Q3 2022 Brightview Holdings Inc Earnings Call
I think fuel costs as well as continued inflation in material and labor expenses, our focus on organic growth and profitability improvements will enable us to leverage our scale to further power our growth and deliver exceptional shareholder value.
Let's review a few financial highlights for the quarter on slide four.
Revenue grew by 11% for the quarter, reflecting strong total organic growth of five 6% and continued benefits from M&A transactions.
Strong net new growth ancillary penetration snow removal services and pricing initiatives powered our total maintenance organic growth of three 1% on top of a prior year organic growth rate of 11%.
Due to a late spring and extended snow season, our maintenance business benefited from significant growth in snow removal services relative to the prior year. In addition, our land business delivered two 3% organic growth, which resulted in total maintenance organic growth of three 1% in line with our expectations.
This dynamic demonstrates the agility of our business and our service mix Snow Hamlin allows us to manage through seasonality.
A robust rebound in our backlog drove development organic growth of 14% demonstrating a continuation of our strong performance development organic growth continues to exceed our expectations and looking at the bidding pipeline, we remain optimistic about the momentum in the business.
It is clear from our topline results that we transform the business to focus on driving sustainable organic growth.
Fortunately, we anticipate this momentum to continue over the near and long term as a result, we expect fourth quarter maintenance land organic growth to be approximately 3% in line with long term plans and development organic growth to be about 8%.
Furthermore, we are confident that our robust sales engine will continue to drive solid organic growth in fiscal year 2023 and beyond.
Adjusted EBITDA was $94 million in the quarter up about 1% year over year, our profitability was impacted by the unexpected level of increase in fuel costs fuel expense increased by about $10 million year over year, roughly a $1 million of that was driven by volume and the remaining $9 million was price we began implementing fuel source.
Charges in April , which enabled us to offset approximately $2 million of that rise in fuel costs.
As a result fuel costs had a net impact of approximately $7 million on adjusted EBITDA excluding.
Excluding this incremental fuel headwind, our adjusted EBITDA would have been $101 million or up about 8% prior to relative relative to prior year above.
Above the high end of our guidance range the strength of our performance demonstrates the outsized execution of our team across our 280 plus branches adjusted.
Adjusted EPS came in at <unk> 43 per share for the quarter, reflecting the benefit of recent share repurchases strong top line performance and effective management of our direct costs labor and materials.
Let's move to slide five to discuss our growth drivers. We are intently focused on executing on our strategy, which is validated by the momentum in our business is centered around three main pillars.
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Delivering robust organic growth through our dedicated locally driven sales force of 200, plus team members focused on customers and new opportunities.
Second investing in technology digital services and marketing to continue to drive a significantly differentiated customer value proposition and expand our market share.
Third executing on our strategic and accretive M&A transactions, enabling efficient expansion into high growth markets.
Let me dive into each pillar with some details.
Starting on slide six our strong organic growth performance over the last five quarters was powered by significant growth in net new sales as our sales force continued to attract new and larger customers over.
Over the last several years, we have increased average job size by more than 40% in the maintenance business as we attracted customers with larger demands and expanded share of wallet with existing customers.
Our land maintenance business generated more than $150 million of organic revenue growth over the last five consecutive quarters.
Importantly.
Our growth is ahead of the industry, which is projected to grow at zero, 9% 2022, According to IMS reporting.
This compares to our projected land organic growth of 4% to 5% and our total projected growth of approximately 8% for fiscal 2022.
Despite the headwinds we are facing we are significantly outgrowing the industry.
Furthermore, we have and continued to gain market share.
Despite the scope reductions we are seeing across the landscaping industry. The scope reductions are driven by two factors first there is natural D. Scoping that occurs as Plantlife takes root in the soil requiring less maintenance overtime.
The current inflationary environment and some customers, we led some customers to actively reduce scope.
As a result, we're seeing modest growth in the market that is certainly below today's inflationary levels.
However, landscape maintenance continues to be a sizable marketplace with massive opportunities given our share of approximately 3%.
Similar to maintenance our development business is relationship based with the majority of our customer relationships exceeding 10 years right.
<unk> customers make up more than 85% of our development business.
And retaining these repeat marquee clients remains our goal through our intense customer focus.
Our model is project based and we've learned over decades of experience that highly repeatable customers tend to be more profitable in nature.
Our end markets are diverse with a balanced distribution of contract sizes and verticals, including commercial hospitality parks and public facilities. Furthermore, we are increasing workload in the public sector, a market that will benefit from increased infrastructure spending.
