Brightview Holdings Inc (BV) 2020 Q4 法說會逐字稿

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.

(Operator Instructions)

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.

Thank you, Lindsay, 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 10x our next largest competitor.

Together with our legacy companies, BrightView has been in operation 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 enhancements 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 customers understand the financial and reputational risks 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.

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 year.

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 the 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, the results of our Strong-on-Strong acquisition strategy benefited our 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 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 been COVID-19 business impacts on ancillary demand in the Maintenance segment and project pipeline softness in Development.

Additionally, we will have about a $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 in our 2 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's impact on the economy and its longevity, we will not be providing annual guidance for fiscal 2021 at this time.

We will operate under the premise that headwinds will continue to impact ancillary demand 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, health care professionals and all essential workers.

But despite 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 1 incident for 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 4 years.

And combined with our consistent excellence and service delivery, we continue to shine and is reflected in our results.

In recognition of our team, we awarded our field employees with some 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 are laser-focused on business continuity.

Company-wide, we continue to exercise extreme prudence as we navigate through a challenging period, but moving quickly on opportunities to maintain and grow our base contract service, protect margins and enhance cash and liquidity, manage capital expenditures and reduce working capital.

Fortunately, across all regions of the country, our 2 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 communities we maintain.

Commercial and corporate campuses, combined with HOAs, represent approximately 3/4 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 this challenge head on.

Conditions presented by COVID-19 remain 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 and 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 while 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 8 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 with 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 our Development segment to 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 3 markets in Central Texas, an important and growing region.

Our business is cash generative with low capital intensity and minimal 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.

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 are 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 have 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 technologies for our customers and enable our field-based account and branch management, HOA or BV Connect, site -- quality site assessments, and Salesforce CRM software have all been implemented as digital tools to improve retention and support property enhancement.

(inaudible) in 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's 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 out to BV customers.

Turning to Slide 10.

In addition to technological enhancements, we continue to invest in our sales organization, growing our teams 10% during fiscal '20 and 25% since fiscal '18.

We also continue to expand the use and effectiveness of our sales tools like Salesforce, our customer relationship management solution and other sales enablement technologies.

To drive the success of these expanded sales teams, we continue to invest in digital marketing initiatives in new markets and through new channels.

Over the last 2 years, we have realized a 3x increase in our marketing-driven qualified sales leads.

These leads have been led to a 7x increase in closed deals, indicating a high-quality of marketing-driven opportunities.

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 2020 was about 2/3 of our Maintenance business.

This slide provides a more granular look at 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 showed positive growth in fiscal 2020.

During 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 that trajectory will continue.

Turning to Slide 12.

In the constant harp 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.

Incentives 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 porter 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 lines.

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 supports engagement by providing client touch points and mobile field solutions.

HOA and BV Connect, our property management portal, are driving deeper connectivity to the customers we serve.

The portals not only provide a platform to digitally engage with customers but also facilitate additional ancillary momentum.

As our customers become more familiar with use, we are seeing a greater willingness to request services via the portals.

In addition, our mobile quality management solution, QSA, is enhancing customer satisfaction by enabling us to share virtual site walks, while incorporating customer feedback and potential ancillary work.

Providing our sales teams with the data and technology tools that yield insights and support client engagement is also critical to support growth.

Our proprietary electronic time capture, labor management tool is resulting in performance efficiencies.

And our bidding and estimating tools continue to be improved and enhanced.

Digital marketing remains critical with our efforts focused on (inaudible) resistant verticals and geographic market expansion.

Our omnichannel approach is all about utilizing data efficiently, while integrating customer interactions via our website, social media channels and mobile advertising.

Increased digital marketing efforts will be supported by a growing inside sales capability.

Technology is a key competitive differentiator and an advantage of scale.

And when combined with the refined sales strategy, structure and increased sales force size should return BrightView to positive growth.

I'll now turn it over to John, who will discuss our financial performance in greater detail.

Thank you, Andrew, and good morning to everyone.

