Good day, and welcome to the Rollins Inc. Third 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 like to now introduce your host for today's call, Marilyn Meek. Ms. Meek, you may begin.

Thank you, Stephanie. 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 pass code 2143746. Additionally, the call is being webcast at www.viavid.com and the 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, Senior 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, Marilyn. Thank you and good morning. We appreciate all of you joining us for our Third Quarter 2018 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 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. Well, we're very pleased to report our 50th consecutive quarter of improved revenue in earnings. Revenues for the quarter grew 8.3% to $487.8 million, compared to $450.4 million for the same period last year. Net income increased 29.6% to $52.9 million, or $0.31 per diluted share compared to $51.4 million or $0.24 per diluted share for the same quarter last year. Revenues for the first nine months rose 9.3% to $1.376 billion, compared to $1.259 billion for the same period last year. Net income increased 24.3% to approximately $180.7 million with earnings per diluted share of $0.83 compared to $105.4 million or $0.67 per diluted share for the same period last year. We expect good growth in all of our business lines in the quarter with the residential up 9.2%, commercial pest control rose 5.7% and termite and ancillary grew 11%. Eddie will provide greater detail on our financial results in a few moments. On August 10, we are privileged to celebrate a historic milestone for Rollins, the 50th anniversary of our company's trading on the New York Stock Exchange. The anniversary was significant in both a business and personal level. To celebrate the occasion, our Chairman, Randall Rollins and Lead Director Henry Tippie rang the closing bell and in doing so made history at the Exchange. They hold the distinction of being the only two directors present for our company's initial listing in its 50th anniversary on the New York Stock Exchange. We're fortunate to have their contribution and leadership for that period as well. As many of you know, we've also hosted an Analyst Day as well as an exhibit in experienced square [ph] in front of the Stock Exchange. This exhibit showcased historical items from our Rollins Heritage Center such as our World War…

Thank you, Gary. As you all know in September, two, where the large hurricanes hit the U.S. mainland, Hurricane Florence in the middle of the month, came ashore near Right [ph] Beach North Carolina. The storm stalled and the most of the damage there was done by flooding. Hurricane Michael was a larger category 4 storm that destroyed Mexico beach and parts of Panama City Beach Florida. I am happy to report that all of our team members were accounted for and our office facilities came through mostly okay. Hurricane Michael was the most impactful as it relates to our team. I know of four families that have lost everything and at least six others with significant loss due to the storm. I spoke with our Orkin region manager for that area on Thursday. He was on-site and working to help both our team and our customers get back on their feet. Of course, we have also engaged our Rollins Employee Relief Fund team in support of these folks and others. You may recall on our second quarter conference call, I discussed the tight labor market and how competition for employees was impacting us. At that time, our brands were handling it fairly well. Since then with the unemployment rate having declined to 3.7% in September, we're experiencing some hiring pressures. We still maintain high retention rates for our industry, but it has become even more important for our people to recruit for new talent consistently in order to maintain a viable pipeline of new team member candidates. As Gary just mentioned, we regard our employees as our most important asset and we continue to assess and act upon what is working; what we need to do to adjust in any additional steps we can take to ensure we will…

Thank you, John. We are fortunate to be in an industry that is minimally impacted by trade talks or tariff, but also now strongly tied the interest rates or fluctuating oil prices. While we do have our own challenges such as continued talent acquisition development as John mentioned and evolving our offerings for a changing consumer base via technology enhancements, we do tackle these requirements on a daily basis. I mentioned this as we had multiple opportunities to celebrate, both the past and the present of Rollins during the quarter. In addition to the celebration that Gary mentioned of our 50th anniversary on the New York Stock Exchange, we also have the opportunity to celebrate one year with Northwest Exterminating which I will talk about in more detail and the acquisition of Aardwolf Pestkare in the country of Singapore. These celebration show the historic development of our company as the leader in the Pest Control industry and our ability to find and acquire topnotch U.S. and international companies continues. For the quarter, all of our service line showed significant growth and keys to the quarter included entry into Singapore with the acquisition of Aardwolf Pestkare as I have just mentioned, profit gains drove increased recurring revenue from previous quarters and cost increases from fleet expense increased which was impacted by least cost and an increase in fuel price per gallon. Looking at the numbers, the third quarter revenues are $487.7 million was an increase of 8.3% over the prior year's third quarter revenue of $450.4 million. 2017 Q3 included two months of Northwest revenue. Income before income taxes increased 8.9% to $89.9 million from $82.6 million in 2017. We are beginning to reap the benefits as anticipated from the historically high recurring revenue growth that we saw in Q2. Net…

Thank you, Eddie. Well, we're happy to take your questions at this time.

