Good morning and welcome to today's BrightView Holdings Incorporated Third Quarter Fiscal 2022 Results Call. My name is Bailey and I will be your 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. [Operator Instructions] I would now like to pass the conference over to our host Faten Freiha, Vice President of Investor Relations. Please go ahead.

Thank you, operator, and good morning everyone. Thank you for joining BrightView's third quarter fiscal 2022 earnings conference call. Andrew Masterman, Chief Executive Officer; John Feenan, Chief Financial Officer; and Brett Urban, Incoming Chief Financial Officer are on the call. Please remember 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. I'll now turn the call over to Brightview's CEO, Andrew Masterman.

Thank you Faten, and good morning, everyone. We are delighted to report on another strong quarter, demonstrating momentum in our fundamental business drivers and the resiliency of our model. Before we start, let me take the opportunity to thank the BrightView team for their hard work and dedication in a rapidly changing and challenging environment. Their efforts help fuel our performance and enable us to remain poised for long-term success. On today's call, I will review the third quarter performance at a high level, discuss execution against our key growth drivers, elaborate on external headwinds facing our durable business, and outline the confidence underpinning our optimistic long-term view. Let me start with Q3 performance. We delivered strong land organic growth for the fifth consecutive quarter, implemented our strategic pricing initiatives and managed through multiple external headwinds with tenacity and focus on positioning BrightView for long-term success. We continue to execute on our successful Strong-on-Strong M&A strategy, made progress on ESG initiatives and enhance our value proposition to customers through technology investments, all while managing through rising fuel costs as well as continued inflation of material and labor expenses. Our focus on organic growth and profitability improvements will enable us to leverage our scale to further power our growth and deliver exceptional shareholder value. Let's review a few financial highlights for the quarter on slide 4. Revenue grew by 11% for the quarter, reflecting strong total organic growth of 5.6% and continued benefits from M&A transactions. Strong net new growth, ancillary penetration, snow removal services and pricing initiatives powered our total maintenance organic growth of 3.1% on top of a prior year organic growth rate of 11%. Due to a late spring and extended snow season, our maintenance business benefited from significant growth in snow removal services relative to the prior…

Thank you, Andrew and good morning to everyone. I'm pleased to report on another solid quarter. We delivered strong organic growth in our Maintenance and Development businesses, and our team navigated through a challenging environment and managed through rapidly evolving external headwinds, including most notably the continued rise in fuel costs. We remain focused on our key investment pillars of cash generation, organic growth, mergers and acquisitions, and margin enhancement over time. Before I cover our financial results in detail, I'd like to give Brett Urban, our incoming CFO, a couple of minutes to introduce himself. Going forward, Brett will be leading our earnings calls. Brett?

Thank you, John and good morning, everyone. BrightView is a durable business with multiple growth opportunities, and an exciting time for me to be part of this dedicated team. I have been with BrightView for seven years and have served as head of the company's Financial Planning and Analysis Group, as well as CFO of our Maintenance segment. In my new role, as the company's CFO, I will follow in John's footsteps and support the team to execute on growth drivers that maximize our potential and expand our market share In addition, I'll be focused on consistently growing our business, enhancing our balance sheet and executing on capital allocation plans that create long-term shareholder value. I'm fortunate to have John's guidance during this transition period, which will certainly position me and BrightView for success. Lastlym I believe engagement with our investors and analysts, is essential to our long-term success. Working with Andrew, John and the team, I look forward to meeting and partnering with you all over the coming months. I will now turn the call back over to John, to cover our results.

Thank you, Brett. Let me now provide a snapshot of our third quarter results. Moving to Slide 14. Total revenue for the third quarter, increased by 11% reflecting 5.6% of total organic growth. Total revenue growth was supported by increases in both on maintenance and development segments. Maintenance revenues, increased by 7.1% driven by 3.1% of total organic growth, which included 2.3% of land organic growth. Our total maintenance organic growth benefited from better-than-expected snow removal services, as a result of the longer than typical snow season, which offset ancillary services in April. Land organic growth was driven by strong contract growth and a continued rebound in our ancillary services. In addition, our pricing strategy contributed approximately 50 basis points to our land organic top line growth, net of scope reductions as expected. Last week, we realized $20.8 million of incremental revenue from acquired businesses. Development revenues increased by 24% compared to the prior year. The increase was driven by a combination of strong organic growth of 14%, and M&A contributions of approximately $15 million. We remain encouraged by our pipeline and bid calendar, and we anticipate continued strong organic growth in the fourth quarter, of approximately 8%. As Andrew mentioned, we serve a diverse mix of end markets in our development business and we are seeing growth across all of these verticals most notably in public works, and commercial construction projects. Turning to the details on Slide 15. Total adjusted EBITDA for the third quarter was $94.3 million, up 0.7% compared to the prior year. Our adjusted EBITDA performance was impacted predominantly by higher fuel prices. For the third quarter, of this fiscal year gasoline spend represented 3.4% of total revenue compared to 2.2% in the prior year. While the guidance for the third quarter that we provided back…

