Rollins Inc (ROL) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Rollins Inc. first-quarter 2012 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 April 25, 2012. I would now like to the conference over to Marilyn Meek. Please go ahead.

Thank you. By now you should have all received a 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 runs for one week. The replay can be accessed can be accessed by dialing 1-800-406-7325, with the passcode 4531560. 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, and good morning. We appreciate all of you joining us for our first-quarter 2012 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, including historical fact, are subject to a number of risks and uncertainties, and 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, 2011, for more information on the risk factors that could cause actual results to differ.

Thanks, Harry. We are pleased to have carried over our positive momentum from the successful 2011, with record revenues and profits for the first quarter of 2012. The success we achieved in the quarter points to the progress that we're continuing to make with our business strategies and programs that are focused on increasing sales while improving service and customer retention. The sales initiatives were clearly aided by unseasonably warm weather in many areas of the country.

Revenue for the first quarter rose 6.6% to $289.5 million, and net income increased 23% to $23.1 million. For the quarter, commercial pest control rose 3.1%; residential pest control increased a very strong 8.2%; and termite also had exceptional results, up 10.5%. This is the largest improvement that we have seen in that segment for quite a while.

Overall, revenue-wise, it's been sometime since we saw a quarter with organic growth like this. Demand for our bedbug services continued to grow as well. Companywide, this business grew 36% over last year's first quarter. While the commercial service represents approximately two-thirds of the total bedbug business, residential revenue for the server service grew 85%.

Clearly this is an indication that people are continuing to bring these pests home, and becoming more aware of the threat that bedbugs present. In fact, we recently announced our annual list of the US top 50 bedbug cities, which further confirm that bedbugs are a problem in most regions of the United States. This list can be obtained by going to the Press Room on Orkin.com.

Our sales and marketing efforts are a driving force in building our business. In that regard, we continue to invest and refine our Internet presence to further create brand awareness for all companies while generating new sales. These investments, coupled with the favorable weather I mentioned earlier, produced double-digit lead increases for all Company brands in this first quarter. Additionally, we made changes to our conventional advertising media mix this year and reintroduced radio this past quarter, with spots on over 4000 radio stations across the country.

At the beginning of March, we rolled out our popular national television campaign, Keeping Pests in Their Place. All of these efforts, we believe, are playing an important part in growing our business.

We recognize the importance and value of communicating with our customers and potential customers at many touchpoints and are constantly looking for ways to expand this interaction. Education plays an important role in this outreach. A recent example is our PR team's participation for our sixth year in the National Science Teachers Association annual convention, which was held this year in Indianapolis.

During this event, we distributed over 6000 pest identification guide posters and scanned approximately 1800 name badges to gather contact information from teachers who are interested in hosting an Orkin Man school presentation in their classroom. This program is part of our long-standing education focus to teach students that insects have a very important role in the ecosystem, and that they only become pests when they threaten our health and property.

We have long considered it both an obligation and a privilege to not only solve pest control problems for our customers, but to also educate the public on how pests impact their lives, and we're constantly observing and expanding our learning about the habits of pests through our fieldwork of our technical teams as well as knowledge acquired through our relationships with a leading US and Canadian universities that have strong entomological programs. The more we know about insects, rodents, and other pests, the better we can serve our customers and the public at large.

To that end, in early March we launched what I consider one of our most exciting projects to date that further shares our expertise and knowledge with consumers. It's called the Orkin Pest Project, and it's located on our web at pestproject.orkin.com.

The Orkin Pest Project presents a wealth of pest information in a highly visual fashion, using dynamic parallax technology, featuring more than 40 insects and 12 specific areas of pest investigations. In this easily accessible site, you will find rich content with outstanding photography and video.

We're already see seeing the site gaining traction in the social media challenge -- channels, confirmed by Facebook likes and viral sharing. It's our hope that people will bookmark the site for future viewing and reference. We're proud to provide this new research as we continue to demonstrate that Orkin is the pest expert.

Our Pest Project website gained further recognition last week, having received a best-in-class education award from the Interactive Media Council, a nonprofit organization of leading web designers, developers, programmers, advertisers, and Web-related professionals. Entrants from all around the world are judged on design, content, feature functionality, usability, and standards compliance.

This best-in-class award recognizes the highest standards of excellence in all of these categories. We congratulate our Internet team for this wonderful recognition.

During the quarter we also improved our communications link with potential and existing customers through the installation of a new, more powerful and sophisticated predictive dialer at Rollins customer service center. The system will allow us to more effectively execute and manage our lead campaigns, and promote better customer and prospect communication, both inbound and outbound. Our CSC is using the dialer initially to follow up on uncontacted Internet leads, and at times, termite renewals.