Thank you. [Operator Instructions] Our first question comes from Michael Hoffman with Stifel.

Hi, thank you all for taking the questions. When we think about the organic growth and you shared a little bit of this with us in prior quarters, how we should think about margin pressure from -- you add new customers, they are not profitable initially, then they get incrementally increasingly more profitable. So can you frame your organic growth, how much was new customer versus outright price? And also talk about where we are in renewals or retention because those were the two sort of points since leverage into the margins going forward?

Yes, Michael thanks for the question. So we don't break out the specifics of a price and the new customer by quarter. We'll kind of talk about that at a high level. I will tell you that retention, we had a really good retention quarter. John and team continue to make improvements in the area of reducing cancel customers. The service levels continue to be improved, and I think that as well as the communication we have through our technology is helping to make that overall customer experience better. So retention definitely a positive for us. We continue to add new customers and our pricing has probably stayed relatively intact with what we've seen in previous quarters somewhere between that 1% and 2% range.

Okay. And when you frame retention good, is it -- did it get better in Q3 versus a year ago or Q2, I mean so.

It did get better and we've seen -- we've seen incremental improvements in our retention over the last probably eight quarters now, but Q3 was even little bit of a better positive step there for us.

Both year-over-year and Q-on-Q, so it's sequential improvement as well as year-over-year?

Correct.

Okay. And then ASC 842 given that you lease lots of equipment. How do you think about what that means to the business model from us modeling in 2019? What are the things that you should be telling us to think about today?

We don't have any numbers at this point in time to share with everyone. We have leases, vehicles, we have leases, facilities, and we also have some other outline leases such as things like uniforms and different things like that. So we're still working through that process. We'll be prepared, as we're moving forward in future calls. At this time, we don't anticipate there being anything materially different, but as we have more information we'll share that with you.

Okay. And then one last question on some of the organic growth...

Sorry. Mike let's someone else take out -- take your question if you could. We will get you back into the queue.

Okay.

Thank you.

Thank you. Our next question comes from Jamie Clement with Buckingham Research.

Good morning, gentlemen.

Good morning.

Good morning.

Good morning.

Good morning.

Thank you. We're having some technical difficulties on a prior call earlier. Gary, it seems to me, I mean just reading some industry stuff, it seems like the pace of merger activity among even smaller players in the industry, just local players seems to me to have accelerated. Does that have any ramifications on your acquisition strategy going forward? And what do you think might be explaining some of that? I mean, if some of it just demographically people just getting ready to retire, I think they doesn't have those second tier or third generation to take over the business. What's going on there?

Well, I think the last case is certainly there that you have aging owners and -- and some cases with no areas [ph] that's really particularly interested in the business, I think that's one of the motivation. There's a lot of interest in activity in the acquisition area. There is -- some of the international companies are realizing what a good market that North American is and that's probably accelerated some of our efforts in energy. But the great thing is the last couple of deals that we made we were the only suitable cost with the reputation that we have in absorbing these new companies versus the other guys. And in fact one of the things that we do is give them the phone numbers and saying call these other acquired companies and see if they're happy or not. So we're just stepped on the gas a little bit and we're particular though, I mean we don't want just anything we -- it's foolish to buy a very low price company when one of the things that drives our success is the fact that we charge good rates for the business that we do. So we have to find the right individual, the right company and we're working hard at it.

Okay. Thanks very much for the color. John, I think you were the one making the comments around unemployment rate being low and recruiting and all that kind of stuff. I think you mentioned your retention rate among technicians is still very high. How has your message in recruiting changed over the years? How do you convince a millennial that the pest control industry is the right one for them?

James, that's a great question. We're always working on that. I don't know how you would answer that as far as millennials go. That is the largest group that we hire today.

Right.

So we're still continuing to or we are continuing to attract a good many of them. So our retention is slightly up, it's a low pressure. We just have to turn over a lot of law rocks and keep looking harder and harder.

Okay. Fair enough. Thank you, all, for your time as always.

Thank you, Jamie.

Thanks, Jamie.