I am very pleased with the strong results we 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 3.7x at September 30, 2020, versus 4.1x 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, driven principally by COVID-19 business impacts on ancillary demand in Maintenance, and project delays in the development business.

Maintenance revenues of $443.9 million for the 3 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 solid revenue contribution of $25.1 million from acquired businesses.

For the 3 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 are 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 in 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 of 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 the 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 3.7x at the end of the fourth quarter of fiscal 2020 versus 4.1x 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 onetime noncash 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.

To further elaborate on working capital, let me briefly review the progress we have made over the previous 3 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.

Thank you, John.

Turning now to Slide 21.

Our fourth fiscal quarter results are at the upper end of the expectations we shared in August.

Our cash flow and contract-based business remains strong.

Combined with our liquidity, we expect to continue our pace of acquisitions 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 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 the highest level in the company's history.

Over time, this enhanced and robust pipeline should support 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 3 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, a 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 Instructions) Our first question comes from Andrew Wittmann with Baird.

I have several questions.

I'll probably hop back and maybe save some of them for later so that other people get a chance to have the slot.

But Andrew, I guess, I wanted to start a little bit talking about on the Maintenance segment.

Last quarter, organic growth rate was minus 12%, this quarter minus 8%, so a sequential improvement.

You talked about this briefly in some of your prepared remarks, but I was hoping you could dig in a little bit more and describe a little bit more about what you saw in the quarter.

What were the -- truly the biggest factors in driving the sequential improvement?

Was it just really more reopenings of customers?

Or was it driven by wins in account retention?

Or is it just ancillary coming back?

I'm sure it's all of these things, but I'm really looking for what the couple of key drivers were that helped the sequential improvements, so we can understand a little better.

Yes.

Good morning, Andrew, I think if you pick that -- the list, and that shows the primary drivers.

Clearly, some of the reopening that occurred in the fourth quarter versus the third quarter was a particular impact.

Although, as you noted, still had some of the decline.

I will say that probably the -- another underlying impact of the improvement was a higher retention rate.

Well, sales clearly has slowed down some, just due to the ability to get in front of our customers.

Also, at the same time, the retention we have with our current clients has maintained a strong position.

So I think those 2 drivers.

Ancillary, while improving some of 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 I would say, on a very positive note, retention improving as well as just a general reopening, will be fine.

Great.

And then just the implication of this, I guess, on your first quarter guidance is my next question.

We've seen a lot of service companies kind of leveling off in that September timeframe, seeing kind of October, even November trends that are more consistent with what they saw in the quarter.

Is that the case for your business on an organic basis as well?

Or how should we think about what's implied in that net guidance from (inaudible) ?

I think thinking about the first quarter is what you will see overall is, you're right, kind of a good resilient space in our contract business.

I think, ancillary, our assumptions are that we continue to see pressure in the ancillary world and that is not coming back.

And the range really is due to the variability, which does happen in December.

So that does cause another uncertainty kind of in our December -- particularly in our December month.

Okay.

And then just over on Development.

I thought I would just ask, you mentioned some project delays.

We noticed in your filing that your recorded but unperformed backlog performance obligations are down pretty significantly since the start of the year.

But I think previously, you mentioned that your fiscal '21 was well booked or even maybe you said nearly fully booked.

And so I guess, the question is, what's the status update on this?

Are some of the delays that you saw in the quarter expected to continue throughout '21 to maybe change the way you see the '21 development picture laying out?

And I was just wondering if, given the uncertainty in the commercial real estate market, if you're seeing any cancellations?

Yes.

Previously, I mentioned that we were booked for the first quarter.

And that continues to be the case that the first quarter is kind of booked at our expectation level.

It's where -- I said before is that in the first half of the calendar year that we saw some weakness overall in the Development, and we continue to see some of that, not cancellations.

It more so has to do with the fact that during the April through July period, overall project activity was lower in the construction area.

And this caused us to pause a little bit on the dip we see in the first half of the calendar year '21.

