Terminix Global Holdings Inc (TMX) 2011 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the ServiceMaster Company's fourth quarter and full year 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 our fourth quarter and full year 2011 earnings conference call. Joining me for today's call is ServiceMaster's Chief Executive Officer, Hank Mullany; Chief Financial Officer, Roger Cregg; Controller, David Martin; and Treasurer, Mark Peterson. We'll make some prepared remarks, and then address your questions during the question-and-answer session.

Before we begin, I'd 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 legends contained in our public filings with the Securities and Exchange Commission. 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 February 29, 2012, 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.

Earlier today, ServiceMaster filed a press release highlighting our fourth-quarter and full-year financial results. Additionally, a handout summarizing our fourth-quarter results and key performance indicators can be found next to the webcast icon on the Investor Relations section of our website. Included in our press release and handout are additional disclosures that we believe will enhance your understanding of our financial and operational 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 options and stock-based compensation expense, among others. We have included in our press release and handout, 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'll now turn the call over to Hank Mullany for opening comments. Hank?

Thanks, Marty. Good afternoon, and thanks for joining us on today's call.

Roger Cregg will be covering the details of our financial performance with you in a few minutes, but I want to share some highlights from our fourth quarter, and some observations on the full year. As you can see in our financial results, we finished 2011 strong, with good momentum heading into 2012. For the year, all five reporting segments reported an increase in revenue. Revenues were up 2.5%, the first time revenues have increased in two consecutive years since 2006 and 2007. We are still not growing our top line as rapidly as we would like, but it's evidence that we are moving in the right direction.

Meanwhile, operating performance in the fourth quarter was strong, up nearly 21%, or more than $22 million, boosted by solid growth in Terminix, TruGreen, and Merry Maids. For the full-year, operating performance was $610 million, up $59 million, or 10.8%, with four of our five segments showing earnings growth. That's compared to a compound annual growth rate of just 7% over the previous 3 years. I'm particularly pleased about the results in our three largest segments -- Terminix, TruGreen, and American Home Shield -- which not only drove the strong improvement in operating performance, but also helped boost operating and performance margins. Margins were up 310 basis points in the fourth quarter, and for the full year were up 140 basis points over 2010.

The changes we've made in TruGreen under our new President, Tom Brackett, have really started to make a difference in our operating performance. We knew when Tom took over as Interim President last May that we would initially be sacrificing some revenue growth in exchange for improved profitability, mostly by rationalizing our neighborhood sales program. But TruGreen outperformed our expectations with consistent strong earnings growth for the final 7 months of 2011. I'll talk more about TruGreen later.

We not only grew in 2011, but we operated more efficiently and more profitably, and it shows in our cash flow statement. In 2011, net cash provided by operating activities before interest and tax payments increased $54 million, or 10.8%, to $559 million. We also simplified our business by selling our TruGreen land care operations, and combining ServiceMaster Clean, Merry Maids, Furniture Medic, and AmeriSpec under a single organizational structure and one President. These changes give us a stronger, more focused portfolio that's poised for future growth.

ServiceMaster is growing and changing, but our mission hasn't changed. We want to simplify and improve the quality of our customers' lives. Everywhere I travel in our Company, whether I'm speaking to associates, customers, or franchise owners, I hear that our mission is important and it's meaningful. It's something they can rally around. More and more, our associates are asking what they can do differently to simplify and improve the quality of our customers' lives. We've still got a lot of work ahead of us, but we're going to remain on track by staying focused on our three strategic pillars.

Number one, as I said before, it's about profitable growth. Our revenue and earnings growth gave us reasons to feel good about 2011, with momentum heading into 2012. But the reality is, we have huge opportunities to accelerate that growth. Our vision is to be a rapidly growing, best-in-class service provider, the best place to work and invest. We know the best way to do that is by creating world-class customer service that's memorable and gets talked about. We're also going to continue to take a thoughtful approach to new growth areas, by tapping into new market segments and new geographies, and exploring new revenue streams. I'll talk about that in a few minutes.

