Q3 2021 Brightview Holdings Inc Earnings Call
Yeah.
Good day, and thank you for standing by and welcome to day brightly third quarter fiscal year 2021results conference call.
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I would now like to hand, the conference over to your Speaker today Ms. St. John Shave Vice President of Investor Relations. Please go ahead.
Thank you Ryan and good morning, before we begin I would like to remind listeners that some of the comments made today, including responses to questions and information reflected on the presentation slides are forward looking and actual results may differ materially from those projected.
Please refer to the company's SEC filings for more details on the risks and uncertainties that could impact the company's future operating results and financial condition.
Comments made today will also include a discussion of certain non-GAAP financial measures reconciliations to comparable GAAP financial measures are provided in today's press release.
Disclaimers on forward looking statements and non-GAAP financial measures apply both to today's prepared remarks as well as for Q&A.
For context bright for you as the leading and largest provider of commercial landscaping services in the United States with projected annual revenues of approximately 2 and a half a billion dollars and 7 times, our next largest competitor.
Together with our legacy companies Bright view has been in operation for more than 80 years and our field leadership team has an average tenure of 14 years.
We provide commercial landscaping services, ranging from landscape maintenance and enhancements to tree care and landscape development.
We operate through an integrated National service model, which deliver services at the local level by combining our network of more than 240 maintenance and development branches for the qualified service partner network.
Our branch delivery model underpins our position as a single source end to end provider for diverse customer base at the national regional and local levels.
Which we believe represents a significant competitive advantage.
We also believe our customers understand the financial and Reputational risks associated with inadequate landscape maintenance and consider our services to be a central and non discretionary.
I will now turn the call over to break D. C E O Andrew Masterman.
Thank you John and thanks to all of you for joining US. This morning, I am pleased to report that our 11, 7% maintenance organic growth underpinned by our 7% organic contract growth has returned us to 2019 revenue levels.
Furthermore, this maintenance driven growth is fueled our EBITDA improvement for the quarter.
We continue to deliver earnings on acquisition growth and overall it was an excellent quarter. Despite operating in an environment presented with a whole host of new experiences and challenges such as labor headwinds and materials inflation.
Our team of more than 20000 employees has continued to go above and beyond their perseverance made it possible for us to deliver the strongest maintenance land organic revenue growth since our IPO combined with continued robust free cash flow generation, while maintaining our focus on health and safety.
Well, we always have more work to do and more progress to make and when we know the COVID-19 outbreaks are continuing to affect many facets of our economy I am extremely proud of these results and the effort and tireless commitment of our team. We believe this is the underpinning of our guidance going forward.
Starting on slide 4 let me first provide an overview overview of our third quarter results.
First our third quarter was fueled by maintenance land organic revenue growth of 11, 7%, which was the strongest since our 2018 IPO.
This expansion was driven by continued growth in our contract business as well as a rebound in ancillary services.
Second as a result of the strategic investments, we've been making at our sales force maintenance land organic growth trends improved for the fourth consecutive quarter.
Our net new sales in fiscal Q3 were the highest Q3 ever for breakeven.
We are confident in our ability to continue to drive positive net new business, resulting in sustainable organic growth.
Third free cash flow generation continues to be robust during the third quarter, we generated $37.3 million of free cash flow sustainable.
Sustainable strong free cash flow will allow us to further execute upon our M&A strategy, while simultaneously, reducing our leverage ratio.
Fourth driven by maintenance land growth total adjusted EBITDA of $93.6 million grew by 2.9% and our adjusted EBITDA margin was 13, 9%.
Over the trailing 12 months, we have produced $303 million or $1 of total adjusted EBITDA.
And finally, the results of our strong on strong acquisition strategy benefited our revenue by $33 million during the third quarter.
As we've commented before our acquisition pipeline is attractive and we expect that M&A will continue to be a reliable and sustainable source of revenue growth.
Before we turn to the details of our third quarter. Let me provide you with our outlook for our fourth quarter and fiscal year 2021 on slide 5.
Our total revenue was $673.6 million exceeded the third quarter guidance provided on our last call and total adjusted EBITDA was in line with our projections.
As expected we continue to see COVID-19 business impacts specifically labor availability, but we are optimistic about our ability to deliver fourth quarter and full year results.
Our maintenance land contract based business and demand for ancillary services is growing.
Our primary end markets homeowners associations and commercial properties remain viable.
Hospitality and retail verticals are returning to pre COVID-19 levels. We are encouraged by what we see happening in the market and we believe this will result in another quarter of maintenance land organic growth of 5% for more.
