Rollins Inc (ROL) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Rollins, Inc. Second Quarter 2009 Earnings Release 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). This conference is being recorded today, Wednesday, July 29th of 2009.

I would now like to turn the conference over to Marilyn Meek of 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 a 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 1-800-406-7325 with the pass code of 4118589. 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'll open up the line to your questions.

Gary, would you like to begin?

Yes, thank you Marilyn. Good morning and thanks to all of you for joining us on our second quarter 2009 conference call. Harry will read our forward-looking statement and disclaimer, and then we'll 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 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 on our Form 10-K for the year ended December 31st, 2008, for more information on the risk factors that could cause actual results to differ.

Thank you, Harry. On our first quarter conference call, we stated that Rollins, like most other companies, expected 2009 to be a challenge. This is still the case, however, we responded favorably to this challenge, and are able to report our 13th consecutive quarter of improved earnings or $25.5 million, a 12.1% improvement on revenues of $284.6 million. Revenue was up $68,000, basically flat with last year.

For the second quarter, commercial pest control revenues were up 2.4%, and we experienced a decline in residential pest control of 1.8%. This shortfall was an improvement over the first quarter of this year, where we experienced a decline of 2.5%. Termite revenue was flat in the second quarter, and sales overall in the quarter were somewhat affected by the unusually cold weather start of the quarter in many areas of the country. But things are heating up, and we would expect phone leads to improve correspondingly with the balance of the summer.

Through June, our Mosquito Treatment business was up over 20% from last year. This business has continued to grow as we have more branches participating and consumers remain aware and concerned about West Nile Virus and other illnesses caused by mosquitoes.

This is probably a good time to mention that our Fight the Bite program is going well. This program is a partnership between the Rollins Companies, and the United Nations Foundation for the purpose of providing insect treated mosquito nets to areas in Africa, where malaria kills 1 million people each year.

The price of each net is $10, which includes distribution and an education on how to use it. This is our second year partnering with the UN and others, with our Rollins commitment to contribute a $150,000 or 15,000 nets. So far, we have raised more than a $110,000 through our mosquito new customer sales program and employee and consumer contributions.

In addition to our providing a beneficial service to humanity, we feel that this program appropriately positions Rollins and Orkin as purveyors of public health. If anyone on this call wants more information about our Fight the Bite program, you can go to www.nets.orkin.com. We'd be pleased for you to join us in supporting this very important initiative.

We're currently documenting our Company's history, and are working on a book in this regard. A couple of weeks ago, Harry came across an analyst report in his files that was published in June, 1964, the year we acquired Orkin. At that time, Rollins had revenues of $9 million, and Orkin had revenues of $34 million. This was a good example of the tail wagging the dog.

Since that time, as you know, our Company has grown considerably. As an example, during the past decade, in 1998, we reported revenues of $549.1 million, and for 2008, we reported revenues of a little over $1 billion or up 82%, over 8% growth per year for the period.

With acquisitions being one of our growth initiatives, Rollins has become more than Orkin during these past 10 years. Today, we are now made up of a family of leading pest control companies and brands, providing commercial and residential pest control services, both domestically and internationally.

In 1999, we acquired three businesses, PRISM, the fourth largest commercial pest control company in the US, followed by PCO Services, Canada's premier pest control provider and their country's leader in market share, and Redd, a leading southeast pest control company. These successful acquisitions were followed by Rollins' acquisition of Western Pest Services in 2004, the eighth largest pest control company in the industry. And in 2005, the Industrial Fumigant company, a preeminent company serving the food manufacturing and processing industry segment.

Last year, we made two terrific acquisitions, HomeTeam Pest Defense, the third largest residential pest control company, and Crane Pest Control, a leading commercial service company serving Northern California in the Reno-Tahoe base.

By maintaining these businesses as independent Rollins brands, with a minimum impact on people and processes, Rollins has become the acquirer of choice for medium to large-sized pest control companies looking to sell. We recognize that this approach limits some economies of scale, but we believe that the employee retention, customer retention, and ensuing revenue and profit benefits from these acquisition strategies far outweigh these cost saving penalties.

