Terminix Global Holdings Inc (TMX) 2013 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the ServiceMaster Company's third-quarter 2013 earning conference call. Today's call is being recorded and broadcast on the internet. Beginning today's call is Brian Turcotte, ServiceMaster's Vice President of Investor Relations. He will introduce the other speakers on the call. At this time, we will begin today's call. Please go ahead, Mr. Turcotte.

Thank you, Colin. Good afternoon and thank you for joining our third-quarter 2013 earning conference call. Today you will hear from ServiceMaster's Chief Executive Officer, Rob Gillette; our new Chief Financial Officer, Alan Haughie; and TruGreen President David Alexander.

For those of you who haven't had the chance to download the investor presentation from our web site, I'll walk through the agenda items shown on slide 1 this morning. Rob will first introduce three of our new executive team members who recently joined ServiceMaster. He'll then speak to the strong business leaders we have in place running American Home Shield and the franchise businesses before giving a brief overview of our third quarter performance. Rob will then review our decision to separate TruGreen from ServiceMaster and also speak to the strong performance of the remaining businesses within the portfolio. David Alexander will follow Rob and provide a brief update on TruGreen's turnaround initiatives. Alan Haughie will then review our third-quarter consolidated and segment results in some detail before we open the call to your questions.

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 Securities and Exchange Commission. These forward looking statements are not guarantees of performance and are subject to the risk factors contained in our public filings that may cause actual results to vary materially from those contemplated in the forward-looking statements. Information discussed on today's call speaks only as of today, November 14, 2013, and any rebroadcast or distribution of information presented on today's call after such date 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.

This morning, ServiceMaster issued a press release that was also filed with the SEC on Form 8-K, highlighting our third quarter 2013 financial results and our intention to separate TruGreen from the ServiceMaster portfolio. Additionally, the aforementioned presentation summarizing the third quarter results and key performance indicators can be found next to the webcast icon on the Investor Relations section of our web site. Included in our press release and presentation are additional disclosures that we believe will enhance your understanding of our financial and operating results. We may reference certain non-GAAP financial measures throughout today's call. We have included definitions of these terms in our press release which is available on our web site.

We have also included relevant reconciliations of the non-GAAP financial measures to the most comparable GAAP financial measures in our press release or on slide 23 of our presentation, in order to better assist you in understanding our financial performance. I'll now turn the call over to ServiceMaster's CEO, Rob Gillette, for opening comments. Rob?

Okay, thanks, Brian. Good afternoon to everyone. Thanks for joining. For those of you that listened to our second-quarter earnings update in August, you'll recall that filling key positions and building our leadership team was our number-one priority. I'm pleased to report that the team is now in place. As Brian mentioned, we're joined by ServiceMaster's new CFO, Alan Haughie. Alan comes to us with tremendous global experience, as shown on slide 3, having served since 2010 as CFO of Federal-Mogul Corporation. As we continue to drive performance at ServiceMaster, Alan brings a combination of strong leadership, integrity, and financial expertise, skills that will be critical to our continued success. We're very pleased to have Alan join the team.

I'm also very pleased to announce that Jim Lucke recently joined ServiceMaster as our General Counsel. Jim's had significant global legal experience in consumer and commercial businesses, with expertise in corporate securities, mergers and acquisitions, litigation, licensing, and intellectual property. Most recently, he served as the general counsel at Mohawk Industries. Jim's background will be especially helpful as we pursue new opportunities to grow ServiceMaster by expanding our commercial and international footprints.

The newest member of our team is Bill Derwin, President of Terminix. Most recently, Bill served as Vice President of Otis Elevator's $4.2 billion global field operations with 30,000 employees around the world, including the emerging markets of China, India, Brazil, and Russia. Prior to Otis, he spent five years as a consultant to McKinsey, leading a number of major initiatives for a broad array of Fortune 100 companies. He has extensive experience in strategy, operations, and sales and marketing.

On slide 4, while it's important to note that we recently added three talented executives to our team, we already have two very strong leaders in place at American Home Shield and our franchise business group. Mark Barry has been President of American Hope Shield since August of 2012 and has a strong track record of executing strategies to drive revenue growth and improve customer experience at world-class global companies, including United Technologies, General Electric, and Tyco International. Prior to joining ServiceMaster, he served as President of United Technologies' Automation Control Solutions, a $3 billion unit of UTC's climate controls and security business.

Tom Coba has been President of ServiceMaster Clean and Merry Maids since November of 2011. He has a strong record of growth and outstanding experience at three of the world's largest franchise-based companies. Before joining ServiceMaster, Tom most recently served as Chief Operating Officer of Subway restaurants. Prior to being with Subway, he spent 20 years at Dunkin' Brands where he held a number of executive positions. With Bill, Mark, and Tom as our business leaders, we believe we have a strong team in place to execute our strategic plans and grow profitably.

Before reviewing our third quarter results, I'd like to thank David Martin, Tom Campbell, and Larry Pruitt for serving as an interim CFO, general counsel, and Terminix President roles, respectively. They all did an outstanding job this their interim roles and I greatly appreciate their efforts and commitment to ServiceMaster.

Please turn to our third-quarter 2013 performance, which is highlighted on slide 5. Overall, our financial performance met our expectations. Total Company revenue in the third quarter increased 3% versus prior year. While the revenue increase was driven primarily by strong performance at Terminix, all of our businesses produced revenue growth versus prior year, including TruGreen. Our operating performance was stable compared to the same period in 2012, as the increase in gross profit related to the higher revenue was offset by higher selling expenses, primarily at TruGreen.

