Earnings Call Transcript - BV Q4 2020

Operator, Operator

Good morning and welcome to BrightView's 2020 Fourth Quarter and Full Year Fiscal 2020 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. Today's press release is available on the company's website 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.

John Shave, Vice President, Investor Relations

Thank you, Lindsey 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 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 along with other disclosures are provided in today's press release. Disclaimers on forward-looking statements and non-GAAP financial measures apply both 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. For context BrightView is the leading and largest provider of commercial landscaping services in the United States with annual revenues in excess of $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 14 years. We provide commercial landscaping services ranging from landscape maintenance and enhancement to tree care to landscape development. We operate through a differentiated and integrated national service model, which systematically delivers services at the local level by combining our network of more than 240 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 customers understand the financial and reputational risk associated with inadequate landscape maintenance and consider our services to be essential and nondiscretionary. I will now turn the call over to BrightView's CEO, Andrew Masterman.

Andrew Masterman, Chief Executive Officer

Thank you, John. Good morning, everyone and thank you for joining us today. Starting on Slide 4, let me provide you with an overview of our strong fourth quarter and full year fiscal 2020 results. First of all I'm pleased to report that all BrightView branches continue to be operational with no limitation on the scope of services. Second, inclusive of acquisitions our maintenance contract-based business for the quarter grew 3% versus the prior. This compares favorably with the third quarter of fiscal 2020 when our maintenance contract-based business declined 2%. Contract maintenance is our core book of business and continues to represent a recurring and durable revenue stream. Third, total adjusted EBITDA for the fourth quarter was $90 million with a solid EBITDA margin of 14.8% up 10 basis points versus prior year. Fourth, net capital expenditures as a percentage of revenue were 2% or $47.9 million down from 3.5% of revenue in the prior year. Our model continues to demonstrate an ability to generate consistent revenues and profitability coupled with very modest levels of working capital and capital expenditures. Fifth, free cash flow generation continues to be exceptional. During the fourth quarter we generated a record $77.4 million of free cash flow. For the full fiscal year 2020, we generated $197.2 million of free cash flow, a 128% increase year-over-year and also a record for the company. And finally, results of our strong-on-strong acquisition strategy benefited revenue growth during fiscal 2020 and with an attractive pipeline acquisitions will continue to be a reliable and sustainable source of revenue growth. Our performance was at the upper end of the guidance provided during our third quarter call and reflects a solid finish to the year. Our financial performance in the fourth quarter showed strong sequential improvement and we remain confident in our opportunity to generate value for all of our stakeholders. Before we turn to the details of our fourth quarter and full year, let me provide you with our outlook for the first quarter on Slide 5. As expected, October and early November has seen COVID-19 business impacts of reduced ancillary demands in the maintenance segment and project pipeline softness in development. Additionally, we'll have about $7 million revenue reduction in the first quarter due to the sale of the tree nursery business. As mentioned, our maintenance contract-based business is growing and our two largest verticals, Homeowners Associations and Commercial Properties, have remained resilient. And we expect a favorable tailwind from acquisitions that were completed in fiscal 2020 and in early fiscal 2021. As a result for our first quarter fiscal 2021 we anticipate total revenues between $525 million and $550 million and adjusted EBITDA between $45 million and $49 million with the lower end of the range contemplating a light snowfall. Due to the uncertain outlook regarding the full extent of COVID-19 impact on the economy and its longevity we'll not be providing annual guidance for fiscal 2021 at this time. We will operate under the premise that headwinds will continue to impact ancillary demands in our maintenance segment and cause project delays in development. These factors will impact our ability to grow organically over the next several quarters. Despite that, we believe with an average snowfall during the first half of the fiscal year and a modest recovery from the pandemic in the second half, we will be poised to deliver improved results year-over-year. Turning now to Slide 6, 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, healthcare professionals and all essential workers. In spite of these difficult circumstances, I continue to be very proud of our persistent focus on safety. The landscaping Industry Standard Incident Rate is 4.0. At BrightView our total recordable incident rate in fiscal 2020 is 1.87, far exceeding industry-wide metrics. What this means is that we have less than one incident per 100,000 hours worked and we have many branches with no incidents at all during the year. This incident rate has improved significantly over the past four years and combined with our consistent excellent service delivery, we continue to shine and it's reflected in our results. In recognition of our team, we awarded our field employees with much-deserved recognition. Earlier this month, we paid $6 million to frontline team members; more than 13,500 employees in branches across the United States received an extra paycheck. This is our way of acknowledging their work and commitment under very difficult circumstances. Moving now to Slide 7, in addition to health and safety, we're laser focused on business continuity. Company-wide we continue to exercise extreme prudence as we navigate through a challenging period of moving quickly on opportunities to maintain and grow our base contract services, protect margins and enhance cash and liquidity, manage capital expenditures and reduce working capital. Fortunately across all regions of the country our two largest verticals, HOAs and commercial properties, continue to be resilient. Both stay-at-home and work-from-home highlight the importance of our services to millions of residents who live in the communities we maintain. Commercial and corporate campuses combined with HOAs represent approximately three quarters of our maintenance contract book. Hospitality and retail have been the most impacted verticals, but represent less than 10% of our overall maintenance contract book. 