Earnings Call Transcript - SITE Q2 2020

Operator, Operator

Greetings, and welcome to the SiteOne Landscape Supply Second Quarter 2020 Earnings Call. I would now like to turn the conference over to your host John Guthrie, Executive Vice President and Chief Financial Officer. Please go ahead.

John Guthrie, CFO

Thank you, and good morning, everyone. We issued our second quarter 2020 earnings press release this morning and posted a slide presentation to the Investor Relations portion of our website investors.siteone.com. I'm 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 the risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Such risks and uncertainties include the factors set forth in the earnings release and in our filings with the Securities and Exchange Commission. Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. A reconciliation of these measures can be found in our earnings release and in the slide presentation. I would now like to turn the call over to Doug Black.

Doug Black, CEO

Thank you, John. Good morning and thank you for joining us today. Overall, we are very pleased with our results for the quarter and for the year thus far. I'm so proud of our tremendous SiteOne team 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. We are gaining strength versus our competition as we build our capabilities and execute our strategy. Accordingly, we are well positioned to deliver outstanding performance and growth for the long term and achieve our vision of excellence for our associates, customers, suppliers, shareholders and communities. I will start the call by updating you on developments since our first quarter call and discussing our actions to successfully navigate the rest of the year and beyond. John Guthrie will then walk you through our second quarter financial results in more detail and provide additional information on our balance sheet and liquidity position. Scott Salmon will discuss their 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. Before I talk about developments and actions, let me first say that our thoughts and prayers continue to go out to all those who have been impacted by COVID-19. With the recent surge in positive cases, we are well aware that this pandemic is far from over, and it's still resulting in tragic loss of life, social isolation, and significant economic hardship for many. While we have certainly not escaped the many challenges associated with this pandemic. We feel very fortunate to be here at SiteOne. We are a financially strong industry leader and as it turns out, our industry is benefiting from the renewed focus on the home due to COVID-19. As a reminder, residential maintenance, repair and upgrade, and new construction comprise about two thirds of the industry and our business. Despite the drag created by high unemployment, the broad social distancing requirements designed to stop the spread of COVID-19 have spurred homeowners to invest in their homes, particularly their outdoor living spaces. At the same time, new residential construction has recovered strongly with low interest rates and increased demand from young couples and families who are seeking a home. All in all, we have been pleasantly surprised by the strong and seemingly sustained resurgence of demand in the residential market. Further, I cannot tell you how proud I am of the SiteOne team. As I mentioned during our last call, our team adapted very quickly in March and April and stepped up to achieve our four near-term operational goals, which were to keep everyone safe in a COVID-19 environment, serve our customers better than anyone else, manage our business to a lower demand, and take care of each other along the way. The stress of this challenge soon transformed into the stress of serving customers during a very busy and compressed spring season in May and June. To add to this challenge, some of our key suppliers have struggled to keep up with market demand, as COVID-19 affected their operations in Mexico, as well as their global supply chains for key components. This has caused our supply chain associates and branch teams to work overtime to ensure that our customers are served well. Taken all together, it has been a tough year. But the SiteOne team has worked stronger together with our suppliers and customers to overcome all challenges and deliver excellent results. I have never felt better about our team and our ability to compete in the landscape industry than I do right now. Slide 5 summarizes our actions, trends, and highlights from the second quarter. As COVID-19 continues spreading in our communities, we keep evolving our operations in order to operate safely and successfully. In addition to implementing the CDC guidelines, we have added screening processes in our branches designed to prevent associates who are sick from coming to work. We continue to allow all associates who are sick to stay home and be paid without using their paid time off or PTO. We have also required all associates to wear face coverings in our branches and offices to better protect each other and our customers. Finally, we continue to restrict travel, meetings, events, supplier visits, and we continue to have our field support associates work from home. In summary, we're now well grooved into operating safely in a COVID-19 environment while also adopting new measures that can help to prevent the spread of this virus. As I mentioned, our markets have recovered across the country with the lifting of stay-at-home restrictions. Additionally, the strong outdoor living demand has added to our customer backlog and has