BrightView Holdings, Inc. (NYSE:BV) Q4 2023 Earnings Call Transcript

BrightView Holdings, Inc. (NYSE:BV) Q4 2023 Earnings Call Transcript November 19, 2023

Operator: Hello, everyone, and welcome to the BrightView Fourth Quarter Fiscal Year 2023 Earnings Call. My name is Bruno. I’ll be operating your call today. [Operator Instructions]. I’ll now hand over to your host, Chris Stoczko. Please go ahead.

Chris Stoczko: Good morning and thank you for joining BrightView’s Fourth Quarter and Full Year 2023 Earnings Call. Dale Asplund, BrightView’s President and Chief Executive Officer, and Brett Urban, Chief Financial Officer are on this call. I will now refer you to Slide 2 of the presentation, which can also be found on our Investor Relation Website and which contains our safe harbor disclaimer. This call may include forward-looking statements that are subject to certain risks and uncertainties. In addition, during this call we will refer to certain non-GAAP financial measures. Please see our 8-K issued earlier this morning for reconciliation of these non-GAAP financial measures. I will now turn the call over to Dale.

Dale Asplund: Thank you, Chris and good morning, everyone. I’m honored to join my first earnings call since being appointment BrightView’s CEO in October. First, I want to thank all our employees [there are] (ph) this past year. I’m proud to be joining a team that is motivated and committed to continuous improvement. In my first 45 days, I spent a lot of time in the field and at the branches, meeting employees and customers, submerging myself in all aspects of BrightView’s business. I have benefited a great deal from these interactions as they are opportunities to listen, to learn and to build relationships. I’ll look forward to meeting many more of our associates and partners in weeks and months to come. I will begin today’s call on Slide 4 by sharing some initial observations about the areas we’re focused on and some of my initial priorities.

I will then provide some highlights for fiscal year 2023 before handing over Brett to discuss our results in more detail and provide our initial outlook for fiscal 2024. By way of background. I spent the past 25 years at United Rentals, the world’s largest equipment rental company. In my most recent role as COO, I was focused on relentless execution and delivering exceptional customer experience. This was accomplished by prioritizing our employees so they are equipped with appropriate resources to serve our customers, all while leveraging the size and scale of the business. By doing this, we can increase the shareholder value significantly. What attracted me to BrightView was the opportunity to meet a group of talented employees through their next stage of profitable growth and operational improvement by leveraging my experience as an operator and leader.

At BrightView, we have a tremendous opportunity ahead of us to become great operators of our business and partner to our customers. In order to capitalize on these opportunities and send BrightView into the next stage of growth we must invest in our employees and prioritizing our relationship with our customers while delivering effective execution and service. We will do this by everyone working together to operate as One BrightView. As CEO, I am focused on establishing a unified BrightView, a company that prioritizes its employees, the customer and a winning culture. This renewed commitment and investment in the business will be critical to our ability to drive profitable growth. It will also allow us to leverage our vast branch network to drive operational efficiency.

Another key area of focus would be the strategic allocation of capital, ensuring that our investments in the business both organic and inorganic, are creating value and generating attractive returns for our stakeholders. Moving to Slide 5. The initial goal of operating as One BrightView is to become the employer of choice. We do that by putting our employees first and by delivering a culture where people seek to achieve individual and group success. By prioritizing our employees, we are ensuring that they have the capabilities and tools required to do their jobs at a high level. Doing this materially impacts the level of service provided to customers and leads to an exceptional customer experience. This includes investing in employee safety, fleet and systems, all of which will allow us to better serve our customers.

By making these investments in our employees, and in turn, employees taking care of our customers, this will allow us to become the partner of choice in our industry. These investments are aimed at improving customer retention and accelerating profitable growth. Creating a customer-centric focus for our employees is critical to our objective under One BrightView. As you can tell, we are highly focused and committed to One BrightView and building a stronger foundation. There is a lot of work ahead of us on these initiatives, but I firmly believe these are the areas we must prioritize. Once we have established this foundation, we will have earned the right to expand strategically. M&A can be a powerful lever for growth and generate meaningful returns on capital but only when it fits strategically, culturally and financially.

