Rollins Inc (ROL) 2013 Q3 法說會逐字稿

Ladies and gentlemen, good morning, and welcome to the Rollins, Inc. third-quarter 2013 earnings conference call held on October 23, 2013.

(Operator Instructions)

I would now like to turn the conference over to your host, Marilynn Meek. Please go ahead, ma'am.

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 passcode of 4643774.

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 is Gary Rollins, Vice Chairman 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 2013 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, excluding historical facts, 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, 2012, for more information and the risk factors that could cause actual results to differ.

Thank you, Harry. Well, we are again pleased with the solid increases that we made in our revenues and our profitability for the quarter and 9 months. This quarter represents our 30th consecutive quarter of improved earnings, in 7.5 years. For the quarter we improved our momentum, with revenue increasing 6.5%, the best percentage increase all year, to approximately $362 million, and net income increased 12.4% to $36.2 million, also the best percentage increase all year. Revenues for the 9 months rose 5% to $1 billion, and net income increased 7.8% to $95.4 million.

All of our business lines continue to show strong demand for our services during the quarter, with residential pest control up 7.2%, commercial was up 6.3%, excluding fumigation, and 5.4% overall. By the way, this is the strongest quarter we have seen in commercial since the second quarter of 2011. Termite had a very strong performance, their very best, rising 8.2%.

The deployment of our HomeSuite iPad app, which I have talked about on previous calls, is showing positive results in improving the selling of our termite and ancillary services. And termite had a very strong assist from HomeTeam through their builders' program. Speaking of which, HomeTeam's Tubes in the Wall installs were up 39% for the quarter, marking the 3rd consecutive quarter in which they have experienced more than 7,000 installs per month. These installs are the driver behind HomeTeam's increasing revenue and long-term profitability, as these new home installations are ultimately activated; hence, the big revenue pickup.

I would also like to note the positive results that we are experiencing in our Orkin rebranding efforts. You may recall we kicked off our 2013 marketing campaign and rebranding initiative in the first quarter of this year. Our marketing folks and the advertising agency put a lot of effort into this initiative and, judging from our third-quarter results, it certainly seems to be paying off. Our strong selling season was made possible in part from the double-digit lead growth for residential, accompanying by better closer.

As we have discussed, our pest control sales are the gift that keeps on giving. This also applies to termite sales, but to a lesser degree. Harry will provide more detail on all of this, but, needless to say, we're pleased with the progress that we're making in executing our programs to grow our business.

As I have referenced many times, we have a culture of continuous improvement. We don't spend much time looking under our rear view mirrors and recognize the need for both innovation and developing different skill sets for the 21st century. To that end, in June, Justine Zarch, Senior Marketing Manager, took on a new role within Orkin, creating a more formal partnership with operations and technical services. Justine will be helping to identify new tools and technology improvements as a means to advance Orkin service delivery and service-line offerings. She will work with a variety of internal and external partners to develop new initiatives to benefit our residential customers and commercial businesses.

Innovation and product development is not new to Rollins. You may recall some of the 12 technology initiatives previously discussed that we have implemented since 2011. The creation of this new position formalizes and underscores the ongoing investments that we're making in this area to create more value for the Orkin brand and enhance value provided to customers. This also supports our ongoing commitment to be the innovator in the pest control industry to ensure that we remain on the cutting edge of pest control science and technology. Or, as our new advertising theme describes, getting pest control down to a science.

There is a tendency to think of manufacturing companies or high-tech companies when we hear the word innovation. But our goal is to lead this process and not to wait for manufacturers to come to us with new products, but to partner with our suppliers on the front end, providing input at the product development stage to secure us the leadership position of the first to utilize. We are also fortunate that we benefited over the years from several well-established vendor and university research partnerships that have helped us seize opportunities through innovative solutions. In order to remain the number one pest control company in the world, we know that we must be progressive and are excited about advancing this initiative in as many fronts as possible.

We're equally excited about another opportunity that we are pursuing. Most of you are aware of the big focus or attention given by many companies today on analytics, or big data. Many organizations are embracing data mining as they look to increase sales, promote new products, gain insights into customer preferences, et cetera.

Simply, they are using data to better direct their plans, priorities, and initiatives. Certainly, we are no stranger to this, having successfully worked with Boston Consulting Group on two major pricing projects in the past. With years of data available to us, we have begun to formalize an analytic discipline in-house, and we will be building our own analytics pricing team to continue to improve our performance in this area.

