Terminix Global Holdings, Inc. (TMX) on Q2 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, welcome to the Terminix Second Quarter 2021 Earnings Call. Today’s call is being recorded and broadcast on the Internet. Beginning today’s call is Jesse Jenkins, Terminix’ Vice President of Investor Relations, FP&A and Treasurer. I would 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 on Slide 2, all forward-looking statements 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 in the forward-looking statements. Information discussed on today’s call speaks only as of today, August 5, 2021. 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 second quarter 2021 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. In order to better assist you in understanding our financial performance, we have included reconciliations of these non-GAAP financial 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 shows the agenda we will cover today. With Brett opening up with an overview of our performance and initiatives, followed by Bob reviewing our financials and unchanged outlook, we will then open it up for questions. I will now turn it over to Brett Ponton to begin the discussion. Brett?
Brett Ponton: Thanks, Jesse. In the second quarter, we delivered revenue of $560 million for growth of 5%. 4% total organic growth was highlighted by double-digit growth in the commercial pest business as we continue our steady improvement in this service line in the wake of the pandemic. Residential pest grew 4% organically, highlighted by retention gains and strong execution on our pricing strategy. Despite lapping strong new unit growth in the prior year, termite grew 1% when adjusting for a $5 million timing impact to revenue recognition as we migrate to our monthly pay termite offering. Second quarter adjusted EBITDA was $123 million, up 3% or $4 million year-over-year for a margin of 22%. We continue to see benefits in fleet management and chemical costs year-over-year, which is helping to offset an expected increase in labor costs as the labor markets become more competitive. Margins were also impacted by revenue mix changes year-over-year as a commercial business recovers from COVID as well as key investments we are making to strengthen our operating capabilities that will drive sustainable growth over the long term. We continue to generate substantial free cash flow, allowing us to be aggressive with our share repurchase plan, returning $181 million to shareholders through the purchase of 3.7 million shares in the quarter. The share count reduction and the debt reduction from the ServiceMaster brand sale in the prior year drove adjusted net income, up 24% and adjusted EPS, up $0.11 per share. I am also excited to have recently completed our management team by filling our GC and CIO roles. Deidre Richardson has assumed the General Counsel role and brings a wide range of experience in multiunit businesses. Her experience with distributed workforces will be valuable as we reshape our teammate value proposition with improved standards and training through the Terminix Way. Joy Wald will take over as our Chief Information Officer at a crucial time in our business as we enhance our systems through the customer experience platform. Joy brings experience in recurring revenue businesses where she held a number of operational roles, including strategy and M&A as well as customer care. Her wide range of operational and informational systems experience will serve our management team well as we move forward with our initiatives. As the leadership team is coming together, we are gaining alignment behind a few specific areas, focusing on service excellence and enabling growth through better customer penetration in both residential and commercial. These key operational capabilities will form the backbone of our work to enable our teammates through both the Terminix Way and CXP. Turning to Slide 5, I will go into more details on these vital investments and how they fit into each of our strategic priorities. This is a slide that should look familiar to you. As we have said since I start a little less than a year ago, making progress on these priorities is instrumental in our ability to improve the consistency of our results and it will guide the initiatives that we undertake as a business. Terminix Way and CXP are the current initiatives that will impact each of these four pillars in meaningful ways as we roll them out over the next several quarters. First and foremost, we must enhance our teammate experience. Our teammates are the most important asset of our business and our work to enhance the tools and training they use in over 50,000 customer touchpoints per day forms the basis of the Terminix Way. We have found that our best technicians deliver excellent service and share their expertise effectively with customers to drive deeper customer penetration. We have pockets of excellence in these key capabilities across our business and bringing that talent together to develop improved standards to drive operational excellence is the first step to the Terminix Way. To that end, we have built a team that is focused on this initiative from our own ranks. The assemble team has over 120 years of pest and termite experience over 100 of those years, which came while working at Terminix. This team understands what it takes to deliver a superior customer experience and will build a century of combined learning