Q3 2020 Brightview Holdings Inc Earnings Call
As a reminder, this call is being recorded.
All lines have been takes time, you present any background noise.
After the speaker's remarks, there will be a question and answer session.
The earnings press releases are available on the company's website investors got bright view dotcom.
Additionally, the online Webcasts <unk> presentations flights that would be reference as part of today's discussion and a downloadable coffee is also available online.
I will now turn the call over to Brightening, Vice President of Investor Relations John Shave. Please go ahead.
Thank you operator, and good morning, before we begin I would like to remind listeners that some of the comments made today, including responses to questions.
Racial reflected in the presentation slides will be forward looking and the actual results may differ materially from those projected.
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Please refer to the company's out to see filings for more detail on the risks and uncertainties that could impact the company's future operating results in financial condition.
Comments made today will also include a discussion of certain non-GAAP financial measures.
Reconciliations to the most directly comparable GAAP financial measures and other associated disclosures are contained in the earnings release on the company's website.
Disclaimers on forward looking statements and non-GAAP financial measures.
Today's prepared remarks as well as secure.
Finally, you're not something unless otherwise stated all references to quarterly year to date. We're I know we're results are periods refer to our fiscal years ending September 30 in each respective year.
The company is presented in the auto audited results for the third quarter in nine month period ended June 30 Twentytwenty.
For more context, right views, the leading and largest provider of commercial landscaping services in the United States with annual revenues in excess of over $2 billion, approximately 10 times, our next largest competitor.
Together with our legacy companies right. It has been operating for more than 80 years third field leadership team has an average tenure of over 17 years.
By commercial landscaping services, ranging from landscape maintenance and enhancement to treat care the landscape development.
We operate for a differentiated and integrated National service model, which systematically deliberate deliver services at the local level by combining our network of more than 278 cents in development branches will the qualified service partner network.
Our branch delivery model underpins, our position as a single source and and provider to a diverse customer base at the national regional and local levels, which we believe represents a significant studied a bit babbage.
We also believe our commercial customer base understands the financial and reputation risk associated with inadequate landscape maintenance and considers our services to beat that central and Nondiscretionary.
I will now turn the call over to break you CEO Andrew Masterman.
Thank you John Good morning, everyone and thank you for joining us today.
Starting on slide four let me start by providing you with an overview of our third fiscal quarter. The nine month period ended June thirtyth.
Expectations for fourth fiscal quarter.
First I'm pleased to report all brand new branches are operational with no limitation on the scope of services.
Free cash flow generation continues to be strong during the third quarter, we generated $66.5 billion or free cash flow and during the first nine months, we generated $119.8 million or free cash flow, a 200% increase year over year.
Third compared to prior year total consolidated fiscal Q3 revenue declined 7.5% $608.1 million driven by headwinds due to covert 19.
Fourth total adjusted EBITDA for the third quarter was $91 million with a solid EBITDA margin of 15%.
Fifth inclusive of acquisitions, our contract base business remained at 98% of prior year, which helped bounced pressures we saw an ancillary revenues due to a pullback on discretionary spending.
Six net capital expenditures as a percentage of revenue for 2.4% or $42.1 billion down from 4% of revenue in the prior year period.
And finally, the results of our strong how strong acquisition strategy benefited our revenue growth in the quarter and wasn't attractive pipeline acquisitions will continue to be reliable and sustainable source of revenue growth.
Before we turn to the details of our fiscal third quarter. Let me provide you with our outlook for a fourth quarter on slide five.
We will continue to see so far in July and early August Cobot, 19 business impacts on ancillary demand in the maintenance segment and project delays in the development site.
Hoping to offset these headwinds our contract base business remains at 98% of prior year and our two largest verticals homeowners associations and commercial properties remain resilient.
As a result for our fourth quarter, we anticipate total revenues between 585 and $610 million and adjusted EBITDA between 85 and $89 million.
Turning to slide six before continuing with the discussion of our results. Once again, we want to express our thoughts to those impacted by the Cobot 19 outbreak. We continue to be extremely grateful for first responders and health care professionals.
We also remain thankful to all the central workers and throughout the entire country landscape maintenance continues to be recognized as an essential service as defined by the department of Homeland Security.
That said I must acknowledge that keeping our employees their families and our customers save remains our number one guiding principle.
As evidenced by our execution over the past several months I continue to be very proud and convinced that our differentiated focus on safety and consistent excellence in service delivery continues to shine through this difficult time and is reflected in our third quarter results.
In response to covert 19, we remain proactive about the health and safety and business continuity perspective.
In early March we were getting beaten began communicating daily critical information from the CDC to all employees will implementing branch based hygiene and standardization operating procedures and social distance in protocols.
And our development business team members continue to report directly to the job site.
And our maintenance business. Many team members now report directly to the job site and for those reporting to the branch we've reduced the number workers at dispatched review.
We're also further utilizing technology to mange, our customer touch points prohibiting not a central travel and supporting a work from home policy as applicable.
More recently as the use of masks and the based coverings has been adopted at best practice by the CDC governments and other large organizations. We have asked her team members to wear masks in the brands in the yard out in the field and in our corporate offices.
Moving now to slide seven in addition to health and safety, we are laser focused on business continuity.