Although these companies are retaining their brand and operating processes and procedures, flee, law, human resources, payroll, accounting and web services will become a centralized support discipline. All areas that provide financial benefits and not constrain our success in the marketplace will be consolidated and centralized.

Each of these companies have provided us with exceptional talent and expertise with compatible work cultures, which provide the engine that propels the Company through today's current economic situation. Our collective business and exterminating knowledge keeps us ahead of the curve, and the innovative pest control service, while providing solid marketplace advantages.

Referring back to the 1964 analyst report I mentioned earlier, I noted that Rollins objectives and priorities back then for Orkin remains as many of the core principles behind Rollins' success today. We continue to focus and improve our marketing programs, and we place a great deal of emphasis on employee selection and exceptional training. At the same time, we also continue to work to improve our service delivery, while making sure that those services are fully priced. And finally, we have an ongoing commitment to improve our management team while controlling our expenses.

There's an old adage that the more things change, the more they remain the same, which seems to apply to Rollins. We are not flashy, but remain focused on the important elements of maintaining a successful service business. Of course, our world has changed significantly in the last 45 years, and certain technological advances have played a major role in many aspects of our business, from sales and service initiatives to training, to improving productivity.

The internet is a good example of new technology that has advanced how we identify, acquire and better meet the needs of our customers. More and more consumers are blogging, texting and tweeting on various aspects of their lives. In this regard, we are just not watching the world go by, but are working on how we can benefit from the latest at web networking and innovations.

To that end, we recently partnered with two international hospitality and lodging experts to determine the influence that pest control has in these two important commercial service areas. We wanted to learn more about the impact of pests on travel and with restaurants. As an example, through review of their blogs, we were able to observe the results indicated by those restaurant patrons encountering pests, and found that 87% would not dine at the establishment again, nor recommend the restaurant to others.

And looking at the hotel industry data, the study found that guest reaction to pest far outweighed their reaction to the failure of any other aspect of the customer's stay. On virtually every blog narrative that was reviewed, management's attempts to remedy the pest situation after the fact had no effect on recovering guest royalty. In all but one review, the sampled guest reported zero tolerance for pests.

Studies such as these provide us with valuable information to better market to potential commercial pest control customers. For restaurants and hotels, repeat customers are their lifeblood, and we can serve a critical role in keeping this return customer cycle successful.

It's been some time since we talked about our Orion routing and scheduling software. Based on our past slippage, I'm reluctant to bring it up now, but progress has been made, and we will be activating Orion at one branch on August 1st. This is an initial, limited trial with an actual full pilot to follow shortly thereafter.

Before the year is out, we hope to have enough experience and information to evaluate Orion's potential, as well as implementation cost with a timeline and ROI. These costs and their results can then be weighed against the benefits identified in the pilot so we can better determine our next steps. We will keep you informed as we proceed.

We remain positive about 2009. However, we're well aware of the challenges that exist in the marketplace, and continue to work hard to deal with these challenges. We are most fortunate to have a family of incredible pest control companies that function well individually and collectively, that are helping to insure that we continue to execute our business initiatives.

I'll now turn the call over to Harry. Harry?

Thank you, Gary. Having lapped the anniversary of acquisition of HomeTeam Pest Defense, revenue growth has slowed, and today we reported revenues for the second quarter of $284.6 million. Most people would say revenue was flat, but being an accountant, an increase, albeit $68,000, is still an increase to me.

Net income for the quarter is $25.5 million as compared to $22.7 million last year, a 12.1% improvement, but diluted earnings per share of this quarter is $0.26, a 13% improvement over the $0.23 reported last year in the second quarter. Now, with HomeTeam results reflected in both years, the quarter comparisons are easier, though we continue to be negatively impacted by the change in foreign currency of Canada, and favorably impacted by the Crane acquisition made right at year-end.

Let's look at how our various service offerings fared, starting with commercial pest control, which continues to be the largest and fastest growing part of our business. Commercial pest control grew 2.4% for the quarter, 2.5% when you exclude the impact of the acquisitions and foreign currency impact. Though slowing, overall the commercial business continues to perform well, given the current economic conditions. We are seeing store closings, some business failures and purchase agents delaying decision.

