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Rollins, Inc. (NYSE:ROL)

Q1 2009 Earnings Call

April 29, 2009 10:00 am ET

Executives

Marilyn Meek – Financial Relations Board

Gary W. Rollins – Chief Executive Officer, President & Chief Operating Officer

Harry J. Cynkus – Chief Financial Officer & Treasurer

Analysts

Clinton Fendley – Davenport & Company Llc

James Clement – Sidoti & Company

Operator

Good morning, ladies and gentlemen. Thank you for standing by. And welcome to the Rollins Inc. First Quarter 2009 Earnings Release Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions) This conference is being recorded today, Wednesday, April 29 of 2009.

I would now like to turn the conference over to Marilyn Meek of Financial Relations Board. Please go ahead ma’am.

Marilyn Meek

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 212-827-3777. 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 1800-405-2236 with the pass code of 11130366. Additionally, the call is being webcast 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, 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?

Gary W. Rollins

Yes, thank you Marilyn. Good morning and thank all of you for joining us for our first quarter 2009 conference call. Harry will read our forward-looking statements and disclaimer and then we will begin.

Harry J. Cynkus

Thanks, Gary. Our earnings release discusses our business outlook and contains certain forward-looking statements. These particular forward-looking statements and all other statements that may be made on this call excluding historical facts are subject to a number of risks and uncertainties and actual results may differ materially from any statements we make today.

Please refer to today’s press release and our SEC filings, including the risk factor section on Form 10-K for the year ended December 31, 2008, for more information on the risk factors that could cause actual results to differ.

Gary W. Rollins

Thank you, Harry. Like the other companies, we expected 2009 to be a challenging year and it is. However, as I stated in our earnings release this morning, we’re fortunate to have a large base of recurring revenue, great pest control brands, and a proven team of highly professional and dedicated employees.

All of these contributed to increased revenues for our first quarter, and our 12 consecutive quarter of improved earnings results. Revenues for the quarter grew 15.7% or 0.6% excluding revenue from the HomeTeam and Crane acquisitions and the decline in the Canadian dollar.

Looking in our business lines, and Harry will provide greater details on this. Commercial revenues grew 3.3% and termite 1.5%, while we experienced a decline of 2.5% in residential pest control. Sales were up for the quarter, but in the case of residential not enough to offset the decline in customer retention. As we’ve indicated previously while we are recession resistant, we’re not immune from a very poor economy. With the layoff of approximately 5 million people across the U.S. we have seen an expected effect on our residential pest business.

A large portion of this retention debt is financially related. We’re providing a remedy for some of these customers with budget problems however, and that is to move them from every other month service to quarterly service. This gives them the ability to maintain their Orkin protection for less money. The HomeTeam had a chance to see the Orkin news release earlier this month summarizing an independent survey conducted by Global Strategies Group, involving approximately 1200 private households across United States.

The results indicate 87% of those polls about pest in the economy agreed. There is still no room for bugs in my home. And some 57% stated that pest control is not a do-it-yourself project, and they would turn to an expert for help. These obviously are all good conclusions supporting the importance in what we do, and its important even in economically troubling times.

Customer satisfaction and retention are always at the forefront of our initiatives, and we are continually looking towards improvement. When we acquired HomeTeam Pest Defense, we were particularly impressed by their high customer retention rate, one of the best in our industry. And we knew, we could learn something from them in this regard.

One of the reasons for these good results was attributed to a four to six minute customer telephone survey, which internally they call customer satisfaction measurement. These surveys have been conducted twice a year since 2000. One of the purposes of the survey is to determine customer loyalty by asking customers if they would recommend HomeTeam service to a friend or colleague.

They believe that a favorable response to this question is the ultimate determination of the customer satisfaction. The survey also helps to determine areas of their service that customers are less satisfied with enabling a location to develop, and execute action plans to address the shortcomings.

Branch bonuses are also based on the survey results. But the initiation of this program HomeTeam has seen both an improvement in retention and an increase in customer referrals. With this knowledge in hand, Glen Rollins, Orkin, President got together with his team to initiate a similar program for Orkin. We then engaged an independent company to begin conducting the surveys. The first phase of the project was recently completed in two regions, North Carolina and Illinois.

