Terminix Global Holdings Inc (TMX) 2016 Q3 法說會逐字稿

Ladies and gentlemen, welcome to ServiceMaster's third-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, 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 Kathy. Good morning and thank you for joining our third-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 third-quarter consolidated financial results. Alan will then review our performance by segment and provide more details of our consolidated results. 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 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 the contemplated in the forward-looking statements.

Information discussed on today's call speaks only as of today, October 25, 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. Highlighted on our third-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. We 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 will now turn the call over to ServiceMaster's CEO, Rob Gillette, for opening comments. Rob?

All right. Thanks, Jim. Thanks for all of you joining our call today. Before I get into the financials and the results for the quarter I want to speak to you about some of the recent changes we've made at Terminix.

On August 15, I assumed responsibility for leading the Terminix business. As I've mentioned in the past, our efforts are focused on improving the customer's experience from the time they begin to search for a service provider to the time they pay for their service. By assuming leadership of Terminix, my goal is to better align our overall resources to accomplish this objective.

Over the past several years, Terminix has embarked upon numerous operational initiatives including the consolidation of branches in some geographies, establishing shared service centers, streamlining processes and implementing a centralized call center operation. As a result of these efforts, we have greatly improved our profitability and expanded on our industry-leading margins.

As we move forward, we want to capitalize on these accomplishments by accelerating our top-line growth. During my first two-months as a leader of Terminix, I have focused most of my time and effort on how best to accomplish this task and have had the opportunity to spend time in the field talking with our technicians and sales and branch leadership.

Terminix is a great brand; it has a tremendous history, and has highly motivated and dedicated employees who take great pride in what they do to serve our customers. As we move forward, we will capitalize on these strengths to position the Company to acquire more customers, continuously improve our service quality and communication and attain higher retention rates and growth in the business. The goal is to improve while simultaneously leveraging the economies of scale inherent with the Terminix business model.

The first steps in positioning Terminix for growth have already taken place in our termite segment. Despite the headwinds resulting from a decrease in termite activity in the recent years, we see significant opportunity to enhance our focus in the preventative termite space. This segment includes customers who do not have an infestation problem but see value in purchasing a termite solution to protect their own home against possible future damage. In most instances, a customer's home is their most valuable asset and protecting it from termite damage is considered to be an essential service.

By using target marketing and innovative product offerings, we are capturing an increase in share of these customers. As a result, this is the fourth straight quarter in which we have experienced a year-over-year increase in sales in our core termite services and have begun to see our efforts show in our financial results.

We will continue to invest in and grow our core termite business in the preventative market segment. As we have mentioned in the past, termite customers have among the highest lifetime value in the ServiceMaster portfolio with high renewal rates and strong margins. We are the industry leader and plan to continue to grow in this market.

With regard to pest control, as I mentioned last quarter, organic pest control growth in Terminix has been less than satisfactory. Terminix is a great brand with great employees and the organic growth rate we have realized over the past several quarters does not meet with our expectations. Over the past two months I've had the opportunity to meet with hundreds of employees, to listen and learn about our issues, challenges and opportunities. The level of commitment and energy we have throughout the business is both humbling and inspiring.

I spent time with the management team and evaluated staffing levels, pay and pricing plans, product offerings, retention metrics, net promoter scores, role definitions and people's accountability. I reviewed various customer surveys and received numerous customer comments and feedback. I am very pleased to report that this experience reaffirms my belief that Terminix is a great business with great people and all our efforts with regards to ServSmart are yielding results.

Our sales engine is performing well; lead generation is strong, close rates are steady and we have high positive-brand recognition. Our e-commerce channel continues to grow, and our social media presence continues to improve. Our long-tenured customers appreciate doing business with us as demonstrated by their loyalty and our retention rates.

But we really need to do a better job of retaining our first-year pest customers. I have met with many industry leaders and most recently attended the annual Pest Manufacturer's Association meeting in Seattle, where I learned a great deal from people who have been in the industry for many years. We are assessing differentiated product offerings that meet the specific needs of customers in various regions throughout the United States. By offering different service intervals and solutions we can provide more choice for customers and tailor our service protocols to meet their needs.

Although there are many issues affecting first-year retention, the solutions are not complex. We have already laid out plans and have begun to implement them. This includes reducing the administrative workload on branch leaders by adding service specialists back into the branches to handle scheduling and service workloads. This allows managers to be in the field selling and servicing customers and leading through example with our team members.

