Rollins, Inc. (ROL) Q1 2012 Earnings Report, Transcript and Summary

Welcome to the Rollins, Inc First Quarter 2012 Earnings Conference Call. [Operator Instructions] Today’s conference is being recorded April 25th, 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) 405-7325 with the pass code of 4531560. Additionally, the call is being web cast over 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 and Chief Financial Officer and Treasurer. Management will make some opening remarks and then we’ll open up the line to 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 2012 conference call. Harry will read our forward-looking statements 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 on this call excluding historical facts are subject to a number of risks and uncertainties and actual results may differ materially from any statement we make today. Please refer to today’s press release and our SEC filings, including the risk factor section on Form 10-K for the year ended December 31, 2011, for more information and the risk factors that could cause actual results to differ.

Thanks, Harry. We are pleased to have carried over positive momentum from the successful 2011 with record revenues and profits for the first quarter of 2012. The success we achieved and the quarter points of the progress if we are continuing to make with our business strategies and programs that are focused on increasing on sales while improving service and customer retention. These sales initiatives were clearly aided by on a seasonably warm weather in many areas of the country. Revenue for the first quarter rose 6.6% to $289.5 million and net income increased 23% to $23.1 million. For the quarter commercial pest control rose 3.1%, residential pest control increased a very strong 8.2 and termite also had exceptional results of 10.5%. This is the largest improvement that we have seen in that segment for quite a while. Overall revenue wise it's been some time since we saw a quarter with organic growth like this. Demand for our bed bug services continued to grow as well, companywide this business grew 36% over the last year’s first quarter while the commercial service represents approximately 2/3s of the total bed bug business residential revenue from this service grew 85%. Clearly this is an indication that people are continuing to bring these pest home and becoming more aware of the threat that bed bugs present. In fact we recently announced our annual list of the U.S. Top 50 bed bug cities, which further confirmed that bed bugs are a problem in most regions of the United States. This list can be obtained by going to the press room on orkin.com. Our sales and marketing efforts are driving force and building our business. In that regard we continue to invest in refine our internet presence to further create brand awareness for all companies while generating new sales. These investments coupled with a favorable whether I mentioned earlier produced double-digit lead increases for all company brands in this first quarter. Additionally we made changes to our conventional advertising media mix this year and reintroduced radio this quarter with spots on over 4000 radio stations across the country. At the beginning of the March we rolled out our popular national television campaign keeping pest in their place. All of these efforts we believe are playing an important part and growing our business. We recognize the importance and value of communicating with our customers and potential customers at many touch points. And are constantly looking for ways to expand this interaction. Education plays an important role in this outreach. The recent example is our PR team’s participation for our sixth year in the National Science Teachers Association Annual Convention which was held this year in Indianapolis. During this event we distributed over 6000 pest identification guide posters and scanned approximately 1800 named badges to gather contact information from teachers who are interested in hosting an Orkin Man School presentation in the classroom. His program is part of our long standing education focused to teach students an insects having very important role in the eco-system and that they only become pest when the threaten our health and property. We have long considered it both an obligation and a privilege to not only solve pest control problems for our customers but to also educate the public on how pests impact their lives. And we are constantly observing and expanding our learning about the habits of the pests to our field work of our technical teams as well as knowledge acquired through our relationships with the leading U.S. and Canadian universities that have strong entomological programs. The more we know about insects, rodents and other pests, the better we can serve our customers and the public at large. To that end, in early March we launched what I consider one of our most exciting projects to-date the further share our expertise and knowledge with consumers. It's called the Orkin Pest Project and it's located on our web at pestproject.orkin.com. The Orkin Pest Project presents a wealth of pest information in a highly visual fashion using dynamic parallax technology featuring more than 40 insects and 12 specific areas of pest