Greetings, and welcome to the Rollins Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Marilyn Meek.
Please go ahead.
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 1, please contact our office at 212-827 3746, and we will send you a release and make sure you are on the company's distribution list. There will be a replay of the call, which will begin 1 hour after the call and run for 1 week. The replay can be accessed by dialing 1-eight forty four 5122,921 with the passcode 1,370,58,13.
Additionally, the call is being webcast at www.lyavid.com and a replay will be available for 90 days. On the line with me today and presenting are Gary Rollins, Rollins' Vice Chairman and Chief Executive Officer John Wilson, Rollins' President and Chief Operating Officer and Eddie Northin, Senior Vice President, Chief Financial Officer and Treasurer. Management will make some opening remarks and then we'll open the line for your questions. Gary, would you like to begin?
Yes, Marilyn. Thank you and good morning. We appreciate all of you joining us for our Q2 2020 conference call. Eddie will read our forward looking statement and disclaimer, and then we'll begin.
Our earnings release discusses our business outlook and contains certain forward looking statements. These particular forward looking statements and all other statements that have been made 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 and our SEC filings, including the Risk Factors section of our Form 10 ks for the year ended December 31, 2019, for more information and the risk factors that could cause actual results to differ.
Thank you, Eddie. Before talking about our results, I want to express how concerned and focus we are regarding the spread of COVID-nineteen. We know many of you are experiencing the expansion of the virus in your communities, and we hope you and your family are doing well and remain safe. Now back to our 2nd quarter. Revenues for the quarter grew 5.6 percent to $553,300,000 compared to $524,000,000 for the same quarter in 2019.
Net income rose approximately 16.5 percent to $74,900,000 or $0.23 per diluted shares compared to $64,000,000 or $0.20 per diluted shares for the Q2 of last year. Revenues for the 1st 6 months of the year were $1,004,000,000 dollars an increase of $9,300,000 compared to $953,000,000 for the same period last year. Net income for the 1st 6 months increased 8.9 percent to 118,100,000 or $0.36 per diluted share compared to $0.33 per diluted share for the comparable period last year, a 9% increase. Turning to our business lines results in the quarter. Residential pest control grew an outstanding 14.8 percent.
Commercial, however, excluding fumigation, was down 5.2 percent. We have offset some of those commercial revenue shortfalls with termite and ancillary service, which was up 7.3 percent. Eddie will provide greater detail around these numbers. During what we consider the most challenging time in our We couldn't be more grateful and proud of them and what they've done. They truly are our most valuable asset.
We continue to be aware and involved to ensure their safety and good health. They are provided with personal protection as needed as they go about servicing our customers. Most of our technicians are working remotely and avoiding spacing issues that would exist that are coming into our branch offices. Majority of our home office and call center employees are also working remotely. Our commitment to safe practices involves our valued customers as well.
On the plus side, most of our residential and in some cases, the need to protect their family and property from unwanted pest. Additionally, as families self quarantine, many are spending more time in their yards, recognizing the need for mosquito control. We are benefiting from the high regard, trust and confidence that our customers have in our brands, which is in part responsible for our fast growing pest control revenue and our gain in new customers, all at record setting rates. Before turning the call over to John, I want to note while we were pleased with our results for the quarter, we continue to face the challenges of the pandemic and the unknowns that go with it. As a result, we review and adjust our activities and policies routinely to help us better address the impact of COVID-nineteen.
As I mentioned, commercial pest control unfortunately has been more impacted by the virus and its related economic circumstances. However, we've been narrowing the revenue shortfall gap each month since March. Anecdotally, we are seeing a growing realization at many businesses that they can't shut down pest control services for an extended period of time without having infestation consequences. A worthwhile offset to these commercial pest control challenges has been our other brands and introduction of our disinfectant service, PhytoClean. As a result of this new service development prior to the pandemic, we have the ability to roll out our related sales and service revenue going forward.
Let me now turn the call over to John, who will provide more details on these aspects of our business. John?
