Good morning, everyone, and welcome to the BrightView Holdings Second Quarter 2024 Earnings Call. [Operator Instructions] With that, I'll turn the conference over to Chris Stoczko. Please go ahead when you're ready.

Good morning, and thank you for joining BrightView's Second Quarter Fiscal 2024 Earnings Call. Dale Asplund, BrightView's President and Chief Executive Officer; and Brett Urban, Chief Financial Officer, are on the call. I will now refer you to Slide 2 of the presentation, which can also be found on our Investor Relations website and contains our safe harbor disclaimer. Our presentation in today's call include forward-looking statements subject to certain risks and uncertainties. In addition, during the call, we'll refer to certain non-GAAP financial measures. Please see our press release and 8-K issued yesterday for a reconciliation of these non-GAAP financial measures. I will now turn the call over to Dale.

Thank you, Chris, and good morning, everyone. I'd like to begin by briefly reflecting on my first 7 months as CEO. We have made incredible progress in such a short period of time, and our organization's ability to absorb these changes has been exceptional. As I sit here today, I am even more enthusiastic than I was on day 1 about the incredible opportunities ahead of us. I have the utmost confidence that all the changes we are making to transform this business are the right long-term decisions to operate as a unified One BrightView, drive profitable growth and create shareholder value. I will start today on Slide 4 by emphasizing our achievements and ongoing progress, along with strategic updates that will enhance our position to accomplish our objectives. Through the first half of the year, our commitment to executing our strategic vision and focusing on profitable growth has proven successful. As a result, we are reaffirming our full year EBITDA midpoint and raising our margin and free cash flow guidance, all while selling our franchise business, unwinding our noncore aggregator business and snowfall coming in at the low end of our original guidance range. We have seen meaningful growth in profitability and margin expansion and are gaining momentum in our business as we continue to implement our strategy of operating as One BrightView. As we move forward, we are confident that the actions we are taking will improve our ability to deliver on our strategic initiatives and enhance our position as the #1 player in the commercial landscape industry. After a strong beginning in Q1, we continued our momentum in Q2 marked by margin improvement across all our operating segments. This reflects the early returns on our actions and investment in operating as One BrightView. Also contributing to our…

Thank you, Dale, and good morning to everyone. I'll start on Slide 9. I'm pleased to report that we are continuing the momentum in our business and progressing with our strategy towards One BrightView, which yielded strong results in the second quarter. We remain focused on the execution of our strategy and profitable growth in our core business evidenced by the unwinding of the unprofitable noncore aggregator business and the sale of our franchise U.S. Lawns business. These actions led to quality revenue, EBITDA growth and significant margin expansion across all segments of the business. Enhanced net working capital, coupled with the timing of capital investments and reduced interest expense, resulted in a meaningful increase of free cash flow compared to the first half of last year. This resulted in a net leverage ratio of 2.4x, allowing for financial flexibility for ongoing execution and investment in the core business. Moving to Slide 10. Total revenue during the quarter increased 3.5% year-over-year to $673 million. Our noncore businesses, including BES and U.S. Lawns, and our focus on profitable growth within our core land business, both had a near-term impact on our land revenue. We remain, however, very encouraged by the underlying health of the market and recent trends within our business. Revenue growth during the quarter was driven by higher snowfall relative to the prior year. Important to note, snow revenue year-to-date is comparable to the prior year season and at the low end of our original guidance range. We continue to see solid demand in our development business, which we grew 5.7% compared to the prior year due to our ability to convert our robust backlog. Development's performance in recent quarters reflects the appealing nature of the business model while also furthering the momentum for future growth as we capitalize…

Thank you, Brett. Before we open the call for questions, I'd like to provide a few final thoughts. We are making considerable progress on our goals, and we are seeing the returns on these efforts begin to materialize in the results and gain traction across the company. I firmly believe that all the strategic changes we are making to transform this business position us to accelerate profitable growth over the long term and create value for all of our stakeholders. With that said, operator, you can now open the call for questions.

[Operator Instructions] Our first question today comes from Bob Labick from CJS Securities.

Congratulations on a nice quarter.

Thanks, Bob.

Thanks, Bob.