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 the challenge head on. Conditions presented by COVID-19 remained fluid, but our quarterly results highlight the resiliency of our contract-based business and reflect the positive underlying trends in our acquisition strategy, cash generation and growth in liquidity. Our team has done an incredible job delivering steady results. Ultimately, we continue to be confident we will emerge from this crisis a better and stronger company. We're remaining focused on building our long-term fundamental strength in creating superior value for our stockholders. Turning now to Slide 8, since the beginning of fiscal 2020, we completed eight acquisitions that strengthened our presence in several key markets. Over time, we expect these acquisitions to add approximately $100 million in incremental annual revenue. In September, we acquired All Commercial Landscape Services headquartered in Fresno, California. All Commercial is a full-service landscaping company and an entry point into a desirable MSA. In October, we acquired Commercial Tree Care in San Jose, California; combined with the acquisition of All Commercial, BrightView is now the leading tree care company in all of Northern California. The purchase of Commercial Tree followed the sale of BrightView Tree Company, our tree nursery division that typically generated between $25 million and $30 million in annual revenue. The redeploying of assets from the development segment through our maintenance segment is consistent with our overall strategic growth plan. Most recently and subsequent to the end of the quarter BrightView acquired full-service commercial landscape firm WLE. The 250-member WLE team serves HOA, developer, commercial and municipal clients across key markets in Central Texas and important growing regions. Our business is cash generative with low capital intensity and minimal inventory, allowing us to consolidate the marketplace in an efficient manner. Our horticulture knowledge and excellence and our ability to operate multiple service lines under one banner positions us well. We have a very disciplined and repeatable acquisition and integration framework which results in less risk and generates predictable and accretive returns. 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. Currently, our M&A pipeline has over $400 million in revenue opportunity and we're in discussions with multiple companies. After an intentional pause during the third fiscal quarter, we resumed our acquisition strategy. As the acquirer of choice in our industry, we deployed over $300 million and closed 22 acquisitions since January 2017 and are accelerating our pace of acquisitions and integration. We will continue our aggressive but disciplined approach against our attractive pipeline as we seek market expansion and new market entry. As we progress through fiscal 2021, we will continue to update you on this core strategy. Turning to Slide 9, we remain focused on deploying technology to enhance 360-degree client engagement across all verticals. Over the course of the last couple of years, BrightView has invested in industry-leading technology to support our customers and enable our field-based account and branch management. HOA or BV Connect, quality site assessment tools and Salesforce CRM software have all been implemented as digital tools to improve retention and support property enhancement. HOA Connect, this digital customer portal introduced at HOAs in late 2019, has been implemented at almost 100 sites across the country, allowing for quick collaboration, digital pictures and direct follow-up on issues within the community. HOA Connect has become a BrightView differentiator. In the summer of 2020, a platform for HOA residents to take advantage of BrightView ancillary services via a web portal was introduced allowing for incremental service offerings. Although early in adoption, initial indicators showed double-digit increases in ancillary services at HOAs utilizing this tool. More to come as we roll this industry-leading software up to our broader customer base. Turning to Slide 10, in addition to technological enhancements, we continue to invest in our sales organization, growing our team 10% during fiscal 2020 and 25% since fiscal 2018. We also continue to expand the use and effectiveness of our sales tools by Salesforce, our customer relationship management solution and other sales enablement technologies. To drive success for these expanded sales teams, we continue to invest in digital marketing initiatives in new market and renewal channels. Over the last two years, we've realized a threefold increase in our marketing-driven qualified sales leads. These leads have led to a sevenfold increase in closed deals indicating a high quality of marketing-driven opportunity. We expect this trend to continue to increase as we evolve our digital marketing strategy into a more effective omnichannel approach. Turning to Slide 11, we remain focused on driving maintenance contract growth during fiscal 2021. Our contract business represents the core part of maintenance including mowing, edging, pruning, trimming, blowing and other basic landscaping services and in 2020, was about two-thirds of our maintenance business. This slide provides more granular level detail on our maintenance contract book of business. We think it is a valid way to better understand both the resiliency and stability of our core maintenance business. As you can see, total maintenance contract-based business turned to positive growth in fiscal 2020. Through the third quarter, we did experience a 7% decline; however in the fourth quarter we delivered strong sequential growth seeing an underlying improvement in COVID-related impacts and are optimistic the best trajectory will continue. Turning to Slide 12, in the constant hunt for profitable organic growth in addition to leveraging technology, we are fine tuning our sales force and strategy. We will invest in the growth of our maintenance sales team and our new virtual training and coaching programs allowing us to more effectively and efficiently onboard new team members. To motivate high levels of the right sales activity, we continue to refine and invest in growth incentives to encourage bundling services around fertilization, sweeping and pruning services, tree maintenance and snow removal. Our recent acquisitions include offerings that allow us to more effectively bundle services while eventually positioning BrightView as the industry leader across a number of service levels. Growth is a primary focus and growth will be recognized and rewarded throughout the organization. We also continue to realize the benefits of digitizing BrightView, our technology-supported engagement by providing client touch points and mobile field solutions. HOA and BV Connect, a property management portal, are driving deeper connectivity to the customers we serve. The portal not only provides a platform to digitally engage with customers but also facilitates additional ancillary momentum. As our customers become more familiar with use, we're seeing a greater willingness to request services via the portals. In addition, our mobile quality management solution implementation is enhancing customer satisfaction by enabling us to share virtual site walks while incorporating customer feedback and potential ancillary work. Providing our sales team with the data and technology tools that yield insights and support client engagement is also critical to support growth. Our proprietary electronic time capture and labor management tool is resulting in performance efficiency and our bidding and estimating tools continue to be improved and enhanced. Digital marketing is critical with our efforts focused on COVID-resistant verticals and geographic market expansion. Our omnichannel approach is all about utilizing data efficiently while integrating customer interaction via our website, social media channels and mobile advertising. Increased digital marketing efforts will be supported by growing inside sales capability. Technology is a key competitive differentiator and advantage of scale and will combine with a refined sales strategy, structure and increased Salesforce use to return BrightView to positive growth. I'll now turn it over to John, who will discuss our financial performance in greater detail.

