Terminix Global Holdings Inc (TMX) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you, and welcome to the ServiceMaster Company's first quarter 2008 earnings conference call. Today's call is being recorded and broadcast on the Internet. Beginning today's call is Mr. Marty Ketelaar, ServiceMaster's Vice President of Investor Relations. Mr. Ketelaar will introduce the other speakers on the call. As a reminder, during the question-and-answer session, please limit yourself to one question and one follow-up. At this time, we'll begin today's call.

Please go ahead, Mr. Ketelaar.

Good morning, and welcome to ServiceMaster's first 2008 earnings conference call. Joining me today is ServiceMaster's Chief Executive Officer, Pat Spainhour, and Chief Financial Officer, Steve Martin. We'll make approximately 15 minutes of prepared remarks, and then we'll be happy to address your questions during the question-and-answer session.

Before we begin this morning, I'd like to note that, throughout today's call, Management may make forward-looking statements to assist you in understanding the company's strategies and operating performance. All forward-looking statements are subject to the Forward-looking Statements Legends contained on our recently filed Form 10-K and our Form 8-K. These statements are not guarantees of performance and are subject to risk factors contained in our public filings that may cause actual results to vary materially from those contemplated in the forward-looking statements. As mentioned on May 14th, The ServiceMaster filed its form 10-Q as well as an 8-K containing additional financial disclosures that we believe may enhance your understanding of our financial and operating results. Due to the inclusion of purchase accounting adjustments, merger and restructuring expenses and non-cash option and restricted stock expense, among others, our financial results may be more complex than in past periods. Therefore, we may reference throughout today's call terms, such as EBITDA, comparable operating performance and operating performance. We have included in our 10-Q and Form 8-K definitions of these terms as well as relevant -- relevant reconciliations to most appropriate GAAP terms in order to better assist you in understanding our financial performance. Our 10-Q and 8-K may be accessed by going to our Investor Relations page of the Web site, which is www.servicemaster.com. I would also like to remind you that this call is being recorded by the Company.

During the question-and-answer session, we encourage you to ask any questions that you may have. Due to our disclosure policy, we will have a very limited ability to hold follow-up conversations with our public side investors, and, as such, we request that you please ask any questions during this public forum. Last, many of you on the call received confidential information as part of the bond offering process in June. The confidentiality agreement that you completed to obtain that information remain in place, and we request that you refrain from asking any questions related to any confidential information you obtained from the company. I'll now turn the call over to Pat Spainhour for opening comments. Pat.

Good morning, everyone. Thanks for joining us today. As -- as you have seen in our 10-Q that we filed last week, the first quarter of 2008 was a very solid quarter for us although historically the first quarter is a period of investment for many of our businesses as we prepare for the production season. The weakened economy, the slowdown in the housing resale market and rising commodity prices present challenges to our growth plan, and we have seen some of that impact our businesses during the first quarter. In a few minutes, Steve Martin will provide you with more details about our first quarter financial performance and what we've been seeing in the marketplace. But, first, let me give you a brief summary of our first quarter 2008 results. Through March 31st, the Company reported a revenue of $632.2 million, including the impact of purchase accounting adjustments of $22 million. Excluding the impact of purchase accounting adjustments, revenues declined 2.9%. Operating performance for the quarter was $65 million, an 11% increase over first quarter 2007 results. Slower consumer spending dampened by the sluggish real estate market in unusually cool weather contributed to lower than expected revenue results. However, improved customer retention rates in our lawn care, termite and home warranty businesses helped to partially offset those factors as did our relationship with [Relegy]. While less than a year into our transformation into a leaner, more efficient company, and, while we're on track with our cost savings goals, we believe there are additional opportunities for improvement. We also remain confident about our longer-term future. We have plans in place to build on the strong market leading positions of each of our brands and are pursuing those strategies and initiatives that we expect will drive top-line and bottom-line growth. For example, in the first quarter we continued our Fast Forward Transformation process, which includes the reorganization and restructuring of certain support functions. We are now entering the second phase of this initiative, which includes a comprehensive evaluation of our functional business processes for re-engineering opportunities. We'll also consider outsourcing, but only where it makes sense.

