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Serve Robotics Inc. (SERV)

Q1 2019 Earnings Call· Tue, May 7, 2019

$9.43

-4.70%

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Transcript

Operator

Operator

Ladies and gentlemen, welcome to ServiceMaster's First 2019 Earnings Call. Today's call is being recorded and broadcast on the Internet. Beginning today's call is Jesse Jenkins, ServiceMaster's Vice President of Investor Relations and Treasurer, and he will introduce the other speakers on the call. Please go ahead Mr. Jenkins.

Jesse Jenkins

Management

Thank you, Keith. Good morning, and thank you for joining our first quarter 2019 earnings conference call. Before we begin, I'd like to remind you that throughout today's call, management may make forward-looking statements to assist you in understanding the company's strategies and operating performance. As stated on Slide 2, all forward-looking statements are subject to the forward-looking statement 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 7, 2019. 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 2019 financial results. The press release and the related presentation 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 at servicemaster.com. We have also included reconciliations of these non-GAAP financial measures to the most comparable GAAP financial measures in our press release and the appendix of this 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. Joining me on today's call are ServiceMaster's Chief Executive Officer, Nik Varty; and Chief Financial Officer, Tony DiLucente. For those following the presentation posted on our website, Slide 3 shows the agenda, we will cover today. I'll now turn the call over to ServiceMaster's CEO, Nik Varty. Nik?

Nik Varty

Management

Thanks, Jesse, and thank you all for your time today. I will start with Q1 financial highlights on Slide 4. ServiceMaster delivered a solid Q1 performance, reflecting progress on all of our strategic initiatives. We reported 13% revenue growth in the quarter, including 3% organic growth at Terminix and 5% organic growth at ServiceMaster Brands. We also completed 11 acquisitions in the first quarter. Acquisitions help drive the 11% growth at Terminix, including year-over-year growth, up 6% at Copesan and 11% at Assured as many of our acquisitions continue to grow at grades faster than the industry average. The 5% organic growth at ServiceMaster Brands include progress in high growth verticals such as commercial restoration, healthcare cleaning and commercial cleaning national accounts all growing significantly faster than the base cleaning and restoration business. Adjusted EBITDA came in as expected as the strong organic and inorganic revenue contributions were reinvested into the business to one traditional sales and marketing investments in people, further commercial pest development and transformational initiatives. These investments will drive sustainable profitable growth as they develop. We delivered on a major shareholder commitment during the quarter with the tax free monetization of our 16.7 million shares of frontdoor. This transaction allows us significant opportunities to pursue our strategic initiatives and despite the reality of negative weather impact on our Terminix business, which Tony will discuss in detail in a few minutes. The results of the quarter met our expectations and we remain on track for all previous full year 2019 guidance. We will build on the positive momentum of the first quarter throughout the rest of the year by executing on the value creation strategy detailed on Slide 5. Our value creation strategy is focused on three priorities. First, we have committed to continuing our focus on building…

Tony DiLucente

Management

Thanks, Nik and good morning, everyone. I'll be covering our Q1 consolidated financial summary and segment level results, cash flow and 2019 guidance. Turning to Slide 9. Let's start with the Q1 financial summary. Revenue grew $54 million or 13% compared to the prior year. Organic growth in Terminix was 3% in the quarter, highlighted by 4% organic growth in residential pest control and 2% organic growth in termite and home services. Terminix acquisitions added $41 million or 11% growth in the quarter driven predominantly by the Copesan and Assured acquisitions, which grew 6% and 11% respectively year-over-year. ServiceMaster Brands grew $3 million or 5% in the quarter, including the high growth verticals of national accounts, healthcare cleaning and commercial restoration. Excluding the impact of $11 million in the prior period were historically allocated American Home Shield costs, EBITDA in Q1 would have been flat to prior year. Although flat, it is important to note that the spin dis-synergies drove $4 million in increased expense in the quarter. The Salesforce implementation also added $2 million of higher cost in the quarter. Additionally, we reported $3 million in adjusted EBITDA as a corporate segment, primarily through a reduction in automobile, general liability and workers' compensation expense through continued improvements in our claims management process. We currently believe we are adequately reserved for future claims expense and are not planning or guiding to additional savings in this area over the remainder of the year. Turning to Slide 10, I'll discuss Terminix starting with the revenue growth by channel. It was another strong quarter for revenue growth in the period with growth in all of our revenue channels. Starting with the termite and home services column on the left side of the chart, revenue increased 4% in the quarter. Breaking this area down…

