BrightView Holdings, Inc.

Good morning and welcome to Brightview's 2020 fourth quarter and full year fiscal 2020 earnings conference call. As a reminder, this call is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. Today's press release is available on the company's website, investors.brightview.com. Additionally, the online webcast includes the presentation slides that will be referenced as part of today's discussion, and a downloadable copy is also available online. I will now turn the call over to Brightview's Vice President of Investor Relations, John Chave. Please go ahead.

Thank you, Lindsay, and good morning. Before we begin, I would like to remind listeners that some of the comments made today, including responses to questions and information reflected in the presentation slides, will be forward-looking, and actual results may differ materially from those projected. Please refer to the company's SEC filings for more detail on the risks and uncertainties that could impact the company's future operating results and financial conditions. Comments made today will also include a discussion of certain non-GAAP financial measures, reconciliations to the most directly comparable GAAP financial measures, along with other disclosures provided in today's press release.

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

Finally, unless otherwise stated, all references to quarterly, year-to-date, or annual results or periods for further fiscal years ending September 30 in each respective year. For context, Brightview is the leading and largest provider of commercial landscaping services in the United States, with annual revenues in excess of $2 billion, approximately 10 times our next largest competitor. Together with our legacy companies, Brightview has been in operation for more than 80 years, and our field leadership team has an average tenure of 14 years.

We provide commercial landscaping services ranging from landscape maintenance and enhancements to tree care to landscape development. We operate through a differentiated and an integrated national service model, which systematically delivers services at the local level by combining our network of more than 240 maintenance and development branches with a qualified service partner network.

