Q3 2019 Earnings Call

Good day and welcome to the Rollins Inc. third quarter 2019 earnings Conference call. Today's conference is being recorded at this time all participants are in listen only mode. Later, we will be conducting a question answer session and instructions will be given at that time, if he should require assistance at any time. Please press star followed by the.

On your Touchtone phone and an operator will assist you I'd now like to introduce your host for today's call Marilyn Meek. Please go ahead.

Thank you Bye now you should have all received a copy of the press release. However, if anyone is mess you know coffee and would like to receive one please contact our office that to want to eight to 73746, and we will send your release and make sure you on the company's distribution last there'll 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 1882 or 3111 too with the passcode 295, 0556. Additionally, the call is being webcast at www dot So I am Fad Dot com.

And a replay will be available for 90 days on the line with me today and presenting our Gary Rollins Rollins, Vice Chairman and Chief Executive Officer, John Well Sun, Rollins, President and Chief operating Officer, and Eddie Northen Senior Vice President Chief Financial Officer, and Treasure management will make some opening remark.

Okay, and then we'll open up that line for your questions Gary would you like to begin.

Yes Merrill Lynch.

Thank you and good morning, we appreciate all your joining us for our third quarter 2019 conference call and he will lead our forward looking statement than disclaimer and then we'll again.

Our earnings release.

Got it is our business outlook and contain certain forward looking statements. These particular forward looking statements and all other statements that had been made on this call. Excluding historical facts are subject to a number of risks and uncertainties actual results may differ materially from any statement, we make today.

Please refer to today's press release, and our 60 filings, including the risk factor section of our Form 10-K for the year ended December 31st 2018 for more information and the risk factors that could cause actual results to differ.

Thank you already.

First and foremost we're pleased with our third quarter execution and results across all of our business service launch.

The warm weather finally appeared thankfully, although later than normal as a result, we experienced a strong delayed demand.

Our pest control service following a less than satisfactory second quarter.

Worked diligently to ensure that we right sized our head count.

And reduced expenses, they want essential for the quarter.

We're proud that our team responded effectively.

Also noteworthy as many of our investments in programs continued to generate improved levels of employee retention.

This is an important step to improving customer service in the field and it missed administration.

In addition earlier this month, we completed the transition of our fully funded U.S. pension plan.

On insurance company. This will provide our company with several accomplishments.

We will be eliminating the annual pension contribution.

Insurance fees administrative cost pension management and other related cost of the plant.

There will be ongoing cash savings.

Employees as freezing of the plan and 26 other enjoyed significant enhancements to their benefits most recently to their full one k. plan.

And he will provide more detail on the pension discontinuation in his remarks.

Record revenues for the quarter rose 14.1%.

The 556.5 million.

Compared to revenues of 487.7 million.

In a third quarter of last year.

Diluted net income of 44.1 million or 13 cents per share was impacted by the noncash pension settlement costs that compares to 66 point sixmillion.

Or 20 cents in 2018.

Revenues for the first nine months rose 9.6%.

To 1.5 billion.

Compared to 1.377 billion for the same period last year.

Net income was approximately 152.6 million.

Or 47 cents per diluted share.

Paired to 180.7 million.

Earnings per share per diluted share.

[noise] 56 cents for the first nine months of last year.

Andy will review the non-GAAP results shortly.

Is there very meaningful.

We experienced strong growth in all of our business lines in the quarter with residential up 17.6% commercial pest control rose 9.2%.

Termite and ancillary services grew 15.4%.

We believe our third quarter results reflect both the resiliency of our company and our team's ability to respond to operational challenges.

Before turning the call over to John just a quick update on core.

John I visited again with the team in California this quarter.

And the more time, we spend was Clark and their employees of more excited we are about having them as a member to our family of brands, we're making great strides with or integration as they are now live on our fleet system.

Fully transitioned into our full one k. program.

And improving their telkom systems.

Now I'd like to turn the call over to John John .

Thank you Gary.

What the warmer weather experienced during the third quarter mosquitoes among other pest were much more active.

Even though the population is becoming more aware of the health threat of mosquitoes, there's still much to be done in this area.

Easter equine encephalitis West Nile Zika and other diseases caused by mosquito bites are becoming or greater health threat.

