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spk08: Hello and welcome to today's Brightview Holdings Incorporated first quarter fiscal 2022 results conference call. My name is Bailey and I will be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to our host, John Shave, Vice President of Investor Relations. John, please go ahead.
spk04: Thank you, Bailey, 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 slide, 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 can impact the company's future operating results and financial conditions. 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.
spk05: Disclaimers on forward-looking statements and non-GAAP financial measures apply both to today's prepared marks as well as the Q&A. I'll now turn the call over to Brightview CEO, Andrew Masterman.
spk04: Thank you, John. Good morning, and thanks to all of you for joining us. I am particularly happy to be with you all today as it is snowing heavily in many parts of the country, while snow removal continues in the northeast following the storm last weekend. As you know, our results during the winter are meaningfully impacted by snowfall. So while the current weather can't help us with our first fiscal quarter, it's a great start to Q2 with almost twice as much snow in January of 2022 versus the prior two Januaries, and we're very happy to have it. And any strength in Q2 will build a very positive trend that we've seen over the last several quarters and which continued in Q1 2022. That trend is organic growth in the core of our company, our maintenance land business. We are pleased to continue our excellent momentum this quarter with strong maintenance land organic growth of 7.3% with Q1 revenue reflecting a return to above 2019 levels. We expect this performance to continue. Strong execution by our maintenance land organization delivered $3.2 million of incremental EBITDA on $40 million of increased revenue. This result is primarily driven by exceptional labor and material management in our organic business, offset by fuel escalation and from maintenance service lines that we acquired from recent development M&A transactions that were not a focal point of those development businesses. We are optimistic this will improve the second half of fiscal 2022. These trends are a result of the culture we have built and of the commitment of our entire organization, from gardeners to leadership team, who are all delivering excellent services to our customers. I am so incredibly proud of the Brightview team. Let me begin by reviewing the highlights from the quarter. First, I am pleased to report another solid quarter revenue growth led by 7.3% maintenance land organic growth. Continued expansion of our contract business as well as a rebound in ancillary services penetration is a result of the investments we are making in our expanded sales team and sales implement technologies. This follows Q4 of fiscal year 2021 in which we grew organically 9% plus and fiscal Q3, in which we grew organically 11% plus. In short, we have grown from fiscal 2019 organic revenue levels, despite operating in an environment presented with continued challenges. Second, adjusted EBITDA for the quarter was $42.6 million, down 18.7%, or $9.8 million compared to the prior year. The decline was driven principally by significantly lower snowfall across Brightview's branch footprint, which pressured our top line and profitability in the quarter. Assuming an average snowfall during the quarter, our adjusted EBITDA performance would have been towards the higher end of the guidance range provided during our fourth quarter call. The lower end of our adjusted EBITDA guidance range contemplated low snowfall, and in our primary snow markets, we did not see any measurable snowfall. Given that we are largely able to provide snow services with our existing fixed cost structure, the impact of low snow revenue, particularly given the geography is impacted, we estimate was a $7.5 million reduction to adjusted EBITDA in the quarter. We will discuss this in more detail later. Third, Our total consolidated adjusted EBITDA margin of 7.2% was impacted by lower snowfall totals, higher materials costs in our development segment, and fuel expense across our organization. Within these results is outstanding labor and material management by our maintenance team, minimizing margin impact. To offset forecast inflationary pressure, we have implemented a price increase initiative that should benefit the second half of the year. Fourth, The results of our strong-on-strong acquisition strategy benefited our revenue growth by $39.7 million during the first quarter. Unlike other quarters, acquired revenue was heavily weighted to our development segment. We also completed a key strategic acquisition that strengthens our presence in a high-growth market. And finally, we announced a $250 million share repurchase program, and in January, completed the repurchase of 5.9 million shares from MSD partners at a purchase price of $13.98. The repurchase represented half of MSD's investment in Brightview. The share repurchase authorization does not affect our previously stated and ongoing mergers and acquisitions strategy. We have to continue repurchases on an ongoing basis for the foreseeable future. Before we turn to the details of our first quarter, let me provide you with our outlook for our second quarter of fiscal year 2025. Our maintenance land contract-based business is growing and demand for ancillary services is improving. We are encouraged by what we see happening in the market and believe this will result in another quarter of maintenance land organic growth of 4% or more. The positive momentum in Q1 maintenance land should continue into Q2, and we will deliver incrementally without from both organic and M&A revenue. Snow removal services is the largest variable in our second fiscal quarter, and we are optimistic about our ability to deliver solid results. In our development segment, we are encouraged by the backlog trends we have previously discussed. Because of this, we are forecasting approximately 5% organic revenue growth in Q2, as well as more than 5% revenue growth from M&A. The market pressure we have seen from material inflation will continue, but at a lessening rate. Looking forward in development, one external tracker we monitor is the Architecture Billings Index. The ABI is an economic indicator for non-residential construction activity with a lead time of approximately 9 to 12 months. The ABI ended 2021 on a high note, as billings increased almost every month of 2021. This architectural activity drives our pipeline of work and is tracking across all markets, evidenced by increasing backlog across the enterprise. As a result, we remain optimistic that modest organic growth trends in the development segment should continue throughout fiscal 2022 and into fiscal 2023. As such, for our second quarter fiscal 2022, we anticipate total revenues between $620 and $680 million and adjusted EBITDA between $50 and $60 