Rollins Inc (ROL) 2015 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Rollins Incorporated second-quarter 2015 earnings conference call. As a reminder, today's call is being recorded. At this time, all participants are in a listen-only mode. Later, we will be conducting a question-and-answer session, and instructions will be given at that time. (Operator Instructions)

I'd now like to introduce your host for today's call, Marilynn Meek. Ms. Meek, you may begin.

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 1-888-203-1112 with the passcode 3030827.

Additionally, the call is being webcast at www.viavid.com, and a replay will be available for 90 days.

On the call with me today are Gary Rollins, Vice Chairman and Chief Executive Officer, and Eddie Northen, 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 second-quarter 2015 conference call. Eddie 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 filing, including the Risk Factors section of our Form 10-K for the year ended December 31, 2014, for more information and the risk factors that could cause actual results to differ.

Thank you, Eddie.

Before I get started, let me welcome our new CFO, Eddie Northen, to his first quarterly Rollins investor conference call.

Thank you.

I never get tired of saying this, so pardon me for being repetitive, but we are very pleased to have once again achieved record revenues and profit for both our second quarter and first six months of 2015.

For the quarter, revenue grew 6.2% to approximately $392 million compared to $369 million in last year's second quarter. Net income rose 10.3% to $45 million or $0.21 per diluted share compared to net income of $40.9 million or $0.19 per diluted share for the same quarter last year.

Revenues for the first six months rose 5.9% to $723 million compared to $682.7 million for the same period of last year. Net income increased 13.1% to approximately $75.4 million with earnings per share of $0.34 per diluted share compared to $66.6 million or $0.30 per diluted share for the prior-year period.

In a few minutes, Eddie will provide more details on these numbers.

All of our business lines experienced good growth during the quarter with residential pest control up 7.8%, commercial pest control grew 4.6%, and termite rose 3.9%.

Our bedbug business has continued to grow and outpaces the industry. At a recent national bedbug summit, it was reported that the industry grew 7.7% back in 2011 and had maintained a consistent growth rate of 7.3% through 2014. As you may recall, we ended 2014 with record growth of 18% for our bedbug business. In the second quarter this year, our growth was even greater.

There's no question that bedbugs continue to be a major pest worldwide. Recently I was referred to a book that was written in 1932, where the author cited numerous peers in the Austrian-Hungarian empire, where he said that civilized Austrian was menaced there by bears and wolves and even more dreadful monsters, such as lice and bedbugs. Eight-plus decades later that same fear remains. Most recently it has been fueled by articles in the press such as the one that states that bedbugs could spread the deadly, heart-damaging Chagas disease.

The concensus among researchers is that it's very unlikely that bedbugs will be responsible for transmitting serious diseases to humans. However, the reality is, according to information shared at the summit, that social and psychological issues arise when people experience bedbugs at home.

Compounding this problem, unfortunately, doctors can't tell the difference between a mosquito bite and a bedbug bite. Given those dynamics, among others, we expect our bedbug business, along with our mosquito business, to experience continued growth.

HomeTeam also enjoyed very good growth in the quarter with dollars and installs of 26% and revenues from new customers b- those who have activated their systems -b up 21%. As HomeTeam continues to grow with new customers, they're also finding ways to become more efficient. Three years ago HomeTeam introduced their pest pack customer portal, which customers can utilize to prepay or auto pay for their services. As of June 30, over 40% of all HomeTeam customers were on some type of prepay or auto pay program with these payments hitting the bank two to three days faster than by mail and no debit entry is required by our employees. HomeTeam receivables have improved significantly.

As most of you are aware, we are continually investing our business to ensure we remain the world's largest and best pest-control company, and as noted in the past, our marketing efforts play an important role in helping us to achieve and attract the most desirable customers.

Last year you may recall among other marketing initiatives, we gave our website a facelift. Our objective was to better educate consumers while demonstrating Orkin's outstanding ability to handle all types of tests and pest-control-related problems.

We also began exploring opportunities to expand our presence with a different audience via YouTube, with a goal of gaining views and engagement, and driving consumers to our website. Based on the success achieved from this outreach, we have upped our game, so to speak. This year we have a series of how-to videos titled At Home With the Orkin Man. This can be found on YouTube's playlist.

