Terminix Global Holdings Inc (TMX) 2015 Q2 法說會逐字稿

Ladies and gentlemen, welcome to ServiceMaster's second quarter 2015 earnings conference call. Today's call is being recorded and broadcast on the internet. Beginning today's call is Jim Shields, ServiceMaster's Vice President of Investors Relations and Treasurer and he will introduce the other speakers on the call. At this time, we'll begin today's call. Please go ahead, Mr. Shields.

Thank you, Charlene. Good morning and thank you for joining our second quarter 2015 earnings conference call. Today, you will hear from ServiceMaster's Chief Executive Officer, Rob Gillette and Chief Financial Officer, Alan Haughie. For those who haven't had the chance to download the investor presentation from our website, I'll walk you through the agenda items shown on slide two.

Rob will lead off by providing a summary of the second quarter results and then review our performance by segments. Alan will then review our consolidated results, Rob will then provide summary comments before opening the call to your question.

Before we begin, I would like to remind you that throughout today's call, management may make forward-looking statements to assist you in interesting the Company's strategy and operating performance. As stated on slide three, 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 guaranteed to performance and are suggest to the risk factors contained in our public filings that may cause actual results to vary materially and those contemplated in the forward-looking statements. Information discussed on today's call speaks as only of today, August 4, 2015. The Company undertakes no obligation to update any information discussed on today's call.

This morning, ServiceMaster issued a press release, filed with the SEC on Form 8-K, highlighting our second quarter 2015 financial results. We have posted (inaudible), a related presentation, both of which can be found on investors relations section of our website. We will reference certain non-GAAP financial measures throughout today's call and we have included definitions of these in our press release which is available on web site.

We also have 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 or adjusted EBITDA as defined in our press release in the figures labeled such therein.

I'll turn the call over to do ServiceMaster's CEO Rob Gillette for opening comments. Rob?

Good, thanks, Jim. Good morning to everyone, thanks for joining us today for the second quarter 2015 earnings call. This quarter's a milestone for us that marks one full year since we reentered the public markets.

We've accomplished much of the last 12 months and remain focused on growing our business. We have entered into new services, expand our sales channels and streamlined our operations. We have invested in hiring, developing and retaining the best employees and we have strengthened ServiceMaster's strong brand by investing marketing and customer service.

As we move forward, we're focused on results and are leveraging our capabilities across our businesses by capitalizing on the unique service network of employees, contractors, and franchisee. We continue to enhance our customer service by invest in digital and mobile technologies, our goal is to expand our service offering, reach a wider audience and provide a seamless cost-effective experience to ServiceMaster's five million customers.

Now let me turn to the second quarter results shown on page four. We have a strong top and bottom line growth. Revenue increased $33 million or 5% versus prior year. The increase was driven by the continued development of the direct consumer channel at our American Home Shield business and growth of new businesses at Terminix. Our EBITDA improved $20 million or 12% compared to prior year, driven primarily by increases of $10 million at AHS and $8 million at Terminix. The adjusted net income of $82 million improved $30 million or 58% compared to prior year.

Adjusted diluted earnings per share of $0.60 increases $0.04 versus prior year. Bear in mind, diluted shares outstanding increases by 44 million shares for this quarter, compared to last year, largely as a result of additional shares issued at the time of our IPO. Cash flow was very strong in the second quarter. Pre tax unlevered free cash flow of $192 million with an increase of $36 million and represents a cash contribution rate of about 101% of EBITDA.

On July 16th, the Company gave notice that it has elected to redeem, in full, $488 million with 7% senior notes effective August 17th. Allen will speak more about our financing activity later, but I would like to note that upon completion of the refinancing, we will have reduced our debt by over $1.1 billion.

Now, turning to page five. All of our business units have made great strides in the past year. Terminix has broadened its portfolio beyond (inaudible) termites and traditional pest services, and created growth opportunities by introducing new services such as crawl space encapsulation, wildlife removal, pest exclusion and mosquito services. By diversing the offering of new services, Terminix has built a more resilient business model that it's positioned for long-term growth.

By investing in marketing and technology, American Home Shield has expanded beyond its traditional value proposition of assisting home buyers and sellers. Today AHS is focused on accelerating growth, targeted at homeowners who seek meaningful dollar saving and avoidance of large one-time repairs.. By focusing on these direct to consumer customers AHS is driving adoption of home warranties by continuing to invest in marketing and increasing consumer awareness in a market that is only 3% or 4% penetrated.

The franchise service group is being repositioned for growth. By working with our franchisees, we are expanding a local and national account pipeline and identifying opportunities to expand our foot print and better serve our customers. People value simple, easy to access services that are dependable, convenient and on time.

As technologies advance, customers expectations with regard to the access and quality of these services are increasing. We need to meet these increased expectations by delivering simple, effective access to our services across a variety of digital and mobile platforms. This means, for example, allowing real-time tracking of our techs by customers, providing customers with real time text and e-mail notifications and enabling customers to provide us instantaneous feedback through mobile devices.

