Slide 1:

Edited Transcript of SERV

earnings conference call or
presentation 27-Feb-20 2:00pm
GMT

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Thomson Reuters StreetEvents•March 5, 2020

Q4 2019 Servicemaster Global Holdings Inc Earnings Call

Memphis Mar 5, 2020 (Thomson StreetEvents) -- Edited Transcript of

Servicemaster Global Holdings Inc earnings conference call or presentation
Thursday, February 27, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony D. DiLucente

ServiceMaster Global Holdings, Inc. - Senior VP & CFO

* Jesse Jenkins

ServiceMaster Global Holdings, Inc. - Senior Director of Treasury & IR

* Naren K. Gursahaney

ServiceMaster Global Holdings, Inc. - Interim CEO & Chairman of the Board

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Conference Call Participants

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* Andrew John Wittmann

Robert W. Baird & Co. Incorporated, Research Division - Senior Research

Analyst

* Gary Elftman Bisbee

BofA Merrill Lynch, Research Division - MD & Research Analyst

* Ian Alton Zaffino

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* James Martin Clement

The Buckingham Research Group Incorporated - Analyst

* Judah Efram Sokel

JP Morgan Chase & Co, Research Division - Analyst

* Keen Fai Tong

Goldman Sachs Group Inc., Research Division - Research Analyst

* Mario J. Cortellacci

Jefferies LLC, Research Division - Equity Analyst

* Timothy Michael Mulrooney

William Blair & Company L.L.C., Research Division - Analyst

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* Toni Michele Kaplan

Morgan Stanley, Research Division - Senior Analyst

[Thomas F. Campbell and J. Christopher Cochran of Campbell Law PC

also registered for and participated in the call. Campbell Law PC
represents almost all claimants who receive settlements or judgments
agains Terminix for fraud in the Mobile Area referred to in the call. No
explanation of given as to why their participation is unrecorded.]

Presentation

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Operator [1]

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Ladies and gentlemen, welcome to ServiceMaster's Fourth Quarter and Full

Year 2019 Earnings Call. Today's call is being recorded and broadcast on the
Internet. Beginning today's call is Jesse Jenkins, ServiceMaster's Vice
President of Investor Relations and Treasurer. I will now turn it over to Mr.
Jenkins, who will introduce the other speakers on the call.

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Jesse Jenkins, ServiceMaster Global Holdings, Inc. - Senior Director of

Treasury & IR [2]

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Thank you, Frank. Good morning and welcome. Before we begin, I'd like to
remind you that throughout today's call, management may make forward-

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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,
2019. The company undertakes no obligation to update any information
discussed on today's call.

This morning, ServiceMaster issued a press release filed with the SEC on Form
8-K highlighting our fourth quarter and full year 2019 financial results. The press
release and the related presentation can be found on the Investor Relations
section of our website at servicemaster.com.

We will reference certain non-GAAP financial measures throughout today's call,

and we have included definitions of these terms in our press release. We have
also included reconciliations of these non-GAAP financial measures to the most
comparable GAAP financial measures in our press release and the appendix of
this presentation in order to better assist you in understanding our financial
performance. All references on the call are to EBITDA -- all references on the
call to EBITDA are to adjusted EBITDA as defined in our press release.

Joining me on today's call are ServiceMaster's Chairman and interim CEO,

Naren Gursahaney; and our Chief Financial Officer, Tony DiLucente. Slide 3 of
the presentation posted on the Investor Relations section of our website shows
the agenda we will cover today.

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Slide 3:

Before I turn it over to Naren, I would like to remind you, effective January 1,
2020, in conjunction with the strategic alternatives review of ServiceMaster
Brands, all operating results of ServiceMaster Brands will move to discontinued
operations. All forward-looking statements on today's call, including 2020
guidance, will focus on continuing operations. I will now turn it over to Naren
Gursahaney. Naren?

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Naren K. Gursahaney, ServiceMaster Global Holdings, Inc. - Interim CEO &

Chairman of the Board [3]

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Thanks, Jesse, and thank you all for joining our call today. I'll start with Slide 4.
Before I cover our financial results, I'd like to make a few comments on our
decision to explore strategic alternatives for our ServiceMaster Brands
business.

Slide 4:

As part of our annual strategic planning process, management completed a

portfolio review of our businesses. This review included an assessment of the

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markets we compete in as well as the strategic plans developed for each of our
businesses and the capital we had to deploy in support of these strategies.

As a result of this review, management and the Board agreed that we should
explore strategic alternatives, including a possible sale of our ServiceMaster
Brands business. We feel that we have 2 great businesses, each with exciting
opportunities to deploy capital in order to grow the business and create value
for our shareholders.

In addition, based on other recent transactions in the markets where

ServiceMaster Brands competes, we felt now was a good time to explore our
options. Depending on the outcome of this process, we expect to be in a
position whereby both businesses will be able to pursue the exciting
opportunities they see in front of them. While we're still early in the process,
we're very pleased with the enthusiastic response we are seeing from potential
suitors.

Moving on to our financial results. 2019 was another year of solid progress
against our strategic priorities. Our focus on improving the fundamentals drove
improvements in the customer experience, as reflected by increases in
customer retention and Net Promoter Scores and declines in cancel rates
across all of our business lines.

We delivered $2.077 billion of revenue, an increase of over 9% year-over-year,

including 2.6% organic growth in Terminix. Organic growth accelerated over
2018 levels, and we met our increased 2019 guidance of 2.5% to 3%. We also
delivered $417 million of adjusted EBITDA, with strong free cash flow
generation of $216 million.

