BrightView Holdings, Inc.

Hello and welcome to the Brightview Fiscal Fourth Quarter Earnings Call. My name is Juan and I will be coordinating your call today. If you would like to ask a question during the presentation, you may do so by pressing star 1 on your telephone keypad. If you have joined us online, you can press the flag icon on your web browser to ask a question. I will now hand over to your host, John Isafe, Vice President of Investor Relations, to begin. John, please go ahead.

Thank you, Operator, and good morning. Before we begin, I'd like to remind listeners that some of the comments made today, including responses to questions and information reflected on the presentation slides, are forward-looking and actual results may differ materially from those projected. Please refer to the company's SEC filings for more detail on the risks and uncertainties that could impact the company's future operating results and financial condition. Comments made today will also include a discussion of certain non-GAAP financial measures. Reconciliations to comparable GAAP financial measures are provided in today's press release. Disclaimers on forward-looking statements and non-GAAP financial measures apply both to today's prepared remarks as well as the Q&A. For context, Brightview is the leading and largest provider of commercial landscaping services in the United States with annual revenues over $2.5 billion and seven times our next largest competitor. Together with our legacy companies, Brightview has been in operation for more than 80 years, and our field leadership team has an average tenure of more than 14 years. We provide commercial landscaping services ranging from landscape maintenance enhancements to tree care and landscape development. We operate through an integrated national service model, which delivers services at the local level by combining our network of more than 280 maintenance and development branches with a qualified service partner network. Our branch delivery model underpins our position as a single-source end-to-end provider to a diverse customer base at the national, regional, and local levels, which we believe represents a significant competitive advantage. We also believe our customers understand the financial and reputational risk associated with inadequate landscape maintenance and consider our services to be essential and non-discretionary. I will now turn the call over to Brightview's CEO, Andrew Masterman.