By standardizing our processes and developing flexible, digital, mobile technologies, we are capitalizing on the scale and breadth of our operations. We operate in large fragmented markets with few national competitors. By developing the right consumer centric technology, it puts us in a position to capture a greater share of these markets and accelerate our growth.

Moving to segment performance, slide six shows the strong first quarter results for Terminix. Revenue at $395 million, increased $19 million, or 5% compared to the same period last year. EBITDA for Terminix was $101 million, up $8 million or 9% compared to last year, primarily reflecting the flow through effect of higher revenue and lower selling costs. EBITDA margin improved 90 basis points year-over-year.

Slide seven provides more detail on Terminix revenue growth by channel. As you can see, we achieved year-over-year growth of 5% reflecting accrued pricing and an increase in the sales of new services, partially offset by a decline in core termite completions. We are focused on growing our traditional termite services. As I mentioned last quarter, we are continuously evaluating alternative pricing, products, customer buying preferences and sales channels.

Although we have maintained our market share in termite over the past several years on a revenue basis, our switch from a liquid product to a higher priced base product has resulted in a lower unit market share.

We believe that switch to bait, which has higher retention, better efficacy and greater life time value is the right decision. But we believe there are opportunities to better position this product. Over the next several months, we are implementing a series of pricing, marketing and sales initiatives that'll reposition our bait product in the market.

With Terminix strong brand recognition and excellent customer service, we believe we're in a position to capture a greater share of the termite market with all these actions. Renewal revenue flat to prior year as improved, pricing is offset by 1.9% decline in the contracted customer accounts at the end of June.

Moving to pest control, with 7% an increase in revenue with (inaudible) improved pricing, mix and increase in mosquitoes sales and in one-time services, in particular bed bug. Although pest control customer account is down this quarter one-time sales are increasing, mosquito services are showing traction, and the roll out of new pricing and service plans is being well-received by our customers. They're very pleased with the direction of the business over the past year.

American Home Shield results are shown on page eight. American Home Shield performed very well with a strong top and bottom line growth for the quarter. Second quarter revenue was $261 million, up 8% compared to prior year, driven by our investment in marketing and the direct to consumer channel. Second quarter EBITDA was $71 million, an increase of $10 million or 16% compared to a year ago. This increase primarily reflected the flows and effect of higher revenue, partially offset by a increase in claims costs.

During the quarter, we realized a $6 million gain on the sale of investments, which is balanced against a $5 million increase in marketing spend compared to the prior year. We continue to invest in digital media and explore new and better ways to engage our customers. The key to customer engagement is to continue to improve our analytical approach to targeting customers and markets.

For example, we plan to test (inaudible) that provides different prices, depending on factors such as the home's age and size, and a customer's previous cancellation history with AHS. Combining these analytical capabilities with our digital efforts provides us with the ability to better position our products to specific customer segments and drive higher profitability. I would also like to note that this quarter the Consumer Financial Protection Bureau informed us that it has completed its review of AHS and does not intend to take any enforcement action.

As we previously reported, the CFPB had issued a civil investigative demand to AHS seeking documents and information related to RESPA and other laws. We are happy to get this matter behind us. The Franchise Services Group second quarter results, shown on slide nine, include revenue at $60 million, a decrease of $4 million compared to prior year, driven primarily by converting the first 18 of 71 company owned Merry Maid branches to franchises. Presently there are another 20 branches that are either scheduled for sale or that we have accepted offers for purchase. We are over half the way through the process and hope to complete this conversion around the end of the year.

Second quarter adjusted EBITDA decreased $1 million, primarily driven by lower revenue and mix, partially offset by cost reduction initiatives. The Franchise Services Group continues to make progress and reposition itself. We're focused on increasing a number of growth oriented franchisees. By selling licenses to new and existing owners and focusing on converting competitors and white space, the Franchise Services Group is positioning for growth in 2016. We have the right team in place that is focused on execution.

I would now like to turn it over to Alan, who will review our second quarter results in more detail and speak to our 2015 outlook. Alan?

Thanks, Rob, and good morning everyone. I will now cover our second quarter results as shown on slide ten. The year-over-year revenue increase of 5% or $33 million includes, roughly, $30 million of organic growth, a little over 4% when including pricing. Very similar, in fact, to the first quarter of this year and, for the sake of completement, I should mention that the balance of the revenue increase of $3 million reflects Terminix acquisitions of about $6 million, partially offset by $3 million of revenue lost due to the ongoing Merry Maids branch conversions.

Significantly, the strong growth in American Home Shield continues with about 8% organic growth over last year. I should also mention that a very modest change in the curve by which we recognize revenue in American Home Shield makes the revenue growth appear, actually, just a little softer than it really is and all of the things being equal, this should be reflected in stronger than 9% revenue growth in the third quartered. And this is evidenced somewhat by the customer account growth of 7%, higher than the 6.2% reported in the first quarter when we had 9% organic growth.

