Ladies and gentlemen, welcome to ServiceMaster's First Quarter 2018 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.

Thank you, operator. Good morning, and thank you for joining our First Quarter 2018 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, May 01, 2018. The Company undertakes no obligation to update any information discussed on today's call. This morning, ServiceMaster issued press release filed with the SEC on Form 8-K highlighting our first quarter 2018 financial results, the press release and related presentation, can be found on the Investor Relations section of our website. 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 website at www.servicemaster.com. We have also included a reconciliation 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. Joining me on today's call are ServiceMaster's Chief Executive Officer, Nik Varty; 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 items shown on Slide 3. Nik will lead off by providing first quarter highlights, and we will then provide an update on the American Home Shield separation, and progress on the Terminix business transformation. Tony will follow and summarize our consolidated first quarter 2018 financial results, review the individual business unit results, provide more details in regard to our financial statements and then speak to the updated full-year 2018 outlook. Nik will then provide summary comments before opening the call to your questions. I'll now turn the call over to ServiceMaster CEO, Nik Varty for opening comments. Nik?

Thanks, Brian, and good morning. Thank you all for joining us today on our first quarter 2018 earnings call. As you saw this morning, we reported solid results for the quarter as we continue to execute on our strategies to drive long-term growth and drive value for our shareholders. For those of you on the call following along our webcast deck, please turn to Slide 4. We reported a 5% year-over-year increase to $675 million in the first quarter for ServiceMaster, with American Home Shield and the Franchise Services Group achieving 9% and 14% organic revenue growth, respectively. Strong growth across two of our businesses demonstrate ServiceMaster's ability to consistently drive organic growth. We have begun leveraging these capabilities across Terminix as part of our front-end transformation. In line with our previous indications, Terminix achieved 1% revenue growth in the first quarter versus prior year, despite an unfavorable weather impact from extreme cold spells, primarily in the northeastern part of the country. We are encouraged that we are seeing positive improvements in customer satisfaction, retention as well as improvements in our sales and marketing practices for Terminix, like we have seen in our other businesses. We also see a strong pest control season coming, are confident that we are better positioned to capture some of that growth as we enter the weather-delayed heat, pests and termite season. Overall, we delivered adjusted net income of $59 million and adjusted EPS of $0.44 versus $46 million and $0.34, respectively, one year ago. Our Terminix business transformation delivered strongly in productivity initiatives and waste reduction, enabling us to improve our business model and responsibly invest in our organic and inorganic growth. On March 30, we closed the Copesan transaction as planned, and I will discuss Copesan and our commercial pest control business in…

Thanks, Nik, and good morning, everyone. Turning to Slide 8. Total company revenue grew $32 million or 5% compared to the prior year. Our results, were primarily driven by continued strong organic revenue growth of 9% at American Home Shield, driven by new unit sales growth and improved price realization; and 14% at the Franchise Services Group, driven primarily by higher disaster restoration royalty fees and janitorial national accounts revenue growth. Revenue grew 1% at Terminix, driven by termite renewals and wildlife exclusion sales. Adjusted EBITDA for the first quarter was $141 million, an increase of $7 million or 5% compared to the prior year. The increase was driven primarily by improved margins at Terminix, reflecting benefits derived from productivity initiatives, which I'll review in greater detail in a moment. Our adjusted net income for the first quarter was $59 million, a $14 million increase versus prior year. Adjusted diluted earnings per share of $0.44 was up $0.10 versus prior year. This 30% increase in adjusted net income was primarily driven by a lower effective income tax rate from the enactment of tax reform and the aforementioned higher adjusted EBITDA. Turning to Slide 9. In the first quarter performance of Terminix, revenue increased 1% to $368 million, most of which was organic growth. The increase was driven by growth in termite renewals revenue and wildlife exclusion sales, offset in part by the decline in termite completions and other service revenue. The decline was driven primarily by unfavorable weather conditions, which created significantly lower customer lead flow versus prior year and four sub-branch closures. We estimate the weather impact on revenue to be approximately $3 million in the first quarter, and we will make every effort to recover that revenue shortfall in the next few quarters. Adjusted EBITDA for the first…

