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Home / US Business / BrightView Holdings, Inc. (BV) CEO Andrew Masterman in Q3 2020 Results – Revenue Ring Transcript

BrightView Holdings, Inc. (BV) CEO Andrew Masterman in Q3 2020 Results – Revenue Ring Transcript



BrightView Holdings, Inc. (NYSE: BV) Q3 2020 Performance Conference Call August 5, 2019 10:00 AM ET

Company Participants

John Shave – VP, IR

Andrew Masterman – President, CEO and Director

John Feenan – EVP and CFO

Conference Call Participants

Andy Wittmann – Robert W. Baird

Judah Sokel – JPMorgan

George Tong – Goldman Sachs [19659004] Sam Kissworm ̵

1; William Blair

Ryan Gunning – Jefferies

Shlomo Rosenbaum – Stifel Nicolaus

Kevin McVeigh – Credit Suisse

Gunnar Hansen – RBC Capital Markets

Sam England – Gossler & Company

] Operator

Good morning, and welcome to BrightView's third quarter for the third quarter revenue conference call. As a reminder, this conversation is recorded. All lines are placed on the muffler to prevent background noise. After the speaker's comments, there will be a question-and-answer session. The press release on earnings is available on the company's website, investor.brightview.com. In addition, the electronic webcast includes the presentation images that will be referenced as part of today's discussion, and a downloadable copy is also available online.

I will now transfer the conversation to Brightvy's Vice President of Investor Relations, John Shave. Please continue.

John Shave

Thank you, operator and good morning. Before we begin, I would like to remind listeners that some of the comments made today, including answers to questions and information reflected in the presentation images, will be forward-looking, and the actual results may differ significantly from those projected. Please refer to the company's SEC filings for more details on risks and uncertainties that may affect the company's future operating results and financial conditions.

Comments made today will also include a discussion of certain non-GAAP economic measures. Reconciliations with the most directly comparable GAAP financial measures and other related information are contained in the results publication on the company's website. Disclaimer of liability for forward-looking statements and non-GAAP financial measures applies to currently prepared comments as well as questions and answers. Finally, unless otherwise stated, all references to quarterly, annual or annual results or periods refer to our financial years ending September 30 of each respective year. Today, the company presents the unaudited results for the third quarter and nine-month period that ended June 30, 2020.

For more context, Brightview is the leading and largest provider of commercial landscaping services in the United States with annual revenues in excess of more than $ 2 billion , about 10 times our next biggest competitor. Together with our older companies, Brightview has been in operation for more than 80 years, and our field management team has an average term of office of over 17 years. We offer commercial landscape architecture services ranging from landscape maintenance and improvement to tree care to landscape development. We operate through a differentiated and integrated national service model, which systematically delivers services at the local level by combining our network of more than 270 maintenance and development branches with a qualified service partner network.

Our delivery model underpins our position as a single source end-to-end supplier to a diverse customer base at the national, regional and local levels, which we believe represents a significant competitive advantage. We also believe that our commercial customer base understands the financial and reputational risks associated with inadequate landscaping, and considers our services to be essential and non-discretionary.

I will now transfer the conversation to Brightvow's CEO, Andrew Masterman.

Andrew Masterman

Thanks, John. Good morning everyone, and thank you for joining us today. From the beginning of slide four, let me begin by giving you an overview of our third tax quarter, the nine-month period that ended June 30, and expectations for our fourth fiscal quarter.

First, I am pleased to report that all BrightView branches are operational without limitation on the scope of services. Second, the free cash flow generation continues to be strong. During the third quarter, we generated $ 66.5 million in free cash flow, and during the first nine months, we generated $ 119.8 million in free cash flow, an increase of 200% the year before. Third, compared to the previous year, total consolidated financial income in the third quarter fell 7.5% to $ 608.1 million, driven by headwinds due to COVID-19. Fourth, total adjusted EBITDA for the third quarter was $ 91 million with a solid EBITDA margin of 15%. Fifth, including acquisitions, our contract-based business remained at 98% from the previous year, which helped balance the pressure we saw in additional revenues due to a downturn in discretionary expenses. Sixth, net capital expenditure as a percentage of turnover was 2.4% or $ 42.1 million, down from 4% of turnover in the previous year. And finally, the results of our Strong-on-Strong procurement strategy gave us revenue growth in the quarter, and with an attractive pipeline, procurement will continue to be a reliable and sustainable source of revenue growth.

Before we go into the details of fiscal third quarter, let me give you the outlook for our fourth quarter in slide five. We still have to see, so far in July and the beginning of August, that the COVID-19 business affects the associated demand in the maintenance segment and project delays in the development segment. By offsetting headwinds, our contract-based business remains at 98% from the previous year, and our two largest verticals, homeowners' associations and commercial properties, remain resilient. As a result, we forecast for the fourth quarter total revenues between $ 585 million and $ 610 million and adjusted EBITDA between $ 85 million and $ 89 million.

We turn to push six; before continuing with the discussion of our results, we will once again express our thoughts to those affected by the COVID-19 outbreak. We continue to be extremely grateful to the first responders and health professionals. We are also grateful to all the important workers, and throughout the country, landscape maintenance continues to be recognized as an important service as defined by the Department of Homeland Security. That said, I must acknowledge that keeping our employees, their families and our customers safe remains our guiding principle. As evidenced by our execution in recent months, I continue to be very proud and convinced that our differentiated focus on security and consistent service delivery skills continues to shine through in this difficult time and is reflected in the third quarter results. [19659028] In response to COVID-19, we have remained proactive from both a health and safety and business continuity perspective. At the beginning of March, we began to communicate daily critical information from the CDC to all employees, while implementing border-based hygienic and sanitary operating procedures and social distance protocols. In our development business, team members continue to report directly to the job site. In our maintenance business, many team members now report directly to the job site. And for those who report to the branch, we have reduced the number of workers sent per vehicle. We further use technology to maintain our touch points for customers, who prohibit non-essential travel and support a work-from-home policy as appropriate. Recently, the use of masks and face coatings has been adopted as best practice by the CDC, governments and other large organizations, and we have asked our team members to wear masks in the branch, in the garden, in the field and in our corporate offices.

