Good day, and welcome to the Rollins Incorporated First Quarter 2020 Earnings Conference Call. Today's conference is being recorded. And at this time, I would now like to turn the conference over to Marilyn Meek of MWW Group. Please go ahead.

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 1-844-512-2921 with the passcode of 3596058. 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, Marilyn. Thank you and good morning. We appreciate all of you joining us for our first quarter 2020 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 31st, 2019 for more information and the risk factors that could cause actual results to differ.

Thank you, Eddie. We find ourselves in a place that none of us could have ever imagined when we last spoke. Needless to say, in our over 50 years as a public company, we have never encountered anything close to this pandemic. Many refer to the economic crisis of 2008 as the closest example that we've had. But from my perspective, this virus is a totally different animal. Its impact is multifaceted, found ourselves in unchartered waters. Prior to the last two weeks of March, our pest control service and sales were very positive and on track. However, as the virus began to expand, we started to see a reduction in the demand for our services. Initially, California shutdown early, and we saw our business affected immediately. Further impacted by the hardest hit state, New York, and other states shutdown randomly until the end of the quarter. As you would expect, we were not able to cut our expenses enough during those final two weeks to adjust for the revenue drop. Revenues for the first quarter though grew 13.7% to $487.9 million compared to $429.1 million for the same quarter in 2019. Net income was approximately $43.3 million or $0.13 per diluted share compared to $44.2 million or $0.14 per share for the first quarter last year. On the positive side, we experienced growth in all of our business lines in the quarter, residential up 18.6%, commercial pest control rose 8%, and termite and ancillary services grew 17.4%. Couple of other bright spots during the quarter, mosquito sales and service began as the weather warmed. As a result, we saw record-setting growth in that business line. We also saw a strong revenue increase in our wildlife business, which increased double-digits over last year. Eddie will provide greater detail on this…

Thank you. As Gary noted, we are certainly in very challenging times, and we are quickly responding to the impact that COVID-19 is having on our businesses, employees, and customers. Our people on the front-lines of this pandemic have performed heroically taking care of their customers and each other during this time. The services we provide are considered essential, so we are continuing to service our residential and commercial customers where possible. This holds true for our global operations as well, and we are continuing to do business in accordance with each country's guidelines. Our focus over the past weeks has been on ensuring that our employees around the globe are safe and that we are providing them with the protection they need to service their customers responsibly. Rollins has purchased and provided our technicians and other employees that interact with customers with disposable personal protective equipment, including masks, gloves, shoe covers, and protective outerwear. This is an ongoing investment that we believe we will continue to make in order to keep our employees and customers safe, in line with this new normal we are all facing. The highest priority during this difficult time is and always will be the safety and security of our team, especially on the front-line. To help ensure this, we have provided a companywide increase to our paid time-off program for all full and part-time employees. Full-time employees will receive up to 80 hours of PTO for emergency leave during this coronavirus pandemic, and our part-time team will receive 40 hours if they should need it. Our people can use this time for their own personal care or for a member of their immediate family who has tested positive or has been quarantined for suspected case of the virus. We believe these measures will provide…

Thank you, John. Our press release on April 20 gave you some insights as to what we knew at that time related to the impact of COVID-19 on our business. Today, we will report on our Q1 actual results and add some insights to what we know today. Before I begin, I would also like to thank our over 15,000 employees that have adapted to a new way to work and support our customers, as well as those that have helped and supported our impacted employees as well as our communities. We want to thank them for their efforts. We will truly be getting through this together. As I go through the results of Q1, there are some items that were already being felt in our numbers. As Gary mentioned, the slowing of our commercial pest control revenue, and as John highlighted, an increased expense related to protective personal equipment or PPE for all customer-facing employees. While we patiently stood in line for PPE behind those first responder groups at the most critical need to ensure they receive first, we began accumulating masks and other items to ensure the safety of our employees. For the quarter, all of our service lines showed growth and key to the quarter included higher material costs and supplies as mentioned with the personal protective equipment, the launch of our new commercial disinfectant service Orkin VitalClean and our initial round of cost containment in our field operations and home office locations. In addition to reporting our Q1 numbers, my focus today will be to share what we know at this time related to Q2. Looking any of the numbers, the first quarter revenue of $487.9 million, an increase of 13.7% over the prior year's first quarter revenue of $429.1 million. Income before income taxes was…

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

[Operator Instructions] And we'll take our first question from Mario Cortellacci with Jefferies. Please go ahead.

