Good day, and welcome to the Rollins, Inc. First Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At this time, all participants are in a listen-only mode. Later, we will be conducting a question-and-answer session, and instructions will be given at that time. If you should require assistance at any time, please press star followed by the zero on your touch-tone phone, and the operator will assist you. I would now like to introduce your host for today's call, Marilyn Meek. Ms. Meek, you may begin.
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 212-827-3746, 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 one hour after the call and run for one week. The replay can be accessed by dialing 1-888-203-1112 with the passcode 2672355. Additionally, the call is being webcast at www.viavid, and a replay will be available for 90 days. On the line with me today are Gary Rollins, Vice Chairman and Chief Executive Officer, Rollins President and Chief Operating Officer, John Wilson, and Eddie Northen, Vice President, Chief Financial Officer, and Treasurer. Management will make some opening remarks, and then we'll open up the line for your questions.
Gary, would you like to begin?
Yes. Thank you, Marilyn, and good morning. We appreciate all of you joining us for our first quarter 2017 conference call. Eddie will read 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-K for the year ended December 31st, 2016, for more information and the risk factors that could cause actual results to differ.
Thank you, Eddie. Well, we're extremely pleased to have posted record results for the quarter, as well as our 44th consecutive quarter of improved revenues and profits. That's 11 years. I don't know where the time went. For the quarter, revenues grew 6.4% to $375.2 million, compared to $352.7 million for the same period last year. Net income before taxes rose 11.9% to $57.3 million, compared to $51.2 million for the first quarter of 2016. Net income rose 26.1% to $40.3 million, or $0.18 per diluted share, compared to $31.9 million or $0.15 per diluted share for the same quarter last year. While our operating results were outstanding, the higher net income and earnings per share for the quarter were significantly boosted by a lower tax rate, which was mostly related to the adoption of ASU 2016-09, which Eddie will discuss more fully.
All of our business lines experienced good growth, with residential up 7%, commercial pest control grew 5.3%, and termite rose 7.5%. Our employees service millions of people every year, and we're well aware of how our customers' lives could be affected by pests that are a health threat. That's why health and public safety are always top of mind with us. Earlier this month, CNN released a study recognizing that the world is at more of a risk than ever for a global pandemic. While I'm not an alarmist, this material reinforces the importance of the services we provide, both to our customers as well as the public at large. According to CNN's material, more than 28,000 people were infected with the Ebola epidemic during 2014 through 2016, with over 11,000 deaths. As of March 10th this year, 84 countries have reported Zika transmission.
This disease was discovered in the 1940s but had its first outbreak in 2007 in Micronesia and really began spreading toward the end of 2015. As the U.S. largest or one of the largest providers of residential mosquito service, we feel that we have an important role in protecting and educating the public concerning this pest. We routinely provide mosquito information through our internet sites and other means with guidelines on how people can reduce the risk of having a mosquito problem. When there are significant instances of record-setting heat and flooding events, as were recently experienced, regrettably, they create the ideal opportunity for mosquito infestations, along with exposure to accompanying transmitted illnesses and disease. In order to ensure that we stay at the forefront of mosquito research and data, we partner with numerous related organizations and universities.
Most recently, members of our Orkin technical service team attended a two-day event hosted by the Centers for Disease Control and Prevention. The purpose of this gathering of experts from around the world was to share scientific and practical initiatives on reducing the incidence of disease transmitted by the mosquito, specifically Aedes aegypti. This mosquito is also known as the yellow fever mosquito. Discussions centered primarily on Zika, dengue, and chikungunya virus. Boy, those are some tongue twisters. We've been a collaborative partner with the CDC since the early 2000s on a wide range of initiatives, including developing educational pest-related material, field pest elimination projects, participating in research studies, conducting train-the-trainer courses, and jointly providing public service messages about pest prevention measures. We're committed to these collaborations and initiatives of public service while internally providing our technicians with the best products and industry-leading training.
This enables us to deliver safer and more effective pest protection to all of our customers. Well, enough about pest and related health initiatives. I'd like to now turn the call over to John.