million. The low end of the guidance assumes light snowfall and the high end assumes average snowfall. Moving now to slide six, as you can see here, we have delivered a consistent level of significant M&A and fiscal 2022 is off to a promising start. During the quarter, we welcome Performance Landscapes to the Brightview family. Performance was founded in 2002 and operates on the islands of Oahu, Maui, and Kauai from their main office in Honolulu. Kauai's landscapes are renowned for their beauty and cultural significance, and Performance provides a full suite of landscape maintenance and enhancement, tree care, and irrigation services. The organization has 110-plus trained and e-verified personnel and an established culture of safety. Performance is the service leader in the Honolulu Oahu market and provides Brightview with a strong foothold in Hawaii. The company has an attractive operating and performance track record and serves clients across the homeowner association, high-end residential, commercial, and private military housing market segments. Brightview Development Services has been a licensed landscape and irrigation contractor in Hawaii since 2008. In addition to renovating the Four Seasons in Kona following a tsunami in 2011, Development Services restored the irrigation system for the Hilton Waikoloa Village and Resort and performed landscaping architecture work at the Four Seasons Resort Maui. Brightview is excited to add maintenance services to its existing development capabilities on the island. In addition to organic growth, We have grown and expect to continue to grow our business through acquisitions to better service our existing customers and to attract new customers. M&A is a critical aspect of our strategy and organic growth. Moving now to slide seven, our strong-on-strong acquisition strategy is focused on increasing our density and leadership positions in existing local markets, entering attractive new geographic markets, and expanding our portfolio of landscaping enhancement services and improving technical capabilities and specialized services. We believe we are the acquirer of choice in the highly fragmented commercial landscaping industry because we improve great businesses after we acquire them. Brightview offers the ability to leverage our significant size and scale. First, centralized procurement and buying power, trucks, trailers, mowers, handheld equipment, power is undisputable. Second, the customer experience and productivity tools. Starting with our CRM and existing platforms to our customer portals, Brightview Connect and HOA Connect to our mobile quality site assessment application. Our field associates have the tools to maximize the customer experience with improved ancillary penetration leading to margin enhancement. Third, Digital marketing tools, strategies, and channels lead to greater awareness and more impactful messaging, resulting in more valuable leads and higher opportunity pipeline dollars. And fourth, safety and training throughout the employee lifecycle. Brightly provides stable and potentially expanding career opportunities. And we take pride in our industry-leading safety programs. In 2021, over half of our branches went without one single industry. Since 2017, we have completed dozens of 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 of value, creating use of free cash flow. 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 a strategy we have developed and deployed over the last five years. Turning now to slide eight, the largest variable to our first quarter and second quarter financial performance is snow removal services. Notably, the United States saw its fourth warmest year in 2021, fueled by the warmest December on record, and this impacted snowfall totals in key markets. According to NOAA, snowfall totals in inches specific to Brightview's geographic footprint were down 59% versus prior year and 56% of the historical 30-year average. Our snow removal services revenue of $36 million was down 43% or $24 million on an organic basis, offset by $4.2 million of acquired snow revenue during the quarter. WeatherWorks, the industry standard for our customer contracts for billing and invoicing purposes, reported snowfall totals in inches mapped to our specific branch footprint were down almost 73% versus the prior year. Let me give you a few year-to-year WeatherWorks specifics on our largest snow markets and regions. Denver, a historically strong and consistent snow removal market, recorded approximately 2.3 inches of snow during the quarter versus approximately 19.6 inches in the prior year. Chicago recorded approximately 2.7 inches of snow, down 39% versus prior year. And in our northeast region, snowfall was less than one inch, down 91% versus prior year. And we realized no snow in the mid-Atlantic region during the first fiscal quarter of 2022. Keep in mind, snow margin is driven by many factors, including when, where, how, how much, and how often it snows and will change every year. Despite significantly less snowfall in our first fiscal quarter versus last year, snowfall totals in January of 2022 were at historical averages and twice 2020 and 2021. This drives our optimism that the snowfall totals specific to this branch footprint during our second fiscal quarter will be near 10 and 30-year historical averages, assuming February and March continue this trend. Turning to slide nine, 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. As a company that designs, creates, maintains, and enhances commercial landscapes across the country, sustainability is central to Brightview's branching corporate purpose. In fact, environmental and social responsibility and corporate governance has been integral to our company since our founding. We will publish an inaugural ESG report next week and are committed to regular, transparent communication and intend to continue providing updates on our progress. Since this will be our inaugural report, let me take a few minutes to review our ESG strategy. Our commitment to environmental, social, and governance practices and progress starts at the top with our board of directors and executive team. And it's a source of pride for every member of our team who bring our commitment to life each day. At Breakview, we are committed to embracing environmentally responsible practices and making progress towards carbon neutrality. striving to take care of all team members by providing a safe, inclusive, diverse, and engaging work environment, dedicating time and resources to improve the communities where we live, work, and play, and maintaining the highest standard of ethics and values. Turning to slide 10, let me provide you with some insight regarding our environmentally responsible practices. To reduce our energy and emissions, we are expanding our fleet of energy-efficient vehicles, adopting next-generation fuel tracking technology, and offering the use of alternative fertilizers. We are also adopting strategies and next-generation equipment to help our clients reduce their