Q3 2020 Terminix Global Holdings Inc Earnings Call
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Please continue to standby your conference will begin momentarily we thank you for your patience.
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As of today November 5th 2020, the company undertakes no obligation to update any information discussed on today's call. This morning, Terminix issued a press release filed with the SEC on form 8-K, highlighting our unaudited third quarter of 2020 financial results. We also issued a press release this morning announcing a settlement with the Alabama.
Tourney General regarding our mobile Bay Formosa termite business practices. These press releases eight case and the related presentation can be found on our new Investor Relations website at investors Dot Terminix Dot com, we will reference certain non-GAAP financial measures throughout today's call and we had include a definition of diff.
Missions of these terms in our press release. We have also included reconciliations of these non-GAAP financial measures to the most comparable GAAP financial measures in our press release in the appendix in order to better assist you in understanding our financial performance all references on the call to EBITDA are to adjusted EBITDA as defined in our press.
Release.
Of consistent operating standards training and quality assurance in the business by enhancing our focus on the fundamental operating procedures branch by branch in technician by technician across the country. We can limit the vault volatility in earnings we have experienced over the last several years. There is considerable knowledge in the business at the local level and we are.
The opportunity to still that knowledge down and leveraged best practices across the organization through robust training procedures and quality assurance. We also have the ability to create a more clearly defined teammate experience complete with development opportunities and career paths and finally with the sale of servicemaster brands behind us.
Capital structure and provides us ample flexibility to pursue attractive tuck in M&A deals and the capacity to support larger strategic targets as they become available.
And finally, we were able to negotiate a favorable settlement with the Alabama Attorney General regarding our for most in termite business practices in the mobile Bay area, the impact of which falls within our previously disclosed ring fence estimates Tony will spend considerably more time on the settlement we were happy to resolve a large.
Portion of this lingering liability in the quarter.
A month retention rates in the right direction, we continue to see meaningfully better retention and first year customers as new customer additions during the pandemic are responding well to more frequent communication designed to clearly explain employee and customer safety measures with first year customers moving into the base and net promoter.
Scores remaining at elevated levels, we feel confident we have runway to continue to make meaningful retention improvements as we progress towards the top end of industry level customer retention.
That we are trending the right direction as we work to put these issues behind us.
I will now hand, it over to Tony to discuss the third quarter results. The mobile base settlement and fourth quarter guidance I will return with some closing comments before our Q and a session.
Tony.
Thanks, Brett today, I'll cover Q3 performance, highlighting improving organic revenue growth trends and continued margin expansion turning.
Turning to slide seven let's start with the continuing operations financial summary, Im going to talk about the Terminix segment in more detail later, so let me first cover a European pest control and other operations.
Our European Pet and other operations contributed $21 million of revenue and $4 billion of EBITDA in the period highlighted by strong results for no bar in Sweden, and Norway, which delivered over 20% margins.
Structure in line with becoming a pure play pest control company.
Including Terminix, which we will discuss in detail in a moment adjusted EBITDA of $98 million improved $26 million or 37% year over year for a margin of 19.2% in the quarter 370 basis points better than the same period in 2019.
Adjusted net income and adjusted earnings per share up 47, and 52% respectively reflect the flow through of higher EBITDA in the period as well as the impact of the Q1 share buyback.
Revenue in the quarter.
The strong growth in renewable units combined with better retention rates bode well for 2021.
As we look to queue for we continue to see growth in our termite business, but at a seasonally lower level is seasonal termite demand wanes.
Residential pest control grew 5% in the quarter tuck in M&A contributed 1% of the growth while organic revenue growth was 4% and approximately 500 basis points sequential improvement over the second quarter as bread previously mentioned, we continue to see improvements in customer Rita.
Tension with daily cancel rates in residential passed down 16% versus prior year.
Growth and residential pest control is partially offset by our decision to limit summer sales activity in order to protect our potential customers in our salespeople from COVID-19, as well as by lower bedbug demand due to travel declines if you normalize for these two circumstances are organic growth would've been approximately eight.
Percent in the quarter.
