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Terminix Global Holdings Inc (TMX) Q3 2021 Earnings Call Transcript

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TMX earnings call for the period ending September 30, 2021.

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Terminix Global Holdings Inc (TMX)
Q3 2021 Earnings Call
Nov 2, 2021, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, welcome to the Terminix Third Quarter 2021 Earnings Call. Today's call is being recorded and broadcast on the Internet. Beginning todays call is Jesse Jenkins, Terminix's Vice President of Investor Relations, FP&A, and Treasurer.

And now, I will turn it over to Mr. Jenkins, who will introduce the other speakers on the call.

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Jesse Jenkins -- Vice President Investor Relations FP&A & Treasurer

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, November 2, 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 third 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 lays out the agenda we will cover today, with Brett opening up with highlights and initiatives, updates, followed by Bob reviewing our financials and outlook. We will then open the line for questions.

I'll now turn it over to Brett Ponton.

Brett?

Brett Ponton -- Chief Executive Officer and Director

Thanks Jesse. In the third quarter, we delivered revenue of $530 million or growth of 4%. Organically, we had a strong quarter in our termite business with 6% growth in termite renewals, the highest renewals growth rate since 2018, as we begin to benefit from increased volume from sales last year as well as better pricing in an inflationary environment. New unit growth in termite are 3% included recurring termite growth, as well as increased home services cross-selling to existing customers, despite a strong prior year comparable of 13%.

Residential pest grew 1% organically with better pricing, cancel rates and retention rates offsetting a reduction in completion rates driven by staffing headwinds in the quarter. Staffing challenges can be seen throughout our results for the quarter including the revenue growth of our pest control businesses as we manage through the pandemic. The lower than needed staffing levels led to challenges, completing recurring work in both residential and commercial pest as well as missed opportunities and national accounts onetime sales.

Despite these challenges, retention rates improved and commercial over the prior quarter and we are confident in our ability to add staff over the winter to be prepared for additional work before the peak pest season of 2022. I will have more on our staffing plans in a moment, as this is a priority at all levels of the organization in the near term.

Third quarter adjusted EBITDA was $102 million up 3% or $3 million year-over-year for a margin of 19.2%. We are pleased with the progress we are making to mitigate termite damage claims expense and saw a $5 million reduction year-over-year the first year-over-year reduction since 2019. The quarter saw a significantly lower litigated cases sequentially and a 6% reduction in non-litigated cases year-over-year. We remain confident in our approach to manage termite damage claims and are encouraged by the results in the quarter. Direct cost productivity included lower chemical costs, better freight management and margin expansion from insourcing national accounts work.

The impacts of the pandemic continued to weigh on our business as we saw $3 million and higher labor expense and $5 million from increased COVID-19 related medical expenses in the quarter. Free cash flow was strong during the quarter, allowing us to return $171 million in capital to our shareholders through our share repurchase program. We also purchased eight tuck-ins in the quarter for $41 million as we gained confidence in our ability to integrate as we roll out the customer experience platform. Leverage or 1.9 times adjusted EBITDA remains below our longer term target, allowing us to continue to prioritize investments in strengthening our underlying operating capability as well as take advantage of opportunities in the acquisition market.

And as we turn to Slide 5, I'm also encouraged by the progress we are making on enhancing our digital marketing presence and implementing both the Terminix Way and Customer Experience platform or CxP. In the quarter, we made progress on our plans to improve our training levels and equip our teammates with the tools and technology needed to improve customer acquisition, penetration, retention and reduce performance variation across our business. While I'm pleased with the progress we've made on improving our processes and systems, in a service-based business, staffing is the most important aspect of our relationship with our customers.

As we saw in the quarter, staffing is a critical component of our business and, given the current tightness of the labor market, labor availability was an issue.

Overall, I'm pleased with our rapid response to the issue, and I'm encouraged by consistent progress that has continued into October. We took several key actions to improve our staffing over the course of the quarter. To start, we needed to increase visibility and urgency across the company from the C-suite, down to the local branch and service managers. As we have learned, staffing is a local issue and while staffing may appear fine at a total company level, there were certain markets that we saw and continue to see at critical levels.

With a heightened urgency and improved visibility, we added weekly critical staffing calls to create and track progress on local branch level action plans. We clearly defined responsibilities across branch and service managers, as well as our talent acquisition teams to ensure we make a rapid progress in the branches where it matters the most. We have also made considerable improvements in how we market and fill open roles. We have done a better job highlighting the improvements we are making in our teammate value proposition. Our technician roles have attractive compensation levels and a high degree of autonomy, and we are making key investments in training and tools that will shorten the time it takes for new hires to be successful. We are also making improvement in shortening the time from an open position to a productive technician with an improvement through the hiring and on-boarding process from click, to apply, to hire.

Additionally, we are enhancing pay plans as it relates to our sales positions. We have increased the fixed salary rates for our new-to-the-role outside sales professionals or OSPs. This provides a workplace certainty for new hires as they get comfortable with the selling process and get the proper training to become effective. Starting in October, we have also enhanced product sales commissions for technicians to improve total compensation and are experimenting with leniency on certain aspects of compensation in areas where staffing is at critical levels and require technicians to absorb additional work.