Companywide, we continue to exercise the trends as we navigate through the uncertain times will quickly moving.
Opportunities to maintain our base contract service protect margins enhance cash and liquidity maintenance capital expenditures and reduced working capital.
As we mentioned on our last call as a precautionary measure in March we tapped the portion of our bank lines and also temporarily pro salaries.
Our discretionary merit increases.
Had decided for one k. matching contributions for all employees.
On the into reading most our free cash flow generation has been in January.
We have fully repaid the bank when we accessed and we currently have excellent liquidity.
In addition, our independent board members continue to be compensated exclusively in stock and other discretionary spending including capital expenditures and travel and entertainment continues to be managed print.
Typically we operate in the upper quartile of the landscaping industry, including many complex and high profile projects that require or horticultural thought leadership and expertise. We are the leading landscaping services provider across many verticals, including corporate campuses education hospitals public part.
Yes, hotels and resorts and homeowners associations.
Fortunately across all regions of the country, our two largest verticals homeowners associations and commercial properties continues to be resilient.
Let's stay at home orders have highlighted the importance of our services the millions of residents who live in communities we maintained.
Commercial and corporate campuses combined with homeowners associations represents approximately two thirds of our maintenance contract book of business.
Hospitality retail have been the most impacted verticals, but only represent about 10% of our overall maintenance contract book of business, we have a healthy and diverse mix of customers in projects and we continue to believe the resiliency of our business and our ability to meet this challenge header.
Beginning in 2008 at the start of the financial crisis, our development segment, a proactive measures to ensure our project mix will be more resilient and recessionary environments.
2008, our private public mix of work was approximately 80% private and 20% public and we had a higher exposure to new homebuilders.
Since that time, we've almost doubled our public work mix, which tends to be more resilient.
As a result today, we are more diversified and our development segment is realizing a steady pace of bookings through 2021, albeit slightly down versus prior year levels.
Opportunities for our business remain robust we're the number one player in an approximately 80 billion dollar highly fragmented industry.
As I mentioned earlier during the third quarter, we realized an overall revenue declined in the mid single digits. We will continue to operate under the premise that Kobin 19 headwinds will continue to impact ancillary demand in our maintenance segment and project delays in our development segment.
These factors will impact our ability to grow organically over the next several quarters.
Conditions remain fluid, but our quarterly results highlight the resiliency of our contract base business and reflect the positive underlying trends and our strong on strong acquisition strategy free cash flow generation and growth and liquidity.
Our team has done an incredible job meeting this challenge.
We continue to be confident we will emerge from this crisis, a better and stronger company. We'll remain focused on building our long term fundamental strengths and building superior value for stockholders.
Turning to slide eight during fiscal 2020, we have completed five acquisitions that strengthens our presence in several key markets and our strong how strong M&A strategy continues to be a reliable and sustainable source of revenue growth.
Commercial landscape. It is a highly fragmented marketplace with approximately half a million firms and over a thousand those companies competing in the upper quartile.
Our pipeline is attractive and we continue to identify strong companies that enhance our current footprint or allow us to enter regions, where we don't currently operate.
Our business is cash generative low capital intensity, and very little inventory, allowing us to consolidate the marketplace and an efficient manner.
Our horticultural knowledge and excellence and our ability to operate multiple service lines under one banner positions US well. This also affords us the opportunity to potentially expand our service lines at offerings.
Our strongest on M&A strategy. It allows us to quickly grow in both existing and new markets without reducing pricing in the marketplace.
And over time, our technology and digital tools allows us to establish stickiness and improve margin performance.
As the acquired choice our industry. We are close 19 acquisitions since January 2017, and are accelerating our pace of integration with existing branches, we havent established presence in that geography.
We will continue.
We will continue our aggressive but disciplined approach against our attractive pipeline as we seek market expansion and new market entry.
Our M&A pipeline has over $400 million in revenue opportunity and we are having an active dialogue with more than a dozen companies.
After an intentional pause during the third quarter, we expect resume our acquisition strategy over the upcoming quarters, and we anticipate closing more deals before the end of 2020.
We are excited about our progress and plan to increase our pace of acquisitions take advantage of our appealing pipeline.
We will continue to consolidate our fragmented industry and acquisitions will be a reliable and sustainable source of revenue growth.
Moving now to slide nine does M&A is a critical aspect of our strategy and a proxy for organic growth I want to providing further insight into our playbook, we began implementing in 2017.
Over the previous two fiscal years, we've averaged $90 million to $100 million of acquired revenue.
You need to our industry, we've been their strategy with internally generated cash and have a very disciplined and repeatable acquisition and integration framework, which resulted in less risk and generates more predictable and accretive returns versus a greenfield new branch start.
Landscaping operates in a very local manner and I think extra market without a presence you face inherent challenges you would typically have to compete with a handful of strong embedded players with established relationships and you have to invest in new equipment hire people with little to no revenue.
Total startup cost for a new Greenfield branch versus an acquired which require a similar upfront investment.
Acquisitions provide us with an established client base a company with a track record of operating results a field leadership team and an experienced workforce.
Now turning to slide 10 in a typical acquisition, we start with a solid company generating approximately 10% EBITDA margins.
Over the course of the 18 to 24 months, we introduced our proprietary management model.
