Terminix Global Holdings, Inc. (TMX) on Q4 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, welcome to the Terminix Fourth Quarter and Full Year 2021 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 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 in the forward looking statements. Information discussed on today's call speaks only as of today, March 1, 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 fourth quarter and full year 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 in order to better assist you in understanding our financial performance. We have included definitions and reconciliations of these non-GAAP measures to the most comparable GAAP financial measures. Joining me on today's call are Terminix's CEO, Brett Ponton, and CFO, Bob Riesbeck. Slide three 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 and initiatives updates 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, everyone, for joining us. Overall, it was a successful quarter and a great end to a challenging year. I am excited to share our results with you today. I'd like to first start off by thanking our dedicated teammates for their hard work in the face of all the obstacles we overcame this past year. It is because of them that we continue to succeed delivering for our customers and each other to protect families, homes, businesses and the environment. Now turning to our results. In the fourth quarter, we reported revenue of $484 million for growth of 5%. Organically, we had a strong quarter in our Residential business with improvements in digital marketing, staffing levels and pricing discipline, leading to an acceleration in organic growth rates. The Termite line was particularly strong with 9% organic growth, driven by double-digit growth in completions and 7% growth in Termite renewals. Residential Pest grew 4% organically with better pricing and improved retention rates. Commercial pest grew 2% with organic declines of 2%. While retention was improved sequentially and year-over-year, we continue to see declines in one-time sales volume as we lap disinfection services, in-source national accounts volume and staff our local commercial sales teams. I will cover our staffing progress in much more detail in a moment. But I'm very pleased with the progress we have made in a short period of time, and I'm confident in our staffing outlook for 2022. In total, organic growth of 3% for the full year was in line with expectations and represents strong acceleration from 2020. The progress over the course of the year and exit rates in the quarter keep us on track for our near term mid-single digit organic growth targets. Fourth quarter adjusted EBITDA was $73 million, up 6% or $4 million year-over-year for a margin of 15%. 20 basis points of margin expansion in the quarter was driven by a higher revenue contribution from strong pricing and fleet productivity as we make progress modernizing our vehicles. These gains were partially offset by investments in labor ramp-up and strategic initiatives, as well as increased medical costs from the lingering effects of the pandemic. Termite damage claims expense was flat year-over-year in the fourth quarter due to the impact of inflationary pressure on building materials. However, we are encouraged by the meaningful progress we are making in our mitigation efforts. We reported the lowest new non-litigated claims in a quarter since we began disclosing claims, and we are pleased to see this trend continue into the first quarter of 2022. We are also making great progress on enhancing our digital marketing presence and implementing both the Terminix Way and Customer Experience Platform, or CxP. While these operational initiatives remain the focus of our customer facing teammates, the back office has begun working closely with the Rentokil team on pre-integration planning as we make progress towards the closing of the pending merger in the second half of 2022. With Rentokil, we are excited to significantly enhance both of our company's capabilities and accelerate the progress already well underway at Terminix, including increasing our investments in organic growth opportunities. As I look back on a successful 2021, we delivered organic growth acceleration of 2 percentage points and also expanded margins by over 130 basis points, all while investing considerably in the long-term capabilities of the business and reaching agreement on a transformational merger that will position our combined company for even greater long-term success. Our Terminix management team made significant strides towards enhancing our digital marketing, and we are laser-focused on staffing. We believe improvements in the business having one technician at a time, one customer at a time and one branch at a time. With the focus and dedication of our teams, we are also able to deliver on all full year 2021 guidance expectations, while making considerable investments in long-term value-creating initiatives. We are well positioned to take the learnings and investments in 2021 and build on them into the New Year. And I'm encouraged by the strong start we already have under our belt in January and February. On slide five, I would like to take a moment on the priorities that we are focused on in 2022. I will start with the teammate experience on the top left. We are aligned throughout the organization on the journey to full staffing before we hit our peak season in the spring. When we last spoke in early November, we had improved staffing levels from over two technicians per branch short in the middle of 2021 to one and a quarter technicians short of our operating model. I am pleased to report that as of the end of January, we are down to less than two thirds of the technician below our needs today and continue to make solid progress as we ramp into the peak season. In response to the tight labor market we saw over the course of the year, we have made several significant improvements in our marketing efforts as we search for talent to expand the Terminix team. Those efforts have been yielding excellent results. In December, we saw an increase in applications for open positions of 64% for technicians and 38% for salespeople. The increase in interest in our positions has led to increased hiring with new starts in January, up 83% for commercial sales professionals, 49% for residential sales and 43% for technicians. These increased new hires comes with cost, and as Bob will discuss in more detail later, labor is up $5 million year-over-year in the fourth quarter, and