BrightView’s latest earnings report breaks down the impact of inflation

Inflation is like a thief in the dark. You don’t see the thief taking your things, but in the light of day, you see what is missing. In the case of inflation, what is missing is profit.

Inflation stole some of BrightView’s profit in the quarter ended June 30, 2022. Fuel inflation alone stole $7 million during the quarter. BrightView implemented a fuel surcharge in April 2022 which increased revenue by $2 million in the quarter or the “theft” would have been $9 million. Here’s how management described their approach to fuel inflation:

“It’s important to note that the dialogue with customers has been constructive and the majority have accepted the fuel surcharges. We have elected to take a balanced approach, absorb some of the incremental fuel costs in the near term and focus on strategic pricing initiatives, improving ancillary penetration and attracting larger clients. Ultimately, we believe the impact of rising fuel cost is transitory, either costs will normalize, or we will further adjust our pricing in the upcoming renewal season to reflect the continued rising costs.”

BrightView stated that it is seeing crew wage inflation of 6 to 7 percent, up from historical norms of 4 to5 percent. Those numbers are less than what we see with most of our clients.

The phrase that financial analysts use for what has happened to BrightView is “margin compression.” In this case, the gross profit margin (a percentage) is being compressed due to fuel and other inflation. (Note that if your company uses comprehensive business management software like Aspire, fuel expense will be recorded as an expense below gross profit; BrightView records it above gross profit.) Margin compression occurs because prices are increasing at a lower rate than expenses like wages and fuel. Fighting margin compression is essential to the health of landscape companies.

In the table below showing annual periods, you will see the gross margin was compressed from 25.5 percent to 24.5 percent.

Interestingly, this decrease continues a longer-term trend of declining gross profit and operating profit margins. In the 12 months ending June 30, 2019, the gross profit and operating profit margins were 26.8 percent and 9.2 percent, respectively. In the most recent 12 months, the gross profit and operating profit margins declined to 24.5 percent and 6.3 percent, respectively.

It will be interesting to see the impact of inflation on gross margins and operating margins when we do The Herring Group’s annual landscape industry benchmark report in October.

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, paying some employees partially through equity-based compensation, and some other unusual expenses. The most recent four quarters also included an adjustment for $22.7 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.

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.

To see short-term trends, the following table shows operating results for each of the past five quarters:

To see long-term trends, the following table shows operating results for each of the past four years: