Good morning, and welcome to BrightView's 2020 Third Fiscal Quarter Earnings Conference Call. As a reminder, this call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. The earnings press release is available on the company's Web site, investor.brightview.com. Additionally, the online webcast includes the presentation slides that will be referenced as part of today's discussion, and a downloadable copy is also available online. I will now turn the call over to BrightView's 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 and information reflected in the presentation slides, will be forward-looking, and the actual results may differ materially from those projected. Please refer to the company's SEC filings for more detail on the risks and uncertainties that could impact the company's future operating results and 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 Web site. Disclaimers on forward-looking statements and non-GAAP financial measures apply to today's prepared remarks as well as the Q&A. Finally, unless otherwise stated, all references to quarterly, year-to-date or annual results or periods refer to our fiscal years ending September 30 in each respective year. Today, the company is presenting the unaudited results for the third quarter and nine-month period 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 over $2 billion, approximately 10 times our next largest competitor. Together with our legacy companies, BrightView has been operating for more than 80 years, and our field leadership team has an average tenure of over 17 years. We provide commercial landscaping services ranging from landscape maintenance and enhancement to tree care to landscape development. We operate through differentiated and integrated national service model, which systematically deliver services at the local level by combining our network of more than 270 maintenance and development branches with a qualified service partner network. Our branch delivery model underpins our position as a single source end-to-end provider to a diverse customer base at the national, regional, and local levels, which we believe represents a significant competitive advantage. We also believe our commercial customer base understands the financial and reputational risk associated with inadequate landscape maintenance, and considers our services to be essential and nondiscretionary. I will now turn the call over to BrightView's 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 30, and expectations for our fourth fiscal quarter. First, I'm pleased to report all BrightView branches are operational with no limitation on the scope of services. Second, free cash flow generation continues to be strong. During the third quarter, we generated $66.5 million of free cash flow, and during the first nine months, we generated $119.8 million of free cash flow, a 200% increase year-over-year. Third, compared to prior year, total consolidated fiscal Q3 revenue declined 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, inclusive of acquisitions, our contract-based business remained at 98% of prior year, which helped balance pressures we saw in ancillary revenues due to a pullback on discretionary spending. Sixth, net capital expenditures as a percentage of revenue were 2.4% or $42.1 million, down from 4% of revenue in the prior year period. And finally, the results of our Strong-on-Strong acquisition strategy benefited our revenue growth in the quarter and with an attractive pipeline, acquisitions will continue to be a 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 our fourth quarter on slide five. We have continued to see, so far in July and early August, COVID-19 business impacts on ancillary demand in the Maintenance segment and project delays in the Development segment. Helping to offset these headwinds, our contract-based business remains at 98% from 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 million and $610 million and adjusted EBITDA between $85 million 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 COVID-19 outbreak. We continue to be extremely grateful for first responders and healthcare professionals. We also remain thankful for all essential workers, and throughout the entire country, the 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 safe 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 in this difficult time and is reflected in our third quarter results. In response to COVID-19, we have remained proactive from both the health and safety and business continuity perspective. In early March, we began communicating daily critical information from the CDC to all employees, while implementing branch-based hygiene and sanitization operating procedures and social distancing 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 reporting to the branch, we have reduced the number of workers at dispatch per vehicle. We are also further utilizing technology to maintain our customer touch points, prohibiting nonessential travel and supporting a work-from-home policy as applicable. More recently, as the use of masks and face coverings has been adopted as best practice by the CDC, governments and other large organizations, we have asked our team members to wear masks in the branch, 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 prudence as we navigate through uncertain times, while quickly moving on opportunities to maintain our base contract service, protect margins, enhance cash and liquidity, manage capital expenditures and reduce working capital. As we mentioned on our last call, as a precautionary measure, in March, we tapped a portion of our bank lines and also temporarily froze salaries, deferred discretionary merit increases and suspended 401(k) matching contributions for all employees. In the intervening months, our free cash flow generation has been exemplary. We have fully repaid the bank line 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 prudently. Typically, we operate in the upper quartile of the landscaping industry, including many complex and high-profile projects that require our horticultural thought leadership and expertise. We are the leading landscaping services provider across many verticals, including corporate 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 stay-at-home orders have highlighted the importance of our services to the millions of residents who live in communities we maintain. Commercial and corporate campuses, combined with homeowners associations represent approximately two-thirds of our maintenance contract book of business. Hospitality and 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 and projects, and we continue to believe in the resiliency of our business and our ability to meet this challenge head-on. Beginning in 2008, at the start of the financial crisis, our Development segment took proactive measures to ensure our project mix would be more resilient in recessionary environments. In 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 have 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 are the number one player in an approximately $80 billion, highly fragmented industry. As I mentioned earlier, during the third quarter, we realized an overall revenue decline in the mid-single digits. We will continue to operate under the premise that COVID-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-based business and reflect the positive underlying trends in our Strong-on-Strong acquisition strategy, free cash flow generation and growth in 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, while remaining focused on building our long-term fundamental strength and building superior value for our stockholders. Turning to slide eight; during fiscal 2020, we have 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 landscaping is a highly fragmented marketplace with approximately 0.5 million firms and over 1,000 of 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, with low capital intensity and very little inventory, allowing us to consolidate the marketplace in 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 and offerings. Our Strong-on-Strong M&A strategy 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 acquirer of choice in our industry, we have closed 19 acquisitions since January 2017 and are accelerating our pace of integration with existing branches where we have an established presence in that geography. 