Fourth-Quarter and Full-Year 2017 Earnings Webcast. February 27, 2018

Transcription

1 Fourth-Quarter and Full-Year 207 Earnings Webcast February 27, 208

2 Cautionary Statements Safe Harbor Statement This presentation contains forward-looking statements, including 208 revenue and Adjusted EBITDA outlook, organic revenue growth projections, as well as statements with respect to the potential separation of AHS from ServiceMaster and the distribution of AHS shares to ServiceMaster shareholders, that are based on management s beliefs and assumptions and on information currently available to management. Most forward-looking statements contain words that identify them as forward-looking, such as anticipates, believes, continues, could, seeks, estimates, expects, intends, may, plans, potential, predicts, projects, should, will, would or similar expressions and the negatives of those terms that relate to future events. Forwardlooking statements involve known and unknown risks, uncertainties and other factors that may cause ServiceMaster s actual results, performance or achievements to be materially different from any projected results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements represent the beliefs and assumptions of ServiceMaster only as of the date of this presentation and ServiceMaster undertakes no obligation to update or revise publicly any such forward-looking statements, whether as a result of new information, future events or otherwise. As such, ServiceMaster s future results may vary from any expectations or goals expressed in, or implied by, the forward-looking statements included in this presentation, possibly to a material degree. ServiceMaster cannot assure you that the assumptions made in preparing any of the forward-looking statements will prove accurate or that any long-term financial or operational goals and targets will be realized. For a discussion of some of the important factors that could cause ServiceMaster s results to differ materially from those expressed in, or implied by, the forward-looking statements included in this presentation, investors should refer to the disclosure contained under the heading Risk Factors in our Annual Report on Form 0-K for the year ended December 3, 206, our Quarterly Report on Form 0-Q for the quarter ended September 30, 207, and our other filings with the SEC. Note to Non-GAAP Financial Measures This presentation contains certain non-gaap financial measures. Non-GAAP measures should not be considered as an alternative to GAAP financial measures. Non-GAAP measures may not be calculated or comparable to similarly titled measures of other companies. See non-gaap reconciliations below in this presentation for a reconciliation of these measures to the most directly comparable GAAP financial measures. Adjusted EBITDA, adjusted net income, adjusted earnings per share and free cash flow are not measurements of the Company s financial performance under GAAP and should not be considered as an alternative to net income, net cash provided by operating activities from continuing operations or any other performance or liquidity measures derived in accordance with GAAP. Management uses these non-gaap financial measures to facilitate operating performance and liquidity comparisons, as applicable, from period to period. We believe these non-gaap financial measures are useful for investors, analysts and other interested parties as they facilitate company-to-company operating performance and liquidity comparisons, as applicable, by excluding potential differences caused by variations in capital structures, taxation, the age and book depreciation of facilities and equipment, restructuring initiatives and equity-based, long-term incentive plans. 2

3 Agenda Nik Varty Chief Executive Officer Tony DiLucente Chief Financial Officer Brian Turcotte VP IR & Treasurer 207 Highlights American Home Shield Separation Update Progress on Terminix Business Transformation Strategic Growth Priorities Q4 and FY 207 Financial Summary and Segment Results FY 208 Outlook 3

4 207 Highlights See Appendix for Non-GAAP Reconciliations and Non-GAAP Reconciliation Definitions. 2 Adjusted earnings per share (EPS) is calculated as adjusted net income divided by the diluted share counts of 35.4M shares and 37.3M shares for full-year 207 and 206, respectively. 4

5 American Home Shield Separation Update May 5

6 Progress on Terminix Business Transformation Build a strong leadership team Drive accountability Empower our technicians to deliver an exceptional customer experience Develop a strong commercial business Implement disciplined, Lean Six Sigma approach Deliver consistently strong revenue & earnings growth 6

7 Developing a strong commercial pest business 7

8 Strategic Growth Priorities Update Execute business transformation Achieve world-class customer service Develop strong commercial business Increase market penetration through world-class service Extend current product offerings Expand into adjacent markets Franchise Services Group Leverage relationships with insurance companies for disaster restoration Accelerate national accounts growth Extend reach & growth beyond core areas 8

