Terminix Global Holdings Inc (TMX) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the ServiceMaster Company fourth quarter 2004 earnings conference call. During the presentation all participants will be in a listen-only mode. (Operator Instructions). As a reminder, this conference is being recorded, Thursday, February 10, 2005. I would now like to turn the conference over to Mr. Bruce Byots, Vice President Investor Relations, ServiceMaster Company. Please go ahead, sir.

Good morning and thank you for joining us. On the call this morning is Jon Ward, our Chairman and CEO and Ernie Mrozek, the Company's President and Chief Financial Officer. Also joining us is Deb O'Connor, our Controller and Eric Zarnikow, our Treasurer.

Before I turn the call over to Jon, I would like to remind you that our earnings report discusses our business outlook and contains forward-looking statements. These particular forward-looking statements and all other statements that will 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, in our release and during this call, we will be using certain non-GAAP measures as defined by the SEC and Regulation G. Please refer to our Website and our press release for a required reconciliation to the most directly comparable GAAP financial measures.

Now, I'd like to turn the call over to Jon Ward.

Thanks, Bruce. Good morning and thank you all for being on the call. For the past several years, we've challenged ourselves to perform as we transform, adopting new trends in the marketplace, manage our costs, invest in process and technology improvements and launch new marketing programs and service offerings. We've made a lot of headway in doing this while we are improving our revenue and earnings growth. We've done it and we are a stronger, healthier and smarter company today because of it.

Every day, we get closer to our goal of transforming the experience of the home and business owner. We're confident we can generate revenue year after year within our established lines of businesses with our existing brands by winning customers away from other service companies, bringing new consumers to the space and making customers more satisfied as their needs are met with consistent service from ServiceMaster brands.

What we are asking ourselves now is -- can we move faster and further in the years ahead? We've shown we can make progress, innovate, and create new momentum in our brands. Now we're looking for new ways to expand our horizons and gain additional customers and keep them longer. There is no doubt that the market will support additional growth -- the customer and prospects are there. Every one of our businesses is focused on reaching and keeping new customers, keeping the 10 million customers we have today; reaching out to the customers we want tomorrow, making the competition customers our customers; taking them in share and by acquisition; creating platforms for brand superiority; reaching customers who we haven't reached before through new sales methods, alliances and channel development; making the service experience so easy and valuable that more and more consumers each day say to us -- would you please do it for me?

This year, we are going to pull some big levers across our company; a strong focus on resolving problems quickly and easily. We can differentiate our brands by handling problem resolution quicker than our competitors. Research tells us the number one reason people choose not to renew with ServiceMaster is poor problem resolution. We are highly focused on improving our sales process, to be more effective in closing our deals by answering and following up on all inquiries, doing business with customers the way they prefer it and using channels and methods of talking to them and communicating with them that are their preference. This is why we're making a big first quarter investment in marketing and sales expansion.

We're also focused on enabling and protecting our technician. Great service people deliver a great service experience when we give them the tools to succeed. We are arming our technicians with large rollouts this year around productivity, GPS, routing and scheduling, putting tremendous effort into handheld technology, giving the tools to our technicians to serve customers better, and we are doing it in a way that will keep them safer and make sure we are a compliant company.

We are recommitted and examined our values over the last two years. We have looked at our values for the first time in 30 years. They have been renewed and we are adding a value and changing one, and that is to excel with customers. Our commitment to honoring God in all we do, to developing our people and to growing profitability is unwavering. This will be reviewed with our shareholders in our proxy, but we are excited about bringing the customer to the forefront of our values. It's where they need to be, they deserve to be, and they are in our daily language within our company.

Let me now comment on 2004. Let's take you back to what our goals were when we started the year -- to deliver revenue growth in the mid-single digits and that our earnings would grow faster than revenue and that cash flow from operations would increase with earning and continue to substantially exceed our net income. We delivered on all those goals.

Excluding adjustments noted in our press release, earnings per share from continued operations increased in excess of 9 percent while revenues increased 6 percent. Net cash flow from operations was $368 million. We returned $63 million to shareholders in the form of stock repurchase and another 125 million went to our shareholders in the form of dividends.

