Rollins, Inc. (ROL) Q1 2017 Earnings Report, Transcript and Summary

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 1940s but had its first outbreak in 2007 in Micronesia and really began spreading toward the end of 2015. As the U.S.’s largest or one of the largest providers of residential mosquito service, we feel that we have an important role in protecting and educating the public concerning this pest. We routinely provide mosquito information through our internet sites and other means with guidelines on how people can reduce the risk of having a mosquito problem. When there are significant instances of record-setting heat and flooding events as were recently experienced, regrettably, they create the ideal opportunity for mosquito infestations along with exposure to accompany transmitted illnesses and disease. In order to ensure that we stay at the forefront of mosquito research and data, we partner with numerous related organizations and universities. Most recently members of our Orkin technical service team attended a two-day event hosted by the Centers for Disease Control and Prevention. The purpose of this gathering of experts from around the world was to share scientific and practical initiatives on reducing the incidence of disease transmitted by the mosquito, specifically Aedes aegypti, this mosquito is also known as the yellow fever mosquito. Discussions centered primarily on Zikas, dengue, and chikungunya virus with those are [indiscernible]. We have been a collaborative partner with the CDC since the early 2000 on a wide range of initiatives including developing educational pest related material, field pest elimination project, participating in research studies, conducting Train the Trainer courses and jointly providing public service messages about pest prevention measures. We are convenient to these collaborations and initiatives of public service, while internally providing our technicians with the best products and industry-leading training. This enables us to deliver safer and more effective pest protection for all of our customers. Well, enough about pest and related health initiatives. I would like to now turn the call over to John.

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 this, we consider many candidates, and prior to inviting them to join us, we spend a lot of time learning about them and educating them about us, our Company and its culture. We are looking for the ideal fit. Notably, our employee demographics are rapidly changing. Last year, over 60% of our new hires were millennials, born between 1982 and 2000. Recognizing the significance of this, we engaged Jason Dorsey, as our guest speaker at the leadership meeting. Jason is a highly recognized authority on millennials and Gen Y. Jason provided great insight about this group of individuals and how we can mutually benefit as they join our workforce. We believe the evolution we are experiencing in our workforce can have tremendous upside for our customers and our business. But we recognize, in order to retain these new hires, we have to be more knowledgeable of their characteristics and adapt accordingly. That challenge begins with their first day on the job. To that end, we’re improving our onboarding and new hire orientation processes. This introduction helps provide them a sense of belonging to our Company and to better understand our culture. We’re also surveying our new hires at regular intervals to gauge how they feel about their experience with us and to ensure that appropriate initiatives are being implemented in the field. In summary, we feel strongly that we need to stay connected with our changing workforce to ensure that we can continue to attract and keep top talent at our company. With these changes, our shared and other initiatives, we’re seeing good improvement in employee retention, which as we have explained in the past, results in higher customer retention. In that regard, we were extremely honored this year to have been recognized as one of our areas’ top workplaces by The Atlanta Journal-Constitution. The top workplaces lists are based solely on the results of an employee survey administered by WorkplaceDynamics, a research firm that specializes in organizational health and workplace improvement. Special aspects of workplace culture were measured, including alignment, execution and commitment. This was a great recognition for us and is another example of our Company’s commitment to our employees and their future. This time every year, we enjoy viewing our latest commercials, which began airing last month. They help us deliver Orkin’s primary branding message of Pest Control Down to a Science. This year’s subtheme, Every Home is Unique, supports that branding message. Let me take a moment to share one or two of my favorites with you. One commercial centers around a neat freak that his house is really, really clean but as the home owner discovers, pests can still find their way into even the neatest of homes. Enter the Orkin Men with his great knowledge and scientifically-based treatment. But those of you familiar with the new trend in the growing population living in tiny houses, you’ll discover that rats can find their way into these unique homes quite easily. Again, the Orkin Men to the rescue. Hope this entices you to take a moment to view these unique commercials. Before handing the call back to Eddie, I wanted to note a couple of promotions which recognize our management strength and depth. Mitch Smith has been promoted to Division President Orkin South Central Division. Mitch began his Orkin carrier as a branch manager in 1989 and has risen through the ranks during his tenure having served as Regional Manager, Regional Vice President and most recently, Division Vice President. Brady Camp was promoted to President of our HomeTeam Pest Defense. Previously, he served as Vice President of Operations and Division Vice President of HomeTeam’s Eastern operation. Speaking of HomeTeam, last month, they achieved a significant milestone of having 1 million installations of their Taexx built in pest control system. This accomplishment emphasizes the strength of HomeTeam’s relationship with its over 1,000 home builders nationwide, which include the top ten national home builders. Congratulations to Mitch, Brady and HomeTeam. I’ll now turn the call back to Eddie.