Which focuses on the sales function and generating profitable growth, including enhanced focus on ancillary revenue.
Introducing productivity tools to enhance margins.
Such as Elektron time capture and customer relationship management.
Leveraging our procurement expertise and national scale.
And executing on cost opportunities to enhance margins.
The end result in a relatively short timeframe is an improved portfolio of business generating mid teen EBITDA margins and improved cash flow.
It's worth emphasizing the acquisitions provide less risk and more predictable and accretive returns versus a new branch serve.
As we progressed in fiscal 2020 and plan for fiscal 2021, we will continue to update you on this core strategy and why we feel in our current M&A focus is a truly approx organic growth.
Now I'll turn it over to John who will discuss our financial performance in greater detail.
Thanks, Andrew and good morning to everyone.
But just changed over the past few months as a country continues to respond to the coated 19 outbreak.
Hi, Brite view, our focus remains on serving our customers and caring for our teams as we navigate this current environment.
Let me first provide a snapshot of our third quarter results on slide 12.
Total revenue for the company declined 7.5% or $49.1 million from $657.2 million in the prior year to $608.1 million in the current quarter.
Driven principally by Cobot 19 business impacts on ancillary demand in the maintenance segments and project delays and the development segment.
Maintenance services segment revenue of $460 million, but the three months ended June thirtyth.
Decreased by $32.1 million from $492.1 million in the prior year.
Maintenance land revenue of $454.9 million represented a decrease of 6.5% compared to the prior year of $486.4 million.
The decrease in maintenance land was driven principally by ancillary demand softness and project delays with solid revenue contribution or $28.6 million from acquired businesses.
For the three months ended June Thirtyth development services segment revenues declined $17.2 million were 10.3% to $149.1 million from $166.3 million in the prior year.
Driven by project delays and scheduling changes.
Earlier as a continued strong backlog and pipeline uncertainty around cobot could cause project delays and negatively impacted our ability to install this demand.
Turning to the detailed on slide 13.
Total adjusted EBITDA for the third quarter was $91 million, a decrease of $10.9 million were 10.7% from $101.9 million in the prior year.
The negative variance was largely driven by revenue shortfalls in both segments.
In the maintenance segment, adjusted EBITDA decreased by $7.1 million to $84 million attributable to the previously mentioned revenue decline driven by ancillary softness due principally to covert 19, and offset by aggressive cost reduction actions.
The result was a modest decline in EBITDA margins of 20 basis points to 18.3%.
In the development segment, adjusted EBITDA decreased $5.9 million to $21.1 million compared to $27 million in fiscal Q3 2019.
The decline was driven by several profitable project under runs in the prior year third quarter as well as project delays related to covert 19.
This resulted in a 200 basis point decline in EBITDA margins to 14.2% in fiscal Q3.
Corporate expenses for the third quarter were down $2.1 million, representing a 2.3% of revenue, which reflects a 20 basis point improvement versus prior year.
This was principally due to targeted cost containment initiatives.
Now let me provide you with a snapshot of our results for the nine months ended June Thirtyth on slide 14.
Total revenue for the company decreased 2.4% to $1.74 billion from $1.78 billion in the prior year.
In the maintenance segment nine months revenue was 1.295 billion.
$62.9 million or 4.6% decline versus 2019.
Key drivers were an 86.2 million dollar decline in snow related revenue in covert 19 business impacts on the ancillary demand.
Partially offset by solid revenue contribution of $80.7 million from acquired businesses.
And then an element segment. Despite project delays a strong project pipeline continued to drive growth as revenues increased 4.9% to $445.5 million compared to $424.7 million in the prior year.
Total consolidated adjusted EBITDA for the nine months of the fiscal year was $181.6 million compared to $213.1 million in the prior year.
Variance was largely driven by lower margins due to lower snow revenue in Q3 softness in our maintenance ancillary revenues.
The maintenance segment's adjusted EBITDA declined by 15.6% to $172.9 million.
Compared to $204.8 million in the prior year.
Due principally to the significant decline in snow removal services.
And the ancillary softness mentioned earlier.
As a result of cobot 19 business interruptions adjusted EBITDA for the development segment decreased 2% to $53.9 million for the nine months ended June thirtyth twentytwenty versus $55 million in the prior year results.
Corporate expenses were down $1.5 million for the nine months essentially in line with our expectations.
And reflecting the cost containment actions taken in fiscal Q3.
As a percentage of revenue corporate expenses were 2.6%, which is in line with the prior year.
Let's move now to our balance sheet and capital allocation on slide 15.
Net capital expenditures totaled $42.1 million for the nine months ended June Thirtyth down from 70.4 million dollar was in the first nine months of fiscal 2019.
Net capital expenditures as a percentage of revenue were 2.4% in the first nine months down from 4% in the prior year.
We remain diligently focused on capital expenditures as we continue implementing prudent actions to increase productivity.
In the first nine months of fiscal Twentytwenty, we invested $86.5 million on acquisitions and drove down our net debt by 50 met $59 million from $1.17 billion to $1.11 billion.
Leverage ratio was 4.1 times at the end of the third quarter fiscal Twentytwenty versus 3.9 times at the end of the third quarter in the prior year.
Primarily due to the lower level of snow related EBITDA.