John Feenan, Chief Financial Officer

Thank you, Andrew and good morning to everyone. I'm very pleased with the strong results we've delivered in our fourth quarter and during fiscal 2020. Our record cash generation combined with modest capital needs resulted in a reduction in our net debt of approximately $116 million and a leverage ratio of 3.7 times at September 30, 2020 versus 4.1 times at the end of the third quarter. Additionally, the growth in our contract maintenance business combined with efficiencies gained from our investments in technology and our ongoing focus on productivity have all been meaningful in driving improved margins and collectively underscore the strength and resiliency of our business. With that, let me now provide a snapshot of our fourth quarter results. Fourth fiscal quarter 2020 revenue for the company declined 2.7% or $16.7 million from $624.8 million in the prior year to $608.1 million in the current quarter. This was driven principally by COVID-19 business impacts on ancillary demand and project delays in the development business. Maintenance revenues of $443.9 million for the three months ended September 30 decreased by $11.5 million or 2.5% from $455.4 million in the prior year. The decrease in maintenance was driven principally by ancillary demand softness with a solid revenue contribution of $25.1 million from acquired businesses. For the three months ended September 30 development revenues declined $5.6 million or 3.3% to $165.1 million from $170.7 million in the prior year, driven predominantly by project delays. We expect COVID-related softness during the first half of fiscal 2021 and more pronounced in Q2 versus last year. But we're also encouraged by our bidding pipeline and bid calendar and we anticipate increased stability during the second half of fiscal 2021. Turning to the details on Slide 15, total adjusted EBITDA for the fourth quarter was $90 million, a decrease of $1.9 million or 2.1% from $91.9 million in the prior year. The impact of lower revenues due to COVID-19 was offset by productivity initiatives and SG&A cost containment. In the maintenance segment, adjusted EBITDA of $77.2 million was flat to prior year. Cost containment initiatives and solid labor management offset revenue losses which led to strong margin expansion. The result was an impressive 40 basis point expansion in EBITDA margins to 17.4%. In the development segment, adjusted EBITDA decreased $400,000 to $26.3 million compared to $26.7 million in fiscal Q4 2019. The modest decline was driven by lower revenues; however through strong cost containment efforts the development business was able to significantly mitigate against the revenue loss which resulted in a 20 basis point expansion in EBITDA margins to 15.9% in fiscal Q4. Corporate expenses for the fiscal fourth quarter increased $1.4 million representing 1.9% of revenue. Now let me provide you with a snapshot of our results for the full fiscal year 2020 on Slide 16. Total revenue for the company decreased 2.4% to $2.35 billion from $2.40 billion in the prior year. In the maintenance segment fiscal year revenues were $1.74 billion, a $74.3 million or 4.1% decline versus 2019. Key drivers were COVID-19 business impacts on ancillary demand, partially offset by solid revenue contribution from acquired businesses. We were also impacted by an $86 million snow revenue decline in the first half of fiscal 2020 results. In the development segment, despite project delays in the second half, strong first half project pipeline totaled growth as revenues increased 2.6% to $610.6 million compared to $595.4 million in the prior year. Total consolidated adjusted EBITDA for the fiscal year was $271.6 million compared to $305.1 million in the prior year. The variance was largely driven by second half softness in our maintenance ancillary revenues, project delays in the development segment and lower snow revenue. The maintenance segment's adjusted EBITDA declined by 11.3% to $250.1 million compared to $282 million in the prior year due principally to ancillary softness and a significant decline in snow removal services. As a result of COVID-19 business interruptions and project delays, adjusted EBITDA for the development segment decreased 1.8% to $80.2 million compared to $81.7 million in the prior year. Corporate expenses were essentially flat compared to the prior year and as a percentage of revenue corporate expenses were 2.5%. Let's move now to our balance sheet and capital allocation on Slide 17. Net