Terminix Global Holdings Inc (TMX) 2009 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the The ServiceMaster Company's second quarter 2009 earnings conference call. Today's call is being recorded and broadcast on the Internet. Beginning today's call is Marty Ketelaar, ServiceMaster's Vice President of Investor Relations and Assistant Treasurer. Mr. Ketelaar will introduce the other speakers on the call. (Operator Instructions). At this time, we'll begin today's call. Please go ahead, Mr. Ketelaar.

Good morning, and welcome to ServiceMaster's second quarter 2009 earnings conference call. Joining me for today's call is ServiceMaster's Chief Executive Officer, Pat Spainhour; Chief Financial Officer, Steve Martin; Treasurer, Mark Peterson; and Controller, David Martin. We'll make some prepared remarks and then we'll be happy to address your questions during the question-and-answer session. Before we begin this morning, 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. All forward-looking statements are subject to the forward-looking statement legends contained in our recently filed Form 10Q and Form 8K. These forward-looking statements are not guarantees of performance that are subject to risk factors contained in our public filings that may cause actual results to vary materially from those contemplated in the forward-looking statements.

ServiceMaster recently filed its Form 10Q as well as a 8K containing additional financial disclosures that we believe will enhance your understanding of our financial and operating results. Due to the inclusion of purchase accounting adjustments, merger and restructuring expenses and non-cash option and restricted stock expense among others, our financial results may be more complex than in periods that ended prior to completion of our merger transaction on July 24, 2007. Therefore, we may reference throughout today's call terms such as adjusted EBITDA,, comparable operating performance and operating performance. We have included in our 10Q and Form 8K definitions of these terms as well as relevant reconciliations to the most appropriate GAAP terms in order to better assist you in understanding our financial performance. Our 10Q and 8K may be accessed by going to the investor relations page on our website which is www.ServiceMaster.com.

I'd also like to remind everyone that this call is being recorded. During the question-and-answer session, we encourage you to ask any questions that you may have. Due to our disclosure policy and legal requirements, we are limited in our ability to hold follow-up conversations with our public side investors and, as such, we request that you please ask any questions during this public forum. Last, the purpose of this call is to discuss second quarter 2009 financial and operating results. While we understand and appreciate your interest in business and industry trends that may have arisen in the current quarter, we will not address those items on the call and will discuss subsequent quarterly results at the appropriate time throughout the year. I'll now turn the call over to Pat Spainhour for opening comments. Pat.

Good morning, everyone. Thanks for joining us today. As you've seen in our second quarter, we began to see the effects of the economy in our performance as reluctant consumer spending results in softer sales and renewals. We expected these challenges and our leadership team is aggressively managing every aspect of our operations to help ensure we're positioned to succeed not just for 2009 but for the long term. In a few minutes Steve Martin will provide you with a more detailed view of our second quarter financial performance and the marketplace conditions that we're experiencing but, first, let me give you a brief summary of our results.

For the three months and six months ended June 30 the Company reported operating revenues of $957 million and $1.6 million(Sic- See 10-Q) respectively. That's down about 4% from the second quarter of 2008 and 1.6% as compared to the six-month period ended June 30, 2008, but not totally unexpected considering the current economy and its impact on consumer demand. Operating performance in the second quarter fell $3.2 million due in part to softer sales and increased cancellations. A large part of the dip was the result of a strategic decision to offer aggressive discounting, particularly in TruGreen to maintain our customer account base as well as pricing pressure at most of businesses. Although discounting has had a negative impact on our short-term profits, we believe it has been the right thing to do for long-term customer retention so that we'll have a larger base to work from when the economy turns around and consumer spending rebounds. Steve will discuss more information about TruGreen's second quarter performance in a few minutes, but I want to tell but a significant reorganization at TruGreen that we recently announced internally.

After examining the business closely over the past few months, we decided to realign our resources it help make TruGreen a stronger, more competitive organization by focusing on four key areas, creating a standardized consistent customer experience, building a lean focused field organization with manageable spends of control, centralizing our sales organization which allows field leadership to focus on customer service and streamlining business reporting to emphasize a standard set of key performance indicators. This realignment will help create a more focused field organization with more manageable spends and control and the bandwidth to drive successful implementation of key company initiatives including an improved, more consistent customer experience from region to region and from branch to branch.