In the first nine months of fiscal 2020, we generated $119.8 million of free cash flow.
This represents over a 200% increase compared to 38.8 million dollar was in the prior year and was principally due to our continued focus on diligently managing our working capital, including our receivables and our payables aggressively managing our capital expenditures and a reduction in interest expense driven by lower rates.
In addition, as we mentioned during our last quarterly earnings call. We operate a largely self insured program for workers compensation general liability auto liability in our employee healthcare programs.
During the third quarter, we recorded a one time non cash charge of approximately $24.1 billion to reflect changes in estimates and actuarial assumptions for these programs as we navigate the uncertainty of this current environment and to ensure our reserves remain adequate and our back.
Balance sheet remains strong.
Let me review our liquidity profile on slide 16.
At the end of fiscal Q3, we had approximately $182 million of availability under our revolver.
Approximately $29.6 million of availability under our receivables financing agreements.
And $89.9 million of cash on hand on the balance sheet, which reflects cash on hand after paying back the $60 million Bank line access in March at the start of the crisis.
Total liquidity as of June Thirtyth 2020 was approximately $301.5 million. This compares to liquidity of approximately $235.5 million as of March 30, Onest 2020.
True Testament to our ability to generate cash.
We also continued to have flexible and covenant light credit facilities with the following maturities.
Our receivables financing agreement matures in February of 2022.
Revolver matures in August of 2023, and our term loan matures in August of 2025.
We're very confident that we have ample liquidity and cash on hand to not only run rate you effectively but also maintain our focus on paying down debt and continuing our accretive M&A strategy with that let me turn the call back over to Andrew.
Thank you John.
Turning now to slide 18.
Anticipated softness in ancillary services within maintenance and project delays in development led to a 7.5% decline in total consolidated revenue, which was inline with expectations. We shared in may.
Our free cash flow generation and contract base business remains exceptionally strong and we have ample cash on hand to increase our pace of acquisitions and pay down debt.
Despite anticipated continued quoted related impacts the fundamentals of our business and industry remains strong our sales and marketing strategies and structure our formula for long term success at our investments in field based sales and operations leadership will drive stronger new sales and result in improved.
Retention will further streamlining or service delivery.
Investment and expansion of our sales team combined with targeted regional efforts in digital marketing have grown our sales opportunity pipeline to its highest level in the company's history.
Overtime, this enhanced and robust pipeline should support organic growth well ahead of industry averages.
Additionally, our M&A pipeline shows no signs of slowing down and is delivering reliable source of growth for three years right.
We plan to utilize our strong cash position and liquidity and expect to take advantage of our attractive pipeline of opportunities.
I would also like a personal aside our dedicated employees families and partners for their resiliency and dedication during these challenging times.
Over 21000 people in revenue come to work everyday to make sure the living assets in which we live work and play are safe and beautiful.
As I said before we entered this crisis in the position of strength and expect to exit even strong.
Although we are mindful of challenging macroeconomic trends and forecasts, we are optimistic about our prospects.
Thank you for your interest if your attention. This morning, we will now open the call for your questions.
Ladies and gentlemen.
Ask a question.
Please go ahead, John and the number one on telecom.
Please limit yourselves to one question and one follow up till now other participants time for questions.
If you have a further question you May again press star one two regions.
Your first question today comes from the line and with Baird. Please proceed with your question.
Great. Good morning, guys and thanks for taking my questions here before we get started on more fundamental questions I just wanted to understand the quarter a little bit vendor.
And some of the adjustments.
Yes, John in your comments, you talked about the $24 million of adjustment for your insurance liabilities.
I mean, those liabilities our general liability those are worker compensation lot of different kinds of insurance that factor into that adjustment.
It looks like Cove admit Hudson sort of impact this quarter as well I was wondering if you could help explain this a little bit more bye.
Talking about which periods. This applies to often times of fees actuarial reserves. They will applies to more than just this quarter, but oftentimes over a period of years.
And so kind of why it was such a big number this quarter.
And then if theres any implication on the accrual rate from the size of this adjustment here.
For the insurance liabilities expenses that you're accruing to the income statement for general liability for workers compensation.
Accordingly, if theres any implication that you need to change the amount that you're accruing to for these kind of adjustments in the future.
Hey, Andy Good morning, there's a lot in there so let me address that I'm sure. It's on everybody's mind.
First and foremost as far as what periods. This is not related to prior periods. This is all related to.
Future periods.
Great be self insurance programs, which is inclusive.
Of our workers comp GL auto and medical.
Like most companies is experiencing significant continued headwinds.
We're seeing increased premiums plus carrier pressure to increase deductibles and things of that nature.
This is not unique to break view and we've talked to others and it's being experienced across multiple industries.
Absolutely.
Impacted.
For us taking a look at it this quarter by by Cobot and Thats one of the reasons at a triggered this quarter, we didnt extensive analysis with independent third parties.
Outside of DMT, our auditor to look at the appropriateness of our assumptions and methodologies.
We decided.
It's a recorded a non cash charge of 24.1 in fiscal Q3 to increase our balance sheet reserves.
To reflect the changes in estimates and actuarial assumptions for what we're going to see in the future, which we don't know it's nonrecurring nonoperational charge. Therefore, we felt it was important to add it back to EBITDA has no impact to free cash flow and it's not related to to prior periods.
