Rollins Inc (ROL) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Rollins Q2 2010 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 28, 2010.

I would now like to turn the conference over to Marilynn 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're 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 4329321. Additionally, the call is being webcast over at 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, Senior 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 second-quarter 2010 conference call. Harry will read our forward-looking statement and disclaimer, and then we'll begin.

Thank you, 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 on our Form 10-K for the year ended December 31, 2009 for more information on the risk factors that could cause actual results to differ.

Thank you, Harry. Well, we're very pleased to report that all business lines contributed positively to the second-quarter financial results, where revenues for the quarter rose 5% and net income was up 8.7%. This marks the 17th consecutive quarter of earnings improvement. We continue to experience solid performance in residential pest control revenue, which were up 4.7%, the highest increase that we've seen in this service since the fourth quarter of 2006. This is particularly gratifying coming off of last year's second quarter when residential pest control was down 1.8%.

Commercial pest control reported an increase in revenues of 5.4% while our termite business grew 4.2%. Additionally, we are seeing a strong growth in our ancillary services. Our mosquito season is now in full force, and at the end of June we saw an almost 20% increase in this business over last year. And, as discussed last quarter, we continue to see a lot of bedbug activity with a lot of press coverage as bedbugs remain a major concern across the country. This business is rapidly growing as well.

We believe that our positive financial performance is an indication that our strategy to steal shamelessly throughout all of our brands is paying off. The sharing of best practices concerning price increases, new customer pricing, and new customer acquisition is benefiting all concerned.

In the end, however, it all comes down to the many positive contributions our employees make every day. We take pride in our strong emphasis on recruiting high quality individuals when needed and, more importantly, pride in retaining our base of excellent employees. At the same time, we foster an environment in which all of our employees have the opportunity for career advancement.

We were, therefore, pleased to announce earlier this month that Steve Levitt, who joined Orkin in 1994, has been promoted to Assistant to the President of Orkin USA. Most recently, Steve was the Senior Region Manager for Orkin in the Pacific Division, responsible for four regions and the West Coast Customer Care Center. Steve is relocating to Atlanta and will be focusing on, among other things, maximizing Orkin's residential pest control growth.

We're also pleased to have Bob Cipriano and Greg Baumann join our home office support organization. Bob brings over 25 years of human resource expertise for Rollins gained through his senior level positions at Kimberly-Clark and General Electric. He joins Rollins as Assistant Vice President of Human Resources and will oversee five division human resource areas for Orkin. In a people business like ours, his is a big responsibility.

We're very proud to have Greg Baumann join our company as Director of Technical Services. Including 18 years at the National Pest Management Association, he has worked in the pest control industry for almost 30 years. Greg will provide technical support and service guidance to Orkin branches nationwide. As I mentioned, Rollins is a people company, and we are rightfully so proud of these three and all of our team.

As many of you are aware, strategic acquisitions are an important aspect of our business plan, and over the last ten years, we have acquired five significant pest control companies that today represent over a third of our business. To that end, at mid-month, we announced that we have signed a definitive agreement to acquire Waltham Services, Inc., established in 1893. By the way, it was hard to find a business older than Orkin, but we did.

Waltham is New England's oldest and finest pest control company. We're extremely pleased that they will be joining our family of brands. Their outstanding management team and talented associates will greatly enhance our service network in the important Northeast market. Waltham's isn't new to our company, having had a strong benchmarking relationship with our Western Pest Services business for over 40 years. Ranked the 33rd largest company in the industry, they have annual revenues exceeding $17 million. Following the acquisition, Waltham will operate independently to preserve its successful brand, loyal customers, and employees.

Internationally, we continue to expand our presence globally, as well, and an Orkin franchise will begin to offer pest control services in Turkey. Turkey marks the 16th foreign country in which Orkin operates. This franchise will primarily provide commercial pest control services. In June, the owners of the franchise completed their initial training at our learning center here in Atlanta.

From time to time, we talk about the importance of our long-established relationships with our various vendor partners. However, I'm not sure if we've mentioned Portrait Software previously. Located in the UK, they are a provider of customer interaction optimization software, which is call center related. We began our relationship with them in 1999 when we began using their software in Orkin's national call center. During the second quarter this year, we expanded our relationship with Portrait to include all six of Orkin's call centers. This implementation will be conducted -- excuse me, concluded later this year. We believe this upgrade and expansion will allow us to better identify and measure agent performance and service offerings across our entire call center network. Our goal is to facilitate high-quality and personalized dialogues and provide exceptional customer experiences at every interaction throughout the country.