Our branch delivery model underpins our position as a single-source end-to-end provider to a diverse customer base at the national, regional, and local levels, which we believe represents a significant competitive advantage. We also believe our customers understand the financial and reputational risk associated with inadequate landscape maintenance and consider our services to be essential and non-discretionary. I will now turn the call over to Brightview's CEO, Andrew Masteman. Thank you, John. Good morning, everyone, and thank you for joining us today. Starting on slide four, let me provide you with an overview of our strong fourth quarter and full year fiscal 2020 results. First of all, I'm pleased to report that all Brightview branches continue to be operational with no limitation on the scope of services. Inclusive of acquisitions, our maintenance contract-based business for the quarter grew 3% versus the prior year. This compares favorably with the third quarter of fiscal 2020 when our maintenance contract-based business declined 2%. Contract maintenance is our core book of business and continues to represent a recurring and durable revenue stream. Third, total adjusted EBITDA for the fourth quarter was $90 million, with a solid EBITDA margin of 14.8%, up 10 basis points versus prior year. Fourth, net capital expenditures as a percentage of revenue were 2%, or $47.9 million, down from 3.5% of revenue in the prior year. Our model continues to demonstrate an ability to generate consistent revenues profitability coupled with very modest levels of working capital and capital expenditures. Fifth, free cash flow generation continues to be exceptional. During the fourth quarter, we generated a record $77.4 million of free cash flow. For the full fiscal year 2020, we generated $197.2 million of free cash flow, a 128% increase year over year, and also a record for the company. And finally, the results of our strong-on-strong acquisition strategy benefited our revenue growth during fiscal 2020, and with an attractive pipeline, acquisitions will continue to be a reliable and sustainable source of revenue growth. Our performance was at the upper end of the guidance provided during our third quarter call and reflects a solid finish to the year. Our financial performance in the fourth quarter showed strong sequential improvement, and we remain confident in opportunities to generate value for all of our stakeholders. Before we turn to the details of our fourth quarter and full year, let me provide you with our outlook for the first quarter on slide five. As expected, October and early November has seen COVID-19 business impacts on ancillary demand in the maintenance segment and project pipeline softness in development. Additionally, we will have about a $7 million revenue reduction in the first quarter due to the sale of the tree nursery business. As mentioned, our maintenance contract-based business is growing, and our two largest verticals, homeowners associations and commercial properties, have remained resilient. And we expect a favorable tailwind from acquisitions that were completed in fiscal 2020 and in early fiscal 2021. As a result, For first quarter fiscal 2021, we anticipate total revenues between $525 and $550 million and adjusted EBITDA between $45 and $49 million with the lower end of the range contemplating a light snowfall. Due to the uncertain outlook regarding the full extent of COVID-19's impact on the economy and its longevity, we will not be providing annual guidance for fiscal 2021 at this time. We will operate under the premise that headwinds will continue to impact ancillary demand in our maintenance segment and cause project delays in development. These factors will impact our ability to grow organically over the next several quarters. Despite that, we believe with an average snowfall during the first half of the fiscal year and a modest recovery from the pandemic in the second half, we will be poised to deliver improved results year over year. Turning now to slide six, before continuing with the discussion of our results, once again, we want to express our thoughts to those impacted by the COVID-19 outbreak. We continue to be extremely grateful for first responders, healthcare professionals, and all essential workers. But despite these difficult circumstances, I continue to be very proud of our persistent focus on safety. The landscaping industry standard incident rate is 4.0. At Brightview, our total recordable incident rate in fiscal 2020 is 1.87, far exceeding industry-wide metrics. What this means is that we have less than one incident per 100,000 hours worked, and we have many branches with no incidents at all during the year. This incident rate has improved significantly over the past four years, and combined with our consistent excellence in service delivery, we continue to shine, and it's reflected in our results. In recognition of our team, we awarded our field employees with some much-deserved recognition. Earlier this month, we paid $6 million to frontline team members. More than 13,500 employees in branches across the United States received an extra paycheck. This is our way of acknowledging their work and commitment under very difficult circumstances. Moving now to slide seven, in addition to health and safety, we are laser-focused on business continuity. Company-wide, we continue to exercise extreme prudence as we navigate through challenging periods, but moving quickly on opportunities to maintain and grow our base contract service, protect margins, enhance cash and liquidity, manage capital expenditures, and reduce working capital. Fortunately, across all regions of the country, our two largest verticals, HOAs and commercial properties, continue to be resilient. Both stay-at-home and work-from-home highlight the importance of our services to millions of residents who live in communities we maintain. Commercial and corporate campuses, combined with HOAs, represent approximately three-quarters of our maintenance contract book. Hospitality and retail have been the most impacted verticals, but represent less than 10% of our overall maintenance contract book. We have a healthy and diverse mix of customers and projects, and we continue to believe in the resiliency of our business and our ability to meet this challenge head on. Conditions presented by COVID-19 are made fluid, but our quarterly results highlight the resiliency of our contract-based business and reflect the positive underlying trends in our acquisition strategy, cash generation, and growth and liquidity. Our team has done an incredible job delivering steady results. Ultimately, we continue to be confident we will emerge from this crisis a better and stronger company while remaining focused on building our long-term fundamental strength and creating superior value for our stockholders. Turning now to slide eight, since the beginning of fiscal 2020, we completed eight acquisitions that strengthened our position as a presence in several key markets. Over time, we expect these acquisitions to add approximately $100 million in incremental annual revenues. In September, we acquired All Commercial Landscape Services, headquartered in Fresno, California. All Commercial is a full-service landscaping company and an entry point into a desirable MSA. In October, we acquired Commercial Tree Care of San Jose, California. Combined with the acquisition of All Commercial, Brightview is now the leading tree care company in all of Northern California. The purchase of commercial trees followed the sale of Brightview Tree Company, our tree nursery division, that typically generated between $25 million and $30 million in annual revenue. The redeploying of assets from our development segment to our maintenance segment is consistent with our overall strategic growth plan. Most recently, and subsequent to the end of the quarter, Brightview acquired full-service commercial landscape firm WLE. The 250-member WLE team serves HOA, developer, commercial, and municipal clients across three markets in Central Texas, an important and growing region. Our business is cash generative with low capital intensity and minimal inventory, allowing us to consolidate the marketplace in an efficient manner. Our horticultural knowledge and excellence and our ability to operate multiple service lines under one banner positions us well. We have a very disciplined and repeatable acquisition and integration framework, which results in less risk and generates predictable and accretive returns. Acquisitions provide us with an established client base, a company with a track record of operating results, a field leadership team, and an experienced workforce. Currently, our M&A pipeline has over $400 million in revenue opportunity, and we are in discussions with multiple companies. After an intentional pause during the third fiscal quarter, we resumed our acquisition strategy. As the employer of choice in our industry, we have deployed over $300 million and closed 22 acquisitions since January 2017 and are accelerating our pace of acquisitions and integration. We will continue our aggressive but disciplined approach against our attractive pipeline as we seek market expansion and new market entries. As we progress through fiscal 2021, we will continue to update you on this core strategy. Turning to slide nine, we remain focused on deploying technology to enhance 360-degree client engagement across all verticals. Over the course of the last couple of years, Brightview has invested in industry-leading technologies for our customers and enable our field-based account and branch management. HOA, or BVConnect, quality site assessments, and Salesforce CRM software have all been implemented as digital tools to improve retention and support property enhancement. Highlighting HOA Connect, this digital customer portal introduced at HOAs in late 2019 has been implemented at almost 100 sites across the country. Allowing for quick collaboration, digital pictures, and direct follow-up on issues within the community, HOA Connect has become a Brightview differentiator. In the summer of 2020, a platform for HOA residents to take advantage of Brightview ancillary services via a web portal was introduced, allowing for incremental service offerings. Although early in adoption, initial indicators showed double-digit increases in ancillary services at HOA utilizing this tool. More to come as we roll this industry-leading software out to BD customers. Turning to slide 10, in addition to technological enhancements, we continue to invest in our sales organization, growing our team 10% during fiscal 20 and 25% since fiscal 18. We also continue to expand the use and effectiveness of our sales tools like Salesforce, our customer relationship management solution, and other sales enablement technologies. To drive the success of these expanded sales teams, we continue to invest in digital marketing initiatives in new markets and through new channels. Over the last two years, we have realized a three-times increase in our marketing-driven qualified sales leads. These leads have then led to a seven-times increase in closed deals, indicating a high quality of marketing-driven opportunities. We expect this trend to continue to increase as we evolve our digital marketing strategy into a more effective omni-channel approach. Turning to slide 11, we remain focused on driving maintenance contract growth during fiscal 2021. Our contract business represents the core part of maintenance, including mowing, edging, pruning, trimming, blowing, and other basic landscaping services, and in 2020 was about two-thirds of our maintenance business. This slide provides a more granular look at our maintenance contract book of business. We think it is a valid way to better understand both the resiliency and stability of our core maintenance business. As you can see, total maintenance contract-based business showed positive growth in fiscal 2020. During the third quarter, we did experience a 7% decline. However, in the fourth quarter, we delivered strong sequential growth, seeing an underlying improvement in COVID-related impacts, and are optimistic