And our development segment, we experienced pandemic related obstacles regarding job delays cost pressures and supply chain issues, all of which collectively put pressure on revenue and our margin.
In development, 1 external tracker, we monitor is the architecture billings index.
The Abi is an economic indicator for nonresidential construction activity with a lead time of approximately 9 to 12 months.
In February the index returned to an expansionary mode for the first time since the start of the pandemic.
During the second quarter, the Abi continued to rebound and accelerate.
And in June the index was near its highest levels ever and we are optimistic that modest growth modest organic growth trends should return towards the second half of fiscal 2022 into fiscal 2023.
As a result for our fourth quarter, we anticipate total revenues between $640.660 million versus $608 million from the prior year and adjusted EBITDA between 89% to $93 million versus $90 million on the prior year.
And for our fiscal 2021, we anticipate total revenues between $2.5 2 and 254 billion.
Versus 235 billion from the prior year.
On adjusted EBITDA between 302 and $306 million for.
$272 million in the prior year.
The forecast for $170 million to $190 million increase in revenue and 30% to $34 million increase in adjusted EBITDA will be driven by maintenance land organic growth.
Improved M&A execution and higher levels of stifle.
Moving now to slide 6 since the beginning of fiscal 2021, we've announced 7 acquisitions that position us as market leaders in several key Msas. We are pleased to welcome Baytree landscape and West Bay landscape for the breakthrough family.
These acquisitions complement our existing presence in these markets.
Baytree landscape as a full service landscaping company founded in 2014 by industry veterans with over 80 years of combined experience in the green industry.
With 6 primary locations in our skilled labor force of approximately 370 team members. They treat is recognized as a leader in the Atlanta, and Charleston, South Carolina markets.
With an attractive mix of work on track record for growth and success Patria is listed as number 49 on the most current release of the lawn on landscape top 100 list.
West Bay landscape, a service leader in the desirable southwest, Florida market is 1 of the region's premier landscape maintenance companies.
The company was 125 trained personnel provide the mix of revenue with both maintenance and enhancements this acquisition strengthens our presence in a desirable market.
We expect these 7 acquisitions to add approximately $150 million in incremental annualized revenue.
Net by the disposal of our tree growing company last year.
2021 has been a record year for M&A and we have achieved our fiscal 2021, M&A revenue target and still have attractive opportunities on our pipeline, which continues to develop.
As we progress we will continue to update you on this core strategy.
Turning to slide 7 we remain focused on driving maintenance land growth our maintenance land business represents the core component maintenance, including mowing hedging pruning trimming blowing and other core landscaping services and in 2020 represented approximately 2 thirds of our maintenance business.
Maintenance land organic growth of 11, 7% during the third quarter of fiscal 2021 represented sequential organic improvement for the fourth consecutive quarter.
Inclusive of acquisitions maintenance land revenue was up 16% versus prior year.
Additionally, we realized strong organic growth across all 3 of our maintenance divisions Evergreen east evergreen west and seasonal further proof that our strategy is working.
Net new sales in fiscal Q3 was the highest Q3 ever for bright for you and significantly ahead of 2020, a bullish indicator for 2022.
This is a direct result of our expanded sales team sales enablement technologies.
Continued focus on improving retention and positive net new sales.
We are confident in our ability to deliver at least.
2% to 3% sustainable annual organic growth going forward approximately twice the industry average.
Turning to slide 8 we continue to be leaders in environmental social and corporate governance or ESG, we truly embrace our ESG strategy and it is embedded into our corporate foundation and culture.
The element of ESG is the assessment of how bright new interacts with the environment and how we perform as a steward of the physical environment.
He takes into consideration our utilization of natural resources and the effect of our operations on the environment, both in direct operations and across our supply chain.
Revenue is actively engaged and looking for ways to practically address environmental responsibility and achieve carbon neutrality. A few of these are highlighted on this slide first for cleaner fleet breakthrough is reducing emissions and is beginning to supplement our fleet with electric vehicles to reduce our fuel and minimize our carbon impact we have begun by deploying 100 electric vehicle.
Over the next 12 months.
Furthermore, we plan to convert 20% of our management vehicle fleet over the next 24 months.
Second in Green on our equipment, we are transforming mowers to cycle and all other equipment to sustainable power, while deploying electric utility vehicles.
Third efficient buildings revenue.
Revenue strive to improve energy efficiency and convert to Green energy, we will implement alternative in solar energy solutions and replace outdated energy equipment and appliances, where possible we will convert all electrical service to our buildings to sources of alternative energy.
