Rollins Inc (ROL) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Rollins Inc. second quarter 2011 earnings conference call. During today's presentation all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions.

(Operator Instructions)

Today's conference is being recorded, July 27, 2011. I would now like to turn the conference over to Marilyn Meeks. 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 4456994. 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 second 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.

Thank you Harry. I'm pleased to report our 21st consecutive quarter of improved earnings, over four years. For the second quarter our earnings increased 12.1% to $31.1 million from $27.7 million. Revenues for the second quarter rose 7.2% to $320.4 million over last year's second quarter.

All of our business lines were ahead with residential pest control up 8.9% followed by commercial pest control recording an increase of 8.1% and termite was up 2.6%.

Harry will provide greater detail on our second quarter financial results in a few minutes. But needless to say we are pleased with what our Company has achieved, both for the quarter and the first six months of the year. All of our lines of business and brands have contributed to this success.

I think many of you may remember that last year we announced a primary goal for this year was to increase our sales yield by focusing on the elements of lead closure, service start percentages and customer retention. I'm pleased to report that we're making headway and the initiatives that we put in place are paying off. We overcame a modest decrease in leads in the quarter but as a result of improved closure and start improvement, sales were up over last year in all business lines.

Our customer retention rate last year was the best that we've seen in a number of years. And we're seeing continued improvement in commercial and termite customer retention with a slight slip in residential. We're clearly focused, however, on having improvement in all three by year end.

Experience has shown us that customer retention and employee retention go hand in hand. And this was reflected in Rollins achieving a historical low employee turnover rate year to date. Supporting this relationship was a recent study from the University of Missouri that found that companies who pay attention to employees' job satisfaction are able to boost both customer satisfaction and repurchase intentions or the number of customers that intend to purchase again.

Christopher Groening, a professor of marketing, stated, "We found that keeping your employees satisfied with their work experience, providing them with challenges and allowing them to have a sense of ownership in the business can have a tremendous effect on customer satisfaction and loyalty." He added, "The length between customer satisfaction and customer loyalty is almost twice as strong when you have high employee satisfaction compared to when they're not satisfied with their jobs."

Based on the findings of the survey, Groening's top recommendation for increasing employee satisfaction was to train and empower employees so they have the tools to make decisions. We wholeheartedly endorse his observations and are dedicated to making sure our employees feel this way.

Although Orkin founder, Otto Orkin, didn't have a marketing degree, he made sure our culture reflects a commitment to the employee and customer and it's just as strong today as it was in 1901. To this end, our training programs have been cited repeatedly among those best in class. And now that our training has taken a Rollins all-brand focus, all of our pest control companies will be getting better and better employee and customer service-wise.

Our annual employee surveys have an important role in this regard and provide valuable feedback concerning job satisfaction and measuring our success in providing a positive work environment. This has been invaluable in improving both employee satisfaction and as Dr. Groening related, customer retention.

Another positive step employee-wise is that we're making our new hire on-boarding more friendly and efficient when an individual has joined Rollins. We recently began a project designed to automate the Rollins new employee hiring process. Working with SilkRoad, a vendor specializing in new employee on-boarding, we will be automating the Company-wide collection of over 40 new employee forms and agreements, reduce them, digitize them, route them electronically while substantially reducing the time, effort and mistakes associated with today's manual processes.

Simply, the new employees experience will be more favorable and payroll will have more timely and accurate information. I think you're all aware that one's first check is an important one.

The final phase of this project, scheduled for 2012, is to automate the data interface to our JD Edwards payroll system and eliminate the need for any data to be manually entered by our payroll department.

With warmer weather, our bedbug business, as expected, is continuing to grow. Bedbug revenues exceeded $7 million in the second quarter. Currently commercial bedbug work makes up almost 70% of this business. But as you would expect, people are taking bedbugs home with them from their travel as residential is growing even faster, up 45%.

I want to again refer to a survey of approximately 800 pest control companies that I mentioned last quarter. Specialty Products Consultants has now published the 2010 survey results indicating that bedbug service revenue grew 25% last year to $320 million. We expect our bedbug business to grow faster than the industry.

Speaking of bedbugs, we recently finalized a major partnership with the University of Kentucky to conduct extensive bedbug research on bedbug biology, behavior and control aspects. One of the objectives is that researchers hope to discover enhanced treatment and prevention methods. Our Company's support is the first programmatic funding for bedbug research of this kind by any business, government agency or institution.

This partnership is one of several collaborations that we've initiated over the years to better combat pest and promote knowledge about pests and health, including partnerships with the Center for Disease Control or CDC, the American Center for Healthcare and Environmental Services, ACHES, the National Science Teacher's Association and the Smithsonian Museum of Natural History via the O. Orkin Insect Zoo.