that that trajectory will continue. Turning to slide 12, in the constant hunt for profitable organic growth, in addition to leveraging technology, we are fine-tuning our sales force and strategies. We'll invest in the growth of our maintenance sales team and our new virtual training and coaching programs, allowing us to more effectively and efficiently onboard new team members. Incentives motivate high levels of the right sales activity. We continue to refine and invest in growth incentives to encourage bundling services around fertilization, sweeping and porter services, pre-maintenance, and snow removal. Our recent acquisitions include offerings that allow us to more effectively bundle services while eventually positioning Brightview as the industry leader across a number of service lines. Growth is a primary focus, and growth will be recognized and rewarded throughout the organization. We also continue to realize the benefits of digitizing Brightview. Our technology supports engagement by providing client touchpoints and mobile field solutions. HOA and BVConnect, our property management portal, are driving deeper connectivity to the customers we serve. The portals not only provide a platform to digitally engage with customers, but also facilitate additional ancillary momentum. As our customers become more familiar with use, we are seeing a greater willingness to request services via the portals. Our mobile quality management solution, QSA, is enhancing customer satisfaction by enabling us to share virtual site walks while incorporating customer feedback and potential ancillary work. Providing our sales teams with the data and technology tools that yield insights and support client engagement is also critical to support growth. Our proprietary electron time capture labor management tool is resulting in performance efficiencies, and our bidding and estimating tools continue to be improved and enhanced. Digital marketing remains critical with our efforts focused on COVID-resistant verticals and geographic market expansion. Our omni-channel approach is all about utilizing data efficiently while integrating customer interactions via our website, social media channels, and mobile advertising. Increased digital marketing efforts will be supported by a growing inside sales capability. Technology is a key competitive differentiator and an advantage of scale. And when combined with a refined sales strategy, structure and increased sales force size should return Brightview to positive growth. I'll now turn it over to John who will discuss our financial performance in greater detail. Thank you, Andrew, and good morning to everyone. I am very pleased with the strong results we delivered in our fourth quarter and during fiscal 2020. Our record cash generation combined with modest capital needs resulted in a reduction in our net debt of approximately $116 million and a leverage ratio of 3.7 times at September 30th, 2020 versus 4.1 times at the end of the third quarter. Additionally, the growth in our contract maintenance business, combined with efficiencies gained from our investments in technology and our ongoing focus on productivity, have all been meaningful in driving improved margins and collectively underscore the strength and resiliency of our business. With that, let me now provide a snapshot of our fourth quarter results. Fourth fiscal quarter 2020 revenue for the company declined 2.7%, or $16.7 million from $624.8 million in the prior year to $608.1 million in the current quarter, driven principally by COVID-19 business impacts on ancillary demand and maintenance and project delays in the development business. Maintenance revenues of $443.9 million for the three months ended September 30th decreased by $11.5 million or 2.5%, from $455.4 million in the prior year. The decrease in maintenance was driven principally by ancillary demand softness, with solid revenue contribution of $25.1 million from acquired businesses. For the three months ended September 30th, development revenues declined $5.6 million, or 3.3%, to $165.1 million from $170.7 million in the prior year, driven predominantly by project delays. We expect COVID-related softness during the first half of fiscal 2021, and more pronounced in Q2 versus last year, but we are also encouraged by our bidding pipeline and bid calendar, and we anticipate increased stability during the second half of fiscal 2021. Turning to the details on slide 15, total adjusted EBITDA for the fourth quarter was $90 million, a decrease of $1.9 million, or 2.1%, from $91.9 million in the prior year. The impact of lower revenues due to COVID-19 was offset by productivity initiatives and SG&A cost attainment. In the maintenance segment, adjusted EBITDA of $77.2 million was flat the prior year. Cost containment initiatives and solid labor management offset revenue losses, which led to strong margin expansion. The result was an impressive 40 basis point expansion in EBITDA margins to 17.4%. In the development segment, adjusted EBITDA decreased $400,000 to $26.3 million, compared to $26.7 million in fiscal Q4 2019. The modest decline was driven by lower revenues. However, through strong cost containment efforts, the development business was able to significantly mitigate against the revenue loss, which resulted in a 20 basis point expansion in EBITDA margins to 15.9% in fiscal Q4. Corporate expenses for the fiscal fourth quarter increased $1.4 million, representing 1.9% of revenue. Now let me provide you with a snapshot of our results for the full fiscal year 2020 on slide 16. Total revenue for the company decreased 2.4% to $2.35 billion from $2.40 billion in the prior year. In the maintenance segment, fiscal year revenues were $1.74 billion, a $74.3 million or 4.1% decline versus 2019. Key drivers were COVID-19 business impacts on ancillary demand, partially offset by solid revenue contribution from acquired businesses. We were also impacted by an $86 million snow revenue decline in the first half of fiscal 2020 results. In the development segment, despite project delays in the second half, strong first half project pipeline, global growth as revenues increased 2.6% to $610.6 million compared to $595.4 million in the prior year. Total consolidated adjusted EBITDA for the fiscal year was $271.6 million compared to $305.1 million in the prior year. The variance was largely driven by second-half softness in our maintenance ancillary revenues, project delays in the development segment, and lower snow revenue. The maintenance segment's adjusted EBITDA declined by 11.3% to $250.1 million compared to $282 million in the prior year due principally to ancillary softness and the significant decline in snow removal services. As a result of COVID-19 business interruptions and project delays, adjusted EBITDA for the development segment decreased 1.8% to $80.2 million compared to $81.7 million in the prior year. Corporate expenses were essentially flat compared to the prior year, and as a percentage of revenue, corporate expenses were 2.5%. Let's move now to our balance sheet and capital allocation on slide 17. Net capital expenditures totaled $47.9 million for the fiscal year ended September 30th, down from $83.1 million in fiscal 2019. This represents a 42% decline and demonstrates again our ability to judiciously manage cash. Expressed as a percentage of revenue, net capital expenditures were 2% in fiscal year 2020, down from 3.5% in the prior year. We will continue to demonstrate a diligent focus on managing capital expenditures, and we expect fiscal 2021 capital expenditures to be approximately 3% of revenue, in line with our long-term guidance. In fiscal year 2020, we invested $90.3 million on acquisitions and decreased net debt $116 million to $1.02 billion. Our leverage ratio was 3.7 times at the end of the fourth quarter of fiscal 2020 versus 4.1 times at the end of fiscal Q3. During the fourth quarter of fiscal 2020, we also completed the sale of Brightview Tree Company, our tree nursery business. In addition to generating cash, the transaction reduces our working capital needs and supports our overall strategic growth plan to redeploy capital from development to maintenance. In connection with this transaction, we recorded a one-time non-cash charge in the fourth quarter of approximately $22.1 million, primarily related to goodwill. During fiscal 2020, free cash flow increased $110.6 million, the highest achieved in our history, to a record $197.2 million. This represents a significant increase compared to $86.6 million in the prior year, and was principally due to an increase in cash flows from operating activities, our continued focus on diligently managing our working capital, including receivables and payables, aggressively managing capital expenditures, and a reduction in interest expense driven by lower rates. To further elaborate on working capital, let me briefly review the progress we have made over the previous three years on slide 18. In 2017, as a percent of last 12 months revenue, networking capital was 12.5%. Through a continued focus on reducing DSO and increased focus on driving more favorable vendor payment terms and aggressively managing our inventory, networking capital was significantly reduced to less than 9% of revenue in fiscal 2020. Going forward, we expect to remain very diligent in regards to managing our working capital. An update on liquidity is on slide 19. At the end of fiscal 2020, we had approximately $182 million of availability under our revolver, approximately $50 million of availability under our receivables financing agreement, and approximately $157 million of cash on hand. Total liquidity as of September 30, 2020, was approximately $389.1 million, This compares to $283 million as of September 15, 2019, a true testament to our ability to generate cash. We are confident that we have ample liquidity and cash on hand to not only run Brightview effectively, but also maintain our focus on paying down debt and continuing our accretive M&A strategy. With that, let me turn the call back over to Andrew. Thank you, John. Turning now to slide 21. Our fourth fiscal quarter results are at the upper end of the expectations we shared in August. Our cash flow and contract-based business remains strong. Combined with our liquidity, we expect to continue our pace of acquisitions and pay down debt. Despite anticipated continued COVID-19-related impacts, the fundamentals of our business and our industry remain strong. Our sales and marketing strategies and structure are a formula for long-term success. and our investments in field-based sales and operations leadership will drive stronger new sales and result in improved client retention while further streamlining our service delivery. The investment and expansion of our sales team, combined with targeted regional efforts in digital marketing, have grown our sales opportunity pipeline to the highest level in the company's history. Over time, this enhanced and robust pipeline should support growth well ahead of industry averages. Additionally, our M&A pipeline shows no sign of slowing down, and it delivered a reliable source of growth for three years running. We plan to utilize our strong cash position and liquidity and expect to take advantage of our attractive pipeline of opportunities. I would also like to personally thank our dedicated employees, families, customers, clients, and partners for their resiliency and dedication during a challenging time. Almost 20,000 people come to work every day to make sure the living assets in which we live, work, and play are safe and beautiful. Most importantly, the strong customer and team-oriented Brightview culture drives the resiliency of our business. At all levels in the organization, a focus on taking care of each other and our customers is and taking pride in how we engage with our clients and the beauty of their properties we design, develop, and maintain has sustained our organization. We will continue this focus on our culture to deliver confidence in the future that lies ahead. Thank you for your interest and for all your attention this morning. We will now open the call for your questions.