Thank you, John, and thanks to all of you for joining us this morning. It is remarkable to consider that we're officially closing out Brightview's fiscal year with this announcement on fourth quarter and full year 2021 results. And yet so much of our day-to-day news is still consumed by the COVID pandemic. You told me at this time last year that we would still be talking about COVID and its immense challenges today. I would not have believed you. And yet, the Brightview team has amazed me every day with their resilience and fortitude. At the end of the day, we are a people business, and I could not be prouder of every single one of my more than 20,000 Brightview colleagues who have continued to show up and serve our customers with excellence. Don't get me wrong. It has certainly not been easy, and there have been many challenges. But as I mentioned during our Investor Day back in September, Brightview is built on an 80-year legacy of providing best-in-class landscape and other services to customers across the country. Just as our predecessor companies persevered through multiple macroeconomic disruptions while continuing to deliver significant value to their owners, so will Brightview. Moving to slide four, as I will discuss in more detail in a moment, Despite the difficulties of 2021, the Brightview team has accomplished so much while driving strong operational and financial results. We continue to invest in our people and our technology, and we completed eight acquisitions, adding close to $160 million of annual revenue. Despite labor shortages, our HR team recruited over 5,000 new employees. We committed to carbon neutrality by 2035 and so much more. While investing in our future, we were also sharply focused on delivering superior financial results. Additionally, I'm delighted to welcome Frank Lopez to the Brightview Board of Directors. Frank brings a depth and breadth of knowledge and experience to our board from his many years in an executive leadership role with Rider System Inc. I look forward to working together with Frank and the rest of the Brightview board. Our team of more than 20,000 employees has continued to go above and beyond. Their perseverance made it possible for us to deliver strong maintenance land organic revenue growth, and our people, their performance, and their intense customer focus is why I'm confident in our ability to deliver continued profitable growth. Starting on slide five, First, I'm thrilled to report another solid quarter led by the maintenance segment, with growth of 14.5%, underpinned by 9.2% of maintenance land organic growth. This expansion was driven by continued growth in our contract business, as well as a rebound in ancillary services penetration. This follows Q3, in which we grew organically 11% plus, and in Q2, our snow contracts grew 10% plus. In short, we have grown from fiscal 2019 organic revenue levels despite operating in an environment presented with continued challenges. For the full year, total revenue was a record $2.55 billion, and adjusted EBITDA increased 11.3% to over $302 million. Full year adjusted earnings per share increased approximately 32% to $1.20 per share, a record for the company. Because of the strategic investment we have been making in our sales force, impressive maintenance land organic growth trends continued. Our second half of fiscal 2021 land organic growth of 10.5% was a result of the continued positive net new sales we discussed over the past few quarters. Third, adjusted EBITDA for the quarter was $89.5 million, which was relatively flat to the prior year. Double-digit growth in our maintenance segment was offset by softness in the development segment due to increased inflationary pressure on material spent. More on that later. Fourth, our consistent and predictable free cash flow generation continues to be robust. For the fiscal year, we generated $96.7 million of free cash flow. And finally, the results of our strong-on-strong acquisition strategy benefited our revenue growth by $44.2 million during the fourth quarter. Our fragmented industry presents many more opportunities for consolidation, and you should expect to see M&A execution from us every quarter. Our adjusted EBITDA performance was within the range of the guidance provided during our third quarter call, and our revenue was above the top of the guidance range, resulting in a solid finish to the year. Before we turn to the details of our fourth quarter and full year, let me provide you with our outlook for our first quarter of fiscal 2022 on slide six. As expected, we continue to see COVID-19 business impacts specifically related to labor and material costs, but we are optimistic about our ability to deliver solid results. Our maintenance land contract-based business is growing and demand for ancillary services is improving. Our primary end markets, homeowners associations, and commercial properties remain durable. Hospitality and retail verticals are returning to pre-COVID levels. We are encouraged by what we see happening in the market, and we believe this will result in another quarter of maintenance, land, organic growth of approximately 3% to 4% or more. In our development segment, we experienced pandemic-related obstacles that impacted project volumes and introduced materials cost increases driven by supply chain issues and inflationary pressures, all of which collectively put pressure on revenue and margins. We expect these headwinds to continue in the first half of calendar 2022. With that said, in development, one external tracker we monitor is the architecture buildings index. The ADI is an economic indicator for non-residential construction activity with a lead time of approximately 9 to 12 months. The ABI scores over the last eight months continue to be among the highest ever seen in the immediate post-recession periods, underscoring just how strong the bounce back has been following the abrupt downturn in 2020. We are encouraged by the pipeline of work we are all tracking across all markets, and our backlogs are robust. Our revenue streams are diversified with a mix of public and private market, owner-direct, and general contractor channels and a balanced segmentation of contract sizes. As a result, we remain optimistic that modest organic growth trends in the development segment should return towards the second half of fiscal 2022 and into fiscal 2023. As such, for our first quarter of fiscal 2022, we anticipate total revenues between 570 and 600 million dollars and adjusted EBITDA between 44 and 52 million dollars. We believe with an average snowfall during the fiscal year, continued sales force performance, and ongoing M&A execution, we will be poised to deliver revenue and margin growth year over year. Annual guidance for fiscal 2022 will be provided post our snow season and during our fiscal Q2 report in May. Now moving to slide seven, let me provide you with a snapshot on how we expect to deliver reliable, consolidated annual top line growth. As we shared with you in our investor day, we have multiple levers to drive top-line growth. The first lever is a dedicated, locally-based sales force to generate new sales, along with newer technologies to support sales. The second lever is our omnichannel digital marketing to help expand the targeted customer base. And the third lever is a continuation of accretive acquisition as part of our strong-on-strong M&A strategy. Our sales and enablement technologies continue to be a differentiator and have continued to support growth and improve customer retention and satisfaction. Brightview Connect and HOA Connect are proprietary technologies that allow our customers to review the status of submitted service requests, expedite the response time from Brightview, and track the progress of the service requests. Today, we have over 150 active homeowners associations on Brightview Connect. Another tool, Quality site assessment is critical to delivering quality services in the field. It allows our account teams to walk alongside customers, collect and mark up visual feedback, note service priorities, and identify additional ancillary opportunities. QSA is a critical enabler that drives value for Brightview team members in the field and was a contributor to the slight uptick in retention. Both of these technology platforms We'll see 2.0 versions launched in fiscal 2022, allowing for an enhanced customer experience. We also continue to invest in our sales organization, growing our team by over 10% in fiscal 2021. To drive the success of these expanded sales teams, we remain focused on digital marketing initiatives in new markets through new channels. During fiscal 2021, our lead