To accomplish this under our new TruGreen president, Steve Donnelly, we made the following geographic changes, expanded the number of divisions from three to five, increased the number of regions from 16 to 26 and established five national sales directors at the corporate level to lead the sales effort across the organization, consolidation and rationalization, technical service and regional administrative functions and exited certain regional offices. Instead of managing as many as 13 branches, our regional managers will now manage an average of eight. We're also moving our regional leaders out of isolated regional offices and into the field so that they can have a more direct day-to-day contact with our branch management. We believe this realignment will result in a modest cost reduction that will be accretive to operating performance in 2009, but we're not doing this for the cost savings reasons. By centralizing our sales efforts, standardizing field operations and allowing branches to focus exclusively on delivering service to customers, we'll be able to drive the kind of performance that results in profitable, sustainable future growth in TruGreen.

Let me also address another topic related to cost savings, just prior to the acquisition by CDNR and our equity sponsors we announced several cost savings initiatives under the heading of Fast Forward. These initiatives were typical of those you would normally see following such an acquisition. As described in our SEC filings, our goal in connection with Fast Forward was to achieve at least $60 million in annual annualized pretax cost savings by the end of 2009. I'm pleased to report this goal is being achieved ahead of schedule. Going forward, we will no longer view streamlining our operations and gaining greater operating efficiencies as specific initiatives but will instead consider them as a continuous improvement process that is part of our daily life. While we will not report specific dollar amounts in savings from these activities, the results will continue to be evident in our financial statements.

While the economy is challenging all of our businesses, we're not sitting back and waiting for the turn around nor are we taking our focus off growth. One growth initiative that we're excited about is is the expansion of TruGreen's neighborhood selling program. We increased the number of new accounts in the first half of the year by knocking on more doors in neighborhoods we already served. Similar efforts are underway in Merry Maids as we continue to look for ways to use our field staff to build and strengthen relationships. Given all of our efforts to retain customers in a difficult economy, our accounts in lawn care, termite, pest control and home service business remained relatively flat in the second quarter notwithstanding this economic environment.

On the expense front, we continue to comprehensively evaluate our functional business processes for re-engineering potentially outsourcing opportunities -- and potentially outsourcing opportunities. We have nearly completed our IT outsourcing transition to IBM and are turning our attention to finance, strategic sourcing and human resources. There are opportunities to further accelerate our transformation by standardizing practices in areas such as HR administration and accounting.

At the heart of our Company's transformation, now as always, is a dedication of our leadership team and our associates. In addition to their commitment to customers, they are heavily involved in many important efforts that are designed to enhance the environment, the community and the workplace. You can read about their commitment in ServiceMaster's first corporate social responsibility report which we published in July and is available online.

Although the economy continues to challenge us, we're bullish about the future. Our one-company strategy is helping us find new ways of working and creating synergies across the company that will unlock the true potential of our brands without compromising one bit on each branch promise to our customers; 2009 is shaping up to be very challenging but we're taking long-term view and will continue to make smart decisions to maximize results in the short-term as well as succeed in the future. I'll now turn the call over to Steve Martin who will discuss our second quarter financial and operational results in greater detail.

Thanks, Pat. The second quarter was a difficult one for several of our businesses as the tough economy began to negatively impact revenue and operating performance. Due to the seasonality of our businesses, this isn't the first quarter we've seen a meaningful adverse impact on revenues and operating performance since the economy began deteriorating. Let me quickly recap our consolidated results and then I'll review the segments.

Excluding purchase accounting adjustments, revenues in the second quarter 2009 declined $52 million or slightly more than 5% when compared to the second quarter of 2008. As Pat mentioned earlier, this is primarily due to price discounting and pricing pressures at most of our businesses as a result of the weak economy. Additionally, we continue to see customers back off on extra services they purchase to reduce their overall cost. Cash flow provided by operating activities of continuing operations was $71.2 million in the first six months of 2009 compared to $13.9 million a year ago. The increase in cash flows was primarily attributable to improved profitability at Terminix, American Home Shield and TruGreen LandCare.

Cost of goods sold in the second quarter was $553 million or 57.8% of revenues compared to $590 million or 59.1% of revenues a year ago. Improved labor efficiency and favorable damage claim at Terminix and reduced overall vehicle and fuel costs were the primary drivers of the higher gross margin figure. SG&A as a percentage of revenues for the second quarter of 2009, excluding purchase accounting impacts, was essentially flat with the second quarter of 2008 with results coming in at 25.1% and 24.8% respectively. Our second quarter operating performance, as set forth in the 8K, declined nearly 2% to $187 million compared to $190 million a year ago.

