Terminix Global Holdings Inc (TMX) 2006 Q3 法說會逐字稿

Welcome to the ServiceMaster Company third quarter 2006 earnings conference call.

During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded, Wednesday, November 1, 2006.

I would now like to turn the conference over to Bruce Byots, Vice President, Investor Relations. Please go ahead, sir.

Good morning and thank you for joining us. On the call this morning is Pat Spainhour, our Chairman and CEO; and Ernie Mrozek, 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 Pat, I would like to remind you that today's 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 results to differ.

Additionally, in the press release and during the call, we are using certain non-GAAP measures as defined by the SEC and Regulation G. Please refer to the exhibit in our press release or our website at svm.com for the required reconciliation to the most directly comparable GAAP financial measure.

Now I'd like to turn the call over to Pat.

Good morning, and thank you for taking the time to be on the call with us today.

Three weeks ago we let you know that a series of events came together and caused us to be off our estimate for the quarter and the year. No single event was big enough to take the enterprise off course, but together they did.

I told you that I was disappointed but not discouraged, and I still feel that way today. And here's why:

At TruGreen LawnCare, we saw an increase in service costs while sales fell short of expectations. But this year we have begun a process to revolutionize our relationship with our customers, primarily through the use of lawn quality audits, which we call LQAs. This initiative is a major investment for TruGreen and I'm pleased to say that it's showing very positive results. Across the entire brand, customer retention is up 50 points, which is a continuation of the positive trend that we've seen as the year has progressed. However, for the 900,000 new customers who receive lawn quality audits, retention was up 1,000 basis points.

An improved relationship with our TruGreen customers is the foundation of our projected improvement in 2007, and LQAs are central to that effort. We're particularly encouraged with the impact that LQAs have had on improving the retention of first-year customers.

At Terminix, the decline in term-out lead flow that began earlier in the year continued in the third quarter. But pest control had solid performance, with retention up 120 basis points. Overall, termite retention is currently flat in this difficult year, but extremely weak termite lead flow was mitigated by solid improvements in our lead-to-sales conversion rate, contributing to a 4% increase in renewable unit sales.

At American Home Shield we experienced higher than expected claim volume and higher average cost per claim. Retention is up 160 basis points.

This quarter we also launched our new business partnership with Realogy, the world's largest real estate broker and franchiser. As you know, they own the leading real estate brands: Century 21, ERA, and Caldwell Banker. They're involved in one out of four real estate transactions in the United States, and our new, five-year agreement could generate as many as 100,000 new AHS contracts in the first year.

At TruGreen LandCare, we saw slight declines in both our base contract maintenance and enhancement sales during a time when we thought we would see moderate gains. We continue to make internal improvements, particularly in rebuilding the sales organization. Those improvements have translated into contributions -- haven't translated into contribution to performance yet, but we knew that we had to rebuild the sales organization in order to rebuild the customer base, which is the linchpin of accelerated performance in this unit. Retention was positive but lower than our expectations.

Let me turn to our support functions. First, we are realizing Project Accelerate savings faster than we had previously expected. We continue to be confident in our ability to realize annual pretax savings net of reinvestments in the 25 to $35 million range or $0.05 to $0.07 per share by 2008.

Second, this week we took a significant step to become a more effective, integrated enterprise, with our plan to consolidate our Downers Grove support functions into the company's operation center in Memphis. We're targeting the consolidation be completed by the third quarter of 2007.

The functions affected our finance, accounting, tax, treasury, and parts of legal, marketing, and IT. It makes sense to house a whole team at our Memphis campus, where we have the largest investment and concentration of employees and operations. Memphis is already headquarters for our business units and the home of our business presidents and their teams. We believe this action will ultimately improve the speed and effectiveness of communications in decision making. Ernie will talk about the cost and intended benefits later in this call.

Right now our team is focused on improving our execution in the fourth quarter and establishing the foundation for a return to stronger performance in 2007. We'll be providing a detailed look at 2007 and our long-term outlook at our Investor and Analysts day, November 28, in New York City.

We know where the pressure points are in the business. They're out there in the streets and the yards and in the homes and the businesses, where customers are searching for a service company that can meet them on their terms and serve them according to their individual needs and expectations. The opportunity is there. I know it, our leaders know it, and our teams know it.

My job is to focus and drive this team to make progress on improving the customer experience, on delivering a consistent service experience, on finding new ways to integrate and leverage our operations, and enabling our people to deliver high performance. That's the heart of our go-forward strategies that we'll be sharing with you at our investor conference later this year. It's an approach that generates the kind of performance that we want and expect from these leading brands. I won't be satisfied until we deliver it.

Thanks for listening, and now here's Ernie with the details.

Okay. Thanks, Pat. And hello again, everybody.

We've got a lot to cover, so I'm not going to be repeating the detailed information we provided on October 11 regarding our revised outlook for 2006 or the factors that caused our third-quarter results to fall short of mid-summer forecasts.

The final results for the quarter were in line with our most recent guidance, and we are maintaining our October 11 outlook for the year, with earnings per share before all restructuring charges of 61 to $0.63, consistent with or slightly improved over comparable 2005 levels.

Earnings per share increased 2% in the first nine months to $0.53, and decreased 9% in the third quarter to $0.21. Earned revenues increased 5% in total in both the year-to-date and third-quarter periods. If you exclude InStar and other acquisitions, revenues increased 2% year to date and 1% in the quarter.

Operating income before charges was consistent with 2005 levels on a year-to-date basis, but it was down 10% or $13 million in the third quarter. The decline in third-quarter earnings was attributable to a combination of factors: Lab revenue growth in three of our large business units; rapid increases in fuel, health care, and interest costs throughout the company, and in costs per claim at American Home Shield; and investments to improve customer satisfaction and retention.

Now, those drags were partially offset by increased operating profits from our franchise businesses, the first-time inclusion of InStar, and continued reductions in functional support costs.

Turning to the factor cost matters that we've updated you many times over the course of the last several quarters. Much higher fuel, health care, and interest costs continue to provide stiff headwinds for our business. In the quarter versus prior-year, aggregate increase of almost $12 million in those three areas. That's $0.025 per share in the third quarter alone.

With respect to fuel, our large fleet consumes roughly 30 million gallons annually. Each year, we hedge approximately 2/3 of our estimated usage. But this year's hedge prices are well above last year's. In addition, until very recently, home prices on the unhedged portion were running much higher than comparable 2005 levels.