into enhanced playbooks for all positions in the company from route technicians to branch managers. Ultimately, standards are only as good as our ability to train to those standards, and this team will lead the rollout of an improved training curriculum through a new Terminix University platform. Terminix University is all about preparing teammates to succeed in their current role, while developing their skills for future jobs as they develop in their careers. While our efforts are in the early stages, and there’s clearly a lot of work remains over the rest of 2021 and into 2022, we are confident that the Terminix Way will improve teammate performance, engagement and ultimately, satisfaction. As expected, given the current state of the labor markets, we did see an increase in turnover year-over-year. While we remain ahead of 2019 turnover rates, we clearly have work to do to become the employer of choice in the industry. We believe enhancing playbooks and training support in Terminix University, in conjunction with more clearly defined teammate growth plans, this will improve our value proposition for prospective teammates and help us become a desired place to build a career. We also remain keenly focused on improving our customer acquisition and penetration capabilities in order to drive better organic growth. Our focus remains on improving our digital marketing capability. We are making progress on local search optimization, which will be accelerated by a new and enhanced website experience. Winning the local search experience, so we are relevant when prospective customers, our searching for pest management is a priority and a key to growing our customer base. These areas take time to develop and I am confident we are on the right track. While we make strides in digital, it is imperative we leverage our brand strength and pest expertise to do a better job of penetrating our existing customers, both with core pest and termite offerings and with adjacent products like mosquito and wildlife exclusion. As a part of the Terminix Way, we are developing a robust technician cross-selling playbook, enhancing our abilities to grow the business by maximizing the selling potential of all of our technicians. CXP is instrumental to enabling our technicians with this capability. CXP will provide the confidence needed to share our expertise with the customer by guiding technicians through a robust service inspection process designed to identify additional ways we can protect homes and businesses. A seamless process to diagnose potential problems before they occur will unlock additional sales opportunities and allow us to reinforce our best expertise and deepen our relationships with our customer base. While technicians are performing these inspections today, the enhanced definition – or excuse me, technology will create consistent and improved selling performance across all of our teammates. As we mentioned last quarter, we recently rolled out our commercial customer sales management tool to our commercial sales teams. We have been pleased by the visibility gain in this area. While it’s still early, the team is energized, and we are happy to have this portion of CXP now in flight. The broader CRM rollout of CXP remains on track for late in the year as we get back past the peak pest season. The other avenue of growth is customer retention. We continue to make progress in this area, delivering trailing 12-month retention improvements in residential pest management and termite in the quarter. We also saw improvements in our local commercial accounts with cancel rates improving 23% in the quarter over the heavily COVID impact of prior year comparison. Retention improvements will accelerate with both CXP and the Terminix Way. The Terminix Way will standardize service delivery by improving our ability to meet the needs of all of our customers from residential customers to our most sophisticated commercial customers in verticals with the highest quality standards. Improved customer satisfaction will ultimately drive retention gains. CXP will give our technicians the tools they need to deliver a consistent experience with automated checklist that will guide technicians through the non-negotiables of every service we deliver. This week, we have over 50 teammates in Memphis to go through a simulation of the process flow of the CXP platform. This is the important step in the process and will allow us to gather real-life feedback from end users that will be incorporated as we finalize the platform design. Similar to the rollout of commercial customer sales management last quarter, we were able to deliver additional enhancements to our teammates this quarter. We recently enhanced our commercial quality assurance program by extending the case management elements of the CXP platform to branch management throughout the country. The addition of over 1,000 users will allow us to move away from managing client service concerns through spreadsheets and e-mails to an automated dashboard that provides immediate visibility from local branch management to executive leadership that will streamline and coordinate our customer response resolution efforts going forward. This process will provide real-time operational insights to ensure we are exceeding our customers’ expectations. And finally, all of these priorities are designed to improve our profitability and expand our profit margins. In the quarter, we saw strong