SERV - NASDAQ

Ladies and gentlemen, welcome to ServiceMaster's Second Quarter 2020 Earnings Call. Today's call is being recorded and broadcast on the Internet. Beginning today's call is Jesse Jenkins, ServiceMaster's Vice President of Investor Relations and Treasurer. I will now turn it over to Mr. Jenkins, who will introduce the other speakers on the call.

Thank you Frank. 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 SEC. These forward-looking statements are not guarantees of performance and are subject to the risk factors contained in our public filings that may cause actual results to vary materially from those contemplated in the forward-looking statements. Information discussed on today's call speaks only as of today August 6, 2020. The company undertakes no obligation to update any information discussed on today's call. This morning ServiceMaster issued a press release filed with the SEC on Form 8-K highlighting our unaudited second quarter 2020 financial results. The press release and the related presentation can be found on the Investor Relations section of our website at servicemaster.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. We've also included reconciliations of these non-GAAP financial measures to the most comparable GAAP financial measures in our press release and in the appendix in order to better assist you in understanding our financial performance. All references on the call to EBITDA are to adjusted EBITDA as defined in our press release. Joining me on today's call are ServiceMaster's Chairman and Interim CEO, Naren Gursahaney; and our Chief Financial Officer, Tony DiLucente. Slide 3 of the presentation posted on the Investor Relations section of our website shows the agenda we will cover today. Naren will begin with highlights from the quarter and an update on our strategic priorities and then Tony will discuss the results and outlook followed by a Q&A. I will now turn it over to Naren Gursahaney. Naren?