A big plus for us when we dial out to potential customers is that the customer will see that the call is coming from Orkin, not a mysterious 800 number. If you're like me, and I suspect most of you are, if you don't recognize the caller, you simply don't pick up the phone. Also, this equipment has the ability to leave phone messaging, which in the past was not available to older answering technology.

Another great plus is that the new equipment effectively marries up the best available agent, ensuring that the most experienced person handles the call, which will improve customer communications and closure. All of our call centers will be serviced by this new dialer network.

All of our brands continued to perform well this quarter, and what better testimony to that value -- they bring customers and third-party recognition of their level of customer service. Western Pest Control celebrated its 85th anniversary in February, and throughout the years has prided itself on delivering high-quality pest control to consumers and business throughout the eastern United States.

This dedication to customer service was recognized by being awarded the 2011 Angie's List Super Service Award for their branches in New Jersey, Western's highest-penetrated market. This award is given annually to a proximally 5% of all the businesses rated on Angie's List, the nation's leading provider of consumer reviews on local service and health providers. To quote Angie's List founder Angie Hicks, the fact that Western Pest Services can claim Super Service Award status speaks volumes about its dedication to consumers.

On another front, HomeTeam was also recognized with a 2011 David Weekley Partner of Choice award in acknowledgment of their outstanding service in acknowledgment of their outstanding service to David Weekley Homes, the nation's largest privately-held homebuilder. HomeTeam is the first pest management Company to receive this honor.

And for the 10th straight year, Orkin was recognized as a top 125 training Company. Training Magazine selects this prestigious list of companies based on programs tied to best training practices and outstanding training initiatives, among other criteria. Congratulations to all these Rollins companies for all their outstanding achievements in these acknowledgments.

Let me back up for a moment on HomeTeam. In the first quarter of this year, we saw nearly a 50% increase in the installation of their new home tubes in the wall Taexx System. This is certainly good news long term for HomeTeam, and we're hopeful that new home construction will continue to gain throughout 2012.

One last investment I need to bring you up-to-date on is our implementation of our branch-operating CRM system we refer to as ServiceSuite. We have three branches piloting the software while we continue to work out the bugs -- no pun intended -- optimize the system performance, and make sure the various interfaces function properly.

That work has progressed well, and we plan to deploy in three additional branches in June. Assuming that that goes as planned, we may add a branch or two over the summer. However, we will need to get through the summer season before we impact too many new branches. Overall, good progress is being made. The branches on the system are enthusiastic and like it, and we'll talk more about ServiceSuite as we go forward.

Another milestone is that we just closed our 19th international franchise in Mexico City, which is only the first of several anticipated this year. We're off to a good start for the year, but we never take anything for granted, and we recognize that we must work diligently to meet the needs of our customers.

As I said last quarter, our challenge to our people this year is what have you done today to improve our customer service? That's what it's all about. With that, I'll now turn the call over to Harry. Harry?

Thanks, Gary. Usually during the first quarter, I'm asking our folks, how late will spring be? This year it was, did anyone see the winter? I'm not old enough to remember the last time we saw such a first -- warm first quarter or month of March. In fact, the National Oceanic Atmospheric Administration records, which date back 117 years to 1895, show it was the warmest Q1 and warmest March on record. We certainly need to give Mother Nature an attaboy, or to be politically correct, attagirl, for her big assist on the quarter.

But without our marketing driving consumers to the phone and Web, our associates in the call centers effectively taking those calls, termite inspectors promptly making their inspections, and commercial salespeople developing service plans, it wouldn't have happened.

A sale isn't revenue in this business unless it's service. And fortunately, we have the best trained and hard-working technicians in the industry. We did a great job in servicing our regular customers and a lot of new ones as well. Thank you for a job well done.

Gary's and my job of communicating our progress has gotten easier this quarter, needless to say, some very positive results. Let's go through them. The Company reported first-quarter revenues of $289.5 million, an increase of 6.6% over the prior year's first-quarter revenue of $271.6 million, experiencing that growth across our entire family of brands.

Net income increased 23.8% to $23.1 million or $0.16 per diluted share, compared to $18.6 million or $0.13 per diluted share for the same period in 2010 (sic), with EPS up 21.3%.

What makes the quarter particularly exciting was the sequential growth experienced this quarter as compared to last quarter, particularly as it was not driven by acquisitions. Last quarter we reported 3.2% revenue growth -- this quarter, 6.6%. That doesn't happen often in this business. The 6.6% also compares very favorably to the 4.7% in the last year's first quarter.

