Q2 2024 Brightview Holdings Inc Earnings Call

Participants

Dale Asplund; President, Chief Executive Officer, Director; Brightview Holdings Inc

Brett Urban; Chief Financial Officer, Executive Vice President; Brightview Holdings Inc

Bob Labick; Analyst; CJS Securities

Tim Mulrooney; Analyst; William Blair

George Tong; Analyst; Goldman Sachs

Greg Palm; Analyst; Craig-Hallum Capital Group

Presentation

Operator

Good morning, everyone, and welcome to the BrightView Holdings second-quarter 2024 earnings call. (Operator Instructions)
With that, I'll turn the conference over to Christos Sky. Please go ahead. When you're ready.

Good morning, and thank you for joining BrightView's second-quarter of fiscal 2024 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 Investor Relations website and contains our Safe Harbor disclaimer in our presentation and today's call include forward-looking statements subject to certain risks and uncertainties. In addition, during the call, we'll refer to certain non-GAAP financial measures. Please see our press release and 8K issued yesterday for a reconciliation of these non-GAAP financial measures.
I'll now turn the call over to Dale.

Dale Asplund

Thank you, Chris, and good morning, everyone. I would like to begin by briefly reflecting on my first seven months of CEO., we have made incredible progress in such a short period of time, and our organization's ability to absorb these changes has been exceptional. As I sit here today, I am even more enthusiastic than I was on day one about the incredible opportunities ahead of us. I have the utmost confidence that all the changes we are making to transform this business are the right long-term decisions to operate as a unified one BrightView drive profitable growth and create shareholder value.
I will start today on slide 4 by emphasizing our achievements and ongoing progress along with strategic updates that will enhance our position to accomplish our objectives through the first half of the year. Our commitment to executing our strategic vision and focusing on profitable growth has proven successful. As a result, we are reaffirming our full year EBITDA midpoint in raising our margin and free cash flow guidance, all while selling our franchise business unwinding our non-core aggregator business and snowfall coming in at the low end of our original guidance range, we have seen meaningful growth in profitability and margin expansion and are gaining momentum in our business as we continue to implement our strategy of operating as one BrightView.
As we move forward, we are confident that the actions we are taking will improve our ability to deliver on our strategic initiatives and enhance our position as a number one player in the commercial landscape industry after a strong beginning in Q1, we continued our momentum in Q2 marked by margin improvement across all our operating segments.
This reflects the early returns on our actions and investment in operating as one BrightView also contributing to our results and outlook is our focus on the core businesses while deemphasizing the non-core. On our Q1 call, we discussed the divestiture of our US loans business, which we sold at a highly attractive, low 10s multiple. But additionally, we have evaluated and are actively unwinding our non-core aggregator business known as BES. It's important to note this action will have no impact on our bottom line. Brett will discuss the full impact of this unwind during the financial segment of today's call.
Ultimately, this decision stems from our commitment to operate as a unified BrightView, maintained high quality brand reputation and focus on our self-performing core businesses. During the quarter, we introduced initial programs aimed at prioritizing the safety and well-being of our employees, notably our boots program.
Additionally, we advanced the one BrightView culture by streamlining our operating structure to reinforce our revitalized go-to-market strategy under a less is more approach. These initiatives are designed to inspire our frontline employees, enhance our ability to service customers and underscore BrightView's dedication and progress towards operating as one BrightView.
On slide 5, I'll showcase our boots program in partnership with Red Wing shoes to equipped over 18,000 team members with high-quality footwear, further highlighting our investment in our team, our dedication to providing team members with the best personal protective equipment is not only an investment in their safety and well-being. It also inspires them to deliver exceptional service to our customers. As you can see from the picture on the right employee reaction has been incredible.
This picture reflects Carlos of choice from our owners' County, California branch receiving his pair of boots. It is one example of countless inspirational moments. This initiative created where we truly focus on prioritizing our employees.
Moving to slide 6, let's discuss our streamlined operating structure. So far this year, we implemented significant measures to enhance our go-to-market strategy as we operate as one BrightView central to these efforts was the realignment of our operating structure aimed at ensuring optimal market and customer coverage while maximizing efficiency and effectiveness.
This structure allows for fewer layers and removes silos and puts us closer to our customers by eliminating inefficiencies and aligning under one BrightView. This improve structure enhances our capabilities with both new and existing customers. At the market level, our maintenance and development segments are now aligned, fostering meaningful growth opportunities.
Our sales and operations are now integrated at the branch level reinforcing our focus on cross-selling opportunities. Additionally, we also elevated one of our most seasoned leaders into our Chief Commercial Officer, overseeing all aspects of growth. Positioning ourselves for success is paramount and I am confident these actions will drive us forward and lead to enhanced service and profitable growth.
Before turning the call over to Brett to discuss our financial results for the quarter. I want to summarize on slide 7 how what we are doing today. Brightview is 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 to unlock growth in our business and gain market share.
Our streamlined operations and go-to-market strategy as one BrightView will allow us to begin to convert more development services into reoccurring maintenance work. This is a simple example of a previously untapped opportunity in order to maximize our potential and capitalize on our opportunities, we must be the best at what we do and provide best-in-class service to our customers. By simplifying our customer satisfaction survey and leveraging predictive AI technology.
We have significantly improved our communication with customers and our ability to proactively service their needs. These efforts, combined with investments in our employees are aimed at driving higher customer retention. We also have the opportunity to optimize our customer and market penetration as we enhance our footprint and strategic approach to winning large accounts and sales efforts. Clearly, we are excited about our business and the significant opportunities ahead.
Our enthusiasm mirror mirrors the meaningful growth and profitability we have achieved through Q2 and our progress towards becoming one BrightView. While there is more to do, I am proud of the team's effort and increasingly confident in our ability to deliver value to our shareholders.
With that, I'll turn it over to Brett, who will discuss our financial performance and outlook

