Rollins Inc (ROL) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Rollins, Inc., first quarter 2011 earnings 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 27, 2011. I would now like to turn the conference over to Ms. 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 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 the pass code 4432545. 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. We appreciate all of you joining us for our first-quarter 2011 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 the actual risks may differ materially from any statement we make today. Please refer to today's press release and our SEC filings, including the risk factor section of our Form-10K for the year ended December 31, 2010, for more information and the risk factors that could cause actual results to differ.

Thanks, Harry. In spite of the disagreeable winter, Rollins had a good first quarter and continues to prosper even with the off-and-on-again economy. The bug business is a great business. We don't worry about foreign competition, product obsolescence, interest rates, commodity pricing, or many of the other factors that negatively impact most companies. And during this time of year, we look forward to spring and summer. And fortunately, for us, they always come. As weather warms up, numerous pests emerge and the momentum or our business picks up. Our pre-season preparations are in place, and we're ready to have a great selling and service season. Accordingly, we anticipate 2011 will be another growth year for all of our businesses, and we are pleased with our good start.

Our company recorded its strongest organic first-quarter results in more than five years. Revenues rose 7.4% to $271.6 million for the quarter, and net income increased 6% to $18.6 million, up from $17.6 million in 2010's first quarter. Excluding two acquisitions made in 2010, revenues rose 4.7%. During the first quarter, we continued to experience overall increasing demand for our services. Our commercial business grew 8.5%, while our residential business rose 8.7 %. Termite control also grew year over year with revenues up 2.7%.

Speaking of termites, towards the end of March, we began to receive an increase in termite calls in the warmer markets, including those in South Texas, Louisiana, Florida, Georgia, South Carolina, and other Sunbelt states. While termites are most visible in the spring, these pests damage property year-round. According to the National Pest Management Association, termites cost US homeowners over $5 billion in property damage a year. Subterranean termites, which cause 95% of all termite damage in North America, reached a peak of their swarming or reproductive activity in the spring months when temperatures begin to exceed 60 degrees. So we're looking forward to this uptick in more markets in our second quarter.

Bed bugs certainly haven't gone away, and we continue to see increased demand for services for these pests. In a recent consumer survey, 1 in 5, or 20% of Americans, have come in contact with bedbugs directly or indirectly. As mentioned on our last call, 75% of our bedbug demand is currently for commercial services, but infestations in the residential area are increasing. During the first quarter our bedbug business was up almost 50%. Last week we hosted a virtual bedbug workshop online titled "What's Your Bedbug Business Plan?" This high profile event dealt with more than just the nature of bedbugs. It was about having a plan to deal with all the other business implications of an infestation, from employee HR policies and privacy issues to risk management and litigation. We were pleased to partner with the American Hotel and Lodging Association, Building Owners and Managers Association, and the National Apartment Association. It was a great opportunity for us to reinforce our expertise in this area and share comprehensive knowledge with well over 900 registrants.

We get a lot of questions on how big is the bedbug market. Regrettably, there are no good current information. However, I recently read where specialty products consultants, who annually survey more than 800 pest management professionals, estimated in 2009, the last available year of data, an estimate that the bedbug market at that time was 258 million. Frankly, I suspect that that was on the low side.

As we begin our pest season, Orkin will be bringing their big bugs advertising back. Last month we launched the latest version of these TV. spots, introducing two new commercials for 2011. The first commercial, titled "Blind Date," features a young woman meeting her blind date and potentially the man of her dreams. When he arrives, a handsome man whose photo she had viewed on an Internet dating services turns out to be a giant termite who, when confronted, explains that his photo was taken a long time ago. He, however, remains intent on going home with her.

Enter the Orkin man to a rescue. He banishes the big bug and insures that the young woman gets home safely. To date, this commercial has had over 35,000 hits on YouTube. We've taken this TV. spot a step further and made it more interactive, having launched a fictitious website, blinddatelove.com, where users can fill out a dating quiz and get matched up with their own big bug. Adding to the fun is a photo gallery with images of successful matches.

Finally, there's a feature that allows the viewer to upload photos of friends and family, turn them into pests, and share the photos on Facebook and Twitter. To date, this Orkin social media effort has received over 5,000 visits and almost 20,000 page views. If you need a good chuckle, give it a try at ww.blinddatelove.com (sic).

The second commercial, which will air in June, is entitled "Vacation," and features two six-foot rats that have taken over a family's home while they're on vacation. When the family returns early, they find these very annoying rats playing Guitar Hero. The Orkin man, once again, comes to the rescue, running the rats out of town. We're anxious to see how this noninsect rodent commercial does in comparison to the big bug creator. I should also note that our Orkin bug battle iphone app that recently became available has already received almost 4,000 downloads from 57 countries.

As I've expressed often, our people are our greatest asset. As a result, it's our ongoing responsibility to seek out, develop, and promote individuals within our company to insure our success for our near and long-term performance. To that end, in February we announced three important corporate promotions that will further strengthen our company.

