Brightview Holdings Inc
NYSE:BV
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Earnings Call Analysis
Q3-2024 Analysis
Brightview Holdings Inc
BrightView Holdings has announced its strong financial performance for the third quarter of 2024, showcasing record EBITDA and promising growth. The CEO, Dale Asplund, expresses a growing conviction in the company's transformation and strategic direction, emphasizing that they are on track for a 'breakout year.' With improvements in employee care and service delivery, the expectation is set for an increase in shareholder value.
In the latest quarter, BrightView reported total revenue of $739 million, which was a decline of 3.6% year-over-year. However, this decline is contextualized by the exit from noncore businesses; when these factors are excluded, revenue remained essentially flat. Notably, the Development business experienced a robust growth of 5.7%, driven by a converted backlog and high-quality projects.
The third quarter showed a strong adjusted EBITDA of $108 million, up 6% from the previous year, translating to an EBITDA margin expansion of 130 basis points. The Maintenance segment improved its adjusted EBITDA margins by 40 basis points, reflecting enhanced operational efficiencies while facing some challenges related to the divestitures of U.S. lawn businesses.
BrightView has reaffirmed its 2024 guidance, tightening expected revenue ranges to $2.75 billion to $2.79 billion, maintaining a midpoint of $2.77 billion. In terms of free cash flow, the company raised its expectations for the second time this year, targeting $65 million to $80 million, driven by improved operational performance.
A core initiative, 'One BrightView' focuses on integrated operations, emphasizing employee investment to reduce turnover and enhance customer service. As of late, the company has observed a remarkable 1,900 basis points improvement in frontline employee retention, indicating a positive cultural shift that is expected to foster stronger customer relationships.
The management highlighted the potential for converting development work into recurring maintenance contracts, projecting significant growth opportunities. Historically, only 10% of developments transitioned into maintenance contracts, but with a new collaborative approach, there is optimism for improvement, potentially generating an additional $50 million in revenue.
The company's leverage has significantly improved, with a net leverage ratio of 2.4x compared to 4.8x a year prior. BrightView has decreased its debt by approximately $549 million, enhancing liquidity by over 60% to $535 million. This financial flexibility positions the company favorably for potential acquisitions in the near future, allowing it to support strategic growth initiatives.
In closing, Dale Asplund and the BrightView team convey a robust sense of optimism regarding the company's trajectory, focusing on improving customer retention and leveraging operational efficiencies. The anticipated expansion of their margins and revenue signals a positive outlook for long-term growth, making BrightView an attractive consideration for investors looking for opportunities in the commercial landscaping sector.
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Hello, and welcome to BrightView Holdings Third Quarter 2024 Earnings Call. My name is Ezra, and I will be coordinating your call today. [Operator Instructions] I will now hand over to your host, Chris Stoczko, Vice President, Finance and Investor Relations, to begin. Chris Stoczko, please go ahead.
Good morning, and thank you for joining BrightView's third quarter earnings call. Dale Asplund, BrightView's President and Chief Executive Officer; and Brett Urban, Chief Financial Officer, are on the call.
I'll now refer you to Slide 2 of the presentation, which can also be found on our website, which contains our safe harbor disclaimer. Our presentation includes forward-looking statements subject to risks and uncertainties. In addition, during the call, we will refer to certain non-GAAP financial measures. Please see our press release and 8-K issued yesterday for a reconciliation of these measures. With that, I will now turn the call over to Dale.
Thanks, Chris, and good morning, everyone. As I reflect on my time here, which is approaching the 1-year mark, my conviction in the incredible opportunities, both near and long term, continue to increase as we are on pace to deliver a breakout year. We are doing this by operating as a unified One BrightView and leveraging our size and scale to drive profitable growth. Both will lead to meaningful shareholder value creation.
As I have said from day 1, this begins with taking better care of our employees, who will in turn provide better service to our customers. I am extremely grateful for our employees and their increased commitment for putting our customers at the center of everything we do. I will start on Slide 4 by emphasizing our achievements and ongoing progress, along with strategic updates that will enhance our position to accomplish our objectives.
First, we delivered a record Q3 and year-to-date EBITDA with margin improvement across all segments. And we are reaffirming full year '24 revenue, EBITDA, and margin guidance, all while raising free cash flow for the second time this year.
Brett will get into more details on the financials in a few minutes. I want to focus my comments on the tremendous progress being made towards One BrightView. As I have said from day 1, our goal is to become the employer of choice, and this is the first step in our journey. Investing in our frontline employees will be the core to our future success.
By making these investments, it will translate to improved employee turnover and customer retention. More on this in a minute. We have also streamlined our operating structure, integrated our business lines to promote cross-selling and are enhancing our technology offering to ensure optimal market coverage and route density by reducing legacy inefficiencies, it brings us closer to our customers.
On Slide 5, I will discuss some of the initiatives we are taking to become the employer of choice and the impact that it's having. As I said earlier, our objective is to build a winning culture. So our employees take greater pride in being part of the BrightView team and have unwavering confidence in the fact that they are our single most important asset. While this requires an upfront investment, this will result in reduced employee turnover and increased customer retention and ultimately drive sustainable, profitable growth.
To remind you of a few examples of these investments. We are refreshing our fleet of trucks and mowers. And in March, we launched the Boots program to ensure our employees are not only safe but comfortable enabling them to better service our customers. While this is a snapshot of a few of the changes underway, we are already seeing positive momentum in employee turnover.
For instance, in the past 7 months, the turnover rate for our frontline employees has improved an impressive 1,900 basis points, including 6 consecutive monthly improvements. This shows unequivocally that if we take care of our employees, they'll become more engaged and more likely to stay. The first step in our One BrightView journey has always been employees first. as they are the key to providing best-in-class service.