Nik Varty

Management

Thanks, Tony. Today, we have been discussed ServiceMaster value creation strategy for sustainable, profitable growth. But the right strategy can only take you so far without the right people to execute on that strategy. We continued to develop a deeper bench of talent to our all levels of the organization, who drives this business. We had investing in talent by attracting the best and putting programs in place to engage, develop and retain our talents better. Our goal is to become the employer of choice in the markets and geographies we serve. We recently completed an organizational cultural assessment in which we asked for employees what makes ServiceMaster special and what can make it better? We all sort of discussed the characteristics needed in winning culture. Using the responses combined with the data we have about our strengths and opportunities, we are developing a playbook for building a culture that will differentiate us. Culture is a difficult thing to manage, but we had a focused on a systematic strategic way to drive a fundamental change in how we interact with our customers, business partners and each other. We want to move towards a culture of empowered, motivated, comfortable, and highly capable people, who drive results now and well into the future. We're developing a servant leadership mindset which creates an environment which strongly empowers our people to succeed, where leaders listen and help remove obstacles to success. I'll now turn the call back over to Jesse to lead us through a Q&A session.

Jesse Jenkins

Operator

Thanks, Nik. As a reminder, during the question and answer session, we encourage you to ask any questions that you may have. Please note that guidance is limited to the outlook and provided in our press release and webcast presentation. [Operator Instructions] Keith, let's open up the line for questions.

Operator

Operator

[Operator Instructions] And our first question comes from the line of Seth Weber of RBC Capital Markets. Please proceed with your question.

Seth Weber

Analyst

Hey, good morning everybody. Tony in your prepared remarks, I heard you mention termite pricing a couple of times being better. That's consistent with some of the survey work that we've done recently on the pest control market. Can you just talk about what's driving the better pricing? Is that just Terminix kind of going out and getting what it feels it deserves, where it's been lacking? Or you do you feel just like the market is supportive of better pricing? Could you just sort of frame what's driving the better pricing, because that's something that we're definitely seeing in our survey work? Thank you.

Tony DiLucente

Management

Sure. Thanks, Seth. And I think the latter explanation you gave is really the best answer the market can support a relatively modest price increases year-in and year-out. And we typically have done that historically and look at that this year as well. So if you think about the – would be build out for these termite services, the increases per customer relatively small, and could be absorbed fairly easily. So pretty typical thing for us.

Nik Varty

Management

And Seth, this is Nik. And I want to appreciate you guys sharing the survey. It is pretty heartening to see an independent validation of our efforts. Really, it was a nice boost for our Terminix team. It's good to get some pat on the back for change from them. And I think they're doing some incredible work, who we now continue to drive the efforts for our customers.

Operator

Operator

Our next question comes from the line of Michael Hoffman of Stifel. Please proceed with your question.

Michael Hoffman

Analyst · your question.

Hi. Thank you very much for taking the questions. With regards to residential growth and retentions, when you parse that between renewals versus new starts and completions and sort of how I think about the scope of the change in the retention, I realize, you're not telling me retention about the service scope?

Tony DiLucente

Management

Yes, Michael. I would say that we did see some reduction in cancels this quarter, so that was certainly part of the growth and new sales as well. So we were encouraged to see better performance in the reduction in cancellations. We moved the needle a little bit more than we have maybe in prior quarters. We still have a lot more to go in that area in the second through fourth quarter, but good progress overall.

Nik Varty

Management

Yes. I think it was both residential pest and termite showed good improvements, but we made a significant improvement in commercial pest business where our NPS scores at an all time high and even our retention rates at a three-year high. So it's really a great progress made by the commercial side as well.

Tony DiLucente

Management

Yes, that's a good point. Both commercial and residential did improved retention, but the commercial improved even more. So they were a really impressive this quarter.