generation increased 41%, and our opportunity pipeline, which are leads that get further qualified, expanded by 38%. Most importantly, as a direct result of our expanded sales teams and sales enablement technologies, combined with our more effective omnichannel approach to digital marketing, our sales pipeline increased 41% year over year to over $3.7 billion. Prior to the pandemic, The development segment has proven they can grow consistently in the range of 2% to 3%. Given our backlog and current industry trends as evidenced by the ABI, we remain optimistic that modest organic growth trends should return towards the second half of fiscal 2022 and into fiscal 2023. Turning to slide 8, maintenance land organic growth of 9.2% during the fourth quarter of fiscal of growth in our contract business, as well as a rebound in our ancillary services realized across all three of our maintenance divisions, Evergreen East, Evergreen West, and Seasonal. Additionally, this is the third successive quarter of organic growth in our maintenance segment, recognizing Q2 snow contract growth. Inclusive of our forecast for the first quarter of fiscal 2022, it represents one full year of primary service line organic growth. Maintenance land organic revenue for the fourth quarter is now above fiscal 2019 levels, and we expect to continue on this trajectory and to be above fiscal 2019 and 2020 levels in fiscal 2022, further proof that our strategy is working. Our current maintenance trajectory, coupled with 2% to 3% acquired growth, creates confidence in our ability to deliver at least 4% to 6% sustainable consolidated annual growth going forward. Moving now to slide nine. Since 2017, we have completed 28 acquisitions that position us as market leaders in several key MSAs. We have a dedicated team and a disciplined and repeatable framework. Our acquisitions are accretive and a value-creating use of free cash flows. Our strong-on-strong M&A strategy leverages our scalable infrastructure while building on best-in-class platforms, processes, and people. Our M&A success is core to our top-line growth, and we will continue to deliver as we execute on transactions and the strategy we have developed and deployed over the last five years. We expect the eight acquisitions completed during fiscal 2021 to add close to $160 million in incremental annualized revenue. Fiscal 2021 has been a record year for M&A, and we still have attractive opportunities in our pipeline, which continues to develop. Our acquisitions of WLE based in Austin, GTI based in Las Vegas, and Baytree based in Atlanta reflects our refined, strong-on-strong acquisition strategy and expanded ability to operate in a high-growth housing development market, which benefits both the maintenance and development segments. We expect to leverage these acquisitions which will allow us to further penetrate or enter large MSAs with high-growth housing markets across the country during fiscal 2022. Turning to slide 10, despite operating in an environment presented with continued challenges, such as labor availability and wage inflation, materials cost escalation, and supply chain constraints, we have a pathway to consolidated margin improvements. In fiscal 2021, we delivered 11.8% consolidated margins. That's a 20 basis point improvement over fiscal 2020 in a very challenging environment. We believe there is a credible path to 13% consolidated margins over the next several years achieved through the following actions. First, in our development segment, we are confident we can begin to return to historical margin performance by fiscal 2023 and drive leverage through our cost structures. Next, our continued focus on pricing and productivity. We have initiated a proactive pricing strategy that we believe will help us to offset challenges with labor and material costs and is structured to begin to deliver margin improvement in fiscal 2022. And third, a continued rebound and focus on ancillary services. Ancillary delivers higher margins and is key to consolidated margin expansion. We are also realistic about the labor pressures impacting Brightview and other companies in the service industry and are aggressively pursuing initiatives to mitigate the impact. John will expand upon this in his comments. Turning to slide 11, we continue to be leaders in environmental, social, and corporate governance, or ESG. We truly embrace our ESG strategy, and it is embedded into our corporate foundation and culture. The E element of ESG is the assessment of how Brightview interacts with our natural surroundings and how we perform as a steward of the physical environment. The E takes into account our utilization of natural resources and the effect on the environment, both in direct operations and across our supply chains. Brightview is actively engaged in ways to practically address environmental responsibility and achieve carbon neutrality. A few of these are highlighted on the slide. First, a cleaner fleet. Brightview is reducing emissions and is beginning to supplement our fleet with electric vehicles. To reduce our fuel and minimize our carbon impact, we have begun by deploying over 500 electric vehicles over the next 12 to 24 months. Furthermore, by 2027, we expect to convert 100% of our management vehicle fleet to electric or hybrid. Approximately 30% of our 11,000 vehicle fleet will be converted by 2027. Second, greener equipment. We are transforming our mowers and two-cycle equipment to sustainable power. We plan to aggressively convert all 50,000 pieces of two-cycle equipment to electric and sustainable energy, resulting in a 50% reduction of Brightview's carbon impact, according to our internal estimates, by the end of 2025. Third, efficient buildings. Brightview strives to improve energy efficiency and convert to green energy. More on that in a second. Fourth, sustainability. Brightview is committed to sustainability. We continue to proactively and purposefully plant 100,000 trees per year, and we intend to double those efforts. By 2030, we intend to plant upwards of 2 million trees. A mature tree absorbs carbon dioxide at a rate of 48 pounds per year. In one year, the 2 million trees Brightview intends on planting will offset the CO2 produced by approximately 7,000 vehicles. We are also transitioning our fertilization efforts to organics, as well as continuing to invest in irrigation technology with a focus on water conservation. We will continue to reduce pollution and implement green energy as a way of reducing, sequestering, and minimizing our carbon footprint. Turning to slide 12, this is a rendering of Brightview's Branch of the Future. As you look at this, you see solar panels on every roof, you see covered parking areas where our trucks are parked and charging to our electric charging stations. You see wind turbines in the background providing energy to our internal shops that are charging our lawnmowers and handheld equipment. You see bicycles our team can ride to and from work, and the trees and greenery surrounding our ranch. In the 300 parcels of real estate we currently own or lease, we will implement alternative and solar energy solutions and replace outdated energy equipment and appliances, Where possible, we will convert all electric service to our buildings to sources of alternative energy. We intend to launch a pilot branch in fiscal 2022. In fact, in October, while visiting a branch in Denver, I witnessed one of Brightview's initial all-electric crews. We are currently maintaining a landscape for the town of Superior in Boulder County and helping them achieve their sustainability goals to reduce greenhouse gas emissions by at least 25%. Landscaping is going electric, and the revolution is here to stay. Additionally, we expect the recently passed infrastructure bill, of which 40% of funding is for climate and clean energy investments, will support our efforts as landscaping is infrastructure. Right View is already having productive and proactive conversations with manufacturers that are supportive of our environmental strategies and with municipalities to help them secure funding and credits. Although capital investments will be required to build our electrical infrastructure, we do not expect there to be significant incremental capex to fund this build-out until the back half of the decade. Furthermore, any additional spending will generate fuel and other savings, resulting in an attractive return on investment. We expect to reduce our fuel consumption by approximately 90% by 2035. And additionally, we expect to decrease our equipment maintenance costs by upwards of 50% annually. The result of our efforts is an expectation of Brightview to be approximately 75% carbon neutral by 2030 and to achieve carbon neutrality by 2035. Most excitingly, Brightview, as the leader, has a unique ability to change our industry. We look forward to continuing to work with our partners and customers in our efforts to achieve carbon neutrality. We're in the early earnings of our journey, and during calendar 2022, we plan on issuing a formal sustainability report. This will allow Brightview to report on environmental and social performance, as well as having publicized ESG goals. 