On Slide 6, similar to investing in our employees, the goal to significantly improve customer retention requires a commitment to provide best-in-class service levels. This will translate to the momentum towards growth. As you can see on the chart, we have seen a steady increase in retention rates, Specifically, over my first 9 months, we have delivered 150 basis points improvement with significant opportunity remaining.
While these trends may not be linear as we continue to transform BrightView, I am confident that we'll experience incremental benefit as a more consistent employee base delivers efficient, collaborative and unified service to our customers. Continued progress on employee turnover and customer retention will fundamentally change the way BrightView operates and had the greatest impact to delivering long-term profitable growth.
On Slide 7, I'll further highlight the benefit of operating as a unified One BrightView. As we have broken down silos, we are gaining traction in cross-selling BrightView's full suite of services. As an example, we recently concluded a $4 million development project in the Southwest on behalf of a prominent corporate client and converted this relationship into a $400,000 annual reoccurring maintenance contract. This is 1 example of the significant underleveraged opportunity that will create meaningful future growth.
Additionally, as we seek to optimize our total addressable market, we have equipped our branches with a prospecting tool that enables more deliberate customer targeting. The combination of incorporating our sales force into our branches and leveraging enhanced technology is expected to improve route density, reduce windshield time and improve margins.
As you can see on the map on the right, the legacy sales strategy was to win new accounts with limited consideration for customer location relative to existing accounts. In turn, our crew spent too much waste of time behind the windshield instead of servicing our customers. The increased route density bundled with increased cross-selling between the development and maintenance business will drive sustainable long-term profitable growth and margin expansion.
Before turning the call over to Brett to discuss our financial results for the quarter. I'll remind everyone that the investments we are making in our employees today are crucial to positioning us for sustainable success over the long term. As the nation's largest provider in our industry, there is tremendous opportunity to leverage our size and scale and capitalize on cross-selling opportunities to unlock growth in our business and gain market share.
As I visit our branches, it's refreshing to see a whole new mindset and sense of teamwork across the integrated business. This gives me an added level of confidence that the work we have done in strengthening our culture will translate to continued improvement in employee turnover and client retention while delivering best-in-class services to our customers. While there is more work to be done, we have successfully taken the initial steps to instill a more disciplined strategy to the customers we approach and the pride we take in servicing them. We are increasingly confident in our ability to capitalize on the significant opportunities that lie ahead.
Our fiscal 2024 is on track to be a breakthrough year. Our enthusiasm is truly unbridled as we think about the long term when we reflect on our earnings power, cash flows and value we can deliver to our employees, customers and shareholders. With that, I'll turn it over to Brett, who will discuss our strong results and our financial guidance. Brett?
Thank you, Dale, and good morning to everyone. Let me start by saying how proud I am of the entire BrightView team as we continue to work together during what is on pace to be a breakout year as we execute on our strategy of driving profitable growth. This is evidenced in our strong results for both the quarter and year-to-date, which both reflect record EBITDA performances for the company, alongside margin expansion across all segments. We are truly transforming this business and setting the stage for long-term profitable growth and shareholder value creation.
Moving to Slide 9. Total revenue during the quarter of $739 million was down 3.6% year-over-year. However, when excluding the impact of exiting the U.S. lawns and aggregator business, revenue was essentially flat. While land revenue was impacted by the exit of these 2 businesses, we remain very encouraged by the underlying health of the market and recent trends within our business. Notably, our improved employee turnover and customer retention metrics, as Dale previously mentioned.
The Development business increased 5.7% as a result of continued conversion of our backlog and high-quality projects. This presents significant opportunity with our revamped go-to-market strategy to convert these projects into future recurring maintenance contracts. As development continues to grow, this enhances our ability to further drive land results through cross-selling opportunities in fiscal '25 and beyond.
Turning now to profitability and the details on Slide 10. Total adjusted EBITDA for the third quarter was $108 million, an increase of $6 million or 6% versus the prior year period. Margin expanded an impressive 130 basis points and reflects continued benefits from our ongoing profitability initiatives. Adjusted EBITDA margins in the Maintenance segment improved by 40 basis points as we continue to operate more efficiently. This represents an adjusted EBITDA decline of $5 million, of which a little more than $1 million was related to the divestitures of U.S. lawn.
Additionally, during the quarter, our overhead expense savings enabled us to reinvest towards best-in-class service levels for our land customers. The majority of this reinvestment was in the form of frontline labor and was an approximate $10 million increase year-over-year in Q3.
In the Development segment, adjusted EBITDA for the third quarter was $31 million, an increase of 29% compared to the prior year. Adjusted EBITDA margin expanded a notable 270 basis points. This is a result of a high-quality backlog conversion while further reducing our costs ultimately resulting in accretive growth.
In our Corporate segment, corporate expenses for the third quarter saw a substantial decrease year-over-year as we made further progress with our One BrightView strategy. We continue to evaluate opportunities for centralization, which we expect to lead to further efficiencies in totality for BrightView.
Let's now turn to Slide 11 to review our free cash flow, capital expenditures and leverage. Our year-to-date free cash flow generation was a robust $120 million compared to $38 million in the prior year. It's important to note, we are committed to reinvesting in our fleet and our year-over-year CapEx reduction is largely timing related.
Year-to-date net CapEx was $32 million, However, timing can impact us as we saw in the third quarter. For example, we received approximately $21 million of vehicle deliveries in Q3, but we'll pay for them in the fourth quarter. For the year, we still expect net CapEx intensity to be approximately 3.5% of revenue or around $100 million.
Net leverage at the end of the quarter came in at 2.4x and compared to 4.8x in the prior year period. This lower leverage reflects a significant reduction in our debt, improve liquidity and improve profitability in the business. Our leverage profile allows for financial flexibility for ongoing execution of our profitable growth strategy and further investment in the business.
