Rollins Inc (ROL) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Rollins third quarter conference call. At this time, all participants are in a listen-only mode mode. Following today's presentation, instructions will be given for the question and answer session. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded, Wednesday, October 25, 2006.

At this time, I would like to turn the presentation over to Susan Garland with the Financial Relations Board. Please go ahead, ma'am.

Thank you. Good morning. By now you should have all received a copy of the press release. However, if anyone is missing a copy and would like to receive one, please contact our offices at (212)827-3777, and we will send you the release, and make sure that you are on the Company's distribution list.

There will be a replay of the call which will begin one hour after the call and run for one week. The replay can be accessed by dialing 1-800-405-2236, passcode 11073223. Additionally the call is being webcast over www.viavid.com, and a replay will be available until November 1st, 2006. On the line with us today are Gary Rollins, President and Chief Executive Officer, and Harry Cynkus, Chief Financial Officer and Treasurer. Management will make some opening remarks, and then we will open the line for questions.

Gary, would you like to begin?

Yes, thank you, Susan. Good morning and welcome to our third quarter of '06 conference call. Harry will read our forward-looking statement disclaimer, and then we will begin.

Thanks, Gary. Our earnings release discusses our business outlook and contains forward-looking statements.

These particular forward-looking statements, and all other statements that may be made on this call excluding historical facts, are subject to a number of risks and uncertainties, and actual results may differ materially from any statements we make today. Please refer to today's press release and our SEC filings, including the risk factor section of Form 10-K for the year ended December 31, 2005. For more information on the risk factors that could cause actual results to differ.

Thanks, Harry. We were pleased with our revenue growth of 8.8% for the second quarter. Excluding The Industrial Fumigant Company's contribution, which we didn't have last year, revenues grew 4.6%.

Once again from a sales perspective we experienced improvements in our three primary areas of business, with the principle contributors being our Commercial and Residential Pest Control segments. While our Termite increases were minimal, given the decreases experienced by some others in the industry who will take it, the progress that we are enjoying as a result of the employees implementing growth initiatives that we started over the past year and a half.

Our rate of revenue increase confirms that our programs are working, although it is not as fast as I would like. In addition to our sales force and sales management team expansion, our service tech sales continue to pay dividends. Pest control technician sales are up 16%, and we are on-track to have technicians add over 50,000 customers this year, and over $20 million of related revenue.

We are also pleased to report that pest control customer retention is tracking to achieve our best year ever. We have improvement in termite retention as well, primarily as a result of our new termite contract sales program.

Thousands of Orkin termite customers have guarantees that are expiring, and we have a great opportunity to renew their protection and keep them as a customer. In support of increasing our termite control growth rate, we have formed a Termite Advisory Council, involving some of our best field and employees to develop additional ways to increase termite revenue, and ensure excellence in new related products and services.

At the same time, our worker retention continues to improve as it has for more than five years. We are dedicating more time and effort to the selection and hiring of good people, and our award winning training is helping us retain them. In addition to helping retain our employees, our training programs are a key component to improving customer service and customer tenure.

We continue to expand nd improve our training programs, whose centerpiece is the launch of Orkin TV, our interactive satellite television communication. This company-wide network links our 8,000 employees through live and video On-Demand broadcast technology.

In recognition of this tremendous training investment, David Lamb, working as Vice President of Learning was recognized with the Learning Practice Silver Award in the Learning Innovation Category. The Learning Practice Award Competition is sponsored by Chief Learning Officer Magazine.

We recognized an important piece of customer service is adapting to our customer's needs, lifestyles and designs. The first step in this regard is to make it easy for them to find Orkin. We want to provide easy access to the services they want, and to be the first company they think of when they are considering any type of pest control service. To that end, many customers are finding Orkin on the internet. And as a result we are receiving an ever increasing numbers of inquiries concerning our programs and services.

Currently we are projecting our website would generate over 70% increase in leads, over 2005 web leads. Additionally this year, two-thirds (2/3) of our pest control leads will come from divisional cost centers and branches, while the remaining one-third (1/3) will come via 1-800 phone numbers and web inquiries, handled by our national Orkin customer service center. Today a growing amount, though less than half, of our termite control leads will also come to us through our Orkin customer service center as well.

To build on this momentum and to further encourage potential customers and define Orkin on the web when they are searching for residential pest control and termite needs, we have continued to acquire different word combinations to assist them in their search. Along with listings in the internet based yellow pages, we estimate that over 200 million people will see Orkin ads on the web this year. We are using the internet to market to our commercial customers as well. Recently we have launched E-mail campaigns to current customers and prospective customers, to further demonstrate our expertise in targeted industry segments.

We are learning as other companies are that the internet provides numerous opportunities to obtain and retain customers. As an example, one of our national accounts with a large franchise network has created a website, so that their franchises can purchase Orkin services directly that through their company's internal intranet site. One of the means that Orkin is doing that is doing a better job of converting phone and web leads to customers through quicker response, more effective communications, and customized service offerings. You can imagine this presents a host of challenges and disciplines, however, it deserves a lot of our attention.

