Q3 2023 BrightView Holdings Inc Earnings Call
Greetings and welcome to the bright skew Q3 fiscal 2023 earnings conference call.
At this time all participants are in India.
Right.
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If you would like to ask a question. Please press star one or your telephone keypad.
As a reminder, this conference call is being recorded.
I would now like to turn the call April Crystal Sky Vice President of Finance. Please go ahead.
Thank you for joining bright views third quarter fiscal 2023 earnings conference call.
Jim Abrahams Sun breakthrough as interim President and Chief Executive Officer, and Bret Urban Chief Financial Officer are on the call. Please.
Please remember that some of the comments made today, including responses to questions and information reflected on the presentation slides are forward looking and actual results may differ materially from those projected.
Please refer to the company's SEC filings for more detail on the risks and uncertainties that could impact the company's future operating results and financial conditions.
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.
I will now turn the call over to Jim.
Thank you, Chris and good morning, everyone.
I'll start on slide four of the earnings presentation.
I plan to focus my prepared remarks, our solid results in the quarter provide an overview of our expanded strategic initiatives.
To discuss our progress on the search for our next CEO and provide some perspective on the impact of our expanded strategy coupled with the renewed focus and energy of our leadership team given the significant value creation opportunity ahead of us.
As Brian few board member for the past eight years and more recently in my role as interim President and CEO .
We are capitalizing on opportunities to drive performance as we grow our revenue and our EBITDA, while expanding margins, increasing free cash flow strengthening our balance sheet and thereby enhancing shareholder value.
We are proud to report that our results for the third quarter reflect substantive progress against each of those financial objectives.
We are particularly encouraged about our disciplined approach to pursuing high quality business opportunities, while increasing our cost efficiencies that has translated into the strong EBITDA growth margin expansion and increased cash flow.
Following a strategic assessment of our business, we launched the first phase of project accelerate during the second quarter.
We have now expanded and intensified the scope of project accelerate with new strategic initiatives centered around growing our revenues.
Operating even more efficiently.
Thereby expanding our profit margins and generating even more cash to delever our balance sheet.
We recently broadened the reach and expanded the depth of our project accelerate cost containment initiatives across all facets of the company.
As we've added the following items could project accelerate including.
Local local branch performance initiatives centered around profitable growth.
Substantially improving customer and contract revenue retention.
Expanded sales initiatives to increase new contract win rates across our segments.
And importantly, our.
Companywide procurement project aimed to drive significant savings across our entire portfolio.
To be clear, we are not waiting to launch these vitally important initiatives and we have commenced the initial rollout during the third quarter.
Looking forward to the remainder of the fiscal year 2023, and our initial outlook on fiscal year 2024, we expect that these initiatives will continue to drive profitable growth.
Enhanced margins and generate increasing cash flow to delever our balance sheet.
We expect to provide additional details on the magnitude of each of these new initiatives and the resulting impact on our performance on upcoming earnings calls.
An important catalyst for driving continued effectiveness of these initiatives will be the selection of our next CEO .
The search is progressing well and according to our timeline.
We are continuing to work closely with an executive search firm and are presently engaged a short list of highly qualified candidates.
We're excited by the prospects of bringing onboard an exceptional leader and operator that will lead the company through its next phase of growth and value creation.
This new leader will be well positioned to drive <unk> forward and we'll hit the ground running with a clear strategy to drive growth and enhanced performance.
With renewed companywide focus and energy.
Coupled with outstanding New leadership, and the strength of our excellent executive team I am confident that bright people will have a strong foundation and an effective strategy to deliver results and drive value for our shareholders now and into the future.
With that ill.
I'll now turn it over to Brett who will discuss our financial performance and outlook in more detail breath.
Thank you Jim and good morning to everyone I'll start on slide six.
I am pleased to report on another solid quarter.
As Jim previewed the business is growing.
The ability of expanding and cash generation has improved significantly.
We grew total revenues by two 5%.
Increased EBITDA by $8 million delivered.
Delivered meaningful margin expansion in both segments and.
<unk> generated significantly more cash despite increased interest.
Our ability to achieve these results reflects bright view as attractive business model and gives us confidence as we pursue new opportunities and drive further financial and operational improvement.
Moving to slide seven.
Total revenue during the quarter increased two 5% year over year to $766 million.
Revenue during the quarter benefited from demand in our core businesses favorable pricing and M&A contributions.
And our land business total revenue increased to $555 million.
Reflecting roughly flat land organic growth and positive contributions from acquisitions.
