Ladies and gentlemen, welcome to ServiceMaster's Second Quarter 2016 Earnings Conference Call. Today's call is being recorded and broadcasted on the Internet. Beginning today's call is Jim Shields, ServiceMaster's Vice President of Investor Relations and Treasurer. He will introduce the other speakers on the call. At this time, we’ll begin today's call. Please go ahead, Mr. Shields.

Thank you, Operator. Good morning and thank you for joining our second quarter 2016 earnings conference call. Today, you will hear from ServiceMaster's Chief Executive Officer, Rob Gillette, and Chief Financial Officer, Alan Haughie. For those of you who haven't had a chance to download the investor presentation from our Web site, I'll walk you through the agenda items shown on slide two. Rob will lead off by providing some opening remarks and then provide a summary of our second quarter consolidated results. Alan will then review performance by segment and provide more details of our consolidated results, as well as providing an update on our 2016 full-year guidance. Rob will then provide summary comments before opening the call to your questions. 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 three, all forward-looking statements are subject to the forward-looking legends contained in our public filings with the Securities and Exchange Commission. These forward-looking statements are not guarantees of performance and are subject to the risk factors contained in our public filings that may cause actual results to vary materially from those contemplated in the forward-looking statements. Information discussed on today's call speaks only as of today July 28, 2016. 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 second quarter 2016 financial results. And we have posted a related presentation, both of which can be found on the investor relations section of our Web site. We will reference certain non-GAAP financial measures throughout today's call, and we have included definitions of these terms in our press release, which is available on our Web site. We have also included reconciliations of these non-GAAP financial measures to the most comparable GAAP financial measures in our press release and presentation 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. I'll now turn the call over to ServiceMaster's CEO, Rob Gillette for opening comments. Rob?

Thanks, Jim, and thanks to all of you for joining our 2016 second quarter earnings call. While many of you on the call today either attended our Investor Day held in New York on May 17th or had the opportunity to view the video on our Web site. At that event, we introduced ServSmart our approach to how we engage our customers, employees, and business partners to provide the best service possible in an efficient way. ServSmart is the foundation of our plans to improve our business processes and enable customers to research, buy, and schedule home services. Our team gave an overview of our approach in how we are transforming our Company through technologies. For our Company, ServSmart is more than just an initiative. It is how we will tackle process improvements across brands and functions, and simplify the tools we use to deliver services on time for customers. Our ultimate goal is to provide a world class experience from the time customer begins to search for a service provider to the time they take for those services. We want to serve our customers when, where, and how they want to be served. By leveraging technology to make it easier and more convenient for customers and our associates, ServiceMaster aims to be top of line for consumers when they select services for their homes. We operate in large and attractive markets with favorable consumer trends. Estimates take the overall addressable market size for home services to be between $250 billion and $400 billion. The industry is incredibly fragmented with the reputation for poor and inconsistent customer service. Many lead generation companies have struggled with the thin margins after decades of investments, and new entrants have failed to gain traction. ServiceMaster is in an excellent position to capture increasing share…

Thanks Rob. Good morning, everybody. As Rob mentioned, we had another solid operating quarter with revenue growing 6%, excluding the conversion of Merry Maids branches with EBITDA margin expanding by 50 basis points. More importantly, and I’ve highlighted on Investor Day, our businesses continue to generate strong gross margins with both Terminix and American Home Shield consistently delivering annual gross margins in the high 40% to low 50% range. So this quarter was no exception. With gross margin expanded 30 basis points year-over-year. As a result of these strong fundamental margins, we are able to invest in technology and marketing to fuel future growth, while still delivering strong bottom line results. And just as in the first quarter, we increased year-over-year technology spending on our ServSmart platform by $6 million, but this time also expanded our EBITDA margin. So, let's begin by discussing the breakdown of Terminix revenue shared on slide six. Revenue increased year-over-year by $19 million or 5%. Now revenue grew by $21 million or 6% if we exclude the product sales which were in line item labeled products in the Terminix segment table in the press release. These products are low margin and tend to vary widely for the year. So of the $21 million in non-product growth, $17 million was driven by acquisitions, most of which was on the acquisition of Alterra completed in November of last year. And again, we’re very pleased with this acquisition. Its performance and integration are both ahead of our internal plans and we are beginning to cross sell other services such as mosquito control to these customers. And historically, acquisitions have played an important role in Terminix's growth and Alterra is a great example of how acquisitions through synergies and cross-selling opportunities add value. Pest control revenue of $226 million…

Okay, thanks, Alan. Just to wrap things up. Our business remained strong. We continue to see revenue and customer account growth at American Home Shield, with OneGuard acquisition, American Home Shield has added the Company with its strong record of growth and entrepreneurial customer focused mindset. We continue to be the leader in the home warranty market and OneGuard strengthens our position. At Terminix, in the integration and performance of the Alterra is ahead of plan, and we’re pleased with the sales in the core termite business. Most importantly, our business model remains strong with resilient margins and cash flow. We’re focused on a customer first culture and enabling our associates to perform essential services in high quality and reliable way. Our investment in ServSmart will empower our team to deliver these services efficiently, which frees them to connect with customers and provide a superior experience. Thank you for joining our call. And now I’ll turn it over to Jim for Q&A, Jim?

