Rollins Inc (ROL) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Rollins, Inc., third-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.) This conference is being recorded today, Wednesday, October 28th, 2009.

I would now like to turn the conference over to Marilyn Meek from Financial Relations Board. Please go ahead, ma'am.

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 212-827-3746. 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 4173072. 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 third quarter of 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 factors section of 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.

We are very pleased to have reported that revenues for the third quarter grew 3.2% with net income increasing 14.8%. This is our 14th consecutive quarter of increased net income. Revenues for the quarter were $286.9 million with all of our companies contributing to our revenue growth. Commercial pest control was up over 6% and residential, following a decline of 2.5% and 1.8%, respectively. in the first and second quarters of the year, rose slightly. Termite revenues were up 3.4% following a flat second quarter.

We think the improving revenue trend was partially a result of our marketing and sales programs, plus somewhat better weather this quarter versus last year. Incidentally, one of the challenges that we regularly struggle with is to determine the difference between the impact of our programs versus that of Mother Nature's influence.

With that in mind, I want to note that while we have talked about our company being recession resistant, it is equally important to note that we are not recession dependent. And as the economy begins to improve, we would expect our business to do so at a faster pace. I'm sure most of you on the call have a different opinion about the economy and its recovery. However, based on what we saw in the third quarter, we're feeling better about 2010.

One of the primary reasons for our success is our employees. And I can never say too often that they are our greatest asset. And they make the most difference in what we do and the success we enjoy. One of our key commitments is to provide them with career growth opportunities. We were therefore extremely pleased to announce the promotion of some of our outstanding leaders during the third quarter.

Six division vice presidents were elevated to the standing of division presidents. These individuals are responsible for our Atlantic, Pacific, South Central, Midwest, Southeast, and Western divisions. We're very proud of the performance of Gene Iarocci, Gary Rowell, Robert Stevens, John Wilson, and Tom Walters, respectively. They would join Bob Wanzer, Home Team President, and Gary Muldoon, President of Orkin Canada, who already hold the position of president of their respective pest control brands.

I'm also pleased to share that our Board of Directors announced the promotion of Glen Rollins to Executive Vice President of Rollins and CEO of Orkin, and Harry Cynkus to Vice President of Rollins.

I will continue as Chairman of Orkin as well as President of Rollins.

We believe that these promotions will enable us to better achieve our company objectives.

As the industry leader, we have a responsibility that goes further than financial performance. The area that I'm referring to addresses our social and environmental responsibilities. This commitment also consists of educating the public concerning the health risk of pests and the benefits of integrated pest management.

I'd like to share with you some of these initiatives that I'm proud of and that in the short and long run will be beneficial to the Company. For more than 100 years Orkin has been dedicated to preventing and controlling pests as well as educating consumers on the potential health risks posed by these pests. In 2004, we teamed up with the CDC, the Communicable Disease Center, to create educational materials to help consumers become aware and prevent pest-related diseases in and around the home. Orkin and the CDC later started to partner on annual Train the Trainers broadcasts in which specialists from CDC helped educate Orkin residential and commercial pest control technicians across the country on pest-related diseases. We likewise have been able to educate the CDC on the methods necessary to control the pests that are the source of these problems.

In another area, following Katrina, Orkin's 12-person ready response team was dedicated to protecting public health for those in need and treated almost 100 homes for termite and mold infestation. The CDC led us to partner with the National Center of Healthy Housing in this initiative.

When there was a deadly outbreak of Rocky Mountain Spotted Fever in Arizona due to a tick infestation, the CDC again approached their partner and Orkin's team responded immediately to provide free tick control service. We also educated community leaders on ways to avoid future outbreaks, again in conjunction with the CDC.

Within our company, I'm pleased to report that we've established an environmental stewardship group consisting of a team of employees from across the Company who are responsible for the review of Orkin's practices, products, and techniques to ensure that we always are being environmentally thoughtful. Recently, Orkin posted a link on its About Orkin Web page titled, "Orkin and the Community." I'd like to take a minute to touch on a few of the practices and activities mentioned there.

