Q2 2022 Brightview Holdings Inc Earnings Call
Good morning, Thank you for attending <unk> second quarter fiscal 2022 earnings conference call.
I will be your moderator for today.
All lines will be muted during the presentation portion of the call with an opportunity for questions and answers that you.
If you would like to ask a question. Please press star one on your telephone.
I would like to now pass the call to take a tour.
Yes.
Great.
<unk> of Investor Relations. Please go ahead.
Thank you operator, and good morning, before we begin I'd like to remind listeners that comments made today, including responses to questions and information reflected in the presentation are.
Our forward looking and actual results may differ materially from those projected.
Please refer to the company's SEC filings for more detail on the risks and.
And on the risks and uncertainties.
That could impact the company's future operating results and financial condition comment.
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 the Q&A session.
I will now turn the call over to Brian <unk> CEO Andrew Masterman.
Thank you and good morning.
I appreciate your time today to review our second quarter results and we also want to extend a warm welcome to bottom breath.
Our team just recently Vice President Investor Relations.
Barton brings a wealth of Investor relations experience and we.
We're delighted to have on board.
As you likely saw this morning, we announced John <unk> retirement, and Brett Urban's appointment as Chief Financial Officer effective October one 2022.
First I'd like to thank John for six years of outstanding leadership and commitment to breakthrough glitter.
A key role in the development and execution of our strategy and our robust financial stewardship, which has positioned us well for the near and long term.
I'm grateful for all his contributions, but im glad there'll be with us for a period of time to ensure a smooth transition.
<unk> appointment is consistent with our succession planning process, which covers multiple key positions throughout the organization. It is regularly reviewed with our board of directors.
John has built a deep bench and a well oiled organization that will support greater urban in his new role, enabling him to help drive results and shareholder value.
As CFO of our maintenance business, where it has helped to drive growth and lead the execution of more than 30 acquisitions since 2017.
We're confident that the momentum and leadership instilled in the organization will help <unk> continue to reach its goal.
And I'm excited to continue to work closely with him to deliver on our long term plans.
Before I cover the highlights I'd like to start by thanking the entire great new team for their world class execution and dedication.
I am proud to report on their hard work, which resulted in an impressive quarter with strategic operational and financial success.
We delivered strong organic growth in both segments with total profitability at the high end of our guidance range.
We refinanced our debt with favorable terms and extended maturities.
And we successfully executed on our share buyback program.
Our results and the progress we have made are underpinned by our strong net new customer wins.
Our successful strong on strong M&A strategy.
Our proactive strategic pricing efforts.
And of course, our dedicated team.
Despite these challenges associated with rising fuel prices, we continued to execute at the highest levels, while managing our material and labor expenses.
And invigorated focus on profit profitable growth is unwavering.
Let's dive right in and review our key highlights for the quarter on slide four.
First we delivered our fourth consecutive quarter of land organic growth we.
We undergraduate growth exceeded 8% driven by strong new customer wins and improve ancillary penetration.
We expect land organic growth to be in a 3% to 4% range for the second half of the year slightly above our long term expectations.
Organic growth will benefit from the implemented pricing measures, which we have begun to realize.
In the near term the benefit of price related to top line growth will be somewhat offset by scope reduction.
Importantly.
These pricing efforts will benefit our top line.
And help us to mitigate cost headwinds, including material cost inflation.
Rising wages.
And fuel prices.
John will address this in greater detail in his remarks.
Our development business returned to positive organic growth increasing by 24% this quarter.
This growth was driven by a strong rebound in our backlog as we continue to move past pandemic topline impacts.
Our profitability in the development segment was impacted by higher material and fuel costs, which were partially offset by reduced subcontracting cost.
As we look ahead, we are encouraged by the momentum we see in the development business and expect organic growth to be north of 10% in the second half of the year.
Second <unk>.
Adjusted EBITDA for the quarter was $60 million, which was at the high end of our guidance range and benefited from strength in our topline growth and exceptional labor cost management.
We are heavily working on minimizing the expected cost headwinds on our margins for the remainder of the year, which are primarily rising fuel prices.
Our ability to manage the fundamental direct business cost in the second quarter, primarily material inflation in labor costs is a testament to our operational efficiencies.
