Terminix Global Holdings Inc (TMX) 2013 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the ServiceMaster Company's first quarter 2013 earnings conference call. Today's call is being recorded and broadcast on the Internet. Beginning today's call is Brian Turcotte, ServiceMaster's Vice President of Investor Relations.

Mr. Turcotte 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 will begin today's call. Please go ahead, Mr. Turcotte.

Thank you, Paul. Good morning, and thanks for joining our first quarter 2013 earnings conference call. Today, you will hear from ServiceMaster's Interim Chief Executive Officer, John Krenicki; our Interim Chief Financial Officer, David Martin; and TruGreen's President, David Alexander. We will make some prepared remarks and then address your questions.

Before we begin, I would like to remind you that throughout today's call management may make forward-looking statements to assist you in understanding the company's strategies and operating performance. All forward-looking statements are subject to the forward-looking statement 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 May 14, 2013, 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 Relation 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 and operating performance, which factor in adjustments related to such things as restructuring expenses, non-cash goodwill, and trade name impairments, and non-cash 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 relevant reconciliations of these non-GAAP financial measures to the most comparable GAAP financial measures in order to 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're 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. However, as a reminder, we don't provide any forward-looking information, so please limit your questions accordingly. I will now turn the call over to John Krenicki for opening comments. John?

Thanks, Brian, and good morning, everyone. This is my first opportunity with you since assuming the position of Interim CEO of ServiceMaster on April 12, in addition to my role as chairman of the board of ServiceMaster Global Holdings, ServiceMaster's parent. For those of you who don't know my background, I am a full-time operating partner at Clayton Dubilier and Rice. And, this is my second Interim CEO role since joining CD&R in January of this year. I previously served as Interim CEO of Wilson Art International until February, 2013, where I also served as Chairman of the Board.

Let me start by saying while I'm disappointed with our recent financial results, including the first quarter of 2013, which we will discuss in detail today, I am confident that ServiceMaster is a strong company that can excel with better execution. We have leading brands in almost all of our market segments, and we have approximately 8 million customers who use those brands every year. The foundation of ServiceMaster, our businesses, Terminix, TruGreen, American Home Shield, and Franchise, are market leaders and enviable positions to build upon. TruGreen's President, David Alexander, is here with me today, and will discuss our plans to address the self inflicted wounds at TruGreen. David and the TruGreen leadership team are taking decisive action to get this business back on track, and have my full support as they execute their plans. While we are executing our turn-around plans at TruGreen, we also have great potential to generate top and bottom line growth across the rest of ServiceMaster. We will fix TruGreen and make ServiceMaster a better company at the same time.

I want to update you on our leadership team and plans going forward. First, we have strong leaders running our businesses. TruGreen President David Alexander, who you will hear from shortly, has an outstanding track record of executive leadership in customer service, operations, supply chain, and revenue growth at City Trend and Family Dollar. David joined us in January and he hasn't tried to rationalize the current situation. Instead he has assumed full ownership and is taking actions to make things better.

American Home Shield President Mark Barry has a strong track record, executing strategies to drive revenue growth and improving customer experiences at United Technologies, GE, and Tyco. Mark is focused on operational excellence and building a foundation for growth. Franchise President Tom Coba has a strong track record of growth in executive experience, most recently as Chief Operating Officer of Subway restaurants. Tom's team is energized around profitable growth and taking swings to make Franchise a bigger part of ServiceMaster. Terminix Interim President Larry Pruitt has 28 years of experience in the pest control industry, and a strong background in sales, operations, and innovation as Terminix Chief Operating Officer. Terminix is Larry's business and he is working closely with me to make sure that we make the right calls for the future.

David Martin, our Interim CFO, joined ServiceMaster in 2005 and was quickly elevated to Terminix CFO and has served as ServiceMaster's controller since late 2007. David also served as ServiceMaster's Interim CFO in 2011. We are fortunate to have someone with David's background and experience to step up and I'm very grateful for his deep commitment to ServiceMaster.

Second, we have over 20,000 passionate and committed employees who are team players with deep domain expertise, and are committed to our customers and building a better ServiceMaster. We won't rationalize churn at the top, nor will we settle until we get it right for the team that touches our customers every day. And third, we have begun the search for a new CEO, and we are extremely pleased with the interest we have received from highly qualified candidates. When hired, the new CEO will work to put in place a headquarter's team that will exist to help our businesses better compete and win. I am intentionally staffing headquarters functional roles that come open with interim leaders to allow the next CEO to build and own his or her team.

As I noted at the beginning, our first quarter 2013 financial results were disappointing with the major negative driver largely isolated to TruGreen. David Alexander will discuss our improvement plans in detail shortly but it is important that we all take ownership for executing the TruGreen turn-around agenda, starting with me. We have been pulling out all of the stops and spending heavily to right the ship and we will continue to wherever necessary. David will walk you through the details but we need to stabilize and grow our customer count and stabilize productivity at historical levels as a foundational basis to improve upon.