Thank you, Gary. As an example of our deep commitment to the further development of our people, this year marked the 20th year of conducting our company-wide leadership meeting. In January, we engage our top managers in team-building exercise and reinforce our priorities for the new year. As Gary voices continuously, we know we can always do better for the benefit of our customers, for our employees, and our shareholders, and we always approach that annual event with that challenge in mind. During this two-and-a-half day conference, we participate in exercises focused on improving our operations with the primary objective to improve our customer service experience, specifically through improving our all-important employee engagement experience. We know a happy and engaged employee will always deliver a better customer service experience. When I joined the company 22 years ago, we were a much smaller organization.
Thanks to the hard work and dedication of our employees, we have continued to grow year after year. Successfully growing our business depends on our ability to hire the right people, train, and then, and most importantly, to retain them. A tenured, well-trained employee helps to ensure the great customer service experience. Our motto is to never disappoint, which well explains our commitment to customer satisfaction. Those of you who attended our Analyst Day in September last year may recall my having said, the one thing that remains the key to our success in the past, present, or future will be our people. In order to survive and thrive, we have to maintain the highest standards for those people. Our objective is to hire A players to bring to the company. We look at every opportunity when we add an employee as an opportunity to improve our team.
To accomplish this, we consider many candidates, and prior to inviting them to join us, we spend a lot of time learning about them and educating them about us, our company, and its culture. We are looking for the ideal fit. Notably, our employee demographics are rapidly changing. Last year, over 60% of our new hires were millennials born between 1982 and 2000. Recognizing the significance of this, we engaged Jason Dorsey as our guest speaker at the leadership meeting. Jason is a highly recognized authority on millennials and Gen Ys. Jason provided great insight about this group of individuals and how we can mutually benefit as they join our workforce. We believe the evolution we are experiencing in our workforce can have tremendous upside for our customers and our business.
We recognize in order to retain these new hires, we have to be more knowledgeable of their characteristics and adapt accordingly. That challenge begins with their first day on the job. To that end, we're improving our on boarding and new hire orientation processes. This introduction helps provide them a sense of belonging to our company and to better understand our culture. We are also surveying our new hires at regular intervals to gauge how they feel about their experience with us and to ensure that appropriate initiatives are being implemented in the field. In summary, we feel strongly that we need to stay connected with our changing workforce to ensure that we can continue to attract and keep top talent at our company.
With these changes I've shared and other initiatives, we've seen good improvement in employee retention, which, as we have explained in the past, results in higher customer retention. In that regard, we were extremely honored this year to have been recognized as one of our area's top workplaces by The Atlanta Journal-Constitution. The top workplaces lists are based solely on the results of an employee survey administered by Workplace Dynamics, a research firm that specializes in organizational health and workplace improvement. Special aspects of workplace culture were measured, including alignment, execution, and commitment. This was a great recognition for us and is another example of our company's commitment to our employees and their future. This time every year, we enjoy viewing our latest commercials, which began airing last month. They help us deliver Orkin's primary branding message of pest control down to a science.
This year's subtheme, every home is unique, supports that branding message. Let me take a moment to share one or two of my favorites with you. One commercial centers around a neat freak whose house is really, really clean. As the homeowner discovers, pests can still find their way into even the neatest of homes. Enter the Orkin man with his great knowledge and scientifically-based treatment. For those of you familiar with the new trend in the growing population living in tiny houses, you will discover that rats can find their way into these unique homes quite easily. Again, the Orkin man to the rescue. Hope this entices you to take a moment to view these unique commercials. Beforehand the call back to Eddie, I wanted to note a couple of promotions which recognize our management strength and depth.
Mitch Smith has been promoted to Division President for Orkin South Central Division. Mitch began his Orkin career as a branch manager in 1989 and has risen through the ranks during his tenure, having served as regional manager, regional vice president, and most recently, division vice president. Brady Camp was promoted to president of our HomeTeam Pest Defense. Previously, he served as vice president of operations and division vice president of HomeTeam's Eastern operation. Speaking of HomeTeam, last month they achieved a significant milestone of having 1 million installations of their Taexx built-in pest control system. This accomplishment emphasizes the strength of HomeTeam's relationship with its over 1,000 home builders nationwide, which include the top 10 national home builders. Congratulations to Mitch, Brady, and HomeTeam. I'll now turn the call back to Eddie.