Importantly, these actions combined with our pricing efforts support our continued commitment to the adjusted EBITA margin target, we set at our Investor day.
13%.
Third we executed against our previously announced $250 million share repurchase program with the repurchase of the final tranche of shares from MSP partners one of our two original private equity sponsors.
Our repurchase included in negotiated discount from current trading prices and resulted in a meaningful reduction of outstanding shares.
MSC has been a dedicated holder.
For more than 15 years, and we'd like to thank them for their commitment and contributions to our company.
Yes.
Fourth we completed the refinancing of our syndicated bank facilities.
<unk> rates, but we're also able to extend maturities to 2027 and 2029.
John will cover our capital allocation and balance sheet in greater detail.
Lastly, we continue to execute on our successful strong on strong acquisition strategy.
We completed four acquisitions this quarter.
<unk>, a top 100 ranked company by loan and landscape.
Our service leader in the desirable Phoenix market and.
And two market leaders and self perform snow removal.
Our acquisitions benefited second quarter revenue by $37 million.
As we have previously said acquisitions will continue to be a reliable and sustainable source of growth for our business.
Moving now to slide five.
I'd like to talk about our recent acquisition.
As you can see since 2017, we completed more than 30 accretive acquisitions that position us as a market leader in several key msas.
Importantly, our acquisitions are accretive and value, creating use of free cash flow or.
Our M&A strategy Leverages, our scalable infrastructure, while building on best in class platforms processes and people.
And we have a dedicated team and a disciplined repeatable framework.
Our M&A success is core to our topline growth, we will continue to execute on our strategy, we have developed and deployed over the last five years.
The second quarter, we added nature scape weaker services.
Regroup and inner mountain plannings for the breakthrough family.
Can you provide any more detail on each of them.
Nature escape is a full service commercial landscaping company, serving Phoenix, Arizona with a leadership team with more than 80 years of combined experience.
The nature of the Cape acquisition grows our already significant market presence in the greater Phoenix Metropolitan area.
This acquisition and showcases our continued execution against our strategy to expand in areas with significant population growth, which will in turn fuel our momentum.
With our services and TBE group are leading commercial snow removal service providers.
Winter services operated throughout New Jersey, Delaware, Eastern Pennsylvania, Southern New York and Connecticut.
TVE operates primarily in greater Detroit.
These two acquisitions expand our footprint in self performance no management, a margin accretive business.
Self performing snow management, where services are performed through direct labor without sub contractors and most contracts are fixed fee based secure stable snow revenue as well as higher and sustainable margins.
Notably the commercial snow business in the United States is a highly fragmented industry approaching $20 billion in siding.
With these two acquisitions, we have increased our market share in this high margin self performing stable business.
These transactions support our strategic focus to position our snow business to include more self performing services.
Which leads to a higher mix of fixed fee contracts, enabling us to stabilize our snow business margins and mitigate future headwinds.
And finally, we added inner mountain plantings or IP, our top 100 commercial development and landscaping services company focused mainly on development business based in the mountain West region.
It provides us with an opportunity to increase our footprint in two of the fastest growing markets in the country.
Salt Lake City and Boise.
Turning to slide six as you know the largest variable to our first half financial performance as snow removal.
Our organic revenue of $196 million.
Is down 13% or $30 million on an organic basis.
Offset by $12 million of acquired still revenue during the quarter.
Whether it works the industry standard for our customer contracts for billing and invoicing purposes.
Reported snowfall totals interest map to a specific branch footprint down almost 11% versus the prior year.
Let me give a few year to year, whether work specifics in our largest steel markets and regions Denver.
Denver, and historically strong and consistent snow removal market recorded approximately 46 inches of snow during the quarter versus 52 in the prior year.
Chicago reported approximately 33 inches of snow down 24% versus prior year and in New York snowfall was 31 inches down 15% versus prior year.
Keep in mind.
No margin is driven by many factors, including web.
Yeah, Hi.
Yeah.
And how often it snows and will change every year.
Let me put this impact in context of our Q2 profitability results recall that we are largely able to provide snow services are.
Although our existing fixed cost structure.
As a result.
The impact of lower snow revenue led to approximately a $10 million year over year headwind to adjusted EBITDA for the quarter.
