Terminix Global Holdings, Inc.

and CXP are the current issues that will impact each of these four pillars in meaningful ways as we roll them out over the next several quarters. First and foremost, we must enhance our teammate experience. Our teammates are the most important asset of our business, and our work to enhance the tools and training they use in over 50,000 customer touchpoints per day forms the basis of DetermineX Way. We have found that our best technicians deliver excellent service and share their expertise effectively with customers to drive deeper customer penetration. We have pockets of excellence in these key capabilities across our business, and bringing that talent together to develop improved standards to drive operational excellence is the first step to determine the next wave. To that end, we have built a team that is focused on this initiative from our own ranks. The assembled team has over 120 years of test and term line experience, over 100 of those years which came while working at Terminix. This team understands what it takes to deliver a superior customer experience and will build a century of combined learning into enhanced playbooks for all positions in the company, from route technicians to branch managers. Ultimately, standards are only as good as our ability to train to those standards, and this team will lead the rollout of an improved training curriculum through a new Terminex University platform. Terminex University is all about preparing teammates to succeed in their current role while developing their skills for future jobs as they develop in their careers. While our efforts are in the early stages, and there is clearly a lot of work that remains over the rest of 2021 and into 2022, we are confident that the Terminex wave will improve teammate performance, engagement, and ultimately satisfaction. As expected, given the current state of the labor markets, we did see an increase in turnover year over year. While we remain ahead of 2019 turnover rates, we clearly have work to do to become the employer of choice in the industry. We believe enhancing playbooks and training support in Terminix University in conjunction with more clearly defined teammate growth plans, this will improve our value proposition for prospective teammates and help us become a desired place to build a career. We also remain keenly focused on improving our customer acquisition and penetration capabilities in order to drive better organic growth. Our focus remains on improving our digital marketing capabilities. We are making progress on local search optimization, which will be accelerated by a new and enhanced website experience. Winning the local search experience so we are relevant when prospective customers are searching for pest management is a priority and a key to growing our customer base. These areas take time to develop, but I'm confident we are on the right track. While we make strides in digital, it is imperative we leverage our brand strength and pest expertise to do a better job of penetrating our existing customers, both with core pest and termite offerings and with adjacent products like mosquito and wildlife exclusion. As a part of the Terminex way, we are developing a robust technician cross-selling playbook, enhancing our abilities to grow the business by maximizing the selling potential of all of our technicians. CXP is instrumental to enabling our technicians with this capability. CXP will provide the competence needed to share our expertise with the customer by guiding technicians through a robust service inspection process designed to identify additional ways we can protect homes and businesses. A seamless process to diagnose potential problems before they occur will unlock additional sales opportunities and allow us to reinforce our pest expertise and deepen our relationships with our customer base. While technicians are performing these inspections today, enhanced technology will create consistent and improved selling performance across all of our teammates. As we mentioned last quarter, we recently rolled out our commercial customer sales management tool to our commercial sales teams. We have been pleased by the visibility gained in this area. While it's still early, the team is energized, and we are happy to have this portion of CXP now in flight. The broader CRM rollout of CXP remains on track for late in the year as we get past the peak pest season. The other avenue of growth is customer retention. We continue to make progress in this area, delivering trailing 12-month retention improvements in residential pest management and termite in the quarter. We also saw improvement in our local commercial accounts, with cancel rates improving 23% in the quarter over the heavily COVID-impacted prior year comparison. Retention improvements will accelerate with both DXP and DetermineX Way. The Terminex way will standardize service delivery by improving our ability to meet the needs of all of our customers, from residential customers to our most sophisticated commercial customers in verticals with the highest quality standards. Improved customer satisfaction will ultimately drive retention gains. CXP will give our technicians the tools they need to deliver a consistent experience with automated checklists that will guide technicians through the non-negotiables of every service we deliver. This week, we have over 50 teammates in Memphis to go through a simulation of the process flow of a CXP platform. This important step in the process will allow us to gather real-life feedback from end users that will be incorporated as we finalize the platform design. Similar to the rollout of commercial customer sales management last quarter, we were able to deliver additional enhancements to our teammates this quarter. We recently enhanced our commercial quality assurance program by extending the case management elements of the CXP platform to branch management throughout the country. The addition of over 1,000 users will allow us to move away from managing client service concerns through spreadsheets and emails to an automated dashboard that provides immediate visibility from local branch management to executive leadership that will streamline and coordinate our customer response resolution efforts going forward. This process will provide real-time operational insights to ensure we are exceeding our customers' expectations. And finally, all these priorities are designed to improve our profitability and expand our profit margins. In the quarter, we saw strong productivity in both fleet management and chemical costs as we had lower vehicle maintenance expenses and improved chemical costs through the purchasing power of our product sales division. This productivity was offset with higher labor year-over-year, partially due to revenue mix. As we have been expecting, turnover is elevated compared to 2020 as the labor markets improve and competition for labor increases. As mentioned earlier, our people are a vital part of our business, and making strides to improve the Terminex team-made value proposition through better tools, training, and technology will help us continue to improve our turnover rates in the future. We have also seen strong productivity gains in our international businesses with margins up in Canada and the UK as we move past the impact of the pandemic as well as UK integration efforts in the prior year. We are encouraged by opportunities we see internationally in both growth and margin expansion and are investing in systems and growth in areas where we already have a significant presence. Termite damage claims are slightly behind our expectations at this point in the year, driven by higher costs per non-litigated claim due in part to elevated costs for building materials and contractor labor. Despite a cost per claim increase in non-litigated claims, we are encouraged by the continuing downward trends we are seeing in the Mobile Bay area in the second quarter, with new non-litigated claim counts down 24% year-over-year and outstanding non-litigated claim counts down 38%. We didn't see elevated litigated cases this quarter, but the cost per case continues to decrease as the cases are coming on lower-value properties. As we have always said, timing of litigated cases is difficult to predict quarter to quarter, but with the value of the cases continuing to decline, we remain encouraged we are on the right track. Outstanding litigated case counts in Mobile Bay were down 24% and cost per outstanding case in Mobile Bay and the rest of the country was down year over year by 8% and over 30% respectively. As we have seen from the progress we are making in Mobile Bay, I'm confident as we scale best practices and incorporate them into the Terminix Way playbooks nationwide, we can reduce our damage claims expenses to historical norms and beyond over time. Overall, we made progress in Q2 executing on our priorities. We will continue to take steps on the Terminix Way and CXP over the course of the year, And despite some of the headwinds we will face with strong industry competition, we are in position to continue to drive consistency across the business that will accelerate growth, expand our margins, and ultimately create value for our shareholders. I'm energized by the opportunity we have with this team and excited to deliver on our commitments. And with that, I will turn it over to Bob to discuss the financial specifics of the quarter. I will return with some closing thoughts in a few moments.

