Rollins, Inc. (ROL) Q3 2016 Earnings Report, Transcript and Summary

Good day, and welcome to the Rollins, Inc. Third Quarter 2016 Earnings Conference Call. Today’s conference is being recorded. At this time, all participants are in a listen-only mode. Later we’ll be conducting 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. 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 of 6530216. 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; Rollins’ President and Chief Operating Officer, John Wilson; and Eddie Northen, Vice President and Chief Financial Officer and Treasurer. Management will make some opening remarks and then we will open up the line for your questions. Gary, would you like to begin?

Yes. Thank you, Marilynn, and good morning. We appreciate all of you joining us for our third quarter 2016 conference call. Eddie will read out 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 statements 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 report that we maintained our pace of generating record revenue and earnings results. The third quarter marked our 42nd quarter of improvement. Revenue grew 6.1% to approximately $424 million, compared to almost $400 million in last year's third quarter. Income before taxes increased 10.4% to approximately $80 million, compared to $72.4 million for the third quarter of 2015. Net income rose 10.2% to $49.7 million, or $0.23 per diluted share, compared to net income of $45 million, or $0.21 per diluted share, for the same period last year. Revenues for the first nine months increased 5.8% to $1.2 billion, compared to $1.1 billion for the same period last year. Net income rose 7.4% to approximately $129.4 million, with earnings per share of $0.59 per diluted share, compared to $120.4 million, or $0.55 per diluted share for the prior period. All of our business lines experienced good growth during the quarter with residential pest control up 7%; commercial pest control grew 4.9%; while termite increased 7.2%. Eddie will provide more detail on these numbers in a few minutes. Last month we are privilege to have hosted Rollins Analyst Day at the New York Stock Exchange. It was a wonderful day for members of our senior management team to interact with analysts and investors that follow Rollins. Nine key members of our team enjoyed sharing their fields of expertise and providing greater depth on what is occurring in their area of responsibility. We feel that all involved gained significantly from this experience. It was hard to believe that year-end is rapidly approaching and reflecting on this in our meeting in New York, I’m once again reminded of what a great company we have, great customers and great employees. I realized that I'm a little biased however. The following is a quote attributed to me recently in one of the trade magazines. For me, it summarizes why we have a great company. “If someone ask you what Rollins most important assets are, you would probably answer, our people and our customers”. That's a no-brainer. I would add our culture as number three. You see, I believe that a strong positive and enduring culture is critical to a company’s success. The mantra of our culture is continuous improvement. As I've said numerous times, we all know we can do better. There is not one aspect of our business that we don’t think we can improve, and we all subscribe to that every day, not just in corporate headquarters but around the globe. In August, ahead of schedule, we completed our rollout of BOSS to Orkin’s 400 U.S. locations. We now have an excess of 7,000 pest control and termite control iPhone-equipped service technicians. Our new system is allowing us to communicate at many touch points with our customers, thus improving the customer experience. Our Orkin technicians and employees have a tool now that helps them to do a better job. As a result, we believe that this technology will ultimately lead to improve customer and employee retention. We've referred to BOSS in the past as a game-changer, and we believe that we're just scratching the surface of what will enable us to do as we continue to build our business. One good example of one of these new features is our latest addition to BOSS. The enhanced route management and scheduling tool, Virtual Route Management, or we refer to it as VRM. It allows us to better organize our technicians day and week in the most efficient manner. Further, it will provide our service personnel the ability to reduce miles driven, have fewer fuel stops, and reduce windshield time. Less drive time translates to a better customer experience with more time available to be with an existing customer or new customer just starting our service. Eddie is going to provide you more details on VRM in a few minutes as well. Another great thing about having our 7,000 plus technicians onto an iPhone is it is enabling them to reduce their paperwork. This also enables them to engage more fully with the customer. Our latest phone app called Scalp [ph] is an excellent example of how we are working to provide our technicians with the tools they need to further enhance our customers’ experience. Scalp [ph] provides a collection of Orkin services and pest information available on the technician's mobile device. As good as our technicians are, their occasionally comes a time when they encounter a pests or something in doing a service treatment they haven't experienced. A good example what we call an occasional invader would be nematodes in a pantry. No problem, the technician goes to Scalp [ph] and pulls up a quick video that shows the eight steps necessary to take care of those pest problem. Technicians are the face of our brand every day. And by empowering them to deliver better customer service, we are enhancing their expertise and earnings, and the ultimate result in better customer relationship. This is just one of the benefits of Scalp [ph]. As Eddie mentioned last quarter, we are still assessing how we will address and prioritize implementation of BOSS technology at our independent brands. We'll keep you posted on this. I want to personally acknowledge and thank all the members of our IT and operations team that contributed so much to the successful conversion. During the quarter, we continue to expand our global presence having acquired Scientific Pest Management in Australia. Scientific provides pest control services through owned and franchise partnered companies. The company offers both commercial pest control and termite service, specializing in large contracts. This acquisition gives our Robbins brands’ nationwide coverage and now positions us as of the third largest pest control company in Australia. We also added to our international franchise portfolio having created five new franchises in South America and Asia. Year-to-date, we have established a total of eight new international franchise or today a total of 56 international franchises. Incidentally we also have 50 U.S. franchises. One aspect of our acquisition strategy is our purchase of Critter Control franchises. Our priority for wildlife expansion is to assess the top Critter Control markets in the U.S. and match them up where we have existing to Trutech operations. We then will make a strategic decision on whether we combine our efforts or not. Year-to-date we have purchased 10 franchises. We have identified a list of target markets, and when the opportunity arises, we will methodically expand this program. In the meantime, we still have our company-owned locations to operate under our brand of Trutech. I want to give a big happy birthday shout to HomeTeam, which is celebrating its 20th birthday this year. Over the years, HomeTeam has grown from 13 branches and 180 employees to 50 branches and 1,600 team members. And if that isn't enough to celebrate, let me share one more milestone, we’re just days away from HomeTeam completing their one million installations. Happy 20th. Thank you HomeTeam, we appreciate your contributions to our company. The next time we speak of 2017 as I said at the beginning of my remarks, we think we have a great company for which we are most thankful. We believe that we’ll end the year having accomplished our financial plans and goals. We are thankful for our customers, employees and stakeholders that have been a part of these accomplishments. With that said, I'll turn the call over to you Eddie. Eddie?

