Rollins, Inc. (ROL) Q4 2017 Earnings Report, Transcript and Summary

Good day and welcome to the Rollins, Inc. Fourth 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 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 6022650. 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, 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 fourth quarter and 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. For the quarter revenue grew 7.5% to $414.7 million, compared to $385.6 million for the same period last year. Income before taxes rose 30.5% to $68.5 million, compared to $52.5 million for the fourth quarter of 2016. As a result of the new Tax Act net income declined 11.2% to $33.7 million or $0.15 per diluted share, compared to $38 million or $0.17 per diluted share for the same quarter last year. However, without these significant tax related items net income increase 19.2% and earnings per share were up 23.5% to $0.21. Revenues for the full year grew 6.4% to $1.673 billion compared to $1.573 billion for the same period last year. Net income increased 7% to $179.1 million with earnings per share of $0.82 per diluted share, compared to net income of $167.4 million or $0.77 per diluted share for the prior period. Again, without the significant tax-related items for the year, net income was a $190.7 million, up 13.9% with earnings per share of $0.87, up 13%. Eddie will review in a few minutes the specifics on the negative impact of the Tax Act to our financials for the past quarter. All of our business lines experienced good growth in the quarter with residential up 6.9%, commercial pest control grew 5% and termite and ancillary rose 15.6%. In summary, 2017 was an excellent year for our company as we continue to execute our strategic plans and goals. These are initiated to our culture of continuous improvement in all we do. We remain committed to service improvement and employee development and are accomplishing both. In the past year, we had 12 international franchises to our network as we continue to increase our presence around the world; we also advanced our acquisition strategy having added Northwest Exterminating which was discussed in our last call in several small tuck-in acquisitions. We greatly improved our routing and scheduling capabilities resulting from the implementation of BOSS and its virtual route management features. John will elaborate on this shortly. Those of you are familiar with our company know that we recognize there's always room for improvement in all we do. We will continue to raise the bar in 2018 and look forward to taking our company to the next level. I’d like now to turn the call over to John Wilson, our Rollins’ COO and President.

Thank you, Gary. We are pleased to report the BOSS, our branch operating system, moved to full implementation for Orkin in 2017. And with this system in place we’re able to add the virtual route management software that has began to improve our technicians routing and scheduling of their customers. Many of the homes are technicians service are made of double income households, and as a result those customers expect reasonable and accurate arrival windows to accommodate their busy schedules. It is essential that our technicians are where they are supposed to be when they are supposed to be there. Scheduling is one the toughest tasks our people face due to constant and daily changes as new customers begin service or existing customers request an additional service or an appointment change. With the aid of this routing and scheduling tool we can improve delivery of our services to our customers by being there when they expect and want us to be. At the same time we are better able to build the most efficient schedules for our daily service. Further, this routing and scheduling tool has improved our miles driven which helps to offset any increase in fuel prices and vehicle-related costs. Our results today show reduction of average miles per stock by half mile. This may not sound like much until you multiply that by the more than 880,000 unique customer visits we perform each month. The 440,000 miles save both reduces wear and tear on our vehicles and saves our technicians thousands of hours of drive time. This effort also contributes to reduced accidents and lower employee turnover. But most importantly it improve our customer experience through better on-time service performance and living up to our promise of being there when we say we will be there. We will continue to move BOSS and the virtual route management capabilities forward and expect to see continued benefits during all of 2018 and beyond. For those of you that have followed the Rollins story for years you know that in 2010 we began enjoying revenue growth due to bed bugs. Since that time we have learned a lot about not only the revenue potential of this pest service, but the profitability of our offerings. Our marketing, sales and technical services groups have worked together over the past year to improve this service line and I'm pleased to announce the launch of our commercial ProAct bed bug offering. Orkin Bed Bug ProAct is an innovative proactive bed bug service developed specifically for the hospitality industry. ProAct creates an ongoing defense against bed bugs and hotel guest rooms that helps reduce the likelihood of costly bed bug infestations and lost customer revenue. The services performed by our trained specialists using residual products that create an effective barrier between service visits, which can now be scheduled as much as six months apart. The net takeaway with the ProAct in our testing is it reduces emergency service visits and hotel room downtime. We pinpointed three key benefits of ProAct that are unattainable with conventional bed bug service treatments; peace of mind, budget predictability and reputation management. 91% of hoteliers reported that they are worried about the impact of bed bug infestations. ProAct lessens the likelihood of an infestation putting their fears to rest and because ProAct is an ongoing yearly service these customers know upfront how much they would spent to prevent bed bugs, instead of on a more random case-by-case basis. Lastly, according to research, bed bugs sightings are the number one reason a guest would immediately switch hotels. And the biggest concern for hotel managers is negative word-of-mouth and reputation damage. By moving to prevent bed bug introductions from growing into an unmanageable infestation ProAct helps reduce the risk of negative online reviews and unwanted media coverage. We look forward to supporting our hospitality customers with this industry-leading service offerings scheme. I would now like to turn the call over to Eddie.