In the fourth quarter of 2019, we strengthened our leadership team with the
addition of Kim Scott to lead our Terminix Residential business. Kim has
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extensive experience in industrial and service businesses and has built
customer-centric teams wherever she has been. Her track record of executing
safety and efficiency programs across large dispersed service network and
employee base fits well with our strategic plan for the Terminix business. Kim
also has a background in environmental engineering, and her experience and
knowledge in this area has played a major role in accelerating our termite
damage claims mitigation program.

We've made substantial investments in our infrastructure, which will help us

more efficiently run our day-to-day business and enable us to drive more and
faster synergies from the strategic acquisitions we pursue. While we're still early
-- in the early phases of these efforts, we're excited by what we're seeing so far.

We went live with the pilot of our new customer experience platform, powered
by Salesforce technology, in a call center in 2 Phoenix area branches. This
deployment was the culmination of one of the largest cross-functional
endeavors in company history involving over 200 employees, from field
technicians to executive team members. Our users are excited and feel
empowered, with better and more accessible information to do their jobs and
serve our customers more effectively.

Our reimagined field standard operating procedures, or project clean sheet, has
been completed for our termite business, and the results are very encouraging.
Although the results reflect only one location, we are pleased that metrics like
Net Promoter Score, cancel rate, close rates and employee retention are
improving. We're planning to roll out key aspects of this program to our
remaining branches, and are excited to have modern and efficient standard
operating procedures that can be replicated and scaled easily across the
network.

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While we're pleased with our progress for the year, our Q4 results show that we
still have work to do to improve our consistency. Organic growth at Terminix
dipped to 1%, as Tony will discuss in more detail in a moment.

We also made several acquisitions in Europe that put short-term pressure on

our margins. We're excited about the platform these acquisitions bring us, which
will significantly enhance our ability to effectively support global commercial
customers. Once we complete our integration work and optimization, we are
confident we'll reach our longer-term margin expectations.

Margins were also negatively impacted by year-over-year growth in termite

damage claims. This impacted both the fourth quarter and the full year results,
and we are laser-focused on addressing the issue for our customers and our
shareholders.

Before we move our attention to termite damage claims, I'd like to discuss our
strategic priorities for 2020, as seen on Slide 5.

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Slide 5:

As we look to 2020, we're excited about the market opportunities we see and
our ability to continue to make progress against each of our strategic priorities.
The market continues to be attractive, with industry growth rates above GDP in
both our residential and commercial service lines.

Our Terminix brand continues to have very strong awareness and customer
satisfaction, as validated by independent third-party studies. And the
fragmented nature of the pest control industry creates opportunities for us to
continue to grow, both organically and via strategic and tuck-in acquisitions.

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With this as a backdrop, our strategic priorities for 2020 remain focused on
familiar objectives. First, we're committed to reducing employee turnover,
especially within our frontline teams through our revamped onboarding process,
improved training, better tools for our frontline employees and a continued focus
on employee safety.

Second, we'll improve customer retention through better employee engagement

and improved customer analytics that will provide a deeper understanding of
the drivers of customer cancellations.

Third, we'll enhance our profit margins across all lines of business using the
new tools and procedures we're developing to our frontline employees,
including the customer experience platform and termite clean sheet initiative,
along with better prioritization and alignment on our key business initiatives.

Cost productivity, marketing optimization and better labor management will be

the key margin enhancement drivers in 2020.

And the final pillar of our strategy focuses on revitalizing our termite business.
We'll continue to roll out our clean sheet standard operating procedures for
termite, enhance our product offering to better align with customer purchasing
preferences and accelerate our mitigation program in the Mobile Bay Area.

Turning to Slide 6, you'll find more detail on our termite damage claim mitigation
program.

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Slide 6:

Over the past 3 years, we've seen a steady increase in our expenses related
to termite damage claims. As Tony will discuss in more detail, virtually all of
the increased claims have been isolated to the Mobile Bay Area of Alabama
and attributable to damage caused by Formosan termites. We've analyzed
these claims and associated trends to better understand the drivers and how
we can address that.

In addition to our own analysis, we engaged a third party to help validate our
findings with deeper statistical analysis. The global valuation consulting firm
we engaged has over 50 years of experience in a wide range of complex legal
liability issues, and many of the largest companies in the world leverage their
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economic and financial expertise. They confirmed our analysis of the
geographic distribution of risk areas and have helped us better understand
drivers of high-cost claims.

In addition, we've spoken to several entomologists and service providers in

geographies where we have limited claims history. All appear to confirm and
validate our conclusions that our primary risk is limited to the Mobile Bay Area,
which is why our mitigation plan initially focuses on this geography. We will
continue to evaluate our claims activity and consult with these industry and
subject matter experts and modify our mitigation plan as needed.

We focused our initial efforts on stopping additional termite damage by

accelerating the pace of our previously discussed supplemental treatment
program. This will ensure that we've treated all 15,000 Mobile Bay Area
customers with a supplemental treatment before the end of 2020. We've
already completed approximately 2,500 supplemental treatments, of which
many were for our customers who have chosen our dual-defend [paste] [Bait]
and liquid solution.1

1
It is likely that these 2,500 customers are those who were fraudulent induced
to switch from Lifetime Renewable Contracts to the Dual Defend service. This
universe of “new” Dual Defend customers were subjected to a common scam.
As a Lifetime Renewable Contracts customer, they were sent an invoice for a
gargantuan increase in the annual renewal premium. When they complained,
they were solicited to convert to the Dual Defend contract to reduce the cost of
service for the next year and on an ongoing basis. Typically, a customer would
get a bill for a $1,499 renewal premium. Then the company would propose
issuing a new Dual Defend contract for $999 or so and a renewal premium of
several hundred dollars. If they asked why Terminix did not just do the additional
liquid treatment under the existing Lifetime Renewable Contract, they were told
that state regulations prohibited treating unless active termites were discovered
or a new contract was issued. These customers were fraudulently induced to
enter the new contracts because Terminix failed to disclose that the “new
service” would be unnecessary if Terminix had fulfilled its existing duty to “apply
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While this initiative will depress our margin in 2020, we believe it's the right
thing to do for both our customers and our shareholders. We're taking these
aggressive steps out of an abundance of caution to make sure that we get to
the root cause of the issue, stopping further termite damage and ensuring that
we're providing the best possible termite protection for our customers.