Thanks, Tony. Slide 16 provides our ServiceMaster shared vision of We Serve, We Care, We Deliver. Those aren't just words to our 13,000 employees or our 15,000 contractor partners and over 4,500 franchise owners and the 34,000 employees. They represent our shared commitment towards obsessing over the service we provide to our customers, deeply caring for employees and consistently delivering the commitments we make as a company. I am confident that I speak on behalf of all our employees, contractor partners and franchise owners across the country in the world when I say that ServiceMaster and its powerful brands are better positioned than ever to deliver on our commitments to our customers, our communities, our shareholders and each other. We are demonstrating our care for employees by enhancing their ability to win along with the company. For example, we have invested in Terminix route technician pay plans that provide incentives linked strongly to performance, while eliminating measures, which penalize their pay for cancellations. We are significantly prioritizing talented bridge as a true differentiator of our success going forward. While bringing in the required talent at leadership levels and across the organization, we are also identifying areas of cost savings to fund and invest in this talent responsibly. We are also investing in a series of initiatives to further empower our employees to win and drive greater successes for everybody at ServiceMaster. Together, we are creating a company that will reinvent the way customers experience residential and commercial services. We are excited to lead the charge throughout 2018 and beyond as we serve, we care and we deliver. Before we open up the line for questions, I'd like to mention that we added Bill Cobb to our Board of Directors on April 9. Bill is the former President and CEO of H&R Block and has previously served on a number of public boards. Bill is a dynamic addition to our board and will offer powerful counsel and support in our efforts to grow profitably, significantly enhance our service capabilities and deliver long-term sustainable value. As we continue to drive our Terminix transformation and, of course, the spinoff of AHS, we look forward to Bill's leadership, along with the active oversight of the rest of our Board of Directors.

Thanks, Nik. 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 we can get everyone in the allotted time. Operator, let's open up the line for questions.

Thank you. [Operator Instructions] And our first question comes from the line of Ian Zaffino with Oppenheimer. Your line is open. Please go ahead.

Hi, great. Thank you very much and very good quarter guys.

Thank you.

Question would be on the slide where you have the revenue growth by channel. Could you maybe, on Terminix, can you maybe just delve a little bit deeper into the puts and takes on the pest control services, that being flat? And how much of it was, maybe, improvements in retention or pricing? Or just any type of details you can maybe give us on that comparison year-over-year will be helpful. Thanks.

Good morning, Ian. Thank you for the question. As you see, overall, we delivered in line with what we've been testing since I've come on board. And we've guided between 1% to 2% for the year, with a slower start at the beginning of the year, which of course also got a little bit of hamper both on the pest side and the termite side, by the weather, roughly $2 million around impact on the termite side and about $1 million on the pest side. What we're seeing in both – we saw 70 basis point improvement in our retention scores, in our retention and even on our NPS scores in the pest and 30 basis points on termite, small yet a significant improvement in the right direction, given the efforts that we're putting into the business. This is a combination of retention rates, it's a combination – plus the new growth, new units that we add in pricing wins and weather. So I'm actually quite pleased as to where we are taking this business. As I mentioned to you earlier, the focus we are trying to move the business towards is how do we generate a consistent rhythm of recurring accounts and new households, and not depending heavily on one-time sales that we were pushing in the past. So there is a big transition that's taking place. So we see momentum actually on all the three different areas that we focus on, different product lines. But as our products revenue strengthen, as we return the business back to the branches, improving the ability of our text to serve, we are starting to see the underlying Net Promoter Scores and retention starting to improve, which, definitely, we're not happy where we are, but this is, as I mentioned, this is a journey, and we're taking the right steps in the journey. So we're going to be – I think it's a combination of both residential and commercial. So the real big improvement we saw was in the residential side. We still have some baggage where we're dealing with two specific areas in commercial and in bedbug, which need significant work and improvement. And as you know, bringing in Kelly Kambs, supporting her with strong leadership, bringing in some best practices from Copesan, is definitely going to bode well as we move forward and even strengthen both the commercial segment and additional segments, such as bedbugs and mosquitoes.

