Rollins, Inc. (ROL) Q4 2016 Earnings Report, Transcript and Summary

Good day, and welcome to the Rollins, Inc. Fourth 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 2262830. 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 at which time all three gentlemen will be available to take your questions. Gary, would you like to begin?

Yes. Thank you, Marilynn, and good morning. We appreciate all of you joining us for our fourth quarter and year end 2016 conference call. Eddie will read our forward-looking statement and disclaimer and then we will begin.

Our earnings release discusses our business outlook and contains certain forward-looking statements. These particular forward-looking statements and all other statements that have been made on this call, excluding historical facts are subject to a number of risks and uncertainties, and actual risks may differ materially from any 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 extremely pleased to the posted record results for the quarter as well as our nineteen consecutive years of improved revenues and profits. For the quarter revenue increased 6.4% to $385.6 million compared to $362.5 million in last year's fourth quarter. Net income 19.7% to $38 million or $0.17 per diluted share compared to net income of $31.7 million or $0.15 per diluted share for the same quarter last year. Revenues for the full year increased 5.9% to $1.573 billion compared to $1.485 billion for the same period last year. Incidentally, the 5.9% increase was the greatest percent increase since 2010. Income before income taxes grew 7.2% to $260.6 million compared to $243.2 million in prior year. Net income rose 10% to $167.4 million with earnings per diluted share of $0.77 compared to $152.1 million or $0.70 per diluted share last year. All of our business lines experienced growth during the quarter with residential pest control up 7.9%, commercial pest control grew 5.5% and termite rose 5.7%. We're also pleased with the growth experienced by our specialty brands and international and wildlife brands all of which reported impressive growth for the year. As stated previously I believe it bears repeating that we think the results underscore the value that we are experiencing in selectively acquiring market leading specialty pest control and wildlife companies. At the same time our ancillary businesses although are relatively small part of our total business continued to perform well. Bed bugs have certainly not going away, although we believe we'll experience a slower growth rate in this business going forward. Earlier this month we released Orkin's Top 50 bed bug cities based on services provided this past year in the leading U.S. metro markets. While these 50 cities have the most treatments last year our Orkin technicians treated for bed bugs in all 50 states as well as internationally. This past year our bed bug revenue increased 10% over the last year. We also experienced growth in our mosquito business. As we have discussed in the past, mosquito borne diseases continue to be an increasing threat around the world. We continue to provide educational materials on the precautions that can be taken to protect against mosquito bites, infestations, and how mosquito populations can be controlled. Revenues for our mosquito business increased over 20% this past year. We continue to make inroads in expanding Orkin's brand recognition to growing our international presence this past year, both through Orkin's expansion in Australia and our entry into the United Kingdom. Also as announced earlier this month in the last quarter of the year we created 17 new international franchises, 12 of these franchises are located in China while the other five are located in Mexico, Ecuador, Bolivia, Malaysia and the Kingdom of Cambodia. All of these franchises will offer commercial and residential pest control, as well as termite services as applicable. With the addition of these new franchises we now have established Orkin's presence in 45 countries through 70 international franchises. Our international expansion is an excellent example of our culture of continuous improvement or in this case continuous expansion. A core element of our culture is a deep commitment to build long-term relationships with our customers based on our quality of service. One means of how we accomplish this is our Listen360 customer feedback surveys where we generate thousands of customer e-mails surveys daily for each of our 600 plus province locations. To enable us to obtain real-time feedback on how our customers view what we're doing, Listen360 organizes customer feedback into three categories; promoters, customers who would recommend us to family and friends; passives, who are neutral; and detractors, those with negative feedback. These scores and rankings by location are shared throughout the company and our people take them very seriously. We are committed to turn any customer with a negative survey to become a promoter and we respond accordingly. Our survey results are provided monthly and we closely monitor our progress from the latest survey results to previous survey findings. We're pleased that in three years that we've had the Listen360 program in place that we've made improvements of over 20% from the positive scores which translate into better customer retention and customer referrals. Our objective is to have over 85% positive promoter's scores and retention of customers for all of our brands. We have a number of operations that are at 85% or better now and are striving to expand that number. As Jerry Gahlhoff, our President in Specialty Brands and the pioneer of this programs has stated, the feedback we get, both good and bad keeps us humbled about our service and focused on ways to improve the customer's experience. We can see exactly what and where our successes and failures are so we can build on our trial and improve on our shortcomings. To further help ensure that we provide the best customer experience as we grow our business we continue to make it a key objective across organization to identify and hire the best employees. We bring them along through our extensive and award winning training, thereby providing them the opportunity to build a satisfying and rewarding career at Rollins. 2016 was a momentous year for our company, one in which employees in North America and around the globe continued to advance our mission to be the best service company in the world. We're even more excited about our prospects for the New Year and beyond. We will continue to make strategic acquisitions that meet our criteria as well as expanding international and domestic franchise. At the same time will be benefiting from the investments we've made, specifically BOSS, our new brand CRM and operating system. BOSS's primary objective is to enable us to improve our customer's experience for the benefit of all of our constituencies. We look forward to sharing our progress with all of you throughout the year. I'll now turn the call over to Eddie who will provide you with more details on our financial results.