carbon footprint and meet LEED certification standards. Our commitment to carbon neutrality by eliminating carbon from our operations represents our biggest opportunity to reduce corporate risk, contribute to a healthy environment, and be the leader in our industry. Our goal is to reduce our carbon consumption by 90% and become carbon neutral by 2035. We have a five-pronged approach to achieving our carbon neutrality goal. First, stewardship. We're actively engaging with industry and suppliers to lead a transformation towards our environmental goals. Sustainability. We're helping to sequester carbon by planting trees and through sustainable design and maintenance of landscapes. A cleaner fleet. We're converting our fleet of 11,000 vehicles with electric and hybrid alternatives. Greener equipment. We plan to convert approximately 35,000 pieces of two-cycle power equipment to rechargeable energy sources by 2025. resulting in a greater than a 50% reduction in Brightview's total carbon footprint. Efficient buildings. In the 300 properties we currently own or lease, we're replacing outdated equipment and appliances with energy-efficient alternatives. Where possible, we intend to convert electrical power to our buildings with alternative energy sources, and we are planning to pilot these measures at one of our branches in 2022. Not only this will be significant for our company and for the environment, But by integrating green energy into our operations, we anticipate decreasing our equipment maintenance costs by upwards of 50% annually. Turning now to slide 11, let me provide you with some insight regarding our efforts to create a socially responsible, great place to work. At Brightview, we provide a safe, inclusive, and engaging workplace where talented people come to work and advance their careers. Guided by our people strategy, we're working to attract, hire, engage, develop, reward, and retain top talent. With an emphasis on ongoing improvement, we continue to assess our programs and meet the evolving needs of our teams and the organization. As a growing company, a key area of focus for us is fostering a positive, inclusive company culture in which everyone's voice is heard. Brightview is committed to attracting, developing, and retaining best-in-class leaders and professionals in the industry. In 2020, we launched Wright View University, our employee development program, which offers courses tailor-made for different positions within our company, from landscapers to business development professionals. Through this program, all team members can receive relevant and accessible training to build their skills. In 2021, we began providing additional management, technical, and leadership development courses to our employees through the Biz Library online learning program. A key to social responsibility is building a diverse and inclusive culture. To make all team members feel welcome and valued, we are working to increase the diversity of our workforce and investing in initiatives that provide equal opportunities to employees and candidates of all backgrounds. While we continue to strengthen our diversity and inclusion strategy, we recognize the most important thing we can do is listen and learn. Turning to slide 12, as it relates to corporate governance, we are dedicated to maintaining the highest standards of business integrity and ethical conduct. Adherence to sound principles of corporate governance through a system of checks, balances, and personable accountability is vital to protecting Brightview's reputation, assets, investor confidence, and customer loyalty. Starting at the top, Board of Directors now has an average tenure of less than four years and reflects our commitment to diversity. Three of our seven independent directors are considered to be diverse, up from zero three years ago. Another example of our strong governance is our commitment to compliance. Because Brightview relies on many seasonal workers, ensuring that our employees can work in the United States legally is important both to us and our customers. E-Verify is a web-based system that allows Brightview to confirm the eligibility of our employees to work in the United States. As an E-Verify employer, we can verify the identity and employment eligibility of newly hired employees by electronically matching information provided by employees against records available to the Department of Homeland Security. While E-Verify is a voluntary program, Brightview is proud to be the only landscaping company that utilizes the program in every state in which we operate. Brightview recognizes that prioritizing ESG is an essential component to meeting the needs of all our stakeholders. Our board, in collaboration with the leadership teams, directs and oversees ESG strategies, establishes relevant policies and practices, and monitors progress and performance. 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. Let me start by reiterating some key highlights for Q1 of fiscal 2022. First, we achieved maintenance land organic growth of 7.3%, a third consecutive quarter of solid organic growth. Second, we had improved labor and material management in the maintenance segment. And third, while still challenged, the development segment had a quarter to quarter improvement from the impact of material cost inflation And fourth, outside of our CARES Act repayment within the quarter, we continue to generate solid cash in our head of our plan for Q1. As a firm, we remain laser-focused on our key investment pillars of organic growth, margin enhancement over time, mergers and acquisitions, and cash generation. With that, let me now provide a snapshot of our first quarter results. Moving to slide 15, First fiscal quarter 2022 revenue for the company increased 6.7% to $591.8 million in the current quarter from $554.4 million in the prior year. Maintenance revenues of $438.2 million for the three months ended December 31st increased by $20.2 million, or 4.8%, from $418 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 7.3% land organic growth. Additionally, we realized $17.8 million of incremental revenue from acquired businesses. For the three months ended December 31st, development revenues increased $17.3 million or 12.6% to $154.7 million from $137.4 million in the prior year. The increase was driven by the $21.9 million contribution from acquired companies. We remain 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 16, total adjusted EBITDA for the first quarter was $42.6 million, down 18.7%, or $9.8 million compared to the prior year. In the maintenance segment, adjusted EBITDA of $45.3 million was down 8.7% for $4.3 million from the prior year. Solid contract growth and a continued rebound in our ancillary services drove a $3.2 million improvement, which was offset by significantly lower snowfall across our branch footprint. The snow impact for Q1 was approximately $7.5 million. Assuming normal historical snow, we estimate our Q1 adjusted EBITDA performance would have been $50.1 million and towards the high