ServiceMaster Delivers Solid Second-Quarter 2018 Revenue Growth Across All Businesses
MEMPHIS, Tenn.--(BUSINESS WIRE)--Jul 31, 2018--ServiceMaster Global Holdings, Inc. (NYSE: SERV), a leading provider of essential residential and commercial services, today announced unaudited second-quarter 2018 results.
For the second quarter, the company reported a year-over-year revenue increase of eight percent. The increase in revenue was driven primarily by nine percent organic growth increase at American Home Shield (“AHS”) and six percent growth at Terminix, largely due to the Copesan Services (“Copesan”) acquisition in March 2018. Second-quarter 2018 net income was $96 million, or $0.71 per share, versus $85 million, or $0.63 per share, in the same period in 2017. Second-quarter 2018 Adjusted EBITDA was $208 million, a year-over-year decrease of $2 million. Second-quarter 2018 adjusted net income was $108 million, or $0.79 per share versus $93 million, or $0.69 per share, for the same period in 2017. Adjusted net income was $15 million or 16% higher in the second quarter of 2018 due to a lower effective income tax rate from the 2017 tax reform. Reconciliations of both Adjusted net income and Adjusted EBITDA to net income are set forth below in this press release.
As previously reported, the company’s net income, Adjusted net income and Adjusted EBITDA for the quarter were negatively impacted by an increase in contract claims costs at AHS of $22 million ($16 million, net of tax), principally driven by a higher mix of appliance replacements versus repairs. The increase in contract claims costs includes an adjustment of $12 million related to changes in estimates as a result of adverse development of first quarter of 2018 and the second half of 2017 claims costs. We estimate that the impact of higher appliance replacements in the second-quarter 2018 increased claims costs by $4 million. The increase in contract claims in the second quarter also includes normal inflationary pressure on the underlying costs of repairs totaling $3 million and a higher number of work orders, driven by significantly warmer summer temperatures in 2018, which increased claims costs by $3 million.
“We are pleased by the strong performance at Terminix and Franchise Services Group during the second quarter. The Terminix business transformation initiatives are on track and beginning to drive improved NPS scores, revenue growth and profitability. The increased focus on expanding our presence in the commercial disaster restoration business and the strengthening of the commercial cleaning business are driving improved results at the Franchise Services Group,” said Chief Executive Officer Nik Varty. “We continue to drive strong revenue growth at AHS by focusing on improving service levels and are taking decisive actions to address the contract claims costs issue. We are confident in the new leadership team we are bringing on board at AHS and strength of the underlying business, and are taking the right steps to drive long-term value for shareholders.”
Reconciliations of net income to adjusted net income and Adjusted EBITDA, as well as a reconciliation of net cash provided from operating activities from continuing operations to free cash flow, are set forth below in this press release.
Terminix reported a six percent year-over-year revenue increase in the second quarter of 2018, primarily reflecting the impact of its acquisition of Copesan on March 30, 2018 as well as an increase in core termite completions, wildlife exclusion and attic insulation, offset by a decline in termite renewals. Terminix achieved organic revenue growth of 0.5 percent in the second quarter, delivering growth over a challenging second quarter 2017 comparison.
Adjusted EBITDA increased four percent, or $4 million, versus prior year, largely reflecting a $7 million increase in revenue conversion including the impact of Copesan, a $3 million decrease in chemicals and materials costs due to sourcing savings, a $2 million reduction in bad debt expense driven by enhanced credit policies and collection rates, and a $1 million decrease in sales and marketing costs, offset by a $5 million increase in selling and administrative expenses as a result of the acquisitions completed during the year, a $2 million increase in incentive compensation, a $1 million increase in fuel prices, and a $2 million increase in other costs. The decrease in sales and marketing costs was the result of a favorable change in the timing of our recognition of sales costs of $6 million due to the adoption of the new revenue recognition standard on January 1, 2018, partially offset by an increase in sales and marketing costs driven by targeted investments to drive sales growth.
As we continue to drive synergies from Copesan and other acquisitions, leveraging world-class service capabilities from Copesan and our service partners, and working towards systematically incorporating those service capabilities into our owned branch locations, we expect the Adjusted EBITDA contribution from Copesan and other acquisition revenues to increase in the future. With the strong efforts of our national account teams and a solid integration process in place, we have been able to demonstrate high customer retention of Copesan customers, post integration.