Thanks Jesse, and thank you all for joining our call today. I'd like to begin by thanking all of our people and especially our frontline workers for their dedication and commitment to our customers during this challenging time. Before I comment on our second quarter performance, I want to share a few thoughts from the other press release we issued this morning. I'm very pleased that we've concluded our CEO search process and equally excited to have Brett Ponton join the ServiceMaster team as our new CEO. With the help of our search partner, the Board was able to conduct a very robust and thorough review of internal and external candidates for this role. Brett was at the top of everyone's list, as he has tremendous experience in leading large distributed organizations, a strong track record of driving operational excellence to fuel organic growth and margin improvement and embodies the values of a servant leader who understands the importance of enabling and empowering our frontline employees, so they can deliver an outstanding customer experience. Brett is an experienced CEO who has led both private and public companies. His deep understanding of service businesses and global operating experience position him well to help us further accelerate progress against our strategic priorities and enhance shareholder value. I look forward to Brett joining us over the next couple of months and supporting a smooth transition to ensure we continue to build on our strong business momentum. Turning to slide 4. I'd like to highlight our strong performance during the second quarter, which underscores the essential nature of the services we provide and the resilience that provides for our business. Total revenue grew by $40 million or 8%, including 5% at Terminix. Organically strong termite and home services completions improved daily cancellation trends in the Terminix Residential business and strong pricing realization across the board helped offset the COVID impact on our Terminix Commercial business. Terminix Residential grew 3% organically in the quarter, with the Termite business leading the way with a 7% year-over-year increase. As we'll discuss in more detail, the Terminix residential business was able to more than offset the impact of our decision to suspend and then scale back our summer sales program. Lower bed bug sales as a result of less travel across the country and higher, but improving temporary work order postponements relative to COVID concerns to ultimately deliver solid organic growth. Terminix Commercial was impacted by COVID-19-related business shutdowns, which were partially offset by strategic pricing initiatives. As we've already seen in July, the economy is starting to reopen. And while some uncertainty remains, we expect continued improvement in commercial revenue trends during the third quarter. During the quarter, we also saw strong revenue growth from acquisitions with the addition of Gregory and McCloud to the Terminix segment and Nomor Holdings in Sweden and Norway as well as Terminix U.K. in England in our European Pest operations. ServiceMaster Brands saw revenue decline of 4% as a result of COVID impact on residential cleaning and the impact of a mild winter on disaster restoration. Similar to Terminix Commercial, ServiceMaster brands are seeing improving trends and is planning for growth in the third quarter. From a margin perspective, I'm pleased to report we were able to convert $40 million in top line growth into $15 million of growth on the bottom line or an incremental margin of just under 40%. Terminix posted adjusted EBITDA margin of 23.3% in the quarter, an improvement of 190 basis points from prior year. Cost actions taken in the second quarter to reduce indirect and G&A expenses combined with labor productivity fueled by better employee retention drove the bottom line improvement. We also continue to generate considerable cash in our business. In the second quarter, free cash flow including ServiceMaster brands was $127 million for a conversion rate of 89%. We ended the second quarter with over $675 million in available liquidity and we're able to reduce our net debt leverage ratio by approximately half a turn down to 3.6 times adjusted EBITDA as we continue to progress towards our target of 2.5 times to three times. These strong results demonstrate the resiliency of our business and the strength of our response to COVID-19. Despite the operational challenges of an ongoing epidemic or pandemic we saw steady demand for residential pest services as more people stayed home and very strong demand for termite services driven by our new product launch and the termite swarm season. We've been able to overcome initial customer concerns regarding the safety of our services, through the new safety protocols and improved communication resulting in COVID-related work order postponements improving approximately 80% from April peaks by the end of the quarter. These new operating procedures also drove better customer retention and increases in Net Promoter Scores across our residential business, which supported optimizing prices for our services. Our Commercial Pest Control business was also able to progressively improve work order postponement rates enabling them to generate improved organic trends every month in the quarter. As business continued to reopen in July, trends have continued to improve and Commercial Pest Control organic growth was flat compared to prior year as we exited July. The long-term growth trends of our industry continue and as this quarter suggests we are well positioned to navigate what may come in the second half of this year. As we move into the back half of the year, we