Earnings Call Transcript - BV Q3 2024

Operator, Operator

Hello, and welcome to BrightView Holdings' Third Quarter 2024 Earnings Call. My name is Ezra, and I'll be coordinating your call today. I will now hand over to your host, Chris Stoczko, Vice President of Finance and Investor Relations to begin. Chris, please go ahead.

Chris Stoczko, Vice President of Finance and Investor Relations

Good morning and thank you for joining BrightView's third quarter earnings call. Dale Asplund, BrightView's President and Chief Executive Officer; and Brett Urban, Chief Financial Officer, are on the call. I will now refer you to slide two of the presentation, which can also be found on our website, which contains our Safe Harbor disclaimer. Our presentation includes forward-looking statements subject to risks and uncertainties. In addition, during this call we will refer to certain non-GAAP financial measures. Please see our press release and 8-K issued yesterday for a reconciliation of these measures. With that, I will now turn the call over to Dale.

Dale Asplund, President and CEO

Thanks, Chris, and good morning, everyone. As I reflect on my time here, which is approximately one year, my conviction in the incredible opportunities both near and long-term continues to increase as we are on pace to deliver a breakout year. We are doing this by operating as a unified one BrightView, leveraging our size and scale to drive profitable growth. This will lead to meaningful shareholder value creation. As I've said from day one, this begins with taking better care of our employees, who will in turn provide better service to our customers. I'm extremely grateful for our employees and their increased commitment to putting our customers at the center of everything we do. I want to focus my comments on the tremendous progress being made towards One BrightView with our achievements and ongoing progress, along with strategic updates that will enhance our position to accomplish our objectives. First, we delivered a record Q3 and year-to-date EBITDA with margin improvement across all segments, and we are reaffirming full-year '24 revenue, EBITDA, and margin guidance, all while raising free cash flow for the second time this year. Brett will get into more details on the financials in a few minutes. I want to focus on the initiatives we are taking to become the employer of choice and the impact it is having. Our goal is to build a winning culture, so our employees take greater pride in being part of the BrightView team and have unwavering confidence in the fact that they are our single most important asset. This requires upfront investment, but will result in reduced employee turnover and increased customer retention. We are refreshing our fleet of trucks and mowers and launched the Boots program to ensure our employees are not only safe but comfortable, enabling them to better service our customers. Over the past seven months, the turnover rate for our frontline employees has improved an impressive 1,900 basis points, including six consecutive monthly improvements. This shows, unequivocally, that if we take care of our employees they'll become more engaged and more likely to stay. On slide six, similar to investing in our employees, the goal to significantly improve customer retention requires a commitment to provide best-in-class service levels. We have seen a steady increase in retention rates, specifically a 150 basis point improvement during my first nine months, with more opportunities remaining. Continued progress on employee turnover and customer retention will fundamentally change the way BrightView operates, with the greatest impact on delivering long-term profitable growth. I will further highlight the benefits of operating as a unified One BrightView. We are gaining traction in cross-selling our full suite of services. For example, we recently concluded a $4 million development project in the Southwest for a prominent corporate client, converting this relationship into a $400,000 annual recurring maintenance contract. This is a significant underleveraged opportunity that will create meaningful future growth. Lastly, the investments we are making in our employees today are crucial to positioning us for sustainable success over the long term. With that, I'll turn it over to Brett.

Brett Urban, Chief Financial Officer

Thank you, Dale, and good morning to everyone. Let me start by saying how proud I am of the entire BrightView team as we continue to work together during what is on pace to be a breakout year as we execute on our strategy of driving profitable growth. This is evidenced in our strong results for both the quarter and year-to-date, which both reflect record EBITDA performances for the company and margin expansion across all segments. Total revenue during the quarter of $739 million was down 3.6% year-over-year. However, when excluding the impact of exiting the U.S. Lawns and aggregator business, revenue was essentially flat. While the business was impacted by the exit of these two businesses, we remain very encouraged by the underlying health of the market and recent trends within our business, notably our improved employee turnover and customer retention metrics. The Development business increased 5.7% as a result of continued conversion of our backlog and high-quality projects. Adjusted EBITDA for the third quarter was $108 million, an increase of $6 million or 6% versus the prior-year period. Adjusted EBITDA margins in the Maintenance segment improved by 40 basis points. Additionally, our overhead expense savings enabled us to reinvest towards best-in-class service levels for our land customers. Year-to-date free cash flow generation was a robust $120 million, compared to $38 million in the prior year. Our year-to-date net CapEx was $32 million; however, timing can impact this as we saw in the third quarter with approximately $21 million of vehicle deliveries during that time. For the year, we still expect net CapEx intensity to be approximately 3.5% of revenue or around $100 million. Net leverage at the end of the quarter came in at 2.4x, compared to 4.8x in the prior-year period. This reflects a significant reduction in our debt, improved liquidity, and improved profitability in the business. These steps we've taken over the last year demonstrate our commitment to fortify our balance sheet and drive shareholder value. We are on track to deliver on our commitments despite the impact of snow and the exit of two non-core businesses. Fiscal '24 is on pace to be a record year as we have revamped our operating structure and changed our compensation plan to encourage collaboration and drive profitable growth. We're tightening our guidance ranges for revenue and maintaining our midpoint for EBITDA while raising our free cash flow guidance for the second time this year. Collectively, we expect to generate free cash flow of $65 million to $80 million, marking the second consecutive increase in guidance.

