Terminix Global Holdings, Inc.

Ladies and gentlemen, welcome to the Terminix fourth quarter and full year 2021 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, 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. 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 in the appendix, all forward-looking statements and cautionary statements about the proposed Renekil transaction 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, March 1, 2022. The company undertakes no obligation to update any information discussed on today's call. This morning, Terminix issued a press release. on Form 8K, including our unaudited fourth quarter and full year 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. In order to better assist you in understanding our financial performance, we have included definitions and reconciliations of these non-GAAP measures to the most comparable GAAP 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, lays out the agenda we will cover today, with Brett opening with highlights and initiatives updates, followed by Bob reviewing our financials, and then returning to Brett for a brief Rent-a-Kill merger update, closing comments, and questions. I will now turn it over to Brett Ponton. Brett?

Thanks, Jesse. And thank you everyone for joining us. Overall, it was a successful quarter and a great end to a challenging year. I am excited to share our results with you today. I'd like to first start off by thanking our dedicated teammates for their hard work in the face of all the obstacles we overcame this past year. It is because of them that we continue to succeed delivering for our customers and each other to protect families, homes, businesses, and the environment. Now turning to our results. In the fourth quarter, we reported revenue of $484 million for growth of 5%. Organically, we had a strong quarter in our residential business with improvements in digital marketing, staffing levels, and pricing discipline leading to an acceleration in organic growth rates. The termite line was particularly strong with 9% organic growth driven by double-digit growth in completions and 7% growth in termite renewals. Residential pests grew 4% organically with better pricing and improved retention rates. Commercial pests grew 2% with organic declines of 2%. While retention was improved sequentially and year over year, we continued to see declines in one-time sales volume as we lapped disinfection services in-source national accounts volume, and staff our local commercial sales teams. I will cover our staffing progress in much more detail in a moment, but I'm very pleased with the progress we have made in a short period of time, and I'm confident in our staffing outlook for 2022. In total, organic growth of 3% for the full year was in line with expectations and represents strong acceleration from 2020. The progress over the course of the year and exit rates in the quarter keep us on track for our near-term, mid-single-digit organic growth targets. Fourth quarter adjusted EBITDA was $73 million, up 6% or $4 million year-over-year, for a margin of 15%. Twenty basis points of margin expansion in the quarter was driven by higher revenue contribution from strong pricing and fleet productivity as we made progress modernizing our vehicles. These gains were partially offset by investments in labor ramp up and strategic initiatives, as well as increased medical costs from the lingering effects of the pandemic. Termite damage claims expense was flat year over year in the fourth quarter due to the impact of inflationary pressure on building materials. However, we are encouraged by the meaningful progress we are making in our mitigation efforts. we reported the lowest new non-litigated claims in a quarter since we began disclosing claims. And we are pleased to see this trend continue into the first quarter of 2022. We are also making great progress on enhancing our digital marketing presence and implementing both the Terminex Way and Customer Experience Platform, or CXP. While these operational initiatives remain the focus of our customer-facing teammates, The back office has begun working closely with the Rent-A-Kill team on pre-integration planning as we make progress towards a closing of the pending merger in the second half of 2022. With Rent-A-Kill, we are excited to significantly enhance both of our company's capabilities and accelerate the progress already well underway at Terminix, including increasing our investments in organic growth opportunities. As I look back on a successful 2021, We delivered organic growth acceleration of two percentage points and also expanded margins by over 130 basis points, all while investing considerably in the long-term capabilities of the business and reaching agreement on a transformational merger that will position our combined company for even greater long-term success. Our Terminex management team made significant strides towards enhancing our digital marketing and we are laser focused on staffing. We believe improvements in the business happen one technician at a time, one customer at a time, and one branch at a time. With the focus and dedication of our teams, we are also able to deliver on all four year 2021 guidance expectations while making considerable investments in long term value creating initiatives. We are well positioned to take the learnings and investments in 2021 and build on them into the new year. And I am encouraged by the strong start we have already have under our belt in January and February. On slide five, I would like to take a moment on the priorities that we are focused on in 2022. I will start with the teammate experience on the top left. We are aligned throughout the organization on the journey to full staffing before we hit our peak season in the spring. When we last spoke in early November, we had improved staffing