Thanks Rob. As a reminder, during the question-and-answer session, we encourage you to ask any questions that you may have. But please note that guidance is limited to the outlook we provided in our press release and webcast presentation. Additionally, since the queue is long this morning, please limit yourself to one follow-up question, so that we can get everyone in on the allotted time. Let’s open up the line for questions operator.

Thank you [Operator Instructions]. And our first question comes from the line of George Tong with Piper Jaffray. Please proceed with your question.

Can you comment on inflationary costs that you’re seeing in the American Home Shield business, specifically how rapidly contractor rates are increasing? And any factors in the market that may change this going forward?

Not that we’re seeing. I mean the $3 million I quoted is, if you think about it given the contracted costs, represent about half of our revenue in American Home Shield. The rate of inflationary increase that they’re giving to our contractors is not that similar to the rate of price increases that the tax includes to our customers. And so that level is about the level that helps us maintain our EBITDA margin -- gross margin as it's been that we’ve seen in revenue and Home Shield and the claims. So given the -- let's call it renewed focus on making sure that we have a broad enough contracted capacity. At this point in time, we’re not seeing any significant headwinds in terms of the behavior of the contractors. And I think bear in mind, and we say it often, that being the market leader actually does mean some things. And so, the level of volumes that we can give to our contractors, we still believe gives us a pre-eminent position to, let's say to have those contractors in our network as opposed to any of our competitor’s network.

And sticking with American Home Shield. Can you provide an update on how much you’ve increased your, in-network contractor base by, in the quarter and thoughts on what level of contractor growth is appropriate to support high single low double-digit revenue growth in the segment?

Sure. I am not going to comment on the number of contractors that we’ve added. But there has been a significant inflow of contractors into the network, I can assure you that. So, the pipeline remained strong. We still believe that the way we are managing and the signals we see from contractors don’t provide any significant tailwinds to the level of, let's call it, mid to high single-digit volume growth that we are projecting for this business.

Our next question comes from the line of Andy Whitman with Robert W. Baird. Please proceed with your question.

On the insurance accrual adjustment, I just want to recognize that those are mostly for prior periods. But what does it say about your current accrual rate, and maybe just to put some in context. Was there an adjustment last year also? And is there an implication on margins that you might need to accrue more aggressively, or take more expense, so that we don’t have more of this in the future?

No, I don’t believe so. I mean, our 26 -- so all of the assessments are actuary at the rates of which we’re accruing in 2016 are more than adequate. So it's not that those as a foregoing expense. If you think about Rob’s comments, particularly around safety as well, I think in the last 18 to 24 months, our process of handling claims as they come in has improved significantly. And so no I don’t actually see an issue with ongoing expense for this. This is an actuary reappraisal of a long tail of claims that preceded most of us in the company today.

Then just on the Terminix business and the organic trends there. It sounded like you guys were generally happy with the Terminix -- termite side, but the pest side, where you saw some of the disappointment. I guess, when you break it down, was it the couponing that weighed on that top line or competitive factors there? Or were you seeing just volume weakness from the market? I guess a little bit more context for why you saw some of the weaker trends on the pest side, would be helpful.

I think it's kind of both. I think in terms of activity, there is clearly activity but not significant core organic growth in terms of activity in the marketplace. And I think we’re, as we’ve talked about before, we’re trying different approaches to provide value to customers in different ways. So combining services, whether it's termite or pest or other things and innovative ways to get value to customers, so I think part of it is has been learning experience. And I think part of it is our execution over the period. And I feel good about the position we’re taking now and the improvements that we’ve made to some of what Alan alluded to in his safety and other things. And we’re making sure that we put the tools in place to do all those things consistently. So, we just call it out because we’d like to see obviously more organic growth to the business. And the Alterra acquisition has done really well, but we still want the core market to continue to grow. So, I think we’ve learned a lot and we continue to implement changes that will pay off in the future.

Our next question comes from the line of Gary Bisbee with RBC Capital Markets. Please proceed with your questions.

This is actually Jay Hanam on the line for Gary today. I noticed that in OneGuard service offerings, several that don’t fall under the typical Terminix HS product line umbrella. How should we think about this? So they all be retained, or is this maybe an attempt that some product expansion?

As I said, we’re going to continue the business and the brand as it is. We think they’ve taken some really innovative approach to the real-estate side of the equation. So, people that buy homes and then adding services and more importantly reinforcing the relationship and the coverages that they do have, so we’re going to maintain and try and learn from them and maybe see if there is opportunities for us to expand that offering. So, they’ve done a really great job in growth, and delivering to customers. So I think there is opportunities for us to learn from them.

Our next question comes from the line of Anj Singh with Credit Suisse. Please proceed with your question.

I wanted to touch first on the termite part of Temrinix. It seems over the past year and half or so that growth there continues to slow. I realized you guys are -- you sound optimistic about your efforts there. But it seems to still be flattish completions and other services down slightly, renewals up slightly. And your competitors continue to seemingly grow faster than the rates you’re seeing. So could you just talk about what’s driving that? And I think you had expressed some optimism on the termite transfer the later part of the year. So, are you less optimistic now? If could just help us understand those things. Thanks.