John Wilson, who joined Orkin in 1996 and had in December been promoted to President of Orkin USA, was elected by our Board of Directors as an officer and Vice President of Rollins Inc. Orkin's five division vice presidents, along with sales operations, currently report to John. John and his team are responsible for about 65% of our business. Joining John in February as new officers and vice presidents of Rollins, Inc. are Gene Iarocci, Vice President of Corporation Administration, and Bob Wanzer, President of HomeTeam. Bob, who joined our company when we acquired HomeTeam in 2008, was also promoted to Chief Operating Officer for the Rollins Independent Brands, which consists of HomeTeam, Orkin PCO, Western Pest Services, IFC, and Waltham Services. These companies represent approximately 34% of our business at this point. Gene Iarocci joined Orkin in 2003 and has served the company as Louisiana Region Manager before becoming Vice President of the Atlantic Division in 2005 and elevated to Division President in 2009. Prior to joining Rollins, Gene had been with Union Carbide for 24 years.

Orkin continued their global expansion in the first quarter with our entry into China, where we established a franchise in Shanghai. This franchise will focus, as do our other 15 international franchises, on providing commercial pest control services. We believe that the business growth that China is experiencing presents us with tremendous opportunities to introduce our integrated pest control management procedures, sales and service in this tremendous market. China, incidentally, has over 160 cities with populations greater than 1 million people. Our franchise opportunity in this country alone are staggering. We've also been recently contacted again to help the government with pest control for the Forbidden City in Beijing.

In February, for the ninth consecutive year, Orkin was recognized by Training Magazine as one of the top 125 organizations that excel at human capital development. A company's selection is based on a number of criteria, including programs tied to business objectives, best training practices, and outstanding training initiatives. To that end, Rollins recently established a Rollins learning steering committee to ensure that each aspect of our new training aligns with and supports all of our pest control companies' strategic sales and service programs. This is an important move, as it recognizes that our training will be less Orkin centric and developed in such a way that all brands can benefit. Employee training will always be a cornerstone in our quest to be the best service company in the world.

As I said earlier, we believe that our year is off to a good start. We have a number of opportunities and programs directed to grow and improve our business this year, and we're clearly focused on executing those initiatives. I'd like now to turn the call over to Harry to review more financial details.

Thank you, Gary. I'm occasionally asked what concerns me most about our business. And ranked right after will it be an early cold winter is how late will spring be this year. However, one of the strengths of this business that gives me comfort is our strong recurring revenue that makes up almost 80% of total revenue. It's always good to get the first quarter in the books and start building our customer base for our new year. I'm happy to report the quarter's performance, get into more details.

Today, we reported revenue for the first quarter of $271.6 million, representing 7.4% revenue growth and experiencing that growth across our entire family of brands. Net income increased 6% to $18.6 million or $0.13 per diluted share, compared to $17.5 million or $0.12 per diluted share for the same period in 2010 with EPS up 8.3%. If you remember, last year we made two more significant acquisitions, Waltham Services in the third quarter and TruTech in the fourth quarter, which contributed to our growth this quarter. Excluding these acquisitions, our total revenue growth was 4.7%, the strongest first quarter, barring impact of acquisitions, going back 5-plus years with residential posting 5.7% growth, commercial 5.1%, and termite 2.3%.

The first quarter is never a big lead quarter, but it's always nice to see a growth in leads as we did in both residential and commercial. Where the growth was modest, they were over last year's record best. More encouraging was to see some of the work our yield team has been doing over the last year come to fruition with increases in closure, average price, and starts. At the same time, our digital musketeers -- excuse me -- marketeers have been busy at work mining the Internet and working their magic to build our presence and attract more new business. After two years of improvements in retention, it was off a small amount for the quarter, not alarmingly, but nonetheless, something we intend to improve.

Lastly and very importantly, we've done some preliminary testing this year with regard to pricing and have seen no changes in elasticity and will continue later in the year with our traditional annual price increase program which occurs in June and July. This is especially important due to increased fuel costs. We had some headwind this quarter, and gross margin for the quarter declined ten basis points, decreasing the 48.1% for the first quarter versus 48.2% in the prior year.

President Obama, there are companies and adding jobs. We've added technicians in anticipation of all those new customers we're expecting. In addition, to no one's surprise, as I mentioned, we had to deal with higher costs of fuel and personnel related costs, both health and employment taxes.

Depreciation and amortization expense for the quarter increased slightly, totaling $9.2 million. Depreciation was $3.7 million and amortization of intangibles was $5.5 million. Amortization of intangibles increased $500,000 from this quarter a year ago as a result of the two acquisitions. Amortization of intangibles will continue to represent a significant noncash charge to the P&L for some time. Based upon our fully diluted shares outstanding, it will be a noncash after-tax charge of $0.09 this year.

