Rollins Inc (ROL) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen; thank you for standing by. Welcome to the Rollins, Inc. fourth-quarter earnings 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, January 27, 2010. I would now like to turn the conference over to Marilyn Meek. 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 212-827-3746. 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 a pass code of 420-0223. 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; Harry Cynkus, Vice President, 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 fourth-quarter and year-end 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 of our Form 10-K for the year ended December 31, 2008, for more information on the risk factors that could cause actual results to differ.

Thanks, Harry. The success we achieved in the fourth quarter and for our full year was particularly gratifying considering the general poor business conditions that were experienced by many. Also, you never want to fumble with the goal line and our team finished the year strongly.

For the 12th consecutive year Rollins posted record improvement in revenues and profits. For the quarter we reported revenues of $259.6 million, a 4.6% increase over fourth quarter 2008 with net income increasing 59%. We had a few unusual items in the quarter. Our conversion of Orkin two an LLC, which was very favorable, and an impairment charge related to Orion which impacted earnings. We will be talking more specifically about these shortly.

From a sales and revenue perspective it was a good quarter. We saw lead and retention improvement in our residential pest control business. And in fact, it was the strongest quarter for residential pest control revenue growth in the last 18 months. We are hopeful that this is an indicator that the economy is turning around; however, apart from that possibility, we were bolstered by our sales and marketing programs.

Our core commercial business, excluding Canada and Crane, was up 5% in the fourth quarter. When you exclude commercial fumigations, which were up 23% for the quarter, the fundamental commercial pest control business grew almost 4%. And we had another positive growth quarter in termite revenue as well which was a build on to the third quarter. For the full year revenue was $1.074 billion, a 5.2% increase over the full year 2008, while net income increased 21.8% to $84 million.

New sales pricing has routinely been a key driver of our success and we've worked hard to ensure that our services are appropriately priced. We've engineered new processes in our call centers that have allowed us to more consistently price as well as present and track special offerings. These improvements have resulted in better pricing and closure this past year. We have plans to improve upon this work and our findings in 2010.

Part of Rollins' culture is to strive to continuously improve our business. We constantly search for areas that have potential for improvement in order to drive our revenue and profits. This year we are turning our focus to increasing our new sales yield, focusing on lead closure and services start percentages, as well as customer retention. We have a team that's looking at every element in this equation to find more effective ways to improve all areas in the sale and new service start execution.

Although pest control is pretty rudimentary and, for most, not very exciting, it does favorably respond to the execution of best practices conducted throughout the Company. Frankly, we've gotten good at stealing shamelessly from ourselves. Our family of brands acquired over the past decade led by Orkin, our primary pest control company, benefited from the synergy of us collectively working on common business elements and sharing the successes experienced by all of our exceptional pest control companies.

The results of this sharing of proven practices is not surprising when you consider that in the past 10 years since we acquired PCO Services, Canada's largest pest control company, that their revenues have tripled and profitability has improved even more dramatically. Western Pest Services, acquired in 2004, has consistently been our greatest organic growth company while improving their profits handsomely. IFC, specializing in pest control for the food industry, came off of a great year with revenues growing over 13% and with record profitability.

HomeTeam in their first full year continued to exceed our expectations and is running well ahead of plan in our acquisition model. Their management team has found ways to continue to grow and improve in spite of the awful new housing market. We have learned a lot from them and, fortunately, they have learned a lot from us. Crane, our most recent acquisition, is a highly profitable company and has also exceeded our expectations.

We believe the success of our brands is a testimony to the partnerships that we've been able to build with the leaders of these companies and their employees. We're working together to build on each other's strengths by sharing our knowledge and resources.

Turning back to HomeTeam for a moment, I want to mention a couple of new business relationships that have been achieved. HomeTeam recently obtained a big win after signing an exclusive provider agreement with Toll Brothers to provide pretreatment termite services along with their Taexx built-in pest control system. This arrangement covers 12 states with a potential for several thousand new home installations next year. This will provide a vehicle to take HomeTeam's tubes in the wall to many more new markets.

Using the low cost model that HomeTeam implemented not too long ago in Nashville, where they utilized the local Orkin branch initially to establish a foothold, they can open up in a new city quickly and very efficiently. As a result of this new contract for 2010, they are planning to take this new market expansion approach to the Philadelphia area.

