This article originally appeared on LandscapeManagement.net on February 22, 2022. Greg Herring regularly writes for Landscape Management, providing financial analysis and insights tailored to landscape business owners.
BrightView management spoke about the company’s ESG (Environmental Stewardship, Social Responsibility, and Corporate Governance) initiatives during a presentation to Wall Street analysts and investors related to the financial results for the quarter ended Dec. 31, 2021.
BrightView has set a goal of being carbon neutral by 2035. BrightView’s management has spent a lot of time discussing and planning ESG initiatives while business owners in markets that compete with BrightView will have to decide whether ESG initiatives are valued by customers.
Because BrightView bids on large landscape construction projects well in advance of performing the work, the recent inflationary trends in labor and materials have negatively impacted BrightView’s construction profitability. BrightView has taken the following step to mitigate the impact of future inflation:
- Shortening the expiration date for bid prices to 15 days
- Including price escalation language in bids
- Shifting from a just-in-time buyer to an advanced purchaser of materials with a plan to purchase materials within 15 days of contract award
- Increasing vendor collaboration to anticipate materials cost trends
Management stated that ancillary services (e.g. enhancements, irrigation) have returned to pre-covid level across all segments of the business. The company has raised prices on ancillary services and has not seen a negative impact on revenue.
Management stated that while labor costs have increased about 4 percent in each of the last few years, they expect increases of at least 5 percent in the next 12 months. In its new proposals, BrightView has not seen a reduction in demand based on increasing prices to reflect higher labor costs.
While discussing the financial results through June 30, 2021, I described BrightView’s discussion of price increases as timid. That timidity was gone in this quarter’s earnings call.
BrightView has an acquisition pipeline with the potential of $600 million in annual revenue. According to management, BrightView is acquiring companies at prices of 5x to 7x EBITDA (earnings before interest, taxes, depreciation and amortization). Management implied that other buyers are paying higher multiples to attract buyers.
BrightView recently repurchased half of MSD Partners’ BrightView stock for $82.5 million. It funded the purchase from its cash balance and borrowings under the company’s credit facility. After the purchase, BrightView’s two largest shareholders, Kohlberg Kravis Roberts & Co (KKR) and MSD Partners will own 57 percent of BrightView, valued at more than $700 million. These two shareholders were the primary owners of BrightView before BrightView sold its stock to the public. They served in the role of private equity investors and led the way for what has become substantial private equity investment in the industry.
Private equity investors play an important role in providing capital and expertise as they seek to transform industries and build large companies. The goal of private equity investors is simple: to create a significant return on their investment. To create that return, they need to be able to sell their investment in a company which is what MSD Partners did by selling its shares to BrightView.
Observations
Here are some important observations:
BrightView sold its shares to the public in June 2018 at $22 per share. At that time, the Russell 2000 index was 1,643. BrightView purchased the shares from MSD Partners for $13.98 per share while the Russell 2000 index was 2,174. While the Russell 2000 increased by 32 percent, BrightView’s value declined by 36 percent.
How will KKR and MSD Partners achieve liquidity? I see three options. They could sell their BrightView stock to the public. BrightView could purchase their stock. They could sell stock to another private equity investor who might take BrightView private. Of course, they could also continue to hold their stock in BrightView.
Any of these options are far easier to accomplish with an increasing stock price. The need for an increasing stock price continues to put pressure on BrightView to grow its revenue and reverse a trend of declining profitability. This BrightView objective will continue to impact local markets for landscape maintenance, landscape construction and snow and ice removal services.
Income Statement Summary
In its public reports, BrightView “adjusts” its earnings before interest, tax and depreciation and net income for certain expenses. I have used some of these adjustments for operating income in the tables below. The idea is that these expenses are not part of ordinary operations. Historically, the adjustments included expenses associated with business transformation and integration, becoming a public company and defending shareholder lawsuits, and paying some employees partially through equity-based compensation. The most recent four quarters also included an adjustment for $22.9 million in COVID-19 related expenses.
