Good day, and thank you for standing by. Welcome to the BrightView Third Quarter Fiscal Year 2021 Results Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mr. John Shave, Vice President of Investor Relations. Please go ahead.

Thank you, Rein, and good morning. Before we begin, I would 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 details 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 projected annual revenues of approximately $2.5 billion and 7x 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 14 years. We provide commercial landscaping services ranging from landscape maintenance and 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 240 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 for 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 risks associated with inadequate landscape maintenance and consider our services to be essential and nondiscretionary. 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. I am pleased to report that our 11.7% maintenance organic growth, underpinned by our 7% organic contract growth has returned us to 2019 revenue levels. Furthermore, this maintenance-driven growth has fueled our EBITDA improvement for the quarter. We continue to deliver earnings and acquisition growth, and overall, it was an excellent quarter despite operating in an environment presented with a whole host of new experiences and challenges such as labor headwinds and materials inflation. Our team of more than 20,000 employees continued to go above and beyond. Their perseverance made it possible for us to deliver the strongest maintenance land organic revenue growth since our IPO, combined with continued robust free cash flow generation while maintaining our focus on health and safety. While we always have more work to do and more progress to make and we know that COVID outbreaks are continuing to affect many facets of our economy, I am extremely proud of these results and the effort and tireless commitment of our team. We believe that this is the underpinning of our guidance going forward. Starting on Slide 4, let me first provide an overview of our third quarter results. First, our third quarter was fueled by maintenance land organic revenue growth of 11.7%, which was the strongest since our 2018 IPO. This expansion was driven by continued growth in our contract business as well as a rebound in ancillary services. Second, as a result of the strategic investments we have been making in our sales force, maintenance land organic growth trends improved for the fourth consecutive quarter. Our net new sales in fiscal Q3 were the highest Q3 ever for BrightView. We are confident in our ability to continue to drive positive…

Thank you, Andrew, and good morning to everyone. I'm very pleased with the results we delivered in our third quarter. The organic growth of our maintenance land business drove EBITDA improvement, strong free cash flow and overall excellent results. Efficiencies gained from our investments in technology and our ongoing focus on productivity and cost management have been meaningful in driving improved performance and collectively underscores the strength of our business. Turning to Slide 11. Third quarter revenue increased 10.8% versus the prior year to $673.6 million. Maintenance revenues increased 15% versus the prior year to $524.6 million. The results are a combination of solid growth in our contract business as well as a rebound in our ancillary services, which led to 11.7% organic growth. Additionally, we realized $18 million of incremental revenue from acquired businesses, investments in technology to support our sales and account manager teams, our enhancing customer relationships and driving both organic growth and strong cash generation. For the 3 months ended June 30, development revenues of $150.3 million declined 1.6%. Excluding the impact of the BrightView Tree Company divestiture, development total revenue would have grown 2.2%. While we expected COVID-related softness to be more pronounced in the third quarter versus last year, we are also encouraged by increases in our development bidding pipeline. And we anticipate increased stability during fiscal 2022. Turning to Slide 12. Total adjusted EBITDA for the quarter was $93.6 million an increase of 2.9% or $2.6 million increase versus the prior year. Higher labor driven by over time, the Juneteenth holiday and material costs resulted in a 110 basis point contraction and EBITDA margins of 13.9%. In maintenance, adjusted EBITDA of $90.6 million represented an increase of $7.3 million or 8.8% from $83.8 million in the prior year. The increase was driven principally…

