Serve Robotics Inc.
Q4 2017 Earnings Call Transcript

Published: 28 Feb 2018

[Operator:]

Ladies and gentlemen, welcome to the ServiceMaster's Fourth Quarter and Full-Year 2017 Earnings Call. Today's call is being recorded and broadcast on the Internet. Beginning today's call is Brian Turcotte, ServiceMaster's Vice President of Investor Relations and Treasurer, and he will introduce the other speakers on the call. At this time we will begin today's call. Please go ahead, Mr. Turcotte.

[Brian Turcotte:]

Thank you, [Tommy]. Good morning and thank you for joining our fourth quarter and full-year 2017 earnings conference call. Before I review the agenda and introduce the other speakers, I'd like to remind you that throughout todays 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, February 27, 2018. The Company undertakes no obligation to update any information discussed on today's call. This morning, ServiceMaster issued press release filed with the SEC on Form 8-K highlighting our fourth quarter and full-year 2017 financial results, the press release and 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 www.servicemaster.com. We have also included a reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures in our press release and presentation to better assist you in understanding our financial performance. All references on the call to EBITDA today 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 of you who haven't had a chance to download the investor presentation from our website, I'll walk through the agenda items shown on Slide 3. Nik will lead off by providing full-year 2017 highlights, and we will then provide an update on the American Home Shield or AHS separation, progress on the Terminix business transformation, and review the Company's strategic growth priorities. Tony will follow and summarize our consolidated fourth quarter and full-year 2017 financial results, review the individual business unit results, provide more details in regard to our financial statements and then speak to the full-year 2017 outlook. Nik will then provide summary comments before opening the call to your questions. I'll now turn the call over to ServiceMaster CEO, Nik Varty for opening comments. Nik?

[Nikhil Varty:]

Thanks, Brian, and good morning. Thank you all for joining us today on our fourth quarter and full-year 2017 earnings call. As you saw this morning, we reported solid results for the quarter and year, while continuing to execute on our strategies to deliver a long-term growth. For those of you on the call following along with our webcast deck, please turn to Slide 4 and our 2017 highlights. Since joining ServiceMaster in July, I've had the great pleasure of meeting many of our approximately 13,000 employees over 15,000 contractor partners and more than 4,500 franchise owners. I am impressed and humbled by the tremendous efforts to take care of our customers, reaching into more than 75,000 homes and businesses every day. This focus on customers is reflected in our results. We delivered value across all our businesses in 2017. We reported a 6% year-over-year revenue increase in 2017 for ServiceMaster with American Home Shield achieving high single-digit organic revenue growth for the third consecutive year and 13% revenue growth overall. We delivered adjusted net income of $286 million and adjusted EPS of $2.11, up 2% and 3% respectively over the prior year. At Terminix, we launched a series of systematic transformational initiatives to significantly upgrade the customer experience, improve customer retention rates, and better positioning ourselves to deliver consistently strong revenue and earnings growth. We are beginning to see the benefits of this transformation through the increase in the net promoter scores submitted by our customers. While we know it takes time for these initiatives to impact the business, we are excited by the strong customer feedback we are already seeing. We continue to strengthen our leadership team, adding significant experience to our executive ranks, which I'll review in a moment. We are also creating an organizational structure that enhances personal accountability and supports a high-performance culture. We return significant value to our owners in the form of share buybacks and debt retirements. In 2017, we purchased over $85 million in shares at an average share price of $13 per share lower than the share price at year end. In addition, we use $31 million of cash to retire a portion of our high coupon legacy notes in 2017, saving over $2 million in annual interest expense. We also reduced our net debt leverage from 4.1 times to 3.7 times in 2017 as a result of overall debt retirement and increase in available cash and adjusted EBITDA growth. Through the efforts of our people and by executing on our strategic initiatives, we will continue to build value for all our stakeholders, customers, employees, the communities in which we do business, and our shareholders. Turning to Slide 5. Seven months ago, we announced our intention to separate AHS from ServiceMaster into a separate publicly traded company to a tax free distribution to the company's shareholders. I am pleased to report that we are on track with the numerous work streams and continue to target the third quarter of 2018 to complete the separation. To date, we have requested a private letter ruling from the Internal Revenue Service and filed a Form 10 with the Securities and Exchange Commission. The initial filing was required to be confidentially filed because we did not yet have audited full-year 2017 financials at the time of submission. As part of the expected process, we will also need to respond to any SEC comments on that submission before filing publicly. I should note that we're also in the process of identifying the leadership teams and reviewing capital structures for both standalone companies. Two decisions that have been made regarding the leadership teams are Tony and I will continue to service in our controls of CFO and CEO at ServiceMaster whole separation. I know that our shareholders and debt holders as well as employees, vendors and partners have other questions regarding this transaction, and we have committed to keeping you informed as this process moves forward. We anticipate providing the next update on our first quarter 2018 earnings call, which is currently scheduled for May 1, 2018. The AHS separation from ServiceMaster, who will better positioned both companies to focus on their unique business needs and market opportunities and grow according to their own distinct business strategies. It will enable both current shareholders and potential investors to evaluate and invest in each business with greater clarity based on their individual merits and very attractive future growth prospects. I'd now like to update you on our Terminix business transformation. Please turn to Slide 6. As I mentioned, we're taking a disciplined approach executing on a number of transformational initiatives to significantly upgrade the Terminix customer experience, enhance our employee engagement, the technician and sales professional level, improve customer retention rates and profitably grow our share. We are building a strong leadership team with significant experience in delivering results and driving profitable growth to lead the tremendous individuals we have throughout the Company. As I mentioned last quarter, we added Dion Persson to head the Spin Management Office and manage the overall strategy for the Company; and Matt Stephenson to manage the Terminix Residential business. In December, we added Pratip Dastidar as Chief Transformation Officer for ServiceMaster. Bringing Pratip on Board reflects our ongoing commitment to make ServiceMaster a strong process oriented customer focused organization that it creates value for customers and shareholders. Prior to joining ServiceMaster, Pratip held numerous executive roles in quality management and operational excellence for global businesses in the industrial technology and digital sectors, including HP, Amazon, Applied Materials, WABCO, and Honeywell. Most recently, he let process innovation as part of the operational scale up at sales force, the cloud-based enterprise software pioneer. Pratip is a certified Lean Master and Six Sigma Master Blackbelt. Under Pratip, we will continue to invest in the required resources to grow our business profitably and we will use lean initiatives and digital capabilities to drive efficiency and process excellence. Last month, we added Matt Loos as Vice President of Marketing and Sales for the Terminix Residential. Matt joins us from Firestone Building Products, a division of Bridgestone Americas, where he led its marketing organization. During his nearly 20 years at Bridgestone, Matt developed and executed world-class go-to-market strategies across large field organizations. In his new role, Matt is responsible for the complete go-to-market strategy across Terminix Residential and aligning sales and marketing for maximum effectiveness. We are also creating an organizational structure that enhances personal accountability and supports a high performance culture. For example Terminix Residential, President Matt Stephenson recently held leadership meetings with more than 800 branch, service and sales managers in five cities across the United States. His goal was to solicit input from the field on ways to better serve our customers, generate profitable revenue growth and take care of our employees, because a unique approach that was greatly appreciated by the field organization and really set the tone for 2018. His organization is in the process of establishing key metrics for success, enhancing the accountability and aligning compensation for those metrics, while improving two way communications with the field. As part of this effort, we are empowering our route technicians to deliver an exceptional customer experience. We are giving them the tools they need to stay connected to customers, including mobile technology, while providing them with timely customer feedback. It's still early in the process, but we have begun to see the benefits through both higher net promoter scores and customer retention rates. In summary, we are enhancing our ability to consistently deliver on our commitments by increasing transparency, improved operational cadence and measurement systems, and strengthening business processes with the goal of creating long-term sustainable value. I remain confident we are headed in the right direction to deliver consistently strong revenue and earnings growth over the long-term and we'll continue to update you on our progress. Turning to Slide 7, we are developing a strong commercial pest control business that are able to focus on commercial customers which represents a significant growth opportunity. Dedicating resources to commercial allows us to focus on national accounts and local business owner's unique needs offering us more opportunities to attract and retain customers. The $3 billion commercial pest control and termite market represents a tremendous opportunity for us and commercial growth is a critical component of our Terminix business transformation. We recently added Kelly Kambs as president of the Terminix commercial pest control and termite business. Kelly joins us from CPG Building Materials where she served a Senior Vice President and defined the commercial strategy for the business and established the sales marketing and contractor base. In her new role Kelly with a full responsibility for the Terminix commercial business and we are focus on driving growth and profitability. Adding Kelly, who are dedicated leadership team will help us build a world-class commercial pest business as we pursue both organic and inorganic growth. I'm also very pleased to announce that last night we entered into an agreement to purchase and combine our Terminix national account pest control operations with Copesan Services; one of the largest national providers with commercial pest management in the country. This combination would significantly improve Terminix capabilities in the commercial pest control business as the Copesan brand will provide us with significant expertise, reputation and process for delivering pest management solutions to sophisticated commercial customers. We're excited about working with Copesan strong experienced national accounts and commercial team. It's exceptional service provider network across the country and it's too strong regional commercial operations. The transaction is expected to close in the next 30 to 45 days we expect Copesan to generate approximately $50 million of revenue for the remainder of 2018 following the close with mid single-digits adjusted EBITDA margins while improving processes for our business. The adjusted EBITDA margin should move higher in the future as we realize synergies from this combination. Turning to Slide 8, I'll briefly update you on our strategic group priorities for each of our businesses. At Terminix we will continue to execute on the business transformation I just review. Our initiatives are designed to increase technician and branch management empowerment to improve customer satisfaction and increase customer retention levels. For example to drive the right behaviors we have instituted new preplans for our route technicians. While they are now using net promoter scores through drive positively reinforcement instead of penalizing them for cancellations. We're also rolling out new preplans for outside sales professionals with an emphasis on selling recurring units to new households. We're also rolling out a new scheduling application that allows our technicians to see plan and reschedule stocks to better serve our valued customers and increase productivity. At AHS we will also seek to increase market penetration, but providing exceptional service to our valued customers. As we've mentioned we invest to improve call center response times. Our driving a lean culture to simplify our service delivery rapidly understand the underlying root cause of our service defects and provide sustainable fixes as well as upgrading contracted capacity and quality. We'd also piloting a courtesy call back future to better serve our home service plan customers during periods of high call volume and longer weak times. And FSG we will continue to leverage relationships with insurance companies that currently provide us with disaster restoration leads as well as form new relationships to grow their business. The ServiceMaster Clean business will work to both increase share with existing national accounts as well as add new accounts to drive higher revenue growth. For example we are targeting high growth verticals that our ServiceMaster Clean franchisees, but we both acquire national accounts and provide our franchisees with any specialized training needed for those verticals. FSG leadership is also exploring opportunities we stand the current reach beyond the core franchise model as well as more traditional franchise development to drive profitable growth. I'm very excited about our growth opportunities across all our businesses and plan to continue to share our progress as we move forward. I will now turn the call over to Tony, who will cover full-year 2017 and fourth quarter results. Tony?