Taking everything into consideration, higher fuel and fertilizer costs -- and I'll remind you that fertilizer costs are also impacted by energy prices -- combined to adversely impact the third-quarter results by almost $3.5 million, incremental over prior year, and year to date totals by over $13 million.

Now, if you assume that pump prices stay at current levels, we would expect an adverse incremental impact for the year as a whole of about $0.03 per share. And that's well above one penny higher than we had anticipated in our original planning.

Turning to '07, based upon the hedges we've already executed for '07 as well as current Department of Energy price forecasts, we would again expect an incremental, adverse impact next year, but at a lower rate of increase of somewhere in the 1.5 to $0.02 per-share range.

Health care costs continued to experience strong inflationary pressures. In addition, as we previously have disclosed, we made an incremental investment in our health benefits of roughly a penny a share in 2006 as part of our efforts to further enhance employee satisfaction and retention. No similar benefit enhancement will be required in 2007. All in, health care costs increased roughly $4 million in the quarter, and $9 million year to date, with an incremental impact of approximately $0.025 cents per share expected for the full year.

Short-term interest rates have risen rapidly and have adversely impacted our results at both the operating income and the nonoperating income lines. That's because of their effects on variable rate, fleet, and occupancy lease costs, which are in operating income, as well as on floating rate debt and the American Home Shield investment portfolio.

On a combined basis, rate increases hurt our results by approximately $3.5 million in the third quarter and almost $10 million year to date, with an incremental impact of approximately $0.025 cents expected for the year as a whole.

On the positive side, we continue to make strides at reducing the costs we can more directly control. As an example, we've maintained our focus and momentum in driving down safety-related costs. Those were down almost $12.5 million or $0.025 cents per share in the first nine months of the year. Safety costs were relatively flat in the third quarter and are expected to continue to be flat in the fourth quarter. And those are consistent with the very strong results that we achieved in the comparable periods of '05.

We're also ahead of schedule with respect to realizing our previously forecasted savings from Project Accelerate. For those of you who are new to the call, Project Accelerate is an initiative to realign our costs in light of the recent divestitures that we've made, as well as to create a more effective and efficient functional support structure. We remain confident that we'll ultimately realize annual pretax savings in the 25 to $35 million range -- that's $0.05 to $0.07 per share -- by 2008, but with $0.03 to $0.04 per share now expected to be realized in 2006. Again, ahead of schedule.

Severance and other one-time restructuring costs associated with Project Accelerate totaled just under $1 million in the third quarter and almost $11 million year to date. All such charges related to Project Accelerate will be incurred and recognized prior to year end, and should approximate 11 to $12 million in total.

Turning now to the balance sheet. It remains strong. During the third quarter we completed the sales of ARS and AMS, generating gross cash proceeds of approximately $111 million. That exceeded expectations and it's been used to reduce outstanding debt.

Now, approximately $100 million of those proceeds was received on the last business day of the quarter, and that amount is reflected as cash on the September 30th balance sheet, but was used to pay down debt on October 3, which was the first business day of the quarter.

So excluding this item from cash, cash and short -- and long-term marketable securities would have totaled approximately $396 million at September 30th. Virtually all of that was effectively required to support regulatory requirements at American Home Shield and for other purposes. And again, after adjusting to reflect the early October repayment, total debt was $773 million, closely approximating the September '05 level of $769 million, and up approximately $115 million from year end '05. Based on our seasonal fourth-quarter collections and other items, we expect that our long-term debt will be reduced from current levels by year end.

Accounts receivable is the only other noteworthy item on the balance sheet. That increased $104 million over third quarter '05 levels. That primarily reflects the inclusion of approximately $72 million of InStar receivables and work in process, as well as some relatively modest increases at DSOs at our other business units.

Turning to cash flows, before considering tax payments associated with I.R.S. audits, cash provided from operating activities declined by approximately $76 million during the first nine months of the year. That was attributable to a combination of factors including the first-time inclusion of InStar, which has used approximately $17 million in cash through September 30th. Now, some of that is due to normal working capital requirements associated with this business. But that's been accentuated in 2006 by approximately $13.5 million of hurricane-related receivables whose collection will be significantly delayed but is ultimately highly probable of collection.

Second, we had a $16 million decline in cash flow at American Home Shield, primarily as a result of a sharp decline in sales from our real estate channel. You should know that in that channel, virtually all sales are customarily paid for up front at the start of the policy period.

Now, the good news here is that real estate sales are expected to return to positive growth in the fourth quarter as a result of the significant new customer relationship that Pat mentioned.

Thirdly, we had a $10 million aggregate reduction associated with those modest increases in DSOs at the other units that I mentioned, and we have plans in place and are expecting to recover a meaningful portion of that by year end.

Then again, the nonrecurring restructuring charges associated with Project Accelerate consumed approximately $11 million that wasn't there last year. And finally, there were some unfavorable timing differences, primarily with respect to insurance and tax payments.

When you look at that year-to-date reduction in cash flows, we expect it to narrow in the fourth quarter as the result of normal seasonal patterns and intensified management focus. And for the full year, while they will fall short of last year's totals, comparable cash flows will continue to meaningfully exceed reported net income.

With respect to dividends, last Friday we announced our fourth-quarter dividend of $0.12 per share. That will result in $0.46 of dividends for 2006 as a whole, a 4.5% increase over 2005 levels. That increase makes 2006 our 36th consecutive year of increase, putting us in the top 2% of all public companies in America in terms of consistency of dividend growth.

Share repurchases in the quarter were approximately $42 million with about $86 million repurchased in the first nine months. Now, based on the current trending of repurchases and our commitment to remaining investment grade, we're now projecting repurchases to total between 100 $120 million for the year, more than double the 52 million we acquired in 2005.

Turning now to our segments: At TruGreen/ChemLawn revenues increased 2% during the nine months, as improved price realization in the 2.5% range and an increase in supplemental and commercial services offset a 2% reduction in residential customer accounts. That was for the nine months. For the quarter, revenues were flat, as increased service calls and lawn quality audits caused certain scheduled revenue production to be delayed into the fourth quarter.

The primary challenge impacting customer accounts has been significant declines in telemarketing sales due to the expansion of do-not-call lists and caller ID mechanisms. Those declines have more than offset double-digit growth in sales from our newer channels, including direct mail and neighborhood programs. As we look to 2007 and beyond, we'll continue to reduce our reliance on telemarketing. Direct mail programs will become more dominant, supplemented by improved and expanded neighborhood, internet, and other sales efforts.

