Ladies and gentlemen, welcome to the Terminix Fourth Quarter and Full Year 2020 Earnings Call. Today's call is being recorded and broadcast on the Internet. Beginning today's call is; Jesse Jenkins, Terminix's Vice President of Investor Relations, FP&A and Treasurer. I will now turn it over to Mr. Jenkins, who will introduce the other speakers on the call.

Thank you. Good morning and welcome. Before we begin, I'd like to remind you that throughout today's call, management may make forward-looking statements to assist you in understanding the company's strategies and operating performance. As stated on Slide 2, all forward-looking statements are subject to the forward-looking statements legends contained in our public filings with the Securities and Exchange Commission. These forward-looking statements are not guarantees of performance and are subject to the risk factors contained in our public filings that may cause actual results to vary materially from those contemplated in the forward-looking statements. Information discussed on today's call speaks only as of today, February 25th, 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.terminix.com. We will reference certain non-GAAP financial measures throughout today's call, and we have included definitions of these terms in our press release. We have also included reconciliations of these non-GAAP financial measures to the most comparable GAAP financial measures in our press release and the appendix of this presentation in order to better assist you in understanding our financial performance. All references on the call to EBITDA are to adjusted EBITDA as defined in our press release. Joining me on today's call are Terminix' CEO, Brett Ponton; current CFO, Tony DiLucente; and Executive Vice President and incoming CFO, Bob Riesbeck. Slide 3 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. Brett?

Thanks, Jesse. The fourth quarter saw a continuation of the strong operating momentum generated in the second and third quarters, driven primarily by the residential service lines. We delivered top line revenue of $460 million with growth of 4%. Our Termite service line grew 6%, including 5% organically, driven by strong sales in both core Termite units and Home Services. We continue to gain traction with our subscription-based monthly pay Termite offering launched during 2020. We are encouraged by the positive customer reaction and are optimistic the new model will lead to higher retention in the future. 4% organic growth in Residential Pest was highlighted by retention gains, volume growth and pricing realization that continued to be partially offset by lower summer sales units and one-time bed bug services. Excluding these impacts, organic growth would have been over 6% in Residential Pest. In Commercial Pest, we continue to see sequential improvement and the business was down only 1% organically year-over-year in the fourth quarter, compared to 3% last quarter. We are optimistic about the outlook in this service line as we move forward in the year and begin to lap COVID impacts in late March. We also saw strong gains in our European Pest business, delivering double-digit organic growth when excluding the benefits of foreign currency translation. Strong gains in Norway and Sweden were driven by growth in the insurance channel in the fourth quarter and despite more severe pandemic restrictions in the quarter, we continued to add customers to build density in our Terminix UK business. Fourth quarter adjusted EBITDA grew 24% or $13 million year-over-year to $68 million. Adjusted 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…

Thanks, Brett. Today, I'll cover 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 in the quarter. Breaking down the components of growth further, Termite completions and Home Services were up 14% in the quarter, with core Termite completion is also up 14% and Home Services completions up 13% year-over-year. The continued strong performance in core Termite is driven by sales of our new monthly pay tiered termite product, while the growth in Home Services is driven by better cross-selling due to more people working from home. Renewals of core Termite units made up approximately 42% of the total Termite and Home Services completion revenue in the quarter. Although customer retention did improve in 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% in the fourth quarter. Tuck-in M&A contributed 1% of the growth, while organic revenue growth was 4%. As Brett previously mentioned, we continue to see improvements in customer retention, with daily cancel rates in Residential Pest 9% lower versus prior year. Growth in Residential Pest was partially offset by our decision to limit summer sales activity in 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, our organic growth would have been approximately 6% in the quarter. These items will continue to affect the first quarter of 2021 as the loss of revenue associated with the…

