Rollins, Inc. (ROL) Q4 2011 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Rollins Incorporated Fourth Quarter and Full Year 2011 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, January 25, 2012. I would now like to turn the conference over to Marilyn Meek. 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 (800) 406-7325 with the passcode 4502890. 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 are Gary Rollins, President and Chief Executive Officer; and Harry Cynkus, Senior Vice President, Chief Financial Officer and Treasurer. Management will make some opening remarks and then we will open up the line for your questions. Gary, would you like to begin.

Yes, thank you, Marilyn, and good morning. We appreciate all of you for joining us for our fourth quarter and year-end 2011 conference call. Harry 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 results may differ materially from any statements 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, 2010, for more information on the risk factors that could cause actual results to differ.

Thanks, Harry. We were extremely pleased to have reported record revenues and profit for both our fourth quarter and the full year. Revenue for the fourth quarter rose 3.3% to $289.1 million and net income increased 11.3% to $21.4 million. Revenues for the full year were $1.205 billion and net income grew to $100.9 million for the year. I would like to bring to your attention that this is our first $100 million profit year, a real milestone. For the quarter, residential pest control was up 5%, commercial pest control rose 2.7%, excluding fumigation, and termite was up 2.9%. Demand for our bed bug services continued to grow, and companywide this business grew better than 30% over the previous year. Our data indicates that we are growing this area faster than the industry. We would expect these sales to expand further this year, in both residential and commercial bed bug services. We have several new initiatives that we feel will raise bed bug revenue to a higher level. As discussed previously, this business also offers us an opportunity for recurring revenue growth through our inspection and remedial services. At the same time, bed bugs provide us with the opportunity to introduce our conventional residential and commercial pest control services to those homeowners and businesses who were not previously customers. We are pleased with what we accomplished in 2011, as I think we should be, but that was almost a month ago. We are ready and into 2012. Our company culture is based on continuous improvement, and this year will be no different. We are as committed to that principle today as Otto Orkin was when he said, "We must never be satisfied with less than the best if we are to secure our share of tomorrows market." This year we are expecting improvement in all major areas of our business. I believe that this aspect of our culture is so appropriate in today's market, as consumers are both more savvy and have greater access to information concerning the products and services they buy than ever before. They typically do the research before making a major purchase or signing on with a company for services, such as pest control. Following their buying decision, they readily share how good or bad their experience was with friends and family, and are now using social media in a lot of instances. Customer loyalty cannot be taken for granted, you have to earn it. And we are working hard every day across our organization to win and retain this loyalty by focusing even greater on our customer service delivery. A challenge to our people all year will be, what have you done today to improve your customer service. With this as a backdrop, as we enter the new year I thought this might be a good time to provide a brief update on some of the initiatives that we advanced in 2011 to improve our business going forward. Let me digress for just a minute. Over the past years we have acquired some excellent companies that today make up our family of pest control brands. These companies have helped us grow our business and in many cases have helped improve our practices and processes. As I have said in the past, we have gotten pretty good at stealing shamelessly from ourselves. And our company has benefitted greatly from this synergy of sharing. For example, HomeTeam began customer satisfaction surveys 11 years ago, to better gauge their individual location performance. The results were so beneficial, we expanded customer surveys at Orkin and Western. And this past year we introduced an electronic version that creates what we call the net promoter score. I discussed a little bit about this last quarter. This too better helps us capitalize on our customers growing desire to provide feedback and share experiences, both good and bad. These surveys have been and will continue to be a major contributor to improving our ability to please and retain customers at all of our brands. We are also expecting this tool in effort to assist us in gaining new businesses through word of mouth referrals from happy customers. Last year we also tested, developed and implemented several technological improvements to increase productivity and efficiency and also improve customer service. Some of these in fact helped us reach our revenue and our profit objectives as they came on stream early in the year. One of the most important projects was the initiation of a new customer relation management or CRM and branch administrative system, called ServSuite. We believe this investment will aid us in customer retention while reducing operating cost and improving productivity. On our last call, I mentioned that our goal was to implement a second pilot branch in December. Well, in fact we added 2 branches