Rollins Inc (ROL) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you so much for standing by. Welcome to the Rollins second-quarter conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) As a reminder, this conference is being recorded today on Wednesday, July 23, 2008.

I would now like to turn the conference over to Mr. Scott Eckstein of the Financial Relations Board. Please go ahead, sir.

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 the release and make sure 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 with the pass code of 11-11-6485. Additionally, the call is being webcast over www.viavid.com and a replay will be available for 90 days.

On the line with me 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 lines up for your questions. Gary, would you like to begin?

Yes, thank you, Scott. Good morning and thank you all for joining our second-quarter 2008 conference call. Harry will read our forward-looking statement and disclaimer, and then we will begin.

Thanks, Gary. Our earnings release discusses our business outlook and contains certain forward-looking statements. These particular forward-looking statements and all other statements that may be made on this call, excluding historic 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 Factors section on Form 10-K for the year ended December 31, 2007, for more information on the risk factors that could cause actual results to differ.

Okay. Well, we are very pleased to have reported an 18.7% increase in revenue for our second quarter. As reflected in the press release, a large percentage of this improvement resulted from our recent acquisition of HomeTeam Pest Defense. Excluding HomeTeam, our 4.7% growth was an uptick from the second quarter and was contributed by both our commercial and residential pest control business lines.

During the quarter, we also experienced an increase in new residential pest control leads, which continues to confirm that the demand for our service is stable and, in fact, this quarter increasing.

This leads to a question on many people's mind these days, and that is -- is the economic downturn affecting your business? This is an understandable question, since we all see the current economic environment having an effect on most businesses across the country.

Fortunately, we aren't experiencing this handicap today. Historically, as I have stated in the past, our business has proven to be recession resistant. We're not bulletproof or completely immune to bad economic environments. Demand may slow somewhat, but historically we have continued to make progress both revenue and profit-wise in the downturns.

We believe that there are several contributing factors to this phenomenon. Three are internal. First, we have stayed focused on our core competencies, residential and commercial pest control. We are not diversified, thereby avoiding exposure to businesses that don't have the same virtues as pest control.

Additionally, over the years we have worked hard to become a leader in our field, so we have more influence on our fate than many other companies do.

Lastly, we have a significant -- over 80% of our revenue is recurring revenue, which means that each month starts with that big advantage.

Externally we have found that in good times and bad, our customers have a high regard for what we do by protecting their health and property. The commercial customers must have pest control service; and homeowners need to protect their home against the threat of termites. The number three phobia in the US today is the fear of insects. So these customers put keeping insects out of their home as a high priority.

These four factors are all realities that make our prospects, customers, and business more stable than most during economic downturns.

Back to the quarter. Excluding the impact of HomeTeam, our margins improved this past quarter. At the same time, we continually look to improve our customer service and customer satisfaction.

Our every-other-month service is one such example. It has grown in popularity, especially with working families, and our pest control retention has improved as well.

At the same time, we have advanced our marketing technology to ensure individuals and businesses seeking pest control can find us easily on the Internet. Our national Orkin customer service center is contributing to our revenue improvements in this area as well.

These significant initiatives, along with other steps, have led to higher customer retention and to more new customers.

Our commitment to improve our business doesn't stop. We never lose sight that there is always areas in which we can make advancements. We have numerous opportunities to further improve our business, to the benefit of our customers, employees, and Company.

As an example, the escalating gas expense has been met with numerous initiatives to reduce miles traveled, provide more GPS oversight, purchase fuel better, as well as other steps to reduce the impact that this cost has had on our business.

Let me talk for a moment now about HomeTeam Pest Defense. This acquisition was a very positive step for our Company. I spoke about this some on our first-quarter conference call, but now we've got three months under our belt and we're extremely pleased with this acquisition. We believe that both for the short term as well as the long term, HomeTeam will be regarded as a vital asset of Rollins.

When we began our discussions with HomeTeam, we felt that they were an exceptional company. Following our due diligence, we were even more convinced that they were a perfect fit, and this has quickly been affirmed. In the HomeTeam's first 90 days with us, they are well ahead of our plans for them, having been accretive in the second quarter.

HomeTeam provides a solid and growing revenue base consisting of both its new construction, new homeowner, the Taexx tubes-in-the-wall customers, and their conventional pest control customers.

I think there has been some confusion over HomeTeam's revenue mix which is important to clear up. First, more than 90% of HomeTeam's business is pest control, servicing residential customers with conventional pest control and termite treatments just like Orkin does, along with their tubes-in-the-wall pest defense system. Less than 10% of their revenue comes from sales to homebuilders for installing new systems for future residential customers.

