Brightview Holdings Inc (BV) 2020 Q1 法說會逐字稿

Good morning and welcome to BrightView's 2020 First Fiscal Quarter Earnings Conference Call.

As a reminder, this call is being recorded.

(Operator Instructions)

The earnings 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.

Before we begin, the company 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 recent 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.

Also, reconciliations to the most directly comparable GAAP financial measures and other associated disclosures are contained in the measures -- the earnings release on the company's website.

Disclaimers on forward-looking statements and non-GAAP financial measures apply both to today's prepared remarks as well as the Q&A.

This does and will include references on today's call to organic revenue within the Maintenance Services segment, which consists of underlying Commercial Landscaping revenue from snow removal services net of Managed Exits.

The company believes that this measure provides a more complete understanding of the factors and trends affecting the business.

Finally, unless otherwise stated, all references to quarterly, year-to-date or annual results or periods refer to our fiscal years ending September 30 in each respective year.

Today, the company is presenting the unaudited results for the 3-month period ending December 31, 2019.

I will now turn the call over to BrightView's CEO, Andrew Masterman.

Please go ahead, sir.

Thank you, Jacob.

Good morning, everyone, and thank you for joining us today.

This morning, we are going to take you through our results for the first quarter of fiscal 2020 as well as provide an update on the key strategic initiatives that we remain sharply focused on.

Turning to our executive summary on Slide 4. Today, we are reporting results for the first quarter of fiscal 2020.

Total revenue grew 8.5% in the quarter versus the prior year period, underpinned by positive organic revenue growth in both of our operating segments.

Revenue on our maintenance segment benefited from increased snow contracts and higher overall snowfall volume and our Strong-on-Strong M&A strategy, which continues to be a reliable and sustainable source of revenue growth for our company.

These benefits more than offset the negative impact from the final tail of our Managed Exits strategy.

Additionally, as expected, the Development Services segment delivered a second straight quarter of double-digit growth, again, demonstrating the robustness of its backlog, which is showing no signs of slowing down as we continue through fiscal 2020.

These results represent the highest revenues ever generated in each segment during the fiscal first quarter.

Adjusted EBITDA for the quarter showed positive growth and was largely in line with our guidance and expectations.

As we exit the first fiscal quarter and look forward, we remain confident in our ability to deliver against the full year 2020 guidance of total revenues between $2.465 billion and $2.525 billion and adjusted EBITDA between $312 million and $320 million.

The fundamentals of our business remain strong and our position in the industry continues to offer opportunities for us to capture.

Additionally, as we look back on our quarterly adjusted EBITDA results over the last 3 years, we are encouraged.

For the 12-month period ending December 31, 2018, we generated approximately $284 million of adjusted EBITDA.

For the comparable 12-month period ending December 31, 2019, we generated approximately $307 million of adjusted EBITDA, up 8.1%.

Assuming an average snowfall during the rest of 2020, we believe we can continue on this trajectory, which positions us to meet our guidance and continue driving shareholder value for our investors.

Moving now to our 2020 first quarter results on Slide 5. Total revenue grew 8.5% in the quarter with both the maintenance and development segments delivering strong results driven by record revenues for our first fiscal quarter.

First quarter revenue in the maintenance segment grew 6.7% versus last year, and this result included a 5.9% or $23.2 million incremental contribution from acquisitions as we benefited from the wraparound of M&A transactions completed in 2019 as well as recent deals completed during the first quarter.

Excluding Managed Exits, organic revenues, inclusive of snow removal services, were up 1.2% or $4.9 million versus the prior year quarter.

This was driven by expanding snow removal revenues, which were up $6 million, representing a 12.5% increase versus the prior year.

Although snow removal services provided an overall favorable revenue tailwind, the cadence and geographies of how and where the snow materialized did not offer the most optimal margins.

The markets that experienced the most snow, our Midwest and Rocky Mountain regions, are made up primarily of fixed fee arrangements, which carry lower margins due to the fixed recurring nature of the business.

Conversely, our Mid-Atlantic region, which operates under variable billing arrangements and carries higher margins due to the complexities of managing in a variable environment, experienced very little snowfall at all.

Commercial Landscaping revenues in the quarter were down about $1 million, some of this due to the impact increased snowfall had on our ability to complete ancillary projects in the seasonal markets and the winding down of some green contract work in our seasonal markets that will be offset as we ramp up in the spring.

We expect the net impact of contract wins and losses to right-size and become positive when we begin servicing those new contracts later in the year during the green season.

Also, we are absorbing the final, albeit small, quarterly impact of our Managed Exits strategy in this quarter.

This is the final quarter that we will be reporting on this initiative.

Lastly, the development segment maintained its strong momentum into 2020 with its highest first quarter revenue contribution ever.

Revenues were up 13.7% versus the prior year quarter.

We are pleased with the overall revenue growth profile for the quarter, and we continue to see momentum in both segments, not only in what we recognized in this quarter, but also in positive leading indicators for both businesses.

New sales in the maintenance business are ahead of last year's strong pace and the backlog in our development business for the balance of fiscal 2020 remains robust.

More on that in a minute.

Turning to Slide 6. I want to provide a quick update on the critical investments we are making in technology and our team members.