Thank you, John. 2017 is off to a very good start. Our operations, both domestic and international, are energized as an outcome of our January leadership meeting that John mentioned. All of our service lines showed consistent growth, and keys to the quarter included continued margin expansion, updates to the BOSS system, which improves overall routing efficiency, processing of termite billing and credit card payments, and an ongoing positive tax impact due to Accounting Standards Update, ASU, 2016-09 related to our stock-based compensation. Looking at the numbers, the company reported first quarter revenues of $375.2 million, an increase of 6.4% over the prior year's first quarter's revenue of $352.7 million. For the quarter, income before income taxes increased 11.9% to $57.3 million.
Net income was positively impacted by the tax changes that Gary mentioned and increased 26.1% to $40.3 million, with earnings per share up 20% to $0.18 versus $0.15 per diluted share last year in the first quarter. When you take out the impact of the tax changes, net income rose 12.7% and earnings per share was up 13.1% to $0.17 compared to $0.15 last year. Overall, our operations and sales team started the year very well, and our BOSS system continues to support additional improvements. In Atlanta, we have had more than our fair share of road disruptions over the past few months. An enhanced routing and scheduling functionality has been especially helpful around here.
Our routing and scheduling efforts continue to become more mature each quarter they're in use, and our IT group also continues to enhance the capabilities by automating the route optimization daily and adding capabilities for our call center to have better visibility to branch capacity when scheduling a new customer. This will be extremely useful during our busy times of the year to ensure we are improving the initial customer experience that we provide. Another IT improvement related to customer experience is the enhanced functionality of accepting credit cards by our technicians through the BOSS application. This has improved the payment process for both the customer and our operations for many of our accounts. Finally, the use of the BOSS system to complete the billing of our termite customers has improved this entire process. We anticipate continued customer and financial benefits as we move throughout 2017.
Let's take a look through the revenue by service line for the first quarter. Our total revenue increase of 6.4% included 1.2% from acquisitions and the remaining 5.2% was from pricing and organic growth. In total, residential pest control, which made up 41% of our revenue, was up 7%. Commercial pest control, which made up 41% of our revenue, was up 5.3%. Termite and ancillary services, which made up 18% of our revenue, was up a very strong 7.5%. Again, total revenue less acquisitions was up 5.2%. From that, residential was up 6.8%, commercial up 3.4%, and termite was up 5.8%. When you take a look at the quarter, taking out the impact of foreign currency, in total, we grew 5.3%. Residential grew 6.8%, commercial pest control was up 3%, and termite was up 6.3%.
Commercial was most impacted by the weak Canadian and Australian dollars, as most of our business in these countries is commercial. Bed bug revenue continues to grow at a faster rate than our company growth rate. For Q1, our bed bug revenue grew at 9.3%. Our data analytics continues to help us assess the best ways to grow recurring bed bug revenue and to improve our profitability. Each of the last several quarters, we have continued to improve our sales process to ensure we are prioritizing the right customers to grow this product the best way for both the top and bottom line. I mentioned the efforts of our marketing and advertising groups last quarter, and I hope that you've had a chance to see their most recent work.
In addition to what John mentioned, we have featured our Orkin woman in a great termite spot and have run our first-ever ad dedicated to mosquitoes with the theme of taking your yard back. We believe these efforts will help to continue to drive our termite and pest control demand as we move throughout the year. In total, gross margin for the quarter was flat to last year at 50.4%. The margin for the quarter benefited from improved efficiencies in routing and scheduling, which helped both service and administrative salaries as a percent of revenue. In addition, personnel-related expenses were down as a percent of revenue, as group insurance and auto liability expenses were less quarter-over-quarter. This was offset in part by an increase in fleet expense with higher fuel prices.
