Rollins Inc (ROL) 2007 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. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions.

If anyone has any difficulties during the conference, please press star, followed by the zero, for operator assistance at any time. I would like to remind everyone that this conference call is being recorded on Wednesday, October 24th, 2007 at 8:00 a.m. mountain time. I will now turn the conference over to Susan Garland from Financial Relations Board. Please go ahead.

Thank you. 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 office at 212-827-3777. We will send you to the release and make sure you're 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, pass code 11099316. Additionally, the call is being webcast over www.viavid.com, and a replay will be available for 90 days.

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'll open up the lines for questions. Gary, would you like to begin?

Yes, thank you, Susan. Good morning and thank you all for joining our third quarter '07 conference call. Harry will read our forward-looking statement disclaimer, and then we'll begin.

Thank you, Gary. Our earnings and 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 statement we make today.

Please refer to today's press release and our SEC filings, including the risk factor section on form 10-K for the year ended December 31st, 2006. For more information on the risk factors that could cause actual results to differ.

Thank you, Harry. Revenues for the quarter increased 4.5% over last year's third quarter, while net income grew 10.1%. We're pleased by the increased rate of revenue growth for this quarter and the solid profit performance. Our revenue increase year-to-date was 3.4%, so you can see this quarter's uptick.

Residential pest control, commercial pest control, and termite all contributed to our improved results. Our sales and service programs are working, and have resulted in improvements in both recurring revenues and customer retention. I'm particularly proud of the acceleration in our commercial pest control service offering, which now represents approximately 44% of our business, and grew 6.8% this past quarter.

One of the big positives of this service offering is that it is not weather-sensitive or particularly lead-driven, which does impact both our residential pest control and our termite business.

On our last conference call I indicated that we were in an advertising agency review. We have concluded this process with the engagement of the Richard Group, located in Dallas, Texas, as our agency of record. They will work with us on brand positioning, strategic planning, and advertising creative development.

Currently, the agency has been in the process of learning as much as possible about our business. Following this period, they will be utilizing their internal branding methodology to develop a strategic plan to enhance the Orkin brand while increasing leads. Some of the Richards Group's campaigns based on this process have run for more than a decade, including Motel 6's "We'll leave the light on for you" and other highly recognizable brand positioning involving Home Depot, Corona, and Chick-fil-A.

Richards' first advertising campaign for Orkin will begin in the spring of '08. We're very excited about this new relationship and look forward to a long and beneficial relationship with Richards.

Last quarter, I also mentioned that we would be testing DRTV advertising. At the end of July, we launched a four-week effort using three different campaign ideas and three different commercial lengths that ran from 30 seconds to two minutes. On a positive note, we saw good interaction with the brand and response to our offer.

We experienced an increase in branded web searches, and an uptick in leads. We also learned some things that could improve lead closure. All of this will be taken in consideration as we decide whether to use DRTV next year.

We're continuing to expand Orkin's global footprint. During this quarter, we established a franchise in the Dominican Republic, and last month we made an entry into Asia with the establishment of a franchise in South Korea. This latest franchise involves this country's leading food distributing company. We believe that this new partner will offer tremendous opportunities in this very important market.

Our franchise partner in the United Arab Emirates, which we announced earlier this year, is also working hard to grow their business considerably through a bid on the largest pest control contract to ever be awarded in this region. The scope of this opportunity could be as much as $50 million over the next three-year period and well acknowledges the immediate prestige that accompanies an Orkin affiliation.

In addition to the three international franchises just mentioned, we also established a franchise in Honduras earlier this year, for a total of four international franchises in '07.

Currently, we have 58 franchises, seven of which are international, and the balance of 51 here in the U.S. We believe our success in attracting quality international franchisees testifies to the high recognition and value of our Orkin brand, and our ability to provide a remarkable level of service and marketing knowledge and business expertise.

Initially, franchisees receive comprehensive training, materials, and systems with everything they need to know to run a state-of-the-art Orkin Pest Control business. We also provide ongoing training to keep their employees up-to-date on the latest sales and service techniques. As part of the Orkin team, they have access to the industry's most advanced equipment and materials as well as our significant buying power, which translates into lower competitive costs. And the Orkin support center in Atlanta is just a phone call or email away.

As we readily emphasize, our employees are our greatest asset, and we take seriously our responsibility to provide them with ongoing opportunities to advance their careers in Rollins. On September 26th, we held our first Company-wide Rollins Orkin women's leadership conference. Representatives from Rollins, Orkin, Western, ECO and IFC joined their counterparts in a two-day Atlanta meeting.