A very encouraging development is that, as we had predicted, the negative disparity in customer retention that existed in the first half of the year has been reversed. This critical measure was improved by 50 basis points as of September 30th, with full-year gains of over 100 basis points now projected by year end. Over the last six months our cancellations have been consistently below prior-year levels, with customers responding favorably to our expanding efforts to improve satisfaction and retention. Clearly, these included the initialization of a program of comprehensive lawn quality audits that Pat referred to.

They've also included faster response standards and follow-up calls on reservices as well as improved customer communication and problem resolution procedures. Substantial additional improvement in customer retention is targeted over the next several years.

Profits at TruGreen ChemLawn were down sharply during the quarter. And that's a result of higher fuel, fertilizer, and health care costs, increased service calls related to crabgrass issues, and incremental investments associated with initiating this new LQA program. And we're very encouraged by the results of that program. Timing differences in the recognition of sales and marketing expenses also contributed.

Turning to LandCare. They reported a 1% decline in earned revenues in both the nine months and third quarter. The third-quarter decline resulted from a decrease in enhancement revenues, which include add-on services such as seasonal flower plantings and mulching. Those revenues were down about 2%. Revenues from our maintenance business were comparable to last year's third-quarter levels.

Now, LandCare has substantially increased the size, caliber, and training of its sales team. In addition, they're using new tools to identify and pursue larger and more profitable accounts. That's resulted in improvements in the relative size and quality of our outstanding sales proposals. There's no question that sales in terms of timing have lagged our original goals. But they are well above prior-year levels, and our team remains confident that we'll end the year with annualized revenues from new sales close to our original goals. And that should lead to improving growth in maintenance revenues in the future.

In total, LandCare's revenues are expected to be relatively flat in the fourth quarter, as maintenance gains are offset by reduced enhancement revenues, and those enhancement revenues will be down because of last year's inclusion of a substantial amount of hurricane cleanup work that we do not expect to recur.

At Terminix, we achieved a 1% overall increase in revenues. That's both in the quarter and in the year to date. But it's a multifaceted story. We had solid and improving growth on the pest control side of the business. And that was offset by reductions in termite completion revenues. Termite renewal revenues, which is the third piece in the revenue equation, were up 4% year to date as a result of improved pricing and mix shifts.

Pest Control represents approximately half of the annual revenues in this segment. And they had solid performance. 6% revenue growth in the quarter was supported by solid growth in unit sales at both the residential and commercial sectors, as well as the 120 basis-point improvement in retention that Pat mentioned, and the impact of acquisitions.

In addition, as we disclosed a few weeks ago, Terminix acquired Safeguard Pest Control at the end of the third quarter. So that acquisition, which has annual revenues of over $23 million, should have an additional positive impact on Pest Control growth in the fourth quarter and into the future.

Termite completions are a bit more complicated, with both challenges and encouraging developments that should benefit us in the future. And I'm going to take a couple minutes to walk through this.

Revenues from termite completions were down. They were down 9% in the quarter. But it's the result of a combination of things. First of all, as previously disclosed, lead flows for renewable termite contracts were down 15%. However, our sales force more than offset that challenge. They did a much better job converting the leads they actually got. So we were able to achieve a 4% increase in renewable unit sales, and that's critical because that benefits renewable revenues in future periods.

So, 4% increase in units, why the 9% reduction in dollars? That is because of two other factors. First, a continued shift in mix from bait to lower priced liquid treatments, with bait comprising 20% of the combined total in the quarter. The good news here is that based on consumer research we expect that mix will stabilize right around this level of 20% bait, 80% liquid. So we think the mix shift is mostly behind us.

Second, less revenue was recognized in the current year from prior-year deferrals. It's a complex accounting thing, but it resulted from the change to a new bait product in '05 which had different operational requirements. And that change in requirements required less revenue to be deferred in the future. So we had a pickup in '05 that did not recur in '06. The good news is that this factor should not, should not, have a recurring impact in 2007 and beyond.

Turning to operating income, third-quarter operating income declined as a result of increases in fuel and health costs combined with some differences in the timing of sales and marketing expenses. Those items were partially offset by lower material costs that resulted from the change to the new bait product that I referred to a moment ago, lower safety costs, and continued improvements and termite damage claim expenses. A very important development.

At American Home Shield, growth in new sales and renewals: those new sales and renewals are recognized as earned revenues in the income statement over the subsequent 12-month contract period. They improved 6% in the quarter and 5% year to date. Earned revenues, which are reflected in the income statement, increased at a slightly faster pace in both periods.

If I look at the real estate channel, which represents approximately 30% of total annual new contracts written, unit sales were down 15% in the quarter and 10% in the nine months, due to a pervasive weakening in the home resale market. That weakening was particularly acute in several of our largest volume states, especially California. We're confident that we've maintained or slightly increased market share in most areas.

As Pat mentioned, the recently signed agreement with Realogy, which again includes the Caldwell Banker, Century 21, and ERA brands, is strategically very important and should help generate overall growth in real estate sales in the fourth quarter of this year, despite a continuing weak market. We anticipate incremental sales in the first full year of this contract to exceed 100,000 units or roughly $40 million in annualized revenue.

But those incremental sales, the annual level of incremental sales resulting from this relationship, should almost double over the five-year contract term, as we expand penetration of the franchised outlets of these brands and increase contract renewals.

Speaking of renewals, they in total represent approximately 55%, that's 55, of annual contracts written. And they increased at double-digit rates in both the quarter and the nine months.

Retention rates improved 160 basis points. And that reflects a more favorable mix of renewing customers. It reflects the effects of customer satisfaction follow-up calls after our service visits, and it reflects a significant improvement in problem resolution ratings from our customers.

Our direct-to-consumer channel, which represents the balance of about 15% of total new contracts written, experienced a modest decline in sales in the quarter due to lower response rates on certain direct mail programs.

Operating income declined approximately 10% in both the quarter and year-to-date periods, primarily as the result of increases in average cost per claim.

Higher air conditioning-related costs accounted for roughly 2/3 of the total increase. Those air conditioning costs were influenced by a higher mix of replacements versus repairs which, in turn, were at relatively higher costs in 2005 due to the required conversion to more efficient 13 SEER or better units as a result of legislation which became effective earlier in the year.

