Good morning. Thank you for attending today’s BrightView Second Quarter Fiscal 2022 Earnings Conference Call. My name is Nate and I will be your moderator for today’s call. [Operator Instructions] I’d like to now pass the conference over to our host, Faten Freiha who is – excuse me, BrightView VP of Investor Relations. Please go ahead.

Thank you, operator and good morning. Before we begin, I’d like to remind listeners that some of the comments made today, including responses to questions and information reflected in the presentation slides are forward-looking and actual results may differ materially from those projected. Please refer to the company’s SEC filings for more detail on the risks and uncertainties that could impact the company’s future operating results and financial conditions. 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 session. I will now turn the call over to BrightView’s CEO, Andrew Masterman.

Thank you, and good morning. We appreciate your time today to review our second quarter results. And we also want to extend a warm welcome to Faten Freiha, who joined our team just recently as Vice President, Investor Relations. Faten brings a wealth of Investor Relations experience and we are delighted to have her on board. As you likely saw this morning, we announced John Feenan’s retirement and Brett Urban’s appointment as Chief Financial Officer effective October 1, 2022. First, I’d like to thank John for 6 years of outstanding leadership and commitment to BrightView. He played a key role in the development and execution of our strategy and a robust financial stewardship, which has positioned us well for the near and long term. I am grateful for all of his contributions, but I’m glad he will be with us for a period of time to ensure a smooth transition. Brett’s appointment is consistent with our succession planning process, which covers multiple key positions throughout the organization and is regularly reviewed with our Board of Directors. John built a deep bench and a well-oiled organization that will support Brett Urban in his new role, enabling him to help drive results and shareholder value. As CFO of our maintenance business, Brett has helped to drive growth and lead the execution of more than 30 acquisitions since 2017. We are confident that the momentum and leadership he instilled in the organization will help BrightView continue to reach its goal. And I’m excited to continue to work closely with him to deliver on our long-term plans. Before I cover the highlights, I’d like to start by thanking the entire BrightView team for their world-class execution and dedication. I’m proud to report on their hard work, which resulted in an impressive quarter with strategic,…

Thank you, Andrew, and good morning to everyone. Before discussing our quarterly results, I’d like to say that I’m humbled to have had the opportunity to lead the financial organization at BrightView for the last 6 years. We are extremely proud of the team that we have built, and we look forward to working closely with Brett and the team to ensure a seamless transition. We are confident that Brett’s leadership, strategic vision and deep knowledge of the business will enable him to succeed in supporting our goal to drive profitable growth and long-term shareholder value. Let’s now turn to our results. I am pleased to report on another strong quarter for BrightView. We delivered outstanding organic growth in our land and development businesses. Our adjusted EBITDA was at the high end of our guidance range despite headwinds from lower snowfall and the surge in the price of fuel. And recently, as Andrew mentioned, we successfully refinanced our syndicated bank facility. Under the new terms, we secured a $1.2 billion 7-year term loan and a new $300 million 5-year revolver. The term loan matures in 2029, and the revolver matures in 2027. Both are SOFR-based loans at favorable rates. Having a balance sheet with cost-effective funding and no near-term maturities enables us to continue to execute on our strategy and to grow our business and positions us for long-term success. We remain focused on our key investment pillars of cash generation, organic growth, mergers and acquisitions and margin enhancement over time. With that, let me now provide a snapshot of our second quarter results. Moving to Slide 11, total revenue for the second quarter increased by 9%. Total revenue growth was supported by increases in both our maintenance and development segments. Maintenance revenues increased by 3%, driven principally by 8%…

Thank you, John. Industry trends remain in our favor and our investment in sales, technology and marketing continue to fuel our momentum. Pricing efforts will help us to drive profitable growth, and our excellent M&A engine will support further top line acceleration and expand our footprint. As we look out to fiscal 2023, we see a clear path to approaching $3 billion in revenue as we continue to execute on our successful organic and M&A growth strategy. Importantly, we operate in a resilient and durable industry. Our business generates solid free cash flow and the strength of our balance sheet gives us the flexibility to continue to invest in our business and drive shareholder value. We believe in the long-term prospects of our business, which is why we bought back 12 million shares from MSD, effectively reducing our share count by 10% without impacting our public float. We are a leader in ESG and continue to be committed to our 2035 carbon neutral goal. Our future is bright, and we are confident that we have the right strategy to accelerate our performance. In closing, I’d like to thank our customers for their support and partnership and working with us on managing the labor and fuel increases we have experienced so far, and we look forward to seeing our customers’ landscape blossom as we move through the summer. Also, I’m thankful for our teams for their dedicated response to the winter storms and their continued attention to designing, creating, maintaining and enhancing the best landscape this summer. Thank you for your interest and for your attention this morning. We will now open the call for your questions.

[Operator Instructions] Our first question comes from Andrew Wittmann with Baird. Andrew, your line is open. Please proceed.

