Earnings Labs

Serve Robotics Inc. (SERV)

Q1 2017 Earnings Call· Thu, Apr 27, 2017

$9.43

-4.70%

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Transcript

Operator

Operator

Welcome to ServiceMaster's First Quarter 2017 Earnings Call. Today's call is being recorded and broadcast on the Internet. Beginning today's call is Brian Turcotte, ServiceMaster's Vice President of Investor Relations and Treasurer and he will introduce the other speakers on the call. At this time, we'll begin today's call. Please go ahead, Mr. Turcotte.

Brian Turcotte

Management

Thank you, Julie. Good morning and thank you for joining our first quarter 2017 earnings conference call. Before I review the agenda and introduce the other speakers, I'd like to remind you that throughout today's call, management may make forward-looking statements to assist you in understanding the company's strategies and operating performance. As stated on Slide 2, all forward-looking statements are subject to the forward-looking statement legends contained in our public filings with the Securities and Exchange Commission. These forward-looking statements are not guarantees of performance and are subject to the risk factors contained in our public filings that may cause actual results to vary materially from those contemplated in the forward-looking statements. Information discussed on today's call speaks only as of today, April 27, 2017. 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 first quarter 2017 financial results. And we have posted a related presentation, both of which can be found on the Investor Relations section of our website. Today, we will reference certain non-GAAP financial measures throughout the call and we have included definitions of these terms in our press release which is available on our website at www.servicemaster.com. 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 or to adjusted EBITDA as defined in our press release. Turning to the agenda. Joining me on today's call are ServiceMaster's Chief Executive Officer, Rob Gillette; and Chief Financial Officer, Tony DiLucente. For those of you who haven't had a chance to download the investor presentation from our website, I'll walk through the agenda item shown on Slide 3. Rob will lead off by summarizing our first quarter 2017 consolidated net results, discuss some of our key business initiatives and then review the Terminix results. Tony will follow with the review of the performances of American Home Shield and Franchise Services Group, provide more details on our consolidated results and then speak to the 2017 full year outlook. Rob will then provide summary comments after he and Tony take your questions. I'll now turn the call over to Rob. Rob?

Robert Gillette

Management

Okay, thanks, Brian. Good morning and thank you all for joining us for our first quarter 2017 earnings call. Before I begin, I would like to thank Jim Shields for all his efforts leading our Investor Relations and treasury function for the past 2.5 years. He's done a great job in the role and I know quite he'll be doing a great job in Terminix as well. And he's going to become the CFO of our Terminix business, so congratulations to Jim. Brian Turcotte has returned to lead our Investor Relations and Treasury team. Brian led our Investor Relations team when we took the company public in June of 2014. He had served in a number of important finance roles within the company and I would like to welcome Bryan back and he will be your point of contact for Investor Relations. Turning to our consolidated results shown on Slide 4. ServiceMaster had another good quarter driven by solid revenue and EBITDA growth. Revenue grew $35 million or 6% compared to the prior year. Our results were primarily driven by organic growth at American Home Shield, where we continue to see strong demand for our products in both the real estate and direct-to-consumer channels, coupled with the favorable impact of our acquisitions of OneGuard Home Warranties and Landmark Home Warranty last year. Terminix and the Franchise Services Group each produced modest revenue growth versus prior year. Adjusted EBITDA for the first quarter increased $7 million or 6% compared to the prior year. The increase in EBITDA was primarily the result of the conversion of higher revenue, driven by organic growth at American Home Shield and the Franchise Services Group and the acquisitions in American Home Shield. The plant's strategic reinvestment in our field operations, sales force and higher commissions drove…