And finally, the impact we have seen in staffing levels this year has led us to explore our long-term operating model. While still in the early stages, we are exploring the idea of universal technicians and are well along the way toward enabling better cross-selling capability and incentives for our teammates. Our plans are working. At the peak of our staffing issues, we're approximately two technicians per branch understaffed on average. We reduced that level to approximately 1.25 technicians at the end of Q3 and have continued to make progress in October.

Confidence in our ability to continue to make staffing progress is reflected in the fourth quarter guidance Bob will discuss later and we are encouraged by the strong October we have already had under our belt in this area. While encouraged by the progress we have made, given the competitive nature of the labor markets, we are expecting to see labor challenges for the rest of the year and are targeting to be fully staffed by late winter and early spring of next year in line with our peak pest seasons.

Longer term, these staffing challenges underscore the importance of the investments we are making to strengthen our value proposition at Terminix with clearly defined training and career paths through Terminix University. Last week, we accomplished a major milestone in the Terminix Way as we roll out the first of a series of playbooks to our regional field leadership. I was able to meet face to face with our team last week to align on our forward growth strategy and introduce new management tools and leadership training to improve their effectiveness as a regional leader responsible for multiple branches. As with most multi-location businesses, when I look across our business, there is a wide variation in our results across all key metrics from the top to the bottom.

For instance, depending on the service line, retention rates of our top performing branches are 20 percentage points to 30 percentage points higher than our lowest performing branches.

Last week, we rolled out a new tool that will give clear visibility for each leader into the underperforming branches in their region by precise metric. The ability for each leader to easily see the key issues and underperforming branches is the first step in the process of turning around performance. Understanding why branches are underperforming is important but being properly trained on how to improve the metrics is what will ultimately drive improvement. To that end, we introduced playbooks that clearly define actions that are proven successful and turning around similar metrics and other branches at Terminix.

Moving low performing branches to the middle of the range will bring drive substantial growth and margin expansion opportunities. Rolling this out with our regional field leaders last week was an important first step in the Terminix Way. And we plan to scale these playbooks to other key positions and competencies in the company as the Terminix Way and the training reinforcement needed in Terminix University continues to mature in the coming months and quarters. Shifting to customer penetration and acquisition there are three core areas we are focused on, to drive better organic growth rates. First, we have significant opportunities to deepen our relationships with our existing customers by leveraging our 50,000 touchpoints per day to drive improved customer penetration.

Today, we go to market in the residential business with four main recurring services. Pest control, mosquito, termite and wildlife exclusion. Our average customer has approximately 1.3 services each, sizing the opportunity each tenth of a point improvement in household penetration represents between $55 and $65 million of potential revenue with higher than normal flow-through to profit. As a part of the Terminix Way and CxP, we are developing a robust technician cross-selling playbook, enhancing our abilities to growth the business by maximizing the selling potential of our technicians. Better training and a repeatable inspection process, enabled by a CxP, will help our teammates diagnose potential problems before they occur and partner with customers to protect their homes.

While we also likely have some incentive changes that we will need to make along the way, the opportunity from a better penetration is a very large one. I look forward to sharing progress and goals on this important penetration metric as we continue to implement the capabilities needed to drive improvement through Terminix Way and CxP. The second area is deployment of CxP. In early October, we pushed the CxP functionality update to our Phoenix pilot branch that reflects the version that we plan to scale, later in the year. We have an aggressive implementation plan that will add several regions to the platform before year-end and see us scale to the entire country by the middle of 2022.

While only a few weeks into the update in Phoenix, I was able to be on site and see firsthand the results of the launch, and I'm confident that the improved technology makes the day-to-day lives of our technicians easier, improves customer service consistency and ultimately, will improve customer retention. The final area of focus is new customer acquisition through enhanced marketing capabilities. Our marketing and IT teams, in conjunction with our agency partners, are making progress on our refreshed website and we remain on track for a December launch. This website will be built around maximizing the self-service e-commerce capabilities that our customers are asking for. The website will also enhance SEO and feature a prioritization on keyword placement to make it easy for us to be found when consumers are searching for pest control online.

In addition to partnering with our customers to drive better penetration, we have significant runway for volume growth to improve customer retention. While both pest business lines were negatively impacted by lower completion of recurring and onetime work year-over-year, cancellations were not the driver. In residential pest, we saw improvement in both near-term cancel rates in the quarter as well as year-over-year trailing 12-month retention rates. In the commercial business, we saw strong cancellation improvement in Q3 and while year-over-year trailing 12-month retention rates remain impacted by COVID, we did see sequential improvement in the quarter.

While the termite business did show strong growth in renewals from volume increases and pricing actions, retention remained relatively flat to prior year and cancellations were elevated due to increased customer moves in the quarter compared to prior year. As we look at retention across the industry and our own 20% to 30% retention variation across the branch network, we are confident we have ample room for improvement and retention rates across both service lines. The implementation of service standards, enhanced training curriculums and improved technology that come with CxP and Terminix later this year, give us confidence we can make meaningful improvements in retention rates during 2022.

