Terminix Global Holdings Inc (TMX) 2012 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the ServiceMaster Company first-quarter 2012 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. (Operator Instructions) At this time we'll begin today's call. Please go ahead, Mr. Keterlaar.

Good morning and thanks for joining our first-quarter 2012 earnings conference call. Joining me for today's call is ServiceMaster's Chief Executive Officer, Hank Mullany; Chief Financial Officer, Roger Cregg; and controller, David Martin. 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 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 statement 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 May 10, 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 this morning, ServiceMaster filed a press release highlighting our first quarter financial results. Additionally, a handout summarizing our first-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 composition expense, among others. We have included in our press release, available on our website, definitions of these terms and we have included in our press release and handout relevant reconciliations to the most-appropriate GAAP financial measures 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 morning, everyone, and welcome to our first-quarter earnings call. Roger will be covering the details of our financial performance with you in a few minutes but first, I want to share some highlights from the first quarter and update you on our progress against our key strategies. We carried over the strong momentum from the end of last year into the first quarter. For the quarter that ended March 31, revenues were up 6.5% over 2011, with the strongest growth coming from our American Home Shield and Terminix businesses. Meanwhile, operating performance in the first quarter was also strong, up 32.5%, or nearly $25 million, boosted by solid growth in American Home Shield and Terminix, and significant improvement in TruGreen over the same period in 2011. It's the third consecutive quarter of improved operating performance for TruGreen, and I couldn't be more pleased with the results we're seeing after the team worked so hard in 2011 to return TruGreen to improved profitability.

I'm also very pleased to report continued margin growth; up in our three largest businesses and up 300-basis points overall in the first quarter. That's a sign that we're not only growing our top line, but we're finding ways to operate more efficiently. I want to point out, though, that while we're extremely pleased with our financial results, the first quarter represents a relatively small portion of our total-year results. Some of the year-over-year improvement we're reporting today is a result of timing, as Terminix collected termite renewals earlier than anticipated. Timing also impacted American Home Shield, as we experienced higher air-conditioning related claims in March due to the and unseasonably warm weather across most of the country. But we're also seeing real change in our operations. As our strategies take hold, our performance has improved.

Take TruGreen for example. Last year at this time, we were talking about a struggling business, highly subject to variation and branch standards and the multitude of challenges in delivering a consistent customer experience. With the changes we've made, we've really started to see a difference in our operating performance. Customer satisfaction scores in TruGreen are improving as well, and retention is also up year over year. While we have sacrificed some revenue growth in exchange for improved profitability, mostly by rationalizing our neighborhood sales program, TruGreen has outperformed our expectations, with strong earnings growth over most of the previous 10 months.

A quick reminder about our mission. We want to simplify and improve the quality of our customers lives. We still have a lot of work to do to consistently deliver on our mission, but we are making solid progress. We're hearing everyday from customers who tell us how our associates are making their lives better, simpler, and more hassle free by delivering exceptional service that gets remembered and talked about. To ensure we remain on track, we're keeping things simple and staying laser focused on our three strategic pillars. Number one, we want to drive profitable and sustainable growth. After a strong finish in 2011, our first-quarter results indicate we're still moving in the right direction. Our vision is to be a rapidly growing, best-in-class service provider, the best place to work and invest. ServiceMaster has shown meaningful improvements in operating performance.

We certainly can't control markets or the weather, and that's why you won't to hear excuses about these things from me. But what we can control is our pace, our priorities, and our execution, and that's where our focus is today. We believe there are huge opportunities to explore new growth areas, but we also want to take a thoughtful approach. Our philosophy has been, let's get the basics right, strengthen our customer experience, then begin tapping into the new market segments and geographies that we believe can provide a platform for additional revenue growth. We believe it's the right formula for long-term success.

