Good day and welcome to the Rollins, Inc. First Quarter 2017 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 passcode of 2672355. 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 first quarter 2017 conference call. Eddie will read forward-looking statement and disclaimer, and then we’ll begin.

Our earnings release discusses our business outlook and contains certain forward-looking statements. These particular forward-looking statements and all other statements that have been made on this call, excluding historical facts are subject to a number of risks and uncertainties, and actual risks may differ materially from any 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, 2016 for more information and the risk factors that could cause actual results to differ.

Thank you, Eddie. We’re extremely pleased to have posted record results for the quarter as well as our 44th consecutive quarter of improved revenues and profit. That’s 11 years. I don’t know where the time went. For the quarter, revenues grew 6.4% to $375.2 million compared to $352.7 million for the same period last year. Net income before taxes rose 11.9% to $57.3 million compared to $51.2 million for the first quarter of 2016. Net income rose 26.1% to $40.3 million or $0.18 per diluted share compared to $31.9 million or $0.15 per diluted share for the same quarter last year. While our operating results were outstanding, the higher net income and earnings per share for the quarter were significantly boosted by a lower tax rate, which was mostly related to the adoption of ASU 2016-09, which Eddie will discuss going forward. All of our business lines experienced good growth with residential up 7%, commercial pest control grew 5.3%, and termite rose 7.5%. Our employees service millions of people every year; we’re well aware of how our customers’ lives could be affected by pests that are a health threat. That’s why health and public safety are always top of mind with us. Earlier this morning, CNN -- this month rather, CNN released a study recognizing that the world is at more risk than ever for a global pandemic. And while I’m not on going to draw [ph] on this, material reinforces the importance of the services we provide, both to our customers as well as the public at large. According to CNN’s material, more than 28,000 people were infected with the Ebola epidemic during 2014 through 2016, with over 11,000 deaths and as of March 10th this year, 84 countries have reported Zika transmission. This disease was discovered in the…

Thank you, Gary. As an example of our deep commitment to the further development of our people, this year marked the 20th year of conducting our companywide leadership meeting. In January, we engaged our top managers in team building exercise and reinforced our priorities for the New Year. As Gary voices contentiously, we know we can always do better for the benefit of our customers, for our employees and our shareholders. And we always approach that annual event with that challenge in mind. During this two and a half day conference we participate and exercise that’s focused on improving our operations with the primary objective to improve our customer service experience, specifically through improving our all important employee engagement experience. We know a happy and engaged employee will always deliver a better customer service experience. When I joined the Company 22 years ago, we were a much smaller organization. But thanks to the hard work and dedication of our employees, we have continued to grow year after year. Successfully growing our business depends on our ability to hire the right people, train and then and most importantly to retain them. A tenured, well-trained employee helps to ensure the great customer service experience. Our model is to never disappoint, which well explains our commitment to customer satisfaction. Those of you who attended our analyst day in September last year may recall my having said the one thing that remains the key to our success in the past, present or future will be our people. In order to survive and thrive, we have to maintain the highest standards for those people. Our objective is to hire A players to bring to the Company. We look at every opportunity when we add an employee as an opportunity to improve our team. To accomplish…

Thank you, John. 2017 is off to a very good start. Our operations, both domestic and international are energized as an outcome of our January leadership meeting that John mentioned. All of our service lines showed consistent growth and keys for the quarter included continued margin expansion, updates for the BOSS system which improved overall routing efficiency, processing of termite billing and credit card payments and an ongoing positive tax impact due to accounting standards update ASU 2016-09 related to our stock-based compensation. Looking at the numbers, the Company reported first quarter revenue of $375.2 million, an increase of 6.4% over the prior year’s first quarter’s revenue of $352.7 million. For the quarter, income before income taxes increased 11.9% to $57.3 million. Net income was positively impacted by the tax changes that Gary mentioned, and increased 26.1% to $40.3 million with earnings per share up 20% to $0.18 versus $0.15 per diluted share last year in the first quarter. When you take out the impact of the tax changes, net income rose 12.7% and earnings per share was up 13.1% to $0.17 compared to $0.15 last year. Overall, our operations and sales teams started the year very well, and our BOSS system continues to support additional improvement. In Atlanta, we had more than our fair share of growth disruption of the past few months, and enhanced routing and scheduling functionality has been especially helpful around here. Our routing and scheduling efforts continue to become more mature each quarter they’re in use and our IC [ph] group also continues to enhance the capabilities by automating the route optimization daily and adding capabilities for our call center to have better visibility to branch capacity when scheduling a new customer. This will be extremely useful during our busy time for the year, to…

Thank you, Eddie. We’ll be glad to take any questions that you might have at this time.