During the quarter, we also announced a partnership with NSF International, an independent third party healthcare organization. We're working together to assist food processing and warehouse facilities by helping them refine their pest control programs to excel in food safety audits via an internet site. This idea was born when our quality control people polled our food processing and food warehousing contacts to find out how they stayed ahead of food safety audits. Some of the responses we got back were that they relied on a calendar and in some cases just from memory. We thought both of these were concerning. We saw an opportunity to develop for them a better way to manage their pest control responsibilities and surpass food safety audit requirements. And we're doing that with a web tool that counts down the days until the user's next food safety audit and sends reminders and tips on the important dates via email.

Well, these are just two examples of how we continue to invest proactively to improve our business and help to ensure our residential and our commercial customers receive the highest quality pest control service.

The first six months of 2010 have been a busy and rewarding time for Rollins. We're enthusiastic about the balance of the year and intend to stay focused on growing and improving our business. I'll now turn the call over to Harry, who will provide you with the details of our financial results.

Thank you, Gary. Good morning. Appreciate your all joining us on the call. The second quarter was one of solid growth positioning us well now halfway through the year. Today we reported revenue of $298.8 million representing 5% revenue growth. Net income increased 8.7% to $27.7 million or $0.28 per diluted share compared to $25.5 million or $0.26 per diluted share for the same period in 2009.

Last quarter we reported that the trends we had seen over the last six months as to the strong fundamentals that drive our revenues -- leads, pricing, and retention -- was a trend and not an aberration. I'm happy to report today that this trend is strong and continuing. Clearly, we have positive momentum.

Let's look deeper into the results. This quarter we enjoyed our strongest organic growth in some time with revenue growth of 5%. With foreign operations, primarily Canada, accounting for nearly 8% of our revenue, it's important at times to look at the impact of foreign currency exchange. We continue to benefit from the stronger Canadian dollar so the impact is lessening. If we look just at our domestic revenue, revenue was up 4.2% versus 3.1% last quarter.

Let's talk about our residential pest control service, which represents almost 40% of our business where our momentum continues to build. A lot is written in the press of late about weakening consumer confidence and demand. However, you couldn't tell that looking at our business, which really isn't surprising. As we have stated and demonstrated for some time, pest control is just not a consumer discretionary purchase. As Gary says, rats and roaches don't read The Wall Street Journal.

[A greater] quarter with strong fundamentals, leads, pricing, retention. Retention is a great barometer into our customers' frame of mind and keeps -- and ours keeps improving. Residential pest control grew 4.7% in the quarter, its best quarter for organic growth going back, as Gary said, to the fourth quarter of 2006.

As we'd talked about on the call last quarter, we started with a great April. Then May slowed, but June came back strong. It all added up to a strong double-digit increase in leads for the quarter and is continuing so far into this quarter. As much as we'd like to take credit for all of this, you have to give Mother Nature some credit as well. We aren't asking for any breaks in the current hot weather, though, though we do sympathize and support those looking for some rain. Nothing like some good heat with some rain mixed in. It really brings on those ants, the nation's number one insect pest.

We have continued to work on our price realization programs and are experiencing better pricing. Last year, Orkin's residential price increase program was instituted in two phases, the primary increase in May, and a second, much smaller group of customers, in July. In order to balance this year's increase program, we delayed one month implementing the program in June. While it's favorably impacted the quarter, less than $1 million, it only impacted one month in the quarter, unlike two months last year in the second quarter. HomeTeam will roll out their price increase in July as they have traditionally.

Retention continues to improve, as well, with just over 10% fewer customers canceling this year.

Commercial pest control, our fastest growing business line, this quarter continued to be a steady performer in a stagnant business environment. It represented over 40% of our revenues and for the quarter grew 5.4%, 3.3% in the US, giving up its domestic leadership baton to residential.

Sales saw a small decline in the quarter over the previous-year quarter. Our leads were off somewhat. Commercial business typically comes from knocking on doors, and we need to knock on more doors next quarter.

