Rollins Inc (ROL) 2012 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Rollins Inc. third-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). The conference is being recorded today, Wednesday, October 24, 2012.

At this time, I would like to turn the conference over to Marilynn Meek. Please go ahead.

Thank you. By now, you should 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 passcode 456-8454.

Additionally the call is being webcast at www.biovan.com, and a replay will be available for 90 days. On the line with me today are Gary Rollins, the 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 third quarter of 2012 conference call. Harry will read our forward-looking statement 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, excluding historical facts, are subject to a number of risks and uncertainties, and actual risks may differ materially from any statement we may make today. Please refer to today's press release and our SEC filing, 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.

Thank you, Harry. I'm pleased to report that following a very strong first half, we continue to post solid performance in our third quarter. Revenue for the quarter rose 5% to $340 million, and net income increased approximately 10% to $32 million with all of our brands and service lines contributing to our growth. Residential pest control had a 7.5% increase. Commercial pest control posted a 4.3% increase, excluding fumigation. This was our third consecutive quarter of increased revenue growth for commercial and the best quarter for commercial in a while. Termite was up 1.8%.

We have from time to time over the past few years talked about our ability to grow our business in all types of economic environments. At the forefront of this capability is the makeup and balance of our revenues, which come from different sources at different times through the year. Although our Company's concentration is all under the pest control umbrella, there are multi-facets to this business -- residential pest services; commercial pest services, which consists of local and national accounts; termite control; new construction termite treatments; new-home Tubes in the Wall; fumigation; ancillary services and so on.

Another strength of the Company is our geographic diversity, which is accomplished through our over 400 branches located from coast-to-coast. As those of you on the call know, one never experiences the best or the worst weather all the time. For example, this summer the drought in the Midwest dampened our growth opportunities there. A drought typically translates to a decrease in pest pressure and prospect demand.

More than offsetting the Midwest handicap, we had other areas of the country which have done very well weatherwise and businesswise. Although you can never plan precisely or anticipate all the business ups and downs, it's very beneficial to have these counteracting elements that I've mentioned that overall provides unique company stability.

Another example of diversity lies with HomeTeam, for instance. We acquired this great company in 2008 as part of our strategy to be able to more effectively market to the new homeowner. HomeTeam works with the leading builders across the country, including the nation's top three production builders -- Pulte, D.R. Horton and Lennar, as well as the nation's top luxury homebuilder, Toll Brothers.

Incidentally we just reached an expanded national agreement with Lennar effective September 1, which will further add to our market penetration next year. Each month the NAHB, National Association of Home Builders, along with Wells Fargo, survey the NAHB members to measure consumer confidence in the single-family housing market. We are pleased that this housing market index has reached its highest level in the past six years. With the low mortgage rates, increasing new housing starts and the new-home inventory supply now, home building appears to be well on its way to recovery.

While revenue from builders is a small part of our total business, it offers us a unique opportunity and an avenue to add new customers where you can also cross-market our other services.

We are now benefiting from this new home construction trend. HomeTeam is currently on track to install in excess of 50,000 -- add Tubes in the Wall systems this year, increasing nearly 30% year-to-date. Although initial installations have startup costs involved, they will translate into more than 30,000 new customers next year as owners move into these new homes and activate their pest control systems.

Taexx installs are forecasted to continue to grow in 2013, exceeding this year's level due to our positive momentum, which will provide a solid revenue stream going forward.

There is a side because of their strong relationship with their builders prior to installing our Taexx system, HomeTeam does their pretreat termite work as well.

Another area that we are seeing really good growth is in animal and wildlife control. In late 2010, we acquired TruTech, the premier wildlife control company, which provides us with expanded expertise that we can use in providing comprehensive pest control services for our customers. Since they joined us, they have been posting excellent sales growth compounding at over 30% annually.

Our animal control business is continuing to grow in importance. As an example, we just recently acquired a company in the Northeast, the No Fly Zone, that specializes in bird control work.

TruTech also serves as a good example of our ability to enhance our acquisition's contribution through the provision of capital, system know-how, improved purchasing, providing cross-division leads and expertise in Internet markets. All of these behind the scene factors help improve margins while growing this business through faster expansion into different markets.

As we have predicted, there seems to be no end to the demand for our bedbug business. Our third quarter marked the biggest quarter ever for this service, over $14 million in sales, and a greater than 30% increase over the prior year. In the first nine months of 2012, we did as much bedbug business as we did all of last year.