Let's now turn to Slide 12. Over the last year, we have fundamentally changed the overall debt and liquidity structure of the business. Let me quickly remind you of what we have done to reduce leverage and create significant financial flexibility. We amended our term loan, and we extended and upsized our AR securitization facility, resulting in reduced interest rates and no near-term debt maturities.
We reduced our debt by $549 million or roughly by 40%. We reduced annual interest expense by approximately $45 million and we increased total liquidity by over 60% to approximately $535 million. These steps we have taken over the last year demonstrates that we will execute every opportunity to fortify our balance sheet, drive shareholder value and be good stewards of capital.
Before moving to our guidance, I want to take a minute on Slide 13 to reflect on our year-to-date progress as we transform this business. 9 months into the fiscal year, we are extremely pleased with our results and remain on track to deliver on our commitments despite the impact of snow at the low end of our guide and exiting 2 noncore businesses.
Fiscal '24 is on pace to be a record year as we have revamped our operating structure and changed our compensation plans to encourage collaboration and drive profitable growth. And as a result, we are seeing margins expand across all segments.
Moving to Slide 14. We where we outlined our revenue, EBITDA and free cash flow guidance. While we narrowed our ranges, it's important to note that we continue to hold the midpoint of our guidance for revenue and EBITDA. And Additionally, we are raising our free cash flow guidance for the second time this year. As we close in on the end of our fiscal year, we are tightening the revenue ranges to $2.75 billion to $2.79 billion and maintaining our midpoint of $2.77 billion.
The updated revenue guidance assumes the following: for land, we have not changed our guidance and are holding to the approximately 6% down, which includes the roughly $70 million impact from exiting our noncore businesses. For development, we are increasing our assumption of 2% to 5% growth for the year to the high end of 5% as the conversion of our robust backlog continues.
Moving to adjusted EBITDA. We are tightening this range as well to $320 million to $330 million and maintaining our midpoint of $325 million with margin expansion expected across all segments.
For free cash flow, we expect a continuation of healthy cash flow generation driven by improved operating performance. Our outlook reflects our continued momentum on our broad-based initiatives to reinvest in the business and drive profitable growth.
Altogether, we now expect to generate free cash flow of $65 million to $80 million, which marks the second consecutive increase to the guidance range. Before I hand the call back over to Dale, I want to reiterate my excitement around the investments we are making and the impact it has had on the momentum in the business and our culture.
By taking better care of our employees who, in turn, are taking better care of our customers, I feel more optimistic than ever regarding the future of our company.
With that, let me now turn the call back to Dale to wrap up on Slide 15.
Thanks, Brett. Before we open the call for questions, I want to provide a brief recap on our performance and key takeaways from our remarks today. First, we generated record Q3 and year-to-date EBITDA and with margin improvements across all segments.
Our employee investments are positively impacting turnover and engagement, best-in-class customer service levels coupled with increased employee engagement are leading to momentum in our customer retention.
The new One BrightView alignment creates significant opportunities to cross-sell development in the maintenance. And technology enhancements are enabling our branches to efficiently identify targeted growth opportunities and to capture market share.
As you can hear, we continue to make great strides and achieve milestones on a wide range of initiatives and remain highly confident we will continue to deliver on our objectives that will translate into an impressive long-term growth trajectory and create value for our stakeholders. We will now open the call for questions.
[Operator Instructions] We'll go our first question from Tim Mulrooney with William Blair.
So seeing that improvement in the customer retention rates is very promising. And I guess I'm hoping you could give us a little more history here on customer retention rates within that Maintenance business. Could you talk about where BrightView was, I guess, several years ago back when the company went public, where you're at today? And where you'd ideally like to be? What do you think that a scaled commercial landscaping business should be generating optimally.
Great. Tim, I'll start with that. This is Dale. Look, -- since day 1, I said the #1 most important metric in this business is taking care of the customers we have today and retaining them so we can grow and grow profitably in the long term. Let me give you -- let me give everybody a high level of the history of this statistic without giving specific decimal place numbers. But this is why when I give you this history, you'll realize why we're still excited.
If you think back to when the company went public, the company was, if you look at the original S1, it will give you the number. It was 85% was our retention when the company went public. We saw during 2019 and 2020, 2021, a slight deterioration to that original number that we went live -- when we went public. In 2022, we saw a much greater deterioration as we maybe hit some headwinds with some of the M&A work we had done and didn't integrate properly.
And at that point, it hit almost the bottom. 2023, in my mind, it deteriorated a little more from 2022 to hit a bottom level that was over 5% below the original go-live of 85%. Now what we shared today was in my first 9 months year-to-date through Q3 for us, we've seen 150 basis point improvement. And this is what's the most exciting. If you think about the history I just said to you, 2024 will be the first year since the company went public that we are going to see an increase year-over-year in our customer retention. This is what makes us so exciting Tim because this is our path for future growth.
This is the metric that really matters. And I've been preaching to my branches, there's nothing more important than putting the customer at the center of everything we do. And I can open -- Brett to maybe add to this if you'd like to, and talk about some of the metrics that we've seen and we've , shared that investment. So Brett, why don't you add?
Yes, Tim, it's a great question. I think from Dale stepped in as CEO, he mentioned employees and customers are our main focus and need to be our main focus to get this business going in the right direction long term. I couldn't be more excited about the momentum in the business.
I mean we are making the right long-term business decisions by focusing on our employees and taking care of our customers. And if you look at Q3, and we said the number in our script, we had the -- we had the substantial savings in our SG&A line of $16 million year-over-year. We also saw Development produce high-quality projects, both on the job level margins increasing as well as the overhead efficiencies they're getting. Both those things allowed us the flexibility to go and reinvest back into our frontline labor and back into customer service levels. Every reinvestment was around $10 million in Q3. And even with that reinvestment, we still posted a record quarter. So we were looking at the right long-term business decision to manage this business.
