second-quarter 2018 earnings webcast july 31, 2018 · 4 q2 2018 highlights 1see appendix for non...

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Second-Quarter 2018 Earnings

Webcast

July 31, 2018

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Cautionary Statements

Safe Harbor Statement

This presentation contains “forward-looking statements,” including 2018 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. Forward-

looking 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 10-K for the year ended December 31, 2017 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.

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Agenda

Q2 2018 Highlights

American Home Shield Separation Update

Progress on Terminix Business Transformation

Q2 2018 Financial Summary and Segment Results

Full-Year 2018 Outlook

Nik Varty

Chief Executive Officer

Tony DiLucente

Chief Financial Officer

Jesse Jenkins

Sr. Dir. IR & Treasury

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Q2 2018 Highlights

1See Appendix for Non-GAAP Reconciliations and Non-GAAP Reconciliation Definitions.2Adjusted earnings per share (EPS) is calculated as adjusted net income divided by the diluted share counts of 135.8M shares and 135.0M shares for second

quarter 2018 and 2017, respectively.3Free 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.

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American Home Shield Separation Update

Q3’18

1Dis-synergies are incremental costs to stand up American Home Shield as a free-standing, public company and the stranded costs remaining at ServiceMaster

post spin

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Progress on Terminix Business Transformation

Empowering our technicians and upgrading Commercial capabilities

Implement disciplined, Lean Six Sigma

approach

Rebuild a strong commercial business

Reinforce accountability

Empower our technicians to deliver an

exceptional customer experience

Build a strong leadership team

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Rebuilding a Strong Commercial Business

• Driving synergies from Copesan

and other acquisitions

• Leveraging world-class service

capabilities from Copesan and

other partners

• Systematically incorporating those

service capabilities into Terminix

owned branches

• Strong efforts by national accounts

team and solid integration plan

continue to drive high retention

rates for Copesan customers

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1See Appendix for Non-GAAP Reconciliations and Non-GAAP Reconciliation Definitions.2Adjusted earnings per share (EPS) is calculated as adjusted net income divided by the diluted share counts of 135.8M shares and135.0M shares for the second

quarter of 2018 and 2017, respectively.

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•

•

•

($ millions, except EPS) Q2 2018 Q2 2017

Revenue 874$ 807$ 67$ 8%

Adjusted EBITDA1

208$ 210$ (2)$ (1)%

Margin 23.8% 26.0%

Adjusted Net Income1

108$ 93$ 15$ 16%

Margin 12.3% 11.5%

Adjusted EPS1,2 0.79$ 0.69$ 0.11$ 16%

Variance

Q2 Consolidated Financial Summary

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$105

6

(4)

$1097 3 2

(5)(5)

Q2'17 RevenueConversion

Chemicals& Materials

Bad DebtExpense

AcquisitionSG&A

Sales &Marketing

AccountingRule

Change2

Other Q2'18

Q2 Financial Results

Adjusted EBITDA ($M)

1See Appendix for Non-GAAP Reconciliations and Non-GAAP Reconciliation Definitions. 2 Adoption of ASC 606 on January 1st 2018, impacts timing on recognition of certain sales costs.

• Revenue growth of 6% driven primarily by the

Copesan acquisition, termite completions,

wildlife exclusion and attic insulation

• Adjusted EBITDA growth primarily due to

revenue conversion ($7M) and business

productivity initiatives ($5M)

• Higher selling and administrative expenses

from acquisitions ($5M)

• Slight gain in net sales & marketing including a

timing benefit due to an accounting rule

change2 ($6M) offset by sales and marketing

investments to drive organic growth ($5M).