Thank you. Hi, everyone. I hope everyone is doing well and staying safe. Just -- I think the most important thing for investors to derive in what the exit rates were at the end of March. And just wondering if you can give us more color and then if you can quantify what you saw organic growth for resi and commercial at the end of March and then how that's trended throughout April? Do you think that we've bottomed at this point? And just what do you see, I guess, where you can expect possibly the rest of the quarter? Obviously we don't know, but just based out of April trends?

Yes. Mario, I hate to punt on the first question out. That's really difficult. We have -- on the residential side, which we put in our press release, we're still seeing good demand. On the commercial side, we know what customers have been impacted on the commercial side. We've suspended some customers or they suspended us because of not having a need. And the reason why I'm pumping on the question is because we don't know of those ones that have suspended. We don't know which ones of those customers will be coming back. We have a feeling for the larger customers which ones will be coming back, but we just don't know about those mom and pops. They may or may not be coming back based on their personal economic situation. So, it's really too soon for us to be able to give any sort of prediction on that. And as Gary talked about on the termite side, that's hanging in there as well. But residential, we're definitely seeing the most positive, and we can give more color as we see things shaping up as we move forward. But I think at this point time, we're still not sure what that commercial is going to look like.

Okay. And then, even during, say, the exit in March, you can share any color on that?

Well, you look at the end of March and then you look at what that flowed into April. So, by the end of March, New York was shutdown, California was shutdown, a few other major states were shut down, but then you had other states that were beginning that shutdown process or shutdown portions of what they had going on. So, I just don't think that it's going to be fair for us to be able to even share that because I don't really know what that's going to look like. I know it's anecdotal. And if you need to go bowling, you can come here to Georgia because we have a bowling alleys open, but we also have restaurants -- we also have restaurants that are opened up. I know it's anecdotal, but we took a little poll this morning of my folks here and I said, okay, how many folks went to a sit-down restaurant since we've opened back up, and no one raised their hand. So, we just don't really know what the impact is going to be even as we're opening back up and what the impact is going to be longer term for these businesses to be able to stay in business.

Got you. Okay. And then just one more and I'll turn it over. On the disinfectant business, actually it's a very interesting idea, and I'm just wondering if you can kind of share some of the success that you might have seen, I think -- I've heard that you think the more success in Europe versus the U.S. in the early on days and probably with COVID hit over there versus the U.S. earlier. But what do you think that business looks like longer-term? I mean, just as people tend to have a very short memory, I mean, does this business accelerate in a year from now or do you think because people tend to be short-minded that maybe they forget about the COVID situation and they tell, I don't need this service anymore, and then maybe doesn't gain as much traction or have as much relevance maybe a year or two for now, just what your take on that?

Well, before 9/11, we could always walk through an airport and we could just go get on a plane. And then after 9/11, that changed for all of us, forever probably. And I don't think we know exactly what the outcome of this will be at this point in time. I think in the near-term, I think all of the things we've seen from the different states that are opening up have some form of a recommendation of the cleanliness. And so, we're trying to go through and talk about what makes sense for the verticals, where to spend our time from a sales perspective with that. Some are going to need that just to be able to get customer back in the door and feel comfortable. Now, what I think the question that we don't know is, what's going to be mandated as we move forward in time as far as cleanliness.

