Q1 2021 Rollins Inc Earnings Call
Greetings and welcome to Rollins, Inc. First quarter 2021 earnings conference call.
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On the line with me today, and presenting of Gary Rollins Rollins Chairman Chief Executive Officer, John Wilson.
Rollins Vice chairman.
Paul Junior President and Chief operating Officer, Eddie Northen, Senior Vice President Chief Financial Officer, and Treasurer, Joe Lieberman, Vice President Finance and Investor Relations.
Management will make some opening remarks and the we'll open the lines of your questions.
Gary you'd like to begin.
Yes, Thank you Joe and good morning, we appreciate all of you joining us for our first quarter 2021 conference call.
The only will read our forward looking statement and disclaimer and then we'll begin.
Thank you Gary our earnings release discusses our business outlook and contains certain forward looking statements.
These particular forward looking statements and all other statements that have been made on this call. Excluding historical facts are subject to a number of risks and uncertainties and actual risks may differ materially from any statement, we make today.
Please refer to today's press release.
Our SEC filings, including the risk factors section of our form 10-K for the year ended December 31st 2020 for more information and the risk factors that could cause actual results to differ.
Thank you Julie.
I'd like to start by taking a moment on behalf of our board our entire team and myself to recognize Henry chippy for everything he's done for our organization over the last 68 years.
As many of you are aware of Mr. Chip. The recently retired from our board.
Do you think behind on an incredible legacy of leadership and service to Rollins its employees and customers.
Henry financial knowledge and guidance help shape Rollins to become the world's best on largest pest control company.
During his distinguished career, not only was Henry our longest serving CFO.
Through a period for over 17 years. He was the architect of Rollins purchase of working and 1964.
Incidentally this is considered to be the country's first ever leverage buyout and was studied for years at the Harvard business School.
Henry along with round of Rollins, our chairman at the time were the only two Rollins directors present during our on National's stock exchange listing of 1968.
And again on our 50 of the year, New York Stock Exchange anniversary.
Additionally, in recognition of his broader impact of the business World. The New York Stock Exchange inducted Henry and 2018 until their exclusive of what.
All of the leaders Randall Rollins was inducted as well.
Rollins would not be the company. It is today without Henry's numerous contributions on bi.
The half of the entire of Rollins family of employees.
Thank you Henry we will continue to honor of your legacy and the example of hard work and dedication that you provide.
I'd also like to acknowledge Lee crops recent retirement from Rollins as Chief Information Officer.
Throughout his 12 year career was Rollins Lee helped guide the company through several important technology advancements while building a fantastic on T team.
He selected and developed the team to not only improve.
The company's performance presently.
What will prevail well into our future.
We wish the Lee all of the best in his retirement he has earned it.
In the end it all comes down to the many positive contributions of our employees.
Continue to make every day.
They have risen again to the occasion going above and beyond what they've ever accomplish before.
We're grateful for their extraordinary dedication and adaptability during the past year.
They truly are our most valuable asset.
While we face many challenges over the past year, we continued to successfully improve our operations.
And we are greatly encouraged by our first quarter performance.
We are benefiting from our technology investments and overall business momentum.
And are looking forward to another successful year.
Let me now turn the call over to the shock.
Thank you and good morning, everyone as Gary mentioned, we are pleased with our first quarter results.
Revenue grew nine 8% to $535 6 million.
Compared to 487 9 million from the same quarter in 2020.
Net income rose to $92 6 million or <unk> 19 per diluted share compared to $43 3 million or nine cents per diluted share for the first quarter of last year.
Eddie will review the GAAP and non-GAAP results. Shortly there was there was one adjustment impacting our financials.
It is not just the results we were pleased with what the trends were seeing in the business highlighted by strong performance in our residential and termite service lines growing 14, 9% and 12, 2% respectively.
Further our commercial business has improved every single quarter. During 2020 continue the steady progress once again this quarter, reaching two 9% growth over the first quarter 2020.