In the table below, I did not adjust the results for COVID-19 expenses because they are a normal part of operations for landscape companies now. In addition, BrightView included an adjustment for the $22.2 million loss on sale of the BrightView Tree Company which I included as an adjustment in the quarter ended Sept. 30, 2020. Finally, in the quarter ended June 30, 2020, BrightView recorded an expense of $24.1 million to increase reserves related to its self-insurance program. Typically, a reserve is based on estimates from current and prior quarters; however, there is not sufficient information to determine the precise timing of when it should have been expensed. Therefore, I have included it as an adjustment. If the additional expense were spread over the prior two years, the net operating profit margin for those periods would have been reduced by approximately 50 basis points (0.5 percent).
For the accounting experts: Note that I have excluded from operating income the expense related to the amortization of intangible assets that were recorded as BrightView acquired other businesses. Since most landscape companies do not have amortization of intangible assets, I have excluded it, so they can compare their numbers to BrightView’s numbers.
| Dec-20 | Mar-21 | Jun- 21 | Sep-21 | Dec- 21 | |
| Snow removal services | $55.8 | $226.0 | $3.4 | ($0.3) | $36.0 |
| Landscape maintenance | $362.2 | $309.7 | $521.2 | $504.9 | $402.2 |
| Landscape development | $137.4 | $117.1 | $150.3 | $170.1 | $154.7 |
| Eliminations | (1.0) | (0.9) | (1.3) | (1.0) | (1.1) |
| Net service revenues | $554.4 | $651.9 | $673.6 | $673.7 | $591.8 |
| Year over year growth rate | 6.7% | ||||
| Cost of services | $420.8 | $493.8 | $494.6 | $493.6 | $451.9 |
| Gross Profit | $133.6 | $158.1 | $179.0 | $180.1 | $139.9 |
| Gross profit margin | 24.1% | 24.3% | 26.6% | 26.7% | 23.6% |
| Selling, general and admin (SG&A) expenses | $123.3 | $127.9 | $123.1 | $133.7 | $134.9 |
| Adjustments | (11.6) | (11.5) | (12.8) | (13.2) | (10.7) |
| Ongoing SGA&A expenses | $111.7 | $116.4 | $110.3 | $120.5 | $124.2 |
| SG&A as a % of revenue | 20.1% | 17.9% | 16.4% | 17.9% | 21.0% |
| Adjusted operating income | $21.9 | $41.7 | $68.7 | $59.6 | $15.7 |
| Operating profit margin | 4.0% | 6.4% | 10.2% | 8.8% | 2.7% |
To see long-term trends, the following table shows operating results for each of the past four years:
| Year Ended Dec-18 | Year Ended Dec-19 | Year Ended Dec-20 | Year Ended Dec-21 | |
| Snow removal services | $246.9 | $252.5 | $163.3 | $265.1 |
| Landscape maintenance | $1,513.8 | $1,587.2 | $1,568.5 | $1,738.0 |
| Landscape development | $572.5 | $613.8 | $601.6 | $592.2 |
| Eliminations | (4.6) | (4.2) | (3.7) | (4.3) |
| Net services revenues | $2,328.5 | $2,449.3 | $2,329.7 | $2,591.0 |
| Year over year growth rate | 5.2% | -4.9% | 11.2% | |
| Cost of services | $1,713.0 | $1800.0 | $1743.8 | $1,933.9 |
| Gross profit | $615.5 | $649.3 | $585.9 | $657.1 |
| Gross profit margin | 26.4% | 26.5% | 25.1% | 25.4% |
| Selling, general and admin (SG&A) expenses | $471.4 | $472.5 | $520.4 | $519.6 |
| Adjustments | (67.2) | (46.4) | (101.6) | (48.2) |
| Ongoing SG&A expenses | $404.2 | $426.1 | $418.8 | $471.4 |
| SG&A as a % of revenue | 17.4% | 17.4% | 18.0% | 18.2% |
| Adjusted operating income | $211.3 | $223.2 | $167.1 | $185.7 |
| Operating profit margin | 9.1% | 9.1% | 7.2% | 7.2% |