Total cash paid to our shareholders over the last 4 years, including dividends and share repurchase, has totaled just under $700 million. That's about 58 percent of our free cash flow. I think you can say we have proven to be disciplined with our cash -- if we don't have needs for it, we give it back to our shareholders in most effective ways.

Bottom line, we're pleased with the results of '04 and we're confident we can grow while handling the internal changes and external challenges that are always present.

We're going into '05 with a strength in leadership team. Over the last several months, you've seen us bring in new talented executives and promote and move our experienced leaders across businesses, a new phenomena within ServiceMaster. These new combinations of leaders deliberately create teams of complementary skills, bringing together discipline and ideas, strategy and operational strengths, making sure that the balance of getting it done in the field every day and making the right decisions for the long term of our businesses is necessarily and appropriately balanced. The bottom line is we put teams together that have the best opportunity to accelerate our growth and transform the customers' experience while making sure we pay attention to our bottom line.

We're not satisfied with all our businesses. In a moment, Ernie is going to give you some detailed view of our business segments. We had strong performance from a lot of them in 2004. We've had two businesses that are still not performing up to their potential -- TruGreen LandCare and ARS. In both businesses, we've strengthened the leadership teams, we're working on the right strategies and processes and we are making progress. This is a year we are counting on continued results, more tangible results that you shareholders can see in both revenue and margin improvements in both these businesses.

A few comments on our outlook, and then I will turn it over to Ernie. This year, we will stay focused on topline sales, increased retention, pricing and consistently delivering a satisfied service experience. We continue to make the upfront investment in our sales force, our processes and technologies to sustain growth. You've heard us say this time and time again. It's a balance of revenue growth and things we know we can do in our company to improve our performance. We're going to meter them out in a way that gives us revenue growth and earnings growth and not disconnect the two.

Some of these investments, particularly in sales and marketing, will hit early this year. During our off-season first quarter, we will make incremental investments in salespeople and programs which will contribute strongly in the second half of the year. We continue to expect revenue growth to be in the mid- to high-single digit range for 2005 and that earnings per share will grow somewhat faster than revenues. We expect comparable cash from operations to increase and substantially exceed net income.

We've proven we can do it in '04 and we're committing committed to sustaining it as we go forward. There is no limit for us in term of our market size and our potential. It's how much and how quickly we can get the job done. There are many factors in our control, such as lead conversion and retention. It takes dedication and process disciplined to execute this in the number of locations we have, but these factors are in our control, they are in our focus and we will get it done. Small improvements in these areas make significant difference. As I've said many times before, it's a simple but tough task. Our leaders are aligned and confident and committed to getting it done. And, as we showed this year as we faced rising fuel costs, insurance escalations and hurricanes, we were strong enough to handle these variations in the economy, weather and consumer confidence throughout the year.

Thanks for your time. I will now turn it over to Ernie to walk you through the quarter in more detail.

Thanks, Jon, and hello again everyone. I'm delighted to be here to share with you some of the details regarding our performance. Unless otherwise noted, I'm going to be citing amounts and growth rates that exclude the onetime tax adjustment resulting from our recent agreement with the IRS, as well as the non-cash impairment charge that was reported in the third quarter of last year. I'm doing this in order to provide you with a better understanding of the core results achieved by our enterprise, as well as our individual business units. And I will remind you that a reconciliation of those so-called core results to the reported totals has been included in the press release that you've all received.

Let me begin with the consolidated highlights for the full year. Our revenue grew 5 percent, and all of that is from internal sources as the positive impact from the acquisitions that we made was offset by revenues that were eliminated as the result of branch closures and consolidations at LandCare and ARS at the end of 2003. Now that 5 percent overall internal growth rate represents a sharp rebound from 2003, and it's also the strongest rate of growth that we've experienced in the past 5 years. And the relevance of that in our view is that we're beginning to see tangible results from our initiatives to better differentiate our brands, develop new marketing methods and channels and improve customer satisfaction and retention.

