Earnings Call Transcript - SITE Q4 2020

Operator, Operator

Greetings and welcome to the Fourth Quarter and Full Year 2020 Conference Call of SiteOne Landscape Supply, Inc. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. This conference is being recorded. I would now like to turn the conference over to your host, John Guthrie, Executive Vice President and Chief Financial Officer.

John Guthrie, CFO

Thank you and good morning, everyone. We issued our fourth quarter and full year 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 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.

Doug Black, CEO

Thank you, John. Good morning and thank you for joining us today. We are very pleased to report our strong results for the fourth quarter, capping off an excellent year of performance and growth for SiteOne in 2020. The COVID-19 global pandemic brought many challenges during 2020 in operating safely, serving our customers, taking care of our associates, working with our suppliers, and managing our business. As the year developed, the stay-at-home trend associated with COVID-19 also brought about opportunities, as more emphasis was placed on homeownership with increased investment in outdoor living spaces. With terrific passion, determination, and teamwork, our SiteOne team worked hard to overcome every challenge and move quickly to capture opportunities during the year, while taking care of each other and serving and supporting our customers better than ever before. As a result, we delivered tremendous value to all of our stakeholders. On top of that, we made critical investments during the year and strengthened our business on all fronts while continuing to add great companies and talent to SiteOne. Overall, I'm very proud of our team and excited to see our strong culture shine during these toughest times. Moving forward, we have a stronger team, stronger systems, a stronger balance sheet, and even more capability to execute our strategy, achieve excellence, and deliver superior long-term performance and growth. I will start today's call with a brief overview of our unique market position and our strategy for long-term performance and growth, followed by some highlights from 2020. John Guthrie will then walk you through our fourth quarter and full-year 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 for 2021 before taking your questions. As shown on slide four of the earnings presentation, we have grown our footprint to more than 570 branches and three major distribution centers across 45 US states and 6 Canadian provinces. We are the clear industry leader, more than five times larger than our nearest competitor and larger than the second through tenth combined. At the same time, we estimate that at the end of 2020 we had only 13% share of the very fragmented $20 billion wholesale landscaping products distribution market. Accordingly, our remaining growth opportunity is significant. We have a very balanced mix of business with 59% focused on maintenance, repair, and upgrade, 27% focused on new residential construction, and 14% on new commercial construction. We are also the only national full product line wholesale distributor in the market. Our balanced end-market mix, broad product portfolio, and geographic spread give us multiple avenues to grow and more ways to add value to our customers and suppliers, while providing important resiliency in softer markets. Turning to slide five, our large and local strategy combines the scale, resources, and capabilities of a large world-class company with the passion, deep knowledge, and entrepreneurialism of our local team in order to deliver superior value and differentiate ourselves from the competition. It is important to note, however, that we are still in the early to middle innings of building our company and our capabilities and still have a long way to go to fully execute our strategy and reach our full potential. Accordingly, we remain highly focused on our commercial and operational initiatives to build our capabilities and improve the value that we deliver to customers and suppliers. These initiatives are complemented by our acquisition strategy, which fills in our product portfolio, moves us into new geographic markets, and adds terrific new talent to SiteOne. Taken together, our strategy creates superior value for our shareholders through organic growth, EBITDA margin expansion, and acquisition growth. Slide six shows SiteOne’s history and the results from executing our strategy over the past five years. Over this period, we have been able to deliver consistent organic growth, strong acquisition growth, and solid EBITDA margin expansion, while investing heavily in SG&A to build our IT, category management, supply chain, finance, marketing, operational excellence, and acquisition teams, as well as our underlying systems infrastructure, including our digital capabilities. While we have not finished building our systems infrastructure, our field support teams are firmly established. You can see in our 2020 results the operating leverage that we are beginning to achieve with a strong team. We will continue to leverage and build on our capabilities to accelerate our performance going forward. You will note that we have now completed 57 acquisitions across the irrigation, agronomics, nursery, and hardscapes product lines during the last seven years, with 11 of these added in 2020 and one so far in 2021. We only acquire well-run companies, and all these acquisitions were already high-performing companies before joining SiteOne. With them, we have added significant capability and tremendous talent. We have learned many lessons that can be applied to future acquisitions. I would like to highlight that we still have over 50 former owners from these companies with us, as well as many of their sons and daughters and longtime leaders, helping us to stay agile, build our entrepreneurial spirit, and maintain local ownership. Our acquisition pipeline remains very robust, and with only 13% market share, we have significant potential to continue growing through acquisitions for many years to come. In summary, our strategy is working. We are still early in our execution, and you will see us get stronger every year as our key