Tony DiLucente: The Holy Grail in the pest control business is to train your people well and make sure they engage with the customer and you're golden.
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Patrick Baldwin: Mr. Tony DiLucente, former Terminix CFO, I tracked him down. He's been out of the industry for over a year and a half or so. I found him and said, “Tony, lovely to have you on The Buzz.
Paul Giannamore: For all of our guests, colleagues, and readers out there, Tony worked at ServiceMaster from 2017 to early 2021. He was the CFO of the parent company, ServiceMaster. He’s heavily involved in a ton of acquisitions. Why I find this conversation particularly interesting is that Tony is no longer in the industry, he's moved on. He was going to retire. When he resigned, he said, “Paul, this is it for me. I might do a little consulting. I'm retired.” They pulled him back in.
He doesn't work in the pest control space anymore and he doesn't work for ServiceMaster. The conversation that we had was extremely candid. I was curious as to his thoughts on the Rentokil-Terminix transaction. I was interested in his thoughts and some of the things that went well and not so well over the last decade or so at ServiceMaster. What do you say, fellas?
Paul Giannamore: I do have a quick question. You did show me the picture that when you closed the Nomor transaction over in Sweden, you're like, “Do you know who this is?” This is over a year or two ago. I don't recognize him. This was the CFO of Terminix. I'm curious, with all the M&A staff they have, how did Tony pull Trump and say, “I'm going to go do this deal.”
Paul Giannamore: In all honesty, he didn't want to go. They sent him. He did not want to be there. They said, “Get on a plane and go over to Stockholm.” That transaction was a controlled auction situation. From the time we entered into the exclusivity until the time the transaction was closed, we had 30 days. He came over the last 4 or 5 days. Due diligence took place all the way up until we funded that transaction. It was a fast-moving situation. I took pictures of the ceremonial closing in which everyone was dressed up in suits and everyone was at the nice conference room table.
The reality is we signed that transaction in the back of a pizzeria-style restaurant in Stockholm at 2:00 in the morning and it was Tony, myself, and two attorneys, that was it. You saw the real photos of the closing, Patrick. Everyone else saw the ceremonial, the super nice ones at the table. As a matter of fact, we closed that transaction twice because, the next morning when we went in to sign, the documents had already been signed. We did a ceremonial signing of the same documents for a proper photo. That's the deal.
Patrick Baldwin: Thank you, that explains a lot. Now we can go on with this interview. Thank you, Paul. What do you say, guys? Let’s step into The Boardroom with Tony D.
Paul Giannamore: Let’s do this, Patrick.
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Paul Giannamore: Tony, welcome to The Boardroom. It has been a long time since you and I saw each other.
Tony DiLucente: It has. I don't even think it was in this country of ours, it was somewhere else, in Sweden.
Paul Giannamore: That's true. The last time we saw each other was closing the Nomor transaction. We took those glamorous photos from the boardroom. Do you remember that little Italian restaurant and lawyers came over?
Tony DiLucente: Great guys out there. They build a great business.
Paul Giannamore: Before we get into some of the nuts and bolts of the pest control industry, you started your career at Terminix. Refresh my memory, what year did you join ServiceMaster?
Tony DiLucente: I joined on January 17, 2017, and I stayed through March 31st, 2021. I had been trying to retire for a couple of years. It took a little bit longer than I expected.
Paul Giannamore: I remember that and you still haven't done it yet.
Tony DiLucente: I discovered that I probably shouldn't have retired so now I'm back at work. It was a good time to change anyway for Terminix given that they were into a new chapter and new CEO who I liked, by the way, Brett Ponton, so it made sense. It was in the works well before we hired Brett. All's well that ends well.
Paul Giannamore: When you left in ’21, I remember you were saying you were going to retire. Now you've left Ohio. Do you live down in Florida now?
Tony DiLucente: I've had a home down here since 2013. The stars were all lined. We have a great business down here that I joined. I had a home here in Sarasota on Siesta Key. It worked out. I was hoping to do some board seats and things of that nature but it didn't work out with ESG initiatives. A little bit tough right now to get board seats. I pivoted back to a CFO role. I still have a lot of energy left so I'm going to keep going for God knows how long, maybe into my 80s, we’ll see.
Paul Giannamore: That's great. You were the CFO of ServiceMaster, a publicly traded company in the pest control space. As you well know, having been in this space for a long time, I've dealt with a variety of executives at ServiceMaster over the course of fifteen-plus years. Your tenure was rather a tumultuous time.
We had Nick and Dian. A new executive management came in. You guys were doing a lot of deals. Of course, we remember what took place in 2019, the great fall there in the autumn. When you think about Terminix’s business from when you started and what you knew about it beforehand versus where it has gone over the last five years from an improvement perspective, what thoughts pop into your mind?
Tony DiLucente: There was a lot to do in Terminix when I joined back at the beginning of 2017. The margins were robust, the organic growth rate was virtually flat, and it had been flat for even a longer period of time than it was apparent by the numbers. For a while, some of Terminix’s growth was coming from the new auxiliary services like exclusion, encapsulation, and insulation. Those types of services propped up the growth rate for a while.
The underlying organic growth of the business was fairly flattish when I joined. There were some pretty big customer service issues at that time and that was the big root cause, a lot of that was over-investment in cost reductions and less emphasis on pure service. The improvements that we made over the four years, and it gets even been better since I left, is we did focus on the service. We did improve our NPS scores. We did improve in all the outside surveys that were done over that time.
I still thought there was quite a bit to go even when I left. I thought we needed more operational consistency. We started to do some nice things in 2020 when Naren Gursahaney stepped in. He did a nice job of focusing the business on four priorities. We did well on all of those in 2020. Bringing Brett in was a good move for us because he's run similar businesses before. He was in a muffler business, distributive services type business before, and has a good marketing background as well too on top of the operational background. He continued that well after I’d left.
It was the right move for us. There were a lot of distractions during my tenure. Let's face it, I had four CEOs that I worked for in four years. When I think of why we're underperforming from an organic growth standpoint is we had too much turnover at the very top. To me, that's the number one root cause.
We've done some good things in the time I was there. I'm proud of what we've done but we could have done more if we had a little bit more consistency at the top. The focus was primarily on driving consistency and operations across Terminix. We could have done more there and Brett has since I left. That's how I would characterize it. We did some good things, we did improve. If we had less turnover and more of a focus on Terminix over those four years on core operations, we could have done even better.
Paul Giannamore: I used to always joke that, over a fifteen-year period, I'd never put the name of the CEO on my phone. I would just put ServiceMaster CEO or Terminix CEO. That way, it was easy to change out. I remember one day we had lunch in Stockholm and we were talking about operations in general and the allocation of capital. In your role as CFO, one of your main functions was how to appropriately allocate capital.
I remember we were talking about consolidation in the pest control industry and you made the point, in particular, in regard to Terminix, “I can go out and spend $1 billion in doing deals and create $100 million in value. I can spend $100 million and focus on operational effectiveness within the organization, the culture, the routines, and the incentives and create $1 billion dollars in value.” Is it safe for me to assume that at least during the period in which you were at ServiceMaster that you were not necessarily excited about doing a ton of deals? Your mind was focused on operations.
Tony DiLucente: I do think that the M&A side is an important part of any strategy in the pest control business, in particular, because of its structure. I thought that we needed to fix ourselves else first and then we would be in a better position to integrate the M&A deals that we did. I wasn't saying that we shouldn't do any deals, I thought that we needed more focus on the organic or the M&A side of the business first, maybe a little bit lesser focus on the M&A side at first until we got our act in order. We could then have ramped up the M&A.