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 am pleased with the strong results we delivered in our fourth quarter and during fiscal 2021. We remain focused on our key investment pillars of organic growth, margin enhancement over time, mergers and acquisitions, and cash generation. we built the foundation and strategy to deliver consistent land organic growth quarter after quarter. In Q2 of this year, we realized 10% plus of snow contract growth and then delivered 11.7% and 9.2% of land organic growth in the third and fourth quarters of fiscal 2021. This resulted in full year maintenance land organic growth of 3.7%. More importantly, we are well-positioned to continue this into fiscal 2022 and beyond. In addition, we have a very consistent and resilient free cash flow generation model, which, as I discussed at Investor Day, is a key driver of value for Brentview. Since fiscal 2018, we have delivered approximately half a billion dollars of free cash flow and have maintained a steady cash conversion ratio of approximately 80%. The key is deploying capital prudently and getting accretive returns. We will continue to deploy our capital for accretive M&A and to deleverage our balance sheet. With that, let me provide a snapshot of our fourth quarter results. Moving to slide 14, fourth fiscal quarter 2021 revenue for the company increased 10.8% to $673.7 million in the current quarter from $608.1 million in the prior year. Maintenance revenues of $504.5 million for the three months ended September 30th increased by $63.8 million or 14.5% from $440.7 million in the prior year. The increase in maintenance was driven principally by strong contract growth as well as a continued rebound in our ancillary services, which led to 9.2% organic growth. Additionally, we realized $24 million of incremental revenue from acquired businesses. For the three months ended September 30th, development revenues increased $1.8 million for 1.1% to $170.2 million from $168.4 million in the prior year. The modest increase was driven by the contribution of acquired companies. We are encouraged by our bidding pipeline and bid calendar, and we anticipate increased stability during the second half of fiscal 2022. Turning to the details on slide 15, total adjusted EBITDA for the fourth quarter was $89.5 million, relatively flat compared to $90 million in the prior year. In the maintenance segment, adjusted EBITDA of $87.1 million was up 13.1% or $10.1 million from the prior year. Solid contract growth and a continued rebound in our ancillary services drove the increase. Adjusted EBITDA margin of 17.3% was down slightly from 17.5% in the prior year, but more importantly, showed a 30 basis point improvement over the pre-COVID fourth quarter of fiscal 2019. In the development segment, adjusted EBITDA decreased $7.9 million to $18.6 million compared to $26.5 million in fiscal Q4 of 2020. Decline was driven by lower organic revenues and higher material costs as a percentage of revenue. Adjusted EBITDA margin of 10.9% was a reduction compared to the prior year levels of 15.7%. For fiscal Q4, corporate expenses represented 2.4% of revenue. Now let me provide you with a snapshot of our results for the full fiscal year of 2021 on slide 16. Total revenue for the company increased 8.8% to $2.55 billion from $2.35 billion in the prior year. In the maintenance segment, fiscal year revenues were $1.98 billion, a $253.5 million or 14.7% increase versus fiscal 2020. The improvement was driven by strong organic growth, contract growth in snow removal services, higher snowfall, and revenue contribution from acquired businesses. In the development segment, fiscal year revenues were $574.9 million, a $45.4 million, or 7.3% decline versus fiscal 2020. The decline was primarily driven by project delays in the Now turning to slide 17, total consolidated adjusted EBITDA for the fiscal year increased $30.7 million, or 11.3%, to $302.3 million, compared to $271.6 million in the prior year. The improvement was primarily driven by strong execution in the maintenance segment. The maintenance segment's adjusted EBITDA grew 20.5%, to $299.6 million compared to $248.7 million in the prior year. Strong double-digit organic growth in the second half of fiscal 2021, 10% plus contract growth in snow removal services, higher snow volume, and solid cost management drove the adjusted EBITDA expansion, which resulted in fiscal year consolidated EBITDA margin improvement of 70 basis points to 15.1%. As a result of inefficiencies driven by project delays, lower project volumes, and higher material costs, adjusted EBITDA for the development segment decreased 20.1% to $65.2 million, compared to $81.6 million in the prior year. For the full year, corporate expenses were 2.4% of revenue, which has held steady for the past several years. Let's move down to our balance sheet and capital allocation on slide 18. Net capital expenditures totaled $51.7 million for the fiscal year ended September 30th, up from $47.9 million in fiscal 2020. Expressed as a percentage of revenue, net capital expenditures were 2% in fiscal year 2021 and fiscal year 2020. Like many firms, we face supply chain constraints pertaining to our equipment orders. combined with multiple years of below historical average capital spending, continued growth in the maintenance segment, and costs associated with our ESG initiatives, we anticipate capital expenditures will be approximately 3.5% of revenue for fiscal 2022, which is within our historical guidance range. In fiscal year 2021, we invested $110.4 million on acquisitions, versus $90.3 million in the prior year. Net debt on September 30th of 2021 was $1.056 billion, compared to $1.015 billion at the end of the prior year. Our leverage ratio was three and a half times at the end of the fourth quarter of fiscal 21, down from 3.7 times at the end of fiscal 2020. For fiscal year 21, free cash flow was $96.7 million as we continue to focus on cash generation and diligently managing our working capital. An update on liquidity is on slide 19. At the end of fiscal 2021, we had approximately $208 million of availability under our revolver, approximately $75 million of availability under our receivables financing agreement, and $123.7 million of cash on hand. Total liquidity as of September 30, 2021, was approximately $406.4 million. This compares to $389.1 million as of September 30, 2020, and provides us with ample flexibility and optionality. Before I turn the call over to Andrew for closing remarks, on slide 20, I would like to address labor and pricing, two topics that I suspect are on the minds of many of you on this call. We are in a difficult inflationary environment, but let me share with you how we are actively mitigating these headwinds. Due to the nature of our business, we hire approximately 5,000 new employees each spring. Despite challenges in a tough labor environment, we successfully executed on that again in 2021. We witnessed higher wage inflation, about 7%, versus about 4% wage inflation historically, and that has put pressure on our business. However, we have taken proactive actions against that. We have implemented multiple pricing initiatives as we head into fiscal 2022. Our teams are collaborating with customers to help them understand how wage inflation is impacting our business and ensuring we balance our scope of work. As we come into our contract renewal period, these are the types of candid and transparent conversations we are currently having with our customers. Driven by inflation, Material price increases have put pressure on the development business over the past few quarters and will continue to impact margins through midsummer. To address this going forward, we have shifted to allowing 10 to 15 days of pricing commitments in our contracts, as opposed to contracts that were historically fixed by three to six months or occasionally longer lead times. We are confident that the materials input inflation that has put short-term pressure on the business is transitional. and importantly, that our efforts will help to offset these headwinds. With that, let me turn the call back over to Andrew. Thank you, John.