The first quarter has never been known as a big lead period. However, this year we saw unprecedented presidential and termite inquiries. I wish I had some way to specifically break down marketing versus Mother Nature's contributions, but I can't. It's difficult to know where one stops and the other starts. Gary has already discussed some of our sales and marketing efforts in building our business and investments to refine our Internet presence. Weather helped, but it wasn't Mother Nature clicking on Orkin.com.

In March we saw organic traffic to our site substantially exceed any previous month by over 100,000 visits -- and to think, we're not in full season. What a powerful statement as to the value of the Orkin brand today in the digital era.

This was a quarter in which everything came together and moved in the right direction. We saw a nice increase in leads, sales, and starts, with good pricing. Most importantly, we also saw improved customer satisfaction, which translates into improved retention.

It's going to be a tough quarter to run against next year. We just need to stay focused on customer satisfaction and keep building that recurring revenue the balance of this year.

Usually I talk next about whichever business line is our bright spot, be it residential or commercial pest control. But for the first time in a long time, the spotlight is shining on our termite business. It represents approximately 18% of our revenue and grew 10.5% this quarter.

We've provided our salespeople with the latest in digital sales marketing material, capitalized on the termite swarm, and enjoyed the results. Approximately 50% of our termite revenue each year comes from existing customer renewal revenue, and it will be good to see the thousands of customers added this quarter continue to be satisfied customers for many years to come. Great job, sales team. Great job, operations.

But it wasn't just termite that contributed to the quarter; all business lines contributed. Just as I don't remember a 10% growth in termite in the 14 years I've been here, I haven't seen 8.2% growth in residential pest control, which represents 39% of the business. We added twice the number of customers to our recurring revenue base than we did last year in the first quarter, as the result of high demand and stellar retention.

The balance of the business, 42%, is commercial pest control, which grew 3.1%, again, up from 1.8% last quarter. The sequential growth is encouraging. The strength of this business is the lack of dependence on any single customer, and in fact, our top 20 national accounts make up less than 3% of our business. It appears some of our new programs we referred to last quarter are gaining traction and restoring our momentum back.

Overall, the fundamentals that drive our business -- leads, pricing, closure, and retention have all improved. It's hard not to be excited by some of the trends we've been seeing. Gross margins for the quarter improved 70 basis points, to 48.8% for the first quarter versus 48.1% in the prior year. The improvement in operating margin was due to improved productivity, personnel related costs, as well as reduced insurance and claim costs, partially offset by higher costs of fuel.

Depreciation and amortization expenses for the quarter increased slightly, $567,000, totaling $9.8 million. Depreciation was $3.9 million, and amortization of intangibles was $5.9 million. For the full year, amortization of intangibles, typically from value assigned to the customer contracts acquired in an acquisition, will represent a significant after-tax charge of $0.10 this year. Most of the dollar increase is from some small tuck-in acquisitions over the previous 12 months.

Sales, general, administrative expenses for the first quarter increased $3.3 million, or 3.6%, to 32.8% of revenues, decreasing from 33.7% last year. The decrease in margin percent is due to continued leveraging of administrative center salaries in our call centers, reductions in professional services, and improvement in bad debt expense. The tax rate for the quarter came in a tad lower, at 37.2%.

Gary mentioned ServiceSuite, and we have begun to gear up for its implementation. We've added our first group of nine trainers to assist in implementation training and provide outside help. From a cost perspective, the run rate won't be significant to impact the next quarter, and probably won't the third, either.

We should have a better handle on it when we talk about the third-quarter results come October, which seems like a long ways away right now. We need to have a more representative samples of branches piloted and the implementation plans locked down.

Our balance sheet remains strong. Rollins ended the quarter with $60 million in cash and no debt. While talking about the balance sheet, one interesting note, and I don't know how many people have noticed our unearned revenue of $98 million. This represents cash we have received for services not yet performed, which exceeds the amount of money owed us for services we have performed, represented by our trade and finance receivables. What a great business model.

Cash provided from operations remained strong; we generated $37 million in the first quarter. There is one area both our shareholders and bankers agree upon -- spend more on acquisitions. We continue to look for the opportunity to invest in what we know best, pest control, and only pest control.

The year is off to a good start. Our team remains 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 are ready to open the call for any questions that you might have.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). Jamie Clement, Sidoti & Company.

Gary, Harry, good morning. Gary, I was wondering if you could refresh our memory a little bit on the HomeTeam business model. There just hasn't been a lot of building that's gone on since you bought the business, so obviously, installations or orders and building seems like it is picked up, obviously, a lot in the first quarter. But you won't -- don't really start making money until somebody actually occupies that home and becomes a recurring monthly customer, right?