Approximately $18 million for the first half.
With our snow season behind US, we entered the green season with significant optimism.
Turning to slide seven.
We continue to be leaders in environmental social and corporate governance or ESG, we truly embraced our ESP strategy and it is embedded into our corporate foundation and culture.
Last quarter, we provided a comprehensive update and subsequently published our inaugural ESG report.
Importantly, we remain committed to our broader goals of carbon reduction for greener equipment, and offset through hundreds of thousands of trees and shrubs, we plant and nourish everyday which.
Which will enable us to achieve carbon neutrality.
By 2035, you'll.
He will continue to see a steady drumbeat on our progress let.
Let me share with you a couple of specific examples from our focus areas sustainability and green our equipment.
We announced last week, our partnership with the Arbor Day Foundation play a 300000 trees throughout the U S by March 2023.
These trees are in addition to the more than 80000 trees and millions of shrubs greenery and graph, we put in the ground and nourish everyday.
Second, we're making significant progress in converting our two cycled gas powered equipment to rechargeable energy sources, which will result in a greater than 50% reduction in bright news carbon footprint by 2025.
We initiated this effort with an external provider and in the second half of this year fiscal 2022, we expect to convert more than 3500 pieces of gas powered handheld devices into greener equipment, which represents more than 10% of the 35000 pieces, we committed to convert by 2025.
It is clear that we are making great and tangible progress so far on this effort.
Moving now to slide eight one of the clear advantages of Brexit to scale as it allows us to develop the technology of the resulting in a significant competitive advantage.
Technology drives efficiency and engagement with existing and prospective customers.
HOA connect quality site assessments.
And Salesforce have all been implemented as digital tools to improve customer retention and satisfaction, while supporting property enhancements and increased ancillary penetration.
In recent conversations with our customer technology Advisory panel a group of our top 10, HOA connect adopters, we learned that a key high demand feature is service conformation.
Which is the ability to receive a text message or E mail alert when our teams complete specified service activities. In response, we're excited to launch the pilot of this high value customer engagement technology, great New service confirmation in April .
We developed a solution supported by a mobile application for our crew leaders and account managers. The delivers an automated service summary, with highlights and photos of the customer.
Service conformation of proprietary breakthrough technology is enabled by our CRM platform and further differentiate differentiate breakthrough capabilities designed to create customer value increased retention and enhance customer satisfaction.
In summary, we are very pleased with our financial results and proud of the progress we've made this quarter.
Our investments in our sales team and technology are resulting in strong organic growth powered by net new customers and improve ancillary penetration our disciplined pricing efforts, we will build on that growth and will support our ability to offset cost headwinds, including material cost inflation wages and rising fuel.
Prices I am confident that our efforts will enable us to continue to win in the near and long term.
I'll now turn it over to John who will discuss our financial performance in greater detail.
Thank you Andrew and good morning to everyone.
Before discussing our quarterly results I'd like to say that I am humbled to have had the opportunity to lead the finance organization a breakthrough for the last six years.
We are extremely proud of the team that we've built and we look forward to working closely with Brett and the team to ensure a seamless transition.
We are confident that Brooks' leadership strategic vision and deep knowledge of the business will enable him to succeed in supporting our goal to drive profitable growth.
And long term shareholder value.
Let's now turn to our results I am pleased to report on another strong quarter for breakthrough, we delivered outstanding organic growth and our land and development businesses.
Our adjusted EBITDA was at the high end of our guidance range, despite headwinds from lower snowfall and the surge in the price of fuel.
And recently as Andrew mentioned, we successfully refinanced our syndicated bank facility.
Under the new terms, we secured a $1 $2 billion seven year term loan and a new $300 million five year revolver.
The term loan matures in 2029, and the revolver matures in 2027.
Both the sulfur based loans at favorable rates.
Having a balance sheet with cost effective funding and no near term maturities enables us to continue to execute on our strategy and.
And to grow our business and positions us for long term success.
We remain focused on our key investment pillar of cash generation organic growth mergers and acquisitions and margin enhancement over time.
With that let me now provide a snapshot of our second quarter results.
Moving to slide 11 total revenue for the second quarter increased by 9%.
Total revenue growth was supported by increases in both our maintenance and development segments.