enabled us to achieve strong growth with our small and midsize customers. At this point, the market is now being constrained by the lack of labor availability to our customers and by supplier product shortages. Most severe product shortages are in the irrigation product line. Fortunately, our supply chain team proactively anticipated shortages and leveraged our distribution centers to mitigate the situation as much as possible. Once again, our size and scale coupled with our three large distribution centers and excellent supply chain team provided an important competitive advantage to SiteOne during a tough time. Our suppliers are working very hard to recover and meet the current market demand, and we expect the supply situation to improve significantly over the next two months. Taking May and June together, we achieved double-digit organic daily sales growth when combined with the negative 8% organic daily sales growth in April, which resulted in 3% organic daily sales growth for the quarter and 4% year-to-date. We have seen strong organic daily sales growth continue in July with positive growth across all regions and all product categories. With the solid organic sales growth, we're seeing good improvements in gross margins as we continue to execute our operational initiatives in supply chain, category management and pricing. During the quarter, we benefited from lower freight costs and excellent growth in our private label products. Additionally, our recent acquisitions operate at a higher gross margin than the base business which contributed to our improvements. On the SG&A side, we achieved excellent operating leverage as we tightly managed our business, avoided discretionary travel and expenses, and benefited from the COVID-19 related trends such as lower healthcare costs. Keep in mind that we continue to invest in our operational initiatives during the second quarter, including investments in siteone.com, MobilePro and our new Transportation Management System or TMS. As I mentioned during the last call, MobilePro has been extremely useful in facilitating social distancing at our branches and getting our customers in and out of our branches faster. We have also seen a strong pickup in the usage of siteone.com, which further improves our safe interactions with our customers. Our implementation of TMS was slow due to COVID-19 travel restrictions, but the benefits from our prior work was evidenced in our favorable freight cost outcome in the quarter and for the year. Overall, I was very pleased that our team was able to achieve strong leverage despite these ongoing investments and the fact that recent acquisitions operate at a higher SG&A than our base business. Our acquisitions performed very well during the second quarter and for the first half of the year, contributing strongly to our adjusted EBITDA growth and margin improvement. Many of our recent acquisitions have been in hardscape and bulk landscape supplies as we fill in our capabilities in these product categories across the U.S. and Canada. These companies have benefited from the strong outdoor living trends. Lastly, we achieved record cash flow in the quarter with strong profits combined with good working capital management. Our supply chain strategy is focused not only on freight and logistics cost reduction but also on inventory productivity. During the first half of the year, we've continued to improve our stock terms, as we reduced slow-moving inventories and maximized the utilization of our distribution centers. That said, part of our working capital gain was due to product shortages, which will hopefully be reversed in the third quarter. Overall, we are pleased with our fundamental underlying improvements in inventory productivity, so far this year. Our strong cash flow resulted in a meaningful improvement in our liquidity and a good reduction in our net debt to adjusted EBITDA ratio, moving from 3.3 times in the prior year period to 2.2 times at the end of the quarter. Maintaining a strong balance sheet is critical to our strategy to invest in our capabilities in growth or acquisition. In terms of acquisitions, we had suspended our activities in April, in order to better understand the impacts of COVID-19, and the direction of the economy and our end markets. There's still a considerable amount of uncertainty in the second half of 2020 and going into 2021. Some of the key questions are: how fast will COVID-19 continue to spread? When will a proven vaccine be available? And will we enter into an economic recession in 2021? That said, we do take comfort in the current positive trends in residential, and we believe that our end market risk is manageable in the near to mid-term. Accordingly, we have made the decision to resume our acquisition activities. Scott Salmon and the development team have done a terrific job of maintaining discussions with potential targets, and we anticipate being able to close additional deals in the coming months while continuing to build a backlog of excellent companies who may wish to join SiteOne in 2021 and beyond. 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, manage our business and take care of each other 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 all our stakeholders. However, we have made great progress in building our company this year, even as we have battled the short-term challenges. We are closely monitoring the trends and adjusting as necessary to perform in the short term while continuing to build our company’s excellence for the long term. Now, John will walk you through the quarter in more detail.

