Terminix Global Holdings Inc (TMX) 2010 Q2 法說會逐字稿

Ladies and Gentlemen, welcome to The ServiceMaster Company's second quarter 2010 earnings conference call. Today's call is being recorded and broadcast on the internet. Beginning today's call is Marty Ketelaar, ServiceMaster's Vice President of Investor Relations and Assistant Treasurer. Mr. Ketelaar will introduce the other speakers on the call. As a reminder, during the question-and-answer session, please limit yourself to one follow-up question. At this time we'll begin today's call. Please go ahead, Mr. Ketelaar.

Good morning, everybody. Thanks for joining us. Joining me on today's call will be ServiceMaster's Chief Executive Officer, Pat Spainhour, Chief Financial Officer, Steve Martin, Treasurer Mark Peterson and Controller David Martin. We'll make prepared remarks and then address your questions during the question-and-answer session. Before we begin this morning, I would like to remind you 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 and legends contained in our recently filed Form 10-Q and Form 8K. These forward-looking 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. Information discussed on today's call speaks only as of August 25, 2010, and any rebroadcast or distribution of information presented on today's call, after such date, is not intended and will not be construed as updating or confirming such information. The ServiceMaster company undertakes no obligation to update any information discussed on today's call. ServiceMaster recently 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. We may reference throughout today's call non-GAAP information such as adjusted EBITDA, comparable operating performance and operating performance, which factor in adjustments related to such things as restructuring expenses and non-cash option and stock-based compensation expense, among others. We've included in our 10-K, -- 10-Q and 8-K, available on our website, definitions of these terms as well as relevant reconciliations to the most appropriate GAAP financial measure in order to better assist you in understanding our financial performance. During the question-and-answer session we ask that you ask any questions that you may have. Due to our disclosure professional and legal requirements, we are limited in our ability to hold follow-up conversations with our public site investors, and as such, we ask you please ask any questions during this public forum. I will now turn the call over to Pat Spainhour. Pat.

Thanks, Marty. Good morning, everyone. I appreciate you joining us for our second quarter earnings call. Overall, I'm pleased with our second quarter results, given the economic back drop in the US. Our operating revenues were up 4.8% compared to the second quarter of 2009. Operating performance was up 3%.

In my remarks this morning, I'll provide some additional insight into our underlying business strategies, as well as, our performance against those strategies. As you know, revenue growth has been a major challenge for us during the past two years as the effects of a tough economy have slowed down consumer spending and softened real estate sales. We have also seen a slowdown in commercial sales that has affected our lawn care, land care, pest and janitorial businesses. After the economy's healthy start to the year there has been some leveling out, and more recently in June and July, a dip in consumer confidence. Consumers seem to be more cautious with their discretionary spending as we head into the second half of the year. Sales of existing homes show some improvement in first half of the year, helped along by the home buyer tax credit. As the tax credit expired, we began to see a decline in revenue associated with real estate sales at American Home Shield. Yet, despite these headwinds, we have continued to perform. Boosted by our efforts to drive retention we saw an 8% drop in cancellations Company-wide. Year-to-date through June, revenues were up in five of our six businesses and we achieved operating revenue growth of about 2.4%. In light of the economy and consumer spending trends, we're pleased with those results and believe we're beginning to see the benefits of the growth strategies we've put in place.

We mentioned on our last call that acquiring new customers hasn't been an issue for our residential businesses. Our sales teams have continued to do an excellent job this year of bringing in new accounts. Our customer accounts in our three largest businesses, Terminix, TruGreen, and American Home Shield are up 155,000 accounts over a year ago. Customer accounts in TruGreen were up 3% in the second quarter versus a year ago. Terminix Pest was up 2%, while Termite remained flat in a shrinking market. American Home Shield customers accounts were up 5 %. Keeping those new customers, as well as our existing ones, is where we're going to continue to be heavily focused. We have been saying for a while customer retention has the potential to be our number one growth engine and generate significant incremental revenue over the next three years. During the past three years, you have seen the steady retention improvements in all of our residential business I say. To ensure retention continues to be a high priority, the retention leaders in each of our businesses are testing a variety of methods to improve the customer experience. There are many ways we try to retaken customers. Some like conducive condition reports in Terminix and Lawn Quality, AHS and TruGreen are designed to improve communication and build strong relationship between homeowners and our service professionals. Others are purely transactional, such as enrolling them in easy pay and pre-pay options at the point-of-sale. Although there are many components of overall customer satisfaction, we've found that the biggest factor is retention -- in retention, is the quality of experience that we provide to our customers from sale-to-service and every point in between and it often begins with preventing problems, before they happen.