Next I too would like to acknowledge the notable impact Mr. Typically is made not only on our company, but with me as well I am grateful greatly appreciative of his many years of leadership as part of our management team and as a board member.
While it's never easy to follow in the footsteps of someone who made that type of impact. We are pleased with the distinguished executives that have agreed to join our board of directors over the past several months.
Many of you may recall that we have enhanced an already experienced and strong board with the recent additions of Jerry Nix, Susan Bell, Patrick Gunning and Harry Zincous the.
The each bring a wealth of knowledge and diverse experience in many different areas that we believe will make us stronger as the company moving forward.
We have also recently announced the appointment of several New Committee chairs and committee designations.
Jerry Nix was appointed as our new lead director and was selected to chair of our compensation Committee.
As well as chair of our nominating and governance Committee.
He is also now serving as a member on our audit committee and will be joining our chairman Gary Rollins on our Executive Committee.
Additionally, Susan Bell was selected to chair of Rollins Audit Committee and to chair of our diversity of committees.
Patrick Gunning was also appointed to be a member of our audit Committee.
As Gary just mentioned the Lee Crump has contributed significantly to Rollins success. During his tenure and we wish him the very best as he retires.
Exceeding Lee as our new Chief Information Officer is Thomas Tesh.
Well, we have spent the last six months working to ensure a seamless transition.
<unk> has been a key part of the Rollins family since 2012.
Previously serving as the vice President of information technology.
Thomas is extremely qualified having let our technology improvement journey through several major rollouts over the years.
And we believe his deep experience and solid track record makes him uniquely qualified for this important position.
Now, let me turn the call over to Jerry who will provide more details on our businesses.
Thanks, John and good morning, everybody.
The first quarter business environment was extremely solid across all of our business lines and our total revenue less significant acquisitions grew seven 9% over first quarter 2020, as both our residential and termite segments presented double digit growth of 12, 8% and 11, 2% respectively. The ease.
Growth levels have exceeded anything we've recently experienced.
Commercial ex fume revenue less significant acquisitions presented positive growth for the first time since first quarter 2020.
The segment has enjoyed sequential improvement since last April reaching 1.3% growth over first quarter of 2020.
Our teams continued dedication in serving our commercial customers and their recovery has been outstanding.
We're pleased with the steady progress achieved over the past 12 months in the segment.
Turning to our mosquito service as families spend more time outdoors recreationally and with the continued threat of mosquito borne disease. We're realizing significant growth in this segment of our business for the quarter, our mosquito revenue experienced growth of over 30%. Additionally.
Additionally, the strength of our termite business remains solid and we expect continued growth in the future.
Looking deeper on our results we continue to attract customers to all of our services and brands, we're particularly pleased with our international performance in the U K and Australia domestically.
Domestically northwest exterminating, which joined the Rollins family in 2017 continues to realize strong growth in the southeastern U S.
Home team has continued their consistent high growth levels as they capitalize on a thriving residential home construction industry.
Similar to last quarter, we experienced tremendous growth and wildlife service offerings through our true Tech and Critter control brands also we continued to selectively purchase critter control franchises and combine them together with our growing wholly owned wildlife operations.
Operationally route we remain focused on ensuring our residential and commercial customers receive the highest quality of services.
As part of our approach in 2015, we began the rollout of our new branch operating system boss at our largest brand Orkin U S.
During 2020, we successfully deployed Boston two additional brands work in Canada, and Western Pest services.
With this new system in place, we were able to add virtual route management software to improve our routing and scheduling processes, even though we're still on the early stages for Orkin, Canada. We've of tree, we've achieved routing improvements of over 20% at this time.
Over the next few years, we expect additional improvements of the as the system gains maturity within these brands.
Looking ahead, we remain committed to investing in implementing technology improvements to other brands and over to improve operational efficiencies as well as enhance our customers' trust by continuing to deliver a worthwhile experience.
Overall, we are pleased with the progress we've made during the first quarter and as the economy continues to recover we're encouraged about our prospects for further improvements for the rest of 2021.
Now, let me turn the call over to Eddie to discuss our financials. Thank you Gerry.
