Terminix Global Holdings Inc (TMX) 2013 Q4 法說會逐字稿

Ladies and gentlemen, thank you for (technical difficulty). Welcome to The ServiceMaster Company's fourth-quarter and full-year 2013 earnings conference call. Today's call is being recorded and broadcast on the Internet. Beginning today's (technical difficulty) Vice President of Investor Relations, and 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, Charlene. Good morning, and thank you for joining our fourth-quarter and full-year 2013 earnings conference call. Today you will hear from ServiceMaster's Chief Executive Officer, Rob Gillette; and Chief Financial Officer, Alan Haughie.

For those of you who haven't had a chance to download the investor presentation from our website, I'll walk through the agenda items shown on slide 1. Rob will lead off by giving a brief overview of our fourth-quarter and full-year performance with and without TruGreen's results. He will then review the performance of the segments remaining in the new ServiceMaster and pro forma portfolio results since 2010. Alan will then review our fourth-quarter full-year consolidated results in more detail and also discuss our full-year segment results 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 legend 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, February 27, 2014, 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 fourth-quarter and full-year 2013 financial results. Additionally, the aforementioned presentation summarizing our results can be found next to the webcast icon on the IR section of our website. 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, and we have included definitions of these terms in our press release, which is available on our website. We have also included reconciliations of the relevant non-GAAP financial measures to the most comparable GAAP financial measures in our press release and presentation in order to better assist you in understanding our financial performance.

All references on the call to EBITDA are to adjusted EBITDA as defined in the morning's press release and the figures labeled as such therein. Please note that we will not be make any comments in our prepared remarks, nor can we respond to any questions during the Q&A period, in regard to any debt or equity financing transactions for ServiceMaster.

I will now turn the call over to ServiceMaster's CEO, Rob Gillette, for opening comments. Rob?

Okay, great. Thanks, Brian. Thanks to everyone for joining our call today. Before I speak to the financial results, I'd like to remind everyone that we completed the separation and spinoff of the TruGreen business on January 14. That means that TruGreen's financial results, as Brian said, for all periods are still included in our financial statements reported in our press release this morning and in our 10-K that will be filed in a couple of days.

During today's call, Alan and I will present our results for 2013 as reported, including TruGreen and on a pro forma basis for the new ServiceMaster excluding TruGreen. This will require a little more detailed discussion, so please bear with us as we walk through the changes to our business.

As we said last quarter, we are confident this separation should enable ServiceMaster to focus on growth and realize our full potential faster. We believe our path forward for the new ServiceMaster is very exciting. We have leading market positions in fragmented markets with attractive growth dynamics. We also have a stable, diversified business model that has demonstrated highly consistent and resilient growth over time. These businesses are sustainable, have great potential and very attractive cash flows.

Page 4 highlights our key areas of focus to create value throughout ServiceMaster. First and foremost, enhancing the customer experience to drive retention and the acquisition of new customers, introducing new products and services to capture share and leverage our core customer base, market expansion and tuck-in acquisitions to expand both geographically and through the addition of new business, productivity driving process improvements that enable us to improve efficiency and service to our customers, and to leverage our supply base and purchasing power to reduce costs.

On slide 5, we provided a summary of our fourth-quarter 2013 performance versus prior year. As you will see, results with TruGreen are included on the left side of the slide and excluded on the right. Including TruGreen, total Company revenue in the fourth quarter increased $38 million, or 6% versus prior year. While the revenue increase was driven primarily by a strong performance in American Home Shield, Terminix also provided solid revenue growth versus prior year.

Our fourth-quarter 2013 EBITDA improved $8 million, or 9% compared to prior year, as the growth that American Home showed more than offset the declines at TruGreen. When you exclude TruGreen's performance from our consolidated fourth quarter of 2013 results, total Company revenue would have increased $41 million, or 8%. EBITDA excluding TruGreen would have increased by $16 million, or 23%, and EBITDA margins would have increased by 1.9 points to 16.7% versus prior year. I should point out that the EBITDA results shown in the overview slides exclude the allocation of any corporate costs associated with the TruGreen separation.

