Terminix Global Holdings, Inc.
Q1 2020 Earnings Call Transcript

Published: 8 May 2021

[Operator:]

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&A and Treasurer. I will now turn it over to Mr. Jenkins, who will introduce the other speakers on the call.

[Jesse Jenkins:]

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 2, 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.

[Brett Ponton:]

Thanks, Jesse. The first quarter saw a 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 poor termite and double-digit growth in both recurring poor termite and home services. 4% organic growth in residential pest was driven by retention gains and pricing realization, that were partially offset by the carryover impact of lower summer sales units in 2020. Commercial Pest, which now includes our European Pest management businesses, grew 3% as reported or 1% when exploiting 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 and commercial test 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, onetime benefits in the quarter included favorable insurance adjustments and lower travel costs due to the pandemic. These gains were partially offset by a higher termite damage claims expense, primarily driven by higher cost per non-litigated claim due to inflationary pressures on building materials and contractor costs.

[Bob Riesbeck:]

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.

[Brett Ponton:]

Thanks, Bob. In closing, I'm excited about the progress we have made in my short time at the helm and the momentum we have created from a great Q1. I am proud of the team and our ability to manage through the uncertainty of COVID, and the back-office simplification changes we have gone through in the first part of the year. We remain focused on the fundamentals of customer service in both the commercial and residential markets and the strong first quarter puts us in a position to fund investments in the Terminix Way initiative that will form the basis for how we do business for years to come. Coupled with the rollout of CXP in our e-commerce platform, we will make inroads to improve consistency of operations from branch to branch, teammate to teammate, and customer to customer, which will ultimately drive more consistent growth and profitability. These major initiatives and other smaller changes will move forward our strategic priorities to improve the teammate experience, enhance customer acquisition, improve customer retention and expand profit margins. We remain confident in our abilities to continue to improve margins, while we invest in the long-term health of the business, and I remain steadfast in my belief. Building these fundamentals during 2021 will lead to 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.

[Jesse Jenkins:]

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 everyone in the allotted time. Operator, let's open the line for questions.

[Operator:]

Thank you very much. Our first question comes from Tim Mulrooney with William Blair. Please go ahead.

[Tim Mulrooney:]

Good morning, Brett. Good morning, Bob.

[Brett Ponton:]

Good morning.

[Bob Riesbeck:]

Good morning, Tim.

[Tim Mulrooney:]

Only one question. So, I got to – I probably got to ask about Residential Pest. I mean, in your press release, the guide says you expect residential organic growth to accelerate from the, I guess, the 4% we saw in the first quarter. I thought that was interesting because I know you're going to be bumping up against some more difficult comps here in the back half of the year. So, can you just talk about what you're seeing that gives you confidence that growth will accelerate? And secondarily, I assume this means you plan on having a summer sales program this year? Thank you.

[Brett Ponton:]

Yes, sure. Thanks, Tim for the question. Good to hear from you again, by the way. First of all, I think we're very encouraged by the momentum that we've seen in the first quarter. Really proud of the progress the team has made in Q1 on Residential. Look, in terms of outlook, we expect strong demand I think for the balance of the year, primarily coming from a combination of work-from-home as well as a hybrid work-from-home model we would expect to see. So, we expect to see some benefits from that. A few specifics, though, I think to keep in mind. Look, we are going to lap the 2020 summer sales impact this year, as you said. And we have launched, by the way, a summer sales program in 2021. And how far we go with the summer sales program, I think, will largely depend on the customer adoption of the program and the success that we see. Look, I think, it's fair to say, Tim, that we're still early innings in building a sustainable growth model here at the company, early innings on developing our digital marketing capability and our e-commerce capability. There's progress that we have, I think, ahead of us on expanding our adjacencies and the work that we have on our plates ahead around routing and scheduling and pricing will also benefit our residential business. So again, I think the key theme here is proud of the progress, but we're not satisfied with where we're at and a lot of initiatives forthcoming here that we think will drive benefit to us in the second half.