In the first quarter, we began by taking a hard look at information technology, finance and sourcing to identify ways to consolidate and simplify our processes and standardizing them across multiple business units where appropriate and when possible. We have targeted annualized savings of $60 million to be fully realized by the end of 2009. We remain confident that we can achieve that target. With the collective input from customers, associates and selected third-party advisors, we're taking a thoughtful and prudent approach, and we expect to have much more to say about this later this year. In the end, we'll create a more nimble company with business units whose full energies will be on growth-oriented activities, such as sales, service and brand marketing while delivering strong bottom-line results. Our Centers of Excellence will provide the resources to support growth, for example, recruiting, training and developing our future leaders. We're also supporting our growth objectives by investing in initiatives that will grow customer retention, a key driver of revenue growth and profitability. In 2007, we saw continued retention improvements in nearly every business unit, and that trend continued in the first quarter of 2008. In TruGreen Lawn Care, for example, we're continuing our expansion of of the successful Lawn Quality Audit Program, focusing our efforts on reducing route manager turnover and improving overall communication with customers. Our TruGreen LandCare unit is undergoing tremendous change, pruning unprofitable accounts in favor of more profitable ones. Although the total base contract maintenance sales dollars declined for the first quarter of 2008, the business actually realized a meaningful improvement in the average value per contract sold, a sign that we are making progress and repositioning the business for growth in the future.

While customer retention remains a top priority, we're also tapping into new growth opportunities. Customer accounts grew in the first quarter at Terminix and American Home Shield, two of our largest businesses. Termite customers grew 2%. Even a slow real estate market, America Home Shield performed well, growing its total number of homes warranty contracts 4%. However at LawnCare, we saw a 2% reduction in full program accounts due to slower sales that have been impacted by weather and the economy. The economy and the weather will continue to be critical factors for our company, and it will require continued focus and resiliency of every one of our associates to meet the challenge at hand. More of the strengths of our Company lies in our deep commitment to our core objectives, access with customers, help people develop and grow profitably, while remaining faithful by honoring God and all that we do. By staying true to all our values and striving to do the right thing in our dealings with our customers and our associates, I believe we'll be in an excellent position to succeed in the future. I'll now turn the call over to Steve Martin, who will discuss our financial and operation results in greater detail. Steve.

Thanks, Pat. And, as Marty mentioned at the beginning of the call, last week we filed our first quarter 10-Q, and we also filed an 8-K. Those filings include reconciliations from our reported GAAP numbers to our non-GAAP figures, such as adjusted EBITDA and operating performance. Due to a variety of items, which resulted from the acquisition led by CD&R, including among other things, higher interest costs, non-capitalizable merger-related expenses, restructuring costs and purchase accounting adjustments, we believe these non-GAAP figures will help you better understand the true operating performance and trends of the Company. And, our comments today will focus on these performance measures. Let me now turn to our results. For the quarter, operating revenues totaled $632 million compared to $673 million a year ago. The 2008 results included approximately $22 million of non-cash adjustments resulting from recording deferred revenue at Terminix and American Home Shield at its fair value in connection with purchasing accounting. Excluding these non-cash adjustments, revenues totaled $654 million, a decline of 2.9%, reflecting reductions at TruGreen LandCare of $24 million as part of our planned repositioning of that business. Excluding LandCare and the effects of the purchase accounting adjustment, our revenues from continuing operations in the first quarter of 2008 were up about 1% compared with last year. Our operating performance as set forth in the 8-K was $65 million compared with $59 million a year ago. All segments except American Home Shield showed improvement in operating performance during the quarter. and I'll discuss the reasons for their results during the segment review. Adjustments to our cost structure throughout the company drove the overall improvement in operating performance while increases in customer retention and improved price realization helped to off-set the adverse effects of rising fuel costs and material costs. Cash flow used in operating activities of continuing operations with $65.5 million in the first quarter of 2008 compared to $36.1 million a year ago. The decrease in cash flows was primarily attributable to higher interest in restructuring payments, partially off-set by lower working capital needs.