Terminix performance is also very similar to the first quarter, with solid performance in the pest business and continued growth in new services, more than offsetting a decline in traditional termite revenue, giving Terminix organic growth of about 3% year-over-year. Gross profit increased by $19 million, representing a conversion rated of 58% of incremental revenue into gross profits, that is $19 million of incremental margin on $33 million of incremental revenue.

And this is a particularly strong performance given that we experienced higher air conditioning claim volumes in American Home Shield due to higher average temperatures in the last year. There's also a modest increase in the average number of claims for American Home Shield customers, given that we are growing in the direct consumer space and these customers, in general, tend to make one extra claim in their first year, compared to the average customer who makes about two claims a year.

Still, the impact of these higher claims costs is clearly more than offset by continued operating leverage across the whole company, which helped gross margin of a percentage of revenue increase by four-tenths of a point to 49%.

Selling, general and administrative expenses increased year-over-year by $4 million but still fell a percentage of revenue by seven-tenths of a point. However, this SG&A increase does reflect about $5 million of additional marketing costs in American Home Shield and $4 million of additional selling costs in commissions in Terminix, partially offset of the continued reductions in infrastructure costs of about $4 million. And while the Terminix selling costs are mostly (inaudible) on current period revenue such is not true for the American Home Shield marketing costs. down, the benefit of which should be felt in future quarters.

So, I'm pleased to say that we're continuing to improve our cost leverage while maintaining of our investment in growth. Interest expense improved by $19 million over the prior year, reflecting two movements in debt structure. Firstly, using the proceeds of last year's IPO combined with balance sheet cash, we reduced gross debt in the third quarter of last year by about $835 million, which lowered quarterly interest expense this year by $13 million.

And secondly, on the first of April this year we completed the redemption of $390 million of 8% notes, so in aggregate, we redeemed 215 of the notes of cash and (inaudible) by $175 million and this reduced quarterly interest expense by about $6 million compared to last year. Now, investment for the quarter includes about $6 million of gains on the American Home Shield portfolio compared to (inaudible) zero last year, this reverses the trend from the first quartered in which we recorded $5 million less investment of income from the prior year.

Now, going to the losses on the American Home Shield portfolio are incidentally included as a component of American Home Shield and (inaudible) EBITDA. And for the first six months of we have realized investment income of about $7 million, the same as last year. My point being that this is not a net source of EBITDA improvement over 2014 and, further more, within American Home Shield we have used the second quarter gains to fund the incremental marketing.

The long term extinguishment of debt of $14 million has two components, the 6% pre payment premium for the remaining $200 million of 8% notes made on the first of April of $12 million. Otherwise, (inaudible) million of previously capitalized debt issuance costs. So, as a result of all of this, our pre-tax income of $109 million compared to $80 million last year.

Now our effective tax rate for the quarter is about 39%, similar to the expected full year rate. On to the second quarter adjusted net income, which I'll reconciled in a moment. increased by $30 million over the prior year to $832 million. And EBITDA of $191 million and $20 million over the prior year, largely reflecting the improvement in gross profit, with investment in American Home Shield, essentially, being reinvested in AHS marketing, as we already said.

Now, slide 11 provides two reconciliations. First, we walk our second performance measure adjusted EBITDA down to (inaudible) from continuing operations, and then walk the reconciliation all the way back up to adjusted net income. As a reminder, we exclude all of our amortization expense, $12 million for the quarter from the quarter from adjusted net income.

And, as discussed last quarter, about $9 million of this amortization actually stands from the (inaudible) intangibles that were created when the Company was taken private in July of 2007. These intangibles not only fully amortized, only associated amortization for these items will start to decline in the second half of the 2015, in fact, the second quarter charge is $9 million, the same as the first quarter, but the third quarter charge will be $3 million and fourth quarter charge will be $1 million. And, y definition, this lower amortization will boost (inaudible) income but not adjusted net income. And also, we naturally exclude the gains or sales of M&A's branchings from net income.

And, also we naturally exclude the gains on sales of Merry Maids branches from adjusted net income. Turning to the cash flow, the second quarter and first half simplified cash flow segments are provided on slide twelve to better explain our source and uses of cash. Pre-tax on levered free cash flow is our preferred measure for the sustainable cash ergative capacity of the company and the components are shown at the top of the slide. Now, I'll mainly discuss the cash flow for the second quarter, which we generated $192 million of pre-tax unlevered cash flow, a $36 million improvement over last year.

A little over half of this improvement came from EBITDA, with the balance in working capital, primarily improvements in accounts payable and general cash control. Net performance, again, allows me to stress that the revenue growth in the quarter clearly did not require any working capital investments and so this quarter's pre tax unlevered cash flow represents only a 1% conversion of EBITDA, up 9% (inaudible) versus last year.