It will have no impact on your other question.
On the accrual rates and no changes in future assumption. So hopefully that gives you.
A lot more color as far as.
The logic and the timing of that charge.
Okay.
Yeah. It does I guess.
A follow up is just and another one of the adjustments here.
I guess related to that one.
Feels like because you took a charge this quarter it's Rick.
It's it's.
Based on the station for the future I guess, maybe a follow up there would be does it help the margins in the future and then also on the on that business integration and transaction costs, you're about $25 million year to date I think when you gave initial guidance.
We're looking for something closer to 15 I was wondering if you talk about where the variance stemmed from and what the updated outlook for the year as particularly as it relates to the fact that it sounds like you and me ramping up your M&A activity here in the fourth quarter, yet another great question and let me give you some color on on the nonrecurring.
As explained in detail in our in our press release.
We're actually seeing an increase around the business integration that's not surprising.
Related.
To our acquisitions.
So that's that's a big part of it.
We also have.
Our corporate related expenses around one time items.
It's part of it the changes in the in the self insurance liability reserves.
As reflected in this quarter in the year to date number and I would say going forward. The only other nonrecurring charge that we would expect would be related to our M&A, which as you know is higher and we got off to a bigger started thats why its higher this year versus last year. Okay.
Got it but my last question then for now I might jump in later, it's just related to the cares Act and the and the benefit that you got some to the payroll tax deferral, yes, you have a lot of flavor. So I imagine it's fairly significant I mean, your your payables in your accrued liabilities were up $62 million quarter over quarter.
I was just wondering I think the cares axis is a decent part of that but could you quantify the cures act payroll tax deferral, specifically and other notable items inside that quarter over quarter increase yeah. When you look at our consolidated statement of cash flows and you see the line account accounts payable in other liabilities.
As of 50.8 million.
This is really.
Three things in there there is the insurance piece that I talked about which is a big.
Chunk of it is also the payroll tax deferral related to the care Zack.
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 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 extensive push on our payables is a modest amount in there on HCP, but the two big drivers of.
That.
Moving to are reflective of the self insurance liability and the 13 million payroll tax.
Very helpful. Thank you so much.
Thank you Andy.
Your next question today comes from the line of discipline.
Can you Morgan please.
Please proceed with your question.
Right.
Good Jude.
Got it. Thanks, So I wanted to know how much M&A.
Our embedding in your guidance for for Q. So that we can get to a run rate and the underlying organic built into that guidance.
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 mean spill into.
Q4, we expect that M&A to kind of be in that.
$25 million to $30 million range.
Revenue.
It does that higher pace, probably a similar kind of levels, what we saw this quarter.
We don't think is now sitting here in early August any any transactions that we might conclude before the end of the fiscal year really won't have any significant impact just running out of time.
So really we have a pretty good.
Vision as far as where that M&A comes at the the uncertainty comes around the ancillary.
No different than the rest of the business.
Okay, perfect. So with that in line with M&A similar to three Q4 Q that implies that your organic revenue declines will will improve somewhat by a few points based on the guidance I was hoping you could give us a little bit of color into what's driving that improvement how much of it is stemming from.
Underlying.
Organic improvement.
Correct.
Great.
Okay.
Okay.
Thanks.
Yes.
Good question do that 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 amounted to retention. So thats slightly upticking, so slight underlying I don't want to call. It.
Organic growth as reality is quarter versus last quarter last year, we still are expecting kind of a similar mid single digit.
Decline it, but but we are seeing beginning signs of improvement of both.
The contract and ancillary sites, but nothing nothing.
It's going to turn it around site.
Yes.
What about.
Kind of conversations you're having.
With clients around those ancillary projects that have been that had been postponed and same thing on the development side did you see an improvement through the quarter and in July are they selling more receptivity.
In doing that projects, you mentioned that you're going to see organic growth challenges on the next several quarters I was just hoping you can help us see the cadence.
Ladies drag.
So we can as we build out our models in our forecast. Thanks, Yes, we're seeing ancillary levels not seen the dramatic noticeable material shift and ancillary performance versus Q3, we're seeing.
Steady book, but it's not at the levels that we saw prior to code. So we're seeing that we expect a similar level of ancillary Penn call penetration.
To our contract base that we see and in this quarter. In addition, we see some level contract retention.
Which has really believes the business and we feel provides great deals stability. When you look at the overall for the overall profile.
Cautious on that I mean, given the current covance environment.
Sales and.
Hospitality being being no huge part of our business, but also a driver of ancillary we don't see that rebounding anytime in the in the fourth quarter or frankly, as we look up the first quarter of 20 significant matter.
On the development side, you asked that question, we're fully booked.
As to our forecasts and it really it really is depending on the ability to trades before us to get their worked.
To allow us to get in.
Thats almost across the board and all the regions, where frankly almost fully booked into our first quarter targets.
In 2021, so it really is coming down to can we get into the trades, but for us because their work done and can we get it done timely manner, we're not restricted.
To work in any region. It just comes down to Ken Ken the business be.
Structured projects be completed in time as our customers a forecast.
Got it okay. Thank you.
Okay.