Now, let's talk about the segment results. At TruGreen Lawn Care revenues grew slightly more than 1% to $134.4 million, primarily due to additional seasonal sales of ice melt materials and improved price realization. Our customer accounts ended the quarter 2.2% lower than last year's levels due to an 11.8% decline in new sales resulting from a cold and snowy March as well as the impact of the economy. This was partially off-set by a 30-basis-point improvement in customer retention. The rolling 12-month customer retention rate at Lawn Care improved 61 -- to 67.1%, the result of our continued focus on improving the customer service experience, enhanced customer communication and lawn quality audit. Operating performance grew more than 16%, benefiting from revenue growth and reduced overhead spending partially offset by higher fuel and fertilizer costs. Turning to TruGreen LandCare, revenues decreased 23.6% to $78.7 million while operating performance improved more than 188% to $4.3 million compared to $1.5 million a year ago. As we have discussed for the past several quarters, the decline in LandCare revenues reflect planned changes, including the closing and consolidation of certain branches and the pruning of less profitable and unprofitable customers. We expect to see the revenue base of this segment continue to decline in the near term as the full year effect of these changes are realized. However, we are now seeing improved profit results despite the lower revenues due to the restructuring of this segment's cost structure and the more profitable customer base.

At Terminix revenues were essentially flat with the first quarter of 2007. However, operating performance grew more than 12% to $55.6 million, reflecting, among other things, lower material costs, effective management of sales and production labor and reduced overhead costs. This was partially off-set by higher fuel costs. Revenues at Terminix reflected modest growth in pest control services and increases in termite renewal contracts, off-set by a 6.4% decline in new termite treatments as the termite swarm activity was negatively impacted by cooler than normal weather conditions. Pest revenues increased by 3.3% as tech-in acquisitions more than off-set a decrease in new unit sales. Pest retention rates declined slightly to 77.9%, due primarily to the impact of the Safeguard Acquisition made in the fourth quarter of 2006. Termite renewal revenues increased 1.4%, due to improved pricing and retention with retention rates increasing 30 basis points to 87.8%. At American Home Shield, revenues were $105 million, including a $19.6 million adjustment for purchase accounting. Excluding purchase accounting, revenues were consistent with first quarter 2007 results. Operating performance for the quarter was $5.8 million compared to $15.7 million a year ago, primarily due to an $11.6 million decrease in interest and investment income, which included a write-down on certain investments in American Home Shield's investment portfolio in the first quarter, whereas we realized approximately $6 million in gains during the first quarter of 2007. I think it's important to remember that last summer when the merger closed, purchase accounting required that we mark the investment portfolio to market. The market was near its peak at that time, and our mark-up was approximately $9 million. Since that point in time the market has performed poorly, and the write-downs taken in the fourth quarter of 2007 and the first quarter of 2008 are reflective of that performance. Rolling 12-month retention rates at AHS increased 330 basis points to 62%. The improvement in retention rates reflects an effort to improve the customer service experience. Our use of preferred service contractors, prompt follow-up measures to ensure customer satisfaction, combined with enhancements to our renewal process have contributed to the significant improvement in retention rates. Unit sales through the real estate channel declined 23.9% in the first quarter, reflecting the continued softness in the home resale market throughout most of the country. Although our [Relegy] relationship has helped buffer the impact of the current housing market, we did see a slowdown in unit sales from our real estate channel. Excluding the sales through [Relegy], real estate unit sales declined nearly 29%, which would be consistent with the trend of sharply lower home listings and closings throughout most key markets in the country.

At the other operation segment, which includes results of ServiceMaster Clean, Merry Maids and the company's headquarters functions, revenues increased 3.1% to $52 million compared to $50.5 million a year ago, reflecting increases in disaster restoration services, off-set by lower product sales. Operating performance for the segment totaled $5.9 million compared to a loss of $200,000 a year ago. The improvement in operating performance primarily -- primarily reflects improved performance at ServiceMaster Clean and Merry Maids and lower support function cost. We delivered solid results during the quarter despite the challenges we're seeing in the housing market and the overall economy, including rising fuel and fertilizer costs. Based on the latest public data, those economic conditions are expected to remain throughout much of 2008. While we cannot alter those conditions, the Management team and Associates at ServiceMaster remain focused on actions that help mitigate the impact on our operating results and on those initiatives that will create and deliver long-term value. We look forward to providing you with an update on our progress later this summer when we report our second quarter results That concludes our prepare remarks, and, at this time, we'd be happy to take your questions.