[Operator:]

And our next question is from Toni Kaplan, Morgan Stanley. Please go ahead.

[Toni Kaplan:]

Thanks so much. Last week, you press released that you'll be hiring 500 sales and services professionals over the next months. I was hoping you could just talk about what the goal is there? Is that to replace the turnover – people that turned over in March or is it more towards driving more sales towards your mid-single digit growth rate or something else? And then, I guess, what's built into guidance from a revenue and expense side from the new side from the new hires? Thank you.

[Brett Ponton:]

Yes. Thanks, Toni. And by the way, good to speak with you again as well. But a lot to unpack with that question. Let me take a step back here to start with, I'd say, that I recognize in this business how critically important managing labor is, in this industry as well as other service industries I've been part of. Our tech's call center team and our sales professionals are the most important assets in our business, and they are the primary connection between our brand and our customers. And given the fact that labor is our largest variable cost component, striking this balance of managing the right labor to deliver a great customer experience along with managing our margins is essential. And to that end, over the past year, our team has made significant improvements in refining our staffing model to improve that balance. And I think we've seen that translate pretty well into our labor efficiency throughout the year, while we improve customer retention. So – but specifically to the hiring press release we put out last week, I think, there's three things probably worth talking about

[Operator:]

Our next question is from George Tong, Goldman Sachs. Please go ahead.

[George Tong:]

Hi, thanks. Good morning. A strong performance from sales of the new monthly paid termite product has helped drive double-digit growth in completions in recent quarters. What percentage of termite new sales currently are made up of the monthly pay product? And how much further customer penetration opportunity do you think there is with this product?

[Bob Riesbeck:]

Yes. So right now, it's roughly 10% of our overall sales, and we feel like it's going to continue to grow going forward. We're seeing a great recovery from that. And then obviously, building off of that going forward – but we also feel like it's going to normalize somewhat as we're lapping over kind of that work from home, and we see the impact of the revenue recognition impact going into next quarter of roughly $5 million in Q2 that is going to impact us in Q2. So, we expect it to continue, but we do have kind of that overhang of the termite revolution product in Q2.

[Brett Ponton:]

And maybe just to add a little color to that strategically, I'm really, really excited about the progress the team has made with the launch of termite evolution we did Q2 of last year, as Bob said, that we're getting ready to lap. So significant improvement in the completions, as you noted, George, but also, we're excited about the likely upside we should expect to see in retention as we move to that monthly pay model. So, as we said, with only 10% of our revenue coming through the monthly pay model there, there's significant opportunity to kind of build off that base going forward. So very encouraged about where we're at with our termite service line right now. Yes, but we do have that a little bit of headwind in this next quarter before we start to lap that into Q3 and Q4, and then we should really start seeing the benefit of it.

[Operator:]

Our next question is from Andy Wittmann with Baird. Please go ahead.

[Andy Wittmann:]

Great. Excuse me. Good morning and thanks for taking my question. I guess I just wanted to touch on the weather. Your primary competitor mentioned this a couple of times on their earnings conference call that it was favorable to them. You guys didn't mention anything here, so I thought I would ask and just see, Brett, what the impact of weather was to your quarter, favorable, unfavorable? And if there was any kind of impact from it, in what form it benefited you? Maybe which segments? Was it a good termite swarm? How did taxes – I mean, those are some of the things maybe you could touch on for all of us. Thanks.

[Brett Ponton:]

Sure. Thanks, Andy, for the question. I think, to start with, I think, we would say that weather was net neutral in the quarter. If you look at, certainly, weather played a major impact in our February business, given the harsh weather conditions, namely down in the south, our team responded extremely well in March and recovered, I think, quite well from the dynamic in February. So, we feel like it was neutralized in the quarter. It wasn't necessarily a net negative or a net gain. But the team, I think, worked our way through those issues in the quarter.

