Terminix Global Holdings Inc (TMX) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, welcome to the fourth quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded Tuesday, February 13, 2007.

I would now like to turn the conference over to 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 Pat Spainhour, our Chairman and CEO. And Ernest Mrozek, Vice Chairman and Chief Financial Officer. Also joining us is Deb O'Conner, our Controller, and Eric Zarnikow, Treasurer.

Just a note here today, Pat is actually calling in from a different location this morning. And the rest of us are calling in from snowy Chicago.

Before I turn the call over to Pat, I'd 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 the 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 this morning, we are using certain nonGAAP measures as defined by the SEC in Reg 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. I would like to turn the call over to Pat Spainhour.

Good morning, and thanks for being on the call. We're starting off 2007 very confident. Confident because we delivered over 43 million residential and commercial service calls last year and this year we will deliver even more.

We're confident because we're focused on the right things. So our people can be at their best while serving others. The result is better relationships with our customers and improved loyalty and retention. We're also confident because of our unrivaled service industry brands with leading market positions. And we're confident because of our experienced and energized senior leadership team.

The work we've been doing together, the plan that we developed together, has led to decisions and commitments which are the foundation for our expectations for 2007 and beyond.

As you know, these plans were presented in great detail at our November investor conference. We believe we can generate growth year after year within our established lines of business, with our existing brands, by winning customers away from the competition and making customers more satisfied as their needs are consistently met.

But before we look ahead, let's address 2006. We did not reach our earnings target for the year, primarily because of the difficult third quarter. But as you can see from our release this morning, we've improved the key business fundamentals that will carry us into the new year and beyond.

Despite an unusual combination of challenges we encountered, we still managed to achieve earnings per share growth of 38% for the quarter and 5% for the full year. Most importantly, we continue to make progress on improving the underlying fundamentals, which gives us additional confidence as we enter 2007.

Customer retention, a top priority across the company, improved in every business unit. Retention has improved almost 300 basis points in both TruGreen and American Home Shield over the last three years. We've had that 15 consecutive quarters of year-over-year customer or contract growth for both Terminix Pest Control and American Home Shield.

In 2006, we strengthen our sales channels with 600,000 customer contracts coming from direct mail. We expect that will grow to 800,000 direct mail sales for TruGreen ChemLawn, Terminix, American Home Shield and Merry Maids in 2007.

We gained over 100,000 customers from leads generated from the Internet and we plan to grow this by at least 50% in 2007. At American Home Shield, we launch our new business partnership with Realogy, the world's largest real estate brokerage firm which includes: Coldwell Banker, Century 21 and ERA brands.

In addition, we successfully divested in American Residential Services and American Mechanical Services to concentrate our resources and manpower on a more unified portfolio of services.

Our plan for 2007 is the result of a ground-up process, a collaboration of our business leaders working together. They own it, they're driving it, and they're accountable for the results.

Our plan focuses on four key areas.

One, our relationship with customers. We're taking action to decrease churn and increase customer retention. At TruGreen LawnCare, we'll continue to roll out additional lawn quality audits to increase customer satisfaction and retention. We've already seen promising results here. Not only are we reducing our reliance on telemarketing, but we're significantly reshaping and repositions our phone sales to focus on reengaging both former and existing customers.

Second, our relationship with associates. We are taking action to improve the recruitment, training and retention of our associates. Our LandCare true potential branch manager training program will insure that we have a consistent level of skilled managers across our branches as we serve our commercial customers. Our new American Home Shield customer service center application equips our associates with the tools and information they need to serve their customers in a way that is both efficient and more satisfying to the customer on the phone.

Third, innovation. We're shifting from an operational culture to a genuine service culture to delight our customers and build lasting relationships. The lawn quality audit at TruGreen, which I already mentioned, are a game-changing innovation in customer engagement. At Terminix, the introduction of the termite inspection and protection plan, a brand-new cost efficient approach that we believe will attract a wide base of new customers answering their need in a brand-new way.

And, fourth, integration and leverage. We are redeploying our people and assets to create new opportunities in ways of doing business. To further utilize the talents of our senior management team, we created two group president positions. Katrina Helmkamp oversees our branch businesses: TruGreen Lawn, TruGreen LandCare and Terminix, and Scott Cromie oversees our franchise and virtual business: American Home Shield, ServiceMaster Clean, Merry Maids and InStar.

