Terminix Global Holdings Inc (TMX) 2011 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the ServiceMaster Company third quarter 2011 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 third quarter 2011 earnings conference call. Joining me for today's call is ServiceMaster's Chief Executive Officer Hank Mullany and Chief Financial Officer Roger Cregg. We'll make prepared remarks and then address your questions during the question and answer session.

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. All forward-looking statements are subject to the forward-looking statement legends contained in our Form 10-Q and 8-K, which was filed with the Securities and Exchange Commission on November 14. These forward-looking statements are not guarantees of performance and 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.

Information discussed on today's call speaks only as of November 17, 2011, and any rebroadcast or distribution of information presented on today's call after such dates is not intended 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. On November 14 ServiceMaster filed its Form 10-Q as well as an 8-K containing additional financial disclosures that we believe will enhance your understanding of our financial 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 noncash option and stock based compensation expense, among others. We have included in our 10-Q and Form 8-K available on our website definitions of these terms as well as relevant reconciliations to the most appropriate financial GAAP measure in order to better assist you in better understanding our performance.

Additionally, we have posted a slide deck on our website that summarizes our third quarter results, and we may make reference to that document, as well, during this morning's call. You can find a PDF of these slides next to the webcast icon our investor relations section of our website. 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 conversation with our public-side investors, and as such we request that you please ask any questions during this public forum.

I'll turn the call over to Hank Mullany for opening comments. Hank?

Thanks, Marty. Good morning, everyone. Happy Thanksgiving, and thanks for joining us on today's call. To kick things off this morning, it's my pleasure to welcome our new Chief Financial Officer Roger Cregg, whom we announced on our last call. We are excited to have Roger on board. He's a strong leader who brings outstanding experience to our team. He will be covering the details of our financial performance with you in a few minutes.

Let me briefly share some highlights of our financial performance in the third quarter. Revenues in the third quarter increased 1.3% or $11.9 million compared to a year ago, with four of our five reporting segments demonstrating revenue growth for the third quarter.

Our operating revenue in the third quarter was largely driven by TruGreen's performance, down 1.1% from the third quarter of 2010. That was expected as we began to see the impact of scaling back our neighborhood sales program. But that decrease was more than offset by strong revenue growth in Terminix and American Home Shield, where we saw revenues grow 1.8% and 3.9% respectively, primarily due to pest customer account growth and one time services at Terminix and no product offerings in our direct to consumer channel at American Home Shield.

Operating performance in the quarter was strong, up 8.9% or $15.8 million, boosted by solid growth in both Terminix and TruGreen. Year to date through September revenues are up 3%, operating performance was up 8.4%. Our cash flow also remains strong, with year to date net cash provided by operating activities before interest and tax payments increasing $30.6 million or 8.5% to $392.2 million.

I'd like to say a little bit more about TruGreen's performance. On our last call, I spoke about rebalancing our TruGreen sales and marketing programs and rationalizing our neighborhood marketing program. You can see the impact of that decision in our third quarter revenues. While this shift will affect TruGreen revenues in the short term, we expect this shift to improve our profitability by focusing on more profitable sales channels. This shift in strategy was also reflected in TruGreen's third quarter operating performance, up 12.2%, or about $10 million higher than the same period last year. We also believe that over the long term, this shift will drive higher customer retention.

Another key driver of TruGreen's operating performance in the third quarter was improved labor efficiency, a result of the continued centralization of many core activities and administrative functions, better routing and scheduling management and branch standardization. Since we laid out our plan to improve TruGreen's performance earlier this year, our TruGreen team has really responded to the challenge, and I'm confident we're on the right path.

As I've mentioned on previous calls, we're focusing on three strategies. Number one, growth. We want to be a rapidly growing best in class service provider, and we know the best way to do that is by improving our customer experience. We're seeing some positive signs in this area, and I'll give you an update on our progress in a few minutes.

Our second strategy involves talent evaluation and development. Throughout our organization, we're focusing on developing high performing, highly engaged diverse teams. In addition to filling key roles on our senior executive team with strong leaders with proven track records, we're stepping up our talent evaluation and performance management efforts at all levels to bring along the next generation of ServiceMaster leaders. And we want to enhance the training tools and resources that will put our associates in a position to provide exceptional customer experiences every day.