Thank you, Gary, and good morning. I would like to echo the commentary Gary made earlier about our team members. A common theme worldwide was their unbelievable response to this pandemic and their commitment to their customers throughout this event. As the pandemic started, we saw firsthand the trust that our customers have in our highly reputable brands and service professionals. Additionally, we quickly moved to outfit our field teams with personal protective gear that help keep them safe, as well as give our customers confidence in our ability to service their pest needs responsibly.
Without the response we received from our outstanding team members, our customers would have been left unprotected from many insect and rodent caused health threats. Thank you all very much for what you do. As we noted last quarter, Orkin and many of our other brands are now offering a disinfection service, which quickly and thoroughly eliminates a wide variety of serious pathogens. Comprehensive disinfection is imperative to keeping an establishment as sterile as possible and disease free. During the Q2, we were very delighted to see the positive reception this service is receiving from our commercial customers.
I was especially pleased at a wide ranging movement from our field teams to provide this service gratis to 100 of first responder locations, police stations, firehouses and hospitals. As the economy slowly opens and more commercial business business begin welcoming back their patrons for indoor dining, shopping or as guests in their hotels and as their employees go back to the various workplaces, we expect the demand for Vital Clean Services to continue to grow. We are pleased with the progress thus far and very excited about for this opportunity. Our call centers were very busy during the Q2 as reflected in our increased residential sales. The record book for performance was completely rewritten as our inbound telephone sales effort replaced 7 of the top 10 sales days in our history.
From what we are currently experiencing, we are optimistic that these results will continue into the 3rd quarter as July performance certainly reflects that as the remaining 3 top 10 sales days have been replaced. Last, we continue to expand our company's presence both in the U. S. And globally, having made 2nd quarter acquisitions in Australia and the UK. On July 1, we announced one of our Australian subsidiaries had acquired the largest independent pest control company in Australia, Adams Pest Control.
This acquisition solidifies Rollins' national coverage in Australia. Adams Pest, founded by John Adams and established in 1944, has expertise in all aspects of general pest and wildlife control and is the market leader in the Greater Melbourne and Adelaide areas. In the United Kingdom, we also acquired 2 environmentally friendly companies, Albany Environmental Services based in Central London and Van Bink Environmental Services in Essex. These latest acquisitions bring our presence to 7 companies covering all the UK. We are very pleased to welcome these very fine companies and their teams to the Rollins portfolio of pest businesses.
I will now turn the call over to Eddie. Thank you, John.
Our press release on July 7 gave you some insight as to what we knew at that time related to the impact of COVID-nineteen on our business. Today, I'll share some details on our Q2 actual results and some additional insight to what we know today that will impact the future. During the entirety of the Q2, our operations have remarkably navigated all that we as a society have dealt with related to the economic and health impacts of the virus. Additionally, our non field operation group successfully switched to a remote work model and did not miss a beat with their support. As you can see from the outcome, their collective results and efforts have been outstanding.
From a reporting perspective, please also keep in mind that we lapped our initial Clark acquisition on May 1, and we will see much more normalized financial results for the quarter and the foreseeable future. For the quarter, our residential pest control and termite services pipelines showed growth and keys to the quarter included higher material and supplies costs, which included the purchase of personal protective equipment, successful cost containment implemented to drive margin improvements year over year and provision set up for potential of commercial customer bad debt. Looking at the numbers, the 2nd quarter revenue of $553,300,000 was an increase of 5.6% over the prior year's 2nd quarter revenue of $524,000,000 Income before income taxes was 103 $500,000 or 19 percent above 2019. Net income was $75,400,000 up 17.2% compared to last year. Our GAAP earnings per share were $0.23 per diluted share.
EBITDA was $126,900,000 and rose 16.4% compared to 2019. Our Q2 numbers have begun to normalize again as we lap the initial Clark acquisition in the quarter. The 1st 6 months revenue of $1,041,000,000 was an increase of 9.3% over the prior year's 1st 6 months revenue of $953,000,000 Income before income taxes was $158,900,000 or 11.1 percent above last year. Net income was $118,600,000 up 9.3% compared to 2019. Our GAAP earnings per share were $0.36 per diluted share.
