Q4 2019 Earnings Call
Welcome to break is 2019 fourth quarter and full fiscal year earnings conference call.
As a reminder, this call is being recorded.
All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If he would like to ask a question you May press star one on your telephone keypad.
The earnings press release is available on the company's website investors dot break Q dot com.
Additionally, the online web cast includes the presentation slides that will be referenced as part of today's discussion and the downloadable coffee is also available online.
Ill now turn the call over to Dan Schleiniger right views Vice President of Investor Relations. Please go ahead.
Thank you Wendy and good morning, everyone.
Joined on today's call by Andrew Masterman, Our Chief Executive Officer, John feet in our Chief Financial Officer.
Before we begin I want to remind listeners that some of the comments made today, including responses to questions on information reflected in the presentation slides will be forward looking and actual results may differ materially from those projected.
Please refer to the company's recent SEC filings for more detail on the risks and uncertainties that could impact the company's future operating results and financial condition.
Our comments today will also include a discussion of certain non-GAAP financial measures.
Reconciliations to the most directly comparable GAAP financial measures and other associated disclosures are contained in the earnings release on the company's website.
Disclaimers on forward looking statements and non-GAAP financial measures apply both to today's prepared remarks.
As well as the QNX.
This does and will include references to the performance of the underlying commercial landscaping revenue within our maintenance services segment.
We believe that this measure, which we also referred to as organic revenue provides a more complete understanding of the factors and trends affecting the business.
Finally, unless otherwise stated all references to quarterly or annual results were periods refer to our fiscal years ending September thirtyth in each respective year.
Today, we're presenting the unaudited results for the three month period and the audited results for the 12 month ended September Thirtyth 2019.
With that I'll turn the call over to bright view CEO , Andrew Masterman will provide an overview of our recent results business strategy and future outlook.
Thanks, Dan Good morning, everyone and thank you for joining us today.
Turning to our executive summary on slide four today, we are reporting results for the fourth quarter as well as for the full year fiscal 2019.
Total revenue grew 7.4% in the quarter versus the prior year period underpinned by positive organic growth in both of our operating segments. This important measure in our maintenance segment improved sequentially throughout the year turning positive in the third and fourth fiscal quarter.
Revenue in the quarter also benefited from our strong Armstrong M&A strategy, which continues to be a reliable and sustainable source of revenue got right for a company. Additionally, as expected the developments segments services sector as a segment delivered record quarterly revenues demonstrating the robustness of its backlog which is showing.
No signs of slowing down as we head into 2020.
This healthy topline performance combined with lower corporate expenses drove a 9.1% increase in total adjusted EBITDA and a 20 basis point margin expansion versus the prior year quarter.
Well this performance reflects a solid finish to the year I recognize that these are not the results that we expected to deliver for the full year 2019.
But as we look forward, we remain confident and the opportunities that lie ahead and are working hard to capture those opportunities and generate value for all of our stakeholders.
The fundamentals of our business was strong and the initiatives that we have been telling you about over the last few quarters to build our teams train our people and invest in technology are starting to deliver the results that are in vision.
And early signs of this is the returned to positive organic growth and maintenance services that I just mentioned.
Perhaps more importantly, our initiatives are forming the base after which we expect to generate sustainable profitable growth for many years ago.
Today, we will also provide you with financial guidance for fiscal 2020, John will take you through the details and some of our underlying assumptions, which reflect our confidence going the industry's future prospects and our ability to capitalize on that delivers solid topline growth improved profitability and strong.
Cash flow generation this year.
Turning now to our 2019 fourth quarter results on slide five total revenue grew 7.4% in the quarter with both the maintenance and developments segments delivering strong results.
Fourth quarter revenue in the maintenance segment grew 5.1% versus last year. This result included organic growth of 1.9%, which was driven almost equally across contract enhancement and national account revenue growth.
Precipitation levels in the fourth quarter returned to their historical averages.
Supporting an important rebound enhancement revenue in the fourth quarter.
This helped drive organic revenue growth of $8.3 million more than offsetting the 6.2 million dollar revenue impact from managed exits realize M&A revenue contributed another $19.9 million in the quarter.
As I mentioned earlier the development segment maintained its strong growth momentum rounding out 2019 with its highest ever quarterly revenue total.
Revenues were up 14% versus the prior year quarter. Despite some weather related delays in a challenging comparison with last year's larger projects as we sit here today are scheduled workload for the first quarter should support another strong result.
And the backlog for the balance of fiscal 2020 remains robust.
