Ladies and gentlemen, welcome to ServiceMaster's Fourth Quarter and Full Year 2018 Earnings Call. Today's call is being recorded and broadcast on the Internet. Beginning today's call is Jesse Jenkins, ServiceMaster's Treasurer and Senior Director of Investor Relations, and he will introduce the other speakers on the call. Please go ahead Mr. Jenkins.

Thank you, Malika. Good morning, and thank you for joining our fourth quarter and full year 2018 earnings conference call. Before we begin, I would 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 legend - 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, February 26, 2019. 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 fourth quarter and full year 2018 financial results. The press release and the 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 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 the appendix of this 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. On October 1, 2018, ServiceMaster successfully completed the spinoff of the American Home Shield segment. As a result, all American Home Shield results for the current and prior periods are reported in discontinued operations as required by U.S. GAAP rules. We have historically incurred certain costs that were allocated to the American Home Shield business. These costs include certain shared corporate level activities, such as finance, accounting, tax, treasury and human resources. In accordance with U.S. GAAP, these historically allocated services are not permitted to be classified as discontinued operations. These costs burden the post-spin reported full year adjusted EBITDA of $398 million by $33 million. On a pre-spin basis, adjusted EBITDA would have been $431 million and above the midpoint of our prior guidance of $425 million to $435 million. On the call today, we will spend the majority of our time discussing fourth quarter performance. Additional details regarding full year performance are included in the appendix of the webcast as well as our SEC filed documents. Joining me on today's call are ServiceMaster's Chief Executive Officer, Nik Varty; and Chief Financial Officer, Tony DiLucente. For those following the presentation posted on our website, Slide 3 shows the agenda, we will cover today. I'll now turn the call over to ServiceMaster's CEO, Nik Varty. Nik?

Thanks, Jesse, and thank you all for your time today. I will start with our 2018 full year accomplishments on Slide 4. We deliver is a commitment we make to our customers, employees, business partners and our shareholders, and I'm happy to report that we delivered on our performance commitments for 2018. Full year consolidated revenue of $1.9 billion, includes the highest Terminix growth rate in 16 years. The 7% growth of Terminix comprises 5% from acquisitions and organic growth meeting the high end of our guidance at 2%. The 9% organic growth of ServiceMaster Brands includes 23% growth in commercial cleaning national accounts as well as 4% growth in the high-margin royalty fees. In large part, due to good progress in commercial restoration and fire mitigation. And despite essential investments to drive growth, pre-spin adjusted EBITDA of $431 million exceeded the midpoint of our full year 2018 guidance. Strong improvements in operations and lead generation help drive this performance and will carry over into 2019 and beyond. Stock rates improved 5.3% in the fourth quarter, reaching all-time highs in December. Route completion rates also continue to improve, up 2.2% in Q4. The focus on 24-hour starts coupled with more effective marketing investments drove over 9% growth in new pest units in the quarter. We have seen continued progress in each of these areas, along with many others early in the first quarter of 2019. I will touch on some specific actions we are taking in 2019 to continue this momentum in a moment. Prior to 2018, Terminix was a residentially-focused pest control business. The acquisition of Copesan in March of 2018 coupled with an enhanced commercial sales and marketing organization reinforced our presence as a serious commercial player in this high-growth market. Also, over the past year, we have…