Our second strategy involves talent evaluation and development. One of my goals since coming to ServiceMaster was to ensure we had a world-class Management Team that's capable of taking this Company to the next level. We've made some key leadership moves, and since our last call, brought in two new world-class leaders to run Terminix and our Franchise Services Group. We're also stepping up our performance management and training efforts at all levels. We want to build deeper bench strength, and provide our associates with the tools and resources that give them the best opportunity to provide exceptional customer experiences every day.

Our third strategy is accelerating the process of sharing best practices, and developing a culture of executional excellence. You know, too often great strategies are not properly executed, so we've picked up the pace of our branch and call center standardization efforts to reduce variation from branch to branch, and even call to call. The impact is better customer service and satisfaction, and I'll share more about those results, and the efforts, shortly.

Let me talk about our first strategy to rapidly grow our business. As I said, improving the customer experience is our number one strategy, and from what we're seeing, we're making good progress. Customer satisfaction scores were up for all five businesses in 2011. We still have work to do in this area, but all of our business leaders are implementing plans to drive meaningful improvements in service delivery, so that our customers' experience isn't just better, it's best-in-class.

We saw signs of growth and margin expansion in 2011 that showed our focus on transforming the customer experience began to pay off. In TruGreen, retention is up, with fewer cancels, fewer customers reporting problems, and fewer revisits to fix the problem. In fact, TruGreen finished the year with seven consecutive months of earnings growth, reduced cancellations, and improved customer satisfaction scores.

A new call management system has been installed in five key regions, and we're planning to expand that in 2012. We've implemented seven Standards of Service Excellence at TruGreen, similar to a program used by Terminix. We've also improved customer communication, with pre- and post-service notifications; so our TruGreen customers know when a technician is going to be on the property, and when they've completed the service. These are all very simple rules of the road to ensure our customers receive consistent, top quality service.

In Terminix, the focus is on multiple customer touch points, from point-of-sale to point-of-service. We're entering the next phase of service mobility, better using technology, and making it easier for our technicians and our customers to do business with each other. And as more of our customers want to transact online, new residential and commercial web portals have been introduced to improve account access, account management, and customer service -- even new apps for customers when they are using a Smartphone. All of this had a favorable impact on our pest and termite retention rates.

American Home Shield also saw improvements in customer satisfaction in 2011, and as a result, a continued increase in its retention rates. As we rebalanced the sales channel mix towards more direct-to-consumer sales, and improved the quality of our customer communications, we are targeting a stronger base of loyal home warranty customers who understand and appreciate the value of the product. We've also introduced a new product that goes beyond the traditional warranty product that's been the core of the business, and opens up a new revenue stream. This product focuses on preventative maintenance, and it's designed to keep household heating and air-conditioning systems in good working condition, which helps avoid potentially expensive repair claims down the road, reduces operating costs, and helps extend the life span of the systems. The product uses our existing national network of contractors, which is regularly monitored and rated, to ensure quality and service.

The customer experience continues to be a major focus of our efforts in Merry Maids. We know that getting a home cleaned the way the homeowner wants it done, the same way every time, is the most important thing we can do to create a great customer experience; so we've revamped our training programs to ensure consistency across our branches, and we're excited about the adoption rates in our franchise locations as well.

We've also rolled out a program called the Merry Maids Advantage. The program is designed to reduce up-front costs, build long-term value, and strengthen our relationship with recurring customers. By signing up for a pre-determined number of cleanings, the customer can receive a discount on both the initial cleaning and ongoing cleanings. We've seen early signs that the program is working. Merry Maids' revenue and profitability were both up, and retention rates jumped over 600 basis points in 2011. In the fourth quarter, we also completed the sale of 10 Merry Maid branches that did not fit our strategic profile for Company-owned locations, and we've converted them to franchise-owned businesses. Merry Maids continues to be an attractive franchising opportunity, recently ranking in the top 10 in Fortune's 211 list of top franchises to own.

As I said earlier, retention is the single biggest growth strategy we have in the Company, and we're going to keep the emphasis on transforming our customers' experiences to help get us to the next level. But we are also exploring other avenues of growth.