We need to be on time, do it right the first time and engage with customers. We're adding discipline to our schedule adherence and execution and measuring and rewarding people on their on-time delivery to customer requests. We are in the service business and need to ensure we are staffed with people who have a great attitude and train them how to deliver a great customer experience.

Many of the changes needed at Terminix are basic and fundamental. By simplifying priorities and holding people accountable, we can drive results for both customers and shareholders. Although not a panacea, technology will help improve sales, technician effectiveness and service and retention.

ServSmart will play an important role and complement some of the operational changes we are making at Terminix. These tools will enable our people to serve customers more efficiently and enable customers to communicate their needs to our team.

As of today, all 1,200 sales professionals have an iPad. With these devices they can now access driving directions, view and schedule visits, create a new sales call, see and update customer information and see nearby prospects. In the future, we will be enhancing this software to allow salespeople to digitally map each home to assist them in their inspections. This software will provide the ability to create sales proposals, close sales via online and take payments through their devices.

We are now beginning to roll out our service mobility platform to all 5,000 service technicians. By the end of this year, all technicians will have a new iPhone that is equipped with the initial service mobility platform and will have an upgraded fully functional mobile platform by the end of 2017. This platform will allow us to more easily communicate with customers and them with us. We will be able to send on-my-way notices to customers, so they know when we will arrive and they can more effectively manage their own time and busy lives.

I'm excited about the future of Terminix. Many of the changes are well underway while some of them still need to be more fully developed. Change will not come overnight, but we have a clear path on how to improve service, retention and top-line growth.

With regard to the cost of these initiatives, many of these changes involve just a shift in resources or a change in the incentive structure for employees. In some cases, additional expense will be incurred to increase our service quality, in particular in the hiring and training of the right people.

Historically we have directed our investors to anticipate about a 35% incremental EBITDA margin at Terminix. We now anticipate that over the next 18 months investors should expect flat margins at Terminix with most of the investment coming over the next six months. Over the long run, we anticipate recouping these costs through higher retention rate and top-line growth returning to incremental margins of 35%.

Terminix is in a great position. We have the size, scale and infrastructure that is unique to the industry. To capitalize on these assets, we need to improve our service quality. We have identified the issues, developed the plans and we are now executing.

Now turning to results. ServiceMaster revenue grew over 7% compared to the prior year and 9% if you exclude the conversion of Merry Maids branches to the franchises. Revenue growth was driven at American Home Shield by the increase in the number of our direct-to-consumer and real estate customers; and at Terminix by the acquisition of Alterra, which occurred in November of last year.

At the end of the second quarter, American Home Shield acquired OneGuard Home Warranties. As I mentioned last quarter, the acquisition is important to our growth strategy. It expands American Home Shield's footprint in three, highly-competitive and important states: Texas, Arizona, and Nevada. In terms of pricing for our services, both Terminix pest control business and American Home Shield continue to realize price increases in the quarter.

We are pleased with the performance of our Alterra acquisition. Acquisitions have been a key growth driver for Terminix in the past and will continue to be in the future. Generally, acquisitions for Terminix fall into two categories: a tuck-in or a strategic acquisition. Historically, we have acquired about $40 million in tuck-in acquisitions annually.

With these acquisitions, we typically retain the customers and a portion of the technicians and quickly integrate the operations into our infrastructure and systems. These have a high synergy value because we take out the administrative costs and sales functions from day one. The customers we acquire are very profitable and provide us with an opportunity to cross-sell. Alterra was a large tuck-in acquisition; it is very profitable, and its performance has exceeded our expectations.

Adjusted EBITDA increased $18 million or 10% this quarter compared to the prior year. This includes $5 million of weather-related claims that we had previously disclosed in our pre-earnings announcement. Adjusted EBITDA increased by 13% if you add the $5 million back to normalize for the effect of extreme temperatures and weather. Adjusted EBITDA includes approximately $5 million in technology costs related to the ServSmart initiative.

As we discussed last quarter, the increase in technology and investment this year is a step change. We expect our investment in technology to remain at approximately the same dollar level in 2017. Our adjusted net income improved this quarter largely driven by the increase in adjusted EBITDA. Third-quarter adjusted net income was a $81 million an improvement of $7 million compared to prior year.