[Bob Riesbeck:]

Yes, I think to Brett's point, I mean we're probably have the strongest March in the company that they've ever had here.

[Operator:]

Our next question is from Michael Hoffman with Stifel. Please go ahead.

[Michael Hoffman:]

Brett, Bob, Jesse, hope things are good in Memphis. Bob, could you go back to your Page 7 and talk to us about 2021 – 2020 versus 2021 in that waterfall. What are the big buckets and directional items we're looking for as we bridge, say, the $445 million to the midpoint of $385 million?

[Bob Riesbeck:]

Yes, I think, Michael, by the way, good morning. And again, appreciate the question and the interaction. I think when we look at how we've kind of carried through roughly the $19 million-or-so beat over guidance, I guess, or where we thought we would end up. On the lower end of our go-forward guidance, we've passed most of that through from the $365 million to the $380 million. Our biggest concerns, I guess, are to Brett's points earlier on labor in the back half of the year and also on travel. As we roll out CXP and roll out really Terminix Way, we feel like there's going to be a bit of an expenditure we're going to have to make in order to drive that forward. On the higher end of the guidance between the $380 million and $390 million, we factored in both of those issues, but then also a little bit more on labor as we try to drive to that higher end sales number. So those are kind of two issues there. The only kind of issues that we've kind of pulled out of there are really the onetime issues that we had in the quarter. The travel beat of $4 million, obviously, is a onetime issue and then also on the insurance of $4 million. That is really just somewhat of a timing true-up between 2020 and 2021. We do our actuary reports really on a bit of a quarter lag. So that was really trueing up primarily auto insurance, but a little bit of workers' comp also. So those two issues are really onetime issues in the quarter. So, for the most part, we've carried through the entire beat, if you want to call it that of Q1, not only on the low end, but also on the high end.

[Brett Ponton:]

Maybe just to add a little bit of color to that, in terms of the outlook for the year, we do recognize that expanding margins in the rest of the year certainly gets a little harder for us. I talked earlier about labor productivity headwinds. Last year, we're lapping 20% turnover improvement the prior year. But we know we're going to have some headwinds there. And we do intend to get it back out and travel, visit our branch and spend time with our team. And as we roll out CXP, that's going to incur more travel expense. And as we launch Terminix Way, we're certainly going to be more active in our field as well. And as Bob said earlier to the termite monthly revenue recognition is going to create a little drag for us, namely in Q2 and a little bit in the Q3 as well. But like more longer term, we're very confident in our ability to expand margins in this business beyond where we're at today, while still investing in the business capabilities we know we need to and lap these headwinds as well. Yes, I think Michael one thing to point out to is, we're lapping over a quarter. The margin rate of the first quarter of last year was the lowest margin rate that quarter in the last three years. So, we get a little bit of a benefit from coming over what was a very tough Q1 of the prior year. But we are showing and expect steady growth from an EBITDA margin standpoint through the balance of the year.

[Operator:]

Our next question is from Judah Sokel of JPMorgan. Please go ahead.

[Judah Sokel:]

Hi, thank you. Just a quick question that I wanted to clarify an important point. When you talked about the cadence of revenue growth over the course of the year, you had mentioned expecting acceleration in Resi Pest and Commercial Pest, I just want to make sure I understand what that word accelerate means. Do you mean that each of the next three quarters the growth rate will expand on a year-over-year basis, coming off of 1Q? Or does that mean just over the rest of the year, on average, will be stronger than 1Q? Thank you.

[Bob Riesbeck:]

Yes, I think, really, it's a quarter-over-quarter basis compared to the prior year. Obviously, as people get back to work, obviously, our commercial business should be picking up pretty steadily, expecting really good slow pace, I guess, on recovery. Again, we're still guiding to that 3% to 4% type range for the full year. By segment, it's obviously going to be quite different, because we're lapping over the revolution product, evolution product and along with commercial drag in the prior year. So, I think our guidance speaks pretty well to where we think we're going. Brett, you got anything else on that?

