Terminix Global Holdings Inc (TMX) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the ServiceMaster fourth-quarter 2003 earnings conference call. (OPERATOR INSTRUCTIONS) I would like now to turn the conference over to Bruce Byots, Vice President Investor Relations of ServiceMaster. Please go ahead, sir.

Thank you. Good morning, and thank you for joining us. On the call this morning is John Ward, our Chairman and CEO, and Ernie Mrozek, the company's President and Chief Financial Officer. Also joining us is Deb O'Connor (ph), our Controller and Eric Ziernico (ph), our Treasurer.

Before I turn the call over to John, I would like to remind you that our fourth-quarter and full-year earnings report discusses our business outlook and contains forward-looking statements. These particular forward-looking statements, and all other statements that may be made on this call, excluding historical facts, are subject to a number of risks and uncertainties and actual results may differ materially. Please refer to our press release and SEC filings for more information on the risk factors that could cause additional results to differ.

Additionally, during the call, we are using certain non-GAAP measures, as defined by the SEC in Regulation G. You will find on our web site at SVM.com the required reconciliation to the most directly-comparable GAAP financial measures. Now, I would like to turn the call over to John Ward.

Thank you, Bruce, and good morning. First of all, a few comments about our performance in the second half of the year 2003, and then give you some perspectives on '04. Our results for the second half of 2003 were the result of hard work by our service people staying focused on serving the customer. Every business showed improvement in the second half in revenues, operating income, and retention rates. We overcame a tough start to the year in 2003 -- weather, economy worries, and a war. There was no swarm in Terminix, and we had a late get-go in TruGreen, as we couldn't get out in a lot of businesses and a lot of branches until March and April.

Those headwinds subsided late in the year. And quite honestly, we had some favorable weather in the fourth quarter, particularly as it related to TruGreen. But, as we came to the end of the first half, we took strong cost reduction measures to control our execution during the second half of 2003 -- tight management of field labor, the elimination of over 600 jobs, a wage and hiring freeze, virtually no incentive compensation for senior management, tight Vendor Management, and wage deferral to 2004. That, with emerging revenue growth, has us feeling much differently about our business now than we did six months ago. We took tough, but appropriate, actions to ensure we had good results in the second half of 2003.

As we go into 2004, we are focused on four key areas across our company -- continued development and delivering a clear, distinctive brand proposition first. Reinventing our brands will help us unleash the power of the thousands of dedicated service people that walk in (indiscernible) 5 million service calls a year, focusing their efforts on delivering the experience the consumer wants, and is clearly telling us not getting today from our competitors, and in some instances, us.

But that brand awareness that we start with -- that everybody knows our brands -- needs to be coupled with clear differentiation. That is what we have been working hard on. And we have been listening closely to our customer -- proprietary research leading to brand and operational insight that is being put in place today. Change, alignment, and refining our offerings to be more valuable, and to hit home with what consumers say they're looking for. And it is the engine that will drive our revenue growth.

Let me give you an example in a few of our businesses. TruGreen LawnCare for 2004 (indiscernible) landed on visible results -- more nitrogen in our offerings, more effectively weed control, guides (ph) to let people know we were not only on their lawn, but we covered their lawn thoroughly. Terminix, choice, how often we come up? What type of treatments? Liquid or bait (ph)? Do you want this service delivered inside or outside? How do you want to pay us? All things that move us from a (indiscernible) operational business to one that embraces the consumer and puts them at the center of thinking.

ARS -- on-time know-how. No one else in the country is moving from half-day windows to one- and two-hour windows to let the customer have their frustration repaired when they want and put them at ease, with the $50 guarantee if we don't show up in the window. Merry Maids thorough cleaning -- making sure a Merry Maid's house is known and distinct from other cleaning services. And it's not just advertising, but changing behavior in branch-by-branch, technician-by-technician across our country -- (indiscernible) training, technology, and thinking about how we staff, and what type of skill sets we need in our branches.

The second area is to build our capabilities. This is the combination of Six Sigma which started three years ago in this company, focused on cost control, and is now the marrying of our Six Sigma capabilities with technology. It allows us to enable our people to transform the experience of the home and business-owner. We're finding better ways to serve customers and improve the way we work. And that is the engine that will grow margins -- brand, customer attention, the revenue line, capabilities here between Six Sigma and technology is where we see great opportunity for margin improvement in the years ahead.