As you can read in our earnings release issued this morning, ServiceMaster's operating revenue in the first quarter decreased about 7% and operating performance decreased about 35%, compared to the first quarter of 2012. As discussed, TruGreen's results were disappointing, but the balance of ServiceMaster, Terminix, American Home Shield, and Franchise, performed about as we had planned. The first quarter was our lightest quarter of the year -- revenue quarter of the year. And, the unusually warm weather in 2012 created difficult comparisons for Terminix, TruGreen, and American Home Shield that we anticipated as we built our 2013 operating plans. That said, ServiceMaster performed worse than expected and our business can and will do better.

Here is where my focus is going to be over the next few months as Interim CEO. First, we will simplify the company and make our business units more competitive. We need to put our business units first and make sure that they are appropriately resourced, nimble, and empowered to win. ServiceMaster wins when our businesses win. We can't let one of our businesses get away from us. TruGreen is a painful lesson for all of us and is not to be repeated.

We will shine a light on execution, getting into the details, driving operational rigger, and improvements at the customer level, and ultimately growing our customer counts. We will rally around our customers, work as a team, and we're going to value candor, collaboration, and results. The only way we are going to make real improvements around here and make them stick is by facing reality, working together as a team, and holding each other accountable for results relative to the best in class competition. We will work hard to meet our commitments, to our customers, to each other, and to our investors. ServiceMaster needs to re-establish itself as a reliable and predictable company. We need to spot issues and opportunities faster and take decisive action as indicated.

Finally, recruiting and hiring a new CEO. We will hire a strong leader and competitor. Someone who understands where and how money is made and rolls up their sleeves to help the individual businesses get better, work together, and win. I'm going to turn the call over to David Alexander to provide more color on TruGreen. David?

Thank you, John, and good morning, everyone. Since this is my first opportunity to speak with you since joining ServiceMaster in December, let me begin by telling you how excited I am to be a part of the TruGreen team. I view this as a great business with significant potential for growth. Over the past four months, I've spent a great deal of time with the TruGreen management team and field personnel trying to better understand why this business has under performed both your expectations and ours. The challenges that I found at TruGreen are not a reflection of a troubled industry, nor of a company that is losing ground to its competitors. Instead, they represent self inflicted wounds that are all very treatable.

As I see it, TruGreen ended 2012 with three very significant challenges. A product offering that wasn't getting the job done, three new core technology systems with real integration and optimization challenges, and a customer base that was about 10% lower than where we began 2012. To assist you in better understanding where TruGreen has been, and where it is going, I will take a few minutes to walk through each of these challenges, and the remedies our team is working towards. First, in 2012, TruGreen made a decision to evolve from selling our customers applications to selling our customers results. Instead of providing a customer with whatever number of applications they requested, we designed scientifically sound programs intended to produce visibly better lawns for our customers over a season.

Unfortunately, in making this change, we moved from an al-a-carte approach to a one size fits all approach and attempted to force every new customer into what we viewed as the ideal treatment plan. The result was a significant drop in sales throughout the year and a resulting decline in customer count. While this approach negatively impacted sales and customer counts, we did see positive lawn results for our new customers. And, as of December 31, 2012, we had seen 190 basis point improvement in the overall retention rate. As we prepared for 2013, the TruGreen management team spent significant time rethinking this approach and created a tiered product offering intended to address the needs and desires of three different types of consumers.

For the homeowner whose primary interest is to simply achieve a green weed-free lawn we now offer a good basic plan. For the customer who also wants insect control, we offer a mid-tier plan. And, for the customer who wants the very best for their lawn, we offer a complete plan that includes additional services such as lawn aeration and over-seeding where appropriate. In addition to the improved product offering, we have also rolled out extensive new training for both our sales reps and our lawn technicians. And, we created a tool to assist our sales reps in identifying the right plan for each new customer, with qualifying questions to gauge which plan will best meet each individual customer's needs.

My initial impression is that these changes in our product offering and investment in training are having a positive impact on our business. This is born out by the fact that in Q1 we saw positive trends in close rates, sales mix, and retention rates. And, I will also tell you, however, that to properly staff and train a sales force that can begin to mitigate the customer count loss from last year requires a sizable investment in sales labor, which negatively impacts profitability in the short term with a revenue benefit typically lagging a few quarters. The second challenge we face in 2013 is an outgrowth of the first. It is the fact that we started the year with a significantly lower customer base than the prior year. We believe that by successfully addressing the sales mix issues, as I just described, we will grow back our customer base.

Third, and most significantly, in mid-2012, TruGreen made the decision to replace its core IT systems. I know you've probably heard this summarized as an upgrade to the operating is system. To provide you with more color, what we have done is replaced the three most critical systems in the company, our operating system, our routing and scheduling system, and our hand-held production system. During the first quarter of 2013, as you might expect, our primary focus was on system stability and resolving integration issues between the three systems. These challenges resulted in missed revenue, delayed starts on new customers, and poor route efficiency with applications and revenue for technician hour substantially below last year.