We had similar improvement in commercial retention that we experienced in residential. As we did last year, the commercial price increase rolled out June 1 to those customers who do not have a price increase condition built into their contract, so something less than half our customers. We expect to see a greater gain this year, which should offset the smaller gain we expect to see from the residential actions.

Net net will be consistent with last year's price increase program adding between 1.25% and 1.5% to Rollins' total revenue over the next six months.

As for termite, it represents less than 20% of our annual revenue. We are pleased to say we continue to see revenue growth, 4.2%. In addition to termite protection, our termite salesmen sell some ancillary services, including moisture control and insulation, which contributed to the revenue growth. HomeTeam's pre-treat business is also a contributor as they have seen housing starts begin to climb from a year ago.

Gross margin for the quarter improved 10 basis points to 50.3% for the second quarter versus 50.2% in the prior year. Slight improvements in productivity, favorable insurance and claim costs, as well as gains from the sale of vehicles more than offset an increase in our cost of fuel and personnel-related costs, both health and employment taxes. Given the amount of new business we put on, we were pleasantly surprised to still experience a decrease in service wages as a percentage of revenue.

Depreciation and amortization expense for the quarter decreased slightly, totaling $9 million. Depreciation was $4 million and amortization of intangibles was at $5 million. Amortization of intangibles declined $400,000 from this quarter a year ago as customer contracts, primarily from our October 1999 acquisition of PCO Canada, are now fully amortized.

We have almost $138 million of value assigned to customer contracts and other intangible assets on our balance sheet as of June 30. Amortization of intangibles will continue to represent a significant noncash charge to the P&L for some time. Based on our fully diluted shares outstanding, there will be a noncash after-tax charge of approximately $0.13 per share before adding the impact of the upcoming acquisition of Waltham Pest Services.

Sales, general, and administrative expenses for the second quarter increased $5 million or 5.4% to 32.4% of revenues, increasing from 32.3% for the second quarter last year. Almost half of the dollar increase was due to sales and administrative staffing increases to handle the growth in the business while the increase as a percentage of revenue was driven by higher personnel-related costs, both health and employment taxes, consulting and acquisition-related costs, and we can't forget fuel. In fact, fuel's impact on cost of services provided and SG&A in the quarter was $2 million, $3.8 million year to date.

Provision for income taxes was 37.6% versus 38.6% a year ago.

We continue to operate from a solid foundation. We have great confidence in our fundamentals. The Company is stable. The balance sheet is strong. We generate significant free cash flow, which gives us the ability to take advantage of growth opportunities such as the one presented to us with the acquisition of Waltham Pest Services, New England's oldest and finest pest control company. We will be closing on the transaction tomorrow, effective August 1.

Waltham, with its leading position in the marketplace, is profitable and generates good cash flow. I can't tell you how accretive it may be until we complete the valuation of its customer contracts and other intangibles, but I can tell you it certainly will be accretive from an EBITDA perspective. We will continue to look for outstanding pest control acquisition candidates to invest in. We have ample borrowing capacity, willing banks, and hope to be able to consummate additional acquisitions before the year is out.

With the year half over, we're well positioned for a great 2010 and look forward to talking to you next quarter. Thank you for your time and interest. Let me also express our appreciation to all of the Rollins associates whose hard work is behind our outstanding results, as well as thank our customers and suppliers for their continued support. With that, I'll now turn the call back over to you, Gary.

Thank you, Harry. Well, 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. And our first question comes from the line of Clint Fendley with Davenport. Please go ahead.

Hey, good morning, gentlemen.

Good morning.

Good morning, Clint.

I'd like to talk first about the termite segment. The revenue growth that you guys have had there is far better than what we saw during even the 2006-2007 time period. I know you've never been a big participant in the home inspection market, but could you tell us maybe what's happening to some of the smaller regional competitors that were big players in that market? Just trying to understand the acceleration here that we've seen in the growth in that segment.

Well, I think one of the reasons that we're growing and some aren't is because of our investment in adding additional salespeople where we have strong demand. I think we're doing a better job analyzing where to -- where we need the people engaged. We have worked on our training, sales training, which, I think, had kind of fallen a little bit by the wayside in the past, so we really refreshed our training. We refreshed our training of sales managers and trainers. So I think we're doing a better job closing our leads, handling those leads, by ensuring that we have the right staffing where we have high demand. And we're just focusing on the business better than we had in the past.