At this time, if you would like to ask a question, please press star followed by the number one on your telephone keypad. Our first question comes from Andrew Whitman with Baird. Your line is now open.

Great. Thank you for taking my questions. Good morning to everyone. I have several questions. I'll probably hop back and maybe save some of them for later so that other people get a chance to have the floor. But, Andrew, I guess I wanted to start a little bit talking about on the maintenance segment. Last quarter, organic growth rate was minus 12. This quarter, minus 8. So a sequential improvement. You talked about this briefly in some of your prepared remarks, but I was hoping you could dig in a little bit more and describe a little bit more about what you saw in the quarter. What were truly the biggest factors in driving the sequential improvement? Was it just really more reopenings of customers or... Was it driven by wins in account retention, or was it just ancillary coming back? I'm sure it's all of these things, but I'm really looking for what the couple of key drivers were that helped the sequential improvements so we can understand them better.

Good morning, Andrew. If you pick the list, those are the primary drivers. Clearly, some of the reopening that occurred in the fourth quarter versus the third quarter was a particular impact, although, as you noted, still had some of the decline. I will say that probably another underlying impact of the improvement was a higher retention rate. While sales clearly have slowed down some just due to the ability to get in front of our customers, also at the same time, the retention we have with our current clients has maintained a strong position. So I think those two drivers, ancillary while improving some of the shortfall in the fourth quarter, did not come back as strong as the contract came back. So ancillary continues to provide pressure in the overall picture, but I would say on a very positive note, retention improving as well as just a general reopening of the contract.

