Rollins, Inc.
Q1 2009 Earnings Call Transcript

Published: 29 Apr 2009

[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

[Gary W. Rollins:]

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

[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:]

Good morning Gary and Harry, a nice quarter.

[Harry J. Cynkus:]

Thank you.

[Gary W. Rollins:]

Thank you.

[Clinton Fendley:]

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:]

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:]

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:]

Gray, Harry. Good morning.

[Gary W. Rollins:]

Good morning.

[Harry J. Cynkus:]

Good morning.

[James Clement:]

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:]

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:]

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:]

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.