This document summarizes a discussion on the COVID impact and future outlook for the pest control industry. It notes that while the overall US market declined 1-2% in 2020, the residential segment grew 2-3% as people spent more time at home. The industry is forecast to rebound in 2021 with 6-7% growth above typical levels. Key strengths of the pest control industry include an aging population, increased pest activity, and its ability to provide additional services to customers. The analyst expects M&A activity and valuations in the industry to increase after pausing in 2020, favoring companies with attributes like recurring revenue and high employee/customer retention.

1. COVID & the Pest Industry:
Market Review and
Forecast
Tim Mulrooney, Equity Research Analyst
William Blair

2. Today’s Discussion
● U.S. Macro
● U.S. Pest Market
● Forecast
● Valuations
● Enhancing your valuation
(from a stock analysts’ perspective)

3. Macro - US GDP
10-year GDP CAGR (2009-2019) = +2.3%
1Q20 = -5%
2Q20 = -31%
3Q20 = +33%
4Q20 = +4%
2021? = ~4%

4. Services Index (versus manufacturing)
● Bigger dip in spring
○ Shutdowns
○ Distancing
● Stronger recovery in summer
○ Services “backlog”
Macro - Services

5. Existing Home Sales
● Major rebound from April’s drop
● Highest since 2007
● WFH driving shifts in “where to live”
● Urban flight to suburbs
Home Prices
● Continue to rise
Macro - Residential

6. Nonfarm Payrolls
● Unprecedented drop in April (21M)
● Recovered 11M jobs so far
● Jobs recover much slower than GDP
● Last two recessions took 4yr and 6yr,
respectively
Macro - Employment

7. Nonfarm Payrolls
● Recovery curve is flattening
● Temporary layoffs becoming
permanent
Macro - Employment

8. Other Macro Data Points
Improving sequentially M/M, but down significantly YoY...
● Consumer confidence
● Restaurant foot traffic
● Hotel occupancy rates
...Except retail sales
● Up 5% in 3Q20
● Government stimulus (unemployment, PPP) and 2020 vacation savings

9. U.S. Pest Market
● 3%-5% over the last decade
● Acceleration in latter half
● Down 4% in the last recession (‘09)

10. 2020 Forecast: Down 1%-2%
● Residential up 2%-3%
● Commercial down 3%-4%
● Termite / home services down 2%-4%
2021 Forecast: Up 6%-7%
● Higher than typical growth (4%-5%)
● Economic recovery / easier comparisons
U.S. Pest Market

11. Pest vs the Rest
Why does U.S. pest control grow faster than
the U.S. economy?
● Demographics
● Regulation
● Pest Activity
● Add-on Services

12. Aging Population
Demographics
Millennials

13. Academic research suggests certain
insect populations have increased
materially over the last 40 years:
● Mosquitos
● Flies
● Termites
● Cockroaches
● Ants
Pest Activity - More Bugs
Tomorrow than there are Today

14. More and More…
People are Signing up for Pest Services

15. Valuation
What has happened over time?
● 2000-2010 = 0.8x-1.2x
● 2010-2015 = 1.0x-2.0x
● 2015-2020 = 1.0x-3.0x
○ A few transactions > 3.0x!

16. Valuation
Why?
● European entrants (Rentokil & Anticimex)
● Private equity interest
● Investor awareness - "defensive growth"
● Ebb and flow of “Big 5” appetite
What Next???

17. Transaction Count
● Pause in spring 2020
● Activity picking up
● Expect further pick up in 4Q
Valuation

18. Valuation - DCF
How do we assess value?

19. Valuation
Valuation Considerations
● Billing vs Service
● Fleet maintenance
● Customer acquisition cost
● EBITDA, not revenue
● Recurring revenue / retention rates
● Employee retention
● Core competency
● Routing and scheduling
● Route density / gross margins

20. ● You are a participant in a highly attractive market (Three Themes):
○ Defensive growth
○ “GDP+”
○ Significant runway for growth
● Expect M&A activity to ramp, pest valuations to recover
● Higher valuations: employee retention, recurring revenue, customer
retention, route density, profitability
Key Takeaways