Two of greatly benefited from Mr. Tippy's vast experience wisdom and knowledge his guidance on cost containment mergers and acquisitions and managing the balance sheet had been invaluable to me.
The results of this quarter and part of Testament to his steady guidance throughout his 68 your involvement with the company.
For the quarter, our residential pest control commercial pest controls termite and ancillary service lines showed growth and key to the quarter included cost containment across all major categories throughout the organization.
Overall, good weather conditions that helped with demand and customer retention rates improving across the board.
As John referenced that we'll be reporting both GAAP and non-GAAP financials for the quarter, which were positively impacted by our gain on the sale of several of our Clark properties. As a reminder, when we purchased the initial park business in 2019, we bought their pest control distribution businesses and their own properties real.
The state is not a core competency of ours, and we decided to make the properties available to the market and secure branch leases.
The first group that sold netted of $31 million gain included in our numbers this quarter.
Looking at the numbers the first quarter revenues of $535 6 million increased nine 8% over the prior year's first quarter revenue of $487 9 million or.
Our GAAP income before income taxes was $119 9 million or of $116, 3% above 2020.
Our GAAP net income was $92 6 million up of $114 one per cent compared to 2020, and our GAAP earnings per share were <unk> 19 cents per diluted share.
When removing the positive impact of the property gain on the sale of 31 million. Our non-GAAP income before income taxes was $88 8 million compared to $55 4 million in 2020 or up 63%.
Our non-GAAP net income was $69 8 million up 61, two per cent compared to Q1 of 2020.
This surge in customer demand again tested our new technology to see how we would be able to handle higher levels of both existing and new customer starts as.
As we move from what we would call stage two to stage three of our five stage routing and scheduling transformation. Our latest changes have enabled our technicians to continue to improve the efficiency of their day and give the customer a better experience.
Specifically, our latest updates are helping to maximize our ability to be proactive with our customers instead of reactive.
Our operations support has added the use of of planning board, which enables of them in real time to adjust for openings and the technician schedule.
If a customer needs to reschedule service for some reason that opens up a time slot during the day, our support group as quickly able to fill that slot with a new customer or to support the changing needs of an existing customer.
This enables our technicians to be more efficient and our customers to have a better experience with their service needs.
These changes positively impacted our margins and our customer retention rates for the quarter.
Let's take a look through the Rollins revenue by service line for the first quarter.
Our total revenue increase of nine 8% included one 9% from significant acquisitions and the remaining seven 9% was from pricing of new customer growth.
In total residential pest control, which made up 44% of our revenue was up 14, 9% and commercial excluding fumigation pest control, which made up 35% of our revenue was up three 6% termite and ancillary services, which made up approximately 20% of our revenue were up 12, 2%.
Also as Jerry mentioned, our Wildlife service continued to see strong double digit growth.
Again total revenue less significant acquisitions were up seven 9% from that residential was up 12, 8% commercial ex fumigation increased one 3% and termite and ancillary grew by 11, 2%.
Our residential business continues to perform well and our commercial pest control business has seen steady improvements each month since April of 2020.
We anticipate of continued steady improvement in our commercial pest control business for the remainder of 2021.
In total gross margins increased to 51, 2% from 49, 5% in the prior year's quarter.
The quarter was positively impacted by lower service salary expense as well as the lower fleet expense through continued improvements from our routing and scheduling efficiencies.
Depreciation and amortization expenses for the quarter increased 2 million to $23 6 million an increase of nine 3%.
Depreciation increased 920000 due to acquisitions and planned it upgrades, while amortization of intangible assets increased $1 1 billion due to several acquisitions, including Mccall pest control in December of 2020.
Sales general and administrative expenses for the first quarter increased $4 3 million or two 8% to $162 2 million or 33% of revenues. This was down six 5% compared to 2020 in the quarter produced savings and administrative salaries and.
Fitz travel and telephone savings from better negotiated contracts.
There's been a lot of inflation discussion related to the economy and what impact companies are seeing or will see as we move through 2021.