initiatives gain more traction. Slide seven shows the long runway ahead in filling in our product portfolio, which we aim to do primarily through acquisitions, especially in the nursery and hardscapes categories. Nursery and hardscapes operations require larger size and significant local expertise, so these product lines cannot just be added to most of our existing branch locations. We are well interconnected with the best companies in our industry and expect to continue filling in these markets systematically over the next decade. I will now discuss some of the 2020 performance highlights, as shown on slide eight. We delivered 15% net sales growth in 2020, with a nice balance between 9% organic sales growth, which includes an extra week in December, and 6% net sales growth through acquisition. Organic daily sales growth was 8%. The market recovery that began during the second quarter has continued through year-end and into the New Year so far. The increase in the number of families who are working or attending school from home due to COVID-19 has spurred additional investment in outdoor living. Currently, 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, contributed to our strong organic net sales growth. Geographically, we saw our highest full-year sales growth in the south and west, where COVID-19 restrictions had less impact on landscaping. All regions finished strongly in the fourth quarter and currently have good momentum. At this point, the market is constrained by labor availability for our customers. We achieved a 50 basis point improvement in gross margin during the year, with contributions from our supply chain and category management initiatives. During the late spring through fall, several of our suppliers suffered from production interruptions due to COVID-19, which limited their ability to fulfill surging market demand. With our three distribution centers and talented supply chain team, we were able to keep our branches supplied, which resulted in good market share gains during the year. Additionally, through our new Transportation Management System, or TMS initiative, we were able to continue reducing our inbound freight costs relative to the market. We also benefited from excellent private label product growth. Lastly, our recent acquisition of hardscapes 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 achieved excellent operating leverage in 2020, as we tightly managed our business through the use of associate furloughs, avoiding discretionary travel and expenses, and benefiting from COVID-19-related trends, such as lower healthcare costs. We achieved this leverage even as we continued to invest in MobilePro, our digital capabilities, TMS, and our marketing and operational excellence teams, all of which are increasing our capability to better serve our customers, grow organically, and achieve higher operating leverage in the future. One indicator of our progress is the fact that our customer Net Promoter Score continued to improve in 2020, moving from 71 to 75 during the year. We also invested in our associates, allowing them to stay at home when they were sick or exposed without using their paid time off, or PTO, creating a PTO bank to support associates in need, and paying special thank you bonuses to our frontline associates. These are in addition to the record annual performance bonuses earned by our associates, as they achieved a truly exceptional year. We expect to continue making investments in 2021 to serve our customers better while leveraging our prior investments to drive organic growth and achieve further SG&A leverage. The combination of strong organic sales, gross margin improvement, good SG&A leverage, and excellent acquisition performance allowed us to deliver 29% adjusted EBITDA growth and expand our adjusted EBITDA margin by 110 basis points for the year to 9.6%. We're excited about the great progress that we made in 2020 toward our midterm milestone of a 10% adjusted EBITDA margin. On the acquisition front, our team did a great job of getting us off to a strong start with four deals in the first quarter, then pausing our acquisitions from March to July, but keeping our prospects in mind while we assessed the impact of COVID-19. Then we picked back up in the second half of the year by closing seven additional deals. Our acquisitions performed well, and we added 8% of trailing 12 months sales to SiteOne through acquisitions in 2020, setting us up for strong growth through acquisitions in 2021. The year 2020 was also an important year for SiteOne from a balance sheet perspective. We maintained strong liquidity throughout the COVID-19 crisis, then seized the opportunity to reduce our net debt leverage by executing a $262 million equity offering in August. Through this offering, we reinforced and expanded our strong base of shareholders and provided them an excellent return on their new investments in SiteOne. At the same time, when coupled with our very strong free cash flow, we reduced our net debt leverage by over one term and ended the year with a net debt to adjusted EBITDA ratio of 1.0 times, compared to 2.6 times at the end of 2019. We are now in a great position with maximum flexibility to execute our strategy, including continued acquisitions in good times and tougher times. Lastly, I would remind you that we published 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 our 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. I would also note that 2020 was our safest year ever, as we reduced our recordable and days-away incident rates by 40% and 58%, respectively, versus the prior year. Based on our benchmarking, SiteOne is among the safest industrial distributors in the world. To summarize, I am very proud of how our team 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. In the end, 2020 was a strong year, during which we continued to execute our strategy and demonstrated the momentum of our long-term growth story. Despite the challenges of COVID-19, we made significant progress in building our company and strengthening our team. We remain excited about both the short-term and the long-term opportunities to deliver exceptional value to all stakeholders. Now, John, we'll walk you through the quarter in more detail.

