Ladies and gentlemen, welcome to ServiceMaster's Second Quarter 2020 Earnings Call. Today's call is being recorded and broadcast on the Internet. Beginning today's call is Jesse Jenkins, ServiceMaster's Vice President of Investor Relations and Treasurer. I will now turn it over to Mr. Jenkins, who will introduce the other speakers on the call.

Thank you Frank. Good morning and welcome. 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 2, all forward-looking statements are subject to the forward-looking statement legends contained in our public filings with the SEC. 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 August 6, 2020. 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 unaudited second quarter 2020 financial results. The press release and the related presentation can be found on the Investor Relations section of our website at servicemaster.com. We will reference certain non-GAAP financial measures throughout today's call and we have included definitions of these terms in our press release. We've also included reconciliations of these non-GAAP financial measures to the most comparable GAAP financial measures in our press release and in the appendix 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 Chairman and Interim CEO, Naren Gursahaney; and our Chief Financial Officer, Tony DiLucente. Slide 3 of the presentation posted on the Investor Relations section of our website shows the agenda we will cover today. Naren will begin with highlights from the quarter and an update on our strategic priorities and then Tony will discuss the results and outlook followed by a Q&A. I will now turn it over to Naren Gursahaney. Naren?

Thanks Jesse, and thank you all for joining our call today. I'd like to begin by thanking all of our people and especially our frontline workers for their dedication and commitment to our customers during this challenging time. Before I comment on our second quarter performance, I want to share a few thoughts from the other press release we issued this morning. I'm very pleased that we've concluded our CEO search process and equally excited to have Brett Ponton join the ServiceMaster team as our new CEO. With the help of our search partner, the Board was able to conduct a very robust and thorough review of internal and external candidates for this role. Brett was at the top of everyone's list, as he has tremendous experience in leading large distributed organizations, a strong track record of driving operational excellence to fuel organic growth and margin improvement and embodies the values of a servant leader who understands the importance of enabling and empowering our frontline employees, so they can deliver an outstanding customer experience. Brett is an experienced CEO who has led both private and public companies. His deep understanding of service businesses and global operating experience position him well to help us further accelerate progress against our strategic priorities and enhance shareholder value. I look forward to Brett joining us over the next couple of months and supporting a smooth transition to ensure we continue to build on our strong business momentum. Turning to slide 4. I'd like to highlight our strong performance during the second quarter, which underscores the essential nature of the services we provide and the resilience that provides for our business. Total revenue grew by $40 million or 8%, including 5% at Terminix. Organically strong termite and home services completions improved daily cancellation trends in…

Thanks, Naren. Today I'll cover Q2 performance including the strong free cash flow as well as our outlook for the third quarter. Turning to slide 6, let's start with the continuing operations financial summary. I'm going to talk about the Terminix section in more detail later. So let me first cover European Pest Control and other operations. Our European Pest Control operations contributed $17 million of revenue and $2 million of EBITDA in the period highlighted by results for Nomor in Sweden and Norway which delivered mid-teens margins. Our Nomar business was negatively impacted by government restrictions on businesses and higher sick leave costs due to COVID. With that said, we see continued strong growth and solid margins in this business post COVID-19. Terminix U.K. saw the most significant revenue impact from government restrictions related to COVID-19 which in combination with expected costs for integration and post-acquisition system carve-outs led to depressed margins. Despite the revenue contraction in the European business EBITDA margins held at around 10% through cost actions taken in response to the pandemic. As we discussed pre-pandemic, we were always planning to ramp EBITDA margins in the European Pest business as we made progress on carving out systems and processes in the U.K. and improved the density by businesses by winning new customers. We remain on-track with that plan, despite the severe impact of the pandemic in the U.K. market. Continuing operations adjusted EBITDA was also impacted by our move of ServiceMaster brands to discontinued operations. There was a $3 million of costs that were previously allocated to the segment that accounting standards requires us to classify within continuing operations. These costs are general allocations for back-office support functions like executive management, accounting and finance, human resources and information technology infrastructure to name a few. Ultimately some…