end of the right guidance range. More on this shortly. Driven by the dynamics just discussed, adjusted EBITDA margin of 10.3% was down from 11.9% in the prior year. In the development segment, adjusted EBITDA decreased $2.6 million to $14.5 million, compared to $17.1 million in fiscal Q1 of 2021. The decline was principally driven by higher material costs as a percentage of revenue. Adjusted EBITDA margin of 9.4% was a reduction compared to the prior year levels of 12.4%. For fiscal Q1, corporate expenses represented 2.9% of revenue. Let me dive a bit deeper into our snow business and provide additional snow data and metrics that highlight what we feel is a valuable part of the Brightview story. On slide 17, we show the buildup of our pro forma results, assuming historical 10- and 30-year average snow results. This is further refined as we base this on NOAA data over that time specific to our branch footprint. We estimate the result would have been adjusted EBITDA of $50.1 million for Q1, which was at the higher end of our guidance range. Let's move now to a balance sheet and capital allocation on slide 18. Net capital expenditures totaled $27.5 million for the quarter ended December 31st, up from $9.1 million in the first quarter of fiscal 2021. Expressed as a percentage of revenue, net capital expenditures were 4.6% in the first fiscal quarter of 2022 and 1.6% in fiscal year 2021. Like many companies, we continue to face supply chain constraints pertaining to our equipment orders. Combined with multiple years of below historical average capital spending, and continued growth in the maintenance segment, as discussed last quarter, we continue to anticipate capital expenditures will be approximately 3.5% of revenue for fiscal 2022, which is within our historical guidance range. In the first fiscal quarter of 2022, we invested $6 million on acquisitions. Net debt on December 31st, 2021, was approximately $1.1 billion flat versus the end of the first fiscal quarter in the prior year. Our leverage ratio was 3.8 times at the end of the first quarter of fiscal 2022, down from four times at the end of the first fiscal quarter of 2021. For the first quarter of fiscal year 2022, free cash flow usage was $49.9 million, This was driven by a $33 million year-to-year swing from the CARES Act repayment, as well as a strategic increase in capital to support our continued organic growth. An update on liquidity is on slide 19. At the end of the first quarter of fiscal 2022, we had approximately $207.7 million of availability under our revolver and $132.8 million of cash on hand. Total liquidity as of December 31st, 2021, was approximately $340.5 million. This compares to $324.2 million as of December 31st, 2020, and provides us with ample flexibility and optionality. I turn the call over to Andrew for closing remarks. On slide 20, I would like to address margin erosion in our development segment. A topic that I suspect continues to be 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. The main contributors to margin erosion in the segment were organic revenue declines due to macroeconomic slowdowns in the construction market and increased material costs as a percentage of revenue due to supply chain pressures. Other costs, primarily labor, have been effectively managed. Historically, material cost estimates and development bids were honored from the time a bid was submitted until it was accepted through the completion of the project. Many current development projects were bid on and won 12 to 24 months ago, and we have little flexibility to renegotiate bids after the fact without potentially damaging long-term client relationships. As we move forward, and as we mentioned in our last call, the development team is shortening the expiration date for the bid price window to 15 days, including more specific cost escalation language in bids to provide protection against potential continued inflationary dynamics. shifting from a just-in-time buyer to an advanced purchaser of materials within 15 days of the contract award to reduce the risks associated with future procurement, and increasing collaboration with vendors to better anticipate material cost trends and expectations. During the first fiscal quarter of 2022, we witnessed some early indications that we are trending in a positive direction. Our adjusted EBITDA margin contraction in Q1 2022 was 300 basis points compared to a 480 basis points contraction in Q4 of 2021. 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 on the market, the landscape maintenance market has a resilient nature and Brightview is growing at rates significantly above the industry. The landscape development market is showing architectural and bidding activity at levels which will support significant growth for Brightview as the industry leader. We are optimistic about trends we see across our segments. Second, growth. Our 7.3% land organic growth in Q1 is our third consecutive quarter of organic expansion and believe we will sustain above industry average growth rates for the foreseeable future. The investment in our sales force, combined with increasing use of omnichannel and digital marketing, continues to deliver year-over-year improvements, and our opportunity pipeline has expanded hundreds of millions of dollars in the last year. The intense customer-focused culture within the company is also driving up our retention rates, and combined with our sales performance, is creating a reliable source of sustainable growth. 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 the next generation investment in Brightview Connect 2.0, which will deliver highly requested enhancements for our customers in 2022 and will continue to differentiate Brightview's digital capabilities. 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. The improved productivity should lessen the need to expand the sales force at the same rate as the last several years. Our sales and marketing strategies and structure are a formula for long-term success. Fifth, in M&A, the results of our acquisition strategy continue to benefit our revenue growth and, with an attractive $600 million bus pipeline, Acquisitions will continue to be a reliable and sustainable source of growth. We have added strategic locations and service line enhancements throughout the United States and believe the deals we are currently negotiating will expand our presence and our depth of landscaping services across the country. And sixth, cash. We continue to generate significant cash and will focus on utilizing our strong balance sheet, driving profitable growth through M&A, share with purchases, and potentially looking at other ways to return capital to stakeholders. I remain as optimistic as ever about our prospects. I thank our teams for their dedicated response to the winter storms and their continued attention to designing, creating, maintaining, and enhancing the best landscapes on Earth. Thank you for your interest and for your attention this morning. We will now open the call for your questions.