Six Sigma has moved from the cost control side of our business to the heart of where we make our money, our field locations. Trained project teams, involved in process mapping to redefine how we do things -- they use technology to simplify and improve our productivity. Significant pilots are under way this year with both rollouts planed in 2005 and beyond, putting hand-held wireless technology into our various businesses to improve our technician productivity. Also, further examining our call management -- where and what type of calls should be taken at a local branch? How many calls can we think about on a regional or national level to manage?

And the last piece is branch simplification. What can we take out of our branch today that is being done to allow them to focus on our employees and our customers. Do they really have to be involved in accounts receivable? How do we handle accounts payable more efficiently? All these things are being examined and changes are under way that we believe will lead to significant productivity gains and opportunities for margin expansion in 2005 and beyond.

The third area is to ensure that we continue to strive to be a fully-compliant company; a company that abides by the rules and regulations. We take safety very personally in our company. We put tough, but achievable, goals of reducing both auto accidents and workman's comp claims and incident rates by 20 percent in 2004. This will be a key metric that management, all the way up through senior levels of the company, will be compensated on and focused on as we go into the year.

This whole idea of compliance, though, becomes a competitive advantage when the national brand can go to the Department of Transportation, can go to OSHA, can work with state and federal environmental agencies, go to employment and say "we have ways to ensure that we are complying with the laws." Simply put, we are going to conduct business the right way; the way that enforces and enhances the brand image and position we have achieved.

The fourth area of focus is to continue evolving and to make sure that we train and developer our leaders, and we are a great place to work for the service work. We're a national company delivering a local experience to an individual customers, and yes, we do compete with mom-and-pops. But the career opportunities, the opportunities for advancement, the benefits we give, we think, create a unique environment for our employees.

Our people will deliver if they feel they are respected. They will improve customer satisfaction if they feel they are a respected employee. Dignity and respect of a worker really starts with one thing -- making sure we have the best branch managers in the country. Two weeks ago, we launched our first company-wide branch manager training school. Our goal is, starting in late '04 to '05, to be developing and delivering up to 150 branch managers a year out of this program -- the focus and where the rubber really meets the road in this company.

Putting these four things together, you'll notice one thing -- that's a stay-the-course (ph) strategy, and we are confident the hard work we have put in over the last three years is starting to pay off. In the second half of 2003, we believe we start to pay off on the promises we have been talking about.

Now, let me give you some comments on 2004. We're going to maintain this focus. We believe it is working, and we can feel the energy gaining. We are focused on topline sales, increasing retention, pricing discipline, and making sure we make significant improvement in TruGreen LandCare and the ARS/AMS segments.

We will see continued pressure from insurance costs. It grew by 3 cents in 2003, and we believe it will grow another three cents a share in 2004. Most of you aware that there was very little variable compensation for the senior and even middle management of this company in 2003. Fully funded next year, it could amount up to a 5 or 6 cent (ph) rollover for 2004.

These rollovers, however, will be offset by a lot of the cost reductions we took in 2003 that net us on a full-year basis about 5 cents. These factors, combined with the current economic and employment outlook, lead us to expect revenue growth to be in the 5 to 7 percent -- right in line with the mid-digits single growth we talked about. And earnings per share will grow somewhat faster than revenue. This is consistent with the message we delivered at our investor conference last fall. We are cautiously optimistic, and that is a word I have not used in my three years here -- the word optimistic. I put cautiously in front of it. I think we are turning the corner, and I do believe there is emerging momentum in our businesses. This cautious optimism is that we are going to deliver on potential that our business have and will continue to bring forward in the months and quarters ahead.

Before I turn the call over to Ernie, I do want to make one -- about the change in our CFO President, and Steve Preston as Executive Vice President. Many of you know we started a search for a CFO during the second half 2003. This has allowed us to free Steve up to work in some of these areas around technologies, Six Sigma, procurement, and other areas. As we got into the searches and saw the confidence in how our team was working together, we came to a conclusion it was not the time and not needed to bring someone in from the outside. So, as good teams do, we sat down with Ernie, myself, Steve Preston, and the entire senior management team and said "if we reorganize our responsibilities, we can continue to plow ahead, making sure we have great financial control, transparent financial reporting, and still ensure that we bring forward the financial results that we are committed to bring our shareholders.