Moves now to push seven; In addition to health and safety, we are laser-focused on business continuity. Companywide, we continue to be cautious as we navigate through the uncertain times, as we quickly move on to opportunities to maintain our core contract service, protect margins, improve cash and liquidity, manage capital expenditures and reduce working capital. As we mentioned in our last conversation, as a precautionary measure, in March, we lost some of our bank lines and also froze temporary pay, deferred discretionary benefits increased and decreased 401,000 matching contributions for all employees. In the intervening months, our free cash flow generation has been exemplary. We have repaid the bank line we were given access to, and we currently have excellent liquidity.

In addition, our independent board members continue to be compensated solely on inventory and other discretionary expenses, including capital expenditures and travel and entertainment that are still managed wisely. We usually operate in the upper quartile of the landscape architecture industry, including many complex and high-profile projects that require our horticulture, thought management and expertise. We are the leading provider of landscaping services across many verticals, including business campuses, education, hospitals, public parks, hotels and resorts, and homeowners' associations.

Fortunately, across all regions of the country, our two largest verticals, homeowners' associations and commercial properties, continue to be resilient. The order-at-home orders have highlighted the importance of our services to the millions of residents who live in the communities we maintain. Commercial and corporate campuses, combined with homeowners' associations, represent approximately 2/3 of our maintenance contract. Hospitality and retail have been the most affected verticals, but represent only around 10% of our total maintenance contract business agreement. We have a healthy and diverse mix of customers and projects, and we continue to believe in the resilience of our business and our ability to meet this challenge head-on.

As of 2008, at the start of the financial crisis, the Development Segment took proactive measures to ensure that our project mix was more resilient in recessionary environments. In 2008, our private public work mix was about 80% private and 20% public, and we had a higher exposure to new home builders. Since then, we have almost doubled our public work mix, which tends to be more resilient. As a result today, we are more diversified, and the development segment is in the process of realizing a steady pace in bookings through 2021, albeit slightly down compared to previous years' levels. The opportunities for our business are still robust. We are the major player in the approximately $ 80 billion, highly fragmented industry.

As I mentioned earlier, during the third quarter, we realized an overall decline in revenue in the middle ground figures. We will continue to operate on the assumption that COVID-19 headwinds will continue to affect additional demand in our maintenance segment and project delays in our development segment. These factors will affect our ability to grow organically over the next few quarters. Conditions remain fluid, but our quarterly results highlight the misery of our contract-based business and reflect the positive underlying trends in our Strong-on-Strong procurement strategy, free cash flow generation and liquidity growth. Our team has done an incredible job of meeting this challenge. We continue to be confident that we will emerge from this crisis as a better and stronger company, while continuing to focus on building our long-term core strength and building superior value for our shareholders.

Turning eight; During the 2020 financial year, we completed five acquisitions that strengthen our presence in several key markets, and our Strong-on-Strong M&A strategy continues to be a reliable and sustainable source of revenue growth. Commercial landscape architecture is a highly fragmented marketplace with approximately 0.5 million firms and over 1,000 of these firms competing in the upper quartile. Our pipeline is attractive, and we continue to identify strong companies that improve our current footprint or allow us to enter regions where we do not currently operate. Our business is cash-generating, with low capital intensity and very little inventory, so that we can consolidate the marketplace in an efficient way.

Our knowledge of horticulture and skill and our ability to serve several service lines under one banner position us well. This also gives us the opportunity to potentially expand our service lines and offerings. Our M&A strategy Strong-on-Strong allows us to grow rapidly in both existing and new markets without reducing market prices. And over time, our technology and digital tools allow us to establish stickiness and improve margin performance. As the acquirer's choice in our industry, we have closed 19 acquisitions since January 2017 and are accelerating the pace of integration with existing branches, and we have a permanent presence in that geography. We will continue our aggressive but disciplined approach to our attractive pipeline as we seek market expansion and new market entry.

Our M&A pipeline has revenue potential of over $ 400 million, and we have an active dialogue with more than a dozen companies. After a deliberate break during the third quarter, we expect to resume the procurement strategy in the coming quarters, and we expect to conclude more agreements before the end of 2020. We are excited about the progress and plan to increase the pace of procurement to go benefit from our appealing pipeline. We will continue to consolidate our fragmented industry, and acquisitions will be a reliable and sustainable source of revenue growth.

Now moves to push nine; Since M&A is a critical aspect of our strategy and a power of attorney for organic growth, I will give you further insight into our gamebook that we began implementing in 2017. Over the previous two fiscal years, we have averaged $ 90 million to $ 100 million acquisition income. Unique to our industry, we finance our strategy with internally generated cash and have a very disciplined and repeatable procurement and integration framework, which results in less risk and provides a more predictable and accretive return compared to a new branch start. Gardening operates in a very local way. And if you enter a market without presence, you face inherent challenges. You will usually have to compete with a handful of strong built-in players with established relationships, and you will need to invest in new equipment and hire people with little or no income. Total start-up costs for a new greenfield branch versus an acquired branch require a similar pre-investment. Procurement provides us with an established customer base, a company with an overview of operating results, a field management team and an experienced workforce.

Now, turn to slide 10; In a typical acquisition, we start with a solid company that generates approximately 10% EBITDA margins. Over the next 18 to 24 months, we will introduce our proprietary management model, which focuses on the sales function and generates profitable growth, including increased focus on additional revenue; introduce productivity tools to improve margins, such as electronic time capture and customer relationship management; utilize our procurement expertise and national standards; and perform on cost opportunities to improve margins. The end result, in a relatively short time frame, is an improved portfolio of companies that generate EBITDA margins from the mid-teens and improved cash flow. It is worth emphasizing that acquisitions provide less risk and a more predictable and accretive return versus a new branch start. As we move through fiscal 2020 and plan for fiscal 2021, we will continue to update you on this core strategy and why we feel that our current M&A focus is truly a mandate for organic growth.