John Guthrie, CFO

Thanks, Doug. I'll begin on slide nine, with some highlights from our fourth quarter results. We reported a net sales increase of 26% to $675 million for the fourth quarter. For the full year, net sales increased 15% to $2.7 billion. During the quarter, we had 65 selling days compared to 61 selling days in the prior year period. While the extra days were a drag on our overall organic daily sales growth due to the timing of year-end holidays, we finished the year strong with net sales growth coming in better than anticipated. For the full year, we had 256 selling days compared to 252 days in the prior year. In 2021, as detailed in the 2021 organic daily sales reconciliation schedule attached to the press release, we have 253 selling days. Organic daily sales increased 12% in the quarter and 8% for the full year, as the stay-at-home trend associated with COVID-19, combined with low interest rates, fueled demand for new home construction and increased investment in existing homes and outdoor living spaces. Organic daily sales for landscaping products, which includes irrigation, nursery, hardscapes, outdoor lighting, and landscape accessories, was strong again this quarter, increasing 16% compared to the prior year. For the full year, landscaping products grew 9%. Landscaping products are most closely tied to the repair and remodel market, which is benefiting from homeowners upgrading their backyards and patios. Organic daily sales growth for agronomic products, which includes fertilizer, control products, ice melt, and equipment, remained steady with 3% organic daily sales growth for both the quarter and the year. Due to the continued strong demand resulting from the stay-at-home trend, as well as favorable weather, our fourth quarter sales exceeded expectations despite the strong comps from the prior year period. Geographically, all regions achieved positive organic daily sales growth during the quarter, with six out of ten regions achieving double-digit organic daily sales growth. As Doug mentioned, we are seeing strong demand continue into the first quarter. While weather, like what we saw last week, can negatively impact sales, it's fair to say that when our customers can work, they are busy. Prices increased 2% for the fourth quarter and 1% for the year compared to 2019. For the full year 2021, we expect price to contribute between 2% and 3% to our overall sales growth. We are not currently seeing strong inflationary pressure in landscaping products that you may be seeing in other building product categories. Acquisition sales, which reflects the sales attributable to acquisitions completed in both 2019 and 2020, contributed approximately $41 million, or 8%, to the overall fourth quarter growth rate. For the full year, acquisition sales contributed $136 million, or 6%, to the overall growth rate. We are pleased with the performance of our acquisitions and our overall deal pipeline, as we saw healthy reacceleration in deals closed in the fourth quarter. Gross profit increased 31% to $222 million in the fourth quarter, and gross margin expanded 110 basis points to 32.9%. The improvement in gross margin for the quarter is primarily due to higher supplier incentives attributable to our increased sales value, along with a favorable customer mix and lower freight costs. For the year, gross profit increased 17%, and gross margin increased 50 basis points. Selling, general and administrative expense, or SG&A, increased 22% to $203 million in the fourth quarter. SG&A as a percentage of net sales decreased 120 basis points to 30%. The reduction in SG&A as a percentage of net sales reflects operating leverage resulting from excellent organic sales growth, combined with solid cost management. For the full year, SG&A increased 11% to $728 million, and SG&A as a percentage of sales decreased 90 basis points. For the fourth quarter, we reported an income tax expense of $1.6 million compared to an income tax benefit of $5.6 million in the prior year period. For the full year, income tax expense was $27.5 million compared to $13.8 million in the prior year. Our effective tax rate was 18.5% compared