Your next question comes from the line of George Tong with Goldman Sachs. Please proceed with your question.
Hi, Thanks, 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 before moving through the quarter as well as through the month of July.
Yes sure George.
We saw clearly there was a big impact in April that we that we saw as things go really dried up with I would say it started in mid April because what happened is you have a tale of projects on the Bush.
Completed through mid April new projects start much slower and so I would have to say during during towards the ended the quarter mid June too early July I guess, we just see a bit of a pick up and as you see going coming as equipment prices increase through mid July and August a bit of a slowdown so.
So I guess that gives us is a bit of a rollercoaster right now when it comes in the ancillary side of the business and kind of the surges that we see back and forth that being said kind of overall they are big variances relative to where our forecast rat and we see a fairly level across 250 plus branches. So we're seeing a fair.
Early kind of balanced approach, we look across the company in line with with for the quarter than we saw in Q3 happening also again Q4.
Got it that's helpful. And then you indicated that your contract base business is at 90% of pre Kobin levels.
Can you talk a little bit about how the reductions in scope of work have progressed and what percentage pre cobot is assumed in your fiscal Fourq you guidance.
Sure.
Yes, it's.
It was assumed it also as the first for the question since our first in Q4, we expect similar levels of contracted so.
Almost 100%, whether it's 97 that 99.
Yes, again give that well so specificity, but I'd say it is buoyed up very close to similar levels of contract that we had that we have in prior periods.
And so in the first part of the question again George.
Yes, just how the reductions in the scope of work and protocols, 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 of this scope shifts have really.
Really really dramatically reduced we don't see many many of the alterations coming in now which gives us a lot of predictability. So that kind of was a onetime surge that happened April to mid may have people really looking at the crisis and kind of adjusting their overall there are discussions with us, but 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 the contract books loaned out.
Very helpful. Thank you.
Your next question comes from the line up.
And.
With William Blair. Please proceed with your question.
Good morning, guys.
Yes, and the maintenance business I may serve as corporate customers and commercial buildings, assuming a 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 nature waste side can make up for the shortfall.
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 as you've seen over the last several years the trend has been more.
Dense downtown working move towards downtown where frankly, there is the low end statement.
As you build and move into future periods more suburban working and attracting people to environments that have more outside amenities in environments 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.
These stabilizer that began at the same time as work become h. ways are going to be an increasing environment and we actually have seen that with increased ancillary offsetting some of the decreased ancillary and some of the other verticals.
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.
They're both vessels there.
Good morning trends are certain regions experiencing any noticeable changes in recent maintenance demand, particularly in harder hit areas, such as Florida, Texas and California.
Yes, when we look at the geographical impacts as far as the contract base, we have not seen.
Just as the scope that might have happened early in April may, but recently, it's been a fairly stable environment.
Well, we had with what's happened 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.
Appreciate the color thanks, guys.
Thank you Sir.
Your next question comes from the line of.
In the dark Jefferies.
Please proceed with your question.
Hey, guys that sexy Ryan going on for Honda.
Real quick on that.
If you're doing right now are they waiting for better multiples given the bounce back in public market or most looking to cash out now thanks.
If you will get our M&A pipeline.
We see is a pretty steady.
As a steady line of deals that were that were currently in negotiations will I can't say, it's changed dramatically from prior periods.
It just continues the flow.
I would say that perhaps those folks who mid were on the sidelines and we're hoping for continues.
Let's say tailwind taking their business even more over the next several years are looking at the realities of.
That that perhaps some of the impacts they might have had.
Slowed down their growth profiles.
As stimulated.
To go ahead move forward with discussions around M&A.
That has been the cases several of the folks that were talking with right now so I wouldn't expect that to continue and it kind of a slower growth or even recessionary environment is going to stimulate those folks who maybe we're out of offensive whether they're going to go ahead and put their market up with a business a market is going to allow them to no.
No perhaps take a step forward that's probably some of the reason we have seen a little bit of an uptick in the overall pipeline.
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 a potential policy changes that could impact you to the upside or downside.
No there is really when it comes to the elections as long as a as long as addressable grows we.
We'll have very little impact on whether the grass grows or landscape continues to flourish. We will continue to be out every single day, making sure anywhere in the country stays beautiful insight.
Great. Thank you.
Okay.
Your next question comes from the line.
Hey, Paul Sorry. Please proceed with your question.
Can you hear me I'm sorry.
Yes, yes.
Great Good morning.
Thank you for taking my questions Hey, Andrew I just wanted to ask you is more of a deep dive on M&A economics in the discussion. This morning, What's you know if that's kind of a signal that this is going to be more of a focus for growth versus.
No.
Organic plus M&A that you had discussed for the last several years kind of being in tandem.
Is that kind of the reason why why you're bringing that up a lot more now.
Yes, I think you look we're looking out over the next several quarters and absolutely.
Seen the uncertainty and what we live in believing that growth that we believe actually has a very balanced approach versus organic versus M&A, meaning the investments to make in M&A are similar to the investments inorganic when you're talking about new branches that we believe that there are opportunities which.
May allow us to accelerate M&A as we as we go into fiscal 2021.
So opinion that picture.
Showing that only that that we think it's a good use of capital. It allows us to grow at similar cost levels organic combined with the natural headwinds I think we're facing as an economy.
