We’ve realigned our sales force into our branches. We’ve set up our operating structure now where our leaders in our geographical markets are both managing maintenance and development. When 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 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 guide changes, look, the majority was not tied to this core land piece. And as you think about the future of this company, as we get through the first half of next year and step over some of this BES unwind and U.S. Lawns 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, in the second half of this year, low single-digit declines on the core side. But next year, presumably, that swings to growth. Can you talk about expectations of how that plays out from a cadence perspective next year? And then perhaps structurally in the marketplace, how easy is it to grow profitably, how easy is it to compete on price or to win contracts that have good economics in a relatively competitive environment?
Dale Asplund: So let me start at a high level, George. So we’re not going to give guidance for next year. We’ll do that from the end of the year. I think we’ll get some headwinds the first and second quarter, call it, $10 million from the BES business. But here’s what I can tell you. We don’t lose business because of price. That’s the most optimistic thing I can tell you. Unfortunately, where we fall down and the customer decides to leave us is usually because of lack of communication or quality of service. Those are two things I can make sure the team fixes and that’s what I’m committed to and those 8 geographic leaders are focused on. We can control that, better communication with our customers and making sure those people that leave the gates every morning are focused on servicing the customer.
That’s the way we’re going to return to growth. We can’t try to outrun customers that decide to leave us because we’re not taking care of them. Our path to profitable growth starts with retaining more of our business and that’s where we’re going to focus. Now we’ve seen a minor improvement in that but nowhere near the levels that we need to be. When I travel, when I open the branches and I’m at a branch that has 90% to 95% retention, they are growing and they are growing profitably. And when I go to a branch whose retention is far below that, they are not growing. They’re struggling just to keep up with new accounts. So it’s a simple business when you think about take care of the customers you have and then find new customers that fill in the existing routes that you have that you can service and make it more profitable.
So this isn’t something that we need to worry about, “We’ve got to get price benefit,” or, “We can’t get price on this.” We’ve got to figure out a way to take care of our existing customers and communicate a lot better to them and listen when they have an issue. So that’s our future: higher retention and continue to focus on new sales.
Operator: Next question today comes from Greg Palm from Craig-Hallum Capital Group.
Greg Palm: Appreciate all the info in the deck. I wanted to also touch on one of the slides, Page 14, on this kind of CapEx plan. So net CapEx over the coming years doesn’t change a whole lot but you’re reinvesting a lot of money into the fleet, I think you mentioned. But presumably, you’re going to save a lot of money on maintenance, rental costs. It seems like a no-brainer. Can you quantify it for us? Can you give us some color on what you hope to save in the coming years? And I guess, is there a sort of a timeline when things really start to ramp up?
Dale Asplund: Yes. Great questions, Greg. So first, let me start. I think the way Brett finished off his section was very fitting: boots, new mowers, new trucks, happy employees; happy employees, happy customers. This morning, when I was at the gate watching the trucks roll out with the crews, you could see the smile on the guys’ faces when they had a new mower and a new truck. So I think that is a byproduct. And then there’s the benefit of the cost savings that we’re going to see. We can’t have mowers that are 4 and 5 years old that we’re trying to maintain to keep things going. This is equipment that our people depend on to service our customers. We’re going to keep our mowers 2 years and then we’re going to remove them out of service and sell them.
As a byproduct, you’re right, today, we’re spending far too much on maintenance for both our 2-cycle equipment, our mowers and the trucks that we’re servicing, let alone we also have the image, when we go out to a customer site and our equipment isn’t the newest out there. We want people to work for BrightView to see that as a privilege to work here, not as just a job. If you want to talk about qualitative, we spent far too much on rental last year. And by sharing our fleet across this company, we think there’s significant opportunity to improve that. Last year, we spent, call it, around $15 million on rental that we can get better at. Probably not eliminate all of it but we can get better. Last year, we also spent a significant amount on maintenance which we’ll always have to do preventive maintenance on fleet but it was a much bigger number than we 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 that’s 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 to the strategy that Brett talked about has been remarkable. And the 2 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 3 to 5 years, we will see benefit as we get 3, 4, 5 years out that we’ll start ticking through the P&L on both the maintenance and on the lack of rental needs and on our employee satisfaction.