Thanks, Tony. Before I pass it back to Jesse for the Q&A, I wanted to provide a quick update on the ServiceMaster Brands, strategic review. With credit and equity markets recovering to pre-COVID-19 levels, we've ramped up our activity level associated with our strategic alternative review for our ServiceMaster Brands business. There continues to be very strong interest in the business. And as we saw in our second quarter results and July trends, we are seeing just how resilient this business is. We continue to be committed to pursuing the option that creates the greatest long-term value for our shareholder and positions the business, for success in the future. ServiceMaster remains in a strong position as we move into an uncertain, second half of 2020. By continuing to execute on our strategic priorities, we look forward to growing our business and expanding our year-over-year profit margins, despite this uncertainty. I'm proud of diligence and hard work of our teams, especially our customer-facing employees. The dedication of our technicians to provide excellent service and improve our service levels during this time is a testament to their commitment to our customers and the strong leadership of our management team. I'm confident in our ability to manage through this environment and come out stronger in the future. And with that, I'll hand it over to Jesse, to lead us through the Q&A.

Thanks, Naren. With the queue being long this morning, please limit yourself to a single question, so that we can get to everyone in the allotted time. Frank, let's open up the line for questions.

Thank you. [Operator Instructions] Our first question comes from Toni Kaplan with Morgan Stanley. Please proceed.

Thank you. I was hoping you could expand a little bit on the termite damage claims. You mentioned it was running a little bit higher than expected. And I think there was a fairly large arbitration in Alabama last week. And so, I was wondering if there's anything in the latest decisions that change how you're thinking about the longer-term termite damage claims estimate. Thank you.

Hi, Toni, it's Naren. I'll go ahead and take that and the others can kind of chime in as appropriate. Clearly, we did have a ruling last week that was high. We plan to appeal that ruling. We think that there's some errors in judgment there. But in the end, we feel very good about the trends that we're seeing overall and they're consistent with our expectations. We're seeing nice progress on our mitigation program. We're seeing nice progress on the non-litigated claims and feel very good about that. We always knew that there was going to be volatility on the litigated claims, especially with the new way we record those. We record them at the time of filing. So that drives a little bit of volatility there, because it's something that's out of control. Just based on what we're seeing on a year-to-date basis, nothing has changed versus our original expectation that we talked about back in February, as far as the total ring-fence exposure that we've discussed.

Our next question comes from Tim Mulrooney with William Blair. Please proceed.

Good morning. I wonder if you could walk us through how the residential business trended through the quarter. Obviously, it looks like April was a low point and June was the high point. But any numbers you could provide would be very helpful. And maybe a comment on how that trend carried into July.

Yes. Hi, Tim, it's Tony. Yes. I hope you're doing well. Yes. I mean, I think, the big thing that we saw early on when COVID-19 hit was an uptick in temporary cancellations of service pushing it back. So we peaked in that particular metric in April. Since April, every month, we've been seeing those temporary cancels declining and getting better. Through this whole period, our service agreement cancels have actually improved. And so, our retention is improving in residential. So we are progressively getting better in residential every month. Again, we did make the decision to scale back on summer sales. So that had some impact as well too. In the month of July, as we mentioned in the script, we are seeing continuing improvement. So the trend looks good heading into the third quarter.

Our next question comes from Michael Hoffman with Stifel. Please proceed.

So, I guess, the one I would ask would be about the normal seasonal pattern for the business. And if I take your third quarter, do I assume a normal seasonal into 4Q? Or is there enough momentum that the momentum will overcome seasonality? And if that's the case, then the message is, Street estimates have to come up?

Yes, Michael, this is Tony. I hope you're doing well. On the seasonality patterns we're seeing, it is going to be the same as we normally see. I mean, you have to factor in, obviously, the cost actions and the pricing and the other improvements that we've made. But you will see a similar seasonal pattern in the third quarter that we've seen in prior years.

Our next question comes from Judah Sokel with JPMorgan. Please proceed.

Hi. Good morning. I'm going to take another stab at the question that was asked earlier about trends. Maybe instead of getting us month-by-month, perhaps you can just quantify the impact in the quarter, just from COVID, or give us at least an approximate sense, so that we can see that underlying run rate and really appreciate how the fundamental business is doing and then going forward. Thanks.