during the quarter and currently have 3 Orkin branches live on the system. We expect to add this software to more branches during the year and when the roll out is complete, ServSuite will be in more than 400 branches companywide along with 58 Orkin franchise operations. We look forward to updating you on our progress as the year moves along. During 2011 we completed and developed and installed a new call processing platform for our call centers, having replaced our old systems. This has enhanced call routing for the entire company, and the feedback that we have received has been most positive, with telephone call time having been reduced as a result of this new system. Laptops, smartphones and enhanced software play a large role in most of our lives. And this is certainly true when it comes to our commercial sales force. Thanks to the efforts of our Orkin Canada division, the sales management software they developed was modified for use among all Rollins U.S. branches. This one system is now helping our Orkin commercial sales managers better direct the daily activities of their sales force with an end result of improving productivity and data collection. Currently, we are in the process of installing this tool in all of our independent branches. Our service technicians have always been the most important factor concerning customer satisfaction and our success in this regard. To help improve their productivity and branch profitability during this past year, we replaced over 2100 handheld devices. And in the administrative area, approximately 2300 branch desktop computers. Orkin Canada is nearly complete in rolling out its new propitiatory technician handheld application, which I am pleased to report has already increased technician and administrative efficiency. Rollins employees are our greatest asset, and it’s our ongoing responsibility to seek out, develop and promote individuals within our company to ensure continued success. We know, and studies have validated that employee satisfaction and customer retention are directly linked. We have therefore developed several initiatives to better understand employees’ attitudes towards our company and their careers. We have accomplished this through confidential surveys, random interviews, and semi-annual town hall meetings held at each location to discuss business issues and employee concerns. This effort is really paying off. Our 2011 survey showed higher job satisfaction which helped result in the lowest turnover rate in our company’s history. Attracting, training and empowering our employees helps provide us with qualified individuals to assume greater responsibility. In that regard, we are pleased to announce that Greg Baumann has recently been appointed Vice President of our combined training and technical services department. Greg joined Rollins in August of 2010 as our technical service director, assigned to marketing and global digital strategies, our internet operation. He is a degree chemist with 30 years of industry experience including food safety, toxicology, research, education, operations and risk management. Greg served in many roles during his 16 years with the National Pest Management Association, including being the architect of the global pest management in food plants standards. We are very proud to have him on our team in this important responsibility. He assumes his expanded position following David Lamb, VP of Orkin Learning and Media Services, who will be retiring at the beginning of April. David has been instrumental in creating our award winning training and human capital development. Under his leadership the reputation of the Rollins training organization is revered not only within the pest control industry but also among other non-industry corporations. We are truly grateful to David for all his contributions. He has been a great asset to our company. To ensure that we continue to have leadership in place to maintain high performance, we have established several new or improved management training programs, including our Rollins University Management Development School, a key resource in training our leaders for the future. In 2011, 54 operational managers completed this program designed to develop the skills needed to more successfully manage our branches. Additionally, we have added a new management training program to future grow our senior management. This new advanced management program was developed through a partnership with Georgia State University School of Business. We refer to it as the Rollins leadership development program, and it crosses all of our brands. Furthermore, we are pleased at our progress in training and promoting women in the field and support center management positions. Again in 2011, we are proud of the contribution of our women’s leadership council, as well as Orkin’s sole sponsorship of the pest control industry’s Women in Excellence award. Due to the strength of our business we have continued to hire, even as the economic environment has remained weak. To make the process of getting onboard easier for our new hires we began the implementation of an automated process moving us away from what had been primarily a manual paper ordeal. This year we plan to complete the final phase of this project which among other things will eliminate the need for data to be manually entered into or payroll system. As I said earlier, we were pleased with what we accomplished last year but we have great expectations and plans for this year. We will continue to invest in technology as well as in our people in order to provide the best in pest control solutions for our customers, and we will continue to pursue strategic acquisitions that are complementary. With all that said, I will now turn the call over to Harry. Harry?