Maintenance revenues increased by 3% driven principally by 8% land organic growth.
Which was offset by weakness in our snow business.
Land organic growth was fueled by strong contract growth and a continued rebound in our ancillary services.
Additionally, we realized $22 million of incremental revenue from acquired businesses.
Development revenues increased by 36% compared to the prior year.
The increase was driven by a combination of strong organic growth of 24% and M&A growth of $15 million.
We remain encouraged by our bidding pipeline and bid calendar and we continue to anticipate more than 10% organic growth during the second half of fiscal 2022.
Turning to the details on slide 12 total adjusted EBITDA for the second quarter was $60 million.
Down $7 million or 11% compared to the prior year.
The decline in our adjusted EBITDA was driven by lower snowfall, which was a $10 million headwind and higher fuel prices, which was approximately a $4 million headwind.
The higher fuel prices impacted primarily our maintenance segment.
Importantly, our adjusted EBITDA came in at the high end of our guidance range and benefit from positive contribution from our maintenance and development organic growth.
As well as strong labor cost management.
Excluding the snowfall and fuel headwind, our adjusted EBITDA would have been $74 million up $7 million or 10% relative to the prior year.
Looking at our results by segment maintenance adjusted EBITDA was $63 million were down 13% compared to the prior year.
Reflects an adjusted EBITDA margin of 11, 4% compared to 13, 5% in the prior year.
Solid contract growth and a continued rebound in our ancillary services penetration was more than offset by lower snowfall across our branch footprint and the impact of the recent surge in fuel prices.
And the development segment adjusted EBITDA increased by 17% for the second quarter.
The improvement was driven by stronger revenues and the implementation of mitigating actions to offset inflationary headwinds primarily material cost.
Development, adjusted EBITDA margin was 8% or 130 basis points lower than the prior year.
The decline represents an improvement over prior quarters, where development adjusted EBITDA margins were decelerating at a greater pace.
On Slide 13. This chart illustrates the historical improvement we have experienced in our development adjusted EBITDA margin over the last three quarters.
As you can see we've made significant improvement in year over year margin trends. We expect this improvement can be sustained and anticipate achieving positive margin growth in the fourth quarter of fiscal 2022.
For fiscal Q2 corporate expenses represented two 2% of revenue a 30 basis point improvement relative to the prior year and reflects our focus on expense management.
Our adjusted earnings per share for the quarter were <unk> 18.
Compared to 26 for the prior year.
Year to date, our adjusted earnings per share were <unk> 26, compared to 38 from the prior year.
We believe earnings per share is a useful measurement of value for breakthrough and expect us to discuss on future calls.
In summary, we are very pleased with the top line growth we delivered during the quarter.
New contract wins, and improving ancillary trends drove land organic growth we saw.
Saw a return to organic growth in the development business underpinned by strong improvement in their backlog.
And our M&A strategy continued to be a reliable source of growth for breakthrough.
Despite what we believe are short term cost pressures and rising fuel prices and year to year fluctuations that can occur from snowfall.
We believe we are managing the business fundamentals, we can control.
Notably material inflation cost and wages.
These efforts will support our goal of expanding margins back to pre pandemic levels overtime.
Let's move now to our balance sheet and capital allocation on slide 15.
Net capital expenditures totaled $34 million for the second quarter or four 8% of revenue compared to $15 million or two 4% of revenue in the prior year.
This increase was driven by the timing of received orders that were impacted by pandemic related supply chain issues.
Looking ahead, we continue to anticipate capital expenditures to be approximately three 5% of revenue for fiscal 2022, which is in line with our historical guidance range.
Net debt on March 31, 2022 was approximately $1 6 billion, reflecting an increase of $212 million versus the prior year.
The increase was driven primarily by executing against our stated share repurchase program timing.
Timing of our capital expenditures and our execution on M&A transactions.
Our leverage ratio was four four times at the end of the second quarter up from three five times in the prior year.
The increase in our leverage ratio was driven by continued accretive acquisitions the.
The repurchase of the first tranche of $5 9 million shares held by MSP and the snow driven year over year EBITDA decline in the first half.
As we publicly disclosed in April we acquired the final tranche of the MSP purchase you will see an additional $72 million outflow in Q3 related to that purchase.