Three, we're accelerating the process of best practice sharing and developing what I like to call a culture of executional excellence. As you know, one of the areas we're working on is reducing the variation and standards and practices from branch to branch in TruGreen. A lot of the work we're doing is modeled after what's been done before in our Terminix business. And we believe we can make it happen in TruGreen too. More on that shortly.

As I've said before, underlying all of our efforts is our mission, to simplify and improve our customers' lives. Our associates and franchise owners have begun to really rally around our mission, because quite frankly, they see it's what our customers are asking for. They see just how powerful it can be when they simplify and improve the quality of a customer's life. It puts a whole different lens on our business when we say with confidence that we're simplifying, improving the quality of our customers' lives.

Associates have also embraced our vision to create a company that will be rapidly growing, best in class service provider -- simply put, the best place to work and invest. Our clear and compelling vision is taking root and giving our teams reason to have confidence in our Company's future. And as we continue to make progress against our strategies, we want to earn your confidence also.

Let's talk about our first strategy to rapidly grow our business. What do we mean when we talk about rapid growth? From 2007 to 2010, our revenues have grown at an average annual rate of 2%, and our operating performance has grown at an average annual rate of 5%. We believe these numbers are comparable with what many companies have experienced, especially against the back drop of a tough economy. But we believe we can do better. We are doing better, and we will do better.

As we improve the customer experience, we expect to achieve sustainable top line and bottom line growth that exceeds these numbers. Each of our businesses is executing against a plan to improve the customer experience, and we are seeing some of the benefits of those plans. Customer satisfaction scores are up year to date in Terminix, American Home Shield, ServiceMaster Clean, and Merry Maids. Our customer retention rates in Terminix, Pest and Termites, American Home Shield and Merry Maids were up for the rolling 12 month period ended September 30.

And although TruGreen's customer retention rate is down year on year, we've seen some positive signs emerging in our late season TruGreen customer save rates. While we're pleased to see some of our efforts getting traction, we know that any improvements must be sustainable in order for us to see long-term and profitable growth. It's a good start, but we still have a lot of work to do.

As I mentioned on one of our earlier calls, that when you look at our portfolio, we have an array of business that is collectively have proven to be recession resistant, but we need to reduce our exposure to uncontrollable events like weather by continuing to diversify our Company. One way to continue to improve our -- is to continue to improve our product offerings to provide customers with more choices and more flexibility, as we're doing with American Home Shield. New products and enhanced pricing are both helping to drive revenue growth in AHS. In fact, while weather-related claims were up in the third quarter, we saw continued sales growth driven by a new and more flexible product lineup.

Our second key strategy is evaluating and developing our talent. It's simple. You just don't get growth without bringing in some great talent and developing high performing, highly engaged diverse teams. One of the areas we focused on is strengthening our management team.

As you know, we've already begun this process by bringing on Roger Cregg as our new CFO in August and Linda Goodspeed as our new Chief Information Officer in October. Linda joins us from Nissan North America, and she has outstanding experience in both strategic and operational roles at Nissan, GE, Lennox, and Ford. Her experience at large global countries (sic) will help drive the IT initiatives we'll need to rapidly grow ServiceMaster and transform our customers' experience.

We're still on track to hire a new business unit president later this year, but in the meantime I can't be prouder of the work Tom Brackett has done to lead TruGreen on an interim basis during this transition while pulling double duty as President of Terminix.

We've also just completed a rigorous talent review of the Company's top 550 leaders to accelerate talent development across our businesses and identify future leaders. We've made some early progress in this area, and I am pleased with the way our senior management team has responded to the challenge by offering up some of their most talented team members for critical roles within the Company and grooming high potential associates for future leadership roles.

But we know we have to move faster in this area to ensure we're putting the right people in the right roles to support our business. One example, we recently promoted a new Chief Sales Officer and Vice President of Sales at TruGreen. This high performing individual was formerly Vice President of Sales at Terminix, and we're excited about having him bring some of his best practices and sales training and call center sales management to TruGreen to help drive revenue growth in the lawn care business.

Finally, as we think about growth, we're continuing our efforts to share best practices -- best practice sharing across all of our businesses and develop a culture of executional excellence. There's been some terrific work done already between Terminix and TruGreen, our two branch-based businesses. For example, we're improving efficiency and customer experience by centralizing our routing and scheduling functions. To improve our customer retention, we've also created a centralized in-bound [save] team similar to what we already do in Terminix, and we expect this will continue to have a positive impact on our cancellation rates.

And we think there's fertile ground for more idea sharing as we move forward, not just on the operational side, but also in areas such as sales training and incentives, call center management, and customer communication. The TruGreen team has really helped the business get back on track by refocusing on a few key areas; improving the customer experience, sharing best practices across the business, and reducing the variation in our service delivery from branch to branch.

One more note on our TruGreen strategies. In addition to emphasizing lower customer acquisition costs and improving our profitability, we're also staying focused on overall service delivery. That includes a full review of our agronomic programs, an improved recovery program for problem lawns, reduce lawn specialist turnover, and continued improvements in communications with customers. In the end, we want to ensure more consistent service delivery from branch to branch and create a truly world class customer experience.

I'll turn the call over to Roger in a minute, butfirst I wanted to remind everyone that we're not looking for short-term fixes here, nor do we expect things to change overnight. But what you will get from me and my executive leadership team is a commitment to keep you informed of our progress and to share our successes, as well as our challenges along the way. We believe we have a huge opportunity here. We have a diverse portfolio and a resilient business model. Even with the challenges, we've delivered both bottom line growth and strong and steady cash flow over the past three years.

We have strong iconic brands. I've talked before about the strong consumer awareness and market segment in our categories, combined with low household penetration. If you add in the untapped opportunities like commercial, we have a business model that is poised for growth, ifwe can consistently deliver the kind of service experience that will meet our customers' expectations.

Lastly, we have 23,000 passionate Company associates and another 31,000 passionate franchise associates who believe in our mission to simplify and improve the quality of our customers' lives. That's a major strategic advantage for us as we go forward. Our vision is to be a rapidly growing best in class service provider. We will be the best place to work and invest.

Now I'd like to turn it over to Roger to review our third quarter results in more detail. Roger?

Thank you, Hank, and good morning, everyone. It's a pleasure to be here with you today, and I look forward to meeting many of you in the future.

ServiceMaster delivered solid third quarter results, and our business units continue to execute on our growth strategies. Let me briefly cover our third quarter consolidated results, and then our view of segment highlights.

For the quarter, revenues increased 1.3% to $931 million, compared to $919 million a year ago. Revenue growth was primarily driven by improved pricing and improved customer retention in the Terminix termite and pest businesses, as well as American Home Shield. This growth was partially offset by a 6.1% decline in customer accounts at TruGreen.

Cost of goods sold as a percentage of revenues increased 60 basis points to 55.6% compared to the third quarter of 2010. The primary drivers of the increase were a $5 million increase in contract claim costs at American Home Shield due to an unusually warm summer, $3 million in higher fuel costs that impacted TruGreen and Terminix, and a $3 million increase in fertilizer prices that impacted TruGreen. These increases were partially offset by $1 million in lower residual value of guarantee charges related to synthetic leases recorded in 2010 at TruGreen, and $5 million of cost reductions realized through ongoing initiatives at TruGreen.

For the full year of 2011, we are forecasting fuel prices to be approximately $10 million to $15 million higher than 2010 levels, and we are forecasting the impact of higher fertilizer prices to be $4 million to $6 million higher than the 2010 levels.

SG&A expense as a percentage of revenue improved 190 basis points to 26.4% compared to the third quarter of 2010. This improvement primarily reflects reduced sales and marketing spend at TruGreen, reduced legal related expenses at American Home Shield of $4 million, a decrease in key executive transition charges of $4 million, and in addition, reduced compensation related charges of $4 million, along with reduced spending in our headquarters functions. These items were partially offset by investments in information systems, including a $2 million investment in a new customer relationship platform at American Home Shield and an additional $2 million for payment card industry standards compliance purposes.