And finally, all these priorities are designed to improve our profitability and expand our profit margins. The margin highlight in the quarter was progress on termite damage claims. In the quarter, we saw a 58% reduction in new litigation compared to Q2. This coupled with a 23% year-over-year reduction and cost per litigated case was the primary driver and expense reduction. On the non-litigated side, new claims were down 6% year-over-year while cost per claim continues to be elevated due to inflationary pressure on building materials.

Both litigated and non-litigated claims count saw a reduction in areas outside of the narrowly defined Mobile Bay Area as we continue to see escalation primarily focused in the Formosan termite areas along the Gulf of Mexico. This is especially true in litigation with approximately 85% of cases coming from within a 200-mile radius of Mobile, Alabama. We continue to make progress with our mitigation program in that area and are confident the strong results we have seen in Mobile will translate to other areas of the country over time. We also saw strong productivity in both fleet management and chemical costs as we had lower fuel prices due to our aggressive 2020 hedging actions and improved chemical costs through the purchasing power of our product sales division.

We also saw productivity as we in-sourced commercial national accounts and are able to perform the work more efficiently than subcontractor rates. Higher costs included labor expense as we managed through higher year-over-year turnover and a tight labor market as well as significantly increased COVID related medical costs. Year-to-date, margins of over 20% have expanded by more than 170 basis points despite longer term investments in key operational capabilities. As Bob will discuss in more detail, despite staffing shortages and medical rate increases, our full year guidance reflects strong year-over-year expansion of more than 110 basis points.

Moving to Slide 6, I thought it will be helpful to include a timeline of initiatives we have underway to better illustrate implementation schedules for each. We have three primary areas with initiatives underway to drive profitable growth in the company. Starting at the top of the page with enhanced marketing, we have already made significant progress on search engine marketing optimization this year and benefits of our actions will carry over into next year. We plan to launch our website in December and would expect soon after launch to drive organic traffic with better search engine optimization.

For CxP, we launched the new platform in Phoenix in the third quarter and CxP is planning to scale this new enhanced code into a few regions before the end of the year and is marked for full deployment by the middle of 2022. For Terminix Way, we recently rolled out our first playbook for field leadership. Over the next couple of quarters, we'll continue to build out standards and playbooks for other roles including technicians and branch managers and are planning the Terminix Way branch pilot, toward the end of Q1 with a full launch later in the year. Once developed, the playbook will become a part of Terminix University online with a full training center and the longer-term plans.

I will now turn it over to Bob for a deeper discussion on the financials and guidance. I will come back with some closing thoughts on the quarter and expectations for the future before Q&A. Bob?

Robert Riesbeck -- Executive Vice President and Chief Financial Officer

Thanks Brett. Let's start with a detailed review of our top performance. Overall, we delivered revenue growth of $18 million driven by $9 million organic growth or 2% as well as 2% growth from M&A. Beginning with the termite and home services column on the left side of Slide 7, reported revenue increased by $5 million or 3% in the quarter. Termite and home services completions were up 3% in the quarter with core termite completions up 1% and home service completions up 5% year-over-year due to improved cross-selling to existing customers. Core termite completions made up 52% of the $91 million completion revenue in the quarter. Termite completions were impacted by lapping 13% growth in completions in the third quarter of 2020 as we saw a strong growth from the introduction of our monthly pay product.

Termite completions also continue to be impacted by staffing challenges and our outside sales professionals, as the labor markets have impacted hiring rates and turnover in this very competitive labor pool. Despite these challenges, we are seeing better productivity from our existing salespeople, which enabled us to bounce back from declines in completions in the second quarter. And as Brett mentioned earlier, the CxP rollout and enhanced training from the Terminix Way to our technicians will help drive selling opportunities in the coming quarters.

Termite renewals were up 3% as we begin to see the benefits of increased volume from the sales last year, as well as a better pricing in an inflationary market. Adjusting for more than $1 million in headwinds from a change in revenue recognition for our monthly pay product, termite renewals were up 6%, the highest renewal growth rate since 2018. We expect to see strong growth in renewals again in the fourth quarter as we start to see benefits from the monthly pay product offering. Residential pest grew 3% in the third quarter, with organic revenue growth of 1%. We continue to see strong pricing benefits in an inflationary environment, as well as in improvements in both the cancel rates and customer retention, both sequentially and year-over-year.

We also experienced strong bedbug demand in the quarter as travel mobility continues to improve. Growth was negatively impacted by shifting resources to cover increased commercial volume. Growth in residential pest was, again, negatively impacted by a lower-than-expected summer sales due to staffing challenges at our sales partners, driven by the competitive labor market. We are making progress in digital marketing and are excited about improvements in the SEO after the launch of our website in December that will drive an increase in profitable leads in the future as our staffing levels improve.