Operator

Operator

Our next question comes on the line of Judah Sokel of JPMorgan. Please proceed with your question.

Judah Sokel

Analyst

Hi. Good morning. Just wanted to follow-up on the topic of retention, which just came up. In previous quarters, the progress that you guys have seen on the top line and margin was primarily attributed to operational levers like start rates, completion rates. But obviously, there was a pivot today that talking more about retention. So I was hoping, you could just review with us total opportunity for improved retention for overall Terminix as well as the revenue and the margin implications for any improvements you could see in retention? Thanks.

Tony DiLucente

Management

Yes. Thanks, Judah. You may recall in previous quarters, we said, we were approaching a fairly high level in our operating performance as far as start rates and completion rates. So really, that's strong performance simply carried over and so it wasn't as – year-over-year as significant and impact that just happen in the third and fourth quarter. Like I said, we did see a little bit of a bump up in reduce – because of reduced cancels on the residential side, a nice pop on the commercial side. So that had a little bit more in the calculus for the revenue growth this quarter as well as the new sales units.

Nik Varty

Management

So that's also reflection of the stock rates and cancel – completion rates being improved, all sides of the major factor towards improving retention as we go forward. So we're starting to see that. We had mentioned, there is strong correlation on business. It's just the time lag. And we're starting to see at least the signs of that, which is really encouraging.

Operator

Operator

Our next question comes from the line of Toni Kaplan of Morgan Stanley. Please proceed.

Toni Kaplan

Analyst

Thank you. Good morning. I want to ask about the commercial pest growth. It's continued to be a little bit weaker in the quarter organically. How are you expecting that business to trend in 2019 and how long until some of the experience you're gaining from Copesan could start providing some benefits to the legacy commercial business? Thank you.

Nik Varty

Management

Good question, Toni. As you know for commercial just about a year plus ago, we setup a whole new focus business unit, created a whole leadership team for that, we have hired some really incredible people throughout the organization, who are starting. And their efforts are starting to show pay dividends. We – as you see the growth, sort of flattish, but that's a big improvement over where we've been, so we're still sort of a paying for some of the losses we've had in the past. And the retention going up was quite a great sign. But we also – and there's also a lot of other mixed things in there. For example, one-time sales were light and our retentions up. But the main part of retention being up that's a sustainable factor that'll continue the levels of service. And a lot of it is – despite a lot of the efforts we've made, but it's also given a tailwind because we're incorporating the quality assurance practices, best practices at Copesan, which is best-in-class in the industry, we're bringing in. So we're using, leveraging their knowledge of serving one of the toughest verticals, which is a food service vertical into other areas of the business as well. So that has actually helped us get through these levels much faster than we would have anticipated from where we were. So it's like, starting a race behind the start line. And your other part of the question was 2019, our forecast or estimates are based on seeing reasonably grow up coming in this backdrop of our business as well.

Operator

Operator

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

Dan Dolev

Analyst · your question.

Hey guys, thanks for taking my question. So in the last two quarters, I think you put up some really good comp by more than 5%, 5% plus, you call that about $3 million or about 1% drag from the weather is to negatively from a 3% to 4%. Can you maybe bridge that sort of the extra points, I think, what needs to happen for you to get back to that 5% leverage? Thanks.

Nik Varty

Management

Well. It's a year-over-year comparisons. So as we continue to grow you have to continue to put numbers above that. And I think it's – like I said, I've been mentioning over time, it's not a straight line. There's a lot of effects. As your understanding Dan, there's weather and there's one-time sales. What I like about it is, this time, we've seen a consistent improvement in our reduction in cancels across residential pest, across commercial pest, and across termite as well. So commercial growth is one thing we have to continue to expand on, so we're – as you know, the residential journey started for us before the commercial. We did start the commercial journey, we got some great tailwind because of Copesan and bringing in some solid leaders. But one of the big efforts going on in the last few months is a reinforcing commercial sales teams. So we have restructured the team. We are continuing to build premium – some incredible talent. As we mentioned, we changed our residential sales pay plans. We are in the process actually of changing the commercial sales pay plans, which we also believe based on the learnings we've had will pay some great dividends going forward. So just continued – I mean, for me, the best part is getting the retention starting to move up was a positive sign. So it's – as we said, our main focus is to get all our entire business to at or above market growth rates. So we continue to see that.