Brett Urban

Thank you, Dale, and good morning to everyone. I'll start on slide 9. I am pleased to report that we are continuing the momentum in our business and progressing with our strategy towards one BrightView, which yielded strong results in the second quarter. We remain focused on the execution of our strategy and profitable growth in our core business, evidenced by the unwinding of an unprofitable non-core aggregator business and the sale of our franchise US lawns business.
These actions led to quality revenue, EBITDA growth and significant margin expansion across all segments of the business enhanced net working capital, coupled with the timing of capital investments and reduced interest expense, resulted in a meaningful increase of free cash flow compared to the first half of last year. This resulted in a net leverage ratio of 2.4 times, allowing for financial flexibility for ongoing execution and investment in the core business.
Moving to slide 10. Total revenue during the quarter increased 3.5% year over year to $673 million. Our non-core businesses, including BES. and US loans, and our focus on profitable growth within our core land business, both had a near-term impact on our land revenue. We remain, however, very encouraged by the underlying health of the market and recent trends within our business revenue growth during the quarter was driven by higher snowfall relative to the prior year.
Important to note, snow revenue year to date is comparable to the prior year season and at the low end of our original guidance range. We continue to see solid demand or in our development business, which we grew 5.7% compared to the prior year due to our ability to convert our robust backlog developments. Performance in recent quarters reflects the appealing nature of the business model while also furthering the momentum for future growth. As we capitalize on cross-selling into maintenance.
Turning now to profitability and the details on slide 11. Total adjusted EBITDA for the second quarter was $64.8 million, an increase of $18 million or 39% versus the prior year and significant margin expansion of 240 basis points, reflecting continued benefits of our ONE BrightView initiatives and improved profitability in all segments of the business.
In the maintenance segment, total adjusted EBITDA of $66.5 million was an increase of $15 million or 29% compared to the prior year. This increase was driven by improved profitability in our core land maintenance business and increased snowfall compared to the prior year. But adjusted EBITDA margin expanded an impressive 260 basis points due to the revenue growth and a more streamlined operating structure in the Development segment.
Adjusted EBITDA for the second quarter was $14.4 million, an increase of 10% compared to the prior year, and adjusted EBITDA margins expanded 40 basis points. This is a result of a quality backlog conversion while simultaneously reducing our costs ultimately resulting in accretive growth. And in our corporate segment, corporate expenses for the second quarter decreased 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.
Turning to slide 12 to discuss the unwinding of our aggregator business. As we mentioned on our previous earnings call, our aggregator business, also known as BES. is a noncore unprofitable sub-contractor business. This business was originally set up to outsource work to local providers in markets where BrightView was unable to provide direct service.
However, our ability to control and maintain service levels was limited as a result and aligned with our goal of one BrightView, we are in the process of unwinding the majority of the contracts within this business. We will, however, retain a few select relationships of high quality customers where we can self-perform the majority of the work directly from our branch network.
While the unwinding of this business will have an impact on revenue, it's important to note this unwind will have no impact to our EBITDA. In fact, we anticipate an annualized EBITDA margin benefit of approximately 20 basis points from this strategic decision. This action reinforces our commitment to one BrightView, enhancing customer service and improving our position as a service provider of choice.
Let's now turn to slide 13 to review our free cash flow, capital expenditures and leverage for the first half. We are extremely pleased with our free cash flow generation of $89 million compared to $16 million in the prior year. It's important to note we are committed to reinvesting in our fleet strategy and our capital expense reduction is purely timing related. More to come on this on the next slide.