Third-quarter adjusted diluted earnings per share of $0.59, it increased $0.05 versus prior year. This 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 $36 million in cash to purchase 960,000 shares at an average price of $37.19.

Before I turn it over to Alan, I want to mention that this morning we are announced the refinancing of our term loan B Since going public in 2014, we have made steady progress in reducing our leverage. Through this refinancing, we anticipate extending the maturities on our debt and reducing our weighted-average cost of debt.

Now let me turn it over to Alan to discuss more about the refinancing and detailed segment results. Alan?

Thanks, Rob. Good morning, everybody. Let's turn now to slide 5.

As Rob mentioned, this morning we announced the refinancing of our $2.4 billion term loan B due 2021 and our $300 million revolving credit facility. We are seeking to refinance our term loan B with a new $1.5 billion term loan B due 2023 and $1 billion of unsecured debt expected to mature in 2024. Our existing $300 million revolving credit facility will be refinanced with a similar sized revolving facility due in 2021.

Now by refinancing our current loan and facility at this time, we anticipate reducing our weighted-average cost of debt, extending our maturities on average by close to three years, diversifying the maturity schedule of our debt and increasing our flexibility to raise capital in the future. In addition to extending our maturities, through this transaction we plan to increase the ratio of our fixed debt to our floating rate debt from approximately 40% to close to 75% thereby protecting us from a potential future rise in interest rates; and we have to close the transaction in early November.

Turning now to slide 6 and Terminix's third-quarter performance. Terminix revenue increased year over year by $24 million, or 6%, roughly $8 million or 2 points of which was organic and $16 million, or 4 points of which was driven by acquisitions, mostly Alterra. The conversion of revenue to profit was very healthy, with $10 million of additional gross profit generated from this $24 million of additional revenue.

Terminix EBITDA increased by $10 million this quarter, but as we can plainly see, the improvement came from the $10 million of increased gross profit with a net $3 million reduction in SG&A offset by $3 million of additional year-over-year technology costs. For the third quarter, we are reporting a very healthy 42% conversion of incremental revenue into EBITDA.

Before moving on to a more detailed breakdown of Terminix's revenue on the next slide, I'm going to say a word or two about the Alterra acquisition. We are very pleased with the performance of this acquisition, which closed almost a year ago. It has exceeded our expectations and yielded a return above our headwind.

As we've mentioned, we consider Alterra to be a large tuck-in acquisition. In such acquisitions, we immediately strip out the administrative costs and sales functions and achieve the upfront synergies of greater profitability and wider margins than would otherwise be realized in a more traditional acquisition. This is true in the case of Alterra, where we retained the customers and a portion of the technicians but not the sales and administrative functions.

Unlike most tuck-in acquisitions, we delayed the integration of the back-office operations onto our operating systems because of Alterra's sheer size, the geographic breadth of its franchise and to ensure a seamless transition to our customers and personnel. In the first quarter of 2017, we will begin to integrate Alterra's back-office operations. As we begin to roll Alterra's branches onto our systems, we will have an increased opportunity to cross-sell Terminix's other services, such as termite and mosquito, to Alterra's customers which to date has been limited.

We are excited about the opportunity as we take the next step with Alterra and focus our sales efforts to grow our relationships with our legacy Alterra customers. From a financial perspective, obviously Alterra has contributed significantly to Terminix's growth.

Turning to slide 7, and Terminix's revenue drivers for the third quarter. Revenue from termite and other services of $140 million increased by $6 million, or 4% year over year, with completion revenue up $3 million, or 5%, to $69 million and the renewal revenue up $3 million, or 4%, to $71. Now the majority of the completion revenue of $69 million is derived from core termite completions, revenue for which was essentially flat year-over-year with the increase of revenue of $3 million largely coming from the new services exclusion, insulation and so forth.

Although core termite completion revenue was flat, we continued the unbroken trend established during the fourth quarter of 2015 of the year-over-year increase in the number of core termite completions. As Rob mentioned, termite services is one of our most profitable services with high retention, wide margins and high lifetime value. To the extent that first-year sales, or termite completions, are increasing that is a good sign for future renewal revenue growth and the long-term profitability of this segment.

In addition to the increased volume of core termite completions, renewal revenue increased by 4%. This increase was driven by an increase in prices and a gradual mix shift to the better retaining bait product, another good sign for the long-term prospects of our termite business. Pest-control revenue of $234 million increased by 8%, or $70 million, over the prior year with organic pest control growing at about 1%.