we expect investment in labor to continue throughout the first quarter of 2022. With meaningful progress under our belt to feed our hiring pipeline, we are laser-focused on retaining the new employees we are adding. In total, technician turnover remains about 10% better than our baseline pre-COVID 2019 levels. However, we did experience increases during 2021. Looking deeper at the data, the majority of our turnover occurs within the first 60 days on the job, while technicians are training and on the journey to become route technicians. Leveraging the work of the Terminix Way, we have developed a detailed onboarding plan for those first two months on the job with refreshed training curriculums designed to engage and motivate technicians along the Journey to Route-Tech. The program includes day one, week one, month one training and leadership engagement points that will better integrate teammates into the culture of the company and better prepare them for success in the position long-term. The Journey to Route-Tech is a key component of the Terminix Way branch pilot we are planning in the next few months. Although the branch pilot will be focused in one area at first, there are certain components of that program that we plan to scale quickly to all regions and branches of the company. Another area of focus is with our sales teams. In addition to tweaks, we have made in the fixed versus variable pay components of the pay plan for residential sales employees. In 2022, we have completely revamped our commercial sales pay plans. The new compensation plans place a greater emphasis on annual customer value and reoccurring revenue than one-time sales. The new plans tier up commission rates for salespeople as they hit certain annual value sales milestones throughout the year, and those higher rates will carry over into the following year. While its only been a few months, the results to date have been strong and we are getting positive feedback from both long-term tenured teammates and new hires. We have continued to instill the urgency of staffing throughout the organization, holding weekly calls with each critically staffed branch to create and track progress on local branch level action plans. Just last week, we had our division leaders in our corporate office for a series of talent planning meetings, and I was encouraged by the level of engagement from each of them on staffing. We discuss their critical branches and the needs in each area of the country to get fully staffed by peak season. With the improved visibility and urgency we now have in place, combined with the improvements we have made in the hiring process and the pipeline for better training and onboarding with the Terminix Way, I am confident that we are much better positioned for growth in 2022. Moving on to our customer acquisition and penetration efforts in the top right quadrant, let me start with our new customer efforts. As I'm sure you saw, we launched our new website on schedule in December. In addition to a more modern look and feel that incorporates our current branding, the website has a much more advanced e-comm presence that allows customers to price, request inspections and in most cases, buy services directly online. The new site is rich with content that will drive increased search traffic so that Terminix is top of mind and wins that crucial first moment of truth in a customer's buying journey. While we are still early in the early stages of the release and far from the peak pest season, we are encouraged by the early signs with total net sales increasing year-over-year 22% in January. We have a robust list of future enhancements, including improvements to customer scheduling that we will continue to add as we optimize the customer experience. We have also made meaningful progress in optimizing our paid digital or SEM spend. You can clearly see this in lead generation and new sales growth in the quarter, especially in our Termite business which posted double-digit growth in the quarter. Additionally, we have deployed the first generation of CxP in eight branches in our Southwest region. Through the exceptional work of our IT and operational teams, the deployment completes a key milestone the team has been working towards over the past few years. This release delivers a simpler mobile application for our technician and sales teams to record and track leads in the sales funnel and complete work orders for the technicians. We are working towards further enhancements that will add inspection checklist to systematically generate cross-selling proposal that will drive additional customer penetration. Given the importance of CxP, we plan to enhance and refine the system in the Southwest region over the coming months prior to continuing on our aggressive deployment schedule to ensure an appropriate end user experience and to ensure we are ready for full deployment. Given the hands-on, high-touch training and field needed for the successful deployment, we also slowed some of our in-person training in light of increased COVID cases to ensure the safety of our teammates. We are also closely monitoring key operational metrics to ensure benefits are realized and scalable, while minimizing near term post-deployment change management impact. In parallel with these activities, we have begun pre-integration planning with Rentokil to deploy a best-of-breed technology platform for our combined future state that prioritizes ease of use for our customers, frontline and back office. Despite the deliberate approach to CxP rollout, customer penetration remains a key component of our strategy for 2022 as we continue our long-term goal of at least two services per customer. We delivered a 2% improvement in services per customer in the fourth quarter and as we pilot Terminix Way in the coming months, we will introduce cross-selling playbooks to further enhance our execution on this key driver of the business. While CxP will help speed our cross-selling capabilities, a more deliberate approach will not keep us from hitting our near term cross-sell targets for services per customer in 2022. Another important part of our growth strategy centers around continued improvement in customer retention and 2021 was another step in this direction. In Residential Pest Control, we saw year-over-year improvement in cancel rates and retention rates with improvements in service quality. While Commercial Pest revenue was heavily impacted by reduction in completion rates and lower one-time sales, retention and cancer rates both improved