Thanks, Brett. Let's start with a detailed review of our top line performance. Overall, we delivered revenue growth of $26 million, primarily driven by $19 million of organic growth, or 4%. Beginning with the termite home services column on the left side of slide six, reported revenue decreased by $3 million, or 2%, in the quarter. Breaking down the components of growth further, Termite and home services completions were up 1% in the quarter, with core termite completions down 1%, and home services completions up 3% year-over-year. Core termite completions made up 59% of the $113 million completion revenue in the quarter. Termite completions were impacted by lapping 14% growth in completions in the second quarter of 2020, as we saw strong growth from the introduction of our monthly pay products. Termite completions were also impacted by staffing challenges in our outside sales professionals as the labor market has impacted hiring rates and turnover in this very competitive labor pool. As Brent mentioned, we are making strides in our digital marketing and cross-selling capabilities that will improve growth in future quarters. Termite renewals were down 5%, driven by approximately $5 million in headwinds from a change in revenue recognition for our monthly pay products. Adjusting for the revenue recognition change, termite renewals would have been up by 1%, and total termite growth would have also been up 1% in the quarter. For the full year, we remain on track for unadjusted growth in termite, despite lapping strong completion growth and the impact of our monthly pay product moving into the renewal period. Residential pests grew 5% in the second quarter, with organic revenue growth of 4%. We continue to see benefits executing our pricing strategy as well as improvements in customer retention. Growth in residential PEST was negatively impacted by lower than expected summer sales to the lower staffing at our sales partners driven by the competitive labor market. Revenue growth was strong in the second quarter, but we continue to monitor increased cancellations year over year by an uptick in customer moves in this historically strong housing market, and we are tracking labor staffing difficulties and door-to-door salespeople at our sales partner that may impact future periods. Commercial pests, which now includes our European pest businesses, grew 14 percent, including 10 percent organically. On a constant currency basis, the service line grew 7 percent in the quarter. The benefit from foreign exchange translated to less than 1% of the total organic growth of the company in the quarter. Growth in commercial tests was highlighted by double-digit growth internationally and continued sequential improvement in the U.S. market. Looking to the back half of the year, we expect growth to moderate to more normalized levels as the severe prior year impact of the pandemic lessens. In the other revenue line, product sales were up about 8% organically over the prior year as we lapped the impact of COVID. Overall, the second quarter saw a strong rebound in the commercial business and consistency in residential pests, while termite was impacted by the timing of revenue recognition. Normalized for currency impacts and termite revenue recognition, organic growth would have been approximately 4%. With advancement in digital marketing capabilities as well as progress on the Terminex Way and CXP, we are confident we can continue to make meaningful progress towards sustainable organic growth rates in the mid-single digits. Turning to slide seven, you can see the financial summary and the detail on adjusted EBITDA drivers for the quarter. On the P&L at the top left of the page, you can see the $26 million or 5% revenue growth we covered on the previous slide leads to a $4 million or 3% increase in adjusted EBITDA. Adjusted EBITDA growth and lower interest expense after the debt pay down from the sales service master brands drove a $13 million or 24% increase in adjusted net income. And finally, the net income increase and continued aggressive share repurchases in the quarter led to an 11 cent or 28% improvement in adjusted EPS to 51 cents per share. Across the bottom of the slide, you can see the adjusted EBITDA drivers for the quarter. Revenue growth added $13 million of adjusted EBITDA in the quarter. Labor increased $16 million in the quarter, primarily driven by higher turnover year over year from the competitive labor markets, as well as a revenue mix shift towards commercial pests. As we discussed last quarter, we expect these headwinds are likely to continue as we lap historic improvements in turnover in 2020 that were partially aided by impacts from COVID-19. Direct cost productivity and fleet management and chemical purchasing generated $4 million of prior adjusted EBITDA. Key investments in Terminex Way and CXP were approximately $2 million in the second quarter. These costs are timing related and are offset in the full year by favorability we saw in the back office in the first quarter. Sales and marketing costs are up from prior year by about $3 million. As discussed earlier, we are investing in digital marketing capabilities to