American Home Shield 2004 Annual Report Download - page 25

2004 annual report ServiceMaster 23
Management is encouraged with the progress TruGreen has
made in diversifying its marketing model, with telemarketing
now accounting for about 60 percent of its new sales, down from
over 90 percent just a few years ago. Overall, new sales in
2004 were down less than two percent, reflecting a decline in
telemarketing sales as a result of new restrictions, including
implementation of the National Do Not Call registry, offset by a
substantial increase in sales from new channels such as neigh-
borhood sales efforts and direct mail. In 2005, the Company
anticipates that the proportion of non-telemarketing sales to total
sales will continue to grow. One important timing matter to note
is that as the Company continues to develop these new channels,
the timing of customer sales will trend more heavily toward the
early part of the second quarter versus the historical first quarter
period where telemarketing was more heavily concentrated.
In April 2004, TruGreen ChemLawn acquired the assets of
Greenspace Services Limited (“Greenspace”), Canada’s largest
professional lawn care service company. The Greenspace acquisi-
tion continues to perform above the Company’s initial financial
expectations.
Operating income in the lawn care operations grew nine percent,
with approximately three percent of the increase related to the
$4 million gain realized from the sale of a support facility in the
third quarter. Operating income margins improved slightly,
reflecting the impact of the support facility gain, partially offset
by increased fuel and chemical costs as well as increased variable
incentive compensation costs.
Revenue in the landscape maintenance business was consistent
with prior year levels, reflecting stronger volume of enhancement
sales (e.g., add-on services such as seasonal flower plantings,
mulching, etc.) and a comparable level of base contract mainte-
nance revenue, offset by the effects of branch consolidations and
closures that were completed in late 2003 and early 2004.
Excluding the impact of branch consolidations, revenue
increased two percent. The growth in enhancement revenue
reflects the impact of focused sales efforts and an improving
economy. The level of operating loss in the landscaping operations
improved, reflecting the favorable grow-over effects of the 2003
impairment charge, an increased level of enhancement sales,
and an improvement in materials expense. These items were offset
in part by a weather-related reduction in high-margin snow
removal revenue and higher variable incentive compensation
and fuel costs.
Although the Company believes that TruGreen LandCare has
significant opportunities for further improvement, it is encouraged
by their accomplishments in 2004 and the Company believes
that the recently strengthened management team will continue
to show progress in 2005 and beyond. Key strategic priorities
include continuing to strengthen the sales organization, increasing
customer retention, and improving performance at under-
performing branches by focusing on operating consistency
through better process disciplines, especially in the areas of
labor management and in the pricing of new jobs.
Capital employed in the TruGreen segment increased one percent,
reflecting acquisitions, offset in part by improved working capital
management. Capital employed is a non-U.S. GAAP measure
that is defined as the segment’s total assets less liabilities, exclusive
of debt balances. The Company believes this information is useful
to investors in helping them compute return on capital measures
and therefore better understand the performance of the Company’s
business segments.
Terminix Segment
The Terminix segment, which includes termite and pest control
services, reported a five percent increase in revenue to $997 million
from $945 million in 2003 and operating income of $133 million
compared to $131 million in the prior year, a one percent increase.
Entering 2004, Terminix was making significant changes to
its operating model with the implementation of a dual service
offering for termites and the migration in pest control from
monthly to quarterly service frequency. With the improved
efficacy of liquid termite treatments, the Company began providing
consumers with the choice of receiving termite services through
baiting systems or liquid treatments. As previously disclosed,
with this enhanced termite offering, the Company anticipated
and did experience a shift in the mix of its termite customer base
from bait to liquid. While the estimated lifetime values of these
two types of offerings are comparable, the earnings cycles are
different with liquid customers having less first year revenues
and profits but more profitability in subsequent years. By offering
consumers a choice in treatments, Terminix was able to increase
the average price realized for each of the two treatment alternatives,
thus helping to offset the adverse, short-term revenue and profit
impacts of the mix shift. The mix of new termite sales (“termite
completions”), which represent about a quarter of Terminix’s
total revenue, moved from approximately 80 percent bait and
20 percent non-bait at the end of 2003 to approximately 45 percent
bait and 55 percent non-bait at the end of 2004. As a result, overall
termite completion revenue increased only modestly in 2004,
even though the Company achieved solid double-digit unit growth
in sales and improved price realization for each treatment alter-
native viewed discreetly.