productivity in both fleet management and chemical costs as we had lower vehicle maintenance expenses and improved chemical costs through the purchasing power of our product sales division. This productivity was offset with higher labor year-over-year, partially due to revenue mix. As we have been expecting turnover is elevated compared to 2020 as the labor markets improve and competition for labor increases. As mentioned earlier, our people are a vital part of our business and making strides to improve the Terminix teammate value proposition through better tools, training and technology will help us continue to improve our turnover rates in the future. We have also seen strong productivity gains in our international businesses with margins up in Canada and the UK as we move past the impact of the pandemic as well as UK integration efforts in the prior year. We are encouraged by opportunities we see internationally in both growth and margin expansion and are investing in systems and growth in areas where we already have a significant presence. Termite damage claims are slightly behind our expectations at this point in the year, driven by higher cost per non-litigated claims due in part to elevated costs for building materials and contractor labor. Despite our cost per claim increase in non-litigated claims, we are encouraged by the continuing downward trends we are seeing in the Mobile Bay Area in the second quarter with new non-litigated claims counts down 24% year-over-year and outstanding non-litigated claim counts down 38%. We did see elevated litigated cases this quarter, but the cost per case continues to decrease as the cases are coming on lower value properties. As we have always said, timing of litigated cases is difficult to predict quarter-to-quarter, but with the value of the cases continuing to decline, we remain encouraged we are on the right track. Outstanding litigated case counts in Mobile Bay were down 24% and cost per outstanding case in Mobile Bay and the rest of the country was down year-over-year by 8% and over 30%, respectively. As we have seen from the progress we are making in Mobile Bay, I am confident as we scale best practices and incorporate them into the Terminix Way playbooks nationwide, we can reduce our damage claims expenses to historical norms and beyond over time. Overall, we made progress in Q2 executing on our priorities. We will continue to take steps on the Terminix Way and CXP over the course of the year. And despite some of the headwinds we will face with strong industry competition, we are in a position to continue to drive consistency across the business that will accelerate growth, expand our margins and ultimately create value for our shareholders. I am energized by the opportunity we have with this team and excited to deliver on our commitments. And with that, I will turn it over to Bob to discuss the financial specifics of the quarter. I will return with some closing thoughts in a few moments.
Bob Riesbeck: Thanks, Brett. Let’s start with a detailed review of our top line performance. Overall, we delivered revenue growth of $26 million, primarily driven by $19 million of organic growth or 4%. Beginning with the termite home services column on the left side of Slide 6 reported revenue decreased by $3 million or 2% in the quarter. Breaking down the components of growth further, termite and home services completions were up 1% in the quarter, with core termite completions down 1% and Home Services completions up 3% year-over-year. Core termite completions made up 59% of the $113 million completion revenue in the quarter. Termite completions were impacted by lapping 14% growth in completions in the second quarter of 2020 as we saw strong growth from the introduction of our monthly pay product. Termite completions were also impacted by staffing challenges in our outside sales professionals as the labor markets have impacted hiring rates and turnover in this very competitive labor pool. As Brett mentioned, we are making strides in our digital marketing and cross-selling capabilities that will improve growth in future quarters. Termite renewals were down 5%, driven by approximately $5 million in headwinds from a change in revenue recognition for our monthly pay product. Adjusting for the revenue recognition change, termite renewals would have been up by 1% and total termite growth would have also been up 1% in the quarter. For the full year, we remain on track for unadjusted growth in termite despite lapping strong completion growth and the impact of our monthly pay product moving into the renewal period. Residential pest grew 5% in the second quarter, with organic revenue growth of 4%. We continue to see benefits executing our pricing strategy as well as improvements in customer retention. Growth in residential pest was negatively impacted by lower-than-expected summer sales, due to lower staffing at our sales partners, driven by the competitive labor market. Revenue growth was strong in the second quarter, but we continue to monitor increased cancellations year-over-year by an uptick in customer moves in this historically strong housing market, and we are tracking labor staffing difficulties and door-to-door salespeople at our sales partner that may impact future periods. Commercial pest, which now includes our European Pest businesses, grew 14%, including 10% organically. On a constant currency basis, the service line grew 7% in the