We still that allow us to show.
An ability to grow using the M&A as a proxy.
Okay and then.
I thought maybe this might be for John in the slide deck you showed the examples like five times EBITDA multiple historically whenever we talked about multiples has been like five to seven you shown five because the pricing is going down in the environment.
Not necessarily Shlomo, we're showing five because it's more indicative of an example of a smaller transaction.
Right, we were not wavering from our range or five to seven we wanted to just give a very simple illustrative example.
What it would look like day, one roughly tenish percent EBITDA at called inline with our strong is strong.
Monitor that we Havent wavered on and then just to have an overview of.
The areas that we focus on early days to increase and improve the business to get it up from.
Ill say, 10% up to that to the mid teens, but my example of 5% was a no way way indicative that all deals or a 5% by time, so excuse me five to our excuse me.
An example, we put out there. So it was five to six times I think thats, what we showed on the slide.
And now.
And the math was five but then as you as you go forward.
Some projects depending on the mix of business, depending on the capital is needed to actually inject into a business as you look into it.
Every deal is definitely different.
But many right as you get towards larger sizes of businesses tend to go up somewhat and.
In the multiple.
I think we're from kind of in that five to seven range, but smaller deals going to be smaller or larger deals going to be larger.
Okay. If I could just sneak in a quick one in free cash flow was there any what should we kind of normalize next quarter over quarter really strong free cash flow. This quarter is there something of that when I'm calculating that I should expect to reverse next quarter, just as a because there's a change of working capital that dead date goes back the other way.
Yes.
As you know Shlomo we focus very hard on this area. We had very good result into two very good results in Q3.
When we think about you know.
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 a range of free cash flow expectations for this year.
100 to 110, obviously sitting here today at 119 or 20.
We obviously feel good about that when we think about the fourth quarter. We've obviously, giving you the starting point with our within a range and 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 projects come in from development and things of that nature that'd be conservative in Tsum Tsum.
Use on our working capital for the fourth quarter interest is down a couple of million Bucks because of lower rates year over year, we are going to pay some taxes in the fourth quarter and as I said in my earlier comment any increase in nonrecurring, which is inclusive in our in our guidance would be related to M&A that that would be your quick build but we.
Expect decent fourth quarter, and that's obviously going to take us north of the 120 that we have year to date.
Okay, great. Thank you.
Thanks.
Your next question comes from the line of Kevin.
With credit Suisse.
Please proceed with your question.
Great. Thank you Hey, I wonder just to follow up on the acquisition a little bit.
Is set up initiative.
He said taking advantage of opposed scolded world is it.
Structurally lower level of snow fall in the business.
Enhance the organic growth just any thoughts around that it seems like games.
We're going to be some increased emphasis on that but again is that just.
And it to the current environment or is there maybe some structural changes in the business you're looking to bridge the gap.
I think is multiple factors.
But it all on one, but but I think one of the driving factors is that we we do look at the investment and building a new branch from a greenfield and it really critically looking at what M&A returns are that with a similar investment low risk is to grow via M&A.
That's probably one of the driving factors.
I believe using dollars that ways and allow us to continue to build up but that being said we will have a continued very disciplined focus on maintenance land focused acquisitions.
We believe Thats, 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 focus deal is going to primarily be in evergreen markets. So to your comment on snow well, we absolutely will consider acquisitions that have so components, it up and our seasonal markets.
We see many of the opportunities emerging in evergreen markets, which will will also.
Kind of move us more is that land to growth as opposed to this no growth from an acquisition perspective.
And then just are you seeing anything demographically, obviously the sand.
Do you think shifted people leave the cities and seeing any kind of near term trends around that you positions for just any color on.
Aspect of that's taking place.
What I would absolutely can comment on is that the h. away business that we do continues to be quite strong and that as you see people moving into homes, which have landscaping around that that certainly see is something which benefits. Our overall business, we've not seen a slowdown.
In the home business.
Homeowners association or the new buildings that we see especially in 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 say parks.
And the outdoor type venues, which we continue to be quite strong in as well from both the development and have made as part of that we see continued inquiries have continued strength in those areas, which we believe we'll continue to be a part of trends going forward.
Yes.
Thank you.
Your next question comes from the line of Butler with RBC.
I think with your question.
Hey, Good morning, guys is is that country I can offer stat I guess just to just to get some clarification for the fourth quarter Guide Andrew or can you just clarify what if any the organic.
Growth outlook is for each segment based on some of that ancillary commentary as well the development backlog.
Yes, if you look at overall, we still believe in total that our land will kind of be a similar kind of kind of magnitude and I'd like to say exactly that that's why there's a fairly wide bands in our guide is still kind of that mid single digit.
Year over year decline.
Got it kind of that magnitude I can't say they would set towards the higher end to the lower end, we need to see that is the ancillary business comes through development.
We will probably a little lighter as far as it will be an improvement.
In the decline in sight and that's the that's really dependent on how much we get it we have the backlog we have the backlog to actually go in that have a fairly good quarter for it for development, but I can't comment exactly to where that where they're trying to get too because literally delays are happening a weekly on our when we apply.
Landing it into a project and then we're not allowed to get it because of the trades before its marketing.
