Rollins Inc (ROL) 2017 Q3 法說會逐字稿

Good day, and welcome to the Rollins, Inc. Third Quarter 2017 Earnings Conference Call. Today's conference is being recorded. (Operator Instructions)

I would now like to introduce your host for today's call, Marilyn 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) 827-3773, 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 1 hour after the call and run for 1 week. The replay can be accessed by dialing 1 (888) 203-1112 with the passcode 4560105. Additionally, the call is being webcast at www.viavid.com, and a replay will be available for 90 days.

Online with me today and presenting are Gary Rollins, Vice Chairman and Chief Executive Officer; John Wilson, Rollins' Vice President and Chief Operating Officer; and Eddie Northen, Vice President, Chief Financial Officer and Treasurer. Management will make some opening remarks and then will be open on the line for your questions.

Gary, would you like to begin?

Yes, thank you, Marilyn, and good morning. We appreciate all of you joining us for our third quarter 2017 conference call. Eddie will read our forward-looking statement and disclaimer and then we'll begin.

Our earnings release discusses our business outlook and contains certain forward-looking statements. These particular forward-looking statements and all other statements that have been made on this call, 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, 2016, for more information and the risk factors that could cause actual results to differ.

Thank you, Eddie. We posted record results for the quarter as well as our 46th consecutive quarter of improved revenues and profits. For the quarter, revenues grew 6.2% to $450.4 million compared to $424 million last year.

Income before taxes rose 3.2% to $82.6 million compared to $80 million for the third quarter of 2016. Net income rose 3.6% to $51.4 million or $0.24 per diluted share compared to $49.7 million or $0.23 per diluted share for the same quarter last year.

Revenues for the first 9 months grew 6% to $1.254 billion compared to $1.183 billion for the same period last year.

Net income increased 12.4% to $145.4 million with earnings per share of $0.67 per diluted share compared to $129.4 million or $0.59 per diluted share for the prior year period last year.

In the third quarter, all of our business lines experienced growth with residential up 6.1%, commercial pest control grew 4.9% and termite and ancillary rose 10.1%.

We were disappointed, however, with the impact to profitability and revenue that Hurricane Harvey had on several of the company's branches and regions, Southwest and North Texas, South Central commercial or Houston Metro, North Texas, Oklahoma, Louisiana and Mississippi. These areas were negatively impacted by pre-hurricane preparation, flood conditions, closed branches and our inability to service many of our customers.

Hurricane Irma followed starting at the end of August with a similar effect in Florida, Georgia, Alabama, Mississippi again and Louisiana again. John and Eddie will provide more detail on this subject, but I want to personally acknowledge how proud we are of our employees and their response to our customers during these 2 natural disasters. While all personnel were safe, thankfully, many endured significant hardships and some experienced property damage of their own. Their dedication in getting our operations back up and running is admirable.

We have some good news. On August 1, 2017, we completed the acquisition of Northwest Exterminating. Northwest was established in 1951 by the Phillips family and serves approximately 120,000 customers in Georgia, Tennessee, Alabama, North Carolina and South Carolina. The purchase of this outstanding company will expand our presence in the Southeast. Northwest provides significant opportunities both for Rollins and Northwest to grow and learn from each other. We see many benefits from this combination.

And now I'd like to turn the call over to John Wilson. John?

Thank you, Gary. When we lose access to our customers and employees even temporarily, it affects our business tremendously. Hundreds of our associates and thousands of our customers across multiple brands and businesses were impacted by these storms. In several states, as Gary indicated, we experienced damage to operations and the ability of our employees to service many of their customers. Our team members were dealing with closed roads and flooded highways that impacted their ability to reach and safely service those customers in many of the impacted branch areas.

During our highest impact day, 55 of our branches were closed. As an example, our Naples, Florida branch was without power for 2 weeks after the storm passed. We are pleased, however, that our people were unharmed. Many of those were involved were compensated although they were unable to work.