Our operating performance, as referenced on slide number three of our accompanying webcast slides, grew 8.9% to $194 million compared to $178 million a year ago, primarily driven by the favorable impact of increased revenues at Terminix, American Home Shield, ServiceMaster Clean, and our operations and headquarter segments as well as reduced sales and marketing expenses at TruGreen.

For the third quarter, our cash balance decreased from $324 million in the second quarter to $292 million, as we consume $32 million in cash. Net cash provided from operating activities for the quarter of $14 million was driven by $117 million in earnings adjusted for noncash charges, partially offset by $101 million in working capital needs and $2 million in cash payments for restructuring charges. The increase in working capital for the quarter is a result of normal seasonal needs.

Net cash used for investments of $35 million for the quarter reflect the purchases of vehicles, technology enhancements and property improvements of $22 million, and $13 million used for tuck-in acquisitions consisting of cash payments to the sellers. In addition we made $10 million in scheduled principal repayments of long term debt during the quarter.

Capital expenditures during the first nine months totaled $80 million, including $44 million in new vehicle purchases. We expect 2011 capital expenditures, excluding vehicles, to range from $65 million to $70 million. Capital expenditures for vehicles during 2011 are expected to range from $50 million to $55 million.

Lastly, our liquidity profile remains strong. Cash in short term and long term securities totaled $439 million, of which $246 million is associated with regulatory requirements at American Home Shield and other requirements. We also have $442 million of capacity under a revolving credit facility agreement, of which there were no borrowings during the third quarter.

Now let's move over and highlight the segment results for the quarter. As Hank commented earlier, third quarter revenues at TruGreen were $367 million, a decrease of 1.1% from the third quarter 2010. The third quarter revenue did see the benefit of improved price realization, which was more than offset by a 6.1% decline in customer accounts.

TruGreen's operating performance was $91 million, an increase of 12.2% compared to $81 million in the third quarter of 2010. Key drivers of the improved results include reduced sales and marketing spend, driven by the reduced focus on the neighborhood sales program and cost reductions realized through ongoing initiatives to improve customer service and improve productivity by our lawn specialists. These benefits were partially offset by the impact of slightly lower revenue, a $2 million increase in fuel prices, and $3 million increase in fertilizer prices.

At Terminix third quarter revenues increased 1.8% to $301 million compared to the third quarter of 2010, reflecting growth in our pest control segment. Pest control revenue grew 3.9% due to a 3% increase in customer counts and an increase in one-time services, primarily bed bug services. The increase in customer counts resulted from an increase in new unit sales, the contribution of acquisitions, and a 10 basis point improvement in customer retention rate.

Termite revenue decreased 1.6% due to lower new unit sales, the result of weak termite activity throughout 2011. This was partially offset by improved price realization and higher customer retention. Third quarter operating performance grew 6.8% to $68 million, compared to $63 million a year ago, reflecting the favorable impact of higher revenue and $4 million in lower incentive compensation expense. This was primarily offset by $2 million in higher fuel prices.

At American Home Shield, third quarter revenues were $205 million, up 3.9% compared to the third quarter of 2010, primarily due to improved price realization and the introduction of several new product offerings discussed in the second quarter. Home service contracts grew 1.2% compared to last year, reflecting higher customer retention. This growth also reflects the planned shift in our sales strategy, moving away from a heavy reliance on the real estate channel to the direct consumer channel, where retention is typically higher and there is a higher lifetime value attached to each sale.

American Home Shield's operating performance for the third quarter declined 1.3% to $41 million compared to it approximately $41 million a year ago, dueto the $5 million impact of higher contract claim costs, resulting from the extreme summer temperatures, and $2 million of increased expenses relating to the investment in a new customer relationship management platform. This was partially offset by the impact of higher revenues, $4 million in reduced legal-related expenses, and a $4 million increase in interest and net investment income from American Home Shield's investment portfolio.

At ServiceMaster Clean, third quarter revenues increased 6.9% to $36 million compared to the third quarter 2010 results. Third quarter trends in revenue reflect an increase in national janitorial accounts, increased fee revenue from growth in disaster restoration services, and an increase in product sales to our franchisees. Operating performance increased 1.7% to $16 million, reflecting the impact of increased revenue, partially offset by investment in sales and marketing.