EBITDA was 206,100,000 percent compared to 2019. As we stated on our Q1 call, we began aggressively our materials and supplies costs between $2,000,000 $3,000,000 in Q2 and will impact the business in a similar manner for the remainder of the year. Let's take a look through the Rollins revenue by service lines for the Q2. As Gary reviewed, our total revenue increase of 5.6% included 3.1% from Clark and other acquisitions and the remaining 2.5% was from pricing and organic growth. In total, residential pest control, which made up 47% of our revenue, was up 14.8% commercial pest control ex fumigation, which made up 33% of our revenue, was down 5.2% and termite and ancillary services, which made up approximately 20% of our revenue was up 7.3%.
Also of note, our wildlife services were up strong double digits yet again this quarter. Again, total revenue less acquisitions was up 2.5% and from that residential was up 10.3%, commercial ex fumigation decreased 7.8% and termite and ancillary grew by 5.5%. As John mentioned in his remarks, but I also want to recognize our call centers that made the transition to working remotely and then went on to set numerous revenue and sales records, which helped drive our residential growth. But Gary and John discussed the trust of our customers during the quarter. Our investment in PP and E also helped our customers to show trust in our well known brands.
Seeing their technicians or salesperson in full PP and E gave a comfort that we also had the customer safety top of mind. Our feedback from customers shared on our NPS score for our residential product showed 2.4 percentage points higher than last year, which included a new COVID-nineteen category. This data was further supported by significantly better Google reviews and Facebook recommendations. Marketing has supported our ops very well to gain these insights. In total, gross margin increased to 53.8 percent from 51.7% in the prior year's quarter.
The quarter was positively impacted by our lower salary expense in the areas of company furloughs, layoffs and salary reductions as well as lower fuel expense and continued improvements from our routing and scheduling initiatives. Additionally, materials and supplies were up as discussed earlier. Depreciation and amortization expenses for the quarter increased $1,800,000 to $21,900,000 an increase of 8 0.9%. Depreciation increased $1,000,000 due to acquisitions, vehicles acquired and equipment purchases, while amortization of intangible assets increased $754,000 due to the amortization of customer contracts from several acquisitions, including Clark. Sales, general and administrative expenses for the 2nd quarter increased $9,400,000 or 5.8 percent to $171,300,000 or 30.9 percent of revenues, which was flat to last year.
The quarter produced savings in salaries and benefits, lower fuel, discretionary savings, but was offset with a higher reserve set for our anticipated bad debt, primarily from our commercial customers due to COVID-nineteen. Our commercial business is a mirror to the general economy around the world. While many of our commercial pest control customers are paying at a slower rate than normal, they are still paying. Based on what we know at this time, we feel that we have adequately reserved for those customers that may not be in business on the other side of the pandemic. Our cash flow continues to be strong and at this time we have no changes to our capital allocation plans.
As our top priority, we have continued with our M and A activity around the globe. As John mentioned, we completed several acquisitions in the quarter and have plans for more in the future. During the quarter, we more aggressively paid down our debt and are now on track to have this retired in late 2021. As for our cash position, for the period ended June 30, 2020, we spent $56,000,000 on acquisitions compared to $410,100,000 the same period last year, which included Clark. We paid $65,500,000 on dividends and had $12,400,000 of CapEx, which was slightly lower compared to 2019.
We ended the period with $134,800,000 cash, of which $73,200,000 is held by our foreign subsidiaries. Before I close, I want to share that we have released our first ever sustainability report for 2019. We've taken the opportunity to highlight some of the things that we have going on in the areas of the environment, social and governance. The report has been posted on our website, and we look forward to building on these areas as a company as we move through 2020 beyond. Yesterday, the Board of Directors approved a temporary reduction of the regular cash dividend to $0.08 per share that will be paid on September 10, 2020 to stockholders of record at the close of business on August 10, 2020.
Gary, I'll turn the call back over to you.
Thank you, Eddie. I'm happy to take your questions at this time.
Thank you. We will now be conducting a question and answer session. Our first question comes from Tim Mulrooney with William Blair. Please go ahead.
Good morning, everybody. Congrats on a nice quarter in these difficult times. Good morning. Thank you
for that.