[Anthony DiLucente:]

Thanks, Nik, and good morning, everyone. Turning to Slide 9. For the full-year, ServiceMaster revenue grew a $165 million or 6% compared to the prior year. Revenue growth was driven primarily by a 13% increase in AHS due to an increase in new unit sales growth, improved price realization, and the impact of the OneGuard and Landmark acquisitions. AHS organic revenue growth remained strong with an increase of 8% versus prior year. FSG delivered 6% revenue growth in 2017 versus prior year, while Terminix revenue was up 1% almost half of which was organic growth. Full-year adjusted EBITDA increased to $11 million or 2% compared to prior year driven largely by growth of 18% at AHS and 10% at FSG mostly offset by 11% decline at Terminix primarily due to investments in the business transformation initiatives and higher sales and marketing expenses to drive future organic revenue growth. Full-year adjusted net income was $268 million, an increase of $5 million or 2% versus one-year ago. The increase was largely driven by the increase in adjusted EBITDA. Adjusted net income and EBITDA does not include the impact of tax reform legislation that I will review in a moment. Full-year adjusted earnings per share of $2.11 with an increase of 6% or 3% versus last year. This was driven by an increase in adjusted net income and lower weighted average diluted common shares outstanding due to our previously mentioned share repurchase program. Turning to the fourth quarter consolidated financial results in Slide 10, total company revenue grew $32 million or 5% compared to the prior year. Our results were primarily driven by continued strong organic growth of 8% in AHS, where we continue to see strong demand for our products in both the real estate and direct to consumer channels coupled with the favorable impact of our acquisition of Landmark Home Warranty last year. FSG delivered 11% revenue growth in the quarter driven primarily by higher royalty fees and janitorial national accounts revenue. Revenue grew 1% at Terminix driven by higher core termite, wildlife exclusion and product sales. Adjusted EBITDA for the fourth quarter decreased $9 million or 7% compared to the prior year. The decrease was the result of a small increases in AHS and FSG being more than offset by margin compression at Terminix versus prior year. I'll cover the fourth quarter performance of Terminix in more detail in a moment. Our adjusted net income for the fourth quarter was $48 million, a $12 million decrease versus prior year and adjusted diluted earnings per share of $0.13 was down $0.08 versus prior year. This 19% decrease in adjusted net income was primarily driven by the after mentioned lower adjusted EBITDA and higher depreciation expense, mainly driven by our investment in sales vehicles and better information technology platforms to help improve the customer experience. Turning to Slide 11 and the full-year performance of Terminix. Revenue increased 1% to $1.541 billion. The increase in core termite control and wildlife exclusion, insulation and mosquito sales and improved price realization were offset by the decline in core pest control, including the $19 million decline in revenue associated with the expected customer attrition from Alterra. I should note that the projected Alterra customer attrition in 2018 should be consistent with our normal customer base and we will no longer break it out as a cause of the change. The temporary closure of 53 Terminix branches primarily in Texas and Florida due to Hurricanes Harvey and Irma negatively impacted revenue by $4 million. Full-year adjusted EBITDA declined by $41 million or 11% from $371 million in 2016 to $330 million in 2017. If you view the waterfall chart on the bottom of Slide 11 and starting on the left side, you will see that higher revenue conversion was about $10 million favorable for the year, including the unfavorable impact of the Alterra customer attrition. Moving to the right, we incurred about $11 million in additional production labor costs associated with our efforts to improve safety, customer service, and retention. We believe that operational improvements will produce modest labor productivity in 2018. The $10 million increase in termite damage claims reflects increased warranty claims and reserve requirements in 2017. As I mentioned on the previous call, large claims increased in the third quarter compared to our historical norms primarily on the Gulf Coast. We are continuously evaluating how we estimate future claims. But as of now, we are expecting a $1 million to $3 million increase in termite damage claims of 2018 versus prior year. The $6 million increase in our insurance programs was principally driven by an increase in the number of company-owned sales vehicles versus prior year. We don't expect further increases in 2018. The $20 million total increase in sales and marketing costs versus prior year to drive organic revenue growth, please note that we're planning to increase our total sales and marketing in 2018 by a combined $4 million to continue to drive organic growth. And finally $6 million of other cost, which includes a number of items included in the unfavorable impact of the 53 temporary branch closures related to the hurricanes and increased technology costs to increase productivity. In summary, regarding the additional costs, we invested in growth in are committed to finding efficiencies that will improve margins. For 2018 Terminix adjusted EBITDA margin should be relatively flat versus prior year. Turning to Slide 12, in the fourth quarter performance of Terminix, revenue increased 1% to $353 million most of which was organic growth. The slight increase in core termite control, wildlife exclusion and product sales were offset by the decline in core pest control including the expected decline in revenue associated with the Alterra customer attrition. Adjusted EBITDA for the fourth quarter declined by $11 million from $73 million in 2016 to $62 million. If you view the waterfall chart on the bottom of the Slide 12 and starting on the left side, you'll see that higher revenue conversion was about $1 million favorable in the fourth quarter, including the unfavorable impact of Alterra customer attrition. Moving to the right, we incurred about $1 million in additional production labor costs associated with our efforts to improve safety, customer service and retention. Termite damage claims increased $1 million in the fourth quarter of 2017 as previously estimated. Vehicle insurance costs increased $1 million year-over-year in the fourth quarter as previously estimated. As I guided last quarter, sales and marketing cost increased $8 million as we invested to drive future business growth, and the $2 million and other costs includes a number of offsetting items. In summary, we continue to reinvest in our business capabilities in the fourth quarter of 2017 to drive sustainable growth. Turning to Slide 13 and the Terminix revenue drivers for the fourth quarter, Terminix revenue growth versus prior year was 2% excluding the impact of Alterra customer attrition on the fourth quarter. Starting on the left side of the chart, revenue from termite completions, which includes new termite sales and related services was $65 million, an increase of $1 million or 2% over the prior year. Termite renewal revenue increased $2 million or 3% to $58 million. During the fourth quarter, about 60% of the $65 million in termite completion and other services revenue was derive from the sale of core terminate completions, meaning a first-time termite service or one-time non-renewable service. Core termite revenue increased about 1% year-over-year continuing the trend established in the fourth quarter 2015 of year-over-year increases in the number of core termite completions. The remaining 40% of termite completion and other services revenue comes from services such as wildlife exclusion and insulation and this revenue stream increased about 4% year-over-year. Termite renewals increased by 3% compared to the prior year driven by price, mix and an initiative to upgrade our bait monitoring stations for a small subset of our customers. Pest control revenue of $209 million in the fourth quarter was flat versus prior year as higher price offset the revenue decline, primarily associated with the Alterra customer attrition. As we have previously discussed, we have significantly invested in improving service levels and driving our new growth in Terminix. Although, we have much more to do, we have seen significant improvement in the customer engagement and service is evidence by higher net promoter scores and realized significant growth the new sales during 2017. We are increasingly confident that we have taken the right steps on our continuing journey to transform service quality, improve retention and growth, and position the business for long-term sustainable growth. For 2017 organic revenue growth at Terminix excluding into Hurricanes was 1% for the full-year. Let's turn to Slide 14 and discuss AHS's full-year 2017 performance. AHS had another strong year with significant topline and bottom line growth versus the prior year. Revenue increased from $1.02 billion to $1.157 billion or 13%, as Nik previously mentioned 8% of that growth was organic with 7% of it coming from an increase in customer count and 1% of it from higher prices. The remaining 5% of growth about $56 million came from the OneGuard and Landmark acquisitions. Revenue growth continued to be solid in both our key channels to market. Year-over- year organic growth in both the direct-to-consumer and real estate channels was 8%. We remained focused on sustaining our strong growth rate through optimizing our advertising, promotion and direct mail campaigns to drive new sales units as well as the improving service quality to improve retention rates. Full-year gross margin was up 30 basis points versus prior year at 49%. Adjusted EBITDA increased year-over-year by $40 million or 18% and adjusted EBITDA margin increased 90 basis points to 22.5%. To understand the drivers of EBITDA growth, please turn your attention to the waterfall chart on the bottom of Slide 10. Starting on the left side, the largest contributor to the increase in EBITDA was $47 million of flow-through from organic revenue growth, with $34 million of it related to volume and $13 million related to price. Higher claims cost on favorably impacted EBITDA by $8 million as inflation more than offset favorable incidence rates. The acquisition of OneGuard and Landmark contributed about $12 million in 2017. G&A savings of $4 million was primarily driven by the integration of previous acquisitions. A $5 million increase in full-year sales and marketing costs reflects investments to drive sales growth. The $6 million increase in customer service cost was driven by high labor cost to improve service