Terminix Global Holdings Inc (TMX) 2011 Q2 法說會逐字稿

Ladies and gentlemen, welcome to The ServiceMaster Company's second-quarter 2011 earnings conference call. Today's call is being recorded and broadcasted on the Internet.

Beginning today's call is Mr. Marty Ketelaar, ServiceMaster Vice President of Investor Relations and Assistant Treasurer. Mr. Ketelaar will introduce the other speakers on the call.

(Operator Instructions). At this time, we will begin today's call. Mr. Marty Ketelaar, you may begin please.

Good morning, and thanks for joining our second-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, 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's legend contained in our Form 10-Q and Form 8-K, which was filed with the SEC on August 15.

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, 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.

On August 15, ServiceMaster filed its Form 10-Q as well as an 8-K containing additional financial disclosure that we believe will enhance your understanding of our financial and operating results. 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 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 morning, everyone, and thanks for joining us for today's call. Let me briefly share some highlights of our financial performance in the second quarter.

Revenues in the quarter increased 3% or $27.8 million compared to a year ago, with all five reporting segments demonstrating revenue growth. Operating performance in the quarter grew 9.8% or $18.8 million. And year-to-date net cash provided by operating activities before interest and tax payments increased $35.9 million or 14.8% to $278.1 million.

Before I get into more details about the business, I want to update you on our key executive searches.

I am very pleased to tell you that Roger Cregg has been hired as our new Chief Financial Officer and will start with us on August 29. Roger has an impressive track record of leading high-performing, highly engaged diverse teams and brings a wealth of experience in guiding the financial operations of both private and public companies. Most recently, Roger served as Executive Vice President and Chief Financial Officer of PulteGroup, the publicly owned parent company of Pulte Homes, one of the country's largest home builders.

He has worked for several large growth-oriented companies in multiple industries, and his experience will be extremely valuable as we continue to establish ServiceMaster as a rapidly growing best-in-class provider. We are excited to welcome Roger to the ServiceMaster team.

David Martin, as you know, has been serving as our interim CFO, and I want to thank David for his leadership during this transition period. His knowledge of our business has been a terminus advantage during this transition, and he will continue in his prior role as Senior Vice President and Controller. David will cover our second-quarter financial results in more detail in a few minutes.

Meanwhile, we are continuing our search for a new TruGreen President, and I'm looking forward to making an announcement on that role soon. Tom Brackett has been doing an outstanding job leading TruGreen on an interim basis since May in addition to his role as President of Terminix. I want to thank Tom for his continued strong leadership at TruGreen during this transition.

As I mentioned last quarter, as we think about our company overall, we're focusing on three strategies -- number one, we're going to focus on rapid, profitable growth. Number two, we're going to focus on talent development to put the right people in the right roles and enable all of our associates to be their best every single day. And third, we're going to do a better job sharing best practices across all of our businesses and developing a culture of executional excellence.

Let me start by talking a little bit about growth. Our number one growth strategy is improving the customer experience. From the customer's perspective, improving the customer experience means fixing problems quickly and professionally, or better yet, preventing them altogether. It means gaining a level of intimacy with our customers that allows us to anticipate their needs. It means doing business with us has to be easy and hassle free. Frankly, it's the heart of our mission to simplify and improve the quality of our customers' lives.

Based on customer feedback, we realize our customer satisfaction levels aren't where they need to be. We're actively working in all of our businesses to implement specific actions to transform our customers' experiences, drive higher customer satisfaction, and as a result, improve retention rates and increase customer counts.

As I said, improving the customer experience is at the core of our growth strategy, particularly in TruGreen. As you know, TruGreen has struggled to consistently grow revenues over the past few years and we're working hard to improve that. But overall, TruGreen's performance in the second quarter simply didn't meet our expectations. Revenue only grew slightly more than 1% and operating performance was below last year for the same time period. We need to do better.

We are seeing some positive signs emerging at TruGreen. We're seeing improved retention and improved customer save rates. But our TruGreen team still has work to do.

To improve the customer's experience in TruGreen, we have launched a set of seven standards of service excellence so we can drive towards a common set of service delivery standards and a superior experience for all of our customers. This isn't complicated stuff we're talking about here. This is knocking on people's doors before we service their lawn to let them know that we are there. It's following up with a phone call to new customers after their first application; just basic steps we can take to improve the customer experience.

