Terminix Global Holdings Inc (TMX) 2012 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the ServiceMaster Companies second-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 will begin today's call. Please go ahead Mr. Ketelaar.

Good morning and thanks for joining second-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 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 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 7, 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 second-quarter financial results. Additionally, a handout summarizing our second-quarter results in 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 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 press release, available on our website, definitions of these terms. And we have included in our press release and handout relative reconciliations to the most appropriate GAAP financial measures 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 morning, everyone. Hope everyone's having a great summer. Welcome to our earnings call for the second quarter. Roger will be covering the specifics of our financial performance with you in a few minutes. But I wanted to start our call today by sharing some of the highlights from our second quarter, and provide some perspective on our key strategies and our progress against those strategies. As expected, we saw slower growth for the second quarter that ended June 30 with revenues and earnings essentially flat versus the second quarter of 2011.

For the first six months of the year ServiceMaster's operating revenue was up 2.2%, while operating performance was up 8.8%. Excluding TruGreen, our operating revenue for the first six months of the year was up 6.7%. We expected revenue growth rates to come back to more normalized levels after our record first quarter and they did.

As I pointed out on our last call, timing played a key role in our first-quarter results as we saw an acceleration of revenues that normally would've occurred in the second quarter. The accelerated timing of that revenue naturally impacted our second-quarter results. Nevertheless, I'm pleased to report Terminix, American Home Shield, and Merry Maids continued their first-quarter momentum and posted revenue growth for the second quarter--compared to the second quarter of 2011.

I want to take a few minutes to talk specifically about TruGreen because I think it's important for me to provide more insight today about our strategy to transform, then grow our lawn care business. As you know, we're still in the midst of retooling TruGreen; part of our plan to return the business to sustainable revenue growth and profitability.

Profitability remains strong in the quarter and the TruGreen's operating performance was up 11.5% versus the second quarter of 2011. That marked its fourth consecutive quarter of improved operating performance. From May of last year, with a change in TruGreen leadership, we knew we'd be taking a step back to evaluate where the business was going and what we needed to do to get its performance on track.

We're just starting to see the full-year effects of last year's decision to re-balance TruGreen's sales and marketing programs, moving away from expensive neighborhood sales, in favor of other more profitable sales channels. We knew this would in effect dial back TruGreen revenues, but in the process build a solid base of loyal, profitable customers.

As we've said before, neighborhood marketing drove higher sales in the short term but we found these customers weren't profitable. Likewise, when we sold less than full programs in the past, that provided a short-term revenue lift. But those sales didn't result in long-term customer relationships because the results didn't meet customer's expectations. The economics didn't make sense for us.

With the new TruGreen leadership team in place we've embarked on a strategy to one, redesign our product offerings based on the latest agronomic science and the differences in regional growing conditions. Our new healthy lawn plan program provides a customized, full-year treatment plan that matches the growing conditions in each part of the country and introduces protection and treatment for lawn-damaging insects.

Early customer feedback has been extremely positive. The good news is that for customers on the healthy lawn plan, customer satisfaction scores are significantly higher and cancellations are significantly lower. So we believe we are on the right path.

Second, we are continuing to transform the TruGreen customer experience through a combination of new technology, new processes and stricter adherence to uniform branch standards. Similar to those that have proven successful in Terminix. We know that the only way to build a strong customer base is by relentlessly improving the customer experience. We have already upgraded our call center operations to provide better customer service on the phone.

We have implemented a better system of pre- and post-service communication. Keeping customers informed when our technicians are going to be on the property and letting them know which services have been delivered. It's simple stuff but it's the combination of high-tech and high touch that customers asked for and remember.

Customer satisfaction scores in TruGreen were up in the second quarter and retention was also up year-over-year. That reflects the team's commitment to create a better customer experience, frankly one that gets remembered and talked about.

The third part of our TruGreen strategy is rebalancing our marketing mix. We're focusing on new sales that will result in higher customer retention and higher lifetime values, and therefore improve our profitability. We are confident that taking a long-term perspective and rebalancing our marketing mix makes sense.

We're looking forward to rolling out a new technology platform at TruGreen that's modeled after the one we are using in Terminix. It will provide benefits to our customers, as well is to our lawn specialists, as they work to keep lawns greener, healthier and weed free. With an injection of talent, and work underway to develop the next generation of TruGreen leaders, we are laying a very strong foundation for the future.