levels in our customer care centers and finally, at $3 million non-recurring prior year investment gains. Slide 15, is the chart we originally showed on the fourth quarter 2016 earnings call to demonstrate how and periods of strong revenue growth AHS maintained consistently high gross margins. We updated it for 2017 and it again shows that even with 30% revenue growth the business produces 49% gross margins for the third consecutive year. Although some quarters see higher than normal claims cost over the course of the year the variation tends to be minimal. Let's turn to Slide 16 and discuss AHS fourth quarter performance. Revenue increased from $234 million to $257 million or 10% with organic growth contributing 8 percentage points and a Landmark acquisition driving the remainder. The organic revenue growth was mostly driven by an increase in customer count which accounted for more than 6% of AHS's 8% organic growth and higher prices accounted for 1% of the organic growth in AHS. The Landmark acquisition contributed about $6 million or 2% of growth. Revenue growth continued to be solid in both of our key channels to market. Year-over-year organic growth in both the direct-to-consumer and real estate channels with 7%; fourth quarter gross margin decrease by 220 basis points versus prior year at approximately 47%, EBITDA increase slightly year-over-year with margin down 180 basis points to approximately 20%. To understand the drivers of EBITDA during the quarter lease turned your attention to the waterfall chart on the bottom of the slide 16. Starting on the left side organic revenue growth was $10 million in the quarter with $7 million related to volume and $3 million the price. Higher claims caused on favorably impacted EBITDA by $8 million with both higher claims cost for incident and increase in the incidence rates. The acquisition of Landmark contributed less than $1 million in the fourth quarter. G&A savings of $1 million was primarily driven by the integration of previous acquisitions. A $3 million increase in sales and marketing costs reflects the increase in our marketing spend compared to prior year to drive more units as we enter 2018. And finally, the $1 million increase in customer service cost reflect the investments to improve customer service levels. Moving on to Slide 17, let's now cover FSG's full-year performance. Revenue increased $12 million versus prior year or 6% primarily driven by $7 million of higher royalty fee revenue related to disaster restoration services and $9 million of higher janitorial national accounts revenue offset in part by a $6 million decrease in revenue from Merry Maids branch conversion to franchises. Excluding the conversion of the Merry Maids branches to franchises and master distributor acquisition revenue would have increased 8% versus prior year. Full-year gross margin increased by 90 basis points versus prior year approximately 61%. Full-year adjusted EBITDA margin was $8 million or 10% higher than the previous year. EBITDA margins increased 160 basis points versus prior year to 41%. To understand the driver of the EBITDA during the year, please turn your attention to the waterfall chart on the bottom of a Slide 17. Starting on the left side revenue conversion growth in 2017 was $8 billion due primarily to Hurricane and wildlife related disaster restoration fees. We had $1 million increases related to the previously company owned Merry Maids branches converted to franchises. Sales expense was up $1 million due primarily to higher labor and $1 million decrease in other costs. Moving on to Slide 18, let's now cover FSG's fourth quarter performance. Revenue increased $5 million year-over-year or 11%. The increase was driven by $2 million of higher royalty fees and $4 million higher domestic janitorial national account revenue offset in part by $1 million of lower product sales. Excluding the conversion of Merry Maids branches to franchises and the master distributor acquisition organic revenue was 10% higher year-over-year. Fourth quarter gross margin decreased by 190 basis points versus prior year to approximately 59% driven by a higher mix of janitorial national accounts revenue. Fourth quarter adjusted EBITDA was $22 million, $1 million or 5% higher than the previous year. EBITDA margins decreased 230 basis points versus prior year to 40.5%. To understand the drivers of EBITDA during the quarter, please turn your attention to the waterfall chart on the bottom of Slide 18. Starting on the left side revenue conversion growth was $2 million primarily due to Hurricane and wildfire related disaster restoration fees. Sales expense was up $1 million to invest in future growth and we had $1 million increase in G&A from a number of small one-time items. Turning to the fourth quarter consolidated P&L on Slide 19, the year-over-year revenue increase of 5% for $32 million includes $25 million or 4 percentage points of net organic growth. The remaining $7 million of in organic revenue growth was primarily driven by the landmark acquisition in AHS. Fourth quarter gross margins was 140 basis points lower versus prior year due primarily to higher labor termite claims and equal insurance cost at Terminix and higher warranty claims cost at AHS. The Year-over-year SG&A increase of $16 million primarily reflects $8 million and $2 million of increased sales and marketing costs at Terminix in AHS respectively, $2 million of higher bad debt expense at Terminix and $1 million of higher customer service costs at AHS and about $2 million of higher sales and one-time items in FSG. As a result SG&A as a percentage of revenue increased by 120 basis points to 27.3%. Net income of $306 million for the fourth quarter was up $275 million versus prior year due to the income tax benefit from the enactment of the Tax Cuts and Jobs Act that I'll cover in a moment. Excluding the tax benefit from this new legislation, adjusted net income for the fourth quarter was $48 million, down $12 million from the same period in 2016, due to lower adjusted EBITDA and higher depreciation. Slide 20 will hopefully assist you in better understanding the 2017 impact from the enacted of the Tax Cuts and Jobs Act on December 22, 2017. U.S. GAAP and SEC regulations required the Company to remeasure its deferred tax asset and liability balances in the period of enactment to reflect the new corporate tax rate of 21% as these deferred items will ultimately be taxed at the reduced rate. The majority of ServiceMaster's net deferred tax liability is related to indefinite live intangible assets that arose in connection with the CD&R acquisition in 2007. 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. Looking at the two tables, the table on the left side explains the fourth quarter and full-year annual effective tax rate calculation and tax expense benefit with tax reform. As you can see, we had a $271 million tax benefit due to tax reform, which produced the negative full-year tax rate of 37.6%. Without tax reform as shown in the table on the right, the annual effective tax rate for 2017 would have been a more customary 35.5%. The large tax benefit from the Tax Cuts and Jobs Act rose significantly higher fourth quarter and full-year net income in earnings per share, but this benefit was not included in the calculation of the non-GAAP adjusted net income and adjusted earnings per share metrics. I'll review our 2018 projected tax rate when I review the outlook in just a few moments. With respect to cash flow as shown on Slide 21, free cash flow was $46 million in the fourth quarter, which was $54 million lower than the same period in 2016, primarily due to higher cash interest and cash taxes as well as payments on fumigation related matters and restructuring. We did not repurchase any shares of ServiceMaster's stock in the fourth quarter of 2017. We currently have $155 million remaining from the original $300 million share buyback program. For full-year 2017 free cash flow of $338 million, which was $68 million higher than 2016. In 2016, we made payments of $90 million related to the U.S. Virgin Islands fumigation matter. The after-tax impact of the payment resulted in a $56 million negative impact to 2016 free cash flow. After adjusting prior year for this payment and despite significant 2017 investments in the Terminix business transformation, free cash flow continue to grow. The 2018 outlook as shown on Slide 22, our 2018 outlook assumes AHS remains part of ServiceMaster for the full-year and excludes the impact of any acquisitions including the previously announced Copesan transaction during the year and projected costs related to the AHS separation. We expect full-year 2018 revenue to range from $3.015 billion, the $3.045 billion or an increase of between 4% and 5% compared to 2017. Full-year 2018 adjusted EBITDA as anticipated to range from $690 million to $705 million or an increase from 2% to 4% compared to 2017. We expect organic revenue growth of Terminix to range from 1% to 2% for full-year 2018 compared to the prior year. For the first quarter 2018, Terminix organic revenue growth is projected to be flat to up to 1% compared to the prior year, but we expect it to accelerate in the second half of the year as we begin to see greater benefits from the transformational initiatives. We also plan to focus on improving the overall quality of our revenue growth by focusing on either improving a rationalizing lower margin in underperforming territories and products. We expect Terminix EBITDA margin to remain relatively flat in 2018 compared to the prior year. Longer-term we still believe the Terminix is incremental margins will be between 30% and 35%. We expect AHS to deliver high single-digit organic revenue growth again in 2018 with relatively flat gross margins versus prior year. Although we plan to increase our investment in sales, marketing and service to drive further direct-to-consumer growth in 2018 we expect our adjusted EBITDA margins to remain relatively flat versus prior year. We expect FSG to deliver mid single-digit organic revenue growth in 2018. Given that we're cycling a record year for U.S. server whether driven disaster restoration fees that contributed over $3 million of additional high margin royalty fees, lower margin janitorial national accounts growth will comprise a greater share of the FSG revenue growth in 2018 which could create EBITDA margin pressure for the business similar to what we experienced in the fourth quarter of 2017. To further assist you with your modeling up provide a few key metrics for 2018 including a projected annual effective tax rate of between 25% and 26% of projected cash tax rate of between 18% and 20%, estimated annual interest expense of between $140 million and $150 million and depreciation and amortization expense of between $100 million and $110 million. I'll now turn the call back over to Nik.