So I sit here today. We've accomplished that; we have realigned our current management team's responsibilities. Ernie will be getting out on the road to meet with you folks in conferences and one-on-ones in the months ahead. And I am highly comfortable that we put together a leadership team that will deliver on the promise that we believe ServiceMaster has. So, with that, I will turn it over to Ernie Mrozek for further comment.

Well thanks, John, and hello again everyone. It's great to be here to share some of the exciting things that are going on in the business. I am encouraged by the progress we're making, the opportunities that lie ahead, and I am looking forward to working closely with John and our operating leaders as we capitalize on them.

As John mentioned, we made steady progress on our key operating initiatives, and achieved solid growth in earnings per share in the fourth quarter, despite a few unusual items which had a net adverse effect on our results.

For the second half, earnings per share increased 11 percent -- a sharp improvement over first-half results, which were severely affected by the operating challenges, weather, and economy-related factors that John has previously mentioned. In fact, American Home Shield and ServiceMaster Clean ended with very strong years. Terminix enjoyed a solid second-half rebounding. And TruGreen ChemLawn reported its largest customer account growth in several years. That is very encouraging, considering where we were just six months ago.

A number of the trends that enabled us to report a strong second half and fourth quarter are lining up to make us optimistic about 2004. We expect our results to be supported by ongoing customer retention improvements, more effective selling efforts, and margin improvements at LandCare and AMS.

You have heard us discuss various factor costs that have affected our results throughout the year. One of the most significant of which has been rising insurance, which ended up reducing our earnings 3 cents a share relative to last year. As we look at our current trending, we believe that self-insured claims, as well as significantly higher umbrella insurance premiums, will result in an additional 3-cent increase in costs in 2004.

Now, I would like to take a minute to discuss some of the aggressive action steps we're taking across the enterprise to help mitigate these costs. Our safety and loss reduction efforts are very high on my personal priority list in 2004 since they are reporting directly to me. Some specific actions include forming an executive safety council of senior safety and operating leaders; adding professional safety and loss-prevention managers in the field; significantly increasing employee communication and training; improving our measurement and tracking systems; and tying a portion of incentive pay for our operating leadership to improvements in this area.

Now, we know that these programs can, and will, work. We have already seen strong improvement in our claims activity at AMS, which was the first of our companies to comprehensively implement these type of programs. We're very optimistic that we can achieve our goal of a 20 percent reduction, but we think it is prudent to be conservative in estimating these costs for 2004 until we actually see them materialize.

Turning to the income statement, before I report on the quarter and the year, let me just briefly remind you that in the third quarter, the company recorded a non-cash impairment charge associated with its ARS, AMS, and TruGreen LandCare business units of $481 million pre-tax, or $1.30 per share. In addition, as has been disclosed in the press release, in the fourth quarter, the company corrected its historical practice of recognizing renewal revenues for certain customers at American Home Shield and Terminix. The impact of this accounting adjustment reduced earnings per share by 2 cents in the fourth quarter. And the breakdown by unit was $5 million pre-tax, related to American Home Shield, and $7 million related to Terminix.

For the year, the company also experienced positive trending in its damage claim costs associated with its acquired Sears Termite customer base, and that resulted in a $7 million reduction in expense in the fourth quarter, so a favorable item, and a $14 million improvement for the full year.

Turning to the income statement, revenues were $3.6 billion, up 2 percent over last year. While, for the fourth quarter, they increased 2 percent to just over 800 million. All of our brands, except for our HVAC and plumbing businesses, experienced revenue growth in 2003, with ChemLawn and American Home Shield being the primary contributors.

Operating income for the quarter was 39 million, down 2 million as a result of the unusual items described previously. While reported operating income from the year was a loss of 166 million, or 314 million of operating income, if the impairment charge is excluded. And that 314 income level compares to 335 million in 2002.

Below the operating income line, net interest expense decreased by 7 million in the quarter, and that primarily reflects higher realized gains in our American Home Shield securities portfolio. For the full year, net interest expense improved $35 million, reflecting these gains, as well as -- and more importantly -- due to a reduction of long-term debt, and the payment of a $15 million premium in 2002 to repurchase some public bonds.

Our annual tax rate, before the impairment charge, was 37 percent. That is a little higher than last year's rate, because last year we were able to utilize a net operating loss carryforward. We anticipate that rate to increase slightly in 2004 to a more normalized rate of approximately 39 percent.

