BrightView Holdings Inc. Q2 2023 Earnings Call
Pension funding things like that.
Yeah.
Obviously key to the business here in April and May, especially in our seasonal markets are key so in key selling quarters.
Selling months I can tell you that as we exited March March with one of our if not our best selling month, we've ever had as a company.
And on the retention side, we're seeing a stability level and will last year certainly some of the pricing initiatives that we initiated to offset inflation.
Somewhat new to the market or.
Rekindled in the market I think our customers are becoming accustomed to understanding that we need price increases to offset inflation. So because of that retention is stabilizing no question about it and I am confident that our sales team continues and the investments we've made to have year over year improvements.
Each month, and our sales and our sales results.
Got it that's helpful strongest selling month ever and that's quite a quite a statement thats great to hear.
My other questions about.
Capex.
You cut capex.
That's great for free cash flow, but.
I am curious about what that means for the future where those cuts were primarily if it was new equipment, new trucks or something else because I know that you pride yourself on keeping a young fleet of trucks and high quality of your equipment base keeps those maintenance costs down. So my question I guess is how much capex cut.
Today impact opex costs, a year or two down the line. Thank you.
Yes, Tim This is Brett let me address your question.
And kind of twofold one is.
I think the management of Capex like we've done in years past in the pandemic and other years, where.
Where the business was in it but it's in a different state given this year that snowfall, we took a deliberate approach to reducing.
We're reducing capex showing kind of the flexibility of our balance sheet.
As you think about the future and your question on Opex, We don't anticipate this adding any additional operating expenses in the future Theres been years, where we've had capex as well as two 5%.
Guided originally to three 5% coming in our Q4 earnings call and then given the lack of snowfall. This year. We were taken just a heightened approach to cash and reducing that and enhancing our target now to less than 3% I think Tim what this really shows is the resiliency of the company and that in years, where we have a lighter snowfall.
Flex our balance sheet to be able to withstand that this does not however suggests that we've reduced our overall targets.
Which kind of in that three to three 5% in a normal year.
Got it very helpful. Thank you.
Then just one last time to your point on the age of the fleet last year, we invested $100 million of Capex in the business.
It was the highest investments to public company and we in turn reduced our fleet by over a year or age of our fleet by over a year makes.
At newer so we did a lot of investment last year, because that's the flexibility even.
Reduce capex a bit more this year.
Thank you. Your next question comes from Bob Lovick, Bob. Please go ahead.
Good morning, Thanks for taking my questions.
Hey, Bob.
Hi, So I wanted to start with could you talk a little bit about labor, so labor availability cost of labor and then the trends and labor inflation, and then I guess kind of tie it in with your your pricing negotiations your ability to pass through price, but just more so like availability and the trends in inflation to start please yes generally speaking.
This is our peak peak hiring season, we hired about 5000 employees between the end of March and the end of may bringing them into the business obviously to deal with the heavy heavy spring season, what we've seen this year is a slightly better recruiting environment I would say, but I would say ever so slightly it's not dramatically different.
But certainly we're having a little more lock and finding folks locally. In addition, due to the it's the expanse expansion or the acceleration of the <unk> program by the government.
Rather than just 33000 pieces and released at the beginning of the year 33000 are released and then an additional 33000 were very quickly released after that.
For a total of 66000 visas available for the country. We were successful in securing actually slightly more reasons than we had last year and so we feel very comfortable that we have a great position as we go into the season not only from local sourced people, but also an enhanced position of age to be.
Relative to last year.
I guess on your pricing question follow up on pricing.
We continue to see a a receptivity at customers on pricing.
As long as we see the inflation levels at this level I think there is an understanding.
Most of these property managers and HOA as they're managing other things, which have direct labor content in them and so as they're managing those they see the inflationary environments and our discussion around being able to recover costs that are also inflating.
<unk> to be a positive environment with our customers.
