Rollins Inc (ROL) 2011 Q4 法說會逐字稿

Welcome to the Rollins Inc. fourth-quarter and full-year 2011 earnings conference call. During today's presentation all parties will be in a listen-only mode and following the presentation the conference will be open for questions. (Operator Instructions)

This conference is being recorded today, January 25, 2012. I would now like to turn the conference over to Marilynn 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 4502890. Additionally, the call is being webcast at www.viabid.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 will open up the line for your questions.

Gary, would you like to begin?

Yes. Thank you, Marilynn, and good morning. We appreciate all of you joining us for our fourth-quarter and year-end 2011 conference call. Harry will read our forward-looking statement and disclaimer, and then we will 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, including historical facts, are subject to a number of risks and uncertainties and actual risks may differ materially from any statements 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 on the risk factors that could cause actual results to differ.

Thanks, Harry. We were extremely pleased to have reported record revenues and profits for both our fourth quarter and the full year.

Revenue for the fourth quarter rose 3.3% to $289.1 million and net income increased 11.3% to $21.4 million. Revenues for the full year were $1.205 billion and net income grew to $100.9 million for the year. I would like to bring to your attention that this is our first $100 million profit year, a real milestone.

For the quarter Residential Pest Control was up 5%, Commercial Pest Control rose 2.7% excluding fumigation, and Termite was up 2.9%. Demand for our bedbug services continue to grow and companywide this business grew better than 30% over the previous year. Our data indicates that we are growing this area faster than the industry.

We would expect these sales to expand further this year in both residential and commercial bedbug services. We have several new initiatives that we feel will raise bedbug revenue to a higher level.

As discussed previously, this business also offers us an opportunity for recurring revenue growth through our inspection and remedial services. At the same time, bedbugs provide us with the opportunity to introduce our conventional Residential and Commercial Pest Control services to those homeowners and businesses who were not previously customers.

We are pleased with what we accomplished in 2011, as I think we should be, but that was almost a month ago. We are ready and into 2012. Our company culture is based on continuous improvement and this year will be no different. We are as committed to that principle today as Otto Orkin was when he said we must never be satisfied with less than the best if we are to secure our share of tomorrow's market.

This year we are expecting improvement in all major areas of our business. I believe that this aspect of our culture is so appropriate in today's market as consumers are both more savvy and have greater access to information concerning the products and services they buy than ever before.

They typically do their research before making a major purchase or signing on with a company for services such as pest control. Following their buying decision they readily share how good or bad their experience was with friends and family and are now using social media in a lot of instances.

Customer loyalty cannot be taken for granted, you have to earn it. And we are working hard every day across our organization to win and retain this loyalty by focusing even greater on our customer service delivery. Our challenge to our people all year will be what have you done today to improve your customer service?

With this as a backdrop as we enter the new year, I thought this might be a good time to provide a brief update on some of the initiatives that we advanced in 2011 to improve our business going forward. But let me digress for just a minute.

Over the past years we have acquired some excellent companies that today make up our family of pest control brands. These companies have helped us grow our business and, in many cases, have helped improve our practices and processes. As I have said in the past, we have gotten pretty good at stealing shamelessly from ourselves and our company has benefited greatly from this synergy of sharing.

For example, HomeTeam began customer satisfaction surveys 11 years ago to better gauge their individual location performance. The results were so beneficial we expanded customer surveys at Orkin and Western, and this past year we introduced an electronic version that creates what we call the Net Promoter Score. I discussed a little bit about this last quarter.

This, too, better helps us capitalize on our customers' growing desire to provide feedback and share experiences, both good and bad. These surveys have been and will continue to be a major contributor to improving our ability to please and retain customers at all of our brands. We are also expecting this tool and effort to assist us in gaining new business through word-of-mouth referrals from happy customers.

Last year we also tested, developed, and implemented several technological improvements to increase productivity and efficiency and also improve customer service. Some of these, in fact, helped us reach our revenue and our profit objectives as they came on stream early in the year.