Our environmentally sensitive approach to pest control service is based on Orkin's integrated pest management protocol where we work with our customers to provide a combination of low impact treatment methods that deliver excellent levels of control with minimal impact on humans and non-target organisms. Product-wise, Orkin uses materials that are scientifically tested, proven, and registered by the EPA. Further, our award-winning training ensures that our technicians are instructed in proper application techniques to help control pests effectively and in an environmentally friendly manner. Further, we select, operate, and maintain our facilities and vehicles with an eye towards energy efficiency. Our use of GPS and route consolidation software reduces miles driven and our emissions footprint. And our satellite training program has helped eliminate an estimated 1 million miles of travel annually that our employees previously logged to attend mandatory, conventional training sessions.

From an educational perspective, most recently, we've taken on the responsibility to educate homeowners on termite prevention and treatment. Orkin partnered with several renowned US universities to form the Consumer Education Council on Termites, and launch an informative Web site focusing on termites, or www.termites101.org.

Incidentally, we also promote insect education in public schools through our Orkin Man school presentations as well as our Junior Pest Investigators Program. Both of these efforts are designed to teach children to think differently about pests and pest management.

Lastly, the O. Orkin Insect Zoo created at the Smithsonian Museum of Natural History in Washington, DC, continues to educate children and their parents on the value of insects in their surroundings. Our exhibit is one of the most highly visited features in the museum.

As one of the largest and most recognized pest control companies in the world, we are often asked to partner in various research projects. A recent request came from Detroit Metro, DTW, the 12th largest airport in the US, and Innolytics company with regard to approximately 200 house sparrows that had taken up residence inside the airport's nearly one-mile long McNamara terminal. We were asked to collaborate with them to test the effectiveness of Innolytics' bird contraceptive product, OvaControl P. Faced with escalating maintenance costs and what if not checked could grow into flight safety issues, as well as the potential for disease transmission, DTW was trying to bring the bird population under control. The birds were breeding in the terminal and trapping was not practical given the heavy traffic.

Although house sparrows are considered a nuisance species and are not protected by law, poisoning was not an option since registered avicides are not approved for indoor use. Orkin's Detroit commercial pest control branch has installed Ova Control feeding stations inside and outside the terminal building and is monitoring test results. Fortunately, these birds have proven to be sensitive to this product's contraceptive effects. And since house sparrows are a short-lived species, it is believed that interfering with their reproduction should cause the population to decline through attrition.

One of the advantages of being the industry leader is that we typically get the first look at new pest control products, often before they go to market. And we get to participate in new ventures like the Detroit airport test.

While you may not have thought that a pest control company, granted the nation's best, would have so many opportunities to promote environmental stewardship and social benefits, as a leader, we subscribe to the mantra that to whom much is given, much is required. At Rollins, we take that challenge and our leadership role seriously.

Let me give you an update on our routing and scheduling software efforts. On March 1st, we began a limited trial of the software at one of our smaller branches in the Atlanta area and were generally pleased as there were no show stoppers.

At the beginning of this month, we initiated our second proof of concept exercise in one of our larger branches located in New Jersey. The first branch trial identified system problems, as you would expect. However, most were fixed before the second branch application. As anticipated, our introduction into a much larger branch has identified other improvements necessary that will have to be dealt with before we expand our tests. And many of these problems have already been corrected.

We're encouraged by the response that we received from customers in our first test. They really appreciate being given a specific appointment time while on the phone when they call to change their regular service time or when an extra service visit is needed. They also benefit from our new controls that ensure that we fulfill those new commitments.

Our goal is to have our fundamental system issues resolved by the end of the year. Once up and running, our routing and scheduling software will allow us to provide our customers and technicians with an improved framework that will improve our service delivery and reduce our costs.