Organic growth was impacted by our increased focus on pursuing higher quality contract opportunities.
This focus and the continued execution of our disciplined pricing strategy was one of the primary reasons for the significant margin improvement.
More on that later in the call.
We grew our development business, a robust nine 1% organically due to our ability to convert our strong backlog.
We remain very optimistic about our development business and the pipeline of projects for the remainder of fiscal 'twenty three and we are seeing continued momentum leading into fiscal 'twenty four.
Turning now to profitability and the details on slide eight.
Total adjusted EBITDA for the third quarter was $102 million, an increase of $8 million driven by both land and development growth and disciplined cost management.
Our increased profitability as a result of our focus on higher quality business.
Price cost dynamics operational performance and good progress on our cost initiatives related to project accelerate.
With the expansion of project accelerate we now expect the benefit to exceed the $20 million annualized target, we discussed last quarter.
We plan to provide more specific details on the timing of these initiatives and the financial contribution on our next earnings call.
Before I leave slide eight I want to reiterate how excited we are with the EBITDA results in the quarter, we delivered on our commitment to grow our profits and expand our margins and intend to continue that trend in future quarters.
Turning to slide nine I'll provide more details on margin expansion.
In the maintenance segment total adjusted EBITDA of $94 million increased by approximately $5 million from the prior year.
This resulted in significant margin expansion of 70 basis points year over year and marks the third consecutive quarter of margin expansion in our core land business.
We continue to be focused on high quality contracts and strategic with our pricing efforts.
While these efforts have led to a modest short term softening of land organic growth. We believe this strategy in the long run will ultimately result in continued margin accretion as we saw in our Q3 results.
And the development segment adjusted EBITDA for the third quarter was $24 1 million, an increase of approximately 15% compared to the prior year.
Development margin expanded 60 basis points year over year and was at the high end of our guidance range of 50 to 60 basis points.
This marks our fourth consecutive quarter of development margin expansion and we expect this dynamic to continue.
Let's now turn to slide 10 to review, our capital expenditures debt and free cash flow for the quarter.
Net capex for the third quarter was $12 million compared to $21 million in the prior year, reflecting nearly up 50% year over year decrease.
As evidenced by these results we are continuing our approach of carefully managing our capital expenditures.
We have made significant progress so far this year and are further reducing our target for capital expenditures to be meaningfully less than 3% of total revenue for fiscal year 'twenty three.
We expect this to benefit our free cash flow by an incremental $5 million to $10 million versus prior expectations.
Sequentially, we reduced our net debt and improved our leverage ratio to four eight times through disciplined cash management and increased profitability.
We are committed to reducing leverage over time through EBITDA expansion and debt reduction.
Free cash flow improved again on a year over year basis, increasing to $22 million for the quarter.
Free cash flow benefited from improved profitability and reduced capital expenditures more than offsetting the doubling of cash interest.
We feel great about our free cash flow improvement and expect that to continue for the remainder of fiscal 'twenty three.
Let's now turn to slide 11 to review our outlook for the fourth quarter and full year fiscal 'twenty three.
While we are pleased with our results year to date and have seen continued progress in our efforts to improve margins and cash flow, our topline results and outlook for the fourth quarter reflect a focus on driving more profitable growth in our key parts of our business.
Given these factors we are modestly revising our full year revenue guidance.
As you can see on the slide for fiscal year 'twenty. Three we now expect total revenues of 280 to 282 billion.
And total adjusted EBITDA of $295 million to $300 million.
For the fourth quarter. This equates to total revenues of $730 million to $750 million and total adjusted EBITDA of $98 million to $102 million.
Our guidance for the fourth quarter assumes the following <unk>.
<unk> organic growth that is relatively flat as we focus on higher quality contracts and continue the execution of our pricing strategy.
Maintenance margin expansion of 40 to 50 basis points, which is significantly above our prior guidance.
Development organic growth above 10%.
And development margin expansion of 50 to 60 basis points.
The expansion of our project accelerate initiative is important to consider as we think about our longer term performance.
Now, let's turn to slide 12 to wrap up.
We are very pleased with our year to date results as we continued to see momentum in our business and execute against key initiatives.
With a renewed level of focus and energy we are dedicated to continuing to improve our business and have taken important steps to achieving our goals.
Thank you for your interest and for your attention. This morning, we will now open the call for your questions.
Okay.
Thank you.
Okay.
If you'd like to ask a question please press <unk>.
Tom Please thank.
Thank you Pat.
If you change your mind please questions Tom.
Sure.
We're preparing to ask your question. Thank you show that you like.
