Good day, and welcome to the Rollins Incorporated Fourth 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'd now like to introduce your host for today's call, Marilyn 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 pass code 7939620. 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, Senior Vice President, Chief Financial Officer and Treasurer. Management will make some opening remarks and then we'll open 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 fourth quarter and yearend 2019 conference call. Eddie will read our forward looking statement and disclaimer and then we'll begin.

Our conference call 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. This conference call also includes certain non-GAAP financial measures and performance. These non-GAAP measures should be used as a supplement and not a substitute for net income loss computed in accordance with GAAP. Please refer to today's press release and our SEC filing, including the Risk Factors section of our Form 10K for the year ended December 31, 2017 for more information and the risk factors that could cause actual results to differ.

Thank you, Eddie. We're pleased to report our 51st consecutive quarter of improved revenue and earnings. Revenues for the quarter grew 7.2% to $444.6 million compared to $414.7 million for the fourth quarter last year. Net income increased 51.1% to $51 million or $0.16 per diluted share compared to $33.7 million or $0.10 per diluted share for the same quarter of 2017. Revenues for the full year rose 8.8% to $1.822 billion compared to $1.674 billion for the same period last year. Net income increased 29.3% to approximately $231.7 million with earnings per diluted share of $0.71 compared to net income of $179.1 million, or $0.55 per diluted share for the full year 2017. We experienced good growth in all of our service lines for the quarter with residential up 7.8%, commercial pest control rose 5.9% and termite and ancillary rose 8.2%. 2018 was a good year for Rollins as we continue to build our global presence through acquisitions, both domestically and overseas. In the U.K. we expanded our footprint with the acquisition three fine companies, Guardian Pest Control, Ames Group and Kestrel Pest Control. We also achieved an important milestone for the company, when we acquired Aardwolf Pestkare. This is Rollins' first company-owned operation in Singapore. In the U.S. we acquired OPC Pest Control, the premier pest control company in Kentucky and we also made small tuck-in acquisitions and year-end we had added a total of 38 companies to our roster. We also continue to expand the Orkin brand internationally with the addition of franchises in South America, Europe, the Middle East, Latin America and other locations. The Orkin brand is now represented at 57 countries throughout 86 international franchises. As we enter 2019, strategic acquisition remain a focus of our growth strategy. We're extremely pleased to have announced earlier this month, our agreement to acquire Clark Pest Control, headquartered in Lodi, California, Clark has operations in over 20 locations in California and Nevada. Founded by Charlie Clark in 1950, the company has grown to be eighth largest pest control provider in the U.S. Clark recorded revenues of $130 million in 2017. The company is also growing at a faster rate than we are as well as a faster rate than the overall pest control industry. I first visited with the company over 20 years ago when I was fortunate enough to meet Charlie Clark, an icon in our industry. We admired the company throughout all this time. The Clark acquisition will be the largest in our company's history. John will provide more details on this acquisition, but I wanted to express our enthusiasm in acquiring this fine company and personally welcome their team to the Rollins family. I'd now like to turn the call over to John.

Thank you, Gary. As Gary noted, we're very pleased to have Clark Pest Control join our family. The Clark team is a natural fit for Rollins, sharing the same values that we do. More on that later. They service customers through more than 20 branch locations in Northern and Southern California and Nevada. Clark Pest Control is stronger in the upper central valley in Northern California areas than Orkin and our other brands. It was very interesting to learn during our due diligence process how closely linked Clark and our biggest brand, Orkin are in their history. As you may know, Orkin was founded by Otto Orkin in 1901, but didn't expand to the West Coast prior to the Rollins purchase in 1964. Meanwhile Charlie Clark founded Clark Pest Control in California in 1950 and patterned Clark on some of the foundational principles of quality customer service, delivered by well-trained people just as Otto Orkin did. Both companies have certainly retained those principles of quality service, delivered by well-trained team members today. Clark has long been recognized as a premier pest control company in residential, commercial and termite services in the markets it serves. Their strong culture of customer service has been aided by very high employee retention rates and has resulted in a loyal and expanding customer base. We are aware that owners have a choice when they look to sell their business and there are four very important factors that come into play. What is best for their family, their employees and their customers, as well as receiving value for their company. We take each of those into account and customize our acquisition plan to fit those factors. What was apparent in our discussions with Clark from the beginning is how deeply they care about what would happen…

