Rollins, Inc. (ROL) Q1 2016 Earnings Report, Transcript and Summary

Good morning. And welcome to the Rollins Incorporated First Quarter 2016 Earnings Conference Call. Today's call is being recorded. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. [Operator Instructions] I would now like to introduce your host for today's call, Marilynn Meek. Ms. Meek, you may begin.

Thank you, Tony. 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 pass code 7012944. Additionally, the call is being webcast at www.viavid.com and a replay will be available for 90 days. On the line with me today are Gary Rollins, Vice Chairman and Chief Executive Officer; and Eddie Northen, Vice President, Chief Financial Officer and Treasurer. Management will make some opening remarks and then we'll open up the line for your questions. Gary, would you like to begin?

Yes. Thank you, Marilynn, and good morning. We appreciate all of you joining us for our first quarter 2016 conference call. Eddie will read our forward-looking statements 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 the 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, 2015, for more information and the risk factors that could cause actual results to differ.

Thank you, Eddie. We are pleased to have posted solid results for the quarter, which represents our 40th consecutive quarter of improved revenue and earnings. For the quarter, revenue grew 6.6% to approximately $352.7 million compared to $330.9 million in last year's first quarter. Income before income taxes rose 9.8% to $51.2 million compared to $46.6 million last year. Net income rose 5.4% to $31.9 million or $0.15 per diluted share, compared to net income of $30.3 million or $0.14 per diluted share. I’d like to point out that net income for 2016 did not include a favourable non-recurring tax adjustment present in the 2015 net income figure. All of our business lines experienced good growth during the quarter with residential pest control up 7.6%; commercial pest control grew 4.7%, and termite rose 7.4% for the quarter. This was the best performance in that area in quite some time. Eddie will provide more details on these numbers in a few minutes. As we stated in the past, the strategic acquisitions continue to be an important component in our initiatives to further grow our business. And we are pleased to have closed seven acquisitions in North America this quarter, as well as one in Australia. The acquisitions we made across the US add to our primary service lines: residential and commercial pest control and termite. These companies were located in Southern California, one in Washington state, two in Texas, one in Florida and another in Georgia. Our nationwide branch network provides great merger opportunities with a dispersed graphical group like this. As announced in March, we are pleased to have continued our expansion in Australia with the acquisition of Murray Pest Control, which is based in Adelaide, Australia. This company provides traditional residential, commercial and termite service offerings through a mix of company-owned and franchise operations. This purchase will also give us an opportunity to learn first-hand about Australian franchises. On our last call, we mentioned the nine Orkin international franchises that we had established at the end of 2015. This quarter we expanded our presence in Central Asia with the addition of a new franchise in the Republic of Kazakhstan. One of the investments that we're making in our international expansion plan is the hosting of an annual summit meeting for our franchises from Europe, Central and South America, the Middle East, India and South Korea. This conference provides the opportunity for franchisees in these countries to share successes and to benefit from marketing and sales training, among other topics which help improve their businesses. These meetings are proving to be so valuable that we will be hosting our first summit meeting for franchise owners in the Asia Pacific region next month in Xiamen, China. Closer to home, we're pleased to have hosted here in Atlanta at our Rollins Learning Center a delegation of 22 representatives from the Chinese Pest Control Association, which included the President of the Federation of Asian & Oceania Pest Managers Association. We scheduled this event a day following their attendance at the National Pest Management Association's PestWorld conference in Nashville. The participants were anxious to improve their knowledge of the US pest control market. They spent a day at the center where they were involved