The total 84 women involved in various management responsibilities gathered to meet and network with their peers while participating in a variety of leadership workshops. The meeting was designed to help everyone understand the importance of their contributions, and to further develop skills for recruiting and/or preparing other women to assume a leadership role in our Company. This event was a great success, and we look forward to future conferences.

Testing and validation continues on our routing and scheduling initiatives, which we have named Orion. Two groups of field representatives have been in our home office during the last few weeks. One group performs sales validation exercises on Orion while the second group came in to test service routines and business processes. Feedback following these sessions were highly positive, and we will continue these validation sessions in November and December.

Pardon me. Sorry for my coughing.

As one would expect, some hiccups have been identified which our programming team is working hard to resolve. At this time we don't see any show-stoppers, and once we overcome these last hurdles, Orion is targeted to be in operations in 2008.

In advance of a full Orion implementation, we're doing some preliminary route optimization in most of our locations using MapPoint software, which is an offshoot from our GPS system. while MapPoint will be replaced by a more comprehensive Orion application, this exercise is important, as well. It will make the conversion to Orion go easier, and it will be an important first step in standardizing our customer data while giving us some preliminary productivity improvements.

In closing, I'd like to add that while we don't take anything for granted in our business, it's important to note that given the current economic situation and very unusual weather patterns, that Rollins has performed well in spite of these obstacles. Our business continues to progress, and our growing recurring revenues and favorable customer retention are good indicators that we're working hard for the shareholders.

We're committed to having another successful year, and one where we will also be laying the foundation leading to a successful 2008.

I'll now turn the call over to Harry, who will walk you through our financials. Harry?

Thank you, Gary, and why don't you get some water there?

Yes, I need something.

Today we reported third quarter revenues grew 4.5% to $238.1 million compared to $227.8 million for the third quarter ended September 30th, 2006, and diluted earnings per share for the quarter of $0.28 per share, a 12% increase. This compares to net income of $17 million, or $0.25 per diluted share for the third quarter of 2006.

I'm pleased to talk about this quarter's revenue growth and the positive growth in all of our business lines. First, as Gary has already boasted about, our commercial pest control, which year-to-date represents around 44% of our business, grew 6.8%.

Commercial fumigations are a small piece of the overall commercial business, representing approximately 10% of the commercial business. However, due to their non-recurring nature, they do not necessarily fall in the same quarter with previous year quarter patterns, and can distort somewhat the growth rate of the commercial business.

I think it gives you a better insight into the strength of our commercial business if we look at the growth excluding the commercial fumigation, as well. With all that said, our commercial business, excluding fumigation, grew at 7.6%, up from the 6% in Q2 on the same basis.

For some time, we have stated that we felt our commercial pest control offerings have the opportunity to outpace the residential pest control growth rate, and this quarter's growth validates that assumption. With the continued maturation of our sales force and the influx of sales proposal activity, we look forward to continuing positive momentum from our commercial pest control business.

Our residential pest control service, which now represents around 36% of the business, grew 3.3% while our termite service line reversed its decline of the last two quarters and grew 1.4% in the quarter. Termite results were especially encouraging, since termite demand, industry-wide, was lackluster.

For the quarter, our gross margins improved by 60 basis points. This represented an improvement to 48.3% versus 48.7% last year. The favorable margin is primarily due to continued improvements in the costs of risk as it relates to our auto worker's compensation general liability due to the success of the Company's loss control programs.

This was partially offset by an increase in group medical costs and in the Company's termite provision. Increase in this quarter's termite provision is more a reflection of having significantly more favorable claim development last year in the third quarter while this year, they were slightly unfavorable.

Overall, new claims are continuing to trend downwards, and paid claims for the year are less than 50% of what they were a year ago. Sales, general, and administrative expenses through the third quarter ended September 30th increased $3.7 million or 4.9% to 32.8% of revenues from 32.7% for the third quarter ended 9/30/2006. The slight margin deterioration was the result of higher salary expense related to the expansion of our sales force across all service lines, and was particularly offset by reduction in our summer sales program costs.

The Company continues to generate superior cash flows. Our cash position and balance sheet remains strong. We ended the quarter with $81.8 million in cash and cash equivalents with basically no debt. Net cash provided by operating activities this year totals $78.5 million, a $17 million increase over last year. $5 million of the improvement represents pension funding that was done in the second quarter last year. We have not made a contribution to the plan this year, and are evaluating if we need to as it nears full funding.