improve lead generation while maintaining total marketing spend as a percent of revenue roughly flat. Increases in sales commissions are largely driven by increases in commercial revenue and the impact of prior year sales growth of the monthly paid termite product. Termite damage claims expense increased $1 million in the quarter, with increases in non-litigated costs per claim from inflationary pressures partially offset by lower litigated costs and approximately $2 million from lower mitigation expense than the prior year. Total termite damage claims expense was $20 million in the second quarter, about $13 million over the baseline of 4% of termite revenue. As Brett mentioned, termite revenue claims expense came in higher than expected due in part to inflationary pressures on cost per non-litigated claim and an uptick in new litigated cases in the quarter. While it remains difficult to predict case counts on a quarter-to-quarter basis, we remain confident we are taking the right steps. Best practices for Mobile Bay are being incorporated into the Terminix way, and we will continue our progress in termite damage claims as these near-term pressures are resolved. In total, adjusted EBITDA margins of 22% contracted 40 basis points year-over-year. However, it is important to remember that we are absorbing approximately $5 million in both revenue and adjusted EBITDA in the period from the timing impact of revenue recognition and termite renewals. When adjusted for this impact, margins would have been 22.7% and expanded by approximately 30 basis points. As we will touch in on the outlook in a few slides, we remain largely on track with our full year adjusted EBITDA and margin outlook and are still targeting full year margin expansion to approximately 19% annually. Turning to slide eight, you'll see the cash flow summary for the quarter. Working capital has been a use of cash year to date and is expected to be a use for the full year as we unwind payroll tax deferrals from 2020 work through the termite damage claims reserves we have on the balance sheet, and absorb the cash flow impact from our move to the monthly paid termite product. CapEx remains on track for between $30 and $40 million for the full year. Year-to-date free cash flow conversion of 65% was in line with expectations, and we remain on track for conversion in the mid to high 50% range for the full year. Shifting the uses of cash, we have completed $45 million worth of M&A and remain active with small tuck-in deals in the pipeline. We made scheduled debt payments on lease vehicles and completed the deferred payment obligation on the 2018 CopaSan acquisition in Q2. And finally, the primary use of cash so far this year has been through the Share Repurchase Program. Under the program, we have purchased $350 million worth of shares this year. Including purchases from last year, we have approximately $43 million left in the existing $400 million authorization. Our capital allocation priorities remain unchanged. With our leverage at the very manageable level, we are targeting accretive M&A and believe we have additional capacity to continue to return cash to shareholders. We ended the quarter with $313 million in cash and $691 million in available liquidity with a net debt leverage ratio of 1.5 times. This cash position and balance sheet flexibility allows us ample ability to invest in long-term growth through the Terminix way, the CXP implementation, and accretive M&A as we progress towards our longer-term leverage target of about 2.5 times. Moving to 2021 outlook on slide nine, our guidance remains unchanged as we remain firmly on track with our plans for the year. We expect full year revenue between $2 billion, $25 million, and $2 billion, $50 million, with organic revenue growth between 3% and 4%. Residential pest is expected to grow with strong pricing realization and improved retention. Commercial pest is expected to moderate slightly from the strong growth in the second quarter as the prior year impacts of COVID subside. Termites and home services are expected to grow as we absorb an approximately $2 million impact in the third quarter from the change in the timing of revenue recognition in our new monthly subscription-based termite offering. Adjusted EBITDA is expected between $380 and $390 million, with margin between 18.8 and 19%. Organic revenue growth is expected to contribute approximately 30% incrementally. We expect to see headwinds in labor expenses, job markets open up, and plan to make investments in sales and marketing, as well as the key operational initiatives of Terminex Way and CXP that will drive future growth and consistency in our business model. We remain encouraged by what we've seen as we make progress on improving the fundamental operations of the business. We are confident investments in standardized playbooks, training, tools, and technology in the back half of 2021 are going to be key enablers of profitable growth in our business and are excited for the hard work ahead of us to deliver these capabilities to our dedicated teammates serving our customers every day. And with that, I will turn it back over to Brett for some closing comments.

