Rollins, Inc. (ROL) Q3 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, good morning, and welcome to the Rollins, Inc.’s Third Quarter 2013 Earning Conference Call held on the 23rd of October, 2013. Throughout today’s conference, all participants are in a listen-only mode. After the conference, there will be an opportunity to ask questions. (Operator instructions) I would now like to turn the conference over to your host, Marilyn Meek. Please go ahead, ma’am.

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 pass code of 4643774. 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 is Gary Rollins, Vice Chairman and Chief Executive Officer and Harry Cynkus, Senior Vice President, Chief Financial Officer and Treasurer. Management will make some opening remarks and then we’ll open up the line for your questions. Gary, would you like to begin?

Yes, thank you, Marilyn, and good morning. We appreciate of all you joining us for our Third Quarter 2013 Conference Call. Harry 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 in 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 Factor section of our Form 10-K for the year-ended December 31st, 2012 for more information and the risk factors that could cause actual results to differ.

Thank you, Harry. Well, we’re again pleased with the solid increases that we made in our revenues and our profitability for the quarter in nine months. This quarter represents our 30th consecutive quarter of improved earnings in seven and a half years. For the quarter, we improved our momentum with revenue increasing 6.5%, the best percentage increase all year to approximately $362 million. And net income increased 12.4% to $36.2 million, also the best percentage increase all year. Revenues for the nine months rose 5% to $1 billion and net income increased 7.8% to $95.4 million. All of our business lines continue to show strong demand for our services during the quarter with residential pest control up 7.2%, commercial was up 6.3%, excluding fumigation, and 5.4% overall. By the way, this is the strongest quarter we’ve seen in commercial since the second quarter of 2011. Termite had a very strong performance, their very best, rising 8.2%. The deployment of our Homesuite iPad app which I’ve talked about on previous calls is showing positive results in improving the selling of our termite and ancillary services. And termite had a very strong assist from HomeTeam through their builders program. Speaking of which, HomeTeam’s Tubes in the Wall installs were up 39% for the quarter, marking the third consecutive quarter in which they have experienced more than 7,000 installs per month. These installs are the drivers behind HomeTeam’s increasing revenue and long-term profitability, as these new home installations are ultimately activated, hence, the big revenue pick-up. I’d also like to note the positive results that we’re experiencing in our Orkin rebranding efforts. You may recall, we kicked off our 2013 marketing campaign and rebranding initiative in the first quarter of this year. Our marketing folks and advertising agency put a lot of effort…

Thanks, Gary. Good morning. And thank you for joining us on in the call. There’s something reassuring about being a pest control company, it’s refreshing not to have to worry about the aftermath of the US Government Shutdown or what the next looming depth feeling breach in potential Fed tapering versus tampering, will do to our business. Fortunately, we don’t have to worry about the strength of the Euro, foreign imports and our product obsolescence. We don’t have to keep up with current world trends, we just have to sell pest control, service our business and collect our money. Sounds simple, but often it brings its own set of challenges. Bugs have been around since the dawn of time which is a blessing as Gary says, rats and roaches don’t read the Wall Street journal. We just need to hire well, train well and deliver exceptional service and the business will do just fine as we’ve demonstrated with this quarter’s results. Third quarter’s revenue were $362.2 million representing 6.5% revenue growth. We saw a continued sequential growth across all of our three service lines, more about that in a minute. Net income increased 12.4% to $36.2 million or $0.25 per diluted share compared to $32.2 million or $0.22 per diluted share for the same period in 2012. Year-to-date, revenue is $1.013 billion a 5% increase, while net income has increased 7.8% to $99.4 million. EBITDA totals a $179.9 million while EPS has increased 8.3% to $0.65 per diluted share. We continue to build on our solid momentum and we see no significant changes in the fundamentals that support our business. Lease [ph], closure, pricing and customer employee retention, all working together to achieve what we have for the first nine months as well as to the remainder of this year.…

Thank you Harry. Harry and I will be happy to answer any questions that you might have at this time.

Thank you. (Operator instructions) Thank you. The first question comes from Joe Box from KeyBanc Capital Markets. Please go ahead. Joe Box – KeyBanc Capital Markets: Hi, guys. Nice quarter.

Thank you, Joe. Joe Box – KeyBanc Capital Markets: Actually, I just got off a call for another environmental services company and they’re referenced seeing more service increases versus decrease just for commercial customers now than they’ve seen in the last five years. I think that’s somewhat curious given the 5.4% increase in your commercial business. I guess what I’m trying to understand is how much of that improvement that you saw in commercial, stems from a pick-up in the market versus maybe successful marketing on your part and just getting a bigger chunk of the pie.