These items will continue to affect the rest of the year is the loss of revenue associated with summer sales units carries over to future quarters and travel a forecast it to be down for the foreseeable future. Despite these factors demand remains strong for residential services and we're planning for continuing organic growth and residential passed and.
Fourth quarter.
Commercial pest control revenue was up 8% in the third quarter versus prior year with M&A growth of 11% more than offsetting an organic decline of 3% acquisitions continued to provide significant growth as the onboarding up Gregory in the cloud provided new commercial capabilities and <unk>.
Periods management teams to our portfolio as.
As a reminder of these acquisitions will move into the organic growth lines, starting in the fourth quarter.
<unk> 19 related work order postponements due to business closures continue to have an impact on organic growth, but not a significantly as we saw early in the pandemic.
We've seen improvement in business trends as the economy reopens and organic growth rates were up sequentially over the second quarter. It continue to improve in October we continue to monitor increasing infection rates across the country, but remain cautiously optimistic that improving trends will continue.
In the other revenue service line product sales soar considerable growth from the Macleod acquisition, but organically other revenue declined by 14% from lower sales through our master distributor shift channel sale.
Sales to distributors were negatively impacted by inventory level adjustments in response to covid as well as lower demand from smaller pest control companies that serve commercial customers.
Although organic growth is down this quarter, we continue to see great value from this business due to the significant purchasing leverage that it creates with our vendors.
Overall, the third quarter delivered solid revenue growth and residential fast and termite and improving trends in commercial passed off April lows as the economy continues to recover.
Moving on to slide nine you could see the EBITDA drivers for the quarter revenue growth added $14 million in the quarter with $9 million generated by organic growth and $5 million from M&A is margins from acquisitions improved sequentially as we realized synergies from previous deals.
Direct cost productivity generate a $10 million of higher EBITDA in the quarter year over year $7 million in labor productivity was primarily the result of improved labor management and better employee retention. We also saw vehicle maintenance costs declined $3 million year over year through the.
On boarding of a new vehicle maintenance provider lower fuel prices and fewer vehicles on the road.
Indirect and G&A cost productivity generated $7 million of higher EBITDA year over year in Q3, primarily from the previously announced $18 million of 2020 cost actions taken in the second quarter. We expect continued savings in the future periods from these actions and are on track to grow these to a run.
Right, a $30 million on a full year basis in 2021.
We also continue to enjoy lower travel expenses due to covid install improvement in collections and the residential business.
We also saw a 2 million dollar decrease in sales and marketing expenses in the third quarter. These savings are primarily timing related and for the full year sales and marketing are tracking roughly flat to 2019.
Partially offsetting the year over year net increase in EBITDA is $5 million of higher incentive compensation costs due to improved financial performance in 2020 as a reminder, in the fourth quarter were lapping a $9 million favorable incentive compensation adjustment that will impact year over year.
Margin comparisons.
We also saw $4 million of higher termite damage claims costs, primarily related to our efforts and the mobile Bay area total termite damage claims in mitigation expense was approximately $19 million in the quarter are mitigation efforts remain on track and we're making good progress.
Dress on our supplemental treatment plans and the mobile Bay area expenses for the mitigation program, where approximately $3 million in the period underlying termite damage claims increased $1 million in the quarter as we saw reductions in both non litigated and litigated file claims counts year.
Over a year.
In total adjusted EBITDA margins of 19, 90% Terminix expanded by 420 basis points when compared to the third quarter of 2019.
Moving to slide 10, you could see the projected capital structure and leverage after the sales surface faster brands. In addition to the $51 million of term loan be that we paid off in Q3, we plan to retire all $750 million of our 2024 high yield bonds.
On November 15th after the applicable estimated taxes and fees associated with the cell we planned to add approximately $347 million of cash back to the balance sheet, reducing our net leverage ratio to just below one times last 12 month adjusted EBITDA the debt ridden.
Duction will save us approximately $40 million and mostly cash interest on and Angela annual basis, and pretax will improve our earnings per share by approximately 30 on.
On an annual basis.
The one times leverage ratio is below are targeted long term range, giving us ample capacity to continue to pursue accretive bolt on acquisitions, while preserving capacity to explore large strategic deals should they become available.