Recapping, our full year revenue results on slide six total revenues were just over $2.4 billion up 2.2% for the year end inline with the low end of our guidance.
Revenue in the maintenance segment grew 2.2% inline with the comp total company and our underlying commercial landscaping revenue was up $8.6 million versus the prior year contributing organic growth <unk>, 0.6% to the segments full year result.
You are Ganic result was driven by higher base maintenance contract revenue, which benefited from a net new sales we've talked about at the beginning of the year and a focused effort on capturing price increases were holding retention study at about 85%.
Our golf business also contributed to segment revenue growth for the year and after a tough start in the first quarter, our national accounts business ended the year with three consecutive quarters of revenue growth.
Enhancement revenue was challenged for the year, principally as a result of unusual wetter weather patterns in the first three quarters of the year.
In line with the figure we provided on our last call.
Realized revenue from maintenance acquisitions reached $91.8 million for the full year.
Adding to 5.2% growth in the segment.
This together with the organic growth in the segment more than offset the lack of hurricane revenue in 2019.
Lower revenue from snow removal services.
And the impact of our strategic managed exit initiative.
Revenue growth in our development segment was also in line with a total company up 2.1% versus the prior year.
Growth was fueled about equally between the organic growth of 2019 workload and revenue contributions from the maintenance acquisitions.
We achieved the low end of our long term organic revenue growth projection for the development segment, despite the challenging weather conditions and a difficult comparison with the large projects that we concluded in 2018.
As we will probably mentioned a few more times on todays call. The backlog in our development segment is as strong as it's ever been and importantly, broad based demand remains strong across our main markets. We expect this positive environment to continue fueling our long term outlook for growth in the development business.
Staying on the topic of organic growth slide seven shows the positive trend in our maintenance segment that I mentioned earlier the sequential quarterly improvement in 2019 is a testament to the foundation, we began laying in 2017 with returned to a decentralized and local sales team.
We expect to continue to build on this trend in 2020 with stronger growth occurring during the second half of the year as is usually the case when our entire maintenance operation is in full swing.
We understand the importance of delivering consistent results in the short term, but we believe the best way to look at our industry and our business as a whole is over the long term.
On slide eight you can see that we're expecting to deliver about 3.7% compounded annual growth in total company revenues from 2016 through 2020.
This compares with the latest Ivas estimates of 2.2% compounded annual growth for the us commercial landscaping and snow removal industry over the same period.
In other words, we expect to grow with almost double the rate of the broader industry by taking a multi pronged approach to generating revenue across both organic expansion and disciplined M&A.
On our last call and went into detail talking about the important investments, we've been making I won't spend as much time on this topic today, but on slide nine I did want to provide you with an update of these initiatives. We have completed the rollout of electronic time capture in our development segment.
The first phase of the implementation of the Salesforce CRM software to our account managers and other customer facing team members has also been successfully completed.
Both the H. away connect and BV connect portals continue to receive favorable reviews from our customers as they recognize that ease with which they can communicate with us using these digital channels.
And finally, our decentralize sales team has grown from 160 to over 180 members as of the ended the fiscal year.
All of them working directly with our branch level leaders locally sourced and validate new business opportunities in our high touch industry.
As we look back on our strong on strong M&A strategy of the last three years on slide 10, we thought it would be helpful to take you through a brief case study of our largest acquisition today, the groundskeeper in Arizona and Texas.
We completed the transaction in May 2018, acquiring about $68 million an annualized revenue. The groundskeeper also added a thousand team members across 13 branches to break these operations.
As is the case with all of our acquisitions, we continue working with the team on the integration of their business into bright view and we're pleased with the result, so far.
We have consolidated the operation down to nine branches all of which are now in the same Oracle enterprise, one ERP system as the rest of breakeven.
All employees are now in our payroll system and enjoying bright views benefits package.
We've also completed the rebranding of all major equipment.
And we are currently implementing our PC labor management tool in the business.
From a profitability perspective 2019, adjusted EBITDA in the maintenance business was up around 25% compared to pre acquisition levels.
As a result of our focus on driving efficiency and generating cost leverage adjusted EBITDA margin has expanded by about 300 basis points over the same period.
We still have work to do but as I've. Just described we've made good progress with this large and complex integration.
In other words.
M&A strategy has been a sustainable successful and impactful source of revenue goat growth for the last three years.
And importantly, our M&A pipeline remains as robust as ever.
In fact today, we're announcing the addition of two more talented teams along with their attractive customer portfolios.
