Q4 2020 Terminix Global Holdings Inc Earnings Call
Okay.
Ladies and gentlemen, and welcome to the Terminix fourth quarter and full year 2020 earnings call today's call is being recorded and broadcast on the Internet <unk>.
Beginning today's call is Jesse Jenkins Terminix as Vice President of Investor Relations F DNA and treasurer.
I will now turn it over to Mr. Jenkins, who will introduce the other speakers on the call.
Thank you good morning, and welcome before we begin I'd like to remind you that throughout today's call management may make forward looking statements to assist you and understanding the company strategies and operating performance at <unk>.
On slide two all forward looking statements are subject to the forward looking statements legend 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 February 25, 2021, the company undertakes no obligations to update any information discussed on today's call.
This morning, Terminix issued a press release filed with the SEC on form 8-K, including our unaudited fourth quarter and full year 2020 financial results. The press release 8-K, and the related presentation can be found on our Investor Relations website at investors day at Terminix Dot Com we.
We will reference certain non-GAAP financial measures throughout today's call and we have included definitions of these terms and our press release. We have also included reconciliations of these non-GAAP financial measures to the most comparable GAAP financial measures and our press release and the appendix of this presentation in order to better assist you in understanding of our financial performer.
All references.
And is on the call to EBITDA are to adjusted EBITDA as defined in our press release.
Joining me on today's call our Terminix CEO, Brett Ponton current CFO, Tony <unk>, and executive Vice President and incoming CFO Bob of respect.
Slide three of the presentation posted on the Investor Relations section of our website shows the agenda, we will cover today I'll now turn it over to Brett Ponton Bret.
Thanks Jesse.
And test business delivering double digit organic growth when excluding the benefits of foreign currency translation straw.
Strong gains in Norway, and Sweden were driven by growth and the insurance channel and the fourth quarter and despite more severe pandemic restrictions in the quarter. We continued to add customers to build density and our Terminix U K business.
Fourth quarter, adjusted EBITDA grew 24% or $13 million year over year to $68 million.
And that EBITDA margins of 14, 8% increased 240 basis points strong adjusted EBITDA growth was highlighted by improved employee retention and better labor management, as well as vehicle efficiencies and better indirect cost containment.
Double digit revenue growth and our international businesses also yielded better EBITDA contributions that will continue to grow as we add customers and Terminix UK.
These gains were partially offset by higher incentive compensation expense, including over $1 million for a one time special bonus to all frontline employees.
At this bonus was given and appreciation for the hard work of our teammates during unprecedented circumstances and 2020 their dedication and commitment to excellent customer service is to be commended and I. Thank them for delivering a very strong year.
Strong incremental margins and the back half of the year are a positive sign but we continue to see 30% incremental margins as the appropriate long term target that balances short term returns with investments and the long term health and profitability of this business.
Another highlight of the year was the completion of the termite damage claim mitigation program and mobile day.
As planned at the beginning of the year, we have completed a rigorous inspection and apply at additional treatments to every available customer and the area. The.
The results of these efforts are apparent and the numbers with over a 30% reduction and both new litigated and non litigated claims year over year and the mobile Bay area.
We plan to leverage the best practices, we've learned and mobile Bay and the development of standard operating procedures and training protocols that would be share it across the organization as we make improvements to reduce termite damage claims expenses in the coming years.
The fourth quarter also saw the completion of the sale of Servicemaster brands and subsequent debt reduction.
Beyond the benefits created by lower leverage and a strong cash position. The sale of allows us to focus 100% of our efforts and resources on improving the operational capabilities and consistency of the terminix business driving greater value for all of our stakeholders.
And an effort to better align our operations to support our teammates as well as reduced the cost structure of the remaining business. We recently announced the promotion of Ken Scott to COO with added responsibilities for Terminix commercial.
With the majority of Terminix customers already serviced out of combination residential and commercial branches expanding Kim's responsibilities to include the other 25% of the revenue base. You did not previously oversee will allow us to harmonize operations behind standard procedures and training protocols that will spur.
And the entire business.
Over the last year as president of Terminix residential Kim has made great strides improving residential operations driving gains in both employee and customer retention and overseas and the successful launch of the monthly paid termite product. She also led the successful execution of the termite damage claims mitigation program and <unk>.
The old day.
This move does not alter our commitment to the attractive commercial sector recognizing the unique go to market commercial model supporting can will be dedicated commercial selling and marketing teams. The commercial business enjoys strong customer retention and lifetime value and with of regulation on business is expected to increase in the coming at.
We expect this service line to be and important part of our growth story.
By reducing costs and better aligning the business, we will generate the necessary savings to invest and the needed key operational capabilities that will drive future growth and all areas of the business.
And I'm also excited at Bob <unk> joined Us as CFO.
Bob and I go back many years and I have watched his career from a distance over the last several years as he has created value for investors under difficult circumstances, and brick and mortar retail businesses.
<unk> offerings at multi unit retail background and his experience and driving consistency from branch to branch through operational consistency and standardized operating procedures and.
And my short time, and the business I have learned that we have a unique operating model at Terminix, which is why I was excited to get Bob together with Tony for these last several months.
The long transition period has certainly been helpful to assist with us onboard into the business, you'll hear from both Bob and Tony and a few minutes.
We have also taken other actions across the business to simplify and streamline the back office in line with the leaner singly focused company, we have become our streamlined structure will better position us to drive our 2021 strategies to improve consistency and results through improved execution.
Greater focus on standard operating procedures and investments and key operational competencies across all of Terminix.
Before I discuss these 2021 initiatives, let's turn to slide five and reviewed the progress made on the 2020 priorities.
As you know, we had four strategic priorities and 2020 and.
Employee turnover improved 20% and 2020 compared to prior year.
As you will see when Tony goes through the EBITDA Bridge, we continue to reap benefits of of more seasoned and tenured workforce with better customer retention as well as improved labor productivity and.
And the fourth quarter technician retention was flat to prior year, maintaining and continuing to improve these metrics will be key as of job market show signs of improvement following the pandemic.