spk08: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Okay, so we do have our first question, and it comes from George Tong of Goldman Sachs. George, please go ahead.
spk06: Hi, thanks. Good morning. Can you provide updated details on how contracted landscape maintenance revenues now compare versus pre-COVID levels and how ancillary maintenance revenues have been impacted by Omicron?
spk04: Sure. Good morning, George. Now, where we're at the pace we're running at, George, we are actually operating above pre-COVID levels. So we're happy to say that, you know, we are back, that the organic growth trends have improved to where we're growing to places we've not been before. We're pretty excited, actually, about where that's at. Certainly in our contract business, in our ancillary business, actually, if you look at the first quarter, it's actually performing at a very strong pace as well. So that gap between 2019 and 2022, we filled it, and we're back in the saddle.
spk06: Great. You talked about shortening the expiration date for bid prices in the development business to better adapt the rising input costs. Can you highlight your strategies to respond to rising input costs in your maintenance business, particularly around labor and how pricing changes will mitigate the headwinds?
spk04: Absolutely. In our maintenance business, if you talk about, I'll take it with both material and labor, material costs tend to be more in our ancillary portion of our maintenance business, and thus our bid in a much shorter window. Usually within four to six weeks of installation, we're putting the bids together. So they're very current costs, and they reflect the current acquisition of those materials in those bins. So we believe we are actually facing or really addressing the inflationary positions on material within maintenance, and so don't have any of the negative impacts that you see in long-term fixed contracts that we see more in our development business. Yeah, and George, this is John. I think one other thing, and you heard it in our comments, we're doing a really good job in managing the labor demand We feel in both segments. The other thing that we're focused heavily on is doing more in-house labor versus subcontractor, which tends to be more efficient for us and has less drag on the P&L. So we made progress on both those fronts within the development segment and the maintenance segment within the quarter, and we're going to obviously continue to try to do that going forward to offset some of the escalations that we've seen. Addressing your last issue on pricing, George, we're going on a very deliberate and focused approach to engaging with all of our customers, showing that the cost inflation that we've seen in labor and materials are things that we need to address and really work together with the customers on being able to cover those inflationary costs. That effort right now is – we're right in the thick of it, and most of those are dealing with contracts as they renew, most of which renew kind of in the March, April, May timeframe as new landscapes come into play. So we expect to see that offset some of those inflationary aspects in the second half of our year.
spk06: All right. Thanks very much.
spk08: Thank you, George. Our next question comes from Shlomo Rosenbaum from Stifel. Shlomo, please go ahead.
spk05: Hi, thank you very much and good morning. Andrew, maybe you could comment a little bit about how does the ancillary services as a percentage of total land maintenance, how does that compare to what we saw in a pre-COVID level? Are we back to the kind of two-thirds, one-third in terms of contract versus ancillary? Are we still kind of trailing that? I'm looking at it more like on a customer-by-customer basis as opposed to just the whole company, just to gauge where we are.
spk04: Yeah, I think in general, the shape of the business has returned to kind of pre-COVID levels. That would be pretty much across all segments. We clearly saw an impact in the hospitality of retail verticals during the height of the COVID pandemic. The reality is, I think you can see it, is that those segments, especially in the resort areas, have seen quite a rebound. And we've been able to go back and go and work with those customers on identifying areas in their properties which continue to differentiate them. So that kind of mix that you said, two-thirds contract, one-third ancillary, that's pretty much where we're operating at, and we feel we're back in kind of a normalized pace. Who would expect that to continue as we move throughout the year and that we're back in a normalized operating case?
spk05: Great. And then how much longer, based on what you see in the future, with the contracts that you had bid on the pre-inflationary period, How long is it going to take for you to cycle through those contracts? In other words, you have to fulfill the contracts where you made a commitment in terms of the pricing before the inflationary environment really started to take off. How long will it take you to really get those implemented so that we won't have that weighing on the numbers?
