Terminix Global Holdings, Inc. (TMX) on Q1 2022 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, welcome to the Terminix First Quarter 2022 Earnings Call. Today's call is being recorded and broadcast on the Internet. Beginning today's call is Jesse Jenkins, Terminix's Vice President of Investor Relations, FP&A and Treasurer. I will now turn it over to Mr. Jenkins, who will introduce the other speakers on the call.
Jesse Jenkins: Thank you. Good morning, and welcome. Before we begin, I'd like to remind you that throughout today's call, management may make forward-looking statements to assist you in understanding the company's strategies and operating performance. As stated in the appendix, all forward-looking statements and cautionary statements, including those about the proposed Rentokil transaction, are subject to the forward-looking statement 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. Information discussed on today's call speaks only as of today, May 5, 2022. The company undertakes no obligation to update any information discussed on today's call. This morning, Terminix issued a press release filed with the SEC on Form 8-K, including our unaudited first quarter 2022 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. In order to better assist you in understanding our financial performance, we have included definitions reconciliations of these measures to the most comparable GAAP financial measures. Joining me on today's call are Terminix CEO, Brett Ponton; and CFO, Bob Riesbeck. Slide 3 of the presentation posted on the Investor Relations section of our website lays out the agenda we will cover today, with Brett opening with highlights, a Terminix Way update and an update on our termite damage claims and mitigation efforts, followed by Bob reviewing our financials and then returning to Brett for a brief Rentokil merger update, closing comments and questions. I will now turn it over to Brett Ponton. Brett?
Brett Ponton: Thanks, Jesse, and thank you for joining us. Overall, it was a strong start to a transformational year at Terminix. I am pleased with the momentum of our performance and excited to start off by sharing the progress the team has made on our strategic priorities. In the first quarter, we reported revenue of $496 million, reflecting growth of 5%. Organically, we had a strong quarter in our residential business and sequential improvement in our commercial business, with strong price realization across all channels. Termite revenue growth grew 6% organically, driven by volume growth and reoccurring core services as well as home services. Residential pest grew to 4% organically, with improved retention rates and better cross-selling of mosquito and bedbug sales volume. Commercial pest grew 2%, with organic declines of 1%. Excluding the impact of foreign currency and approximately $1 million of disinfection revenue in the prior year, commercial pest organic growth would have been approximately 2%. Commercial pest continues to improve with strong sales, improved retention rates and the disinfection headwinds now behind us, we are well positioned for growth in the coming months. In total, organic growth accelerated to 4% in the first quarter, which was in line with our own expectations and reflects the progress we have made in the business. First quarter adjusted EBITDA was $86 million for a margin of 17.3%. The decline in EBITDA in the quarter was driven by planned key investments in labor and staffing levels that are needed to support growth in the coming quarters. Like most companies, we also experienced some inflationary pressures in fuel, labor and materials in the quarter, which we are expecting to continue throughout the next few quarters. In the middle of last year, we began investing in our strategic pricing capabilities and have been successfully increasing prices above historical rates with minimal impact to our customer retention levels. This program has continued for a few consecutive quarters, and I'm confident we can continue our progress into future quarters. We are confident that these price increases enhance our ability to cover inflationary increases as we move throughout the rest of the year, just as we did this quarter. Now turning to the progress we've made in advancing our strategic priorities. Just last week, I was in the Dallas-Fort Worth area for the launch of our Terminix Way pilot. This exciting launch puts into action all the work we have been doing behind the scenes to make enhancements for our front line that will make it easier to provide world-class service to our customers. I will share more on the changes implemented with the Terminix Way in a moment. The back office team is also making progress towards completing the Rentokil merger, with preintegration planning increasing across the functions, including finance, HR and IT. Just last week, several members of the Rentokil team were in Memphis for on-site meetings and technology and operations. With progress and all conditions closed, we continue to see late in the third quarter as the target for transaction completion. The pending merger will enable us to further our important investments to drive organic growth, and we are excited at the prospect of accelerating the progress already well underway at Terminix. Starting on Slide 5, I will go a little deeper on the Terminix Way pilot and the enhancements we have in the pipeline in the coming months. Terminix Way is an initiative designed to give our front line the tools, training and technology they need to provide consistent, world-class customer