Q4 2021 Terminix Global Holdings Inc Earnings Call
Well count in early 2022, and we are well positioned with staffing levels and enhanced pay plans heading into the new year to continue making progress in commercial sales that will ultimately drive growth.
And the other service revenue line product sales were up 4% organically over the prior year.
Sales of products was negatively impacted by product availability and supply channel slowdowns stemming from COVID-19.
Those issues have improved marginally in early part of 2022, and we expect to see growth in product sales in the new year.
Overall, the fourth quarter continued the positive momentum in the residential business with growth in our termite and residential pest segments, and we are seeing positive signs of a rebound in our commercial business.
We are off to a strong start in 2022 with improvements in staffing levels in commercial sales and services pricing discipline and improvements in our marketing capabilities, we're well positioned to drive growth in the mid single digits in the near term.
Turning to slide seven you can see the financial summary, and detail on adjusted EBITDA drivers for the quarter on.
On the P&L at the top left of the page you can see that the $24 million or 5% revenue growth. We covered on the previous slide led to a $4 million.
A 6% increase in adjusted EBITDA.
Incremental margins of around 17%.
For the full year incremental margins of around 50% are well above our targeted levels of 30%.
<unk> annually.
Adjusted net income declined $4 million.
Or 15% and adjusted EPS declined <unk>, <unk> or 7% the declines in adjusted net income and EPS were driven by an increase in tax expense compared to the prior year.
Across the bottom of the slide you can see the adjusted EBITDA drivers for the quarter revenue growth, including growth from acquisitions added $13 million of adjusted EBITDA in the quarter for a gross margin flow through of 54% slightly higher than normal rates due to the strong pricing we delivered in the quarter.
As Brent mentioned earlier labor increased $5 million in the quarter, primarily driven by investments in training and staffing levels to get ahead of peak season and drive growth in 2022.
Turnover was also slightly higher year over year from the competitive labor markets.
As we have discussed we are expecting similar investments in our labor force year over year in Q1, as we lap lower training staffing levels from the early part of 2020.
Direct cost productivity generated $6 million or <unk>.
Higher adjusted EBITDA in addition to lower chemical costs and favorable fixed fuel hedge prices. We also sell a margin increase from the in sourcing of national accounts customers. As we can as we can provide services at a lower cost and sub contracting.
We expect increases in fuel expense of approximately $10 million in 2022, as we move from a fuel hedge were approximately $2 per gallon to a more market rate price of $3 per gallon.
We have now hedged between 80 and 90% of our expected fuel usage in 2022 and are well protected from any additional inflation that could occur on this line during the year.
Medical cost increased $5 million due to increased medical claims in short term disability cost as a result of increased COVID-19 in fact infection rates across our customer facing workforce.
These costs are difficult to predict we are planning for increases although not as severe in the early part of 2022.
Non capital third party investments in design implementation and deployment of Terminix way and CSP were $3 million in the quarter. These.
These investments are also expected to continue in the first quarter at similar levels.
Turning to slide eight you will see the cash flow summary for the full year of 2021.
$46 million in cash from working capital in 2021 about $15 million of the usage was it related to the first half of the 2020 payroll tax deferrals from the cares Act, which we repaid in December .
In December of 2022, we expect the other $15 million to be paid additional.
Additional cash used was primarily prepaid software licenses for CSP that will be expensed in 2022.
Capex of $22 million for the year was slightly below expectations of less than 2% of revenue and is lower primarily due to less than expected capitalized CSP development cost.
Cash taxes of $14 million is in line with expectation and is expected to be roughly consistent with 2022 rates.
Year to date free cash flow conversion of 56% deliver on our full year guidance of mid 50% range.
Shifting to uses of cash, we completed $113 million of acquisitions, including $27 million in the fourth quarter, and we repurchased $551 million in shares including $19 million in the fourth quarter, we borrowed and repaid $50 million from our revolving credit facility during the quarter for short term liquidity.
Needs for these acquisitions and share repurchases.
We plan to remain active with our small tuck in acquisition program. During the early part of 2022, however, given the pending pending <unk> merger, we're not planning to be in the share repurchase market in the near term.
We ended the quarter with $116 million in cash and $494 million in available liquidity with a net debt leverage ratio of two times.
Before I turn it over to Brent for an update on the merger I want to briefly discuss the decision not to provide 2022 guidance.
After careful consideration, we have decided not to provide specific guidance expectations for the year ahead.