levels from over two technicians per branch short in the middle of 2021 to one and a quarter technicians short of our operating model. I am pleased to report that as of the end of January, we are down to less than two-thirds of a technician below our needs today and continue to make solid progress as we ramp into the peak season. In response to the tight labor market we saw over the course of the year, we have made several significant improvements in our marketing efforts as we search for talent to expand the Terminex team. Those efforts have been yielding excellent results. In December, we saw an increase in applications for open positions of 64% for technicians and 38% for salespeople. The increase in interest in our positions has led to increased hiring, with new starts in January up 83% for commercial sales professionals, 49% for residential sales, and 43% for technicians. These increased new hires comes with a cost, and as Bob will discuss in more detail later, labor is up $5 million year-over-year in the fourth quarter, and we expect investment in labor to continue throughout the first quarter of 2022. With meaningful progress under our belt to feed our hiring pipeline, we are laser-focused on retaining the new employees we are adding. In total, technician turnover remains about 10% better than our baseline pre-COVID 2019 levels. However, we did experience increases during 2021. Looking deeper at the data, the majority of our turnover occurs within the first 60 days on the job, while technicians are training and on the journey to become route technicians. Leveraging the work of the Terminex way, we have developed a detailed onboarding plan for those first two months on the job with refreshed training curriculums designed to engage and motivate technicians along the journey to route tech. The program includes day one, week one, month one training and leadership engagement points that will better integrate teammates into the culture of the company and better prepare them for success in the position long term. The journey to route tech is a key component of the Terminix Way branch pilot we are planning in the next few months. Although the branch pilot will be focused in one area at first, there are certain components of that program that we plan to scale quickly to all regions and branches of the company. Another area of focus is with our sales teams. In addition to tweaks we have made in the fixed versus variable pay components of the pay plan for residential sales employees, in 2022, we have completely revamped our commercial sales pay plans. The new compensation plans place a greater emphasis on annual customer value and reoccurring revenue than one-time sales. The new plans tear up commission rates for salespeople as they hit certain annual value sales milestones throughout the year, and those higher rates will carry over into the following year. While it has only been a few months, the results to date have been strong, and we are getting positive feedback from both long-term tenured teammates and new hires. We have continued to instill the urgency of staffing throughout the organization, holding weekly calls with each critically staffed branch to create and track progress on local branch-level action plans. Just last week, we had our division leaders in our corporate office for a series of talent planning meetings, and I was encouraged by the level of engagement from each of them on staffing. We discussed their critical branches and the needs in each area of the country to get fully staffed by peak season. With the improved visibility and urgency we now have in place, combined with the improvements we have made in the hiring process and the pipeline for better training and onboarding with the Terminex way, I am confident that we are in a much better position for growth in 2022. Moving on to our customer acquisition and penetration efforts in the top right quadrant, let me start with our new customer efforts. As I'm sure you saw, we launched our new website on schedule in December. In addition to a more modern look and feel that incorporates our current branding, the website has a much more advanced e-com presence that allows customers to price, request inspections, and in most cases, buy services directly online. The new site is rich with content that will drive increased search traffic so that Terminix's top of mind and wins that crucial first moment of truth in a customer's buying journey. While we are still early in the early stages of the release and far from the peak test season, we are encouraged by the early signs with total web sales increasing year-over-year 22% in January. We have a robust list of future enhancements including improvements to customer scheduling that we will continue to add as we optimize the customer experience. We have also made meaningful progress in optimizing our paid digital or SEM spend. You can clearly see this in lead generation and new sales growth in the quarter, especially in our termite business, which posted double-digit growth in the quarter. Additionally, we have deployed the first generation of CXP in eight branches in our Southwest region. Through the exceptional work of our IT and operational teams, The deployment completes a key milestone the team has been working towards over the past few years. This release delivers a simpler mobile application for our technician and sales teams to record and track leads in the sales funnel and complete work orders for the technicians. We are working towards further enhancements that will add inspection checklists to systematically generate cross-selling proposals that will drive additional customer penetrations. Given the importance of CXP, we plan to enhance and refine the system in the Southwest region over the coming months prior to continuing on our aggressive deployment schedule to ensure an