Good day, and welcome to the Rollins, Inc. Fourth 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, Cassidy. 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 1421446. 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 will 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 2019 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, 2018 for more information and the risk factors that could cause actual results to differ.

Thank you, Eddie. Revenues for the fourth quarter grew 13.8% to $506 million compared to $444.6 million for the same quarter in 2018. Net income was approximately $50.8 million or $0.16 per diluted share compared to $51 million or $0.16 per diluted share for the fourth quarter of last year. Revenues for the full-year increased 10.6% to $2.015 billion compared to $1.822 billion for 2018. We are all pleased that we broke the $2 billion milestone. Net income for the full-year was $203.3 million with earnings per share of $0.62. This compared to net income of $231.7 million or $0.71 per diluted share last year. Net income this year was negatively impacted by $50 million one-time charge for closing down our pension plan and a casualty reserve increase. Eddie will address these charges further in a few minutes. We continue to experience good solid growth in all of our business lines for the quarter, with residential up 16.5%, commercial, excluding fumigation, rose 9.8%; and termite and ancillary services grew 16.1%. During the fourth quarter a question that we heard on a regular basis from investors was, what is your exposure to termite damage claims. I thought this might be a good time to provide some history and background on our termite claims and the service initiatives that were implemented over many years of treating and protecting structures of termite infestations and damage. As background, Chlordane was used as a pesticide in the United States from 1948 to 1988, 40 years. Among its numerous uses, Chlordane was a very effective termiticide to control against termite infestations in homes and other structures. In fact, from 1983 to 1988, Chlordane use was narrowed to only control termites. In 1988, all approved uses of Chlordane in the United States were canceled. Orkin had stopped…

Thank you, Gary. As Gary just noted, by the mid-'90s, it was clear the replacement chemicals didn't work as well as Chlordane in the treatment of termites. In the three years prior to 1995, Orkin's termite damage claims averaged around $3 million per year. Over the next couple of years, the claims expense multiplied in dramatic fashion. By 1997 and for several years thereafter, termite damage claims exceeded $20 million a year. Decisions were made by our leadership team to improve process, training, and treatment protocols. These new processes were then developed by our technical services group, led by industry icon Paul Hardy, and many other members of our team. This approach allowed our operations to focus on meeting all obligations to their customers. The Companywide quality assurance program Orkin put into place during that time concentrated solely on termite issues and helped us to get out in front of this accelerating termite issue. We also addressed the Formosan termite at that time, which has made recent headlines, as they were already a growing concern. In other words, our quality assurance team as well as many other actions taken served over time to de-risk our termite service business. As a result of these many actions and activities, we have seen a steady decline in claims and retreatments from year-to-year. It is easy to put your finger on the many things mentioned that we changed. What is not so easy to put a finger on is the cultural change that had to occur with our field teams. It was painful, it was hard and it was costly from both a financial and human capital standpoint, and it also took a long time, but it was worth it in the long run. In more recent years, as we have continued to work…

Thanks, John. Before I begin my review of the financial numbers for the quarter, I want to recognize the solid results that our operations produced during the second half of the year. After mother nature deviated from her normal path in Q1 and Q2, the weather pattern turned more normal and the results of our operations produced record revenue growth in the quarter, strong double-digit EBITDA growth, and continued improvements in both employee and customer retention. Specifically, our Orkin employee retention increased 1.8 percentage points and our commercial service line improved the most of all three service lines for retention year-over-year. Consistency and experienced management matters. I also hope that the details that both Gary and John shared related to our termite service will put to rest any concerns that you have about the recent termite discussions in our industry. For the quarter, we had strong revenue growth and items that impacted the quarter were, rising accident and insurance expense that reduced the Q4 results by a $0.01, depreciation increase related to the final stages of the BOSS rollout in Canada, and a very successful pilot of the next phase of routing and scheduling journey. In addition to reporting our Q4 and full-year numbers, my focus today will be to share the non-operational event that impacted our Q4 results, specifically casualty and insurance related to accidents and injuries. Lastly, I will give you some insight on some items that have 2020 already off to a great start. First, I will go through the results. Looking at the numbers, the fourth quarter revenues of $506 million, was an increase of 13.8% over the prior year's fourth quarter revenue of $444.6 million. Income before income taxes was $72 million or 0.008% above 2018. Net income was $50.8 million, down 0.004% compared to…

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

Thank you. [Operator Instructions] Our first question comes from Mario Cortellacci of Jefferies.