Thank you, Gary. 2016 was another incredible year on a lot of fronts which included record-setting financial results during a time of significant change. We successfully wrapped up our CRM BOSS and virtual route management rollouts made several acquisitions, both, inside and outside of the U.S. and made promotional changes in our executive ranks. I cannot be more proud of our sales, operations and support teams for their resiliency during 2016 and their ability to produce these results. Each of our service lines showed the sustained growth and key to the quarter included the best growth rates since 2010, cost savings based on safety improvements and a reduction in medical claims and continued maturity of our new technology and the operations. Looking at the numbers, the company reported fourth quarter revenue of $385.6 million, an increase of 6.4% over the prior year's fourth quarter's revenue of $362.5 million. Before I go through the income results, I want to bring you up-to-date on a change we've made in Canada concerning tax planning. In 2004, Kinro Investments was created as part of Rollin's tax planning strategy. However, recent changes in Canadian Tax Law eliminated the benefit of this strategy and we dissolved Kinro before the end of 2016. As a result a one-time withholding tax expense had to be recognized. This expense which reduced income-before-tax by approximately $9 million was offset by a tax credit of approximately the same amount. Have we not removed Kinro from Canadian taxation, the company would pay approximately an additional $100 million of taxes over the next ten years. Rollins after-tax income and earnings per share for 2016 were not affected by the dissolving of Kinro. For the quarter the pre-tax margin of 13.6 would have been 16.0 without the one-time withholding tax expense, an 11.9% improvement over 2015. As a result for the quarter, income before income taxes only increased 1.4% to $52.5 million, net income was not impacted by the tax charge and increased 19.7% to $38 million with earnings per share of 13.3% to $0.17 versus $0.15 per diluted share last year in the fourth quarter. Our operations performed very well through the quarter but as an organization we also received the benefit of lower personal related expense, primarily healthcare and casualty cost due to improved safety results. At the beginning of 2016, we restructured our risk and our safety groups and are benefiting from those changes. Outside of the cost savings, we believe our improved safety in the area of accidents and injuries will create other opportunities such as improved customer experience with fewer absences of our technicians, less negative impact to the brand and the P&L through decreasing vehicle damage. Additionally, we saw a reduction in personnel related expense, primarily healthcare as we experienced fewer claims than expected during the year. Both of these items are encouraging but as we continue to mature on our virtual route management path, we also know that reduced miles will further help us with our safety and casualty expense. Let me expand a little about the early positive operational results of our BOSS and VRM investments. Even with the historically high conversion and training expense pushed into the first two quarters of the year, our year-to-date net margin has expanded 70 basis points. However, the Q4 taking out the impact of the tax withholdings, the net margin improved a 140 basis points which we were pleased to see partially as a result of our related gains from BOSS and VRMs, also included in this improvement or gains in our casualty and healthcare expenses as I mentioned earlier. As you may recall, January is the month of our annual leadership meeting where our Top 100 leaders throughout North America come together in Atlanta to recap 2016 and get the New Year kicked off. With all of the Orkin branches now on BOSS and VRM, we were able to take quality time to discuss pest control route management best practices and align our priorities for the Orkin operations related to the customer with the use of this technology. For the twelve months, our revenue grew 5.9% or $1.485 billion in 2015 to $1.573 billion in 2016. Income before income tax grew 7.2% from $243.2 million in 2015 to $260.6 million in 2016. Net income grew 10% from $152.1 million in 2015 to $167.4 million in 2016. Again, as I explained the full year income before taxes was impacted by our one-time tax charge to dissolve Kinro and net income and earnings per share were not negatively affected. Let's take a look at revenue and revenue by service line for the fourth quarter. Our total revenue increase of 6.4% for the quarter included 1.2% from major acquisitions and the remaining 5.2% was from pricing and organic growth. In total, residential pest control which made up 42% of