Dale Asplund, President and CEO

Thanks, Brett. Before we open the call for questions, I want to provide a brief recap on our performance and key takeaways from our remarks today. First, we generated record Q3 and year-to-date EBITDA, with margin improvements across all segments. Our employee investments are positively impacting turnover and engagement. Best-in-class customer service levels coupled with increased employee engagement are leading to momentum in our customer retention. The new One BrightView alignment creates significant opportunities to cross-sell development into maintenance. We continue to make great strides and achieve milestones on various initiatives and remain highly confident we will continue to deliver on our objectives that will translate into an impressive long-term growth trajectory and create value for our stakeholders. We will now open the call for questions.

Operator, Operator

Thank you very much. We've got our first question from Tim Mulrooney with William Blair. Tim, your line is now open, please go ahead.

Tim Mulrooney, Analyst

Dale, Brett, good morning.

Dale Asplund, President and CEO

Good morning, Tim.

Brett Urban, Chief Financial Officer

Morning.

Tim Mulrooney, Analyst

So, seeing that improvement in the customer retention rates is very promising. I'm hoping you could give us a little more history here on customer retention rates within that Maintenance business. Could you talk about where BrightView was a couple of years ago, back when the company went public, where you're at today, and where you'd ideally like to be? What do you think that a scaled commercial landscaping business should be generating, optimally?

Dale Asplund, President and CEO

Great. Tim, I'll start with that. Look, since day one, I've said the number one most important metric in this business is taking care of the customers we have today and retaining them so we can grow profitably in the long term. Without specific decimal numbers, when the company went public, our retention was 85%. We saw slight deterioration during 2019, 2020, and 2021, with more significant drops in 2022, and in 2023, it dropped below 80%. Today, however, we've seen a 150 basis point improvement in retention rates over the past nine months. 2024 will be the first year since the company went public that we're going to see an increase year-over-year in retention. I see the path for future growth in this metric. This is the metric that truly matters.

Brett Urban, Chief Financial Officer

Yes, Tim, it's a great question. I think from the minute Dale stepped in as CEO, he emphasized employees and customers as our focus. The investments we are making are all long-term decisions. We have substantial savings in our SG&A line, and those efficiencies have allowed us to reinvest back into frontline labor and customer service levels. We posted a record quarter even with this reinvestment.

Dale Asplund, President and CEO

If you ask what an optimal retention rate is, I have been to branches operating above 90%. They grow profitably with engaged employees and happy customers. I don't think the public level of 85% should be our target. Every 1% improvement creates a $15 million opportunity in Maintenance land revenue for us. I see us going well past that.

Tim Mulrooney, Analyst

That's all really great color, guys. Thank you for that. As a follow-up, you mentioned the relationship between retention improvement and incremental revenue, especially in terms of margin profile versus new business. How should we think about margins associated with that extra revenue?

Dale Asplund, President and CEO

The cost to acquire a customer you already have is much less than getting a new one. Absolutely, when we grow in our Land business, you will see margins improve leveraging existing overhead. This is a key lever that will allow us to continue to expand those margins.

Tim Mulrooney, Analyst

Thank you, Dale. Thanks, Brett.

Dale Asplund, President and CEO

Thanks, Tim.

Brett Urban, Chief Financial Officer

Thanks, Tim.

Operator, Operator

Thank you very much. Our next question is from Bob Labick with CJS Securities. Bob, your line is now open, please go ahead.

Bob Labick, Analyst

Thank you. Good morning, and congratulations on those strong retention improvement numbers in such a short period.

Dale Asplund, President and CEO

Thanks, Bob.

Brett Urban, Chief Financial Officer

Yes, thank you, Bob.