capital expenditures totaled $47.9 million for the fiscal year ended September 30, down from $83.1 million in fiscal 2019. This represents a 42% decline and demonstrates again our ability to judiciously manage cash. Expressed as a percentage of revenue net capital expenditures were 2% in fiscal year 2020 down from 3.5% in the prior year. We will continue to demonstrate a diligent focus on managing capital expenditures and we expect fiscal 2021 capital expenditures to be approximately 3% of revenue in line with our long-term guidance. In fiscal year 2020, we invested $90.3 million on acquisitions and decreased net debt $116 million to $1.02 billion. Our leverage ratio was 3.7 times at the end of the fourth quarter of fiscal 2020 versus 4.1 times at the end of fiscal Q3. During the fourth quarter of fiscal 2020, we also completed the sale of BrightView Tree Company, our tree nursery business. In addition to generating cash, the transaction reduces our working capital needs and supports our overall strategic growth plan to redeploy capital from development to maintenance. In connection with this transaction, we recorded a one-time non-cash charge in the fourth quarter of approximately $22.1 million primarily related to goodwill. During fiscal 2020, free cash flow increased $110.6 million, the highest achieved in our history to a record $197.2 million. This represents a significant increase compared to $86.6 million in the prior year and was principally due to an increase in cash flows from operating activities. Our continued focus on diligently managing our working capital including receivables and payables, aggressively managing capital expenditures and a reduction in interest expense driven by lower rates were all contributors. To further elaborate on working capital, let me briefly review the progress we've made over the previous three years on Slide 18. In 2017, as a percent of last 12 months revenue net working capital was 12.5%. Through a continued focus on reducing DSO and increased focus on driving more favorable vendor payment terms and aggressively managing our inventory, net working capital was significantly reduced to less than 9% of revenue in fiscal 2020. Going forward, we expect to remain very diligent in regards to managing our working capital. An update on liquidity is on Slide 19; at the end of fiscal 2020 we had approximately $182 million of availability under our revolver, approximately $50 million of availability under our Receivables Financing Agreement and approximately $157 million of cash on hand. Total liquidity as of September 30, 2020 was approximately $389.1 million. This compares to $283 million as of September 30, 2019, a true testament to our ability to generate cash. We are 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.

Andrew Masterman, Chief Executive Officer

Thank you, John. Turning now to Slide 21, our fourth fiscal quarter results were toward the upper end of the expectations we shared in August. Our cash flow and contract-based business remained strong. Combined with our liquidity, we expect to continue our pace of acquisition and pay down debt. Despite anticipated continued COVID-19 related impacts, the fundamentals of our business and our industry remain strong. Our sales and marketing strategies and structure are a formula for long-term success, and our investments in field-based sales and operations leadership will drive strong 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 the highest level in the company's history. Over time, this enhanced and robust pipeline can support growth well ahead of industry averages. Additionally, our M&A pipeline shows no sign of slowing down and it 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, customers, clients and partners for their resiliency and dedication during a challenging time. Almost 20,000 people come to work every day to make sure the living assets in which we live, work and play are safe and beautiful. Most importantly, the strong customer and team-oriented BrightView culture drives the resiliency of our business. At all levels in the organization, our focus on taking care of each other and our customers and taking pride in how we engage with our clients and the beauty of their properties we design, develop and maintain has sustained our organization. We will continue this focus on our culture to deliver confidence in the future that lies ahead. Thank you for your interest and for all your attention this morning. We will now open the call for your questions.