To give you an idea of the market potential these present, searches related to how-tos on YouTube are growing 70% year on year, and more than 100 million hours of how-to content has been watched in North America alone as of June this year. Nearly one in three millennials say that they have purchased a product as a result of watching a how-to video, and 91% of smartphone users turn to their devices for ideas while completing a task.

I'm guessing that most of you on the call at one time or another may have been interested in learning about one of these video topics: how to protect your home from rats, how to remove a wasp nest, how to remove ticks, how to get rid of mosquitoes, how to identify bedbugs, or how to inspect for termites. These subjects were selected based on our research to align with high search volume do it yourself. This is our effort to help people with their pest control problems while making Orkin readily available should they decide to utilize an expert.

We are also very excited about this campaign and believe it will not only create goodwill for our Orkin brand, but also, as I mentioned, to help create consideration for Orkin should the viewer seek an alternative. These how-to videos will also help support our position as the authority in pest control.

One of the biggest components in making Rollins what it is, has been and will continue to be in the future, our Company's culture. We know it's a word that gets tossed around quite a bit these days and can be defined as a blend of values, beliefs, priorities and commitments that companies develop over time. Here, the cornerstone of our culture -- and it's ingrained in our mission statement -- is to be the world's best service company. We are committed to that objective and will always be driven in that regard.

Last year we concluded a culture survey of approximately 3000 long-term field employees or culture keepers as we've defined them. They know our Company well and are well-qualified to provide their (indiscernible) views about Rollins' culture.

We then compare these results with the results of a separate survey of our Company's leadership and found incredible alignment. This alignment, when asked what was important to the Company from top to bottom, speaks volumes to how integrated, cohesive and resilient our culture is. We felt that that was pretty amazing when you consider our size and geographic reach.

Another important part of our culture is our dedication to continuous improvement. Simply, we know we can always do better. And as we've discussed previously, we are always looking to improve our service to the benefit of our customers, as well as to improve our operating efficiencies.

To that end, we routinely dedicate resources to study and identify opportunities to accelerate our growth and profitability. Later this year, we look forward to sharing with you more information on some of these initiatives that are directed to improve our Company.

Following 10 years in the making, on June 4th, we had the grand opening of the Rollins Heritage Center here in Atlanta. A dream of ours and certainly one on my bucket list was to have a place our employees could be proud of, a facility that would house all the important documents and memorabilia that speak to Rollins Inc.'s history of over 100 years, collectively. Among the many documents and memorabilia, our newspaper clippings from old Orkin advertisements from the 1940s, letters from satisfied customers dating back to the 1900s, the last Ford Ranger truck off the production line, which is a gift from Ford Motor Company, and also displayed as a replica of Orkin's official uniform from the 1940s, as well as a reproduction of an Orkin wagon used to deliver services during World War II when gasoline and vehicles were rationed.

I could go on and on, but will just say, if you find yourself in Atlanta in the future, we would welcome you to visit our center. You can also visit the Rollins Learning Center at the same time as it adjoins the Heritage Center.

As a service company, we must be focused on the success and well-being of our employees. As an example, we're pleased to announce that Rollins has set up a nonprofit organization to help our employees in crisis. At one time or another, countless members of our employees have been affected by natural disasters, including hurricanes, flooding, as well as other personal disasters such as losses due to fire, medical bills, or other family emergencies. Employees may also contribute to the fund; however, it's not necessary to contribute in order to apply for a grant.

Our President, John Wilson, sums up our intent well saying, this is a great way to show your support and help fellow employees. We all care about each other, and this foundation allows us to express that.

Operationally we continue to expand our roster of international franchises. This quarter we were pleased to have expanded our presence in China with the establishment of a new franchise in China's capital city, Beijing. Orkin now has four franchises in China and 39 in total throughout the world.

It's been an exciting, busy and rewarding first half of the year for all of us. We are all looking forward to sharing with you the next quarters, and I'd like to send a well-deserved thank you to all of our associates around the globe who make our success possible.

I'll now turn the call over to Eddie for an update on our financials

For those of you that might be tired of talking about geopolitics, the only grief that we will mention today is the liquid that needs to be removed in commercial kitchens for a clean, pest-free environment. That play on words is my tribute to my friend and mentor, Harry Cynkus who successfully reported this call for 17 years.

As Harry was asked numerous times, and I've been asked in my short time on board, we continue to struggle to find any direct economic correlation to our quarterly success. Our 6.2% revenue gain was accomplished by our outstanding sales and operations personnel in the same quarter that the Wall Street Journal wrote the article entitled, Retailers Hit by June Swoon.