Orkin PCO Canada has started to roll out their proprietary handheld computer application they call SmartScan. This new application is expected to increase technician productivity, saving up to 25% of time spent at large accounts through more efficient inspection and documentation processes. Same-day automatic work ticket hosting will provide four day faster invoicing and eliminates our customer service reps printing and processing tickets. Additionally, for our customers, corresponding GPS tracking allows us to dispatch the closest technician for emergencies and same-day starts.

50 handhelds are currently in use and a full rollout across Canada is scheduled to begin in August. Approximately 500 service technicians will be issued handhelds and in the field we will be paperless when the implementation is complete.

Incidentally, much is being run through our Canadian initiatives that will be helpful to all of Rollins US brands. We continue to increase our franchises both domestically and internationally and we were pleased to have Sawyer Inc., based in Boise, Idaho, join Orkin under a unified brand through a means that we refer to as reverse franchise.

This model is particularly appealing to pest control company owners who have a desire to generate cash and are looking to accelerate their growth through an association with Orkin. This franchise approach rebrands their operation as Orkin and takes advantage of all the benefits they can accrue from Orkin, for example, advertising, marketing, fleet, purchasing, IT, etcetera.

This is the latest of several reverse franchises executed by Orkin and we look forward to completing more of these arrangements in the future. The Boise operation will serve as both residential and commercial customers in 35 counties in Idaho and parts of Oregon and Wyoming. Currently we will do nearly $2 million in revenue from this operation.

As we look to grow all of our brands and gain market share, we continue to reach out to consumers through our Company's websites and the Internet. A leading example is the expansion of the content of Orkin.com which enables us to put that brand in front of more consumers in their research and consideration phases. Additionally, we are promoting conversations about the Orkin brand in Twitter and Facebook, facilitated by "Ask the Orkin Man" on our Corporate website.

//es.orkin.com. I'm sure many of you are aware that -- of the tremendous buying power that this group represents. According to the 2010 US Census Report between 2000 and 2010 the US Hispanic population grew 43% from 35.5 million to 50.5 million. A share of the total population rose from 13% to 16%. That accounts for more than half the total US population growth since 2000.

Individuals are becoming more and more connected with the digital media, which is clearly illustrated by some facts that our advertising agency, the Richards Group, recently provided us. For instance, every 60 seconds in today's world, 168 million emails are sent. 70+ domains are registered. 600+ new videos are posted to YouTube totaling 25 hours in duration. 13,000 iPhone applications are downloaded.

Further, every 60 seconds 320+ new Twitter accounts are established. And there are 695,000 Facebook status updates and 6,600 new pictures are uploaded on Flickr. I think you get the picture. Amazing, isn't it? And we're fully engaged in capitalizing on these phenomena.

To further expand our presence in this area, we are testing mobile ad display banners, targeting Smart Phones and iPad devices with specific marketing messages and monitoring Orkin's online social presence. In 2012 we expect to further increase our use of online and other areas to address the population's changing media consumption habits.

While I said a few minutes ago, we're pleased with our year's first half results, but please know that we believe that there are numerous untapped opportunities to improve and grow our business. We have tremendous leadership and employee dedication in all of our brands and are individually and collectively focused on taking advantage of these opportunities.

I'll now turn the call over to Harry. Harry?

Thank you Gary. Good morning. Thank you for joining us on the call. The second quarter each year is probably our most important. Now with spring having sprung, we reported solid growth this morning in revenue and profits, positioning us well for the balance of the year.

As much as we'd like to take credit for all of this, as we have many great employees, you have to give Mother Nature each year some credit as well. What's great about this business is summer always follows spring. Don't get me wrong. We aren't asking for any breaks in the current hot weather, though we are sympathetic and support those areas looking for some rain. Something like good heat with some rain mixed in to really bring on the ants, who continue to be the nation's number one insect pest.

Second quarter revenues were $320.4 million, representing 7.2% revenue growth experiencing that growth across our entire family of brands. Net income increased 12.1% to $31.1 million or $0.21 per diluted share compared to $27.7 million or $0.19 per diluted share for the same period in 2010.

For the first six months of 2011, revenues have risen 7.3% to $592.10 million compared to $551.8 million last year. Net income for the first six months of 2011 was $49.7 million or %0.34 per diluted share compared to the same period last year, representing a 13.3% increase in diluted earnings per share.

In the second half of 2010 we made two significant acquisitions, the first of which, Waltham Services, we will begin [lap] only in the next quarter. Excluding the contributions of both acquisitions, our total revenue growth was 5.2% with our strongest business line, residential pest control, posting 5.3% growth, commercial pest control coming in at 4.6%, 5% when excluding fumigation, and termite at 1.3%.