That's exactly right. There's really kind of a long tail on the process. You really need -- we were early on in installing the tubes in the wall, so we have to wait for the house is -- until it's completed. And then we have to wait until it sold, where we can contact the new owner.

So that might be an 18-month period. Now the good news is that we get a very high penetration, I mean it's in the high 70%s. And then we also have the opportunity to market, as the homes get older, our termite service to them.

That's one of the things that's really kept HomeTeam moving forward during those construction lull, is that they were able to go back on the older homes, some of the original homes, and cross-sell them termite service. So it's one of those things -- it's like planting a garden, you know, you've really got to put the tubes in, and you're not going to benefit immediately, but long term, it's been a very successful model.

Okay, all right. A follow-up question if I may, just kind of changing gears a little bit. Obviously, big numbers in termite and residential. Through the recession, your numbers held up very well, so it was always hard to tell how much of the -- how much the recession, and rising unemployment, and all that sort of stuff was hurting your business, because your numbers stayed strong.

Now we see a massive acceleration here. Do you attribute some of that to, perhaps, confidence getting a little bit better, unemployment kind of stabilizing, and any of that?

I think you have to give some credit -- I mean, to me that would probably be the smallest element, but Orkin had record retention this quarter. I think that retention improved over 8%, which certainly you could say some of that would be the economic outlook, but we really give a lot of that credit to our survey program that I've shared in the past.

I mean, we really have a way to communicate to our branches how they're doing service-wise, and there's a lot of peer pressure among the branches not to be on the bottom and try to be on the top. But there had to be some effect.

Weather, as we mentioned, to me would be the biggest change, and I've thought about that. I remember a definition I saw about luck one time. They said luck is where preparation meets opportunity, and I think one of the terrific things is that our people did a great job executing on this nice lead increase. Just because you get a bunch of leads doesn't necessarily mean that you get a bunch of new customers, so we really took advantage of a situation where we had great lead increases.

I don't know exactly how do you give the appropriate consideration to the investments we've made in the Internet? I mean people chose us over others. It's kind of really hard to read the moving parts, but I'm really proud of our people taking advantage of the nice improvement that we had in leads.

Yes, absolutely. As always, thank you very much for your time.

(Operator Instructions). Eric Hollowaty, Stephens Inc.

Great job in the quarter. A couple of follow-ups. Regarding the weather benefit that you got in the first quarter, is there any risk of a pull-forward here? In other words, does this create sort of a demand shift scenario, maybe just earlier in the year, and potentially steal from maybe 2Q and perhaps 3Q? Or do you think that this truly generated incremental business this year that, while it will be tough to comp against, will incrementally benefit you net net this year?

There's really -- the answer is two-part. I think when you look at termite, the conditions -- we saw the best swarm we've seen in years. The warm weather early, without a cold snap coming in and freezing -- kept the mosquito -- excuse me, kept the termites active.

So I -- we certainly pulled -- I don't know if we've pulled forward, because we're still seeing a good termite demand in April. But a good piece of that revenue is one-time revenue; the other half comes from the next 10 years as they make their renewal payments on that, but we haven't seen a 10% quarter in years on termite. So some of that is -- I don't know if it pulled forward or pulled up, but yes, there is certainly one-time occurrence in a piece of that business.

But when it comes to the residential and the commercial business, this isn't cash for clunkers, where you pull forward a one-time sale and then you got to wait a few years. The beauty of our model, 80% of our revenue is recurring revenue. Those customers now signed a year service agreement, so rather than starting the business in June, or that demand came -- there's demand that built early, and we're still going to see a lot of demand when we get into the season.

So I think our secret here is the recurring revenue. We need to -- we enjoyed it early, building early in the year. We added twice the number of customers in the first quarter than we did a year ago, but we're going to enjoy and service and take care of those customers for years to come.

One thing I could add to Harry's comment. The termite swarm typically is -- stretches over 2.5 to 3 months, depending on the area of the country. So everybody didn't have a termite swarm, and that's weather-related, and just the reproductive nature of the pests. So we don't think that the termite season is over, by any stretch of the imagination. We'll just see. We've tried to look at this thing in every possible way you could look at it.

Right. Well that's great news, nonetheless. Harry, reviewing the gross margin for a moment, is there any way you can quantify for us what the components contributed? It sounds like you got a benefit from productivity, and there was one other factor I think I missed. You had lower insurance and claims, as well, partially offset by --

We did. I don't have them right in front of me. The biggest contributor, though, was increased productivity, by far. Total fuel, which impacted CSP and SG&A -- fuel cost was up $1.2 million in the quarter, but productivity by far was the largest contributor.