All of these efforts have helped power the recovery of our development business and the strength of its organic growth.
Let's turn to technology on slide seven.
Strategic investments in technology provide a differentiated customer value proposition across all verticals technology investments directly support our maintenance book with new and bigger accounts and enhanced retention.
Technology also drives efficiency and engagement, including many of the tools, we've discussed bright view, our HOA connect quad.
Quality site assessments.
Salesforce CRM and service conformation.
Each has been implemented as digital tools.
To engage customers, while supporting property enhancement and increased ancillary penetration.
By the end of this calendar year, we will be upgrading our customer portal and launching breakthrough correct to point out.
Enhanced portal will be available to all customers and we'll put the entire relationship online similar to online banking.
Once this portal is launched our customers quality site assessments monthly reviews enhancement proposal contact points and maintenance schedules, we will all be digitally available too.
Through this service customers can engage with us in an efficient manner and we can readily address their needs importantly, we will be the only landscaping company that offers this customized service, which is aligned with our customers' demands.
All of these digital advancements have driven net new growth and this is one of the reasons. We continue to see it for the fifth consecutive quarter solid land organic growth exceeding our industry.
In addition, our integrated suite of applications enabled efficiency seamless acquisition integration and robust data analytics and.
And operational efficiencies deliver cost savings, along with better service quality and safety.
Let's turn now to our acquisitions and move to slide eight.
We continue to execute on our strong on strong M&A strategy a strategy, we have developed refined and effectively deployed over the last five tiers are 30, plus acquisitions over that period positioning us as market leaders in key high growth Msas enable us to further extend our reach and grow market share.
Importantly, our pipeline remains robust with attractive valuations more than $700 million of opportunity.
Recently, we acquired STS Hawaii, a premier commercial landscaping provider headquartered in Wailuku, Hawaii with operations on Maui, The Big Island in Hawaii.
SGS focuses primarily on the hotel and resort sector with services, ranging from grounds management and lawn maintenance irrigation tree trimming harbor care soil testing and fertilization.
Importantly, SCS sustainability characteristics align with our ESG priorities SCS utilizes electric powered equipment across all of its operations and its business is entirely supported by a modern specialized electric fleet SD.
<unk> expertise in the hotel and resort industry strengthens our portfolio, while its commitment to reducing carbon emissions through the use of electric powered equipment is the perfect complement to our environmental sustainability strategy.
With Sds, we now have presence on all major islands in Hawaii, which solidifies our presence in this attractive market.
Let's now move to slide nine our successful execution comes in a challenging and dynamic environment with sustained uncertainty associated with notably most notably with inflationary trends let.
Let me address three external factors that are influencing our business material cost inflation labor challenges and rising fuel costs and how our team is responding to position the company for long term profitable growth.
Let's start with material cost inflation, which is mainly impacted the profitability in our development business.
Development has been impacted by material price increases this put significant pressure on margins over the last five quarters historically contracts had three to six months and sometimes nine month lead times.
We have shifted now to allow 10% to 15 days of pricing commitments in our contracts, which shortens the timeline and mitigate the impact of rising material costs.
By the end of this current fiscal year, the impact of the contracts with longer lead times and fixed pricing should be behind us as a result, we expect our margins in the development business to improve over the coming quarters.
Labor cost inflation continues to be a headwind similar to many other companies. Historically, we have seen on average wages increase and look forward to 5% range and now we are seeing increases in the 6% to 7% range.
Pricing volume and operating efficiencies have helped to offset this wage pressure the.
The teams in the field have done an outstanding job of attracting labor to execute on our customers' demands use it during this busy summer season.
In addition, the influx of H <unk> workers continues to support our labor needs. The combination of this influx and the ability of our teams to recruit and step up has put us in a great position to ensure that we can execute on our customers' demands this year.
Lastly, rising fuel costs have significantly impacted our business this quarter.
As I mentioned earlier fuel costs had a net impact of approximately $7 million on our adjusted EBITDA.
Well, we have been able to offset inflationary pressure on wages through pricing initiatives.
Fuel cost to presented more of a challenge given the rapid escalation in costs.
Although we instituted a good fuel surcharges.
On lower gasoline prices back in fiscal Q2 also keep in mind that these are customers. We reached out to a few months back for significant price increases. It is important to note that the dialogue with customers has been constructive and the majority of accepted the fuel surcharges, we have elected to take a balanced approach absorb some of the incremental fuel costs in the near.
Term and focus on strategic pricing initiatives, improving ancillary penetration and attracting larger clients.
