Earnings Call Transcript - SITE Q3 2020

Operator, Operator

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

John Guthrie, CFO

Thank you and good morning, everyone. We issued our third quarter 2020 earnings press release this morning and posted a slide presentation to the Investor Relations portion of our website at investors.siteone.com. I am joined today by Doug Black, our Chairman and Chief Executive Officer; and Scott Salmon, Executive Vice President, Strategy and Development. Before we begin, I would like to remind everyone that today's press release, slide presentation and the statements made during the call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Such risks and uncertainties include the factors set forth in the earnings release and in our filings with the Securities and Exchange Commission. Additionally, during today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. A reconciliation of these measures can be found in our earnings release and in the slide presentation. I would now like to turn the call over to Doug Black.

Doug Black, CEO

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

John Guthrie, CFO

Thanks, Doug. I'll begin with some highlights from our third quarter results on Slide 9. We reported a net sales increase of 15% to $752 million in the third quarter. During the quarter, we had 63 selling days, which were unchanged compared to the prior year period. Organic daily sales increased 11% in the third quarter compared to the 7% we experienced in the third quarter of last year. We saw solid demand across product lines as consumers continued to invest in their homes and outdoor living spaces. Geographically, we saw strong sales across the country with seven out of ten regions achieving double-digit growth. Organic daily sales for landscaping products, which includes irrigation, nursery, hardscapes, outdoor lighting and landscape accessories, grew 11% during the quarter. Hardscapes again experienced very strong growth as consumers continued to upgrade their backyards and patios. Organic daily sales for agronomic products, which includes fertilizer, control products, ice melt and equipment, also increased 11%, reflecting strong demand for lawn maintenance products and, we believe also, some solid market share gains. As Doug mentioned, the positive trend for organic daily sales has continued into October. But sales have moderated somewhat the last two weeks. In addition, we faced a strong organic daily sales comp of 8% in the fourth quarter, including double-digit growth in November of last year. We also have an additional four days this year in the month of December, and because of the seasonally low sales projected for that week, we expect it to negatively impact organic daily sales growth for the quarter by three to four percentage points. To provide further context, our 8% organic daily sales growth in the fourth quarter of 2019 would have been reduced to approximately 4% if we had the additional four days in December with the same impact as this year. Prices increased 2% in the quarter and 1% year-to-date compared to the prior year period. For the full year 2020, we expect price inflation between 1% and 2%. Acquisition sales, which reflect the sales attributable to acquisitions completed in both 2019 and 2020, contributed approximately $32 million or 5% to the overall third quarter growth rate. We are pleased with the performance of our acquisitions, which are collectively ahead of plan year-to-date. Gross profit increased 16% to $250 million in the third quarter, and gross margin expanded 30 basis points to 33.3%. Similar to Q2, the increase in gross margin for the quarter was driven by lower freight costs and the contributions from acquisitions, which carry higher gross margin. Selling, general and administrative expense, or SG&A, increased 11% to $183 million in the third quarter. SG&A as a percentage of net sales decreased 90 basis points to 24.4%. The reduction in SG&A as a percentage of net sales reflects operating leverage resulting from our excellent organic sales growth combined with solid cost management. For the third quarter, we reported an income tax expense of approximately $14 million compared to approximately $10 million in the prior year period. The effective tax rate for the quarter was 22.3% compared to 21.9% for the prior year period. We recorded net income for