Commercial pest grew 3% in the quarter, including 4% from M&A. Our international business reported in the commercial revenue line saw strong growth in the quarter and also benefited from about $1 million in favorable currency exchange in the period. The domestic business was severely impacted by lower staffing levels due to the increase in volume from the insourcing of certain national accounts customers. Staffing shortages led to challenges completing recurring work as well as missed corresponding opportunities and one-time sales. As Brett covered earlier, we have a robust staffing plan in place and have improved our staffing levels consistently over the quarter and into October and remain confident we can get back to the needed levels in time for the peak pest season next year.

In the other revenue service line, product sales were up 11% organically over the prior year as we lapped the impact of COVID and the chemical purchasing outlook improves. Overall, the third quarter saw a strong rebound in termite business while both residential and commercial service lines were impacted by staffing issues. With advancement in digital marketing capabilities as well as progress on Terminix Way and CxP, we are confident we can continue to make meaningful progress toward sustainable organic growth rates in the mid-single digits as we look to 2022 and beyond.

Turning to Slide 8, you can see the financial summary in detail and the adjusted EBITDA drivers for the quarter. On the P&L, at the top left of the page, you can see that the $18 million or 4% revenue growth we covered on the previous slide led to a $3 million or 3% increase in adjusted EBITDA for incremental margins of around 20%. Adjusted EBITDA growth and lower interest expense drove a $17 million or 50% increase in adjusted net income. And finally, the net income increase in share repurchases in the quarter led to a $0.15 or 49% improvement in adjusted EPS to $0.41 per share.

Across the bottom of the slide, you can see the adjusted EBITDA drivers for the quarter. Revenue growth, including growth from acquisitions added $8 million of adjusted EBITDA in the quarter. Labor increased $3 million in the quarter primarily driven by higher turnover year-over-year from the competitive labor markets. We are expecting labor headwinds in Q4 and into 2022 as we ramp-up our staffing levels over the winter. Direct cost productivity generated $4 million of higher adjusted EBITDA. In addition to lower chemical costs and favorable fixed fuel hedge prices, we also saw a margin increase from the insourcing of national accounts customers as we continue to provide services at a lower cost than subcontracting.

Termite damage claims expense decreased $5 million in the quarter due to lower costs per litigate case as well as a 6% reduction in non-litigated claims count. These reductions more than offset higher costs for non-litigating claims due in part to inflationary pressures on building materials and contractor cost. Medical costs increased $5 million due to increased medical claims and short-term disability cost as a result of increased COVID-19 infection rates across our customer facing workforce. While the impact of the pandemic are difficult to estimate at this point, we are expecting higher medical costs in the fourth quarter and into next year.

Non-capital, third-party investments and design implementation and deployment of Terminix Way and CxP were a $1 million in the quarter and $2 million year-to-date. We expect to see another $1 million to $2 million in the fourth quarter as we scale CxP and train our teammates on the new operating system. As we will touch on in the outlook in a few slides, we remain largely on track with our full-year adjusted EBITDA and margin outlook, and are still targeting full year margin expansion of between 110 basis points and 140 basis points.

Turning to Slide 9, you'll see the cash flow summary for the quarter. We have used $21 million in cash from working capital year-to-date, and we expect Q4 to also show a use of cash as we repay the first half or approximately $15 million of the 2020 payroll tax deferrals from the CARES Act in December. Capex of $17 million year-to-date is primarily related to the capitalized development cost of CxP. Year-to-date, free cash flow conversion of 63% is in line with expectations and remain on track for the conversion to be in the mid to high 50% range for the full year.

Shifting to the uses of cash, we have completed $86 million worth of acquisitions, including eight in the quarter, and remain active with other small tuck-in deals in the pipeline. As we get more comfortable with our ability to integrate these operations with CxP, we plan to continue to ramp the M&A spend into next year. We made a scheduled debt payment of $79 million, including approximately $50 million for the final payment of the Copesan agreement and earn-out. And finally, the primary use of cash so far this year continues to be through the share repurchase program. Under the program, we have repurchased $522 million worth of shares this year. We have approximately $272 million remaining in our current $400 million program.

We ended the quarter with $156 million in cash and $534 million in available liquidity with a net debt leverage ratio of 1.9 times. This cash position and balance sheet flexibility allows us an ample ability to invest in long-term growth through Terminix Way, CxP implementation and accretive M&A, as we progress toward our longer term leverage target of around 2.5 times. Moving to 2021 outlook on Slide 10. For the full year 2021, revenue is expected to range between $2.035 billion and $2.050 billion. We have increased the low end of the revenue guidance range by $10 million to reflect increased acquisitions in the third quarter. While organic revenue is still expected to remain between 3% and 4% given the staffing impacts to pest revenue in the quarter, we are now trending [Phonetic] to the lower end of that range. Adjusted EBITDA remains unchanged between $308 million and $390 million with margins between 18.7% and 19% for margin expansion of between 110 basis points and 140 basis points year-over-year. Incremental margins are expected around 50% at the midpoint despite absorbing headwinds from pandemic-related expenses in medical and labor.