And in order to have that fit, we must be a better owner that accelerates revenue, increases operational efficiencies and create significant synergies, so that one plus one equals three. As One BrightView, we have to be the best of what we do for our customers, and I’m confident that we can deliver on these goals. Now moving to our results. As you can see on Slide 6, fiscal 2023 was a successful year for BrightView as we achieved solid execution and deliver results in line with expectations. During the year, we focused on targeting profitable growth, driving consistent EBITDA margin expansion and improving our cash flow. We were pleased with the results for the year considering the challenging economic environment, consisting of elevated inflation, higher interest rates and a winter with very little snow.

Despite these challenges, we executed our plan for the year. Additionally, during the year, we achieved a transformational reduction in our leverage, driven by the strategic investment from One Rock Capital and our improved profitability. As shown on Slide 7, prior to One Rock, our leverage profile and interest expense payments were restricting our growth in cash flow and reducing the overall financial flexibility of the business. By partnering with One Rock, we were able to use those proceeds to pay down debt, resulting in a significant reduction in our leverage and interest expense. This added flexibility allows us to invest in the business with an emphasis on profitable growth. In addition to the financial benefits of this partnership, we are also leveraging One Rock’s operational expertise, including previous experience in our industry which will allow us to accelerate the execution of our strategy.

The investment also reflects a strong vote of confidence in BrightView’s strategy and potential to drive profitable growth for years to come. With that, I’ll turn it over to Brett, who will discuss our financial performance and outlook in more detail. Brett?

Brett Urban: Thank you, Dale, and good morning to everyone. I’ll start on Slide 9. I am pleased to report on another solid quarter. We grew total revenues by 2.8%, increased EBITDA by $10 million, delivered margin expansion in all segments and generated significantly more cash despite increased interest expense. Our ability to achieve these results reflects BrightView’s attractive business model and gives us confidence as we pursue new opportunities to drive further financial and operational improvement. Moving to Slide 10. Total revenue during the quarter increased 2.8% year-over-year to $744 million, reflecting 2.1% year-over-year organic revenue growth. Revenue during the quarter benefited from demand in our core businesses, favorable pricing and M&A contribution.

In our Maintenance business, total revenue decreased 1.5% to $521 million as we continue to pursue higher quality contracts which reflects our relentless focus on profitable growth and margin expansion as we discussed last quarter. We grew our Development business, a robust 13.5% organically, due to our ability to convert our strong backlog into higher project volumes. We remain very optimistic about the pipeline of projects and the momentum of our Development business headed into fiscal ’24. Turning now to profitability and the details on Slide 11. Total adjusted EBITDA for the fourth quarter was $101.6 million, an increase of $10 million driven by both land and development growth, margin expansion in all segments and a strategic asset sale, which came in above expectations.

In the Maintenance segment, total adjusted EBITDA of $81.7 million was up slightly year-over-year. This resulted in margin expansion of 30 basis points and marks the fourth consecutive quarter of margin expansion in our core land business. As I mentioned, our focus on higher quality contracts led to a modest near-term impact on land revenue but as evidenced throughout this year, this strategy led to continued profitability growth and margin expansion. In the Development segment, adjusted EBITDA for the fourth quarter was $29.1 million, an increase of approximately 14% compared to the prior year. Adjusted EBITDA margin expanded 10 basis points, which marks our fifth consecutive quarter of Development margin expansion and we expect this trend to continue as we head into fiscal ’24.

As part of our ongoing initiatives, we executed a strategic sale of our corporate airplane that generated both cash and future cost savings. This sale benefited profitability and cash flow, which allowed us to immediately reinvest back into the business by replacing some of our oldest production vehicles. Important to note, in our previous guidance, we assumed an approximate $4 million EBITDA benefit from selling the airplane in our corporate segment. Through favorable negotiations, we were able to secure an approximate $7 million benefit to EBITDA on the sale of this asset. Lastly, the sale had both a positive impact on our corporate and environmental initiatives. Turning to Slide 12. I’ll provide you with our full fiscal year ’23 results.

Total revenue for the year was $2.82 billion, which represented a 1.5% increase compared to the prior year. Total land services increased 1.7% to $1.86 billion, reflecting healthy growth despite the contraction in our noncore business. Additionally, snow represented a year-over-year headwind of $47 million due to the absence of material snowfall. Revenue in the Development segment increased a meaningful 8.5% and with a robust 6.8% organic growth for the full year. As you can see on Slide 13, we delivered EBITDA growth and margin expansion throughout the year. We’re committed to growing profitability and expanding margins in fiscal ’23, and we are proud to report that we delivered on these commitments. I am extremely delighted with the team’s ability to execute this growth and margin expanding despite the challenging operating environment.

