Terminix Global Holdings Inc (TMX) 2021 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the Terminix First Quarter 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.

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, May 6, 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 first 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 strategic progress; followed by Bob, reviewing our financials and outlook. We will then open it up for questions.

I'll now turn it over to Brett Ponton. Brett?

Thanks, Jesse. The first quarter saw a solid growth across all of our major service lines as we delivered top line revenue of $471 million for growth of 3%, almost all of which was organic. Our termite service line grew 4% organically despite the negative impact of a revenue recognition change that Bob will discuss in more detail in a moment. Growth in termite was driven by another successful quarter of double-digit growth in both recurring poor termite and home services. 4% organic growth in residential pest was driven by retention gains and pricing realization that were partially offset by the carryover impact of lower summer sales units in 2020.

Commercial Pest, which now includes our European Pest management businesses, grew 3% as reported or 1% when excluding the impact of foreign currency. Double-digit growth in our international businesses and continued sequential growth improvements in the U.S., were the key drivers of the gains in this service line. We expect growth to accelerate in Commercial Pest starting in the second quarter as we fully lap COVID and businesses continue to reopen.

First quarter adjusted EBITDA grew to $90 million, up 50% or $30 million year-over-year, with margins improving 590 basis points to 19%. Strong adjusted EBITDA growth was highlighted by improved labor management, lower chemical costs, vehicle efficiencies and back-office cost reductions. Additionally, onetime benefits in the quarter included favorable insurance adjustments and lower travel costs due to the pandemic. These gains were partially offset by higher termite damage claims expense, primarily driven by higher cost per non-litigated claim due to inflationary pressures on building materials and contractor costs. We are pleased with our strong margin improvements in Q1 and the positive business momentum. However, we continue to see 30% incremental margins on organic revenue growth as a correct long-term target that balances short-term returns with investments in the long-term health and profitability of the business.

While we remain confident in margin expansion, even with the investments we are making in our operating capabilities, starting in the second quarter, the pace of margin improvements will slow as we lap COVID impacts in the business. Our strong margin improvement in the first quarter allowed us to raise our adjusted EBITDA guidance for the full year. In addition to solid revenue growth and improved adjusted EBITDA conversion, we returned capital to shareholders by aggressively repurchasing approximately 3.5 million shares in the quarter. Bob will go into more detail on capital allocation and full year guidance in a moment.

I am also excited we have officially launched the Terminix Way initiative in late April. This wide-reaching project will enhance our standard operating procedures, which will form the backbone of consistent service delivery and improve the customer experience. These enhanced SOPs will be used to develop robust onboarding and training curriculums in Terminix University that will shorten our training time for new hires and facilitate better sharing of best practices across the company. I am also encouraged to have launched CXP with our commercial sales team. The launch is an important key milestone in this transformational multiyear project.

I will now turn to Slide 5 and review the progress made on the 2021 priorities in more detail. I will touch quickly on each of the priorities we laid out back in February. These priorities are the key to continuing the progress we have made in the business on growth and profitability, and I am proud of the work our team has done over the last several months. The first priority focuses on enhancing our teammate experience. Our teammates are the most important assets of our business. Our field technicians and call center teams interact with over 50,000 customers every day over the phone or in homes and businesses across the country, and we are focused on giving our teammates the enhanced tools necessary to make each of those touch-points a positive customer experience.

While we have improved consistency over the last several years, we have the opportunity to further develop and document the best practices of our most tenured and effective technicians to produce industry-leading customer retention. The Terminix Way initiative will clearly define our standard operating procedures for technicians, sales professionals and customer success center teammates. We are bringing together a cross-functional team of technicians and managers to help us develop the criteria needed to improve our processes across the organization, creating a framework for the recurring technical tasks that must be performed consistently across our business in order to eliminate pests in the most efficient way possible. This will allow our teammates to spend more time on the personal side of the business, interacting with customers and developing relationships.

Once the groundwork has been done to build out these playbooks, we will institutionalize these procedures to give more structure to our training programs for both new hires and continuing education through Terminix University. This will also enable us to establish a clear career development process accessible to all that defines expectations to all of our teammates on what they need to do in order to advance up the career ladder.