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 ensure we’re improving the initial customer experience that we provide. Another IC improvement related to customer experience is the enhanced functionality of accepting credit cards by our technician through the BOSS application. This was -- this has improved the payment process for both the customer and our operations for many of our accounts. And finally, the use of the BOSS system to complete the billing of our termite customers has improved this entire process. We anticipate continued customer and financial benefit as we move throughout 2017. Let’s take a look to the revenue by service line for the first quarter. Our total revenue increased of 6.4% included 1.2% from acquisition and the remaining 5.2% was from pricing and organic growth. In total, residential pest control which made up 41% of our revenue was up 7%. Commercial pest control which made 41% of our revenue was up 5.3%. And termite and ancillary services which made up 18% of our revenue was up a very strong 7.5%. Again, total revenue less acquisition was up 5.2%; from that residential was up 6.8%, commercial up 3.4% and termite was up 5.8%. When you take a look at the quarter, taking out the impact of foreign currency, in total, we grew 5.3%; residential grew 6.8%; commercial pest control was up 3%; and termite was up 6.3%. Commercial was most impacted by the weak Canadian and Australian dollars as most of our business in these countries is commercial. Bed bug revenue continues to grow at a faster rate than our Company growth rate. For Q1, our bed bug revenue grew at 9.3%. Our data analytics continues to help us to set the best way to grow recurring bed bug revenue and to improve our profitability. Each of the last several quarters, we have continued to improve our sales process to ensure we are prioritizing the right customers to grow this product the best way for both the top and bottom line. I mentioned the efforts our marketing and advertising group last quarter, and I hope that you’ve had a chance to see their most recent work. In addition to what John mentioned, we have featured our Orkin woman in a great termite fight and have run our first ever ad dedicated to mosquitoes with the theme of taking your yard back. We believe these efforts will help to continue to drive our termite and pest control demand as we move throughout the year. In total, gross margin for the quarter was flat the last year at 50.4%. The margin for the quarter benefited from improved efficiencies in routing and scheduling, which helped both service and administrative salaries as a percent of revenue. In addition, personnel related expenses were down as a percent of revenue as group insurance and auto liability expenses were less quarter over quarter. This was offset in part by an increase in fleet expense with higher fuel prices. While the cost per gallon for Orkin increased $0.44, the miles driven per vehicle were down 2.8% as a result of our improved efficiency from enhanced routing and scheduling through the virtual route management system. Depreciation and amortization expenses for the first quarter increased $2.1 million to $13.8 million, an increase of 18.3%. Depreciation was $6.9 million, increasing $1.5 million with most of that increase related to our BOSS software, iPhone and printer depreciation. Amortization was $6.9 million, which increased $597,000 with amortization of intangibles asset increasing due mostly to amortized customer contracts of the acquisitions of Murray Pest Control, and Scientific Pest Control in Australia, as well as various Orkin acquisitions throughout the year. Sales, general and administrative expenses for the first quarter increased $2.9 million or 2.6% to 30.7% of revenues, down 1.1 percentage points from 31.8% for the first quarter last year. The decrease in the percent of revenue is due to improvements administrative salaries and overtime as a percent of revenue which has been held by the BOSS implementation. This expense was offset by planned higher sales salaries and advertising expenses. Let’s take a minute on the tax impact. For the quarter, the effective tax rate in 2017 was 29.7% versus 37.6% in 2016. The decrease was primarily due to the adoption of financial Accounting Standards Board Update number 2016-09, also known as ASU 2016-09, which recognizes the excess tax benefit of stock-based awards as a reduction to income tax expense instead of the previous methodology, which reported the benefit on the balance sheet. The adoption of this standard generated a $0.01 benefit to the earnings per share in the quarter. We expect the effective rate to be slightly less than the last year number for quarters two, through four. The Company is currently projecting an effective tax rate of below 37% for the 2017 year. We expect to see continuing favorable volatility in the first quarter’s tax rate for the next several years. Most of our Company’s stock grants vest in the first quarter of each year. As for our cash position for the three months ending March 31, 2017, we spent over $3 million on acquisitions and $25 million on dividends, up 14.7%. We had $5.3 million of CapEx, which was down 39.1% in 2016, primarily from the completion of the BOSS project and ended with a $162 million in cash, up 32.7% from last year. Last night, the Board of Directors declared a regular cash dividend of $0.115 per share that will be paid on June 9, 2017 to stockholders of record at the close of business, May 10, 2017. The cash dividend is a 15% increase over the prior year. This marks the 15th consecutive year the Board has increased our dividend by a minimum of 12%. We’re off to a great start and are well-prepared to continue to move forward in 2017. I will now turn the call back to Gary.

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.