The well-being of our employees is always the top priority for us. Those of you familiar with our company may remember that in 2015, we announced the Rollins Employee Relief Fund, or RERF. This is a nonprofit organization, which we set up to make funds available to employees facing tragedies such as natural disasters like these and medical emergencies or other crises. Over the past several weeks, the RERF committee has worked earnestly, reviewing situations and issuing emergency grants to dozens of Rollins employees affected by Harvey and Irma. I want to personally thank this committee for their support of our employees during the time of need.

Most of our locations in Texas, Florida and other areas in the Southeast are back up and running normally. All of these locations are finding other ways to support customers based on what their particular needs may be. In some cases, we are providing moisture remediation services to homes with serious flood damage. For others, we will be reapplying termite protective barriers due to flooding. And for many others, we're providing mosquito services in the areas primarily where standing water exists.

It is also noteworthy that BOSS, our new branch operating system, was a major benefit to us during these times. It allowed us to run our business remotely, communicate with customers, close out our books in locations directly impacted by flooding and other storm-related factors that caused us to close branches. Even though we wish that we had not needed this flexibility, we are pleased to find yet another benefit from our BOSS investment. Given the challenges that our people faced, our operations performed well, but we all look forward to getting business back to normal.

Speaking of BOSS, with the continued maturation of that system and virtual route management in our operations, our branch locations are changing the way they do things pretty dramatically. We have made brief references in the past to Orkin 2.0, which is what we are calling these transformed branch locations. As technology continues to be added and transactional work is reduced, we are more able to have the frontline branch support teams concentrate on an improved customer experience and a more timely and accurate routing and scheduling of our technicians. We anticipate these changes to be fully rolled out to all branches by Q2 of 2018. Some of the positive outcomes we have witnessed to date are: Improved communication with customers, including more frequent 1-call resolution; fewer incoming calls to our branch locations as our customers are more certain of their schedules; technicians driving less miles, which translates to better customer care and better technician work-life balance; and service managers spending more time outside the branch, coaching and mentoring technicians to name a few.

As we continue to mature in this area, we believe that these efforts will enable us to continue to see margin expansion in the coming quarters.

I would now like to turn the call over to Eddie.

Thank you, John. I also want to add my thanks to all the Rollins employees that helped during the hurricane. Along with John, I want to thank the members of our Employee Relief Fund committee, who showed tremendous diligence and support as they always do for those in need.

While we celebrated new growth through the addition of our latest specialty brand partner, Northwest Exterminating, in the same quarter, we saw demand greatly subside in the most impacted areas from the storm. While we normally refrain from discussing weather on these calls, extreme weather does impact our customers and employees. When homes or businesses are destroyed or significantly damaged, our service delivery is not a priority. Even in the face of the storm adversity, with thanks to the support of our operations teams, we were still able to set record profit and revenue in Q3.

For the quarter, all of our service lines showed growth and improvement keys to the quarter included: Integration of Northwest Exterminating into our company; demand and cost impacts related to the storms; and as John mentioned, accelerated BOSS branch transformation and implementation.

Looking at the numbers, the company reported third quarter revenues of $450.4 million, an increase of 6.2% over the prior year's third quarter revenue of $424 million. We closed on Northwest Exterminating on August 1, the realized 2 months of added revenue.

For the third quarter, as I mentioned, our revenue and expenses were negatively impacted. Income before income tax increased 3.2% to $82.6 million. Net income increased 3.6% to $51.4 million, the difference related to positive tax credit. And earnings per share was up 4.3% to $0.24 versus $0.23 per diluted share last year in the third quarter.

Our revenue for the first 9 months of $1.259 million -- billion is a 6% growth rate. Income before taxes was $226 million, up 8.6%, and net income was $135.4 million, an increase of 12.4%. Earnings per share was $0.67 compared to $0.59 last year, up 13.6%.