As the quarter concluded, we began to see improvement in system stability. We still had a long way to go to optimize TruGreen's unique business model. This optimization effort has proven significantly more difficult than the company envisioned. And, while we have reduced the productivity gap to last year, we are still a ways away from even achieving last year's efficiencies. This is our single biggest issue and we do not see this changing in the immediate future.

Lastly, I'm sure you're aware of the dramatic year over year unfavorable impact of weather. In the first quarter of 2012, TruGreen benefited from the warmest March in 118 years. For the first quarter of 2013, March was unseasonably cool and wet. And, this certainly impacted our year over year revenue comparisons.

In closing, I am very confident that we can and will get TruGreen solidly back on track in a reasonable period of time. I'm encouraged by the improved trends, and we are providing the focus needed to resolve the system issues. We began this year in a very challenging position. And, progress certainly does not come easily. But, I firmly believe that we're doing the right things to return TruGreen to success. I look forward to updating you on our progress in the coming quarters. And, David Martin will now review ServiceMaster's consolidated and business segment results. David?

Thank you, David, and good morning, everyone. Let me briefly cover our consolidated results and then I will move on to the segments. First quarter consolidated revenue decreased 7.1% to $608 million, compared to $655 million a year ago. This decrease was primarily driven by lower revenue at TruGreen and American Home Shield. First quarter operating performance decreased 35% to $65 million, compared to $101 million a year ago. First quarter operating performance margin declined 460 basis points to 10.8%, compared to 15.4% in the first quarter of 2012. The decrease in operating performance for the quarter was primarily driven by lower revenue, lower labor efficiency, and investments in sales labor and technology, principally at TruGreen.

Cost of goods sold as a percentage of revenue increased 240 basis points to 61.4% compared to the first quarter of 2012. The increase primarily reflects reduced leverage due to the decline in revenue, lower labor efficiency at Terminix and TruGreen, and higher expense in our automobile, general liability, and worker's compensation insurance programs. SG&A expense as a percentage of revenue increased 330 basis points to 32.5%, compared to the first quarter of 2012. The increase primarily reflects reduced leverage due to the decline in revenue, investments in sales labor at Terminix and TruGreen, higher technology costs related to new IT systems at TruGreen, and investments to drive improvements in service delivery at American Home Shield. These items were partially offset by lower technology costs at Merry Maids, a reduction in tax-related reserves at American Home Shield, and a reduction in costs in our centers of excellence.

Moving on to the balance sheet. For the first quarter of 2013, our cash balance decreased from $423 million to $354 million during the quarter, or 16%. Net cash used for operating activities for the quarter of $13 million was driven by a $17 million increase in working capital needs and $5 million in restructuring payments. This was partially offset by $9 million in earnings adjusted for non-cash charges. The increase in working capital requirements resulted from interest payments, incentive compensation payments related to 2012 performance, and seasonal activity. For the quarter, net cash used for investing activities of $26 million primarily reflects purchases of technology and property improvements of $19 million and $4 million used for tuck-in acquisitions.

Net cash used for financing activities was $29 million for the quarter. And, primarily consisted of debt repayments of $13 million, a discount of $12 million paid on issuance of debt, and payments of debt issuance costs of $5 million. Our liquidity profile remains strong. Cash and short and long-term securities totaled $510 million, of which $266 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 facility during the first quarter of 2013.

Now, let's talk about the segment results. At Terminix, revenue for the first quarter of 2013 was $313 million, up 0.6% compared to the first quarter of 2012, reflecting growth in pest control revenue, partially offset by a decline in termite revenue. Pest control revenue increased 5% primarily reflecting improved price realization. Termite revenue, including revenue from new and renewing customers, decreased 3.7%, reflecting a decrease in new unit sales, a 60 basis points decline in the customer retention rate, and the unfavorable timing of renewal revenue, partially offset by improved price realization. Terminix's operating performance for the first quarter of 2013 was $88 million, a decline of 2.9% compared to the first quarter of 2012. This decrease in operating performance of almost $3 million reflects lower labor efficiency, investments in sales labor, and higher bad debt expense. This was partially offset by the impact of higher revenue and lower provisions for certain legal matters.

At TruGreen, revenue for the first quarter of 2013 was $94 million, down 28.3%, compared to the first quarter of 2012, primarily due to the following factors David Alexander just discussed. Fewer full program customers, a result of lower sales volume in 2012. Inefficiencies in service delivery caused by integration issues with newly-implemented technologies. And, the unfavorable timing of production driven by a much colder and wetter first quarter than experienced a year ago. TruGreen's operating performance for the first quarter of 2013 was a loss of $37 million, a decline of $34 million compared to the first quarter of 2012. This decline in operating performance mainly reflecting the impact of lower revenue as well as lower labor efficiency, higher sales staffing levels, and higher technology costs related to new IT systems.