Let’s now turn to Slide 14 to review our free cash flow, debt and capital expenditures for the year. We committed to improving our cash flow in fiscal ’23 and deliver upon this commitment. This improvement was a result of higher profitability, a strategic reduction to capital expenditures, favorable working capital and benefits from our tax planning which more than offset the higher cash interest expense in the year. The reduction in capital expenditures reflects the resiliency and flexibility of our balance sheet in the year with low snowfall. For the full year, we generated $80 million in free cash flow compared to $7 million last year. These levels of cash generation reflecting improvements in our business and laid the foundation for continued momentum going into fiscal ’24.

In addition to the improved cash levels in the business, we announced a strategic investment from One Rock Capital that contributed to a significant reduction of our leverage profile. This investment resulted in leverage coming down by approximately 2 turns and reaching a historical low of 2.9 times compared to the 4.8 times in the prior year. This strengthens our balance sheet and provides us with flexibility and the opportunity to reinvest in the business, specifically towards customer and employee satisfaction, which as Dale mentioned, will lead to profitable growth and operational improvement. Let’s now turn to Slide 15 to provide an update on Project Liberty. As a refresher on our Q3 earnings call, we announced an expanded strategic review of our business beyond just cost initiatives.

These initiatives include areas such as branch performance, customer growth and retention, procurement and capital allocation with a collective goal of expanding profitable growth and generating higher returns. We have seen the early successes of these initiatives reflected in our EBITDA margin and cash flow performance in the back half of the year. Under Dale’s leadership, Project Liberty continues to take shape across the business and has aligned with our goal of becoming a collaborative and unified One BrightView. Branch performance will be driven by investing in our employees, while also aligning sales and operations to better service our customers. Profitable growth, led by new sales and improved customer retention will be driven by prioritizing the customer and aligning incentives for our employees.

We will continue to focus on high-quality business strategic pricing efforts and deliberate capital allocation, underscoring our prioritization of profitable growth. Taken together, continuous execution of these initiatives will create higher returns and lead to shareholder value. Let’s now turn to Slide 16 to review our outlook for fiscal ’24. Profitable growth will continue to be our guiding factor and key focus. We are now providing full year guidance for fiscal ’24 with expected total revenue of $2.825 billion to $2.975 billion, reflecting a range of relatively flat to 5% revenue growth. This assumes the following. In Maintenance, we expect our focus on profitable growth to continue to have a near-term impact, while we remain encouraged by the underlying health of the market and recent trends within our business.

For snow, our fiscal ’24 guidance range assumes flat at the low end and a return to five-year historical averages at the high end. And for Development, the conversion of our strong backlog projects will continue to benefit revenue and margin growth. Moving to adjusted EBITDA. One BrightView will be the key driver to growing profit and expanding our margins. In fiscal ’24, we expect margin expansion in both Maintenance and Development segments, benefiting from One BrightView key initiatives and disciplined management of the business. We expect these improvements to generate margin expansion of 40 to 80 basis points and adjusted EBITDA of $310 million to $340 million. In fiscal ’24, we expect a continuation of healthy cash flow generation driven by profitable growth and improved operating performance.

Our outlook on Slide 17, reflects our commitment to growth as we expect an increase in capital intensity to support our strategy. These higher levels are consistent with historical requirements to support the business and reflect a more normal snowfall this year. Contributions from reduced interest expense will be managed alongside the ongoing requirements to optimize the business. Altogether, we expect to generate free cash flow of $45 million to $75 million, supporting the financial flexibility we maintain today, while enhancing our ability to generate future profitable growth. With that, let me now turn the call back to Dale to wrap up on Slide 18.

Dale Asplund: Thank you, Brett. Before we open the call for questions, I’d like to provide a few final thoughts. It’s an exciting time at BrightView, and I’m honored to be leading such a talented team. There are tremendous opportunities ahead of us. We are moving this business forward with a clear strategy and vision for One BrightView. We are strategically positioned to accelerate profitable growth and to create meaningful values for our shareholders. We will now open the call for questions.

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Q&A Session

Operator: [Operator Instructions] We do have our first question comes from Bob Labick from CJS Securities. Bob, your line is now open. Please go ahead.

Bob Labick: Thank you, good morning.