Just a reminder that.
Mr. Paul Toms question.
Our first question comes from Tim Mulrooney, William Blair Kim. Please go ahead.
Yeah.
Hey, Ian this is Sam on for Tim Thanks for taking our questions here I just have a few I guess to start I believe last quarter your expectations for 2% to 3% land organic growth in the back half year.
Now, it's looking like it will be flat I guess I'm wondering if you could expand on what drove that change.
Yes, great Great question, Bret do you think about growth of the company. We're excited with the quarter three results and we're we're excited about the Q4 guidance. The total company is growing.
Three we grew two 5% organically was one 5%.
And both segments showed growth in Q3, so we're excited about those results.
When it comes to land organic specifically as you think about our expansion of project accelerate and how is that now expands into client retention and new sales wins.
We are very focused on bringing new sales in that are higher quality business.
And we're being extremely prudent and judicious with our price increase strategy when it comes to customer renewals.
Both of which have led to the margin expansion you saw in Q3 and the guidance for Q4.
And in the short term as we go through this expanded project accelerate strategy, we'll see.
Short term modest softening of land organic growth relatively flat into next quarter, but we do expect that focus on higher quality business when it relates to new sales.
And our pricing strategy as it relates to renewals to continue to drive outsized margin expansion in the business.
Gotcha Thats helpful.
Maybe pivoting to the accelerated program.
Given that you've taken significant costs out of SG&A.
This program.
Do you think that Youll have to eventually bring some of those costs back or our current SG&A levels sustainable in your view.
Yes, thanks for the question.
These important when youre considering this this is Jim Abrahams being around this company for the last 18 years I've got a good handle on what makes it tick.
And where we saw overhead cost escalation that we were able to bring back under control more importantly.
Taking a deeper dive really across the organization. So we're expanding this.
Beyond just SG&A, if you would if you're thinking corporate or call. It top top line top level expense.
Categories, where our focus was in the initial phase we've now expanded that to get into.
The remainder of the companies that we're looking across those five areas that we've talked about on the call.
Each of those areas such as branch performance, such as our team productivity and other areas. We've the broadening and deepening of the of the program is really where the opportunity is.
Because we've got a widely distributed company. So we think theres great opportunity. We don't believe this with short term in nature, we have restructured our company based on what.
What we've found and having a good handle on how this company operates I think we are able to prudently put these cost control measures into place and we believe these these will be permanent savings.
Over a period of time, so as we continue to roll. These out we will have more guidance on the future of what our targets are but we're guiding these to be permanent permanent reductions.
Okay, Great. We'll look forward to that maybe I'll sneak one last one in here.
I think you mentioned in our prepared remarks, and some of your commentary here about retention just improving that.
Yes, great question as you think about.
And we were fighting that inflation by launching our pricing strategy.
We're continuing that pricing strategy now, we've seen retention rates stabilize but not rebound back to historical levels call. It pre pre hyperinflation.
So as we think about expanding that initiative and really getting back to branch performance and getting back to our high customer focus we expect now that two years into pricing with inflation now in the 3% range for CPI CPI, <unk>, which is which is a metric we track internally.
Is less than two 5%, we expect our aggressiveness on pricing to start to subside.
That will have an impact on customer retention and a bit more focus on back to the basics.
The branches, we expect that to have an impact on retention. So we are seeing it stabilize year over year, but we would expect in the future as we launch the expansion of project accelerate to see a rebound in retention.
Got you. Thanks, Thanks for the answers guys.
Yes, absolutely. Thank you.
Thank you.
Our next question comes from Bob <unk> from CJS Securities. Please go ahead.
Hi, Good morning, it's Pete Lucas for Bob you've talked before about the bridge back to 12% to 12, 5% margins being running off old development services using the five year average at normal margins for snowfall and price increases as well as fuel price declines just wondering how project.
<unk> impacts this bridge and is that still the 12, 5% still a viable medium target for you.
Yes.
Pete that's a great question.
As we said on the prior call we.
We committed to already in 2024 through project accelerate to see 50 basis points of margin expansion and Thats without snow rebounding right.
Think about our guidance now right around 10, 10, 6% EBITDA project accelerate in its initial phase.
Really secured 50 basis points of margin expansion, bringing us into that low 11% range for next year.
Now with the expansion of project accelerate we're expecting that meaningfully more margin expansion above above what was originally communicated and we'll communicate more on exactly what those numbers are in our next earnings call, but if you think about original project accelerate and a low 11% EBITDA margin range.
And normalized snowfall, which would be somewhere between 40, and 60 basis points of additional margin that puts us in the mid to high 11% range.