I will discuss our future plans to continue to make progress on teammate retention. Despite the larger macro headwinds when we discuss our 2021 priorities.
Customer retention also improved during 2020 and the residents residential pest service line daily cancel rates were down 9% and the fourth quarter compared to prior year, while on the termite side cancel rates were down 3%.
This is the third straight quarter of daily cancel rate improvement and both service lines and that consistent focus has led to improvement and trailing 12 month retention rates.
Residential pest retention improved 160 basis points, and termite improved 230 basis points compared to prior year.
While the commercial pest service line has been severely impacted by COVID-19, cancellations and is down compared to prior year when adjusted for cancellations related to those concerns retention has remained relatively flat year over year.
Despite the improvement and residential pest and termite, we continue to see room for improvement and our customer retention rates across all service lines and this will remain a key opportunity of the business going forward.
As I discussed previously these retention gains coupled with our initiatives to improve productivity and our cost structure drove margin expansion of 240 basis points year over year and.
Adjusting for incentive compensation, which was $10 million higher than the same period and 2019.
The underlying margin improvement was over 450 basis points.
Strong pricing realization, especially in commercial and growth and high margin termite services and residential were also key contributors to margin expansion.
And finally 2020 was a resounding success in all phases of our termite business, our new tiered product helped us grow core termite completions, and 14% and the fourth quarter and turned and 10% on the full year.
All the new monthly pay customers will create some headwinds for us and termite renewals and the first half of 2021, we are confident that the long term consistency and predictability that will come from better retention more than outweighs the near term timing impacts.
Success with core termite has also led to new cross selling opportunities and our home services products, such as attic installation and wildlife exclusion, which were up 13% and the fourth quarter and 9% for the full year.
We also had a good year with termite damage claims as I mentioned earlier, we finished our mitigation program and the mobile Bay area as expected and believe the added protection for our remaining customers will help to improve claims and has higher risk area of the country and the future.
Including mitigation expense, we saw at just over $70 million of total termite damage claims expense and 2020, while this has over $20 million higher than prior year and $45 million higher than our baseline of 4% of total terminate termite revenue at.
Was in line with our communicated expectations for the year.
We have seen continued improvement and damage claim trends over 2020, and saw a 16% reduction and new non litigated claims nationwide year over year.
As I mentioned earlier, we saw over 30% improvement and new litigated cases, and the mobile Bay area.
While litigated cases are difficult to predict quarter to quarter, the progress and both litigated and non litigated trends is encouraging we of a long way to go to get to industry, leading rates and we plan to leverage the best practices learned and the mobile Arie during 2022 other parts of the country and 2021.
Turning to slide six I would like to discuss our strategies to drive improvement and the business and 2021 and beyond.
Our goal at Terminix is to become the pest management provider of choice for teammates customers and investors alike.
Behind our industry, leading brand and we have aligned our team to be singly focused with a commitment to this goal over 2021 and beyond we will build world class capabilities that will drive consistency across the business through focused investments and key operational areas.
These specific 2021 initiatives reflect my firm view that we can create significant value and this business.
And through a dedication to and focus on.
Operational excellence and the core fundamentals of service delivery.
Building off of strong momentum generated in 2020 and with the right leadership pieces now in place, we will drive more consistent and better results for years to come starting with the initiatives you see here.
While these initiatives may sound simple on the service driving consistency across over 11000 teammates and over 50000 customer touch points of day will require a steadfast dedication and focus.
Improving the teammate experience is critical to our ongoing success. Our teammates are the most important part of our business. They are typically the first and often the only person from terminix, who directly interact with our customers the customer relationships. They develop over many years during a long tenure with the <unk>.
Company is a key driver of customer satisfaction. This.
And this is why we will be developing defined career paths for our teammates that will provide everyone and equal opportunity to grow both personally and professionally.
We have countless examples of homegrown talent developing from a route technicians to division leaders and and our goal to become the employer of choice and the industry. The opportunity of the term terminix from just the job into of fulfilling career as an important first step and improving the teammate experience.
The next step will be the development of standard operating procedures across the business that I mentioned earlier standard procedures are only as valuable as our ability to train against those procedures, which is why we will also be building our terminix University. This year as the platform to deliver enhanced training to our teammates to support.
They are chosen career paths.
In addition to training and enhancement, we will be prioritizing technology enhancements and order to improve our teammates work life and help them be more successful key of this will be the rollout of our customer experience platform or CSP.
And I came onboard we paused on CSP. So we can be sure we have the proper enhancements and scope to prioritize the teammate and customer experience. We are now planning on a rollout that begins in the coming months and are rapidly expands once we move beyond the peak pest season into the fourth quarter.
And 2021, we will also be accelerating our efforts to improve our customer acquisition initiatives. We are planning to launch of state of the art E Commerce platform and the back half of the year that will improve the way our customers interact with US online. This improvement will make it easier for customers to find us and buy from us online.
Search engines are a key driver of web traffic today, and our new site will start the process of optimizing this channel.
While we are still and the early phases, we do have an update the terminix dot com that will be coming and the next few months to begin this process.
We also have plans to optimize our digital and marketing processes. Alex Arrow has brought a wealth of knowledge and sophistication from his background and digital marketing and he is moving forward with a few initiatives designed to increase lead generation, while improving our return on marketing and investment.
Some of the savings from these actions will be used to develop and implement the new ecommerce platform.
We also have several initiatives and terminix commercial to better leverage our industry, leading brand recognition and further develop the commercial sales professionals or csp's with state of the art training. These actions will drive more inbound leads and improve our close rates at a time, where the commercial market is set to rebound here.
Oracle norms finally, we have new leadership and place to help develop and refine our M&A strategy and integration capabilities.
We are likely to be deliberate and our approach out of the gate, while we enhance our integration capabilities focused on operational improvements and the rollout of CSP. We will remain active with both smaller tuck in deals as well as terminix franchisees as.
As we develop our capabilities, we will leverage our substantial cash and balance sheet flexibility to become more active and the M&A markets over time.