in both classroom instruction and hands-on activities. The delegation received a variety of presentations on specific topics and information, including advertising, internet management, marketing and technical subjects. They also heard from several other Rollins departments, fleet, IT, purchasing and so forth which cover the role that each has in our business. It’s proved to be a great experience for all concerned and we look forward to hosting visitors from other pest control associations from around the world. These events provide us excellent networking opportunities. HomeTeam continues to garner business and recognition from its home builder partners. For the fifth consecutive year, HomeTeam received the David Weekley Homes’ Partners of Choice Award. HomeTeam has been a builder partner with David Weekley for 10years and was one of the only eight companies to receive A quality rating last year. They also are the only pest control company ever to receive this award. In addition to this national recognition, several of HomeTeam’s regional operations have also received honors and awards. The company's Fayetteville, North Carolina team earned the McKee Home Quality Vendor award. This coveted award goes to the top five McKee vendors. Additionally, HomeTeam’s San Antonio branches received the Pulte Top performer award for their outstanding service. All of these company teams are to be congratulated. Recognition within our organization doesn’t stop with HomeTeam. At the National Pest Management Association Annual Conference, Dr Ron Harrison of our company was recognized as a winner of the 2015 PCT Syngenta Crown Leadership award. This award spotlights individuals who have contributed positively to the growth and development of the structural pest control industry festival, as well as established ties with fellow business leaders, civic groups and customers. Ron certainly fits all of that criteria more and is very deserving of this important award. Ron serves as Rollins’ technical services director who joined us in 1998 and was instrumental in planning and constructing the Rollins Learning Center. Additionally, he helped develop our curriculum for service, sales and management courses and oversaw introduction of this training to the field. Ron was involved in bringing distance learning programs to more than 400 working branches. Additionally, Ron works closely with industry regulatory agencies, the academic community vendors and the media. Last month, based on his customer service excellence, Waltham Services’ Peter Gorman was named by PC Magazine as commercial technician of the year. This award is sponsored by BASF Pest Control Solutions and recognizes pest, termite and commercial technicians who offer the very best service in the industry. I'd like to thank Ron and Peter for their contributions to our company and our industry. On our last call, the Zika virus had just raised its ugly head and was beginning to gain attention through the US media. In the three months since then, the concern about Zika has intensified. As an example, the CDC stated a couple of weeks ago, everything that we look at with this virus seems to be a bit scarier than we initially thought. And as summer approaches, officials are warning that mosquito eradication efforts, lab tests and vaccine research may not be able to quickly catch up. Most recent CDC report shows 346 cases of Zika have been confirmed in the United States. They recognize that the species of mosquitoes transmitting the virus are present in all or part of 30 states, not just the 12 as originally indicated. Educating the public is an important part of containing the spread of this virus. We invite you to visit our Mosquitoes page or visit mosquitoes101 infographic on the orkin.com section of our website. The information contained there is designed to educate the public about the Zika virus and provides tips to protect one from mosquito bite. Speaking of our website, I'd like to thank everyone in the company involved in the recent upgrade of the Rollins sites. Our sites now contain expanded information on Rollins, Orkin and our specialty brands. For those of you who utilize the investor section, we've added a significant amount of information that we believe will give you a more complete insight into our operation. We're off to a good start for the year and we look forward to discussing our progress with you through the year. I’ll now turn the call over to Eddie who will provide you with details on our first quarter financials and further insights into our initiatives. Eddie?