At this point, we do not see major inflation exposure that would materially impact our margins as you probably know payroll fleet of materials and supplies are our largest three expense areas. At this time payroll margins are mainly improving due to enhanced technology and efficiency are.
Fleet has been positively impacted by lower fuel costs and of mid single digit percentage reduction in our miles driven.
Finally, our materials and supply costs are lower as a percent of revenue even with our continued personal protective equipment use by our customer facing employees.
As for our cash for the period ended March 31, 2021, we spent 17 million on acquisitions compared to $47 6 million during the same period last year.
We paid $39 4 million on dividends and had $7 8 million of capital expenditures, which was slightly higher compared to 2020.
We ended the period with the $117 3 million of cash of which 71 3 million of held by our foreign subsidiaries.
Yesterday, the board of directors approved of regular cash dividend of <unk> <unk> per share that will be paid on June 10, 2021 to stockholders of record at the close of business on May 10th 2021.
Gary I'll turn the call back over to you.
Thank you Eddie we're happy to take your questions at this time.
At this time, we'll be conducting a question and answer session. Please ask one question and one follow up question and then re queue for additional questions.
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Yeah.
Our first question today is from Tim Mulrooney of William Blair. Please proceed with your question.
Good morning, everybody.
Good morning.
So you had a really strong year of last year on the residential side and yeah.
I think one of the big questions on everyone's mind of how that might translate to organic growth in 2021.
You've got some difficult comparisons coming up over the next several quarters in residential pest, but you know as I sit back I'm thinking then again, we're still largely in of working from home environment and I have to think that a lot of the accounts that you signed up last year are probably now finally, turning profitable after the third or fourth visit so.
<unk> taken all of that into account I'm, just curious how youre thinking about the residential side of the business as we continue to emerge from this pandemic.
Yes, so so Tim this is Eddie so we're seeing a continued.
Continued good demand I mentioned in my prepared remarks, we did have overall good weather in the first quarter.
I don't know what that will look like as we move throughout the remainder of the year.
But I think one of the things that we're seeing and I think we're all living this real time as we're seeing more of this hybrid work environment.
So it's not only people necessarily working from home are there not only working from the office, but we're seeing more of this hybrid environment.
Which we believe is still going to have some eyes.
That's going to create that demand that we've seen as we move through 2020.
You you see the numbers here on our lead generation as we go into Q2 is still very strong for us and that's starting to lap some of the some of those numbers that you already talked about.
I don't know that any of us know exactly what this will look like as the entire year plays out.
But I think there are things that the that are positive for us to be able to continue to see demand as we're moving forward.
Okay. Thanks, Eddie I appreciate those comments.
And the good color on the lead generation, if I could pivot.
No.
It was Jerry that was talking about the technology.
That you are implementing boss and Orkin, Canada, I know, that's not new news, but I'm not sure I heard about western before.
So I'm just curious if you could give us an update on maybe your technology rollout plans. This year are there any other quote unquote specialty brands that you are planning to rollout boss or VRM to.
And the incremental I guess technology investments to keep in mind as we model out your expenses for 2021.
Yeah, I'll I'll answer that the luxury of follow up from there. So yes orkin are aware.
A little bit further down the down the path as far as getting things moving more towards maturity.
We've added western to that to the queue there moving down the path of maturity I will take a pause at this point in time make sure that we worked through in the we get the benefits from those two units or those two brands before we were to make a decision or anything else.
We would let you know ahead of time, if there was going to be anything significant to change our capex as a percent of revenue or anything else like that but we I would say from a modeling standpoint within the historic range of what we've seen over the last few years is what our plans are right now and if we make a decision to change that will well, let you know what we know.
About that moving forward, one thing I'd add to that Eddie.
There's technology improvements when we buy.
On the other company.
Typically they don't have the best phone systems are not paying the best rates for communications and there are some products are available within the industry that in some cases or upgrades from what they currently have so although bosses certainly important is going to be.
Critical to our future.