While the cost per gallon for Orkin increased $0.44, the miles driven per vehicle were down 2.8% as a result of our improved efficiency from enhanced routing and scheduling through the virtual route management system. Depreciation and amortization expenses for the first quarter increased $2.1 million to $13.8 million, an increase of 18.3%. Depreciation was $6.9 million, increasing $1.5 million, with most of that increase related to our BOSS software, iPhone, and printer depreciation. Amortization was $6.9 million, which increased $597,000, with amortization of intangible assets increasing due mostly to amortized customer contracts of the acquisitions of Murray Pest Control and Scientific Pest Management in Australia, as well as various Orkin acquisitions throughout the year. Sales, general, and administrative expenses for the first quarter increased $2.9 million or 2.6% to 30.7% of revenues, down 1.1 percentage points from 31.8% for the first quarter last year.
The decrease in the % of revenue is due to improvements in administrative salaries and overtime as a % of revenue, which has been helped by the BOSS implementation. This expense was offset by planned higher sales salaries and advertising expenses. Let's take a minute on the tax impact. For the quarter, the effective tax rate in 2017 was 29.7% versus 37.6% in 2016. The decrease was primarily due to the adoption of Financial Accounting Standards Board update 2016-09, also known as ASU 2016-09, which recognizes the excess tax benefits of stock-based awards as a reduction to income tax expense instead of the previous methodology, which reported the benefit on the balance sheet. The adoption of the standard generated a $0.01 benefit to the earnings per share in the quarter. We expect the effective rate to be slightly less than the last year number for quarters two through four.
The company is currently projecting an effective tax rate of below 37% for the 2017 year. We expect to see continuing favorable volatility in the first quarter's tax rate for the next several years. Most of our company stock grants vest in the first quarter of each year. As for our cash position for the three months ending March 31st, 2017, we spent over $3 million on acquisitions and $25 million on dividends of 14.7%. We had $5.3 million of CapEx, which was down 39.1% from 2016, primarily from the completion of the BOSS project and ended with $162 million in cash, up 32.7% from last year. Last night, the board of directors declared a regular cash dividend of $0.115 per share that will be paid on June 9th, 2017 to stockholders of record at the close of business May 10th, 2017.
The cash dividend is a 15% increase over the prior year. This marks the 15th consecutive year the board has increased our dividend by a minimum of 12%. We're off to a great start and are well prepared to continue to move forward in 2017. I will now turn the call back to Gary.
Thank you, Eddie. We'll be glad to take any questions that you might have at this time.
Thank you, sir. Ladies and gentlemen, if you wish to ask a question, please signal by pressing star followed by the digit 1 on your telephone keypad. If you're using a speakerphone today, please make sure your mute function is turned off to allow your signal through to our equipment. Once again, star one to ask a question, we'll pause for just a moment to allow everyone an opportunity to signal for questions. We will take our first question from Sean Kennedy with Nomura Instinet. Please proceed.
Good morning, guys.
Good morning.
Good morning.
I was wondering if you could provide a bit more detail on the ASU tax benefit, specifically what we can expect going forward. Can we expect just a lower tax rate in the first quarter? Could you just comment on that?
Yes, Sean, so for us, as I'm sure you're aware, the tax benefit or detriment is based on the share price difference between the vesting time and the grant time. For us, our stock price has been up, and therefore, we receive the tax benefit. The $4.3 million will be obviously the biggest impact in Q1. As I stated, we will see below what we would historically see year-over-year as far as tax rates for two through four. We anticipate the full year rate being slightly less than 37%. The way that this pronouncement is written, we would see, again, based on the stock price at the time of vesting, we would see similar gains in future years for that.
Great. Thanks for the details. Definitely. Also one follow-up question. Do you have a sense that you're gaining share versus your competition? Could you comment on just specifically commercial, residential, and pest control?
We believe that we've been incrementally growing market share in total for the last several quarters. We believe a piece of that is because of the digital marketing efforts that our marketing group has had in place, that has helped us to be able to reach, especially on the residential side, been able to reach a broader group of customers. In addition to that, we continue to fine-tune on the commercial sales side and continue to grow there as well.
Great. Thanks, guys.
Once again, as a reminder, ladies and gentlemen, to signal for a question or comment, please press star followed by the digit 1 on your telephone keypad. We will take our next question from Sean Egan with KeyBanc Capital Markets.
Hey, good morning, gentlemen. How are you?
Good morning.
Good morning, Sean.