Okay. That's very helpful. And then I know you just closed on Copesan, but I guess in the time that you – or brief time you've had running it, maybe give us an idea of kind of updated thoughts there. I know you're excited by getting some of the learning systems and some of the processes from them. I think you've talked about the retention rates previously. But maybe give us maybe some incremental thoughts on Copesan now that you've been running it for, I guess, a month now. Thanks.

Well, if anything, my belief that we made the right – absolutely the right move to strengthen dealing with the world-class operations of Copesan right from the leader, Deni Naumann, the kind of knowledge and expertise that she brings to the table along with a very strong team. We've already had several exercises where Terminix commercial and Copesan employees have been working very closely now over the national accounts in how we integrate our national accounts in Copesan, given their lead and their world-class retention rates. They are a benchmark, and we've got a lot to learn from them. Largely, our commercial business, as you know and I've mentioned before, was largely an extension of how we run our residential business, and we need to do a lot of work to get to the levels of Copesan. So if you ask me, I think it was a great move. We almost, I would like to say, we planted our flag in the commercial space, announcing that we are very serious about this business. We believe that we have an incredible opportunity to capture a lot of share in this market in terms of how – but have to improve how we serve these customers, and adding Copesan just gives us a tailwind.

Our next question comes from the line of Toni Kaplan with Morgan Stanley. Your line is open. Please go ahead.

Hi, good morning.

Good morning.

Good morning, Toni.

I wanted to ask about margins. So the Terminix margins were greatly improved this quarter. And some of the items you highlighted in terms of why, it sounded pretty sustainable, like the sourcing savings. And so just trying to get a sense of which of the items you would think could continue. And when I look at the guidance, the guidance raise on EBITDA was only about $1 million so – and this quarter was better than accepted, that's ex the Copesan $4 million that you mentioned, and EBITDA this quarter was better than I had thought. So I just want to get a sense of how to think about the rest of the year in terms of EBITDA. Was it – was there something that's sort of missing because I thought that, in theory, guidance on EBITDA could have been higher.

Good morning, Toni. As I've mentioned in earlier discussions that one of our prime focus of bringing in somebody like Pratip Dastidar to drive a culture of transformation in the company. And underlying the transformation is not just growth transformation, but also focus on waste elimination and strict streamlining of processes. So, a, we've become easier to do business with, b, we drive more responsible sustainable processes. So we're seeing the first results of these which – no, you may call it the low-hanging fruit, and we aim to continue to drive some of these initiatives and even additional initiatives that are planned. But I have mentioned earlier, there was a concern that we have to invest a lot in this business, which we do, but we're also going to find a way to continually pay for them. So this is why we're keeping the EBITDA guidance to where we were because we do have to take a lot of these savings that we drive and reinvest those back, especially where we need to drive the growth and we need to drive some consistent practices. We just enhanced and enriched our pay plans, for example, taking effects of cancellations out from our technicians, which we, I believe, was quite unfair, and giving and putting it a pay structure the pays for performance. And enabling our employees to win along with the company just goes a long way, not only in our value of deeply caring for them, but also how we treat our customers. So all this adds up. And I think don't underestimate the power of – for us to continue to drive cost reduction and waste out of the system, because that was two things. It's not just makes us a better company and easier to do business with, but provides necessary funding to responsibly pay for any investments we plan to make.

That’s great. And I know we haven't seen the Form-10 yet, but what are your updated thoughts on paying dividends, just given the strong free cash flow profile? Thanks.

We are working it, but as I mentioned earlier, we are pretty much on track here now to deliver on the spin. And as we go into the next phases of filing the Form-10 publicly, sometime in Q3, we will elaborate further on what our capital structures, cash needs and allocations will be.

