Terminix Global Holdings Inc (TMX) 2016 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the ServiceMaster's second quarter 2016 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 Investor Relations and Treasurer. 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, operator. Good morning and thank you for joining our second 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 haven't had a 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 second quarter consolidated results. Alan will then review performance by segment and provide more details of our consolidated results as well as providing an update on our 2016 full-year guidance. Rob will then provide summary comments before opening the call to your questions.

Before we begin, I'd like to remind you that throughout today's call management may make forward-looking statements to assist in 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 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, July 28, 2016. The Company undertakes no obligation to update any information discussed no today's call.

This morning, ServiceMaster issued a press release, filed with the SEC on Form 8-K, highlighting our second 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 have included definitions of these terms in our press release, which is available on our website. We have also included reconciliations of these 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.

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

Right. Thanks, Jim, and thanks to all of you for joining our 2016 second quarter earnings call. I hope many of you on the call today either attended our investor day held in New York on May 17th or have had the opportunity to view the video on our website.

At that event, we introduced ServSmart, our approach to how we engage our customers, employees, and business partners to provide the best service possible in an efficient way. ServSmart is the foundation of our plan to improve our business processes and enable customers to research, buy, and schedule home services. Our team gave an overview of our approach in how we are transforming our company through technology.

For our company, ServSmart is more than just an initiative. It is how we will tackle process improvement across brands and functions and simplify the tools we use to deliver services on time for customers. Our ultimate goal is to provide a world-class experience from the time a customer begins to search for a service provider to the time they pay for those services. We want to serve our customers when, where, and how they want to be served. By leveraging technology to make it easier and more convenient for customers and our associates, ServiceMaster aims to be top of mind for consumers when they select services for their home.

We operate in large and attractive markets with favorable consumer trends. Estimates peg the overall addressable market size for home services to be between $250 billion and $400 billion. The industry is incredibly fragmented with a reputation for poor and inconsistent customer service. Many lead-generation companies have struggled with the thin margins after decades of investment and new entrants have failed to gain traction.

ServiceMaster is in an excellent position to capture an increasing share of this market. We have three of the largest and most profitable home service brands in the industry with a record of solid service delivery across all of our brands. We visit 75,000 homes and businesses each day and, in the process, our trusted professionals deliver quality service through an unmatched network of employees, contractors, and franchisees. As we showed you on our investor day, we are now capitalizing on our size and scale by investing in technology to take our service to the next level. Through technology, we are transforming the customer experience and building a reputation for delivering quality service.

Now, before I walk you through our second quarter financial results, I'd like to address the charge we took this quarter related to the incident in the U.S. Virgin Islands. The Company has reached a tentative agreement to settle the civil claims of the family injured from the fumigation incident at a U.S. Virgin Island resort serviced by a local Terminix branch.

This incident was tragic and we deeply regret that it happened. Under the tentative settlement, in addition to payment from our insurance carriers, we will pay $90 million representing non-insurance amounts. We had previously recorded a charge of $3 million, which was an amount equal to the Company's insurance deductible under its applicable insurance program.

With regard to criminal proceedings on this matter, On July 21st the Company entered into a new plea agreement with the Department of Justice. The plea agreement supersedes the previous plea agreement entered with the Department of Justice in March of this year, which has been rejected by the U.S. District Court of the U.S. Virgin Islands. The Company had previously taken a $10 million charge associated with this criminal matter. Under the new plea agreement, the Company does not anticipate taking any additional charges. The new plea agreement is subject to the approval of the court. The court hearing is anticipated to be held in August of 2016 and if the new plea agreement is approved it will resolve the Federal Criminal Department of Justice investigation.

As a company, we continue to improve and make significant investments in our health and safety programs and our goal is to be the best in the industry. Over the past year, we have made great strides toward that goal. We will continue to invest in technology, personnel, and training to continually improve our processes.

Now, turning to results. ServiceMaster revenue grew 4% compared to the prior year or 6% if we exclude the conversion of Merry Maids branches to franchises. Revenue growth was driven by American Home Shield through the increase in the number of direct-to-consumer and real estate customers and at Terminix by the acquisition of Alterra, which occurred in November of last year.