We're still focused on producing profits. We're still focused on growing this business but we are focused on the right long-term decisions. And that reinvestment, we're starting to see those green shoots in customer retention, as Dale mentioned. And we feel confident that this year will be the first year since going public that we'll see that customer retention metric improve.
Tim, let me take the second part of your question because you said what do I think is optimal? I don't think -- here's what I can tell you. I've been out to branches that are operating at customer retention in the 90-plus percent level. Those branches grow and they grow profitably. They have engaged employees, they have happy customers, and the whole team is understanding the importance of that customer.
I don't think that the goal, public level of 85% should be our target. We have some work to do to get back to that level. And every 1% improvement creates an opportunity of around $15 million of maintenance land revenue for us. That's why we're so excited.
I see us going well past that 85% level that we went public with back in 2018. So I don't want to give a number for where we're going to end because my branches know, like safety with no accidents acceptable, I don't want to lose any customers. My goal is to get 100% customer retention, whether that's unrealistic, I'd really like to go for that goal one day.
That's all really great color, guys. Just as a really quick follow-up. You mentioned the 100 basis point improvement equates to $15 million in extra revenue. How should we think about the margins associated with that extra revenue. I mean, is that a different margin profile than what -- than new business?
Obviously, the cost to acquire a customer you already have is much less than getting a new one. So absolutely, Tim, when we grow this business in 2025 in our land and we pushed that through our existing infrastructure organically, you will see margins improve because the flow-through on that incremental business, leveraging our existing overhead will be greater than our existing margins. So absolutely.
I mean I would be very disappointed if this didn't help continue the progress we've seen this year on margin expansion as we went through '25, '26 in future years. So it's a great question. I think the midpoint of our guide right now is suggesting over 100 basis points improvement from last year's results, and I see that continuing, and this will be a key lever that will allow us to continue to expand those margins.
Our next question is from Bob Labick with CJS Securities.
Congratulations on the strong retention improvement numbers in such a short period of time. So I wanted to start -- you have obviously one of the themes is profitable growth and driving that. And looking at Slide 7, you talk about something I want to dig into a little bit. One of the things we've talked about is the big opportunity of converting development service work into recurring -- or reoccurring maintenance work. So what are you doing differently now? What historically the BrightView do in the past that was either unsuccessful or was it not even an effort to do that? And how do you see this driving profitable growth going forward? What's the opportunity ahead of us?
Great question, Bob. So I'll start off at a high level operationally, and then I'll let Brett talk through some of the math and how it can help us long term. So firstly, we talked about on our last call, our new operating structure, breaking down silos, getting people working together. That was -- that's been a huge cultural change for this business to have 8 geographic leaders that manage both our development groups and our maintenance group.
We brought those teams together that actually are now communicating regularly on a daily basis. In the past, these groups were almost motivated cannot be cooperating with each other and not get the full leverage of the ongoing maintenance. Our Development business is growing and growing, as you saw in the quarter and expected to grow this year at the high end of the range we gave you last quarter. It is a very, very quality group and the work we're getting continues to come out of the ground.
The opportunity, like you said, is to take that work and transition it to our Maintenance group. It's our ability to leverage the size and scale of BrightView to further distance that growth every year by converting that. And let me let Brett comment on the math behind that. It probably makes sense for you why we're so excited about this new collaboration that we're feeling under our new org structure.
Yes, Bob, I'll just go to the math again. Look, I think as we showed an example on the deck of a development conversion, again, we're at the very early stages of this conversion opportunity as you think about the way the business was siloed in the past and now our new operating structure at a leadership level and our new go-to-market strategy as we approach customers as one holistic BrightView, and this creates such opportunity for development to convert into maintenance. We showed a slide in the deck of a $4 million development opportunity that we just recently converted into a $400,000 maintenance contract. That's really what we're talking about is seeing more of those opportunities convert.
In the past, we converted less than 10% of projects from development into maintenance contracts, less than 10%. And the size of the prize there, Bob, just to remind, I guess, everyone on the call, our Development business is guided to around $800 million of revenue this year. It's about $0.07 on every development dollar converts into maintenance contracts because the development projects are larger onetime in nature, the reoccurring maintenance is really $0.07 on the dollar.
So general rule of thumb that $800 million of revenue will kick off something like $55 million of maintenance contracts in the next 12 months, right? We've converted less than 10% of that in the past, call it less than $5 million. there's this $50 million untapped opportunity that, the way we are structured in the past wasn't really allowing for that collaboration to convert those projects to maintenance, but now the way we're structured in the future.
Again, we're seeing some early wins like the one we showed in our slide deck, are really taking advantage of that $50 million size of the prize on those conversions. And that, as we couple with the customer retention we talked about earlier, that's where we feel really confident that as we get into '25 and beyond, we're going to see that land organic growth beginning to pick up.
Okay. Great. Yes, that's super helpful and obviously, can be very powerful and exciting. And then -- so just one other quick question, if I may. In terms of one of the things you highlighted as well as reinvestment in the fleet in the trucks and the mowers and in your employees. Can you give us a sense of where we are in that? And when do you start seeing benefits? I believe the benefits are going to be in equipment rental and maintenance costs dropping. Can you maybe size it? And is this a 5-year program, 10-year program? Or might we even start seeing some benefits next year? How does that like roll into the P&L?
Yes. So there's 2 ways to look at it, Bob. First, I would say we've started that process. We are getting -- we've received a lot of new mowers this year to replace some of our older mowers, and we will continue on the mowers and the trucks. We're starting to upgrade at a regular pace. In fact, we saw a lot of fleet land right at the end of Q2 -- Q3.
