Latest earnings report shows rebuild approach for BrightView

As I read its materials and listened to the earnings call with the CEO and CFO, one statistic stood out as a great summary of the magnitude of the changes at BrightView. This statistic was given in response to a question from an investment analyst.

Here’s the stat from Dale Asplund, CEO, “70 percent of our employees have a new boss right now … and some of the people didn’t know their new boss.”

This statistic was part of the answer to the question as to how BrightView is thinking about acquisitions now. See below for more on BrightView’s answer.

If you are competing with BrightView, change of this magnitude creates significant short- and medium-term opportunities. It also serves as a warning for the long-term: BrightView intends to become a formidable competitor.

I encourage you to read about the changes and think about the opportunities those changes create in your business. You will also find a summary of BrightView’s financial results below.

Timeline of changes

Jan. 31, 2023 – BrightView announces what would become its last acquisition until 2025.

May 4, 2023 – Andrew Masterman resigned as CEO effective May 31, 2023. Jim Abrahamson was appointed interim CEO.

Aug. 28, 2023 – Dale Asplund appointed as CEO effective Oct. 1, 2023. Asplund announces plans to make a personal investment of $5 million in BrightView stock.

Aug. 28, 2023 – One Rock Capital Partners, a value oriented, operationally focused private equity firm, invests $500 million in BrightView convertible preferred stock.

Jan. 31, 2024 – BrightView announces the sale of its non-core U.S. Lawns franchise business.

March 19, 2024 – BrightView provides Red Wing footwear to over 18,000 field employees.

May 2, 2024 – BrightView announces that it will shut down its qualified service partner network managed by the BrightView Enterprise Service (BES) team. This network allowed BrightView to outsource maintenance services to local providers when it does not have a branch nearby.

May 2, 2024 – BrightView announces that it plans no acquisitions until 2025.

Cultural changes

BrightView has turned its focus from revenue growth to profitability (growth in operating profit margin).

BrightView management understands that the keys to profitability in the landscape industry are customer retention and employee retention. There is a lesson there for landscape companies with low levels of profitability.

To demonstrate this cultural shift as the green season was starting, BrightView negotiated a deal with Red Wing Shoes to give over 18,000 field employees a new pair of boots. BrightView said the program, “Inspires them (the employees) to deliver exceptional service to our customers.”

In addition, to help it become an employer of choice, the company is going to transition to more frequent vehicle and mower replacement. For example, the company is planning to replace its mowers every two years.

(Note that investors often focus on EBITDA margin rather than operating profit margin. Operating profit margin is the better gauge of operating performance in this industry. The primary difference between the two measures in the landscape industry is depreciation expense. Replacing vehicles and equipment more frequently generally increases depreciation and decreases repairs and maintenance. The impact of this change on the operating profit margin is probably negligible. The EBITDA margin will likely increase. If you are interested in selling your company in the future, you should think about this valuation quirk. EBITDA is earnings before interest, taxes, depreciation and amortization.)

Organizational changes

Previously BrightView was organized as four business lines, the most prominent of which were maintenance services and development services (i.e. construction).

Now, BrightView is organized by branch. All services, including golf course and tree services, are managed by local branches.

Here are some specific changes:

• BrightView disbanded its “stand alone” sales team and assigned the salespeople to local branches.
• The company moved from 16 Regional Leaders divided by business lines to eight Regional Leaders covering specific geographic areas.
• The company moved from 40 Market Leaders divided by business lines to 20 Market Leaders covering specific geographic areas.
• Certain administrative functions, including those performed by finance employees, are being removed from the branches and centralized.

BrightView’s operational goals are simple to describe:

• Cross sell.
• Improve customer retention.
• Gain market share.

Previously, BrightView stated that it had done a poor job of selling maintenance work to its construction customers after the project was completed. This reality was an unintended consequence of the company’s organization around business lines rather than branches.

BrightView hasn’t disclosed its retention rate, but its financial results show that revenue in the landscape maintenance business continues to decline despite previous acquisition activity. A low retention rate is usually a sign of significant, multi-dimensional problems in a landscape business. For our clients, we calculate retention rates on both a year-over-year basis and on a year-to-date basis. Management said that they monitor retention rates daily.

For BrightView, gaining market share includes a focus on building route density – often an effective way to increase profitability.

Balance sheet and valuation

The company issued $500 million of preferred stock which has a 7 percent annual dividend and is convertible to common stock at $9.44 per share.

The company used most of the proceeds from the preferred stock issuance to repay debt. Accordingly, the ratio of debt (net of cash) to EBITDA decreased from 4.8 on March 31, 2023, to 2.2 on March 31, 2024, a much more manageable level of debt.

The company’s stock price is up from $5.62 on March 31, 2023, to $12.96 on May 14, 2024. While the stock price has more than doubled, the value of the company has not. Often landscape companies are valued based on a multiple of EBITDA.

At March 31, 2024, Brightview was valued at a multiple of adjusted (explained below) EBITDA of 7.9 which is up from a low of 6.7 at March 31, 2023 but down from a 10.1 multiple at March 31, 2022. It is good for the industry, especially sellers of landscape companies, for BrightView to be valued at a high multiple. (For a more complete explanation of valuation, see a previous article here.)

Income statement summary

In its public reports, BrightView “adjusts” its earnings before interest taxes depreciation and amortization 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 company also made an adjustment for 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 and the gain on divestiture. Since most landscape companies do not have these items, I have excluded them so that management teams can compare their numbers to BrightView’s numbers.

Beginning in the quarter ended March 31, 2024, the sale of US Lawns and the discontinuation of BES will make it more difficult to compare BrightView’s current financial results with its historical financial results.

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: