Rollins, Inc. (ROL) Q1 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, good day and welcome to the Rollins Incorporated First Quarter 2018 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, Ms. Marilyn Meek. Ms. Meek, you may begin, ma’am.

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 1244009. 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’ Vice President and Chief Operating Officer; and Eddie Northen, Vice President, 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, Marilyn, and good morning. We appreciate all of you joining us for our first quarter of 2018 conference call. Eddie will read our forward-looking statement and disclaimer and then we will begin.

Our earnings release discusses our business outlook and contains certain forward-looking statements. These particular forward-looking statements and all other statements that have been made on this call, excluding historical facts, are subject to a number of risks and uncertainties, and actual risks may differ materially from any statement 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, 2017, for more information and the risk factors that could cause actual results to differ.

Thank you, Eddie. For the quarter, our revenues grew 8.9% to $408.7 million compared to $375.2 million for the same period last year. Net income increased 20.5% to $48.5 million or $0.22 per diluted share compared to $40.3 million or $0.18 per diluted share for the same quarter last year. Eddie, will provide greater detail on the impact of our recently announced enhanced employee benefits, the tax rate changes, and other financial numbers in a few minutes. All of our business lines experienced good growth in the quarter, with residential up 8.4%, commercial pest control grew 5.6% and, termite and ancillary rose 16. 2%. We’re continuing to expand our global footprint and are extremely pleased with the growing international presence for the Orkin brand. We’re accomplishing this to both company-owned acquisitions and our extensive and expanding franchise network. During the quarter, we announce the addition of four international franchises in South America, Europe, the Middle East, and Latin America. All of these locations will offer commercial and residential pest control as well as termite services were applicable The Orkin brand is now represented in 53 countries with 83 international franchises. In the first quarter we’re also pleased to acquire two additional fine companies in the United Kingdom, AMES Group and Kestrel Pest Control. AMES located in Birmingham has a rich history of providing superior pest control, bird control and specialty services to the commercial customers throughout the Midlands as well as London. Kestrel located in the Eastleigh, Hampshire provides commercial pest control services to customers in South Hampton and the surrounding areas of Southwest England. Kestrel will ultimately merge with our Safeguard Company. Important to us is, both of these companies share our commitment to continuous improvement in making an ongoing investment in training and employee develop. We’re also pleased that the founders and the leaders of these two new companies will remain with AMES and Kestrel. As we continue to expand globally we look for external opportunities promote our brand. To that end last month we were privileged to be a gold sponsor of the Global Food Safety Initiatives, GFSI at their Global Food Safety Conference in Tokyo. This is a unique annual event and brings together the leading food safety specialists from over 50 countries, dedicated to advance food safety practices. The organization addresses the entire food chain from production to consumption or as they like to say from farm to fork. This year’s event had over 1,200 attendees which was a record and a number of our existing U.S. customers were represented with their international affiliates; Nestlé, ADM and Land O’Lakes can name a few. We were representing two of our brands at the conference, Orkin and IFC, both leading providers of pest management services to the food industry. We believe that customer engagement is paramount to our success, and this event provided a good opportunity in this regard. Our presence at GFSI Conference provided us with a great opportunity to strengthen the relationships with existing customers and future prospects. We believe that through participation in events such as this we will continue to elevate our brand awareness around the globe. Shifting our focus to the U.S. now, we are also pleased to announce the acquisition of Louisville, Kentucky based OPC Pest Services. This leading pest control company was founded in 1972 by the late Lamon Blake and his sons Donnie and Terry Blake. I have known Donnie for a long time and have long admired the company he and his family have built. As a result of their hard work, strong customer values, and appreciation for every employee’s contribution to their company, they are recognized as Kentucky’s premier pest management company. We’re very excited to partner with them and look forward to working together to grow our business, while sharing best practices. We were especially pleased on us last week as a result of the U.S. tax legislation. Rollins will be using part of these tax rate savings to improve our employee benefits. John will review some of these details in a minute. Additionally, we further strengthened our management team during the quarter with a promotion of three of our team members, who will be expanding their responsibilities with our company. In January, Tom Luczynski was elevated to the position of President of Orkin Global Development and International Franchises, as well as Assistant Corporate Secretary. Since 2007, Tom has presided over the Orkin International Franchising Group and has led the company’s expansion to over 53 countries. In January, we also announced that Beth Chandler, Rollin’s General Counsel, has been appointed to the position of Corporate Secretary. Beth joined Rollins in 2013 as Vice President and General Counsel. In 2016 she assumed responsibility for the Risk Management Group. And last year the Internal Audit Group was added to Beth’s responsibilities. These moves will provide dynamics between risk, legal, and internal audit. In early March we’re pleased to announce that Julie Bimmerman was promoted to Vice President of Finance and Investor Relations. Julie joined Rollins in 2015 as Managing Director of Rollins Specialty Brands Accounting and was promoted in 2016 to manage the Rollins Finance Department. Previously she had worked at HomeTeam Pest Defense, where she served as Vice President of Finance and Corporate Controller. And Julie’s new role, she has added Investor Relations and Rollins Payroll Group to her areas of responsibility. Her sanctum is a good example of Rollins benefiting talent wise from these acquisitions. Our congratulations and thanks go to these three individuals for the contribution they’ve made and will continue to make to our company. I will now turn the call over to John Wilson.