In addition, at the end of the second quarter, American Home Shield acquired OneGuard Home Warranties. The acquisition is important to our growth strategy and expands American Home Shield's footprint in three highly-competitive and important states; Texas, Arizona, and Nevada. Based in Phoenix, Arizona, OneGuard was named in the 2015 Inc. Magazine's 5000 list of America's fastest-growing private companies. We are excited about OneGuard being part of our team and the talent they bring to ServiceMaster. OneGuard will continue in the market with its current brand identity and product offering. We look forward to learning from their success and having them as part of our team.

With regard to our termite business, our targeted marketing, couponing, and bundling strategies have resulted in the third straight quarter where we have experienced a year-over-year increase in sales. As Alan mentioned last quarter, termite customers have one of the highest lifetime values in the ServiceMaster portfolio. The increase in termite sales is a good sign for future revenue as these new customers renew their subscription in subsequent years.

With regard to pest control, we are pleased with the integration and performance of our Alterra acquisition and continue to invest in our core pest control business. Our organic pest control growth in the quarter was disappointing, but we are focused on developing new strategies to improve execution and growth in the future.

Adjusted EBITDA increased $12 million or 6% this quarter compared to the prior year. The increase reflects $21 million from the conversion of higher revenue offset by an increase of approximately $6 million in technology costs related to ServSmart and a $3 million reduction in investment income. We also incurred $2 million in additional marketing spend this quarter compared to Q2 of 2015. As we discussed last quarter, the increase in technology investment this year represents a step change, which we expect to remain at approximately the same level in 2017.

Adjusted net income improved this quarter largely driven by the increase in adjusted EBITDA. Second quarter adjusted net income was $93 million, an improvement of $11 million compared to prior year.

Second quarter adjusted diluted earnings per share of $0.67 increased $0.07 versus prior year. The improvement was driven by an increase in adjusted net income partially offset by higher weighted-average diluted common shares outstanding. As approved under our share repurchase program, during the quarter the Company used $17 million in cash to purchase 461,000 shares at an average price of $36.04.

Now, let me turn it over to Alan to discuss the detailed segment results. Alan?

Thanks, Rob. Good morning, everybody. As Rob mentioned, we had another solid operating quarter with revenue growing 6%, excluding the conversion of the Merry Maids branches, with EBITDA margin expanding by 50 basis points.

More importantly, and as highlighted on investor day, our businesses continue to generate strong gross margins with both Terminix and American Home Shield consistently delivering annual gross margins in the high 40% to low 50% range. And this quarter was no exception, with gross margins expanding 30 basis points year over year.

As a result of these strong fundamental margins, we are able to invest in technology and marketing to fuel future growth while still delivering strong bottom-line results. And just as in the first quarter, we increased year-over-year technology spending on our ServSmart platform by $6 million, but this time also expanded our EBITDA margin.

So, let's begin by discussing the breakdown of Terminix revenue, shown on slide 6. Revenue increased year over year by $19 million or 5%. Now, revenue grew by $21 million or 6% if we exclude the product sales, which are in a line item labeled 'other' in the Terminix segment table in the press release. These products are low margin and tend to vary widely throughout the year.

So, of the $21 million in non-product growth, $17 million was driven by acquisitions, most of which was from the acquisition of Alterra completed in November of last year. And, again, we're very pleased with this acquisition. Its performance and integration are both ahead of our internal plans and we're beginning to cross-sell other services, such as mosquito control, to these customers. And, historically, acquisitions have played an important role in Terminix's growth and Alterra is a great example of how acquisitions, through synergies and cross-selling opportunities, add value.

Pest control revenue of $226 million increased by 10% or $21 million over the prior year, with residential pest growing 14% and commercial pest growing about 3%. Now, excluding Alterra and other acquisitions, our pest control business grew 2%, with residential pest growing 3% and commercial pest growing 1%. And, although we were pleased with the performance of certain service lines, such as bed bug, which increased 24%, and mosquito, which increased 42%, our organic growth in pest control did not meet our expectations this quarter.

Now, revenue from termite and other services of $168 million was flat to prior year with completion revenue down $1 million at $88 million and renewal revenue up $1 million to $80 million. But despite revenue being essentially flat, we are actually pleased with some of the recent developments in our core termite business. As Rob mentioned, this is the third quarter in a row in which we have increased year-over-year sales. And, as a reminder, first-year sales, or termite completions as we call them, are a key source of future profitable revenue. In a business where retention rates are as high as 85%, acquiring such customers results in a very profitable multi-year revenue stream with high lifetime value.