Net leverage for the quarter came in at 2.4 times compared to 5.0 times in the prior year period. This lower leverage reflects the significant reduction in our debt, improved liquidity and improved profitability in the business. Our leverage profile allows us for financial flexibility for ongoing execution of our profitable growth strategy and investments in the US.
Moving to slide 14. With our enhanced profitability and strengthened balance sheet, we have the financial flexibility to invest in the business and execute our growth strategy. One of our top priorities for reinvesting in the business is upgrading our fleet and equipment. To facilitate this change. We recently hired two central leaders to further unlock leveraging the size and scale of the organization.
We aim to rejuvenate our fleet, optimize asset life cycles, enhance our overall brand and continue to take better care of our employees. This capital deployment will directly benefit our employees and customers while also yielding financial advantages by reducing future maintenance and rental costs. It's important to note that we do not anticipate this changing our long-term net CapEx outlook of approximately 3.5% of revenue as the higher residuals will offset the gross increase in investments.
Now let's turn to slide 15 to review our outlook for fiscal '24. As Dale previously mentioned, we are reaffirming our fiscal year '24 EBITDA midpoint and raising our margin and free cash flow guidance.
Now let's hit on some of the details. We are updating our revenue range to $2.74 to $2.8 billion to primarily reflect the BTS unwind and snow coming in at the low end of our original guidance range. The updated revenue guidance assumes the following the unwinding of VES and the previously announced sale of US loans is expected to have an approximately $70 million impact on revenue for the year for snow.
Now that snow season is complete, we are incorporating revenue of $215 million, which is within but at the low end of our original guidance range. And for development, we are maintaining our assumption of 2% to 5% growth for the year as the conversion of our strong backlog of projects will continue to benefit revenue growth for core land.
We are refining this to the lower end of our original guidance range as we focus on profitable growth. And in regards to acquisitions, we are now assuming zero versus minimal in our previous guidance as we focus on streamlining our operating structure and ensuring stability for acquisitions in the future.
Moving to adjusted EBITDA, one, BrightView will be the key driver to growing profit and expanding margins. Despite adjusting our revenue guidance and despite no revenue at the low end of our original range. We are maintaining the midpoint of our EBITDA guidance, which in turn translates to raising our margin expansion expectations. We expect these improvements to now generate total margin expansion of 90 to 130 basis points, with adjusted EBITDA of $315 to $335 million.
We expect the continuation of healthy cash flow generation driven by improved operating performance. Our outlook reflects our commitment to growth and investment in our core business. Contributions from reduced interest expense will be managed alongside the ongoing requirements to optimize the business altogether, we now expect to generate free cash flow of $55 to $75 million, which is an increase to the previously provided guidance range.
Before I hand the call back over to Dale, I want to wrap up on Slide 16. I want to reiterate my excitement around the investments we are making and the impact it has had on business and our culture by taking better care of our employees. So 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 17.

Dale Asplund

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

Question and Answer Session

Operator

Thank you. We will now begin today's Q&A session. (Operator Instructions)
Bob Labick, CJS Securities.

Bob Labick

Good morning and congratulations on a nice quarter.

Dale Asplund

Thanks, Bob.

Bob Labick

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

Dale Asplund

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

Brett Urban

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

Bob Labick

Okay, great. That's a great explanation, really appreciate that. And segues well into my next question to obviously, you've mentioned you reiterated that our midpoint of EBITDA guidance. Frankly, you're exciting beginning of a transformation here. If you hit $325 in EBITDA this year or five years at or below? Yes, $300, I think it's a home. And so maybe you can just kind of help us think through this and the coming years in terms of the key drivers for that.
Finally, getting to EBITDA growth, how much of it is cost cuts, rightsizing the organization? And is that sooner? And then how much. You've talked about a lot of operational and cultural changes. When does that start driving the bottom line growth and margin accretion?