John Guthrie, CFO

Thanks, Doug. I'll begin with some highlights from our second quarter results on Slide 6. We reported a net sales increase of 9% to $818 million in the second quarter. During the quarter, we had 64 selling days, which were unchanged compared to the prior year period. Organic daily sales increased 3% in the second quarter. Organic daily sales started the quarter slowly, declining 8% in April due to the adverse market impacts from COVID-19. Organic daily sales recovered during May and June, as many state and local restrictions were eased and demand returned to those heavily impacted markets. Geographically, seven out of the 10 regions had positive sales growth in the quarter with only those regions hardest hit by the COVID-19 shutdown unable to pull themselves out of the hole. Organic daily sales for landscaping products, which includes irrigation, nursery, hardscapes, outdoor lighting, and landscape accessories, grew 4% during the quarter due to strong demand in our end markets and drier weather compared to the second quarter of 2019. We saw strong growth in hardscapes as consumers are spending more time at home and choosing to upgrade their backyards and patios. Organic daily sales for agronomic products, which includes fertilizer, control products, ice melt, and equipment, were up 1% for the quarter due to the negative impact of COVID-19 shutdowns in some key agronomic markets during the critical spring selling season. As Doug mentioned, the positive trend for organic daily sales has continued into the third quarter. It should be noted, however, that the organic daily sales comp in the second quarter of 2019 was only 1%. Whereas the organic daily sales comps in the third and fourth quarters are 7% and 8% respectively. Prices were up 1% in the quarter and 1% year-to-date compared to the prior year period. For 2020, we are expecting price inflation between 0% and 2%. Acquisition sales, which reflects the sales attributable to acquisitions completed in both 2019 and 2020 contributed $43 million or 6% to the overall second quarter growth rate. Scott will provide more details regarding our acquisition strategy in the current environment. Gross profit increased 11% to $286 million in the second quarter and gross margin expanded 70 basis points to 35.0%. The increase in gross margin for the quarter was driven by lower freight costs and the contributions from acquisitions, which carry higher gross margins. Selling, general and administrative expense, or SG&A, increased 5% to $175 million in the second quarter. SG&A as a percentage of net sales decreased 80 basis points to 21.4%. The reduction in SG&A as a percentage of net sales reflects operating leverage resulting from the combination of our solid organic sales growth combined with tight cost management. Last quarter, we highlighted a number of actions taken to align our cost structure with our sales volume, including a hiring freeze, furloughs of associates, and cutbacks in discretionary spending. Those actions benefited our second quarter results. But as sales have rebounded, our branches have gotten very busy. We brought associates back from furlough and started hiring new associates to meet the increased demand. For the second quarter of 2020, we recorded an income tax expense of $25.6 million compared to $19.3 million in the prior year period. The effective tax rate for the quarter was 24.5% compared to 23.0% for the prior year period. The increase in the effective tax rate was primarily due to a decrease in excess tax benefits attributable to stock-based compensation. We recorded net income for the second quarter of $79 million compared to $65 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 43.1 million for the second quarter compared to 42.7 million for the same period last year. Adjusted EBITDA for the second quarter improved by 16% to $132 million compared to $114 million for the same period in the prior year. The improvement reflects our solid top line growth, gross margin improvement, and SG&A leverage. Now I'd like to provide a brief update on our balance sheet and cash flow statement, as shown on Slide 7. Net working capital at the end of the quarter was $584 million compared to $536 million at the end of the second 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 brought on by COVID-19. Markets have stabilized, we have started the process of reducing our cash on hand and paying down our outstanding debts. Excluding cash on hand, net working capital decreased 18% to $420 million compared to the prior year period. Receivable collections have held up well in this challenging environment, and inventory levels are lower than last year, due in part to some supply challenges caused by this COVID-19 pandemic. Our supplier partners are working tirelessly to reduce the outstanding order backlog and we expect the supply disruptions to resolve themselves in the second half of the year. Cash provided by operations increased $185 million in the second quarter compared to $37 million in the prior year period. The increase was primarily attributable to our management of working capital. Because we expect to catch up on our inventory purchases in the second half of the year, we expect some of the operating cash flow improvement in the second quarter will reverse itself in the second half. We made cash investments of $5 million during the quarter compared to $29 million for the same quarter last year. The decrease in cash investments reflects our decision to postpone acquisition activity in response to the uncertainty brought on by COVID-19. Net debt at the end of the quarter was $477 million compared to $622 million at the end of the second quarter in 2019. Leverage decreased to 2.2 times of trailing 12 months adjusted EBITDA compared to 3.3 times at the end of the second quarter of 2019. The lower leverage primarily reflects our increased profitability and strong cash flow. As a reminder, we have no debt maturities until 2024. At the end of the second quarter, we had liquidity of $351 million, made up of approximately $164 million cash on hand and $187 million in available capacity under our ABL Facility. 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 or market opportunity. I'll now turn the call over to Scott for an update on our 2020 acquisition strategy.