And as we head into Q4, we still expect our guide that we originally started with about 3.5% of revenue to be accurate. But the reduced maintenance, the future residual values are great. Even the fleet we've received today, Bob, the bigger impact is on the employee. The employee having a mower that they can depend on that's knew that they can take care of customers with.
The employee getting a new truck that truck is their office. That truck is important for them. They spend their whole day in them. And like we started the whole conversation with today. I said from day 1, we have to become the employer of choice. We have to make sure we take better care of the people that touch our customers on the frontline.
I don't want anybody to miss the metric we shared. In the last -- since December, we've had our overall turnover of our frontline crews come down 1,900 basis points. That's a result of not only the Boots program, like I said, but getting these new trucks, getting new mowers. That's what's so exciting. The investments we are making great. They're going to help us on the P&L long term. And over the next 3 years, let's call it, we'll go through that transition, but it's bigger than that. it's helping us in the most important metric, taking better care of our customers so they can -- taking better care of our employees so they can service our customers better. But Brett, if you want to add any comments.
No, I think you're right on, and last earnings call, we mentioned, Bob, we just brought on a new leader for our fleet department to really enact this strategy to make sure fleet with our trucks and mowers is truly a strategy of how we acquire, maintain and then dispose of timely the fleet we have. So we're going through that process now of upgrading the age of our fleet and mowers.
We also brought on a leader of procurement that is going through how to procure those pieces of equipment better, how to procure materials better. So as I think -- as you think about the long-term margin of the business, yes, it's customer retention focus. Those customers are much less expensive to acquire than acquiring new customers. It's enacting our fleet strategy and buying, maintaining and disposing of them in a timely manner. We're not keeping fleet now 10-plus years where we're spending a significant amount of maintenance and then it breaks down. We have to rent something new. That's all going to go away. It's going to take us a few years to get through that full strategy, but that's all going to be incremental margin improvement as we move forward.
Our next question is from Andy Wittmann with Baird.
I wanted to, I guess, build on the capital question from the last person here. Your free cash flow guide here is $65 million to $80 million and up, and that's great. But you guys are at -- by my calculations at $120 million year-to-date. So there's a big cash drag in 4Q. And Brett, so I thought maybe I'd give you a chance to talk about why there's a cash burn in the fourth quarter. Is that CapEx is considerably heavy or is that -- is there working capital? Or what's going on there?
Yes, I'd say 2 things, Andy. One, our balance sheet is so well positioned right now to invest back in the business. We have leverage at all-time lows. We have liquidity at all-time highs. Our debt are at all-time lows since going public. So the balance sheet is so well positioned to reinvest back in the business.
As you think about where we're to date, $120 million of free cash flow, that that's on $32 million of CapEx. We are still guiding to spend right around $100 million in CapEx. A lot of this capital, if we could get it quicker, we would. But a lot of the capital seeing coming in, mainly in trucks like at the end of June, we received a significant amount of trucks about $21 million worth, but we're going to end up paying for that in the first weeks of July when we hit CapEx.
So right there, if you just adjust for that number, $120 million of cash flow is more like $100 million of cash flow. And that would put us on pace to spend another $50 million or so in Q4 for capital.
So we're going to continue to make sure we're reinvesting in capital, in our fleet. And timing could impact that as we get to the end of Q4, but the data we're looking in that now would still have us on track to spend about $100 million of CapEx, so that's about a $70 million drag right now from what's in the P&L and the balance sheet for Q3 versus what's in Q4. That's the biggest item, Andy, that's going to drive that down.
Okay. And then, Dale, for you, I guess, I think since you took the job, you kind of looked at the comp plan. You said there's too many comp plans. They [ weren't working ] -- lots of things you said about the comp plan. You mentioned in your prepared remarks as well. So maybe I would have you just give a little bit more detail on this one. What levels and positions were specifically impacted as you changed incentives around your company and can you talk about any changes at a high level what those included? And maybe even more importantly, how they've been received and as it's helped or hindered the employee retention on those positions that were affected by the comp plan change.
Yes. Good question, Andy. I would say, you brought it up. We had a lot of people being compensated differently across the company. In fact, when I joined, we had over 30 different discretionary compensation programs to reward our people for the way that they perform. That obviously didn't create everybody rowing in the same direction. So we redid it. We found a way to come up with a simple plan for our branch that everybody at the branch shares in a common profit-sharing pool when they grow and they grow profitably. That's what's key.
We don't use budget. We use year-over-year profitable growth. And what makes me the happiest about that, Brett talked about the $10 million increase we saw, making investments in our frontline people to make sure we can service customers better. That creates a headwind for all those branches that make that decision that taking care of our customers is so important because they know the impact that will have on their program next year and the year after that.
So it's all about getting everybody on one program. In fact, we have 2 programs as a company now. We basically have our branch and market program and then we have a corporate program and the only difference with corporate is, like many public companies, we use some key metrics such as diversity, safety, that we put into our overall program, but our program is 80% based on that EBITDA and EBITDA growth.
So it's all about getting everybody aligned. It's all about taking every person at the branch, Andy, and make sure they're all working at the common goal of driving profitable growth long term.
It's been received very well in the past. Bonus dollars were distributed by who could budget at the lowest level. And even if they budgeted the shrink and they shrunk, they could be rewarded. Today, the profit-sharing program is going to reward the people that grow the bottom line. And that's what we want to do. So it's been very well received, and it's motivating the people to know that if they run their business and run it responsibly, take care of their customers and grow the business, they're going to be rewarded for it. But great question.
Our next question is from Greg Palm with Craig-Hallum Capital Group.