Great. Thanks for that. The implication of this, I guess, on your first quarter guidance is my next question. We've seen a lot of service companies kind of leveling off in that September timeframe, seeing kind of October, even November trends that are more consistent with what they saw in the quarter. Is that the case for your business on an organic basis as well? Or how should we think about what's implied in that guidance?

Yeah, I think I think thinking about the first quarter is what you see overall is, you're right, kind of a good and resilient space in our contract business. I think ancillary, our assumptions are that we continue to see pressure in the ancillary world, and that is not coming back. And the range really is due to the variability we have in snow, which does happen in December. So that does pose another uncertainty kind of in our December, particularly in our December. Okay.

And then just over on development, I thought I would just ask, you mentioned some project delays. We noticed in your filing that your recorded but unperformed backlog performance obligations are down pretty significantly since the start of the year. But previously you mentioned that your fiscal 21 was well booked or even maybe you said nearly fully booked. And so I guess the question is, What's the status update on this? Are some of the delays that you saw in the quarter expected to continue throughout 21 to maybe change the way you see the 21 development picture laying out? And I was just wondering, given the uncertainty in the commercial real estate market, if you're seeing any cancellations.

Yeah, previously I mentioned that we were booked for the first quarter, and that continues to be the case, that the first quarter is kind of booked at our expectation level. It's where I said before is that in the first half of the calendar year that we saw some weakness overall in the development, and we continue to see some of that. It's not cancellation. It more so has to do with the fact that during the April through July period, overall project activity was lower in the construction area, and this causes us to pause a little bit. on a dip we see in the first half of the calendar year 21. That being said, actually bidding activity is increasing, and we're actually seeing some nice upticks in overall project inquiries, kind of the reverse of cancellations. It gives us some optimism as we look out nine months from now.

Our next question comes from Tim Mulrooney with William Blair. Your line is now open.

Morning, John. Good morning, Andrew.

Good morning, Tim.

A couple questions. First, can you talk about how your enhancement revenue trended through the quarter and maybe into October? I mean, you talked about your base contract revenue, which is really helpful, but the variability really seems to be around the enhancement revenue. So curious if you could share what enhancement revenue was as a percentage of sales, maybe relative to this time last year or how it moved through the quarter.

Yeah, if you look at overall enhancements, well, we did note that the total contract was up about 103% of last year. The ancillary continues to show weakness, obviously, with the overall profile of the business being down about 3%. So the corollary to that is ancillary. And, you know, we are seeing ancillary, although improved off of the fourth quarter, off the third quarter, still a fast 20% or so down year over year.

Okay. That's really helpful. Thanks, Andrew. And I wanted to ask about employee retention. This isn't really – you know, necessarily directly correlated year results, but I know this is a critical metric for the business. So I'm thinking about a couple different factors here, and I know we've talked about this in the past, Andrew, but now I'm seeing these one-time bonuses you recently paid out. Do you expect that to have an impact? I'm thinking about suspension of the H-2B visa program in June. How has that affected your operations? Can you just touch on your branch-level retention rates and how that's changed, if at all, through this COVID period?

Yeah, and what you see out there is that we continue to have a very dedicated and strong base of employees throughout the organization, a critical core that continues to operate. You know, we talked about we paid over 13,000 people in the company a central work bonus, and that shows you the extent of the stickiness that we have with our employees. I mean, the fact of the matter is those folks had to have been with us since May. to get that bonus. And that was not, those were the people who were actually doing work, landscaping, gardeners in the field every single day. So when you look at that overall attention, we're very, I'm very pleased to be able to say that we had a very strong retention element throughout the entire pandemic. As you look out towards the H-2B, the H-2B visa announcements back in June were through December 31st. And so, you know, the program itself continues to be active with taking applications for 2021, and there has not been any declaration specifically related to how that impacts 2021.

Okay, understood. Thanks for the color.

Our next question comes from the line of Shlomo Rosenbaum with Steeple. Your line is now open.

Hi, good morning. Thank you. Hey, can you walk me through again why you sold the tree nursery business?

Yeah, Shlomo, good morning. This is John. Part of our development segment, much more cyclical in nature. The user of working capital, as you've heard me say before, the company has about $30 million of inventory. Twenty of it was tied up in the tree nursery business. And we had a really good offer at a really good multiple. We wanted to take advantage of that. I think it's normal also if you look strategically. A nursery business, within what we do, we don't grow products or make products. We basically develop products. landscapes, install landscapes, and maintain them. Strategically, the company that acquired this was a nursery company. And so taking a nursery company and putting it with another nursery company really gave a strategic reason for it to be in more of a group focused on that line of business rather than the line of business that strategically is really what we'll present.

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

No, no. We treated all transactions between the nursery and our own development business pretty much as an arm's length transaction. We did buy and we continue. Actually, what's encouraging is we actually have a very cooperative agreement now with Devil Mountain, which is a company that bought the nursery, to continue a very positive and healthy working relationship between our two companies. And we actually think it's going to expand our relationship by tapping into Devil Mountain's other nursery businesses and create an overall really strategic synergy with a company that's focused in on nursery business.

Okay. And you said $7 million next quarter. Is there any impact there?

Yeah, it's about a million dollars in Q1.

Okay, so it's small. Okay, great. And then can you talk a little bit about the increase in contract revenue margins during the quarter? What's going on? What are the kind of conversations that you're having that are enabling that to happen? Is it pricing at all, or is it really the fact that you guys are just being very, very disciplined on costs, if you can elaborate on that?