spk04: We've been doing a deep dive on that and actually going in and working with all of our branches. We would expect, you know, we saw an improvement from 480 bits to 300-bit contraction in this quarter. We would expect that to continue to improve slightly over the course of the next several quarters, and we'd expect really it's going to be late in the second half, you know, probably into the first quarter of 2023 before we see really fully getting out of that. But we do expect the impact to increase.
spk05: lesson over time okay and then in terms of development projects what's going on with the construction are we seeing you know is it really delayed are you seeing more delays now are you seeing any areas where it's accelerating um you know how should we think about that in terms of like kind of the timetable or your visibility to when you'll actually be able to get into the projects you know since you guys are usually the last ones uh you know kind of a capstone on the project
spk04: Yeah, I think the delays that we're seeing now in the development sector are actually less COVID-related and they're more just labor availability of the other subs for us. So that's the uncertainty. Sometimes when the subcontractors before us actually get in and get done on time, there are places in the country where they're doing very well, and some of the construction companies and the general contractors do a fabulous job of getting those done. It's just when you take the broad brush, the broad scale that we do landscaping across the country, there are pockets where maybe they're not quite as on top of it as... as we are we're ready and primed to go that's the fortunate thing is the second uh the projects and the subs before us get done we're ready to go we are seeing a lessening of that impact relative to where it was let's say six months ago um and so we're we are optimistic about being able to post five percent organic growth in the in our development segment as we look forward thank you
spk08: Our next question comes from Tim Mulrooney from William Blair. Tim, please go ahead.
spk03: Good morning, Andrew, John. A couple questions. I apologize if this one's been asked already, but 7% organic growth in your maintenance green business in the first quarter. Can you walk us through how organic growth in the business trended through the quarter and any more recent color you could provide on January? Sure.
spk04: Sure, absolutely, Tim, and good morning. You know, if you look at it, in the three months, October is our busiest month. And that's just due to the nature that we're still kind of in fall mode. And so, just naturally, what you'd see throughout the quarter is clearly our seasonal market kind of slows down and our evergreen markets continue moving right forward. So, what I would say is that, in general, we're seeing a positive pace, again, 7.3% growth over the whole business. And what we did see, I would say, in November and December, well, the magnitude, the dollar magnitude is the biggest in October. We're actually seeing an improving profile over November and December, which that's why that gives us optimism as we go into January, February, March, and actually cascading forward. So as I said, overall, dollars-wise, October is the biggest. but an improving trend as we go through November and December when it comes to the growth picture.
spk03: Yeah, that makes a lot of sense, Andrew, because I think if I remember correctly, your guide was like 3% to 4%, and you come out with 7%. So it makes sense that things improved throughout the quarter relative to your expectations. And now I guess your guide is 4% plus, but there's a plus there. Okay. Yeah.
spk04: And the reason the plus is, you know, it's just in these seasonal markets, you just don't know exactly whether the snow, whether it comes in or not. And if it's a little lighter snow in March, it allows us to really accelerate some of that growth into the March period.
spk03: Okay. Okay. That's helpful. And then one more from me, Andrew. It looks like your deal pipeline has grown in the slides. I think it's at $600 million today, up from $400 million, I don't know, a year or two ago. Is this kind of because you've expanded your internal M&A capabilities, or is there something broader going on here in the marketplace where there are more folks coming to the table and being willing to have the conversation about selling versus a couple years ago?
spk04: It really comes down to our match rate. We're maturing in our approach to M&A, and we're adding people. So the thing is, over the last couple of years, we've enhanced and built out our dedicated team. We've actually added another business developer, what I call the M&A business developer, going out searching for deals. I think now also we've established a reputation, and that's, I think, the biggest thing we have probably that stimulates the M&A market. is that we have a reputation for being extremely fair, extremely straightforward, and the purchaser of choice. Really, it's the people have heard. We've done almost 30 acquisitions over the course of the last five years, and that success breeds a reputation where people prefer to come to Brightview as others. Yeah, and Tim, good morning. This is Sean. The other thing I would add to Andrew's comments is exactly what he said. We're getting more people to reach out to us directly. whether it's to our M&A team, directly to myself, directly to Andrew, and I think it's a causal of everything that Andrew talked about, of what we've been able to demonstrate over the last three or four years.
spk03: Yeah, so you think it's more internal to Brightview than specific to Brightview than any real change in the market. Can you touch on how valuations have trended relative to the historical average?
spk04: Yeah, we're staying right within that window of five to seven times. We're staying very disciplined, very matter of fact. Every now and then for a deal that may be a little bigger, we may go a little higher. But again, that's on a pre-synergistic basis. So these are still going to be very accretive for us. But we're, for the most part, Tim, we have not waived out of that five to seven times. As people come into the marketplace, obviously expectations sometimes of sellers go up. And, frankly, we stay very disciplined. The amount of opportunities out there are so big that we don't have to go out and pay up. that some of our other competitors might go and pay up for because we have the companies approaching, as John said, they're approaching us and we have a reputation. Those companies, those other companies out there that compete with us in the M&A marketplace may not have the reputation, may not have the balance sheet, may not have the ability to create career opportunities and the track record of what we have in the business. So, frankly, they have to pay up to be able to attract them to go with another buyer rather than ourselves.