Yes. Given how much is going on lately, I have plenty of questions about the quarter, but something else came up recently that I wanted to get your perspective on. So here it goes. A major lawn care provider recently announced that they're getting into the residential exterior pest services. Given how well residential pest has held up during the pandemic, are you seeing that more often, other service providers encroaching into the pest control space?
Do you view this as a competitive threat? Are you not concerned? Any thoughts you have on this issue would be greatly appreciated.
Yes. So I guess, what I would say is that we've seen through the years and Gary can share his 50 plus years of what he's seen getting in and out of this space over time. Residential continues to grow at a very hefty rate. But at the same time, it's a very fragmented market, as you know. We have a very healthy market share and other large players also have a very healthy market share.
But there are a lot of other regional and mom and pop players that are part of this market as well. I know John has had some interaction with different companies as well. So John, I don't know if you want to share something and maybe Gary share what you see in the past.
Yes, sure. Thank you, Eddie. Tim, we've seen sort of an evolution with TruGreen as their non compete with Terminix has sort of expired, go from lawn to offering tick and fleet services to mosquito to now what they're offering is essentially outdoor residential pest control, outdoor only. And so the relationship with the technician and the customer is a struggle and cross selling those customers is a real struggle. I think if that were easy to do, ServiceMaster would still own both brands and they would have been more successful at selling at cross selling those services.
So while it certainly bears watching, it's a tough sled. So we'll see what they do.
Many of you may know that we were like the number 3 lawn care company in the country. And we had a decision kind of moving in the other way. Just felt like the lawn care business would be under more scrutiny. The fact that more regulatory pressures were existing and we just didn't see the growth pattern and margin pattern equaling pest control. So what we did is when we got out of the business, we just ramped up our acquisitions and ramped up the speed in our revenue.
It's going to be a challenge for them to do. What they say, nothing is hard for the guy that doesn't have to do it. That may apply to us, Eddie. But we welcome them. Anytime a competitor comes in that has big prices, it just makes our job easier.
Got it. Thank you for that perspective everybody. That's very helpful. As my follow-up, I'll ask one question about commercial pest. Gary, you mentioned something that I thought was interesting.
You said you're narrowing the revenue shortfall gap each month since March. Is another way for me to interpret that is to say as you move through the quarter, the declines became smaller each month. So April was down the most, May was down less, June was down less and July is down even less than June. Am I reading that right?
Tim, I'll start and then let Gary share obviously what he wants to say. But I mean, we're really going to be the mirror of the economy in general. So I think in March going into early April is when the majority of the economy was completely shut down. And I think as you saw pockets begin to open up and you began to see commerce and hiring begin and some of the stimulus checks get into people's hands, I think that made people make different decisions on things. And I think you've kind of seen the ebb and flow, of course, of that as some things are starting to kind of tighten up again.
But I think incrementally, as things got a little bit better and a little bit better, we saw that on the commercial side as well. Thank you. Did you want to say anything else on that?
Yes, I would just for a minute. We, as I said We've been in the business, we think that there's a different growth patterns in lawn care than in pest control. But what we're seeing is more of our commercial accounts, especially in the food related industries, realize that they can't defer their pest control indefinitely. And that's one of the motivations of them coming back, because they've had an experience typically of large infestations and that's one of the things. They cannot do without pest control indefinitely.
And they've got health department attention naturally. And so we really think that they'll we see them coming back, but we think they'll continue to come back.
Great. Thank you, everybody.
Welcome.
Our next question comes from Seth Weber with RBC Capital Markets. Please go ahead.
Hi. This is Emily McLaughlin on for Seth this morning. My first question is on the margins. They were clearly very strong this quarter. Can you frame for us how much that reflected the temporary cost actions and what will come back with volumes as they improve?
And I know you called out routing and scheduling enhancements as a benefit. Any way to quantify that?
I would say a couple of things. 1, if this event had to occur, if the virus had to occur, the pandemic had to occur from a business standpoint, it was the best possible time for us as an organization. We had not hired for our peak season, we were just starting into that at that point in time. So it enabled us to really be able to go through and quickly align the payroll side as best we could. And then John and team as well as here in our home office, we made some difficult decisions far, We feel like we were prepared from a payroll standpoint and a discretionary standpoint.