I had a quick item on what we can expect to see as far as a reasonable incremental operating profit figure heading forward now that we're starting to get into a lot of the benefits of the BOSS. We're not trying to be nitpicky here, but it was about 27% this quarter. I think we were looking for a little more, just kind of looking for a little bit of guidance there.
Well, we know that we'll continue to see improvements in the overall margin, I think at all levels. I think certainly the operating margin and gross margin as well. Of course, we feel that BOSS is going to continue to be able to be a driver of that. We're not going to give guidance as far as specifics. We're going to continue to get incrementally better, and I think we continue to find areas and ways where BOSS is going to be able to help us with that. We've talked a lot about the routing and scheduling, and on future calls, we'll give some more specifics on what we're seeing there as far as the improvements.
Just the fact that IT was able to bolt on with some additions this quarter having to do with termite billing and the acceptance of credit cards by all of our technicians at this point in time. All those things are going to continue to help streamline both in the operational and the non-operational side as we're continuing to move forward. We'll give some more specifics having to do around the BOSS metrics again on future calls. We continue to see good improvements in a lot of areas.
Got you. Then, moving to the M&A front, have you seen valuations rise at all, or at least asking prices, given the move in public equities over the last, call it six months?
There are lots of companies that we'd probably like to have a part of the Rollins family that from a multiple perspective just haven't made sense to us, and other companies that have been buyers have felt as though that it does make sense. We just continue to use the same prudence that Rollins have had in place for years. When there's a good fit that the seller is trying to find the right partner to partner up with, that's when we win. We deployed 40% more capital in 2016 than we did in 2015, and that included the Critter Control franchise that we bought in 2015. We continue to find good quality partners to match up with and to be able to acquire. Are some of our competitors paying other higher multiples than historic multiples? Absolutely.
You know who some of those are and what those dollars are. We feel as though we'll continue to be prudent, and as we're continuing to find those that make sense, both financially and from a cultural perspective, we'll pull the trigger and we'll move forward.
Eddie, if I could add something. We think that we've got really a lot of opportunity in the Critter Control area. The people, the franchises have not had an exit program per se. Their strategy was just to add franchises and really did very little to help the franchises with their business. We have a full-time person now that really is
Meeting and traveling with the franchisees and sharing key learnings, because if we improve their business, they're certainly going to be improving our royalty stream, and they're also going to be improving our likelihood to want to buy them when their franchise expires. I witnessed Waste Management come into the industry several decades ago, paid a lot of money, had a lot of different companies to try to put together, had a very difficult time doing so, then retracted from the industry. I'm not saying that that's going to happen again, but I did learn a key thing from that is that when you buy these companies that have different operating systems and different procedures and policies, and you start trying to roll them up and put them together, it's a very complicated and difficult endeavor.
Great. Thanks for the color. That's all for me, guys.
Thanks.
Once again, ladies and gentlemen, to signal for a question or comment, please press star one on your telephone keypad, and we will take our next question from Joan Tong with Sidoti & Company.
Good morning. You guys talked about 60% of your new hires is millennials, and I just want to see if there's any change in employees' turn rate. Also, the second question is regarding the reception to technology. Obviously, I can imagine it's pretty high and that should play to your strength because with all these cool new technologies and the route management and all this new stuff that employees have to use, and you have Gen X being pretty receptive to technology, I think it should be a benefit to you guys. Can you just comment on those two? Thanks.
Yeah, Joan. I'll give you my view and then John's much closer to it than I am. Kind of starting with the latter, you're spot on. The technology piece is much easier for the Gen Ys and for the Xers, much easier to adopt, I think, from that perspective. I got to tell you, in my personal interaction with probably 100 plus technicians of all ages, there's been an overwhelmingly positive feel for the technology and for the capabilities. Gary says it really well. It's a technology that's enabling them to have a smoother day and have a more fulfilling overall involvement with their job because things are more scheduled. I think that part is going to definitely be a help, and I think as far as the overall churn rates or retention rate of our employees, it's relatively the same.
I think that's part of what John was talking about is the onboarding of these employees may look a little bit different, and I think that's the reason why John's taken that on. John, I don't know if you want to comment more on that.