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 9 to help get a better understanding of headwinds and tailwinds as we transition to 2021. Working capital was a benefit to us in 2020, with approximately $30 million of favorability driven by a one-time payroll tax deferral as part of the CARES Act. In 2021, we expect working capital to be the use of cash as we paid 50% of that payroll deferral back, with the other 50% to be repaid in 2022. We are also expecting the working capital 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 in 2021. CapEx in 2021 is expected to remain between 1.5% and 2% of total revenue or approximately $30 million to $40 million at the midpoint of guidance. Cash interest of $83 million in 2020 is expected to be reduced by a little less than $40 million after following the November 15th paydown of $75 million in high-yield bonds and $51 million advanced payment on the term loan. 2020 cash taxes of only $4 million saw the benefit of a one-time net operating loss refund from 2015 that will not repeat. In 2021, we expect the cash tax rate to be between 20% and 22%. You can also see the $49 million in payments we made in connection with the Alabama Attorney General settlement in December. Excluding the impact of this one-time payment, our free cash flow to adjusted EBITDA conversion in 2020 would have been 64%. As for the uses of free cash flow in 2021, we do not have any near-term maturities…

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 the company ultimately becoming Terminix and solely focused on pest management. He is leaving us with a strong finance team, a pristine balance sheet and cash position and some very large shoes to fill. I'm glad we have been able to support Tony in his decision to move on to the next phase in his life, and I wish him and his wife, Anita, well going forward. I'm excited about the opportunities that lay ahead of us in 2021. Our strong leadership team is focused on the fundamentals of customer service in both the commercial and residential markets. Our strategy, collectively known as the Terminix Way, is designed to build key operational capabilities in the business through enhanced standard operating procedures that will improve consistency from branch-to-branch and teammate-to-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'll be rolling out a number of initiatives that will move us forward with a better teammate experience, improved customer retention, streamlined 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 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 Terminix turns 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'm excited about what we are going to accomplish together in 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 in the allotted time. Operator, let's open the line for questions.

Thank you. [Operator Instructions] Our first question comes from Ian Zaffino with Oppenheimer. Please proceed.

Hi guys. Thank you very much. You know very comprehensive prepared remarks, really appreciate that. You know the question would be, maybe, Brett, you've been here for a little while now. You know what are your targets for let's say, retention targets for ultimate pricing? And how do you balance retention with pricing? And then also maybe touch upon commercial as well I know you talked about you know the harmonization that came out you know leading both areas. But like I mean what should we anticipate as far as the change on the commercial side? Or I mean what's kind of going on there? Sorry about all the questions, but I appreciate it. Thank you

Thanks, Ian. Good morning, by the way. I thought maybe I'll take the second part of the question first. It's a bit more strategic, then I'll cover off on your question around retention versus price. First of all, let me give you a little context for the changes that we made to the organization. As you said, I've been here now for just over five months in the role. And there's really five objectives I had for myself and the team in my first six months here in the role. Number one, I wanted to go out and learn this industry and learn our organization. So I spent a considerable time out in the field. Objective there, of course, is to really understand how the model works, how our team operates, understand strengths and opportunities in our field organization, in particular. Number two, of course, we had a complete spin-out of the sale of ServiceMaster Brands and deleveraged. And that left us with a business here, of course, that's now 100% focused on pest control. And to that end, that 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 a vision, our objective here to be the preferred brand in our industry, preferred by customers, 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 that I had from a structure point view. Number one, I knew I'd have to develop a succession plan for Tony, who wanted to exit the organization as he had planned on doing. We named Kim Scott, as we said, in the…

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, lifted by 14% growth in new completion from the sales of the monthly pay tiered product. How sustainable do you think double-digit growth in new completions is? And what range of organic growth in 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 guidance is 3% to 4% organic growth overall. We've actually done - our breakdown on that is really half of its price and half of its volume across all product lines. We obviously have not gotten into providing individual guidance by product category.

Maybe just to add a little color on that, Bob - George. First of all, I think with the success of the monthly pay tiered package certainly was a tremendous success this year. And I think there's still a 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 in 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 we've established there.