We are very pleased with the degree of feedback received. By HomeTeam, we identified an important factor leading to customer satisfaction, personal communication. Our customers appreciate note from the service ticket from their pest control specialists. Telling them what service was performed, they recommended actions the homeowner should take, and what the specialist plans do to on the next business.

With this and other feedback we’ve been able to modify our training programs and take other proactive steps to improve customer satisfaction. We will be conducting surveys by September in all Orkin and Western Pest Services locations. These first surveys will be our benchmark, which will be later used to measure the effectiveness of our programs.

We’re confident that Orkin and Western will also realize improved customer retention, as well as new referrals once the program is fully implemented. We expect these surveys to be an ongoing process. In March, we reintroduced a very successful keeping pest in the place advertised that we launched last year. The campaign will run through August on cable television networks that include T&T, USA, HGPV and the Food Network. And we’ll involve earth other media. I understand that this campaign’s popularity and reach is going beyond TV having had more than 100,000 views on youtube.

The Internet also continues to be an important aspect in reaching potential customers. In fact the growth experience from our Internet marketing out reach over the past few years has contributed to our leading to double the space international call center to 40,000 square feet. Before you know, it will be mosquito season, did I hear some urghs out there. For last year, we enjoyed a 42% increase in this service, and expect to continue to grow to a greater customer penetration and repeat purchases.

This month we also kicked off our second year on our nothing but nets program, where our goal is to raise a $150,000 for the purchase of mosquito nets to protect people from the threat of malaria in Africa. As many of you are aware, we invest extensively in training for our employees to help ensure that the services we provide are at the highest quality. We are pleased to see periodically that it’s paying off. Effective Pest Management is critical to food safety and we are pleased to have received a Reader's Choice Award from food processing magazine, a leading trade publication within the Food & Beverage Industry.

Orkin has also received a Reader’s Choice Award from today’s Facility Manager Magazine, a leading trade publication for Senior Facility Management Executives, also these awards attest the superior pest knowledge and service provided by our commercial technicians. This is gratifying to receive this confirmation and recognition by commercial decision makers and their respect of industries as to the quality of the services we provide.

We also continue to make investments, to educate consumers on the importance of pest control. And to make it easier for them to contact us to meet their needs, I think we can all agree that we become a nation from children to grandparents that are addicted to our mobile communication devices. In many cases they seem to have become an append each.

On April 20, this month we launched Orkin Pest 411. And consumers can now reach Orkin with a touch of a bud. By signing on to our user-friendly mobile web application individuals can learn about the threat pests can pose to health and home with the ability to contact a Orkin Pest specialist anytime to discuss our treatment options. Orkin is the first national pest control company to offer this interactive resource to consumers.

In addition to the mobile site, Orkin Pest 411 is also available through a unique website at 411orkin.com. I hope you will agree that in business today need and opportunities to change are ever present. As a company, Rollins and its terrific pest control companies are committed to embrace change for the benefit of our customers, employees, and shareholders.

I will now turn the call over to Harry. Harry?

Harry J. Cynkus

Thank you Gary. Let me just add to what Gary was saying about the new Orkin Pest 411 pest site. I have it on my phone, and it’s a great way to be able to identify exactly what type of pests you may be looking at and you can call 888-orkinman right from the site. I invite you to give it a try http://411.orkin.com/ in your mobile browser or on the web.

Anyway, I think it’s fair to say we got off to a good start this year, and you and our investors are probably more interested in the numbers right now. So let’s get to that. Revenues for the quarter improved 15.7%, revenues totaled $243 million compared to $210 million for the first quarter last year. Net income for the quarter is $15.8 million compared to $13.8 million last year, a 14.2% improvement. While diluted earnings per share this quarter is $0.16 a 14.3% improvement over the 14% recorded last year in the first quarter.

Another important measure, earnings before interest, taxes, depreciation and amortization, EBITDA, was $35.6 million, increasing 24.3% over the first quarter last year. EBITDA grew faster than net income due to $2 million and additional intangibles amortization related to the HomeTeam and Crane acquisitions.