Thank you, sir. Ladies and gentlemen, we welcome your questions and or comments. (OPERATOR INSTRUCTIONS) Also, as a reminder, we would like to ask you to kindly ask one question and one follow-up. Thank you. Our first question comes from the line of Emily Shanks of Lehman Brothers. Please go ahead with your question.

Good morning. Thank you for taking the questions. I wanted to follow up on the comment in your opening remarks of around the $60 million of -- of savings that you expect to realize, I believe you said in fiscal year 2009. Can you comment at all as to how much of those savings have actually already been realized?

What I can tell you is that we have made very good progress on it to date, realizing some benefit in '07 as well as '08. And, we are on track and, actually, a little ahead of schedule of achieving that target of $60 million by the end of '09.

Okay. Great. And, then, can you speak to some of the initiatives that you found successful in driving your customer retention rate? Because it, obviously, ticked up fairly nicely.

Well, it's different by company as we go forward. I mean, I guess the biggest impact that we really had or the biggest changes in our Lawn Care business, where we started back in '06 doing lawn quality audits. And, that really is creating a personal relationship between our specialists, our service agent who will go out and actually walk the yard with the client as much of that as we can get done. And, our target has been to get 100% of our new accounts, and this year we're taking it to our first year renewal people to drive that and we've seen significant results building that relationship. The customer relationship is all about people working with people, and that's the key thing there.

I think when you look at American Home Shield, they have really just been working on customer service and strengthening what we've been doing over the last several years, the phone call follow-ups that we do with every service -- or every claim that's been processed, working with our premium of contractors, the 14 or 15,000. There's a small subset of that that get the majority of our business, so we stay focused on using the best of the best in putting the service out there and shown a tremendous results over the last 12 months.

Thank you, sir. Continuing onto our next question is -- comes from the line of Colbert Cannon of Glenview Capital. Please go ahead with your question.

Hi, gentlemen. Thanks for -- thanks for taking the call. I just wanted to clarify the gains -- the investment portfolio in Q1 of 2007 of $6 million. Does that mean that the $11.6 -- $11.6 is net of that number. Or, you add the $6 million and we had an incremental $11.6 million decrease in investment income in Q1 of '08?

The -- the $11.6 million is the total spread. So, there is $6 million gain last year offset by -- whereas we had losses this year, total loss on the investment portfolio and interest income at American Home Shield was $4.5 million, and the impairment write-down was $5.2. That's the amount in '08.

Okay. Thank you.

Yes.

Okay.

Thank you, Mr. Canon. Continuing on, our next question comes from the line of Yilma Abebe from JPMorgan.

Thank you. Good morning. My first question is, the percent decline in Lawn Care new customer account growth, are you able to categorize that in terms of how much of that do you think roughly is impacted by the economy, and how much should it be more - more weather related?

We, certainly, in March had a different weather month for Lawn Care than what we had last year, and that was an impacter. But, as we've looked at the data, each month for the quarter and looked at that time by geography, there is a consistency in the amount of the impact on the business.

And, so, what we -- what we would say at this point is there seems to be a -- a pretty significant impact from the economy. Weather in March, certainly, was an impacter, but, if you remember last year, we -- April was a bad weather month. And, so, hopefully, as we talk about second quarter, we'll bring -- give that a perspective. But, right now -- right now it's more the economy because of the consistency that we see in by geography across the U.S. of the impact.

Okay. Thank you. I guess my second question is related to pricing. It looks like you had some positive pricing in Lawn Care. Were you able to pass on all your, I guess, your target pricing increases, or were you able -- did you have to give back some?

Well, at -- in the first quarter the total effect between pricing and cost -- and inflation on the cost side, we did not see any margin deterioration. I think as the public data that's available for outlook on fuel and fertilizer, prices that we all are seeing, I think that will be more and more of a challenge the remainder of the year and will likely require other mitigating actions in our cost structure to off-set the full impact.

Thank you, sir. Our next question comes from the line of Yahyin Shen of MetLife. Please proceed with your question.

Hi. Getting back to the $11.6 million decline and interest in investment income at American Home Shield, was that -- is that just write-downs on the market value of fixed income securities held in the portfolio, or you had some write-downs as well as actually realized losses on sales?

