Rollins Inc (ROL) 2011 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the Rollins, Inc. third-quarter 2011 earnings conference call on the 26th of October, 2011. Throughout today's recorded presentation all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions)

I will now hand the conference over to Marilyn Meek. Please go ahead, madam.

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 4478118. 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 third-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 Factors section of our Form 10-K 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 proud to report that our company achieved another quarter of record operating results. In fact, this marks the 22nd consecutive quarter of improved earnings. For the quarter, our net income rose 15.3% to $29.4 million. Revenues for the quarter were $323.9 million, an increase of 6.2%, with all of our brands and business lines positively impacting our growth. Residential pest control led the way, with a 5.4% increase; commercial pest control followed with an increase of 4.3%; and termite was up 2.5%.

There's been a lot of concern of late over the potential global impact of the problems being experienced in Europe and other countries. At a time like this it is gratifying to be in a business that we're in. Fortunately, Rollins should not be impacted by the euro sovereign debt crisis or the slowdown of economic activity in China. While we don't see a short-term robust recovery of the US economy, Rollins remains stable and expects a continuation of mid-single digit increases in revenues. As I shared previously, this was reflected in our results for the past quarter.

The growth that we continue to experience confirms the fact that pest control is a recession-resistant business. And thankfully for many, pest control services are not a discretionary purchase. Our customers want to protect the health of their families and avoid the threat of their property being damaged by termites. Our commercial business is also very stable because most of these customers have to meet numerous regulatory requirements, as well as the potential risk that exists concerning their reputation. Furthermore, we're very fortunate to have a company that requires very little capital and is not subject to many of the threats that other businesses experience today.

The response to the bedbug epidemic has certainly confirmed the country's interest in these pests, and we continue to benefit from this concern. We recently completed our first $10-million-plus quarter of bedbug revenue. This work is providing an excellent opportunity for recurring revenue growth through our inspection and remediation programs. As part of our bedbug initiatives we have completed training or certification of almost 3,100 of our technicians in conventional treating methods, with over 700 now having completed a more advanced bedbug heat treatment certification. Beginning next month all new residential and commercial service and management employees will be automatically scheduled to complete these courses where pest appropriate. Bedbugs might not be making headlines every week, but they will continue to expand their reach and threat in the US.

As most of you are aware, a major goal for us this year is to increase our sales yield, which is the result of lead closures, our ability to quickly begin the newly sold service, and to retain our customers. The most important component in this equation is customer retention. In a service business with a large amount of recurring revenue, nothing is more important than satisfying the customer. A major contributor to our recent success in this area is our customer survey efforts where we solicit feedback from our customers and then utilizing this information to specifically address our improvement opportunities as well.

To give you a little background, approximately two years ago we initiated a customer satisfaction system based on Net Promoter Score, or NPS, a customer loyalty metric developed collectively by Fred Reichheld, Bain & Company and Satmetrix. This tool, or product, was first introduced in 2003 via the Harvard Business Review. Since its introduction, this measurement has been embraced by numerous companies, including Apple, Google, JetBlue, and GE to measure customer satisfaction.

NPS is based on one simple question -- how likely are you to recommend our company to a friend or colleague -- with the objective of creating what NPS refers to as promoters, those who are likely to recommend our services. And on the other side of the coin, having few detractors, those who are less likely or would not recommend our services. By the way, it's been shown statistically that a person referred by a promoter is 6 times more likely to purchase your service or product than someone that has had no personal endorsement.

In addition to the finding I just referenced, another part of the survey asks our customers to provide specific comments, both positive and negative, on the service they received. These are summarized into categories, such as impression of the personnel, service thoroughness, reliability, et cetera. The direct feedback of these areas provides a Net Promoter Score. Responses are scored on a 1 to 10 scale, with 9 and 10 representing those customers most likely to recommend us to our friends and 0 to 6 for those not likely to recommend our services.

The benefit of this system is that we can dive deeply, identifying customer issues, trends, and individual location results. We can (inaudible) reports at any level by total company brand, by service type -- termite, residential pest control or commercial control -- and by branch. And we can break out this data right down to the technician. We can identify every location that has a problem in any area, and the specific customers that have identified those problems.

When there is a problem with a customer, we follow up with a phone call to quickly address their concerns, schedule a return service call, or whatever is appropriate. These reactive calls are being made every day throughout the entire company. Trend lines are also established, which allow us to see whether a branch is improving or not, or whether a recurring problem is eliminated. NPS provides a relatively quick confirmation on what we are doing right and what we need to be doing better, and, most importantly, whether we are producing positive improvement.

