Rollins Inc (ROL) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by.Welcome to the Rollins fourth-quarter and full-year 2010 earnings conference call.

(Operator instructions)

This conference is being recorded today, Wednesday, January 26, 2011. 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, 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 pass code 4399060. 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 for 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 2010 and year-end conference call. Harry will read our forward-looking statement and disclaimer, and then we'll begin.

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 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 filing, including the risk factor section of our Form-10K, 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 are extremely pleased with our results for both the fourth quarter and the year just completed. This marked our Company's 13th consecutive year of reporting improved results, with 2010 concluding with record revenues and profits. Last year also marked our strongest organic revenue growth going back, which is quite some time. We're particularly grateful for this performance from our family of leading pest control brands, and all of our employees who made these results possible.

Revenues for the quarter rose 7.8% over last year's fourth quarter, and net income on a comparable basis increased 23%. For the full-year, revenues increased 5.9% to over $1.1 billion, with our net income growing 13%, to $90 million. We're pleased with our acquisition results for the year as well, with the largest being Waltham, a leading New England pest control company. And we closed on what we feel is the premier wildlife control company in the Southeast. Excluding the contributions of these two acquisitions, fourth quarter's revenues increased 5.1%.

Our core Commercial business rose 7.8% for the quarter. Fumigation was down, but this resulted from work that fell in October last year, being completed in September this year. As you may recall, we saw strong growth in Fumigation in the earlier reported third quarter. Our Termite business had solid results this quarter and rose an impressive 5.8%, following less than 1% improvement in the third quarter. About half of the growth in Termite came from ancillary services; moisture control, insulation, deck and gutter work, with the balance coming from our traditional revenue of termite completions and annual renewals.

And lastly, we maintained our positive growth in Residential Pest Control which rose 8.5% for the quarter. For the full-year, we experienced the strongest increase in Residential Pest Control since prior to 2005. Bedbug demand continued to grow in our fourth quarter and for the full-year, to the extent that we have not been able to precisely identify bedbug revenues, as we don't typically track all of our work by bug type, it appears that we did approximately $22 million this past year, compared to what we think may have been $12 million to $15 million the previous year. Some of our operations reported over 100% increase, and we're looking for even better 2011. I've challenged our teams to double this business this year.

Bedbug service is a rapidly developing opportunity, and there is nothing on the horizon to indicate that this demand is going to diminish. All the experts are telling us that not only will the trend continue, but it will accelerate as bedbugs invade more markets. In my 40 years in the industry, there has never been a pest that has so quickly generated so much interest and concern. Additionally, this is the first time that I have seen such a great opportunity to increase the penetration of pest control usage, both commercially and residentially. And clearly, as you would expect, we are fully engaged in addressing the most effective bedbug sales and service protocols.

Currently, the lion's share of the bedbug business falls in our Commercial segment, and as the largest US commercial pest control service provider, we are positioned perfectly. I should point out, however, that we're seeing a lot of activity in the Residential area as well. While bedbugs are a small part of our business at this time, we believe that it will continue to grow at a rapid pace and will be an excellent source of new customers. We believe that Rollins can better serve in this market that anyone else because of our knowledge, national service network and extensive resources, and we're running hard to seize on this opportunity.

As I mentioned earlier, we closed on two important acquisitions in the last half of 2010, beginning with Waltham Services in August, followed by TruTech in October. TruTech is the premier wildlife control company, and will enable us to expand the pest-related services we offer our customers. Currently, TruTech operates in seven states throughout the Southeast; however, with Rollins' resources they should be able to grow at a greater rate.

In addition this year, in fact this month, we closed on a Canadian pest control company. This acquisition was made by our subsidiary, PCO Orkin. Next to us, this acquisition is the largest pest control management company in British Columbia, and it significantly improves our presence and footprint in the Vancouver market. We continue to expand our reach internationally, having added Turkey, Ireland, Jamaica and Lebanon to our foreign franchise portfolio during the past year.

This year, to improve our performance, we will continue to invest in our technology by upgrading our software at the Rollins Customer Service center and our five division call centers, so that everyone is on the same operating system. With all the centers utilizing the same operating platform, we will be able to better insure our customers a consistency of service follow-through, as well as more effectively managing and tracking sales leads and new customer starts. Additionally, we'll be rolling-out hand-held computers for our Canadian service technicians, payroll automation for Orkin, and sales management software throughout all brands.

As mentioned on last quarter's call, we're working on a new branch operating system that could be utilized across all of our branches and brands. This would be accomplished over the next three years, and directed to increase customer retention and satisfaction, reduce operating costs, and improve productivity. We look forward to updating you on our progress on this important initiative, as we move through the year.

