Rollins, Inc. (ROL) Q3 2017 Earnings Report, Transcript and Summary

Good day and welcome to the Rollins, Inc. Third Quarter 2017 Earnings Conference Call. Today’s conference is being recorded. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] I would now like to introduce your host for today’s call, Marilynn Meek. Ms. Meek, you may begin.

Thank you. 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 4560105. 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 and presenting are Gary Rollins, Vice Chairman and Chief Executive Officer; John Wilson, Rollins’ President and Chief Operating Officer; and Eddie Northen, Vice President and Chief Financial Officer and Treasurer. Management will make some opening remarks and then we’ll open up the line for your questions. Gary, would you like to begin?

Yes. Thank you, Marilynn and good morning. We appreciate all of you joining us for our third quarter 2017 conference call. Eddie will read our 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 posted record results for the quarter as well as our 46th consecutive quarter of improved revenues and profits. For the quarter revenues grew 6.2% to $450.4 million, compared to $424 million for the same period last year. Income before taxes rose 3.2% to 82.6 million compared to 80 million with the third quarter of 2016. Net income rose 3.6% to $51.4 million or $0.24 per diluted share compared to $49.7 or $0.23 per diluted share for the same quarter last year. Revenues for the first nine months grew 6% to $1.254 billion, compared to $1.183 billion for the same period last year. Net income increased 12.4% to $145.4 million with earnings per share of $0.67per diluted share, compared to $129.4 million or $0.59 per diluted share for the prior year period. In the third quarter all of our business lines experience growth with residential up 6.1%, commercial pest control grew 4.9% and termite and ancillary rose 10.1%. We were disappointed however with the impact to profitability and revenue at hurricane Harvey on several of the company’s branches and regions, South West in North Texas, South Central Commercial or Huston Metro, North Texas, Oklahoma Louisiana and Mississippi. These areas were negatively impacted by previous articulating preparation flood conditions, closed branches and our inability to service many of our customers. Hurricane Irma followed starting at the end of August with a summer effect in Florida, Georgia, Alabama, Mississippi again and Louisiana again. John and Eddie will provide more detail on this subject but I want to personally acknowledge how proud we're of our employees and their response to our customers during these two natural disasters. While all personnel were safe thankfully, many endured significant hardships in selling experience property damage of their own. Good dedication in getting our operations back up and running is admirable. We have some good news, on August 1, 2017, we completed the acquisition of Northwest Exterminating. Northwest was established in 1951 by the Phillips family and serves approximately 120,000 customers in Georgia, Tennessee, Alabama, North Carolina and South Carolina. The purchase of this outstanding company will expand our presence in the Southeast. Northwest provides significant opportunity both for Rollins and Northwest to grow and learn from each other. We see many benefits from this combination. I would now like to turn the call over to John Wilson. John?

Thank you, Gary. When we lose access to our customers and employees even temporarily it affects our business tremendously. 100s of our associates and thousands of our customers across multiple brands and businesses were impacted by these storms. In several states as Gary indicated we experienced damaged operations and the ability of our employees to service many of their customers. Our team members were dealing with close roads and flooded highways that the impact of their ability to reach and safely service those customers and many of the impacted branch areas. During our highest impacts day 55 of our branches were closed. As an example, our mason Florida branch was without power for two weeks after the storm passed. We are pleased however that our people were unharmed; many of those who were involved were compensated although they were unable to work. The wellbeing our employees is always the top priority for us. Those of you familiar with our company may remember that in 2015 we announced the Rollins employee relief fund, or REIF. This is a nonprofit organization which we set up to make funds available to employees facing tragedies such as natural disasters like these, and medical emergencies or other crises. Over the past several weeks the REIF committee has worked earnestly reviewing situations and issuing emergency grants to dozens of Rollins employees affected by Harvey and Irma. I want to personally thank this committee for their support of our employees during the time of need. Most of our locations in Texas Florida and another areas in the south east are back up and running normally. All of these locations were finding other ways to support customers based on what their particular needs may be. In some cases, we are providing moisture remediation services to homes with serious flood damage. For others we will be reapplying termite protective barriers due to flooding and for many others we are providing mosquito services in the areas primarily where standing water exists. It is also noteworthy that BOSS our new branch operating system was a major benefit to us during these times. It allowed us to run our business remotely communicate with customers close our books and locations directly impacted by flooding and other storm related factors that caused to close branches. Even though we wish that we had not needed this flexibility, we are pleased to find via another benefit from our BOSS investment. Given the challenges that our people faced our operations performed well, but we all look forward to getting business back to normal. Speaking of BOSS with the [contending] maturation of that system and virtual route management in our operations our branch locations are changing the way they do things pretty dramatically. We have made brief references in the past or [4.2.0] which is what we're calling these transforms branch locations. As technology continues to be added and transactional work has reduced, we're more able to have the front-line branch support teams concentrate on an improved customer experience and a more timely and accurate routing and scheduling of our technicians. We anticipate these changes to be fully rolled out to all branches by Q2 of 2018. Some of the positive outcomes that we have witnessed today are improved communication with customers including more frequent one call resolution, fewer incoming calls to our branch locations as our customers are more certain of their schedules, technicians driving less miles, which translates to better customer care and better technician work life balance. And service mangers spending more time outside of the branch, couching and mentoring technicians to name a few. As we continue to mature in this area, we believe that these efforts will enable us to continue to see margin expansion in the coming quarters. I would now like to turn the call over to Eddie.