Yeah, I would say it's more the latter than the former. We are being aggressive where we can be and prudent on pricing as we have been historically. But I would say the main driver of the incremental margin improvement in the maintenance side It was driven by really good utilization of our technology tools around our electronic time capture and managing the labor, so there was a benefit there. And then also the cost side, Shlomo. Those were the two main drivers of the enhancement and margins for the quarter.

Okay, and if I could squeeze one more in. You did a really good job on working capital, and that's something that has really driven the cash flow over here. Is there any, you know, how should I think of this going forward? Do you feel like you've squeezed it down to kind of a run rate level here? Or is there more work that you think you can do there, John?

Well, I think, you know, for us, it's all about continuous improvement, Shlomo. So we're going to continue to be prudent and disciplined. We have made a lot of structural improvements in how we manage the working capital. But our goal right now is to hold on to the improvements that we've made. But we, as I said in my comments, will continue to manage it very aggressively on the working capital side. And we really want to focus on the items that are controlled at the branch level, mainly collecting our money. And we've done a very good job in being aggressive in our collections across the board, both development and maintenance.

Our next question comes from George Tong with Goldman Sachs. Your line is now open.

Hi, thanks. Good morning. The pace of development and revenue decline improved pretty meaningfully in fiscal 4Q, even against the relatively tough comp in the year-ago period. Can you talk a little bit about how project delays are currently impacting the development business if you're seeing a broad-based reopening now or if things are still pretty much under lock and key?

Yeah, George, I think overall in development, it's really spotty, meaning around the country, different areas have different cases. I mean, the reality is, for example, the Boston area seems to have a little more impact on the ability to speedily get projects done. So we're seeing a little more delays in those kinds of areas. I think overall, you know, we're seeing demand in the development area. In Q1, kind of similar to last year, a little light relative to last year, it's really where we see kind of the impact of the slowdown is really kind of our Q2. We're then kind of coming back in Q3 and Q4 to probably more typical levels that we saw in 2020. So really our dip happens in Q5.

Got it. That's very helpful. In your prepared remarks, you did cite several organic revenue growth drivers looking ahead, so sales team growth, marketing effectiveness. You talked a little bit about some of the virtual coaching and training programs. Can you elaborate on which of those levers you think has the most potential to accelerate your growth exiting COVID?

Yeah, exiting COVID. We're seeing some – there's multiple levers there that I tried to outline. As I pick on a couple of them, I mean, we're seeing some real positive shoots coming out of our digital marketing efforts, which is really showing a deliberate attempt to get out into the market using omni-channel or really a multi-pronged approach to generate significant qualified lead generation. We started this about a year ago with a single stream kind of approach and now going into a multi-omni-channel approach in targeted markets. We're seeing, as I mentioned before, a 3x improvement in leads that's leading to a 7x close. So a very significant element. And where we're seeing some of that is as recently as October, we talked about before is our net new. Our net new number in October was the highest net new we've seen in the company's history. which means our sales efforts are beginning to work. Now, that doesn't mean realized revenue coming tomorrow, but it means the contracts, which we start looking now early into contracts that will start in April, we're seeing some real positive shoots coming out of that marketing initiative.

Got it. Very helpful. Thank you.

Our next question comes from Judith Sokol with J.P. Morgan. Your line is now open.

Hi, good morning. I wanted to ask a little bit about a comment you made around fiscal 21. You had said, Assuming a couple of caveats, which is average snowfall and a modest recovery, you're expecting improved results year over year. So I just wanted to make sure I understood what that meant. Is that saying for the full year we should be looking at revenues, you know, in total up year over year? Is it talking about either die as well or is this maybe just a maintenance comment? So just hoping to dig into a pretty encouraging comment that you made.

Yeah, it's an overall comment. I think, Judah, the answer is yes, revenues up and even the up. As long as we have average snowfalls and we see a modest recovery, we're very encouraged by what we see out there, not only with, as I mentioned, our new sales pipeline, but also with the overall development looking trend. The thing is, as I noted, our contract maintenance business is stable. And growing that contract-based business with a return to normalized activity with COVID, the ancillary pull-through will come. And so, yes, we're encouraged as long as we see recovery in COVID, which we believe with a vaccine will occur, and overall snowfall happening at natural levels.

Great. And that would also not be relying on increased M&A, right? Let's just put M&A aside. On an organic basis, do you think that this could be up year over year, assuming, like you said, average snowfall and a modest recovery? Yes. Okay, great. And then the other thing I just wanted to ask, I appreciate the slide that you guys included which showed the trends for the contracts, I believe it was slide 11. I just wanted to make sure I understood it. So this is the piece of maintenance that is just contracts, right? So it excludes the enhancement work? Is that how I'm understanding it?

That's correct, Judah. It's contract only. It excludes ancillary.

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

Judah, yeah, I mean, excluding snow, including snow would be $25.75, excluding snow, roughly two-thirds, one-third, if you look at it. But the overall maintenance business, about 25% of the overall maintenance business, the ancillary services.

Okay, so putting it all together, if we wanted to just quantify how much impact you're seeing from COVID. So I know you quantified it last quarter. I believe it was $75 million in total, $65 million of that was in maintenance. Could you help us? Maybe you did and I missed it. Could you just quantify how much you saw an impact from COVID-19 on your revenues in the fourth quarter and then what you're sort of expecting, what's embedded in your guidance for the first quarter?