Ultimately, we believe the impact of rising fuel cost is transitory either costs will normalize we will further adjust our pricing and the upcoming renewal season to reflect the continued rising costs.
Let's turn to slide 10.
Despite these external headwinds.
Fundamentals remain strong and gives us confidence that we continue to be poised for long term profitable growth.
Commercial landscaping is a resilient business that has withstood various economic cycles and environments. We have over 80 years of experience in this business have navigated countless cycles. Our team is prepared and focused on achieving our goals.
Second our customers span across a number of diverse verticals, we serve marquee customers across various end markets, including corporate and commercial properties HOA Public Park hotels, <unk> resorts hospitals, and other health care facilities educational institutions for restaurants, and retail and golf courses among others.
Our business and customer mix give us.
<unk> to continue to thrive in a rapidly changing environment.
Third we have a differentiated customer value proposition powered by technology, our focus on sustainability and an unparalleled network of expertise.
Fourth secular trends, including moving towards greener equipment, and irrigation maintenance are in our favor and position us very well competitively.
We've invested heavily behind our environmental efforts and have made great progress in moving towards using greener handheld equipment as well as technology powered water systems that reduced usage.
Lastly, we have multiple opportunities organic and M&A that will power our growth and fuel long term profitability.
Our organic growth will be driven by technology enhancements as well as our powerful sales engine and expertise across various ancillary services. Our M&A pipeline remains robust and we are well positioned to attract M&A candidates.
Before turning the call over to John I'd like to speak to our environmental sustainability efforts on slide 11.
As a company dedicated to designing developing and maintaining the best landscapes on Earth. We are continually focused on seeking and investing behind sustainable solutions that minimize our impact on the environment. Our customers have understood the value of sustainability for many years. In addition to reducing carbon emissions water conservation remain.
The forefront for many of our clients, particularly as we continue to face drought conditions across several regions in the United States.
As the leader in irrigation services, we are thrilled to partner with customers to help them reduce water usage through smart irrigation technology and turf conversion into native landscapes, which are less water intensive let me illustrate with a couple of examples.
A few years ago, we partnered with Oracle to maintain two of their California locations, we installed smart irrigation controllers and planted native plants to help reduce water consumption, enabling them to achieve savings of more than half a million dollars.
And 91 million gallons of water in one year.
Both sites were recognized for efficient water use by the Silicon Valley Water Conservation Awards coalition.
We continue to work with Oracle along with several other large companies across the country with corporate campuses to maintain native landscapes track and monitor water usage and enhanced irrigation, helping them save millions of gallons of water and significantly reduce facility costs.
Importantly, we support customers across a diverse set of end markets, including golf course municipalities.
So a community.
For instance earlier this year in Nevada legislation was put into place that requires TERP removal in cases, where grass exists for purely aesthetic purposes.
As a result, we are now working closely with a number of HOA is in Las Vegas to help them convert decorative or nonfunctional turf and the less water intensive native landscapes.
Our expertise in water management enables us to drive water conservation efforts and allows us to expand our relationship with existing customers through additional ancillary irrigation services. We are privileged to work with a diverse mix of customers, who continue to embrace environmentally conscious practices, particularly in the area of water conservation.
To wrap up we are pleased with our results and proud of our financial and strategic progress amid a challenging environment. We are executing on our key growth drivers investing in our sales team and technology with power net new customers and improved ancillary penetration leading to solid organic growth or M&A strategy.
<unk> continues to be reliable and sustainable source of growth our disciplined pricing efforts build on that growth and support our ability to offset cost headwinds importantly, we are dedicated to positioning the business to thrive in the face of external macro headwinds changing secular trends and regulatory requirements.
I am confident that our efforts will continue to position us for long term profitable growth 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.
I'm pleased to report on another solid quarter, we delivered strong organic growth in our maintenance and development businesses.
And our team navigated through a challenging environment and manage through rapidly evolving external headwinds, including most notably the continued rise in fuel costs.
We remain focused on our key investment pillars of cash generation organic growth.
Mergers and acquisitions and margin enhancement over time.
Before I cover our financial results in detail I'd like to give Brett urban our incoming CFO a couple of minutes to introduce himself.
Forward, Brent will be leading our earnings calls Bret.
Thank you John and good morning, everyone. <unk> is a durable business with multiple growth opportunities and is an exciting time for me to be part of this dedicated team.
I assume with bright view for seven years and have served as head of the company's financial planning and analysis group as well as CFO of our maintenance segment.