We also had a substantial increase in our mosquito business in the third quarter. This year's outbreak of the West Nile virus was the worst in recent decades, and many were reminded of the health danger to our families that mosquitoes represent. This outbreak centered in North Texas with more than 80,000 estimated infections in the region. While most cases weren't serious, hundreds were, and in Dallas County alone, 16 deaths were reported. Nationwide the death toll hit 160 people.

Mosquito service is still only a very minor part of our business, but it and our bedbug service are further examples of our diversity, while addressing two additional target tests that are helping to build our brand.

So you can see that Rollins is not just Orkin or convenient conventional pest control. We are team of leading brands growing through regionalization and specialization within our markets. And, most importantly, we are seizing on many opportunities to keep our Company moving forward with growth faster than our industry.

Our geographic balance certainly helps us, but it is not just the geographic mix that strengthens our business. It's the overall diversification of the Company I described that as a unique strength.

A main span of this growth hedges on new customer service programs focused to improve customer satisfaction and retention. Our net promoter numbers are again up for a year, reflecting good service improvement and increasing customer satisfaction, which is all fortified by our improved employee retention.

As an example of this focus, Orkin this year launched a companywide initiative called The Orkin Promise, which is a commitment each employee makes to his or her customers each and every day by providing top quality service. The four points of the promise are to be respectful, responsible, effective and informative.

Specifically we promise Orkin customers will receive an a respectful and professional specialist who shows up on time and when promised. It provides effective and responsible treatment that solves their problems and shares information on what we found, how we handled it and what to expect next, and to deliver prompt response and resolution to any service request within 24 hours.

We know that we have to work hard everyday to be the world's best service company, and this is just one important program we've put into place as we continue to work to that end.

This has been an exciting year for our Company. We are continuing to benefit from the contributions of all four major brands and a number of initiatives instituted this year. There is a great deal of enthusiasm and excitement about what we are doing and accomplishing. Our culture of continuous improvement helps keep this energy alive.

I'd like to now turn the call over to Harry.

Thanks, Gary. Good morning and thank you all for joining us on the call. I don't think that Gary left me with much to cover. Well, maybe a few financial facts.

Today we reported revenue of $340.2 million, representing 5% revenue growth. Net income increased 9.5% to $32.2 million or $0.22 per diluted share compared to $29.4 million or $0.20 per diluted share for the same period in 2011. Year-to-date revenue is $964.5 million, a 5.3% increase, while net income increased 11.8% to $88.4 million. EBITDA totals $170.6 million, while EPS has increased 11.1% to $0.60 per diluted share.

We continue to maintain our solid momentum and have seen no significant changes to the fundamentals that drive our business -- leads, pricing, closure and customer and employee retention -- all working together to position us well for the remainder of this year and a great stepping stone for next year.

Let's get deeper into the results. This year we have seen revenue growth across all brands and all service lines. Another strength of this Company is it's recurring revenue model. Nearly 80% of our revenue is recurring. The beauty of the recurring revenue is it recurs and continues to recur, not unlike a magazine subscription. That stability of that recurring revenue is the driver and consistency of our performance.

Life is a lot easier when you just need to replace 20% of your nonrecurring revenue each period. Leads, sales, closure, pricing are all levers to work in replacing that 20%.

But it's equally important to constantly work on improving customer satisfaction as that drives your retention on the other 80%, and that determines your long-term success.

Let me first address what's happening with that 80% base of recurring revenue. First, as Gary has already mentioned, we have continued to see improvements in our net promoter scores. Our efforts and our quest to become the nation's best service company by improving customer satisfaction as a part of every thing we do are taking hold, and our residential customer base is growing. Retention this year has improved for both residential and commercial pest control.

Regardless of the economy, happy customers and a service that has inelastic demand is a powerful combination. Selective price controls -- excuse me. Selective pest control customers saw price increase beginning in the June or July billing cycles. Our earlier price testing showed no changes in the elasticity, and our actual result mirrors the test. In fact, retention within price increases -- increased group is marginally better than last year. We believe that is due to higher customer satisfaction.

Overall the revenue realization should be in the same neighborhood as realized last year of $15 million to $20 million on an annual basis.

As to replacing the 20% of nonrecurring revenue I discussed earlier, the first step is leads -- demand for our business by new prospects. In order to drive residential pest and termite sales, we continue our success with residential, experiencing double-digit lead growth at Orkin and increase installs of HomeTeam that Gary addressed. Leads don't do you any good unless you ultimately close them. Our closure by source held steady; sales were at a higher price.