As you know, we have completed the rollout of our Electronic Time Capture in our development segment and are continuing to drive full utilization by our team members across the enterprise.

The increased visibility provided by Electronic Time Capture is enabling our operational leadership to more effectively and efficiently manage our workforce.

We have shifted into the next phase of further integrating the Salesforce CRM software into our business and our account managers and other customer-facing team members are benefiting from the enhanced visibility into our current and prospective client base.

Both the HOA Connect and BV Connect portals continue to receive favorable reviews from our customers as they experience the ease with which they can seamlessly communicate with BrightView on how to manage their properties and meet their needs using these proprietary digital channels.

And finally, we have continued to invest in our decentralized sales team, which has grown from 180 at fiscal year-end to over 200 at this point in time.

All of them are working directly with our branch-level leaders to locally source and validate new business opportunities in our high-touch industry.

We are already seeing positive signs from this investment.

As I mentioned earlier, maintenance new sales are ahead of last year's pace and in fact are the strongest results we've experienced over the last 4 years.

This is evidence that the continued investment and redesign of our sales team is working.

The team is producing more stable customer portfolios and stronger new business pipelines to support future growth in our underlying maintenance business.

And as I mentioned in the past, new sales wins during the first half of the year are a strong indicator of how revenue will trend in the coming quarters, particularly during the green third and fourth fiscal quarters.

Our ability to continue to invest in our people and industry-leading technology is a key differentiator and a benefit of the scale of BrightView.

While we maintain a thoughtful and disciplined approach to how we utilize our capital, we are uniquely positioned in our industry to pursue multiple value-added investment opportunities that we believe will further enable our organic growth capabilities while continuing to drive long-term shareholder value.

On Slide 7, we provide a similar recap as we have in the past of the companies that have joined BrightView through our Strong-on-Strong M&A strategy over the last 3 years.

We reported last month the addition of 2 more talented teams along with their attractive customer portfolios.

Summit Landscape Group, serving customers across the Carolinas and Nashville, Tennessee; and Signature Coast, serving customers in Northern California and Nevada.

These transactions strengthen our presence in several attractive evergreen and seasonal markets.

We are excited to welcome Mike, Steve and the entire Summit team consisting of 180 skilled landscapers to the BrightView family.

Mike and Steve, along with their senior leaders, will remain with the business.

We are also proud to welcome the 600 members of the Signature Coast team to BrightView.

Signature Coat is a top 50 landscape services provider and the second largest acquisition we've made since the 2017 inception of our Strong-on-Strong acquisition strategy.

Over the coming months and years, we will work with Kelly Solomon, along with other senior leaders from the organization, leveraging their talents to consolidate our strong position in these incredibly important evergreen markets.

As the acquirer of choice in our industry, these acquisitions mark our 17th and 18th acquisitions since 2017, and we have learned a tremendous amount from every one of them.

We have continued to evolve and enhance our integration approach with every acquisition based on what we've learned from the past.

More specifically, we have started engaging with branch-level leadership earlier in the process to identify ways to accelerate growth, especially in attractive markets like Reno, Napa and Charleston, South Carolina.

We've also started to accelerate our pace of integrating acquisitions into existing branches when we have an established presence in that geography.

We are excited about our progress and plan to continue taking advantage of attractive opportunities such as the ones I just described to consolidate our fragmented industry, driving profitable long-term revenue growth for BrightView.

Finally, before I turn the call over to John, I wanted to discuss another focus area of BrightView on Slide 8, which is our commitment to environmental sustainability, social responsibility and corporate governance, or ESG.

Over the last few years, we have made significant strides in each of these areas to ensure that as the leader in the landscape industry, we are also on the forefront of commitment to ESG.

These concepts are important to all stakeholders, the communities where we operate, our employees, our customers and our stockholders.

As it relates to environmental sustainability, BrightView is a leader in the use of environmentally-responsible equipment and techniques, including zero-emission commercial lawnmowers, state-of-the-art water conservation technology and innovative landscape practices, such as green roof installations, LEED-certified landscape consulting, waste reduction programs and xeriscaping.

BrightView is currently the nation's largest purchaser of zero-emission commercial landscaping equipment, and we've also been honored for helping clients conserve hundreds of millions of gallons of freshwater each year through innovative irrigation technology and design strategies.

On the topic of social responsibility, we have been laser-focused in many areas, including diversity and inclusion in the workplace.

This past quarter, we celebrated the second anniversary of an employee advocacy group for women at BrightView.

The name of the group is GROW, which stands for Growth in Relationships and Opportunities for Women.

Being an industry that is made up predominantly of males, I thought it was critical that we take the lead in changing this dynamic.

GROW's mission is to advocate for the recruitment, retention and promotion of women at BrightView.

GROW has grown from an idea to a group of hundreds of women across the enterprise actively participating to advance the mission.

I'm personally involved in GROW and serve as the executive sponsor, along with Amanda Orders, BrightView's recently promoted Chief Human Resources Officer and Co-Founder of GROW.

I congratulate the members of GROW on their second anniversary and look forward to continued progress in year 3.

On the heels of the success of GROW, we have just rolled out another internal employee support group that is focused on advocating for former members of our armed forces.