I particularly liked the tuck-in acquisitions, those make the most sense, but you have to have a good platform to maximize that. I was all about building the platform first and then we could accelerate the M&A side after that. I do value M&A in the pest control business, in particular, I just thought we needed to be a better platform to bolt these acquisitions onto.
Paul Giannamore: In regard to the news, it's almost over a year now since the Rentokil-Terminix acquisition was announced. Of course, it was consummated. When you first learned about that, what was your take?
Tony DiLucente: I wasn't surprised at all. It's no secret. It's been looked at before in the past. I'm familiar with their operations. Andy has done a great job in growing that company globally, particularly what he's done in the United States over the years is impressive. It's a perfect marriage. I thought it made a lot of sense in the past and it makes even more sense now. There were some barriers in the past. We had the American Home Shield and the ServiceMaster brands. Rentokil, even more focused on the pest control business, is more of a pure-play type of company. That was somewhat of a barrier in the past in making anything happen but it always was a logical move.
If you look at the companies, the Terminix brand is great, it has the best brand recognition, and is powerful. Rentokil is strong operationally and great presence everywhere. Their brand isn't as known or as robust, at least in the United States. The US is the biggest market, a fast-growing market. It makes perfect sense. It brings a great brand together with an operationally efficient company that's huge. The sum of the parts is going to be even greater. I'm bullish on the merger or whatever we want to call it and it's going to work out great.
Paul Giannamore: A few people would argue the fact that Terminix is probably the most valuable brand, at least a consumer-facing brand, in North American pest control. The theory here is, at least based on some of Rentokil’s most communications, they're going to use Terminix as the residential brand. Ultimately, they’ll use Rentokil for national accounts.
As you pointed out, Rentokil is almost a non-existent brand in the United States. The majority of their revenue is run through a portfolio of 80 or 90 different brands across the US that they own. Brett and Andy have spoken publicly about the synergies that they intend to get from this, as well as the revenue enhancements. What do you think are some of the biggest challenges to putting together a business like Terminix and Rentokil?
Tony DiLucente: I always go to the people side and particularly the field side. The field culture of Terminix has always been strong. People are proud of that brand. They call themselves the Terminix Nation. Integrating that culturally and with Rentokil, it will be the biggest challenge. Rentokil is going to be well-equipped to manage that transition because the company, in some ways, is they're like-minded. That goes a long way in helping these cultural integrations work.
If the people don't buy into this, it’s not going to work as well as it could anyway. The most important thing is focusing on change management and making sure everybody gets engaged around the new company, taking the best of both companies, and making it the best pest control company in the world. As long as they can motivate their field employees around that, they'll be in good shape.
Paul Giannamore: The frontline service professional is the most important individual in a pest control company. It's probably pretty low risk if done right with regard to technicians and frontline service professionals. It's when you start getting into branch management, regional management, and national management that you probably do have some redundancies.
When you look at the numbers, Rentokil last said approximately $150 million in synergies. Various different equity research analysts have spouted out a variety of different numbers. I’m seeing up to 300 and 300 and change. You're out of this game now, you've moved on, and you're doing other stuff, but any high-level reflection on the potential synergies that could be gained from a transaction like this?
Tony DiLucente: There are several layers of cost synergies that you can look at before you get into any revenue synergies. First off, in two fairly large public companies, you always have corporate duplication redundancies. Number two, in the operating structure of both companies, I'll take Terminix, for example, there were, at one point, 5 residential divisions with VPs over them and 3 commercial divisions, that's 8 divisions.
These divisions had organizations under them. They had a dozen regional directors and then they had people organizations that help them plan and schedule. You have these layers of organization that you can integrate. If Rentokil has 5 divisions and Terminix has 8, you don't need 13, maybe you need half of that. You have a lot of cost synergies at that level.
You get into the branch consolidations. The people who know the pest control business know this but there are always route densities that maybe the uninformed don't think about, that's a huge synergy. The technicians are going to be spending more time servicing and less time driving between service locations because you get to densify those routes with this type of acquisition.
From a revenue perspective, every company has gaps in its coverage. This should fill out Rentokil’s position in the United States. There's a good chance that Terminix is in locations that may be Rentokil isn't or isn't as strong in and vice versa. You got all those synergies coming together. The public announcement was $150 million, that's a prudent and conservative estimate. They're a public company that needs to be that. Can they do better than that? Yes, they can.
Three years is the timeframe. The timeframe is always a little bit squishy. I don't think you ever get it done before that timeframe. Usually, it takes a little longer. It wouldn't surprise me if they do better but it may take a little bit longer than they first expected. That's what my gut feel tells me. I see all the synergies, we've looked at it before so it makes a lot of sense. It had the best industrial logic of any large M&A you could do in the pest control business. This was the logical move.
There are a lot of other synergies beyond the cost synergies. Having that residential brand, I'm not that glued to their commercial strategy. I would point out that the Terminix commercial brand was relatively strong too. There was a lot of growth in commercial mainly through M&A during my time, which was very positive. I'll be interested to see how they roll out commercial. I am glad they are going to use a Terminix brand for residential, that's going to help them out.
It seems, since COVID, the residential side of the pest control business has exploded, at least there was when I was there, maybe it slowed down since I left, but I'm not sure. The game changed with COVID, in the industry I'm in now too as well. It's interesting how these things can have that influence on businesses and industries.
Paul Giannamore: When I look at Rentokil and Rollins and I compare it to Terminix, I'm not talking about right now in particular, but maybe over the course of the past ten years, one of the things that I've noticed is that Terminix seemed to have a lot of middle and senior management. When I looked at departments, if I take the one that I deal with every day, I look at an M&A department, when you have Rollins, there's one guy.
When you look at Rentokil, there are 1/2 of people in North America doing this. Of course, you would look at Terminix and you had three VPs, a couple of directors, and you might have twenty people in an M&A department. Terminix wasn't doing any more or less M&A than Rentokil, for example. It didn't take long to kind of look across some of the other corporate functions and I felt like there were a lot more people at Terminix than some of its peers. Do you agree with that or not?
Tony DiLucente: The big thing you got to keep in mind about ServiceMaster is it was more than Terminix. The American Home Shield business, when it was spun off, had $1.2 billion in revenue. At the time, Terminix was about $1.8 billion. You had this ServiceMaster brand business. Although the revenue from there was $250 million, the real revenue was more like $2.6 billion, the system-wide revenue as a franchise business. It's a big business and it wasn't just Terminix.
That was part of the root cause of why maybe Terminix was underperforming from a growth perspective. There had to be a lot of focus or some focus on the other two businesses. Various CEOs had different opinions on American Home Shield and ServiceMaster brands, “Should we grow those? Should we concentrate on Terminix?” When the game is constantly changing, you have a tendency to maybe lose focus and lose priority.
From an organizational standpoint, the organizations could have been optimized better but a big part of it was the fact that you had three rather large businesses at the corporate level that we were managing. I wouldn't worry just about Terminix, I had to worry as much about American Home Shield and somewhat about the ServiceMaster brands. The same thing with M&A, they were looking at acquisitions in both the other two businesses as well too.
Could we have streamlined all of our organizations? Yes. I'm not going to pick on M&A, and we ultimately did. It took a while to do it because we had a lot of initiatives. That was something that Nuan brought a little bit more focus to us. We started to concentrate on four big initiatives. We probably had too many priorities as well too. That generates large organizations that were focused on growing the revenue base significantly. I would say your thoughts are right on the mark, we definitely could have been more efficient in our organizational structure. Keep in mind, a lot of it was driven by the structure of the organization itself.
Paul Giannamore: That makes perfect sense. What you said about various CEOs coming in over the years, the brand's business was disposed of under your leadership if I remember correctly. I remember, over the years, maybe over ten years prior, every time you got a different CEO, one of them loved the brand’s business, wanted to go out, do acquisitions, and add on to it. Another one wanted to get rid of it and wanted nothing to do with it and it flopped back and forth.