Our second key strategy is developing our talent and strengthening our Management Team. We made several key executive moves in the fourth quarter to help us take the Company to a new level. Since our last call, we've officially moved Tom Brackett into the role of TruGreen President, where he had been serving on an interim basis since last May. We're thrilled Tom chose to bring his 20 years of experience to our lawn care business. The TruGreen Team has already made terrific progress in implementing many of the best practices from Terminix, and we saw solid performance in the seven months Tom led TruGreen, while he pulled double duty as President of Terminix.

Replacing Tom at Terminix is Chuck Fallon, who joined us in December from Burger King North America, where he was the Chief Operating Officer, responsible for business strategy, operations, and franchise development for over 7,500 locations in North America. We also brought in Tom Coba, who was the Chief Operating Officer at Subway Restaurants, to lead ServiceMaster Clean and Merry Maids. Tom has a wealth of experience in market expansion, opening 13,000 new restaurants, and remodeling 13,900 locations during his time at Subway. Tom was part of the team that increased revenues more than $7 billion. Both Chuck and Tom have outstanding credentials, and track records of driving growth and profitability, and leading strong teams. I'm very excited to have them on my Executive Team at ServiceMaster.

On the leadership development front, I'm extremely pleased with the progress we've made hiring world-class talent into the Company, like Roger Cregg as our new CFO, and Linda Goodspeed as our new CIO. I'm also pleased with our early success at moving top talent across Businesses, while preparing high-potential associates for future leadership positions. In fact, in the past 3 years, we've moved more than 140 managers across our Businesses, accelerating our ability to drive best practices across the Company, and deeper into the Organization. But we know we have to do more in this area to ensure we're putting the right people in the right roles to support our Businesses, and bringing in outside talent to help us fill strategic new roles as our business grows and becomes more diverse. As we think about growth at ServiceMaster, we're continuing our efforts to share best practices across all of our Businesses, and develop a culture of executional excellence.

As I mentioned earlier, there's been some terrific work done already between Terminix and TruGreen, but TruGreen is taking the process even further, by ensuring there's more standardization between regions and branches. The TruGreen Team is taking the next steps, by introducing a new agronomic program designed to standardize protocols and better match lawn treatments with specific geographic regions. To simplify the implementation of these programs, TruGreen has made the strategic decision to adopt the same operating system as Terminix. To ensure the work gets executed flawlessly, we've asked the Terminix IT Team to oversee the implementation in TruGreen. As a result, we'll be able to deliver a more reliable service, and improve our labor management, helping to manage route efficiency and seasonal labor costs.

You'll recall that in 2011, we reorganized our call centers for both TruGreen and Terminix under a single reporting structure to help accelerate best practices between our two branch businesses. Across the Company, we are making strategic technology investments to help pave the way to growth. Our strategic IT road map ensures we are building processes and systems that enable growth through better project prioritization, enhanced customer service, improved workforce management and labor efficiency, better training tools and resources, and improved talent management and development.

I'll turn the call over to Roger in a minute, but I first want to say that in 2011, our Team achieved the best results in years. We performed and delivered strong results, but more importantly, we'd laid the groundwork for continued performance in 2012. I'm even more excited about the opportunities for growth today than when I became the CEO a year ago. That's because we've got a diverse portfolio and a resilient business model. Not only did we deliver top line growth in 2011 for the second consecutive year, but we achieved double-digit earnings growth and double-digit cash flow growth.

We have strong, iconic brands. We have strong consumer awareness and market segment leadership in all of our categories. We know we have low household penetration, so that's a tremendous opportunity to grow our residential business. If you consider our other untapped opportunities, like commercial and international, and new products, like the ones we've introduced in American Home Shield, we believe we have a powerful business model poised for growth.

Last, we have 21,000 passionate Company associates, and another 31,000 franchise associates who believe in our mission to simplify and improve the quality of our customers' lives, and we are creating a culture of performance and execution. Our Teams are ready to bring their A-game in 2012. 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'd like to turn it over to Roger to review our results in more detail. Roger?

Thank you, Hank, and good afternoon, everyone. I'd also like to extend my welcome to our new investors, who are joining us today on this call.