We continue to work with various agencies and organizations in an effort to educate the public about these mosquito risks.

In order to meet this public threat, we have worked persistently over the years to add Mosquito service isn't all branch locations.

This year, we have grown that service line by more than 30%.

And this has helped greatly to propel us to our 6.4% overall organic growth rate for the quarter.

Additionally, we know that coupling these and other service offerings together for our customers clearly lengthens our relationship with that customer increasing the revenue receipts.

Now I'd like to share with use an exciting news regarding one of our brands.

Northwest exterminating.

Last week at the National Pest Management Association meetings Northwest received the National Pest Management Association gifts Award.

The Infinium make gifts award recognizes member companies that have demonstrated leadership through dedication and contribution to their community.

Problems has increasingly encouraged start brands to get back to their communities and northwest certainly led the way in this effort.

We are proud of this recognition I want to congratulate our team at northwest.

The 2006 northwest and introduced their green Pest control program, which is a rather unique service offering targeting common household pests and Spider Roaches, My centipedes, Millipedes and more using only high quality nontoxic products derived from botanical such as flowers plants.

And natural elements from there.

As well as an IP or integrated pest management management approach utilizing exclusion techniques to keep pass out in the first place.

Overtime. This program has expanded to include a green elite offerings as well other green services, such as Terremark mosquito and long care.

Northwest Green programs are continuing to grow with an increasing desire among homeowners are now in chemical treatment in pest control.

Overall these programs are great contributing to northwest impressive growth rate is this brand has produced the highest growth of any rals brands during the quarter.

Gary previously noted our strong employee retention and I'm pleased to be able to say that we've continued our improvement and that important metric.

The third quarter of this year.

We talk about retention a lot in our businesses as we can't stress enough.

That for a service provider importance to.

Ensuring that our employees remain happy and motivated and their jobs is paramount.

Happy employee translates well happy customer.

We have largely focus our field team efforts in three ways to gain this.

First we conduct exit surveys to focus on why people leave.

As well as concerted employee engagement assessment efforts to ensure our teams feels I have a voice and making thing.

And last is the effort to improve the onboarding and orientation experience our people undergo.

We know if we can just get them pass the first year or so the likelihood to stay goes exponentially.

Our team members are the face of our brands and we will continue to invest in training programs technology and provide opportunities for investments to ensure they remain with us.

Finally for me just a quick update on routing and scheduling.

Third quarter, we again had improvements in driving and route efficiency as we clock 571000 less miles driven.

This improved efficiency comes on the heels of a 1.4 billion ball reduction in Q3 last year.

And we have now have 19 consecutive months of mileage reductions.

Now, let me turn the call over to Eddie.

Thanks, John .

Mother nature return, but full strength in the third quarter and our operations support staff sales groups were up for the challenge.

Record revenues and able to strong improvements in our financial metrics across the board.

Even with the ongoing business expenses headwinds of employee benefits foreign currency exchange and Clark integration items, we made tremendous improvements in all of our financial metrics for the quarter and are positioned well to end the year on a very strong note.

For the quarter all of our service line showed exceptional growth and keys to the quarter included.

Finalization of the Rollins pension risk transfer.

Expansion of our glimpse communication to our residential customer base.

And a return to margin growth year over year.

Before we proceed with a review of our financial results I Hope that you've had a chance to review our press release for October Threerd related to our pension risk transfer if not it is posted on our website to view.

Our overfunded status grew from our original estimate of 104% to nearly a 111%.

As noted in the press release, we will be using these cash proceeds to fund our company Boral. One came match over the next several quarters and pay other plan related expenses.

Once these steps are completed we will anticipate bringing $6 million to $8 million in cash back to the company for additional deployment.

The accounting adjustment was also significantly lower than our original estimate mainly driven by lower interest rates.

This accounting pension adjustment flowed through our personnel in Q3 and was approximately $50 million before tax.

As you know this is a onetime noncash occurrence.

As Gary said I will be discussing our GAAP metrics and then spending time on our non-GAAP financial metrics that exclude the pension adjustment.

For the quarter, we're only calling out the pension adjustment for our non-GAAP results, but a few other items to keep in mind with regards to our net income for the quarter related to our Clark acquisition are there.

Depreciation up 1.4 million for the quarter for buildings in vehicles at it.

