Terminix Global Holdings Inc (TMX) 2016 Q1 法說會逐字稿

Ladies and gentlemen, welcome to ServiceMaster's first-quarter 2016 earnings conference call. Today's call is being recorded and broadcast on the Internet today, May 4, 2016. Beginning today's call is Jim Shields, ServiceMaster's Vice President of Investor Relations and Treasurer, and he will introduce the other speakers on the call. At this time, we will begin today's call. Please go ahead, Mr. Shields.

Thank you, Melody. Good morning, and thank you for joining our first-quarter 2016 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 have not had the chance to download the investor presentation from our website, I'll walk you through the agenda items shown on slide 2. Rob will lead off by providing some opening remarks and then provide a summary of our first-quarter consolidated financial results. Rob will provide an update on our 2016 full-year guidance. Alan will then review our performance by segment, and provide more details of our consolidated results. Rob will then provide summary comments, before opening up the call to your questions.

Before we begin, I would 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 3, all forward-looking statements are subject to the forward-looking statement legends contained in our public filings with the securities and exchange commission. These forward-looking statements are not guarantees of performance and are subject to the risk factors contained in our public filings, that may cause actual results to vary materially from those contemplated in the forward-looking statements.

Information discussed on today's call speaks only as of today, May 4, 2016. 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 first-quarter 2016 financial results, and we have posted a related presentation, both of which can be found on the investor relations section of our website.

We will 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 our press release and the figures labeled as such therein.

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

Thanks Jim, and welcome to our Q1 2016 earnings call.

This is another strong quarter of top line revenue growth, as we continue to benefit from our past investments in people, marketing, and customer service. Through these investments, we are making great strides in transforming our business to be the leader in the way people buy home services.

As we move forward, we will continue to invest our people, technology, and brands to transform our Company. We are establishing a nimble, agile, and winning culture, and we are arming our employees and partners with the right technology to act decisively to improve customer service, and drive profitability. Our results in the quarter reflect these efforts.

ServiceMaster grew 6% compared to the prior year, and 8% if we exclude the conversion of Merry Maids owned branches to franchises. Revenue growth at both American Home Shield and Terminix accelerated, compared to the fourth quarter of 2015. American Home Shield led the way, with 11% growth in revenue and a 7% increase in the number of customers we serve.

American Home Shield's growth was strong in both the direct to consumer and real estate channels. Terminix revenue grew 8% compared to prior year, with organic pest growth accelerating from last quarter. Acquisitions contributed 5% growth this quarter. In particular, the Alterra contributed approximately $15 million in revenue.

Historically, acquisitions have played an important role on our growth, and have complemented our marketing and sales strategy to acquire new customers. As we mentioned last quarter, the Alterra acquisition fit well with our existing business. It adds significant scale, was all residential pest, it's geographically dispersed, and yet it matched well with our footprint. We have significant synergy opportunities, as we convert these new customers to our technology platform, and we are pleased with our integration efforts to date, and the financial contribution of Alterra to Terminix bottom line.

Furthermore, we just announced the acquisition of Catseye Pest Control's Northeast operations. A $10 million Company with a reputation for premium customer service, and experience in exclusion product services. With this acquisition, we are acquiring a valued brand and a very experienced and capable workforce. Catseye is a great addition to our Terminix business. Our acquisition pipeline is healthy, and will continue to be important part of our overall growth plans.

New products are also important to our long-term growth. For example 18 months ago, we rolled out our successful mosquito service. With the Zika virus in the news, this is a service which is highly valued by our Terminix customers.

With the spread of the virus, we have seen an increase in the number of customer inquiries on social media, call centers, and through online search traffic, just as we are entering the mosquito season in most of our markets. We can't say whether the Zika conversation will directly impact sales, but we do believe our education and awareness efforts around the potential dangers will encourage our customers to protect their homes and families with mosquito treatments. Terminix is focusing our marketing effort on responsible education, about eliminating mosquito breeding sites, personal protection at home and while traveling, and the different options that are available for reducing mosquito populations in customers' homes and yards.

During this time we are especially grateful to have Dr. Stan Cope on our staff. Dr. Cope leads our entomology and regulatory services team, and is our resident mosquito expert. With deep knowledge of pest control as it relates to public health, Dr. Cope is an asset and resource for our team. He is also the current president of the American Mosquito Control Association. He recently attended the White House Zika Action Plan Summit in Atlanta, Georgia. He will continue to be an expert resource for our team, as the conversation around mosquito-borne illnesses increases.