ServiceMaster delivered strong fourth-quarter results, and our business units continued to execute on our growth strategies. Let me briefly cover our fourth-quarter consolidated results, and then I'll get to the segment highlights. For the fourth quarter of 2011, revenues increased 0.007% percent to $693 million, compared to $688 million a year ago. Revenue growth was primarily driven by improved pricing and customer retention in each of our three largest businesses -- Terminix, TruGreen, and American Home Shield. This growth was partially offset by a 5.3% decline in customer accounts at TruGreen, as a result of lower neighborhood sales that have been discussed in our last two conference calls. For the year, revenues grew 2.5%, or $78 million, to $3.2 billion, with all 5 reporting segments showing revenue growth over 2010 results. Full-year operating performance increased 10.8%, or nearly $60 million, to $610 million, with four out of the five reporting segments demonstrating improvement over 2010's operating performance results.

Cost of goods sold as a percentage of revenue decreased 30 basis points to 58.4% compared to the fourth quarter of 2010. The decrease primarily reflects a reduction in termite damage claims expense and production labor efficiencies at Terminix of 43 and 38 basis points, respectively; and cost reductions realized through ongoing initiatives of 82 basis points. This was offset in part by an increase in fuel and fertilizer prices of 44 and 36 basis points, respectively; and higher claims cost at American Home Shield of 53 basis points. Regarding fuel costs, we are forecasting fuel prices in 2012 to be approximately $10 million to $15 million higher than 2011 levels.

SG&A expense as a percentage of revenue decreased 240 basis points to 26.6% compared to the fourth quarter of 2010. This improvement primarily reflects the reduction in sales and marketing expense of 208 basis points, spending in the Company's headquarter functions of 44 basis points, and cost reductions realized through ongoing initiatives of 54 basis points. This was partially offset by an increase in technology-related investments, driven by our new customer relationship management platform at American Home Shield of about 39 basis points; and for payment card industry standards compliance purposes of another 27 basis points.

Our fourth-quarter operating performance, as referenced on slide number 4 and 5 of our handout, grew nearly 21% to $129 million, compared to $107 million in the fourth quarter of 2010. This increase was primarily driven by the favorable impact of increased revenues at Terminix, American Home Shield, ServiceMaster Clean, and our other operations and headquarters segments, in addition to reduced sales and marketing expenses at TruGreen, and reduced termite damage claims at Terminix. Fourth-quarter operating performance margins increased 310 basis points to 18.6%, compared to 15.5% in the fourth quarter of 2010.

During the fourth quarter of 2011, our cash balance increased from $292 million to $329 million, as we added $37 million in cash. Net cash provided from operating activities for the quarter of $138 million was driven by $80 million in earnings, adjusted for non-cash charges; and a $61 million decrease in working capital needs, offset by $3 million in cash payments for restructuring charges. The decrease in working capital for the quarter is the result of normal seasonal needs. Net cash used for investments of $25 million for the quarter reflects the purchases of vehicles, technology enhancements, and property improvements of $17 million; and $20 million used for tuck-in acquisitions, consisting of cash payments to the sellers, offset by notes receivable of $8 million; and the sale of equipment of $3 million.

In December, we purchased and retired $65 million of debt from our parent Company, ServiceMaster Global Holdings. That debt was originally purchased by Global Holdings in December 2008, using cash received from our Management Team's investment and ServiceMaster Global Holdings stock. ServiceMaster Global Holdings used those proceeds, plus $10 million of its existing cash, to repurchase 7.5 million shares of common stock from BAS Capital Funding Corporation. Additionally, we made $11 million in scheduled principal repayments of long term debt during the quarter.

Capital expenditures during the quarter totaled $17 million, including $5 million in new vehicle purchases. For the year, capital expenditures totaled $97 million, compared to $134 million in 2010. Vehicle purchases totaled $48 million and $46 million for the years ended 2011 and 2010. During the fourth quarter of 2011, we signed an agreement to begin leasing vehicles instead of purchasing. These leases will be treated as capital leases.