Fourth sustainability breakthrough is committed to sustainability, we continue to proactively and purposefully plant trees reduce pollution and implement green energy as a way of reducing sequestering and minimizing our carbon footprint.
Although capital investments will be required to build our electrical infrastructure fuel and other savings will result in an attractive return on investment.
We are on the early innings of our journey during calendar 2022, we plan on issuing a formal sustainability report. This will allow bright news report on environmental and social performance as well as having publicized ESG goals.
Moving now to slide 9.
Our scale drives technology advantages that automate and enabling more efficient processes from a few perspectives.
First technology allows us to further engage our existing customers and prospective customers for.
<unk> has invested in industry, leading technology to support our customers, while enabling our field based accounts and branch management HOA connect.
Quality site assessments and Salesforce CRM software have all been recently implemented as digital tool to improve retention support property enhancement and increased ancillary penetration.
Second our technology solutions extend business and operational analytics for improved decision, making and process efficiencies unified dashboard and combining data from multiple sources for those field teams to efficiently support labor and material planet.
And third technology allows us to improve crew and vehicle safety tools that optimize fleet utilization in cab cameras with artificial intelligence will help identify and correct potential safety issues.
Telematics will provide safety and efficiency data to help improve fuel unit.
Route efficiency and safety.
Furthermore, an updated fleet management system will help further enhance our equipment ordering transfers dispositions and maintenance.
Our investment in technology drive safety compliance and greater effectiveness in all aspects of our business.
We are excited about the progress we are making because we believe customer engagement and satisfaction ultimately drives financial performance on.
I'll now turn it over to John who will give some further color on these initiatives and discuss our financial performance in greater detail.
Thank you Andrew and good morning to everyone I.
I am very pleased with the results we delivered in our third quarter the on.
Organic growth of our maintenance land business drove EBITDA improvement.
<unk> free cash flow and overall excellent results.
Efficiencies gained from our investments in technology, and our ongoing focus on productivity and cost management.
Been meaningful in driving improved performance.
And collectively underscores the strength of our business.
Turning to slide 11.
Third quarter revenue increased 10, 8% versus the prior year to $673.6 million.
Maintenance revenues increased 15% versus the prior year to $524.6 million.
The results are a combination of solid growth in our contract business.
As well as a rebound in our ancillary services, which led to 11, 7% organic growth.
Additionally, we realized $18 million of incremental revenue from acquired businesses.
Investments in technology to support our sales and account management teams are enhancing customer relationships and driving both organic growth and strong cash generation.
For the 3 months ended June 30th development revenues of $153 million declined 1.6%.
Excluding the impact of the breakthrough tree company divestiture developed.
Development total revenue would have grown 2.2%.
While we expected COVID-19 related softness to be more pronounced in the third quarter versus last year.
We are also encouraged by increases in our development bidding pipeline and we anticipate increased stability during fiscal 2022.
Turning to slide 12, total adjusted EBITDA for the quarter was $93.6 million an increase of 2.9%.
For $2.6 million increase versus the prior year.
Higher labor driven by overtime, the June 10th holiday and material costs resulted in a 110 basis point contraction in EBITDA margin to 13, 9%.
And maintenance adjusted EBITDA of $96 million.
Represented an increase of $7.3 million for.
For 8.8% from $83.8 million in the prior year.
The increase was driven principally by organic growth in our contract business as well as a rebound in ancillary services.
Adjusted EBITDA margin of 17, 3% reflected a 100 basis point reduction from the prior year level.
The decline was driven by higher labor the impact of newly acquired businesses and the June 10th holiday.
In development adjusted EBITDA decreased $3.1 million to $18.7 million.
Compared to $21.8 million in fiscal Q3 of 2020.
The decline was driven by lower revenue and higher material costs.
Operationally, we continue to face pandemic related obstacles, Inc.
<unk> costs supply chain issues and labor related issues affecting the trades in our production cycle.
Development adjusted EBITA margin of 12, 4% reflected a 190 basis point decline driven by the aforementioned issues.
Corporate expenses for the fiscal third quarter were $15.7 million, representing 2.3% of revenue consistent with the same quarter last year.
Now let me provide you with a snapshot of our revenue results for the 9 months ended June 30 at the beginning on slide 13.
Total revenue for the company increased 8.2% to $1.88 billion.
And maintenance for the 9 months revenues were $1.48 billion.
A $189.7 million increase for 2014, 7% versus 2020.
And development revenues decreased 10, 4% to $404.7 million.
As we reported in May Covid related softness was more pronounced in Q2 versus last year.
Relative to Q2, we have witnessed improving trends in Q3 and.