Commercial pest control sales are typically creatively obtained by knocking on doors or making proposals. But it's still good to see double-digit lead growth in that area as well.

We are also benefiting from a sales management system we have developed. It doesn't hurt to know whose door you should be knocking on and tracking results. Again, we have got good price realization.

This time of year termite leads drop off. The termite sales can likewise need to get creative by cross-selling to pest customers, provide prospects free inspection, and selling ancillary services -- installation, dry zone moisture control, etc.

We saw a small drop in leads in the first quarter this year, and pricing was relatively flat, though as Gary already mentioned, the pretreat work the HomeTeam does with builders helped us in this business line.

So with all that background, our residential pest control was up 7.4%, commercial pest control increased 3.6%, and termite 1.9%. To judge the true strength of our commercial revenue at times, you need to exclude fumigation. While fumigation is a small part of our commercial business, 7%, it swings can distort the true strength within the other 93% of our business. When you look at commercial, excluding fumigation, it was up 4.3%, its strongest quarter in the past seven.

The mix of business doesn't change quickly. Both residential pest control and commercial represent 42% respectively. With residential's accelerated growth over the last two years, it has now again overtaken commercial as our largest service line.

What a wonderful situation to have these very profitable service lines keep striving to be the revenue leader.

Gross margin for the quarter increased to 49.9% for the third quarter versus 49% in the prior year due to productivity improvements and more favorable claim development costs with regard to termite costs and litigation, which were partially offset by higher casualty and medical costs. The nice growth for HomeTeam and past installs that Gary talked about does have some drag on margins in the short-term, but installs period to period are accelerating.

These new systems are sold to the homebuilder at a substantial discount to our cost in order to obtain the ultimate customer -- the new homeowner. Installs for HomeTeam are the equivalent of leads for Orkin.

Depreciation and amortization expenses for the quarter increased slightly $128,000 totaling $9.5 million. Depreciation was $3.8 million, and amortization of intangibles, which will remain a significant non-cash charge that is paying out for some time, was $5.7 million.

We are not a capital-intensive business with CapEx running $11.8 million year-to-date. Sales, general, administrative expenses increased $6.1 million or 6% to 31.9% of revenue, increasing from 31.6% for the third quarter ended September 30.

The increase in cost as a percent of revenue is primarily due to a nearly 70 basis point increase in bad debt expense, along with increase due to medical costs and higher sales salaries. I don't mind the higher sales salaries as it means we have people selling more. The higher bad debt, though, is another matter. We believe our bad debt expense was impacted in part due to September having two less workdays and, therefore, two less collection days than a year ago. We get those two days back in October and I assure you we have people working the phones, working hard on collections.

The last item to note on the P&L, provision for income taxes, was 37.7% versus 37.4%. I look forward to corporate income tax reform. Service companies don't enjoy some of those incentives and loopholes available to other industries.

I wanted to provide you with an update on our branch operating CRM system or served suite as we refer to it. We've had eight branches piloting the software and held off on adding any additional pilots over the summer as we continue to work out the kinks.

Based on conversations with our project steering committee, the plan is to go live in the last couple of pilot branches in the first quarter of next year. If no further issues develop, we hope to then be in a position to finalize a rollout on our hands for the system over the next 18 to 24 months throughout Orkin.

When fully ramped out in the full rolled out mode, non-capitalized nonrecurring implementation costs could run between $1.5 million to $2 million a quarter.

These are very tentative numbers, and I refer you to our forward-looking statement. It takes about three months for the branch to get comfortable on a new system and about six months to start gaining good benefits. It's our objective to obtain benefits from early adopters, offsetting new branch costs once we get through the first one-half of the rollout.

It has long been the philosophy and practice of Rollins to return capital to our shareholders. For a number of years, we have done this through increasing dividends and our share repurchase program.

In fact, this year marked the 10th year in which we have increased our annual dividend by a minimum of 12% each year. July, the Board approved the addition of 5 million shares to our existing repurchase program. And yesterday we announced that we will be paying a special one-time year-end dividend of $0.12 payable December 10, 2012 to stockholders of record at the close of business November 9, 2012. This is in addition to our $0.08 regular quarterly dividend.

We are pleased that our strength of our balance sheet and our strong cash generation ability continues to provide us with the capability to return value to our shareholders through these initiatives.