Now I will turn it to John, who will discuss our financial results in more detail.

John Feenan

Thanks, Andrew, and good morning everyone. That has changed in recent months as our country continues to respond to the COVID-19 outbreak.

At BrightView, our focus remains on serving our customers and taking care of our teams as we navigate the current environment. Let me first give a snapshot of the third quarter results on Slide 12. Total revenue for the company fell 7.5% or $ 49.1 million from $ 657.2 million the year before to $ 608.1 million in the current quarter, mainly driven by COVID-19 business effects on associated demand in the maintenance segment and project delays in the development segment.

The $ 460 million maintenance service segment revenue for the three months ended June 30 fell $ 32.1 million from $ 492.1 million the year before. Maintenance revenues of $ 454.9 million were a decrease of 6.5% compared to the previous year of $ 486.4 million. The decline in maintenance countries was mainly driven by associated demand elasticity and delays in the project with a solid revenue contribution of $ 28.6 million from acquired businesses. For the three months ended June 30, development services segments fell $ 17.2 million or 10.3% to $ 149.1 million from $ 166.3 million the year before, driven by project delays and planning changes. Although there is still a strong backlog pipeline, uncertainty surrounding COVID may lead to delays in the project and have a negative impact on our ability to install this demand.

Regarding the details of slide 13; the total adjusted EBITDA for the third quarter was $ 91 million dollars, a decrease of $ 10.9 million or 10.7% from $ 101.9 million the year before. The negative variance was largely driven by a lack of income in both segments. In the maintenance segment, adjusted EBITDA decreased by $ 7.1 million to $ 84 million, due to the previously mentioned decline in revenue, driven by additional flexibility that is mainly due to COVID-19 and is offset by aggressive cost-cutting measures. The result was a modest decrease in EBITDA margins of 20 basis points to 18.3%. In the development segment, adjusted EBITDA reduced $ 5.9 million to $ 21.1 million compared to $ 27 million in the financial year 3rd quarter 2019. The decline was driven by several profitable project surveys in the previous third quarter as well as project delays related to COVID-19. This resulted in a decrease of 200 basis points in EBITDA margins to 14.2% in the fiscal third quarter.

Operating expenses for the third quarter were down $ 2.1 million, representing 2.3% of revenue, reflecting a 20 basis point improvement over the previous year. This was mainly due to targeted cost containment initiatives. Let me now give a snapshot of our results for the nine months ended June 30 on Slide 14. Total revenue for the company fell 2.4% to $ 1.74 billion from $ 1.78 billion the year before. In the maintenance segment, revenue in nine months was $ 1.295 billion, a decrease of $ 62.9 million or 4.6% compared to 2019. Key drivers were a decrease of $ 86.2 million in snow-related revenue and COVID-19 business effects on associated demand, partially offset by a solid revenue contribution of $ 80.7 million from acquired businesses. Despite delays in the project, strong project management continued to develop growth, while revenues increased 4.9% to $ 445.5 million compared to $ 424.7 million the year before. Total consolidated adjusted EBITDA for the nine months of the fiscal year was $ 181.6 million compared to $ 213.1 million the year before.

The variance was largely driven by lower margins due to lower snow revenues and 3rd quarter softness in our maintenance support revenues. The maintenance segment's adjusted EBITDA decreased by 15.6% to $ 172.9 million compared to $ 204.8 million the year before, mainly due to the significant decline in snow removal services, and the aforementioned associated softness. As a result of the COVID-19 business break, adjusted EBITDA for the development segment decreased 2% to $ 53.9 million for the nine months ended June 30, 2020, compared to $ 55 million in the results before the year.

Corporate spending was down $ 1.5 million in the nine months, mainly in line with our expectations and reflecting the cost containment measures taken in the third quarter. As a percentage of turnover, operating expenses were 2.6%, which is in line with the previous year. Let's now go to the balance sheet and capital allocation on slide 15. Net investment expenditure was $ 42.1 million for the nine months ended June 30, down from $ 70.4 million in the first nine months of the fiscal year 2019. Net capital expenditure in per cent of turnover was 2.4% in the first nine months, down from 4% the year before. We remain diligently focused on capital expenditures as we continue to implement prudent measures to increase productivity. In the first nine months of fiscal 2020, we invested $ 86.5 million in acquisitions and reduced our net debt by $ 59 million from $ 1.17 billion to $ 1.11 billion.

Our influence rates were 4.1 times at the end of the third quarter of fiscal 2020 compared to 3.9 times at the end of the third quarter the year before, mainly due to the lower snow-related EBITDA. In the first nine months of fiscal 2020, we generated $ 119.8 million in free cash flow. This represents an increase of over 200% compared to $ 38.8 million the year before and was mainly due to our continued focus on diligently managing working capital, including accounts receivable and debt, aggressively managing our capital expenditures and a reduction in interest costs, driven by lower prices. In addition, as we mentioned under our last quarterly income, we run a largely self-insured program for employee compensation, general liability, auto liability and our medical health programs.

During the third quarter, we recorded a $ 24.1 million once-cascade fee to reflect changes in estimates and actuarial assumptions for these programs as we navigate the uncertainty of this current environment and to ensure that our reserves remain adequate and the balance remains strong. Let me look at our liquidity profile in slide 16. At the end of fiscal third quarter, we had approximately $ 182 million available under our revolver, approximately $ 29.6 million available under the accounts receivable financing agreement and $ 89.9 million in cash available in the balance sheet. reflecting cash on hand after repaying the $ 60 million bank line that opened in March at the start of the crisis.

