Terminix Global Holdings Inc (TMX) 2011 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the ServiceMaster Company's first quarter 2011 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 afternoon, and thanks for joining us for our first quarter 2011 earnings conference call. Joining me for today's call is ServiceMaster's Chief Executive Officer, Hank Mullany; Interim Chief Financial Officer, David Martin; and Treasurer, Mark Peterson. We will make some prepared remarks and then address your questions during the question-and-answer session.

Before we begin this afternoon, I would like to remind you 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 Statement Legend, contained in our recently filed Form 10-Q and Form 8-K. These forward looking statements are not guarantees of performance [that] 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 May 25th 2011, 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 will enhance your understanding of our financial and operating performance. We may reference, throughout today's call, non-GAAP financial measures, 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 have included in our 10-Q and Form 8-K, available on our website, definitions of these terms, as well as the 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 encourage you to ask any questions that you may have. Due to our disclosure policy and legal requirements, we are limited in our 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. I will now turn the call over to Hank Mullany for opening comments. Hank?

Thanks, Marty. Good afternoon everyone, and thanks for taking the time to join us for today's call. This is my initial opportunity to talk with you since becoming CEO, so in addition to discussing our first quarter results, which I have asked David Martin to cover in more detail later on, I want to spend a little time today talking about how we are thinking about ServiceMaster for the long-term.

Let me quickly provide some highlights of our financial performance in the first quarter. For the quarter, revenues increased 5.9%, or $34 million compared to a year ago, and our operating performance grew 3.6%, or $2.6 million compared to 2010. Net cash provided by operating activities before interest and tax payments increased $18.1 million, to $92.3 million. However, while we do not expect a significant increase in capital spending for the full year of 2011, we have elected to spend more on vehicles and other capital items in the first quarter as compared to a year ago, to help better position our business for the production season.

I am spending a lot of my time in the first 100 days on the job listening to associates and listening to customers, both current customers and former customers. I have been out to visit many of our branches and customer contact centers. I have met with franchisee owners. It has been a great opportunity for me to hear what is on their minds and get a better understanding of what we need to do to transform our customers' experience, and ensure that our customers' experiences are truly world-class.

Let me share with you some of my first impressions. We have a diverse portfolio and a very resilient business model. When you step back and look at our portfolio, we have an array of businesses that collectively have proven to be recession resistant, despite a difficult economy over the past few years. Where many companies saw their revenues and earnings decline dramatically, we experienced relatively flat revenues, and we've also delivered both bottom line growth and strong and steady cash flow over that period. But we need to do much more to demonstrate we can achieve sustainable top and bottom line growth in all of our businesses.

For example, over the past three years, our franchise-based businesses, ServiceMaster Clean and Merry Maids, grew revenues only slightly. And the obvious miss is TruGreen. Over the past three years, TruGreen revenues actually declined. These results simply aren't acceptable. Also, we need to reduce our exposure to uncontrollable events by further diversifying our businesses.

Diversification can mean a lot of things. It can mean geographic diversification, both within North America and potentially outside North America. It can mean diversifying our business mix, and by growing our segment share of commercial business, an area we know that is a tremendous opportunity for growth. It also means potentially looking at new products and services that expand our customer reach into new and existing markets and other channels.

My second observation is we have strong, iconic brands. Most of our brands are leaders in their category, with strong consumer awareness. In fact, our research shows that we have a leading share of the Residential segment with our TruGreen, Terminix, and American Home Shield brands. And what is even more exciting is we still have an opportunity to grow. Our research also shows we enjoy strong brand awareness. For example, Terminix has unaided awareness of 62% in the Pest Control category compared to 47% for its nearest competitor. In Termite, that number jumps to 70% compared to 42% for the top competitor.

With all of the customer data we have collected, we have a pretty good idea of who our customers are and also who are non-customers are, but we need to do a better job of using that data to develop the kind of customer relationships that allow us to know what customers want. When you have true customer intimacy, you know what your customers really want. As you can imagine, we received a great deal of consumer feedback from a variety of sources, and our customers aren't shy about telling us how they feel about us. Quite frankly, we haven't done a good enough job of listening to our customers, and what we are hearing plain and simple is our customer service hasn't been consistent enough or good enough.