Thank you, Gary. Over the past few months we have undertaken an extensive review of what actions other companies have taken as a result of the recent U.S. tax code changes. Many companies chose to give employees one-time bonuses or similar items that provide a one-time benefit to employees. As a service company though we have long recognized that our employees are our most important asset and we wanted to do something that would have a longer term effect for them and their families. We believe our benefit improvements realize that goal. Effective January 1, 2018 we improved the employee match to our 401(K) program, previously we matched employee contributions 50% on up to 6% of their contribution. We now match 100% on the first 3% of their contribution and 50% for contributions above 3% up to 6%. As a result of benchmarking with other service companies as well as feedback from our employee survey process, we concluded that an improvement to our paid time off policies was warranted. Adding one more floating holiday for our team members to use anyway they wish was determined to be the best way to make improvements there. Rollins has always maintained a strong commitment to education, and in that spirit we are increasing the number of scholarship opportunities by 50% for our team member’s children. Each scholarship has a value of $12,000 over four years. Last, we will reward our U.S.-based team members with a one-time stock grant of stock in Rollins. These grants recognize tenure and are being given on a tier basis to employees of 2 years to 10 years or more of service. The stock is expected to be granted in May and will vest in one year. During the quarter we were also pleased to have announced that Rollins and Northwest Pest Control were awarded 2018 Top Workplaces honored by The Atlanta Journal-Constitution. This was the second consecutive year that Rollins has received this award and the several such awards for Northwest. This honor is based solely on employee satisfaction and engagement feedback gathered through a third-party survey. The survey measures several aspects of workplace culture, including alignment, execution, leadership and connection. At our core we are customer service company, so our track record of success is a direct result of the efforts of the dedicated and caring people that work at Rollins. To quote, Jerry Gahlhoff, VP of Human Resources and President of Rollins Specialty Brands, this recognition challenges us to continually raise the bar. We must strive to improve the work environment and reinforce our culture as we continue to build on our tradition of success. We’re also pleased for Rollins to have been recognized by Training Magazine as the Top 125 Training Company. For 12 years Rollins has been recognized with – excuse me, for 12 years Orkin has been recognized with this honor. This latest award recognizes all of the Rollins Corporation for the quality, commitment, and investment in training our people. According to the Training Magazine, the Training Top 125 ranking is based on a number of benchmarking statistics and is determined by assessing a range of qualitative and quantitative factors, including financial investment and employee development, the scope of development programs and how closely such development efforts are linked to the business goals and objectives. Thank you. And we’ll now turn the call over to Eddie.

