Managed Exits.
As explained below, that’s an important phrase for all landscape maintenance companies and one that BrightView probably wishes it had used earlier. That phrase does not appear in the documents it filed to sell its stock to the public, but it does appear in two purported shareholder class action lawsuits filed against the company beginning in April 2019. The suits allege that the company failed to disclose its plan for managed exits to potential shareholders.
Before discussing the importance of managed exits for all landscape maintenance customers, I will review the latest financial results for BrightView.
The summary of BrightView’s financial results for the 12-month period ended March 31, 2019 is: no growth — no growth in revenue and no growth in adjusted operating income as compared with the 12-month period ended March 31, 2018. As I described in a previous article, no growth is not what BrightView needs.
As a CFO, I assemble and review rolling 12-month income statements in highly seasonal industries like the landscape industry. I have simplified BrightView’s income statement in the table below which shows the trailing 12-month income statements for the last 36 months. In other words, each column represents 12 months. The dollars in the table below represent thousands of dollars.
| 12-month periods ended March 31 |
|||
| 2017 | 2018 | 2019 | |
| Net service revenues | $2,160.2 | $2,336.0 | $2,334.7 |
| Year over year growth rate | 8.1% | -0.1% | |
| Cost of services | 1,569.9 | 1,716.5 | 1,715.5 |
| Gross profit | 590.3 | 619.5 | 619.2 |
| Gross profit margin | 27.3% | 26.5% | 26.5% |
| Selling, general and administrative expenses | 455.2 | 446.2 | 473.0 |
| Adjustments | (29.0) | (45.6) | (69.5) |
| Ongoing selling, general and administrative expenses | 426.2 | 400.6 | 403.5 |
| Adjusted operating income | $164.1 | $218.9 | $215.7 |
| Operating profit margin | 7.6% | 9.4% | 9.2% |
Comparing the 12-month period ended March 31, 2019 with the 12-month period ended March 31, 2018, revenue gains from acquiring landscape companies were more than offset by lost revenue from managed exits, the loss of revenue from hurricane clean-up services, and less snow revenue.
BrightView’s gross profit margin for the 12-month periods ended March 31, 2019 and 2018 was 26.5%, down from 27.3% for the 12-month period ended March 31, 2017.
BrightView’s operating profit margin was down slightly in the 12-month period ended March 31, 2019 as compared with the 12-month period ended March 31, 2018, but has increased from the 12-month period ended March 31, 2017 due to a reduction in adjusted selling, general and administrative expenses.
Note that BrightView incurred expenses associated with acquiring and integrating businesses, becoming a public company and paying some employees partially through equity-based compensation. Because most landscape businesses do not incur these expenses, I have reduced selling, general and administrative expenses by these amounts.
Now, I want to talk about managed exits, a topic of great importance this time of year.
Every landscape maintenance company should review the profitability of its customer relationships annually. All landscape companies will have customer relationships where the gross profit margin (revenue less job costs divided by revenue) is below average. Some of those customer relationships with below average gross profit margins may not meet a company’s standard for profitability. For these customers, a company will need to increase its price or “manage the exit” of the customer.
I recommend that the management team of companies begin this process well in advance of the snow or maintenance contract renewal seasons. I want the management team to gather each customer’s profitability data, plan for future crew wage increases, and construct the narratives supporting the need for a price increase. Then, the team needs to develop its communication strategy not just to customers, but also employees. (I find that employees do not understand the need for price increases and do not like communicating “bad news” to customers.)
Price increases are a norm for BrightView and should be a norm in the landscape industry. Managed exits are part of the price increase process. Now is the time to start thinking about pricing for the next season.
Greg Herring has served as a CFO of both public and private companies. Herring is the CEO of The Herring Group, an operational and strategic finance consultancy. He has significant experience in the landscape industry, where he serves business owners challenged by growth by installing financial dashboards and systems that provide more margin for their businesses and their lives. Reach him at greg.herring@herring-group.com.