And expect continued improvement in Q4.
Turning now to slide 14 total adjusted EBITDA for the first 9 months for the fiscal year increased 17, 2% to $212.8 million.
Compared to $181.6 million in the prior year.
Adjusted EBITDA for maintenance increased to 23, 8% to $212.5 million compared to $171.7 million in the prior year.
This $48 million improvement was driven by maintenance land organic growth <unk>.
Acquisitions, and snow removal revenues driven by organic growth and increased snowfall.
Adjusted EBITDA for development decreased $8.5 million.
This year to date performance shortfall was impacted by lower revenues and higher material costs.
Corporate expenses for the first 9 months were 2.5% of revenue a 10 basis point improvement compared to the prior year.
In the fourth quarter of fiscal 2021, we expect modest expense headwinds as a result of re initiating our 401 K matching contribution and increased year over year incentive compensation driven by our improved results.
As we discussed during our last call the impact of these items will be approximately $4.6 million in Q4.
We expect continued higher labor and material cost to impact margins in both segments.
But have implemented corrective actions to aggressively address these headwinds.
Let's move now to our balance sheet and capital allocation on slide 15.
Net capital expenditures totaled $37.2 million for the first 9 months of fiscal 2021 day.
From $42.1 million in the first 9 months of fiscal 2020.
Expressed as a percentage of revenue net capital expenditures were 2% of revenue in the first 9 months and we expect fiscal 2021 capital expenditures to be approximately 2.5 percentage of revenue.
As a result of supply chain constraints at our vehicle and equipment suppliers advanced purchases initiated to support growth will result in increased levels of capital expenditures in 2022 to share.
3 to 3.5 percentage of revenue.
And the first 9 months of fiscal 2021, we funded approximately $106.2 million of acquisitions versus $86.5 million in the first 9 months for fiscal 2020.
Our net debt decreased to $1.5 billion at the end of fiscal Q3.2021 versus $1.$1.1 billion at the end of fiscal Q3.2020.
Our leverage ratio was 3.5 times at the end of the third fiscal quarter of fiscal 2021 versus 4.1 times in the prior year quarter.
Based on our full year fiscal 2021 midpoint of guidance and coupled with initiatives that we have ongoing we are on a solid trajectory to further improve this key metric.
Our free cash flow performance in Q3 continued to be solid despite higher accounts receivable during our snow season.
This was driven by our solid EBIT results timing of capital expenditures lower interest expense and strong net working capital performance.
On a year to date basis, we have generated $96 million of free cash flow and expect another year of consistent and predictable cash flow.
An update on liquidity is unlike slide 16 at the end of the third quarter of fiscal 2001, we had approximately $207.7 million of availability under our revolver approximately $75 million of availability under our receivables financing agreement and 125.
Of cash on hand.
Total liquidity as of June 32021 was approximately $403.2 million.
This compares to $301.5 million.
As of June 32020.
This gives us ample flexibility to further implement our strategy.
Overall, we are pleased with our year to date performance. We are confident in our full year guidance and the momentum we plan to carry into fiscal 2022.
With that let me turn the call back over to Andrew.
Thank you John.
Our third fiscal quarter results were excellent.
The operating and financial performance, we delivered is sustainable and we know we can deliver.
And most exciting is that we see so much more opportunity and potential.
In summary here are the key takeaways on slide 18.
First the market, we are seeing signs and all maintenance verticals of the impact of the pandemic is subsiding and business is recovering.
The fundamentals of our business and our industry remains strong and we are optimistic about our ability to drive sustainable organic growth.
Second growth.
Our investment in our sales team is driving sustainable organic growth our maintenance land organic growth of 11, 7% was the strongest since our 2018 IPO.
Net new sales in fiscal Q3 was the highest Q3 ever for breakthrough, we will deliver 5% plus maintenance land organic growth in Q4.
Third technology, we continue to remain focused on deploying technology to enhance productivity profitability and client engagement. We are expanding adoption of HOA connect facilitating direct customer communication with our teams our expanded usage.
On the sales force customer relationship management tool and quality site assessment software continues our focus on customer retention and supporting property enhancement.
For sales and marketing in addition to technological enhancements, we continue to grow and invest in our sales organization and expand the use and effectiveness of our sales tools digital marketing initiatives and new markets and verticals with a more effective omni channel approach continues to support the success of these expanded.
Sales teams.
Our sales and marketing strategies and structure, our formula for long term success on our investments in field based sales and operations leadership will drive stronger new sales and result in improved client retention, we will further streamlining our service delivery.