Thank you, John. Our third fiscal quarter results were excellent. The operating and financial performance we delivered is sustainable, and we know we can deliver. And most exciting is that we see so much more opportunity and potential. In summary, here are the key takeaways on Slide 18. First, the market. We are seeing signs in all maintenance verticals of the impact of the pandemic is subsiding and business is recovering. The fundamentals of our business and our industry remain strong, and we are optimistic about our ability to drive sustainable organic growth. Second, growth. Our investment in our sales team is driving sustainable organic growth. Our maintenance land organic growth of 11.7% was the strongest since our 2018 IPO. Net new sales in fiscal Q3 was the highest Q3 ever for BrightView. We will deliver 5% plus maintenance land organic growth in Q4. Third, technology. We continue to remain focused on deploying technology to enhance productivity, profitability and client engagement. We are expanding adoption of HOA Connect, facilitating direct customer communication with our teams our expanded usage of the Salesforce customer relationship management tool and quality site assessment software continues our focus on customer retention and supporting property enhancements. 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. Digital marketing initiatives in new markets and verticals with a more effective omnichannel approach continues to support the success of these expanded sales teams. Our sales and marketing strategies and structure are our formula for long-term success and our investments in field-based sales and operations leadership will drive stronger new sales and result in improved client retention, while further streamlining our service delivery. Fifth, M&A. The results of our acquisition strategy…

[Operator Instructions]. The first question comes from George Tong from Goldman Sachs.

On Slide 7, you're forecasting for fiscal 4Q this year, a step back in organic and reported maintenance land revenue from fiscal 3Q levels. Just wanted to clarify whether that's seasonality or if there are other factors driving that performance?

Yes. The overall organic growth and growth we're seeing overall is really the result of the sales force investments we made, George. The overall seasonality -- the fourth quarter continues to be a good green season for us. We have no question about that. And it is across the board, whether it's evergreen markets or seasonal markets. But the overall contract growth really is the result of increased sales levels coming through the company. And we believe this is going to be something that's growth not only on 2020, but also over 2019.

Okay. Got it. And then if we look at the margin side of things. You mentioned higher labor and material costs and the fact that you're taking corrective actions to address these higher input costs. Can you perhaps elaborate on that? What are some of the initiatives that you have to work through those higher costs? And what are the implications for margin flow through?

Yes. First and foremost, we certainly have seen some of the inflationary pressures that we've seen throughout that -- I think we've all seen throughout the country. Fortunately, something that has happened here in the fourth quarter is -- and it's just happening right now is that we've been able to take some H2B -- additional H2B labor coming into the marketplace, which is allowing us to actually fill those slots that haven't been filled but we have to cover with over time. Those folks are arriving as we speak. They're a little later than we initially expected through some of the government processes that we've had to go through to get them. But here in August, they're arriving, and we expect as we get towards the end of Q4 and into Q1, that should have a very strong impact for us.

Your next question comes from Andy Wittmann from Baird.

Great. I do have a couple. I guess, just talking about labor, I guess, to start out with either one of you, I guess. Could you talk about the mechanism for which labor is inflating? Is it because you're paying overtime, because of lack of availability? Is it average rates? Just some detail about -- is it inefficiency because there's new people. There's a lot of ways that can hit you. And so I was just wondering what it is. And if you could quantify what the impact of labor was on your profit margins year-over-year, I think that would be helpful. Last quarter, you guys said it was running a couple of hundred basis points higher inflation than normal levels. Is that still the rate? Or is it more than that now 3 months later? Just kind of curious.

Yes, Andy. This is John. A lot of questions in this. Let me go back and layer those and give you some color. Starting with you first, the labor is definitely more expensive. It's less efficient, caused us to have more overtime due to the labor shortage. Historically, I think we've been very clear that we've seen inflation around 4% to 5%. We're seeing it closer to 5% this year. Historically, we've been able to offset that or mitigate that with price increases. That's been more challenging through COVID. We definitely plan to reinitiate that towards the end of this year and into 2022. And we have been able to adjust some of that through scope. At the end of the day, we are taking several actions to be creative in attracting labor. Andrew mentioned one of them. We were lucky to get H2B labor, but we did get it a little bit later than we expected. So that was a challenge, but we've also done things to expand our hourly workforce recruiting pool around flexible work schedules, flexible start times, doing things on the weekend, things of that nature. So a lot of attention on labor, as you can imagine.

Got it. And then I guess just for a follow-up, it's always helpful for us to understand what your ongoing M&A program that you guys are still committed to, the delta every quarter. So I guess you said there was $150 million of annualized revenue that's been added this year. I was wondering how much of that $150 million is going to hit this year. Just looking compared versus how much was supposed to be added last quarter. So just basically trying to figure out the delta of revenue and guidance from incremental last quarter.