quarter. The benefit from foreign exchange translated to less than 1% of the total organic growth of the company in the quarter. Growth in commercial pest was highlighted by double-digit growth internationally and continued sequential improvement in the U.S. market. Looking to the back half of the year, we expect growth to moderate to more normalized levels as the severe prior year impact of the pandemic lessens. In the other revenue line, product sales were up about 8% organically over the prior year as we lap the impact of COVID. Overall, the second quarter saw a strong rebound in the commercial business and consistency in residential pest, while termite was impacted by the timing of revenue recognition. Normalized for currency impacts in termite revenues recognition, organic growth would have been approximately 4%. With advancement in digital marketing capabilities as well as progress on the Terminix Way and CXP, we are confident we can continue to make meaningful progress towards sustainable organic growth rates in the mid-single digits. Turning to Slide 7, you can see the financial summary in the detail on adjusted EBITDA drivers for the quarter. On the P&L at the top left of the page, you can see the $26 million or 5% revenue growth we covered on the previous slide, leads to a $4 million or 3% increase in adjusted EBITDA. Adjusted EBITDA growth and lower interest expense after the debt pay-down from the sale of ServiceMaster Brands drove a $13 million or 24% increase in adjusted net income. And finally, the net income increase and continued aggressive share repurchases in the quarter led to an $0.11 or 28% improvement in adjusted EPS to $0.51 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. Labor increased $16 million in the quarter, primarily driven by higher turnover year-over-year from the competitive labor markets as well as a revenue mix shift towards commercial pest. As we discussed last quarter, we expect these headwinds are likely to continue as we lap historic improvements in turnover in 2020 that were partially aided by the impacts from COVID. Direct cost productivity and fleet management and chemical purchasing generated $4 million of higher adjusted EBITDA. Key investments in Terminix Way and CXP were approximately $2 million in the second quarter. These costs are timing related and are offset in the full year by favorability we saw in the back office in the first quarter. Sales and marketing costs are up from prior year by about $3 million. As discussed earlier, we are investing in digital marketing capabilities to improve lead generation while maintaining total marketing spend as a percent of revenue roughly flat. Increases in sales commissions are largely driven by increases in commercial revenue and the impact of prior year sales growth of the monthly paid termite product. Termite damage claims expense increased $1 million in the quarter, with increases in non-litigated costs per claims from inflationary pressures, partially offset by lower litigated costs and approximately $2 million from lower mitigation expense than the prior year. Total termite damage claims expense was $20 million in the second quarter, about $13 million over the baseline of 4% of termite revenue. As Brett mentioned, termite revenue claims expense came in higher than expected due in part to inflationary pressures on cost per non-litigated claims and an uptick in new litigated cases in the quarter. While it remains difficult to predict case counts on a quarter-to-quarter basis, we remain confident we are taking the right steps. Best practices for Mobile Bay are being incorporated into the Terminix Way and we will continue our progress in termite damage claims as these near-term pressures are resolved. In total, adjusted EBITDA margins of 22% contracted 40 basis points year-over-year. However, it is important to remember that we are absorbing approximately $5 million in both revenue and adjusted EBITDA in the period from the timing impact of revenue recognition and termite renewals. When adjusted for this impact, margins would have been 22.7% and expanded by approximately 30 basis points. As we will touch in on the outlook in a few slides, we remain largely on track with our full year adjusted EBITDA and margin outlook and are still targeting full year margin expansion to approximately 19% annually. Turning to Slide 8, you will see the cash flow summary for the quarter. Working capital has been a use of cash year-to-date and is expected to be a use for the full year as we unwind payroll tax deferrals from 2020, work through the termite damage claims reserves we have on the balance sheet and absorb the cash flow impact from our move to the monthly paid termite product. CapEx remains on track for between $30 million and $40 million for the full year. Year-to-date, free cash flow conversion of 65%, was in line with expectations, and we remain on track for conversion in the mid to high 50% range for the full year. Shifting to uses of cash, we have completed $45 million worth of M&A and remain active with small tuck-in deals in the pipeline. We made scheduled debt payments on lease vehicles and completed the deferred payment obligation on the 2018 Copesan acquisition in Q2. And finally, the primary use of cash so far this year has been through the share repurchase program. Under the program, we have purchased $350 million worth of shares this year. Including purchases from last year, we