BRAVO, which stands for BrightView Recognizing and Advocating for Veterans Opportunities (sic) [BrightView Recognizing and Acknowledging Veteran Opportunities], will support the current and future members of the BrightView family that have bravely served and protected their country.

The new group is in the early stages of assembly, but I look forward to continued progress and engagement with these team members.

And finally, we at BrightView and our Board of Directors remain committed to driving a best-in-class corporate governance structure.

This was evidenced by the appointment of 2 new independent directors during fiscal 2019.

Half of our board now consists of independent directors, half of whom are women, and all of whom bring a wealth of executive level leadership, experience and expertise from across a broad spectrum of industries.

As we move forward, we will continue to work on identifying and pursuing areas of opportunity to lead the charge in all facets of the landscaping industry, especially ESG.

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

Thanks, Andrew, and good morning to everyone.

Let me start with a snapshot of our first quarter results on Slide 10.

As you have already heard, total revenue for the company was up in the quarter on the back of increased snow removal revenues in the maintenance segment, a strong book of business in the development segment and the continued revenue contribution from our M&A activities.

Our adjusted EBITDA totaled $51.7 million, up 3.2% versus the prior year.

At the consolidated level, our results were right in line with our expectations for the quarter.

We were able to deliver overall growth while funding additional investments that we believe will allow us to drive even stronger new sales results, improve client retention and further streamline our service delivery in the maintenance segment.

Turning to the details on Slide 11.

As I mentioned, total adjusted EBITDA for the first quarter of 2020, was up 3.2% at $51.7 million.

This was driven by solid snow results, although muted in one of our historically strongest regions, momentum in our Development Services segment plus excellent management of corporate expenses.

The maintenance segment's adjusted EBITDA declined by 2.1%, which led to a 100 basis point margin contraction versus the prior year quarter in this segment.

This decline in profitability was primarily driven by higher SG&A spend in this segment related to the timing of certain variable compensation expenses as well as the increased people and technology investments mentioned earlier.

These 2 factors amounted to approximately $3.5 million of headwind in the quarter.

Additionally, while overall we experienced higher snow volumes year-over-year, the profitability contribution from snow was not enough to fully offset the cost of this investment due to the lower snowfall realized in the Mid-Atlantic region, which is generally a higher margin book of business for BrightView.

Profitability in the development segment grew roughly in line with revenue with adjusted EBITDA up 12.4% versus the prior year quarter.

The segment's margin of 12.5% was down 10 basis points in the -- from the prior year due to timing of certain variable compensation expenses in the quarter.

To partially offset the increased maintenance SG&A spend, we implemented several initiatives to reduce centralized costs.

As a result, corporate expenses were $0.5 million lower versus the prior year quarter and represented 2.6% of revenue, down 40 basis points as a percentage of revenue.

Let's take a look at our capital expenditures and capital allocation on Slide 12.

Net capital expenditures for the quarter were $13.5 million representing 2.4% of revenue, which is in line with our expectations and our long-term framework.

As you may recall, we saw an uptick in capital expenditures in the second half of fiscal 2019 driven by some opportunistic investments as well as some accelerated purchasing to prepare for the snow season.

We are now seeing those spend levels come back in line with our longer-term targets.

Net debt decreased $6.3 million compared to the prior year quarter.

Our leverage ratio for the quarter was 3.8x compared with our prior year Q1 leverage ratio of 4.1x.

We are pleased with this result.

And as stated previously, with our adjusted EBITDA guidance range and improved cash generation, we expect our leverage ratio to be at or below 3.5x by the end of fiscal 2020.

Before I turn the call back over to Andrew, let me reiterate a message he conveyed earlier in the call.

With first quarter results in line with our expectations and the continued marketplace opportunity ahead of us, we remain confident in our ability to deliver against the full year 2020 guidance we shared on our last call.

On Slide 13, you'll see a recap of what we shared on that call.

We believe we are on track to deliver total revenue between $2.465 billion and $2.525 billion, adjusted EBITDA between $312 million and $320 million and net capital expenditures between 2.5% and 3% of revenues.

Our assumptions are for the maintenance segment to grow organically between 1% and 3%, the development segment to grow between 1% and 2% and acquisitions to deliver at least $60 million in realized revenue, including about $30 million of wraparound from 2019.

Our guidance range for total revenue and adjusted EBITDA contemplates average snow removal revenue for the rest of 2020.

Finally, our improved cash generation should continue to support our M&A strategy while also allowing us to reduce our leverage to 3.5x or lower by the end of fiscal 2020.

With that, I'll turn the call back over to Andrew.

Thank you, John.

Turning now to Slide 15.

Overall, we are pleased with our first quarter results.

We were able to continue delivering top and bottom line growth and remain encouraged by many of the underlying positive trends that we are seeing in both of our segments.

Our new sales in the maintenance segment are the highest they've ever been and as I mentioned in the past, represent a strong indicator of how revenue will trend in the upcoming quarters.

Development Services delivered a second straight quarter of double-digit growth with a backlog that shows no signs of slowing down through fiscal 2020.

And we were able to deliver overall adjusted EBITDA growth while increasing our investments in field-based sales and operations leadership to drive even stronger new sales results, improve client retention and further streamline our service delivery in the maintenance segment.