We continue to make improvements in our reinspection and quality assurance

processes using best practices and tools from our clean sheet efforts. We're
supporting our reinspection efforts with better scheduling procedures to
improve access to the home for more thorough examinations. Improved
inspection tools and techniques will help us identify potential damage earlier,
improving customer satisfaction and mitigating higher costs from prolonged
infestations.

We're also expanding the size of our quality assurance teams. These teams
lead our training efforts and also review the effectiveness and quality of
inspections and treatments. By adding supplemental resources to these
teams, we are able to better maintain our improved quality standards and
ensure consistent delivery of services, leaving our customers better protected
and minimizing the likelihood of future infestations.

The third prong of our strategy focuses on continuing to strengthen our claims
management and contracting processes. We will continue to engage with our
third-party claims management firm to centrally manage the claims process
and accelerate the pace of claims resolution. Even though this pulls forward

any additional treatment deemed necessary at no additional cost” under the

existing Lifetime Renewable Contract. Mobile Service Manager Robert Steele
admitted during his Peebles v Terminix arbitration trial testimony that he and
others were trained to deceive customers by misrepresenting that a retreatment
under their existing Lifetime Renewable Contract was prohibited by Alabama
Regulations.
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costs, efforts to solve these problems earlier -- in the earlier phases of claims
resolution will improve customer satisfaction and ultimately reduce our total
expense.

We are also making changes to our contracts with customers to better align
terms and pricing with what we've learned about the real cost to serve. As
we've seen from the experience of others in the industry, this is certainly an
issue that can be managed effectively, and we are fully committed to doing
the right thing for our customers and our shareholders. I'm confident the
execution of this mitigation plan will pay dividends for years to come.

I'll now turn it over to Tony to discuss the financial impact we've seen from
termite damage claims, our 2019 financial results and our financial outlook for
2020. Tony?

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Anthony D. DiLucente, ServiceMaster Global Holdings, Inc. - Senior VP &

CFO [4]

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Thanks, Naren, and good morning, everyone. Turning to Slide 7, let's start with
a deeper look at termite damage claims in 2019.

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Slide 7:

This view breaks out the Mobile Bay Area versus the rest of the country. It
further breaks down litigated damage claims or those that end up in arbitration
or a trial versus non-litigated damage claims or those that are settled directly
with the customer.

I wanted to take a moment to explain the accounting change that we have

made on litigated cases. According to the accounting guidelines for
contingencies, reserves can only be recorded when the loss is probable
and estimatable. Historically, this occurred at the time cases move
through discovery, and we eventually had enough information, including
an outside counsel opinion, to make this determination.
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In 2019, we experienced an increase in the number of litigated claims and,
assisted by our work with the third-party valuation firm, we can now use
the specific attributes of these cases at the time of filing to make an initial
estimate using statistical regression analysis. As a result, we recorded an
additional liability of $45 million for pending cases2, the bulk of which are
attributable to the Mobile Bay Area. The onetime adjustment we made for
this change in estimation timing has been excluded from our non-GAAP
measures in the current period.

However, this change now becomes a normal part of our ongoing

operations. This means that going into 2020, expenses will be recorded
both when new litigated cases are filed as well as when case settlements
differ from previously recorded reserves. While the timing of when future
cases will be filed will be difficult to predict, we do expect to see an
increase in litigated cases filed in 2020.

Moving to non-litigated damage claims, you could see an incident rate of

approximately 5% in the Mobile Bay Area.3 This rate is approximately 20x

2
Because the accounting rules only allows assigning a value for purposes of a
reserve when the “loss is probable and estimatable,” this means that for the
filed, litigated cases Terminix believe it will lose cases that will result in
judgments or settlements of around $40,000,000 in the aggregate.
3
The non-litigated incident rate when applied to the Mobile Area where
Terminix had 15,000 to 17,500 customers at year-end 2019 means that there
should be 750-875 non-litigated claims. Elsewhere in the transcript, the
company identifies 15,000-17,500 Mobile Area customers as of the end of
2019 because that is the number that will receive a supplemental treatment.
Because Terminix reserved $15,000,000 to pay these claims, it means the
company expects to pay an average of $17,143 to $20,000 per claim. [E.g.,
$15,000,000/(15,000)(.05)=$20,000] Conversely, if Terminix expects to pay
$40,000,000 to the 40 customers who have claims in litigation, it means
Terminix expects to pay Campbell Law clients and average of $1,000,000
each. If customers knew that Terminix predicts that they will pay over 5,000%
more if the customer hires Campbell Law PC, it is reasonable that Campbell
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higher than the base rate for the rest of our termite business. As a reminder,
non-litigated claims are accrued based on warranty accounting principles,
where we recorded initial estimated liability based on known claims and
expected but not incurred damage claims for all contracts through their next
renewal date. We also had a change in estimation technique for non-litigated
claims of $8 million to take into account both the expected geographic
distribution of claims as well as the variation in the cost per claim in those
geographies.