Hi, thanks for the time. So, I think, I just wanted to get a sense for what the current multiples you're seeing in the M&A market. I mean, I think, a larger competitor of yours is not going to be doing deals for a, while and - or at least they are going to be less aggressive on what they are going to be paying. I just wanted to see if that is impacting your planning for 2020. And, if multiples do remain off peak in 2020, should we expect another outsized year? Maybe not a year as large as 2019, but could 2020 be another above-average type of year?

Yeah. So, Mario, I will just say that, yeah, I mean, there is no question that within the industry - that several within the industry have paid above historic rates. We did have the largest acquisition in our Company's history, which obviously from a multiple perspective was a little bit higher than what we paid historically, but we have not deviated from the average acquisition that we have. We have not deviated from our normal history, which has been somewhere between 1.25 times and 1.75 times annual revenue. And it really comes down to the selection of that seller and then making the decision of what it is that they are trying to accomplish. If that seller is just trying to get the largest dollar that they can out there, there are competitors in the market that, as you stated, have paid higher multiples. We have been very diligent with that and I think We have made some great selection. And, John is really more involved in that on a day-to-day basis and I don't know if you have something else - you would like to add to that.

No, I don't know that I have much, but I would say, 2019 would be really rather hard to top. And I can only think that they will go down from there. I don't know, it is anybody's guess as to how much, but we want to maintain discipline in our approach, and - but then be willing to go a little extra mile when it is a really solid Company.

Great. And then, just a quick question on your connected technology and just wondering if you can give us a sense of how many of your customers are using technology, or how many locations connected technology is already at? And, I guess, where that fits into your technology road map overall? I just didn't know how big or how fast you wanted that to be longer term.

We have been testing connected technology for several years now. We have our technology, our IT group as well as our technical support group, are constantly testing all the technology and of course, as I'm sure you can assume, it is changing rapidly. We have test customers that are using different products. At this point in time, we are not in a position to make any sort of material change to what we are doing today. We feel very prepared that if and when there is an industry shift or change or a customer need, we are ready to be able to respond to that. But I think, at this point in time, we are just continuing doing what we are doing from a service perspective and we would supplement it, as appropriate from there.

Eddie, I would like to add. One advantage I think that we have is that several of our brands are using different software. So, we are really in a position to monitor the successes and the features that exist and, of course, as always, to use the best product. We will be converting BOSS and Western next year. At this point, it is certainly the superior of everything that is out there, but I think it is worthwhile that we can watch carefully when other products are available.

And, every time - and to add to that, every time we do that, it gives us the ability to be able to link in any connected technology in a more efficient manner, but I think we have some really smart people on our team that are looking at this, both from the technology and the technical support side and I feel very confident where we are at this point.

Great. Thank you.

Our next question comes from Jamie Clement of Buckingham Research.

Hey, guys, although it is early in earnings season, it seems like some of the industries out there that advertise heavily and I have got sort of restaurant chains in mind, have discussed with investors on their calls that with elections in front of us that there might be a little bit of margin pressure from increasing in - increase in advertising and marketing costs. I don't recall that being called out as much four years ago. Is that something that you have your eyes on or did it impact you four years ago or can you just tweak your mix and really have it not be that much of an issue?