Operator, Operator

Our first question comes from Andrew Wittmann with Baird. Your line is now open.

Andrew Wittmann, Analyst, Baird

I've several questions; I'll probably hop back in maybe save some of them for later as other people get a chance to have the floor. But Andrew, I guess I wanted to start a little bit talking about the maintenance segment. Last quarter organic growth rate was minus 12, this quarter minus eight, so a sequential improvement. You've talked about this briefly in some of your prepared remarks, but I was hoping if you could dig in a little bit more and describe a little bit more about what you saw in the quarter. What were truly the biggest factors in driving the sequential improvement? Was it just really more reopening of customers or was it driven by wins in account retention or was it just ancillary coming back? I'm sure it's all these things, but I'm really looking for what the couple of key drivers were that helped the sequential improvements so I can understand a little better.

Andrew Masterman, Chief Executive Officer

Good morning, Andrew. I think if you pick that list, the primary drivers were a combination. Clearly, some of the reopening that occurred in the fourth quarter versus the third quarter had a particular impact, although as you noted we still had some decline. I will say that another underlying impact of the improvement was a higher retention rate. While sales clearly has slowed down somewhat due to the disrupted ability to get in front of our customers, at the same time the retention we have with our current clients has maintained a strong position. So I think those two drivers — reopening of the economy and improved retention — were important. Ancillary was improving somewhat, but the shortfall in the fourth quarter did not come back as strong as the contract came back. So ancillary continues to provide pressure in the overall picture. But on a very positive note retention improved as well as general reopening of the economy.

Andrew Wittmann, Analyst, Baird

Great, thanks for that. The implication of this, I guess, on your first quarter guidance: since my last question we've seen a lot of service companies leveling off in that September timeframe and seeing October even November trends that are more consistent with the pace you saw in the quarter. Is that the key streak for your business on an organic basis as well? How should we think about what's implied in that guidance?

Andrew Masterman, Chief Executive Officer

Yes, I think, thinking about the first quarter, what you'll see overall is a good resilient space in our contract business. I think ancillary assumptions are that we continue to see pressure in the ancillary world and that has not come back fully. The range in the guidance really reflects variability, which still happens in December. So there is still uncertainty, particularly in the December month, which affects the guide.

Andrew Wittmann, Analyst, Baird

Okay and then just over development. I thought I would just ask. You mentioned some project delays. We've noticed in your filing that your recorded but unperformed backlog and performance obligations are down pretty significantly since the start of the year, but I think previously you mentioned that fiscal 2021 was well booked or even maybe said nearly fully booked. So what's the status update on this? Are some of the delays that you saw in the quarter expected to continue through 2021 to maybe change the way you see the 2021 development picture laying out? And I was just wondering, given the uncertainty in the real estate market, if you're seeing any cancellations?

Andrew Masterman, Chief Executive Officer

Previously I mentioned we're booked at the start of the first quarter and that continues — the first quarter is booked at our expectation level. As I said before, in the first half of the calendar year we expect to see some weakness overall in development. That continued pandemic-related impact caused us to pause during April through July when overall construction activity was well below normal levels and this has resulted in a dip we expect in the first half of calendar year 2021. That being said, bidding activity is increasing and we're actually seeing some nice upticks in overall project inquiries — the inverse of cancellations — which gives us optimism as we look out nine months from now.

Operator, Operator

Our next question comes from Tim Mulrooney with William Blair. Your line is now open.

Tim Mulrooney, Analyst, William Blair

Couple questions. First, can you talk about how your enhancement revenue trended through the quarter and maybe in October? I mean you talked about your base contract revenue which is really hopeful. But the variability really seems to be around the enhancement revenue. So curious if you could share what enhancement revenue was as a percentage of sales maybe relative to this time last year or how it moved through the quarter? And second, I wanted to ask about employee retention. I know this is critical for the business. You recently paid one-time bonuses to frontline employees. Do you expect that to have an impact? I'm thinking also about the H-2B visa program suspension in June; how has that affected your operations? Can you just touch on your branch level retention rates and how that's changed, if at all, through this COVID period?