As part of the sales Servicemaster brands are board has authorized the new $400 million share repurchase plan that we plan to use systematically to offset dilution as well as opportunistically in times of weakness in the market.
The leader balance sheet provide support as we focus on organic growth and operational consistency is a pure play first control business.
Before return to the impact of the mobile Bay for most of the termite settlement I thought it would be helpful to refresh investors on the specifics of our original ring fence estimates as seen on slide 11.
As we discussed in February we expected to see between 130 and $150 million and termite damage claims expense above our historical norms of 4% of termite at home services revenue through 2029.
As we discussed at that time, we expected the expenses to be front end loaded with $45 million above historical norms expected in 2020 and $100 million expected by 2024.
Turning to fly 12, I'd like to walk through some of the details of today's mobile Bay, Formosa termite settlement and the resulting changes to our ring fence estimate.
There are three main components to the 40 49 million dollar settlement. The first component is the establishment of a 25 million dollar state sponsored consumer fund.
The fund will be managed by an appointed facilitator that will oversee various remediation efforts as well as manage the refund the price increases to customers in the mobile Bay area as I discussed on the termite service line break up this resulted in a 3 million dollar reduction of termite renewal revenue recorded in the <unk>.
Third quarter.
The facilitator will also have the authority to result, consumer disputes on future termite damage claims.
This will provide customers with a state sponsored process for the speedy resolution of claims rather than the lengthy litigation process overtime. This process should decrease the number of disputes the new to litigation and reduce the volume of high cost Litigators litigated claims and the associated legal fees.
The second component of the settlement includes $6 million to reimburse various state agencies for administrative costs.
The third component is a $90 million settlement with the state.
Under Alabama law. This settlement mitigates future punitive damage awards for Litigated claims filed by mobile Bay area consumers. After the date of the settlement essentially the settlement serves as a full forward of those punitive damages and provides more certainty on the total amount of damages.
We may have to pay.
This helps to reduce the expense recorded on future litigated claims filed dissuades consumers from seeking costly and time consuming litigation and limits the potential negative outcomes that may occur and volatile arbitrations.
While we still have a backlog of litigated cases outstanding to work through during 2021 and early 2022 that are not impacted by this settlement. We're confident the effects of this settlement will limit our future liability and reduce litigated claims costs and our P&L in the coming years.
Turning to the ring fence estimate estimate bridge you can see the impact of the settlement and it's associated benefits on the expected total future liability starting on the left the consumer fund increase the ring fence by $25 million.
The reimbursement of the administrative costs increase the ring fence by $6 million and the settlement added an additional $90 million.
The benefits from reducing future punitive damage awards in litigation filed after today is expected to reduce the estimate by $15 million to $20 million.
And the expected reduction in future case volume from the establishment of the consumer fun is expected to reduce the ring fence by between 15 and $20 million.
These factors result, and a new ring fence estimate of between 140 and $150 million above historical norms over the 10 year period.
It's also worth noting that we still believe 2020 to be the peak claims expand here and as you can see including the cost of the settlement and claims expense through the third quarter, we've already recognized $81 million of the total expected amount above historical norms.
With the improved clarity on total expenses that the settlement provides we were able to tighten the total range by $10 million. While we are now trending towards the high end of our previous estimates we believe the settlement provide significant value to mobile bay customers, while providing terminix with better certainty have expected.
The future termite damage claims expense.
In total we expect between $59 $69 million of remaining elevated termite damage claim expense through 2029 and consistent with the previous estimates. This is expected to be front end loaded with most of the costs coming in the next few years.
The positive trends in both litigated and non litigated claims and the benefits of this settlement give us confidence that we can move forward with better predictability into 2021 and beyond.
Before I moved to the guidance page I wouldn't be remiss, if I didn't think the mobile bay supplemental treatment team for all their hard work at 2020 to get us at this point.
Moving to the outlook on slide 13 for the fourth quarter, we expect revenue.
Between 445, and 465 $460 million, we expect adjusted EBITDA between 60, and $70 million and margins between 13, $5 15, 2%.