That’s certainly hard to quantify. We had – as we’ve talked in some prior quarters, we may have made some changes in our sales team, brought on a – promoted a very aggressive and a great sales manager, the Vice President of Sales, you know, as we reinvigorated the national account sales team, they’ve gone back, we have a lot of natural agreements. We’re the preferred provider or have the hunting license. But then you have to go knock down the doors and solve the individual location which they did, they had a number of sales – and I think it resulted as I mentioned, the national account sales were up 39% this quarter. So we have been seeing momentum shift in our commercial business now and it’s been turned up for a couple of quarters. So we’re happy with the direction.

Yes, I think it’s more – and I don’t mean to sound egotistical. I think it’s more of what we’re doing than what’s going on in the marketplace. I think we just increased our effort and our focus on the commercial business and it’s paying off. Joe Box – KeyBanc Capital Markets: Right. Clearly a great job on that front. I guess speaking with the commercial side, I know you guys are in the early stages of changing up commercial pricing. So one, can you maybe give me a sense of how much growth in commercial stem from pricing in the quarter, and maybe, two, some of the customers that you’re testing this pricing on, does it seem like they’re receptive just taking the price increases or are you may be seeing, a little bit lesser attention than what you had in the past?

From the pricing, and I don’t have a broken out commercial versus residential. But just under 2% of our revenue increase came from the pricing initiatives. In terms of retention on the commercial side of the business, we saw a small uptick in – or downtick. The retention fell a little in the quarter. And when I said a little, I think our retention dollar, lost dollars from customers third quarter this year versus last year was $100,000, $125,000 difference. And year-to-date our retention is running well ahead of last year when it comes to our commercial customers. So if you give good service and give exceptional service, the customers are accepting.

Joe, I think another thing to consider on the pricing is, our commercial customers, pest control services is way down the line as far as our expenses are concerned. If you look at restaurants you got food cost, labor cost, I mean, which is not a big part of their P&L. And so, I don’t think if we have the same sensitivity, that larger elements of their P&L would have. Additionally, the second phase of our loss [ph] and consulting group project was really to improve the standardization and the methodology of what we charge new customers. And we really think that hasn’t paid off yet. I mean, it’s just recently been completed as in test, but we really think we have some opportunities there as far as improving the consistency and really the appropriateness of what we charge our commercial customers. Joe Box – KeyBanc Capital Markets: Sure. And I guess to that point, do you still think that the commercial opportunity is as big as the residential opportunity?

Yes, we do. Joe Box – KeyBanc Capital Markets: Okay, great. Gary, you talked earlier about accelerating acquisitions, do you expect broaden your search criteria or do you think that Matt will just be able to look at a greater number of deals? And maybe if you guys have typically been able to drive a few 100 basis points of growth from acquisition, how do you think that might change going forward?

Well, I think Matt is going to bring more methodology to our acquisition efforts as far as assigning specific call objectives to our field people to really do a better job in prospecting as supposed to waiting until we’re contacted. I think that’s going to be a big improvement. Well, we really add methodology to what we do. And we’re also seeing some activity now as far as Obama Care is concerned. A lot of these independent business operators are recognizing that there’s cost involve in this new Health Care Reform. And I think we’ve seen an uptick as far as interest, as far as these pest control operators are concerned in talking to us about a sale situation. Joe Box – KeyBanc Capital Markets: Sure. And one more question, then I’ll turn it over. Harry, few quarters back it didn’t seem like you guys are too receptive to doing another one time dividend, I know what you guys paid out in the quarter or the one that you announced in the quarter wasn’t that big. But can you just maybe put some rational around the special dividend?

Well, like I said, our Board, I think was a little disappointed with the amount of shares that we bought back year-to-date. We haven’t quite covered the dilution from the, at a minimum, we’d like to always cover the dilution. So we’re couple of 100,000 shares behind covering that. And like I mentioned in my comment, the Board very much believes that returning our profits and cash to shareholders and whether it would be in dividends or stock buyback. And since we kind of hit the numbers that we had hoped down the stock buyback, they thought that it wouldn’t be a bad idea to add a little special dividend this quarter. It’s not something that we want people to build in an expectation for. But again, I have $116 million in – no cash in my prospects – no debt, I said cash. But my prospects are continuing to generate a lot of cash, looked very favorable. Joe Box – KeyBanc Capital Markets: Right. So it’s basically just a true-up in the quarter. It wasn’t necessarily a change in philosophy where we can think that, there will be a large special dividends –

No. Joe Box – KeyBanc Capital Markets: OK, great. Well, thank you guys, and again, nice quarter.