We have an opportunity to better leverage our brand awareness to drive top and bottom line growth, and even though we are the category leaders in most of our industries, our categories still have low household penetration. We estimate that we have approximately 4% penetration in Home Warranties, 12% penetration in Lawn Care, 4% penetration in Termite, and about 7% penetration in Pest Control. There are a lot of non-users out there who can and should be using our services. We have to do a better job converting non-users into new customers, and also retaining more of our existing customers.

My other major observation in my first 100 days is that we need to fix our TruGreen Lawn Care business. The performance of the Lawn Care business simply isn't acceptable. Revenues in 2010 were below 2007 levels, and customer counts haven't been growing. As you know, there has been a leadership change in the business, and while we search for a new TruGreen President, I've asked Tom Brackett to lead TruGreen in addition to his role of President of Terminix. I'm confident that with Tom's operational experience and success at Terminix, he will provide us with valuable insights and very strong leadership at TruGreen during this transition.

I just want to be clear, we are not going to combine TruGreen and Terminix. The two businesses will continue to run separately within our organization. During this interim period, I have asked Tom to focus on three key things at TruGreen. Number one, improve our customers experience. Too many of our TruGreen customers are unhappy with their lawn results or their technicians. These are the two biggest drivers of overall customer satisfaction in that business.

Number two, I have asked Tom to drive a culture of executional excellence at TruGreen. One thing he will be doing in this area is looking for opportunities to accelerate best practice sharing between Terminix and TruGreen, and although we've made some small gains in this area, right now there is still too much variation from branch to branch. So, to create the consistency that we need, we are going to develop best practices, pilot them, and then quickly scale them across the business. Third, we need to a more rigorous talent evaluation process. We want to develop stronger leaders at every level in the organization and bring along the future leaders so we have the bench strength to succeed in the future.

So how do we take ServiceMaster to the next level? Well, as I have talked to our associates, one of the things I have heard clearly was that our associates want to better understand the Company's mission and vision. They want more clarity around our Company's purpose, and most importantly, their role in helping the Company succeed. Our mission is to simplify improve the quality of our customers lives, and great companies need a common vision. If we aren't clear on our vision for the future, working together as one team to get there, we are going to miss the mark. Our vision is to create a Company that will be a rapidly growing, best-in-class service provider. We will be the best place to work and the best place to invest.

So, how are we going to do this? Two of the recurring themes you will hear from me on our calls are strategy and execution. Strategy boils down to three things, where are we going to play, how are we going to win, and making choices. And, as you know without execution, the best strategy isn't worth the paper it's written on. We are going to keep a clear focus on strategy and execution, nothing complicated. What's simple and clear is understood, and what's understood gets executed. As you know, we've already taken steps to simplify the Company with the recent sale of TruGreen LandCare, which wasn't performing up to our expectations. Selling LandCare helped eliminate a distraction and has enabled us to redeploy resources into our core businesses, where we can better focus on growth and transforming the customer experience.

I am looking forward to talking in more detail about our strategies in future calls, but for now I can tell you we are focusing on three key strategies. Number one, we are going to focus on rapid, profitable growth. Number two, we are going to focus on talent development to put the right people in the right roles, and enable all of our associates to do their best every single day. And third, we are going to do a better job sharing best practices across all of our businesses and developing a culture of executional excellence.

Let me talk about growth. As I've met with associates and customers over the last three months, I have been asked what attracted me to ServiceMaster, and what I've been telling people is that number one, we have fantastic brands. The second thing that attracted me to ServiceMaster was the tremendous potential growth we have for our Company. We've got opportunities to grow by focusing on our customer experience and also keeping our current customers, in addition to new avenues for growth. But it's not just about fixing problems, it's about preventing them.