Congrats on the continued progress here. Brett, I know you alluded to return to growth in that core Maintenance segment, but can we dig into that a little bit more? There's clearly, lots of levers, the cross-selling potential, retention rates. It just seems like there's a lot of positive indicators at this point. It's still pretty early. So I mean -- thanks for the question. I mean, do some of these initial metrics make you more confident in that ultimate reacceleration, kind of the longer-term potential. Would love to get -- maybe just a little bit more color on how you're thinking about the long term.
Look, I think -- let me jump in, Greg, real quick. I think the way Brett ended his part of the opening today says a lot. Brett seen and Brett is a believer now with the commitment that we made to reinvest in our employees because we're not managing the business for each quarter. We had a record quarter. We had an unbelievable Q3 for the business, and we are showing progress in so many ways. But we need to grow this business, not just development, not just cut the overhead, we need to grow our core land business. That is our next level. So I'll let Brett talk about how he sees it going out through '25, but you're right, Greg. This is our next level, and we are positioned today that we are in a better position going into '25 than any other year we were going into. So Brett, I'll let you comment.
Yes. No, I fully agree. Look, I think if you look at Slide 9 of the presentation, we're still stepping over some of our aggregator business exit U.S. loans divestiture that's going to be about a $25 million headwind in Q4. That's going to be about a $10 million headwind to that land number in Q1, ending Q2. So call it $20 million in the first half of the year. But look, Greg, I can't tell you if it's going to be March of next year, April of next year, June of next year, July of next year, but we are on such -- such momentum behind that land growth metric. And you think about what we're doing from a customer retention standpoint, every 100 basis points or so of customer retention were $15 million annualized of contract and ancillary growth. Those development conversions, that $50 million of untapped opportunity.
I mean, that's significant growth even if we don't go all the way from 0 to 100 overnight. If we start to incrementally tick that up from less than 10% to 25% to 50% that's new found opportunity to this company that we've never executed in the past. So I think as Dale said that, we are doing such a good job expanding margins this year, which is really coming from restructuring the company and cost controls in the business and our Development business continuing to produce.
As you think about next year, getting to the back half or the exit speed of next year, it's going to be that land organic growth, coupled with the development growth that we're seeing, coupled with the streamlined operating structure that's really going to be where this company takes off. But yes, we feel more confident than ever today on that long-term organic land growth as you get into the back half of next year.
Okay. Good. Appreciate that. And then on the frontline employee retention metric, I mean, that really stood out. And it sounds like, and I'm sure the primary reason is some of the investments you've made around the fleet and the boots, that's what it sounds like. I guess how do you continue to improve this metric going forward even after lapping some of those big initial investments that have maybe caused that metric to come down to this level?
Look, Greg, it starts -- I'll start, I'll take it over to Brett. But it starts with recognizing how important those people are. They have to understand the importance that they service our customers every day at the highest level. That's where it starts with. I have traveled around the country. I have been out to visit most of these branches. The way I start my day every time is doing stretch and flex with our frontline crews. And when they see that, they understand and the culture has transformed I remind every person above the crews that leave our yard every day, we work for them.
We work for them to make sure their jobs should be easier to service our customers. That's a complete change than where we were 12, 18, 24 months ago. That's probably the quickest way I can tell you. What's causing that turnover reduction is culture. That is the #1 word. But Brett I'll let you...
No, I just -- I would just add that we have to continue to be unwavering on executing our strategy. And we have been through the first 9 months of this year. We recognize the importance of every 90-day cycle and delivering a quarter, but making the right long-term business decisions and taking care of those employees, making sure we continue to get the new trucks and mowers, make sure we look at things like the boot program where we can to get them in the right safety, comfortable work shoes like we did back in Q2. We going to continue to be unwavering that, Greg, because that will lead to long-term health of this business.
We recognize the 90-day cycle, we're a public company. But that even goes through our shift from going from quarterly guidance to annual guidance because we're so focused on the right long-term decisions. We have to continue to be unwavering on that and making sure those employees come first. In turn, will take care of our customers, driving that customer satisfaction, driving that satisfaction, they enabled us to get easier price increase conversations, more conversions into development into maintenance, more references for new customers. So we just got to make sure we continue to be unwavering on that strategy and execute every chance we get.
Our next question is from Jeffrey Stevenson from Loop Capital.
Congrats on the nice quarter. So what were the primary drivers of the strong development margin expansion during the quarter? And also, do you believe that development margin improvement is coming in ahead of schedule now that pricing protections are included in contracts and lower margin work is beginning to be worked off as well.
Okay. So Jeff, let me start the answer with that. You saw the work we're doing at the Obama President Center with me. Our development team, hands down, does some of the most amazing work across North America. We've got to make sure we continue that as we go forward. The level of skill we have in our development group is second to none. So I'll let Brett comment about the margin of the business. But remember, it starts with being the partner of choice for your customers to make sure they know by choosing BrightView, they're choosing the best group to do their work. But Brett, I'll let you comment on the margin expansion.
Yes, Jeff, great question. Look, we feel so optimistic about this business. We've said that now for the last 6 or 7 quarters. we're going to say it again this quarter. Our backlog and Development is essentially sold out through this time next year or through the end of Q3 next year. So even if that business doesn't sell any more work between now and then, we're essentially sold to this point next year.
We continue to see significant opportunities in that business to grow that backlog and grow revenue. I'd say from a margin standpoint, I mean a few years back, you go back to 2019, this business was operating around 14% EBITDA margin. And then we saw hyperinflation and we had contract that didn't have price protection in there, right? But we fixed all that.
In 2022, 2023, we started to put those price protections in place, commodity price protections in place. And now with the amount of backlog we have, we have the ability to be a little bit more selective on the bids we're going after and the pricing we're going after them with. That's all leading to margin expansion in the business.