In another area, I want to acknowledge an award that we recently received. Orkin's Web site was recognized by the Web Marketing Association as the winner of the 2009 Web Award for the best diversified business Web site. This competition honors the best Web sites from companies in 96 industries around the world based on design, ease of use, use of technology, et cetera. Our Web site traffic is an important part of the Company's lead generation. And we are pleased that an outside authority agreed that we've done a good job in this area.

In closing, I want to recognize our wonderful family of companies for our brands here at Rollins all of whom have stepped up to the plate to help us meet the financial and operational challenges that we've faced over the last several quarters. We are pleased that we have been able to grow in a difficult environment and that our customers continue to recognize the value of the services our companies provide.

I'll now turn the call over to Harry who will provide you with details on our financial results.

Thank you, Gary.

Gary spoke to recent promotions at Rollins and I want to turn the table to mention that he was again named as one of the top performing CEOs in Georgia by the Atlanta Business Chronicle, ranked by a single yet most significant standard, return they produced for shareholders during the five-year period to December 31st, 2008. This marks the fourth year in a row that he has received this well-deserved honor.

Let's turn our attention to what drives that award, Company performance. Today, we reported for the third quarter $286.9 million representing 3.2% revenue growth. Net income increased 14.8% to $22.7 million or $0.23 per diluted share compared to $19.8 million or $0.20 per diluted share for the same period last year. Year to date, revenue is $814.4 million, a 5.4% increase while net income has increased 13.6% to $64 million. EBITDA reached $132.9 million, a 14.3% increase and EPS has increased 14.3% to $0.64 per diluted share.

Now, with Home Team results reflected in both years and the impact of Canadian currency conversion becoming less and less impactful, this quarter's comparison is more straightforward.

Let's look at how our various service offerings faired starting with the largest and fastest growing portion of our business, commercial pest control. This past quarter, as Gary has already mentioned, it grew 6.1% driven somewhat by strong, commercial fumigations. We typically don't mention fumigations as it is a small part of our commercial business. However, its strength this quarter boosted our commercial results. This year, both IFC and Western have been successful in growing this niche portion of our commercial business. Fumigations were up 12.4% in the quarter, 7.7% year to date.

Excluding the impact of fumigations, our commercial business grew at a very healthy 5.7% this quarter, up from last quarter's 2.1%. Having added sales staff, we saw the strongest quarter in commercial sales and national account sales in some time. National accounts were aided by some one-time events as well as further penetration of existing accounts as well as new customers.

At the same time, our cancellation rate improved, which is always an indicator of customer satisfaction.

Residential pest control had a small gain, 0.03% growth in revenue following two consecutive quarters of decline. We saw a number of positive signs in the quarter. Leads were up. Cancellations were flat. At the same time, consumers continue to be careful with their purchasing decisions. We saw an uptick in consumers wanting one-time service versus our annual service, which might have been because it's now late in the season. Unlike commercial, this portion of our business is still feeling the impact of the economy.

The strength of our termite business continues to encourage us. We saw growth in all of our companies, with termite sales this quarter at Orkin and Western up over 8%, leading to the strongest termite sales revenue growth in over five years, 3.4%. Having added sales people to handle an increase in leads resulted in greater closure and increase in revenue.

As I've said before, residential termite treatments are a larger dollar purchase than pest control and, given consumer sentiment, this portion of our business is performing very well.

I think it's noteworthy to add that we saw a revenue increase across our entire family of brands with the lone exception being Canada, which had organic growth but was slightly impacted by the foreign currency exchange.

Gross margin for the quarter improved 90 basis points, increasing to 48.6% for the third quarter versus 47.7% in the prior year. Margin improved due primarily to a $2.9 million reduction in fleet cost due to lower cost of fuels and reduced number of vehicles, as well as improvements in service technician productivity. These improvements were partially offset by increases in cost [of risk] and material and supply costs.