As we have discussed during the call. We are building significant momentum in performance by leveraging the Terminix way digital marketing enhancements as well as the capabilities, we have developed and staffing of Multiunit leadership during 2021.
We are off to a strong start in 2022 and expecting to continue our current trajectory throughout the new year.
We're confident in our plan for next year and excited about the potential of the future combined business.
We believe this continuation of quantitative guidance for our Standalone company as appropriate in light of the pending merger and our expectation that it will be completed in the second half of the year.
And with that I will turn it back over to Brett for some additional thoughts on the merger.
Thanks, Bob over.
Over the past few months since we announced the merger I have been encouraged by the reaction we have heard from our teammates and our customers. We remain confident that rentokil is the perfect partner for Terminix and is an exciting next step that significantly advances terminix is journey towards becoming a global leader in pest management, bringing together.
These two highly complimentary businesses creates a global leader in pest control with around $4 9 million pest control customers and 56000 colleagues around the world. This highly complementary combination brings substantial upside potential and we believe will be a win for the best.
The interest of all of our stakeholders.
Together, we are building a combined company that is differentiated by a strong focus on people customers and ESG and well positioned to drive continued growth and value creation.
Ultimately as a larger and stronger organization. We are looking forward to taking our superior service to the next level, while offering an even more comprehensive range of solutions for our customers internally. Our frontline has been engaged and is excited about the complementary nature of our of the two.
<unk> businesses as we engage with Rentokil team both parties have made clear our commitment to a best of breed approach that will leverage pockets of excellence in both of our organizations. Our teams both have considerable experience that they can share with each other.
As you May have seen last week, we recently deployed $20 million retention program that will help us retain key customer facing and back office teammates during this important time.
We were able to host Rentokil CEO , Andy ransom and the executive leadership team in Memphis in early January and Andy and I were able to have a sit down where we take questions from our field teammates and that introduction was very well received by the team.
With our highly talented teammates motivated for the future. We are very excited for the integration and the potential that it brings for both businesses externally. We have continued our dialogue with our customers and those interactions remain very positive with customers pointing towards an improved customer service model that will come from the combination.
<unk> as a key benefit to them.
I have mentioned several times the cultural alignment from the executive team all the way to the route technician had been clear from the beginning with engaged teams cultural alignment and tremendous synergy potential I continue to see this transformation as a win for customers teammates and shareholders alike.
Pre integration planning is well underway and we started where you would expect by getting our technology teams together to discuss a best of breed World class software and systems backdrop.
Leaders from Terminix Rentokil met face to face for several days in early February for our initial showing share discussion that will form the basis of how we move the combined company forward. Other integration planning work streams are also underway with the finance team among other areas having weekly.
<unk> discussions so we can assure we are aligned for day, one week one month, one activities once the deal closes.
While I defer specifics on the closing timeline to the Rentokil team and the earnings call. They have scheduled later this week I will share that all work streams remain on track for the previously communicated expectation for a closing in the second half of 2022, our confidence in the merits and benefits of the pending merger.
<unk> remain as strong as ever and we believe that is the right next step for Terminix.
In closing on slide 10, the fourth quarter was another quarter of meaningful progress, we delivered above market growth in termite accelerated our total organic growth rate sequentially and ended the year with considerable momentum carrying into 2022. The efforts, we undertook to better understand their staffing needs.
And improved visibility of those needs throughout the organization. During 2021 have set us off to a strong start in the new year, despite meaningful investments in staffing CSP in Terminix way, we were able to expand margins by over 130 basis points on a full year and have clear line of sight to continue to expand.
<unk> in the new year with good pricing leverage favourable trends in termite damage claims and continued operational efficiencies from improved standards and training with the Terminix weight branch pilot later this year, while the focus is on the execution of the 2022 operating plan. The team is engaged in pre integration planning with rent.
Go and excited about the prospects of our best in breed combined business.
In summary, we had a strong finish to the year. We are seeing encouraging results in Q1, and we are confident in the value creation opportunities. We have in front of us in 2022, and with that I will hand, it over to Jesse to lead us through the Q&A.
Thanks, Brett.
Brent mentioned, we are limited in order visibility to discuss specifics on the timeline of the merger prior to the <unk> earnings release on March 3rd.
And we are happy to take any other questions. You may have at this time.
I ask you to please limit yourself to a single question. So that we can get to everyone in the allotted time.
Operator, let's open the line for questions.
Thank you.
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One moment please for the first question.
Our first question comes from Tim Mulrooney.