A summary of our full-year performance is shown on slide 6. Including TruGreen on the left side of the page, total Company revenue for full-year 2013 was relatively flat versus prior year, as an 8% revenue decline at TruGreen offset solid revenue growth from the remaining businesses. Our full-year 2013 EBITDA declined $95 million, or 17% compared to the same period in 2012, as a $127 million decrease at TruGreen more than offset growth in the remaining portfolio.

Excluding TruGreen from a consolidated full-year 2013 results on the right side of the page, total Company performance met our expectations. Revenue would have increased by $79 million, or 4%. EBITDA excluding TruGreen would have increased by $37 million, or 9% versus 2012, and our EBITDA margin would have increased to about 20%. Although this improvement is driven primarily by a 21% EBITDA growth at American Home Shield, ServiceMaster Clean reported 11% growth as well.

Turning to slide 7, you may recall that we provided an earlier version of this chart last quarter. The larger table provides full-year 2013 revenue, EBITDA, and margin for the individual segments and the new ServiceMaster consolidated. Three-year compound annual growth rates for revenue and EBITDA for the segments and consolidated portfolio are also provided. The smaller table on the right includes this same information for TruGreen.

Terminix has a $1.3 billion termite business and pest control services business that has increased its revenue and EBITDA at a 4% and 6% CAGR, respectively. American Home Shield is a $740 million provider of home warranty contracts that has increased its EBITDA at a 14% rate and reported a 23% margin for 2013. Our Franchise Services Group -- which includes ServiceMaster Clean, AmeriSpec, Furniture Medic, and Merry Maids -- is a $236 million business that has increased its EBITDA at a 2% rate and reported a 38% margin for 2013.

The new ServiceMaster consolidated portfolio shown in the far-right column includes Terminix, American Home Shield, Franchise Services Group, and other operations and headquarters but excludes TruGreen in all periods. In total, it's a $2.3 billion business that has increased its EBITDA at an 8% rate since 2010 and reported a 19% margin for 2013. This performance summary includes an annual allocation of $25 million of corporate expenses to TruGreen, as noted in the boxes you see on the chart.

Slide 8 provides the ServiceMaster portfolio pro forma results for 2013. All metrics exclude TruGreen for all periods. Starting the top left-hand corner of the chart and moving from left to right, you can see that ServiceMaster has delivered consistent revenue growth, averaging 4% per year. Although the separate businesses are not shown here, they have all, without exception, delivered growth over this period. We have delivered an 8% average EBITDA growth rate since 2010, twice the rate of revenue growth. This is due to strong variable margins and consistent focus on productivity. It's important to note that, like the previous slide, this measure of EBITDA reflects the pro forma reduction of $25 million of corporate cost as a result of the TruGreen spinoff.

The box located in the lower left provides a measure we call business reinvestment. This is the sum of CapEx, acquisition payments, and capital lease payments each year. As you can see, we reinvest about 4% of annual revenue into our businesses on a consistent basis. The cash contribution rate shown to the right and defined as EBITDA minus business reinvestment averages about 78% of EBITDA each year.

The key takeaways from this slide and from my presentation here is the business is growing the bottom line at twice the rate of the top line, and we have been doing this consistently over time; that it generates well over $300 million a year in cash flow while doing so.

I'd like to turn it over to Alan now, who will review the fourth-quarter and full-year consolidated and segment results. Alan?

Thanks, Rob. And good morning, everyone. I will now briefly cover our fourth-quarter 2013 consolidated results shown on slide 9. Given that the separation of TruGreen has now occurred, we felt that the presentation of the P&L accounts as separate businesses would be useful. So starting on the left, the blue highlighted column shows ServiceMaster's results without TruGreen on a pro forma basis. The next column shows the TruGreen business itself on a pro forma basis. And the third column shows total ServiceMaster as reported in our 10-K.

The next three columns show the corresponding year-over-year variances. It should be noted, however, that the pro forma results shown here do not reflect the impact of the $25 million of annual costs that were transferred effectively when the spin went into effect in mid-January.

So focusing now on the two blue highlighted columns for pro forma ServiceMaster. As you can see, revenue increased over 8%, or $41 million versus prior year, with the growth coming from Terminix, Home Shield, and the franchise businesses. Gross profit increased by $29 million, and the gross profit percentage of the business increased by 2.2 points to 44.4% of revenue, due primarily to the efficient conversion of the higher revenue and lower claims costs at American Home Shield.