Heading up this effort is John Joninas, who has joined our Rollins marketing team as Managing Director of Pricing and Analytics. John brings a very successful track record to Rollins gained through pricing efforts, new product launching, bundling officers, and creating many analytic revenue-driven activities. Prior to joining us, he was with YP for 14 years, a $2.5-billion print and digital media company specializing in local search. John will lead our Company's efforts for rate card development and our regular price increases across all brands. He will help us build our analytics team to gain greater leverage from our customer data to improve our ability to make better fact-based decisions.

Acquisitions continue to be a primary priority for our Company. Therefore, I am pleased to announce that Matthew Whiting recently joined Rollins as Director of Acquisitions. He brings more than 20 years of experience in merger and acquisitions and corporate finance to our Company. Prior to joining Rollins, Matt was the Managing Partner of Corporate Finance for TechCXO, a national consulting firm that provides senior-level strategic and functional services to the technology and business services companies.

Prior to that he was Senior Vice President with a middle-market investment banking firm where he worked closely with companies with $20 million to $200 million in revenue. Matt will be working closely with senior managers from each of the Rollins brands and divisions to help us accelerate our efforts to acquire quality pest control companies. He replaces Bob Hines, who recently retired from Rollins. We welcome both John and Matt and feel like we have added two highly qualified leaders to our Company.

You may recall on our fourth-quarter conference call that I briefly discussed that we were looking to improve our procurement practices this year -- our goal being to significantly reduce the cost of everything that we buy. I am pleased to report that our new Rollins Marketplace, also known as procure-to-pay project, is now in the process of being rolled out throughout the Company. HomeTeam and the Rollins support center, our home office, were phased in during the latter part of September, and we expect the full rollout to be completed by the end of the year. This new process will allow purchasing of various items from one site using a single sign-on with an electronic approval process.

We are very proud of our people and their performance, and our Company. And I would like to turn the call over to Harry.

Thanks, Gary. Good morning, and thank you for joining us on the call. There is something reassuring about being a pest control company. It is refreshing not to have to worry about the aftermath of the US government shutdown or what the next looming debt-ceiling breach and potential Fed tapering -- versus tampering (laughter) -- will do to our business.

Fortunately, we don't have to worry about the strength of the euro, foreign imports, nor product obsolescence. We don't have to keep up with current world trends. We just have to sell pest control, service our business, and collect our money. Sounds simple, but often it brings its own set of challenges.

Bugs have been around since the dawn of time, which is a blessing, as Gary says. Rats and roaches don't read the Wall Street Journal. We just need to hire well, train well, and deliver exceptional service, and the business will do just fine, as we have demonstrated with this quarter's results.

Third quarter's revenues were $362.2 million, representing 6.5% revenue growth. We saw continued sequential growth across all of our three service lines; more about that in a minute. Net income increased 12.4% to $36.2 million, or $0.25 per diluted share, compared to $32.2 million, or $0.22 per diluted share, for the same period in 2012. Year-to-date revenue is $1.013 billion, a 5% increase, while net income has increased 7.8% to $99.4 million. EBITDA totals $179.9 million while EPS has increased 8.3% to $0.65 per diluted share.

We continue to build on our solid momentum, and we see no significant changes in the fundamentals that support our business. Leads, closure, pricing, and customer and employee retention all working together to achieve what we had for the first 9 months as well as for the remainder of this year.

Let's get deeper into the results. This year, we have seen revenue growth across all brands, other than IFC, and all service lines. Our total revenue increased 6.5%. Our Canadian operation, which represents approximately 7.5% of our revenue, impacted our growth this quarter due to currency exchange.

It has been some time since we saw the need to discuss the impact of currency exchange. But with the strengthening of the US dollar against the Canadian dollar -- or is it the weakening of the Canadian dollar against the US dollar? -- whatever -- domestically, excluding our Canadian results, our total revenue would have increased 7%, with residential growing 7.2%; termite 8.3%; and commercial 5.4% -- 6.3% when you exclude fumigation.

Let's look at the service lines that make up our business, starting with residential pest control which had its strongest quarter of the year, increasing 7.4%, which represents 42% of our revenues this quarter. Residential sales are driven by inbound activity, phone calls, and web leads. We believe that our new marketing campaign, rebranding initiative, and Internet balancing has made a difference this year.