Thank you, John. We have a strong, resilient and agile business. We are leaders in our industry with an unparalleled customer value proposition, supported by our investments behind digital services and sustainability. We are executing against our growth initiatives and driving strong momentum in our business. Our investment in sales, technology and marketing continue to fuel our momentum. Pricing efforts will help us enhance our profitability and our excellent M&A engine will support further top line acceleration and expand our footprint. Our performance in the third quarter was excellent and we exceeded our internal expectations excluding the fuel headwind. We drove strong organic growth, offset our operational costs, labor and materials through price increases and our teams executed at the highest level. We expect this momentum to continue for the fourth quarter. And, as we look out to fiscal year 2023, we continue to see a clear path to approaching $3 billion in total revenues. Importantly, 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. Our model creates a cycle of high free cash flow and reinvestment capacity. The recurring revenue model drives profitable top line growth. And that in turn delivers strong free cash flow which is predictable and consistent overtime, as evidenced by the generation of approximately $500 million of free cash flow over the last five years. All of these efforts along with the benefit of secular trends give us strong confidence in the long-term prospects of our business. Our future remains 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 current inflationary environment. We are excited to see our customers' landscape blossom, as we move through our green season. Also I'm thankful for our teams, for 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'll now open the call for your questions.

Thank you. [Operator Instructions] The first question today comes from the line of Tim Mulrooney from William Blair. Please go ahead, your line is now open.

Andrew, John, Brett, good morning.

Good morning Tim.

So, I wanted to ask about your maintenance land business. You were forecasting 3% to 4% organic growth in the back half of the year. And it looks like the third quarter came in slightly below that at 2%. So, I was wondering if that was because you didn't get the net new contract growth that you were looking for this selling season or if maybe there was a slight pullback in enhancement spend could you just provide a little bit more color on the spending patterns that you're seeing within your customer base with a particular focus on how that enhancement piece of the business is doing? Thank you.

Absolutely Tim. Yes, it was a dynamic similar to what we saw a couple of years ago and that we had a late spring with snow coming in at the beginning of April. And so as we missed that window for ancillary installation because we had snow coming down that really was the offset. So, if we hadn't had the snow, we would have replaced it with ancillary. So, we saw a similar demand as we expected. It just we couldn't get to it because there was snow on the ground. And so it really was that straightforward.

Yes. That makes sense. And we're hearing that from like the pest guys other similar industries were affected by a cold spring. So, that all makes sense.

Exactly. And we continue to be very confident that as we go forward that continued growth right around 3% is what we should expect going forward.

Okay. All right. That's helpful too. If I could sneak one more in. Just on pricing. Last time we spoke I think you expected about 50 to 100 basis points of organic growth in maintenance land come from pricing this year. And I know usually you get pricing through changes in scope. But this year you're actually expecting price to contribute to organic growth now that we're through that key selling season and with the fuel surcharge, I wanted to check in on that number and see how we should still be thinking about pricing this year if that 50 to 100 basis points contributing to organic growth is the right number or if it's a little higher or lower than that? Thank you.

Yes, right in that range, Tim. We're seeing -- we saw this quarter about 50 basis points impacting us from price. And we believe that as you said the pricing and season is by and large over and we expect that to continue into the fourth quarter.

Very helpful. Thanks guys.

Welcome.

Thank you. The next question today comes from the line of George Tong from Goldman Sachs. Please go ahead, your line is now open.

Hi, thanks. Good morning. I wanted to dive a little bit into fuel prices which remain a headwind. To the extent that fuel prices remain elevated, could you talk a little bit more about the strategies you have to manage through the impact? You touched on efficiencies and pricing anything directly related to hedging or pass-throughs that you can implement that can help mitigate any surprises or unforeseen changes in oil prices?