Thank you, John. I also want to add my thanks to all the Rollins employees that helped during the hurricanes. Along with John I want to thank the members of our employee relief fund committee, who showed tremendous diligence and support as they always do for those in need. While we celebrated new growth through the addition of our latest specialty brand partner Northwest Exterminating, in the same quarter we saw demand greatly subside in the most impacted areas from the storm. While we normally refrain from discussing weather on these calls extreme weather does impact our customers and employees. When home or businesses are destroyed or significantly damaged our service deliver is not a priority. Even in the face of the storms adversity, we thanks to the support of our operations team, we were still able to set record profits and revenue in Q3. For the quarter all of our service lines showed growth and improvements keys to the quarter included integration of Northwest Exterminating into our company, demand and costs impacts related to the storms and as John mentioned accelerated BOSS, branch transformation and implementation. Looking at the numbers the company recorded third quarter revenues of 450.4 million an increase of 6.2% over the prior year's third quarter revenue of 424 million. We closed on Northwest Exterminating on August 1st to realize two months of added revenue. For the third quarter as I mentioned our revenue and expenses were negatively impacted. Income before income tax increased 3.2% to $82.6 million. Net income increased 3.6% to $51.4 million the difference related to positive tax credit and earnings per share was up 4.3% to $0.24 versus $0.23 per diluted share last year in the third quarter. Our revenue for the first nine months of $1.259 billion is at 6% growth rate. Income before taxes was $226 million up 8.6% and net income was 135.4 million an increase of 12.4%. Earnings per share were $0.67 compared to $0.59 last year up 13.6%. Let’s take a look to the revenue by service lines for the third quarter. Our total revenue increase of 6.2% included 2.3% from several acquisitions of which northwest was the largest, and the remaining 3.9% was from pricing and organic growth. This 3.9% of organic growth is in line with our 2014 and 2015 growth rates. In total residential pest control, which made up 43% of our revenue was up 6.1%. Commercial pest control, which made up 39% of our revenue was up 4.9% and termite and ancillary services, which made up approximately 17% of our revenue was up 10.1%. Again, total revenue less acquisitions was up 3.9%, and from that residential was up 4.2%, commercial increased 3.9% and termite improved 3.3%. When you take a look at the quarter taking out the impact of foreign currency in total we grew 5.7% residential grew 6%, commercial pest control was up 3.2% and termite improved 10.5%. Many of you have asked about the impact of severe weather on pest populations as we move forward in time. Coincidently we recently had a meeting with Doctor Eric Benson, Professor of Entomology at Clemson University who is renowned for his study of ants. Doctor Benson shares that following hurricanes [indiscernible] in 1989, there was a significant increase later in the ant population. he surmised that their breeding was enhanced due to trees that had come down across the state. Additionally, many other pests have new moisture laden areas that creates prime environments for pest population expansion. Finally, our critter control and [indiscernible] tech people advised that when areas are severally storm disrupted the natural wildlife often are forced to move to different areas, which sometime include where people live and work. Animals such as raccoons, possums, bats and others become more visible as they seek new surroundings. As a result, our critter control business should see increased demand. Overall as a result of the hurricanes we believe that our customers' needs in this regard will increase in the coming months because of these factors. Another of the pest that will be impacted by weather disruptions are rodents. Dr. Beavers our Managing director of Technical Services and his team have ongoing testing related to new technology and products related to rodent management and rodent control. This team is involved in different stages of testings of dozens of different products and technology and we will continue to move forward with properly tested embedded options for our different customers' needs. We are hopeful that we will find better methods for rodent management in the future. As a result, as Rollins has done successfully throughout the years the integration of Northwest has begun. Communication is such an important piece of any integration. John and our team along with the Phillips family hit the road to get in front of the Northwest team members and to welcome them to Rollins. This group has 23 meetings at 21 locations in eight days. The results were very positive. From a business and integration perspective we have already started the process of margin improvement at Northwest by adopting better materials and supply purchasing using our vehicle leasing discounts and sharing revenue opportunities as well. An example is that Northwest serviced a large regional retail customer and had previously outsourced locations where Northwest did not have a branch presence. Working branches have replaced those previously outsourced locations, which will help to ensure a more consistent customer experience for this account. In total, gross margin declined slightly to 51.4% for the third quarter compared to 51.5% in 2016. Our reduction in revenue from the storm combined with additional cost related to the storms and expenses related to integrating Northwest impacted the margin. For the quarter we benefited from improved efficiencies in routing and scheduling with the continued reduction in miles which help to lower salaries as a percent of revenue. The gains the company experienced were offset by higher personal lead cost from incorporating acquisition additional fleet expense which increase due to higher fuel prices and higher vehicle cost. And materials and supplies which were higher as we encored, as we increased our term line [batting] with the addition of Northwest. Depreciation and amortization expenses for the third quarter increased $1.2 million to $14.3 million, an increase of 9.4%. The depreciation portion has continued to subside with the lapping of BOSS but the amortization has increased with our M&A activity. Depreciation was $6.8 million increasing $354,000 with most of that increase related to our BOSS software, iPhone and printer depreciation. Amortization was $7.5 million, which increased $876,000 with amortization of intangibles assets increasing due mostly to amortize customer contract of the acquisition of various Murray acquisitions made throughout the year and Northwest Exterminating. Sales, general and administrative expenses for the third quarter increased $9.5 million or 7.6% to 30% of revenues up four times of the percentage point from 29.6% for the third quarter of last year. The increase in the percent of revenue is due to high sales commissions related to increase revenue including Northwest and higher planned outside contractor cost to support continued BOSS and virtual route management enhancement. The increases will partially offset by an efficiencies and administrative salaries as a percent of revenues. As for our cash position for the nine months ended September 30, 2017 we spent 128 million on acquisition and 75 million on dividend an increase of 14.8%. We had 17 million of capital expenditures which was down 30% from 2016 primarily from the completion of the BOSS project and ended with a 113.4 million in cash down 18.6% from last year. As a reminder we use all cash for our acquisition of Northwest Exterminating. Last night the Board of Directors declared a regular cash dividend of $0.115 per share and a special dividend of $0.10 per share that will be paid on December11, 2017 to stockholders of record at the close of business November 10, 2017. The regular 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 good start in the quarter to finish the year on a strong note and to successfully integrate Northwest Exterminating. I’ll now turn the call back over to Gary.