Organically, we expect continued strong demand and termite and residential path to be partially offset by lower year over year summer sales units and the continued lower trends in bedbug services do to reduce travel during the pandemic.
The guidance assumes less than $5 million of revenue from USA acquisitions completed during the 12 previous month's primarily from small tuck in deals evenly split between residential and commercial pest control surface mines.
We expect double digit revenue growth in our European pest control businesses to deliver between 18, and 2018 and $20 million in the fourth quarter. The outlook assumes commercial past will continue the positive trends we've seen over the last several months as the economy continues to reopen and that residential demand.
Not be negatively impacted by economic issues associated with the prolonged covid in fact the resurgence.
It just that EBITDA will see the flow through higher revenue and expected continued productivity an indirect expense benefits from the second quarter cost actions the year over year margin comparability is negatively impacted by the lapping of $9 million and lower incentive compensation expense from the fourth quarter of two.
Thousand 19.
Normalizing 2019, the year over year margin improvement for the fourth quarter of 2020 would be over 300 basis points.
For the full year, we expect adjusted EBITDA above the top end of our pre pandemic full year adjusted EBITDA guidance as we continue to see strong momentum in the business.
And with that I will now turn it over to Brett for closing comments Brett.
Tony before I pass it back to Jessie for the Q&A I wanted to thank the many TMA sort of helped me get up to speed over the last few weeks by him energized by the passion across the organization to deliver creative solutions for our customers and their time of need.
The velocity of improvement we have made in the underlying metrics of the business like employee retention customer retention and margin expansion is a testament to the hard work and dedication of many during a difficult pandemic backdrop.
Today's settlement behind Us I am confident that we have considerable opportunities to continue to strive for more consistency in our performance across the business by equipping the frontline with the enhanced support training and technology needed. We can continue to build upon are impressive performance as.
As we look towards the future as a pure play pest control company, we have considerable flexibility to self fund investments in those initiatives that will drive sustainable profitable growth for years to come.
I look forward to sharing more with you on some of those specific initiatives and the forward looking strategy on our next earnings call, but I am courage by the strong foundation already in place and the momentum of the team as we work to deliver a strong close to this challenging 2020 year and.
And with that I will hand, it over to Jessie to lead us through the Q&A.
Thanks bread with the queue being long. This morning, please limit yourself to a single questions. So that we can get to everyone knew a lot of time, let's open the line for questions.
Thank you.
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One moment please for the first question.
Our first question comes from Tim Mulroney with William Blair.
Proceed.
Good morning, everybody.
I'm going to leave the turn my questions for somebody else. My question is for Brett and congrats on the new gig by the way Brett. We're we're excited to see what your leadership means from the company and that's really what my question is about.
I know you've adjustments, a little bit and prepared remarks, but I wanted to drill down very specifically on the residential turnaround effort.
How do you think about what stage or phase or inning and the company is in with respect to the turnaround effort and.
Has the heavy lifting been done and now it's just about making sure that retention rates continue to rise or do you still view. This is there is a significant amount of work that still needs to be done here.
Thanks, Tim first of all I appreciate the warm welcome then the question.
Over the past 10, plus years or so I've been more of a turnaround guy candidly and so I don't know that I would necessarily characterize us as a classic turnaround attempt to my perspective.
Let me share with you a little bit on why I say that.
First of all brand Terminix is a wonderful brand, but we have an industry leading brand at this company.
And I believe that this brand is not yet planning out to its full potential.
Great culture, Terminix and I've seen that firsthand in my first of two days and the company. We got 10000 passionate teammates that loved this business and are committed to taking care of our customers and truly proud to be a member of terminal nation as a nine candidly.
And my short time, there I've seen clear evidence at multiple levels of the organization of our team's focus and commitment an improvement the customer experience.
I've been really impressed so far with the progress we've made in 2020 across all four of the strategic priorities, we set out to achieve this year clear.
Clearly understand the strategy that we set up I believe and I think the team is very focused on the right metrics here, we're seeing great improvement and are leading indicators employee retention is moving in the right direction customer retention improvements in both of those are clearly translating wall into organic growth margin expansion as we can.
Covered in our Q3 results today I'd.