Andrew Masterman, Chief Executive Officer

If you look at overall enhancement, we did note that total contract was up year-over-year; ancillary continued to show weakness. Overall profile of the business was down about 3% for the quarter. We correlated that to ancillary and we are seeing ancillary, although improved off of the third quarter, still about 20% or so down year-over-year. Regarding retention, we continue to have a very dedicated and strong base of employees throughout the organization, a critical core that continues to operate. We paid over 13,000 people in the company a bonus and that shows the extent of the stickiness that we have with our employees. Those folks had been with us since May to get that bonus and they were the people doing the work every day in the field. So overall retention has been very strong throughout the pandemic. As you look out, the H-2B visa program announcement back in June allows applications through December 31 and the program continues to be active for 2021; there has not been any declaration specifically related to how that impacts 2021 beyond the standard program timing.

Operator, Operator

Our next question comes from Shlomo Rosenbaum with Stifel. Your line is now open.

Shlomo Rosenbaum, Analyst, Stifel

Can you walk me through again why you sold your tree nursery business?

John Feenan, Chief Financial Officer

Yes, Shlomo, good morning. Part of our development segment is much more cyclical in nature. Working capital-wise you heard me say before the company has about $30 million of inventory, $20 million of it was tied up in the tree nursery business. We had a really good buyer at attractive multiples and we wanted to take advantage of that. The sale generated cash and reduced working capital needs allowing redeployment into maintenance.

Andrew Masterman, Chief Executive Officer

I think Shlomo also, strategically the nursery business is not core to BrightView's primary model. We don't primarily grow products; we develop, install landscapes and maintain them. The company that acquired the nursery is focused on that business and grouping the nursery with other nursery operations made strategic sense. The transaction allows each company to focus on their core strengths.

Shlomo Rosenbaum, Analyst, Stifel

Did it change any of your costs in terms of development that you now have to buy as opposed to produce by yourself?

Andrew Masterman, Chief Executive Officer

No, we structured the transaction between the tree nursery and our development business as an arm's-length commercial arrangement. We continue to have a cooperative agreement with the company that bought the nursery, and we expect to maintain a positive working relationship. In fact, we believe it can expand our access to nursery supply through their broader network, creating strategic synergy.

Shlomo Rosenbaum, Analyst, Stifel

Okay and you said $7 million next quarter, is there any EBITDA impact there?

John Feenan, Chief Financial Officer

Yes, it's about $1 million of EBITDA impact in Q1, Shlomo.

Shlomo Rosenbaum, Analyst, Stifel

Okay, so it's small, okay great. And then can you talk a little bit about the increase in contract revenue margins during the quarter? What's going on? What are the conversations that you're having that are enabling that to happen? Is it pricing at all or is it really the fact that you guys are just being very disciplined on costs? If you can elaborate on that?

Andrew Masterman, Chief Executive Officer

Yes, I would say it's more the latter than the former. We're being prudent on pricing as we have been historically. The main drivers of the incremental margin improvement in the maintenance side were good utilization of our technology tools — our electronic time capture and labor management — which improved labor productivity, and cost containment actions. Those were the two main drivers of the margin enhancement for the quarter.

Shlomo Rosenbaum, Analyst, Stifel

Okay and if I can squeeze one more in. You did a really good job on working capital and it's something that has really driven the cash flow for the year. Is that something you feel that you've squeezed down to a run-rate level here or is there more work that you think you can do there going forward?

John Feenan, Chief Financial Officer

Well I think for us it's about continuous improvement, Shlomo. We're going to continue to be prudent and disciplined. We have made a lot of structural improvements in how we manage working capital. Our goal right now is to hold onto the improvements that we've made. We'll continue to manage it aggressively and focus on items controlled at the branch level, mainly collecting our money and managing payables. We've done a very good job in being aggressive in our collections across the board in both development and maintenance.

Operator, Operator

Our next question comes from George Tong with Goldman Sachs. Your line is now open.

George Tong, Analyst, Goldman Sachs

The pace of development revenue decline improved pretty meaningfully in fiscal 4Q, even against the relatively tough comp in the year-ago period. Can you talk a little bit about how project delays are currently impacting the development business? Are you seeing broad-based reopening now or are things still pretty spotty?

Andrew Masterman, Chief Executive Officer

Yes, George. In development it's really spotty around the country with different areas at different paces. For example, the Boston area has seen more impact on the ability to execute significant projects. Overall, in Q1 we're seeing activity similar to last year. We expect a dip in Q2, with things recovering in Q3 and Q4 toward more normalized levels. So the primary impact is timing and regional variability rather than broad cancellations.

Operator, Operator

Our next question comes from Judah Sokel with JPMorgan. Your line is now open.