investigation. In this easily accessible site you will find rich content with outstanding photography and video. We are already seeing the site gaining traction and the social media challenge channels confirmed by Facebook likes and viral sharing. It's our hope that people will bookmark the site for future viewing and reference. We are proud to provide this new research as we continue to demonstrate that Orkin is the pest expert. Our pest project website gained further recognition last week having received a best in class education award from the interactive media council, a nonprofit organization of leading web designers, developers, programmers, advertisers and web related professionals. Entrants from all around the world are judged on design, content, feature punctuality, usability and standards compliance. This best in class award recognizes the highest standards of excellence in all of these categories. We congratulate our internet team for this wonderful recognition. During the quarter we also improved our communications link with potential and existing customers through the installation of a new, more powerful and sophisticated, predictive dialer at Rollins customer service center. The system will allow us to more effectively execute and manage our lead campaigns and promote better customer and prospect communication both inbound and outbound. Our CSC will be using the dialer initially to follow-up on un-contacted internet leads and at times termite removal. The big plus for us when we dial out to potential customers is that the customer will see that the call was coming from Orkin not a mysterious 800 number. If you are like me, and I suspect most of you are, if you don't recognize the caller you simply don't pick up the phone. Also this equipment has the ability to leave phone messaging which in the past was not available to over answering technology. Another great plus is that the new equipment effectively marries up the best available agent ensuring that the most experienced person handles the call which will improve customer communications and closure. All of our call centers will be serviced by this new dialer network. All of our brands continue to perform well this quarter and what better testimony to that value they bring customers and third-party recognition of their level of customer service. Western Pest Control celebrated its 85th anniversary in February and throughout the years has prided of itself on delivering high quality pest control to consumers and business throughout the Eastern United States. This dedication to customer service was recognized by being awarded to 2011 Angie's list Super Service Award for the branches in New Jersey, Western’s highest penetrated market. This award is given annually to an approximately 5% of all the businesses rated on Angie's list. The nation’s leading provider of consumer reviews on local service and help providers. To quote Angie’s list Founder Angie Hicks, “The fact that Western Pest Services can claim super service award status speaks volumes about its dedication to consumers”. On another fronts home team was also recognized with a 2011 David Weekly Partner of Choice Award and acknowledgment of their outstanding service to David Weekly Homes, the nation's largest privately held home builder. Home team is the first pest management company to receive this honor and for the 10th straight year Orkin was recognized as a top 125 training company, training magazines selects this prestigious list of companies based on programs tied to best training practices and outstanding training initiatives among other criteria. Congratulations to all these Rollins companies for their outstanding achievements in these acknowledgments. Let me backup from a moment on home team. In the first quarter of this year we saw nearly a 50% increase in the installation of their new home teams in the [indiscernible] system. This is certainly good news long-term for home team and we are hopeful that new home construction will continue to gain throughout 2012. One last investment I need to bring you up-to-date on is our implementation of our branch operating CRM system, we have referred to as service suite. We have three branches piloting the software while we continue to work out the bugs, no pun intended, optimize the system performance and make sure the various interfaces function properly. That work is progressed well and we plan to deploy in three additional branches in June. Assuming that goes as planned we may add a branch or two over the summer. However, we will need to get through the summer season before we impact too many new branches. Overall good progress is being made, the branches on the system are enthusiastic and like it and we'll talk more about service as we go forward. Another milestone as we just closed our 19th international franchise in Mexico City which is only the first of several anticipated this year. We are off to a good start for the year but we never take anything for granted and we recognize that we must work diligently to meet the needs of our customers. As I said last quarter our challenge to our people this year is what we have done today to improve our customer service. That's what it's all about, with that I will now turn the call over to Harry, Harry?