our revenue was up very strong 7.9%. Commercial pest control which made up 41% of our revenue was up 5.5% and termite and ancillary services which made up approximately 17% of our revenue was up 5.7%. Again, total revenue less acquisition was up 5.2% and from that residential was up 7.7%, commercial was up 3.7% and termite was up 3.9%. When you take a look at the quarter, taking out the impact of foreign currency, in total, we grew 5.4%, residential grew 7.8%, commercial pest control was up 3.7% and termite was up 4.2%. Commercial and termite were most impacted by that weak Canadians and Australians dollars as most of our business in these countries is commercial. When looking at revenue and its service lines for the full year, our total revenue increased 5.9% and included seven-tenth of a percent from acquisitions and the remaining 5.2% was from pricing in organic growth. In total, residential pest control was up 7.3%, commercial pest control was up 4.4%, and termite and ancillary services was up 6.3%. For the full year total revenue less acquisitions was up 5.2%, from that residential was up 7.2%, commercial was up 3.5% and termite was up 4.8%. When you take out the impact of foreign currency for the year, in total, we grew 5.8%, residential grew 7.2%, commercial pest control was up 4.7% and termite was up 5.1%. Many of you have inquired about our mosquito business and even though this is still a relatively small base of revenue compared to our total. As Gary mentioned, we grew well for the quarter and for the year. When we look back over the past five years, we've grown in the mid-teens range. However we have not and will not market in a way that will be perceived to prey on public fear related to well-known Zika and what's now [ph] virus transmission. Our marketing team will continue to explore ways to solicit and provide this service to our existing customer base. At extremely high retention rate, the benefits of the service speak for themselves from a quality of life safety perspective. We look forward to continued positive results in this area. In total, gross margin for the quarter increased to 50.0% versus 49.7% in the prior year. The margin for the quarter benefited from improved efficiencies and pest control customer routing and scheduling, increased technician productivity and reduced miles driven. Additionally, personnel related expenses were down as a percent of revenue as group health insurance and auto liability expenses were down quarter over quarter. This was all set by an increase in maintenance agreements and software costs related to BOSS Depreciation and amortization expenses for the fourth quarter increased $2.5 million to $13.8 million an increase of 21.9%. Depreciation with $6.9 million increasing $1.8 million with most of the increase related to our BOSS software, iPhone and printer depreciation. Amortization was $6.9 million which increase $648,000 with amortization of intangibles asset increasing due mostly to amortize customer contracts of the acquisition of Murray pest control, scientific pest control in Australia, as well as various Orkin acquisitions throughout the year. Sales, general and administrative expenses for the fourth quarter increased $8.7 million or 7.4% to 32.8% of revenues up, four-tenth of a percentage point from 32.4% for the fourth quarter last year, the increase in the percent of revenue is due mostly to our one-time tax event to dissolve Kinro which impacted us for the quarter by $9 million and increased SG&A by two percentage points. This was partly offset by the lower administrator’s salaries and over time as a percentage of revenue, which is then helped by the BOSS implementation. Personnel related expenses as prove insurance expensive down and telephone call as we call it decreases with a change of data service provider. As for a cash position for the full month ended December 31, 2016. We spent over 46 million over acquisition, of 38.4% year-over-year and included the charges that the change of our special dividend, were total of $109 million paid in dividends, which is up 18.8% over the last year. We were active with share repurchase in the open market during the year, but not in Q4 and purchased for the year a total of 835,559 shares for $22.7 million. We had $33.1 million capital expenditures, and ended with $143 million cash up 5.7% from last year. Last night the Board of Directors declared a regular cash dividend of $0.115 per share that will be paid March 10, 2017 stockholders of record that close the business February 10, 2017. The cash dividend is at 15% increase over the prior year, this marks fifteenth consecutive year the board has increased our dividend by a minimum of 12% or greater. We’re encouraged with the results of 2016 and look forward to 2017. I will now turn the call back over to Gary.