Bob Labick, Analyst

I wanted to start on the opportunity of converting Development service work into recurring Maintenance work. What are you doing differently now compared to the past? How do you see this driving profitable growth going forward?

Dale Asplund, President and CEO

We've broken down silos between our Development and Maintenance teams to encourage collaboration. The Development business is growing, and our new structure has created a cultural change that allows us to leverage our size and scale to convert Development projects into Maintenance work. Our teams are now more motivated to work together to maximize these opportunities.

Brett Urban, Chief Financial Officer

We're in the early stages of this. Our Development business is expected to generate significant revenue. Historically, we've converted less than 10% of these projects into Maintenance contracts. There’s a $50 million untapped opportunity we can capitalize on as our teams work together under the new structure.

Bob Labick, Analyst

Great. That sounds super helpful and can be very powerful. About the investments in the fleet and installation of trucks, can you clarify where we are with that and when do you expect to start seeing benefits?

Dale Asplund, President and CEO

We've started the process of refreshing our fleet. The new mowers and trucks are part of the initiative to improve service quality and efficiency. The upfront investment will lead to reduced maintenance costs and higher employee satisfaction as they are equipped with reliable equipment. We're committed to making our frontline employees' jobs easier, which directly impacts customer service.

Brett Urban, Chief Financial Officer

We are investing in our fleet as part of our growth strategy. Our focus is on renovating to reduce maintenance costs and improve efficiency in operations. This strategy will yield margin improvements that are expected to materialize over the next few years as we upgrade our equipment steadily.

Bob Labick, Analyst

Thank you so much.

Brett Urban, Chief Financial Officer

Thanks, Bob.

Dale Asplund, President and CEO

Thank you, Bob.

Operator, Operator

Thank you very much. Our next question is from Andy Wittmann with Baird. Andy, your line is now open, please go ahead.

Andy Wittmann, Analyst

Thanks. Good morning, and thank you for taking my questions. Your free cash flow guide is impressive, but it seems like there will be a cash burn in Q4. Can you explain the reason behind the cash burn, is it due to CapEx or working capital?

Brett Urban, Chief Financial Officer

Great question, Andy. Our balance sheet is well-positioned right now to invest back in the business. After $120 million in free cash flow, we’re guiding to $32 million in CapEx. A lot of this capital is timing-related. For instance, we received around $21 million in vehicle deliveries recently that will hit our CapEx report in Q4. This timing can drive down cash flow for Q4 but is crucial for the 2025 growth strategy.

Andy Wittmann, Analyst

Dale, you mentioned changes in compensation plans. Can you elaborate on what levels and positions were impacted and how the changes have been received?

Dale Asplund, President and CEO

We revamped our compensation structure to create a unified program across the company. Previously, we had over 30 different discretionary compensation programs in place. Now we have a simple plan for our branches that shares profits based on year-over-year growth. This has been well-received as it directly links compensation to performance and growth targets.

Andy Wittmann, Analyst

I appreciate that answer. Have a good day.

Brett Urban, Chief Financial Officer

Thank you, Andy.

Dale Asplund, President and CEO

Thanks, Andy.

Operator, Operator

Thank you very much. Our next question is from Greg Palm with Craig-Hallum Capital Group. Greg, your line is now open, please go ahead.

Greg Palm, Analyst

Good morning, everyone, and congrats on the continued progress. Can you provide more color on anticipated growth in the Maintenance segment, especially concerning the positive indicators you've alluded to?

Dale Asplund, President and CEO

We have a lot of momentum right now, and while I can't predict an exact timeline, we are confident we’re in a better position going into fiscal '25. We’re focused on growing our core Land business, and it's crucial for our next growth phase.

Brett Urban, Chief Financial Officer

We have a solid backlog in the Development business, essentially sold out through Q3 next year. The investments we are making in customer retention and the organizational changes will provide strong growth potential.

Greg Palm, Analyst

Any additional observations on improvements in frontline employee retention and how you can continue to enhance this metric?

Dale Asplund, President and CEO

It begins with recognizing the importance of our employees. Our new culture emphasizes teamwork, ensuring we meet customer service expectations without overburdening our staff. Flexibility in scheduling allows for better service and improved morale.

Brett Urban, Chief Financial Officer

We are unwavering in our strategic decisions, focused on long-term relationships with employees and customers. The investments we are making will show meaningful results and drive customer satisfaction, providing a clearer path toward growth.

Greg Palm, Analyst

Thank you for the detailed insights.

Brett Urban, Chief Financial Officer

Thanks, Greg.

Dale Asplund, President and CEO

Thank you, Greg.