Thanks Gary. Usually during the first quarter I am asking our folks how late will spring be. This year it was did anyone see the winter? I'm not old enough to remember the last time we saw such a warm first quarter or month of March. In fact the national oceanic atmospheric administration records which date back a 117 years to 1895 show it was the warmest Q1 and warmest March on record. We certainly need to give Mother Nature an “atta boy” or to be politically correct an “atta girl” for her big assist on the quarter. But without our marketing driving consumers to the phone and web, our associates in the call centers effectively taking those calls, termite inspectors promptly making their inspections and commercial sales people developing service clients it wouldn’t have happened. A sale isn’t revenue in this business unless it's service. Unfortunately we have the best trained and hard-working technicians in the industry. It did a great job in servicing our regular customers and a lot of new ones as well. Thank you for a job well done. Gary and my job of communicating our progress has gotten easier this quarter, needless to say some very positive results. Let’s go through them. The company reported first-quarter revenues of $289.5 million an increase of 6.6% over the prior year's first-quarter revenue of $271.6 million experiencing that growth across our entire family of brands. Net income increased 23.8% to $23.1 million or $0.16 per diluted share compared to $18.6 million or $0.13 per diluted share for the same period of 2010 with EPS up 21.3%. What makes the quarter particularly exciting was the sequential growth experience this quarter as compared to last quarter particularly as it was not driven by acquisitions. Last quarter we reported 3.2% revenue growth, this quarter 6.6%. That doesn’t happen often in this business, the 6.6% also compared very favorably to the 4.7% in the last year’s first quarter. The first quarter has never been known as a big lead period; however this year we saw unprecedented residential and termite inquiries. I wish I had some way to specifically break down marketing versus Mother Nature's contribution but I can’t. It's difficult to know where one stops and the other starts. Gary has already discussed some of our sales and marketing efforts and building our business and investments to refine our internet presence. Weather helped, but it wasn’t Mother Nature clicking at Orkin.com. In March we saw organic traffic to our site substantially exceed any previous month by over 100,000 visits and to think we are now in full season. But a powerful statement as to the value of Orkin brand today in the digital era. This was a quarter which everything came together, it moved in the right direction. We saw a nice increase in the leads, sales and starts with good pricing. Most importantly we also saw improved customer satisfaction which translates into improved retention. It's going to be a tough quarter to run against next year, we just need to stay focused on customer satisfaction and keep building that recurring revenue the balance of the year. Usually I talk next about whichever business line is our bright spot, be it residential or a commercial pest control. But for the first time in a long time the spotlight is shining on our termite business. It represents approximately 18% of our revenue and grew 10.5% this quarter. We provided our sales people the latest in digital sales marketing material capitalized on the termite swarm and enjoyed the results. Approximately 50% of our termite revenue each year comes from existing customer renewal revenue, they will be good to see that 1000s of customers added this quarter continue to satisfied customers for many years to come. Great job sales team, great job operations. But it wasn’t just terminating that contributed to the quarter all business lines contributed. Just as I don’t remember 10% growth in termite in the 14 years I've been here I haven't seen 8.2% growth in residential pest control which represent 39% of the business. We added twice the number of customers to our recurring revenue base than we did last year in the first quarter. As a result of high demand and stellar retention, the balance of the business, 42% is commercial pest control which grew 3.1% again up from 1.8% last quarter. The sequential growth is encouraging. The strength of this business is the lack of dependence of any single customer and in fact our top 20 national accounts makeup up less than 3% of our business. It appears some of our new programs we referred to last quarter are gaining traction and restoring our momentum back. Overall the fundamentals that drives business leads, pricing, closure and retention have all improved, hard not to be excited by some of the trends we have been seeing. Gross margins for the quarter improved 70 basis points to 48.8% for the first quarter versus 48.1% from the prior year. The improvement in operating margin was due to improved productivity, personnel related costs as well as reduce insurance and claim cost. Partially offset by higher cost of fuel. Depreciation and amortization expenses for the quarter increased slightly, $567,000 totaling $9.8 million. Depreciation was $3.9 million and amortization and tangibles was $5.9 million. For the full-year amortization and tangibles typically from value assigned to the customer contracts acquired in an acquisition will represent a significant after tax charge of $0.10 a share. Most of the dollar increases from some small tucked in acquisitions over the previous 12 months. Sales, general and administrative expenses for the first quarter increased $3.3 million or 3.6% to 32.8% of revenues decreasing from 33.7% last year. The decrease in margin percent is due to continued leveraging of administrative center salaries in our call centers, reductions in professional services and improvement in bad debt expense. The tax rate for the quarter came in at tad lower at 37.2%. Gary mentioned serve suite and we have begun to gear up for its implementation. We have added our first group of nine trainers to assist in implementation training and provide on-site help. From a cost perspective the run rate won't be significant to impact the next quarter and probably won't the third either. We should have a better handle on it when we talk of the third quarter results come October which seems like a long ways away right now. We need to have more representative samples of branches piloted and the implementation plan locked down. The balance sheet remains strong. We all ended the quarter with $60 million of cash and zero debt. While talking about balance sheet, one interesting note and I don’t know how many people have noticed our unearned revenue of $98 million. This represents cash we have received for services not yet performed which exceeds the amount of money owed us for services we have performed represented by our trade and finance receivables. What a great business model, cash provided from operations remained strong. We generated $37 million in the first quarter. There is one area both our shareholders and bankers agree upon spend more on acquisitions. We continue to look for the opportunity to invest what we know pest control and only pest control. The year is off to a good start, our team remains determined and I will point out we have our agents standing by to start the year of pest control service. Just call 1800-800-Orkin. Within the meantime Gary and I are ready to open the call for any questions that you might have.

