scott. I'll wrap up on Slide 17. First and foremost, we will continue to ensure the safety of our associates, customers, suppliers and communities as we operate in a coronavirus environment. As our country works to overcome this pandemic, our ability and the ability of our customers and suppliers to operate safely remains a critical priority. In terms of demand outlook, as previously mentioned, we have seen the trend in the third quarter continue into October, though sales have moderated somewhat throughout the month. October typically represents approximately 50% of our fourth quarter sales. That said, the months of November and December are more impacted by weather. And, as John mentioned, November organic daily sales last year was particularly strong. So taken altogether, we would expect organic daily sales growth in the fourth quarter to be in the mid to high single digits, excluding the extra week. In terms of end markets, assuming significant stay-at-home restrictions are not reinstated in the fourth quarter, we would expect maintenance, which comprises 42% of our business, to remain steady with low, single-digit growth. Residential new construction, which comprises 26% of our business, looks to remain strong as builders work to create new home inventory to meet higher demand. Repair and upgrade, which is 17% of our business, is very strong with significant backlogs to carry our customers through the end of the year and on into 2021. Finally, we expect the commercial end market to be steady in the near term with some weakness going into 2021 as businesses and commercial builders pare back projects to adjust to the impacts in the restaurant, entertainment, retail and hospitality sectors. Taking all of these factors together, we would expect the market to support solid organic growth as we finish up the year and move…

[Operator Instructions] Your first question comes from the line of David Manthey with Baird.

First question is related to operating expenses. During the initial stage of the pandemic and through the summer, many companies pulled back on items that they could pull back on, 401(k) match and executive comp and a number of other things, not just the T&E and the normal stuff that would be lower in this environment but sort of actively pulling expense levers. And now as we get into the fourth quarter and 2021, they're starting to feather those back into the expense line. Given the strong sales that you've seen so far this year, can you just tell us, are there any unusual SG&A reductions in the second or third quarter that will need to be added back in the fourth quarter and into 2021?

Thanks, David. I don't think there are any onetime items. There is in Q4 some projects, some investments we've made specifically with regards to some of our digital strategy that were like in Q2 and Q3, and those will be hitting in Q4. But there weren't any major items like specifically with regards to operating expenses. I guess the only other item I would say is -- I mean, I think this is something that's common across industry -- people haven't been taking vacation or PTO in the first half of the year. And we've actually extended our policy, increasing the accrual there, and that's kind of a onetime item that'll be hitting this year also, especially in Q4. But those are the 2 primary items I would highlight.

Yes, David, I would just add. Those are some additional costs that we carry as we have associates that go on quarantine. We're taking care of our associates without them having to take PTO so that they have no incentive to not stay home when they're sick. We also made the special bonus that are -- which was a onetime kind of thank you to our associates. So we haven't pulled back any items. We've obviously been very prudent about travel, and insurance costs are naturally down just given the trends. But other than that, what you're seeing in the fourth quarter is just continued investment in our folks and setting ourselves up for 2021.

Makes sense. And second, the big question for all distributors that are playing in outdoor sports today is will we see a hangover in 2021 as the -- we come up against these difficult 2020 comparisons and you've got shifting market sands. And you talked about the trends that you're seeing currently into October. What are customer discussions telling you about the durability of the current strong level of demand you're seeing as we move into 2021 and the prime selling season in the second and third quarters?