We have now rolled this survey tool out to all of our locations in the US and Canada, for all of our brands. Most of our pest control customers are now receiving their survey via email immediately following their initial service, or after the first regular scheduled service. For those other customer types from whom we have their email addresses, they will be surveyed on a semi-annual basis. Termite customers receive a survey following their initial treatment and/or after their annual reinspection.

This survey program has proven to be a great tool to drive our service improvement and we're excited about its ongoing potential to help us better serve our customers, retain existing customers, and gain new business through word of mouth referrals.

I often envy Orkin's founder, Otto Orkin. Although an industry visionary in the 1900s, he didn't have the challenge of identifying and adapting to new computer technology or meeting the ever-changing factors impacting the marketplace. He just personally focused on sales, service, and collections.

In the area of computer technology, it's been a year since I talked about our initiation of a new branch operating system. We began parallel testing last November in our Orkin Philadelphia branch, with ServSuite, a pest control software package written by Service Pro.net of Columbus, Ohio. This product is currently being used as the customer relations management CRM and branch automation system utilized our Western division, Crane in California, TruTech, and almost all of our domestic franchises. Our plan is to replace our old proprietary branch accounting system with a superior branch operating system that will ultimately be utilized in all of our brands. We anticipate substantial business and customer benefits when this project is completed.

Our work to date has been very productive at both identifying developmental issues and creating solutions, while further confirming that this product is the best long-term fit for our branches and our business. Open enhancement still exists and are being addressed and we are hard at work preparing for a staged 2012 expansion. Our goal is to implement a second branch in December, followed by the remaining 8 branches in that region in the first half of 2012. This is, of course, dependent on our team, internal and external, meeting its schedules. Initially, different training models will be used for different groups of branches converting to determine the best approach for the full Orkin rollout. This will allow us to better estimate the implementation costs and timetable going forward.

For the past 8 years we've forged a strong relationship with the Center for Disease Control, or CDC. And we've both benefited from the sharing of information and expertise between our two organizations. You may recall that the CDC has also asked for our assistance from time to time in treating disease causing pest or rodent infestations, including a tick infestation at the Fort Apache Indian Reservation in Arizona. This was a situation where there was a Rocky Mountain spotted fever outbreak and, regrettably, some fatalities. Orkin provided a corrective treatment over a 5-day period with highly satisfactory results.

The CDC recently reached out to us once again, asking Orkin to be the exclusive pest control provider for their Lyme and Tick-Borne Disease Prevention Study. This study was conducted in specific areas of New York, Connecticut, and Maryland. Working with the CDC and respective state health departments in each of these states, Orkin provided one-time preventative tick treatments to over 1,500 properties. The purpose of the study was to determine the degree of underreporting of tick-borne diseases, and whether a one-time tick treatment will reduce the number of Lyme disease cases in the areas involved. The CDC is currently analyzing the data and expects to release their findings between April and June of 2012. We're hopeful that these one-time treatments will be found to have produced positive results, as we could quickly offer this proactive program there and in other areas where Lyme ticks are a problem.

At the same time we've been focusing on how to better manage our costs and improve our operations. In August we signed a co-sourcing agreement with Wheels, a well known 70-year-old fleet management company. By partnering with them, we are able to obtain better vehicle purchasing ability, improve other related financial options, such as having the potential of higher vehicle resale values, and improving our fleet management reporting. This new arrangement will provide a higher level of sophistication and expertise we didn't have with our old fleet system, and is expected to save our company several million dollars over the next 6 years.

Last week we were pleased to announce the further expansion of our franchises internationally. Orkin established its first two franchises in Africa, specifically in the Federal Capital Territory of Abuja, Nigeria and the Federal State of Lagos, Nigeria. Orkin Nigeria will offer both residential and commercial services, focusing mainly on hotels, office buildings, food processing facilities, restaurants, hospitals, and apartments.

In closing, we remain committed to our mission of being the world's best service company, and work every day toward that objective. We are pleased with what we've accomplished so far this year, and are on target to meet our goals for 2011.

With that, I'd like to now turn the call over to Harry. Harry?

Thank you, Gary. Good morning, and thank you all for joining us on the call. I was thinking of some reference to Gary and I found him like a broken record. But I stopped and thought how archaic a term that is, something that well predates dial-up internet and today's iPad. I wonder how many people listening to the call remember polyvinyl records that would repeatedly skip back. Anyway, let me begin.