Depreciation and amortization expense for the quarter increased 3.2% totaling $9.3 million. Depreciation was $3.9 million and amortizations was at $5.4 million. This amortization continues to represent a significant noncash charge to the P&L. Based upon fully diluted shares outstanding, there will be a noncash, after-tax charge of $0.13 this year.

Sales, general administrative expenses for the third quarter ended 9-30 increased $1.8 million or 2% to 32.5% of revenues, decreasing from 32.9% for the third quarter last year.

Savings in fuel and travel were offset by increase in administrative and sales salaries, as again, we expanded sales staffing, as well as higher stock-based compensation charges, and personnel-related costs, primarily pension and increasing medical claim costs.

Continued record results contributed to continued financial strength. We reduced our loans outstanding $10 million this quarter while funding $5 million to our frozen pension plan and, at the same time, repurchased 146,300 shares this quarter.

As we enter the fourth quarter, we look forward to being able to report another year of steady and consistent sales and earning improvement. 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 call for any questions that you might have.

Thank you, sir. We will now begin the question and answer session. (Operator instructions.) One moment, please, for our first question. Our first question comes from the line of Clint Fendley with Davenport & Company. Please go ahead.

Hi. Good morning, gentlemen. Congratulations there, Gary.

Thank you.

I wondered if you had any thoughts just on the termite space, obviously a very strong quarter for this segment. Is there anything going on competitively speaking, I guess, with regard to pricing or whatever at competitor Terminix during the quarter?

Well, not that we're aware of. No changes as far as our primary competitors are concerned. I think the thing that has contributed to our success is that we have established new training programs to train our new termite sales people. And we have increased the staff in selected markets where demand really warrants an expansion. And we've added some branch sales managers in our bigger termite branches. So I think that we've just addressed the fundamentals. We still are the price leader, and I think, frankly, provide the most comprehensive termite protection of any of our competitors. So I think just working hard on these fundamentals are starting to pay off for us.

Okay. And then, a final question. I believe the PestWorld conference was this week. I wondered if you'd had a chance to attend that, Gary, and if you had any thoughts on just what the M&A environment might look like among some of the potential acquisitions during the next year or so?

Well, I didn't attend the conference. I do have -- we do have our people there. And one of their responsibilities is to report when they get back what they accomplished and what their observations were.

I think our acquisition -- mergers and acquisitions activities are a 12-month endeavor. We just continue to call on the companies that we feel to be highly desirable. And I think the economic situation, although we thought it would make a difference earlier as far as some people maybe getting up to the decision point of deciding to sell their business, did not -- was not forthcoming. But I guess like a lot of areas like real estate and many areas that were still feeling the consequences of the economy that we're still optimistic that we will be successful as a result of some of these great companies deciding to sell.

Great. Thank you, guys.

Thank you. Our next question comes from the line of Jamie Clement with Sidoti & Company. Go ahead.

Gary, Harry, good morning.

Morning.

Morning.

Gary, you alluded a little bit in your prepared remarks to national account business on the commercial side which I think there's been sort of a trend that has been growing over the last couple of years. Can you talk a little bit about that trend? Do you think your sales folks are having a better job of convincing larger accounts the benefits of going with one, or rather a limited number, of national providers?

I do. We have a pretty stable and productive national account sales force. I think that one of the things with national accounts that's worth mentioning is, very rarely do you get all of their business. I mean, typically, they'll give you a couple of regions and then wait and see how you do and then make the decision as to whether they want to expand the relationship or not. I think one of the areas that has been behind our growth is that our service has been such that most typically, we're able to get the next region or the next two or three regions, so we've been able to add on to our existing national account customers.

And the other thing is the progress that we've made with our handheld computers. More and more of the national accounts want to get consolidated information about their locations as far as pest sightings are concerned, as far as sanitation, construction issues. I think they are kind of using the exterminator as a second set of eyes. And frankly, it's enabled them to pull back on some of the people that they've formerly had visiting and reviewing these aspects of their location.