As you know, one of the challenges in TruGreen is variation in agronomic conditions from region to region. But customers everywhere still expect a healthy, green, weed-free lawn. When that doesn't happen, it's not surprising that we get dissatisfied customers. So we are reviewing all of our agronomic programs to ensure we are providing the most appropriate lawn care treatment for every lawn in every region.

And when a customer's lawn isn't meeting expectations, we are rolling out a new lawn recovery process to proactively address this problem before the customers decide that they want to cancel the service.

In Terminix, we are continuing to make technology investments to take our service experience to the next level. That means making enhancements to sales and service mobility for our field teams, putting more real-time customer information and transaction capabilities at their fingertips. While the sales mobility enhancements have been completed, service mobility enhancements are scheduled to be completed early next year.

We are making final updates to a new Web portal for Terminix customers to improve the way they interact with us online. And we're launching a Terminix smartphone application this fall so our customers can manage their accounts online anytime, anywhere.

In American Home Shield, we are working to improve the product offering we provide our customers and give them more choices to protect their homes. We are also well into a major technology upgrade that is going well and is scheduled to be completed by the middle of next year.

When finished, it will enable service enhancements that will make it even easier to do business with us, providing better customer information and communication and improved case management.

Two of our franchise-based businesses, ServiceMaster Clean and Merry Maids, are industry leaders in innovation, offering environmentally friendly cleaning products and processes. Our franchise training academy and continuing education programs ensure a high level of brand consistency, professionalism, and quality service that customers can count on across our network, and it shows in our customer satisfaction surveys.

In 2011, our increased focus on customer experience has led us to make improvements in the tools and technologies we provide to our sales and service teams in the field. One of the ways we are helping to drive customer satisfaction throughout the franchise network is through 24/7 emergency phone support for owners and customers, especially in the disaster restoration business where response times are critical.

As I said earlier, we are not yet where we want to be in terms of customer experience, but we have seen improvements. Every business in June had customer satisfaction scores higher than the previous year. And year to date, every business except TruGreen had scores above the prior year.

We also have an opportunity to better leverage our brand awareness to drive top- and bottom-line growth. You know, even though we're the category leaders in most of our industries, our categories have low household penetration. And by that, I mean that's the number of users in a category based on the total number of US households. So that's roughly 4% penetration in home warranties, 12% penetration in lawn care, 4% penetration in termite, 7% penetration in pest-control.

There's just too much of a growth opportunity being left on the table. There are a lot of nonusers out there who can and should be using our services. We have to do a better job converting nonusers into new customers and retaining more of our existing customers.

While we continue to strengthen the core, we're also going to look for ways to balance organic growth with external growth. Earlier this week, we entered into a joint venture with security and intelligence services, a leading services company in India, to enter the growing pest and termite market there. SIS is India's largest security services group with 75 branches throughout 13 regions serving more than 3,000 corporate customers. We have had a relationship with SIS since 2008 through our ServiceMaster Clean Brand, providing commercial cleaning services in India through a franchise agreement with SIS.

We view India as a huge growth opportunity for us, and this latest announcement combines the power of the Terminix brand and our technical expertise with local sales, marketing, and service capabilities in India.

Also on the international front, we have repurchased our Terminix master franchise license agreement in the Caribbean and plan to pursue acquisitions of these franchise operations and convert them into company owned locations.

Let's talk a little bit about talent development. We know that ultimately, it's our people who will drive the execution of our strategies. That's why the second area we're focused on is evaluating and developing our talent. It's a critical step in developing high-performing, highly engaged diverse teams.

To help us get there, we're looking at four dimensions of talent development. First, each of our business units is reviewing its structure to ensure it can support our strategy and our objectives. We are conducting a rigorous organizational review to make sure we have the right team in the right place to execute our strategies. Where changes are necessary, we will make them.

Second, we are implementing a rigorous talent management process. This means we will review our talent twice a year instead of just once. We will share our talent across businesses to accelerate best practice sharing and grow our leaders. Year to date, we have moved over 35 senior managers across our business units and functions.