Second, HomeTeam has extremely high customer retention rates, one of the highest in the industry, coupled with very high customer satisfaction ratings.

Third, even as home construction has slowed there are numerous homeowners that have yet to activate their systems. We expect to benefit from this untapped asset in the future.

One other situation I would like to address is that the tubes in the wall are not one-half-inch or even one-quarter-inch PVC tubes, like some people have envisioned, but they are an eighth of an inch or less. It's actually very thin plastic tubing, smaller in thickness than a straw -- actually more like fat spaghetti. This small size is more conducive to minute pesticide delivery, plus provides more efficient installations.

HomeTeam's success is largely the result of an exceptional management and field team. As previously mentioned, that was an important consideration for us when acquiring this business. At Rollins, it's all about people, our most important asset. We're very proud of what Bob Wanzer and his team have accomplished in such a short time and with a can-do attitude.

We believe that we can help them further leverage their business and improve their profitability. When we acquired HomeTeam, their margins were 7% on a trailing 12-month basis; and we believe that we can double those margins in the next four years.

In fact, we've already seen margin improvement. Using our buying power, risk management practices, and other efficiencies such as fleet management will all be making an impact.

Turning to other areas, I'm happy to report that our new national advertising campaign is being well received and having a positive effect on our lead generation.

I hope you've all seen our big bug commercial and feel, as we do, that they are memorable. If you haven't seen one, you can go to our website, www.Orkin.com, and watch the Orkin man working hard to protect homeowners from a six-foot cockroach and termite.

During the second quarter, we repurchased 260,775 shares of the Company's stock under our share repurchase program, taking advantage of the current stock market environment. We also reduced our debt under our credit line by $36 million, which is a tribute to the cash generating power of Rollins.

I would like now to turn the call over to Harry, who will discuss our financial results in greater detail.

Thank you, Gary. I am also proud to report the second-quarter results, the first reflecting our most recent acquisition of HomeTeam. I think the results speak volumes about the resiliency of the business even in this year's more difficult economic conditions.

We've had what I feel is a great quarter. We produced record revenue, record profits, and generated a lot of cash, allowing us to pay back $36 million of the $90 million we drew down at the beginning of the quarter to finance the HomeTeam acquisition, while also buying back $4.2 million of our stock.

Let's get into details. Revenue for the second quarter grew 18.7%. Revenues totaled $284.5 million compared to $239.6 million for the second quarter last year.

Net income for the quarter is $22.7 million as compared to $21.2 million last year, a 7.1% improvement, while diluted earnings per share this quarter is $0.23, a 9.5% improvement over the split-adjusted $0.21 reported last year in the second quarter.

Earnings before interest, taxes, depreciation, and amortization, EBITDA, was $46.4 million, increasing 12.3% over the second quarter last year. EBITDA grew faster than net income due to $1.9 million of amortization of intangibles relating to the HomeTeam acquisition recorded for the first time this quarter.

Our most recent significant acquisition, HomeTeam Pest Defense, contributed revenues of $33.7 million. Excluding the impact of HomeTeam, revenues increased 4.7% in the quarter and 4.5% year-to-date.

There continues to be a lot of talk of economic concerns, but it has not significantly impacted our business. Our commercial pest control now represents 39% of our business and continues to lead the pack pace-wise. Excluding the contribution of HomeTeam, our commercial revenue grew 9%; and 9.4% if you look at it excluding fumigations.

New sales for the quarter were over 10% better than the same quarter last year. In this business, it's not only what new business you sell, but what you retain, and our commercial customer retention improved slightly, approximately one-half of a point over last year's record, a testimony to our best-in-class service to our customers. This also confirms that we are not losing any significant number of commercial accounts due to the economy.

Our residential pest control now represents a little more than 39% of the business and grew 2% before HomeTeam's contribution, up from the first quarter's growth of 1.6%; and with HomeTeam, 30.4% in the second quarter compared with the prior year quarter. We saw an increase in leads during the quarter which resulted in improved sales.

Lastly, let's talk about our termite service revenue, which now represents just under 21% of our business and grew 17.2% as a result of the acquisition of HomeTeam. In fact, excluding HomeTeam's contribution, our previously existing termite business was a little less than flat.

Given the pest control industry trends concerning the termite business, I think it held up surprisingly well overall. Termite work is a much larger dollar purchase, but if one has termites most people won't consider it a discretionary purchase.

As HomeTeam has a higher cost of services for the quarter, our gross margin declined by 60 basis points from 49.3% last year to 48.7% this quarter. Margins excluding the impact of HomeTeam actually improved 40 basis points due to greater service technician productivity and a decrease in pension cost, which was partially offset by a $1.4 million increase in fleet cost, primarily the higher cost of fuel.