Remember, our cash generation will be greater than earnings as half of our depreciation and amortization, or $10.1 million in the first nine months, represents write-offs of intangibles, primarily customer contracts valued at the time of acquisition. This represents a significant non-cash charge to the P&L. Based upon our fully diluted shares outstanding, it represents a non-cash, after-tax charge of $0.12 to GAAP earnings this year.

For those investors who've been lamenting not buying the stock earlier when it was under $20, our board has addressed your concerns. In case you missed the announcement, our board yesterday approved a three-for-two stock split. The split will be affected by issuing one additional share of common stock for every two shares of common stock held. The additional shares will be distributed on December 10th, 2007, to holders of record at the close of business on November 12th.

In addition, the Company declared its regular quarterly dividend of $0.075 per share. This cash dividend will be paid on the pre-split shares. The board of directors will reevaluate the amount of the regular quarterly dividend, as it has historically done, at the January board meeting.

We were not active this quarter with our share buyback program, though the Company has repurchased a total of 1.2 million shares year-to-date. A total of approximately 1.1 million additional shares may be purchased under previously approved programs by the board.

As we enter the fourth quarter, we look forward to being able to report another year of steady and consistent sales and earning growth. Our focus remains sharply directed on the execution of our growth and operational strategies.

I'll now turn the call back over to Gary.

Thank you, Harry. We're now ready to open the calls for any questions that you might have.

Thank you. Ladies and gentlemen, we will now conduct the question and answer session. (Operator Instructions.) One moment, please, for your first question.

Your first question comes from Jamie Clement from Sidoti and Company, please go ahead.

Good morning, gentlemen.

Good morning, Jamie.

Gary, could you provide us a little bit of extra color in terms of where or what you saw as the drivers of the commercial division's revenue growth acceleration?

Well, the big drivers are the fact that we have expanded our sales force. We began in, I guess, about 18 to 24 months ago. We've as a result increased the number of sales managers that we have in that business. We have put in some computer software to track the performance of this group of people, and we've raised our average prices quite a bit. So it's been a multifaceted effort, and we think that we've got the momentum that we would expect this to continue to accelerate.

Okay, great. With respect to your residential business and some of the recent weather patterns over the last month or two, I think it's been a little unusual. Is there anything that the investors need to watch out for with respect to the fourth quarter or, you know, the next couple of months with respect to the weather in your residential business? I'm just not sure we've seen this phenomenon before over the last couple of years.

Well, I've been in the business 40 years and I've never seen a weather situation like this year. No, the greatest impact the weather has on the business is in the insect reproductive cycle, and typically influenced in the spring and the early summer. So the only winter weather issues that you have is if you have phenomenal snowfall, and typically that's very moderated because the cities that are influenced by snow to that degree have good equipment and ability to clear the roads.

So we -- and again, the weather vulnerability is really in the beginning of the season and not at the end of the season.

Okay. And last question with respect to termite, obviously returning to growth on the top line there, you know, but also I think you had discussions on paid claims being down. Do you look at the claims activity of your termite business and the steady improvements that you've seen there, I mean, is that a function of technician training? Because I know that's been a point of emphasis at Rollins over the last 12 to 18 months.

I think that just like any kind of risk-related facet of business, whether it's workman comp claims or casualty claims or vehicle claims or whatever, there's always a tail and you don't see immediate response when you do corrective activities. And we're really reaping the benefits of things that we've started to do in the very late '90s and the early 2000s in the form of the, as you mentioned, training, changing our guarantees, changing some of the language in our contracts, having a quality control team that covers the United States. So we're just finally seeing the benefits of a lot of different activities.

Okay, thanks very much for your time.

Thank you.

The next question comes from Clint Fendley from Davenport. Please go ahead.

Thank you. Good morning, gentlemen. Gary, I wondered if you could comment a bit, circling back to the strength that you've seen on the commercial side. Could you update us maybe on where you are on the industry specialization of your sales force and the selling efforts there, and how widespread the vertical sales effort is across the organization?

Okay, well, to give you some idea, we're the largest commercial provider in North America, so we have a wonderful foundation to grow this business. We have numerous national accounts that we don't do all of the locations that they have, and that's pretty typical of national accounts. But it also gives you the opportunity to continue to add more.

As far as the verticalization throughout the -- within the Company, we have a vertical sales organization in all the locations or all the states and divisions that we have within Orkin, within Western, and to that extent, IFC. So we've completely verticalized. I think we've got a lot of opportunity. As I mentioned a little bit earlier, you know, our momentum is going in the right direction.