Our second strategy centers around talent evaluation and development. Now that we have a world-class senior management team in place, we're focused -- we're focusing on improving recruiting, talent assessment, and development, and reaching deeper into the organization to develop the bench strength that will ensure the right people are placed in the right roles to lead our Company in the years ahead. The third strategy you've heard me talk about is sharing best practices and developing a culture of executional excellence. Successful execution required narrowing our focus, and we've done that across the board. The root of TruGreen's recent success, brought over from our experience with Terminix has been accelerating branch standardization and delivering better processes to deliver service and address customers' concerns. We're bringing our franchise owners together to review best practices across the franchise network and implement them wherever possible. And our investments in IT are helping us speed up the development of technology platforms that will enable our business to share customer data and deploy best practices faster and more effectively than ever before.

Let me talk more about our first strategic pillar, to rapidly grow our business. As I've said before, we're not going to be satisfied with incremental improvements in customer experience. We want it to be transformational. We want to differentiate ourselves by delivering the kind of world-class service that gets talked about. That's our number one strategy. We're not perfect, but we're listening more closely to our customers, and although we still have work to do in this area, our business teams are making meaningful improvements in service delivery. The proof is in our customer satisfaction scores. They were up in four of our five businesses in the first quarter. And the proof is also in our customer retention. Retention was up in TruGreen, Terminix, American Home Shield, and Merry Maids.

In TruGreen, the rollout of a new call management system is now well underway, and on track for completion later this year. It will ensure that customer calls are handled in a more timely fashion and without the long call waiting times or dropped calls that plagued us in the past. We're also seeing the positive impact of the seven standards of service excellence that were implemented last year at TruGreen. Simple steps like alerting customers when their technician is going to be on the property, and better explaining the services they performed during the visit. We're also doing a more thorough job following up when customers have a question about how to properly care for their lawn, or by offering additional services like tree and shrub care.

Terminix is celebrating its 85th anniversary this year, and we're proud of its position as the long-time category leader and innovator in pest and termite control. We believe Terminix's brand strength offers a powerful competitive advantage. In the first quarter, we saw strong growth in early-season pest renewals and termite treatments. And we also believe the introduction of new mobile technology in Terminix is making it easier for our customers to keep in touch with us and manage their accounts, whether it's from home or from their smartphone. The handheld devices used by our technicians are closing the loop between sales and service in real time. We've also developed the capability to e-mail customers their service tickets and reschedule at their convenience. Now, if a technician is running late, we have solutions to prevent a bad customer experience. Technicians can see on their device when they are at risk of being late for a service and take action. Route managers also have the ability to spot a scheduling issue and intervene early by contacting the customer proactively, reassigning the job, or rescheduling, instead of waiting for a call or inviting a cancellation from an unhappy customer.

Another exciting growth opportunity is emerging in the American Home Shield, with the continued rollout of a suite of preventive maintenance products designed to keep household heating and air-conditioning systems in good, working condition. We're pleased by the early consumer acceptance, and we believe ultimately this new product will help homeowners extend the lifespan of the systems while avoiding potentially expensive repair claims down the road. But if we're going to grow American Home Shield over the long haul, we have to improve the customer experience at every touch point, because it's the same single biggest reason our customers decide not to renew with us. From the initial service claim to scheduling the service to actual contractor visit, we must ensure that we're exceeding customers' expectations. One effort that's working very well, we continue to develop our national network of contractors, which is regularly monitored and rated to ensure quality and service.

The second key strategy you've heard me talk about is developing our talent and improving our bench strength. One of the ways I believe we can grow our business is by growing our talent. As you know, we've made a number of key executive moves last year to strengthen our senior management team, and I'm extremely proud of the world-class executive team we've assembled. Next up for us is reaching deeper into the organization to identify top talent and prepare our high-performing, high-potential associates for future leadership roles. The entire executive team is heavily involved in this process, and we are conducting extensive talent assessments so that we can better prepare our leaders for their next career moves within ServiceMaster. We're also training more than 500 managers throughout our Company this year to better equip them as they develop high-performing, highly-engaged diverse teams in a Company that's focused on accelerating growth and transforming customer experiences.