Great. So I wanted to start off. Obviously, it makes sense to us the unwind of the BES business. But for those of us with a history of BrightView and maybe prior management, can you talk about how this is different than when prior management would say they are walking away from unprofitable business, but we never saw any results in margin accretion or anything like that? How do you break this out? How is this different than the past?

Yes, that's a great question, Bob. I'll start off, and then I'll kick it over to Brett. So first, we're doing today's call from our branch in Elmhurst, Illinois. And there's no better way to start the day than to go out and spend time with our hourly employees to do stretch and flex as they go to leave our branch to service our customers. That's what's key in our business, is using our employees to service our customers. Unfortunately, what had happened with that aggregator business is we were using our brand, our reputation on quality of service and actually not doing the work, letting different providers all over the country use our name to actually service the customer. And when they disappointed the customer, it turned out the customer would think BrightView was the one underperforming the service. So what's different about what this aggregator business, the choice to deemphasize in the past, is this is just unique enough that we said we don't want to be a provider of service where we can't control the end service to the customer. In the past, when the company made the decision that we wanted to walk away from unprofitable business, that's not our goal. Our goal here is to find a way to make any business we have profitable, work with our branches to drive profitability through the business. This aggregator business was completely different. It was not about us being able to do things better to service the customer, it was completely about us just trying to get a small margin off service somebody else was providing. And that would have been okay until our name, our reputation, was being damaged. But I hope that gives you a high level. I'll let Brett add in. He can probably give you some details on what we're talking about as far as the volume of the walkaway that we're going to do in this business.

Yes, Bob, I would just add to that. I think Dale said it well. I would just add, too, that the aggregator business is different from the past. As you see, we're adjusting our revenue guidance, with the majority really being the unwind of our aggregator business and snow at the low end of the range, really, the two main pieces of the revenue guide change. But the big difference form the past, I think from what you're seeing here is we're reaffirming our EBITDA guidance at $325 million at the midpoint, and we're raising margin expectations. I think when we go back and play old tapes from the past, there was strategies to maybe exit accounts that didn't come with profit accretion or margin accretion. I think that's really where you're seeing the big difference here in this strategy, is that you're seeing the profit dollars and you're seeing the margin come along with that. So look, we're really excited about the future of the business, what our core self-performed network of branches is going to be able to produce. And unwinding this noncore business, which had an impact on our brand reputation in the market, is definitely the right move for the company. And important to note, it really comes with very minimal to no EBITDA impact to the company. But we feel great about that decision. We're really through the unwind at this point. We're able to update guidance for the rest of this year, as you can see in our new guidance issued on Page 15 of the earnings deck, and really the biggest piece of our revenue change in guidance is the unwind of this aggregator business, which call it about $70 million when you couple that with the sale of the U.S. Lawns business.

Okay. Great. That's a great explanation, really appreciate that, and it segues well into my next question, too. Obviously, you reiterated the midpoint of EBITDA guidance. And frankly, you're, it's exciting, at the beginning of a transformation here. If you hit $325 million in EBITDA this year and up to 5 years at or below $300 million, I think it's a home run. And so maybe you can just kind of help us think through this in the coming years in terms of the key drivers for that finally getting to EBITDA growth. How much of it is cost cuts, rightsizing the organization? And is that sooner? And then you've talked about a lot of operational and cultural changes, when does that start driving the bottom line growth and margin accretion as well?

Yes. Great questions, Bob. I think we are so proud of what will be a breakthrough year for us on the EBITDA front. You're right, this business has hovered around the $300 million level. And this year, at the midpoint of $325 million, it will definitely be a transformation. Now short term, we're getting a lot of that benefit as we lean out the organization to remove layers so that our people can service our customers better. I think we all can understand that long term, our focus is going to be on growing this business. So we've seen some changes over the first 6 months that we are going to focus on continuing to invest in our sales force so we can actually get back on the growth engine because that is the way we will grow this business. We have some headwinds from the amount of revenue that we're trimming off from BES, the aggregator model. But long term, we're going to grow the bottom line by growing the top line but doing it profitably, not chasing revenue, by having an organization structure where our branch managers can work with our sales organization to target which accounts make the most sense to build out route density for our team so that we can service our customers at a lower cost. So long term, it requires all of our team and our branches working together to make sure we drive profitable growth. So short term, yes, cost saves will drive a lot of the benefit. Long term, it's going to come from growing together as a company and growing with the right accounts profitably. Brett, do you want to add anything?