Perhaps even more encouraging was that our teams did a good job converting those increased revenues and the resulting cash flows into profits as pretax income increased 11 percent, or twice as fast as our revenue growth. The cost controls and the focus on improved efficiencies that we talked about during the latter half of 2003 continued firmly in place throughout this year, and that was very instrumental in helping us grow over approximately $35 million, or 7 cents a share, of incremental variable compensation and fuel costs. As a result, operating income increased 7 percent overall and related margins improved 20 basis points. We would expect growth rates and incentive compensation to return to more normal levels in 2005 and in subsequent years.

We had a net decrease in interest expense of approximately $5 million, and that reflects continued exceptional cash flows as well as the effects of the interest rate swap agreements that we entered into last year -- late last year. And last but certainly not least, diluted earnings per share were 59 cents, a 9 percent increase.

Another key thing is that we finished the year with good momentum. Revenues in the fourth quarter increased 6.5 percent, slightly higher than our full year rate of growth. And although overall EPS for the quarter was flat, it reflects the net effects of very strong growth in operating income, offset by two things -- timing differences and investment gains at American Home Shield and the unfavorable rollover effect of a true-up to last year's annual effective tax rate that was recorded in the fourth quarter of 2003.

When you look at the rate of growth and operating income for the fourth quarter of over 30 percent, it's important to recognize that it has been impacted by several notable items which had a net favorable impact. By their nature, most of these items had been previously known or anticipated and were reflected in the overall guidance that we had previously provided. And these items included, first, good fundamental momentum in the business units as reflected in that improving revenue growth rate that I mentioned; second, the absorption of disproportionate increases in incentive compensation and fuel costs consistent with our full year trends; third, the favorable rollover effects of accounting adjustments that were both recorded and disclosed last year and finally, the favorable true-up of certain current year costs that had been recognized in prior quarters, including materials expense at TruGreen ChemLawn, claims costs at American Home Shield and our current year insurance charges.

When you put all of that together, after consideration of all of those different things, our fourth quarter growth rate and operating income on a core basis exceeded that for the year as a whole and was in below double digits, which is very encouraging.

Turning now to our cash flows, cash from operations totaled $368 million for the year. That's about $84 million more than last year. And again, that that total substantially exceeds comparable net income. This exceptional results of course reflects increased profits, it reflects reduced working capital usage of about $40 million, and it does include a favorable timing difference of about $25 million in our tax payments resulting from the agreement with the IRS. And I will speak more to that later.

With respect to the improvement in working capital usage, that reflects a lower rate of incentive payments in early 2004 that related to 2003, combined with a much higher level of non-cash accruals this year for 2004 incentives which will be paid later this month.

It's important to remember that cash flows have consistently and significantly exceeded net income at ServiceMaster -- this is not an aberration -- and we expect them to continue to do so in 2005. However, we would expect the rate of growth to temporarily subside due to the nonrecurring nature of the tax and incentive items that I just described.

Regarding the use of our cash flows, acquisitions were up meaningfully due in part to the purchase of Green Space in Canada by TruGreen ChemLawn at the beginning of last year's second quarter, a unit which continues to perform above our initial expectations. In 2005, we expect to continue to expand our tuck-in acquisition programs at both Terminix and TruGreen with overall acquisitions slightly higher than 2004 levels.

Capital expenditures were up about $14 million, resulting primarily from investments in information and productivity-enhancing operating systems. Our current expectations for property additions for this year is that they will total approximately $50 million.

And with respect to share repurchases as Jon mentioned, we did about 63 million during the year at an average price of $11.70. We're anticipating continuing our program at similar levels in 2005. Dividends paid a reflected a 2.4 percent increase when measured on a per-share basis and 2004 represented our 34th consecutive year of dividend increases. That's a record which puts us in the top 3 percent of all dividend-paying companies in the United States. We expect to continue to increase our dividend, although as previously disclosed, at a rate lower than our growth in profits and a reminder that at current share prices, our dividend produces a yield of almost 3.5 percent.