Our work in this regard is vital to our continued success. As we have seen over the last 12 months, reducing technician turnover is a driver of both better top line growth through improved customer retention and better profitability through labor efficiencies. While we're roughly flat year-over-year in technician turnover in the first quarter, March did see a slight increase as the economy opens up, creating tighter labor markets. As we lap historic improvement in tech retention last year, we are expecting continued competition as we move through the year. But we are confident longer-term, that the build-out of the Terminix Way will give us an advantage as we progress to become the employer of choice in pest management.

We also continue to accelerate our efforts to improve our customer acquisition initiatives in order to drive better organic growth. We remain on track to launch our new e-commerce platform as well as update terminix.com in the back half of the year, that will reduce the friction in the customer buying process. The new platform will help us better engage with our customers online, where they increasingly want to interact and get service. While we do see marketing as an investment opportunity and are planning increased spend in 2021, we are continuing our plans to optimize our digital marketing processes that will increase lead generation while improving our return on marketing investment.

We are also excited to have our commercial selling teams on CXP for sales process management. This will improve commercial lead generation and help us better manage our prospects, increase visibility into commercial demand and, ultimately, improve our sales close rates. While this is only a small piece of CXP that is now operational, it is an important step in the process. We remain on track for a broader rollout of a full CRM and administrative platform starting after the peak season in the fourth quarter.

Finally, we continue to make progress in customer acquisition through M&A. In the first quarter, we closed 4 tuck-in deals in total, including 1 in the United Kingdom and 3 in the U.S. We are also able to close the Canadian deal on April 30, that will add density and fill additional white space in the growing Canadian pest market. Tuck-in M&A continues to be an attractive customer acquisition channel and will remain a focal point as we continue to develop our integration capabilities. We also made good progress, improving customer retention in the quarter with trailing 12-month retention up in all of our service lines. Cancel rates continue to improve in the residential business even as businesses reopen and people are starting to slowly transition from working at home.

The commercial business also continues to rebound with unadjusted retention rates up for the first time since the start of the pandemic. We have seen an increase in customer cancellations related to moving, and we continue to watch the hot housing markets very closely as we stay close to customers to attempt transfer service to new locations when possible. While it's still early, we are also seeing promising retention results early on with our monthly pay termite product. Customer retention remains a key lever in our growth story going forward and the development and rollout of the Terminix Way initiative and CXP will allow us to continue to make strides in the coming years as we work to become best in class.

Finally, we remain committed to expanding our adjusted EBITDA margins. Direct cost productivity continues to be a benefit to us with improved labor management, reduced chemical and material costs and better fleet management, all benefiting the first quarter. Customer retention improvements continue to benefit the bottom line as well. And in the first quarter, we made progress on simplifying our back office as a singular-focused pest management company. These cost reductions will allow us to reinvest in the Terminix Way initiative and CXP in the back half of the year to further accelerate growth and profitability. We also saw a few COVID-related onetime benefits that we don't expect to repeat, with travel costs significantly lower and an insurance adjustment benefit, primarily, from a focus on safety initiatives and a reduction in auto claims, driven by fewer drivers on the road in 2020.

We are also on track for reductions in termite damage claims expense as Q1 costs remain in line with our expectations. We continue to see meaningful reductions in claims counts in the Mobile Bay Area with new non-litigated claims down 30% year-over-year and outstanding non-litigated claims in the area down 36%. The reductions in claim counts were offset by a 26% increase in average claim cost as inflation has impacted the cost of building materials and contract labor nationwide. And we have worked diligently to close more claims prior to litigation. On the litigation side, we are monitoring a new case filed by the State of Mississippi related to termite inspections and treatment practices. While the case is loosely patterned after our recent Alabama AG settlement, the underlying characteristics in the 2 states are very different.

In Mississippi, there are considerably fewer customers, claims and state complaints. In fact, there are approximately 90% fewer damage claims and only a handful of state complaints. In addition, some of the key elements of the Alabama settlement like pricing practices were not used in Mississippi. Because our original ring-fence estimate was developed using historical claims data from Alabama, Mississippi, and the rest of the country, our estimate of the overall impact has not changed as a result of this litigation. Despite some pressure on claim cost and subject to the uncertainty of the outcome of the Mississippi litigation, we remain on track for reduced termite damage claims expenses in 2021. And we remain confident we are taking the right steps to reduce expenses below our previous levels over time.

