Rollins Inc (ROL) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Rollins, Inc. Q3 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 questioning. (Operator instructions.) This conference is being recorded today. And today's the 27th of October 2010.

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

Thank you. By now, you should have all received a copy of the press release. However, if anyone is missing a copy and would like to receive one, please contact our office at 212-827-3746, and 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 the passcode 4372650. Additionally, the call is being webcast 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 third 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 have been made on this call, excluding historical facts, are subject to a number of risks and uncertainties, and the actual results may differ materially from any statements we make today. Please refer to today's press release and our SEC filing, 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 with our record results for both the quarter and the first nine months of this year, with revenues increasing 6.4% over last year's third quarter and 5.2% up year to date.

On August 1st, we completed the acquisition of Waltham Services, a leading New England pest control company that was established in 1893, even before Orkin started. Excluding the contributions that Waltham made to our results, residential pest control posted an impressive 5.5% increase in revenues and the highest growth rate we've seen in residential revenue since the third quarter of 2006.

Commercial revenues increased 6%, aided by strong growth in fumigations, while termite increased approximately 1% over last year's third quarter. These strong revenue results contributed to a 12.2% increase in net income.

As we discussed on our second quarter call, our focus this year has been on increasing new sales yield. Simply, yield is the end product after we get a lead, sell the lead and perform the start of the account. Our team, along with BCG, worked together to develop five simple ways for our employees to better engage customers to improve customer yield and customer retention. We want to make it easier for the customers to work with us. And our results have been positive.

Given the publicity that bedbugs have received, I would be remiss if I failed to recognize their impact on our quarter. I've always looked with pride at the growth rate of our mosquito service, which is increasing at better than 20% annually. But our bedbug business is leaving the mosquitoes in the dust. Needless to say, bedbug demand continues to grow and represents over $4 million in revenue this quarter alone, up over 75% from the same quarter last year.

While we don't have any clear-cut evidence as to what further impact this high level of interest and publicity will have on our residential pest control revenue, we have no doubt that the bedbug invasion has made consumers more conscious of their pest problems, specifically as it relates to their health and property, causing them to have greater concern about their living environment. Such heightened concern of this nature is always good for our business.

We know our training efforts are a significant contributor to the success of the Company. This area is also one of the reasons that we continue being named to Training Magazine's top 125 list of organizations that excel in human capital development. Most of our award-winning training is generated from the Rollins Learning Center in Atlanta. And we are proud to say that all of the Rollins pest control brands are benefiting to some degree from this excellent source of knowledge and education.

Let me share some of our recent training initiatives. In the third quarter, we conducted four certified field trainer courses. Simply, we invest routinely in training the trainer, as it gives us more training leverage. We now have a total of 357 certified field trainers. Sixty three of our employees signed up for mastering the art of frontline customer service training, 552 students completed the introductory training technical training and 225 students completed new-hire sales training.

Our Rollins University sales training team conducted a four-day pilot of a new commercial and termite sales management training program, which defines the standards and best practices used to generate greater commercial and termite sales.

Our Media Services Satellite Broadcast along with Video on Demand also play a central role in our training. Media Services just recently completed five initial residential and commercial training classes, three initial termite classes, three account manager training classes and three termite sales technical training classes. Additionally, they also conducted several technical training sessions that were certified by state regulatory agencies. When our training is accepted by regulatory authorities as CEUs, or continuing education units, it's very beneficial to us. And for the most recent quarter, there were 18,467 launches of online resources and enrollments of our web-based training curriculum.

I could go on and on about our training, but I think you can see that we take training very seriously at our Company, and it's paying off. At Rollins, training isn't a sometimes thing, it's an all-the-time thing.

At this point, I'd like to take a minute to personally address a recent change in management that may be on some of your minds. As many of you are aware, in early September the Company's Board of Directors announced that my son, Glen, would be leaving the Company. While I cannot elaborate on his departure since it has legal ramifications and it also would not be appropriate since it's a family matter, although this situation was a personal disappointment, I want to be clear that this is an unfortunate family matter, not a business disagreement. I also want to assure you that Glen's departure will not and has not affected the operations of our Company, nor our plans for the future. Keep in mind, I have never been out of the Rollins-Orkin picture, and I won't be in the near future.