Turning to the balance sheet, it remains very strong with cash and short-term and long-term marketable securities now totaling approximately $0.5 billion with about 200 million of that total deemed to be unrestricted and available for general corporate purposes.

Total debt at the end of the year was $805 million. That's an 8-year low, and it's 14 million less than last year's total. Approximately 138 million of that $805 million total matures in April of 2005. When you look at the 200 million in unrestricted cash, the availability on our revolving credit facilities of about 400 million and our continued strong cash flow from operations, we're confident that we have significant financial flexibility which will enable us to pay or refinance the maturity debt and meet our obligations under the recently disclosed agreement with the IRS which, by the way, we consider to be very favorable. As always, we remain committed to retaining our investment-grade status and meeting these obligations.

Turning for a moment to the IRS agreement which was disclosed in January, that is expected to result in an aggregate net cash outflow by the end of 2005 of approximately $63 million, and that's going to consist of three pieces. First, the previously mentioned tax savings of $25 million that we actually have already realized in the fourth quarter; a payment of 133 million that is due later this month and a favorable reduction in our estimated tax payments of approximately $45 million that will occur in the latter half of 2005. So, just to confirm the math -- $133 million payment later this month, less the 25, less the 45 gets you to the net 63 million that we've been referring to.

It's important to remember again, as previously disclosed, that of this aggregate net outflow of 63 million, 57 million, or the overwhelming majority, is a timing difference that will be recovered through incremental tax savings in future years. So, when all is said and done, three things have happened. First, we resolved all open issues for a net outflow of $63 million. Second, the incremental tax savings of roughly $50 million a year that we have enjoyed since 1997 as a result of our conversion back to corporate form -- that 50 million of incremental tax savings has been affirmed and continues for another 8 years. And thirdly, that total has actually been increased in the process from 50 million to an average of approximately $57 million per year.

These savings very favorably impact our cash flow, but as a reminder, they are not recognized in our income statement. As a result, our recorded tax expense will continue to substantially exceed our actual tax payments. And again, this unique and extremely favorable aspect of our overall strong cash profile will continue for the next 8 years.

Overall, we are encouraged by our results and we are excited about the future. To amplify the guidance provided by Jon and in the press release, we expect full-year earnings to continue to grow at a rate faster than revenues. Within the year, we will be making significant investments in marketing programs and an expanded sales force in the first quarter that should benefit us during our peak selling season that occurs in subsequent quarters.

The first quarter is also going to reflect the first-time absorption of off-season costs in our Canadian Lawn Care operations which, as I mentioned earlier, were acquired in April of last year. We expect that these factors will be offset by stronger results in the other three quarters of the year. We also anticipate having a slightly higher comparable effective tax rate throughout 2005 which should approximate 39 percent.

Turning briefly now to the business units, which we've tried to provide very full and comprehensive disclosure in the press release and I will try not to be redundant other than for a few key points. The TruGreen segment experienced 5 percent growth in the full year with an 8 percent increase in the Lawn Care unit and flat revenues in the Commercial Landscaping business. In Lawn Care, full-program customer accounts increased 8 percent with about 5 percent of that achieved on organic basis. That's the strongest growth that we've achieved in several years, which is an exceptional accomplishment considering the additional telemarketing restrictions that we faced at the beginning of the year in the form of a national do-not-call registry.

Secondly, TruGreen ChemLawn's customer retention rate finished up 207 basis points over last year. As I've said before, this improvement was geographically broad-based and it reflects a comprehensive focus in this area, including the use of more effective weed killers and other materials and the introduction of an incentive compensation structure that rewards employees for achieving specific retention goals.

If you look at the last three years as a whole, with intense focus on customer satisfaction, TruGreen has been able to improve their retention rates by an impressive 450 basis points. And there is no letting up in sight. We plan to continue these efforts in 2005 with an expansion of our visible results program and the problem resolution focus that John alluded to.