Thanks, Nik, and good morning, everyone. I'll be covering our Q4 financial performance, 2018 consolidated financial results and 2019 guidance. Turning to Slide 8, let's start with Q4 financial performance. Revenue grew $48 million or 12% compared to the prior year. Organic growth in Terminix was 5% in the quarter, highlighted by 7% organic growth in residential pest control, following 7.8% organic growth posted in the third quarter. Also noteworthy was that our pest control acquisitions in 2018 contributed 8% of growth in the fourth quarter, while adding significant strategic capabilities for our business. Our ServiceMaster Brands business grew a 11% in total, with 5% coming from organic growth, highlighted by a 11% growth in ServiceMaster Clean national accounts. With respect to EBITDA Q4, we were negatively impacted by $5 million of dis-synergies, $1 million more than we previously estimated. We expect $18 million in total dis-synergies in 2019, including $13 million incrementally in the first 3 quarters of the year. Additionally, we drove $3 million in savings at the corporate level, primarily through a reduction in automobile, general and workers' compensation expense through continued improvement in our claims management process. Turning to Slide 9, I'll discuss Terminix starting with the revenue growth by channel. Starting with the termite and home services column, on the left side of the chart, revenue increased 4% in the quarter predominantly from organic revenue growth. Breaking this area down further, termite renewals were up $1 million or 2% in the fourth quarter. Termite renewals benefited by $2 million in the quarter from a onetime acceleration of revenue related to an accounting methods change for a bundled pest and termite service offering in order to comply with new revenue recognition standards. In the full year, this benefit was more than offset by the cycling of…

Thanks, Tony. We made tremendous progress on the core business in 2018, while taking on an increased workload to deliver on the spin because of major commitment to our shareholders. Revenue growth at Terminix is at levels we haven't seen in over a decade, and new unit sales are at an all-time high. With 5% organic growth in the quarter, we are approaching industry-level growth rates and have direct line of sight to 30% incremental margins. We are focused on improving profitability in the Terminix business, but we are approaching the next steps in a strategic disciplined manner. We have gone through a period of time in our company history where the emphasis was on short-term cost cutting and it let to sharp declines in customer service levels, and ultimately, a declining growth rate. We are taking the necessary steps to create a long-term sustainable business model that will convert consistent growth, both organically and through acquisitions, to the bottom line. By focusing on our mission of creating cleaner, healthier, safer environments for our customers at home, work and play, we can deliver on our future commitments just as we have done in 2018, and I am confident that executing on our strategic goals in 2019 will lead to significant shareholder value. I will now turn the call back over to Jesse to lead us through a Q&A session.

Thanks, Nik. As a reminder, during the Q&A 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. [Operator Instructions]. Malika, let's open up the line for questions.

[Operator Instructions]. Our first question comes from the line of Dan Dolev of Nomura.

I'm sitting in front of my screen and I'm seeing the stock up 16%, and all I have to say is, wow, amazing, so nice job on that. And my question is on organic growth. You did factor some comp, which is very, very impressive, and you're really guiding to 2% to 3% next year? Are you just being conservative? Is there - how should we think about sort of the growth run rate and why you are not guiding a higher number? And again, congrats on a very strong results.

Dan, we're really proud of what we achieved in the last couple of quarters starting to see an uptick in our organic growth. And I think the first thing when we started on this whole transformation process was to start unlocking the potential that I always believed coming in Terminix as a brand and this company overall, including the ServiceMaster Brands has. So we started focusing very heavily on residential pest as the first vector. Since then, obviously, we've started putting the focus on all our other lines like termite and home services. As you know, we created a commercial pest business unit. So those are sort of next in the queue in terms of how we started executing our vision and mission. And the first thing was to really get our marketing efforts better aligned with where our capabilities are, where our strengths are, where our branch footprint is, and I'll not say Matt Loos and his group who drive our marketing efforts in residential have done a phenomenal job in - not only - I mean, yes, we have to invest more in marketing because we have to get to at-market, above-market growth rates. And I see we've gotten there a bit early due to a couple of things. The number one is the marketing investments are actually paying more dividends, but as you know, marketing investments have a way to return. In the first year, we see almost a negative return on those because you're spending a lot of money upfront, but as you continue to retain these customers by the third year you start seeing the 30% plus incremental returns on those. The second thing, I must give a lot of credit in terms of the operational discipline in terms of the 24-hour start rates, pickups, we've seen a pretty good improvement, continued improvement in the completion rates. So those things have helped. We have also seen our NPS scores in pest up 5% and termite up 7% year-over-year, and we've seen that continue to pick up even in Q1, so which bodes well. And we started seeing - even in there - obviously some of these efforts on retention improvement, which is our major, major focus for 2019 are starting to show dividends. So we picked one of our regions where we heavily piloted these and we saw an above turn in the retention numbers. So I'm pretty confident we'll continue to see the correlation between NPS scores and retention. Obviously, there's a time lag, but - and the 2% to 3% is because we've got to go beyond - you can only grow completion rates and others up to a certain point. Well, now, our job is to sustain that. But I see a lot of opportunity beyond residential pest in both termite and commercial pest as well.

