Terminix Global Holdings, Inc.

Ladies and gentlemen, welcome to the Terminix fourth quarter and full year 2020 earnings call. Today's call is being recorded and broadcast on the internet. Beginning today's call is Jesse Jenkins, Terminix's Vice President of Investor Relations, FP&A, 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 statements 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, February 25, 2021. The company undertakes no obligations to update any information discussed on today's call. This morning, Terminex issued a press release filed with the SEC on Form 8K, including our unaudited fourth quarter and full year 2020 financial results. The press release 8K and the related presentation can be found on our 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've also included reconciliations of these non-GAAP financial measures to the most comparable GAAP financial measures in our press release and the appendix of this presentation 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, current CFO Tony DiLicente, and Executive Vice President and incoming CFO Bob Respec. Slide 3 of the presentation posted on the investor relations section of our website shows the agenda we will cover today. I'll now turn it over to Brett Cotton. Brett?

Thanks, Jesse. The fourth quarter saw a continuation of the strong operating momentum generated in the second and third quarters, driven primarily by the residential service lines. We delivered top-line revenue of $460 million with growth of 4%. Our termite service line grew 6%, including 5% organically, driven by strong sales in both core termite units and home services. We continue to gain traction with our subscription-based monthly paid termite offering launched during 2020. We are encouraged by the positive customer reaction and are optimistic the new model will lead to higher retention in the future. 4% organic growth in residential pests was highlighted by retention gains, volume growth, and pricing realization that continued to be partially offset by lower summer sales units and one-time bed bug services. Excluding these impacts, organic growth would have been over 6% in residential pests. In commercial pests, we continue to see sequential improvement and the business was down only 1% organically year-over-year in the fourth quarter, compared to 3% last quarter. We are optimistic about the outlook in this service line as we move forward in the year and begin to lap COVID impacts in late March. We also saw strong gains in our European best business, delivering double-digit organic growth when excluding the benefits of foreign currency translation. Strong gains in Norway and Sweden were driven by growth in the insurance channel in the fourth quarter, and despite more severe pandemic restrictions in the quarter, we continue to add customers to fill density in our Terminex UK business. Fourth quarter adjusted EBITDA grew 24% for $13 million year-over-year to $68 million. Adjusted EBITDA margins of 14.8% increased 240 basis points. Strong adjusted EBITDA growth was highlighted by improved employee retention and better labor management, as well as vehicle efficiencies and better indirect cost containment. Double-digit revenue growth in our international businesses also yielded better EBITDA contributions that will continue to grow as we add customers in Terminix UK. These gains were partially offset by higher incentive compensation expense, including over $1 million for a one-time special bonus to all frontline employees. This bonus was given in appreciation for the hard work of our teammates during unprecedented circumstances in 2020. Their dedication and commitment to excellent customer service is to be commended, and I thank them for delivering a very strong year. Strong incremental margins in the back half of the year are a positive sign, But we continue to see 30% incremental margins as the appropriate long-term target that balances short-term returns with investments in the long-term health and profitability of this business. Another highlight of the year was the completion of the termite damage claim mitigation program in Mobile Bay. As planned at the beginning of the year, we have completed a rigorous inspection and applied additional treatments to every available customer in the area. The results of these efforts are apparent in the numbers, with over 30% reduction in both new litigated and non-litigated claims year over year in the Mobile Bay area. We plan to leverage the best practices we learned in Mobile Bay in the development of standard operating procedures and training protocols that will be shared across the organization as we make improvements to reduce termite damage claims expenses in the coming years. The fourth quarter also saw the completion of the sale of ServiceMaster brands and the subsequent debt reduction. Beyond the benefits created by lower leverage and a strong cash position, the sale allows us to focus 100% of our efforts and resources on improving the operational capabilities and consistency of the Terminex business, driving greater value for all of our stakeholders. In an effort to better align our operations to support our teammates, as well as reduce the cost structure of the remaining business, we recently announced the promotion of Kim Scott to COO with added responsibilities for Terminex Commercial. With the majority of Terminex customers already serviced out of combination residential and commercial branches, expanding Kim's responsibilities to include the other 25% of the revenue base she did not previously oversee, will allow us to harmonize operations behind standard procedures and training protocols that will span the entire business. Over the last year as president of Terminex Residential, Kim has made great strides improving residential operations, driving gains in both employee and customer retention, and overseeing the successful launch of the monthly paid termite product. She also led the successful execution of the termite damage claims mitigation program in Mobile Bay. This move does not alter our commitment to the attractive commercial sector. Recognizing the unique go-to-market commercial model, supporting Kim will be dedicated commercial selling and marketing teams. The commercial business enjoys strong customer retention and lifetime value, and with the regulation on businesses expected to increase in the coming years, we expect this service line to be an important part of our growth story. By reducing costs and better aligning the business, we will generate the necessary savings to invest in the needed key operational capabilities that will drive future growth in all areas of the business. I'm also excited to have Bob Riesbeck join us as CFO. Bob and I go back many years, and I