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 to 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 to 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; since M&A is a critical aspect of our strategy and a proxy for organic growth, I want to provide you further insight into our playbook that we began implementing in 2017. Over the previous two fiscal years, we have averaged $90 million to $100 million of acquired revenue. Unique to our industry, we fund our strategy with internally generated cash and have a very disciplined and repeatable acquisition and integration framework, which results in less risk and generates more predictable and accretive returns versus a greenfield new branch start-up. Landscaping operates in a very local manner. And if you enter a 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 and hire people with little to no revenue. Total start-up costs for a new greenfield branch versus an acquired branch 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 next 18 to 24 months, we introduce our proprietary management model, which focuses on the sales function and generating profitable growth, including an enhanced focus on ancillary revenue; introducing productivity tools to enhance margins, such as electronic 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 time frame, is an improved portfolio of business generating mid-teen EBITDA margins and improved cash flow. It's worth emphasizing that acquisitions provide less risk and more predictable and accretive returns versus a new branch start-up. As we progress 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 proxy for 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. What has changed over the past few months as our country continues to respond to the COVID-19 outbreak. At BrightView, 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 COVID-19 business impacts on ancillary demand in the Maintenance segment and project delays in the Development segment. Maintenance Services segment revenue of $460 million for the three months ended June 30, 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 of $28.6 million from acquired businesses. For the three months ended June 30, Development Services segment revenues declined $17.2 million or 10.3% to $149.1 million from $166.3 million in the prior year, driven by project delays and scheduling changes. While there is a continued strong backlog pipeline, uncertainty around COVID could cause project delays and negatively impact our ability to install this demand. Turning to the details on slide 13; total adjusted EBITDA for the third quarter was $91 million, a decrease of $10.9 million or 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 COVID-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 underruns in the prior year third quarter as well as project delays related to COVID-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 30 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, a $62.9 million or 4.6% decline versus 2019. Key drivers were an $86.2 million decline in snow-related revenue and COVID-19 business impacts on ancillary demand, partially offset by solid revenue contribution of $80.7 million from acquired businesses. In the Development 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. The variance was largely driven by lower margins due to lower snow revenue and 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 COVID-19 business interruptions, adjusted EBITDA for the Development segment decreased 2% to $53.9 million for the nine months ended June 30, 2020, 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 30, down from $70.4 million 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 2020, we invested $86.5 million on acquisitions and drove down our net debt by $59 million from $1.17 billion to $1.11 billion. Our leverage ratio was 4.1 times at the end of the third quarter of fiscal 2020 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 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 and our employee healthcare programs. During the third quarter, we recorded a onetime non-cash charge of approximately $24.1 million 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 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 agreement 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 accessed in March at the start of the crisis. Total liquidity as of June 30, 2020, was approximately $301.5 million. This compares to 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 covenant-light credit facilities with the following maturities: our receivables financing agreement matures in February of 2022, our revolver matures in August of 2023, and our term loan matures in August of 2025. We are very confident that we have ample liquidity and cash on hand to not only run BrightView 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 in line with expectations we shared in May. Our free cash flow generation and contract-based business remains exceptionally strong, and we have ample cash on hand to increase our pace of acquisitions and pay down debt. Despite the anticipated continued COVID-related impacts, the fundamentals of our business and industry remains strong. Our sales and marketing strategies and structure are a formula for long-term success, and our investments in field-based sales and operations leadership will drive stronger new sales and result in improved client retention, while further streamlining our service delivery. The 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. Over time, this enhanced and robust pipeline should support organic growth well ahead of industry averages. Additionally, our M&A pipeline shows no sign of slowing down and has delivered a reliable source of growth for three years running. 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 to personally thank our dedicated employees, families and partners for their resiliency and dedication during these challenging times. Over 21,000 people in BrightView come to work every day 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 a position of strength and expect to exit even stronger. Although we are mindful of challenging macro trends and forecast, we are optimistic about our prospects. Thank you for your interest and for your attention this morning. We will now open the call for your questions.