Seeing as you have the new ServiceSuite in only a very limited number of branches, what do you credit that opportunity improvement to, exactly?

I think it -- new customers and --.

I think one of the things is -- what is it, necessity is the mother of invention. I mean, when we just had a bunch of customers that we added, and certainly, we didn't staff up. It wouldn't have been practical to even try that, so we just got a lot -- our people just did a lot more, and you know, we had longer hours, but in those longer hours we had a great conversion as far as our labor to the revenue. So they just did a stellar job as far as getting these customers absorbed into the operation.

Great. And if I could sneak one more quick one in. Any sense of how much pricing actions contributed in the quarter?

Pricing would have been a small contributor. In most areas of the country we saw good pricing a little -- when I say a little better, we're talking a percent or two different than what the average prices rolled up.

We'll take our pricing action in, typically, for most of the brands, residential -- price increase will go into effect June 1. Commercial price action will go in July 1. We've tested this winter; we're analyzing the results, but we don't see -- we're not expecting anything significantly different than what we've seen in the last several years. Still good -- very good pricing environment.

Great. Thanks very much. I'll get back in the queue.

(Operator Instructions). Joe Box, KeyBanc Capital Markets.

You just talked a minute ago about the margin impact in the quarter. Can you maybe just give us some forward commentary on some of the puts and takes for operating margin expansion over the next couple of quarters?

Well, we don't give a lot of forward guidance. The tricky part in this business is always matching -- we are starting to and have -- gear up for the season, so we're adding people. You hope you're adding them in the right places at the right time.

Our long-term goal is to continue to increase our operating profits 10% a year. We've been fortunate; this quarter we did a little better than that. We certainly -- one of the pressures we are looking at is what's gas cost? We're hoping it continues to moderate, and that's something we'll have to overcome. But we think we certainly can continue to improve margins through the year, between our pricing action, the benefit of increased customer accounts and rug density, and overcome gas cost increases.

How about retention?

Retention certainly contributes. Good retention -- the most profitable customer you have is one that's already on your books.

Actually, to that point, Harry, I think I heard you guys say earlier that Orkin had record retention this quarter. Can you maybe just refresh us on where your residential retention rates are, and maybe how far along in the process you are of closing the gap with HomeTeam's retention rates?

Again, I don't have that particular number handy. Orkin has traditionally been in the residential in the 74% to 76% retention. We're at the high -- close to the high end that we've -- might've been the best we've ever seen in Orkin.

HomeTeam had improved retention; Western had improved retention. But typically, the first quarter is not a big retention quarter. You still -- fortunately, I think early season keeps that pest pressure, and people like to enjoy their pest-free homes and environment.

We still think we're in the early innings on improving retention. I think we certainly -- we talked about it last quarter. The cover of our annual report talks about and addresses customer service satisfaction. And we've put in the programs, the survey, and we're building it into the culture. People are embracing it, but I think we have a lot of opportunity to improve on our retention, and we're really at the early innings of progress.

Great, thanks. So it sounds like really solid lead growth in the quarter. Is that something that you're seeing hold through April?

We haven't -- I think that leads dropped off in western Pennsylvania this week. But we -- for the first -- what are we, 20 plus days into the quarter? We still see lead growth; it hasn't been as dramatic as the first quarter. I think we've seen some cooling off in the weather. And we usually see variability between April, May. I don't think we've ever had a outstanding both April and May months. Usually, one gets a little cooler, one gets a little warmer.

One of the things that -- you know, the lead numbers start getting bigger, so we won't see the same kind of increases that we saw the first --

Percentage.

Yes, percentage increases. I mean, if the wheel gets bigger to roll. But early on, we're still seeing positive lead improvement.

I guess the one thing I'm trying to understand is, potentially, how sustainable are the growth rates that you guys put up in residential and termite?

Well, I don't think we'll -- I'll go out on a limb and say I don't think we'll see another 10% termite growth.

Yes, or 8% in residential.

Residential at 8% -- we'll have to wait and see. Gary said no, I say possible.

I hope you're right, Harry.

That's it for me. Thanks, guys.

(Operator Instructions). And I'm showing no remaining questions at this time. I like to turn the conference back to management for any closing remarks.

Well, again, thank you for joining us today, and we look forward to the balance of the year, and we'll continue to work hard to grow and improve our business. We look forward to sharing our performance with you this next quarter. Thanks again.

Ladies and gentlemen, this does conclude our conference for today. Thank you for your participation. You may now disconnect.