appropriate end-user experience and to ensure we are ready for full deployment. Given the hands-on, high-touch training field needed for the successful deployment, we also slowed some of our in-person training in light of increased COVID cases to ensure the safety of our teammates. We are also closely monitoring key operational metrics to ensure benefits are realized and scalable, while minimizing near-term post-deployment change management impact. In parallel with these activities, we have begun pre-integration planning with Rent-A-Kill to deploy a best-of-breed technology platform for our combined future state that prioritizes ease of use for our customers, frontline, and back office. Despite the deliberate approach to CXP rollout, customer penetration remains a key component of our strategy for 2022 as we continue our long-term goal of at least two services per customer. We delivered a 2% improvement in services per customer in the fourth quarter, and as we pilot Terminex Way in the coming months, we will introduce cross-selling playbooks to further enhance our execution on this key driver of the business. While CXP will help speed our cross-selling capabilities, a more deliberate approach will not keep us from hitting our near-term cross-sell targets for services per customer in 2022. Another important part of our growth strategy centers around continued improvement in customer retention, and 2021 was another step in this direction. In residential pest control, we saw year-over-year improvement in cancel rates and retention rates with improvements in service quality. While commercial pest revenue was heavily impacted by reduction in completion rates and lower one-time sales, retention and cancel rates both improved year over year. In termite services, retention declined during 2021 due to the impact of robust housing market sales driving increased cancellations throughout the year. However, we are seeing promising results from our monthly pay product and our total termite retention remains above the industry levels of around 85%. As we continue to drive service consistency from branch to branch with clear standards and enhanced training against those standards with Terminex Way, we remain confident we have plenty of runway for additional retention improvements across all service lines. The progress on the first three priorities will naturally improve our profitability. In the fourth quarter, we saw 20 basis of margin expansion, and for the full year, we delivered over 130 basis points of expansion in line with our increased adjusted EBITDA guidance. We also saw high revenue flow through from our successful pricing action during the quarter, as well as continued cost reductions in fleet from both an attractive fuel hedge rate as well as investments to modernize our fleet that is driving lower fuel usage and maintenance expense. We were able to manage effectively through inflationary pressure on wages, medical expenses, and building materials. We're also making investments in our workforce to ensure we are fully staffed for the peak season. On average, in the fourth quarter, we drill a 38% increase in technicians and training. As a reminder, while technicians are in training to get certified and productive in a route, they are paid primarily with an hourly rate and not a percent of production revenue. This investment in staffing caused a headwind in labor expense in the quarter. We expect to see increased investments in training expense in the first quarter of 2022 as we make progress towards our goal of full staffing. Another key driver of margin enhancement in the coming years will come from progress mitigating our termite damage claims expense. As I mentioned earlier, our mitigation efforts are driving improvements. New non-litigated termite claims were down over 26% in the fourth quarter year over year, including 30% in areas outside Mobile Bay. For the full year of 2021 new non-litigated claims were down 9% in total. The less than 500 new non-litigated claims in the fourth quarter was the lowest total we have seen in a quarter since we began reporting and over 20% below the previous low from earlier this year. We have also made progress working through the backlog of non-litigated claims with total outstanding claims down over 16% sequentially. Cost per claim for non-litigated claims continues to be negatively impacted by cost inflation on building materials and was up about 8% year-over-year. We continue to see the opposite impact with litigated cases with the value of each new case dropping while claim counts remain slightly higher than the expectation. In total, we had 12 new litigated cases in the quarter, which is two higher than the previous year, while the cost per case was down over 28% year over year. Litigation continues to be focused in the very narrowly defined Mobile Bay branches, with 11 of the new cases in the quarter stemming from this area. With flat termite damage claims expense in the quarter, the full year expense came in at about $68 million or $2 million less than 2020. Significant increases in non-litigated expense from inflation were more than offset by lower litigated expenses and mitigation costs in the previous year. We have seen a similar pattern continue into the first quarter of 2022 with new claims continuing to decline. This is encouraging. And as we continue to make progress with our mitigation efforts in areas along the Gulf, we remain confident that we are taking the right action to return our damage claims expenses below historical norms, and we are planning for reduction in expenses in 2022. I will now turn it over to Bob to walk through the revenue drivers, the major fluctuations in costs, and the full year cash flow. I will come back with a brief update on the proposed rent-to-kill merger, as well as closing thoughts before our Q&A session. Bob?