($ millions) Q2 2018 Q2 2017

Revenue 456$ 428$ 27$ 6%

Gross Profit 206$ 196$ 10$ 5%

Margin 45.2% 45.8%

Adjusted EBITDA1

109$ 105$ 4$ 4%

Margin 24.0% 24.5%

Variance

Business Productivity

New image needed

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$ millions

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Q2 Revenue Growth by Channel

$93 $84

$229

$96 $81

$254

Termite Completions &Other Services

Termite Renewals Pest Control Services Other

Q2 2017 Q2 2018

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Q2 Financial Results

$82$73

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(22) (3) (2) (2)

Q2'17 Org. RevenueConversion

ClaimsCosts

Sales &Marketing

Call CenterCosts

Other Q2'18

1See Appendix for Non-GAAP Reconciliations and Non-GAAP Reconciliation Definitions.

Adjusted EBITDA ($M)

• Organic revenue growth of 9% largely driven by new and

renewal units and price

• $22M contract claims costs increase:

- $12M of adverse claims development from prior

periods related to higher appliance replacement

versus repair rates

- $4M of higher appliance replacement versus repair

rate in Q2

- $3M of normal claims costs inflation

- $3M of higher claims incidence due to hot weather

• Increase in sales and marketing costs to drive direct-to-

consumer unit growth

• Increase in customer care center costs to deliver a new

level of customer experience

($ millions) Q2 2018 Q2 2017

Revenue 355$ 326$ 29$ 9%

Gross Profit 159$ 163$ (4)$ (2)%

Margin 44.8% 49.9%

Adjusted EBITDA1

73$ 82$ (10)$ (12)%

Margin 20.6% 25.3%

Variance

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AHS Claims Costs Issue

• Appliance replacement rates accelerating above historical levels

• Parts availability is becoming an increasingly complex issue

• AHS taking decisive actions to address claims costs issue:

- People: strong leadership driving accountability

- Pricing: reflecting replacement rate increases, dynamic pricing

- Process/Visibility: daily visibility of operational trends

- Cost Containment: renegotiating appliance contractor agreements

Higher appliance replacement rates from prior periods $(12) $(6)

Higher appliance replacement rates in 2018 (4) (12)

Normal inflation (3) -

Higher incidence rates due to weather (3) (3)

Total margin impact $(22) $(21)

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$22$24

3

(1)

Q2'17 Revenue Conversion G&A Costs Q2'18

FSG Q2 Financial Results

1See Appendix for Non-GAAP Reconciliations and Non-GAAP Reconciliation Definitions. 2FSG recognized $4 million of national advertising fund contributions

as revenue pursuant to Company’s adoption of a new accounting rule regarding revenue recognition on January 1, 2018.

Adjusted EBITDA ($M) • Revenue growth driven by higher royalty fees

including increases in commercial and fire disaster

restoration services ($3M), higher janitorial national

accounts revenue ($4M) and the revenue

recognition accounting rule2 change ($4M)

• Higher Adjusted EBITDA due to increased

revenue, partially offset by an increase in G&A

costs

• Lower Adjusted EBITDA margin due to a higher

mix of janitorial national accounts revenue as well

as the revenue recognition accounting rule change

($ millions) Q2 2018 Q2 2017

Revenue 64$ 52$ 11$ 21%

Gross Profit 40$ 32$ 7$ 22%

Margin 62.3% 62.0%

Adjusted EBITDA1

24$ 22$ 2$ 9%

Margin 37.4% 41.6%

Variance

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Q2 Consolidated Results

$ millions, except per share data

2018 2017 B/(W)

Revenue $ 874 $ 807 $ 67

YoY Growth 8%

Gross Profit 407 392 15

% of revenue 46.5% 48.6% -2 pts

Selling and administrative expenses (225) (206) (19)

% of revenue 25.7% 25.5% -0.2 pts

Amortization expense (7) (7) —

Fumigation related matters — (1) 1

Restructuring charges — (1) 1

American Home Shield spin-off charges (8) — (8)

Interest expense (37) (38) —

Interest and net investment income 1 1 —

Loss on extinguishment of debt — (3) 3

Income from Continuing Operations before Income Taxes 130 137 (7)