As you can see from our press release, we have tried to give a more comparable view of our EPS for 2003 and 2002. After excluding the $1.30 per share non-cash impairment charge, our earnings per share was 54 cents in 2003. Now, total earnings reported in 2002 were 51 cents, but, again, as I previously mentioned, there was about a 3-cent impact in there from the early extinguishment of debt. So, on a comparable basis, earnings per share is consistent between years.

Turning to cash flows, we had another solid quarter, generating about $118 million in cash from operations. The fourth quarter has historically been a very strong cash flow quarter for us due to the seasonal nature of several of our businesses. For the full year, cash from operations totaled 284 million, exceeding net income by over 75 percent, or $122 million. Now, that is an exceptionally favorable relationship, where operating cash flows substantially exceed net income, but it has also been a consistent reality at ServiceMaster. That amount is below an extraordinary level that was achieved in 2002.

And, as has been discussed with you in prior conference calls, most of that differential to last year occurred in the first quarter, and was based on a number of timing differences involving customer prepayments and accrued liabilities. We believe that this year's cash flow pattern is more indicative of a normalized situation, and we expect 2004 cash flows to increase consistent with earnings.

When you think about our cash flows, there are three consistently reliable factors contributing to that exceptional strength. First, a simply-solid earnings base. Second, our businesses need little, if any, working capital to grow. And finally, we have a large annual tax benefit, which we expect will remain near its current level for another nine years. Much of this benefit is due to a large base of amortizable intangible assets. And those exist for income tax reporting purposes, but not for book purposes, and they arose in connection with our conversion to corporate form at the end of 1997.

Share repurchases totaled $86 million in 2003, with 29 million occurring in the fourth quarter. We expect to repurchase 40 to $50 million early in 2004, and, as we always do, we will then assess our operating trends and business acquisition opportunities to determine our posture toward repurchases for the remainder of the year. I want to emphasize that we remain committed to our goal of staying investment-grade.

As we closed the year, acquisitions totaled 38 million. Those were primarily of TruGreen ChemLawn. We expect, in aggregate, to double that in 2004. TruGreen ChemLawn, we expect, will be at about the same level as 2003, with Terminix reentering the tuck in acquisition game during the year. Terminix has not been making significant tuck in acquisitions over the last few years, while they focused on integrating -- and very successfully, I might add -- the large acquisitions of Allied Bruce (ph) and Sears Pest Control.

Dividend payments totaled 125 million, a 2.4 percent increase, and that marked our 33rd consecutive year of annual growth in dividends.

Our balance sheet is healthy. Total debt at the end of the year was 819 million. That is down slightly from prior-year levels, and that is our lowest debt level since the first quarter of 1997, and reflected our 14th consecutive quarter of debt reduction. In addition, cash, short-term and long-term marketable securities on the balance sheet totaled $410 million, with about 220 of that amount at American Home Shield to support regulatory requirements.

Okay, turning to the individual segments. Revenue for the TrueGreen companies increased 8 percent in the quarter and 5 percent in the full year. Operating income in the fourth quarter increased by $4 million, but declined $10 million, excluding the impairment charge, in the full year.

And looking at the individual businesses making up the segment, our lawn care team did a terrific job, capitalizing on more normal weather during the fourth quarter, with revenues up 11 percent. For the full year, revenues grew by 6 percent, reflecting a 4 percent increase in residential customer accounts, and expansion of ancillary services and commercial revenues.

We did experience a 10 percent decline in sales for our traditional telemarketing channel. But, that was offset by a doubling of sales achieved through other channels, most notably direct mail. And continued development of those other channels will be a critical focus for us in 2004, as we continue to work through the effects of the national do-not-call list.

As we discussed before, we want to remind you that we do expect a slight change in the timing of when new customers are obtained in 2004. Typically, telemarketing is a preseason activity that is particularly heavy in January and February. Our direct mail and other new sales channels will shift the timing of customer acquisitions into later in the first quarter and early in the second quarter. So, as a result, we expect to experience a slight decline in lawn care customer accounts at March 31st, but we fully expect that to be restored in subsequent months.