We are expanding our succession planning process and top talent review to include senior leaders in our business units and all of our support functions. We have also conducted in-depth assessments of our top talent so we can create targeted development plans for them. In the past 12 months, we have assessed more than 55 top talent associates to prepare them for larger roles within the company.

Third, we are addressing associate engagement. Associates have told us they want a clear, unified mission and vision, something to tie the work they do every day to overall company growth. We know having engaged associates leads to better employee satisfaction. We also know that associates who are satisfied in their jobs tend to provide better customer experiences. In turn, better customer experiences tend to lead to higher customer retention and better revenue growth. We will continue to measure our performance in this area through our Annual Associate Engagement Survey this fall.

Finally, we are accelerating talent development at all levels of our organization. For our managers, we're enhancing our leadership training programs so we can provide more career guidance and experiences to open new opportunities for professional growth.

For leaders already identified as top talent, we're going to be closely monitoring their performance and identifying opportunities to place them in new positions where they can help speed our journey toward being a best-in-class service provider.

As we improve our talent, evaluation and development, I am looking to all of our teams to share their best talent. To date, we have already moved several top talent and high potential associates from Terminix to help accelerate the best practice sharing we need to help improve performance at TruGreen.

We can rapidly grow TruGreen simply by transferring many of the best practices for a branch-based business currently being employed in Terminix. We are fortunate that Terminix has a strong talent bench, so we don't expect these moves to have an adverse impact on Terminix.

As we identified best practices across our businesses, there is a huge opportunity to grow faster simply by accelerating best practice sharing across all of our businesses and developing a culture of executional excellence.

Naturally, we think the biggest opportunities for best practice sharing are in our two branch-based businesses, and that's reflected in the work we have done to date leveraging the Terminix operating model into TruGreen wherever it makes sense.

While there's still a lot of hard work ahead of us, in just a short time, have begun to see what can happen as we share best practices and talent from Terminix with TruGreen. As I said on the last call, I have asked Tom Brackett to focus on three things while he is leading the TruGreen business.

One, focus on improving the customer experience. Two, drive a culture of executional excellence. Three, develop a more rigorous talent evaluation process in TruGreen.

I have already outlined what we are doing in TruGreen to improve the customer experience. In the second area, executional excellence, what we found in TruGreen is there's too much variation in service standards from branch to branch. As a result, there's too much inconsistency in our service delivery.

As we have evaluated our TruGreen operations, we've found that we compounded the problem by introducing too many initiatives to the field teams and then not sticking with them very long. As a result, our field operators are feeling whip lashed, and frankly, the customer experience is suffering.

One of the other issues we are addressing in TruGreen is our customer service training programs. Today, they aren't uniformly delivered across the entire business. That restricts our ability to implement best practices and standardized training.

To deliver the kind of service our customers expect from us, we need to be better at executional excellence. Some of the improvements we are looking for will come from investments in technology, such as better call management, similar to what's being used today in Terminix. Other improvements will come from improved processes and procedures.

For example, we are refining our branch standards to ensure consistency across the brand. We are also standardizing our branch staffing model so that our labor management is consistent with the seasonality of our business.

We are also reevaluating all of our existing sales channels and our marketing spend to ensure that we are making the most of our resources.

For example, we are taking a long, hard look at the TruGreen neighborhood sales program. You may recall in 2009 that we expanded neighborhood sales as a way of growing customer counts. We had our field staff knocking on more doors in more neighborhoods. But, what we found is that neighborhood selling isn't as effective as it was in the past.

As a result, we're going to rebalance our sales and marketing efforts and focus more on profitable sales. Although this will impact TruGreen revenues in the short term, in the long term, we believe this will be an opportunity to improve profitability, increase the average and lifetime value of a sale, and drive higher customer retention.

As I've said before, developing talent in TruGreen will be a key to our success. In some cases, we will develop the talent from within the business. In other cases, we may reach outside TruGreen.

Before I turn the call over to David, I would like to reiterate some of my remarks from last quarter. Since joining the company in February, I am even more excited about the opportunities for growth at ServiceMaster. Think about it -- we have a diverse portfolio and a resilient business model. Despite a difficult economy over the past few years and relatively flat revenues, we have delivered both bottom-line growth and strong and steady cash flow over that period.