The stability of our cash flow generation and strong business fundamentals give us the comfort to operate at higher leverage levels and to continue to execute on accretive and opportunistic acquisitions.
For the second quarter of 2022 free cash flow was $31 million the decline in our free cash flow of approximately $30 million compared to the prior year was driven by the timing of capital expenditures and the impact of lower snow revenue.
For the first half of the year free cash flow decreased to an outflow of $19 3 million compared to an inflow of $58 9 million in the prior year.
This decrease was mainly due to the repayment of the payroll tax deferral under the cares Act.
Excluding the cares act impact we would have been free cash flow positive.
Our free cash flow trends reflect our renewed investment in our resilient and durable business, particularly in comparison to prior year.
An update on liquidity is on slide 16 at the end of the second quarter of fiscal 2022, we had approximately $145 million of availability under our revolver and receivables financing agreement and $46 million of cash on hand.
Total liquidity as of March 31, 2022 was approximately $190 million, which is down from the prior year due to the share repurchase and timing of capital expenditures.
Our liquidity continues to provide us with ample flexibility and optionality to run breakthrough and support our growth strategy.
Importantly, as of May 2nd following the repurchase of the final tranche of shares from MST.
And the refinancing of our syndicated bank facility, our liquidity increased by $100 million plus to approximately $300 million.
Let's turn now to slide 17 to review our outlook for the fiscal year.
Our maintenance land a contract based business is growing and demand for ancillary services is improving we are encouraged by market trends and believe this will result in durable maintenance land organic growth.
For the second half of the year, we believe that organic maintenance land growth of approximately 3% to 4% is reasonable and slightly ahead of our long term expectations.
As <unk> mentioned price increases will likely result in certain scope productions, while this will mask the benefit on the top line and we will certainly support our adjusted EBITDA.
Pricing benefits will enable us to offset cost headwinds, including wising wages material costs and fuel prices.
We are confident that the positive momentum in Q2 maintenance land should continue in the second half of the year and.
And we expect to deliver incremental EBITDA for both organic and M&A revenue sources. Additionally.
Additionally, we remain optimistic about our green season, and our ability to deliver solid results.
And our development segment, we are encouraged by our pipeline and backlog trends, we expect organic growth to continue throughout fiscal 2022 and into fiscal 'twenty, three and would be greater than 10% for the second half of the year.
The market pressures, we've seen from inflation, which affects the cost for materials needed for projects as well as fuel prices will.
We will continue we are confident that our proactive efforts, including pricing will help to offset these headwinds.
As a result for our third quarter fiscal 2022, we anticipate total revenues between 715 and $735 million and adjusted EBITDA between 94 and $100 million.
For our fiscal year 2022, we anticipate total revenues between $2 73, and $2 77 billion.
And adjusted EBITDA between $290 and $352 million.
Let's move to slide 18.
Turning the call over to Andrew Let me speak about our adjusted EBITDA margin goal.
Fiscal year 2021, we reported adjusted EBITDA margin of 11, 8%.
For fiscal 2022, the midpoint of our full year guidance range implies an adjusted EBITDA margin of about 10, 8%.
This decline relative to the prior year is driven by first the rise in fuel prices. This would result in approximately 50 basis points of contribution to that decline.
The reintroduction of the 401K benefit was paused in the prior year.
This is expected to contribute approximately 30 basis points to the decline.
And third the impact of lower snow revenue in the first half of the year, which drove approximately 30 basis points of margin pressure.
Fortunately, we were able to offset approximately 50 basis points of labor cost pressures through pricing increases that we will realize in the second half of the year.
As we look to the second half of the year with snow headwind will be behind us and we will be focused on managing primarily our fuel costs.
We are aggressively pursuing initiatives to mitigate this headwind.
Many other companies, we have been introducing fuel surcharges across our business and we expect to continue to do this as long as fuel prices remain higher than prior years.
We believe these near term headwinds rising fuel and material costs are transitional.
Our advantageous scale and efficient cost structure gives us the confidence to believe that we have a clear path to improve our consolidated EBITDA margins of 10, 8% towards 13% target we set at our Investor day in late 2021.
We expect to achieve this through the following actions.
First our sustained focus on pricing within our maintenance segment, we are executing on a proactive pricing strategy, which we believe will return margin through the historical levels.