No, I would just say, Bob, we're really excited. We had a great second quarter results when it comes to EBITDA and EBITDA margin expansion. We're not guiding quarterly anymore, but for the first half of the year, we've had great results. We grew EBITDA $16 million. We grew margins over 100 basis points. So we feel great for the first 6 months results of this year. We feel like the back half of the year is set up to have fiscal '24 a breakthrough year for BrightView. And then as Dale mentioned, through the first half of '25, as we step over the unwind of our BES aggregator business and we step over the sale of the U.S. Lawns business, we feel like we'll be off and running in the second half of next year through that profitable accretive growth.

Our next question today comes from Tim Mulrooney from William Blair.

Yes, so two quick ones. A lot of change going on, so Slide 6 to me was the most interesting slide of the deck and really highlighting the operational changes that you're making in the business. My question is on that top box, the 4 divisions and the legacy structure that you've eliminated. Can you just dig into this a little bit more? What was it that you eliminated that you're doing differently now versus before that's really helping to add value to the business?

Yes, Tim, great question. I think the way to look at it is traditionally, the business was operated in 4 divisions. Those divisions, one was our development division, that was solely focused on development and new work of landscape. The other 3 were one was seasonal, which is the northern climates. We had a division that was focused on Evergreen West and Evergreen East, so those were more in the non-snow climates. The challenge, Tim, was we were operating each one of those businesses independently. And a lot of the things that we should benefit as a company of our size and scale weren't happening based on having those 4 independent divisions. In fact, we weren't even leveraging the expertise we had in our development business to migrate that into new maintenance revenue. We've taken one of those resources. He's now our Chief Commercial Officer. We've eliminated that layer, and we're utilizing our regional people who now manage our branch managers from development and maintenance to work together across geographies in the country, which is creating a big improvement in our go-to-market to service our customers. Traditionally, we had silos in this business where people were trying to manage to the best of their P&L, not focused on what's best for the overall company; and by doing that, putting the customer first. So removing that top layer really allows us to step back and say, "We're going to run this as a $2.8 billion business, not as 4 independent businesses located across the country." And we're using that layer below it, our regional leaders that now manage both maintenance and development locations geographically, as a way to get people to work better together. So eliminating that layer has been our first step to trying to get more people closer to the customer and trying to get more people working together as One BrightView. That's a great question.

It looks like some of the boxes below that as well, some of these changes that you're making, are all kind of along that same kind of mindset: getting everyone to work together, whether it's sales and operations being integrated into the same branch or taking both siloed specialty businesses and integrating them into the branches. Is that the right way to think about, a lot of these transformational organizational changes is just bringing everyone together under one roof so it's less siloed and didn't focus on the customer?

Yes. Exactly, Tim. That is a great way to look at it. We have to take all the services we can provide as BrightView and allow us to provide services to our customers as a unified front to the customer. The customer has to leverage everything we do. We're a top 50 construction company with our development group. We have a wonderful tree division. We have golf course specialties. We have a turf division. We have to make sure that all of our branches can leverage all of those resources to service our customers. Removing those silos where people were operating independently enables us to just go to market with the customer and motivate us to grow faster by giving the customer the ability to get all the services from us. So yes, that's a great way to look at it. This is all about our ability for our customers to leverage everything we do better and be able to grow faster with us by working with BrightView and having one partner versus needing to rely on multiple different companies.

Our next question today comes from George Tong from Goldman Sachs.

I wanted to drill in further into the core land revenue performance. So excluding any impact from the aggregator business unwind and the U.S. Lawns divestiture, the updated full year guide is for the core land business revenue to be down 2 to down 1. Previously, it was down 2 to up 2. Can you just revisit what are the factors that led to the core business having a bit of a slower revenue performance for the full year and where you are in your process of rightsizing your portfolio of contracts and making sure all the contracts in the core land maintenance business are economic and profitable?