Dale Asplund

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

Brett Urban

I know, Bob, we're really excited that we had a great second quarter results when it comes to EBITDA and EBITDA margin expansion. We're not guiding quarterly anymore, but to the first half of the year, you know, we've had great results. We grew EBITDA $16 million, grew margins over 100 basis points. So we feel great for the first six months results of this of this year. We feel like the back half of the year is set up to have fiscal '24 a breakthrough year for BrightView.
And then as Gale mentioned, we get through the first half of '25. As we step over the unwind of our BES. aggregator business, we step over the sale of the U.S. bonds business. We feel that we'll be off and running in the second half of next year through that profitable accretive growth.

Bob Labick

Okay, super. Appreciate that, and I'll jump back in queue. Let others ask questions. Thank you.
Tim Mulrooney, William Blair.

Tim Mulrooney

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

Dale Asplund

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

Tim Mulrooney

It looks like some of the boxes below that as well. Some of these changes that you're making are all kind of along that same kind of mindset, getting everyone to work together, whether our sales and operations have been integrated into the same branch or ticket, both siloed specialty businesses and integrating them into the branches. Is that the right way to think about a lot of these transformational organizational changes is just bringing everyone together under one roof. So it's less siloed and focused on the customer.

Dale Asplund

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

Tim Mulrooney

Sounds like a lot of change, but also sounds very exciting. So good luck with that, and thank you for taking my questions, and thanks, Tim.

Dale Asplund

Thanks, Tim.

Operator

George Tong, Goldman Sachs.

George Tong

Good morning. I wanted to drill in further into the core land revenue performance. So excluding any impact from the aggregator business online in the US launch divestiture, an updated full year guide is for the core land business revenue to be down two to down one. Previously it was down two to up two.
And can you just revisit what are the factors that led to the core business having a bit of a slower revenue performance for the full year and done where you are in your process on rightsizing your portfolio of contracts and making sure all the contracts in the core land maintenance business are economic and profitable?

Dale Asplund

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

Brett Urban

Yes, George, I would just add just for clarity and the change in the guide, you know, at the midpoint of our previous guide, which we really came out with at the end of Q4, and we discuss the unwinding potential of our aggregator business. Keep in mind, we are in the middle of our snow season for the aggregator business, and we didn't want to disrupt any current customers. And we said we'd give an update on this call.
But if you think about the midpoint of our guide at $2.9 billion when we first came out this year to the adjusted midpoint now of $2.770 billion, it's about $130 million adjustment, $70 million of that is that aggregator business, US lawn sale, which is the biggest portion of the guide adjustments, $45 million of it is simply no midpoint of $240. So coming up to $215, that's another $25 million and in the previous guy, we had minimal M&A.
Now we're saying for the rest of this year, we'll have no M&A. So call it another $10 to 15 million or so out of $130 million revenue adjustment at the midpoint, $110 million of those three factors, which really leaves you with call it [8] to [10] additional per quarter for that core land.
And I think Tim asked the question last from William Blair about the operating structure. And I think that correlates to where we are in our journey back to sustainable profitable growth. We said on previous calls that this organization on a quarterly basis was was growing at that at the sake of really anything to grow and that's not the way we're positioning this Company moving forward.
We've realigned our sales force into our branches. We've set up our operating structure now are leaders in our geographical markets. Are both managing maintenance and development. And you think about the long-term potential of those things that we've done. I mean, it's just so significant. And we're in the early journey of this of this change, right? We just announced the operating structure, which is about 90 days old, right? So that's going to take a little bit of time to gain traction.
So that's really the difference between the back half of the land core guide. It's not that we see anything systemic in the business. We actually see quite the opposite. We see strong ancillary demand in the back half of this year. We see big opportunities in our contract business. We see even bigger opportunities, George, when it comes to cross-selling development into maintenance, which is really an untapped potential today.
So as you think about the guy changes, but the majority was not tied to this core land piece. And as you think about the future for this company as we get through the first half of next year and step over some of this CES. unwind and US lawn sale, you step over that and get to the second half of next year. That's really when this operating structure will have a year under its belt. And we expect big things from a land organic growth from that point forward.

George Tong

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

Dale Asplund

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

George Tong

Yes. Very helpful. Thank you.

Dale Asplund

Thanks, George.

Operator

Greg Palm, Craig-Hallum Capital Group.