service across our 50,000 customer touchpoints a day. Here, at Terminix, we have always believed that the technician is the center of the customer relationship and may need to feel supported in order to provide excellent customer service. We have seen a direct correlation between technician retention and customer retention, which led us to one of the guiding principles of the Terminix Way: all process enhancements should drive higher teammate retention. As we explore the first year turnover data in our organization, we saw room for improvement in our teammate retention rates in the early months of their hires. In an effort to address this, we have created a white glove process for our technicians, which we are calling their journey to route. Similar to a customer journey mapping exercise I have done many times in my life in marketing, we mapped teammate journey from day 1 of hiring as a trainee through the necessary training courses and, finally, to graduation into a full-route technician and have developed a thorough plan to address all of the touchpoints from this experience. The 60-day period, on average, is our first chance to make an impression on our teammates, and we have mapped out a detailed daily activity list from day 1 that we believe will improve the experience. The process leverages best practices from branches with high teammate retention rates and touches all corners of the organization, with involvement from our corporate talent acquisition team, region and division level field leaders and executive leadership. We're also working to modernize our training curriculums for all positions in the company. In addition to refreshing the graphics and content, we are making the training more interactive with the potential for both in-person and virtual sessions in small classroom settings to foster both a sense of inclusion as well as the more conducive learning experience tailored to the way our teammates learn today. We have created short videos that work well for independent learning and have pivoted to more of a on-the-job lie-along with current technicians guided by management and tenured teammates who have completed a recently launched certified trainer program. The certified trainer program launched in Dallas last month and pairs seasoned teammates with new hires, allowing our tenured teammates to pass on their practical knowledge as well as fostering meaningful peer-to-peer relationships with new hires. These enhancements will also help us move new hires through the training quicker so they can graduate throughout text in a shorter period of time and move directly from the classroom to serving customers with confidence. We plan to house these materials and a new learning management tool that will make it easy for us to make them available to anyone in the organization well after the initial training sessions are completed. These enhancements are in production and scheduled for launch in the coming weeks. We are excited about the benefits these actions will bring to help improve our teammate turnover in the coming months. As I mentioned last quarter, we have made tremendous progress in talent acquisition that has improved our staffing levels in the business, leading to an increase in productive technicians year-over-year at the end of the quarter. With this increase in new hires, we are making enhancements in our pay structure to ensure we make progress with turnover. For hourly trainees, we have increased wages in certain markets to attract candidates to the job and help improve turnover. These increases are nominal on the total population but make a big impact at the individual level when having compensation discussions. We have also instituted additional pay certainty for newly promoted route technicians. These teammates will still graduate into a production-based position, but we have created higher minimum pay floors so they can feel supported with more fixed pay if they needed as they transition to their new positions. While these changes are relatively new, the initial feedback from teammates has been positive, and we believe these changes will drive improvement in turnover in the crucial first year with the company. In total, turnover in the quarter for our route technicians was relatively flat to the end of the year in Q1, while we did see an uptick in turnover for our hourly positions. Our significant investments in labor in the quarter has led to a 35% increase in trainee headcount year-over-year in the quarter. These trainees will graduate in early Q2. And with these enhanced onboard training and pay structures, they will be better prepared to serve our customers in the vital spring season. Despite the challenging labor markets, we are encouraged by the capability we have built over the last few quarters that has positioned us well to capitalize on growth opportunities over the balance of the year. Turning to Slide 6. We also made some technology enhancements that makes it easier for technicians to become trusted advisers to our customers. In addition to simple step-by-step instructions for service delivery, there is a quick 5-question survey that will help identify possible opportunities to enhance protection for homeowners beyond their existing services, resulting in solutions, such as mosquito control and wildlife exclusion. Our technicians are well positioned to help customers understand the risk and limitations in their current services and offer solutions to those problems. One example that makes this easy is through prompts for pictures of the conditions that could lead