Slide 6 shows that if we exclude TruGreen's performance from all of our consolidated third-quarter results, total Company revenue would have been up 5% or $27 million, and our operating performance would have increased 17% or $19 million versus the third quarter of 2012. These results clearly show the strong top- and bottom-line characteristics of the remaining businesses. I should also point out the operating performance results shown without the allocation of any corporate costs associated with the TruGreen separation.

With that as a backdrop, I'd like to make a few comments about the announcement this morning regarding our plan to separate TruGreen from the remaining ServiceMaster portfolio. You've heard John Krenicki and I speak on the past two earnings calls about the need to turn TruGreen around. TruGreen President, David Alexander, and his team have taken the critical first steps in getting the business back on track, and we believe TruGreen is a strong brand that is positioned for growth. The team is committed to winning, but there's still a lot of work ahead.

As we've considered alternatives to create the most value for our investors, it's become clear that although we're seeing some early progress, TruGreen is on a different earnings growth timeline than the rest of ServiceMaster. As a result, we've decided to take steps to help TruGreen and ServiceMaster operate at their fullest potential. Effective December 31 of 2013, we plan to separate TruGreen from the remainder of ServiceMaster and create a stand-alone business that will operate independently within the CD&R portfolio. This separation will enable ServiceMaster to concentrate on growth while providing TruGreen the time and focus it needs to complete the turnaround and stabilize the business. We believe separating TruGreen will allow both Companies to fully realize their potential faster and with fewer distractions.

Slide 8 shows the remaining ServiceMaster and some of the key performance metrics for our businesses. What's exciting to us is that each business is performing well, has a strong brand, and is a market leader in its respective category. Terminix is a $1.3 billion business that has increased its operating performance at a compound annual growth rate of 9% over the past five years and has 25% operating performance margin. American Home Shield is a $700 million business that has increased its operating performance at a 4% rate with a 21% margin. Our franchise group, which is shown beneath the ServiceMaster Clean logo, and includes ServiceMaster Clean, AmeriSpec, Furniture Medic, and Merry Maids, is a $230 million business that has increased its operating performance at a 4% rate with a 39% margin.

The new ServiceMaster portfolio shown in the far right column, which includes Terminix, American Home Shield, ServiceMaster Clean, all the other operations and headquarters but excludes TruGreen, is a $2.3 billion business but has increased its operating performance at an 8% rate over the past five years with a 19% operating performance margin. What's important to note is that while the new ServiceMaster portfolio is performing well today, we feel that we have significant opportunities for growing these businesses by leveraging our leading market positions, infrastructure, and franchising expertise into adjacent markets and new sectors with very minimal investment.

Slide 9 shows ServiceMaster's revenue, operating and cash contribution performance, excluding TruGreen, from 2008 to the last 12 months ending September 30, 2013. As you can see on the top left, the Company has delivered consistent sales growth averaging 3% per year. Although the separate businesses are not shown here, they have all without exception, delivered growth over this period. We have also very consistent operating performance growth each year delivering a 7% average growth rate in operating performance, more than twice the rate of revenue. This is the result of healthy variable margins and consistent cost control. The individual businesses all performed well over this period, again with no exceptions. As I mentioned earlier in regard to the third quarter results, excluding TruGreen, this measure of operating performance does not reflect any allocation of corporate costs that could occur as a result of the TruGreen separation. We'll quantity that amount when we provide pro forma results for the remaining ServiceMaster portfolio.

CapEx and acquisition in the lower left side of the slide shows that our businesses require a low investment of about 4% of revenue over the period. This leads to an extremely high cash contribution rate defined in the bottom right graph as operating performance minus CapEx and acquisitions, averages about 80% of operating performance. The key message is that the business is growing the bottom line at twice the rate of the top line, that it's been doing this consistently for five years, and generates $300 million a year in cash flow in the process.

Alan will review the third-quarter consolidated and segment results in a moment, but I'll now ask David to provide an update on TruGreen's turnaround progress. Before he begins, I'd like to thank you him for his leadership during the past year, as we've begun the process of returning TruGreen to sustainable growth and profitability. David has demonstrated outstanding leadership, and I know he joins me in thanking everyone at TruGreen for the progress they've made over the past several months. David?

Thank you, Rob. And good afternoon, everyone. We at TruGreen owe a great deal of thanks to our colleagues at ServiceMaster for helping us to work through a significant number of challenge over the past 10 months. While I greatly respect and enjoy working with my teammates at ServiceMaster, I am very excited about this upcoming change. I believe that this is the best possible move for both ServiceMaster and TruGreen. At TruGreen, we now have the right team and the right plan in place. We're in charge of our own destiny, and we will take advantage of all the opportunities in front of us to make the TruGreen turnaround story a reality.

Please turn to slide 10. In the second-quarter earnings call in August, I mentioned that we were taking steps to ensure that we address our business challenges in a way that lays the foundation for improved profitability in 2014. The key areas of focus to drive success include growing our full program customer account through more targeted direct mail campaigns, and better execution of both outbound telesales and neighborhood door-to-door sales. We're also focused on addressing service delivery challenges to drive down costs and improve customer retention rates. For several month months now, our new leadership team has been engaged in leading five cross-functional initiatives addressing our most critical areas for improvement. We have seen meaningful progress in every area.