Thank you, Gary. Record setting revenue growth was a key to our 40th consecutive quarter of improved revenue and earnings results. Behind the record setting results were well executed, targeted marketing initiatives and the performance for our operators, as well we pushed forward successfully on our BOSS system rollout during a very busy time in many parts of our business. We once again had a very strong performance in the first quarter with all service lines showing significant continued growth. Each of the quarter included robust revenue gain, accelerated cadence of acquisition, less currency headwinds that were offset by higher year-over-year BOSS, our new CRM system expense and limited savings from fuel. A one-time 2015 tax event impacted the net income increases this quarter. Looking at the numbers, the company reported first quarter revenues of $352.7 million, an increase of 6.6% over the prior year’s first quarter revenue of $331 million. Our sales and marketing teams continued to do an outstanding job in our balanced growth. For the quarter, income before income taxes increased 9.8% to $51.2 million but in the first quarter 2015 we had a large beneficial adjustment that reduced the effective tax rate that we did not have in the first quarter 2016. Also, our foreign taxes were a bit higher than last year due to the growth in our foreign operations. As a result, net income increased 5.4% to $31.9 million with earnings per share up 7.1% to $0.15 versus $0.14 per diluted share last year in the first quarter. Tax credits are nicer when you get down than when you have to explain them a year later. Our investment involved in the associated implementation and depreciation cost as planned nearly doubled year over year. The BOSS implementation expense will begin to subside towards the end of Q2 and become virtually eliminated towards the end of Q3. We will continue to have our full depreciation moving forward. In addition, our branch operations staffing has been pushed forward in the year with the increased demand that we had seen early in the season. One example following a smaller base is the increased requests for mosquito service, particularly driven by the well publicized concern around Zika. As Gary mentioned, we recently purchased our first Critter Control franchises and we will be incorporating this incredible brand name into our existing Trutech operating model. Whether it’s a need for the removal of raccoon, bats or cute little squirrels that make their way into your home, both Critter Control and Trutech have seen very good double digit growth for some time and the combination of the number one and number two brands in the industry will give us great momentum for growth into the future in the wildlife control category. The combination of these groups moving forward will provide greater efficiency, positive growth opportunities for the brand and an enhanced career path for Trutech employees as they will be able to stay with Trutech or venture into their own new Critter Control franchise territories in currently targeted markets. Let's take a look to the revenue by service line. Our total revenue increase of 6.6% included approximately 7% underlying sales and pricing growth and four-tenths of a percent contribution from acquisition, offset by currency headwinds for approximately eight-tenths of a percent. Residential pest control was up a tremendous 7.6%, commercial pest control up 4.7% and termite up an impressive 7.4%. Our previously announced Q1 acquisitions were featured in during the quarter and Critter Control was the only major acquisition that was included in our numbers this quarter. Our sales teams continued to gain momentum with improvements in the area of commercial pest control, residential pest control, termite and national account. Our National Accounts team has a nice win and pricing in all areas continues to be strong. Again for the quarter, when we take out the impact of foreign currency, residential which makes up 41% of our revenue grew 7.5%. Commercial pest control, which is 41% of our revenue was up 4.6%, and termite, which makes up 17% of our revenue was up 6.7%. As I’ve mentioned to many of you over the past month, today we will be providing more detailed update as to where we are with BOSS, share some lessons learned and our expectations over the Q2. Where we are today. As previously mentioned, we have advanced our rollout and now plan to be complete with Orkin by Q3 of this year and are currently 80% deployed. This means that we have over 4700 iPhones in the hands of our service technicians as of April. This decision impacted our profit growth for the quarter but is setting us up for longer term enhanced profitability sooner. Lessons learned. At this point in time we have four regions that have been involved for over a year. And we've had a chance to compare quarter over quarter results for those branches for the rollout and app. While these results are not seen in all regions, we saw a reduction in administrative overtime by over 20%. Customer pest control retention increased by over 7% with more attention spent on the customer and less on the administrative cap. Miles per stop decreased by over 10% with the help of turn by turn directions given to technician, and a greater than 20% improvement in pest control bad debt as the administrative group was more