year-over-year. In Termite services, retention declined during 2021 due to the impact of robust housing market sales, driving increased cancellations throughout the year. However, we are seeing promising results from our monthly pay product, and our total Termite retention remains above the industry levels of around 85%. As we continue to drive service consistency from branch-to-branch with clear standards and enhance training against those standards with Terminix Way, we remain confident we have plenty of runway for additional retention improvements across all service lines. The progress on the first three priorities will naturally improve our profitability. In the fourth quarter, we saw 20 basis of margin expansion and for the full year, we delivered over 130 basis points of expansion in line with our increased adjusted EBITDA guidance. We also saw high revenue flow-through from our successful pricing action during the quarter, as well as continued cost reductions in fleet from both an attractive fuel hedge rate, as well as investments to modernize our fleet that is driving lower fuel usage and maintenance expense. We were able to manage effectively through inflationary pressure on wages, medical expenses and building materials. We are also making investments in our workforce to ensure we are fully staffed for the peak season. On average in the fourth quarter, we drilled a 38% increase in technicians and training. As a reminder, while technicians are in training to get certified and productive in a route, they are paid primarily with an hourly rate and not a percent of production revenue. This investment in staffing caused a headwind in the labor expense in the quarter. We expect to see increased investments in training expense in the first quarter of 2022 as we make progress towards our goal of full staffing. Another key driver of margin enhancement in the coming years will come from progress mitigating our termite damage claims expense. As I mentioned earlier, our mitigation efforts are driving improvements. New non-litigated termite claims were down over 26% in the fourth quarter year-over-year, including 30% in areas outside Mobile Bay. For the full year of 2021, new non-litigated claims were down 9% in total. The less than 500 new non-litigated claims in the fourth quarter was the lowest total we have seen in a quarter since we began reporting and over 20% below the previous low from earlier this year. We have also made progress working through the backlog of non-litigated claims, the total outstanding claims down over 16% sequentially. Cost per claim for non-litigated claims continues to be negatively impacted by cost inflation on building materials and was up about 8% year-over-year. We continue to see the opposite impact with litigated cases with the value of each new case dropping, while claim counts remain slightly higher than the expectation. In total, we had 12 new litigated cases in the quarter, which is too higher than the previous year, while the cost per case was down over 20% - 28%, excuse me, year-over-year. Litigation continues to be focused in a very narrowly defined Mobile Bay branches with 11 of the new cases in the quarter stemming from this area. With flat termite damage claims expense in the quarter, the full year expense came in at about $68 million or $2 million less than 2020. Significant increases in non-litigated expense from inflation were more than offset by lower litigated expenses and mitigation costs in the previous year. We have seen a similar pattern continuing into the first quarter of 2022 with new claims continuing to decline. This was encouraging, and as we continue to make progress with our mitigation efforts in areas along the Gulf, we remain confident that we are taking the right action to return our damage claims expenses below historical norms and we are planning for reduction in expenses in 2022. I will now turn it over to Bob to walk through the revenue drivers, the major fluctuations in costs and the full year 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 delivered revenue growth of $24 million, driven by $14 million of organic growth of 3%, as well as 2% growth from acquisitions. Beginning with the Termite & Home Services column on the left side of slide six. Reported revenue increased by $12 million or 9% in the quarter. Termite & Home Services completions were up 11% in the quarter, with core termite completions up 10% and home services completions up 12% year-over-year due to improved cross-selling to existing customers. Demand remains strong for Termite Services, and the growth in the quarter came despite lapping 14% growth in completions in the fourth quarter of 2020. Core termite completions made up 41% of the $84 million completion revenue in the quarter. Termite renewals were up 7% as we continue to see the benefits of increased volume from double-digit sales growth in the fourth quarter last year, as well as better pricing in an inflationary environment. As a reminder, we have now fully lapped the headwinds from the shift to monthly pay termite offerings and are now expecting - and are not expecting any impact from the shift of 2022 revenue. Residential Pest grew 5% in the fourth quarter with organic revenue growth of 4%. We continue to see strong pricing benefits in inflationary environment, as well as improvements in both cancel rates and customer retention year-over-year. We also experienced strong one-time bed bug demand in the quarter as travel and mobility continues to improve. We also saw strong growth in mosquito services, as the warmer weather in the fourth quarter led to an extension in the season in several larger markets. Our Residential service line, which includes both Residential Pest and Termite has remained strong in January and February, with momentum from improvements in cross-selling, e-commerce capabilities and staffing levels mixed with a net favorable weather outlook driving growth in the early part of the year. Commercial pest was up 2% in the quarter, driven by M&A growth of 4%. The acquisition growth was fairly evenly split between international and domestic acquisitions and include smaller tuck-in deals closed late in the back half of 2021 that will carry over into the first half of 2022. The organic revenue decline of 2% was driven by a reduction in one-time services, including approximately $2 million in disinfection services in the same period in 2020. Despite a rebound in bed bug services in the residential markets, we have yet to see meaningful improvement in