In my new role as the company's CFO I will following John's footsteps and support the team to execute on growth drivers that maximize our potential and expand our market share.
In addition, I'll be focused on consistently growing our business enhancing our balance sheet and executing on our capital allocation plans that create long term shareholder value.
I am fortunate to have John's guidance during this transition period, which will certainly position knee and bright view for success.
Lastly, I believe engagement with our investors and analysts is essential to our long term success.
Working with Andrew John and the team I look forward to meeting and partnering with you all over the coming months.
I will now turn the call back over to John to cover our results.
Thank you Brett let me now provide a snapshot of our third quarter results.
Moving to slide 14, total revenue for the third quarter increased by 11%.
Reflecting five 6% of total organic growth.
Total revenue growth was supported by increases in both on maintenance and development segments.
Maintenance revenues increased by seven 1% driven by three 1% of total organic growth.
Which included two 3% of land organic growth.
Our total maintenance organic growth benefited from better than expected snow removal services.
As a result of the longer than typical snow season, which offset ancillary services in April .
Land organic growth was driven by strong contract growth and a continued rebound in our ancillary services and.
In addition, our pricing strategy contributed approximately 50 basis points to our land organic top line growth net of scope reductions as expected.
Last week, we realized $28 million of incremental revenue from acquired businesses.
Development revenues increased by 24% compared to the prior year. The increase was driven by a combination of strong organic growth of 14% and M&A contributions of approximately $15 million.
We remain encouraged by our pipeline and bid calendar.
We anticipate continued strong organic growth in the fourth quarter of approximately 8%.
As Andrew mentioned, we serve a diverse mix of end markets in our development business and we are seeing growth across all of these verticals, most notably in public works and commercial construction projects.
Turning to the details on slide 15.
Total adjusted EBITDA for the third quarter was $94 $3 million up 7% compared to the prior year or.
Our adjusted EBITDA performance was impacted predominantly by higher fuel prices.
The third quarter of this fiscal year gasoline spend represented three 4% of total revenue compared to two 2% in the prior year.
While the guidance for the third quarter that we provided back on the second quarter call reflected the higher level of fuel versus prior year.
The actual surge was much higher than anticipated, especially in May and June two of our busiest months of the year, where fuel consumption is at its highest.
As a result, the unanticipated level of increase resulted in adjusted EBITDA that is about a net $7 million below our expectations.
Excluding this incremental fuel headwind, our adjusted EBITDA would have been $101 million for the fiscal third quarter above the high end of our guidance range.
Looking at our results by segment maintenance adjusted EBITDA was $89 million were down one 5% compared to the prior year and reflects an adjusted EBIT margin of 15, 9% compared to 17, 3% in the prior year.
Solid contract growth and a rebound in our ancillary services penetration was more than offset by the surge in fuel prices.
The rise in fuel prices year over year, largely impacted our maintenance segment, where the net impact was approximately $6 million.
Excluding the net impact of fuel maintenance adjusted EBIT margin for the third quarter would've been approximately 17% roughly flat with the prior year.
And the development segment adjusted EBITDA increased by 11, 8% for the third quarter.
This growth was driven by stronger revenues and the implementation of mitigating actions to offset inflationary headwinds primarily material costs.
Development adjusted EBIT margin was 11, 2% or 120 basis points lower than the prior year roughly in line with the guidance, we provided last quarter.
Relative to the prior year profitability in the development segment was impacted by higher subcontracted labor due to project mix as well as higher fuel costs, which were partially offset by reduced material costs.
As a reminder, the margin decline in the development segment represents an improvement over prior quarters, where development adjusted EBIT margins were decelerating at a greater pace.
On Slide 16. This chart illustrates the historical improvement we have experienced in our development adjusted EBIT margins over the last three quarters we.
We expect this improvement to be sustained and we still anticipate achieving positive margin growth in the fourth quarter of fiscal 2022 for the development segment. Despite the expected fuel headwind.
Turning now to slide 17 for fiscal Q3 corporate expenses represented two 1% of revenue.
20 basis point improvement relative to the prior year and reflects our focus on expense management.
Interest expense for the third quarter was $15 million compared to $9 million in the prior year.
Afflicting, an increase in interest rates, coupled with increased borrowings.
Looking ahead to the fourth quarter, we expect interest expense to be approximately $20 million, reflecting higher sofa rates and increased long term debt due to our recent refinancing.
Our adjusted earnings per share for the quarter was <unk> 43.
Compared to 44 for the prior year adjusted.