As your sales force ages, they get more and more proficient. They have more proposals that they have in process, and their confidence builds and their skills build. So we really think that we've got it moving in the right direction, and we just need to get it going a little bit faster.

All right, I think you've added, roughly, what, 150 salespeople over the last year or so. Could you update us on how the turnover has been there, and maybe even their efficiency gains here in the latest quarter?

Well, our productivity has improved. I don't really have those figures, you know, before me. I think Harry and I can get back with you on that, but our turnover has improved within this group.

Our average revenue per salesman has increased. It takes probably close to six months before I think a salesperson who comes on board to begin really hitting their stride. You know, part of it is learning certainly the business. A lot of it is getting -- you don't knock on a door and come away with a contract the same day. So it's working your proposals.

So the maturation and maturity and sales effectiveness comes down the road, so. And we've seen -- and I don't have how many consecutive quarters here at hand, but we've seen significant increases in what the average revenue sold per salesperson, and we see it as -- we compare the age of the salesperson, his experience, and his revenue, and the longer they're here, the much more effective they become.

So we're now nine months into the second phase ramp-up of the sales force, and I think you saw it in the value of the business we've put on. I don't think we've had a month this year where we haven't seen a 10% -- less than a 10% increase in new sales over a year ago sales. So they continue to put up good numbers over what they were selling the year before, and sell more. So we're -- as I think Gary said earlier, we expect the momentum to continue and build.

One of the things that we have is kind of a laboratory to the extent that we started this on the west coast 24 to 30 months ago, and as a result of the progress that we made gave us the confidence that we needed to roll this out in the rest of the country. So we've kind of seen the phenomena, as Harry indicated, of what happens when the sales force is six months old and eight months old and so forth.

So I think that we're pretty much on target. One of the other things that happens is that we have the ability, when a sales manager has six salesmen that are successful; you can start giving him a couple more. So we should be able to improve our span of control with our sales management team as we gain success with the existing salesmen.

So as you look out to 2008, is it fair to say you'll be focused more on maybe adding additional heads to the sales force or maybe in raising the average revenue per your salesperson?

I think it will be, and of course when you add new people, you know, there is usually some adverse impact on the total average because these new people are not selling as much as the older people. But I think in the relativity of it, we certainly are not expecting a big program in that regard.

I think that we're expecting the total number of salespeople, the existing salespeople to improve in their productivity. We would expect our prices to go up because we are targeting really higher-end accounts. Certainly we don't reject any business, but we spend a lot of time specializing, teaching our salespeople to specialize with specific accounts, whether they be hotels, tablecloth restaurants, food processing, and distribution companies.

So I think that we really look to several areas contributing in '08, so we're not just counting on just doing this with bodies. I think that we're counting on kind of a multifaceted payout.

Thanks, Gary, that's helpful. And a final question, Harry, obviously the cash balance is up there pretty nicely now. Not a lot of share repurchases in the quarter. Could you talk about your appetite over the longer term for continued buybacks and anything as well as kind of updated from the acquisition pipeline, and where that might stand now?

Certainly. Our number one priority and use of cash has always been acquisitions. We have a healthy cash position and we're hoping some of our potential acquisition candidates out there are looking at our balance sheet and more than willing to give us a phone call and continue to start dialogues. So we're hoping that the acquisitions come along.

Glen was recently -- this past week was the National Pest Management Association's annual convention. This year it was down in Orlando and Glen Rollins was down there and met with a number of candidates and I think the general feeling was that people -- it seems to run in waves. No one wants to sell and then it seems like sometimes the window of opportunity might open. But we shall see. We certainly hope, and we have the cash and we'd love to buy some nice, good-sized companies.

And who knows, maybe the adverse weather is impacting some of these smaller regional players, smaller players that are thinking it's a good time to turn the business over.

In terms of share repurchase, we are committed to continue to buy back shares. We've been opportunist in buying the shares. We bought 1.2 million this year, a million last year, a million before that, so I would expect us to continue to buy back shares. We won't necessarily be in the market every quarter, but by no means have we changed our plans. We just have to adjust our price targets.

Good deal. Thanks guys, nice quarter.

Thank you.

Thank you.

Ladies and gentlemen, if there are any additional questions at this time, please press the star, followed by the one. As a reminder, if you are using a speakerphone, please lift the handset before pressing the keys. One moment, please, for any additional questions.

Mr. Rollins, there are no further questions at this time. Please continue.

Well, thank you all for joining today's call and for your interest in our Company. We look forward to your participation on our next quarter's call. Thank you.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.