one-time bed bug revenue in the commercial market. The commercial organic declines included declines in our Sweden and Norway businesses as COVID-related absences in our technicians base slow - caused slow completion rates for recurring customers. The organic declines were partially offset by favorable foreign currency fluctuations of about $1 million. Sales trends are picking up in local commercial and national accounts in early 2022, and we are well positioned with staffing levels and enhanced pay plans heading into the New Year to continue making progress in commercial sales that will ultimately drive growth. In the other service revenue line, product sales were up 4% organically over the prior year. The sales of products was negatively impacted by product availability and supply channel slowdowns stemming from COVID-19. Those issues have improved marginally in the early part of 2022 and we expect to see growth in product sales in the New Year. Overall, the fourth quarter continued the positive momentum in the Residential business with growth in our Termite and Residential Pest segments, and we are seeing positive signs of a rebound in our commercial business. We are off to a strong start in 2022 with improvements in staffing levels and commercial sales and services, pricing discipline and improvements in our marketing capabilities. We are well positioned to drive growth in the mid single digits in the near term. Turning to slide seven, you can see the financial summary and detail on adjusted EBITDA drivers for the quarter. On the P&L, at the top left of the page, you can see that the $24 million or 5% revenue growth we covered on the previous slide, led to a $4 million or 6% increase in adjusted EBITDA for incremental margins of around 17%. For the full year, incremental margins of around 50% are well above our targeted levels of 30% incremental annually. Adjusted net income declined $4 million or 15% and adjusted EPS declined $0.02 or 7%. The declines in adjusted net income and EPS were driven by an increase in tax expense compared to the prior year. Across the bottom of the slide, you can see the adjusted EBITDA drivers for the quarter. Revenue growth, including growth from acquisitions added $13 million of adjusted EBITDA in the quarter for a gross margin flow-through of 54%, slightly higher than normal rates due to the strong pricing we delivered in the quarter. As Brett mentioned earlier, labor increased $5 million in the quarter, primarily driven by investments in training, staffing levels to get ahead of peak season and drive growth in 2022. Turnover was also slightly higher year-over-year from the competitive labor market. As we have discussed, we are expecting similar investments in our labor force year-over-year in Q1 as we lap lower training staffing levels from the early part of 2020. Direct cost productivity generated $6 million or a higher adjusted EBITDA in addition to lower chemical costs and favorable fixed fuel hedge prices, we also saw a margin increase from the in-sourcing of national accounts customers as we can provide services at a lower cost than subcontracting. We expect increases in fuel expense of approximately $10 million in 2022 as we move from a fuel hedge of approximately $2 per gallon to a more market rate price of $3 per gallon. We have now hedged between 80% and 90% of our expected fuel usage in 2022 and are well protected from any additional inflation that could occur on this line during the year. Medical costs increased $5 million due to increased medical claims and short term disability costs as a result of increased COVID-19 infection rates across our customer facing workforce. While these costs are difficult to predict, we are planning for increases, although not as severe in the early part of 2022. Non-capital third-party investments in design, implementation and deployment of Terminix Way and CXP were $3 million in the quarter. These investments are also expected to continue in the first quarter at similar levels. Turning to slide eight, you will see the cash flow summary for the full year of 2021. We used $46 million in cash on working capital in 2021. About $15 million of the usage was related to the first half of the 2020 payroll tax deferrals from the CARES Act, which we repaid in December. In December of 2022, we expect the other $15 million to be paid. Additional cash use was primarily prepaid software licenses for CxP that will be expensed in 2022. CapEx of $22 million for the year was slightly below expectations of less than 2% of revenue and is lower primarily due to less than expected capitalized CxP development cost. Cash taxes of $14 million is in line with expectation and is expected to be roughly consistent with 2022 rates. Year-to-date, free cash flow conversion of 56% delivered on our full year guidance of mid-50% range. Shifting to uses of cash, we completed $113 million of acquisitions including $27 million in the fourth quarter, and we repurchased $551 million in shares, including $19 million in the fourth quarter. We borrowed and repaid $50 million from our revolving credit facility during the quarter for short term liquidity needs for these acquisitions and share repurchases. We plan to remain active with our small tuck-in acquisition program during the early part of 2022. However, given the pending Rentokil merger, we are not planning to be in the share repurchase market in the near term. We ended the quarter with $116 million in cash and $494 million in available liquidity with a net debt leverage ratio of two times. Before I turn it over to Brett for an update on the merger, I want to briefly discuss the decision not to provide 2022 guidance. After careful consideration, we have decided not to provide specific guidance expectations for the year ahead. As we have discussed during the call, we are building significant momentum in performance by leveraging the Terminix Way digital marketing enhancements, as well as the capabilities we have developed in staffing and multiunit leadership during 2021. We are off to a strong start in 2022 and expecting to continue our current trajectory throughout the New Year. We are confident in our plan for next year and excited about the potential of the future combined business. We believe this continuation of quantitative guidance for our stand alone company is appropriate in light of the pending merger and our expectation it will be completed in the second half of the year. And with that, I will turn it back over to Brett for some additional thoughts on the merger.
