American Home Shield 2006 Annual Report Download - page 21

Key Performance Indicators
As of December 31, 2005 2004
TruGreen ChemLawn -
Growth in Full Program Contracts 1% 8%
Customer Retention Rate 61.2% 62.2%
Terminix -
Growth in Pest Control Customers 3% 7%
Pest Control Customer Retention Rate 77.2% 78.1%
Growth in Termite Customers 0% 0%
Termite Customer Retention Rate 87.2% 87.9%
American Home Shield -
Growth in Warranty Contracts 6% 5%
Customer Retention Rate 57.4% 55.2%
TruGreen ChemLawn Segment
The TruGreen ChemLawn segment, which includes lawn care services, reported revenue in excess of $1 billion for the first time in
its history. A four percent increase in revenue to $1.02 billion from $981 million in 2004, was achieved in spite of continued
declines in telemarketing sales and challenging weather conditions throughout much of the country. Summer drought conditions
dominated several key regions, adversely impacting both production and customer retention. Although weather can periodically
impact its business in the short-term, the Company believes that its own actions over the medium and long-term will have a much
greater impact on the business.
The four percent growth in revenue was supported by a two percent improvement in price realization, growth in supplemental
residential (e.g., seeding and aeration) and commercial services, as well as a one percent increase in customer counts. Management
is encouraged by TruGreen ChemLawn's efforts to improve price realization. This improvement resulted from disciplined efforts to
reduce discounting on new sales and strategically targeted price increases to the existing customer base. Unit sales increased
approximately one percent from last year's levels, as the Company continues to successfully diversify its sales channels through
increased emphasis on neighborhood selling, direct mail and other efforts. Expansion of these new sales channels have helped offset
continued declines in telemarketing sales, which have been adversely impacted by "do-not-call" restrictions. Sales from
neighborhood programs more than tripled to almost 300,000 customers in 2005, while sales from direct mail efforts increased 14
percent. In 2006, the Company expects that the proportion of non-telemarketing sales to total sales will continue to grow. The shift
away from telemarketing sales impacts the relative timing of customer sales. As the Company continues to develop these new
channels, the timing of customer sales will be more concentrated and trend more heavily toward the early part of the second quarter,
versus the historical first quarter period where telemarketing was more heavily concentrated.
TruGreen ChemLawn's total customer retention rate decreased 100 basis points in 2005, reflecting a sharp drop in the Canadian
operations and a nominal decrease in the U.S. The Company believes the circumstances in Canada are unique, and included the
combination of five acquired brands into one at the beginning of this year, as well as tightened application regulations in certain
markets.
Despite the decrease in 2005, overall retention rates have increased 350 basis points over the last four years taken as a whole, and
the Company is targeting, and anticipating, meaningful additional improvement in the future. To capture that opportunity, the
Company has taken comprehensive steps to improve customer communication and problem resolution procedures, expand quality
assurance processes, and provide focused incentives at all levels.
Operating income totaled $172 million in 2005 compared to $176 million in 2004. The operating income comparison was adversely
impacted by the $4 million pre-tax gain in 2004 from the sale of a support facility. Incremental profits from increased revenues and
reduced safety-related costs were offset primarily by the impacts of higher fuel and fertilizer costs and the first time absorption of
approximately $3 million of first quarter seasonal losses in the Canadian operations which were acquired in April 2004.
Capital employed in the TruGreen ChemLawn segment increased two percent, primarily reflecting the impact of acquisitions.
TruGreen LandCare Segment
The TruGreen LandCare segment, which includes landscape maintenance services, reported a three percent increase in revenue to
$453 million from $439 million in 2004 and operating income of $4 million compared to an operating loss of ($4) million in 2004.
Base contract maintenance revenue increased two percent despite a modest decline in customer retention. Improving customer
retention is a top operational priority. Management believes it also represents a significant and achievable opportunity, with current
rates at least 10 full percentage points below the Company's long term expectations. The Company believes that improvements in
retention will be driven by improved procedures related to customer communications, landscape inspections, and problem
resolution, combined with more selective targeting of sales prospects.
Enhancement revenue (e.g., add-on services such as seasonal flower plantings, mulching, etc.), which represents approximately
one-third of LandCare's revenue, grew six percent and was favorably impacted by more consistent focus throughout the country, as
well as hurricane-related work. The Company believes the investments that it has made in this business, including the development
of a systematically stronger and larger sales organization that is better qualified, trained and equipped, will position it well to realize
the substantial growth potential in this business.