We also experienced inflationary pressures in claim costs in other areas such as appliances and plumbing that accounted for about 1/3 of the total increase.

Finally, within our franchise businesses, ServiceMaster Clean, which has been one of our strongest and steadiest performers, continued to achieve double-digit increases in disaster restoration services and solid overall profit growth, while Merry Maids achieved solid revenue gains as a result of both internal growth and the effects of acquisitions.

Our new InStar business is also included within the other operations segment. And its revenues and operating income levels, net of the effects of noncash acquisition amortization charges, were disclosed in this morning's press release. For the seven-month period since acquisition, revenues were below our expectations due exclusively to a reduced level of hurricane activity. But we did experience solid progress in our efforts to diversify into noncatastrophic sales channels such as rehabing buildings to comply with the American Disabilities Act.

Profits at InStar were also below expectations due to the hurricane factor as well as costs associated with improvements in our asbestos removal procedures. But while below expectations, the acquisition is still expected to be modestly accretive for the year as a whole.

Project backlog is comparable to prior-year levels as reductions in hurricane work have been offset by increases in other channels.

Thank you for your patience. And now we open it up for questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Alex Paris from Barrington Research. Please go ahead.

Hi, guys. Good morning.

Good morning, Alex.

Good morning.

I have just a couple of questions. First off, with the decision to close the Downers Grove/Chicago office, when might we expect the severance charges and so on related to that action? Will that be in this current quarter? And then -- for that matter, is it included in Ernie's projection that it would be 11 to $12 million for the full year?

Alex, the 11 to 12 was strictly Project Accelerate. We'll be filing an 8-K in the next couple of days with details regarding the closure costs at -- the costs related to the consolidation of the headquarters.

In terms of how those are accounted for, things like severance and retention payments are required to be accrued over the remaining service period of the employees so they will not be accrued all up-front. It will be spread between now and that midsummer closure date Pat alluded to. We expect in total the aggregate cost to be about 25 to $30 million. Obviously those will be paid out over the next eight, nine months. The incentives that were negotiated with the state and local authorities exceed those totals, although clearly, those will be paid out over time. But even on a net present value basis, they're pretty comparable.

Okay. And then, once this conversion is complete -- I realize it's not necessarily done for cost savings purposes, it's more for operational purposes. But do you anticipate annual cost savings from this move, say, starting in 2008?

Alex, yes. It is very difficult to get our hands on what that's going tol be for a period of time until we see what the organization shakes out here, those moving versus not moving. But we expect to see some consolidation of functionality business support areas using resources that we have in the companies and with the corporate structure that we have. And do anticipate seeing some reductions over the next couple of years in that area.

Okay. Great.

And I guess one last one and I'll jump back in the queue. With the recent sale of ARS and AMS, that sort of came in line what you had expected it to generate in terms of gross proceeds that will be applied to debt and so on. Does that have an impact on the amortization of the tax basis? That's the add-back we use to come up with cash earnings per share, that had arisen from the change in corporate structure 10 years ago.

Alex, it does. As you know, that can become quite a complicated explanation. I'll try to simplify it. And if necessary, we'll take it offline. But the long and short is that there was a piece of the total that was associated with ARS and AMS. That piece gets accelerated into '06 and '07. What's left is still going to be an annual amount in the 52 to $55 million range of remaining tax benefit that's not flowing through our income statement.

And that goes through, what, 2011 or 2012?

2012. It's not an equal amount each year, but it extends through 2012.

Okay. And lastly, do you have a CAPEX target for the full year? I think you're $38 million through the nine months.

Yes, I think a good estimate would be about $50 million.

Okay, good. Thanks.

Our next question comes from the line of Sam Darkatsh of Raymond James. Please go ahead.

Good morning, Pat, good morning, Ernie.

Good morning.

I've got three questions. First off, I know that you didn't give specific '07 earnings growth. I was just wondering, directionally, if you could perhaps give a first blush. As I see '07, I see -- you mentioned a lot of these oil being less of a drag as it was in '06. You got Project Accelerate savings, you get a lower share count. And you should be going up against easy comparisons, both externally and internally.

So I guess my question is that, you know, directly, should earnings growth in '07 be in excess of your normal 10 to 12% stated goal or around that area? Or would perhaps some of the issues that you're facing right now last a little bit longer than perhaps you had originally thought and it would be less than your normal growth rate? If you could just give a little bit of color to that, that would be helpful.

Sam, we are right in the middle of working on our plans that we haven't even presented to the Board yet. And we'll probably be better equipped to address that at our investors conference. There's puts and takes, obviously, as we look at the investments for the future versus some of these gains that you're alluding to. But we haven't even had a bottom line yet. We would just be putting something out there that's not final in our minds yet.

Okay.

Second question, as it relates to LawnCare, are you expecting LawnCare to be profitable in '06? And I guess the follow-up question to that would be -- the previous management, we've been told before that that's a high single-digit business, in a latent respect at least, and within a couple years, two, three years, that would be a possibility. Is that still on the drawing board, and why is it -- is it taking longer than expected, or are there just other forces in play that may -- are being forced to deal with?

Sam, I think you said LawnCare. I think you might have meant LandCare?

Yes, LandCare, I'm sorry. Yes, LandCare.

Because obviously LawnCare is -- although its profits are down in the third quarter, it's a very profitable business and will continue to be so.

LandCare is what I meant. I apologize.

Okay. Just didn't want the other callers to get confused when we responded.

I think in terms this year, we're still, got a lot of work left in the fourth quarter, Sam. But in terms of the things that we're working on that really -- that we're looking at to say this is a viable business going forward or not, and a lot of it's been underway. The sales organization, the up-front work that we've been doing there is really coming together in a very disciplined way. And as we relook at the mix in our portfolio, with the top accounts that work best in there, the combination of those two things are on track and coming together to really tee us up for '07.

We have -- and the company has talked about this for several years, have issues with our branch structure, the operations, the leadership, and so on. And we're addressing that, as well. And doing something about it. Stepping up to the plate as opposed to just putting it out there as an issue. And both of those factors are the key to the success of that business. It's not about finding revenue. It's not about drawing the top line.

That business is out there for us to go after, which allows us to change the portfolio or the mix of the type of accounts that we look at. It's can we physically manage it, can we operationally manage it, can we sell in and have the ongoing run rate that we can deliver operationally with the leadership at the branch level? That's the focus and that's the keys to success in that business that we're working on.