That being said, actually bidding activity is increasing, and we're actually seeing some nice upticks in overall project inquiries, kind of the reverse of cancellations, that gives us some optimism as we look out 9 months from now.

Our next question comes from Tim Mulrooney with William Blair.

A couple of questions.

First, can you talk about how your enhancement revenue trended through the quarter and maybe into October?

I mean you talked about your base contract revenue, which is really helpful, 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?

Yes.

If you look at overall enhancements, what we did note that contract -- the total contract was up about 100 -- about 3% at 103% to last year.

Ancillary continues to show some weakness, obviously, with the overall profile of the business being down about 3%.

So the correlate of that is ancillary.

And we are seeing ancillary, although improved off of the fourth quarter -- off of the third quarter, still about 20% or so down year-over-year.

Okay.

That's really helpful.

And on -- I wanted to ask about employee retention.

This isn't really necessarily directly correlated to your results, but I know this is a critical metric for the business.

So I'm thinking about a couple of different factors here.

And I know we've talked about this in the past, Andrew, but now seeing these onetime bonuses you recently paid out do you expect that to have an impact?

I'm thinking about suspension of H-2B visa program 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?

Yes.

And what you see out there is that we continue to have a very dedicated and strong base of employees throughout the organization, a critical core that continues to operate.

We talked about, we paid over 13,000 people in the company essentially work bonus, and that shows you the extent of the stickiness that we have with our employees.

I mean the fact of the matter is those have been with us since May to get that bonus.

And that was not -- those were the people who were actually going out and doing work, landscaping, gardeners in the field, every single day.

So -- and so when you look at that overall attention, we're very -- I'm very pleased to be able to say that, that we had a very strong retention element throughout the entire COVID pandemic.

As you look out towards the H-2B, the H-2B visa announcements back in June were through December 31.

And so the program itself continues to be active with taking applications for 2021, and there has not been any declaration specifically related to how that impacts 2021.

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

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

Yes, Shlomo, this is John.

Part of our development segment, much more cyclical in nature, the user of working capital.

As you've heard me say before, the company has about $30 million of inventory.

$20 million of it was tied up in the tree industry business.

And we had a really good offer at a really good multiple, we want to take advantage of that.

I think, Shlomo, also, if you look strategically, this nursery business within what we do, we don't grow products or make products.

We basically develop landscapes, install landscapes and maintain them.

Strategically, the company that acquired this was a nursery company.

And so taking a nursery company and putting it with another nursery company really gave a strategic reason for it to be in more of a group focused on that line of business rather than the line of business strategically is really where we're present.

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

No, no.

We treated all transactions between the tree nursery and our own Development business pretty much as an arm's length transaction.

We did buy and we continue.

Actually, what's encouraging is we actually have a very cooperative agreement now with Devil Mountain, which is a company that bought the nursery to continue a very positive and healthy working relationship between our 2 companies.

And we actually think it's going to expand our relationship by tapping into Devil Mountain's other nursery businesses and creating an overall really strategic synergy with a company that's focused in on nursery business.

Okay.

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

Yes.

It's about $1 million, Shlomo, in Q1.

Okay.

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 kind of 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, very disciplined on costs, if you can elaborate on that?

Yes.

I would say it's more the latter than the former.

We are being aggressive where we can be and prudent on pricing as we have been historically.

But I would say the main driver of the incremental margin improvement in the maintenance side was driven by really good utilization of our technology tools around our electronic time capture in managing the labor, so there was a benefit there.

And then also the cost side, Shlomo.

Those were the 2 main drivers of the enhancement in margins for the quarter.

Okay.

And if I could squeeze one more in.

You did a really good job on working capital, and that's something that has really driven the cash flow over here.

Is there any -- how should I think of this going forward?

Do you feel like you've squeezed it down to kind of a run rate level here?

Or is there more work that you think you could do there, John?

Well, I think, for us, it's all about continuous improvement, Shlomo.

So we're going to continue to be prudent and disciplined.