Thank you, John. This is truly a transformational time for our company. As we see technology continue to mature, achieve record revenue growth and as John reviewed, we’re making industry leading investments in our employees through enhanced benefits as we recognized the difference they make each and every day. The quarter’s organic growth has been in line with our historic norm, but our overall revenue improvements have been strongly fueled by good quality acquisitions. During the first quarter alone we had 16 acquisitions for a total of over $40 million. These acquisitions enable us to continue to become more efficient in our business model and will produce sustain growth for years to come. There are only two other times in our company’s history that we have seen M&A play such a critical part of our growth, the acquisition of Orkin in 1964 and the acquisition of HomeTeam in 2008. I think we would all agree that these have been – that these have worked out extremely well for Rollins. For the quarter, all of our service lines showed growth and highlights included, enhancements to our employee benefits program that John discussed, a significant increase in amortization as a result of multiple acquisitions, and the strongest commercial revenue growth in the past five years. Looking at the numbers, the first quarter revenues of $408.7 million was an increase of 8.9% over the prior year’s first quarter revenue of $375.2 million. Income before income taxes increased 3.4% to $59.2 million from $57.3 million in 2017. Net income rose 20.5% to $48.5 million, and earnings per share increased 22.2% to $0.22 per diluted share compared to $0.18 per diluted share in the first quarter of 2017. There are two unusual items that impacted the profit numbers compared to the average quarter. As we noted in our press release last week, the enhanced employee benefits impacted the first quarter by roughly $0.01 and was equated to about $2.3 million. And we would anticipate a similar impact in quarters to come for the remainder of the year. This is a tremendous use of our portion of our tax savings as John stated we invest in our greatest asset, our people. Additionally, the significant number of recent acquisitions increased our amortization for intangible assets for the quarter by 40.8% which is the highest percent increase since we purchased HomeTeam in 2008. As a comparison over the past five years, our average increase of amortization of intangible assets year-over-year has been above 5.1%. Compared to last year this significant increase also impacted the earnings per share by a $0.01 or roughly $2 million after tax. And importantly, indicates a tremendous investment for our future. If you exclude these two items that are unusual, our income before taxes would have been 10.9% improvement year-over-year and income after taxes would have risen 31.2%. Let’s take a look through the revenue by service line for the first quarter. Our total revenue increased 8.9% included 4.2% from several acquisitions, of which Northwest was the largest and the remaining 4.7% was from pricing and organic growth. In total residential pest control which made up 40% of our revenue was up 8.4%. Commercial pest control which made up 40% of our revenue was up 5.6%. And termite and ancillary services which made up approximately 19% of our revenue was up 16.2%. Our commercial growth has trended higher over more than the last five years, but this first quarter displayed the fastest growth that has occurred during this recent time period. Our commercial sales team continues to improve through a better selection process of people, enhanced training and continued improvements to our key technologies, namely BizSuite, our customer facing iPad presentation tool. Our commercial operations are performing at the highest levels in the industry, and we see this through retention and new sales, especially in the areas – the segment areas of hospitality, property management and restaurants. We look forward to continue success in this area. Again total revenue less acquisitions was up 4.7%, and from that residential was up 4.2%, commercial increased 4.5%, and termite improved 4.2%. When you take a look at the quarter, taking out the impact of the foreign companies in currency, in total we grew 8.8%, residential grew 8.3%, commercial pest control was up 4.5%, and termite and ancillary improved 16.8%. In total, gross margin for the quarter was flat to last year at 49.6% for the quarter. The costs related to the enhanced employee benefit impacted the first quarter by 1 percentage point. Additionally, administrative expense was higher with the addition of our multiple acquisitions as well as increasing fleet expenses as gasoline costs were up an average of $0.25 per gallon compared to last year. The quarter benefited from improved efficiencies, and routing and scheduling technology which reduced miles per vehicle by 5% and also helped to lower service salaries as a percent of revenue. Insurance and claims were lower than prior year as a percent of revenue as we’ve reduced our litigated exposure. Depreciation and amortization expenses for the first quarter increased $3.1 million to $16.9 million, an increase of 22.8%. Depreciation increased $300,000 due to acquisitions and equipment purchases. And as mentioned before, amortization of intangible assets increased $2.8 million related to customer contracts included in various acquisitions which reduced our earnings per share by approximately $0.01 after taxes. Sales, general and administrative expenses for the quarter increased $11.1 million or 9.8% to 30.9% of revenues, up 0.2 of a percentage point, from 30.7% for the first quarter last year. The increase in the percent of revenue is due to higher administrative salaries and personnel related expenses due to acquisitions, and fleet costs due to increased gasoline price. The increases were partially offset by lower insurance, and claims expense due to reduced exposure in litigation. As for our cash position for the quarter ended March 31, 2018, we spent $43.1 million on acquisitions compared to $3 million for the same quarter last year, and $30.6 million on dividends an increase of 22%. We had $6.1 million of capital expenditures, which was up 12.5% from 2017 primarily from planned IT upgrades and the Northwest acquisition. We ended the quarter with $84.3 million in cash, down 48.1% from last year. But as a reminder, we use all cash for our acquisition to both, Northwest Exterminating and OPC. As we mentioned on our Q4 call, we anticipate a significantly lower tax rate for 2018. Our Q1 rate of 18% will be the lowest of the year and we anticipate a rate in the mid-20% for the remainder of the year. As a reminder the Q1 rate is lower due to the impact of the stock-based compensation plan. Last night, the Board of Directors declared a regular cash dividend of $0.14 per share that will be paid on June 11, 2018, to stockholders of record at the close of business May 10, 2018. This is a 22% increase over the prior year and marks the 17th consecutive year the Board has increased our dividend by a minimum of 12%. I will now turn the call back over to Gary.