Earnings per share benefited from decreased in our share count driven by recent share repurchases strong topline performance as.
Well as solid cost management of direct costs labor and materials.
These benefits were offset by the rise in fuel costs and higher interest expense.
In summary, we are pleased with the top line growth we delivered during the quarter net.
Net new growth improved ancillary trends and our pricing initiatives drove solid organic growth and enabled us to offset labor and material cost inflation.
The more our M&A strategy continued to be a reliable source of growth.
Fuel will likely remain a headwind for the fourth quarter and we will continue to work to mitigate its impact on our profitability.
We believe our pricing initiatives and operational efficiencies will continue to support our goal of expanding margins.
Pandemic levels over time.
Let's move now to our balance sheet and capital allocation on slide 18.
Net capital expenditures totaled $21 million for the third quarter were two 8% of revenue.
Compared to $13 million or one 9% of revenue in the prior year.
This increase was driven by the timing of received orders that were impacted by pandemic related supply chain challenges.
Looking ahead, we continue to anticipate capital expenditures to be approximately three 5% of revenue for fiscal 2022, which is in line with our recent guidance.
Net debt on June 32022 was approximately $1 $37 billion.
Reflecting an increase of $109 million sequentially.
Our leverage ratio was four eight times at the end of the third quarter up from four four times in the second quarter the.
The increase in net debt and leverage ratio was driven primarily by the repurchase of the second tranche of shares held by MSP.
We expect positive free cash flow in the fourth quarter and anticipate a modest decline in our leverage ratio by fiscal year end.
Moving to slide 19 year to date free cash flow was an outflow of $17 million compared to positive $96 million in the prior year.
A variance in our free cash flow was driven by the following.
First $45 million of increase in net capital expenditures due to the timing of received orders that were impacted by pandemic related supply chain challenges.
$34 million of net outflow associated with the repayment of the payroll tax deferral under the cares Act.
And $13 million of cash tax outflow due to the timing associated with the cares Act tax planning.
Looking ahead, we expect fourth quarter free cash flow to significantly improve relative to the fourth quarter of the prior year, resulting in second half 2022 results.
That are in line or modestly ahead of 2021 second half performance.
It's important to reiterate that we expect capital expenditures for 2022 to represent approximately three 5% of revenue in line with our prior projections and we anticipate a similar run rate for fiscal 2023.
Fiscal year 2022 free cash flow is not typical of our business, which has consistently delivered solid free cash flow as evidenced by the generation of $500 million of free cash flow over the last five years.
Looking beyond 2022, and the impact of timing related drivers such as the tax impact associated with the cares Act, we anticipate robust free cash flow generation over the long term.
An update on liquidity is on slide 20.
At the end of the third quarter of fiscal 2022, we had approximately $324 million of availability under our revolver and receivable financing agreement and $26 million of cash on hand.
Liquidity as of June 32022 was approximately $350 million compared to $403 million in the prior year.
Our liquidity continues to provide us with ample flexibility and optionality.
Let's turn now to slide 21 to review our outlook for the fourth quarter.
We remain optimistic about the momentum we are seeing in our business and expect to deliver another strong quarter of organic growth in both land maintenance and development segments.
Our maintenance land contract based business is growing and demand for ancillary services is improving.
We believe this will result in durable organic maintenance land growth of approximately 3% for the fourth quarter in line with our long term expectations.
Notably this growth is up a high growth rate in the prior year of nine 2%, which demonstrates the strength of our momentum in our business.
And our development segment, we are encouraged by our pipeline and bookings and backlog trends and we expect organic growth to be about 8% for the fourth quarter.
In both segments the market pressure, we have seen from inflation, which effects the cost for materials needed for projects and labor will continue.
We are confident that our efforts, including pricing will help to offset these headwinds.
Fuel will remain a headwind for the fourth quarter and we will continue to manage the impact on our profitability with fuel surcharges through a balanced approach.
Given the uncertainty around fuel prices our guidance assumes a fuel headwind that is similar to the headwinds we experienced in the third quarter.
As a result for our fourth quarter fiscal 2022, we now anticipate total revenues between 711 $731 million in line with our prior implied guidance.
And our total adjusted EBITDA, we now expect between 88% and $94 million compared to a.
Our prior implied guidance of <unk> $94 million to $100 million.
This decrease is driven by the $6 million to $7 million of expected net impact of fuel costs.
Note that at the midpoint this implies 2% adjusted EBITDA growth year over year for the fourth quarter with that I'll turn the call back over to Andrew.
Thank you John .