Judah Sokel, Analyst, JPMorgan

I wanted to ask a bit about a comment you made around fiscal 2021. You had said assuming a couple of caveats — average snowfall and modest recovery — you're expecting improved results year-over-year. So I just wanted to make sure I understood what that meant. Is that saying for the full year we should be looking at revenue in total up year-over-year and EBITDA as well, or was this just a maintenance comment? I was just hoping to dig into that pretty encouraging comment.

Andrew Masterman, Chief Executive Officer

Yes, it's an overall comment. The answer is yes: revenue up and EBITDA up as long as we have average snowfalls and we see a modest recovery. We're encouraged by what we see in our new sales pipeline and development booking trends. The contract maintenance business is stable and growing; with a return to normalized activity and ancillary pull-through, we expect improved full-year results. We are not relying solely on increased M&A for that outcome.

Judah Sokel, Analyst, JPMorgan

Great and then also to confirm: the slide showing trends for contract (Slide 11) — this is the piece of maintenance that is just contracts, right? So it excludes enhancement work?

Andrew Masterman, Chief Executive Officer

That's correct, Judah — it's contract only and excludes ancillary work.

Judah Sokel, Analyst, JPMorgan

And that mix is generally like 75/25 mix, if I recall correctly?

Andrew Masterman, Chief Executive Officer

Judah, including snow it would be different by quarter, but excluding snow, maintenance contract services are roughly two-thirds of the maintenance business and ancillary services about one-third. Overall, ancillary services represent roughly 25% of total company revenue.

Judah Sokel, Analyst, JPMorgan

Okay, so putting it all together, can you quantify how much impact you're seeing from COVID? I know you quantified it last quarter around $75 million in total with $65 million of that in maintenance. Could you quantify how much impact COVID-19 had on revenues in the fourth quarter and what you're expecting embedded in your first quarter guidance?

John Feenan, Chief Financial Officer

If you look at maintenance, the overall impact has moderated from the peak. We said about $75 million earlier in the year. We think the total impact to COVID in the fourth quarter in maintenance is somewhere around $50 million or so in the fourth quarter. Development was a bit less in terms of COVID impact on revenue. If you look at the overall picture year-to-date, it's about $135 million impact for the year so far. We would expect that impact to largely come back as we come out of the pandemic.

Operator, Operator

Our next question comes from Hamzah Mazari with Jefferies. Mario Cortellacci is filling in. Your line is now open.

Mario Cortellacci, Analyst, Jefferies (filling in)

Just wanted to touch on some of the decremental margins expected in Q1 which is tied into the guide. How should we think about incremental margins throughout the remainder of 2021 as comps get easier and growth turns positive? Could you give us some guidance or outlook on how to think about the cadence of that in 2021? Also, you added 10% to the salesforce this year and 25% since 2018. How are you thinking about Salesforce productivity or how are you measuring it? Are you looking at total sales per salesperson or total contract revenue per salesperson? How quickly can a salesperson ramp once hired — is it a six-month ramp or does it take a year or two? And finally on M&A, you said you have a $400 million pipeline. Could 2021 be an outsized year for M&A and how much of the pipeline could you recognize in 2021?

John Feenan, Chief Financial Officer

Mario, good morning. On margins, we expect the impact of pressure on ancillary to influence margins through the first couple of quarters of fiscal 2021. We don't see a big change in that near term. We're encouraged by the contract side and how we've been able to manage labor and cost as shown in the fourth quarter. On development, it's trickier because of project timing: when projects get delayed that impacts margins. We have good visibility in Q1 but expect some softness in Q2 and a return toward normalized levels in Q3 and Q4.

Mario Cortellacci, Analyst, Jefferies (filling in)

Okay thanks. On the Salesforce productivity question, what's the primary KPI and ramp time?

Andrew Masterman, Chief Executive Officer

Our primary KPI is contract revenue per salesperson. With the ramp we've seen historically, tenured salespeople — those with over a year — produce materially more. Ramp timing is influenced by the nature of landscape sales being in-person and relationship-driven; it's not instant. New hires typically ramp over time and improve significantly after a year. We've been investing in virtual training, coaching and digital tools which helps accelerate productivity even during the pandemic. We're optimistic that when pandemic restrictions ease, sales productivity will accelerate further.

Mario Cortellacci, Analyst, Jefferies (filling in)

And on the M&A pipeline, you said about $400 million. Could 2021 be an outsized year relative to historical levels?

Andrew Masterman, Chief Executive Officer

Our pipeline has grown to about $400 million in opportunities. If it converts at similar historical rates, we should expect slightly more M&A activity. That said, M&A is an art as well as a science: we remain disciplined, focusing on cultural fit and integration risk. We will continue to be opportunistic and use our liquidity to pursue attractive, accretive deals.