Our businesses are good at fixing problems, once we know about them, but we need to get better at preventing problems before they occur. We've found consistency is an important factor in the customer experience. For example, our Merry Maids customer's tells us they want the same person regularly cleaning their home. So we've introduced a new neighborhood ownership program that helps ensure our cleaners are assigned to homes in specific neighborhoods to build stronger customer relationships. This approach has helped our retention scores jump more than five points in the past year. What we're finding, as we learn more about our customer's preferences, is that they want us to focus on the basics. In TruGreen, they want a healthy, green, weed-free lawn. In Merry Maids, it's a consistently clean home done by someone they trust. In Terminix, customers want their home pest free and in American Home Shield, they want the issues repaired on the first service call. Customers also expect hassle free service, convenient payment options and speed responses to questions they can't get answered anywhere else. But if we can prevent problems in the first place, we can reduce the number of times we have to retreat, reclean, or make repeat service calls. That should not only drive better retention, it should also reduce costs.

By the end of 2010, we expect to have surveyed about 322,000 customers across all of our businesses to learn more about their experiences and expectations. While we'll continue to respond when the customer experiences don't live up to expectations, we're going to be putting more efforts into problem prevention, so that customers truly see us as a trusted service provider. That's when transactions become relationships and customers become clients. One of the reasons for our continued optimism is that our retention numbers have been steadily increasing. In the second quarter, customer retention in TruGreen, American Home Shield, and Terminix Pest Control were all up. In fact, since the end of 2007, TruGreen retention is up 540 basis points, American Home Shield is up 370 basis points, and Terminix Pest is up 160 basis points.

We believe that commercial space also represents a major growth opportunity for us. In recent months, we've seen property managers respond to the slower economy by scaling back on both base and extra services in janitorial, lawn care, and landscaping. TruGreen Land Care, in particular, has seen reduced demand for enhancements in re-bidding of existing contracts, which have dampened both earnings and profit margins in that business. Despite the continuing challenges, we still view the commercial space as very important to our overall strategy and I look forward to discussing our commercial growth strategies in more detail on a future call.

In addition to the economy, the weather continues to create challenges for us in the second quarter, which affected our operating performance. Since the weather played such a critical role in our first half performance, I want to spend a little time this morning talking about the way we look at weather and its impact on our businesses. Typically, snow, ice, and cold work against us in early and late winter and early spring, because they prevent our lawn care technicians from getting out into the field. Poor winter weather also tends to keep Merry Maids cleaners from getting to their customers. TruGreen and Merry Maids experienced the impacts of the winter weather during the first quarter. Extremely prolonged winter cold and summer heat tend to increase the number of heating and air conditioning work orders, and claims, at American Home Shield and we saw the effect of the extreme heat played out during the second quarter of this year. The heat can also have a negative effect on TruGreen and TruGreen Land Care if drought and water restrictions become an issue. Historically, we have seen cancellations increase as lawns go dormant during periods of prolonged summer heat. Severe weather can be a benefit to certain of our businesses. TruGreen Land Care snow removal business benefits from winter weather. Flooding and high winds can result in increased business for our disaster restoration business and ServiceMaster Clean. Certain types of weather also can create conditions and conducive, -- conditions conducive to termites and other pests, which typically increases sales leads in Terminix.

The way weather has played out for us this year, is that we're still playing catch up with reduction in TruGreen due to the cold and wet start to the spring. From an operating perspective TruGreen revenues aren't recognized until the actual service is delivered. You will recall, in some parts of the country, we had to delay one or two lawn applications until the weather improved. We're making good progress in making up that production, but it came at a price with increased labor costs in the second quarter. We'll have a more complete picture of TruGreen's performance for 2010 when we report the third quarter results. In American Home Shield, what's made this year so unusual is the intensity, location, and duration of the heat wave, which has driven up air conditioning claims to the highest level in years. We believe this increased activity, 108,000 more workers orders through June in 2009, will have an overall negative impact on 2010 operating performance. This is related -- this is reflected in AHS's second quarter operating performance.

Regardless of what happens with the economy and the weather, we're focused on delivering a strong second half that demonstrates we can sustain both top-line and bottom-line growth over a full year and eventually into 2011 and beyond. While we're committed to a strong finish in 2010, we're not going to change our basic game plan or sacrifice the future to get there. Our business priorities remain the same, led by keeping the focus on our customers. We'll also continue to develop new tools and technologies to enable our businesses to operate more efficiently and our associates to more easily focus on our customers. One example, is the transformation of our TruGreen Lawn Care business which began this year. This initiative is enabling our branches to focus on what they do best, deliver outstanding professional lawn care service while centralizing and standardizing many administrative and support services. We're also continuing our work in finance, IT, and human resources to develop new processes and introduce technology that should enable our associates to better support all of our business units. These enhancements should allow our corporate functions to work more efficiently with our business units and free our field teams to focus on our customers. There aren't any quick fixes, but they representative investment in customer associate experiences that will help us grow our Company in the future.