Our guidance for 2020 assumes approximately $70 million of termite damage
claims expense, including $10 million for the mitigation program. On an
adjusted EBITDA basis, this represents a $20 million increase over 2019. For
clarity, I've also included on the chart our current $80 million balance sheet
reserve for each of these categories. These balances include the year-end
adjustment entries I spoke about earlier.

Turning to Slide 8.

Law PC will promote dissemination of this fact and increase the number of
litigated claims in 2020 and beyond.
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Slide 8:

I'd like to talk about the process that we went through with an independent
third-party to calculate our expected liability over the next 10 years for all of
our 1 million-plus termite customers.

In December, we provided our termite damage claims data from 2010 to 2019
to a third-party firm for actuarial statistical analysis. The firm reviewed
thousands of damage claims that explored many customer attributes that could
indicate the likelihood of future claims. They used these variables to develop a
formula and statistical model to apply against our existing termite customer
base and mitigation plans to estimate annual liability into the future, then

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extrapolated that formula over a 10-year time horizon. The results of this robust
study give us valuable analysis to better understand which customer attributes
are the best leading indicator of future damage claims so we can improve our
practices going forward.

In the chart on Slide 8, you could see our claims expense history and
expectations, segmented into 5-year buckets. This shows a clear divide
between the historical norms in 2010 to 2014 bucket and the increases we have
seen over the last 5 years. As you can see by the red bar, these increases are
driven almost exclusively by the Mobile Bay Area.

During the 5-year period from 2015 to 2019, the company incurred
approximately $230 million in total termite damage claims expense. The results
of the study established an expectation of approximately $230 million for the
years 2020 to 2024 before returning to historical levels of approximately 4% to
5% of termite and home services revenue in the last 5 years of the decade.

In total, we expect incremental expenses above 4% of Termite & Home

Services revenue, to be between $130 million and $150 million over the next
10 years. The majority of these incremental expenses will occur in the first few
years as our mitigation program starts to take hold. Approximately $45 million
or around 35% of these higher-than-normal termite damage claim expenses are
expected to occur in 2020. As we have seen from competitors in the industry,
improving our historical damage claims expense rate is certainly possible and
represents an additional opportunity for us as we move forward.

Turning to Slide 9.

Slide 9:

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Our analysis also confirmed that the issue is largely isolated to 1 geographical
area. As a part of the analysis, we examined all geographies for any additional
costs at our customer base beyond our historical claims experience. While the
analysis identified a few areas of moderate risk for Formosan termites in the
adjacent Gulf Coast counties in Southeastern Hawaii, shown in yellow on the
map, the overwhelming majority of the total increase is coming from the Mobile
Bay Area.

The analysis reflected that no other areas of the country have significantly
deviated from their historical patterns. Our analysis leads us to conclude that
we're not likely to see an acceleration of claims in moderate risk areas over the
next 10 years.

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Turning to the results for the quarter on Slide 10, you can see the consolidated
Q4 financial summary for the business, including ServiceMaster Brands.
Revenue grew $50 million or 11% to $507 million.

Slide 10:

Adjusted EBITDA was roughly flat to prior year, while adjusted net income
improved 12%, driven primarily by lower year-over-year tax expense in the
quarter.

ServiceMaster Brands' revenue grew 8% in the quarter through continued

progress on commercial national account and health care cleaning and
disinfection. Adjusted EBITDA per branch was roughly flat year-over-year, with

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revenue growth coming from lower-margin national accounts, health care and
owned branch operations. As Jesse mentioned earlier, going forward,
ServiceMaster Brands will be classified as held for sale and will move to
discontinued operations while we explore strategic alternatives for the
business.

Our European pest operations reported $18 million in revenue in the quarter,
primarily from our 2019 acquisitions of Nomor, which operates in Sweden and
Norway; and Terminix UK. As a reminder, our European pest operations are
reported in the Corporate and Other Operations area of our financials to allow
clear visibility to the base Terminix business and provide better alignment with
management structure of the European pest business. Adjusted EBITDA
contribution from Nomor operations was offset by ongoing integration and
carve-out expenses and optimization efforts in Terminix UK.

The Terminix UK business is a national accounts-only carve-out of the former

Mitie Pest Control business. Optimization efforts include revenue rightsizing
as we add additional accounts to the business that will add density to the
existing national accounts portfolio. Early results are encouraging, and we are
excited about the opportunity to grow this valuable global platform, but
margins will be pressured at the beginning of 2020 while we work through
these operational and system improvements.

Turning to Slide 11, I'll discuss the Terminix Q4 revenue growth by channel.
Overall, Terminix delivered revenue growth of $30 million or 8%, with $27
million of growth coming from acquisitions.

Slide 11:

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Starting with the Termite & Home Services column on the left side of the chart,
revenue declined 1% in the quarter. Organic decline of 2% was partially offset
by acquisition growth of 2%.

As expected and discussed in the Q3 earnings call, termite renewals were down
$2 million or 3% in the quarter, driven primarily by lapping a $2 million onetime
acceleration of revenue related to an accounting method's change for a bundled
pest and termite services offering that we made in order to comply with new
revenue recognition standards in 2018.

We also experienced continued slight revenue decline in the Mobile Bay Area
from customer attrition. Termite completions and home services were up 1% in

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the quarter, driven by acquisition growth. As Naren discussed earlier,
revitalizing our termite business is a key priority for 2020, and we're excited
about the rollout of a new monthly-pay termite offering during the year.