continue to be intently focused on driving our strategic initiatives and feel we can grow profitability throughout the remainder of the year and enter 2021 well positioned to capitalize on the ample growth opportunities in front of us. Turning now to our strategic priorities for 2020 on slide 5 you'll see a slide that looks familiar. As we previously discussed, when we moved into 2020, we decided to refine our focus on a fewer number of priorities in order to accelerate the impact of our efforts. In the first half of 2020, we've made meaningful progress on each of these strategic priorities and they are driving positive momentum across the business. Many of our COVID response actions aligned well with these priorities further accelerating progress. First employee turnover has improved year-to-date across the board. Labor is the biggest cost driver of our business and after taking a step back in employee retention in 2019, it's nice to see the focus on this area driving improvement in 2020. Through improved engagement and moving decision-making closer to the customer, we've improved technician retention by 8% over prior year. Better retention allows us to reduce training costs associated with new hires and as technicians become more tenured, they become more efficient. These improvements helped us deliver $5 million of labor productivity in the second quarter which combined with a better business mix resulted in meaningful reduction in labor as a percent of revenue. We are pleased that these productivity gains have favorably impacted customer satisfaction as Net Promoter Scores improved year-over-year in the second quarter. While our actions are helping us to drive this improvement, we attribute part of the reduction in turnover to the uncertain job market. As the economy strengthens and alternate employment opportunities improve, we will remain focused on continuing to find ways to further engage our people to provide the excellent customer service our customers expect. Second, as we've seen over time employee retention has a direct correlation to customer retention. Customer retention is a topic, we've been focused on for some time and I'm pleased to report a 15% improvement in daily cancel rates in our Terminix residential service line in the second quarter. We saw the results of more frequent and robust customer communication protocols in response to COVID eased customer safety concerns. As I mentioned earlier, although they are still higher than last year, we've improved COVID-related work order postponements by approximately 80% from the peak in April. We've also seen better retention results on customers in the first year of the contract. Typically, first-year customers turn over at a quicker rate than longer-tenured customers. And as the new customers, we added in the second quarter flow through to renewals in 2021, we are well positioned to continue our retention improvement journey. In Commercial Pest Control, retention was impacted by COVID-related cancellations in small businesses and our strategic focus on enhanced customer pricing to improve profitability of certain underperforming accounts. Third, we were also able to expand profit margins in the second quarter. In addition to the decisive cost actions we took during the quarter to take out $18 million of indirect and G&A expenses from the business during 2020 we also saw the benefits of better employee and customer retention impact on our results. Growth from retention our most cost-effective customer acquisition channel drove bottom line benefits in the quarter. In total second quarter Terminix EBITDA margins improved by 190 basis points from prior year with strong incremental margins. As we look to the rest of 2020, we expect to continue to expand EBITDA margins year-over-year as we see the benefits of our actions continuing into future periods. And finally, we're making meaningful progress on revitalizing our Termite business. With the heightened focus on this service line, we were able to deliver termite organic growth 7% and the new unit sales and Termite & Home Services completion of 14% as we saw positive customer reaction to our new monthly pay tiered offering. In the Mobile Bay Area, we fully staffed our teams and are diligently working our way through supplemental treatments of our entire customer base. To date, we've completed approximately 6000 supplemental treatments or dual-defend conversions. Net of cancellations, we have approximately 5500 supplemental treatments remaining to perform and we are on pace to complete the mitigation plan within the calendar year. As we discussed in our previous business update, termite damage claims expense in the period was up $8 million year-over-year in the second quarter. While our litigated claims are running a few cases higher than our original expectation on a year-to-date basis, we've been able to mitigate the financial impact by continuing to improve the non-litigated claims rates and through better overall business performance. As we've stated in the past, the timing of litigated case filings is difficult to predict on a quarter-to-quarter basis and variations are expected. We remain confident in our overall assessment of the financial impacts of these claims and the actions we are taking to mitigate their impact. Improvement in these priorities over the first half of the year reassures us that we are on the right track and I am confident that further improvements in the second half of the year will position us well as we enter 2021. I'll now hand it over to Tony to discuss second quarter results and third quarter guidance. I'll return with some closing comments before our Q&A session. Tony?