We believe that our recent performance improvement is a direct result of the many actions I've described in our previous calls. Albeit by a small amount, our third-quarter revenue increased versus 2012. The first year-over-year revenue increase in over two years. In addition, our service delivery costs are now tracking to return to 2012 levels by the beginning of 2014. As I stated earlier, we now have the right team and the right plan. And we'll take advantage of this opportunity to make the TruGreen turnaround story a reality. Alan will now review ServiceMaster's consolidated and segment results. Alan?

Thanks, David, and good afternoon, everyone. I'd like to start by saying that I'm very excited to be working with Rob and the ServiceMaster team, and I very much look forward to speaking and meeting with you as we move forward.

I will now briefly cover our consolidated results shown on slide 11, and then I'll move on to the business segment results. As Rob mentioned, third-quarter revenue increased 3% or $28 million year over year, with $27 million of that growth coming from Terminix, American Home Shield, and the franchise businesses. Gross profit increased $8 million, due primarily to efficient conversion of the higher revenue, lower claims costs at American Home Shield, and lower termite damage claims at Terminix. These factors were partly offset by labor, chemical, and vehicle inefficiencies at TruGreen, resulting in a slight decline, 0.5 point, in the gross profit percentage to 42.4%. In fact, excluding the impact of TruGreen, gross profit would have increased by $22 million on $27 million of increased revenue. And the gross profit percentage of the businesses excluding TruGreen, would have increased by 1.6 points to 47.3% of revenue.

Now, although selling, general, and administrative expenses increased $8 million in the third quarter versus the prior year, they were relatively flat as a percentage of revenue. The increase in SG&A reflects an investment in sales and marketing costs at American Home Shield as well as higher sales staffing at TruGreen. Third quarter 2013 net income was $46 million, and this compares to a net loss of $704 million last year. Although that included goodwill and trade name impairment charges at TruGreen of $725 million, that being the gross charge of $845 million, less $120 million of tax benefit on the charge. We reported third-quarter operating performance, which is a proxy for EBITDA, of $169 million comparable to the prior year, as Rob mentioned, because the increase in gross profit was offset by higher selling expenses, primarily at TruGreen.

Slide 12 provides a reconciliation of our non-GAAP segment performance measure, operating performance to net income. This slide also shows segment performance compared to last year. The reconciled items are very much the ones you might expect to see in any EBITDA reconciliation. The line described as Other includes stock-based incentive compensation charges and management fees, and in 2012 it included a $16 million loss on extinguishment of debt.

Turning to the results for Terminix shown on slide 13, third-quarter revenue was $334 million, up $16 million or 5% over last year, reflecting growth in both pest and termite revenue. In fact, pest control revenue increased 4%, as price increases more than offset the impact of a very slight drop in average customer counts of 0.5 point over the same period last year. Termite revenue, including revenue from new and renewing customers, increased 5%, again reflecting increased pricing, but also an increase in new unit sales during the quarter, offset in part by a roughly 2% decrease in average customer counts. We believe that the cold, wet Spring this year contributed to the decline in customer count. Third-quarter operating performance of $77 million is $8 million higher than last year, primarily reflecting the impact of the higher revenue combined with the lower termite damage claims expense. As a result, Terminix operating performance as a percentage of revenue increased 1.3 points to 23.2%.

At TruGreen, as shown on slide 14, third-quarter revenue was $314 million, a slight increase compared to prior year, driven primarily by improved pricing, offset in part by an 8% decline in average residential full-program customer counts. Operating performance was $40 million, a decrease of $19 million year over year. This primarily reflects the impact of labor, chemical, and vehicle inefficiencies, driven in part by technology issues. In addition, TruGreen sales staffing levels were also increased as part of the turnaround strategy.

Moving on to American Home Shield results on slide 15, third-quarter revenue was $219 million, up 2% compared to the prior year, reflecting improved pricing and a 2% increase in average customer counts. Operating performance of $60 million, an increase of approximately $10 million compared to a year ago, reflects the impact of higher revenue and lower claims costs, offset in part by higher sales and marketing costs as part of American Home Shield's investment in growth.

The ServiceMaster Clean segment, as shown on slide 16, reported third-quarter revenue of $39 million, an increase of 14% year over year. This was driven by a 10% increase in domestic royalty fees, primarily from the increase in disaster restoration services, a 25% increase in janitorial national account revenue, driven by strong sales activity and a 3% increase in sales of products to franchisees. As a result, operating performance was $17 million, an increase of $2 million over the prior year.

As a reminder, the Other Operations and Headquarters segment shown on slide 17, includes our Merry Maids operations, ServiceMaster Acceptance Company, and various business support functions. Merry Maids, which represents over 90% of the segment revenue reported third-quarter of $21 million, an increase of 3% compared to prior year. This primarily reflects revenue growth of over 6% from Company-owned branches, driven by a 4% increase in average customer counts and some improved pricing. Merry Maids operating performance for the third quarter was $5 million, up approximately $1 million to the prior year.

The third quarter cash flows are shown on slide 18. Net cash provided from operating activities was $30 million compared to $6 million last year. The $24 million improvement was primarily due to a $12 million change in working capital, which is favorable in the quarter, and the non-recurrence of $11 million in cash payments for core premium paid on the retirement of notes in 2012. Net cash used for investing activities increased to $41 million compared to $24 million last year, as a result of continued investments in technology and a different patent of investments in American Home Shield. Free cash flow for the period, being cash from operations less cash used for investing, was a usage of $12 million. Slight improvement over the use of $19 million in the prior year.