to issues with these pests. Then with the push of a button, technicians can now generate proposals and sell some of our most needed services directly to interested homeowners. This technology built off our legacy platform will give our team the confidence needed to not just upsell customers but provide value-added services and education to homeowners who may otherwise be unaware of potential problems. We also felt it's important to ensure that the customers who are not home when we perform our services also have access to this additional resource to receive better insights into the work we have completed as well as any possible pest risk we identify while at the home. A new healthy home report is in development, and we will be system-generating this based on inputs from the technician during completion of a normal service. We feel these valuable insights can be helpful in building better relationships with our customers, ultimately leading to better retention, a willingness to accept price increases and to consider Terminix for additional recurring and onetime services. This is also a nice way to increase the pay of our dedicated technicians with additional commission opportunities as they deepen their relationships with customers on their routes. I was on site when we deployed this feature to our team in the Dallas-Forth Worth Area, and the response was overwhelmingly positive, with technicians mentioning the speed to execute and ease of use as the primary benefits. While this remains a very small sample size, the results were quite impressive. We have seen more than double the technician-generated leads than we saw in the same time period last year, with significantly improved close rates. With those early results and the overwhelming field leadership and technician response, we are taking steps to deploy these features to other areas of the country as soon as possible. We've already made great progress with the Terminix Way, and I'm encouraged with the competency we have built in executing strategic initiatives, and it gives us confidence to hit our deliverables on future enhancements in the pipeline. We are making great strides to provide our field-facing teammates with best-in-class tools, training and technology needed to provide world-class customer service. Before I hand it over to Bob for a full review of our financials, I also wanted to touch on the progress we have made on our termite damage claims mitigation efforts. We continue to feel that we are taking the right steps in our approach in this area despite historic inflationary pressure in building materials. Over the last couple of years, we have improved our visibility into claims across the country, and the data shows that our problem remains intensely focused in the region along the Gulf of Mexico within a 250-mile radius of Mobile, Alabama. This area accounts for almost 90% of the outstanding litigation and, over the last 12 months, had a claim rate that is over 5x larger than the rest of the country despite representing only approximately 13% of our protection plan termite customers. Because this problem is local, our solution is local as well. If you remember, during 2020, we completed a comprehensive mitigation program that enhanced the protection of all of our customers in the Mobile Bay Area. That plan continues to pay dividends. New nonlitigated claims in Mobile in the first quarter decreased another 10% year-over-year, and outstanding claims were 24% lower than the previous lowest reported numbers. During 2021, we expanded elements of the program to other high-risk areas and have seen similar claims reductions. In total, our new claims are down 55% from our highest reported peak in 2019. While claims counts have fallen drastically, we have been absorbing historic inflationary pressure in building materials and contractor labor costs, including the price of lumber that is still about 3x the prepandemic levels. We also recently began a claims management transition from a third-party provider to an internal team in order to improve the speed to resolution for our customers. By leveraging a team with over 140 years of termite control experience, we feel we can better adapt to the unique needs of our customers and resolve issues quickly and effectively. The reduction in new claims and improvement in closing older claims have resulted in total outstanding nonlitigated claims in the first quarter at the lowest levels we have ever reported. We are confident in our trajectory and our ability to continue to make progress reducing nonlitigated claims in the quarters to come. On the litigated side, case counts have remained high, with 15 new cases in the first quarter, almost all of which are in a 250-mile radius of Mobile. Despite a few more claims than we were projecting, we are continuing to see a steady decline in the quality of these cases, with cost per case dropping 25% since the fourth quarter of 2019. While we did see an increase of about $3 million year-over-year in total termite damage claims expense, we remain confident we are taking the right actions to reduce termite damage claims expense to baseline levels of approximately 4% of termite revenue. The expenditures we have gained and the actions we are taking will help us move beyond those baseline numbers in the years to come. I will now turn it over to Bob to walk through the revenue drivers, the major fluctuations in costs and the first quarter cash flow. I will come back with a brief update on the proposed Rentokil merger as well as closing thoughts before our Q&A session. Bob?