Furthermore, it's important to understand that we have a very strong management team at both corporate and divisional levels. During the past couple of years in particular, we have strengthened and expanded our leadership team through numerous internal promotions, and at the same time added several top-level executives through acquisitions.

In December of last year, you might recall we promoted John Wilson, a highly successful Division President who joined Orkin in 1996, to the newly created position of President of Orkin USA. John served the Company in a number of capacities, and was responsible for significant improvement in both of the operating divisions that he managed before being promoted.

In January, Greg Clendenin, who has over 30 years of industry experience and was instrumental in building a leading Florida pest control company, joined Orkin and replaced John as President of the Southeast Division.

We, in fact, have nine Rollins and Orkin division presidents, who collectively have over 205 years of industry and management experience, most of it gained at our Company. There's not a service company that I'm aware of with greater depth of highly capable leaders.

Over the past 11 years, the strategic acquisitions that we've made have provided us with outstanding leadership. In fact, we typically target companies with strong management teams that are committed to stay and continue to operate their businesses. This has not only helped make us the acquirer of choice, but also has strengthened our Company. Each of the management teams in Rollins' family of brands brings expertise and proven track records that continue to help us build our Business.

As I mentioned earlier, we were pleased to have Waltham Services join our family of pest control brands. And they are already contributing to our results, having posted $3.5 million in revenues for the partial quarter. We are pursuing future acquisitions through the balance of the year, which could provide an additional $10 million to $20 million in revenue carrying over into the new year.

Let me bring you up to date on our service routing initiative. After backing away from our previous routing and scheduling project last December, we identified a vendor with a relatively new and robust routing software package. We initiated a proof-of-value pilot in two test branches earlier this year. While initial results were promising, the economics weren't there to show an acceptable ROI, in part because of the expense of having to have a separate system rollout. Frankly, this is why you do pilots and tests. And we carefully watched the results from these tests.

Our primary branch operating system, which we refer to as Focus, is several years old. While it's served us well, we realized during our routing and scheduling tests that we have a greater need to concentrate our IT efforts toward a new common Rollins branch operating system, one in which all brands can benefit from enhanced features and processes. We believe that this initiative will provide a very high return on investment.

As we've acquired a number of brands over the last several years, we've had the opportunity to observe up close some newer, more advanced branch operating software packages. Currently, Orkin is in the very early stage of piloting one of these packages used by several of our brands and many of our Orkin franchises. This would take the place of Focus.

This initiative could provide an updated universal Rollins branch operating system that would allow us to leverage the data captured by all operations, which in turn will enable us to better service our customers and provide greater support to our technicians, salespeople, administrators and managers, while improving operating efficiencies. This software also provides a routing and scheduling platform, so we ultimately will be pursuing this benefit as well, and with one system rollout.

Sometimes I envy Orkin's founder, Otto Orkin, as he didn't have the challenge of identifying and adopting new computer technology. He just personally worked on sales, service and collections.

I turn now to something that we've been very successful with, our Big Bug Ad Campaign. Since first airing in 2006, it continues to be extremely popular. TV awareness is up to 90% for these commercials. We will continue to build upon our equity in big bugs, and we can all look forward to the introduction of some new characters and story lines in our Spring 2011 campaign.

At the same time, we continue to optimize our Internet strategy, which continues to provide us with a high percentage of leads. We plan to roll out new Internet strategies in the new year.

By the way, if you haven't visited our Orkin website recently, we invite you to do so. You will observe over 400 positive customer testimonials by branch locations, which are really creating interest and increasing traffic. Location page views are up 54% over year to year. And we also now have a Spanish version of the site.

Well, before I turn the call over to Harry, it's the time of year when we start working on our annual report. And I want to congratulate our annual report team for winning a Silver Award from the League of American Communications Professionals. This is quite an impressive honor, given that there were 4,000 entries from more than 20 countries worldwide. I've told our people, however, that this recognition just raises our bar for the 2010 product.