Yes. Great. I'll start it off, George, and I'll kick it over to Brett. So obviously, the biggest adjustment to our revenue that we put in our guidance was from the aggregator business. And there is a slight adjustment that's coming from our core business. That comes from two factors. First is an adjustment in the ancillary revenue, and some of that is from last year's hurricane benefit that we had through the first 2 quarters. And the second is as we continue to work through our core customer base to make sure we're doing everything we can to provide levels of service that they're happy with. Unfortunately, when you look at the business today, our levels of retention are below where they were when the company went public. So our goal is to find a way to try to get that retention level back up to those levels. We are not trying to eliminate customers. That's not our goal. Our goal is to increase the service levels that we have for customers and find a way to service them better. We are not trying to walk away from business. We made a strategic decision on the aggregator business based on our brand and reputation. But our goal is to find a way to service every customer we have today and find a way to get growing back again in 2025. So we're working hard. And we've got to get our teams focused on putting that customer first because that's our next step to making sure we can grow this business on both the top line and the bottom line as we go into '25.

Yes, George, I would just add, just for clarity in the change in the guide, at the midpoint of our previous guide, which we really came out with at the end of Q4 and we discussed the unwinding potential of our aggregator business, keep in mind, we're in the middle of our snow season for the aggregator business, so we didn't want to disrupt any current customers, and we said we'd give an update on this call. But if you think about the midpoint of our guide at $2.9 billion when we first came out this year to the adjusted midpoint now of $2.770 billion, it's about $130 million adjustment. $70 million of that is that aggregator business, U.S. Lawns sale, which is the biggest portion of the guide adjustment. $25 million of it is simply snow, midpoint of $240 million, snow coming at $215 million. That's another $25 million. And in the previous guide, we had minimal M&A. Now we're saying for the rest of this year, we'll have no M&A. So call that another $10 million to $15 million. So out of the $130 million revenue adjustment at midpoint, $110 million are those three factors, which really leaves you with, call it, 8 to 10 additional per quarter for that core land. And I think Tim asked the question last, from William Blair, about the operating structure. I think that correlates to where we are in our journey back to sustainable, profitable growth, right? We said on previous calls that this organization, on a quarterly basis, was growing at the sake of really anything to grow. And that's not the way we're positioning this company moving forward. We've realigned our sales force into our branches. We've set up our operating structure now where our leaders in our geographical…

Got it. That's very helpful. And then sticking with the core land business and as you look forward to next year, in the second half of this year, low single-digit declines on the core side. But next year, presumably, that swings to growth. Can you talk about expectations of how that plays out from a cadence perspective next year? And then perhaps structurally in the marketplace, how easy is it to grow profitably, how easy is it to compete on price or to win contracts that have good economics in a relatively competitive environment?

So let me start at a high level, George. So we're not going to give guidance for next year. We'll do that from the end of the year. I think we'll get some headwinds the first and second quarter, call it, $10 million from the BES business. But here's what I can tell you. We don't lose business because of price. That's the most optimistic thing I can tell you. Unfortunately, where we fall down and the customer decides to leave us is usually because of lack of communication or quality of service. Those are two things I can make sure the team fixes, and that's what I'm committed to and those 8 geographic leaders are focused on. We can control that, better communication with our customers and making sure those people that leave the gates every morning are focused on servicing the customer. That's the way we're going to return to growth. We can't try to outrun customers that decide to leave us because we're not taking care of them. Our path to profitable growth starts with retaining more of our business, and that's where we're going to focus. Now we've seen a minor improvement in that but nowhere near the levels that we need to be. When I travel, when I open the branches and I'm at a branch that has 90% to 95% retention, they are growing and they are growing profitably. And when I go to a branch whose retention is far below that, they are not growing. They're struggling just to keep up with new accounts. So it's a simple business when you think about take care of the customers you have and then find new customers that fill in the existing routes that you have that you can service and make it more profitable. So this isn't something that we need to worry about, "We've got to get price benefit," or, "We can't get price on this." We've got to figure out a way to take care of our existing customers and communicate a lot better to them and listen when they have an issue. So that's our future: higher retention and continue to focus on new sales.

Next question today comes from Greg Palm from Craig-Hallum Capital Group.

Appreciate all the info in the deck. I wanted to also touch on one of the slides, Page 14, on this kind of CapEx plan. So net CapEx over the coming years doesn't change a whole lot, but you're reinvesting a lot of money into the fleet, I think you mentioned. But presumably, you're going to save a lot of money on maintenance, rental costs. It seems like a no-brainer. Can you quantify it for us? Can you give us some color on what you hope to save in the coming years? And I guess, is there a sort of a timeline when things really start to ramp up?