Our bundling, targeted marketing, and couponing strategy has proven to be a success. New services revenue excluding mosquito was flat this quarter largely driven by a lower demand for insulation services. And, once again, our recent dedication of more sales and marketing resources to repositioning our core termite services was the principal driver.

Turning to slide 7 and Terminix's segment results, the conversion of revenue to gross profit was very healthy with $10 million of additional gross profit generated from the $19 million of additional revenue. As a result, the gross margin rose by 30 basis points to 47.6%. Terminix EBITDA increased by $11 million this quarter and, as we can plainly see, the improvement came from the $10 million of increased gross profit plus a modest net $1 million reduction in SG&A.

As I've discussed on the first quarter call and our investor day, we continued to incur $4 million of additional year-over-year technology costs, but these were more than offset by savings in other areas of expense. However, most of this SG&A improvement is simply timing within the first half of the year. You may recall that we had in the first quarter a year-over-year increase in SG&A of about $5 million due to a host of small items.

And so, while we are reporting for the second quarter a very healthy 58% conversion of incremental revenue into EBITDA, when we look at this on a year-to-date basis, Terminix has increased EBITDA by $17 million on a revenue increase of $47 million, a conversion of 36%, consistent with the longer-term conversion rates we have been discussing. So, overall, for Terminix; healthy gross margin, good operating leverage, strong total revenue growth driven by acquisitions, but challenging top-line organic growth.

So, let's turn to slide 8 and discuss American Home Shield's second quarter performance. Overall, American Home Shield had a strong quarter with good top-line revenue growth and strong gross margins while continuing to invest in marketing and technology. Claims costs have returned to more normal levels as we have expanded our contractor network to better align capacity with demand.

In addition, we acquired OneGuard at the end of the quarter. And, as Rob mentioned, this is a significant acquisition for us. Its strong record of growth and entrepreneurial customer-focused mindset makes OneGuard a perfect fit with American Home Shield and with ServiceMaster. And, for the sake of transparency, we paid about $65 million for OneGuard and expect it to contribute roughly $15 million and a little over $2 million in EBITDA for 2016. However, for the second quarter, American Home Shield's results include no impact of the OneGuard acquisition because there no revenue or EBITDA recognized in the quarter.

So, for Home Shield, the year-over-year revenue growth for the second quarter was 8% or $21 million, of which roughly $6 million was from pricing. For the second quarter, we had about a 50% flow-through, as you should expect, of the increase in volume to gross profit. And, of course, the higher pricing flows through to gross profit at 100%, naturally.

These two positive items have been partly offset by $4 million of higher non-volume-related claims costs, of which about $3 million can be attributed to inflationary pressures and the remaining $1 million to the impact of the growth in first-year direct-to-consumer customers, which historically have one additional claim in their first year than the average customer. And so, the second quarter gross margin percentage of 49.6% is about six-tenths of a point lower than the same quarter last year.

Shifting our attention to EBITDA, the higher gross profit of $9 million was partly offset by higher selling and marketing costs of $3 million and higher technology costs of $2 million, as, of course, we maintained our investment in ServSmart technology at roughly the same levels as the first quarter. And, as I mentioned last quarter, incremental selling and marketing costs are largely front-loaded this year. In the second half of the year, we anticipate selling and marketing costs to be roughly flat to last year, but also the year-over-year step up in technology costs of $2 million per quarter should continue through the third and fourth quarters. In 2017, we expect our technology costs to be flat compared with 2016 and the same comment actually applies to Terminix, too.

We did report lower investment income of $3 million as we actually had $3 million in investment gains this quarter compared to $6 million in gains a year ago. Now, these gains are the result of sales of securities held by American Home Shield as part of its regulatory obligations. The sale of the securities is the result of a strategy to sell all equity and long-dated fixed income securities held by American Home Shield in order to de-risk its portfolio. And with the sale of securities this quarter, American Home Shield's portfolio has largely been restructured and we do not anticipate any additional gains for the foreseeable future.

