Greetings, and welcome to the BrightView Q3 Fiscal 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Chris Stoczko, Vice President of Finance. Please go ahead.

Thank you for joining BrightView's third quarter fiscal 2023 earnings conference call. Jim Abrahamson, BrightView’s Interim President and Chief Executive Officer; and Brett Urban, 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 detail on the risks and uncertainties that could impact the company's future operating results and financial condition. Comments made today will also include 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 will now turn the call over to Jim.

Thank you, Chris, and good morning, everyone. I'll start on Slide 4 of the earnings presentation. I plan to focus my prepared remarks on our solid results in the quarter, provide an overview of our expanded strategic initiatives, discuss our progress on the search for our next CEO, and provide some perspective on the impact of our expanded strategy, coupled with the renewed focused and energy of our leadership team, given the significant value creation opportunity ahead of us. As a BrightView board member for the past eight years, and more recently in my role as interim President and CEO, I'm focused on leading the creation and execution of our expanded strategic plan and improving company performance in concert with our excellent BrightView team. We are capitalizing on opportunities to drive performance as we grow our revenue and our EBITDA, while expanding margins, increasing free cash flow, strengthening our balance sheet, and thereby enhancing shareholder value. We are proud to report that our results for the third quarter reflect substantive progress against each of those financial objectives. We are particularly encouraged about our disciplined approach to pursuing high quality business opportunities, while increasing our cost efficiencies that has translated into strong EBITDA growth, margin expansion, and increased cash flow. Following the strategic assessment of our business, we launched the first phase of Project Accelerate during the second quarter. As a reminder, this is a company-wide program designed to reduce overhead costs. We have now expanded and intensified the scope of Project Accelerate with new strategic initiatives centered around growing our revenues, operating even more efficiently, thereby expanding our profit margins and generating even more cash to delever our balance sheet. We recently broadened the reach and expanded the depth of our Project Accelerate cost containment initiatives across all facets of…

Thank you, Jim, and good morning to everyone. I'll start on Slide 6. I am pleased to report on another solid quarter. As Jim previewed, the business is growing, profitability is expanding, and cash generation has improved significantly. We grew total revenues by 2.5%, Increased EBITDA by $8 million, delivered meaningful margin expansion in both segments, and generated significantly more cash despite increased interest. Our ability to achieve these results reflects BrightView's attractive business model, and gives us confidence as we pursue new opportunities and drive further financial and operational improvement. Moving to Slide 7, total revenue during the quarter increased 2.5% year-over-year to $766 million. Revenue during the quarter benefited from demand in our core businesses, favorable pricing, and M&A contributions. In our land business, total revenue increased to $555 million, reflecting roughly flat land organic growth and positive contributions from acquisition. Organic growth was impacted by our increased focus on pursuing higher quality contract opportunities. However, this focus, and the continued execution of our disciplined pricing strategy, was one of the primary reasons for the significant margin improvement. More on that later in the call. We grew our development business a robust 9.1% organically due to our ability to convert our strong backlog. We remain very optimistic about our development business and the pipeline of projects for the remainder of fiscal 2023, and we are seeing continued momentum leading into fiscal 2024. Turning now to profitability and the details on Slide 8. Total adjusted EBITDA for the third quarter was $102 million, an increase of $8 million, driven by both land and development growth and disciplined cost management. Our increased profitability is the result of our focus on higher quality business, price-cost dynamics, operational performance, and good progress on our cost initiatives related to Project Accelerate. With the…

[Operator Instructions] Our first question comes from Tim Mulrooney from William Blair. Tim, please go ahead.

Hey, this is Sam Kusswurm on for Tim. Thanks for taking our questions here. Just have a few. I guess to start, I believe last quarter your expectations were for 2% to 3% land organic growth in the back half here. Now it's looking like it'll be flat. I guess I'm wondering if you could expand on what drove that change.