[Nikhil Varty:]

Thanks Tony. I'm pleased to announce that we're in the process of moving into our new corporate offices, which we refer to as our global service center in Downtown Memphis as shown on Slide 23. At our global service center we expect the posture of the next great wave of innovation, customer service, and performance in a contemporary collaborative work environment, for the full focus will be supporting on employees, contractors and franchisees who serve our customers directly. By retrofitting a Downtown Mall abandoned years ago into our new global service center we will bring a new level of energy to the city of Memphis, another way of giving back to the community in which we live and work. We look forward to hosting you at this amazing facility in the months and years ahead. In 2017 we reaffirm our vision to ensure our invaluable brands of the unparalleled best at serving our wonderful customers. Putting our customers at the heart of everything we do will allow us to continue to strengthen and expand our customer relationships, driving sustainable growth throughout our business. We are committed to demonstrating our care for our employees, contractor partners and franchise owners. This care is an essential ingredient of our ServiceMaster transmission plan. Our employees, partners and franchisees perform our most important work and we are confident that demonstrating our care for them will improve their ability to provide outstanding service opportunities to our customers ultimately benefiting all our shareholders. Every day ServiceMaster delivers peace of mind for our customers. Whether we are keeping homes and commercial properties clean, protecting them from pests, restoring them after a disaster, for fixing heating and cooling systems, we are protecting our customers' biggest investments their homes and facilities. We also announcing ability to deliver for our other stakeholders by improving our operational cadence and measurement systems. Before opening the call to questions I am confident that I speak on behalf of all our employees, contractor partners and franchise owners across the country and the word, when I say that ServiceMaster and his powerful brands a better position than ever to deliver on our commitments to our customers, our communities, our shareholders and each other. Together we are creating a better company that to reinvent the way customers experience of residential and commercial services. We are excited to lead the change in 2018 as we serve, we care and we deliver.

[Brian Turcotte:]

Thanks Nik. As a reminder, during the question-and-answer session, we encourage you to ask any questions 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 as this morning please limit yourself to one follow-up question. So we would make it to everyone in the allotted time. I realized that our prepared remarks were longer than normal this morning. So we'll extend the Q&A session beyond the top of the hour. Tommy let's open up the line for questions.

[Operator:]

Thank you very much. [Operator Instructions] And we will get our first question on the line from Anj Singh with Credit Suisse. Please go ahead.

[Anjaneya Singh:]

Hi, good morning. Thanks for taking my question. So first one for you Nik, on the Terminix organic growth. It seems your fiscal 2018 guidance for that business is a little bit below I think [indiscernible] anticipating, and given the Alterra adjusted growth that you've been putting up of around 2% recently. Is the 1% to 2% guide just conservatism or is there something else you're seeing? Maybe just talk about what you're seeing today for retention rates, new customer acquisition levels as the retention showing sort of a slow and steady improvement? Just help us understand the puts and takes as it relates to your organic growth guide there?