Tony DiLucente: It's tough when your enterprise strategy shifts and the focus shifts like that. We could have done better on the Terminix side. Let's just say we came in on day one and could instantly chop off the other two businesses and focus on Terminix and Terminix only. In 2017, when I started, we would have been much further along by 2021. We were focusing on American Home Shield. The big thought on American Home Shield is we can make this a sexy business service on demand rather than the warranty business.
A lot of focus and attention went into things like that. What can we do with ServiceMaster brands? Should we buy these franchisees back and grow the revenue? When you're focusing on those types of things, you tend to lose focus on the operational basics and that's what we did to some extent. We did some good things in Terminix. We could have done even better if we had better focus.
Paul Giannamore: Tony, I appreciate your thoughts on the Rentokil transaction. I was chatting with our buddy, Tim Mulrooney, and he said that out of the hundreds of executives he's worked with over the years, you're easily one of his favorites. He jumped at the chance to do a catch-up here with you with some questions.
He talks a little bit more about some of the fundamentals of the market and we touched on this a little bit. Tim's always focused on penetration as far as the proportion of US households and businesses that are using pest control services. He mentioned you guys had discussions over the years and at one point, you had suggested it could be as high as 25%. He was always thinking it was in the mid-teens. Where's your head out on that now?
Tony DiLucente: Tim's probably more accurate than that. One thing that we gained from Tim is a lot of good research that he did. He did his homework in all areas of the pest control business, impressive work. I learned some things interacting with Tim at our investor meetings and things of that nature. I do recall the debate, we had about 25% or 15% penetration. You know me, I have to be somewhat conservative so I'm sure that's why I said 25%. 15% probably rings a little bit more true to me. As usual, Tim's right again.
Paul Giannamore: Tim tries to run some models and come up with figures. As far as I know, there's no hard data on that anywhere.
Tony DiLucente: That's a good point. You could probably do some things at a high level, some calculations that he's done, which might get you in the ballpark. I don't think anybody's ever come up with a firm number.
Paul Giannamore: Tim and I have had some discussions. I don't know if you've been paying attention to this but it looks like a couple of days before Thanksgiving, Goldman Sachs went out in the market and sold a $307 million block of equity from ROL Inc, which is one of the Rollins’ family trusts. Rollins didn't come out and specifically address it. I noticed it on Bloomberg and then I see the stock at the open fall 6% unknown news. On the Bloomberg chats, I could see the traders hard at work moving a block. Of course, Rollins did file a Form 4 discussing national blocks out.
There were, of course, some rumors back in 2020 that they had engaged an investment bank. You probably remember that whole news, like, “Is Rollins for sale? What's going on?” They ended up engaging Goldman. It was for estate planning purposes because the patriarch, Randall Rollins, had passed away.
There's some speculation in my mind if there's a $3 billion-plus estate tax bill. There are pros and cons to being a publicly traded family business with a narrow float. One pro is that you get tight control over the business, you can set dividend policies easily, and you can see what happens to the equity valuation. One of the downsides to that is when a family trust owns more than 50% of the business and Uncle Sam comes knocking for tax bills, you've got to go out into the market.
I'm interested in your thoughts. You, me, and Tim, all of us in this space, have debated this over the years. Tim used to write and he wrote a note one time called Narrowing The Gap, if you recall it was about Terminix versus Rollins. When you think about Rollins, why does Rollins trade at such a substantial premium over its peers?
Tony DiLucente: That's one of the universal questions out there.
Paul Giannamore: I'm sure you've been asked that by many investors.
Tony DiLucente: It's like a unicorn. They've had stable CEO and top management for I don't know how many years, probably 50 years.
Paul Giannamore: As long as I've been around.
Tony DiLucente: That's one thing. The fact that it’s 57% or 58% controlled by the family gives it a lot of control over the operations, the strategy, and the business. That consistency has helped them. They've made their mistakes over the years and they've learned from them but the same leaders were still there that maybe made the mistakes earlier and they're not going to make them again.
You have that huge advantage where they can have that consistently strong quarter-over-quarter performance. One thing is consistency. It was like the old days with GE. For 24 straight years, they had earnings growth or something like that. You see something similar with Rollins, they come out every quarter with good numbers and sometimes good numbers. That's number one, consistency.
Number two, family control is another reason. The third reason is the dividend. They give a healthy yield that tends to grow over time. When you put that all together, it's one of those equities that you can invest in. You know you're going to get a 10% return with almost zero risk or very little risk. That's why I call it a unicorn, it's safe, and you put it in there. Even if I don't see a lot of appreciation, I'm going to get the dividend yield. I'm guaranteed at least X pretty much. It's a low-risk, fairly high-yielding equity out there that has some growth as well too, and excellent performance.
I still don't think that reconciles the gap between, let's say, where Rentokil trades and where they trade. It's maybe a big part of the explanation anyway. If you compare it to Terminix when it was public, there is an even wider gap and we could have done better at Terminix and certain things for that part of the gap. You look at the gap between Rentokil and Rollins in the valuation, it's still pretty big. That those reasons that I enumerated are why. That's the only thing I can think of anyway.
Paul Giannamore: Your thoughts here are well taken because that's all that we come up with. I can understand the ServiceMaster-Rollins delta more so than the Rollins-Rentokil. To your earlier point, ServiceMaster, for many years, was dealing with various different assets, the brand's business. It wasn't a pure play pest control business. Executive management couldn't specifically focus on Terminix and nothing else. It's the rating that every other pest control company wishes to get, the Rollins’ rating out in the market. That's the great aspiration for everyone.
Since you left Terminix, the market has continued to evolve. We've had COVID. During the COVID period, we saw a tremendous amount of fiscal and monetary stimulus. Of course, we've had lockdowns, central service, and all that. Financial sponsors have now flocked to anything resi services, whether it be HVAC, pest control, or plumbing. We're seeing a tremendous amount of activity, it's starting to slow down a little bit. Over the course of the past 18 to 24 months, we saw a lot of activity. What are your thoughts with regard to financial sponsors entering into pest control?
Tony DiLucente: I'm back in the PE space. I'm working for a portfolio company of a large private equity firm and I've been in PE before in Terminix or ServiceMaster. It's going to be a good thing for the industry overall, that's bringing in capital number one. Some of these PE firms can do a nice job of coming in and consolidating the market further and then maybe exiting later on with one of the big players like Rollins or Rentokil.
The activity that they could be performing is bringing capital into the industry and using it to make the industry better, make these companies better that they're acquiring. A lot of them are looking at a platform strategy like what Rentokil did when they came to the United States, “Let's buy a couple of base businesses and then let's tuck-in over the years.” That's a clear PE strategy too and that's what's going to happen. I see them coming in.
Right now, it's a bad time in the capital markets. Eventually, that's going to change and when it does, you're going to see some PE firms do quite well in this industry, and do a nice job of bringing some smaller companies together and establish platforms that they can then provide some nice M&A targets for these larger pest control companies.
Paul Giannamore: I remember when you came on board as ServiceMaster, and this was back in 2017, you couldn't believe what valuations look like in 2017. Every year you were there, they further marched on. In 2018 and 2019, they got more expensive and so on and so forth. My thoughts are that we've had 40 years of declining yields. We've had a lot of quantitative easing. We've had a lot of fiscal monetary stimulus that has propped up asset prices at the expense of savers in the United States. Now we're paying the piper for that through consumer price inflation.
It appears that this era of declining yields and ever-increasing asset values may be shifting at a rapid pace. I remember comments that you would make, it’s consistent with what you've said today, back in 2018 and 2019, where you liked a creative tuck-in and add-on acquisitions. You were able to get those at post-acquisition multiples in the single-digit EBITDA. By the time you guys had a few hard synergies and got some revenue enhancements, you tuck those bad boys in and you were able to create value.
