Good day, and welcome to the Rollins Incorporated First Quarter 2019 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, 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 passcode 2305197. 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, 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. Thank you, Marilyn and good morning. We appreciate all of you joining us for our first quarter 2019 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, 2018 for more information and the risk factors that could cause actual results to differ.

Thank you, Eddie. As most of you know our first quarter is a transitional quarter that leads into our higher demand pest season. Although, we rarely talk about the impact of weather on the business, this year mother nature was particularly unkind, unleashing what some referred to as the polar vortex delivering some of the coldest temperatures to parts of the country in over two decades. But as we say around here, spring always comes sometimes it's earlier, sometimes it's later. We much prefer earlier however. But it always comes and with it comes higher pest activity. This pest activity can be measured by digital and phone lead flow. March and early April confirmed that spring is arriving and service demand and sales will begin to increase significantly. The good news is that we have already added to and trained our seasonal staff to meet this increasing demand. Although, we were hampered with the coldest first quarter in the past several years we had many important operational successes. These were the result of our previous investments that will benefit our employees and customers. This quarter we achieved major improvements in both employee and customer retention. Our new technologies developed to improve our service delivery through our customer routing and scheduling and as you recall we enhanced our 401(k) and other benefits. These actions are both paying dividends, and I'll explain further in a minute. Revenues for the quarter grew 5% to $429.1 million, compared to $408.7 million for the first quarter of 2018. Net income was $44.2 million or $0.14 per diluted share, compared to $48.5 million or $0.15 per diluted share in the first quarter last year. Eddie will provide greater details on these results. Looking at our business lines in the quarter, residential pest control grew 4.9%; commercial…

Thank you, Gary. While our first quarter results were not what we expected, we have reasons to celebrate and most of that centers around our team members. Gary has already recapped the highlights of our employee benefit enhancements, so I thought to report that this year how these improvements are helping our operations. For the Orkin brand alone, we saw a 33% improvement in our most important metric employee retention. This meant that we separated from Orkin 224 fewer people. This saves time spent searching for replacement team members as well as dollars spent for training those new hires. We also saw similar employee retention improvements in nearly every other one of our brands and what we all know is a very tough labor market. During the quarter, we were also pleased to announce that Rollins and Northwest pest control has been awarded a 2019 top workplaces award by The Atlanta Journal-Constitution. This marked the third consecutive year for Rollins having been honored for this award, and the seventh year -- seventh consecutive year for Northwest recognition. Rollins ranks 16th in the large business category, and Northwest ranks 20th in the list of midsized companies. This honor is based solely on employees satisfaction and engagement feedback gathered through a third-party survey. The survey measures several aspects of workplace culture including alignment, execution, leadership and connection, and more than 4,300 Metro Atlantic companies participated in this program and 80,000 of their employees were surveyed about their workplace experience. Many thanks go to our leadership team, who deserve the credit for Rollins achieving this honor. We were also pleased that Rollins was recognized again this year by Training Magazine as one of the top 125 training organizations in the world. This marks the 14th time, since 2003, that either Rollins or Orkin…

Thank you, John. The extreme weather and late spring coupled with several one-time items contributed to uncharacteristic results for the first quarter. We were well-staffed to provide our best-in-class service between a much publicized polar vortex and the substantial rain in all of California and the Midwest, pest demand did not materialize in a normal fashion. For example there was several days in February that were impacted with snow in unlikely places like Pasadena and Las Vegas. January was a good month February a difficult -- a very difficult month and March was a more normal month. Even with late snow in many areas of the country, we see April is off to a favorable start. For the quarter, all of our service lines showed growth and peak of the quarter included impacts of extreme weather patterns, continued improvements in both employee and customer retention, and as mentioned, several one-time items that impacted bottom-line profitability. Looking at the numbers, the first quarter revenues of $429.1 million was an increase of 5% over the prior year's first quarter revenue of $408.7 million. Income before income taxes decreased 5.3% to $56.1 million from $59.2 million in 2018. Expense grew faster than revenue as we prepared for the spring season that was delayed this year. This impacted most of our subsequent financial metrics as well. Net income fell 8.9% to $44.2 million and earnings per share decreased 6.7% to $0.14 per diluted share compared to $0.15 per diluted share in the first quarter of 2018. EBITDA was $72.5 million, down 4.9% over Q1 of 2018. As we move forward, we will speak more to EBITDA as we add Clark and more customer amortization to the Rollins family brands. Let's take a look at the one-time items that impacted the quarter. A normal quarter…

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

[Operator Instructions] We will take our first question from Sean Kennedy with Nomura. Please go ahead.