The next bucket of initiatives is a continuation of our journey to industry, leading customer retention and we made tremendous strides and customer retention and 2020 and have several initiatives that will help us maintain and improve these efforts this year.
Review the details of why our customers leave us at is centered on two main themes did.
Did you show up when you were scheduled and did you solve my pest problem. While this sounds quite simple and the key is consistency from customer to customer teammates at teammate and branch to branch. Our focus this year will be centered on improving our technical capabilities through standard operating procedures and protocols to ensure that we are <unk>.
And our customer problems. The first time every time.
We're also planning and develop greater consistency and our approach to routing and scheduling.
And the early innings of optimizing routing and scheduling and are developing of better plan to improve our current efforts.
While we won't wait for full development of <unk> to begin this initiative routing and scheduling and will also be a key component of our new platform.
And will lead to even greater strides once fully implemented.
One area, we are watching closely as we head into 2021 as cancellations related to customer is moving we.
We saw a shift and customer behaviors late in 2020 at the housing markets rebounded and this has continued into early 2021, while we have a robust action plan to engage with the new homebuyer and transfer services for the seller to a new property. We expect this to be retention headwind, we will have to overcome.
Commercial retention declined in 2020 due to customer cancellations related to Covid and we are expecting of gradual returned to norm and 2021 as the economy improves and we continue to improve our service delivery standards and.
And finally, we are focused on expanding our adjusted EBITDA margins and.
We have seen through 2020, improving customer and teammate retention and head of direct impact on profitability in.
In addition to the benefits of those initiatives, we have several initiatives on pricing plan for this year.
Better segmentation of our customers will allow us to explore of elasticity of our services and early indications show, we have some opportunities to be more aggressive with pricing both for new customers and as existing customers renew their services.
We're also planning for reductions and termite damage claims expense as we move past the mitigation plan and leverage best practices and lessons learned across the country.
And the reductions, we're seeing and outstanding claims counts and improvements over 2020 give us confidence we are making the expected improvements to return to and ultimately improve upon industry levels and the coming years.
We have developed a strong customer first culture, and Terminix nation, and our efforts in 2021 to provide enhanced tools and training necessary through the CSP rollout will enable our teammates to deliver world class service. Additionally of Newell newly aligned M&A leader with a focus on integration.
Allow us to build a scalable platform that we can leverage as our operational consistency and execution and improve while there is considerable work to do we are in a very good position with the right leadership team and culture to make progress on these initiatives and 2020.
I am excited about the opportunities to drive continued growth and build greater long term values.
And with that I will turn it over to Tony to discuss the fourth quarter performance and I'll return with closing comments after Bob discusses 2021 guidance.
Thanks, Brett today I'll cover Q Q4 performance highlighted by strong organic revenue growth and substantial margin expansion overall, terminix delivered revenue growth of $19 million or 4% with organic revenue growth of 3%.
Starting with the termite and home services column on the left side of the chart revenue grew $7 million with 5% organic growth and the quarter.
Breaking down the components of growth further termite completions and home services were up 14% and the quarter with core termite completions also up 14% and home services completions up 13% year over year and continued strong performance and core termite is driven by sales of our new <unk>.
Monthly pay tier termite product all of the growth of at home services is driven by better cross selling due to more people working from home.
Renewals of core termite units made up approximately 42% at the total termite and home services completion revenue and the quarter, although customer retention did improve and the fourth quarter termite renewals were down 3% driven by a lower volume of completions available for renewal from the prior.
Year.
Residential pest grew 5% and the fourth quarter tuck in M&A contributed one percentage of growth while organic revenue growth was 4% as Brent previously mentioned, we continue to see improvements and customer retention with daily cancel rates and residential past 9%.
Lower versus prior year growth and residential pest and was partially offset by our decision to limit some of our sales activity and order to protect both our potential customers and our salespeople from COVID-19, as well as by lower bed bug demand due to travel declines if you normalize for these two.
Circumstances are organic growth would've been approximately 6% and the quarter.
These items will continue to affect the first quarter of 2021 and the loss of revenue associated with the summer sales units carried over to future quarters and travel is forecasted to be down for the foreseeable future. Despite these factors demand remained strong for residential services and we are planning for continued.
Continuing organic growth and residential pest and the first quarter.
Commercial pest revenue was flat and the fourth quarter versus prior year with M&A growth of 1% offsetting and organic decline of 1%.
COVID-19 related work order postponements due to business closures continue to have an impact on organic growth, but not as significantly as we saw early and the pandemic.
We've seen improvement and business trends as the economy reopens and organic growth rates were up 2% sequentially over the third quarter and continue to improve into January.
While we can't foresee when the commercial market will fully returned to its historical growth rates. We are forecasting growth in 2021, particularly as we lap prior year COVID-19 impact by the second quarter.
European Pest revenue was up 29% and the fourth quarter, including 24% organically.
Approximately 10% of the organic growth was related to favorable currency translation and the remaining 14% organic growth was driven by strong double digit growth and Sweden, Norway and Terminix UK.
Sweden, and Norway saw growth and insurance contract work driven by an uptick and growth infestations, while growth at Terminix UK continues to come from both national and non National accounts added since the acquisition and the fourth quarter of 2019.
Starting at 2021, we plan to include European Pest revenue and the commercial revenue service line given that the vast majority of its revenue is commercial.
And the other revenue service line product sales were down approximately $1 million from prior year due to declines in sales through distributors to small pest management providers and tighter inventory management by larger distributors and response to COVID-19, and although organic growth is down this quarter.
The significant purchasing leverage this spend provides with our vendors continues to provide benefits and lower chemicals costs.
Overall, the fourth quarter delivered solid revenue growth and residential pest termite and European past, while trends continue to slowly improve and commercial pest.
Turning to slide eight you can see the financial summary, and detail on the adjusted EBITDA at drivers for the quarter.
Before we turn to the specifics.