As I mentioned on last quarter's call, at ServiceMaster, we know that the world has changed, and we see that as an opportunity. ServSmart is our approach to capitalize on that opportunity. Customers want dependable experts who they can trust to fix their problems, and they want convenient access to be able to buy and schedule services where, when, and how they want.

Many companies are trying to disrupt the home services industry, as they see a significant opportunity to improve the customer experience. But fixing a mechanical system or solving a pest infestation problem is not something that can be done digitally. With over 80 years of experience, we have the scale to provide high-quality service, and we are using technology to give customers the access and experience they expect.

The on-demand economy and mobile technology have changed people's expectations. Through our years of experience, skilled employees, and partners, we have a legacy of solving our customers' problems, and now we are on a path to enable them to do so through technology. Our investments in marketing and ServSmart technology this quarter reflect our commitment to transform and grow.

For the quarter, EBITDA was $6 million lower than last year, largely because we increased marketing spend by $10 million, and incurred approximately $6 million in additional technology costs associated with our ServSmart initiative. In addition, there was a $5 million increase in our contractor claim costs at American Home Shield associated with the residual effects of greater use of more expensive out-of-network contractors. As of the end of the first quarter, our use of in-network contractors has returned to historical levels.

As we have mentioned in the past, the investment in people, technology, and marketing are important to grow our business. We make investments when and where appropriate. Our ServSmart methodology enables our IT teams to develop and quickly deploy smart solutions. The result is a more agile, nimble approach to technology development, with a quicker payback.

Through this development process returns on the first-quarter investments will be realized faster and benefit the bottom line, more quickly than in the past. Both adjusted net income and adjusted diluted earnings per share improved this quarter, largely driven by lower interest rate expense. First-quarter adjusted net income was $47 million, an improvement of $2 million compared to prior year. First-quarter adjusted diluted earnings per share of $0.34 increased $0.01 versus prior year.

Now turning to slide 5 in our 2016 outlook. As I mentioned previously, we have invested in the future by spending more money on marketing, and investing more in technology. As we move through this year, we will continue to invest. In addition, the effectiveness of our marketing spend is somewhat dependent on timing.

Last year, we shifted some of our marketing spend from the fourth quarter of 2015 to the first quarter of this year. The goal was to avoid the holiday season mail clutter on specific mail drops. We are still analyzing the effectiveness of this shift, but as we progress through the year, we may accelerate some of our marketing spend from the beginning of 2017 into the end of 2016.

In addition, we have noted a greater percentage of our spend is being devoted to digital and online marketing. Specifically, at Terminix, we have seen our online sales grow. Although it is still early, we may spend more on Terminix digital and e-commerce efforts if we continue to see progress and realize the current returns on our investments.

As such, for 2016, we are refining our outlook. We now project revenue to be between $2.75 billion to $2.78 billion, or 6% to 7% growth over 2015, and an EBITDA of between $675 million to $690 million or 8% to 11% over 2015. As I mentioned previously, we do not manage our investments or marketing spend on a quarter-by-quarter basis. We time our spend and investment to optimize the return we get on the spend. As such, in the first quarter, we had significantly higher marketing spend and investment.

We continue to expect revenue growth of approximately 10% at American Home Shield, and the middle to high single digits at Terminix. We will continue to see operating leverage as we grow the top line, and we expect margin expansion of 50 to 100 basis points. Our businesses remain resilient, and we are investing for the future and are confident in our outlook and growth potential.

Before I turn it over to Alan, I would like to mention that we will be holding an investor day in New York City on May 17. I will be joined by the rest of our ServiceMaster's executive team and we will share our strategic plan, and more about our ServSmart initiative. We are excited about the event, and the opportunity to present our plan, to reinvent the way customers buy home services.

I hope you have the opportunity to join us. You can register for the event on our website under the investor relations section.

Now let me turn it over to Alan to discuss the financial results. Alan?

Thanks Rob, and good morning, everyone. I will begin, of course, by discussing the Terminix segment shown on slide 6.

Terminix revenue increased by $28 million or 8% year over year, comprising $18 million or 5 points of growth from acquisitions, and $10 million or 3 points of organic growth. This organic growth reflects a roughly equal split between increases in price and the volume of services.

More specifically, pest control revenue of $206 million reflects an increase of 12% or $22 million over the prior year comprising 16% growth in residential pest revenue, and 5% growth in commercial pest revenue. The majority of this growth in residential pests resulted from acquisitions, the largest being Alterra, with organic residential pest growth of 3% for the quarter. And the 5% growth in commercial pest revenue was substantially all organic.