Thank you, Eddie. We are happy to take your questions at this time.

[Operator Instructions] And we will take our first question from [indiscernible] with Nomura. Please go ahead. Your line is open.

So, can you maybe discuss how quickly will you see the organic growth accelerate because of the hurricane? And then I have a follow up.

I have talked a little bit about some of the things from an entomology perspective that we will see overtime. I don’t know if we ever had two storms of this magnitude back to back, Katrina I think would be the only thing that we could compare that to which John was very involved with at that point and time. So, we know from an entomology perspective we are going to see growth in the future in these areas, but I would say -- during John's prepared remarks that he talked about some of the other different activities that the operations have going on separate from what our normal pest control may be. I think the other part of that is going to be as the residences and as the businesses will get back up and running that’s when our services will be needed and I don’t know any of us know exactly that will look like over the coming months.

I might add again it's really hard to quantify early on after these events what we have is one-time service revenue that we gain and much I talked about was that. As the areas rebuild as home owners rebuild as businesses rebuild then we start to add customers in a recurring fashion which is the organic revenue growth that we are looking for.

And then my last question is, can you may be quantifying the impact of the deleverage of the hurricane or maybe also of the M&A, so what would margins look like [indiscernible].

We are not going to break that out. These are big competitive markets for us. So, we are not going to break that out because that would give a lot of clarity as far as our total revenue and profitability in those areas. It's well into the millions and the quarter would have looked much more normal, had we not had these storms.

We will take our next question from Jamie Clement with Macquarie. Please go ahead. Your line is open.

I just wanted to be clear on what the metric was with respect to these community's cleanup activities and these kinds of things, I would have to assume that -- I would have assumed that you have 55 branches still down but are some branches still down or would you expect some residual impact from all this in the fourth quarter, I would imagine you have to right?