Yes. So the demand is robust, and that's continued. Our customers are busy. They have backlogs. Especially in the repair and remodel market, outdoor living market, there's a big backlog there. And as you know, COVID-19, unfortunately, is still with us and probably will be with us into next year. And so we anticipate that there will be some good carryover demand. We're labor constrained in that part of the market, and so, at least going into the first half year, there are some good backlogs in repair and remodel. New home construction, as you know, is robust. And together, those drive about 2/3 of our business. So we feel good about it. Our customers are having good years this year. They feel good about next year, at least going into the first half. Commercial is the one area where there's weakness, and we've seen some of that weakness this year. Our activity has flattened out. We would expect that to be down somewhat next year. But given our strong bias toward residential and the strength of those markets, we actually feel pretty solid going into the first half. And remember, we had the big COVID drop, obviously, in April. That will be a favorable comp. But it seems like the momentum in the residential markets, both new construction and repair and remodel, are pretty durable. I would just add to that the outdoor living trend has been with us for a while. And so while that may taper down, it certainly is an underlying engine. And we've got some self-help ways to drive organic growth. With our digital strategy, we expect to gain higher share of wallet. We're really focusing now on the small customer and gaining share there, which we're seeing some success. And then we've got a Hispanic customer strategy as well that we're launching with our new Chief Marketing Officer coming on board that we're excited about to gain some share in those markets. So we're certainly thinking about how do we sustain our growth beyond any kind of COVID wave, if you will, or bump in activity. And we feel good about those initiatives.

Your next question comes from the line of Ryan Merkel with William Blair.

Congrats on a nice quarter.

Thanks, Ryan.

So first off, and you sort of answered this, today's question, but on the 4Q guide, if I add back the 3% or 4% from the extra week, organic sales would be up, call it, 5%, 6%. You mentioned the last 2 weeks slowed somewhat, and I know November and December are hard to predict. But should we be reading that the demand environment is moderating off a rapid pace? Or is this more about the fourth quarter being off-season and hard to predict?

Yes. I think it's more the latter. Weather is a big impactor when you get into November and December. And again, a large part of the country from Mason-Dixon on up starts to close down. So the numbers get smaller and they get more volatile. And we had very good weather. We had a very good kind of double-digit November last year as a comp. So just reading into it, we're being cautiously optimistic about the underlying demand seems to still be strong, but you just have the winter shutdowns that start to take effect, and weather can throw those numbers, favorable or negative, pretty quickly. So we take all that into consideration when we set our guidance.

Okay. That's what I thought. And then I just wanted to ask about digital tools. I know some of them, it's early days, but can you just expand upon e-commerce, MobilePro, barcoding, how that impacted this year? And do you see acceleration in 2021?

Right. Well, let me talk about MobilePro, barcoding because that's the one that's the most advanced. We pushed that across the company really this year and accelerated the usage of that. Obviously, with COVID-19, that became a very good tool, allowing us to literally check people out while they stay in the truck and be able to check folks out in the yard and et cetera. So that's across the majority of our branches. It's being used. It's helping us to get customers in and out faster, and it's helping our associates to be more efficient. So we feel like part of our SG&A leverage is being aided by MobilePro. So we're quite excited about that. If you look at -- and so that's going to continue to benefit us. We rolled that out this year. Next year, we'll be well grooved in it, and we think it's going to give us additional benefit. If you take siteone.com, siteone.com is a solid tool, but we're upgrading it in many ways. We're adding kind of buy online, guest checkout, making it more easy for customers that might not have an account yet to test out SiteOne, if you will. And we're really focusing on the small to midsized customer and upgrading siteone.com to make sure it's a great tool for those customers to use. And we expect to gain traction there as we go through next year and gain wallet share, quite frankly. It's a prime target for us. So that, we see, is a good way to help us fortify our organic growth, sustain our organic growth. If we can continue -- we have the lowest share of all of our segments in that small customer segment. We're about 12%, 13% market share overall, and we're only about 5%, 6%…

Your next question comes from the line of Keith Hughes with Truist.

This is Judy Merrick for Keith Hughes. Just a follow-up on your comments on the commercial markets, where you said they're paring back. Is there anything -- just is that more on projects getting delayed? Or has there been a change in the bidding? Or does it kind of vary by what the end market sector is?

Yes. It's hard to tell exactly what's going on, but there were project delays as COVID hit, and we continue to see those as end commercial users are trying to figure out the future, if you will. But the metric that we really watch is just overall bidding activity. We have a project services group that provides bids for our contractor customers. And while we were starting the year with growth, we've seen that flatten out. Now it did -- it dipped down as COVID hit initially in April, in May, and then it came back to flat, and it's been, let's call it, flattish. So that's the main -- and in addition to talking to our customers. But I think it's a combination of delayed projects and some cancellations, mostly project delays, and lack of new projects coming on.