Thank you, Gary. I would also like to say thank you to those of you that were able to spend some time with us at our recent Investor Day in New York City. The time enabled us to highlight our greatest asset, our people. On September 20, we introduced our top executives to a group of investors and leading analysts at the New York Stock Exchange. While tests the bed bug sniffing dog almost stole the show, we were able to share the depth and breadth of our management team that is helping to lead this great company. I recently attended a luncheon where a local university professor gave an economic update that shared that as a nation, we are in the 88th month of the economic expansion, and Rollins has exceeded that record of growth with our equivalent of 126 month of growth and improved earnings results. We had a solid 6.1% revenue growth and return to our historical double-digit net income growth at 10.2%. I also want to express my thanks to our IT team for an incredible job rolling out arguably, the most complex project in our company's history. Each of our service line showed sustained growth and key to the quarter included continued strong residential termite and ancillary revenue gains, the largest commercial gain in the past seven quarters and enhanced margin expansion even with the cost for the completion of the Orkin BOSS rollout. Looking at the numbers, the company reported third quarter revenues of $424 million, again an increase of 6.1% over the prior-year's third quarter revenue of $399.7 million. While we do have lumpiness in our quarters, as we had discussed, our nine-month revenue growth is the best in the past five years. For the quarter, income before income taxes increased 10.4% to $80 million. Our foreign taxes were a bit higher than last year due to the growth in our foreign operations, and as a result, net income increased 10.2% to $49.7 million with earnings per share up 9.5% to $0.23 versus $0.21 per diluted share last year in the third quarter. As I mentioned, our results were positively impacted by the very early operational benefit of our investments. Even with the historically high additional BOSS expense pushed into the first two quarters of the year, our year-to-date net margin has expanded 10 basis points. However for the third quarter, the net margin has jumped to an expansion of 50 basis points, which we are very pleased to see. For the first nine months, our revenue grew 5.8% from $1.1 billion in 2015 to $1.2 billion in 2016. Income before income tax grew 8.7% from $191.4 million in 2015 to $208.1 million in 2016. Net income grew 7.4% from $120.4 million in 2015 to $129.4 million in 2016. As I just mentioned, our early operational improvements positively impacted our results. Let's go through an update of how BOSS can potentially impact our future. With roughly half of our branches reaching maturity at some time during the quarter, we are getting more clarity on operational and business improvements related to the technology and we are extremely encouraged. During our Q1 earnings call, we gave an update on some areas where we were seeing some quantifiable improvements, and I want to update these results. While we still have roughly half of our branches that need to move to maturity, we have seen a double-digit reduction in administrative over time, customer pest control retention improved slightly, termite retention improved by mid-single digits, and we believe that our termite renewal improvement is due to more attention spend on the customer and less on administrative tasks. Miles per customer service decreased by low-double digits with the help of turn-by-turn directions given to the technicians. I should point out we have not seen significant impact yet by the rollout of our Virtual Route Management system. In these mature branches, we experienced a greater than 25% improvement in pest control bad debt as the administrative groups were able to concentrate more on collections. We are guardedly optimistic about these results. However we need to have a lot more data before we celebrate. Now that our Orkin operations have finished their rollout, we are prioritizing improvements to enhance functionality of BOSS. One of the first improvements that was added in the quarter was the BOSS iPhone functionality for all of our termite technicians. Up until a couple of months ago, they were still doing everything manually on paper tickets and the posting was still done the next day by branch administrative staff. They are now on iPhone, so all termite technicians are now like our pest control technicians and have paperless and real-time posting capabilities. There will be more updates on our progress to share in future quarters. Let's take a look through the revenue by service line for the quarter. Our total revenue increased 6.1%, which included eight-tenths per percent from acquisitions and the remaining 5.3% was from pricing and organic growth. In total, residential pest control was up which made up 43% of our revenue was up a solid 7%. Commercial pest