Yes. Thanks, Judah. I hope you're doing well. We saw roughly a $6 million impact from two, I think, big events that the COVID really influenced. Number one would be the -- our actions on summer sales and scaling back, that was about $3 million. And then we saw another $3 million or so related to bed bug revenue, in that, the people are traveling less and so the demand is lower. And we have a pretty big bed bug portfolio. So that had a bigger impact than maybe you would expect. We also talked about the work order postponements and so there's some impact, perhaps, beyond that $6 million. So you could get into a more normalized view of our Residential Pest Control business for the quarter, if you adjust for those items.

Our next question comes from Seth Weber with RBC Capital Markets. Please proceed.

Hi. This is Emily McLaughlin on for Seth. Just going back to summer sales program. Did that ever get restarted? Or was it suspended for the whole season? And have you identified any other channels to sort of backfill what's been lost there?

So this is Naren, Emily. Yes, so we did phased relaunch of that summer sales program really on a geography-by-geography basis based on where restrictions were opening up to pursue that type of business. Clearly, we've been monitoring customer response, particularly around social media to make sure that there's no negative reaction there. So it has ramped up, but it's still nowhere near what we had last year and frankly what we had in our plan. So we're continuing to -- on a measured approach to kind of launch that out. As far as other channels, we're always looking at and evaluating new channels to market. Our digital marketing continues to do well. As you may have saw we announced last week, the addition of a new Chief Marketing Officer Alex Ho for our Residential business. We're really looking forward to the potential impact that Alex and the marketing team can have on the business. So this is -- we're exploring all avenues and looking how we continue to grow this business.

Our next question comes from Andrew Wittmann with Baird. Please proceed.

Great. Thank you and good morning. My question was I guess on slide 8 a little bit more here. The progression of EBITDA growth. I mean you got leverage on almost every bucket you show here outside of the expected decline in Termites which is obviously very good and very refreshing. Tony, I just thought -- so much of what you did in the quarter, you talked about the $18 million that you're going to realize this year the $30 million run rate. We knew about some of these things. But some of this is also driven by furloughs and other kind of what I'd call more temporary staffing adjustments. So could you just talk a little bit about the reinstitution of costs that may or may not occur along with improving revenue trends in your business? Which buckets in other words of these might not give us much benefit for the second half of the year as they did here in the quarter?

Yeah. Thanks, Andy. And I hope you're doing did well. We do have a continuous productivity program. We're looking for -- we're continuously looking for new initiatives. So I just wanted to make that point. But if we go down these categories one by one, obviously on the production labor side we've done a lot of great actions there on employee retention and better labor management. Some of that is due to the fact that we haven't had as much training expense this year. And so eventually there'll be some moderation in that -- well if you want to call it productivity as we hire more people as we grow. But I am pleased with what we've done with respect to progress and employee retention and our better labor management processes. As far as the vehicle and fuel, most of that really is related to better vehicle management. We have a new fleet provider that's helping us and we've had some good progress there. But there is a full part of that that's more based on fuel prices. We hedge most of our fuel, but some of it is unhedged. So as fuel prices change, there'll be some impact there. We talked about chemicals and materials and we said that we're going to see about $0.5 million a quarter in higher PP&E costs, but we had some offsets this quarter more because of mix because we did a greater percentage of termite. So there might be some moderation there. And then as far as the corporate general administrative expenses that's what we think is sustainable into next year based on all the cost actions we took early on in the process. So again, there'll be some moderation in some of these items. But I like what we've done. Another area that we might see some scale back is travel. It's actually will be beyond the pandemic. And although we'll never go back to the travel rates we were doing pre-pandemic, we will be traveling more eventually at some point in time.

Our next question comes from Ian Zaffino with Oppenheimer. Please proceed.

Hi. Great. Thank you very much. Tony, you talked about the pipeline for M&A. Can you give us a little bit more color there as far as the trend in multiples or maybe the multiples size of the pipeline how it compares to previous periods? And also maybe the size of deals. Any other color you could give us that would be great? Thanks.

Yes. So first off, the activity level was very light in the second quarter. There weren't very many larger deals going on and very few small deals in the market for obvious reasons. So it's kind of hard to say for sure. But I do think things will eventually heat back up in the third quarter and beyond. And we're -- and I can say that we're definitely going to be a player in that market and we're interested in tuck-ins and even other types of capability adding acquisitions as well. Naren, anything you want to add.

Yeah. I think it's just hard to say, if there's going to be any meaningful change in margins at this data.