The fundamentals that drive our business remain strong. While leads are off modestly and marketing keeps reminding me that it's never easy to run against a prior year that had set a record with double-digit increase in lead, I don't feel we're seeing any real change in consumer sentiment. And in fact, closure is up with improved price realization. Retention is running as we expected, clearly as we continue our positive momentum. As Gary stated, we are pleased, just never satisfied.

Last quarter I mentioned that price testing showed little changes in the elasticity and as a result in June Orkin implemented its traditional annual price increase program for eligible residential and commercial customers. Overall, the revenue realization should be similar in scope as last year and favorably impact revenues by a little over $1 million in the second quarter.

Home team's price increase program goes into effect in the third quarter beginning July 1. In total the price increase program will add over [one] percentage point to Rollins' total revenue over the next six months.

Gross margin for the quarter decreased 10 basis points to 50.2% for the second quarter versus 50.3% in the prior year. Favorable group health experience and cost controls could not offset the nearly 70 basis point cost of higher fuel.

Depreciation and amortization expenses for the quarters increased $300,000 totaling $9.3 million. Depreciation was $3.7 million and amortization of intangibles was $5.6 million. Amortization of intangibles increased $300,000 from this year quarter a year ago as a result of the two acquisitions.

With the nearly $145 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 non-cash charge to the P&L for some time, and in fact will result in a non-cash, after-tax charge of approximately [10%] this year.

Sales, general and administrative expenses for the second quarter increased $4.8 million or 4.9% to 31.8% of revenues, increasing from 32.5% for the second quarter ended June 30, 2010. The increase in dollars is due primarily from the two acquisitions made in the third and fourth quarters of 2010. The decrease in cost as a percentage of revenues is due to growth in revenue as most costs other than fuel remain level, leveraging the Company's sales, general and administrative expenses in the business existing before the 2010 acquisitions.

We can understate fuel's negative impact on the quarter and in fact, increased cost was enough to reduce our earnings $0.01 for the quarter. Our customers certainly can relate to this component of our cost and have no significant resistance to their price increase as a result. We have several proactive programs in place to help us reduce fuel consumption.

Our provision for income tax was 37.3% versus 37.6% a year ago. We look forward to the day Congress agrees to rewrite the tax code that would lower corporate rates, close loopholes, end tax breaks and make other adjustments. It is not the service companies in America that aren't paying Uncle Sam their fair share of taxes, that's for sure.

We continue to operate from a solid foundation. We have great confidence in our fundamentals. The Company is performing well. The balance sheet is strong. We generated significant free cash flow and in fact, net cash provided by operating activities reached $74 billion year to date, up 25.9%.

The strong cash flow gives us the ability to take advantage of growth opportunities such as the two more significant ones presented to use last year, first with the acquisition of Waltham Pest Services, New England's oldest and finest pest control company. We will be celebrating the first anniversary of Waltham under our tutelage come August 1.

This past quarter has been our strongest and when you add back the amortization of intangibles to their profits, their operating margin in the second quarter was among the strongest in the Company. We are working on plans to better execute and deal with the more seasonal nature of their business and believe this will prove to be an excellent acquisition.

And at the same time, our other acquisition last year, TruTech, which is one of the largest animal control, wildlife and animal removal companies in the nation, is also performing well. Barring bedbugs, they are the fastest growing component of our business and are balancing growth and profitabilities extremely well. We will continue to look for outstanding pest control acquisition candidates to invest in.

With the year half over, we're well positioned for a great 2011 and look forward to talking to you next quarter. Let me express our continuing 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.

Thank you for your time and your interest. With that, I'll turn the call now back over to you, Gary.

Great, thanks Harry. We're now ready to open the call for any questions that you might have.

Thank you. (Operator Instructions)

Clint Fendley, Davenport & Company.

Thank you. Good morning, guys.

Good morning.

Good morning.

I had a question on the reverse franchise thing that you talked about there, Gary. It sounds like an interesting opportunity. How are you thinking about the potential cannibalization from some of your existing branches as you look at that opportunity?

I don't think -- in Idaho acquisitions, for instance, we had -- Orkin had a very meager share of that market per say. The company we acquired was a leader in that market. We had no other brands, no other Rollins brands in that market so they really -- there wasn't any cannibalization per say there. I think, we're not exposed to any more than we are through our natural expansion with the Rollins brands versus the Orkin brands. All of them are opening new operations.

I think we have very specific and well understood rules of engagement where we have two brands in the same market. We will not allow a brand to impose on another and try to steal their customers. The only way that we will think that that can be handled fairly is if they get more money for that account than the previous provider was getting.

And so we really, fortunately, I ought to knock on some wood here, we've not really had a lot of commotion as far as competing within the same markets.

Maybe another way of asking the question, I guess if you look at the United States today, where would you say that you're under-represented on a geographic basis?

New England and California.