We continue to experience strong bedbug growth, as well, with a 35% increase in revenue this quarter, split fairly evenly between residential and commercial. Revenue for core termite and other services of $143 million increased 1% or $2 million, with completion revenue itself falling by 2% or $1 million to $61 million. However the number of core termite completions actually rose year over year, continuing a trend that began in the fourth quarter of 2015. This is a positive development, given that these customers have one of the highest lifetime values in the ServiceMaster portfolio, and we should therefore increase renewal revenue in 2017. This quarter, core termite renewal revenue itself rose by 4% or $3 million to $82 million, although this is primarily due to pricing.

The lower demand for our insulation services caused by the unusually warm weather throughout the nation during the first quarter, and our recent dedication of more sales and marketing resource to the repositioning of core termite did result in a flattening of sales of other services, but despite this, exclusion and encapsulation revenue actually grew by 7%. Although new services represent about $100 million of our revenue in 2015, and so therefore, small are small parts of our portfolio of services, they remain key to our growth story going forward.

Terminix EBITDA increased by $5 million this quarter. The $28 million of additional year-over-year revenue directly produced $15 million of incremental EBITDA; however this was offset by $4 million in additional technology costs, associated with the development of the ServSmart platform Rob mentioned earlier; and a $1 million increase in sales and marketing costs; and about $5 million increases in a variety of other costs, including $1 million in additional insurance premiums. So gross profit actually remained flat at 46%, compared to the same quarter in 2015.

Now, on a revenue increase of $28 million the $5 million increase in EBITDA for the quarter represents an incremental flow-through of 18% for each dollar of incremental revenue. If we notionally add back the $4 million in additional investment and technology, Terminix would have converted 32% per dollar of incremental revenue into EBITDA. Historically, I think it's fair to say that we have tended to invest roughly in line with revenue growth, but given the returns we expect from the development and implementation of our digital platform, we have stepped up that rate of investment in 2016.

Now, let's turn to slide 7 and discuss American Home Shield's first-quarter performance. The strong revenue growth in American Home Shield continues, with 11% or $19 million of year-over-year organic revenue growth, about $7 million of which was from pricing. Claims costs in the quarter were $10 million higher than last year. About $4 million of this increase was due to inflationary pressures and about $1 million reflects the impact of extra claims from first year direct to consumer customers. The remaining $5 million relates to the excess cost of servicing the appliance trades, compared to last year.

As a point of reference, when discussing our fourth-quarter results a couple of months ago, we explained that the use of more expensive out-of-network contractors drove about $10 million of additional claims costs; and at that time, we estimated that our mitigating actions would take hold in the first quarter, but signal that there would be some continuing impact in the first-quarter results. In fact, as Rob mentioned, as of March 2016 our use of preferred contractors has returned to the previous high levels, and so the first-quarter impact was very much as anticipated, about half of that experience in the fourth quarter.

In other words, the use of out-of-network contractors cost us about $5 million this quarter compared to $10 million in the fourth quarter of 2015. So as a result, the first-quarter gross margin percentage for Home Shield of 45.9% is 2 points higher than that of the fourth quarter last year. And, if we were to normalize this year's first quarter margin for the $5 million of exceptional appliance claims costs, than the gross margin percentage will be the same as the first quarter of 2015.

Now, sales and marketing spend increased by $10 million over the first quarter of 2015 and this increase is largely the result of the shift and increase in size of a mail drop that was originally planned for the 2015 holiday season. As mentioned, in order to avoid the holiday mail clutter, and in an effort to enhance the effectiveness of the mail drop, we shifted to the first quarter 2016. In order to further enhance the effectiveness of the mail drop, we pulled forward some digital and broadcast spend, roughly another $1 million.

Coupling these traditional marketing and digital initiatives greatly improve the effectiveness of the campaigns. And in addition, in order to handle the demand associated with the initiatives, we incurred about $2 million in costs associated with extra selling agents and contact center staff. Now over the past three years, we have substantially increased our marketing spend, which has in turn resulted in an acceleration of customer acquisition and [some] revenue growth. Our acquisition costs remain flat on a per customer basis and the return on our marketing dollars remains compelling, and therefore so does the case for continuing to invest in marketing.

In addition to an increase in marketing spend this quarter, we increased the investment our ServSmart technology platform by about $2 million. So given these investments, we now dissipate that full-year American Home Shield EBITDA margins will be similar to those of 2015.

Slide 8 shows FSG's performance. The revenue decline of $10 million or 17% is almost entirely related to the Merry Maids business, the vast majority of which is due to the ongoing conversion of the branches into franchises. As of now, we have divested or have commitments to sell over 94% of the branches. Once again, we have largely maintained our EBITDA by driving cost reductions on pace with the branch disposals, which has the impact of raising the gross margin of this segment by 6 percentage points year over year to 59%, and the EBITDA margin by 5 percentage points to 37%.

Turning to the full P&L account on page 9, and looking at the business in its entirety, the year-over-year revenue increase of over 6% or $37 million includes $26 million or 5 points of organic growth. The remaining $11 million of revenue increase includes $18 million due to acquisitions within Terminix, partly offset by the $7 million of revenue divested as we convert our Merry Maids branches into franchises. Gross margin as a percentage of revenue fell by just 2/10 of a point to 46.7%, the principal driver being the $5 million of additional claims in American Home Shield discussed a moment ago.

Now, the year over year SG&A increase of $21 million is primarily the result of $11 million in additional selling and marketing costs, of which $10 million is in American Home Shield and $6 million of high technology costs. Now, as described in prior calls, the amortization expense has fallen by $4 million this quarter. The definite lived intangibles created when the Company was taken private in 2007, have become fully amortized. And with respect to interest expense, we're now running at the $38 million of quarterly interest expense referenced on the third and fourth-quarter calls.

Furthermore, in the absence of any debt redemption this quarter, there is no repeat of the loss on extinguishment of debt to $13 million recorded in the first quarter last year. Other expense of $3 million includes a further $2 million of legal and other charges relating to the USVI incident, to supplement the $8 million recorded in the fourth quarter of 2015. And even though the matter remains open, we continue to believe that a reserve of $10 million for penalties related to this incident is appropriate.

This results in pretax income of $62 million compared to $45 million over the same period last year. Our effective tax rate for the quarter is about 37%, and so the net income for the quarter is $39 million, compared to $28 million last year. Of course, to aid comparability we also report adjusted net income, which I will reconcile briefly in a moment, and this increased by $2 million to $47 million.

So slide 10 provides our standard two reconciliations. First we walk our segment performance measure, adjusted EBITDA, down to income from continuing operations, and then walk the reconciliation back up to adjusted net income. However, I think the reconciliations are self-explanatory or immaterial, so we shall move on.

Slide 11 provides the first-quarter simplified cash flow statement. In the first quarter, we generated $89 million of free cash flow, an $18 million improvement over last year. We continue to demonstrate the incredible fundamental cash flow characteristics of this business, with working capital generating $26 million of inflow, an increase of $5 million over last year, largely offsetting the reduction in EBITDA. Now, our investment in ServSmart is the principal source of higher capital spending in the quarter, and as a result, we expect about $60 million of capital spending this year.

Interest payments of $42 million are $25 million lower than last year, largely reflecting the carryover savings from the redemption of our high-yield notes, interest on which was paid semiannually in February and August. As mentioned on prior calls, we become a federal taxpayer, given that are NOLs have largely been exhausted, and we are a profitable US company, so payments of $3 million this quarter merely reflects favorable timing of payments. For the year, we still expect to pay cash taxes somewhere in the $140 million to $150 million range.

Notwithstanding that, we still expect to comfortably exceed $300 million in free cash flow for the year. At a high level this free cash flow projection is derived as follows. Our increase in EBITDA, coupled with lower interest rate payments, will provide roughly $100 million of cash flow improvement, which will be offset by a conservative cash tax increase, let's say, of $110 million, plus $20 million more in capital spending on ServSmart. So a reduction of about $30 million in free cash flow from last year's $358 million, before considering any changes in working capital. Please note that a formal reconciliation from the US GAAP cash flow statement to free cash flow is provided in the appendix and in the press release.

Slide 12 provides a history of our free cash flow from 2012 to the last 12 months, ended March 31, 2016. As a reminder, we have provided our long-term leverage target of 2.5 to 3 times EBITDA. This is a level that we expect to comfortably reach, even in the absence of further debt reduction, given our expectations for EBITDA growth alone will reduce our leverage by around 5/10 of a point per year.

We have Board approval for $300 million of share buybacks over three years, we're clearly leaving our strategy somewhat open regarding the use of the, let's say, unallocated $200 million at least, of free cash flow, that we will generate each year. So we continue to explore potential acquisitions that will be significantly value-enhancing, synergistic, and that will complement our core businesses.

Now with respect to our full-year guidance, we have revised our EBITDA for the year, moving our low-end estimate down by $10 million to $675 million, reflecting the likelihood that we may accelerate investments in both marketing and technology, in order to generate future revenue and EBITDA growth. Furthermore, the investments made to date will result in us exceeding the low-end revenue figure previously provided. We remain confident in our long-run EBITDA conversion targets of about 35% of incremental revenue. So in other words, for every dollar of revenue increase, we will convert roughly 35% of that into EBITDA over a span of courses and years.