Plus the expansion of project accelerate which will share more on the next call. So as you think about getting back to the pre pandemic margins of mid <unk> for the company.
As we start to solidify the expansion of our project accelerate that will all become incremental to that bridge that is provided.
Okay.
Very helpful. Thanks, and then.
Just one more I guess, how is the scope of work trending in our customers pulling back or contract size starting to grow again.
Yes.
Great question, we have seen no sign of customer per customer pullback in either business.
And the development business, we were already beginning to sell our backlog through the second half of next year as we have a great line of sight into the first half of next year, we see no slowing down in that business and we're getting positive indications from.
Some of the internal Kpis, we track that we don't expect to see any slowdown.
And then the maintenance side of the business, we're seeing increased demand on ancillary services, which is our outside the contract services, we provide to our customers.
We actually saw quarter three versus.
Quarter three of last year, so an increase in those demand for services. So.
From a customer demand standpoint on either side of the business, we see no signs of a slowdown.
Great and just a last quick one for me as weather has been a major impact, particularly the heat in any of your areas have you seen anything there.
Yes.
Yes, the heat wave that just came through the country was was I.
I would say extremely hot in multiple areas that to say the least but from an impact on the business I would say very little we want to make sure our employees are safe.
And as we think about productivity on a job and the most important thing to US is safety. So if there needs to be an extra couple of minutes break here or there.
For our employees, that's first and foremost, but we have not seen any major impact on the underlying business from that heatwave that just came through.
Yes ill just add to that I think we reported on.
California range on everything last year, we showed a lot of disruption. This isn't the same kind of disruption that's going on.
Is it really creating the same kind of disruption.
Rainfall issues, we're creating earlier on so.
It's really steady as she goes from an overall weather standpoint this year.
Okay.
Other than personally of course.
It's been a hot summer.
Sure.
Great. Thanks, so much I'll jump back in the queue.
Thank you.
Okay.
Thank you.
Our next question comes from <unk> Tong from Goldman Sachs. Please go ahead.
Hi, Thanks, Good morning, your landscape maintenance business declined a little bit year over year this quarter because of reduced commercial demand can you talk a little bit about.
Where that reduction in demand is coming from whether it's the contract base business, whether it's ancillary and how much of that was driven by external environmental factors versus internal initiatives to right size pricing for example.
Yes, George how are you doing this is Brett great to hear from you today, so from a from the maintenance services standpoint year over year that business grew just to clarify grew about half a point of growth.
And within that was with a small decline in our snow business, we have very little snow in quarter, three but we do have some.
That business went backwards as disclosed about $3 million so.
Without the snow impact of that call. It maintenance services is in total grew about 1%.
Which was land organic growth relatively flat and M&A contributions of about 1% of growth. So just to clarify that the business is growing.
And as you think about land organic growth as we mentioned before.
I would say the bigger impact of internal initiatives.
Rather than external factors, we are making sure the business we are bringing in from a new sales perspective as high quality high margin business.
We're ensuring that our pricing strategies.
We're continuing to be prudent in our pricing strategies on the customer renewals that that business is margin accretive to the company as you think about our overall strategy of growing profits, which we did in Q3 and expect to do again in Q4.
And growing margins, which we did in Q3 and expect to do again in Q4, that's all leading towards.
Generating more cash for the company and ultimately Delevering the balance sheet, which we also did in Q3.
Okay.
Great that's helpful.
Really I guess asking about land organic.
Yes.
Which organic.
<unk>, which was I think down 0.2% year over year. So that's helpful context, and then you talked a little bit about project accelerate spending.
Making progress around cost containment branch performance customer retention new sales procurement.
How are you internally rank ordering these various initiatives certainly it takes a lot to.
Tackle with project accelerate what are the priorities.
And what are the various timelines for when you would expect to see.
Progress on these.
And what would be the associated revenue and margin benefits.
Yeah.
That's exactly what we're focused right now so we've calibrated some targets internally this has been a team effort.
Not just taking this this isn't a top down this is a company wide.
Our operations teams have been really really focused on.
Hitting what those targets intend to beat.
Clearly the branch performance issues, that's our bread and butter right, that's where our customers.
A live and performance there is vitally important so in doing that the first thing to look at is to not all branches are are performing equally right. Now. So obviously your eyes are driven to the bottom tier of those branches and fixing the underperformers are very deliberate aggressive steps.
In place that's a first step very achievable type of.
Opportunities to be able to look at that bottom tier a bottom quartile of branches sweep we've created the data and the research and an action plan to start there.