We have strong, iconic brands. Most of our brands are leaders in their categories with strong consumer awareness. And even though we are the category leaders in most of our industries, our categories have low household penetration. We have huge untapped opportunities and a business model poised for growth.

We have passionate associates who are committed to our brands and our customers. We believe that's a real strategic advantage for us as we strive to improve our customer experiences and consistently meet and exceed their expectations.

Although we are still in the early stages of this transformation, we believe we're on the right track. While I am excited about the huge opportunities ahead of us, the changes we are making won't happen overnight, and we certainly expect a few bumps in the road along the way.

Here's my commitment to each of you. We will keep you informed of our progress along the way, and in the end, we will get it right.

Our vision is to be a rapidly growing, best-in-class service provider. We will be the best place to work and invest.

Now I would like to turn it over to David Martin to review our second-quarter results in more detail. David?

Thanks, Hank. As many of you know, the second quarter is typically the most significant quarter of our fiscal year in terms of revenue and operating performance. Let me briefly recap our second-quarter results, and then I will get to the segment highlights.

For the quarter, revenues increased 3% to $967 million compared to $940 million a year ago. As Hank mentioned earlier, all five reporting segments demonstrated growth this quarter. Revenue growth was primarily driven by improved pricing in several of our businesses.

Cost of goods sold as a percentage of revenues decreased 80 basis points to 53.8% compared to the second quarter of 2010. The primary drivers of the decrease are a $3.4 million residual value guarantee charge recorded in 2010 at TruGreen that did not recur; favorable termite damage claim trends at Terminix; and favorable claims trends in our medical plan and our automobile, general liability and workers' compensation program, which may or may not continue. These items were partially offset by increased fuel costs.

SG&A expense as a percentage of revenue decreased 60 basis points to 26.8% compared to the second quarter of 2010. This decrease primarily reflects reduced sales and marketing spend at TruGreen and American Home Shield and decreased legal provisions at American Home Shield. These items were partially offset by increased investments in sales and marketing at Terminix; investments in a new customer relationship management platform at American Home Shield; increased investments in information systems for payment card industry standards compliance purposes; and $2.5 million in key executive separation charges associated with our former Chief Financial Officer and former President of TruGreen.

Fuel costs was approximately $1.6 million higher during the second quarter of 2011 when compared to the second quarter of 2010, driven by price.

For 2011, we are forecasting fuel costs to be approximately $10 million to $15 million higher than 2010 levels.

Fertilizer costs were $1.2 million higher this quarter than a year ago. For 2011, we do not expect higher fertilizer prices to have a significant impact on our overall financial performance.

Our operating performance as set forth in the 8-K grew 9.8% to $211.5 million compared to $192.7 million a year ago, driven by the favorable impact of increased revenues at several of our business units, as well as the favorable claims trends in our medical plan and our automobile, general liability and workers compensation program.

Net cash provided from operating activities year to date increased $47.6 million to $143.1 million and was driven by $137.9 million in earnings adjusted for non-cash charges and an $8.3 million decrease in cash required for working capital needs. This was partially offset by $3.1 million in cash payments for restructuring charges.

The decrease in working capital requirements for the six months ended June 30, 2011, was favorably impacted by the timing of customer prepayments.

Capital expenditures during the first six months totaled $57.8 million, including $33.7 million in new vehicle purchases. We expect 2011 capital expenditures excluding vehicles to range from $60 million to $70 million. The slight increase from our first-quarter estimate was due to additional investments in business compliance and customer experience initiatives.

Capital expenditures for vehicles during 2011 are expected to range from $55 million to $65 million.

Lastly, our liquidity profile remains strong. Cash in short- and long-term securities totaled $472 million, of which $274 million is associated with regulatory requirements at American Home Shield and other requirements.

We also have $442 million of capacity under our revolving credit facility and $40 million of capacity available under our Accounts Receivable securitization facility.

Now let's talk about the segment results. At TruGreen, second-quarter revenues were $383 million, an increase of 1.2% from second quarter 2010. The key drivers of second-quarter revenue growth included improved price realization and higher sales of expanded services.