Bob Riesbeck: Thanks, Brett. Let's start with a detailed review of our top line performance. Overall, we have delivered revenue growth of $25 million, driven by $19 million of organic growth or 4% and as well as 1% growth from acquisitions. Beginning with the Termite and Home Services column on the left side of Slide 8, revenue increased by $9 million or 6% in the quarter. Termite and Home Services completions were up 13% in the quarter, with core termite completions up 5% and home service completions up 19% year-over-year due to increased cross-selling to existing customers. We experienced strong unit growth in the quarter despite lapping 12% growth in completions in the first quarter of 2021. Termite renewals were down 1% due to lower volume, partially offset by better pricing in an inflationary environment. We are lapping a strong renewals period in the prior year and have continued to see pressure on retention and termite renewals from increased moves in the quarter. We are planning to launch a new mover program in the second quarter and are off to a strong start in early April. Residential pest grew 5% in the quarter, with organic revenue growth of 4%. Organic revenue growth was driven by improvement in cancel rates and trailing 12-month retention rates, increased mosquito and bedbug sales volume due to improved cross-selling and strong price realization. Commercial pest was up 2% in the quarter, driven by M&A growth of 4%. Organic revenue growth of 1% was driven by a reduction in onetime services, including more than $1 million of disinfection revenue from the same period in 2021. International growth was negatively impacted by increased COVID-related sick leaves in both Sweden and the United Kingdom that peaked in late January and early February. Growth was also impacted by unfavorable foreign currency fluctuations of about $1 million. Excluding the impact of foreign currency and the more than $1 million of disinfection revenue, commercial pest organic growth would have been approximately 2%. In the other service revenue line, product sales were up 18% organically over the period -- over the prior year due to increased chemical demand as we lap the impacts of COVID-19. Overall, the first quarter continued positive momentum in the residential businesses, with growth in our termite and residential pest segments. We also saw a sequential improvement in our commercial business, and with improvement in retention rates in that service line, we are well positioned for growth in the coming quarters. Turning to Slide 9, you can see the financial summary and detail on the adjusted EBITDA drivers for the quarter. On the P&L at the top left of the slide, you can see the $25 million or 5% revenue growth we covered on the previous slide. Adjusted EBITDA of $86 million were down $4 million or 5% compared to prior year. Adjusted net income of $42 million improved $3 million or 7%, and adjusted EPS increased $0.05 or 16% to $0.35 per share. Across the bottom of the slide, you can see the adjusted EBITDA drivers for the quarter. Revenue growth added $13 million of adjusted EBITDA in the quarter for a gross margin flow-through of 52%, higher than our normal rates due to strong pricing we delivered in the quarter. Labor increased $6 million in the quarter, primarily driven by investments in staffing levels and talent acquisition to get ahead of peak season and drive growth in 2022. As Brett mentioned earlier, the bulk of the costs came from approximately 35% more nonproductive training headcount in the quarter compared to the same period in the prior year. While most of our teammates are on our production-based plans, we did see some wage pressure on our hourly employees, but we're able to pass along price increases to cover that inflation. As we alluded in February, vehicle fuel increased $2 million, driven by higher prices per gallon. Given current fuel prices, we expect to see similar increases in future periods. As a reminder, we have approximately 90% of our fuel usage in 2022 protected with the fuel hedge, which gives us more certainty about these impacts despite the volatility we see in oil and pump prices. As Brett discussed in detail, termite damage claims increased $3 million due to higher litigated claims counts in the Mobile Bay Area as well as higher cost per nonlitigated claims due, in part, to inflationary pressures on building materials and contractor costs. Investments in Terminix Way increased $1 million as we deployed enhanced technology and training to our teammates in the quarter. Investments in staffing levels and training in both sales and service in our call center increased $3 million to support expected growth in the back half of the year. And finally, travel expenses increased $1 million due to the easing of COVID-19 travel restrictions. These results are in line with our expectations for the first quarter. And we remain firmly on our full year plan, with needed labor investments in the quarter increasing our staffing levels to support continued growth over the remainder of the year. Turning to Slide 10. You will see the cash flow summary for the quarter. Working capital improved $11 million, favorably impacted by seasonal activity and the timing of interest and income tax payments. CapEx of $7 million for the quarter included recurring capital needs and information technology projects. Restructuring charges of $10 million primarily included costs