When you would go out and you guys would look at some of these larger platform businesses, you were paying in the mid-teens and upward from an EBITDA multiple basis and you weren't necessarily getting immediate accretive synergies by doing these deals. Where do you think the long-term trajectory evaluations are in the space? Do you think they remain elevated? Do you think, over time, they ultimately mean revert?
Tony DiLucente: I've been out of the industry for over a year now. At the time, my feeling though was, over time, especially now with what's going on in the external world, the valuations for the bigger targets would moderate to some extent. I still thought that the smaller companies would hold their own in valuations mainly because there's such a good opportunity for the larger pest control companies with platforms. You go out there and you buy a smaller pest control company, it's going to improve your route density. You're going to bring them in at probably something like 50% incremental margins. The IRR is going to be good.
If you put together a good process for systematically acquiring these types of companies, you can add up a lot of value over time. You don't get the instant gratification of doing a $200 million pest control acquisition and making a big splash. If you systematically work on acquiring these smaller companies and molding them into your platform and adding value that way, that's the winning strategy over time. That might benefit the smaller pest control companies over time.
I'm certainly not fresh in the pest control business anymore but that's what I thought at the time, the larger acquisitions were getting ridiculously high. I thought though that the smaller M&A valuations were still improving, at least when I left, and I thought they would continue to improve to some degree. That's how I see it. You'll see the bigger company valuations may be moderating. I still see some strength for the smaller companies because they're such attractive targets to these larger pest control companies. You can get a lot of synergies and add a lot of economic value by doing these tuck-in acquisitions.
Paul Giannamore: I’m monopolizing this discussion here, Patrick.
Patrick Baldwin: Patrick, welcome to The Boardroom.
Tony DiLucente: Hey, Patrick.
Patrick Baldwin: Thanks.
Paul Giannamore: Patrick, what question are you scribbling down over there?
Patrick Baldwin: Can you share our guest? Just kidding. Looking in the rearview, I'm picking up some of these breadcrumbs. Copesan was acquired in 2018. Brett coming in 2020 selling off brands a month later. Residential and commercial turn into one term next or maybe that's Terminix Nation, Greg Rutherford, and Kim Scott. Were all these leading signs getting into the acquisition? Was it all in preparation for possibly getting acquired one day, maybe Rentokil, or maybe not? Looking back, did you see that? Was it, “This is about making the business more efficient.”
Tony DiLucente: Starting with Nick, there was a large focus on building the commercial business. Our commercial business was somewhat floundering. Before Nick came on board, he saw an opportunity to get better in the commercial pest control company. The assessment was that we weren't as good, can't say it any other way. Rollins and Rentokil in the commercial side and we need to do something about that.
At the time, circa 2017, we always thought there was more growth on the commercial side, it's different now. At that point, we thought there was more growth there and we had to get better in there. That was the strategy on why we went after Copesan because that was a quick way to build capabilities. Copesan had a lot of capabilities in areas that we didn't. I'll give an example, food processing, we had virtually none of that whereas they had big expertise in that area and some other areas as well too.
Acquiring Copesan and then eventually, systematically acquiring even companies that were in the Copesan network could be a good way of building commercial business and it did that. The business went from somewhere around less than $300 million to over $500 million by the time I left. I would say that mission was accomplished. We could have accomplished it even better had we done certain things differently but I’ll always be that way, I'm always going to be critical of things we could have done better.
I was pro-fixing the operations and the platform, that was certainly my wish, my desire. I did see some pretty good value in building up the commercial business through the M&A platform. I thought, in theory, the Copesan deal was a good way of doing that. It wasn't done with an eye toward being acquired by somebody else. We wanted to grow commercial, that was the emphasis.
Patrick Baldwin: The other decisions that were made, as far as Brett coming in and selling off the brand’s business, do you think those decisions were made separate from ever being acquired? This is just what's going to make us better.
Tony DiLucente: Things started to change. As I was coming on board, the first thing I did when I was there working with the board and the CEO at the time, Rob Gillette, was, “What do we do about American Home Shield? Should we become a pure-play pest control company?” The answer was yes. We spun American Home Shield. Our intent over time was eventually to become that pure-play pest control company.
After the spin of American Home Shield, which took about a year to do if I remember right, we spun it in October 2018, we started to think, “What do we do about ServiceMaster brands?” We went through a period of about, “Does it fit with the pest control business?” When COVID hit, there was a period of time where we thought maybe we had disinfection and all that. We went through those and then some of us thought there were some explosive growth opportunities in ServiceMaster brands and we should keep it. People like me thought, “No, we need to go to that pure-play pest control company.”
You have different leaders coming on board with different strategies and you get caught up in these things. What happens is you don't spend as much time as you should on Terminix’s operations or whatever the case may be. It's that focus. I do think the clear intent was for us to become a pure-play pest control company. We eventually got there. It was a bumpy road but we eventually did it.
We did feel that we had a lot of work to do on Terminix and we did put a lot of work into it and made a lot of good improvements. At a high level, that was the strategy, we needed to become a pure-play pest control company. Everybody didn't always agree with that strategy as we went through it but we did get there at the end of the day.
Paul Giannamore: One question on what you were saying, Tony. Here, you have a large publicly-traded company struggling with the topic of focus. Is there a corollary there and even the privately held businesses out there who are pure-play pest control businesses but are always contemplating, “Let's add in a restoration business,” or, “Let's add this aspect,” or a variety of different services that are ancillary? Knowing what you know and having had the experiences that you have, if you were running a $5 million or $10 million privately held pest control business, would you remain pure-play and steer clear from adding ancillary services, or is that different?
Tony DiLucente: It's about protecting the home or the business. If there's some relationship to that and it can be done efficiently or even better or with synergies with the pest control service, it makes sense. Insulation, you're already inspecting the home and you see installation needs to be improved. Why not? It's when you get beyond that and start looking at things that are tangential to that core protection to the home type thing. There's no logical tie-in from an operational model standpoint.
American Home Shield is about protecting your home too but it doesn't fit the operating model of pest control. That didn't fit and that's ultimately why we decided to spin American Home Shield. If I were a small pest control owner, I would look at things like mosquito encapsulation, exclusion, and things that fit in nicely and operationally around that whole theme of protecting the home. I wouldn't venture into something thing that didn't fit with that operating model. That's how I would look at it.
Paul Giannamore: It makes perfect sense.
Patrick Baldwin: I appreciate what you said about consistency earlier and you said Naren came in and gave four priorities. What were they?
Tony DiLucente: I don't even remember.
Patrick Baldwin: I'm not trying to test her memory.
Tony DiLucente: One of them was improving our termite business, I remember that one. Employee engagement was a big one. Employee retention and employee engagement. We built a lot of programs around that. Customer retention was one. The fourth one, I can't remember. My mind is blank. The most important one was the employee retention and employee engagement initiative. That was probably one thing that we still hadn't put a lot of meat around looking at how we could do better on our employee retention side.
We brought in a strong CHRO, David Dart. He did a great job of coming up with some good programs to improve the people side and field engagement side. I can remember him always on the road going and visiting branches and learning about how we could improve. I did a little bit of that too early on. He did a nice job of getting the pulse of the organization. He helped us implement some nice programs that improve employee retention.
When you improve employee retention, your service levels get even better. When your service levels get even better, your customers don't leave. When that happens, it becomes a lot easier to grow 5% or 6% organically. I thought that was the most important of the four strategies. Maybe termite was my number two in that year. We needed to do some things differently on the termite side and they've done a great job putting in some better procedures around that. It was that simple. Three of the four, I remember right off the top of my head, it was employee engagement, customer retention, and improving the termite business.