So, for the remainder of 2016, American Home Shield will not have the marketing or investment gains headwinds. The business is on track to achieve about 10% organic growth for the year. And with the inclusion of OneGuard for the second half, we expect to grow the American Home Shield top line between 11% and 12% in total. Our claims costs are under control and we're continuing to invest in growing the business. So, as mentioned on investor day, American Home Shield is very well-positioned for a strong second half of the year.

Slide 9 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, of course, due to the ongoing conversion of the branches into franchises. As of right now, we are in the process of divesting our one remaining branch. Actually, we are maintaining our branch here in Memphis as a test kitchen and I can assure you that I test it regularly, every week. Once again, we've largely maintained our EBITDA by driving cost reductions on pace with the branch conversions, which has the impact of raising the gross margin of this segment by 3 percentage points year over year to 58% and the EBITDA margin by 5 points to 38%.

So, let's turn now to the full account on page 10 and look at the business in its entirety. The year-over-year revenue increase of over 4% or $31 million includes $23 million or 3 points of net organic growth. The remaining $8 million of revenue increase comprises $17 million due to acquisitions within Terminix partly offset, of course, by $9 million of revenue divested due to converting the Merry Maids branches to franchises.

Gross margin as a percentage of revenue increased by three-tenths of a point to 49.3%. That's actually due to the faster growth rate in Home Shield than in Terminix and Home Shield has a higher gross margin than Terminix. The year-over-year SG&A increase of $5 million largely reflects the higher technology costs combined with general overhead efficiency. So, this does result in SG&A as a percentage of revenue improving by four-tenths of a point to 25%.

Now, we've recorded a $23 million charge referred to as an insurance reserve adjustment. Annually, during the second quarter, our actuary performs a retrospective review of loss development factors in relation to our self-insured reserves for workers' comp, auto, and general liability. So, over the past several years, we've experienced significant adverse development on many of the older claims for which we have set aside reserves. Many of these claims were older than five years and some older than 10 years and arose at entities (inaudible) the Company has since divested. Exacerbating the problem is that many of these claims in years in which the Company had a higher deductible than it does now and thus greater exposure.

As such, the Company has determined, in consultation with its actuaries, that an increase in the balance sheet reserve of $23 million is appropriate. And, of this $23 million charge, about $10 million actually relates to these previously-divested entities. Now, this charge is tax-deductible so it will have the impact of reducing this year's cash taxes by about $8 million. And there is no relationship between this $23 million charge and the $88 million charge that we are taking for what I'll describe as fumigation-related matters.

So, even with these charges in our results, we generated pre-tax income of $23 million compared to $109 million over the same period last year. And so, net income for the quarter is $16 million compared to $67 million last year. But, of course, to aid comparability, we also reported adjusted net income, which I will reconcile in a moment, and this increased by $11 million to $93 million.

So, slide 11 provides our standard two reconciliations. First, we walk our second performance measure, adjusted EBITDA, down to net income and then walk the reconciliation back up to adjusted net income. But, of course, we have excluded the charges for fumigation-related matters and the insurance reserve adjustment from both EBITDA and adjusted net income.

And I think the other reconcile actions are self-explanatory or immaterial so we will move on to cash flow, which is shown on slide 12, where we show the second quarter and year-to-date simplified cash flow statements. In the second quarter we generated $123 million of free cash flow, some $29 million less than over the same period last year. However, as outlined on prior calls, we have become a federal taxpayer in 2016 and so the primary source of the change is the $29 million increase in cash taxes. And I'll say more on cash taxes in a moment.

Moving down the cash flow statement, the $70 million of acquisition payments includes the cash paid in the quarter for OneGuard and during the quarter we also placed $95 million of cash in a collateralized trust for the benefit of Zurich, our primary insurance provider. The purpose of the trust is to secure our self-insured claims. Previously, the Company provided Zurich a letter of credit to secure the claims and, by using a trust structure secured by cash, the Company avoids over $3 million in letters of credit fees. This change has no impact on our liquidity since the reduction in cash balance is matched by an equal and opposite increase of the availability under our revolver.

The $47 million of cash realized from the sale of securities relates to the de-risking of the American Home Shield portfolio that I mentioned earlier. And this is simply a transfer from all long-term marketable securities to cash and it does not affect the amount of restricted cash or restricted net assets. And, of course, as Rob mentioned, also during the second quarter we spent $17 million purchasing 461,000 shares of common stock at an average price $36.04.