During our annual goodwill and intangible impairment testing, which takes place in the fourth quarter of each year, we identified a trade name impairment at TruGreen. The impairment was a result of higher discount rate used for the discounted cash flow valuation analysis, and not due to any change in business fundamentals. As a result, we recorded a $37 million pre-tax, non-cash impairment charge during the fourth quarter of 2011. There was no impairment to the Company's recorded goodwill. Our liquidity profile remains strong. Cash in short-term and long-term securities totaled $471 million, of which $226 million is associated with regulatory requirements at American Home Shield, and other requirements.

We also have $447 million of capacity under our newly amended revolving credit facility, of which $265 million has now been extended through January 2017. There were no borrowings on the revolving credit facility during the fourth quarter. As many of you know, earlier this month we closed on a $600 million senior unsecured note offering, with an 8% coupon. The offering was well received by the investment community, and we are very pleased with the result. These offerings were the first step in a multi-step strategy that we expect to take to begin addressing our existing capital structure and maturity schedules. While I cannot provide specific details on our plan, I can assure you that we are actively working on those plans, and we will update you at the appropriate time.

Now, let's talk about the segment results. Fourth-quarter revenues at TruGreen were $214 million, a decrease of 3.7% from the fourth quarter of 2010. Revenue from residential full program accounts, which was 48% of the segment's revenue in the fourth quarter of 2011, declined 5% in 2011 compared to 2010. This reflects a 5.3% decline in customer accounts, and the $5 million unfavorable impact of differences in timing between the quarters as compared to a year ago; offset in part by a 5.6% increase in the average application price, from approximately $55 in 2010 to slightly below $58 in 2011. The decline in customer accounts was driven by a decrease in net unit sales, primarily in our neighborhood selling channel, which was expected. That was partially offset by a 70 basis point increase in the customer retention rate. As we have discussed on the previous two earnings calls, TruGreen is redefining its sales channel mix by shifting focus away from the neighborhood sales channel.

TruGreen's results also reflect a $3 million decline in sales of other services, primarily expanded services. TruGreen is continuing its efforts to reduce customer cancellations by focusing on the overall quality of service delivery, including more consistent application of service standards, an improved recovery program for problem lawns, the reduction of lawn specialist turnover, and a continued improvement of overall communication with customers. TruGreen's operating performance in the fourth quarter was $49 million, an increase of 19% compared to the fourth quarter of 2010 results.

On a margin basis, operating performance margin increased to 23.1% for the fourth quarter of 2011, compared to 18.7% for the fourth quarter of 2010. The 440 basis point increase primarily reflects a reduction in sales and marketing expense, driven by the reduced focus on the neighborhood sales channel, which was 360 basis points of the increase; as well as cost reductions realized through ongoing initiatives, totaling 257 basis points. This was partially offset by an increase in fuel and fertilizer prices, totaling 61 and 116 basis points, respectively.

At Terminix, fourth quarter revenues increased 2.3% to $274 million compared to the fourth quarter of 2010, primarily reflecting growth in our pest control business. Pest control revenue, which was 60% of the segment's revenue in the fourth quarter of 2011, increased 4.9% in 2011 compared to 2010, reflecting a 6.4% increase in customer accounts, a 1% increase in the average annual account value, and a $400,000 increase in other services, primarily pest service special offerings and bedbug treatments. The increase in pest control customer accounts was driven by an increase in new unit sales and acquisitions, and a 70 basis point increase in the customer retention rate.

Termite revenue, including new unit sales and renewals, was 35.5% of the segment's revenue in the fourth quarter of 2011, and declined 1.8%, primarily reflecting a 7% decline in new unit sales, and a 1% decline in renewal customer accounts, offset in part by a 2.2% increase in average price. For the fourth quarter of 2011, termite renewal revenue comprised 56% of total termite revenue, while the remainder consisted of termite completion new unit sales. The decline in termite customer accounts was driven by a decrease in new unit net sales, offset in part by a 10 basis point increase in the customer retention rate.