[Operator Instructions] Our first question comes from the line of James Clement with Sidoti & Company.

Gary I was wondering if you could refresh our memory a little bit on the home team business model, if there hasn’t been a lot of building it's going on since you bought the business. So obviously installations or orders and building seems like it's picked up obviously a lot in the first quarter but you all don't really start making money until somebody actually occupies that home and becomes a recurring monthly customer, right?

That’s exactly; there is really kind of a long tale on the process. You really need we are early on in installing the tube's in the wall. So we have to wait for the house to as to completed and then we have to wait until it's sold so we can contact the new owner. So that might be an 18 month period, now the good news is that we get a very high penetration I mean it's in the high 70s and then we also have the opportunity to market as the homes get older, our termite service and that’s one of the things it's really kept home team moving forward during this construction as they were able to go back on the older homes some of the original homes and cross sell the termite service. So it's one of those things, it's like planting the garden, you really got to put the tubes in and you are not going to benefit immediately but long-term it's been a very successful model.

Follow-up question if I may just kind of changing gears a little bit is obviously big numbers in termite and residential through the recession numbers hold up very well so it was always hard to tell how much the recession and rising unemployment and all that sort of stuff was hurting your business because your number stayed strong, now we see a massive acceleration here. Do you tribute some of that to perhaps confidence getting a little better, unemployment kind of stabilizing and any of that?

I think you have to give some credit I mean that to me that would probably be the smallest element but working at record retention this quarter and I mean think retention improved over 8% which I certainly you can say some of that would be the economic outlook but we really give a lot of credit to our survey program that I have shared in the past. I mean we really have a way to communicate to our branches how they are doing service wise and there's a lot to peer pressure among the branches to not to be on the bottom and try to be on the top but there had to be some effect whether as we mention to me it would be the biggest change and I thought about that I don't remember the definition I thought about that I remember definition, I saw about luck one time, they said luck is where preparation meets opportunity. And I think one of the terrific things is that our people did a great job executing on this nice lead increase. Just because you get a bunch of leads doesn’t necessarily mean that you get a bunch of new customers. So we really took advantage of all the situation where we had great lead increases and I don't know exactly how do you give the appropriate consideration to the investments we've made in the internet, I mean people choose us over others so it's kind of really hard to read the moving parts that I am really proud of our people taking advantage of the nice improvement that we had in the leads.

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

Couple of follow-ups, regarding the weather benefit that you got in the first quarter, is there any risk of a pull forward here, in other words does this create sort of a demand shift scenario maybe just earlier in the year and potentially steal from maybe 2Q and perhaps 3Q or do you think that this truly generated incremental business this year that while it will be tough to comp against will incrementally benefit you this year.

That answer is two part, I think when you look at termites, the conditions -- we saw the best swarm we have seen in years, the warm weather early without a cold staff coming in freezing kept the mosquito, kept the termite active. So we certainly -- I don’t if we pull forward because we are still seeing good termite demand in April but good piece of that revenue is one-time revenue. The other half comes for the next 10 years as they make the renewal payments on that but we haven’t seen 10% quarter in years on termite. So some of that is I don’t know if it's pulled forward or pulled up but certainly one time occurrences in piece of that business. But when it comes to the residential and the commercial business this isn’t cash for clunkers where you pull forward a onetime sale and you got to wait for few years. The beauty of our model, 80% of our revenue is recurring revenue those customers sign a year service agreement so rather than starting the business in June the demand came there is demand that built early and we are still going to see a lot of demand when we get into the season. So I think our secret is the recurring revenue, we need to, we have enjoyed it early, building early in the year. We added twice the number of customers in the first quarter than we did a year ago but we are going to enjoy and service take care of those customers for years to come.

I thing I could add to Harry’s comment, the termite swarms typically it stretches over 2.5 to 3 months depending on the area of the country so everybody didn't have a termite swarm and that’s weather-related and just the reproductive nature of the pest. So we don't think that the termite season is over by any stretch of imagination, we will just see. We try to look at this in every possible way you can look at it.