9 FY Consolidated Financial Summary ($ millions, except EPS) FY 207 FY 206 Variance Revenue $ 2,92 $ 2,746 $ 65 6% Adjusted EBITDA $ 678 $ 667 $ 2% Margin 23.3% 24.3% Adjusted Net Income $ 286 $ 28 $ 5 2% Margin 9.8% 0.2% Adjusted EPS,2 $ 2. $ 2.04 $ % Revenue growth of 6% driven primarily by revenue growth of 3% at AHS and 6% at FSG Strong full-year Adjusted EBITDA growth of 8% at AHS and 0% at FSG was mostly offset by an % decline at Terminix, primarily due to business transformation initiatives See Appendix for Non-GAAP Reconciliations and Non-GAAP Reconciliation Definitions. 2 Adjusted earnings per share (EPS) is calculated as adjusted net income divided by the diluted share counts of 35.4M shares and 37.3M shares for full-year 207 and 206, respectively. 9

10 Q4 Consolidated Financial Summary ($ millions, except EPS) Q4 207 Q4 206 Variance Revenue $ 666 $ 633 $ 32 5% Adjusted EBITDA $ 35 $ 44 $ (9) (7)% Margin 20.3% 22.8% Adjusted Net Income $ 48 $ 60 $ (2) (20)% Margin 7.2% 9.4% Adjusted EPS,2 $ 0.35 $ 0.44 $ (0.08) (9)% Continued strong organic revenue growth at American Home Shield (AHS) Solid revenue growth at Franchise Services Group (FSG) Terminix margin compression, as expected, primarily due to business transformation initiatives See Appendix for Non-GAAP Reconciliations and Non-GAAP Reconciliation Definitions. 2 Adjusted earnings per share (EPS) is calculated as adjusted net income divided by the diluted share counts of 35.4M shares and 36.6M shares for the fourth quarter of 207 and 206, respectively. 0

11 FY Financial Results ($ millions) FY 207 FY 206 Variance Revenue $,54 $,524 $ 8 % Gross Profit $ 663 $ 684 $ (2) (3)% Margin 43.0% 44.9% Adjusted EBITDA $ 330 $ 37 $ (4) ()% Margin 2.4% 24.4% $37 FY'6 0 Revenue Conversion Adjusted EBITDA ($M) Revenue growth in core termite control, wildlife exclusion, insulation and mosquito sales; improved price realization () Production Labor Termite Damage Claims Vehicle Insurance (20) (6) Sales & Marketing Other $330 FY'7 Adjusted EBITDA margin compression Primarily due to business transformation initiatives, including increased production labor to improve customer experience and higher sales and marketing expense to drive organic revenue growth Higher termite damage claims See Appendix for Non-GAAP Reconciliations and Non-GAAP Reconciliation Definitions.

12 Q4 Financial Results ($ millions) Q4 207 Q4 206 Variance Revenue $ 353 $ 349 $ 4 % Gross Profit $ 4 $ 44 $ (3) (2)% Margin 39.9% 4.% Adjusted EBITDA $ 62 $ 73 $ () (5)% Margin 7.4% 20.8% $73 Adjusted EBITDA ($M) () (8) (2) $62 Revenue growth driven by core termite, wildlife exclusion and product sales Adjusted EBITDA margin compression primarily due to business transformation initiatives Increased sales and marketing expense in the fourth quarter as projected to drive future business growth Q4'6 Revenue Conversion Production Labor Termite Damage Claims Vehicle Insurance Sales & Marketing Other Q4'7 Continued reinvestment in business capabilities to drive sustainable growth See Appendix for Non-GAAP Reconciliations and Non-GAAP Reconciliation Definitions. 2

13 Q4 Revenue Growth by Channel $ millions 3

14 FY Financial Results ($ millions) FY 207 FY 206 Variance Revenue $,57 $,020 $ 37 3% Gross Profit $ 566 $ 496 $ 70 4% Margin 49.0% 48.6% Adjusted EBITDA $ 260 $ 220 $ 40 8% Margin 22.5% 2.5% $220 FY'6 47 Org. Revenue Conversion Adjusted EBITDA ($M) Organic revenue growth of 8% in 207 versus prior year (8) (5) (6) Claims Costs Impact of Aquisitions G&A Sales & Marketing Customer Service Costs PY Investment Gains See Appendix for Non-GAAP Reconciliations and Non-GAAP Reconciliation Definitions. $260 FY'7 OneGuard and Landmark acquisitions contributed 5% revenue growth Increased gross margins and Adjusted EBITDA margins by 30 bps and 90 bps, respectively Investments in sales & marketing to drive sales growth and customer care centers to improve service levels 4