Our next question comes from Michael Hoffman with Stifel. Please proceed.

Hi, thank you for the questions and Tony, it was a blast traveling with you and meeting the investors. Good luck.

Thank you, Michael. Well I enjoyed it too.

So can we walk through the cash flow bridge again? Just trying to write everything down and core processes at the same time. So in the middle of your EBITDA, you're at $372 million. And I think what I have is headwinds known are you know or the, you know, the go to your Page 8 and follow that chart. We're going to have $35 million of CapEx, $42 million of cash interest, implies about $51 million of cash taxes. So I think the treatment charge, there's no incremental there. So the only two numbers I really don't have a good handle on are other and working capital. Can you help us zone in around that?

Yeah. So we did give you a little bit of guidance on that as far as the working capital and has given back a 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 million and $40 million. And you're right on top of the interest number of roughly $40 million, and then cash tax guidance of 20% to 22%. So I think we've given you enough there from that perspective. And then I think the only other thing is Termite damage claims also with those being roughly $10 million less based on the mitigation payment of the current year.

Okay. So following that Page 8 chart, the working capital line is going to be a positive $15 million. And you're not assuming any working capital for organic growth. You'll be sort of neutral. It's just the CARES act. And then I got a $10 million instead of a $49 million as a positive instead of a 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 on your next adventure.

Thanks, Tim. Enjoyed our working together. It's fun.

Yeah, me too. So my question is on M&A. You've got a very healthy balance sheet now, and all indications are but there's still a lot of transaction activity across the US Pest Control market. Would you anticipate getting more involved in 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 you know also appears to be a good place to be right now. So I just would be interested to get any of your thoughts here.

Sure. Good morning, Tim, by the way. Yeah, certainly, I think as we've shared, a couple of times now, our first and foremost focus is going to be on organic growth here at the company and building the capability here to drive you know sustainable, consistent organic growth from quarter-to-quarter as we talked about. Certainly, inorganic growth is going to be part of our growth algorithm here going forward. As I mentioned, part of us, strategy are adding Christie Grumbos to the M&A team. We are going to be very focused, I think on building out our pipeline, more robust pipeline certainly, but also this year, intense emphasis and focus on how we integrate those acquisitions going forward. And certainly, CXP is going to be a huge enabler to help us integrate deals more efficiently going forward. So having said that, you know from an M&A priority point of view, I think, as we've said before too, our initial priority is going to be on tuck-in deals that 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'll certainly continue to look at adding geographic presence to our business. We have over 20 franchisees left that some of which have an interest in exiting, and we certainly would be interested in taking over that brand in those respective geographies. We certainly, as you said, the balance sheet capacity to contemplate something a bit more strategic and certainly will, if that comes along for us. But I think it's fair to say our immediate focus here as a team is focused on organic growth and density acquisition plays for us in the near-term.

Our next question comes from Andy Wittmann with Baird. Please proceed.

Yeah, great. Thank you. I just - I guess I want to understand a little bit more about the Termite segment in particular. You've had these great completions in the last couple of quarters. And that seems like it should be a great leading indicator for eventually converting that into renewal revenues that, I think, potentially could or maybe should accelerate maybe even beyond this low single-digit kind of rate that you're talking about in 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 the base of renewals is so large. Or what are the things that 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 in 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 in Q4. So we do believe the program will help us grow and grow the business, obviously, it's new to the company here recently. And so very - you know feel good about where we're heading.

Maybe just to add a little bit more color on that. Certainly, as you said, Andy, clearly success this year in you know 2020 with the Evolution project, the product that we launched there, really positioning well with the consumer to make sure we got an affordable option for them. You said, we expect that to translate well into strong renewal rates going forward. But keep in mind, Andy, too, I think historically here, our 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 a strong base and a, you know very strong go-to-market platform here. And also with the advent of new technology tools and online selling of cross-selling opportunities to improve, 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 Sokel with JPMorgan.