As we move through the balance of 2010, it's important to note that we haven't based our operating plans on any significant improvement in the overall economic picture. In fact, the changes we've made to our cost structure during the past three years have been extremely beneficial and in helping us manage through the impact of the economy over the past 18 months. We believe our business fundamentals remain solid and we feel good about the strategic direction we're taking to grow our Company. We know our businesses always will be somewhat sensitive to changes in the economy and the weather, but we think we're a much better position today to withstand these challenges. Even as outside factors, like the economy and extreme weather conditions, continue to present challenges to our Company, our Leadership team and our Associates remain totally committed to growth and delivering outstanding service to our customers and doing it the right way. These efforts are visible in our many efforts that serve and support the environment, our communities and our workplace. You can read more about the ServiceMaster commitment in our 2010 Corporate Social Responsibility Report which is available online at ServiceMaster.com. I have never been prouder of our people, our Company and our performance. I am looking forward to updating you on our progress and talking more about some of our strategies on our next call. Now, I will turn the call over to Steve Martin, who will discuss our financial and operational results in greater detail.

Thanks, Pat. Second quarter results were strong for Servicemaster even with the higher claims activity at AHS, as we were able to make up a sizable portion of our missed first quarter production at TruGreen Lawn Care. Let me quickly recap our consolidated results and then I will review the segments. Revenues in the second quarter of 2010 increased $46 million to $1.0 billion, up 4.8% when compared to the second quarter of 2009, with operating performance, as set forth in the 8-K, increasing 3% to $192 million compared to $187 million a year ago. Our results reflect a nice job by TruGreen Lawn Care of making up for the late spring start we discussed last quarter and another quarter of solid performance by Terminix. Growth in customer counts in nearly every business unit driven by improvements in retention and an increase in new customer acquired, along with reductions in some key factor costs, helped to offset continuing revenue and margin challenges at TruGreen Land Care and higher expenses associated with warranty claims and legal matters at American Home Shield. Costs of services rendered and products sold in the second quarter was $574 million, on 57.2% of revenue, compared to $553 million a year ago or 57.8% of revenue. Lower fuel and fertilizer costs more than offset increased overtime at Land Care and higher claims frequency at American Home Shield. Costs of services rendered and products sold in 2010, also included a $3.9 million charge associated with a residual value guarantee on our synthetic real estate lease facility that we retired in July. Although this charge is excluded from the operating performance earnings amount, reported in the 8-K, and discussed on today's call.

Selling and administrative expense adds a percentage of revenue for the second quarter of 2010 was 26.3%, or $263.5 million, compared to 25.1% or $239.9 million a year ago. The increase in selling and administrative expenses primarily reflects increased investments and sales and marketing efforts, increased provisions for incentive compensation, increased project costs related to our on-going initiatives at TruGreen Lawn Care and increased provisions for certain legal matters at American Home Shield. For the first six months of the year, revenues were up 2.4% over 2009 with five of our six operating segments showing growth.

Operating performance for the first half of the year was down 1.8% as growth in TruGreen Lawn Care, Terminix, ServiceMaster Clean and Merry maids was more than offset by declines at TruGreen Land Care and American Home Shield, as well as, higher expense in our other operations segment due to the prior year including the reversal of a reserve related to a long-term incentive plan for which there was no payout. Cash flow provided by operating activities was $105.9 million in the first six months of 2010 and was comprised of $140 million in the earnings adjusted for non-cash charges offset in part by a $26.2 million increase in cash required for working capital and $7.9 million in cash payments related to restructuring charges. Working capital requirements increased primarily due to seasonal activity growth in trade accounts receivable and income taxes receivable. CapEx was $40.4 million through June 30, and included $15.6 million in new vehicle purchases. We expect 2010 capital expenditures, excluding vehicles, will range from $55 million to $65 million and total capital expenditures for vehicle needs will range from $50 million to $60 million.

Our liquidity remains very strong. Cash and short-term and long-term securities totaled $422 million of which $279 million is associated with regulatory requirements at American Home Shield and other purposes. Additionally, we have $500 million available under the revolver, as well as, $40 million available under the accounts receivable securitization facility.