You'll notice that we have combined our business into a single segment for external reporting. We believe this presentation better represents how we manage the business as a focused pest management company and simplified some back end processes without sacrificing the details of our investors need to fully understand our business.
<unk>.
Turning to the P&L box on the left of the page you can see the 4% revenue growth at covered on the previous slide led to a 24% increase and EBITDA driven by revenue conversion and strong productivity gains and.
Adjusted EBITDA growth and lower interest expense after the debt pay off using proceeds from the sale of Servicemaster brands drove an $18 million increase and adjusted net income and a 14 cents per share increase and adjusted earnings per share.
Across the bottom of at Slide you can see the adjusted EBITDA drivers for the quarter.
Revenue growth almost all of which is organic added $8 million and the quarter.
Direct cost productivity generated $9 million of higher adjusted EBITDA and the quarter $7 million and labor productivity was primarily the result of improved labor and overtime management and better employee retention and we also saw at vehicle and fuel costs declined $2 million year over year.
Through actions to improve the fleet management process and lower fuel prices.
Indirect and G&A cost productivity generated $9 million of higher adjusted EBITDA year over year, primarily from the flow through of back office cost productivity and lower travel expenses.
Partially offsetting the year over year net increase and adjusted EBITDA was $10 million of higher incentive compensation costs due to improved financial performance and 2020. This includes the special one time bonus to our frontline teammates that Brad discussed earlier.
We also saw a $3 million increase and expenses from higher termite damage claims costs and termite damage claims expense was $18 million and the quarter, which was approximately $13 million above the historical norms of 4% of total termite revenue the increase in the quarter was primarily related.
And at the completion of the mitigation program and mobile Bay, while damage claims expense was roughly flat at the prior year.
For the full year damage claims expense was just over $70 million four of $21 million increase over prior year and of $45 million over the historical baseline.
And total adjusted EBITDA margins of 14, 8% expanded by 240 basis points when compared to the fourth quarter of 2019, excluding the onetime impact of $10 million and additional incentive compensation expense and the quarter margins would've increased by 400.
And 50 basis points.
And finally with this being my last earnings call I wanted to say, thank you to the board of directors and executive leadership team of Servicemaster, and Terminix, we're allowing need of privilege of helping to lead this exciting company over the last four years.
Also of special note of thanks to determine explanation and our 11000 plus employees, who have great passion and energy to provide consistently outstanding service to our customers either.
I've enjoyed the transition with Brad and Bob They are exceptional leaders and I am confident that Terminix will continue to enjoy great success going forward.
Finally, I want to thank all of our investors and exceptional analysts that invest in and cover our company I hope to cross paths with each of you down the road as I move on to my next adventure and with that I'll turn it over to Bob to review the cash flow for the year end of 2021 guidance Bob.
Thanks, Tony and thank you for supporting my transition over the last couple of months.
We thought it would be helpful to first walk through our cash flow on slide nine to help get a better understanding of headwinds and tailwind as we transition to 2021.
Working capital was a benefit to us and 2020 with approximately $30 million of Fame favorability driven by a onetime payroll tax deferral as part of the cares Act and.
And 2021, we expect working capital be of use of cash as we paid 50% of that payroll of deferral back with the other 50% to be repaid in 2022.
We are also expecting of working capital will use from increased termite damage claims payments as we proceed through the litigation process and reduce the number of litigated cases on the balance sheet and 2021.
Capex in 2021 is expected to remain between one five and 2% of total revenue of approximately $30 million to $40 million at the midpoint of guidance.
Cash interest of $83 million and 2020 is expected to be reduced by a little less and $40 million.
Following the November 15th Paydown of $75 million and high yield bonds and $51 million advance payment on the term loan.
2020 cash taxes of only $4 million solid benefit of of onetime net operating loss refunds from 2015 and that will not repeat.
And 2021, we expect the cash tax rate to be between 20 and 22%.
You can also see at a $49 million and payments we made in connection with the Alabama Attorney General settlement in December of <unk>.
And the impact of this onetime payment our free cash flow to adjusted EBITDA conversion and 2020 would have been 64%.
As for the uses of free cash flow and 2021, we do not have any near term maturities on our probably that however, we do have and approximately $50 million deferred acquisition payment related to the 2018 Copa sand purchase that we will pay and the second quarter and we will continue to be active with our share repurchase program.
End of the year.
While the one times leverage ratio is below our ultimate long term target range the flexibility of a large cash position and strong balance sheet was important to us during the pandemic.
You can expect us to use our cash and responsibly through 'twenty and 'twenty, one with opportunistic and systematic share repurchases as well as accretive easy to integrate bolt on acquisitions.
While we certainly have ample capacity to explore large strategic transactions should they become available. We are focused in the near term on executing on the 2021 initiatives at bread Bret laid out earlier.
These will ultimately drive operational consistency leading to improved financial results.
Moving to 2021 outlook on slide 10, we expect revenue to grow to between $2 $25 million and.
And $2.050 billion with organic growth between three and 4% we.
We expect adjusted EBITDA between 365, and $380 million and margins between 18 and 18, 5%.
For revenue and the outlook assumes commercial pest will continue the gradual of positive trends we've seen over the last several months as the economy continues to reopen and with.
With the back half of the year of picking up as we lap prior year Covid impact.
Growth and commercial pest will be aided by continued strong growth from penetration of Terminix UK end of the London area and a continuation of the historical growth patterns, and Sweden and Norway.
We expect continued growth and residential pest to be partially offset by lower year over year summer sales revenue and the first quarter from fewer units sold and 2020 and the continued lower trends and bed bug services due to the reduced travel during the pandemic.
We also expect continued demand and termite termite completions due to the new monthly pay product and strong growth and home services.
The unprecedented winter weather over the last week has also impacted our business at one point, we closed over 100 branches nationwide did at deteriorated road conditions from ice and snow.
I am pleased to say our teammates are well and we have been able to get back to work. This week the service our customers.
Still evaluating the full impact, but this will certainly have an effect on demand for pest services and the first quarter.