Fourth quarter operating performance for Terminix grew 28.9% to $69 million, compared to $53 million a year ago. As a percentage of revenue, operating performance margins increased to 25.1% for the fourth quarter, compared to 19.9% for the fourth quarter of 2010. The 520 basis point increase primarily reflects continued cost reduction efforts, including branch labor efficiencies of 141 basis points, lower termite damage claims of 111 basis points, and other cost reductions, totaling 212 basis points. Also included are reductions in incentive compensation expense of 48 basis points and legal-related expense of 71 basis points. This was partially offset by an increase in fuel prices of 63 basis points. At American Home Shield, fourth-quarter revenues were $146 million, up 2.2% compared to the fourth quarter of 2010, primarily due to a 2.3% increase in average price from $509 in 2010 to $521 in 2011, and 1.6% increase in customer accounts. The increase in average price was driven, in part, by the introduction of new product options in our direct consumer channel, providing our customers with more options for appliance and system coverage.

The increase in customer accounts was driven by a 210 basis point increase in the customer retention rate, offset in part by a decrease in new unit sales. American Home Shield's sales in the real estate channel were negatively impacted by softness in the home resale market. However, this decline was offset, in part, by the growth in direct-to-consumer sales and renewals. American Home Shield's operating performance in the fourth quarter was $23 million, down less than 1% compared to the fourth quarter of 2010. As a percentage of revenue,

American Home Shield's operating performance margin declined to 15.5% for the fourth quarter of 2011, compared to 15.9% for the fourth quarter of 2010. The 40 basis point margin degradation was primarily due to an increase in claims costs of 172 basis points, technology-related costs of 184 basis points, driven by our new customer relationship management platform, and other ongoing initiatives, and an increase in service expense of 78 basis points; offset, in part, by a decline in sales and marketing expense of 361 basis points. Partially offsetting this decline was a $500,000 increase in interest in net investment income from the American Home Shield's investment portfolio, which contributed 33 basis points of improvement.

The ServiceMaster Clean segment, which also includes the Furniture Medic and AmeriSpec brands, reported an 8.3% increase in revenue. Domestic royalty fees, which were 55% of the segment's revenue in the fourth quarter of 2011, increased 18% in 2011 compared to 2010, driven by increases in disaster restoration services. Revenue from janitorial national accounts, which was 7% of the segment's revenue in the fourth quarter of 2011, declined 1.4% in 2011 compared to 2010; which is just timing between the quarters, as full-year revenue from this line grew 32.4% compared to 2010.

Sales of products to franchisees, which were 13% of the segment's revenue in the fourth quarter of 2011, declined 16.6% in 2011 compared to 2010. ServiceMaster Clean's operating performance increased 6.2% to $20 million in the fourth quarter of 2011. Operating performance as a percentage of revenue declined to 53.7% for the fourth quarter of 2011, compared to 54.7% for the fourth quarter of 2010. Key executive transition charges of $400,000 were incurred in the fourth quarter of 2011, which were hiring-related expenses for the new President of ServiceMaster Clean and Merry Maids. These charges negatively impacted operating performance by approximately 113 basis points. The remaining 13 basis point increase primarily reflects cost reductions realized through ongoing initiatives of 233 basis points; offset, in part, by an increase in support services of 164 basis points, sales and marketing expense of 23 basis points, and technology-related costs of 33 basis points, all driven by ongoing initiatives to increase commercial, fire remediation, and janitorial market segment share.

In the other operations and headquarters segment, which includes our Merry Maids operations in addition to our business support functions, fourth quarter revenues increased 3.7% to $22 million, reflecting improved revenue at Merry Maids. Merry Maids, which accounted for nearly 94% of the segment's revenue in the fourth quarter of 2011, reported a 4.6% increase in revenue. Revenue from Company-owned branches, which was 77% of Merry Maids' revenue in the fourth quarter of 2011, increased 2.6% in 2011 compared to 2010, driven by a 1.8% increase in the average service price from $111 in 2010 to approximately $113 in 2011, offset in part by a 3.6% decline in customer accounts.

