SiteOne Landscape Supply, Inc. (SITE) Q3 2020 Earnings Report, Transcript and Summary

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 in a very fragmented and attractive market. The landscaping products distribution market has a very nice balance between maintenance, new construction and repair and upgrade with an attractive construction sector mix of approximately 2/3 residential and the remainder divided between commercial and the remainder divided between commercial and recreational facilities. As you turn to Slide 6, our strategy is to combine the financial strength, talent, resources and technology capabilities of a large company with the fast, flexible and entrepreneurial capabilities of our local businesses to deliver superior value to our customers and our suppliers while providing better growth opportunities for our associates. We are building the capability to provide a full line of landscaping products in all our markets, which makes us very unique in our industry and gives us more ways to help our customers win. We complement our strategy with 6 commercial and operational initiatives, which we believe will allow us to steadily improve our performance for all stakeholders. Finally, given the fragmented nature of our industry with over 1,000 other distributors, we are building SiteOne by adding the best local and regional companies to our team through acquisitions, filling in our product lines, expanding our reach and adding terrific talent along the way. Overall, our strategy is designed to deliver strong organic growth, expanded EBITDA margin and growth through acquisition. While we have made great progress over the past 5 years, I would remind you that we are only in the third or fourth inning of building our company and developing our full capabilities to achieve excellence for our stakeholders. For example, Slide 7 shows that we have a full product line offering in only 21% of our markets. That is why you see us continuing to invest in the good times and the challenging times, both in building our internal capabilities and in adding terrific companies to SiteOne, to expand and strengthen our full product line position. I would also like to emphasize that although we are seeing strong end market demand, COVID-19 is still spreading in our communities, and so we must continue to keep the safety and welfare of our associates, customers and suppliers as our top priority. Our execution of the CDC guidelines, wearing of face coverings and daily associate screenings, are now well proved. We also continue to take care of our associates by allowing them to stay home if they are sick without using their paid time off or PTO. In August, we took this a step further and provided a onetime special bonus for all frontline associates as a way of thanking them for the extra burden that they have carried while providing exceptional service and support to our customers during the spring and summer. This was a $1.8 million investment in them. Finally, we continue to have our field support associates work from home and limit nonessential air travel in order to keep our exposure to COVID-19 as low as possible. I would like to thank everyone of our SiteOne associates for their tremendous commitment to our customers and our company this year and for producing terrific results. Slide 8 summarizes the highlights from the third quarter. The market recovery that we reported during the second quarter continued into the third quarter and through October so far. The increase in the number of families who are working and/or attending school from home due to COVID-19 has spurred additional investments in outdoor living. Concurrently, the new residential construction market has fully recovered with low interest rates and a renewed focus on home ownership. These factors, along with our internal growth initiatives, helped us to achieve our first double-digit organic daily sales growth quarter since going public, on top of the 7% organic daily sales growth that we had in the third quarter of 2019. Additionally, the growth in the third quarter was very broad based both geographically and across product categories. At this point, the market is now being constrained by the lack of labor availability for our customers and by select supplier product shortages, though our product supply situation has improved significantly in October. We also continue to drive good improvements in gross margin during the third quarter with contributions from our supply chain, category management and pricing initiatives. We were able to continue lowering freight costs through our new transportation management system, and we benefited from excellent private label product growth. Additionally, our recent acquisition of hardscape and nursery companies, which operate at a higher gross margin than the base business, also contributed to our gross margin improvement. On the SG&A side, we once again achieved excellent operating leverage as we tightly managed our business, avoided discretionary travel and expenses and benefited from COVID-19-related trends such as lower health care costs. We achieved this leverage even as we continued to invest in MobilePro, siteone.com and TMS, all of which are increasing our capability to serve customers better, grow organically and achieve better operating leverage in the future. I would like to highlight that we have achieved an increase in our Net Promoter Score this year from 71 in December of 2019 to 74 currently. Our NPS was in the low 60s 3 years ago. This increase reflects our continuous improvement in providing consistent and excellent service to our customers of all sizes and segments. The combination of strong organic daily sales growth, good gross margin improvement and solid SG&A leverage allowed us to deliver 25% adjusted EBITDA growth and expand our adjusted EBITDA margin by 90 basis points. Year-to-date, we have also expanded EBITDA margin by 90 basis points and are making great progress toward our midterm milestone of 10%. I'm very pleased that we were able to restart our M&A program during the third quarter, picking up with deals