At American Home Shield, revenue for the first quarter of 2013 was $143 million, down 9.9% compared to the first quarter of 2012. This decline reflects the impact on revenue of a change in the expected timing of contract claims and a 60 basis points reduction in the customer retention rate. This was partially offset by improved price realization and growth in new unit sales. American Home Shield's operating performance for the first quarter of 2013 was $27 million, a decline of 13.6% compared to the first quarter of 2012. This $4 million decrease in operating performance primarily reflects the impact of lower revenue and investments to drive improvements in service delivery, partially offset by a reduction in tax-related reserve, and a favorable adjustment to reserves for prior year contract claims.

The ServiceMaster Clean segment, which also includes the Furniture Medic and AmeriSpec brands, reported revenue for the first quarter of 2013 of $35 million, up 10.9% compared to the first quarter of 2012. This increase was driven by a 5.9% increase in domestic royalty fees, primarily from an increase in disaster restoration services, a 48.9% increase in janitorial national account revenue driven by strong sales activity, and a 9.6% increase in sales of products to franchisees driven by higher demand for equipment. ServiceMaster Clean's operating performance for the first quarter of 2013 was $15 million, up 13.6%, compared to the first quarter of 2012. This increase of just under $2 million primarily reflects the impact of higher revenue and improved efficiencies in sales labor.

The Other Operations and Headquarters segment, which includes our Merry Maids operations, ServiceMaster acceptance company, and our business support functions, reported revenue for the first quarter of 2013 of $22 million, an increase of 3.8% compared to the first quarter of 2012. Merry Maids revenue for the first quarter of 2013 was $20 million, an increase of 3.1%, compared to the first quarter of 2012, which primarily reflects a 3.9% increase in revenue from company-owned branches. This increase was driven by a 250 basis points increase in the customer retention rate and improved price realization, partially offset by a decrease in new unit sales and a decline in the frequency of services provided for existing customers. Merry Maids' operating performance for the first quarter of 2013 was just under $5 million. An improvement of $3 million compared to the first quarter of 2012. This increase primarily reflects the impact of higher revenue and lower technology costs as $4.2 million of technology costs were recorded in the first quarter of 2012, related to the abandonment of internally developed software. This was partially offset by higher branch labor costs and higher technology costs related to a new operating system.

The operating performance of the company's headquarters functions and ServiceMaster acceptance company improved slightly in the first quarter of 2013 compared to the first quarter of 2012. This was primarily driven by a reduction in costs in our centers of excellence, partially offset by higher expenses in our automobile, general liability, and worker's compensation insurance programs. That concludes my comments on ServiceMaster's consolidated and business segment results. Now, I will turn the call over to John for his closing comments. John?

Thanks, David. Before we open up the call for questions, I want to say again that I'm excited to be leading ServiceMaster and to be a part of this team. We're committed to turning TruGreen around and taking the steps necessary to drive top and bottom line growth in all of our businesses. I'm looking forward to sharing our progress as we take the next steps on the path forward.

Thanks, John. Paul, let's open up the lines for questions, please.

Thank you.

(Operator Instructions)

Sam McGovern, Credit Suisse.

Hi, guys. Thanks for taking my call. Was hoping you could give us an update in terms of the timing of your expectation for why -- when the CEO might be hired?

Okay, this is John Krenicki. It is top of the heap in terms of priorities for me. So, we're actively pursuing candidates now. We've got greatest interest in the job but we're in no rush to fill the job unless we find the right person. So, I'm prepared to act as long as I need to, but at the same time, it is top of my priority list to find the right person to do this thing long-term.

Got it. And then, in terms of the tier pricing that you guys implemented. When this season was that implemented? Was it before Hank left or after?

A lot of the work on the tier pricing was done last fall. We finalized that pricing in the December/January timeframe. And, as we went to market, from a sales standpoint, this January we had moved to our new tier prices.

Got it. And, how is that being received so far?

The things I'm able to tell you is it is being very well received. The markets that we really have data are more of our southern markets in terms of through the first quarter. We saw good close rates. We saw good sales mix. So, my view of that is pretty positive.

Got it. And, in terms of the customer count gap that you cited for Q1, where we began the year, how much -- how long do you think it takes to close that gap? Is this a one or two years of process or is it longer to get up to where were you before?

I think the way I would answer that as we came into the year customer counts were still declining. So, to stabilize that and to begin to regrow customer count is really a matter of two things. One, it is continued improved retention. And, if you look at our first quarter results you saw that we improved retention. And, number two, it is to begin to have a better sales effort and I would again tell you we are doing that. But, in terms of the amount of gap we have to bridge, that is not a short-term obstacle. I think you will see improvement in customer count, but it is going to take a while to regrow the amount of customers that we lost.

Got it. And, in terms of the IT system that you put in place at TruGreen, what is the long-term benefits that you guys see in it or why not just downgrade to the old IT system?