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

I guess, maybe this one is - this one is, I guess, for Tony. I just want to understand the guidance a little bit. It's in the - at the end of your prepared remarks that you've done about nine tuck-ins in addition to Assured. If you use the midpoint of your organic growth rate that you guided for both segments, it looks like there's about $80 million-or-so of acquired revenue for the year. I guess, my question is, how much of that $80 million can be attributed to these tuck-ins that we did not know about?

Most of the impact is going to be from Assured. The tuck-ins are going to be a little bit smaller, maybe roughly $30 million-or-so from the tuck-ins. Probably more like $35 million for Assured, just to give you a range, and about $20 million-or-so from the Copesan acquisition, which didn't occur until the second quarter of 2018.

Got it. Great. I guess, my second or follow-up question would be related to the labor costs, in particular. And you mentioned here, Nik, that you're making some investments in the pay plan using some of the feedback. I guess, when you look at the margin guidance, is - are these adjustments to the pay plan factored into that 30% after? Sorry, something is on the line there. Was that - the - was the 30% incremental margins including the adjustments to the pay plan as well?

Well, if I understand your question correctly. I mean, first thing, let me comment on the labor part. I think one of the major fundamental shift we made culturally is to ensure our technicians, our sales people, our call center people feel part of the journey, and the pay plans have been set up in terms of if the company wins, they win because that's the culture we want to build. And we've also taken a lot of feedback from several, almost, we had 875 field people involved and how we understood the feedback, took - drove workshops and intensive boot camps with them, which really helped us get honest candid feedback from them on what's working, what's not working. And the fact that they're seeing us taking their feedback and bake it into our approach and tweak the pay plans - continue to tweet the pay plans to not only their benefit, but in the end, it's a pay-for-performance kind of culture, which we're continuing to build. And that automatically, as you can understand, Andy, the focus on our results that we're driving is driven largely by a very, very strong engagement from them. So we think these improvements will definitely cost us some, but actually that cost returns in - good investment returns for us in terms of high retention. So those have been factored into the calculations as you asked.

And our next question is coming from the line of Judah Sokel of JP Morgan.

You've mentioned at the time that the transformation is going to be a gradual process, investments are going to be continuing in order to really position the company for long-term sustainable organic growth. And I think most people walked out of Investor Day feeling that those investments are going to continue and the messaging today as well was the investments are going to continue yet. You've already guided to 30% incremental margins and impressive level of margin expansion despite also lifting organic revenue growth. So maybe you could just give us a little color on the pacing of investment? The guidance suggests that maybe you're mostly finished with the large investments you need to make, and now it's just a matter of the revenue growth lifting over time as a result of these investments.

Yes. Judah, if you look at what we guided to is - we - there's two things that have a heavy sort of overhang on us, which is the dis-synergies, which is going to be some, you know, sizable. And it's not that we're saying that those are of something we expect permanently because we will work hard to normalize those as we go. Or you can imagine those are significant amount of value that came since the day we announced a spin. And by executing it on a flawless way, delivering it on a timely manner is a major commitment to our shareholders. It does cost money when you separate two organizations with stranded costs and continue. So if you took those and our substantial investment in our Salesforce system, which is going to, again, longer term generate some amazing stuff for the company and our people and our customers. The rest of it is, as we have continued to guide and mention, it's going to be a very disciplined approach of growth and productivity balancing. So we're focusing very heavily whether it'd be waste in terms of our bad debts that our productive behavior with our suppliers and vendors, cutting out waste in our system in terms of our processes and capabilities. So we are continuing to target generating incremental margins through those EBITDA, through those cost and waste improvements that we can plough back accordingly back into the business as investments, thereby continuing to deliver a responsible return from our revenue conversion.