Hi, good morning. I also wanted to just begin by thanking Tony, wishing him well wishes and welcoming Bob to the team.

Thanks, Judah. Enjoyed working with you.

Thank you. I wanted to ask about the Customer Xperience Platform. It's clear that customer retention is an important initiative in the company's drive to improve customer overall organic revenue growth. I'm 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, trying to understand what exactly is different about the CXP. Maybe you could 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 reach those industry-leading retention levels? Thank you.

Yeah. Thanks, Judah, for the question. First of all, I would like to just echo what you said. The team has done a great job in 2020 with intense focus and strong execution on retention today. Having said that, as I traveled out in the field and spent time riding 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 the limitations are with our current system today and really providing timely information that's consistent across all those stakeholders that touch our customers today. So first and foremost, I think the technology that we're investing here is going to give us a 360 degree view of the customer with real-time information that flows between key departments in our business. That should allow for a much better experience and transparent experience going forward. So I feel pretty confident about that. As we said, it's a major initiative for the company. Both Bob and I have had experience in launching you know initiatives like this one. 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 talked about in the prepared remarks, we'd expect in the second half of the year to start to roll out to our service organization going forward. So a couple the enabling technology with CXP, 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 have a really strong package of standard operating procedures, great training through Terminix University, supported with a good solid CXP platform to enable that, provide our team with the tools that they need to do their job.

Yeah. The other area it's also going to help us is with M&A. And definitely with tuck-in acquisitions, getting them integrated much faster and getting them up on basically our platform and being able to basically monitor consistency across the company from an SOP standpoint with all the branches, and it's just going to basically make us a much more integrated operating business.

Maybe one last thing that I'd add to that, as I learned more about this industry and the route-based model and the experience we're delivering to customers, you realize quickly how important those customer relationships are between our techs, in particular, and the households or 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 in building those relationships. And certainly, that becomes enabled with tighter SOPs and stronger execution through the technology.

Yeah. And it's 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.

Thank you. Also wanted to add my congrats to Tony and look forward to working with Brett and Robert. Wanted to ask about your long-term view on the right level of EBITDA margins. I guess there was a time when margins were in the mid 20s, but I think many people would view that as potentially a period of underinvestment. Now you're at sort of mid-to-high teens but maybe in an elevated damage claims period. So I guess, what are you viewing as a normal margin level for the business long-term? And how are you thinking about investing for growth versus margin expansion within that context?

Yeah. Thanks for the question, Toni. Just maybe a couple of overarching comments, and Bob can add some color here. Certainly, I think we see a significant opportunity here to improve upon our margin base in 2020 that we've established here. The team has done a great job this last year of expanding margins, and that we certainly expect 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 some of the operating expense investments that we need to make in this business. I think it's fair to say our long-term target of 30% incremental margins is still an appropriate target for us. And certainly, as we exceed those targets, it's going to drive our overarching margins up going forward. So at this stage, we're comfortable with the guidance we're providing for next year. Again, 30% incremental margins is the appropriate target here. That frees up, I think, enough operating expense here for us to reinvest back in the business, but we're comfortable with the 30% incremental target 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 lost productivity as we launched the CXP experiment, I guess, and then experience. And then also increased travel, we got to get back on the road. We got to start seeing our branches more and understanding what's going on in the field. That obviously has not happened in the past year. And then we had some great experience from an employee retention standpoint due to COVID. So we've got concerns that some of that may be a headwind also. So I think in the short-term, we've got some headwinds, and that's why we've kind of got steady improvement going from early 17.2% in the prior year to 17.6%. We're guiding in the 18% to 18.5% range on a go-forward basis for the next 12 months, I think. You know we do have some challenges short-term, but we think that they do go away long-term.

Maybe the second part of the question there was, how do we balance margins and growth. And I think as we demonstrate in our plans for 2021, we are going to strike a balance here between showing margin expansion, but also we feel like we're making the necessary investments, the appropriate responsible investments at this point in our journey, that's going to develop capability that unlocks, I think, more accelerated growth in our out years '22, '23 and beyond, given the investments we're making in SOPs, training and development through the Terminix University as well as some of the investments in marketing and the e-commerce platform.