As I've shared before, we routinely listen to and survey our customers to make sure we're recognizing and responding to what often can be their changing needs and concerns. Our customer surveys are an integral part of the Rollins culture, and provide insight into staying up-to-date concerning our customers' expectations, all of which result in our ability to improve our procedures and execution. Another by-product of our listening to our customers, is that it gives us direct insight into individual branch customer service performance issues.

We're expanding our efforts in 2011, to not only include surveys twice a year across our brands, but we'll also be adding an electronic version, which will initially be directed to new customers, and with a plan to expand over time to our older customers. The value of these surveys is reflected in part to the customer retention rate improvement we achieved last year, which was the best that we've seen in a number of years. Now keep in mind, that this was under some pretty difficult economic conditions. We're especially appreciative to HomeTeam for sharing with us their survey program a couple years ago, which they credit as a major contributor to their service improvements.

And as I've said previously, we're not reluctant to steal shamelessly from ourselves. We continue to build and expand our presence on the Internet, which plays an important role in generating leads and attracting new customers to our service offerings. In connection with this, I want to invite those of you who have an iPad or an iPhone to check out our new free pest game application; this will be available at the App Store beginning February 4.

I also should note, that even as we continue to grow our impressions and leads last year, we became more efficient in our spend. And in fact, spent less in media -- mass media during the year than previously. Speaking of media, beginning in March, we will launch our new pest control commercials, and we'll be introducing some new characters to our Big Bug creative. We're really excited about these new commercials, and think that they will be a primarily influence on increasing Orkin's consumer brand awareness.

2010 was truly an excellent year for Rollins and our family of leading pest control brands. We're equally excited about our opportunities for 2011. We will continue to invest in our Company and our people, to further ensure that we deliver best-in-class service to our customers, thereby increasing value to our shareholders. I'll now turn the call over to Harry. Harry?

Thank you, Gary.

Last month someone said that our Company reminded them of that old Timex slogan, 'It takes a licking, and keeps on ticking.' I think they described us well. Doesn't matter what the economy does, doesn't matter what consumer sentiment may be or what employment is doing, we just keep continuing with nice, steady improvements. No need to reset or restart, we continue to post improved results. It doesn't get old to say, record revenues; record profits, another good year. And our investors will be happy to know that we're working hard on making 2011 another successful year.

Let's talk about the quarter's performance. Today, we reported revenues for the fourth quarter of $279.9 million, representing 7.8% revenue growth. Net income increased 23% to $19.2 million or $0.13 per diluted share, compared to $15.6 million or $0.10 per diluted share for the same period last year, excluding certain charges.

The Company believes that meaningful analysis of our financial performance requires an understanding of the factors underlying the performance, and our judgment about the likelihood that particular factors will repeat. As previously disclosed in 2009 results, we excluded a tax benefit related to the conversion of Orkin to a limited liability company, net of costs associated with the Canadian restructuring and repatriation of cash, as well as an impairment charge related to a software project, all of which combined to increase earnings last year by a net $0.03 per diluted share.

By excluding these items for comparison, we believe it will allow a more accurate comparison to last year and our fourth-quarter operating performance. As required by SEC rules, included in our press release is a reconciliation of our presented non-GAAP measures to the most directly comparable GAAP measures. Simply said and worthy repeating, considering the adjustments I just mentioned, net income for the quarter increased 23%.

Let me also point out, all share numbers have been restated to reflect the three-for-two stock split that took place in December 2010. Year-to-date, revenues $1.137 billion, 5.9% increase, while net income has increased 13% to $90 million. EBITDA reached $180.4 million, a 9.7% increase, and EPS has increased to 15.1% to $0.61 per diluted share; again, excluding certain charges already discussed. The fundamentals that drive our revenue, lead, pricing, closure and retention, remain strong and continued through the fourth quarter. The project we started earlier this year to improve sales yield, starts and retention, has clearly borne fruit with ample opportunity for further improvement.

Let me first talk about acquisitions before we take a deeper look into the results. Many of you are familiar with our history and goal of acquiring other fine pest control companies. Some years, we're more fortunate and successful than others. Each year, while we do a few small tuck-in acquisitions, we much prefer to marry-up with well-established leading regional players. A small acquisition can be actually more difficult to earn an acceptable return on. By small, could be anything from a one route or $50,000 in revenue, to a long established operation generating $1.5 million in revenue.

You need to be very selective in doing these smaller acquisitions, as they may not be a good cultural fit. You may have issues with account pricing, as well as employee retention and customer retention. Typically, pest control companies do not have much in the way of hard assets. You're buying a future revenue stream, and the value is in it's sustainability. We feel the larger and more established the company, the odds of being successful improve substantially.