to 15.1% for the prior year. The increase in the effective tax rate was primarily due to a decrease in the excess tax benefits resulting from option exercises relative to income before taxes compared to the prior year. Excess tax benefits of $10.9 million were recognized for the 2020 fiscal year, as compared to $9.6 million for the 2019 fiscal year. In 2021, we expect the effective tax rate to be between 25.5% and 26.5%, excluding discrete items, such as excess tax benefits. We recorded net income for the fourth quarter of $11.5 million compared to $2.5 million for the prior year period. The improvement was primarily driven by our strong sales growth, SG&A leverage, and gross margin improvement. Net income for fiscal 2020 was $121.3 million compared to $77.7 million for fiscal 2019. Our weighted average diluted share count was 44.1 million for fiscal year 2020 compared to 41.8 million for fiscal year 2019. The increase was primarily attributable to our equity offering completed in August. Adjusted EBITDA increased by 98% to $43.9 million for the fourth quarter, compared to $22.2 million for the same period in the prior year. For the full year, adjusted EBITDA increased 29% to $260.2 million compared to $201.1 million for 2019. Adjusted EBITDA margin, reflecting our SG&A leverage and gross margin improvement, increased 110 basis points to 9.6% compared to fiscal 2019. Now I'd like to provide a brief update on our balance sheet and cash flow statement, as shown on slide 11. Net working capital at the end of the year was $483 million compared to $455 million at the end of 2019. The increase is primarily due to a $36 million increase in our cash on hand. In response to market uncertainty resulting from the COVID-19 pandemic, we increased our cash on hand to enhance our financial flexibility. As markets stabilized, we started the process of deploying our cash on hand by paying down our outstanding debt and investing in the business. During the fourth quarter, we lowered our cash on hand by $290 million to $55 million, reduced our outstanding debt, including finance leases, by $164 million to approximately $305 million, and invested $97 million in new acquisitions and capital expenditures. Excluding available cash on hand, net working capital at the end of fiscal 2020 decreased $8 million compared to the end of fiscal 2019, reflecting increased asset efficiency resulting from our improvement in both inventory and receivables returns. Cash flow from operations decreased 27% to $49 million for the quarter but increased 75% to $229 million for the full year 2020, an improvement of $99 million over 2019. The increase was primarily attributable to higher net income and improved working capital management. We made cash investments of $97 million for the quarter compared to $28 million for the same quarter last year, and $184 million for the fiscal year 2020, compared to $92 million in 2019. The increase in cash investments reflects our increased acquisition activity compared to the prior year period. Net debt at the end of the year was approximately $250 million, compared to $529 million at the end of 2019. Leverage decreased to one times our trailing 12 months adjusted EBITDA compared to 2.6 times at the end of 2019. The lower leverage reflects the repayment of our debt with proceeds from our August equity offering and our strong operating cash flow, as well as our improved profitability. Our target net debt to adjusted EBITDA range is one to two times at year-end. As a reminder, we reduced our target net debt to adjusted EBITDA range to one to two times from two to three times. This allows us to increase our financial flexibility, allowing us to execute our acquisition strategy in all market environments. For the year, we had liquidity of approximately $418 million, which consisted of approximately $55 million cash on hand and approximately $362 million available capacity under our ABL facility. Finally, as a reminder, we have no debt maturities until 2024. 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 for market opportunities. I'll now turn the call over to Scott for an update on our acquisition strategy.