Thank you, John. Before I get into our quarterly and yearend numbers, I want to reiterate the positive impact of our enhanced employee benefit. Our people are so pleased with the investment that we made in 2018 and looking back this was absolutely the right decision and has been reinforced by the positive result that they have produced for the year. As you may recall in April, we increased our 401(k) match and provided stock grants to our employees, which added about $10 million to our expense for the year, but this recognition of their impact on our business is rippling through our results. A recent leadership meeting in Atlanta was the first that we have had -- first that we held since rolling this announcement out last April. The comments of many of the over 100 participants were overwhelmingly positive and appreciative. I want to share a few of the positive changes that we have seen. All employees want to work for an employer of choice. Our employee retention rate has the best year-over-year improvement in the fourth quarter in 2018 since 2016. As you know, during that same time period, the unemployment rate has fallen from 4.7% down to 3.9% in December of 2018. Investing in our people is one of the components that has helped us in this area. We've also often talked about how important our technicians are in their relationship with our customers. Our improved employee retention has translated directly to higher customer retention in Q4 and for all of 2018. Our organic growth rates, again, ticked to historic highs as a result of better technician and customer retention. Enhancing our employee benefits will continue to drive improvements in employee and customer retention for years to come. For the quarter, all of our service lines…

We're happy to take your questions at this time.

We'll take our first question from Dan Dolev from Nomura. Please go ahead.

Hey, guys. Thanks for taking my question.

Good morning, Dan.

Good morning. So I have two questions. One question and then a follow up. So it looks like organic growth was actually really, really strong and impressive and definitely ahead of what we were modeling. Can you maybe give us a little stand about how the weather impacted it? I know it was a little colder in the first -- at least, in the first two months, it was colder in key areas like Florida. Is the execution getting better? Is this share gains? What is driving this strength in organic growth? Then I have a follow up. Thank you.

So Dan, I would point back to my opening comments. We see our employee retention improve. We know there's a direct correlation with the retention of our customers. We saw our customer retention improve and while there was to your point, there were weather issues in pockets of the country I think we saw better retention of our existing customers as well as additional better sales in some different areas, which caused part of our increase in our sales commission. I think those key items really helped us continue to move that in the right direction.

Got it. That make sense. And then my follow up is…

We'll now take our next question from Jamie Clement from Buckingham Asset Management. Please go ahead.

Good morning, gentlemen. John, I think it was John, or maybe it was Eddie, but I think you mentioned the Clark historically, has outgrown the industry, and I think he might have even said outgrown you all. Is that a function of the geography, is that they're in California, Nevada, or there's something extra special about their special [sauce] [ph]?

They've been there since 1950. I think it's probably fair to say they have been the premiere provider in that greater area for a lot of years, and I think they figured it out from a customer experience and [the boy] [ph] perspective and one of the reasons why they are a great cultural fit for us. But I know John spent a lot of time out there and –John probably has stuff to add to that.

Yeah, Jamie, I would say that comparable to our operations out there, our growth has been fairly similar. That area over the last ten years or so for us, has been then led really well and so our out there has been fairly similar. It’s other areas where the -- maybe the Pest control market a little more mature that our growth lag. But there's no doubt they're a special company with a special group of people that really -- they really care about the family that has led them so well for so many years and that their brand living on and we're intent on helping them do that.

Thank you. And Eddie you've -- you want to defer talking intangible amortization and interest expense until the next quarter.

I am sorry, Jamie. I didn’t quite understand what you said.