Our customer retention rates at TruGreen improved by 20 basis points, successfully following increase of 160 basis points in 2002. Customer feedback indicates we had a higher level of cancels that were attributed to economic considerations, but that this was offset by an improvement, or a reduction, in cancellations resulting from the quality of service. And we believe this trend is a direct result of our increased focus on customer service and problem resolution. It also gives us confidence that we're going to achieve further improvements as we roll out service offering enhancements that have been selected based on our extensive customer research.

Our operating income in lawn care increased $11 million, or 75 percent, in the quarter, reflecting strong controls over labor and other costs, as well as effective leveraging of the higher revenue volumes. For the full year, operating income increased 3 percent. Margins decreased slightly as a result of higher insurance costs and marketing investments.

In LandCare, revenues increased 2 percent for the full year, and slightly higher -- 3.5 percent -- in the fourth quarter. Enhancement revenues showed an encouraging increase in the fourth quarter after steady economy-related decreases during the first nine months. And core maintenance revenues were up modestly in both the quarter and the year.

LandCare's operating income declined $7 million in the fourth quarter and 15 million in the full year. The decline in enhancement sales for the twelve months, as a whole, combined with higher insurance and labor costs, were primarily responsible. The fourth-quarter loss is proportionally larger, as a result of insurance costs, and the inclusion of almost 1.5 million of branch consolidation costs.

Now, while these results are unacceptable, our team is certainly anything but discouraged. LandCare is strengthening its management team by adding both depth and industry experience. They are improving standardization, pricing, and cost disciplines; consolidating sub-scale branches; and adding dedicated safety professionals and programs. And that makes us optimistic about a strong improvement in results in 2004.

At Terminix, the full year is truly a story of two distinct halves. In the first half, we, along with the entire industry, endured what was, for weather-related reasons, one of the worst termite swarms in recent memory. This adversely affected new termite sales, but also had a dampening effect on renewals. On the cost side, systems-related expenses increased sharply, as we began the widespread rollout of our new operating platform, known as Mission, which is expected to be completed in the spring of 2004.

On the positive side, termite damage claim costs associated with our previously-acquired Sears customer base were trending favorably, and we were able to record an initial positive adjustment during the second quarter.

Put it all together, first half revenues were flat, and operating income declined almost $7 million. In the second half, termite revenue stabilized, customer retention rates improved, strong cost controls were implemented, and our commercial pest control initiative began to show traction.

In the fourth quarter, revenues of $212 million was flat, but that was after reflecting a $9 million reduction from the previously-described change in renewal accounting.

Operating profits were up 17 percent during the period. And, it is important to note that the accounting change, and an additional favorable adjustment in damage claims during the quarter, had a net effect that was insignificant and did prop up the 17 percent growth in operating profits.

Earlier, John mentioned Terminix's dual-service offering for termite control. As (technical difficulty) previously, we expect the mix of new termite sales to move from 80 percent bait and 20 percent liquid during 2003 to roughly 35 percent bait and 65 percent liquid during 2004. Now, it is important to note that the lifetime profit values of our liquid and bait termite customers are comparable. In fact, there's a slight edge to liquid customers. However, the year-by-year earnings results are a little bit different, with liquid customers having less first-year profitability, but higher profitability in subsequent years. Now, we anticipate that increased volume from a more normal swarm and improved pricing will help offset the first-year effect of this change in mix.

At American Home Shield, for the full year, revenues increased 6 percent. And, that level was down slightly from the 8 percent we saw through the first nine months, as a result of a 2 percent decline in the fourth quarter. Which, again, is primarily attributable to the $5 million reduction which resulted from the modification in renewal accounting that I spoke to previously.

New contract sales were up 5 percent in the fourth quarter. For the year, new contract sales increased 8 percent, and were driven by strong growth in renewal revenues, reflecting both a larger renewal base and improved customer loyalty. Retention rates improved 90 basis points, despite increased cancellations from mortgage refinancings. Sales from the direct consumer channel increased modestly, with the timing of sales coming later in the year, as mail drops were delayed during the Iraq war. We continue to be encouraged by the results from our initial entree into the insurance channel, which is being done in partnership with Farmer's Insurance. And we expect further expansion in this area in '04.

These soft spot emerged in the real estate area, where sales increased slightly for the year, but decreased 5 percent during the fourth quarter. This channel has been impacted by an industry-wide decline in home listings and closings, particularly in California and Texas, which are two of our largest usage states.

Operating income at American Home Shield decreased $1.8 million for the fourth quarter, which is entirely attributable to the effects -- the $4.7 million effect of the renewal accounting adjustment I spoke to earlier.