We are pleased that as revenue growth has accelerated over the last three years, we have continued to achieve high incremental margins and margin expansion; however, with these potential additional in-year investments, conversion this year is likely to be in the 28% to 35% range, and we anticipate at least 50 basis points of EBITDA margin improvement.

On that note, I will turn the call back over to Rob for closing comments.

All right. Great, thanks, Alan.

We continue to reap the benefits of our investments with strong top line revenue growth this quarter. We will continue to make investments in marketing and technology, to drive both growth and productivity. We have the number-one position in large fragmented markets, and we offer services that are essential to our customers, and that result in high retention rates and recurring revenue. Throughout our ServSmart initiative, we are positioning the Company to capitalize on these attributes, and become the provider of simple, easy-to-access services that are dependable, convenient, and on time. We have to share some of the progress we have made with you at our investor day on May 17 in New York.

Now I will turn it over to Jim Shields for Q&A.

Thanks, Rob. As a reminder during the question-and-answer session we encourage you to ask questions that you may have, but please note the guidance is limited to the outlook that we provided in the press release and webcast presentation. Additionally, since the queue is long this morning, please limit yourself to one follow-up question, so that we can get everyone in the allotted time. Melody, let's open up the line for questions. Thank you.

(Operator Instructions)

Jeff Volshteyn, JPMorgan.

Let me start with Terminix. I wanted to get a little more color on the termite side of the business. Can you just help us understand what are some of the trends, maybe by geography, or by type of customers that you see there?

Well, we're still seeing the trend we discussed a few quarters ago, and it has been somewhat of a constant theme -- the acquisition or the purchase of additional services by our customers, I think as I mentioned, organic growth is not exactly particularly strong in pest at 3%. But it's an improvement over the fourth quarter, and we still see an underlying increase in the volume of services that are being purchased by our pest customers. Mosquito is still small at the moment, but that's showing very positive signs. There's still that, let's call it, on-demand behavior of our core past customers. That is progressing very well.

Within the termite segment, as I said, we have actually seen an increased number of completions. We're doing some bundling and couponing and bringing in more customers again, throughout the first quarter than we did in the first quarter of last year, 2015. So we're actually seeing very positive developments in the way core termite is behaving. And they're not fully reflected yet, as I said in the revenue. That will come through later in the year, as well as in terms of renewals in 2017. But the actual -- the underlying developments in both markets are quite strong.

The other thing I would add to what Alan said, Jeff, is that because of the weather and the warm weather that we have had, the insulation site has been soft. Softer year over year than what we'd normally experience, which is logical, but given that, hopefully activity will continue to be there for termite going into the spring season.

That's helpful. As a follow-up, quick question on the AHS. I'm glad to see the cost issues with some of the contractors is been resolved. Alan, I think you mentioned $4 million of inflationary increases in cost. What is it related to, and how should we think about it for the rest of the year?

If you look at the dynamics of the American Home Shield business, we have about $7 million in pricing. So we will always be able to offset underlying inflation with -- sorry offset cost increases or inflationary cost increases, with pricing at something close to our gross margin. In other words, of we have, let's say, $7 million of pricing year over year, it's reasonable to anticipate maybe half that dollar value in inflation and contracted costs. I think as we've talked before, we have to be flexible, and make sure that we manage the contract base appropriately, particularly as we grow.

I believe we have that, I'd say, under good control as we exit the first quarter and enter the second quarter. But there will be a few million dollars per quarter in underlying inflation, I would say, but never more than the price increases that we are passing through; because we get a two-for-one ratio of pricing to inflationary cost, given that our contracted cost base is roughly 50% of our revenue.

Denny Galindo, Morgan Stanley.

This time of the year, as you move into May, we start to get a better sense of a swarm. Are you seeing -- what are you seeing right now? This is a year where the weather has been warmer, and it seems like it should be a good environment for termites. Do have any color on how the year will progress, and if this big termite year is going to be this year, are maybe we wait another year for it?

Well, Alan and I have been waiting for three or so. We think actually the conditions are positive to support activity. We've seen some of that and on the core termite side of our business, and we think we're making good progress, and have backlog that we're executing on today. So in general, I would say, it should be a good termite season.

Okay. Then one question on American Home Shield. The top line accelerated pretty nicely here, but the customer count was a little bit slower than we had thought. So maybe more of it came from pricing. In conjunction with the higher marketing expense that you've spent this quarter, I want to get a feeling for was this increased marketing cost needed to keep the growth at this level? Or was it something that maybe will cause further acceleration in the future?