Residential Pest Control grew 5% in the quarter over prior year, including 4%
organically. Organic growth in Residential Pest Control was driven by price
realization in the quarter and unit growth in mosquito services, which were up
13% for the full year. Growth in residential pest was delivered despite lapping
a 7% prior year organic growth quarter that was driven by onetime accelerations
of start and completion rates that are difficult to meaningfully improve beyond
the levels we achieved.

Commercial Pest Control revenue was up 26% versus prior year, including 2%
organically. Organic growth in the commercial pest was driven by a 2%
improvement in retention rates, offset by lower onetime sales. Acquisition
revenue contributed the remaining 24% growth in the quarter, predominantly
from assured environments, which moves to organic in Q1 of 2020 as well as
the October acquisitions of Gregory and McCloud.

Turning to Slide 12.

Slide 12:

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Adjusted EBITDA for the fourth quarter increased $2 million or 4% to $58
million, reflecting a margin of 13.7%. I'll highlight a few of the items across the
bridge on the bottom of the slide.

Revenue growth contributed $6 million of adjusted EBITDA, mainly from the

impact of 2019 acquisitions. We delivered $5 million of sourcing productivity
through better pricing on chemicals and supplies. This was partially offset by $4
million of additional production labor as improved hiring processes and lower
employee turnover have allowed us to staff up with trained employees in
advance of the peak pest season. We expect the trend of higher production
labor costs to continue into the first quarter, but this will normalize over the
course of the year.

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As Naren mentioned earlier, reducing employee turnover is 1 of our 4 strategic
priorities in 2020 as this will improve customer service and eventually retention.
Fumigation expense increased $2 million as we continue to work through the
margin and volume reductions from outsourcing this high-risk service. We
expect an additional $5 million of increased expenses year-over-year from this
outsourcing in Q1 of 2020 before fully lapping the initiative by Q2.

Sales and marketing was up $4 million in the quarter, primarily driven by

increased sales commission from higher summer sales in 2019, which
contributed to the increase in pest growth I mentioned earlier. These increased
expenses were offset by a $9 million reduction in incentive compensation due
to our full year 2019 financial performance.

Turning to guidance on Slide 13.

Slide 13:

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We expect 2020 to be another solid year of progress on our Terminix
transformation journey. As a reminder, guidance addresses continued
operations only and excludes any financial impact from ServiceMaster Brands
as we continue to explore strategic alternatives.

We expect revenue will grow in total between 9% and 10% and range between
$1.98 billion and $2 billion. We expect adjusted EBITDA in total will range
between $320 million and $335 million, with margins of between 16% and 17%.

Turning to the Terminix segment. We expect organic revenue growth will range
between 3% and 4%, with acquisition growth of approximately $60 million
carrying into 2020. Normalized organic incremental margins are expected to be
approximately 25%, but are offset by $10 million in incremental termite damage
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claims expense, $10 million in termite damage mitigation program and $5
million related to fumigation outsourcing.

Adjusted EBITDA contributions from primarily commercial acquisitions of

Gregory and McCloud are expected at rates in the mid- to high teens as we
focus our efforts on integration and capturing synergies in those businesses
during 2020. Terminix adjusted EBITDA margins will be pressured in the first
quarter, primarily due to the impact of the fumigation outsourcing. We'll lap the
fumigation outsourcing initiative after Q1.

On Slide 14, you'll see some additional details on guidance for damage claims
expense as well as the European pest business.

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In 2020, we expect termite damage claims expense to increase to $70 million,
including an increase of $10 million in claims costs and $10 million related to
the previously discussed termite damage claim mitigation program.

As I mentioned earlier, litigated damage claims will now be expensed at the

time the case is filed, making them difficult to predict on a period-to-period
basis. Our guidance is our best estimate, given our litigated claims history in
predictive analytics from our third-party actuarial and economic valuation firm.

For European pest operations, we expect to see approximately $75 million of

revenue, with margins in the low to mid-teens. High teens to low 20s percent
margins in the Nomor business will be offset by our ongoing efforts to
integrate and rebuild the revenue base of the primarily national accounts
business of Terminix UK. The European pest business will start the year
below the full year margin expectation and improve through the year as these
efforts take hold.

Additional modeling details for the full year 2020 included expected book tax
rate of between 27% to 29%, with a lower cash tax rate of 12% to 14%, as we
benefit from a large refund in 2020 for a prior period net operating loss
carryforward before returning to our midterm expected cash tax rate of
approximately 20%. We expect CapEx to continue to be less than 2% of
revenue or below $40 million.

And with that, I'll turn it back over to Naren for final comments. Naren?

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Naren K. Gursahaney, ServiceMaster Global Holdings, Inc. - Interim CEO &

Chairman of the Board [5]

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Slide 14:

Thanks, Tony. Spending the last month with many of the key leaders in the field
and in our corporate office has reinforced my strong conviction that we have a
great business. The talent and passion I see that provide excellent customer
service permeates the entire organization. A clear focus and better prioritization
and alignment on our 4 key business initiatives will continue to allow us to
execute on our strategic goals.

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Slide 15:

Our strategy remains focused on reducing employee turnover, which will help
us continue to drive improved customer retention and ultimately lead to better
financial returns. Our focus on returning our termite business to the core of our
success will also support our delivery of these goals. I'm confident in our
strategy and look forward to updating you on our progress in the future.

Before I turn things back over to Jesse and open up the line for questions, I
wanted to spend a minute on our CEO search. We've engaged a leading
executive search firm to help us with this search, and we're already beginning
to screen potential candidates.

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Over the past few weeks, I've received several questions regarding the search
and what characteristics we're looking for in our next CEO. We're looking for
somebody who is skilled, both commercially and operationally. Ideally, he or
she will have experience leading large distributed organization and a
demonstrated ability to create followership in this environment.