Okay Super and then you have a nice fine I think 15 or so on driving core margin improvement you lay out a couple of factors can you talk about back half of this year could you maybe expand upon the core margins improvement opportunity and talk about the <unk>.
Bridge back to the so for 10 10, five today back to the 12% plus margins that you've seen in the past what are the kind of key components, maybe to get us there.
Broad time horizon.
Yes, Bob Hey, it's Brad I'll touch on a couple of couple questions. In there slide 15, we have a slide on driving core margin improvement, Yes, I think if you look at the underlying business for the last two quarters and land when you when you normalize for snow and strip that out we saw land margin improvement.
Put a slide in the earnings deck, showing that the land revenue in totality grew $14 million year over year, roughly half organic half M&A.
That drove roughly $8 million of EBITDA.
Earnings year over year in land, so extremely excited that second quarter and the underlying land business once normalized for snow.
Margin improvement and then development posted at 40 basis points in Q2.
As well Mark the third quarter of margin improvement sequentially in development.
And as we look ahead to the second half of the year, we're calling margins and maintenance of 20 to 30 basis points for the second half of the year to see continued margin improvement and maintenance.
In development, we will be closer to 50 to 60 basis points in the second half of the year.
So we're looking at five sequential quarters now of development by the end of the year improves.
Improving margin and maintenance would be for.
And as you think about kind of that path back to pre pandemic margins.
This year's roughly 10, 5% at the midpoint of the guidance and then as you think about building back to next year.
It's going to be that continued momentum in margin improvement in the back half of the year.
Which we're seeing in the company.
Maintenance 2030 basis points in development that should be roughly around 50 basis points of margin expansion heading into next year, all things being equal.
And then project accelerate as you think about that layering in.
Mainly have an impact a little bit in Q4.
'twenty, three but mainly in fiscal 'twenty four.
So that would be incremental somewhere between 15 and $20 million of underlying EBITA improvement.
Can you kind of put those things together, that's marching you're back to a path of summer in the low 11% range and then as snow normalizes or gets anywhere close to prior year averages, which by the way is below normal. It takes you back up into mid elevens, the high 11% range.
Okay. That's super I appreciate that thank you.
Sure.
Thank you. Your next question comes from George Tong George Please go ahead.
Hi, Thanks, Good morning, Andrew I also wanted to say congrats on the tenure and best wishes ahead.
Thanks George.
So you are guiding to development growth of 10% plus in the second half how much visibility you have into that growth outlook were there deals pushed from the first half and in the second half that would help you clear that growth. What is your backlog tell you any details here would be helpful.
Sure Let me, let me address it both in maintenance and in development, starting with development. Our backlog is fully booked into Q3 and Q4, so that 10% plus growth that we have is <unk>.
A cure it really comes down to our ability to get it in and not having too many delays or by our by the subcontractors where before us. So really that's really the only thing thats when they really impact that is making sure that the rest of the jobs of the projects continue as they as they normally do so but we have confidence as most.
By and large across the enterprise.
Book growth is there and we will execute to that.
On the maintenance side of the business our contract side is booked it is in place, which gives us confidence around the growth.
The only variable that really comes into play is the ancillary side of the business and the degree that we pull through the ancillary business.
As we look into.
Right now into Q3, we have indications.
Port.
That growth rate of 2% to 3%.
The overall maintenance business, but of course, we need to see us move through May into June before we can because.
Because we post those actual results, but again contract is booked where maintenance development is booked with backlog. The only revenue kind of variability. We have is the ancillary side of the maintenance business.
Got it that's helpful color. Thank you and then.
Youre slowing M&A.
Over the near term to prioritize cash and strengthening the balance sheet has your view on M&A broadly changed in and when would you expect to re engage in.
M&A at a level, that's consistent with historical activity.
Yes, it really is a balance sheet issue right here that we're just prioritize we paid $56 million of cash down.
Use that cash to pay down debt this quarter.
We will expect as we continue to generate cash to use that priority prior primarily to pay down debt.