spk08: Thank you, Tim. Our next question comes from Justin Hawk of Robert W. Baird. Robert, please go ahead. Justin, please go ahead. Sorry.
spk07: Two first names. OK, so thank you for all the colors so far. The question I had, just looking at the for 2Q, You know, if I use the math, 4% for organic land and 5% for development organic to keep snow flat, I get just over $670 million of revenue versus the $620 to $680 guide. So given that M&A was, you know, pretty material here in the first quarter, I was hoping you could give us – some commentary on what the inorganic revenue contribution you're expecting for 2Q, and then maybe also based on acquisitions you closed last year or the one you did earlier this year, how much total revenue contribution are you assuming from M&A for 2022?
spk04: Yeah, one thing as you look at the guide that we have out there is recognizing last year, the snow was slightly above average in total for the quarter. So on a year-over-year basis, I definitely would take that down a portion, whether that's 10% to 15% or so, just because we have extraordinary February when you look at the midpoint of our pattern. So, we did have to take snow down somewhat because of that kind of over-delivery on snow. When it comes to our assumptions related to acquisitions, I think what you've got to think about is, number one, it's primarily weighted more towards our development segment because we have some significant kind of deals which have rolled into development. So I think it's going to be kind of a balance between the two. But I think overall, when you look at that, you know, it's going to be somewhere around $15 million or so when it comes to development. And then on the maintenance side, it's probably a similar magnitude. So right around $30 million. But again, much of that depends on their worth of snow, their risk of elements of snow in there. It also depends on the ability of the development to fit that in. But, you know, somewhere between, let's say, $25 and $30 million in total.
spk07: Okay, yeah, no, that's helpful, and I appreciate that on the February headwind. I mean, yeah, it's snowing right now, so hopefully that helps. On my second question, you talked a lot about the inflationary costs on the development side and particularly on materials. Labor, I mean, just given that you're going into or you will be in the next couple of months your seasonal hiring time, I think last quarter you were saying that the rate of labor inflation was running in kind of the 7% range in the second half of 21. I'm just curious if you're seeing kind of a similar level of wage increases this year, or is that increased or decelerated? Anything you can give on that side, Nicholas?
spk04: Yeah, Justin, I think, again, it depends on certain parts of the country. But if we go back and look at what we experienced this time, we were slightly over 4%. You know, we've had some quarters between now and then where it's been certainly above that. We've been assuming that we're going to see, you know, at least 5%. Could we have a quarter where it's higher than that because of timing? Sure. But I think that's kind of how Andrew and I are thinking about it, a little bit higher than what we've experienced over the last three or four years when it was about 4%, so 5% plus. is what we're thinking about. And that's what we're looking at as we're talking with customers on price increases to make sure that the price increases we're getting adequately covers those kind of inflationary aspects that are out there. And fortunately, so far, the negotiations that we've gone and we're just, again, in the middle of them, we're really optimistic about what our customers are cooperating with us to make sure that the cost inflation that we see are being covered by food prices.
spk08: Thank you, Justin, for that question. Next question comes from Hamza Mazzari of Jefferies. Hamza, please go ahead.
spk01: Hi, this is Hans Hoffman filling in for Hamza Mazzari. So my first question is, can you just talk a little bit about, you know, your technology journey and I guess, you know, what's behind you, what's yet to come, and if you're starting to see some of the benefits from tech spend in the margin line or on operating leverage?
spk04: Yeah, look, we have absolutely invested significant dollars in new platforms and new operating technologies that we see across the board, whether that's internal or whether that's customer-facing. And no question that actually over the last several years has many of our internal investments when it comes to efficiencies around going to one operating system, when it goes into our ability to capture time, whether electronic time capture, those kinds of things, I think, fueled some of the margin expansion we saw several years ago. So we're actually very pleased right now where those investments actually did generate nice returns. I think as we look forward and where we see things going forward is the new BB Connect 2.0, which is really a customer portal, which will be a unique experience customers will be able to have with Brightview. Being able to engage with us across their entire customer relationship, whether it's ancillary services, whether it's service verification, whether it's history of bids, whether it's your financial relationships, or frankly, whether it's relationships and who is servicing your account contact points. and pictures and videos on things that we do throughout the entire property we manage. That's all going to the web and going to be digital to our customer. We're really excited about launching this, and that will be probably in our Q3, kind of Q4 timeframe, really taking BB and HOA Connect to the next level. That's coming. We also just recently introduced our QSA, which is our Quality Site Assessment 2.0 software. That was launched in the winter, or I should say last quarter, in Q1, which allows our account managers to regularly communicate, and again, in a digital way, property health. and what's going on in the property, the dynamics of the horticultural intensity, of the issues that we're seeing or potentially opportunities for enhancing the entire property. That digital and seamless coordination was launched in Q2, and we would expect that as we mature the usage of it to continue to see it manifest in ancillary business as we look at ways which we can truly enhance properties. So that's more on a revenue growth side standpoint to basically support the overall business and our customer engagement. We're really excited about where technology can take the business because those are things when it comes to, again, our one operating system, one system throughout the whole company. and electronic time capture which is a little bit more internally focused these two other platforms of qsa 2.0 and h and bb connect externally focused and there's other things when it comes to technology such as autonomous mowing and some things that we see coming into the future over the next several years which will continue to have that will have some margin impacts not quite ready for prime time but we believe that's going to have some some significant margin impacts as we can take labor out of the business and put autonomous mowing into the business, but that's probably more so in the 2020, 24, 25 timeframe.