Thank you, Eddie. Well Eddie, John and I are happy to answer your questions, I'm glad to proceed forward.

[Operator Instructions] And we'll take our first question from Joe Box with KeyBanc Capital, please go ahead your line is open.

Hey, good morning everyone. So just from a high level, obviously 2016 was the strongest growth rate that we seem since 2010. I'm curious your thoughts as we get into 2017 X the 1.2% from acquisitions that you had and actually that might just been for the quarter, but X the M&A, I mean do you think that these are sustainable growth levels or should we expect some level of moderation as we finalize our models.

So Joe, I will take that, this is John Wilson. That’s sort of our plan is for them to be sustainable. We don't start any of our years without -- without our plans to get better. We maintain a continuous improvement mindset. So our plan, we think there's sample opportunity out there to continue growing our free service lines of business, they we have.

Okay, and I guess I'm just a follow up on that then. You called out bed bugs is theoretically growing at a lower rate and I guess that's just a small component of your business, but if you look at a lot of the other big drivers for your business, where there be the home team deployments or Mosquito deployment. Are there any kind of big one-time drivers that you might not step up in 2017 anything that we should just be aware of.

I don't know of any single one-time driver. Eddie mentioned and Gary did too about our mosquito business our bed bug business. They are both growing faster than our -- than our regular service lines but they are -- they are not that large. So I don't know of any single thing.

We don’t -- weather-wise we had our share of bad weather, so I think as Eddie shared with you these different segments of our businesses grow with different rates, different times. Which complement each other frankly with we don't have all down, all of the two different degrees. We don't see any big obstacle out there that’s going to knock us off those plans.

Got it. One quick one for you. Eddie you mentioned increased tech productivity, can you just put some numbers around the average stops for technician or maybe revenue per tech. Just to give us a sense of how much it was up in Q4.

We don't -- we don't break that out, we will have technicians that will be in range of 8 to 10 jobs, it will tend on density and role verses urban areas but we are continuing to be better stops per mile from our virtual management system and we're able to see better productivity that's kind of a byproduct out there. So that's what we're -- you know, as we continue to have BOSS become more mature and our last regions went on in August of last year. So as those become more mature, and as virtual management becomes more fully adopted, I think we will see these numbers continue to incrementally get better.

Thank you.

And we will take our next question from [indiscernible]. Please go ahead, your line is open.

Gentlemen, good morning. Gary I don't -- I don't recall ever seeing a press release announcing seventeen franchise starts in a single press release. Can you give us a little bit more color on that and the following questions that would be is are creating new franchises that more of a point of emphasis now and maybe fill us in on some of the economics to get an upfront from nice folks. How is that all work.