With regard to our 2004 and 2005 marketing efforts, overall, 2004 new sales were down less than 2 percent, reflecting a decline in telemarketing sales that was offset by a substantial increase in sales from our new channels and methods, including direct-mail and neighborhood sales efforts. That's very encouraging progress in the diversification of TruGreen's marketing model, and we anticipate continuing to increase our non-telemarketing sales in 2005.

One important timing matter to note is that as we continue to develop these new channels, the timing of customer acquisitions will trend more heavily toward the early part of the second quarter versus the historical first quarter period where telemarketing was more heavily concentrated.

Turning to LandCare, contracts maintenance revenues were flat for the year. We had good growth and new sales, but that was offset by lower retention, impacted in part by Company-initiated terminations. Enhancement revenues continued to experience solid momentum, reflecting focused sales efforts and an improving economy. And if you exclude the impact of branch consolidations, overall revenues from continuing operations in LandCare increased by 2 percent.

LandCare achieved a modest improvement in comparable operating results for the year which resulted from the growth in the higher margin enhancement business and an improvement in the materials expense that was partially offset by a reduced level of high-margin snow removal and higher fuel and incentive comp costs.

Although we believe LandCare has significant opportunities for further improvement, we are encouraged by their accomplishments in 2004 and we believe that the recently strengthened management team will continue to show progress in 2005 and beyond. Key strategic priorities include continuing to strengthen the sales organization, improving retention at each location -- of each location's top 25 customers and improving performance at our underperforming 25 branches by focusing on operating consistency; and finally, continuing to show improvements in the area of safety, which was a point of specific encouragement in 2004. We made a lot of progress there.

Turning to Terminix -- last year at this time, we discussed with you that we would be entering '04 with an enhanced termite offering of both bait and liquid treatment alternatives, and that we anticipated a continued migration on the pest control side of the business from monthly to quarterly service. We indicated that we anticipated a significant shift from bait to liquid and that while the lifetime values of each of these types of offerings were comparable -- comparable lifetime values -- the earning cycles were different with liquid customers having less first-year profit but more profitability in subsequent years.

We projected for the year as a whole that we'd see increased termite volume and that while reduced as an overall average, we expected pricing for each treatment alternative to improve, all helping to offset the first-year effect of this change in mix. What actually occurred in 2004 closely matched our anticipations. On the termite side, the mix of new termite sales, which roughly represent a quarter of Terminix's total revenues, moved from approximately 80 percent bait at the end of 2003 to roughly 45 percent bait and 55 percent liquid at the end of 2004. Hence, overall completion revenues increased only modestly, even though we achieved solid double-digit unit growth in sales and improved price realization for each treatment alternative viewed discreetly.

In addition, our termite renewal revenues experienced strong growth and improved pricing.

On the pest control side, our revenues were up modestly, as high single-digit growth rate in customer counts with particularly strong growth in the fourth quarter -- that improvement which was attributable in part to a 100 basis point improvement in retention -- those again were offset on the top line by the effects of the change in service visit frequency from monthly to quarterly. That's a onetime phenomena -- the shift has made an impact on increasing overall customer satisfaction and has already and should continue to lead to improved labor efficiencies.

Our operating income for the year grew modestly as the projected termite shift did have a negative impact on first-year margins. In addition to higher revenues, Terminix also benefited from a final adjustment to reflect favorable trending of damage claims that related to our acquisition of the Sears customer base several years ago.

On the negative side, we incurred costs associated with a program to accelerate the timing of termite reinspections, and that resulted from a procedural change in our branches to ensure that such reinspections occur before the actual renewal payments are received. Higher health insurance, fuel and bad debt costs also adversely affected the year.

At American Home Shield, reported revenues increased by 8 percent. Renewal sales, which is the largest source of revenues, experienced solid growth, reflecting management's specific programs to improve satisfaction and retention. Our real estate sales, which are our second-largest channel, had modest growth with volume negatively impacted by strong declines in home listings in high warranty usage states like California and Texas. And consumer sales, which is our smallest but fastest-growing channel, experienced very strong double-digit growth, reflecting an increased level of direct-mail solicitations.