Operator, Operator

Thank you very much. Our next question is from Jeffrey Stevenson with Loop Capital. Jeffrey, your line is now open, please go ahead.

Jeffrey Stevenson, Analyst

What were the primary drivers of the strong development expansion during the quarter? And do you believe that Development margin improvement is ahead of schedule now that pricing protections are included in contracts?

Dale Asplund, President and CEO

Our development team is performing exceptionally well, and we’re exceeding quality benchmarks right now. I believe our backlog supports long-term expansion, and collaboration among teams has been heightened significantly.

Brett Urban, Chief Financial Officer

Our Development margins have improved from historical levels due to better contract management, helping us mitigate rising costs in the past. As our backlog grows, we can be more selective, further enhancing margins.

Jeffrey Stevenson, Analyst

Given your improved balance sheet, what's the likelihood of returning to M&A in fiscal '25, and what types of acquisitions are attractive for you?

Dale Asplund, President and CEO

We've paused M&A for restructuring this year, but we're ready to explore opportunities. Future acquisitions would target greenfield markets or companies that complement our existing services, enhancing our capabilities.

Brett Urban, Chief Financial Officer

We currently have over $535 million in liquidity, giving us the flexibility to pursue acquisitions. We’re focused on executing M&A in a more structured manner than in the past, with a bottom-up approach led by field managers.

Jeffrey Stevenson, Analyst

Thank you for taking my questions.

Dale Asplund, President and CEO

Thank you, Jeff.

Operator, Operator

Thank you very much. Our next question is from George Tong with Goldman Sachs. George, your line is now open, please go ahead.

George Tong, Analyst

Could you elaborate on the timing and areas of investment in personnel moving forward?

Dale Asplund, President and CEO

Our investments focus on providing reliable service without pushing our employees to cut corners. We are hiring frontline labor to ensure proper work hours and enhance customer satisfaction. The focus on investments will continue throughout this year.

Brett Urban, Chief Financial Officer

Our investments will focus on the onboarding process, as well as enhancing training programs. These investments will improve labor performance and further contribute to customer satisfaction down the road.

George Tong, Analyst

Could you provide specific examples of how you plan to improve customer service through labor and best practices?

Dale Asplund, President and CEO

For example, we are considering changing the work schedule for crews to allow for make-up days in case of weather. This would ensure our clients receive timely service, while also positively impacting employee retention. It’s about fulfilling promises.

Brett Urban, Chief Financial Officer

Improving customer service levels requires a culture of accountability. We are focused on proactive communication with clients to maintain customer satisfaction and assist in operational efficiency.

George Tong, Analyst

Thank you for the information.

Dale Asplund, President and CEO

Thank you, George.

Operator, Operator

Thank you very much. Our next question is from Harold Antor with Jefferies. Harold, your line is now open, please go ahead.

Harold Antor, Analyst

On the tech side, can you provide updates on route optimization and how it's saving costs?

Dale Asplund, President and CEO

Our route optimization is already deployed, aiming to reduce travel times to serve more clients in a day. This enhances fuel efficiency and minimizes wear and tear on vehicles, though quantifiable savings are still being evaluated.

Brett Urban, Chief Financial Officer

Fuel costs are about 2.5% of our revenue, equating to roughly $75 million. Thus, route optimization should improve overall efficiency and indirectly contribute to lowering maintenance costs.

Harold Antor, Analyst

Regarding SG&A as a percentage of revenue, where do you think this business can run as you execute on profitability growth?

Dale Asplund, President and CEO

The initial reductions reduced inefficient overhead, but as we grow, we'll reinvest in sales resources. Efficiency gains will be targeted while we work towards EBITDA growth. We won't provide a precise SG&A target.

Brett Urban, Chief Financial Officer

Our focus remains on improving total EBITDA margins. While we're not guiding on specific SG&A percentages today, our operational efficiency will be pivotal for expansion into next year.

Harold Antor, Analyst

Thank you. I'll leave it there.

Brett Urban, Chief Financial Officer

Thanks, Harold.

Dale Asplund, President and CEO

Thank you, Harold.

Operator, Operator

Thank you very much. We currently have no further questions, so I will hand back over to Dale for any closing remarks.

Dale Asplund, President and CEO

Thank you, Operator. I want to close by reiterating that we are extremely excited about the transformation of BrightView. I am very pleased with our record Q3 results. Our objectives remain clear: we are committed to becoming One BrightView, growing profitably, and creating meaningful shareholder value.

Operator, Operator

Thank you very much everyone for joining. This concludes today's call. You may now disconnect your lines.