[Nikhil Varty:]

Well, thanks Anj for the question. The way I look at this as we've gone through my first six or seven months here. I treat this is a steady slow progress because there's a lot of work needs to be done in rebuilding some of our capabilities in our branches, retraining are employees, connecting in a better way with them. And I must say that I'm very pleased at the significant progress we're making on this, but a lot of work still needs to be done. And as you see to our commentary, there are a few things that we are going to focus on. Number one, is our commercial business needs a lot of work. So if you see that number, it's a combination of both our residential and commercial. And we've already seen some very promising signs in both our net promoter score and retention rates specifically on the pest side more so than even termite improving quite a lot. So I have high level of confidence going on in the residential business. Again, we're also going to focus on some things such as the quality of the revenue that we generate. For example, I want to make sure that the marketing dollars that we are spending are spent on the right type of revenue, so whether it's the profitability that comes with it and also focusing on the life cycle value of those customers. They're going to go after more customers that have higher retention rates, certain geographies that we either shouldn't be playing in or focusing on geographies that are much more beneficial to us. So all this transformation has to be done very carefully. I mean we're in here for the long haul. My goal and our goal of the company here is to build a long sustainable journey for a company that can consistently deliver at or above about market growth numbers. I had made a commitment that we're not going to do crazy things to me jerk and try to grow on quarterly basis or so, but make sure there's a sustainable turn. I mean that's never a straight line as you understand with such a massive undertaking. What I can say is I'm very encouraged that within six to seven months, we've seem a tremendous amount of grounding and progress in many areas, but a lot still needs to be done in terms of our capacity planning. When we continue to put technology in our people's hands, but we have to continue to evolve that technology into better tools. We are learning from our customers what we need to do in terms of being better to serve them. We want to make sure that we are controlling how the kind of selection of the type of customers which tune to better payment cycles, better performances and stuff going forward as well. So it's a combination of all those, but primarily our focus on commercial which will take where our work has just begin, just a week and a half ago. We announced bringing in a leader for that business, a business that was in a relatively sort of given a stepchild sort of a seat in the business and bringing it to the floor, bringing a new leader and announcing tailwind of an acquisition, by the way our guidance does not include any addition from the Copesan acquisition or any future acquisitions that we might be planning. So for me I think this is a balanced approach to how we look at the business and as we go forward we'll continue to update on that number.

[Anjaneya Singh:]

Okay. Got it. That's really helpful. And for a follow-up, one for Tony, could you just talk about the EBITDA guidance. If I heard correctly, you're expecting flattish margins in Terminix, so maybe just talk about what would cause it to be down year-over-year in 2018? And then on AHS, is there a reason why you're stepping up the investments so much higher to cause flattish EBITDA margins year-over-year given the sort of 35% incremental margins you've spoken to in the past? And I didn't hear you reiterate the 35% target for that business, so is that still intact? Thanks.

[Anthony DiLucente:]

Yes. Good questions Anj. Let me talk about Terminix first. As you know and as Nik just mentioned, we're investing in our capability to better serve the customers and we're continuing to see opportunities. We're going to continue to invest as needed. But we're also going to do is generate productivity and efficiency. We talked about that Pratip coming on Board to drive Lean Six Sigma through our operations. We believe that improvements that that will generate will offset any additional investments that will have to make. So that's why we believe margins will be basically flat in Terminix. Now Nik is going to talk about the increased investment in AHS, but I will say that before I turn it over to him to address that, incremental margins were higher - were 35% or better in 2017 and we still expect that going forward. So Nik…?

[Nikhil Varty:]

On the AHS what's critical to me is as I came in, I saw an incredible groundbreaking opportunity in this business. As you know we've been serving, we just touched across our customer condo over $2 million in this year, which a big achievement for the business. But what lingered in my mind is there's 120 million homes in America. How do you get to those levels because the market the way we defined it, we were counting up having about 47% market share. So we've been through an intensive amount of effort and work to see how we can serve beyond the 4 million homes and how do you capture a significant portion of 116 million homes going forward and that's just counting the United States as of now and not even really expanding our thinking process to outside our boundaries and commercial in other places. The fantastic part of this business is it's a one of a kind which is a guarantee service to its customers who are incredibly strong technical platform that connects 15,000 contractors in America we monitor manage score and train - help them improve to over two million customers. There's a huge ability to expand this, but we have to look at other avenues beyond the warranty model that we offer today in terms of retail services and stuff. So whether we go into retail services or not, it is imperative in today's world to be the best-in-class in customer service. And we're investing a lot to reduce our whole times to improve our customer service levels. But it is also helping us drive significant mindset shift in terms of how we understand our customer issues and complains, so rapidly understand the causes and put permanent solutions in place to give service that we can be very, very proud of becomes a huge barrier to entry in the future. This will also give a nice foretold as this company becomes independent to expand beyond its own capabilities today in the warranty space to retail and concierge services for the like. So we've done a lot of work on the stand back, but it does stained backed upgrading that service plus where I strongly believe in digital capabilities that this business can benefit hugely from, which gives even higher ability to deliver increase margins in the future because you're going to be a lot more dependent on artificial intelligence machine learning and other capabilities, which is business is very, very well suited for.

[Anjaneya Singh:]

Okay, understood. Thanks for the details.

[Operator:]

Thank you very much. We'll go to our next question on the line, from the line of Sam Eisner with Goldman Sachs. Please go ahead.

[Samuel Eisner:]

Hey, good morning, guys.

[Nikhil Varty:]

Good morning.

[Anthony DiLucente:]

Good morning, Sam.

[Samuel Eisner:]

So maybe just kind of ask - some kind of straightforward questions here. In terms of just the deal statistics associated with Copesan, let me understand how it fits into the portfolio from a kind of strategy standpoint? But any kind of deal statistic where you can share revenue multiples, EBITDA multiples, synergies, how you're financing and aiming of that nature?

[Nikhil Varty:]

Yes, I'll give you part of the answer. I'll leave it to Tony to talk about the financing part and stuff. The Copesan, number one, to understand it's an incredibly great asset that we've been able to create this deal with. Copesan brings to us an unparalleled capability in this industry to serve national accounts. And as you know Sam, bulk of our commercial business was to serve a lot of small and medium businesses, which with combined with capabilities to acquire and retain over the long-term strongly retained national accounts that Copesan has demonstrated with average retentions well into the double-digit years, brings a huge complementary benefit to our companies together. We will be benefiting from strong leadership that Copesan has which will come along with this business. And the way the dealer structured is we're paying $100 million upfront as you can read it and there's about $40 million to $50 million that we paid in over the three years or towards the end of the third year. And we have a relationship with - the way the dealers structured, it gives us a lot of ability to drive synergies over the next year and a half to three years to significantly upgrade not only the EBITDA performance, but exponentially help our commercial space to grow. So I'm very encouraged because we're getting some systems capabilities that we would otherwise have to be investing in on our own. We're getting leadership capabilities that are very necessary specifically in the national accounts space, and we're also getting some best industry and best practices that significantly upgrade our commercial space which would have taken us in at least four to six quarters to reinstate or install in our own business in our own way. So that's going to be some money that we need to invest to make this combination deliver significant returns in the future, but I also see that this is sort of a huge tailwind or cornerstone deal that I'm really happy about.

[Anthony DiLucente:]

And I'll follow-on with a little bit of information on the transaction, Sam. We will pay approximately $100 million at closing and approximately another $50 million three years from closing. We will fund that out of cash flow. As far as specific 2018 impact as we talked about in the script, we are expecting about $50 million of revenue, assuming it causes 30 to 45 days from now which is likely. Initially the margins will be light around mid single-digit range and they'll improve significantly as we move into 2019 and beyond with the implementation synergies.

[Samuel Eisner:]

So maybe I'm just trying to understand the feel better, so your pain if I prorate that $50 million for a full-year, it seems like your pain well north of 2.5 times sales here. I guess why is the multiple - the multiple relative to other things I've seen seems to be on the upper end of historical spectrum. So what is it about this transaction that is causing you to pay that level?

[Nikhil Varty:]

Remember that the transaction is going to close in the second quarter, let's call it. So you're talking about $50 million for a nine month period.

[Samuel Eisner:]

Right. I understand that. As the growth rate particularly interesting for this transaction, if this is a business that's doing $65 million or so of revenue annually. What was it last year? Is it growing in particularly pest rate, again just trying to understand the price paid coupled with the earn out relative to the earning profiles?