Patrick Baldwin: Three out of four is a passing grade.
Tony DiLucente: I'm an old guy now. I'll be on Medicare in 2023.
Patrick Baldwin: Congrats. As CFO, you've got to report to investors. You got to do your research at Wall Street Journal or Bloomberg. You're putting out fires and you’re meeting with the CEO and executive staff. I wonder, how do you divide your time as a CFO?
Tony DiLucente: I spent 30% to 40% of my time with investors. That's a $7 billion to $8 billion market cap so you have to do that. That was a big part. Tim can attest to that or Michael Hoffman and guys like that, that we did a lot of work with, and others as well too, maybe throwing into that the debt side, the debt capital markets, the equity markets. That's 30 to 40% of my time. I tend to be a little bit more operationally focused. I probably spend a little bit more time focusing on how we can improve our core operations.
I had finance people in my organization embedded in the business and they worked pretty closely with the division VPs, the branch managers, and such, which helped drive these programs that drive operational improvements. Working behind the scenes and trying to help the businesses out. You still have SCC reporting and accounting and all that good stuff that you got to do well. Maybe working with the executive team, making sure that we're focusing on strategy, and we're evaluating how well we're doing against the strategy making adjustments. Those four things are probably where I spent most of my time.
Patrick Baldwin: I imagine, all the time, you had to PEG stock price. That stresses me out. That would keep me up at night.
Tony DiLucente: The public markets are challenging because everybody wants long-term growth and long-term value accretion. They tend to measure that on short-term results, which is difficult. The expectations are that you have to grow your earnings every quarter and your revenue every quarter. There are some times in your business history when you have to over-invest. When you over-invest, that's probably going to put a dent in your earnings. That's hard to do in a public company.
It's a lot easier to do in a PE-backed company or a private company because you know you may have some bumpy quarters or bumpy years when you're investing in the business and making your capabilities better but it doesn't matter. It only matters that you put together about eight straight quarters of great performance before you go to the market and exit your company. It's a lot easier to make those fundamental improvements, add capabilities, and execute a strategy on the private side than it is on the public side.
The public side brings a lot of advantages as you get bigger. The bigger you get, the more you have to be public because you need that access to capital and things of that nature. When people asked me, “Should we go public?” They're like $150 million to $200 million in revenue, I say, “Hell no. Stay private as long as you can.” Number one, you need scale because you got to add a lot of people. Think of SCC reporting and everything that goes with that. These public companies and all the governance that's a must in a public market add a lot of costs. It's a good thing when you get to the right scale but before that, you want to stay private and take advantage of that easier pathway for adding long-term growth.
Patrick Baldwin: Are there investments that a smaller pest control operator can make to reduce his costs?
Tony DiLucente: Think about it in terms of employee retention, that was one example we talked about. You have to have actions to help your employees to be more engaged and that could be training. I'm going to spend more money training my employees, which is an investment, that's an expense, and it hits your P&L. It should add value at the end of the day because your technicians are better trained. They'll perform better service, they'll be more successful, and they won't leave.
The longer they stay, the more experienced they become. Over time, your labor costs will be more productive and lower cost. That's a good example of investing in growth to reduce your costs. You're doing it to improve your service but you'll get another benefit, it'll reduce your costs at the end of the day. When we bring on new technicians, it's 90 days of training and no revenue. If you're bringing in thousands of employees every year, that's a lot of money.
Think of the money you can save in training if fewer people left. If I were a small or big pest control company, I still say now in my learning, in my four years here, the most important thing is to focus on the people, the technicians. They're your business, they're the face of the customer. When I look at good NPS scores, it was always, “As long as Joe is my technician, I'm a Terminix customer for life. He's great. We never see pests. We always have a nice conversation. He asked about my kid’s soccer team.” Those are the good scores.
I always look at the good scores. I never looked at the bad scores because everybody else was looking at the bad scores. That was my big learning. The business is all about your technicians. If you do a great job in training them, they have to be successful or they're going to leave. They're not going to stay around. They'll go do something else in construction or whatever unless they can make good money as a pest control technician.
If you do that well, everything else is going to fall into place. You're going to retain your customers, you're going to reduce your training costs, and you're going to grow profitably. The Holy Grail of the pest control business is to train your people, make sure they engage with the customer, and you're golden. I know it's not that simple but if you focus on that, it's going to be all good.
Patrick Baldwin: That's a great example and that's applicable to everyone.
Tony DiLucente: In other businesses too where you have many people facing the customer. It's the same principle there too.
Patrick Baldwin: What is the cost of technician turnover? I've heard 1/2 times annual revenue.
Tony DiLucente: It would be hard for me to go back and put it on a revenue basis at this point. At a minimum, right off the bat, you got 90 days of salary and benefits because that pest control technician is not going to produce any revenue for the first 90 days so it's pure expense at that point. You got the inefficiencies from the time they start producing to the time they optimize their production, that's probably even a bigger number. If you put all that together, it's big. I can't put it on a percent of revenue basis or any relation. My mind is getting too far out of pest control. I know intuitively that it's a big number. That was why it was one of our four priorities in 2020 and I'm sure it still is a priority.
Patrick Baldwin: I'm curious about the most important metrics. If you could say, “I need these 7, 5, 3, or 1 metrics.” If I can just see these numbers of a pest control business, I know that they're doing well or I can easily identify, “Here's room for improvement.” What would you look at as far as KPIs or metrics to figure out the health of a company?
Tony DiLucente: Employee retention is one, customer retention. You take it down a level, start times are important. What percentage of the time do you start a lead within 24 hours or 48 hours? That was an important metric. Completion percentage, schedule attainment, or whatever you want to call it, that's critical. If you're starting all your leads timely, you're completing your schedule, and your employees are sticking around and they're getting better, those three things right there are going to drive your customer retention.
If you drive your customer retention higher, you're going to have far fewer customers leaving. Your new sales coming in all fall into the organic growth column. If you have too many customers leaving, you can't keep up with that, you can't bring in enough new customers. That's what was going on with Terminix when I joined. Our customer count was decreasing. We were doing good on new customer acquisition or new sales but we were so bad on the retention side that we couldn't keep up with it.
It wasn't necessarily because of me but I saw the progression of our plans over the four-year period. We did improve that customer retention, that was the most important thing we needed to do. We were never going to grow organically unless we got that customer retention number up. How do you do that? Everybody knows you need to do that. That's easy but how do you do it? What I learned over time is employee retention is probably the most important thing.
If you have well-trained employees, they're going to help you keep customers. By the way, they're going to lower the cost too because you don't have to train as many people and they'll get more done in a day, all those kinds of good things. You get margin too as long as you're training your employees well and making sure they can be successful so you have to have the right compensation systems and make sure they're engaged. As long as you do that, it's a lot easier to retain customers, and then it's a lot easier to grow organically with margin.
Patrick Baldwin: You came out of the gate answering with operational-minded metrics and that's not what I was expecting, by the way. I thought you were going to say, “Your gross margin needs to be this.”
Paul Giannamore: Those are the important ones though.
Tony DiLucente: I divide up my world, results, metrics, and leading metrics if you will. In other words, you want the results but if you're just looking at those, you're not going to get anywhere. What drives the results? You have to go down as low as you can. At the high level, you don't want to have too many metrics but then everybody at the third level has a set of metrics that contribute to those higher-level metrics, those results metrics.
The people in operations need to focus on things like employee retention and what's going to drive employee retention. There are other metrics too that they were focusing on that would help with things like employee retention and customer retention. I gave you a few of what I thought were the more important ones.
Patrick Baldwin: That was awesome. Thank you.