control, which made up 40% of our revenue was up 4.9%, and termite an ancillary services, which made up approximately 16% of our revenue was up a strong 7.2%. During the quarter, we acquired Scientific Pest Control Company in Australia, which made a slight improvement on our commercial and termite businesses. Again total revenue less acquisitions was up 5.3%, from that residential was up 6.9%; commercial was up 3.6%; and termite was up 5.5%. When you take a look at our domestic revenues for the quarter, in total we grew 5.7%; residential grew 6.9%; termite was up 5.7%; and commercial pest control was up 4.4%. Commercial and termite were most impacted by the weak Canadian and Australian dollars, as most of our business in these countries is commercial. We are now into our sixth year of tracking the impact of bed bug revenue. Our four-legged friend test at Western Pest Control has assigned bed bug duty at only one of our brands, but most of our independent brands and Orkin provides bed bug services. For the quarter, bed bug grew 9.5%, and for the year, bed bug revenue is up over 10%. As experience has increased, we have improved our profitability, and just as importantly, our recurring revenue in this area. Another milestone during the quarter and a byproduct of rolling out BOSS was the completion of training on the Virtual Route Management system that Gary mentioned. This add-on to BOSS has the potential to give us further improvements in the routing and scheduling of our technicians. The program takes the planned work of the technician and optimizes the route travel while addressing known customer request for specific service times. When we first rolled this out to our branches in June, less than 10% of our routes were optimized, and as of September, over 50% of all routes are now being optimized each day. The effectiveness of this new tool will continue to improve in the future. This optimization has a couple of large benefits. First, it gives more structure to the technician today, which enables them to concentrate more on the customer and not the logistics of the day. Second, and arguably more importantly, will enable us to better meet our appointments for customers that have requested service time. The optimizer calculates the time of each service and travel time between the services to better ensure arriving during the committed service window. Our technicians will have more time to concentrate on pest services and less on travel. In total, gross margins for the quarter increased to 51.5% versus 51.1% for the prior year. The margin for the quarter benefited from improved efficiencies that I discussed in routing and scheduling and improved technician productivity that helped to lower salaries as a percent of revenue. The improved pest control technician productivity contributed to a reduction in fleet expenses. Personnel-related expenses were down as a percent of revenue as group insurance and auto liability expenses were down quarter-over-quarter. This was offset by an increase in maintenance agreements and software costs related to BOSS. Depreciation and amortization expenses for the third quarter increased $1.9 million to $13.1 million, an increase of 17.3%. Depreciation was $6.5 million, increasing $1.6 million with most of that increase related to our BOSS software, iPhone and printer depreciation. Amortization was $6.6 million, which increased $362,000 with amortization of intangible assets increasing due mostly to amortized customer contracts of the acquisition of Murray Pest Control and Scientific Pest Control in Australia. Sales, general and administrative expenses for the third quarter increased $3.5 million or 2.8% to 29.6% of revenues, down nine-tenth of a percent from 30.5% for the third quarter last year. The decrease in the percentage of revenue is due to lower administrative salaries and over time as a percent of revenues, which has been helped by the BOSS implementation. Personnel-related expenses were lower as group insurance expense was down and telephone costs reduced as we saw decreases with the change of data service providers. As for our cash position for the first nine months ended September 30, 2016, we spent almost $41 million, up 30.1% year-over-year on acquisitions and paid out $65.5 million in dividends, which is up 25% over last year. We were active with share repurchase in the open market purchasing a total of 835,559,000 shares for a total of $22,718,000. We had $27.1 million of capital expenditures and ended with $139 million in cash, up 3.7% from last year. Last night, the Board of Directors declared a regular cash dividend of $0.10 per share and a special dividend of $0.10 per share both to be paid on December 9, 2016 to stockholders of record at the close of business November 10, 2016. This marks the 14th consecutive year the Board has increased our dividend by minimum of 12% or greater. We are positioned to finish the year on a strong note and I'm looking forward to reporting a good finish to 2016. With that, I'll turn the call back over to Gary.