I will take that and maybe Alan can jump in. Remember, the biggest part of what we do is the renewals year over year, so in part, the price comes from some of the renewals, but also some of the new business. So you see the variance in price and/or product mix as people choose different product solutions, and things like that.

Most of the costs that we mentioned that we carried over from Q4 2015 to 2016 was direct mail. Direct-mail tends to lag little bit. So it's not tied to the current period. As you know, we signed one-year contracts that we renewed, so it tends to pay out over a number of months. So it really isn't tied to the current period. Don't connect the two together. We just decided to try different approach to the direct-mail side.

That's right.

George Tong, Piper Jaffray.

There was a $1 million increase in AHS claims costs in the quarter because of extra claims. More broadly, can you talk about changes you've seen in AHS claims frequency and severity, and actions you may be taking to manage any of the increases?

If you think about the theme we developed we discussed -- when we brought out the fourth-quarter results. There is a slight greater tendency of the new customers we're bringing on, whether through real estate or direct to consumer to favor the appliance coverage that we offer in various ways in our contracts.

As we've said, when we looked at last year we saw, we had, in the fourth quarter maybe a 7% increase in the number of customers but an 8% increase in the number of appliance claims. Not a massive increase. With 1.6 million customers overall, and growing at Home Shield, it is a reasonably, let's call it, robust portfolio. So there aren't many small factors that cause that portfolio to change.

I think the most important aspect of this business to bear in mind is that we can and do, continually redefine and redevelop our products to both add new services, to remove things and any -- and we will cover some of this on Investor Day -- the nature of the product is being continually refined and piloted in given areas. That will continue to happen as we go forward. The beauty of this product is that, however I believe -- however, our customers behave, we fundamentally will have a product that will match that general need; and you see us going through one of the development phases right now.

Anj Singh, Credit Suisse.

My first one, a couple part question on American Home Shield. If you could help us with what is baked in for marketing expenses for American Home Shield for the full year versus last year? It seems like marketing expenses are taking up, so should there be any change to the 10-ish percentage growth top-line growth outlook that you've talked about previously? And if not, then when should we expect that growth profile to start improving?

Good question. I'm probably too conservative to come out here right now and say that the amount of spend that we're plowing into 2016 will show any revenue benefits in 2016. The fact that we are accelerating and continuing to invest more dollars in marketing should, we should see the benefit in 2017 of that growth rate.

Okay. Would you still say your customer acquisition costs are flat in a American Home Shield?

Yes. I tried to make the point that, that is the issue. We've often talked about us not seeing, what I'll call, the inefficient frontier of this investment. That continues to be the case. Therefore, the argument for investing sooner is still compelling.

Okay. Got it. My second question, with regards to the technology investments, it seems like you've ramped up the pace of investments and size of investments. Could you talk about what's changed in your outlook or plans to ramp these up, as it relates your guidance for this year?

I think it's more about timing. What we talked about is we don't really pace them by quarter, we pace them in terms of return, and when we make the investments, including that investment in technology. So, both. We -- two things I would say.

It's focusing on rolling out the service mobility application for Terminix in large part. Two is, it's translating a lot of our e-business and digital marketing learnings from AHS to Terminix, so we put a lot of energy and effort into that in the quarter. Then we also rolled out a new sales mobility tool with iPads, and [ciPads] and support with applications, which actually the guys are deploying this week. So I've seen a number of emails and excitement about using the tool, and it gives us the ability to update, provide information to, and current knowledge to our sales people in the field, that provide to the customers. Really those three areas: the digital investment in Terminix, continued direct-mail largely, and AHS was a big part of the investment in marketing. But then the technology was largely deploying these two tools in mobility for Terminix.

Okay. Got it. Appreciate the color. Thank you so much.

Gary Bisbee, RBC Capital Markets.

Let me start by following up on that IT spend. So the $6 million, I think, was a higher number than any of us expected. Can you help us understand the phasing of the spend through the rest of this year, and what's the timing that this incremental spend on these initiatives is going to persist for?

Well, at least we recorded 6 million additional costs year over year. I would say that we're going to see at least that every quarter for the rest of the year. We obviously -- we re trying to build in quite -- obviously the flexibility to accelerate that should the benefits be obvious to us. The whole point is to get -- we're working what we call agile. The idea is to bring in minimally viable product as soon and as early as possible, that will benefit the customer experience.

We are enjoying great success in that. And therefore, there is no, there is little benefit in delay. There's really no point in going slowly with this initiative, because it's transformative. And so we will see, as I said, roughly $6 million per quarter of increase year over year for this initiative, at least.