Scott Salmon, EVP, Strategy and Development

Thanks, John. As we explained on our last earnings call, COVID-19 brought about significant uncertainty in terms of the economy, our customer’s ability to operate and our end market demand. Accordingly, we took the necessary steps to reduce our near-term capital spending, which included temporarily pausing the closing of any acquisitions. We were transparent and communicated this to the owners of each company we were in negotiations with at that time. They appreciated our direct and honest style, which also respected their need to focus on leading their own businesses through the uncertainty while reaffirming our strong desire to eventually join forces with them. Our Strategy and Development teams took advantage of the pause to conduct a review of many of our past deals. The objective was to identify consistent themes, best practices, and lessons learned and then modify our supporting cross-functional acquisition processes as needed. We also standardized and enhanced the documentation of our processes from end-to-end, to better communicate and train new leaders on our robust approach. With this important objective achieved, we are now restarting our due diligence activities and anticipate closing acquisitions again sometime in Q3. Thankfully, because we have over 80 associates continually connecting with potential acquisitions, we could seamlessly restart our acquisition engine without delay. Our pipeline is deep and our commitment is steadfast to execute our M&A strategy and build upon the strong growth history shown on Slide 8. While we obviously didn't close any deals in Q2, I want to thank our field and functional support associates for demonstrating the power of our SiteOne teamwork, in our local markets every day. Their excellent leadership, passion for SiteOne and obsession with helping our customers succeed really shines through and sets our company apart. This makes SiteOne easily the most attractive option in our industry for entrepreneurs who want to ensure a legacy of excellence for their associates. Summarizing on Slide 9, we are confident in our strategy, our teams, our acquisition pipeline, and our approach. We are looking forward to once again bringing on new dynamic partners who will make the SiteOne team stronger, expand our product capability, and support further performance and growth. I will now turn the call back to Doug.

Doug Black, CEO

Thanks, Scott. I'll wrap up on Slide 10. First and foremost, we will continue to ensure the safety of our associates, customers, suppliers and communities as we operate in the coronavirus environment. This is a fiercely contagious virus and we are monitoring the trends and implementing best practices as they are developed. As our country works to overcome this pandemic, we believe that our ability and the ability of our customers and suppliers to operate safely will be critical to us all having a successful 2020. In framing our outlook for the remainder of the year, let me remind you of the trends from last year. We had a very weather affected spring season last year, with negative organic growth in May and June and only 2% organic growth at the half year. Then, as John mentioned, we achieved 7% and 8% organic daily sales growth in the third and fourth quarters respectively to end the year at 5% organic growth. Our big months for growth last year were September, October, and November at 8% to 10% growth. July, August, and December were in the 5% to 6% growth range. So we had some big months last year in the fall where we caught up from earlier weakness. Accordingly, though we are seeing strong sales growth in July, we will not likely see strong growth during September through November, even if the underlying markets are positive. Overall, we are cautiously optimistic for the second half and would expect organic daily sales growth to be similar or slightly lower than our first half, given the trends from last year. In terms of end markets, assuming significant stay-at-home restrictions are not reintroduced in the second half, 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 be solid in the second half, as builders work to create new home inventory to meet demand. As we mentioned, 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 in the second half of the year. Against this backdrop, we will continue to operate safely and efficiently with tight management of our discretionary expenses until we get past the COVID-19 pandemic. 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 organic growth and improve our gross margins. We will also continue to make investments in key capabilities for the future, including siteone.com and TMS. Considering all of these factors, we expect to achieve good progress in our adjusted EBITDA margins this year. In terms of acquisitions, as Scott mentioned, we have restarted due diligence on active deals and resumed conversations with potential prospects who are interested in exploring a sale of their company at this time. We expect to add additional companies to SiteOne in the second half and are excited about our ability to fill in our product portfolio, add terrific talent, and help build our company through acquisitions going forward. Keep in mind that acquisitions added in the second half of the year 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 increased visibility that we have on our end markets, we are pleased to reintroduce our adjusted EBITDA guidance range for 2020. We would expect adjusted EBITDA for 2020 to be in the range of $205 million to $225 million. This is a wider range than typical, due to the considerable uncertainty associated with the development of COVID-19 and the corresponding impact on our end markets. Keep in mind, this range includes an extra loss-making week in December as compared to 2019, which reduces our adjusted EBITDA by approximately $2 million to $3 million and reduces organic daily sales growth by approximately one 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. Overall, we are cautiously optimistic that 2020 will end up being a tough year, but also a year of tremendous success for SiteOne, as we pressure test our strategy and take our company to the next level in terms of performance and growth for all stakeholders. 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 our stakeholders. I would also like to thank our supplier partners for supporting us so strongly and our customers for allowing us to be their partner. Our tagline is 'stronger together.' And this has proven to be a tremendous strategy during these challenging times. Operator, please open the line for questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Your first question comes from Ryan Merkel at William Blair. Please go ahead with your question.

Ryan Merkel, Analyst

Hey, thanks. Good morning all.

Doug Black, CEO

Good morning.

John Guthrie, CFO

Good morning.

Ryan Merkel, Analyst

So first off, second half guidance, low single-digit organic growth. It feels a little conservative just given the outdoor living trend. So what organic levels did you see in June and July and then just clarify, is it primarily the tough comps in September through November that gives you the pause? Because it sounds like you think the industry will still grow during the second half?