I know that many of you are interested in an update on our routing and scheduling initiative. Since our last conference call, senior management from the software development company we are working with visited Atlanta, to discuss the project and to acknowledge their unwavering commitment to the ultimate success of this endeavor.

They have doubled their resources on the project, and we have seen significant progress as we begin to overcome some of the initial issues, and are solving problems on a much more timely basis. While the delay is disappointing, we remain enthusiastic concerning the opportunities and benefits this initiative will provide us once implemented. We regret that like the majority of significant IP projects, the conclusion of this endeavor is taking much more time than we anticipated.

During the quarter, we repurchased 127,306 shares of common stock. In total, approximately 2.3 additional shares may be purchased under programs previously approved by the Board of Directors. In closing, Orkin is making tremendous investments in several areas to improve our ability to grow the Company, while never losing the focus on providing ever improving service to our customers.

I will now turn the call over to Harry, who will take you through our financial results for the quarter. Harry.

Thank you, Gary. I am pleased to share with you more detail on our financial results. Today we reported third quarter net income of $17 million, with diluted earnings per share of $0.25. This compares to 15.1 million, or $0.22 per diluted share for the third quarter last year, representing a 12.8% increase in net income. That brings our nine-month year-to-date net income to 47.3 million, with diluted earnings per share of $0.70. This compares to 45.4 million, or $0.67 per diluted share last year.

However, if you recall, last year in the second quarter, we curtailed the Rollins Inc.'s pension plan, and recognized an additional noncash $2.5 million gain net of taxes, or $0.04 per diluted share. Excluding the impact of the pension curtailment gain in 2005, the Company's EPS has increased $0.07, an 11.1% increase compared to the same period last year.

Let us discuss the results as to further details, starting with revenue. Our revenue in the second quarter rose 8.8% to 227.8 million, compared to 209.3 million for the third quarter ended September 30, 2005. Our most recent significant acquisition, IFC, contributed revenues of 8.8 million, their third quarter traditionally being their strongest. Over the first nine months of this year they contributed $19.8 million. Excluding the impact of IFC, revenues have increased 4.6% in the quarter, and 4.4% year-to-date.

Breaking down our revenue numbers further, commercial business which represented almost 43% of our overall business in the third quarter, grew 17.1% including the impact of the IFC acquisition, and more importantly, grew 5.5% excluding the contribution of IFC.

Residential pest control that represents almost 39% of the business showed the greatest growth, increasing 6.1%, up from the second quarter when it grew 4.7%. And we are especially pleased by the improvement we experienced in our residential pest control gross contract revenue, or GCR, this is our monthly recurring revenue.

Going into the fourth quarter we don't expect to be net adding new customers. So what is important is the amount of GCR we carry into this slow period. With a growth over the last three quarters, we will carry a 5.2% GCR advantage into the quarter, versus 1.2% a year ago. One of the strengths of our Company is the amount of recurring revenue we enjoy. Termite, which contributed around 18% of the business, was basically flat.

Gross margin for the quarter improved to 47.7% in the third quarter of 2006, versus 47.4% last year. The increase in margins is due to favorable group medical costs, reduced material and supply costs, and reduced service salaries representing increased improved productivity. This was partially offset by increased fleet claim experience, and the addition of IFC.

The drop in fuel costs came too late in the quarter to help. Needless to say, with more than 30 million miles driven in the quarter, total fleet ran 40 basis points over a year ago, impacting both cost of services provided, and sales general administrative expense.

SG&A expense decreased to 32.7% of revenues in the third quarter of 2006, from 32.8% of revenues in the third quarter of 2005. It is the lower SG&A of IFC, as well as favorable group medical costs, reduced costs of our summer sales program, and lower bad debt expense, more than offset the higher salary expense related to the approximately 100 plus associates the Company has added to the sales force.

Depreciation and amortization totaled 6.7 million for the third quarter, with amortization of intangibles of 3.5 million, and depreciation at 3.2 million. The amortization of intangibles primarily customer contracts valued at the time of the acquisition represents a significant noncash charge to the P&L.

Under GAAP, we write off the value assigned to customer contracts acquired in acquisitions over their economic life, while we fully expense all costs in acquiring new customers internally. In 2006 total amortization of our intangibles expects to be approximately $14 million, based upon our fully diluted shares outstanding, it will represent a noncash after tax charge of $0.12 GAAP EPS this year. Our tax provision for the quarter is 38.8%, bringing the year-to-date provision to 39.6%.

Our balance sheet remains strong. Cash and cash equivalents this quarter stand at 53.8 million, with practically no debt. Our cash flow remains very strong, our net cash provided by operating activities year-to-date totaled 60.5 million, though decreasing 7.8 million from prior year. The decrease has more to deal with collections and timing, than any fundmental change in the business.

The decrease was due primarily to two factors. One a larger increase in accounts receivable, 6.6 million, and this was primarily due to the increase in revenues and the system conversion for our Canadian operations.

The other factor was a decision we made to fund our frozen pension plan earlier this year. We added this year's full contribution of $5 million in the second quarter, while last year the contribution was made in the fourth quarter. We continue to return money to our shareholders through our dividend, which was increased 25% this year, as well as our ongoing stock buyback program. Through the two programs we have returned over $32 million to our shareholders year-to-date.