Now, although selling, general, and administrative expenses increased to $12 million in the fourth quarter versus the prior year, they actually improved 0.2 of a point as a percentage of revenue. And this increase in SG&A reflects an investment in sales and marketing costs to drive incremental sales growth, primarily Home Shield.

Now, as I mentioned last quarter, all of the debt currently shown on the ServiceMaster balance sheet remains with ServiceMaster post-spin, hence the entirety of the interest expense is reflected in the pro forma ServiceMaster results.

So the fourth-quarter 2013 pre-tax net loss was just $2 million but an improvement in $19 million over the net loss of $21 million in 2012. ServiceMaster pro forma reported fourth-quarter 2013 EBITDA of $89 million, an increase of $16 million over the prior-year; again, as the increase in gross profit more than offset the higher selling expenses.

Moving briefly to TruGreen, shown in the second and fifth columns, this business had a revenue decline of roughly 2%, or $4 million; $27 million less net income, actually resulting in a net loss of $16 million; and $1 million of EBITDA, a decline of $9 million versus the prior year. And on a consolidated basis, ServiceMaster's fourth-quarter revenue increased 6%, or $38 million year-over-year. And the fourth quarter 2013 pre-tax net loss was $23 million compared to a pretax net loss of $20 million in 2012.

On an after-tax basis, the net loss in the fourth quarter was $16 million worse than the prior year, due largely to a $60 million benefit from a tax true-up in 2012 that did not occur in 2013. And I should note that we moved from reporting operating performance as our segment performance measure to EBITDA for the fourth-quarter and full-year 2013 results and will continue to do so going forward. By definition, EBITDA, or adjusted EBITDA -- we'll use the terms interchangeably -- differ from operating performance and that we are now adding back non-cash asset impairments. And we do include the equity interest in joint ventures, which is relatively minor.

Slide 10 provides a reconciliation of our segment performance measure, adjusted EBITDA, to net loss for the fourth quarter, and the items are exactly those to be expected it in a traditional EBITDA reconciliation. The line described as other includes stock-based incentive compensation charges and management fees in both quarters as well as a non-cash asset impairment charge in 2012.

Moving to segment performance, slide 11 provides the full-year results for Terminix. 2013 revenue, full year, for Terminix was $1.3 billion, up $44 million, or 3% over last year, reflecting 4% and 2% growth in pest control and termite revenue, respectively. The 4% increase in pest control revenue reflects improved price realization offset in part by a slight decline in average pest control customer accounts. The pest control customer retention rate for 2013 was comparable to prior-year. And the 2% increase in termite revenue, again, reflects improved price realization and an increase in new unit sales offset in part by a slight decline in average customer accounts.

Full-year 2013 EBITDA of $319 million is roughly comparable to last year, primarily reflecting the flow-through effect of higher revenue and lower incentive compensation expense, offset by a number of discrete charges in the fourth quarter including year-end increases in reserves for deferred revenue and product obsolescence due largely to the introduction of new technology, and certain legal matters.

Turning to the American Home Shield results on slide 12, full-year revenue was $740 million, up 3% compared to the prior year, reflecting higher prices and customer accounts. Full-year EBITDA was $171 million, an increase of approximately $29 million, or 21% compared to a year ago. And this increase reflects lower claim costs and the flow-through of higher revenue as well as a change in provisions for tax-related reserves, offset in part by higher sales and marketing costs, as we have said, to drive incremental sales growth.

And please note that earlier this month, the American Home Shield division ceased efforts to deploy a new operating system. This decision, we believe, will allow the business to more effectively focus its energy and resources on driving growth and serving our customers. Important factors that led to this decision include the fact that our plans to extend the technology beyond Home Shield to other business units lost viability with the spinoff of TruGreen. The existing operating system has been very effectively modified to support the needs of the business, and the anticipated benefits of the new system can now be achieved through other means. So the business will now be able to invest resources in areas that will allow it to focus on growth. As a result, though, an impairment charge of approximately $50 million -- that's 5-0 -- is expected in the first quarter of 2014 relating to this decision.

The ServiceMaster Clean segment, as shown on slide 13, reported full-year 2013 revenue of $151 million, an increase of 8% compared to prior year, driven by a 32% increase in janitorial national account revenue and a 3% increase in domestic royalty fees.