Overall, we made great progress in all our strategic initiatives in Q1. As we continue to make progress on the Terminix Way and CXP over the course of the year and despite some of the headwinds we will face, we are in a very good position to continue to drive consistency across the business that will accelerate growth, expand our margins and ultimately create value for our shareholders.

And with that, I will turn it over to Bob to discuss the details of our strong first quarter. I'll return with some closing thoughts in a few moments.

Thanks, Brett. Let's start with a review of the top line performance before we move into the details of our strong EBITDA margin improvement. Overall, we delivered revenue growth of $16 million, primarily driven by strong organic growth across all our major service lines. Starting with Termite and Home Services column on the left side of Slide 6, revenue grew by $7 million or 4% in the quarter. Breaking down the components of growth further, termite completions and Home Services were up 12% in the quarter, with core termite completions up 11% and home service completions up 14% year-over-year. Core termite completions made up 44% of the $79 million completion revenue in the quarter. The continued strong performance in core termite is driven by sales of our new monthly pay termite product, while the growth in Home Services is primarily due to improved cross-selling to existing customers.

Despite double-digit growth for consecutive quarters, we do expect the return to more normalized growth rates in future quarters as we lap COVID impacts in the termite evolution product rollout in Q2 of 2020. Termite renewals were down 2%, driven by approximately $5 million in headwinds from a change in revenue recognition for our monthly pay product. This was partially offset by improved customer retention in the quarter. Normalizing for the revenue recognition change, termite renewals would have been up by 4%, and total termite growth would have been up 8% in the quarter.

Residential pest grew 5% in the quarter with organic revenue growth of 4%. We continue to see benefits in price realization as well as improvements in customer retention with daily cancel rates in residential pest 5% lower versus prior year. Growth in residential pest was partially offset by our decision to limit summer sales activity in order to protect both our potential customers and salespeople from COVID during 2020. If you normalize for lower summer sales activity, our organic growth would have been approximately 6% in the quarter. We plan to lap launch our summer sales program in Q2 and are planning for growth in this channel over the peak season.

While demand has remained strong for residential services early in the second quarter, we are closely monitoring increased moving activity due to the historically strong housing market as potential impacts in the second quarter. Commercial Pest, which now includes our European Pest business, grew 3% organically. On a constant currency basis, the service line grew 1% in the quarter. The $3 million benefit from foreign exchange translated to about 0.5% of 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. markets with strong exit rates in March as we begin to lap the impact of COVID in 2020.

April had been promising, and we are planning for strong growth in this service line as we lap prior year COVID comparisons in the second quarter and as reopenings continue to accelerate. In the other revenue service line, product sales were down approximately $3 million from prior year due to tighter inventory management by larger distributors in response to COVID. With COVID fully lapped in this service line in the second quarter, we are forecasting strong growth for the rest of the year. And we continue to create meaningful cost benefits from the purchasing leverage this channel gives us with our suppliers. Overall, the first quarter delivered solid revenue growth in residential pest, termite and commercial pest as we continue to focus on driving consistent results. Normalized for currency impact, summer sales and termite revenue recognition, organic growth would have been approximately 4%. We 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 and the detail on the adjusted EBITDA drivers for the quarter. Turning to the P&L box on the top left of the page, you can see the $16 million or 3% revenue growth we covered on the previous slide, led to a 50% increase or $30 million increase in adjusted EBITDA. Adjusted EBITDA growth and lower interest expense after the debt paydown from the sale of ServiceMaster Brands, drove a $28 million increase in adjusted net income. And finally, the net income increase and lower count from an aggressive share repurchase strategy in the quarter led to a $0.22 improvement in adjusted earnings per share.

Across the bottom of the slide, you can see the adjusted EBITDA drivers for the quarter. Revenue growth, almost all of which was organic, added $7 million of adjusted EBITDA in the quarter. Direct cost productivity generated $12 million of higher adjusted EBITDA, $6 million in labor productivity was primarily the result of improved labor management and the lapping of inefficiencies in the first quarter of 2020 due to the impact of COVID. We also saw a $3 million benefit of lower chemical costs, and vehicle and fuel costs declined $3 million year-over-year through actions to improve fleet management as well as lower fuel prices. As Brett noted, we did see job markets tighten up. And as we lap COVID actions taken last year, we are expecting some headwinds in labor over the balance of the year.