Now Rob spoke previously about our disappointment in our organic growth at Terminix and the steps we're taking to improve service quality, retention and growth. Although we continue to be pleased with the performance of certain service lines, such as mosquito which increased by 27% year over year, we believe the actions we are now putting in place will result in improved customer service and ultimately faster growth. Overall for Terminix, continued healthy gross margin, good operating leverage, strong total revenue growth, driven by acquisitions, new services, and termite renewals but continuing challenges with organic pest growth.

Let's turn to slide 8 and discuss American Home Shield's third-quarter performance. Home Shield had a strong quarter with good top-line revenue growth with strong gross margin even though claims were impacted by the record high temperatures. Home Shield revenue grew organically by $24 million, or 9%, comprised in 2 points of pricing and 7 points of customer account growth. When we include the $10 million of revenue impact from OneGuard, acquired at the very end of June, revenue increased by 12%. Volume contributed to $19 million of the increase and pricing contributed about $5 million, a very strong quarter.

Gross margins increased by $9 million, but decreased as a percentage of revenue from 51.9% to 49.1%. The decrease was largely driven by the $5 million attributable to the warmer weather partially offset by the flow-through of volume and price and the addition of OneGuard. In addition to the weather-related claims' costs, gross margin includes a $3 million increase in claims attributed to normal inflation and almost $1 million of increased claims' costs due to the impact of the growth in first-year direct-to-consumer customers.

Now there are three points I want to make about American Home Shield's gross margins here. The first is with regards to the $3 million increase in claims attributed to normal inflation. We historically maintain our gross margin percentage close to 50% largely due to our ability to pass increases in contractor costs through to our customers in price. That is true this quarter as about $3 million in normal inflation of contractor costs was offset by about $5 million of increases in price.

The second point is with regard to the $5 million increase in weather-related claims costs. These claims were entirely due to the record temperatures in July and August increasing the number of air-conditioning system breakdowns and associated repairs. The cost per work order was well within our expectations. Following the elevated claims that occurred due to higher out-of-network usage in the fourth quarter of 2015 were carried over into the first quarter of 2016, we have implemented a number of changes that give us better visibility into contractor costs and enhance our ability to align growth with our supply of contractors.

The third point relates to the $1 million increase in claim costs related to our first-year direct-to-consumer customers. As discussed previously, these customers tend to make one extra claim in their first year after which they revert to the average of two claims a year.

First-year direct-to-consumer customers represent about 15% of our annual revenue. Because these first-year, direct-to-consumers represent such a small proportion of our overall revenue base, the impact of one additional claim per year by these customers has a minimal impact on claims' cost in the quarter. As you can see, this quarter we've continued to grow the top line and it's on that direct-to-consumer customer base, but with just $1 million of increased claims' costs related to these first-year direct-to-consumer customers.

Now shifting to EBITDA, which increased $5 million, or 7%, this quarter compared to last year. The higher gross-profit contribution of $9 million was partly offset by the SG&A acquired, so to speak, with OneGuard of $3 million and higher year-over-year technology costs of $2 million as we maintained our investment in ServSmart at roughly the same levels as the first and second quarters.

Excluding the weather-related claims, EBITDA would have grown close to 14%. As mentioned on prior calls, incremental selling and marketing costs were largely front-loaded this year. In the first half of the year, we incurred $9 million more marketing than in 2015. For this third quarter, our marketing costs at Home Shield were $1 million lower than the third quarter of last year, and we would anticipate a similar year-over-year pattern for the fourth quarter of this year.

Now, slide 9 shows FSG's performance. Revenue declined by $7 million, or 12%, of which $9 million is due to the carryover impact of the now completed conversion of the Merry Maids branches into franchises. This $9 million reduction was partly offset by $2 million of increased investor restoration revenue largely from the Fort McMurray fire in Canada earlier this year.

Once again, we have largely mitigated the impact on EBITDA of the Merry Maids conversions through cost reductions. This, in combination with the increased fee revenue, has raised FSG's gross margin by 6 percentage points year over year to 61% and raised the EBITDA margin by 7 points to 41%.