Our next question comes from Gary Bisbee with Bank of America Securities.

Thank you. Good morning and good luck, Tony. It's been a pleasure.

Thanks, Gary.

You know 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 multiyear turnaround effort here. 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 in 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? I think you acknowledged on employee retention being up. That may well have been you know somewhat impacted by the job markets. But are there other categories those improvements in retention? You know are margins sort of perversely benefiting from not having had the summer sales program? And if you reinstitute 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 creates some headwinds over the next 12 months to 18 months we should be thinking about?

Yeah. I mean we've provided that in the guidance. I mean, I think that you know we do have a travel headwind. Again, as we mentioned that we got to get back on the road. We had a labor productivity headwind because of that retention. And then we also have you know the Commercial Pest business was a challenge this past year, where we've lost roughly 5% of volume and - but we still have 4% of price increase. So you know there's still a lot of things that are impacting us related to COVID that we've got to you know shore up here in the long-term. And you know we've reflected that in this guidance and - but we do feel like it's an opportunity longer-term.

Yeah. I think it's, so just going back to the point to around - certainly, I think we commented that our employee retention certainly benefited this year from maybe a less mobile work environment. So we've got some work to do as we lap that. But having said that, I think the investments that we're going to make, improving teammate experience, better training strengthens our employer value proposition and we feel like there's a nice offset to maybe some of the tailwinds that we enjoyed through COVID. But I think also from a consumer behavior point of view, some structural changes long-term that COVID's created, certainly stronger awareness around safety and health in both service lines, Residential and Commercial, that certainly is going to benefit us going forward as well as a work-from-home dynamic that's likely going to persist post-COVID as well. It sets up a nice backdrop I think for our Residential business.

Our next question comes from Mario Cortellacci with Jefferies.

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 e-commerce platform, could you just help size up any cost or investment that is going to be involved there? And then similar to the question on CXP, how is that going to be different or even differentiated from the competition? And does the launch in the back half of '21, is that just like an initial phase? Or is that something that will continue into 2022 and potentially helping ramp organic growth in '22 or would have a benefit from that into '22?

Yeah. So the first part of the question around e-commerce, as we made the comment and prepared remarks, we're self-funding you know the investments in both the you know modern website - the modernized website as well as stronger e-commerce capability. And that's coming from stronger return on investment and other channels that we're using to help self-fund that. So no incremental investment this year being made in that enhanced capability. As it relates to CXP, I think the real opportunity we have to differentiate our services versus the competition, again, are the relationships that our techs enjoy. All 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 brands. I think our opportunity here has been how do we unlock the capability and empower our team on the frontline to enhance those relationships by having access to real-time information that's timely and provides that 360 degree view of the customer that's been missing here. So unlocking our team's ability to extract value there, I think, is at the epicenter of what CXP is all about. As it relates to timing, you characterized it right. We're going to start to roll out after the pest season from - you know starting in Q3 into Q4. Of course, we would expect that to roll through the calendar year into Q1, Q2. How long it's going to take us is all going to be dependent upon how well the initial rollouts go beyond pilot. The team's developed a very robust plan that we're working through today. And at least right now, we're expecting you know a roll over the calendar year into Q1 to complete that.

Yeah. And from a capital perspective, again, it's within the guidance that we provided as a $30 million to $40 million of CapEx and then also within the margins that we provided from an EBITDA perspective. So all of that's captured in here. And you know as Brett mentioned, it will go into 2022, but the majority of it should get done in 2021.

Mr. Jenkins, there are no further questions at this time.

Yeah. That concludes our call today. Thanks, everyone for your continued interest in the company. And we look forward to talking to you again on our next earnings call tentatively scheduled March - excuse me, May 6th.

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.