Thanks, Bob. In closing, I'm excited to have the full team on board and aligned behind the same business priorities and strategic initiatives. I am proud of how the team has come together over the last few quarters and I'm encouraged with our progress and direction. We are committed to making the investments necessary in the Terminex way to improve our teammate value proposition by improving the standards, developing the training, and enhancing the tools needed to deliver a consistent customer experience from branch to branch, teammate to teammate, and customer to customer. Overlaying improved sales and service quality from the Terminix way with the CXP technology platform will create a seamless and easy inspection process for technicians who will be able to more effectively share our trusted expertise and offer additional solutions to our customers' problems. These investments are critical to returning to industry-level growth and profitability and ultimately bridging the gap to our competitors in the marketplace. Digital marketing capabilities and a refreshed e-commerce platform are also on track and will deliver a frictionless experience when customers find us and buy from us on the web. CXP and Terminix Way are the initiatives that will drive progress on our priorities to improve the team-made experience, enhance customer acquisition and penetration, improve customer retention, and expand profit margins. I am proud of the work we have already done and believe we are on the right track to deliver considerable shareholder value as we progress towards our goal to become the best-in-class pest management provider. And with that, I will hand it over to Jesse to lead us through the Q&A. Thanks, Brett.

With many analysts in line this morning, I ask you to please limit yourself to a single question so that we can get to every one in the allotted time. Operator, let's open the line for questions.

Thank you. Ladies and gentlemen, if you would like to register a question, please press the one followed by the four on your telephone. You will hear a three tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. One moment please for the first question. Our first question comes from Andy Whitman with Baird. Please proceed.

Great. Thank you. So, guys, you know, the quarter was generally in line and the guidance is unchanged. But inside of that, I think the commentary on labor stood out to me. I don't know if it's changed, but it sounds like it may have changed. Brett, I was just hoping you could talk about some of the ways that labor is impacting your business there's a lot of ramifications here um there can be just the late the raw labor price that you're having to pay people more because of labor inflation there can be inefficiencies for due to turnover there can be higher costs related to training new people to backfill and and there's just there's just a lot of ways that this can affect your p l and there's probably others too that i didn't even mention so Just given that this is something that impacted the quarter and you said that it's going to be impacting the rest of the year, I was hoping you could talk about some of those dynamics in a little bit more detail and then just talk about some of the plans and processes that you have in place to address this and how good of a grasp you have on the labor situation. So I apologize. I know there's a lot there, but I think this is a key issue, and I thought maybe you could touch on some of those points.