For these two operations, this non-cash charge amounted to 8.2% of their revenue. While I wise we could continued to report 15% revenue gains for the balance of the year, unfortunately we have now lapped the anniversary of the acquisition of HomeTeam Pest Defense and beginning in quarter two, will not get the revenue left from them. As we have for the last three quarters, let me break out their revenue contribution so you can gain a better view of how the balance of the business is doing.

HomeTeam contributed revenue of $31.1 million for the quarter, excluding the impact of HomeTeam and for that matter the $2.7 million revenue attributed by the Crane acquisition that closed on 12/31, revenues decreased four-tenths of a percent in the quarter. However, we were again impacted and will be through the third quarter as a nearly 21% drop in the Canadian dollar this quarter over the same quarter a year ago, which negatively impacted our total revenue growth.

Looking just at our U.S. domestic revenue, excluding the impact of HomeTeam and Crane acquisition [which earned] in last years results in our Canadian operations, for the quarter total revenue grew six-tenths of 1% versus 1.6% last quarter on the same basis. Let me repeat that, for the quarter our U.S. domestic total revenue grew six-tenths of a percent versus 1.6% last quarter on the same basis.

Growth continues to slow, but not off the chart like so many other businesses today. Breaking down the business further, starting with commercial pest control, which continues to be the largest and fastest growing part of our business. Commercial pest control totaled 41% of revenue in the first quarter, substantially all of the pest control business we serviced in Canada is commercial.

To draw a better picture of the health of our commercial business we need to separate the impact of Canada and just look at our domestic commercial business, which grew 3.3% on a comparable basis. Respectable, but slowing from last quarter’s 5.7% growth.

Our Canadian operation which represents approximately 7% of our revenue on a constant dollar basis performed very well this quarter and in fact Orkin Canada grew organically over 8%, but in converting into U.S. dollars, its contribution to our consolidated revenue was an unfavorable 11.6% decrease, which dampens our overall revenue growth.

The decline of revenue growth reflects net slowing national accounts which we’re running up against last year’s record first quarter when two major customers were started. We are more positive about national account sales improvement in the second quarter. We also saw a decrease in our commercial retention, in fact Orkin’s commercial customer cancelations increased $154, 000 in the quarter.

We are sharing in the pain of our customers as a result of store closings and business barriers. Our residential pest control service now represents about 39% of the business and with HomeTeam, residential pest control grew almost 29% in the quarter compared to the prior year. Excluding HomeTeam’s contribution, residential revenues declined 2.5%. Orkin’s lead soles were down slightly 4% during the quarter and cancellations increased to $145, 000.

Unfortunately some of the 5 million people laid off in that last 12 months were our customers. While April is off to a slow start, now that’s spring and good weather is here. We hope to be able to reverse the recent trend and start to grow this line of business through new customer additions, price increases and tight discipline.

Lastly, let’s talk about our termite service revenue, which now represents around 19% of our business, and grew 23.3% as a result of the acquisition of HomeTeam. Excluding HomeTeam’s contribution, our previously existing termite business increased in the quarter 1.5%, reversing the last two quarter’s negative growth trends. The internal organic growth is certainly a bright spot.

Termite treatments are a much larger dollar purchase and given the consumer sentiment, this portion of our business has performed well. We enjoyed a nice increase in leave and with proper sales staffing, we benefitted. Gross margin for the quarter improved 70 basis points to 48.4% in the quarter versus 47.7% in the prior year. Margins excluding the impact of HomeTeam improved a 170 basis points due to a nearly $2 million reduction in fleet cost due to lower cost of fuel as well as greater service technician productivity.

Depreciation and amortization expense for the quarter totaled $9.4 million with amortization of intangibles of $5.4 million and depreciation of $4 million. Amortization increased $2 million in the quarter, a 60% increase due to the almost $97 million assigned to customer contracts and other intangible assets as part of the HomeTeam and Crane acquisitions. The amortization of intangibles represents the significant non-cash charge to the P&L. Under GAAP, we write-off the value assigned to customer contracts acquired in acquisitions over their economic life. 2008, total amortization of intangible expense was $19.2 million and will increase to $22 million in 2009. Based upon our fully diluted shares outstanding, it will be a non-cash after-tax charge of $0.14 per share.