Sure. I think, as we know the market itself is not growing a lot in the last two years, two to three years. So, that’s part of the equation. I think that some of the approaches we’re taking to providing multiple services to the same customer have an impact that makes it a little less transparent on the outside. Remember when we say core termite is one part that we’re happy with and the growth. And when we report termite, in general, there is all the other services tied to it. And in number, you can’t just look it as termite solely. But I do think that we’ve positioned the product and the service that we have in positive that will increase growth in the future. So we feel pretty good about it. We’d always like it to be more. And as we mentioned, the lifetime value of that business is critical and probably one of our best, similar to DTC and American Home Shield. So, growing the base and expanding the services to more customers is our focus.

And for my second question, I was hoping you could talk a little bit about the marketing expense as it relate to Terminix and more broadly. It seems like Terminix more getting expense is basically flat for the first half of ’16 versus the last year. I guess, first, have you pulled back on your marketing expense plans for Terminix, are you proceeding in line with your initial expectations? And then more broadly, are you no longer anticipating, going forward, some marketing expense from 2016?

I guess I’ll take the last part first. It depends on where we are and what opportunities we see. So we still look at, as we talked about in the prior call, the potential of moving some of those expenses in, whether it's IT investment or marketing. So, we continue to do that. Collectively, you saw that we spend more on marketing in Q2 of this year versus last year. So, we’re up somewhat. I would say a lot of the work that’s been done in marketing in Terminix has been focused on translating some of the digital capabilities that we have in American Home Shield through the new marketing organization and focusing on lead generation in different ways. So, versus the classical TV advertising and other things that we’ve done, there is much more element of digital, email, and other types of media that we’re using to create leads. So it's more of a mix shift and a change in how we’re going to market, but no real reduction in how we’re spending to grow the Terminix business.

Our next question comes from the line of Sara Gubins with Bank of America, Merrill Lynch. Please proceed with your question.

First, given the improving termite sales, should we see completion revenue grow in the back half of the year on a year-over-year basis?

I think the increase in -- not necessarily, no. I wouldn’t -- we’re certainly not banking on that, and which is we’d like to see it. The increase in completion revenue dollars will generate renewal revenue on the anniversary of those sales that we’re seeing, that’s the real thrust of where the ultimate growth comes from by virtue of having these additional completions. So we won’t see a flow through into revenue of those additional sales of any significance until 2017.

Okay and then turning to AHS. Could you talk about how we should think about margins for AHS in the back half of the year? And comment about the investment revenue hit to the quarter, given that you’ve now de-risked that. Is that actually going to be a drag on margins for the next couple of quarters?

Well, we certainly won’t be getting any more investments gains in American Home Shield. So, if you look at it from that perspective, from quarter-to-quarter, year-over-year of course it wouldn’t have any impact. Comparing second half to first-half, we will see a huge margin increase in American Home Shield from the second half to the first-half. As I said on earlier, the marketing spend was front loaded and that was year-over-year increase of about $10 million and we won’t see that in the second half of the year. The third quarter in American Home Shield is our highest revenue quarter in the year. We have the acquisition of OneGuard and we have the massive tailwind from the fourth quarter claims expense that was from last year. So, there will be a significant margin improvement in the second half of the year.

And our next question is from the line of Jeff Goldstein with Morgan Stanley. Please proceed with your question.

You touched on this a little earlier. But with the recent acquisition of OneGuard, they offer services beyond just your typical home warranty, like pest control and carpet cleaning. I was just thinking, is this something you’re contemplating, doing within American Home Shield as well and maybe cross-selling with your other segments. If you could just talk about any opportunity there, that’d be helpful.

I think if you look at the way they’ve gone to market, they do it in concert with other companies as well, so not as similar to what we would do in other pieces of business. But there is also the lot changing side of it and other things. I think the real, the way to look at it is, it's an innovative way on the real-estate channel to create more stickiness from a customer perspective and improve retention in first year and beyond. So, we think it's pretty creative in making sure you touch the customer, and it just isn’t a line item on the closing statement. But it's real. And if you go and look at people who acquire home in the first six to eight months spend more to either improve the home or make modifications to their liking or other things than they do over five years, typically. So there is an opportunity to sell the other services that we provide in ServiceMaster as well. So we like the way they’ve approached it, and I think its additive to the way we felt with the real-estate market and how we could potentially grow.

And then just on the $90 million settlement, that’s related to the Virgin Islands case. Could you just talk about any measures you’ve taken to prevent the similar situation from reoccurring again in the future?

I mentioned the investment in the environmental practices and safety practices that we’re making. And we continue to do that and continue to look at improving our processes in general. So, I think that we have the right process and disciplines in place to prevent that type of thing happening in the future and we are certainly focused on it in a big way.

Mr. Shields, I’ll turn the call back to you for your closing remarks.

Thank you again for participating in today’s conference call and webcast. As a reminder, a replay of the call will be available on our Web site in about one hour. We look forward to speaking with you. Thank you, Operator.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.