Good day, and welcome to the Rollins Inc. 4th Quarter 2016 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.
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 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 eighty eight-two zero three one-one-two 1-one-two, excuse me, with the passcode 2,262,8 30.
Additionally, the call is being webcast at www.plyofit.com and will be available for 90 days. On the call with me today are Gary Rollins, Vice Chairman and Chief Executive Officer Rollins President and Chief Operating Officer John Wilson and Eddie Northin, Vice President and Chief Financial Officer and Treasurer. Management will make some opening remarks and then we'll open up the line for questions. At which time, all three gentlemen will be available to take your questions. Gary, would you like to begin?
Yes. Thank you, Marilyn, and good morning. We appreciate all of you joining us for our Q4 year end 2016 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 statements 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, 2015, for more information and the risk factors that could cause actual results to differ.
Thank you, Eddie. We're extremely pleased to have posted record results for the quarter as well as our 19th consecutive year of improved revenues and profits. The quarter revenue increased 6.4 percent to 385,600,000 compared to 362,500,000 dollars in last year's Q4. Net income rose 19.7 percent to 38,000,000 dollars or $0.17 per diluted share compared to net income of $31,700,000 or $0.15 per diluted share in the same quarter last year. Revenues for the full year increased 5.9% to 1,573,000,000 compared to 1,485,000,000 for the same period last year.
Incidentally, the 5.9% increase was the greatest percent increase since 2010. Income before income taxes grew 7.2 percent to 260,600,000 compared to 243,200,000 in the prior year. Net income rose 10% to 167,400,000 with earnings per share diluted share of $0.77 compared to 152,100,000 dollars or $0.70 per diluted share last year. All of our business lines experienced growth during the quarter with residential pest control up 7.9%, commercial pest control grew 5.5% and termite rose 5.7%. We're also pleased with the growth experienced by our specialty brands and international wildlife brands, all of which reported impressive growth for the year.
As stated previously, I believe it bears repeating that we think the results underscore the value that we're experiencing and selectively acquiring market leading specialty pest control and wildlife companies. At the same time, our ancillary businesses, although a relatively small part of our total business, continued to perform well. Bad bugs have certainly not gone away. Although we believe we will experience a slower growth rate in this business going forward. Earlier this month, we released Orkin's top 50 bed bug cities based on the services provided this past year in the leading U.
S. Metro markets. While these 50 cities had the most treatments last year, our working technicians treated for bed bugs in all 50 states as well as internationally. This past year, our bed bug revenue increased 10% over last year. We also experienced growth in our mosquito business.
As we've discussed in the past, mosquito borne diseases continue to be an increasing threat around the world. We continue to provide educational materials on the precautions that can be taken to protect against mosquito bites, infestations and how mosquito populations can be controlled. Revenues for our mosquito business increased over 20 percent this past year. We continue to make inroads in expanding Orkin's brand recognition to growing our international presence this past year, both through Orkin's expansion in Australia and our entry into the United Kingdom. Also as announced earlier this month in the last quarter of the year, we created 17 new international franchises.
12 of these franchises are located in China, while the other 5 are located in Mexico, Ecuador, Bolivia, Malaysia and the Kingdom of Cambodia. All of these franchises will offer commercial and residential pest control as well as termite services where applicable. With the addition of these new franchises, we now have established Orkin's presence in 45 countries through 70 international franchises. Our international expansion is an excellent example of our culture of continuous improvement or in this case, continuous expansion. The core element of our culture is a deep commitment to build long term relationships with our customers based on our quality of service.
One means of how we accomplish this is our Listen360 customer feedback surveys. We generate thousands of customer email surveys daily for each of our 600 plus Rollins locations. To enable us to obtain real time feedback on how our customers view what we're doing. Listen360 organizes customer feedback into 3 categories: promoters, customers who would recommend us to family and friends, passives who are neutral and detractors, those with negative feedback. These scores and rankings by location are shared throughout the company and our people take them very seriously.
We're committed to turn any customer with a negative survey to become a promoter and we respond accordingly. Our survey results are provided monthly and we closely monitor our progress from the latest survey results to previous survey findings. We're pleased that in 3 years that we've had the Listen360 program in place that we've made improvements of over 20% on the positive scores, which translates into better customer retention and customer referrals. Our objective is to have over 85% positive promoter scores and retention of customers for all of our brands. We have a number of operations that are at 85 or better now and are striving to expand that number.