that we had put on hold back in April. Over the last 3 months, we were able to add 4 market-leading companies focused on hardscapes and bulk landscape supply. Like SiteOne, these companies are benefiting from the powerful short- and long-term trends in outdoor living. As we mentioned during our last call, our acquisition pipeline is very active, and we expect to continue closing deals in 2020 while carrying a healthy backlog of potential deals into 2021. Very importantly, the companies that we added last year and earlier this year are performing well and contributing to our strong results. We are also pleased to execute our equity offering during the third quarter in order to strategically reduce our net debt-to-adjusted EBITDA ratio from the 2 to 3x range down to the 1 to 2x range. The uncertainty brought on by COVID-19, along with the continued robust pipeline of acquisitions, spurred us to make this move in order to ensure that we could continue to invest in acquisitions without leverage constraints during an economic downturn. This equity offering, along with our outstanding year-to-date operating cash flow, has reduced our net debt-to-adjusted EBITDA ratio to 0.8x at the end of the third quarter from 2.9x at the end of the prior year period. We are now set up with maximum flexibility to execute our strategy in good times and tougher times. Lastly, we were very pleased to recently publish our first SiteOne responsibility report on siteone.com, which outlines all of the terrific work that our teams do to ensure that SiteOne is a great place to work for all associates and a good neighbor in our communities. Environmental, social and governance best practices are already a part of our DNA, and we are happy to introduce our programs, practices and metrics to communicate and benchmark our actions and results going forward. To summarize, I'm very proud of how our team has performed in this extraordinary environment to keep everyone safe, serve and support our customers, deliver outstanding financial results and take care of each other all along the way. We still have a long way to go in building the full set of capabilities at SiteOne and achieving consistent excellence for our stakeholders. However, we are having a great year and have made significant progress in building our company in 2020 even as we have battled the short-term operating challenges associated with COVID-19. We remain excited about both the short- and long-term opportunities to drive excellent performance and growth with our strong team and winning strategy. Now John will walk you through the quarter in more detail. John?

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 same impact as this year. Prices increased 2% in the quarter and 1% year-to-date compared to the prior year period. For the full year 2020, we expect price inflation between 1% and 2%. Acquisition sales, which reflect the sales attributable to acquisitions completed in both 2019 and 2020, contributed approximately $32 million or 5% to the overall third quarter growth rate. We are pleased with the performance of our acquisitions, which are collectively ahead of plan year-to-date. Scott will provide more details regarding our acquisition strategy later in the call. Gross profit increased 16% to $250 million in the third quarter, and gross margin expanded 30 basis points to 33.3%. Similar to Q2, the increase in gross margin for the quarter was driven by lower freight costs and the contributions from acquisitions, which carry higher gross margin. Selling, general and administrative expense, or SG&A, increased 11% to $183 million in the third quarter. SG&A as a percentage of net sales decreased 90 basis points to 24.4%. The reduction in SG&A as a percentage of net sales reflects operating leverage resulting from our excellent organic sales growth combined with solid cost management. For the third quarter, we reported an income tax expense of approximately $14 million compared to approximately $10 million in the prior year period. The effective tax rate for the quarter was 22.3% compared to 21.9% for the prior year period. We recorded net income for the third quarter of $48 million compared to $35 million during the prior year period. The improvement was primarily driven by strong sales growth, SG&A leverage and gross margin improvement. Our weighted average diluted share count was 44.6 million for the third quarter compared to 42.8 million for the same period last year. The increase was due primarily to our equity offering completed in August. Adjusted EBITDA for the third quarter improved by 25% to $88 million compared to $71 million for the same period in the prior year. Adjusted EBITDA margin increased 90 basis points to 11.7%, reflecting our operating leverage and gross margin improvement. Now I'd like to provide a brief update on our balance sheet and cash flow statement, as shown on Slide 10. Net working capital at the end of the quarter was $710 million compared to $516 million at the end of the third quarter of 2019. The increase is primarily attributable to our decision to increase our cash on hand to enhance our financial flexibility in response to the market uncertainty resulting from the COVID-19 pandemic. As the markets have stabilized, we've started the process of reducing our cash on hand and paying down our outstanding debt, including a $138 million reduction in the outstanding principal under our term loan facility on September 30. Excluding the available cash on hand, net working capital decreased 10% to $435 million compared to the prior year period. Receivable collections have held up well in this challenging environment, and we have maintained flat inventory levels with the prior year period. Last quarter, we mentioned how interruptions in our supply chain resulting from COVID-19 were causing some product shortages. Over the course of the quarter, we saw fewer product shortages, though we still expect some to last through the end of the year. Cash provided by operations was $62 million for the quarter compared to $76 million in the prior year period due to increases in working