Now, with regard to our full-year free cash flow projection, the $23 million insurance reserve adjustment is not expected to have a material cash impact in 2016 although it will reduce cash taxes by $8 million, as I mentioned a moment ago. This benefit, in combination with other tax-planning initiatives, reduces our expected cash taxes to about $125 million compared to the $145 million we referenced on investor day and on prior calls. However, we do expect to pay the $88 million for fumigation-related matters in 2016, but this will also be fully cash-tax-deductible when settled so the net cash impact of this one-time settlement will be an outflow of around $53 million.

So, all other things being equal, our full-year free cash flow projection has been reduced by about $33 million. That is a $20 million reduction in cash taxes more than offset by the net $53 million outflow for the fumigation-related matter. So, we're revising our free cash flow projection for full year to a $272 million to $290 million range. Please note that a formal reconciliation from the U.S. GAAP cash flow statement to free cash flow is provided in the appendix and in the press release. And, naturally, we are maintaining our long-term leverage target of 2.5 times to 3 times EBITDA.

For now, with respect to our full-year guidance shown on slide 13, as I mentioned previously, American Home Shield continues to perform well. We expect organic growth revenue at Home Shield to continue to be approximately 10% and, with the addition of the OneGuard acquisition, total revenue growth for Home Shield should be between 11% and 12%.

Now, as for Terminix, our outlook for revenue growth is now in the mid-single digits, down from mid- to high-single digits, as organic growth has disappointed us. As such, we've revised our full-year outlook for revenue down by about $20 million.

As for EBITDA, given the strength of our margins, our capacity for operating leverage, the investment gains, and the OneGuard acquisition, we are maintaining our previously-reported full-year EBITDA range. I should say previously-provided full-year EBITDA range.

And, on that note, I'll turn the call back over to Rob for closing comments.

Okay. Thanks, Alan. Just to wrap things up, our business remains strong. We continue to see revenue and customer account growth at American Home Shield. With the OneGuard acquisition, American Home Shield has added a company with a strong record of growth and entrepreneurial customer-focused mindset. We continue to be the leader in the home warranty market and OneGuard strengthens our position.

At Terminix, the integration and the performance of the Alterra acquisition is ahead of plan and we are pleased with the sales in the core termite business.

Most importantly, our business model remains strong with resilient margins and cash flow. We are focused on a customer-first culture and enabling our associates to perform essential services in a high-quality and reliable way. Our investment in ServSmart will empower our team to deliver these services efficiently, which frees them to connect with customers and provide a superior experience.

Thank you for joining our call and now I'll turn it over to Jim for Q&A. 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 yourself to one follow-up question so that we can get everyone in on the allotted time. Let's open up the line for questions, operator.

Thank you. (Operator Instructions). George Tong, Piper Jaffray.

Hi, thanks. Good morning.

Good morning.

Can you comment on inflationary costs that you're seeing in the American Home Shield business, specifically how rapidly contractor rates are increasing and any factors in the market that may change this going forward?

Well, George, hello. Not that we're seeing. I mean the $3 million I quoted is, if you think about it, given that contractor costs represent about half of our revenue in American Home Shield, the rate of inflationary increase that we're giving to our contractors is not that dissimilar to the rate of price increases that we're passing through to our customers. And so, that level is about the level that helps us maintain our gross margin as being the difference between the revenue in Home Shield on the clients.

So, given the, let's call it, renewed focus on making sure that we have a broad enough contractor capacity, at this point in time, we're not seeing any significant headwinds in terms of the behavior of the contractors. And I think, bear in mind, and we say it often, that being the market leader actually does mean something. And so, the level of volume that we can give to our contractors we still believe gives us a preeminent position to, let's say, to have those contractors in our network as opposed to any of our competitors' network.

Got it. Makes sense. And sticking with American Home Shield, can you provide and update on how much you've increased your in-network contractor base by in the quarter and thoughts on what level of contractor growth is appropriate to support high-single, low-double digit revenue growth in the segment?

Yes, sure. I'm not going to comment on the number of contractors that we've added, but there has been a significant inflow of contractors into the network. I can assure you of that. The pipeline remains strong. We still believe that the way we are managing and the signals we see from contractor growth don't provide any significant tailwind to the level of, let's call it, mid- to high-single digit volume growth that we are projecting for this business.