And I would just add to that, there will be an inflection point in the year when the 30% margins hit. The first quarter will still have Copesan in the mix, in the inorganic numbers. Once we hit the second quarter and beyond with that switching over to organic plus the productivity initiatives that hit in the rest of the year, that's going to - expect from a pacing standpoint to see more of those benefits in the back half of the year, the third and fourth quarter.

And we'll also start lapping the dis-synergies in the fourth quarter, which will help that tremendously going forward as well.

Good point.

Our next question is coming from the line of Toni Kaplan of Morgan Stanley.

This is Jeff Goldstein on for Toni. How should we be thinking about Copesan's contributions and margins in 2019? I'm assuming it's still dilutive because you're still outsourcing the work, but you're now bringing more of that work in-house. And if so, what kind of year-over-year benefit would you be expecting then? Because I know you mentioned it being a single-digit EBITDA margin business initially. Any color there would be helpful.

Yes. I think there's two aspects to this. Number one is, let's look at the tangible benefits that Copesan is bringing because Copesan has help us tremendously on our Terminix Commercial road map and help us accelerate from the levels we were at. So we're leveraging a lot from their capabilities and learning cross - we've had some good cost synergies in leveraging their people. So - and the next step is towards improving the performance, underlying performance of all our branches. So once we - and one of the things is, we just want to make sure that the customers that we brought over, which are highly sophisticated national accounts focused on food service, which is one of the most complex, but also an excellent vector to be in because it's - it takes a much higher - it's a much higher demanding service level, and Copesan is one of the - probably the best in the industry in delivering that. So that has definitely helped. And as we continue to invest in the space, we had notified that there's going to be a three year plan on how we bring over this business systematically into our fold, but also continue on growing and leveraging some of our partnerships with these outsourced companies which are best-in-class. So we want to continue to build that relationship, but bringing this over the next three years. So you will see in the second half of the year us having some movement. And bear in mind, in the meanwhile, we've also acquired a couple of those partners. So now they're a 100% with us, for example, sites, Cooper Pest Control and Assured, which were pre - which are still continuing to provide service for Copesan. And now they are a 100% part of our ServiceMaster journey.

And our next question is coming from the line of George Tong of Goldman Sachs.

And also like to add my congratulations on the strong 5% organic growth this quarter. If you had to deconstruct this growth into pricing improvements in the retention rate and improvements in net new sales. What will the breakout look like? And looking ahead to 2019, which of these levers do you expect to potentially moderate given your growth guidance points to a step down in organic growth?

George, we missed that question. Could you repeat that? I'm sorry, we had some background noise.

Yes. So just trying to understand the deconstruction of the organic growth into pricing improvements in the retention rate and improvements in net new sales? And then, which of these levers you think might moderate looking ahead to 2019, given your current guidance?

Okay. So as far as our breaking it up between price and volume, first, let me cover that. Generally, we get around 2% in price every quarter in Terminix. And it came out roughly that amount about 1.5%-or-so. The rest of the organic growth came from volume about 3.5%. And we really benefited on the volume side from a couple of different things. We enhanced our marketing efforts both a little bit more money, but more importantly, a better focus in that marketing towards the markets that we had opportunity in. And that created the leads, which we were able to convert into strong new sales as we talked about. And then on top of that, concurrently, we made a lot of improvements in productivity in field services as far as start rates and completion rates. And so that enabled us to show pretty impressive volume growth, which is something we've been really pushing more since we began this transformation. So we really again like the mix in the Terminix organic growth this quarter.

And our next question is coming from the line of Gary Bisbee of Bank of America Merrill Lynch.

On the Terminix residential pest business, you've talked a lot about the start rates and completion rates driving growth being it incremental driver been both over the last two quarters. I guess, where are those versus like what you think is best-in-class? Is there room for that to continue to be a real driver? Or are we getting closer to that point where you need the retention really step up to drive more sustainable revenue growth in that business?