We have a strong resilient and agile business, we are leaders in our industry with an unparalleled customer value proposition supported by our investments behind digital services and sustainability we are.
Executing against our growth initiatives and driving strong momentum in our business our.
Our investment in sales technology, and marketing continue to fuel our momentum pricing.
Pricing efforts will help us enhance our profitability and our excellent M&A engine will support further top line acceleration and expand our footprint.
Our performance in the third quarter was excellent and we exceeded our internal expectations, excluding with fuel headwind.
We drove strong organic growth offset our operational costs labor and materials through price increases and our teams executed at the highest level. We expect this momentum to continue for the fourth quarter and as we look out to fiscal year 2023, we continue to see a clear path to approaching $3 billion.
In total revenues.
Accordingly, our business generated 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.
Our model creates a cycle of high free cash flow and reinvestment capacity.
The recurring revenue model drives profitable topline growth and that in turn deliver strong free cash flow, which is predictable and consistent overtime as evidenced by the generation of approximately $500 million.
Our free cash flow over the last five years.
All of these efforts along with the benefit of secular trends give.
It gives us strong confidence in the long term prospects of our business.
Our future remains bright and we are confident that we have the right strategy to accelerate our performance.
In closing I'd.
I'd like to thank our customers for their support and partnership and working with US on managing the current inflationary environment. We are excited to see our customers' landscapes, Boston as we move through our green season.
Also I am thankful for our teams for their continued attention to designing creating maintaining and enhancing the best landscape Center. Thank you for your interest for your attention. This morning, we'll now open the call for your questions.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to turn these that question. Please press star followed by <unk>. As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.
The first question today comes from the line of.
Tim Mulrooney from William Blair. Please go ahead. Your line is now open.
Yeah.
Andrew John Brett Good morning.
Again funding them.
So I wanted to ask about your maintenance land business.
We're forecasting 3% to 4% organic growth in the back half of the year and it looks like the third quarter came in slightly below that at 2%. So I was wondering.
If that was because you didn't get the net new contract growth that you were looking for this selling season or if maybe there was a slight pullback in enhancement spend could you just provide a little bit more color on the spending patterns that you're seeing within your customer base with a particular focus on how that enhancement piece of the business.
Thank you.
Absolutely Tim.
Yes. It is a dynamic similar to we saw a couple of years ago and that we had a late spring with snow coming in at the beginning of April and so as we missed that window for ancillary installation because we had snow so still coming down that really was the offset.
So if we hadn't had the snow we would've replaced with ancillary so we saw similar demand as we expected.
It's just we couldnt get to it because there was still on the ground.
And so it really was that straightforward.
Yes that makes sense and we're hearing that from like the past guidance.
Are there similar industries were affected by a cold spring.
That all makes sense exactly Andrew exactly.
We continue to be very confident that as we go forward that.
Continued growth right around 3% is what we should expect going forward.
Okay, Alright, that's helpful too if I could sneak one more in just on pricing last time, we spoke I think you expected about 50 to 100 basis points of organic growth and maintenance land from pricing this year and I know usually you get pricing through.
Changes in scope, but this year, you're actually expecting to contribute.
To organic growth now that we're through that key selling season and with the fuel surcharge I wanted to check in on that number and see.
How we should still be thinking about pricing. This year, if that 50 to 100 basis points contributing to organic growth is the right number or if it's a little higher or lower than that thank you.
It's right in that in that range, Tim we're seeing we saw this quarter about 50 basis points impacting us from price.
And we believe that.
As you said the pricing and season has by and large over and we expect that to continue into the fourth quarter.
Very helpful. Thanks, guys.
Welcome.
Thank you.
The next question today comes from the line of George Tong from Goldman Sachs. Please go ahead. Your line is now open.
Hi, Thanks, Good morning wanted to dive a little bit into fuel prices.
Which which remain a headwind to the extent that fuel prices remain elevated could you talk a little bit more about the strategies you have to manage through the impact you touched on efficiencies and pricing.
Directly related to hedging or pass throughs that you can implement that that can help mitigate any surprises or unforeseen changes in oil prices.
Yes, George and obviously fuel was the biggest.
Biggest impact to our business here in the third quarter and as we look at the fourth quarter, we see fuel continuing to be at a relatively higher level compared to last year. While we continue to do is work with our customers on fuel surcharges, we feel like we have pretty much completed the discussions with those customers to be able to continue to receive.
Surcharges as long as fuel remains above that kind of.