Thank you, sir. [Operator Instructions] And we will take our first question from Sean Kennedy with Nomura Instinet. Please proceed.

Good morning, guys.

Good morning.

I was wondering if you could provide a bit more detail on the ASU tax benefit; specifically, what we can expect going forward? Can we expect the lower tax rate in the first quarter, could you just comment on that?

Yes, Sean. So, for us, as I’m sure you are aware that the tax benefit is based on the share price, the difference between the vesting time and the grant time. For us, our stock price has been up. And therefore, we received a tax benefit. So, the $4.3 million will be obviously the biggest impact in Q1. But as I stated below what we would historically see year-over-year as far as tax rates for two through four. And we anticipate the full year rate being slightly less than 37%. And the way that this pronouncement is written, we would see again based on the -- based on the stock price at the time of vesting, we would see similar gains in future years for that.

Great. Thanks for the detail.

Helpful?

Yes, yes, definitely. Also, one follow-up question. Do you have a sense that you’re gaining share versus your competition? And then, could you comment on specifically commercial, residential and pest control?

We believe that we’ve been incrementally growing market share in total for the last several quarters. And we believe a piece of that is because of the digital marketing efforts that our marketing group has had in place that has helped us to be able to reach, especially on the residential side, been able to reach, I think a broader group of customers. And in addition to that, we continue to fine tune on the commercial sales side and continue to grow there as well.

[Operator Instructions] And we will take our next question from Sean Egan with KeyBanc Capital Markets.

I had a quick item on what we can expect to see as far as a reasonable incremental operating profit figure, heading forward, now that we’re starting to get into a lot of the benefit to the BOSS. We’re not trying to be nitpicky here, but it was about 27% this quarter. I think we look for a little more, just kind of looking for a little bit of guidance there.

We know that we’ll continue to see improvements in the overall margin, I think at all levels I think starting with the operating margin and gross margin as well. And of course, we feel that BOSS is going to continue to be able to be a driver of that. We’re not going to give guidance as far as specifics. We’re going to continue to get incrementally better. And I think we continue to find areas or ways where BOSS is going to be able to help us with that. I mean, we talked a lot about the routing, scheduling and on future calls we’ll give some more specifics on what we’re seeing there as far as improvement. But just the fact that IC was able to bolt on with some addition this quarter having to do with termite billing and the acceptance of credit cards by all of our technicians at this point in time. All those things are going to continue to help streamline, both in the operational and the non-operational side as we’re continuing to move forward. So we’ll give some more specifics having to do around the BOSS metrics again on future calls. But we continue to see good improvements in a lot of areas.

Got you. And then, moving to the M&A front. Have you seen valuations rise at all or at least asking prices, given the move in public equities over the last, call it six months?

I mean, there’re lots of companies that we would probably like to have a part of the Rollins family. From a multiple perspective this makes sense to us and other companies that have been buyers that it does make sense. So, we will continue to use the same prudence that Rollins has had in place for years. And when there is a good fit, if the seller’s trying to find the right partners to partner up with that’s when we win. We deployed 40% more capital a year ago than we -- in 2016 than we did in 2015, and that included the Critter Control franchise that we bought in 2015. So, we continue to find good quality partners to match up with and to be able to acquire. Are some of our competitors paying other higher multiples than historic multiples? Absolutely. And you know who some of those are and what those sellers are. But we feel that we will continue to be prudent and as we are continue to find those that make sense both financially and from a cultural perspective, then we will pull the trigger and we’ll move forward.

And if I can add something, we think that we have got really a lot of opportunities in critter control area. People, the franchises have not had an exit program per se; their strategy was just to add franchises and really had very little to help the franchises with their business. We have a full time personnel that really is leading and travelling with the franchisees and sharing key learnings because if we improve their business, they are certainly going to be improving our royalty stream and they are also going to be improving our likelihood of want to buy them when their franchise expires. So, I witnessed waste management come into the industry several decades ago, paid a lot of money, had a lot of different companies to try to put together, had a very difficult time doing so, and then retracted from the industry. I am not saying that’s going to happen again but I did learn a key thing from that is that when you buy these companies, they have different operating systems and different procedures and policies, and you start trying to roll them up and put them together that’s a very complicated difficult endeavor.

[Operator Instructions] And we will take our next question from Joan Tong with Sidoti & Company.

You guys talked about 60% of your new hires is like millennials. And I just want to see if there is any change in employees, turn rate. And also the second question is regarding the receptive -- or reception to technology. Obviously, I can imagine it’s pretty high and that should play to your because there was already new technologies, and the route management and all this new stuff that employees have to use and have Gen X being pretty receptive to technology; I think it should be a benefit to you guys. Can you just comment on those two?