Thanks, Naren. Today I'll cover Q2 performance including the strong free cash flow as well as our outlook for the third quarter. Turning to slide 6, let's start with the continuing operations financial summary. I'm going to talk about the Terminix section in more detail later. So let me first cover European Pest Control and other operations. Our European Pest Control operations contributed $17 million of revenue and $2 million of EBITDA in the period highlighted by results for Nomor in Sweden and Norway which delivered mid-teens margins. Our Nomar business was negatively impacted by government restrictions on businesses and higher sick leave costs due to COVID. With that said, we see continued strong growth and solid margins in this business post COVID-19. Terminix U.K. saw the most significant revenue impact from government restrictions related to COVID-19 which in combination with expected costs for integration and post-acquisition system carve-outs led to depressed margins. Despite the revenue contraction in the European business EBITDA margins held at around 10% through cost actions taken in response to the pandemic. As we discussed pre-pandemic, we were always planning to ramp EBITDA margins in the European Pest business as we made progress on carving out systems and processes in the U.K. and improved the density by businesses by winning new customers. We remain on-track with that plan, despite the severe impact of the pandemic in the U.K. market. Continuing operations adjusted EBITDA was also impacted by our move of ServiceMaster brands to discontinued operations. There was a $3 million of costs that were previously allocated to the segment that accounting standards requires us to classify within continuing operations. These costs are general allocations for back-office support functions like executive management, accounting and finance, human resources and information technology infrastructure to name a few. Ultimately some smaller portion of these costs will become dissynergies that impact the EBITDA of the remaining business upon final separation. Until that final separation occurs, we expect this $3 million per quarter impact to the continuing operations financial statements. Including Terminix which we'll discuss in detail in a moment adjusted EBITDA for continuing operations of $119 million improved $15 million year-over-year for a margin of 22.4% in the quarter 130 basis points better than the same period in 2019. Adjusted net income and adjusted earnings per share reflect the flow-through of higher EBITDA in the period. Turning to Slide 7 you can see the Terminix revenue growth by channel. Overall Terminix delivered revenue growth of $22 million or 5% with flat organic revenue growth. Starting with the Termite and Home Services column on the left side of the chart, revenue grew $13 million with 7% organic growth in the quarter, breaking down the components of growth further, Termite renewals were flat to the prior year with strong retention improvements year-over-year. Termite completions and home services were up 14% in the quarter driven by strong growth in our monthly pay tiered termite product in an active swarm season. The sale of renewable core units made up approximately 60% of the total Termite and home services completion revenue in the quarter. The strong growth in renewable units combined with better retention rates bode well for a strong 2021. As we look to Q3 we continue to see growth in our Termite business, but at a more normalized level as seasonal termite demand begins to weigh in. Residential Pest Control was flat in the second quarter. Tuck-in M&A contributed 1% of the growth while organic revenue declined by 1%. As Naren discussed, work order postponements related to COVID-19 have declined approximately 80% from April peaks and while work order postponements remain higher than prior year they continue to improve into July. Residential Pest Control was impacted by approximately $3 million from our decision to limit summer sales activity in order to protect both our potential customers and our salespeople from COVID-19. Residential Pest was also impacted by approximately $3 million from lower bed bug revenue as travel restrictions have severely impacted the spread of this pest. These items will continue to affect the rest of the year, as the loss of revenue associated with summer sales units carries over to future quarters and travel is forecasted to be down for the foreseeable future. Despite these factors demand remained strong for residential services and we saw a strong positive organic growth in July and we are planning for organic growth in the third quarter. Commercial Pest Control revenue was up 2% versus prior year with M&A growth of 11% more than offsetting organic declines of 9%. Organic declines were driven by COVID-19-related work order postponements as businesses were forced to close early in the pandemic. We've seen improvement in business trends as the economy reopens and organic growth rates improved sequentially every month in the quarter. This trend continued into July where we saw flattish organic growth in the month despite a slight increase in service postponements on the West Coast related to recent COVID-19 resurgence. Acquisitions continue to provide significant growth as the onboarding of Gregory and McCloud provide new commercial capabilities and experienced management teams to our portfolio. Our product sales division saw a considerable growth through the McCloud acquisition, but organically declined by 9% due to lower sales of pest control products to smaller pest control providers and the decision by larger distributor customers to take down inventory levels in response to COVID-19. Demand has increased for products in July as the economy reopens and demand for commercial services increase. Overall the second quarter saw strong demand on the residential side of the business with organic growth of 3% including strong growth on our focus area of core termite services. Commercial Pest consistently improved off April lows and continues to show positive momentum as the economy reopens. Moving on to Slide 9, you can see the EBITDA drivers for the quarter. Revenue growth added $4 million in the quarter, primarily from M&A as margins improved sequentially in our acquisitions as we continue to drive synergies. Production labor productivity generated $5 million of higher EBITDA in the quarter year-over-year primarily the result of better employee retention which led to less training and unproductive labor costs in the quarter, efficiencies for more tenured technicians and improved labor management