Good morning and welcome to BrightView's third quarter fiscal 2019 earnings conference call. As a reminder, this call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [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 and a downloadable copy is also available online. I will now turn the call over to Dan Schleiniger, BrightView's Vice President of Investor Relations. Please go ahead.

Thank you, Denise, and good morning, everyone. I'm joined today on today's call by Andrew Masterman, our Chief Executive Officer; and John Feenan, our Chief Financial Officer. Before we begin, I want 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. Our comments today will also include a discussion of certain non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measures and other associated disclosures are contained in 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. 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, we're presenting the unaudited results for the three and nine-month periods ended June 30, 2019. And with that, I'll turn the call over to BrightView's CEO, Andrew Masterman, who'll provide an overview of our recent results, business strategy and future outlook.

Thanks, Dan. Good morning, everyone, and thank you for joining us on today's call. Before we get into the details, I'll take you through some of the key takeaways from our third quarter results and future outlook on slide 4. We generated strong total revenue and adjusted EBITDA growth in the third quarter of fiscal 2019. In fact, this is the first quarter in BrightView's history with adjusted EBITDA above $100 million for the period. Importantly, we generated this result despite a challenging operating environment due to very wet weather conditions across many of our key regions around the country. The foundation for growth in our business model is made up of contract revenue on our Maintenance Services segment and project bookings on our Development Services segment. Both of these key elements of our business performed well in the quarter. Contract revenue in the Maintenance Service segment grew reflecting the net new sales we began telling you about on our first quarter earnings call. This is a direct and still early reflection of our strategic decision to reorganize and decentralize our sales team. In addition, we have concluded our Managed Exit program. Our revenue over the next two quarters will include the remaining impact of this initiative. With that, our account managers are now squarely focused on delivering the kind of intense customer focus that differentiate the BrightView from our competitors, and that should support future long-term organic growth of our business. As we look forward, we believe that our land maintenance contract revenue growth will provide the base off of which our account managers will be able to help drive additional revenue growth by focusing on retention rates and ancillary or enhancement service sales. In line with our comments on our last call, we expect to see additional momentum…

Thanks, Andrew. Good morning to everyone. Let's take a quick look at our full year guidance for fiscal 2019 on slide 9. The guidance ranges that we first shared with you in November of last year were based on our assumption that we would experience normal weather patterns during the year. So far, fiscal 2019 has seen anything but normal weather patterns. As we'll discuss when I take you through our revenue drivers, snow removal revenue for the year came in below last year's level due to reduced snowfall in many of our key markets, especially the Northeast. More importantly, we experienced a disproportionate impact on profitability due to the timing and nature of the snowfall, notably in the first quarter of the year. And as Andrew already highlighted, the third quarter of fiscal 2019 brought very wet conditions that dampened our ability to generate revenue from ancillary services in the Maintenance segment and to capture the full benefit of our substantial project bookings in the Development segment. With that said, the underlying business results are improving sequentially in our Maintenance segment as a result of the strategic decisions we made over the last few years. Meanwhile, the Development segment delivered a very strong third quarter result and should be able to repeat that performance in the fourth quarter. Additionally, the M&A pipeline remains quite robust, supporting our strong-on-strong approach to revenue growth through acquisitions. In fact, we are now expected to realize around $90 million in acquired revenue in fiscal 2019 from the prior year wraparound, plus the benefits of this year's transactions. Putting it all together, we believe that the underlying improvements in the fundamentals of our business will deliver the growth necessary to offset the weather headwinds and challenging comparisons with last year's episodic events. As a…

Thank you, John. Turning now to slide 16. As John just alluded to, we have a clear strategy to generate long-term profitable growth for BrightView. First, we will drive top line growth through improved customer relationships at the local level, some of which are already evident in our third quarter results. Second, we will continue to consolidate the top quartile of the $68 billion commercial landscaping and snow removal industry with a focused M&A strategy. And third, we will capture efficiencies in our business to improve profitability through process enhancements and by leveraging technology. This is a cyclically resilient business and we have delivered solid results in the face of difficult operating conditions so far this year. I am confident that BrightView's underlying fundamentals are as strong as they have ever been, which means we are well positioned to leverage our significant scale and industry leading expertise in every aspect of commercial landscaping. Our teams are energized and we continue to attract only the best landscaping professionals in the country. By creating a culture of accountability and focusing on our strategic imperatives, we have positioned BrightView to generate sustainable long-term growth and stockholder value. Thank you for your interest in BrightView and for your attention this morning. We will now open the call for your questions.