Without going into too many details about the whys of why we went to it and why we don't go back to the old. If it were one system, it would be easier to answer your question. It is really three different systems. We have an operating system, and the way to think about that is that is the system that keeps track of the customers and the numbers of applications and the dates to the do the applications. We have a routing and scheduling system that creates the route efficiency and plans the work every day. We have a hand-held system that then the tech uses to actually do the work. Those three system, the integration around those systems and the optimization of each system, has proven to be a pretty challenging issue for us to face.

I would tell you the old systems -- the systems we were using before were very old. There were stability issues around those. And, we are now looking at all of our options. We're looking at each individual system. And, we're looking how to put together the best technology for TruGreen. So, that is about all I would say at this point.

Sam, thanks for your questions. We have a number of people in the queue so let's try to limit it to one follow-up. Paul, can we move on, please?

Kevin Coyne, Goldman Sachs.

Hi, thanks for taking the question. Just to touch base on the technology again, was the, let's say, hand-held technology an off the shelf type of technology, where you just put your software in an app on there? Or were these devices that were tailor-made specific for TruGreen? And, if so, were all of these already bought and sitting in inventory at this point? Or sitting in a warehouse?

The hand-helds themselves are -- they're a production product. But, there is technology that drives a hand-held. There is middle ware that communicates back to our operating system. And, again there is a routing and scheduling system. So, if you think about the effort, there are integration issues around all thee systems. Every one of those systems had its own rule, its own parameter, its own settings. So, the first quarter, there was a lot of stability issues that had to be resolved.

Once we got the system stable, then we are left with a lot of optimization issues that have to be done. So, it is a situation where some of this is more internal, some of it is more packaged. But, the integration is very specific at TruGreen. And, the optimization is very specific at TruGreen. And, that's where a lot of work remains to be done.

Okay. So, the investment has been made, and you will just make it work going forward?

Exactly. Yes, the hand-helds are in the branches, the system -- we have the systems, it is a matter of making them work the way they need to.

Okay. Just to touch on TruGreen, just the pressure in general. I know you always talk about your mix in the big three states of California, Texas, and Florida. Was the weakness that you have been experiencing equally spread across the US or did you see more weakness in the big three or any other region?

Well, again, I would define weakness as having several components. If we talk about customer count loss, that was in all channels and in all parts of the country. And, I'm talking about 2012 when we went to a single product offering. If you look at the impacts this year, the system efficiency issues have also been broad across all parts of the country. The weather impact has been very specific to the midwest and parts of the west and some parts of the east. So, for example, if you look at the weather maps for the first quarter, you will see significant weather events in the plains, in Colorado, you will see significant weather delays in the midwest. We have branches that last March produced substantial revenue that this March didn't produce a $1. So, whether impact was more regionalized. System impact, customer count loss, was more broad.

Okay. And, if I could just squeeze one in on American Home Shield. So, I see the segment obviously experienced some pressure. And, you referred to the timing of contract claims. I was just wondering if you could expand on the -- that timing of those claims as well as remind us what is a -- if there is any concentration of the contracts in any particular geographic region?

Yes, maybe taking the second question first, not a high degree of concentration. I think it is fair to say that we have more accounts in the big three states in the United States, which would be Florida, Texas, and California. But, other than that, no high degree of concentration. With respect to your first question, that really gets to our margin accounting. And so, what that means is we had a significant impact on revenue in the first quarter, based on a change in the timing of claims cost, a change in expectation.

So, another way to think about that would be lower revenues reflected in first quarter on lower claims costs. So, in future quarters, what that would suggest is that we will reflect higher revenues on higher claims costs, such that the AHS business should have a consistent margin across all four quarters in the year.

Okay. Thank you.

Yilma Abebe, J.P. Morgan.

Thank you, good morning. My first question is if we look at operating performance of TruGreen, minus $37 million this quarter versus minus $3 million in the prior year quarter, you walked us through the issues in the business. But, perhaps if you can, put it in buckets for us. For example, of that, of the Delta, how much of that was related to your higher sales and marketing efforts? How much of that is related to your IT inefficiencies, weather? Maybe a little more color around that, with numbers.

I will give you some very general comments. Again, as I stated, we began the year between 10% and 11% fewer customers, first big impact. Second impact was we had significant weather issues. And, those weather issues, while regional, had a big affect -- impact on a lot of branches. Third, we had issues around routing and scheduling, that affected both our ability to do the work and our labor efficiency. So, those were the three big impacts on the company. To go into more detail than that, I am really not prepared to do.

I can add to that and maybe, to a large degree, just to repeat what David said. While we're not really prepared to provide dollar sizing, certainly we're speaking to you about the largest of the drivers, of the business in TruGreen. So, again, top line was off $37 million, about 28%. Certainly that's customer counts first, and followed by, I think about it as production ability in two forms. One would be weather. One would be the impact of our technology.

On a flow-through basis to our operating performance, you've got the impact of revenue, which would be the most significant of the drivers to operating performance, followed by the impact to our labor, be it the technology challenges. We also made specific investments in sales labor, to drive new unit sales, and then just the overall costs associated with the new technology itself. If that helps.