In the other operations and headquarters segment, third quarter revenues increased 2.7% to $22 million, reflecting improvement -- improved revenue at Merry Maids. This improvement was driven by an increase in the number of new franchise sales and an increase in product sales to franchisees.

Third quarter operating performance for the segment was a loss of $21 million, an 8.2% improvement compared to the third quarter of 2010. The improvement was primarily due to a decrease in key executive transition charges of $3 million and reduced spending in our headquarters functions. This was partially offset by investments in information systems, including the $2 million for purchase card industry standards compliance purposes and $2 million in higher compensation-related charges.

This concludes our prepared remarks. We look forward to providing you an update on our progress when we report our fourth quarter and full year results. Operator, let's please open up the lines for the question and answer session. Thank you.

Thank you. (Operator Instructions). Our first question comes from the line of Yilma Abebe of JPMorgan. Please proceed.

Thank you. Good morning. My first question is on the lawn care business. I think -- you talk about going to a new I guess lower acquisition cost and strategy, away from the neighborhood selling, and you also alluded to short term impacts from that. Have we seen the worst of these short term impacts, or could we see more, I guess, going forward?

The impact that we've seen on this today, Yilma, is right on what we had pro formaed, so we're well within the expectation of how we thought this would shake out. Again, I'd like to remind everyone we're really just rationalizing the neighborhood marketing channel. It still will be part of the way we market our services, but we're just taking it down to more rational levels like we've utilized in the past. And again, we're very excited about the positive impact we've seen on that in terms of our operating performance.

And I guess in this new strategy here, this new rationalization program that you have, is the mix of your customer changing in any favorable way?

Yes, what we're seeing is a shift in the mix of customer to a more profitable customer, and also a customer that we're able to have improved retention rates with. It's definitely a channel that -- we're moving to channels that give us higher retention rates.

Thanks. That's helpful. And then my other question relates to American Home Shield, thenew and flexible products programs that you have. Can you give us a little bit more context? How large is that, what's the profitability profile of these new products?

Yes, we'revery encouraged by our consumers' response to our new warranty products. We've rolled them throughout the USin our direct to consumer channel and couldn't be happier with what we're seeing. Pricing, margins, metrics are all exactly in line with what we had pro formaed them to be. So we're excited about that.

Also, as we look at some of the newest products that we've launched in terms of preventative maintenance programs, these are still in the pilot phase. But again, we're highly encouraged by the initial results there.

(Operator Instructions). Our next question comes from the line of Todd Harkrider of UBS. Please proceed.

Yes. Thanks for taking my questions, and congratulations on another strong quarter. I guess to ask some of the same questions in a little bit different way, the reduced neighborhood selling, I assume that should be [fully] --- at a steady state basis for next selling season? And do you see continued benefits in regards to cost reductions and so forth next year?

Todd, this is Marty. You're cutting out pretty bad. Can you please repeat that question?

Yes. In regards to the TruGreen, the neighborhood selling, I assume you'll be more at a steady state or reduced neighborhood selling kind of level next year for the next selling season, and do you continue to see benefits there rolling into next year, or did you capture most of it this year already?

Yes, yourassumption is correct in terms of the revenue side, and we see the ability to have continued benefit capture with this shift in strategy as we move forward.

Okay. And then a follow-up on that, obviously Tom's done a great job of taking costs out there and doing double duties at TruGreen. In regards to the candidates for the President of TruGreen, are you mainly looking at internal candidates, or are you looking at more external as in external outside the industry? And does that change your acquisition strategy at all at lawn care, or do you primarily expect to focus on Terminix next year as well on the acquisition side. Thanks.

We're really focused on external candidates for our next business unit president. We've got some fantastic internal associates who we're focused on developing them and moving them from business to business to enhance their year. And we will not change our strategy with TruGreen nor Terminix once we get our new leader on board.

Mr. Ketelaar, there are no further questions at this time. Please continue with your presentation or closing remarks.

Great. I want to thank everybody for joining us today. Wish everybody a very happy Thanksgiving, and we look forward to speaking with you next year when we report our fourth quarter and full year 2011 results. Thanks again.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day, everybody.