Terminix Global Holdings, Inc.

ladies and gentlemen welcome to the terminix first quarter 2021 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 and 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 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, May 6, 2021. 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, including our unaudited first quarter 2021 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. In order to better assist you in understanding our financial performance, we have included reconciliations of these non-GAAP financial measures to the most comparable GAAP financial measures. Joining me on today's call are Terminex CEO Brett Ponton and CFO Bob Respec. Slide three of the presentation posted on the investor relations section of our website shows the agenda we will cover today, with Brett opening up with an overview of our performance and strategic progress, followed by Bob reviewing our financials and outlook. We will then open it up for questions. I'll now turn it over to Brett Cotton. Brett?

Thanks, Jesse. The first quarter saw solid growth across all of our major service lines as we delivered top line revenue of $471 million for growth of 3%, almost all of which was organic. Our termite service line grew 4% organically despite the negative impact of a revenue recognition change that Bob will discuss in more detail in a moment. Growth in termite was driven by another successful quarter of double-digit growth in both recurring core termite and home services. 4% organic growth in residential pests was driven by retention gains and pricing realization that were partially offset by the carryover impact of lower summer sales units in 2020. Commercial pests, which now includes our European pest management businesses, grew 3%, as reported, or 1% when excluding the impact of foreign currency. Double-digit growth in our international businesses and continued sequential growth improvements in the U.S. were the key drivers of the gains in this service line. We expect growth to accelerate in commercial tests starting in the second quarter as we fully lap COVID and businesses continue to reopen. First quarter adjusted EBITDA grew to $90 million, up 50% or $30 million year over year. with margins improving 590 basis points to 19%. Strong adjusted EBITDA growth was highlighted by improved labor management, lower chemical costs, vehicle efficiencies, and back office cost reductions. Additionally, one-time benefits in the quarter included favorable insurance adjustments and lower travel costs due to the pandemic. These gains were partially offset by higher termite damage claims expense, primarily driven by higher costs per non-litigated claim due to inflationary pressures on building materials and contractor costs. We are pleased with our strong margin improvements in Q1 and the positive business momentum. However, we continue to see 30% incremental margins on organic revenue growth as a correct long-term target that balances short-term returns with investments in the long-term health and profitability of the business. While we remain confident in margin expansion, even with the investments we are making in our operating capabilities, starting in the second quarter, the pace of margin improvements will slow as we lap COVID impacts in the business. Our strong margin improvement in the first quarter allowed us to raise our adjusted EBITDA guidance for the full year. In addition to solid revenue growth and approved adjusted EBITDA conversion, we returned capital to shareholders by aggressively repurchasing approximately 3.5 million shares in the quarter. Bob will go into more detail on capital allocation and full year guidance in a moment. I am also excited we have officially launched the Terminex Way initiative in late April. This wide-reaching project will enhance our standard operating procedures, which will form the backbone of consistent service delivery and improve the customer experience. These enhanced SOPs will be used to develop robust onboarding and training curriculums in Terminix University that will shorten our training time for new hires and facilitate better sharing of best practices across the company. I am also encouraged to have launched CXP with our commercial sales team. The launch is an important key milestone in this transformational multi-year project. I will now turn to slide five and review the progress made on the 2021 priorities in more detail. I will touch quickly on each of the priorities we laid out back in February. These priorities are the key to continuing the progress we have made in the business on growth and profitability And I am proud of the work our team has done over the last several months. The first priority focuses on enhancing our teammate experience. Our teammates are the most important assets of our business. Our field technicians and call center teams interact with over 50,000 customers every day over the phone or in homes and businesses across the country. And we are focused on giving our teammates the enhanced tools necessary to make each of those touch points a positive customer experience. While we have improved consistency over the last several years, we have the opportunity to further develop and document the best practices of our most tenured and effective technicians to produce industry-leading customer retention. The Terminex Way initiative will clearly define our standard operating procedures for technicians, sales professionals, and customer success center