Joan, I’ll give you my view and John is much closer to it than I am. But kind of starting with the latter. You’re spot on. I mean, the technology piece is much easier for the Gen Ys and for Xs, much easier to adopt I think in that perspective. But I got to tell you in my personal interaction with probably 100 plus technicians of all ages, there has been an overwhelmingly positive feel for the technology and for the capability. Gary said it very well. The technology is enabling them to have a smoother day and have a more fulfilling overall involvement with their job because things are more scheduled. So, I think that part is going to definitely be a help. And I think as far as the overall churn rate or retention rate of our employees, it’s relatively the same. And I think that’s part of what, John, was talking about is the onboarding of these employees may look a little bit different. I think it’s the reason why John’s taken that on. John, I don’t know if you want to comment more on that.

Yes. Thank you, Eddie. And the turnover rate, Joan, has not been hugely different between millennials, surprisingly to me. And as a matter of fact, when we looked at it, I learned that baby boomers were the highest. And I suspect that that’s largely because physically as they age, they’re struggling to complete the work or do the job. But it’s not been a huge difference, despite what you hear about the millennials taking a job and leaving it compared to our older workforce. What we want to do is zero in through the various methods that I outlined, and try to improve that, not only with them, but the other categories as well.

Okay. Fair enough. And then, my next question is related to, you talk about investing back to the business. I know that you guys don’t make any proprietary pesticides or chemicals, but in terms of the pest control methods, have that evolved over time with technology improvement? I just wanted to see what you’re doing on that front. And obviously, Gary, you mentioned about mosquitoes. Is it like a new method or new way to improve efficacy to your competitors. They have been pretty vocal talking about enhancing pest control methods, just want to get an idea of what you guys are doing on that front. Thank you.

Well, I think it depends on the pest. Certainly, there’s not been any big technological changes as far as mosquito control is concerned. It doesn’t mean that there’s not some new material around the corner. But so far, there has not been a secret weapon per se. But if you look at some of the other ideas, heat has been a new and different form of pest control, which is very effective in the bed bug area. That has not characteristically been pest control means. They are experimenting now with dry ice as far as rodent and control. They’re trying to take statistics and so forth. One of the difficult things about that is it’s hard to get death counts because when a rodent dies, -- it is going to be complicated to measure the effectiveness. There’s birth control product that’s out being tested now as far as growth rodent control is concerned. I think those things would be the most memorable or remarkable I guess the way to say it. But the industry is evolving. There is major pesticide producers typically. The path of residential pesticide is to agriculture. Agriculture is so much larger than the conventional pest control. And those products are developed and perfected and often they migrate into pest control. But other than those, say those three new forms of technology, there’s not a lot of change they can put.

Okay. Got it.

Joan, if I may, the only thing I might add is commercially, for rodent control, there’s been the development of RFID type of technology for rodent base stations where you can monitor from afar activity. But that’s an evolving piece of technology. We’re still fiddling with that as are others in our industry, just trying to figure out the economics of that. And the concern is always, it doesn’t work what in enough time to react for your customers, particularly sensitive ones like food processing and manufacturing.

Got it. Thank you. And then, one last question, I will jump back in the queue. Obviously the tax discussion from tax plan discussion in front and center today, I just want to get a reminder from you, how much of your business is actually based in U.S. because you did make some acquisitions recently in UK as well as in Australia, just want to get a sense, I believe a majority part of it is generated from the discussion from U.S., just want to get a percentage there.

Joan, you’re exactly right and we listed in our 10, about 93% of our total is in the U.S., so of course we’re paying the U.S. tax rate on that. And historically we’ve had a tax rate that’s been close to full rate at almost 38%. Based on this discussion, we had today, separate from corporate tax reform, based on discussion we had today on our ASU 2016-09, we feel as though that our tax rate will be a percent lowerish than where we have been historically, but yes 93% is in the U.S.

I think you also got a wildcard on what they’re going to do in Washington. Certainly, I think we are well-managed and performing company. And I think that certainly the reduction in our tax rate would help and I would also say, bring foreign money back into the country. We have quite a substantial operation in Canada. And here’s the talk of changing the rules where corporations are more encouraged to bring foreign profits back into the United States. That would certainly be welcomed as far as we’re concerned.

[Operator Instructions]

Okay. Well, thank you. We really appreciate your interest. We look forward to reporting our second quarter results. And I think we’ll have more, as Eddie said, we’ll have some more information with BOSS. I think we now have two regions where our virtual route management automatically is in place; we’ll have more conversion as far as that’s concerned. We think it could be a game changer as far as our business is concerned. Thank you.

And ladies and gentlemen, that does conclude today’s conference. We’d like to thank everyone for their participation. You may now disconnect.