Yes. Great questions, Greg. So first, let me start. I think the way Brett finished off his section was very fitting: boots, new mowers, new trucks, happy employees; happy employees, happy customers. This morning, when I was at the gate watching the trucks roll out with the crews, you could see the smile on the guys' faces when they had a new mower and a new truck. So I think that is a byproduct. And then there's the benefit of the cost savings that we're going to see. We can't have mowers that are 4 and 5 years old that we're trying to maintain to keep things going. This is equipment that our people depend on to service our customers. We're going to keep our mowers 2 years, and then we're going to remove them out of service and sell them. As a byproduct, you're right, today, we're spending far too much on maintenance for both our 2-cycle equipment, our mowers and the trucks that we're servicing, let alone we also have the image, when we go out to a customer site, and our equipment isn't the newest out there. We want people to work for BrightView to see that as a privilege to work here, not as just a job. If you want to talk about qualitative, we spent far too much on rental last year. And by sharing our fleet across this company, we think there's significant opportunity to improve that. Last year, we spent, call it, around $15 million on rental that we can get better at. Probably not eliminate all of it, but we can get better. Last year, we also spent a significant amount on maintenance, which we'll always have to do preventive maintenance on fleet, but it was a much bigger number than we…

Yes, I would just add that given the financial flexibility we have on our balance sheet right now, we're in such a good position to reinvest back into our employees and reinvest back into our people which will, in turn, take care of our customers, right? I think I did wrap up with new boots, new trucks, new mowers. And that's really you spend time in a branch like we are today, you see folks drive out in a brand-new truck with brand-new mowers on the back with new safety shoes on, I mean it's a culture change that is happening in the company. It's hard to quantify, but it will have a quantifiable impact on the P&L at some point in time. And then where our balance sheet is and cash flow generation, we're going to invest almost double the amount of CapEx we did last year. They'll generate $55 million to $75 million of free cash flow, which is an increase of our previously provided range. We feel great about our ability, given our balance sheet, to execute this strategy. And Dale said it, it won't all happen in fiscal '24 or fiscal '25. Right now, we're getting about $0.08 to $0.10 residual on equipment we sell. That number should be far greater as we get into the future, as the chart kind of illustrates on Page 14.

Yes. That's interesting color and makes a lot of sense. I guess that kind of ties in with my next question. I mean so you're getting a nice margin boost, call it, this year with the unwind of BES. You'll have maybe a little bit of benefit next year. But how do you think about continued outsized margin improvements outside of that? And maybe this saving on maintenance and rental cost is probably part of it, but what are the levers to increasing that margin, whether it's 100 basis points annually or something different but getting back to that close to 13% EBITDA margin that the company achieved in prior years and hopefully eventually getting somewhere past that?

Yes. Great. So Greg, one way to think about it is the BES unwind is going to have about a 20 basis points improvement on our margin. So we are going to improve margins on our business this year by, like you said, roughly 100 basis points. If you look at the midpoint of our guide right now, it's at 11.7% EBITDA margin this year. That's a 110 basis point improvement. We still have significant opportunity to continue to centralize. We're working on different functions that have to leverage the size and scale of our business. Like procurement, we have to find a way to leverage all the spend that we have to better buy it across the whole organization. When we answered Tim's question about the 4 unique divisions we had, unfortunately, you can guess, they were all buying somewhat independently. We weren't doing enough centrally. We have so much opportunity to continue to centralize so we can leverage the size and the scale of the business. I like what you're going with. I like the 100 basis point thought. I remind Brett of that number every year that, that should be our goal. And I firmly believe there is no reason, with our size, that we should not run this business in a normal market with mid-teen EBITDA margin. So yes, last year's 10.6% was far below what it should have been. Many reasons that got us there, but you've seen the actions we've started taking today to lean out the organization. And we're going to continue to find ways to reduce costs so we can drive for that annual margin improvement like you're thinking. Brett, do you want to add anything?