Yes, great question. This is Brett. You think about growth of the company, we're excited with the quarter three results, and we're excited about the Q4 guidance. The total company is growing. In quarter three, we grew 2.5%, organically was 1.5%, and both segments showed growth in Q3. So, we’re excited about those results. When it comes to land organic specifically, as you think about our expansion of Project Accelerate, and as that now expands into client retention and new sales wins, we are very focused on bringing new sales in that are higher quality business. And we're being extremely prudent and judicious with our price increase strategy when it comes to customer renewals, both of which have led to the margin expansion you saw in Q3 and the guidance for Q4. And in the short term, as we go through this expanded Project Accelerate strategy, we'll see a short term modest softening of land organic growth relatively flat into next quarter. But we do expect that focus on higher quality business when it relates to new sales and our pricing strategy as it relates to renewals to continue to drive outsized margin expansion in the business.

Got you. That's helpful. Maybe pivoting to the Accelerate program then a bit, but given that you've taken significant costs out of SG&A with this program, do you think that you'll have to eventually bring some of those costs back or are current SG&A levels sustainable in your view?

Yes, thanks for the question. Always important when you're considering this. This is Jim Abrahamson. Being around this company for the last 18 years, I've got a good handle on what makes it tick, and where we saw overhead costs escalation that we were able to bring back under control. More importantly, we've taken a deeper dive really across the organization. So, we're expanding this beyond just SG&A, if you would. If you're thinking corporate or call it topline, top level expense categories where our focus was in the initial phase. We've now expanded that to get into the remainder of the company. So, we're looking across those five areas that we talked about on the call. Each of those areas, such as branch performance, such as our team productivity and other areas, the broadening and deepening of the program is really where the opportunity is, because we've got a widely distributed company. So, we think there's great opportunity. We don't believe this was short-term in nature. We’ve restructured our company based on what we found. And having a good handle on how this company operates, I think we're able to prudently put these cost control measures into place, and we believe these will be permanent savings over a period of time. So, as we continue to roll these out, we'll have more guidance in the future on what our targets are, but we're guiding these to be permanent reductions.

Okay, great. We'll look forward to that. Maybe I'll sneak one last one in here. I think you mentioned in your prepared remarks and some of your commentary here about retention, just improving that for the customer contract level. Can you maybe share more detail what exactly you're trying to do to achieve that?

Yes, great question. As you think about a year and a half, two years ago when inflation was peaking around 9% and we were fighting that inflation by launching our pricing strategy, we were very prudent and judicious in renewing customers with the right pricing dynamics. We're continuing that pricing strategy now. We've seen retention rates stabilize, but not rebound back to historical levels, call it pre-hyperinflation. So, as we think about expanding that initiative and really getting back to branch performance and getting back to a high customer focus, we expect now that two years into pricing, with inflation now in the 3% range for CPI, CPIW, which is a metric we track internally, is less than 2.5%. We expect our aggressiveness on pricing to start to subside. That will have an impact on customer retention and a bit more focus on back to the basics in the branches. We expect that to have an impact to retention. So, we are seeing it stabilize year-over-year, but we would expect in the future as we launch the expansion of Project Accelerate, to see a rebound in retention.

Got you. Thanks for the answers, guys.

Thank you. Our next question comes from Bob Labick from CJS Securities. Bob, please go ahead.

Hi, good morning. It's Pete Lukas for Bob. You've talked before about the bridge back to 12% to 12.5% margins being running off old development services using the five-year average at normal margins for snowfall and price increases, as well as fuel price declines. Just wondering how Project Accelerate impacts this bridge, and is that still - the 12.5 half% still a viable medium target for you?

Yes, Pete, that's a great question. Look, as we said on the prior call, we committed to already in 2024, through Project Accelerate, to see 50 basis points of margin expansion, and that's without snow rebounding, right? So, you think about our guidance now, right around 10.6% EBITDA. Project Accelerate in its initial phase would have really secured 50 basis points of margin expansion, bringing us into that low 11% range for next year. Now, with the expansion of Project Accelerate, we're expecting meaningfully more margin expansion above what was originally communicated, and we'll communicate more on exactly what those numbers are on our next earnings call. But if you think about original Project Accelerate in the low 11% EBITDA margin range, plus a normalized snowfall, which would be somewhere between 40 and 60 basis points of additional margin, that puts us in the mid to high 11% range, plus the expansion of Project Accelerate, which we'll share more in the next call. So, as you think about getting back to the pre-pandemic margins of mid 12 for the company, as we start to solidify the expansion of Project Accelerate, that will all become incremental to that bridge that is provided

Very helpful. Thanks. And then just one more, I guess. How is the scope of work trending, and are customers pulling back or is contract size starting to grow again?