The first nine months of this year have been most gratifying for all of us. But as I've said in the past, we have a culture of never being satisfied and always believing there's room for improvement. I'm confident we'll continue to build and improve our Business to the benefit of all of our constituents -- employees, customers and shareholders.

Let me now turn the call over to Harry, who will provide you with more about our financial results.

Thank you, Gary. Good morning. Appreciate you all joining us on the call. In the third quarter, we accelerated the solid growth from the first half of the year, positioning us well for the remainder of this year, and a great stepping stone for next year.

Today we reported revenue of $305.1 million, our first $300 million quarter. This represented 6.4% revenue growth. Net income increased 12.2% to $25.5 million or $0.26 per diluted share, compared to $22.7 million or $0.23 per diluted share for the same period in 2009.

The fundamentals that drive our revenue -- leads, pricing, closure and retention -- remained strong, and continue so into the fourth quarter, albeit it's still early in the quarter. Clearly, our positive momentum strengthened.

Let's look deeper into the result. Certainly, revenue was aided somewhat by the acquisition of Waltham Services. And their results were included for two of the three months in the quarter. Excluding Waltham, it still remains our strongest organic growth in some time, with revenue growth of 5.1%. The stronger Canadian dollar made little impact, lifting revenues just 0.2 points.

Revenues on a comparable basis to last year, excluding Waltham and Canada, grew 4.9%, a nice improvement over last quarter's comparable growth of 4.2%.

While bedbugs have generated a lot of interest in our Company of late, I think it's important to remind investors of the underlying strength in our business is the recurring nature of most of our services. In fact, nearly 80% of our revenue is recurring. Our best quarters, spring and summer, are now behind us. We always hope for a late winter. But what is most important to us at this point is our gross contract advantage, or GCR, which describes how much recurring business we are carrying into Q4. This year, it will be in excess of 5%, over 300 basis points better than where we were going into the fourth quarter last year.

Let's talk some revenue specifics. First, residential pest control, which continues to represent about 40% of our business, posted an impressive 5.5% increase in revenues, the highest growth rate we've seen in the residential sector since the third quarter of 2006. This is noteworthy, since back in 2006 we heavily employed a door-to-door sales program that at the time represented 10% of our sales. Today, it's used very selectively and represents less than 3%, making this quarter's revenue gain all the more impressive.

Pest control is a great recession-resistant business, whether residential or commercial, for that matter. People and businesses don't like bugs. And their concern over health and property is paramount. As we have noted, our brands enjoyed low price elasticity, giving us opportunity to continue to fine-tune our price realization programs. And at the same time, retention continues to improve.

Commercial pest control continues to be a steady performer in a stagnant business environment. It represents 42% of our revenues. Last quarter, our commercial sales team mission was to knock on a few more doors. And for the quarter, our commercial pest control business, excluding Waltham, grew 6%. We saw a strong improvement in commercial retention as well.

As for termite, it represents less than 19% of our annual revenue. Termite results were mixed. We saw some strong results in some parts of the country, with weak results elsewhere. This portion of our business is more dependent on new sales, as only approximately half the revenue is recurring, coming from renewals and monitoring.

Gross margin for the quarter improved 30 basis points to 48.9% through the third quarter versus 48.6% in the prior year, due to improvements in productivity for both service, administrative salaries and reduced professional fees. Those improvements were partially offset by higher fuel and material and supply cost which is related to the fumigation business, which had a strong quarter.

As I said last quarter, given the amount of new customers we put on, we're pleasantly surprised to have experienced a decrease in service wages as a percent of revenue. The impact of Waltham with its higher cost of service was marginal, maybe 5 basis points.

Depreciation and amortization expense decreased slightly -- [$245,000] -- as amortization of intangibles, specifically customer contracts from our 1999 acquisition of PCO Canada are now fully amortized. However, this pickup was partially offset from the additional $300,000 increase in depreciation and amortization from Waltham Services, an acquisition that closed August 1st.

With the recording of intangibles from the acquisition, we now have $145 million of value assigned to customer contracts and other intangible assets on our balance sheet as of September 30th. 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, it'll be a non-cash, after-tax charge of $0.13 this year.