[Brett Ponton:]

No. I think if we just the service line, right, gaining good momentum in residential exit rate there, I feel like we'll see continued momentum in that business as we mature in the year. Commercial is our biggest opportunity earlier in the year, Q2, and Q3, because we're lapping harder comps from the reopen as we talked about. Termites, again, strong double-digit growth last year that we're lapping. So, recognizing all of that, I think, it's all built into our 3% to 4% guide for the full year.

[Bob Riesbeck:]

And I think Brett and I come from a more traditional retail background. So, when we're starting to look at this, we're starting to look at like a two-year stack. And we feel really good about the growth in all of our product lines through the balance the year. But we really feel comfortable with where the guide is.

[Operator:]

Our next question is from Gary Bisbee, Bank of America Securities. Please go ahead.

[Gary Bisbee:]

Hi, outside of labor costs, which you've already commented a lot on, I guess, I just wanted to ask about some of those factors benefiting EBITDA and the bridge you provided. There was pretty big cost cutting actions initiated a year ago at the company and then, certainly, there've been a few COVID tailwinds on the cost side as well. When we look forward, how do you think about those big buckets outside of labor? And I understand the onetime ones you called out that won't return. But are we at the point where we're sort of lapping a lot of those G&A savings and some of the direct cost savings that the company has been achieving? Or have there been incremental gains over the last few quarters that would lead to continued efficiency gains over the balance of the year outside of labor? Thank you.

[Bob Riesbeck:]

Yes, I think, from a G&A perspective, you started to see – we started to see some of that in Q2 of last year, and it continued. Brett, and I and this entire team are focused on margin enhancement opportunities. So, we're obviously looking at it every day. But I think it's important, as Brett mentioned during the pre-prepared comments, that we reinvest in this business from an operational standpoint, so that we can get back on track to really try to grow our overall margin rates, but also to start outpace the industry on the growth rate, and beat this 3% to 4% guidance that we're getting.

[Brett Ponton:]

Hey Bob, let me just add a little color to Gary. If you remember last year, we talked about $30 million worth of cost takeout in the business post-COVID in Q2, and we recognized that we got $80 million of that last year and $12 million likely to come this year. I think it's fair to say we got that in Q1, clearly.

[Bob Riesbeck:]

And that comes in the form of guidance already.

[Brett Ponton:]

This comes in the form of G&A, but also direct labor benefits we picked up. And anchoring off my comments earlier around the work the team has done on refining our labor model that we started during COVID, that certainly has enabled us to unlock some of the labor efficiencies that we saw. But as we head into Q2, we're certainly starting to lap those benefits that we saw last year. However, we still feel pretty good about our ability to expand margins off of this base. And maybe lastly, I would say, we did take some actions in Q1 to further reduce our fixed cost structure, back-office cost. And our intention there is to basically pivot our cost structure to take cost out of the back-office and use that to invest in areas that we know we want to, to support our operational parts of our organization. So that's underway now, and we still have a little bit of work to do as we mature through the year. But all that's certainly contemplated in our guide.

[Bob Riesbeck:]

Yes, and that's why we're still kind of holding tight on that 30% incremental margin on organic growth rates that we've guided to. So, there's plenty to do here, and we're focused on it. But I think that that guide is still correct.

[Operator:]

Our next question is from Ian Zaffino with Oppenheimer. Please go ahead.

[Ian Zaffino:]

Hi, great. Thank you very much. Maybe shifting gears here. The buyback, glad to see you guys stepping up defending the shares. But how do we read into that maybe as it relates to M&A? Was there just not a lot you saw? Are they mutually exclusive, buying back stock and finding companies to buy? And then maybe just, in general, the M&A landscape and kind of what you're seeing there, bid-ask spreads, et cetera? Thanks.