In summary, here are the key takeaways on slide 22. First, in the market. Brightview is the number one player in a $70 billion fragmented market. As landscapers, we manage living assets, resulting in a resilient market. Additionally, we continue to see signs in all maintenance verticals that the impact of the pandemic is subsiding and business is recovering. Second, growth. Maintenance land growth trends continue as our investment in our sales team is driving sustainable organic growth. Today, we have over 200 sales leaders and business developers that drive new business opportunities through strategic partnerships at both the national and local levels. Combined with our omni-channel approach to digital marketing, we have improved our retention modestly and increased our sales close rates, while growing our sales pipeline in all markets. Third, technology. We continue to deploy best-in-class customer engagement and operational management solutions. Our technology is successfully enhancing productivity, profitability, and client engagement. We recently kicked off a next-generation investment in Brightview Connect 2.0, which will deliver highly requested enhancements for our customers in 2022. Our investment in Brightview Connect 2.0 and other technological capabilities, such as QSA 2.0, will continue to differentiate Brightview's digital capabilities with new features that improve the customer experience and retention. Fourth, sales and marketing. In addition to technological enhancements, We continue to grow and invest in our sales organization and expand the use and effectiveness of our sales tools. The result is increased efficiencies while positioning us to continue to deliver profitable growth. This improved productivity should lessen the need to expand the sales force at the same rates as the last several years. Our sales and marketing strategies and structure are a formula for long-term success. Fifth, M&A. The results of our acquisition strategy continue to benefit our revenue growth, and with an attractive $600 million pipeline, acquisitions will continue to be a reliable and sustainable source of growth. Our business is cash generative with low capital intensity, allowing us to consolidate the marketplace in an efficient and disciplined manner that we have shown to be repeatable. For fiscal 2022, we have identified six target MSAs that present us with plentiful accretive opportunities expand in new markets and existing markets. And sixth, cash. At the end of the fourth fiscal quarter, our leverage ratio continues to be at a historic low for Breakthrough. We continue to generate significant cash and will focus on reducing our leverage ratio, driving profitable growth through M&A and potentially looking at other ways to return capital to shareholders. Fiscal year 2021 was an unprecedented environment that few have ever experienced, and what the Brightview teams have accomplished in the face of a pandemic is simply amazing to me. We are extremely grateful for first responders and healthcare professionals, each of whom bear the greatest burden. I would also like to personally thank each and every member of our dedicated teams. To all of our gardeners, account managers, business developers, and branch leadership, I thank you. Also, thank you to all Brightview customers and partners for your resiliency and commitment during a challenging time. Our focus on taking care of each other and our customers and taking pride in how we engage with our clients and the beauty of their properties we design, develop, maintain, and enhance has sustained our organization. We will continue this focus on our people and our culture to deliver confidence in the future that lies ahead. Thank you for your interest and your attention this morning. We'll now open the call for your questions.