15 Strong Revenue Growth and Consistently High Gross Margins $ millions 5

16 Q4 Financial Results ($ millions) Q4 207 Q4 206 Variance Revenue $ 257 $ 234 $ 23 0% Gross Profit $ 20 $ 4 $ 6 5% Margin 46.7% 49.0% Adjusted EBITDA $ 5 $ 50 $ 0 % Margin 9.7% 2.5% $50 Q4'6 0 Org. Revenue Conversion Adjusted EBITDA ($M) Organic revenue growth of 8% in the fourth quarter versus prior year (8) Claims Costs Impact of Aquisitions G&A (3) Sales & Marketing () Customer Service Costs $5 Q4'7 Increase in claims cost due primarily to higher claim cost per incidence and an increase in incidence rates Increased marketing spending to drive sales growth Increase in customer care center costs to improve customer service levels See Appendix for Non-GAAP Reconciliations and Non-GAAP Reconciliation Definitions. 6

17 FSG FY Financial Results ($ millions) FY 207 FY 206 Variance Revenue $ 22 $ 200 $ 2 6% Gross Profit $ 29 $ 20 $ 9 8% Margin 60.6% 59.7% Adjusted EBITDA $ 87 $ 79 $ 8 0% Margin 4.0% 39.4% $79 FY'6 Adjusted EBITDA ($M) Revenue growth driven by higher royalty fees related to disaster restoration services $87 and janitorial national accounts revenue 8 Revenue Conversion Branch Conversions See Appendix for Non-GAAP Reconciliations and Non-GAAP Reconciliation Definitions. () Sales & Marketing Other FY'7 Increased gross margins and Adjusted EBITDA margins by 90 bps and 60 bps, respectively Hurricane- and wildfire-related disaster restoration royalty fees drove strong yearover-year revenue and Adjusted EBITDA performance 7

18 FSG Q4 Financial Results ($ millions) Q4 207 Q4 206 Variance Revenue $ 55 $ 50 $ 5 % Gross Profit $ 32 $ 30 $ 2 7% Margin 58.9% 60.9% Adjusted EBITDA $ 22 $ 2 $ 5% Margin 40.5% 42.9% Adjusted EBITDA ($M) Revenue growth driven by higher royalty fees related to disaster restoration services and janitorial national accounts revenue 2 $2 $22 () () Gross margin compression driven by higher mix of janitorial national accounts revenue Q4'6 Revenue Conversion Sales & Marketing G&A Q4'7 See Appendix for Non-GAAP Reconciliations and Non-GAAP Reconciliation Definitions. 8

19 Q4 Consolidated Results $ millions, except per share data Fourth Quarter B/(W) Revenue $ 666 $ 633 $ 32 YoY Growth 5% Gross Profit % of revenue 44.% 45.5% -.4 pts Selling and administrative expenses (82) (66) (6) % of revenue 27.3% 26.% -.2 pts Amortization expense (6) (8) 2 40(k) Plan corrective contribution (0) () Fumigation related matters (2) (0) () Restructuring charges (0) (4) (6) Interest expense (38) (38) 0 Interest and net investment income 0 Loss on extinguishment of debt (32) 32 Income from Continuing Operations before Income Taxes Benefit (Provision) for income taxes 249 (9) 258 Income from Continuing Operations Loss from discontinued operations, net of income taxes (0) (0) 0 Net Income $ 306 $ 3 $ 275 Weighted-average diluted common shares outstanding Diluted Earnings Per Share $ 2.26 $ 0.23 $ 2.03 Adjusted Net Income $ 48 $ 60 $ (2) Adjusted EBITDA $ 35 $ 44 $ (9) Adjusted Earnings Per Share $ 0.35 $ 0.44 $ (0.08) See Appendix for Non-GAAP Reconciliations and Non-GAAP Reconciliation Definitions. 9