Scott Salmon, EVP, Strategy and Development

Thanks, John. In August, we began to close deals again after a five-month pause. We were pleased to regain momentum quickly and add seven outstanding companies over the remainder of the year, with five of those in the fourth quarter alone. As shown on slide 12 for the full year 2020, we acquired 11 companies with trailing 12 months net sales of approximately $191 million, or a little over 8% of 2019 net sales. Since 2014, we acquired 57 companies with more than $1 billion in acquired net sales. Turning to slide 13 through 18, you will find information on our most recent acquisitions. On October 1, we acquired BURNCO Landscape Centres with 12 locations across three Western Canadian provinces, establishing a leading hardscapes and landscape supply platform which complements our growing irrigation and agronomic business there. On October 5, we acquired Hedberg Supply with two locations in the greater Minneapolis metro area, which establishes yet another leading hardscapes and landscape supplies platform. On December 9, we acquired Alpine Materials with a single location serving the greater Dallas Fort Worth, Texas market through the distribution of mulches, soils hardscapes, and landscape supply to landscape professionals. This is our first dedicated hardscape center in Dallas Fort Worth and gives us a full product line in that market. On December 30, we acquired Dirt and Rock which serves the Lake Oconee, Georgia market just near Atlanta metro area. Dirt and Rock is focused on the distribution of hardscapes, natural stone, and landscape supplies to landscape professionals. This acquisition extends our leading hardscapes position in the greater Atlanta Metro, complements our existing branch network, strengthening our capability to provide the full line of products and services in Georgia. Finishing off 2020, we acquired Stone Center in Virginia on December 31, 2020, with two locations focused on the distribution of hardscape, natural stone, and landscape supplies to landscape professionals in the Richmond and Fredericksburg market. This addition strategically builds upon our 2018 acquisition of the Stone Center of Virginia’s foundational site in Manassas, Virginia. For our first acquisition of 2021, we acquired Lucky Landscape on February 17. Lucky Landscape is a wholesale distributor of nursery products to landscape contractors, serving the greater Houston market from a single location. This is our fourth dedicated nursery branch in Houston and expands our full-line capabilities in this important market. Summarizing on slide 19, our acquisition strategy continues to create significant value for SiteOne, and our pipeline is strong and continually expanding across all geographies and lines of business. More importantly, the quality of the companies that are joining SiteOne is very high, bringing terrific expertise and exciting new talent to our fast-growing company. Building relationships and joining with excellent companies is only one element of our success. The other key element comes from our outstanding and experienced teams in the field and functional support areas, who warmly welcome our new associates to the SiteOne family and are just as eager to learn from them as they are to share the winning culture we have built here at SiteOne. As Doug mentioned, we have over 50 former owners who are now part of the SiteOne team. I want to thank all of these highly successful entrepreneurs and the whole SiteOne team who together build unbreakable relationships with our customers, suppliers, and our communities every day. Together, we will continue to bring on new dynamic leaders and the best companies in the Green industry to expand our product capability, help us to better serve our customers, and achieve further performance and growth. I will now turn the call back to Doug.

Doug Black, CEO

Thanks, Scott. I'll wrap up on slide 20. Before I jump into the outlook, I would like to recognize the entire SiteOne team for their continued leadership and commitment to excellence during the COVID-19 pandemic. We are all excited to see the number of positive cases dropping and look forward to widespread vaccination. However, the daily battle against the spread of COVID-19 goes on and will likely continue during the next several months. Our thoughts and prayers go out to all of those who have been negatively impacted by COVID-19. We at SiteOne will continue to do our part to help fight the spread of this terrible virus. In terms of demand outlook, we have seen the trend in the fourth quarter continue into January and February, with sales performing above seasonal expectations so far. Overall, we expect to achieve strong organic daily sales growth in the first half of the year, with strong demand and weaker comparable sales. We expect growth to moderate in the second half of the year against stronger comparable sales. As John mentioned, we expect price inflation to be in the 2% to 3% range in 2021, as compared to about 1% in 2020, which will support higher organic daily sales growth. In terms of end markets, we would expect maintenance, which comprises 41% of our business, to remain steady with low to mid-single digit growth. We have terrific capability in maintenance with our market-leading LESCO brand, so we are very confident in our ability to perform in a steady market. Residential new construction, which comprises 27% of our business, should remain strong as builders work to create new home inventory to meet higher demand. Interest rates are forecast to remain low, and we believe that the new focus on home ownership will continue post-COVID-19. So we would anticipate mid to high-single digit growth in new residential demand. By contrast, the new commercial construction market, which represents 14% of our business, is expected to be weak in 2021. Our commercial customers remain busy but are also wary of declining demand during the second half of the year. We would expect a low to mid-single digit drop in commercial demand for the full year. Lastly, the repair and upgrade market, which is 18% of our business, remains very strong driven by the stay-at-home trend and increased investments in outdoor living. We expect this trend to moderate through the year, as widespread vaccination reduces the spread of COVID-19 and spending on travel and entertainment rebounds. That said, we do expect the positive outdoor living trend to continue, as it has for the last 10 to 15 years. Taken together, we would expect mid to high-single digit growth in repair and upgrade. In summary, we expect mid-single digit overall growth in our markets for 2021, which will provide a solid platform for us to continue executing our strategy, growing our business, and expanding our adjusted EBITDA margin. In terms of acquisitions, as Scott mentioned, we currently have a very strong pipeline of high-quality companies and believe that 2021 will be a good year for acquisition growth. Additionally, our ability to integrate acquisitions and achieve synergies improves each year. We expect our acquisitions to perform well in the coming year. Taken all together, we expect fiscal 2021 adjusted EBITDA to be in the range of $275 million to $292 million, which represents year-over-year growth of 6% to 12%. This range does not factor any contribution from unannounced acquisitions. In closing, I would like to sincerely thank all of our SiteOne associates, who continue to amaze me with their passion, commitment, teamwork, and selfless service. We have a tremendous team, and it is a true honor to be joined with them as we overcome adversity and deliver value for all 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, Operator

Our first question is with David Manthey from Baird. Please go ahead with your question.