As a finance guy I sometimes cringe at the money we spend on marketing, but it's hard to argue with our results and a 10%-plus lead growth we saw in the third quarter. It doesn't do you any good to make the phone ring or increase your Internet leads if you don't close and start the new business. Hats off to our great sales agents for their improvement in closure rate and new customers obtained, and for all those terrific technicians that got those sales started. It was a great team effort by all.

With the commercial business, you receive less than one-tenth as many commercial leads as you do residential. So for them, it's all about being creative and knocking on doors and making proposals, which our commercial sales team did a great job of this quarter. We saw good performance from our branch-based commercial accounts managers, who increased sales 6%. But our national account team knocked it out of the ballpark, experiencing an almost 30% increase in sales.

We saw a significant increase in sales with the General Services Administration, GSA. Sales increased due to adding new accounts and continued penetration in existing national accounts. As a result, commercial pest control, which makes up 42% of our business, grew 5.4% -- 6.3% excluding fumigations, as IFC business was off again this quarter. As I have mentioned before, commercial fumigation is a very lumpy situation.

The impact of the currency exchange reflected almost exclusively in our commercial business, as most of Canada's business is commercial. Domestically, commercial was up 6.5% -- 7.6% when you exclude fumigation. Lastly, our termite business, which makes up 16% of our business this quarter, enjoyed growth of 8.3% in the third quarter, which was unprecedented for the quarter.

Strong new home starts and the pre-treat work HomeTeam does contributed, but the biggest contributor is the power of Orkin chooses of the HomeSuite iPad application. HomeSuite is now used by our residential termite sales inspectors, which enables them to better describe the service we will be delivering to our customers, specific to the home, and why it is important. Gary talked about this proprietary tool at length in our first-quarter conference call.

Gross margin increased to 50% for the third quarter versus 49.9% in the prior year. This is due to continued favorable termite claim development cost and improved trends with casualty claims. It is partially offset by the increase in material and supply costs related both to the substantial increase in HomeTeam's Tubes in the Wall installs as well as our ancillary sales.

39% growth in HomeTeam -- for HomeTeam in [hags and saws] that Gary talked about does have some natural drag on margins in the short term. But installs period to period are accelerating. As I've explained before, these new systems are sold to the home builder at a substantial discount to our cost in order to obtain our ultimate customer, the new homeowner. Installs for HomeTeam is somewhat like leads for Orkin.

Depreciation and amortization expense for the quarter increased $600,000, totaling $10.1 million. Depreciation was $3.7 million, and amortization of intangibles was $6.4 million. As of September 30, we have nearly $135 million in customer contracts and other intangible assets on our balance sheet. As a result, it will remain a significant non-cash charge to the P&L for some time.

Capital expenditures are running $13.3 million year to date, a further testament confirming we are not a capital-intensive business. Sales, general and administrative expenses increased $4.5 million, or 4.2%, to 31.2% of revenues, decreasing from 31.9% for the third quarter ended September 30, 2012. The decrease in cost as a percentage of revenues were the result of us being able to leverage our administrative and sales salaries along with reductions in bad debt expense, which more than offset increases in professional services related to our commercial pricing initiative and higher advertising expense related to our new advertising campaign. Last item to note on the P&L, the provision for income tax has returned this quarter to its normalized run rate, 37.6%.

Let me add some comments related to our CRM branch operating system project. Some questions were raised over the ongoing cost model in training related to its implementation in a recent conference call hosted by Jefferies. First, we paid a one-time fee for the fundamental software and have all rights to do anything we want with it, except resell. The use includes all brands and franchises as well. In effect, we bought the source code, and there is no ongoing fee or per user fees associated with the software.

We will pay an annual maintenance fee that covers technical support as well as gives us access to all software enhancement that Service Pro develops. As for training, we have devoted internal training resources to develop material to ensure our branch personnel, all brands, are well-trained before the implementation, drawing on our experience, which has been recognized for 11 consecutive years by Training Magazine in its annual list of the top 125 training companies.

Our balance sheet remains very strong. We ended the quarter with $116.7 million in cash, with no debt. It would be hard to find another pest control company with as strong a balance sheet. We continue to work hard to find opportunities to put that cash to work in what we know best -- pest control.

We are looking to accelerate our acquisitions and, hopefully, the recent on-boarding of an experienced M&A director will help. In the meantime, we continue to return capital to our shareholders, both through dividends and our share repurchase program. With $116 million in cash and no debt, we certainly have the flexibility to pursue acquisitions, continue to increase our dividends, as well as buy back stock.