Net cash used for financing was $14 million, largely reflecting mandatory debt payments. This leaves with us a strong liquidity position, cash plus long-term securities totaled $525 million, of which $237 million is associated with regulatory requirements in American Home Shield and other purposes. And we had $324 million of unused revolver capacity, bringing total liquidity to $850 million. This is probably an appropriate point to mention, that at this point we anticipate that the legacy debt currently on the ServiceMaster balance sheet will remain with the ServiceMaster Company post spin.

I'll now briefly cover our year-to-date consolidated results, shown on slide 19. Revenue declined 2% to $42 million year over year, driven primarily by a decrease of $18 million at TruGreen and revenue recognition timing at American Home Shield. Gross profit declined $67 million and almost two points in gross profit percentage to 41.1%. This decline in margin primarily reflects reduced leverage due to the decline in revenue and labor and chemical and vehicle inefficiencies at TruGreen.

Now excluding the impact of TruGreen, gross profit would have increased by $26 million on $38 million of increased revenue, and the gross profit percentage of the business, excluding TruGreen, would have increased by 0.4 point to 47.6%. It's worth noting the stability of the gross margin here, excluding TruGreen, when comparing the third quarter, 47.3%, to the year-to-date, 47.6%.

Selling, general, and administrative expenses increased $36 million year to date versus the prior year, and by 1.9 points to 28.9% of revenue. The increase in SG&A primarily affects the investment in sales and marketing costs to drive growth across our businesses, as well as the higher sales staffing at TruGreen as part their turnaround.

The year-to-date loss for 2013 is $488 million, this compares to a net loss of $711 million last year. Both periods included goodwill and trade name impairment charges at TruGreen of $673 million in 2013 and $913 million in 2012. We reported year-to-date operating performance of $386 million, down $96 million to the prior year. And this decline was driven primarily by the $119 million operating performance decrease at TruGreen.

Year-to-date cash flows are shown on slide 20. Net cash provided from operating activities was $109 million compared to $100 million last year. In essence, EBITDA, or operating performance, fell by $96 million year over year. This decline was offset by better working capital movements in 2013 of about $60 million and the non-recurrence of the $43 million of core premium and retirement of notes in 2012, leaving cash from operations roughly the same as last year.

Net cash used for operating activities increased to $113 million compared to $98 million last year. And although the Company reported both lower CapEx and acquisition spend year to date, the net cash used for investing activity increased versus the prior year due to the increased investment in marketable securities at American Home Shield. So free cash flow for the year-to-date period was the usage of just $4 million, a decline versus the $2 million generated in the prior-year period. Net cash used for financing activities was $59 million year to date, largely reflecting mandatory debt payments.

That concludes my comments on ServiceMaster's consolidated and business segment results. I will turn the call back to Rob for closing comments. Rob?

All right. Thanks, Alan. Before we open up the call for questions, I want to reiterate that I'm very pleased with the team that we've assembled. Their skills and experience will provide a strong foundation for the continued growth and success of ServiceMaster.

The future for the remaining ServiceMaster portfolio is compelling. We've got great businesses, and we're committed to taking the steps necessary to continue to drive both top- and bottom-line growth. For example, Terminix entered the Canadian pest control market in August with the acquisition of Toronto-based Magical Pest Control, one of the largest pest control companies in Ontario. Our acquisition of Magical's operations marks an important strategic opportunity to expand our business into the growing Canadian market. In addition, American Home Shield has signed an agreement to acquire HSA Home Warranty, a leader in the industry, based in Wisconsin. We believe HSA uniquely complements our home warranty business and will help accelerate our pace of growth in strategic markets. We look forward to positioning both Companies to deliver even more value to our homeowners across the country. I look forward to sharing our performance and the progress of our growth initiatives with you in the coming quarters. I'll turn it over to Brian now to get into Q&A. Brian?

Thank you, Rob. As a reminder, during the question-and-answer session, we encourage you to ask any questions you may have, but please note that we don't provide any guidance. So please limit your questions accordingly. Also, please limit yourself to one follow-up question so that we can get to everyone in the allotted time. If there is time remaining, we can certainly take additional questions if you rejoin the queue. Colin, let's open up the line for questions.

Thank you.

(Operator Instructions)

Karru Martinson, Deutsch bank.

Good afternoon. I wanted to start with TruGreen. I wanted to get a sense of how are you implementing the spin? What's the mechanism there? And how are you coming up with the valuation for that?

This is Alan. It's a great question. We're obviously not really at liberty to fully disclose how we've established the value. But obviously we have done that with the assistance of professional valuation services.

I think the important mechanism question that I will deal with head on is that the spin is entirely consistent and in compliance with our covenants. So it is clearly based on our assessment and valuation within our restricted payment basket. All within the limits set by that. I assume that's the thrust of the question.

Yes. And as a followup here, you made the comments that by the beginning of 2014 we would be back towards 2012 levels. I'm trying to reconcile that with your comments about the timeline in terms of turning around TruGreen. What needs to be done to make this business back to the performance that it was at before?

Well, I think we've made a lot of progress in terms of our productivity. So we began this year with productivity down about 400 basis points. The most recent timeframe, we've been a lot closer to 50 to 70 basis points off in terms of labor as a percent of productivity. We've made a lot of progress there.