Let's take a look through the revenue by service line for the third quarter. Our total revenue increase of 6.2% included 2.3% from several acquisitions of which Northwest was the largest, and the remaining 3.9% was from pricing and organic growth. This 3.9% of organic growth is in line with our 2014 and 2015 growth rates. In total, residential pest control, which made up 43% of our revenue, was up 6.1%; commercial pest control, which made up 39% of our revenue, was up 4.9%; and termite and ancillary services, which made up approximately 17% of our revenue, was up 10.1%. Again, total revenue less acquisitions was up 3.9%. And from that, residential was up 4.2%, commercial increased 3.9% and termite improved 3.3%.

When you take a look at the quarter taking out the impact of foreign currency in total, we grew 5.7%, residential grew 6%, commercial pest control was up 3.2% and termite improved 10.5%. Many of you have asked about the impact of severe weather on pest population as we move forward in time. Coincidently, we recently had a meeting with Dr. Eric Benson, Professor of Entomology at Clemson University, who is renowned for his study of ants. Dr. Benson shared that following Hurricane Hugo in 1989, there was a significant increase later in the ant population. He surmised that their breeding was enhanced due to trees that have come down across the state.

Additionally, many other pests have new moisture-laden areas that create prime environments for pest population expansion.

Finally, our Critter Control and crew tech people advised that when areas are severely storm-disrupted, the natural wildlife often are forced to move to different areas, which sometimes include where people live and work. Animals such as raccoons, possums, bats and others become more visible as they seek new surroundings. As a result, our Critter Control business should see increased demand. Overall, as a result of the hurricanes, we believe that our customers' needs in this regard will increase in the coming months because of these factors.

Another of the pests that will be impacted by weather disruptions are rodents. Dr. Beavers, our Managing Director of Technical Services, and his team have ongoing testing related to new technology and products related to rodent management and rodent control. This team is involved in different stages of testing of dozens of different products and technology and will continue to move forward with properly tested embedded options for our different customers' needs. We are hopeful that we will find better methods for rodent management in the future.

As a result, as Rollins has done successfully throughout the years, the integration of Northwest has begun. Communication is such an important piece of any integration. John and our team, along with the Phillips family, hit the road to get in front of the Northwest team members and to welcome them to Rollins. This group had 23 meetings at 21 locations in 8 days. The results were very positive.

From a business and integration perspective, we've already started the process of margin improvement at Northwest by adopting better materials and supplies-purchasing, using our vehicle leasing discounts and sharing revenue opportunities as well. An example is that Northwest serviced a large regional retail customer and had previously outsourced locations where Northwest did not have a branch present. Orkin branches have replaced those previously outsourced locations, which will help to ensure a more consistent customer experience for this account.

In total, gross margin declined slightly to 51.4% for the third quarter compared to 51.5% in 2016. Our reduction in revenue from the storm, combined with additional costs related to the storms and expenses related to integrating Northwest, impacted the margin. For the quarter, we benefited from improved efficiencies and routing and scheduling with the continued reduction in miles, which helped to lower salaries as a percent of revenue. The gains the company experience were offset by higher personnel-related costs from incorporating acquisitions, additional fleet expenses, which increased due to higher fuel prices and higher leased vehicle costs and materials and supplies, which were higher as we incurred -- as we increased our termite baiting with the addition of Northwest.

Depreciation and amortization expense for the second quarter increased $1.2 million to $14.3 million, an increase of 9.4%. The depreciation portion has continued to subside with the lapping of BOSS, but the amortization has increased with our M&A activity. Depreciation was $6.8 million, increasing $354,000 with most of that increase related to our BOSS software, iPhone and printer depreciation. Amortization was $7.5 million, which increased $876,000 with amortization of intangible assets increasing due mostly to amortized customer contract of the acquisitions of various Orkin acquisitions made throughout the year and Northwest Exterminating.