Travel costs were $4 million lower year-over-year. We're expecting travel to increase over the balance of the year as we continue to develop the Terminix Way and implement our CXP platform throughout our branches. We also had a $4 million benefit in the quarter due to a favorable adjustment to our insurance reserves -- I'm sorry, primarily related to lower auto claims experienced throughout 2020. Back-office simplification contributed $3 million as we become a more focused pest management company. We were able to accelerate our cost takeout plans into the first quarter. We remain on plan to reinvest these benefits in future periods to continue to develop operational capabilities that will drive future growth and consistency in our financial performance.

Sales and marketing costs were $1 million favorable in the period. As Brett mentioned earlier, we plan on investing in marketing over the course of 2021, in line with revenue increases. And we will see sales commissions rebound from lower rates last year as new sales growth in commercial and residential are forecasted to occur. Termite damage claims expense increased $2 million in the quarter, entirely driven by non-litigated claims due to an increase in cost per claim from inflation of building materials and contractor costs.

Total termite damage claims expense was $15 million in the first quarter, about $12 million over the baseline 4% of termite revenue that we expect. As a reminder, starting with the second quarter, we begin to lap the $10 million Mobile Bay Area mitigation plan of 2020. Termite damage claims expense came in roughly as expected, and we remain on pace for reduced expenses in 2021. In total, adjusted EBITDA margins of 19% expanded 590 basis points when compared to the first quarter of 2020. We will touch on this in the outlook as we were able to take a very strong quarter and pass on a large part of our improvement to our overall full guidance for 2021.

Turning to Slide 8. You will see the cash flow summary for the quarter. Working capital was the slight use of cash in the quarter and is expected to be a use of cash for the full year as we unwind payroll tax deferrals from 2020, worked through the large termite damage claims reserve we have on the balance sheet and absorbed a slight drag related to our move to the monthly pay termite product. CapEx remains on track for between $25 million and $35 million for the full year. Our free cash flow conversion of 77% was in line with expectations and as expected, benefited from no federal income tax payments in Q1. Free cash flow conversion for the full year remains on track for a mid- to high 50% range.

Shifting to use of cash. As we noted, we purchased 4 tuck-in acquisitions in the first quarter and remain active with M&A in the second quarter, closing on a Canadian deal on April 30. We made scheduled debt payments on leased vehicles and prior acquisitions of $15 million in the quarter. As a reminder, we have approximately $50 million in deferred payments for the final installment of the Copesan acquisition that we plan to fund in the second quarter. And finally, we purchased 3.5 million shares for a total of $169 million through our share repurchase program in the first quarter, and we remained active in April.

For the full year, we expect to continue to be aggressive with opportunistic repurchases over the remainder of the year, along with easier to integrate tuck-in M&A remaining a priority. We ended the quarter with $484 million in cash and $862 million in available liquidity with a net debt leverage ratio of 1.1x. This cash position and balance sheet flexibility allows us ample ability to invest in long-term growth through the Terminix Way, CXP implementation and rational M&A activity.

Moving to the 2021 outlook on Slide 9. We expect full year revenue between $2.025 billion and $2.050 billion with organic growth between 3% and 4%. Residential Pest is expected to accelerate due to pricing realization and the lapping of lower summer sales units in 2020 due to COVID. Commercial pest is expected to increase the pace of organic growth as the economy continues to reopen, and we lap severe prior year COVID impacts. Termite and Home Services is expected to continue to grow, despite a $5 million impact in the second quarter from a change in the timing of revenue recognition and our new monthly subscription-based termite offering.

We have raised our expectations for adjusted EBITDA to between $380 million and $390 million, with margins now between 18.8% and 19%. In addition to organic revenue flow-through at approximately 30%, we expect lower termite damage claims throughout the balance of the year. 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 at Terminix Way and CXP that will drive future growth and consistency in our business model.

Before turning this back to Brett, I want to thank the team and Terminix nation for all the hard work delivering a very strong start to 2021. Brett?

Thanks, Bob. In closing, I'm excited about the progress we have made in my short time at the helm and the momentum we have created from a great Q1. I am proud of the team and our ability to manage through the uncertainty of COVID, and the back-office simplification changes we have gone through in the first part of the year. We remain focused on the fundamentals of customer service in both the commercial and residential markets and the strong first quarter puts us in a position to fund investments in the Terminix Way initiative that will form the basis for how we do business for years to come. Coupled with the rollout of CXP in our e-commerce platform, we will make inroads to improve consistency of operations from branch to branch, teammate to teammate, and customer to customer, which will ultimately drive more consistent growth and profitability.