Depreciation and amortization expenses for the second quarter totaled $8.7 million, with amortization of intangibles at $5.3 million and depreciation at $3.4 million.

Amortization increased $1.9 million in the quarter, an increase of 56%, due to the almost $90 million assigned to customer contracts and other intangible assets as part of the HomeTeam acquisition. Amortization of intangibles, primarily customer contracts valued at the time of acquisition, represents a significant non-cash 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 cost in acquiring new customers internally.

In 2008, total amortization of intangible expenses will be approximately $19.3 million. Based upon our fully diluted shares outstanding, it represents a non-cash after-tax charge of $0.12 to GAAP EPS this year.

Sales, general, and administrative expenses for the second quarter ended June 30 increased $15.2 million or 19.9% to 32.3% of revenue from 32% for the second quarter ended June 30, 2007. $10 million of the dollar increase was due to the addition of HomeTeam.

Sales, general, and administrative expenses, excluding the impact of HomeTeam, as a percent of revenues increased 60 basis points due to higher sales salaries, additional $600,000 of fleet expense, and an additional $900,000 in nonrecurring expenses related to the acquisition of HomeTeam.

On last quarter's call, we were guarded concerning the contribution we expected from HomeTeam, as we were concerned about minimizing any disruption and getting the HomeTeam Associates on board and focused on the business. Well, I'm happy to report that we have successfully onboarded the HomeTeam, disruption has been minimal, and they have exceeded our expectations in all respects, operationally and financially.

HomeTeam is a great fit culturally as well. They are working hard and enthusiastically to take advantage of the myriad of programs we can offer them to improve and expand their business.

At the same time, our ownership has opened doors of opportunity for the HomeTeam not previously available. A number of builders who previously had not used the Taexx tubes-in-the-wall pest defense system because of their former parent Centex being a competitor. They are now willing to talk and are beginning to work with HomeTeam.

Most notably, D.R. Horton, known as America's Builder, the largest homebuilder in the United States, has added HomeTeam to their approved vendor list. We still firmly believe that a pest control business owned and managed by the world's best pest control company can earn far more than a pest control company owned and managed by a homebuilder, even a world-class one.

We are working diligently to take advantage of the many opportunities for improving their margins. For the trailing 12 months prior to our acquisition, their reported EBITDA of approximately $9 million represented a margin of 6.7%.

Based on the progress they've made on their own over the course of last year, and now having converted them to our payroll and benefit programs, replacing their insurance programs with ours, taking advantage of our purchasing power, we have already seen greater than a 200 basis point improvement in their EBITDA margins. We believe there continues to be ample opportunity to more than double margins over the next four years, bringing them into line with our other business.

But bottom line, the question everyone is interested in -- when will it be accretive? The answer -- this year. Even with the large write-off of intangibles and interest expense on the debt to fund the acquisition, we expect it to be accretive on a GAAP basis in its first year.

Rollins continues to be financially solid. We generated $45 million in free cash flow, cash provided from operations less capital expenditures year to date. This represents 9.1% of revenue. Our strong cash flow allowed us to pay back $36 million, more than one-third of the $90 million borrowed in April to fund the purchase. In addition, $8.2 million has been expended under the Company's share buyback program.

We continue to have an abundance of opportunity, not only with the HomeTeam but with our existing business as well. I look forward to reporting our results as the year continues, and I will turn the call back to Gary.

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

(Operator Instructions) Clint Fendley with Davenport.

Good morning, gentlemen. Nice quarter in what is a very difficult environment out there.

Thank you.

A couple modeling questions here, off the start. Obviously it's some pay-down on your debt. What is the outlook there between now and the remainder of the year? How will you sort of balance that against the opportunity for share repurchases here in the near term?

Well, I think you can look historically at our cash generation by quarter. Third quarter tends to be a strong quarter. I think last year, cash from operations was -- I want to say 30-something-million dollars; CapEx, probably $4 million or $5 million.

So, our first priority will be to pay down debt, but we will continue to look at opportunities in the marketplace. We bought stock in Q2 when I think -- what was our average price? It was close to $15.85. So I think there will be some opportunities possibly in this quarter to continue to buy back stock. We have about 0.5 million shares currently authorized.

Okay, thanks. That's helpful, Harry. Then on the termite accrual, do you have the adjustment that was made to the provision and then also the settlements during the quarter?

We will have that in the Q; I don't have that handy. Our claims, though, we had very positive results in the quarter.

23%.