And of course, we're looking for a customer-centric executive, who is familiar

with recurring revenue businesses like ours; somebody with a keen eye for
talent and a demonstrated ability to recruit, retain and develop diverse talent.
And finally, someone who embraces the servant leader model and understands
the importance of enabling and empowering our frontline employees so that
they can delight our customers.

Continuity during the ServiceMaster Brands' strategic alternative review as well

as the CEO search and leadership change is paramount. I'm thankful to be able
to leverage Tony's experience and knowledge of the business during this time,
and I'm happy to report that we've entered into a retention agreement to make
sure he'll be available through these transitions.

So all in all, we're making good progress on a number of fronts across the
company. We're excited about the future and focused on executing on all 4
prongs of our 2020 strategy to drive shareholder value.

Let me now turn the call back over to Jesse to lead us through a Q&A
session.

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Jesse Jenkins, ServiceMaster Global Holdings, Inc. - Senior Director of

Treasury & IR [6]

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34
Thanks, Naren. With the queue being long this morning, please limit yourself
to a single question so that we can get to everyone in the allotted time. Frank,
let's open the line for questions.

===========================================================
=====================

Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Mario
Cortellacci with Jefferies.

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Mario J. Cortellacci, Jefferies LLC, Research Division - Equity Analyst [2]

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Obviously, questions about the litigation and termite expense. So just could you
give us a sense of the cadence for that $230 million over the next 4 years?
Obviously, I think you said that a good chunk of that's going to be in 2020. But
I guess, what's the cadence in the out years?

And then, how much litigation is baked into that $230 million? And you guys
had the $45 million in ligation reserve but, I guess, what are the odds of that
going up? And again, how much of the litigation is baked into the $230 million?

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35
Anthony D. DiLucente, ServiceMaster Global Holdings, Inc. - Senior VP &
CFO [3]

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Okay. Hey, Mario, thank you. This is Tony DiLucente. Obviously, in 2020, we
signaled that that's going to be the peak of the termite damage claim expense,
and then it's going to slowly trend down and get back to that 4% to 5% average
in the last 5-year period, the 2025 to 2029 period. So that's the general trend
that we're seeing.

Your other question, I think, was around litigation.

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Naren K. Gursahaney, ServiceMaster Global Holdings, Inc. - Interim CEO &

Chairman of the Board [4]

--------------------------------------------------------------------------------

Yes. This is Naren. I would say that the cost that we put out there in that range,
it really includes all of our costs. The mitigation plan costs, litigation costs as
well as the actual claims settlement in there. So that should be the total impact
of the termite damage claims.

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Operator [5]

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

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36
Timothy Michael Mulrooney, William Blair & Company L.L.C., Research
Division - Analyst [6]

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Yes. So this question is unsurprisingly also on termite, but it's a broader

question. I mean I know you're retreating all the homes down in Mobile, right? I
think that's 15,000 customers. You've done a few thousand so far.

Do you think there are other regions that will also require additional
retreatments? I see that yellow other high-risk regions. With 1 million termite
customers nationwide, how should we think about the implications to your
termite margins over the next several years?

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Naren K. Gursahaney, ServiceMaster Global Holdings, Inc. - Interim CEO &

Chairman of the Board [7]

--------------------------------------------------------------------------------

Yes. Tim, this is Naren. I'll answer that. Based on this, the analysis that we've
done, there's no indication that the problem or the concerns are outside of that
Mobile Bay Area. Clearly, we're going to continue to monitor the data and see
if there are any new trends. But right now, we're very comfortable it is isolated
to that Mobile Bay Area, and that's where our initial focus is.

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Operator [8]

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37
Our next question comes from the line of Judah Sokel with JPMorgan.

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Judah Efram Sokel, JP Morgan Chase & Co, Research Division - Analyst [9]

--------------------------------------------------------------------------------

Just wanted to also thank you for providing that ring-fence assessment, very
helpful. Maybe to just turn over the Q&A a little bit to organic revenue growth. I
thought the 3% to 4% guidance that you put out was very encouraging. And so
I was hoping that you could just provide a little bit of color by channel? Which
areas of the business, commercial versus residential, termites versus pest,
where do you really think that you're going to see that acceleration? Are there
certain areas that you're going to see more or less?

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Anthony D. DiLucente, ServiceMaster Global Holdings, Inc. - Senior VP &

CFO [10]

--------------------------------------------------------------------------------

Judah, this is Tony. I really am encouraged with the Commercial Pest Control
business, in particular. The Q4 organic growth rate was 2%, but we're seeing
nice improving trends in our retention rates that are, really, I think, it would give
us some acceleration going into 2020. So that's probably the most significant
changes that I'm seeing.

We did have a strong Residential Pest Control growth quarter as well, 4%

organic growth. And if you will recall, we were lapping a 7% growth in Q4 of
2018. So I was really pleased to see the organic growth at that 4% level for this
quarter. So those are the areas that I'm most encouraged.
38
--------------------------------------------------------------------------------

Operator [11]

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

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Toni Michele Kaplan, Morgan Stanley, Research Division - Senior Analyst [12]

--------------------------------------------------------------------------------

Just on the decision to explore alternatives for brands, any sense of timing of
when we should expect an announcement? Like how quick you're expecting to
complete that process? And how you're expecting to use the proceeds?

And then just given that you're exploring alternatives with brands, would you
also look at selling the entire business as well?

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Naren K. Gursahaney, ServiceMaster Global Holdings, Inc. - Interim CEO &

Chairman of the Board [13]

--------------------------------------------------------------------------------

A lot to unpack there, Toni. Let me start with kind of the timing of the process. I
mean, clearly, we're very early in the process right now. And while we're very
encouraged, we're not in a -- we're not anxious to rush the process. We want
to make sure we go through a thorough evaluation.