We believe by the time we start 2014, we'll be back to 2012 productivity levels. We've made a lot of progress in terms of our ability to deliver the services that we should deliver. You saw that in the fact that our revenue exceeded last year in the third quarter.

But we are well down from where our customer accounts have been historically. And we've got a lot of work to do to build back our customer count. There's going to be a lot of investments in terms of driving our sales labor, in terms of investing in door-to-door sales, in terms of investing in direct marketing.

There are system investments we want to continue to make to really drive our -- not just getting us back to historical levels, but creating really a strong system that will set us apart in our industry. So if you look at where TruGreen is, and you look at the timeline we still need to really build back our customer accounts and build back our business, we're just not on the same timeline as the rest of ServiceMaster.

Bobby Jones with Highland Capital.

I was wondering if you could help me understand. I'm looking at a document filed in April that listed the RP basket as $325 million at that point in time. Is that a fair observation?

I believe that's an old calculation. It would have been valid at that time. September, 2011, I think. So yes, that would have been a fair assessment of those strict repayment basket at the end of September, 2011.

Okay. Then I'm trying to understand, when you are performing your valuation for the TruGreen business, if I look back in the last seven years, the average EBITDA has been $180 million. And companies of this caliber and franchise strength, while customer accounts are down a little bit, LTM revenue is not down enough to justify that kind of impairment to fit within that basket, it would seem to me.

A good question. I would say that two things, you are measuring it against a basket that's two years old. So it's not necessarily the most current basket. And if you look at the EBITDA of TruGreen in the last year, there has been a significant change in the value of that business.

The trajectory of that EBITDA to now and even into the third quarter, despite the beginning of a revenue turnaround, is extremely low. And I'm not confident that the historic EBITDA is necessarily indicative at this point, in the absence of completion of these turnaround actions, not indicative of its future EBITDA.

Todd Harkrider, UBS.

Thanks for taking my questions. To stick to the stronger divisions and the strong management team now, I know some strategic decisions might not be able to be shared still. But obviously ServiceMaster does have a full team again, which is nice to see. And it's even nicer to see that some of the key hires like the CEO position, CFO, and President of Terminix positions all have significant international experience as well as public experience.

Rob, can you talk about if having a full team on board allows you to get more aggressive on acquisitions now? Specifically, larger bolt-ons internationally than tuck-ins in the US. And CD&R's possible commitment to maybe throw some money in to actually aggressively go after larger ones to make them deleveraging?

And then also, if CD&R decided to pull the trigger tomorrow, to try to IPO the remaining business, given it is a very strong core, and you have a pure play pest control Company trading at a very nice multiple out there, do you feel like you're more ready today than you would be in the past given the full team?

Well, I think first is, I'd say thanks for the comments on the team. And I'm pretty excited about it. If you look across the board, you see international experience, but also strong business backgrounds in a lot of different areas and different types of businesses. So they bring a lot of knowledge in growth and methods to market and productivity that I don't think we had before. So that's great.

I think what it does is allows us to build on the strengths that we've had historically as a Company and then focus on new ways to grow. And I think acquisitions would be a part of that. So we'll continue to look at things that make sense. In all of these things you can imagine, despite some of the changes that we had to go through and think about with TruGreen, there's been incredible support from CD&R to invest in the business and grow.

So I think we'll look at that as a method to grow. What I want to do is, with the team in place now, is to get through the transition with TruGreen and then focus on really firming and developing our strategies that will direct us as to where to invest and how to grow. We're pretty excited about that and you could probably see that throughout the presentation.

I'm excited about David's team and what they've done and what they're going to do. It's a challenge, but I think they know what to do. It comes to execution, we'll get through the year of 2014, the year of looking at the total cycle and where they are.

In general, proud of the team and proud of the capabilities and position we have. And really we did it to look at and best position the Companies to create value. So whatever the best means is, CD&Rwill decide how to do that.

Okay. On the American Home Shield side, you have 1,600 employees while the Company you acquired, HSA, has around 200 employees. Would sizing of the employee base be a good approximation for the sizing of revenues as well? Any additional color you could give around that is helpful. And from your opening comments, it sounds like you're going to be more aggressive on trying to consolidate that sector more actively going forward?

Yes, thanks for the question. I think we've done a pretty good job of evaluating all the market opportunities out there. And HSA we felt was a very strong Company basically serving a regional market that we didn't participate as highly in.

I think it's a great complement to the team. I think there's synergies that we can continue to work on with them and with the existing Home Shield team. And then with the investments that we're making, some of the systems look at new product offerings and things to position in the market. So we're excited about it.

They're bringing a different perspective to the market, which we'll build on and look at how to grow the two together. So I think the two together are even stronger than we were separately. So the headcount and things, we'll evaluate as we merge the businesses and determine how best to go forward.

Kevin Coyne, Goldman Sachs.

Hi, thanks for taking the question. If I go back to the August call, it was a lot about systems related to TruGreen and a lot of, let's say, work that needed to be done on that front. But there weren't a lot of details provided on this call related to that.

I was wondering how much still needs to be spent on upgrading the TruGreen systems? And as you think about spinning out the business, how much cash needs to be put with that spinout for core operations? And then do you have to also allocate a large chunk of cash just for the systems upgrade going forward?

Let me first of all talk about where we are from a systems standpoint. Then I'll let Alan address your more financial questions.