Sales, general and administrative expenses for the first quarter increased $10.5 million or 14.7% to 33.7% of revenues, decreasing from 34% for the first quarter last year. $9.1 million of the dollar increase is due to the addition of HomeTeam and Crane. SG&A excluding the impact of HomeTeam as a percent of revenues increased 80 basis points due to increases in cost of risk as well as stock-based compensation and sale salaries all partially offset by decreases in fleet cost and $1 million of non-recurring expenses related to the HomeTeam acquisition last year.

Rollins continues to be financially solid. As a result of our increase in net income and depreciation and amortization, net cash provided by operating activities totaled $20.6 million in the first quarter of this year increasing 33% over last year’s Q1. This continuing strength of the company has allowed us to reinvest money in our business by acquiring outstanding pest control companies.

Last year we made two significant acquisitions, HomeTeam and Crane Pest Control both contributed to this quarter’s success and are performing ahead of expectations. We also returned money to our shareholders this quarter by repurchasing 603,000 shares of common stock at a weighted average price of $15.19 per share. We have approximately $4 million additional shares that can be purchased under previously approved program by the Board of Directors.

As announced in December, we are pleased that for the seventh consecutive year, that we have increased our dividend by 12% or more currently with an annual pay out of $0.28 per share. This seems particularly impressive given Standard & Poor’s announcement early this month that Rollins was one of our record low 283 companies that announced increased dividend pay outs during the first quarter of 2009. A 52.7% drop from the 598 companies that reported dividend increases during the first quarter of 2008, a testament to the relative financial strength of Rollins Inc. Spring is here, and we remain cautiously optimistic. We’ve seen some slowdown in the residential pest control demand while our business model, which has held up well in prior recessions continues to produce good results.

Our past year acquisitions are performing well and increasing their contributions to our success. We continue to keep a close eye on our operating expenses and are enjoying the relief from last year’s high fuel charges and hopefully released a little well and more. Lastly, keeping pest in their place is our only business. If we can help you, keep us in mind 1800-800-Orkin.

I’ll turn the call now back over to you Gary.

Gary W. Rollins

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

Question-and-Answer Section

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from the line of Clinton Fendley with Davenport. Please go ahead.

Clinton Fendley – Davenport & Company Llc

Good morning Gary and Harry, a nice quarter.

Harry J. Cynkus

Thank you.

Gary W. Rollins

Thank you.

Clinton Fendley – Davenport & Company Llc

Gary, I wondered, a typical Q2 is the time that you guys evaluate your pricing and any potential increases. I wondered if you could update us on your expectations for this year in light of the challenging market environment?

Gary W. Rollins

Well, we have been doing testing as far as our annual residential price increase, and commercial price increases and we’ve confirmed that we have opportunities in that regard. We are very pleased with the results of our testing. But felt like we really needed to do that, as you mentioned in light of the economic situation. And we will be initiating those this coming month. And we are looking forward to the successful effort, I can’t really get into more details, for obvious reasons about exactly what our strategies are, but we were pleased with the results of our test.

Clinton Fendley – Davenport & Company Llc

Okay, thank you. And any update on just the competitive environment out there, and what you are seeing from both some of the smaller as well as larger competitors in the market?

Gary W. Rollins

Well I think it, the smaller competitors are certainly suffering, they don’t have the quite, they don’t have the diversification that we have the different markets that we are in. But, the industry information just indicates that the industry is scrambling. I think the fact that when gas went up, as high as it did, it was really dramatic to the competitors. And we’re very hopeful that we will see an increase of people that are interested in selling their business, we’ve seen some uptick, but to-date we don’t have anything to show for it. I think that, people accounted in a catch 22 their expenses are not going down, they really know if they start discounting, and I guess that’s the natural tendency, when you are not getting that many phone calls to cut your prices, but, they don’t have any other expenses with the exception of gasoline that’s gone down. So, they really are on the horns of a dilemma.

Clinton Fendley – Davenport & Company Llc

Okay, that’s helpful. Thank you guys.

Operator

Thank you (Operator Instructions). And our next question is from the line of James Clement with Sidoti & Company. Please go ahead.

James Clement – Sidoti & Company

Gray, Harry. Good morning.

Gary W. Rollins

Good morning.

Harry J. Cynkus

Good morning.