Moving now to the second quarter segment results. At TruGreen Lawn Care revenues grew 8.7% to $379 million reflecting TruGreen's ability to make up for the delay in service from the first quarter, due to the unfavorable weather conditions throughout much of the country. Lawn care revenues also benefited from a 2.5% increase in customer accounts, higher sales of expanded services to existing customers, lower discounting, and improved price realization. The increase in customer accounts was driven by a 260 basis points improvement in customer retention and strong new unit sales from our neighborhood selling program. The rolling 12 months retention rate at TruGreen now stands at 70.9%. Although we saw the retention improvement trend begin to taper off during the quarter, as record high summer temperatures started taking a toll on lawns across the country.

Operating performance, improved 29% to $81.5 million compared to $63.2 million a year ago. TruGreen's improved results reflect the flow through of the higher revenue I just mentioned, as well as, lower fuel and fertilizer costs partially offset by investments in sales and marketing and increased project costs related to our ongoing initiatives to restructure our branch operations and improve customer service. The late spring start resulted in a change in the pacing of TruGreen Lawn Care's service delivery, in both the first and second quarter of 2010, compared to the prior year as the slow start in Q1 was made up for in Q2. For this reason, it's helpful to look at TruGreen's results for the first half of the year in total. TruGreen lawn care's revenues and operating performance for the first six months of 2010 were up 4.1% and 6.2% respectively over 2009. This not only highlights TruGreen's ability to recover from the late start but it also reflects strong overall results in a difficult economic environment while at the same time transforming the operations of this business, as Pat mentioned earlier.

At Terminix, second quarter results improved 5.2% to $323 million, compared to $307 million a year ago. These results reflect solid growth of 4.3% in pest control revenues and $7.6 million of additional product sales. The growth in pest revenues was related to a 2.4% growth in customer counts due to a 180 basis points improvement in customer retention rates. Termite revenue, which includes renewal and completion revenue, increased 1.3% in the second quarter primarily due to increased new unit sales. The Termite retention rate remains steady at 86.2%. Operating performance grew nearly 5% to $85.1 million reflecting reduced fuel and vehicle related costs partially offset by higher investments in sales and marketing and a higher provision for incentive compensation.

At American Home Shield, revenues grew 2.2% to $184 million compared to $180 million a year ago. The increase in revenue reflected an increase in customer accounts and improved price realization. The increase in customer accounts was helped by an increase in new unit sales, primarily from the real estate channel, although we saw the productive decline as the home buyers tax credit expired during the quarter. AHS also realized a 300 basis points improvement in its rolling 12 month customer retention rate, as of June 30, which stood at 65.6%. Second quarter revenue was negatively impacted by a difference between years in the timing of revenue recognition. As we have discussed in previous quarters, American Home Shield recognizes revenue over the contract period in proportion to the expected direct costs. During the second quarter of 2010, American Home Shield experienced seasonal contract claims that were significantly higher than historical averages. These claims are primarily associated with air conditioning repairs and were incurred as a result of high temperatures that have lasted for an extended period in several parts of the country. We concluded that had these additional claims will likely result in a full year reduction in American Home Shield's planned operating income and, as a result, we did not adjust the timing of recognition related to the unusual volume of seasonal claims. Had the claims been considered a timing difference between quarters, the timing of revenue recognition would have been accelerated, which was the case in the second quarter of last year. Second quarter operating performance was $33.8 million compared to $41.2 million a year ago. The decrease was due to the higher claims costs, I just mentioned, as well as an increased provision for certain legal matters and higher investments in consumer sales programs.

Turning to TruGreen Land Care. Operating revenues decreased 8.6% to $63.5 million while operating performance declined $4.2 million to a negative $800,000. The lower revenue amount included a 10.1% decline in base contract maintenance and an 8% decline in enhancement revenue reflecting contract cancellations and price concessions granted in 2009, and 2010, increased competition in the commercial landscaping space, and the impacts of the difficult economic environment. Operating performance during the quarter was hurt by the revenue declines and pricing concessions, as well as, higher labor costs due to a shortage of qualified laborers which resulted in higher overtime costs. The increased overtime was offset in part by reduced fuel costs. As a result of the difficulties experienced at TruGreen Land Care, we have lowered our outlook for the remainder of 2010 for this business. Doing so, required us to perform an interim goodwill impairment test and the results of that test indicated that the fair value attributable to land care's intangibles was lower than the carrying value. As a result, during the quarter we recorded a non-cash impairment charge of approximately $47 million, which eliminates all remaining goodwill attributable to TruGreen Land Care. This charge does not impact operating performance.

Now, at ServiceMaster Clean revenues grew 4.8% to $32 million compared to $30.6 million a year ago. Revenue growth was driven by an increase in disaster restoration and other revenues. Operating performance improved slightly to $14.7 million driven by the impact of higher revenues. In the other operations segment, which includes the results of Merry Maids and the Company's headquarters functions, revenues were essentially flat at $21.7 million. Operating performance for the segment was a net expense of $22.2 million compared to a net expense of $16.6 million last year. The larger expense was primarily due to the effect of a reversal of a $4.4 million reserve for cash awards in 2009 related to a long-term incentive plan since certain performance measures were not achieved.