Thank you, Eddie. Mary, John and I will be happy to answer any questions that you all might have.

[Operator Instructions]. And we'll take our first question from Joan Tong with Sidoti & Company. Your line is open.

Hi Gary, Eddie and John. How are you guys?

Good morning.

Doing well.

Good. I have a bunch of questions here. First off, just want to ask about the BOSS system. Thank you for all the update in terms of the operating improvement metrics. It's really helpful. And with the BOSS system implementation completed and you are now focusing in enhancing functionality and then also like Virtual Route Management looks really encouraging. So I'm just wondering like going into next year, how should we think about any incremental spending in technology, if there is any?

Yes, so Joan thanks for that. As we talked when we were at the Analyst Day, our anticipation at this point in time is to return to the historical norm that we’ve seen. On that day the graph that we showed went back to 2008 and showed our much higher capital expenditures spend when we opened up our call center. And then that graph kind of fast-forwarded through time. You saw kind of the historical norm of capital expenditure spend. Then you saw a spike obviously in 2015 and ‘16 with the BOSS rollout. And we anticipate it returning back to that historical norm. And again as we move forward and if we see anything that's going to be material in nature, we will communicate that ahead of time as far as anything that would deviate from that historical norm.

Okay. Got it. And then for the Virtual Route Management, you talked about that functionality actually improve or optimize 50% of the route. Is there a reason why the rest is not being optimized or you’re just kind of still in the middle of rolling that out to all your Orkin brands?

Yes, so we've gone through the training for all the Orkin brands and now it's a matter of having this become part of the daily routine of what they go through and do. So each branch we are going through and as follow-up training is needed then will continue to do that to make sure that we are maximizing opportunities as quickly as we can. Just like with anything, you have very early adopters and you have others that take a little bit more time to be able to make a change. So this is a relatively material change in the life of a branch where we are having to have routes that are adjusted and changed. And probably most importantly, we have to make sure that we have all of the customer-related service times that need to be locked in that all of those are accounted for. So we want to make sure that as we are going through and we are optimizing that all of that is taken care of. And I think we've had good improvement since the beginning to get over the 50% number and we'll continue to move that forward.