teammates. We are bringing together a cross-functional team of technicians and managers to help us develop the criteria needed to improve our processes across the organization, creating a framework for the recurring technical tasks that must be performed consistently across our business in order to eliminate pests in the most efficient way possible. This will allow our teammates to spend more time on the personal side of the business, interacting with customers and developing relationships. Once the groundwork has been done to build out these playbooks, we will institutionalize these procedures to give more structure to our training programs for both new hires and continuing education through Terminix University. This will also enable us to establish a clear career development process accessible to all that defines expectations to all of our teammates on what they need to do in order to advance up the career ladder. Our work in this regard is vital to our continued success. As we have seen over the last 12 months, reducing technician turnover is a driver of both better top line growth to improve customer retention and better profitability through labor efficiencies. While we're roughly flat year over year and technician turnover in the first quarter, March did see a slight increase as the economy opens up, creating tighter labor markets. As we lap historic improvement in tech retention last year, we are expecting continued competition as we move through the year. But we are confident longer term that the build-out of the Terminex way will give us an advantage as we progress to become the employer of choice in pest management. We also continue to accelerate our efforts to improve our customer acquisition initiatives in order to drive better organic growth. We remain on track to launch our new e-commerce platform as well as updates to Terminix.com in the back half of the year that will reduce the friction in the customer buying process. The new platform will help us better engage with our customers online where they increasingly want to interact and get service. While we do see marketing as an investment opportunity in our planning increased spend in 2021, we are continuing our plans to optimize our digital marketing processes that will increase lead generation while improving our return on marketing investment. We're also excited to have our commercial selling teams on CXP for sales process management. This will improve commercial lead generation and help us better manage our prospects, increase visibility into commercial demand, and ultimately improve our sales close rates. While this is only a small piece of CXP that is now operational, it is an important step in the process. We remain on track for a broader rollout of a full CRM and administrative platform starting after the peak season in the fourth quarter. Finally, we continue to make progress in customer acquisition through M&A. In the first quarter, we closed four tuck-in deals in total, including one in the United Kingdom and three in the U.S. We were also able to close the Canadian deal on April 30th that will add density and fill additional white space in the growing Canadian pest market. Tuck-in M&A continues to be an attractive customer acquisition channel, and will remain a focal point as we continue to develop our integration capabilities. We also made good progress improving customer retention in the quarter, with trailing 12-month retention up in all of our service lines. Cancel rates continue to improve in the residential business, even as businesses reopen and people are starting to slowly transition from working at home. The commercial business also continues to rebound with unadjusted retention rates up for the first time since the start of the pandemic. We have seen an increase in customer cancellations related to moving, and we continue to watch the hot housing markets very closely as we stay close to customers to attempt transfer service to new locations when possible. While it's still early, we're also seeing promising retention results early, on with our monthly paid termite product. Customer retention remains a key lever in our growth story going forward, and the development and rollout of the Terminex Weigh Initiative and CXP will allow us to continue to make strides in the coming years as we work to become best in class. Finally, we remain committed to expanding our adjusted EBITDA margins. Direct cost productivity continues to be a benefit to us with improved labor management, reduced chemical and material costs, and better fleet management all benefiting the first quarter. Customer retention improvements continue to benefit the bottom line as well, and in the first quarter, we made progress on simplifying our back office as a singularly focused pest management company. These cost reductions will allow us to reinvest in the Terminix Way initiative and CXP in the back half of the year to further accelerate growth and profitability. We also saw a few COVID-related one-time benefits that we don't expect to repeat, with travel costs significantly lower and an insurance adjustment benefit, primarily from a focus on safety initiatives and a reduction in auto plans driven by fewer drivers on the road in 2020. We're also on track for reductions in termite damage claims expense as Q1 costs remain in line with our expectations. We continue to see meaningful reductions in claims counts in the Mobile Bay Area with new non-litigated claims down 30% year over year