There -- they -- again, the $11.6 is a swing, so there is $6 million gain last year and a net $4.5 million loss in the first quarter this year. Of that $4.5 million loss, there was a $5.2 million write-down. That was on our overall portfolio, which is a balanced portfolio, both fixed income and equities. These write-downs were on the equities side. We look at it security-by-security to evaluate what is -- where the write-downs are needed. So, those write-downs were primarily -- were primarily, if not almost entirely, in the equity portfolio.

Okay. Thank you.

Thank you. Continuing on, our next question comes from the line of Brian Watson of Fortress. Please go ahead. Your line is open.

Hi. Can you talk a little bit more about what exactly your approach is to really hedging out raw material costs as they affect your business and --

And, Brian, we can't hear you, Brian. Can you pick up your handset, please.

Mr. Watson, would you be please able to pick up your handset? We're not unfortunately able to hear you.

Can you hear me okay now?

Thank you, sir. Please go ahead with your question.

Sorry. Thank you. Can you just talk a little bit more about your raw material costs and kind of how you're approaching hedging out the negative effects from those. And, you just spoke about possible margin deterioration, and how you were going to take some -- going to have to take additional steps to kind of rationalize costs. Those additional steps, are those in addition to the $60 million of Fast Forward initiatives that you have and could you maybe expand on that -- ?

Hey. Hey, Brian.

Yes.

You're not coming through very well. I think your question related to the hedging of our materials costs and commodity pricing.

Yes.

What we currently do in that area relates -- is in our fuel costs, where we hedge approximately two-thirds of our usage on an annual basis, which we did last year, and we have in place again this year. So, that -- that gives us a fair amount of protection from the volatility of fuel prices, but that's the only commodity that we currently have hedging programs in place on.

Okay. Can you hear my next question? Can you hear me okay.

Sorry about that, but I didn't -- I didn't hear the rest of that question.

Okay. I'll call you off-line. Thank you.

Okay.

Alright.

Thank you, Mr. Watson. Continuing on, our next question comes from the line of Alan Mark of Raven Asset Management. Please go ahead with your question.

In -- a couple of questions. As far as the renewal process, overall in your business, given the economy, is there any trends that you could share with us? And, also, as far as is there a -- from a seasonality perspective in your business, is there a period that we -- that we've either heading into or have just exited, where you have a chunkier part of the renewals if -- I'm assuming they're annual?

Renewals -- renewals continues to be a bright spot for our company through the first quarter. American Home Shield renewals are up as expected. Our renewal businesses, other businesses that have renewal activity, spike in the end of the first quarter, into the second quarter because we're in our selling phase right now. And, so the preponderance of accounts renew over April -- March, April, May, June, and, so, we'll get a better sense of what the real impact of that spiked seasonality is, But, renewals -- renewals as it has for the last year, have been very positive for the Company and what we've seen through the first quarter have continued that track.

And, you're seeing that again, nothing -- nothing different really in the second quarter?

Well, we don't talk about the second quarter, yet. We'll talk about that in a few months, but, through the first quarter, renewals are where we expected them to be.

Thank you. And, our next question comes from the line of Max Saffian of Fortress. Please go ahead with your question.

Hi. Just -- just sticking with AHS again, on the -- on the $5 million write-down, have you taken similar write-downs in the past? What I was trying to get to is more of a run-rate operational number for this quarter, excluding those write-downs.

Answer your first question, we had write-downs in the fourth quarter of '07 as well. You may recall.

Yes.

And, with -- and that -- a good bit of those write-downs were on the heels of writing up the portfolio during purchase accounting mid-year '07. However, we have seen the market performance has overall been weaker than it had been in the past, and that's why we -- you're seeing additional write-downs now.

Got you. And, when you say you've written down the equity portion of it, these are publicly-traded equities? These aren't -- this isn't a private equity investment that's been made.

That is correct.

-- from that portfolio, correct?

That is correct. That is correct.

And, then the second question I had was, just in the other operations ,you saw over $6 million improvement year-over-year. Can you just go into that a little bit more? Because we hadn't seen that previously. Just wanted to understand that a little better, which businesses had improved. And, is that more of a cost savings initiative or -- or from a top line? It's --

Well, it's a combination. We have some improvement at ServiceMaster Clean and Merry Maids both at the top line and the bottom line there, and we also saw improvements in our functional overhead cost structure as a result of Fast Forward and just overall cost control.