Joan, we also have the ability to know whose is using and who is not. But the great thing is the excitement that the branches are going through is that we haven't had to poke anybody, but do have the ability to know where we stand in every branch.

Got it. I see. Thanks for the update. And maybe you guys can talk a little bit about the lead activities or the operating metrics? And if I recall correctly in the second quarter there was some sort of softness in the lead generation on lead closure, and just want to see if that has improved? And also I have follow-up on Critter Control.

Okay. So Joan if it’s okay, we'll answer this one and then we’ll move on and let someone else get in the queue and please come back into the queue if that's okay with you. But as far as lead generation is concerned, all of our different areas, our termite control, our commercial and our residential, all are a little bit different states, but they are all in the single digits as far as our lead control to low-double digits. So we see lead enhancements continuing to be healthy in all of the different areas and we'll see - we think that we’ll see sales that will continue to move along based on that as well.

[Operator Instructions]. We’ll go next to Sean Kennedy with Nomura. Your line is open.

Hi, good morning guys.

Good morning.

Good morning, Sean.

I was wondering if you could give an update on the size in terms of the revenue of HomeTeam, and also it's grown at install base about little over 10% since ‘07. I was wondering if you could sort of moving trends recently, if it’s accelerating or decelerating from that number?

Yes, so Sean we don't break out the size of HomeTeam at this point in time. We continue to see very positive trends and on previous calls I've given some specifics both the installation improvements as well as the actual revenue improvements. We see HomeTeam growing regularly faster than our total company growth rates, so that's a very positive thing for us. And as we continue to improve on the installations, as Gary mentioned in his remarks, it just gives us that many more opportunities to be able to have potential new customers through time. So all good things from HomeTeam and we’ll continue intermittently giving updates as far as specifics are concerned, but nothing really noticeable to necessarily report outside of the good results that we’ve talked about in previous calls.

Got it. And are you able to give the active customer count?

We are not.

Okay, great. Thanks guys. Great quarter.

Okay. Thank you.

[Operator Instructions]. And we'll pause for a moment to allow further questions to queue.

No more questions?

We do have a follow-up from Joan Tong with Sidoti & Company. Your line is open.

Hi. Yes, the follow-up is regarding Critter Control. It seems like it’s a very nice growth area, and then Gary you touched on that a little bit on your prepared remarks. Can you just like remind us the economics in terms of the benefits of folding that back in or buying back the Critter Control franchisees, and also when you're reaching out to those franchisees just want to see what type of feedback you got from those proposal?

Well, the well-run Critter Control branches have certainly good margins. I mean some of them are better than some of our pest control margins. It's really a great fit for us. Critter Control was the number one brand in the market. We've already seeing big jumps in leads when we updated their internet coverage. They've not been very aggressive in that way and we can benefit from what we've learned from our pest control side. So we are excited. I mean, we - these folks have really never had a buyer per se. The guy that found Critter Control really all he wanted was to have franchises, so I think they have approximately 200.

For the franchise?

Yes.

So about 200.

Yes, so there is 200 franchises, so it's not insignificant. We just think it's a great fit and we also know how to do it. I mean with our Trutech operation, we've had a very good success. And so this is not really getting into something that we are not familiar with. So we're very optimistic about it.

Yes, so Joan since we bought some of those back where, I guess, we're little low over 100 now as far as the total franchises are concerned after we bought some of these back. And of course we bought the master franchise or we had the royalty fees that we were receiving. And to Gary's point, now in these key markets we're able to roll that brand name and the customer base into our existing wildlife operations and we are able to see some very good opportunities by combining those efforts together. And it took us a little while. We purchased them I think February of last year, and we’ve worked through all the economics of it to make sure that we started this correctly when we started the buyback. So it took us almost 10 months before we bought the first one back, so we wanted to make sure that it was done correctly in the right markets for the right price. So now that we have that down, we've been able to go through and get that process started and it's been very positive results for us so far.

Thank you.

Thank you, Joan.

And this does conclude our Q&A for today. I'd like to turn the call back to our presenters for any closing remarks.

Well, thank you for joining us today and we look forward to sharing our fourth quarter and year-end results on our next call.