We have made a lot of structural improvements in how we manage the working capital.

But our goal right now is to hold on to the improvements that we've made.

But we -- as I said in my comments, we'll continue to manage it very aggressively on the working capital side.

And we really want to focus on the items that are controlled at the branch level, mainly collecting our money, and we've done a very good job in being aggressive in our collections across the board, both development and maintenance.

Our next question comes from George Tong with Goldman Sachs.

The pace of Development revenue decline improved pretty meaningfully in fiscal 4Q, even against a relatively tough comp in the year ago period.

Can you talk a little bit about how project delays are currently impacting the Development business if you're seeing a broad-based reopening now?

Or if things are still pretty much under lock-and-key?

Yes, George, I think overall in Development, it's really spotty.

I mean, around the country, different areas have different cases.

I mean the reality is the -- for example, the Boston area seems to have a little more impact on the ability to speedily get projects done.

So we're seeing a little more delays in those kinds of areas.

I think overall, we're seeing demand in the Development area in Q1 kind of similar to last year little like are relative to last year.

It's really where we see kind of the impact of the slowdown is really kind of our Q2, we then kind of coming back in Q3 and Q4 to probably more typical levels that we saw in 2020.

So really, our dip happens in Q2.

Got it.

That's very helpful.

In your prepared remarks, you did cite several organic revenue growth drivers looking ahead.

So sales team growth, marketing effectiveness.

You talked a little bit about some of the virtual coaching and training programs.

Can you elaborate on which of those levers you think has the most potential to accelerate your growth exiting COVID?

Yes.

Exiting COVID, we're seeing some -- there's multiple levers there, as I tried to outline.

As I pick on a couple of them, I mean, we're seeing some real positive shoots coming out of our digital marketing efforts, which is really showing a deliberate attempt to get out into the market using omnichannel or really a multipronged approach to generate significant qualified lead generation.

We started this about a year ago with a single stream kind of approach and now going into a multi-omnichannel approach in targeted markets.

We're seeing, as I mentioned before, a 3x improvement in leads.

It's -- that's leading to a 7x close.

So a very significant element.

And where we're seeing some of that is as recently as October.

We talked about before is our net new.

Our net new number in October was the highest net new we've seen in the company's history, which means our sales efforts are beginning to work.

Now it doesn't mean realized revenue coming tomorrow, but it means the contracts, which we start looking now early into contracts that will start in April.

We're seeing some real positive shoots coming out of that marketing initiatives.

Our next question comes from Judah Sokel with JPMorgan.

I wanted to ask a little bit about the comment you made around fiscal '21.

You had said assuming a couple of caveats, which is average snowfall and a 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 revenues in total up year-over-year?

Is it talking about EBITDA as well?

Or was this maybe just a Maintenance comment?

So just hoping you could dig into a pretty encouraging comment that you made.

Yes.

It's an overall comment.

I think, Judah, the answer is, yes, revenue is up and EBITDA up as we -- as long as those funds, we have average snowfalls and we see a modest recovery, we're very encouraged by what we see out there, not only with, as I mentioned, in our new sales pipeline, but also with overall Development booking trends.

The thing is -- and as I noted, our Contract Maintenance business is stable.

And growing that contract-based business with return to normalized activity with COVID the ancillary pull-through will come.

And so yes, we're encouraged as long as we see recovery in COVID, which we believe with the vaccine will occur and overall snowfall happening at average levels.

Great.

And that would also not be relying on increased M&A, right?

That would -- let's just put M&A aside, on an organic basis, do you think that this could be up year-over-year, assuming, like you said, average sales go on a modest recovery?

Yes.

Okay.

Great.

And then the other thing I just wanted to ask, I appreciate the slide that you guys included, which showed the trends for the contracts, I believe it was Slide 11.

I just wanted to make sure I understood it.

So this is the piece of Maintenance that is just contracts, right?

So it excludes the enhancement work.

Is that how I'm understanding it?

That's correct.