Additionally, HomeTeam has a letter of intent to expand their relationship with Pulte, the nation's largest homebuilder. I know there were some questions as to what might happen to HomeTeam when their former parent company, Centex, was bought by Pulte. As a result of a lot of hard work by HomeTeam leaders, and no small part to the Company's outstanding reputation for service, quality and value, it now appears that this relationship will be expanding.

The high regard that builders like Toll and Pulte have for HomeTeam was further confirmed by an independent homebuilder's survey that was recently conducted. The survey asked 500 builders nationwide "who was your best subcontractor"? HomeTeam was named the best subcontractor by 36% of the participants. This is even more impressive considering that there can be 20 to 30 subcontractors on a given project.

They've also earned the nickname from builders as the ghost subcontractor because they come in, get their work done, sometimes people say being invisible, and, most important, they don't slow down the construction process. 36% gives us a great benchmark to improve upon going forward.

Following today's press release some of you may be wondering where do you stand on your routing and scheduling initiative, Orion. We continue to be very positive about the benefits of affective routing and scheduling software and remain committed to the concept. We were just unable to get there with the current system and vendor.

The good news is that the results of our branch pilot test confirmed our belief in the benefits to be achieved through an automated routing and scheduling system. However, as mentioned in our third-quarter conference call, our pilot test revealed some fundamental system issues that we had hoped to have resolved by this time. Unfortunately those issues have not been resolved and, after careful consideration, we have concluded that we need to make a change in vendors to move us past these issues.

Having said that, we aren't writing off the total investment. Some of the internal work that was developed will help us more quickly integrate to another solution. Plus we have a better idea of what works and what doesn't work. We are currently looking to take what we have learned from our initial development effort and move to a new source relatively quickly. To repeat, we remain committed to routing and scheduling and we hope to be back with an alternate solution in our proof of concept branch later this year.

Looking at our franchises, we continue to increase Orkin's operations globally. In October we expanded our presence to the Mediterranean, opening a branch in Cyprus. In January we opened a franchise in Lebanon, our sixth franchise in the Middle East. Our expanding number of Orkin international franchises further confirms the worldwide power of the Orkin brand. With yesterday's announcement of our newest franchise in Jamaica, we now have 14 international franchises.

We are pleased to announce four new key management changes recently. John Wilson was recently promoted to President of Orkin USA, a newly established position. And John will oversee Orkin's five US divisions through their presidents and the Vice President of Sales operations.

John joined Orkin in 1996 and has held various positions of increasing responsibility, learning the business as a service technician, sales inspector, branch manager, region manager, vice president and division president. His most senior positions have included Atlantic division vice president, and most recently as Southeast division president.

Orkin's Gene Iarocci has been named Vice President of Rollins Corporate Administration. Gene has more than 20 years experience in multi-union unit management in a number of service and manufacturing industries, including a Union Carbide Corporation where he worked for 24 years. He has been with Orkin for seven years serving most recently as president of Orkin's Atlantic division.

Gene's former responsibilities in the Atlantic division will be assumed by Freeman Elliott who began his Orkin career as a lawn care technician following graduation from the University of Georgia. He quickly moved through the Company working as a service manager, branch manager, National Service manager, and most recently as assistant to the President of Orkin's Atlantic division.

And the last important organizational move that warrants mention is Greg Clendenin's decision to join Rollins this month as the incoming President of Orkin's Southeast division, filling John Wilson's previous role. Greg has 30 years of pest control management experience and is a highly respected industry leader.

Most of Greg's industry experience was acquired at Sears Pest Control, at the time a $100 million company, and Middleton Lawn & Pest Control, a well respected Florida pest control company. We are proud to have him join our team.

In March we will launch two new pest control commercials as part of our 2010 advertising, telling consumers that Orkin is relentless about keeping pests in their place. [Chet] the Cockroach will be back along with two giant ants. We're excited about both of these commercials as they build on our last two years creative. We expect them to get a lot of attention and make the phone ring, so be on the lookout for them.