have approximately $43 million left in the existing $400 million authorization. Our capital allocation priorities remain unchanged with our leverage at the very manageable level we are targeting accretive M&A and believe we have additional capacity to continue to return cash to shareholders. We ended the quarter with $313 million in cash and $691 million in available liquidity with a net debt leverage ratio of 1.5x. This cash position and balance sheet flexibility allows us ample ability to invest in long-term growth through the Terminix Way, CXP implementations and accretive M&A as we progress towards our longer term leverage target of about 2.5x. Moving to 2021 outlook on Slide 9, our guidance remains unchanged as we remain firmly on track with our plans for the year. We expect full year revenue between $2.025 billion $2.050 billion, with organic revenue growth between 3% and 4%. Residential pest is expected to grow with strong pricing realization and improved retention. Commercial pest is expected to moderate slightly from the strong growth in the second quarter as the prior year impact of COVID subsides. Termite and home services is expected to grow as we absorb an approximately $2 million impact in the third quarter from the change in the timing of revenue recognition in our new monthly subscription-based termite offering. Adjusted EBITDA is expected between $380 million and $390 million, with margins between 18.8% and 19%. Organic revenue growth is expected to contribute approximately 30% incrementally. We expect to see headwinds in labor expense as job markets open up and plan to make investments in sales and marketing as well as the key operational initiatives with Terminix Way and CXP that will drive future growth and consistency in our business model. We remain encouraged by what we’ve seen as we make progress on improving the fundamental operations of the business. We are confident investments in standardized playbooks training, tools and technology in the back half of 2021 are going to be key enablers of profitable growth in our business and are excited for the hard work ahead of us to deliver these capabilities to our dedicated teammates serving our customers everyday. And with that, I will turn it back over to Brett for some closing comments.
Brett Ponton: Thanks Bob. In closing, I am excited to have the full team on board and aligned behind the same business priorities and strategic initiatives. I am proud of how the team has come together over the last few quarters, and I’m encouraged with our progress and direction. We are committed to making the investments necessary in the Terminix Way to improve our teammate value proposition by improving the standards, developing the train and enhancing the tools needed to deliver a consistent customer experience from branch to branch, teammate to teammate and customer to customer. Overlaying improved sales and service quality from the Terminix Way with the CXP technology platform will create a seamless and easy inspection process for technicians who will be able to more effectively share our trusted expertise and offer additional solutions to our customers’ problems. These investments are critical to returning to industry-level growth and profitability and ultimately bridging the gap to our competitors in the marketplace. Digital marketing capabilities and a refreshed e-commerce platform are also on track and will deliver a frictionless experience when customers find us and buy from us on the web. CXP and Terminix Way are the initiatives that will drive progress on our priorities to improve the teammate experience, enhance customer acquisition and penetration improved customer retention and expand profit margins. I am proud of the work we have already done and believe we are on the right track to deliver considerable shareholder value as we progress towards our goal to become the best-in-class pest management provider. And with that, I will hand it over to Jesse to lead us through the Q&A.
Jesse Jenkins: Thanks, Brett. With many analysts in line this morning, 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.
Operator: Thank you. Our first question comes from Andy Wittmann with Baird. Please proceed.
Andy Wittmann: Great. Thank you. So guys, the quarter was generally in line and the guidance is unchanged. But inside of that, I think the commentary on labor stood out to me. I don’t know if it’s changed, but it sounds like it may have changed. Brett, I was just hoping you could talk about some of the ways that labor is impacting your business. There is a lot of ramifications here. There can be just the raw labor price that you’re having to pay people more because of labor inflation. There can be inefficiencies due to turnover. There can be higher costs related to training new people to backfill. And there is just a lot of ways that this can affect your P&L. And there is probably others to that I didn’t even mention. So just given that this is something that impacted the quarter and you said that it’s going to be impacting the rest of the year, I was hoping you could talk about some of those dynamics in a little bit more detail. And then just talk about some of the plans and processes that you have in place to address this? And how good of a grasp do you have on the labor situation? So I apologize, I know there is a lot there, but I think this is a key issue. And I thought maybe you could touch on some of those points.