Provision for income taxes (34) (52) 18

Income from Continuing Operations 96 85 11

Gain from discontinued operations, net of income taxes — — —

Net Income $ 96 $ 85 $ 11

Weighted-average diluted common shares outstanding 135.8 135.0

Diluted Earnings Per Share $ 0.71 $ 0.63 $ 0.08

Adjusted Net Income1 $ 108 $ 93 $ 15

Adjusted EBITDA1 $ 208 $ 210 $ (2)

Adjusted Earnings Per Share1 $ 0.79 $ 0.69 $ 0.11

Second Quarter


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Cash Flow

$ millions

Net Income $ 96 $ 85 $ 136 $ 124

Depreciation and amortization expense 28 25 53 51

Working capital, excluding impact of accrued interest and taxes 9 1 41 28

Fumigation related matters charges, net of payments — 1 — 1

Loss on extinguishment of debt — 3 — 3

Working capital impact of accrued interest and taxes 5 10 20 36

Deferred income tax provision 8 (2) 10 (2)

Stock-based compensation expense 4 4 8 9

Restructuring charges, net of payments (4) — 4 —

American Home Shield spin-off charges, net of payments 4 — 8 —

Other non-cash expenditure add-backs (12) 6 (1) 12

Net Cash Provided from Operating Activities $ 138 $ 133 $ 279 $ 260

Property additions, net of Government grant fundings for

property additions (19) (17) (42) (34)

Free Cash Flow $ 119 $ 117 $ 238 $ 225

2018 2017

Second Quarter June YTD

2018 2017

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Full-Year 2018 Outlook1

1 WholeCo 2018 outlook assumes AHS remains with ServiceMaster for full year. For WholeCo, RemainCo and SpinCo, the FY 2018 outlook excludes the impact of

any future potential acquisitions.2 Full-year 2018 outlook includes spin-related dis-synergy costs of approximately $4 million for RemainCo and approximately $5 million for SpinCo.

(In millions)

Revenue $ 1,875 $ 1,890 $ 1,250 $ 1,270 $ 3,125 $ 3,160 Growth Rate 7% 8% 8% 10% 7% 9%

Adjusted EBITDA $ 425 $ 435 $ 245 $ 255 $ 670 $ 690 Growth Rate 2% 4% (6)% (2)% (1)% 2%

Margin 23% 23% 20% 20% 21% 22%

Full-Year 2018 Outlook (including Spin dis-synergies2)

WholeCo

Low HighHigh

RemainCo SpinCo

LowHighLow

(In millions)

Revenue $ 1,875 $ 1,890 $ 1,250 $ 1,270 $ 3,125 $ 3,160 Growth Rate 7% 8% 8% 10% 7% 9%

Adjusted EBITDA $ 430 $ 440 $ 250 $ 260 $ 680 $ 700 Growth Rate 3% 5% (4)% 0% 0% 3%

Margin 23% 23% 20% 20% 22% 22%

Full-Year 2018 Outlook (excluding Spin dis-synergies)

WholeCoRemainCo SpinCo

HighLow High Low High Low

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Full-Year 2018 Outlook Detail

1 FSG recognizing approximately $14 million of national advertising fund contributions as revenue pursuant to Company’s adoption of a new accounting

rule regarding revenue recognition on January 1, 2018.

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Appendix

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Non-GAAP Reconciliation Definitions

Adjusted EBITDA is defined as net income before: depreciation and amortization

expense; 401(k) Plan corrective contribution; fumigation related matters; insurance

reserve adjustment; non-cash stock-based compensation expense; restructuring

charges; American Home Shield spin-off charges; non-cash impairment of software and

other related costs; (gain) loss from discontinued operations, net of income taxes;

provision for income taxes; loss on extinguishment of debt and interest expense.

Adjusted net income is defined as net income before: amortization expense; 401(k)

Plan corrective contribution; fumigation related matters; restructuring charges; American

Home Shield spin-off charges; impairment of software and other related costs; (gain)

loss from discontinued operations, net of income taxes; loss on extinguishment of debt;

and the tax impact of the aforementioned adjustments and the impact of tax law change

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.

