Rollins Inc (ROL) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Rollins, Inc. First Quarter 2010 Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions.) This conference is being recorded today, Wednesday, April 28, 2010.

I would now like to turn the conference over to Ms. Marilyn Meek. 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 a pass code of 4282234. 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, 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 First Quarter 2010 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 fact, 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 ending December 31, 2009.

Thank you, Harry. As most of you know, we concluded a successful 2009 with revenue up 5.2%, profits before taxes were up 11.8% and our dividend increasing over 28% in January.

As we began our new year, I looked over our history since 1984 -- 1984 was the year of the spin-off from Rollins of Rollins Communications and RPC, our oil services company. Over this period of time, Rollins, Inc. has increased dividends 19 out of 25 years, increased our revenue 24 out of 25 years and increased profits 21 out of 25 years. We're proud of these accomplishments. But we're well aware that 2010 is a new year. At Rollins, we don't spend much time looking in the rear-view mirror. But I thought that you'd like to hear those historical results.

We're extremely pleased with our first quarter, having reported our 16th consecutive quarter of improved earnings. At the same time, revenues rose to $253 million or 4.1% over last year's first quarter, with all of our business lines contributing to our growth.

The increase in demand for our services which we experienced the fourth quarter is carried over into the new year. We were particularly pleased with the strong increase in residential pest control revenues, which were up 2.5%. This represented the strongest organic growth since the fourth quarter of 2007. It feels good to start the year with this kind of results. Some of you may recall, in the first quarter of last year, we saw a decline in residential pest revenues of 2.5%.

In addition to our residential improvement, our first quarter had commercial pest control growing 6.6%. And termite revenues were up 2.1% year over year. Earnings improved 11.2% from $15.8 million to $17.6 million. All three business lines had good results. Harry will cover more financial details later. But needless to say, we're pleased with the start of 2010.

It's been some time since we talked about some of our ancillary services -- bed bug and mosquito control, in particular, which last year contributed over $10 million in revenue. Those services are expected to continue to grow this year at double-digit rates. As the general public becomes more educated about these pests, specifically the inherent risks involved with them, and as they become more aware of the related services we provide, we will see the pace of this business accelerate. Many of our new customers in this area come from referrals, so we have a compounding effect with each new customer added.

Certainly, two of the most frightening words in our pest vocabulary today have become bed bugs. Just mention to a friend that you know someone who has bed bugs in their home or that an acquaintance had an unfortunate bed bug experience in some recognized hotel, and see the response that you get. Today, the hotel-motel industry and residential property managers are very concerned about bed bugs at their properties and the related liability.

Looking to tackle this challenge, the National Apartment Association Education Institute, or NAAEI, recently approached Orkin to partner with them. Orkin responded by hosting a number of webinars, as well as developing a White Paper with them, answering related questions from a pest management perspective. Jointly, we developed Don't Let Them Bite Our Community, a resident tip sheet to help tenants accurately identify and report sightings. I invite you to take a look at these at the Orkin University Online and OrkinCommercial.com.

Partnerships like the one with NAAEI are extremely important to us. We were therefore pleased to have renewed our partnership with the Building Owners and Managers Association, BOMA International, for the third year running. We have and will continue to work with them, serving as a critical resource for the commercial real estate industry while supporting building owners and managers with the pest management aspects of their operations.

Orkin has also expanded their relationship with NSF International, a leading authority on food safety. Food processing companies are under close sanitation scrutiny and receive periodic third-party audits to make sure they're in compliance with various local, state and federal regulatory requirements. In partnership with NSF International, we recently developed a free online training video titled Two Experts, One Customer, featuring an Orkin pest management expert and an NSF safety veteran with ten years of experience in auditing food processing facilities. The video offers tips and helps prepare food processors for the pest control portion of their third-party audits.

By the way, our Gold Medal Protection clients have an average score of better than 95 on the pest management portion of their third-party audits.

Speaking of food processing, we are pleased to have received for the second year in a row the Reader's Choice Award for Pest Management from Food Processing Magazine, a leading publication within the food and beverage industry. Additionally, every year since 2003, Orkin has been the only pest control company named to Trading Magazine's Top 125 List of organizations that excel at [human] capital development.

These two awards emphasize the importance of the investment we put in employee training.

Simply, with all the great awards and alliances that we're building, you can be assured that we're working hard to create relationships with apartment managers, hotel operators, building owners and food manufacturers and processors that will cause them to first think of Orkin when they have pest control needs.

Orkin has always had an exceptional brand recognition. And this recognition, plus the positive reputation behind it, continues to drive customers to our services.