[Operator Instructions] Your first question comes from Shlomo Rosenbaum with Stifel.

I just want to ask a little bit about -- I understand that it's a very wet season. I seem to remember last year, there was a similar type of issue that there was the primary issue last year restarting the Managed Exits, but there was also a wet season that was impacting the June quarter, and I thought it would be kind of an easier comp because of that. Like on a historical basis, is this like something that's significantly different from what you've seen years, or over years or can you just give us some context in that because obviously we don't control the weather, but it's one of those things that we want to be able to pay more attention to?

Yes, Shlomo. Good morning. This is Andrew speaking. When you look at last year, it was certainly wet, wetter than average, but wasn’t an extraordinary wet year. If you look at 2018, the same quarter we're talking about now is only 8% as I said in my earlier comments versus a 22% very wet environment, so actually it was a pretty big difference between last year and this year. And how that had impacted us combined with the fact that we had a very early season of snowfall last year that gave us a really nice top line growth in snow, and delivered snow returns margins does have that double impact of good snow with margin generation combined with a significantly wetter quarter this quarter than last year really impacted us.

Okay. And then could you talk a little bit about the CapEx in the quarter? And just it was significantly higher than what we had expected in terms of focusing on free cash flow. Could you talk about what the goal is for this year? I mean, if you could just kind of walk through that, I think that one of the focuses of the business is to generate cash flow and be able to -- or fund the business totally internally, and if you can review the free cash flow target, that would be helpful.

Sure. Shlomo, good morning. This is John. Let me start with that and then I'll delve into the AR, the first part of your question, in a little bit more detail. In prior calls, we've talked about being able to generate free cash flow of approximately 140 million. We still feel confident of getting to 140 million this year. The walk is slightly different, so let me just walk you through the mechanics of it. Assuming we hit the low end of our target at 310 million from a starting point of EBITDA, that would be a start. We're going to do a little bit better in interest. Previously, I've said about 75 million. We think we'll be in the low-70s due to a slightly lower effective rate. We're going to get some benefit in taxes as well, previously, I said about 25 million in taxes, and we think it will be closer to 10 million. And that's driven by some timing elements as well as tax planning that we've been able to institute this year. The other two components are our working capital and CapEx. I'll get to the CapEx last. Working capital, we said would be about a $10 million use historically. We think that's going to be about 20 million. The two incremental drivers for that are, we made a conscious decision to invest in some of the development business and mainly the tree, which we had -- which is very profitable sub-segment for us. And also we're seeing the impact in working capital around some of the acquisitions that we're bringing in where it takes time to integrate them on the AR side. The last piece, the CapEx, we said that net CapEx would be about 60 million. We're probably going to be about 10 million higher. We've essentially cut it off for the fourth quarter. We still have some dispositions to go, but we've done some opportunistic real estate purchases. As you can imagine, sometimes, it's really hard to get quality real estate to fund our branch network from a zoning standpoint. So we did that opportunistically. We also did a project in the Gulf that is about a 10-year contract. And then we did -- the last piece was the development piece that I talked about in my prepared comments where we wanted to purchase some capital to offset lease expenses. So when you do that math, 3 times less 70 of interest less 10 of taxes, working capital use, call it 20, and CapEx, net of 70, that will gets us to the same area of around 140.

Your next question comes from George Tong with Goldman Sachs.

You talked about weather as having an adverse impact on your Maintenance and Development revenues. Can you quantify this impact between the two segments and discuss whether you expect to recapture any of the revenues next quarter?

Well, if you look at -- when you look at -- and I'll take them both separately, George. You take the development business first. That business, we had actually a very strong bookings profile and that business is still there. So what we expect in Development, is as long as the subcontractors that are ahead of us also get done with their work, we're poised to go, capture a significantly better fourth quarter in development than we did last year. So we expect to be able to absolutely capture what we had in development, which we'll accelerate then into the fourth quarter. On the maintenance side, if you look at overall, the whole business, it's really going to be much dependent on how the quarter comes through, if you can think about the businesses there to get. But when the weather comes in as it did, if you take one example, we go out and we'd have to trench and put an irrigation system throughout the enterprise. When it rains, the trench you just built yesterday, you have to rebuild to get the fields back there. Mulch washes away. After you mulch, so it's another ancillary situation for example that happen to the -- you put that mulch and it washes away. You sometimes have to replant the trees or bushes that come in and then collapse because of the soft soil that comes in. So things like that that occur. As long as we have normalized weather levels, we believe that we'll be able to recapture some of that revenue and margin. Those reasons are some of the reasons why that 70 bp margin shortfall happened to the quarter was because that replanting, re-performing of services that we had in place that didn't then contribute to additional revenue, but did introduce some additional costs.