Total liquidity as of June 30, 2020 was approximately $ 301.5 million. This compares with liquidity of approximately $ 235.5 million as of March 31, 2020, a true testament to our ability to generate cash. We also continue to have flexible and portfolio-light credit facilities with the following maturities: the financing agreement for receivables matures in February 2022, our revolver matures in August 2023, and our maturity matures in August 2025. We are very confident that we have plenty of liquidity and cash to available to not only operate BrightView efficiently, but also maintain our focus on paying down debt and continuing our accretive M&A strategy.

Let me return the call to Andrew with this.

Andrew Masterman

Thanks, John. Now turns on slide 18; Expected softness in additional services within maintenance and project delays in development led to a decrease of 7.5% of total group revenues, which was in line with the expectations we shared in May. Our free cash flow generation and contract-based business is still exceptionally strong, and we have good cash to increase the pace of acquisitions and repay debt. Despite expected continued COVID-related effects, the fundamentals of our business and industry remain strong.

Our sales and marketing strategies and structure are a formula for long-term success, and our investments in field-based sales and operations management will drive stronger new sales and result in improved client retention, while further streamlining service delivery. The investment and expansion of our sales team combined with targeted regional efforts in digital marketing has expanded our sales opportunity pipeline to its highest level in the company's history. Over time, this improved and robust pipeline was to support organic growth well before the industry average. In addition, the M&A pipeline shows no signs of slowing down and has provided a reliable source of growth for three consecutive years. We plan to utilize our strong cash position and liquidity and expect to take advantage of the attractive opportunity.

I would also like to personally thank our dedicated staff, families and partners for their resilience and commitment during these challenging times. Over 21,000 people in BrightView come to work every day to ensure that the living assets we live, work and play in are safe and beautiful. As I said before, we entered this crisis in a position of strength and expect to go out even stronger. Although we are aware of challenging macro trends and forecasts, we are optimistic about our outlook.

Thank you for your interest and attention this morning. We will now open the conversation for your questions.

Question-and-answer session

Operator

[Operator Instructions] Your first question today comes from the line of Andy Wittmann with Baird. Continue with your question

Andy Wittmann

Great. Good morning guys, and thanks for taking my questions here. Before we get started on more, I guess, basic questions, I just wanted to understand the quarter a little better and some of the adjustments, and I guess, John, in your comments you talked about the $ 24 million adjustment for your insurance liabilities, I mean that These obligations are generally liability, it is the employee's compensation, many different types of insurance that are included in these adjustments. It looks like COVID may have had some kind of impact this quarter as well. I was just wondering if you could help explain this a bit more by talking about what periods this applies to? Often with these actuarial reserves, they apply more than just this quarter, but often over a period of years, and then, sort of why there was such a large number this quarter, and if there are any implications on the accrual from the size of this adjustment here for the insurance liabilities and expenses you incur in the income statement for general liability for employee compensation, and consequently, if there is any implication that you must change the amount you incur to avoid such adjustments in the future?

John Feenan

Andy, there's a lot there. So let me bring it up. I'm sure it's on everyone's mind. First of all, as far as for what period, this is not related to past periods, this is all related to future periods. BrightView's self-insurance programs, which include employees' comp, GL, car and medical, which most companies experience significant headwinds. We are seeing increased premiums plus carrier pressure to increase deductibles and things of that kind. This is not unique to BrightView, and we have talked about this, and it is experienced in several industries. Absolutely influenced by us to look at it this quarter of COVID, and that is one of the reasons why it triggered in this quarter. We conducted a comprehensive analysis with independent third parties outside of D&T, our auditor, to look at the appropriateness of our assumptions in methodologies. We decided to record a non-cash charge of $ 24.1 million in the fiscal third quarter to increase the balance sheet to reflect the changes in estimates and actuarial assumptions for what we will see in the future, which we do not know. It's unique. It is a non-operating fee. Therefore, we felt that it was important to put it back to EBITDA, has no impact on free cash flow, and it is not related to previous periods. It will have no effect on your second question on the accrual ratio and no changes in future assumptions. So hopefully it gives you a lot more color as far as the logic and timing of this charge.

Andy Wittmann

Ok. Yes it does. I guess my follow-up is just on another of the adjustments here. In connection with it, it feels as if you took a load this quarter, so it is based on an expectation for the future. I guess the follow-up there will be, will it help the margins in the future? And then also of business integration and transaction costs, you are about $ 25 million years to date. Jeg tror at når du ga innledende veiledning, så lette du etter noe nærmere 15 millioner dollar, og jeg lurte på om du kunne snakke om hvor variansen stammer fra og hva de oppdaterte utsiktene for året er, spesielt når det gjelder det faktum at det høres ut som om du kommer til å øke din M & A-aktivitet her i fjerde kvartal?

John Feenan

Ja, et annet stort spørsmål, Andy. La meg gi deg litt farge på den ikke-gjenganger som er forklart i detalj i vår pressemelding. Vi ser faktisk en økning rundt forretningsintegrasjonen. Det er ikke overraskende knyttet til anskaffelsene våre. Så det er en stor del av det. Vi har også COVID-relaterte utgifter rundt artikler på en gang, det er en del av det. Endringene i selvforsikringsansvarsreservene gjenspeiles i dette kvartalet og antall år til dato, og jeg vil si fremover, det eneste andre engangsbeløp som vi forventer vil være relatert til M&A, som, som du vet, er høyere, og vi startet en større start, det er grunnen til at det er høyere i år kontra i fjor.

Andy Wittmann

Ok, greit det. Mitt siste spørsmål da foreløpig; Jeg hopper kanskje inn senere, er bare relatert til CARES Act og fordelen du fikk ved utsettelse av lønnsskatten, du har faktisk mye arbeidskraft, så jeg ser for meg at det er ganske betydelig. Jeg mener, gjeldene og påløpte forpliktelser økte $ 62 millioner kvartal over kvartal. And I was just wondering, I think the CARES Act is a decent part of that, but could you quantify the CARES Act payroll tax deferral specifically and other notable items inside that quarter-over-quarter increase?