Additionally, our M&A pipeline shows no signs of slowing down and has delivered a reliable source of growth for 3 years running.

We are excited about our progress and plan to continue taking advantage of attractive opportunities to consolidate our fragmented industry and drive profitable long-term growth for BrightView.

Thank you for your interest in BrightView and for your attention this morning.

We will now open the call for your questions.

(Operator Instructions) We have a question from Judah Sokel.

Just wanted to ask a question about M&A.

I know the guidance is still for the same $60 million in fiscal 2020 despite making these 2 skilled acquisitions.

I assume that's because you were already incorporating these 2 deals in the previous guidance, knowing that it was in the pipeline.

But maybe just help us think through the math.

You mentioned $30 million of wraparound and now it looks like you made a couple of deals.

I would have thought that, that would have brought us above an incremental $30 million to really bring us above that $60 million, well above $60 million.

So maybe help us think through the math of the contribution you had from previous deals as well as these new deals, please?

Sure, Judah.

When we look at what we've been able to accomplish with the 4 deals that we've been able to do since the beginning of the quarter, yes, you're right.

We -- during the earnings call last time, we had already known about 2 of those 4 deals.

But that being said, we do believe there is some upside in the overall revenue from M&A with these deals we've already completed.

It's just as we look at the entire picture, and we still have the uncertainties around the ancillary flow-through as we get into the second quarter, we'll be able to give an update on that on the next call.

In addition, when it comes to the full year outlook for the company, the reality there still is the remaining second quarter and the snow removal services, which we have to understand what those are through the second quarter before we can give an overall update to the impact holistically.

Understood.

Just one other quick question as far as development organic revenue growth is concerned.

You've now had 2 straight quarters of double-digit organic revenues in development, yet the guidance is still for 1% to 2% for the full year.

So maybe help us understand why is that going to slow down so materially.

It sounds like the pipeline is fairly strong.

So just trying to understand the cadence of organic revenue growth in development.

Sure, yes.

And the organic revenue growth continues.

The pipeline continues to be strong for development.

We're not fully booked for the entire year yet, although there are very strong indications about bookings pace.

That being said, the second quarter, we expect this quarter -- sorry, the first quarter, we expect this quarter to be the highest revenue growth quarter for the development segment throughout the whole year given what we see going forward.

As we continue to layer in and book for development over the next several months, again, as we get into May, we'll be able to give you a better feeling.

As you know, development is a project-based business.

Overall, given the breadth and the size we are, it does provide a fairly stable level of revenue growth and revenue for the company, and we'll be able, again, to give a better visibility as we complete, and we should be more or less complete with our bookings profile into 2020 and within the next several months.

We have a question from Hamzah Mazari.

This is Mario Cortellacci filling for Hamzah.

I'm just curious about the investment in sales and operational leadership.

I didn't know if that was to retain some talent.

We know there's some tightness in the labor market on the field side.

I just don't know if you're also seeing it on the management side.

And lastly, could you also maybe give us an idea of what you're thinking about or what you're looking at for in -- for wage inflation in 2020?

Yes, Mario.

This is John.

I'll talk about the degradation in the quarter on the maintenance margins first and then to answer your question.

We reported 100 basis points of degradation in margin.

I want to be very clear that those were deliberate decisions that we're focused in the SG&A side.

We added the additional field headcount and operational resources in addition to technology to support that sales force through CRM.

That was the main driver, that 100 basis point degradation.

The other piece was just around some timing and better snow performance on our incentive comp.

And then as we talked about the M&A, when they first come in, they're lower from a margin standpoint versus our process of 12 to 24 months to getting them up to our level.

So that was a smaller piece of that walk.

As far as on the labor side, we really haven't seen anything different as far as wage inflation.

We factored in our modeling 4% to 5%.

That's what we've consistently seen.

We've been able to manage that, I think, quite well.

And I think the other telling thing in the quarter that's not as evident is if you look at our gross profit in the quarter, which we disclosed, we're dead nuts flat year-to-year.

And I think that's a testament to our ability to continue to focus on pricing and other efficiencies and productivities to offset any labor inflation.

Great.

And just one more, and I'll turn it over.

So what we're seeing in other sectors and other roll-up stories is that there's some urgency from sellers, specifically in private or smaller businesses.

Just trying to get it done before the election, just some unknown tax consequences, depending on who's in office.

I just didn't know if you're seeing the same thing in the landscaping industry.

Over the last -- this is Andrew speaking.

Over the last several years, we've seen a fairly robust M&A pipeline.

I can't say that it dramatically changed one way or another.

I can say that we continue to see a very strong pipeline, and we are engaged at any given time with a dozen companies across the country that really are looking at potentially joining BrightView.

And what stays is -- and our discipline is that we are looking at strong companies with our Strong-on-Strong strategy, and we'll continue to be that disciplined.

But I would say there's really no dramatic or different degree of quality or of size of the pipeline that we see.

We have a question from Kevin McVeigh.

Given the strength on the maintenance side or on the development rather, I wonder if you can just revisit for us kind of the sensitivity on kind of the development and how that ultimately translates into maintenance in terms of the sensitivity from a revenue perspective?

And then just from a margin perspective, do you think we'll continue to see kind of the same historical deltas?