Your first question today is from Andy Wittmann 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 better and some of the adjustments, and I guess, John, in your comments you talked about the $24 million of adjustment for your insurance liabilities. I mean those liabilities are general liability, those are workers' compensation, a lot of different kinds of insurance that factor into that adjustment. It looks like COVID may have had some sort of impact this quarter as well. I was just wondering if you could help explain this a little bit more by talking about which periods this applies to? Oftentimes with these actuarial reserves, they apply to more than just this quarter, but oftentimes over a period of years, and so, why it was such a big number this quarter, and then if there's any implication on the accrual rate from the size of this adjustment here for the insurance liabilities and the expenses that you're accruing to the income statement for general liability for workers' compensation, and accordingly, if there's any implication that you need to change the amount that you're accruing to avoid these kind of adjustments in the future?

Andy, 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 period, this is not related to prior periods, this is all related to future periods. BrightView's self-insurance programs, which is inclusive of our workers' comp, general liability, 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 BrightView, and we've talked about this, and it's being experienced across multiple industries. It absolutely impacted us in this quarter by COVID, and that's one of the reasons that it triggered in this quarter. We did an extensive analysis with independent third parties outside of our auditor to look at the appropriateness of our assumptions and methodologies. We decided to record a non-cash charge of $24.1 million 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. It's a non-operational charge. Therefore, we felt it was important to add it back to EBITDA; it has no impact to free cash flow, and it's not related to prior periods. It will have no impact on accrual rates or changes in future assumptions. So hopefully, that gives you a lot more color as far as the logic and the timing of that charge.

Okay. Yes, it does. I guess my follow-up is just on another one of the adjustments here. I guess, related to that one, it actually feels like because you took a charge this quarter it's based on an expectation for the future. I guess maybe the follow-up there would be, does it help the margins in the future? And then also on the business integration and transaction costs, you are about $25 million year-to-date. I think when you gave initial guidance, you're looking for something closer to $15 million, and I was wondering if you could talk about where the variance stemmed from and what's the updated outlook for the year, particularly as it relates to the fact that it sounds like you're going to be ramping up your M&A activity here in the fourth quarter?

Yes, another great question, Andy. Let me give you some color on the nonrecurring that's explained in detail 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 a big part of it. We also have our COVID-related expenses around onetime items, that's part of it. The changes in the self-insurance liability reserves is reflected in this quarter and 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 start, that's why it's higher this year versus last year.

Okay, got it. My last question then for now; I might jump in later, is just related to the CARES Act and the benefit that you got from the payroll tax deferral. You actually have a lot of labor, so I imagine it's fairly significant. I mean, your payables and your accrued liabilities were up $62 million quarter-over-quarter. 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?

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 generating this cash on the back of our vendors with an aggressive push on our payables. There's a modest amount in AP, but the two big drivers of that movement are reflective of the self-insurance liability and the $13 million of payroll tax.

Very helpful, thank you so much.

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

Right. Good morning, 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.

Yes. If you look at our overall M&A pipeline, we obviously are higher than what we had said initially. 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 a higher pace, probably a similar 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.

Okay. Perfect. 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?

Yes, a good question, Judah. We're seeing 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 improvement; I wouldn't call it organic growth because the reality is this quarter versus 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 sides, but nothing that's going to turn it around.

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?