I hope that you sense that we are prepared for and optimistic about 2010, although we recognize that the business environment will again provide challenges. We're confident that we're up to the challenge and that we will continue to grow even when others don't. Our strategies and business model are working and we will continue to expand Rollins through both organic growth and selected acquisitions. I'll now turn the call over to Harry who will take you through the financials. Harry?

Thank you, Gary. It seems like the year just flew by. While many companies probably couldn't wait to get the year over, we enjoyed a very good year with record revenues and profits. This one we'll enjoy -- well, I wish I could say for some time, but unfortunately it's in the books and our investors will be happy to know we're working hard on making 2010 another successful year. Let's talk about the quarter's performance.

Today we reported revenue for the fourth quarter of $259.6 million representing 4.6% revenue growth. Net income increased 59% to $20 million or $0.20 per diluted share, compared to $12.6 million or $0.13 per diluted share for the same period last year. Year-to-date revenue was $1.74 billion, a 5.2% increase, while net income has increased 21.8% to $84 million. EBITDA reached $164.4 million, an 11.7% increase, and EPS has increased 21.7% to $0.84 per diluted share.

With what is a very predictable revenue and profit model due to our strong recurring revenue base, you shouldn't expect to see a quarter's earnings jump 59% unless something unusual happened in the quarter. And as Gary already mentioned, we had two unusual items which I'll expand on.

First, you may have noticed our very low provision for income taxes this quarter, 10.7%, bringing the full-year provision to 33.5% -- and this is after the year was running 38.4% through three quarters. I wish I could say that this would be our ongoing rate; wouldn't that be nice? What's happened is as of year end Rollins converted Orkin, Inc. and certain other subsidiaries from C Corporations to wholly-owned LLC's.

This change has no impact on how the companies operate, but it simplifies our structure from a tax perspective. As a result it will allow the Rollins, Inc. Corporation to offset prior state tax losses it generated, primarily in Georgia, by using the operating profits generated by the Orkin and other LLC subsidiaries. By enabling us to utilize the tax loss carryforwards in the future we were required to bring down the valuation allowance that has been established against the NOLs.

In addition, we did some restructuring in Canada and repatriated cash. The net of all these tax events enabled us to reduce our provision by approximately $6.2 million. Going forward the conversion of our operating companies to LLC's will allow us to reduce our state income taxes by approximately $1.5 million a year.

The second item that Gary has already addressed was the $2.9 million impairment charge related to our Orion routing and scheduling project. Let me make it perfectly clear, our routing and scheduling project is continuing, but we needed to back up and make a change in direction to be successful. As Kenny Rogers' song indicated, you've got to know when to hold them and when to fold them, and here we folded on our current approach.

There are promising alternative routing solutions in the marketplace that we are actively exploring. We expect to move forward quickly with another development partner to capitalize on the benefits we are confident that can be achieved through implementation of an automated routing and scheduling system.

Looking at our quarter and full-year results, excluding the $0.06 impact of Rollins' conversion to the Orkin -- of Orkin to a limited liability company, and the $0.02 impairment charge associated with the software system write down, the Company's EPS per diluted share for the quarter was $0.16, an improvement of 23.1% and the full-year $0.80 of 15.9% improvement. Solid results for the quarter and full year.

Let's talk revenue. We saw our revenue increase for the quarter across our entire family of pest control brands and in total revenue was up 4.6%. For the first time this year the exchange rate with Canada helped us and, along with Crane, accounted for 2% of our growth.

Breaking down the revenue by the service components, starting with the largest and fastest growing part of our business, commercial pest control. For the year commercial pest control was nearly 42% of our business and grew 9.7% in the quarter helped by strong commercial fumigations, which Gary mentioned, as well as the Crane acquisition and the stronger Canadian dollar.

If you take those impacts out, commercial revenue grew at 3.9%. We saw strengthening in local branch commercial sales while national account, which comes on board unevenly, did not contribute in this quarter. While the commercial business is not primarily a lead driven business, with more of the new business sold creatively, knocking on doors, etc., it was nice to see the leads increase over 10%.

Gary stole some of my thunder, it was probably less thunder and more of a little rumble, but we did have 1.1% growth in our residential pest control business which makes up almost 40% of our business this year. This is the strongest quarter since Q2, 2008. All it took was strong lead growth, better pricing and better retention. It sounds simple, but it isn't.