Full-year EBITDA was $68 million, an increase of $7 million, or 11% versus the prior year, driven by the impact of the higher revenue.

And please note that we plan to combine Merry Maids, which is currently reported within the other operations and headquarter segment, with ServiceMaster Clean to create a Franchise Services Group segment for reporting purposes in the first quarter of 2014.

The other operations and headquarter segment, as shown on slide 14, as I said, not only includes Merry Maids but also includes the ServiceMaster Acceptance Company and various business support functions. Merry Maids, which represents over 90% of the segment revenue, reported full-year 2013 revenue of $85 million, an increase of 3% compared to prior year. And this increase primarily reflects revenue growth in Company-owned branches, higher average customer accounts, and improved price realization.

Full-year 2013 EBITDA declined $4 million versus prior year, reflecting higher key executive separation charges and higher IT costs at Merry Maids versus prior year.

Fourth-quarter cash flows, as shown on slide 15 -- net cash provided from operating activities was $143 million in the fourth quarter of 2013, compared to $135 million in the prior year. The primary source of cash inflow was from the largely seasonal working capital movements of about $120 million in both years. Net cash provided from investment activities was $8 million, compared to $20 million used to invest in activities last year. The $28 million swing was primarily related to lower CapEx and acquisition spend and higher sales of marketable securities in our American Home Shield portfolio.

Free cash flow for the period, being cash from operations plus cash provided from investing, in this case, was $151 million, a $36 million improvement versus prior year. Net cash used for financing was $22 million, largely reflecting mandatory debt repayments.

So this leaves us with a strong liquidity position. Cash plus short- and long-term securities totaled $635 million, and we have $242 million of unused revolver capacity, bringing total liquidity to $877 million.

I will briefly cover now our full-year 2013 results shown on slide 16. Again, we presented the P&L accounts as separate businesses. Starting on the left, ServiceMaster's results without TruGreen on a pro forma basis is shown in the first blue column. And as you can see, revenue increased to nearly 4%, or $79 million versus prior year, with growth in all businesses. Gross profit increased by $55 million, and the gross profit percentage increased 0.8 of a point to 46.8% of revenue.

As was the case in the fourth quarter, full-year SG&A was up due to investment in sales and marketing to drive growth across our remaining businesses, but as a percent of revenue SG&A fell by 0.5 of a point.

Full-year 2013 net income was $42 million, an increase of [$16 million] from prior-year. And ServiceMaster pro forma full-year 2013 EBITDA of $450 million is $37 million higher than prior-year, again, with an increase in gross profit more than offsetting higher selling expenses.

TruGreen, reported on a pro forma basis, had a revenue decline of almost 9%, or $83 million. Net income was up $147 million to a lower impairment charge than in 2012, but EBITDA decreased by $132 million. On a consolidated basis, full-year revenue was relatively flat versus prior year, as the decrease in $83 million at TruGreen was mostly offset by growth in the other businesses.

And on an after-tax basis, the full-year 2013 net loss was $506 million, and this compares to a net loss of $714 million in the prior year. Both periods, of course, included goodwill and trade name impairment charges at TruGreen of $673 million in 2013 and $909 million in 2012

We reported full-year 2013 EBITDA of $476 million, down $95 million to prior year, and this decline was driven primarily, of course, by the $132 million EBITDA decrease at TruGreen.

Slide 17, it has a reconciliation of adjusted EBITDA to net loss for the full year. And, again, the line described as other includes stock-based incentive compensation charges and management fees for both years as well as a loss on extinguishment of debt and a non-cash asset impairment in 2012.

And finally, full-year cash flows are shown on slide 18. Net cash provided from operating activities was $252 million for 2013 compared to $235 million in the prior year. In essence, EBITDA fell by $95 million year-over-year, but this decline was offset by better working capital movements in 2013 of roughly $69 million and the non-recurrence of the $43 million co-premium on the retirement of notes in 2012.

For 2013, the working capital requirements were also favorably impacted by a change in the timing of customer prepayments. Net cash used for investing activities fell to $105 million compared to $118 million last year, as the Company reported both lower CapEx and acquisition spend in 2013, partially offset of cash flows associated with the amount outstanding under the revolving promissory note with ServiceMaster Global Holdings. The (inaudible) of this note is primarily associated with stock repurchases from former employees.