These major initiatives and other smaller changes will move forward our strategic priorities to improve the teammate experience, enhance customer acquisition, improve customer retention and expand profit margins. We remain confident in our abilities to continue to improve margins while we invest in the long-term health of the business, and I remain steadfast in my belief. Building these fundamentals during 2021 will lead to 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.

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 Instructions) Our first question comes from Tim Mulrooney with William Blair.

Only one question. So I got to -- I probably got to ask about Residential Pest. I mean, in your press release, the guide says you expect residential organic growth to accelerate from the, I guess, the 4% we saw in the first quarter. I thought that was interesting because I know you're going to be bumping up against some more difficult comps here in the back half of the year. So can you just talk about what you're seeing that gives you confidence that growth will accelerate? And secondarily, I assume this means you plan on having a summer sales program this year?

Yes. Sure. Thanks, Tim, for the question. Good to hear from you again, by the way. First of all, I think we're very encouraged by the momentum that we've seen in the first quarter. Really proud of the progress the team has made in Q1 on Residential. Look, in terms of outlook, we expect strong demand I think for the balance of the year, primarily coming from a combination of work-from-home as well as a hybrid work-from-home model we would expect to see. So we expect to see some benefits from that. A few specifics, though, I think to keep in mind. Look, we are going to lap the 2020 summer sales impact this year, as you said. And we have launched, by the way, a summer sales program in 2021. And how far we go with the summer sales program, I think, will largely depend on the customer adoption of the program and the success that we see.

Look, I think, it's fair to say, Tim, that we're still early innings in building a sustainable growth model here at the company. Early innings on developing our digital marketing capability and our e-commerce capability. There's progress that we have, I think, ahead of us on expanding our adjacencies and the work that we have on our plates ahead around routing and scheduling and pricing will also benefit our residential business. So again, I think the key theme here is proud of the progress, but we're not satisfied with where we're at and a lot of initiatives forthcoming here that we think will drive benefit to us in the second half.

And our next question is from Toni Kaplan, Morgan Stanley.

Last week, you press released that you'll be hiring 500 sales and services professionals over the next months. I was hoping you could just talk about what the goal is there? Is that to replace the turnover -- people that turned over in March or is it more towards driving more sales towards your mid single-digit growth rate or something else? And then, I guess, what's built into guidance from a revenue and expense side from the new hires?

Yes. Thanks, Toni. And by the way, good to speak with you again as well. But a lot to unpack with that question. Let me take a step back here to start with, I'd say, that I recognize in this business how critically important managing labor is, in this industry as well as other service industries I've been part of. Our tech's call center team and our sales professionals are the most important assets in our business, and they are the primary connection between our brand and our customers. And given the fact that labor is our largest variable cost component, striking this balance of managing the right labor to deliver a great customer experience along with managing our margins is essential. And to that end, over the past year, our team has made significant improvements in refining our staffing model to improve that balance.

And I think we've seen that translate pretty well into our labor efficiency throughout the year, while we improve customer retention. So -- but specifically to the hiring press release we put out last week, I think, there's 3 things probably worth talking about: Number one, we are certainly ramping up to ensure we are appropriately staffed to handle the peak season, no different we wouldn't any year. Secondly, as we mentioned in the prepared remarks, we are seeing an increase in more macro demand in our business as well as beyond just the seasonal pickup in residential. But also, we are starting to see improvements in our commercial business as the broader economy reopens. The last thing I think I would speak to is, as the economy reopens, we are fully expecting labor to become more mobile as well.

And as a reminder, we are lapping a 20% reduction in tech turnover that we saw in 2020. We're expecting to see some headwinds in turnover this year compared to last year. So this is about getting out in front of the expected staffing and training we know we need to see and ensure they are in place to match the improving demand environment that we're seeing in our business. And I think all the costs related to the hiring activities we're taking are fully contemplated in the guidance that we have provided. And maybe I'd leave you one last point. Just I think, strategically as well, one of the things our team is very focused on is improving the teammate experience here and also strengthen our value proposition. And we wanted to start the message to the marketplace regarding that press release. The Terminix is a great place to come work and have a wonderful career and the press release was intended to start that messaging to the marketplace.