As for termites, representing 19% of our annual revenue, we had another good quarter. While not as strong an improvement as last quarter, we saw growth in all of our companies with revenue increasing 2.1%. This resurgence of our termite business continues to encourage us. Gross margin for the quarter improved 100 basis points, increasing to 47.4% for the fourth quarter versus 46.4% in the prior year.

Margin improved due to a combination of improvements in service technician productivity, lower cost to fleet. So it has moderated significantly as fuel for the first time this year in December exceeded the prior year. As well is reduced cost to risk which was offset by an increase in materials and supply costs primarily due to service mix.

Depreciation and amortization expenses for the quarter decreased slightly totaling $9 million. Depreciation was $3.9 million and amortization of intangibles was at $5.1 million. This amortization continues to represent a significant non-cash charge to the P&L. Based upon our fully diluted shares outstanding there will be a non-cash after-tax charge of $0.13 this year.

Sales, general and administrative expenses for the fourth quarter increased $4.4 million or 5.3%, or 20 basis points, to 34.1% of revenues. An increase in administrative and sales salaries as we expanded sales staffing this year over last, higher stock-based compensation charges and personnel related costs, as well as some professional fees, accounted for most of the increase.

We already talked about the tax rate, but I don't mind repeating myself on this point -- the tax rate for the quarter was 10.7% and 33.4% for the full year. Unfortunately this was due to some one-time events and we do expect next year's rate though to be less than 38%. Of course that's provided Congress and various state legislatures don't pass any new tax legislation.

Lastly, I'd be remiss not to talk about our strong balance sheet. We ended the year with $30 million in debt, $20 million net of cash, with more than ample capacity to fund future acquisitions. One of the wonderful attributes of this business is its strong cash flow generation.

I saw an article in last week's Wall Street Journal's Heard on the Street that treasurers were in a quandary, a cash conundrum -- what to do with their cash. We've not had that problem. Our strategy has not changed in 10 years, it's very simple. The number one priority has been and remains acquisitions of excellent pest control companies.

Unfortunately the opportunity for acquisitions in many years leaves us with plenty of cash, a problem many companies would love to have. This is not a capital intensive industry, giving us ample opportunity to return money and value to our shareholders through our ongoing stock buyback program as well as our dividend.

This year net cash provided by operating activities is nearly $111 million, substantially greater than net income of $84 million. Everyone [adds] depreciation and amortization, in our case $16 million for depreciation and $21 million for amortization of intangibles related to those prior acquisitions. What did we do with that cash? As I said, the number one priority has been and is acquisitions.

There was not an abundance of excellent companies available this year, but we did spend $11 million on smaller strategic tuck-in acquisitions. We paid down our debt remaining from the HomeTeam acquisition, $35 million. We reinvested $16 million on capital expenditures.

In addition, we returned nearly $57 million to the shareholders via our stock buyback and dividend programs. We purchased nearly 1.7 million shares in 2009 under our previously approved plan and have authorization to purchase an additional 2.9 million shares.

As to dividends, the Board of Directors in yesterday's meeting increased the quarterly dividend 28.6% to $0.09. This marks the eighth consecutive year the dividend has been increased a minimum of 12%. It's not hard to spend $110 million. It's like my wife said, the money was in the account and it just went. Gary won't buy that explanation from me though.

Two weeks ago we had our annual leadership meeting with almost 150 of our top managers from all of our operating companies. It's an amazing group of extraordinary talent and to a man and woman; everyone was enthusiastic and very positive about the results we expect to deliver in 2010. Our team is focused and sees the wonderful opportunities we have before us.

I look forward to talking about another record year four quarters from now. And with that 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.

(Operator Instructions). Clint Fendley, Davenport.

Good morning, Gary and Harry. Harry, I wondered -- the termite accrual adjustment for the quarter and any idea how that impacted margins?

Our termite claims for the full year were flat to last year. Our liability continues to decrease as the number of open claims and severity of claims are lower. I don't have the analysis of the termite accrual handy to give you a net number, but the accrual ended the year just under $10 million.

Okay. And any idea (multiple speakers)?

A long way from the $100 million it was 10 years ago.