Now it seems that we've taken on a new level of celebrity with our two new TV commercials becoming a hit on YouTube. These commercials, in case you haven't seen them, known to us as Hot Tub and Ant, have received over 100,000 hits on YouTube since they began airing in March. We hope that this is indicative of things to come lead-wise this season.

Last year we mentioned probably more than once that our Company was recession-resistant. But what I hope you also remember is that we noted that, unlike a few companies that also share this aspect, we are not recession-dependent. As the economy improves, we would expect our business to grow at a faster rate. The country has started to see some signs of economic improvement toward the end of last year and the first quarter, as several indicators point towards continued improvement. Based on this, coupled with the business initiatives that we have under way, we believe that we are well positioned to have accelerating revenue this year.

On our last call, I mentioned that our focus for 2010 would be on increasing our new sales yield. That will be achieved by focusing on lead closure, service start percentages, along with customer retention. Simply, yield to us ultimately means efficiently growing our customer base. To help us do this more effectively, we have enlisted help from a leading business consultant, with whom we've had previous success, to identify specific actions that we can take in this regard.

Even though we've been in pest control sales and service since 1901, sometimes it pays to have a fresh perspective. We have a team working with field operations on improving and identifying methods to improve all of these drivers that I've mentioned. As I've said in the past, we have a culture at Rollins where we're never satisfied and continually look for ways to improve our performance.

As an example, our work with customer satisfaction surveys shows that we have a great opportunity to provide more effective service and customer retention improvement by having a better dialogue between our service specialists and our customers. To that end, in January we introduced AIM, which stands for Access, Implement and Monitor. This is our branded approach on how we communicate with our customer and the methods in which we conduct pest control services in our customers' homes and businesses. Not only does our AIM approach focus on how we execute our property inspections, it transitions into how we utilize these findings to address pest issues. And finally, it also becomes a way in which we can open the lines of meaningful communications with our customers.

In support of the launch of AIM, we introduced our new training modules that address specific how-tos for better communication and inspections and treatments to help provide a more positive customer experience. We're convinced that effective customer research, along with improvements such as AIM, will have a positive effect throughout our whole organization and will create significant bottom-line benefit through improving customer retention and customer referrals.

Just a brief update on our Service Routing Project -- we are testing new products and are very encouraged. Our Proof of Value pilot is currently in two test branches. To date, our technicians are enthusiastic about the results. And we're seeing the improvements in reduced miles driven. It's too soon to track customer service improvement. However, we're optimistic. Past experience has taught us not to get too excited at this stage, as there is much to do before we have a system to roll out. But the point is that we continue to press on, as the benefits could be very positive. We hope to be able to expand to two additional branches in the upcoming months and share our progress with you as we go forward.

This quarter, we continue to add to our international franchises, establishing our first franchise in Ireland, which is our 15th international franchise.

There's a lot going on in our Company. We got off to a great start in the first quarter. And we're excited about our prospects for the rest of 2010. We're on plan for the year, and intend to grow our business organically as well as through selective acquisitions.

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

Thank you, Gary. As Gary has already said, we were extremely pleased with our first quarter's results. And it's not just the results we're pleased with, but the trends we're seeing in the business as well as the opportunities we have identified to significantly improve our business.

Let's talk about the quarter's performance and get into some details. Today we reported revenues for the first quarter of $253 million, representing 4.1% revenue growth. Net income increased 11.2% to $17.6 million or $0.18 per diluted share, compared to $15.8 million or $0.16 per diluted share for the same period in 2009.

During the fourth quarter, I shared our strong lead growth along with better pricing and better retention. Although it's hard to get real excited about lead growth in the dead of winter, it's now spring. And all three of these fundamentals continue to improve and build. It's not an aberration, but what we believe is a substantial trend.

Getting into the details, revenue growth 4.1%. Foreign operations, primarily Canada, accounts for approximately 7% of our revenue. A much stronger Canadian dollar this quarter contributed approximately one-fourth of the revenue increase. Doing the math, looking at the balance of our domestic revenue, it grew 3.1 percentage points.

This quarter, I want to switch it up and first talk about our residential pest control revenue, because that's where the excitement is. It is typically not a quarter for residential pest control to shine. In fact, this is the first time in a number of years that we have seen sequential growth in residential pest control from the fourth quarter to the first quarter.

What's particularly encouraging is the strength throughout the quarter. We saw very significant lead increases every month this quarter, even in February, the coldest in the last seven years with 49% of the US covered in snowfall. The first couple of weeks in March started where February left off, yet we achieved 2.5% growth in our residential pest control. What's particularly interesting is that growth is not geographically driven, not channel driven, but everywhere. We even saw double-digit increases from Yellow Page calls.

I think we're seeing less caution and more confidence from consumers. In fact, I just read that consumer spending, which accounts for roughly 70% of US economic activity, rose for the fifth straight month in February.