Good morning everyone.

Good morning.

Good morning Sean.

So I had a question about the operating margins this quarter. I know Eddie touched on it, but even adding back this $3 million of add backs that you called out on the press release, it's still getting back to around 14% operating margin. So I was wondering, if you could maybe detail some of the other pressures and then see and describe whether they are recurring or just one-time? Thank you.

Yes. I will point you back to the softness of the quarter from a weather perspective the softness of demand based on the weather. Revenues did not come in as we would typically anticipate because of the slowness of the spring season, which caused some of that as well. We don't necessarily have that particularly quantified. We're well staffed across the board but those – but that staffing without the revenue that's there is going to put some pressure on that as well.

Got it. And then one follow-up question on commercial was a little weaker than expected was that due to weather? Or is there anything else to call out there?

You know, I think if you look at that from kind of the roller-coaster perspective, if you look at it over the last four years you'll see commercial rolling faster then you'll see it a little bit slower then you'll see faster and a little bit slower. I think we just had a quarter that was a little bit off from what we've seen in some of the previous years. If you look back in 2018 and even 2017, we had some pretty strong commercial numbers that we saw.

Great. That's it for me. Good luck with the rest of the year.

Thank you for that.

Thank you. [Operator Instructions] We'll take our next question from Michael Hoffman with Stifel.

Hi. Thank you very much. In the fourth quarter you gave us guidance about the tax rate for the year at 26%. How do I think about the cadence of that tax playing out for the remainder of the year given the 21% in 1Q?

Yes. So we will get to around that 26% for the full year. 2018 was similar in fashion where Q1 was the lowest tax rate that we had for the year and then the subsequent quarters Q3 and four brought us back to that total numbers. So I would anticipate a cadence based on everything we know right now that would be similar in nature to that. And of course, last year the tax rate was at 18% with some extraordinary items that impacted that and the tax rate this year 21% lower than the full 26%, but still again higher than last year. But we believe that the subsequent quarters should level that out for the full year up to 26%.

Okay. And then the revenues shortfall have you quantified for yourself how much was – branch was close we couldn't do this service versus we didn't get a new customer and so you understand – maybe that branches closing and you didn't get the work done but it's going to get done? How much of that number that shows up in 2Q?

Yes. We've not taken the time to grow through and break that down. That – it's really going to be demand that is pent-up. And as Gary talked about earlier, we seen the least of the phones ringing much more aggressively and its A - it's a stuff that we'll see in the upcoming months. As I mentioned April is off to a good start for us and as that warm weather comes the demand will come through. The good news is that John and team are well prepared and they are well-staffed well-trained ready to go for that.

Right. And may I squeeze one other and what's your borrowing costs so we can do our own analysis of when we can get Clark closed and all that and figure out what's kind of happen on the balance sheet?

Yes. So we do want just one follow-up, but we will have the term loan tied to LIBOR and then the credit line will be slightly higher than that. But once we finish and close we'll give you some more details on that.

LIBOR plus what?

What? We'll give you more when we close.

Okay. Thanks.

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

Yes. Good morning.

Good morning.

Good morning.

So, Sean and Mike each asked the question, I'm just going to try ask it one more time. How much did weather impact your top line results in the first quarter?

Well, we don't like to say the word weather and Gary kind of opened with that, it's the reality. As good as we are at being involved with that and as far as the different quarters are concerned mother nature still does her thing. And in this case, it's by far the coldest that we've seen in several years. We staffed as appropriate for a relative normal year. And in -- like an example that I gave. Pasadena is snowing, Las Vegas is snowing. There was more rain in Los Angeles and in Southern California than there was in Seattle during the first quarter. So, it's just anomalies that just occurred that we're not accustomed to. When it rains every day in Southern California, we can't do termite work. We can't do a lot of pest work that we can do in those types of situations. And then when it's snowing in places or polar vortex cold in Chicago was minus 20, we're not digging trenches for termite when it's minus 20 degrees. So, we don't have a number that's going to quantify that. It's just very different than what we seen in the past several years. Gary is in this longer than any of us. So may you put some more color on it?