Are able to help these newly acquired companies was something short of boss and of course that'll be.
On their plate in the future.
Is that does that help with them.
Very helpful. Thank you.
Yeah.
The next question is from Mario Court of watching of Jefferies. Please proceed with your question.
Hi, everyone. Thanks for the time.
I actually just wanted to ask about organic growth you guys are using.
The significant acquisitions.
Verbiage, when you're referring to I guess organic growth now or are you able to provide what organic growth looks like less all acquisitions and revenue commercial and termite.
Yes. This is yes, I think thanks for that question. So we didn't mean to add confusion here. This is the same way that we've measured it every quarter.
Probably for the last 15 years, we were just trying to give a little bit of clarity around that part.
If we were two of when we acquire a.
Small tuck in acquisition of let's just say five technicians, we acquire them on a on a Thursday on Monday, they have new uniforms and new vehicles in there and they are embedded into that Orkin branch and we really don't have a way for that that very small piece to be able to.
Kind of parse that out.
So this is again this is the same way that we've looked at it every quarter again at least for the last 15 years. So we really don't we really don't look at it because it's such an insignificant number from that perspective.
Just.
Maybe a follow up to that with with those types of acquisitions are those like the $1 million in revenue or like 500 or is it that insignificant that it's not even worth mentioning.
That's absolutely correct, yes. So again, we didn't we didn't mean to add to add confusion to the bye bye bye wording that we have here.
But again this is the same way we've looked at it throughout time and nothing else would be of part of it that would be material significant at all.
Okay, great. Thanks for clarifying and then just my follow up would be on the labor market you guys actually said that youre seeing.
Labor efficiencies and Youre seeing I guess may be savings there are coming in better than expected.
I think commentary from other companies is that theyre seeing difficulty in hiring new labor essentially competing with the government.
For for people looking for jobs with the stimulus on unemployment checks are you seeing anything similar to that within your new hires.
Also heard that I guess smaller pest companies are.
Even offering bonuses to the new hires that they sign and then they work for the first 30 days or 60 days or whatever it is they will get an additional bonus for for staying with them are you doing something similar or is that is that.
Really not on the cards for you.
Well.
When we had demand levels that we've seen this quarter and even if you go back to last quarter that are significantly higher than what we would see on average in <unk>.
Any times it would always be a challenge to ensure that we're finding are hiring and retaining the right employees. The good news for us and it all kind of kind of move to specifically your question of the good news for US is as our technology continues to mature on the routing and scheduling part it enables us.
To automatically be more efficient so during my prepared remarks, I talked about let's just say a technician that maybe went out with nine stops on a day and then at 10 o'clock in the morning, someone called and said well, they're not going to be available and not be home at two o'clock in our old world that two o'clock slot basically would've gone empty.
And the technician would not have had anything to do in this new world. The branch can see that in real time, our call center can see that in real time. So now when we have of new customer we can slot of new customer into that time slot. So it's enabling us to continue to be more efficient with that which is helping with that demand with the new.
<unk> and also being able to move that existing customer as well so with all of that being said with this with the demand levels.
We are absolutely having issues to be able to go through and make sure that we're finding and hiring the folks that we need to be able to keep the business moving forward and HR group in the operations groups are doing a tremendous job with that but it is a battle with the other companies that are out there that are offering some of the things that you've talked about.
And this is Jerry and John and I recently out of meaning with branch managers in the field of the Orkin about your number one job of your number one priority is of branch leader is recruiting and building your team.
We put a high emphasis that of it.
That's first and foremost most important thing you can do so we've placed a lot of emphasis and have good processes and procedures behind that but as Eddie said it is getting tougher we do offer.
Bonuses, there's a lot of activities.
On the.
Brendan family of referrals for new employees things along those lines that also incentivize people if they if they get referred and they stay longer.
Pay referral bonuses over time things along those lines. So we take advantage of every everything that we can.
Get our hands on to help keep keep of competitive advantage in the search for talent.
But the.