The decline in customer accounts was driven by the sale of 10 Company-owned branches to existing and new franchisees in the fourth quarter of 2011, offset, in part, by a 630 basis point increase in customer retention rate. Royalty fees, which were 18% of Merry Maids' revenues in 2011, increased 7.4% in 2011 compared to 2010, primarily driven by market expansion. Fourth quarter operating performance for the segment was a loss of $31 million, a 7.5% decline compared to the fourth quarter of 2010. At Merry Maids, operating performance as a percentage of revenue increased to 37.5% for the fourth quarter of 2011, compared to 28.2% for the fourth quarter of 2010. This 930 basis point increase reflects the gain resulting from the sale of certain branches of approximately 615 basis points; a reduction in sales and marketing expense of 149 basis points; and cost reductions realized through the ongoing initiatives of approximately 219 basis points. This was partially offset by an increase in fuel costs, totaling approximately 53 basis points.

The operating performance of ServiceMaster Acceptance Corporation and the Company's headquarters functions declined $4.4 million for the fourth quarter of 2011 compared to the fourth quarter of 2010. Operating performance included a $200,000 increase in interest and net investment income in the fourth quarters of 2011. Additionally, key executive transition charges declined $1.2 million, as $200,000 was incurred in the fourth quarter of 2011, which included restructuring costs and signing bonuses related to the hiring of our new Executive Team; while $1.4 million occurred in the fourth quarter of 2010, which represented separation charges related to the retirement of our former CEO on March 31, 2011. The remaining $5.8 million decrease in operating performance primarily reflects an increase in technology-related costs of $1.9 million for payment card industry standards compliance purposes, higher incentive compensation expense of approximately $1.8 million, and a $4.8 million true-up of charges to our business units for various support services. This was partially offset by a $2.7 million reduction in spending in the Company's support center.

We are extremely pleased with the way 2011 concluded, and expect to carry that momentum into 2012. We look forward to providing you an update on our progress when we report on our first-quarter results.

That concludes our prepared remarks. Operator, let's open up the lines for the question-and-answer session.

(Operator Instructions)

Our first question comes from the line of Emily Shanks with Barclays Capital. Please proceed.

Good afternoon, everybody. Thank you for all of the details and taking the questions. I have just a couple of follow-ups. My first one is, on the TruGreen side, the price increase was fairly impressive. I'm just curious, does that reflect an actual price increase implementation intra-4Q, and how are we supposed to be thinking about that going forward? I'm just wondering if we're going to cycle that, and/or if there are future price increases planned.

Yes, Emily, this is Roger. We do put forth price increases in the business. But I would not read into the average application price. Again, it's going to vary by the number of applications, and the various mix that goes on within the business itself. I would just tell you that it's directional, but it is not all price that drops to the bottom line. Again, mix is part of that. We do increase prices during the season. But there are certain parts of the season you can't increase prices to recover costs.

Okay great. Thank you for the details. And then my second question I will jump back into queue after. Specific to the IT conversion plans, bringing TruGreen on Terminix's platform. What is the timing of that, that you plan to test that and roll that out fully?

Yes. The testing is already in process. The initial reads on the testing and the pilot are going extremely well. The rollout will begin in our second quarter of this year, and will be complete by the end of this year. So we are really excited about the information we can get out of that system, and about the process standardization that that will enable the TruGreen business to achieve, very similar to what Terminix has achieved over the years.

Great. Thank you so much for the detail.

The next question comes from the line of Todd Harkrider with UBS. Please proceed.

Yes. Congratulations on a great fourth quarter and a successful bond offering.

Thanks, Todd, appreciate it.

Sure. Guess I will ask Emily's question in a different way. The expanded services on the TruGreen side. I assume that snow removal is no longer a part of your business, since LandCare was divested? And if you can add any color regarding balancing your price increases versus trying to upsell your customers on the more profitable add-on services, and what are some of the things you're trying to do to get your more value-added services turning positive again?

Yes. Snow plowing was a very, very small piece of the business in the past. So you won't even see a blip on that. In terms of pricing and our product mix, really what we're focused on at TruGreen is, with our new agronomic program, is providing the right services and the right products for each customer based on where they live. So in the past, things that might be an add-on service, what we are going to do in the future is bake that in to the regular standard offering for that geographic area, and make the appropriate pricing adjustments.