So, free cash flow for the full year of 2013 was $147 million, an increase of $30 million versus the $116 million generated in the prior year.

Net cash used for financing activities was $82 million, largely reflecting mandatory debt repayments. And incidentally, the TruGreen business itself consumed about $5 million of cash in 2013.

Now, that concludes my comments on ServiceMaster's financial results for 2013, and I will turn the call back over to Rob for closing comments.

Great. Thanks, Alan. As you can tell, 2013 was a busy year for all, including the separation of TruGreen and all the energy and effort that went into that. And I'm proud to say that we've got a full team in place, and that has been a big focus of ours, and we got really great people to go drive the business forward. So we are committed to take the steps necessary to continue to drive both the top and the bottom line, and I look forward to sharing our performance in progress of our growth initiatives with you in the coming quarters.

So I'll turn it over now to Brian, and he can walk through the process for Q&A and facilitate the Q&A. Brian?

Great. Thanks, Rob. As a reminder, during the question and answer session we encourage you to ask any questions that you may have. But please note that we don't provide any guidance, so please limit your questions accordingly. Also, for those of you that may have missed my comments at the outset of the call, we cannot respond to any questions in regard to any prospective capital market transactions. Additionally, please limit yourself to one follow-up question so that we can get everyone in in the allotted time.

Charlene, let's open the line for questions.

(Operator Instructions) Karru Martinson, Deutsche Bank.

I was wondering if you could drill down a little bit in Terminix. What was the growth in customer numbers and your retention rate? And then also on that same subject, when we look at the cold winter, does that historically have an impact as you ramp up for the season?

Well, I think -- it's Rob, so I'll take the latter part of the question, and Alan can address the customer account numbers. But the good part for the pest business is wet and warmer temperatures. So the cold weather definitely affects the rate with which it ramps. So, depending on where you live, it has been pretty cold across -- especially the Northeastern and Southeastern United States. But we anticipate that the market will start to ramp here in the coming weeks as the temperature warms up.

For the business, it has been pretty flat. So that will be favorable For the market. And then I will turn it over to Alan to talk about the customer account.

Yes. The customer account metrics will, of course, be in our 10-K. The customer account for pest was down a little, about 1.6 points in 2013 compared to 2012; and for termites, down about 2.3%. The pest potential rate was actually pretty healthy, just under 80% for pest, very similar to the 2012 level. So there are modest, very modest changes in the -- in both customer account and retention rates. Nothing particularly significant there.

Okay. And just as a follow-up -- and when we look at the Franchise Services Group, do you guys feel that this is more of a GDP growth business? And what is your ability to take some costs out of that silo?

I think -- it's Rob -- I would say one of the most interesting learnings for me since joining the business is the Franchise Services Group and the opportunities we have to grow it, both through some of the innovation products and our core business. And I think the team has done a really good job of doing that. So, no, I would say I would think it could do a lot better than GDP. And we look forward to expanding that business and looking at acquisition opportunities to be complementary to it. And as you can tell by the margins, it's a really good margin business. It doesn't scale like a Terminix or a large business would because it's a small number of people, but we can definitely continue to drive the revenue growth and expansion of the business. I'm excited about it.

Thank you very much, guys. Appreciate it.

Kevin (inaudible), Citi.

Just following up on the weather issues, could you talk about the American Home Shield side of the business and how the extreme weather that we've had affects that? And I guess also how this weather impacts your route performance on the Terminix side. Thanks.

Yes, it's true. When the temperatures are cold, people are running their heaters. And it's a ratio of how long you operate the machines and how they wear out and break. So our claims costs early in the year are up, and that's a traditional type of issue that we see. For the balance of the year, who knows what the weather will bring? So we try not to forecast or look toward it. And, yes, definitely in the North, where there has been snow on the ground and market issues in terms of applying or servicing customers in Terminix, it's something that we have to wait to do and schedule accordingly.

So it hasn't drastically affected the business. I would just say that some of the cooling or cool temperatures in certain regions of the US have affected our ability to serve customers. But we would expect in the next two to three weeks that the temperatures will warm up, and we will be able to get more done.

