American Home Shield 2007 Annual Report Download - page 26

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Significant declines in telemarketing sales, due to the expansion of Do-Not-Call lists and caller ID mechanisms, more than offset
solid growth in sales from newer channels, including direct mail and neighborhood programs. In 2007 and beyond, the Company
will continue to reduce its reliance on telemarketing. Direct mail programs will become more dominant, supplemented by improved
and expanded neighborhood, internet and other sales efforts.
The decrease in operating income was attributable to investments in new programs to improve customer satisfaction and retention,
as well as increased fuel and fertilizer prices and higher health insurance and variable lease costs. Over the next several years, the
Company believes margins will be favorably impacted by improving customer retention, reducing route manager turnover,
experiencing more normal increases in key factor costs and better leveraging its infrastructure through improved revenue growth
and route density.
Capital employed in the TruGreen LawnCare segment increased seven percent, primarily reflecting the impact of tuck-in
acquisitions.
TruGreen LandCare Segment
The TruGreen LandCare segment, which includes landscape maintenance services, reported a two percent decrease in revenue to
$444 million from $453 million in 2005 and operating loss of ($0.6) million compared to operating income of $4 million in 2005.
Base contract maintenance revenue was comparable to the prior year. Sales activity at the end of 2006 was strong and there was a
modest improvement in customer retention. During 2006, TruGreen LandCare continued to invest in expanding the size and caliber
of its sales force and providing it with improved tools and training. These investments have led to steady improvement in the
relative size and quality of sales proposals, which the Company believes will support improving growth in base contract
maintenance sales in 2007 and future periods.
Enhancement revenue (e.g., add-on services such as seasonal flower plantings, mulching, etc.), which represents approximately
one-third of LandCare's revenue, was consistent with 2005 levels, as solid growth early in 2006 was offset by a large amount of
fourth quarter 2005 hurricane-related work that did not recur.
The decline in operating results was largely impacted by much lower snow removal revenue due to less snow. Although the
Company's snow removal business accounts for less than five percent of the full year revenue, it has relatively high margins. In
2006, gross profit from snow removal work decreased $6 million from the level in 2005. Over the next several years, the
Company's Plan targets significant margin improvement, which the Company believes will be accomplished through: (1) a better
customer mix, reflecting higher average job sizes, stricter pricing on new sales, and the pruning of less profitable jobs, (2)
improvements in branch manager selection and training, and (3) increased customer retention from new operating and account
management initiatives.
Capital employed in the TruGreen LandCare segment totaled $41 million approximately $7 million more than prior year-end,
reflecting the timing and reduced level of accounts payable and accrued expenses.
Terminix Segment
The Terminix segment, which includes termite and pest control services, reported a two percent increase in revenue to $1.08 billion
from $1.06 billion in 2005. Operating income increased five percent to $152 million compared to $146 million in 2005.
The Terminix segment's overall revenue growth reflected solid growth on the pest control side of the business and increases in
termite contract renewals, offset in part by a decline in revenue from initial termite applications. Revenue from pest control
services, which represents approximately one-half of the annual revenues of the Terminix segment, increased six percent, supported
by an improvement in retention, solid growth in unit sales, and the impact of acquisitions. At the beginning of the fourth quarter,
Terminix acquired Safeguard Pest Control, a company that operates in 16 markets across the United States with annual revenue of
over $23 million. This acquisition had a positive impact on the nine percent overall pest control customer count growth, as well as
related retention rates. Excluding this acquisition, the Company achieved a five percent increase in pest control customers and a 170
basis point improvement in related pest control retention rates.
Revenue from initial termite applications declined eight percent as a result of a combination of factors. A weak annual termite
swarm season in most regions of the country drove a significant (16 percent) decline in the in flow of sales leads. However, the lead
to sales conversion rate for the year improved, resulting in a four percent increase in renewable unit sales. The increase in unit sales
was, in turn, offset by the combined effects of a continued shift in mix from the bait service to lower priced liquid treatments, as
well as less revenue being recognized in the current year from prior year sales. This latter factor resulted from the change to a new
bait product in early 2005. The new bait product has different operational protocols, which required less revenue and profits to be
deferred into 2006 than had been deferred into 2005. This factor should not have a recurring impact in 2007 and beyond. Revenue
from termite contract renewals increased four percent, supported by improved pricing and gains in retention.
The operating income comparison includes unusual and offsetting items that did not have a significant net impact on comparability
of results between years. In 2006, the Company recorded $2 million of costs associated with site remediation at two locations in the
first quarter and $4 million of litigation expense in the fourth quarter. Additionally, 2006 included the above-mentioned impact of
less deferred bait revenue and profit. Offsetting these items, the Company recorded $10 million of incremental damage claims
expense in 2005 due to a correction in estimating prior years' termite damage claims reserves. The overall growth in operating
income primarily resulted from lower termite material costs and improved labor efficiency, offset in part by higher fuel prices and
health insurance costs.
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