Brett Ponton: Thanks, Bob. Over the past few months, since we announced the merger, I have been encouraged by the reaction we have heard from our teammates and our customers. We remain confident that Rentokil is the perfect partner for Terminix and is an exciting next step that significantly advances Terminix's journey towards becoming a global leader in pest management. Bringing together these two highly complementary businesses creates a global leader in pest control with around 4.9 million pest control customers and 56,000 colleagues around the world. This highly complementary combination brings substantial upside potential, and we believe will be a win for in the best interest of all of our stakeholders. Together, we are building a combined company that is differentiated by a strong focus on people, customers and ESG and well positioned to drive continued growth and value creation. Ultimately, as a larger and stronger organization, we are looking forward to taking our superior service to the next level, while offering an even more comprehensive range of solutions for our customers. Internally, our frontline has been engaged and is excited about the complementary nature of the 2 independent businesses. As we engage with the Rentokil team, both parties have made clear, our commitment to a best of breed approach that will leverage pockets of excellence in both of our organizations. Our teams both have considerable experience that they can share with each other. As you may have seen, last week, we recently deployed $20 million retention program that will help us retain key customer facing and back-office teammates during this important time. We were able to host Rentokil's CEO, Andy Ransom, and the executive leadership team in Memphis in early January and Andy and I were able to have a sit down where we took questions from our field teammates and that introduction was very well received by the team. With our highly talented teammates motivated for the future, we are very excited for the integration and the potential that it brings for both businesses. Externally, we have continued our dialogue with our customers, and those interactions remain very positive with customers pointing towards an improved customer service model that will come from the combination as a key benefit to them. As I have mentioned several times, the cultural alignment from the executive team all the way to the route technician have been clear from the beginning. With engaged teams, cultural alignment and tremendous synergy potential, I continue to see this transformation as a win for customers, teammates and shareholders alike. Pre-integration planning is well underway and we started where you would expect by getting our technology teams together to discuss a best of breed world class software and systems backdrop. Key IT leaders from Terminix and Rentokil met face-to-face for several days in early February for our initial show and share discussion that will form the basis of how we move the combined company forward. Other integration planning work streams are also underway with the finance team among other areas, having weekly scheduled discussions, so we can assure we are aligned for day one, week one and month one activities once the deal closes. While I defer specifics on the closing time line to the Rentokil team and the earnings call they have scheduled later this week, I will share that all work streams remain on track for the previously communicated expectation for a closing in the second half of 2022. Our confidence in the merits and benefits of the pending merger remain as strong as ever and we believe that is the right next step for Terminix. In closing on slide 10, the fourth quarter was another quarter of meaningful progress. We delivered above market growth in Termite, accelerated our total organic growth rate sequentially and ended the year with considerable momentum carrying into 2022. The efforts we undertook to better understand our staffing needs and improve visibility of those needs throughout the organization during 2021 have set us off to a strong start in the New Year. Despite meaningful investments in staffing, CxP and Terminix Way, we were able to expand margins by over 130 basis points in the full year and have clear line of sight to continued expansion in the New Year, with good pricing leverage, favorable trends in termite damage claims and continued operational efficiencies from improved standards and training with the Terminix Way branch pilot later this year. While the focus is on the execution of the 2022 operating plan, the team is engaged in pre-integration planning with Rentokil and excited about the prospects of our best in breed combined business. In summary, we had a strong finish to the year. We are seeing encouraging results in Q1, and we are confident in the value creation opportunities we have in front of us in 2022. And with that, I will hand it over to Jesse to lead us through the Q&A
Jesse Jenkins: Thanks, Brett. As Brett mentioned, we are limited in our availability to discuss specifics on the time line of the merger prior to the Rentokil earnings release on March 3. But we are happy to take any other questions you may have at this time. I ask you to please limit yourself to a single question, so that we can get to everyone in the allotted time. Operator, let's open the line for questions.
Operator: Thank you. Our first question comes from Tim Mulrooney with William Blair. Please proceed.
Tim Mulrooney: Good morning.