No. I'll just reiterate, great first half of the year, Greg, as you can see from our margin improvement. We're over 100 basis points in the first half. We're guiding to basically a similar number in the second half, another 100 basis points in the second half between both quarters. And look, as Dale mentioned it and as we've talked a few times, the change we've undergone over the last 7 months, there's more change to come, more positive change to come. And we're at the early innings of that change and the impact it's going to have in the organization. So as you think about next year, you think about the following year, yes, there's definitely more margin to be had as you think about getting back to that IPO level which is, call it, the 12.5% range. This year, we're essentially halfway back. We'd be at 11.5% to 11.9% at our guidance range. And then as Dale mentioned, that kind of 100 basis points end year goal would get us back next year to that IPO level of about 12.5%, 12.8%, within that range. So again, we're not providing guidance for next year, specifically for '25, but we feel really good about the margin expansion opportunities, especially when we get that sustainable growth engine going in the back half of next year and we start this development conversions and the maintenance projects, that's untapped opportunity we have today that would just drive accretive margins in the business.

All right. I would leave it there. Best of luck.

Thanks.

Thanks.

[Operator Instructions] Our next question comes from Stephanie Moore from Jefferies.

This is Hans Hoffman on for Stephanie Moore. Just wanted to touch a bit on sort of M&A. Obviously, I know you guys removed it from the guide. But just given net leverage is in a much healthier position today, I'm just curious when you think that sort of comes back into the picture? And as you sort of evaluate acquisition targets, I know like the strategy has changed a bit versus prior year, so I'm just kind of curious what you guys are looking for in acquisitions.

Yes. Look, it's a good question. Obviously, we're in a much better financial position, and if we wanted to deploy our precious capital that way, we could. But I think, as you can see on Slide 6 of the deck, we've had significant operational changes in our organization. I want to make sure we absorb all those changes and get our teams working together cohesively so that when we bring an acquisition in, we can be a better owner of that acquisition. I don't think that's long periods away, but it's probably not going to occur over the next 2 quarters. But I firmly believe accretive M&A is a way for us to grow this business. But we have to be a better owner. We have to make sure when we bring an asset in, we can help it grow faster and operate more efficiently than what it does today. That capital that we choose to deploy through M&A is precious. And we've talked about all the investments we're making with trucks, with mowers, with boots for our employees. Those are all things that are creating a cultural shift in this company. So if we're going to bring somebody in, they've got to match our culture. They've got to want to be here, and we've got to be willing to invest in that business. And then by leveraging all the services we've talked about, turf, irrigation, tree, hopefully, when we bring their customers in, we can be a better owner and help them grow faster. So I will tell you, we will be targeting M&A in 2025 just because we said we'd be positive for this year. But we've gone through tremendous change. I mentioned to somebody, 70% of our employees have a new boss right now, and that's a…

Got it. That's helpful. And then just kind of curious on the cross-sell of development into maintenance, was there any particular reason that, that opportunity wasn't pursued in prior years? And then just sort of any thoughts around your initiatives to get retention back to where you were pre-IPO, if you could just sort of unpack that a bit more.

Yes. Let's start with the development into maintenance. Look, I think like anything, when the compensation system motivates people to do what's right for themselves and converting development into maintenance, there's always some warranty work that we have to do. And it's easier not to worry about who's going to pay for the warranty if it's not going from left pocket, right pocket. So I think by putting it under one person that now owns it, they will be able to negotiate who's going to pay the warranty better than having 2 independent people that were worried about 2 different P&Ls. So this is all upside. You heard me say, it's untapped opportunity. The developers are different than the people that are going to have the ongoing business, but that doesn't mean we should be getting the level of conversion we have in the past. We should be able to get 70-ish percent of the business that we create every year with our great development team and the new maintenance to be serviced by our teams. So unfortunately, it was the structure that we had that created that. But that's work that we can do in the future. What was the second part of your question? Retention. Customer retention, yes. So customer retention, look, it's near and dear to my heart. It pains me when I hear people think that our focus is to not service our customers like we don't want to have the customers we have today. There is no customer that costs less to acquire than the one we already have today. It is our job to find a way to service those customers and make sure they're getting the value for what they're paying for. Let us do that. We can't just throw our challenges on…

That concludes the Q&A portion of today's call. I'll now hand back over to Dale Asplund for closing remarks.

Thank you, operator. As you can tell, we are extremely excited about the opportunities ahead. And I'm thrilled to be leading this great company through this important period. Our objectives are clear. We are committed to becoming One BrightView, growing profitably and creating meaningful shareholder value. With that, I thank everybody for joining our call today. Operator, you may now end the call.

Thank you. That concludes today's call. You may now disconnect your lines.