Terminix Global Holdings Inc (TMX) 2010 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the ServiceMaster Company's 2010 year-end 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. As a reminder, during the question and answer session, please limit yourself to one follow-up question. At this time, we'll begin today's call. Please go ahead, Mr. Ketelaar.

Good morning and thanks for joining our year-end 2010 earnings conference call. Joining me today is ServiceMaster's Chief Executive Officer, Pat Spainhour; Chief Financial Officer, Steve Martin; Treasurer, Mark Peterson; and Controller, David Martin. Also on today's call is ServiceMaster's incoming CEO, Hank Mullany.

We'll make some prepared remarks, and then address your questions during the question and answer session.

Before we begin this morning, I would like to remind you that throughout today's call, management may [look] forward-looking statements to assist you in better understanding the Company's strategies and operating performance. All forward-looking statements are subject to the forward-looking statement legend contained in our recently filed Form 10-K and Form 8-K. These forward-looking statements are not guarantees of performance and are subject 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 March 30, 2011, and any rebroadcast or distribution of information presented on today's call after such date is not attended and will not be construed as updating or confirming such information.

The ServiceMaster Company undertakes no obligation to update any information discussed on today's call.

ServiceMaster recently filed its Form 10-K as well as an 8-K containing additional financial disclosures that we believe will enhance your understanding of our financial and operating results. We may reference throughout today's call non-GAAP financial measures such as adjusted EBITDA, comparable operating performance and operating performance, which factor in adjustments related to such things as restructuring expenses and non-cash option and stock-based compensation expense, among others. We have included in our 10-K and Form 8-K, available on our website, definitions of these terms as well as the relevant reconciliations to the most appropriate and GAAP measures in order to better assist you in understanding our financial performance.

During the question-and-answer session, we encourage you to ask 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.

I will now turn the call over to Pat Spainhour for opening comments. Pat?

Good morning, everyone. I appreciate you taking the time to join today's call. This morning, we will be providing an overview of our 2010 results, and an update on the progress of some of our key initiatives.

As you've seen in our recent filing, we wrapped up 2010 with solid overall performance despite some continued challenges in the economy. Despite these challenges, we feel good about the year we just completed. Operating revenues were up approximately 4% to nearly $3.37 billion, and we saw revenue growth in five of our six business units.

Operating performance declined less than 1% to $560.8 million. These results, after two years of soft consumer and commercial spending, demonstrate the resiliency of our key businesses as well as of our leadership team's ability to manage and grow our Company through difficult economic conditions.

Our largest business, Terminix, delivered another strong year in both termite and pest control. Particularly encouraging for us was Terminix revenue growth, up 6.3%. Although extended hot summer weather affected both American Home Shield's and TruGreen's operating performance, new sales and revenues were up in both businesses.

Our focus on customer retention also continued to play an important role in our growth in 2010. Terminix saw improvements in retention in both termite and pest over year-end 2009. American Home Shield retention increased 230 basis points over the same period last year. Only TruGreen saw a decline of 210 basis points as cancellations ticked upward and customer counts began to decline in the third and fourth quarters.

With a nod towards generating new growth in 2011, our service teams in all of our businesses are heavily focused on retention strategies that will retain our customers with consistent and outstanding service.

In our franchise businesses, we recently announced that Merry Maids has joined the ServiceMaster franchise services group under President and Chief Operating Officer Mike Isakson. This shift puts our franchise-based brands, Merry Maids, ServiceMaster Clean, AmeriSpec and Furniture Medic, under a single organizational structure. This move enables us to explore ways to leverage resources and share best practices across our franchise businesses.

Finally, I'd like to introduce you to our next CEO, Hank Mullany. As you know, I'm retiring from ServiceMaster and this will be my last quarterly earnings call with you. Hank will be taking over as CEO effective tomorrow.

A little bit of background on Hank -- he brings a wealth of experience to his new role. He is a former executive vice president of Wal-Mart US and president of Wal-Mart's northern US business where he oversaw retail operations for more than 1300 stores and 34 distribution centers in 19 states, leading 400,000 associates. He is a seasoned executive with nearly 30 years of experience and a strong background in operations, finance, and strategic planning.