I will then landscape management in San Diego and clean cut landscape management in the greater Phoenix area. These transactions strengthen our presence in two important evergreen markets.
We're excited to welcome Tom have Olin and his entire team of 150 skilled landscapers the bright view family.
Tom along with the senior leaders will remain with the business.
We're also proud to welcome 110 members of the clean cut team right for you.
Over the coming months in years, we will work with John Nation, along with other senior managers from his organization leveraging their talents to consolidate our strong position in the greater Phoenix market, especially in the age away vertical.
We plan to continue taking advantage of attractive opportunities such as the ones I just described to consolidate our fragment industry driving profitable long term revenue growth for bright view.
I'll now turn it over to John who will discuss our financial performance in greater detail.
Thanks, Andrew and good morning to everyone.
Let me start with a snapshot of our fourth quarter results on slide 12.
As you've already heard total revenue for the company was up in the quarter on the back of good organic growth in the maintenance segment.
A strong book of business in the development segment.
And the continued revenue contribution from our M&A activities.
Our adjusted EBITDA totaled $91.9 million.
Up 9.1% versus the prior year.
With a 20 basis point improvement in margin.
To 14.7%.
At the consolidated level. This was a solid quarter for bright view.
Well, a strong result versus the prior year. This is not the EBITDA performance that we expected to deliver.
As a result, we've taken actions that impacted our 2019 numbers.
And if implemented a few changes to drive better results in fiscal 2020 .
We are squarely focused on continuing to generate efficiencies in our business.
Keeping the customer at the center of everything we do.
While promoting a culture of accountability across the organization.
Turning to the detailed on slide 13.
The maintenance segment's adjusted EBITDA declined by 3%.
Which led to 140 basis point margin contraction.
Versus the prior year quarter in this segment.
This decline in profitability was driven primarily by lower enhancements services margins.
And to a lesser degree by lower margin mix from recent acquisitions.
Work on enhancements experienced weather related delays and inefficiencies.
Carried over from the third quarter in many of our markets.
Additionally, our Florida in southeast regions based delays and cancellations related to the threat of Hurricane Dorian.
They also incurred expenses associated with preparing to provide storm recovery services.
But in the end, we're not needed due to dorians unexpected turn to the north.
These factors led to margin compression driven by the higher labor costs needed to complete or in some cases redo those enhancement projects to ensure a customer satisfaction.
Profitability in the development segment grew in line with revenue with adjusted EBITDA up 14.1% versus the prior year quarter.
As a result, the segment's margin was flat in the period.
Since we did not achieve our full year targets for profitability and cash flow, we significantly reduced variable compensation compared with 2018 in both operating segments as well as for our corporate staff.
Additionally, during the quarter, we implemented several initiatives to reduce corporate expenses.
And also incurred lower professional fees versus the prior year.
As a result, corporate expenses were $6.8 million lower versus the prior year quarter.
And represented 1.9% of revenue down 130 basis points as a percentage of revenue.
Looking at our full year financial results on slide 14.
Total revenue came in at the low end of our guidance for the year with a strong contribution from our acquisitions as well as a positive result in our underlying commercial landscaping business.
Despite facing significant weather related challenges throughout the year.
We were able to overcome the headwinds that we identified in our guidance.
Specifically the comparison with hurricane cleanup revenue in 2018.
The elimination of lower margin revenue through our strategic managed exits initiative.
And the year over year decline in snow removal revenue due to lower snowfall.
Taking a longer term view on slide 15, we have generated a healthy level of adjusted EBITDA growth of around 6% compounded annually since 2016.
Outpacing revenue growth.
And delivering average annual margin expansion of about 30 basis points from 2016 to 2019.
Assuming a return to long term averages for both snowfall and precipitation.
And by capturing additional efficiencies in our business.
We believe that we can maintain this pace of growth in fiscal 2020 .
Let's take a look at our capital expenditures in capital allocation on slide 16.
Net capital for the full year 2019 was $83.1 million ending the year at 3.5% of revenues.
This figure came in higher as compared with our longer term guidance of 2.5% of revenues.
Due to a number of factors.
First we increased equipment spending this year to support future growth in our existing businesses, including golf and tree investments that we mentioned on our last call.
We made some opportunistic real estate investments in markets with strong long term growth prospects.
We invested in developing and deploying technologies to support our people and improve the experience offered to our customers.
We also completed some of our recent acquisitions at attractive levels in part because they require certain capital expenditures to be up to bright view standards.
Based on the progress we made in these integrations.