Sales, general and administrative expense increased $5.7 million to 32.4% of revenues, decreasing from 32.5% of revenue. We saw dollar increase in sales, administrative staffing and commissions related to the growth of the business, along with higher consulting costs. However, revenue grew at a faster rate, and thus the decline in SG&A as a percent of revenue.

Our provision for income taxes was 37.7% versus 38% a year ago.

We continue to build to our solid foundation. The economics of the business only continue to improve. Our balance sheet remains strong, with total assets exceeding $600 million. We continue to generate significant free cash flow in excess of $85 million year to date, which has allowed us to take advantage of growth opportunities such as the acquisition of Waltham Pest Services, as well as possible other transactions anticipated for this quarter that Gary has already alluded to.

For those investors who have been lamenting not buying the stock earlier when it was under $20, our Board has addressed your concerns. In case you missed the announcement, our Board yesterday approved a three-for-two stock split. This split will be affected by issuing one additional share of common stock for every two shares of common stock held. The additional shares will be distributed on December 10, 2010 to holders of record at the close of business on November 10th. In addition, the Company declared its regular quarterly cash dividend of $0.09 per share. This cash dividend will be paid on the pre-split shares. The Board of Directors will reevaluate the amount of the regular quarterly dividend, as it has historically done, at the January Board meeting.

Hard to believe 2010 will be drawing to a close before we know it. It's been an excellent year for our Company. And we are looking forward to 2011 with great enthusiasm. As Gary always says, there is much to be done.

We are focusing on improving and expanding on the initiatives we have put in place, and look to identify and capitalize on new opportunities to grow and improve our business. I look forward to talking to you next quarter and share in our fourth quarter and record-year results.

Let me once again express our appreciation to all the Rollins associates whose hard work and dedication are behind these outstanding results. We also thank our customers, suppliers and shareholders for their continued support.

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

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

We will now begin the question-and-answer session. (Operator instructions.) Our first question comes from the line of Clint Fendley with Davenport & Company. Please go ahead.

Good morning, gentlemen.

Good morning, Clint.

Good morning, Clint.

Wondered if we could get a little bit more color just on the 5.5% growth that we saw in residential? And any trend geographically, or any pricing and volume commentary?

Well, we had overall improvement. All of our business units had good revenue increases, which always makes you feel good. Demand was up, which is always important for us, both on the Internet and conventional telephone leads. We've continued to make progress as far as our pricing is concerned. We completed a successful price increase campaign for our existing pest control customers. So I think it was just a lot of things coming together in the quarter that contributed a little here, a little there. And we didn't see any unique thing occurring as far as any geography or any one particular business unit.

And a lot of those pricing changes were made back, what, in late spring timeframe? So I guess it's safe to say that that's definitely stock at this point, then.

Yeah, all the price increases went into effect at the end of the -- by the end of the second quarter. Home Team's price increase was effective July 1st. You know, we took the total impact of the price increase this year versus last year. This year's actually a little lower than last year's, not significantly. So the quarters are pretty comparable in terms of the dollars from the price increase this year versus last.

Okay.

The great thing about it, Clint, the price increase is the gift that keeps on giving.

Yeah.

So we did that. And it rolls into this quarter. It'll roll into next quarter, and so forth. So we've done a lot of research and a lot of work on our pricing. And we watch it very carefully.

Any reason why your door-to-door sales approach is being used a lot less in the current environment?

Well, we were really concerned that these customers were not as sticky as conventionally acquired customers. The prices continued to grow up -- or go up. Finding people to do this -- we hired college students who had worked for an independent organization. And they became fewer and fewer. So the rates kept climbing up. And we just kind of sat down and put a pencil to it, and just decided that although it was painful to stop, it just wasn't the best thing for our Business. And as Harry said, we use it sparingly. If we have a unique market that we really think that we can turn up the growth significantly, and if we can make the economics work for us, then we'll selectively do it. But it's --

Also, with the door-to-door program, it's more of an impulsive buying decision. And certainly, in this environment, people are less inclined to make that impulsive decision. So with that and the economics of it that Gary alluded to, it has had a high cost of sale. The retention is not as good as -- and I think it's because of the impulsive nature of the buy -- that we've dialed it back significantly.