If you would like to ask a question, please press a star followed by one on your telephone keypads now. If you change your mind, please press a star followed by two. As a reminder, participants will be allowed to ask a maximum of two questions. When preparing to ask a question, please ensure your phone is unmuted locally. And our first question comes from George Tong from Goldman Sachs. Please, George, your line is now open. Hi, thanks.

Good morning. Wage inflation has stepped up to 7% from historical levels of 4%. You mentioned balancing the scope of work with clients to adapt. How much do you expect pricing to increase by an absolute basis in fiscal 2022 in response to the higher wage inflation? And when would you expect pricing increases to balance or perfectly offset the wage increases and input cost increases overall?

Yeah, good morning, George. As we look forward, we're beginning our pricing discussions with the customers. So within landscaping, really those discussions come right now. It's November, December, October, all the way through, frankly, early May that we're talking with all our customers. So the degree at which we get the pricing in our actual top line versus our scope reductions, that's something that we're going to be in a constant conversation with our customers about. really understanding the dynamics they have while also acknowledging the pressures that we have within the labor and materials world. So I really don't know exactly. I will say that this year, We will probably see at least 1% to 2% on the revenue side, somewhere in that range, where we have typically not seen that in the past with the scope reductions or scope adjustments. But we really won't be able to have a definitive kind of level of top-line impact that that will have until we get out of that kind of pricing negotiations and contract renewals that occur through the beginning of May.

Okay, got it. And then with respect to your guidance for fiscal 1Q, you're pointing to organic revenue growth in the maintenance business of 3% to 4%. The prior year comps are relatively easy if you look at the rate of decline. So are there any factors that are currently preventing the growth in fiscal 1Q to be even higher than what you're guiding to?

It really comes down to how much ancillary revenue gets pulled through. You know, we're still – we're only in the early parts of November right now. And also seasonally, it's a – it can be a more challenging year just because of the environment, the weather. The weather gets a little colder, and so we still have a little less pull through an ancillary than we typically have. But really that variance comes through at that level. And, yes, there is potential that that 3% to 4% that I said is more than 3% to 4%. It just is a little too early to tell.

Got it. Thanks very much. Thank you. Our next question comes from Andy Whitman from BERT. Andy, please, your line is now open.

Yeah, great. Sorry, I'm just thinking here. I've got more than two questions. I'm trying to figure out which ones I want to do. All right, so I guess we'll let's talk about ancillary. Can you talk about what the performance on ancillary in the quarter was compared to pre-COVID levels? In other words, we're just trying to get a better sense of how far back that is on a run rate basis today and how much further is to go tomorrow.

Yeah, Andy, good morning. This is John. When you look at the detail between both contract and ancillary in the fourth quarter, versus the same period of, uh, 2019, we're ahead on the contract side, um, modestly by about one to 2%. Um, and on the, uh, ancillary, we're still slightly behind where we were, uh, in, in, in the fourth quarter. Um, but we're still positive net when you combine both ancillary and contract for the quarter versus 19. So good, uh, good results on the contract side. And, uh, getting very close on the ancillary side.

Got it. Okay. For my follow-up, I wanted to kind of talk about some of the reconciling items in free cash flow. In particular, the COVID costs that you called out in the quarter, as well as the IT integration costs. You know, COVID is kind of subsiding, yet your number, the cost that you're excluding is still relatively high. In fact, it's a little bit higher. So I wanted to understand if there was something in there that was one-time-ish or what the expectation was on a go-forward basis for those costs in 22. And then similarly with the IT costs, I mean, you guys have been running $3 million to $4 million per quarter almost every quarter for two years. And so I was just wondering when the expectation for the IT costs spend to reduce substantially or go away is going to occur. Thank you.

Yeah, sure, Andy. Again, this is John. The breakout of the non-recurring in the fourth quarter, about half of that is business transformation and integration costs. The other half is COVID. We saw a slight uptick in the quarter driven by the Delta variant in the quarter. on a quarterly basis as we get into fiscal 2022. On the IT and infrastructure, there's several technology initiatives that we have discussed. Amongst them continued another version of our ERP going to 2.0, the Salesforce and CRM, but we expect those, like COVID, to certainly slow down as we head into 2022.

Andy, I will make one comment on the coronavirus impact. And that's the fact that we continue to quarantine anybody in the company who has exposure to anyone who has the coronavirus. And that's the predominant expense that we have there. We didn't see a slowdown. In fact, we saw an increase in our fiscal Q4 with the caseload we have. We are seeing a reduction now as we see some time in November coming down. But it actually – the July through December time period, and that's what really drove that cost.

Got it. Okay. Thank you. And our next question comes from Slomo Rosabam from Stifel. Please, Slomo, your line is now open.

Okay. Thank you for taking my questions. You mentioned that you're looking for maybe potentially other ways to return capital to investors. Do you mind expanding on that? Would you guys be doing a share buyback? Would you be introducing a dividend, maybe putting in a variable dividend or anything, depending on how snow comes out during the year? Maybe you can expand on that.

Yeah, sure, Shlomo. That was a comment that really carries off of what we talked about at Investor Day, which said that going forward, depending on where we feel the the share price trades that we would possibly enter into some form of share buyback. We have not executed that yet, but we want to continue to be available to make that decision if we deem that it's the best for the company. So that's really what that relates to.

Okay. And then how much in total do you plan to spend on your ESG initiatives in fiscal year 22 that are going into the CapEx number?

Yeah, when you talk about what fiscal 22 will impact, it really comes down to some of the incremental electric vehicles, the incremental cost, I should say, of those electric vehicles, which, you know, over 500 vehicles, that really is a super big number, right? So we're talking about 500 vehicles at most somewhere between $5,000 premium That's going to be consumed in the normal context.

And Shlomo, good morning. This is John. I would add that, you know, we got a lot of opportunity in the handhelds, the two cycles. And, you know, that's going to be life for life, essentially. There's not a lot of cost differentiation today between the gas and electric handheld. And that's fertile territory for us to make traction on ESG.