Great. Good morning, and thanks for taking my question. I guess first, Andrew, for you, I’m just – I’m curious with the need to go out to your customers for price increases, it’s probably not unexpected to them. In fact, I’m sure it’s quite expected. I’m just wondering if the posture of your customers is increasingly looking at the price increases and taking the contracts out to bid or if they are renewing with you ahead of rebidding the contracts? I’m just wondering if there is any change in the customer behavior from that perspective?

Yes. It’s across the board, I would say, the initial response we get from almost all customers, Andrew, is an understanding of the pressures and the cost inflationary environment we live in. So there is a willingness to talk and a willingness to come in and try and figure out a way. Some of those have resulted in just fewer price – top line price increases and some have also resulted in scope reductions and kind of adjustments down in what we actually performed while keeping prices the same or sometimes even reducing the actual scope. But I think the general spirit and nature of our conversations has been fairly open. That being said, we do expect and we are seeing a slight downtick in retention as we see some customers, but it’s the part or put things out to bed. What I’d have to say that, that is really at the margin as opposed to the primary response, which is more a willingness to engage.

That’s helpful. Thanks for those comments. And then maybe, John, for you. I was just hoping if you could give us a little bit more context on the fuel impact in particular. And I think just for all of our edification, it would be helpful to know how much fuel you consume, either like gallons at your current business size or maybe as a percentage of revenues, what you think that fuel is going to represent, I think that we will all probably look at the volatile fuel markets and try to have a clearer sense of how this is going to impact future quarters. I think this information would help all of us.

Yes. Andrew, yes, fuel was actually real challenging for us this quarter. As you know, it hit immediately. The quantum of fuel that we use from a percentage of revenue has increased about 50 to – excuse me, 60 to 70 basis points. That has gone from roughly 1.6%, 1.7% of revenue to 2.3%, 2.4%. When we spend at any given week, about $1 million a week to put it into context. So when we saw those increases, they hit our P&L immediately. Now what we’re doing that we mitigate that we talked about is we are in the early stages of the fuel surcharges. That’s going to take a little bit of time to get into the invoicing and then the collection of that. I don’t know exactly what the response is going to be. But again, that hopefully should give you some color as far as the percentage of revenue and the quantum of fuel.

It does, thank you very much.

You are welcome.

Thank you, Andrew. Our next question goes to Tim Mulrooney with William Blair. Tim, your line is open. Please proceed.

Good morning, Andrew and John, just a point of clarification on organic growth for your maintenance land business. Do you expect organic – do you expect maintenance land organic growth of 3% to 4% for the full year? Or is that specifically for the second half of fiscal 2022?

Yes, that’s specifically for the second half. So the first two quarters, roughly 7% to 8% organic growth. You combine that with 3% to 4%, will definitely be north of 3% to 4% for the consolidated year.

Perfect. Thank you for taht clarification, Andrew. And just one more for me, building on Wittmann’s comments. If you take pricing increases and scope reductions together, how would you characterize how much this represents in terms of pricing gains this year? Pricing historically has been 1% to 2% per year. How is pricing now relative to the historical average. I know you’re in the midst of these discussions right now, Andrew. So not looking for a perfect answer, but any direction would be helpful.

Sure. Absolutely, Tim, no problem. Yes, typically, we’ve gotten 1% to 2%, but that’s always been offset by scope. So it never has realized itself really in the organic growth column because of the offset. What we’re experiencing right now in the second half is that we’re actually seeing some – due to the magnitude of our pricing increases, we’re seeing – we will see some realization of pricing impacting organic growth. So in that 3% to 4% number, somewhere between 50 bps and 1 – 0.5% to 1% will be realized from price increases. So that’s the net improvement we will see in that 3% to 4%, again, 05% to 1% in the second half. In the first half, there was none. It basically – it’s typically pricing offset by scope increases. And a lot of that is due, Tim, to the fact that the discussions with our customers really occurred in that kind of December through April time period. And so the effectivity of those increases by and large, is happening between April and July, is when – we will realize in the third quarter some benefit on the top line, small, but some benefit in that organic growth.

Got it. Thank you.

Thank you, Tim. Our next question goes to George Tong with Goldman Sachs. George, your line is open. Please go ahead.

Hi, thanks. Good morning. As you look between your two segments, maintenance and development, can you talk a bit more about how you expect inflation to impact each of those segments differently based on cost structures and contract lengths? And then how price increases compare between the two segments?