Operator

Operator

Our next question comes from the line Tim Mulrooney of William Blair. Please proceed with your question.

Tim Mulrooney

Analyst · your question.

Good morning. You guys acquired 11 pest control companies in the quarter. And it looks like for about $100 million according to the cash flow statement. Am I right about that? And can you share with us approximately what you expect the annualized revenue of those 11 pest control companies to be? Thank you.

Tony DiLucente

Management

We – you are correct. It was a – we did acquire 11 separate pest companies, and a $100 million is the right acquisition amount that you see right in the cash flow statement. As far as, the impact of the revenue, those acquisitions should drive about $40 million in Q1 and roughly $60 million rest of the year.

Operator

Operator

Our next question comes from the line of Ian Zaffino of Oppenheimer. Please proceed with your question.

Ian Zaffino

Analyst · your question.

Hi. Thank you very much. How are you guys? A question in the guidance the 2% to 3%, it just seems to me that everything is going right as far as your retention is getting better, NPS scores are up, pricing is up, but yet your still only looking at the 2% to 3% growth for the full year organically at Terminix. Are there any like headwinds that we're maybe not thinking about? I know you mentioned onetime or maybe there's an idea of like how much one timers that is and what the headwinds would be as you kind move away from onetime sales or any other headwinds? I'm just trying to reconcile this 2% or 3% organic growth guidance. Thanks.

Nik Varty

Management

Ian, as you know, our guidance is based on the best information and knowledge we have in understanding of markets where we're going. One of the things you've got to factor in is, on April 1, we sold our – divested our fume business, which is about $21 million annualized impact on sales. Now there's negligible EBITDA impact of that business. The other thing is, we did better in Q3 last year and Q4. So the competitors also started to becoming tougher as we go. So like I said, again ultimately it matters how we continue to improve our service levels, continue to bump up our attention levels. And then if you start really cranking the engine on commercials, we'll start seeing that growth. But at this stage, we see comfortably between the 2% of 3% and that's what we're guiding towards.

Operator

Operator

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

Andrew Wittmann

Analyst · your question.

Great. Thanks and good morning. I guess my question is on...

Tony DiLucente

Management

Hi.

Andrew Wittmann

Analyst · your question.

How are you guys? On the Copesan deal and obviously you guys – the learnings are helping you with your organic commercial business. I was just wondering about the ultimate product goal and improving those Copesan standalone margins, which I think was always part of the plan. Nik, can you just give us an update as to where you are on getting those businesses cost synergized so the way you want them? Has that started to happen yet? I know that you've been very focused on making sure that those customers are very happy before you change anything. But I think just an update on that would be helpful.

Nik Varty

Management

I think number one, we've benefited significantly in other parts of the business, overseeing there help to improve customer service levels, retention on the remaining commercial business, which already has good payback for us. On the other hand, as you know, we've acquired quite a few of the partner providers like Assured Environments, Seitz Brothers, Hooper Pest Control. So that's one area that already – we've already paid for those margins, we'll be acquiring those companies now with bringing those margins in back home. And we are exploring even beyond. I mean, so first of all, mid-2019 was continued to bump up some business in. But as you know, we are also leveraging some of the partners' capabilities and they're finding new ways of cooperation with them, that will help us significantly improve synergies between us and these companies as well. So there's about three different vectors we're looking at, one is the learnings, second is the acquisitions, and third, apart from bringing them in, in combination is also looking how we can leverage some of their capabilities to drive even accelerated growth in those areas.

Andrew Wittmann

Analyst · your question.

Great.

Operator

Operator

Okay. Our next question comes from the line of George Tong of Goldman Sachs. Please proceed.

George Tong

Analyst

Hi. Thanks. Good morning.

Tony DiLucente

Management

Good morning.

George Tong

Analyst

Your termite and home services organic growth rate came in at 2% in the quarter. You touched on improvements you've seen around retention overall. Could you elaborate on how much further improvements in retention, you could achieve in termite control and what your expectations are for new business trends there?