Brett Ponton: Yes, certainly, good morning, Andy, by the way. Thanks for the question. And you’re right, there is a lot to unpack there with that question. But why don’t we first start with just let’s bifurcate the labor discussion between technicians and sales professionals in our business because I think the backdrop of the landscape is a little different by each. Let’s first start with technicians. And then, as you characterized, we can have some labor issues with turnover, that’s going to create premium pay, overtime issues and potential service issues related to understaffing in various branches. We knew coming into the year that we were going up against a pretty hard comp because our turnover was at near all-time lows, I guess, in 2020. So we are expecting to deal with some turnover in the business. And I think the team has done a nice job navigating through that in the quarter. And I think – so we’re seeing more costs related to premium pay to cover shortage in demand – or a shortage in labor. But also I think it’s fair to say we haven’t seen a lot of wage inflation on the technician side, just given the fact that most of our techs are paid on a productivity basis. And our entry wage rates are fairly competitive in most of the markets that we’re in. But there are exceptions to that, certainly in high-growth markets and pretty attractive areas would be the outlier of that. But generally speaking, we feel pretty good about where we’re at on the tech side. Our value proposition is strong there, and it’s going to get even stronger with Terminix Way, Career path into Terminix University and the enhanced tools that we’re going to provide our team there. Let’s switch gears and talk a little bit about our OSPs, or our sales professionals on the outside. Because I think that’s – the story has been a little different there. It has been a little bit more challenging environment there, a very competitive labor pool for sales professionals. In our model today, we rely a lot on our sales professionals to drive new unit growth, and they do a lot of cross-selling for us. So some of our may be dissatisfaction with our performance in termite and home services, we would point back to some of the challenges we had on our OSPs, in particular, things that we’re doing there to improve. We have recognized that we needed to benchmark our value proposition versus the marketplace and are making some tweaks to our approach in terms of how we market to prospective people coming in. And we have made some minor tweaks modifications to our compensation pay plans to ensure that our opportunity here at Terminix is in line with the marketplace and create an opportunity for them to grow and develop in their careers. So, a lot there. But certainly, we recognized in this model how important labor is to deliver great service excellence to our customers, and any issues that come from that certainly create downstream effects to our business here. So maybe last thing I’d leave you with, Andy, is I feel like our HR team has done a wonderful job in improving how we market the Terminix value proposition to prospective new hires here with a whole new campaign online as well as using new channels to reach prospective new hires as well. In addition to that, we’ve launched a recent referral program internally to attract more talent into our company. So a lot of initiatives underway to really strengthen the value proposition here, both near-term as well as long-term in our business.
Operator: Our next question comes from Tim Mulrooney with William Blair. Please proceed.
Tim Mulrooney: Good morning, Brett, Bob and Jesse. Thanks for taking my question. Bob, I have one – just one question for you on the guide. So I think your guidance implies EBITDA margins of about 17% for the back half of the year versus the 21% that we saw in the first half of the year. Is that in line with typical seasonality? And if not, can you talk about the primary factors driving the expected margin compression sequentially from the first half to the second half? And also, is there maybe just some conservatism built into the numbers here, given ongoing uncertainty with Delta? Thank you.
Bob Riesbeck: Good morning, Tim. Thanks. Yes, you’re spot on. It is in line with the seasonality of the business, but it is slightly better than the prior year. We’re going to continue to show consistent growth in margins. To Brett’s point on labor, we do see some headwinds there. So we’ve kind of factored that in. It was in our guidance last quarter also expecting our record turnover rates of the prior year to not continue and some significant investments in CXP and Terminix Way that will hit the P&L and then also from a sales and marketing perspective and digital marketing. And then the other headwind we do have is travel. We are getting more people back on the road. When we talk a little bit more about CXP later, we do have a group of individuals in here for some training this week. So we are getting back on the road quite a bit more than we did the prior year. So, that – those are really the key drivers there. We do see top line growth being consistent with the first half of the year. So we kind of are guiding at that midpoint at about 3.6% revenue growth compared to the 3.4% organic growth we had in the first half. So again continued progress, just trying to be smart about what we put out in the market.
Operator: Our next question comes from Ian Zaffino with Oppenheimer. Please proceed.
Ian Zaffino: Hi, great. Thank you very much. I kind of wanted to ask just general thoughts on how you guys are doing versus the competition, both in the second quarter, where you just completed and then also your outlook for the second half of the year within the same vein? Thanks.