Now, certainly, good morning, Andy, by the way, and thanks for the question. And you're right, there's a lot to unpack there with that question. But why don't we first start with just let's bifurcate the labor discussion between technicians and sales professionals in our business, because I think the backdrop of the landscape is a little different by each. Let's first start with technicians. And as you characterized, when you have some labor issues with turnover, that's going to create premium pay and overtime issues and potential service issues related to understaffing in various branches. We knew coming into the year that we were going up against a pretty hard comp because our turnover was at near all-time lows, I guess, in 2020. So we were expecting to deal with some turnover in the business. And I think the team's done a nice job navigating through that in the quarter. And I think we're seeing more costs related to premium pay to cover shortage in demand or shortage in labor. But also, I think it's fair to say we haven't seen a lot of wage inflation on the technician side, just given the fact that most of our techs are paid on a productivity basis. And our entry wage rates are fairly competitive in most of the markets that we're in. But there are exceptions to that, certainly in high-growth markets and pretty attractive areas would be the outlier to that. But generally speaking, we feel pretty good about where we're at on the tech side. Our value proposition is strong there, and it's going to get even stronger with Terminex Way, career pathing through Terminex University, and the enhanced tools that we're going to provide our team there. Let's switch gears and talk a little about our OSPs or our sales professionals on the outside, because I think that's The story's been a little different there. It has been a little bit more challenging environment there, a very competitive labor pool for sales professionals. In our model today, we rely a lot on our sales professionals to drive new unit growth, and they do a lot of cross-selling for us. So some of our maybe dissatisfaction with our performance in termite and home services, we would point back to some of the challenges we had on our OSPs in particular. Things that we're doing there to improve, we have recognized we need to benchmark our value proposition versus the marketplace. And we're making some tweaks to our approach in terms of how we market to prospective people coming in. And we have made some minor tweaks, modifications to our compensation pay plans to ensure that our opportunity here at Terminex is in line with the marketplace and create an opportunity for them to grow and develop in their careers. A lot there, but certainly we recognize in this model how important labor is to deliver great service, excellence to our customers, and any issues that come from that certainly create downstream effects to our business here. So maybe the last thing I'd leave you with, Andy, is I feel like our HR team has done a wonderful job in improving how we market The term enacts value proposition to prospective new hires here with a whole new campaign online as well as using new channels to reach prospective new hires as well. In addition to that, we've launched a recent referral program internally to attract more talent into our company. So a lot of initiatives underway to really strengthen the value proposition here, both near term as well as long term in our business.

Our next question comes from Tim Mulroney with William Blair. Please proceed.

Good morning, Brett, Bob, and Jesse. Thanks for taking my question. Bob, I have just one question for you on the guide. So I think your guidance implies EBITDA margins of about 17% for the back half of the year versus the 21% that we saw in the first half of the year. Is that in line with typical seasonality? And if not, can you talk about the primary factors driving the expected margin compression sequentially from the first half to the second half? And also, is there maybe just some conservatism built into the numbers here, you know, given ongoing uncertainty with Delta? Thank you. Good morning, Tim, and thanks. Yeah, you're spot on. It is in line with the seasonality of the business, but it is slightly better than the prior year. We're going to continue to show consistent growth and margins. To Brett's point on labor, we do see some headwinds there, so we've kind of factored that in. It was in our guidance last quarter also, expecting our record turnover rates of the prior year to not continue. And some significant investments in CXP and Terminix Way. It'll hit the P&L. And then also from a sales and marketing perspective and digital marketing. And then the other headwind we do have is travel. We are getting more people back on the road. When we talk a little bit more about CXP later, we do have a group of individuals in here for some training. this week. So we are getting back on the road quite a bit more than we did the prior year. So those are really the key drivers there. We do see top line growth being consistent with the first half of the year. So we kind of are guiding at that midpoint at about 3.6% revenue growth compared to the 3.4% organic growth we had in the first half. So again, continued progress, just trying to be smart about what we put out in the market.