[Brett Ponton:]

Yes, thanks, Ian. Good to talk to you. I'll take the first part, and I'll ask Bob talk about the second part around share buyback and capital allocation. But on the M&A front, really, encouraged by progress we've already made in the quarter. As you saw, we had four deals that we closed, three in the U.S., one in UK as well as a new deal we announced with Citron up in Canada. I'm proud of the fact that our team has really worked pretty hard. Number one, we've established our M&A team, again, in the company, dedicated team focused on growth. A lot of progress they've made on rebuilding the pipeline, developing relationships with players in the industry. I think we made considerable progress in doing that. In terms of the outlook on deal flow, again, our pipeline is full. Certainly, it's a very competitive market, and we're seeing that be reflected in the multiples out there. But having said all that, I think, despite the choppy market on deals that's out there, we still see attractive accretive deals in front of us here. So very encouraged by what we're seeing on the M&A front.

[Bob Riesbeck:]

Yes, Ian good morning. Yes, I think to Brett's point, I mean, we're definitely focused on it. We've got a much more concerted effort towards M&A than, I think, has been in place for a while. But obviously core to the pest industry, as opposed to ancillary. And obviously the strong free cash flow that we generated in the quarter, obviously, benefited from a lack of tax payments and some other things. But our balance sheet definitely gives us the opportunity to continue to look at rather sizable deals if they come upon us. The $169 million buyback is obviously part of our $400 million program. We continued that through April. We'll continue that through the buying periods that we're allowed to participate. And obviously – but we also want to make sure that the base of this company operationally has the muscle to bring on a larger deal. So that's why we're hyper-focused on more tuck-in opportunities that we can do more branch by branch, as opposed to stressing out the entire organization with a larger deal right now. But I think we'll be well on our way once we get the Terminix Way up and running, and we also get CXP up and running.

[Operator:]

Our next question is from Mario Cortellacci with Jefferies. Please go ahead.

[Mario Cortellacci:]

Hi, thanks for the time. I just wanted to touch on the commercial business. How much of that was as, I guess, the 1% that you saw FX was driven by the U.S. versus Europe? And how much room do you think there is for that part of the business to accelerate even faster in 2021? And maybe to ask a different way, how much a GDP acceleration are you baking in to the expectation for that business? Could we see a much larger ramp in the back half of the year? Say things do come in better-than-expected for the overall economy with GDP and maybe we see a little more normalization in 2022? Any color there would be great.

[Brett Ponton:]

Thanks, Mario. Good to speak with you again, by the way. So let me frame commercial here. First of all, international grew double digits in the quarter. So certainly, a real strong performance by our team there. And we did to see really strong, sequential improvement throughout the quarter in our commercial business. Certainly, the macro demand trends continue to improve, as I mentioned, sequentially through the quarter as well as into April. We're really encouraged by the improvement, I think, in our retention on the commercial side in our business. This is the first time since the pandemic started that we saw improvements in retention on the commercial side. Our team right now is very focused on not only improved operational execution, of course, through retention, but also pricing, continues to be pretty strong for us as well. So, we're encouraged about the outlook, I think, on commercial going forward in this business.

[Bob Riesbeck:]

Yes, and I think you got to look at the fact that last year, Q2 commercial fell off track pretty significantly. And this kind of goes back to our earlier comment from looking at a two-year stack. And so, we kind of – we definitely feel good about our commercial business and getting back on track with some significant growth there. But when you look at it just on a year-over-year basis, it still puts us in line with that guidance.

[Operator:]

And that does conclude all the questions we have for this time, Mr. Jenkins, I'll turn it back to you.

[Jesse Jenkins:]

And that concludes today's call. Thank you, everyone for your continued interest in the company. We look forward to talking again on our next earnings call, tentatively scheduled for Thursday, August 5. Thank you.

[Brett Ponton:]

Thank you, everybody.

[Operator:]

And ladies and gentlemen, that concludes the call for today. We thank you all for your participation. Have a great rest of your day. You may disconnect your line.