Yes, thank you. That is a helpful ranking. Would you be able to tell us if it is, for example, more than 50% is related to the lower customer count? Maybe if you can cap it in thirds and quarters? It is a little bit difficult to get a little more feel for the numbers without any specifics around it.

Customer counts would be the single biggest driver of all that we have discussed. Beyond that, Yilma, I'm really not prepared to provide any further numerics.

And then, my follow-up is in terms of -- we're in the middle of May right now, any sense in terms of how the selling season is going? I know you don't give guidance, but a little bit more color in terms of how customer count trends are playing out so far in the second quarter.

Well, obviously, our calls in the middle of May are comments through the end of March. And, let me tell you where we were at the end of March. As I said, our retention rates were up, and I think we shared in our release that they were up 300 basis points. So, strong retention. We stated that in the southern markets where we are really active we are seeing a good sales mix and we're seeing good close rates. We invested in higher neighborhood sales and we view that as a good investment. That's really all I can say. And, again, my comments are really just to the end of March. I really can't comment beyond that.

Bobby Jones, Highland Capital Management.

Good morning. I just wanted to follow up on some of the previous questions and some of the commentary, John, you made about rationalizing what is going on with the company and assuming full ownership. About three months ago, we tried to re-price all of our credit facilities. And then, if I listen to David's commentary, I get the sense that all is well, and everything is going and going.

In the last three quarters we lost 15% of the Company's profitability and erased four years of operational improvement. So, just following up on Yilma's, in terms of both bucketing the amount of the year-over-year change, as well as what is going on in May, and how do we think about this business going forward?

I think the answer is we have one business in a ditch, which is TruGreen, that we have to get out of the ditch. And, I think David articulated the components that we are working to get it out of the ditch, and that's what the team is rallying around. Absent that, the bulk -- the rest of the franchise through the first quarter, pretty much performed as expected.

So, I mean is there any further clarification that we can try to divine in terms of what actually went wrong and what are the dollar signs around those strategic missteps?

I actually thought I could not have been much clearer about the system issues that we faced. I came in in December, was here for a few days. Came into January, we began to recognize that we had real integration issues. As we worked through those, and it is like peeling off an onion, as we continued to work through them, we found, particularly over the last six weeks or so, discovered the depth of some of those system issues.

I was pretty clear in my comments that those issues are not gone, that we're still dealing with them. I did tell you that you we're seeing improvements in sales. We most definitely are. I told that you we have a mix we feel good about. We do. But, I don't think I could have been much clearer that we have real system issues and those system issues affect both our productivity and they affect our labor efficiency. They also affect our fuel efficiency. They also affect our truck needs. So, we have challenges and we are working hard to attack them. But, I certainly don't think I was polyanna in any of my comments about the challenges we have in TruGreen.

And, certainly, we started -- we certainly started the year with the knowledge that the customer counts were down. That was going to certainly impact us in the first quarter. That was planned. The production ability, less of. So, we did not understand the depth, necessarily in the beginning, of the technology challenges we faced. And, obviously, the weather piece is not something that we control.

Sure.

So, some of it is was planned. Some of it was incremental of the planned.

I think as investors, we're looking for greater transparency. And, to your point, David, on past calls we've had over the past four to six quarters, all of these issues have been glossed over. They were never made as disconcerting as we're now hearing that they were at the time. And so, we're just trying to handicap, going forward, how to actually think about the business in light of the commentary that we were receiving at the time.

The only thing I would tell you is when I got here, the perception was that these systems were going to be fine. And, it was the perception, the perception was that the challenges related around the culture at TruGreen and an inability to deal with change. As we dug into those, as I visited branches, as I talked to branch managers and service managers, as we looked at how the system was actually playing out, I heard things like, if the branch managers would just follow what the system tells them to do, we would be fine.

So, we began to dig into that. We began to look at the routes being produced. We began to look at the amount of work being done and not being done. And, what we found is TruGreen is a unique business. And, it has very unique requirements. And, the systems were not meeting those requirements. And, it was giving us an inability to get our work done and an inability to create efficient routes.

And, while we have made stability progress, we have other issues that still need to be worked through. And, basically at TruGreen, we have a lot of issues we're trying to solve. We have two issues we're laser focused on. One is how do we rebuild our customer base? How do we regrow it? How do we grow our retention rates and our customer relationships? And, we're making real progress there. Secondly, we have a system issue that is significant and we're working through that. But, I'm not in a position today to tell that you we're about to turn the corner because we are working hard to get through it.

That's helpful. That's all I've got. Thank you for the clarification.

Thanks, Bobby. Paul, next question.

Jeff Kobylarz, Stone Harbor Investments.

I just want to understand a little bit more about these systems issues. Can you explain when you say you have your arms around the systems issue now, so do you know when you will get the system operating appropriately?