David Manthey, Analyst

Yeah. Good morning, guys.

Doug Black, CEO

Good morning.

David Manthey, Analyst

So to start off here, there were a lot of positives clearly in 2020 and in fourth quarter, but fourth quarter trends are not super representative, necessarily of anything going forward. As you look at 2021 and think about the key initiatives that you're undertaking, Doug, what are you most excited about? I mean, is there anything new? Are there any of these levers that you're leaning on a little harder into 2021 that we should focus on?

Doug Black, CEO

Well, I think one of the levers that we're going to lean harder on in ‘21 that we haven't in the past is marketing. As you know, we hired a new Chief Marketing Officer, Shannon Versaggi, in February of last year. She's been able to build her team and create a plan. We also did a study of our customer excellence to see what our customer experience looks like and things that we need to work on there. We also did some brand studies to see where SiteOne was with different areas of the market. Armed with that information, we're going to go heavier on marketing in 2021. For example, we're less well-known with the Hispanic customer than with our regular customers. So we're going to be aggressive there. In advertising, why SiteOne is a great place for Hispanic customers, our bilingual capability, etc. That's just one example. We're going to put a lot more marketing behind our product lines, like LESCO and Protrayed, which we saw really good growth in ‘21, or in ‘20. But we expect more in ‘21. The new marketing team and our new capability there is one of the things that we're working on. In addition to that, we're putting in a new CRM for our salesforce. I think we've come a long way with our salesforce. We have an older homegrown CRM, we're going to replace that with the salesforce CRM. That's becoming more advanced. Then just overall customer excellence—the operational excellence group has been in place for a while. We've been really working on our customer experience. That involves MobilePro; it also involves TMS in terms of the dispatch track, which is our way of tracking deliveries in the local market and informing customers when things are on their way. So I know some of those we've been working on for a while, but we feel that it's all coming together, and we're excited about it. The last one I would mention is our digital product siteone.com. We've been working hard on that to get it to kind of a world-class level. We're very close. We're launching some pilots early this year to really go after that aggressively with a great new product and do some marketing behind it. Assuming that goes well, you'll see us roll that out more aggressively in the year. So I know that's a lengthy list of things, but those are the things that have us excited that we can drive organic growth, despite the market; the market is likely to be in our favor in the first half, and it might be tougher in the second half, but we want to be able to swim downstream and upstream faster as a company.

David Manthey, Analyst

Yeah. That all sounds great. I guess the final question here is, how concerned should we be with the labor shortage issue? Are you—is there any news out there as you look at business formation of landscapers or visa issuance or anything else that might help alleviate the tightness issue in 2021?

Doug Black, CEO

Yeah. So, you know, it's going to continue to be with us, but I would just keep in mind, tight labor has been an issue for the last three or four years. It's no worse in 2021; we're all working on it, you know, our customers, ourselves, our trade associations. I think we're making some headway there in terms of getting people into landscaping and making it known that landscaping is an attractive industry, but there's no magic bullet. We'll continue to be tight. I think our customers are getting more productive; we're helping with that. We're getting more productive, as well. Things like MobilePro and siteone.com will enable us to fight through and deliver a good year of growth, despite the tight market, but it will still be with us all year, for sure.

Operator, Operator

Our next question is with Stephen Volkmann with Jefferies. Please proceed with your question.

Stephen Volkmann, Analyst

Hi. Good morning, guys. I know you don't really have a big build-out for the 2021 forecast. But I'm wondering just sort of broad brush, can we talk a little bit about how you're feeling relative to puts and takes for gross profit and SG&A next year? You know, do you expect continued leverage on both, or maybe just on the SG&A side? Any kind of unusual items or rebates or things that we should keep in mind as we try to model out ‘21 would be great? Thanks.