Earlier in his career, Hank served in various senior management positions, including as president of Genuardi's Family Markets in Pennsylvania and leading one of Philadelphia's largest nonprofit organizations.

I've spoken with Hank at length about ServiceMaster, its people and its culture. His proven track record of focusing on customers, executing strategies and producing outstanding results make him the right person to drive continued growth at ServiceMaster for many years to come.

Let me introduce Hank for a few comments.

Thanks, Pat and good morning, everyone. I'm looking forward to speaking with you in the future and sharing more about our business. I think Pat and the leadership team have done a great job here leading the Company through a tough economy. I'm looking forward to updating you on our first-quarter call in May. For now, I will turn it over to Steve Martin to review our 2010 results in more detail. Steve?

Thanks, Hank.

ServiceMaster delivered strong fourth-quarter and full-year 2010 results, despite the challenges posed by the economy. We were able to overcome many of those challenges, and I am particularly pleased with our revenue results. This is the first time we've reported full-year revenue growth since 2007.

Let me quickly recap our consolidated results, and then I will review the segments.

Revenues in the fourth quarter of 2010 increased $30 million to $746 million, up 4.2% compared to the fourth quarter of 2009. For the year, revenues increased to $3.4 billion, an increase of $126 million or 3.9% compared with full-year 2009 results.

All of our business units except TruGreen lawn care showed improved revenue results for the fourth quarter and full year with full-year growth rates of 6.3% for Terminix, 4.6% for TruGreen LandCare, 4.2% for American Home Shield and 5.2% for ServiceMaster Clean. Needless to say, we are pleased with the resiliency of our core brands and the ability of these businesses to show growth as the economy began to recover in 2010.

Fourth-quarter operating performance as set forth in the 8-K declined 1.7% to $112.2 million compared to fourth quarter 2009 results. Terminix, TruGreen lawn care and ServiceMaster Clean each delivered strong performance, and I will discuss those results in a few minutes.

For the year, operating performance declined less than 1% to $560.8 million, primarily due to the ongoing challenges at TruGreen LandCare. All other business units showed growth in operating performance for 2010.

Cost of services rendered and products sold for the year also remained constant at 59.2% of revenue compared to 59.1% of revenue in 2009. The 10-basis-point decrease in gross margin was driven principally by higher claims costs at AHS, residual value lease charges, incentive compensation and costs related to ongoing initiatives at TruGreen lawn care, partially offset by lower factor costs and health care expenses.

Selling and administrative expense as a percentage of revenue for 2010 was 27.3% compared to 26.3% a year ago. The increase in SG&A primarily reflects increased investments in sales and marketing efforts across our businesses, increased costs related to ongoing initiatives at TruGreen lawn care, increased spending in our business support functions, business improvement initiatives, higher incentive compensation expense and key executive separation charges related to the retirement of our CEO and the resignation of the president at TruGreen LandCare.

Net cash flow provided by operating activities from continuing operations increased $41.3 million to $233.5 million in 2010 compared to $192.2 million in 2009. Net cash from operating activities was comprised of $264.2 million in earnings, adjusted for non-cash charges, offset in part by an $11.4 million increase in cash payments related to restructuring charges, and a $19.3 million increase in cash required for working capital.

CapEx was $145 million in 2010 and included $37 million for real estate that was part of a synthetic lease facility, and $51.4 million in new vehicle purchases.

We expect 2011 capital expenditures, excluding vehicles, to range from $50 million up to $60 million, and total capital expenditures to range from $105 million to $115 million.

Cash payments for tuck-in acquisitions in 2010 totaled $57.9 million compared to $32.6 million in 2009, with the increase due to the Antimite acquisition by Terminix in August, 2010.

Our liquidity remains strong with $500 million available under the revolver and $21 million available under our accounts receivable securitization facility at year end.

Additionally, we had approximately $151 million of unrestricted cash and marketable securities.