The first proof of the power of this integration is our plan to create a new shared facilities for TruGreen Lawn and Terminix Pest Control branches. This concept opens the door to significant operational savings in the opportunity in the future to cross-sell services.

This year we'll stay focused on increasing the retention of our customers and our associates to insure that we are consistently delivering a satisfying service experience. We will reinvest in the business, particularly in areas that will drive sales and satisfaction.

During our off-season first quarter, we will make incremental investments in people and programs, which we believe will contribute to stronger sales and profits later in the year. We believe there are improved portfolio, combined with solid execution of our business plan, should enable us to deliver mid to high single digit revenue growth in 2007. We anticipate 2007 earnings per share to be in the range of $0.67 to $0.68, after accounting for restructuring charges from Project Accelerate and the consolidation of offices in Memphis.

This is consistent with the guidance we provided at our recent investor conference.

Based on the actions we are taking this year and plan to take in the years ahead, our target is to achieve high single-digit revenue growth and earnings per share growth progressively increasing in the mid-teen level by 2009, with cash from operations growing and continues to substantially exceed net income.

Before I turn it over to Ernie, let me mention one more topic.

As we move forward with our plan, we continue to conduct a thorough exploration of strategic alternatives, which includes a possible sale of the company. If this process results in a proposed transaction that would deliver value that is superior to our current course, then the board will pursue that transaction. Of course, there is no assurance that we're pursue any particular alternative, or that any transaction will occur or on what terms. We won't be releasing any additional information about the status of this review until we have a definitive agreement or the process is otherwise completed.

As a result, we will not be answering any questions about this process during today's call.

Thanks for your time. Now, Ernie will walk you through the quarter and full-year results. Ernie.

Thanks, Pat. And hello, again, everybody. We're encouraged by our fourth quarter. EPS before restructuring charges and before two favorable nonrecurring tax items totalled $0.11.

That was sharply higher than $0.08, and slightly above the top end of the range of our most recent guidance. These better than expected results reflected significant gains in customer retention, tight cost controls and effective management of seasonal labor, and favorable weather conditions in the latter part of the quarter. Our operating cash flows also exceeded our prior forecast.

For the full year, EPS on that same basis totalled $0.64. That's a 5% increase, which was particularly encouraging in light of the unusual combination of challenges that we faced during the year. These included: a very weak termite swarm, a significant softening in home resales, unusually rapid increases in fuel, healthcare and interest costs, and the impact on AHS claims of new energy efficiency legislation.

We overcame those challenges with steady and significant gains in customer retention, continued sharp improvement in the development of prior years' safety claims, and savings from Project Accelerate and other cost control initiatives. Most importantly, we believe we ended the year fundamentally stronger than we started it.

Revenues increased 7% in the fourth quarter and 6% for the full year, with organic growth at 2% in both periods. Now, we provided an exhibit to the press release that shows a detailed reconciliation of GAAP EPS to the comparable EPS numbers that I just mentioned. But I'm going to briefly walk you through the fourth quarter reconciliation.

On a GAAP basis, EPS from continuing operations was $0.13. To that, we add back restructuring charges that are associated with our headquarters relocation. Those charges totalled $10.9 million at the operating income level and $6.7 million or $0.02 per share net of normal tax benefits.

Then we subtract the impact of the two favorable but nonrecurring tax items. First, as part of the package of relocation incentives provided by the state of Tennessee, we were able to recognize NOL carry-forward benefits of approximately $6 million or $0.02 per share.

Second, certain unrelated state tax items were favorably resolved during the quarter. Enabling us to recognize a nonrecurring benefit of roughly $7.5 million or an additional $0.02 per share.

So when recapping the math, GAAP EPS of $0.13, plus $0.02 for the restructuring charges, and minus $0.04 for the nonrecurring tax benefits gets you to the $0.11 of comparable EPS that I mentioned.

A -- fuel, healthcare and interest costs continued to negatively impact our results in both the quarter and the full year. And when compared to '05, these key costs increased by $10 million in the quarter and $36 million or a full $0.07 of increase for the year as a whole.

Let me share some specifics. Higher fuel costs adversely impacted fourth quarter results by almost $1.5 million. And year-to-date totals by over $13 million.

Based upon the hedges we've executed for 2007, as well as current Department of Energy forecasts, we would expect an incremental adverse impact in '07 in the $0.01 per share range. Now, that's a meaningful impact, but much more manageable than the almost $0.03 increase we experienced in '06. Healthcare costs continue to be impacted by inflation, but in addition we made an incremental investment in our employee health benefits of roughly $0.01 per share.