Now, interest payments of $26 million are $1 million higher than last year. This is, of course, significantly different from the interest expense (inaudible) disused a moment ago. And this was because interest on our high yield debt is, or I should say was, made semi-annually in February and August, so last year under our old debt structure in the second quarter, we did not make any interest payments on high yield debt and our debt reduction efforts have, naturally, been focused on our high yield debt, hence this quarter has very similar interest payments as last year.

So this is probably the right moment to discuss, further, the impact of the pending redemption of all $488 million of our 7% notes. This will be effected using a combination of cash and the additional borrowing under our term (inaudible). Let's suppose, for simplicity sake, that we assume 100% of the redemption as (inaudible) and this will accelerate our $8 million of interest payments in 2015 and 2016, since interest on those high yield notes would have been paid (inaudible) in mid-Feburary 2016, and we have replaced this with term debt on which we paid interest monthly in 2015. And as a result of removing (inaudible) callable high yield debt, we expect to incur a third quarter charge of about $31 million, reflecting $25 million of 5.25% pre payment premium and a $6 million write-off of previously capitalized debt issuance costs.

Now, as mentioned on prior calls, we will be a federal taxpayer in 2020 and although payments this quarter were delightfully low, cash payments are expected to commence in full in the third quarter. And so we currently expect to pay roughly $60 million over the second half of the year. So combining the cash flow items we accumulated about $159 million of cash available of debt reduction in the second quarter.

So the debt repayment of $45 million reflects, shown here, reflects the $25 million of cash we contributed to the 8% note redemption, because we were doing $200 million of notes using $175 million (inaudible) plus the 6% pre payment premium of $12 million and the balance was mainly regularly scheduled dollars. So we ended the quarter with $361 million of cash. Please not that the formal reconciliation from the (inaudible) cash flow statement to pre tax unlevered tax flow in provided in appendix and in the press release.

Slide 13 provides an update in our net leverage and interest coverage as of the end of the quartered. Net leverage at the end of the quarter is calculated as gross debt with a face value of about $2.91 billion, less unrestricted cash of about $270 million. So that's net debt of about $2.64 billion, we divide this, of course, by trailing 12-month EBITDA of $595 million to get net leverage of about 4.4 times EBITDA, compared to 7.8 times at the end of 2013 and five times at the end of 2014.

Now, assuming we redeem the $488 million of 7% notes with term debt at the rate of 4.25%, then once complete, we expect to be running, I think, annualized interest experience of no more than $156 million, a little under $39 million dollars a quarter. And using this annualized $39 million per quarter, respective interest expense, our trailing 12-month EBITDA $595 million, is 3.8 times our go forward interest expense. And to include the (inaudible) million of swaps we have in place, then we'll have a fixed floating debt ratio of roughly 14 to 60.

Now, with respect to our outlook on slide 14, we are raising the low end of our previously provided revenue range but are confirming our minimum 2015 EBITDA guidance. As Rob mentioned, it's over one year that the company's IPO. At that time we provided an outlook that was boldly consistent with historical performance with net to long-term EBITDA growth targets in the fixed rate percent range.

We're very pleased that with the effectiveness of our digital technologies, our supply chain initiatives, and our operating leverage we continue to realize productivity gains and exceed our original outlook. With investments in both technology and marketing clearly bearing fruit, (inaudible) plan to continue to reinvest in these areas for further growth. So we remain confident that we'll generate at least $610 million of EBITDA for the full year of 2015 while continuing to feel growth well into 2016.

That concludes my comments on ServiceMaster's financial results an outlooks. So I'll now turn the call back over to Rob for closing comments.

Thanks, Alan. As I mentioned before, we've accomplished a lot. We have a tremendous future and we have the right people to take advantage of that opportunity. We have a team focused on providing outstanding customer service, with exceptional expertise in each of our businesses. Our customers are demanding convenient, on time, dependable and effective service that is accessible through a variety of devices. By leveraging the our resources, developing the right cutomercentiric digital and mobile technology and executing, we are confident in meeting these demands.

Again, we had a great quarter and took another step and positioned ourselves as the leading provide of essential services. We are confident in our future and our ability to deliver to shareholders.

I look forward to sharing our performance with you in coming quarters. I'll turn it back over to Jim to get into the q and a part of the call. Jim?

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 guidance is limited to the outlook we provided in our press release and webcast presentation. Additionally, since the queue is long this morning please limit your questions to one follow-up question. Now I would like to turn it over to the operator.

Thank you. (Operator Instructions). Our first question comes from the line of Denny Galindo with Morgan Stanley. Please proceed with your question.

Hi, good morning, guys.

Good morning.

The new termite revenue has been driving much of the revenue in our model, and I was curious if you're doing anything different in marketing that's really driving that revenue. Are you going after different accounts? Are you using a different channel? And then ultimately, when will we see the customer count start increasing in termite?

Yes, I think you know some of what we covered, it's Rob, what we covered in the call is repositioning the bait product and creating new offerings, and in terms of position of product, historically, we've done well on a revenue side. We think that we've lost unit share of volume, which also translates, in part, to the customer count.