During the quarter, we were active with our share buyback program. Earlier this month, we announced that the Company repurchased 168,100 shares under the share repurchase program, and 340,700 shares have been repurchased year to date. In total, just under 5 million additional shares may be purchased under previously approved programs by the Board of Directors. The program does not have an expiration date.

Yesterday, the Board declared a regular quarterly cash dividend on its common stock of $0.09 per share, payable December 10 to stockholders of record at the close of business on November 8. The Board will re-examine the quarterly dividend, as it normally does, in its regularly scheduled January meeting. This past year marked the 11th year in which we have increased our annual dividend by a minimum of 12% each year. We have not returned as much capital through our share buyback program as we would have liked, and, as result, the Board declared a special year-end dividend of $0.09 per share payable December 10 to stockholders on record at the close of business November 8.

Hard to believe 2013 will be drawing to a close. We have not come close to exhausting the opportunities we have 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 will now turn the call back over to Gary.

Thank you, Harry. Harry and I will be happy to answer any questions that you might have at this time.

Thank you.

(Operator Instructions)

Joe Box from KeyBanc Capital Markets.

Hi, guys, nice quarter.

Thank you, Joe.

Actually, I just hopped off a call for another environmental services company, and they referenced seeing more service increases versus decreases for commercial customers now than they have seen in the last five years. I think that is somewhat curious, given the 5.4% increase in your commercial business. I guess what I'm trying to understand is how much of that improvement that you saw in commercial stems from a pickup in the market versus successful marketing on your part and getting a bigger chunk of the pie?

That is certainly hard to quantify. We have, as we have talked in prior quarters, we have made some changes in our sales team, brought on a -- promoted a very aggressive and great sales manager, Vice President of Sales, who has reinvigorated the national account sales team. They have gone back.

We have a lot of national agreements where we are the preferred provider -- or have the hunting license, but then you have to go knock on the door and sell the individual location. Which they did a -- they had a number of sales blitzes. I think it resulted, as I mentioned our national account sales were up 39% this quarter. So, we have been seeing momentum shift in our commercial business now, and it has been turned up for a couple of quarters. So, we are happy with the direction.

I think it is more -- I don't mean to sound egotistical, I think its more of what we are doing than what is going on in the marketplace. I think we just increased our effort and our focus on the commercial business, and it is paying off.

Right, clearly a great job on that front. Sticking with the commercial side, I know you guys are in the early stages of changing up commercial pricing. So one, can you maybe give me a sense of how much growth in commercial stems from pricing in the quarter? And maybe two, some of the customers you are testing this pricing on, does it seem like they're receptive to taking be price increases, or are you seeing a little bit less retention than what you had in the past?

From the pricing, and I don't have it broken out, commercial versus residential, but just under 2% of our revenue increase came from the pricing initiatives. In terms of retention on the commercial side of the business, we saw a small of uptick in the -- or down tick. The retention fell a little in the quarter and when I said a little, I think our retention dollar lost dollars from customers, third quarter this year versus last year was $100,000, $125,000 difference. And year-to-date our retention is running will ahead of last year when it comes to our commercial customers. If you give good service, and give exceptional service, the customers are accepting.

Joe, I think another thing to consider on the pricing is our commercial customers, pest control services is way down the line as far as their expenses are concerned. If you look at restaurants, you have food cost, labor cost. We're just not a big part of their P&L. And so I don't think that we have the same sensitivity that larger elements of their P&L would have.

Additionally, the second phase of our Boston Consulting Group project was really to improve the standardization and the methodology of what we charge new customers. And we really think -- that hasn't paid off yet. It's just recently been completed and is in test. But we really think we have some opportunities there as far as improving the consistency and really the appropriateness of what we charge our commercial customers.

Sure and to that point, do you still think that the commercial opportunity is as big as the residential opportunity?

Yes, we do.

Okay, great. Gary, you talked earlier about accelerating acquisitions. Do expect to broaden your search criteria, or do you think that Matt will just be able to look at a greater number of deals? And maybe if you guys have typically been able to drive a few hundred basis points of growth from acquisition, how do you think that might change going forward?

I think Matt is going to bring more methodology to our acquisition efforts as far as assigning specific call objectives to our field people to really do a better job in prospecting as opposed to waiting until we are contacted. I think that's going to be a big improvement. We really add methodologies to what we do, and we are also seeing some activity now as far as Obama care is concerned. A lot of these independent business operators are recognizing that there is cost involved in this new healthcare reform. I think we are seeing an uptick as far as interest, as far as these pest control operators are concerned, and in talking to us about a sale situation.