Judah, it's contract only.

It excludes ancillary.

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

Judah, it's -- yes, I mean, excluding snow -- including snow it would be 25:75, excluding snow roughly 2/3, 1/3 kind of if you look at it.

But the overall Maintenance business -- about 25% of the overall Maintenance business, the ancillary service.

Okay.

So putting it all together, if we wanted to just quantify how much impact you're seeing from COVID?

So I know you quantified it last quarter.

I believe it was $75 million in total, $65 million of that was in Maintenance.

Could you help us -- maybe you did and I missed it, could you just quantify how much you saw an impact from COVID-19 on your revenues in the fourth quarter?

And then what you're sort of expecting, what's embedded in your guidance for the first quarter?

Well, (inaudible) at this time if you look at it, if you look at the Maintenance business, in general, you're right, we said about $75 million in the third quarter.

I think that's slowed down a little bit.

So we would think the total impact to COVID in the fourth quarter in Maintenance is somewhere around $50 million or so in the fourth quarter.

And that's in Maintenance.

Development (inaudible) involved quite a bit less (inaudible) in revenue.

So you looked at the overall picture, $60 million out of the $75 million, about $135 million or so impact for the year on COVID so far.

We would expect that there is no indication that, that won't come back as we come out of the COVID pandemic.

Our next question comes from Hamzah Mazari with Jefferies.

This is -- it's Mario Cortellacci filling in for Hamzah.

Just wanted to touch on some of the decremental margins kind of expected in Q1, which is (inaudible) guide.

But I guess, just how should we think about incremental margins throughout the remainder of 2021 as comps get easier and growth turns positive?

Is there -- could you give us some guidance or outlook on how we should think about the cadence to that in '21?

Yes, Hamzah -- excuse me, Mario, this is John.

I'll start on that question.

As we said in our comments, we still expect on the Maintenance side, the impact of the pressure on ancillary will impact our margins, we think, through the first couple of quarters of fiscal 2021.

So we don't see any change in that.

We are encouraged by what we're seeing on the contract piece of the business and how we've been able to manage our labor and our costs, which was evident in our results for the fourth quarter.

On the development side, it's a little bit trickier because of the project nature of those -- of that business.

And when projects get delayed, it's -- that is indicative of how the margins are going to hold up in that business.

But again, we saw decent results in managing the cost in the fourth quarter there, which led to an increase in margins.

Our challenge in Development in fiscal 2021 will be, as Andrew said, we have good visibility in Q1, things look okay.

It's Q2, we expect some of that softness to materialize.

And then if things back, we hope we would see a more normalized level in Q3 and Q4 on the Development side.

Okay.

That's helpful.

And then, I mean, you guys said that you added 10% to the sales force this year, 25% in 2018.

You made some comments around marketing leads growing 3x.

And you added some detail on one of the other questions.

But I guess, just how are you thinking about sales force productivity?

Or how are you measuring that?

Are you guys looking more at total sales per salesperson total contract revenue or ancillary revenue?

Just trying to get a sense for how you're basing that?

And then what does that, I guess, look like versus history?

And how quickly can that salesperson ramp once you guys are adding them?

Is it a 6-month-type of ramp?

Or does it take a year or 2 for them to get up to being fully productive and fully profitable?

Yes.

If you look at it -- I mean, our primary KPI we use is contract revenue per sales employee.

And with the ramp that we've had, I mean, if you look at that 25% rent over 2 years, the -- and then couple that with the ability that the training and the in-person kind of development that you typically have with salesperson has slowed down, no question because of COVID.

But the point is that we continue to invest.

We've continue to build our sales force.

And we've seen some quite nice stickiness with our employees if we brought them on during this pandemic.

So what we do believe it is as we come out of the pandemic that the sale -- and thus, we have also seen, as you bring in more new employees, you see that metric come down a little bit, not combined with new employees and the reality that the sales process within landscaping is a very personal, in-person sale, dealing with a client, going on customer walks with the properties, understanding the issues at a property with the property managers and owners.