Well, will it be profitable in '06 when you factor in Q4?

It's going to be probably break even to slightly negative, remembering one thing: that they did take about a $4 million hit year over year from snow removal, which is just going to be there or not there from year to year. But that would -- that would imply that the base -- the core business will be improved profitability and a little bit better than break even.

And can you see high single-digit operating margins in that business within two or three years, or is that too much of a stretch goal at this point?

I think there again, let's wait until the investors conference so we can lay the whole story out. And we'll be looking at 2007 through 2009.

Okay. Last question, then I'll defer to others. In ChemLawn, you have -- your major competitor did not cite whether as a major issue, and they noted higher enhancement sales, not lower up sales, as you folks experienced.

I was just curious, I mean, there could be a more basic explanation for that which would simply be differences -- core differences in the two companies' customer base, mix, and/or customer acquisition methods. And you're going away from telemarketing sales, which I think is a real good thing, but that doesn't necessarily mean you're going away from being a price-oriented seller of those services instead of a quality or a service-oriented provider.

And is that an unfair way of looking at it, saying that perhaps you're still a little too price sensitive or at least price oriented with customers so you're getting lower margin, less sticky customers, or am I missing the forest for the trees?

Well, I think there's several factors in there as you look at the competitors out there. The telemarketing issue has really been an impact here for the last couple of years, as the do-not-call list has really dropped down that channel to us. In the past we've been significantly driving revenues to this telemarketing thing. And as we're trying to transition out of those, as the competition is new in the field here, who started off much more in direct in the internet, they don't have to fight those issues. And we're coming out of that and we will address that again at the investors conference.

I think the other thing, too, when you look at the size of the businesses of probably who you're comparing us to, we've been out there. We're the largest brand out there, and dominate the market as opposed to coming in with a blank canvas, so to speak, and beginning to build businesses as competition is doing today. It's much easier to go out with that type of open front and runway in front of you as opposed to dealing with the issues that people who have been in the business for the time that we have and going through this telemarketing chain.

So I don't know whether it's a fair comparison at this point, but I know what we're doing internally is working on those issues that the source of sales and source of leads in a very meaningful way, converting much more into the direct, the internet, and to a lesser degree, the neighborhood-type selling, which is a viable opportunity for us and has been, and the LQA thing that we've worked around in terms of drawing the customer satisfaction which, for the new customers that we've added this year, what we've done LQAs, we've increased that retention rate in that base, albeit not the total house yet, 1,000 basis points.

That's significant and that's what we're looking at: Getting control of the channel, the source of the business, which we're about to make that turn, and then driving this retention through things like LQA.

Yes. Just to piggyback on that, Sam, regardless of what relative prices are, we -- our primary focus is on, you know, intensifying the service culture within TruGreen/ChemLawn. That's our number-one priority right now. That's why we're encouraged by this -- it's not just the lawn-quality audit program, although that's the new program that we invested a lot of money in in the third quarter. Frankly, the financial impacts of that investment far exceeded the crabgrass issue. The crabgrass issue came up in explaining the variance to prior expectation. That we didn't expect in August and September. When you look to prior year, it was the investment in the LQA program and the belief that it will enhance long-term retention. One thing that will enhance long-term retention was a much bigger factor, year over year.

And we've done a lot of other things. We're implementing response standards. We'll be at every home in no more than 48 hours after we get a service call. All kinds of different things in place to enhance the customer experience, to improve the service culture within TruGreen/ChemLawn.

Scott's is a great company. I'm not going to take anything away from a competitor. But if you talk about their price premiums, it is only fair to point out that even with those perceived price premiums, their margins are less than half of what we have in our business.

So I don't think the issue with TruGreen/ChemLawn is pricing. I think it's a matter of working our way through this telemarketing sea change, which they didn't have to face, and improving the customer experience and the service culture and continuing to capture the retention gains that are out there.

Was your net customer pricing up or down in the quarter on a year-on-year basis?

I don't know about the quarter, but as I said before, year to date, pricing -- price realization was up about 2.5%.

How do you define that? Is that price per customer, or is that pricing across the -- on a service-by-service -- how is that defined? The pricing?

That's -- that would be on our -- a basic program, our basic program of applications and what we actually realized this year versus last year on an average per application basis.

So it's per application. If we looked at it on a customer basis, would it be meaningfully different?

I don't think so. I don't know why it would be.

Okay. Thank you very much. I appreciate the candid answers. Appreciate it.

Okay.

Our next question comes from the line of Matt Litfin of William Blair. Please go ahead.

Hi, I have a couple of questions. But first I just wanted to clarify something from your answers to that previous line of questioning. When you look at your competition in lawn care, I think you sort of characterized your size as maybe a disadvantage rather than an advantage. So I'm interested in your clarification of that. Do you believe that's true, and can that be changed?

We certainly don't look at it as a disadvantage. It's an advantage. What I was referring to, Matt, when I said that was we've been around a long period of time. And we've gone through the impact of telemarketing and riding that telemarketing wave for a while. It just takes time to get out of that and develop the other channel of strategies.

But there's nothing about being around longer than the competition that's a negative. It's a very positive. We've got the largest footprint out there, and we expect to exploit that.

Matt, the size gives us an advantage in that significant disparity in operating margins that I spoke to. Again, we're more than double their margins. The only time I think it works against us is when people ask about their growth rate in revenues or customer accounts versus ours. And it's just simply the reflection that it's easier to grow a business that's 20% the size of another business.

Yes. That's the impression I had. I just wanted to clarify that.

Okay.

How many of the approximately -- I think it's about 150 senior managers in Chicago, do you expect to make that move down to Memphis? And I guess a corollary question is, who among the key senior management that maybe has had some street exposure at analyst days, etc., in the past would you expect might depart as a result of the headquarters move?

Matt, at this time, we just made the announcement here. We just -- individually, one on one, began this week starting the process of going through packages and opportunities with each person. So right now we won't -- we won't know until later on in December with the way that we're doing this and the timing of the responses that we're expecting back.

With one reminder. And that is when you talk about who you had exposure to at investor day, obviously the bulk of the exposure at investor day comes from the business unit leader. All of those business unit leaders are already in Memphis. This will not impact them at all. And you'll see them again on November 28.

So we clearly expect to lose some functional people who just can't relocate. But I want to emphasize that from an operational perspective the business units will be largely unaffected by this.