Today we reported revenues of $323.9 million, representing 6.2% revenue growth. Net income increased 15.3% to $29.4 million, or $0.20 per diluted share compared to $25.5 million, or $0.17 per diluted share for the same period in 2010. As we've discussed, real profit, real cash and with net cash provided from operations for the quarter coming in at $40.7 million, up 22%.

Year-to-date revenue is $916 million, a 6.9% increase, while net income has increased 11.8% to $79.l million. EBITDA reached $154.7 million, a 10% increase, while EPS has increased 12.5% to $0.54 per diluted share.

We see no significant changes in the fundamentals that drive our business -- leads, pricing, closure, and retention, with programs underway that position us well for the remainder of this year and provide a great stepping stone for next year.

Getting into revenue specifics, we saw the revenue growth across all brands and all service lines. We lapped the Waltham acquisition beginning on August 1st and the TruTech acquisition October 1, the start of the fourth quarter. Excluding the contribution of both acquisitions, our total revenue growth was 4.3%, with residential pest control service offerings being our strongest at 5.4%, commercial at 4.2%, and termite, with its best growth this year, at 2.5%.

First, residential pest control, which continues to represent almost 41% of our business. Given all the headlines in the press about the plight of the consumer and less than convincing US economic data, we posted a 5.4% increase in revenues, right in line with where we've been running now for the last 6 quarters, between 4.7% and 5.7%, excluding the impact of the 2 acquisitions already mentioned.

Gary mentioned earlier that pest control is truly a recession-resistant business. As my wife reminds me -- there is still no room for bugs in our home. Though many Americans have slashed home maintenance budgets in this economy, a March 2009 independent survey Orkin commissioned reported nearly 9 in 10 adults, 87%, still refused to tolerate pests in their home. More than half the respondents, 57%, also agreed that unlike services like home -- house cleaning, pest control is not a do-it-yourself project. Our homes are likely our biggest investments, which is why it is important to protect them from pests. A professional, trained in pest identification and control, can help reduce pests and the risks that they pose to our homes and health. Survey respondents named severity of the pest problems and health concerns as the two most important reasons for calling an expert to control pests.

In order for us to grow that revenue, we need leads, sales, starts, and retention. After reporting a modest decrease in leads the last quarter, it was nice to see a modest increase. Again, we're running against last year's record, with its double-digit increases.

After getting the telephone to ring you have to close the sale and start the job. We didn't see the improvement that we would like to see in closures, but I suspect it's more a matter of lead channel mix than execution -- web leads versus phone leads. Starts were good and longer-term customer retention is improving. And we are giving a lot of attention to shorter-term customers. We think this is where our customer satisfaction surveys will pay large dividends.

42% of our revenue is commercial pest control, which continues to be a steady performer in a pretty much stagnant business environment. We saw some weakness in the commodity volumes flowing through the East Coast ports, hurting our commercial fumigation business.

As for termite, which is more seasonal than our other service offerings, it represents now just over 16% of revenue. Though seasonally influenced, half of this revenue is recurring in nature, coming from year-round monitoring and renewal fees recognized ratably over the course of the year. As already mentioned, termites saw its strongest growth this year at 2.5%. Leads were essentially flat, closure off a tad, but more than made up for with ancillary services.

Gross margin for the quarter improved to 49% for the third quarter versus 48.9% in the prior year. This quarter we were able to offset the nearly 50 basis point cost of higher fuel by favorable margin improvement related to administrative salaries, favorable medical claim, and cost [of risk], [casualty and termites.]

Depreciation and amortization expense for the quarter increased slightly, $261,000, totaling $9.3 million. Depreciation was $3.7 million and amortization of intangibles was $5.6 million. We are not a capital intensive business. Our CapEx ran $13.4 million year to date. And that's at the high end of our typical spend, reflecting the first ServSuite branch system project, as well as having pulled forward a complete refresh of our handheld computers into the last six months of this year.

The larger piece of depreciation and amortization is the amortization of customer contracts totaling $5.6 million for the quarter, and will remain a significant noncash charge to the P&L for some time. This represents a significant after-tax charge of $0.10 this year. When we do pest control company acquisitions there seldom is any significant hard assets on the balance sheet and, as a result, most of the valuation ends up being classified as goodwill and customer contracts. We currently have $140 million of intangibles from acquisitions on our balance sheet. With current amortization running $22 million a year, we have a few more years of this expense flowing through the P&L. We see little risk in possible impairment charges. All of the business we have acquired has grown while we continue to write down the value of the customer contracts acquired. And we are expensing fully all new customer acquisition costs.