Early indications are the impacts will be nominal and we have included our current expectations and this guidance.
As Brent mentioned briefly we do expect between eight and $10 million of termite renewal revenue to be pushed into 2022 due to revenue recognition on our new monthly pay product.
Historically revenue was typically revenue recognized on or around the annual renewal date, while at the new monthly pay product will be recognized evenly over 12 months does and such.
Subscription based model.
We believe the affordability of the monthly payments and the shift towards this model will improve our retention rates as we move forward and we'll smoothed out.
Termite renewal revenue over time, as we lap the timing impact of 2021.
Due to the seasonality of termite swarm season, this change will impact us more severely early in the year.
Using prior revenue recognition as our baseline, we expect revenue and the first quarter and it'd be $5 million lower the second quarter to also be $5 million lower third quarter to be roughly $2 million lower and the fourth quarter $2 million higher due to the change and revenue recognition.
Adjusted EBITDA, we'll see at a flow through of organic revenue growth and reduced termite damage claims expense as we lap the completion of $10 million.
Mitigation plan and the mobile Bay area.
We expect to see cost headwinds during the year related to increased training and loss of productivity from the rollout of CSP as well as increased travel and the lapping of strong employee retention performance.
We expect the cost of our 2021 initiatives and investments and operational capabilities to be funded through cost structure simple simplification as we evolved and leaner singularly focused pest company.
In addition, we expect our effective tax rate to be approximately 28% and depreciation and amortization to be approximately $95 million and with that I will now turn it over to Brett for closing comments.
Thanks, Bob and Tony before I start on my closing statements I want to thank Tony for his contributions to Terminix and the preceding Servicemaster businesses. Tony was instrumental in a number of strategic initiatives that culminated with a cold company ultimately become in Terminix and solely focused on pest management.
He is leaving us with a strong finance team of pristine balance sheet and cash position and some very large shoes to fill and I'm glad we have been able to support and Tony and his decision to move on to the next phase and his life and I wish him and his wife, Anita well going forward.
And I'm excited about the opportunities that lay ahead of us and 2021, our strong leadership team is focused on the fundamentals of customer service and both the commercial and residential markets. Our strategy collectively known as the Terminix way is designed to build key operational capabilities and the business through enhanced standard operating procedures that.
And will improve consistency from branch to branch and teammates of teammate.
2021 will be focused on building the capabilities needed to drive sustainable long term profitable growth over the course of this upcoming year, we will be rolling out a number of initiatives that will move us forward with a better teammate experience improved customer retention and streamline customer acquisition and expanded profit margins.
These initiatives will require dedication and incremental improvements every day and we are committed to driving them forward step by step we are confident building and these fundamentals during 2021 will lead to considerable shareholder value as we progress towards our goal to become the pest management provider of choice as <unk>.
Terminix turns of the page on a strong 2020 and continues our efforts into 2021 I want to again, thank our many teammates who have sacrificed and delivered under considerable pressure during the COVID-19 pandemic I am proud to serve with you and be a member of Terminix nation and I am excited about what we're going to accomplish together.
And 2021 and beyond.
And with that I will hand, it over to Jesse to lead us through the Q&A.
Thanks, Brett with the queue being long. This morning, please limit yourself to a single question. So we can get to everyone and the allotted time operator, let's open the line for questions.
Thank you.
If you would like to register a question. Please press star one four on your telephone you will hear at Wheatstone pump technology of request.
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 Ian Zaffino with Oppenheimer. Please proceed.
Hi, great. Thank you very much.
And hence of prepared remarks, and we're increasing that.
The question would be.
Maybe break it down for a little while now.
And what are your targets for let's say retention.
Targets for ultimate pricing.
And and you hadn't balance retention with pricing and then also maybe touch upon commercial as well I know you talked about you know the harmonization that came now.
Moving both.
Areas, but what.
And what should we anticipate as far as of the change and the commercial side or.
And what kind of going on there.
Sorry about all the questions, but I appreciate it.
No. Thanks, Thanks, Ian and good morning by the way I thought maybe I'll take the second part of the question first of its a bit more strategic and I'll cover off on your your question around retention versus price.
First of all let me, let me give you a little context for the changes that we've made to the organization.
I've been here now for just over five months and the role and theirs.
Really five objectives I had for myself and the team and my first six months here and the role of number one I wanted to go out and learn this industry and and learn of organization. So I spent a considerable time out and field objective. There of course is to really understand how the model works, how our team operates understand strengths and opportunities in our field.
The organization in particular and.
And number two and of course, we have to complete the spin out of the sale of Servicemaster brands and Deleveraged and that left us with the business here of course is now 100% focused on.
And pest control and to that end and I was my third priority for six months here was really developing the terminix near term strategy for the company as you heard in my prepared remarks, we set of vision of our objective here to be at a preferred brand and our industry preferred by customers and employees as well as investors and.
The fourth priority was to align the terminix leadership team structure to be able to enable the execution of that strategy and within that there were a few priorities and that I had from a structure point of view and number one I do I have to.
Develop of succession planning for Tony who wanted to exit the organization and so you had planned on doing.
We named Kim Scott and as we said and the CLO rule.
And the reason why I did that just to comment on that.
And felt like there was a significant opportunity to bring residential and our commercial businesses together, there's certainly uniqueness and the sales portion of the model sales and marketing that requires distinct and unique capabilities, there and we're going to maintain differentiation, there, but and our service organization and traveled out and field and saw the opportunities there as <unk>.
<unk> opportunity to bring those parts of our organization together between residential and commercial and under Kim's leadership I felt like we have a really strong leader to do that over the past year here at Terminix. Kim has been very instrumental as I said and driving retention improvements and our teammate performance there certainly customer reach.
Tension was really really strong as well and successful launch of our termite monthly pay package and then finally and strong execution as we talked about with the termite damage claims project and the mobile Bay. So I feel really good about the strength of our operational capability and believe there is best practices that we can quickly scale to our.
<unk> side of our organization and then lastly.