Okay. And maybe just one last one. It's a two-part question having to do with your portfolio of businesses. Are you happy with all of the existing businesses? Are there additional candidates for divestitures?

And then the second part of that would be, what about acquisitions? Are there -- are you seeing any attractive candidates out there for that? What's your appetite for that, given everything else going on, etc.?

I'll start and Ernie can add to it.

In terms of the portfolio, all but one of our companies are operating above our cost of capital, and that's LandCare. And in a prior answer, we have specific things that we're working on there to drive that business to get to where it generates the type of return that would make it be a candidate, stay in the portfolio. But at this point in time, with the things we have going on right now, we are doing what it takes to get that business to where it needs to be.

In terms of acquisitions, we're always going to be opportunistic. We certainly made a great acquisition when we acquired Safeguard with Terminix a month or so ago. We have other tuck-in acquisitions that we'll always look at. We have some in process.

Beyond that, opportunistically as we see things out there, we're certainly going to look hard and see the fit into the core competency and how other companies may work in here.

Ernie?

Yes. Two piggyback points. With respect to pest control and lawn care, one of the things we've traditionally seen and are seeing right now is we aren't the only one who has faced some of the challenges this year that we've talked about. And normally what happens when that happens industrywide is we see our pipeline bubble up and start to fill. And we've definitely seen that happen in both areas, particularly pest control. And so that gives us encouragement because those tend to be very lucrative. We're very experienced at them.

In addition, as we've talked about before, you know, we're still in the process of assimulating InStar and getting their team rounded out, etc., etc. But there are very definitely some meaningful opportunities there to expand the geographic footprint, to fill out the breadth of services. And by no means have we lost any kind of faith or optimism about that business. So that's another area that as we look to the future I would expect to see some additional acquisition opportunities pop up.

Okay. Thank you.

Our next question comes from the line of Chris Gutek of Morgan Stanley. Please go ahead.

Thanks. Good morning.

Just first a couple of quick follow-up questions on an earlier line of thinking or questioning with the TruGreen business, starting with the LandCare segment. Ernie, specifically, obviously, the company is investing in hiring more salespeople. Could you kind of quantify that? In other words, if there weren't such significant investments, presumably the business would be profitable. Can you give a sense for where the margins would be?

I would think that the -- if you look at, incrementally, the investments that we've made over the last, say, 18 to 24 months, I think you'd probably add a point or two to the margins. But I think those were important and necessary investments to help get us to that high single-digit margin that Sam spoke to earlier that we see in our top quartile, 30% branches, and we see in our major competitor. Our judgment was we needed to make that kind of investment in size, caliber, training, and tools that we made in order to get there.

Makes sense. And then, Ernie, on the ChemLawn side of the business, in terms of the telemarketing, could you refresh us -- refresh our memory on what the customer acquisition costs are for telemarketing acquired customers versus customers acquired through other channels for ChemLawn?

You know, traditionally -- I don't have an up-to-the-minute figure. Traditionally there's been about a 20% differential. What's gradually happened is telemarketing has gotten less efficient as this whole thing has unfolded. And we're getting better at direct mail and the neighborhood sales programs, so that gap is probably about the same. And I'll have an updated assessment for you, Chris, at the investor day.

Okay. And then, finally, for Pat, just one final question. I guess to the extent the Company's performance is not currently where you want it to be in terms of overall performance and consistency and predictability, what do you think a reasonable timeframe would be -- or what timeframe are you hoping to see a return to more consistent, predictable performance, and if you don't see that, at what point would the Company consider a change in direction?

Well, again, at the investors conference we're going to present a plan for the next three years. And we certainly don't expect '07 to be as prolific as '08 and '08 as prolific as '09. We certainly are doing the things that we started, and we'll add some more things over the course of '06 and '07 that will foundationally get some inefficiencies, operationally and otherwise, going in correctly that will reap benefits of late fourth quarter of next year and into '08 and '09.

So as we've told everybody, second part of your question, is we've gone through all that we're working on right now. We're here to work for the shareholder, drive the greatest shareholder value and if our plan gets us to that point that we feel like as we value that plan to the point where we need to be to drive the greatest shareholder value, that's where we'll go. If it lead us to something else, we'll certainly be open it.

Makes sense, thank you.

Our next question comes from the line of Mike Hamilton of RBC Dain. Please go ahead.

Good morning.

Good morning.

Sorry, a fair amount of minutia here. One, if we could come back to InStar, has there been any update on any of the Florida environmental issues that were disclosed earlier in the year?

Mike, there's been no update other than our team has taken that matter very seriously and it frankly is turning it into a marketing differential, a positive. We were doing training of -- across the country of all of our people. We're setting in place some quality assurance processes to ensure that we do what we're trained to do. And, you know, initially some of our customers were concerned about the costs and what not. But as they started to focus on their own exposure here, they quickly came to realize that working with someone who has a truly first-class program in this area might be the best thing to think about.

So I think we've seen a migration from disappointment and denial into outright embracement and trying to turn this into a marketing differential that's favorable.

Do you feel like you've got your arms around whether you're carrying any exposure in other jurisdictions?

I'm sorry, I didn't hear the first part of that.

Do you feel like you've got your arms around whether you've got exposure in other jurisdictions?

Mike, nothing significant has come up in other jurisdictions to date. I can't promise that there's not something else out there, but we've done a pretty hard look, and we're not expecting additional things to arise.

A reminder for those who may be new to the call, this relates to activities that occurred pre-acquisition.

So we've done what we can to ferret out where there might be risk. We haven't found much, if any, and we don't expect it. But we're not in a position where we can promise anything there.

Staying with InStar, intuitively, to me, as you get mix shift away from the hurricanes and into other business, that -- intuitively I would think that would carry lower margin. Is that true or is that a false assumption?

You know what, my partner here, Ernie, when we first got into this, thought that was a false assumption. But what we've learned as we've moved into this business, and we ought to have challenged it, but you know, the margin is very comparable. So that's a very good thing for us. And it's proven out, contract by contract, that one versus the other is the same ball game for the most part.

What we are doing is trying to build that business up so we have less dependency on hurricanes being the reason that we miss an estimate if in fact, like this year we have no hurricane season, and convert that into hurricanes become the reason that we have a great year at InStar, if in fact we can build up the foundation of this everyday business, so to speak.

Thanks.

On the income statement, your interest income line, I'm assuming you've got some AHS gains in there. Can you give us a ballpark on the picture there?