No, the answer is I don't. The answer is, we have three distinct systems. They're working to various levels. We began the year with these systems creating very significant inefficiencies. That inefficiency gap we've cut 50%. But, we're still not even to last year's efficiency. So, we have a team of engineers and IT folks, we have outside resources looking at each one of the systems, looking at everything from the quality of the data going into the systems to the connections between the systems. Looking at scenarios where a parameter in one system creates a problem in the other system.

So, this is like any major system issue. As you unravel it and fix things, you find other things that need more work. And, I would tell that you we have a primary path we're going down, we have backup paths we're going down. And, we will get it resolved. But, I'm not in a position to give you a timeline.

And, I guess will you not know better about the timeline until you're in your peak season in July or so? Is that really when you are going to -- you just have a better feel about just how difficult the systems are and whatever fixes you're putting in place now are --.

I would say we know how difficult the systems are right now. But, in terms of how we're going to correct those, for example, we have algorithm changes that went in on the 13th. We have other algorithm changes in one of the core systems that go in on the 20th. We have look at over -- there is roughly 200 different parameter settings in one system. We have changed numerous parameters, we simulated the effects of those changes. So, we are making -- this is not a -- we are not sitting around waiting for this to be fixed. We're all hands on deck fixing it.

Right.

And, again, the inefficiency, if you look at progress, and we don't want to -- I don't want to emphasize progress, because we're still not there. If you look at where we began in January versus today, the efficiency gap we've cut 50%. But, we're not to where we need to be.

Okay. And then, also, can you comment about, I guess, the -- just given TruGreen used to be an 18% to 19% operating contributor. And, just given what you have, with the systems in place, is there going to be a high effects cost of operating these systems going forward, say in 2014? Do you have any feel about that? Can you get back to those 18%, 19% operating contribution margins?

So, let me comment as someone, again, who has been here for a few months. But, my view is absolutely. What we are looking at is a -- well, we're looking at our issues of temporary, and I don't know how to define temporary, but they are temporary, they are of a finite period. Our revenue -- our customer base, we are working to grow back. We are retaining our customers. Those are the things that will drive our profitability. As the system issues are fixed, we absolutely will be able to return to former efficiencies. In terms of ability to begin service, complete service, in terms of stops per route, in terms of revenue per hour, those are all things we can regain. I have no doubts about that. It is a matter of a system implementation that has issues and we've got to get through them.

But, I don't view that as a reflection of the long term success of the business at all. I've run a lot of companies and I've been through system challenges before. The system challenges are just that. We've implemented new systems and they are making us less effective. We've got to get them fixed.

Yes, I would echo David's thoughts in that regard, and think about it revenue is down and obviously that is going to have an impact on margins. Labor, the production -- the efficiency of labor today is not where it needs to be. But, it is remediable and we're in the process of doing so. We're consciously making decisions about sales labor investments today as a means to drive the counts for the future success of this business. And then, obviously the technology costs are not here to stay. Once we are able to make the right investments, we get the technology functional, then that is a cost that will exit the business.

All right. And, just lastly, does it make sense now to try to go for customers? As long as you're not irritating your customers that you do bring in, the new one, I guess, then it does make sense to bring in new customers. But, just any general color about that. Are you sure you're not going to -- it is not going to backfire on you, that you are going to hire, get a new customer, pay the commission to your sales force, and then lose that customer and then have a net, negative ROI on that customer?

Well, it is obviously always a risk when you're having system issues. But, let me tell you, our branches are doing a tremendous number of things to still deliver the service to the customer. And, we won't do things that are inappropriate for a customer. So, if it costs us revenue to reduce the number of applications for a customer, because we started late in the season or our period windows between treatments become compressed and it would be the wrong thing to treat, we're not going to do the wrong thing by the customers, we're going to do the right things. And, we're going to make -- and we're looking at ways to better serve them. And, we're looking at how we communicate with them. So, we are selling customers and we are retaining customers at the highest rate we have ever retained customers. It is just not easy in this environment to do that. But, we are doing it.

To David's point, I mean if you look at one key metric for us at TruGreen, it is customer retention rate, and that actually is up almost 300 basis points on a trailing '12.

To a new record. To levels we've never been to before.

That's right.

All right. Thank you.

Thanks, Jeff.

Marianne Manzolillo, Angelo Gordon.

Yes, hi. More questions regarding the technology. As you're saying -- as you talk about this efficiency gap, how do you measure your efficiency? Is it, as you were saying, stops per route? Or the time per stop?

No, the key things that we're looking at -- the time per stop has not really changed. That is not a system issue. That is the matter of the work done on the person -- on the individual's lawn. What we look at are the number of stops per hour that the tech is able to make and we look at the revenue per hour the tech is able to generate. So, if I have a well-planned tight route, then my drive time between stops is diminished as a percent of the total day, and I'm able to generate higher revenue and higher stops per hour.