Yes, Andy. We certainly have had a high level this year at $150 million. In addition, though, that has not all been in the maintenance area. We've had a split between development point just is the nature of some of the deals that have come through. So in addition, we've had a divestiture last year, which has impacted this complete year of our tree company. So you need to take down that 150 by somewhere, I would say, at around $30 million due to the tree divestiture. So that $120 million, and that all hit us here in -- as far as the divestiture was completely reflected within fiscal '21. So if you look at the net of it all, we're going to achieve all in somewhere, somewhere between $80 million to $90 million. Probably as we factor in some of the recent acquisitions, perhaps as high as $100 million in this fiscal year, with wrapping about $30 million or the $20 million to $30 million in the next year. So somewhere, let's call it, $90 million to $100 million this year and 20 to 30 next year of what we have already done.

Your next question comes from Judah Sokel from JPMorgan.

The organic revenue growth is really encouraging in the third quarter. That's definitely an area that's been a focus by investors. So it was great to see that pop, especially landscaping, maintenance. And it seems like the fourth quarter should persist in terms of that positive momentum against a tougher comp. I just wanted to, therefore, maybe focus a little bit on EBITDA. Just trying to understand what's going on in the fourth quarter and the implied fourth quarter EBITDA came when you gave guidance for the third quarter versus the actual guidance that you're now giving just seems a little bit lower. So maybe you could just help us walk through what's going on the profit side, so we could better understand just the dynamics between that better organic than was expected versus what's happening on the EBITDA line?

Yes, Judah, this is John. When you look at our guide for the fourth quarter, previously, we said $91 million to $95 million. So around, call it, 14.3%. Our guide now, $89 million to $93 million, around 14%. So about a 30 bps headwind on the margin still feel good about the revenue. And there's really 2 things driving that. On the maintenance side, it's the labor pressures and the late arrival of the H2Bs, but mainly the continued labor pressures and challenge there. And then the biggest driver without a doubt is the development softness. We saw that in Q3 was very clear in our financials. But without a doubt, the biggest challenge in that guide was the challenge we're seeing in the organic softness within the development. That's the big drag.

Okay. So then, I guess, maybe just as a follow-up, as we start to think about the next fiscal year, we're now in the fourth quarter, and I know you haven't given guidance yet, but maybe you can just tease out a little bit of a sneak peak if the company can continue to maintain the positive momentum on the top line in terms of organic revenue growth, how should we start thinking about the EBITDA contribution given some labor headwinds and given the sales force investments, but at the same time, some operating leverage from the top line? How do you think about just overall margin directionally for next year?

Yes. Judah, we are optimistic given what we're seeing in the sales force investment, the returns on maintenance organic growth. And combining maintenance organic growth with M&A, we believe in the maintenance side of the business, we're going to have the strongest growth profile in 2022 when we've had just with all. So we're very optimistic about that. Certainly, margin pressure is out there. We do, fortunately, most -- many of our contracts have annual ability really to renew during seasons in our contract base. So clearly, any kind of labor headwinds that we see in the business, we're going to be able to address that December to March period when we price for the 2022 season.

Your next question comes from Tim Mulrooney from William Blair.

This is Sam on for Tim. Maybe we'll start with pricing. Despite slowing off of the price increases last year, I know you guys typically got 1% to 2% in any given year here. But with continued inflationary pressures, I guess I'm curious 1% to 2% is really enough to offset what I assume is the higher liability energy and equipment costs. Can you maybe talk a little bit about each of these buckets? And if you think the 12 pricing is enough to really offset this if you need to raise prices further? Or we should expect maybe a couple of quarters of margin compression until pricing can kind of ramp back out here?