And that was part of our ongoing efforts to improve satisfaction retention. No similar benefit enhancement will be required in '07.

In total, healthcare costs increase roughly $7 million in the fourth quarter, and approximately $15 million or about $0.03 per share, for the full year.

And in '07, we expect incremental healthcare costs of about $0.02 per share. Higher short-term interest rates adversely impacted our results at both the operating and nonoperating income lines by virtue of their effects on our variable rate fleet and occupancy lease costs, as well as our floating rate debt.

On a combined basis, rate increases hurt our results by approximately $1.2 million or $0.005 per share in the fourth quarter, and nearly $8 million or $0.015 for the full year.

Now, although these key factor costs increased at unusually rapid rates, we did continue to make great strides in reducing other costs that we can more directly control. For instance, we maintained our momentum in driving down safety costs. For the quarter, safety-related costs, including the effects of favorable development of prior-year claims, were reduced by almost $2 million. And for the year, such costs declined $14 million or nearly $0.03 per share.

We also remain ahead of schedule with respect to our savings from Project Accelerate, which is our initiative to realign costs in light of recent divestitures, as well as to create a more effective and a more efficient functional support structure.

We captured approximately $0.04 per share of net savings in '06, and expect an additional savings of $0.03 per share in '07.

Our balance sheet remains very strong. Cash and short and long-term marketable securities total $420 million at year end. Most of that was associated with regulatory requirements at American Home Shield.

Our total debt increase very modestly to $690 million, primarily as the result of an increased level of tuck-in acquisitions. And accounts receivable rose almost $100 million, reflecting the first time inclusion of approximately $65 million of receivables and unbilled work in process related to InStar, the commercial disaster restoration business we acquired last February.

Total cash flow from operating activities increased to $289 million. However, excluding the effects of unusual tax payments, cash flows decreased by approximately $36 million.

This decline was attributable to a combination of factors, including $16 million of working capital requirements associated with InStar. Some of that was attributable to receivables from work associated with 2005 hurricanes, whose collection will be delayed. They also reflected the $6 million decline at American Home Shield, primarily as a result of a market wide decline in sales from our real estate channel.

It should be noted that virtually all sales in this channel are customarily paid for by the customer up front.

Thirdly, nonrecurring cash restructuring charges totalled approximately $11 million during the year.

Now, despite that decrease, cash flows, again, meaningfully exceeded our reported net income. And we expect this relationship of cash flow and excess of reported net income to continue into the future.

We declared and paid dividends of $0.46 per share in 2006, an increase of almost 5%. And that represented our 36th consecutive year of dividend increase. That places us in the top 2% of all public companies in the country in terms of consistency of dividend growth.

Due to our decision to explore strategic alternatives, we did not repurchase any shares during the fourth quarter. For the year, we repurchased $7.3 million shares for $86 million, an average cost of $11.78.

I want to briefly mention some Form 4 filings that were made yesterday by two executive officers, including myself, and three directors. These individuals exercised options to purchase shares that were among a larger grant issued several years ago to a broad group of employees and directors. And those options were due to expire at the close of business yesterday. All of these options had a fixed exercise price that was established on the original date of grant, and all of these individuals continued to hold all of the shares that were purchased.

Before turning to the segments, I'd like to give a quick update on the consolidation of our headquarters. As announced last October, we'll be moving all of our Downer's Grove support functions to Memphis in order to improve the speed and effectiveness of our communications and decision making. During the fourth quarter we accrued almost $11 million of costs associated with this relocation and those costs will be paid next year.

Total costs associated with the move are expected to be approximately $33 million, with the balance being expensed fairly rapidly over the first 10 months of 2007. All material relocation costs are expected to be expensed and paid by the end of 2007. And as noted in our press release, our guidance for next year in terms of earnings per share is before consideration of these nonrecurring relocation costs.

As part of that consolidation, we're exploring the possibility of building a new facility that would house all of our Memphis employees at one site. The alternative is to lease additional space at one of our existing Memphis locations. The incentives that are being provided by state and local government agencies would be higher if a new facility is constructed.

But I want to affirm that no decision will be made before the review of strategic alternatives is completed.

Turning now to the segments. At TruGreen, lawn care revenues increased 3% for the year, reflecting increased price realization of over 2.5% and that's a very encouraging improvement over recent experience. We also had increases in supplemental and commercial services.