Thank you, John. We ended the year on a positive note with good growth in revenue and earnings in both pest control and termite. While the second half of the year had its challenges, we produce record-setting revenue, income and earnings per share. 2017 was a great transition year related to technology as John mentioned and has created a platform for continued improvement at Oregon as well as our other brands. With the signing of the Tax Cut and Jobs Act law, our tax provision went through some robust Q4 changes. As mentioned in our press release, we will review our numbers from the GAAP and non-GAAP perspective for this quarter and for the full year of 2017. Fourth quarter 2017 and full year 2017 results reflect the estimated negative impact of the enactment of the TCJA, which resulted in an $11.6 million charge of which $8 million was from transition tax on foreign earnings, $2.9 million was from deferred tax asset and 700,000 was from changes in tax on stock compensation or $0.06 per diluted share decrease in net income. Net income and diluted earnings per share excluding significant items are non-GAAP financial measures. For the quarter, all of our service line showed growth and key to the quarter included a significant one-time tax event, fastest growth rate since 2008 and strong international growth and profitability in all countries. Looking at the numbers the company reported fourth quarter revenue of $414.7 billion, an increase of 7.5% of the prior year's fourth quarter revenue of $385.6 million. Income before income taxes increased 30.5% to $68.5 million from $52.5 million in 2060. In 2016 we had a one-time expense items $9 billion related to our changes in our Canadian tax company. Net income was $33.7 million, down 11.2% from $38 million in 2016 and earnings per share were $0.15 for the quarter and $0.17 in 2016. We realized a 15.8% [ph] tax rate for the quarter significantly higher than our historic 37% rate due to the Tax Act. From an non-perspective for the fourth quarter net income increased 19.2% to $45.3 million with earnings per share of $0.21 versus $0.17 per diluted share last year in the fourth quarter, up 23.5%. Our revenue for the 12 months of $1.673 billion represents a 6.4% growth rate. Income before taxes was $294.5 million, up 13%. And from a GAAP perspective, net income was a $179.1 million, an increase of 7%. Earnings per share were $0.82, compared to $0.77 last year, up 6.5%. This total revenue growth is our highest since 2008. From an non-GAAP perspective for 12 months net income increased to $190.7 million, up 13.9% from $167.4 million in 2016. Earnings per share were $0.87 compared to $0.77 in 2016, up 13% increase. Let’s take a look at the revenue by service line for the fourth quarter. Our total revenue increase of 7.5% included 3.5% from several acquisitions of which Northwest Exterminating was the largest, and the remaining 4% was from pricing and organic growth. In total residential pest control which made up 41% of our revenue was up 6.9%, commercial pest control which made up 40% of our revenue was up 5%, termite and ancillary services which made up approximately 18% of our revenue was up 15.6%. The Northwest business contributed to this increase. Again total revenue, less acquisition was up 4%. From that residential was up 4.7%, commercial increased 3.9%, and termite and ancillary improved by 8.2%. When you take a look at the quarter taking out the impact of foreign currency in total we grew 7.5%, residential grew 6.7%, commercial pest control was up 4.3%, and termite and ancillary improves 16.2%. As we completed the year, our international operations finished on a high note with strong revenue and profit growth. In Australia our national presence and excellent service levels have enabled us to be involved in many national level tenders business. In addition to our initiatives we’ve been able to standardize pricing across the country. During this past year Canada expanded margin at the fastest rate in the last several years. In the U.K the Safeguard name continues to gain recognition and has enabled them to continue a pace of significant growth. As Gary mentioned in his opening, we had 12 new international franchises to which now totals 81 at the end of 2017. Each of these operations continues to grow in maturity which enables service levels to continue to improve and recurring revenue to grow. Our participation last year at the World Pest Day and our upcoming