Well, if you look at it, you know, you look at the maintenance business in general. Well, you're right. We said, you know, about $75 million in the third quarter. I think that slowed down a little bit. So we think the total impact to COVID in the fourth quarter in maintenance is, you know, somewhere around $50 million or so, you know, in the fourth quarter. And that's in maintenance. You know, development will lessen that, well, quite a bit less, you know, by the end of the year. in revenue. So, you know, you look at the overall picture, 60 out of the 75, you know, we're at about 135 million or so impact for the year on COVID so far. We would expect that to, there's no indication that that won't come back as we come out of the pandemic.

Okay, great. Thanks for that.

Our next question comes from Hamza Nazari with Jefferies. Your line is now open.

Hey guys, this is, uh, it's Mario Hortolaci filling in for Hamza. Just, uh, wanted to touch on some of the, uh, the decremental margins kind of expected in Q1, which is again, implied in the guide, but I guess just how should we think about incremental margins throughout the remainder of 2021 as, as comps get easier and growth turns positive? Um, is there, could you, could you give us some, some guidance or outlook on how we should think about the cadence to that, um, in, in 21?

Yeah, I'm sorry. Excuse me, Mario. Good morning. This is John. I'll start on that question. As we said in our comments, we still expect on the maintenance side, the impact of the pressure on ancillary will impact our margins, we think, through the first couple of quarters of fiscal 2021. So we don't see any big change in that. We are encouraged by what we're seeing on the contract piece of the business and how we've been able to manage our labor and our costs, which was evident in our results for the fourth quarter. On the development side, it's a little bit trickier because of the project nature of that business. And when projects get delayed, that is indicative of how the margins are going to hold up in that business. But again, we saw... decent results in managing the cost in the fourth quarter there, which led to an increase in margins. Our challenge in development in fiscal 2021 will be, as Andrew said, we have good visibility in Q1. Things look okay. It's Q2. We expect, you know, some of that softness to materialize, and then if things back, we hope we can see a more normalized level in Q3 and Q4 on the development side.

Great. That's helpful. And then... I mean, you guys said that you added 10% to the Salesforce this year, 25% since 2018. You made some comments around marketing leads growing three times, and you added some detail on one of the other questions. But I guess just how are you thinking about Salesforce productivity, or how are you measuring that? Are you guys looking more at total sales per salesperson? total contract revenue or ancillary revenue? Just trying to get a sense for how you're basing that. And then what does that, I guess, look like versus history? And how quickly can that salesperson ramp once you guys are adding them? Is it a six-month type of ramp or does it take a year or two for them to get up to being fully productive and fully profitable?

Yeah, if you look at, I mean, our primary KPI we use is contract revenue for sales employees. And with the ramp that we've had, I mean, if you look at that 25% ramp over two years, and couple that with the ability, you know, that the training and the in-person kind of development that you typically have with a salesperson has slowed down, no question, because of COVID. But the point is that we continue to invest. We continue to build our sales force. And We've seen some quite nice stickiness with our employees that we brought them on during this pandemic. So what we do believe is as we come out of the pandemic that the sales – and thus we have also seen as we bring in more new employees, you see that metric come down a little bit. Combined with new employees and the reality that the sales process within landscaping is a very personal, in-person sale, dealing with a client, going on customer walks. with the properties understanding the issues at a property with the property managers and owners. So that combination has caused that metric to slide a little bit recently, but we are very optimistic that when we look at tenure, people who have been with us for over a year, the amount they sell dramatically improves. And we're seeing that metric go up. So as you see time pass and those new employees gain experience, combined with the removal of the pandemic weight, we are really, really energized about what this sales team, this continued investment in sales is going to produce.

Great. And I could just sneak in one more on M&A. I mean, you said you have a $400 million pipeline. I mean, there's a lot of chatter in other services industries that 2021 could be an outsized year in M&A, with 2020 being toward the lower end of the expected ranges. I mean, is that an opportunity for you guys in 2021? Could it be an outsized year, or how much of that $400 million in your current pipeline could you recognize in 2021?

Yeah, our pipe is up. We typically said we have about 300 to 350. Our pipeline now is about 400 million in opportunities in the pipe. You should expect, I think everyone should expect that pipe to convert. If we convert it at a similar rate, we should be doing slightly more M&A. But, you know, M&A is more of an art than a science. So we're dealing with making sure that the companies that we're connecting with have an ability to match with the culture of Brightview. And that's the most critical part. So right as we sit here today, opportunities out there have grown, and we continue to be very optimistic about what that can mean for acquisitions in 2021.

Our next question comes from Seth Bednar with RBC. Your line is now open.

Hey, good morning, guys. Gunnar Hansen on for Seth. You guys have questioned a lot of things, but I guess, John, going back to the net working capital benefit, you know, obviously below 9% of revenues have turned it down pretty significantly in the last couple of years. I mean, should we assume that that takes back up to kind of the 10% that had been realized, you know, in prior years? Or, you know, how confident are you that a 9% working capital is a sustainable benefit?

Well, as I said earlier in Good Morning Gunner, we're going to work extremely hard to maintain what we've achieved here. We have done some structural things on the AR side. We've had a heavy focus on anything that's aged to get that in the building as soon as possible. One of the things I do want to mention is that we haven't done these dramatic improvements on the back of our vendors, so we're not aggressively expending our vendors. We have very good relationships there. And I think those are really the key elements. Combined with managing our capital expenditures aggressively, and we're certainly not starving the business at all, I think those two components will really help us to maintain our consistency and ability to generate significant cash in this business to both, as we said, delever and continue our acquisitions.