Our next question comes from the line of Andrew Wittmann with Baird. Your line is open. Please go ahead.

Great, thanks. I guess, I wanted to build a little bit more detail on the last question. And specifically, I guess, since the margins were good in Terminix, you said they would be flat year-over-year, is that suggesting, Nik, that the plan includes incremental investments that were not contemplated at the last guidance update? Was the implication that the Terminix margins are flat? We also have to recognize here that Copesan is mixing the reported margin profile down for the balance of the year, so maybe that's a factor. Is that part of the reason why they're flat? They're actually trending above plan organically, but now that you've folded Copesan in, that brings them back down to flat. Just trying to understand the moving pieces around the Terminix margins would be helpful.

Yes, thanks Andy and good morning. We've consistently maintained that we will be investing in this business, and we will find ways to fund it versus just adding more investments at the cost of delivering on the bottom line margin. So it's a responsible way of doing the business. And one thing I'm steadfast about is long-term growth. I see no reason why both Terminix residential and commercial can't return to at or above market growth if we obsess about the service to our customers, we deeply cared about our employees and have them completely engaged. So there's a lot of investment in terms of training in systems, technology that we plan to make. But it's going to be very systematic because, ultimately, it has to drive the necessary results and the momentum that we're starting to build. So I'm pretty happy about the momentum. I think Terminix – Copesan margins, if you think about the whole business, including the operations of it, the margins are no different than what our normal commercial business would be. The reason we are doing it in a staged way is because we want to leverage the benefit of excellent customer service and retention rates that Copesan has consistently delivered. So rather than onboarding some of those accounts strictly just for EBITDA's sake, I think it's much more beneficial for us to continue to streamline our own internal operations before we bring some of that business over the next years, thereby not only enhancing our brand equity or brand value, but continuing to improve our retention rates towards, as I mentioned, Copesan has demonstrated that, to be benchmark in the industry.

Okay, I guess, I wanted to kind of do my follow-up in Copesan, so thanks for kind of going that direction a little bit. I guess, when you guys first gave us the revenue target that you're seeing at Copesan, you're talking about like $65 million of annual revenue, now you're talking about a partial year contribution of a similar amount. So I guess, I want to understand the delta. Does that include some level of contemplating that some of that revenue will be brought in-house? And then assuming you account for that new revenue that's been brought in-house from Copesan, is that going to be considered organic when you bring that in? And do you plan to disclose how much revenue you're bringing in so that we can look maybe at the remaining Terminix business on an apples-to-apples type basis, recognizing that Copesan is a little bit of a different animal?

Let me clear – let me clear what I think is an obvious misunderstanding. When we talked about Copesan in the previous quarter, where we just signed them a deal, we are bringing the entire revenue of Copesan in. It's just the margins because we are still outsourcing the work with individual partners that are coming over time. So the revenue was always the same. We have taken a conservative estimate because, at that stage, we just signed a deal, but we're still waiting for certain approvals. So the $50-plus million was prorated for 2018, so it's apples-to-apples, it's just that we were able to close by March 30, which it's just a timing issue. So it's – we closed earlier than we expected, this is why we're getting a higher revenue in this year.

Our next question comes from the line of Judah Sokel with J.P. Morgan. Your line is open. Please go ahead.

Hi, good morning.

Good morning.

Just one – I have a couple of two quick questions. The first one is to what extent was weather already contemplated in guidance when we spoke just a couple of months ago, both on AHS side in terms of the claims as well on the termite side in terms of the completion?

We never – unless we are absolutely sure of seeing the impacts, we never guide to weather or make guesses on it. I mean, if you look at, for example, we had revenue impacts on Terminix, we had the incidence impacts on AHS, but we had a favorable impact on our restorations business. But we're not also – we're not forecasting, for example, the hurricane season because, last year, we had a pretty heavy hurricane season. Every time we forecast, we use normalized weather patterns. So no, Judah, we didn't really take that into account as that story was building up while we were having the conversations.