In the fourth quarter, we expect the flow-through of revenue growth to be largely offset by headwinds in labor, medical expenses and investments in sales and marketing. Despite staffing and COVID impacts to the business, we remain encouraged by the progress we are making to improve the fundamental operations of the business. Terminix Way and CxP are the initiatives we need to drive consistency across our branch network that will lead to better customer retention and improved customer penetration.

And with that, I will turn it back over to Brett for some final thoughts.

Brett Ponton -- Chief Executive Officer and Director

Thanks Bob. As I move past my first year in the business, I have gained a better understanding of the key drivers of our business. As we saw this quarter, staffing is the most critical component of our business, and I'm encouraged by the progress that we have made in improving the staffing levels in October and I'm confident that we have line of sight in our next year in a better place than we exit it this year. I've also seen the attention to detail we need on growth. I am happy with the management team that we have in place but, given the importance of growth to our business, we plan to make a final addition to our leadership team with someone solely focused on revenue growth.

Overall, the third quarter reflected good progress on key initiatives with a lift on digital marketing efficiency, the launch of CxP and Phoenix, and the deployment of the first Terminix playbook to our field leadership. We remain on track with our long-term strategy, and I'm proud of our ability to drive growth and margin expansion in 2021 while we build out these foundational capabilities for the future.

I remain confident that we have the pieces and strategies in place to reach industry-level growth and profitability as we leverage the additional capabilities these initiatives will provide our teammates. As we look to 2022 and mature with CxP and Terminix Way, I look forward to sharing details, refresh growth plan focused on improving the new customer acquisition, customer penetration, and reduce variation across the branch network. The foundational investments we are making in 2021 are vital pieces to enabling that growth plan, and I remain encouraged that we are on the right track toward industry-leading growth and operating consistency.

And with that, I will hand it over to Jesse to lead us through Q&A.

Jesse Jenkins -- Vice President Investor Relations FP&A & Treasurer

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.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] Our first question comes from Tim Mulrooney with William Blair. Please go ahead.

Tim Mulrooney -- William Blair -- Analyst

Brett, Bob, good morning.

Brett Ponton -- Chief Executive Officer and Director

Good morning, Tim.

Tim Mulrooney -- William Blair -- Analyst

A question on organic growth. It looks like you maintained your full-year guide for organic growth of 3% to 4%. Correct me if I'm wrong, but a little back of the envelope math and I think your guidance implies that you expect organic growth to accelerate a little bit here from the third quarter to the fourth quarter. Is that a fair statement? Did I do that math right? And if so, can you talk about the primary factors driving the expected acceleration despite the more difficult comparison?

Brett Ponton -- Chief Executive Officer and Director

Yeah. Sure. Tim, this is Brett, by the way. Your math is accurate there. It does imply an improvement in our run rate off of our Q3 exit rate here. The primary driver of that is related to staffing improvements that I commented on in the prepared remarks. We've seen a nice improvement in our staffing levels to model and as a result of that, we've seen that translate into improved completion rates of our recurring revenue that's translated into higher revenue growth. So, we feel confident in the guide given that improving labor backdrop that we've seen in October.

Tim Mulrooney -- William Blair -- Analyst

Great. Thank you.

Operator

Our next question is from Ashish Sabadra, RBC Capital Markets. Please go ahead.

Ashish Sabadra -- RBC -- Analyst

Thanks for taking my question. So my question was on the EBITDA. We saw some pretty -- there are a number of moving pieces there but we saw productivity improvement really help alleviate some of the headwinds from inflation. How do we think about those puts and takes going forward? I know you've talked about some mid-single-digit growth going into next year, I was wondering if you could provide some early view about all these puts and takes as we exit the year. Thanks.

Robert Riesbeck -- Executive Vice President and Chief Financial Officer

Yeah. As we look at next year, and this is Bob by the way. Good morning. Obviously, we see some strong pricing backdrop to continue through next year. Really some good -- as Brett just mentioned, year-over-year organic improvement and definitely with our termite business. And then, we do see some headwinds going into next year as it relates to fuel. The team here did a great job hedging fuel this year and so, we will see that kind of be somewhat of a headwind going into next year. We do see as Brett mentioned during the prepared remarks some labor challenges continuing into next year. So, those are really the primary really items going into 2022.

Ashish Sabadra -- RBC -- Analyst

Thanks for the color. Thank you.

Operator

And our next question is from Ian Zaffino with Oppenheimer. Please go ahead.

Ian Zaffino -- Oppenheimer -- Analyst

Hi. Thank you very much. Actually if I could kind of maybe sneak in two questions, one on build up on the last one, would be on the pricing side. You know, is your pricing catch-up pricing? Are you able to pre-emptively push through pricing assuming that this could be additional inflation? You know how are you actually thinking about pricing and elasticity and offsetting any type of increases? And then just maybe touch upon in-sourcing your Copesan, we haven't really heard about that so, I don't think that was asked yet. So, anything related to that, how do we think about the insourcing of that? Thank you.

Brett Ponton -- Chief Executive Officer and Director

Sure. Good morning Ian by the way and thanks for the questions. Let's talk pricing first. First of all, I think one of the things I like about this industry and we see in our business is our ability to push price into the marketplace, both on the consumer side and residential as well as commercial. We do think there's been a little bit of catch-up pricing that we saw this year because we've done analytics we feel like there maybe under market in our service lines both commercial and residential so certainly some catch-up pricing there.