With William Blair. Please proceed.
Good morning.
Good morning, Jim.
Tim.
So you didn't give a guide and I understand why but I am seeing some decent trends in the in the residential and termite business. So I'm going to try to ask this another.
Another way based on what Youre seeing in customer retention rates and new account growth is there any reason, we shouldn't expect to see continued improvements inorganic growth towards market growth rates as you move through the course of 2022.
Okay.
I'll start and then I'll, let Bob add some color to that I think the short answer to the question is no. There is no reason why we wouldn't see acceleration in our organic growth trajectory into 2022, and let me just share some perspective on why.
You touched on a lot of the key elements there but.
I'm really really encouraged by the progress our team made on several key areas in our business. This year that we set out to improve our capability number one was around pricing.
We recognized an inflationary environment, we wanted to be much more sophisticated data driven in our pricing approach and the team did a great job of building capability, it's translated nicely into results.
Couple of other areas I think are noteworthy.
The progress on digital marketing is noteworthy I think the team launched a really solid first version of our website in December on schedule and we're already seeing nice results in January as a result of that and.
Needless to say I think our team is very hyper focused now on being number one critical success factor in this business, which is staffing levels and retaining our team and arguably.
Contributing the most to our progress sequentially from Q3 to Q4 into 2022 is that improvement that we're seeing in staffing and we intend to start to pivot now and get refocused now not just on being world class at hiring people, but how do we onboard them train them develop them to retain them better and Thats, where our <unk>.
Focus is going to lie in 2022 as well. So so having said that very encouraged I think about the progress that we're seeing probably a couple of points I would make though in addition to the broad strokes just around expecting to see acceleration in organic growth as you characterize we would agree with.
We should talk about about pacing because I think it's fair to say that Q1.
We are going to invest more in labor in Q1, even though we're off to a really strong start in January and February . We said, we are making some investments in labor there now to prepare ourselves for Q2 and Q3. So we would expect kind of growth to ramp up consistently throughout the year, Bob maybe if you want to add some color on the cost side, yes, Tim.
Even though we didn't guide I think that we do have enough information out there to give people a little bit of an idea, where we're going I think we still feel pretty comfortable with that 30% incremental margin rate.
Even though we do have some headwinds obviously coming into the year related to labor related to cost on CSP and the Terminix way and then obviously, we talked about a $10 million roughly headwind on fuel and obviously some challenges on medical so I still think even though we have those headwinds we still feel pretty.
Comfortable with that 30% incremental margin rate, maybe two other points I would just add as Bob said.
Covenant there.
Also expecting improvement year on year in termite damage claims as well we think the efforts. The team did in 2021 has translated well into improved trends that we saw in Q4, and we expect that to continue as well and consistent with the theme from day one when I joined here, we are committed to margin expansion here we bill.
We can still make the necessary investments that we continue to make care to build long term capability. We can do so and fund those and still drive incremental margin expansion here in the business as a result of that.
Our next question comes from Ian Zaffino with Oppenheimer. Please proceed.
Green Dot bank.
Very much.
I guess, if I could maybe squeeze in.
Two here.
Just very quickly.
Let me talk about.
From the pricing on the termite side.
Have you recouped all.
The cost from the termite claims.
Meaning sort of the price increases greater now.
And how much more widely per se.
The other question if I May you said no more buybacks from a capital allocation standpoint, how are you thinking about.
Small kind of tuck in M&A.
Production.
Our transaction.
Closing in the second half of the year.
Thanks for the questions.
This spread I'll take the first part and I'll, let Bob comment about M&A first of all related to pricing and in termite damage claims, let me to say, let's parse those and decouple those two because we certainly don't price to cover termite damage claims I think as I commented before I'm really proud of the progress. The team has made on improving our price.
Specification and look I think we've made some good progress this year and that's manifest itself in the improvements that we're seeing in our growth performance on termite.
Other things I would probably more to on our on our termite business. It's really the positives that we saw around our marketing performance in particular as well as our cross selling capability with home services that created a nice lift in our terminal business as well so.
We're early innings on pricing, we're going to continue to get smarter about how we price and over the long term certainly we will start to reflect maybe some more risk based pricing as we think about this model.
Geography to geography, but certainly near term, we feel very positive about how we're pricing the category today, Bob you want to touch on the M&A I think on the M&A front and I think it's consistent with where we've been in the past and we are focused on that smaller tuck in acquisitions right now and we do have a team dedicated.
To that.