If we were to see the housing market turn up at some point -- I mean, have you learned anything from HomeTeam with regard to the pre-treat market? I mean, should we look at the segment differently if we were to begin to see strength within new home construction?

I think that we've concluded that HomeTeam needs to be our new home marketing organization. Orkin some years ago had been in the pre-treat business and really did not do it particularly well. It's a very competitive feel, and you really have to spend a lot of time cultivating relationships with builders. And HomeTeam just does that tremendously well. I think one of the great things that HomeTeam have going for them right now is they're able to sell some of the better builders that would not buy from them before because of the relationship that they had with [Simtex]. So they're pretty much encouraged. They feel like -- they see the housing starts improving. Now, much of that is because they've got new customers coming online like Toll Brothers and Pulte, but one of the wonderful things about HomeTeam is they really don't spend a lot of time relaying some of the bad statistics that you read about home sales out there. They just try to find more creative ways to get additional sales.

Right. Thank you. That's helpful. And switching gears, Gary, I wondered if you could update us on the BCG study. I mean, any early conclusions from the work that they are doing?

Oh, the EOE retention? Well, we continue to work hard on that. I think that we've gathered some great statistics about what percentage of customers or new sales we start, depending on how quickly we get there, and there's definitely a correlation. Quite often a branch is busy and just human nature sometimes is well, we don't really need to do anything tomorrow; we can always do it on Friday. But our statistics indicate that that's just a terrible conclusion. And we have done a better job educating our branches as to how important it is to get that account started quickly.

Steve Levitt's role, frankly, and I touched on him a little bit earlier, we took one of our very best people from the field, our operators, and he -- this is his area. And he is carefully monitoring how we are closing leads in our call center, which is really the beginning of the yield process, how few times we hand off that lead. We also know that every time we hand a lead off to another party that our closure goes down. And as I touched on a minute ago, we also know that when you don't start the sale the same day or when the customer wants you to, has requested it, that you really lose a lot of potential sales. So, I think it's like a lot of things that we've done in the past. We've just kind of got a magnifying glass type focus on this particular part of our business, and we're seeing improvements.

Okay, great. And the last question, this morning on NPR there was a report on the bedbug epidemic in New York. And I guess the City has gone as far as creating a bedbug czar to focus on the problem. Are you seeing any notable pickup in bedbug calls?

Our bedbug business is picking up, and we're pretty pleased. We have kind of an inter-company, multi-brand task force that's working on refining our bedbug protocols. I mean, I think we've been a little bit uncomfortable that we were doing this a lot of different ways. And as I mentioned before, I think we've gotten good about stealing shamelessly from ourselves, so we've got our team together and we are refining our treating protocol. We are refining our pricing and our guarantees. I mean, this thing is going to continue to pick up momentum. The press loves the subject. I had read earlier in New York that they were contemplating legislation where landlords had to advise new tenants as to whether the property had had bedbug problems in the past, which is a wonderful thing for a pest control operator. So, we are -- we're very much aware that this is -- really has high potential for us.

Excellent. Thank you, guys.

You're welcome.

Thank you, and our next question comes from the line of Jamie Clement of Sidoti & Company. Please go ahead.

Gary, Harry, good morning.

Good morning.

Good morning.

I -- this was actually not going to be my first question, but since Clint brought it up, I'll follow up with it directly. I, obviously -- I'm located in New York, and you can't actually -- there are many charitable organizations, high profile ones that you would've heard of, that now will not take mattresses because of this. And from some of the stuff that I read was that really the treatment protocols thus far have really not been all that successful. How -- or do you feel like there is -- first of all, A, is that an accurate statement? And, B, you alluded to this a little bit, but do you feel you have the right remediation techniques?

Well, we think that we're getting there, so to speak. I use the analogy there's more than one way to Chattanooga. There's not a single -- at this point, there's not a single best way to eliminate bedbugs. We think that one of the best ways is with heat. You have been using heat on the West Coast probably for 18 months now with good results. It has some drawbacks. One of the drawbacks is if you overdo it, you can get delamination of the furniture and some things with the wallpaper and so forth, so it's not a silver bullet, but we think that it really has a lot of potential.