As you all know, retail sales were not robust for Q2. However, we had a strong performance in the second quarter with all service lines showing impressive growth. Keys to the quarter included strong residential growth and continued cost discipline by our operations teams.

Looking at the numbers, the Company reported first-quarter revenues of $392 million, an increase of 6.2% over the prior year's first quarter's revenue of $369 million. We experienced that growth across all of our families of brands as measured in constant currency.

Net income increased 10.3% to $45.1 million compared to $40.9 million with earnings per share up 10.5% to $0.21 versus $0.19 per diluted share last year in the second quarter.

For the first six months of 2015, revenues rose 5.9% to $723 million compared to $682.7 million last year. Net income for the first six months of 2015 was $75.4 million or $0.34 per diluted share compared to the same period last year, representing a 13.3% increase in diluted earnings per share year to date.

Let's take a look through the revenue by service line.

Residential pest control was up an impressive 7.8%, which is the best growth since 2012, commercial pest control up 4.6%, and termite was up 3.9%. With operations in Canada and Australia, the strong dollar was once again not our friend. The currency impact caused over a 1% decline on Company growth, and there was no currency hedging offset.

On the other side of this, our acquisitions made over the last year b- Statewide and PermaTreat b- and our most recent acquisition, Critter Control, contributed 1.4%.

Put all of that together and it means that our business, excluding currency, excluding acquisitions, grew 5.7% versus 4.6% in Q1.

As for the impressive residential pest-control gains, we definitely had favorable weather in certain parts of the country compared to last year. But, in addition, our sales staffing and productivity continues to be improved, and our marketing group is seeing traction matching media delivery to customer opportunities. Our residential customer base has grown 21 consecutive quarters, and that's quite an impressive growth story.

Again for the quarter, residential, which makes up 41% of our revenue, grew 7.8% and excluding acquisition 7%. Termite, that makes up 17% of our revenue, was up 3.9%, excluding acquisition 1.5%. And commercial pest control, which is 42% of our revenue, was up 4.6%, excluding acquisition 4%. Commercial was again heavily impacted by the weak Canadian and Australian dollars as most of our business in these countries is commercial.

If you just look at our commercial business excluding acquisition, it grew 4%, which does include a significant lift from fumigation. Fumigation had its best growth quarter in the last five years, up 16.6%.

It would not be an earnings call without highlighting the continued growth in bedbug revenue. We enjoyed a growth of 18.5% in the second quarter or $17 million. Again, staying with our residential growth theme, the residential bedbug business grew 27% for the quarter, which was very encouraging.

For those of you that travel, make sure you check out our how to identify bedbugs video on YouTube that Gary mentioned earlier.

Here in Atlanta, as in much of the country, summer is in full swing. In total, leads received, leads sold, and percent of leads closed all continue to trend in the right direction, which bodes well for the future.

HomeTeam had another great quarter with improvement in their TAEXX Tubes in the Wall margin and improved pricing, which resulted in new TAEXX activation dollars up 21%.

In total, gross margin for the quarter improved to 51.5% for the second quarter versus 50.6% in the prior year. The quarter benefited from improved service salary with lower fleet costs due to the drop in fuel, while maintaining good cost controls across most expense categories, including materials and supplies.

Depreciation and amortization for the second quarter increased $637,000, totaling $11.2 million. Depreciation was $4.8 million, increasing $1 million, with most of that increase related to our new Branch BOSS Operating System. Amortization of intangibles was $6.5 million, which decreased nearly $365,000, as some of the older, eight- to 10-year-old acquisitions have become fully amortized.

For the full year, amortization of intangibles, which is typically the value assigned to acquired customer contracts, will represent a significant after-tax, non-cash charge of approximately $0.07 to $0.08 this year.

As for BOSS, the deployment continues positively forward. At the end of the quarter, we were 38% deplored for the Orkin brand. With test business ramping up in the summer by design, we are deploying at a slower rate until the fall.

On a recent field visit, I was able to see the latest system release, a service manager check-in dashboard. This dashboard will give real-time, online display of all service technician status and progress on their scheduled services throughout the day.

When we have the opportunity for a new customer same-day start, we are allowed better efficiency in assigning the sale to the appropriate technician.