While we continue to work on our TruGreen transformation, we are growing the top line in all of our businesses. As I said earlier, excluding TruGreen, ServiceMaster's operating revenue in the first half of the year grew at a healthy 6.7%. Let's discuss rapid profitable growth.

Terminix already leverages its scale and category expertise to drive superior customer experience. However, even as the category leader, we believe there is plenty of room for growth by expanding our footprint in parts of the United States that are currently underserved. And we can rapidly grow the business by increasing our penetration into the commercial market segments. In fact, we announced last week that we acquired Schendel Pest Services, which operates 10 office locations across Midwestern states, with a focus on commercial services.

American Home Shield is developing technology that will enable us to deliver better service and more customized products to meet our customers' changing needs. Customer retention was up 170 basis points in the second quarter and we continued to diversify the real estate channel. We're looking at renewals and direct-to-customer sales as our biggest growth opportunity.

In addition, our new preventative maintenance programs will open the door to more sales opportunities with more new customers. And expanding relationships with existing ones. We're off to a strong start with the introduction of our new preventative maintenance contracts, which are designed to keep household cooling and heating systems in good working conditions and avoid potentially expensive repair claims down the road.

Growth is also on the agenda at ServiceMaster Clean. I just returned from the annual ServiceMaster Clean international convention. One of the things we talked with franchise owners about was the investments we're making in technology and marketing tools to help them grow their businesses. We also recognize a real opportunity to partner with other brands and develop the suite of professional services to commercial customers.

Growth opportunities also exist in at Merry Maids. We're using the Merry Maids advantage program to encourage new customers to sign up for predetermined number of weekly and biweekly cleaning services. We're also seeing positive results by centralizing the handling of leads, as well as creating a centralized call center for after-hour calls helping customers contact us when it's convenient for them. Not for us.

It all boils down to living our mission. We want to simplify and improve the quality of our customers' lives. Every day we receive phone calls and letters from customers who tell us how our associates are making their lives better and simpler by delivering exceptional service. Ultimately, the proof is in our customer satisfaction scores. They were up in four of our five businesses in the second quarter.

Let's discuss talent development. For more than a year now, you've heard me talk about our second strategic pillar, talent, evaluation and development. Along with my senior executive team, we recently completed an extensive assessment of our top 500 managers in the company, so that we can better identify the next generation of ServiceMaster leaders.

We had some great discussions about talent, and more importantly, we're now reaching deeper into the organization than ever before to identify high-performing, high-potential leaders. We have also introduced a new leadership training curriculum to help these leaders develop high-performing highly engaged, diverse teams. A critical ingredient for a company that needs everyone, at every level, focused on rapid growth and improving the customer experience.

We are also announcing a key executive change today. Dave Crawford, the president of American Home Shield, has announced he will be retiring later this year after 25 years with the company. We are very pleased that Dave will be remaining with us as we transition to Mark Barry, who will be joining us as the new President of American Home Shield, effective August 20.

Mark comes to us with a strong track record of executing strategy to drive revenue growth and improved customer experience at world-class global companies, including United Technologies, General Electric, and Tyco International. Mark's experience and sales leadership are a terrific fit for our growth strategies at ServiceMaster and we're looking forward to having him join our team.

The third strategy you've heard me talk about is sharing best practices and developing a culture of executional excellence. As we've learned from our experience with Terminix, and more recently with TruGreen, nothing drives consistent profitable earnings growth like a culture of executional excellence. This means accelerating branch standardization wherever possible and raising our service standards across the board. It means bringing our franchise owners together to learn from each other and share best practices and implement them quickly.

Strategic investments in IT can ensure rapid growth by providing the systems we need to improve access to customer and market data faster than before. As you know, part of our strategic IT road map, we made the decision to review all of our external IT partner relationships. And where it makes sense, reassigned certain responsibilities to strategic partners who can perform the work at a higher level of service and quality.

We are already experiencing the benefits of this process as we roll out these changes. We are achieving better product 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 remind you about our vision. To be a rapidly growing best-in-class service provider. We will be the best place to work and invest. We don't take that vision or our mission lightly. They are part of every executive meeting and they are embedded in all of our associate training sessions. I start and finish every one of my meetings with Associates with a reminder about what we're here to do and what our customers expect of us.