2010 turned out to be a good year for acquisitions, and 2011 has started out on the right foot as Gary has already shared. These acquisitions contributed a little more than $10 million in revenue this year, and will contribute in excess of $30 million in 2011. For the quarter, Rollins reported a revenue increase of 7.8%. We saw a revenue increase for the quarter across our entire family of pest control brands, a strong testament to the strength of our business. Excluding the acquisitions we just spoke of, our revenue growth remained equal to the third quarter at 5.1%.

Let's look at the service lines that make up our business, starting with our Residential Pest Control business. This year, it makes up almost 40% of our business. Again, disregarding the contributions from the two acquisitions, Residential Pest Control continued the strong performance exhibited last quarter. Again, posting an impressive 5.5% increase in revenues this quarter, the highest growth rate we've seen in the Residential since the third quarter of 2006, and grew 4.6% for the year on a comparable basis. It was a great year; leads up, average price up, growth in customer base, and cancellations down. I think the only disappointing stat was overall lead closure was down slightly, but when you break that down by channel, and lead quality and opportunity varies greatly by channel. But overall we feel progress has been made there as well. Also having all our call centers on the same platform will standardize our data collection and measurements. With our yield and retention team hard at work, we feel there's a significant opportunity to continue to improve in all facets.

Commercial Pest Control continues to be a steady performer in a stagnant business environment; it represents 42% of our revenues this year. Excluding the contributions of the two acquisitions we talked about, our Commercial Pest Control grew 4.4% for the quarter, and 5.6% for the year. We've talked before on how timing from period-to-period of our fumigation work would impact the calculation of growth in our Commercial service line. This quarter when you exclude the specialized fumigation work, Commercial revenue grew 5%, which is the same as last quarter, excluding fumigation. Like our Residential business, we saw an increase in leads, average price, growth in customer base, and a very nice improvement in retention. We need to add some feet to the street, as we ended slightly down on sales staffing at year-end.

As for Termites, representing less than 20% of our annual revenue, we had another good quarter. We did see mixed results around the country, but the stronger performance in some areas made up for others, and overall rose 4.8% for the quarter, and 3% for the full-year; again, excluding contributions from acquisitions. Gross margin for the quarter decreased 10 basis points to 47.3% for the fourth quarter versus 47.4% in the prior year. Favorable improvements in cost of materials and supplies, as well as medical costs was more than offset by a little slippage in our payroll margin, as well as some unfavorable casualty costs.

Depreciation and amortization expenses for the quarter increased slightly totaling $9.3 million. Depreciation was $4 million, and amortization of intangibles increased as a result of the acquisitions, and was $5.3 million. This amortization continues to represent a significant non-cash charge to the P&L. Based upon our fully diluted shares outstanding, it will be a non-cash after-tax charge of $0.09 next year.

Sales, general, administrative expenses for the fourth quarter decreased to 33% of revenues, decreasing from 34.1% of revenues, primarily reflecting a reduction in advertising costs in the fourth quarter this year. Tax rate for the quarter was 36.3% and 37.3% for the year, which we hope to sustain. It is a shame we couldn't repeat the rate from our fourth quarter last year; 10.7%, but one-time events are called one-time for a reason.

Lastly, I'm always happy to talk about our strong balance sheet. We ended the year with $20 million in cash, $26 million in debt, with more than ample capacity to fund further acquisitions with our return on equity of approximately 32%. This business has great capacity to generate strong cash flows. And in fact, our net cash provided by operating activities was approximately $122 million, substantially greater than net income of $90 million, adding back depreciation and amortization. In our case, $16 million in depreciation and $20 million for amortization of intangibles related to prior acquisitions.

Ours is not a capital-intensive business, CapEx being $13 million this past year. Gives us ample opportunity to return money and value to our shareholders through our ongoing stock buyback program, as well as our dividend -- which, I would be remiss not to mention the Board of Directors in yesterday's meeting increased the quarterly dividend 16.7% to $0.07 per quarter. This marks now the ninth consecutive year the dividend has been increased a minimum of 12%.

Let me echo Gary's words, 2010 was truly an excellent year for Rollins and our family of leading pest control brands. We are equally excited about opportunities for 2011. I wish to thank our customers, suppliers and shareholders for their continued support.

And lastly, let me once again express our appreciation to all of our Rollins associates, whose hard work and dedication are behind these outstanding results. With that, I'll now turn the call back over to Gary. Gary?

Thank you, Harry.

We're now ready to open the calls for any questions that you might have.

(Operator instructions).

Our first question is from the line of Clint Fendley with Davenport & Company.

Good morning, Gary and Harry.

Good morning.

Good morning.

I guess first question, it's good to hear your work on your survey program and I wondered Gary, as you look at your results, just how are you thinking about your pricing? Bearing in mind that we're obviously still a few months away from any rate card changes.