Do you think that persists beyond this year or are these three things that Rob just mentioned, you get them done and get through the bulk of it, and you're back to normal pace of growth with revenue?

Something closer to the way you said it, yes. We will not see continual rates of increase like this at all. Going into the year.

And then the follow-up question, just on the marketing spend, so the incremental $11 million this quarter, I understand how you frame that, and you told us to expect some of that last quarter. Was there pulling forward from later in this year as well? Any thoughts on year-over-year timing through the rest of 2016, in terms of marketing spend? In other words are there going to be any quarters it's down or less?

It's going to be up in Q2. It will be up to a lesser extent than it was in Q1, but it will be up in Q2. And as yet, we haven't -- we are undecided, and this is the truth, we are undecided in Q3 and Q4. It depends on the effectiveness and the rate at which we are acquiring customers as we modulate growth and the investment.

But again, we're trying to make sure that we're building in the flexibility for higher marketing in the second half, should we think that's appropriate. That was something that Rob covered in his prepared remarks. But we will see, to clarify that, higher marketing costs year over year in the second quarter in Home Shield.

As Alan said, moderated by our costs to acquire balancing that return, which we mentioned during the call.

Sara Gubins, Bank of America.

Could you give us an update on the pricing environment that you are seeing in termite and pest?

It doesn't change much. I think as we've said, in pest, this is an essential service. Customers largely expect and absorb a couple of points of price a year. If you are a Terminix customer, you'll have received a little notification, polite notification -- as I did, for my services, indicating that the price has gone up and I'm always delighted and happy when that happens, like most customers.

And in termite completions, as I mentioned, we're actually doing some bundling and coupon discounting of termite services. The termite completion that is, that's the initial thing that brings in the customer. So with some modest discounting, and I say modest, we've seen this acceleration in the number of completions, and of course what that means is, the real benefit is we have an increased number of customers that will therefore renew -- pay the ongoing annual premium in the out years.

So the environment, it remains -- certainly in pest it can absorb the standard levels of price that we're putting in; and the termite market, at least in certain aspects and certain geographies, is actually quite responsive volume wise, so we're seeing, for the initial treatment. When it comes to termite renewal, very absorbent of price increases as you saw. The reason for the termite renewal revenue going up is largely price. Once customers are, let's say, hooked on the product, they generally get -- just like the pest customer, they absorb the price increases. The environment remains very healthy.

Remember the conditions too, our favorable in terms of pest activity. So the warmer the weather and the start of the spring, the more activity that occurs, and much activity in terms of pest is customers calling us with problem. That gives us an opportunity to sell these bundled products that Alan talked about, too.

I think Alan mentioned too, bedbug was up quite a bit, although small but it indicates there's activity out there. So customers tend to call us when they have a pest issue and it gives us an opportunity to sell them on mosquito and other things like that.

Okay, great. Thanks. Sorry if I missed this, but within AHS, you go now back to network utilization levels, are you paying those contractors more -- that are in network -- are you paying them more per job than you were before or does that go back to historical levels, as well?

I think as Alan mentioned, it varies by region and specific contractor, and then he mentioned some of the inflation that we can anticipate for the balance of the year. It's a combination of price both labor, but also materials.

Okay. Thank you.

Andy Wittmann, Robert W. Baird.

I want to build on that last question about AHS contractors, and just ask specifically what actions have you taken that have addressed the contractor claims. Is the network bigger now, or maybe you can give a little bit of detail as to what you've done to address that?

I will start. I think we added somewhere in the neighborhood of 150 or so contractors, net between ads and deletions and new. So it's increasing. So we've added more contractors. And then is our density grows in specific geographic regions evolving, we add new contractors to that, as well. So we're up in the contractor base.

Got it. I guess Alan, on the balance sheet, there was a notable jump in prepaid expenses and other assets, as well as your self insurance liability. I was wondering if you can tell us what was driving that sequential change?

The principal element is the fact that within -- on the USVI matter we are, as we said, covered by insurance. But as the claim develops, we have to gross up our balance sheet to reflect both a payable out for the potential settlement of the claim, as well as an asset to recognize the equal and opposite recovery from the insurance. The principal, that's the largest element of that increase.

Got it. Okay. Thanks. I will leave it there.

Dan Dolev, Nomura.

I just can't get my head around it. You're growing low single digits in pest control. If you look at the first quarter of Roland, it's up 7, Rentokil up 6, Ecolab, which I'm not a big fan of, up 9. What's going on? Are you losing share, are you in a different market? Could you shed some color on this? Thanks.