Fourth quarter revenue and profit growth rates benefited from a higher level of production. And you may recall that we had certain services delayed from the third quarter into the fourth quarter. We were able to complete those services due to favorable weather conditions, and we also benefited, most importantly, from continued sharp gains in customer retention.

At year end, full program customer accounts were comparable to prior-year levels.

As we've remarked through the the year, 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. These declines were partially offset by double-digit growth in sales from newer channels, including direct mail and our neighborhood programs. We plan to continue to reduce our reliance on telemarketing, with direct mail becoming our more dominant marketing channel, supplemented by improved and expanded neighborhood, internet and other sales efforts.

As we forecasted last call, we continued to experience steady and significant improvements in our customer retention rate. That critical measure improved 170 basis points by year end, a sharp increase from the declines that had existed early in the year. Cancellations were consistently below prior-year levels, with customers responding favorably to our stepped-up efforts to improve satisfaction and retention.

Those efforts included the initiation of a program of comprehensive lawn quality audits, or LQAs, which in the 2006 focused more heavily on our newer customers. Other efforts included the implementation of faster response standards, and follow-up calls on reservices, as well as improved customer communications.

As we look to the future, we anticipate substantial additional improvements in customer retention, as we expand the LQA program to the rest of our customer base, focus our efforts on reducing route management turnover, and continue to improve our overall communications with customers.

Profits at TruGreen were down for the year. That resulted primarily from incremental investments associated with the new LQA program, as well as higher fuel, fertilizer, vehicle lease and healthcare costs.

Over the next several years, we're anticipating modest margin improvements and we're confident that that will be accomplished by continued gains in customer retention, reductions in route manager turnover, more normal increases in key factor costs, and better leverage of our infrastructure through improved revenue growth and route density.

TruGreen LandCare reported an overall 2% decline in earned revenues in '06, a modest increase from combined base maintenance and enhancement sales, and enhancements are add-on services such as seasonal flower plantings, mulchings, etc. Those were more than offset by lower levels of snow removal revenues. Less snow in December, as well as the absence of hurricane-related enhancements during the fourth quarter of 2006, as was realized in the fourth quarter of '05, contributed to a 5% decline in revenues in the fourth quarter.

During '06, LandCare substantially increased the size, the caliber and the training of its sales team. In addition, they're using new tools to identify and pursue larger and more profitable accounts. This resulted in improvements in the relative size and quality of outstanding sales proposals, with overall proposal dollars up approximately 40% over the prior year.

The most important thing is that this is now beginning to breed an increase in the total volume and the average size of our sales that we're closing. Both volume and average size increased sharply in the fourth quarter. And that should contribute to improving growth and maintenance revenues in the future.

Lower snow removal and hurricane revenues, which are higher margin services, combined with the higher fuel and healthcare costs and sales force investments that we talked about. Those factors more than offset favorable trends in safety, and more efficient equipment and vehicle utilization, resulting in a total decline in operating profits for the year of about $5 million.

Over the next several years, we are confident in achieving significant margin improvement. That will be accomplished through a better customer mix, reflecting higher average job sizes, stricter pricing on new sales and the pruning of smaller and less profitable work. It will be accomplished through improvements in branch manager selection and training, and from increased customer retention from our various operating and account management initiatives.

At Terminix, we achieved a 2% overall increase in revenues for the year. We had solid growth in pest control and termite renewals and that was partially offset by reductions in termite completion revenue dollars. Our pest control business, and as you know, that represents about half of the annual revenues in this segment, had a solid performance on both the residential and commercial size of the equation.

As previously disclosed, we acquired Safeguard Pest Control at the end of the third quarter. And that's a company that operating in 16 markets across the country with annual revenues of about $23 million. Now that acquisition clearly had a positive effect in our overall pest customer comp of 9% and it also benefited related retention rates.

But even if we exclude this and other acquisitions, we achieved an encouraging a 5% increase in pest customer counts and a 170-basis-point improvement in related retention rates for the year. And we had an organic increase in pest revenues of 8% in the fourth quarter for a very solid finish.

In 2006, new termite completions had meaningful challenges, as well as encouraging developments that should benefit the future. Revenue dollars from termite completions were down 8% for the year. And that resulted from a combination of factor that is we've talked about before. A weak swarm in most regions caused [inaudible] flows for renewable contracts to be down 16%.

However, our sales force more than offset that challenge by doing a much better job converting the leads they received. And, as a result, we actually had a 4% increase in renewable unit sales, which is critical because it drives future renewal revenues.