John Feenan

Yes. When you look at our consolidated statement of cash flows and you see the line, accounts payable and other liabilities of $50.8 million, there's really three things in there. There's the insurance piece that I talked about, which is a big chunk of it. There's also the payroll tax deferral related to the CARES Act, and that's approximately $13 million, and I'm sure the question is, is that what you expect going forward? Pretty much, that's what we expect going forward. So there's really we're not we want to be very clear, we're not generating this cash on the back of our vendors with expensive push on our payables. There's a modest amount in there on AP, but the two big drivers of that movement are reflective of the self-insurance liability and the $13 million of payroll tax.

Andy Wittmann

Very helpful, thank you so much.

John Feenan

Yes. Thank you, Andy.

Operator

Our next question today comes from the line of Judah Sokel with JPMorgan. Please proceed with your question.

Judah Sokel

Right. Could you to how you know them good, thanks. So I wanted to know how much M&A you guys are embedding in your guidance for 4Q, so that we can get to a run rate of the underlying organic built into that guidance.

Andrew Masterman

Yes. If you look at our overall M&A pipeline, we obviously are higher than what we had said initially, right? The $60 million guide that we had overall for the year. As we spill into Q4, we expect that M&A to kind of be in the $25 million to $30 million range of revenue. It does at higher pace, kind of probably a similar kind of level to what we saw this quarter. We don't the thing is now sitting here in early August, any transactions that we might conclude before the end of the fiscal year really won't have any significant impact just as we're running out of time. So really, we have a pretty good vision as far as where that M&A comes in. The uncertainty comes around ancillary, and that's no different than the rest of the business.

Judah Sokel

Okay. Perfekt. So with that in mind, with M&A similar to 3Q and 4Q, that implies that your organic revenue declines will improve somewhat by a few points based on the guidance. So I was hoping you could give us a little bit of color into what's driving that improvement? And how much of it is stemming from underlying organic improvement in contract business versus perhaps COVID-19 impacts moderating from the third quarter?

Andrew Masterman

Yes, a good question, Judah. We're seeing kind of, overall, a very similar level of underlying operating within organic the organic business. We see slight improvements relative to improved retention, combined with our sales, what we call our net new, which is new sales retention. So that's slightly upticking. So slight underlying, I don't want to call it organic growth because the reality is this quarter versus last quarter last year, we still are expecting kind of a similar mid single-digit decline, but we are seeing beginning signs of improvements on both the contract and ancillary sites, but nothing that's going to turn it around, let's say.

Judah Sokel

Got it. And then just a final question, I was wondering if you could just talk a little bit about the kind of conversations you're having with clients around those ancillary projects that have been postponed and then same thing on the development side, did you see any improvements through the quarter and in July? Are they showing more receptivity in doing those projects? You mentioned that you're going to see organic growth challenges over the next several quarters. So I was just hoping you could help us see the cadence of those drags as we build out our models and our forecast?

Andrew Masterman

Yes. We're seeing ancillary levels. I'm not seeing a I mean, a noticeable material shift in ancillary performance versus Q3. We're seeing a steady book, but it's not at the levels that we saw prior to COVID. So we're seeing we expect a similar level of ancillary penetration to our contract base that we see in this quarter. In addition, we see some level of contract retention, which has really believed the business, and we feel it provides a great deal of stability when you look at the overall profile. We're cautious on that. I mean, given the current COVID environment, again, hotels and hospitality being not a huge part of our business, but also our driver of ancillary, and we don't see that rebounding anytime in the fourth quarter or frankly, as we look out in the first quarter to any significant measure.

On the development side, you asked that question, we're fully booked to our forecast. And it really is depending on the ability of the trades before us to get their work done, to allow us to get in, and that's almost across the board in all the regions. We're frankly almost fully booked in through our first quarter targets in 2021. So it really is coming down to, can we get in kind of the trades before us, get their work done, and can we get it done in a timely manner? We're not restricted to work in any region. It just comes down to can the business be the construction projects be completed in time as our customers have forecast.

Judah Sokel

Got it. Okay, thank you.

Operator

Our next question comes from the line of George Tong with Goldman Sachs. Please proceed with your question.

George Tong

Hi. Thanks and good morning. Ancillary services were down this quarter due to pullback in discretionary spending. Could you provide more color on that, specifically how those ancillary trends performed moving through the quarter as well as through the month of July?

Andrew Masterman

Yes, sure, George. We saw, clearly, there was a big impact in April that we saw as things really dried up. I would say, kind of starting mid-April. Because what happens is you have a tail of projects on the books, and it completed through mid-April, new projects start much slower and so I would have to say during toward the end of the quarter, mid-June to early July, I guess we could kind of say a bit of a pickup and then as you see quiet incoming as COVID crisis increased through mid-July and August, a bit of a slowdown. So I guess that gives us it's a bit of a roller coaster right now when it comes to the ancillary side of the business and kind of the surges that we see back and forth. That being said, the kind of overall, there aren't big variances relative to where our forecasts were at, and we see a fairly level across, again, 250-plus branches. So we're seeing a fairly kind of balanced approach when we look across the company, in line with for the quarter that we saw in Q3 happening also again in Q4.

George Tong

Got it, that's helpful. And then you indicated that your contract based business is at 98% of pre COVID levels, but can you talk a little bit about how the reductions in scope of work have progressed and what percentage pre-COVID is assumed in your fiscal 4Q guidance?

Andrew Masterman

Sure. Yes, it's it was assumed I'll answer the first part of the question second part first. In Q4, we expect similar levels of contract to continue. So almost 100%, whether it's 97%, 98%, 99%, I can't give that level of specificity, but I'd say it's buoyed up very close to similar levels of contract that we had in prior periods. And the first part of your question again, George?

George Tong

Yes, just how do the reductions in the scope of work had progressed?