Thank you, Gary. Good morning. We appreciate you for joining us on the call, Gary shared an important message that this year is everyone’s responsibility to improve customer service. I recently read an article that stated that the corporation isn’t a sturdy species, and only a tiny fraction reach the age of 40. And here our Orkin brand is beginning its 111th year. An accomplishment in its own right. Particularly given that the average large firm does not live as long as an ordinary American. Fortunately, we are not dependent on innovation and forced to cannibalize our big revenue generators to build our business. We just need to work relentlessly on our service. We are not a technology company like Apple or Intel worrying about the next technological breakthrough. We are not a drug company worrying about what drug is coming off of patent. We just need to take care of service. Although we have had our successes we can’t get complacent, we can't get arrogant, we just need to excel in caring for our customers. With that, let me share our results. Today, we reported fourth quarter revenues of $289.1 million, representing 3.3% revenue growth. Net income increased 12.4% to $21.6 million or $0.15 per diluted share, compared to $19.2 million or $0.13 per diluted share for the same period in 2010. As you have come to expect real profits, real cash, with a great quarter for cash generation with net cash provided from operations for the quarter coming in at $40 million, up over 25%. Year-to-date revenues $1.2 billion, a 6% increase. Net income for the full year has increased 11.9% to $100.7 million, while EBITDA fell just short of $200 million coming in at $199.1 million. Having previously hit the billion dollar milestone with revenue, now this year we have passed the $100 million milestone for net income. I wonder if we can call it a milestone or a millstone when our income tax should someday reach $100 million. Anyways let’s talk about revenue. Revenue growth at 3.3%, less this quarter then you have been witnessing, as for the first time in 6 quarters there were no significant acquisitions aiding the comparison. We saw revenue growth across all but one brand and all service lines. Our residential pest control continues to be a bright spot growing 5% for the quarter and making up almost 41% of our business. Trends are encouraging. The fourth quarter is not a big lead quarter, but lead growth is still growth and I will take a double-digit lead growth in any quarter. And making -- it’s made this the strongest growth in leads in over a year. Leads don’t do any good though unless you sell them, start them and most importantly as we have been talking about, pleasing our customers. One measure of service is retention which did improve in the quarter. 42% of our revenue is commercial pest control, which grew just under 2%. It was hurt by both fumigations and for the first quarter and sometime unfavorable currency exchange. The one brand that didn’t have growth, which is always disappointing, happens to be one of our specialized companies, Industrial Fumigation. And their seasonality is more volatile. For the year they still ended up as one of our top organic growers and we continue to have high expectations for them again in 2012. Customer retention also remains strong and actually improved in the quarter, which says the issue with growth is that we are not putting enough in the top of the funnel. Gary has already talked about some plans to improve that and I am sure we will. Our termite and ancillary services grew 2.9% and represents almost 17% of revenue. While seasonally influenced, half of this revenue is recurring in nature coming from year-round monitoring through renewal fees recognized ratably over the course of the year. The fourth quarter ended strong showing its best growth of the year -- leads, pricing, sales, retention all improved, a good finish for 2011. Overall, business-wise, we see no significant change other than positives in the fundamentals that drive our business, leads, pricing, closure and retention. We are excited by some of the trends we have been seeing in these typically low demand, slow winter months for our residential services. We expect to see greater growth in our commercial business with the new programs we believe will gain some traction and help restore our momentum. Although bedbugs seemed to have lost their newsworthy appeal, I haven’t seen them in the headlines of late, they continue to flourish. They will remain for sometime our fastest growing area of pest control. As my grandmother used to say, "Sleep well and don’t let the bed bugs bite. Call