Sales, general and administrative expenses increased 3.5%, or $3.5 million, to 31.6% of revenues, decreasing from 32.4% of revenues. It helps to grow revenue faster than expenses, and in addition we saw some savings in sales expense as well as consulting.

In total, between CSP and SG&A, the increased cost of gasoline totaled nearly $2.9 million, up $0.01 in the quarter.

We continue to build to our solid foundation. Possessing a strong balance sheet and cash flows, Rollins continues to be financially strong. With that cash flow we've paid off the last tranche of our line of credit. Our banks would love to lend us some money, and we continue to wait patiently for that big regional pest control company looking to join our family of brands.

While we wait for the opportunity to reinvest our cash in what we know best, pest controls, we've bought back nearly 600,000 shares of our common stock this quarter, bringing the total share buyback this year to nearly 1.4 million shares.

Hard to believe, 2011 will be drawing to a close. There is still much to be done and, fortunately, much opportunity remaining in front of us. I look forward to talking to you next quarter and sharing our fourth-quarter and record year results.

Lastly, let me express our appreciation and not forget to thank 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. We're now ready to open the call for any questions that you might have.

Thank you, sir. (Operator Instructions) Jamie Clement; Sidoti & Company.

Gary, I was wondering if -- you touched on bedbugs a little bit. I was wondering if you could give us just a little bit more color on how your service offering and the protocols have kind of evolved over the last six to nine months. It's something you all have alluded to. It seems like it's more comprehensive. It seems like it's more uniform across your branches. So I was just wondering if you might have some comments on that.

Well, it's been exciting, to say the least, because the markets are expanding fairly dramatically, with people traveling and doing business travel, that it's pretty incredible how the pest has moved from kind of city to city.

We still have two fundamental approaches as far as treatment is concerned. One is a conventional treatment where there's very thorough inspections and there are pesticide-related products that are used. In some cases steam is used around the bed seams and in the curtains, et cetera. Pretty labor intensive as compared to heat treatment, which we have some areas that we have developed expertise. As I mentioned, we have about 3,000 people trained to do conventional. We have about 700 trained to do heat. And that's where you really raise the temperature in the room or rooms that are involved and hold it and that kills the pest. Quicker, more effective -- you have fewer callbacks. Bigger investment as far as the equipment is concerned and more complication as far as training.

Inspection, we have two approaches to inspection. One is a visual inspection, which, again is pretty labor intensive and time consuming. And we are using dogs, much like the way the D&A group use dogs to identify drugs. We have 10 dogs now. And, as you would imagine, adding a dog to the lineup adds a little complication because you've got to have a trainer and a handler and there has to be kind of remedial training as far as the dog's concerned. But very effective and the dog has the ability to come in and inspect the rooms. And this is especially important in hotels where they really can't tie the room up long and you really need to kind of get in and get out. So as we develop more expertise in the dog inspection area, we would expect that this will be a faster growing inspection process.

We're also seeing our residential bedbug business increase. Percentage-wise it's increasing greater than commercial, although commercial represents the biggest part of the business. And, again, that's because people are traveling. Our residential bedbug business is up over 50%. And if somebody's picking up bedbugs in a hotel, I mean, they're going to invariably in most cases take them home.

And we charge for those inspections and we apply the inspection fee towards any treatment cost that would be incurred. So I think that we have a good way of really generating revenue and not spending an inordinate amount of time in really situations where they don't have a problem.

Okay. Changing gears just a little bit, if I could ask another question -- TruTech, not one of your larger acquisitions by historical standards, but it seems to me that that's a business that requires some specialty expertise. And therefore I would imagine it's probably pretty profitable. Is that market a market that you'd like to get into in some other areas of the country?

Absolutely. And I think what it's done is -- and this is kind of like -- you've probably heard me say this before about stealing shamelessly from ourselves. One of the things that it's caused the Orkin folks to do, particularly -- well, all of the other brands really -- when they see the impact that TruTech has in the areas that you mentioned, as far as profitability and growth, then we're adding more critter control business and expertise to our other branches. I mean, we've got the platform. We've also go the expertise. I mean, TruTech really does a terrific job so we're able to share service methods and pricing and protocols as far as the other locations are concerned.