As a result of the relative timing of those solicitations, however, the fourth quarter of '04 versus '03, American Home Shield experienced a lower rate of growth in overall new contract sales of 3 percent.

Operating income increases for the year reflect the effects of revenue growth and continued very strong controls over claim costs. And partially offsetting those factors were continuing investments to increase market penetration and customer retention. In 2005, Home Shield is planning to continue its efforts to expand sales in less established real estate markets by expanding its sales force, improving training and reducing the span of control of sales force supervisors, all intended to drive a replication of the work of high performing account executives.

Management is also focusing on continuing to improve its communication around their warranty contracts with goals to reduce so-called scope of coverage surprises, increased service follow-up calls, all as part of its efforts to continue to improve customer satisfaction and retention.

Our revenues at ARS and AMS were up 3 percent and 6 percent after excluding the effects of 2003 branch closures. That reverses a downward trend that began 3 years ago. The strongest growth came from American Mechanical Services' Commercial, HVAC and Electrical Installation business. It was accompanied by solid gains in our residential and construction business. Our plumbing services overall had nominal growth. Continued declines in our basic plumbing service revenues were offset by encouraging improvement in new initiatives, including sewer line repair and light commercial service.

In the residential HVAC service line, revenues declined as improvements from our retail initiative with Home Depot were offset by declines in basic service that we believe are attributable to prevailing cooler summer temperatures.

On a comparable basis, operating income in this segment declined primarily due to higher residential selling and advertising expenses and an increase in key factored costs, such as insurance and fuel. Fourth quarter's improvement in profitability primarily reflected initial improvements in our American Mechanical Services commercial project pricing.

In addition to the items that Jon discussed, the ARS team continues to build and differentiate the ARS service express Service Express brand and improve their sales close rates. The project backlog at AMS continues to grow and is now at very healthy levels. But I must add that, due to continued competitive industry conditions, margins on that backlog, while they have been showing initial signs of improvement, are still below historical levels and leave us room for meaningful additional improvement.

Finally, in our other operations segment, ServiceMaster Clean and Merry Maids experienced solid growth in revenues and profits in the year. Clean continued to experienced strong growth in disaster restoration services and Merry Maids continued to experience steadily-improving internal growth in both its branch and franchised operations. Increased profits from those two franchise businesses were offset by higher headquarter costs resulting primarily from increased variable compensation expense in both the quarter and the year.

Again, we're both encouraged and excited. At this point, we welcome your questions and now I will turn it over to the operator.

(Operator Instructions). Sharat Shroff, Morgan Stanley.

A few questions, if I may. Jon, going back to your prepared comments, it appeared that there was slightly more emphasis on winning market share from other companies -- other established companies and an increased focus on acquisitions. Am I reading too much into your comments, or is that actually true?

I think you are reading too much into it. There's three ways we win -- taking customers from competition -- and I think that's just a total focus we have. We really do believe there are great ways to bring more users to the market and we'll continue to look at tuck-in acquisitions. I don't believe that there will be -- there isn't a significant change in our perspective. I would say that we are -- the biggest change which is helping us follow up on leads is a significant investment in our sales force across American Home Shield, Terminix and TruGreen Lawn Care.

I think in my remarks, I mentioned that we expected acquisitions to actually be pretty close to 2004 levels.

And then just switching to the guidance for 2005, the revenue guidance, you're looking at mid- to high-single digits growth. Can you perhaps provide some more thought on the individual segments which build up to that mid- to high-single digits expectation?

I don't think we're prepared to do that on the phone. Once again, we continue to, when we're out talking to investors, say we're not going to talk a lot about quarterly guidance. We're strategically focused on revenue growth and earnings growing quicker. We think this is very sustainable. And there's always going to be a little up and a little down. And obviously, we give you all the thought that with the investments we're making in the first quarter here, although we're comfortable with our strategy plan and what's going to happen in '05 that we're not going to be distracted by little variances up and down by quarter or by business unit.