related to our proposed acquisition by Rentokil. We expect to have additional restructuring payments related to the transaction in future periods that will negatively impact our expected free cash flow conversion rates for the year. Free cash flow conversion for the quarter was 73%. During the quarter, we borrowed $80 million from our revolver for short-term liquidity needs, repaying $50 million within the period and the remaining $30 million subsequent to quarter end. While we did not complete any acquisitions in the quarter, we remain active with our small tuck-in acquisition program. We also used approximately $30 million to initiate a restructuring of our minority interest in several businesses in China. We expect to receive proceeds from those transactions in the coming quarters as the restructuring is completed. As we discussed last quarter, given the pending merger, we are not planning to be in the share repurchase market in the near term. We ended the quarter with $170 million in cash and $518 million in available liquidity, with a net debt leverage ratio of 2x. Overall, we are excited by the momentum we have built in a business with accelerating growth rates and investments in staffing levels and the Terminix Way positioning us for additional profitable growth in the coming quarters. While we are not providing guidance due to the pending merger, we are encouraged by the first quarter results and the outlook we have for the remainder of the year. And with that, I will turn it back over to Brett for closing comments.
Brett Ponton: Thanks, Bob. In closing and on Slide 11, the first quarter was another quarter of progress against both our short-term goals and our longer-term strategic priorities. We delivered strong growth in termite and improved our growth rates in both residential and commercial pest from the fourth quarter. With our key investments in staffing levels across our technician base, we are well positioned for continued growth as we look to spring. We continue to provide support in this inflationary market, and I remain confident we will continue to pass along increasing costs in order to absorb increases in fuel, labor and materials in the future. I'm encouraged by the positive feedback we have received from our front line after deploying the first phase of Terminix Way, and I look forward to further enhancements in the pipeline. We remain on track with our operating plan for the year, and we are well positioned to continue our trajectory into the peak season. In our back office, we are supporting the additional closing conditions on the pending merger. We are finalizing agreements for the sale of our UK and Norway businesses and are expecting an announcement as early as next week. Other integration planning is well underway, and we remain on track for a close toward the end of the third quarter. And with that, I will hand it over to Jesse to lead us through the Q&A.
Jesse Jenkins: Thanks, Brett. As a reminder, we are limited in our ability to discuss specifics on the time line of the merger, but we are happy to take any other questions you may have at this time. Operator, let's open the line for questions.
Operator: Our first question comes from Tim Mulrooney with William Blair.
Tim Mulrooney: Brett, I know you discussed pricing briefly in your prepared remarks, but I didn't catch it. So I apologize if you already addressed this. But we did want to ask about pricing given the inflationary environment. I believe it typically averages between, I don't know, 1% to 2% on an annualized basis. But curious how much you expect it to be this year on an annualized basis, like for the full year, where we've spoken to a number of different privately held companies in the space over the last couple of weeks and over the last months who are talking about significant price increases, like 5% or more. Wondering if Terminix is thinking along the same lines because this could obviously impact how we're thinking about organic growth.
Brett Ponton: Sure. Tim, great question, by the way. First of all, and just as a starting statement, I think we feel very good about our ability to price to recover any inflationary pressure that we're seeing in our material costs as well as wage inflation. So regarding specific targets for the year, we're not going to provide specific numbers here, but I think it's fair to say, using the industry benchmark of 1.5% to 2.5%, we feel like it's going to exceed that pretty significantly. And a couple of things that's driving that for Terminix, I think, if you remember last year, we talked about one of our major strategic initiatives was to establish a much more robust strategic pricing team, leveraging stronger analytics, better competitive intelligence, down at the hyperlocal market level. And we're really pleased with the progress the team's made last year that we're now starting to see the benefits of us being able to take the necessary price we feel like there is an opportunity to take and also with mitigating the impact we see on customer retention. So we feel very good about striking that balance. So net-net, I think we feel very good about our ability to recover any inflationary pressure here and also see an opportunity here to close a potential gap that we found in certain markets relative to the market, which, I think, over the long term, helps fuel our objective of expanding margins in this business over the long term.