[Anthony DiLucente:]

Yes. I think given our brand equity income and the kind of incredible capabilities and customer relationships that this company has, we see some complementary benefits where we can all expand even the existing national accounts with more locations and grow into additional national accounts which gives us a significant benefit. If you look at the overall revenue, we're looking at just around 2x of revenue, but we see huge amount of synergies both on the growth side and the profitability side going forward. And we're also counting synergies where we would have to significantly invest a lot of cash flow and capabilities in terms of technology and capacity that building branches. I mean bear in mind, we're getting around 325 service locations that come with it, which we would have to steadily build in the commercial space to grow at our own pace.

[Samuel Eisner:]

Okay. Great. I'll hop back in queue. Thanks.

[Anthony DiLucente:]

As the transaction closes, Sam, we will continue to provide more color on this deal.

[Operator:]

Thank you very much. We'll get our next question on the line from the line of Toni Kaplan from Morgan Stanley. Please go ahead.

[Toni Kaplan:]

Hi, good morning.

[Anthony DiLucente:]

Good morning, Toni.

[Nikhil Varty:]

Good morning, Toni.

[Toni Kaplan:]

Are there any changes that you're planning to your investment strategy in 2018 as oppose to this year, so which areas are you planning on spending more? Where are you pulling back? And just in terms of the investment plans so far, this was asked a little bit earlier, but have you seen any sort of increases in Terminix retention since you've started the investments?

[Nikhil Varty:]

Yes. As I mentioned earlier on even in my script, what I said is, we have seen very encouraging signs both in the improvement in our net promoter score and also our retention rates. For competitive reasons, we don't declare - give our exact numbers. But we're seeing close to - I would say about 150 basis points improvement in our pest retention for example and we're seeing significant improvements like I said in our net promoter scores as well. So yes, know I would say our investments are working, but all of them working in the same direction or the one-time that I want them. As I've learned through the last few months, which is what I said one of the fundamental shift we're going to make, even though it may cost us some small percentage of revenue growth, I want to divert the marketing dollars, divert the sales efforts, divert the regional strategies to areas and products and customers where we have higher lifecycle values. So we're creating a longer term benefit for the Company rather than shooting for our short-term growth kind of strategy as well. So where our focus will be - number one will be continuing to build the growth platforms. So it's going to be - will be very step fast in delivering the growth for the future that we need in this Company. As you saw from the M&A perspective, bringing in highly synergistic acquisition like Copesan because it gives us a huge presence in the upper end, not only in the - for example national accounts, but in sectors or segments like certain specific verticals where we - which were missing across. We are broadening the scope of commercial services that we provide. And I think commercial longer-term is a much faster growing path for us in this business as well. I see great commerce, address potential is going to be a steady growing and build up and I'm very confident with the initial results. So yes, we're going to invest in our growth. We're going to invest in technology, more and more in digital capabilities and also continuing to invest in capacity and capability where it's absolutely necessary to drive the growth. But as I promised, by bringing in a Chief Transformation Officer and already starting not only on continuous improvement, but pain management projects, we are going to balance the act of - we're not just going really, really invest and dilute our margins. We're going to continue to build that margin strand. So we can continue to deliver stronger cash flow, which will help find some of these activities as we go forward.

[Toni Kaplan:]

That's great. And then now that you go further down the path for the spin-off, can you give us an update on your thoughts around future capital structure of the two businesses or what's the corporate costs of the new entity will take on or are you waiting just until you have done the filing?

[Anthony DiLucente:]

Yeah you will see more Toni, when we do the filing. As Nik mentioned, we did a - our confidential filing and as we proceed through the process and make this thing public, you'll see all that information.

[Nikhil Varty:]

Just an imagine Toni, it's a complicated process and we have over 18 or 19 work streams that are working very diligently towards, it was encouraging to me is, we are absolutely on track, not only in our filing and stuff. But all the work we're doing in terms of the physical separation of these two companies setting up the right teens that's - I think there is an incredible amount of work. We have to be very thoughtful on how we allocate the right people to the right jobs. We'll be bringing in some talents externally. There's a lot of great internal talent that will helps, but we're also as I mentioned earlier both Tony and I have decided and it's been agreed to the Board that we will staying on with ServiceMaster, which I'm pretty happy about. But we're - we've also launched - our search both internally and externally focusing on the people who get the best C-Suite candidates and CEO for the Company going forward as well. But we're pretty encourages a lot of work and as I said, as we know you will know. So what we're going to be very transparent and things back readily shared with people. I mean I think I mentioned right in that first call. Number one priority for me is to maintain an absolute transparent relationship there.

[Toni Kaplan:]

Thanks a lot.

[Operator:]

Thank you very much. We'll go to our next question on the line from Ian Zaffino for Oppenheimer & Company. Please go ahead.

[Ian Zaffino:]

Thanks. Just taking on the retention question, Nik, since you've been in there, you've been running the show, what sort of your thoughts on retention going forward as far as what were your expectations and then we can't disclose exactly what they were, but all the expectation initially compared to what you're seeing now and to get that retention up is it really just a matter of focusing on certain areas or maybe you can give us a breakdown of the retention proven how it would kind of manifest itself as far as within each specific region versus switching regions, if you can kind of give any detail there and then I have a follow-up.

[Nikhil Varty:]

Thanks Ian. Great question, I mean this is kind of the heart of the question of what our Terminix is all about or is any service business is all about. So there's three fundamental things that we focus on which is why which sort of aligns completely with our new vision which is we serve be care we deliver. It all - the number one priority is always the service, so the first component is ensuring flawless service to our customer because you know I've learned with my several rights along and branch visits and conversations with the field and our customers directly. When a pest controlled technician leaves a particular home and you see a smiling customer shutting the door that's when you secured the business longer term. Because they're going to drown out the noise from any competition, any ads or any [indiscernible] that come their way and we've got to get a lot better at that. So and the second part that goes very hand in hand with that is our ability to treat our technicians and sales professionals with the greatest care. If you treat them like gold and going to treat like customers like gold which is core practice that we have worked really hard to build and which is why yes we've had some separation of leaders where with the company when I joined and we brought in some incredible talent and one of the highest quality or look for is not just the ability to deliver are being right in the past, but also extremely humble. Matt Stephenson has done an extremely amazing job, bringing together several people and if I barely see him because he's out in the field so you know so much. It's really to gain the confidence of our people that this is for real we're going to take actions that stick with a long-term because we have to ensure that they have from belief that every time they go out to the customer and promise something that a company is going to be right behind them to help them ultimately deliver the kind of service that we want to deliver. So it is a long journey, but if you ask me what are the fundamental things it's all about getting the service level to the highest and getting and you know ensuring that our employees are totally engaged they understand and by the way we're getting much better feedback from our employees today who are willing to share some of the issues which help us actually improve both the processes, systems and the capabilities that we deliver to them. And I think I've seen I'm actually pleasantly surprised at the pace of which the retention is improved. It's never going to be a straight line, but so it's just going to be until we get to a steady state where we're really talking about building on top of something that's solid we're still in the foundation building mode in my mind?

[Ian Zaffino:]

Okay. And then just for Tony. The 45% revenue growth that assumes contribution from the deal or does not exclude the contribution?

[Anthony DiLucente:]

That excludes contribution from the acquisition it's strictly our base results without regard to acquisitions.

[Ian Zaffino:]

Okay. All right. Thank very much.

[Operator:]

Thank you very much. We'll get our next question on the line from Dan Dolev with Nomura. Please go ahead with your question.

[Dan Dolev:]

Hey, guys. Thanks for taking my question. I have two questions.

[Nikhil Varty:]

Hey, Dan.

[Dan Dolev:]

Hey, guys. First question is what have you learned from your processors M&A practices more specifically from Alterra when it comes to the Copesan acquisition. How are you - what are you doing to avoid the kind of the same issues that we've had with Alterra and then I have a follow-up. Thank you.