We've accomplished a lot from a systems standpoint. We're not there, where we want to be. The analogy I've used within the Company, to the folks within ServiceMaster, within TruGreen, are when we began the year, I thought our systems were a liability and a competitive disadvantage.

Today, I feel with all the progress that's been made, we are competitively neutral from a systems standpoint. With the initiatives we have underway, I think six to nine months from now we will view our systems as a source of pride and a point of competitive advantage.

So we have made a lot of progress. We're not where we need to be yet. Right now, in the process arena, we have 16 significant initiatives. In the systems arena, we have over 30 significant initiatives. A lot of those things will roll out between now and the month of January. Our goal is to get an awful lot of that in place as we go into the season next year. We'll have continued things we want to focus on with our systems next year.

Again, where I view TruGreen today, is we've made a lot of progress in terms of ability to actually capture revenue. We've made a lot of progress in terms of the ability to get the work done and to begin to do it more productively. We have lost a lot of customer count in the last two years. That means that from a leverage standpoint we are nowhere near as strongly positioned as we once were.

We still have the same number of branches. We still have an awful lot of the same costs. So we're operating today, by the end of this year, with 300,000, or more, fewer customers than where we were hitting great numbers. We've got a lot of work to do in that area and a lot of investment to do to regrow to rebuild this business.

With that, I'll let Alan comment on the rest of your question.

Thanks, David.

The issue is not so much the dollar investment, which is relatively modest and not critical to the spin. It's more creating the right systems and processes, as David mentioned. So it's not necessarily the financial issue, but more the execution and success of those systems.

Okay. Maybe I could just ask about what you mentioned about growth going forward. You said about expanding into adjacent markets. I was wondering if you could give us any color in terms of what markets you think you can see some expansion.

And in order to keep up within, let's say, I forget what your CAGR was for five years on top line, I think it was 8% on EBITDA. If you wanted to maintain that top-line growth, how much has to come through expansion, or how much do you think can be organic?

I think the focus, and I can talk business by business, I guess would be the easiest way to do it. If you look at Terminix, there's opportunity to expand in a number of places, including wildlife management, the commercial marketplace where we've got business, obviously. But we haven't focused on or concentrated on it as much as we have the residential side. Then, international expansions, like we did into Canada. So that's really the focus in Terminix.

With American Home Shield, part of what has held us back has been the system capability and having a CRM system that enables us to look at offering different products effectively and implementing it. We hope to have that up in the first quarter and running. We've tested it, things are going well. It's a good progress there. We need that system to enable us to broaden the product offering and base.

We've been growing very well in the franchise businesses. You saw the growth rate there. And good expansion there, both on franchise sales, new franchise sales, but also on the core growth. We've got some good development projects in place, including new technologies that our customers are pretty excited about, to professionalize what they do on the disaster recovery side, and some of the other work.

I think with a lot of the changes that we've had, it's made it more difficult to focus on growth. And some of David's challenges over the last year to right TruGreen have been distracting, which is part of why we thought the timing of right to set it up on its own within CD&R and let David and team implement and focus on the challenges and resolutions they have to those challenges and take the time to do it. And then us to really focus on growth. So that's why we've also hired people that we think can do that for us. So that's what we're looking at.

Ellen Itskovitz, UBS.

Are you looking to get TruGreen back to the margin level that it had initially been at? Do you think you guys can accomplish that?

I think we have the opportunity to drive a lot of productivity improvement to TruGreen. And I think as we rebuild our customer base over the next few years, you'll see a lot of improvement in our margin percents. The one thing I would tell you is to some extent the payroll model was a little different prior to a year and a half or so ago, when there was some changes from a Department of Labor standpoint. But I think we can produce very, very strong operating margins, particularly as we rebuild our customer base.

And just from your perspective, it will take a lot of investment in systems and things like that for all --

I'm sorry. Would you ask that again?

It's going to take a lot of investment in systems and things like that.

Well, it's going to take time, number one. It's going to take investment in systems. We're going to begin to rebuild based on the fact that we do have better tools today. Our ability to serve is better today.

If you look at our retention on our base customers, it's at a very high level. Where we had problems last year were -- in 2013, have been retaining new customers. That has been very directly a result of issues with our systems.

So if you're an existing customer, we have been fairly effective at scheduling your services and delivering your services. If you're a new customer, we've had to do what we call best fit. We've had to figure out places to fit you in to schedules and to serve you.

We had a lot of system issues around that. And because of that, we didn't have the retention we expected on new customer sales. So as we get that fixed, we begin to retain at a higher percent on new customers, we continue to retain at increasing percents on existing customers. And we invest in all of our sales channels, we will begin to rebuild our customer base. But it will take several years to recover the number of customers we've lost in the last two years.

Lieng Chin, MetLife.

I wanted to clarify from an earlier question, will any cash be traveling with TruGreen, cash traveling from ServiceMaster to TruGreen?

Initial assessment is that there will be a modest amount of traveling to TruGreen, yes.

Okay. And then will ServiceMaster, the legacy ServiceMaster, be receiving any compensation for losing the TruGreen asset?

No.

Okay.

Paul Hanson, Loomis Sayles and Company.

Hi, guys. Thanks for taking the question. Actually, most of mine have been answered. You had mentioned that there will be pro formas released at some point by cost allocations, etc. Do you have a target timeframe for that?

Not really. There will obviously be, and I'm assuming -- assuming we go ahead with this and successfully, in our 10-K at the end of the year.