able to concentrate on the important area of cash flow. Overall results are very encouraging and we look forward to assessing these and other areas into the future. Please realize that these are high points and not branch wide accomplishments. As you would expect, our vision for the future with BOSS is very bright. Because of the BOSS conversion, our call center lead management system of contact360 is now embedded and we have all the benefits of technician scheduling, customer appointment by our call centers sales executive. Our sales force productivity will be enhanced with their systems integration into BOSS. Our sales force will now have full visibility to their higher customer base, can access by vertical or by geography. Today if a salesperson has time between appointment, in most cases they are cold calling, because they do not have visibility to their customer base. With this integration into BOSS, the same salesperson will be able to search their existing customer base in a given geographic area, and take the opportunity to thank their customers for their business and inquire what other services we could provide. The customer now just has a standard pest control. There can be a need for other services. This will be a much more efficient process that will enable the sales force take their excellent results to the next level. From a cost and customer service side, the possibility exists for improving administrative efficiency in some branches from an hour's work perspective. Efficiently we think that there is the opportunity to focus our branch, administrative team to think in more on the customer service and customer experience rather than just the historical clerical item. Another of our benefit is that BOSS is enabling us to take our first step in route and rallying the technicians more efficiently. On previous calls, we've mentioned the virtual route management for BRM and how this can help with our routing capability when implemented. For example, in a few of our Midwest regions, we started the rollout and the limited results have been extremely positive. Our first step is simply taking the work that is scheduled for the day and rallying that in the most efficient or optimized way keeping in mind all customer specific needs and working around them. Based on our initial branch rollout, we have the possibility of reducing miles by 10% to 15% which frees up valuable time for our technicians to ensure they are better meeting service commitments and providing more time to start new customer business which in the spring time and summer is at a premium. None of these sales improvements, productivity gains, routing enhancement, and most importantly customer experience enhancement could be possible without the successful rollout. We're on pace for the 200 to 300 basis point improvement with the execution of this revenue, costs, and customer improvement and excited about the impact BOSS will have on our business. In total, gross margin for the quarter improved 49.6% versus 49.2% in the prior year quarter. Margin for the quarter benefited from lower personnel related expenses as group insurance premium claims were down year over year, lower fleet costs due to the decrease in fuel price, service salaries as a percent of revenue, and better productivity. The margin decreases were partially offset by increased materials and supply usage as we enter our business season. Depreciation and amortization expense for the first quarter increased 8%, totalling $11.6 million. Depreciation was $5.4 million, increasing 803,000 with most of that increase related to our new BOSS system. Amortization was $6.3 million which increased 66,000 due to the addition of Critter Control customer contract that will be amortized over seven years. Sales, general and administrative expenses for the quarter increased $6.7 million or 6.3% but slightly improved to last year at 31.8% of revenue. A reduction in the area of bad debt and ongoing cost containment program were offset by higher seasonal sales salaries needed for the increased volume and increased administrative salaries due to the accelerated BOSS implementation. Including our accelerated BOSS expense, income before income tax was up 9.8% in the quarter and net income was up 5.4% when comparing the favorable tax rate in 2016. Our balance sheet remains strong as we continue to look for more opportunities to reinvest in our business through technology and acquisition. For the quarter, we spent over $21 million on acquisition with the addition of select Critter Control franchises and other pest control opportunities. Our pipeline for M&A is full for the remainder of 2016. We had $9 million of capital expenditures for the quarter and had $131 million in cash along with no debt. Last night the board of directors declared a regular cash dividend of $0.10 per share that would be paid on June 10, 2016, stockholders of record at the close of business May 10, 2016. The cash dividend is a 25% increase over the prior year’s dividend. This marks the 14th consecutive year that the board has increased our dividend by 12% or greater. We’re off to an incredible start to the year and look forward to solidifying our technology improvement, support and improved customer experience coupled with productivity enhancements in the coming quarters. I will now turn the call back to Gary.