Oh I am sorry, Eddie. I was saying you wanted to defer discussing intangible amortization and borrowing cost until the next quarter related to Clark.

Yes. We haven't closed on the deal. So this is still a pending deal. So we want to work through those issues and then we'll be ready to talk more about some of the specifics from there.

We'll now take our next question from Tim Mulrooney from William Blair. Please go ahead.

Good morning. So I wanted to talk about operating margins, they contracted I think 60 basis points for the full year. How much of this was the temporary impacts from onboarding more recurring customers something you guys have been talking about, which I know negatively impacts margins near-term and do you expect this dynamic to have the reverse impact on operating margins in 2019?

Yes, this is very intuitive question and we talked about that a lot and I believe in our Q2 call and we’ve continued to see sales that have been impressive. Recurring revenue sales that have been impressive in Q3 and in Q4. So I think to your point, there is definitely some cost that is associated and in there and typically what we see is when that's lowered or at some point Tom, when those recurring sales kind of trail off a little bit is when we really see the overall positive impact on the margin side and it’s a good thing for the long term to not see that because the recurring sales continue to be strong and if you remember back to the discussion we had in Q2, we talked about those being almost double-digit numbers. And for some of our products, we still continue to see extremely strong recurrent sales. So that's definitely impacted in that number.

If I may add something, I think one of the other drivers behind our progress in this area is our enhanced use of the Internet. I have to give our marketing folks credit that they just continue to work on how to buy better and how to use our presence in the Internet and fortunately those leads question was brought up earlier about Mother Nature. Mother Nature certainly can put a damper on things, but that was more than offset I believe by the efficiency that we gain from the Internet.

Tim does that help with your question.

Yeah, it does help, Eddie, and thank you Gary. I'm curious, were there any other major factors that you highlighted as what drove that 60 basis point contraction? I guess the employee benefit program, is that the other big one?

So the employee benefits program is -- and of course, that's not going to be recurring. We'll lap that. This is the last quarter we'll talk about that. So that's the 401(k) piece as well as the stock piece. We know that on the vehicle side that, well, fuel prices have moderated somewhat compared to previous quarters, they're still up year over year, has been an impact. And then we had other factors outside of that.

I think one other thing that is noteworthy is, we've been very aggressive as far as our IT expenditures. The enhancement to BOSS, the pace of the rollout of BOSS and so forth. And of course, that's going to moderate itself. But we've never spent that kind of money that we spent last year.

Yes. Okay. That's very helpful. Thank you. And I'll hop back in the queue.

Yes. Thank you. Just one last thing, Tim, on that point having to do with the benefit is, we did see an acceleration in the fourth quarter as far as people taking advantage of this new enhanced benefit that we've rolled out with more 401(k) dollars. So I think the word continues to spread and people continue to understand this is a great opportunity and that number ticked a little bit higher than what we've seen in the previous quarters.

We will now take our next question from Chris McGinnis from Sidoti & Company. Please go ahead.

Good morning. Thanks for taking my questions. Can you just -- Eddie, I think there was -- you may be have commented on just even more acquisitions to come on the year. Can you maybe just talk a little bit about the landscape now, obviously, a very strong year in '18? And just what you see ahead for the opportunities in '19, obviously, outside of Clark?

Yes, so Chris, I think if you look back over the last 3 years, you'll see the dollars and/or the numbers continuing to increase. I think a little bit of that is going to be attributable to our team here, just continue to develop the relationships and being ready to go when companies are ready to go. Good quality companies are coming to the table, which, of course, we want to be a part of. We continue to expand our look into different geographies to find the right fit. As you know, Singapore this year, in 2016, the U.K. we entered, and we added some more into the U.K. this year. But I think a lot of it also has to do with the actual industry itself. It's an industry that started after World War II. Some of the original owners are having to make life decisions on what they want to do with their company. And John talked a little bit about that on how different companies make those different decisions. So I would say, we're still probably 2 to 3 -- in the next few years, I would say, we'd still be in that type of a cycle, having to deal with different companies making different decisions on what they want to do. Whether it is to hand it off and keep it within their family or whether it is to do something different and be able to pass it along. But I think there's going to continue to be opportunity. With this pending acquisition for us, it'll be our largest in our history. So it's hard to sit here and say today how active we will be. But when the right opportunity presents itself, we're still absolutely going to be at the table. But we're going to have a lot of good work to do, having to do with this, depending on what we have.