I'd say a starting point here is very good we have a strong foundation in place we've got good operating momentum and our business, but having said that Tim.
<unk> I do believe there are significant opportunities here to drive meaningful improvement in our business and.
And really focus on improving the consistency in our operating performance going forward.
50 days in as identified a few areas, but I think we'll dig in deeper on over the next few months number one is to the opportunity here to improve our customer acquisition marketing. We're in the very early early in the development.
I'll say as we want to have which is a world class digital marketing strategy to drive lead generation in our business.
I have some extensive experience in this area in my career and I'm also very excited about the new marketing leadership were brought on board to drive there's going forward.
We have a significant opportunity to drive operational consistency Terminix from branch to branch in Tech the tech than consistent with what I've seen in other companies that I've been at.
Over the years and those companies that are grown primarily through acquisition, there's a real opportunity here to drive standardization across the organization I think by taking the best practices from our top performing branch and institutionalized those best practices across all of our other locations we need to create a standard playbook here for teams to execute.
Against.
And the playbook is going to be only as good as our ability to train against that so we need to develop a more robust training strategy terminix.
See some opportunities around enhancing our commercial sales and marketing efforts here, we've had the opportunity to strengthen our capability.
To drive significant growth in our commercial business I was really excited to see the investments we made an emanated over the last year and a half or so we've added a lot of capability to our company and our team we have the opportunity now I think the scale that and build upon that.
Another area I think we have an opportunity to improve on and strengthened our analytics there at the company and to particular areas.
Importance to me one has the opportunity to strengthen our capability around pricing these understand deeper price less tests and the opportunity to leverage thank market segmentation data describe more localized pricing strategies in our business.
In addition, I think there's opportunities to improve our analytics around route density and optimization.
Quickly learned in a short period of time here in the business that how important route density is to our business model that drives customer satisfaction teammate satisfaction and certainly has the opportunity to lower our costs to serve.
And I'd say, probably lastly, the other opportunity is around.
Refining our organizational structure here to simplify the business model and get us really focused on our new model, which is a pure play past organization with the organization that is 100% committed to supporting our frontline teams. So all in all <unk> great about the foundation, where we're at certainly wouldn't characterize this as a turnaround.
But I still see significant runway ahead for us in terms of drive insignificant meaningful improvement in our business.
Our next question comes from Ian.
With open appointment. Please proceed.
Okay, great. Thank you very much and I could quarters.
But maybe you could talk a little bit about.
Honest to turn my side and mobile Alabama.
We were down there.
May walk us through some of the reflection had kind of thoughts.
And any kind of ground level details you have thanks.
Thanks for the question and.
As you would expect one of the first markets I wanted to go visit was mobile Bay given.
Sensitivity to our business and the challenges that we've had in this area. So there is extremely important to go down to that market for two reasons.
Number one I wanted to thank the team for doing a great job of executing with supplemental treatment plan. This year and too I really wanted to understand of the ground level of.
The opportunities are the issues that we had and the opportunities that we that.
That we create into will improve our operating performance there.
First hand experience here with visiting consumer's homes and Ah software is Dianne, how we conduct a supplemental treatment plants being administered by our team. There is quite impressive to see you have a team operated chance to spend a little bit of time on customers and her first hand, while they appreciated the efforts to determine X was go into two two.
Retrieve their homes.
I was also very pleased to see the dedicated quality assurance teams. We had in place that provided only enhanced training to our team and execute the quality assurance audit process that we put in place.
It's clear metrics in place to measure performance and our team is execute well against those metrics.
Truly mobile I would say inspired by our team and also very confident in the pit Bull that we've established there to drive consistent performance in our in our business, they're going forward a couple of other areas and I'd look pretty hard at as well related the mobile Bay is our claims trends and I've been very encouraged by what we've seen.
In that particular area are outstanding non litigated claims and mobile Bay are down 27% Q3 versus last year and are non litigated claims filed are down 42% versus Q3 of last year. So I feel pretty strongly that the efforts that we've put in place is translating nicely and <unk>.
Proved performance in our operation there.