Thank you. We're now ready to open the call for any questions which you might have.

[Operator Instructions] We will take our first question from Joe Box with KeyBanc Capital Markets.

So in 4Q you guys actually quantified what the BOSS impact was for the year. I think you said it was a $0.05 drag on 2015. And I apologize if I missed it in the quarter, but can you maybe just quantify what the BOSS implementation was just so we can get a sense of where it is once it updates post 3Q?

So for the quarter, with the implementation cost -- so if you're asking about the partners go [ph] the implementation cost was a little bit less than a penny. And if you remember back in the Q4 call we talked about what we felt like the impact would be pretty usual [ph].

Right, it was expected to be somewhat similar.

That's right.

And then I guess on that same vein, Eddie, you gave some nice steps in the BOSS system so far. I wanted to ask about lead conversion in particular. Are you seeing much better conversion with the ability to plan for your routes better and show up on site in less time? How does that compare for the locations that have been converted versus the ones that haven’t?

So when we take a look at customer retention, we look at that early, compare that also – those results also with the improvement we see from the revenue gain, the pest control retention has been better, pre and post. So we know that by being at the right customer location on the right day the right time, is giving that better customer experience which for us is the most important thing, that we know is going to enable us to be able to continue to retain customer at a higher rate.

And Eddie, if I could add one thing. We also – the BOSS also gives them more time, which in addition to improving their scheduling, it also gives them an opportunity to spend more time with the customers.

And just so I'm clear, are you saying that retention is the same on the backend with existing customers and you're also comparing it to, once a lead comes in, somebody needs some level of service and they're a new customer. And you're able to convert that lead into a customer; is that commonly referred to as retention?

Joe, when I was talking about retention, I am talking about the percent of customers that stay with us on an annual basis. So what we did is we compare the same branch locations, in the same region before they went on BOSS and then after they went on BOSS. And those are the improvements that I was talking about. It’s the improvement in the retention, so customers are retaining and staying with us at a higher rate for the regions that are on BOSS.

That's what I thought. I guess I was more curious on the front end of the calculation, if you're getting a hundred leads, are you now converting 80 whereas before you were converting 70. And ultimately what I'm trying to understand is, has that resulted in a step up in terms of the organic growth that you saw this quarter, are there some other factors that are like weather that might have driven that step up?

Warmer is always better for us, Joe, you know that. That’s always good thing. We are seeing things move on both side, we see the improvement on the BOSS side, we see an improvement as far as our marketing efforts and sales efforts are concerned.

Thank you. Next, we will move to Denny Galindo with Morgan Stanley.

Thanks for taking my question. I want to delve in a little bit into the termite strength. It’s been good for two quarters now, almost like the Q4 strength carried into this quarter. Is anything different happening there, are you gaining share, is the weather just supporting that, on any other color you could give on termite would be helpful.

Denny, termite has been stronger for the last couple of quarters. As we talked in previous quarters, some of that we see as cyclical, a different type of few warmer weeks in one quarter versus another quarter can help drive the numbers one way or another. But our sales group is doing a good job with that. And there they're continuing to grow their sales and they're able to close at a higher rate. They've made adjustments. If you were back on the call maybe three quarters ago, two quarters ago we made a slight adjustment to the organization, the sales group. They’re doing a better job using -- the use of the technology which is enabling us to be able to close at a better rate. So home suite is the technology that our sales group uses. So really we have a better opportunity to put a better product in front of the customer to be able to sell. So before using the technology, before using the home suite, it was a salesperson that was trying to verbalize what the needs were to the customer. And now with the home suite, it gives a pretty visual of where the issues are, what the concerns are and it’s enabling our sales folks to be able to improve their closure rate with use of the home suite. And it was something that we rolled out, we rolled the technology out, knowing that it was a good technology and just kind of assumed that everybody would look at it, know it’s a good technology and use this. And when we went back and look we saw that it wasn't being used at the rate that we would have anticipated and we went through, we did a follow-up training, sales folks clearly understand the benefits of it and we've seen improved sales because of that.

Is there any difference in pricing or I can make a bet versus liquid or anything like that the home suite is allowing you to kind of focus on more by having that product out there?

No, home suite is really not going one way or another with that. I mean that’s really just -- naming it to be able to sell and then where we are in the country and whatever the needs are as far as the customer – decision is made as far as you going one way or another, of course they would look better. The use of the technology has been – again has been good. We’re retaining our sales team at a higher rate than we have in previous quarter as well. I think the combination of all those things are continuing to give us good momentum when it comes to sales team. One, which is the last thing, last quarter one of the things that we talked about was our ability to be able to up on the finance side for customers and we have our in-house financing that we use just purely from a sales perspective, and we are finding that the sales group, at a higher rate and that’s helping them to close and enabling us to grow at a faster pace than what we’ve grown at in the previous quarters.

One other one on mosquito, I've heard some people talk about mosquito could eventually be as big as pest or termite, and you kind of mentioned the Zika virus, so maybe you could give us some details on your mosquito offering, how it's different than competitors, how the kind of the business model is a little different? Is it more frequent visits or less frequent that sort of thing? And then any kind of outlet you have on how big you think that could get this year?