the third quarter of $48 million compared to $35 million during the prior year period. The improvement was primarily driven by strong sales growth, SG&A leverage and gross margin improvement. Our weighted average diluted share count was 44.6 million for the third quarter compared to 42.8 million for the same period last year. The increase was due primarily to our equity offering completed in August. Adjusted EBITDA for the third quarter improved by 25% to $88 million compared to $71 million for the same period in the prior year. Adjusted EBITDA margin increased 90 basis points to 11.7%, reflecting our operating leverage and gross margin improvement. Now I'd like to provide a brief update on our balance sheet and cash flow statement, as shown on Slide 10. Net working capital at the end of the quarter was $710 million compared to $516 million at the end of the third quarter of 2019. The increase is primarily attributable to our decision to increase our cash on hand to enhance our financial flexibility in response to the market uncertainty resulting from the COVID-19 pandemic. As the markets have stabilized, we've started the process of reducing our cash on hand and paying down our outstanding debt, including a $138 million reduction in the outstanding principal under our term loan facility on September 30. Excluding the available cash on hand, net working capital decreased 10% to $435 million compared to the prior year period. Receivable collections have held up well in this challenging environment, and we have maintained flat inventory levels with the prior year period. Last quarter, we mentioned how interruptions in our supply chain resulting from COVID-19 were causing some product shortages. Over the course of the quarter, we saw fewer product shortages, though we still expect some to last through the end of the year. Cash provided by operations was $62 million for the quarter compared to $76 million in the prior year period due to increases in working capital to support our strong sales growth. For the first nine months, cash flow from operations was still a very strong $181 million compared to $64 million for the same period of 2019. The increase is primarily due to higher net income and improved working capital management. We made cash investments of $31 million during the third quarter compared to $16 million for the same quarter last year. The increase in cash investments reflects increased acquisition activity compared to the prior year. On August 3, we raised $261.7 million of net proceeds in an equity offering of 2.15 million shares of our common stock. We intend to use the proceeds from the offering to reduce leverage, increase liquidity and fund future acquisitions. By reducing our leverage, we believe we have increased our operational flexibility, which will enable us to be more opportunistic and execute our acquisition growth strategy in all macroeconomic environments. Net debt at the end of the quarter was $195 million compared to $566 million at the end of the third quarter of 2019. As a reminder, we have no debt maturities until 2024. Leverage decreased to 0.8 times our trailing 12 months adjusted EBITDA compared to 2.9 times at the end of the third quarter of 2019. The lower leverage reflects our increased profitability and the debt reduction due to our equity raise and strong operating cash flow. We have reduced our year-end target net debt-to-adjusted EBITDA leverage range to 1 to 2 times from our previous range of 2 to 3 times. The reduction reflects our strategic decision to lower leverage and increase our financial strength and operational flexibility. We expect to be at or slightly below that range at year-end depending upon acquisition activity in the fourth quarter. As a result of these changes, Moody's upgraded our corporate family credit debt rating to Ba3 from B1. At the end of the third quarter, we had liquidity of $641 million, which consisted of approximately $275 million in cash on hand and $366 million in available capacity under our ABL Facility. As I mentioned earlier, on September 30, we used $138 million of the cash on hand to reduce the principal under our term loan facility to $300 million. In summary, our priority from a balance sheet perspective is to maximize our financial strength and flexibility during this uncertain time without sacrificing long-term growth and market opportunities.