If we're at today.
But as we look at the M&A pipeline is as robust as ever.
$700 million.
As confident as we've ever been and being able to execute on those transactions, we're just being a little more picky as we look right now out there we expect to do somewhere between one to three transactions before the end of the fiscal year and we're lined up as we look into next year, we've always given a range of 2% to 3% of M&A, we're just going to be doing it too low.
Sure end of that range as we look right now.
If things and cash flow.
That improve as we think they will we will be probably accelerating it back towards that 3% level.
Got it very helpful. Thank you.
Thank you. Your next question comes from Andrew Steinman, Andrew. Please go ahead.
Hi, This is Alex has on for Andrew <unk>.
Andrew wishing you all the best of luck in your next venture and thanks for all that you helped us.
Maybe sticking with the contract book as it is right now and the end even to a degree the ancillary book within.
Maintenance land could you highlight some of how that business has changed in the last 234 years.
Then I'll have a follow up.
Yes, the contract side of the contracts have a base of our maintenance business I'd have to say in general.
It has remained very stable, it's growing at a very very modest rate.
One to one 5% as the contract rate.
And as we look at the business I think that there hasnt been any dramatic change in the behavior of the other property owners in fact.
I'd have to say they continue to be very interested.
Improving their property and how their property.
Especially as we exit the pandemic and I think thats evidenced by the fact that our ancillary rates have actually continued to improve.
Slightly after the slightly over the last 234 years, not dramatic increases or improvements, but just slight improvements. So I think their general approach to property management has been as we've been.
Fairly consistent.
Got it and then maybe maybe taking a step back and thinking longer term on Brian for you and I know that.
You will be on your next adventure by then but.
Is there anything that that really structurally caps your ability to grow is there. Some route in your view to bright view hitting mid single digit organic and maintenance land.
Over over the cycle.
Yes, no I mean as you look at the overall algorithm given the fact that we only have about a 3% market share.
Out there in the marketplace there is abundant.
Room to grow for the foreseeable future.
And that's both inorganic as well as organic growth that we see out there. There is no reason why sustained kind of ability to grow in that 2% to 3% range. I think is a very doable do the only thing that would limit our ability to grow is our ability to attract and retain great people to run the business and we see.
Being able to digest and run 2% to 3%, we can find folks and develop them internally to be able to handle that level of growth and are looking and occasionally be able to exceed that kind of growth to be able to be able to staff. The jobs. The branches as we grow in that manner. So I don't think there's really anything.
That is.
Indicative of the market that would impede our ability to grow in fact, it's quite the corollary opposite of that I'm very optimistic about being able to grow at above above market rates on a consistent basis going forward.
Got it thank you very much.
Thank you, ladies and gentlemen, as a reminder, should you have a question. Please press star one on your Touchtone phone.
Next question comes from Andy Wittmann, Andy. Please go ahead.
Yes, great and Andrew Best of luck, it's been.
Nice working with you.
Thanks, So much I wanted you bet.
I wanted to ask and maybe put a little bit finer point on the M&A with a slight tone change here to reducing debt I just wanted to understand whats in the guidance range that you've given us I think previously as I was looking at my notes you were previously saying that there was about $35 million of revenue.
Two this fiscal year 'twenty three from deals that were closed last year and that you were expecting probably another $20 million from deals that we're going to be closed this year to contribute this year are those numbers still correct with the new approach towards capital allocation.
Is there a different assumption that's implicit in the guidance this year.
Hey, Andy it's Brett.
The guidance this year through two quarters, we've posted M&A revenues of about $50 million. So when we came out in Q4, we said about 2%. This year, just given with a heightened focus on debt and cash.
That we do about 2% M&A contributions to revenue $50 million of that are call. It more.
More than one 5% is in the bank.
And our guidance does not assume we have to do any new transactions at the midpoint.