Yes George and obviously fuel was the biggest impact to our business here in the third quarter. And as we look at the fourth quarter we see fuel continuing to be at a relatively higher level compared to last year. What we continue to do is work with our customers on fuel surcharges. We feel like we've pretty much completed the discussions with those customers to be able to continue to receive the surcharges as long as fuel remains above that kind of $3.50 kind of level and so we're able to protect it there. Fuel hedges we did not hedge in 2022 for 2023 because we saw escalating fuel prices continuing to raise and we're concerned a little more about the volatility that we would see at fuel. And the last thing I think anyone wants to do is to see the hedge of the peak and when fuel prices potentially came down. So, that's why we didn't hedge before. We'll think about it again as we look at every year about hedges as a potential mechanism to be able to offset the fuel. But at this point in time given where fuel is at we have not placed any additional hedges as we look forward into Q1 or Q2 2023.

Okay, got it. That's helpful. You talked a bit about market impact that you're seeing from inflation as it relates to material and labor in your development business. Are you seeing any easing of trends or peaking of trends here, or is the momentum still sort of up and to the right as it relates to input costs?

Yes. And well I will have to say we've said we're beyond the peak. We're kind of on the other side of the curve. And so we saw especially as we progressed through the third quarter as we saw the material portion of material impact or the negative material impact to lessen in the development segment. So, we're believing as we go into the fourth quarter that we're going to start to see that turn as we've talked about for several quarters now is that we needed to get towards the latter half of the summer into the fall and we are actually seeing that. We're seeing improvements in our material rates. And that's a combination of getting out of the contracts that were priced with historically longer lead times and getting into the newer contracts, which have much shorter lead times. So on the material side we see a turn on that. And on the labor side of the business, the teams in both the development and maintenance segments have done an outstanding job of managing labor. If you can look at our notes that we talked about as well as the overall results being able to manage a labor environment and deliver -- basically the only impact being fuel deliver results that were pretty much in line with what we expected with the exception of a commodity base. Fuel drive has really been able to give us confidence about what we see looking forward. And this is in combination with leveraging the technology that we've deployed with our electronic time capture and our labor management tools to be able to have that tight management across both segments the Maintenance and Development segments in our business.

That’s great. Thanks very much.

Thank you. The next question today comes from the line of Justin Hauke from Baird. Please go ahead. Your line is open.

Hello, Justin.

Hello, Justin. Are you there?

Yes. Can you hear me now?

Yes.

We can now Justin.

Great. Thank you. So I wanted to ask I guess how do I ask this a little bit about kind of the balance sheet and cash flow here. The reason why I ask you quantified for 4Q the M&A contribution is going to be about the same as what it's been so $35 million-ish a quarter that you had. As we look into 2023 though with leverage being 4.8 times, I'm just curious the extent to which you're able to continue to do a similar level of M&A next year? And part of the reason why I ask is because some of the cash flow headwinds you had this year I think will continue. Next year you've got another CARES Act repayment. I think you're making in December. And then also your interest expense the $20 million you're guiding to in 4Q is like $80 million annualized. So I'm just thinking -- I guess the question is how do you think about free cash flow for next year and the ability to actually continue to deploy the balance sheet as you have over the last couple of quarters?

Yes. It’s a great. A lot in there Justin. So let me unpack that question for you. I think when we look at the cash flow this year it was definitely impacted when you look at it year-to-date by really three things. It was impacted by the increase in capital, but we were very clear that we expect that to maintain a 3.5%, and you can do that math. We also were impacted by I call it the unwinding of the CARES Act where we had benefits and then payments and that was about $34 million $35 million. And then the increase in cash taxes which is more of a normalized rate this year when we were benefited from tax planning in the prior year. When we look forward we are very confident that this is still going to revert back to our average. If you go look at our average over the last five years where we mentioned about $0.5 billion we're averaging about $100 million a year and we think that's still very attainable. Let me kind of walk you through some of the key points. When we think about where we're going to be next year we've guided -- or we've said that we would be at approximately -- approaching $3 billion right? And what's going to happen next year? We are going to grow so there's going to be a headwind around working capital. We're growing quite a bit. We are going to have an increase in interest expense driven by -- mainly around rates and the increase in SOFR. But a couple of positives are going to occur. We're growing the business so we would expect incremental EBITDA. And then when you look at the payments into your piece on the CARES Act, yes, we have that outflow in the first half of fiscal 2023. But we're also going to benefit from some tax planning that we've put in place that will more than offset that CARES Act payment probably by a magnitude of 1.5 times to 2 times that CARES Act component. So we're very confident we'll still be in that $90 million - $100 million range of cash generation, which reverts right back to our average over the last five years. And obviously that allows us to continue the M&A strategy.