[Nikhil Varty:]

What I've learned is acquisition and I used to be a M&A leader in my previous life for a company. So hardly back, but partly also I mean the best thing about history that teaches you some lessons and that's all you can really take and move forward and for me it's all about are you acquiring value, are you acquiring our short-term benefits. So it's about retention and the quality as I mentioned it's not just from an acquisition Dan, but even going forward from the marketing dollars over we spend we're going to be very judicious about the quality of revenue that we focused on. Life cycle means a lot in this business and how we acquire customers that are significantly longer one way for us where we're not constantly throwing in dollars just to regain. I'd like to make sure that we - one is to improve service and care of employees and all of it improve, but we also - it's like great employees. You don't do the right recruitment, you're not going to get the best results either. So it's about the recruitment of customers that we have a profile of customers that stay with us longer that actually will pay us on time as we go. So we're improving that as well. So that's the same logical on acquisition. We did a lot of studies in this. And I think what is helpful with, for example with Copesan is the kind of retention. We're talking 15 to 17-year retentions and many accounts and they've done a phenomenal job, demonstrating the kind of service that customers deserve. The other thing is when you say value you don't acquire more of the same. You'll acquire what's complementary to you. So what helps us with Copesan is bringing in a strong national account to recruit acquisition and management capability combined with our ability to acquire a lot of small business and serve a lot of small locations. You're talking national accounts with thousands of locations across the country, so it's an incredible combination. So all these factors going back, so definitely you will never see us do an acquisition that we are doing just to fill in the blanks. It's always got to be about what it's going to be better for the long-term kind of shareholders and company.

[Dan Dolev:]

Thank you. Very helpful. And my follow-up is, I think last data point you provided on the number of technician was about 5,700. I was bit surprised to see the margins kind of stayed flat in Terminix this year or flattish. Can you maybe give us an update on the technician number and kind of where you see the steady state technician number for Terminix? Think you so much.

[Nikhil Varty:]

Not a material change from 2017. I think we did some significant work in 2017 to improve engagement. We did see a spike up in the number of minutes per work orders and that stabilized now. We're going to work on 2018, is better planning our capacity, so we manage that labor better and we think we'll get some productivity from that. Again there we are thinking that that's going to offset any additional investments that we want to make to further improve the business.

[Anthony DiLucente:]

And I think also going forward you will see some capacity as sort of a better match our marketing spend in territories where those capacity ads are being done, proper training, getting them on time, so we can manage the influx of the leads and customers that we generate.

[Dan Dolev:]

That's very helpful. Thanks guys. Congrats.

[Anthony DiLucente:]

Thank you.

[Operator:]

Thank you very much. We'll get to our next question on the line from Andy Wittmann with Baird. Please go ahead.

[Andrew Wittmann:]

Great. Thanks. Just given all the focus on the Terminix segment. I thought I would just try to get a little bit of thought from you guys about the relative split between your outlook on the pest business versus the termite business and just kind of the relative growth rates that you see here. And specifically for that second half kind of what you're seeing accelerating growth, what are the things that you're looking at today that are kind of given you confidence to that acceleration in the second half of the year for the Terminix segment?

[Nikhil Varty:]

Hey, Andy. Thanks for the question. If you see this year, we make some progress on termites, but we've also seen as I mentioned in the fourth quarter reasonably encouraging uptick on both net promoter scores and retention in the pest. So we're starting to see our pest business trend upwards and then I see that steadily building throughout this year in various areas, different geographies and segments of pest businesses that we drive, whether it's some regular pest that we are talking roaches or mosquito business or bed bug business. We're starting to see good traction in those and I am very encouraged with the trend we will see in that business. On the termite, even though we saw some upward trend, we're starting to see some challenges infecting in some areas. We obviously had a record breaking cold January which it's not always helpful, but we're starting - but we're pretty encouraged that we can continue to make some progress on termites, but I would say pest is going to be a faster trend for us going forward.

[Andrew Wittmann:]

It's helpful. Thank you. And then my second, my follow-up question here is on the American Home Shield business. In the quarter the claims, the incidence and the severity were both factors into the flat year-over-year EBITDA trends that you saw there. I was just wondering, as you look at the trends, is there something in the customer mix or the way you're marketing the AHS product today that might be driving that or what can you say that helps us get comfortable that the claims incidence and severity is may be more of a one-time or do you expect that to continue into 2018?

[Nikhil Varty:]

Yes, we expect that to continue in a similar way. We have not seen any noticeable shift in current types of customers or the type of complaints or claims. As we go you - there's definitely a lot of quarter-to-quarter variation in these given the script, several factors depends on how hot, how cold, what kind of breakdowns, I mean obviously for example when you see an incredible heat wave you're going to have a much more bigger approach. But what we're doing is we're also putting in smart procedures and then where we can start actually early February turning conditioners, attending to customers more in proactive basis. So we smoothen out more of the significant uptick even when we get higher temperatures and stuff. So it's a way of generating productivity upon, because then if your volume of breakdowns not high, you're not doing replacement. You're not showing more people of the call centers, to ensure peak volumes, so we're working on improving how we serve these customers. I don't Andy in any way that there's been a between 16 and 17 that there was a noticeable shift or so. In Q4, we had some issues, but it if you look at the year-over-year, the trend is pretty much the same.

[Anthony DiLucente:]

And I would just add to that and say that remember, incidence rates were favorable earlier quarters this year and for the full-year, they averaged essentially flat - at the same full-year rates, we had for the previous two years. So I think this is just normal variation.

[Andrew Wittmann:]

Okay, great. Thanks guys.

[Nikhil Varty:]

Thank you.

[Operator:]

Thank you very much. We'll go to our next question on the line from Tim Mulrooney with William Blair. Please go ahead.

[Tim Mulrooney:]

Yes, good morning.

[Nikhil Varty:]

Good morning, Tim.

[Tim Mulrooney:]

So piggybacking on just to go back to Terminix margins one more time, can you talk about the assumptions that are built in your guidance for flat adjusted EBITDA margin at Terminix you expect organic growth of 1% to 2%? So you're getting some revenue conversion, but you're also continuing to invest in the business. I heard you say $4 million in incremental sales and marketing, I think in the prepared remarks. Is there anything we have to consider related to production, labor or customer service initiatives changes in compensation et cetera?

[Nikhil Varty:]

Yes, I think it's going to be a combination of improving capacity in certain areas where it's absolutely necessary, not only to maintain the customer base and a happy and efficient way, but continue to grow there. So we're ensuring this investment is in high quality revenue. We're ensuring that the capabilities in technology are going to be strong. We're going to do - we did quite a lot in terms of residential business this year and we're going to - so if you look, so there's going to be some continuing run rate from that. But I think the bigger investments this year. The focus is going to turn also in commercial, where we believe the business has a significant amount of growth runway that we really didn't focus as heavy on in the past and I believe this is going to be you know a very, very critical part of our Terminix Transformation or turnaround and so we have to invest in certain additional systems capabilities, people resources and even a lot more in terms of digital technology. Now Copesan acquisition will help a lot. So that actually takes off some pressure from us going forward in terms of the amount we would have been best otherwise without something like that. But even still I think bringing Kelly in has been the just the first step, but we've got to look at a significant upgrade in terms of how we build leadership capabilities and system capabilities around this business. This business is much more acumen and they don't in the future for things such as machine learning and other digital capabilities of work carefully starting and analyzing those, and my vision is in future, how do we combine the customers of synergies between this business and our ServiceMaster Clean business going forward as well, which is also focused on a similar level of commercial customers.

[Tim Mulrooney:]

Okay, thank you. But one more on the pest, you just mentioned that bugs and mosquitoes in Q&A here, which I know to keep growth factors in the pest world today, have you ever shared or can you share what percent these represent of your pest business today and are they important growth opportunities or do you view them more it's kind of one-off services that you're have they performed but not quarter the growth story.

[Anthony DiLucente:]

Yes, there are bed back in mosquito relatively small percentages of our overall Terminix revenue, but they are growing and they are important services for us going forward.