Fifth M&A the results of our acquisition strategy continued to benefit our revenue growth and with an attractive pipeline acquisitions will continue to be a reliable and sustainable source of growth. Our business is cash generative with low capital intensity, allowing us to consolidate the marketplace in an efficient and disciplined manner that we've shown to be.
Be repeatable.
Combined with our horticultural knowledge and excellence and our ability to operate multiple service lines under 1 banner. We believe we are well positioned to drive solid performance in Q4 and beyond.
6 cash at the end of the third fiscal quarter, our leverage ratio continues to be at a historic low for breakthrough we are on the trajectory to further improve this metric and expect it to drive closer to a leverage ratio of 3 times.
Most importantly, I would like to personally thank our dedicated employees families clients and partners for their resiliency and commitment during a challenging time.
Our focus on taking care of each other and our customers and taking pride in how we engage with our clients and the beauty of their properties, we design develop and maintain has sustained our organization.
We will continue this focus on our people and our culture to deliver confidence in the future that lies ahead.
In closing please join us in a virtual format on September 21 for our bright view Investor Day, 2021 presentation and question and answer sessions will be presented live from bright new headquarters in Blue Bell, Pennsylvania.
Im excited to showcase our high quality operating officers and division heads and we will also share bright news plans for growth profitability and long term capital allocation.
On a formal advisory in Investor day agenda will be released shortly.
Thank you for your attention. This morning, we will now open the call for your questions.
Yes.
Thank you.
As a reminder to ask a question. Please press star 1 on your telephone keypad image.
A question crashed it balance please.
Please standby, while we compile the Q&A roster.
Your first question comes from George Tong from Goldman Sachs. Your line is open.
Hi, Thanks, good morning on slide 7.
Your you are forecasting for fiscal for Q This year.
Back in the organic and reported maintenance line revenue from fiscal <unk> levels, just wanted to clarify whether that seasonality.
Or if there are other factors driving that performance.
Yes, the overall organic growth and growth. We're seeing overall is really the result of the sales force investments we've made towards the.
On the overall seasonality.
The fourth quarter continues to be a good green season for us. So there's no question about that.
And it is across the board, whether it's evergreen markets or seasonal markets, but the overall contract growth really is the result of increased sales levels coming through the company and we believe this is going to be something thats growth not only on 2020, but also over 2019.
Okay got it.
And then if we look at the margin side of things.
Mentioned higher labor and material costs and the fact that you are taking corrective actions to address these higher input costs can you perhaps elaborate on that what are some of the initiatives that you have 2.2.
Worked through those higher costs and what are the implications for margin flow through.
Yes, first and foremost.
We certainly have have seen some of the inflationary pressures that we've seen throughout.
I think we've all seen throughout the country. Fortunately something that has happened here in the fourth quarter and it's just happening right. Now is that we've been able to take some HQ. The additional H <unk> labor coming into the marketplace, which is allowing us to actually fill the slots that hasnt been filled that we'd have to cover with overtime those folks are arriving.
As we speak there are a little later than we initially expected.
Due to some other government processes that we've had to go through to get them, but here in August they are arriving and we expect as we get towards the end of Q4 and into Q1 that should have a very strong impact for us.
Very helpful. Thank you.
Your next question comes from Andy Wittmann from Baird. Your line is open.
Okay, great. Thanks for taking my questions here do you have a couple I guess.
Just talking about labor I guess thats turned out with.
Either 1 of you I guess could you talk about.
On the mechanism for which.
Labor is inflating is it because you are paying over time because of lack of availability is at average rates just some detail about the inefficiency because theres new people.
A lot of ways. It can hit you and so I was just wondering what it is and if you could quantify what the impact on flavor was on your profit margins year over year I think that'd be helpful. You know last quarter you guys said it was running a couple of hundred basis points.
Higher.
Inflation than normal levels is that still the right or is it more than that now 3 months later just kind of curious.
Yes, Andy.
Good morning. This is John a lot of questions on this let me let me go back.
On later, those and give you.
Some color.
Starting with your first.
The labor is definitely more expensive.
It's less sufficient.
Caused us to.
Have more overtime.
<unk> shortage.
Historically, I think we've been very clear that we've seen.
Inflation of around 4% to 5%, we're seeing closer to 5 this year.
Historically, we've been able to offset that.
Or mitigate debt with price increases.
That's been more challenging through Covid.
We plan to Reinitiate that.
Towards the end of this year and into 2022, and we have been able to adjust.
Adjusted some of that through.
Through scope.
At the end of the day, we are taking several actions.
To be creative and attracting labor Andrew mentioned, 1 of them we were lucky.