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

Ladies and gentlemen, at this time the floor is now open for your questions. [Operator Instructions] And our first question will come from Tim Mulrooney with William Blair.

Good morning, everybody.

Good morning.

So one of your competitors recently highlighted at the lay in the spring pest season that’s having a negative impact on their first quarter result, I’m curious that the unseasonably cold spring have an impact on your revenue growth at all. It doesn’t look like it did given the strong organic growth in the quarter, but I’m just curious if there was any impact there in the first quarter, and then any anticipated impact on the second quarter given the cold April that we’ve had.

We were – certainly we were impacted primarily due to the snowfall. The National Weather Service measures snowfall in the top 35 markets and it was up over 30%. So the snowfall and weather also affect demand, but they affect our ability to get around the service or customer, so certainly we’re impacted. Certainly I can’t say anything about the quarter. The second quarter, other than I’ve been in the business for 50 years and we always have a season, it drives you crazy when it starts off like this, but we have no doubt that the pest season will arrive.

Okay, okay, thank you. Just tell me guys that –

I’m sorry.

Go ahead.

Yes. This is Eddie. So just to add on to that, we try our best, I mean, you’re spot on as far as it impacting actually what’s going on, but we try our best to take that away. And John and team do a tremendous job, continuing to hold the sales folks and the operations accountable. So just one of the ways to grow and to make sure you retain your customers and you are servicing them even above and beyond is the great service that they normally get, to make sure that we don’t have them and we will reduce our turnover the best that we can to take that out of the picture. But obviously when the weather does get better, and it is going to get warmer to Gary’s point, we hope to benefit from that as well.

Okay, got it, Eddie, thank you. Maybe one more from me, did you say that VRM helps reduce miles driven by 5%?

So miles driven per vehicle is the measure that we reviewed. So we’ve got the Orkin brand on our Virtual Route Management tool as I think that you know and this was part of an offset for our increase of the fleet expense overall. By reducing our miles we were able to reduce our gallons used and improve our time in front of the customer or our technicians. So we’re seeing the maturity come to bear some good fruit for us.

Okay. I think last quarter you said you were saying a benefit, your vehicle – miles per vehicle by about 0.5 mile. Is that consistent with what you’ve seen in the first quarter? I’m just trying to compare it and see if there was any incremental benefit as the system matures and you get better at rerouting and everything?