Yeah.

I think there haven't been enough transactions happening lately. So it's something we'll watch closely. Clearly the equity market is kind of bouncing back to the level they have would suggest that you might see the same rates that we saw pre-pandemic, but we're going to have to watch closely and see. We'll continue to be a disciplined buyer in the market.

Our next question comes from Mario Cortellacci with Jefferies. Please proceed.

Hi, thanks for the time. Just wanted to congratulate Brett on the CEO job. And then just a few questions, though I guess on some of this background. And I guess just what, kind of, experience does he have with the servant leadership culture? And obviously you're going through a transformation over time. I guess, just what's his experience with past transformations as well? And what, kind of, success has he had with either -- with helping service companies improve service levels and ramp on organic growth?

Yes. Great question, Mario. I mean, clearly his servant leadership mindset and behaviors it was one of the attractions and really we have why -- a big part of why we decided to move forward with Brett and appoint him into the CEO role. I'd look to his last job or his current job in Monro Muffler. They've got a, I believe 1,250 store locations. So he's very experienced in dealing with distributed organizations. In fact normally I talk to people about the complexity we have with 350. Needless to say, I didn't have to have that discussion with Brett. He spends a lot of time out in the field, visiting the stores, building connections with those frontline people. He understands the importance of supporting them and empowering them, because that is similar to our business model those are the people who are creating and delivering that customer experience. So I think he's got tremendous experience at Monro. Prior to that at Heartland, was at Jiffy Lube similar kind of model and AAMCO. So he is very familiar with very distributed organizations and have great experience there. And I would say also both driving growth and margin improvement. He's got an operational excellence mindset. So I think he really brings a lot to the table does not have pest control experience. And the good news for our business is we have a lot of people especially when you get out in the field who have very long tenured pest experience and Brett is the kind of guy who will be out there in the field learning from those people, learning the business from the field back. So I feel very good about the hire and the impact that Brett will have on the business going forward.

Next question comes from George Tong with Goldman Sachs. Please proceed.

Hi, thanks. Good morning.

Good morning, George.

Termite & Home Services organic growth -- morning. So, Termite & Home Services organic growth accelerated to 7% in the quarter and a big part of that growth acceleration was driven by new completions. Can you elaborate on what factors drove the robust improvement in the completions and how you expect this to trend over the remainder of the year?

Yeah. Thanks George. And hope you're doing well. Yeah, we're very pleased with the progress we made in Termite this quarter. And as you recall that's one of the four priorities of the business. So that's a key focus for us. We had a very successful launch of our new termite tiered monthly pay product, and we think that was a big driver of our completions growth. And on top of that, we think it was somewhat of a heavy swarm season. So we think those two factors in combination were big drivers. And a third driver is probably the fact that a lot of at home these days, and our home services side of the termite product line actually had some growth as well too. So it was very nice to see that kind of growth in the completion side. That’s really drove the overall 7% organic growth for termite and that bodes well for 2021 and beyond. So we were pleased to see that.

Our next question comes from Gary Bisbee with Bank of America. Please proceed.

This is Jay Hanna on for Gary today. So a big trend we've seen in the past several quarters has just been an uptick in spending to grow -- spur better organic growth in areas like sales and marketing and labor, which we obviously didn't see as much of in Q2. So I was hoping could you comment on how we should, sort of, expert to see the cadence of that spending going forward? Or are we sort of over the hump there?

Yeah. Thanks Jay. Hope you're doing well. This is Tony. Yeah we – we’re not really -- the change in the margins have really driven by cost actions around our direct cost productivity and really focusing in on our cost structure and our indirect costs, our G&A. We didn't scale back in our investments in growth per se. So really look at it that way, we're still committed to investing in marketing and we're still doing the sales force investment, so all of that effort still continues. We're just doing a better job, I think of driving direct cost productivity. And as we talked about we've addressed the structure and done some good things there as well.

Yeah. The only other thing I would add is we will see some favorability from lower summer sales, because the commissions associated with summer sales have been spread of two years. But as I talked about earlier, we are looking at other channels. So what we can't do there, we'll look to reinvest in other channels that drive equal or better productivity and efficiency for us.

Yeah. And the summer sales decision was more about health and safety of our employees not our commitment to growth.

We have taken all the questions for today. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day everyone.