Lucky to get each to be labor, but we did get it a little bit later than we expected.
So that was that was a challenge, but we've also.
Done things to expand our hourly workforce recruiting pool around flexible work schedules flexible start times doing things on the weekend things.
Things of that nature, so a lot of attention on labor as you can imagine.
Got it.
And then I guess just for a follow up.
It's always helpful for us to understand what's your ongoing M&A program that you guys are still committed to.
On the Delta every quarter. So I guess I guess, you said there was $150 million of annualized revenue. That's been added this year I was wondering.
How much of that 150, it's going to hit this year.
Just looking compared versus how much was supposed to be loaded added last quarter. So just basically trying to figure out the delta of revenue and guidance from incremental M&A since last quarter.
Yeah Andy.
We certainly have had a high level this year at $150 million. In addition, so that has not all been in the maintenance area. We've had a split between development for maintenance just as the nature of some of the deals that have come through.
So in addition, we've had a divestiture last year, which was impacted this complete year of our 3 company. So you need to take down that debt 150 by somewhere between let's say at around $30 million due to the divestiture. So a net $1.20.
And that all hit us here as far as the divestiture was completely reflected within fiscal 'twenty..1. So if you look at the net of it all.
We're going to achieve all in somewhere somewhere between $80 million to $90 million.
Probably.
As we factor in some of the recent acquisitions, perhaps as high as $100 million in this fiscal year with wrapping about $30 million for the $20 million to $30 million into next year, So somewhere let's call. It 90 to 100 this year and 20 to 30 next year from what we've already done.
Cool.
Great I'll leave it there maybe follow up later, if theres anything else. Thanks, a lot guys sure.
Your next question comes from Judah Silva from Jpmorgan. Your line is open.
Hi, good morning, Thanks for taking my question.
On the organic revenue growth was really encouraging in the third quarter. That's definitely an area. That's been a focus for investors. So it was great to see that pop.
Actually on landscaping maintenance and it seems like the fourth quarter, you should persist in terms of that positive momentum against the tougher comp.
I just wanted to therefore, maybe focus a little bit on EBITDA, just trying to understand.
What's going on in the fourth quarter, the implied fourth quarter EBITDA.
Yes.
When you gave guidance for the third quarter versus the actual guidance that you are now giving.
It just seems a little bit lower so maybe you could just help us walk us through what's going on on the profit side. So we can better understand just the dynamics between net better organic and was expected versus what's happening on the EBITDA line. Thank you.
Yeah Judah good morning. This is this is John when you look at our guide for the fourth quarter.
Previously, we said 91% to 95 so around.
Call It 14, 3%.
Our guide now 89 to 93 around 14% so about a 30.
The headwind on the margin still feel good about the revenue.
There's really 2 things driving that on the <unk>.
Inside it's the labor pressures and the.
The later arrival of the <unk>, but mainly the continued labor pressures.
And the challenge there.
And then the biggest driver without a doubt is the development softness.
We saw that in Q3, it was very clear on our financials.
But without a doubt the biggest challenge in that guide.
Was the challenge we're seeing in the organic softness within within the development that's the big drag.
Okay. So then I guess, maybe just as a follow up as we start to think about the next fiscal year.
Now on the fourth quarter and I know you haven't given guidance, yet, but maybe we could just tease out a little bit of a sneak peek.
If the company can continue to maintain the positive momentum on the top line in terms of organic revenue growth.
How should we start thinking about the EBITDA contribution given some labor headwinds given the sales force investments, but at the same time from operating leverage from the top line. How do you think about just overall margin directionally for next year. Thank you.
We are we are optimistic given what we're seeing in the sales force investment and the returns on maintenance organic growth combining maintenance organic growth with M&A. We believe in the maintenance side on the business, we're going to have the strongest growth profile.
Profile in 2022 than we've when we've had since we're on public so we're very optimistic about that.
Margin pressure is out there we.
We do Fortunately most many of our contracts have annual or bill.
Really to renew during seasons and our contract base.
So clearly any kind of labor headwinds that we see in the business, we're going to be able to address and that December through March period, when we price for the 2022 season.
Okay. Thank you very much.
Your next question comes from Tim Mulrooney, William Blair. Your line is helpful.
Hey, guys. This is Sam on for Tim Thanks for taking our questions here.
Maybe it will start with pricing.
Despite holding off on the price increases last year I know you guys typically get 1% to 2% in any given year here, but with continued inflationary pressures I guess I'm curious of the 1% to 2% is really enough to offset what I assume is the.