As Jerry Gayloff, President of Specialty Brands and the pioneer of this program has stated, feedback we get both good and bad keeps us humble about our service and focused on ways to improve the customer's experience. We can see exactly what and where our successes and failures are so we can build on our trials and improve on our shortcomings. To further help ensure that we provide the best customer experience as we grow our business, we continue to make it a key objective across our organization to identify and hire the best employees. We bring them along through our extensive and award winning training, thereby providing them the opportunity to build a satisfying and rewarding career at Rollins. 2016 was a momentous year for our company, one in which employees in North America and around the globe continued to advance our mission to be the best service company in the world.
We're even more excited about our prospects for the New Year and beyond. We will continue to make strategic acquisitions that meet our criteria as well as adding international and domestic franchises. At the same time, we will be benefiting from the investments we've made, specifically BOSS, our new branch CRM and operating system. BOSS's primary objective is to enable us to improve our customers' experience
for the benefit of all
of our constituencies. We look forward to sharing our progress with all of you throughout the year. I'll now turn the call over to Eddie, who will provide you with more details on our financial results.
Thank you, Terry. 2016 was another incredible year on a lot of fronts, which included record setting financial results during a time of significant change. We successfully wrapped up our CRM box and virtual route management rollout, made several acquisitions both inside and outside of the U. S. And made promotional changes in our executive ranks.
I could not be more proud of our sales, operations and support teams for their resiliency during 2016 and their ability to produce these results. Each of our service lines showed sustained growth and key to the quarter included the best growth rate since 2010, cost savings based on safety improvements and a reduction in medical claims and continued maturity of our new technology in the operations. Looking at the numbers, the company reported 4th quarter revenue of 385,600,000, an increase of 6.4% over the prior year's 4th quarter's revenue of 362,500,000. Before I go through the income results, I want to bring you up to date on a change we've made in Canada concerning tax planning. In 2004, Kinro Investments was created as part of Rollins tax planning strategy.
However, recent changes in Canadian tax law eliminate the benefit of this strategy and we dissolved Kinro before the end of 2016. As a result, a one time withholding tax expense had to be recognized. This expense, which reduced income before tax by approximately US9 $1,000,000 was offset by a tax credit of approximately the same amount. Had we not removed KINDRO from Canadian taxation, the company would pay approximately an additional $100,000,000 of taxes over the next 10 years. Rollins' after tax income and earnings per share for 2016 were not affected by the dissolving of Kinross.
For the quarter, the pre tax margin of 13.6% would have been 16.0% without the one time withholding tax expense, an 11.9% improvement over 2015. As a result, for the quarter, income before income taxes only increased 1.4% to $52,500,000 Net income was not impacted by the tax charge and increased 19 0.7% to $38,000,000 with earnings per share up 13.3 percent to $0.17 versus $0.15 per diluted share last year in the Q4. Our operations performed very well through the quarter, but as an organization, we also received the benefit of lower personnel related expense, primarily healthcare and casualty costs due to improved safety results. At the beginning of 2016, we restructured our risk and our safety groups and are benefiting from those changes. Outside of the cost savings, we believe our improved safety in the area of accidents and injuries will create other opportunities such as improved customer experience with fewer absences of our technicians, less negative impact to the brand and the P and L through decreasing vehicle damage.
Additionally, we saw a reduction in personnel related expense, primarily healthcare, as we experienced fewer claims than expected during the year. Both of these items are encouraging, but as we continue to mature on our virtual route management path, we also know that reduced miles will further help us with our safety and casualty expense. Let me expand a little about the early positive operational results of our BOSS and VRM investments. Even with the historically high conversion training expense pushed into the 1st two quarters of the year, our year to date net margin has expanded 70 basis points. However, the Q4, taking out the impact of the tax withholdings, the net margin improved 140 basis points, which we were pleased to see partially as a result of our related gains from BOS and BRM.
Also included in this improvement were gains in our casualty and healthcare expenses, as I mentioned earlier. As you may recall, January is the month of our annual leadership meeting where our top 100 leaders throughout North America come together in Atlanta to recap 2016 and get the New Year kicked off. With all of the Orkin branches now on BOSS and VRM, we were able to take quality time to discuss pest control route management best practices and align our priorities for the Orkin operations related to the customer with the use of this technology. For the 12 months, our revenue grew 5.9 percent from $1,485,000,000 in 2015 to $1,573,000,000 in 2016. Income before income tax grew 7.2% from $243,200,000 in 2015 to 260,600,000 in 2016.
Net income grew 10% from 152,100,000 in 2015 to $167,400,000 in 2016. Again, as I explained, the full year income before taxes was impacted by our one time tax charge to dissolve Kinro and net income and earnings per share were not negatively affected. Let's take a look at revenue and revenue by service line for the 4th quarter. Our total revenue increase of 6.4% for the quarter included 1.2% from major acquisitions and the remaining 5.2% was from pricing and organic growth. In total, residential pest control, which made up 42% of our revenue, was up a very strong 7.9%.