On a brighter note, our commercial retention rate improved from the first quarter, though modestly down from the second quarter last year. Our Residential Pest Control service declined 1.8%. Leads sold, continued to be off from last year, somewhat impacted by a cold June. We experienced the same phenomena as with commercial retention, improved from the first quarter, though modestly down from the second quarter last year.

Just as Gary related that we were concerned about not under pricing our service back in 1964, 2009 is no different. As many of you are aware, we have consistently raised prices in the second quarter each year. While there was more debate this year, our research indicated that we could successfully go forward. Compared to most expenditures, our service represents a small part of the family or business budget.

Our customers value our services, and they understand that our cost increased. The one difference this year was that the annual commercial price increase, which was delayed from April to June, as a result of our program testing. Overall, we expect total dollars realized from the price increase to be inline with prior years.

Lastly, Termite Service revenue this quarter ended up flat. We had an increase in our traditional customer completions, however they were offset by the decline in new construction pre-treats due to the slowing in new home construction. As I said before, residential termite treatments are a large dollar purchase -- larger dollar purchase than pest control, and given consumer sentiment, this position, this portion of our business has performed well.

Gross margin for the quarter improved a 150 basis points, a 50.2% for the quarter versus 48.7% in the prior year. Margins improved due to primarily a $3.4 million reduction in fleet cost, due to lower cost of fuels, and a reduction in the number of vehicles. Proactive management led to improvements in service technician productivity, reduced costs of risk and travel expenses, while material supply cost increased slightly.

Depreciation and amortization expense for the quarter totaled $9.4 million, with the depreciation at $4 million, and amortization of intangibles at $5.4 million, an increase of 7.9% or $700,000 versus the prior year second quarter. And that was due to a $600,000 increase in depreciation, half of which have come from acquisitions.

Amortization of intangibles continues to represent a significant non-cash charge to the P&L. Based upon our fully diluted shares outstanding, it will be non-cash after tax charge of $0.14 this year. Sales, general and administrative expenses for the second quarter ended June 30th decreased $200 million or two-tenths of a percent to 32.2% of revenues, decreasing from 32.3% in the second quarter last year.

Savings in fuel, travel, cost of risks were nearly offset by increases in administrative and sales salaries, as we expanded staffing in our national sales and service call center. We experienced higher stock based compensation and personnel related costs, primarily pension.

While we do not separately report any of our acquisitions, I know there is a lot of interest in HomeTeam, the largest acquisition we made in our history. After 15 months, I can say they have improved their margins well ahead of expectations, and are contributing strongly to Rollins' success and performance.

Having just reported our latest record results, it's easy to say Rollins' continues to be financially solid. As you know, we generate strong pre-cash flow, cash flow from operations plus purchase of equipment and property, which totaled $58 million for the first six months of this year.

We have not had the opportunity to make any substantive acquisitions to-date this year. So, we continue to return money to our shareholders, through our share repurchase program. Year-to-date, we repurchase just over 1.3 million shares, returning over $21 million so far this year. We have approximately $3.3 million additional shares that can be purchased under previously approved programs by the Board of Directors.

July is almost over and we wouldn't mind an extended hot summer, as I'm sure some of our shareholders in the north would as well, not having had too many hot days up until now. Our business plan continues to produce outstanding results. We continue to benefit from the release of a $140 barrel oil for another quarter. But we realize we need to continue to keep a close eye on our operating expenses. We see opportunities for improving margins even in the slow growth environment. We need to continue to focus on price realization, as well as productivity improvement.

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

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

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions).

And our first question comes from the line of Clint Fendley with Davenport. Please go ahead.

Morning, Gary and Harry.

Morning.

Morning.

Gary, I wondered if you could remind us, the mosquito revenue that you talked about in the intro roughly, is that still around 2% or so of your revenue and how many of your branches are currently offering this service?

Yes, I don't think 2% -- I think it's a little bit more than 2%. It's a relatively small number compared to our termite business and our commercial pest control. It's the fastest growing part of our business. We have about -- excuse me --we have about half of our branches on the program and certainly, it would be our intent to have the majority of the branches on the program.