I've talked over the past year about the importance of sharing best practices across all of our businesses and developing a culture of executional excellence. We're getting much better at this simply by working more closely together at all levels of the Company, but the work continues. For example, in TruGreen, we committed to a training program for all newly-hired specialists in a program we call Advantage Training Academy. With more than 3,800 new hires expected for the peak season, this gives us a unique opportunity to ensure we're delivering the same training and setting the same service standards across all of our regions. TruGreen's new agronomic program has also vastly improved the way we match lawn treatments with specific geographic regions, and simplify the way we sell to consumers. Instead of selling by the treatment, we're now selling full-year lawn service packages that are matched to the specific conditions found in each region of the country. We believe that's much more in line with the way customers want to think of lawn care. In the process, we've also found that it has helped improve our labor cost structure and allowed us to better manage our seasonal workforce, ramping up and down more quickly and efficiently.

Big improvements in execution have also resulted from the reorganization of our call centers for both TruGreen and Terminix under a single reporting structure. It's all about creating a compelling scorecard, built around consistent standards, driven by committed leadership, all the elements found in a culture of executional excellence. I also want to mention our ongoing investments in technology that are going to help pave the way to growth. The strategic IT roadmap adopted by our Board of Directors is laying out new processes and systems that will serve as the backbone for future growth. As part of our strategic roadmap, we've made the decision to review all of our external IT partner relationships. In some cases, we determined that the work can be better performed in house. In other cases, we've reassigned certain responsibilities to strategic partners who can perform the work at a high level of service quality and at a cost that are in the best interest of our businesses, customers, and associates. As a result, we're expecting better project prioritization and focus, enhanced customer service, improved workforce management, and labor efficiency, better training tools and resources, and improved talent management and development throughout the Company.

Before I turn the call over to Roger to review our segment results in more detail, I want to again say how pleased I am with our first-quarter results. They reflect the hard work and continued support of our business teams to grow our business rapidly by transforming our customer experiences. Not only are we showing improved financial results, but we're also seeing improvements in overall customer satisfaction, and as a result, customer retention. The team's efforts were recognized in March when Fortune named ServiceMaster on its list of most admired companies for the second consecutive year. The work's not done, but I think you've seen that our performance over the past year that we have built a track record of successful execution, consistent, exceptional performance, and both top-line and bottom-line growth. Our vision is to be a rapidly-growing, best in class service provider. We will be the best place to work and invest and I'm looking forward to reporting on our progress on our next call.

Now I'd like to turn it over to Roger to review our results in more detail. Roger?

Thank you, Hank, and good morning, everyone. ServiceMaster delivered robust first-quarter revenue and operating performance results as our business units continued to execute on our growth and operating strategies. Let me briefly cover our first-quarter consolidated results, and then I'll move on to the segment results. For the first quarter of 2012, consolidated revenues increased 6.5% to $655 million compared to $615 million a year ago. Revenue growth was primarily driven by improved pricing and customer retention in our three largest businesses, along with favorable revenue timing. This growth was partially offset by an 8.6% decline in customer accounts at TruGreen, primarily as a result of a reduced focus on the neighborhood sales channel. Operating performance increased 32.5%, or nearly $25 million, to $100.7 million, with Terminix, TruGreen, and American Home Shield all demonstrating improvement over the first quarter of 2011 results. First-quarter operating performance margin increased 300-basis points to 15.4% compared to 12.4% in the first quarter of 2011.

Cost of goods sold as a percentage of revenue decreased 130-basis points to 59% compared to the first quarter of 2011. The decrease includes labor efficiencies, a reduction in termite damage claims and home service contract claims. Cost of goods sold also reflects the $1.9 million increase in fuel prices. We continue to forecast that fuel prices in 2012 will be in the range of $10 million to $15 million higher than 2011 levels after the impact of fuel hedging. SG&A expense as a percentage of revenue decreased 190-basis points to 29.2% compared to the first quarter of 2011. This improvement includes a reduction in sales and marketing expense, and cost reductions realized through ongoing initiatives. This was partially offset by technology-related costs with our new customer relationship management system at American Home Shield, the transition to a new operating system at TruGreen, the abandonment of certain internally-generated software at Merry Maids, and costs related to compliance with the payment card industry standards.