Great. Thanks.

And Chris, if I may add, reputation is big with this. And how you deal with and how you treat these companies as you bring them in. And we worked really hard on that aspect. I like to tell our team, you get two things in this deal, employees and customers, and neither has to stay. And so we work really hard on making sure we keep both.

And Chris, we're making sure -- yes, so just one more thing. I mean, that really is a great point and just one more thing to add in Gary's comments at the beginning. He sat down with Charlie Clark 20 years ago, and there's not a lot of other people that are out there that are sitting down with these owners and have the history that Gary has and that our Chairman have with these folks. And so when it comes time for them to make a decision, guess who got a phone call? When you have a long-term relationship, that's part of what's going to be the decision point there. So I think as long as we continue to see that and we have folks that have decisions to make, that'll be to our benefit.

Yes, I guess, just one follow-up on that. I guess, out of all the acquisitions last year, were they all privately negotiated? Or was there may be a percentage that were maybe auction based.

I don't know any of on the top of my head that were...

On auction based, there were certainly some offered up as -- by brokers, if that's what you're referring to. I don't know the percentage off the top of my head, but certainly -- and a lot of the bigger ones are typically brought to us by brokers. But there's quite a few too that we're bringing to the table through our relationships in the industry.

Thanks again for the additional color.

Thanks, Chris.

We will now take our next question from Michael Hoffman from Stifel. Please go ahead.

Thank you very much. I'd like to talk about costs, both the OpEx as well as SG&A and how to think about what your trend should look like in '19 in comparison to '18? Would we expect to be proportional to sales -- percent of sales similar numbers or is there a little uptick? Because you've mentioned 401(k) sort of accelerated absorption by the employee base, I'm assuming that hasn't peaked. How to think that through the model, ex any influences from deals Thanks.

Yes. Thanks for that question. A majority of the employee benefits related expense is going to be behind us as far as the year-over-year look is concerned. We did have -- to your point, we did have a little bit of an uptick in Q4. More folks are continuing to be able to take advantage of that. But if you take a look at the total, total numbers, there won't be anywhere near the significance of the impact from a year-over-year perspective. The sales, our commission piece, we just don't know what's going on with that. As long as we continue to find ways to be able to grow, and we continue to hit these new highs as far as our organic growth rates are concerned and our sales folks are executing, we may continue to see dollars that are in that area. On the fleet side, we're all seeing the price of fuel that continues to kind of stabilize now and when we start lapping a year-over-year, there should be less of a headwind or maybe even possibly a benefit with that. So I would say that a lot of the items that we have are onetime items on the expense side from the employee benefits. But then we also have other things that, I think, intuitively we will all see that are kind of moving in the right direction. So I would say, we would be moving in a positive direction with that as far as that particular question is concerned.

So just so I'm clear, you would expect some operating leverage?

Yes.

Okay. Thank you.

[Operator instructions] We will now take our next question from Dan Dolev from Nomura. Please go ahead.

Hey, thanks for having me jump back on. I got cut off before. So my follow-up was this. Look, I look at the stock today, it's down 6%. I think this is a little bit of an unforced error. It has to do more with expectations and not -- in my view, not having guidance. Does a day like this make you want to think maybe it is time to start offering guidance? I strongly believe it could avoid such things because the organic growth was so strong, and I feel like people are missing in. Any views on that.