Doug Black, CEO

Yeah, so I mean, that characterizes it. I mean, we're seeing strong growth in July, as we did in May in June. However, as we outlined, you know, we've got some tough comps. We were really catching up last year, in September, October, which is the heart of our fall season. There weren't any hurricanes, meaningful hurricanes. So, we had a good year from that standpoint. And so it's a combination of tough comparables and the fact that there's just a lot of uncertainty, right? I mean, COVID-19 is still spreading. We still don't know how this is going to go. So yeah, we were enjoying the strong trends today. We don't think those outdoor living trends, by the way, will change. So we think that strength will carry through. But, you know, we think it's better to be cautious in an environment where you've got so much uncertainty.

Ryan Merkel, Analyst

Yeah, makes sense. Okay, so it's both comps and just an uncertain outlook. Might as well be conservative, makes sense. Okay. And then second, margins were better than I was thinking, this quarter the outlook seems to be far more flattish EBITDA margins during the second half. I don't know if you said this, but at well, I think you said as SG&A, you're going to be adding back. Is there anything else that hits the margins in the second half?

John Guthrie, CFO

We believe that the gross margin will remain relatively stable, considering we haven't accounted for the strong growth in margins from the first and second quarters. As you mentioned, in terms of SG&A, as long as our current activity levels continue, we plan to maintain full staffing. Additionally, we benefitted from reduced healthcare costs in the first half, but we expect those costs to potentially return to normal levels in the second half. There were also some deferred expenditures that we anticipate will occur in the second half. Therefore, we will be managing these factors while aiming to improve our EBITDA margins, and these considerations are included in our outlook.

Ryan Merkel, Analyst

And if I could just follow up, why the flat gross margins? Is the TMS not going to continue or is there anything else?

John Guthrie, CFO

We expect to see ongoing benefits from freight and some advantages from acquisitions as well. However, we anticipate that incentives may decrease slightly as we aim to catch up on the full year figures. Additionally, we've projected pricing and selling margins to remain stable, particularly in the first half of the year. While these two key factors will persist, the lower sales volume may lead to some offset from incentives.

Ryan Merkel, Analyst

Got it, makes sense. All right, thanks. I’ll pass it on.

John Guthrie, CFO

Thanks, Ryan.

Operator, Operator

Your next question comes from the line of Stephen Volkmann with Jefferies. Please proceed with your question.

Stephen Volkmann, Analyst

Hi, good morning, guys.

Doug Black, CEO

Good morning.

Stephen Volkmann, Analyst

I'm wondering if we can talk a little bit more about the M&A pipeline. It's good to see that sort of restarting and I'm curious, maybe Scott, is there a scenario where there's some sort of pent up demands and deals that were closed that can get done, fairly quickly? Or does this restart kind of more slowly, I guess, as we go through year end?

Scott Salmon, EVP, Strategy and Development

Yeah, I would say we’ve got a good pipeline that we paused on. So, as we restart the engine, I think I feel good about our prospects. I wouldn't expect a flurry per se. But I also don't think it's going to take a significant amount of time to restart acquisition activities. And, like I said, we had, we did have some in progress. So, hopefully we can move forward with those.

Stephen Volkmann, Analyst

And any commentary around what you're seeing relative to valuation expectations?

John Guthrie, CFO

Yeah, no real change at this point. I think most people are probably discounting the last several months as sort of one-off. There's so many factors that have occurred with COVID that I don't think too much weight is being placed on the near term.

Stephen Volkmann, Analyst

Got it, understood. Thank you. I'll pass it on.

John Guthrie, CFO

Thank you.

Operator, Operator

Your next question comes from the line of David Manthey with Baird. Please proceed with your question.

David Manthey, Analyst

Thank you. Good morning, everyone. My first question relates to the guidance, particularly what it suggests about second half EBITDA. If I'm calculating correctly, the midpoint indicates a 7% decline, which seems quite significant compared to the low single-digit growth you're projecting. Considering the contribution margins you've reported recently, 19% in the first half, this appears to be on the lower side. If we project a contribution margin of 15% or even 10% for the fourth quarter, it's likely you would be at or above your guidance range. I'm looking for any additional insights regarding cost expectations. John, I believe you touched on some of these points, but any further information concerning the outlook, which seems somewhat low, would be appreciated.