Moving onto the balance sheet and cash flow, for the first quarter of 2012. Our cash balance decreased from $329 million to $228 million, as we consumed $101 million in cash in the quarter. Net cash used for operating activities for the quarter of $32 million was driven by a $37 million increase in working capital needs, $32 million in cash payments related to the call premium paid to redeem a portion of our 2015 notes, and approximately $3 million in cash paid for restructuring charges. This was partially offset by approximately $37 million in earnings, adjusted for non-cash charges, and $3 million in premiums received on the issuance of the notes due in 2020. The change in working capital for the quarter is a result of incentive compensation payments related to our 2011 performance, interest payments on our 2015 notes, and normal seasonal needs as we gear up for our second-quarter production activities. Net cash used for investing activities of $44 million for the quarter primarily reflects the purchases of technology enhancements and property improvements of $30 million, $6 million used for tuck-in acquisitions consisting of cash payments to the sellers, and investments in marketable securities of $9 million. Net cash used in financing activities was $24 million, consisting of $11 million in scheduled debt repayment and $13 million cash paid for debt issuance costs related to the sale of the 2020 notes.

Interest expense for the first quarter of 2012 was $64.8 million, while cash interest paid totaled $100.2 million. In February, we successfully completed a $600 million senior unsecured note offering maturing in 2020. The original amount offered was $400 million, but with strong demand the offering was upsized to $600 million at a coupon of 8%. Proceeds from the offerings were used to retire $600 million of our 10.75% notes due in 2015. We now have $396 million remaining of the 10.75% notes due in 2015. Capital expenditures during the quarter totaled $30 million. For the year capital expenditures are expected to be in the range of $85 million to $95 million. As we mentioned last quarter, we signed an agreement to begin leasing vehicles instead of purchasing. These vehicles purchasing -- excuse me -- lease financing for vehicles is expected to be in the range of $55 million to $65 million during 2012, with in year principal payments of approximately $5 million to $10 million in 2012. Our liquidity profile remains strong. Cash and short and long-term securities totaled $381 million, of which $249 million is associated with regulatory requirements at American Home Shield and other working capital requirements. During the first quarter we successfully amended and extended our revolving credit facility, which includes extending $265 million of the facility until January 2017. We currently have $447 million of capacity under our revolving credit facility, and there were no borrowings on the revolving credit facility during the first quarter.

Now let's talk about the segment results. First-quarter revenues at TruGreen were $131 million, a decrease of 3.8% from the first quarter of 2011. Revenue from core lawn service customers declined 6% in 2012 compared to 2011. This reflects an 8.6% decline in customer accounts, driven by a decline in new unit sales related to our decision to rationalize the neighborhood sales program. This was partially offset by a 100-basis point improvement in the rolling 12-month customer retention rate and the unfavorable impact of differences in production timing between the quarters as compared to a year ago. Partially offsetting the decline in customer accounts was a 5.9% increase in average application price. During the first quarter, we also saw a $4 million increase in expanded services, which included lawn services, such as aeration, grub and nuisance pest control, and lime application. However, all of this increase was offset by lower ice melt sales due to the mild winter conditions much of the country experienced in January and February.

TruGreen's operating performance in the first quarter was a loss of $3 million, an improvement of nearly 71%, compared to the first quarter of 2011. On a margin basis, operating performance margins improved 530-basis points to a negative 2.3% for the first quarter of 2012 compared to a negative 7.6% for the first quarter of 2011. The improved operating performance of $7.4 million at TruGreen mainly reflects $6.2 million in lower sales staffing, production labor efficiencies, sales from ongoing initiatives, and benefit from lower ice melt sales that has a lower margin than our core lawn services. These improved results were partially offset by $5 million of higher branch and corporate overhead costs associated with training and technology improvements, higher fuel prices totaling $700,000, and $700,000 in higher fertilizer costs.