Yes. This is John Wilson, by the way, if I may add. I think Eddie hit the nail in the head with the mandated portion. I think there'll be certain industries, maybe hospitals, healthcare, food processing that it may well be mandated, some others that it's strongly recommended by the various government entities, health department, maybe most especially. So, it's hard to say, but I do think it can be fairly significant for us where the early returns is terrific in terms of what our people are managing to add to their customers with.

Okay. Thank you so much.

Our next question will come from Tim Mulrooney from William Blair. Please go ahead.

Good morning, everybody.

Good morning, Tim.

Good morning, Tim.

Can you shed some light on your end market exposure in the commercial parts business? I understand you don't want to give any insight into the growth rates through April, but what would help me and others maybe model because we have to model something, right? Specifically, I'm curious what percent of your commercial business is restaurants and hotels, which are likely under significant pressure right now?

Yes, we've never broken that out. We're not going to break that out by vertical, and a lot of that's just going to be from a competitive standpoint. We don't want to put ourselves in the crosshairs of other competitors being able to step into the areas, but we have a good strong cross-section of all the different verticals. And if you'll go back to previous calls that we've had having to do with this topic, we've talked a lot about moving into the verticals such as -- or moving more strongly into verticals such as healthcare, such as food processing, such as logistics, and we've talked about that over the past couple of years. So, we've had a strong concentration in those areas. But there's no question that we have a very strong cross-section of all those different ones as well as a decent amount of large customers with a large performance of small and medium-sized customers as well.

Okay, Eddie. Okay. That -- I understand. You don't want to disclose that for competitive reasons. Any vertical, I'm just trying to get something that can help us if any vertical more than 25% of your commercial business or can you tell us that no vertical is more than X percent of your business? Any color that way where you're not really disclosing much of anything for competitive reasons but gives investors assurance that you're not over-weighted in any particular end market?

I think your last statement is spot on. We were not over-weighted in any individual vertical that is out there. We have a relatively diversified set of verticals and have percentages in those relatively diversified as well.

Okay. Because I read an article recently from specialty consultants, which does market sizing. I think in there, it said something like 40% of the commercial business is restaurants. So, it's fair to say that your end market mix does not necessarily match that of the broader market?

Your statement is correct. And I would -- I would be interested to understand the data behind what you read there. That's what I understand about, about what's out there in the industry. But your statements correct.

Okay, cool. Thank you very much. I'll get back in the queue.

Okay. Thanks.

[Operator Instructions] And we will take our next question from Seth Weber with RBC Capital Markets. Please go ahead.

Hi. Good morning. Hope everybody's well. I guess maybe a question for Eddie. Can you just talk about what you're seeing on the collection side? Are you seeing customers delay payments? Are you doing anything to kind of ensure just the quality of your receivables or anything like that? And then I just had a follow-up on the M&A comment. Thanks.

Yes. So we shored up our reserves a little bit on that side, just to make sure, we do have a pretty healthy diversified customer base as well, we really concentrated on higher income to be able to not only sell a product that sell more than one product. And we're seeing that band -- or income band of customers not being as impacted from a collection standpoint. So I think it's still a little bit too early to be able to say one way or another on that, you know, we're just three or four weeks into the unemployment checks and people still having, you know, relatively, relatively full income. But we're being a little bit cautious with that and we're being a little bit aggressive, putting more resources into that area, just to do the best that we can at this point.

Okay. Thanks. And then just going back to your comment on --

Just one more thing, just one more thing with that, you may or may not know, there are certain states that have put mandates in place where you are not allowed to collect, and those there.

Right.

So you probably already know about all those and we're complying as we should for all of those states.

Okay. Thank you. And then just following up on your, your M&A comment, can you just characterize and valuation started to come down across the group here, over the last couple months relative to where they were?

I would say the number of sellers are much less than what we've seen in previous times. And I would say that valuations for those that are still in the market are probably coming down as well, with other with less other players in the market. Some of our direct competitors have said publicly that they are not in the market. And, you know, while we're not necessarily aggressively going out there and looking we're absolutely being, open and opportunistic.