Our next question comes from Ian Zafino with Oppenheimer. Please proceed.

Hi, Greg. Thank you very much. I just kind of wanted to ask, you know, just general thoughts on how you guys are doing, you know, versus the competition, you know, both in the second quarter, you know, what you just completed, and then also your outlook for the second half of the year in the same vein. Thanks.

Good morning, Ian. I'll take the first part of that and ask Bob to add some color on the outlook here. But generally speaking, if you look at Q2 and just a quick strategic assessment here, I'm really pleased with the progress the team is making here and we remain on our plan for the year. And just a reminder, we raised our guide after Q1 and we're staying committed to that guide as of Q2. But as we assess our performance versus the industry, we do recognize we still have some significant opportunities to improve in our business. I do think the team is coming together, and we are all aligned very much on the critical priorities in this business that I think have the opportunity to create some real meaningful value for the company and our shareholders here. And those three core areas that we're really, really focused on here is, number one, again, driving customer retention. through better service quality, and that's where the Terminex way comes in to help us improve consistent service quality across all of our customer base. If we do that well, it'll lead to really strong improvements in retention. Secondary is just around penetration. We've identified, I think, a significant opportunity for us at Terminex to improve deeper relationships with our customer base, not only on residential but on commercial, through much stronger cross-selling, cross-marketing efforts, and help provide our technicians the opportunity to do more of that with better tools to help enable that. And that's where CXP and Terminix Way comes in to help unlock that potential value for us going forward. And then finally, on acquiring new customers into the brand, That also is very much pointed to the digital marketing efforts that our team has made some really good progress on. We recognize that relative to the industry here, we've got a lot of opportunity ahead of us. I think it also reinforces what an attractive industry that we're in today. with a company like Terminex with a really strong, well-recognized brand with a national footprint. Once we install this capability to improve service and give our team the tools, we feel like there's significant opportunity to improve our performance and close that gap versus what we're seeing in the marketplace with other competitors.

As it relates to the outlook, you know, in the year? Yeah, good morning, Ian, and thanks. You know, as we mentioned just a second ago, I mean, our midpoint on the guide is 3.6% organic growth versus 3.4% in the prior year. And our revenue plan is really continue that consistent growth and stabilize the residential and the termite business. We also are coming over some tougher commercial comps in the back half of the year as the market started to open up last year, and also some tougher termite comps on completion compared to the prior year. some headwinds from summer sales. So we're comfortable with where we are on the guide right now, and to Brett's point, we've got a lot of gap to close versus the competition, and we're working towards that.

Let me just add a little bit more color on that. I feel really good about our progress on commercial. As you saw that in the QQ results here, I think we're seeing a nice recovery there, and our team's doing a nice job of capitalizing on that recovery. Stable demand, pretty consistent in resi across the back half compared to the first half. And termite, we knew we were going to have really strong comparables, as Bob said. So we've got some work ahead of us on termite here, but I feel like we're focused on the right thing here with our business. You know, keen focus on digital marketing on termites, drive more leads there. And, again, the opportunity here for us, the leverage, and create more selling resources in the company. And unlocking our technicians by giving them the tools to cross-sell and improve that customer penetration will also be a help to us in the second half. But despite that, we're quite confident with the guidance we're committed to here at the end of Q2.

Our next question comes from Judah Sokol with J.P. Morgan. Please proceed.

Good morning. Just wanted to touch on capital allocation. The quarter saw a major step up in share repurchases. Clearly in the past, share repurchases have taken a little bit of a step back towards things like investment and the turnaround, as well as M&A. Do you think this is a little bit of a you know, philosophical pivot where maybe you're going to be a little bit more aggressive on the buyback front with this maybe just a one-quarter opportunistic type of approach? Or just how do you see balancing the different needs for cash going forward? Thank you.