Yes. We're seeing ancillary levels; I'm not seeing 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 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 buoyed the business, and we feel it provides a great deal of stability when you look at the overall profile. We're cautious on that, given the current COVID environment. Hotels and hospitality are not a huge part of our business but are a driver of ancillary, and we don't see that rebounding anytime in the fourth quarter or frankly, as we look out, in the near term to any significant measure. On the development side, 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 through our first quarter targets in 2021. So it really is coming down to, can the trades before us get their work done, and can we get in in a timely manner? We're not restricted to work in any region. It just comes down to can the construction projects be completed in time as our customers have forecast.

Got it. Okay, thank you.

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

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?

Yes, George. We saw clearly a big impact in April as things really dried up. I would say, 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. Toward the end of the quarter, mid-June to early July, we saw a bit of a pickup and then as COVID cases increased through mid-July and August, a bit of a slowdown. So it's been a bit of a roller coaster for the ancillary side of the business. That being said, there aren't big variances relative to where our forecasts were, and we see a fairly level performance across our more than 250 branches. So we're seeing a fairly balanced approach companywide and expect a similar pattern in Q4.

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?

Sure. 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 very close to prior levels. As for reductions in scope, we saw that happen quickly out of the gate, highly in the hospitality and retail segments, mostly in April. Since mid-May, the scope shifts have dramatically reduced. We don't see many alterations now, which gives us a lot of predictability. So that was largely a onetime adjustment April to mid-May and since then we've dialed it in and have confidence in the contract book going forward.

Very helpful, thank you.

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

Good morning, guys. 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?

We actually don't believe that we'll see a significant drop in commercial customers because the trend has been toward more suburban working, which has more outdoor amenities and landscaping. As more companies and people value suburban environments, that plays to our strengths. We believe commercial will be a stabilizer. At the same time, HOAs are seeing increased attention as people spend more time at home, and we've seen increased ancillary demand in those communities. So HOA demand can offset some shortfalls elsewhere.

Fair. 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?

When we look at the geographical impacts on the contract base, we have not seen a meaningful shift in July and August relative to prior periods. The main impacts occurred in April-May with scope adjustments. Recently, it's been fairly stable. In those areas where hospitality and retail reopenings could provide upside, those reopenings have remained relatively quiet.

I appreciate the color. Thanks, guys.

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

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

If you look at our M&A pipeline, we see a steady line of deals in negotiation. Some owners who were on the sidelines are now moving forward as they reassess growth prospects, and in some cases this has accelerated discussions. So we expect continued activity. The pipeline remains active.

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?

No. When it comes to the election, as long as the grass still grows, which I think it will, the election will have very little impact on landscaping demand. We will continue to work every day to keep properties safe and beautiful across the country.

Great, thank you.

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

Good morning. Thank you for taking my questions. Andrew, I wanted to ask: the deeper focus on M&A in the discussion this morning — is that signaling that M&A will be a greater focus for growth versus the previous approach of organic plus M&A in tandem? Is that why you're bringing it up more now?

Yes. We're looking out over the next several quarters and seeing uncertainty in the economy. We believe in a balanced approach between organic growth and M&A. The investments to make in M&A are similar to investments in organic new branches, and we see opportunities to accelerate M&A into fiscal 2021. We believe M&A is a good use of capital and can act as a proxy for organic growth, particularly given the current environment.

Okay. And on multiples, in the slide deck you showed an example of about five times EBITDA. Historically, we've talked about five to seven. Are you showing five because pricing is coming down in the environment?

Not necessarily, Shlomo. We showed five as a simple illustrative example for a smaller transaction. We're not wavering from our historical range of five to seven. The example was intended to illustrate a small transaction starting at roughly 10% EBITDA and the pathway to mid-teens with our integration playbook. The math was illustrative, not a change in our overall multiple expectations.

Yes. The example on the slide was five to six times and the math was at five times. Every deal is different; smaller deals trend lower in multiple, larger deals trend higher. We're comfortable in the five to seven range overall.

If I could sneak in a quick one on free cash flow: was there anything that should normalize next quarter? You had very strong free cash flow this quarter — is there something that might reverse next quarter because of working capital changes?