The spans of control and the layers of management. So we're looking very closely at what those opportunities are again, those are very quantifiable and achievable goals items that we can take their discrete actions. We can put into place will be able to we think harvest some benefits from that initiative fairly quickly.
And that will allow us to kind of restructure and optimize and using technology to help us be more efficient and effective.
We look at retention and win rates those evolve overtime right, putting new training programs companywide initiatives allow us to perform better rate when more loose last that's what every business drives to do and we've seen those.
Those retention rates and those contract win rates decline, we reported on that in the past. We believe that there is there is sort of immediate recovery back to earlier performance levels, but we think there is upside beyond it.
Procurement very again, a much more quantifiable discrete project line procurement, we've we've identified a significant.
Our level of spend here that is currently not covered by national accounts. Some of the programs. We think this is again a very achievable early return.
Component that is well underway right now.
We have employed some top tier consulting firms that are helping us roll that out. So we believe that we're going to be harvesting results from project accelerate over the course of.
Right away here in Q Q4, but more importantly, this will be.
Implemented and rollout into our FY 'twenty four plans.
Have more information for you on the next the next go around I think you can see where this is this is a company that it's a big company is widely distributed but we've got specific focus in this areas and we've got a great leadership team to implement this so it's a team team effort.
Okay.
Very helpful. Thank you.
Thanks Stuart.
Okay.
Thank you.
As a reminder to ask a question. Please press star one.
Pat.
Our next question comes from Jonathan Bock from Bob Johnson. Please go ahead.
Yes, hi, good morning.
I wanted to ask.
About M&A and the reason why is just because ever since the company has been public.
You guys have always had kind of bad.
Even even when things haven't been announced there has always been in it.
A couple of points of revenue contribution annually from M&A.
I think this is the first quarter.
You've had really didn't press release, you've done any acquisitions, obviously, you've got this focus on free cash flow and deleveraging.
And with the <unk>.
CEO search underway I'm, just I'm just curious as we think about 'twenty four.
As it stands right now is M&A kind of officially on pods for the for the near term and we shouldnt be thinking about contribution from that next year whats the status of what Youre doing there.
Yeah, Jonathan Great question, you kind of said a couple of things in your question around CEO .
CEO search underway focus on margin accretion and Delevering the balance sheet. That's definitely our focus is right. Our focus is priority number one to generate additional free cash flow year over year, which we've which we've done for the first nine months of the year that free cash flow generation is up over $55 million.
Year over year.
We are using that cash to pay down debt and.
And we're growing our earnings and a way to Delever the balance sheet. So that is our vendors our focus right now as it comes to the company as far as it relates to M&A, specifically I would not say it's on pause we are not an official pause we're still being very selective.
And strategic with our acquisitions we've.
We've seen multiples come down into the five X range or lower like we've presented on on previous calls.
We still have a very robust M&A pipeline north of $700 million.
So as deals come across we are just being very selective and strategic in those deals. How do you think about modeling for 2024, we're not ready to give guidance yet for 2024 as it relates to M&A, but it will be likely less than the 2% target we provided in years past.
Okay that makes sense. Thank you for your kind of.
Clarifying.
And then I guess from.
The other question I had.
Just on fuel costs, obviously, they've come down I think in the past you guys have quantified, sometimes where where that is.
Curious how much of a margin lift that has been and.
Is that something where fuel costs are right now and will they continue to be a tailwind for the next couple of quarters.
Yeah, Great question fuel in Q3 was roughly a 2 million dollar benefit to the P&L.
Year over year, and that's split roughly 75% maintenance, 25% development as you think about the segment splits there of fuel so call. It 20 to 30 basis points fuel accretion in the quarter.
We'd expect that to continue into Q4 at a similar pace.
Fuel is a bit on the rise right now.
It's about $3 75, a gallon last Q4, we were about $4 75 to $5 a gallon. So it should still be a tailwind when it comes to fuel year over year.
And we'd expect that somewhere in the 20 to 30 basis point range for Q4.
Okay.
Okay. That's helpful. Thank you very much.
But from.
Thank you.
Now the Q&A session following.
Brett Thanks for closing remarks.
Thank you operator, once again I want to thank our team members for their dedication to designing creating maintaining and enhancing the best landscapes on Earth.
And thank you everyone for participating in our call today and for your interest in breakthrough we look forward to talking with you again.
Talk to you.
Okay.
This concludes today's coupe. Thank you joining you may now disconnect your lines.
Yeah.
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You may now disconnect your lines.