Doug Black, CEO

We do expect continued growth in EBITDA margins and EBITDA margin expansion next year. There will be some combination of gross profit and SG&A, with regards to gross profit. One of the things we saw was a customer mix, a benefit—we're seeing more growth of the small residential-focused customers and less growth in the large commercial jobs. That's a slight benefit. We think we really saw it in Q4, and we think that will continue on certainly next year also. With SG&A, while obviously everybody's aware, there were certain things that will pick up next year. We're going to go back to traveling; we’re going to have some sales and marketing, which are budgeted higher next year. But at the same time, we won't have certain incentives that will probably normalize. Additionally, some of the costs that just come from running in a COVID world likely won't reoccur either. There will be puts and takes; we expect gross margin improvement. I don't think there were any major one-time items. As we've alluded to before, it’s kind of a grind forward on all fronts, and we expect to continue to make progress next year.

Stephen Volkmann, Analyst

Okay, great. And just as a quick follow-up on the SG&A, specifically in the fourth quarter. So kind of a nice bump-up from the run rate earlier in the year. Is that where the incentive compensation sort of showed up, John? Is that sort of an unusual bump-up there? Or is that just sort of taking advantage of strong markets to increase investment?

John Guthrie, CFO

We did see an increase in incentive compensation, and we did have an extra week in the fourth quarter. I would say the additional non-seasonal kind of sales were trending down. Those are the three items, but especially I would say the extra week is probably the largest component when you look year-over-year from that perspective, but then incentive comp was obviously accelerating as we had outperformed expectations in the fourth quarter also.

Operator, Operator

Our next question is with Ryan Merkel with William Blair. Please proceed with your question.

Ryan Merkel, Analyst

Hey, everyone. Congrats on a nice finish to the year.

John Guthrie, CFO

Thank you.

Ryan Merkel, Analyst

So my first question is on the outlook; mid-single digit organic growth in ‘21 feels a little conservative to me. Just given the backdrop is pretty good. And you're going to have two to three points of price. So I guess a two-part question: where might there be upside to your market guide above mid-single digits? Are you including share gains in your outlook?

Doug Black, CEO

Yeah. When we talk about the market, we talk about our own sales; we would still classify it as mid-single digit. Upsides would be that the first half could be stronger than we think. The second half—the uncertainty with COVID .as the virus tails off and the vaccines become more widely utilized and people start spending again on entertainment and travel, what happens in our market. We still think there will be strong outdoor living and new residential will still be strong. Commercial is a question mark. So when you put those puts and takes together, there's just a lot of uncertainty in the second half. So we're budgeting mid-single digits as a reasonable assumption.

Ryan Merkel, Analyst

Yeah. All right, that makes sense. 2020 was a great weather year, so certainly understand that. All right. And then as we think about modeling the fourth quarter ‘21, how much do you think mild weather boosted 4Q? I know that's hard to answer, but I'm just looking for any guideposts you can provide as we think about for 4Q ’21?

John Guthrie, CFO

It's John. Yeah. It's always difficult to bifurcate that. I would say, well, first off when you model ‘21, take out a week of sales from that standpoint. This is somewhat of a couple of points of growth on top of that, I would potentially say from weather with regards to that. I think we saw of our 10 regions, eight out of the 10 were drier in Q4, especially out west which was really positive to sales growth. General conditions were warmer, from that perspective, which allowed people to work a little bit more. It's a one-to-one side thing; we did see about of our agronomic sales would have actually been stronger. However, we saw no one was buying ice melt in the fourth quarter. So there was a little bit of a—we went backwards, $5 million or $6 million just because of that. So in general, I would probably say two to three points; but that is an estimate, and it's very difficult to bifurcate it.

Operator, Operator

Our next question is with Matthew Bouley with Barclays. Please proceed with your question.

Ashley Kim, Analyst

Hi. This is Ashley Kim on for Matt this morning. So I just—I guess just digging more into the guide for moderation and growth in the back half. Are you talking about flatter trends? Are you actually anticipating a turn negative also off of the tough comp?

Doug Black, CEO

Yeah, I think you're going to see, like I said, strong Q1, Q2; Q3 will moderate. The fourth quarter, as John mentioned, has a lot of things that are going on in ’21, almost all of them positive in the fourth quarter. There is a chance that our organic growth could be negative in the fourth quarter. Looking at the second half overall, we would be somewhere around flat. It could be plus or minus; it's really hard to call it at this point. We wouldn't expect the third quarter to be negative; the fourth quarter could very well be negative in terms of organic growth.