During the fourth quarter, we decided to pull ahead some of the investments that we had originally planned for early fiscal 2020.
And finally also during the fourth quarter, we decided to invest in additional snow equipment to support a plan to increase in self performance of snow removal services, which will reduce our usage of subcontractors in this part of the business.
In terms of our financial debt as of the end of fiscal 2019, we lowered our net debt versus the prior year end, while continuing to execute on our strong on strong M&A strategy.
Our 2019 year end leverage ratio was 3.7 times down from 3.8 times at the end of fiscal 2018.
With our adjusted EBITDA guidance range and improved cash generation, we expect our leverage ratio to be at or below 3.5 times by the end of fiscal 2020 .
Turning now to slide 17 over the last several years, we've taken a disciplined approach to free cash flow generation and delivered significant free cash flow growth.
We took a step back in 2019 due to three main factors.
First the shortfall in our adjusted EBITDA versus the low end of our guidance.
Second the higher than planned capital expenditures that I just described.
Third an increase in accounts receivable, primarily due to the strong second half revenue growth in our development segment.
Collections in this segment are subject to the construction industries paid when paid dynamic between general contractors and subcontractors like ourselves.
In other words, we expect free cash flow to resume its long term growth profile in fiscal 2020 driven by better cash from operations as a result of adjusted EBITDA growth and a reduction in accounts receivable together with lower net capital expenditures versus the prior year.
I should mention that our capital allocation priorities remain the same.
Namely executing our strong on strong M&A strategy, and reducing our financial leverage.
Before I turn the call back over to Andrew Let me review all of the elements of guidance that we mentioned today.
On Slide 18, you see that we are expecting total revenue between 2.465 in $2.5 billion to $5 billion.
Adjusted EBITDA between 312, and $320 million and net capital expenditures between 2.5 and 3% of revenues.
Our assumptions are for the maintenance segment to grow organically between one and 3%.
The development segment to grow between one and 2%.
And acquisitions to deliver at least $60 million and realized revenue, including about $30 million of wraparound from 2019.
Our guidance range from four adjusted EBITDA margins contemplate averaged a negative snow removal and 2020 .
With that said, we will continue to target our long term margin expansion guidance of 10 to 30 basis points.
We are adjusting our guidance on long term net capital expenditures to a range of 2.5% to 3% of revenue.
This is because we will not compromise on the quality of our equipment, where the safety of our people and we plan to continue making investments in our various existing and future technology platforms.
Finally, our improved cash generation should support our M&A strategy, while also allowing us to reduce our leverage to 3.5 times are lower by the end of fiscal 2020 .
With that let me turn the call back over to Andrew.
Thank you John .
Turning now to slide 20, I want to close with a few important takeaways from our first full fiscal year as a public company.
The strategic initiatives that we began implementing three years ago helped us navigate a very challenging year.
In the end, we delivered solid results despite difficult revenue and profitability comparisons with certain episodic events in 2018 and operating disruptions from the unusual weather patterns that we face throughout 2019.
More importantly, the fundamentals of our business and our industry remains strong.
As you heard today, the underlying trends in both of our operating segments reflect those strong fundamentals the maintenance segment improved his land organic revenue growth sequentially throughout 2019, turning positive in the second half as well as for the full year.
Looking ahead, our net new sales trends in maintenance remains strong thanks to our growing localized sales team.
Our M&A pipeline can only be described is robust and has delivered a reliable source of growth for three years running with no signs of slowing down.
And our development segment's backlog is as strong as ever and.
In other words, well, it's important to keep in mind that this is a seasonal business with considerably more activity in earnings in the second half of the fiscal year. The main drivers are in place for bright view to continue growing faster than the broader industry for years to come.
You may have seen in a recent filings that we reorganized the leadership of our maintenance segment.
Jeff Harold was named Chief operating officer for maintenance services, and President of the seasonal division within the segment.
With Jeff focused more on the seasonal markets and our operational excellence efforts, we have added a second senior leader to our evergreen markets.
Marshall, who joined bright we recently after holding several key leadership positions at another leading business services company has been appointed President of the Evergreen West Division and golf maintenance Ed has demonstrated a tremendous passion for bright views people and clients and we look forward to benefiting from his leadership for years to come.
And finally, Michael Dozer will continue in his role as president of the Evergreens East Division is reputation is built on a thorough understanding of our industry as well as his long standing and productive client relationships. He will continue to lead his team with a focus on retention and growth.