Andrew Masterman

Yes. And the scope, we saw that really upfront. So, that happened quickly out of the gate; again, highly in the hospitality and retail segments. I'd say, in April, we saw a lot of those shifts and now as we head into the summer and into July and August, the scope shifts have really, really, really dramatically reduced. We don't see many of the alterations coming in now, which gives us a lot of predictability. So that kind of was a onetime surge that happened kind of April to mid-May. People really looking at the crisis and kind of adjusting their overall their discussions with us about what we do. And since that mid-May time, we've been able to pretty much dial that in, which gives us some confidence around how our contract book looks going out.

George Tong

Very helpful, thank you.

Operator

Your next question comes from the line of Sam Kusswurm with William Blair. Please proceed with your question.

Sam Kusswurm

Good morning, guys. Ja. In the maintenance business, I know you service corporate customers and commercial buildings. Assuming the work-from-home trend continues, are you expecting lower demand from the corporate real estate customers in the future? And do you think additional demand from the HOA side can make up for the shortfall?

Andrew Masterman

We actually don't believe that we'll see a significant drop in commercial customers because we see the trend is going to be more suburban working which, you've seen over the last several years, the trend has been more cut debts, downtown working, move toward downtown, where frankly, there isn't a lot of landscaping. As you do then move into future periods, more suburban working and attracting people to environments that have more outside amenities and environment actually is going to play to our hand, which frankly has been the trend away from that, right, in the last several years. So we actually believe commercial is going to be a fairly decent stabilizer. That and at the same time, as work-from-home, HOAs are going to be an increasing environment. And we actually have seen that with increased ancillary offsetting some of the decreased ancillary and from the other verticals that you see going out as people pay more attention to what's going on within their communities that they are spending a lot more time.

Sam Kusswurm

Fair. It's good to have both of the best worlds there. Turning more to trends, are certain regions experiencing any noticeable changes in recent maintenance demand, particularly in harder-hit areas such as Florida, Texas or California?

Andrew Masterman

Yes. When we look at the geographical impacts as far as the contract base, we have not seen a shift in, let's say, July August relative to the prior periods. We really saw more of the impact overall as you looked at adjustments of scope that might have happened early in April-May, but recently, it's been a fairly stable environment. What we had would happen, I guess, in those areas where we were hoping that we would see more open reopenings of hospitality and retail, those reopenings, which would provide upside, really have continued to remain relatively quiet.

Sam Kusswurm

I appreciate the color. Thanks, guys.

Operator

Your next question comes from the line of Ryan Gunning with Jefferies. Please proceed with your question.

Ryan Gunning

Hey, guys. This is actually Ryan Gunning on for Hamzah. Real quick on M&A, can you talk a little about what you are doing right now? Are they waiting for better multiples given the bounce back in the public market or most looking to cash out now?

Andrew Masterman

If you look at our M&A pipeline, what we see is a pretty steady line of deals that we're currently in negotiations with. I can't say it's changed dramatically from prior periods. It just continues to flow. I would say that perhaps those folks who maybe were on the sidelines, and were hoping for continued, let's say, tailwind, taking their business even more over the next several years, are looking at the realities of that perhaps some of the impacts they might have had have slowed down their growth profiles and stimulated them to go ahead and move forward with discussions around M&A. That has been the case in several of the folks that we're talking with right now. So, I would expect that to continue in kind of a slower growth or even recessionary environment is it's going to stimulate those folks who maybe were on the fence on whether they're going to go ahead and put their market put their business on the market; it's going to allow them to now perhaps take a step forward. That's probably some of the reasons we have seen a little bit of an uptick in the overall pipeline.

Ryan Gunning

Great, that's helpful. And then as a follow-up, just with the elections coming up, is there anything on your radar that we should be paying attention to regarding potential policy changes that could impact you to the upside or downside?

Andrew Masterman

No. There's really, when it comes to the election, as long as the grass still grows, which I think the election will have very little impact on whether the grass grows or landscaping continues to flourish. We will continue to be out every single day making sure anywhere in the country stays beautiful and safe.

Ryan Gunning

Great, thank you.

Operator

Our next question comes from the line of Shlomo with Stifel. Please proceed with your question.

Shlomo Rosenbaum

Can you hear me? I'm sorry.

Andrew Masterman

Yes.

Shlomo Rosenbaum

Okay, great. God morgen. Thank you for taking my questions. Andrew, I just wanted to ask you, is more of a deep dive on M&A economics in the discussion this morning. And I want to know if that's kind of a signal that this is going to be more of a focus for growth versus kind of the organic plus M&A that you had discussed for the last several years and kind of being in tandem. Is that kind of the reason why you're bringing that up a lot more now?

Andrew Masterman

Yes. I think, look, we're looking out over the next several quarters and absolutely seen the uncertainty on what we live in, believing that growth that we believe actually has a very balanced approach versus organic versus M&A, meaning that the investments to make in M&A are similar to the investments in organic when talking about new branches, that we believe that there are opportunities which may allow us to accelerate M&A as we go into fiscal 2021. So painting that picture, and showing not only that we think it's a good use of capital. It allows us to grow at similar cost levels organic, combined with kind of the natural headwinds that we're facing as an economy, will still allow us to show an ability to grow using M&A as a proxy.

Shlomo Rosenbaum

Okay. And then I thought maybe this might be for John. In the slide deck, you showed the example of like five times EBITDA multiple. Historically, whenever we talked about multiples, it's been like five to seven. Are you showing five because the pricing is going down in the environment?

John Feenan

Not necessarily, Shlomo. We're showing five because that's more indicative of the example of a smaller transaction, right? We're not wavering from our range of five to seven. We wanted to just give a very simple illustrative example of what it would look like day 1, roughly 10-ish percent EBITDA that falls in line with our Strong-on-Strong mantra that we haven't wavered on. And then just an overview of the areas that we focus on, early days to increase and improve the business to get it up from, say, 10% up to the mid-teens, but my the example of 5% was in no way indicative that all deals are at 5% excuse me, five times, excuse me.