$3 50 kind of level and so we're able to protect their fuel hedges, we did not hedge in 2020 $22 for 2023, because we saw escalating fuel prices continuing to raise and we are concerned a little more about the volatility that we would see in fuel.
And the last thing I think anyone who wants to do is to see the hedge at a peak and when fuel prices potentially came down. So that's why we didn't hedge before we'll think about it again as we look at every year about hedges as a potential mechanism to be able to offset the fuel but at this.
St in time, given where fuel is at we have not placed any additional hedges as we look forward into Q1 or Q2 of 2023.
Okay got it that's helpful.
You talked a bit about market impact that you're seeing from inflation as it relates to material and labor in your development business are you seeing any.
Any easing of trends or peaking of trends there or is the momentum still sort of up into the right as it relates to input costs.
Yeah.
I will have to say, we're we've said we're beyond the peak, where we're kind of on the other side of the curve.
And so we saw it especially as we progressed through the third quarter as we saw the material portion material impacts or the negative material impacts lessen in the development segment. So we're believing as we go into the fourth quarter that we're going to start to see that turn as we've talked about for for several quarters now is that we needed to get <unk>.
The later half of the summer into the fall and we are actually seeing that we're seeing improvements in our material rates and thats a combination of getting out of the contracts that were priced with historical.
Historically longer lead times and getting into the newer contracts, which have much shorter lead times. So on the materials side, we see a turn on that and on the.
Labour side of the business the teams in both the development and maintenance segments have done an outstanding job for.
Managing labor if you can look at our our our notes that we talked about as well as the overall results.
Being able to manage our labor environment and deliver.
Basically the only impact being fuel will deliver results that were pretty much in line with what we expected with the exception of a commodity based fuel drive has really been able to give.
It gives us confidence, but what we see looking forward and this is in combination with leveraging the technology that we've deployed with our electronic time capture or labor management tools to be able to have that tight management across both segments, the maintenance and development segments in our business.
That's great thanks very much.
Thank you.
The next question today comes from the line of Justin Haley from Baird. Please go ahead. Your line is now open.
Hello, Justin.
Hello, Justin.
Yes can you hear me now.
Yes, yes.
<unk>.
Great. Thank you.
I wanted to ask.
Yes, Hello, I asked it a little bit about that.
Kind of the balance sheet and cash flow here.
The reason why I ask.
You quantified <unk> the M&A contribution is going to be about the same as when it stand so $35 million ish a quarter that you've had.
As we look into 2023 now.
With leverage being four eight times I'm, just curious the extent to which you are able to continue to.
A similar level of M&A next year and part of the reason why I ask is because some of the cash flow headwinds you had this year.
I think we will continue.
Next year, you've got another cares act repayments I think youre, making in December and then also your interest expense the $20 million you're guiding to in <unk> is like $80 million annualized. So I'm just thinking I guess the question is how do you think about free cash flow for next year and the ability to actually continue to deploy the balance sheet as you have.
Over the last two yes, it's a great team.
A lot in the adjusted so let me unpack that question for you.
I think when we when we look at the cash flow.
This year it was definitely impacted.
When you look at it year to date by really three things it was impacted by the increase in.
And capital, but we were very clear that we expect that to maintain at three 5% and you can you can do that math. We also were impacted by I call. It the unwinding of the cares Act.
Where we had benefits and then payments and that was about $34 million to $35 million.
And then the increasing in cash taxes, which is more of a normalized rate. This year. When we were benefited from tax planning in the prior year when we look forward.
We are very confident that this is still going to revert back to our average if you go look at our average over the last five years, when we mentioned about half of $1 billion.
<unk> about $100 million a year and we think that's still very.
Very attainable, let me, let me kind of walk you through some of the key points. When we think about where we're going to be next year, we've guided where we've said that we would be at approximately three three approaching $3 billion right and what's going to happen next year, we are going to grow so theres going to be a headwind around working capital will grow.
<unk> quite a bit we are going to have an increase.
And interest expense driven by mainly around rates and the increase in sofa, but a couple of positives are going to occur we are growing the business. So we would expect to incremental EBITDA and then when you look at the payment to answer your piece on the cares Act, yes, we have that outflow in the first half of fiscal 2023, but we are.
Also going to benefit from some tax planning that we've put in place that will more than offset that cares act payment.
Buoyed by a magnitude of one five to two times that cares Act component. So we're very confident we'll still be in that $90 million to $100 million range of cash generation, which reverse right back to our average over the last five years.
And obviously that allows us to continue the M&A strategy.
Yes.
Okay great.
So $90 million to $100 million.
Let's say for next year.