Sure. One more question that I will turn it over. Harry, I think a few quarters back it did not seem like you guys are too receptive to doing another one-time dividend. I know what you guys paid out in the quarter, or the one that you announced in the quarter, wasn't that big. But, can you put some rationale around the special dividend?

Like I said, our board was a little disappointed with the amount of shares that we bought back year-to-date. We have not quite covered the dilution from the -- at a minimum we would like to always cover the dilution, so we are a couple hundred thousand shares behind covering that. And like I mentioned in my comments, the board very much believes in returning our profits and cash to shareholders and whether it be in dividends or stock buybacks. Since we hadn't hit the numbers that we had hoped on the stock buyback, they thought it wouldn't be a bad idea to add a little special dividend this quarter. It's not something that we want people to build in an expectation for, but again, I have $116 million and no cash and my prospects -- no debt. I have plenty of cash. My prospects for continuing to generate a lot of cash looked very favorable.

Right. It was basically just a true up in the quarter. It wasn't necessarily a change in philosophy where we can think that there would be a large special dividend.

No.

Okay, great. Thank you guys and again, nice quarter.

Thank you Joe.

Dan Dolev, Jefferies.

Hi, good morning, thanks for taking my question. Really quickly on pricing in the commercial side, I heard in the last few -- and clearly that hasn't had a big impact. But I have heard in the last few months that maybe one of your large competitors is trying to buy some volume perhaps ahead of some transactions -- that they would like to show some good growth. Have you seen any pressure on the commercial pricing? Clearly quite strong, but have you seen any pressure? In other words, would it have been even stronger had there not been any pressure from one of your competitors? Thanks.

We see it in selected cases, but it usually comes down to competing on service. So, we always have some competitive pressures. Everyone is typically -- I shouldn't say everyone, but there is only a few players with a national footprint, so you're going to see them in most of the accounts that we do business with. And again, we believe that we compete based on our service.

I think one additional advantage that we have this year, and we will have more so going forward was our BizSuite app with iPad. We have the ability to really have a more professional presentation to these commercial prospects. We can show them pictures of the inspection. It is not often that an owner or a manager will go around and accompany a salesperson when they make their inspection. But the old deal with a picture is worth a thousand words applies here, because if you can show the prospect that he's got a 2-inch gap under his backdoor, that he's -- that the other current provider is not doing the job by showing him pest activity, there is just a lot of benefits to really share with the prospect what you have found in your inspection. We think that is going to continue to help us as far as our commercial sales are concerned. And we are not aware of anybody that has a tool like this and not to say that they won't at some point. A good idea's never held secret for long, but we think that is making a good contribution.

Great, thank you very much. I appreciate it.

Thank you.

(Operator Instructions)

Sean Kim, RBC.

Just one more follow-up on pricing. I think you said you saw about a 200 basis point positive impact from the pricing actions. If you -- if we look more longer-term, is that sort of the impact we should expect every year, 200 basis points? How should we think about the timeline of pricing increases in the future?

This year's price increase was the most successful and largest I think in our history. It typically has run 1.25% to 1.75%, so I don't know if we can count on a 2% necessarily going forward every year. I certainly would love to, but one of the things that is coming out of the pricing -- commercial pricing project is to do a better job on pricing the account to be more profitable up front which would limit your need to raise prices as much going forward. The commercial pricing project had three pieces. One, to increase pricing, but B to also develop a application for commercial account managers to price correctly, more correctly, more profitably on the front end. And then third, a model for us to determine and measure profitability by customer.

So this year, we were able to take a first look at profitability across all of our commercial accounts, and the least profitable got substantially higher price increases than the more profitable accounts. So I guess if we do a much better job pricing on front, we will have less unprofitable accounts to significantly raise prices on. But again, this business is all about recapturing your labor. And the more successful you are in estimating what the true labor cost, labor time is going to be up front, the better your pricing will be.

I think Harry makes a good point. We're really for the first time I think more sophisticatedly looking at both ends of the equation. I think that we -- I'd give ourselves higher marks as far as raising the prices and developing the methodology to do that. But this coming year and beyond we're going to do a better job in pricing the accounts to begin with.

Okay, that is helpful. Just one more question regarding HomeTeam. I think we saw some moderation in housing starts lately. How should we think about the growth in new installations and growth in revenue at HomeTeam in light of that?