No, it was over -- it was 31%. Total claims for the first six months of this year was only $2.6 million, so after a 30-plus-% reduction in claims last year, we are running against some -- our low numbers; and we have improved it a further 30%. So we had a small, minor net expense in the quarter.

Okay. On the -- some really nice developments on the margins at HomeTeam. Obviously some very good, long-term expectations there for that acquisition. Any thoughts maybe even on the near term and how you might be able to get any potential low-lying fruit maybe in the next two quarters or through the remainder of the year for that unit?

Well, again, they're only at the front end of starting to take advantage of our purchasing power. It's going to take some time for the inventory to work its way through the lower prices when they start replacing their inventory levels.

We are working with them on fleet. That takes longer to work its way through. We are looking at -- on the insurance. We need to track and see what their experience is.

They're aggressively looking at how they can grow their businesses in this economy. They are doing a sales blitz in an additional city they had not been in before, trying to establish -- see if we can establish a presence in a new market.

So, they are looking at -- they are in the process of also looking at some of the other programs we have. It's like drinking from a fountain -- not from a fountain -- like a firehose right now. They have a lot of opportunities; but they've got a great management team and they are focused on growing the business.

They have cracked the code. They are talking to a number of builders who previously chose not to do business with them. Like I said, we are happy that D.R. Horton has made them an approved vendor; and we hope to see some of the units in D.R. Horton homes down the road here.

Okay, thanks, Harry. Then a final question. We have had a couple of people asking about any kind of update on the software routing and where you guys stand on that.

Well, we continue to work on it. I guess we've got a better appreciation of the complexity of our service scenario. Unlike UPS and some of the others, Sears, and some of the other people that we benchmarked with, there's quite a few variables that we are still working on.

We've got multiple frequencies. We've got callbacks. We've got customers changing their service date. We've got new starts to add and cancellations to delete. So it will be the most complicated service routing, system that has been developed.

But each of our testing environments -- and we have had those along the way, where we bring our field people in. They are most enthusiastic and are pleased. In fact, they are getting kind of anxious about let's turn in on in the branches.

But based on previous experience with IT initiatives, we are going to be very cautious about it. So we continue to be encouraged and look forward to it.

Okay, thanks, Gary. That's helpful. Thank you, guys.

Jimmy Clement with Sidoti & Company.

Good morning, gentlemen. Gary, can you talk a little bit about employee retention in this environment? I think typically when the general economy gets a little tight, usually that becomes a positive offset to you. Have you noticed a trend there yet?

I don't think we have noticed any trend per se. But I think you hit it right on the head in that when things get tough there's more good people available. People put a higher priority on retaining their job.

Historically I think we've been able to kind of move it up a notch, so to speak, that we have less openings. We have a better labor pool to draw from. I think as a result of an economic downturn that we get some movement as far as just the overall quality of our people.

Just a question about HomeTeam, Gary. When -- is there any difference between how HomeTeam historically marketed to homeowners that had the tubes in their homes but had not activated the system with the service contract?

Was there a method that HomeTeam, the salesmen, were going to that kind of homeowner versus what you guys are going to do now? Can you talk a little bit about that strategy and how you expect that to play out?

The HomeTeam's marketing model was that their salesmen would we kind of call blitz an area, you know. That as a large number of units were installed in a project, then they would really go out and meet the homeowners, and make sure that they understood what opportunities they had and how the ongoing service would work, etc.

In addition to that, they did telemarketing, where they called the customers. Certainly there is not any restrictions when you are talking about someone that already owns an asset. So it is not really soliciting a customer that has no interest in what you are doing.

I think if anything, we were very impressed with what they did and how they did it. I think that some of the things that we can help with is we have some knowledge about direct mail, which I think we can share with them. We have, I think, knowledge of doing call-center work on a larger scale, utilizing some more sophisticated technology and practices.

So I think that's -- I would say if there were two areas that we might be able to help them a little bit would be in the direct-mail side and in the telemarketing side, where they go back again. Because a lot of times when that new customer moves in, they've just got a lot of things. You know, the guy is still hanging pictures and unloading the boxes and so forth. So it's not unusual to be able to add a significant amount of customers after the initial move-in, when the dust kind of settles and they have more time to think about the options that they have.

So I think that they do a good job. I think we may be able to help them a little bit with the technology and some of the things that we've learned.

Yes, and Gary, just to sum up kind of what I'm hearing, and this is also based on your prepared remarks, I think that one of the concerns perhaps over the last couple of months here is that there was some, quote unquote, integration risk with respect to HomeTeam.