For the full year, operating income increased $10 million, or 21 percent. Our margins improved 160 basis points as a result of favorable trending of prior-year claims, and a meaningful reduction in the current-year claims incidence rate. Now, those factors are not expected to recur at quite the same level in 2004. Our team has been successful in implementing programs to reduce low-cost claims, control the prices we pay to our contractor network, and utilize technology to improve both productivity and customer convenience.

Turning to ARS Service Express and American Mechanical Services, that segment saw revenues decline 1 percent in the quarter and 6 percent in the full year. Operating income declined by 2 million in the fourth quarter, and by 7 million in the full year, when the impairment charge is excluded.

Looking at ARS Services Express, revenues declined 5 percent for the year, primarily reflecting an industry-wide reduction in plumbing service calls and the effects of discontinued branches. HVAC replacement sales were up slightly, despite milder temperatures and the weak economy. We were encouraged by our progress with specific initiatives to increase replacement sales through third-party retail channels, and to increase residential sewer line repairs. In addition, we have achieved a 98 percent success rate on our new 2-hour arrival guarantee, which was rolled out in October.

Now, as part of its effort to offset the revenue shortfalls we have been experiencing in improved profitability, ARS has strengthened its management team and industry experience at all levels, emphasized higher margins sales, tightened indirect costs and overheads, and sold our discontinued 13 underperforming branches or service lines. Those operations had $35 million in revenues in '02 and 20 million prior to their discontinuation in '03.

Full-year operating profits at ARS, before the third-quarter impairment charge, decreased 700,000. But, that was after including incremental shutdown costs and operating losses, prior to disposition of about $1.8 million. And a similar positive relationship existed in the fourth quarter.

At AMS, 2003 revenues decreased by 9 percent, and that reflected reduced levels of project work, due to depressed conditions in the commercial construction industry. Our project backlog has increased substantially, but bid pricing remains very competitive, and we continue to see longer leadtimes.

Finally, in the other operations segment, revenue growth was strong at ServiceMaster Clean, with double-digit increases in the disaster restoration business. Operating income improved sharply due to solid (indiscernible) growth, controlled overhead spending, and improved product sales.

Merry Maids is probably our most discretionary service, and it saw customer retention rates trend slightly below the prior year. But, it did achieve revenue growth from acquisitions. Margins at Merry Maid have been pressured by revenue softness and increased workers' compensation costs, and overall profits were relatively flat.

At the headquarters, or what we call our business support center level, costs were up $5 million in the quarter, primarily due to an increase in insurance reserves. For the full year, these costs at the headquarters level increased by approximately $19 million in total, which included higher investments in marketing and strategy, costs associated with technology and compliance initiatives, as well as the insurance increase.

So, in closing, we feel like we've made some good progress throughout most of our businesses, particularly in the second half, and we believe this gives us a solid platform and improved momentum going into 2004.

At this point, we welcome your questions. And, I will turn it back to the operator. Thank you.

(OPERATOR INSTRUCTIONS). Matt Litfin, William Blair & Company.

Good morning. I wonder if you could talk further about how the do-not-call list is affecting you at this point. You sound encouraged, so far. What, so far, is coming in differently than you would have guessed maybe late last year?

We don't ramp up our telemarketing until '04, so we didn't really get any insight until the last couple weeks. I would say that we are basically right about where we forecast we would be in telephone sales. It is harder to get a qualified lead, not only making sure we comply with the do-not-call list, but we are seeing more and more people with caller I.D., etc. that are not picking up the phones. So we are making more phone calls to get the same number of contacts.

We are probably slightly below where we would like to be in total telemarketing sales. That is being balanced by much better cancellation rates, and those two are interrelated. Because as we sold more customers through direct mail and other channels last year, we know those customers have more stickiness. So, we like where we are. We are pretty much tracking as we felt we would in that. The big chunk of customers who are both coming in through telemarketing and direct mail, however, is during this March, early April period. So we are not declaring victory. We like where we are. We are close to 100,000 accounts ahead of last year at this time. So, we are feeling pretty good about where we are, and yet we are watching it on a weekly basis.

And we also have door-to-door kicking in, which is a direct sales force. We hired a new executive in that area, Matt, and he has been with us now about a month and a half, two, and we are supplementing in those states where we have lost a lot of access to names in telemarketing with the door-to-door solicitation.