Is there any difference in the functionality of the two-cycle? I mean, just why didn't you do it beforehand? Like, what's your tradeoff here?

Really what's happened, I would say, in the last couple years is you're seeing increased battery performance of the two cycles, which are allowing us to actually have duty cycles that last longer. And that's been really the limiting factor. If you think about a blower that might have you know, a 30-minute to 45-minute battery cycle in the past. Now as that cascades towards a couple hours with backpacks even extending it to three hours, you know, it really allows two or three changes a day rather than eight changes a day. And really that battery life and the technological advancements that are coming in, that's really what's driving the ability to move forward. And we believe those technological advancements will continue over the next several years allowing us to achieve our goals.

Great. Thank you.

Thank you. Our next question comes from Tim Mulroney from William Blair. Please, Tim, your line is now open.

Andrew, John, good morning. Of course.

Morning, Tim.

So it looks like EBITDA margins are expected to step down in the first quarter, kind of at a similar rate to what we saw in the fourth quarter here. But based on all the mitigation actions and your prepared remarks, when would you kind of expect that margin headwind to tailwind? Is that a back half a 22 thing, you know, in line with the improvement in your development business, or is it more of a 2023 expectation at this point?

Yeah, Tim, the first and the largest driver is really the development side of the business. And to be clear what that is, is when we entered into contracts, let's say about nine months ago, there were certain material costs that are fixed in those contracts. With the inflationary pressures that have come in, most of what the impact of the developed business is that the costs that we're buying materials at are significantly higher. Now, so those contracts were priced again maybe nine months ago. So what we're seeing is as we look at our bookings, you know, we're quite booked right now here in Q1 and Q2 and even partially into Q3 or significantly, I should say, into Q3 with those kinds of contracts with those other materials. So as we are now booking into our Q3 and Q4 with more current costing and current contract structure, we believe that we'll see the turnaround in the development segment as well as in the business because of that. as we get into Q3 and more so into Q4 and then forward after that.

Yeah. You know what, Andrew, that's really clear and really helpful. Appreciate you walking us through that in detail. That'll help, I'm sure, all of us model it out. My second question's on your branch of the future. You know, I'm just curious how you think about the unit economics. of the branch of the future relative to your current branches with with 90% fuel reduction, 50% reduction in maintenance costs and other energy savings with those solar panels. I would really think the unit level economics and return profile for a branch would look really different. But I'm curious how you think that could could impact your 13% long term margin outlook.

Yeah, it's a great question, Tim. And actually, we're very optimistic about long-term economics, because reality is not only is fuel one of our major inputs, as we move away from fuel, that will be significantly reduced, and frankly, the volatility around fuel prices, also reduced. So we believe the investments in the branch of the future from a fuel perspective alone will drive significant return on investment, which will improve our overall margins. Now, the thing is that's not going to come real – I mean, it doesn't come tomorrow because the reality is most of our trucks in the short term are heavy-duty vehicles. And the ability of electric to be able to – tow trailers and to carry our heavier equipment around. Really, the technology isn't there in 2022. But we believe, and after talking with multiple heavy-duty truckloads, Ford or General Motors or those types of folks, we believe as we get into the second half of the decade, that's going to really start becoming technology which is available and usable for us. And we'll start seeing that nice return, I think, as we move into that period.

Okay, thank you. Thank you. Our next question comes from Bob Labic from CJS Securities. Please, Bob, your line is now open.

Good morning. This is Brendan on for Bob. I just wanted to ask about the labor issue in your contracts. How has it impacted your contract negotiation up to now? And could you dive into that 10- to 15-day period shortened pricing commitment. Can you kind of give us more detail on what that means versus your historical norm?

Yeah, regarding the 10- to 15-day pricing cycle, you know, historically when we have contracts similar to what we said earlier about nine months, we would quote a certain price of materials. And because over the last four to five years we had almost no inflation on those materials, we actually ended up having just regular performance on that. With the inflationary pressures now, we've been able to really shrink that up. And this is all in the development segment. that this is happening. So we've shrinked it up to 10 to 15 days so that someone can't sit on a quote for three months or six months, come back to us and say, here's what you put into your bid. We'll go with it. We're saying you can only come back to us within a week or two weeks. If you come back to us after that period, the pricing and the quote isn't good anymore and we'll need to redo that quote. So it's really been a complete change, coupled with the fact that as we then win those contracts, we then take those material levels that are in those bins, and we match those with POs that we send into our suppliers.

Great. And then following up on that, obviously you talk to a lot of companies with your M&A pipeline. What are you hearing from them about pricing? Are some of the smaller guys getting squeezed? So what are you hearing across the industry as everyone is renegotiating contracts and looking at pricing?

Yeah, that's good insight into what's happening out there in the marketplace. There are unquestionably several players out there that we've actually talked with who are struggling significantly on the pricing side of things, especially the smaller players. If you're quite a smaller player, you need to be able to negotiate and get the additional price. and they're having to deal with that living through this cycle while they're in their contract period. So it's put some stress on the industry, and the industry itself knows that this kind of pricing activity that's going to be going on is something that customers are going to need to expect.

Great. Thank you. Our next question comes from Andrew Stateman from J.P. Morgan. Please, Andrew, your line is now open.