Although our second quarter performance didn't meet our revenue expectations, I am pleased with the progress we are making on many other fronts, including earnings, customer experience, talent development, and building a culture of executional excellence. I'm extremely pleased with the way our entire leadership team has responded to the revenue growth challenge and I can promise you that we're going to stay focused and double down on the strategies that will grow our business rapidly.

There is work ahead of us and I'm looking forward to reporting on our progress on the next call. Now, I would like to turn it over to Roger, who will review our results in more detail.

Thank you, Hank, and good morning, everyone. As you've heard, ServiceMaster delivered relatively flat revenue results largely driven by the ongoing strategic changes at TruGreen, while operating performance results demonstrated modest growth. We believe these strategic changes at TruGreen will position the Company for longer-term revenue growth. Let me briefly cover our second-quarter consolidated results and then I'll move on to the segment results.

For the second quarter of 2012, consolidated revenues decreased 0.5% to $962 million compared to $967 million a year ago. The decrease in revenue was primarily driven by a 13.8% decline in customer accounts at TruGreen. This was primarily driven by the rebalancing of TruGreen sales and marketing programs. This was partially offset by improved past revenue at Terminix and improved price realization at American Home Shield. Operating performance increased 0.3% to $212 million. With TruGreen growing 11.5% or $9 million above its second-quarter 2011 results.

Second quarter operating performance margins increased 19 basis points to 22.1%, compared to 21.9% in the second quarter of 2011. Cost of goods sold as a percentage of revenue increased 160 basis points to 55.4%, compared to the second quarter of 2011. The increase primarily reflects an increase in fuel and fertilizer prices, a $2.5 million impairment of licensed intellectual property at Terminix, and increased expenses in our automobile, general liability and workers comp program. This was partially offset by lower home warranty claims costs at American Home Shield.

For the quarter we saw fuel prices increased $2.5 million. However, we did see a downward trend in fuel prices over the course of the second quarter and we are now forecasting that fuel prices in 2012 will be $5million to $10 million higher than 2011 levels after the impact of fuel hedging. SG&A expense as a percentage of revenue decreased 170 basis points to 25.1% compared to the second quarter of 2011.

This improvement reflects a $1.6 million reduction in key executive transition charges, lower sales and marketing expense, and cost reductions realized through ongoing initiatives. This was partially offset by a $5.4 million increase in tax-related reserves at American Home Shield, increased technology costs related to our new operating system at American Home Shield, and spending in our Centers of Excellence.

Reviewing the cash flow for the second quarter of 2012, our cash balance increased from $228 million in the first quarter to $300 million in the second quarter for an increase of 32%. Net cash provided from operating activities for the quarter of $126 million, was driven by a $151 million in earnings, adjusted for non-cash charges. This was partially offset by a $4 million in cash paid for restructuring charges, and a $21 million increase in working capital needs.

The change in working capital for the quarter is attributable to seasonal activity and the timing of interest payments on the 2015 notes. Net cash used for investing activities of $30 million for the quarter primarily reflects the purchases of technology enhancements and property improvements of $19 million, $5 million used for tuck-in acquisitions consisting of cash payments to sellers, and investments in marketable securities of $6 million.

Net cash used for financing activities was $22 million, consisting of $22 million in scheduled debt repayments. Interest expense for the second quarter of 2012 was $59.7 million, while cash interest paid totaled $25.4 million. For the year, capital expenditures are expected to be in the range of $85 million to $95 million. Lease financing obligations for vehicles is expected to be in the range of $55 million to $65 million during 2012. With end-year principal payments of approximately $3 million to $5 million in 2012.

Our liquidity profile remains strong. Cash in short- and long-term securities totaled $453 million, of which $258 million is associated with regulatory requirements at American Home Shield and other working capital requirements. We currently have $447 million of capacity under our revolving credit facility. And there were no borrowings on the revolving credit facility during the second quarter.

Let's now talk about the segment results. At Terminix, second-quarter revenue increased 3.9% to $347 million compared to the second quarter of 2011. Reflecting growth in our pest control business. Pest control revenue increased 6.6% in the second quarter of 2012, compared to 2011. That reflected a 4.7% increase in average customer accounts. A $2.7 million increase in other revenue, primarily bedbug services, and improved price realization.