But I would say, there's 230 takeaways for me coming from the market number one in the mobile space situation reinforces in my mind, the importance of driving operational consistency in our business. This consistency will clearly lead to higher margins improve customer satisfaction, and obviously retention and hopefully less management.
<unk> spent with regulators going forward I left mobile highly committed to doing what's best for our customers and making the necessary investments and our teammates to ensure that they have the tools training and technology to properly deliver on that commitment.
Our next question comes from Tony Caplin with Morgan Stanley. Please proceed.
Thanks, very much and.
I just wanted to make sure that I understand that head on that correctly.
140 to 150 isn't exactly a cast on how much you'll have to pay out for the termite damage claims but.
Could it be above that number is that.
It sounds like the settlement does limit the punitive damages, which I think is probably the one of the most important that day. So I'm not trying to dismiss that just casually think of that that potential that come in above the ring fence.
Okay. Thanks, Tony I'll take that question. So the 140 to 150 million dollar ring fences, our estimate of future liabilities.
We feel confident in that estimate for a number of reasons number one we did a we're doing these the mitigation program in mobile that Brett just talked about that's absolutely critical.
For us going forward and we're already seeing the benefits from that is we talked about with.
Our outstanding claims being down 27% in that area and the new claims filed being down 42% so feel great about that.
The consumer fund that we're going to establish.
Is going to be really great thing for us for the consumer number one because they'll have an independent facilitator, helping us a more timely file these claims going forward and with that I will do is reduce the number of litigated cases going forward. So we're pleased with that part of it obviously.
We do feel the settlement.
Does help reduce punitive claims going forward. So the cost per claims are going to go down in the future as well we factored all of this information in to our model.
That we use near up.
An outside company at actuarial company to help US estimate this and that's really the basis of the $140 million to $150 million ring fence and so if you look at it so far we've incurred about $81 million up through.
Q Q3 and that includes the settlement.
So that means there is another $60 to 70 million.
That will happen going forward.
Our next question comes from Mario Katachi with Jeffries.
<unk>.
Thank you so much.
I guess.
My questions around that the long term margin profile of the business.
I mean, you you made good progress this year with cost Takeouts that will benefit next year, but it sounds like like from from Brett you guys are also going to do some standardization you're going to do some training I'm, assuming there's gonna be some costs associated with that and then I'll. Just didn't then I think you're also going to get some benefit benefit from it sounds like refining the Oregon.
Additional structure I don't know if that includes head count.
It'd be some benefit there for the margin, but I guess just kind of.
Having those building blocks and maybe even some others.
Including some route density I, just where do you think you are in two to three years from now and if you're able to provide any color to those building block that would be super helpful.
Sure I'll I'll take that question.
As far as the sustainability of our margin improvement. The first key point I want to make is the G&A an indirect cost reductions that we made early in 2020, which realized $18 million of improvement this year, an annualized run rate of $30 million next year.
That's absolutely critical to our success so far this year in the margin expansion.
Also key as the termite growth termite is higher margin and we've seen great growth because of our new tier products. So that's definitely will continue in the future and help sustain the margins.
I really like about what we did in 2020 was it really focused effort around four key priorities, but first priority was employee retention well trained well onboard a text are going to provide better customer service, which helps our customer retention and also helps your margins as it reduces training.
Going forward, we've made really good improvements in our business processes around.
Call It direct cost management as far as labor number one and you see all the labor productivity this year.
Fundamental improvement there and then we did improve our vehicle maintenance, we have a new outsource provider that is helping is there that we really feel good about going forward.
We're also obviously not done we're in this journey, where now a pure play pest control company that gives us a unique.
Opportunity to focus on organizational.
Structure. So we can focus our priorities better going forward to help improve our business and we think that's going to further cement the improvements. So when you think about the guidance. We've always given on this business. It certainly intact, we see those 30% incremental margins up long term average for this business.
Which puts us in a pretty good overall EBITDA margin perspective.
Maybe just add a little more strategic color to that as well Mario like I've been here for 50 days, so clearly not going to establish.
<unk> targets here for the business, Tony clearly is covered but from my perspective.
Start with our our brand position in the company, we have a really strong industry Leibrand I see no reason why that's the strongest brand in the industry shouldn't be commanding star.