I will say, however, we made some pretty significant investments in 2021 to improve our analytics and our capability to drive deeper insights around elasticity and consumer behavior in particular and we're starting to see some of the benefits of that flow through in Q3 and are expecting that into Q4 and beyond. We recognize we're likely heading into an inflationary environment here that we know we're in and enhancing that analytic capability was paramount and a priority for the team here. So as we built that out, we feel very good about our ability to continue to take price here as we exit 2021 and we enter 2022.

Another positive point around pricing, we did comment about improvements that we saw on customer retention and certainly in our residential area and despite us taking maybe a little more price in the quarter, our retention rates have improved as well, so we feel good about that. Related to Copesan, it certainly was an impact on our business in the quarter and I'd like to provide a little more clarity around that. If you recall, our Copesan earnout agreement expired in late April and that agreement had a 30-day notification period for the partners and we did have a handful of partners who decided to leave the Copesan service network, if you will and that required us to take on that incremental Copesan volume.

So a significant portion of that hit us in Q3. And, just as a reminder with the Copesan model, the insourcing is only a margin contribution item for us. We were already collecting the revenue and reporting the revenue, and that was already in our run rate, of course. So, what we saw in Q3 was a pretty sizable increase in our volume, at our branch level, it's not just the volume. It was high frequency and high complexity volume that put some strains on our labor in our business. And certainly, the unintended consequence of that, I think has led to lower completion rates and one-time sales opportunities in our commercial business and to a certain degree in our residential business.

So, on the positive side, that's now behind us. Our labor markets or labor situation has dramatically improved as we head into October, and I'm really encouraged about the team's ability to withstand taking on that incremental volume, still delivering the in-line quarter that we delivered. And now that's in the rearview mirror, we can get focused on regaining our completion rates back to the levels that we saw before that Q3 insourcing challenge.

Ian Zaffino -- Oppenheimer -- Analyst

All right. Thank you very much.

Operator

And our next question is from Gary Bisbee with Bank of America Securities. Please go ahead.

Gary Bisbee -- Bank of America -- Analyst

Hey, if I could just follow up on that. So, you talked about missing some onetime opportunities, but maybe it sounds to me like more of an issue of not able to complete some recurring business. Retention is up but, if you're not doing the services you're supposed to do, I think particularly for commercial customer, it strikes me that there's some risk that, that goes down as they're unhappy with that. So, is that an issue in residential than commercial? How are you dealing with that? And can you give us a little more color on, when you say that you're sort of in a much better shape in October from a staffing, what that really means? Is it that you've passed this surge from Copesan coming in or have you really made real progress in the discount? Thank you.

Brett Ponton -- Chief Executive Officer and Director

Yes. Good question Gary. Let's start with the first part of that. I'm really proud of the protocols being put in place with our customers. We established good solid lines of communication with our national account customers in particular. We leveraged some of capability from our CxP technology to help give us better visibility on that and we feel like we've navigated through that quite well through that surge if you will and maintain good solid relationships with our customers despite that.

The improving backdrop I mentioned in the prepared remarks is our staffing gap technicians to our model was about 2.0 and now we're down to roughly 1.25 techs per branch being light. So, certainly we saw improvement in our technician staffing plan and as a result of that, we've seen a corresponding improvement in our reoccurring completion rates in October that is certainly leading to a much more positive outlook on revenue as we finish out Q4.

Gary Bisbee -- Bank of America -- Analyst

Okay. Thank you.

Operator

And our next question is from Mario Cortellacci with Jefferies. Please go ahead.

Mario Cortellacci -- Jefferies -- Analyst

Hi. Thank you for the time. Maybe you could just talk about the cadence of returning to mid-single-digit organic growth and is there anything over the next 12 months that's more nonrecurring in nature that could hurt progress there? And then along with that, in that mid-single digit number, how much -- if you could help kind of pick that apart and how much you think is coming from better retention, how much is from pricing, better product penetration, new customers etc? Any color there will be helpful.

Brett Ponton -- Chief Executive Officer and Director

Yes. First of all, I'll start with the second part of the question. I think, yeah, the expectation we would have is -- and I won't parse retention and new customer growth, but I think the industry has historically seen 2% to 3% on price so implied in that is better retention and better customer acquisition on the balance of that to get to the mid-single digits. Related to our progress on the path to get there, first of all, let me just recap here. I think our team's done a nice job we're right on our plan that we've established for the year, in fact, we're exceeding our plan that we established.

We raised our EBITDA guidance after Q1 as I mentioned in the prepared remarks, I'm really pleased with our team's ability to expand margins and drive the 3% to 4% organic growth this year, despite the fact we're making pretty significant investments and the underlying capability led by work we're doing on Terminix Way, of course, and CxP in particular. And so, we talked about -- I'm encouraged that we've reached some pretty significant milestones yet this year on those two initiatives rolling out our leadership modules to our field organization last week in Dallas was one of those big milestones, as well as rolling out the version that we plan to scale for CxP and Phoenix earlier this month. And that rollout, by the way, was all modified based upon the input session that we had by bringing our technicians in to Memphis to get feedback on the previous version. All those edits have been made and are now being implemented that we intend to scale, starting later this year.