In many cases, our former customers tell us the reason they left us is simple, we didn't do what we promised. We didn't show up on time for a service visit, we didn't kill their weeds, the contractor didn't fix the problem the first time, or my house wasn't cleaned the way I like it. All of these are opportunities to improve customers' experiences, and when we do that, they will be more likely to recommend us to a family member or a friend. When we are successful, we will earn the trust of our customers and establish a level of customer intimacy that allows us to build long-term relationships. When we make a promise, we are going to keep it.

While we fix the core, we are also looking for ways to balance organic growth with external growth. As I have said before, that could mean diversifying our Company by pursuing a greater share of the commercial business. It also means potentially looking at new products and services that expand our customer reach into new markets, new geographies, or new channels. As part of our growth strategy, you'll hear me talking about operating margins in dollars as a key metric. As we drive top line growth, we're potentially willing to accept lower margin percentages, as long as we're driving growth in actual dollars. This focus will help us grow faster, and ultimately deliver on both top and bottom lines.

The second strategy we are going to focus on is to develop high-performing, highly engaged diverse teams. You don't get growth without talent, and making sure that we are developing talent and strengthening the Management team. We've already begun this process by addressing certain key Executive Management positions. As you know, we are transitioning to a new CFO, we've recently added a Chief Operating Officer in TruGreen, and we are bringing in a new TruGreen President. We've also brought in new Commercial Account Executives in both TruGreen and Terminix.

But there is a lot of work ahead of us. We need to accelerate talent sharing across all of our businesses. We've already focused on stepping of performance management and talent development at all levels of the organization, beginning with the top two levels of our Management team. We are also evaluating new Company-wide training initiatives at the field level, that we believe will bring the standardization and consistency we need to develop to deliver an outstanding service experience.

We are also going to be putting a great deal of emphasis on Associate engagement. Studies show a strong correlation between Associate engagement and customer satisfaction. Think about it. If we want to provide the best customer service, we need to recruit and retain high-performing, highly engaged Associates. We need to create a diverse workplace where all Associates have an opportunity to do their best, reach their potential, and contribute to our success. Developing high-performing, highly engaged, diverse teams is essential, because it helps us deliver on our third strategy - - sharing best practices across all of our businesses, and developing a culture of executional excellent.

During my first 100 days, I have seen some examples of outstanding service in our Company, but we aren't doing enough to deploy those best practices across all of our businesses. We need to do more and do it faster. Terminix, for example, has already implemented much of what TruGreen needs to do in terms of technology, operational processes, and best practices. That includes everything from phone systems to branch standards and operations. Another opportunity is our Call Centers. We have Customer Call Centers in all of our businesses. We need to learn what works best, leverage our capabilities, and scale them across the entire Company.

Executional excellence means getting it right all of the time. It's not acceptable to get it half right, or almost right, or right some of the time. Our job isn't just to meet customers' expectations, we want to exceed them. Executional excellence also means improving our IT systems. We have begun by making strategic investments at American Home Shield, and we will continue to make similar investments in all of our other businesses, transferring best practices in design, development, execution, from one business to the next as we go.

To help transform our customers' experience, we are also going to do a better job listening and responding to customer feedback and applying what we learn across all of our businesses. How do we measure performance? Ultimately, like you, we are going to measure our success on key financial results, specifically in three ways; revenue growth, operating performance, and cash flow. We also need to demonstrate a good stewardship of capital and make sure that we are being as productive and efficient as possible. You'll hear us report on these metrics quarterly, and you can expect us to share these results, as we build the case for ServiceMaster as the best place to invest.

Let me conclude by saying I believe in ServiceMaster. We have huge, untapped opportunities, sustainable, competitive advantages, and a business model that is poised for growth. The changes we are talking about making won't happen overnight. We'll certainly experience some bumps in the road, but my commitment to you is we're going to get this right.

Now, I will turn it over to David Martin, to review our first quarter results in more detail. David, as you know, has been named our interim CFO, replacing Steve Martin, who recently resigned from the Company. David joined ServiceMaster in 2005, as Vice President and CFO of Terminix. He was promoted to Senior Vice President and Controller of ServiceMaster in 2007, overseeing Company-wide accounting, internal and external financial reporting, compliance with Sarbanes-Oxley act, and financial planning and analysis. I am confident that with David's prior experience and familiarity with our business, he will provide outstanding leadership during our transition.