Our next question is from George Tong from Goldman Sachs.

A strong performance from sales of the new monthly paid termite product has helped drive double-digit growth in completions in recent quarters. What percentage of termite new sales currently are made up of the monthly pay product? And how much further customer penetration opportunity do you think there is with this product?

Yes. So right now, it's roughly 10% of our overall sales, and we feel like it's going to continue to grow going forward. We're seeing a great recovery from that. And then obviously, building off of that going forward -- but we also feel like it's going to normalize somewhat as we're lapping over kind of that work from home, and we see the impact of the revenue recognition impact going into next quarter of roughly $5 million in Q2 that is going to impact us in Q2. So we expect it to continue, but we do have kind of that overhang of the termite revolution product in Q2.

And maybe just to add a little color to that strategically, I'm really, really excited about the progress the team has made with the launch of termite evolution we did Q2 of last year, as Bob said, that we're getting ready to lap. So significant improvement in the completions, as you noted, George, but also we're excited about the likely upside we should expect to see in retention as we move to that monthly pay model. So as we said, with only 10% of our revenue coming through the monthly pay model there, there's significant opportunity to kind of build off that base going forward. So very encouraged about where we're at with our termite service line right now.

Yes, but we do have that a little bit of headwind in this next quarter before we start to lap that into Q3 and Q4, and then we should really start seeing the benefit of it.

Our next question is from Andy Wittmann with Baird.

I guess I just wanted to touch on the weather. Your primary competitor mentioned this a couple of times on their earnings conference call that it was favorable to them. You guys didn't mention anything here, so I thought I would ask and just see, Brett, what the impact of weather was to your quarter, favorable, unfavorable? And if there was any kind of impact from it, in what form it benefited you? Maybe which segments? Was it a good termite swarm? How did taxes -- I mean, those are some of the things maybe you could touch on for all of us.

Sure. Thanks, Andy, for the question. I think, to start with, I think, we would say that weather was net neutral in the quarter. If you look at, certainly, weather played a major impact in our February business, given the harsh weather conditions, namely down in the south, our team responded extremely well in March and recovered, I think, quite well from the dynamic in February. So we feel like it was neutralized in the quarter. It wasn't necessarily a net negative or a net gain. But the team, I think, worked our way through those issues in the quarter.

Yes. And I think, to Brett's point, I mean, we probably had the strongest March in the company that they've ever had here.

Our next question is from Michael Hoffman with Stifel.

Bob, could you go back to your Page 7 and talk to us about '21 -- '20 versus '21 in that waterfall. What are the big buckets and directional items we're looking for as we bridge, say, the $445 million to the midpoint of $385 million?

Yes. I think, Michael, by the way, appreciate the question and the interaction. I think when we look at how we've kind of carried through roughly the $19 million-or-so beat over guidance, I guess, or where we thought we would end up. On the lower end of our go-forward guidance, we've passed most of that through from the $365 million to the $380 million. Our biggest concerns, I guess, are to Brett's points earlier on labor in the back half of the year and also on travel. As we roll out CXP and roll out really Terminix Way, we feel like there's going to be a bit of an expenditure we're going to have to make in order to drive that forward.

On the higher end of the guidance between the $380 million and $390 million, we factored in both of those issues, but then also a little bit more on labor as we try to drive to that higher end sales number. So those are kind of the 2 issues there. The only kind of issues that we've kind of pulled out of there are really the onetime issues that we had in the quarter. The travel beat of $4 million, obviously, is a onetime issue and then also on the insurance of $4 million. That is really just somewhat of a timing true-up between 2020 and 2021. We do our actuary reports really on a bit of a quarter lag. So that was really trueing up primarily auto insurance, but a little bit of workers' comp also. So those 2 issues are really onetime issues in the quarter. So for the most part, we've carried through the entire beat, if you want to call it that of Q1, not only on the low end, but also on the high end.

Maybe just to add a little bit of color to that, in terms of the outlook for the year, we do recognize that expanding margins in the rest of the year certainly gets a little harder for us. I talked earlier about labor productivity headwinds. Last year, we're lapping 20% turnover improvement the prior year. But we know we're going to have some headwinds there. And we do intend to get it back out and travel, visit our branch and spend time with our team. And as we roll out CXP, that's going to incur more travel expense. And as we launch Terminix Way, we're certainly going to be more active in our field as well. And as Bob said earlier to the termite monthly revenue recognition is going to create a little drag for us, namely in Q2 and a little bit in the Q3 as well. But like more longer term, we're very confident in our ability to expand margins in this business beyond where we're at today, while still investing in the business capabilities we know we need to and lap these headwinds as well.