Specifically in Q3, we saw really 2 wins in that business. We saw job level margins increase significantly as well as reducing our overhead costs that led to more efficient operations, which caused lower margin expansion in that business. We expect to see very similar results in Q4. That's why we've raised our guide in development to the high end of the revenue guide of 5% and we've increased margins essentially twofold. We were at 70 basis points last go around for the year. Now we're at 150 basis points this go around for margins. And that gets us back in really that 12.5% range of EBITDA.
Remember, '19, this company was -- this business was at 14%. So I still feel like there's opportunity to go with being more selective in the projects we're bidding, continue to produce high-quality results at that job level coupled with the restructuring of our overhead to get more efficiency there. There's still room to grow in that business in '25 and beyond to get that margin back up to those 2018, 2019 levels.
Great. That's very helpful, Brett. And then given your improved balance sheet and leverage position Dale, I was hoping you could provide an update on the likelihood of returning to M&A in fiscal '25 and what types of acquisitions would be attractive for the company moving forward?
We've said, Jeff, we paused a little bit this year as we did all the restructuring within our own company. The business is getting very close to being able to support M&A. And the people who are changing the culture in this business, my branches who can find us good deals are ready, and they want us to start looking at doing M&A. Our process to do M&A is drastically different than it was when the company struggled to integrate the businesses.
We are asking our operation teams to tell us who they think would be the best fit in their market to join BrightView. To joint BrightView has to be a privilege. We shouldn't buy companies that don't add value to us servicing our customers. We will focus that on probably greenfield markets that we don't operate in today. We will look at ancillary businesses like Tree that we could fold into markets where perhaps we're not doing the work today, we're using partners.
We'll look at ways that we can be a better partner to our customers. Do I think we're going to return in 2025, Absolutely. Brett has done an amazing job, getting me in a position with our balance sheet that we're ready to go. And I'll let him comment quickly on just what that means because I think it's worth noting, where our cash position was last year versus where we sit today. So Brett, I'll let you [indiscernible] to that.
Yes, Jeff, it's a great question. Look, right now, we sit with over $535 million liquidity and of that liquidity, $115 million of that is cash. Last year, we had $10 million of cash, which essentially make 1 or 1.5x payroll. So we're such a better spot from a cash position. When we get back into M&A, we will have the cash to fund that M&A. And I would even say from a process standpoint, we now have our strategic partners of One Rock Capital on board when we do get into M&A, and we start thinking about how to do diligence differently, how to look at opportunities areas differently, how to -- not only identify synergies but track synergies, we have this partner that does it every day, One Rock, who is going to help us kind of build out and fortify that process.
So you think about the process of going through diligence with the support of One Rock, you think about the process changes from our field managers bringing those opportunities to us. So bottoms up, not a tops down and you couple that with the cash and liquidity we have on the balance sheet to go execute. When we are ready to do M&A, we're better positioned today than we've ever been to execute.
Our next question is from George Tong with Goldman Sachs.
You talked about dedicating investments back into the business and into personnel. I just want to get a better sense of the timing and where exactly those investments will play out over the next couple of quarters. If you can talk a little bit more about that, that would be great.
Yes. Thanks, George. Good question. I think we want to make sure that all of our customers get the service that they're provided. We want to make sure that nobody is pushing our employees to cut any quarters when it comes to customer service. So the majority of that cost comes at the expense of making sure they have enough hours to do that service in the form of labor.
But that's what's driving a lot of that employee retention, that employee turnover decrease we're seeing because people don't feel like we're asking them to do more with less time.
They feel like they're being allocated enough time to do the service levels that they can and required to service our customers. And it's showing up in the numbers. It's showing up in our customer -- our employee engagement and in our customer retention. So we're investing it. We did the boots program. Everybody saw that. But more importantly, it's in the labor for these people. It's making sure that they can put in the hours every week that they need to, to service our customers. But Brett, I'll let you kind of...
Yes, George, just to quantify that a little bit further. If you think about our Maintenance business, we do about half our -- we do about 1/3 of our revenue in the first half of the year. and then we do 1/3 of our revenue in Q3 and 1/3 of our revenue in Q4. So we said in the prepared remarks in the script, that -- we invested around $10 million more in frontline labor. Actually, in the first half of this year, we invested about $8 million in frontline labor, right? It's just our business over the first 2 quarters isn't as big as the third quarter and included in our guide is to invest more frontline labor right around that same $10 million mark that we did in Q3.
So as Dale mentioned, I mean, again, being unwavering on that customer service level making sure they get the service that they deserve and that they're paying for and those investments that we're making now, all while guiding to a record year, all while guiding to incremental improvement those investments we're making now will lead to that long-term sustainable growth that we're looking to build.
So we couldn't be more excited about the flexibility we have with some of the overhead savings that we've had in the business and how development continues to show their momentum to be able to go and reinvest those dollars back into our customer service.
That's helpful. And then with respect to customer service, could you give some examples of some of the blocking and tackling you're hoping to improve with labor and with some of the best practices and how that should help improve the overall customer experience. What exactly the staff are doing better going forward compared to the past?
Look, let me give you 1 example of something we're working on, George, that helps the employee morale and to make sure our customers get service. Unfortunately, a lot of the work we do is outside and it's weather related. So in markets, we're doing work to try to have our employees work 4 10-hour days versus 5 8-hour days. By doing that, if 1 day during the work week, Monday through Thursday, we get rain for the day that we can't work. We can have a makeup day on Friday. The employees still get their 40 hours. We still provide the service during the week to the customer that they expect. We don't try to just take a week off and catch up with them the next service cycle. It's a win for us long term. It costs us money short term, but the employees appreciate it, the customers appreciate it.