Tony DiLucente

Management

Well, I still think we have some room for improvement in termite control. I think we probably have even more improvement in pest and residential pest control. But we still do have I think some line of sight to further improvement in termite control. And we're seeing the NPS scores in termite continuing to increase, so we're optimistic that it will come eventually.

George Tong

Analyst

And new business trends?

Tony DiLucente

Management

What was that again? I'm sorry. George, can you repeat the second part of your question? We misunderstood.

George Tong

Analyst

Yes. The new business trends that you're seeing in termite control, how those are performing?

Nik Varty

Management

I mean what we're seeing right now is based on our new renewed efforts to focus heavier on preventive rather than just curative is starting to pay dividends with just – an initial rollout of our bundled offerings. So this will take some time to take traction, but already our customers are appreciating in our pilot programs what is happening. I'm also even more excited for the future where we're driving these clean sheet designs. And from – it was the first program we picked up on where we're completely redefining, how we do business with our customers and completely re-imagining the journey, and touch points that we have. So I see a lot of good progress. And all of this new stuff that we're going to drive is only going to work if our service levels start creeping up. And seeing the NPS score month after month after month improving and also finally starting to see the cancellations turnaround is a very positive sign for our termite business.

Operator

Operator

Our next question comes from the line of Jamie Clement of Buckingham Research. Please proceed.

Jamie Clement

Analyst

Good morning and thank you. Tony, have you all – to the extent that in certain regions, you're seeing technician retention improve at rates that are above the company average, which obviously is improving. Are you noticing customer retention also improving kind of in a correlated way?

Tony DiLucente

Management

We did see nice improvement in retention this quarter, especially in the commercial side, but also to a lesser degree in the residential side, we had less cancels year-over-year. So I think there is a lag impact between service delivery improvements and retention. So we're really starting to see the first parts of that improvement, I think in Q1. So that was – that's obviously a good sign. Now we expect much more improvement going forward. We still have a long way to go. So we are starting to see the first signs of that. Again a particularly good retention quarter in commercial. And although their revenue growth was flat, they were still digging out of some of the issues we had in prior years, coupled with lower one-time sales in the quarter. So overall, we're encouraged.

Jamie Clement

Analyst

Okay. Thank you.

Tony DiLucente

Management

Thank you.

Operator

Operator

And our next question comes from the line of Gary Bisbee of Bank of America Merrill Lynch. Please proceed.

Gary Bisbee

Analyst

Hey, guys, good morning.

Tony DiLucente

Management

Hey, good morning, Gary.

Gary Bisbee

Analyst

With the balance sheet now a lot stronger, I guess could you update, how you're thinking about capital allocation, and within that, how do you think about share repurchases versus the M&A, which you've obviously accelerated? And on the M&A front, is there anything chunkier out there or is the – these smaller type of deals to more likely path forward from here? Thank you. A - Nik Varty Gary, we – it's all sort of in line with the strategy that we outlined at our Investor Day. So our primary focus is going to continue to look at acquisitions that are accretive to us in terms of capabilities that we can bring in. So we look at acquisitions in a couple of forms. One is where we can look at some strong companies that we bring in, in terms of like Assured Environments, which is going to be a major accelerator and pillar for us to drive our urban strategy where we had relatively weak market share, so this bodes well. Bringing in stuff like Hooper Pest Control with bedbugs, hometown with LawnCare, which is essential in Florida to bundle up with the pest. So looking at several of these and we continue to explore those. And the next the second level is where we look at pretty smart tuck-ins, which help us with the density improvement, which also not just helps us improve our service levels or get better growth rates, but mainly helped improve profitability as well. But the underlying factor for these are, we are going to continue to follow a very disciplined approach in terms of what kind of multiples we paid for these businesses and what kind of synergies we see going forward. And then as you know, we started a very structured systematic share purchase plan, which is the next thing for us. And we'll selectively also look at debt refinancing and debt pay down as we go.

Jesse Jenkins

Operator

All right. And that concludes our call. Thank you again for your participation in today's conference call and webcast. As a reminder, a replay of the call will be available on our website in about one hour from now. We look forward to speaking with you next during our Q2 2019 earnings release, tentatively scheduled for August the 6th. Thank you.

Operator

Operator

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