Overall, we continue to feel positive about our results, and look forward to reporting continued growth and improved results. Gary, I will now turn the call back over to you.

Thank you, Harry. We are now ready to open the call for any questions that you might have.

Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. [OPERATOR INSTRUCTIONS] One moment please for our first question. Our first question comes from James Clement with Sidoti and Company. Please go ahead.

Good morning gentlemen! Harry, if I could ask you a question about capital spending. Obviously last year and thus far this year, a little bit higher than what it historically has been. Can you help us, can you break down for us and maybe in general terms, you know, the level of what you would consider to be maintenance CapEx, versus investments in the business, expansion opportunities, et cetera, and then maybe give us a sense of this year, what that kind of investment spending has looked like, what you have spent on, et cetera?

Sure. One minute. This year the CapEx is running a little higher than normal, and a pice of that represents some money we reinvested in some land and buildings, and we typically don't invest in land or buildings, but we had some tax free exchanges the year before, and we rolled that money into the CapEx, also when you break it down, you know, a lot, typically our CapEx runs 12 to $16 million a year. And IT is really the variable portion that can drag that higher if we had a particular project, for example, now the routing and scheduling, we are working on SOX in the past, a project to improve our HR and payroll system. So, you know, if you look routine and strip out the IT, it is about 7 to 10, and then depending on what we do on the IT side, we will increase that.

So, there is nothing that is fundamentally changed that would you know, that would have caused your maintenance Cap Ex level to rise above the mid-teens level, in other words, right?

No. No.

Okay. Just asking for a little bit of update about the sales force additions, obviously on the last couple of conference calls, you have discussed that a fair amount, and certainly attributed some of the acceleration of the top line growth to that. How do you feel that has shaped up? Do you feel the majority of the new hires have sort of ramped up their proficiency levels to be contributing like, some of the more veteran guys that you have, or is there still room for improvement?

There is a lot of room for improvement. I think what we are seeing is the more mature operations like the Pacific division, the West Coast division that started a couple of years, ago and I guess in the Atlantic division in the Northeast, were kind of the next to follow, you can see the momentum really building and making very solid improvements in those areas, and take it all the way down to the more recent conversions where, they are still struggling with making sure they have the right people on board, and you know, putting in the accountability elements, et cetera.

And we have been very encouraged with our verticalization of the sales management and the sales program. We have continued to expand that, and I really think that we have got, which is not the easiest thing to do, but I think we have got our managers and our different levels really spending a lot of time on sales, and understand that you know, that this is something that is going to be very important to our future. And the positive thing is that our customer service indicators continue to improve, so we are not shifting emphasis we are adding emphasis.

We had one of the best retention, pest control retention quarters in the company this last quarter. We also had, I think a 13% improvement in those service allowances. So, you know, the thing that makes it complicated is when you take on a big initiative that you don't deemphasize something that is very important, and at this stage that is not happening to us.

Okay. And last question, if I may, then I will turn it over to somebody else. From where I sit and I am not privy to a ton of information, but it looks like there have been a couple, a handful of acquisitions in your industry, mostly smaller ones. Can you give us a sense of how you see the acquisition environment? It doesn't sound like much has changed over the last couple of quarters.

I don't think so. It is really kind of lumpy, Glen and I are leaving after this call to go to Dallas where they have the Annual Convention, and we are certainly going to renew some of our relationships with the companies that, and people that we are very much interested in. You know, we feel like we are opportunists, we are there and we are available, I think our Best of Class Award that we won last quarter among companies over $6 million is really a testament to the Company. You know, Orkin has not always been revered by the competitors.

It is kind of hard sometimes to have a good relationship with someone that you are aggressively advertising against, and marketing against, so I think that's a testimony to the fact that we have earned the respect of the industry, and have made good improvements in that area. I wish there was some way that I could predict with some kind of assurance our success.

We have the money. We have the track record. One of the wonderful things that we can say is just call the last three or four companies that we have acquired, and talk to the people, and see what they say, and I think that puts us in a very strong position.

Yes, I think that's a good point. Thanks a lot for your time.

Thank you.

Thank you, sir. Ladies and gentlemen, [OPERATOR INSTRUCTIONS] One moment please for the next question. [OPERATOR INSTRUCTIONS] One moment please. Management, at this time, we have no additional questions in the queue, and I will turn it over to you for any closing remarks.

Well, thank you for joining our conference call and for your interest in Rollins and Orkin. We look to your participation on our next call, when we report our full year results. Have a good day!

Thank you, sir. Ladies and gentlemen, at this time we will conclude today's teleconference presentation. We thank you for your participation on the program.

If you would like to listen to a replay of the conference, please dial 800-405-2236, or (303)590-3000, with the access code of 11073223. Once again, if you would like to listen to a replay of today's conference call, please dial 1-800-405-2236, or (303)590-3000, with an access code of 11073223.

We thank you for your participation on the program. You may now disconnect, and please have a pleasant day.