John Guthrie, CFO

I want to highlight the impact of the extra week, as Doug noted, resulting in a $2 million to $3 million loss, which affects our organic sales growth for the year by nearly 100 basis points since we are adding a week with limited sales during this time. Regarding future expenses and gross margins, there remain many uncertainties. On the positive side, if recent trends continue, we will be performing well. However, we anticipate facing challenges with strong sales in the fourth quarter contributing to that. In terms of SG&A, we will likely see an increase in labor incentives. Additionally, as we develop our outlook, we have some costs that were deferred in the first half which we expect may continue into the second half. Those are the numbers from our standpoint, and we aim to exceed these expectations.

Doug Black, CEO

Yes, I want to emphasize that we are fully committed to our initiatives. We believe we will keep seeing benefits from the Transportation Management System. We've made progress on the inbound aspect of this system earlier this year, and it's starting to yield results. We will keep focusing on category management, and our Pro-Trade and LESCO brands are both performing well. There are promising opportunities we are exploring, but we must also consider the significant comparisons we’re facing. Additionally, there is considerable uncertainty ahead, and the extra week along with other factors has resulted in a more stagnant performance.

David Manthey, Analyst

Got it, okay. And is it correct that April normally represents 40% to 45% of your second quarter revenues but July, August, and September are more evenly split?

John Guthrie, CFO

Historically, July is a significant month for us, similar to June on a like-for-like basis. August and September are slightly lower than July in that regard. Notably, July has five weeks, while August and September each have four, which makes July stand out. When looking at it weekly, they are relatively similar.

David Manthey, Analyst

Okay, but is April your biggest month of the year?

John Guthrie, CFO

It is, it is. It is significantly higher than every other month, yes.

David Manthey, Analyst

Okay, great. Thanks a lot, guys.

John Guthrie, CFO

Thank you, thanks David.

Operator, Operator

Your next question comes from the line of Matthew Bouley with Barclays. Please proceed with your question.

Matthew Bouley, Analyst

Hey, good morning, everyone. Thanks for taking the questions. Doug, any more color on the impacts of the supply chain disruptions you mentioned? Should we expect that the suppliers would actually, you know, raise prices as a result? Or is this more of just a temporary volume issue?

Doug Black, CEO

No, this is a temporary volume issue. I mean, and it really has impacted our irrigation suppliers, although we have a few other suppliers that have run tight. It's, you know, in one way, it's a good problem to have because volume is very strong, right? So first of all, it's, you know, we have very strong demand in irrigation. But those suppliers, all three of them really have operations in Mexico that were disrupted with COVID. They had employee issues and, you know, the plant’s capacity was lowered pretty significantly. The other thing is they have components that are sourced around the world that there's been some shortages in those component supply chains. We're in very close communication with our suppliers. They're working hard on it, their capacity is increasing. And so they're catching back up. We feel like it'll probably be tight for the next couple of months, but there won't be any long-term, I guess, results from this. And certainly this would not be a great time to come in and raise prices. So we don't expect that.

Matthew Bouley, Analyst

Got it. Okay, that's helpful. And then secondly, just back on the M&A side. I know you mentioned you know, what you're seeing on the multiples earlier but is, I guess, the size of the pipeline, kind of status quo versus pre-pandemic or has it changed at all in terms of you know, availability of targets? And honestly, given how residential and commercial markets are evolving from your perspective, has it changed at all the type of, you know, product focuses that you guys are looking for in your pipeline? Thank you.

Scott Salmon, EVP, Strategy and Development

I'll answer the second part first, I guess. You know, I think just given our market share, you'll continue to see a predominance of landscape supply and hardscapes, you know, passed to nursery as well, deals as we go forward. And then as far as the pipeline size, I mean, it continued to grow, as Doug mentioned, you know, we continued our contacts of potential targets throughout our pause, and just through the normal course of events, new companies are willing to sell. I wouldn't say it exploded, as some had projected that there'd be a lot of financial distress pushing people to sell, but it did continue to grow. So the new interest, I'd say it's continued at a historically normal pace.

John Guthrie, CFO

Let me just emphasize that we are strategically focused on expanding our product line across the country. We have approximately 200 markets that interest us, but we only have a complete product line in about 50 of them. This indicates that there's significant room for growth, especially in nursery and hardscapes, which we are currently lacking. We anticipate many opportunities in hardscapes and nursery deals, as well as with excellent irrigation and agronomic companies that we would love to partner with. The emphasis will naturally be placed on hardscapes and nursery products. Given the current outdoor living trend gaining momentum, companies involved in hardscape and landscape supplies are likely to perform well in the near future, and we believe they will contribute positively to our product line over the long term.

Matthew Bouley, Analyst

Got it. Thanks for the details.

Scott Salmon, EVP, Strategy and Development

Thank you.

Operator, Operator

Your next question comes from the line of Keith Hughes with SunTrust Robinson Humphrey. Please proceed with your question.