Dale Asplund: Good morning.

Bob Labick: And, Dale, congratulations on your new role — your new position.

Dale Asplund: Thank you very much, Bob.

Bob Labick: I want to start — absolutely, very excited for you for sure. I wanted to start, and I think you began the call this way, so reiterate, your employee first focus will drive customer satisfaction and improve retention and all that kind of good stuff. So that all makes a lot of sense. Can you like take it one level further and talk about what you’ve seen so far? I know it’s 45 days, but thoughts on how to improve branch operations and change things, tweak things, what are your intentions operationally to grow organically from here?

Dale Asplund: Yeah, yeah, great question, Bob. First, I think you’re right, 45 days, I’ve had a chance to, as I said, visit many of our associates, some of our customers in different parts of the country. And what I’ve seen to start with is we have a very talented group of people that service our customers every day. We have a development group. We have a tree care business. We have a turf business, we have an irrigation business. We have a golf course maintenance business, and of course, our primary business, the Maintenance group. All these groups service customers at extremely high levels. Our biggest opportunity, like I said in my statement, is going to be to get everybody operating as One BrightView, getting all these people to leverage their skills together to service our customers.

And when we do that, Bob, we will accelerate our organic growth internally because we have talented people with the right focus of customers. We just haven’t leveraged the ability for them to really act as one team when they go to market to the customer. So that upside is there within our own control of working as One BrightView, one group to drive profitable growth. So I would tell you, I am more optimistic than ever by talking to the people in the field because the closer I get to the customer, the more our team is engaged to service the customer. So that’s a great way to start when you’re going to focus on how can we grow the business. And that starts and ends with those people that touch our customer every day. And we, as a leadership team, have to find a way to provide them all the tools they need to be able to do it efficiently and make our customers feel the choice they made to choose BrightView is the obvious choice.

Bob Labick: Okay. Great. I appreciate that. And it sounds obviously with the employee and therefore, customer focus, that’s the direction you’re going to start with. How does this align with investing in the employees, aligned with margin enhancements. And is there lull period where you invest more in the employees, you get your improved retention and then later margins start improving. Is it — like how do those connect if you’re going to continue to really invest in employees first? Because obviously, the goal being lower churn, higher retention and therefore, better growth. The investment comes before the improved retention, right? It can’t be simultaneous. So how do you think about that as it relates to margins over the year or next one, two, three years?

Dale Asplund: Yeah. I would just say, in our business, we have obviously a lot of seasonality. But even the number of employees that were tasked with hiring to service our customers, training and onboarding every year, is a significant number. And the more we put those employees as our primary focus to give them the tools, the safety equipment, the systems, the vehicles to operate their jobs the right way, the more their job satisfaction will go up and the more we’ll see that valuable resource of our employees turnover come down. So that will, Bob, drive the margin expansion just by being able to reduce the cost we pay to recruit and onboard employees. So that is our first step. And by doing that, that translates to them being able to serve the customer better and help us in that retention, as you said, to drive additional organic growth in the business.

But our efforts to onboard and train customers right now are too high. That’s why we have to prioritize our employees so we can make sure those employees are embracing a customer-centric focused business, and they know the importance they play in that journey.

Bob Labick: Super. That sounds great. Good luck and thank you. I’ll get back in queue.

Dale Asplund: Thanks, Bob.

Operator: Our next question comes from Tim Mulrooney from William Blair. Tim, your line’s now open.

Unidentified Analyst: Hi. This is Luke on for Tim. Thanks for taking our questions today.

Dale Asplund: Hey, good morning. You’re welcome.

Unidentified Analyst: So it looks like land organic growth was down about 2.5% in the fourth quarter. I think you had previously expected it to be flat. Could you share what drove that decline? Was it primarily attributable to lower contract renewals or lower enhancement revenue or maybe something else?

Dale Asplund: Yeah. So I’ll start off and then I’ll kick it over to Brett. I’d just remind everybody, our focus was profitable growth and margin expansion. So the team has been focused to make sure the customers that we’re going after are the customers that fit that profile. And the businesses that we’re focused on growing are businesses that are focused in that area, more of our core business, as you heard Brett mention on the call. So let me let Brett kind of decompose this for you. But just remember, our focus is not just chasing revenue. It’s going to be make sure the revenue we bring is accretive to our base business as we bring in new customers. So Brett, why don’t you give them a little more detail on the financial side.