We expect these organizational changes in the maintenance segment to bring our senior leaders closer to our people and customers driving more efficiencies in the business and improving our customer relationships over time.
We will also continue making investments in technology to support our operation our customers and our leaders.
Which is why as you already heard from John we're leaving room in our guidance for additional capital expenditures over the next several years.
We strongly believe that these tools will allow us to further differentiate ourselves from the competition, leading to improved customer satisfaction and ultimately even better financial results.
Thanks to the disciplined approach to the execution of our plan, we have outperformed our industry's growth over the last several years and we have been able to leverage that growth to generate the highest revenue and adjusted EBITDA. This industry has ever seen for any single company.
Thank you for your interest in bright view and for your attention. This morning, we will now open the call for your questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the powder hash key we ask that you. Please limit your questions to one and one follow up you may rejoin the queue. If you have additional question.
We will take our first question from Judah Socal with Jpmorgan. Your line is now open.
Hi, Good morning, Thank you for taking my question.
Good.
First question I wanted to ask what about free cash flow last quarter, John you get a great very helpful Bridge between EBITDA to get us free cash flow guidance for the year and I was hoping you could you the same thing specifically digging into working capital to understand exactly what's going to.
But your assumptions are there.
Yes due to good morning.
Last call well first of all we define free cash flow.
Or the definition of free cash flow includes nonrecurring items.
Identified in our financial statements.
On previous calls, we guided to free cash flow, excluding nonrecurring items. So I want to be very clear with everybody. There were approximately $23 million of nonrecurring items in our full year 2019 results. So moving forward for clarity and transparency.
We will guide to our defined free cash flow, which which gets published in our financials as you know.
On our last call, we guided to 140 million of free cash flow.
Which was which excluded any of the 23 million of nonrecurring, which is which would have taken that number to 117 million.
We reported 87 million $30 million less.
And that was driven by three reasons, the higher capex of approximately $10 million.
Driven by two things snow equipment, where we made a conscious decision, where we wanted to self perform and reduce our exposure to subcontractors.
And also some investments in recent acquisitions, a little bit earlier than we had planned.
The other piece was approximately $20 million to use in working capital.
Around our development business.
The revenue as you know from earlier calls was deferred from the first half into the third quarter and specifically the fourth quarter and because of the paid when paid industry dynamic we were really very optimistic of collecting and we weren't successful because of that paid when paid dynamic in a final piece was was the $5 million.
A shortfall in our lower EBITDA versus the guidance on the last call.
Okay. So heavy takes 87 that you reported and then you add back the one timers. The nonrecurring and then you account for the receivable than the $10 million of extra Capex.
What's the delta between that number and the 100 to onetime because that would have implied next year given normal normal.
Patterns, otherwise you would have been maybe above the one inch to 110th of just trying to understand fully needy what your working capital exact assumptions are exactly or just anything else I conclude that delta. Thank you.
No problem Jude what I'll do now again, let me now give you the free cash flow guidance.
For fiscal 2020, as we alluded to in the call. Our adjusted EBITDA range is 312 to Threetwenty.
We now expect our capex to be between two and a half and 3%, but lower versus 19, so assume approximately 70 million.
Because of our growth we expect another use in working capital. So we expect approximately 20 million there.
We expect our interest to be about the same in fiscal 2020, so approximately $70 million.
We're going to pay more in cash taxes, because we benefited this year from some tax planning and in some timing is around a refund, but because we'll have higher pre tax we expect our cash taxes to be around 35 million.
Nonrecurring items will mainly be centered around our continued focus on M&A. So that's about 15 million and that's our defined free cash flow range somewhere in the range of 100 210 million for fiscal 2020.
Our next question comes from George Tong with Goldman Sachs.
Line is now open.
Hi, Thanks, good morning.
EBITDA margins came in lower than your expectations on the full year basis. When you cited weather labor inefficiencies and M&A margin dilution. If some of the reasons can you elaborate on the initiatives, you're taking that generate better efficiency heading into 2020.
Sure I think.
Let me start with the fourth fourth quarter George in the margin compression.
Of 140 basis points.
It was really driven by the ancillary inefficiencies, we basically had more labor more over time.
Because we had a lot of late orders that really generated time constraints and we really wanted to keep our customers happy that was that was the biggest headwind as 140 basis points.
We then had the impact of Hurricane Dorian, we had to move people and equipment around we wanted to be prepared in case, we got hit with that hurricane and that was more of a margin impact as opposed to a revenue impact.
That was the second largest item and then we had the the slight headwind around recent acquisitions, which are lower when we get them.