In summary, we're pleased with the progress made during the second quarter as we continue to execute on our strategies despite what continues to be a very bumpy economy. As Pat mentioned, we don't expect the economy to take off in the short-term and as a result we will continue to focus on our core strategies of improving retention and making improvements in our cost structure and the efficiency of our operations. We believe that doing so will position us for longer term growth when the economy rebounds. The Management Team and Associates at ServiceMaster remain focused on these initiatives that we believe create and deliver long-term value. I look forward to providing you an update later this fall when we report our third quarter results. That concludes our prepared remarks and at this time we would be happy to take your questions. Operator.

Thank you. (Operator Instructions). Our first question is from the line of Emily Shanks with Barclays Capital. Please proceed with your question.

Hi. Good morning. I was hoping you could just explain a little bit more around the American Home Shield one-time claim. I want to be clear that I have this correct. Are you saying that you did not change the revenue recognition, but you did have an increase in your direct costs due to that one-time uptick?

That's exactly correct.

Okay. And can you give us a sense of how large that is? That you consider one-time?

Yes. The higher claims costs net that flowed through as one-time for the quarter was essentially $5 million, was the one-time higher claims expense. The timing effect of the revenue that we did experience last year, that we did not experience this year, was about $5 million of revenue on a quarter, and about $2.5 million impact on EBITDA. So those are the two differences related to the claims, both the one-times and the difference in the timing of the revenue recognition.

Okay. Great. We'll get back in queue. Thank you.

Thank you.

You're welcome.

Our next question is from Yilma Abebe with JPMorgan. Please proceed with your question.

Hi. This is actually Ryan Dean in for Yilma.

Hi there,.

We just have one question. What are some of the corrective actions you are taking to try and increase profitability in the Land Care segment going forward?

Land Care is unlike the other commercial businesses that we have, in that Land Care by itself is 100% commercial. Terminix and TruGreen each have a bit of commercial in their business. The things that we're doing, and have been doing since the economy turned over the last two years, is really number one, fighting under the competitive pressure of everybody else, and making sure that our pencils are as sharp as they needed to be to make sure that we got our fair share of the business going on, and we have done a pretty good job. Sales continue to be landed, and proposals continue to be accepted out there.

But we have really focused on customer satisfaction. Our net promoter scores, the key measurement of how we're performing, has really improved over this period of time. And so, Rick and the team have really set forth customer satisfaction, the customer experience is being much more important, and it will be going forward, and so that's helped as well too.

We're doing all that we can from the labor situation, which is really, all companies are impacted by this, where we have to go through this e-verify process, and we've opened up some new channels and some new opportunities to bring labor in quicker than what it was four months ago, five months ago, when labor was hard to get in because of the e-verify process. But there is a lot of things continuing like that, and we're just staying close to it, and the customer scores, customer satisfaction scores that we see say that we're making it happen out there as well too. It is just a tough, tough market out there.

Thank you.

Thank you. Our next question is from Marianne Manzolillo with Angelo, Gordon. Please proceed with your question.

Hi. Another question on the American Home Shield business. In Q2 of this year, you had higher claims costs because of the intense heat, and you're saying that cost about $5 million. Is that correct?

Yes, year-over-year the spike in the claims.

Sure. Was about $5 million? Then you're saying last year you recognized kind of like an additional $5 million of revenue that resulted in $2.5 million of EBITDA.

Correct.

So, it is kind of a $7.5 million EBITDA delta?

Correct.

Is that the right way to look at it?

That's exactly the right way to look at it.

Okay, and now these claim costs. So basically, you're charging a certain amount for this contract you have for these customers, based on an assumption of the claims they're going to submit in this year, because of the intense heat they submitted more claims. So making the contracts less profitable. Does this in any way impact perhaps how you view contracts in the future? Will you perhaps raise prices in the future, and then is this leaving perhaps some contracts unprofitable?

It is really, has been somewhat of a cyclical thing when you look at claims activity, claims volume. We generally budget a four to five year average based on claims experienced. And for the last two to three years that average has, because of the weather, has been there, and we haven't had these -- this volatility. This year compared to 2006, which was another anomaly year out there, this one was worse. And so we actually experienced 108,000 more claims, HVAC claims, air conditioning claims this year over the same period of time last year, which was that much above that average.

We always look, when we process an actuarially priced product at the cost that's going in there, and that does in fact impact the pricing that we do going forward. So, the cost of the claim is probably up a little bit, but the volume of the claim is driving the expense that we have, and yes, we do fold that information, that data into future pricing.