It is hard to believe 2012 will be drawing to a close. We haven't come close to exhausting the opportunities we have to continue to grow and improve our business. I look forward to talking to you next quarter and sharing our fourth-quarter and record year results.

Lastly, let me express our appreciation for a job well-done to all the Rollins associates whose hard work and dedication are behind these outstanding results.

With that, I'll turn the call now back over to you, Gary.

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

(Operator Instructions). Clint Fendley, Davenport & Co.

Thank you. Good morning, gentlemen. I joined the call a little bit late, so I apologize. But I wonder if you could update us on the HomeTeam growth that you're seeing there in the quarter.

HomeTeam was our second fastest brand in terms of growth. Their revenue numbers were up in excess of 7%. What is really encouraging the growth in their installs with builders. Builder installs this year are up 30% over last year. Total installs will exceed 50,000 this year. They feel that with the growth is being confident between the builders and the buyers, they are incurring with inspection fee additional strong growth next year. We've signed a national agreement with one of the top homebuilders, Lennar, which would give us additional development as well.

So short-term, it has some pressure on their margin. But long-term, we are really excited that those 50,000 plus calls this year will translate into more than 30,000-35,000 customers next year.

So is the growth in the install here reflective of just the increased relationships that you guys have been able to establish post the acquisition here a couple of years ago?

I think certainly we worked on the relationship. We are probably dealing with less builders today than we were in 2008. A lot of the smaller builders got forced out of the business in the economic downturn. But I think building is coming back.

The statistics you have indicated -- we see the strongest surge in new home construction within the last six years.

We are coming from a lower base, but it's certainly encouraging. As Harry indicated, the way that works is kind of like planning a garden. As we do those installs, you really don't generate a surge of revenue to any extent until the new homeowner buys the house and activates the system.

Right. Over the longer-term, is it going to be a challenge maintaining this growth rate with HomeTeam, I guess, under sort of the dual brand structure that you guys have, or are they just the main Orkin franchise competing in a completely really different space from HomeTeam?

Orkin never has really done new home construction of any significance. I mean you may have a branch here or there that does pretreat work, but not to any extent, and frankly, that was the thing that appealed most to us about HomeTeam. And plus, they have the Tubes in the Wall system, which Orkin doesn't have.

So we really -- HomeTeam has by far the strongest brand in that whole new construction area, and we don't really feel like Orkin is a threat or vice versa.

Thank you. I guess switching gears to the last question, on the new software costs, is that something that we would expect to be capitalized then, and is there going to be much of an expense on those items? If you could just help frame how we should be thinking about those costs as we have moved forward with the implication here.

The costs -- the numbers that I gave you, the $1.5 million to $2 million a quarter is something. We think that is the nonrecurring implementation costs. So it is not the -- it doesn't include depreciation. It does not include the cost to capitalize. We believe once we get halfway through the implication, the savings that we will be getting from the productivity improvement, the benefit from the system to offset -- further offset that additional running costs, but then ultimately when it is really rolled off -- rolled out -- those costs will go away.

It will be -- we are hoping -- hoping to complete the pilot in the first quarter and start ramping up the implementation in the second and third quarters. But we'll have to pick our branches carefully because we will be in season and probably won't get our ascribed to late year in terms of requests on implementing the software.

Okay. Thank you, guys.

Jamie Clement, Sidoti & Co.

Gary, Harry, good morning. You all have owned HomeTeam through a real roughhousing stretch, and obviously now it seems like things are getting a bit better. Can you talk a little bit or remind us, because I think the last time this was brought up was perhaps when you made the acquisition. Can you talk a little bit about the economics of actually serving a customer once they've turned on the system, once they are in the house, they bought it and have become a HomeTeam customer. In other words, approximately how many homes can a technician serve, how many tube customers can technician serve in a day versus a traditional pest control technician?

The really nice thing about HomeTeam is when they sell to the builder, it's not an option in the house. They sell it to the builder as an item that goes in all the houses that they are developing. So if it's a 30-home development, all 30 homes will have Tubes in the Wall. If it's 2000 homes in that development, all 2,000 homes will have it.

With their capture rate being as high as it is, once that development gets built out, you put a technician in there to service the home, so, again, remember you don't have to go in the house, you do an outside service, and then you unlock the cord on the outside of the box and service it.

So the productivity is wonderful. We walk house to house in the development; sometimes don't leave the development for a week. We do love to go home and have dinner and sleep. So great productivity. The economics are wonderful and will help their margins.

We also have another thing, Jamie, is our retention is better than conventional pest control.