39
And normally, what we've been told is kind of 4 to 6 months is kind of typical for
these types of things. So that's kind of what we're working towards. But again,
we're not going to push the schedule. We want to make sure that we find the
right home and, probably, more importantly, get the right value for our
shareholders. We think it's a great business. And fortunately, it looks like others
do as well.

As far as the rest of the business, there's no intention there. I mean we are --
the business is not for sale. We think we got a great business. We think we've
got plenty of opportunities to drive both growth and operational improvement.
And we're looking forward to driving those improvements and creating value.

And then finally, as far as the use of the proceeds, I think we've talked about
that in our press release. Clearly, we will pay down some debt to get our -- get
back to our target leverage ratio. We are losing some EBITDA with this. We
think there'll be plenty more to continue to invest in the business for organic.
And to the extent we see -- continue to see opportunities for acquisitions out
there, and if there's left over funds, we'll look at the opportunity to redeploy back
to our shareholders in one fashion or another.

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Operator [14]

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Our next question comes from the line of Andrew Wittmann with Baird.

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Andrew John Wittmann, Robert W. Baird & Co. Incorporated, Research

Division - Senior Research Analyst [15]

40
--------------------------------------------------------------------------------

Great. I guess, first off, I wanted to ask Tony on free cash flow here. If you
could give us some help of what you're expecting here for 2020? Presumably,
some of the $53 million reserve that you took on termite is going to be a cash
cost this year, other factors between the EBITDA and cash flow as well. So if
you could just kind of bound for us what you think the cash flow could come in
at this year, that would be helpful.

And then also I wanted to get just a little bit more detail as it relates to the
independent quality assurance teams and the third-party claims
administrators, how those 2 items are -- how they work and how they're going
to help you better address the termite issues that you've had and are having?

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Anthony D. DiLucente, ServiceMaster Global Holdings, Inc. - Senior VP &

CFO [16]

--------------------------------------------------------------------------------

Andy, thank you. As far as free cash flow conversion, we still see that mid-50%
-- 50-ish, 55-ish range for 2020. And there will not be any impact to that
conversion based on the reserve we took for termite damage claims. We'll
obviously pay claims as they go. So again, around the mid-50% range for the
free cash flow conversion.

And the second question was on Q&A and third party administrator.

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Naren K. Gursahaney, ServiceMaster Global Holdings, Inc. - Interim CEO &

Chairman of the Board [17]
41
--------------------------------------------------------------------------------

Yes. This is Naren. I'll go ahead and take that. Yes, the QA teams really
supplement our traditional operations people. The QA team provides the
training for our techs, and they'll make sure that they're up-to-date with the latest
-- both inspection techniques as well as the supplemental treatment techniques
using the work that we've come out of our clean sheet termite process. And
they'll also be involved with doing quality control reviews of the work that we're
doing. Again, initially, in that Mobile Bay Area but, clearly, they'll continue to
provide value across our entire network.

And then the third-party claims administrator. This was actually a change that
was made over a year ago, to have a professional organization reviewing those
claims. And really, with a goal of moving faster than we were able to move when
the claims were being handled at the branch level. Clearly, our data and
analysis shows the more quickly we can resolve these claims, the better
customer satisfaction and the less likelihood there is of any type of continued
damage, if there is an infestation. So speed is really important to us, and we
want to make sure we have adequate resources to pursue that.

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Operator [18]

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Our next question comes from the line of Gary Bisbee with Bank of America.

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Gary Elftman Bisbee, BofA Merrill Lynch, Research Division - MD & Research
Analyst [19]

42
--------------------------------------------------------------------------------

So appreciate all the incremental color on termite claims. I guess I wanted to

ask about what seems to me are 2 other key components of the termite
business. So first, just the operating cost base. I guess you talked about the
incremental mitigation expense in 2020, but how has that been trending? And
how do you see that cost base, long-term, as you get through these? Are your
operating costs higher than they would have been historically to manage claims
back down to the level?

The second part of that is the $10 million sort of onetime in 2020 that
incremental mitigation cost? Or do you expect that to continue?

And then the third piece of other termite costs, I wonder if you could comment
on is, obviously, renewals where you don't have an issue at the home is your
highest margin business in Terminix. So how do we think about what you've
lost from customer losses as you try to push higher price in other regions? How
much is that impacting the forward profit outlook? I know there's a lot there. I
apologize for that, but really trying to understand this issue.

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Naren K. Gursahaney, ServiceMaster Global Holdings, Inc. - Interim CEO &

Chairman of the Board [20]

--------------------------------------------------------------------------------

So Gary, let me kind of address the termite piece first and that $10 million. That
$10 million we view as a onetime cost to go back and provide the supplemental
treating and the inspection for the 15,000 homes in the Mobile Bay Area. So
that should truly be a onetime cost there.

43
As far as the long-term margins, we still feel excited about the opportunity to
continue to improve margins. I think we've seen some good progress. But as
you're aware, we're making significant investments with the clean sheet work,
the new customer experience platform.

And we have a series of other productivity initiatives on the sourcing side, on

the labor productivity and on the marketing efficiency side. So we continue to
see opportunities to drive margin improvements as we move forward. Clearly,
some of that will take investments, and we're making those investments.

On the renewal side, again, I think that when you look at the pricing, we did
make some adjustments on pricing in the Mobile Bay Area, and that was really
to align ourselves with the cost to serve4, understanding better now what our
real cost to serve there -- what the real cost to serve is.