Amortization of intangibles up 2.9 million for customer contracts.

Interest expense was 2.8 billion related to the borrowing of Clark.

Professional services up 800000, as Clark uses a large number of subcontractors and this is a higher percentage of revenue that are going into our other Rollins brands. These categories equate equate to 7.9 billion and as they subside or lapped, we'll continue to improve our year over year margin expansion.

Moving forward.

As we look to our numbers I will give you got numbers that include our pension accounting adjustment and then transition to our non-GAAP numbers that reflect our true operating results again, only with the pension loss eliminated.

So with the pension looking at the numbers the third quarter revenue.

Was 556.5 million that was an increase of 14.1% over the prior years third quarter revenue of 487.7 billion.

Again with the pension adjustment included income before income taxes was 46.1 billion for 48.7% below 2018, net income was 44.1 billion down 33.9% compared to 2018.

Our GAAP earnings per share were 13 cents per diluted share.

Without the pension adjustment our non-GAAP income before income tax rose, 6.8% to 96 million compared to 89.9 million in 2018.

We had a slightly higher tax rate this quarter at 26.4%, but feel that our full year rate will be in the low twentys with our Q3 pension entry.

Our net income rose, 6% to 70 point Sixmillion and Aes were 22 cents per diluted share up from 20 cents per diluted share in the third quarter of 2018, a 10% increase.

As I mentioned on previous calls our best financial measure at this time, if EBITDA, which was 120.6 million compared to 106.7 billion in 2018, a 13% increase.

We've only had one other quarter outside of the quarter with a tax cuts in jobs Act.

That eclipsed this growth since 2014.

With the pension revenue for the nine months ended September Thirtyth 2019 was 1.5 Onein built a billion an increase of 9.6% over the prior years third quarter revenue of 1.377, Doug.

Income before income taxes decreased 20.9% to 189.2 million from 239.3 million in 2018.

Net income fell 15.6% to 152 point Sixmillion and earnings per share were 47 cents down 14.5% from the 2008 number of 55 cents EBITDA was 252.1 million down 12.9% compared to 2018.

Without the pension adjustment income before income tax decreased a 10th of a percent 239 million from 239.3 million in 2018.

Net income fell eight tenths of a preset to 179.2 million and earnings per share were 55 cents flat to the previous year.

EBITDA was 302 million up 4.3% compared to 2018.

Our technology Road map continues to pay healthy dividends with regards to operational efficiency improvements and an improved customer experience.

John mentioned the improvements in miles driven for the quarter as we continue to see improvements year over year since the inception of our routing and scheduling initiative, which started in 2016.

These reductions increase the time, our technicians can spend with the customers and increases the technicians capacity.

As of September we have added over 70% of our Orkins residential routes to glimpse each customer on these routes is receiving multiple proactive text for email notifications from the technician beginning days in advance and culminating when they are on their weight to the customer.

This technology is the best in industry and our early results show improved customer retention for each of our mature branches that are providing this enhanced customer communication.

We anticipate these results to continue to improve our customer retention and margin for quarters and years to come much like we have seen from a routing and scheduling for adults.

Let's take a look to the Rollins revenue by service line for the third quarter.

As discussed earlier, our total revenue increase was 14.1% and included 7.7% from Clark and other acquisitions and the remaining 6.4% was from pricing inorganic growth.

This is the strongest organic growth rate in a quarter since 2013.

In total residential pest control, which made up 45% of our revenue was up 17.6%.

Commercial pest control, which made up 37% of our revenue was up 9.2%.

And termite and ancillary services, which made up approximately 17% of our revenue was up 15.4%.

Again total revenue less acquisitions was up 6.4% from that residential was up 8%.

Commercial increased 3.5%.

And termite and ancillary grew 7.9%.

This was the largest commercial increase and over a year.

The revenue strength. This quarter is a combination of the late season that did not materialize into one or Q to.

Execution by our operations and a great job by our Salesforce.

I want to Gary's famous quote is the season always comes.

At some point it does get warm and the pests do come out and the season does start.

In most years that strength as seen in May and June and impacts Q2.

As you know that did not occur this year, but our year to date revenue growth ex currency and M&A is moving in a direction to be inline or higher than the past three years.