20 207 Impact from Tax Reform Legislation With Tax Reform Without Tax Reform (in $ millions) (in $ millions) Full Year Full Year Pre-Tax Book Income: $ 370 Pre-Tax Book Income: $ 370 Rate Reconciliation: Rate Reconciliation: Tax at U.S. Statutory Rate % Tax at U.S. Statutory Rate % State & Local Tax, net of Federal benefit 3 3.5% State & Local Tax, net of Federal benefit 3 3.5% Other (0) (2.9)% Other () (3.0)% Tax Reform Rate Change (27) (73.3)% Annual Effective Tax Rate $ (39) (37.6)% Annual Effective Tax Rate $ % (in $ millions) (in $ millions) Q4 Q4 Pre-Tax Book Income: $ 57 Pre-Tax Book Income: $ 57 Year-to-Date Tax Expense (Benefit) (39) Year-to-Date Tax Expense 32 Less: Tax Expense in prior quarters 09 Less: Tax Expense in prior quarters 09 Tax Expense (Benefit) $ (248) (433.0)% Tax Expense $ % Deferred tax asset and liability balances are updated in the period of enactment to reflect the new corporate tax rate of 2% as these deferred items will ultimately be taxed at the reduced rate. The majority of our deferred tax liability is related to indefinite-lived intangible assets that arose in connection with the acquisition of the Company by Clayton, Dubilier & Rice in As the Company is in a net deferred tax liability position, the reduction to the deferred tax liability on the balance sheet is reflected as a benefit in income taxes from continuing operations. Confidential 20

21 Q4 and Full Year Cash Flow $ millions Fourth Quarter Full Year Net Income $ 306 $ 3 $ 50 $ 55 Depreciation and amortization expense Working capital, excluding impact of accrued interest and taxes (22) Fumigation related matters Payments on fumigation related matters () (2) (90) Insurance reserve adjustment 23 Loss on extinguishment of debt Working capital impact of accrued interest and taxes (30) () (24) (2) Deferred income tax provision (253) 9 (226) 22 Stock-based compensation expense Restructuring charges, net of payments () 5 7 Other (3) (5) 3 Net Cash Provided from Operating Activities $ 73 $ $ 43 $ 325 Property additions, net of government grant fundings for property additions (27) () (75) (56) Free Cash Flow $ 46 $ 00 $ 338 $ 270 2

22 Full-Year 208 Outlook Range ($ millions) Low High Revenue $ 3,05 $ 3,045 Growth Rate 4% 5% Adjusted EBITDA 2 $ 690 $ 705 Growth Rate 2% 4% Margin 23% 23% Outlook assumes AHS remains with ServiceMaster for full year and does not include potential financial impact from acquisitions or projected costs related to AHS separation targeted for Q See Appendix for Non-GAAP Reconciliations and Non-GAAP Reconciliation Definitions. 22

23 We Serve, We Care, We Deliver 23

24 Appendix 24

25 Non-GAAP Reconciliation Definitions Adjusted EBITDA is defined as net income before: depreciation and amortization expense; 40(k) Plan corrective contribution; fumigation related matters; insurance reserve adjustment; non-cash stock-based compensation expense; restructuring charges; gain on sale of Merry Maids branches; non-cash impairment of software and other related costs; (gain) loss from discontinued operations, net of income taxes; (benefit) provision for income taxes; loss on extinguishment of debt and interest expense. Adjusted net income is defined as net income before: amortization expense; 40(k) Plan corrective contribution; fumigation related matters; insurance reserve adjustment; restructuring charges; gain on sale of Merry Maids branches; impairment of software and other related costs; (gain) loss from discontinued operations, net of income taxes; loss on extinguishment of debt; the tax impact of the aforementioned adjustments and the impact of the tax law changes on deferred taxes. Adjusted earnings per share is calculated as adjusted net income divided by the weighted-average diluted common shares outstanding. Free Cash Flow is defined as net cash provided from operating activities from continuing operations; less property additions, net of government grant fundings for property additions. 25