However, offsetting this growth was a 5.2% decline in customer counts, driven by a decrease in new unit sales and the unfavorable impact of differences between years and the start of production in certain areas of the country.

A significant portion of the decline in new unit sales was due to a change in sales channel mix away from the neighborhood sales program. As Hank stated earlier, we are rebalancing our sales and marketing program with a focus on lower average customer acquisition costs and higher customer retention.

TruGreen's operating performance was $79.1 million compared to $81.5 million in the second quarter of 2010. The flow-through impact of higher revenues and reduced sales and marketing spend at TruGreen was more than offset by higher fuel costs and $1 million in key executive transition charges related to the resignation of the former President of TruGreen.

At Terminix, second-quarter revenues increased 3.4% to $334 million compared to the second quarter of 2010, reflecting growth in both our termite and pest control segments. Pest revenue grew 6.1% due to a 4.7% increase in customer counts and an increase in one-time services, primarily bedbug services.

The increase in customer counts resulted from an increase in new unit sales, the contribution of acquisitions and a 60 basis point improvement in customer retention rate.

Termite revenue increased 1.2%, driven by improved price realization. This was partially offset by lower new unit sales, the result of weak termite swarm activity.

Second-quarter operating performance grew 6.3% to $90.5 million compared to $85.1 million a year ago, reflecting the favorable impact of higher revenues, lower termite damage claims, and the continued favorable impact of moving from leasing vehicles to purchasing vehicles due to changes in the leasing market that made buying our vehicles more economically attractive. This was partially offset by increased investments in sales and marketing and higher fuel costs.

At American Home Shield, second-quarter revenues were $195 million, up 6.3% compared to second quarter of 2010, primarily due to improved price realization.

In addition to the realization of normal price increases, American Home Shield has recently introduced several new products which allow our customers to choose the systems and appliances they would like to have covered. These products have a higher price than our traditional offerings, and we are seeing the benefit in our reported revenues and operating performance.

Customer counts declined 1.5% compared to last year's results, reflecting a reduction in new unit sales driven by declines in the real estate channel that continued to be negatively impacted by the weak home resale market, partially offset by growth in consumer sales.

Operating performance for the second quarter improved 29.1% to $43.6 million compared to $33.8 million a year ago due to the impact of increased revenues, reduced sales and marketing spend, and decreased provisions for legal matters. This was partially offset by investments in a new customer relationship management platform.

At ServiceMaster Clean, second-quarter revenues increased 2.6% to $32.9 million compared to $32 million in 2010. Second-quarter trends in revenue reflect an increase in national janitorial accounts and fee revenue for forward in disaster restoration services. This was partially offset by a decrease in sales of products to franchisees.

Operating performance decline 2.6% to $14.4 million, reflecting increased investments in sales and marketing, which was partially offset by the impact of increased revenues.

In the other operations, at headquarters segment, second-quarter revenues increased 1% to $22 million, reflecting improved revenues at Merry Maids.

Second-quarter operating performance for the segment was a loss of $16.1 million, compared to a loss of $22.5 million a year ago. The smaller loss was primarily due to favorable claims trends in our medical plan and in our automobile, general liability and workers' compensation program.

This was partially offset by $1.5 million in key executive transition charges related to the resignation of our former CFO and to investments in business compliance.

That compared concludes our prepared remarks. We look forward to providing you an update on our progress later this fall when we report our third-quarter results.

Operator, let's open up the lines for the question-and-answer session.

(Operator Instructions). [Todd Ryder], UBS.

Yes, and congratulations on a good quarter and filling the CFO spot. But, and also, congrats on the JV with SIS. It sounds very promising. Can you talk about some of the CapEx involved with that initiative, and if there's any sales or earnings benchmarks you expect to achieve from it in the short term?

Todd, can you repeat that? I think you had a question on CapEx, but we couldn't pick up the second question.

Yes, the JV with SIS -- if there's going to be any incremental CapEx involved and maybe some of the sales and earnings benchmarks or guidance you expect from it?

Yes, I will address the opportunities at SIS, and then I'll ask David to talk about our overview on CapEx.

We are extremely excited about the JV opportunity with India. We think we've got the right partner, in the right market, at the right time.