Yes. Mike, the reason for the increase, though, gains year over year were fairly comparable. There's a kind of a weird accounting rule. We do have a deferred compensation plan here at ServiceMaster, as many companies do. And the accountants require us, when the market goes up, we have investment gains. They require us to take a hit at the operating income level and reflect a benefit at the interest income level in the company's financial statements, even though practically speaking, that's the money of the people participating in the plan.

But it is because it -- legally, it's still a part of the company. The accounting rules require that. So it always makes their job a little more difficult.

I don't know if you followed all that, but I hope you did.

Yes. You know -- no, thanks. Could you give some basic ballpark components as to what is in there, related to that, what's in there related to AHS?

In terms of amounts or the types of items --

Right, right. Amounts.

I don't have that. Maybe we could take that one off line, Mike. I don't have that kind of detail handy.

I will just tell you that one thing we always check is are the gains a significant factor, year over year, that needs to be pointed out.

Although I do want to take the moment to give my normal commercial, that gains on American Home Shields investment portfolio are really an integral part of their operating model. And while we point them out, when timing has an impact, I don't feel at all that that's some sort of tainted income. That's real income, it's over a $300 million investment portfolio.

And -- but in this particular quarter, gains were not significantly different than they were a year ago. It had some higher interest income because of higher rates, just as we had higher interest expense on our floating rate debt.

Thanks.

Frankly, those -- the net effect of rising interest rates was a net negative. It was positive on the interest income line and negative on the interest expense line.

Thanks. One last two parter related to asset sales. You've got what appears to be some minor discontinued assets still floating around. And if there's nothing worth noting, great. If there is, if you could comment there, and also are there any contingencies being carried from your perspective related to these sales.

There's no lingering assets being held for sale. And it -- going back to the sale of Management Services, over the years there's still some miscellaneous liabilities that are recorded, but nothing unusual. And certainly in connection with the ARS and AMS dispositions, no new meaningful contingencies were generated.

Thanks for all the insights.

Okay. You're welcome.

Our next question comes from the line of Jim Barrett of CL King and Associates. Please go ahead.

Good morning, everyone.

Good morning.

Pat, could you talk about the lawn quality audits? I think you mentioned they were conducted on 9,000 lawns. Can you tell us, how long does it take, how much does it cost, how -- it was very impressive that it increased retention by, what, 1,000 basis points. I'm just trying to understand that program better.

Number one, it's 900,000.

Yes. We did about 900,000 year to date --

-- over the course of the new year with new customers that joined the brand this year.

Okay.

These are actually personal visits and, therefore, they're done later in the day when we hope to find customers at home. And we literally walk over the yard with the customer, pointing out things that are right and things that are wrong, mistakes that we've made, if, in fact, we see them out there, to get the people back in. It's a way of building connections. It's a way of being more important to them as opposed to just getting a card to say, "We serviced your yard today." And as a result of building that personal connection, we believe from a customer servicing and a relationship-building perspective, that's what's driving the retention with these new customers. To increase it 1,000 basis points year over year, new customers, is significant, and the only variable is what we've done there to go out and meet them and help them evaluate our work and help us point to opportunities that they have in their yard.

And oh, by the way, a side benefit to this is to sell enhancements, to get other business, begin to deal with shrubbery and other things that are out there beyond the lawn care itself. Beyond the applications that we do.

So it's building a relationship. And as far as the cost, we'll talk a little bit about that at the investors conference as we put this investment and [inaudible] this investment in perspective for you.

Yes. We estimate that in aggregate we invested about $4 million in this program in the third quarter. Because the bulk of those 900,000 did occur in the third quarter.

There's also -- you know, Pat mentioned the ancillary benefit of upsells. That's not the primary purpose and there is an ancillary cost, too, because if you go out on the lawn and there's a problem, we're generating service calls that maybe the customer wouldn't have initiated before.

But I've got to tell you, just from personal experience, my wife had one of these. And she almost fell over with praise as to how well it was conducted and the fact that the guy initiated a service call to fix a problem that she hadn't even noticed. So it cost us some money, and that's not in that $4 million figure I gave you. We have no way to track the cost of the service calls that are generated from it. But her reaction and she's -- she can be pretty hard to impress. It was pretty darn positive.

Okay. Good. And by definition, does the homeowner have to be there for the audit to take place?

To be effective in building the customer relationship, absolutely.

Okay.

Will we do lawn quality audits without the person there? We'll do some. But we want to try to make that personal contact, get in the customer's face as much as we possibly can.

Yes. And if they're not there, typically what's done is there's a written report left at the home, and then a follow-up call to make sure that the customer understood it and if they had any questions. So, clearly, highly preferable to do it while they're there. But there is a backup.

And this whole thing is just a tenet of our foundation to -- all that you're going to hear us talk about in November relative to building these customer relations is to focus on the customer and becoming were in important to them than just a piece of paper or a flag in the yard to say that we've been there.

Sure. That makes a lot of sense.

Then finally, Pat, can you refresh my memory. How are these folks who are either putting fertilizer on the lawn or making these audits, how are they incentivized? In addition to salary? Or are they?

Are you talking about the service technician?

Yes.

Yes. Our pay plans have a few components to them. Clearly, part of it is based on productivity, how much work they get done per workday. But it -- increasingly -- excuse me, over the last couple of years, we've added a component based on retention on their specific route.

Okay. Okay. Thank you, Ernie.

Your next question comes from the line of Scott Hill of Brown Brothers. Please go ahead.

Good afternoon, guys.

Good morning -- good afternoon, Scott. Sorry about that.

Of the 25 to $30 million figure that you threw out for the consolidation of the headquarters in Tennessee, is that pretax or after tax, and what portion of it is cash?

That's pretax. Over time, it would be mostly cash. There are some lease hold amortization write-offs. But I -- if I were you, I would just think about it as all cash.

And is that incremental cash expenditure, is that what is largely driving in conjunction with your desire to remain investment grade, the reduction in your share buyback guidance?

I mean, certainly that's a consideration. Again, we took into account the current pace that we're on for repurchases. As you know, we black ourselves out before earnings releases and if there's anything at a Board meeting. And then we're also limited as to how much we can buy on given days. And if the market's on an uptick, we can't buy, yadda, yadda, yadda.

So as we looked at the pacing, that cash requirement, all other factors considered, that's how we came up with that updated assessment.