So, I think that's helped quite a bit. And as I mentioned, I think that we have probably done a better job expanding relationships rather than just adding new customers.

Okay. And, Harry, just a couple of bookkeeping items, kind of looking forward. Do you -- I'm not sure I have the number in front of me -- but total capital spending for 2009, where do you expect to come in at roughly?

That should be in with the historical, the $14 million to $16 million range this year, low end of -- we didn't have any big IT projects or capital spend related IT this year. But we don't see that number changing dramatically. And we're looking at some -- our IT spend for next year, we haven't finalized it. We could have a few million dollar increase next year, but we should be well below $20 million in total next year.

Okay. And Harry, does some of that non-cash intangible amortization related to the acquisition, does some of that start to roll off next year?

A very insignificant portion. I think it's $1 million or less. Because most of it has lives bearing from 10 to more than 12 years. So some of the acquisitions done back in '98, '99, some of those pieces are being -- rolling off. But the big pieces have many years left to go.

Okay. And other cash flow items -- just in terms of taxes, any change going forward versus what you've seen over the last couple of years?

Well, this quarter, the rate was low, 38%. We were able to take advantage of some state tax credits. We are looking at some tax planning opportunities for next year. We don't have it dollarized yet. It will be a pretty significant reduction in our provision, but it's a noncash. It has to do with our -- we have a lot -- if you look in the footnotes -- a lot of net operating losses that we've never been able to fully utilize in various states. So we're looking at some tax structure work where we'll ultimately be able to utilize possibly $1 million or so a year going forward. So we'll have to adjust the reserve. It'll be a big noncash event this year but it will allow us to utilize some of those reserves -- or some of those losses in various states provided they don't change their laws going forward.

So we're always looking for -- to ways to save money on taxes. And hopefully, we can stay a step or two ahead of the states.

Okay. All right. Thank you all very much.

Thank you.

Thank you. Our next question comes from the line of Matt McGeary with Sentinel Investments. Please go ahead.

Good morning. Most of my questions have been answered. Just do you have a cash flow from operations number, Harry? Year to date would be fine.

Give me a second. We will - should be filing the Q here in a day or two. But I should have a number on cash flow provided from operations.

As you know, with our strong recurring revenue and -- we generate nice cash. Net cash provided by operating activities is, through three quarters, $92 million. And it's up $14.5 million year to date. There's a $5 million timing issue. Actually, we would have been up closer to $20 million. We did do a 5 -- we funded the pension plan $5 million this year and accelerated it to quarter two in '09 versus quarter four in '08.

Excellent.. Where do you stand on the pension funding at this point?

Well, the pension -- well, two years ago before the wonderful returns of '08 had been fully funded, after last year's great returns in the market, we were about $20 million underfunded. We're having good performance this year. It's hard to predict where we'll be at year end because we suspect interest rates will be down, which moves the discount rate and the valuation and liability. We'll still be underfunded going into, I think, into next year. And it's our long-term plan here to probably continue to funding it at the rate of around $5 million a year until it's fully funded.

But the plan is frozen. No new entrants into the plan since 2002, I believe it was,or 4, and the benefits have also been frozen.

Great. Okay. Thank you. Nice quarter.

Thank you.

Thank you. (Operator instructions.) One moment, please. I show no further questions in the queue.

I'd like to turn the call back over to management for closing remarks.

Gary Rollins. Okay. In closing, I'd like to thank you all for joining us today. We remain cautiously optimistic concerning the balance of the year. And we'll continue to work on our plans to grow our business organically and through acquisitions. We look forward to speaking with you again next quarter.

Thank you.

Ladies and gentlemen, this concludes the Rollins, Inc., third quarter conference call. If you'd like to listen to a replay of today's conference, please dial 303-590-3030 or 800-406-7325 and enter the access code 4173072. Those numbers again are 303-590-3030 or 800-406-7325. And the access code is 4173072.

We'd like to thank you for your participation. And you may now disconnect.