Thank you. Our next question comes from Chris McGinnis with Sidoti & Company.

Good morning. Thanks for taking my questions. Nice quarter. Can you maybe just talk a little bit more about the growth in mosquito, maybe how penetrated that is throughout the network itself and it sound like you feel pretty confident going forward with the strength of growth maybe just a little bit more around that why -- why is that rate or at a pretty high rate?

Yes, Chris, thanks. This is Eddie. So we've offered the mosquito products for several years, but it is not been one that we really had put a lot of time and effort into from a coordinated basis on the marketing and the operation side. And so those that were kind of -- kind of on the forefront, we're out there trying to -- trying to work and win the mosquito business.But now that we have marketing that has really put a good push on the operators are on the same page, 2018 we saw a really good first step forward. We saw it in several of our brands, Orkin, Northwest HomeTeam, as well as other brands that were out there that had good growth. And I think that we'll continue to see that, as we've seen this momentum start in 2018. I think we'll continue to see this, as we move forward in time. John I don't know, if there is anything else you want to add as far as that concern.

I do. Our technicians have always -- we've always relied on them offering that service for our customers, as opposed to advertising Eddie touched on that. And so penetration has been not that great in many markets, but probably Northeast is where we started with our first and so that's probably the greatest as well as the Southeast. So those were the -- those were the two areas to answer your question about what's our market penetration. We just have a ton of opportunity both still in those two markets, as well as elsewhere.

I think the health risk has also created greater demand. I think you read about these articles almost every other week that there's been more mosquito-related health problems. We don't really see that even the CDC has not given us any attention or assurance that's going to change. I think it will -- we think it will just continue to pick up, plus the customers are highly satisfied with this service. I mean, we're really giving them their backyard back if they can barbecue and enjoy a better lifestyle when the mosquitoes are not keeping them in the house.

Great. Appreciate that color. And then one other question, just on the organic growth rate and the new customer wins. Do you have any color in terms of were they -- were the customer beforehand or they did not have a solution prior to you coming in. Can you say -- give a little color on that -- offhand? Thank you.

Yes, Chris, so this is Eddie. So we'll have some about. We'll have share of wallet and piece of that can be exactly what we're -- were' just talking about what the mosquito. So they are an existing pest control customer of ours. We cross sell them the mosquito and so we pick up new revenue at that point in time. But we also are incrementally taken some market share. I talked about this specifically in Northwest and the games that they're seeing in the markets that they're in. But we are seeing that with some of our other companies as well. So both -- I think it's really both that are -- that are going out for us.

Great. Thanks for taking my questions. Good luck in Q4.

Thank you.

Thank you. Our next question comes from Sean Kennedy with Nomura.

Hi. Good morning, everyone.

Good morning.

Good morning.

I have two quick questions. The first, could you comment on the deceleration in commercial. Does that have anything to do with the hurricanes or just in general?

I don't think we know if it's impacted by the hurricanes, but the second hurricane would have probably the more impacted in the current quarter. The Q3 that we had this year we're comping the biggest growth that we had in 2017 beginning of the quarters. [Indiscernible] had a little bit of it. And then we're also going to always have a little bit of lumpiness kind of in between the quarters as well. When you look at the full year, it's absolutely in line with what we've seen over the previous probably three years now.

Okay. Great. And then, I was also wondering if you could comment on the recent revenue trends for HomeTeam especially if you've seen any near term deceleration due to a recent slowing in housing economic data? Thank you.

We have not seen any slowing at all with HomeTeam. They have over a million customers that we put the -- or they put the Taexx system in. So even if housing does slow, which of course we know it will at some point in time, they have a database to be able to go and win new customers even without new homes being built. So they're constantly working on that. They also have a very robust mosquito business. And then also in the termite business that we talked about before the pre-treating for the termites as well as the recurring of termite service. So the Taexx is what they're known for and there are big things that they do, but they also have other revenues that they've been successful with.

Great. Thank you. Congrats on the quarter.

Yes. Thank you for that.

Thank you. Our next question comes from Tim Mulrooney with William Blair.

Good morning, everybody.

Good morning.

Can you give us a quick update on your tech initiatives, where you are at in terms of deployment of VRM Orkin 2.0 and maybe the BOSS system in Orkin Canada?