At Terminix, first-quarter revenues increased 9.6% to $311 million compared to the first quarter of 2011, reflecting growth in our termite and pest control businesses. Pest control revenue increased 8.1% in the first quarter of 2012 compared to 2011, reflecting a 5.7% increase in customer accounts, driven by an increase in new unit sales and acquisitions. It also includes a 20-basis point increase in customer retention rate, a 0.3% increase in the average annual account value and a $2.7 million increase in other services, primarily bedbug treatments. Termite revenue, including new unit sales and renewals, increased 10%, primarily reflecting an 11% increase in new unit sales, a $5 million favorable impact from the timing of renewal revenue and a 2.6% increase in average price per unit. Termite renewal customer accounts declined 0.7%. This was partially offset by a 10-basis point increase in the customer retention rate.

Product distribution revenue increased $3.1 million in the first quarter of 2012. First-quarter operating performance for Terminix grew 24.6%, or nearly $18 million, to $90 million compared to $73 million a year ago. As a percentage of revenue, operating performance margins increased 350-basis points to 29% for the first quarter of 2012 compared to 25.5% for the first quarter of 2011. The improved performance primarily reflects the favorable benefit from the timing of termite renewal revenue, production labor efficiencies, lower sales and marketing expenses, lower termite damage claims, and other cost reductions. This was partially offset by an increase in fuel prices of $1.2 million, and increased product distribution revenue, which has lower margins than our termite and pest control revenues.

At American Home Shield, first-quarter revenues were $159 million, up nearly 13% compared to the first quarter of 2011, primarily due to differences between years in the timing of contract claims, a 4.8% increase in the average price on home service contracts, and 0.2% increase in customer accounts. The unseasonably warm weather in March caused an increase in air conditioning claims, as contract holders utilized their air conditioners for the first time in 2012. As we've discussed in the past, American Home Shield recognizes revenue over the contract period in proportion to the expected direct costs. In the first quarter of 2012, we recognized approximately $9 million of revenue in the first quarter that normally would have been recognized during the second or third quarter due to the timing of first-quarter air conditioning claims. American Home Shield's operating performance for the first quarter was $31 million, an improvement of 24% compared to the first quarter of 2011. As a percentage of revenue, American Home Shield operating performance margins improved to 19.6% for the first quarter of 2012 compared to 17.8% for the first quarter of last year. The improved operating performance results are due to lower heating-related claims in January and February, the benefit of recognizing revenue associated with higher air conditioning claims in March, and lower sales and marketing expenses. This was offset by increased technology investments related to our new customer relationship management system.

The ServiceMaster Clean segment, which also includes the Furniture Medic and AmeriSpec brands, reported a 2.7% decrease in revenue, driven principally by a reduction in sales of products to franchisees. ServiceMaster Clean' s operating performance decreased 4.4% to $13.5 million in the quarter. Operating performance, as a percentage of revenue, declined slightly to 42.3% for the first quarter of 2012, compared to 43.1% for the first quarter of 2011. This decrease reflects an increase in support services driven by ongoing initiatives to increase market share segment in the commercial, fire remediation and janitorial markets. This was partially offset by other cost reductions realized through ongoing initiatives.

In the other operations and headquarters segment, which includes our Merry Maids operations, in addition to the ServiceMaster Acceptance Company and our business support functions, first-quarter revenues increased 3.3% to $21 million, reflecting improved revenue at Merry Maids. Merry Maids reported a 3.4% increase in revenue. Revenue from Company-owned branches increased seven -- excuse me -- revenue from Company-owned branches increased 0.6% in 2012 compared to 2011, reflecting a $1.2 million reduction in revenue driven by the sale of 11 Company-owned branches to new and existing franchisees in the fourth quarter of 2011 that was more than offset by 1.4% increase in average service price after adjusting for the impact of branch sales, a 6.4% increase in average customer accounts. In addition, royalty fees increased 10.5% in 2012, primarily driven by market expansion and the sale of Company-owned branches mentioned previously.