Paul Giannamore: Tony, I got a question. Back in 2015, it was before your time, it was November 2015 and I advised on a transaction called Alterra. Terminix bought that business, it closed on November 9th, 2015. It was an interesting period of time, at the end of 2015, with Terminix. This is my own sneaking suspicion that it was the better part of $100 million in revenue, it was $80 million-some-odd in revenue. They needed to plug a few holes and wanted to get the deal done. We rushed through it.
In early 2016, there were a lot of organizational changes consistent with one of the things we talked about earlier. You had folks changing around new people. They changed the way that they integrated that business because they were going to let those 28 Alterra branches run standalone and then they decided, “We can get millions of dollars in cost savings. Let's get rid of all these offices.”
When I talk to institutional investors and private equity firms, when they're assessing door-to-door, in general, and I know that's a very special aspect of the pest control market, a lot of them focus on some of the public comments that you folks made. It’s not necessarily you but management on earnings calls about some of the complications with regard to Alterra. It's long been my suspicion that ServiceMaster got probably a lot of mileage out of Alterra in regard to earnings calls because they were able to blame a lot of things on Alterra. You came in a couple of years later so the dust had settled. Was that such a bad thing, that deal?
Tony DiLucente: The motivation on why we did the deal I don't think was as good as a motivation is, it could have been, and I'll leave it at that. What happened was the customer retention was so bad on that one compared to other tuck-in acquisitions. It was a very large tuck-in acquisition. Generally, they're not that big. We'll generally do $5 million, $10 million, or maybe even smaller than $5 million. Those tend to work pretty good because you can do them. It's a small thing and you can easily integrate it and they tend to go pretty well. This was a large multi-branch type of acquisition.
The problem is the customer loss was so much higher than what we saw on the smaller deals that we were doing. By the time you got to 2017, it was creating a pretty big drag on organic growth because your customer retention was so bad. Remember, I said that if your customer retention is bad, it makes it tough to grow organically. Everybody jumping on that is one of the big drivers of the organic growth not being as high as we would have liked.
It wasn't the only issue though. It would be unfair to blame it all on Alterra but it had its piece in the thing. The reason it did is I'm not that high on the door-knocking business. I haven't seen as high customer retention from those types of deals that I do on other types of deals that are built more stable over many years with a little bit more balanced effort at bringing in customers. I always felt that those deals did have higher customer loss. The melting ice cube melted faster than normal. I was always fairly skeptical of those types of deals. We did have a negative experience with that deal, Alterra.
A funny story, I still remember everybody was talking about Alterra when I got there. We had this new coffee company come in called Alterra and I said, “Are they into coffee too?” I get my coffee and it was Alterra coffee. This is crazy. It’s good coffee though. It was probably overplayed to some degree. It was not anywhere near as positive as some of our other tuck-in acquisitions.
Paul Giannamore: I get that. Any of these door-to-door businesses are going to have lower retention rates, that's for sure. They are what they are and people know that and they know retention rates are going to be lower. What you attempt to do is you attempt to address that on the front end through your purchase price. I'm not going to pay as much as I will pay for another asset.
Tony DiLucente: That's a good point. I'm sure because of maybe the motivations at the time not being around there, maybe that's why we paid too much for it, assuming we did pay too much for it. I will also say this, we've had some success with certain door-knocking companies but that's not what we call them.
Paul Giannamore: You call them summer sales back then, that’s what you call them.
Tony DiLucente: You get to see I'm losing it. In some of the summer sales companies, we had a little bit better success. In some respects, it came down to which company it was that you were acquiring. We did 1 or 2 more after that, and those worked out better, it was my recollection than the Alterra one did.
Paul Giannamore: They were super small in comparison. Alterra was the equivalent of doing 28 $3 million acquisitions simultaneously across your entire footprint.
Tony DiLucente: I don't think we did a good job integrating it either. It was almost like an impossible job to some degree. I remember there was one individual that had responsibility for it and he was overwhelmed because there was a lot to do. There were several things that were probably at odds or issues with that deal and some of them did work out after that but they were much smaller. One learning we had is if you're going to do these summer sales companies, let's do it at a smaller scale with the people that we feel good about working with. That's the strategy we moved into after Alterra.
Paul Giannamore: It's great, I appreciate that perspective. That transaction, in a lot of ways, has not only did it help Terminix to ServiceMaster get more sophisticated about doing at least door-to-door or summer sales deals, but it also helped the industry in general. David and those guys have built a better business based on what they've learned from that. Tony, we loved having you. I appreciate you taking some time out of your schedule to catch up and talk some pest control.
Tony DiLucente: I'm glad to do it, it brings me back to some happy times, and some challenging times but mostly good times that I had during those four years. It was great working with you, Paul, over in Sweden and I get to catch up with you again. It's back off to my new job. Hopefully, we'll see how this goes and probably do something after this one too. I don't think I'll ever stop.
Paul Giannamore: Patrick and I will be cruising through. We are speaking in Tampa in January 2023, I don't remember the dates. I'll send you a text, Tony. If you happen to be around and you're not that far from the bare minimum, maybe grab a quick drink if you got some time at dinner or something like that.
Tony DiLucente: It's only an hour away. In fact, I'm going up there for a CFO network thing that I'm involved in for the Tampa Bay region. I go up there quite a bit.
Paul Giannamore: We'll ping you.
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Patrick Baldwin: Paul, Tony is one of your all-time favorite CFOs you've ever worked with, you told me that. You even said that off the record but I'm coming out and saying it. Harry Cynkus, all-time favorite. Is that right?
Paul Giannamore: That is correct. I loved working with Tony. Tony is the type of guy who was not very political in nature. If he had something to say, he would say it. He butted heads with other executives. He butted heads sometimes with the board. When he was out on the scene, he was candid in the way he had discussions, particularly on M&A deals. He always knew where you stood with Tony and that's something I appreciate about people. I enjoyed working with him. I certainly miss the fact that he's gone. I'm hoping when I come out to the Power Conference this January 2023, I'll get an opportunity to see him because I don't think Sarasota is too far from Tampa, is it?
Seth Garber: 45 minutes.
Paul Giannamore: We should invite Tony over to Power.
Seth Garber: Yeah, he would love it. He’d probably feel reinspired to see all these operators growing companies. He'd probably want to jump right back into the business and start making it happen again.
Paul Giannamore: I say we do that.
Patrick Baldwin: Let's do that.
Seth Garber: It would be awesome.
Patrick Baldwin: Seth, tell me, you must have learned something from listening to Tony.
Seth Garber: I enjoyed the episode, I went back and listened to it twice. I wanted to think about the perspective because he was transparent and open. One of the things that I thought was interesting was how he talked about the future. Right now, as a growing company, people out there are under a lot of stress about what's going on in the economy and all these different things. There was this tiny little bit of information that I kept thinking about. He said, “The times are going to change and we're going to get back to good times again at some point,” he brought that out, and that money's going to free up again. He mentioned companies coming together to become targets for larger organizations.
I went back and I kept thinking about it and I was like, “If I'm a company today and I'm starting to build a mini platform versus some of the large platforms, could I do that? Could I build myself into a target for a large acquirer as part of my personal succession or exit plan?” I thought about it after I listened to it. I woke up thinking about it. There's a big opportunity that came out of that for me, could we build these mini platforms everywhere and set ourselves up as targets for these acquires? We probably could. What are your thoughts about that?
Paul Giannamore: When you look across the industry right now, that's, of course, exactly what financial sponsors are attempting to do. It's the classic roll-up model, you go out and buy smaller businesses, and roll them up into a platform. As this industry has consolidated heavily over the last decade, there has become somewhat of a scarcity value that comes into the equation when businesses are valued. Over five years ago, before Modern, Viking, American, Killingsworth, Turner, Wayne's, and Allgood, the list goes on, before all of those companies had been acquired, there was a plethora of $15 million to $30 million businesses around the country. There are not that many anymore.