And I want to emphasize again, we talk about mid- to high-single digit revenue growth and earnings growing quicker than revenue; that's what we're dedicated to getting done. We're committed to getting it done, we are getting it done and if there's any change in that, we will make sure we have full transparency to our investors, our Board, and our leadership team.

Fair enough. Just switching to Terminix (multiple speakers).

You know, I want to try and limit folks to two questions. So, if you can just kind of reboot and come back in at the end, I will take all your questions, but I went to make sure I have equal access to everybody. Thanks a lot.

Matt Liftin, William Blair & Company.

Let me sneak my two in. A question on the tax and incentive items that you -- Ernie mentioned that would affect cash-flow growth in '05. Were you basically saying that you believe operating cash-flow should be up, but at some lesser rate that it then grew in '04? Or were you sort of saying '05 operating cash flow is more flattish with the '04 levels?

Yes. I was saying there that I would expect the growth rate to temporarily subside, is I think what I said. And on a comparable basis, meaning obviously I'm going to need to exclude that onetime $130 million tax payment. But excluding that item, I would expect it to continue to grow, continue to substantially exceed reported net income as it has for long period of time, but at a slightly lower rate.

Okay and then on -- the other question is on TruGreen Lawn Care. Given the recent management shift there, could you comment on the growth that you're seeing in new customer contracts as you move through the important early year selling season?

Matt, it's too early to comment on sales progress to date for '05. If you remember, we said it last year which it occurred, the move from telemarketing to neighborhood selling moved the whole process back 6 to 8 weeks. So, we will see some more of that. We're actually ramping up from about 600 or 700 neighborhood selling sales executives last year to in excess of 2000 this year. So, we're bearing some of those expenses right now. The year is off to a nice start six weeks into it on both retaining customers in new sales, but it's just the tip of the iceberg.

And, one other comment. Dennis Sutton (ph) and the whole Lawn Care team is doing a great job. They are focused, they are looking at new ideas, challenging existing ways of doing it, building on the operating strength that we've had in that business, but also more appropriately examining new ways of thinking about getting and keeping customers. So, I'm very excited about how this leadership team is operating and thinking and working together.

(Operator Instructions). Jim Barrett, C. L. King & Associates.

John, broadly speaking, could you talk about your major businesses and the level of pricing flexibility or pricing realization you'd expect to get in '05?

Yes, well, we'll walk you through it. I think the good news is we are up through '03 where we were seeing slightly down trends in pricing, '04, across most of our businesses, we saw slightly upticks. I would say that each of our businesses is getting more and more sophisticated in their pricing theories, first putting out pilots and then rolling them out. So, let me kind of walk you through a couple of things.

I think TruGreen has found ways and what type of customers, where they are located, what their average application is today that allows them to think they might be getting a percent -- 2 percent of price increase this year. I think American Home Shield has continually been trading off price realization versus what's covered in their contract. You've seen great increase in their operating margins as it relates to how many service calls they get per contract. That is in a way a price increase because they might be either excluding more things covered or raising a call fee. So I think American Home Shield will kind of trend on that same type of price increase they have realized, both directly from consumers and from coverages and coverage elimination on the back side.

Terminix is a little more complicated because we have -- you know, there's bait and liquid, you will continue to see -- we actually had a situation in the fourth quarter where we came out with a package called Total Control which was an attempt and an effort to better cross-sell past and bait customers in an initial dual relationship with Terminix. It worked well, it worked well on units, but quite honestly, the sales force for the 14 weeks it was in effect, we were disappointed in our ability to control price. So, we got a lot of unit growth. I think we came to the conclusion that the price realization and discipline was in place, so we shut that program down in the middle of January. But, the focus on price in Terminix we feel is very disciplined at this point going forward. We continue to want to be pushing both bait and liquid. We continue to want to be pushing what we're doing on the pest control side. So, once again, we're also working with our suppliers on the bait side and liquid side to understand what they can do in costs.

So, in some of these situations, we may not realize price gains, but because what we already do on the supply side, we're actually getting a margin or a price realization that way.