One of the most important projects was the initiation of a new customer relation management, or CRM, and branch administrative system called ServSuite. We believe this investment will aid us in customer retention while reducing operating costs and improving productivity.

On our last call I mentioned that our goal was to implement a second pilot branch in December, but in fact we added two branches during the quarter and currently have three Orkin branches live on the system. We expect to add this software to more branches during the year, and when the rollout is complete, ServSuite will be in more than 400 branches companywide along with 58 Orkin franchise operations. We look forward to updating you on our progress as the year moves along.

During 2011 we completed and developed and installed a new call processing platform for our call centers having replaced our old systems. This has enhanced call routing for the entire company and the feedback that we have received has been most positive with telephone call time having been reduced as a result of this new system.

Laptops, smartphones, and enhanced software play a large role in most of our lives and this is certainly true when it comes to our commercial sales force. Thanks to the efforts of our Orkin Canada division, the sales management software they developed was modified for use among all Rollins US branches. This one system is now helping our Orkin commercial sales managers better direct the daily activities of their sales force with an end result of improving productivity and data collection. Currently, we are in the process of installing this tool in all of our independent brands.

Our service technicians have always been the most important factor concerning customer satisfaction and our success in this regard. To help improve their productivity and branch profitability during this past year we replaced over 2,100 handheld devices and in the administrative area approximately 2,300 branch desktop computers. Orkin Canada is nearly complete in rolling out its new proprietary technician handheld application, which I am pleased to report has already increased technician and administrative efficiency.

Rollins' employees are our greatest asset and it's our ongoing responsibility to seek out, develop, and promote individuals within our company to ensure continued success. We know and studies have validated that employee satisfaction and customer retention are directly linked.

We have, therefore, developed several initiatives to better understand employees attitudes towards our company and their careers. We have accomplished this through confidential surveys, random interviews, and semiannual town hall meetings held at each location to discuss business issues and employee concerns.

This effort is really paying off. Our 2011 survey showed higher job satisfaction which help result in the lowest turnover rate in our company's history.

Attracting, training, and empowering our employees helps provide us with qualified individuals to assume greater responsibility. In that regard we are pleased to announce that Greg Baumann has recently been appointed Vice President of our combined Training and Technical Services department.

Greg joined Rollins in August of 2010 as our Technical Service Director assigned to Marketing and Global Digital strategies, our Internet operation. He is a degreed chemist with 30 years of industry experience including food safety, toxicology, research, education, operations, and risk management.

Greg served in many roles during his 16 years with the National Pest Management Association, including being the architect of the global pest management and food plants standards. We are very proud to have him on our team in this important responsibility.

He assumes this expanded position following David Lamb, VP of Orkin Learning and Media Services, who will be retiring at the beginning of April. David has been instrumental in creating our award-winning training and human capital development. Under his leadership the reputation of the Rollins training organization is revered not only within the pest control industry but also among other non-industry corporations. We are truly grateful to David for all of his contributions; he has been a great asset to our company.

To ensure that we continue to have leadership in place to maintain high performance, we have established several new or improved management training programs, including our Rollins University Management Development School, a key resource in training our leaders for the future. In 2011, 54 operational managers completed this program designed to develop the skills needed to more successfully manage our branches.

Additionally, we have added a new management training program to further grow our senior management. This new advanced management program was developed through a partnership with Georgia State University's School of Business. We refer to it as the Rollins Leadership Development Program and it crosses all of our brands.

Furthermore, we are pleased at our progress in training and promoting women in the field and support center management positions. Again, in 2011 we were proud of the contribution of our Women's Leadership Council as well as Orkin's sole sponsorship of the Pest Control Industry's Woman in Excellence award.

Due to the strength of our business we have continued to hire even as the economic environment has remained weak. To make the process of getting on board easier for our new hires, we began the implementation of an automated process moving us away from what had been primarily a manual paper ordeal. This year we plan to complete the final phase of this project, which among other things will eliminate the need for data to be manually entered into our payroll system.