We expect the pricing focus to generate approximately 300 basis points in consolidated margin improvement.
Second in our development segment, our recent improvement is expected to drive sustained margin growth.
As a result, we anticipate generating approximately 80 basis points in consolidated margin improvement.
Third our snow business, we expect the business to rebound and recover to normalized levels importantly, our focus on expanding our exposure to self performance snow removal will secure higher snow revenue and more stable margins.
As a result, we expect our snow business trends to drive approximately 40 basis points in consolidated margin improvement.
These actions will be partially offset by continued inflationary pressures, including higher than average historical fuel prices and material costs.
These headwinds combined will impact consolidated margins by approximately 200 basis points.
Netting our efforts and the expected offsets we continue to build the path to margin expansion exceeding the high end of our historical performance.
With that let me turn the call back over to Andrew.
Thank you John .
Industry trends remain in our favor and our investments in sales technology and marketing continue to fuel our momentum.
<unk> efforts will help us to drive profitable growth and our excellent M&A engine will support further top line acceleration and expand our footprint.
As we look out to fiscal 2023, we see a clear path to approaching $3 billion in revenue as we continue to execute on our successful organic and M&A growth strategy.
Accordingly, we operate in a resilient and durable industry, our business generating solid free cash flow and the strength of our balance sheet gives us the flexibility to continue to invest in our business and drive shareholder value.
We believe in the long term prospects of our business, which is why we bought back 12 million shares from MSC effectively reducing our share count by 10% without impacting our public float.
We are a leader in ESG and continue to be committed to our 2035 carbon neutral goal.
Our future is bright and we are confident that we have the right strategy to accelerate our performance.
In closing I'd like to thank our customers for their support and partnership and working with us on managing the labor and fuel increases we have experienced so far and we look forward to seeing our customers' landscapes blossom as we move through the summer.
Also I am thankful for our teams for their dedicated response to the winter storms and their continued attention to designing creating maintaining and enhancing the best landscapes honor.
Thank you for your interest and for your attention. This morning, we will now open the call for your questions.
Absolutely.
I'd like to ask a question. Please press star followed by one telephone keypad.
For any reason you would like to repeat that question keep historic bullied by cheap again to ask a question Star one as a reminder, if you are using a speakerphone. Please remember to pick up your handset before asking your question. We will pause here briefly is questions our registry.
Our first question goes to Andrew Wittmann with Baird.
Your line is open. Please proceed.
Great Good morning, and thanks for taking my question.
I guess.
Andrew for you.
I'm just I'm curious with the with the need to go out to your customers for price increases, it's probably not unexpected to them in fact in shirts quite expected and I'm just wondering as to.
Posture of your customers is increasingly looking at the price increases and taking the contracts out to bid or to renewing with you.
Ahead of Rebidding of contracts.
I'm wondering if there's any change in customer behavior from that perspective.
Yes.
It's across the board I would say the initial response, we get from most all customers Andrew is an understanding of the pressures on the cost inflationary environment to deliver.
So there is a willingness to talk and our willingness to come in and try and figure out a way.
Some of those have resulted in just pure price topline price increases and some have also resulted in scope reductions and kind of adjustments.
Adjustments down.
We actually performed well keeping price the same or sometimes even reducing the actual scope, but I think the general spirit and nature of our conversations has been fairly open.
That being said we.
We do expect and we are seeing a slight downtick in retention as we see we see some customers but.
Depart.
Put things out to bid, but I'd have to say that that is really at the margin as opposed to the primary response, which is more of willingness to engage.
That's helpful. Thank you for those comments and then maybe John for you I was just hoping you could give us a little bit more context on the fuel impact in particular and I think.
Just for Oliver.
Vacation it would be helpful to know how much fuel you consume.
Either on a gallons.
Current business size.
Or maybe as a percentage of revenues, which you think that fuel is going to represent I think that we'll probably look at the volatile fuel markets and try to have a clear sense of how this has some impact future quarters and I think this information will help all of us.
Yes, good morning, Andrew.
<unk>.
Actually.
Real challenging for us this quarter as you know.
For the immediately.
The quantum.
Fuel.
We use from a percentage of revenue has increased about.