Again it’s a small base for us, it’s growing rapidly, of course with the well publicized Zika virus, is that it’s giving people a reason to call on mosquito but it's not something that we do, and we could live with, it’s something that in a lot of cases, we have existing customers that would use this as another service they would use from us. I talked about our – the use of the BOSS information by our sales group, that's a great example. So we may have a customer that existing testing for customer, we call on them, and they contact with them and then we’re able to go and sell another service at one time. From the frequency perspective, it’s going to be once every other month type of service, and for us – if a customer has the pest control and they want to add on the mosquito, then that’s a very good thing for us from a productivity perspective.

I'd like to add to that. Although the frequency of the number of times if your services is typically five or six depending on the market. But there is clearly a mosquito season and as winter time approaches and late fall and you don't have mosquito. So this is not a twelve month type of service offering. So I think that, to your initial question about is it going to be like termite or conventional residential pest control, because of that limitation, the response to that would be no.

Next we will move to Dan Dolev with ‎Nomura.

Thanks for taking my question. Just to return to termite, those swarm picked up in the spring, it was unclear to me.

I don't think we used the word swarm but the spring time is definitely a better time when it comes for termite. And it has been warmer in a lot parts of the country. So there's definitely demand out there for it. I think the other thing, Dan, that we just talked about, I think are key parts of it, I think the technology piece, the home suite has made a difference, retaining of our sales folks has made a difference. And the ability to be able to finance to close the deal has also made a difference. I think when you compare those nice warm spring time in a lot of areas, that stuff has helped us out.

Can you provide some more color on the very strong acceleration in the residential side despite the toughening compares, what has been driving that?

Yes, residential again, from the sales perspective, has again done very well. Pricing has been good. And the targeted marketing efforts have really given us a chance to be able to know exactly what markets that we would spend our time and energy on and payback dividends for us. Again we kind of combine some of those different things and what our marketers have learned over the last probably four to six quarters, they put in place over the last three to four quarters, we really see the fruits of that, especially in the retention.

Is that sort of a run rate we should be thinking about?

I don't know that we can ever say exactly where it is. If you look back over the last three years you’d see the ebbs and flows of commercial and residential. In 2013 we saw in our residential growing at a faster rate and then in 2014 you saw it slow down some, little bit of cyclicality, commercial growing at a faster rate and in 2015 you saw it reverse again. You saw residential growing faster and we're seeing the same thing as we move into 2016.

Thank you. Next, we will move to James Clement with Macquarie.

Gary, I think that might be a need of a little wildlife control industry 101. If you could indulge me. Strikes me as being an incredibly fragmented industry, perhaps other than Critter Control and Trutech, how fast has this market been growing in your opinion, let's say, over the last five or ten years, how fast do you think you all can grow? And then last question, with respect to the branch -- at the Critter Control franchises that are still out there, both Critter Control requires the right to purchase those at certain intervals, at pre-negotiated multiples of whatever earnings they're doing. Can you just give us a little bit more info on the marketplace?

Well, to give you a fair answer we don't know. This is the first time that this opportunity has come along to this Critter Control franchises. Franchisor that we successfully purchased never had an interest in buying franchises, his whole play was that he wanted to add franchises, he didn't operate. And I think that as a result there wasn't much of a market for these folks to sell. So I think in the range of the acquisitions, I mean there's some very large locations. And there's a very small ones. Our situation is we're trying to look where we have a Trutech operation, where we have merger opportunities. That’d be the first priority. If the big one came along and we didn't have a Trutech operation we certainly wouldn’t acquire that too. So we're just getting our toe in the water so to speak but I think as I told to Eddie the other day I said the jumbo drums are beating with us acquiring two of these there's no doubt that the interest is going to exist and permeate is going to be dramatic, because now they have a buyer. The other good thing about it is, we're not getting into typically a bidding contest. We don’t have, like pest control where you’ve got three other potential buyers waiting in the wings. So I don't mean to deduct the questions, I mean, we will know more next quarter than we know this quarter. The other positive is that we know this business. This isn’t like us kind of getting into something that we're not familiar with. Trutech the number two brand. And the number two -- although they are a distant number two, we have a wonderful opportunity, unlike anything that has come along since I'm been around.