Hi, Andrew and John. Two questions. The first one has to do with seasonality on the maintenance side. So after the first quarter, fiscal quarter that you just guided for, help us think about kind of sequential organic revenue growth for maintenance. Should we expect kind of normal seasonality building off that first quarter base, or do you expect maybe better than normal seasonality because there's still some rebounding nature to the maintenance business? And I have a second question.

I think when you look at overall growth in the maintenance segment, that the things that we've invested in in our sales team will continue to drive contract growth. What the seasonality will be is how much the ancillary growth really pulls through. So the fact that we may have base levels of growth in our seasonal markets, it's relatively low. And so we don't have that extra push that we have in the ancillary bucket. So I would say that, well, in the winter months, in our Q1 and Q2, we'll have a little tempered seasonal growth because we take out really a good portion of the contract maintenance in those segments. And then you would expect to see a little higher than average growth happening in the Q3 and Q4 course.

Yeah. And John, think about the revenue that's still being dragged residually by COVID, both on the maintenance and the development side. When that revenue comes back, do you have a sense of the incremental margins on that rebounding revenue?

Yeah, we are working very hard, Andy, on the maintenance side. I gave that measurement of our results in fourth quarter versus 19. And so we're encouraged by that. That 30 basis point increment that we saw this quarter in maintenance versus fourth quarter of 19 is very encouraging. We're moving aggressively on pricing. We're managing our labor aggressively. Fortunate for us on that part of the business, the material component of our P&L is less than on the development side, so less of a headwind there. And so we're encouraged really hard in the quarter, this coming quarter, the Q1, to see if we're going to have that continued incremental improvement because of the impact of snow. But we're encouraged by what we're seeing, and we're certainly confident that we can get that in the back half of the year.

And when you talk about margin, Andrew, what you see is... is in Q3 and Q4, you'll see the double impact of, number one, the pricing initiatives that we're putting in place. So that should have a help on margins. And then secondly, while it's not near as much as it was here in 2021, you'll see a slight pickup of the ancillary as that normalizes completely back to pre-COVID levels, if it does.

Okay. Thank you.

Thank you. As a reminder, to ask any further question, please press the star followed by one on your telephone keypad now. Our next question comes from Shlomo Rosebaum from . Shlomo, your line is now open.

Hi. Thank you for sneaking me back in. I want to clarify something that I didn't catch well in the call. You said something about getting acquisitions in higher-growth housing markets. If you wouldn't mind just clarifying what you're talking about in terms of higher-growth housing markets.

Yeah, absolutely, Shamo. If you look at three acquisitions that we've done, Baytree, GTI, and and WLE in Austin and Las Vegas and, frankly, down in Atlanta, but also in Charleston, South Carolina. These are really good housing markets, and we typically have had less activity in our development segment on housing. And with those acquisitions, they have really introduced us into those housing markets, working on new developments. for landscaping development in those housing markets. And it also allows us to have a little bit of drag along or pull along with our maintenance contracts as those development projects and those housing developments complete. We've seen an interesting segment because, again, we've kind of not paid as much attention to those housing development markets. And we see, taking those examples, and actually we've launched an initiative in several new markets, that we are starting to see some good traction on with the learnings we've had from those M&A acquisitions.

I'm trying to understand. Are these like condos, so it's more HOAs? What kind of pull-through activity is there after there's like, you know, if it's just residential homes, I would understand an initial landscaping. What happens after that?

HOAs. HOAs. So what's happened in the industry is in an HOA, yeah, you develop a new homeowners association, you have the infrastructure, maintenance, but also what happens in many of these is the front yards also get maintained in an HOA contract. So an HOA of 200 or 300 homes might include within their HOA dues us maintaining the front yards in a regular manner, but only dealing with one customer with the HOA. And then that led to using HOA Connect and BB Connect, which is the service ticket management software that we have that allows the actual resident through the HOA to communicate how our performance is doing. It really led itself to really pushing harder into that segment, and we're seeing some really positive initial signs and a couple new markets of growth.

Got it. Okay. And then I just want to piggyback on one of the questions that was asked earlier in terms of the COVID costs year over year. Could you break down that $8.8 million and just kind of explain what the costs are for? On the ground, what are you spending the money on?

Well, the biggest part, Shlomo, is the PTO, without a doubt. And as I said in my earlier comments, with the Delta variants, There's been another resurgence. But when you look at the fourth quarter, the biggest chunk, without a doubt, was PP&E between masks, gloves, sanitizers, just because we have so many people in the field in an extensive branch network. The other big driver was exactly what I just said, the PTO and the sick pay. for folks, those are the predominant costs that we've seen. And again, those were up slightly versus fourth quarter of last year. But again, you know, when you look at the numbers through the year, we had about seven and a half million in the first quarter, tapered down in the second quarter, slightly under four, under three in the third, but then that ramp up again because of the variant. But again, as I said in my comments, We're certainly hopeful they go down, and we'll see.

Okay, thank you.

Yep.

We currently have no further questions, and we now hand over back to Andrew Masterman for any final remarks.

Thank you, Operator. Once again, I want to thank everyone participating in the call today and for your interest in Brightview. We look forward to speaking with you when we report our first quarter results. Stay safe.

This concludes today's call. Thank you for joining. You may now disconnect your lines and enjoy the rest of your day.