and outstanding non-litigated claims in the area down 36%. The reductions in claim counts were offset by a 26% increase in average claim costs as inflation has impacted the cost of building materials and contract labor nationwide. And we have worked diligently to close more claims prior to litigation. On the litigation side, we are monitoring a new case filed by the state of Mississippi related to termite inspections and treatment practices. While the case is loosely patterned after our recent Alabama AG settlement, the underlying characteristics in the two states are very different. In Mississippi, there are considerably fewer customers, claims, and state complaints. In fact, there are approximately 90% fewer damage claims and only a handful of state complaints. In addition, some of the key elements of the Alabama settlement, like pricing practices, were not used in Mississippi. Because our original ring fence estimate was developed using historical claims data from Alabama, Mississippi, and the rest of the country, our estimate of the overall impact has not changed as a result of this litigation. Despite some pressure on claim costs and subject to the uncertainty of the outcome of the Mississippi litigation, we remain on track for reduced termite damage claims expenses in 2021, and we remain confident we are taking the right steps to reduce expenses below our previous levels over time. Overall, we made great progress in all our strategic initiatives in Q1. As we continue to make progress on the Terminex way and CXP over the course of the year, and despite some of the headwinds we will face, we are in a very good position to continue to drive consistency across the business that will accelerate growth, expand our margins, and ultimately create value for our shareholders. And with that, I will turn it over to Bob to discuss the details of our strong first quarter. I will return with some closing thoughts in a few moments. Thanks, Brett. Let's start with a review of the top-line performance before we move into the details of our strong EBITDA margin improvement. Overall, we delivered revenue growth of $16 million, primarily driven by strong organic growth across all our major service lines. Starting with termite and home services column on the left side of slide 6, revenue grew by $7 million or 4% in the quarter. Breaking down the components of growth further, termite completions and home services were up 12% in the quarter, with core termite completions up 11% and home service completions up 14% year-over-year. Core Termite completions made up 44% of the $79 million completion revenue in the quarter. The continued strong performance in Core Termite is driven by sales of our new monthly pay termite product, while the growth in home services is primarily due to improved cross-selling to existing customers. Despite double-digit growth for consecutive quarters, we do expect the return to more normalized growth rates in future quarters as we lap COVID impacts in the termite evolution product rollout in Q2 of 2020. Termite renewals were down 2%, driven by approximately $5 million in headwinds from a change in revenue recognition for our monthly pay product. This was partially offset by improved customer retention in the quarter. Normalizing for the revenue recognition change, termite renewals would have been up by 4% and total termite growth would have been up 8% in the quarter. Residential pests grew 5% in the quarter with organic revenue growth of 4%. We continue to see benefits in price realization as well as improvements in customer retention with daily cancel rates and residential pests 5% lower versus prior year. Growth in residential pests was partially offset by our decision to limit summer sales activity in order to protect both our potential customers and salespeople from COVID during 2020. If you normalize for lower summer sales activity, our organic growth would have been approximately 6% in the quarter. We plan to launch our summer sales program in Q2 and are planning for growth in this channel over the peak seasons. While demand has remained strong for residential services early in the second quarter, we are closely monitoring increased moving activity due to the historically strong housing market has potential impacts in the second quarter. Commercial pest, which now includes our European pest business, grew 3% organically. On a constant currency basis, the service line grew 1% in the quarter. The $3 million benefit from foreign exchange translated to about a half a percent of total organic growth of the company in the quarter. Growth in commercial pests was highlighted by double-digit growth internationally and continued sequential improvement in the U.S. markets with strong exit rates in March as we begin to lap the impact of COVID in 2020. April has been promising, and we are planning for strong growth in this service line as we lap prior year COVID comparisons in the second quarter and as reopenings continue to accelerate. In the other revenue service line, product sales were down approximately $3 million from prior year due to tighter inventory management by larger distributors in response to COVID. With COVID fully lapped in its service line in the second quarter, we are forecasting strong growth for the rest of the year, and we continue to create meaningful cost benefits from the purchasing leverage this channel gives us with our suppliers. Overall, the first quarter delivered solid revenue growth in residential