Greg Palm

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

Dale Asplund

Yes. Greg, great question, Greg. So first on the data this morning, but I think the way for us finished off his section was very fitting. It's new borrowers, new trucks, happy employees, happy employees and happy customers this morning when I was at the gate watching the trucks roll out with the crews, you can see the smile on the guys faces when they have a new model or a new truck.
So I think that as a byproduct and then there's the benefit of the cost savings that we're going to see. We can't have mowers that are four and five years old that we're trying to maintain to keep things going. This is equipment that our people depend on to service our customers. We're going to keep our mowers two years and then we're going to remove a modest service and sell as a byproduct. You're right today we're spending far too much on maintenance for both our two cycle equipment, our mowers and the trucks that we're servicing let alone.
We also have the image when we go out to a customer site in our equipment isn't the newest out there. We want people to work for BrightView to see that as a privilege to work here, not as just a job. If you want to talk about qualitative, we spent far too much our rental last year and by sharing our fleet across this company, we think there's significant opportunity to improve that last year we spent part around $15 million on rental, so we can get better at probably not eliminate all of it, but we can get better.
Last year. We also spent a significant amount on maintenance, which will always have to do preventive maintenance on fleet. But it was a much bigger number than we should have because of the age of our fleet. So last year, I think we spent around $40 million on maintenance. So maybe we can get rid of half that over time. It's not all going to come overnight. We've got to take the fleet. We have this far past its useful life and get it to a much healthier age.
But I'll tell you the transformation I've seen with Brett and his team finding creative ways to transition from our old days of buying equipment and keeping it as long as humanly possible and then disposing of it for nothing. So the strategy that Brett talked about has been remarkable in the two leaders we brought in to help us focus on procurement and fleet management are going to help us drive this strategy these benefits won't necessarily come in 2024 and 2025.
But I can assure you if we execute this strategy over the next three to five years, we will see benefit as we get three, four, five years out, that will start ticking through the P&L on both the maintenance and on the lack of rental leads and on our employee satisfaction. Brad, do you want to add anything?

Brett Urban

Yes, I would just add that, you know, given the financial flexibility we have in our balance sheet right now, we're in such a good position to reinvest back into our employees and reinvest back into our our people, which will in turn take care of our customers, right?
I think I did wrap up with new boots, new trucks, new mowers. And that's really you spend time with the brands like we are today. You folks drive out a brand new truck with brand new mowers on the back of new safety issues on I mean, it's a culture change that is happening in the Company is hard to quantify, but it will have a quantifiable impact on the P&L at some point in time and where our balance sheet and cash flow generation, we're going to invest almost double the amount of CapEx we did last year and still generate $55 to $75 million of free cash flow, which is an increase to our previously provided range.
We feel great about our ability, given our balance sheet to execute this strategy and to offset it all happened in fiscal '24, fiscal '25. Right now, we're getting about $0.08 to $0.1 residual on equipment. We sell that number should be far greater as we get into the future as the chart kind of illustrates on page 14.

Greg Palm

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

Dale Asplund

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

Brett Urban

What I think I was just below just reiterate you know, great. First half of the year, Greg, as you can see from our margin improvement, we're over 100 basis points in the first half. We're guiding to basically a similar number in the second half, another 100 basis points in the second half between both quarters and the outlook, as Dan mentioned, and as we've talked a few times, we the change we've undergone over the last seven months, there's more change to come more positive change to come, and we're at the early innings of that change. And the impact is going to have in the organizations as you think about next year, you think about the following year?
Yes, there's definitely more margin. I would say to be had as you think about getting back to that IPO levels, which is called the 12.5% range this year, we're essentially halfway back. We'd be at 11%, 11.5% to [11 nine] of our guidance range. And then as Dan mentioned, you know, that kind of 100 basis points a year goals would get us back next year to that IPO level about 12.5%, 12.8% net rate.
So again, we're not providing guidance for next year, specifically for '25, but we feel really good about the margin expansion opportunities especially when we get that sustainable growth engine going in the back half of next year. And we start this development conversions in the maintenance projects, that's untapped opportunity we have today that will just drive accretive margins.

Greg Palm

All right. I will leave it there. Best of luck. Thanks. It varies right.

Operator

(Operator Instructions)
Stephanie Moore, Jefferies.

Hi, this is Han Hoffman on for Stephanie. More balm. No, just wanted to touch a bit on sort of M&A. Obviously, you guys removed it from the guy, but just given your net leverage is in a much healthier position today, I'm just curious when you think that sort of comes back into the picture and as you sort of evaluate acquisition targets. I know like the strategy has changed a bit versus prior years. I'm just kind of curious what are you guys looking for in acquisitions.