That was a branch I particularly, when you talk about our business in general, we say the key to profitability is the productivity and [wind chill time], you're not incurring any revenue. So when we can take an area like Idaho, where we just didn't have the branch in Idaho cover the entire state and we were doing just a little over $1 million in revenue or under -- a little under $1 million of revenue, combine it with another operation that operated in the entire state.

The productivity improvement by having the -- improving productivity and reducing drive time and wind chill time, will make a much more profitable operation and we look forward to the opportunity, as I think we said before, all of our domestic franchises are somewhat unique in franchising that we have the right but not the obligation to buy these franchises back at a predetermined price per customer.

So this individual has got his exit strategy, he doesn't want to walk away from the business today. He wants to build it and build it a little bit further and so we think it's just a grand opportunity for us.

Okay.

And I think it just shows that we've had to be creative. We are kind of circling and waiting for these great companies to have a life changing event that would put them on the market or make them available. But in the meantime, we've come up, as Harry described, with that franchise program which really is an indirect acquisition program, and we're pretty excited about this reverse franchising situation. There's a lot of good operators out there that have never taken any real cash out of their business. I mean, they make a nice living but they've not really reaped the benefit of the equity that they've developed, and this gives them an opportunity to do that.

They continue to stay in the business which they love and they all know that with the buying power and the knowledge that we've amassed since 1901 that we will enable them to improve their operations beyond what they currently can do themselves.

Okay. And I wondered, are you guys still as enthusiastic about the opportunity on the international franchise front?

We do. In fact I have a presentation just this afternoon on it. No, we're very excited. In fact the thing that we've been most pleased with is the enthusiasm that we're finding from Canada and the affinity that these people have for US brands and in this particular case, Orkin, is just remarkable.

They just -- if it's American and it's well known here, there's just an automatic interest. And we're coming up to renewing some of these early franchises and we just got a coterie of happy franchisees internationally, so we really are -- we think China represents a tremendous opportunity for us.

Incidentally we've been invited to talk again to the folks at the Forbidden City. They've not been able to effectively deal with their termite problem so we just think that it's a terrific opportunity and it's different than the domestic franchises but as you would expect, these are entrepreneurs. These are individual business people.

We kind of hedge against trying to worry about the differences in bookkeeping in that we have minimum fees that we charge annually so we know we're going to get at least X so we don't get into whether they're following US GAAP or international GAAP or Chinese GAAP. So we're pretty excited about it.

And any idea from where stand today say if you would take your domestic franchises as well as the international, what percentage of your earnings are derived from the franchise revenues?

We don't have --

It's a small number overall. The domestic and international franchises in total probably under $3 million or $4 million, done quickly in my head in terms of revenue.

But our revenue is --

Well, it's the royalty revenue. It certainly has better margins than our (inaudible) costs associated so at that level, it's less than -- it'd be less than a penny at this point.

But the great thing or the other part is that we're continuing to build brand. People in Singapore or Shanghai will be exposed consumers and commercial accounts will be exposed to the Orkin brand. So it's just a win-win for us.

It's got excellent long-term potential.

And I guess the last question here just on the pricing, the second quarter we've definitely seen some weaker consumer data from across the landscape here. Have you seen any evidence of that in your business, particularly with regard to your pricing ability?

Not per say. As Harry and I, both of us shared, our pest control leads were pretty much flat down just a little bit this quarter. We attribute that more to weather than anything. I mean, heat is great but you need moisture with heat. I kind of sound like a chef here making a cake, but a cake would just be hot. It's got to be kind of -- you have to have a combination.

We look at our unbranded search. Google provides that information about how many people search the word 'ants' and how many people search 'termites' and so forth so we do have a way of determining how the industry overall did. We think the Web gives us the best determination as to, is really the season if you will.

So we just are not seeing a great difference as far as the economy. I read the same things as you read. You probably read a lot more but I know what you're talking about as far as the dip but fortunately I don't think that we've experienced that dip.

We had, as I mentioned, while leads were off a small amount, closure was up, price was up, so we had record sales for the quarter, but new sales for new customers were (inaudible) [highs] and, which is certainly good.

Great, thank you guys.

Thank you.

Thank you. (Operator Instructions) And I show no further questions in the queue at this time. I'd like to turn the call back to management for closing remarks.

I just want to -- before Gary, I just wanted to give a shout out at the (inaudible) listening on the Web, [Jamie] (inaudible) disability leave. I guess he's suffering with a bad back which some of us can probably relate to, so Jamie, we hope you get well soon and we'll talk with you at some day in the future shortly.

Thanks Harry. Okay, well if there's no further questions, I'd like to thank you all for joining us today. We look forward to sharing with you our results at the end of the third quarter and please know that we're continuing to work hard to grow and improve our business.

Have a good day.

Ladies and gentlemen, this concludes the Rollins Inc. second 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 4456994 followed by the pound sign. Thank you for your participation. You may now disconnect.