Brett Ponton: Good morning, Ian, this is Brett. I’ll take the first part of that and ask Bob to add some color on the outlook here. But generally speaking, if you look at Q2 and just a quick strategic assessment here, I’m really pleased with the progress the team is making here, and we remain on our plan for the year. And just a reminder, right, we raised our guide after Q1, and we’re staying committed to that guide as of Q2. But as we assess our performance versus the industry, we do recognize we still have some significant opportunities to improve in our business. I do think the team is coming together and we are all aligned very much on the critical priorities in this business that I think have the opportunity to create some real meaningful value for the company and our shareholders here. And those three core areas that we’re really, really focused on here is, number one, again, driving customer retention through better service quality, and that’s where the Terminix Way comes in to help us improve consistent service quality across all of our customer base. We do that well. It will lead to really strong improvements in retention. Secondary is just around penetration. We’ve identified, I think, a significant opportunity for us at Terminix to improve deeper relationships with our customer base, not only on residential, but on commercial through much stronger cross-selling, cross-marketing efforts and help provide our technicians the opportunity to do more of that with better tools to help enable that. And that’s where CXP and Terminix Way comes in to help unlock that potential value for us going forward. And then finally, on acquiring new customers into the brand, that also is very much pointed to the digital marketing efforts that our team has made some really good progress on. So we recognize that relative to the industry here, we got a lot of opportunity ahead of us. That could also reinforce what attractive industry that we’re in today. And with a company like Terminix with a really strong well-recognized brand with a national footprint, once we install this capability to improve service and give our team the tools, we feel like there is a significant opportunity to improve our performance and close that gap versus what we’re seeing in the marketplace with other competitors. As it relates to the outlook on the year, do you want to take that?
Bob Riesbeck: Yes. Good morning, Ian and thanks. As we mentioned just a second ago, I mean, our midpoint on the guide is 3.6% organic growth versus 3.4% in the prior year. And our revenue plan is really continue that consistent growth and stabilize the residential and the termite business. We also are coming over some tougher commercial comps in the back half of the year as the market started to open up last year and also some tougher termite comps on completion compared to the prior year, so some headwinds from summer sales. So we’re comfortable with where we are on the guide right now. And to Brett’s point, we’ve got a lot of gap to close versus the competition, and we’re working towards that.
Brett Ponton: Yes, maybe just add a little bit more color on that. I feel really good about our progress on commercial, as you saw that in Q2 results here. I think we’re seeing a nice recovery there, and our team is doing a nice job of capitalizing on that recovery. Stable demand, pretty consistent in resi across the back half compared to the first half. And termite, we knew we’re going to have really strong comparables, as Bob said. So we’ve got some work ahead of us on termite here, but I feel like we’re focused on the right thing here with our business, a keen focus on digital marketing on termite to drive more leads there. And again, the opportunity here for us to leverage and create more selling resources in the company and unlocking our technicians by giving them the tools to cross-sell and improve that customer penetration will also be a help to us in the second half. But despite that, I think we’re quite confident with the guidance that we’re committed to here at the end of Q2.
Operator: Our next question comes from Judah Sokel with JPMorgan. Please proceed.
Judah Sokel: Hi, good morning. Just wanted to touch on capital allocation, the quarter saw a major step-up in share repurchases. Clearly, in the past share repurchase pay a little bit of the setback towards things like investment in the turnaround as well as M&A. Can you give us as a little bit of a philosophical pivot where maybe you’re going to be a little bit more aggressive on the buyback front? With this maybe just a one quarter opportunistic type of approach or just how do you see balancing the different needs for cash going forward? Thank you.
Bob Riesbeck: Good morning, Judah. And obviously, our M&A activity has picked up this year. We spent $45 million year-to-date on five transactions. We spent only $36 million last year in total on 12 transactions. So there is a significant pipeline going forward on M&A. So investing in growth with the Terminix Way and CXP is obviously critical along with M&A. We did return $181 million in the quarter at an average price of about $48.77. So we’re still trading at sub-18x EBITDA. We feel like that’s an attractive price for us to buy. We do have $43 million remaining under the $400 million that’s authorized and we are committed to returning capital to shareholders. We want to be good stewards of capital and get to that kind of leverage target of 2.5x. So we are focused on it. Our Board is focused on it. We’ve got some meetings with them over the next few weeks. And we do plan to have a more communicated plan next quarter.