processes. While we expect to continue to drive labor efficiencies they will moderate as we move through the year and need to onboard and train additional technicians. Vehicle and fuel costs declined $4 million in the quarter through better fleet management and lower fuel prices. Chemicals and material costs declined by $2 million as the revenue mix impact of higher termite volume more than offset increased spending on personal protective equipment, we expect higher PPE costs of roughly $0.5 million per quarter as we obtain the equipment needed to keep our customers and employees safe from COVID-19. General and administrative expenses were down $4 million in the quarter mostly the result of the previously announced $18 million of 2020 cost actions taken in the second quarter including reduced travel and other discretionary expense reductions. We expect continued savings in the future periods from these actions that are expected to grow to a run rate of $30 million on a full year basis in 2021. These cost declines were partially offset by an $8 million increase in termite damage claims and mitigation costs in the period. Total termite damage claims and mitigation expense was approximately $19 million. The expense is primarily driven by activity in the Mobile Bay Area and is in line with our previous guidance. Our mitigation efforts remain on track. And we are making good progress, on our supplemental treatment plans to the Mobile Bay Area. Expenses for the mitigation program were approximately $2 million in the period. To-date we've experienced little impact to our mitigation efforts from COVID-19 and remain on track to complete the program, over the course of 2020. We also saw $2 million of improvement in other categories, the largest of which was slight improvements in total bad debt expense, despite an increase in provision for commercial customers. In total adjusted, EBITDA margins of 23.3% at Terminix, expanded by 190 basis points when compared to the second quarter of 2019. We will continue to see year-over-year margin expansion in the third quarter for the Terminix segment, as I'll discuss in more detail on the guidance page. Moving to slide 9, you can see the second quarter and full year simplified cash flow. Year-to-date adjusted EBITDA to free cash flow conversion was 81%. The second quarter benefited from the CARES Act, through the deferral of both payroll and income taxes to future periods. We also received a $20 million net operating loss refund from 2015 that posted in the quarter. Normalizing for these one-time items, free cash flow conversion would still have been over 65% year-to-date and improved from prior year. As we shift gears to the second half, we will again become a cash taxpayer and are expecting a cash tax rate of between 12% and 14%, for the full year. We will also have some CapEx and restructuring cash uses, as we work through the ServiceMaster brands, strategic review process that will impact free cash flow conversion. For the full year 2020, we expect free cash flow conversion to be at the high end of our original expectations of approximately 60% and improved over 2019. Shifting to uses of cash, we don't have any significant changes to our capital allocation plans. Our net leverage target remains between 2.5 to 3.0 of adjusted EBITDA. We would expect to continue to reduce debt and could be in an even better position to do so, depending on the outcome, of the ServiceMaster brand strategic review. We also plan to be active in the M&A market. And while we didn't have any meaningful acquisitions in the second quarter, we have several opportunities in the pipeline, for the third quarter and beyond. We were also able to deploy a little over $100 million year-to-date to our share repurchase program, purchasing over 3.7 million shares, at $27.64 per share. Through strong cash generation we were able to improve our net debt leverage ratio, by approximately 0.5 a turn to 3.6 times trailing 12-month adjusted EBITDA. Cash generation remains a strong characteristic of our business and gives us flexibility to continue to invest in organic and inorganic opportunities, as we move forward. Moving to slide 10, for the third quarter, we expect continuing operations revenue to grow between 6% and 11% to between $495 million and $515 million. We expect to expand adjusted EBITDA margins from prior year with totals between $80 million and $90 million. The guidance assumes approximately $20 million of revenue from U.S. acquisitions completed during the 12 previous months, primarily in Commercial Pest service line from Gregory and McCloud. We also expect revenue from our 2019 European Pest Control acquisitions to be between $16 million and $18 million, in the third quarter. The outlook assumes Commercial Pest will continue the positive trend, we have seen over the last several months, as the economy continues to reopen. And the residential demand will not be negatively impacted by economic issues, associated with the prolonged COVID impact. We expect adjusted EBITDA will be highlighted by improving margins for acquisitions and European Pest Control. Margins are also expected to expand year-over-year at Terminix as second quarter G&A and indirect cost savings actions continue to flow through the P&L. These gains will be offset by higher year-over-year costs from Termite damage claims and mitigation expenses and $3 million from costs historically allocated to ServiceMaster brands. Moving to slide 11, I'd like to touch on ServiceMaster Brands' second quarter performance and our expectations for the third quarter. ServiceMaster Brands reported a year-over-year revenue decline of 4%. Revenue increases in commercial cleaning national accounts and owned branch operations were more than offset, by a reduction in royalty revenue in the period. Royalty revenue was negatively impacted by, COVID-19-related pressure in Merry Maids, and by the mild winter and significantly less area-wide events than prior year, in ServiceMaster Restore. ServiceMaster Brands also benefited from increased demand from enhanced cleaning and disinfection services. Adjusted EBITDA declined $3 million year-over-year, with approximately half of the decline attributable to Merry Maids and the other half to ServiceMaster Restore. For the third quarter we expect to see improving commercial trends, stabilizing demand in Merry Maids and improvements in ServiceMaster Restore. We expect revenue of between $63 million and $68 million or flat to 8% growth and adjusted EBITDA between, $23 million and $27 million. And with that, I'll now turn it over to Naren, for closing comments. Naren?