First-quarter operating performance for Merry Maids was $1.1 million compared to $3.9 million in the first quarter of 2011. Operating performance as a percentage of revenue decreased to 5.7% for the first quarter compared to 20.4% for the first quarter of 2011. The decrease reflects $4.2 million in technology charges related to the abandonment of certain internally-developed software, partially offset by a $600,000 reduction in key executive transition charges. The remaining $800,000 increase reflects the impact of higher revenues, labor efficiencies, and other cost reductions realized through ongoing initiatives.

The operating performance of the ServiceMaster Acceptance Company and the Company's headquarter functions declined by $3.2 million for the first quarter of 2012 compared to the first quarter of 2011. This was driven by increased spending in our centers of excellence, to increase capabilities and improve the performance of our business units, technology-related costs for compliance with payment card industry standards, and increased expense in our automobile, general liability and worker's compensation program, due primarily to the reversal in the first quarter of 2011 of $1.3 million in claims reserves due to favorable claims development. Offsetting these charges were lower key executive transition charges of $1.6 million. We're extremely pleased with the way the year has begun and expect to carry that momentum through 2012. We look forward to providing you an update on our progress when we report our second-quarter results later this summer. That concludes our prepared remarks. Operator, please open up the lines to begin the question-and-answer session.

Thank you. (Operator Instructions) And our first question comes from the line of Emily Shanks with Barclays. Please proceed.

Good morning, everybody, thanks for all the details. I have just a couple of follow-up questions. I was curious if you could comment, by geography, if you were seeing any particular trends, particularly as it relates to TruGreen and Terminix?

Hello, Emily, it's Hank, thanks for the call. What we're seeing from a geography standpoint is a little bit of warmer weather than normal up in the northern part of the country, and that's really the biggest difference. As you know, the majority of our businesses is centralized in California, Texas, and Florida; but from a weather standpoint, that's the key thing that we saw in the first quarter.

Okay, great. And then, just in terms of the TruGreen new sales being down, I'm just -- the new unit sales being down, I'm just curious if the reduction in sales staffing may have impacted that, or any color you can give around that?

Emily, the reduced revenue that we're seeing in TruGreen is really planned for, and a function of us rationalizing our neighborhood marketing program. We didn't totally eliminate the program, but we just rationalized it back to levels in 2007. As you recall us saying before, that channel -- the neighborhood marketing channel was our least-profitable channel, extremely high cost of customer acquisition, and we found that it had our lowest retention rate. So really, from a labor standpoint, we're adjusting our labor to match it to the customers' needs and our revenue flow.

Terrific. And then my final question, and I'll get back in queue is -- I was hoping, Roger, you could give us an update on what your view is around addressing the term loan majority?

Well, you saw we executed a $600 million transaction in the first quarter. We continue to work -- look at the markets. And again, nothing to report at this point, but as we mentioned before, we continue to look at restructuring the balance sheet as we move forward.

Great. Well, terrific quarter, good luck. Thank you.

Thanks, Emily.

Thank you. And our next question comes from the line of Bobby Jones with Highland Capital. Please proceed.

Good morning, guys, congrats on a great quarter. I was wondering -- if I'm hearing you guys correctly, it sounds like the warm weather may have pulled forward a little bit of some revenue in a couple of your lines. Is there any way you can comment on what you were seeing in April, in terms of year-over-year comps?

Yes, this is Roger, Bobby. No, we're not going to comment on the current quarter. We didn't see a lot of seasonal because of the warm weather pull in the first quarter. Some of it was what we did see at American Home Shield, specifically around the air conditioning claims. And then on the -- as we mentioned, in the Terminix side, some of that was really addressed because of the renewals seemed to be earlier this year. We got a lot more cash payments earlier, people paid their bills earlier, and typically we would recognize that when the work is performed.

In the normal course of business, we perform before we actually get payment, and in this particular case, we got the payment and were able to recognize the revenue earlier. But again, as I mentioned, that wasn't a very significant number in total. So, we didn't see a very large impact from just weather itself.