And then as Andrew alluded to we're building our team. So we had some we had some increase.
People that we brought on mainly around business developers and account managers.
All of those items offset by the.
The final piece of our managed exits.
When we think about the guidance.
And where we're going we're still confident in targeting our long term guidance range of 10 to 30 basis points.
We expect a similar sequential profile or shape.
As as we executed in 2019 for both revenue and margin second half will be stronger than the first half.
That's assuming normal weather.
Invest we have investments in retention, we expect to continued tight labor market, but the first half as you know is sensitive to the snow business.
And we could see better topline growth and productivity initiatives, which would help on our efficiencies driven mainly by E. T C and more importantly, our CRM project.
And that's that's what gives us confidence in that maintenance organic of one to three.
What could happen risk wise, we could have unfavorable weather could be the snow were not enough snow or too much rain.
Our enhancements sales penetration and profitability could be lower than we're planning.
We've done a good job of getting price increases to offset labor and materials, we could see some risk there.
But on an opportunity side and if those risks don't materialize, we got the maturing sales team.
We're working hard to improve our retention.
We could get a quicker adoption of CRM.
And I think the maintenance reorg debt Andrew talked about.
Allows our leaders to get closer to our customers in our operations.
And we really want to make sure that we can provide guidance that we have high confidence that we can hit that's really the walk and our guidance in margin for fiscal 2020.
Got it that's helpful and.
Organic revenue side for for next year, you're guiding to 1% to 3%.
How do you think about where you would likely land within that range and how maintenance and development for will shape up next year.
Yes, George will take that one.
Actually what we're seeing out there with our Salesforce is we're seeing a positive momentum building throughout the organization you saw that with the results. We saw in Q4 on positive organic growth frankly, the best we've seen.
In our reported time as a public company.
We believe especially as you get to the back half of that continued organic build.
We'll have a tangible impact in the in the regions that we operate in but it's also across also our national accounts in our golf business as well.
We we forecast.
Average liberal bills, though we're not relying on that necessarily driver our topline and we do believe M&A will continue to have a positive impact in our overall revenue profile for the maintenance business.
Two elements to answer your question I'm, sorry to answer your question on development development is focused in that 1% to 2% organic revenue growth. The fortunate thing is as were booked as strong as we've ever been going into 2020, and we're highly confident we can maintain that same level of growth that we expect.
Into 2019.
Our next question comes from Andy Wittmann with Baird.
Our line is now open.
Great Yeah, I guess I wanted to dig in a little bit more.
Excuse me to the guidance.
I think I heard that there's $30 million of wrap from deals that you've already closed in 2019, you've announced two deals here that closed in November .
Does that account for the other $30 million of the 60 or are there. Some on identified acquisitions that that factor into the incremental $30 million coming this year just want to understand what the act the underlying acquisitive revenue assumptions are in this guidance I'd also want it just check how does I think I heard a comment.
That you assume that flat was that snow was flat to maybe slightly negative in the guidance. John If you could just clarify those couple of things on the revenue guide.
Okay.
And is Andrew.
Talking when it comes to our M&A the last two acquisitions, where the two acquisitions, we announced today of clean cut in Heaven will obviously add to our 2020 forecasting and it really helps satisfy that total $60 million book.
It Doesnt completed in total.
We have a very.
Diligent robust pipeline that we're we've built we feel confident that thats going to fill in relatively quickly within the first two quarters two quarters by the end of Q2, we certainly believe we should be able to achieve that these particular two acquisitions combined with the wrap around.
We're kind of in that 70% to 80% of that that that target in total.
Well when we look at the totaled the total M&A.
Regarding snow and the overall snow.
In our guidance right now we do see a range.
And that range is lightly.
We're forecasting a slightly lower.
Snowfall than what we experienced last year remember last year first quarter was quite low offset by a really good second quarter. So we see it slightly off of last year, but but but not dramatically off the range will though that we present out there, though gives you the ability to feel.
Confident we're able to execute as we get greater snowfall coming in should be able to to push push ourselves well into the range.
Got it. Thanks I guess my my follow up question was then on.
Kind of the market you are seeing for your people on the on the labor side.
Just notice here in the filing that you actually had.
Pretty good year in your age to be view says I guess you commented on that earlier.
But as you head into 2020 is your.
Is that a tough comp on each TBV says.
Seeing any moderation or inflections and the cost changes of the labor that you're having to pay nationally and just can you comment on the pricing environment.
And then any developments or changes that have happened on that side of equation too.