Yes, great question. We have seen no sign of customer pullback in either business. In the development business, we are already beginning to sell our backlogs through the second half of next year. So, we have a great line of sight into the first half of next year. We see no slowing down in that business, and we're getting positive indications from some of the internal KPIs. We track that we don't expect to see any slowdown. And in the maintenance side of the business, we're seeing increased demand on ancillary services, which is our outside-the-contract services we provide to our customers. We actually saw quarter three versus quarter three of last year, show an increase in those demand for services. So, from a customer demand standpoint on either side of the business, we see no signs of a slowdown.

Great. And just a last quick one from me. Has weather been a major impact, particularly the heat in any of your areas? Have you seen anything there?

Yes, the heat wave that just came through the country was, I would say, extremely hot in multiple areas, to say the least. But from the impact on the business, I would say very little. We want to make sure our employees are safe. And as you think about productivity on a job, the most important thing to us is safety. So, if there needs to be an extra couple minutes break here or there for our employees, that's first and foremost, but we have not seen any major impact on the underlying business from that heat wave that just came through.

Yes, I'll just add to that. I think we reported on, there was weather - California rains and everything last year, we showed a lot of disruption. This isn't the same kind of disruption. This kind of heat isn't really creating the same kind of disruption that those rainfall issues were creating earlier on. So, it's really steady as she goes from an overall weather standpoint this year, other than personally, of course, it's been a hot summer.

Great. Thanks so much. I'll jump back in the queue.

Thank you. Our next question comes from George Tong from Goldman Sachs. George, please go ahead.

Hi, thanks. Good morning. Your landscape maintenance business declined a little bit year-over-year this quarter because of reduced commercial demand. Can you talk a little bit about where that reduction in demand is coming from, whether it's the contract-based business, whether it's ancillary, and how much of that was driven by external environmental factors versus internal initiatives to right-size pricing, for example?

Yes, George, how are you doing? This is Brett. Great to hear from you today. So, from a maintenance services standpoint year-over-year, that business grew. Just to clarify, grew about half a point of growth. And within that was was a small decline in our snow business. We have very little snow in in quarter three, but we do have some. That business went backwards as disclosed about $3 million. So, without the snow impact of that call it, maintenance services in total grew about 1%, which was land organic growth relatively flat and M&A contributions of about 1% of growth. So, just to clarify that the business is growing. And as you think about land organic growth, as we mentioned before, we are - I would say the bigger impact is internal initiatives rather than external factors. We are making sure the business we are bringing in from a new sales perspective is high quality, high margin business. And we're ensuring that our pricing strategies, that we're continuing to be prudent in our pricing strategies on the customer renewals. That business is margin accretive to the company. As you think about our overall strategy of growing profits, which we did in Q3 and expect to do again in Q4, and growing margins, which we did in Q3 and expect to do again in Q4, that's all leading towards generating more cash for the company and ultimately delevering the balance sheet, which we also did in Q3.

Great. That's helpful. And yes, I was really, I guess, asking about land organic, organic performance, which was, I think, down 0.2% year-over-year. So, that's helpful context. And then you talked a little bit about Project Accelerate spending, making progress around cost containment, branch performance, customer retention, new sales, procurement. How are you internally rank ordering these various initiatives? Certainly, it's a lot to tackle with Project Accelerate. What are the priorities and what are the various timelines for when you would expect to see progress on these, and what would be the associated revenue and margin benefits?