<unk> excuse me 60 to 60 to 70 basis points.
That.
That has gone from roughly 161, 7% of revenue.
2324.
When we spend in any given week about $1 million a week to put it in context.
So when we saw those increases they hit our P&L.
Mediately now what we're doing what we mitigate that we've talked about.
As we are in the early stages of the fuel surcharges, that's going to take a little bit of time to.
When you get into the invoicing and then the collection of that.
No exactly what the response is going to be.
But again that hopefully should give you some color as far as the percentage of revenue in the quantum of fuel.
It does thank you very much.
Well.
Thank you Andrew.
Our next question goes to Tim Mulrooney with William Blair.
Ken Your line is agency proceeds.
Good morning, Andrew and John just a point of clarification on organic growth when your maintenance land business do you expect.
Organic.
Do you expect maintenance land organic growth, 3% to 4% for the full year or is that specifically for the second half of fiscal 2022.
Yes, that's specifically for the second half.
Second half so the first two quarters, roughly 7% to 8% organic growth you combine that with three to four will definitely be north of 3% to four for the consolidated year.
Perfect. Thank you for that clarification, Andrew and just one more from me building on.
Living in his comments.
H.
Pricing increases in scope reductions together.
How would you characterize how much this represents in terms of pricing.
Gains this year.
I think historically <unk> been 1% to 2% per year, how does pricing now relative.
Relative to the historical average I know you are in the midst of these discussions right now engine itself is not looking for a perfect answer, but any direction would be helpful.
Absolutely no problem.
Yes, typically we have gotten 1% to 2%, but thats always been offset by scope. So it never has realized itself really in the organic growth column.
Because of the offset what we're experiencing right now in the second half.
Is that we're actually seeing some due to the magnitude of our pricing increases we're seeing we will see some realization of pricing impacting organic growth. So in that 3% to 4% number somewhere between 50 bps and one half a percent to 1% will be realized from price increases so.
That's the net improvement, we'll see in that 3% to 4% again, a half to half to 1% in the second half in the first half there was none it basically.
<unk> pricing offset by scope increases and a lot of that is due to him.
For the fact that the discussions with our customers really occurred.
In that kind of December through April time period.
And so the activity of those increases are by and large it's happening between April and July is when we.
We will realize in the third quarter some benefit on the topline small small, but some benefit in that organic growth.
Yeah.
Got it thank you.
Thank you Tim.
Our next question is George Tong with Goldman Sachs.
George Your line is open. Please go ahead.
Hi, Thanks, good morning.
And you look between your two segments maintenance and development can you talk bit more about how you expect inflation to impact each of those segments differently based on cost structure. We can contract length, and then how pricing increases continue between the two segments.
Yes, good morning, George.
Interesting question, because they do manifest themselves differently the.
The biggest cost impact of the maintenance segment is labor.
Questionably and considerably more than the development and in development the biggest cost impact is materials.
So in the maintenance area what were doing is obviously as we look at inflation as the price increases that are offsetting the wage increases and we're pretty much able to match that in addition to the ancillary business. We have is priced at a more current dynamics. So within four to six weeks of doing the project, where pricing authority, reflecting those higher wage.
Cost as well as any higher material cost that tend to be a little higher as a percentage of revenue in the ancillary part of the maintenance segment.
So we're seeing the offsets occurring there the one thing thats.
We are struggling with is fuel and then were going with the fuel surcharge on that that's what we do believe will impact us in the short term, but we feel that whether it's through pricing or weather hopefully it's through a relaxation in fuel pricing that we'll see that as a transitional costs.
When you go to the nature of the development segment really the inflationary impacts hitting us there is primarily primarily materials.
And that material shift we are seeing a change in that and Thats whats really good if you.
The slides we prepared you we've seen the big hit was back in Q4 480 bps down.
And so and then top of that.
We now see ourselves moving more towards.
As low as 100 bps impact in Q3, and actually changing that into a growth on the margin side of things as we go into.
Going into Q4.
So again materials in development on top of that in development, Yes, Theres fuel, we're offsetting that fueled by really doing less stock sub contracting work and putting a lot of that subcontract work back into a self perform a situation, which also helps margins and helps offset some of those inflationary aspects.
Got it very helpful color and then second.