capital to support our strong sales growth. For the first 9 months, cash flow from operations was still a very strong $181 million compared to $64 million for the same period of 2019. The increase is primarily due to higher net income and improved working capital management. We made cash investments of $31 million during the third quarter compared to $16 million for the same quarter last year. The increase in cash investments reflects increased acquisition activity compared to the prior year. On August 3, we raised $261.7 million of net proceeds in an equity offering of 2.15 million shares of our common stock. We intend to use the proceeds from the offering to reduce leverage, increase liquidity and fund future acquisitions. By reducing our leverage, we believe we have increased our operational flexibility, which will enable us to be more opportunistic and execute our acquisition growth strategy in all macroeconomic environments. Net debt at the end of the quarter was $195 million compared to $566 million at the end of the third quarter of 2019. As a reminder, we have no debt maturities until 2024. Leverage decreased to 0.8x our trailing 12 months adjusted EBITDA compared to 2.9x at the end of the third quarter of 2019. The lower leverage reflects our increased profitability and the debt reduction due to our equity raise and strong operating cash flow. We have reduced our year-end target net debt-to-adjusted EBITDA leverage range to 1 to 2x from our previous range of 2 to 3x. The reduction reflects our strategic decision to lower leverage and increase our financial strength and operational and flexibility. We expect to be at or slightly below that range at year-end depending upon acquisition activity in the fourth quarter. As a result of these changes, Moody's upgraded our corporate family credit debt rating to Ba3 from B1. At the end of the third quarter, we had liquidity of $641 million, which consisted of approximately $275 million in cash on hand and $366 million in available capacity under our ABL Facility. As I mentioned earlier, on September 30, we used $138 million of the cash on hand to reduce the principal under our term loan facility to $300 million. In summary, our priority from a balance sheet perspective is to maximize our financial strength and flexibility during this uncertain time without sacrificing long-term growth and market opportunities. I will now turn the call over to Scott for an update on our acquisition strategy.

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 into 2021. Against this backdrop, we will continue to operate safely and efficiently with tight management of our discretionary expenses yet higher payouts of bonus and commissions as our teams finish up a very good year. We will also continue to drive our commercial and operational initiatives in supply chain, category management, pricing, sales force performance, marketing and operational excellence. We expect these initiatives to allow us to gain market share in support of our organic growth and improve our gross margin while setting us up for strong performance in 2021. We will also continue to make investments in key capabilities for the future to include siteone.com and TMS. Considering all these factors, we expect to achieve good progress in our adjusted EBITDA margin this year and have raised our guidance. In terms of acquisitions, as Scott mentioned, we expect to add additional companies to SiteOne before year-end, finishing what has turned out to be a very solid acquisition year despite the 4-month pause. We have a strong pipeline and numerous active deals, which make us optimistic that 2021 could be another very good year in welcoming new companies to SiteOne. Keep in mind that acquisitions added in the third and fourth quarters will not contribute meaningfully to our adjusted EBITDA growth this year but we believe will set us up for strong growth in 2021 and beyond. With the strong third quarter performance and increased visibility that we have on our end markets, we are pleased to be raising our adjusted EBITDA guidance range for 2020. We now expect adjusted EBITDA for 2020 to be in the range of $230 million to $236 million, exceeding the high end of our prior range of $205 million to $225 million. Keep in mind that this range includes the extra loss-making weeks in December, as John mentioned, as compared to 2019, which reduces our adjusted EBITDA by approximately $2 million to $3 million and reduces our full year organic daily sales growth by approximately 1 percentage point. Additionally, while our range includes economic uncertainty, it does not include any broad reinstatement of stay-at-home restrictions that would limit landscaping services. 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 overcome adversity and deliver value for all of 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] 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% with the small customers. So we know it's an area that we can gain share and kind of level up, and we see siteone.com as a way of doing that. Additionally, we have our Transportation Management System that we put in on the inbound freight, and that's -- you see our freight cost and our margin being benefited from that. Now we're working on the outbound piece where we can notify customers when their load's on the way, when their delivery is going to be scheduled. We can give them updates. Just a terrific customer service tool that doesn't exist in our industry. We're finishing up 2 pilots as we speak. The results are good. And then we're going to move that across the country. So that's just another tool for those kind of small to midsized customers that are counting on deliveries and have to call and track them down today, that they'll be -- we'll be fully automated there, keeping them updated and making sure they're there on time. So we're excited about all those put together, that we're going to be a much more advanced digital company in 2021, and that will help us gain share and lower our cost of servicing at the same time.

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.