have watched his career from a distance over the last several years as he has created value for investors under difficult circumstances in brick-and-mortar retail businesses. Bob brings a multi-unit retail background and is experienced in driving consistency from branch to branch through operational consistency and standardized operating procedures. In my short time in the business, I have learned that we have a unique operating model at Terminex, which is why I was excited to get Bob together with Tony for these last several months. The long transition period has certainly been helpful to assist with his onboarding to the business. You will hear from both Bob and Tony in a few minutes. We have also taken other actions across the business to simplify and streamline the back office in line with the leaner, singly focused company we have become. Our streamlined structure will better position us to drive our 2021 strategies to improve consistency and results, to improve execution, greater focus on standard operating procedures, and investments in key operational competencies across all of Terminix. Before I discuss these 2021 initiatives, let's turn to slide five and review the progress made on the 2020 priorities. As you know, we had four strategic priorities in 2020. Employee turnover improved 20% in 2020 compared to prior year. As you will see when Tony goes through the EBITDA bridge, we continue to reap benefits of a more seasoned and tenured workforce with better customer retention as well as improved labor productivity. In the fourth quarter, technician retention was flat to prior year. Maintaining and continuing to improve these metrics will be key as the job market shows signs of improvement following the pandemic. I will discuss our future plan to continue to make progress on teammate retention despite the larger macro headwinds when we discuss our 2021 priorities. Customer retention also improved during 2020. In the residence residential pest service line daily cancel rates were down 9% in the fourth quarter compared to prior year, while on the termite side, cancel rates were down 3%. This is the third straight quarter of daily cancel rate improvement in both service lines, and that consistent focus has led to improvement in trailing 12-month retention rates. Residential pest retention improved 160 basis points, and termite improved 230 basis points compared to prior year. While the commercial pest service line has been severely impacted by COVID-19 cancellations and is down compared to prior year, when adjusted for cancellations related to those concerns, retention has remained relatively flat year over year. Despite the improvement in residential pest and termite, we continue to see room for improvement in our customer retention rates across all service lines, and this will remain a key opportunity of the business going forward. As I discussed previously, these retention gains, coupled with our initiatives to improve productivity and our cost structure drove margin expansion of 240 basis points year over year. Adjusting for incentive compensation, which was $10 million higher than the same period in 2019, the underlying margin improvement was over 450 basis points. Strong pricing realization, especially in commercial, and growth in high-margin termite services and residential were also key contributors to margin expansion. And finally, 2020 was a resounding success in all phases of our termite business. Our new tier product helped us grow core termite completions 14% in the fourth quarter and 10% on the full year. While the new monthly paid customers will create some headwinds for us in termite renewals in the first half of 2021, we are confident that the long-term consistency and predictability that will come from better retention more than outweighs the near-term timing impacts. Success with core termite has also led to new cross-selling opportunities in our home services products, such as attic insulation and wildlife exclusion, which were up 13% in the fourth quarter and 9% for the full year. We also had a good year with termite damage claims. As I mentioned earlier, we finished our mitigation program in the Mobile Bay area, as expected, and believe the added protection for our remaining customers will help to improve claims in this higher risk area of the country in the future. Including mitigation expense, we saw just over $70 million of total termite damage claims expense in 2020. While this is over $20 million higher than prior year and $45 million higher than our baseline of 4% of total termite revenue, It was in line with our communicated expectations for the year. We have seen continued improvement in damage claim trends over 2020 and saw a 16% reduction in new non-litigated claims nationwide year over year. As I mentioned earlier, we saw over 30% improvement in new litigated cases in the Mobile Bay Area. While litigated cases are difficult to predict quarter to quarter, The progress in both litigated and non-litigated trends is encouraging. We have a long way to go to get to industry-leading rates, and we plan to leverage the best practices learned in the mobile area during 2020 to other parts of the country in 2021. Turning to slide six, I would like to discuss our strategies to drive improvement in the business in 2021 and beyond. Our goal at Terminex is to become the pest management provider of choice for teammates, customers, and investors alike. Behind our industry-leading brand, and we have aligned our team to be singly focused with a commitment to this goal. Over 2021 and beyond, we will build world-class capabilities that will drive consistency across the business through focused investments in key operational areas. These specific 2021 initiatives reflect my firm view that we can create significant value in this business through a dedication to and focus on operational excellence in the core fundamentals of service delivery. Building off the strong momentum generated in 2020 and with the right leadership pieces now in place, we will drive more consistent and better results for years to come, starting with the initiatives you see here. While these initiatives may sound simple on the surface, driving consistency across over 11,000 teammates and over 50,000 customer touchpoints a day will require steadfast dedication and focus. Improving the teammate experience is critical to our ongoing success. Our teammates are the most important part of our business. They are typically the first and often the only person from Terminix who directly interacts with our customers. The customer relationships they develop over many years during a long tenure with the company is a key driver of customer satisfaction. This is why we will be developing defying career paths for our teammates