Great, thank you.

Yes. Thank you, George.

Andy Wittmann, Robert W. Baird.

Great, thanks. On the insurance accrual adjustment, Alan, I just wanted to think about -- I recognize that those are mostly for prior periods, but what does it say about your current accrual rate? And maybe just to put some in context, was there an adjustment last year also? And is there any implication on margins that you might need to accrue more aggressively or take more expense so that we don't have more of this in the future?

No, I don't believe so. I mean all of the assessments with our actuary are the rates at which we are accruing in 2016 are more than adequate. There's not a forward-going expense. If you think about Rob's comments particularly around safety as well, I think in the last 18 months to 24 months our process of handling claims as they come in has improved significantly. And so, no, I don't actually see an issue with ongoing expense for this. This is an actuarial reappraisal of a long tail of claims that preceded most of us in the Company today.

Got it. Thank you. Then, just on the Terminix business and the organic trends there, it sounded like you guys were generally happy with the Terminix termite side, but the pest side is where you saw some of the disappointment. I guess, when you break it down, was it the couponing that weighed on that top line or competitive factors there? Or were you seeing just volume weakness from the market? I guess a little bit more context for why you saw some of the weaker trends on the pest side would be helpful.

Yes, I think it's kind of both. I think, in terms of activity, there was clearly activity, but not significant core organic growth in terms of activity in the marketplace. And I think, as we've talked about before, we're trying different approaches to provide value to customers in different ways; so, combining services, whether it's termite or pest or other things, in innovative ways to add value to customers. So, I think part of it is it's been a learning experience and I think part of it is our execution over the period. And I feel good about the position we are taking now and the improvements that we've made to, some of what Alan alluded to, in safety and other things. And we're making sure that we put the tools in place to do all those things consistently.

So, we just call it out because we'd like to see, obviously, more organic growth to the business. And the Alterra acquisition has done really well, but we still want the core market to continue to grow. So, I think we've learned a lot and we continue to implement changes that will pay off in the future.

Operator?

Gary Bisbee, RBC Capital Markets.

Hi. This is actually Jay Hanna on the line for Gary today. I noticed within the OneGuard service offering several that don't fall under the typical Terminix AHS product line umbrella. How should we think about this? Would they all be retained or this maybe an attempt at some sort of product expansion?

Yes. As I said, we're going to continue the business and the brand as is. We think they've taken some really innovative approach to the real estate side of the equation, so the people that buy homes, then adding services and, more importantly, reinforcing the relationship and the coverages that they do have. So, we're going to maintain and try and learn from it and maybe see if there's opportunities for us to expand that offering. So, they've done a really great job in growth and delivering to customers so I think there's opportunities for us to learn from them.

Thank you.

Yes.

Anj Singh; Credit Suisse.

Hi, good morning. Thanks for taking my questions. I wanted to touch first on the termite part of Terminix. It seems over the past year-and-a-half or so that growth there continues to slow. I realize you guys are -- you sound optimistic about your efforts there. But it seems to still be flattish, completions and other services down slightly, renewals up slightly, and your competitors continue to seemingly grow faster than the rates you're seeing. So, could you just talk about what's driving that? And I think you had expressed some optimism on the termite trends for the latter part of the year. So, are you less optimistic now? If you could just help us understand those things. Thanks.

Sure. I think, as we know, the market itself has not grown a lot in the last few years, two to three years. So, that's part of the equation. I think that some of the approaches we're taking through providing multiple services to the same customer have an impact that makes it a little less transparent on the outside. Remember when we say core termite is one part that we're happy with in the growth and when we report termite in general there's all the other services tied to it. So, in a number, you can't just look at it as termites solely.

But I do think that we've positioned the product and the service that we have in a positive way that will increase growth in the future. So, we feel pretty good about it. You know we'd always like it to be more. As we mentioned, the lifetime value of that business is critical and probably one of our best, similar to DTC and American Home Shield. So, growing the base and extending the services to more customers is our focus.