Roughly 2% of our revenue growth in the last quarter was related to acquired M&A type activity and we see a pretty significant pipeline that we're tracking down and have continued efforts towards that and feel like it will be an important part of our growth going forwards.
Our next question comes from Mario <unk> with Jefferies. Please proceed.
Hi, guys. Thank you for your time.
Just wanted to ask about I guess, just one of your competitors.
Sales force push in 2021, I guess, maybe you can just comment on what Youre seeing from a competitive standpoint and can you also comment on what your sales force head count growth has looked like over the past year and then what your expectations are for maybe adding new sales force head count in 2022.
Okay.
Yes, the spread I'll take it Bob feel free to add some color here.
We made a comment in our prepared remarks made a lot of ground I think with our outside sales professionals, we would call them in our residential business.
In addition to that we've made some pretty significant changes to our compensation plans to be more attractive I think on our commercial sales professions professionals part of the drag that we saw in our commercial business.
Was driven by the fact, we've maybe been a little bit slower to ramp up our <unk>. If you will in the Q4 and that certainly created a little bit of a drag on our commercial business relative to residential but encouraged though by the progress that we're seeing in fact, I think I made the comment that our hiring was up 83% for commercial sales professionals in January .
Alone, we expect those trends to continue throughout the first quarter to be much better positioned through the peak of the year here with our selling organization.
The thing I would add is during breath prepared comments. He did mention how we've seen that performance in the first two months improve in our commercial business compared to Q4.
Sure.
Yes.
Our next question comes from Andy Wittmann with Baird. Please proceed.
Yeah, great. Thanks for taking my question I guess.
I was curious a little bit about the continuation of the investment in CSP in Terminix. When all of these various initiatives that you put in place and you got there just given that you will be combining here in a few quarters with turned to kill.
Some of these things include the implementation of new standard operating procedures. So I'm just wondering if you could just talk about the fact that you're choosing to go on with US what that means for the future operating model.
I would think you'd want to kind of change things twice and just so maybe just talk about a little bit about your decision to stay the course with these initiatives and what it means for the combined company going forward do you think if anything yes.
Good morning, Great question by the way first of all let me just.
Underscore maybe.
The value of the transaction with Rentokil and one of the things that I've felt really strongly about is the cultural alignment as well as the alignment between our two companies on operating philosophy. So I think there is a really strong alignment there in terms of the work that we have kicked off and done under Terminix way and it's very much in alignment with <unk>.
Lot of the work the Rentokil that seven or eight years ago, So feel pretty strong or at least the lion philosophically on the direction. There I think everybody recognizes that our strength of Terminix certainly is in the residential business in Rentokil certainly is extremely strong and recognized as such in the commercial business.
So there's really an opportunity there to take best of breed here to create the most optimal model going forward. So having said that related to Terminix way are focused primarily on our residential business to start with we feel like.
That's our strength certainly in the areas that we're investing in here, we think certainly will serve both companies quite well once we bring these companies together.
The most important area that you touched on is around technology.
<unk> in particular and Thats. There is certainly we are going to be very thoughtful we did roll that out to our southwest region.
The team did a remarkable job partnering with operations to do that.
Given the.
The children Homochrome variance, we decided to delay the training on that which was probably fortuitous timing allowed us to start to engage with the rent to kill team to start doing.
Some in earnest planning post integration planning around what does the future technology state look like so certainly related to technology, we are going to be very thoughtful and methodical about how we march that forward and.
Every confidence we'll end with a very good solution here that meets the needs of both companies there.
Consistent with what we've said in the prepared remarks, one of the things that I've enjoyed about engaging with rental team already gives us deep commitment.
From them to take best of breed and look at the best practices across both organizations and align on a forward strategy that makes sense for both businesses.
To continue to do so in a very thoughtful methodical way and and do everything we can to be the least disruptive we can to our organization.
And that's all contemplated in our plans for 2022.
Our next question comes from Brian Butler with Stifel. Please proceed.
Good morning, Thank you very much for taking my question.
Good morning, Ken Good morning.
Just wanted to go look at the progress you guys have made on the termite claims I mean, it was $68 million in the full year and if I heard correctly on the call expectation is that to be down again in 2022, and I was hoping you might just provide some detail.
How that step down with the litigated cases, and then where were the right normalized long term level is and when do you kind of reached that.
Well, let me start with the last part were not going to provide long term guidance in terms of where we expect that to land over the long term, but let me just come back to.
The momentum that we're seeing in Q4.