Thanks, Tony. Before I pass it back to Jesse for the Q&A, I wanted to provide a quick update on the ServiceMaster Brands, strategic review. With credit and equity markets recovering to pre-COVID-19 levels, we've ramped up our activity level associated with our strategic alternative review for our ServiceMaster Brands business. There continues to be very strong interest in the business. And as we saw in our second quarter results and July trends, we are seeing just how resilient this business is. We continue to be committed to pursuing the option that creates the greatest long-term value for our shareholder and positions the business, for success in the future. ServiceMaster remains in a strong position as we move into an uncertain, second half of 2020. By continuing to execute on our strategic priorities, we look forward to growing our business and expanding our year-over-year profit margins, despite this uncertainty. I'm proud of diligence and hard work of our teams, especially our customer-facing employees. The dedication of our technicians to provide excellent service and improve our service levels during this time is a testament to their commitment to our customers and the strong leadership of our management team. I'm confident in our ability to manage through this environment and come out stronger in the future. And with that, I'll hand it over to Jesse, to lead us through the Q&A.

Thanks, Naren. With the queue being long this morning, please limit yourself to a single question, so that we can get to everyone in the allotted time. Frank, let's open up the line for questions.

Thank you. [Operator Instructions] Our first question comes from Toni Kaplan with Morgan Stanley. Please proceed.

Thank you. I was hoping you could expand a little bit on the termite damage claims. You mentioned it was running a little bit higher than expected. And I think there was a fairly large arbitration in Alabama last week. And so, I was wondering if there's anything in the latest decisions that change how you're thinking about the longer-term termite damage claims estimate. Thank you.

Hi, Toni, it's Naren. I'll go ahead and take that and the others can kind of chime in as appropriate. Clearly, we did have a ruling last week that was high. We plan to appeal that ruling. We think that there's some errors in judgment there. But in the end, we feel very good about the trends that we're seeing overall and they're consistent with our expectations. We're seeing nice progress on our mitigation program. We're seeing nice progress on the non-litigated claims and feel very good about that. We always knew that there was going to be volatility on the litigated claims, especially with the new way we record those. We record them at the time of filing. So that drives a little bit of volatility there, because it's something that's out of control. Just based on what we're seeing on a year-to-date basis, nothing has changed versus our original expectation that we talked about back in February, as far as the total ring-fence exposure that we've discussed.

Our next question comes from Tim Mulrooney with William Blair. Please proceed.

Good morning. I wonder if you could walk us through how the residential business trended through the quarter. Obviously, it looks like April was a low point and June was the high point. But any numbers you could provide would be very helpful. And maybe a comment on how that trend carried into July.

Yes. Hi, Tim, it's Tony. Yes. I hope you're doing well. Yes. I mean, I think, the big thing that we saw early on when COVID-19 hit was an uptick in temporary cancellations of service pushing it back. So we peaked in that particular metric in April. Since April, every month, we've been seeing those temporary cancels declining and getting better. Through this whole period, our service agreement cancels have actually improved. And so, our retention is improving in residential. So we are progressively getting better in residential every month. Again, we did make the decision to scale back on summer sales. So that had some impact as well too. In the month of July, as we mentioned in the script, we are seeing continuing improvement. So the trend looks good heading into the third quarter.

Our next question comes from Michael Hoffman with Stifel. Please proceed.

So, I guess, the one I would ask would be about the normal seasonal pattern for the business. And if I take your third quarter, do I assume a normal seasonal into 4Q? Or is there enough momentum that the momentum will overcome seasonality? And if that's the case, then the message is, Street estimates have to come up?

Yes, Michael, this is Tony. I hope you're doing well. On the seasonality patterns we're seeing, it is going to be the same as we normally see. I mean, you have to factor in, obviously, the cost actions and the pricing and the other improvements that we've made. But you will see a similar seasonal pattern in the third quarter that we've seen in prior years.

Our next question comes from Judah Sokel with JPMorgan. Please proceed.

Hi. Good morning. I'm going to take another stab at the question that was asked earlier about trends. Maybe instead of getting us month-by-month, perhaps you can just quantify the impact in the quarter, just from COVID, or give us at least an approximate sense, so that we can see that underlying run rate and really appreciate how the fundamental business is doing and then going forward. Thanks.

Yes. Thanks, Judah. I hope you're doing well. We saw roughly a $6 million impact from two, I think, big events that the COVID really influenced. Number one would be the -- our actions on summer sales and scaling back, that was about $3 million. And then we saw another $3 million or so related to bed bug revenue, in that, the people are traveling less and so the demand is lower. And we have a pretty big bed bug portfolio. So that had a bigger impact than maybe you would expect. We also talked about the work order postponements and so there's some impact, perhaps, beyond that $6 million. So you could get into a more normalized view of our Residential Pest Control business for the quarter, if you adjust for those items.