Okay. Are there any kind of challenges, I guess, with marketing that service? I mean, it clearly seems to be --

It really is -- it's kind of an odd duck. The best way we found to grow the business is through existing customers and referrals. It's really -- we have tried some advertising, tested some advertising, and the cost per lead or the cost per sole lead is just prohibited. So, that doesn't -- we've done some direct mail and that has been marginally successful.

But the branches that get on the program quickly understand that -- the value obviously. And I think we've all been dubious when we first began this. Mosquitoes are a flying insect. The notion that you could restrain them in your yard and your neighbor not affect you, it's just a lot of I guess barriers that we have to reach with our people.

But once a branch gets on, our experience has been that they just do progressively better. They get -- I go to a little gym here, and I have a customer friend of mine there who sold to five of her friends. So, it's just something that when you have something that really works, you want to tell your friends about it, and that's the main source of growth.

And these customers are sticky, that's another great thing. They do renew. We were in the lawn care business, they renew far greater than a lawn care customer would. And we have tied it into our regular service, so we're not just going out and selling mosquito jobs. We're selling it as with a new customer word, selling is part of a comprehensive pest control program.

It sounds like it works. You're just up against some customer --

It does, I mean people -- our business is kind of like a battleship, so to speak. You like to turn it on a dime, and you like to say, "Okay, everybody, on the count of 10, jump on this." But I'll say this, the momentum is gaining, and we have experimented with ways to try to ramp it up some, and we'll continue to do that, but it's a very good part of our business.

And switching gears, I wondered if you could -- if you had an early read on the receptivity of the price increases. Have you noticed any uptick in attrition or maybe customers opting for less frequent service after the increases in --?

No, we have been really -- of course, we tested it pretty extensively, and the expectations that we've validated in our tests we're finding in the marketplace. And I think Harry's comment about the retention being up ever so slightly is a validation of that. We're just not losing a lot of customers.

We give the branches the authority, that if they feel it is appropriate, that they can roll back the increase or negotiate the increase. And we have visited branches, I think Glen this last quarter probably visited over a dozen branches. And invariably, the reaction was that it has not been a big deal, that they've typically had a half a dozen calls.

As I said, some of those were -- they made some adjustments as far as the increase was concerned, and Glen talked to the bookkeepers. That's the one to really talk to, because they are the ones that are fielding the telephone, and they are the ones who typically deal with the customers that are not reacting favorably to the increase.

So, all of our testing has been validated, and I really think that that shows the stickiness of pest control. If the people are happy -- and these are modest compared to the family's budget, this is a very modest expenditure. And if they're pleased, then they see the need and have agreed to the increase. Now, certainly if a person lost their job, and their budget was turned upside down, we're not suffering any illusions that that person would likely cancel our service.

That's helpful. And a final question on HomeTeam. I wondered if you could comment on just how much of a margin pullback you might expect to see when we eventually see an uptick in the builder revenue and any kind of color on how the builder revenue may be doing currently would be helpful.

Well, the building revenue is still soft. We have one big advantage with Centex and their merger or sale -- was it Pulte?

Pulte.

To Pulte, Pulte never blacklisted kind of HomeTeam, because they were a Centex company. Now that Centex and Pulte are together, then we've had doors opened to us that we never really have had before. It's just a matter of volume, I mean, there's very few new homes being built today, and this is one of those business that as the growth slows the margins improve.

So, there's no doubt that one of the benefits that we've got from this from a profit point of view is the growth is slowed. But they've got a lot of programs that they have presented to new builders. They've gone after different builders that have not particularly used them a lot. They are selling post construction jobs, they're selling baiting.

So, it's made them look more closely into their business. When they've kind of suffered in one particular avenue, they've shifted over to another. So, it will have some impact. Now, the good news is is just about every month, HomeTeam is benefiting from some of the programs and key learnings that Orkin has developed over the years as far as price increase.

A good example was they really did not have an intention to do a price increase this year. And as a result of this, the work that we've done with Orkin, they will be doing a price increase. So, we're really kind of bringing some things that I think potentially could mitigate some of the margin drop-off when the construction business increases.

Great. Thank you, guys, nice quarter.

Thank you.