Brett Ponton: Good morning, Tim.
Bob Riesbeck: Good morning, Tim.
Tim Mulrooney: So you didn't give a guide, and I understand why, but I'm seeing some decent trends in the Residential and Termite business. So I'm going to try to ask this another way. Based on what you are seeing in customer retention rates and new account growth, is there any reason we shouldn't expect to see continued improvements in organic growth towards market growth rates as you move through the course of 2022?
Brett Ponton: Yes. I'll start, Tim, and then I'll let Bob add some color to that. I think the short answer to the question is no. There is no reason why we wouldn't see acceleration in our organic growth trajectory into 2022. And let me just share some perspective on why. I think you touched on a lot of the key elements there. But I'm really, really encouraged by the progress our team made on several key areas in our business this year that we set out to improve our capability. Number one was around pricing, Tim, and that we recognize an inflationary environment. We want to be much more sophisticated and data driven in our pricing approach. And the team did a great job of building capabilities that's translated nicely into results. Couple of other areas I think are noteworthy. The progress on digital marketing is noteworthy. I think the team launched a really solid first version of our website in December on schedule. And we're already seeing nice results in January as a result of that. And needless to say, I think our team is very hyper-focused now on the number one critical success factor in this business, which is staffing levels and retaining our team. And arguably, what's contributing the most to our progress sequentially from Q3 to Q4 into 2022 is that improvement that we're seeing in staffing. And we intend to start to pivot now and get refocused down not just on being world-class at hiring people, but how do we onboard them, train them, develop them, to retain them better, and that's where our focus is going to lie in 2022 as well. So having said that, we're very encouraged thinking about the progress that we're seeing. Probably a couple of points I would make though in addition to the broad strokes just around expecting to see acceleration in organic growth, as you characterized, and we would agree with. Probably we should talk little about pacing because I think it's fair to say that Q1, we are going to invest a little more in labor in Q1, even though we're off to a really strong start in January and February as we said. We are making some investments in labor there to prepare ourselves for Q2 and Q3. So we'd expect kind of growth to ramp up consistently throughout the year. Bob, maybe if you want to add some color on the cost side?
Bob Riesbeck: Yeah. Tim, even though we didn't guide, I think that we do have information out there to give people little bit of an idea of where we're going. I think we still feel pretty comfortable with that 30% incremental margin rate. Even though we do have some headwinds, obviously, coming into the year related to labor, related to cost on CxP in the Terminix Way. And then obviously, we talked about a $10 million roughly headwind on fuel and obviously some challenges on medical. So I still think even though we have those headwinds, we still feel pretty comfortable with that 30% incremental margin rate.
Brett Ponton: Maybe two other points I would just add as Bob comment there. Also expecting improvement year-on-year in termite damage claims as well. We think the efforts the team did in 2021 has translated well into improved trends that we saw in Q4 and we expect that to continue as well. And consistent with the theme from day one when I joined here, we are committed to margin expansion here. We believe we can still make the necessary investments that we continue to make here to build long-term capability. We can do so and fund those and still drive incremental margin expansion here in the business as a result of that.
Operator: Our next question comes from Ian Zaffino with Oppenheimer. Please proceed.
Ian Zaffino: Great. Thank you very much. I guess if I could maybe squeeze in two here just very quickly. Can you maybe talk about some of the pricing on the termite side? Have you recouped all the cost from the termite claims, meaning, is sort of the price increases greater now, and how much more were they per se? And then the other question is, I know you said no more buybacks from a capital allocation standpoint. How are you thinking about small kind of tuck-in M&A, especially with the bigger transaction closing in the second half of the year?
Brett Ponton: Thanks for the questions, Ian. This is Brett. I'll take the first part, and I'll let Bob comment about M&A. First of all, related to pricing in termite damage claims, let me just say, let's parse those and decouple those two because we certainly don't price to cover termite damage claims. I think as I commented before, I'm really proud of the progress the team has made on improving our pricing sophistication. And look, I think we've made some good progress this year, and that manifests itself in the improvements that we're seeing in our growth performance on termite. And other things, I would probably more point to on our Termite business is it's really the positives that we saw around our marketing performance in particular, as well as our cross-selling capability with home services that created a nice lift in our Termite business as well. So look, we're early innings on pricing. We're going to continue to get smarter about how we price. And over the long term, certainly, we will start to reflect maybe some more risk based pricing as we think about this model, geography-to-geography. But certainly, near term, we feel very positive about how we're pricing the category today. Bob, do you want to touch on the M&A?