Tim Mulrooney: Yes. That's really helpful color, Brett. And I appreciate that. And because Jesse forgot to limit us to one question, I'm going to go ahead and dare to ask a second question really quickly. And just as a follow-up to that, to ask when your price increases typically go into effect. I think when your competitors said second quarter is typically when the annualized price increase goes into effect. But I'm curious how you think about layering in those price increases. And is it just for new customers or for existing customers as well?
Brett Ponton: Yes. Good question, Tim. We don't have an annualized price increase schedule that happens at a certain time of year. Our pricing are at the customer-specific level based upon the terms of the contracts that we have with those customers. So in effect, we're taking pricing actions every month in this business based upon the terms that we have with our customers, which, as you would expect, gives us a lot of flexibility to deal with any short-term trends that we might see that will impact our overarching pricing objectives that we would establish there. Again, we feel very good about the capability that we've built in this area, having foreseen, I think, some hyperinflationary environments. So we're expecting like the investments we've made and strengthen our pricing analytics is certainly starting to pay off here.
Operator: Our next question comes from Ashish Sabadra with RBC Capital Markets.
Ashish Sabadra: If I can just build on Tim's last question, and would it be possible for you to provide any details on what percentage of your portfolio has already been repriced higher for the inflationary environment?
Brett Ponton: Well, as I said, I think -- and I'll ask Bob to add some color to this. Look, we price on a rolling basis here. So we look pretty strongly at customer demographics in certain markets. We look at competitive dynamics based upon a set of local and regional competitors. And it's those 2 decision points, I think, that we take into consideration in addition to our input costs that we're seeing there. So in terms of the impact on a percentage basis of customers, I'll let Bob add some color to that.
Bob Riesbeck: Yes. And if you recall, we started taking price really in Q3 of last year. So we're just continuing that momentum. And Brett mentioned the fact that we put together a team that started to look at it more strategically in the back half of last year. So we are seeing some kind of tailwinds in the first quarter and second quarter of this year, but it will start to level off in the back half of the year.
Ashish Sabadra: That's very helpful color. And maybe just on my follow-up, can I -- I just wanted to drill down further on the cross-sell opportunity. There was several references to improve cross-selling. And now that you are well staffed, we could potentially see better cross-selling going forward. I was just wondering if it's possible to provide any color on how much of your existing customer base is penetrated. How do you think about the cross-sell opportunity? Any color there would be helpful.
Brett Ponton: Yes, great question. Maybe I'll point back to a metric we shared on our last call. There's 4 core services we offer to customers at Terminix: general pest control, termite, mosquito and wildlife exclusion. And across those 4 services today, on average, our customers are buying 1.3 of those 4 services. So about a year ago, we identified this as a significant growth opportunity for us to develop deeper relationships with our customers in an effort to drive higher penetration. I'm really pleased that I made the prepared remarks that we launched our first initiative to fully capitalize on that opportunity by launching the first phase of the Terminix Way in Dallas. And although there's 2 parts of the Terminix Way, one is focused on training and onboarding our technicians to create a good experience that allows them to get to their full performance faster. But also, there is an element of Terminix Way to unlock the power of the upsell or the cross-sell by putting in the hands of our technicians an easy-to-follow inspection process that allows us to quickly translate the results of that inspection into an upsell opportunity with the customer but also make it really easy for the technician to do that. We talk about one button execution of amending contracts on the customers' front step, if you will, that makes it really easy to do that. As we shared in the prepared remarks, although the data is pretty small sample size, I'm very, very encouraged by how quickly our team is ramping up in driving better leads through this process that we implemented as well as a higher close rate on those leads as well. So naturally, as you would expect, the excitement that we're seeing with that cross-sell opportunity is allowing us to challenge the team to accelerate rolling that initiative out across our branch network in the upcoming months.
Operator: Our next question comes from George Tong with Goldman Sachs.