But is it really -- is it just really a gating, a timing issue that, okay, it doesn't happen in the fourth --

Yes, Scott, I would tend to look at it like that. Clearly, I got to prove what I said. And in term of these cash flow things, I think there are some timing issues in there that we're aggressively going to go back and capture those timing issues. And if I'm right and we do that, that obviously frees up money to make investments. And we think our stock's a very good investment.

Okay. One of the issues, when you look at your report and when you guys warned three weeks ago, you guys were attributing a lot of things to some nonformal weather patterns.

And then when you issue your current updated guidance for the fourth quarter, I guess a fair question is what set of weather conditions and otherwise do you guys expect that underpins that guidance? Are you looking at a kind of a very bearish, pessimistic scenario, so you make sure that there's really very little risk of further disappointment, relative to the expectations that you've created? Or are you again assuming just normal seasonality?

Normal seasonality is the quick answer. What we do in our businesses is we tend to look at four-year averages in terms of production equivalents that we're able to accomplish in some of our markets where snow can be a factor. And over time, those tend to be pretty close.

But clearly, if we got a massive snowfall across the whole country on the 2nd of November, it's going to hurt us, and it's not in our estimates. On the other hand, if we don't get any snow until Christmas, that will help us a little bit and ensure that we get all our available revenue produced.

But we use -- in our forecasting, we do use historical averages, and typically it's a four-year average. And that affects LawnCare, it affects LandCare with snow removal. In all of our businesses we tend to follow that type of process.

I think that makes a lot of sense from a normal perspective. Given the issues faced with transition of leadership and disappointing relative expectations, do you think that's really the best policy going forward, or should you be more conservative in your planning and guidance so there's just less chance of disappointment, relative to the expectations that you create?

You know, there's always different strategies. That's our best judgment.

Okay. How big is the Realogy opportunity you guys actually see for your business going forward? You know, forget about the obvious negative conditions that the real estate channel is facing now nationally. But just as things normalize, how big of a win is this actually for your business?

Well, number one, these are three of the premiere brands in the country, and they're exclusive relationships with the company-owned locations. They're involved in one out of every four home resales in the country, one of their brands is. We've dealt with them before in the past and been very successful at it.

And then, as I said, in the first year, we would expect an incremental 100,000 units annually. And then by year five, we're expecting 200,000 incremental units annually. So, you add those up over five years, those annual totals, and it's quite significant.

What specific incentives were you guys referring to regarding the consolidation of your headquarters operation in Tennessee?

Normal -- as you entertain this kind of a thought, there are property tax incentives that you can go try to obtain and we did. There are some income tax incentives from an estate that we were able to procure. But mostly it's property tax and income tax benefits that we otherwise would not have been entitled to. There's also some jobs training credits, etc., etc., etc.

But we've been -- the people in Tennessee and in Memphis were extremely cooperative. And we think we struck a very good deal.

And you said the NPB of the incentive stream, while strung out for a longer period of time than the cash outlays, is likely to be comparable to the pretax hit of 25 to $30 million. Is that right?

Yes. Particularly -- there's different options. You know, we can lease, we can build, and the amounts vary depending upon which option we choose. I don't want to mislead anybody. These incentives are paid out over an extended period of time. But I stick with the comment earlier that the NPBs will provide a meaningful offset to the gross costs -- or the NPB of the outflow.

At the end of the day, though, Scott, the thing was not about costs or incentives, it was about help in making us a better company.

Right.

And getting shoulder to shoulder, improving communications, speed of decision-making, making everybody feeling part of one team. And I think by far that will be the biggest advantage.

I think it's long overdue. So congratulations on that.

On your retention issues, these were like just huge gains, and I know you report them on a rolling basis. So the transformation and pickup more recently is quite large.

Were you surprised by the size of it, and secondly, were you also disappointed that, given the size of the pick-up, that it didn't have a better financial result or performance in offsetting the significant softness in the new program sales opportunities?

Because you always talk about retention having such powerful benefits to the bottom line, keeping your existing customer base. You had this massive pickup. Just seems to me it would have had a bigger effect in terms of offsetting the top line weakness that you guys have experienced nine months, year to date.

Yes, but Scott, don't forget that this program was really launched in the third quarter. So you're not going to get an immediate impact there. And it is the new customer base. What we did is we had cells that didn't get the LQAs and compared them to the cells that did get the LQAs, and that's where this 1,000-point differential is coming. It's not to say that our overall customer base had a 1,000-point improvement.

It's an extremely encouraging development, but I'm not surprised because of the timing and because of -- we're still dealing with samples here. I'm not surprised that it didn't have a more dramatic impact in the third quarter. I think it can have a very significant impact in the future.

Okay. Thank you very much. Good luck.

Our last question comes from the line of [Nicholas Dansinger] of Columbia Management. Please go ahead.

Hey, good morning, Ernie and Pat. Actually, good afternoon.

Good afternoon.

I wanted to go back really quickly, if we can, in terms of customer acquisition. I know we've talked a little about the shift in terms of acquiring customers away from the telemarketing channel. But your comments centered specifically on ChemLawn and my question is what sort of impact are you seeing in your other businesses from that? Is it just that it's not as big of your acquisitions, part of your acquisition strategy in the other businesses? Is that why you haven't commented on it? [Inaudible].

Yes, we haven't been nearly as telemarketing dependent anywhere else. And consequently we haven't had the sea change and the channel sourcing that we have had at TruGreen/ChemLawn.

The other thing is, I know you've commented on this before --

Nicholas, we're having a little trouble hearing you. I don't know if it's the phone or if you're --

Can you guys hear me okay?

Now we can. Yes. For a while there you were fading in and out.

Okay. Just final question on this whole telemarketing issue. Was curious if -- you may have mentioned this before, but what ultimately is the target, in terms of what percentage of the customer acquisition comes from telemarketing as opposed to other channels?

Well, actually, as we look at LawnCare going forward, telemarketing is not going to be the proactive callout as for new customers as much as it is calling people who have had our service in the past. And, therefore, calling them back to try to get them to re-engage with the brand. So the dependency upon telemarketing in terms of "driving new customers" is not near what it has been in the past. What we want to do is to get some people that have been with us back into the fold.

The indirect, the inquiry side of business, and to a lesser degree, neighborhood, will be the core thrust for driving new sales leads into the business.

Okay. Thank you very much, fellows.

Thank you all.

Thanks very much.

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