Thanks, John. That is helpful. One follow-up, if I might, a final question here for Ernie. The loss in your other operations segment was a little bit higher than we had been expecting. Can you give us some sense of the break-out and relative size of the items in that? And help us think about, going forward, were that's going to be?

One of the items that I, frankly, was not aware of when I came up, is the result of an accounting rule which requires us, when we have appreciation on our investments in our deferred compensation pool, because that is considered an asset of the company that is available to our secured creditors, it is on our balance sheet as both an asset and a liability. But, the accounting rules require that, as the investments appreciate, you take a charge at the operating income line, and get an offsetting credit at the non-operating line. And, believe it our not, that was $5 million in the year. So, as I looked at that variance, that was the biggest thing that popped up that I would not have even thought about.

Any thoughts on where other operations, operating loss, might be? You know, perhaps this quarter or beyond?

Well, certainly, for the full year, we don't anticipate a significant reduction in some of the investments that we have been making in technology and compliance. But, we think that those investments are built into our base. And I would not expect the level of increase -- let me rephrase that -- I would expect any level of increase next year to be much closer to our overall increase in the business.

Chris Gutek (ph), Morgan Stanley.

I have a question on the dominant (ph) segment. We have seen the past couple of quarters the customer account decline by (indiscernible), and you talked about some recovery in the lead flow in the third-quarter conference call. Just curious as to where things stand and when we might see an increase again in the customer accounts?

I think we're anticipating customer account lead flow increases this year. Once again, we're just moving into our peak seasons. If you remember, last year we were down 18 percent, double-digit, teen-type of numbers -- this time last year of our lead flow. I would say we are about where we were with -- particularly on pests (ph), we are seeing an increase in lead flow. We would not anticipate seeing that much in termite yet because the regional swarms are just starting now. So, we're certainly not going backwards, and we are seeing some trend that is starting to increase.

I think the other thing we are doing in the business -- and once again this is a great Six Sigma project -- is, once again, getting a lead and then making sure we capture and follow-up on it. And as we put some work into this area, not only in Terminix, but some of our other businesses, is making sure that every lead we capture gets followed-up on and given an opportunity for a customer to buy. So we have ratcheted up not only our focus on leads, but on how we manage the leads once we get them.

Okay. Thanks. John, you earlier mentioned about some success in (indiscernible) channels in the TruGreen business line. Just curious as to what the cost of acquiring a new customer is from direct mail? And how (multiple speakers)

I honestly don't have that in front of me right now, so I would rather not guess. But, it is somewhat higher, but not significantly higher. Once again, you need to look at the whole value of the customer, because if we're paying more for a lead and we're paying more to get a customer, but he or she stays around longer -- I have not looked at this in about six months, and if there's any difference from what I'm saying here, we will get back to you -- but, my judgment is, on a whole lifetime value of the customer, insignificant whether it was a telemarketing for direct mail. A little bit more up front, but a lot more stickiness, kind of equaling each other off.

Okay. A final question for Ernie, if I may. It looks like the (indiscernible) in the fourth quarter was a little bit lower. And you talked about a 5 million deferred compensation expense. Does that flow into the tax line or -- what exactly? (multiple speakers)

That flows in to -- it adversely impacts operating profits and favorably impacts interest income.

Okay. Can you sort of explain the lower taxes in the quarter?

The tax rate is really a reflection of a true-up of the estimates that we made earlier in the year, and reflect some incremental tax benefits that we were able to confirm, and hence, recognize. Very similar to what occurred last year in the fourth quarter. You will note that, year-over-year, the fourth-quarter tax rate was very comparable.

Okay. Great. Thanks.

Michael Tilly (ph), Clover (ph) Partners.

If you guys could just clarify a little bit the 3-cent gain that you guys saw in your interest and investment income with the -- reflected in the HP (ph) Shield business?

3-cent gain -- (multiple speakers)

3 cents to the bottom line. I'm kind of looking at where the street was -- the street was looking for about 1.7 million. You guys came in at 8.8 -- it is about a 3-cent increase to earnings. So, I mean, what are you kind of looking -- how should people be modeling that, going forward in the next year? I mean, is this an anomaly or onetime event?

I'm going to ask Deb O'Connor, our Controller, to pipe in here, because I'm not recognizing the number that you are mentioning.