that will provide everyone an equal opportunity to grow both personally and professionally. We have countless examples of homegrown talent developing from route technicians to division leaders And in our goal to become the employer of choice in the industry, the opportunity to turn Terminex from just the job into a fulfilling career is an important first step in improving the teammate experience. The next step will be the development of standard operating procedures across the business that I mentioned earlier. Standard procedures are only as valuable as our ability to train against those procedures, which is why we will also be building out Terminix University this year as the platform to deliver enhanced training to our teammates to support their chosen career paths. In addition to training enhancement, we will be prioritizing technology enhancements in order to improve our teammates' work life and help them be more successful. Key to this will be the rollout of our customer experience platform, or CXP. When I came on board, we paused on CXP so we could be sure we had the proper enhancements in scope to prioritize the teammate and customer experience. We are now planning on a rollout that begins in the coming months and rapidly expands once we move beyond the peak test season into the fourth quarter. In 2021, we will also be accelerating our efforts to improve our customer acquisition initiatives. We are planning to launch a state-of-the-art e-commerce platform in the back half of the year that will improve the way our customers interact with us online. This improvement will make it easier for customers to find us and buy from us online. Search engines are a key driver of web traffic today, and our new site will start the process of optimizing this channel. While we are still in the early phases, we do have an update to Terminex.com that will be coming in the next few months to begin this process. We also have plans to optimize our digital marketing processes. Alex Oh has brought a wealth of knowledge and sophistication from his background in digital marketing, and he is moving forward with a few initiatives designed to increase lead generation while improving our return on marketing investment. Some of the savings from these actions will be used to develop and implement the new e-commerce platform. We also have several initiatives in Terminex Commercial to better leverage our industry-leading brand recognition and further develop the commercial sales professionals or CSPs with state-of-the-art training. These actions will drive more inbound leads and improve our close rates at a time where the commercial market is set to rebound to historical norms. Finally, we have new leadership in place to help develop and refine our M&A strategy and integration capabilities. We are likely to be deliberate in our approach out of the gate while we enhance our integration capabilities, focus on operational improvements, and the rule out of CXB, we will remain active with both smaller tuck-in deals as well as Terminex franchisees. As we develop our capabilities, we will leverage our substantial cash and balance sheet flexibility to become more active in the M&A markets over time. The next bucket of initiatives is a continuation of our journey to industry-leading customer retention. We made tremendous strides in customer retention in 2020 and have several initiatives that will help us maintain and improve these efforts this year. We'll review the details of why our customers lead us. It is centered on two main themes. Did you show up when you were scheduled? And did you solve my pest problem? While this sounds quite simple, The key is consistency from customer to customer, teammate to teammate, and branch to branch. Our focus this year will be centered on improving our technical capabilities through standard operating procedures and protocols to ensure that we are solving our customer problems the first time, every time. We're also planning to develop greater consistency in our approach to routing and scheduling. We're in the early innings of optimizing routing and scheduling and are developing a better plan to improve our current efforts. While we won't wait for full development of CXP to begin this initiative, routing and scheduling will also be a key component of our new platform and will lead to even greater strides once fully implemented. One area we are watching closely as we head into 2021 is cancellations related to customers moving. We saw a shift in customer behaviors late in 2020 as the housing markets rebounded, and this has continued into early 2021. While we have a robust action plan to engage with the new home buyer and transfer services for the seller to a new property, we expect this to be a retention headwind we will have to overcome. Commercial retention declined in 2020 due to customer cancellations related to COVID, and we are expecting a gradual return to norms in 2021 as the economy improves and we continue to improve our service delivery standards. Finally, we are focused on expanding our adjusted EBITDA margins. As we have seen through 2020, improving customer and teammate retention had a direct impact on profitability. In addition to the benefits of those initiatives, we have several initiatives on pricing plan for this year. Better segmentation of our customers will allow us to explore elasticity of our services, and early indications show we have some opportunities to be more aggressive with pricing, both for new customers and as existing customers renew their services. We're also planning for reductions in termite damage claims expense as we move past the mitigation plan and leverage best practices and lessons learned across the country. The reductions we are seeing in outstanding claims counts and improvements over 2020 give us confidence we are making the expected improvements to return to and ultimately improve upon industry levels in the coming years. We have developed a strong customer-first culture in Terminex Nation, and our efforts in 2021 to provide the enhanced tools and training necessary through the CXP rollout will enable our teammates to deliver world-class service. Additionally, a newly aligned M&A leader with a focus on integration will allow us to build a scalable platform that we can leverage as our operational consistency and execution improve. While there is considerable work to do, we are in a very good position with the right leadership team and culture to make progress on these initiatives in 2020. I am excited about the opportunities to drive continued growth and build greater long-term values And with that, I will turn it over to Tony to discuss the fourth quarter performance, and I will return with closing comments after Bob discusses 2021 guidance.