Yes, Sam, I mean the thing is, if you look at pricing right now, we will see continue -- we will see continued softness. We will see continued softness in Q4 a bit because that contract is an annual contract many times. Unfortunately, in ancillary, that's tighter correlated to current activity. So we unfortunately see that positive correlation and being able to work with material on the maintenance side of the business. At the same time, on the development side of the business, typically in development, you see contracts commitments that go out 3 months, 4 months when you commit. You lock in. So the development business that we have today is our contracts that we lapped in back in January and February, which we anticipated some inflation, but not the degree we're experiencing. We adjusted our development approach now to allow us to reflect more current costing and shorter time frames for being able to reflect on pricing. So as we look into Q1, and at the end of Q4, we're really optimistic about being able to match both development margin and labor margins, especially as we get to the new contract period. So perhaps we do feel some pressure. You see that in our guide in Q4, some pressure there. But as we get into Q1, Q2, Q3, we think that's going to be unwinded. And when I say unwinding, I mean getting into a more kind of regular pattern that we've seen in the past.

Got you. That's very helpful color there. it maybe the residential side, for the maintenance plan business, if you break apart your exposure between residential and I guess, everything else there, could you talk a little bit about how that residential component performed during the quarter? And I guess, correct me if I'm wrong, but I think residential represents something like 35% of your land revenue just from your HOA exposure. Am I right about that? And do you see this existing...

When you say residential, you mean Homeowner Associations, right? I mean we do not do residential business to speak of, okay? We only deal with -- yes, there are homes in the homeowners associations. But as we deal with the master association, we don't go back into the individual residents.

Correct. Yes. I guess your HOA line exposure specifically, just how that's kind of in the quarter and then is it still...

Yes. HOA stayed positive. I mean we're really off with me. The thing is we see little impact with the pandemic in the HOA if any. In fact, I have to say it's -- we haven't seen really any impact in our HOA vertical. Perhaps as we go forward, we see that as a stable part of the business that we perhaps believe there's actually more growth going to happen in HOA with the introduction of more stay-at-home work and working home that stuff.

Great. So maybe we should expect that to just expand as percent of your sales going forward or...

We believe that's exactly right. We believe HOA is a great part of the market to be in. We have a strong presence there. Our sales folks know how to work with the homeowners association boards and our account managers are just best-in-class and being able to deal with homeowners boards dealing with great property managers out there and really that's a place where we believe we excel.

Your next question comes from Shlomo Rosenbaum from Stifel.

Anthony, maybe you could talk a little bit about the ancillary revenue performance. What you're seeing now versus what you were seeing before COVID-19. In other words, for the -- are you up to 90% of what you used to be? Just some way we can gauge it to see how much tailwind we have as things kind of fully open up, hopefully, notwithstanding the Delta variant. And then maybe you could also talk about specifically the hospitality and retail verticals. I know you said they're coming back. How far away are they from pre-COVID levels?

Yes. Let me kind of divide that question into both our ancillary and contracts answer both of those as it relates to the overall mix. Contract levels are back in '19 already. So we believe growth in contract coming forward. We actually contract not only will show a positive growth off of '20, but actually a positive growth in '19 in our contract base. And because we are in total, not all the way back to '19 with ancillary, we believe there is some continued tailwind as we get into 2022 with a return to normalized levels of ancillary. If you look at '19, '20, we're 20% plus in ancillary up year-over-year compared to 2020. Compared to '19, we're within 5%. It's really closing in quite tightly. So -- and we believe that probably is going to be about the same level in Q4. But as we get into 2022, we expect there's, again, some additional tailwind that we see coming down, especially as we get into the summer months next year.

And then hospitality and retail, what you're seeing over there?

Yes, bouncing back and probably hospitality, really strong. the hotel and the travel industry is seeing increased rates. I think we all know that out there. And our customers have seen that. So some of these ancillary improvements we're seeing right now are, frankly, it happened exactly what we thought was going to be happening, right? Hotels are coming back in. They're saying we need a little bit of extra effort to differentiate our property versus others. And so we're seeing not only current refreshing hotels back into how they used to be pre-pandemic. But frankly, inquiring future projects into 2022 about ways we can differentiate and expand and improve their properties. There are properties around the country, whether it's the Four Seasons hotels, whether it's the Ritz-Carlton, whether it's the Marriott, I can go down the list of properties that are going into service today that we have put increase not only ancillary, but also large-scale development projects that are looking at really enhancing what those properties look like and thus can attract better customers.