And switching gears for just a moment, what is the time line for the rollout of the replacement for the Focus system? And just any thoughts here as to the CapEx requirements for the new system?

Well, I think the rollout's going to take close to two years, if everything -- because there's enhancements that's having -- that we're having to do now. Although this is a very robust product, we just have some nuances in the way we manage our business and run our business. So we can't really take a product right off the shelf and have it fulfill all of our requirements. So --

Yeah, and we don't have a clear rollout schedule as yet. We're still -- we're taking -- we're doing a pilot. We're converting one branch here in the fourth quarter. And as a -- and we need to evaluate those results and see what additional changes, if any, need to be made -- incorporated, which will really then determine what the rollout would look like. CapEx -- again until we have a rollout schedule plan, really can't give you any color on the impact next year. But it's not anything out of the ordinary. Our CapEx runs pretty consistently between $10 million and $20 million a year. We hit the highs of $20 million when we do something like this. This year, we're at the low end. So if it's anything outside of that range once we look at the -- get a better picture of the rollout, we'll give you more color at that time.

So Orion in total, if I'm not mistaken, was about, what, $15 million? So would this be more or less than that?

No, Orion was far less than $15 million. I think with rollout costs --

I think that may have been the intent when we got --

(Inaudible). But we've -- over a couple of years, it'd certainly be in that neighborhood of $15 million to $20 million. It could cost -- some of that's CapEx. Some of it's internal cost, training.

One of the things that we've kind of mastered to some extent is this web-based training, which, as opposed to sending a bunch of people out and physically being on hand at locations to put in this -- these systems, we've had good success with some of our smaller projects by doing our training over the web, where people can become familiar with the routines and ask questions and so forth. So one of the benefits, I would think, Harry, is -- versus comparing to Orion -- that our next system rollout should be more economical, because cost of training will not be so high.

All right. That's certainly one of the things that we're planning right now. But it's real -- we're real early into this process. And it -- we'll give you more color when we really understand the full impact and how -- at this point, we're planning to absorb the costs in our normal operating costs. And if it falls outside of that, we'll let you know.

Great. Thanks, guys. Nice quarter.

Thank you.

Thank you.

Thank you. (Operator instructions.) Our next question comes from the line of Jamie Clement. Please go ahead.

Gary, Harry, good morning.

Good morning.

Good morning.

Just a follow-up question on the software system from Clint's questions. I -- what exactly, from like an efficiency standpoint, are you looking to achieve? I'm not talking numbers, but just sort of like a -- from a process. I think you mentioned you had -- some of your different brands were using different systems. What are the -- maybe the top two or three sort of cool things you hope to achieve with the system?

Well, I think sharing data, more carefully measuring our advertising and marketing results, having common definitions as far as the way you count customers and the way you count retention. You can imagine, each of these systems have a little twist or turn. So I think we'd be -- we would be adapting common definitions to measure and account for the data and the performance of the business. And we're certainly compliant with GAAP and Sarbanes and all of that. But it is frustrating when you try to find out exactly how many leads do we have in the whole Company, and then you just find that not everybody counts leads the same way. So I think that the data side and the marketing as that relates to marketing will be a pretty powerful addition. And it's just a lot cheaper to maintain one operating software. You don't have to have a group of IT people that are familiar with --

Four different systems.

Yeah, with four different systems. And so I think there's just inefficiencies. We certainly don't -- we've not identified all of them. But I think the other good thing is that this is kind of -- this isn't focused. And I think these non-Orkin brands look towards a universal software system with a little bit more enthusiasm as opposed to trying to adopt Orkin's system. So that's been one of the positive things, Harry, that I've seen. All of our different brands are enthusiastic about getting on this.

Okay. Thank you all for your time.

Thank you.

And there are no further questions. Please proceed.

Okay, no more questions? Well, thank you all for joining us today. We look forward to the balance of the year. And we'll continue to work hard to grow and improve our business. And we look forward to sharing the year-end results with you.

Ladies and gentlemen, this concludes the Rollins, Inc. Q3 2010 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 4372650. ACT would like to thank you for your participation. You may now disconnect.