Yes, I’m not sure if we can use the previous quarter and this quarter and kind of extrapolate out from there. I would just say that the maturity continues to pay dividends for us. We’ve really concentrated on making sure that we’re improving our on-time delivery and part of that has been the use of routing and scheduling and optimizing these routes. And our operations have really done a tremendous job. It really, really almost throughout the entire U.S. and we’ve got 500 branches and almost everyone is at the mark that we wanted to be at or significantly higher. So we’re reaping the benefits of that and we know we’ve got more opportunities as this moves forward.

One benefit that we have to look forward to is putting our routing and scheduling in all of our brands. Currently we don’t have it in all of the brands and I guess [indiscernible] went up. So, you know, we should be able to have similar benefits as we roll it out to other brands.

And Tim, other byproduct that we see of this as we continue to have a better on-time delivery of services as John’s group continues to do that, our customers are going to respond more positively to that. So having the right technician on the right day at the right time at the customer’s location, because they’re running this route correctly saves us miles, but also puts that right technician in the right spot and we have a better customer experience because of that.

Yes, okay, I got it. Well, congrats on a great quarter and thanks for taking my question.

Thank you.

Our next question comes from Sean Kennedy with Nomura.

Good morning, everyone. Congratulations on a strong start of the year and thank you for taking my questions.

Thank you.

Yes, thanks, Sean.

Yes, I was wondering was there anything else that affected the strong commercial growth of 4.5% ex-M&A? And do you think this rate can be sustained?

Well, I’ll say that – I’m sure John can talk about the operational side of that, but from the sales side of that, the three keys that I talked about the continual improvement of the individuals that we are bringing on from a sales perspective; having them use the technology almost without exception is helping us in front of the customer. And then the service that John and team are providing to the customer, they’re not turning over, they’re staying with us at a higher rate and it’s giving us something for our sales force to be able to sell better. As we talk about the industry in whole – as a whole, unequivocally we have by far the best commercial service that’s out there. And I think that some of our customers are seeing that, that they may have had service with someone else that is out there, they’re seeing the difference in the service that John and team are providing.

Yes, Sean, thank you for the question. I don’t think I want to add to what Eddie had just said would be that our National Councils team just had a terrific quarter with a 60% sales increase year-over-year. And so the question is will that sustain, that’s hard to keep doing quarter-after-quarter. But I think with the added emphasis and focus those guys have on getting out of hunting up customers has helped tremendously. So in addition to field based sales effort that Eddie referenced, our National Councils group did a great job and I shout out to them for that.

And Sean, Gary opened with talking about some of the international piece of our business. And we know today that’s not a big part of our business that’s growing. But things like this Global Food Safety Conference; it puts us in a position to be able to have a wider or more global approach. And as more customers come to us and they’re looking for a global solution, we’re in 53 countries and we have opportunities to be able to service from a global perspective. So in some cases from an RFP perspective, that’s going to knock out a lot of others that don’t have that global reach. So as we continue to spend time and energy there, I think that’s going to pay more positive dividends for us and give us more opportunity.

Okay, great. I have one more. Can you comment on how the tuck-in acquisitions in North America like Northwest and OPC over the past year will affect operating margins like in the medium- to long-term? Specifically, how much will the added density affect the margin opportunity at Rollins?

So I’ll break that question down. So when we talk about – when we think about tuck-in acquisitions we think about 10 to 12 to 15 technicians that we are able to take and put into an existing, say, Orkin brand or an existing HomeTeam brand based on whatever, wherever they are. And at that point in time we are able to tremendously positively improve the efficiency; the density becomes better overnight, so all of those things get better when we have a tuck-in acquisition. For us in total this quarter we have 16 total acquisitions, and I would say, 12 to 13 of those were relatively tuck-in acquisitions. However, the others, the names that you mentioned there, such as a Northwest or an OPC, we run those as standalone brand. We see the value in the company that we bought and we typically buy companies that are growing at a faster rate than our overall growth rate, which both Northwest and OPC are. And frankly, they’re doing a good job, doing what they’re doing. So we’re just going to share with them the benefits of opportunities and services, the buffet of opportunities and services that we have as an organization, we want to learn from them, we want to steal their good people like we’ve done with Julie, bringing her onto our team, such as we have with Jerry Gahlhoff bring him on to our team to do more. So there’s a lot of other things that happen with that. But as far as the density, and efficiency, and improvement in margin, other tuck-in acquisitions are going to continue to be able to provide that opportunity. Did that –?