Sales, general and administrative expense for the second quarter increased $7.9 million or 7.1% to 30.2% of revenue, increasing from 30% for the second quarter last year. The increase is due to higher sales salaries, which were driven by increased sales related to payroll expense due to acquisitions such as PermaTreat and professional fees related to procurement and acquisitions.

Income before income tax was up 10.1% in the quarter. We had a few minor, one-time tax items that brought our tax rate down to 37.7%. We expect the tax rate to return to 38% next quarter.

All of this resulted in a net income that was up 10.3%.

Our balance sheet remains strong as we continue to look for more opportunities to reinvest in our business. Year to date we've spent over $30 million on acquisitions and continue to look for opportunities in the pest and wildlife areas. We had $18 million of capital expenditures and had $109.7 million in cash, along with no debt.

With my first three months on the job under my belt, I'm more encouraged than ever on the strength of Rollins and our business model and the management team as we continue to achieve our growth and profitability. During my visits over the past months, I've been asked about my vision for the future of the Company and briefly here are a few of my thoughts.

First and foremost, don't mess with what is working. We have a great balance of customer interaction and efficiency. Ensuring the customer has a great experience is a key to the industry-leading retention rates. This is constantly in our sights.

Second, related to the first and based on my prior work experience, there is opportunity in the area of customer routing and scheduling. We want to find the right way to continue to enhance the customer experience by being in the right customer home or business at the right time, always.

And lastly, there will be opportunity outside of the United States. Our international operations and international franchisees are doing a tremendous job. I had a chance to meet with some of our international franchisees a few weeks ago, and they are very hungry to grow and by country had great plans to do so.

As I wrap up, I would like to take a quick moment to thank all of those great individuals that have helped me to transition into this new role. From our Rollins operations groups to the nonoperating support groups to the business associates, which include investors and analysts, that have all stepped forward to lend their support, I truly say thank you.

I will now turn the call back over to Gary.

Thank you, Eddie.

Well, we are ready now to open the call for any questions that you might have.

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

Hey, good morning, guys.

(multiple speakers) Good morning, Joe.

Eddie, you said earlier that leads sold and leads generated were moving in the right direction. Can you maybe put some more color around those metrics? I'm just curious if that direction suggests an acceleration or a deceleration from current growth rates.

I think we're in line with the current growth rates. I think we've seen growth from Q1 to Q2 across all of the different products, and I think we've seen similar improvements from previous quarters for all three of the categories.

Within leads sold and leads generated b

Right.

Is that b? Okay. Got you. (multiple speakers)

Yes, I'm talking about for all three of those categories.

Okay, perfect. And then you both alluded to sales and productivity improvement. Do you guys have a sense of what portion of revenue growth that you are seeing tends to be more market share gain-oriented versus just end market growth in pest control?

Well, we think that we're growing faster than the industry. You know, there's not a lot of market data in our industry. I mean, that would be current or quarterly. But you know, in looking at other businesses through our acquisition activities, attending these summits, reading the trade publications, we believe that we're growing faster in all of the elements. We think that we've made investments that other people are not or other companies are not really in the same -- had the same opportunity in doing, and that's had a lot to do with it.

And then, you know, as I mentioned earlier, we are just not happy with where we are. We want to do better. So we just keep pushing in every direction and every way that we know to.

Joe, this is Eddie. So the only small amount of science that's out there that our marketing group is able to do is to take a look at the total search, total Google search under the pest control topic, and then look to see what percent of that that we win. And we feel that Gary's thought that, to Gary's suggestion that we're winning more of those than potentially the others that are out there.

And I think that this is important because, you know, we really need to know is our Internet contributing positively and is our advertising contributing positively? And one of the great things that the Google search does is give us kind of an overall reflection as far as the industry is doing. If the searches are up in general, then you know, Mother Nature, we think, is making a contribution, and you've got to be careful that you're not giving yourself too much credit. But in our analysis, we are growing faster than that barometer.

Right. Okay. I appreciate that color.

Last one for me, just can you give us an update on the Critter Control integration? Maybe where you're at in that process, if you're starting to see any revenue synergy from the deal, and any of the targets that you're willing to put out?

Yes, Joe, I don't think we're ready to talk about targets at this point in time. I will tell you that we were able to meet with the advisory board of Critter Control, had them in town and had a chance to meet with them. They are very happy with the way that the integration is going. I'm not sure that you're ever going to have every franchisee that's always going to be happy, but 17 of the 18 that were in the room were extremely positive. They're happy with what they're getting from a marketing support, they're happy with what they're getting from the back office support that we've been able to give them, and that's a little bit of the synergy that I think that we're going to be able to see in the shorter term is going to be that.