Thank you. And, our next question comes from the line of Alexis Gold of Solace. Please go ahead with your question.

Hi, yes, I had a follow-up on one of the earlier questions. And, I have another question. But, when do you typically reset your pricing? I'm just -- do you reset it at the end of the year or is it the middle of the year? And, when we think about your contracts, do you have any ability to adjust for changes in raw material pricing? Can you pass that through at all?

What -- it varies by business unit. Some of our business units have annual fixed contracts, and so those prices are adjusted as we look at those renewals. And, it varies on the contract.

And, other businesses, triggering lawn care in particular, those are not annual contracts, but recurring services. And, we look at those market-by-market and customer-by-customer mid-season, and we phase in increases during the middle of the year.

So you would be phasing in increases right around now, then?

That's correct.

And how are customers responding to that?

Well, obviously that's a -- that's a Q2 activity, which we'll be giving a much better update on next call. But, we've had historically very good success at passing those increases on, and we feel good about that for this year.

It really flows with how we're doing in retention. When our retention is moving up as it has been, our price increases are easier to pass through.

Thank you, gentlemen. Our next question comes from the line of Brian [Gilco] of Commercial Industrial. Please go ahead, sir. Your line is open.

Hi, good morning. My question is around interest expense. Given the reduction in interest rates, how would you characterize your, sort of, new run-rate interest expense on an annual basis?

Well, obviously, the lower interest rates have been a significant pickup to our plan, which we don't typically get into our forecasts and planned expenditures on this call. But, I will say that the combination of the lower rates and our -- the hedges that we put in place, the interest rate swap, have allowed us to take significant advantage of the current interest rate environment.

I know that with your term loan you had not hedged the majority of your exposure, but, it sounds like you have been adding additional hedges as rate -- as rates have fallen?

That's right. That's right. That's been on the term loan.

Got you.

And, right now, we're right at $1 billion in motional amount that we have swapped.

Thank you, gentlemen. (OPERATOR INSTRUCTIONS) And, as a reminder, we'd like to remind everyone that you're allowed one question and one follow-up. We now have a question from the line of Mr. Scott Goldsmith of Invesco. Please go ahead, ma'am -- sir. Your line is open.

Just a follow-up to that interest question. That interim facility matures this summer, and you have the ability to pick that facility. When do you have to make that decision, or is that something you have contemplating, exercising the pick feature?

That is -- that is expected to occur just in normal course as that matures.

I'm sorry --

I think he's asking about the pick, the pick on the --

On whether or not we'll be using the pick notes? We're not going -- our anticipation and expectation is that we'll be electing to make cash interest payments throughout 2008. Sorry about that. I thought you were asking me about the -- was that interim loan going to convert.

Okay. Just to switch gears. Obviously, bad weather is not good for the lawn side of the business. As far as on the pest and on the termite business, how does rain or bad weather, how does rain impact that business?

Well, it can impact it a little bit. But, the bigger impacts are in the termite side of the business is the annual swarm. And, we're a little early to talk about the whole Eastern Seaboard, but we can, certainly, say that, in the first quarter, we had a softer swarm than what we expected. And, there's weather conditions. There's humidity and heat conditions that either help the swarm develop or keep it from developing, and, so far, in Florida through the first quarter, it was softer than what we expected.

And thank you. Our next question comes from the line of Joe McFadden of Aberdeen Asset Management. Please go ahead. Your line is open.

Hi there. Approximately what percentage of your cost of goods and services are -- are spent on fertilizer?

I don't think we -- I don't think we -- Joe, we don't publicly -- we don't make that available publicly. That's not something that we would normally disclose.

Okay. Okay. Thank you.

Thank you. Continuing on, our next question comes from the line of Judd Arnold of King Street. Please go ahead. Your line is open.

Yes. I'm trying to understand the swarm season a little bit more. Listening to the Rawlins call, I know it's a different company, but similar business. They sort of implied it was, my take away, that the weak swarm season was good for them because they had all these term contracts, essentially they sold insurance that was never hit. Is that the case for you?

I can't -- I can't speak to anything that they would say. I know our business in swarm season, which probably is the best marketing tool for the termite business, when it doesn't swarm, folks -- people just don't see the -- that termites in the air. And, they're really still there. That's the misnomer about the swarm. It's not saying there's no termite activity. It's just that conditions don't exist for them to come out of the ground and be seen.