26 Q4 Net Income to Adjusted EBITDA and Adjusted Net Income Reconciliations $ millions, except per share data Fourth Quarter Net Income $ 306 $ 3 Depreciation and amortization expense (k) Plan corrective contribution Fumigation related matters 2 Non-cash stock-based compensation expense 2 3 Restructuring charges 0 4 (Benefit) Provision for income taxes (249) 9 Loss on extinguishment of debt 32 Interest expense Adjusted EBITDA $ 35 $ 44 Terminix $ 62 $ 73 American Home Shield 5 50 Franchise Services Group 22 2 Corporate Adjusted EBITDA $ 35 $ 44 Net Income $ 306 $ 3 Amortization expense (k) Plan corrective contribution Fumigation related matters 2 Restructuring charges 0 4 Loss on extinguishment of debt 32 Tax impact of adjustments (5) (7) Impact of tax law change on deferred taxes (27) Adjusted Net Income $ 48 $ 60 Weighted-average diluted common shares outstanding Adjusted Earnings Per Share $ 0.35 $

27 Full Year Net Income to Adjusted EBITDA and Adjusted Net Income Reconciliations $ millions, except per share data Full Year Net Income $ 50 $ 55 Depreciation and amortization expense (k) Plan corrective contribution (3) 2 Fumigation related matters 4 93 Insurance reserve adjustment 23 Non-cash stock-based compensation expense 2 3 Restructuring charges 34 7 Gain on sale of Merry Maids branches (2) Non-cash impairment of software and other related costs 2 (Gain) loss from discontinued operations, net of income taxes (Benefit) Provision for income taxes (39) 85 Loss on extinguishment of debt 6 32 Interest expense Adjusted EBITDA $ 678 $ 667 Terminix $ 330 $ 37 American Home Shield Franchise Services Group Corporate (3) Adjusted EBITDA $ 678 $ 667 Net Income $ 50 $ 55 Amortization expense (k) Plan corrective contribution (3) 2 Fumigation related matters 4 93 Insurance reserve adjustment 23 Restructuring charges 34 7 Gain on sale of Merry Maids branches (2) Impairment of software and other related costs 2 (Gain) loss from discontinued operations, net of income taxes Loss on extinguishment of debt 6 32 Tax impact of adjustments (23) (73) Impact of tax law change on deferred taxes (27) Adjusted Net Income $ 286 $ 28 Weighted-average diluted common shares outstanding Adjusted Earnings Per Share $ 2. $

28 Q4 and Full Year Adjusted EBITDA Bridge to Adjusted Net Income $ millions Fourth Quarter Full Year 207 B/(W) PY 207 B/(W) PY Adjusted EBITDA $ 35 $ (9) $ 678 $ Excluded from Adj. EBITDA / Included in Adj. Net Income Stock-based compensation (2) (2) Interest expense (38) (50) 3 Depreciation (20) (2) (76) (5) Provision for income taxes (27) () (54) 4 Adjusted Net Income $ 48 $ (2) $ 286 $ 4 See Appendix for Non-GAAP Reconciliations and Non-GAAP Reconciliation Definitions. 28

29 Full Year Consolidated Results $ millions, except per share data Full Year B/(W) Revenue $ 2,92 $ 2,746 $ 65 YoY Growth 6% Gross Profit,360, % of revenue 46.7% 47.3% -0.6 pts Selling and administrative expenses (773) (7) (62) % of revenue 26.6% 25.9% -0.7 pts Amortization expense (27) (33) 6 40(k) Plan corrective contribution 3 (2) 5 Fumigation related matters (4) (93) 89 Insurance reserve adjustment (23) 23 Impairment of software and other related costs (2) () () Restructuring charges (34) (7) (7) Gain on sale of Merry Maids branches (0) 2 (2) Interest expense (50) (53) 3 Interest and net investment income 4 6 (2) Loss on extinguishment of debt (6) (32) 26 Income from Continuing Operations before Income Taxes Benefit (Provision) for income taxes 39 (85) 225 Income from Continuing Operations Gain (loss) from discontinued operations, net of income taxes 0 () Net Income $ 50 $ 55 $ 355 Weighted-average diluted common shares outstanding Diluted Earnings Per Share $ 3.76 $.3 $ 2.63 Adjusted Net Income $ 286 $ 28 $ 5 Adjusted EBITDA $ 678 $ 667 $ Adjusted Earnings Per Share $ 2. $ 2.04 $