Yes. Good morning, George, an interesting question because they do manifest themselves differently. The biggest cost impact of the maintenance segment is labor, unquestionably and considerably more than the development. And in the development, the biggest cost impact is material. And so in the maintenance area, what we’re doing is, obviously, as we look at inflation, it’s the price increases that are offsetting the wage increases, and we’re pretty much able to match that. In addition, the ancillary business we have is priced in a more current dynamic. So within 4 to 6 weeks of doing the project, we’re pricing it. So we’re reflecting those higher wage costs as well as any higher material costs that tend to be a little higher as a percentage of revenue in the ancillary part of the maintenance segment. So we’re seeing the offsets occurring there. The one thing that we’re struggling with is fuel, and then we’re going with a fuel surcharge on that. That’s what we do believe will impact us in the short-term, but we feel that whether it’s through pricing or whether hopefully, it’s through a relaxation in the fuel pricing that we will see that as a transitional cost. When you go to the nature of the development segment, really the inflationary impacts hitting us there is primarily materials. And that material shift, we are seeing a change in that. And that’s what’s really good. If you – in the slides we prepared, we’ve seen the big hit was back in Q4, 480 bps down. And so – and on top of that, we now see ourselves moving more towards as low as 100 bps impact in Q3 and actually changing them to growth on the margin side of things as we go into Q4, so again, materials and development. On top of that, in development, yes, there is fuel. We’re offsetting that fuel by really doing less subcontracting work and putting a lot of that subcontract work back into a self-perform situation, which also helps margins and helps offset some of those inflationary aspects.

Got it. Very helpful color. And then secondly, can you talk a little bit about within the landscape maintenance business, how the recovery in key verticals is progressing, hospitality, retail, I know historically that – or recently that’s been recovered nicely. And then are there any other verticals that you would call out with respect to COVID-related recovery?

Yes. I’d say right now, George, across the board. Our maintenance segment is back to pre-pandemic levels. We are operating at a level now, which really reflects, I think, more on a revenue basis where we’re at. Obviously, still as we just talked about some of these inflationary pressures are hitting us in the short-term on the margin side. But on the revenue side, we are optimistic. Our hospitality customers have come back the ancillary penetration on both hospitality, retail, the highest impacted sectors versus segments during our verticals impacted during the COVID crisis, they are back. They are spending and we continue to get out there and unify those properties. So I am optimistic as we go forward that we are seeing ourselves back at a pre-pandemic level of operations.

Very helpful. Thank you.

Thank you, George. Our final question goes to Bob Labick with CJS Securities. Bob, your line is open. Please proceed.

Hi, good morning. It’s Pete Lukas for Bob. Just two quick ones for me. Can you discuss labor availability and increased overtime? And what you’re seeing in terms of your staffing level versus what the optimal level would be?

Yes. As we head now into May and into June, these are the busy months for us. We hired over 5,000 people in April, May and June as we ramp into the summer season. I would have to say that the teams in the field have done an outstanding job of being able to attract labor, staff up, get people in the door and be able to execute on the spring operations. So as we sit here today, well, labor is always an issue, and we can always use more folks. We actually are very close to having a full stable of people to execute on our jobs. What’s also been helpful is that we were able to get a fairly good allocation of H-2B labor through the process this year, just slightly more than last year, but it was a slight uptick. And so the combination of that, meaning the labor influx that we’ve had and the ability of our teams to go out and recruit and really staff up the job has put us in a great position to make sure our customers’ properties do very well this year.

Great. And last one for me sticking with labor, does the labor availability impact the overall M&A environment? Are you seeing any changes there given the labor challenges?

It’s a good question. We dive deep into every acquisition to understand their labor situation. And we won’t go in and buy companies or acquire companies that rely too much on temporary labor, rely too much on H-2B. We want companies that have very stable workforces. So we – believe me, when you look at some acquisitions, they certainly do have an exposure to having a very, I want to say, temporary workforce. So I’m pleased to say that the acquisitions we buy have a more stable environment as opposed to necessarily some of those out there. And that’s part of the lens that we look at and we evaluate as we determine what acquisitions that we pursue.

Very helpful. Thank you.

Thank you. Our final question goes to Andrew Steinerman with JPMorgan. Andrew, please proceed.

Hi, Andrew, could you just remind us of your medium-term organic revenue growth and margin goals. You just gave us that second half guide, but I just wanted to know what we should think of that kind of building off of past the second half?

Yes. I mean we’ve been committed to that 2% to 3% annual organic growth trend. We’re going to see, as we get into more of this pricing dynamic, how much more that might be additive to that. We definitely will be updating that as we give our results as we move through these quarters and through our pricing initiatives. Today, we will stick to the 2% to 3%. But again, as we continue to realize that pricing initiative, we may update that. But for right now, I’ll stick with 2% to 3% organic and then on top of that, 2% to 3% on M&A.

And I mentioned margins, too.

Margins, we continue to be in the medium-term committed towards moving back towards that 13% level. I do believe that we will see ourselves improving over the next several years. Again, the pricing initiatives having some of it and frankly, the turnaround that we’re noticing already in our development group should help to be accretive and get back towards the higher levels we have. We feel that the initiatives in development, we will need a bit of a turnaround in the snow, but also the traction we’re receiving in pricing should give us a lot of confidence moving back towards that – kind of in that 12% to 13% range and towards 13%.

Thank you very much, much appreciated.

Thank you. There are no further questions at this time. So I’ll turn the conference back over to management, Andrew Masterman, for any closing remarks.

Great. Thank you, Nate. Once again, I want to thank everyone for participating in the call today and for your interest in BrightView. We look forward to speaking with you at upcoming conferences, and of course, we report our third quarter results in August. Until then, stay safe and be well.

That concludes today’s call. Thank you for your participation.