And all it takes is for us to let the customer know, "Hey, it's ranking on today. We're not going to be out there. We'll be able to do your service on Friday." It's a different culture in the business than what we had just 9 months ago. So that's a great example. It's the best way I can say it. it's about making sure we do what we said we're going to do every week.
Our next question is from Stephanie Moore with Jefferies.
This is Harold Antor on for Stephanie Moore. On the tech side, I know you talked about route optimization. Just wanted to get an idea of where you are on that front, some of the other initiatives that you're doing on the tech side. And if you could quantify for us how much savings you're seeing from the route optimization and using less fuel and I guess, what percentage of fuel represents on cost of goods? Any comments around that would be helpful.
Yes. So Harold, let me start off with that and then Brett could add any comments he wants. But look, I think the tool that we've deployed to our branch is the second step in our go-to-market strategy. To better drive efficiencies at our branch. If you remember earlier in the year, we realigned our sales force to go under our operations team so that we have 2 people working together to go after the market.
This tool enables them to identify maybe where we have customers, as the example shows that are remote that we're spending too much time driving to, and we're not spending enough time servicing customers. So what this technology enables us to do is to actually go after customers that are geographically close to the customer, which we have today that might be remote so that we can retain all our customers and drive profitability long term.
This tool is in the early stages. Our branch is working with their sales force are still in the early stages. But this is another example of technology that we're giving our branches that allow them to be able to manage their business better.
If everybody remembers, in the beginning of the year, in the early stage, I said we are going to transform the way we support our branches. We're giving them a playbook that allows them to manage their business better. We're going to give them tools like this tool that we're showing you so that they can run their business better. That was a big driver when we said we wanted to divest, the U.S. lawns business that we sold at the beginning of the year.
We did that because I don't want to give people this tool that we're investing in to drive our branches to grow. That's what -- that's why we divested that business. Now this is just one example of tools that we're looking at. Our #1 asset.
I started the call off with this, is our employees. We are in the process of selecting and implementing a new HRIS system so we can manage those employees from the time we onboard them from the time we recruit them all the way through the annual performance cycle. So getting a better tool to allow us to do that will create huge value for us. And we have a lot of crews that go out every day. And today, unfortunately, we don't leverage technology to manage that process.
But we're drastically changing that, and we're implementing a new system that we plan to roll out in '25 that will allow us to use technology to manage those crews as they leave, and we need to shift resources around. We're still in the early days. So it's tough for me to give you a quantitative number that comes from this route optimization, but what I will tell you qualitatively, we are making huge progress in getting people aligned. But Brett, I'll let you add.
Yes. I mean fuel is one area, right, Harold, fuel is about 2.5% of revenue for us, so call it $75-or-so million of fuel cost if you do the math. There is absolutely route optimization that will add some efficiencies there. But even more is the wear and tear on our trucks, the wear and tear on our equipment, unloading and offloading all that from our trucks every day, I mean that all adds opportunity as well, not to mention the efficiency of our crews, as Dale mentioned.
When you have to get and pack all that stuff up and get on a truck and drive 25 miles, which is the example we gave in the presentation. 25 miles in the country might take you 30 minutes, 25 miles in the middle of San Francisco or New York or any major metropolitan area could take 1.5 hours. But that is all wasted time.
So the more we can equip our sales force with this type of data and drive that route optimization, we're going to see efficiencies throughout the P&L and labor costs, or our jobs in fuel efficiencies in maintenance and repair efficiencies, et cetera, et cetera. So it's a great question. We feel like that is going to be a big unlock as we get into the future, really driving efficiencies throughout the P&L.
And I guess on SG&A as a percentage of revenue has around about 18% to 19% for the most part, historically, but you guys have been making considerable progress. So I guess, when you think about the long-term the long-term business outlook. Where do you think this business can run on the SG&A front as you continue to execute in a profitable growth share.
I'll start, Harold, Look, I'm proud of all the overhead we've been able to remove from the business because a lot of it was redundant and created some of those silos that we had. We are going to invest in our sales force. We are going to grow our sales force and our go-to-market team is focused on that as we speak, adding sales resources.
As we get our crews, our tools, our ability to service customers at that premium level, we are going to turn loose a sales force that goes out there and gets us more customers so we can grow this business. So we made great progress. The overhead we've taken out was needed overhead reduction, the investment we're going to make is going to be in people to help us find new customers. But Brett, I'll let you give the thoughts...
I think you said it right on. I think, Harold, it's -- we're not going to guide to a specific line on the P&L, but even if I was going to guide it, it'd be tough to do right now because we're making so many investments back in different areas of the business. as well as centralizing resources and creating efficiencies. And those 2 things are working against each other, but they are the right long-term moves to the business. I think the thing you could be confident on, Harold is whether SG&A stays at 18.5%, whether it goes to 19%, whether it goes to 18% long term or maybe less, what gives me confident is, we are focused on that total EBITDA margin expansion, and we're going to gain efficiencies by centralization and use some of those efficiencies to reinvest back into growth. That's going to be the key. And we're committing to that margin expansion, not only this year, which is going to be a little bit more than those 100 basis points that we're saying, but next year as well, getting back to those, call it, IPO levels, which were in the 12.5% range.
Thank you very much. We currently have no further questions. So I will hand back over to Dale for any closing remarks.
Thank you, operator. I'll close by reiterating that we are extremely excited, as you can tell, and have a growing level of conviction regarding the transformation of BrightView. I am extremely happy with our record Q3 results, Long term, our objectives remain clear. We are committed to becoming One BrightView, growing profitably and creating meaningful shareholder value. Thank you, operator. You can now end the call.
Thank you very much, everyone for joining. This concludes today's call. You may now disconnect your lines.