Anthony DiLucente

Management

Okay. Thanks, Rob and good morning, everyone. Let's turn to Slide 10 and discuss the American Home Shield's first quarter performance. As Rob mentioned, American Home Shield or AHS, had a strong quarter with solid top line growth, bottom line growth and almost 4 percentage points of margin expansion. Revenue increased from $194 million to $227 million or 17%, with the organic growth contributing half of that growth and acquisitions driving the other half. The organic revenue growth was mostly driven by growth in customer count which accounted for almost 7% of AHS' 8% organic growth. Higher prices accounted for about 1.5% of the organic growth in AHS. The OneGuard and Landmark acquisitions contributed about $17 million or 8.5% of growth. EBITDA increased year-over-year by $12 million or 63% and margins expanded 390 basis points from 9.8% to 13.7%. The largest contributor to the increase in EBITDA and margin expansion was $7 million, a flow-through from organic revenue growth and $3 million of flow-through from the inorganic growth generated by the OneGuard and Landmark acquisitions. Price, net of inflation on claims cost provided an additional $1 million of EBITDA benefit in the quarter. Revenue growth was solid in our 2 key channels to market. Year-over-year organic growth in the direct-to-consumer channel was 12% and 7% in the real-estate channel. Our key focus areas to sustain our strong growth rates center around optimizing our advertising, promotion and direct mail campaigns to drive new sales units as well as improving service quality to improve retention rates. AHS continues to upgrade their contractor base. A key initiative is to proactively build and improve the contractor network, both with respect to total capacity as well as quality. These efforts are critical to our ability to sustain the ongoing growth of the business, both with…

Brian Turcotte

Operator

Thanks, Tony. [Operator Instructions]. Julie, let's open up the line for questions.

Operator

Operator

[Operator Instructions]. Our first question comes from the line of George Tong with Piper Jaffray.

George Tong

Analyst

We saw margin compression in the quarter in Terminix because of investments back into the business. Rob, can you discuss your anticipated required investments over the next several quarters in Terminix in order to achieve your growth objectives for the segment?

Robert Gillette

Management

Well, not specifically going forward, but we made a lot of investments as you can tell in the first quarter and actually in Q4 as well, relative to training and hiring, recruiting and staffing. So you - that was the majority of the increases and then some of the other incidents that occurred as the claims cost and the investment in sales as well impacted the margin. So I wouldn't anticipate that the majority of the investments that we need to make have been made in the year. Now we need to focus on growing the business and converting that investment into growth.

George Tong

Analyst

Got it. And Tony, in the American Home Shield segment, can you elaborate on trends you're seeing with claims, frequency and severity as well as what you're seeing with in-network and out-of-network contractor costs?

Anthony DiLucente

Management

Sure. Well, first off, we - our preferred contractors are around 80% of the network. The in-network contractors are definitely trending up. What we're trying to do is stay ahead of the curve, if you will. So I think it's important - or we think it's important, every - continuously to build that network. So we're constantly evaluating the contractors we have. If we don't see good quality, we'll move them on and we'll bring in new contractors. It takes a while to get new contractors into the preferred status, but that's an investment so to speak that we're going to continually make each quarter so we have the capacity to grow. So things are trending up overall in that regard.

Operator

Operator

Our next question comes from the line of Gary Bisbee with RBC.

Jay Hanna

Analyst · RBC.

This is actually Jay Hanna on for Gary today. I was hoping you guys can give a little more insight on the situation with Alterra in terms of that. Those revenue losses in collecting.

Robert Gillette

Management

Well, the only insight, as you remember, it's primarily all of the majority of the customers of Alterra were first-year customers which is the lower renewal rate that we experienced, I just think that we described it in Q4 as well. So year-over-year, this is - the impact that you've seen or we discussed was that we had the entirety of all the new customers in the first quarter and then we had attrition over the year and then into Q1 of this year. So it's just the comparison of the initial investment being late in fourth quarter of '15 and then the customer account differences between Q1 of '16 and Q1 of '17.

Operator

Operator

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

Anjaneya Singh

Analyst · Credit Suisse.

The first question on Terminix, realizing it's small dollars. But can you give us some more insight on what those damage claims are and what's driving those? It seems like it's been a few years since you've incurred those. Just trying to get a sense of how we should be thinking about those going forward.

Robert Gillette

Management

Yes, as we said, we incurred more sizable claims than normal and more of them in the quarter than we typically have. So it varies from quarter-to quarter in the business and they're termite claims, specifically, right? So it just varies and we track them closely. But when it comes to settlement time, it's a little lumpy and less predictable. So that's just the variance we believe that for the balance of the year, scrubbing what we know about the market and our customer base that will return to normal levels for the balance of '17.

Anjaneya Singh

Analyst · Credit Suisse.

Okay, got it. And a follow-up on American Home Shield. Last quarter, you guys had referenced some attrition you'd expected related to your financial institution customer. How is that tracking? Any color on the retention of those customers versus what your expectations were?