That sounds good. And then with the warmer weather we are enjoying, and seeing your deferred revenue balance up 5% year over year, is it fair to say that lawn care is shaping up to have a good spring season, and revenues are set to go positive again this year? And that's obviously on top of the additional horsepower that Tom is going to bring going forward by focusing just on that division.

Yes, Todd. Again, we are not giving projections about going forward. I think, again, you need watch what is going on around the country. Typically you can't -- Hank just mentioned about the agronomics, you can't get out there early, because the lawns aren't starting to grow at this point. That's where you would begin to recognize that revenue. Again, as we look at deferred, certainly indication of future things, and again, we are not giving projections on that, and again, it's early in the season to start to project that.

Okay. One more question, and I'll jump back in queue. On the American Home Shield side. Can you talk about the size of the opportunity the preventative maintenance plan represents, and maybe talk about that division a little bit more granularly? If you keep posting strong results, there, it looks like it could give lawn care a run for his money when it comes to the size of the earnings. Is there like a margin target, or earnings target you think you can get the business to? If my memory serves me correctly, I think you've actually doubled EBITDA in that division over the last 4 or 5 years.

Yes, Todd. American Home Shield has been a key performer for us. We see big opportunities for that business to continue to grow as we get into some new products and services that we've already talked about. And as we look forward down the road, we think that will continue to be a very strong and important part of our portfolio.

Okay. I appreciate it. Thanks for taking the questions. Good luck with the spring season.

Thanks, Todd, appreciate it.

The next question comes from Bobby Jones with Highland Capital Management. Please proceed.

Hey guys. Congrats on a great quarter and a good year. I was wondering, maybe, if you could talk about the capital structure a little bit. You guys did a very successful bond offering. It looks like it's trading kind of around low 7%'s What are the thoughts about refinancing the rest of that tranche?

Yes, Bobby, this is Roger. Again, like I said in my prepared remarks, we have a sequence of events were we're planning to work our way through in 2012. So really can't articulate that any more than that at this point, but we are definitely focused on looking at the maturity schedule, looking at what our capital structure is today, and what we can do in the short-term to continue to improve that.

Okay. Well, I'll just reiterate that it appears that the bond markets are open to you guys. But thank you and congrats. Look forward to another great year.

Thanks, Bobby, much appreciated.

The next question is a follow-up question from Todd Harkrider with UBS. Please proceed.

Just a follow-up on the preventative maintenance plan. Can you talk about if the margin structure is higher there than existing American Home Shield business, or if it's more leveraging your existing infrastructure in a natural progression of moving the business forward?

Really, on the preventative maintenance program, that is something that we'll really start to see the initial impact more as the summer cooling season comes. We're not sharing details in terms of the margin impact, but suffice it to say that we're excited about tapping into that new revenue stream, and think it will provide some very nice returns for American Home Shield and for the entire Company.

Sounds good. Quickly on the inflationary pressures part. I heard you say fuel costs were expected to increase $10 million to $15 million. Did you mention if fertilizer costs are going to be higher as well? And on the Terminix side, I know one of your main products came off patent a while ago, and you had prices locked in for a while. Has that rolled off, and should we expect higher costs in that division? Thanks.

Again, those prices on the fertilizer side ebb and flows, but we did not give any guidance on that for next year. So I have no comment on that.

I appreciate it, thank you.

Thanks.

Thanks, Todd.

The next question comes from the line of [Brian Schur] with Deutsche Bank. Please Proceed.

Hey guys. Congrats on a nice quarter. Roger, just a housekeeping question. Can you just give CapEx and cash interest for Q4? If you have it. If not, I can wait for the K.

Let's see if we have that. We don't have the level of that with us right now.

Brian, I will give you a call after this, and we can get that sorted out.

All right, Brian, thanks.

All right. Appreciate it, guys.

Thanks, Brian. Appreciate the congrats.

As there are no further questions at this time, I will now turn the call back to you.

Great. Thanks, everybody, for your participation on today's call, and we'll look forward to give you an update on the first quarter results later on this year.

Thanks a lot.

Ladies and gentlemen, that concludes the conference call for today. We thank you for your participation, and ask that you please disconnect your lines.