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Q2 Net Income to Adjusted EBITDA and Adjusted Net Income Reconciliations$ millions, except per share data

Net Income $ 96 $ 85

Depreciation and amortization expense 28 25

Fumigation related matters — 1

Non-cash stock-based compensation expense 4 4

Restructuring charges — 1

American Home Shield spin-off charges 8 —

Provision for income taxes 34 52

Loss on extinguishment of debt — 3

Interest expense 37 38

Adjusted EBITDA $ 208 $ 210

Terminix $ 109 $ 105

American Home Shield 73 82

Franchise Services Group 24 22

Corporate 2 —



Amortization expense 7 7


Restructuring charges — 1



Tax impact of adjustments (4) (4)

Adjusted Net Income $ 108 $ 93


Adjusted Earnings Per Share $ 0.79 $ 0.69

Second Quarter

2018 2017

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$ millions, except per share data


2018 2017 B/(W)

Revenue $ 1,549 $ 1,450 $ 100

YoY Growth 7%

Gross Profit 720 689 32

% of revenue 46.5% 47.5% -1 pts

Selling and administrative expenses (422) (392) (30)

% of revenue 27.3% 27.1% -0.2 pts

Amortization expense (12) (14) 1

Fumigation related matters — (2) 2

Impairment of software and other related costs — (2) 2

Restructuring charges (12) (3) (9)

American Home Shield spin-off charges (15) — (15)

Interest expense (75) (75) —

Interest and net investment income 2 1 —

Loss on extinguishment of debt — (3) 3

Income from Continuing Operations before Income Taxes 185 199 (14)

Provision for income taxes (48) (76) 27

Income from Continuing Operations 137 123 13

Gain from discontinued operations, net of income taxes — 1 (1)

Net Income $ 136 $ 124 $ 13


Diluted Earnings Per Share $ 1.00 $ 0.91 $ 0.09

Adjusted Net Income1 $ 167 $ 138 $ 29

Adjusted EBITDA1 $ 349 $ 343 $ 5

Adjusted EPS1 $ 1.23 $ 1.02 $ 0.21

June YTD

June YTD Consolidated Results

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June YTD Net Income to Adjusted EBITDA and Adjusted Net Income Reconciliations$ millions, except per share data


Depreciation and amortization expense 53 51


Non-cash stock-based compensation expense 8 9

Restructuring charges 12 3


Non-cash impairment of software and other related costs — 2

Income from discontinued operations, net of income taxes — (1)

Provision for income taxes 48 76


Interest expense 75 75


Terminix $ 195 $ 186

American Home Shield 105 113

Franchise Services Group 46 43

Corporate 1 1



Amortization expense 12 14


Restructuring charges 12 3


Impairment of software and other related costs — 2

Income from discontinued operations, net of income taxes — (1)


Tax impact of adjustments (9) (9)

Adjusted Net Income $ 167 $ 138


Adjusted Earnings Per Share $ 1.23 $ 1.02

June YTD

2018 2017

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Q2 and June YTD Adjusted EBITDA Bridge to Adjusted Net Income


$ millions

Adjusted EBITDA1 $ 208 $ (2)

Excluded from Adj. EBITDA / Included in Adj. Net Income

Stock-based compensation (4) —

Interest expense (37) —

Depreciation (21) (2)

Provision for income taxes (38) 19

Adjusted Net Income1 $ 108 $ 15

Adjusted EBITDA1 $ 349 $ 5

Excluded from Adj. EBITDA / Included in Adj. Net Income

Stock-based compensation (8) —

Interest expense (75) —

Depreciation (40) (3)

Provision for income taxes (58) 27

Adjusted Net Income1$ 167 $ 29

YTD

2018 B/(W) PY

Second Quarter

2018 B/(W) PY

second-quarter 2018 earnings webcast july 31, 2018 · 4 q2 2018 highlights 1see appendix for non...

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