And as we've moved through time and as we've seen some of the business come back and as we've seen pockets in some areas flourish, especially on the So So we continue to manage on the discretionary side very closely and we'll continue to do that. We'll continue to monitor that. I've stolen my bosses saying that there are still more unknowns than knowns at this point in time. So staying very close to that to make sure that we are appropriately managing on the cost side will be something that will be that we'll have a clear focus on. And John and team across all the brands have done that.
And of course, the commercial operations have been the most impacted, our brands that are predominantly commercial. But we have a lot of brands that have both residential and commercial and in a lot of cases termite. And then Emily, if
I may add, we got a pretty good indicator over the last 2 weeks of March that our commercial business was going to be most heavily impacted and whereas residential and our termite business was going to remain strong. So our people were able to laser in on the commercial side of that business and then and react very, very quickly. And then further to that, as we furloughed those people, we maintained them on benefits and as various circumstances happened, we were able to recall them and put them back to work and make them productive right away. So our teams in the field did a terrific job reacting. And as Eddie said, we hadn't really shifted into high gear quite yet on our hiring for the season.
So those factors were at play.
Okay. That's helpful. And just a quick follow-up on Vital Clean. I know it's still early days. But is there any way to think about the revenue and the margin contribution in the quarter and what the take rate of that offering is with the clients that are reopening and if it's helping you win new customers?
So we're not going to break that out. We don't break any other pieces out like that. I'll say that what we are seeing we're pleased with the growth that we've seen in a short period of time. What we're seeing is a couple of different things. 1, if customers have some sort of incident at their locations, they're typically much more open to quickly move forward and get that in place.
And then as other places are fully ramping up, so restaurants instead of being takeout and delivery now having inside seating, those are the types of places where we've seen much more of a need. And as the economy continues to move in that direction, I think we'll see good opportunities. But it's been a great cross sell for us. John and team, again, hats off, we're able to get the product launched to get the salespeople trained, to get technicians fully trained and for our procurement group to get the product into the hands of our folks in a very short period of time has been very positive. So it's another trust point for our customers that we allow them to be able to run their business by us supporting them and just takes one more worry off of their plate having to do with this whole situation.
Okay, great. Thanks. I'll leave it there.
Our next question comes from Mario Cortellacci with Jefferies. Please go ahead.
Hi, everyone. Thanks for the time. I wanted to drill a little further into the commercial business and just I guess what you're seeing from commercial customers right now? Have you seen any bankruptcies from that business that could potentially impair part of it? Obviously, I know you have the disinfectant business that is going to offset some of the lost revenue there and hopefully the commercial comes back.
But I just wanted to see, I guess, what do you expect longer term? Is there going to be a partial impairment of the commercial business longer term? And obviously you'll gain some new commercial customers as the economy rebounds, but would love
to get your thoughts there.
Well, I don't think anybody has the full crystal ball on exactly what the economy is going to look like for Q3, Q4 moving into next year. I think there's no question that there will be bankruptcies that will come out of this. We've seen some of those already. We have the same headlines that you have having to do with major franchise groups that have gone bankrupt, restaurant chains, some retail stores and things like that. When you don't have foot traffic and you're shutting down, of course, they're having to deal with everything dealing with that.
So we're dealing with that. We're staying close to those customers. I did mention in my prepared remarks that we have set aside a reserve for what we feel is appropriate based predominantly on our commercial customers. And that's really where we're seeing the impact at this point. Residential, we're not seeing an impact at this time, having to do with the concern with that.
But we're staying close to those large customers to try to help mitigate whatever we can and also work with our long term customers that we've had relationships with. We want to help them to survive this as best we can and we're going to work with them as appropriate, but then we'll take the needed steps from there.
Great. And then just one more and I'll turn it over. Obviously, you guys have had great strength in residential and congratulations on that. But I guess just I think that's obviously being driven from the work from home dynamics, but I guess just are you seeing anything a little deeper down below the surface that we're not seeing? Is there anything that could be causing maybe a shift or a step up in the long term trajectory of the residential growth rate?