sponsorship of the Global Food Safety Conference in Tokyo will continue to elevate our brand around the globe. In total gross margin was flat to last year at 50% compared to the prior year as we incorporated Northwest Exterminating into our company. We experienced good cost control increasing our gross margin inserted salaries as we continue to improve efficiency and increase productivity from our technicians with the use of BOSS. We witness improved margins and administrative salaries as cost remain relatively flat to prior year, and we reduced insurance claims as we experience reduction in legal liabilities. The gains in productivity were offset by increases in materials and supplies as we spend more on termite product with our revenue growth, fleet expenses due to gasoline price increases and leased vehicle cost. Depreciation and amortization expense for the fourth quarter increased $1.1 million to $14.9 million, an increase of 8.1%. The depreciation portion has continued to subside with lapping of BOSS, but the amortization has increased with our M&A activity. Depreciation was $6.9 million decreasing 53,000 or $0.08 of a percent from last year. Amortization was $7.9 million which increased $1.1 million with amortization of intangible assets increasing due mostly to amortize customer contracts resulting from the purchase of various Orkin acquisitions throughout the year and Northwest Exterminating. Sales, general and administrative expenses for the quarter ended December 31, 2017 decreased $2.6 million or 2.1% compared to the prior year quarter. SG&A decreased to 29.8% of revenues compared to 32.8% for the prior year. The primary driver for the reduction was the one-time tax event to dissolve the subsidiary Kinro Investment Company in 2016. The fourth quarter 2016 SG&A expense increased by $9.1 million or $0.06 of a percentage point due to the one-time tax event that was offset by a credit and income tax expense. Other marginal decreases were to administrative salaries, sales salaries and personnel related expenses. The company experienced increased expense margin and professional services as we used outside contractors for various projects, maintenance and repair due to maintenance contracts on various IT upgrades and fleet expense. As per as our cash position for the 12 months ended December 31, 2017, we spent $130.2 million on acquisitions and a $122 million on dividends, an increase of 12%. We had $24.7 million capital expenditures which was down 25.4% from 2016 primarily from the completion of the BOSS project and ended with a $107.1 million in cash, down 25% from last year. As a reminder, we used all cash for our acquisition of Northwest Exterminating. As mentioned in our press release we anticipate having a significantly lower tax rate for all of 2018. Our historic rate of 37% will be reduced in the mid-20s and we will see further clarity as we know more details. In addition as we saw in 2017 our first quarter 2018 rate should be reduced even further due to the impact of the stock-based compensation plan. At this time we do not plan to repatriate any cash, but we’ll continue to look for opportunity to put this to use in our ongoing international operations and used for expansion opportunities. As far as the tax savings from the lower 2018 rate, we will continue to assess other opportunities related to our business, our shareholders and our employees. From a business perspective one way that we would use the savings will be in the area of technology projects. Based on our success in the U.S. with efficiency gains and improved routing and scheduling we’ve made the decision to roll out our BOSS technology to Orkin Canada. The development and rollout will take most of 2018 and should contribute in 2019. And will be a financial event for us in either late 2018 or 2019. We will keep you posted on the impact in future quarters. We are very excited of the possibilities of BOSS that BOSS presents for us in our Orkin Canada. And finally from a shareholders perspective, last night the Board of Directors declared a regular cash dividend of $0.14 per share that will be paid on March 9, 2018, the stockholders of record at the close of business February 9, 2018. The cash dividend is a 21.7% increase over the prior year. This is the largest percent increase since 2010. And this also marks the 16th consecutive year the board has increased our dividend by a minimum of 12%. I’ll now turn the call back over to Gary.