As we previously announced in February, we extended the maturity of our revolving credit facility by one year and lowered the commitment level by 20% for those lenders who extended. As a result, we currently have borrowing capacity of $442 million through July 24, 2013, and then $229 million through July 24, 2014. Our access to letters of credit under this facility remains at $75 million.

Moving now to the segment results -- at TruGreen lawn care fourth quarter revenues grew 4% to $222.6 million. For the year, revenues grew 4.6% to $1.1 billion, reflecting improved price realization and higher sales of expanded services. However, TruGreen's customer count declined 1.7% as of year end, driven by a 210 basis point decrease in customer retention rates. This decline occurred during the latter half of the year, lessening the impact on 2010 revenues. The decline in customer retention rate at TruGreen was due to a combination of the impact of high summer temperatures on the appearance of lawns across the country, as well as some impact associated with our ongoing transformation efforts at TruGreen. Operating performance for the quarter was $41.5 million, an increase of 9.4%. For the year, operating performance grew 3.8% to $194.5 million. The improvement in operating performance was driven by the impact of increased revenue, the favorable impact of fuel, fertilizer and health care costs, offset in part by higher investments in sales and marketing, increased costs related to the initiatives to reorganize field leadership and branch operations, to improve customer service and increase incentive compensation.

At Terminix, fourth-quarter revenues improved 8.9% to $268 million. For the year revenues improved 6.3% to $1.2 billion. These results reflect solid growth -- a 5.2% in pest control revenues, a 3.1% growth in termite revenue, and $23.2 million of additional product sales to pest control industry distributors. Revenues were also bolstered by the acquisition of Antimite which closed in August 2010.

The growth in pest revenues was related to a 3.6% growth in customer counts due to an increase in new unit sales, the contribution of acquisitions, and a 140 basis point improvement in customer retention rates.

Termite revenues improved due to an increase in new unit sales, improved price realization, the contribution of acquisitions, and a 30 basis point improvement in customer retention.

Fourth-quarter operating performance grew nearly 13%, to $53.3 million. For the year, operating performance grew 8.1% to $270.8 million reflecting the margin derived from the increased revenues, reduced fuel and vehicle-related costs and favorable healthcare claims, partially offset by higher investments in sales and marketing, and a higher provision for incentive compensation.

At American Home Shield, fourth-quarter revenues grew 1.9% to $143 million. For the year revenues increased 4.2% to nearly $657 million, reflecting improved price realization. Although new unit sales declined 3.8%, primarily due to the soft real estate market, we did see growth in renewals and our consumer sales channel. Customer retention improved 230 basis points.

Fourth-quarter operating performance remained flat at $22.7 million, and for the year operating performance grew 2.4% to $116.6 million, reflecting the impact of higher revenues and an increase in interest and investment income. This was partially offset by an 8.3% increase in contract claim costs, primarily related to an increase in the number of seasonal air conditioning claims due to extreme summer temperatures.

Turning to ServiceMaster Clean, fourth-quarter revenues increased to 3.2% to $33.8 million. For the year, revenues increased 5.2% to $132.1 million, reflecting an increase in national janitorial accounts and higher product sales to franchisees.

Fourth-quarter operating performance increased 14.5% to $18.5 million for the year and increased 7.3% to $63.8 million for the year. This increase reflects the favorable impact of higher revenues and reduced overhead spending.

At TruGreen LandCare fourth quarter revenues decreased 7.4% to $58 million, and for the year revenues declined 9% to $238.5 million. The decline in revenue was due to contract cancellations and pricing concessions in response to the impact of a difficult economic environment in the commercial space.

Operating performance was negatively impacted by revenue declines, inefficiencies created by labor shortages in certain markets and key executive separation charges. This was partially offset by reduced fuel, vehicle and health care costs.

As we announced last quarter, we've made a decision to explore our strategic options with LandCare, including the possible sale of the businesses. We've made good progress in the evaluation process, and expect to have this concluded over the next few months.