pests, termite, and commercial pests as we continue to focus on driving consistent results. Normalized for currency impact, summer sales, and termite revenue recognition, organic growth would have been approximately 4%. We continue to make meaningful progress towards sustainable organic growth rates in the mid-single digits. Turning to slide 7, you can see the financial summary and the detail on the adjusted EBITDA drivers for the quarter. Turning to the P&L box on the top left of the page, you can see the $16 million or 3% revenue growth we covered on the previous slide led to a 50% increase or $30 million increase in adjusted EBITDA. Adjusted EBITDA growth and lower interest expense after the debt pay down from the sales service master brands drove a $28 million increase in adjusted net income. And finally, the net income increase and lower count from an aggressive share repurchase strategy in the quarter led to a $0.22 improvement in adjusted earnings per share. Across the bottom of the slide, you can see the adjusted EBITDA drivers for the quarter. Revenue growth, almost all which was organic, added $7 million of adjusted EBITDA in the quarter. Direct cost productivity generated $12 million of higher adjusted EBITDA. $6 million in labor productivity was primarily the result of improved labor management and the lapping of inefficiencies in the first quarter of 2020 due to the impact of COVID. We also saw a $3 million benefit of lower chemical costs and vehicle and fuel costs declined $3 million year over year through actions to improve fleet management as well as lower fuel prices. As Brett noted, we did see job markets tighten up, and as we lapped COVID actions taken last year, we are expecting some headwinds in labor over the balance of the year. Travel costs were $4 million lower year over year. We're expecting travel to increase over the balance of the year as we continue to develop the Terminex way and implement our CXP platform throughout our branches. We also had a $4 million benefit in a quarter due to a favorable adjustment to our insurance reserves, primarily related to lower auto claims experienced throughout 2020. Back office simplification contributed $3 million as we become a more focused pest management company. We were able to accelerate our cost takeout plans into the first quarter. We remain on plan to reinvest these benefits in future periods to continue to develop operational capabilities that will drive future growth and consistency in our financial performance. Sales and marketing costs were $1 million favorable in the period. As Brett mentioned earlier, we plan on investing in marketing over the course of 2021 in line with revenue increases and we will see sales commissions rebound from lower rates last year as new sales growth in commercial and residential are forecasted to occur. Termite damage claims expense increased $2 million in the quarter, entirely driven by non-litigated claims due to an increase in cost per claim from inflation of building materials and contractor costs. Total termite damage claims expense was $15 million in the first quarter, about $12 million over the baseline 4% of termite revenue that we expect. As a reminder, starting with the second quarter, we begin to lap the $10 million Mobile Bay Area Mitigation Plan of 2020. Termite damage claims expense came in roughly as expected, and we remain on pace for reduced expenses in 2021. In total, adjusted EBITDA margins of 19% expanded 590 basis points when compared to the first quarter of 2020. We will touch on this in the outlook as we were able to take a very strong quarter and pass on a large part of our improvement to our overall full guidance for 2021. Turning to slide 8, you will see the cash flow summary for the quarter. Working capital was a slight use of cash in the quarter and is expected to be a use of cash for the full year as we unwind payroll tax deferrals from 2020, work through the large termite damage claims reserve we have on the balance sheet, and absorb the slight drag related to our move to the monthly pay termite product. CapEx remains on track for between $25 and $35 million for the full year. Our free cash flow conversion of 77% was in line with expectations and, as expected, benefited from no federal income tax payments in Q1. Free cash flow conversion for the full year remains on track for a mid to high 50% range. Shifting to use of caches, as we noted, we purchased four tuck-in acquisitions in the first quarter and remain active with M&A in the second quarter, closing on a Canadian deal on April 30th. We made scheduled debt payments on leased vehicles and prior acquisitions of $15 million in the quarter. As a reminder, we have approximately $50 million in deferred payments for the final installment of the CopaSan acquisition that we plan to fund in the second quarter. And finally, we purchased 3.5 million shares for a total of $169 million through our share repurchase program in the first quarter, and we remained active in April. For the full year, we expect to continue to be aggressive with opportunistic repurchases over the remainder of the year, along with easier-to-integrate tuck-in M&A remaining a priority. We ended the quarter with $484 million in cash and $862 million in available liquidity with a net debt leverage ratio of 1.1 times. This cash position and balance sheet flexibility allows us ample ability to invest in long-term growth through the Terminex way, CXP implementation, and rational M&A activity.