Got you. Okay. And when you talk about the new residential construction being very strong, is there anything you're seeing here? Are you anticipating any lags or any shifts or it being so strong, maybe like labor constraints or anything else?

Well, there's always labor constraints. And we lag starts probably 6 months or so given that we're the last in. But we -- while there was a little bit of a dip in 2020 when the builders halted work and paused to assess the environment, they've come back strongly. We took a little bit of a pause in some areas of the country where we had less activity, but we've kind of ramped back up full speed, if you will. And when you say ramp back up, there's a limit at which you can ramp back up because of the labor constraints. So I'd say we're back at full capacity in terms of servicing the residential market. And our view is that, that would sustain through 2021, at least the first half, but we would think probably for most of the year next year because there's been a real swing in attitude toward homeownership and the importance of homeownership. And everybody is trying to figure out how that trend is going to manifest itself, but it's logical to think that, that trend would not just shut down once there's a vaccine, that there'll be an overhang of attitude toward, hey, we want to be in a home prepared for the next pandemic. So we think residential is going to be strong in 2021.

[Operator Instructions] Your next question comes from the line of Ryan Frank with RBC Capital Markets.

So I just -- last quarter, you guys have been expecting 2 half organic sales to kind of be in line or slightly below 1H. But obviously, you did significantly better than that this quarter. So I was just trying to figure out what the main differences were there. Was it just stronger new res? Or was there something else?

I think what we saw this quarter was just a much stronger repair and remodel and homeowner than we expected. We were coming out, sales were strong, but the demand out in the marketplace, especially in repair and remodel, was probably greater than we had anticipated at the -- on the second quarter call.

Got it. And then the next one I had is appreciate that you just kind of worked to lower your leverage with the offering. But now, with you guys being below 1x, are there any larger acquisitions that are attractive? Or maybe, should we see the pace materially pick up next year?

I think we exited our pause feeling very good about our pipeline. It's balanced across line of business and size as it has been since I've been here. So pause is probably the wrong word actually. I mean we were hard at work improving our sourcing, maintaining and building relationships and just improving our processes. So we were able to exit when the economy improved, I think, in a much better position from a pipeline. In terms of any particular large deal, that wasn't a motivator for us in terms of our equity offering, but we're certainly well positioned to take advantage of anything that does arise.

Okay. And quickly, just a follow-up on that. So is the 1 to 2x range kind of likely the new range going forward as opposed to kind of 2 to 3x?

Yes. You should consider that, that that's where we're going to operate. And from our perspective, what we're really doing is, is that allows us in both up markets and down markets to continue to execute that strategy, that acquisition strategy, and especially even in down markets to -- really to be opportunistic and not have to necessarily put our strategy on hold if there is a market downturn, which, obviously, there will be some time in the future.

So Ryan, just to be specific, so in the good times, we expect to operate in 1 to 2. And then in a recessionary period, we expect to continue to do acquisitions because they're going to be available, and we don't want to miss out on them. And we would anticipate our ratio would migrate up in the 2 to 3 range, and -- but it wouldn't get up in the risky ranges above that. And that was the strategic decision we made, to lower that so that we could continue to -- we don't want to miss out on acquisitions just because there's a downturn. And so we're quite comfortable now where we are to be able to navigate through a downturn and continue to do deals when and if they come available.

Got it. Yes, that makes sense. That's all for me. Congrats in the quarter.

Thanks, Ryan. Sure.

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

Okay. Well, thank you all for joining us today. We very much appreciate your interest in SiteOne, and our thoughts and prayers go out to all of those impacted by COVID-19. And I'd like to once again thank all of our terrific associates, our suppliers and our customers for helping us to be a great company, and we look forward to sharing our year-end results with you as we go into 2021. Thank you very much.

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