This increase in customer accounts was driven by an increase in new sales and acquisitions. Partially offset by a 40-basis-point decrease in customer retention rate. Termite revenue, including new unit sales and renewals, decreased 1%. Primarily reflecting a 5.5% decrease in new unit sales offset by improved price realization. Product distribution revenue increased $4.1 million in the second quarter of 2012.

Second-quarter operating performance for Terminix declined slightly to $89 million, compared to $90 million a year ago. This $1.3 million decrease in operating performance primarily reflects a $2.5 million impairment of licensed intellectual property and increased product sales, which have a lower margin than our termite and pest businesses. These items were partially offset by the impact of higher revenue and reduction in sales and marketing expense.

Moving to TruGreen; second-quarter revenue at TruGreen was $351 million a decrease of 8.3% for the second quarter of 2011. As Hank described earlier, TruGreen has embarked on a strategy to redesign its product offerings based on the latest agronomic science, transform the customer experience or a combination of new technology, improve processes and develop stricter branch standards, and rebalance its sales mix toward channels with higher retention and profitability.

The rebalancing of our marketing mix has resulted in declines the new unit sales and full program customer accounts in the second quarter as compared to 2011. But along with the implementation of new processes and stricter branch standards, these changes have contributed to improvements in operating performance and customer retention as compared to the second quarter of 2011 results.

Revenue from residential lawn service customers declined 11.2% in the second quarter of 2012 compared to 2011. And this reflects a 12.1% decline in average customer accounts. The decline in customer accounts was driven by a decrease in new unit sales, partially offset by a 20-basis-point improvement in the rolling 12 month customer retention rate. Partially offsetting the decline in residential revenue was a $4.6 million increase in revenue from commercial customers.

As we noted in our press release, TruGreen's second-quarter operating income was negatively impacted by $67.7 million pretax, non-cash impairment charge to reduce the carrying value of TruGreen's trade names to their estimated fair value. TruGreen's operating performance in the second quarter, which excludes it trade name impairment charge, was $88 million. An improvement of more than 11% compared to the second quarter of 2011.

The improved operating performance of $9.1 million at TruGreen mainly reflects lower sales staffing, other cost reductions realized through ongoing productivity in standardization initiatives, and a reduction in key executive transition charges. This was partially offset by the impact of lower revenue and an increase in fuel and fertilizer prices.

At American Home Shield, second-quarter revenue was $208 million, up 6.7% compared to the second quarter of 2011. This was due primarily to improved price realization and an increase in average customer accounts. American Home Shield's operating performance for the second quarter was $44 million, an improvement of 1.5% compared to the second quarter of 2011.

The $700,000 increase in operating performance is primarily due to the impact of higher revenue, and a reduction in home warranty claims costs, and sales and marketing expenses. This was partially offset by an increase in technology costs related to our new customer relationship management system, which is currently under development, and a $5.4 million tax related reserve adjustment.

The ServiceMaster Clean segment, which also includes the Furniture Medic and AmeriSpec brands, reported a 1.4% decrease in revenue. This was driven by lower domestic royalty fees from disaster restoration related services and lower product sales to franchisees. This was partially offset by increased revenue from janitorial national accounts.

ServiceMaster Clean's operating performance decreased 14.6% to $12.3 million in the second quarter of 2012. This $2.1 million increase reflects the impact of lower revenue, specifically domestic royalty fees, which have higher margins than the janitorial national accounts. Or sales of products to franchisees and an increase in key executive transition charges.

In the Other Operations and Headquarters segment, which includes our Merry Maids operations, ServiceMaster Acceptance Company, and our business support functions second-quarter revenue increased 3.6% to $23 million. This reflected improved revenue at Merry Maids, which reported a 2.5% increase in revenue. Revenue from company-owned branches increased 0.9% in 2012 compared to 2011. This was partially offset by 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.

After adjusting for the impact of the branch sales, revenue from Merry Maids benefited from an 8% increase in average customer counts at our company-owned branches. Second quarter operating performance for Merry Maids was $5.6 million, compared to $4.7 million in the second quarter of 2011. The $900,000 increase reflects the impact of higher revenue, labor efficiencies and other cost reductions realized through ongoing initiatives.

The operating performance of ServiceMaster Acceptance Company, and the Company's Headquarter functions declined by $6.6 million for the second quarter of 2012, compared to the second quarter of 2011. This was driven by increased expense in our automobile, general liability and workers compensation program.