Higher labor energy and equipment costs.
Can you maybe talk a little bit about each of these buckets and if you think for 102 pricing is enough to really offset this but you need to raise prices further.
Or we should expect maybe.
Maybe a couple of quarters on margin compression until pricing can kind of ramp back up here.
Yes, I mean, the thing is as we look at pricing right. Now we will see continued we will see continued softness.
We'll see continued softness in queue for a bit because of that contract is an annual contract many times. Unfortunately in ancillary.
Tighter correlated to current activity.
We fortunately see that positive correlation and being able to work with material on the maintenance side of the business at the same time on the development side of the business.
Typically in development you see contracts.
<unk> that go out 3 months for months when you commit to lock in the development business that we have today.
Our contracts that we locked in back in January and February, which we anticipated some inflation, but not the degree we're experiencing we've adjusted our development approach now to allow us to reflect more current costing in shorter timeframes for being able to.
To reflect that pricing so as we look into Q1 and on the end of Q4, we're really optimistic about being able to match, both development margin and labor margins, especially as we get to the new contract periods. So perhaps we do feel some pressure do you see that in our guide in Q4, some pressure there, but as we get into Q1 Q2 Q3.
We think thats going to be unwinding.
I'd say on winding I mean getting into a more kind of regular pattern that we've seen in the past.
Yeah.
Gotcha.
Helpful color there.
Pivoting, maybe residential side for them.
Maintenance land business, if you break apart your exposure between residential and I guess everything else. There could you talk a little bit about how that residential component perform during the quarter and I guess.
Correct me, if I'm wrong, but I think residential represents something like 35% of your land revenue just from your HOA exposure.
Am I right about that line could you see this as well when you say for us.
Essentially you mean homeowners associations right I mean, we don't we don't.
We do not do residential business to speak up okay.
We only deal with.
Yes, there are homes in the homeowners associations, but as we deal with the Master Association.
We don't go back into the individual residents.
Correct, Yes, I guess for your HOA line exposure, specifically, just how that trended for the quarter and then is it still HOA stayed positive I mean, we're really option for me. The thing is we see little impact from the pandemic in the HOA if any in fact I'd have to say, it's there we haven't seen really any impact on our HOA vertical, especially.
Perhaps.
As we as we go forward.
We see that as a stable part of the business that we perhaps believe theres actually more growth going to happen in HOA with the introduction of more stay at home work it broke from home type stuff.
Great. So maybe we should expect that.
Expand as a percentage of sales going forward or.
We believe.
That's it that's exactly right. We believe HOA is a great part of the market to be in we have a strong presence there our sales folks know how to work with the the homeowners Association boards and our account managers are just best in class and being able to deal with element of his board dealing with the great property managers out there.
And really that's the place where we believe we excel.
Great I appreciate the color there guys.
Yeah.
Your next question comes from.
Shlomo Rosenbaum from Stifel. Your line is open.
Alright, Thank you very much for taking my questions.
Andrew maybe you could talk a little bit about the ancillary revenue performance, what youre seeing now versus what you were seeing before COVID-19 in other words for day are you up to 90% of what you used to be.
Just some way we can gauge it to see how much tailwind we have as things kind of fully up open up hopefully.
Notwithstanding the Delta variants and then maybe you could also talk about specifically the hospitality and retail verticals I know you said they are coming back.
How far away are they from pre COVID-19 levels.
Yes.
Let me, let me, let me kind of divide that question into both our ancillary on our contracts as to when I answered both of those as it relates to the overall mix contract levels are back in 19 already.
So we believe growth in contract coming forward, we actually believe contract not only will show a positive growth off of 'twenty, but actually a positive growth off of 19 and our contract base.
Because we are.
In total not all the way back to 19 with ancillary. We believe there is some continued tailwind as we get into 2022 with a return to normalized levels of ancillary as you.
If you look at 19 that 20% for 'twenty, we're 20% plus and ancillary up year over year compared to 2020 compared to 19, 5%. It's really closing in quite tightly. So we believe that probably is going to be about the same level in Q4, but as we get into 2022, we expect theres again.
Some additional tailwind that we see coming down, especially as we get into the summer months next year.
And then hospitality and retail what youre seeing over there.
Yes, bouncing back and probably hospitality.
Really strong.
The hotel on the travel industry is seeing increased rates I think we all know that out there and our customers have seen that so some of this ancillary.
Movements, we're seeing right now are frankly things happening exactly what we thought was going to be happening right hotels are coming back and they are saying, we need a little bit of extra effort to differentiate our property versus others and so we're seeing not only current refreshing hotels back into how how they used to be pre pandemic, but frankly enquiring on.