Thank you.

Thank you. And our next question is from the line of Jamie Clement with Sidoti & Company. Please go ahead.

Hi. Gary, Harry, good morning.

Good morning.

Good morning.

Alright, Gary, I was wondering if you could just discuss over the last couple of years, your advertising and marketing, the direction of your advertising and marketing spending, I mean I guess you have print -- a little direct mail, radio, television and internet. I think you all have talked more about an internet focus. Can you give us a sense of kind of the magnitude of the shifts and kind of what you're seeing and how the nature of your marketing has changed and those kinds of things?

Well, generally we do a lot of network cable advertising, TV, conventional television, a little radio, not very much in direct mail. We've just never seen a real great return as far as cost per lead. Although the internet advertising is growing, it's still a relatively small part of the budget, and it's kind of one of those things that it just doesn't make sense to -- you just can't increase your spend by 30 times and expect to get that type of return.

So, there is some limitation as to spending money and being able to do it successfully. I'd say it's about 5% of our advertising --

Okay.

-- budget. It's growing, but when you're that small, the growth percentages can be fairly large, but the actual dollars don't amount to that much. We're also doing a lot of testing in Yellow Pages. Yellow Pages is a medium that's going south, kind of like newspapers. But we do know that it is effective in some markets.

It's always been a big challenge to us to know really what the ads were doing, and we've developed kind of an internal model that we feel like we can measure the effectiveness of the ads, which really helps us direct this and making those spending decisions. It also helps us in negotiating with the Yellow Page companies.

Okay, okay. Changing gears a little bit, I think last year, when the economy started to kind of head south, you all had discussed the expectation or sort of the history with your Company that when times got tough, your technician and sales were tension rates actually had a history of improving. Have you seen that through the first half of this year?

Yes, we have.

Okay, and is that something where -- is there like a quantifiable -- can you guys -- you don't have to share it, but I mean can you quantify the cost of technician and sales kind of attrition? I mean, is that something that has helped your margins in the first half of this year?

Well, yes, it's had to. I mean, we can't measure the impact of our service wage margin based on that. But clearly, if you can get that technician where he's taking home another $250, $500 a month, then he's a lot happier, he's got a better job.

Okay.

And I think what we've proven just through our success and staying on it for, I guess really the last five years, we've had that as one of our rally cries, is that when that technician kind of -- when they're out talking in the parking lot, they're showing each other their checks like they do often. That's a pretty big incentive to -- for the guy that hadn't sold to go out and start selling. So, we have more technicians selling, and typically the ones that have had experience at it, get better at it. So, it is -- and that customer is probably your best new sale.

Okay.

Because a technician typically is selling in his territory, he knows that he is going to have the account. He does a very good start and makes sure that they get off to a good beginning. And they just stick.

Okay, and Gary, based on your experience, if the national unemployment rate continues to kind of tick up, I mean you would still benefit from this trend, I would assume?

You mean that we --

Well, in terms of -- if the national unemployment rate kind of trends up kind of 2 percentage points over the next couple of quarters, you would presumably continue to have pretty strong retention in that regard, right?

Well, you're talking about employee retention?

Employee retention, employee retention, yes, like --

Yes, sure, I mean, there's no doubt. I mean, when there's fewer jobs, people have a tendency to appreciate their job more and some of the little things don't bother them. And I think that plays and the other positive side of that is when you do have a turnover, that you got to improve labor pool. I mean, you have a lot of highly qualified people that are in that statistic of unemployed.

Okay, thank you all very much for your time.

Thank you.

Thank you. (Operator Instructions).

Okay, well, I have to go back to work then. Thank you for joining us today, we're cautiously optimistic concerning the balance of the year, but please be assured that we will continue to work to grow our business, and our both top line and bottom line, and we look forward to speaking to you again next quarter. Thank you.

Thank you, sir. Ladies and gentlemen, this concludes the Rollins, Inc. Second Quarter 2009 Earnings Release Conference Call. If you would like to listen to a replay of today's call, please dial 1-303-590-3030, or you can dial 1-800-406-7325 and enter access code 4118589 followed by the pound sign. We thank you for your participation and you may now disconnect.