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

Thank you. [Operator Instructions]. And we will take our first question from David Polansky with Lowell, Blake & Associates.

Good morning, guys. Thanks for taking my question. Hello.

Yes. Hello.

Hi. Can you hear me?

Yes. Good morning, Dave.

Good morning. Thanks for taking the question. I was wondering if you guys were seeing any pickup during the quarter from the natural disasters from Q3. And if there’s any flow-through from that?

Well, we know that from Q3 to Q4 we had a lot more of our customers that were up and running or had their personal situation that improved during Q4. For those that were impacted by Hurricanes and things like that when a home is either destroyed in a worst-case scenario or is greatly impacted, they’re going to met our services, that’s not going to be something that’s a priority to them. To add those recovery efforts that continued, we continue to see more for our customers coming back to us in Q4.

All right. Great. Thank you.

And we’ll take our next question from Joe Box with KeyBanc Capital Markets.

Hey. Good morning, guys.

Good morning.

So incremental margins came in a little bit better than where they were at last quarter, but at 24% that was just a little bit below what we were thinking. Can you maybe just talk about if there was a sort of residual hurricane impact or carryover there? Or so it just be a mix factor related to taking in more termite business?

Yes. Joe, I think we were pretty much done with the hurricane impacts. I would say in Q4 it wasn’t really a prime situation from a weather perspective immediately a lot of areas that were shutdown and I think that impacted some things that we had to go above and beyond from a cost perspective in some areas because of that weather. And I think there was a little bit impact with that, but I'm not sure that we know exactly what the total amount that would be as far as the number that you were thinking that would be.

I mean, I guess, was there anything else in the numbers that would have cause the incremental margin to maybe a little bit light versus high 20s, low 30s?

There was nothing else this material

Okay. And again, I know its not your practice to give guidance, but I guess, in an effort to get everybody on the same page for 1Q, should we think about the tax rate going to the mid 20s in 1Q, and then we should exclude the additional tailwind from share-based comp. What do you think that should all be lumped into together?

I think for the full year 2018 we’re going to be in the mid-20s and I think Q1 will be slightly better than that because of the share-based compensation.

Do you have a sense what the share comp could be? Maybe as a percent or as a dollar value to give us a sense or no?

I don’t have that calculated. I’m sure we can go back and look at the impact that we have for 2017. We know what’s our historic rate was for 2017 and then the impact we saw in Q1 from that. I just don’t have that in front of me, Joe.

Okay. I’m sorry, just one more quick one if you don’t mind. Can you maybe just talk about where cash taxes were in 2017 and what your expectation is then for cash tax in 2018?

Again, we don’t have anything broken out on that as far as any specifics are concerned. The only specifics that we’ve gone through and we’ve looked at has to do with our deferred tax, our foreign assets and with our pension, those are the only things that we’ve broken out specifically. So I’d have to get back you with any other specifics on that.

Okay.

[Operator Instructions]. And we’ll take our next question from Sean Kennedy with Nomura Instinet.

Good morning, Sean.

Good morning, gentlemen. Good morning. Thanks for taking my question. On termite growth, 8% growth ex M&A is certainly impressive and I’ve noticed that it's been accelerating about 100 bps per year the past few years. Is there anything strategically that management is doing to accelerate that growth overtime? Have the catalysts been success at HomeTeam?

Yes. HomeTeam is going to be a part of that, Sean. But John has got some thoughts on that as well.

Yes, Sean. Certainly termite has been accelerating, much of it is been related to our ancillary offerings. Termite demand in our industry for traditional termite services has been down over recent years, but we’ve added to our line, our people -- in a real effort originally that’s keep them busy and more productivity in the off seasons. But as termite demand has slowed it certainly helped us in the other seasons – other quarters as well, but that’s been a huge part of it. Our ancillary offerings is really what's sort of driving some of that.

And could you call out a few of your, I guess, leading offerings?

Sean, could you say it again, I was I was interrupting, sorry about that.

Sorry. No, I was just asking, could you maybe call out a couple of your leading ancillary offerings. Is that an example?

Yes. So something like installation in a home that has pest offerings in it that helps you reduce the pest opportunity is an example something there. But termite as we’ve talked about its not growing as fast as pest control is. But it still growing for us, but to John’s point we have these other items that are also able to keep some of our termite folks more productive as they are out. So they’re able to out beat the part of termite job and also have opportunities in some of these other areas as well.

Okay, great. Thanks guys.

Does that help?

Yes, definitely.

Great. Thanks.

[Operator Instructions].

Rollins are excited about the opportunities for 2018 and we very much appreciate your interesting in our company and look forward to updating you on our progress throughout the year. Thank you.

This concludes today’s call. Thank you for your participation. You may now disconnect.