Or do you see any kind of narrowing of those margin trends within maintenance as opposed to development?

Well, I'll take -- the first part of your question on development is we see a continued strength within the overall development business.

It's -- we actually see, given the fact that we have 25 branches across the country, looking at projects in most every major metropolitan area.

I think that the revenue side that we see in development is a fairly steady indicator.

Don't see it coming down.

And in fact, we're looking at projects now that extend out into 2021 and 2022.

So while we still do have some room to fill in our guidance, we're filling the development backlog for this year, the inquiries going out into future periods continue to be quite strong and we remain very optimistic on where the development falls within that scope.

The development conversion into maintenance, again, historically, we see some projects move into maintenance but the nature of the customer is different.

The development customer is a general contractor in general.

The maintenance customer tends to be a property manager or a property owner.

That really definitely shifts a bit how the nature of the transaction occurs between our development customers and our maintenance customers.

That being said, hand off happens between roughly 20% to 25% of the times, and it continues to be a good pipeline of opportunity for our maintenance group.

And your second question was on maintenance margins.

Is that right?

Yes.

The margins kind of maintenance versus development and if you should expect any kind of relative spread to continue or narrow over time?

Yes, Kevin.

This is John.

I'll take that one.

Look, we still expect to see differentiation in those margins.

I don't see them changing in the near term or if we look out.

They're different types of businesses, different cost structures, different gross margin profiles, et cetera, et cetera.

And that translates into the bottom line where we have historically seen differentiation in the EBITDA margins of the maintenance versus development.

We don't expect that to come closer together or to differentiate widely versus what we've seen historically.

Super, super.

And then just real quick on the snowfall.

Can you remind us what the difference is in terms of the margin on the fixed contracts versus variable and what the mix is overall?

Number one, we don't really break out between snow margins.

But I can tell you that in general, across the industry, as you go to more predictable high snow areas typically in the north, like Boston or Detroit, Chicago, Colorado, Denver, places like that, those tend to have fixed fee arrangements, which means you're paying a certain service fee regardless of whether it snows or not.

And then when you go down into some of the less predictable areas such as Washington, D.C., Baltimore, Delaware, North Carolina, places all the way pretty much in the Mid-Atlantic and some of the Southern, Northeastern areas like Philadelphia, what you see there is a pricing model that's much more variable in nature.

In periods where it snows on average, it can be within the guidance of what we give.

And kind of -- it's a very solid business.

In times when it doesn't snow a lot, you have to carry the extra fixed cost to support that.

When it does snow, you can actually, actually see a nice benefit because of the deployment to those folks who are waiting for it to snow.

Got it.

And just one quick follow-up.

Did that factor into kind of the decision earlier in the year to increase the in-sourcing?

In some ways, it does.

I mean the in-sourcing idea that we have, especially in our fixed fee markets, we have a revenue stream which is pretty much quite predictable.

So that allows us to build our team to provide more stability for the labor force to allow us to then utilize those employees in both the predictable fixed fee -- fixed fee-type arrangements and then cascade that right into the main season.

We have a question from Andrew Wittmann.

Great.

I'm going to go back to the first question and ask it in a little bit different way on the revenue guidance.

You guys touched on this and you said that you thought at least on the revenue side, there's some upside.

But it seems like there might be maybe more upside or I want to understand this a little bit more.

Because you previously talked about $30 million of wrap from last year.

And then at the last conference call, you also said there's $20 million already factored in that you'd closed for this year as of the last conference call.

So you only had a $10 million hole to fill.

And since then, you've had 2 acquisitions, and one of these looks like it's pretty big.

I mean just based on headcount alone, this kind of feels like these 2 acquisitions combined to deliver, I don't know, somewhere in the neighborhood of $50 million of annual revenue.

So 3 quarters of that would imply probably about $40 million of revenue this year, which should be more than the $10 million hole that you had to fill.

So I mean why isn't revenue substantially higher than high end or coming in above plan?

Yes, Andrew, this is Andrew.

You're right.

As we look at the overall basis for what the acquisition is coming in at, at this point in time relative to M&A, we would expect the revenue, as with the deals we've already done, to come in $20 million plus to kind of where we're sitting.

Although when it comes to the overall company, just as we've said, we just don't know exactly where snow revenues actually come in for the quarter.

As long as snow revenues come in at the average of what we forecast for 2020, with the remainder of the year, we would expect as we get into the May period to be looking at a positive move on the overall revenue as long as that snow revenue comes in.

And you think you can use that -- yes, you're correct in your analysis of looking at the overall capital deployed on the new deals.

That should be able to be calling up that M&A side of the business.

Okay.

Okay, that's helpful.

And then just as it relates to the margins.

I guess this is probably for John.

Basically, the $3.5 million that you called out for the investments that you made in the P&L explained the maintenance segment's margin entirely.

I guess, my question is on a go-forward basis, John.

I mean these investments are clearly part of the P&L now.

And I was just wondering if as you look over the next couple of quarters, if you continue to see that the maintenance segment margins will see some of these headwinds -- I don't know if snow is a factor as well.

So I was hoping you could tease out how the puts and takes work out here for the margins as the year goes on.