In terms of CapEx, very minimal impact in terms of CapEx, but we are excited about the opportunity to partner with them. And we look forward to sharing more details on that as that joint venture gets up and rolling.

I think the only other thing I would add is in terms of the investment that we will make as a part of that joint venture, obviously, we will invest dollars but not all up front. They will be over about an 18- to 24-month period. And total initial investment by us is around $2 million to $2.5 million.

Okay, thank you. And regarding the AHS customized packages, it seems like that could grow the pie pretty meaningfully in regards to how many people actually take home warranty going forward. What kind of percentage are you seeing that people actually take it today? Or is it too early to tell right now?

Yes, we are -- Todd, you are right on. We are very excited about some of the new products that were -- have already been rolled out at AHS, as well as some of the ones that we were working on for the future.

But what we have seen is that by providing our consumers more choices, and allowing them to customize the products that they want the way they want, in the way that they want to spend for it, we have seen great customer acceptance. And actually, it has had a positive impact on our average sale per customer. So we are seeing our sales rates on direct-to-consumer increase over what we had achieved previously with previous products, so we're very excited about that.

We are seeing about -- well, the majority of the homeowners are actually choosing our most comprehensive coverage, so we are very thrilled about that.

Yes, and I would just provide that it's in the face of continued difficulties with respect to the real estate channel. Our real estate sales are off year over year 15% to 20%. So we are having success driving units through the direct-to-consumer channel, and these new products are really assisting in that regard. We have a higher price point, as Hank mentioned. These products also have a higher retention element associated with them as well.

(Operator Instructions). Yilma Abebe, JPMorgan.

Yes, hi, and good afternoon. This is Ryan in for Yilma. My question was regarding the last conference call you talked about, diversifying either geographically by customer. And can you comment on that and provide some color and what your expectations are moving forward, and where the focus is going to be to increase household penetration?

Sure, Ryan. Happy to. Again, as we talk about our business and look at the different opportunities, one way that we have an opportunity to diversify is by getting more into the commercial space and not being just in the residential space. And we see huge opportunities for every single one of our brands to grow in the commercial space. So that's something that we are excited about, and we see big opportunities down the road.

Also, as I had just mentioned with some of the new products that American Home Shield has already rolled out, we are seeing improved consumer acceptance of those products, which again, is also helping our geographic diversification.

Also, internationally, we see other opportunities similar to the joint venture we just signed with SIS, which can further enhance our diversification.

But also, you know, it's not just in addition to diversification. We see opportunities to grow in current markets and gain additional share where we already operate, which will really help with our leverage.

Okay, thank you. And then on a follow-up to that, is that what happened in the retention rate in the TruGreen segment? You guys moved away from the residential to commercial, and when do you expect a rebound in that retention rate? Or when do you see that --?

Yes, on the -- in terms of the TruGreen retention, frankly, the big driver of that was our change, our decision, to change our channel mix, deemphasizing the neighborhood sales program, so I mean it's still in existence, but I think at more rational levels. So what we've found is that in neighborhood sales, that was our most costly sales channel, and frankly, had some of our lowest customer retention rates. So the customer decline was mainly due to the sales channel mix.

However, we need to do a better job of improving our customer's experience in TruGreen. We are focused on that. I've mentioned some of the key initiatives that we've rolled out, our 7-step initiative; we're having great success there. We also have rolled out and enhanced our branch standards, which is starting to show a positive impact in terms of our customer count and retention also. So, it's really the -- the big item was the change in channel mix away from neighborhood sales.

Yes, and I'll just add to Hank's point, cancels are certainly an item in that discussion. And I mentioned in the last call that there was a timing of production element that drove timing of cancellations when you looked at retention rates comparing March year over year. I just wanted to make sure that it was clear that as we sit here at June, that is not an issue. We don't have any timing elements that should impact your thinking around retention rates.

Kevin Coyne, Goldman Sachs.

Hi; thanks for taking my question. I guess it just relates to your current debt maturities. I know Roger is coming on at the end of the month, but perhaps you can give us an indication of how you are feeling about those maturities, particularly the credit facility and the 10.75% notes. Is that something you want Roger to address in the near term at some point later this year? Or is it something you feel comfortable about waiting till next year to address?