<unk> always felt like the best leading indicator to predict our future termite damage claims expense is looking at the non litigated claims in our business.
And have a record level of non litigated claims in Q4, we feel very good about and I really want to credit like the really strong work that our team did over last year and a half with our mitigation efforts that we executed in Alabama, and we kind of took that show on the road to surrounding regions around the Gulf area and Thats starting to translate nicely into.
Improvements that we're seeing there.
Im really proud of the team and the efforts they did that with the.
The other team really did a nice job with his claims management in one of the key initiatives. We had was to bring that in house, where we can control that the customer experience in a more thoughtful way the very strategic about the approach that we're taking there and certainly that has bode pretty well for us as well.
Economically speaking I think we were pretty clear in the prepared remarks to here, we got kind of a tale of two cities. Some even though are not litigated claims are down the call.
Cost per claim was up driven largely by the inflationary pressure that we're seeing we expect that to continue certainly into 2022 and as that normalizes. We would expect that trend line total dollars to be reflective of that.
On litigated side, even though litigated cases were up primarily in <unk>.
All of which for the most part with exception of one was in mobile Bay. We're very encouraged by the cost per case is down considerably year on year, and we expect that trend likely to continue as well.
But as you might expect pretty difficult to predict and project. What this is going to look like over the near term, but long term I'm very confident in the path. This teams on to continue to drive improvement in 2022 and beyond on term termite damage claims.
Our next question comes from George Tong with Goldman Sachs. Please proceed.
Hi, Thanks, good morning.
Discuss how retention rates performed in the quarter in termite commercial pests in residential pest in how much additional room for improvement you see for retention rates.
Yes. The short answer is we feel very strongly we have lot of runway to continue to drive improvement.
Let me talk by service line here.
The retention side and I'll, just give you more 12 month rolling average numbers here, but we did see improvement in our residential retention rates.
Sequentially up slightly.
Not.
I'm, just a little bit on the residential side, it's a slight improvement there did see improvement in both cancel rates and retention rates on commercial so really proud of our progress there the area that we're watching pretty closely as termite. We did see decline in our retention rates slightly in the quarter. We think that's driven by mobility of people.
With the amount of residential homes selling going on right now.
The spike in our cancel rates as a result of that.
Clearly that's an area of focus for our team is to strengthen our relocation program going forward and have initiatives underway right now that we can execute in 2022, we would expect to stabilize and improve that trend long term, but none of that we think the initiatives that we're working on with Terminix way and improving train.
<unk>.
Our teammate retention certainly gives us runway to drive improvement off of the rates of improvement. We're currently seeing today.
Our next question comes from Tim Mulrooney with William Blair. Please proceed.
Hey, Thanks for fitting me in again just.
I know you guys don't want to talk about deal specifics.
Because I know there's not much you can say at this point, but this is the first earnings call. We've had since the deal was announced.
Wanted to ask if you could talk about what kind of feedback that you've been getting from shareholders on the proposed deal since it was first announced thank you.
Yes.
Good question Tim.
I think overall, we continue to see certainly a steel is a huge value creation opportunity for all stakeholders, not just shareholders, but our team our customers et cetera, I think for the most part feedback we're getting from the large percentage of our shareholders recognize I think the strategic.
Benefits to bring in.
Two great companies like German exit Rentokil together.
As we've commented the industrial logic here is pretty compelling very complementary businesses and in the route based business model and the opportunity that we have to drive local density is immense here.
And.
Just very very encouraged by the complementary nature of this business of these businesses, bringing them together.
What I get pretty encouraged about is because we have engaged more with the rentokil leadership team directly as just how aligned we are culturally philosophically and operationally oriented.
Deep commitment to their team and the investments that they have made certainly is aligned with the direction that we're taking the terminix way and the investments we intend to make and I think our investors recognize that there's a significant opportunity for us to accelerate a number of the initiatives. We're working on today by leveraging the capability that <unk> team has done a nice.
Java building over over the years and I also think when you look at our core service lines certainly our strength in term termite and residential is showing in our Q4 performance and we still got good momentum we can build on there, but we're also excited about the capability that we get a chance to kind of leverage as we parked.
With Rentokil on the commercial side of our business the investments they've made in technology and our remote monitoring certainly gives our sales organization a much more compelling value proposition that they can walk into customers with and provide more value to them. So so I think our investors see the large benefits of bringing these companies together and they are still encouraged I think about.
The prospect of bringing rents go in Terminix together.
Okay.
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.