I mean maybe the other way of asking that question would be, when do the compares or when are these investments in the base where you could start, again, showing some margin lift inside of the maintenance segment?

Yes, great question, Andy.

I think as we reiterated and reaffirmed our full year guidance, I think that's pretty important as a starting point.

This quarter's impact will be the highest of the year.

You're right, there will be impacts in future quarters.

But as our revenue grows, they'll be to a lesser degree.

And again, this was all contemplated when we developed our full year guidance.

I think at the end of the day, we also have historically said or had recently said for our full year guidance that the second half of the year would be stronger than the first half of the year.

We obviously have the snow to contend with in the second quarter.

So that's a little bit harder to predict.

But once we get into the green quarters and in the back half of the year, we expect to see some improvement.

I think any headwind that we could expect would be really related to the M&A, right?

And exactly what we've said and what we've been able to demonstrate historically with our results, they come in somewhere between 10% and 12% on an EBITDA margin basis, depending on the business.

And then over time, we're able to get those up to our -- add 300 or 400 basis points to it.

I wouldn't expect any difference, Andy, in that cadence this year.

But this quarter was definitely the highest.

And regarding the SG&A, it was a deliberate decision.

And as I said, that's why I mentioned the gross profit.

I'd be more concerned if there were issues there, but this was a controllable -- and we think it's the right thing to do.

Our next question comes from George Tong.

Your landscape maintenance revenue this quarter was impacted by lower ancillary sales and the wind down of certain contracts.

Can you elaborate on these headwinds and specific initiatives you have to reaccelerate organic growth in landscape maintenance?

Yes, sure, George.

It really -- when it comes down to the maintenance organic growth side, we did have the positive on the snow contract growth.

That was offset somewhat by the timing.

It was pretty much as the timing of wind down of some contracts and the ramp-up of others, primarily all in the seasonal segment.

It was really the seasonal segment that has the biggest impact.

And you can imagine one contract coming off before they -- then start up again.

That's what caused a little bit -- the relatively small gap we had, combined with the fact that with the additional snow that we primarily saw in our Midwest and Rocky Mountain regions, if you can recall, it was -- there was snow in October and November.

It was a pretty early start to the snow season.

So by that happening with that early start, we weren't able to get to all the ancillary projects that were necessarily on the books.

We believe as we get into the busy season, as we get into the green season, that latent demand will resurface as well as the fact with these increased sales folks coming into the business, we should start seeing incremental growth when it comes -- incremental above where we had last year.

On the sales through that incremental sales team, it's going to have an impact in 2020, and it's going to have an even bigger impact in 2021.

Got it.

That's helpful.

And then with respect to margins, can you confirm if you're reiterating your guidance of EBITDA margin expansion of 10 to 30 bps in fiscal 2020 and discuss the puts and takes or determine where within this range you land?

Yes.

We definitely -- as we said upfront, George, we reconfirmed our guidance on the revenue and the EBITDA.

And obviously, those margins are what they are.

Taking a long-term guidance, we've not wavered on our objective to deliver incremental margin improvement of 10 to 30 bps.

As we said as well, we feel the second half of the year will be stronger than the first half-assuming normal weather.

We're dealing with some of these investments, which we think bode well for the business long term.

But we're quite confident in being able to see improvement in our organic growth in the land maintenance business in the second half of the year, which should have very good results to the bottom line.

What could be risk there?

Unfavorable weather.

We had too much rain in the second half of the year.

If we don't get as much enhancement penetration, that could be a headwind.

And labor.

Labor can always be a potential headwind, but I think we're managing that quite well.

On the plus side, we have a maturing sales team.

We got a number of initiatives to improve our retention, and I think the CRM that the investment is tied to in the first quarter, very, very early days, and I know the folks are excited about that.

And as we've alluded to in some of our past discussions, the fact that we've hived the maintenance business into 3 discrete leadership functions really allows Andrew and myself, along with those 3 leaders, Evergreen East, Evergreen West and the Seasonal business, to really hone in on what's driving the business, and everybody knows we want to drive that profitability and growth.

And George, this is Andrew.

The thing is, the one thing that puts a little pressure on margins is the fact that we found great companies to add into this business.

Signature Coast and Summit that we've been able to do in the last couple of months, these are fantastic leadership teams with great positions in the market.

They might come in a little lower than our average.

It might put a little pressure over time as we continue to develop more and more M&A.

It's going to involve putting more EBITDA, more earnings into the company, albeit it might be at slightly lower margin pressure.

We'll have a better view of that, I think, as we continue to layer in and understand where we sit by the time we get to our May and August calls as relative margins, how that really is going to impact the overall year.

Our next question comes from Shlomo Rosenbaum.

Andrew, I just wanted to follow-up on that last question a little bit.

There's been a decent amount of investment into sales resources and kind of the leadership over there.

Where do you see this going in terms of kind of a normalized organic level?

1.2% this quarter.

A decent amount of investment momentum building, talking about a lot of sales.

I mean what's a realistic expectation for where this business can get to?

We're just looking at it in terms of where we are in the kind of economic cycle and where you are.

Where should we think about this business going?

Yes, so thanks for the question.

If you look at overall, we've guided in the kind of 1% to 3% as far as organic growth.