Andrew Masterman

Yes. And the example we put out there, Sholomo, was five times to six times, I think, is what we showed on the slide and the math was five times. So then as you go forward, some projects, depending on the mix of business, depending on the capital that's needed to actually inject into a business as you look into it, every deal is definitely different, but many as you get toward larger sizes of business that tend to go up somewhat in the multiple, but I think we're firm kind of in that five to seven range, but the smaller deal is going to be smaller, the larger deal is going to be larger.

Shlomo Rosenbaum

Okay. If I could just sneak in a quick one on free cash flow. Was there any what should be kind of normalized next quarter? Really strong free cash flow this quarter, is there something that when I'm calculating that I should expect to reverse next quarter just as because there's a change in working capital that goes back the other way?

Andrew Masterman

Yes. As you know, Shlomo, we focused very hard on this area. We had very good results in Q2, very good results in Q3. When we think about the fourth quarter, I think a couple of things I want to comment on. First, if you go back to my statements that I made a couple of quarters ago, we gave a very detailed walk on our range of free cash flow expectations for this year of $100 million to $110 million. Obviously, sitting here today at $119 million, $120 million, we obviously feel good about that. When we think about the fourth quarter, we've obviously given you the starting point with our range in EBITDA. We expect our CapEx to be pretty much in line with what we did last year. Working capital could be a little bit more of a use because we could see some of those progress come in from development and things of that nature. So I'd be conservative and assume a use on our working capital for the fourth quarter. Interest is down a couple of million bucks because of lower rates year-to-year. We are going to pay some taxes in the fourth quarter. And as I said in my earlier comments, any increase in nonrecurring, which is inclusive in our guidance, would be related to M&A. That would be your quick build, but we expect a decent fourth quarter, and that's obviously going to take us north of the $120 million that we have year-to-date.

Shlomo Rosenbaum

Okay, great. Thank you. Sure.

Operator

Our next question comes from the line of Kevin McVeigh with Credit Suisse. Please proceed with your question.

Kevin McVeigh

Great, thank you. Hey I want to just follow-up on the acquisition a little bit. Is part of the stepped-up initiative is that taking advantage of a post-COVID world? Is it maybe just a structurally lower level of snowfall in the business to enhance the organic growth? Just any thoughts around that, because again, it seems like there's definitely going to be some increased emphasis on that, but again, is that just taking advantage of the current environment, or is there just maybe some structural changes in the business that you're looking to bridge the gap on?

Andrew Masterman

I think it's multiple factors. I wouldn't put it all on one, but I think one of the driving factors is, is that we do look at the investment in building a new branch from a greenfield and really critically looking at what M&A returns are that with a similar investment with low risk, is to grow via M&A. And I think that's probably one of the driving factors we believe. Using dollars that way is going to allow us to continue to build up that. That being said, we will have a continued, a very disciplined focus on maintenance land-focused acquisitions because we believe that's where we want to grow most of the business. Some might have a small development component with them, but it's going to be a maintenance land-focused deal. And it's going to primarily be in evergreen markets. So to your comment on snow, well, we absolutely will consider acquisitions that have snow components to them in our seasonal markets. We see many of the opportunities emerging in evergreen markets, which will also kind of move us more into that land growth as opposed to the snow growth from an acquisition perspective.

Kevin McVeigh

And then just are you seeing anything demographically? Obviously, there's been a pretty big shift of people leaving the cities, and are you seeing any kind of near-term trends around that, that you're positioned for or just any thoughts on that aspect of just, I guess —

Andrew Masterman

Yes. What I actually can't comment on is that the HOA business that we do continues to be quite strong. And that as you see people moving into homes, which have landscaping around them. That certainly is something which benefits our overall business. We've not seen a slowdown in the home business, and the homeowners association or the new building that we see, especially in the growth markets of Florida, Texas, California, we see that continuing to be a good source of growth, and we believe that's going to continue to be where we see focus. In addition, I have to say, parks and outdoor-type venues, which will continue to be quite strong and as well from both the development and the maintenance part of that, we see continued inquiries and continued strength in those areas, which we believe will continue to be a part of trends going forward.

Kevin McVeigh

Thank you.

Operator

Our next question comes from the line of Seth Weber with RBC. Please proceed with your question.

Gunnar Hansen

Hey, good morning guys. This is Gunnar Hansen on for Seth. I guess just to get some clarification for the fourth quarter guide, Andrew, can you just clarify what, if any of the organic growth outlook is for each segment based on some of the ancillary commentary as well as the development backlog?

Andrew Masterman

Yes. If you look at overall, we still believe in total that our land will kind of be a similar kind of the magnitude, and I'm not going to say exactly. That's why there's fairly wide band in our guide. It's still kind of that mid-single-digit year-over-year decline kind of that magnitude. I can't tell you today, whether it's trending toward the higher end or the lower end, we need to see that as the ancillary business comes through. On development, we'll probably be a little lighter as far as it will be an improvement in the decline, if you can say. And that's really dependent on how much we can get in. We have the backlog. We have the backlog to actually go in and have a fairly good quarter for development, but I can't comment exactly to where that where they're actually going to get to because literally delays are happening weekly on our when we plan to get into a project, and then we're not allowed to get in because of the trades before it's not getting done. That being said, I think development will have again, they will have relative to the year-over-year positioning. They're going to have a better quarter in the fourth quarter than they did in the third.

Gunnar Hansen

Okay. And on the cost management side, I think margins on a segment level were better than most had anticipated. I guess, with the cost actions, how much of that stability was kind of temporary cost actions versus permanent? Should we expect that as revenue and when revenue returns to growth, will those costs return? Just trying to get a sense as to how margins should progress going forward?