American Home Shield
American Home Shield reported a nine percent year-over-year revenue increase in the second quarter of 2018 driven by new and renewal unit sales growth and improved price realization.
Adjusted EBITDA decreased 12 percent versus prior year, primarily reflecting a $19 million increase from the conversion of organic revenue, offset by a $22 million increase in claims cost, a $3 million increase in sales and marketing costs which was driven by targeted spending to drive sales growth, a $2 million incremental investment in customer care center costs to deliver a new level of customer service, $1 million in incremental ongoing costs (spin-off dis-synergies) related to the spin-off of American Home Shield, which primarily relate to the separation of information technology systems historically shared by our business units and a $1 million increase in other costs. The $22 million increase in contract claims costs includes an adjustment of $12 million related to the first quarter of 2018 and the second half of 2017. This adjustment recorded in the second quarter represents a change in estimate as a result of adverse development of contract claims costs from previous quarters.
Accruals for home service plan claims are made based on historical claims experience and actuarial projections. Our actuary performs a reserve analysis utilizing generally accepted actuarial methods that incorporates cumulative historical claims experience and information provided by us. We regularly review our estimates of claims costs and adjust the estimates as needed. The increase in contract claims costs in the second quarter, and the change in our previous contract claims costs reserve estimates, were principally driven by a higher mix of appliance replacements versus repairs. In addition to the $12 million of higher claims costs from periods prior to the second quarter of 2018, the impact of higher appliance replacements in the second quarter increased claims costs by $4 million. The increase in contract claims costs in the second quarter also includes normal inflationary pressure on the underlying costs of repairs totaling $3 million and a higher number of work orders driven by significantly warmer summer temperatures in 2018, which increased claims costs by $3 million.
As previously reported, the AHS business is taking decisive actions to address the claims costs issue, including renegotiating appliance contractor agreements, increasing pricing to properly reflect the rise in replacements of appliances, and implementing processes to more dynamically price home service contracts.
Franchise Services Group
The Franchise Services Group reported a 21 percent year-over-year revenue increase in the second quarter of 2018 driven by higher royalty fee revenue related to disaster restoration services including our increased efforts to boost our fire restoration business, stronger focus on our commercial restoration efforts and the continued strengthening of janitorial national accounts revenue, as well as the recognition of $4 million of national advertising fund franchisee contributions pursuant to our adoption of a new accounting rule regarding revenue recognition that took effect on January 1, 2018. Prior to 2018, contributions to the national advertising fund made by our franchisees were treated as an offset to advertising expense. The adoption of this accounting standards change increased revenue by $4 million but had no impact on Adjusted EBITDA.
Adjusted EBITDA increased nine percent, or $2 million, versus prior year, primarily reflecting $3 million from increased revenues, offset, in part, by a $1 million increase in general and administrative costs.
For the six months ended June 30, 2018, net cash provided from operating activities from continuing operations increased to $279 million from $260 million for the six months ended June 30, 2017, an eight percent year-over-year increase.
Net cash used for investing activities from continuing operations was $194 million for the six months ended June 30, 2018, compared to $56 million for the six months ended June 30, 2017. Net cash used for investing activities in the six months ended June 30, 2018, included $149 million of payments for Copesan and other acquisitions, net of cash acquired.
Net cash used for financing activities from continuing operations was $110 million for the six months ended June 30, 2018, compared to $124 million for the six months ended June 30, 2017. During the six months ended June 30, 2018, we used $79 million to repay our 2018 Notes which matured during the first quarter. In the six months ended June 30, 2017, we used $85 million to purchase 2.2 million shares of company stock.
Free cash flow (3) was $238 million for the six months ended June 30, 2018 compared to $225 million for the six months ended June 30, 2017.
Full-Year 2018 Outlook
As previously reported on July 17, in anticipation of the separation of AHS from ServiceMaster late in the third quarter of 2018, full-year 2018 revenue and Adjusted EBITDA outlooks are provided for WholeCo (pre-spin ServiceMaster), RemainCo (post-spin Terminix and FSG) and SpinCo (AHS). For WholeCo, the 2018 outlook assumes AHS remains with the company for the full year. For WholeCo, RemainCo and SpinCo, the 2018 outlook excludes the impact of any future potential acquisitions.
The table below provides the full-year 2018 outlook excluding any impact from spin-related dis-synergies on Adjusted EBITDA.
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