Can you talk a little bit about in the maintenance business.
The recovery.
Key verticals.
Hospitality retail.
Although historically that recently that's been recovering nicely.
Any other verticals that you would call out with respect to.
Covid related.
Yes, I would say right now George across the board our maintenance segment is back to pre pandemic levels.
We are operating at a level now, which really reflects I think more on a revenue basis, where we're at obviously still as we just talked about some of these inflationary pressures our hands.
Hitting us in the short term on the margin side, but on the revenue side, we are optimistic our hospitality customers have come back to the ancillary penetration on both hospitality retail the highest impacted sectors versus segments during our verticals.
<unk> during the Covid crisis, they're back their spending and we continue to get out there and unify those properties. So I am optimistic as we go forward.
We are seeing ourselves back had a pre pandemic level of operations.
Very helpful. Thank you.
Thank you George.
Our final question goes to Bob <unk> with CJS Securities. Your line is open. Please proceed.
Hi, Good morning, it's Pete Lucas for Bob I, just two quick ones for me.
You discussed labor labor availability and increased over time, and what Youre seeing in terms of your staffing level versus what the optimal level would be.
Yes.
As we head now into May and into June . These are the busy months for us we hire over 5000 people.
April may and June as we ramp into the summer season.
I'll have to say that the teams in the field have done an outstanding job of being able to attract labor staff up get people in the door and be able to execute on the spring operations. So as we sit here today will labor is always an issue.
And we can always use more folks we actually are very close to having a full stable of people to execute on our jobs. That's also been helpful is that we were able to get a fairly good allocation of H <unk> labor through the process. This year.
Just slightly more than last year, but there was a slight uptick and so the combination of that.
Meaning the labor influx that we've had and the ability of our teams to go out and recruit and really staff of the jobs has put us in a great position to make sure our customers' properties do very well this year.
Great and last one for me sticking with Labour density labor availability.
Impact to the overall M&A environment are you seeing any changes there given the labor challenges.
It's a good question.
Dive deep into every acquisition to understand their labor situation.
And we won't go in and buy companies or acquire companies that rely too much on temporary labor relied too much on <unk> B, we want companies that have very stable workforces. So we believe me, though when you look at some acquisitions. They certainly do have an exposure.
To having a very.
The only what I say temporary workforce. So I am pleased to say that the acquisitions, we buy have a more stable environment as opposed to deploy some of those out there and thats part of the lens that we look at and we evaluate as we determine what acquisitions that we pursue.
Very helpful. Thank you.
Thank you.
Our final question goes to Andrew Steinman with J P. Morgan.
Hi.
Hi, Andrew could you just remind us of your medium term organic revenue growth and margin.
Goals, you just gave us that that second half guide, but I just wanted to know what we should think of that kind of building off.
Past the second half.
Yes, I mean, we've been committed to that 2% to 3% annual <unk>.
Organic growth trend.
Trend, we're going to see as we get into more of this pricing dynamic how much more that might be additive to that would definitely we'll be updating that as we give them.
Our results as we move through these quarters through our pricing initiatives today, we will stick to the 2% to 3%, but again as we continue to realize that pricing. The pricing initiative. We may we may we may update that but for right now I'd stick with 2% to 3% organic and then on top of that 2% to 3% on M&A.
And I mentioned margins Tim.
Margins, we continue to be in the medium term committed towards moving back towards that 13% level.
Do believe that we will see ourselves improving over the next several years.
Again, the pricing initiatives and some of it and frankly, the turnaround that we're noticing already in our development group should help to be accretive and get back towards the higher levels. We have we feel the initiatives in development, we will need a bit of a turnaround the snow, but also the traction we're receiving in pricing. She gives us a lot of confidence moving back towards that kind of.
That 12% to 13% range and towards 13%. Thank.
Thank you very much much appreciate it.
Thank you Andrew there are no further questions at this time, so I'll turn the conference back over to management.
Andrew Masterman for any closing closing remarks.
Great. Thank you David.
Once again I want to thank everyone for participating in the call today and for your interest in breakthrough we look forward to speaking with you at conferences and of course, when we report our third quarter results in August until then stay safe and be well.
That concludes today's call. Thank you for your participation you may now disconnect your line.
Okay.