Anthony DiLucente

Management

Well, I would say that it's happening, but it's happening in a slower rate than we had planned. But certainly that move is still intact and it's going to happen over time.

Robert Gillette

Management

So pretty much on track to right thought.

Operator

Operator

Our next question comes from the line of Judah Sokel with JP Morgan.

Judah Sokel

Analyst · JP Morgan.

I was wondering if I could ask about the reduction in revenues from termite renewals. Maybe you could explain as what's going on there. Last quarter, I saw that it was up a little bit, now it's down a few million. I would have thought that maybe a shift to the big product could help in that renewal. And then maybe you could just explain what you're seeing in trends going on there.

Robert Gillette

Management

Yes. One of the things I mentioned in the call in my script was the change between '16 and '17 and - related to marketing initiatives and customer communications. So there was - one effect is the billings year-over-year. So there was a movement '15 to '16 versus '16 to '17, so that's part of it. And then the balance is just a normal attrition of the core customer base that we have. So we're happy about the new sales increase in termite overall. But on the base, that's the difference.

Judah Sokel

Analyst · JP Morgan.

And maybe just one more question to follow up on a previous question about seeing improvement in Terminix as the year progresses. Are you expecting that to be very much back-half loaded versus the first half? Are we going to see some steady progression as we go through the quarters?

Robert Gillette

Management

Yes. It will be steady and we're focused on it now. As I said, I feel like we've made the investments necessary, put a lot of the energy effort and dollars into people processes and training and now it's down to the execution phase of going out and getting the business and continuing to drive the retention improvements that we saw in the first quarter.

Operator

Operator

Our next question comes from the line of Toni Kaplan with Morgan Stanley.

Jeffrey Goldstein

Analyst · Morgan Stanley.

This is actually Jeff Goldstein on for Tony. Just to provide a little bit more color around commercial growth within Terminix and how that's been trending recently. And should we expect any of the labor initiatives that you've been undertaking at Terminix to provide? Any type of lift to commercial as well?

Robert Gillette

Management

Yes. In terms of the total resource commitment, it's across the board, right? So it's really the addition of technicians and supervisors, whether it's commercial or residential to ensure that we have the right ratios and the right kind of people in place, in training the - provide service to customers. New - we didn't call out specifically, but new commercial pest grew about 8%. So pretty good in terms of the growth rate. We had some movement in core customers in terms of total units and national accounts up and down that cost an impact on the customer base. So that happens in commercial, where you got one national account that would have many, many locations across the U.S. So in general, I - we felt pretty good about the new sales and we're focused the resources on commercial as well as residential.

Jeffrey Goldstein

Analyst · Morgan Stanley.

Okay, that's helpful. And then can you just talk a little bit what you've seen so far in the second quarter as it relates to termites and if you'd expect this year's mild winter to have any type of noticeable impact on termite activity?

Robert Gillette

Management

Yes, we've said it before, we can't give you - we can't think of anything you can truly correlate to get you something just definitive demand or tomorrow or other things. So what we've said that we had an increase in terms of customer contact through the web or searches for Terminix online of 11% and a majority of those were termite as well as pest. So I think in terms of activity, it's about normal to what we would expect, nothing exceptional. Some believe that it may be somewhat delayed because of where the temperature patterns played out. But I - it's difficult to say. We just know that if we get the team out there and train and we start selling, that's when we convert the business. So I'm not sure I could tell you much more than that.

Operator

Operator

Our next question comes from the line of Andrew Wittmann with Robert W. Baird.

Andrew Wittmann

Analyst · Robert W. Baird.

I guess, Rob, I wanted to just clarify in an earlier answer you had about the termite renewals, I didn't understand portion how marketing affects - are you referring to the fact that - I guess, maybe the question is, last year, you guys talked about discounting and bundling to build the annuity on the termite business. Are you saying that the discounted customer that maybe signed a year ago doesn't renew it quite the same rate as you would have expected? Or how does the marketing that you talked about affect the renewal rate?