And, so, it's not good for us when we don't get that marketing advantage, and that's what we didn't experience in Florida to the degree that we expected in -- in the first quarter.

Sure. So, I guess your answer is that there's two impacts. One is financial, and one is ongoing marketing. So, I mean I take your point on the ongoing market and contracting, but,on the steady state, this past quarter we had a weak -- weak swarm season. How did it impact first quarter? Was it better or worse for you that the swarm season was bad?

As I said, we didn't see the swarm in Florida alone, and we're too early in the season for the rest of the Eastern Seaboard, where we really measure it to really have an opinion on it yet. But, we didn't -- we didn't see the swarm to the extent that we had expected to see it in Florida.

Thank you, sir. We'll now proceed to follow-up questions from participants. We now have a question as a follow-up from Emily Shanks of Lehman Brothers. Please go ahead, ma'am. Your line is open.

Thank you. Just a follow-on as it regards to the pick option. I understand you will elect cash likely through '08. Under what circumstances would you consider picking those notes?

Emily, all I'll really tell you is that we're going to evaluate that in the future, and we'll take all matters into consideration in forming our judgment. It could be a whole host of different things that influence the decision, but, as far as what we see right now, we expect to elect cash payments for the balance of 2008.

Okay. And, then, my -- my second follow-up question is, as it relates to your contract with [Relegy], can you please remind us what the monetary terms are of that contract and if there have been any discussions to change it at all?

Emily, we have not publicly disclosed what the exact terms of the [Relegy] relationship is. So, that's not something that we're going to disclose.

Thank you, sir. Continuing on, our next follow-up question comes from the line of Alan Mark of Raven Asset Management. Please go ahead, sir. Your line is open.

Thanks. Yes. In your earlier comments, you referred to fuel as being an issue in -- in some of your businesses. Obviously, that continues to go up. Can you quantify -- help us quantify, sort of, how important fuel and other commodity products are for your business overall?

Well, it's a -- I would describe it this way. It's a -- it is a variable cost item for us. And, so, when there's significant increases in it, we have to either pass those increases along or find ways to mitigate it with other reductions or simply outgrow it. Fuel -- fuel is a significant -- more significant item for us than fertilizer in total.

Allen, this is Marty Ketelaar. I think we publicly disclosed in some of our filings that we utilize about 30 million gallons on an annual basis. You can look at current market data on both unleaded and diesel prices and kind of factor -- excuse me -- factor in what sort of financial impact that might -- might have for us.

Okay, Marty. Yes, that's helpful. Thank you.

Thank you. Our next question is from Alexis Gold from Solace. Please go ahead, sir. Your line is open.

Just following up on that fuel question. I think you said you actually hedged two-thirds of your fuel costs. Can you tell us what your -- what your average price is, and can you tell us when -- how far out you have hedges?

No, we're not going to get into that level of detail. I think what Steve has mentioned is accurate. We traditionally hedge about two-thirds of the annual fuel usage, and that's the policy that we have put into place last year and this year as well.

Have you started hedging for '09 at all?

A minimal amount.

Yes, we're certainly evaluating that now as we're seeing what fuel prices are doing.

Okay. And, you think you would keep it around that two-thirds level going forward?

That's --

That's our current plan. That's our current plan.

Okay. Thank you.

Thank you. And, our next question comes from the line of Yilma Abebe of JPMorgan. Please go ahead. Your line is open.

Thanks. Actually, one more question on fuel. In your 10-K, you had disclosed $8 to $10 million of pre-tax adverse impacts from fuel. Is that still your -- your best guess for -- for this year?

You're referring to the disclosure made in the 10-K for 2007?

Yes, yes.

I think the best answer to that is what Marty just said. We consume about $30 million gallons, and I -- I would just suggest go and look at what the publicly available information is regarding the outlook on fuel prices.

Thank you.

Thank you. Gentlemen, I'll return the conference back to you to continue or for your concluding remarks. Thank you.

Well, we thank you for joining our call today. We appreciate the level of interest. We've hope we have answered the questions that you've had, and we look forward to the next quarterly call. Thank you very much.

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