So that combination has caused that metric to slide a little bit recently, but we are very optimistic that when we look at tenure, people who've been with us for over a year, the amount they sell dramatically improves.

And we see -- we're seeing that metric go up.

So as you see time pass and those new employees gain experience, combined with the removal of the pandemic weight.

We are really, really energized about what the sales team -- this continued investment in sales is going to produce.

Great.

If I could just sneak in one more on M&A.

I mean you said you have a $400 million pipeline.

I mean there's a lot of chatter in other services industries that 2021 to be an outsized year in M&A, with 2020 being towards the lower end of the expected ranges.

I mean, is that an opportunity for you guys in 2021?

Is that -- could it be an outsized year?

Or how much of that $400 million in your current pipeline could you recognize in '21?

Yes.

Our pipe is up.

We typically said we have about $300 million to $350 million.

Our pipeline now is about $400 million in opportunities in the pipe.

You should expect -- I think everyone should expect that pipe to convert.

If we convert it at a similar rate, we should be doing slightly more M&A.

But M&A is more of an art than a science.

So dealing with -- making sure that the companies that we're connecting with have an ability to match with the culture of BrightView, and that's the most critical thing.

So right as we sit here today, opportunities out there have grown, and we continue to be very optimistic about what that can mean for acquisitions in 2021.

Our next question comes from Seth Weber with RBC.

It's Gunnar Hansen on for Seth.

I guess you guys have tested on a lot of things.

But I guess, John, going back to the net working capital benefit, obviously below 9% of revenues have trended down pretty significantly over the last couple of years.

I mean should we assume that, that ticks back up to kind of the 10%?

Has it been realized in prior years?

Or how confident are you that a 9% working capital is sustainable benefit?

Well, as I said earlier -- and good morning, Gunnar, we're going to work extremely hard to maintain what we've achieved here.

We have done some structural things on the AR side.

We've had a heavy focus on anything that's aged to get that in the building as soon as possible.

One of the things I do want to mention is that we haven't done these dramatic improvements on the back of our vendors.

So we're not aggressively extending our vendors.

We have very good relationships there.

And I think that's -- that -- those are really the key elements combined with managing our capital expenditures aggressively, and we're certainly not starving business at all.

I think those 2 components will really help us to maintain our consistency and ability to generate significant cash in this business to both, as we said, delever and continue our acquisitions.

Okay.

That's helpful.

And Andrew, I guess, just with some of the metrics you provided around the sales pipeline and the marketing leads, all that seems pretty encouraging.

Can you give us a little bit more color on the background of those programs?

I think you mentioned that it really started a year ago, and it's moving more to the omnichannel today.

I mean how -- is that done on a centralized basis and then those leads pushed out to the local branches?

How pervasive are those leads across the country?

Are there any end markets that are better than others?

And with the lead that you're seeing, is it white space?

Or are you winning share from competitors?

Has there been a shift to greater outsourcing?

Any color around kind of some of the context on those?

Yes.

We've put a deliver project about a year ago, and there are various stages that we're introducing.

We split out with single stream channel.

Omnichannel is something we're just starting right now.

When you look at what we think we can create as far as pipeline, it is targeted at certain markets throughout the country.

What we've done is about a year ago, we started deploying regional digital marketing resources that partner with our divisions out in our regions.

So that it's kind of -- we've taken the first step on that.

We do believe there's kind of multiple steps we're taking.

Step 1, done, solid results.

We're now taking it down to expanding our market presence.

Step 2, we believe there's even more coming in step 3, which probably will be beginning starting in about 6 months to 9 months from now.

So there's multiple stage levels that we're going at that.

And the initial -- initially what we're seeing or what are reported is some very positive results.

And -- look in landscaping, the reality is the land exists.

And so most of it is going to have some competitive element, but the market is so big, we only have about a 2% to 3% share of the landscaping market, right?

And so as we're going out there, we're basically reaching out and engaging with customers, many times who don't know who we are.