Well we did get a kind of an initiation fee. Depending on the population we have for the bases what that first major payment is, we have minimal requirements as far as the payments going forward. We certainly don't want to give in involved in having to audit the books of 50 different businesses. So we have a percent that we get and then we have a minimum. So we feel like we are kind of protective as for the accounting concerned, there's accounting standards that are different from country to country. We've done very well in China, we have a very good relationship with the head of the Chinese pest control authority, which is a government employee, in fact, she came to a month ago and I think that's been helpful. But we've been working, this is not been a quick thing because we've been working in China for five or six years, it just it they all kind of came to head at the same time, they're like 15 or 20 cities over there with five million plus people and most of them most of us don’t even know their names. We think there's going to be a lot of potential, it won't be much residential business, but commercial wise and China's really growing by leaps and bounds and we think it's going to have very beneficial commercial pest control market.

Now did you all the announcement came, I guess the week or so, but I think in your prepared remarks you said these were actually created in the fourth quarter is that it was just a 4Q event or 1Q event.

Jamie, this is a 4Q event.

Q4, okay.

They were added in Q4, which took us total of 70.

Okay, and then just follow the question, when you say most of it's commercial, I mean presumably, I mean these big cities, you've got a lot of apartment buildings; so are these residential apartment buildings that you are all just defining as commercial, is that how we should think about it or am I wrong?

Yes, so Jamie, in most there is outside of the U.S residential pest control is not necessarily -- there not a lot of countries that look at residential pest control something they would pay for, there are some exceptions that the U.K. is an exception, exception of Australia, and there are few others that are out there, Canada is an exception, but most of the other countries it's all do yourself on a residential to a personal perspective. So some of the markets are making some slight changes with that, but for the most part we say commercial, we're talking about food, we're talking about hospitals, other different areas purely commercial perspective. There may be a sprinkling of those buildings that are like that, but for the most part it would be purely commercial residential.

Okay, well, I appreciate the clarification.

And we will go next to Joan Tong with Sidoti. Please go ahead, your line is open.

Hi guys, a very good quarter just have a couple of questions here. Eddie, so the VRM or maybe Gary, for the VRM we are talking about last quarter you said you optimize half of the route. Can you give us a quick update in terms of are you making any progresses, like maybe having that model or that platform to optimized more route and you talk about improvements and productivities, and all that. Just kind of sort of give us an update.

Yes, so that number of 50% Joan moved up closer to 75% of the route been optimized on a daily basis. And again this is just us going through and getting everybody more comfortable with -- with not only the technology itself but with the use of the technology, and have that become part of the daily routine. So as we -- as we're able to continue to do that, we will be able to get more of the, more of the route optimize that front, and in the next step from there is to take the steps that we can to not disrupt those optimized routes, as best as possible. So we're going to continue to see incremental gain that are going to occur. I think quarter by quarter by quarter with that as the branches learn and understand better ways to be able to keep those routes that have been optimized run in the best way to can.

I see.

And Joan, if I may add; so that the savings there with optimizing is the 20% to 25% reduction in miles driven, the benefit the company will show up with our improved fuel cost and wear and tear on our fleet. The big bang for the buck, we feel is an improved customer service and attention to our customers and what we're really working with our teams in the field now, is to just to improve the amount of service time they spending quality come and spend with that customer. So that's what that's all about.

Right. I'm just wondering is there any way to sort of like things some sort of any of you can talk about any tangible like resulting how we measure our customer service and Gary, obviously you mentioned the positive like promotion for and that's one thing. And also that costumer 360 maybe you can incorporate some of those survey results back to the analytics, you have and drive better improvement a customer like experience going forward. Can you just give us a little more color?

Yes, so that's exactly right. The 360 survey scores really we see that correlating with our customer retention metric, and improving that can be big for our company, no question.

Got it. And then obviously very strong like operating margin. If you exclude that $9 million one-time items there, you had talked about 16% like operating margins for a seasonally weak quarter, very strong results and then all of Eddie, you mentioned that some of the reasons behind other than property is the BOSS benefits but also you get some reductions or some gain in their group health, insurance costs and all that. Can you sort of quantify like how much of that expansion margin expansion is related to health care costs coming down? And how much is more sort of the benefit that we are actually seeing on the process?