spk01: Got it. That's helpful. And then could you just maybe talk about what margins on ancillary look like again, I guess, versus maintenance and how big ancillary is today versus pre-pandemic levels and maybe historical peaks, if any?
spk04: uh yeah this is john i'll take that i mean i think our um our mix um as we said has been about you know one third two thirds uh ancillary versus um contracts uh that's been pretty consistent certainly was in q1 when you go back and look at it what it was in q1 and 19 and 20 versus q1 of 2022 from a margin standpoint um we don't disclose specifically the ancillary margins but i will tell you hans that They tend to be slightly better than our contract margins. We've been able to maintain that discipline. And the other thing that we focus on is our penetration rate. We don't disclose that as well, but the penetration rate, meaning the percentage of ancillary dollars to contract dollars, has been getting better. And we're starting to see that come back, which were in Andrew's prepared comments. And we expect that to continue throughout the year and get, quite frankly, to more historical levels in Q3 and Q4, which are the real good quarters for us when we get past the seasonal snow piece.
spk08: Thank you for your question. Next question, we have Andrew Steinemann from JP Morgan. Andrew, please go ahead.
spk00: Hi, Andrew. I wanted to go back to your comments about price increases and the ability to cover wage inflation the second half of the year in your maintenance business. My question is, do you feel like spending with a typical maintenance customer will go up about 5%? Or do you feel like with the contract price going up, they might get more selective about their ancillary services?
spk04: Yeah, that's a really good question. if you look at the balance, I think there's an acknowledgement right now, which has been different over from the last couple of years, that just overall inflationary pressures are hitting the business. And an acknowledgement that the property also needs to be maintained at a certain level. We have not seen a downtick in ancillary services because of the pricing increases that we see going out there. So I can't, know there are portions of our ancillary business such as you know irrigation management tree service management you know fertilization those tend to be ancillary lines so those well they are certainly in our ancillary portion they're really less they're somewhat discretionary um and so i i really and i think the magnitude of the increase that we're seeing again with an overall inflationary environment in the country right now we're not seeing an indication of uh ancillary reduction in our pipeline of ancillary projects so i'm not anticipating a big shift here that makes total sense thank you so much thank you andrew our final question comes from bob lavik of cjs securities bob please go ahead thank you good morning um i want to follow up on the pricing and just talk a little bit about competition
spk02: particularly in the maintenance contract, you know, pricing the annual renewals that you'll be going into shortly. Given the fragmented nature of the market, how are competitors reacting to the higher wages and higher costs? Are they seeking, you know, to raise prices on their renewals? Are they expecting lower margins? Or do you expect them to? And how is this going to impact your strategy on contract, you know, renewals and pricing going forward? Good question, Bob.
spk04: When we look at the marketplace, in any given market, we have four to five solid competitors that compete at the higher end in the commercial landscaping market. Those competitors are professional companies that actually become mostly our acquisition candidates that we look at. Those companies are following kind of and looking at normalized levels of price increases that we see in most cases. Of course, you may have particularly target customers, which are competitors, might want to go in and take an opportunity to try and cover it. But the reality is they're facing the same economic pressures we're facing. in the labor market, in the material market. There's no difference what they're facing. So long-term strategy, they might be able to take a customer by taking a price down or not having an increase, but you can't. That isn't a strategy for long-term success in the competitive market brand, in the competition that we compete with. So we have not seen a broad-based impact on that. You know, we've seen, frankly, what we've seen is we've seen our retention levels actually improve as we go forward. Although I will say, you know, there have been some bit of a turn in the marketplace. So I would expect that to be the case, just given the dynamics of where people think about. So overall, though, Our overall business remains healthy. What we talked about before, our net new, which is our wins minus our losses, continues to be in a positive trajectory, and we feel supports an organic growth rate of 4% plus as we look going forward for the next several quarters.
spk08: Okay, great. Thanks so much. Thank you, Bob. is registered. So I will hand the conference back over to Andrew Masterman for closing remarks.
spk04: Thank you, Bailey. Once again, I'd like to thank everyone for participating in our call today and for your interest in Brightview. We look forward to speaking with you when we report our second quarter results, and everybody thinks snow. Stay safe and be well.
spk08: That concludes the Brightview Holdings Incorporated first quarter fiscal 2022 results conference call. You may now disconnect your lines.
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