Sales, general and administrative expenses for the first quarter increased $6.6 million or 7.8% to 33.8% of revenues, increasing 20 basis points. The increase in margin percent is due to the higher sales, general and administrative costs from the acquisitions made in the third and fourth quarters last year. The impact of higher fuel on both CSP and SG&A in the quarter was $1.5 million.

Waltham's business is much more seasonal with lower revenues in the first months of the year due to having little residential business. While they collect the cash in advance for their annual homecare residential service, which certainly helped our cash flow to the tune of almost $2 million -- but none of the revenue is recognized until service is performed.

Our balance sheet remains solid. We ended the quarter with $23 million in cash and $25 million outstanding on our line of credit. Cash provided by operating activities is looking strong, up $4.7 million or 16% in the first quarter, and that was after we chose to move up our pension contribution of $4.1 million to the first quarter. We continue to return monies to our shareholders, having increased the dividend payout 16.7% in this past quarter and continued our stock repurchase program, buying back over 256,000 shares in the quarter.

The year is off to a good start. Our teams remain determined, and I'll point out, we have our agents standing by to start your pest control service. Just call 1.800.800.ORKIN. But in the meantime, Gary and I will address any questions you may have.

(Operator instructions). Our first question is from the line of Clint Fendley with Davenport Southside Research Firm. Please go ahead.

Thank you. Good morning, Gary and Harry.

Good morning.

Good morning.

Just wondering, the brand spend, if I recall, has historically been about 5% of revenue. I wondered if the success that you're having with kind of the viral marketing effort to offer an opportunity to possibly lower that spend going forward.

Well, if you -- we talk to our marketing people, they always find opportunities to spend more. So, you know, we have to really -- we're always balancing, you know, where to get the best spend for the dollar and find our lowest cost per lead. So we really don't see ourselves cutting back on our marketing dollar spend. We need to make those impressions. We need to keep the brand in front of the consumer. So we'll continue to keep on spending.

Okay. I wondered if you could update us also on just what the contribution is currently from the international franchises, and I wondered where you see this going based on the discussion here on the China opportunity.

Good question. The international franchises last year did in the neighborhood, I want to say, of -- I haven't looked at them in a couple of months. I want to say it was in the neighborhood of about $30 million to $35 million in revenues, and you know, we collect the franchise fee on that, and it's variable. But, you know, they probably contributed in the neighborhood of about $2 million in franchise fees and revenue to our top line. You know, I think the potential when it comes to the international franchise is really long term. A lot of these franchises, we're excited. We signed -- like I said, we are opening the doors to our first franchise in Shanghai. But they are de novo startups. So it takes, you know, some time to build that revenue and whatnot. So we think it's a long-term, wonderful opportunity that will just keep building and adding to the value of the brand as well as to our profitability.

Okay, thanks. And then the last question. I know it's been a while, but I wondered if you could update us on where we stand on the routing project.

Well, we've got a pilot branch operating system in Philadelphia, and we've had our first month under our belt, and I'd say overall we were pleased. I mean, you have the typical hiccups, when you have new software and new operating system. But the branch employees are very enthusiastic, and that's always a good barometer, if the people that are actually doing the work are enthused. So it's really kind of too soon to tell. You know, the first thing you do is get your data coordinated and do your fundamental business so the routing and scheduling piece will follow later. And I don't mean it's not developed, but you don't want to give people a lot of new stuff when you're just trying to replicate the business fundamentals. So we're optimistic. We think that it's going to make a difference. And you've been following us long enough to know that we've had a couple of misfires, but we realize how important this is, and we are just going to stay with this thing until we get it right.

So this is a completely new software approach, isn't that right, Gary, with what you're doing in Philly?

That's correct.

Well, I wouldn't call it completely new in the sense that the software is operating in some of the other brands. You know, it's been developed; it's been on the market. We certainly have to do, you know, work to add some functionality to it and do all the interfaces. But, this isn't a start from scratch. We write --

Write all the code.

Writing all the code on our own.

You know, Orkin is slightly more sophisticated than most of the other pest control companies. So we have to kind of organize part of it to make it consistent with the way we -- the fundamentals of the way we run our business. But Harry's right. I mean, we're not starting from scratch, and Western currently has a version of this software and has been on this operating system -- I don't know -- for 10 years or more. So we're pretty enthused about the opportunities that we have, and potentially we have an opportunity to have all of our brands on this software, which means the ability to have a common data base and common customer base is a phenomenal advantage.

Okay, great. Thanks, you guys. Nice quarter.

Thank you.

Thank you.

(Operator instructions).

Okay. I guess there are no further questions. I hope I haven't got you all confused, that this is a sign of satisfaction. We'd like to thank you for joining us today. We're cautiously optimistic concerning the year, and we will continue to grow our business organically and through strategic acquisitions. And Harry and I look forward to speaking with you again next quarter. Thank you.

Ladies and gentlemen, this concludes the Rollins, Inc. first quarter 2011 earnings 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 4432545. ACT would like to thank you for your participation. You may now disconnect.