Yes. And I think, Michael, one thing to point out to is, we're lapping over a quarter. The margin rate of the first quarter of last year was the lowest margin rate that quarter in the last 3 years. So we get a little bit of a benefit from coming over what was a very tough Q1 of the prior year. But we are showing and expect steady growth from an EBITDA margin standpoint through the balance of the year.

Our next question is from Judah Sokel of JPMorgan.

Just a quick question that I wanted to clarify an important point. When you talked about the cadence of revenue growth over the course of the year, you had mentioned expecting acceleration in Resi Pest and Commercial Pest, I just want to make sure I understand what that word accelerate means? Do you mean that each of the next 3 quarters, the growth rate will expand on a year-over-year basis, coming off of 1Q? Or does that mean just over the -- the rest of the year, on average, will be stronger than 1Q?

Yes, I think, really, it's a quarter-over-quarter basis compared to the prior year. Obviously, as people get back to work, obviously, our commercial business should be picking up pretty steadily, expecting really good slow pace, I guess, on recovery. Again, we're still guiding to that 3% to 4% type range for the full year. By segment, it's obviously going to be quite different because we're lapping over the revolution product, evolution product and along with commercial drag in the prior year. So I think our guidance speaks pretty well to where we think we're going. Brett, you got anything else on that?

No. I think if we just walk down by the service line, right, gaining good momentum in residential exit rate there, I feel like we'll see continued momentum in that business as we mature in the year. Commercial is our biggest opportunity earlier in the year, Q2 and Q3, because we're lapping harder comps from the reopen as we talked about. Termites, again, strong double-digit growth last year that we're lapping. So recognizing all of that, I think, it's all built into our 3% to 4% guide for the full year.

Yes. And I think, Brett and I come from a more traditional retail background. So when we're starting to look at this, we're starting to look at like a 2-year stack, and we feel really good about the growth in all of our product lines through the balance of the year, but we really feel comfortable with where the guide is.

Our next question is from Gary Bisbee, Bank of America Securities.

Outside of labor costs, which you've already commented a lot on, I guess, I just wanted to ask about some of those factors benefiting EBITDA and the bridge you provided. There was pretty big cost-cutting actions initiated a year ago at the company and then, certainly, there've been a few COVID tailwinds on the cost side as well. Is -- when we look forward, how do you think about those big buckets outside of labor? And I understand the onetime ones you called out that won't return. But are we at the point where we're sort of lapping a lot of those G&A savings and some of the direct cost savings that the company has been achieving? Or have there been incremental gains over the last few quarters that would lead to continued efficiency gains over the balance of the year outside of labor?

Yes. I think from a G&A perspective, you started to see -- we started to see some of that in Q2 of last year, and it continued. Brett and I and this entire team are focused on margin enhancement opportunities. So we're obviously looking at it every day. But I think it's important, as Brett mentioned during the pre-prepared comments, that we reinvest in this business from an operational standpoint so that we can get back on track to really try to grow our overall margin rates, but also to start outpacing the industry on the growth rate and beat this 3% to 4% guidance that we've given.

Bob, let me just add a little color. Gary, if you remember last year, we talked about $30 million worth of cost takeout in the business post-COVID in Q2, and we recognized that we got $18 million of that last year and $12 million likely to come this year. I think, it's fair to say, we got that in Q1 clearly.

And that comes in the form of guidance already.

This comes in the form of G&A, but also direct labor benefits we picked up. And anchoring off my comments earlier around the work the team has done on refining our labor model that we started during COVID, that certainly has enabled us to unlock some of the labor efficiencies that we saw. But as we head into Q2, we're certainly starting to lap those benefits that we saw last year; however, we still feel pretty good about our ability to expand margins off of this base.

And maybe lastly, I would say, we did take some actions in Q1 to further reduce our fixed cost structure, back-office cost. And our intention there is to basically pivot our cost structure to take cost out of back-office and use that to invest in areas that we know we want to, to support our operational parts of our organization. So that's underway now, and we still have a little bit of work to do as we mature through the year. But all that's certainly contemplated in our guide.