Does it drive more demand for contracts on the American Home Shield side?

I don't know if we could say so. I think we've been doing a good job of growing the direct-to-consumer market as well. And we like that business because it's stickier versus the real estate. So I think, in general, we have been doing well in growing the customer account and the business. And we are hopeful that would have an impact, that people would want to have a warranty on their homes more. But I don't know that we can correlate that to increasing opportunities.

Okay. Just my last question is on acquisitions. Did the HSA acquisition close? And could you talk about what your expectations are for the year ahead in terms of level of acquisitions and where they might be focused?

Yes. We are in the final stages of closing the HSA acquisition. And we will operate that business in its regional business area as is and then look for opportunities to integrate business processes both from their practices but also from ours. So we are excited about that. We should get that taken care of in the number of days or weeks here. So that's exciting.

We also continuously look at bolt-on acquisitions in Terminix to expand both our market opportunity in commercial but also geographically. And I mentioned during the pitch, there's a lot of opportunity to expand in North America but also in other regions of the world. And you might remember last year we invested in Canada and picked up some good business there. So we will continue to do that. And we will also look for opportunities to expand the portfolio in the franchise business group.

So we've got a continuous process monthly to look at new opportunities and how we might be able to expand. So we will continue to do that throughout this year and into the future.

Thanks very much.

Sam McGovern, Credit Suisse.

Is there any cash cost associated with either shutting the American Home Shield operating system upgrade down or in effecting the TruGreen [spin]?

No, not all. No. In fact, the system that we are in the process of deploying was actually going to continue to be very expensive in addition to the amount of money that's already been spent. So in fact, no, this would effectively improve our otherwise cash flow performance. No. No cash impact whatsoever; only on the positive.

Okay, great. And then just post the TruGreen spin, is there any plan to change the reporting, or will you guys continue to keep Merry Maids lumped in with the corporate overhead? Or will you allocate that to the individual segments?

Good question. I actually covered this on the call. No, we are actually going to move Merry Maids out of this fourth segment that we have and combine it with ServiceMaster Clean because essentially they are both franchise businesses. And so the more logical mechanism and the way we actually look at it internally now is as the Franchise Services Group. So you will see those businesses combined in the future, starting with the first quarter of 2014.

Okay, great. I'll pass it along. Thanks so much.

Kevin Coyne, Goldman Sachs.

I just wanted to focus on some of your Terminix commentary around the, quote-unquote, discrete charges. You mentioned the product obsolescence moving to a new technology. I was wondering if you could just expand on what the new technology is. And is there a different formula, or should we be focused on different input costs associated with that change?

No, nothing so significant. But as we look to grow the business, we are expanding into, let's call it, new areas. And an area that Terminix was not hitherto focused particularly heavy on is mosquito -- mosquitoes. And we did have, effectively, a product offering to push into that market which wasn't particularly successful. And we are replacing that with a more -- what we believe is a far more efficacious product in 2014. So I'm hoping that we will be able to report some upside there from the introduction of that new technology.

So it's actually a very positive thing, but it basically means that we will be ceasing the formal product offering for mosquitoes and replacing it with this new, more effective one.

Okay. So no additional CapEx associated with that?

Not at all. No.

And then just with the deferred revenue, should we -- what's -- maybe you can just elaborate as to why you are increasing the reserve for that.

Again, it's -- as we look at any business, there are certain elements of the business that have grown, just a little more rapidly than others. And so we -- obviously, this is a very mature cash business. And many of our customers pay in advance for their services. So we have to closely monitor whether or not we have actually managed to get out and perform the service. Sometimes it's just a routine inspection for which we have already been paid.

So what this really means is a portion of the revenue, because of growth in certain areas in the fourth quarter, had to be deferred into -- essentially to 2014. So the cash has been received, but we won't be able to report the revenue until next year.

Was that one time related to whether or not really (inaudible)?

No, not really, not really.

Okay. And then just finally on the certain legal matters?

Yes. This is a business that, just by virtue of its vast spread across the US, is occasionally subject to legal issues of one form or another. So this is nothing that we are particularly alarmed about. Just sizable enough that, in aggregate, these items made the Terminix performance look a little worse than it really is, hence we called it out.