We focused hard on free cash flow and have delivered strong results. Earlier we gave a full-year free cash flow expectation of $100 million to $110 million. Sitting here now at $119.8 million year-to-date, we're comfortable. For Q4, CapEx should be similar to last year. Working capital could be a use as some development progress comes in. Interest is down a couple of million year-over-year due to lower rates. We will pay some taxes in Q4. Any further nonrecurring charges would be related to M&A. Conservatively assume a working capital use in Q4, but we expect a decent fourth quarter that will take total year-to-date north of the current level.

Okay, great. Thank you.

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

Hey, thanks. I want to follow up on the acquisition pace. Is part of the stepped-up initiative taking advantage of a post-COVID environment, or are you just shifting to a structurally different focus to enhance organic growth where revenue may be softer in certain areas like snow? Any thoughts on those drivers?

It's multiple factors. One driver is that acquisitions can provide similar returns to greenfield branch starts with lower risk. We will focus on maintenance-led acquisitions in evergreen markets. We will consider acquisitions with snow components in seasonal markets, but many opportunities we're seeing are in evergreen markets, which moves us more into land growth than snow growth from an acquisition perspective.

And are you seeing any demographic trends, such as people leaving cities, that could influence demand?

We haven't seen a slowdown in homebuilding and HOA demand; those remain strong and continue to be a solid source of growth. Parks and outdoor venues are also seeing continued inquiries and strength. These trends should support demand for our services.

Thank you.

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

Hi, this is Gunnar Hansen on for Seth. Could you clarify the fourth quarter guide: what, if any, organic growth outlook is embedded for each segment based on ancillary commentary and development backlog?

Overall, we expect maintenance land to be roughly similar magnitude with a mid-single-digit year-over-year decline, which is why our guidance band is relatively wide. Development should be a bit better in Q4 relative to Q3 and have a better quarter year-over-year, depending on our ability to get onto projects. We have backlog, and development could deliver a fairly good quarter if trades ahead of us complete their work on time.

On the cost management side, margins were better than many expected. How much of that stability was from temporary cost actions versus permanent changes? If revenue returns, will those costs come back?

Some cost actions are shorter-term, such as salary freezes and suspended 401(k) matching, and travel and entertainment reductions. We will be prudent in bringing costs back; they will not be reintroduced until we see revenue improvements and COVID-related effects dissipate. So our cost management is sustainable and tied to revenue recovery.

About the M&A pipeline, are these mostly smaller single-branch operators or larger networks?

The pipeline is more weighted to smaller, single-branch operators in the $5 million to $15 million revenue range. We've done larger deals historically, but current pipeline has multiple smaller deals — single-branch organizations with strong leadership teams.

Thanks.

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

Hi guys, thanks for taking the questions. First, you talked about weakness in hospitality and retail. What level of recovery have you seen so far as lockdowns eased? How far through the recovery are you, and how are you thinking about the shape of the recovery in that segment?

We saw some rebound in May and June in southern economies as things opened up, but occupancy rates at hotels remain well below prior levels. Properties are being maintained at basic levels, but we don't expect a major improvement in the near term. This expectation is incorporated into our Q4 guidance.

Given continued weaker demand in July and early August, are you planning further cost reductions and what levers might you use if demand remains weak in Q4?

We will maintain the cost actions we've taken and match cost conservation to any revenue shortfall. There are additional levers we could pull if declines accelerate, but we will manage prudently and only reintroduce costs when revenue recovers.

Okay, great, thanks very much.

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

Okay, great, thanks for that. With all this talk of M&A, I wanted to discuss the balance sheet. Earlier this year you discussed deleveraging and paying down debt. I understand snow season impacted the leverage ratio, but even without that the leverage hasn't materially changed. Should we expect leverage around the four times area over the next several quarters and how do you view the balance between deleveraging and opportunistic acquisitions?

Andy, that's accurate. We could have paid down more debt but chose to hold cash to be opportunistic. We think a leverage ratio in the 3.8x to 4.0x range over the next couple of quarters is realistic given the current environment.

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

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

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 and EBITDA for the quarter?

If you look at the trajectory we had exiting Q2, we were on a path for slight organic growth. In Q3, we estimate the COVID impact on revenue was approximately $75 million across both Development and Maintenance. That represents the combined effect of ancillary softness and project delays that prevented us from realizing expected growth.

I appreciate the insight there. Thank you.

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

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. Stay safe and be well.

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