Okay. Great. And you mentioned legal matters a couple of times on the American Home Shield side.

We don't really comment on pending legal issues.

But just generally, what is the suit about?

We don't comment on pending legal issues.

Okay. Fine. All right. Thank you.

You're welcome.

Thank you. Our next question is from Jeff Kobylarz with Stone Harbor Investments. Please proceed with your question.

Good morning. About American Home Shield again, just want to make sure I understand this. So this second quarter phenomenon, I would think that just given that your second quarter ends in June and just given the heat that's been occurring in this third quarter, these claims that occurred in the second quarter, won't they similarly occur in this third quarter? Isn't it just a tough year for HVAC repairs?

It has been a tough year, and when you look at the trend, I mean, we typically think the cooling season ends somewhere September, and it should be coming down. I know where we are in Memphis here, we're actually experiencing the 80s as highs this week for the first time in months. I wish it were that way across the Company, but we have seen, the rate of increase in the second quarter has come down from the beginning of the quarter to now. And so we just hope that trend continues, and it only will continue if the weather supports it continuing. So that's as far as we can go on predicting anything for the third quarter. It is a function of where the weather forces us to react to.

Sure. All right. That's helpful. Appreciate your comments there.

Let's see, last conference call you mentioned about the overall increase in customers, and you said it was 103,000 and up 1.5% in the first quarter, and you did mention by business segment, you said that TruGreen's customer accounts were up 3%, American Home Shield up 5%. Can you say, like in total for the Company for those three businesses, Terminix, American Home Shield, and TruGreen? Just how much your number of customers were up?

Yes. In total, the customer count for those businesses is up right at 2.5% year-over-year at the end of June.

All right. Well, congratulations on that. That's great to see. And is there any way you can state any kind of ultimate goal for retention, say over the next few years?

Well, we certainly have goals out there, and in businesses like Lawn Care and Merry Maids, three years ago, four years ago, those retention rates were ridiculously low, in the 50s and 60s. And since 2007 we have grown 400 and something basis points, and in TruGreen, we're going to stay on that type of a trajectory to increase the retention rate, whether it is 100 or 200 basis points a year. But there is life out there, is the main point I want you to understand, in retention, primarily in TruGreen and American Home Shield.

Those are the key areas of focus that we have, and just by building that year-over-year at the rate we've been going in, we see that that in fact can be a major contributor to revenue growth in this Company. And that's where all the focus and emphasis on customer service to customer experience, all that we have been doing for the last three years is beginning to pay dividends. We're very proud of the work that's been done, but there is more work to be done.

Can I ask one more question, or do you want me to get back in queue?

Sure.

Well, you mentioned that you were trying different ways of improving the customer experience, whether it is by easy pay or by lawn audits or other things. Have you narrowed down to see what the best formula is for how to improve the customer experience, or are you still going to be experimenting for say another year until you roll out the model of how you want to improve customer retention?

It is somewhat different by business unit that we have, but there is a core, a core foundation that we're trying to make sure that we put things in place that we can hit this core. And that core is all about being in a relationship with our customers. Let me give you an example. In 2006, in doing the service for TruGreen Lawn Care, our trucks would spend 20 minutes at the home and never speak to the customer and never do anything, would do a leave behind and so on. And so there was no relationship developed between the customer and the specialists doing the work.

Now, we've taken that in several different ways that we do, and we started this in 2006, lawn quality audits where we schedule time to walk over the yard with the customer at their convenience, be it weekends or after work or whenever they're ready, so in fact we can present realistic expectations of what they should expect from the application we have just done, and just get into a relationship-building situation. Well, we're trying to do that across all of our companies.

How do we do things to create a relationship? An example in American Home Shield, we're working on a case management issue right now that says when things are escalated, and it is more of an emergency nature, and because we operate through a call center, we want the technology to allow that customer to always speak to that same person. And that's under way right now, a little progress, but that seems to be helping and making a difference. Again, that personal relationship.

Then beyond that core, it's unique by company. What makes it, like in Merry Maids as I said in my comments, they want to see that same person in their house every week when they come in to clean. And so that's why we put together this older neighborhood type of an effort here, where we're going out of our way now to ensure the consistency of that same person as much as we possibly can going into that house, and creating that bond, that relationship with the customer. So it works differently, but it is all about having that relationship.

Okay. Thanks very much.

Thank you.

Thank you. We have a follow-up question from the line of Emily Shanks with Barclays Capital. Please proceed with your question.

Thank you. I wanted to ask a question around termite. I thought I heard, at the beginning of the conversation, that you said that counts were flat, and despite a shrinking overall market, one, I wanted to confirm that I had that correct, and two, I was hoping you could give us a little color as to what you meant by an overall shrinking market, and how that is measured, please?