There's a chance you may not pull the trigger on this? Is that --

No, no. (laughter)

Are you just being cautious with your wording?

Exceptionally cautious. (laughter)

Okay, fair enough. I'm sorry, I had to jump out during your answer to another question. Is it reasonable to view this as accelerating the timeframe for an IPO? It seems, it's kind of a beacon that's flashing here.

Well, let's put it this way, there's always the idea of a liquidity event somewhere in ServiceMaster's future. I would say this brings that liquidity event closer to us. Clearly.

Matt Dratch, Reef Road Capital.

Hi, thanks, guys. I just have a couple questions. One was around some of the customer metrics that you disclosed in your release on the Terminix business. It seemed like some of those had fallen off a little bit, despite the EBITDA growth and revenue growth. I'd like some discussion there.

And then also you said last time on the call you spoke a little bit about your legacy customers showing you a lot of quote, graciousness, I believe was the word used. And this time you said them sticking with you is the result of you providing them solid service. So I feel like there's a little differentiation there, and having some clarity around the change in tone there would be helpful.

Yes. Firstly, it's Rob. I'll take the question relative to Terminix. Yes. We did mention in a number of categories whether it's pests or termites, some slight decline in customer accounts which, we call out because we're disappointed in that. When you get a customer, to Dave's point, you want to keep them. That's the most cost-effective way to do so.

In some cases, I think Alan might have mentioned in his part of the talk, that it was somewhat seasonal and due to the weather in the first quarter and really not having much of a pest season either because of the mild weather. So part of that is what's impacting the business. But I think that there has been some cancels that we want to try and rebirth, and that's why I mentioned it in my comments. And we're going to focus across the board do that.

As Dave said, we've retained a good core. Hanging on to some of the new ones has been a challenge in TruGreen. We've always been good at customer retention. We want to keep it above the 80% level. In some instances, we haven't been as successful at others. That's a big focus for all the team in Terminix, TruGreen, HS, no matter where you are.

To your question about my August comment and my comment today, I actually think those comments are very aligned. What I believe I said in August was that our core customers have shown us a lot of grace and they have stuck with us. What I said a moment ago is that our retention rates with our base or core customers have held up well. So those comments are actually the same comment.

Our service for our base customers has definitely been better than our service for our new customers. But that, by no stretch of the imagination, does it mean it's been great. We've had issues, early in the year, very severe issues from an ability to serve everyone. We were definitely better. And I believe the comment I said is that we did a modestly good job or moderately good job serving our core customers. But did not do nearly as good a job serving our new customers where we couldn't get them to fit in the schedules.

So we have not provided all-star service to anyone early this year. It has definitely gotten better. But we have provided better service, relatively speaking, to existing customers who are already scheduled in our systems, than to new customers that we tried to fit in to schedules.

Dave DeCoste, Neuberger Berman.

Thanks. Thanks for taking my question, guys. My first question is, are you going to be releasing what the RP basket was before, and what it is after the spinoff of TruGreen?

No, I don't believe so, no.

Okay. Trying to calculate it is kind of difficult. Is it fair to say it was somewhere in the 650 range?

If I have to answer the question, I'll be contradicting my previous answer. (laughter)

Well, I'm not asking for the exact number. I'm wondering if you can agree with an area for if we're close, because we can't calculate it exactly.

I appreciate that. Sorry. I don't think I can -- I can't allow myself to be drawn further on that.

Fair enough. My other question is, what options are you looking at to delever the new business? Obviously there's been some questions about an IPO and that's the obvious one.

But what about other options you have? Would you consider selling a segment to delever and actually paying down some debt if you do that?

Well, obviously we'll look at every -- I'm going to give a stock answer here. We look at every opportunity to enhance and maximize the value for our stakeholders, and we'll continue to do that.

What kind of leverage do you think you need to go public for the new business?

What kind of leverage? Well, you yourself will know that they like to call it the general levels of leverage that under current market conditions, X multiple of EBITDA that a business could support. I don't see us as being any different from the way most multiples are working today in the marketplace in terms of leverage as a multiple of EBITDA.

Kevin Ziets, Citi.

Thanks for taking the questions. My question is -- sounds like you're not going to give the actual RP basket levels. Could you say in which instrument you think the RP basket is most restrictive? Whether the agreement or which of the bonds?

No. I will say that the difference between them is very small.

Okay. That's helpful. And there are a number of financing conditions, or I shouldn't say financing conditions, but closing conditions with respect to the spin. Could you call out any of the important ones?

Oh, to be honest, there aren't any really critical ones.

Okay.

So it's small things, such as ensuring we have vendor consent, and so on like that, where there are certain contractual arrangements. Just making sure the Is are dotted and the Ts are crossed in respects like that. And that's what gave rise to my caution. Nothing, no show-stoppers in my opinion.

Jack Burgess, with PineBridge Investment.

Hi, guys. Thanks for taking my question. What I want to ask is since we do have an asset, TruGreen, that will be going out of our credit, albeit one that's still a work in progress, and some cash and no debt, then it seems clear that on a net leverage basis, leverage is going to be increasing as a result of the spin. So I wanted to ask you why your existing lenders should feel good about this announcement.

Well, there are two reasons. If you think back to the -- I don't know what slide number it was, the slide that showed the underlying performance of ServiceMaster survivor or the portfolio after TruGreen, what you see, I'm going to reiterate what Rob said, is relentless, inexorable sales growth, EBITDA growth at twice that rate, minimal investment to both grow and maintain the business and shockingly high conversion of EBITDA into cash flow. The business that remains, in my opinion, is easily capable of servicing the debt, and it has a, while being smaller, has a better risk profile than the business including TruGreen, in my opinion.