So that would be the big ones. I think on the commercial side, we're seeing a focus in LandCare on larger commercial customers that are both better for us to service, give us better margins and actually have some price realization. AMS has seen some price realization in the last two quarters. They've seen some firming as what they call their backlog fills up and they see their competitors becoming more busy. So overall, I think there's a nice little price lift that we're getting from our business right now in the range of this 1 to 2 percent that we talked about 18, 24 months ago.

And then secondly, for ARS and LandCare, can you give us in broad terms what your expectations are for those businesses if we look out -- whatever time-frame we look out, three years -- and to what degree do they -- do you need -- what is the limits of your patience, in terms of seeing those businesses ultimately turn around?

Maybe I will talk about LandCare and Ernie will spend a few minutes on ARS. I think we saw a turning point in LandCare during '04 -- let's go back. In early '04, late '03, we separated LandCare out under a different management team. We brought Bob Fates in, we brought focus, we gave LandCare what I called their first chance at creating their own identity. Towards the end of '04, we brought in Rick Ascolese, a very experienced operator, number two guy in our American Home Shield business, a lot of operating background. He's a perfect complement to Bob. Bob has done a great job of invigorating the sales efforts, understanding what's going on in the marketplace. Rick is a very disciplined, consistent guy in day-to-day operations. Once again, it's the type of skills sets I like the team in running a business.

We saw the improvement start to come out of the business during the second half of '04, despite a year where we didn't get a lot of what I'd call high margin revenue out of our snow business. We would expect more of that. We just got back from a conference with the leadership team; I don't know, 150 people. I, for the one time, first time saw this business unit working as one organization. It is a business of one. It's not regions and divisions doing it their own way, the way they used to do it pre-acquisition of the LandCare roll-up.

So, I'm very optimistic about their future. I think we are also under coordination with Dennis Sutton, finding much better ways to coordinate our commercial sales efforts across Lawn and Land, and I think this will be a very nice accelerator. I will be very surprised -- on this one, it's not a matter of patience. I would be very surprised if we don't show nice progress '05, '06, '07, '08. Ernie, you want to comment on ARS?

Sure. With respect to ARS, we just simply have to find a way to address the steady, gradual erosion in the core service business that we've experienced over the last few years. The team has done a terrific job trying to identify new sources of revenue. Very successful, as I mentioned, with sewer line repair and commercial plumbing with the add-on replacement emphasis through our initiative with Home Depot, improving sales closing rates and average ticket prices, selling higher energy efficient units, etc., etc.. So, as we go down the scorecard, we are encouraged by the progress that we're making. But overall, we've been treading water because of the continued steady erosion in the core service calls. And that, we've got to arrest.

On the profit side, this is a business that clearly is not built around the same type of recurring revenue model that the other businesses are. We can't get the same degree of routing leverages that we do in the others. Having said that, it's also a business that in the period of time we've owned them, has achieved overall operating income margins in the mid- to high-single digits. And we believe that if we can get the top line back growing with some of the other initiatives to enhance productivity that we've got in place, that we can get back there. Obviously, it's not happening at the rate we expected or want, but we think we've got the team in place that can get the job done. We're working on the right things. We've just got to find a way to offset that decline in service revenues.

Just one other comment. You also saw us promote Albert Cantu out of Terminix. He now has oversight for ARS, Merry Maids, ServiceMaster Clean and Furniture Medic. The primary driver of this is, Albert has a very experienced, proven track record within ServiceMaster. Letting him work with the team in ARS, Mark Burel, and making sure we've got the right leadership processes in place, disciplines in the field, what type of resources do we need, is another sign of our commitment to ARS and also a great opportunity for Albert to see business outside of Terminix where he has spent all of his career.

Sir, there are no further questions at this time. Please continue with your presentation or closing remarks.

I think we're finished. We appreciate your time on the phone today and Bruce, Ernie and I, as always, will be available follow-up questions after the call. Thank you so much. Bye-bye.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day, everybody.