This increase was due primarily to the reversal in the second quarter of 2011, a $5.6 million in claims reserves. Increased spending in our Centers of Excellence to enhance capabilities, and a number of initiatives designed to improve the performance of our operating segments. These expenses were offset by lower key executive transition charges of $1.4 million.

In conclusion, we believe we're making the right strategic changes to TruGreen to position it for long-term success and long-term growth. While revenue growth at TruGreen was particularly challenging during the second quarter, our other businesses grew revenue by 4.5% in the second quarter and 6.7% during the first six months of 2012, compared to 2011.

Moreover, our overall operating performance and cash flow continues to be strong. We continue to stay focused on executing our strategies that will drive growth and profitability. That concludes our prepared remarks for this morning. Operator, let's open the lines to begin the question-and-answer session.

Thank you.

(Operator Instructions)

Our first question comes from Vilma Abeebee with JPMorgan. Please, go ahead.

Thank you. Good morning. My first question is, and looking at the segment operating performance on a year over year basis, the first quarter year over year versus the second quarter in a year over year. Across your businesses, I think if my math is right, American Home Shield was up 24% in the first quarter year over year. Terminix was up [225]% year over year. What is the bridge between that growth rate that we saw in the first quarter and the flattish growth that we are seeing in the second quarter on a year over year basis? Is there weather impact there? Are there buckets of drivers you can point us to?

This is Roger. When you look at the revenues for American Home Shield, basically we have contracts with our customers and we will take those out over the life of the contract, typically 12 months. So we don't see much on the revenue side in movement relative to weather overall. So it's basically the customer accounts that we have in the sales programs that we're driving to pick up new customers. So you really see almost a smoothing of those contracts over the period of the contract.

Typically you will see impacts in the cost side because of weather related activities. For instance, American Home Shield will be affected by air conditioning claims based on the weather. So warmer weather creates people to turn on their air conditioners and when they have problems--service issues with those typically we will see spikes in the hot periods certain parts of the country for those costs and those claims. So that's relatively what you will see in any impact from seasonality.

When you look at, certainly, Terminix and TruGreen, there will be a little bit more affected by weather conditions. For instance, as Hank mentioned, earlier in the first quarter we saw a warming across the country--probably two-thirds of the country. So we saw a little bit of greater activity on the pest side, as well as people wanting to get their lawns prepared for the summer season--in the spring season from that standpoint. Other than that we haven't seen much activity in swings from the weather.

So if weather is the driver then what is the driver then for the year over year growth rate declining in the second quarter versus the first quarter? Plus 24% on EBITDA basis and 1Q year over year versus flattish in 2Q.

Well, again, I think if you look at first quarter to second quarter--again if you're looking at revenue, you know we had some pull ahead in the revenues in the first quarter, more seasonality dropping off of the second quarter. When you look at the EBITDA you've got more expenses coming on in the business again, as we talked about, the ramp-up of the business overall from first quarter to second quarter in TruGreen. As well, again, as you saw weather and claims does affect some of the American Home Shield as you start getting into second quarter. But more of a seasonality, when you looking from first-quarter to second quarter. Probably more appropriate thing to do, again is look at last year quarter-to-quarter, again watch that seasonal pattern as you move forward.

Okay, thank you. That's helpful. And my second question is, in terms of the customer count decline at TruGreen, has it rebased at this point or should we expect further declines going forward or is it still too early to tell, at this point?

As you know, we don't issue guidance but we can tell you we intend to stay committed to our strategy. We feel good about the direction that strategically we're going with TruGreen. And again, we are going to get away from selling a less-than-full program applications, which have done in the past. We found that when we did that in the past it gave us the short term lift in revenue, however, it was unprofitable. And also it didn't deliver the results that our full-season program delivers. So we are going to stay committed to make sure we're doing what's right for our customers, by making sure that we sell them and deliver them a product that is sufficient and works. And we're going to do what's right for our associates and our investors by making sure that we're not just churning unprofitable customers.

Thank you. That's helpful. And my final question is maybe at a high level qualitatively, if you can talk about what you are seeing. A lot of companies are talking about slower micro environment. Are you seeing any customer behavior changes today versus how 2Q closed? Any high level qualitative color on that would be helpful.