Got it. That's helpful. And I guess following up on the topic of margins, we did see margins contract in the quarter year-over-year in the maintenance business. Can you talk about how you expect benefits from your efficiency initiatives going forward to flow through to margins and how those might be offset by the investment requirements?

George, good morning. This is John. Let me just give you the walk on the third quarter margin degradation in the maintenance business. Last year, we did about 19.2%. We're going to benefit from the Managed Exits that Andrew alluded to in his comments of around 30 basis points. The other 100 million -- excuse me, the other 100 basis point headwind was really driven by ancillary softness, driven around the rain and driven by the margin compression. I mean we fully expect, as I said in my comments, if we have the normalized weather patterns than we expect and we've gotten off to a good start in July, that way we see our margins revert to our historicals for the year. And if we execute on our low end of the range, we'll be right at that 12.9 bp, the 10 bp low end that we talked about for the full year.

And George, let me just ride on that one a little bit on the technology side, is what we saw -- John is absolutely right on the ancillary pressures that we saw. On the contracts side of the business, we saw efficiencies being driven into the organization by utilizing electronic time capture. That really has basically given us positive on our contract basis. So the efficiencies we’re driving in the contract, and it shows through in the basic base maintenance performance on the efficiencies that's seen unfortunately this quarter were offset by that really -- that extraordinary position we see -- we saw whether that almost 3 times wetness, 8% versus 22% in this quarter that look as we go into fourth quarter, as long as we perform at normal levels of precipitation, we expect that to normalize.

Your next question comes from Dan Dolev with Nomura.

So really quickly on the revenue guide, I mean you have about $15 million of extra M&A. And if my calculation is right, you're basically to get the low end of the guidance range, get to about 7% growth year-over-year. And even if I take out that about a point of growth, it's 6%, and it's a big ramp in my view from like the 4% that you did in the third quarter. I think you're facing about 300 basis points tougher compare. So how should we get confident that you're not going to miss this target, God forbid, given the ramp that's required?

This is Andrew. If you look at overall, the increase in M&A that we have, we've been guiding all year that M&A would contribute about $75 million to the quarter. What we're seeing now is we're forecasting that to be more be around 90. Okay. And why that is, is a couple of reasons. Number one, obviously, the additional acquisition which is part of it that we had this May with Luke's and Desert Classic. But frankly also because we're seeing improved organic growth within the acquisitions that we had already executed earlier at the fiscal. So we're seeing some more momentum happening there. That's already coming. So we see that coming there. And then you come back to the other elements of growth we see out there is going to be in the Development segment because of that pent up demand that still is there. It's -- we have the bookings, and actually we're executing getting those into the ground. So that's a big portion, it's not just the Maintenance segment. Maintenance, we expect to grow modestly. This is not going to be -- in this business, we are not going to see these massive pops, but if you look at the sequential growth quarter-over-quarter-over-quarter, we see an increasing trend of base contract growth, and what we saw realized within this quarter was a 1% organic growth. We expect that to continue and build a little bit plus the development growth, plus a little bit stronger in M&A, just a little, should deliver higher than -- right around the low end.

Thank you. I appreciate it. And then one quick follow up on the M&A. So I understand this correctly, the M&A is coming in at a lower margin than the actual business. And I know you've been pruning lower margin businesses. So how can we get confidence that this new M&A margin would improve over time, so that you're not faced with kind of margin dilutive M&A that you might need to prune down the road?

Yes. Well, in any acquisition that we bring on board, we analyze the portfolio and make sure that we quickly act on those accounts, which might not fit that profile. And as we go to the whole year M&A, we exit the year after year as a strong profile, and almost every acquisition we have shows that margin improvement that we have overall. In this particular quarter, we've bought some businesses which had a slightly dilutive effect. And now as we look at the businesses going forward and these businesses, we're building off of a strong base. We want to be real clear about that. These acquisitions we buy are strong groups. Some are going to be a little stronger than others, but they are upper quartile, strong performing acquisitions, which add value to the company. And we saw that -- we see that in the entire profile of acquisitions that we have purchased and acquired here in 2019.

Your next question comes from Justin Hauke with Robert W. Baird.

I guess I was hoping to the extent that you can quantify the weather maybe a little bit more concretely. I mean it sounded like on the margins, you said in the maintenance segment is about 100 basis points from the lower ancillary revenues. So maybe just defining what's the difference on the margins you get on ancillary versus base business and how much revenue impact was lost there?