I'm not. I mean, it's painful when it's the first quarter. The good news is, is if you had stumbled this is the one to do it on, because of the size of the quarter. But I'd like to add one thing we spent a lot of time developing our bonus plans for our managers and leaders. And our plans are settled quarterly and -- but they also have an annual checker, so our people get back in the game. I mean, you can have a bad quarter, but still pull it out and that's been very helpful. So, we don't have anybody depressed or suicidal. It's just a matter of bad situation and it's very difficult to just determine the impact of not being get to the customers and not having the leads which is important part of our business. I mean, I would really imagine that even a mathematical genius would have a hard time trying to figure that out.

Yes. That makes sense. Thanks for the additional color. Garry, I appreciate that. Just -- my other one, Eddie you said April is off to a good start, right?

That's correct.

So, if I'm looking at the second quarter which I know is a critical period for you guys, could weather potentially be a tailwind this year? Am I remembering correctly that last year had a delayed spring pest season? Thank you.

Well, the -- I'll ask John to weigh in on this as well. But the thing that I would add is whenever there is extreme moisture, once that dries up it creates a significant demand on the pest side. And warmer weather are good for us as long as long as the wet dries up enough for pest to proliferate. So, I would say that we would have opportunities, especially in those areas that have significant rain or other moisture whether it's snow in the first quarter, we'll see the benefits of that trailing, I would say, this quarter and the following.

Yes. I think all of those things, Tim I mean we're seeing a pent-up demand. We had $1 million day in our call center, which handles residential pest sales for us on Monday. We hadn't had one of those this early or in April since 2017. So plenty of pent-up demand, our teams are well prepared to handle that. I think it'll be a much better quarter for us, no doubt.

The encouraging part to me, which John talked about during his part of the call. The employee retention is significant improvement, which has helped us with our customer retention is significant improvement. So now we go into this pent-up demand time period with higher employee retention, well-trained technicians and we're going to be ready to rock and roll with the demand that is there. So that's the encouraging part to me is how well prepared we are for what's about to happen or what's happening right now.

Great. Thank you, and good luck in the spring.

Thank you.

Thank you. We will take our next question from Chris McGinnis with Sidoti Capital. Please go ahead.

Good morning. Thanks for taking my question.

Morning.

Just maybe to follow-up on that. Does that pent-up demand puts stress at all on the system? Can you maybe just highlight that how better positioned you might be given the kind of the weaker trends in Q1?

Well, from me you don't have a situation where we're going to have to hire additional new people and have then trained as this demand continues to increase. With the employee retention, again that John talked about and that we've had. We have the productivity and the efficiency already in the network that will enable us to be able to I believe -- I strongly believe to be able to digest it easily. So it's not that the demand is increasing and we're having to add new stuff and having to train them and get them up to speed. These people are already on the payroll, they're already trained, they are ready to go. And I think we'll be more efficient than what we -- maybe would be if we were still adding people during this time period.

I'd like to add one thing, Eddie, which is also important about the retention. Although you do save on the search and the training, you also save as far as management time. And I think that's an important consideration, because it takes a certain amount of management time to go through that sourcing and training and energy in training. So they'll have more time to really work on our businesses forward.

Thanks for that. And then just a lot of acquisitions in 2018. Can you maybe just talk about how those businesses are trending versus maybe as you want just call the legacy business as well in the quarter? Thanks.

Yes. From an acquisition perspective, once a year we have a summit to come together to go through all the acquisitions we've had for the previous years. So we track those on a monthly basis to make sure that we are seeing the benefits that we should see. At this point in time we're very happy. If you look outside of -- just the Orkin, U.S. operation, you look at our Specialty Brands and our international operations for Q1, they performed very well for us and we don't -- we're not going to break anything out, we're not going to give any specifics of anything. But they performed very well for us. And in some cases those were newer acquisitions, the OPC newer acquisition, Northwest newer acquisition. We've increased our footprint in the U.K., Singapore last year, newer acquisition that have all performed very well for us. And I think seeing those has helped the overall distribution of what we have as far as revenue and profitability. So, I think overall we're in a good spot and I think in a great spot as far as growth for the future.

Great. Thanks for that color and good luck in Q2.

Thanks.

[Operator Instructions] We'll take our next question from James Clement with Buckingham Research. Please go ahead.

Hey, good morning gentlemen.

Good morning.

Can you hear me?

Yes. Go ahead.

Okay, great. Guys I want to ask you I saw -- I don't know how long it's been on TV, but I saw one of the Orkin commercials featuring like the baby nursery. I kind of thought that was a little bit different in terms of tone than some of your other ad campaigns in the years past which were a little bit more outrageous, whether it's a guy wearing a bug costume and holding a pizza box and that kind of thing. Any intents behind sort of the change in vibe there?