Strong industry growth rates as well as margin performance in our business and as Tony said, we have a significant opportunity here too I think self fund the number of the key initiatives that we have identified in the business and this opportunity that we now have to get really hyper focused on being a pure play company certainly will pay play well I think in our.
Our focus and create some additional opportunities to expand margins going forward.
Our next question comes from Gary busy with Bank of America. Please proceed.
Hey, guys good morning.
Hey, Gary follow up on the margins more sort of tactically thinking through what.
Incredible strength this quarter.
I hear Ya, Tony on the G&A being sustainable it sounds like the vehicle to vehicle is a real improvement on the other hand.
A portion of labor at least I would think is somewhat covid.
Package, the sales and marketing.
It sounds like it's timing.
And so is the how.
How should we think about the next couple of quarters.
Really the right level or was there some level of maybe timing that benefited this quarter.
That might not over the next few I guess, just any of those moving parts and maybe as part of that one other one given all of the termite updates and more clarity you now have.
Is it is it safe to think of that in 21 that $10 million of mitigation costs sort of goes to zero or is there. Some tale of that that would continue in the next year I guess, that's really a two part of it. Thank you.
Yeah, Thanks, Gary you bring up.
A good point dimension.
Obviously, we have some favourable tailwind in 2020 from from Covid.
In certain areas travel expenses. When you did mention that we will we will see travel have actually increased not to the level that we were in 2019, but.
Make no mistake, we have some benefit there.
That is probably driven by covid on the labor side of it yes I.
I think employee retention is definitely improved from the initiatives that we've I've taken but there's also some tailwind that you get from the fact that there is.
Less opportunities and less therefore, less people moving to new new role. So I certainly accept that but when you look at the magnitude of the labor productivity I took part of that is sustainable and it's based on better practices an employee turnover.
Did it help improve employee turnover. So I do think that there is significant fundamental sustainable improvement and the earnings.
But.
It is important to recognize that there will be some changes in area like travel expenses.
It'll be a little bit more challenging on the employee turnover side, just because it'll be more opportunities for employees as the economy picks up.
Our next question comes from US Webber with RBC capital markets. Please proceed.
Hey, guys. Good morning, hope you're doing well.
I wanted I wanted to just touch on something that I that I think I heard you say.
The rescue residential past would've been up 8% organically. If you were to sort of normalize for the summer sales program and the bed bug is that.
Is that what you're saying and then.
The implication from that I mean, do you feel like that this business is now.
Going forward in a position to kind of perform at at industry growth levels. Maybe if you could just give us any kind of color on more color on retention rates in pricing that are contributing to that kind of eight ish percent number. Thanks.
Yeah.
I'll I'll take that set so you're correct view, if you normalize the impact on summer sales because we did pull back on that this year.
For safety concerns interview normalize the impact of lower travel a bedbug, that's roughly 3 million each or $6 million for the quarter and if you normalize that you come up to 8% on a normalized basis.
So as far as.
The sustainability of that in our face and getting to industry, leading organic growth rates I think we've made an important.
Step ahead in that journey of 2020, and I think even thanks.
Focus on prioritization around improving that employee turnover focusing in on the driver's for customer cancellations and really working on the fundamental service levels and I think we're seeing that with respect to.
Lower cancels an residential.
Which which are down significantly this year.
NPS scores continue to improve so all the underlying metrics and factors are there now coupled with a very strong brand and the opportunity that Brett mentioned on.
Digital marketing, which I'll turn it over to breath to talk about gap sure toning just jump at an area theme.
I think it has done a great job this year on driving grow through to focus on retention, but as I mentioned earlier I think we have a significant opportunity to drive customer acquisition and get our lead lead flow.
Much more robust in the business with.
Conservative focus here on digital marketing, improving our online presence with.
With a really strong focus on improving our SCO performance in the business.
Thank you you are a couple that focus on marketing along with driving tour consistent operating performance across our business and we feel pretty good about closing the gap and our performance long term versus industry growth rates.
Our next question comes from Andrew Whitman with Bird. Please proceed.