The key is that the man does not evaporate when it gets warm the bugs come out this year that did not happen until July but it did in a really big way.

[noise] in total gross margin improved 51% to 51.7% from 51.6% prior years quarter.

The quarter experienced increases in several categories, such as surface salaries sales salaries personnel related and professional services all related to the acquisition of Clark.

These increases were offset by reductions and administrative salaries due to improved efficiency and reduction in materials and supplies.

The additional Clark items that I, just mentioned impacted the margin by almost a full percentage point.

Depreciation and amortization expense for the quarter increased 4.8 million to 21.7 billion an increase of 28.6%.

Depreciation increased 1.7 billion due to acquisitions and equipment purchases as mentioned earlier well amortization of intangible assets increased 3.1 billion due to the amortization of customer contracts from several acquisitions.

[noise] sales general and administrative expenses for the third quarter increased 22.1 billion or 15.2% to 167.2 million or 30% of revenues.

Three tenths of a percentage point from 145.1 million or 29.7% revenues for the third quarter of 2018.

The increase in the percent of revenues is primarily due to acquisitions as well as increased sales competition compensation enhanced for one k. plant expense maintenance and I T contract expense.

As for our cash position for the period ended September Thirtyth 2019, we spent 431.2 million on acquisitions compared to 71.8 million for the same period last year, which of course included Clark.

We paid 103.1 million on dividends and had 18.7 million of Capex, which was up 4.8% from 2018, primarily from planned I T upgrades, such as our boss, Canada rollout and building improvements we ended the period with 104.4 million in cash upward.

71 million is held by our foreign subsidiaries.

Yesterday, the board of directors declared a regular cash dividend tend to have centsper share that will be paid on December 10th 2019 to stockholders of record at the close of business November 11th 2000 2019.

In addition, the board declared a special dividend a five cents also payable when the regular dividend is paid for.

For the regular cash dividend. This is a 12.5% increase over the prior year.

This marks the 17th consecutive year. The board has increased our dividend by a minimum of 12% and the seventh year in a row. The board has declared a special dividend.

Gary I'll turn the call back over to you.

Thank you Andy we're happy to take your questions at this time.

Thank you Sir.

Ask your question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again. Please press star one to ask a question and the interests of time, we ask that you. Please limit yourself to one question and one follow up.

Additional questions. Please feel free to reenter the queue by pressing star one.

We will now Paul for just a moment to allow everyone opportunity to signal for questions.

My first question will come from Tim Mulrooney with William Blair.

Good morning Tomorrow morning.

Yeah, I want to focus on I know, what the smaller piece your business only 17% in the quarter, but wanted to ask you a couple of questions about your termite business. This morning.

Almost 8% organic growth.

Which is particularly impressive I think given that last year you know that's on top of a 6.5% growth. So I mean, your termite business is growing.

Really well and above what what we've seen in some of your competitors I was wondering if you could comment on that business and perhaps why you're seeing such strong performance there [laughter].

Yeah, Tim a I would say a couple of different thing you know we've had good termite growth I think if you look back probably over the last nine or 10 quarters or maybe even a little bit little bit further back than that we've had good consistent termite growth you're right. This quarter was was it has a little bit more a little bit of that would be.

Pent up demand.

Well, we've talked about them on previous calls that we have our.

Internal credit department that enabled us to really be able to help with the closing tool for that so it's a great quality service from a turn my perspective.

And we also have the ability for our customers to be able to use our internal credit department.

For some time in some cases, a larger dollar expense that they would have for that type of a service. So operations continue to put a good quality product out there and I think that sales folks continue to use our sales tools extremely well to be able to close those sales.

Okay. That's helpful. Thank you Eddie and then as my follow up.

One of your competitors recently began talking about some increased claims expense that they're experiencing because of more aggressive behavior from out of foremost and termite and answer you know that's what the in a specific region, but I'm. Just curious if you guys are also seeing higher.

Claims activity.

Some thought maybe if one company we're seeing it maybe other companies would be seeing it too I'm wondering if you're you're seeing increased pressure from higher claims activity as well. Thank you.

Yeah, I, Yeah, Tim I don't know the specifics a oh the other than that you're talking about and we can read some of the same thing that you read the publicly I also [noise].

[noise] active for termite [noise].