With respect to those revenue dollars that I mentioned, the increase in units, that 4% increase in units, was offset by the combined effects of two factors. First, a shift in mix from bait to lower-priced liquid treatments, with bait comprising roughly 20% of the combined total in the fourth quarter. And based on consumer research, we anticipate that this mix shift is now largely behind us, and that bait will stabilize at around the 20% level on an ongoing basis.

Second, less revenue was recognized in the current year from prior-year deferrals. That resulted from a change in the bait that we were using that we initiated in 2005. The new bait at different operational protocols, which required less revenue to be deferred into 2006, that then had been deferred into 2005.

Operating margins for the year at Terminix increased by 30 basis points, primarily resulting from lower materials costs and that resulted from the change to the new bait product I just mentioned, lower safety costs, and continued improvements and termite damage claim expenses, offset in part by the increase in fuel and healthcare and interest costs.

At American Home Shield, growth in new sales and renewals, which of course are recognized as earned revenues over the subsequent 12-month contract period, improved a solid double-digit rate of 12% in the fourth quarter and 6% for the full year.

Earned revenues increased 4% in the quarter and 7% in the full year. Focusing on that strong fourth-quarter growth in new sales, that was driven by continued double-digit growth in renewals, and renewals represents 60% of total warranty contracts written. And that double-digit growth was the result of increased price realization and an 80-basis-point improvement in retention rates.

The growth also reflected improving trends in our real estate channel, primarily resulting from the launch of our new marketing agreement with Realogy. Unit sales from the real estate channel, and that channel represents approximately 25% of total annual contracts written, those unit sales were down 9% for the full year, but were flat in the fourth quarter.

We experienced a pervasive weakening in the home resale market, that was particularly acute in several of our largest volume states, especially California. But we're confident that we've maintained, or slightly increased market share in most areas. With the benefit of the Realogy deal, which started in late September, real estate sales are expected to increase sharply throughout 2007.

Finally, our direct to consumer channel, which represents roughly 50% of new contracts written, experienced a 6% decline in sales due to lower response rates on certain direct mail programs. Operating income at home shield declined 15% in the quarter and 12% for the year. And that was primarily the result of increases in average cost per claim. Most of that was due to higher heating and air conditioning costs.

Those were impacted by the required conversion to more efficient 13 SEER or better units, as a result of new energy efficiency legislation which became effective in 2006. Claim costs in other areas, such as appliances and plumbing, were also higher as a result of general inflationary pressures.

The fourth quarter decline in profits was also impacted by start-up investments related to the Realogy deal, as well as incremental direct mail programs that should benefit 2007 revenues and profits.

Finally, within the other operation segment, InStar achieved revenues of almost $96 million during the 10-month period subsequent to acquisition. Its operating income, head of acquisition-related amortization, was approximately $2 million.

Results were negatively impacted by the lack of new hurricanes in 2006, as well as the costs associated with improvements and our asbestos removal procedures. And we talked about those last quarter.

The company made good progress in its efforts to diversify into noncatastrophic sales channels, such as rehabing buildings to comply with the American Disabilities Act.

In the fourth quarter, InStar's revenues were $24 million. It incurred an operating loss of $2.9 million, which included an increase in reserves for certain receivables associated with preacquisition hurricanes in Florida.

As previously discussed, the company has accounts receivable from a family of insurance companies in Florida, whose claims are now being administered by the Florida Insurance Guarantee Association. The related receivables balances, net of reserves, total approximately $9 million and represent the company's best estimate of the amounts that will ultimately be collected.

The ServiceMaster Clean and Merry Maids operations reported strong combined increase in revenues of 14% for the quarter and 12% for the full year. Again, this was driven by continued excellent growth in disaster restoration and residential maid service, which in turn generated solid gains and operating income. Headquarters costs, which are also included in the other segment, included the restructuring charges alluded to earlier, which on a combined basis, totalled $11 million in the quarter and $22 million for the full year.

And those incremental costs were substantially offset by continued favorable trending and prior-year safety claims, lower overhead costs, initial savings from Project Accelerate, and reduced incentive compensation rules.

Overall, as we mentioned, we're very encouraged by our strong finish and are confident as we enter 2007.

At this point, we'll turn it over to you for your questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Sam Darkatsh from Raymond James. Please go ahead.

Good morning, Pat. Good morning, Ernie.

Good morning, Sam.