And that's just simply that it's just -- it actually is the system -- I don't know if there's enough science there to conclude one way or the other, but are there actually -- having the Tubes in the Walls, is that a superior way to control pests?

In some areas, it is because you are getting back behind the walls certainly. And to add to Harry's comment, if the customer is having a problem inside, if they have mice or if they have a roach infestation that needs additional supplemental service, then we go inside. It is we do what's necessary to take care of the problem. But I think the biggest reason that the retention is better is that you're not interrupting their lifestyle. I mean the family member doesn't have to be home. It's much like lawn care to that extent. So you're not an inconvenience in any regard, and if they do have a particular problem that the conventional application is not taking care of, then certainly we do whatever is necessary to take care of the problem.

And the other thing, too, is the homeowners bought a house, they bought it with a pest control defense system. It is not unlike buying a house with a built-in vacuum cleaner or alarm system or a sprinkler system. You bought something and you value it, and you're going to utilize it. And to the extent -- and with regards to the pest control defense system, you are locked into it being serviced by HomeTeam and only HomeTeam. So the homeowners have a vested interest more so than on a regular service.

Changing gears, if I may, in terms of your lead generation, is that still trending in the direction of the Internet? I was wondering if Gary or Harry, you might comment on mobile and whether that's an area where you're starting to increasingly generate customers.

To respond to the first observation, the Internet is really kind of the workhorse as of late and which has been well-timed because conventional media is just not doing what it used to do. But we still get a lot of leads from the Yellow Pages and from TV advertising, etc.

But I think we've continued -- the Internet now has passed what I would consider the conventional phone leads.

The second problem or part of that deal was mobile. Yes, we are getting very much involved in this whole mobile area, and it's really amazing what we are seeing in some of these applications as far as our home suite and that that technology has even kind of leapfrogged just the conventional development of software for iPads, etc.

So the application -- and we do have -- run ads on mobile phones. We have a fixed button, call us and it connects to us. I don't have any breakdowns as to Internet leads versus mobile. I haven't yet seen that, but I know we can identify the type of phone that the call is coming in on. An Apple phone lead seems to work a lot better than a MetroPCS lead. But I haven't seen any specific numbers broken down one to the other.

Thank you all as always for your time.

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

Good morning, guys.

Congratulations on your big event. I understand you're now married.

I am. Thanks, Harry. A question for you on your special dividend, which looks like it may have been in place of a buyback for the quarter. I'm just curious, was this really a tax uncertainty based decision, or could you potentially be changing your capital allocation policy at all?

We are not changing our capital allocation policy at all. It wasn't in place of stock buyback. We've always been an opportunist buyer on the stock. Our stock was pretty strong in the fourth quarter. We didn't see -- in the days we aren't in the blackout, we didn't see the opportunity to pick up shares at a discount.

So it's not unusual to see a quarter or two that we don't buy shares, but we are always looking for that opportunity.

In terms of -- I think everyone is aware taxes are changing next year. So how clear and in what direction I guess will be determined in about 30 days. But we certainly have some built-up cash, we've got great cash generation ability going forward, and the Board thought it would be nice to get back to our loyal shareholders who returned some capital to them.

Okay. Great.

And they will review the dividend policy as they do every year in January and make an evaluation separate on what the dividend should be going forward.

Great. I appreciate the color there. With respect to the eight branches where you've rolled out the service suite, can you maybe give us some preliminary results from the system in terms of maybe where you're seeing some productivity savings and then maybe also highlight some initiatives where you're starting to see the most success or some of the biggest challenges?

It's kind of a mixed bag, really. When you take a branch and put in a new operating system, the first, I guess, priority is survival. Because things are different and things are not working exactly right and they are having to understand new reports and new operating procedures, etc.

So I wouldn't really think that we could look back and say that we've really seen great gains in the area of productivity, retention, etc. because it's just the commotion that you have when you are doing these things. They say what is it, a pioneer? That's the guy that gets the most arrows. And I think that these new branches have certainly had a more difficult time than the next eight branches will have.

The interesting thing that's held true from the very beginning is the field really likes the system. I mean at no time have they ever said, we want to go back on focus. Please stop, etc., etc. Because their routines that they can see the benefit from, even though they have had some kinks, so all along the things -- one of the factors that have kept us so encouraged is that they can see the benefits. Now it hasn't manifested itself yet as far as the bottom line is concerned, but we have every confidence that it will.