This is Eddie. So something to add to that, the growth rate has been a good double digit growth rate in that category for us. And removal of the animal is a piece of that, but it also opens up a great opportunity for us to take a next step with our customers. And that is to do exclusive work. So it’s one thing to have apps when you're at it and examine, have those bats that are removed, and then it's a whole another service for us to provide to be able to close that off to the back and not go back into that at it. That's whole another service for us. But going in and removing of the animal to start with opens up that opportunity for us to be able to now do that additional service.

Some of the market, you also have depending on the pests, you also have an extended protection plan opportunity much like the people with the washing machines and ovens and so forth that -- there are some pests you can exclude, there are some pests that you can’t exclude. So we're able to offer an ongoing program or at least certainly a program that could go into the second year where they can extend their protection at a disk.

So Gary, not a particularly big market but kind of the mid tier sort of market or maybe even a little bit smaller than that, who are the folks that are actually competing with you all? I've been having a problem trying to figure that out. Is it, somebody calls up another local pest control operator and says, hey, can you fix this and the guy just gives it a shot and quote some price. I am trying to figure out who you compete with.

Jamie, I think most of those folks are going to be one-offs. You’re going to have an individual or two people market. There will be some of our pest control competitors that will have those folks as well. We -- in roughly half of our Orkin branches around the US we have individuals that have a feel that to be able to this as well. That’s kind of the way that we've done it. And other pest control companies have the same type of thing. They'll have kind of hit and miss, they will have somebody that has this buildup, because it is a different buildup to be able to do that.

The other markets that don't have that expertise, Orkin expertise, then they give those leads to some. And now that we've got this Critter Control link, then certainly we can generate revenue as far as these Critter Control branches are concerned. So there's a lot of different synergy there. And I think Eddie makes a good point. The pests have been there, the critters have been there for some time. As some of our branches have just been reluctant to get into that part of the industry and I think that's what we learned about Trutech is, when we had that specialization it wasn't secondary with Trutech. It was primary, and we saw how well it grew and the customer satisfaction rates were incredible. If you’ve got a possum in your ad, you have a wife like mine, you're going to do something about it. So you have a highly motivated customers, almost like customers with fleece they don't want to know much about what it costs, they want to know when can you do it. So that's a pretty dramatic situation as far as, as a motivated purchaser.

Now, Eddie, just one follow up question to the some of the ones that were taken in a few minutes ago. The new financing option that you’re giving to some of your new termite customers. Clearly it's been popular. It sounds like roughly what percent of new termite customers are opting for financing? I mean I don't need an exact number but just sort of rough ballpark.

20%.

So I mean I just want to make sure I'm clear on the accounting, so for customers that use this financing, you guys obviously incurred the cost. And you book the revenue as well, I would assume, are you booking the revenue over the payment period?

So we are booking the revenue when the job is completed. And let me just make sure I am clarifying this, on this piece. The only reason we have this in place is to help with the sales process and to give that option for that. So what we had in place, basically 90 days payment cash for those – to be able to help with getting that deal closed. And this is a piece that has helped us over the last probably three quarters, we’ve moved that in the right direction to be able to help with that.

Thank you. Next we’ll move to Joan Tong with Sidoti & Company.

So questions regarding, again going back to the BOSS system, I just want to make sure I get it right. Understanding on the system this quarter compared to the same quarter last year, was there an increase or about the same?

Joan, it was an increase. Our implementation expenses were much higher. We are implementing now our big division. So West Coast, California, Hawaii, all those higher travel expenses, higher implementation costs, and again we are doing it at a faster pace. So we’ve increased the number of that we are implementing at the same time. So the implementation cost has been higher.

So the implementation cost of this quarter is higher than the same quarter last year. And I think you mentioned about penny, am I correct?

Correct.