Yes, and that's why we're still kind of holding tight on that 30% incremental margin on organic growth rate that we've guided to. So there's plenty to do here, and we're focused on it, but I think that, that guide is still correct.

Our next question is from Ian Zaffino with Oppenheimer.

Maybe shifting gears here. The buyback, glad to see you guys stepping up defending the shares. But how do we read into that maybe as it relates to M&A? Was there just not a lot you saw? Are they mutually exclusive, buying back stock and finding companies to buy? And then maybe just, in general, the M&A landscape and kind of what you're seeing there, bid-ask spreads, et cetera?

Yes. Thanks, Ian. Good to talk to you. I'll take the first part, and I'll ask Bob talk about the second part around share buyback and capital allocation. But on the M&A front, really, encouraged by progress we've already made in the quarter. As you saw, we had 4 deals that we closed, 3 in the U.S., 1 in U.K. as well as a new deal we announced with Citron up in Canada. I'm proud of the fact that our team has really worked pretty hard. Number one, we've established our M&A team, again, in the company, dedicated team focused on growth. A lot of progress they've made on rebuilding the pipeline, developing relationships with players in the industry. I think, we made considerable progress in doing that.

In terms of the outlook on deal flow, again, our pipeline is full. Certainly, it's a very competitive market, and we're seeing that be reflected in the multiples out there. But having said all that, I think, despite the choppy market on deals that's out there, we still see attractive accretive deals in front of us here. So very encouraged by what we're seeing on the M&A front.

Yes, Ian. Yes, I think to Brett's point, I mean we're definitely focused on it. We've got a much more concerted effort towards M&A than, I think, has been in place for a while; but, obviously, core to the pest industry as opposed to ancillary. And obviously the strong free cash flow that we generated in the quarter, obviously, benefited from a lack of tax payments and some other things. But our balance sheet definitely gives us the opportunity to continue to look at rather sizable deals if they come upon us. The $169 million buyback is obviously part of our $400 million program. We continued that through April. We'll continue that through the buying periods that we're allowed to participate.

And obviously -- but we also want to make sure that the base of this company operationally has the muscle to bring on a larger deal. So that's why we're hyper-focused on more tuck-in opportunities that we can do more branch by branch, as opposed to stressing out the entire organization with a larger deal right now. But I think we'll be well on our way once we get the Terminix Way up and running, and we also get CXP up and running.

Our next question is from Mario Cortellacci with Jefferies.

I just wanted to touch on the commercial business. How much of that was, I guess, the 1% that you saw ex FX was driven by the U.S. versus Europe? And then how much room do you think there is for that part of the business to accelerate even faster in '21? And maybe to ask a different way, how much a GDP acceleration are you baking in to the expectation for that business? Could we see a much larger ramp in the back half of the year? Say things do come in better-than-expected for the overall economy with GDP and maybe we see a little more normalization in 2022? Any color there would be great.

Thanks, Mario. Good to speak with you again, by the way. So let me frame commercial here. First of all, international grew double digits in the quarter. So certainly, a real strong performance by our team there. And we did see really strong sequential improvement throughout the quarter in our commercial business. Certainly, the macro demand trends continue to improve, as I mentioned, sequentially through the quarter as well as into April. We're really encouraged by the improvement, I think, in our retention on the commercial side in our business. This is the first time since the pandemic started that we saw improvements in retention on the commercial side. Our team right now is very focused on not only improved operational execution, of course, through retention, but also pricing, continues to be pretty strong for us as well. So we're encouraged about the outlook, I think, on commercial going forward in this business.

Yes. And I think you got to look at the fact that last year, Q2 commercial fell off track pretty significantly. So -- and this kind of goes back to our earlier comment from looking at a 2-year stack. And so we kind of -- we definitely feel good about our commercial business and getting back on track with some significant growth there. But when you look at it just on a year-over-year basis, it still puts us in line with that guidance.

And that does conclude all the questions we have for this time, Mr. Jenkins. I'll turn it back to you.

And that concludes today's call. Thank you, everyone, for your continued interest in the company. We look forward to talking again on our next earnings call, tentatively scheduled for Thursday, August 5. Thank you.

Thank you, everybody.

And ladies and gentlemen, that concludes the call for today. We thank you all for your participation. Have a great rest of your day. You may disconnect your lines.