Yes, I'll take that. This is John Wilson. All branches are back up and running, I'll mention the number of 55 that was the peak and that was really only a day or two or three. Our most heavily impacted branch, I would determine would be Key West Florida and so that branch is been pretty decimated, the rest are up in running and taking care of their customers as they, as they can and ready to accept our services, as you can well imagine when you have your roof torn apart, that’s a much higher power taking your pest control service. So that’s sort of where we are and it will be slow [bill] back to where we were.

Okay and Eddie again, is the message that you know, you guys impression of the impact of this storm was it, we would have seen a Q3 very similar kind from year-over-year perspective in the growth rate and profitability that we would have seen it. In Q3, we would have seen a similar number what we saw in the first half of this year, is that kind of what we're hearing from you guys.

It would have been much post to that Jamie, taking the consideration also the acquisition of Northwest and bringing that revenue on but we also, make sense that we related that as well. I think if you factor that in and net all that together, I think your statement is probably very fair.

I would like to just add this, and John touched on it and it's hard to put a figure on it but based on our past experience, there will be quite a few termites what we call boosters done, where customers and non-customers will have to renew their termite barrier, the states typically send out the bulletin to the consumers that indicate that the termite barriers at risk, it's very difficult to measure that but this is again a key learning that we had from past hurricanes. John touched on the mosquito situation and we think we're going give a nice uptake in mosquitoes where we still have stand water and Houston still has standing water. And our moisture and [mildew] abetment, these homes that were flooded are going to have to have the structures treated a rest, the mold and mildew, so there is some positive if you want to look at that it comes from this, but it's very difficult for us to put a number to that.

Garry I'm glad you brought that you, I do have a question about that, if a home is a [indiscernible] termite customer and the land was flooded brutally and that kind of, is it their responsibility to repay you to treat the outside of the home or do you have to go back and do it on the company’s dime.

No, its really the home owner's responsibility but we really do it at just about a cost basis, this is a terrible situation itself into our customers and we don’t want to feel like we are preying upon it. So, they really get a tremendous benefit but as I say the state support this activity, so this isn’t really something that’s inappropriate, it is just obvious that if your surrounding yard is under deep little water for two days, you're going to have a deterioration of the termite barrier.

[Operator Instructions]. We will take our next question from Joe Box with KeyBanc. Please go ahead. Your line is open.

apologize obviously there is a lot of questions around just on hurricane impact but I do want to drill down because you guys aren’t explicitly quantifying the impact. Eddie just to go back to your comment that the quarter would have looked much more normal. I guess is it fair to assume that normal is something in the tune of about 5% organic growth and then an incremental operating margin in the tune of about 30% to 40% which is what we saw in the first half of the year?

I would say as long as you are take in consideration the northwest acquisition and again expenses we have related to that and getting them -- seeing them up and running then I would say it would be much close and your staking will be very close and true.

So, on that front I think you called that what $800,000 of incremental amortization?

I believe so.

What were the other integration expenses that we should think about?

Well we had legal that was the big part of that. We had other things having to do with some compensation plans that we put in place, that we are not going to breakdown and disclose. Those are the main items.

So, are we thinking $2 million box of Northwest items, if you would ex that out you would kind of be that incremental operating margin of 30 to 40?

I think that’s fair.

Should we think about there being a cost carryover in the 4Q I think that was a good color on how the expense would work for a termite rebuild but is there any sort of cost that we should be prepared for 4Q?

I don’t believe so. I think that worse part is behind us to Johns point we do have a couple of branches that have been much more decimated than others, he mentioned Key West, Naples Florida was the same. But I think for the most part the rest of them are back up and running the expense that we had were the preparation for the hurricane in some cases moving vehicles closing buildings up. After the hurricane we had some building repair we had some other different things that had to go on. But I believe all of that has passed us, I don’t think we are going to have any issues as of right now that we know of having to do with any of the storms.

And then lastly for me, John can you maybe talk about the trajectory of margin improvement from installation of this new BOSS module that you are putting in place. I'm just curious if we are getting to a point where maybe we could start to see accelerating margin improvement a margin potential or is it just a steady stream of margin potential as you work through all the different modules that you are installing.

Hey Joe let me jump in before John gives you some color. So, this isn’t necessarily a new module this is a [audio gap] improved customer retention that’s really what we are after.

And there are no further questions at this time.

Thank you for joining us. We look forward to reporting on our fourth quarter and our year end results and share accomplishments in January. In the meantime, we are wishing you and your family the best for the holidays. Thank you.

This does conclude today's program. Thank you for your participation and you may disconnect at any time.