And then now it’s 80% of the branches, or the Orkin branches have implemented with BOSS. So I'm just wondering for this quarter, did you actually the margin expansion that we are seeing that 40 basis point expansion, will you characterize that you actually have some sort of benefit like, quantify what type of benefit you actually get from BOSS like for this quarter?

We’re going to have some small benefit, I think, we will see and we've talked about a few of the things that we recognize as far as improvement before and post BOSS implementation, for just a reduction of overtime. We are keeping customers at a better rate, or stop for miles have improved which of course, would mean less gas, less fuel for us, different things like that. So I think there is a sprinkling of what we're seeing as far as some of the benefits. But again we have a very small percent of our total branches and regions that we rolled out that are now moving to the point of being mature. So as we move through the next two quarters is when we will start seeing more of those becoming mature and we will see more of an impact we think on that margin at that point in time.

And then like you mentioned by the end of the third quarter we're going to see everything said and done 100% implemented on the Orkin brand. So we should be able to see some sort of spending etch down a little bit. Is it the right way to think about it? Maybe in the fourth quarter, we can see like spending come down slightly?

So based on everything that we know right now, where we're going, the implementation costs will be reduced or eliminated at that point in time, or depreciation once we are fully rolled out, slightly higher than where we are right now. And we haven’t finalized what our next steps are going to be with the system related to any of our independent branch. So we're still assessing what if anything that we're going to do with that. And once we get to a point of making that final decision, we will communicate that as well. We're basically going through and taking a look to see from a return perspective that it makes sense to spend additional dollars to make adjustment to be able to implement it with the other independent brand. So we're going through that assessment but at this point of time we've not made a final decision of what we’re going to do with that.

And then in terms of routing schedule, you sort of -- you mentioned that plain vanilla routing and scheduling module and then maybe a mobile desktop system or module later on, and is this doing in your words or you guys are pretty happy about what you have right now and you just kind of want to see how it goes before you move on to the next level?

Yes. So the more robust model is basically shown on the table. However we are very happy with the opportunities that we are going to have with the virtual route management. So we know that we're going to be spending the next two quarters getting that rolled out, getting people trained, getting our measurement in place to be able to see it. But I have to tell you, it's been extremely extremely well received by the branch management, branch technician. Having the flexibility of being able to spend more time with the customers, having the ability to be able to ensure that, that technician is not having to change their appointments with existing customers. Because the days that are planned out are being received extremely well. So we're going to move forward with maximizing our opportunities with virtual route management, while in the background we're still looking at the more robust option as we move over time.

And then let's move on to HomeTeam. I think Gary, you mentioned a couple of things about HomeTeam. I'm just wondering like how fast is HomeTeam is growing right now, then the profitability of that division. And then also with housing slowdown a little bit -- housing starts slowdown a little bit in the first quarter, just want to see if there's any impact on HomeTeam, especially on the installation side. Thank you.

Joan, all of the categories you just mentioned, we're not seeing any impact as of right now with anything housing related. I mean their growth rate, top line and bottom line, the housing with the new installs, are all moving forward very well, they are moving forward in the low to mid teens. So we are continuing to see good improvement with HomeTeam.

And then I have a final question regarding competition. Obviously, you want to have your largest share competitors, foreign competitors, have extended footprints in the US. And it's the second quarter into it. I'm just wondering is there any change in competitive landscape? Have you seen them being a little bit more aggressive in terms of pricing?

We haven't. I don’t know that we've really seen that. Our pricing for Q1 was strong across all of the service lines. It’s one of the pieces that our sales group was able to be very successful with. I think the thing to remember when it comes to the other competitors that are out there is, before they move to the – new companies that are with now, we still compete it against them. So we're still competing just like we did with them before. But we really don’t see any issues from a pricing perspective there and we've been very very pleased with how that’s helped us with our overall growth. End of Q&A

Thank you, and it appears we have no further questions at this time.

I'd like to thank you for joining us today. Eddie and I look forward to the next quarter and will continue to work hard to grow and improve our business and I would suspect that we'll know more about BOSS with another quarter under our belt. So thanks again.

Thank you. This does conclude today's conference. You may disconnect and have a great day.