Commercial pest control, which made up 41% of our revenue, was up 5.5% and termite and ancillary services, which made up approximately 17 percent of our revenue, was up 5.7%. Again, total revenue less acquisitions was up 5.2% and from that residential was up 7.7%, commercial was up 3.7% and termite was up 3.9%. When you take a look at the quarter, taking out the impact of foreign currency, in total, we grew 5.4%. Residential grew 7.8%, commercial pest control was up 3.7% and termite was up 4.2%. Commercial and termite were most impacted by the weak Canadian and Australian dollars as most of our business in these countries is commercial.
When looking at revenue and service lines for the full year, our total revenue increased 5.9% and included 0.7 percent from acquisitions and the remaining 5.2% was from pricing and organic growth. In total, residential pest control was up 7.3%, commercial pest control was up 4.4% and termite and ancillary services was up 6.3%. For the full year, total revenue less acquisitions was up 5.2%. From that, residential was up 7.2%, commercial was up 3.5% and termite was up 4.8%. When you take out the impact of foreign currency for the year, in total, we grew 5.8%, residential group 7.2%, commercial pest control was up 4.7% and termite was up 5.1%.
Many of you have inquired about our mosquito business and even though this is still a relatively small base of revenue compared to our total, As Gary mentioned, we grew well for the quarter and for the year. When we look back over the past 5 years, we've grown in the mid teens range. However, we have not and will not market in a way that will be perceived to prey on public fear related to well known Zika and what's now virus transmission. Our marketing team will continue to explore ways to solicit and provide this service to our existing customer base. At extremely high retention rates, the benefits of the service speak for themselves from a quality of life and safety perspective.
We look forward to continued positive results in this area. In total, gross margin for the quarter increased to 50 point 0 versus 49.7 percent in the prior year. The margin for the quarter benefited from improved efficiencies in pest control customer routing and scheduling, increased technician productivity and reduced miles driven. Additionally, personnel related expenses were down as a percent of revenue as group health insurance and auto liability expenses were down quarter over quarter. This was offset by an increase in maintenance agreements and software costs related to BOS.
Depreciation and amortization expenses for the 4th quarter increased 2 $500,000 to $13,800,000 an increase of 21.9%. Depreciation was $6,900,000 dollars increasing $1,800,000 with most of that increase related to our BAW software, iPhone and printer depreciation. Amortization was $6,900,000 which increased $648,000 with amortization of intangible assets increasing due mostly to amortized customer contracts of the acquisition of Murray Pest Control and Scientific Pest Control in Australia, as well as various Orkin acquisitions throughout the year. Sales, general and administrative expenses for the Q4 increased $8,700,000 or 7.4 percent to 32.8 percent of revenues, up 0.4 percentage point from 32.4 percent for the Q4 last year. The increase in the percent of revenue is $9,000,000 and increased SG and A by 2 percentage points.
This was partly offset by lower administrative salaries and overtime a percent of revenue, which has been helped by the BOS implementation. Personnel related expenses as group insurance expenses down and telephone costs as we saw decreases with the change of data service providers. As for our cash position for the 12 months ended December 31, 2016, we spent over $46,000,000 on acquisitions, up 38.4 percent year over year and included the charge of the change of our special dividend for a total of $109,000,000 paid in dividends, which is up 18.8 percent over the last year. We were active with share repurchase in the open market during the year, but not in Q4 and purchased for the year a total of 835,559 shares for $22,700,000 We had $33,100,000 of capital expenditures and ended with $143,000,000 cash, up 5.7% from last year. Last night, the Board of Directors declared a regular cash dividend of $0.11 5 per share that will be paid on March 10, 2017 to stockholders of record at the close of business February 10, 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% or greater. We're encouraged with the results of 2016 and look forward to 2017. I will now turn the call back over to Gary.
Thank you. Well, Eddie, John and I are happy to answer your questions and we're glad to proceed accordingly.
Certainly. And we will take our first question from Joe Box with KeyBanc Capital. Please go ahead. Your line is open.
Hey, good morning, everyone. Good morning, Joe. So just from a
high level, obviously 2016 was the strongest growth rate that we've seen since 2010. I'm curious your thoughts as we get into 2017 ex the 1.2% from acquisitions that you had and actually that might have just been for the quarter, but ex the M and A, I mean, do you think that these are sustainable growth levels or should we expect some level of moderation as we finalize our models?
So Jamie, I'll take that. This is John Wilson. That's certainly our plan is for them to be sustainable. We don't start any of our years without our plans to get better. We maintain a continuous improvement mindset.