And I think the team has a good plan in place to address that. I think, externally in our reporting it would include the innovation sales, as well, for the termite line, so you would see a small amount of that growth. Again, all these other services and things we're focused on, we're growing the services and expanding the offering that Terminix has, so we don't report that separately at this point, but we'll focus on it.

And then a longer term question, your balance sheet's improving, your (inaudible), and your cash flow is increasing, with the shift to franchises you'll be even less capital intensive. It's looking by 2017, you'll be really generating a lot of cash and be under-levered.

So, when you think about that, kind of, medium term outlook, what's the next step for this Company? Are there new segments would you add? Would you start buying back just a lot of shares? As more international, more aggressive international expansion in the cards?

You can give us help on what to think about the Company after you kind of get to your right leverage level?

I'll start offense and Alan can chip in on the balance sheet and with, kind of, our other plans. We've always said that, you know, we felt like if we got in at three and a half to four times (inaudible) range that we would evaluate apartmentive usage for capital and as you can tell, that we've focused on debt pay down and a high yield, as Alan mentioned, interest products that were out there. So, we've done that, we'll continue to do that.

We always continually look at acquisitions, we continue to do the tuck in acquisitions in Terminix and we looked to adding to the product offering of American Home Shield. So, we'll continue that strategy and plan as well. And then, I think, in early 2016 or mid 2016, we'll decide what we do on the balance, in terms of cash, with all of the items you mentioned being alternatives that we have considered and yet to decide upon.

So, Alan, if you want to add?

Not a great deal that I can add, really. I mean, as Rob mentioned, this trajectory and we're obviously going to hit that, all things being equal, we'll hit that three and a half to four times net leverage soon after the end of this year. And so next, and, let's say, in the first quarter to the first half of next year is when we'll be more forthcoming on our, the significant stage in our capital structure, our capital strategy.

Our next question comes from the line of Gary Bisbee with RBC Capital Markets. Please proceed with your question.

Hi, you did really well at AHS. I guess the question, just sort of a bigger picture one. You've talked about, in past calls, moving some of the marketing spend to some newer channels, internet and seeing benefits and better acquisition costs. How confident are you, that as you continue to scale the marketing investment, that you'll be able to maintain those acquisition costs and drive continued growth? Or is there some chance that you're getting, sort of, the easy opportunities now but at some point it gets more difficult to find that same level person for the same cost?

Well, I think, the first that you have to consider the penetration in the market of the 3% to 4%, and our meter in terms of the next incremental dollar or the yield that we get is always our cost to acquire. And so, we mentioned before, with the investments that we've made, we basically are flat in our cost to acquire new customers which tells us that all of the individual avenues that we're pursuing are working and therefore, we continue to invest in that area, as Alan said, and drive growth.

It's a business where we can demonstrate and correlate the investment in marketing to yield and with the small penetration in the market, I think creating awareness of the product offering and the value that it provides to customers is going to continue to drive growth, so I always keep that cost per customer or CPS in mind and measure it continuously and, so far, all of the investments have paid off very well.

Great. Then a follow-up. Alan, did you say you changed the revenue, how you recognize revenue? (Inaudible).

Yes, let me clarify that. We recognize American Home Shield will increase its earnings curve. (Inaudible) basically in the last few years of history and (inaudible) and revenue curve in advance of the year. For the moment, and the only reason I mention it is because if you think back in the first quarter, we had 9% organic growth in Home Shield, so it's come up in the second quarter and our revenue is up organically about 8%. I know, as you do, that is about $4 million to $5 million of revenue that's essentially been shifted and, just in the way our model looks in Q2 to Q3, so I know that revenue's there and I can see it in the customer counts. So I didn't want any of the listeners to think that our rates of organic growth was shallower in the second than the first, otherwise, I wouldn't have introduced that complication, but that was the point I'm really trying to make. If you look at the customer account in American Home Shield, it's several percentage points on which you would add a couple of points at least on pricing so you know the underlying revenue is going up over 9%.

And does the cost have the same shift this year? Thanks, appreciate it.

Not really. No, I mean, (inaudible) the revenue's modeled in anticipation of where the cost is going to be and then it's kind of set. So the costs are flowing and what you see in terms of the costs that have gone into second quarter are the actual costs. So, it'll be, any claimed activity that I referenced has been (inaudible) expensed in the second quarter.

Got you. Thank you.

Our next question comes from the line of [Andy Wittmann] with Robert W. Baird, please proceed.

Hi. I guess my first question's for Rob. Rob, just in one of the introductory slides, you talk about the growth avenues of your businesses and I wanted to focus on Terminix, then move, I don't know if it's a move. Well, I guess, maybe that's the question here.

But, you know, core termite, traditional pest is a very good business, you make at lot of money there and growth markets certainly have been a key contributor, I would say, since the IPO and probably will continue to be. But, I guess, strategically, what is the investor supposed to read into this?