Brett, do you want to add anything?
Brett Urban: Yes, I would just add that given the financial flexibility we have on our balance sheet right now, we’re in such a good position to reinvest back into our employees and reinvest back into our people which will, in turn, take care of our customers, right? I think I did wrap up with new boots, new trucks, new mowers. And that’s really you spend time in a branch like we are today, you see folks drive out in a brand-new truck with brand-new mowers on the back with new safety shoes on, I mean it’s a culture change that is happening in the company. It’s hard to quantify but it will have a quantifiable impact on the P&L at some point in time. And then where our balance sheet is and cash flow generation, we’re going to invest almost double the amount of CapEx we did last year.
They’ll generate $55 million to $75 million of free cash flow which is an increase of our previously provided range. We feel great about our ability, given our balance sheet, to execute this strategy. And Dale said it, it won’t all happen in fiscal ’24 or fiscal ’25. Right now, we’re getting about $0.08 to $0.10 residual on equipment we sell. That number should be far greater as we get into the future, as the chart kind of illustrates on Page 14.
Greg Palm: Yes. That’s interesting color and makes a lot of sense. I guess that kind of ties in with my next question. I mean so you’re getting a nice margin boost, call it, this year with the unwind of BES. You’ll have maybe a little bit of benefit next year. But how do you think about continued outsized margin improvements outside of that? And maybe this saving on maintenance and rental cost is probably part of it but what are the levers to increasing that margin, whether it’s 100 basis points annually or something different but getting back to that close to 13% EBITDA margin that the company achieved in prior years and hopefully eventually getting somewhere past that?
Dale Asplund: Yes. Great. So Greg, one way to think about it is the BES unwind is going to have about a 20 basis points improvement on our margin. So we are going to improve margins on our business this year by, like you said, roughly 100 basis points. If you look at the midpoint of our guide right now, it’s at 11.7% EBITDA margin this year. That’s a 110 basis point improvement. We still have significant opportunity to continue to centralize. We’re working on different functions that have to leverage the size and scale of our business. Like procurement, we have to find a way to leverage all the spend that we have to better buy it across the whole organization. When we answered Tim’s question about the 4 unique divisions we had, unfortunately, you can guess, they were all buying somewhat independently.
We weren’t doing enough centrally. We have so much opportunity to continue to centralize so we can leverage the size and the scale of the business. I like what you’re going with. I like the 100 basis point thought. I remind Brett of that number every year that, that should be our goal. And I firmly believe there is no reason, with our size, that we should not run this business in a normal market with mid-teen EBITDA margin. So yes, last year’s 10.6% was far below what it should have been. Many reasons that got us there but you’ve seen the actions we’ve started taking today to lean out the organization. And we’re going to continue to find ways to reduce costs so we can drive for that annual margin improvement like you’re thinking. Brett, do you want to add anything?
Brett Urban: No. I’ll just reiterate, great first half of the year, Greg, as you can see from our margin improvement. We’re over 100 basis points in the first half. We’re guiding to basically a similar number in the second half, another 100 basis points in the second half between both quarters. And look, as Dale mentioned it and as we’ve talked a few times, the change we’ve undergone over the last 7 months, there’s more change to come, more positive change to come. And we’re at the early innings of that change and the impact it’s going to have in the organization. So as you think about next year, you think about the following year, yes, there’s definitely more margin to be had as you think about getting back to that IPO level which is, call it, the 12.5% range.
This year, we’re essentially halfway back. We’d be at 11.5% to 11.9% at our guidance range. And then as Dale mentioned, that kind of 100 basis points end year goal would get us back next year to that IPO level of about 12.5%, 12.8%, within that range. So again, we’re not providing guidance for next year, specifically for ’25 but we feel really good about the margin expansion opportunities, especially when we get that sustainable growth engine going in the back half of next year and we start this development conversions and the maintenance projects, that’s untapped opportunity we have today that would just drive accretive margins in the business.
Greg Palm: All right. I would leave it there. Best of luck.
Dale Asplund: Thanks.
Brett Urban: Thanks.
Operator: [Operator Instructions] Our next question comes from Stephanie Moore from Jefferies.
