Terminix Global Holdings, Inc.

Ladies and gentlemen, welcome to the Terminix third quarter 2020 earnings call. Today's call is being recorded and broadcast on the internet. Beginning today's call is Jesse Jenkins, Terminix Vice President of Investor Relations and Treasurer. I will now turn it over to Mr. Jenkins, who will introduce the other speakers on the call.

Thank you. Good morning and welcome. Before we begin, I'd like to remind you that throughout today's call, management may make forward-looking statements to assist you in understanding the company's strategies and operating performance. As stated on slide two, all forward-looking statements are subject to the forward-looking statement legends contained in our public filings with the Securities and Exchange Commission. These forward-looking statements are not guarantees of performance and are subject to the risk factors contained in our public filings that may cause actual results to vary materially from those contemplated in the forward-looking statements. Information discussed on today's call speaks only as of today, November 5, 2020. The company undertakes no obligation to update any information discussed on today's call. This morning, Terminex issued a press release filed with the SEC on Form 8K, highlighting our unaudited third quarter 2020 financial results. We also issued a press release this morning announcing a settlement with the Alabama Attorney General regarding our Mobile Bay Formosan Termite business practices. These press releases, 8Ks, and the related presentation can be found on our new investor relations website at investors.terminex.com. We will reference certain non-GAAP financial measures throughout today's call, and we have included definitions of these terms in our press release. We have also included reconciliations of these non-GAAP financial measures to the most comparable GAAP financial measures in our press release and the appendix in order to better assist you in understanding our financial performance. All references on the call to EBITDA are to adjusted EBITDA as defined in our press release. Joining me on today's call are Terminex CEO Brett Ponton and Chief Financial Officer Tony DeLucenti. Slide three of the presentation posted on the investor relations section of our website shows the agenda we will cover today. I will now turn it over to Brett Ponton. Brett.