Andy Good morning, it's John I'll I'll take that one on the labor cost trends.
The labor market remains very tight.
We've been saying that for a while we expect inflation in that area.
To be in the 4% to 5% per annum on our composite wage rate.
And as you know and as we talked about our composite wage rate is about twice the federal minimum rate.
And this cost related to recruiting training retention.
The higher ever average ranges and quite frankly, some lower productivity when were when we're bringing people in the door.
So we expect.
We continue to expect our pricing.
In our operating efficiencies to offset the wage pressure, which we've been able to do historically.
As far as the update on H. to be.
The number of HCV labor is is a small fraction of our total labor force, we're not dependent on each to be labor in order to meet our commitments.
Also we should be labor is not cheap labor the wage we don't set the wages.
This set by the federal government.
And despite a tight labor market, we annually hire more than 5000 people not inclusive of age to be.
As part of our seasonal flex of labor, which usually occurs in the February at April timeframe.
So we think we habit well manage it will continue to focus on that relationship between wage inflation and price.
Our next question comes from Tim Mulrooney with William Blair. Your line is now open.
Good morning.
Good morning, Tim.
Hey on organic growth with within the maintenance business Thats, while I'd like to focus my two questions on so the first one you expect 1% to 3% underlying growth from the landscape maintenance business in 2020, I believe how does that translate to organic growth does the 1% to 3% include acquisitions what.
Bob managed exit what are the other moving pieces here. So we can make sure our model reflects your guidance.
Absolutely Tim that guidance on the growth is organic okay that 1% to 3% is underlying organic growth in the business in the maintenance part of the business. The development side has a 1% to 2% growth. So we believe there is slightly more growth and maintenance and there isn't development, but that does not include acquisitions.
Acquisitions will be in addition to those numbers.
Yeah that gives us that range of 24 2.46 by the 2.5 to five that encompasses both organic and inorganic M&A growth.
Gotcha, Okay that that was easy.
Sticking with the subject thinking about the cadence throughout the year, you expect stronger organic growth in the second half for the year Andrew but.
That's when the comps get materially more difficult I, just want to make sure that I'm thinking about this the right way that you expect organic growth to be higher in the second half of 2020 expanding sequentially from the first half of 2020. Thank you.
Yes, Thats exactly right and there is some of the dynamic of the market. Okay in the seasonal markets Green organic growth basically stops in the first and second quarters. Because there is nothing to do so that kind of revenue based rise up.
You have snow, but you don't have green and so you don't have any either up or down on that contracts in this first and second quarter in the in them in the green side of the business. When you start getting into the third and fourth quarter. That's when actually a lot of the landscaping activity picks up and thus thats when you're going to see the organic growth layer.
Again, we're positive we feel really good about the net new sales coming in and the retention, where we've seeing out in our overall contracts even today as we see the new sales layer in and the renewal of contracts even in the evergreen markets. Some of those are as we as you push out into Q2 in Q3 in the seasonal Mark.
Thats all of those start in basically very very beginning of Q3 and into Q4.
Our next question comes from Kevin Mcveigh with credit Suisse.
Your line is now open.
Great. Thank you just I guess going back to that revenue guidance for 2020.
If I had the math right it looks like weather between kind of the Hurricanes and snow was about a 27 million dollar headwind in 19, there was about 35 million to manage to exit so about $62 million.
If you later in the acquired revenue 60, it feels like there's kind of 120 million or so that's one off but if you look at the guidance like it would imply kind of the low end is down year on year.
It is in fact is that the case and is there any kind of weather and managed eggs exit impac modeled into the 2020 guidance.
Yes, it is what like.
Absolutely.
Let me address that on the weather impact in 2020.
We have and managed to exits the managed exits as far as the initiative that we started.
Yes, so last year and to the end of the prior year. We don't man, we don't have any of that built into the guidance for 2020 with the exception of various small tail that we've previously discussed in Q1 of a couple of million dollars.
But other than that note managed exits there is nothing in 2020 around that the only other thing on the revenue side, which which would be weather.
Specifically, whether would be as we previously talked about briefly was snow that we are we are forecasting is slightly lower snow number.
In the revenue guidance, but thats somewhere between $10 million to $20 million range, so that would be the only.
Weather related.
Forecasts are putting on the revenue side.
Got it and then.
How much the snow removal how much of that is subcontracted and then what's the margin to come to the subcontracted versus in house, obviously, it seems like you're making a strategic shift there to take more that inhouse given the capex.
No.