Sales, general and administrative expenses for the third quarter increased $9.5 million or 7.6% to 30% of revenues, up 0.4 percentage point from 29.6% for the third quarter last year. The increase in the percent of revenue is due to higher sales commissions related to increased revenue, including Northwest, and higher planned outside contractor cost to support continued BOSS and virtual route management enhancements. The increases were partially offset by efficiencies and administrative salaries as a percent of revenues.

As for our cash position for the 9 months ended September 30, 2017, we spent $128 million on acquisitions and $75 million on dividends, an increase of 14.8%. We had $17 million of capital expenditures, which was down 30% from 2016, primarily from the completion of the BOSS project and ended with $113.4 million in cash, down 18.6% from last year. As a reminder, we used all cash for our acquisition of Northwestern Exterminating.

Last night, the Board of Directors declared a regular cash dividend of $0.115 per share and a special dividend of $0.10 per share that will be paid on December 11, 2017, to stockholders of record at the close of business November 10, 2017. The regular cash dividend is at 15% increase over the prior year. This marks the 15th consecutive year the board has increased our dividend by a minimum of 12%. We are off to a good start in the quarter to finish the year on a strong note and to successfully integrate Northwest Exterminating.

I will now turn the call back over to Gary

Thank you, Eddie. Well, we're happy to take your questions at this time.

(Operator Instructions) And we'll take our first question from Dan Dolev with Nomura.

So can you maybe discuss how quickly will you see the organic growth accelerate because of the hurricane? And then I have a follow-up.

So, Dan, I talked a little bit about some of the things from an entomology perspective that we will see over time. I don't know that we've ever had 2 storms of this magnitude back-to-back. Katrina, I think would be the only thing that we could compare that to, which John was very involved with at that point in time. So we know, from an entomology perspective, we're going to see growth in the future in these areas. But I would say is, during John's prepared remarks, he talked about some of the other different activities that the operations have going on separate from what our normal pest control may be. I think the other part of that is going to be, as the residences and as the businesses get back up and running, that's when our services will be needed, and I don't know that any of us know exactly what that will look like over the coming months.

Yes, I might add, Dan, it's really hard to quantify. Early on after these events, what we have is a onetime service revenue that we gain. Much of what I talk about was that. As the areas rebuild, as homeowners rebuild, as businesses rebuild, then we start to add customers in a recurring fashion, which is the organic revenue growth that we're looking for.

Understood. And then last question is, can you maybe quantify the impact of the deleverage of the hurricane and maybe also the M&A? So what would margin should look like (inaudible)?

Dan, we're not going to break that out. These are big competitive markets for us, so we're not going to break that out because that would give a lot of clarity as far as our total revenues and profitability in those areas. It's well into the millions, and the quarter would have looked much more normal had we not had these storms.

We'll take our next question from Jamie Clement with Macquarie.

I just wanted to be kind of clear on what the message was with respect to these communities, cleanup activities and these kinds of things. I mean, I would have to assume that -- I mean, I would assume that you don't have 55 branches still down. But are some branches still down? Or would you expect some residual impact from all of this in the fourth quarter? I would imagine you'd have to, right?

Yes, I'll take that. This is John Wilson. All branches are back up and running. I think I mentioned the number of 55. That was the peak, and that was really only a day or 2 or 3. Our most heavily impacted branch, I would -- term, would be Key West, Florida. And so that branch has been pretty well decimated. The rest are up and running and taking care of their customers as they can and are ready to accept our services. As you can well imagine, when you have your roof torn apart, that's a much higher priority than taking your pest control service. So that's sort of where we are, and it will be a slow build back to where we were.

Okay. And Eddie, I mean, is it -- I mean, is the message that you guys impression of the impact of the storm was that we would have seen a Q3 very similar kind of from year-over-year perspective to the growth rates and profitability that we would've seen? In Q3, we would have seen a similar number of what we saw in the first half of this year. Is that kind of what we're hearing from you guys?

It would've been much closer to that, Jamie, taking into consideration also the acquisition of Northwest and bringing that revenue on, but we also...

Sure.

And the expenses that were related to that as well. So I think if you factor that in and net all that together, I think your statement is probably very fair.