Operator, Operator

Our next question comes from Seth Weber with RBC. Gunnar Hansen is on for Seth. Your line is now open.

Gunnar Hansen, Analyst, RBC (filling in)

I guess you guys have trusted a lot of things, but John, going back to the net working capital benefit — net working capital has trended down pretty significantly in the last couple of years. Should we assume that picks back up to kind of the 10% levels realized in prior years or how confident are you that less than 9% working capital is sustainable?

John Feenan, Chief Financial Officer

Good morning, Gunnar. We're going to work extremely hard to maintain what we've achieved. We've done structural changes on the AR side, focused on reducing aged receivables and billing faster. We haven't aggressively extended vendor terms; we've maintained strong vendor relationships. Those elements combined with prudent CapEx management will help us maintain our improvements in working capital. Our goal is to sustain these levels but we'll continue to be diligent.

Gunnar Hansen, Analyst, RBC (filling in)

Okay, that's helpful. Andrew, the pipeline and marketing leads are encouraging. Can you give more color on the background of those programs? Is this centralized and then pushed to branches? How pervasive are these leads across the country? Are there end markets that are better than others? Are these white-space opportunities or are you winning share? Any color would be helpful.

Andrew Masterman, Chief Executive Officer

We've been developing our digital marketing program over about a year. We split the rollout regionally and partnered digital resources with divisions in markets. We started with single-channel approaches and are now moving to a multi-channel omnichannel approach targeted in certain markets. Initial deployments showed strong results, and we've been expanding. Given the large market and our current share being only 2% to 3% of the landscape market, a lot of the leads are white-space — customers who don't know BrightView. The marketing is aimed at building brand awareness and generating high-quality leads that convert at good rates. The program is producing very positive early results.

Operator, Operator

Our next question comes from Kevin McVeigh with Credit Suisse. Your line is now open.

Kevin McVeigh, Analyst, Credit Suisse

How much snowfall have you factored into the low end and high end of Q1 guidance? Any way to think about a range for snowfall impact for Q1 and perhaps for the full year of 2021? Also, you've taken actions to bring some capacity in-house to minimize expense volatility around surge. Are you where you need to be on that? How should we think about in-house vs outsourced balance in normalized environment versus disruptive events?

Andrew Masterman, Chief Executive Officer

If you look at snowfall generally in Q1 last year, it wasn't particularly favorable. For the first quarter guide range, the top end anticipates an average snowfall scenario. The bottom end contemplates light snowfall and could mean roughly $5 million to $10 million of revenue downside versus the top end — on the order of $5 million to $10 million off prior year at the bottom end. Regarding in-sourcing, we continually evaluate the balance between outsourcing and in-sourcing. We are trending toward more in-sourcing as our branches scale and perform, but that is a measured multi-year process because it requires capital to build capabilities. We will continue to move in that direction where it makes strategic and financial sense.

Kevin McVeigh, Analyst, Credit Suisse

That's helpful, thank you.

Operator, Operator

Our next question comes from Sam England with Berenberg. Your line is now open.

Sam England, Analyst, Berenberg

The market data in your 10-K shows the overall market gains back to 2019 levels in 2022-2023. Do you think you can outperform that on an organic basis over the next couple of years?

Andrew Masterman, Chief Executive Officer

Yes, we believe we can outperform given our digital marketing investments, the expanded salesforce and the return of ancillary demand as the economy recovers. Those initiatives should allow us to capture share and exceed market growth as we exit the pandemic.

Sam England, Analyst, Berenberg

And on CapEx, your guidance is back up to about 3% of sales in 2021. Is that just catch-up on stock you delayed this year or any new investments? Also, is there more to invest in technology going forward?

John Feenan, Chief Financial Officer

The guide is directional for fiscal 2021 and reflects a prudent level of capital versus what we expect in revenue. We spent less in 2020 than in 2019 but we are not starving the business. There are no large incremental projects that would materially change CapEx beyond the guidance.

Andrew Masterman, Chief Executive Officer

On technology, I'm very excited. We can deploy relatively modest capital into software and systems that drive productivity for thousands of employees. Investing in industry-specific digital tools is a differentiator for us. We'll continue to invest in capabilities that drive sales and operational efficiency. It's a small percentage of our overall CapEx but yields meaningful competitive advantage.

Sam England, Analyst, Berenberg

Okay, great. Thanks very much. I'll leave it at that.

Operator, Operator

That concludes our Q&A session for today's call. Thank you all for participating. You may now disconnect. Thank you.