Andrew Masterman

Yes. There will there were certainly some shorter-term cost actions, such as the wage freezes and the 401k match and things like that, which will go back; travel and entertainment, things like that, will layer back in to a certain degree, but we're going to be very prudent. We're going to be very diligent in making sure that those costs are not going to come back in until you actually start seeing revenue coming back in. So I would say that's a very sustainable level of cost management that we have matching our revenue shortfalls that there will not be any increases coming back into this business until you start seeing the revenue improvements and the COVID-related effects dissipated.

Gunnar Hansen

Okay. And just last one on the M&A pipeline. It sounds like it's a pretty solid pipeline and with several active dialogue. I mean are these could you describe the pipeline a little bit more? I mean, are these kinds of smaller or single branch operators, or are these more larger kind of networks of branches, a little bit of context in terms of what's included and also what your preference is going forward?

Andrew Masterman

Yes. We've done two very large acquisitions in the last three years. We've done Signature Coast, we've done the Groundskeeper. Those were large top 10-type top 20-type acquisitions, multi branch, sophisticated and very strong management teams that came along with them. When we look at the pipeline going forward, it is more smaller, probably why we put the example of a smaller branch in there. These are more $5 million to $15 million type branches, single site or single branch-type organizations; strong leadership teams, kind of what we talked about in the example, the embedded local player with one maybe two, but most likely one, that's the nature of what we see, and there's multiple deals in that pipeline, so, more of the single brand type examples, less of the large multi-branch deals.

Gunnar Hansen

Sure. Okay.

Operator

Your next question comes from the line of Sam England. Please proceed with your question

Sam England

Hi guys, thanks for taking the questions. And the first one, you talked about weakness in hospitality and retail side of the business, but I wondered what level of recovery you've seen so far as the lockdowns have been eased? And I suppose how far through the recovery we are and how you're thinking about the shape of the recovery in that segment?

Andrew Masterman

Yes. It's really interesting. We saw it's interesting, we saw in May and June, some rebound in the southern economies as things opened up, preparing for an increase in visitors to some of the hotels. So we saw a bit of that rebound. I think in general there's a modulated effect right now where many of those properties are being maintained at their basic level, but the occupancy rates have not come near back to what they were at before. So, I expect really where we're at today, they are not we are not planning for a big improvement and that's included within kind of the guidance that we've kind of given out there for Q4. We expect it to be where we're at. If there was a big turnaround, we'd expect some a bit of an upside as those hospitality and retail properties start coming back to what they were before, but we don't see any signs right now that those are going to be coming back in any kind of major way in the foreseeable future.

Sam England

Okay, great. And then the next one was, given what you've seen in terms of continued weaker demand in July and early August, I just wondered whether you're planning to take further actions on cost reduction, just some of the levers that you might have demand continues to be weak in Q4?

Andrew Masterman

Yes. We will maintain absolutely all the cost actions that we've taken to be able to continue to manage the profile that we delivered in Q3 and be able to sustain a similar direction that we had in Q4, matching kind of our cost conservation with any kind of a shortfall in revenue. So there are other levers, obviously, we could always pull. Again, our declines are only as I say, we're happy about this in any way, shape or form, but our declines are kind of in the single-digit mid-single-digit for whatever reason, which we do not foresee, but for any reason, those accelerated, we would have further actions to take, but we will absolutely prudently manage our overall profile.

Sam England

Okay, great, thanks very much guys.

Operator

Your next question today comes from the line of Andy Wittmann with Baird. Please proceed with your question.

Andy Wittmann

Okay. Okay, great, thanks for that. We take the follow up here guys. With all this talk in M&A, I wanted to just give a little bit of conversation to the balance sheet here and get expectations set appropriately because earlier this year, you guys were talking about deleveraging and paying off some debt. And I understand that the snow season had a 2/10 impact on the net leverage ratio, but even withstanding that, I mean, the leverage is essentially on a ratio basis, not materially changed, and so it sounds like that should be the expectation that somewhere in this four neighborhood is probably where you're going to be operating for the next several quarters at least, and it's a little bit different than before. So I just wanted to make sure that we're all on the same page and get your latest thoughts on that.

John Feenan

Yes, Andy, this is John. I think that's very accurate, your comments. We're not going to sit here in pro forma what it would look like if we have the EBITDA from snow. I think we all know that math. Outside of that in COVID, we felt we were in a really good shape, but we've been conservative. We're holding cash right now. We could have paid down more debt, but we wanted to make sure we had ample liquidity to be opportunistic, but I think your comments about our leverage ratio being in that 3.9%, 3.8% to 4% over the next couple of quarters is probably realistic.

John Shave

Okay. Greg, I just want to make sure. Thanks.

Operator

Your next question comes from the line of Sam Kusswurm with William Blair. Please proceed with your question.

Sam Kusswurm

Hey guys, thanks for the follow-up. I want to quickly circle back to COVID impacts. What would you quantify as the overall COVID-related impact on revenues EBITDA for the quarter?

Andrew Masterman

Well, if you look at overall, I mean, clearly, we were expecting growth to occur at our overall land business. We exited Q2, growing organically at 1.9%, a little more than 2%. So if you continue that trajectory, we felt we were on that path. We thought we could actually grow that. So in the third quarter, if you look at those trajectories, we estimate the impact probably was somewhere around $75 million or so. I think if you layered that in across both development and maintenance, because we would have expected development also to be able to come in and show although when we talked about it, it was going to be a slight growth profile, but not near what we had in the first-half, but we thought combined, there was no reason there were no indications that we wouldn't have anything but slight and positive momentum of organic growth in the second quarter and development maintaining there. They're kind of continued positive profile in the third quarter. So it's all in about $75 million.

Sam Kusswurm

I appreciate the insight there. Look for the next quarter here. Thank you.

Operator

Thank you. Now and that concludes our time for questions today. I now turn the call back to the presenters for any closing remarks.

Andrew Masterman

Okay. Thank you, Operator. Once again, I want to thank everyone for participating in the call today and your interest in BrightView. We look forward to speaking with you when we report our fourth quarter results. And stay safe. Be well.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.


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