Brett Ponton: Just to add a little bit of color to that, Bob, too. Just to reinforce and underscore, I think we’re trying to stay balanced there, right, with investments and strengthening our operational capability in the company while we remain in the market for M&A. So, that’s the reason why we’re focused on tuck-in deals here near-term, while we strengthened the platform that we’re building here as part of Terminix Ways with right technology and training. So as that platform continues to evolve and mature, it will give us more confidence, I think, to improve and look to increase may be the flow of deals to drive future growth once we stabilize and strengthen that platform.
Operator: Our next question comes from George Tong with Goldman Sachs. Please proceed.
Zach Lopez: Hi, good morning. This is Zach Lopez on for George. I was just wondering if you could kind of talk about the monthly service subscription and how that’s kind of progressing and what percentage of termite new sales currently are made up of the monthly pay product?
Brett Ponton: I’ll take the first part, Aaron and let Bob handle the second part. I think the team has done a nice job, I think, developing a good strong value proposition with our monthly pay product. And we will continue to see good momentum in that service line, especially related to the monthly pay option there. But roughly 75% of all of our new customers we’re bringing on is taking the monthly pay option with the termite evolution package we put out there. So it’s going to be a key part of our go-to-market model going forward, again with the spirit of aligning our value proposition to match the needs of the marketplace and we continue to see momentum there and expect that to continue going forward.
Operator: Our next question comes from Michael Hoffman with Stifel. Please proceed.
Michael Hoffman: Hi, thank you for taking the question. So I have a cadence question that is about the second half broken into the quarters about sales, EBITDA and free cash flow. And in particular, what is the drag on the conversion ratio in second half, if you’re going to end up at 55% to 60%, down from 65% in the first half?
Bob Riesbeck: Good morning, Michael. Obviously, we have some issues that are dragged in the second half. There is the care – we got the benefit from the CARES Act payroll deferral. Termite evolution is a drag in Q3. We kind of picked it up on the other side in Q4, and some other working capital issues. And obviously, we got a $20 million tax refund from an NOL carry-back last year. So those are kind of the major issues as far as the impact in the back half. We overall – still see the overall free cash flow in the high 50% and working our way, a reasonable goal of 60%.
Michael Hoffman: And the sales and EBITDA cadence by three and 4Q to meet the guide, how to think about that?
Bob Riesbeck: Yes. We just see it stable. Again, our guide is roughly 3.6% in the back half compared to organic growth of 3.4% in the first half.
Brett Ponton: Let me just add some color to that, Michael, good morning by the way. It’s Brad. I think I look table demand from last year, I think we’re seeing consistent demand this year relative to the table of demand last year. So I would expect consistent pacing.
Michael Hoffman: Okay, thank you.
Operator: Our next question comes from Mario Cortellacci with Jefferies. Please proceed.
Mario Cortellacci: Hi, just a quick question on price, I think you guys mentioned that you’re expecting strong price realization in resi – I’m just wondering where that’s coming in within that historical range towards the high end or are you even kind of pushing pricing a little higher within resi again, above that historical range? And then maybe you can also give us some color within commercial, how much of price is contributing to growth there currently? And then what’s the outlook there? If it’s not really contributing to growth within Q2, what do you need to see within the market or from your customers to pull that pricing level a little harder?
Brett Ponton: Good question. Good morning, by the way, this is Brett. If we anchor off of an industry that historically is priced call it, 1.5% to 2% as a baseline, we probably saw a little stronger pricing in our resi service line and probably in line more on termite and commercial. But I think we also feel like we have significant runway here going forward. The team has done a really nice job in Q1 and Q2, building much stronger analytics. I think that’s helping shape our pricing strategy going forward that will give us a little bit more confidence going forward to build levers by certain demographics a little more aggressively than historically with a deeper understanding of consumer behavior and reaction to those pricing actions. So we feel very good about the analytics that we have built in Q2 that will help us, I think, be more informed second half of the year.
Jesse Jenkins: That was our last question in the queue. So that concludes today’s call. Thank you for your continued interest in the company. We look forward to talking to you again on our next earnings call, tentatively scheduled for Tuesday, November 2. Thank you.
Operator: 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.