Yes, I think -- it continues to be a good question. I think the markets are certainly constructive. I would say that we are in constant communication now and will continue through the balance of this fall to be in communication with our banking partners as well as our owners about a potential finance transaction. Certainly beginning on the 29th of August, Roger will become very involved in that process as well. But as we sit here today, no final decisions have been made.

Great. And just one follow-up -- as we look at the business, it feels like June 30 was a long time ago as we look at a lot of the volatility in the broader markets. Have you seen any changes to any of your customer habits or business fundamentals with that increased volatility? Thank you.

No, Kevin, I mean, not really. What -- despite some of the macro changes that are happening in the world. What we have seen with our customers is that by as focusing on the things that we can control, better customer experience, making sure our associates are engaged, that we are able to deliver good results. So we haven't seen any significant movement in terms of our consumers based on some of the things that are happening.

Jeff Kobylarz, Stone Harbor Investment.

Just curious to follow up on the last question. So, you haven't seen any change in behavior yet of your customers, but you put through some price increases earlier this year, and can you comment -- do you think those price increases are going to be able to stick through next year? Or do you think, just given the weaker consumer confidence numbers that we are constantly seeing out there that you will have to start reducing prices at all?

No, Jeff, what we have seen is -- and in our past we have had a very disciplined process around price increases. We have put through some very modest price increases, haven't seen a hiccup, and don't anticipate any hiccups on that moving forward.

Yes, I would just add to that that AHS is obviously one of our highest growing businesses as you look at the quarter, and that is driven by price. But while there is a price realization element to that, please remember that the bigger piece of that would be by virtue of the introduction of those new products at a higher price point.

Okay, very good. And also you mentioned about putting these best practices that are at Terminix in place in the lawn care business. And so how quickly can you put these best practices in place there at lawn service? (multiple speakers)

There are several that are already in place and that we are starting to see some positive benefit from. There are more on the way. I expect to see progress on that every single day, and frankly, we are.

We have seen in TruGreen, the number of canceled accounts has been better than our plan for the last 12 weeks. So we are definitely starting to get some traction. And we look forward to sharing more of some of those results with you on our next quarter call.

(Operator Instructions). Todd Ryder, UBS.

Yes, regarding the excessive heat and dryness in the South recently, how should that impact your third quarter? I know it should impact TruGreen, but Terminix probably, with the lack of ants because there's no water out, and then maybe AHS, with higher HVAC orders -- I was wondering how we should look at that.

Well, Todd, again, you know we don't want to give forward-looking information, but historically, heat tends to lead to increased air-conditioning claims at American Home Shield. And although there's been some heat in Texas, that hasn't impacted the entire US, although a decent portion of it.

Got you, okay. And then back to AHS and the customized packages, I assume that's a first for the industry -- that type of customization?

Yes, it is. And again, we are excited by the results. Dave Crawford, the President of AHS and his team have done a very good job listening to their customers and developing innovative solutions that meet their needs. And you know in any business, usually when you listen to your customers and give them what they want, good things happen.

Jeff Kobylarz, Stone Harbor Investment.

Hi, yes, just curious about the acquisitions that you are maybe contemplating. Can you comment at all the size? Would it be in general like less than $20 million a year or $50 million a year? Is there any ballpark numbers you could say there, just given what you said about SIS was going to be a, I think, less than a $3 million investment?

Jeff, I don't really like to comment on potential or future acquisitions. Suffice it to say that on the acquisition front, we will continue to ensure that we are good stewards of capital, and that any acquisition that we make provides a good return on our invested capital.

And although we see acquisitions as one opportunity for us to grow, we also still see lots of opportunities for organic growth. And frankly, our biggest growth opportunity, which is also the most effective in terms of invested capital, is for us to do a better job retaining our current customers. That's why that is the number one focus of every meeting and everything that we do here.

Okay. Thanks very much.

Thank you. And I am showing no more questions at this time.

Great. Thank you very much for everyone joining us today and we will look forward to speaking with you again in the fall when we announce our third-quarter results.

Thanks, everybody. Have a good one.

Thank you. Ladies and gentlemen, that does conclude our call for today. We thank you for your participation and ask that you please disconnect your lines.