In the other operations segment, fourth-quarter revenues increased slightly to $21.2 million and for the year increased from $84 million up to $84.7 million. Fourth-quarter operating performance for the segment was a loss of $28.7 million compared to a loss of $16.6 million last year. For the year, operating performance was a loss of $93.3 million compared to a loss of $70.3 million in 2009. The higher loss was primarily due to a $5.5 million charge related to key executive separations, higher incentive compensation charges, and higher spending in the business support functions designed to enhance capabilities in our centers of excellence, and on initiatives designed to improve the performance of our operating units. This was partially offset by an improvement in Merry Maids performance, primarily reflecting increased labor efficiencies and reduced legal provision.

In summary, our core businesses performed well in 2010 despite the difficult economic climate, the spike in warranty claims and lawn care cancellations driven by the high summer temperatures. Although there has been some improvement in consumer spending and unemployment, we will continue to take a cautious approach as the economic recovery continues.

This concludes our prepared remarks and at this time we would be happy to take your questions. Operator?

(Operator Instructions) Emily Shanks, Barclays Capital.

Good morning, thanks for taking the question.

I wanted to see if you could give us a little more color; you touched on this in your prepared remarks, but specific to the other operations segment on EBIT, if you could give us a sense of what's driving that year-over-year decline in dollars for the fourth quarter.

I think I heard your question -- and I do apologize; you were going in and out, but let me recap your question and make sure I got it right. Did you ask if we could give some more color on the year-over-year decline in performance of the other operations segment? Was that your question?

Yes, thank you.

Okay.

There are essentially -- the whole change, it's about $23 million year to year. About half of that is due to one-time items -- $5.5 million for key executive separation charges in 2010, and $4.4 million associated in 2009 with that reversal of the accrual for our long-term incentive compensation plan we talked about last year. So that was a credit last year; that was a one-time item. So that was about half of that total change.

The other half is essentially the investments I mentioned in the centers of excellence and the corporate support functions, as well as initiatives to drive the performance of the business in those areas -- HR, finance, transformation initiatives that you've heard us talk about in the past.

Okay, and for the latter bucket that you just went over, do you view those as one-time investments, or should we assume that that investment rate will continue as we look into 2011?

I think the best way to think about it is, we will always be looking for ways to improve our overall performance and make investments that are smart to make, that we think are going to pay off for us in the future. So these particular investments were of that nature and are a nonrecurring nature, but we'll continue to evaluate ways to improve our overall performance.

Okay, thank you.

Todd Harkrider, UBS.

Yes, thanks for taking my questions.

In regards to the slight decline in retention rates sequentially at Terminix, is that due to a drop in Antimite customers, or was it more broad-based? Would you expect it to come back this year? Thanks.

Todd, you were cutting in and out again; can you please repeat that question for us?

Yes. In regards to the Terminix retention rates, the slight sequential decline, was that more due to the Antimite customers you were losing, or was that more broad-based -- which you expect to come back this year?

Which business unit were you referring to, or segment?

Terminix.

Terminix? The retention rate in both businesses, so I'm not sure I followed your question.

But since you report on an LTM basis, sequentially it was down a little bit, right, like on the pest control side.

I think it's also associated with the seasonality of the business. There is still a little bit of a seasonal curve from quarter to quarter, as well as timing associated with when we add acquisitions and new sales, and when cancellations occur. All of those can impact it from quarter to quarter, which is why the comparison on the trailing 12-month basis year over year is better than the sequential comparison from quarter to quarter.

Okay, I appreciate it.

And then, I know the last quarter call you talked about going after the commercial business more aggressively, which makes a lot of sense, especially if you're talking about the Terminix side. Could you provide a little bit more color there, please?

Well, what I'll say is that we do think that's an attractive market for us, and you've heard us talk about that in the past. It's probably premature for us to talk about specific strategies today, given that Hank's first day as CEO is officially tomorrow, and I think those would be a good topic for future calls as we communicate our strategies going forward.

Sounds good. Congratulations, Hank, and thanks for answering my questions and I wish you the best in retirement, Pat.

Thank you.

(Operator Instructions) Yilma Abebe, JP Morgan.

Thank you, and best of luck, Pat, and congrats to Hank.