Turning now the full P&L account on page 10 and looking at the business in its entirety. The year-over-year revenue increase of over 7%, or $52 million, includes $35 million, or 5 points, of net organic growth. The remaining $17 million of revenue increase comprises $16 million due to acquisitions within Terminix, $10 million from the OneGuard acquisition in Home Shield, partly offset by $9 million of revenue divested due to converting the Merry Maids branches to franchises at FSG.

Gross margin as a percent of revenue decreased by 7/10 of 1 point to 47.2%, largely as a result of the $5 million of weather-related claims at Home Shield. The year-over-year SG&A increase of $7 million reflects the higher technology cost of $5 million, the OneGuard SG&A of $3 million combined with general overhead efficiency. With the 4% increase in SG&A on a 7% increase in revenue, we naturally have SG&A as a percentage of revenue improving by 8/10 of 1 point to 24.4%.

For the third quarter, we've generated pretax income of $116 million, compared to $83 million over the same period last year and with an effective tax rate of around 39%. Net income for the quarter is $70 million compared to $49 million last year. Of course, to aid comparability, we also report adjusted net income, which I'll reconcile in a moment and this increased by $7 million to $81 million.

Slide 11 provides our standard two reconciliations. First we walk our segment-performance measure, adjusted EBITDA down to net income and then walk the reconciliation back up through to adjusted net income. Nothing surprising here, so we'll move on slide 12, which provides the third-quarter and year-to-date simplified cash flow. In the third quarter, we consumed $43 million of free cash flow compared to an inflow of $36 million over the same period last year. This reduction of $79 million has two primary components.

First, the cash payment of $88 million for settlements in the civil side of the USVI fumigation matter was made this quarter for which we took the charge to income last quarter. The cash-tax offset was about $35 million, so this resulted in a net outflow of $53 million. We also consumed $26 million more in working capital this year than last year. Now the third quarter is always a quarter with a working capital outflow; both this year and last year have working capital outflows of $65 million and $39 respectively. The increased outflow this year is primarily timing and seasonally growth-related.

With respect to our full-year free cash flow projection, we now expect to generate between $260 million and $270 million of free cash flow given the reduction in EBITDA guidance that I will discuss in a moment. 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.

Now, with respect to our full-year guidance shown on slide 13. Contractor costs at American Home Shield have remained under good control, and we anticipate a significant tailwind in the fourth quarter on claims' costs compared to last year. However, the impact of the warmer weather and the heightened third-quarter claims that resulted will impact full-year EBITDA by about $5 million. Taking the long view, claims are good for renewals, and so this warmer weather will enhance customers' reliance on and belief in the Home Warranty product.

With respect to Terminix, our outlook for organic revenue growth is around the 2% to 3% range. As Rob explained, we're introducing plans to improve the Terminix customer experience, in essence, taking our high incremental margins and reinvesting them to improve customer service and ultimately grow. As such, we've lowered our fourth-quarter and full-year EBITDA guidance to reflect this investment.

In summary then, we've lowered our full-year EBITDA guidance range to $665 million to $675 million. That is a range of $665 million to $675 million, the midpoint of which reflects a reduction of about $12.5 million from our prior midpoint. That reduction reflects the $5 million of weather-related claims in Home Shield with the balance reflecting the investments in Terminix.

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

Okay thanks Alan. We had a good quarter and have identified significant opportunity to improve our Terminix business and focus the team on the critical few priorities that will make us successful. By simplifying our focus to delivering for customers, being on time, right the first time with a great attitude, I am confident that we can drive growth in the future.

Our continued growth in American Home Shield demonstrates that customers see significant value in the services we provide. We continue to build awareness and grow the market for Home Warranty products and services. We have made a successful transition in the franchise services group by moving to a franchise-only model in Merry Maids while simultaneously improving our EBITDA margins.

We have the free cash flow to continue to invest in technology and to acquire companies that expand our product offering and customer base, which provides new sales opportunities for all of our businesses. We feel good about the progress we have made and the opportunity we have going forward. Thank you for investing in our company, and I look forward to sharing our progress with you in the future.

I'll now turn it over to Jim for a question-and-answer session. 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 that we have provided in our press release and in the webcast presentation. Kathy, I'd like to open it up to questions now.

(Operator Instructions)

Toni Kaplan with Morgan Stanley.

Good morning. You mentioned the increased investment in Terminix in the fourth quarter to help drive the customer experience. Just wondering how long these investments should last. Will it only be fourth quarter, or would you expect to continue to invest in 2017 as well?