I would point to 2 things. I would point to 1, the continued growth of our mosquito product. If we go back 2 years, if we go back 3 years ago, it was roughly 1 point 7% of our total revenue. Now it's grown to 2.8% of our total revenue, which again is not necessarily material at this point in time yet. But the growth rate has been very strong over now going on a 4 year time period.
And I think if you were to ask our folks, they would believe that we have a good opportunity to grow this product for many years to come. It's a great add on. It's a highest retention service that we have. Once people have it, they know that their lifestyle has changed. So I think that's one thing that's going to continue to help us drive on that residential market.
When customers have more than one product, if they take more than one service from us, their likelihood of staying with us doubles over that time period. So if they were only a pest control customer and now we add on mosquito to that, it doubles their average time that they stay with us. So when we have less turnover from a customer standpoint, that's going to help us continue to make sure that we're growing as we move into the future. And the second point that I would make would be what we're seeing as far as a shift of the need or want from services from the newest homeowners, the Gen X folks that are the newest homeowners that are out there, the millennials that are the newest homeowners that are out there. They gravitate kind of stereotypically seem to gravitate more towards services, paying for food delivery, paying for things like that.
And we believe that the services that we offer are also going to potentially fall into that category and we're seeing a good take rate from the newest homeowners that are out there.
Eddie, if I could add one thing. We've been investing quite heavily in technology and one of those areas in particular is provide the customer more ways that they can pay us. And before we had the quarterly customer and that they paid at the end of the previous quarter. And now they can pay by monthly. So there's other ways that they could pay and it's been highly acceptable.
And I think Eddie made a real good comment about if our customer has multiple services and we call it bundling. So typically that starts when they're sold and that's helped a lot as far as customer satisfaction is concerned.
Great. Thank you so much.
Our next question comes from Michael Hoffman with Stifel. Please go ahead.
Thank you very much. I appreciate the time. I'd like to try and thread in some of the previous questions and maybe tease out a little bit of clarity. And somehow asked 2 questions and it turned into 10, right? Gary, your comment about Vital Clean is, I think what you were trying to say is even if I'm not open yet, but
I know I'm going to be,
I better start the pest service because it's you're getting infestations. That was the point, not Vital Clean. I meant the well, that's part of Vital Clean. But is that part of your comment about commercial is that some are even doing the pest service even though they're not open yet, but they expect to be open. That was part of what you were indicating because of the
The part about Vital Clean that is taking place right now is more and more companies are coming back. And they've read about the dangers, they know more about the dangers of the virus and so forth. And they also from a PR point or HR point of view, they want to be able to tell their employees what they're doing to maintain good health practices. So that's been a wonderful factor as far as this past quarter and it will be beyond. I mean if the experts are ready and are correct, then we should be seeing a continuation of this group of customers.
A continuation of this group of customers.
And some customers restarted pest without being back open again because of your infestation comment?
Yes. I think that's what we've seen as the time has gone up. Okay.
That's what
I was trying to understand better. Okay. And then on June 30, you all filed a 13 with regards to the original trust and dissolve that trust and there's a distribution. Are those distributions done? Are there any restrictions on those shares with regards to how they can be traded or not?
Or can having redistributed them all those shares, are those individual smaller trust now allowed to do whatever they want with the shares?
Michael, there's no material change. This has been updated multiple times throughout the years and just an update that was needed for the most recent setup that they have.
Okay. But that didn't answer the question about trading restrictions on the shares.
I did say that, I mean, you can go back and read it, that I did say that there were no material changes. This was just an update that they've done periodically over time.
Okay. Thank you.
There are no further questions. I would like to turn the floor over to Gary for closing comments.
Thank you. I want to thank you for participating. We still unfortunately, there's more if we don't know than we do know. I think most of you will agree and just following the monthly dialogue and the spike and various components that are impacting the disease. But we meet weekly or every other weekly, our key management people to evaluate the success that we're having in different aspects of our defensive and offensive policy.
And I didn't know you're going to quote mothers more known than others.
All right. So it's so good.
I hadn't borrowed it. I mean, a copyright person. But thank you for your support during these challenging times and look forward to speaking with you on our next call. Thank you again.
This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.