So I just think, I'll start with the last one first the BOSS system in Orkin Canada. They're on track for us to be able to see something early 2019. So we've gone through -- we're going through the development, going through the adjustments that need to be made for currency, for frequency of services, for some different service lines. But we feel like we'll be able to see something rolled out pretty well early 2019, which means we should be able to see some type of benefits toward the end of 2019 for Canada. As far as the other initiatives are concerned, we continue to test and roll out the new visibility that we're going to have for our customers that we talked about when you were at the Stock Exchange Analyst Day. We're -- we're continuing to get good feedback from customers with that that are feeling better about the communication that we're giving them and kind of giving them a better overall customer experience. The virtual route management, I talked a little bit about the improvements that we saw in September having to do with -- with our miles and that's even after lapping this over another year. So over 5% gain in September alone on top of what we've seen in previous -- in the previous year. So all the initiatives continue to move forward well. The IT team is staying on top of the request from the operations side to make sure that we are using BOSS most efficiently and most effectively. And I think on average, the IT group gets and implements 100 small upgrades on a monthly basis. So they're constantly just fine tuning and tweaking it, just to make it a little bit better and a little bit easier to use and little bit more customer-friendly for us. So continued positive momentum in those areas.

Got it. Thank you. Moving on -- maybe one more. Eddie a lot of services-related industries are highlighting higher labor costs and lower labor availability as key issues to consider particularly when forecasting margins. So maybe can you just remind us, what your total labor costs are, as a percentage of sales? And maybe what has been the increase in labor cost this year or maybe how much -- can you quantify how much its pressured gross margins in the quarter, just any -- any other detail?

I'll say it's not enough for us to highlight that as a headwind.

Okay.

It has kind of stayed intact based on our revenue growth overall. And as you know a lot of our operations are working kind of on a productivity basis. So it makes more sense for them to use this technology that we had in place for them to be more efficient to drive less and to be able to work more and they're getting a little bit of a benefit, where they're getting the benefit of that from -- from the pay perspective, when they get an opportunity to do more jobs. So we're really not seeing that as an headwind at this point, but we'll continue to manage that. The thing that we got to make sure that we're staying ahead of is, is retaining the employees best we can because of course, there are -- there are costs that are related to hiring, to finding and hiring new employees. But again it's not something that we wouldn't be even listed out as the top three or four item on any of our cost-related areas.

One of the reasons that we increased our benefits, people hold benefits certainly equal, if not higher than compensation or their -- their pay -- take home pay. So we made a pretty big move as far as improving the 401(k) and scholarships and stock to the -- our North American employees, which we think will make a big difference both in recruiting and retaining our employees. The other thing that we are proud of is how well the stocks done. We have about 85% and 90% of our employees were in the 401(k) plan. So when the stock goes up, you know, their assets go up and their retirement benefits go up. So we think we've got a lot of things working for us that -- that some of the others really don't. It was amazing how a few people really took the tax money and spend it, invested with their employees.

Right. Good point, Gary. Thank you for that color and thank you, Eddie. I'll hop back in the queue.

Thank you.

Thank you. Our next question comes from Paul Fanelli with Gabelli Research.

Good morning.

Good morning.

Thanks for taking our questions. On the second quarter call, you've called out some higher startup cost associated with the growth in recurring revenue. Has that trend continued in Q3 or those sort of recurring revenues started to mature at all?

We did see, if you take a look at the income before taxes and the income after, you'll see we had a little bit of an acceleration compared to Q2 and the year-to-date number. So we are seeing some of the benefits from the historically high Q2 recurring revenue growth that we saw, but we did see our recurring revenue growth in Q3 grow at a higher-than-average rate. So we're continuing to see positive in that area not -- again not to the same degree we saw in Q2. So we saw little bit of benefits that are -- that are of the majority of that that have started and our -- our anticipation would be, we'll continue to see that as we move into Q4, and as we move into next year.

Okay, great. And then just a follow-up. You discussed sort of the continued trends with the BOSS system and VRM being able to offset some fuel cost at least 5% improvement in the mileage. Can you give any color around, how much increase in leasing cost and fuel cost that you've been able to offset?

So we haven't broken that out. It did not offset a 100% of it. Our price per gallon was up $0.56 year-over-year, which is a significant increase. So we did not offset said that. But it offset more than half of it, I will say that.

Okay, that's hepful. Thank you.

Thanks.

Thank you. [Operator Instructions] We do have a follow-up question from Michael Hoffman with Stifel.