Okay. And would you quantify the sum of those three as the $13 million decrease, or would you care to put a number on that?

Well, that's about fair. It's about $13 million in aggregate.

Okay. Thank you.

Bobby Jones, Highland Capital Management.

I was wondering if we could just follow on that line of questioning. So it looked like costs were up year over year -- $21 million. So could you just help bridge us between all of the different buckets there?

When you say costs, you are referring to the combination of cost of sales and SG&A? I'm not quite sure --

Yes, as in revenue being up $8 million and EBITDA being down $13 million. So --

Yes. Well, with a revenue increase of $8 million, we are going to see a little bit of product mix shift, which we have done. So even with a modest increase ---

I hope to see some positive operating leverage on that, though.

Yes, that's fair. That's fair, but the product mix shift hasn't all been at all necessarily favorable. So there is a slight negative mix shift within that $8 million revenue increase. And then, of course, there's the impact of the $13 million.

So, at worst, if you take $8 million, take the revenue increase and apply a 45% variable margin, you might have expected a $3 million to $4 million increase; with $13 million negative, as I said, by virtue of the aggregate of those $13 million items.

So I don't want to trivialize it, but the impact of lost leverage is $3 million to $4 million, I would say.

But not all of the $13 million, as you said, were one-time, so I guess it was really more like a --

Well, it's very difficult for me to describe them totally as one-time. But I've got no expectation that these items will recur.

And then just picking up on the customer contract growth, can you actually give us some specific numbers? I think you said for the year, but how did the quarter shape out in terms of pest and termite?

No, my apologies. I don't actually have those numbers in front of me, but we can certainly get back to you with that.

Would it be -- I guess, if you were 2% for the year, is it an accelerating decline? I'm just looking at --

No, no, no, I don't believe so, no. I'd say it's very similar to what we saw in the September year-to-date numbers.

Okay. That's all I've got. Thank you.

Owen Douglas, Robert W. Baird.

Sorry to beat a dead horse here, but focusing on the Terminix, I think we've had a few quarters, at least, on the termite side, where you've had negative customer accounts. But the pricing increases -- what has been the tolerance for passing through price increases, and where do you think that ends?

Well, obviously business -- we can track it back to some introductions we made of the [tip] product to and some of the guarantees that we put in place to total performance plans that we put in place. So just offer people protection over time, which I think affected some of our price positioning.

We look for -- we are getting, I would say, much more sophisticated at how we look at the segments and regions down to a ZIP Code level and position pricing and our product offering to the market versus having to be something that is on a rate card for people and branches to do as they may choose.

So we put a full-time pricing person in place, and I think we are getting much more sophisticated about how we position price and the product offering. And that's a part of what you've seen, I think.

So we continue to look at and have different selling campaigns to grow the market and our customer account and, as I said, increase our performance with customers to continue to acquire new ones but also to retain the other ones at the high levels that we've had in the past.

But by the same token, if you are doing these target price increases, I presume you are also doing some targeted price offers to attract new customers. So where do you think the disconnect is between providing these price offers and actually signing up these new customers?

Well, a lot of it is driven by demand as well. So a lot of it is driven by activity. Our guys would tell you that you can generate leads and you can do a lot of things, but activity is what drives a lot of what happens. And you've heard us discuss earlier the temperatures in the market, and what will happen in the coming months will have an impact on the growth of the business and how we position it.

So I would say that is the driving force, more than anything, is the activity that's out there.

Okay. Thank you very much.

(Operator Instructions) Yilma Abebe, J.P. Morgan.

My first question is, if I can take you back to the termites and the discrete items, would it be possible to put a dollar figure around those three items -- the legal costs, deferred revenues, and technology-related issues?

No, I'd prefer to just keep them as an aggregate number.

If I just said a third, a third, a third, would I be significantly off?

No.

Okay. And then in terms of the American Home Shield, the better claims trends that you saw, any views around what the driver for that is? And perhaps if you can share with us how much of the increase in EBITDA in American Home Shield was driven by these better claims trends versus operating leverage in the business?

The reason for the favorable claims was largely, again, relatively mild weather patterns in 2013. And also, of course, if you think about the way the Home Shield model works, what -- I'm going to use the word insurance, but it's not quite right. What we essentially cover is the period during the year when appliances are most likely to break, and that's usually the summer months. So we really -- if you can imagine putting your mind at a normal distribution curve, we are covering the warm part of the year.