David? Do you want us to walk us to the results in a little more detail?

Thank you, Hank. We have experienced modest growth in revenues and operating performance in the first quarter, which as you know, is historically our least important reporting period. Let me briefly recap our first-quarter results, and then I will get to the segment highlights. For the quarter, revenues increased 5.9%, to $615 million, compared to $581 million, a year ago. Revenues were positively impacted by a improved pricing in several of our businesses, as well as the ability to start our production season at TruGreen earlier in certain parts of the country as compared to last year.

Cost of goods sold, as a percentage of revenues, decreased 80 basis points to 60.3%, compared to the first quarter of 2010. The primary drivers of the decrease are a $4.5 million residual value guarantee charge recorded in 2010 at TruGreen that did not recur, improved labor efficiency at TruGreen, and reduced provisions for legal matters at Terminix. SG&A expense, as a percentage of revenue, increased 40 basis points to 31.1%, compared to the first quarter of 2010. This increase primarily reflects the timing of marketing spending at TruGreen, and increased investments in sales and marketing, and higher overhead spending at Terminix. Additionally, this increase reflects increased provisions for incentive compensation and key executive separation charges of $2.8 million. These items were partially offset by the timing of sales and marketing spending at American Home Shield.

Before I go on, let me briefly address our commodity exposure. As most of you know, we do have exposure to certain commodities, primarily fuel and fertilizer. Fuel cost was approximately $1.8 million higher during the first quarter of 2011, when compared to the first quarter of 2010, driven by price. For 2011, we are estimating that fuel costs will be approximately $15 million to $20 million higher than 2010 levels. Regarding fertilizer cost, our primary exposure is urea, a component of fertilizer. For 2011, we are anticipating a small increase in total fertilizer cost, and believe this increase is very manageable.

Our operating performance, as set forth in the 8-K, grew 3.6% to $76 million, compared to $73.4 million, a year ago, driven principally by the favorable impact of increased revenues at several of our business units. Our operating performance, as a percentage of revenues, declined slightly this quarter compared to a year ago, primarily due to the results of the Other Operations and Headquarters segment. This segment's loss increased approximately $5.5 million, driven by $2.8 million of key executive separation charges; $1.2 million is related to increased incentive compensation, and the remaining amount is primarily attributable to the timing of overhead spending, which is expected to reverse in the second quarter of 2011.

Net cash used for operating activities was $9.3 million, and was driven by a $22.1 million increase in cash required for working capital. The increase in working capital requirements for the three months ended March 31, 2011, was principally driven by normal, seasonal activity, incentive compensation payments related to 2010 performance, and the timing of interest payments on the permanent notes. Capital expenditures during the first quarter totaled $25.4 million, including $15.2 million in new vehicle purchases. We expect 2011 capital expenditures, excluding vehicles, to range from $50 million to $60 million, and total capital expenditures to range from $105 million to $125 million.

Lastly, our liquidity profile remained strong. Cash and short and long-term securities totaled $343 million, of which $284 million was associated with regulatory requirements at American Home Shield and other requirements. We also have $442 million of capacity under our revolving credit facility, and $19 million of capacity available under our accounts receivable securitization facility.

Now, let's talk about the segment results. At TruGreen, first quarter revenues were $136 million, an increase of nearly 10% from first quarter 2010. The key drivers of revenue growth included improved price realization, higher sales of expanded services, and an ability to begin servicing customers earlier in the year, as compared to 2010. Unfortunately, customer counts declined 3.6% compared to last year, primarily attributable to a 470 basis point decrease in the trailing 12-month retention rate. As Hank mentioned earlier, TruGreen's customer experience, which impacts their customer count, is a key area of focus for us. Operating performance was a loss of $10.4 million, compared to a loss of $9.6 million in the first quarter of 2010. The flow-through impact of higher revenues and improved labor efficiency at TruGreen was more than offset by the timing of marketing spend, higher fuel costs, and other costs related to ongoing initiatives to improve customer service.