Again. This is nothing that's new I mean, it might be a little bit more heightened at this moment right here, but this is nothing new for us in the service industry. We've gone just in my time period that I've been here of six years. This is something that we're constantly focused on John set the tone as far as the importance of that Jerry has set the tone as far as the importance of that over time.
And we've been able to be successful with that and we will find ways to continue to be successful with it as we're moving forward as well.
And the other piece of.
Of the staffing situation as retention.
And we have created in Oregon, and in the Western and in Canada.
We've created a better job.
It was very frustrating for that pest control Tec to have that cancellation that Eddie just described.
Really not.
Okay.
The gaining to unravel.
The days route.
And now we have the tools that we can.
Move of customer to that slot of new customer to the slot typically.
And and he doesn't have a sheet of didn't have that frustration that that how am I going to get through how am I going to get it done.
This has created a missed it ratchets all the way down through the day et cetera.
So it's going to be interesting to see what this does to retention it has to make a better job for the pest control.
The technician in those areas that have boss.
Great. Thank you so much.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question is from Michael Hoffman of Stifel. Please proceed with your question.
Thank you very much I met Henry Kippy almost from the very beginning of my career of 33 years ago. When I was covering Rollins environmental and he was gave me Sage advice, then which I've always followed.
In my modeling so I wish him the best of luck.
Thanks for sure of dark.
So the conversation about growth and I get you're not doing anything different in the.
And the language of the significant but.
The double digit or very high single digit organic growth in residential relative to the underlying market growth.
Is phenomenal so what are you doing different.
That you are producing that type of organic growth versus anybody else from the business because that's you're clearly gaining share in your well run company, but what are you doing different do you think that allows even if the comps had to come down because it's so strong last year, you're still gaining share. So what are you doing different.
Michael I think it's a very intuitive question that the ask and Trust me as we've gone through this time of these higher demand levels. We've continued to really drill down into that to get a better understanding of.
I talked again in my prepared remarks, we did have good weather that we were they were up against the created.
But I think I think the essential worker status and the and the seriousness that we took with that especially as the pandemic started to me I think it's one of the things that separated us.
For sure in the service industry, and I would say separated us within our pest control industry as well. So we already had a a very professional technician.
As we've talked about previously we invested in PPE very early on.
And when you combine that together with that trusted.
With that trusted person that you already have we believe that that separated us potentially from others that are out there. We've all had people on different service industries.
That may be showed up to do some sort of work that look the shovels didn't look professional and they could have been the best person to be able to do that job that you would hope, but the impression didn't come across positively and we believe that our that our technicians across the board in all of our brands come across professional.
Generally and we believe that essential worker status really translated into a into a trusted brand and as people have felt more comfortable opening their homes over this last I'll say 345 months. We believe that's translated more into a trusted brand of trusted name.
<unk>.
I'm open to them coming into my home and it's and it's really been a reflection of this demand that we've seen that we've been able to go through and grow our business with so we think that those are a few things. When you couple that with these continued enhancements in the routing and scheduling and how our communication with our customers continues to improve we believe those are things.
They continue to separate us from the competition Thats out there and enabling us to win on high demand and to retain it at a high rate.
Okay fair enough.
You all updated your corporate presentation recently by the way it was on.
Nice change.
I have to admit took me a moment to realize those clicking through of book.
Kind of make it rotate the different way.
But you put in there of about a $12 billion domestic market.
And yet the major trade associations defining it as nine 6 billion growing a little bit less than 3% last year Whats can you bridge the gap between your per your market.
The size and the PCT market size.
Michael I'll have to get those numbers from you I'm sure, we'll get a chance to talk to you probably later today or tomorrow, let us.
Our marketing group and let's see what we can do to help out with the difference between those two okay that'd be very helpful. Thank you yeah. Thanks.
There are no additional questions at this time I would like to turn the call back to management for closing remarks.
Okay, well, thank you for joining us today, we're optimistic about Rollins as opportunities ahead in.
And appreciate your interest in our company.
We look forward to updating you next quarter on our progress. Thanks again.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Okay.
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Okay.
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