The overall shrinking market is a phenomena going on in the pest control and termite industry. We utilize trade industry data for that, reflects the overall reported revenues for all of the professional pest control companies across the country.

Okay. And what type of rate is it shrinking?

It is somewhere in a range of 5% to 7% on the residential side of the termite business.

Okay. And what's your view in terms of what's driving that?

Well, there is a lot of things out there, weather being one. There has to be conducive conditions for termites to be exposed, to come out of the tubes and so on. But the general weather pattern as it's changed, probably is a piece of it.

But this industry, over the past 10 years, has really created products of which the efficacy has just gotten better and better and better, and so there is less recall. There's less new stuff going on out there because of the type of product that the termite folks are putting out now. And so it's weather, and it's the products that have delivered more than what the past has been.

And the key here, this is really the big thing for Terminix, and they've done a terrific job of developing and rolling out their termite inspection and protection program to get at this very issue. Terminix is in the unique position of providing a guarantee against termite damage to homes. So they can offer that at a price point that is more affordable than the traditional liquid treatment of the homes.

And what that does is it allows them to continue to grow their customer base in termite, and maintain that renewal revenue, while the rest of the industry is shrinking. And it's really helping to build a competitive advantage for Terminix. So their revenue growth and market share has continued to build, while that overall market is declining.

That's helpful. And what is Terminix's market share today?

It is in the 20%'s. I don't remember the exact percentage.

Emily, I will circle back with you. I'll pull the latest trade publication and find out what the number says and get back to you.

That would be great. Thank you.

Thank you. We have a follow-up question from the line of Marianne Manzolillo with Angelo, Gordon. Please proceed with your question.

Hi. I had a question regarding working capital. Receivables have grown, even if you account for the higher top-line, and in the accounts payable grew as well, obviously there being a positive for cash, but I was wondering if you could comment on that?

Yes. I can make a comment first with respect to receivables. Obviously, you have a lot of seasonality that you see if you're looking in the cash flow statement, and that, you'd see that in both years. However, as you noted, there is higher growth in receivables in the six months ended 2010 as compared to the six months 2009.

In addition to just seasonality then, really there is a timing of services issue in Q2 that would be driving that higher receivables at the June date. And then lastly in the Terminix, we have higher sales of products this year over last year, with slightly longer terms associated with those, which is also contributing to that growth.

On the payables side, that's really just timing and season.

Okay, great. And with the timing of services, would that be related to the catch-up on the lawn care side, on the TruGreen side?

That's correct.

And would that also be impacting the deferred revenue then?

That phenomena is not so much impacting the deferred revenue. The impact there is more associated with the American Home Shield real estate sales, where the cash is collected early in the year, or excuse me, cash is collected at the time of the sale. Revenue is recognized over the life of the contract. That's the biggest component of what's changing in deferred revenue.

Okay, great. Thank you very much. Thank you. (Operator Instructions).

We have a follow-up question from the line of Jeff Kobylarz with Stone Harbor Investments. Please proceed with your question.

I was curious, you mentioned a little about the commercial side of the business, I know you said you wanted to talk about this in the future as you do put more emphasis there. I am just curious if you could say, now, what percentage of your total sales are made up of the commercial business?

Well, we haven't broken that out anywhere yet.

All right. Okay. And then in the statement of cash flows, in the investing section, there is like $15 million or so of money that was spent for acquisitions. I am not sure if that's earnouts, or if those were new, small, tuck-in acquisitions? Can you say what that $15 million went for?

Yes. It is really both. It is for the tuck-in acquisition programs, principally at Terminix and TruGreen, both those that closed during the quarter as well as payments for seller financing that closed in prior quarters.

Okay. And there was an acquisition that was made by your company sometime in the third quarter, for I believe it was a pest control or termite control business? That seems like it is a bit of a larger kind of acquisition for you guys, can you comment at all about your thoughts there?

Well, it is larger than the ones we typically make. That was one of the top 10 companies in the market. So, those we take more opportunistic approach, and it worked out for us this time to be able to close that acquisition. Those are much less frequent than what you typically see us do.

Okay. In general, can you comment about the acquisition market, just are there a lot of smaller companies that are looking to be acquired, or what it looks like out there?

I'd still say it is fairly erratic. When the economy turned south, for the most part these companies which are family-owned generally, decided to wait and not sell, so there is actually a little bit of a decline in the activity. Starting to see that pick back up, but not anything in dramatic way than what we have seen over the years. So a little more opportunity here recently this year than we saw the last year or two.

Okay. Thanks very much.