All business segments, except TruGreen LawnCare, showed improvements in operating performance in the second quarter in the face of a tough economy. Stable customer retention, lower vehicle fuel and fertilizer costs and ongoing cost savings initiatives helped to offset the negative impact of slower sales and discounting. CapEx was $38.9 million through June 30 and included $22 million in new vehicle purchases. We expect CapEx needs will be between $30 million and $40 million for the remainder of the year.

Last, liquidity remains very strong. Cash, short-term and long-term securities totaled $495 million at June 30 of which $286 million is associated with regulatory and other requirements. In addition, we also had $330 million available under our revolver at June 30. In July, we repaid $125 million borrowed under the revolver.

Moving now to the second quarter segment results. At TruGreen LawnCare revenues declined nearly 8% to $348 million primarily as a result of soft customer demand for new sales as well as the impact of discounting offered for full program customers. As a result of our customer retention initiatives, including price discounting, full program accounts declined only 3% through June 30. Retention rates remained generally flat coming in at 68.3%. Operating performance was $61.6 million compared to $75.4 million a year ago. The lower results are a direct reflection of discounting and the higher cost of neighborhood marketing sales discussed earlier partly offset by lower fuel, fertilizer and the favorable impact of acquiring assets in connection with exiting a fleet leasing program in 2008.

Turning to the TruGreen LandCare segment. Operating results -- excuse me, operating revenues decreased 17% to $69.4 million while operating performance more than doubled to $1.4 million compared to $0.6 million a year ago. The lower revenue figure included a 10.2% decline in base contract maintenance and a 26.8% decline in enhancement revenue, reflecting soft customer demand, particularly for the additional services as discussed earlier. At Terminix, second quarter revenues, excluding purchase accounting adjustments, declined 1.7% to $307 million compared to $312 million a year ago. These results reflect growth of 2% in pest control revenues offset by a 4.8% decline in termite renewal revenues and a 6.7 % decline in termite completion revenue. The growth in pest revenues was related to higher customer accounts associated with tuck-in acquisitions partially offset by a 60 basis point reduction in retention rates. Termite renewal revenue was negatively impacted by higher cancellations resulting in a 190 basis point decline in customer retention. Termite completion revenue was lower due to a lower average pricing on new treatments and fewer units sold.

Operating performance grew nearly 6% to $77.9 million, reflecting favorable damage claim trends, effective production and sales labor staffing, reduced overhead spending and fuel costs, and the favorable impact of acquiring assets in connection with exiting a fleet lease program in 2008. At American Home Shield, excluding purchase accounting adjustments, revenues grew approximately 1% compared to 2008. The annual value of home service contracts written increased 2.2% consisting of a 4.5% increase in average price per contract offset by a 2.2% decline in the total new contract sales and renewal units. The decline in sales is primarily due to a 14.4% decline in the real estate channel and approximately 1% decline in consumer sales partially offset by a 2.4% growth in renewals.

Customer retention rates increased 70 basis points to 62.6% due to retention improvements in our consumer channel. This demonstrates that American Home Shield customers value the budget protection that home service contracts provide during these tough economic times. Operating performance for the quarter was $39 million compared to $36.9 million a year ago. The increase was primarily due to a change in the timing of advertising spending and a reduced provision for certain legal matters.

At the other operations segment, which includes the results of ServiceMaster clean, Merry Maids and the Company's headquarters function, revenues decreased 8% to $52.3 million compared to $56.8 million a year ago, primarily reflecting decreased product sales at ServiceMaster Clean and Merry Maid. Operating performance for the segment totaled $6.7 million compared to $3.5 million last year. The improvement in operating performance primarily reflects a lower provision for incentive compensation compared to the second quarter of 2008. Despite the continuing challenges we're seeing in the economy and the related impact on our customers, we continue to make improvements in our cost structure and the efficiency of our operations, positioning us for longer term growth when the economy begins to recover. The management team and associates at ServiceMaster remain focused on these initiatives that will create and deliver long-term value. I'll look forward to providing you an update later this fall when we report our third quarter results. That concludes my prepared remarks and at this time, we'd be happy to take your questions.

Thank you. (Operator instructions). Our first question comes from the line of Yilma Abebe with JPMorgan. Please go ahead.