Good question, and it will give me an opportunity, I need -- Gary got a little forward himself in his comments. He said HomeTeam had him better than 7,000 installs for three quarters. It was two quarters in six months. I don't know if he was looking forward to next quarter.

I was planning on the next quarter. (laughter)

You're planning on the next quarter. We haven't -- HomeTeam and their markets haven't seen that downturn. And in fact, if October continues as -- and I guess we only have a week left here in the month, it could be their biggest month of the year. Traditionally, homebuilders, and installations turn -- [new sticks] coming out of the ground turn. They cut the pipeline typically in the fourth quarter, and historically HomeTeam saw a drop-off in installations in the fourth quarter. Last year was -- we were thinking was an anomaly. They had been running around 5,000 installs a month for the previous five or six months going into October, and then October last year it hit 6,700, which was the biggest month of the year.

And then it dropped back to 5,400 and then below 5,000 in December. So this year, like I said, they are headed for the biggest month. They could cross 8,000 installs in October, and then the question is how much the builders pull back. Like I said, we are not seeing softening in HomeTeam's markets, and we just see them all as future new customers. So we are excited about the opportunity though it does hurt our margins short-term.

Okay, thank you both and congratulations on the strong results.

Thank you.

Joe Box, KeyBanc Capital Markets.

Just one quick follow-up can you give us a feel for what the international franchise pipeline looks like? I guess both in terms of signing up franchisees and then maybe also a feel for what overall contribution could be to Rollins next year.

Certainly, the -- we have one agreement that has been signed that we have not announced yet that will be announced here in the next -- another island in the Caribbean. We have another franchisee who is close to taking another country. Tom Luczynski has just returned from Singapore, two weeks ago at an international franchise show. And there was high interest expressed there and a number of good leads and five, six very strong perspective future franchises.

So, the interest is definitely strong and I would say accelerating. But again, the thing to keep in mind, most of these, all of these international franchises for the most part are de novo startups. We get a fee up front, but it takes some time for them to build the business and for it to contribute substantially to the bottom line.

I think one big thing that we've got going for us this year that we haven't had in the past is that our training now is on the web. So we really are doing a better job of preparing these franchises to deliver good service and really benefit from the training that we have developed over the years.

Understood, thank you.

Sean Kim, RBC.

Thanks, just one more question on margins and operating profit. I think you saw a pretty strong margin expansion year-over-year, and I think the growth in operating profit was the best in at least the past year. Going forward, how should we think about the level of operating leverage that you could achieve?

Good question.

I don't know that I really understood it.

I think he is trying to -- how much leverage do we have and what kind of margin opportunity? The fourth quarter is always the most difficult quarter for us to really project. The business there's -- well, the commercial business isn't very -- doesn't have much seasonality to it, certainly termite and residential does. So, we typically have a strong October. The trends going into October have been very positive. We continue to see good lead growth. But then the question is what happens -- when does it get cold, how much does business drop-off in November and December, how good a job do we do in managing our labor costs? We true up our various expenditures at the end of the year. So it is tough to sit here and really have much visibility into the quarter.

The good news about this business is the recurring revenues, the nice growth in customers that we have had will continue. It is just a question as to what kind of retention you will see fourth quarter this year versus prior years. But the leverage going forward, we believe we can continue to certainly grow the top line mid- single digits, and we haven't given up from our goals of 10% increase in profits going on out. It gets harder every year and some years we do a little better and some years we trail a little, but like I said, I don't think we see any change in our prospects for our business.

One other way to look at this is that we can improve upon the same quarter last year. But one thing I have learned is you can't extend the season. You can't take advertising dollars and turn the fourth quarter into the third quarter. And so there's a law of diminishing returns. When weather -- when it starts to get cold, the pests are not as active as they were previously and you can throw a lot of advertising dollars at it, but you can change the seasonality of the business.

Okay, thanks.

There seem to be no further questions at the present time. Please go ahead with any concluding remarks you may have.

Okay, this has been an exciting year for the Company. We began the year with a great deal of enthusiasm and energy, and that has only continued to increase throughout the year. We've got great teams in all areas of our business who never lose sight that our goal is always to get better and be better. Thank you all for joining us today, and we look forward to speaking with you in the new year. Thanks again.

Thank you ladies and gentlemen, that does conclude the conference call for today. Thank you for your participation, and you may now disconnect.