We named Christy grumbles into our M&A and roll with real focus early on and on building our stronger integration capabilities of the company and to focus on tuck in acquisitions Christy comes to US. He was previously the CFO of our residential business and she's got deep insights into operations and is at really strong.
And help us develop the integration capabilities required to effectively integrate and tuck in deals going going forward and then lastly, as you heard us share today number.
Volume was really established and our priorities for the year and the emphasis there is to build off our 2020 momentum team did an outstanding job of building and I think really strong momentum exiting Q4 ended the year and we're going to build on that that momentum and the business. We've laid out our key strategic priorities for the year.
<unk> of critical one strengthening our marketing capabilities I talked about and also really set the table and the year on our future capabilities that sets up growth and 22 and beyond.
And maybe the last thing I'll comment on as we simplify our organizational structure here at the company now that we are singularly focused on past.
And it gives us an opportunity to reinvest some of that and operational support and marketing to drive future growth going forward. So long answer to your question around structure, but I wanted to give some context to the changes that we've made there and as it relates to retention goals for the company as we talked about really strong here.
Coming off of in 'twenty and 'twenty with a.
230 bps of improvement and our termite service line and of 160 bps and past really strong performance on the year again, a lot of that.
Led by Kim and her leadership team and executing that.
I also believe there is plenty of runway here to get the best in class and that's really where we're set and our marks is industry, leading performance and those metrics.
A couple of the reasons to believe errors as we looked across our branch and a portfolio of 360 branches, we certainly at branches and our company of the day that are delivering industry, leading customer satisfaction and ultimately retention. The opportunity. We have here is to learn from those branches the best practices, they're using <unk>.
Liver that.
Packaged those best practices up and Playbooks and then use those to scale across the organization supported with the right training systems and enabled through the <unk> technology to bring this together. So we certainly have to invest and capability here to ensure that we get to industry, leading levels, but I feel good about the progress we've made.
We have onboard to help us achieve those longer term goals for the business.
Yeah.
Our next question comes from George Tong with Goldman Sachs. Please proceed.
Hi, Thanks, good morning.
Termite and home services grew 5% organically in the quarter and lifted by 14% growth and new completions from sales of the monthly pay tiered product how sustainable do you think double digit growth and new completions is and what range of organic growth and termite and home services is embedded in your full year guidance.
Yeah. So we obviously on page on slide 10 provided some guidance on our revenue for the year and then obviously that that guidance is 3% to 4% organic growth overall.
We've actually done at <unk>.
Lake down on that is really half of its price and half of its volume across all product lines of.
We obviously have not gotten into providing individual guidance by product category and maybe just add a little color of that Bob George first of all I think of the success of the monthly pay tiered package certainly ways of tremendous success. This year and I think there is still significant runway here to build upon that growth going.
Next year and of course, given the fact, we've now migrated to a monthly pay subscription based model, we would expect that to translate well into higher retention on our termite business going forward in terms of renewals.
And the out years, so I feel like we've built significant momentum here in 2020, but still runway for us to grow off of the baseline that we've established there.
Okay.
Our next question comes from Michael Hoffman with Stifel.
Please proceed.
Hi, Thank you for the questions and Tony It was a blast traveling and many of them meeting with investors. Good luck.
Thanks Boyd.
Boyd at too.
So can we walk through the cash flow of bridge again, I'm, just trying to write everything down and end customer.
Processors at the same time.
And with the middle of of your EBITDA, you're at $3 72.
And I think what I have as headwinds.
The go to your page eight and follow that that chart, we're going to have 35 million of Capex 42 million of cash interests.
<unk> is about 51 million of cash taxes.
So I think the treatment charges and Theres no incremental there.
So the only two numbers I really don't have a good handle on our other and working capital can you help us.
Zone in and around that.
Yes. So we did give you a little bit of guidance on that as far as the working capital and us giving back of piece of that tax deferral from the prior year. So you do have about a $15 million impact from a use of cash standpoint related to that one time deferral of payroll taxes under the cares Act.
And then obviously capex guidance between 30, and $40 million and Youre right on top of the interest number of roughly 40 million and and then and then cash tax guidance of 20% to 22%. So.
I think we are getting enough there from that perspective, and then I think the only other thing and as termite damage claims also with those being roughly $10 million less of.
Based on the mitigation of payment of the current year.
Okay. So so following that page eight chart.
The working capital line is going to be a positive 15, and youre not assuming any working capital for organic growth you'll be at sort of neutral and it's just the cares Act and.
And then I've got a 10 instead of a 49 is a positive instead of negative.
That's correct.
Okay.
That helps.
Our next question comes from Tim Mulrooney with William Blair. Please proceed.
Good morning, Brett Bob and Tony Tony Congrats on your tenure at Terminix and wishing you all the best and your next adventure.
Thanks, Tim enjoyed are working together and it's fun.
Yeah and too.
So my question is on M&A, you've got a very healthy balance sheet now and all indications are that there is still a lot of transaction activity across the U S. Pest control market and would you anticipate getting more involved and a more serious way over the next several quarters and if so can you talk about the type of.
Assets that you'd be particularly focused on because I mean, you've done a lot of large commercial transactions over the last couple of years, but the residential market.
And also appears to be a good place to be right. Now so just would be interested to get any of your thoughts here.
Good morning to and by the way.
Yeah, certainly I think of as we've shared a couple of times and our first and foremost focus is going to be on organic growth here at the company and building the capability here to drive sustainable and consistent organic growth from quarter to quarter as we've talked about.
Certainly inorganic growth can be part of our growth algorithm here going forward as I mentioned part of us.
<unk>, you're adding Christy grum boats to the M&A team, we are going to be very focused and I think on and on building out our pipeline of more robust pipeline certainly with also this year and intense emphasis and focus on how we integrate those acquisitions going forward and certainly <unk> is going to be a huge enabler to help us integrate deals and more efficiently.
Going forward, so I haven't said that.
From an M&A priority point of view I think as we've said before to our initial priority is going to be on tuck in deals to drive density in existing markets here recognizing how important density is to our business model and those tuck in acquisitions are still relatively easy for us to integrate.