Yeah. Thank you, Eddie. The turnover rate, Joan, has not been hugely different between millennials, surprisingly to me. As a matter of fact, when we looked at it, I learned that baby boomers were the highest. I suspect that that's largely because physically, as they age, they're struggling to complete the work or do the job. It's not been a huge difference despite what you hear about millennials taking a job and leaving it compared to our older workforce. What we want to do is zero in through the various methods that I outlined and try to improve that, not only with them, but the other categories as well.
Okay. Fair enough. Then my next question is related to, you talked about investing back to the business. I know that you guys don't make any proprietary pesticide or chemicals, but in terms of the pest control methods, has that evolved over time with technology improvement? Just want to see what you're doing on that front. Obviously, Gary, you mentioned about mosquitoes. Is it like a new method, a new way to improve efficacy? Because your competitors out there have been pretty vocal talking about enhancing pest control methods. Just want to get an idea what you guys are doing on that front. Thank you.
I think it depends on the pest. Certainly, there's not been any big technological changes as far as mosquito control is concerned. That doesn't mean that there's not some new material around the corner, but so far, there's not been a secret weapon, per se. If you look at some of the other areas, heat has been a new and different form of pest control, which is very effective in the bedbug area. That has not characteristically been a pest control means. They're experimenting now with dry ice as far as rodent control. They're trying to take statistics and so forth. One of the difficult things about that is it's hard to get death counts, because when a rodent dies down a tunnel, it is just going to be more complicated to measure the effectiveness.
There's birth control product that's out being tested now as far as rodent control is concerned. I think those things would be the most memorable or remarkable, I guess, is a better way to say it.
The industry is evolving. There's major pesticide producers. Typically, the path of a residential pesticide is through agriculture. Agriculture is so much larger than conventional pest control, and as those products are developed and perfected, then often they migrate into pest control. Other than, say, those three new forms of technology, there's not a lot of change taking place.
Okay. Got it.
Joan, if I may, the only thing I might add is commercially.
For rodent control, there's been the development of RFID type of technology for rodent bait stations to where you can monitor, from afar, activity. That's an evolving piece of technology. We're still fiddling with that, as are others in our industry, just trying to figure out the economics of that. The concern is always, does it work, and will you know in enough time to react for your customers, particularly sensitive ones like food processing and manufacturing?
Got it. All right. Thank you. Then one last question, and I'll jump back in the queue. Obviously, the tax discussion, like Trump tax plans discussion is front and center today. I just want to get a reminder from you how much of your business is actually based in U.S., because you did make some acquisitions recently in the U.K. as well as in Australia. Just want to get a sense. I believe a majority part of it is generated from the U.S. Just want to get a percentage there.
Yeah, Joan, you're exactly right. We list this in our 10-K. It's about 93% of our total is.
Okay
Of course, we're paying the U.S. tax rate on that. Historically, we've had a tax rate that's been close to full rate at almost 38%. Based on this discussion we had today, separate from corporate tax reform-
based on this discussion we had today on our ASU 2016-09, we feel as though that our tax rate will be a % lower-ish than where we have been historically. Yeah, 93% is in the U.S.
I think you also have got the wild card of what they're going to do in Washington.
Certainly, I think we are well-managed and performing company, I think that certainly the reduction in our tax rate would help, I would also say bringing foreign money back into the country. We have quite a substantial operation in Canada, you hear the talk of changing the rules where corporations are more encouraged to bring foreign profits back into the United States. That would certainly be welcomed as far as we're concerned.
Thank you, guys.
Thank you.
Thank you.
Once again, ladies and gentlemen, to signal for a question or comment, please press the star key followed by the digit one on your telephone keypad at this time, and we'll pause once more to allow everyone an opportunity to signal for questions.
Okay, this is Eddie. I think we're good.
Okay. Well, thank you. We really appreciate your interest. We look forward to reporting our second quarter results, and I think we'll have more, as Eddie said, we'll have some more information with BOSS. I think we now have two regions where our virtual route management automatically is in place. We'll have more conversion as far as that's concerned, and we think that it can be a game changer as far as our business is concerned.
Thank you.
Ladies and gentlemen, that does conclude today's conference. I'd like to thank everyone for their participation. You may now disconnect.