Gary, well, you need a combination of continued new sales growth and retention to have sustainable, and retention is really the name of the game. And what I'm encouraged about is how the NPS scores have been, every month that we've been in the last half of the year successfully been going up. So that bodes well for us entering into the new year. And as I mentioned earlier, in one of the questions that, we started pushing hard on particular regions as pilots on some of these initiatives. And we're already seeing early returns on retention in those regions as well. So we know for a fact it's not going to be a straight line, but on the overall, the trend is very encouraging on retention for me. And combined that with, obviously, you want to retain a customer, it all starts with ensuring that you're communicating well with the customer, you show up on time and you give them the right level of service that excites the customer to continue to retain their business with you. So that's the - that has what has helped us really drive improved focus on start rates, on completion rates. So it's really - I think, now is the time with 2019, if you ask me what is our number one, number two, and number three priority is retention. And we're geared up for that. We've unlocked, as I mentioned, we unlocked the potential of what Terminix is capable of. And like I said, it's not a straight line, it's not predictable, but we are at least starting in a much better way, we're starting '19 than we were last year at this time.

And our next question is coming from the line of Ian Zaffino of Oppenheimer.

Just going back to the tuck-ins and maybe a broader question just about M&A in general. What are you seeing towards multiples out there? Or are you willing just may be to paying higher multiples just given that the business has started to improve? How do we think about that? And maybe as you look at the landscape out there, what should we expect you to spend on M&A this year?

Yes. That's a good question, Ian. As far as the multiples that we're seeing out there, they continue to be higher than they were, let's say, 2 or 3 years ago. We do like both tuck-ins and stand-alone acquisitions for different reasons. The stand-alones, we more or less target for capabilities and enhancements to our businesses strategically that we want to add. The tuck-ins give us a good way of improving route density. And I would say that the - as far as the multiples are concerned, they're definitely higher than they were a few years ago. The tuck-ins are definitely - the market on tuck-ins is lower than our stand-alones acquisition. So we do what we get capabilities. And the key point is, we take a very, very disciplined approach in this. We look at not only the return, but we look at what other value points is the acquisition adding, be it route density in a tuck-in or adding talent or platform to a stand-alone acquisition like Copesan. That's the important point in that. We - let's say, we really focused on that is a really important part of our overall strategy.

Yes. Ian, as it is evident from not only what we did with Copesan in terms of bringing in incredible asset that helps us accelerate a path to commercial success, bringing in Cooper Pest Control, which is best-in-class in bed bug treatment or look at Assured, which is the first acquisition we did at the start of this year. Assured brings us some incredibly talented people like Andrew and people that work in his team like Brian. Just - but the real heart of that was, this is a company that is very strong with its urban market strategy. They are the leaders in a very complicated market like New York City. But to get that talent now allows us to focus on areas that we traditionally have been - haven't been very strong in which is the urban vertical markets. So leveraging their capabilities and not much is their knowledge but the know-how and how they've become number one and taking it to different cities not only in the United States, but over time into international markets where a lot of the wealth and lot of the demand comes from big cities. So that is a major asset. So it's beyond just buying revenue, it's actually buying incredible amount of synergistic capabilities for us for the future.

And our next question comes from the line of Tim Mulrooney of William Blair.

Yes. So we talked a lot about start rates and completion rates. But I would like to talk specifically about the work that Matt and his team have been doing around reducing the daily adjustable cancellations. So can you give us an update maybe lay out where you've been, where you'd like to go over the next two years and what are you doing to get there?