Beyond that we will certainly continue to look at at and.
<unk> presents to our business, we have over 20 franchisees left of some of which of an interest in exiting and and we.
And we'd be interested in and taking over that brand and those of those respective geographies.
We certainly as you said of the balance sheet capacity to contemplate something a bit more strategic and certainly we'll at that comes along for us, but I think it's fair to say our immediate focus here is of team is focused on organic growth and density acquisition plays for us and the near term.
Our next question comes from Andy Wittmann with Baird. Please proceed.
Yeah, great. Thank you.
And I, just I guess I wanted to understand a little bit more about the termite segment in particular, you've had these great completions.
And the last couple of quarters and.
And that seems like it should be of great leading indicator for.
Eventually converting that into renewal revenues that.
I think the.
Potentially could or maybe should accelerate maybe even beyond this low single digit kind of rate that you're talking about and your guidance for all segments. So I was just hoping you could explain a little bit about some of the dynamics as to.
Why that would not be the case or and if maybe that's just because of the base of renewals is so large or what are the things are holding you back from.
Posting better growth on the renewal side of termite.
Thanks.
So I think one of the impacts that we have is that headwind related to the change and our payment plan and that program because it's been very successful so far and we think it will continue to be successful from a retention standpoint and from a growth standpoint, but we do have that headwind for the first three quarters of the year of roughly $12 million.
And we get a little bit back and Q4. So we do believe the program will help us grow and grow the business obviously at its new to the company here recently and so.
Very feel.
Good about where we're heading.
And it was downloads of forward color went out and certainly as you said and it clearly success this year and.
And.
2020 of what the evolution projects or products that we launched there really positioning well of the consumer to make sure we got an affordable option for them.
And said, we expect that to translate well into strong renewal rates going forward, but keep in mind on hand, and two I think historically here of growth rate here has been around 3% to 4%. So we're kind of in line with that we're optimistic we're building off of a strong base and a very.
Strong go to market platform here and.
And also with the advent of new technology tools and online selling with.
Cross selling opportunities and improve and we hope to accelerate upon that but at this stage, we're comfortable with the guidance we're providing.
Our next question comes from Judah <unk> with Jpmorgan. Please proceed.
Hi, good morning.
I also wanted to just begin by thinking Tony wishing and well wishes and welcoming thought to the team.
Thanks, Judy I enjoyed working with you.
Thank you.
I wanted to ask about the customer experience platform, it's clear that customer retention at an important.
Initiative, and the company and its drive to improve customer retention.
Overall organic revenue growth and trying to understand after a year, where customer retention did improve so much and really has been the focus of the company and investments for a number of years now I'm trying to understand what exactly is different about the CSP. Maybe you can just help us give a little more color and what this new initiative involves what capabilities. This will bring to help bridge the gap.
To peers and.
And reach those industry, leading retention levels. Thank you.
Yeah. Thanks for the question first of all I would like to second what you said the team has done a great job and 2020 with intense focus and.
And strong execution on retention today.
Having said that as I've traveled out in the field and spent time, writing with technicians and spending time with our branch leaders and talking to our call center team and understanding better our back office systems here. It was pretty clear to me to see how challenging or the limitations are with our current systems today and really providing timely information that is <unk>.
System across all of the stakeholders of touch our customers today, So first and foremost I think of the technology that we're investing and area is going to give us a 360 degree of view of the customer with real time information that flows between key departments and our business and that.
Should allow for a much better experience and transparent experience go and going forward. So I feel pretty confident about that and as we said it's a major initiative for the company, both Bob and I have that experience and launching.
You know initiatives like this one we.
We have a pretty aggressive rollout plan. This year, we intend to start with our commercial selling team to get on the platform and as we've talked about and the prepared remarks, we'd expect and the second half of the year to start to rollout towards service organization going forward, so and so.
So you're a couple of the enabling technology with <unk> with the work we intend to do this year around developing stronger standards for execution supported with the right training, we feel like as we head into 2022, we're going to of a really strong package of standard operating procedures right training through Terminix University.
<unk> worth of good solid CHP platform to enable that and provide our team of the tools.
And you need to do their job and the other area. It's also going to help us with is with M&A and definitely with tuck in acquisitions getting them integrated much faster and getting them up on basically of our platform and being able to basically monitor.
And consistency across the company from and S&P standpoint, with with all of the branches and it just kind of.
Basically makes gus of much more integrated operating business and one last thing I'd add to it and as I learn more about this industry and of the route based model and.
And the experience, we're delivering to customers like you realize quickly how important those customer relationships are and between our techs and particular in the of households of the customers that they serve and that's another major advantage here is we want to free up their time to spend as much time as they can and building those relationships and certainly that becomes enabled with inside of restaurant.
At the use and stronger execution through the technology and its also important to understand that most of that investment has been made.
And then any ongoing investment is already included in our guidance both from a capex standpoint, and from an operating standpoint.
Our next question comes from Toni Kaplan with Morgan Stanley. Please proceed.
Thank you.
Also wanted to add my congrats Tony and look forward to working with right Robert.
Wanted to ask about your at long term view on the right level of EBITDA margins I guess, there was a time when margins were and the mid twenties, but I think many people and view that as potentially a period of underinvestment and now you're at sort of mid to high teens, but maybe an elevated of damage claims.
And so I guess what are you what are you viewing and.
And nowhere in la and margin level for the business long term and.
Thinking about investing for growth versus margin expansion.
And in that context.
Yeah. Thanks for the question, Tony maybe a couple of overarching comments and Bob can add some color here.
Certainly I think we see a significant opportunity to improve upon our margin.
Our base in 2020 of that we've established here and the team's done a great job. This last year of expanding margins and we certainly expect it to expand margins going forward and I think that's a guiding principle here going forward as well as we expect to expand margins, while we're making and <unk>.