Well, first of all, we don't break out ancillary versus contract. And so as you look at the total balance of the business, we saw that total balance of the business was that 100 bps number that John referred to. We believe with normalized weather patterns is that that would go away. I mean that would come back. And so you can do the basic math on the 100 bps shows you the dollar. But we do believe also on the ancillary side of business, there are several million dollars that we would have been able to put in play, which we were not able to do because of those extraordinary wet conditions.

Okay, that's helpful. And then I guess my second question is just, on the 15 million of extra M&A, you said it's both the two deals you did in May as well as just maybe better organic within the acquired businesses you previously acquired. Can we extrapolate from that for the contribution of those two deals that have, maybe it's 10 million or so for the fourth quarter? I mean, is that a good number to use to kind of annualize the contribution that they'll have as we think about 2020?

If you look at 2020, when we give our guidance for 2020, we'll be very clear about what the wraparound is and what the experienced acquisition level is. So as we give the guidance for 2020 just like we did in '19, there will be a certain portion which will be explicit about was associated with '19 acquisitions that was realized in '19, and what we already have in place at that time and what we expect to deliver out of '20. So we'll be very clear just as we were in '19.

Your next question comes from Kevin McVeigh with Credit Suisse.

Not to kind of belabor the weather point, but how does that impact the profitability? I guess if folks aren't working, do they get the same pay rate that they would if they were working? And then you have this pent up demand. There's only so many hours in a day somebody's going to be able to work. Do you have -- is it the same profitability as you're looking to recover that revenue to the extent there's gaps in the -- that allow you to kind of make up some of the revenue that missed? And then, how does that kind of circle back to -- the guidance, when you say near the low end, is that the low end of the range or it could have possibly fall below that depending upon where the makeup is on the weather?

Well, let's unpack your question, more so on kind of performance. And you hit the nail on the head. What happens is when you -- you get the revenue done, but you do it very inefficiently. So it rains for 4 days or 3 days. A day opens up, it has to dry out. And all of a sudden, now you have to dispatch people in overtime situations on the weekends to go in and get that one window because that's the rare time that it actually stopped raining, okay, in an unusual situation. And so you're deploying a very inefficient use of labor, kind of dealing with the surges of good weather and bad weather. But that being -- I mean, yes, this is just -- we are clear. We have a great book of business out there. This just impacted us. It did impact us in the quarter, but we believe as we get back to more normalized levels that we're going to be able to perform at a regular rate. As the overtime costs came in, perhaps dealing with, as I said before, re-digging ditches, re-putting in mulch, having to replant trees out there and do things also in that -- the manner that you would like to do it on a Monday through Friday even basis, but having to really shuffle labor and sometimes put in 12 hours of labor on a certain day only because if it was really good and then having to go back down the next day.

Got it. Is there any way to -- just any way to maybe frame what the EBITDA impact would have been from kind of the profitability? And maybe hard question, which is, what the profitability would be within a normal course and then what it's going to be, like just to try to gauge how that could impact the EBITDA for '19.

Kevin, this is John. The walk I gave earlier I think was the impact that we experienced in the third quarter around weather when we had the 70 basis point degradation in the contract maintenance. And I think in our guidance that we talked about, I want to be very clear on one point we mentioned. You just asking your question, where we're saying we were going to be below guidance. No, we were saying the low end of our range of guidance that we provided heading into this year. We want to be very clear on that. But we expect -- outside of that, that one-off that we experienced in the third quarter, which was mainly pronounced around the ancillary side, I will disclose to you. And we have said this before, historically, the ancillary business has better profit-wise than our contract work. So obviously, that was an impact that we couldn't get it in through that degradation of 70 bps. We expect things to revert back to where they historically would be in the fourth quarter in order to get to our low end.

Your next question comes from Sam England with Berenberg.

Could you talk a little bit about the rollout and uptake freight you connect so far? And whether you view it as just a customer retention tool or whether you think it could drive some ancillary services revenues going forward as well?

It's something -- it's a great question. We just rolled it out. So it's being introduced in several launch customers that we had, but it is a nationwide rollout. So similar to as we see continued acceleration and adoption of HOA Connect, which is the same portal utilized for homeowners' association, we expect that over the next several quarters to gain greater and greater adoption. And what it does is it allows an easy and quick connection between the property manager direct back into the account manager, which allows and then a quick response. All being done frankly via the being portable phones and being able to -- that gives alerts and follow ups in an automated way -- automatic way. So we have a really strong optimism about how this is going to continue to gain traction as HOA Connect has, okay? And what ultimately is going to drive then is customer feedback, the customer retention with the business. We think it's more of a customer retention tool but should have some knock-on ancillary benefits as well.