Yes, yes, definitely. But do you also put kind of the Rollins machine, the BOSS and VRM? Will you overlay that on, say, Northwest and OPC businesses?

Yes. I think that’s absolutely – the radar is going to move forward in time. And we’ll go through each one of those, we’ll see what they have in place and see what makes sense as far as routing and scheduling in their individual company. And if they have a product that is already working well for them and they figure out what makes sense as far as they used to catch from there. As Gary and John just mentioned, Orkin Canada is next for us and we’ve already started down that path of that, which is going to make a lot of sense for us. And we think we’re going to have a good opportunity there. But these other brands that you mentioned will continue to assess those and we will figure out where the best place is for us to spend our time and energy and see improvement.

Okay, great. Thanks, guys. Good luck with the rest of the year.

Yes, thank you for that.

[Operator Instructions]

Yes. If there’s no other questions, we will go ahead and we’ll wrap up. I’m sorry

We have one.

We have one more, okay. Yes.

That’s correct. We have – our next question comes from Jamie Clement with Buckingham.

Hey, gentleman, good morning.

Good morning.

Gary, I was wondering if I could get your long-term perspective here. Seems like more family-owned businesses have come to market, it sounds like more perhaps on the way. It’s not – at least my opinion is it’s not as if the industry fundamentals have deteriorated. What do you think is going on? Is this just a question of family, legacy and financial planning and that kind of thing? Why they increase?

Well, I think that if we just look over, show over at the most recent ones, there’s family dynamics that are involved. Some of the family members want the money and some want to continue to work. We’ve been very fortunate that we’ve been able to keep a lot of the principles and the leaders with the company, their company. This just got more complicated and it requires a heavy investment in IT, a heavy investment in digital, in the Internet. And some of the companies are really kind of frightened by that. As it becomes more sophisticated you’ve got to rely more on technology and I think that’s a turning point. I think the values that are getting today versus two years ago, they’re getting more module. So that’s been motivating some of the people that when they see the market improved as far as that user concern. If they are on offense that’s kind of the knowledge that takes place to cause them to consider disposing of the business and we’ve got one for reputation and that people stay with us, and that’s not the case. And most of the other folks that we’re competing with, the retention of our people they acquire the promotions of the acquired are getting. It has really I think driven a lot of these great companies and interaction. We’re fortunate there.

A quick follow-up. And Eddie, I don’t know if you want to take this. Just on multiples, I mean, obviously, over the last couple of years we saw some big commercial just go with very high multiples. I kind of think that what you’re paying is not outside of your historical range all that much, right.

I would agree with your statement. I think Gray’s point is as companies hear about multiples that some other companies are paying, it will be getting them to think about, okay, maybe this is the time, maybe this is something for us to think about. And as they learn more about do I go after that biggest check or do I go after an opportunity to be able to take my business and partner with somebody who had done this for a long time and lives up to their word, and that’s when we win, it’s the latter one. We’re not going to necessarily be the one to write the biggest check, but we are going to live up to our work and we’re going to keep people on that that we say we’re going to keep on and we’re going to have them continue to run the business. Gary and Mr. Rollins have a track record of that for 50 years. And I think that’s a reason why people continue to come back to us over and over again and say, you’re the choice for us. For us this quarter 16 acquisitions, I think that’s just a testament to exactly how companies look at that.

Okay, terrific. Thank you all for the additional color, I appreciate it.

Thank you.

Thank you.

[Operator Instructions]

Okay. Well, I’d like to thank you for joining us today. We appreciate your interest in our company and look forward to updating you on our second quarter and our progress on the next call. Thank you.