Thank you, Joe.

Thank you. And your next question comes from Dan Dolev from Jefferies. Please go ahead. Dan Dolev – Jefferies: Hi. Good morning. Thanks for taking my question. Hey, guys. Just real quickly on pricing in the commercial side, I heard in the last few – that it hasn’t had a big impact. But I’ve heard in the last few months that maybe one of your large competitor is trying to buy some volume perhaps ahead of some transaction. They’d like to show some good growth. Have you seen any pressure on the commercial pricing clearly quite strong, but have you seen any pressure? In other words would they have been even stronger had there not been any pressure from one of your competitors?

We’ve see it in selected cases. But it usually comes down to competing on service. So we always have some competitive pressures. Everyone is typically, I shouldn’t say everyone, but there’s only a few players with a national footprint. So you got to see them in most of the accounts that we do business with. And again, we believe that we compete based on our service.

I think one additional advantage that we have this year and we’ll have more so going forward was our Biz Suite app with iPad. We have the ability to really have a more professional presentation to these commercial prospects. We can show them pictures of the inspection. It’s not often that a – owner or a manager will go around in a company, or sales person when they make their inspection. But the old deal of a picture is worth a 1,000 words applies here because if you can show the prospects that he’s got two-inch gap under his back door, that the other current provider is not doing the job by showing him pest activity, there’s just a lot of benefits to really share with the prospect what you found in your inspection. And we think that that’s going to continue to help us as far as our commercial sales are concerned. And we’re not aware of anybody that has a tool like this and not to say that they want at some point, a good idea is never held secret for long. But we think that that’s making a good contribution. Dan Dolev – Jefferies: Great. Thank you very much. I appreciate it.

Thank you.

Thank you. (Operator instructions) the last question currently comes from Sean Kim from RBC. Please go ahead. Sean Kim – RBC Capital Markets: Hi, thanks. Good morning.

Good morning. How are you? Sean Kim – RBC Capital Markets: Just one more follow up on pricing. I think you said, you saw about a 200 basis point, positive impact from the pricing actions [ph]. If we sort of look more longer term, is that sort of the impact we should expect every year 200 basis points? And how should we think about kind of timeline of price increases in the future?

Well, this year’s price increase was the most successful and the largest, I think in our history. It typically is we’re on, 1 in a quarter to 1.75. So I don’t know if we can count on 2% necessarily going forward every year. I certainly would love to. But one of the things that is coming out of the commercial pricing project is to do a better job on pricing account to be more profitable up front which would limit your need to raise prices as much, going forward. Because the commercial pricing project have three pieces, one, to increase pricing, but we need to also develop a – application for our commercial account managers to price correctly, more correctly, more profitably on the front-end. And then third, a model for us to determine and measure profitability by customer. So this year, we were able to take a first look at profitability across all of our commercial accounts. And the least profitable got substantially higher price increases than the more profitable account. So, I guess if we do a much better job pricing upfront, we’ll have less unprofitable accounts to significantly raise prices up. But again, this business is all about recapturing your labor. And the more successful you are in estimating what the true labor cost, labor time is going to be upfront, the better your pricing will be.

I think Harry makes a good point. We’re really, for the first time, I think more sophisticatedly looking at both ends of the equation. I think that we – I’d give ourselves higher marks as far as raising the prices and developing a methodology to do that. But this coming year and beyond, we’re going to do a better job in pricing the accounts to begin with. Sean Kim – RBC Capital Markets: Okay. That’s helpful. Just one more question regarding HomeTeam. I think we saw some alteration in the housing starts lately. How should we think about growth in new installations and growth in revenue at homes in light of that?

Good question. And give me an opportunity, I need – Gary got a little forward of himself in his comments. He said HomeTeam had better than 7,000 installs for three quarters. It was two quarters, but in six months. But I don’t know if he was looking forward in the next –

I’m planning on the next quarter.