I would like to follow-up on one of the questions that was asked earlier on this margin, your investing margin and growth, but remember we saw that compression in the first half, we're starting to see some margin expansion in the second half. How do you frame how we should see the end of the year? Do we end up flat with a slightly positive bias in EBITDA or does this accelerate, I'm trying just to understand where we gain some of this operating leverage, as you benefit from some of the growth?

Michael, I think flat to slightly positive is what we'll see, as we finish out the year. And then I think as we go into 2019, we'll see a little bit more acceleration from that. The time that we see the benefits from this recurring revenue is after the third and fourth service. So based on the service frequency that the customer has will depend on when we will see the benefits from that. So again historically high growth rates in Q2, if you look at in every other months, where customer, you can do the math as far as when we would really see the benefits. And then again in Q3 like I just mentioned, we saw above average recurring revenue growth, which we'll see positive improvements from as we move forward as well, so.

Okay. And then tying that margin story to your 401(k) investment the intention was to do it in 2018 at that level and then it stays at that level in 2019. So I should see, I get a benefit of that into 2019 all else being equal?

Yes, that' correct. The stock option as well. The stock options were a one-time event, but incrementally, you're right. We will have already lapped that on the 401(k).

Right. Did we calculate it correct, ti's about 60 basis points of pressure on margins? What was the benefit of that?

I think it was a little bit more than that. I don't have that number on top of my head. We can take a look and see what that is.

Okay. And one last one, thank you for your patience. Where are you able to use technology in the things like bait traps, things like that where you helped us labor [ph] leverage thing particularly in commercial or sort of having to look at all 25 bait traps, you only have to look at something went in and chewed on the bait. And that where are we in progress in bringing technology to help drive labor utilization [indiscernible] much hiring issues as well as those people.

Yes, Michael, we'll take this as the last call for you or the -- I'm sorry, the last question for you. We continue to look at the opportunities from a technology perspective. We continue to look at all the different opportunities that are out there. We've tested, I believe probably every single opportunity that's out there, we want to make sure that we are understanding what the best opportunities that are. This is still a human business at the same time. Making sure that we have the right connection with our customers is an extremely important part. So we're going to continue to make sure that we understand what technology benefits exist and where that would make sense, we'll go through and we'll put those in place. We really only had the most opportunity, where we have the BOSS operating system and we don't have that in all places as well. But we'll be positioned when and if there is indeed from a market perspective to be able to put that in place.

Thank you.

Thank you. Our next question comes from Jamie Clement with Buckingham Research.

Yes. Thanks for the follow-up. I mean, Eddie my recollection is I excluding the noise from the Tax Cuts and Jobs Act in the fourth quarter of last year, your fourth quarter of last year my recollection was very, very strong. Is there anything we need to think about as we model the fourth quarter from a year-over-year perspective that hasn't come out on the call yet?

I don't believe there's anything it hasn't come out on the call. I think the last question, where we talked about the recurring revenue and where we'll see the improvements on the profitability side. I think we'll continue to see that help us in Q4 and moving into next year. I think based on everything we know right now, those are probably the most impactful items. We still don't have a full view of everything from the hurricanes. We don't anticipate it being anything material based on what we know right now.

All right, terrific. Thanks very much for the extra time. I appreciate it.

Thanks, Jamie.

Thank you. [Operator Instructions] Our next question comes from Tim Mulrooney with William Blair.

Yes. Thanks for the follow-up. Eddie, I think maybe you said this in the prepared remarks, but how many companies have you acquired year-to-date and what was the total cash paid?

The number is 34. I'm looking to see if we have the numbers here. I don't think we've said the number of companies. But we're going -- we can take -- we can take a look real quick in dollars we do have, I believe it's $77 million [indiscernible] that's right. Yes, so $77 million this year, it was $127 million last year because we had Northwest that we purchased last year. So $77 million so far this year. And we'll take a look to see if we have the companies. But of course, that will be made available once we have our 10-Q available, the number of companies would be available.

You know what, I'll just wait for the 10-Q. Thanks, guys Congrats on the quarter. Bye.

Yes. Thank you for that. Appreciate it.

Thanks.

Thank you. There are no additional questions at this time.

Okay. Well, thank you, all, for joining us today. We appreciate your interest in our company and we look forward to reporting our fourth quarter and year-end results in January.

Thank you. Ladies and gentlemen, this concludes today's presentation. You may now disconnect.