Thanks, Jesse, and thank you all for joining our call today. Before I get into the performance of the quarter, I'd like to begin by recapping a few observations from an eventful first 50 days. My first month and a half on the job has been spent working closely with both the senior leadership team here in Memphis and directly with the frontline. I would like to thank the technicians and management teams in Dallas, Orlando, and Mobile for taking the time to meet with me as I get up to speed. Over the next few months, I look forward to visits with other teammates across the country as I continue to educate myself on the finer intricacies of the pest control business. As I spend time with teammates in all levels of the organization, one of the things that becomes immediately clear is the organizational focus on the customer experience. The passion of the team to deliver excellent customer service is evident in every interaction I have had in my short time at the helm. The team has done a good job of understanding and tracking the metrics around the customer experience that will drive improved business results. I've always felt that employee retention is a critical component of success, and it has been a real driver of improvement for Terminix over the course of 2020. Engaged, experienced teammates delivering valuable services to our customers in their time of need are improving Net Promoter scores, which are a clear leading indicator to customer retention. Something unique in our business is the opportunity to consistently engage with our customers over multiple touchpoints in a year. Our ability to understand what makes those touch points stand out to people will drive better customer satisfaction and ultimately better customer retention. When I'm in our branches and offices, I can see the clear focus on a customer-first culture. I have spent much of my career helping companies in need of a turnaround, so it is nice to inherit a company that already has such strong operating momentum and clearly defined organizational objectives supported by substantial industry tailwinds. I look forward to putting my own stamp on some of the finer points as I lay out my strategy in the coming months, but I feel encouraged about the current direction and momentum already evident in the business. During my travels and initial meetings, I've identified a few opportunities that we will dig into over the next few months. One clear objective will be improving the consistency of our operations. Today's settlement underscores the importance of consistent operating standards, training, and quality assurance in the business. By enhancing our focus on the fundamental operating procedures branch by branch and technician by technician across the country, we can limit the volatility in earnings we have experienced over the last several years. There is considerable knowledge in the business at the local level, and we have the opportunity to spill that knowledge down and leverage best practices across the organization through robust training procedures and quality assurance. We also have the ability to create a more clearly defined teammate experience, complete with development opportunities and career paths. And finally, with the sale of service master brands behind us, we need to realign our support structure around a leaner organization, 100% focused on equipping our passionate frontline with the enhanced tools, technology, training, and development opportunities to deliver excellent customer experiences. I'm encouraged by what I have seen in the first few weeks. The core business is on a stable foundation and already making progress on a powerful set of initiatives. Improved execution, supported by strong underlying industry dynamics, has the company positioned well for future profitable growth. And with that, I will turn to slide five to discuss recent performance. In the third quarter, the company delivered top-line revenue of $512 million with growth of 10%. Our termite service line saw retention gains and strong new unit sales in both core termite units and home services, delivering 4% organic growth, which would have been 6% if not for the $3 million one-time impact of the Mobile Bay Formosan termite settlement, which I will discuss in more detail in a moment. Four percent organic growth in residential pest control was highlighted by retention gains, volume growth, and pricing realization, partially offset by lower summer sales units and one-time bed bug services. And although our commercial pest business was down organically year over year, we saw a strong sequential improvement from last quarter and are cautiously optimistic about the trends in October. Third quarter adjusted EBITDA was $98 million with a margin of 19.2%, a year-over-year expansion of 370 basis points. Strong EBITDA margin expansion was driven by improvements in employee and customer retention. One of the most impressive aspects of this business is its free cash flow generation, and year-to-date we have generated $232 million. And as Tony will cover in more detail in a moment, the ServiceMaster brand sales significantly improved our capital structure and provides us ample flexibility to pursue attractive Tuckian M&A deals and the capacity to support larger strategic targets as they become available. And finally, we were able to negotiate a favorable settlement with the Alabama Attorney General regarding our Formosan termite business practices in the Mobile Bay area. the impact of which falls within our previously disclosed ring fence estimates. Tony will spend considerably more time on the settlement, but we are happy to resolve a large portion of this lingering liability in the quarter. As we exit the third quarter and look into the fourth quarter and beyond, I am encouraged by the positive results and strong momentum. Turning to slide six, I will give a brief update on our progress on strategic priorities for the year. When I joined the company in September, I was encouraged by the focus on a manageable number of key priorities in order to accelerate solid performance. We continue to make meaningful progress on each of these strategic priorities, and this is driving the improvements in both growth and profitability over the last few quarters. Employee turnover improved 18% in the third quarter compared to the prior year. By focusing on better hiring assessment, onboarding, and training and development practices, we were able to continue to drive service level and customer retention improvements, not to mention $7 million of labor productivity in the quarter. While the impacts of COVID on the job markets are likely aiding the impressive performance, we believe the actions we are taking are sustainable and will continue to aid turnover and efficiency gains into future periods. With more seasoned and experienced technicians on the job, customer satisfaction continues to improve as seen in net promoter scores and customer retention. On the residential side of the business, combined termite and residential pest daily cancel rates are down 18% year-over-year in the third quarter. Consistent improvement in daily cancel rates over the last several quarters are starting to drive trailing 12-month retention rates in the right direction. We continue to see meaningfully better retention and first-year customers as new customer additions during the pandemic are responding well to more frequent communication designed to clearly explain employee and customer safety measures. With first-year customers moving into the base and net promoter scores remaining at elevated levels, we feel confident we have runway to continue to make meaningful retention improvements as we progress towards the top end of industry-level customer retention. As I discussed previously, these retention gains coupled with our initiatives to improve productivity and our cost structure drove margin expansion 370 basis points year over year. Strong pricing realization, especially in commercial and growth and high margin termite services in residential were also contributors to our margin expansion. And finally, we are making meaningful progress on revitalizing our termite business. With a heightened focus on this service line, we were able to deliver strong termite organic growth through sales of our new monthly paid tiered product offering. New core termite units were up 70% in the quarter, and combined with the strong first-year retention rates I mentioned earlier, will set us up for customer account growth into 2021. On my trip last week to visit our team in the Mobile Bay area, I saw firsthand our commitment to serving our customers and the significant progress made on our ongoing supplemental treatment plan. To date, we have completed approximately 9,000 supplemental treatments and dual defend conversions. Net of cancellations, we have less than 2,000 supplemental treatments remaining to perform, and we are on pace to complete the mitigation plan within the calendar year. These supplemental treatments are helping to drive outstanding non-litigated claims in the Mobile area down 27% year over year, and new non-litigated claims filed in the third quarter are down 42% compared to the same period in the prior year. And Tony will go through the details in a few minutes, but there are many favorable factors of the settlement that have me optimistic we are trending the right direction as we work to put these issues behind us. I will now hand it over to Tony to discuss the third quarter results, the Mobile Bay settlement, and fourth quarter guidance. I will return with some closing comments before our Q&A session. Tony?