Well. I think we were trying to -- and I'll let John help out with this, but I think the intent was to pull in all of the different support that we give to our customers. And I think if you look at the many different types of ads that are out there, we talk about lots of different scenarios where our customers need our help and our support. And for me, the most favorite one is the female technician that is part of the family. And they show her in the house, they show her help them with the kids homework and they show her making breakfast and stuff. They just consider her to be a part of their family an extension of their family. And I think that's more of what we're trying to get to is how supportive we are with people's lifestyle. And by creating a safe customary environment and by creating an environment on the outside of a home that are customary and mosquito free enable people to live their lives in a different way. And having Orkin be a part of that, I think it's really what -- part of what it was that we were trying to create.

Okay.

Yes, Jamie I would add. So the messaging is all about pest control is an ongoing necessity as opposed to an emergency type of situation. To your point about the big bug holding the pizza box that...

Which I loved by the way I absolutely love that to see it now.

No doubt, but it was really about -- the messaging was about only calling us when you have a need, right. Whereas now the messaging is about in order to maintain a healthy and happy lifestyle, pest control is kind of a necessity as opposed to that only call when you have a need. So that's kind of the messaging and then the other piece of the new advertising is it's attention getting. I mean, I was in a hotel in Chicago and I had the television on the news channel and all of a sudden the television kind of went silent. And after a few seconds I looked up and then it was one of our ads and it was the one with all of the adults on the back deck having a party. And they we're talking in a muffled, which by and large there wasn't much sound coming from the commercial. And they told me to look up to see what was going on and about the time I looked up the ad was ending and the Orkin logo showed up. And so it went a lot of quarter we're trying to get -- grab people's attention with that move. And it's -- I think it will pay off for us it's proven successful early on. We've got some really good reviews on it.

Okay. I think if I might add one thing. We do a lot of testing. And so, there would be several creative initiatives that were stopped or discontinued and we select what we feel is going to be the best one and if you're watching television or the commercials or cable or whatever, you can just see a similar situation with major advertisers. They are just looking to grab the audience and deliver their message, but if you can't grab them, it doesn't matter what your message is. So we're hopeful and time will tell.

I appreciate that. Eddie real quick, your comments around the range of growth in intangible amortization, were you giving it back to the fact that you're only talking about eight months of 2019? Or were you did meaning on like an annualized basis?

So that would be the impact -- once we make the acquisition that will be the impact, there will be a range of the impacts on a quarterly basis.

Okay. So like a year-over-year basis?

Correct.

Okay, okay. Okay, great. Thanks very much. I appreciate it.

You're welcome. Thank you.

Our next question will come from Michael Hoffman with Stifel. Please go ahead.

Hi. Just, you gave a bunch of data, which on the phone was breaking up unfortunately. So I didn't know whether it was -- you gave big growth rates. I think you gave us the totals, that 4.9%, 4.6%, 4.8%, the next group, was that organic, the 4.5%, 2.5% and 4.3% res, comm and termite?

That is correct.

Okay. I couldn't. The phones were breaking up unfortunately. So inside that 4.5% to -- and all those numbers, because of the weather and the disruptions, is virtually all of that retained business and add-on services, plus prices versus new customer adds?

Well, we'll have new customer adds in certain parts of the country. I think the majority will come from the categories that you mentioned. But there are -- there's certain parts of the country that were less impacted by the weather than others. I mean if you look at the Midwest, they were probably the most impacted, then I would probably say California is where it kind of followed that. But there were other areas of the country that were less impacted and we would have new customer growth that will come from here.

And that's why you're saying that retention across all three businesses improved year-over-year, because -- in each of the biz segments, because you're part of getting the number -- the organic growth number, you worry you had to improve the quality of the retention too, right, given the disruption in new leads.

That’s right.

Okay. So that’s why I was trying to get it right. All right.

Yes. So the -- so we -- again, we believe that the tie between the improvement and the employee retention, again, that John talked about is always a great correlation for us on customer retention and we've seen that now a couple of quarters in a row, where we've seen some pretty healthy improvement.

Okay, great. Thank you.

Thank you. I will now turn the call back over to our speakers.

Great. Thank you. Okay. Thank you for joining us today. We appreciate your interest in our company and look forward to updating you on our progress in the second quarter call. Thanks, again.

Ladies and gentlemen, thank you for joining today's conference call. The call has now concluded. Please disconnect your lines and have a great day.