Kevin Smith is our CMO and he has been up against this hurdle, not specifically the one you're talking about with the election, but he has been up against this hurdle with potential for rising costs in this area for the last several years. Digital marketing - we shifted to digital marketing tremendously over the last six years. And as everyone knows, the cost in those areas continue to escalate. But Kevin's budget for advertising has not changed over that time period as far as a percent to revenue. So he and his team have done a tremendous job just figuring out how do we still create the number of leads that we need by the different service lines, using the different opportunities that are out there. Some of that is going to be things like advertising on billboards, some of it is going to be commercial advertising, some of it is going to be through digital, but he uses that total bucket and goes through and figures out a way to be able to create that demand that we need in order to be able to grow our business. And I don't see this 2020 year being any different for the results that you will be able to go through and create.

Okay, great, Eddie, and just one final thing. The strong termite numbers that you reported for the quarter and obviously they have been very good for the last couple of years. During the quarter and kind of bigger picture, looking back over the last year or two, has there been a disproportionate level of growth internationally in your termite reported segment versus domestically or are they both pretty consistent? And, I'm just thinking about climate differences in places like Australia and that kind of thing.

Yeah, we don't break things out by geographic areas, but I will just say, in general, We have not seen any sort of specific area that is been tremendously different. We have - our folks have done a great job growing this product across all of our markets. Within the U.S., We have done a tremendous job using our closing tools that we have, our in-house financing has been a big push and a big piece of that, our sales folks have done a tremendous job. And, we camped out on this for a while with Gary and John talking about the quality of the service. And people talk and when the quality of the service is what it is and we have great outcomes, then we get an opportunity to have word of mouth and we get a chance to continue to cross sell, knowing we had the largest residential set of customers that are out there. We get a chance to cross sell our pest control or our termite into our pest control customers.

Thank you all very much for your time as always.

Thanks, Jamie.

Our next question comes from Tim Mulrooney of William Blair.

Gary, thank you for the great history lesson on the termite business. That was very informative. And, John, for the termite damage claims, you said claims expenses were below 1% of revenue for the full-year. Is that 1% of total revenue or 1% of termite revenue?

No, it is 1% of termite revenue.

All right. I just wanted to make sure. That is what I thought, but I wanted to make sure. And, John, while I got you, can you also just talk about what you plan to do differently this year to prepare for the spring pest season? What were the primary takeaways from your recent meeting with business leaders or at least one that you can share with us publicly?

Yeah, I think the single biggest thing would be to delay our stub staffing for the seasonality of our business to more of a just-in-time approach. That is a tricky tightrope to walk in a tough labor market, but that is what our field operators are really focused on doing this year.

Okay. Thank you, guys.

Thank you. Our next question comes from Brian Butler of Stifel.

Okay, great. I was hoping, could you give a little bit of color on maybe on organic growth heading into 2020? I mean, it was strong in the back half of 2019. Is that pace sustainable or is there some things out there that could put some pressure on that?

We don't know of anything right now that would put pressure on it. I mean, it is early in the year to be celebrating. January has been a much better month than it was a year ago. But you know, but you never know what mother nature is going to do as we move forward in time. You never know what storms might look like. In 2017, we had two back-to-back storms, the two largest storms in our country's history, that negatively impacted things. So there are lot of variables that will come into play, but given everything that we know today, we believe that we are off to a good start and we have no reason to believe that we won't have a really good year from an organic growth perspective. With the growth of our mosquito product now for the third year, as I mentioned during my prepared remarks, we continue to see great opportunity with that particular product as a cross-sell opportunity. We talked about our termite being able to grow as far as a cross-sell opportunity, We have been able to do that. So I think there are lot of very positive things that are going on. Pricing is still very rational and we are able to see price increase. So we feel very good about 2020 from an organic growth perspective.

And I think it is important to share that this was the most disappointing year We have had for 22 years. So we think that it was an anomaly. I have never seen so many one-time charges in my experience, Eddie.

Noticed that.