Yes, so I guess, my view and, of course, it's the person sitting at the end of the table here ultimately gets to make that decision. But my view on that would be, I would think that you as well as the others on the call and our investors would much rather me and John and Gary and others be spending their time on running the business and making decisions on how we're going to make this better as we have for the last lots of years as opposed to answering questions on somebody's guidance or filling in a blank or reconciling something or something else like that, letting us have the autonomy to continue to execute. I think when take a look at the items that drove the "disappointment" that might be out there, based on what you said, having to do with the stock price. And we go through and we kind of parse through that. We look at an investment in our employees, the 401(k) benefits, we look at IT spend, rolling out enhancements in Canada where we've already seen improvements in the U.S. when we did that. Our largest acquisition and the costs that are related to that largest acquisition that's impending in our company's history and the costs that are related to that. And I think if you look at all those different pieces, and to your point, if you kind of break down into that and look and see what's onetime versus what's recurring, I think you'll see that we're running the business at a very good level. And rather than taking the time to go through and reconcile all of that, I would think that you all would want us to continue to make those decisions to make the company better. I can easily be overruled by the person at the end of the table here.

That's not likely.

Yes. No, I totally agree with you. I mean, it's a great quarter and the organic growth looks fantastic. And I'm surprised that -- of the stock reaction.

We'll see how the rest of the day goes. How about that?

I'll be watching. Thanks, guys.

Thank you.

Thank you, Dan.

Thanks. Thanks, guys.

We will now take our next question from Michael Hoffman of Stifel. Please go ahead.

So my next one is about retention. Can you talk about the rate of change in the retention? I get you don't like to talk about the absolute number, but how does that rate of change look in 4Q and relative trend through the year?

So I'll start with employee retention. Our employee retention had the best improvement we've seen since 2016, and we believe that a large contributing part of that is the enhanced employee benefits. I don't want to take anything at all away from how John and his group are managing the overall operations. Our employee opinion scores continue to go in the right direction. Gary talks a lot about the enhancements in our technology and how that makes our job almost easier for our technicians. It just makes it more straightforward. It takes a lot of the stress out of it when we have a very clear day for them to be able to go through and manage, and we start taking away issues and problems that the customer might have through better communication and things like that. So I think all of those things are making the employee retention number. But again, we feel as though the enhanced benefits are a key part of that. And then that's directly tied to improvements in the customer attention, and that's been a clear focus of John and his operations group over the last 2 years. But I can tell you unequivocally that we've seen the best improvements in Q4 and really kind of trending the right way throughout the year as far as the customer retention is concerned.

You might mention podium?

Yes, yes, sure, that's fine. So we've really done a better job reacting -- that's what Gary's bringing up here. We've done a better job reacting to our customers that have issues or concerns that give us that information online. Historically, we did not do a very good job communicating back with customers as far as issues and concerns, and we've done a better job with that. And we've seen the scores that have improved because of that. So we had scores that, in some areas, were not acceptable because we weren't necessarily communicating with our customers that have problems or issues. And those numbers now -- the average rating is up to about 4.7 out of 5. So in a lot of markets, we're seeing enhancements and improvements just simply in the communication, and of course, the great execution of John and his team are having from an operations' perspective. So lots of different moving parts that are all trending in the right direction, and we feel extremely good about this continuing to move as we move into 2019.

May I ask one subtle interpretation of that? Is there a difference between residential and commercial in this conversation?

There is not a substantial difference between those two. There really is not. I would say that our technology enhancements, if you take a look at the customer communication piece on the residential side, has been enhanced and has been a very positive thing. But I think on the commercial side when we take a look at what we've offered as far as data and information to our commercial customers, that has been a significant technology improvement as well. And I think we've seen good improvements on both sides of the coin there.

Thank you.

There are no further questions over the telephone at this time.

Okay. Well, thank you so much for being here or being on the call. We appreciate your interest in our company, and we look forward to reporting our first-quarter results. Thank you.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.