At Terminix, revenues increased nearly 5%, to $284 million in the first quarter compared to 2010, reflecting growth in both our Termite and Pest Control segments. Pest revenue grew 6.6%, due to a 4.5% increase in customer counts and an increase in one-time services. The increase in customer counts resulted from an increase in new unit sales, the contribution of acquisitions, and a 90 basis point improvement in customer retention rates. Termite revenue increased 3.5%, driven by new unit sales, the contribution of acquisitions, and improved price realization. Operating performance grew 5.1% to $72.6 million, compared to $69 million a year ago, reflecting the favorable impact of higher revenues and reduced legal provisions. This was partially offset by increased investments in sales and marketing, increased fuel costs, and higher overhead spending.

At American Home Shield, revenues were $141 million, up 5.8% compared to first quarter 2010, primarily due to improved pricing. Customer counts were comparable with first quarter 2010 levels, reflecting 170 basis point improvement in customer retention rates, offset by a reduction in new unit sales. New unit sales reflect declines in the Real Estate channel that continue to be negatively impacted by the weak home resale market, partially offset by growth in consumer sales. Operating performance for the quarter improved nearly 33% to $25.1 million, compared to $18.9 million a year ago, due to the impact of increased revenues, as well as the timing of sales and marketing spend.

At ServiceMaster Clean, revenues increased 1.8% to $32.8 million, compared to $32.3 million, in 2010. Trends in revenue reflect an increase in national janitorial accounts, partially offset by lower product sales to franchisees. Operating performance declined 5.3% to $14.2 million, reflecting an increased investment in sales and marketing, partially offset by the impact of increased revenues.

In the Other Operations segment, first quarter revenues increased 1.7% to $20.5 million, primarily reflecting improved revenue at Merry Maids. First quarter operating performance for the segment was a loss of $25.4 million, compared to a loss of $19.9 million a year ago. The higher loss was primarily due to the $2.8 million charge related to changes in leadership and increased provisions for incentive compensation.

That concludes our prepared remarks. I look forward to providing you an update on our progress later this summer, when we report our second quarter results. Operator, let's open up the lines for the question-and-answer session.

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

Thank you. Good afternoon. Thank you for all the details. I had a couple of follow-up questions. The first one is for you, Hank, around your prepared remarks, around household penetration on the Termite and Pest Control fronts. I just wanted to confirm, at least on the Terminix side, we should still think about your market share here in the US as number one, in the 20-ish percent range, and correct me if I'm wrong, but you're just speaking to a defined household population, and then saying how many [use] service? Is that how to look at the difference, or - - ?

Yes Emily, you're thinking the right way in terms of our household penetration and market share the way we talked about. And I'm sorry, you broke up a little bit on the second part of your question?

Well, it was just that I was curious how you are defining households?

How we define households?

Yes.

We look at the number of households in the US, and then we also look at what percent of those households we've penetrated and do business with. It done on an entire category basis.

Okay. And then, in terms of the inflationary pressures that you talked about specific to fuel and fertilizer, as it relates to the TruGreen Lawn Care business specifically, are you seeing any of your competitors trying to pass through fuel surcharges at all?

No, we haven't seen much activity on that front at this point.

Okay. And just generally, how would you characterize the pricing environment in that segment?

We think, in our TruGreen Lawn Care segment, that there could be opportunities for us later this year to have modest price increases, while not negatively impacting our customer's perception of value nor retention.

Okay, and then my final question is just around the TruGreen LandCare that you sold. Can you give us a ballpark of what the right adjusted EBITDA contribution was in fiscal year '10?

Emily, let's take that offline; why don't you give me a call after this and we'll see if we can get you the right answer.

Okay, great. Thank you.

Thanks, Emily.

Thank you. Our next question is from the line of Todd Harkrider with UBS. Please proceed with your question.