Our termite claims are actually down year over year.

Our dollars, our litigated dollars or are down or claims dollars are down year over year.

I think the the thing that we had in place that really has enabled us to continue to produce is over many years is we have a very strong dedicated termite services group a technical services group.

That enable us to make sure that we have a good quality product. It's out there we have a Q a group that will look on the back side to make sure that a good quality services is being done.

I will also help to manage any claims related issues or concerns that that might be out there.

To be able to help to minimize the that.

The way possible.

We also take a look carefully at the at the contracts that we offer a that are available out there kind of based on the different type of termite into different areas of the country to make sure that we feel like that it's a direct reps could be able to take into different areas.

Yeah I.

I would add to that that a these this termite dedicated termite quality assurance team that that Eddie mentioned they are independent from our from our branch operations. So they go in to every one of our branches on a regular basis to to actually go out and inspect the work that they do and and make sure that we're delivering what.

We promise and and so that's been the huge lynchpin in terms of us reducing our termite damage claims both from a dollar perspective paid perspective, and a number of perspective over the last say 20 years.

Thank you. Our next question comes from Jamie Clement with Buckingham Research group.

Hi, gentlemen, good morning.

<unk> running a John I don't know if you want to take this or or Gary but just a.

Obviously, you know M&A activity in your industry is you know what I I think is probably an unprecedented level right now and I you know it seems like a lot of smaller businesses are being bought by by some of the bigger folks on the seems you. All are interested you know you for students and quality small businesses as well.

Now on can you talk a little bit about the challenges.

I Oh purchasing in integrating small businesses with respect to retention both at the technician level it as well as the customer level.

Yeah, JV no doubt those the the market as frothy from that perspective in terms of both of the opportunity by these companies and what the multiples being paid certainly many of the smaller companies or go are out there and actively shopping or you know I'm trying to sell their their companies as well, we certainly go out.

For the small ones or just just like we do the bigger ones, though they can provide a tremendous opportunity to tuck into a location and really improve oh that that the density. The route density of that branch and that business and so.

That's usually approach will take with those but from an employer perspective, we take the same approach as we do from well with the federal bigger ones because as as I like to say to our team.

In our business when you buy a company you don't buy a lot of hard assets, all you get our employees and customers.

And neither has to stay.

So if we don't treat the employee well, an onboard them well and and integrate them well then that customer wont wont be there at the end of the day, either and so that's really our approach or whether it's big or small.

Okay I appreciate that thank you.

[noise]. Thank you. Our next question comes from Seth Weber with RBC capital markets.

Hey, good morning, everybody.

Good morning, I'm, just wondering if you could give us some more color the 3.5% growth in commercial a you noted that was the best in you know in more than a year or is there anything you'd call out the or any kind of special initiatives anything.

You've been targeting there can you talk about what you're seeing on the pricing front as well. That's my first question. Thank you.

Yeah, I would say a that pricing is still very rational in the industry. We know that there are other players that are if you look back three years five years seven years that may not have been in the market.

We're still seeing very rational pricing, but that is out there in most cases that are available. We've we've really concentrated on areas, where we know that there's there's less price sensitivity. So we've really shifted our focus probably over the last 18 months from a new customer perspective really looking at those area.

As.

You know there theres lots of different groups that companies that have their own margin pressure.

And that can be pushed along to all of their vendors and we're we're continuing to move away from those and continue to concentrate in areas, where there's less price sensitivity and they care more about the quality and they're willing to pay for the quality of the service. So a we're seeing some more attention from that because of the quality of service that we're able to attain and I think that's held.

Thing is to be able to continue to incrementally improving in this case have have a pretty pretty helped to jump as far as the commercial is concerned.

Yeah, It looks great.

One thing I might add we also are implemented a new pay plan for our commercial sales people that that much more greatly incentivize them to pursue recurring revenue.

What kind of got hooked on that the bed bug revenue.

For a period of time and and and while that's great. That's great to get its not recurring and as you guys know we you know, we really prefer that recurring revenue to build and and so we're sort of changed our focus and and Ah incenting our people to two oh pursue this this this these other higher quality coal.

For sure that are recurring in nature as Eddie described.

John I'd like to add to that so we have developed a a software.

That we call insight.

So we have the ability to to show.