Got it, thanks. And then, it feels like the impressive performance you guys keep putting up is largely one of the reasons why your debt capital structure remains trading very well in the secondary market, so, just wondering if you guys had any thoughts on addressing the -- [sub] $400 million of bonds? And, again, I know that you talked about the term loan a bit, but it feels like the markets are anticipating you guys to do a transaction. Is there anything else that you guys are waiting for, or any other comments you've got?

No, it's a very good question, and no, we don't really have any comments. Just, as I mentioned, we're looking to be opportunistic, and we continue to focus on how we run our business, and how that aligns with market expectation, as well as trying to understand the capital markets.

Certainly. Well, congrats on a great quarter, and look forward to seeing more. Thank you, guys.

Thanks, Bobby, appreciate it.

Thank you. And our next question comes from the line of Yilma Abebe from JPMorgan. Please proceed.

Thank you, good morning. My first question is on TruGreen. The full program count -- when are we going to anniversary the rationalization of the neighborhood selling? Really trying to gauge when we should expect to see that program count increase?

Yilma, it's Hank. We're going to lap against that later in the summer, and then you'll see some positive revenue at that standpoint.

Okay, great. And then, on retention rate, I guess in a more high level, TruGreen retention rates obviously a lot lower than your other businesses. Is there a target retention rate you can comment on, or is TruGreen structurally a very different business that will never be at a rate where, for example, American Home Shield is at?

No, really, I think there's opportunities in each one of our businesses to improve their retention rates. If you look right now, Terminix has our best retention rate. There's no reason whatsoever that TruGreen couldn't rival that in the future. Our TruGreen team is very focused on transforming their customer experience; I'm very proud of the work that they've done. They're focused on every single touchpoint where we have an opportunity to interact with our customers. The momentum in TruGreen and improving the customer experience has been a positive one every single month, and also they continue to show very nice improvements in retention every single month. So, I'm very pleased by the momentum that we're seeing in TruGreen, and expect it to continue.

Thank you. My final question is -- I know you don't make forward-looking comments, but can you talk about, at a high level, how the key spring selling season is going? Maybe if you don't want to talk about numbers, maybe at a high level, in terms of what they're seeing in the industry and the overall competitive landscape, and of a sense for how the key spring selling season is coming along? Thank you.

You're asking about -- can you repeat the first part of your question about key competitors?

No, just -- I know you don't give specific forecasts, so, if you want to talk about the key spring selling season in the context of the industry, and what you're seeing in terms of your Company, other competitors? And then trying to keep it broad, if you don't want to talk specifically about what you are seeing for your Company in the key spring selling season?

Yes. As we think about our business, we think about a business with strong, iconic brands, brands that have fantastic recognition. I talked earlier in the call about Terminix 85-year anniversary -- incredible brand. So, we feel great about the brands that we have. Also, we feel good about the things that we've done within our Company to improve our customer experience, and we think you're going to see dividends from that, as you have this past quarter.

Also, we feel great about the things that we're focusing on from a talent perspective to improve our operational efficiency and the productivity that results in that, and you saw some of that hit this quarter also. As we look at the competitive landscape, we respect all of our competitors, but we're focused on making sure that the customer experience with our family of brands is the best possible experience in the marketplace. Thanks for the call.

Thank you. And our next question comes from the line of Marianne Manzolillo with Angelo, Gordon. Please proceed.

Sure, good morning. I was wondering if you could discuss the use of cash and working capital -- $37 million increase in working capital, and it appears that the biggest increase came in accounts receivable?

Actually, the inventory's built for the quarter. And again, when we end up taking a look at the receivable itself, we've got the normal seasonal approach as you come into the first quarter out of the fourth quarter, so, there's a build there. Again, deferred revenue was a part of that, as well. Typically, we would get prepayments early in the season, so, from the cash standpoint that flows in.

And then from the accrued liability side, we've got a decrease. Typically we've got interest payments, which we had in the first quarter, which I highlighted, as well as other expenses that get paid that built up at the back end of the year. I did mention the compensation expense that's accrued. That actually comes out in the first quarter, as well. So, those are the big usage, and then we did mention the $32 million that we paid for the redemption of the notes.