Okay, got you. And for my second question I was hoping you could talk a little bit about the marketing expense as it relates to Terminix and more broadly. It seems like Terminix marketing expense is basically flat for the first half of 2016 versus the last year. I guess, first, have you pulled back on your marketing expense plans for Terminix or are you proceeding in line with your initial expectations? And then, more broadly, are you no longer anticipating pulling forward some marketing expense from 2017 into 2016?

Yes. I guess I'll take the last part first. It depends on where we are and what opportunities we see. So, we still look at, as we talked about in the prior call, the potential of moving some of those expenses in, whether it's IT investment or marketing. So, we continue to do that. Collectively, you saw that we spent more on marketing Q2 of this year versus last year. So, we're up somewhat.

I would say a lot of the work that's been done in marketing in Terminix has been focused on translating some of the digital capabilities that we have in American Home Shield through the new marketing organization and focusing on lead-generation in different ways. So, versus the classical TV advertising and other things that we've done, there's much more of an element of digital, email, and other types of media that we're using to create leads. So, it's more of a mix shift and a change in how we're going to market, but no real reduction in how we're spending to grow the Terminix business.

Okay, understood. Thank you.

Yes.

Sara Gubins, Bank of America Merrill Lynch.

Hi, thanks. A couple questions. First, given the improving termite sales, should we see completion revenue grow in the back half of the year on a year-over-year basis?

I think the increase in -- not necessarily, no. We're certainly not banking on that, much as we'd like to see it. The increase in completion revenue dollars will generate renewal revenue on the anniversary of those sales that we're seeing. That's the real thrust of where the ultimate growth comes from by virtue of having these additional completions. So, we won't see a flow through into revenue of those additional sales of any significance until 2017.

Okay. And then, turning to AHS, could you talk about how we should think about margins for AHS in the back half of the year? And your comment about the investment revenue hit to the quarter; given that you've now de-risked that, is that actually going to be a drag on margins for the next couple of quarters?

Well, we certainly won't be getting any more investment gains in American Home Shield, so if you look at it from that perspective. From quarter to quarter, yes. Year over year, of course it wouldn't have any impact. Comparing second half to first half, we will see a huge margin increase in American Home Shield from the second half to the first half. As I said earlier, the marketing spend was front-loaded and that was a year-over-year increase of about $10 million and we won't see that in the second half of the year.

The third quarter in American Home Shield is our highest revenue quarter in the year. We have the acquisition of OneGuard. And we have the massive tailwind from the fourth quarter claims expense from last year. So, there will be a significant margin improvement in the second half of the year in Home Shield.

Okay. Thank you.

Jeff Goldstein, Morgan Stanley.

Good morning. Thanks for taking my questions. You touched on this a little earlier, but with the recent acquisition of OneGuard, they offer services beyond just your typical home warranty, like pest control and carpet cleaning. I was just thinking; is this something you're contemplating doing within American Home Shield as well and maybe cross-selling with your other segments? If you could just talk about any opportunity there that would be helpful.

Yes. I think if you look at the way they've gone to market, they do it in concert with other companies as well; so, not dissimilar to what we would do in other pieces of the business. But there is also the lock-changing side of it and other things. I think the way to look at it is it's an innovative way on the real estate channel to create more stickiness from the customer perspective and improve retention in first year and beyond.

So, we think it's pretty creative in making sure you touch the customer and it just isn't a line item on the closing statement, but it's real. And, if you go and look at people who acquire a home in the first six to eight months spend more to either improve the home of make modifications to their liking or other things than they do over five years, typically. So there's an opportunity to sell the other services that we provide in ServiceMaster there as well. So, we like the way they've approached it and I think it's additive to the way we've dealt with the real estate market and how we could potentially grow.

Okay, that's helpful. And then, just on the $90 million settlement that's related to the Virgin Islands case, could you just talk about any measures you've taken to prevent a similar situation from reoccurring again in the future?

Yes. I mentioned the investment in the environmental practices and safety practices that we're making. And we continue to do that and continue to look at improving our processes in general. So, I think that we have the right process and disciplines in place to prevent that type of thing happening in the future and we are certainly focused on it in a big way.

Thank you.

Mr. Shields, I'll turn the call back to you for your closing remarks.

Thank you again for participating in today's conference call and webcast. As a reminder, a replay of the call will be available on our website in about one hour. We look forward to speaking with you. Thank you, operator.

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