What it sounds to me is you bought a pretty good company, you are very enthusiastic with what you bought, and really it's not so much integration but just using your superior pest control company resources to help them out. I mean, is that an accurate assessment?

You say it better than I could.

Okay.

I think we've learned something from our mistakes and watching other people. And that is that the people are our most precious asset. So their attitudes and how they feel like they are being treated and respected is really an important consideration.

We have really kind of adopted a philosophy that we would like to lead them, we don't want to push them. The wonderful thing about this HomeTeam group is that they just are very open-minded. They really want to be excellent, and they are pretty close to it right now.

So I mean, I think their attitudes have been terrific. When you have a group that's got a great attitude about it, it just makes all the difference in the world.

I would have to give Glen and Bob a lot of credit. They traveled around the country, the first -- almost when the ink was drying on the purchase agreement -- and for three weeks, and visited the employees face to face to discuss their anxieties, and really just established a great understanding from the beginning.

Okay. Gary, Harry, thank you very much for your time.

Matt McGeary with Sentinel Asset Management.

Good morning, guys. Just a couple clarifying questions on HomeTeam for my own understanding. Their business is the -- they are tubes only, right? They don't do any traditional pest control?

No, 40% of the business is the tubes; 50% of their business is traditional.

But if you really want to further expand the definition of traditional to some extent is -- once that customer turns on the service, I mean it is very comparable to traditional pest control. I mean, certainly you have the sophistication of the technology that makes the service call easier.

But they service the outside of the home. They will go inside if required. So when you make that transition and that new homeowner turns the service on, I mean, it replicates traditional pest control. I guess the only difference would be they have the advantage of some pretty unique technology.

Right. What does it cost, you know, for -- I [mean not] exact numbers. But for a homeowner, if I am a new homeowner, I've got this system in my house, is it -- what does the cost look like to utilize the HomeTeam solution?

It's very comparable to what the Orkin every-other-month service is. So one of the neat things is that this company has maintained solid pricing, which is always kind of an obstacle when you acquire another company. You would like to think that your prices and your margins aren't going to be diluted.

But one of the wonderful things that they have is the density. Because when you're selling these homeowners, I mean, the technician can carry a lot bigger route. The typical service call is somewhat less than a conventional call. But literally, you get into these housing divisions and they can go from house to house right down the street. So that is a wonderful advantage. They just don't have a lot of windshield time.

Right, right. If -- for the home buyer, do they really pay anything extra for the system? Or is this kind of a nice little perk to have in your home?

The homebuilder will pay for the system to be installed. The way the program works, the HomeTeam will sell the builder for the entire development. It is not a feature you are going to put in phase two, because the people who were in phase one who don't have it wouldn't be necessarily happy with the builder.

So they will sign up and get a commitment from the builder for the entire development. As the homes are built out, the system -- when the house is framed and it gets to the electrical state, typically they will go in and install the tubes at that time.

I think to kind of expand on that a little bit, the customers feel like they bought this. So you used the term perk; I mean, I think they look at it as an asset. I think as a result of that, that contributes to the retention cycle.

So it's a neat thing. We were in the alarm of business for many years, and it's very similar to the way the customer felt about their alarm system if it was part of the home when they acquired it. So you really get a stronger allegiance as far as the customer is concerned.

That's a good point. Just lastly, you mention that there are some opportunity with customers that have it but have not yet signed up for the service. Can you give us some sort of order of magnitude? Opportunity there relative to the number of customers there are, something like that? Just so we can get an idea of just the potential growth just from selling the folks that have the system already.

I think it's really too soon to tell. You know, we've had them for three months. I mean, we love what we see.

It's difficult to say how many of those we will get. But they have -- and I think we've talked about this before. It appears about 50% out of -- half the systems they've installed during the lifetime of the company, about half of them today are activated.

But I think this is one, to go back to an earlier question, that if we can come up with a more efficient way to telemarket and to use direct mail, then I think we have some opportunities.

But frankly after three months we haven't been able to get that cranked up. So that is really -- once we do that, once we really kind of turn them on, so to speak, to power dialers and things like that and experiment with direct mail, I think we've got a great opportunity to improve the rate of these sales that were not made on initial contacts.

Okay, thanks, guys. I appreciate your time.

(Operator Instructions) Robert Mitchell with Conestoga Capital.

Good morning, guys. I am wondering if you could talk a little bit more about the strength in your commercial business. If there is any particular initiatives or programs you are rolling out, and if there is any verticals within that commercial business where you guys are really seeing some traction.

One of the big things that we look forward to is that our customer -- is it CRM? What is the analogy, Amdocs?