Our next question comes from Seth Weber with RBC Capital Markets. Please proceed.

Hi. This is Emily McLaughlin on for Seth. Just going back to summer sales program. Did that ever get restarted? Or was it suspended for the whole season? And have you identified any other channels to sort of backfill what's been lost there?

So this is Naren, Emily. Yes, so we did phased relaunch of that summer sales program really on a geography-by-geography basis based on where restrictions were opening up to pursue that type of business. Clearly, we've been monitoring customer response, particularly around social media to make sure that there's no negative reaction there. So it has ramped up, but it's still nowhere near what we had last year and frankly what we had in our plan. So we're continuing to -- on a measured approach to kind of launch that out. As far as other channels, we're always looking at and evaluating new channels to market. Our digital marketing continues to do well. As you may have saw we announced last week, the addition of a new Chief Marketing Officer Alex Ho for our Residential business. We're really looking forward to the potential impact that Alex and the marketing team can have on the business. So this is -- we're exploring all avenues and looking how we continue to grow this business.

Our next question comes from Andrew Wittmann with Baird. Please proceed.

Great. Thank you and good morning. My question was I guess on slide 8 a little bit more here. The progression of EBITDA growth. I mean you got leverage on almost every bucket you show here outside of the expected decline in Termites which is obviously very good and very refreshing. Tony, I just thought -- so much of what you did in the quarter, you talked about the $18 million that you're going to realize this year the $30 million run rate. We knew about some of these things. But some of this is also driven by furloughs and other kind of what I'd call more temporary staffing adjustments. So could you just talk a little bit about the reinstitution of costs that may or may not occur along with improving revenue trends in your business? Which buckets in other words of these might not give us much benefit for the second half of the year as they did here in the quarter?

Yeah. Thanks, Andy. And I hope you're doing did well. We do have a continuous productivity program. We're looking for -- we're continuously looking for new initiatives. So I just wanted to make that point. But if we go down these categories one by one, obviously on the production labor side we've done a lot of great actions there on employee retention and better labor management. Some of that is due to the fact that we haven't had as much training expense this year. And so eventually there'll be some moderation in that -- well if you want to call it productivity as we hire more people as we grow. But I am pleased with what we've done with respect to progress and employee retention and our better labor management processes. As far as the vehicle and fuel, most of that really is related to better vehicle management. We have a new fleet provider that's helping us and we've had some good progress there. But there is a full part of that that's more based on fuel prices. We hedge most of our fuel, but some of it is unhedged. So as fuel prices change, there'll be some impact there. We talked about chemicals and materials and we said that we're going to see about $0.5 million a quarter in higher PP&E costs, but we had some offsets this quarter more because of mix because we did a greater percentage of termite. So there might be some moderation there. And then as far as the corporate general administrative expenses that's what we think is sustainable into next year based on all the cost actions we took early on in the process. So again, there'll be some moderation in some of these items. But I like what we've done. Another area that we might see some scale back is travel. It's actually will be beyond the pandemic. And although we'll never go back to the travel rates we were doing pre-pandemic, we will be traveling more eventually at some point in time.

Our next question comes from Ian

Hi. Great. Thank you very much. Tony, you talked about the pipeline for M&A. Can you give us a little bit more color there as far as the trend in multiples or maybe the multiples size of the pipeline how it compares to previous periods? And also maybe the size of deals. Any other color you could give us that would be great? Thanks.

Yes. So first off, the activity level was very light in the second quarter. There weren't very many larger deals going on and very few small deals in the market for obvious reasons. So it's kind of hard to say for sure. But I do think things will eventually heat back up in the third quarter and beyond. And we're -- and I can say that we're definitely going to be a player in that market and we're interested in tuck-ins and even other types of capability adding acquisitions as well. Naren, anything you want to add.

Yeah. I think it's just hard to say, if there's going to be any meaningful change in margins at this data.

Yeah.