When you look at our other pricing increases across the rest of the network, I
think there are normal type of price increases that are consistent with the way
costs move on a normal basis. And we're always looking at retention and the
trade-off between pricing and retention of those. And the good news is we're
continuing to see improvement in our retention metrics or cancellation metrics.

So we feel good about the trade-offs that we're making there.

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4
If the new premium is the expected “cost to serve” for Mobile customers, this
should mean that when it raises a premium to $33,000 annually for a
condominium complex that it is predicting that the claims expense (it cannot
include the cost of retreating because the contract requires to be borne by the
company) will be almost $33,000 per year indefinitely. So if the customer cannot
afford that premium, its incidental damages for the next thirty years would be
the $33,000 times 30 years or $990,000.
44
Operator [21]

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

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Ian Alton Zaffino, Oppenheimer & Co. Inc., Research Division - MD and
Senior Analyst [22]

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Great. Question would be on the CEO search. You touched on some details.
Maybe give us the sense of timing, whether you're looking for a public CEO or
someone just at a larger company? And then also, you mentioned the servant-
led culture. What has been kind of your experience so far trying to implement
that? And is that the right way to go about this? Or we might see a different type
of strategy?

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Naren K. Gursahaney, ServiceMaster Global Holdings, Inc. - Interim CEO &

Chairman of the Board [23]

--------------------------------------------------------------------------------

Yes. So as far as the search goes, Ian, clearly, I think the timing will be based
on our ability to attract and find the right candidate. My guess, again, based on
what we're hearing from the executive recruiters is in that 4- to 6-month time
frame.

45
I think, again, based on preliminary list we've seen, there's a lot of talented
people out there with the skills and capabilities. Love to find somebody who has
been a public company CEO and has the experience dealing with the external
side. But it doesn't necessarily -- that's not a hard requirement. It could be a
CEO of a private company. Or it could be somebody the next level down in a
public company, who's had that external exposure.

And the third piece of that was around the servant-leader model. Again, our
customer experience is driven by our frontline people. They're the ones in the
home, in the businesses every day, and that's what our customers see when
they think of Terminix, especially. So I think it's very important.

I think we've done a nice job over the past couple of years of kind of turning that
around and putting ourselves in the position where we better serve them. We're
making the investments in the technology platforms and the training. And I think,
again, in this type of business, in a recurring revenue business where retention
is so important, the customer experience is so important, having a leader who
understands that model and the importance of supporting that frontline is
absolutely critical.

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Operator [24]

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

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46
James Martin Clement, The Buckingham Research Group Incorporated -
Analyst [25]

--------------------------------------------------------------------------------

Tony, just on the termite study methodology, the term you guys used was
customer attributes as being sort of like the factor being looked at. And I'm just
kind of curious, methodologically, why not look at things like climate, prevalence
of Formosans, soil conditions, or even like historical measures of your own
service quality adds factors to figure that. And maybe those factors were
considered and maybe I'm just trying to look for a little bit more on that
methodology there.

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Anthony D. DiLucente, ServiceMaster Global Holdings, Inc. - Senior VP &

CFO [26]

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Yes, Jamie, those other factors were definitely considered. We consulted with
our own entomologists and external entomologists and took into account things
like soil conditions and weather and climate in the area. And obviously, we took
into account the mitigation plan that Naren has talked about. So all of that was
factored into the analysis. So you're seeing a complete -- statistically based but
also based on actions we're taking and other external considerations in the
environment.

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Naren K. Gursahaney, ServiceMaster Global Holdings, Inc. - Interim CEO &

Chairman of the Board [27]

47
--------------------------------------------------------------------------------

Yes. Jamie, I'll add a little bit to that. Remember, the data that was used was
our entire claims history over the last 10 years. So clearly, all of that is
embedded into the raw data. And so we're looking at ZIP codes of where the
homes are, home value. So when you talk about customer characteristics, it's
not necessarily income and things like that. It's the home characteristics, the
size may -- the size of the home, so more of that. And again, it's using all of our
claims history of the last 10 years. So all of the service capabilities and
everything are embedded in that raw data that was used to build the models.

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Operator [28]

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Our next question comes from the line of George Tong with Goldman Sachs.

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Keen Fai Tong, Goldman Sachs Group Inc., Research Division - Research
Analyst [29]

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I'd like to go back to the termite claims costs you've provided, the $230 million
ring-fence for termite claims for 2020 through 2024. Can you elaborate on what
litigation incidence rates you're assuming in your outlook? And what gives you
confidence that claims cost will revert back to 5% after 2025?

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48
Anthony D. DiLucente, ServiceMaster Global Holdings, Inc. - Senior VP &
CFO [30]

--------------------------------------------------------------------------------

Yes. So again, we used the historical statistical data, the very granular level,
taking into account some of the factors we just talked about, home size and so
forth, to come up with the trends that we're seeing in litigated claims. Clearly, it
shows that they spike in 2019, 2020, and then the trend starts to move down
after that based on everything. And then including the supplemental treatments,
the mitigation plans that we're doing all factor into that downward trend that
you're seeing after those 2 years of spike.

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Operator [31]

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I am showing no further questions. I will now turn the call back to you.

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Jesse Jenkins, ServiceMaster Global Holdings, Inc. - Senior Director of

Treasury & IR [32]

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Yes, thank you for your participation toda

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Naren K. Gursahaney, ServiceMaster Global Holdings, Inc. - Interim CEO &

Chairman of the Board [33]

49
--------------------------------------------------------------------------------

Thank you.

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Operator [34]

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That does conclude the conference call. We thank you for your participation,
and ask that you please disconnect your line.

50