There has become a level of scarcity amongst businesses that are big enough and have the appropriate resources to be considered a platform and that's typically around $15 million-plus in revenue. It's a company that has management with some skills and experience to scale a business, non-family member management, and professional management, and is growing at twice the typical industry rate. These are some of the indicia of what an appropriate platform would be.
I tend to agree with that, Seth. If you want to ultimately get extreme value for your business in the future, you should target that. You don't have to be that much bigger though because there's not that much multiple expansion in the pest control industry, at least present day, where a $25 million business will sell for a substantially lower multiple than a $50 million or $100 million, that doesn't exist. If you start getting $15 million plus and you got those capabilities, you're in a good position.
Seth Garber: I kept thinking about it in terms of the companies that we work with and I said, “Is that opportunity out there over the next 5 to 10 years?” It seems like it is. He called that out, Paul.
Paul Giannamore: Let's take Florida. Let's say you've got $4 million or $5 million businesses roughly in the state of Florida and friendly competitors. Could you potentially merge those four businesses together into one specific platform covering maybe half the state and create value in and of itself by merging those?
Instead of having $4 million or $5 million businesses, now you've got one $20 million business. You're getting the hard synergies. There are some redundancies and then, of course, you now have more resources to invest in capabilities. We don't see that in this industry. I've seen it in other industries. I've seen a lot in the tech space. What do you think about that in pest control?
Seth Garber: We'll use Florida because we live here. If you have three $5 million companies, what if they got together and they looked at the best-in-class of each of them? Some of them are going to be incredibly good operators, others are going to be incredibly good marketers, and others are going to have incredibly good service operations. What does that company look like?
From my perspective, you do get the efficiency. It's going to take some time to put it together. Efficiency happens. I'm not a large acquirer by any means but if I'm an acquirer and I look at that business and that business can put together eight good quarters as an entity, does that make them super valuable? I would argue that I could create a case for it.
I could also argue that there may be some additional unseen value within that business as it relates to the leadership team because your people could stand out for the ones that could implement that and make that happen. They probably are good plug-in plays in the big organizations that have a deep infrastructure and who may not look at that talent. You might be able to bring some superstars up in your organization that way.
The other part that I think about using that same example is what if it started with three $1 million or $2 million companies and they started to look at best-in-class? They became a $5 million or $6 million company and then they went out and did the deal with another $5 million or $6 million company and then did it again.
Now you could potentially bring the horsepower in of 8, 9, and 10 companies best-in-class all the way up. I wonder how that would all come to play. You'd save a tremendous amount of money in marketing. You could put a much better sales infrastructure in place. Service operations would probably be pretty consistent for companies that size because you have to get to that size. You could put together something pretty powerful there.
Paul Giannamore: There are a lot of key ingredients to something like that. You would need companies whereby the actual owner doesn't feel like he needs to be the manager of that business. You're focused on taking a step back and saying, “I am an investor in this business but I don't need to walk around as GM. I'm going to up my game and bring on some real high-class management.”
Seth Garber: It creates a shift from the feelings around your business to looking at the data related to all the businesses together and being able to focus on the different data sets. If you build a company from the ground up, whether you're $1 million, $5 million, $10 million, $15 million, or $20 million, there's a lot of emotion that goes into that if it's yours. The elimination of emotion and focus on the data sets can make a big difference. It’s some things to think about.
Patrick Baldwin: My hang-up is what do those former owners do? They're still owners, they’re investors. Do they stay in the day-to-day of the business? Are they executive staff? Are they management? One is a sales manager, one is a service manager, and so on.
Paul Giannamore: The way I look at all of this is that the biggest impediment to growth in this industry are owners, they're not managers. If we've got 20,000 pest control companies in the United States, do you think we got 20,000 grade-A managers managing these businesses? No, we don't. By default, what ends up happening is somebody starts a business, they work for Orkin, “I'm a technician. I'm a one-man shop. I end up growing the business.”
Because you've gone from 1 man to 5 men or 10 men doesn't necessarily mean you're going to get to 300 or 400. Usually, one of the best decisions an owner can make is to fire themselves and pull themselves off that org chart because, usually, they're the problem. I look at hundreds of these things. You see this too, Seth. Usually, the owner is the problem.
Seth Garber: I was thinking about a discussion I was in. we're involved in a project where there are two pest control companies that are starting a discussion about becoming one. Of these companies, one is about $3 million and the other one is about $1.8 million. From a legal standpoint, it's easy to put this deal together. The question that was posed to me by one of the investors, because they brought an investor in, was, “Seth, who runs the business?”
I know both companies and I said, “They're both good guys. They're both emotionally attached to their business. I don't think either one of them can run the business.” The investor said, “I've got another guy to run the business.” I said, “Okay.” He said, “It's another person who runs an incredibly great service operation, not in our industry. What if we put the agreement together where these guys are the partners but we bring in an operator who's a real operator?” This deal is not put together completely yet but it probably is going to happen.
I thought it was a good scenario because the other guy from the other company is incredibly proven and he's been running the company for twelve years. The margins are unreal. It’s a whole different industry but similar enough. They might hit the home run. They're in a tertiary market, which is something that's pretty untouched in our industry. It can be pretty interesting. I thought about the fact that we were in this conversation. The nuances that these guys are talking about is how they make decisions. What's going to be the judge of success? How would they market? Do they market as 2 companies or 1 because the consumers know that because it's a small market?
Paul Giannamore: PB, what was your biggest takeaway from Tony's discussion?
Patrick Baldwin: Insistency. I can't imagine what he did for 4 or 4.5 years as CFO of a publicly traded company with multiple services going through Copesan, ServiceMaster, the brands, Terminix, and all that. Four CEOs. You call it the revolving door. What does that do to him? I imagined more undue stress or not normal stress from the investors, like, “What's going on?” Every day having to answer that. How do you keep all the other lower levels afloat like that?
Paul Giannamore: It's interesting, we went into this a little bit in the discussion. Prior to Nick coming on in 2017 as CEO, the business was preparing to divest brands. The board had made the decision, “We're going to get rid of the brand’s business.” Tony came on maybe 4 or 5 months before Nick. Tony was, of course, 100% on board, “Let's get rid of the brand’s businesses. Let’s get to our core.” Nick came on and decided he loved the brand's business and wanted to triple down on it and go out and make acquisitions.
For many years, Nick and the board had a significant disagreement over the strategic direction of that business with regard to that particular business unit. Of course, Nick’s gone, and Naren came in as interim CEO. Ultimately, the brand's business was divested. That was ServiceMaster’s primary problem over a fifteen-year period. Every 18 to 24 months, it should have a new head of state come in so to speak, and want to do something violently different.
Patrick Baldwin: I saw a notification, “Co-CEO steps down.” All of a sudden, an 8% drop in stock price. This is not Terminix. With Terminix, Tony had to deal with that four times in four years. Sorry, Tony. I think he's 29, he just looks older.
Paul Giannamore: I remember having discussions with him after you've got quarterly earnings releases and conference calls. I remember Terminix, who had released earnings in the morning, getting on the analyst call. Afterward, I remember having chats with him, I'm like, “Tony, that didn't seem fun.” He's like, “Fun? It was miserable.” I don't think he necessarily believed in always wholeheartedly. Anyway, it's a difficult job though. We talked about this being a publicly traded company because you want to make long-term decisions, you want to affect value long-term, and you're managing quarter to quarter. It's not exciting being public.