Remember, this portion of our business is significantly a lead-driven business. And we've been working hard to get more of our equitable share.

Overall, again, we are very pleased and encouraged, more so than any time in the last two years, about our residential pest control trends. Because this is a business that just keeps giving. Along with strong lead growth, we experienced better pricing. We are seeing the benefits of the price realization work we began last fall enhanced by better retention. In fact, the retention is the best we've seen in two years with only 10% fewer customers canceling. Hats off to our best-in-class service team.

The trend has certainly carried over in April, as well. But, Gary, do you ever remember when we've seen March, April and May all be strong months?

Nope.

Let's hope no volcano ash rains on our parade.

Turning attention to the component that has been and continues to be the fastest growing part of our business -- commercial pest control, which continues to perform well. It represented approximately 42.5% of our revenues this quarter and grew 6.6%, 4.3% in the US. We aren't seeing the dramatic up-tick here that we saw on the residential side of the business. But the commercial pest control continues to perform steadily. And we've had similar improvement in customer retention that we experienced in residential.

As for termite, it represents less than 19% of our annual revenue. We're pleased to say, we continue to see revenue growth. The last two weeks of warm weather in March was a little late in the quarter. However, the business grew 2.1%.

For anyone out on the call wanting to know about the swarm, it's too soon to say it did not affect our business in the first quarter of this year. Any swarm will be Q2 this year, which isn't all that unusual.

The improvement we saw so far this year came from continued growth in traditional completions and some additional pre-treat growth that we see -- as we've seen housing starts start to climb, while bait and renewals were basically flat. Overall, the strength of our termite business continues to encourage us.

Gross margin for the quarter declined 20 basis points, decreasing to 48.2% for the fourth quarter versus 48.4% in the prior year. Increase in cost of fuel and personnel-related costs both helped, and employment taxes more than offset improvements in productivity.

Depreciation and amortization expense for the quarter decreased slightly, totaling $9 million. Depreciation was $4 million and amortization of intangibles was $5 million. Amortization of intangibles declined $500,000 from this quarter a year ago as customer contracts, primarily from our 1999 acquisition of PCO Canada, are now fully amortized. We have almost $142 million of value assigned to customer contract and other intangible assets on our balance sheet as of March 31st. Amortization of intangibles will continue to represent a significant non-cash charge to the P&L for some time. Based upon our fully diluted shares outstanding, there will be a non-tax after-tax charge of $0.13 this year.

Sales, general and administrative expenses for the first quarter increased $3.1 million or 3.8%, representing 33.6% of revenues, declined 10 basis points. The increase in total dollars reflects primarily increases in personnel-related, professional services and fuel. In fact, fuel's impact on the cost of services provided in SG&A in the quarter totaled $1.8 million.

The last item of note related to the P&L, our provision for income taxes was 37.3% versus 38.6% a year ago.

Our balance sheet remains strong, ended the quarter with $14 million in cash and $15 million outstanding on our line of credit. If I didn't need some cash to operate the business, our borrowings to fund Home Team and Crane would be fully paid back.

We are continuing to look for outstanding pest control acquisition candidates to invest in. If any candidates are listening, let me point out it's a great time to sell. Capital gain rates will only be going up. Don't delay. We have ample borrowing capacity and time to get a deal done before the year is out. We promise complete discretion.

Our balance sheet will remain strong as our business generates substantial free cash. For the full year last year, cash provided from operating activities totaled $111 million. In the first quarter of this year, it exceeded $28 million, an increase of $7.6 million over last year's first quarter. Capital expenditures usually fall between $14 million and $18 million for the full year.

Our team remains focused. The year's off to a great start. Trends are only improving. We have lots of opportunities to build on our track record.

I look forward to talking to you again next quarter. And thank you for your time and interest. 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.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions.) Our first question is from the line of Clint Fendley with Davenport. Please go ahead.

Hi. Good morning, gentlemen.

Good morning.

Good morning.

The termite growth really seems to have turned the corner here in the last couple of quarters or so. What do you guys attribute this to?

Well, I think we have increased our staff somewhat. We have improved our training. And we've got a nice lead up-tick in the quarter. So I think it came from three different areas.

Could you remind us how much termite exposure the Home Team acquisition had? And is there anything that you guys have maybe learned, even from them, as -- that could explain the improved growth rate for that unit?

No, I think the -- one of the biggest things that we've learned from Home Team has been their customer surveying and employee surveying which we have adopted, which has an impact on turnover and customer retention. But, no, their -- as you know, their business is very much construction orientated. And as far as just conventional termite sales, I think we've probably helped them as much as they've helped us.