Okay, great. Thanks, So I want to go back to the termites settlement, a little bit more just to make sure that we understand of what other way it sounds like the way you describe the mechanism.
You're going to be you expect it to reduce the amount of punitive damages, but it doesn't it doesn't sound like actually limited your your actual liability on that.
Like more like you are opening up a new channel that people who.
<unk> chosen to litigate claims.
Can now go to this more expeditious route without all the headache, and you think it's related this other route channeling this way with was.
Litigation list paperwork, all the stripes that goes along with that is really the fact, they're not actual limitation on your liability.
So is that the correct understanding of this or or.
Am I wrong on that.
Yeah, and it's Tony I'll I'll take that one so the consumer fund.
It provides for independent facilitation for consumers to resolve their termite damage claims issues and that's going to reduce the number of litigated claims going forward because there's more rapid process.
To resolve the dispute so the number of future litigated cases will go down that's number one number two we do feel that it will reduce punitive damages on.
New litigated cases in the future.
Because the settlement basically provides is a pull forward of those <unk>.
<unk> it damages and so that's why we think the cost for litigated claim will also go down.
In future periods on litigated claims so two pronged network litigated cases reduce and the cost per litigated case, she goes town.
Our next question comes from George punk, which goes.
And sacks this procedure.
Hi, Thanks, Good morning, a termite entertainer services organic growth moderated a bit to 4% from last quarter's 7% in the last quarter benefited from certain one time items.
But can you discuss the puts and takes the impacted organic growth intermittent home services this quarter and elaborate on some of the specific initiatives you have to accelerate the growth.
Yeah, George How're you doing it is Tony.
Look we still had a pretty strong termite in home services organic growth ever because if you normalize the reported 4% organic growth rate for.
The the terms of the mobile settlement on the price refund portion of that we would have reported 6% normalized organic growth fairly similar to the the the amount we saw in queue to as far as organic growth. So the court termite portion of that law.
<unk> is it continues to do very well that the the tiered product is definitely a success for US one of the best launches I've ever seen in my my career I couldn't.
Tip my hat to our team on that and then we're seeing the strength in home services.
Lot of that is cross selling offer the court termite growth. Some of that is due to the fact that more of us are at home working and we notice things that maybe we have a notice before.
But we're really encouraged about what we see a termite remember termite has a higher margin segment for us so that helps our margins as well.
Our next question comes from Michael Hoffman with Stifel. Please proceed.
Thank you very much for taking the questions and welcome onboard look forward to seeing you next week.
The my questions about retention and I apologize I had three for earnings call. Today. So if you've talked about this earlier I'm asking you to repeat something.
We thank you entered this year, we're having got residential to about 80% in commercial somewhere between 80, 85, and termite was 85 plus.
Those are the right numbers from my perspective, how have you improved.
That through the year put sudden relative improvement.
Sunday morning, Nice to meet you look forward to spend some time in the next week.
We're still making pretty good progress in residential test and termite, while we're encouraged by the progress there's still room clearly to become I think best in class and the team right now is digging into all the customer touch points, along the journey to understand what influences customer satisfaction to continue to drive that improvement going forward on the commercials.
Shall side.
Pest control certainly has been impacted by Covid and some targeted reductions and profitable customers that we've done through price increase actions throughout the year. So excluding those items were roughly.
Roughly flat prior year and still below industry levels.
Continuing to improve our service levels and the commercial side.
Yeah, if I could just add a little bit to the commercial fast retention.
I want to remind everybody that we did.
<unk> address price on underperforming nah.
National accounts, and so that has some impact on our retention rates and commercial we made a lot of fundamental improvement in commercial retention in 2019 more flattish of this year due to those factors and Covid. So just just a point that.
I'm pleased with the progress we've made in commercial service levels and retention over the last couple of years.
Mister Jenkins are no further questions at this time, please continue with your presentation or closing remarks.
Yes. Thank you and thank you for your continued interest in our company. We look forward to talking to you again on our next earnings call tentatively scheduled for Thursday February 25th of 2021. Thank you.
That does conclude the conference call for today, we thank you for your participation and as such please disconnect your lines have a great day everyone.
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