I think from my perspective, we said investments will occur over the next six months or so, so really into the first quarter with the overall go-forward being to have flattish margins over the next 18 months, so it will be carry over. A lot of it is training; a lot of it is I'd mentioned putting people in the field. We want to make sure they're all trained and are able to help assist the field and get them out and working with our technicians and customers. So expect it to continue for the next six months or so, and then we will maintain kind of a level margin.

Terrific. Can you talk about pricing in the Terminix business? How did that trend this quarter, and did you see similar trends across termite and pest in pricing? Thanks.

I will take this one. No, the behavior of our pricing strategy is actually different impact in termite. Pest, yes, has good pricing and the majority of the organic increase is price in the pest side. With termite, particularly the core termite completion part that is driving an increased flow of potential future renewal customers, they have a modest price increase, which is proving highly effective in bringing in customers that we would otherwise simply not have given that a completion event is a one-time event.

Thanks a lot.

Andy Wittmann with Robert W. Baird Company.

Thanks. Alan, for you. In American Home Shield, you talked about some of the systems that you've recently put in place to give you little bit better visibility, I think you called it, into contractor costs. I was hoping you could give us just a little bit more detail on some of those initiatives and how they will help you manage those contracts or costs better.

Sure. The most important thing is to make sure that as we grow into new areas, new regions, that we have, let's say, a pipeline. It's like a normal supply management exercise of constantly ensuring that you have an adequate supply of new contractors that we're ensuring have adequate insurance, that are adequately qualified. The most important point is making sure that the pipeline is full and that we're constantly trying to promote contractors up from, let's call it, the less preferred funnel through to the ultimate, which is the most preferred contractors that getting the closest volume of work.

The real change for us has been more closely monitoring this on a daily or weekly basis as opposed to monthly and making sure that we don't have any, let's call it, supply gaps. It really is the case of there are pockets and regions, as you can imagine, around the nation that move at different rates and establishing a closer relationship between our growth patterns in a given municipality and linking that with our ability to add and promote contractors as well as manage the volumes we expect to give to those contractors. It is essentially linking our revenue growth on a far more micro level by municipality with contractor capacity.

Thank you. That's helpful color. Then I wanted to ask my follow-up on your refinancing activities. Can you give us a sense -- I know obviously it hasn't been priced, but clearly you've got a vision for what this is going to be. Can you give us a minimum savings that you expect or maybe a range of savings that you expect from all the refinancing that you will be conducting here?

No. It's a bit early. It's a good question, Andy. I wish I could answer it, but I think it's a bit too early.

Okay. Thank you.

George Tong with Piper Jaffray.

Hi, thanks. Good morning. You discussed the role of ServSmart and technology in improving service quality in Terminix. Can you elaborate on additional actions you are taking to drive improved organic revenue growth trends in the segment?

George, it's Rob. Really, it's more about focusing on fundamentals in general, so adding back people who can help deal with scheduling changes, locally, and have a point of contact in the individual branches in general. Truly focusing on on-time delivery and ensuring that we have discipline in meeting customer commitments, I think will help significantly. Then, I think most importantly, how we respond when things don't go as planned and how we can address customers' concerns. That will help by having someone in the field and then the ability to communicate.

One of the things that the iPhones give the team in the field is the ability to communicate easily, directly with customers and our branch people and personnel, which is not something that you really have today. There is the ability to digitally link and communicate customer to tech, customer to our inside service people and then our inside service people to the tech. All those things will contribute to our growth and retention. Then doing a great job for customers, there is no real replacement for that.

Got it. You have indicated you now expect flat margins in Terminix over the next 18 months, elevated investment spending over the next six months. Can you elaborate on what that implies for the cadence of margin performance over the next several quarters; and longer term, why you believe incremental margins can return to 35%?

We're not giving out 2017 guidance yet, George, but the implication in your question a fair one that I'll deal with. Yes, so we will see lower-- at this point in time, I expect we will see lower margins in Terminix than the prior year for probably first half of 2017. But for the full year, I expect to see margins -- at this point in time -- flat to 2016 in total. That's our current expectation. We're still developing our plans obviously, but that's how we see it evolving at the moment.

Great. Then longer-term confidence around the 35% target?

Remember, the business still remains very, very scalable, and the underlying business model is highly effective with very high variable margins. I think, as Rob addressed, we need to go through a period of investment, which is essentially reallocating resource and training. The majority of that expense, we expect to be temporary.