So, the self-help initiatives are starting to mature, and those are certainly going to roll into next year. And then the last point I would add is just the investments we're making around marketing. You know, building the marketing capability here on digital, we made some progress on improving our SEMs as we talked about. The real major first step forward is getting our new website launched in December and collection of those key initiatives as we laid out in our timeline will create the self-help this company needs to help drive the improvement of our current run rate and get to that mid-single-digit organic growth rates that we're expecting.

Mario Cortellacci -- Jefferies -- Analyst

Great. Thank you very much.

Operator

And our next question is from Toni Kaplan of Morgan Stanley. Please go ahead.

Jeffrey Goldstein -- Morgan Stanley -- Analyst

Hey guys. This is Jeff Goldstein on for Toni. I just wanted to follow up on one of the last comments you made around the new website and e-commerce platform that's going to be launched in December. Is that strictly a revenue opportunity or is it also an expense saving opportunity as well because I was hoping that if there was anything that you could give us around maybe your customer acquisition costs currently and if you think that these platforms can drive some type of reduction in that, just how should we think about the benefit on the expense side from that rollout? Thanks.

Brett Ponton -- Chief Executive Officer and Director

Yeah, great question Jeff by the way, it's an area that we're digging into a great deal, and it's just understanding better our conversion rates from lead to a new sale, and we've identified significant opportunities there to improve our conversion rates. And so, you might expect a more enhanced website that improves the efficiency from the point that customer enters the brand to ultimately transacting. Every improvement in the conversion percentage point drives significant improvement in our revenue, but also of course loaners [Phonetic] are cost to acquire that customer. And so, both sides, I think, is going to be well-addressed here as we launch our first version of this website.

And, I will say look, this is the journey that we're going to be on, this is version one. We're going to, like every other initiative in the company, we're going to focus on continuous improvement. I'm really proud of the progress that our marketing team has made to get us to this point, and we're excited to get this launched later this year and we continue to build on that as we head into 2022.

Jeffrey Goldstein -- Morgan Stanley -- Analyst

Okay. Thank you.

Operator

Our next question is from Michael Hoffman with Stifel. Please go ahead.

Unidentified Participant

Good morning Brett and Bob. This is actually [Indecipherable] on for Michael Hoffman. Thank you for taking the question. Just going back to the organic growth. So, your largest peers usually post organic growth in high single digits in the aggregate. What do you see as a pathway that gets Terminix to that level and above the mid-single digits that you expect from your self-help initiatives?

Brett Ponton -- Chief Executive Officer and Director

Yeah. So, we've talked about I think to get to the mid-single digits, we expect half of that and grow half of that in pricing. We talked about the enhancements that we're making to strengthen our pricing analytics that we're starting to see the benefits already in Q3 and Q4. And as I mentioned, I also believe we're playing a little bit of catch up on our overall pricing relative to the marketplace so, that's on the price side.

And as we talked about a number of key initiatives in the slide already, I won't go through those again but they're certainly all geared toward driving focus in two key areas. One is to improve our retention rates by delivering better, consistent service quality. As I made the comments in the prepared remarks, we have significant variation across our branch network on virtually every metric and our ability to reduce that variation through tighter standards and better training will drive significant improvement, not just in retention but overall improvement.

And then the second area is around household penetration, and I think one area that we've identified here is a significant growth opportunity for the company as drive deeper relationships with our customers. We shared a new metric with you all, where we currently have roughly 1.3 of our fourth core services the customers buy today and there's a significant pathway to growth going forward by driving deeper relationships with them. How we unlock that is twofold. One is through equipping our technicians with better technology to perform a thorough inspection but also at the customer's home be able to translate the results of that inspection into an easy to execute cross-selling opportunity and that's enabled through the CxP platform that we're in the process of scaling out later this year. And the second area is around getting incentive plans right for those technicians and we're modifying some incentive plans in October here as we commented about and we'll learn a lot from that in Q4 that we'll use to make any necessary adjustments in 2022 and beyond.

So we feel like the runway is long here in terms of self-help initiatives to drive both retention and penetration and then you overlay the new customer acquisition through better website, better conversion there that gives us confidence as we head into 2022. There's plenty of self-help here to close the gap versus current run rate and entry level growth rates.

Operator

Our next question is from Andy Wittmann with Baird. Please go ahead.

Andy Wittmann -- Baird -- Analyst

Yeah. Good morning. Thanks for taking my question. I guess I would like to hear a little bit more detail on understanding the labor costs. I mean, if your staffing levels were down in the quarter from what you wanted them to be here and you expected them to be, the costs were up and as I understand that your service technicians are paid more really on volumes than on other factors. So, maybe -- wonder if you guys could take us through kind of the mechanism that led to the increase in labor costs not just because the wage rates on average are up from inflation or other factors going on there?