So we'll continue to spend time with them, and I think that's going to help us as we're moving forward and as we develop our overall wildlife strategy.

Joe, I think it's important that we really don't do too much too quickly. You know, we really need to get to know these people better and need to really show, as Eddie mentioned, the things that we can do to their benefit. And then I think that will allow us in the future to consider how we handle the Trutech name and expansion and potential purchasing opportunities that we might have with some of the franchises that are interested in selling their business. But we're just trying to be fairly calm and solidify the relationship.

Right, I understand that completely. Are you pushing leads right now from Trutech that they can't perform to Critter Control, or has that not happened yet?

Yes, we're hearing leads. I mean, we are in -- as you know, we're in a lot of markets, working in a lot of markets that Trutech's not in. And so I think that's one of the big benefits that this acquisition is providing these franchisees.

So yes, we are providing those leads, and I think that fosters a sense of cooperation, and they are in a position really to help Orkin with leads because they're not taking care of all the pest control or bedbugs, and there's many areas in pest control that they don't really address.

Great. Thanks for the color.

Dan Dolev, Jefferies.

Thanks for taking my question. Two questions, one on revenue and one on opportunities, long-term opportunities.

On the residential side, it seems like a very nice acceleration. Is 7% sort of the new run rate? And if yes, why?

Yes, so Dan, this is Eddie; I'm not sure if that's a new run rate or not. I think if you look back, as I said, since 2012, this is the fastest growth quarter that we have had. I think marketing feels very good with their matching of their media to the target audiences, which we feel is helping, to be able to move the residential forward.

So I'm not sure if we know what that new run rate is going to be. The weather was good around most of the country, as we know. I mean, a couple of isolated spots where we had extensive rains and those types of things, but overall the weather was good, which would always push towards a good residential number for us.

Got it. And what happened in termites? It seems a little bit light. You know, the comps were tougher.

You sound like me!

Well, outside of Gary's comments, you know, Q1 we had an 8% growth, which was a very positive number. And if you look back, again, over the previous years and you look at two quarters together, you kind of see numbers that are in line or maybe even slightly better than what we've seen in the last couple of years.

You know, we could have had the end of March be a little bit stronger, whereas in previous years, those first, last couple of weeks of March could have pushed into April and made a difference. But I think if you take a look at the first quarter and you move into the second, you'll see numbers that are relatively in line with what we've seen.

Okay. One more quick one. Any color on this year's price increase? Usually take pricing.

Are you just looking for color on it?

Yes, some color on (multiple speakers) what is the impact, what's going on with the price increases this year?

Yes, elasticity is still good, the testing January/February, then we had March and April testing. All the testing is showing similar results to what we've seen in the past. The [zip-plus-4] continues to give us opportunity to make sure that we are selling and sticking in the right areas, and our analytics group that we've stood up in this last year have made a difference in us being able to really know and understand what areas, where we need to be, especially from the zip-plus-4 perspective, and that's where we've seen improvements.

Got it. All right. I'll get back in the queue. I have more questions that I can ask later. Thank you.

Jamie Clement, Macquarie.

Gary, Eddie, good morning. A couple of random questions. You know, obviously the 7% number in residential was the number that most caught my attention. Gary, obviously Mother Nature is a component, housing can be a component, and I'm hoping that perhaps you can give me your thoughts on that. Digital marketing, obviously that's something you've talked about as a success over the last couple of years.

As you look at the things that drive your residential business, in a 90-day rearview mirror, what were the things that kind of popped out on the page that impressed you?

Well, you know, as I've told you on previous calls, I hate to talk about weather because we can't control it, but we did have good weather, and we're continuing to really work hard as I shared earlier with our Internet and our mobile marketing. I think that the marketing folks deserve a lot of credit as far as continuing to identify new ways to capture consumers.

I think that we have aligned ourselves properly as far as really stressing the educational side. You know, more and more people are shopping on the Internet to help direct their decision-making, and we want to position ourselves that we are the authorities, and we're the first and hopefully the only source that they're looking to when they have a pest problem.