The industry itself grows at 1% to 1.5% when it comes to the overall segment growth according to IBIS and some of the industry kind of prognosticators.

I believe we can grow at double that rate, meaning that 1.5% is where we're at.

Can we grow at 3%?

Yes.

I believe that's a very doable thing across an incredibly diverse and widespread group.

Last year, we didn't do that.

But this year, I believe strongly that the sales team that we have, and generating that while keeping retention levels at a very stable level compared to last year, is going to result at that 2% to 3% as we continue to look forward and continue to invest in our sales force and the sales -- the deliberate sales force training that we've introduced across the entire enterprise and really getting the sales team humming.

It doesn't happen immediately because the new person you bring out today isn't necessarily delivering what a full person who's been here a couple of years.

But I'm very optimistic and very, very confident in saying that we will get the double growth of the industry.

And potentially, as we -- more as we go forward.

Okay.

And then, John, how should we think about free cash flow this year?

Is there any changes in versus what you talked about last quarter?

And if you can just kind of walk us through what you've done in the past to kind of an EBITDA to kind of real free cash flow, how to think about it this year?

Yes, I don't think there's any changes, Shlomo.

Again, assuming the normal weather patterns and assuming we hit our guidance of $312 million to $320 million, that obviously would be the starting point.

Capital, we're right on -- right where we want to be.

We had a good first quarter.

We're spending more time on that, really scrutinizing that.

And we had talked about $70 million for the year.

I don't see anything changing off that, especially with our good start to the year.

Working capital, we assumed a use there of $20 million.

That ebbs and flows, as you know, based on the business and where that business is, whether it's on the development side or the maintenance side.

But I don't see anything changing drastically in there.

Our interest, we're doing a good job of managing our interest expense.

And I don't foresee any changes there.

We had called out approximately $70 million for fiscal 2020.

Cash taxes, we had some refunds in the prior year, which helped last year.

I think this year, we had talked about $35 million.

I don't see anything changing there.

The only item that could move a little bit is the nonrecurring.

That was a little bit higher in the first quarter, but that was driven predominantly by M&A and some IT infrastructure costs, mainly around CRM and an estimating tool.

But outside of that, if you do that math, and we had talked about nonrecurring of 15-ish, that would get you somewhere between $100 million and $110 million.

And we're not wavering on that, certainly not now.

And what about that -- there was a big kind of receivable in terms of a project that didn't occur last year.

Is there any update on some of that kind of flowing through into this year?

Yes, I think it's -- a lot of it's around the timing on the development business.

The terms -- our working capital on our maintenance business is stellar.

It's less than 10%.

On the development side, it's a little bit more challenging because you're dealing with GCs and you have to deal with things like paid when paid.

It's related to that and the ramp-up in the business that we've seen there, but we expect that to unwind during the year.

So should that be an upside to this number?

Or is that already factored into this number?

We factored that into our full year look in the working capital.

But are we working hard to improve and turn that working capital into a source versus as use?

Yes.

But we thought it was prudent in the guidance to make sure we can do what we say we're going to do, to guide prudently as opposed to aggressively.

But I can tell you that, Shlomo, we are working to collect that money as aggressively as possible, which would be a benefit to us.

Great.

And then can you just go through a little bit more detail?

Like is the incentive comp in the quarter a factor in terms of the development just coming in so strong?

Is that where you guys are kind of seeing it more?

Yes, exactly.

It's a little more pronounced in the development side, a little bit less on the maintenance side.

Maintenance driven by the uptick in snow, development driven by the strength in what they're seeing in the first half of the year.

Our next question comes from Tim Mulrooney.

Regarding contract renewals, I think you're about 2 months in your renewal season, at least for the seasonal markets.

Can you help frame how the renewal process is going this year and what pricing improvements you're targeting?

Yes, absolutely, Tim.

You're spot on.

We are a couple of months in.

It usually starts in the beginning of December and lasts through the end of April, is really the time period of the primary seasonal renewal markets.

Things are trending well.

In fact, we're trending a little better than we were last year as far as the pace at which we're getting renewals in, in-house.

We feel very confident that we will be able to achieve, if not beat, the renewal rates that we had last year and the retention rates we have.

So overall, there's obviously thousands of accounts you're dealing with.

So there's pluses and minuses that come in every day.

The big thrust of that will come, however, you see that really happening heavily in the March time period is when a lot of that -- and then into the middle of April for the start-up season, really targeting kind of a May time period when most of the contracts have been done and signed.

So we feel pretty good about that.

The pricing, we continue to focus on the same type of pricing increases that we've seen in the past.

It's -- there's really no change.

We see the same inflationary pressures that all our competitors see and the whole service industry sees.

And as we've said before, we tend to be able to get pricing around that 2% plus range across -- somewhere between 2% to 4%, depending on the client, that we see going forward with an average of about 2% to cover primarily labor inflation.

Okay.

Maybe I'll ask you again next quarter how April and May went as well because that's a big one.

Yes, that's right.

That's absolutely right.

And you're spot on.

Really, our May CAR, when we -- it's timely because we'll be able to really to report on how that retention and how that renewal rate was because we'll -- next time we have a call, we'll be done.

We'll be through that renewal process from the seasonal markets.

Got you.