Dale Asplund

Yes. Look, a good question. Obviously, we're in a much better financial position than if we wanted to deploy our precious capital that way we could. But I think as you can see on Slide 6 of the deck, we've had significant operational changes in our organization. I want to make sure we absorb all those changes and get our teams working together. Cohesively so that when we bring an acquisition in, we can be a better owner of that acquisition.
I don't think that's long periods away, but it's probably not going to occur over the next two quarters. But I firmly believe accretive M&A is a way for us to grow this business, but we have to be a better owner. We have to make sure when we bring an asset in, we can help it grow faster and operate more efficiently than what it does today.
That capital that we choose to deploy through M&A is precious and we've talked about all the investments we're making with trucks with mowers with and boots for our employees. Those are all things that are creating a cultural shift in this company. So we're going to bring somebody in. They've got to match our culture. They kind of want to be here, and we've got to be willing to invest in that business. And then by leveraging all the services, we've talked about turf irrigation tree.
Hopefully, when we bring their customers and we can be a better owner and help them grow faster. So I will tell you we will be targeting M&A in 2025 just because we said we paused it for this year, but we've gone through tremendous change. I mentioned to somebody 70% of our employees have a new boss right now, and that's a change in some of the people didn't know their new boss. So let us absorb that.
Let us get our feet under us, and we'll do M&A. I'm a firm believer in M&A. When it's done right, it can create great value. When it's done wrong, it's wasted capital. So we're going to do it and we're going to do it right? We have a big pipeline where I'm going to focus M&A because I'm going to focus it on our core maintenance contract business, small business, as we've all seen, it's very unpredictable.
I'm glad when we get to know I'm glad when our employees can service customers with snow, but where I'm going to put our energy for future M&A is going to be focused on the maintenance contract business across North America. And we have a lot of states today. We're not into so if I can find M&A in new states that I can help our teams grow into and then accelerate growth, that's a great opportunity for us. So yes, probably not like we said zero M&A in the back half of the year. But in 2025, when we give you guys guide, we'll give you an update of what we're thinking about with a high level on M&A.

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

Dale Asplund

Yes, let's let's start with the development and maintenance. Look, I think, you know, like anything when the compensation system motivates people to do what's right for themselves and converting development into maintenance. There's always some warranty work that we have to do. And in all, it's easier not to worry about who's going to pay for the warranty. If it's not going from left pocket right pocket. So I think by putting it under one person that now owns it, they will be able to negotiate that who's going to pay the warranty better than having two independent people that were worried about two different P & L's.
So this is all upside. You heard me say it's untapped opportunity. The developers are different than the people that are going to have the ongoing business. But that doesn't mean we should be getting the level of conversion we have in the past, we should be able to get 70 ish percent of the business that we create every year with our great development team in the new May is to be serviced by our teams. So I think it's unfortunately, it was the structure that we had that created that the best that's work that we can do in the future.
And what was the second part of your question?

Retention, customer retention. So yes, sir.

Dale Asplund

Yes. So customer retention, but it's near and dear to my heart, it pains me when I hear people saying that our focus is to not service our customers like we don't want to have the customers we have today. There is no customer bid cost less to acquire the one we already have today. It is our job to find a way to service those customers and make sure they're getting the value for what they're paying for. Let us do that. We can't just throw our challenges on our customers all the time.
Our retention today is below where it was five years ago. I am going to improve that. I am creating a culture where those people that leave our gates in the morning to go out and service the customers. There are the ones that can make the change every positive letter I get from a customer. They talk about the crew that's doing the work at their facility. Those crews are critical in customer retention and then communicate, communicate, communicate.
We can't let our customers ever be surprised that you heard me mention we have an AI tool now where last year when we ran the AI. tool over our customers that left us, 87% of them were predicted that they were going to leave us. If I can get that information into my branch managers hands, they can go out and sit down and trying to prevent those customers from leave it. We have everything we need to solve our own problems on retention. And it is a way that the more we retain the faster we can grow this business. Our customers are valuable. They pay our bills. They have to be the center of every single thing we do, and that's our focus, and that's what we're going to focus on this year.
And '25. And until I get every branch someday at that 95% that I go to my best branches and see, I'll never be happy because when I see a fully engaged branch manager. He has that level of retention. I know the power that this business can have. Great question.

Got it. Thanks.

Operator

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

Dale Asplund

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

Operator

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