Thank you. Good morning. Can you give us a general sense for the industry, for the business environment in lawn care and then the current quarter? That is, is the business environment getting tougher or about the same or easier if you compare 3Q so far versus 2Q?

Well, it is a highly seasonal business in lawn care. As you know, first quarter we're just getting out there, no real production going on and selling begins heavily. Second quarter is the beginning of the sales season and then we do as much in the third quarter and fourth quarter, actually more in the third quarter and fourth quarter than we do in the first six months. So it's hard from the second quarter to look at it and say is it getting better or what, as the build process begins in the second quarter. Certainly the consumer is not as prolific in terms of wanting to buy discretionary services because the economy and we felt that impact beginning in the first quarter and in the second quarter. But we'll report on our next call as to how that carried into the third quarter and what we see from that perspective.

Yes. So are the seasonal patterns carrying over or is that being overshadowed by, I guess, the weak economic environment?

Well, the trends, the historical trends that we have are consistent. The curve is the same, it is just the impact of the economy that has deflated the curve somewhat from what we've seen in the second quarter.

Thanks. That's it for me.

Thank you. Our next question comes from line of Todd Harkrider with Goldman Sachs. Please go ahead.

Yes. Thanks for taking my questions. Hopefully trying to rephrase that last question. I know you don't like giving forward guidance but second quarter on an overall basis came in better than what most analysts were expecting. So I was hoping to see if you could give us an update on the third quarter tracking better, worse or maybe what you thought several months ago, thanks?

I'm sorry, but as we've said in so many different ways this call is about the second quarter and we'll speak to the activities in the third quarter on our next call.

Okay. And can you talk about some of the opportunities that you're seeing on the at acquisition front? Do you still expect only small tuck-in acquisitions and if the multiples came down any in the past year?

We are certainly pushing as hard as we can on tuck-in acquisitions, trying to get as many bigger ones as we can but you can only take what the market gives. The other piece of that is we've gotten much more refined in our process and how we evaluate these tuck-ins to ensure that when we bring them in, that we can fully realize the potential that we wanted to buy them for in the first place. So we're a little more selective in trying to get as many big ones as we can, but we're still aggressively in the tuck-in marketplace.

Okay. And then in regards to the Fast Forward and the restructuring program, should we see the full benefit in the third quarter now? And when does the TruGreen realignment start kicking in and will there be any one-time costs associated with it?

As far as Fast Forward $60 million, as I've said in my remarks, we're going to deliver what we said in the SEC filings ahead of schedule which was to be in by 2009. As far as the reorg, it is a work in process. We just announced and so the results of that we did say it should be somewhat accretive. It is a nominal number relative to the value add that we get by the reorganization but you'll see that, again, as we report third quarter and fourth quarter results.

Okay. Appreciate it. And good luck with the rest of 2009.

Thank you.

Thank you. Our next question comes from the line of [Anton Kowalski] with Canyon Capital. Please go ahead.

Hey, guys. I understand that the $60 million is ahead of schedule but I guess my question is will we see the $60 million in savings really in 2009 or were there costs associated with getting to that $60 million that we won't see the effect until 2010?

Well, I think, as we reported the first quarter and second quarter results, given the economy and the run rate in the sales, hopefully as you go to your models you say part of that recovery that we've had has got to be coming from these Fast Forward type savings.

Yes -- -- that we're seeing already or is it this year will we see all of that $60 million or only some of it because of costs related?

Most of the costs related are hitting in the restructuring line, so most of the benefit is running through the operating performance results that reflect out of the 8K.

Got it, great, thanks a lot.

Thank you. Our next question is from the line of Michael Kass with Blue Mountain Capital. Please go ahead.

Oh, hi. Thanks for taking my call. I was hoping to get a little bit more I guess visibility or understanding on the economics of American Home Shield business. I realize its not the largest business for you guys but it seems that you've been able to increase pricing pretty well and also at least on the rolling 12-month basis that your reporting warranty contracts seem to be relatively stable given where at least traditionally the contracts have been sold. I was wondering if you could just provide any more insight into what the overall sales environment or the home sales environment looks like, how that factors or not factors into your warranty contract, I guess some level of how the warranty contracts look like on a last quarter versus prior-year basis and also what's really going on with respect to the pricing improvement that we see?