Yes (multiple speakers)

We acquired, I guess, a pretty powerful software product from Amdocs I guess about a year ago. One of the features that that has is the ability to have a far more affordable salesforce.com type application.

What this really kind of means maybe in layman language is you have a computer system that enables you to keep up with the calls that your salesmen are making; record specific information about those calls. It has follow-up systems. It has the ability really to monitor salesman activities from remote sites.

So a sales manager at the end of the day really can review the data and see what his salesforce did, so he can plan his time and his activities accordingly.

We are really on the cusp of rolling that out. We have worked on it now, I guess, for the past six or eight months. We got a lot of field input, because we were using salesforce.com on the West Coast and we were using -- what is the name of the --?

I don't remember the other (multiple speakers).

We have another product that we use in Canada. So we really kind of got the best-of-breed so to speak features, and then took this core software product, and we are going to be able to expand that.

As I say, salesforce.com is a great product. It's a little overkill, frankly, for where we are at this juncture, but it's very expensive. So we've got a far more affordable system that is integrated into FOCUS, which is very important. FOCUS is our proprietary system -- branch, lead, and service system. So we think we are going to come out with a superior lead management and sales management situation.

The other advantage that we have is our salesmen are maturing. The people that we trained a year ago are a year better, and certainly two years are two years better. So, we know that as they get older and more experienced, their sales go up. Our turnover goes down. The average sale that they make goes up, which typically improves our margins. You know, they are able to sell bigger and more sophisticated customers like hospitals and nursing homes and food processing facilities and so forth.

So we see a lot of good things. We also know that with the confidence of our success in some of these areas then we will be growing the salesforce. We will be going into newer markets, so we will have more people on the street with these new tools.

What is the -- how many people salespeople in the commercial side do you have right now?

250?

No, it's more than that. It's in the neighborhood -- I want to say 300.

Yes, we can give you a better figure. We've kind of got two groups out there. We've got the vertical salesmen that are working in these metro markets. You know, Los Angeles, Chicago, Philadelphia, Atlanta, New Orleans, etc. But we also have a group of commercial salesman that are in these outlying markets like Tulsa, Omaha, etc., who work for the branch manager. So I think that is why we are kind of mumbling a little bit here about the number.

Okay, great. Thanks very much.

(Operator Instructions)

Okay, Harry says the number is 327.

(Operator Instructions) Garo Norian with BlackRock.

I was wondering if on the traditional side of the business, excluding HomeTeam, you guys talked about how margins improved some. I wanted to see if you could provide a little more color on how much might have been from top line, either pricing or better mix, versus any kind of efficiencies. I would have thought that you would have had some challenges with the fuel prices, etc.

I think we briefly mentioned productivity improvement. In anticipation and getting prepared for the rollout of our routing and scheduling initiative, we've done in the last, I guess, six months now, a lot of work with MapPoint software in optimization. Trying to optimize the routes before we roll out ORION.

We saw that in the productivity on the service side. We also mentioned we got -- our pension expense this year is running about $0.5 million per quarter less than last year.

Those two things more than offset the $1.9 million -- what was it? I think $1.9 million in increased fuel cost in [CSP]. So we are real happy that productivity is working for us.

One of the things that is kind of a constant with us is productivity. We get so many benefits that -- if we can get the work done with fewer people.

Because you get typically -- if you reduce -- if you have a technician that is not required you also benefit on the vehicle, you benefit on the fuel cost, you benefit on the accidents. It's just -- it has a lot of good things that take place.

One of the limitations to MapPoint is that it is not a constant, constant application. In other words, you can reroute your customers and organize your routes, but it doesn't have an ongoing maintenance capability. It doesn't deal with the adds and the deletes and the changes and so forth.

And that is the big benefit of ORION, that it is a real-time, active routing and scheduling system. So every time -- once you get them organized, every time that any change takes place, the system just automatically adjusts for that particular change.

Okay, thank you.

Jon Christensen with Kayne Anderson Rudnick Investment.

A longer-term kind of question. Over the past eight or nine years, your operating margins have gone from about 2% to about 12% on the back of the lower warranty costs and moving from monthly service to every-other-month service. These things are sort of playing themselves out now. I think they are pretty much fully played out.

So then the question comes -- what are your --? How much further do you have in margin opportunity and what will be the sources of that?

Let me start. First, I don't think our opportunity to improve margins has played out. I think for a long time we said that we expect to get our margins back to 15% pretax. We don't see any reason why we can't continue to strive for that.

Some comes down to this management. When we look across the field of our 400 branches, we have a substantial number of branches performing well above that level. And a lot of it comes down to continued focus on improving management, which will translate into better blocking and tackling at the field level.