You’re planning on the next quarter. We haven’t – HomeTeam and their markets haven’t seen that downturn. And in fact, if October continues as – yes, we’re – I guess we only got a week left here in the month. It could be the biggest month of the year. Traditionally, home builders, installations turn – new sticks coming out of the ground turns – they cut the pipeline typically in the fourth quarter, and historically, HomeTeam saw a drop-off in installations in the fourth quarter. Last year was – we were spanking [ph] with an anomaly. They had been running around 5,000 installs a month for the previous five, six months going into October. And then October last year, it hit 6,700 which was the biggest month of the year. And then it dropped back to 5,400 and then below 5,000 in December. So this year, like I said, they’re headed for the biggest month. They could cross 8,000 installs in October. And then the question is how much the builders pull back. But like I said, we’re not seeing softening in HomeTeam’s markets and we see them all as future new customers. So we’re excited about the opportunity, but it does hurt our margins short-term. Sean Kim – RBC Capital Markets: Okay. Thank you. Thank you, both, and congratulations on the strong results.

Thank you.

Thank you. Joe Box has joined the Q&A again, from KeyBanc Capital Markets. Joe, please go ahead. Joe Box – KeyBanc Capital Markets: Just one quick follow up. Can you guys just give us a feel for what the international franchise pipeline looks like, I guess both in terms of signing up franchisees and then maybe also a feel for what overall contribution could be to Rollins next year?

Certainly. We have one agreement that’s been signed that we haven’t quite announced yet that we announced here in the next – another island in the Caribbean. We have another franchisee who’s close to taking another country. Tom Luczynski has just returned from Singapore two weeks ago at an international franchise show. And there was high interest expressed there and a number of good leads in five, six very strong perspective future franchisers. So, the interest is definitely strong and I would say accelerating. But again, the thing to keep in mind, most of these – all of these international franchisers, for the most part is the inaugural startups. So, we get a – see [ph] upfront. But it takes some time for them to build the business and for it to contribute substantially to the bottom line.

I think one of the biggest thing that we’ve got going for us this year that we haven’t had in the past is that our training now is on the Web. So, we really are doing a better job preparing these franchisers to deliver good service and really benefit from the training that we’ve developed over the years. Joe Box – KeyBanc Capital Markets: Understood. Thank you.

Thank you. Sean Kim has also joined the Q&A, from RBC. Please go ahead. Sean Kim – RBC Capital Markets: Thanks. Just one more question this time on margins and operating profit. I think you saw pretty strong margin expansion year-over-year and I think the growth in [inaudible] it was the best in at least the past year. Going forward, how should we think about the level of operating leverage that you can achieve?

Good question.

I don’t know that I really understood it, but –

Well, I think he’s trying to – you know, how much leverage do we have and what kind of margin opportunity – the fourth quarter is always the most difficult quarter for us to really project. The business, there’s – well, the commercial business isn’t very – doesn’t have much seasonality to it. Certainly, termite and residential does. And so, we typically have a strong October. The trends going into October have been very positive. We continue to see good lead growth. But then the question is what happens once it get cold, how much does the business drop off in November and December, how good a job do we do in managing our labor cost? We accrue up our various expenditures at the end of the year. So, it’s tough to sit here and really have much visibility into the quarter. The good news about this business is that recurring revenue is – the nice growth in customers that we’ve had will continue – to this question is to, what kind of retention you’ll see in fourth quarter this year versus prior years. But, you know, the leverage going forward, we believe, we can continue to certainly grow the topline to mid-single digits and we haven’t given up from our goals of 10% increase in profits going on out. It gets harder every year and some years we do a little better and some years we trail a little. But like I said, we – I don’t think we see any change in our prospects for this business.

I think one other way to look at this is that we can improve upon the same quarter last year. But one thing I’ve learned is you can’t extend the season. I mean, you can’t take advertising dollars and turn the fourth quarter into the third quarter. And so there’s a law of diminishing returns that when whether your owner [ph] starts to get cold, the pests are not as active as they were previously and you can throw a lot of advertising dollars at it, but you can’t change the seasonality of the business. Sean Kim – RBC Capital Markets: Okay, thanks.

Thank you. There seems to be no further questions at present time. Please go ahead with any concluding remarks you may have.

Okay. Well, this has been an exciting year for the company. We began the year with a great deal of enthusiasm and energy. And that’s only continued to increase throughout the year. We’ve got great teams in all areas of our business who never lose sight that our goal is always to get better, and do better. Thank you all for joining us today. And we look forward to speaking with you in the New Year. Thanks again.

Thank you. Ladies and gentlemen, that does conclude the conference call for today. Thank you for your participation. And you may now disconnect.