Keith Hughes, Analyst

Oh, yes. You mentioned some labor restrictions, and I believe you were referencing your own limitations as well as a broader question about your contractors. What is their current situation regarding labor, especially for larger jobs related to irrigation and landscaping? The quoting process has taken longer due to a shortage of labor caused by the virus, so there just aren't enough workers available.

Doug Black, CEO

Before the pandemic, labor was already in short supply. While many people were laid off during the pandemic, there doesn't seem to be a significant number of suppliers entering the landscaping sector. As you mentioned, due to the coronavirus, there are ongoing issues with employees getting sick or being quarantined, which impacts the labor supply. Nonetheless, our customers are resourceful and managing to adapt, as evidenced by their growth. Every year, new landscapers enter the industry, which contributes to some growth despite the challenges. Although the situation has worsened due to the pandemic, the overall tightness in labor doesn't seem to have changed drastically. We haven’t observed significant job delays; some commercial projects have been postponed because owners or developers are being cautious, but this isn't largely due to widespread labor shortages.

Operator, Operator

Your next question comes from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question.

Mike Dahl, Analyst

Hi, thank you for taking my questions. I want to touch on your comments about the commercial side and what you mentioned in your opening remarks about some steady performance but also some weaknesses heading into 2021 due to delays. Can you assess the impact of this on your backlog or what your customers are reporting, and whether this will be reflected in the fourth quarter as you prepare your guidance? Additionally, regarding the maintenance component related to commercial work, are you noticing any delays as the work-from-home environment persists?

Doug Black, CEO

I’ll address the last question first. Maintenance remains quite stable for both residential and commercial services. While it's primarily two-thirds residential, the commercial maintenance will persist. Even companies with offices that aren't fully staffed will continue to care for their landscaping. That aspect has been consistent. Regarding job opportunities, we have noticed some delays, and growth has certainly softened. Our Project Services team, which assists contractors with bids, has been experiencing steady bidding improvement last year and into this year, but that progress has plateaued. Specifically, since May, June, and July, bidding activity has been relatively flat, indicating a slowdown. The ABI index, which is currently below 15, is showing signs of improvement after a significant drop. When speaking with our customers, they are reporting fewer projects to bid on. While we don’t expect a significant impact in 2020, it appears that commercial activity will be subdued in 2021. It's important to note that our industry often lags behind underlying trends; landscaping is typically one of the last services involved in a commercial project, which explains our delayed response to current conditions.

Mike Dahl, Analyst

Okay, that makes sense.

John Guthrie, CFO

On the positive side, we expect that the residential sector will be stronger next year, and that is obviously a bigger part of our business.

Doug Black, CEO

Right, yeah, given that we're two thirds residential. If we had a choice, we'd have the current trend, which is, commercial weakening, but residential looks like it's kind of gaining strength. And certainly outdoor living is very strong and will continue to be strong, so kind of some great balancing trends there.

Mike Dahl, Analyst

Regarding the second question about SG&A, I understand that some costs that emerged in the second quarter were temporary and are expected to return in the second half. However, some expenses like travel and entertainment and certain other typical business expenses from before the pandemic may not return, perhaps not even next year, depending on how things unfold. Could you provide any estimates on how travel and entertainment and other components might remain subdued?

Doug Black, CEO

So, yeah, that's true. T&E is down so far this year, from that perspective. It was reflected in our Q2 numbers. From that perspective, I guess we're not talking a huge dollar amount though. We're talking probably $1 million to $2 million reduction year-over-year from that perspective. So that would be a positive, what we've seen and what will continue going forward.

Mike Dahl, Analyst

Got it. Thanks.

Operator, Operator

Your next question comes from the line of Seldon Clarke with Deutsche Bank. Please proceed with your question.

Seldon Clarke, Analyst

Good morning. Thank you for the question. Following up on the previous inquiry, have you noticed any structural costs in recent months? You mentioned travel and entertainment, but are there other areas, such as site consolidation or procurement, that could enable more efficient operations moving forward? Also, in that same vein, are you observing any temporary costs related to personal protective equipment or COVID-related cleaning that might decrease next year?

Doug Black, CEO

We expect some costs to reverse from the first half of the year to the second half or potentially next year. Health insurance costs may decrease as fewer people have gone to the hospital, while travel expenses are currently lower, though it's uncertain if that trend will continue. Our organization has become leaner, improving labor efficiency as a critical factor in our operations, which we believe will continue. Additionally, our fleet utilization has improved significantly, which is another major cost area. We're learning from this experience and anticipate emerging as a more efficient organization in the future.