I appreciate those remarks. But those are part of our credit before the spinoff. So how are we better off after the spinoff?

I would also add that there is -- to take one of my previously comments and repeat it just as coyly. This brings a liquidity event a little closer to the present day, I would say.

Marianne Manzolillo, Angelo Gordon.

Sure. Just to continue along those lines, sure the credit post the spinoff displays better growth characteristics. But there was value associated with TruGreen that is now being spun off. And we're not being compensated for it. So again, how are we supposed to feel good about that?

Well, I would say that within the terms of the various credit agreements, it is in compliance with our restricted payments basket. So--

Okay. Go ahead, I'm sorry.

I wasn't going to say much, it's okay. (laughter) Go ahead.

The balance in the restricted payment basket that you referred to earlier of approximately $325 million, that was last year, Q2 2012?

I think it was 2011 -- I think it was 2011.

2011.

2011. Okay. Now would you say that the TruGreen business is at its trough right now as it relates to customer count or customer retention?

You know, we're still -- we still have some upper battles in terms of customer account. I don't think we're going to begin to build customer account significantly for several -- probably two, three more quarters. I think we're stabilizing customer count.

So yes, I would probably say we're at a trough, but I don't us beginning to really raise that number for several quarters. I think we're to a point we can stabilize, but I wouldn't say we're at a point where we're going to be building it again for several quarters.

Yilma Abebe, JPMorgan.

Thank you. A real quick one from me. I wondered if you could perhaps comment on the timing of the spin. Why now, given the improvements that are you seeing in the TruGreen book of business?

That's the first question. The second question is, from a free cash flow perspective, would this spin be accretive on an LTM basis?

I'll answer the last question first. The answer is, yes, it would. The spin would be accretive. Our cash flow on a free cash flow basis would improve in the absence of TruGreen.

As to the timing, I think essentially Rob covered that in his earlier description. That we've reached a point where we believe that the Companies need to move at different speeds. And I feel as though we've largely covered that area a number of times.

It's Rob. When you tie it in to David's comments about customer accounts, it's unfortunately a lot easier to lose than it is to gain them. I think that's the primary focus, and it's going to take us time to do that as we build that base. It helps him drive his performance. But we think it will take more time, and yet the remaining ServiceMaster businesses have performed very well, so --

Cynthia Bush, Teachers Insurance.

Thank you. Most of my questions have been answered. But are you going to need to get any type of amendment or approval from your bank lenders for the spin?

No, we don't believe so, no.

And do you need IRS approval as one of the approvals prior to consummating this?

Yes, yes.

It sounds like given the timing, that you must be well down the path of that?

That's correct, yes.

Thank you.

Thank you.

Karru Martinson, Deutsch bank.

I was planning on asking what the RP basket was, but since you have been fairly adamant (laughter) you won't give it to us. Perhaps you could ballpark it, I think someone earlier talked about the end of September, 2011, being at that $325 million. Since then, are we looking at a number that's below that? Between that and $500 million? Or do you feel that it's greater than that?

Oh, you've got me. I decided early on I was going to answer it the third time it was asked. (laughter) No, no, sorry, I still don't -- I'm still not willing to answer that question.

Not even a range? That was my followup.

Not at this point, no.

All right.

But thank you for asking.

Preshith Kunta, Nomura.

It's actually Greg Ford. Thanks for taking the call. I guess you'll get an opinion that the value of the spin is of a -- you'll argue that it's below the thresholds for a bank debt amendment and/or bondholder waiver. So will that value, since you guys are filing, will that value ever be made available to the bank lenders and/or the bondholders? What you're arguing that it's worth?

I don't believe so, no. No.

Okay. That is all. Thank you.

Thank you.

David [Kariski], Apollo.

Thanks, guys. I think just from the question before about what is the value to the debt holders of the spin, and you pretty much said that the only value you can see is that it accelerates the timing of the liquidity event. And yet you wouldn't answer before any feelings about where you think leverage needs to be for that liquidity event to happen. Can you give us an estimate of just a general range of either timeframe where you think you're going to get that leverage? Or a leverage that you think the Board or anyone is comfortable?

Obviously you must have put a lot of thought into this in order to make the decision that you wanted to do the spin in the first place. I'm trying to get a sense for the debt holders about how you thought about that.

I appreciate the reasoning behind the question. I'll apologize that I'm not really in a position to answer that because much of this is still being worked out, and it would be premature of me to answer the question.

Well, where it closes, when the spinoff closes and after you filed the 10-K and pro forma, will you be able to explain it then?

Not really, no. Not in the context of your question, which if I understand it correctly, is how much debt do we think, looking out into the horizon, the Company would be able to support given its EBITDA level. That's, I think, is the first question. And therefore, what would we foresee in that future? At this point in time, it's too early for me to answer that question.

Mr Turcotte, there appear to be no further questions on the phone lines at this time. I'll now turn the conference back to you. You may continue with your presentation or closing remarks.

Thank you, Colin. Thank you again for participating in today's conference call and webcast. As a reminder, a replay will be available on our web site in about an hour. We look forward to speaking to you again when we announce our fourth-quarter results in late February of 2014. Have a good evening.

Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation. You may now disconnect your lines.