George Tong: You mentioned that the merger is on track to close in 3Q. Can you discuss what remaining closing conditions there are in order to complete -- successfully complete the merger? And then also the divestiture in the UK, any elaboration on that? Sounds like something might be announced over the next several days.
Brett Ponton: Sure. George, this is Brett. As we said, we're still targeting late Q3 for the close. There is 3 or 4 remaining steps that we need to take care. As you characterized, the first one that Terminix needs to execute is the sale of our UK and Norway assets. And I'm really proud of the progress our team has made there. And we've run a pretty robust process, a lot of interest in those 2 assets. And we would expect in the next week or so to be in a position to announce the future direction of those 2 assets in our company. So we're on track there to get that condition to close completed. In parallel, of course, we're working on the proxy, and all that work is on track. The SEC, of course, needs to review that proxy and mark that proxy effective, of course. That will allow us then to send the proxy to our shareholders. We expect the vote then to be taken probably 30 to 45 days later. So all of those major events, we're still comfortable with the late Q3 time line. And it's probably worth noting here that these items that we talked about at this point are very procedural in nature. So it's just a matter of us executing the process. And the team is fully focused on this, and we remain committed to this late Q3 closing time line.
Bob Riesbeck: Yes. And George, this is Bob, by the way. And one thing we would like to call out also related to the UK and Norway is those two assets combined represent about $60 million annually on -- from a revenue perspective and less than $10 million from an EBITDA perspective.
Operator: Our next question comes from Brian Butler with Stifel.
Brian Butler: Can we start with the EBITDA bridge that you provided, which was very helpful for the first quarter? Can you talk maybe about how that trend in the give and takes look heading into the second quarter and maybe the remainder of 2022?
Bob Riesbeck: Yes, we got to be careful, obviously, we're not providing any type of guidance here. But we're very similar to what we have mentioned last quarter is that, obviously, our revenue conversion rate should be consistent with what we said in the past, which is roughly a 30% flow-through. The labor investments that we made in the first quarter will obviously continue through the second quarter. We did make some investments in the back half of last year. So they'll start to taper off in the back half of the year. And then there are some investments in Terminix Way. It was only $1 million in the quarter, but it is a significant amount during the balance of the year. And then the largest headwind, I would say, would be fuel. Even though we are hedged, it is at about $1 per gallon more than the prior year, and on the usage of 10 million to 12 million gallons, it's a rather significant headwind.
Brett Ponton: Maybe just to add some color here, Brian, to some context here. But first of all, we're right on where we thought we'd be at the end of Q1 here. If we go back to last year, if you remember, pretty strong margin performance in Q1 of last year was driven by probably the, unfortunately, lowest labor staffing levels that we've seen in a long time coming out of COVID, so we building our staffing levels really positions us well heading into the peak quarters of Q2, Q3. If you remember last year, we had some headwinds, I'd say, due to shortness in staffing and when you overlay the Copesan in-sourcing work that we took on in Q2, Q3, that certainly created a little bit of a headwind for us. So we're now lapping that this year in a much stronger labor position as a result of the investments that we made in Q1. So we feel like we're well positioned to capitalize on probably accelerating performance in our business in the second half of the year.
Bob Riesbeck: Yes. And I think some of the conversations we've had in the past about margin expansion throughout the year, I think that we're on track, to Brett's point, and to have that occur.
Brian Butler: Okay. That's helpful. And then as a follow-up, when you talk about organic growth in the commercial, it was negative in the first quarter but looking to trend positive kind of in 2022. How does that work through the year? Is that going to just be -- it's going to be positive a little bit kind of going into second, third? Or is it going to really be back-end weighted with a lot more organic growth potentially in the third or fourth quarter?
Brett Ponton: Yes. I think, first of all, maybe just to clarify, yes, as reported, we were down 1%, but we adjust for FX, disinfection actually plus 2% growth organically here. So -- and that's a sequential improvement versus Q4. So we're encouraged by the momentum that we're seeing in our commercial business on the domestic front and an improving environment, I think, now in Q2 in our international business. So we would expect to see, I think, acceleration in our commercial business as we progress through the year here.
Operator: There are no further questions at this time. Ladies and gentlemen, 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.