Okay, that's helpful. And Andrew, I guess just, you know, with some of the metrics you provided around the sales pipeline and the marketing leads, all that seems pretty encouraging. Can you give us a little bit more color on the background of those programs? You know, I think you mentioned that it really started a year ago, and it's moving more to an omni-channel today. I mean, is that done on a centralized basis and then those leads pushed out to the local branches? You know, how pervasive are those leads across the country? Are there any end markets that are better than others? And, you know, with the lead that you're seeing, is it white space or are you winning share from competitors? Has there been a shift to greater outsourcing? Any color around kind of some of the contracts of those markets.

Yeah, we put a deliver approach out about a year ago, and there are various stages that we're introducing. We started out with single stream channel, omni-channel, something we're just starting right now when you look at what we think we can create as far as pipeline. It is targeted at certain markets throughout the country. What we've done is about a year ago we started deploying regional digital marketing resources that partner with our divisions out in the regions. So that it's kind of we've taken the first step on that. We do believe there's kind of multiple steps we're taking. Step one, done, saw the results. We're now taking it down to expanding our market presence, step two. We believe there's even more coming in step three, which probably will be beginning starting, you know, in about six months, nine months from now. So there's multiple stage levels that we're going at that. And the initial – Initially, what we're seeing in what I reported is some very positive results. And look, in landscaping, the reality is the land exists. And so most of it is going to have some competitive element, but the market is so big. We only have about a 2% to 3% share of the landscaping market, right? And so as we're going out there, we're basically reaching out and engaging with customers many times who don't know who we are. So being able to go out and stimulate brand awareness is really what this marketing is doing, and by doing that, we're stimulating more customers coming into the pipeline that ultimately converted a higher rate into pricey.

Great. That's helpful. Thanks, guys.

Our next question comes from the line of Kevin McVeigh with Credit Crease. Your line is now open.

Great. Thanks. How much snowfall do you factor in to kind of the low end and the high end of the Q1 guide? And is there any way to think about, you know, just ring fencing, what type of range we should think about for 2021 overall as well? You know, appreciating you're not giving formal guidance, but just your way to think about the bands, not only for the quarter, but I guess for the full year.

Yeah, if you look at snowfall in general in Q1 last year, it was a pretty good first quarter. And so if you look at the range that we have, the top end of the range with average snowfall, it doesn't anticipate anything big to get to the top end of the range. In other words, we'd go through the range if there was a blizzard event in December. The bottom of the range, I'd say light snowfall, probably a shrinkage of roughly $10 million or so off of prior year at the bottom end of the range, $5 to $10 million shrinkage off of last year. And that's kind of the range that we really need to get as many people know. Where it snows is important. And so, you know, events that occur in high snow markets tend to be more in fixed contracts. And those that have more variable or kind of mid-Atlantic type snow, we need to see snow in all areas to some degree, ice and snow events to kind of hit the averages. We'll get more color as that goes. As far as 2021, the rest of the quarters go, we really need to get closer into December and January to see kind of weather patterns, to see what that's looking like before we get any more specificity on where we'll leave that alone.

That's helpful. And then just remind us, because I know you've taken some actions in terms of bringing some of the capacity in-house to try to minimize, you know, I think some of the expense volatility around surge. Are you kind of where you need to be on that? Or, you know, is there any way to think about how much of the coverage would be in-house versus outsourced, obviously, you know, in a normalized environment as opposed to something super, super disruptive?

We look at that balance all the time between outsourcing and insourcing. We are trending towards putting more to our insource to our branch perform. We will continue that. Measured, meaning that, you know, there's capitalist expenditures involved with outfitting our capabilities. So it was going to be a multi-year process where we continued doing more and more insourcing with the CapEx deployment supported by overall data CapEx.

Thank you.

Our next question comes from Sam England with Barenburg. Your line is now open.

Hi, guys. Thanks for taking the questions. The first one, the market data that you've got in your 10K has the overall market getting back above 2019 levels in sort of 2022, 2023. Do you think you can outperform that on an organic basis over the next couple of years?

Yeah, if you look at the IBIS data that we have out there, you're right. It's showing... a rebound more in 2022, 2023. And, yes, we believe that given the marketing, the digital marketing investments, the increased sales force we have, and then also the return of ancillary demand, which we fully expect will happen as we get out of the crisis, all those will be able to fuel a better-than-market growth.

Okay, great. And then just on the CapEx, you're guiding to CapEx going back up to 3% of sales in 2021. I just wondered whether that's just a catch-up on stuff that you've delayed this year or whether there's any sort of new investment going in anywhere. And then you mentioned the sort of technology improvements you've made. Is there more investment to do going forwards on the technology side as well?

Yes, Sam, good morning. The guide we gave was you know, directional what we think we're going to be doing in fiscal 2021. We spent less, obviously, in 20 than we did in 19. As I said, we certainly are not starving the business. We just, the guide was based on a prudent level of capital versus what we expect on revenue, but nothing incrementally or large projects out there that would, you know, stimulate any ancillary capital expenditures. And let me emphasize on technology, what I'm thrilled about this is this is why Brightview is different. We can go deploy a million dollars of capital in capitalizing and doing software development that is unique to this industry, that enables thousands of people in our company to operate more efficiently. It's something only we can do. And frankly, when it comes to our capital of a $65 million number, it's a relatively small amount of our capital. It's something that's a differentiator for this company that we will continue to invest in and continue to enhance and deploy our tools. It's going to drive a greater sales result.

Okay, great. Thanks very much. I'll leave it there. Thanks, guys. Thank you, Sam.

That concludes our Q&A session for today's call. Thank you all for participating. You may now disconnect. Thank you.