I think with the -- while Gary said construction orientated, their builder exposure, or their new revenue that comes from builders is under 10% of their revenue. But, certainly, that -- the building starts have improved. So that gives them some additional pre-treat work to do.

I think where they've seen growth, though, is as their business has slowed down with the economy and builders, they've become a little more creative. And they've certainly done a very good job at going back and cross-selling their existing customers, both conventional and those with (inaudible). So they've done a good job in marketing their other services and cross-marketing.

Harry, were there any material adjustments to the termite accrual in the quarter?

No, claims continue to move down. They were -- I think claims last year in total were maybe $7 million. This year through one quarter, they're running around 10% less than a year ago -- very little -- no significant changes in the reserves.

I guess just a final question -- in light of the improving consumer scenario here, just any thoughts on price increases in both the res and commercial for this spring?

Well, we have done studies already as far as price increasing existing customers. And we do plan to have a price increase program this year. The studies would support that. And rate card-wise, we would intend to continue to increase our rates in specific markets. So based on last year and based on our testing, we think we have opportunities in both of those areas.

And we'll see the impact -- the price increase traditionally will be -- I think the residential price increase for Orkin is effective in May. Depending if you're an every-other-month customer, the first time you might see a price increase, if you're in that group that's eligible, will be either May or June. Home Team is -- traditionally increases their price in July. So -- and then our commercial price increase, for those customers who don't have contracted price increase, it will -- I believe is June this year. So we'll start to see a little of the impact of price increase program in the second quarter, and more so in the third quarter. And I would expect in total, the impact to the Company should be pretty much in line with last year.

Great. Thank you, guys. Nice quarter.

Thank you.

(Operator instructions.) Our next question is from the line of Jamie Clement with Sidoti & Company. Please go ahead.

Gary, Harry, good morning.

Good morning.

Good morning.

Looking at your excellent residential quarter, do you guys have the ability to track when your business is -- when customers are coming to you, do you have a sense whether these were perhaps customers that had been with you that had dropped out for maybe a year or a year and a half, and they're coming back? Or whether they're totally new people? I don't know if that's something that you guys have any way of tracking whatsoever.

I think the --

I think the vast majority of our additional customers are new customers. And they may have been former customers someplace else. But technically, if a customer returns, it's later in the season.

Okay.

So I would say the vast majority of the customer growth came from new customers.

Okay, that's interesting. Because I was just curious whether it might've been okay, well, it was -- had been a loyal customer, fell -- they let service lapse for a while and now they're kind of coming back into the mix.

But it sounds -- now, in terms of regeneration, you guys over the last couple of years have, I think, emphasized the Internet a little bit more than you had in prior years. What's kind of the breakdown of where your leads are coming from these days?

I think we've said our lead growth is coming across all the channels.

Okay.

Yellow pages, traditional phone, Internet. And we really don't break down -- I don't have -- I have totals. I don't have them by channel. But all channels are operating well.

So in other -- I mean like, Gary, just out of curiosity, are your Yellow Page leads up year over year?

Yes.

Yes.

Oh, they are? Okay. All right.

Yeah, they were up several digits --

Wow.

From last year.

Wow. Maybe the Yellow Pages are coming back.

Well, we're pleased with our ability to better manage our Yellow Page advertising. So I think we spent time on it. It's an important lead source. And I would suspect that we kind of reversed the trend that generally was out there concerning Yellow Pages.

And just a last question kind of as we head into warmer weather. How do you -- how are you all planning on marketing mosquito and bed bug and kind of warmer weather kinds of phenomena? I guess bed bug could be really any time of year. Right?

Yes, because it's strictly an inside pest.

Right.

So it's like 70 degrees or so in a hotel or in your home most all the time. We market to existing customers. Let's talk about -- I think bed bug is more lead-driven as far as an occurrence in a hotel or whatever. Mosquito is that we cross-market to our existing customers, which has historically been the way we were growing the business. But we're involved now in some direct mail and some other forms of advertising. It doesn't really lend itself to television or anything like that. We have references on our Website. So we're trying a more faceted approach. But you just can't afford to create a bed bug commercial or a mosquito commercial.

Okay. All right. Well, as always, thank you all for your time.

Thank you.

(Operator Instructions.)

Okay. Well, thank you for joining us today. We're cautiously optimistic concerning the balance of the year. And we continue to work to grow our business, as I mentioned, both organically and we are certainly looking for strategic acquisitions. And we look forward to talking to you next quarter. Thanks for being here.

Ladies and gentlemen, if you would like to listen to a replay of today's conference, please dial 1-800-406-7325 or 303-590-3030 and enter in the access code 4282234 followed by the # key. The replay will be available until May 5, 2010.

This concludes the Rollins, Inc. First Quarter 2010 Conference Call. Thank you for our participation. You may now disconnect.