I think our BizSuite and HomeSuite products or iPad products that we have for our salespeople, our people are getting more comfortable with them. We're making -- continuing to make enhancements with the field feedback. We have a better product than we had a year ago. I think that that's making a contribution as well. So there's just a lot of components. It's really hard to quantify that this one is 50% or this one is 25%, but (multiple speakers)

No, that's very fair. That's very fair. Gary, if I could ask you about HomeTeam, one of the things that Harry had periodically mentioned over time was that typically Rollins didn't make a lot of money on b- if any really at all b- on the installation of the tags tubed into the wall, and that perhaps over time that was something that perhaps the Company could make a little bit of money on because it certainly was a value add for the builder. Any update on that kind of progress?

Well, yes, I think we've increased it. You know, when the contractors are in trouble, which they went through a pretty rough period of time, you don't really have much of an opportunity to raise your rates. I think what we've been able to do is, now that things are better and housing starts are up and they're doing better, we've been able to slightly increase our rates as far as our install rates, and we've also identified some contractors that we really have deemed not to be profitable.

So I think that we've improved our margins in that regard, and we've been prudent (multiple speakers)

Okay.

And I think that builders do see value. You know, very rarely do we ever, if ever lose a builder because they don't think that this is a great value-added feature for them to provide the new purchaser.

Very fair. Thank you. And Eddie, one last question: is my math of about 800,000 gallons at about a $0.90 benefit in terms of fuel year over year, is that about right?

We'll say it's a number between [650] and [850], and the price per gallon is going to be a little bit more than that.

Okay. Got it. Many thanks.

(Operator Instructions) Joan Tong, Sidoti & Company.

Good morning. A couple of questions here. Obviously the residential segment is very, very strong, and I'm just wondering with the upside surprise on the top line, I believe we would have seen better margins expansion carryforward down to the bottom line, but we haven't seen that. Last quarter, the margin expanded over 100 basis points; this quarter is a little bit light. I'm just wondering, is there anything one-time there that caused your expenses to be a little bit higher this quarter?

Yes, Joan, we had a little bit of one-time expense, and there's nothing that's going to be recurring that's going to cause a degradation in what you've seen in previous quarters. We had a little bit higher advertising cost this quarter that was really just kind of a shift in some dollars from one quarter to another. And then anything else that we had were really just one-time events.

Okay. And then the gas, lower gas prices benefit on the year-over-year comparison, how much is the benefits for the quarter?

The benefit for the quarter for fuel will be somewhere around $2.5 million.

Okay. Thank you. And then let's talk about your commercial business. It was a little bit light last quarter, still very good results. You know, you're talking about 4% growth in the first quarter. It seems like you stepped up a little bit. We drove like around 6% in the second quarter.

We know that your competitors, one of your major competitors keeps talking about like you may be putting more effort into the commercial business. Have you seen any change in competitive landscape? And definitely the uptick of this quarter, like showing that, like there's some improvement there, so any color you can share?

Well, I'll share two things with you, Joan. I think, one, we feel as though the commercial could have even been a little bit better. Our foreign exchange difference, which was a little over a full percent on the revenue, was mostly in the commercial area. I mean, most of our business that we had in Canada and Australia is commercial business. So we feel as though the numbers could have been even a little better.

But we feel as though the use of the BizSuite by our national account groups is helping to be able to maybe differentiate a little bit from a sales perspective, and they are able to use their information they have to be able to lock customers in as we are growing on the residential side. I'm sorry, on the commercial side.

So I think it's kind of the combination of those two things that are helping us continue to move the commercial forward.

And any change in competitive landscape?

Well, if you believe what you read, you would think so because I think that Rentokil and Terminix have spent quite a bit of time talking about their emphasis. But keep in mind, this is a very fragmented business, and more likely than not, we're running into locals and regionals moreso than we are running into Rentokil or [Beeko Lab] or so forth. So it's kind of hard to really weigh that.

You know, our intent is just to go after the business, and I think we did a better job this past quarter as far as our national accounts were concerned, and those things are kind of lumpy. I mean, you really b- you know, it takes quite a few months to really make progress in that area because of the sales cycle. But I don't think, I don't hear our people really talking about one or two specific competitors that is really giving them a hard time.

Okay. And then b- that's good. Thanks for an update.

Regarding HomeTeam, I believe Jamie kind of asked the questions regarding HomeTeam's profitability level. Have we seen any improvements? I'm just wondering, is the HomeTeam segment profitability is actually on par or in line with the residential segment as a whole?