Good morning, Judah. And obviously, you know, our M&A activity has picked up this year. We spent $45 million year-to-date on five transactions. We spent over only $36 million last year in total on 12 transactions. So there is a significant pipeline going forward on M&A. So investing in growth with the Terminix Way and CXP is obviously critical, along with M&A. But we did return $181 million in the quarter at an average price of about $48.77. So we're still trading at sub-18x EBITDA. We feel like that's an attractive price for us to buy. We do have $43 million remaining under the $400 million that's authorized. And we are committed to returning capital to shareholders. We want to be big, you know, good stewards of capital and get to that kind of leverage target of two and a half times. So we are focused on it. Our board's focused on it. We've got some meetings with them over the next few weeks. And we do plan to have a more communicated plan next quarter.

just add a little bit of color to that top two just to reinforce and underscore i think the point of we're trying to stay balanced here right with investments and strengthening our operational capability in the company while we remain in the market for m a so that's reason why we're focused on the tuck in deals here near term while we strengthen the platform that we're building here as part of terminex ways for the right technology and training so as that platform continues to evolve and mature It will give us more confidence, I think, to improve and look to increase maybe the flow of deals to drive future growth once we stabilize and strengthen that platform.

Our next question comes from George Tong with Goldman Sachs. Please proceed.

Hi. Good morning. This is Zach Lopez on for George. I was just wondering if you could kind of talk about the monthly service subscription and how that's kind of progressing, and what percentage of termite new sales currently are made up of the monthly pay product?

I'll take the first part, Aaron, and let Bob handle the second part. I think the team has done a nice job developing a good, strong value proposition with our monthly pay product, and we continue to see good momentum in that service line. especially related to the monthly pay option there. But roughly 75% of all of our new customers we're bringing on is taking the monthly pay option with the term, you know, termite evolution package we put out there. So it's going to be a key part of our go-to-market model going forward. And with the spirit of aligning our value proposition to match the needs of the marketplace and, you know, continue to see momentum there and expect that to continue going forward.

Our next question comes from Michael Hoffman with Stifel. Please proceed.

Hi. Thank you for taking the question. So I have a cadence question that is about the second half broken into the quarters, about sales, EBITDA, and free cash flow. In particular, what is the drag on the conversion ratio in second half if you're going to end up at 55% to 60% down from 65% in the first half?

Yeah, good morning, Michael. Obviously, we have some issues that are dragged in the second half. There's the CARES. We got the benefit from the CARES Act payroll deferral. Termite evolution is a drag in Q3. We kind of pick it up on the other side in Q4. And some other working capital issues. And obviously, we got a $20 million tax refund. from an NOL carry back last year. So those are kind of the major issues as far as the impact in the back half. We still see the overall free cash flow in the high 50% and working our way, you know, reasonable goal of 60%.

And the sales and EBITDA cadence by 3 and 4Q to meet the guide? How to think about that?

Yeah, we just see it stable. Again, our guide is roughly 3.6% in the back half compared to organic growth of 3.4% in the first half.

Let me just add some color to that, Michael. Good morning, by the way, to the spread. I mean, if you look at the table of demand from last year, I think we're seeing consistent demand this year relative to the table of demand last year. So I would expect consistent pacing. Okay.

Thank you.

Our next question comes from Mario Cotolacci with Jefferies. Please proceed.

Hi, thanks for the time. Just a quick question on price. I think you guys mentioned that you're expecting strong price realization in resi. I was wondering where that's coming in within that historical range, towards the high end, or are you even kind of pushing pricing a little higher within resi, again, above that historical range? And then maybe you can also give us some color within commercial How much of price is contributing to growth there currently? And then what's the outlook there? If it's not really contributing to growth within Q2, what do you need to see within the market or from your customers to pull that pricing level a little harder?

Yeah, good question. Good morning. By the way, this is Brett. If we anchor off of an industry that historically has priced called 1.5% to 2% as a baseline, We probably saw a little stronger pricing in our resi service line and probably in line more on termite and commercial. But I think we also feel like we have significant runway here going forward. The team has done a really nice job in Q1 and Q2 building much stronger analytics I think that's helping shape our pricing strategy going forward that will give us an equal bit more confidence going forward to pull levers by certain demographics, maybe a little more aggressively than historically, with a deeper understanding of consumer behavior and reaction to those pricing actions. So we're very good about the analytics that we have built in Q2 that will help us, I think, be more informed second half of the year.

And that was our last question in the queue, so that concludes today's call. Thank you for your continued interest in the company. We look forward to talking to you again on our next earnings call, tentatively scheduled for Tuesday, November 2nd. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.