Got it. So it's all because of the weather that happens, the good weather surprise that happened after the last time you gave guidance? Understood. And then one other, sorry...

It's – we have these cyclones – bomb cyclones and other thing unusual weather patterns. And it's a matter of what happens from January to March. But this – it takes a while for us to completely understand the impact exactly of weather. So we weren't – in February, when we gave the quarterly guidance, no, this weather was baked into it.

Understood. Okay, that's fair. The other follow-up question is just about – is a follow-up to what Toni asked earlier in terms of the components of the margin within Terminix. Just trying to understand specifically the bad debt expense, I think people's instinct is to look at bad debt expense and say that's not a real genuine productivity initiative, but it sounds like, if it's stemming from improved collections, improved credit policies, perhaps that is a recurring dynamic. So maybe you could just give us a little bit more elaboration on what's going on there and how long and to what extent we can expect that to recur over the next few quarters. Thank you.

Hey, Judah, it's Tony. I'll take this one. This is really all about business process improvement. And Nik mentioned Pratip Dastidar and the great work he's doing with Lean Sigma across our business. It's really about the ease of doing business with our customers, improving that. We really focus hard on that. Our business practices in the field translate it into improved collections as well as, in the financial area, we did tighten up the credit policies as well. So it was really those two actions, better processes in the field, coupled with better procedures and corporate and managing credit.

Our next question comes from the line of Sam Eisner with Goldman Sachs. Your line is open. Please go ahead.

Yes, good morning, guys.

Good morning, Sam.

Good morning.

Just going back to the Copesan numbers that you provided. I was wondering if you could maybe give us some pro forma numbers for 2017. If you took your existing commercial business, add it on the 2017 Copesan revenue, and also gave us a margin or an EBITDA associated with that, what would it be? I'm just trying to understand how big this business really is on a stand-alone annualized basis.

Sam, it's Tony. I'll take this question. If you – essentially, you could see this is – it was baked into our guidance. We added, essentially, $60 million of revenue related to Copesan for the nine months in 2018 and roughly $5 million of EBITDA. And that's all reflected in the guidance.

I guess, what is your 2017 existing commercial revenue and EBITDA? Because you're making comments about how you expected to get up to commercial margins. I'm really trying to understand what the profitability of your commercial business is going to be, looking out really to 2019 and 2020 and beyond that. I recognize you're going to see margin expansion over time, but I really want to know what it is today when you combine the new Copesan, which is a low-margin business and your existing commercial business, which is maybe a bit higher?

Well, we've – if you look at our breakoff – breakdown between our residential and commercial business, it's 80/20 of our total Terminix business, so 20% being commercial. Of course, adding Copesan, as we mentioned, $60 million for the rest of the year, you can pretty much annualize what that would be in terms of revenue, combined with our commercial business. Now we've always mentioned that commercial business margins are a few basis points below our residential, so if you take the total margins you can see where they fall, say, between 18% to 20%, given different quarters and the breakdown. And Copesan margins, I'm not worried about the Copesan margins at this level because that's how we – the acquisition because we're getting EBITDA dollars now for that for gaining – for winning the business and maintaining the accounts. We're still outsourcing the work to individual partners. And as we mentioned, as we improve the branch performance of Terminix, it will be easier for us to start on-boarding this and thereby deliver the kind of outstanding service that Copesan delivers today. The number one priority for me is that this – the service levels – the quality of the service level should be the same or better in terms of delivery to the customers. This whole transaction should be transparent from the customer's perspective, and that is critical for us, while we actually benefit from this partnership and improve our own underlying practices, thereby, helping even our own margins and synergies with them. So I'm pretty encouraged, and just mathematically, as I mentioned, had we brought all this operation in on day one, the margins of Copesan wouldn't be any different than the commercial margins we deliver today.

Our next question comes from the line of Tim Mulrooney with William Blair. Your line is open. Please go ahead.