I guess my first question is, in terms of LandCare, when you sell that to -- that business, any kind of synergies that may go away? And, also, if you can touch on how easy it is to separate that business from the rest of your book of business.

Well, I think on the first question about synergies, we think that there's greater opportunity for us once we exit the landscape business as being a -- self-performing in that space, and instead focus on being a partner with the landscape industry, particularly with our TruGreen lawn care business being -- providing spray services to landscape companies. So we think that opportunity is a significant opportunity for us going forward.

As it relates to separating the business, it is not a complete standalone, so it's not going to be just an automatic carve-it-out. However, we don't see any significant challenges that are going to make it be an overhang or a big challenge for us.

Thanks. And then my second question is, as it relates to raw material and oil and chemicals and so forth -- and I know you put on some hedges for oil -- but maybe if you could give us, broadly as you look forward, should oil and raw materials be more of a headwind, or how are you seeing that?

Well, we are for this year -- we are hedged at about 70% to 75% of our volumes for this year. So we don't think -- and that's on the fuel side, so we don't think that's going to be a major headwind. Obviously it is volatile and that unhedged piece can still be an impactor.

Chemical prices we are unable to hedge, and those can be volatile and are petroleum-based.

But, overall, we don't anticipate those factor costs being major -- a significantly different impact on our business than they have, than you've seen over the last couple of years.

Thank you, that's all I had.

Emily Shanks, Barclays Capital.

Thank you.

I wanted to see if you could provide us with an update on your thoughts on the capital structure, and namely your 2014 term loan and 2015 bonds, how you are approaching those now.

Well, what I will say, Emily, is that we are looking at it very carefully, monitoring it on a regular basis and in discussions with our banking partners. So we are evaluating our options. You may see us move forward with a transaction to refinance a portion of the debt. But it's premature to announce anything today and nothing is definitive to talk about today.

Okay, great. Thank you, and best of luck to Pat and Hank. Thanks.

Thank you.

Thank you, Ms. Shanks. And gentlemen, there are no further questions at this time. Mr. Ketelaar -- I stand corrected, we just had a question queue up now, and this is a follow-up from the line of Todd Harkrider from UBS.

Thanks for putting me inside the bell real quick; I had a couple of follow-up questions.

On the AHS side, how will the higher claims last year impact AHS this year? You know, are all the contracts one year, so reset annually? Or do you have some two-year policies where some of those might get squeezed this year?

Yes, Todd, they are annual contracts. They are not all on a calendar period, but they are all annual contracts, so no multi-year contracts to speak of.

Okay. And then, I know in the past sometimes when you talk about Terminix, you've talked about product sales. Is that the Terminix SafeShield that actually is growing, or is that other products?

That is primarily other products. Terminix also serves as a -- does sell to distributors for the pest control industry, as well as sales to their franchisee network. So that is principally what we're talking about, or the biggest component of that when we talk about product sales for Terminix.

Got you, okay. And in regards to BASF's talks to maybe sell their fertilizer business, you actually make your own, right? So that wouldn't impact you at all?

We do not make our own fertilizer. We do buy from the industry, so we will be -- we evaluate different suppliers and each year source our fertilizer products to maximize the benefit to us, so we will see how that plays out.

Got you. So do you actually mix it yourself? Or -- I know, like the pest control side, you actually buy branded product, I think; but on the fertilizer side, I didn't know how that worked.

Yes, for the most part, we buy fertilizers that are available to the industry as a whole. The mixing we do is principally for our lawn program, and the agronomic program we apply to our customers on a round-by-round basis has different portions of the components of the fertilizer, as well as sometimes mix as you know with herbicides and weed control. And that's the mix you typically hear us talk about, not the blending of the fertilizer itself.

Got you. Appreciate it, and good luck with the spring season. Thank you.

Thank you, sir. And now I will return the conference to Mr. Ketelaar for your concluding remarks. Thank you, gentlemen.

Great. Thanks, everybody, for joining us and we look forward to giving you an update in May on our first-quarter results. Thank you.

Thank you, sir. Well, ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation, and ask that you please disconnect. Thank you once again; have a great day.