Okay, okay. In terms of...

Maybe Gary would like to add to that.

I'd like to just add this and John touched on it, and it's hard to put a figure on it. But based on our past experience, there will be quite a few termite, what we call boosters done where customers and noncustomers will have to renew their termite barrier. The states typically send out the bulletin to the consumers that and indicate that the termite barrier is at risk. It's very difficult to measure that, but this is again a key learning that we've had from past hurricanes. John touched on the mosquito situation, and we think we're going to get a nice uptick in mosquitoes where we still have standing water. Houston still has standing water. And our moisture and mildew abatement, these homes that were flooded are going to have the structures treated to arrest the mold and mildew. So there's some positives, if you want to look at that, it comes from this, but it's very difficult for us to put a number to that. We just...

Yes. Gary, Gary -- oh sorry, Gary, I'm glad you brought it up because I did have a question about that. If a home is an Orkin-termite customer and the land was flooded brutally and that kind of thing is it their responsibility to repay you to treat the outside of a home? Or do you have to go back and do it on the company's dime.

No, it's really the homeowner's responsibility. But we really do it just about a cost basis. I mean, we certainly -- this is a terrible situation that's happened to our customers, and we don't want to feel like we're preying upon it. So they really get a tremendous benefit, but as I say, the states support this activity so this isn't really something that's inappropriate. It's just obvious that if your surrounding yard is under 3-foot of water for 2 days, you're going to have a deterioration of the termite barrier.

(Operator Instructions) We'll take our next question from Joe Box with KeyBanc.

I apologize, obviously, there's been a lot of questions around just the hurricane impact, but I do want to drill down because you guys aren't explicitly quantifying the impact. Eddie, just to go back to your comment that the quarter would have looked much more normal. I guess, is it fair to assume that normal is something in the tune of about 5% organic growth and then an incremental operating margin in the tune of about 30% to 40%, which is kind of what we saw in the first half of the year?

I would say as long as you take into consideration the Northwest acquisition and again expenses we had related to that and getting them up and running, then I would say it would be much closer. Your statement will be very close to being true.

So on that front, I think you called out, what, $800,000 of incremental amortization?

I believe so.

What were the other integration expenses that we should think about?

What we had legal, that was a big part of that. We had other things having to do with some compensation plans that we put in place that we're not going to break down and disclose. Those are the main items.

So are we thinking a couple of million bucks of Northwest items? If you were to x that out, you'd kind of be at that incremental operating margin of 30% to 40%?

I think that's fair.

Okay, got it. Should we think about there being a cost carryover into 4Q? I think there was good color on how the expense would work for a termite rebuild. But is there any sort of costs that we should be prepared for 4Q?

I don't believe so. I think that worst part is behind us, to John's point. We do have a couple of branches that have been much more decimated than others. You mentioned Key West. Naples Florida was the same. But I think for the most part, the rest of them are back up and running. The expenses that we had were the preparation for the hurricane. In some cases, moving vehicles, closing buildings up. After the hurricane, we had some building repair. We had some other different things that had to go on. But I believe all of that has passed us, and I don't think we're going to have any issues as of right now that we know of having to do with any of the storms.

Got it. And then lastly for me, John, can you maybe talk about the trajectory of margin improvement from installation of this new BOSS module that you're putting in place? I'm just curious if we're getting to a point where maybe we could start to see accelerating margin improvement or margin potential or is it just a steady stream of margin potential as you kind of work through all the different modules that you're installing.

Joe, let me jump in before John gives you some color there. So this isn't necessarily a new module. This is

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Improve customer retention. That's really what we're after.

And there are no further questions at this time.

Okay. No questions, all right. Well, thank you for joining us. We look forward to reporting on our fourth quarter and our year-end results and share our accomplishments in January. In the meantime, we wish you and your family the best of the holidays. Thank you.

This does conclude today's program. Thank you for your participation, and you may disconnect at any time.