Just one more for me.

You're 1/3 the way through your big snow quarter here.

How are you looking so far?

Well, I think the only thing we can say is it's definitely in the Mid-Atlantic and Northeast areas.

It was a light January.

You can look at that.

That being said, it's snowing right now in Denver and Chicago, and a lot of those places there.

It's too early to call.

We've got 8 weeks left of what is a full quarter.

And there have been times -- that's one thing about the business that we run, sometimes it will show up on January 1, sometimes it will show up on March 30.

You just -- you don't know how the weather is going to fly, but you can look at historical averages, and some months, some quarters, they're early, some quarters, they're late, and we don't make a particular forecast on that.

We just look at the averages.

Our next question comes from Seth Weber.

It's Gunnar Hansen on for Seth.

A lot of questions have been answered already.

But just to go back to the margins on the maintenance segment, in particular.

John, can you just clarify -- I know some of it was related to timing, but are these more onetime incremental cost?

Or is this something that particularly on the technology and people investment that's likely to recur?

Or what -- just to clarify that.

Yes, let me just reiterate what we said on the maintenance side.

We had the investment in the quarter around the additional sales force headcount that Andrew articulated to get us up to 200 headcount in conjunction with technology to support that, mainly around CRM.

This quarter's impact we feel will be the highest of the year.

There will be impacts in future quarters.

But as I said, as our revenue grows, it will be less of a headwind or less of a -- it will be to a lesser degree, for sure.

And all of this, as we said, was factored in when we looked at our full year guidance.

That was -- of the headwind in the quarter, that was the biggest chunk.

The other piece around incentive comp, as I said, was tied mainly around the development piece and the increase in snow.

And then the M&A piece, that's expected.

We've been very clear on that when they come in and they're new.

We've had a little bit more in the first half of the year.

Some of these deals are -- they're time-sensitive, like the deal that Andrew alluded to.

That just didn't happen overnight.

That was a 15-month discussion and meeting between a combination of Andrew and myself and that team.

It just happened to hit when it hit.

And when that does, that will hit -- impact quarters.

That could happen in the future, depending on when that -- those things materialize.

But as I said, we don't expect it to be a showstopper for the full year.

Okay.

That makes sense.

And I guess just with the sensitivity around the Q2 snow revenue.

I know the expectations are kind of for an average.

The revenue contribution for the second quarter over the last 2 years has been obviously pretty variable.

What is kind of the standard baseline average snowfall that you guys are kind of handicapping in its place there?

Well, we look at 10- and 30-year averages.

That's how we plan.

If I go back over the last 2 years, the snow revenue in the second quarter was very, very consistent.

If I look at the second quarter fiscal '19 and second quarter of fiscal '18.

If I go back to second quarter fiscal '17, it's a different story, you know, $50 million less.

So there is some variability.

And again, I think Andrew answered it perfectly.

We're early days into the quarter.

There's a lot left.

We'll see how it shakes out, and we'll obviously have a lot to say in our second quarter call on what materializes.

Yes.

Okay, that's fair.

And I guess, Andrew, just on kind of the business development hires you guys have made, obviously, that's been expanding since you guys have kind of introduced that initiative.

Could you speak maybe to how some of the more mature personnel have performed and kind of how they're ramping and what the expectations are for this group of 200 people?

Sure, yes.

We're not going to disclose what our targets for -- goals are for each individual salesperson.

It is natural to assume that the 20 folks that we brought on, the net 20 folks that we brought on in the first quarter, now they're not going to sell at the same rate as a seasoned or tenured salesperson.

That's going to start out relatively slower.

We team them up with other leaders.

We have regional sales leaders in every market to be able to help guide those folks in the business.

And the reality is by -- it will take somewhere between 9 months to 12 months before that person ramps all the way up to being able to really sell what we would see on an average across the entire company.

So first year, a little less of an impact.

That's why my statements before -- we see some impact coming into '20.

But we really believe, as we get into '21, and these folks are actually in their seats, the pace that we would expect is that sales growth will accelerate as we go into the outer years.

Yes.

And just to follow up on that, I mean, how much white space is there or opportunity to continue to add more salespeople?

I mean are you kind of early innings?

Or is this -- maybe speak to that.

Yes.

That's -- the industry is a 70 -- we operate in a $70 billion maintenance and snow removal market in the country.

If you look at that and you look at our ability to strategically look at the top 50 MSAs and grow into those as well as some of the subtier markets beyond that, there is absolutely a significant amount of white space to continue this pace of hiring, to the pace that we can actually digest it within the teams.

We feel our pace right now, adding about 10% or so salespeople in the last quarter and kind of getting that steady for the rest of the year is something that -- it may not be as high as 10% but kind of that high single-digit adding and kind of growing, that we believe we can digest going for the foreseeable next several years.

Thank you, everyone, for dialing in.

Are there any other closing comments or remarks from the speakers or presenters?

Yes.

I just want again -- once again, I want to thank everyone for participating in the calls and for your interest in BrightView.

We do look forward to speaking with everybody over the course of the quarter as well as when we report our second quarter of fiscal 2020 results in early May.

Have a great day and look forward to speaking with you soon.

Thank you, everyone, for joining today's conference.

You may now disconnect at this time.