To the extent that my routing is inefficient, to the extent that I'm looping, to the extent that it is sending me to places that I don't need to go, I'm either too early or I'm too late, and then we see that when we get there, that [how] has very inefficient routes. That's how I failed to get the amount of revenue done in a day that I should. And, that's how I end up spending more on fuel, more on drive time, more on vehicle maintenance as a result of inefficiency. So, that's what I am talking about when I say inefficient route.

Okay. So, you're incurring, as you're saying, then overtime labor or more fuel or whatever, all of these different costs in an attempt to get the proper service to your customer. But, it is being delivered in currently an inefficient way.

Absolutely.

And, you are saying now that you have cut this efficiency gap 50% from where it was at the beginning of the year. But, where would you stand versus last year in the stops per hour or revenue per hour metrics?

I know it -- being as I don't really want to give the specifics, what I would say is that we are still lower than last year. Obviously, our goal is to begin by getting to last year's numbers. We are not there yet. But, the gap to last year we've cut 50%.

Okay, all right. And then, as far as the three different programs that you offer, this basic, or good, better best, how does that compare price-wise versus the one size fits all type of thing that you were offering last year, price-wise?

Sure, the easiest way to think about that is our mid tier product is aligned with what we were selling last year. So, last year, as a customer, we would give you the right number of treatments and we would also give you the right insect control for your yard and we basically offered that one thing. A portion of customers are not that concerned about the insect control. They're concerned with having a green weed-free lawn, period. It is a matter of convenience for them, it is something they don't want to have to do. We basically walked those customers last year. We had nothing to offer them. So, a portion of our sales now are introductory product that appeals to a lot of those consumers.

The mid tier product, which is what we sell the most of, is what we were offering last year. We also now have a higher end product, which not only combines the weed and feed, the insect control, but it also includes aeration, it may include overseeding, depending where are you in the country it may include things like lime for your soil. So, specific to the part of the country, we have three different things you can buy.

The other thing I would tell you though is -- and I would also tell you that is not all we sell. We still offer tree and shrub and we have a lot of expanded services. So, let's say you are in an area where you have a problem with fire ants or fleas or ticks, we do have a-la-carte items you can still buy, but they're incremental to the basic service to your lawn.

So, as far, then, the mix that you're offering this year, revenue per customer, or whatever, how would it compare to last year? Is it the same or above or below?

What I would say is with some price increases we've taken our revenue per customer is very comparable with last year. And, the mix is around that core center product. We sell a little more of the lower end -- lower product. Again, we wouldn't have gotten those sales last year. We are selling the higher product, we are selling expanded. And, the overall blend of all of that with some price increases we've taken is about the same revenue per customer as a year ago.

Okay.

Marianne, I think we have time for one more question.

Okay. Terminix or AHS, anything going on there as far as -- AHS, you're saying that you had fewer claims this year. I'm wonder if last year Q1 had a higher number of claims? Anything there we need to worry about? Or on the Terminix side as well, anything there -- especially regarding the termite side. I saw that the change in the termite customer is down 1.9%.

Yes, as it relates to AHS first, first quarter 2012 was unique for AHS in that they had a very favorable winter, and they also had an early summer. Both of which contributed to increased profitability in the first quarter of 2012. As it relates to first quarter of 2013, as I indicated in a previous question, we have had an impact on revenue this year relative to a change in the timing of claims. So, less revenue recorded this year on lower claims costs but with an expectation that it is all timing to the year. So, you would expect higher revenue on higher claim costs in future quarters. So, I think that is all we're really talking about with respect to AHS.

If I move to Terminix for just a minute, and I know you highlighted one KPI, but maybe just back up for a second. You have you seen somewhat flattish customer counts, both on the termite side and the pest side, somewhat flattish retention rates both on the termite side and on the pest side. Slightly down -- that is resulting from slight modest declines in new units, modest increases in cancellations, there is no question about that. I think one big data point to that would again be the weather year-over-year Q1. And, what I mean by that is in first quarter of 2012, we had very favorable weather for us, which made pest and termites very top of mind to a customer and to a potential customer. That drove higher new unit sales. It also served to repress cancellations because the pests and the termites were out and about.

In 2013 Q1, just the reverse was true. Unfavorable weather from that standpoint. So, we didn't drive the same level of new unit sales and we had customers who felt like because the pests and the termites were not necessarily top of mind they no longer needed the service, and so we had slightly higher cancellations. Those are some comments. Obviously, we believe Terminix is an extremely strong, extremely stable business. We are going to stick to our core going forward. Which is to continue to drive our retentions forward and look at those initiatives to do so. I think that is actually playing through the P&L even in this first quarter of 2013, relative to slight increases in labor costs.

We're also going to drive this Company forward with respect to new unit sales. You're seeing that actually play through this quarter, too, from the standpoint of slight increases in our sales labor. As we look at the right geographic expansion in this business, for targeted areas of the country, be it areas we're already in, or areas we think we should be.

Okay, great. Thank you, very much.

Great. So, thank you again for your participation in today's call. We look forward to speaking with you again after our second quarter results. Goodbye.

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.