As I said earlier, we were pleased with what we accomplished last year but we have great expectations and plans for this year. We will continue to invest in technology as well as in our people in order to provide the best in pest control solutions for our customers, and we will continue to pursue strategic acquisitions that are complementary.

With all that said, I will now turn the call over to Harry. Harry?

Thank you, Gary. Good morning. We appreciate you for joining us on the call.

Gary shared an important message that this year it's everyone's responsibility to improve customer service. I recently read an article that stated that the corporation isn't a sturdy species and only a tiny fraction reach the age of 40. And here our Orkin brand is beginning its 111th year, an accomplishment in its own right, particularly given that the average large firm does not live as long as the ordinary American.

Fortunately, we are not dependent on innovation and forced to cannibalize our big revenue generators to build our business. We just need to work relentlessly on our service.

We are not a technology company, like Apple or Intel, worrying about the next technological breakthrough. We are not a drug company worrying about what drug is coming off of patent. We just need to take care of service.

Although we have had our successes, we can't get complacent, we can't get arrogant. We just need to excel in caring for our customers.

With that let me share our results. Today we reported fourth-quarter revenues of $289.1 million, representing 3.3% revenue growth. Net income increased 12.4% to $21.6 million, or $0.15 per diluted share, compared to $19.2 million, or $0.13, for the same period in 2010.

As you have come to expect, real profits, real cash with a great quarter for cash generation with net cash provided from operations for the quarter coming in at $40 million, up over 25%.

Year-to-date revenue is $1.2 billion, a 6% increase. Net income for the full year has increased 11.9% to $100.7 million, while EBITDA fell just short of $200 million coming in at $199.1 million. Having previously hit the $1 billion milestone with revenue, now this year we have passed the $100 million milestone for net income. I wonder if we would call it a milestone or a millstone when our incomes taxes someday reach $100 million. Anyways, let's talk about revenue.

Revenue growth at 3.3% less this quarter than you have been witnessing, as for the first time in six quarters there were no significant acquisitions aiding the comparison. We saw revenue growth across all but one brand and all service lines.

Our Residential Pest Control continues to be a bright spot growing 5% for the quarter and making up almost 41% of our business. Trends are encouraging. The fourth quarter is not a big lead quarter, but lead growth is still growth and I will take a double-digit lead growth in any quarter. And it has made this the strongest growth in leads in over a year.

Leads don't do you any good, though, unless you sell them, start them, and most importantly as we have been talking about, pleasing our customers. One measure of service is retention which did improve in the quarter.

42% of our revenue is Commercial Pest Control, which grew just under 2%. It was hurt by both fumigations and, for the first quarter in sometime, unfavorable currency exchange.

The one brand that didn't have growth, which is always disappointing, happens to be one of our specialized companies, Industrial Fumigation, and their seasonality is more volatile. For the year they still ended up one of our top organic growers and we continue to have high expectations for them again in 2012.

Customer retention also remains strong and actually improved in the quarter, which says the issue in growth is that we are not putting enough in the top of the funnel. Gary has already talked about some plans to improve that and I am sure we will.

Our Termite and Ancillary Services grew 2.9% and represents almost 17% of revenue. While seasonally influenced, half of this revenue is recurring in nature coming from year-round monitoring and through renewal fees recognized ratably over the course of a year.

The fourth quarter ended strong showing its best growth in the year. Leads, pricing, sales retention all improved, a good finish for 2011. Overall, businesswise we have seen no significant change other than positives in the fundamentals that drive our business -- leads, pricing, closures, and retention.

We are excited by some of the trends we have been seeing in these typically low demand, slow winter months for our residential services. We expect to see greater growth in our commercial business with the new programs we believe will gain some traction and help restore our momentum.