And then, just a technical question to follow up on, the M&A that you did in the quarter of $41 million deployed, was -- is it really the most, I think, Brett, since you've joined the company? And, so, I was hoping maybe you could just give a little bit of a commentary as to what may be the annualized revenue from those acquisitions is expected to be or how it splits out into the three reporting groups? Thanks, guys.

Brett Ponton -- Chief Executive Officer and Director

Thanks Andy. I'll take the first part of the question let Bob take the second part. But, as it relates to labor costs, I think there's three components of that, first two, which were the primary driver. And, certainly, there is a cost to turnover. Turnover is going to drive the hiring cost and unproductive time with your technicians as they ramp up. The second part is we have had overtime expenses in the quarter as we run leaner on labor, of course, we have to cover those routes by paying overtime to the technicians to be able to do that. And the third part, which was less of an impact here, certainly, we have seen some wage inflation in select markets, where we've had to get more competitive on our starting wages for entry level technicians on an hourly basis.

But going forward, as you commented, most of our more experienced technicians are paid on a productivity basis, and our wage profile and value proposition on those mature technicians certainly, we think are very competitive in the marketplace, and our value proposition will continue to get stronger with a better career pathing and training through the Terminix University etc so we feel good about, again the progress that we've made and certainly our exit rate in Q3 and into October certainly reflects that.

I'll turn it over to Bob on the follow-up question.

Robert Riesbeck -- Executive Vice President and Chief Financial Officer

Yeah. Good morning Andy. And really, just to kind of run down kind of our thought process really related to capital allocation. I mean, our first and foremost focus is investment on growth. And so, whether that's the opex investments that we're making in CxP, Terminix Way, and digital marketing, as Brett has kind of mentioned, that's clearly the focus. But, when we see opportunities in the market, as we did in the quarter, we did spend about $41 million on eight transactions. They were primarily commercial transactions and then, we are kind of consistently paying roughly that 3 times revenue rate on all of these

Transactions right now. So, we'll continue to look at those and look at those opportunities as another path for growth.

Operator

And our next question is from George Tong, Goldman Sachs. Please go ahead.

George Tong -- Goldman Sachs -- Analyst

Hi. Thanks. Good morning. You mentioned that you have ample room for retention to improve across service lines in 2022. In each of your service lines, can you walk through where retention rates are now and where you hope retention will work toward?

Robert Riesbeck -- Executive Vice President and Chief Financial Officer

Yes. Good morning George. We haven't disclosed what our exact retention rates are but I think if you look across the three service lines relative to what the industry talks about in terms of industry growth rates certainly termites, we feel like we're more in line -- if not slightly above industry retention rates on termite. Certainly, commercial pest, we feel like there's an opportunity for us to improve relative to the industry and some similar dynamic on our residential pest area. And I think, both residential and commercial I think speak to the importance of us on establishing clear service protocols that are supported with good training to our technicians to deliver those service protocols and enable by really strong technology that make certain that our team is executing against those standards and we're confident we'll deliver good service quality and good customer satisfaction that will lead to higher retention rates. And I'm pleased with the progress the team has made despite having a lot of the tools and technology that our competitors have had in place and for a number of years.

So as we close that gap in terms of capability, we would expect that gap to close and look to grow beyond industry growth rates in these areas and I think the other positive point I would touch on is the fact that across our network of 350 branches a day, we already have branches that are performing at above industry leading levels in these areas. And as you would expect, that's where we're spending our time and energy and grabbing those best practices from those highest performing branches. Those are becoming the genesis of all the service protocols we will look to scale as part of Terminix Way to the rest of our organization.

In addition to that, on the commercial side, we are now in a position to fully take advantage of the investments that we've made in acquiring Copesan and several Copesan partners that have developed deep insights into commercial verticals that have performed at a very high level. We're using those best practices as the basis for the Terminix Way in our commercial vertical. So, collection of all those things coming together and heading into next year will create some nice self-help for us on driving higher retention.

George Tong -- Goldman Sachs -- Analyst

Got it. Thank you.

Operator

And that was all the questions we have. I'll turn the call back over to you for closing remarks.

Jesse Jenkins -- Vice President Investor Relations FP&A & Treasurer

Yeah. We appreciate you joining us for the call and we'll talk to you again as we lay out our 2022 plans. Thank you.

Operator

[Operator Closing Remarks]

Duration: 55 minutes

Call participants:

Jesse Jenkins -- Vice President Investor Relations FP&A & Treasurer

Brett Ponton -- Chief Executive Officer and Director

Robert Riesbeck -- Executive Vice President and Chief Financial Officer

Tim Mulrooney -- William Blair -- Analyst

Ashish Sabadra -- RBC -- Analyst

Ian Zaffino -- Oppenheimer -- Analyst

Gary Bisbee -- Bank of America -- Analyst

Mario Cortellacci -- Jefferies -- Analyst

Jeffrey Goldstein -- Morgan Stanley -- Analyst

Unidentified Participant

Andy Wittmann -- Baird -- Analyst

George Tong -- Goldman Sachs -- Analyst

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