Are the growth markets really where the focus point is and are we doing the core traditional businesses? I guess I want to think about the annuity that comes from the contractual regular visits and your value of that versus these new markets and just get some context around how you're thinking about emphasizing the two sides of the business?

That's a good question. And I would say first, is we like that core business that we have and we want to grow it, we want to expand it. We prefer to have standing customer accounts who are focused on a lot of fronts. That's why we talked about the termite product offering and how we're changing the way we go to market somewhat with what's happened with the marketplace.

So we want to make share that we get our share of that volume and increase our penetration, and I think, because of our product positioning we may have gotten the dollars but fewer units, which we mentioned on the call today. I don't think that it's focusing on other things at the expense of, I just think, you know, back to a lot of our discussion before, we're the only people that report the customer account metric and those are contracted customer accounts and that's why we continue to report them.

So, you know, in some instances, in quarters in the past, the customer count has been up, termite down, so we want to make sure that we focus on the product and position of that growth. But we also see significant opportunity to add additional services to our loyal customers, which is important, we think, in terms of long term value, but also retention of those customers.

So we're able to do a number of different things with them and all these innovative sales of products are targeted at and historically have been with the customer base that we have. So adding more services and value and being in front of them more, I think, helps to create long-term value and relationship over time to maintain those contracts that we mentioned.

Okay, thank you. And then my follow-up is for Alan. Alan, I just wanted to understand some of the of lumpiness in the investment gains and, you know, net for the year over last year, you said flat, (inaudible) help the quarter here. Should we, as investors and analysts, continue to expect this kind of lumpiness and is the lumpiness that we saw in the quarter purposeful, like you know you had some of these embedded gains, you also knew that you had some increased marketing costs and,, so to smooth earnings for all of us and help the predictability, is this purposeful or how should we think about these gains as we march through the future?

Great question. The majority of the portfolio has now been (inaudible) balanced to lower yield securities, so it's a less risky portfolio. So the majority of the significant gains have now been realized. The second point is the (inaudible) it was delivered, not as it weren't a smooth earnings, but to create the maximum dollars that we really wanted to put into the second quarter in American Home Shield. So, yes, it was deliberate to provide funds, as it were, (inaudible) marketing. You shouldn't necessarily expect anything this lumpy going forward (inaudible) balanced now, but yes, it was deliberate.

Thank you.

Our next question comes from the line of Anjaneya Singh with Credit Suisse. Please proceed.

Good morning, guys, this is Zach in for Anj. I just wanted to ask some questions about the AHS marketing spend. It looks like you've been, you know, quite successful there with like for like growth greater than 9%. Is this an opportunity that you might see in some of the other segments to increase marketing spend and accelerate growth, as well. Or is this kind of spending unique to AHS given the low presentation in that segment?

Well, I can tell you that, you know, that last year and this year we've invested strategically in expanding market investment in Terminix as well. So, I think a lot of what we learned in American Home Shield on the digital media side, we're looking at translating into Terminix as well. And so, it's really having the opportunity to achieve the correlation of the spend to the growth and then that TPS value staying and hovering around the same dollar amount, which tells you that the yield is very good.

So we've learned a lot about addressing and interacting with customers in all kinds of different ways but still the traditional methods still holds, whether contact by phone or direct mail or all kinds of other media and digital media. So, you know, it is something we learned how to improve and focus on in AHS but we'll continue to invest in expanding what we do in Terminix to direct growth. So, I think that there's definitely room to improve there and it's kind of the advantage of having different businesses at different stages to take advantage of what they learn, then translate it to the other companies that we have.

Thanks for the color. And then, while we're talking about Terminix growth, you call it a couple of different markets in your presentation. We didn't really hear much of an update on what's happening in the commercial segment. I'm just wondering whether or not the unit share loss in the customer accounts decreased? Something you're seeing in that segment as well or whether or not penetration trends are a little bit more positive in that aspect of the market?

Yes, no, we didn't mention because we kind of expanded on the termite side but on the commercial side, it's up about 9% so we're seeing growth in commercial and we are continuing to pursue that market. As you know, it's been, as our portfolio, a percent of our portfolio is smaller than others. So we see that as an opportunity to grow the business and develop relationships, which takes time and there's a different method to market and different service protocols and, I think, we've mentioned before, to you guys, that we have set up a separate team who focuses on that and is growing that business nicely. So we're pretty happy with our progress and we want to be more of a commercial business in the future.

Thank you.

Yes.

Our next question comes from the line of George Tong with Piper Jaffray. Please proceed.

Hi, thanks, good morning.

Good morning.

In the termite business, can you elaborate on some of the potential strategies you may adopt to combat the impact from switching from liquid to bait?

Well, I think, to the extent that we would, I mentioned in my comments during the presentation, so I think that, you know, there's different ways to approach customers, both curative and preventive, right, and there's multiple products that we've offered over time and we think we can execute in different ways in the future, and that's what I was referencing in the context of my comments during the call. So we think there's opportunity to expand our market penetration through some of the efforts and that's what we're working on.