Although bedbugs seem to have lost their newsworthy appeal -- I haven't seen them in the headlines of late -- they continue to flourish. They will remain for some time our fastest growing area of pest control. As my grandmother used to say, sleep well and don't let the bedbugs bite; call Orkin.

Gross margins for the quarter improved 40 basis points to 47.7% for the second quarter versus 47.3% in the prior year. This quarter's fuel cost increases moderated and we were able to offset its 30 basis point variant by favorable margin improvement related to service and administrative productivity, as well as continuing favorable medical claim costs.

Depreciation and amortization expenses for the quarter increased slightly $313,000 totaling $9.7 million. Depreciation was $4 million and amortization of intangibles was $5.7 million. Over the last five years our capital expenditures have averaged $16 million.

We didn't exactly go wild this year but we did spend an amount greater than average, $18.6 million. This reflects a little over $4 million on the development of the ServSuite project and nearly $4 million on improving our telephonic capabilities and computer refreshment.

The larger piece of depreciation and amortization involves acquired customer contracts totaling $5.7 million for the quarter and $22.4 million for the full year. This represents a significant after-tax charge of $0.10 this year.

But as I mention every quarter, but for those who may need to be new to the story, when we do pest control company acquisitions there is seldom any significant hard assets on the balance sheet. As a result, most of the valuations ends up being classified as intangibles and customer contracts.

We currently have $137.5 million of intangibles from the acquisition on our balance sheet. With current amortization running approximately $22 million a year, we will have a few more years of this expense flowing through the P&L. We have seen little risk in possible impairment charges. All the businesses we have acquired have grown as we continue to write down the value of the customer contracts recognized at the time of the purchase while expensing fully the cost of all new customers acquired.

Sales, general, and administrative expenses increased $400,000, or 0.5%, to 32.1% of revenues decreasing from 33% of revenues. There is something to be said about growing our revenue faster than expenses and leveraging your cost structure. We saw savings in sales expense as well as professional consulting expense.

The tax rate for the quarter came in a tad higher at 37.7% with our year-to-date provision for income taxes at 37.5%, which we expect to maintain barring anyone in Washington coming to their senses and passing tax relief to help the competitiveness of US companies.

We continue to build on our solid foundation. Possessing a strong balance sheet and cash flows, Rollins continues to be financially strong. EBITDA reached $199 million. With our strong cash flow this year we funded our $18 million of capital expenditures, paid off the last $26 million of our line of credit. We would have loved to spend more on acquisitions and will continue to look for the opportunity to reinvest our cash in what we know best, pest control and only pest control.

With cash to spare we returned $71 million to our shareholders through both our stock buyback and dividend programs. This year we brought back nearly 1.5 million shares of common stock and have authorization to purchase an additional 1.1 million shares.

Speaking of dividends, I would be remiss not to mention that yesterday our Board of Directors increased the quarterly dividend of 14.3% to $0.08 per share. This marks now the 10th consecutive year that the dividend has been increased a minimum of 12%.

One might wonder why after 10 consecutive years of strong dividend increase our dividend yields seldom exceeded 1.5% during this time. Well, we don't often talk about our stock performance but an analyst brought to my attention our performance over the past 10 years with dividends reinvested as compared to the S&P 500 Index and the Russell 2000 Index.

Between January 2001 and the end of December 2011 the S&P 500 Index increased 33.3% for the 10-year period, an annualized increase of 2.9%. The Russell 2000 Index rose 73.1%, an annualized increase of 5.6%. This compared with ROL, which rose over the past 10 years a total of 537%, an annualized basis of 20.3%. No brag, just the facts.

2012 is already here and overall we feel well-positioned for another record year. Most importantly, before we turn the call back to Gary, let me express our appreciation and thank all the Rollins, Orkin, Orkin Canada, HomeTeam, Western, IFC, TruTech, and Crane 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 will now turn the call back to Gary.

Thank you, Harry. We are now ready to open the call for any questions that you might have.