Scott Salmon, Executive VP, Strategy and Development

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

Doug Black, CEO

Thanks, Scott. I'll wrap up on Slide 17. First and foremost, we will continue to ensure the safety of our associates, customers, suppliers and communities as we operate in a coronavirus environment. As our country works to overcome this pandemic, our ability and the ability of our customers and suppliers to operate safely remains a critical priority. In terms of demand outlook, as previously mentioned, we have seen the trend in the third quarter continue into October, though sales have moderated somewhat throughout the month. October typically represents approximately 50% of our fourth-quarter sales. That said, the months of November and December are more impacted by weather. And, as John mentioned, November organic daily sales last year was particularly strong. So taken altogether, we would expect organic daily sales growth in the fourth quarter to be in the mid to high single digits, excluding the extra week. In terms of end markets, assuming significant stay-at-home restrictions are not reinstated in the fourth quarter, we would expect maintenance, which comprises 42% of our business, to remain steady with low single-digit growth. Residential new construction, which comprises 26% of our business, looks to remain strong as builders work to create new home inventory to meet higher demand. Repair and upgrade, which is 17% of our business, is very strong with significant backlogs to carry our customers through the end of the year and on into 2021. Finally, we expect the commercial end market to be steady in the near term with some weakness going into 2021 as businesses and commercial builders pare back projects to adjust to the impacts in the restaurant, entertainment, retail and hospitality sectors. Taking all of these factors together, we would expect the market to support solid organic growth as we finish up the year and move into 2021. Against this backdrop, we will continue to operate safely and efficiently with tight management of our discretionary expenses yet higher payouts of bonuses and commissions as our teams finish up a very good year. We will also continue to drive our commercial and operational initiatives in supply chain, category management, pricing, sales force performance, marketing and operational excellence. We expect these initiatives to allow us to gain market share in support of our organic growth and improve our gross margin while setting us up for strong performance in 2021. We will also continue to make investments in key capabilities for the future to include siteone.com and TMS. Considering all these factors, we expect to achieve good progress in our adjusted EBITDA margin this year and have raised our guidance. In terms of acquisitions, as Scott mentioned, we expect to add additional companies to SiteOne before year-end, finishing what has turned out to be a very solid acquisition year despite the four-month pause. We have a strong pipeline and numerous active deals, which make us optimistic that 2021 could be another very good year in welcoming new companies to SiteOne. Keep in mind that acquisitions added in the third and fourth quarters will not contribute meaningfully to our adjusted EBITDA growth this year but we believe will set us up for strong growth in 2021 and beyond. With the strong third-quarter performance and increased visibility that we have on our end markets, we are pleased to be raising our adjusted EBITDA guidance range for 2020. We now expect adjusted EBITDA for 2020 to be in the range of $230 million to $236 million, exceeding the high end of our prior range of $205 million to $225 million. Keep in mind that this range includes the extra loss-making weeks in December, as John mentioned, as compared to 2019, which reduces our adjusted EBITDA by approximately $2 million to $3 million and reduces our full-year organic daily sales growth by approximately 1 percentage point. Additionally, while our range includes economic uncertainty, it does not include any broad reinstatement of stay-at-home restrictions that would limit landscaping services. In closing, I would like to sincerely thank all our SiteOne associates who continue to amaze me with their passion, commitment, teamwork and selfless service. We have a tremendous team, and it is an honor to be joined with them as we overcome adversity and deliver value for all of our stakeholders. I would also like to thank our suppliers for supporting us so strongly and our customers for allowing us to be their partner. Operator, please open the line for questions.

Operator, Operator

Your first question comes from the line of David Manthey with Baird.

David Manthey, Analyst

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

John Guthrie, CFO

Thanks, David. I don't believe there are any one-time items. In the fourth quarter, we have some projects and investments related to our digital strategy similar to what we saw in the second and third quarters, which will be reflected in Q4. However, there weren't any significant issues related to operating expenses. One other thing to mention is that, like many in the industry, people have not been taking vacation or PTO in the first half of the year. We've also extended our policy to increase the accrual, which is another one-time item that will be coming into play this year, particularly in Q4. Those are the two main items I would point out.

Doug Black, CEO

Yes, David, I would just add that we are incurring some extra costs as we have associates who go into quarantine. We're supporting our associates without requiring them to use their paid time off, ensuring they feel comfortable staying home when sick. We also provided special bonuses as a one-time gesture of appreciation for our associates. We haven't cut back on any items. We've been cautious with travel, and insurance costs have naturally declined according to the trends. Aside from that, what you're seeing in the fourth quarter is our ongoing investment in our employees and preparing for 2021.

David Manthey, Analyst

Makes sense. The big question for all distributors in outdoor sports right now is whether we will experience a downturn in 2021 as we face tough comparisons to 2020 and shifting market conditions. You've mentioned the trends you're observing as we move into October. What are customer discussions revealing about the sustainability of the strong demand you're experiencing as we head into 2021 and the key selling season in the second and third quarters?

Doug Black, CEO

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

Operator, Operator

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

Ryan Merkel, Analyst

Congrats on a nice quarter.

Doug Black, CEO

Thanks, Ryan.