Okay, got it. If you look at the extent of cross selling between Terminix and American Home Shield to date, where is that level of cross selling currently and can you describe some of the actions you're taking to promote cross-pollination and where you hope to take the percentage of customer overlap going forward?

Yes. We've test a number of different things and there are areas where we've been successful in doing to and I think we want to do more of it. So, I would say, you know, there's single digit overlap today, in our core customer base, between AHS and Terminix, and we think it presents an excellent opportunity for us to expand our relationship with customers by offering additional services, including AHS type warranties to Terminix customers and Terminix to AHS customers. And the team actually is doing some evaluation and analysis about maybe new and different products that we could present in the future, so we'll tell you about those once we sort them out.

Great, thank you.

Thank you, George.

Our next question comes from the line of Jeff Volshteyn from JP Morgan. Please proceed.

Good morning. Thank you for taking my question. Just going back to the termite business, what is the competition using, what type of product?

Similar products to what we use today. And over the last couple of years there's been a shift towards bait, you know, it's bait (inaudible). And (inaudible) curative and preventive areas so before that, it was predominantly liquid, as you probably know, so, I think, that's changed the dynamic somewhat. Then they use similar products in the marketplace.

Okay. And so when I look at the quarter results for termite business it seems that customer retention is improving, renewals are decreasing a little bit. Are you able to communicate any sort of numeric target for additional effort? What do you expect to see in either in renewal metric or retention metric?

Well, I think, frankly, I mean, we probably see in the context of this, moving more into this preventive market, it would, we're anticipating, it's really both. We've certainly improve the renewals metric as well as the customer account metric. And that's basically by accessing the preventative market in which we don't have a huge presence at the moment. The majority of our improvement was in the (inaudible) area, to a greater extent. It would help with renewals and core customer care.

Okay. And quick question on AHS. With the new or slightly shifting mix of customers, what is now a percentage of claims that end up in a replacement, particularly on the AC systems?

In our commercial?

Yes.

I'm not sure that statistic's changed a lot. So now it (inaudible) about 12% of our claims that, on average, of course everything resulting (inaudible).

Okay. Thank you.

Thanks.

Our next question comes from the line Sara Gubins with Bank of America Merrill Lynch. Please proceed.

Hi. Thanks (inaudible) The guidance suggests that adjusted EBITDA margin expansion will be much lower on a year-over-year basis in the back half than it was in the first half. Can you talk about what the balance of this is, how your marketing spend versus other areas of investment? And it sounds like it's probably fair to think about the second half and seeing a more reasonable run rate or incremental margin than what you saw in the first half. Is that fair?

Yes, I mean, you answered the question yourself. It (inaudible) the degree of an incremental spending market that was shallow or down from the EBITDA growth in the second half of the year. That's the primary focus. If you look at how successful the spend in the second half of 2014 had been in terms of pushing American Home Shield through into 2015, it's hard to argue against continuing that rate of investment to enjoy that rate of growth. (Inaudible, as you said, the rate at which we've added new customers and the improvement on the new (inaudible) for many of our existing customers are virtue of our market (inaudible). And if you think about, the only (inaudible) not seeing any material change in the unit cost of a client or customer than the most sensible course of action is to continue plow as many excess dollars as we can into that market, while still hopefully hitting or beating our $610 million target. Yes, your question contained its own answer, yes.

Okay. And then, separately, the slide presentation notes that you're getting pricing in both termites and pests. Could you talk about where you're able to take up pricing, where maybe if other spots are down?

It's basically up everywhere. That's the curious nature of this business, that our pest pricing is universally up. The only area, and it's so minor at the moment that it has no real significant impact, is the lowering in the price our preventital offering. We (inaudible) the market unless we don't have a sufficient presence anyway. So that's part of our strategy in the core termite business, to regain some of that business or to regain core termite customers. That's really the only price movement that we may make. But currently or across the board, our prices are up year-over-year. (Inaudible).

Okay. Thank you.

Our next question comes from the line of Dan Dolev with Jefferies. Please proceed.

Thanks for taking my question. You're making, obviously, a big push into the one-off services. And my question is, maybe, you can quantify, in pest control, what the proportion that's been driven off of these one-off services today versus, say, a year ago?

Oh, that's a tough one. I mean, when we look at the second quarter of this year, it's about, the key one-off service is essentially is in pests. In terms of one-off services, bed bug and mosquito, although with mosquito we're trying to make it contractual. I would say a year ago, we were close to 9.5% to 10% in one time services. In fact, I would say it was closer to 11.5%, something like in the first quarter. Again, it's not a shockingly high increase, but of course it is reflective with a counterbalance in the pest, number of pest customers and (inaudible) we do stress it.

Got it.

(Inaudible) very favorable as it is, it's just not a massive part of the revenue about 48% year-over-year. So, a number of these factors are significantly increasing out side of the core pest business.