Yes, and it really is it all depends on the degree of snow, what's caught subcontracted versus what's not subcontractors. So what we're doing is we're preparing ourselves to shift more and more to self perform at smaller levels. However, if you have very significant snowstorms that come in.
That's where the unpredictability of of the actual underlying snow business comes and why we use subcontractors because let's say it snowed a foot or two feet at one time, we have to get out there and service all the properties, which says we have to have a portion of self perform and a portion of sub to the both attack that or to.
Sport that it all the properties.
It's when is in the smaller level other shore the slighter snowballs that we actually then.
Our transitioning one more towards that self perform model that we think is how we really.
Support our customers, a tighter and closer customer intimacy.
Our next question comes from Seth Weber with RBC.
Your line is now open.
Hey, good morning, guys is going to hands and offer Seth.
I guess I'll take one last cut at the guidance in particularly on the main inside.
So the 1% to 3% includes the expected.
Decline and snowfall that that is the messaging.
Yes, no the 1% to 3% is only on the green side or the the non snow business, so that 1% to 3%.
Tool growth and our underlying business that we feel quite confident about the snows kind of a separate.
We treat that and we disclosed.
Overall snow performance on the revenue side.
And so that snow at 10% $20 million shortfall, depending on snowfall that's a separate thats away from the the organic growth.
Right, Okay, that's fair.
So I guess it did.
Follow up on that I mean, you guide ended fourth quarter with excuse me in maintenance screen kind of being up 1.9% as you highlighted the underlying growth.
Sure I said that strikes me that there's a lot of momentum and especially some of the.
Commentary around improving retention engine getting closer to customers as well as some of that business development hires I mean.
You know how should we expect the cadence of that throughout 2020. If you are kind of exiting this fourth quarter. It at nearly 2% I mean, what what are the puts and takes.
Between the range of 1% to 3% you guys provided that would help us kind of understand.
How about awfully, though yes, absolutely what happens in the business, even though contracts get struck sometimes here in the and the first our first quarter into the second quarter the businesses and actually start until you start seeing growth happening in landscaping as as spring emerges. So I think it's a very similar profile the.
You looked at this year.
In 2000, Thats, where there really growth doesn't start occurring even in an evergreen markets in a big way until spring starts starts coming in strong. So similar to this year, where you saw where you saw growth really starting to emerge. If you look at the four quarters. In 2019, we felt we showed an underlying shrinkage in Q1 Q2, and then growth.
And in Q3 in Q4, we'd expect that similar level pattern going into 2020.
Hi, Ken as a reminder, ladies and gentlemen to ask a question. Please press star one on your telephone keypad.
Our next question comes from Sam, England with Berenberg. Your line is now open.
Morning, guys. That's on me that's just.
Can you give us an idea of the tail off in managed exits next year and is that something you'll stop disclosing at some point.
Yes, absolutely is and this is Andrew speaking.
Unmanaged exits we basically in the Q4 disclosure we talked about our managed exits that's really the end of the major part of the program in 2020, we expect a small tail to happen in into Q1 small scale, we've called it out as a couple of million dollars and Thats.
We will always be looking at our account portfolio will always going to be examining our customer lay out in our customer composition, but as far as this specific identified initiative we've concluded that.
Okay great.
And could you just give us an idea the timeline for improving the margins in the acquired businesses. This year that you said was so the headwinds margins this quarter.
Absolutely.
As we highlighted in the M&A.
Example used in groundskeeper.
Once we get hold of the acquisition, we get into it usually takes somewhere between 12 to 18 months, sometimes as long as 24 months to really achieve that it all depends on the size and scale of the acquisition and the Groundskeeper example, we the it was about 18 months ago that we bought groundskeeper and we've seen we've seen that 300 bit improve.
Movement over the course of those 18 months, it's a great management team.
They've embraced the processes and procedures that we put in front of them and they really delivered throughout the entire groundskeeper acquisition great team great results.
We're implementing LTC now at Groundskeeper, we feel that is going to continue to be able to fuel even further improvements in that acquisition and we'd expect to see those kinds of improvements layering in again that 12 to 24 month time period. After we have after we conclude the acquisition.
At this time, we have no more questions. So I'd now like to turn the call back over to Mr. Masterman for closing remarks.
Thank you Lindsay.
Once again I want to thank everyone for participating on the call today and for your interest and break view, we look forward to speaking with you and when we report our first quarter fiscal 2020 results in early February have a great and happy holiday season.
This concludes today's conference call you may now disconnect.