Yes, Joan, I'm not sure there's a b- I don't know if we can have a direct correlation with residential on Home. HomeTeam's profitability continues to move forward. You know, Gary talked a little bit about the builder side. So we have the consumer side that's continuing to grow. The new activations increased 21% year over year. So when we take that growth and now we have improved and enhanced profitability and growth from the revenue side with the builders, HomeTeam continues to perform really well.

And we're continuing to benefit from some of the reorganization that we had at midyear b-

That's right.

-b where we had some consolidation and improved the efficiency of our field operation.

Okay. And then finally, can you update on your M&A pipeline? Going forward is that being more like domestics focused, or you are still maybe like you're trying to add on to your Australian platform that you have mentioned in the past as one of the very attractive areas? But given the local economy there, would the oil prices come down, and it's not exactly maybe the right time to put more resources in that space? Maybe your M&A efforts would be more refocused back to the domestic market? Thank you.

Yes, Joan, I don't know that we're necessarily focused in one area or another. I think we are looking for the best opportunity wherever it is, and I don't think we would be taking anybody out of the pipeline as far as any of the countries that we are in. You know, if there's a good opportunity in Canada, we would take a look at that. We want to continue to find ways to build out our network in Australia. If there was a right opportunity, we would want to do that.

And, of course, as we've talked about on previous calls, there are many, many opportunities obviously here in the US that we'll continue to look at.

So we're just, were looking for the right company at the right price. Unfortunately for us, some of our competitors are paying dollars that are way above market rates, and we want to continue to be involved with opportunities. But I think we're going to make sure that we stay logical as far as what we are willing to pay and continue to grow in that manner. That's one of the great things about being here is Gary and group have such a great history as far as seeing how this overall market will react and just making sure that we are paying the right amounts so that we can make sure that we are either accretive or we are able to improve in a short-term with any sort of acquisition.

(Operator Instructions) Dan Dolev, Jefferies.

Two more questions. You mentioned that you're not seeing your competitors so much or your big competitors; you're more seeing the local guys, but one of your -- basically your biggest competitor is making a big push into one-off services. Do you offer the same thing? Are you pushing it? If yes, why, and if not, I guess why not?

Yes, Dan, we're really about the recurring revenue. You know, lots of people have asked me when I've been out recently about statements that our competitors have made on the one-off revenues. And it's nothing that we would turn away from, and if it's the right one-time revenue, we're going to still go ahead and be a part of that. But that's not something that we are out trying to chase.

I mean, 80% recurring revenue, that's part of the success of this model for the long-term. When you keep the customers happy, they continue to come back. They don't leave. And we are able to keep the revenue stream moving forward.

So, we would not turn away from an opportunity but one time, and it's not something we are out seeking. We are out seeking customers to be able to get them in for the long term.

Got it. And then one last question: when, in your remarks, Eddie, you mentioned the three things that you're looking forward to, your CFO vision, so to say, and one of them was the opportunity to improve the routing and scheduling. I know when you guys are talking usually about 200 to 300 basis point improvement from the BOSS system, are you seeing things incremental or incremental opportunity to improve margins beyond the BOSS system based on your experience at UPS?

I think it's probably too soon to say what it would look like. You know, my intuition would be that there's probably something else is there; I just don't know what else that that would look like at this point. I had a chance to spend, as you know, a lot of time in the operations, had a chance to work with some folks and try to understand a little bit more about what we see right now as far as routing is concerned. But I think getting more involved with that is going to help me to be able to answer that question better in the coming quarters.

But BOSS in the short term is going to help us incrementally. Then we will just have to see from there what opportunities, if any, we're going to have after that.

One thing that makes it very difficult at this stage because we don't have, I think we have maybe a third of our branches or 40% of our branches owned, is the impact of employee turnover, the impact of customer retention, fleet expense. There's just a number of variables. And, you know, I don't think Einstein could figure out really, when you took all those individual components, to exactly what the outcome is going to be. But the more we do, the more mature these branches are that we've got on BOSS, the better sense that we're going to have as far as what the payback is going to be.

Understood. Very helpful. Thank you.

It looks like we have no further questions at this time, so I'm going to turn it back over to management for any additional or closing remarks.

Okay. Well, thank you for joining us today. We appreciate it, and Eddie and I look forward to next quarter, and we will continue to work hard to grow and improve our business. Thanks, again.

And that does conclude today's call. We thank everyone for their participation.