Yes, I would agree with all of those statements. I do see valuations maybe coming down a bit, because just simply -- because there aren't as many buyers in the market at least right now.

Okay. It's very interesting. Thank you. Thank you guys, appreciate it.

[Operator Instructions] Our next question will come from Michael Hoffman with Stifel. Go ahead.

Hi. Thank you all for taking the questions and I'm glad everybody is safe and you all have done the right thing by your employees. Can I ask a clarification question first, if I may? I'm scribbling the numbers down as fast as I could when you're talking, but when you said $18 million to $22 million cost containment, is that an annualized number or that's the quarter savings?

That's for the quarter. That's for the quarter. And that's going to include some of the categories that John talked about having to do with payroll. We really didn't go into a lot of the details on the discretionary cuts that we've made, but that would include those two categories, discretionary and payroll.

So, just so I'm clear. If I took the high end of materials and furloughs, and PTO, I mean, that's kind of $4 million, so I got $4 million headwind and I got an $18 million offset.

If that's just the math -- yes. I don't have that -- that's transcribed.

Okay, good. All right then. I just want to make sure I understood right. My question-question -- it's two parts, trying to stay in the spirit of one question. Residential lead generation is okay, and when this lead starts, do you think you would get calls from commercial, let's say, hey, I'm going to restart, come in and do a -- I'll call it an added service, so there's a restart service kind of activity?

Yes. I'm sure John can weigh in with a lot more specifics to that, but I'll just start by saying. I think we see customers in a few different buckets. One is, they're doing normal -- their normal service that they would have, either because they are fully in business or they're in some sort of partial business. I think we have another bucket that it completely stops at this point in time, because they don't have anything at all going on. And I think we have a third bucket, which is kind of a hybrid which let's just say they maybe received a service once a week, they might now be receiving a service every other week or every three weeks just to keep things relatively intact at this point. So, we've got -- by customer, we're trying to accommodate as best as makes sense for them, especially for those that know they're going to be opening up relatively soon, they don't want to make a decision that they're going to open up on, let's just say, May 1st, they haven't done anything for four weeks and now they have an infestation that they have to go through and deal with. They don't want to have that situation. So, I think those are kind of the buckets of what we're seeing by the customers.

And Michael, we've seen a wide array of tactics by our customers to maybe defray costs. Some have chosen to suspend altogether, some have chosen to reduce frequency, and some have continued with their service even though they may be shut down knowing that they don't want an outbreak of pest problem. We've had one of our big retailers that had put us on suspend that's already notified us for to re-begin or begin service in May. So, I would suspect that we will have quite a few that as we're coming back on, we'll get us in there before they open.

Okay. That's what I thought, given a little pop from that and then back on to a normal trend.

That makes sense.

Okay. Thanks.

Yes. Thank you.

And there are no further questions at this time.

Okay. No other questions?

Okay. No other question. I'd like to add a comment, and that's -- we were so uncomfortable with these we don't know answers as I'm sure you all are hearing them. But I think that we have responded quickly. I think that we have three wonderful areas of increasing our business with our termite season, our mosquito season, and with the VitalClean. So -- and again, it is challenging to try to determine how big can VitalClean be. The first 30 days have been very encouraging, and our residential pest control leads have continued to be strong. So, you have so many variables, it's just really difficult to gauge all these, but I think one of the reasons that we took status with our dividend was that we just want to be prepared for the future. And those of you that have followed the company for some time know that we're generally conservative, and I think that we're in a best position of anybody in the industry to deal with this. So, we're just going to keep working at it and improving, and hopefully we'll see this turn in the near future. Saying that, I'd like to thank you all for joining us, we appreciate your interest in our company. On our behalf, we hope that you and your family and friends remain safe and well, and we look forward to updating you on our second quarter call. Thank you.

And this concludes today’s conference. Thank you for your participation. And you may now disconnect.