Ashley Kim, Analyst

Okay, that's helpful color. And then I hear you on the inflationary pressures generally being less than what we've heard across building products. But can you just comment on what you've seen specifically in free inflation so far and maybe quantify some potential impacts to margins there?

Doug Black, CEO

We are—we've seen an increase really in the second half of this year and especially in the first quarter; we expect it to be a mild headwind. With regards to our margin gross margin improvement, we think that because of the initiatives we've done with transportation management and how we're managing it smarter, we should be able to mitigate that. Then in the second half of the year, I would say, we would expect some pressure relief. But minor, we would say minor headwind to gross margin improvement; we're overall hopeful that we will be able to still achieve a margin improvement this year.

Ashley Kim, Analyst

Okay. Thanks so much. I'll leave it there.

Doug Black, CEO

Thank you.

Operator, Operator

Our next question is with Keith Hughes from Truist. Please proceed with your question.

Keith Hughes, Analyst

Thank you. Question on the acquisitions; you talked about one of the slides on the acquisitions that there were 11 deals, 191 and trailing 12 months sales. Given the timing of the deals, how much of that spills over into ‘21? How much acquisition revenue, in rough numbers, do you have kind of at the bag if you will for ‘21?

Doug Black, CEO

If you actually look at our earnings announcements this year, the acquisitions we did in the first half of the year are largely built into the numbers. So I would say the pre-COVID acquisitions, there's not a lot of revenue growth with regard to those, while the post-COVID ones, you'd probably have about half the year with additional revenue from those. So if you look at our acquisitions going into next year, the 2020 acquisitions contributed $5 million in revenue this year. The balance will still be a contributor to overall revenue growth.

Keith Hughes, Analyst

So—but I can't do 190 minus 75. That's, I think I'm missing…

Doug Black, CEO

150.

Keith Hughes, Analyst

Is that kind of what you expect?

Doug Black, CEO

Yeah.

Keith Hughes, Analyst

If that answers the - that answers the question. I guess one final question on your commercial business. You talked in the guidance numbers about a weak commercial construction. Understand that you have some commercial maintenance and a little bit of remodeling; any thoughts on the trends heading into early ’21?

Scott Salmon, EVP, Strategy and Development

Yeah, the maintenance is stable. I mean, you know, commercial properties continue to be maintained, so low single-digit growth. Remodel is just not a—it's not a big—you know, there is some; it’s very small. We would also expect that the maintenance of properties is—if the property needs to be remodeled, certainly in a tough market, that becomes essential to stay competitive, et cetera, so yeah, those will continue to be steady and healthy.

Keith Hughes, Analyst

Okay, great. Thank you.

Operator, Operator

Our next question is with Mike Dahl with RBC Capital Markets. Please proceed with your question.

Unidentified Analyst, Analyst

Hey. This is actually Chris on from Mike. Thanks for taking my questions. My first question is just on the inflation outlook for this year. I know you guys picked up your pricing outlook to two to three. Are you embedding any cost inflation looking out at full year ‘21 from your supplier base?

Doug Black, CEO

That two to three is primarily cost inflation from our supplier base. Our marketplace generally sees most of the cost inflation being passed on. We're seeing that from our supplier base, and we're passing it on; or we would expect that to be reflected in higher prices to the market in general.

Unidentified Analyst, Analyst

Got it. That makes sense. I guess just my second question, any color you could provide today on what impact the cold weather, the recent cold weather in the country and power outages in Texas has impacted you? And whether that's embedded at all in your guidance for ‘21?

Doug Black, CEO

Yeah, so obviously, we've had a tough time in Texas. That's affected everybody. But, you know, it's one week—the weather's back. Their sales have come back. Events like that become—it doesn't become material, because it was only a week. We had obviously snow across the country, but that's normal. But it was only one state. Although Texas is a big state, that’s something they can make up through the year, you know, assuming normal weather the rest of the year. And in fact, you know, repairs of nursery or even irrigation pipe and backflows that get frozen and damaged might be a little pick-up to help them catch up. It was a tough event. Our folks, our associates are all safe and well. Our branches are back open; they were closed for three or four days, but they are back up and running. In the scheme of the year, it wouldn't make a material difference. Okay, great. Well, thank you all for joining us today. We very much appreciate your interest in SiteOne. I’d like to once again, thank our terrific associates for all they're doing to make us a great company, our suppliers, and our customers. We look forward to updating you again when we report our first quarter results. Thank you.

Operator, Operator

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