(Operator Instructions) Eric Hollowaty, Stephens Inc.

Thanks for taking my question, a couple here. You guys did what appears to be a great job of leveraging SG&A in the quarter and as well for the year, which appears to be down around 50 basis points to 32.3%. Is it fair to assume that that might be a maximum level to expect going forward as a percentage of sales? Or how should we think about the opportunities for that SG&A reduction?

And were the initiatives that you described in terms of some of the back office improvements directly related to the leverage that you were able to achieve in the fourth quarter specifically?

Eric, I think if you look at over time we have a long history of focus on cost control and productivity improvement. I don't think by any stretch of the imagination that we have reached any maximum level as yet.

I think some of the actions that we have talked about -- the replacing of all of the telephone equipment with the call centers, some of the software changes, process improvement -- there is certainly opportunities to continue to become more efficient. So I think we have better days ahead.

That is great, Harry. One other follow-up if I could. One aspect of your business I think a lot of investors forget about is the HomeTeam business that you acquired a few years ago, which services the new housing build market.

Could you just talk about the relative performance of that business from a margin standpoint per the rest of your portfolio? Are you starting to see some signs of life there in terms of resumption of growth?

Let me take that one. Yes, we are. We are seeing some signs of life in the new construction area. We have been fortunate that we have added some new builders, national builders, to our collection of customers.

Our installs are up, which is the validation of that, and HomeTeam has done a very good job during the deepest of the trough of really going back to their customer base and selling them other pest control-related services. And I think it's noteworthy that they have continued to improve their margins and improve their profits all through the downcycle as far as construction is concerned.

That is great to hear. Thanks very much, good luck.

(Operator Instructions) Clint Fendley, Davenport & Co.

Thank you. Good morning, Gary and Harry. I wondered, Gary, just on your comments in the prepared remarks you talked about raising the bedbug activity to higher levels. I wondered how you might go about accomplishing that.

I know in the past you seem to be limited by the supply of (inaudible), etc. I mean how do you think you can drive what has been a phenomenal growth story even higher than here recently?

Well, I think one of the ways to do that is to develop programs that generates more recurring revenue, and I think that residential customers in particular that have a bedbug infestation also have a certain amount of anxiety that it's going to return. And I think if you think about it, the bed bugs got there somehow, typically through travel. People are not likely to change their lifestyle or their travel or their work style as a result of having a bed bug problem.

So we are working on developing creative ways to handle ongoing inspections. There is new monitoring products that are coming out routinely that we are testing. So we really need to and are focusing on taking kind of a one-time sale situation, although it's a nice one, but converting these customers into recurring customers.

And cross-selling, frankly. It's certainly not unusual for these customers, once they have the experience of the service that we render and the quality of our people, to have us take care of their general pest control problems. So I think we are going to do more cross marketing and we are going to accelerate the recurring revenue aspect of bed bugs.

Just wondering where you see the biggest opportunity, on the commercial side or the residential side?

Well, the residential is growing faster. It's a smaller number so it's a little bit easier for it to grow. I don't really see a limitation; more and more the hotel lodging industry is very concerned and highly motivated to have bed bug protection.

And I think that again with an inspection the old deal that an ounce of prevention is worth a pound of cure. They don't want an incident and so I think that lends itself again to the recurring revenue opportunity that we would go in and we inspect a certain number of rooms each month. So I really think that percentage-wise that we have got comparable opportunities as far as growing both areas of the business.

Great. Thank you, guys.

At this time there are no further questions in the queue. I would like to turn the call back over to management for closing remarks.

Well, thank you and we appreciate you joining us today. Please know that we will continue to work hard to grow and improve our business, and we look forward to speaking with you again next quarter. Thanks again.

Thank you, ladies and gentlemen, that does conclude our conference for today. If you would like to listen to a replay of today's conference, please dial 303-590-3030 or 800-406-7325 and enter the access code 4502890.

We would like to thank you for your participation. You may now disconnect.