We're clearly in different markets that the companies that you mentioned, which are predominantly are more commercial. So I think that's a part of the equation, and I think part of it is what we've done to focus on and transform the business, and how we approach selling. So that's why I mentioned some of the tools that we put together and the investment in technologies for mobility tools and things. Right now we feel pretty good about where we're headed, and our ability to grow in Terminix. There's differences, of course, between all of the individual companies and mix and acquisitions and everything else that's reported.

Got it. And a follow-up on AHS. On those out-of-network contractors and the customers -- so if I'm a customer today and I make a claim, am I still getting the contractor at the same time that I got it maybe three or four months ago? Or have you changed the time it takes to fix the problem?

You mean service levels in general?

Yes. Are you providing the same service levels with just better cost structure?

Part of the investment that we mentioned in the quarter was the investment in the ability to speed to answer the calls and the service capability that we have. So we increased both the number of contractors that we have, but also increased the number of people that we have on the phones and manning the phones, and setting up and scheduling appointments. So I would say it's equal in terms of a quality.

Agreed.

Thanks. Appreciate it.

Sam Eisner, Goldman Sachs.

This is Nick Stuart on for Sam. Circling back to the $4 million in insurance costs in Terminix, could you -- is that a run rate quarterly cost that continues from here, or is that just a one-time charge?

I may have mangled my words. The $5 million charge for a bunch of other stuff. $1 million of that is insurance premiums.

Got it. So of the $5 million in other costs, what are those specifically, and do those continue?

Too many small things to break down. There's no reason to expect them to continue, I could really break it down into so many small items, none of which were any sense a trend or anything like that.

Okay. That's helpful. And then with the respect to the Catseye acquisition, when did that close, and what can you tell us about how many customers you acquired, or how much revenue that acquisition should contribute?

The revenue I mentioned is $10 million. In general, and the rest we don't disclose typically.

Got it. Okay. And then just lastly on the DOJ investigation, can you just update us on what the rejection that you called out means?

You mean the proceedings --

Yes. Right.

Part of the process in resolving and coming to agreement and finalizing everything with DOJ, there is another scheduled date in August. So, no change of significance to that.

(Operator Instructions)

Denny Galindo, Morgan Stanley.

The acquisition that you announced, it sounded like it was a little different than what you typically do, because you're not using your brand, where you typically bring them under the Terminix brand. So maybe if you can give a little bit more background on that structure? And is this something that would become more common as you become more of a technology and marketing company and you improve those capabilities, it might be useful to a mom-and-pop brand to tap into some of the investments that you're doing there. Maybe talk about that a little bit?

Sure. I think it varies by specific supplier that we acquire. And really, how well they have executed in terms of both brand, but also service. I mentioned that in terms of Catseye, we're pretty excited about actually learning from some of the things that they've done in premium service, and how they've provided services in exclusion, but also really high quality service, and that's how they are recognized. We want to make sure that we learn from that, and apply it in different places.

And also, take advantage of much of the investment that they have made in their brand name. So it varies from business to business. I think in the case of Alterra, it's a similar circumstance, and the number of customers that we work with gives us the opportunity to provide alternative services to them. So over time, we will integrate some of these things back into the one brand approach, but given the business and where it is, and quite honestly what we can learn, we take advantage of the investment that we have made.

And then secondly, just it does sound like the claims issues are pretty much past now. But is this something that will now recur during every slow season in AHS, where you're going to grow 10% every December; you'll have a battle with the contractors and you'll have to divert some claims to the lower tier contractors in order to -- while you're negotiating; and you'll have higher claims costs in Q4 and Q1, and then it will be fine for the rest of the year? Or was this truly a one-time occurrence?

Let me answer in between those two aspects of the question. We are obviously are working hard to make sure that the structure of our relationships with our contractors is designed to prevent something like this happening again, in terms of design and negotiation. But I wouldn't -- it may at some point in some area happen again. I wouldn't necessarily -- in no way would I assume it's a regular fourth-quarter occurrence. I don't believe that.

It's something that happens throughout the year continuously, so it's not something that you can say happened, will happen on a recurring basis, as Alan said.

Do the contracts come up at different times during the year or is it --?

Yes.

So they're evenly spread?

The contracts are anniversary, not calendar year.

Okay. That's it for me.

We have no further questions at this time. I will turn it back to you, Mr. Shields, for closing remarks.

Thank you for your participation in today's conference call and webcast. As a reminder, we will be holding an investor day in New York on May 17. You can register for the event on our website under the investor relations section. A replay of today's call will be available on our website also in about one hour. Thanks again, and we look forward to seeing you in New York on May 17.

Thank you.

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