Good morning.

Good morning.

Good morning, Tim.

So I'm sorry if I missed it, I'm juggling a couple of calls this morning. But did you say retention rates were up 70 basis points in the pest?

Yes. That's correct. In pest, it was up 70 basis points.

All right. So do you guys attribute that expansion and retention to the improvements in service that you've implemented over the last several quarters? And do you expect similar improvements in retention throughout 2018? Just the 70 basis points is pretty impressive turnarounds kind of happening faster than I had expected.

Tim, it's – unfortunately it's never a straight line, but I'm very encouraged with the initial progress. And we see much more progress on the residential side. We still have a lot of work cut out for us on the commercial side and some specific products. So commercial is going to be a challenge as we grow, but if we – I'm pretty encouraged, given the kind of turnaround Matt and the team have brought in Terminix residential or starting to bring – we follow those same practices, same discipline. I'm pretty encouraged we're going to see that change of NPS scores and retention, even on the commercial side, even though we're just in the beginning of the journey with Kelly's addition to the team, changing a lot of people in the team learning from Copesan as we go. The one fundamental thing is really getting the pay plans in place by the end of December as we had committed to our technicians. We're driving better service because we have returned the business pretty much back to the branches. Our technicians today have a much bigger and better ability to see the schedules of their customers and have a better control on it than we had in the past where we were controlling it with a growth that’s driven from a central office structure. So we returning that business back, giving them the flexibility, giving them the information technology tools to deal with the customer and incentivizing – the team has been driving significant contests, significant energizing efforts for the branch managers where they – we've gone from forcing them to report on lower 40 to 50 metrics, constantly changing on a daily basis, to seven simple metrics, which they drive by. And their ownership of the business – and they're held accountable for it, but these are the metrics they came up with. So this is taking their feedback into account and then running as our business branch managers would like to run it. So that empowerment is really helping see that initial rush in momentum, and we can – we aim to continue to build on it. And then layering that with the transformation efforts that we're driving at the company, ultimately what we want to do is build a company that's able to sustainably deliver high-growth revenue or high-profitable revenue. It's not about winning a quarter, it's about winning the war in the end.

Yes. That makes sense. Thank you. So if pest retention rates are growing, they grew 70 basis points, why don't we see that trend…

Can you speak a little louder? It's hard to hear you.

Yes. Sorry, can you hear me now?

Loud and clear.

How’s that?

Perfect.

Okay. So if the retention rates are growing, which they are, why aren't we also seeing organic growth growing in pests? And we all know the math, 100 basis points in retention is $10 million to $12 million in incremental revenue. Is it just the new customer growth is still lagging? Or is there – was it just related to weather? Can you help me bridge that gap or understand it? I know it's not that simple.

Yes. Apart from the basic math of new sales retention pricing, there's other factors, such as the commercial, where we, as I mentioned, we have bigger challenges, which we're continuing to work on. And I'm starting to see some promising improvements there as well, which will bode well for the future. We also have a lot of focus on some special pest spaces or product strategies that we work on, such as bedbugs and mosquitoes, which we are also working hard to improve. And then, as I mentioned, I think, in our last conversation, we also dependent in the past a lot on some of the one-time sales. So we overemphasized the one-time sales at the cost of building recurring headcount with new households or new customer accounts. So that is where we're putting our focus on. So losing some of those one-time sales causes some turbulence in our numbers in the beginning but over time, as we to continue to build that household count, we will see much more sticky growth as we go forward.

And there are no further questions on the phone lines at this time. I'll now turn the call back to our presenters. You may continue with your presentation or closing remarks.

Great, thank you. Thank you again for your participation in today's conference call and webcast. As a reminder, a replay of the call will be available on our website about an hour from now. We look forward to speaking with you on the second quarter earnings call currently scheduled for July 31. Thank you.

Ladies and gentlemen, that does conclude the presentation for today. Thank you for your participation. You may now disconnect.