[Nikhil Varty:]

And this is also part of the investment story as we need to invest in things like that where we see a higher quality of revenue and higher differential and we have to build certain product capabilities and system capabilities just for that and we see the potential opportunities here been and like and like Tony said we're relatively small today but we see a lot of run rate in this going forward.

[Tim Mulrooney:]

Got it. Thank you.

[Nikhil Varty:]

Thank you.

[Operator:]

Thank you very much. We'll get to your next question on the line from Judah Sokel with J.P. Morgan. Please go ahead with your question.

[Judah Sokel:]

Hi, guys. How are you?

[Nikhil Varty:]

Hi, Judah.

[Judah Sokel:]

One quick question - has everything I don't know if you guys mentioned a CapEx guidance in the prepared remarks we clearly have OpEx visibility from the guidance but in terms of CapEx how are you guys thinking about that for 2018?

[Anthony DiLucente:]

Two days it's relatively flat versus 2017 might be up a little we're still firming up numbers with respect to the spend for example which will disclose later. But remember 2017 was a little higher than 2016 because of investments in the headquarters plus the Terminix investments we made in new vehicles.

[Judah Sokel:]

Okay helpful. And then just staying on that investment being and not it just one more question in terms of Copesan and maybe you can explain exactly what you're buying. Clearly they have regional operational providers and then they have alliance partners with revenues that are far exceed the $50 million that you guys are expecting for the rest of the year. So maybe you could explain how those alliance partners will be - how that will apply once you guys acquire Copesan if they apply it all. And maybe that'll help us understand also the lower margin than what we normally would expect to see at a pest control business? Thank you.

[Anthony DiLucente:]

Yes, thanks Judah. Well, the point I want to make about Copesan is it provides us some capabilities that more enhances our ability to serve the commercial market. Strong national accounts team the alliances with these companies that they work with that's all part of what we're acquiring and over time we'll see synergies and combining our national accounts efforts with the national accounts efforts and so that's the reason why the margins are a little bit light out of the gate. But they'll go to normal levels which you would see in this kind of a business once we implement those synergies accordingly Nik I don't if there's a thing you want to add to that.

[Nikhil Varty:]

Yes, as just Tony mentioned, Judah it's a combination of best of both wars for us is taking the higher and sort of national account acquisition capabilities which we needed to enhance internally anyway and in our ability with our strong brand equity and also some capabilities that we bring to the table not, you know the alliances partners will be very helpful over the term with certain outsourced services and stock we will continue to rely on, but the entire business that we have acquired as a national account business. So that's something we'll be 100% sort of part of Terminix 4% combination that we will serve.

[Judah Sokel:]

Understood.

[Nikhil Varty:]

And we've also as we mentioned require two very strong you know operating locations our operating commercial operations with help bolster how we saw her with all the best practices and serving commercial customers.

[Judah Sokel:]

Got it. Okay. Thanks for the explanation.

[Operator:]

Thank you very much. We'll get to our next question from the line of Gary Bisbee with RBC Capital Markets. Please go ahead.

[Gary Bisbee:]

Hey, guys. I'll stick with the commercial seem. So Nik you've been very clear you see this is a growth opportunity and it strikes me that the capabilities both people and maybe the technologies you're using the level of the tax the certainly the national accounts it's all very different from the resin market and it sounds like the deal bring some good capabilities. But how much more do you need to invest in people and process et cetera and what's the timeline to get this business just with the foundation and infrastructure and people in the right place to then begin to consistently grow the business? Are you close are you thinking this is a multi-year process to get it where you want it to then be consistent growth? Thanks.

[Nikhil Varty:]

Hi, Gray. Thanks for the question. I mean you're right I mean right from day one there are certain teams that I talked about is, number one was getting closer to our people, upgrading the service levels in all three of our businesses, focusing heavier on commercial, the complete transformation of Terminix as we do business, and certain other themes like transformation, rights. So I have been fixed on those. And as you know, we've said a lot of things, but we've also done an incredible amount in the last seven months by putting the right leadership team in place on doing certain things we were doing. We are focusing on some right systems and processes and capabilities. Now the commercial business, if you look back the past in Terminix, the stronger focus has always been residential. And I hate using the word stepchild, but let's call the commercial business as a stepchild treatment over the last few years. We separated very early in my tenure here with the leadership of that business. And it took me a while to bring in the right leader because for me recruiting the right leader is so important that I would rather have taken the time, but make sure we get the right person in place. And I'm very, very encouraged and happy that we were able to bring somebody of the Kelly's caliber on board. Now if you had not done this acquisition, we would have had a higher investment both in terms of the kind of leadership talent and kinds of people we bring on board. And bear in mind, commercial is not just about national accounts. So what we really got, we hear is leadership, systems, processes, people for serving national accounts. So we can combine our national account practice with Copesan pretty efficiently, so that saves us a lot of hard work and effort or accelerates some of our timelines. But there is a vast array of commercial customers outside of national accounts, the small and medium businesses, the factories, the schools, whatever you may in this. So there's a huge amount of opportunity there and we're looking at different angles for that, so we will continue to invest in that. There are different system capabilities necessary for that. We will inherit certain things from Copesan that can be leveraged across, but there are certain things that we will have to spend on our own. And bear in mind, this is just a place that the investments are never put into, and if we truly believe in the business, we've got to do what's right to build our foundation whether it's systems or people, right. So it's a higher, but it'll continue to be a high priority for me and our company and I'm just very encouraged that I feel like I've got a tailwind coming into us with a partnership like Copesan and Danny Newman, who's the head of their business. I'm really happy that she's becoming a critical part of our team to help guide us through some growth in national accounts, but also bring much necessary leadership and capabilities and definitely going to be a huge help for Kelly who is not new to driving successful businesses, but new to the industry. So that's a great combination for us.

[Gary Bisbee:]

Great. Thanks. And then the quicker follow-up, both that you mentioned that revenue - focus on selling the right revenue, I think in particular the residential business and Tony, I think you even used the term some revenue you could rationalize as you focus on improving profitable right revenues. Is any more color you can provide? Is there a material piece of the base that is not the recurring revenue that you're really focused on and should we think that that could be a real drag as you do that to revenue growth or is it more on the margin in the focus on just ads will be the right?

[Anthony DiLucente:]

It's not a substantial by any means. We're just going to drop the ball on something or just wipeout or carve out or write-off something that's not the approach. The approach is I want to make sure that while I'm committing to the business that we will give them the necessary marketing and sales dollars that we are doing a far better understanding and analysis that those dollars are being spent for higher lifecycle value customers versus customers that where we have to chase every year as the brand new customers. It's not doesn't mean we will not completely give up on some of those opportunistic moments, but we're going to be very diligent and judicious in how we spend our dollars going forward. We're going to look at geographies, which white spaces, where that is help with an acquisition for acceleration. We're spending a lot of money. We're going to look at branches that are underperforming and how we help them grow in the right way. So there's going to be a plus and minus takes there Gary, it's going to be done with a very clear good analytical approach and there are certain geographies and territories, which you know we have to look at the overall profitability. As I mentioned my green one day is to have over 310 million plus type operations around this business with brain CEO type mentality where we provide the backbone with the brain the capability, the digital signal capabilities in processes. But we pretty much leave them alone because they should know their local market so well that they become unparalleled leaders and how they serve these regions. But we've also go to pick on, which where we want to put our higher bets on and that's something that has to be done without any good solid performance company does that, we just got to get there.

[Gary Bisbee:]

Great. Thanks. That's helpful.

[Operator:]

Thank you very much. Mr. Turcotte, we have no further questions on the line. I'll turn it back to you for any closing remarks.

[Brian Turcotte:]

Thank you again for your patience in today's call and webcast. As a reminder, a replay of the call will be available on our website about one hour from now. We look forward to speaking with you on our first quarter 2018 earnings call currently scheduled for May 1. Have a great day. Take care.

[Operator:]

Thank you very much. And ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation. I'll ask you disconnect your lines. Have a good day everyone.