Lastly, could you discuss what you're incremental margin targets are for American Home Shield and if you anticipate making any increased marketing investments in order to sustain high single-digit organic revenue growth?

Good question. Again, moving on to 2017, at this point in time, I expect to see an increase in overall margin for American Home Shield. We have a number of tailwinds that I hope will come through in Q1 and Q3 in 2017. At this point in time -- thanks for the question. It is a bit too early for me to comment on the marketing plans. We have Marvin Davis, our new CMO, and so, until we've finalized our plans for 2017, it's too early for me to say what the specific marketing expectations are.

Very helpful. Thank you.

Rasha Mosaad from Credit Suisse.

Hi. This is Anj Singh from Credit Suisse. Rob, I wanted to follow up on some of your commentary on Terminix. Could you help us size what is the amount of incremental investment you're baking into that business over the next 18 months? Do you have any perspective on perhaps when you may see the results in organic growth for that segment, or perhaps what is your aspiration for organic growth once these initiatives or improvements have taken hold? Lastly, how long do you plan to have direct responsibility for Terminix?

I would say good questions, Anj. There's a lot of them there. In terms of the longer term and total costs, I'm not in a position to address that. I think it's more incremental and, as I said, specific to training and making sure that we do a good job hiring and recruiting the right people. A big part of growing Terminix is that we need the people in place to both sell and service the business. Without having that right kind of talent and attitude in place and fully staffed, it's hard to grow. That's one of the things that we want to truly focus on.

To do that, we may add some incremental numbers of people and then invest in training to ensure the effectiveness of those people, but also make sure that we don't end up behind the curve in terms of total ability to serve customers, whether it's with technicians in total or with the sales people in general. That's another investment that we are making in the business.

I think many of the other things that we talked about are really kind of changing priorities and focus. I think we might have gotten a little bit distracted by all the multiple number of things that were being asked in the field, especially administratively. So by reducing that workload and allowing the guys to focus on the core products and services that we provide, I think it will help them immensely.

Then having the marketing team as well as the people in the field truly focused on improving the service levels and specifically retention on the first-year pest customers. Because that's what it's all about in terms of sustaining that position. When they are two years and beyond or after the second year, then they renew incredibly well. That's our focus as a business. I would expect we could equal the growth of the industry, and hopefully, on a longer term, do better than that based on the services that we provide.

Okay. Got it. As a follow-up for Alan, I just want to go over the commentary on Alterra and make sure I understood that correctly. What is the impact that we should be anticipating in 1Q 2017 as you integrate Alterra's back end? Should there be a margin improvement there or is it better growth through more (inaudible) cross-sell? I just wanted to make sure I got what you are trying to convey there.

The objective I was talking about that was that we're hoping to have an opportunity to cross-sell, which is something that we don't see in the numbers right now. Do bear in mind, Alterra is a mega tuck-in; so fundamentally, we have gone through this first year and we have a new set of many first-year customers. We will see a tail off in the number of customers in 2017 versus 2016, and we're hoping to offset that with cross-selling opportunities to those same customers. No, I wasn't implying that there was going to be a cost of integration or anything like that.

Okay. I appreciate it. Thank you.

Gary Bisbee with RBC.

This is Jay Hanna on for Gary this morning. I was hoping you could give a little bit more color on the balances in organic revenue at termite and maybe a little bit more to identify the deceleration in organic revenue at pest.

Yes, sure. From a termite perspective, I was talking about completion revenue I think $69 million [b]. As I said, the termite revenue piece of that, dollar revenue, which is core termite completions are flat year over year. We actually had, virtually all of the increase this quarter driven by the innovation services. That's pretty good. It's been a while since we've actually reported a meaningful increase in the innovation services year over year.

The fact that core termite completion revenue is flat is entirely in keeping with the strategy and the themes we've just been discussing for the last three quarters, in terms of increased volume, lower price, generating an increased base of renewal customers. That's a fundamental point there.

Our organic pest growth of 1%, as I think as I said on the call, it's mostly pricing. The core was a slight drop in, let's call it the core contracted pest services, as has been our trend, with good performance on a lot of the other one-off services that we provide to help offset that. Yes, the pest revenue organic growth was mainly price.

So there was no real bounce from any weather-related issues?

Not notably, no.

Thank you.

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