Okay. Great. So $90 million to $100 million is kind of -- that's in tune for next year. I guess the next question I don't have a lot on the P&L just because you did a good job talking about the fuel impact and then labor it sounds like it's mostly offset by what you're doing. But on some of the items that you're also spending on like all the IT spend this year. I guess, I was just curious how much more is there to go on kind of that spend? Does that taper off after the fourth quarter. And then some of the other items that are excluded like the COVID expenses how much longer is that going to be something that's continuing to impact the results at least on a GAAP basis?

Justin, let me talk about the IT and maybe John can then pick up on the COVID expenses. But our IT pipeline that we have for initiatives around digital implementation of tools actually has a pretty long horizon when I look over several years. And these tools are things which will engage customer engagement things like HOA and BV Connect 2.0 that's going to be coming out. That's only 2.0. There are actually constructs out there what 3.0 could look like. And as we continue to enhance that combined with tools that help us in our ancillary management, help us in our tree care management things that think about employee engagement. There are multiple tools that we have out as we continue to transform this industry into a really a more digital and future-focused organization that will not only drive better customer retention and employee engagement and employee retention, but also look at growth initiatives in our digital marketing spend and our approach to digital. So that IT spend, I don't see coming down and I see the opportunity is fairly significant as we continue to deploy that. Fortunately, that mostly happens in a capitalized way. So we don't foresee that to be an expense headwind at all. And John I'll have you.

Yeah. And Justin on the COVID, we expect that to drop precipitously going forward. We have started to see that this year. We're down about $2 million sequentially from Q2 to Q3. We expect that to continue to drop quite a bit, where it will be I would say de minimis in fiscal 2023.

Great. Thank you for better color on both of those. I appreciate it.

Yeah. No problem.

Thank you. The next question today comes from the line of Bob Labick from CJS Securities. Please go ahead. Your line is now open.

Hi. Good morning. It's Pete Lukas for Bob. Just looking at it, due to cost inflation scope changes et cetera kind of hard to gauge the underlying growth of the business in terms of net number of contracts, revenue per contract. Just wondering if you could comment a little bit more on how these have trended and give us a little sense and any kind of clarity or more info you can give us on that? And also, is there a better way to look at growth there?

Yeah, sure. And I can give you certainly, we looked at price and the impact of price being about 50 bps in the quarter. Outside of that, it's really a combination of contracts and ancillary. We saw some rebound in ancillary, but ancillary is pretty much running at historical levels. So we continue to see net new contract improvement, which basically that's underlying growth. And we saw that in the first quarter, we saw the second quarter and we're seeing in the third quarter and we're going to see in the fourth quarter. And we see that because our contract wins that we've got in the third quarter we see that kind of spill out and basically impact the next several quarters when it comes to contract growth. So we do see a significant amount of growth continuing to come into the business and net new contracts and then you look at the size of our contracts also those are growing. So we see our positive about the trends of the investments in our sales force really continue to pay off and will continue to deliver a sustainable picture. We've done five quarters of organic growth. Next quarter, will be our sixth quarter and we believe those quarters will continue. This is a steady machine that we expect to continue to deliver for the foreseeable future.

Great. And just following up on that. In terms of the biggest focus for new wins, if you could kind of talk about that and what end markets do you think you have the biggest advantages there?

Yeah. It's a great question because this marketplace has so many diverse elements of -- there are so many different types of customers. And we are seeing -- it's interesting. We're not seeing necessarily any specific customer except I would say the larger customers, one that have a more sophisticated approach. And so that can be in the commercial area. It can be in homeowners associations. It can be in parks and recreation. But the larger size of a customer comes, the more resonation that comes with ancillary services that we can provide across the whole suite of services we deliver combined with the attention that our account managers who are doing a great job of really engaging with our customers and really demand that level of horticultural expertise combined with direct customer communication. So there is something about size of customer and that's why we've increased the size of our customers by over 40% in the last several years looking at what contracts really demand that high customer touch and really delivers the kind of value that we see. So I would say rather than necessarily any particular vertical, it's more just on looking at the increasing size of the customer.

Very helpful. Thanks.

Thank you. There are no additional questions waiting at this time. So I'd like to pass the conference over to Andrew Masterman for closing remarks.

Thank you, operator. Once again, I'd like to thank everyone for participating in the call today and for your interest in BrightView. We look forward to speaking with you at upcoming events and we will report our fourth quarter results in November. Until then, stay safe and be well.

That concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.