You're right about the mattress deal. I mean, if you've got a severe bedbug infestation in a hotel, we would strongly recommend that they change the mattresses just because of -- eliminating one of the big sources of harborage.

We're using -- and don't laugh, but we're using dogs in Canada, dogs in the Midwest, dogs in the Northeast. Very effective. The same capabilities that they have of locating drugs on airline passengers, etc., they have the same ability, when trained, to locate bedbugs.

One of the big challenges with bedbugs, and I know this sounds a little bit farfetched, but the industry's even considering if there's some way that they can use DNA. Because you could go into a hotel and just do a wonderful job eliminating bedbugs and within a month they could have bedbugs again. And then you got a customer that's kind of unhappy that says, hey, why didn't you kill all my bedbugs? And you start debating about are these new bedbugs or old bedbugs that didn't die, and it's a pretty complicated thing because they're not going to stop their business. I mean, they're not going to -- when they have people from foreign countries, they're not going to restrict them from checking in.

Right.

And quite often, that's where the bedbugs come from to begin with.

Sure, and I mean, it sounds to me like we might be actually on the brink of some municipality legislation on all of this stuff when people finally figure out what the story is. I don't know. That's just -- that's my impression and obviously maybe I'm at ground zero, so to speak, in the bedbug world.

I don't think you're far off because I had read in the paper about Abercrombie closing their store in New York, and -- because of -- from having a bedbug problem, so this is not a casual situation like carpet beetles or something.

Sure. Sure. Changing gears a little bit, Gary, you all last year and towards the end of '08, you never made excuses on the residential side of the business. You never referenced really the recession. Obviously, your residential growth numbers were not what they had been. Now they're looking great. I know you spent a lot of time, a lot of effort, and a lot of money on refining your lead generation techniques, refined where your marketing dollars are spent, all that sort of thing. Do you think you're getting a little bit of a lift from the fact that the economy maybe today isn't as bad as it was a year ago? Or do you really think it's more that a lot of those initiatives that started three, four, five years ago, these estimates you made in your call centers [and sales force,] that they're all kind of coming together also a little bit more?

Well, I hope this isn't a conceited answer and I guess the most truthful answer is there's no way to know precisely.

Right.

But, typically, when you spend a lot of energy and you invest a lot in a particular area and really work hard on it, you can move it. And we think that we've had a lot to do in moving it with our marketing decisions. We've had a lot to do in moving it with our attention to our call centers. I mean, when you start moving closure percentages (technical difficulty) call center on these leads and then you start moving or reducing the cancellations after the sale is made, and I touched on starting the customer quicker, those are all pressure points that add up. And we think we've really worked on that. We think -- Harry touched on it. Don't ever underestimate Mother Nature, and Mother Nature has really been good for us generally and she does make a difference.

Sure. Sure.

I don't -- I wouldn't say the economy -- my sense of all the things that I just mentioned, the economy would have the least to do with the success that we had.

And I think I'd agree with that. And I don't know what industry data you look at, but in terms of -- you mentioned Mother Nature, but Mother Nature should benefit the rest of your industry, too. And I haven't seen a number, looking at residential pest control, and there are a bunch of different numbers out there, but I have not seen a growth number that is higher than a number that has a two in front of it for your industry this year. And I think -- what was it this quarter, 4.7 for you guys?

Right.

Yes, so it's -- that's impressive work.

There's some things that we can do that they can't do, and that's the benefit of the scale that we have.

Okay.

Certainly Terminix can do the things that we do because of their network. But when you look at advertising leverage and call center management, many of these people don't have a call center.

Yes. Yes. Okay. Thank you all very much for your time, as always.

Thank you.

Thank you.

Thank you. (Operator instructions.)

Okay. Well, no more questions. In closing, thank you for joining us today. We appreciate your interest, and as I mentioned, we're looking forward to the balance of the year and we'll continue to work hard to grow and improve our business during that time. So, we look forward to joining you next quarter. Thank you.

Thank you. Ladies and gentlemen, this concludes the Rollins Q2 2010 conference call. If you'd like to listen to a replay of today's conference, as a reminder, the phone numbers are 303-590-3030 or 1-800-406-7325 followed by a pass code of 4329321.

AT&T would like to thank you for your participation. You may now disconnect.