Orkin." Gross margins for the quarter improved 40 basis points to 47.7% for the second quarter versus 47.3% in the prior year. This quarter’s fuel cost increases moderated and we were able to offset its 30 basis point variance by favorable margin improvement related to service and administrative productivity, as well as continuing favorable medical claim cost. Depreciation and amortization expenses for the quarter increased slightly, $313,000, totaling $9.7 million. Depreciation was $4 million and amortization of intangibles was $5.7 million. Over the last 5 years our capital expenditures have averaged $16 million. We didn’t exactly go wild this year but we did spend an amount greater than average, $18.6 million. This reflects a little over $4 million on the development of the ServSuite project, and nearly $4 million on improving our telephony capability and computer refreshment. The larger piece of depreciation and amortization involves acquired customer contracts totaling $5.7 million for the quarter and $22.4 million for the full year. This represents a significant after-tax charge of $0.10 this year. As I have mentioned every quarter, for those who may be new to the story, when we do pest control company acquisitions there’s seldom any significant hard assets on the balance sheet and as a result most of the valuations ends up being classified as intangibles and customer contracts. We currently have $137.5 million of intangibles from the acquisitions on our balance sheet. With current amortization running approximately $22 million a year, we will have a few more years of this expense flowing through the P&L. We see little risk in possible impairment charges, all the businesses we have acquired have grown as we continue to write down the value of the customer contracts recognized at the time of the purchase, while expensing fully the cost of all new customers acquired. Sales, general and administrative expenses increased $400,000 or 0.5% to 32.1% of revenues, decreasing from 33% of revenues. There is something to be said about growing our revenue faster than expenses and leveraging your cost structure. We saw savings in sales expense as well as professional consulting expense. The tax rate for the quarter came in a tad higher at 37.7%, with our year-to-date provision for income taxes at 37.5%, which we expect to maintain, barring anyone in Washington coming to their senses and passing tax relief to help the competitiveness of U.S. companies. We continue to build on our solid foundation. Possessing a strong balance sheet and cash flows, Rollins continues to be financially strong. EBITDA reached $199 million. With our strong cash flow this year we have funded our $18 million in capital expenditures, paid off the last $26 million of our line of credit. We would have loved to spend more on the acquisitions and will continue to look for the opportunity to reinvest our cash in what we know best, pest control and only pest control. With cash to spare, we returned $71 million to our shareholders through both our stock buyback and dividend programs. This year we bought back nearly 1.5 million shares of common stock and have authorization to purchase an additional 1.1 million shares. Speaking of dividends, I would be remiss not to mention that yesterday our board of directors increased the quarterly dividend, 14.3% to $0.08 per share. This marks now the tenth consecutive year that the dividend has been increased a minimum of 12%. One might wonder why after 10 consecutive years of strong dividend increase, our dividend yield seldom exceeded 1.5% during this time. Well we don’t often talk about our stock performance, but an analyst brought to my attention our performance over the past ten years, with dividends reinvested as compared to the S&P 500 Index and the Russell 2000 Index. Between January 2001 and the end of December 2011, the S&P 500 Index increased 33.3% for the 10-year period, an annualized increase of 2.9%. The Russell 2000 Index rose 73.1%, an annualized increase of 5.6%. This compared with ROL, which rose over the past ten years, a total of 537%, an annualized basis of 20.3%. No brag, just the facts. 2012 is already here and overall we feel well positioned for another record year. Most importantly before I turn the call back to Gary, let me express our appreciation and thank all the Rollin, Orkin, Orkin Canada, HomeTeam, Western, IFC, Trutech and Crane Associates, whose hard work and dedication are behind these outstanding results. We also thank our customers, suppliers and shareholders for their continued support. With that, I’ll now turn the call back to Gary.