I think we've concentrated up to now on the challenges, but vis-a-vis it is easy to find the challenges. I think we said something last quarter or through that, on the residential side, keep the business systems really working really well. On the commercial side, that's where we had some challenge. We need some -- add some not as robust as -- we need some of the demanding challenges we have in our larger commercial accounts, and we are -- during this hiatus, that's where the work has been spent.

In one of the other challenges, we didn't get the billing slate right. We are not -- some of the prebilling wasn't going out the way it used to. We've seen some growth in A/R as a result, and we are fixing the billing issue as well.

So that's why we have a few more branches to pilot because we would like to give them a more robust version of the software to really be able to have a good branch to measure against. And I think that the first day has proven to us the concept works, the software is robust, it adds a lot of things that we want, it is very field friendly, user-friendly, but we need to fix the kinks that really measure exactly how well it is performing. So it's got a lot of potential.

Got you. Just to follow up on one of the earlier questions from HomeTeam. If we were to look at the potential trajectory for new housing builds and the installs that would be implied there, and if you were to pick up your 30,000 customers that you guys are forecasting for next year, what type of revenue growth does that imply for HomeTeam in 2013?

Good question. Trajectory on growth, I know -- boy. I would be the last person to give you an accurate projection on what building activity is going to happen next year. The consumer confidence stays fine, mortgage rates stay low.

We saw a 30% increase in installs this year. It is 30% next year? It is 3%? We certainly think it will be more than 3%, but we don't expect to see a 30% on top of this year.

Throw a dart at the wall. Pick a number or look at someone who has more knowledge and can predict housing starts next year than I can. Their revenue gain, as I mentioned, they have 7% revenue growth this year. We would expect that to continue and accelerate next year by (multiple speakers) high single-digit (multiple speakers).

You need to keep in mind that half of their business or more than half of their business is conventional pest control.

60% actually.

So we are talking about half, and as Harry said, there's a lot of unknowns. But I would expect that we would be in the high single digits.

Okay. That's great color. Harry, can you just remind me if there's a headwind at all to topline from having to fewer work days, and would that potentially create a benefit on the margin just from putting in less costs?

The headwinds from the last work day on our current pest control, you get that in. You know you had to do some many services in the month, and you get it in.

What we find on the nonrecurring, when you have less work days, you have two less days to do termite completions. You have two less days to --.

So you'll see some headwinds in the revenues that you'll get back in a month when you get a couple extra days. So it affects us on the margins. It could have cost us something on the revenue side, 2/10 of 1 point maybe. (multiple speakers)

Last question and I'll turn it over. Looks like you guys opened four international franchises so far year-to-date. Can you just refresh us on what the pipeline looks like there and maybe what the current revenues are that are generated by the franchises versus the revenues that you're currently getting?

Are you talking about international first?

International.

We are very excited. I would expect that we are going to be adding four to six international franchises this next year. It could be more. China is very exciting. We've just come back from Beijing. We have a lot of interest in China. We've been able to kind of piggyback on a sister company, our oil service companies contacts in China. So we're pretty excited about that.

We are planning to add a person to our franchise team to concentrate in South America. We've added our first South American franchise in Chile. So we think that that could be very productive. We have just recently been advised that our United Arab Emirates has gotten one part of the contract that they have been working on, which is a multimillion dollar pest control contract. So we are very excited and optimistic about our international franchise.

Domestically we have now, what about 60 -- 60 million (multiple speakers) close to 60 million. Maybe more. And the exciting part of that is the acquisition provision. Because really from the beginning, I mean we liked the idea of royalty income from our franchises, but really what we wanted to do is to grow these $1 million to $2 million businesses kind of off the balance sheet, if you would, and being able to exercise our purchase right and really kind of speed up our growth on any secondary markets that would take 10, 15 years for us to ever really get to it.

So I think this year we've got a couple of those just the way the chronology works, a couple of those that will come up for purchase, and we'll certainly be a contributor as far as the Company is concerned.

Got it. Thank you both.

I'm showing no further questions at this time. I would like to turn the conference back over to management for any closing remarks.

Thank you, again, for joining us. We appreciate your interest and your attendance, and we look forward to reporting back at the conclusion of the year and our fourth quarter. Thank you.

Ladies and gentlemen, if you'd like to listen to a replay of today's conference, please dial 1-800-406-7325 or 303-590-3030 using the access code of 4568454 followed by the #.

This does conclude the Rollins Inc. third-quarter 2012 earnings conference call. We would like to thank you all very much for your participation, and you may now disconnect.