Yes. So Joan, Q3 we saw an expansion of about 90 basis points, we think that we're continuing to see maturity in the BOSS with VRM, we think that's going to be a little bit better which is -- which is helping with the total net margin that we are operating margin which you see. Those are dollars obviously push back in the previous quarters and you look at the full year margin of the 70 pests I think that is really representative of where we are with it. So I think that Q3 and we had a little bit more maturity in BOSS and VRM, and it proves that 90 basis points I think that's probably more representative of where the quarter would be outside of the casualty and the medical.

I see, got it. And then finally for next year I would say for 2017. I think in the past you mentioned that you would continue to stand in technology to stay ahead of the competitors and making sure good customer experience and all that, and I just want to see if you have any like initiative you can call out that you're planning for 2017 in terms of technology spending, and then maybe you can quantify that in terms of maybe the impact to operating expense. Thank you.

Yes Joan, I think that's a good question. We're still getting down the path of that, we're from this from a strategy perspective, we kind of narrow down about three or four items that we want to continue to spend our time and energy on, and ultimately our dollars on, part of that focus on customer experience. But we've not finalized exactly what that is going to be that time with dollar amount at this point. So we'll keep you informed as we -- as we kind of talk through this as we can figure out next steps, the good news is that we have some good opportunities in a few different areas, and we've got some good folks with great expertise that I think can help us get down these path. So we’ll share more once we get that kind of narrow down.

All right, thank you guys.

Thanks, Joan.

[Operator Instructions] And I'll take our next question from Sean Kennedy. Please go ahead, your line is open.

Good morning guys. My question also concerns growth. How are you finding the current hiring environment in terms of attracting enough quality employees necessary to sustain your growth, has it become more difficult since we've been hearing that and challenging for other companies as employment has gotten tighter generally, thanks.

Yes, Sean this is, Joe Wilson. It is difficult but it always has been, I don't think our industry jumps out it whether its college graduates, recent college graduates or people seeking to leave where they are today to go -- to come work in our industry. So what we what we try to do is have a very defined process around the hiring process and our operations and our branches are taught to follow that pretty rigorously and they turn over a lot of rocks to find those good quality people. And I think the final thing I would say is our greatest source of new employees has been our current employees. We get somewhere near 40% or so of our new employees from referrals of our current employees and we have a reward system that in place that pays them for bringing forward those good people but that's our best source.

Yes, got it. Thanks, but have you -- has it been more difficult lately, have you seen that just as employment gotten tighter or has it just generally been the same.

I think it's generally the same, we still have to turn over a lot of rocks to find the ones we want, but it is I think is still the same.

Sean, it's just how do that, we take a look at retention our employee retention rate and how they have friended and we compare that to the overall unemployment rate, we could do better in the overall employment rate, unemployment rate. So I think to John point, we're having work a little harder but once we're finding those employees were able to -- able to retain at least better than the overall unemployment rate has [indiscernible].

I think I can add one thing to that as far as VRM we're creating a better job for service technicians, there was been a tremendous amount frustration for the technician, getting himself organized, and find out he's in an unfamiliar area and we didn't -- he doesn't live, absolutely he has more capacity because of being better organized, most of our technicians are on a productivity pay plan, so they can make more money and if you have a more satisfied employee, with a better work experience, earning more then you're going to have less turn around.

Great, I got it thanks for the detail guys.

[Operator Instructions] and we have a question from Alex Connelly with SM Investors. Please go ahead, your line is open.

Thank you. I have only one question left at this point which is just [indiscernible]. You are talking about a $9 million charge for the Canadian entity, that's an SG&A. I'm assuming that the contract or the credits that is in provision for income taxes, is that correct?

Yes, it is correct. It would impact the overall tax rate which was lower and ultimately had no impact on the net income, so that’s exactly right.

Alright, thank you so much.

And at this time we have no further questions. I will turn it back over to management for closing remarks.

Thank you for joining us today and we look forward to our new year, and we'll continue to work hard to grow and improve our business. Thanks, again.