Great. Thanks. And then just a follow-up. Given the investment in technology you’ve been putting in, is that included in the sort of guidance for 10 to 30 basis points EBITDA margin expansion a year or could some of the efficiency improvements you've been actually drive EBITDA margin expansion ahead of that?

Sam, this is John. It's included in the guidance. Yes. Well, it's included in the guidance, the 10 to 30 bps. Not incremental above that.

[Operator Instructions] Your next question comes from Seth Weber with RBC.

This is Gunnar Hansen on for Seth. I guess just one more on the Development segment. The profits obviously were strong and you guys seem to be starting the strong pipeline I guess. How sustainable are -- is the profitability there? Is it really dependent on the book of business that you guys have in the pipeline? And I guess, longer term with regards to the pipeline, how much visibility do you have? Is this a two-quarter kind of book of business or is this tends to be longer than that?

Yes. No, it is actually the team in development has done a great job and has a tool, really a continuous improvement tool and process which creates that just more margin performance ongoing. It's just been something embedded in the business and something that's been delivering a consistent view. Now quarter-to-quarter, you will see ups and downs because of the actual mix coming through. But over time, you're going to see consistent drumbeat or steady improvement within development within that 10 to 30 bps range that we talked about overall for guidance. Now as you look at the backlogs, kind of your second point, this is not just a one or two-quarter look. We are seeing book rates coming in. We had one of the strongest booking quarters last quarter in our company's history in the development business. And we actually believe, as we look into 2020 forward, that this momentum that we see in development is sustainable for the foreseeable future.

Okay. Thanks. And I guess just, we're a little bit past kind of the one year anniversary since the IPO. At the time of the IPO, you guys talked about having the newly created 125-person kind of business development team that was mostly focused on targeting new business and new customers. I wonder if you can provide a quick update on kind of that -- the success of that team and also kind of staffing levels there, if you guys have expanded upon that, et cetera.

Absolutely. We have seen that grow. So we’ve built that team. We had 125. We're about in a position now where our retention rates have stayed about where they have historically. In order to sustain the organic growth we're seeing, we're seeing better sales results than we've ever had. And that group what was 125 has now grown up towards 160 or so over the course of the last 12 to 15 months since we first talked about it. And that then leads to net new, which we talked about a couple quarters ago. And that organic contract revenue growth is underpinning the business right now.

Your next question comes from Shlomo Rosenbaum with Stifel.

Thanks for squeezing me back in. Could you just talk a little bit about how important it is that you doubled those H-2B visas? How much of a help is that for your -- for the margins of the business, the efficiency? Was that something that you guys were expecting before you got into the quarter, if you could just talk about that?

Sure. Yes. If you look at the overall H-2B environment, these folks have just arrived. So they arrived in late June, early July. Basically, it was freed up, a second wave of H-2B visas were released. We were able to reach out mostly to folks -- all folks -- well actually it's all folks who've been with us before, and we're able to then deliver a real, real injection of labor into the organization. That being said, we still have -- we're able to perform a landscaping without these folks. That's not -- what these guys do is -- just to your point -- they come in and they help stem the turnover, allow us to stabilize the operations, and we would expect us to be able to get out there and really, really shine at the high end as we do with their presence.

So were you expecting that level beforehand, or this is something that's a recent development?

We applied for a 1,000s of visas throughout the entire enterprise. That's very typical. We do it every year, apply to them. And the reality is the system is a lottery system run by the government. And so we really can't -- we don't know. We don't know how many visas we actually will receive in any given year because it's a random selection process by the government. We plan to do the business without H-2Bs, okay. We make sure we can execute and deliver all of our contracts regardless of whether we get the books or not is when they come to the [indiscernible] stabilizing factors for business.

There are no further questions queued up at this time. I'll turn the call back over to Mr. Masterman for closing remarks.

Great. Thank you, Denise. Once again, I want to thank everyone for participating in the call today and for your interest in BrightView. We were encouraged by the fundamental trends that have underpinned the results so far this year, especially given the difficult operating environment we have had to manage through. And we are confident in BrightView's ability to generate long-term sustainable stockholder value for many years to come. If you have any follow-up questions, please don't hesitate to reach out to us. We look forward to speaking to you when we report our fourth quarter and full year fiscal 2019 results in November. Thanks a lot.

This concludes today's conference call. You may now disconnect.