Well, let me say this that we have been investing more in channels other than the real estate channel and so historically American Home Shield was very dependent on the real estate channel at driving new sales, and we shifted our investments into direct consumer and other channels which have been very, very positive and that's helped offset much of the decline that we saw as the real estate market declined. As you know, that decline started a good 12 to 24 months ago so our comparables at this point in that channel are -- it's -- has -- is not as bad as it once -- as it started out, but we've seen investments in the other channels. And the good thing about that is that on the economics and those other channels, those customers stay with us longer so the overall economics of customers coming through the other channels is better than the economics of the customers coming through the real estate channel. Does that help?

That does help. If you -- I mean, if I recall historically you are getting -- regarding new contracts you were getting about roughly two-thirds, one-third real estate to DCC. What is that now in terms of mix of mix?

I -- let me just say that it -- the mix has shifted but we haven't disclosed what the mix is, and at this point don't have plans to disclose that level of detail.

Okay. And also just with regard to that, so you mentioned -- so if -- when I look at the pricing improvement, let's say year-over-year, I guess the 4 .5%, so that's a function of just better pricing in DCC channel versus real estate or is some of that -- or is it due to seasoning of the policies or what is it due to?

Well, I think it's a combination of factors. One thing that we did roll out a modification in our American Home Shield service plan, with a flex plan contract that is priced a little bit higher. It does cover more. That has helped lift the overall pricing as well. And that is -- that flex plan has been in our real estate channel, which is still the dominant one, so that has helped lift it as well. So that's a part of it.

Okay. There's no -- I'm just think thinking, even if you look at it over the last few quarters over the last two-year period that you're talking about, it just means that you guys have been able to hold up very, very well in terms of aggregate contracts and I'm just wondering given the decline in the real estate channel that is obvious to everybody, have you been taking share from other people? How has that happened?

Well, we had the [realogy] agreement, which is coming, I guess, to the end of the second year of that contract and that is helping us to drive or stabilize the real estate channel while the overall real estate market has decline, so I think that that has helped -- in American Home Shield had, as you see in the numbers, our retention rate has been improving despite the economic environment. So I think it's a combination of the initiatives on the retention side as well as our realogy agreement and just held up pretty well given the overall climate.

Okay. Thank you.

You're welcome.

Thank you. Our next question comes from the line of Oliver Corlett with RW Pressprich and Company. Please go ahead.

Good morning. Continuing on the AHS discussion for a minute, I think in Q1 the revenues were sort of abnormally high because they were matched to higher than expected claims and also you'd said that advertising expenses in Q1 were sort of deferred, which you also said for Q2. So the question is has -- on the claims front, has that sort of balanced out now towards end of Q2 to what you would have expected so that your revenues are more or less matched in a traditional way at this point of the year and also the same as the advertising expenses?

Well, on the -- the claims front, I would say year-over-year that it's running -- it is kind of balanced out and its running as a pretty traditional curve, I would say the mark in advertising we have been -- I'd say just a little more careful in how much we've been spending early on in the year. And that may -- you may see some increase in that in the back half, but we're really just being careful about how much we spend on advertising in this overall climate.

Okay. And is advertising typically seasonal in this business?

It's -- well, we -- I'd say a little bit but nothing like the other big businesses of lawn care and Terminix.

Okay. And secondly on the other operations and headquarters segment, I wonder if you could just give me a little bit more clarity breaking out the revenues there. I know that franchise fees typically seem to be about half. What goes into the other half?

Well, the -- those are not big enough for segments. Way really don't provide the detail of that information. The -- but that -- that overall other operating segment is substantially all revenues from our franchisees, whether it be franchise fees or product sales.

Oh, okay. So the fees that you sort of give some indication of are only part of the franchise revenues.

Right.

And the --

That's right.

Do those franchise revenues, do they include TruGreen and Terminix franchises or not?

Not in the other operations segment, they do not. Those franchise fees roll through the respective segments of TruGreen and Terminix.

Okay. And finally the total profits from franchise operations that you sort of give a percentage number in your significant accounting policies section, is that operating profit that we're talking about there?

Yes, it is.

Okay. That's good. Thank you very much. Okay.

You're welcome.

Thank you. There are no further questions at this time, Mr. Ketelaar. I will now turn the conference back to you. Please continue with your presentation or closing remarks.

Well, we thank you all for being involved in the call today, for your interest in the Company and we look forward to our third quarter update. Thank you.

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