Okay, thank you. I guess I'll follow up after then for a bit more details. Any idea on the -- on the HomeTeam, obviously some really good news there with Toll Brothers. Can you remind us how many other builders there are that you could have new and expanded relationships with as we look forward here?

I didn't get a final count for 2009. I think the year before they dealt with 999 builders in total. I believe they now have relationships with not 20 out of the top 20 homebuilders, 19 out of 20. So there are always additional homebuilders across the country. We continue to work with them to get additional penetration into further of the development. And as new housing starts will increase, HomeTeam's installations will increase as well. So we're hoping we've bounced off the bottom and it's a good source of new customers for them that will be growing in the next couple of years.

Last question -- can you maybe just talk a bit about how you're thinking about pricing? Obviously we're still in a -- hopefully what is an early recovery phase here. But yet unemployment remains very high. How does that affect the way that you think about the pricing for your services as we approach the busy spring season here?

Clint, we're very fortunate that we have I guess a giant laboratory in the form of our call centers. And the largest part of -- one of the largest parts of our business is residential pest control and it's sold over the telephone. So we're really able to see what happens when we raise our prices and we're able to look at closure by market. And so that gives us the ability to do some fairly precise adjustments to our pricing.

We learned quite a bit about special offers this last year; certainly those are more desirable as the season wanes. So I really think that rather than speculating, we're in a position frankly to see what happens when we raise our prices $2 in the market or when we reduce our prices $2 in the market. We're also looking at ways to try to look at the demographics of the customers in that market based on the customers that we have. So we've kind of taken the speculation out of it.

I think it's like anything else, that things can come along as far as demand is concerned, but we have a -- we think we have a pretty good handle on our pricing. And we're very fortunate, we've really found that we've not run into elasticity problems, our service is tricky. When people want it they really do want it and they want to keep it.

Great. That's very helpful. Thanks, guys. Good quarter.

(Operator Instructions). Jamie Clement, Sidoti & Co.

Gary, Harry, good morning. Gary, I think you all mentioned that retention numbers in residential improved during the quarter, is that right?

That's right.

Based on your experience, would you attribute that more to the economy or were there improvements in service protocols or something that you guys developed during the year that you'd also give some credit to?

Jamie, that's really hard. Unlike the pricing, I guess our understanding of the pricing situation (technical difficulty) effect on our business. I would have to say yes to your question because we have worked on our pay plans, we've worked on training; trying to improve the value component is what we provide to the customer.

I think that typically when the economy falters our people put a higher priority on retention from a culture point of view. So I really think it would be a combination. I'd like to think that it's a great indicator that the economy is changing. I think we do think that there are some indications of that, but we can't precisely determine how much of it is us and how much of it is the economy.

I think our position at the beginning of the year and all through the year was that we felt like we weren't going to get any advantage from the economy and we were going to have to come up with plans and programs to offset that situation.

Let me maybe ask it a little bit of a different way. When you have a customer that does not re-up with you or goes dormant for a couple of months and doesn't live up to their end of the bargain and you talk to them and get reasons for that, has the frequency of them raising their hand and saying, you know what, I just can't afford it -- has that comment appeared to have kind of moderated to your call centers?

I don't think that we've seen any notable uptick as far as pricing and value and I can't afford it. I think one of the things that's contributed to our business, kind of to go back to your first question, is that we have record low turnover. One of the good things that a poor economy typically brings is high unemployment and the people appreciate their jobs more. And we know that when you get into residential pest control and even commercial pest control, having the same technician deliver the service is one of the most important parts of the whole service delivery scenario.

That's a good point. Okay, thank you very much for your time.

Thank you. There are no further questions in the queue at this time.

Okay, well it's kind of going, going, gone. We really want to thank you for joining us today. We remain cautiously optimistic concerning the new year. And we'll continue to work to grow our business organically and through acquisitions. And we look forward to speaking with you again next quarter. So thank you for your interest.

Ladies and gentlemen, this concludes the Rollins, Inc. fourth-quarter earnings conference call. If you'd like to listen to a replay of today's conference, please dial 303-590-3030 or 800-406-7325 with the access code 420-0223. Those numbers again are 303-590-3030 or 800-406-7325 with the access code 420-0223. ATT would like to thank you for your participation. You may now disconnect.