James Clement – Sidoti & Company

Gray, if I could, you alluded to advertising and marketing a little bit in your prepared remarks and it seems like, in this environment where advertising costs are generally speaking down across the Board, the company is, in good financial shape, weren’t you guys either or able to spend a little less get the same kind of penetration or they spend the same amount and arguably get much better penetration, get better spots on TV et cetera. What’s the role you guys are taking this year?

Gary W. Rollins

Well, we will have a slight increase as far as the dollars that we are expecting to spend. I mean, we certainly plan for that, but as you mentioned, we are seeing for the first time some fairly attractive rate decreases, I mean, we don’t, we are not compelled to spend every dollar that we budgeted. But we are enjoying to see some benefits for the fact that the major advertisers are really feeling the same pain that a lot of businesses are seeing. We continue to work very closely on our Internet presence. But, I guess to kind of sum it up we’re just enjoying the fact that, that people that we’ve been calling on for years and purchasing advertising, are willing to come off of their rate card.

James Clement – Sidoti & Company

Sure, sure now that’s consistent with what we have heard. With respect to the termite business, I think over the last year or so from what I understand the profitability results have trended very well, on top line performance, nothing related to right home about one way or the other, but this quarter looked pretty good. Can you talk a little about what you’ve done with that business and kind of what the goals are in, whether you maybe have turned the corner here?

Gary W. Rollins

Well, we are very encouraged with the results we have selectively added sales managers in our larger commercial branches, which always makes the difference. We have improved and expanded our sales training. Jamie, you followed us for along time and, we kind of fought the termite wars back in the 90s and cautiously we’ve really kind of unintentionally, we emphasize that part of our business, but I think, we’re always a leader as far as termite sales were concerned prior to that situation and we’ve just got back into the termite sales business. And I think that our managers some of which are young enough that they did not experience the benefits to the profit and loss statements when they had a good termite month. Really you are seeing the benefits that the termite really contributes to the bottom line because you get that infusion of profitability immediately as opposed to pest control or you really have to wait several months before you see a favorable impact on the bottom line.

Harry J. Cynkus

And Gary my understanding is that the science behind termite treatment is better than now than it was in the 1990s. Would you agree with that?

Gary W. Rollins

All the materials are better, and that’s kind of hitting the nutshell. We went through a period of timing the entire industry did. The only products that were available for so many years were just partially affected that when [boarding] was withdrawn from the market, they weren’t anything really suitable as from an effectiveness position and certainly we did know all that, but the reality is that there is very good products out there now and we got a lot smarter as a result of sometimes diversity can be a good thing. And I think it just caused us to redouble our training efforts and really become more expert as far as controlling termites.

James Clement – Sidoti & Company

Okay. Thank you. My last question is are you able to share anything about some of the Middle Eastern franchises that were opened up last year or any of them up in running and any updates can be given there?

Gary W. Rollins

We are very pleased with the progress that we are making over there, in fact we are, for the first time really, infusing some of those franchises with Orkin, people on the ground so to speak, our business does increase, our ability to I guess to have [closures] involvement as far as the franchises are concerned, that has improved, but we also, we got that $25 million contractor, our franchise did in Saudi Arabia...

Harry J. Cynkus

As you know there are member of U.K. they are doing well.

Gary W. Rollins

Yeah UAE and is doing well and we just had our VP of franchising go over there and he was very pleased with what was taking places as far as the franchisees ability to execute on that contract.

James Clement – Sidoti & Company

Okay, thank you all very much for your time.

Gary W. Rollins

Thank you.

Operator

Thank you. (Operator Instructions). And there are no further questions at this time. I would like to turn the call back to management for any closing comments.

Gary W. Rollins

Okay, well I hope that silence indicates that you all are pleased with our results. We certainly are pleased. We appreciate you joining us today. As Harry indicated we remain cautiously optimistic concerning the balance of the year. We are working hard to grow our business organically and through our acquisitions and we will always have our eye on the bottom line.

We look forward to speaking with you all again in next quarter. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes the Rollins Inc. first quarter 2009 earnings release conference call. If you would like to listen to a replay of today's conference please dial 303-590-3000 or 1800-405-2236 and enter the access code 111-303-66 followed by the pound sign. ACT would like to thank you for your participation. You may now disconnect.

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