Then, Roger, the usage for seasonal purposes, is it greater than last year?

No, I think it actually looks a little bit less than last year. The build in inventory, I think, was a little bit greater last year, and a little bit less this year, so, I would say on par it's about even. There's not much variation in there, other than the notes that we paid off this year.

Okay, great. And then, could you talk a little bit more about the pricing that you've taken so far? You did mention a price increase on the American Home Shield side, I believe you said 4.8%, and were there price increases put through in the other segments, as well?

Yes, I would say typically we do, as a normal part of our approach coming into the season, adjust pricing. And so, it's not going out everywhere in every single market. Each market has to actually match up against competition, and what they're doing, and they have to be competitive in those markets. So, we have some, typically in the TruGreen business, the Terminix business and the American Home Shield, as well.

Right. And have those price increases been offsetting some of the higher costs you've been seeing? You mentioned higher fuel costs, could you just talk about any other, perhaps, cost increases that you're seeing?

Yes, I think typically we do see the fuel move around. We hedge -- we're about 80% hedged for our fuel for this year. And then the other one would be in the fertilizer side. We're seeing some spikes today in the urea component of the fertilizer. We've seen that increase probably from the beginning of the year by about 85%. So, again, sometimes that's hard to actually chase as you're coming through the season. We saw a little bit of impact in the first quarter. We would expect a little bit more coming into next quarter, but we don't think it's material for us at the end.

You don't think it will represent -- that spike in the urea prices you're seeing -- you don't think that will represent a big delta versus last year?

We do not.

Okay, great. Thank you very much.

Thank you. (Operator Instructions) And our next question comes from the line of Kevin Coyne with Goldman Sachs. Please proceed.

Hi, good morning, thanks for taking the question. Just on the Terminix side -- obviously, the termite business was strong, up 10%. Can you remind us of what the mix of termite is in that segment? And I believe in the past, you've expected most of your growth on the pest side, I was wondering if -- is this signaling a change that we can expect this growth in termite going forward, or was this potentially some pull forward that was mentioned previously?

Yes, this is Roger, Kevin. Yes, there was a little pull forward on that side of it, as well. And I would say that, again, the first quarter's not representative of the year at this point. So, again, we see still the opportunity on the pest side. Termite, again, a little bit with the warmer weather earlier, again, could have an influence. We'll have to see how that materializes as we move throughout the year.

Great. And then just, as we think about weather, based upon your past track records, when we do have warm winters like this, can you give us some color as to what typically happens over the summer? Like, do you get a more aggressive weed season, which could perhaps lead to more demand on the lawn care side? Or on the pest side, does that accelerate things because it was a mild winter? I was wondering if you'd give us some color on that.

Kevin, I'm not going to get into long-term weather forecasting, because I find weathermen can't get it right three days out, let alone a few months out. But to answer your -- (laughter) but to answer your question, the termite activity varies depending on environmental factors. Also, it's not just heat, but also rainfall that affects lawn conditions. So, really, what we're focused on is, regardless of the weather, making sure that we're delivering the best customer service experience we can to all of our customers, and providing the best total value. So, that's what we're really focused on. Those are the key strategic initiatives that we're driving in all of our businesses. And our management team is not allowed to discuss weather in any of our meetings. We're focused on the things we can control, and that's by picking the right priorities to focus on and driving the right pace.

Great, and then just one final one. I know in the past you've talked about potentially pursuing a bundling strategy across the different brands. I was just wondering -- is that something that you expect to start this year, or is that further out?

Actually, we've got a little bit of that going on right now, as customers become more familiar with different brands that we offer. We've got some initiatives in a couple of our key businesses today that have a little bit of that working. We're going after it right now.

Great, thank you.

Thanks, Kevin.

Thank you. And Mr. Keterlaar, there are no further questions at this time. I'll turn the presentation back over to you.

Great. Well, we appreciate everybody joining us today, and as Roger and Hank said earlier, we look forward to giving you an update on our second-quarter results later this summer. Thanks, again.

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