That is an estimate (multiple speakers)

Reflecting in the interest and investment income line (multiple speakers)

We recognized gains at American Home Shield, and we also had the improvement in our interest related to some of the deferred (indiscernible) that Ernie talked to. But, we did recognize gain over and above what we had been estimating in the fourth quarter.

Let me just add that the amount of gains that came out of American Home Shield were 1 cent per share, not 3. That it is a very normal level, given the size of our equity portfolio at Home Shield. In the prior year, there were very little gains because of the condition of the market. But, in '03, as the market really ratcheted up in the second half of the year, our outside professional money managers recommended that we realize some gains that had built up in the portfolio, and that we did that during the fourth quarter. But really, for the full year, gains of 5 to 6 million is very normal, given the size of the equity portfolio at Home Shield.

Okay. That is all I have.

Jim Barrett, CL King & Associates.

Good morning, everyone. Ernie, I have a question for you. The prior specific guidance relating to sales expectations by segment and operating margin progress by segment, are those still valid guidance?

Jim, we think -- and I was the one that commented on '04, both margins and revenue growth -- we think we're very consistent with what we told you folks in New York with our investor conference. For those of you who were not there -- Bruce, is it still on our web site?

Yes it is.

You can still get it on our web site. So, we think we both delivered the results consistent with that in the second half of the year, and are anticipating '04 will be consistent with those numbers.

Okay. Thank you, John.

(OPERATOR INSTRUCTIONS). Kevin Monroe, Thomas Weisel Partners.

A couple of questions. First on the -- what was internal growth for the quarter, if you back out what you did in terms of acquisitions?

I don't know if we have that at our fingertips --

It does not vary greatly from the external reported numbers.

Okay, in terms of your growth outlook for next year -- 5 to 7 percent revenue growth -- how much of that comes from acquisitions? Or, is that all organic?

It is not all organic. As we said, if you go back to the model, we had always talked about a couple percent of internal growth, a couple percent of better retention, and a percentage or two of acquisition, and a percent or two of price. And that is the model we are working at and think we are getting.

What are the factors that lead you to believe you're going to accelerate the organic growth? Is part of that -- ?

We have an improving economy. That is the one lay-up we might be getting from this time last year, but a lot of hard work internally, which is all about our brand position, all about better service. You know, we recognize that -- customers have said this -- they want to understand "Why should I buy TruGreen? Why should I buy Terminix? Not just that you're big." So we put a lot of work into our brand positions, and it is, once again, not just the advertising making that come alive in each one of our branches and each one of our technicians. That is number one.

The problem resolution, Ernie touched on it. It is more expensive to get a customer then keep one. I think that knowledge is really getting well thought through in our businesses. I see a lot of our businesses thinking through problem resolution differently and putting a lot better effort to get out and resolve the customer's problem, and then follow up and make sure it is resolved. So we have a lot higher level of accountability in the field about getting and keeping customers than we did 12 or 24 months ago. Those are the things -- three yards and a cloud of dust -- that start to move the needle on both -- getting new customers and retention. The third piece about it is you have a better perceived service, you do start to get a little bit -- not a lot in today's environment -- but a little bit of pricing. I think we are starting to see a little bit of that come through also.

In terms of (multiple speakers)

I want to make sure I let everybody else in, so I will let you have one more question, and then I'm going to -- (multiple speakers)

One more question, still on the revenue growth -- with AHS growth slowing pretty significantly here, how confident are you that you can accelerate that growth in '04? This has been one of the only growth drivers of the business -- (multiple speakers)

Yeah, I think we are seeing a little bit of shift. We are a little bit dependent on housing, but interestingly enough, the direct mail and third-party channels in Home Shield are growing very, very nicely. So, we think that will kick in. But, you are right -- we had Home Shield supporting our revenue growth in the last 24 months here. They're probably going to take a little bit of a breather -- not too big of a breather, but a little bit of a breather as Terminix, TruGreen, and the other businesses kick in.

Okay. Thank you.

We have no further questions at this time.

If there's no further questions -- Bruce, do you want to wrap it up?

If you have any follow-up questions, please free to call myself or Ernie. And thanks for joining us.

Thank you. Take care. Have a good day.

Ladies and gentlemen, that does conclude our conference call for today. We thank you for participating and ask that you please disconnect your lines. Thank you, and have a great day.