And, but seriously, I mean, We have learned from this past year, I think John hit it on the head. I think we got too ambitious, too soon. You can't make the season and we had some disappointments due to mother nature. But I'm a believer of taking our mistakes and learning from them and benefiting from them. And we had a very powerful leaders conference. Our people are optimistic. And with the technology that we are enlisting, we think we are going to have a good year.

Okay, that is very helpful. And then one last one. On the cost, you had pointed out a higher cost around Clark in the service salaries, is that limited to 2019? Or should we think about those costs really kind of continuing forward into 2020?

Well, the purchase was closed May 1. So by May 1, we will be lapping at that point in time, but it will be new until then.

Our next question comes from Seth Weber of RBC Capital Markets.

Just to follow -- just following up on that last question. Just to make sure I'm understanding this, the insurance claims issue, does that continue to be an overhang in next year or is this kind of - do you feel like you have isolated it here in the fourth quarter? Does that become - until you install the new technology on the new vehicles, a better training and whatnot, do you expect to see this elevated level into next year? And sorry for the clarification.

Appreciate you asking that question. We do not continue to see an issue as we move forward. We believe that this was a little bit of an anomaly from the two items that I pointed out. The industry for the first time in several years, insurance rates increased dramatically. Some commercial groups would have strong double-digits, that they would talk about. Our increase in our casualty in total was about 5%. And I think a piece of that was managing our automotive claims year-over-year. But we feel as though, with the enhancements that we are going to have from a technology perspective, with the vehicles, as well as the continued training that we will see positive results that come from that. When you take a look at our total claims in the automotive side, again those are down. So we know that that will pay dividends as we move forward in time.

Okay. And is it possible to displace out how much that impacted gross margin in the quarter on the just the insurance portion of that?

I don't know that number off the top of my head. I'm sure that we have that in our breakout, but I don't know that number off the top of my head.

Okay. And just on the...

It was worth a $0.01 to us in total for our earnings. So you can...

Right.

You could get kind of a rough idea from that perspective.

Okay. And then just, when you talked about the expected, I think it was 150 basis points to 200 basis points of additional margin improvement over the next several years from some of the new initiatives and things. I guess is that off of a kind of the current level? Is that off of the pre-Clark margin? I'm just, I just want to make sure I understand what the baseline is for that compare. Thanks.

Well, once Clark lapse, we will have less of a negative comparison from that. So you could really look at it from the pre-Clark levels and say this is going to enhance our overall operations as we are moving forward by the 150 basis points to 250 basis points.

Okay. And, sorry, what was the timing on that?

Next two to three years.

Two to three. Okay. That is all I had. Thank you very much.

Thanks.

[Operator Instructions] We have a follow-up question from Tim Mulrooney of William Blair.

Hey, thank you for taking my follow-up question. Eddie, I saw that you guys used cash to pay down debt a little bit more in the fourth quarter. Can you remind me what your capital allocation plans are for 2020 with respect to debt pay down? I am trying to get a handle on how much cash you would have left over after that for M&A and dividends?

Well, that is our number one priority and it is - the fact that we have some debt right now will not keep us out of the market, if the right opportunity comes and the right valuation. But we will keep that as our number one priority to find and acquire good quality pest control companies. If they come about, then we will continue to use our cash to be able to move forward with that. Number two priority, we just announced that we were able to increase our dividend, and then from there we will pay down our debt. So if there are good quality opportunities that come to market and it makes sense to us, we are going to continue to move forward just like we have over the last several years. If that were to slow down some, then we will be a little bit more aggressive paying that debt down. So that is kind of where we stand with that.

Got you. Thanks for the clarification.

Yeah, absolutely.

And at this time, we have no further questions in queue.

Well, thank you all for joining us today. We are very optimistic about our Company's opportunities going forward. And appreciate your interest in our Company. We look forward to updating you on our progress on our first quarter call. Thanks, again.

Thank you. Ladies and gentlemen, this concludes this teleconference. You may now disconnect.