Yes, it sounds like you weren't pleased with the first-quarter results, but still want to say congratulations on the good start to the year, as it seems like it was. But I guess to start it off, the further diversifying the businesses, it sounds pretty promising. Can you talk about if there is any timeline on when you might start that process and any size parameters? The if you expect incremental leverage from that, or since you have a decent amount of leverage, it could actually be a deleveraging event? Thanks.

Yes Todd, thanks for your positive feedback on the first quarter. In terms of us diversifying our business, that's one of our key strategic initiatives that we have laid out. We see several ways that we can do that. As I mentioned, it could be diversifying more into the commercial space versus residential. We also think there is opportunities for geographic diversification within the US, which also will decrease our susceptibility to weather related events, et cetera. So you'll be hearing us talk in more detail about what we are doing in terms of our diversification on future calls.

Okay, and I appreciate you giving us some additional metrics that you are going to be focused on going forward. Does that mean you have a little bit less of an emphasis on retention rates on like a quarterly basis, or those are still going to be the top priority?

You know, retention is one of the metrics that we look at, but as you heard me say, we are really focused on top line growth, growing our bottom line, and also making sure that we're generating outstanding free cash flow.

Okay. I appreciate it. Then, I guess, is there any indication in regards to you slowing down the a customer count decline that you saw in the first quarter? And, I guess in regards to the pricing realization, did you actually increase prices? It sounded like you really didn't, but you have an opportunity to on the TruGreen side. Just trying to get a little additional color there.

In terms of customer count, and as you get to know me better, you'll recognize that I am extremely passionate about our customer experience. We are very focused on customer experience. I am a firm believer it's always more efficient to keep a current customer than trying to go to a new customer. So we will have a laser focus on customer experience, and also, as we continue to gain traction on that, we think you'll see that in terms of our customer count. So, that's a top priority for us.

I might also add here with respect to price, that we do have a very disciplined program in place in our business units, with respect to pricing, year on year on year. So some of the realization that you might have been referencing would be by virtue of past price increases that we have taken.

I would like to also take this opportunity, since you referenced retention rate, to first indicate that to Hank's comment, that the results of TruGreen are not acceptable. Revenues are down to 2000 levels, below 2000 levels, customer counts are not growing, but I did want to provide some insight with respect to the 470 basis point decline that occurred first quarter over first quarter, in that, in the first quarter of 2010, we had a very late production start to the season. So cancellations were moved or shifted into subsequent quarters into 2010, as compared to, in first quarter of 2011, we had a normal start to the production season, and in getting out and doing that production, the cancellations ensued. The point I'm trying to make is, substantially all of the 470 basis point decline that we speak to first quarter over first quarter is attributable to that dynamic of timing of cancellations, driven by timing of production season.

That was very helpful; I appreciate it. Thanks for taking my questions and good luck with the rest of the year.

Thanks.

Thank you. Our next question is from the line at Yilma Abebe with JPMorgan. Please proceed with your question.

Hi, this is Ryan Dean in for Yilma. Thanks for the prepared remarks in the opening. So just real quick, on the branch standardization processing, I know we talked about this in the past, where you guys at with that? And I know you said you wanted to make some changes at the TruGreen segment, comparable to what is going on now with Terminix. So what is that going to look like?

Yes. We are very, very pleased with the branch standardization that exists currently in Terminix. I would call that a best-in-class process. And, really with Tom Brackett now helping us with the leadership of TruGreen while we search for President, in a couple of weeks Tom has been over there, he has already identified additional opportunities to accelerate branch standards at TruGreen. So, that's a great, specific example of one of our key strategic initiatives, which is again, identifying best practices within one of our businesses, and sharing those best practices across all of our businesses.

Also, in addition to that, we've got some branches in TruGreen that are performing at an extremely high level. So again, what we are doing with under Tom's leadership there is identifying what those branches are doing, applying those learnings, and scaling that to the rest of the TruGreen business. So we think that is something that can be a key advantage for us moving forward. Also, as we look at our other businesses, we see opportunities for continued standardization and improvement in our Merry Maids business, also.