And is there an impact of one-off services in lue of a contractual pest control service or?

Well, there is some of that. You know, it's an interesting topic because it's not only aggressive pushed, that change, it's that we don't necessarily aggressively push the contract itself. The idea that, and we said it before, we want to make our customers lives a little easier and make doing business with us easier. So if their initial preference is for a one-off service and a no hassle treatment then that's what we'll do.

And how is that, that's exactly what I'm on too. How are those conversations, is there any statistic about X percent of customers that have asked for the one-off non-contractual today versus then, based on the fact that you're not pushing the other one, right?

No, I don't really have a statistic that I can quote now. But, I mean, obviously you know it's a factor. And another thing to consider, as well, which is a subtle change we made in the second quarter. Again, time will tell how well it bears fruit, is when we perform a reinspection, for example, on a termite customer, doing when the customer's actually in actually in the home and having the technician actually meet the customer, that, again, allowed us to generate sales with our existing customers, simply by virtue of the face-to-face contact. And, again, what that generated was some one-off non-services such as encapsulation work or (inaudible). By virtual of being at the home to perform the termite [renewal] inspection. And so that sort of activity (inaudible) deep so many one offs are generated on the back, ironically, of some contracted customers.

Understood. And so, just one last clarification. So the decline, you may have answered it before so sorry, the decline in pest retention is 60 basis points, decline year-over-year, that's not because of that, right?

No. No.

So what is the (inaudible) for that retention decline, in pest?

The retention decline in pest, it is the shift you're talking about.

Okay.

I thought you were talking about the last comment which was to termites, termite inspections. Jumping over to pest, obviously, the change in pest retention isn't necessarily to do with termite business. Some of the pest retention losses or modest change will be by virtue of this mix shift in business, yes. (Inaudible). Again, the retention rate and the renewable level of serves still remains very high, but yes, that will be a profit.

Understood. Thank you so much. Appreciate it.

Our next question comes from the line of [Michael Freeberg] with [Greenwich Wealth Management]. Please proceed.

Good morning.

Hi.

The recent news on the health of all four members the Delaware family who were poisoned in St. John's remains dire. Are the results of your investigation complete and will it be released?

We are continuing to cooperate with all authorities and continuing to make our assessment, so we don't have it complete as of yet and we are respecting all participants and family included and not discussing it openly. So we have no changes in our communications relative to.

When you're cleared, will they be released?

We haven't made that decision yet and again, it would have more to do with respect to those involved and doing the right thing.

Okay. Thank you.

Yes.

Our next question comes from the line of Andy Wittmann with Robert W. Baird. Please proceed.

Thanks for letting me in on the follow-up, guys. This question's kind of been asked but I want to maybe ask it a little bit more directly, which is the Terminix segment customer logs in termite, you've been, I guess you said you've tested a couple of different strategies on how you go to market. This has been a couple of months now, including during the swarm season.

I guess coming out of that, what are the lessons that have learned and are you gaining confidence in the reasons for the customer loss and the corrective actions to address it from here?

Yes, I think, again as we talked about during the call, there's been a change in the product offering and (inaudible) in general, which we led quite honestly in mix to bait and I think that, shift, whether, as Alan mentioned, preventative or curative, meaning do you have a problem that you can visually identify or not being preventive, has impacted the market.

So the bait product is a higher priced product, but It's something where you annually come back and you make sure that there's no activity at the site and evaluate the bait and replace it and there is an issue where ever the bait station is located, then you treat with other types of materials.

It's been a change in the marketplace, which has increased the revenue, as I said, so we've maintains our position in terms of revenue share, but on a united basis, it's something we need to address. And so we believe the actions that we're taking, mentioned during the call, are going to give us the ability to grow our unit count and revenue count in termite going forward.

All right. Well, then I wanted to go over to the Franchise Services Group and just talk a little bit more. When you first announced the movement to selling the company owned Merry Maids franchise, you talked about it being EBITDA neutral. Now that we're along that path, do you still feel like that's the right way to think about it or is this maybe a little bit more dilutive but still the right thing for the Company?

Oh, we're still convinced it's the right thing. From an EBITDA margin, it won't be dilutive and the modest decreases in, let's say, FSG (inaudible) this quarter are not the result of the Merry Maids, that franchise divestiture particularly. So, no, we're committed to the course of action (inaudible). I mean, we won't see a, let's say, traction of the strategy, really, until It's complete and all of the branches are converted to franchises. And we're going to have, next quarter, a coherent (inaudible) consistent strategy for growing those franchise businesses. But that will need to follow from (inaudible) rationalization.

Yes. Okay, thank you.

Thanks, everybody. Go ahead, operator.

There are no further questions at this time, sir. You can continue with your presentation or closing remarks.

Thanks, everybody, for participating in today's call. As a reminder, a replay of the call will be available on our website in about an hour from now. So, again, appreciate your participation and look forward to speaking with you in the future.

Thank you.

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