Robert Gillette

Management

It's complicated. But it was driven also by payment notification from year-to-year which should have been mailed to certain group of renewal customers, but did not go out as planned, right? So a notification instead went out in January of '16. So it moves quarter-over quarter. It moves kind of a disproportionate or call it another month of renewals into Q1 of '16 versus '17. So that seems a little tricky to respond to and that - but that's what happened. So basically, we said marketing communication is just a billing movement from Q4 of '15 in the Q1 of '16 and so we call it timing collectively.

Andrew Wittmann

Analyst · Robert W. Baird.

Okay, that make sense. And then, I guess, maybe, Tony, can you talk a little bit about what the out-of-network costs were year-over-year? I believe, as we think about the year-ago period, certainly 4Q '15 was the one where we had probably the most impact negatively last year. But once you still had, what I would call, what should have been in the easy comp this year or an easier comp. Can you quantify what the out-of-network claims cost impact was on a year-over-year basis for us?

Anthony DiLucente

Management

Well, probably the easiest thing to do with - the out-of-network or the most expensive contractor account is declining and it's declined by 4%. So that - so the issue that we had in Q4 of 2015 and the spilled over into the first quarter of 2016 to some degree, that issue is gone. I mean, we don't have - we're really working hard to manage this contractor base and it's going very well. What we're doing is attempting to continuously grow this contractor base. And as we do that, we bring on new contractors, we move on contractors that aren't performing. When we bring on new contractors, there's a ramp-up that occurs to bring them from an out-of-network or in-network to preferred contractor status. A little bit of costs in that process, but we think it's an important thing to do because we do see the growth in this segment. And if we have a strong contractor base that we grow quarter-in quarter-out every year, every quarter, we'll be able to take advantage of that growth. So that's basically the impact there as far as the claims cost year-over-year.

Operator

Operator

Our next question comes from the line of Robert Davis with Oak Hill.

Robert Davis

Analyst · Oak Hill.

If you remember going back to Q4 2016, there were some increased onetime costs in AHS that were being lapsed. And then I think there were some idea that these costs were going to also be favorable going to Q1 2017. I just wanted you guys to comment. Obviously, the AHS performance is very strong, but I just wanted to hear what the impact of that easier comp was from some of those claim costs in AHS for Q1?

Anthony DiLucente

Management

So hopefully, I understand the question. But in Q1, of '17, we - again, we're continually working to increase our capacity, the number of contractors that we have. So in order to do that, we have to bring in new contractors. Those new contractors then become preferred contractors over time. So there's a little bit of cost increase associated with that. But we're maintaining strong level preferred network contractors at 80%. And like I said before, we're declining the - what I would call, the out-of-network contractors and we've seen a 4% decline there. But again, there's going to be a little bit of an increase in Q1 of 2017 associated with developing new contractors over time. So I don't know, hopefully, that addressed your question. If not, let me know.

Operator

Operator

Our next question is a follow-up question from the line of Anj Singh with Credit Suisse.

Anjaneya Singh

Analyst

A quick follow-up on American Home Shield, not sure if I missed it. But the organic growth of 8%, it looks like it was primarily driven by the warranty growth at 7%. So could you just update us on price increases at American Home Shield? What's driving what seems to be slightly lower pricing in 1Q?

Robert Gillette

Management

Well, comparatively, year-over-year, there's a lot of mix changes and other things between real estate and DTC and other things. We still kind of pursue a normal pricing increases on renewals in the 1% to 2% range, depending on where they are. So maybe a little bit of price impact in the quarter, but nothing major, right?

Anthony DiLucente

Management

And there's still 150 basis points of price in the growth.

Robert Gillette

Management

Yes. Right.

Operator

Operator

There are no further questions at this time. And so Mr. Gillette, I will now turn the call back to you.

Robert Gillette

Management

Okay, great. Thanks for joining the call today. Listen, we're focused on growth throughout the company and you can see that. American Home Shield and the Franchise Services Group had strong top and bottom line growth in the first quarter. In Terminix, we're taking the right steps to improve the organic growth by investing people and improved processes that are making an early impact. We're doing the right things for the future and are beginning the execution stage of our improvement plans. Thank you for joining our call today and we look forward to reporting on our progress at the next earnings call.

Brian Turcotte

Operator

Thanks, Rob. Thank you again for your participation. As a reminder, a replay of the call will be available on our website in about an hour from now. We look forward to speaking with you again on our second quarter earnings call at a date to be announced in July. Goodbye.

Operator

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 line.