Bob Riesbeck: Yeah. And I think on the M&A front, Ian, I think it's consistent with where we've been in the past. I mean, we are focused on the smaller tuck-in acquisitions right now, and we do have a team that is fully dedicated to that. Roughly 2% of our revenue growth in the last quarter was related to acquired M&A type activity. And we see a pretty significant pipeline that we're tracking down and have continued efforts towards and feel like it will be an important part of our growth going forward.
Operator: Our next question comes from Mario Cortellacci with Jefferies. Please proceed.
Mario Cortellacci: Hi, guys. Thanks for the time. I just wanted to ask about, I guess, just one of your competitors, they made a big sales force push in 2021. I guess maybe you can just comment on what you are seeing from a competitive standpoint? And can you also comment on what your sales force headcount growth has looked like over the past year? And then what your expectations are for maybe adding new sales force headcount in 2022?
Brett Ponton: Yeah, this is Brett. I'll take it. Bob, feel free to add some color here. As we made a comment in our prepared remarks, we've made a lot of ground, I think, with our outside sales professionals, we would call them in our Residential business. In addition to that, we made some pretty significant changes to our compensation plans to be more attractive, I think, on our commercial sales professionals. Part of the drag that we saw in our commercial business was driven by the fact we've maybe been a little bit slower to ramp up our CxPs, if you will, in the Q4, and that certainly created a little bit of a drag on our commercial business relative to residential, but encouraged though by the progress that we're seeing. In fact, I think I made the comment that our hiring was up 83% for commercial sales professionals in January alone. We expect those trends to continue throughout the first quarter, we'd be much better positioned through the peak of the year here with our selling organization.
Bob Riesbeck: Yeah. The only thing I would add is during Brett's prepared comments, he did mention how we've seen that performance in the first two months improving our commercial business compared to Q4.
Operator: Our next question comes from Andy Wittmann with Baird. Please proceed.
Andy Wittmann: Yeah. Great. Thanks for taking my question. I guess I just was curious a little bit, Brett, about the continuation of the investment in CxP and Terminix Way and all these various initiatives that you put in place and you got there. Just given that you will be combining here in a few quarters with Rentokil. I mean, some of these things include the implementation of new standard operating procedures. So I'm just wondering if you could just talk about the fact that you're choosing to go on with us, what that means for the future operating model. I wouldn't think you'd want to kind of change things twice. And just so maybe just talk a little bit about your decision to stay the course of these initiatives and what it means for the combined company going forward, do you think, if anything?
Brett Ponton: Yeah. Good morning, Andy. Great question, by the way. First of all, let me just underscore maybe the value of the transaction with Rentokil. And one of the things that I felt really strongly about is the cultural alignment, as well as the alignment, I think, between our two companies on operating philosophy. So I think there's a really strong alignment there in terms of the work that we have kicked off and done under Terminix Way and is very much in alignment with a lot of the work that Rentokil did seven or eight years ago. So we feel pretty strong. We're at least aligned philosophically on the direction there. I think everybody recognizes that our strength of Terminix certainly is in the residential business, and Rentokil certainly is extremely strong and recognizes that in the commercial business. So there's really an opportunity there to take best-of-breed here to create the most optimal model going forward. So having said that, related to Terminix Way, our focus primarily on is our Residential business to start with. So we feel like that's our strength and certainly the areas that we're investing here, we think certainly will serve both companies quite well once we bring these companies together. The most important area that you touched on is around technology, CxP in particular. In that scenario, certainly, we are going to be very thoughtful. We did roll that out to our Southwest region. And our IT team did a remarkable job partnering with operations to do that. Given the children Omicron variant, we decided to delay the training on that, which was probably fortuitous timing has allowed us to start to engage with the Rentokil team to start doing some in earnest planning post-integration planning around what does the future technology state look like. So certainly, related to technology, we are going to be very thoughtful and methodical about how we march that forward. And I'm very confident that we'll end with a very good solution here that meets the needs of both companies there. And consistent with what we said in the prepared remarks, one of the things that I've enjoyed about engaging with the Rentokil team already is this deep commitment from them to take best of breed and look at the best practices across both organizations and align on a forward strategy that makes sense for both businesses. But we're going to continue to do so in a very thoughtful, methodical way and do everything we can to be the least disruptive we can to our organization, and that's all contemplated in our plans for 2022.
Operator: Our next question comes from Brian Butler with Stifel. Please proceed.
Brian Butler: Good morning. Thank you very much for taking my question.
Brett Ponton: Good morning.
Brian Butler: Morning. Just wanted to go look at the progress you guys have made on the termite claims. I mean, it was $68 million in the full year and if I heard correctly on the call, expectation is that to be down again in 2022. And I was hoping you might just provide some detail kind of how that steps down with the litigated cases and then where the right normalized long-term level is? And when do you kind of reach that?