And I just might add that Terminix doesn't stop. I mean, as you see it played through the queue, there is a Terminix branch optimization process there, continued enhancement of technology and process to improve the customer experience, at the same time, some opportunities with respect to bricks and mortar, and the decisions that could be made around the continued existence of that, as well as some labor efficiencies that can be identified.

Thank you for the color on that. And then, currently could you guys maybe provide some color on what you guys are seeing in the spring selling season so far, specifically around the pricing environment? I know you guys touched upon it before - - ?

Ryan, we are not going to give any forward-looking results for the second quarter. I appreciate the question, but we'll look forward to you tuning in when we report our second quarter results later this summer.

All right. And then, just one real quick [type]? On this diversifying the business strategy, is the pipeline in the near-term looking full, or how is that going to go forward?

There is initiatives that we've already begun working on, that I think you'll see evident in our results in the future. But again, that is part of our long-term strategic planning process and we'll keep you updated on a quarterly basis, as we see success on each of those initiatives.

All right. Thank you.

Thank you.

Thank you. (Operator Instructions) Our next question is from the line of Jeff Kobylarz with Stone Harbor Investments. Please proceed with your question.

Hank, thanks for the overview and sharing your game plan. I just wanted to make sure I understood correctly what I thought I just heard, that the 470 basis point decline in customer retention, that's all due to the timing of when customer service began, in TruGreen?

That's correct. So earlier production season in 2011, when we get out for those initial treatments, and [the] cancellations can occur, versus in 2010, due to the challenging weather conditions and the delay in getting out and doing that production into second quarter, and the cancellations that then resulted in the 2010 year.

Okay. But, then the decline in customer counts down 3.6% year-over-year, is that just correlated with this decline in retention?

That's right, it followed suit.

Okay.

But also, adding on to what David said, I want to be clear, customer experience is a major focus for us.

Right.

And although, as David said, a lot of the change, quarter to quarter, can be explained by timing and production [fees] and et cetera, I don't anyone on the call to underestimate our focus on this and what a key advantage we think we can have with that.

Okay. And, that does sound like a bit of a big initiative. How long do you think it will take to fix these customer service issues (inaudible) here?

What I have seen in my career is customer service is a journey not a destination. Customer service can always be improved. I expect improvement in customer service in all of our businesses today, and that's something we're focused on as a Senior Management team and something that we all of our Associates have a laser focus on.

Okay. But it sounds like some of these things, like whether it's scheduling, since you may not be showing up on time, or the results of the lawn care treatment, may not be meeting the customers' expectations. Are those just some kind of operational things that have to be implemented that will take a couple of quarters, or less than a year? Do you have any ballpark color there?

Yes, a key root cause driver of each of those symptoms that you mentioned is variability, in terms of the operating processes, standards and procedures. So as you've heard, one of our big focuses is executional excellence, which basically is decreasing the variability from our very best to our very worst branches. That's something that we've had great success with in Terminix over the years, and they continue to focus on that and improve on that daily. And that's something that we've already begun to address with TruGreen in the last couple weeks.

Okay, fine. And then, about the diversification of your portfolio, you did mention acquisitions as a potential way to do that. Can you say how large of an acquisition you might make?

I don't like to speculate on acquisitions, but that would be one potential avenue of growth. However, we've also got lots of opportunities for organic growth. You heard our low household penetration numbers; we've got abilities to do what we do well in new geographic markets in the US, and we can do a lot of that organically, and we will do some of it with acquisitions.

Okay, then lastly, can you update us on your thoughts on refinancing, either the bank debt or the bonds?

Great question, we do continue to closely monitor the capital markets. We are having ongoing discussions with our banking partners about our current capital structure. We recognize the constructive environment that is out there, so we are evaluating our alternatives. But as of today, no decisions have been made.

Okay. Thank you.

Thanks.

Thank you. There are no further questions at this time Mr. Ketelaar, I will now turn the conference back over to you.

Great. Thanks very much everybody for joining us. Have a very safe and enjoyable Memorial Day weekend, and we'll look forward to talking with you in the second quarter when we report those results. Thanks again.

Thanks, everybody.

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.