Couple housekeeping questions, if I could. Can you quantify the Q1 cost of the additional sales initiatives that you're undertaking, Ernie, if you could?

In the quarter, we anticipate that investments will cost us roughly $0.015 to $0.02 a share. And that would be investments across the spectrum of services that reflecting the initiatives that Pat spoke to.

The second question, in AHS, if you -- what was the beneficial sales impact of the Realogy deal in the quarter? Would sales have been up excluding Realogy?

The sales went from a double-digit decline in the third quarter to flat in the fourth quarter and we're seeing meaningful in increases so far in 2007. I don't have the exact impact with me here today on a unit basis in the fourth quarter. But that improvement in trends was clearly in part the -- in largest part the reflection of Realogy.

Okay. You also noted in your release a legal matter in Terminix. Could you remind us what that situation is and what the impact of the increased reserve was?

Yes. Sam, it was not a material increase. It was a factor that influenced overall results. And it related to a wage and overtime matter in California at Terminix.

Got you. A couple more quick questions and then I'll defer to others. Deferred revenues in the quarter, the last three quarters it's been trending down on a year-on-year basis on the balance sheet. What was it in the quarter, and can you give color as to why that trend might have been?

The decline in deferred revenues is really a result of the temporary mix shift at American Home Shield. As I mentioned in my cash flow remarks, the real estate channel is the channel where people pay for the service up front and that generates the larger deferred revenue balance.

Otherwise, there were some minor differences in the timing of our prepayment solicitations. But we saw the cash come in early in January, so there's no fundamental change impacting that deferred revenue balance other than the one that I mentioned.

So you would suspect that deferred revs would grow commensurate with overall sales growth beginning in '07?

Yes, I think so. And again, we should get a bump in the growth rate in our real estate channel in '07. And that should help that growth rate in deferred revenues.

Last question, then I'll defer to others. Any update on the Lowe's pilot?

Sam, we're continuing to work with them. Obviously, not as hard right now, with the due diligence, or the transaction thing going on. But it's still a viable thing. They're energized over it and our people are. And we will continue at a pace that Lowe's is willing to go. We continue to think that retail channel is a significant channel that we need to be a participant in some form or some level, whether we man it and service it or whether it's kiosk or what, but there's a great opportunity there that we're going to continue to pursue.

Thank you, gentlemen. I'll defer to others.

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

Good morning, everyone.

Good morning.

Hi, Jim.

Pat, could you talk -- while you're undergoing strategic review, does the company plan to continue with acquisitions?

We haven't changed anything that we're doing. I mean if we find tuck-ins, we're doing them. We're trying to run the business as we would as we go through this process. And as Ernie mentioned earlier in the call, we did a fourth quarter pretty large tuck-in, Safeguard and Terminix and we're just going to continue doing the things that propel the geographic location and the ability to grow these brands.

Okay. Now, the acquisitions within InStar space, does that remain a priority sector for you, or are we likely to see no further acquisitions in that area?

We think in the future it's a tremendous opportunity for us. InStar, with the combination of ServiceMaster Clean, the mitigation and then the construction buildout is a great combination.

And as we get the InStar Group totally absorbed and working with the company in the disciplined way that we need, then we're going to look to enhance the capability that we have, as well as again the geographic location to really be the fastest-growing and largest player in this marketplace.

So, yes, it's a tremendous opportunity, but the integration and getting the performance and the standards and the disciplines in place before we just shove out and bring something else in, is what's driving the timing of any acquisition there.

I see. And then finally, with Realogy, is the deal the company struck with Realogy, does that represent average profitability, or did you have to make concessions in order to make that arrangement work?

It's pretty much the same profitability, but probably has a longer term of upside potential because of the breadth of it and the way the deals are done. Ernie may have some color to add to that as well.

No, that's exactly right, Pat. Over -- the agreement has a five-year life and over the term of the contract, we clearly anticipate at least equal economics. I would say that in the first year, meaning '07, because of funding some incremental investments and infrastructure to support the deal, you won't see that same degree of profitability, basically being a break-even result.

But generating the unit sales, which will generate subsequent renewals and contribute to very good profitability over the five-year contract period as a whole.

Thank you both.

[OPERATOR INSTRUCTIONS] Mr. Byots, there are no further questions at this time. I will now turn the call back to you.

Okay. Thank you all for joining us today. And if you have any follow-up questions, please feel free to give me a call. Thank you.

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. Thank you, and have a great day.