Thank you. Our next question is from Todd Harkrider with Goldman Sachs. Please proceed with your question.

Congratulations on a good quarter, and the AntiMite acquisition.

Thank you.

But I was wanting to get your thoughts on behind of keeping the AntiMite name as opposed to reflagging it to Terminix, and have you ever done that in the past, or since it is such a strong name you decided to keep it? Thanks.

It is such a strong name, and more importantly, it is a strong acquisition for us, and we feel like there is learnings that we can get from the way they do business, and vice versa, that before we would do any sort of tuck-in activity on that one, we want to make sure that we optimize this investment here. It's a pretty good performing company, and Tom and our team will take it to a new level, and we'll determine somewhere in the future whether we keep it AntiMite or if we tuck it in to Terminix.

Okay. And I know this is a one-off since it was so large, but are you seeing your end markets, since it is more stable today, are you -- do you plan on getting more aggressive with tuck-ins, or should we expect you to maybe get more aggressive in paying down debt, especially since some of your legacy bonds are trading in the low 70s, or how should we look at free cash flow? Thanks.

In terms of the banking side of that, that will not necessarily dictate our tuck-in activity. It is opportunistic. If we find a company like an AntiMite or our typical tuck-ins that are $1 million to $1.5 million, and it makes sense, I am sure we will buy as many of those as we can, if they in fact enhance our ability, and create bottom-line and top-line growth.

We don't typically do a lot on a per-year basis. I think $25 million, $35 million between those two companies is about the run rate that we have been going through, and I don't know, unless we have another year where we can find an AntiMite type of a size deal that we should count on doing any more than that. But it is a small number relative to the bigger issues concerning debt and paying down debt and everything, and it enhances our ability to get geographical positioning that we don't have, to be able to grow in different ways that we don't do it, and it is just a great asset out there to take advantage of.

Sounds like it is. Then regarding Land Care, do you still consider that a strategic division, or at the right price you would be willing to flip it to the Brinkman, Valley Crest, Yellowstones or the likes?

I'm running it.

Okay. I know you don't discuss the terms of your Realogy relationship, but we haven't heard much about it in awhile. Can you refresh us on when it expires? Are you still happy with the relationship, and anything else you're willing to share about it? Thanks.

You know what, I don't think we have in front of us the timing of it. Realogy, being in the real estate business, that they're impacted by what's going on out there, but our contract allows us to work within changes in activities. So we're comfortable with where we sit right now.

Okay. Thanks for taking my questions, and good luck with the rest of the season.

Thank you.

Thank you. Our next question is from [Patrick Walsh] with Neuberger Burman. Please proceed with your question.

My question is, I just saw recently that New York City's number one with bed bugs, and it has been in the news non-stop. Can you guys comment on how long you see this problem being around, and kind of the positive impact that you've seen in going forward? Thanks.

Well, I don't know how long it is going to be around, but it's certainly one of those opportunistic service things that peak and valley over time, that Tom Brackett, who heads up Terminix, is certainly taking advantage of. It's a big deal now, and generally, it was in New York and that area as it really began to pop, and now it's moving if you saw the news reports over the weekend on NBC and Wall Street Journal articles and everything, it's moving. So we're prepared. We have the capability. We're technically savvy on how to deal with these things, and Tom and the team will take full advantage of this as long as it lasts.

Thanks.

Thank you. Our next question is from Joe McFadden with Aberdeen Asset Management. Please proceed with your question.

Hi, there. With regard to the amount of money you said you were going to spend for both CapEx and vehicle purchases, how much of that amount is maintenance spending versus growth or other types of non-recurring types of spending?

If you think about the non-vehicle CapEx, the -- it is about 50/50 between base and compliance requirements versus strategic investments.

Okay. And the $50 million to $60 million that you will be spending this year for vehicles, is that a sort of normalized type of run rate?

It is. It is essentially a normalized run rate. So you may see some increase, particularly with the growth in customer counts, but we are constantly investing in the fleet, and we'll continue to invest strategically in the fleet .

And previously, the purchase of vehicles, is this a little bit of change than in the past as far as purchasing versus leasing? Seems to me, and correct me if I'm wrong, but you used to lease more than outright purchase, is that correct?

Yes, that is correct. That's correct. We have shifted to buying versus leasing as the financing rights for leasing, just much less economical versus buying them with cash from operations or revolver borrowing.

That's right. Okay. I remember you talking about that in the past. Okay, thanks a lot.

Yes.

Thank you.

Operator, thank you. We're running up against our hour.

Thank you. Please continue with your presentation or closing remarks.

We certainly appreciate you being on the call, and for the questions, and we look forward to our third quarter report. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and we ask that you disconnect your lines.