So some of these initiatives, margin improvement will continue to come from opportunity to grow the business, additional revenue, tighter routes. We talk about the productivity initiatives we have underway. We continue to reduce our cost of risk.

Sometimes it's the small things. Surprisingly, we started a program last year -- and this might seem innocuous -- but looking at people's shoes that they wear, the safety shoes. What we learned was that people were not wearing the shoes that we had been providing them because they weren't waterproof. They wear them in the morning, walk across someone's yard, and the shoe would get wet and be wet all day.

So we spent some time investigating better safety shoes that were waterproof as well as good looking, that people would want to wear them. And our slip and falls this year are down significantly. It will save us probably several hundred -- well over $700,000 in reduced workers comp claims.

So with 2 million customers, we have a lot of transactions, and this takes small improvements per transaction to translate into a lot of dollar improvement. (multiple speakers) you have something you want to add?

I would add this. I think that we work both ends of the spectrum. We look for triples and home runs, and we also look for the singles.

You know, the big opportunities that we have certainly is service frequency. As new materials come out we certainly have a consideration on quarterly service versus every-other-month service.

Certainly we've got to satisfy ourselves that we can maintain the level of service satisfaction that is required. Because even though it's appealing to think about reducing the number of service calls and not adjusting your income much, the first thing you better be doing is delivering a good level of service.

We know in the northern markets this is certainly a lot more palatable and presentable than it is in the higher pest markets. So that is a long-term opportunity that we have.

ORION for the reasons that we've discussed today and in the past also has the opportunity to be a triple for us. But we don't ever take away from the singles. Because we do have so many locations and we really get a lot of data -- on revenue per add net employee, revenue per technician, span of control on service managers, revenue per vehicle -- we are constantly looking at our operations.

We have a program called the 75th percentile where we are earnestly trying to move our lower-producing branches to the 75th percentile, with the idea being that you don't have to be the very best in your region or you don't have to be the best in your division. You just need to get up to the 75th percentile.

So I really think we look at both ends of the spectrum. Some of them are longer-term, as you mentioned, and will be more difficult to achieve and will take a lot of thought and a lot of testing. Then others -- just like improving the efficiency of the vehicles -- are things that you can start doing and are doing on a month-to-month basis.

I think I heard you say that your warranty costs were $2.6 million. But I didn't get for what period.

That was for the first six months of the year.

Okay. Four, years after you acquired Western exterminators, you are still keeping that brand. Frankly, I'm surprised. Because it makes me wonder if the Orkin brand isn't that much more powerful than Western, and what the strength of the Orkin brand is if you're not converting your acquisitions to that brand.

Well, first of all, the Orkin brand -- we have 70% brand awareness. I think the thing you've not included in your equation is that Western started in New Jersey and then that Delaware, DelMarVa kind of peninsula area, probably 50 years before Orkin was ever up there. So it was our feeling that they really had a brand that was significant enough for us to consider a different strategy than we've had in other places.

We continue to look at that. We look at the leads that we are getting in Orkin markets where we have both an Orkin branch and a Western branch. We have merged some of the Western operations in Georgia, and did that initially within the first year. Georgia and Florida where their brand really -- they were new in that area; their brand really didn't do much.

It's also given us kind of a situation -- like the product business is determined, is that you can sell a lot more cigarettes if you have two different brands. Saying all that, we constantly look at it, and we are prepared to make a decision to take a different strategy when we are satisfied that we are giving up market share as a result of the Western brand.

The other thing, too is one -- 60% of Western is commercial business, whereas the -- but the 40% that is not, Western offered a different service frequency and offering. They have a home protection plan which they sell and package differently than what the Orkin every-other-month and quarterly service is.

So having different services in the marketplace under different brand names we think has made sense and continues to make sense.

If you do not merge the brands, does that mean you cannot integrate the routes and gain route density?

No. Certainly it would be our expectations to move Western to ORION and really the next generation of management, branch management systems, FOCUS.

We have been very much involved -- the Western people in the development of these products and programs. So you know, we will get the -- we have them on our fleet system. We have them on our accounts receivable policy. We have them on our payroll. We have them on our accounts payable. So we have made some fairly significant integration.

We've also moved business between branches. I mean, we have done some optimization between the companies.

Exactly.

I guess my question is, if you have a neighborhood that has an Orkin customer and a Western customer, do you have to send two trucks out there?

Currently, we do send two trucks. That homeowner relates to the technician that has been servicing them.

So there is no anticipation of trying to get one truck and improve the route density?

Yes, I think that is the ultimate objective. But as I mentioned before, I think we have learned that the people side of it -- and getting these companies that we acquire onboard with the programs that we have and the practices that we have -- really are a primary consideration.