So being able to go out and stimulate brand awareness is really what this marketing is doing.

And by doing that, we're exhibiting more customers coming into the pipeline that ultimately converted to higher rate in the BrightView.

Our next question comes from the line of Kevin McVeigh with Crédit Suisse.

How much snowfall you factored into kind of the low end and the high end of the Q1 guidance?

Is there any way to think about just ring fencing?

What type of range we should think about for 2021 overall as well?

Appreciating you're not giving formal guidance, but just your way to think about the bands, not only for the quarter, but I guess, for the full year?

Yes.

If you look at so far, in general, in Q1, last year was -- it was a pretty good first quarter.

And so if you look at kind of the range that we have, the top end of the range, with kind of -- with average snowfall.

It doesn't anticipate anything big to get the top end of the range.

In other words, we go through the range, if there was a blizzard event in December.

The bottom of the range, I'd say light snowfall, probably a shrinkage of roughly $10 million or so off of prior year at the bottom end of the range, $5 million to $10 million shrinkage off of last year.

And that's kind of the range.

But we really need to get as many people know, where snow is important.

And so events that occur in high snow markets tend to be more in fixed contracts than those that have more variable or kind of mid-Atlantic type snow.

We need to see snow in all areas to some degree, ice and the snow that kind of hit the averages.

We'll give more color as that goes.

As far as 2021, rest of the quarters go, we really need to get closer into December and January to see kind of weather patterns, to see what that's looking like before we're getting more specificity as to where we got to go.

That's helpful.

And then just remind us because I know you've taken some actions in terms of bringing some of the capacity in-house to try to minimize.

I think some of the expense volatility around surge.

Are you kind of where you need to be on that?

Or is there any way to think about how much of the coverage would be in-house versus outsourced, obviously, in a normalized environment as opposed to something super, super disruptive?

We look at that balance all the time between outsourcing and in-sourcing.

We are trending towards putting more to our in stores to our branch perform.

We will continue that.

Measured, meaning that there's capital expenditures involved with outfitting our capabilities.

And so it was going to be a multiyear process, where we continue to doing more and more in-sourcing with the CapEx deployment supported by overall data CapEx.

Our next question comes from Sam England with Berenberg.

The first one, the market data that you've got in your 10-K has the overall market going back above 2019 levels in sort of 2022, 2023.

Do you think you can outperform that on an organic basis over the next couple of years?

Yes.

If you look at the (inaudible) we had, you're right.

It's showing a rebound more in 2022, '23.

And yes, we believe that given the marketing, the digital marketing investments, the increased sales force we have, we believe that we -- and then also the return of ancillary demand, which we fully expect will happen as we get out of the crisis, all those will be able to fuel a better than market growth.

Okay.

Great.

And then just on the CapEx, you're guiding into CapEx going back up to 3% of sales in 2021.

I just wanted to know if that's just a catch-up on stuff that you've delayed this year, whether there's any sort of new investment going in anywhere?

And then you mentioned the sort of technology improvements you've made, is there more investment to do going forwards on the technology side as well?

Yes, Sam.

The guide we gave was directional what we think we're going to be doing in fiscal 2021.

We spent less, obviously, in '20 than we did in '19.

As I said, we certainly are not starving the business.

We just -- the guide was based on a prudent level of capital versus what we expect on revenue.

But nothing incrementally or large projects out there that would stimulate any ancillary capital expenditures.

And let me emphasize on technology, what I'm thrilled about this, is this is why BrightView is different.

We can go deploy $1 million of capital in capitalizing and doing software development that is unique to this industry that enables thousands of people in our company that operate more efficiently.

It's something only we can do.

And frankly, when it comes to our capital of the $65 million number, it's a relatively small amount of our capital.

It's something that's a differentiator for this company that we will continue to invest in and continue to enhance and deploy our pools that's going to drive a greater sales result.

That concludes our Q&A session for today's call.

Thank you all for participating.

You may now disconnect.

Thank you.