Brett Ponton: Let me start with the last part. We're not going to provide long-term guidance in terms of where we expect that to land over the long term. But let me just come back to the momentum that we're seeing in Q4. We've always felt like the best leading indicator to predict our future termite damage claims expense is looking at the non-litigated claims in our business. And to have a record level of non-litigated claims in Q4, we feel very good about. And I really want to credit like the really strong work that our team did over the last 1.5 years with our mitigation efforts that we executed in Alabama, and we kind of took that show on the road to surrounding regions around the Gulf area. And that's starting to translate nicely into improvements that we're seeing there. I'm really proud of the team and the efforts that we did that with. The other area I think the team really did a nice job with is claims management. And one of the key initiatives we had was to bring that in-house where we can control that customer experience in more thoughtful way and be very strategic about the approach that we're taking there. And certainly, that is boding pretty well for us as well. Economically speaking, I think we were pretty clear in the prepared remarks till here. We got kind of tail of two cities on - even though our non-litigated claims are down, the cost per claim is up driven largely by the inflationary pressure that we're seeing. We expect that to continue certainly into 2022. And as that normalizes, we'd expect that trend line total dollars to be reflective in that. On the litigated side, even though litigated cases were up primarily in all of which, for the most part, with the exception of one was in Mobile Bay. We're very encouraged by the cost per case is down considerably year-on-year. We expect that trend to likely continue as well. But as you might expect, pretty difficult to predict and project what this is going to look like over the near term, but long term, I'm very confident in the path this team is on to continue to drive improvement in 2022 and beyond on termite damage claims.
Operator: Our next question comes from George Tong with Goldman Sachs. Please proceed.
George Tong: Hi, thanks. Good morning. Can you discuss how retention rates performed in the quarter in termite commercial pest and residential pest and how much additional room for improvement you see for retention rates?
Brett Ponton: Yeah. The shorter answer is we feel very strongly. We have a lot of runway here to continue to drive improvement. But on the - let me talk by service line here. On the retention side, I'll just give you a more 12 month rolling average numbers here. But we did see improvement in our residential retention rates, sequentially up slightly, not - just a little bit on the residential side, it's a slight improvement there. Did see improvement in both cancel rates and retention rates on commercial, so really proud of our progress there. The area that we're watching pretty closely is termite. We did see a decline in our retention rates slightly in the quarter. We think that's driven by mobility of people with the amount of residential home selling going on right now. We did see a spike in our cancel rates as a result of that. Clearly, that's an area of focus for our team is to strengthen our relocation program going forward and have initiatives underway right now that we can execute in 2022. We would expect to stabilize and improve that trend long term. But none of that, we think the initiatives that we're working on with Terminix Way and improving training and our teammate retention certainly gives us runway to drive improvement off of the rates of improvement we're currently seeing today.
Operator: Our next question comes from Tim Mulrooney with William Blair. Please proceed.
Tim Mulrooney: Hey, thanks for fitting me in again. Just - I know you guys don't want to talk about deal specifics because I know there's not much you can say at this point, but this is the first earnings call we've had since the deal was announced. So I do want to ask if you could talk about what kind of feedback that you've been getting from shareholders on the proposed deal since it was first announced? Thank you.
Brett Ponton: Good question, Tim. I think overall, right, we continue to see - certainly feel there is a huge value creation opportunity for all stakeholders, not just shareholders, but our team, our customers, et cetera. And I think for the most part, feedback we're getting from a large percentage of our shareholders recognize I think the strategic benefits to bringing two great companies like Terminix and Rentokil together. As we've commented, the industrial logic here is pretty compelling, very complementary businesses. And in the route-based business model, the opportunity that we have to drive local density is immense here. And we're just very, very encouraged by the complementary nature of these businesses bringing them together. But what I get pretty encouraged about is as we've engaged more with the Rentokil leadership team directly, is just how aligned we are culturally, philosophically and operationally oriented. Their deep commitment to their team and the investments that they have made certainly is aligned with the direction that we're taking the Terminix Way and the investments we intend to make. And I think our investors recognize that there is a significant opportunity for us to accelerate a number of the initiatives that we're working on today by leveraging the capability that the Rentokil team has done a nice job of building over the years. And also I think when you look at our core service lines, certainly, our strength in termite and residential is showing in our Q4 performance, and we still got good momentum we can build on there. But we're also excited about the capability that we get a chance to kind of leverage as we partner with Rentokil on the commercial side of our business. The investments they've made in technology and remote monitoring certainly gives our sales organization a much more compelling value proposition that they can walk into customer's web and provide more value to them. So I think our investors see the large benefits of bringing these companies together, and they are still encouraged, I think, about the prospect of bringing Rentokil and Terminix together.
Operator: 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.