Commercial customer of the lay out of their facility and what we intend to do in those areas typically Bates stations and.

And.

Service emphasis on the high.

Pest pressure areas and we we think that this is going to.

Help distinguish.

What we can offer the customer and and so far we don't having an everywhere, but where are we do have it.

Which we're showing good results.

In or are you finding that customers are willing to pay the contract sizes bigger with that didn't say.

Because [noise].

Bite by using insight can you can you get higher contract values and things like that or it can you just six expand on that all that.

Oh, I think ultimately we will I mean, it it distinguishes us and and then we're able to to identify where we've had a road and activity. So this isn't just a sales to Ah, but it's also a means to have continuous communication with the customers.

Especially important when you get into big commercial situations and you know you you might have 50 base stations at some of these.

Larger warehouses and manufacturing operations so.

You know I think.

One of the benefits will be not only from the sales point of view, but retention point of view because we're just reaffirming the fact that we were doing these.

Service stops if you will or.

I'll check in the base stations and and ER and you know it did it gives the customer feel that that you know this is not just to say all this is an ongoing communications too.

Thank you once again, if you'd like to ask a question. Please press star one our next question comes from Brian Butler with cycle.

Hi, Good morning, Thank you for taking my question.

Good morning.

I'm just the first one on kind of the growth trends, you're seeing can you give a little more color I guess on the organic trends, maybe maybe help us if we pull out some of the seasonality you know across second quarter third quarter, well you know what kind of organic trends are you seeing as this is this pace changed recently <unk> improving.

That'd be very helpful.

Well I think I think it'd be extremely difficult to break it out exactly you know, we've we've talked about pent up demand.

Gary talked a regularly about looking at a full year as far as revenue growth because there is gonna be fluctuation, it's going to occur between the different quarters of course. It. This year was tremendously different than anything that we've seen in previous years and I think Gary probably will stay the same thing and his time period. If it was completed its completely different.

But there was significant pent up demand, but I would also say that a debt that we had a great marketing initiatives in our operating our operations executed extremely well to be able to have a higher retention rate from a customer perspective, which I think will help us from an organic revenue perspective, as we're moving forward in time so I.

I think a combination of those things helped with the record that we sell just this quarter.

And I think are gonna help us as we're moving forward to you know the technology that we've put in place with Glimpsing and John talked about our routing and scheduling is making it a better job for our technician and it's making it a better customer experience from our customers perspective, and all those things are incrementally improving that customer.

Tension piece, which ultimately will help us as we're continuing to grow our revenues.

Okay and then my follow up question just on the margins I'm just looking at the EBITDA margin it looks like EBITDA margin acts the pension we're still down.

Around 20 basis points can you give a little bit of color on kind of very strong revenue growth, but some of that operating leverage seems seems to Ben.

Lost somewhere and and then how to think about operating leverage going forward or from here.

Well I talked about that a little bit in my comments when I've because the only thing we called out in the adjusted was the pension adjustment. However, we do know that we'd have some one time events, having to do with the Clark integration such as our our DNA or interest professional expenses as well as our four one k. increases all of those country.

Have you did a probably to a difference of a percentage point as far as the overall margin was concerned. So I think if you go through and you.

If you're willing to look at it from that perspective, you go through kind of stripped those things out I think you'll see a nice improvement.

Year over year for the quarter, and we believe that as those areas subside indoor we lap those areas, we're going to continue to see that margin.

Moving in a positive direction as we had for many quarters many years before this.

Thank you as a final reminder, please press star one at this time, if he would like to ask a question again that is star one if he would like to ask a question.

[laughter].

At this time I am showing no questions in the queue I'd like to turn it back over to management for closing remarks.

Well. Thank you all for joining us a we appreciate your interest.

I hope you since it we're optimistic about our company's opportunities going forward, we have a lot of.

Investments or.

That we think we'll start to to pay off in a greater form.

Oh, it's kind of hard to to.

Put it all together and come up with the team relation of of these investments and where they take us, but we see movement a with all of them positive movement with all of them are and we got some tremendous companies in brand so and we're very proud of.

What we've done and we were very proud of the transition that these companies have gone through and have experience. So.

We look forward to.

Giving you our.

Our update or with our fourth quarter call.

Thanks again.

Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.