Well, I think the whole journey starts with when you get your first chance at somebody that you show up in a very reasonable or accelerated time or differentiated from your competition. So the journey that you take the new customers on right from off the bat is very important, that's why start rates are important. Completion rates are important because completion rate improvement means you made a commitment to the customer and you showed up every single time at that customer. So that's important too. So as we've laid - we had laid out at the Investor Day, we understand the different relevant factors that were affecting us. So this will definitely bode well. But apart from that we are focusing very heavily on the service delivery. So understanding the need of every customer, having the technician completely prepared when he or she enters the home. So Matt and his team have been driving a very disciplined approach, as I mentioned earlier, in terms of the boot camps or the - that we drove across every branch in the country. We're bringing 875 people from the field into different workshop settings and cascading that down the line. I mean Matt and his team are pretty much gone to every branch, the entire month of January and some parts of December as well to really drive this whole - continue to drive this discipline down. So that level of work, and we've already started seeing the translation of that in better service, better feedback from customers, higher NPS scores and even leveling off of some retention losses that we've had in some branches, and actually, an uptick in specific regions where we spend, we have spent more time than other branches in piloting these efforts. So it's a combination of, a, marketing efforts getting a higher quality of customers. So we're also focusing the quality of revenue we go after, the regions we're going after, the density of these markets, completion rates, start rates, and then supplementing that by an outstanding customer experience. Now imagine as we go through this, we are overlaying on that, a big investment in our systems and Salesforce, which becomes extremely important if you want to sustain the behavior where you provide not only consistency, but scalability of all these initiatives that we're working on. So that's what continues to raise our confidence. And as we see the full benefits of something like Salesforce and reimagining the journeys and how we continue to differentiate ourselves from the rest of the world in how we provide that service.

Our next question is coming from the line of Brian Butler of Stifel.

Just to start, can you give a little bit of additional color on retention trends in residential and commercial and kind of what is built into the '19 guidance, as well as how that translates kind of the organic growth expectations?

Yes. Brian, so if you look at start rates and completion rates, you can continue to improve those, but they go only at a certain level and over that it's a matter of continue to sustain them at the highest level possible. The real improvement that we've continued to drive is not just for marketing and bringing in new households and new customers to the fold, but how we spike up those retention rates. And we don't generally discuss exact retention rate numbers, we haven't for a while. But the real, if you look at our 2% to 3% guidance and a lot of that is based on our ability to drive those retention rates going up into the next year.

And our final question comes from the line of Seth Weber of RBC Capital Markets.

This is Emily McLaughlin on for Seth Weber this morning. Just looking beyond the monetization of Frontdoor and the debt pay down, how should we think about your appetite for larger M&A or international expansion relative to smaller tuck-ins or franchisee acquisition? And how would you balance that with potential share buybacks now with the program has been extended through 2022?

Well, if you look at our overall capital allocation strategy, our number one focus is going to be how we invest in our current business in improving growth potential and improving our capabilities. So that's the number one. The second thing, we're going to look at is continuing to be acquisitive, but in a very disciplined and very systematic way. And - so there's going to be a healthy balance between tuck-ins, as Tony mentioned, which help us understand improvement of route densities, getting some smart capabilities in certain regions, which we believe have strong growth potential, and then we look at stand-alones, which are bringing in not only incredible talent, some processes and process capabilities that we can learn and quickly integrate into our discipline, and then also bringing in some additional vectors, for example, urban growth strategies, which is fulfilling a gap in our, sort of, profile as a company. Looking at bed beg capabilities, we looked at - we bought in a company in Florida, which combines lawn care in a market, where most people like to buy a combined service of lawn care and pest. So these are very targeted strategic initiatives that help us build some strong capabilities that continue to not only help us in our base business, but also looking at some adjacent space growth as we drive forward. I don't know if Tony want to comment beyond that.

Yes. I think obviously with the share buy - I mean, sorry, the retained share sell as we talked about is planned before June 14 that helps us get to our targeted leverage ratio, which is 2.5 to 3x. And then, of course, we announced the extension of the share buyback program. So the key point though is to finalize the answer to the question is, we've a wonderful business as far as cash flow generation and we target 50% to 60% EBITDA conversion into free cash flow. That will give us flexibility to look at large deals if they makes sense for us. And we also have a very flexible debt structure. So we have the ability to look at those types of opportunities. We would only do something like that if it fits into our overall strategy.

And with that, we'll conclude the call. 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 in about one hour from now. We look forward to speaking with you next during our Q1 2019 earnings release tentatively scheduled for May 6. Thank you.