In 2013, we had different weather patterns. And so what basically happened is claims were accelerated forward. So that meant that the pattern of profitability changed during the year. So what you really see in the fourth quarter is, effectively, revenue that can be recognized once the claims have largely expired for the year because we then move into the colder months in the fourth quarter.

So, fundamentally, the business continues to see slightly increasing customer accounts, increasing revenue, and a very -- what is actually, on a long-term basis, if you look at this over a long period, very stable or slightly declining claims costs. It's more difficult when you look at it per quarter because of the seasonality I described.

So it's actually a very, very effective business model that also relies on leverage because of our scale, our size, in terms of our negotiations with our subcontractors and suppliers. And that's also an impact, too, on the slightly increasing profitability.

But is there a way to perhaps parse the claims trend for what you just articulated versus just a higher level of revenue flow-through in the business?

Well, not as clearly as -- not so that it would be very helpful, I think. It would just be a little less clear by the time we finished to trying to explain that. The whole point of this is that, in some respects, if you think about it, it's a warranty product. And so the coverage is in place, and the patterns of claims cause this variability.

Absent the fluctuations in the timing of these claims, the costs as a proportion of revenue are almost the same as last year. What you are seeing is the increased volume, so at a higher revenue, and that proportion of claims was broadly the same to revenue. It's -- think of it like a variable margin model. The revenue went up because we have more customers. The claims performance was broadly the same as a proportion of revenue year over year. So it's -- look at it as the variable margin model when you look at revenue to EBITDA performance.

Okay. Thank you. That's helpful. And then my final question is the IT system that you are ceasing implementing at American Home Shield -- was any part of that system being currently used, or was it just being dealt with in the background? What I'm trying to get at is does it affect the current IT infrastructure that you have?

No, not significantly at all. A very, very small part had been piloted, but nothing of any significance. Nope, not at all.

Thank you. That's all I had.

And our last question comes from the line of Todd (inaudible), UBS.

I think you introduced the brand ServiceMaster Restore last year to differentiate that service with ServiceMaster Clean. Can you talk about how that brand is doing and also talk about the nice growth in the janitorial revenues in 2013? Do you see that continuing in 2014 as well?

Yes -- it's Rob -- I do. And really the reason for the split and the reintroduction of the brand is the recognition of the growth that we've had in that disaster recovery segment and the opportunity we think exists to continue to serve both individual homeowners and customers but also insurance companies. So Tom Coba and his team have done a very good job of putting field marketing people in place; so we are out there developing leads for our franchisees and working with customers to become a preferred provider for disaster recovery types of services. And that business is growing very nicely.

I would say the same applies to the janitorial side of the business. As you know, there's many, many players in that market. And it's a huge, huge industry -- like in the neighborhood of $30 billion. So we look to go out and generate share-of-mind with customers and create pull-through for our franchisees. And we've instituted field marketing personnel and people that we haven't had before. And we are focused on continuing to grow both of those segments, DR as well as the janitorial side. So you will see it continue.

Sounds good. And I appreciate that you don't want to talk specifically about any future debt or equity financing. But you recently put a lot of material efforts around convincing debt holders your intent to IPO or do a de-leveraging transaction, given your prior talks and even putting out a slide presentation on it. But (inaudible) if you could just add a little color there, if it's still an intent to IPO or have a deleveraging event this year, at least. Thanks.

Yes. No, we can't. So I try -- not to be direct or anything, but I'm working on that. But as we said, we are excited. It was a lot of work and heavy lifting to do what we did with TruGreen. We are excited about the opportunity that exists with the new ServiceMaster. And we will continue to drive the results of the business, which in the end is what matters. So that's our game plan.

Sounds good. Good luck with the spring season. Thank you.

There are no further questions at this time. I will now turn the call back over to you. Please continue with your presentation or closing remarks.

Yes. I will close it out, Charlene. Thank you again for participation in today's conference call and webcast. As a reminder, a replay of the call will be available on our website in about one hour from now. We look forward to speaking to you again when we announce first-quarter 2014 results in late April or early May. Have a great day. Bye.

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