Yes, we're seeing with our customers is no significant macro changes. What we're seeing is when we do a good job and provide a good service and we've got happy customers. And if we don't do a good job we've got unhappy customers. As you know, our services are such a small percentage of consumers household income we are not subject to some of the macro changes that some other businesses might be seeing. So we are still seeing very solid consumer base.

Thank you. That's all I had.

Thanks.

Thank you. Our next question comes from Marianne Manzolillo with Angelo Gordon and Company. Please go ahead.

Good morning. I had a question regarding working capital. And the greater use of cash for working capital. If you could explain that a bit more? You had said it was related to seasonal activity and interest payments. How would that have differed from last year?

It hasn't significantly differed from last year. I think if you looked at the first six months, quite frankly, in the trend of the receivables side, the growth has been the same in there. Even slightly off. I think you have to look at also the deferred revenue that we were able to pick up from quarter-to-quarter. Some of that has some seasonality. We experienced differences in the deferred revenue people paid us earlier, in some instances. Again we've seen different patterns based on that. Again those are the two major drivers in there.

Deferred revenue and what else would be the other driver?

I was just saying the receivables didn't have a huge impact on that as well but we had some slight increase in inventories but not much of note.

There is also some year over year differences with respect to our incentive compensation programs.

Okay. Great. And question regarding on the Terminix side on the termite business. Did you say a 5.5% decline in new sales?

Let's verify the number.

While Roger is getting that, if you remember in the first quarter we saw record results in Terminix. A lot of that being due to an earlier termite season that happened in the first quarter. So some of what happened in the second quarter was a balancing out of that which is still on a year-to-date basis. We feel really good about where we are with our Terminix business.

Yes, we did say a 5.5% decrease in new unit sales, yes.

So is there a trend there to be concerned of? To be concerned about?

No, again it's more of a timing issue of quarter to quarter. We feel very bullish on our Terminix business. We've got initiatives in place on both the termite side to grow that. And frankly what we've seen is the pest side of the Terminix business has presented even greater growth opportunities.

Sure. It does appear to be the case. And then on the American Home Shield side. How the claims -- how are you experiencing the claims this quarter? Are they kind of along plan according to plan or has the hot weather perhaps caused an increase in claims?

Yes, we can't talk about the third quarter. But yes, when you typically see a spike in the weather and in certain areas of the country you see a spike in the claims. Naturally when people turn on their air conditioners at those points in time, if they have issues, that's where you see the claims. But, again, we track those year over year and again patterns will change month by month by location across the country.

But your assumptions kind of inherent in the price you charge for your contracts are -- are the claims that you are experiencing or seeing are they kind of according to your expectations and are you satisfied with the pricing of your product?

Yes, we're very satisfied with our pricing. And the claim activity that we are seeing is in line with our forecast expectations.

Okay, great. Thank you very much.

Sure.

Thank you. Our next question comes from Jeff Kobylarz with Fiber Investments. Please, go ahead.

Hi. Good morning and congrats on good results. I'm curious about TruGreen customer count decline. It's accelerated now on a compound basis. Down 5% last year and down near 14% this year in the second quarter. And your results operating performance was up so net it's fine. But can you comment -- when do you think it's going to start kind of abating it's decline in your customer counts here.

Yes, Jeff, thanks. What we're seeing in TruGreen, like you said, is we saw the customer count decline more on this quarter. And really the key drivers for that are two things. One is our movement away from neighborhood sales. And that is something that we planned--anticipated and that is a strategic move so we will continue with that.

The second thing, Jeff, is in the past we would sell a customer not the full program but just a couple of applications. A couple applications don't delivered the lawn results that the full program does. So we'd sell them a couple applications. We'd then try to upsell them to get them to sign up for more applications. Led to a bad customer experience and was very expensive to do that so we've got an unhappy customer and unprofitable customer, and a customer who ultimately we lose. So there was a big churn of that which we're not going to do in the future. So we feel confident that the strategy that we've embarked on is the right one and you can see that although our revenue was down in the second quarter, as you mentioned, our operating performance was up double digit. So, we're going to stay true to our strategy and we believe that ultimately that will give us a healthier business with better growth potential and more satisfied customers.

Sure and can you comment about the change in your full-service accounts or full-program accounts? And in lawn care?