Okay. I hadn't even been aware of that. Like I wasn't -- I thought that was almost a kind of business that you'd have to kind of buy your way into. I wasn't sure that it was expertise that you could actually kind of build organically. So that's actually -- that's great to hear. Thanks very much.

(Inaudible); Northland Capital Markets.

Just had a couple, actually. Curious if the branch office systems rollout that you started in Philadelphia kind of go according to the [stake] you're talking about today, will that begin to have any short-term impact on the P&L in 2012? Just kind of curious as you look at the overall cost of implementation.

I think the answer is, it may. At this point -- and the point we tried to make during the call, as we roll out over the next 8, 9 test branches, what we need to determine is what is the most cost-efficient method for training and bringing the people on line. Once we've done that we'll be able to gauge better and give some guidance on what we see that cost might be. Really, any impact at this point is third or fourth quarter next year, assuming we're in position to roll it out. So it's a stay tuned -- when we talk about our prospects I think it's -- the short-term cost of rolling out this system will be very quickly offset by improvements in productivity and customer service and whatnot. But there certainly is some front-end costs that will be involved. And we just don't have a really good way of estimating that until we determine exactly how we're going to do it.

And I think Harry makes a good point. While we're doing the second phase of rollouts we're going to have a maturing operation as far as Philadelphia is concerned. So we'll be simultaneously getting a better feel of mileage reduction and productivity and some of the other aspects that we're expecting improvement on. So we're kind of going to be looking at both important parts of the equation. And just in the area of testing different protocols on training can make a pretty big difference. And we have been benchmarking with other companies that have done branch rollouts, trying to learn how much training is enough, how much is overkill, what's the best way to do it.

And the neat thing is that we're big enough that we can experiment. We don't have to kind of bet the farm on one particular approach. We should have a pretty good sense of what works better when we complete this next group of I think it's 8 branches.

And so when you have it figured out, if you will, then will you go with a pretty broad national rollout? And do you have any sense of how long that could take?

Well, I think you just -- you're looking into 2013, just by the sheer numbers, because we've got these other brands involved.

I think the -- and, again, these numbers are so preliminary that -- we would hope to be able to roll out with an Orkin before going to the other brands. And I think a best case scenario -- and we don't have a long track record of hitting best case when it comes to IT projects. But the best case would be probably 18 months. So if we're in position to start in July, we'd have it fully rolled out -- that's knocking on wood -- in 2013.

One of the goods thing in Orkin is success sells. And it's kind of like our GPS rollout and some of the other things. Once the field sees -- is going to start seeing the benefits, it's almost like you can't do it quick enough. And so I think the best answer all around is we just don't know. I mean, we just need to learn more. And just based on my previous experience, when something really works well we have a tendency usually to figure out how to step on the gas.

Great. And then, on your emails survey, I'm kind of curious what's the kind of response rate you're getting to those? And I guess are you mostly just finding it's when the service isn't where it should be? Is that [when they kind of] (inaudible) --

No. And I'd have to go back and look. I don't -- Gary seems to recall it's around 30% response. And it's a pretty good response, especially with your new customers, because they've just had their first service. They want to tell you what's right. They want to tell you what's wrong. So I don't think we see a preponderance of good comments versus bad comments, but we're getting a pretty good response rate. And able to -- you know, the nice part is all through the organization you can look at these and see how we are doing and give us an opportunity to respond very quickly when there's an issue.

One of the good things that I would add is that we really kind of went to school with HomeTeam. And we were able to track, and they were able to track and show us the progress that they made each year as far as moving their ratings. So this is a large company, relatively. It was the third largest at the time that we acquired them. And so we really, we had a laboratory, so to speak. So we could see the benefits. And I think that the most recent enhancement has been the use of emails. Because historically, HomeTeam for years did the written mail-out on their -- and they were very pleased and encouraged us really to start working harder overall on getting email addresses when we first made the sale. So I think that's going to be kind of a horserace, is to get as many of these email addresses as we can where we can very efficiently survey the customers.

Right. Okay. Thanks for all the color.

(Operator Instructions)

Okay. Well, if there's no more questions, thank you for joining us. We appreciate your interest in our company. And we all look forward to the balance of the year and continuing to work hard to grow and improve our business. And thanks again for your interest.

This concludes the conference call. Thank you for participating. You may now disconnect.