Yes, that's exactly where we're focused right now. So, we've calibrated some targets internally. This has been a team effort. We're not just taking this - this isn't a top down. This is a company-wide initiative too. And our operations teams have been really focused on hitting what those targets intend to be. Clearly, the branch performance issues, that's our bread and butter, right? That's where our customers live and performance there is vitally important. So, in doing that, the first thing to look at is too, not all branches are performing equally right now. So, obviously, your eyes are driven to the bottom tier of those branches and fixing the underperformers are very deliberate aggressive steps in place. That's a first step, very achievable type of opportunities to be able to look at that bottom tier or bottom quartile of branches. So, we've created the data and the research and an action plan to start there. We expect to be able to see near-term results from fixing that bottom quartile, if you would. Overall then, it's really optimizing those top quartiles, right, showing continuous improvement and building our ancillary penetration as we're able to achieve in our best performing markets. We believe there's upside to both revenue performance, as well as cost out opportunities within the branches. So, obviously, that's the biggest and broadest. That's our business. This is a locally run business. This is a street corner business, and winning more and losing less is important there. the customer that - what we call team performance, the next phase down is really looking at our organizational structure and what areas do we have in front of us to be able to calibrate the spans of control and the layers of management. So, we're looking very closely at what…

Very helpful. Thank you.

Thank you. [Operator instructions]. Our next question comes from Justin Hauke from Baird. Justin, please go ahead.

Yes. Hi, good morning. I wanted to ask about M&A. and the reason why is just because ever since the company's been public, you guys have always had kind of - even when things haven't been announced, there's always been an assumption, a couple points of revenue contribution annually from M&A. I think this is the first quarter that you've had where you didn't - press release that you've done any acquisitions. Obviously, you've got this focus on free cash flow and deleveraging and with the CEO search underway. I'm just curious, as we think about 2024, as it stands right now, is M&A kind of officially on pause for the near term and we shouldn't be thinking about contribution from it next year, or what's the status of what you're doing there?

Yes, Justin, great question. You kind of said a couple of things in your question around CEO search underway, focus on margin accretion, and delevering the balance sheet. That’s definitely our focus, right? Our focus is, priority number one, to generate additional free cash flow year-over-year, which we've done for the first nine months of the year. That free cash flow generation is up over $55 million year-over-year. We're using that cash to pay down debt, and we're growing our earnings in a way to delever the balance sheet. So, that is our focus right now as it comes to the company. As far as it relates to M&A specifically, I would not say it's on pause. We are not an official pause. We are still being very selective and strategic with our acquisitions. We've seen multiples come down into the 5x range or lower, like we've presented on previous calls. We still have a very robust M&A pipeline north of $700 million. So, as deals come across, we are just being very selective and strategic in those deals. As you think about modeling for 2024, we're not ready to give guidance yet for 2024 as it relates to M&A, but it will be likely less than the 2% target we've provided in years past.

Okay, that makes sense. Thank you for kind of clarifying that. And then I guess, the other question I had, just on fuel costs, obviously they've come down. Like, in the past, you guys have quantified sometimes where that is. I'm just curious how much of a margin lift that has been and is that something - where fuel costs are right now, will they continue to be a tailwind for the next couple of quarters?

Yes, great question. Fuel in Q3 was roughly a $2 million benefit to the P&L year-over-year. And that split roughly 75% maintenance, 25% development, as you think about the segment splits there of fuel. So, call it 20 to 30 basis points fuel accretion in the quarter. We'd expect that to continue into Q4 at a similar pace. Fuel is a bit on the rise right now. it's about $3.75 a gallon. Last Q4, we were about $4.75 to $5 a gallon. So, should still be a tailwind when it comes to fuel year-over-year, and we'd expect that somewhere in the 20 to 30 basis point range for Q4.

Great. Okay. That's helpful. Thank you very much.

Thank you. That is now the end of the Q&A session, so I'll now hand back over to Brett Urban for closing remarks.

Thank you, Operator. Once again, I want to thank our team members for the dedication to designing, creating, maintaining, and enhancing the best landscapes on earth. And thank you to everyone for participating in our call today and for your interest in BrightView. We look forward to talking with you again. Talk soon.

This concludes day's call. Thank you for joining. You may now disconnect your lines.