Got it. And then -- and then maybe you could just focus back on kind of the -- I hate to be a dead bush here, but -- or a dead horse, but the labor inflation, I'm just trying to understand it in light of what the H2B visa is, I know they're starting later. But it seems like you guys got a decent amount more than you were expecting. Is it just so much more pronounced that it's harder to offset that? Or is it really -- the margin for 4Q is really a matter of you guys bidding stuff a quarter or 2 ago on the development side and things have just run against you against the commitments that you have. You can just kind of unpack that for us a little bit. I just was expecting a little bit more benefit from H2B Visas.

Yes. The H2B folks, we hope they would be coming in June and July, they actually are only arriving now. And that's things that we just -- we're giving certain indications by the government authorities that process all the visas. And frankly, there's some people there to process the visas and what we initially thought coming got the way. And that's just the reality of that program as those people come in. We're optimistic now they're here. They're here as we get into August, or I should say as we get into December, October, November, December, that should normalize, kind of our overall labor profile with those folks coming in that really fill the gap. What happened is that the labor availability was on, okay, across the country, we had a tough time finding people. We applied for the H2 visas, which is that's what the program is designed to do to fill where labor availability is low. But at the same time, we had customers we had to service. So because of that low labor availability, the really talented landscapers, the dedicated folks we have went to work and work a lot over time. And that over time, expense really came in and it was about a 50 bps headwind in Q3 when you look at kind of the maintenance side of the business. So that headwind really came and hit us. We believe there's going to be some of that hitting. I can't say exactly how much in Q4, but that is some of the margin issues we see in Q4, not much. Some, again, we're talking 50 bps or so. And then we believe that's going to turn around back into more of a normalized pace as we get into Q1, Q2.

[Operator Instructions]. Your next question comes from Bob Labick from CJS Securities.

It sounds -- the net new wins at an all-time high is obviously a terrific stat and it's been -- you've been building it. Can you talk a little bit about the primary reasons you're winning when you do win these new accounts? Is it price? Is it services? Is it -- what are you doing to win and to drive net new install time lines?

Yes. Number one, it's just been the period investment in our sales force from the tools and the training that we have really done a solid investment over the next 18 months, I'd say, last 18 months. Really, that has been a driving force behind what we've done. It's something we deliberately invested in. It started. It started showing up as we talked about in Q2 2020. We started the nascent beginnings of growth but we deliberately capture that strategy. And so it's the training to bring into the people because the expanded number of people who we've been able to build, frankly, over the last 18 months, and it's the dedicated sales guys and the account managers and branch managers who really are focused on how we can showcase the talents we do. We also have a really strong marketing backbone behind us, okay? So the opportunities we've developed both our omnichannel marketing, really developing opportunities in a digital way, which allows us to then convert in a more efficient way in the field, right? And so that investment also is paying off and allowing us to grow net new. We're going to be at a net new position this year, frankly, which will absolutely underpin our Q2 and Q3 -- underpinned our Q3 growth now, our Q4 growth going forward and is going to continue to underpin that 2% to 3% organic growth. We're very positive about that, and that's why we're guiding at 5% plus. It's twice the industry growth that we're seeing. And if you look at the growth we had, the latest of this report we're calling this year to be 1.5%, 1.6%, we just grew 1.7% I think we're going to be continuing with a very positive trajectory here. The investment in tools are working. The expanded sales force are coming on board and are working and it's resonating with customers.

There is no further question at this time. I would now like to turn the call over back to Andrew Masterman for closing remarks.

Thank you, Rein. Once again, I would like to thank everyone for participating in the call today and for your interest in BrightView. We look forward to speaking with you at Brightview Investor Day 2021. Please be safe and be well.

This concludes today's conference call. Thank you all for joining. You may now disconnect.