Our new program -- the new healthy lawn program varies by geography across the country. In northern states there is fewer applications and southern states, where there is a longer growing season, there is more applications. And, Jeff, what we have seen is customers that are on the new healthy lawn care program have a significantly better customer satisfaction score, and our retention of those customers is greater than customers that are not on that. So we think those are two good leading indicators that will deliver good long-term results in the future.

Okay. And just one other question. About in your, you're corporate headquarters function line item where you talk about -- you mentioned first quarter and again in this quarter about additional investments in your Centers for Excellence et cetera. Can you elaborate on what you are doing their and how much longer there's going to be these investments.

Yes, the big drivers of what's happening in our Centers of Excellence, Jeff, is we've invested more money in our information technology department. That will enable us to enhance the productivity and profitability of our businesses. The two big drivers of that are; in American Home Shield, we are installing a new customer relationship management system. And in TruGreen, we are implementing a new operating system--really the same operating system that's been successful and led to the margin expansion in Terminix over the last several years. So, we are investing where we know we will get a good return in our information technology. And we feel very good about what's going to come out of that.

Okay. Do you know when those are going to be completed?

The American Home Shield installation of their computer system should be completed Q1 of next year. Our TruGreen mission system is being implemented and that will be completed at the end of this year. And, then obviously on an ongoing basis we will match our IT investments to our strategic plan to ensure that we've got the tools to drive our results.

All right, thanks for your help.

Thanks, Jeff.

Thank you. Our next question comes from Kevin Coyne with Goldman Sachs. Please go ahead.

Hi, good morning, thanks for taking the question. Just related to the healthy lawn plan. Can you just elaborate on what the current formulas you have now are? And then, when you go to this customization, is that going to increase the amount of inventory you will have to keep on hand or will this all be real-time generated formulas that will just be more or less produced and not warehoused.

Yes, Kevin, good morning. The healthy lawn plan that we are implementing will have no significant impact on our inventory levels or our working capital. Like you said, it's more real-time based on customer demand so you won't see a big impact on that. On the positive front, as I mentioned, where we've got consumers that are on this -- the retention is better and also the customer satisfaction scores are better.

Great. And then just--I know typically some of your customers don't react to weather but with the severe drought in a lot of part of the country--did that have any impact on any of your businesses?

Yes, the droughts had an impact in our TruGreen business. In some parts of the country the drought was so bad customers are actually not wanting us to service their lawn. So there has been an impact in terms of the drought on our TruGreen business.

Is impossible to quantify that in any way?

No, we are not sharing that. It's not dramatic Kevin. It's not big.

Okay. Thank you.

Thanks, Kevin.

(Operator Instructions)

And our next question comes from Bobby Jones with Highland Capital Management. Please go ahead.

Hi. Congrats on a continued strong execution. My question revolves around your debt capital structure. With your bonds yielding 5.5% can you maybe talk about your plans to continue terming out your extending maturities of both your loans and your bonds? Thank you.

Well, I'll tell you, the goal certainly is to deliver the balance sheet through a combination of debt repayments and growth in the business itself. We continue to closely monitor the debt markets and discuss the options and strategies with our board of directors as well as our financial advisors. At this point I can't really give any more information on that.

Okay. I would just imagine being able to sell paper at $1.10 on the $1 would help you deliver but that's all. Thank you.

Thanks Bobby. Appreciate the comment. Thank you.

Follow-up question from Jeff Kobylarz with Fiber Investments.

Hi, it's Stone Harbor Investments, by the way. Just curious as a follow up about the drought situation. Can you say what the impact of the drought has been on your pest control and termite control business?

No, we are not providing any guidance on that, Jeff.

Okay. Can you say it has had an impact on those areas?

Yes, we've seen an impact, as Hank had mentioned, on the TruGreen side, specifically in some of the Midwestern states where the drought has been very bad. So we've had some turn aways from them not wanting us to service the lawn. But again giving no projections at this point.

And again, if you think about it, where the drought has been severest we have our fewest number of customers. So the impact on the business is not material.

Okay. Thanks very much.

Thanks Jeff.

Thank you. I'm showing no further questions at this time.

Great, we appreciate everybody joining us and we look forward to giving you an update with our third quarter results later on this fall. Thank you.

Thank you. Ladies and gentlemen that concludes our conference call for today and we thank you for your participation and ask that you please disconnect your lines. Have a good day.