Thank you, Harry. We are now ready to open the call for any questions that you might have.

[Operator Instructions] Our first question comes from the line of Eric Hollowaty with Stephens Inc.

Couple here. You guys did what appears to be a great job of leveraging SG&A in the quarter and as well for the year which appears to be down around 50 basis points to 32.3%. is it fair to assume that that might be a maximum level to expect going forward as a percentage of sales, or how should we think about the opportunities of SG&A reduction and were the initiatives that you described in terms of some of the back office improvements and such, directly related to the leverage that you were able to achieve in the fourth quarter, specifically?

Eric, I think if you look at overtime we have a long history of focus on cost control and productivity improvement. I don’t think by any stretch of the imagination that we haven’t -- we have reached any maximum level as yet. I think some of the actions that we have talked about the replacing of all the telephony equipment with the call centers, some of the software changes, process improvements, there’s certainly opportunities to continue to become more efficient. So I think we have better days ahead.

That’s great, Harry. And I wanted to follow-up, if I could, one aspect of your business I think a lot of investors forget about is the HomeTeam business that you acquired a few years ago which services the new housing build market. Could you just talk about the relative performance of that business from a margin standpoint for the rest of your portfolio and are you starting to see some signs of life there in terms of resumption of growth?

Let me take that one. Yes, we are. We are seeing some signs of life in the new construction area. We have been fortunate that we have added some new builders, national builders to our collection of customers. Our installs are up, which is the validation of that. And HomeTeam has done a very good job during the, I guess the deepest of the trough, of really going back to their customer and selling them other pest control services. And I think it’s noteworthy that they have continued to improve their margins and improve their profits all through the down cycle as far as construction is concerned.

[Operator Instructions] Our next question comes from the line of Clint Fendley with Davenport & Company.

I wonder if, Gary, just on your comments in the prepared remarks, you talked about raising the bedbug activity to higher levels. I wondered how you might go about accomplishing that. I know in the past you have seemed to be limited by supply of trained dogs etcetera. I mean how do you think you can drive what's been a phenomenal growth story, even higher than it’s been here recently.

Well, I think one of the ways to do that is to develop programs that generates more recurring revenue. And I think that residential customers in particular that have a bedbug infestation, also have a certain amount of anxiety that it’s going to return. And I think if you think about it, the bedbugs got there somehow, typically through travel. People are not likely to change their lifestyle or their travel, or their work style as a result of having a bedbug problem. So we are working on developing creative ways to handle ongoing inspections. There is new monitoring products that are coming out routinely that we are testing. So we really need to and are focusing on taking kind of a onetime sales situation although it’s a nice one, but converting these customers into recurring customers. And cross-selling, frankly, it’s certainly not unusual for these customers once they have the experience of the service that we render and the quality of our people, to have us take care of their general pest control problems. So I think we are going to do more cross-marketing, and we are going to accelerate the recurring revenue aspect of bedbugs.

And just wondering where you’ll see the biggest opportunity, on the commercial side or the residential side here?

Well, the residential is growing faster, it’s a small number so it’s a little bit easier for it to go. I don’t really see a limitation. More and more the hotel, lodging industry is very concerned and highly motivated to have bedbug protection and I think that again, with inspection, the old deal that an ounce of prevention is worth a pound of cure. They don’t want an incident. And so I think that lends itself again to the recurring revenue opportunity that we would go in and we inspect a certain number of rooms each month. And so I really think that percentage wise that we have got comparable opportunities as far as growing both areas of the business.

And at this time, there are no further questions in queue. I would like to turn the call back over to management for closing remarks.

Well, thank you. We appreciate you joining us today and please know that we will continue to work hard to grow and improve our business, and we look forward to speaking with you again next quarter. Thanks, again.

Ladies and gentlemen, that does conclude our conference for today. If you would like to listen to a replay of today’s conference, please dial (303) 590-3030 or (800) 406-7325 and enter the access code 4502890. We would like to thank you for your participation, and you may now disconnect.