Patrick Baldwin: The other thing was, asking him about KPIs and metrics, I was expecting some financial numbers to come through and it turned this conversation about leading and lagging indicators, which I loved. As far as making those investments for technicians and employee retention, what non-monetary things can be done? I think about increasing pain but that doesn't solve all things. Increasing benefits doesn't necessarily solve all things. What other creative things can get done to help get employees engaged?
Paul Giannamore: One of the biggest problems that Terminix had was employee engagement. Sure, some of it had to do with pay and incentive comp structures. A lot of frontline employees thought that management didn't care. It's hard to build a business when you've got a lot of turnover at the top. I was on the JP Morgan call and we talked about Terminix. One of the things that I mentioned is that Terminix, over the years, had turned into an extremely political organization where people were less concerned about the day-to-day and more concerned about not losing their job.
Every time you get a new CEO, he brings his own staff in and he brings in a new COO and maybe a new CFO. We see this at Anticimex, for example. Jarl stepped down and Stephen came from Ericsson. He's now the new CEO in Stockholm. On January 1, 2023, he will be bringing on a new head or co-head in North America who also is from Ericsson. He's a Swedish guy. He’s based in London now. He'll be moving to the United States here over the Christmas break. Of course, there's probably talent in-house. Bill Talon is an interim president right now. You've got a lot of great guys. You've got Shawn Hollis, Jim McHale, and the list goes on. I'm not going to exclude any of these guys. He's bringing his own guy in.
Patrick Baldwin: What does that mean?
Paul Giannamore: From my perspective with regard to Anticimex, I would imagine that if I were a platform president, they've gone out and made these platform acquisitions across the board. Some of the guys were former owners like Jim McHale. Jim is sticking around. Others were guys like Bill Talon and Paul Bergmann, individuals who were working for the platform as presidents, not a former owners. A lot of these guys probably do have the capability to be the president of Anticimex North America. Of course, you're bringing somebody in from the outside.
A lot of those guys probably look around and say, “Where's the advancement for me? I'm already the president of a platform, where do I go from here?” It's always nice to grow your business. Seth, I would have to imagine you agree with us here. Sometimes making sure that you're constantly growing is important because you need to give your high performers additional opportunities. If you don't, they're going to say, “That's it, I'm tapped out. Where else am I going to go from here?” Those guys self-select, it's the ones who want more opportunity and want to make more money, they're going to leave because they're going to say, “I'm not sticking around here.”
Seth Garber: To me, there's no truer statement to make about your people. At larger organizations like Anticimex, there are people within these organizations that still have a tremendous amount of energy left. They may have been in these organizations working 20, 30, or 40 years as heads of companies but they still have something to accomplish, and it may be something to accomplish about helping their people. It might be something that they want to make a difference, it might be something they want to really force the expansion, or be there for people. I agree with you.
The other part I think about is the speed of initiatives happening. If we bring a new person in, is the speed of that person understanding the nuances of the organization? If you're going to drive an initiative down, it's going to take much longer than bringing in somebody who's been there, whether they're the perfect fit or not. If you bring the energy of wanting to accomplish something, plus someone who's been there, you can create velocity and get your initiatives to take place as the new CEO. That's my sitting-here-in-Tampa thoughts.
Patrick Baldwin: You're in favor of bringing someone in, is that want to hear?
Paul Giannamore: Sometimes you have to or sometimes you're forced to.
Patrick Baldwin: This is another Ericsson guy?
Paul Giannamore: Yeah. The North American business will be split between Bill Talon, who will run the South.
Patrick Baldwin: South of North America?
Paul Giannamore: Correct. The new fella will run the North and West so there'll be two.
Patrick Baldwin: That’s Swedish from Ericsson.
Seth Garber: Patrick, I can probably create an argument on both sides as I process it a little further. Let me give you my argument from the other side of bringing somebody in. if you are coming from an organization that was high performing and your idea is to replicate certain components of that business into the new organization, it probably does make sense to bring somebody in who understand your leadership culture and what your expectations are in order to assist you to push that down through the organization. If a company is going to make a major shift based on a model that they've proven, it could potentially make sense to bring your team over.
As I was processing it and I thought about it in my career, it was a lot easier as a head of revenue in the tech world to bring my team over who I knew understood how to execute, understood the pace that I wanted to work, and understood how to drive results in the matter that I wanted to make those happen as a leader. I found that a lot easier. We had to work through that learning curve quite a bit but it was something interesting. We never did it at a public level but we did do it on our level. That's the counterpoint to the initial point that I made.
Patrick Baldwin: It's communication. I don't know what was said to the management or to the frontline employees. Now I have a second Ericsson guy that's going to help come in. He's making a statement but what's communicated? “Here's why I'm bringing him in.” The same thing with Rentokil and Terminix, “We're acquiring Terminix.” There are a lot of people with unknown, “Am I going to make it to the transaction? Am I part of the hard synergy that's been talked about?”
Paul Giannamore: Yes, you are, Patrick.
Patrick Baldwin: Thank you.
Seth Garber: Patrick, related to the Rentokil-Terminix deal, the good news is that you can still be The Boardroom Buzz host.
Patrick Baldwin: Thank you.
Seth Garber: You're part of the strategic plan regardless.
Paul Giannamore: We're not bringing anyone from Sweden yet.
Patrick Baldwin: Paul, I've got one more question for you. How often are you asked about taking a company public?
Paul Giannamore: A lot.
Patrick Baldwin: Do you give them Tony's advice?
Paul Giannamore: Which is?
Patrick Baldwin: Heck no.
Paul Giannamore: I had dinner with a few guys in my YPO chapter. Down here in Puerto Rico, it's an interesting terrain because of the tax incentive programs. You've got a lot of folks that have moved down here that are billionaires. These guys got companies down here doing $350 million per year in EBITDA. I'm not talking about revenue, I'm talking about the bottom line.
Often, these guys struggle with that as an opportunity to exit the business. It's interesting that the extreme majority of the folks that I talked to don't want to do that, they don't want to be publicly traded companies. I get calls from guys in the pest control industry that say, “I own a $15 million business. How big do I need to be to go public?” I’m like, “You got to keep working at that quite a bit.”
Patrick Baldwin: I can see the desire to go public and raise capital and all that but more money there and attention. From the guy who’s putting $350 million on the bottom line, what are the reasons not to go public?
Paul Giannamore: Once you become a publicly traded company, then everything becomes public like your reporting. When you heard Tony talk and he said that 1/3 of his time was spent dealing with the investing public, dealing with research analysts, and dealing with institutions. He was constantly on the road.
At least once a week, he was on the road to go to this JP Morgan conference or go and meet with the T. Rowe Price guys in Boston to talk about pest control and Terminix. It's a lot of managing institutions investing public. It dumb. Plus, it's expensive now. It’s becoming more and more expensive and the regulatory regime is different than it was years ago. The costs have continued to creep up. It's a pain.
Other things have changed. The world of financial sponsors and private equity is different than it was years ago. Years ago, there weren't nearly as many exit opportunities. Think about it, ServiceMaster was a publicly traded company and it was acquired by a private equity company, and they take private transactions. C, D, & R did a tender offer, bought ServiceMaster, and turned it from a publicly traded company into a privately held business. They then turned around an IPO back in around June of ’14, it was either June 13 or June 14, and then they went public again. Of course, now they're gone.
Patrick Baldwin: Seems like a lot of headaches.
Paul Giannamore: Overall, I appreciated the candid discussion with Tony. I always love to chat with the guy. I thought it was a great discussion. I'm thankful he spent some time with us. I hope our readers would agree that it was worthwhile to try to get a little bit into the mind of the CFO of a public-traded company as well as a little bit more background and thoughts on Terminix in general as well as the Rentokil-Terminix transaction.
Patrick Baldwin: That was great. Tony, thank you so much, it was awesome.
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Tony DiLucente
Apple Podcast – The Boardroom Buzz