We will buy smaller businesses and immediately they are converted over to Orkin 100%. We have no short-term plans to change HomeTeam's brand to Orkin. And I think that when we look at it, Western makes their profit plans; they have very ambitious plans. I hope the Western people aren't listening, but we have ambitious plans for them, and they meet those plans.

So I think it is working. But I don't discount the fact that there is a lot of efficiencies to be gained when you have that one technician in the same neighborhood.

Thank you for your help.

Mike Christodolou with Inwood Capital Management.

Good morning, gentlemen. A couple of questions. I think there is, what, 385,000 HomeTeam accounts; is that correct?

Yes.

Did I hear correctly that that is half of the installed tubes out there? Has HomeTeam since inception installed 770,000 sets of tubes out there?

In that neighborhood.

Actually, the 385,000, I think, is total customers.

[Opposed] to commercial accounts and residential.

That includes traditional; and I want to say the two numbers -- actually I think there's about 200,000 current tube-in-the-wall customers, and 400,000 have been installed over the life.

Got it. Okay. Gary, a question, forward-looking. This is a great quarter. You have built a great Company, and your family has been patient over a lot of years. You have done a great job paying down this debt here just in the last three or four months. No doubt you and your team and your family have seen cycles in the stock market. And you've seen springs where there is not a lot of bugs, and you've seen clearly times where the stock market doesn't believe in what you're building over the years.

I'm just curious what your thoughts might be on a more efficient perhaps capital structure. I mean, the stock is up today 10%, but it's still down 26% just in the last eight months. It felt like your cash flow was down 26%. It's not like there's 26% fewer bugs. It's not like you guys have become 74% as smart as you used to be.

I'm just wondering if there is a point where in your gut you feel like, hey, we just spent $90 million, borrowed owed $90 million to buy HomeTeam. What if we borrow $90 million with low interest rates here to buy the business we know best, which is Rollins stock, and shrink the cap by several percent? I am just curious what your thoughts might be on that.

Well, we certainly look at that. I don't know; we had to figure what, yesterday, about how much stock we bought over the last five years. Do you remember what that --?

It was a pretty good-sized number.

We can get back to you with that piece. We've continued to do it. We think about those things from time to time. You think about going private; you think about making a bigger stock purchase play.

But I guess where we come back to is we feel like we know what we're doing in the approach that we've taken. If you look at what the stock has done over a longer horizon, certainly it's a lot more substantial than what you just indicated.

We think we have a lot of options. I guess the good thing, like a lot of companies that are looking to try to pull a rabbit out of a hat, that we know that we can move the business forward just by working on maybe a less sexy approach, but an approach of just adding customers, improving margins, reducing costs, etc. But we don't discount anything.

Very good. Thank you. Again, congrats on the quarter.

Jimmy Clement.

Just last question, follow-up there. I think actually the number between 2005 and 2007, you bought back about, I think it was about $90 million worth of stock.

Gary, the follow-up question just sort of to that is, do you sense from an acquisition environment perspective -- and people talk about baby boomer demographics and all of those kinds of things. I mean, do you think that the next five years could yield some fruit from an acquisition perspective, based on your conversations with other people in the industry?

We absolutely do. You know, the great thing I guess -- that is kind of that old good news, bad news. The good news is that when things are tough, and people get unsure about the future, and see things that concern them, with perhaps an administration change with the upcoming election, they start to reevaluate whether it's time to cash in and move on. As I've mentioned in some of the calls before, I think it's been our strategy -- for the last five years certainly more aggressively -- to be the first call.

In the last acquisitions that we made, I mean,, HomeTeam had no other suitors that they were really seriously contemplating, Western, we were the first call with them and the only call that they made. I think we have really positioned ourselves.

Well, you can't make these people sell, as much as I would like to. But -- and I think our track record. I think when they see how we have acclimated these companies and given them the respect and the freedom that they have had, also speaks volumes. Because some of the people that we have competed against in the past as far as acquisitions are concerned do not have the same regard and track record that we do.

Thank you very much for your time.

Thank you. There are no further questions at this time. Please continue with any closing comments.

Okay, well, thank you. As always, we appreciate your interest and we look forward to our next visit. Thank you.

Thank you. Ladies and gentlemen, this does conclude the Rollins second-quarter conference call. If you would like to listen to a replay of today's conference in its entirety you can do so by dialing 1-800-405-2236, or 303-590-3000, and input the access code 11-11-6485. (Operator Instructions)

ACT would like to thank you very much for your participation today. You may now disconnect. Have a very pleasant rest of your day.