I think there haven't been enough transactions happening lately. So it's something we'll watch closely. Clearly the equity market is kind of bouncing back to the level they have would suggest that you might see the same rates that we saw pre-pandemic, but we're going to have to watch closely and see. We'll continue to be a disciplined buyer in the market.

Our next question comes from Mario Cortellacci with Jefferies. Please proceed.

Hi, thanks for the time. Just wanted to congratulate Brett on the CEO job. And then just a few questions, though I guess on some of this background. And I guess just what, kind of, experience does he have with the servant leadership culture? And obviously you're going through a transformation over time. I guess, just what's his experience with past transformations as well? And what, kind of, success has he had with either -- with helping service companies improve service levels and ramp on organic growth?

Yes. Great question, Mario. I mean, clearly his servant leadership mindset and behaviors it was one of the attractions and really we have why -- a big part of why we decided to move forward with Brett and appoint him into the CEO role. I'd look to his last job or his current job in Monro Muffler. They've got a, I believe 1,250 store locations. So he's very experienced in dealing with distributed organizations. In fact normally I talk to people about the complexity we have with 350. Needless to say, I didn't have to have that discussion with Brett. He spends a lot of time out in the field, visiting the stores, building connections with those frontline people. He understands the importance of supporting them and empowering them, because that is similar to our business model those are the people who are creating and delivering that customer experience. So I think he's got tremendous experience at Monro. Prior to that at Heartland, was at Jiffy Lube similar kind of model and AAMCO. So he is very familiar with very distributed organizations and have great experience there. And I would say also both driving growth and margin improvement. He's got an operational excellence mindset. So I think he really brings a lot to the table does not have pest control experience. And the good news for our business is we have a lot of people especially when you get out in the field who have very long tenured pest experience and Brett is the kind of guy who will be out there in the field learning from those people, learning the business from the field back. So I feel very good about the hire and the impact that Brett will have on the business going forward.

Next question comes from George Tong with Goldman Sachs. Please proceed.

Hi, thanks. Good morning.

Good morning, George.

Termite & Home Services organic growth -- morning. So, Termite & Home Services organic growth accelerated to 7% in the quarter and a big part of that growth acceleration was driven by new completions. Can you elaborate on what factors drove the robust improvement in the completions and how you expect this to trend over the remainder of the year?

Yeah. Thanks George. And hope you're doing well. Yeah, we're very pleased with the progress we made in Termite this quarter. And as you recall that's one of the four priorities of the business. So that's a key focus for us. We had a very successful launch of our new termite tiered monthly pay product, and we think that was a big driver of our completions growth. And on top of that, we think it was somewhat of a heavy swarm season. So we think those two factors in combination were big drivers. And a third driver is probably the fact that a lot of at home these days, and our home services side of the termite product line actually had some growth as well too. So it was very nice to see that kind of growth in the completion side. That’s really drove the overall 7% organic growth for termite and that bodes well for 2021 and beyond. So we were pleased to see that.

Our next question comes from Gary Bisbee with Bank of America. Please proceed.

This is Jay Hanna on for Gary today. So a big trend we've seen in the past several quarters has just been an uptick in spending to grow -- spur better organic growth in areas like sales and marketing and labor, which we obviously didn't see as much of in Q2. So I was hoping could you comment on how we should, sort of, expert to see the cadence of that spending going forward? Or are we sort of over the hump there?

Yeah. Thanks Jay. Hope you're doing well. This is Tony. Yeah we – we’re not really -- the change in the margins have really driven by cost actions around our direct cost productivity and really focusing in on our cost structure and our indirect costs, our G&A. We didn't scale back in our investments in growth per se. So really look at it that way, we're still committed to investing in marketing and we're still doing the sales force investment, so all of that effort still continues. We're just doing a better job, I think of driving direct cost productivity. And as we talked about we've addressed the structure and done some good things there as well.

Yeah. The only other thing I would add is we will see some favorability from lower summer sales, because the commissions associated with summer sales have been spread of two years. But as I talked about earlier, we are looking at other channels. So what we can't do there, we'll look to reinvest in other channels that drive equal or better productivity and efficiency for us.

Yeah. And the summer sales decision was more about health and safety of our employees not our commitment to growth.