Future projects into 2022 about ways, we can differentiate and then expand and improve their properties. There are properties around the country, whether it's the 4 seasons hotels, whether it's the Ritz Carlton's, whether it's the Marriott I can go down the list.
Properties that are going into service today that we have put inc.
Increased not only ancillary but also large scale development projects that are looking at really enhancing what those properties look like and thus can attract better customers.
Got it and then.
And then maybe you could just focus back on kind of I hate to beat a dead Bush here, but a dead horse, but the.
<unk>.
On the labor inflation I'm, just trying to understand it in light of like day, each to be visa's, I know theyre, starting leader, but it seems like you guys got a decent amount more than you were expecting.
Is it just so much more pronounced that it's harder to offset that or is it really.
Margin for <unk> is really a matter of.
You guys bidding stuff.
Quarter or 2 ago on the development side and things are just run against you against the commitments that you have you can just kind of unpack that for us a little bit I, just was expecting a little bit more benefit from the <unk> visas.
The ACB folks we would hope they would be coming in June and July they actually are only arriving now.
And that's things that we just were given certain indications by the government authorities that process all the pieces and frankly, they're just aren't the people there to process. The V. Susan what we initially thought becoming got delayed and that's just the reality of.
That program as those people come in we're optimistic now other here, they're here and as we get into August.
So to say as we get into September October November December, especially normalized kind of our overall labor profile with those folks coming in.
That really filled the gap what happened is as the labor availability was well okay for cross country. We had a tough time finding people we applied for the H 2 pieces, which is that's what the program is designed to do to fill where labor on labor availability is low but at the same time, we had customers we had to service so because of that low labor availability.
A really talented landscapers are dedicated both we have went to work on work a lot of overtime.
Net overtime expense really came in and it was about a 50 bps headwind in Q3, when you look at kind of the maintenance side of the business. So that headwind really came and hit US we believe theres going to be some of that hitting I can't say exactly how much in Q4, but that is some of the margin issues, we see in Q4 not much.
Some again, we're talking 50 bps or so and then we believe that is going to turnaround back into a more of a normalized pace as we get into Q on Q2.
Got it great.
Again to ask a question. Please press star line on your telephone keypad.
Your next question comes from Bob <unk> from CJS Securities. Your line is open.
Good morning.
Bob.
It sounds great you know the net new wins and an all time high as obviously terrific stat and it's been you've been building it.
Can you talk a little bit about the primary reasons youre, winning when you do win these new accounts is it price is it services.
What are you doing to win and to drive net new wins to all time highs.
Yes.
Number 1 it has just been the pure investment on our sales force from the tools on the training that we have really done a solid investment over the next 18 months last day last 18 months really that has been.
A driving force behind what we thought it was something we deliberately invested in it started it started showing up as we've talked about in Q2.2020, we started the nascent beginnings of growth and believe we deliberately cut for that strategy.
And so as the training we bring into the people. It's the expanded number of people that we've been able to build frankly over the last 18 months and it's the dedicated sales guys and the account managers and branch managers, who really are focused on on how we can showcase for the tenants. We do we also have a really strong marketing backbone behind this okay for the opportunities we have.
Develop both through omni channel marketing.
Really developing opportunities in a digital way, which allows us to then convert in a more efficient way in the field.
And so that investment also is paying off and allowing us to grow net new we're going to be at a net new position this year, frankly, which will absolutely underpin our.
Our Q2 and Q3.
Underpinned, our Q2 or Q3 growth now our Q4 growth going forward and is going to continue to underpin that 2% to 3% organic growth, we're very positive about that and Thats why we are guiding at 5% plus.
It's twice the industry growth that we're seeing and if you look at the growth we had the latest ibis reports for calling this year to be.
151, 6%, we just grew 11, 7%.
I think we're going to be continuing at a very positive trajectory here on the investment and tools are working the expanded sales force are coming on board and are working and it's resonating with customers.
Okay Super guys that wraps up my questions, you've obviously given us some great detail on talked a lot about the labor. So thank you for that as well.
Thanks, Bob.
There is no for a good question at this time I would now like to turn the call back to Andrew Masterman for any closing remarks.
Thank you for rain.
Once again I would like to thank everyone for participating on the call today and for your interest in breakthrough we look forward to speaking with you at bright view Investor Day 2021, please be safe.
And be well.
This concludes today's conference call. Thank you all for joining you may now disconnect.
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Okay.
Inc.
Andrew.
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On that.
Okay.
Okay.
Okay.
Thank you.
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