That being said I think development will have.
They will let relative to the year over year positioning they're going to have a better for the fourth quarter than they did.
Okay, Thanks, and on the cost management side at margins on a segment level were better than most had anticipated.
I guess, what the cost actions how much of that.
Stability was kind of temporary cost actions versus permanent.
Should we expect that AD revenue and one revenue.
Turns to grow.
Those cost returns just trying to get a sense as to how Martin should progress going forward. Yes. There will there were certainly some shorter term cost actions such as the wage freezes in the four one k. matching.
And things like that which will go back travel and entertainment things like that will layer back into a certain degree, but we're going to be very crude we're going to be very diligent and making sure that those costs are not going to come back end until you actually start seeing revenue coming back. So I would say, it'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 revenue improvements and the coded related effects dissipate.
Okay. Thanks, and just last one on the M&A pipeline sounds like it's pretty solid pipeline.
Several active dialogue I mean.
Are these could you describe the pipeline a little bit more I mean are these kind of smaller single branch operators or are these more.
Larger kind of network branches, a little bit of context in terms of sure sure.
And also what are your preference is going forward.
At least on two very large acquisitions and last three years, we done signature coast, we've done the groundskeeper.
Those were those were large top 10.
20 type acquisitions, multi branch sophisticated and very strong management teams.
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 are these are more $5 million to $15 million type branches of single site or a single branch type organizations strong leadership teams kind of what we talked about an example, the embedded local player one.
Maybe too, 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 brands type examples less less so the large multi branch deals.
Okay.
Your next question comes from the line Sandy.
Please proceed with your question.
Thanks for taking the questions. The first one on you talked about weakness in off kind of came retail onto the business by one did walk levered up recovery you've seen so far is the knockdowns Vinnie.
How far through the recovery, we are and how you're thinking about the shape of the recovery in that segment.
Yeah, It's really interesting we saw it's interesting you saw in May and June some rebound in the southern.
Economies as as things opened up preparing for an increase in.
The increase in visitors to some of the hotels.
So we saw a bit as everybody I think there's a general there is a modulating effect right now where many of those properties are being maintained to the basic level, but the occupancy rates have not near back to what they were at before so I expect really where we're at today, they're not where we're 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 we expected to be where we're at if there was a big turnaround we expect we'd expect some a bit of an upside.
As those hospitality and retail.
Property is 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.
Okay, Great and then the next homeless given what we've seen intensive continued weak demand in July and August I, just wondered whether you're planning to take their actions on cost reduction and just some of that leverage that you might have.
Continues to be week in Q4.
We will 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 Q4 matching kind of our cost conservation with any shortfall umbrella. So there are other levers obviously, we could always full again our declines are only.
As I say, we're happy about that in any way shape or form, but our declines are they going that single digit mid single digit if for whatever reason, which we do not foresee by that for any reason those accelerated we would have further actions to pay but we will absolutely prudently manage for overall profile.
Okay, great. Thanks, your most guys.
Your next question.
The line.
Eric.
My question.
Okay.
Great. Thanks for letting you ticked up a follow up here guys.
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 and.
I understand that the snow season had a two tense impact on the net leverage ratio, but even even with standing that I mean, the leverage is essentially incentive ratio basis not materially changed.
So it sounds like that should be the expectation that somewhere in this for neighborhood, it's probably we're going to be operating for the next several quarters at least.
Little bit different than before so I just wanted to make sure that we're on the same page and get your latest thoughts on that.
Yes, Andy This is John I think Thats I think it's very accurate.
Your comments.
When I can sit here and pro forma.
What I would look like if we could have EBITDA firms from snow I think we all know that math.
Outside of adding in Kobin, we focus we're in really good shape, but we've been conservative we're holding cash right now.
We could have paid down more debt, we wanted to make sure we had ample liquidity to be opportunistic.
What I think your comments about our leverage ratio being in that.
Yes.
The re 938 to four over the next couple of quarters is probably realistic.
Okay, Great I, just wanted to make sure. Thanks.
Your next question comes from the line.
With.
Thanks for taking my question.
Hey, guys. Thanks, a follow up I wanted to Cook, we circle back to Kevin It impacts.
What would you quantify the overall cobot related impact on revenues and EBITDA for the quarter.
Well, if you look at overall and clearly we were expecting.
To occur at our overall land business, we exited Q2 growing organically at 1.9 little more the 2%.
So if you add 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 trajectory as we estimate the impact probably was somewhere around $75 million are so I think you'd layers that it across both development and maintenance because we would have expected development also to be able to come in and show April. Although we will we talked about it was 30 slight growth growth profile very been up near what we have the first half.
But we thought combine there was no reason to there were no indicates that we wouldn't have anything but.
Slight positive momentum up organic growth in the second quarter and development maintaining their kind of continued positive.
Profile for the third quarter. So it's all about 75 minutes.
Awesome I appreciate the inside there good luck when export here.
Thank you. Thank you.
That concludes our time for questions today, I now turn call back to the presenters for any closing remarks. Okay. Thank you operator, once again I want to thank everyone for participating in the call today and your interest in bright.
We look forward to speaking with you in reported fourth quarter results and stay safe.
Well.
Concludes today's conference call. Thank you for your participation.
By now disconnect.
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