I guess the next question I don't have a lot on the P&L just because you did a good job talking about the fuel.
Impact and then labor it sounds like it's mostly offset by what you're doing.
Some of the items that.
You're also spending on like all the Houston this year.
I guess I was just curious how much more is there to go on kind of that spend does that taper off.
After the fourth quarter and then some of the other items excluded like the Covid expenses.
How much longer.
Is that going to be something that's continuing to impact our results under GAAP.
Yes.
So let me talk about the IP and maybe John can pick up on the Covid expenses, but.
Pipeline that we have for <unk>.
Initiatives around digital implementation tools.
Actually has a pretty long long horizon.
When I look over.
Several years and these tools are things, which will engage customer customer.
Customer engagement things like HOA and BV connect to point out it's going to be coming out that's only to point out there are actually contracts out there with three point O and look like and as we continue to enhance that combined with tools that help us in our ancillary management helped us on our tree care management things to think about it.
Employee engagement there are multiple tools that we have that as we continue to transform this industry into a really a more digital and future focusing.
Focused organization that will not only drive better customer retention.
And employee engagement and employee retention, but also look at growth growth initiatives and our digital marketing spend and our approach to digital so that it spend I don't see coming down at ICD opportunity is fairly significant as we continue to deploy that.
Fortunately that mostly happens in the capital capitalized waste, we don't foresee that to be an expense a headwind at all John I'll have used.
Listen on Covid, we expect that to drop precipitously going forward, we have started to see that.
This year, we're down about $2 million sequentially from Q2 to Q3.
We expect that continued to drop quite a bit.
It will be I would say de minimis in fiscal 2023.
Great. Thank you.
Appreciate it.
Sure no problem.
Thank you.
The next question today comes from the line of Bob <unk> from CJS Securities. Please go ahead. Your line is now open.
Hi, Good morning, it's Pete Lucas for Bob.
Just looking at it due to cost inflation scope changes et cetera kind of hard to gauge the underlying growth of the business in terms of net number of contracts revenue per contract. Just wondering if you could comment a little bit more on how these have trended and give us a little sense.
<unk>.
Kind of clarity.
More info you can give us on that and also is there a better way to look at growth now.
Yes, sure and I can give you certainly.
We looked at price and the impact of price being about 50 bps in the quarter outside of that it's really a combination of contracts and ancillary and we saw some rebound in ancillary but ancillary is pretty much running at historical levels. So we continue to see net new contract improvement, which basically that's underlying growth and we saw that.
In the first quarter, we saw in the second quarter and we're seeing in the third quarter I want to see in the fourth quarter and we see that because of our contract wins that we've got in the third quarter, we see that kind of allowed and basically impact. The next several quarters when it comes to contract growth.
So we do see a significant amount of growth continuing to come into the business and net new contracts and when you look at the size of our contracts also those are growing so.
We see.
Our positive about the trends of the investments in our sales force.
Continue to pay off and will continue to deliver a sustainable picture. We've done five quarters of organic growth next quarter will be our sixth quarter and we believe those quarters will continue this was a steady machine that we expect to continue to deliver for the foreseeable future.
Great and just following up on that in terms of the biggest focus for new wins, if you could kind of talk about that and what end markets. Do you think you'll have the biggest advantages there.
Yes.
It's a great question because this marketplace has so many diverse elements.
Of.
There are so many different types of customers and we are seeing it's interesting we're not seeing necessarily any specific customer except I would say at the larger customers. One that have a more sophisticated approach and so that can be in the commercial area. It can be in homeowners associations. It can be in parks and recreation, but the larger a size of a customer comes the more.
Presentation that comes with ancillary services that we can provide across the whole suite of services we deliver.
Combined with the attention that our account managers, who are doing great job of really engaging with our customers and really demand that level of horticultural expertise combined with direct customer communications. So there is something about size of customer and that's why we've increased the size of our customers by over 40% in last several years have looked.
At what contracts really demand that high customer touch and really delivers the kind of value that we see.
So I would say rather than necessarily any particular vertical it's more just on.
Looking at the increasing size of the customer.
Very helpful. Thanks.
Thank you.
There are no additional questions at this time, so I'd like to pass the conference over to Andrew Masterman for closing remarks.
Thank you operator, once again I'd like to thank everyone for participating on the call today and for your interest in breakthrough we look forward to speaking with you at upcoming events and when we report our fourth quarter results in November until then stay self stay safe and be well.
Yes.
That concludes today's conference call. Thank you all for your participation you may now disconnect your lines.