Well, we've been very fortunate, we've not identified any elasticity issues. I think that -- pricing-wise -- I think at that we will be even further sophisticated in doing a better job of comparing closure from market to market. So I think we're going to peel the onion back another layer. But we've been very encouraged with the consumer's response to rate card increases, and I think we're just going to get better at it. The great thing that we have with the call center in Covington is that about 70% of our residential business is sold from there. So we really have a laboratory. I mean, we can adjust the price. We can have promotions. We do not have to really rely on 400 branches keeping great records. I mean, we've got a tremendous amount of data over there at our fingertips.

That's helpful. And as we look at your business, obviously it is a very steady business, but something you said made me wonder. I mean how much variability do you see at the individual branch level? Based on your work with the survey, could we possibly see some upside for us in 2011, as you bring what could be some lower performing branches up to the Company average?

Well, I'm optimistic that we'll see an improvement in our service to the customers. We've got, again, we've got a wonderful example in HomeTeam, who really, I think, this is their tenth year of doing customer surveys. And we've got a tremendous amount of data that just shows how their service factors improved, as they surveyed their customers and shared the information with their branches. So I really think that if we follow their lead, so to speak, that we'll see retention continue to improve and allowances improve and so forth.

But we also have a wonderful opportunity when we look at, like, bottom 25% of our branches. We have a program of -- we call it the 75th percentile, where we are directing our teams to move their performance, the ones that are under performing, to at least the 75% percentile. They do not have to be the best at every category within their region. We just are trying to encourage them to make a move, and move up to the 75th percentile. So, this is something that we work on routinely and we have a lot of good tools that we use to keep our people kind of focused on the drivers that will improve their margins.

Yes.I think there's -- this is a people business, Clint, and we spend a lot of time, effort and money in training and development. There's a huge variability between our branch performances and it's driven by leadership. That's why we believe investing in our training was so important, because it will give us that opportunity to continually bring those bottom performers to the mean, and raise the bar in total.

Great. Thanks, guys.

Thank you.

The next question is from the line of Jamie Clement with Sidoti & Company. Please go ahead.

Gentlemen, good morning.

Good morning.

Good morning.

I know we're a couple of years out from implementation of the branch operating system, but, Gary as you stand today what are the priorities for that system, in terms of what functions at the branch level do you think could be improved by a system like this? Like, what are your priorities?

Well, routing and scheduling are always on the top of our list. Our ability to better organize our routes, and our reinspection, employees. I think that is where the greatest amount of leverage is, but you've got to get the fundamentals in first. That's just kind of the icing on the cake. We have the -- we have our pilot in two locations now in Orkin. We've been pleased with what we've seen so far, but you know there's a -- it's going to be an arduous journey, but we're encouraged.

Okay, very good. Gary, I know, again, that we may be looking out a bit of time, but HomeTeam, the work that they have historically done with the builders, with the tubing. Since you haven't owned that business in an exactly robust new home build environment, but hopefully we're getting closer to a recovery than where we are six months ago or 12 months ago. Can you talk a little bit about that market opportunity? Where you think that you stand with the home builders, and really what that business kind of looks like going forward, once we start getting some new home starts?

Well, we're very positive about the business. And I think that the HomeTeam should be congratulated, because in light of a terrible new construction situation they've continued to move their business forward by concentrating on the conventional pest control customers. But we're -- we just added two important builders last year.

Okay.

We added Pulte, which is the largest builder in the United States. We added Toll Brothers. These were two builders that were -- when Centex owned the HomeTeam, they really just couldn't get too excited about doing business with a company that was aligned with one of their competitors.

Sure.

So, that move -- those two moves will be very beneficial to us. I'm sure you look at some of the same statistics that we do. There are markets that are starting to recover, from a construction point of view.

Right.

And there's not anything that we can do about that, but we certainly are poised. We have maintained our sales team, which we think is really exceptional as far as building builder relationships. So, we're just kind of -- I guess we've got our powder dry. We're waiting for the uptick, and I think that we're poised to take advantage of it.

Yes. I mean, it sounds-- with the new customers, it sounds like your penetration of the market, the next up cycle, will actually be better with the last one, when HomeTeam had different ownership.

We certainly hope so.

Okay. Thanks very much for your time.

Thank you.

Thank you.

(Operator instructions).

Okay. No more? No more questions. Okay. Well, thank you for joining us today. We are cautiously optimistic concerning the New Year, and are continuing to work hard to grow our business organically and through strategic acquisitions. And we look forward to sharing our progress with you again next quarter. Thank you.

Ladies and gentlemen, this does conclude this conference call. 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 of 4399060. ACT would like to thank you for your participation. You may now disconnect.