John Guthrie, CFO

We have initiatives aimed at enhancing sales force performance, as we have a large team of over 400 sellers. Improving their productivity will significantly contribute to SG&A leverage. Additionally, we are making progress with our branch operational expenses, reaching a new level of efficiency. The pandemic has pushed us to adapt, especially when branches faced staffing shortages, forcing us to find ways to better serve our customers. Our MobilePro system, which is nearly fully deployed across the network, has made our associates more efficient. There are positive underlying trends and initiatives that we are actively pursuing to outperform our expectations. These efforts will help mitigate some challenges, such as those related to healthcare costs, which were previously less than normal due to COVID.

Seldon Clarke, Analyst

Okay, that's helpful. I understand there are many moving pieces, but your updated guidance for EBITDA indicates that the midpoint is only about 3% below pre-COVID guidance, which clearly included the same comparison issues from 2019. However, we are in a different situation now than we were six months ago. Can you help us understand the difference in terms of revenue and profitability? Additionally, how did the results from the first half shape your initial expectations for the second quarter and the second half of the year compared to your projections from January?

Doug Black, CEO

Sure, I'll address that and then let John chime in. Looking back at last year, we experienced a very weather-restricted first half but a robust second half. Our expectation was to see significant growth in the first half followed by more moderate growth in the second half. Currently, we’re at a 4% growth for the first half, which is tied to our organic growth. We anticipated higher growth given last year's performance. As we approach the second half, the key question is about the outdoor living trend, which has proven to be stronger than we anticipated and is currently driving our results. We are curious about how sustainable that trend will be as we enter the second comparison year. Overall, we expected higher growth in the first half and lower in the second half, but what we’re indicating now is that the growth in the second half will likely be on par with the first half, which is a shift from our original expectations. John, would you like to add anything?

John Guthrie, CFO

If you look at our performance over the year, the most significant change has been in revenue. We've managed to compensate for some of that in the second quarter primarily through SG&A efforts. Gross margin has also seen an improvement. However, our current outlook does not indicate ongoing strong performance in SG&A as we are reinstating some expenses, and we remain cautious about both SG&A and gross margin in our projections. There are certainly opportunities to improve on both revenue and margin sides, but that's the key difference in our current situation. To summarize for the full year, revenue is expected to show the largest decrease compared to our previous forecasts.

Seldon Clarke, Analyst

Okay, it's helpful. I appreciate it.

John Guthrie, CFO

Thank you.

Operator, Operator

Your next question comes from the line of Damian Karas with UBS. Please proceed with your question.

Damian Karas, Analyst

Good morning, gentlemen, very solid execution during this challenging time.

Doug Black, CEO

Thank you.

Damian Karas, Analyst

You mentioned that you experienced positive sales growth in seven of your ten regions during the quarter. Similar to last quarter, could you provide a range for the three regions where you saw declines compared to those with higher growth? Can you share some specific numbers for that range?

Doug Black, CEO

Go continue on.

Damian Karas, Analyst

I wanted to specifically ask about Florida and Texas, two important regions. I'm curious if you noticed any changes in activity there, especially since there's been a bit of a resurgence. Do you see strong and consistent demand in those two areas?

John Guthrie, CFO

Regarding the quarter, what we shared in the prior period quarter is essentially the situation. We experienced some weakness and negative sales, particularly in three regions: from Delaware to Boston and over to the Midwest. These areas were significantly affected by COVID and the related restrictions, resulting in negative sales growth during the quarter. In contrast, we have seen strong performance in the Southeast, all the way to Texas. Looking ahead, we haven't observed a significant decline due to the rise in COVID cases. We are currently in Georgia, which is experiencing a surge, and operations are ongoing. However, both our associates and customers are understandably exercising more caution in this environment.

Doug Black, CEO

The results we're seeing in July are strong pretty much across the board.

Scott Salmon, EVP, Strategy and Development

Across the main region.

Doug Black, CEO

And across regions and product categories, this includes Texas and Florida. Currently, there are challenges in Georgia due to COVID.

John Guthrie, CFO

Yeah, if you look at June and July, we would expect all regions to be showing positive growth.

Operator, Operator

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

Doug Black, CEO

Okay, great. Well, I'd like to thank everybody today; we really appreciate your interest in SiteOne. We feel great about our company and our team. I'd like to thank the SiteOne associates one more time and also our suppliers and customers. You know, together we're making it through this pandemic, and we feel good about the rest of 2020 and building our company for the future. Our last thoughts go out to anyone that's affected by COVID-19 and we look forward to updating you after our third quarter. Thank you.

Operator, Operator

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