And if we were to do any transactions it would tick revenue up towards the higher end, but at this point I think Andrew mentioned, just a minute ago, we're looking at potentially one to three additional M&A transactions this year.
But that would push us up more towards the higher end of guidance range for revenue and that's only if.
They're at the right multiples and we're being very selective in that process are also looking forward. The M&A deals that we are potentially going to conclude our relatively smaller in nature. So you cannot expect them to have any big significant impact on the overall fiscal year in 2023, but should have been.
Again to build towards that 2% number for 2024.
Okay. That's helpful. I guess the corollary to that question is what's the implication or what are you thinking about for interest expense now.
In this.
For this year I guess, I guess, you've put some hedges in place to capture upside exposure.
Rising rate exposure.
And so I just wanted to make sure we asked that question to us.
Next year, you're free cash flow outlook for the year.
As we talked about.
Last earnings call were very.
Please that we put our hedges in place in January .
And we're pleased that we were opportunistic last April to extend our term loan to 2029. So we have no significant maturities on the horizon with catheter interest expense.
Essentially around $100 million is the cap.
There is some timing related in Q2 to the hedges, but essentially we're sticking to that $100 million here for fiscal 'twenty three.
And then as we go into 'twenty four based on the future curve. So far we'd expect that to come down in 'twenty four.
That's helpful as well thank you and then.
Yes, I didn't hear.
Our cash cost number attached to the project accelerate $20 million EBITDA that you hope to realize.
I was wondering what that cash number could be and when you expect it to be.
To be used.
Yes, Andy Good question I would say the majority of the cash number associated with trying to accelerate would be in Q3 Q4.
We don't expect that number to the material.
As you look at some of the some of the items in project accelerate is the only one that would really consume any cash would be the FTE or employee related items.
But other than that it could be $1 million to $2 million call. It net cash impact from project accelerate which you'd see sometime towards the end of Q3 beginning of Q4.
Okay. That's also very helpful and then I guess, Andrew or just.
One bigger picture for you I, just want to understand kind of what youre thinking about the macro a little bit different way because what I heard in your prepared remarks is that several times here the development pipeline is good.
You are fully booked.
Backlog there is good so that's good I always think about that is the most cyclical part of your business and I would think that if there is.
Any impacts from the macro would kind of show up there first but you're also and you're talking about project accelerate you had the qualification and said Hey, we think it's $20 million, but like the macro could change so you hedged a little bit.
I just could you just expand upon the comments to so we can think about it the way at least youre thinking about it how this all plays out.
Absolutely, yes first of all with development, we are booking now into 24 at a faster rate than we booked in 2023. So we are actually better positioned now vis vis 24, which gives us even more confidence and that's on a slight growth. That's again kind of 2% to 3% organic growth, we're booking at a faster pace than the 24 then.
Did for 23, so that's some of the things that give us confidence about the overall bookings rate.
In the development segment that does have our our best visibility into the future out of the entire business.
When it comes to project accelerate my comments on kind of other macroeconomic headwinds what I mean by that is potential fuel spikes potential.
A continued.
Snowfall impact or whether it's some other <unk>.
Significant variable cost initiatives event, which in the past has put weight on the P&L. This project accelerate is intended to be able to grow the margins of the business, but and.
OSA or offset any unanticipated spike to maintain the level of profitability, but if there is no. Other AG macroeconomic factor you should expect to see that manifest itself on the P&L.
Okay. That's more clear I didn't know if that that hedge on the $20 million was was a demand side equation, where recession hits ancillary gets cut back in your guide effect of that and so it sounds like you are really focused on cost side shocks not demand side shocks.
Correct, that's absolutely correct.
Okay got it thank.
Thank you.
Thank you there are no further questions at this time I will now turn it back to Andrew Masterman CEO . Please go ahead.
Thank you operator, and once again I want to thank everyone for participating in the call today and for your interest in breakthrough.
And be safe.
And look forward to talking with you again as we move forward.
Thank you ladies and gentlemen. This concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.