Some of the operating expense investments that we need to make and this business I think it's fair to say, our long term target of 30% incremental margins as Phil and appropriate target for us and certainly as we exceed those targets, it's going to drive our overarching margins up and going forward and so at this stage, we're comfortable with the guidance, we're providing for next year and <unk>.
30% incremental margins of the appropriate target here of that frees up and then.
Enough operating expense here for us to reinvest back in the business, but we're comfortable with the 30% incremental target that we've established yeah and I also think that you know we did provide you some guidance on the headwinds that we have.
Both from a training and some loss of productivity as we launch the CSP.
Pyramid, I guess and then experience and then also increased travel and we Gotta get back on the road, we got to start seeing our branches more and understanding what's going on and the field that obviously has not happened in the past year and then we had some great experience from an employee retention standpoint, and due to COVID-19. So we've got concerns that some of that may be.
Headwind also so I think and the short term we've got some headwinds and that's why we kind of got steady improvement Guan from early 17, two and the prior year to 17, six we're guiding and 18 to 18 and a half range on a go forward basis for the next 12 months I think.
We do have some challenges short term, but we think that they do go away long term.
And maybe the second part of the question there was how do we balance them.
And margins and growth and I think as we're demonstrate and our plans for 2021, and we are going to strike a balance here between show and margin expansion, but also we feel like we're making the necessary investments of the appropriate responsible investments at this point of our journey and that's going to develop capabilities and unlocks I think more accelerated growth.
And our out of years 'twenty to 'twenty, three and beyond and given the investments, we're making and Sob's training and development through and Terminix University as well as some of the investments and.
Marketing and.
E Commerce platform.
Yeah.
Our next question comes from Gary Bisbee with Bank of America Securities. Please proceed.
Thank you and good morning, and good luck, Tony it's been a pleasure thanks, Greg.
And I guess.
Thinking about 2020, and your commentary today and really over the last couple of quarters. There certainly were several.
Areas, where there was some real momentum evident on the back of a multi year turnaround effort here at.
And and you know I guess I just wanted to ask do you feel like you have a good sense for how much of those benefits and a couple of categories may well have been.
A byproduct of the pandemic and where you could see some of that turn into a modest headwind at thank you acknowledged on.
Employee retention being up that may well have been.
Somewhat impacted by the job markets, but are there other categories that those improvements and retention.
Our margin sort of perversely benefiting from not having had the summer sales program and and if you reinstitute that at that at some point does that become a headwind and I'm not trying to suggest that there wasn't a lot of progress I just wonder if some of that was pandemic related and create some headwinds over the next 12 to 18 months.
We should be thinking about.
Yeah, I mean, and we've provided that and the guidance I mean, I think that we do have of travel headwind.
And again to mention that we got to get back on the road, we had at labor productivity.
Headwind because of that retention and then we also have.
The commercial pest business was a challenge this past year, where we've lost roughly 5% of volume and but we still at 4% of price increase. So you know there's still a lot of things that are impacting us related to COVID-19 that we.
Got it.
Sure up here on the long term and we've reflected that and this guidance.
And but we do feel like it's an opportunity longer term.
And I think it's just going back to the point to around the certainly I think we've commented that our employee retention certainly benefit of this year from maybe a less mobile work environments. So we've got some work to do as we lap lap that but having said that I think the investments and we're going to make improving teammate experience better training strengthens our employer value props.
And we feel like is a nice offset to maybe some of the.
The tailwind that we enjoyed through through Covid, but I think also from a consumer behavior point of view some structural changes long term that COVID-19 has created certainly of stronger awareness around safety and health and both service lines residential and commercial.
Certainly, it's going to benefit us going forward as well as of.
Of work from home dynamic, that's likely going to persist post COVID-19 as well and sets up a nice backdrop I think for our residential business.
Our next question comes from Mario Kart of Lackey with Jefferies. Please proceed.
Hi, Thank you for the time I'll reiterate the same as everybody else good luck to both Tony and Bob.
Thank you.
On the new ecommerce platform could you just help size up and any cost of our investment that is going to be involved there and then similar to the question on <unk>, how is that going to be different or EBIT differentiated from the competition.
And does the launch in the back half of 'twenty. One is that just like and initial fees or and Thats something that will continue into 2022 and potentially helping ramp.
Organic growth in 2002 or whatever benefit from that into 'twenty two.
And so the first part of the question around E Commerce.
And we made the comment on the prepared remarks, we're self funding and the investments and both the modern website to modernize website as well as stronger e-commerce capability and that's coming from stronger return on investment and other channels that we're using and help self fund that so no incremental investment this year being made and that enhanced.
Ability as it relates to <unk> I think the real opportunity we have to differentiate our services versus the competition and are the relationships that our techs enjoy all of the touch points that we have between our brand and our customers become a real strong part of our differentiation that's in line and consistent with our industry, leading brand I think our opportunity here has been how do we unlock.
And the capability and empower our team on the frontline and to enhance those relationships by having access to real time information and it's time and finally and provides at 360 degree view of the customer that's been missing here. So.
Unlocking and our team's ability to extract value there and it goes is at the epicenter of words CSP is all about as it relates to timing.
And you've characterized it right we're going to start the rollout after the pest season.
From certain and Q3 into Q4 of course, we would expect that to roll through the calendar year end of Q1 Q2 and how.
And how long it's going to take us is all going to be dependent upon how well the initial rollout scope beyond pilot at.
Teams developed a very robust plan that we're working through today.
And at least right now we're expecting.
A rollover of the calendar year end of Q1 to complete that.
Yeah and on from a capital perspective again, it's within the guidance that we provided as of $30 million to $40 million of Capex and then also within the margins of we provided and from an EBITDA perspective. So all of that is captured in here and and <unk>.
I mentioned it will go into 2022, but the majority of it should get done in 'twenty and 'twenty one.
Yeah.
Yes.
Mr. Jenkins there are no further questions at this time.
And that concludes our call today and thanks, everyone for your continued interest and the company and we look forward to talking to you again on our next earnings call tentatively scheduled March excuse me and May six.
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.
So.
Uh huh.
[music].