Ryan Merkel, Analyst

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

Doug Black, CEO

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

Ryan Merkel, Analyst

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

Doug Black, CEO

Let me discuss MobilePro and barcoding, as they are the most advanced tools we've implemented. This year, we expanded their use across the company, which proved to be very effective, especially during COVID-19. It allowed us to check people out while they remained in their trucks and facilitated customer interactions in the yard. This tool is now utilized in most of our branches, enabling us to serve customers more efficiently and expediting their experiences. We believe that MobilePro is contributing positively to our SG&A leverage, and we're excited about its continued benefits. Having rolled it out this year, we anticipate being well integrated with it next year, bringing further advantages. In terms of siteone.com, it's a strong platform, but we're in the process of enhancing it. We're adding features like online purchasing and guest checkout to make it easier for customers without accounts to engage with SiteOne. Our focus is on small to midsized customers, and these upgrades will ensure that siteone.com becomes an excellent resource for them. We expect to see increased engagement and greater share of their spending as we progress through next year, as this segment remains a key target for us. Currently, we hold about 12% to 13% market share overall, but only around 5% to 6% in the small customer segment. This presents a clear opportunity for us to improve and grow with the help of our updated siteone.com. Additionally, we've implemented a Transportation Management System to enhance our inbound freight operations, which has positively impacted our freight costs and margins. We are also developing the outbound aspect to improve customer notifications regarding their deliveries. This will provide customers with real-time updates and streamline communication, a significant enhancement since this service is not commonly found in our industry. We are currently completing two pilot programs with promising results, and we plan to roll this out nationwide. Collectively, these initiatives will position us to be a more advanced digital company in 2021, helping us capture market share while reducing service costs.

Operator, Operator

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

Judy Merrick, Analyst

This is Judy Merrick for Keith Hughes. Following up on your comments about the commercial markets, where you mentioned they are reducing activity. Is that primarily due to project delays, a change in bidding, or does it vary by the specific end market sector?

Doug Black, CEO

It's difficult to pinpoint the exact situation, but we experienced project delays due to COVID, and these delays continue as end users assess their future needs. The primary metric we monitor is overall bidding activity. Our project services group provides bids for our contractor clients. At the beginning of the year, we saw growth, but that has since plateaued. Initially, in April and May, there was a decline due to COVID, but it bounced back to a flat level and has remained relatively unchanged. This situation stems from a mix of project delays and some cancellations, with the main issue being the delays and a shortage of new projects.

Judy Merrick, Analyst

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

Doug Black, CEO

There are always challenges related to labor. We tend to experience delays of about six months since we are the last to enter the market. However, after a slight decline in 2020 when builders paused to evaluate the situation, they have returned robustly. We did halt some activities in certain areas where demand was lower, but we have since resumed full operations. It's important to note that there is a limit to how quickly we can scale up due to labor constraints. Currently, we are operating at full capacity to serve the residential market. We anticipate that this will continue into the first half of 2021, and likely for most of the year, given the significant shift in attitudes towards homeownership. Many are trying to understand how this trend will evolve, but it's reasonable to assume that interest in homeownership will persist beyond the distribution of a vaccine, as people want to be prepared for potential future pandemics. Therefore, we expect the residential market to remain strong throughout 2021.

Operator, Operator

Your next question comes from the line of Ryan Frank with RBC Capital Markets.

Ryan Frank, Analyst

Last quarter, you were expecting two halves of organic sales to be in line or slightly below the first half. However, you performed significantly better this quarter. I was trying to understand the main differences. Was it just stronger new residential sales, or was there something else?

John Guthrie, CFO

I think what we observed this quarter was a much stronger repair and remodel market and homeowner activity than we anticipated. Sales were solid, but the demand in the marketplace, particularly in repair and remodel, was likely higher than we expected during the second quarter call.

Ryan Frank, Analyst

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

Doug Black, CEO

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

Ryan Frank, Analyst

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

John Guthrie, CFO

Yes, you should consider that this is where we plan to operate. From our perspective, this approach allows us to execute our acquisition strategy in both up and down markets. Particularly in down markets, we can be opportunistic and not have to pause our strategy if there is a market downturn, which we know will occur at some point in the future.

Doug Black, CEO

So Ryan, to be clear, during favorable conditions, we plan to operate within a 1 to 2 range. In a downturn, we will look to continue making acquisitions since opportunities will be available, and we want to capitalize on them. We anticipate our ratio could rise to the 2 to 3 range, but it will not reach riskier levels beyond that. This was a strategic choice we made to ensure we remain active in pursuing acquisitions even during downturns. We feel confident in our current position to navigate a downturn and continue pursuing deals as they arise.

Ryan Frank, Analyst

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

Doug Black, CEO

Thanks, Ryan. Sure.

Operator, Operator

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

Doug Black, CEO

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

Operator, Operator

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