That’s great news nonetheless Harry, if you are setting a gross margin for a moment is there any way you can quantify for us what the components contributed it sounds like you get a benefit from productivity and there was one other factor I think I missed and we had lower insurance and claims as well.

And I don't have that right in front of me; the biggest contributor though was improved productivity. Total fuel which impacted CSPM, has been a fuel cost up one $1.2 million in the quarter; the productivity by far was the largest contributor.

Seing as you have the new service suite and only a very limited number of branches, what do you credit that productivity improvement to exactly?

I think the new customers…

I think one of the things what is -- necessity is the mother of invention. I mean when we just had bunch of customers that we added and certainly we didn’t staff up and it wouldn’t have been practical to even tried that so we just got a lot and our people just did a lot more we have longer hours but in those longer hours we had a great conversion as far as our labor to the revenue. So they just did a stellar job as far as getting these customers absorbed into the operation.

Great and if I can snick one more quick one in, any sense of how much pricing actions contributed in the quarter?

Pricing has been a small contributor, in most areas of the country, we saw good pricing when I say little better we are talking percent or two different than what the average prices rolled up. We will take our pricing action in typically for most of the brands residential price increase will go into effect June 1st, our commercial pricing action ago in July 1. We have tested this one, we are analyzing the results but we don’t see we are not expecting anything significantly different than what we've seen in the last several years, still very good pricing environment.

[Operator Instructions] And our next question comes from the line of Joe Box with Keybanc Capital Markets.

You just talked a minute ago about the margin impact in the quarter, can you maybe just give us some forward commentary on some of the puts and takes for operating margin expansion over the next couple of quarters.

Well we don’t give a lot of forward guidance, the tricky part of this business is always matching. We are starting to and have to gear up for the season. So we are adding people, and hope you're adding them in the right places at the right time. Our long term goal is to continue to increase our operating profits 10% a year we have been fortunate this quarter we did a little better than that. We have certainly -- one of the pressures we are looking at what gas costs, we are hoping it continues to moderate and that’s something we will have to overcome. But we think we certainly can continue to improve margins through the year between our pricing action, the benefit of increased customer counts and density and overcome gas cost increases and retention certainly contributes, retention most profitable customer you have is one that’s already on your books.

Actually to that point Harry, I think I heard you guys say it earlier that Orkin had record retention this quarter. Can you maybe just refresh us on where your residential retention rates are and maybe how far along in the process you are of closing the gap with home teams retention rates.

Again I don’t have that particular number handy; Orkin has traditionally been in the residential in the 74% to 76% retention we were at. At the high -- close to the high end that we might have done the best we have ever seen that in Orkin, Home Team had improved retention, Western had improved retention. But typically first quarter is not a big retention quarter, you still fortunately I think early season keeps that pest pressure and people like to enjoy their pest free homes and environment. So we still think we are in the early innings on improving retention I think we have certainly we talked about it last quarter. The cover of the annual report talks about, it addresses customer service satisfaction and we have put in the programs the serve and we are building into the culture and people are embracing it but I think we have a lot of opportunities to improve on your retention and we are really at the early innings of progress.

Great. Thanks so it sounds like, really solid lead growth in the quarter, is that something that you are seeing hold through April?

I think that leads dropped off on in Western Pennsylvania this week. But we first -- 20 plus days into the quarter, we still see lead growth that hasn’t been as dramatic as the first quarter. I think we have seen some cooling off in the weather and we usually see variability between April and May. It's like I don’t think we have ever had an outstanding both April and May months usually one gets a little cooler, one gets a little warmer. One of the things the lead number start getting bigger. So we won't see the same kind of increases if we saw the first percentage increases. I mean the wheel gets bigger to roll, but early on we are still seeing positive lead improvement.

I guess one thing I am trying to understand is potentially how sustainable are the growth rates that you guys put up in residential and termite?

I don’t think we will, I don’t think we will see other 10% termite. Residential, the 8, we will have to wait and see Gary says no, I say possible.

I hope you are right.

[Operator Instructions] And I am showing no remaining questions at this time. I like to turn the conference back to management for any closing remarks.

Well again thank you for joining us today and we look forward to the balance of the year and we will continue to work hard to grow and improve our business and we look forward to sharing our performance with you this next quarter. Thanks again.

Ladies and gentlemen this does conclude our conference for today. Thank you for your participation. You may now disconnect.