So that's certainly our plan. We think there's ample opportunity out there to continue growing our free service lines of business the way we have.
Okay. And then I guess maybe just to follow-up on that then. You called out bed bugs as theoretically growing at a lower rate and I guess that's just a small component of your business. But if you look at a lot of the other big drivers for your business, whether be the home team deployment or mosquito deployment, are there any kind of big one time drivers that might not step up in 2017? Anything that we should just be aware of?
I don't know of any single one time driver. Eddie mentioned and Gary did too about our mosquito business, our Bed Bug business, they are both growing faster than our regular service lines, but they are not that large. So I don't know of any single thing.
We don't weather wise, we had our share of bad weather. So I think as Eddie shared with you, these different segments of our businesses grow at different rates at different times. And which complement each other frankly that we don't have them all down and all of them are up, but to different degrees. So we don't see any big obstacle out there that's going to knock us off of our plans.
Got it. One quick one for you. Eddie, you mentioned increased tech productivity. Can you just put some numbers around the average stops per technician or maybe revenue per tech, just to give us a sense of how much it was up in 4Q?
No, Joe. We don't break that out. We will have technicians that would be in a range of 8 to 10 jobs or so in a day. It will depend on density and rural versus urban areas. But we are continuing to see better stops per mile from our virtual route management system.
And we're able to see better productivity that's kind of a byproduct of that. So that's what we're as we continue to have BOSS become more mature, our last regions went on in August of last year. So, as those become more mature and as virtual route management becomes more fully adopted, I think we'll see those numbers continue to incrementally get better.
Thank you.
And we will take our next question from Jamie Clement with Macquarie. Please go ahead. Your line is open.
Gentlemen, good morning. Good morning. Good morning. Gary, I don't recall ever seeing a press release announcing 17 franchise starts in a single press release. Can you give us a little bit more color on that?
And follow-up questions that would be is, are creating new franchises that more of a point of emphasis now and maybe fill us in on some of the economics? Do you get an upfront from these folks? How does
it all work? Well, we did get a kind of initiation fee. Depending on the population, we have a formula that bases what that first major payment is. We have minimal requirements as far as the payments going forward. We certainly don't want to get involved in having to audit the books of 50 different businesses.
So we have a percent that we get and then we have a minimum. So we feel like we're kind of protected as far as the accounting is concerned. Well, there's accounting standards that are different from country to country. We've done very well in China. We have a very good relationship with the head of the Chinese Pest Control Authority, which is a government employee.
In fact, she came over and visited about a month ago and I think that's been helpful. But we've been working, this has not been a quick thing because we've been working in China for I would say 5 or 6 years. So it's just that they all were kind of came to a head at the same time. As you know that there are like 15 or 20 cities over there with 5,000,000 plus people and most of them most of us don't even know their names. We think there's got to be a lot of potential.
It won't be a much residential business, but commercial wise, I mean, China is really going by leaps and bounds, and we think it's going to have a very beneficial commercial pest control. Okay. Now, did you all the announcement came,
I guess, a week or so ago, but I think in your prepared remarks, you said these were actually created in the Q4. Is that was this a 4Q event or a 1Q event? Jamie, this is a Q4 event. Q4 event, okay. 17 were added in Q4, which took us to a total of 70.
Okay.
And then just follow-up question. When you say most
of it's commercial, are you I mean, presumably, I mean, these big cities, I mean, you've got a lot of apartment buildings. So are these residential apartment buildings that you are all just defining as commercial? Is that how we should think about it or am I wrong? Yes. So Jamie, in most areas outside of the U.
S, residential pest control is not necessarily a service. There are not a lot of countries that look at residential pest control, something that they would pay for. There are some exceptions, the UK is an exception, Australia is an exception and there are a few others that are out there, Canada is an exception. But most of the other countries, it's all do it yourself from a residential, from a personal perspective. So some of the markets are making some slight changes with that.
But for the most part, when we say commercial, we're talking about food, we're talking about hospitals, other different areas purely from a commercial perspective. There may be a sprinkling in of those buildings that are like that. But for the most part, it would be purely commercial outside of residential. Okay. Well, I appreciate the clarification.
And we will go next to Joan Tong with Sidoti. Please go ahead. Your line is open.
Hi, guys. Very good quarter. Just have a couple of questions here. Eddie, for the VRM or maybe Gary, for the VRM, we are talking about last quarter, you said you optimized half of the routes. Can you give us a quick update in terms of are you making any progress like maybe you having that module or that platform to optimize more routes and you talk about improvement in productivities and all that.
Can you just kind of sort of give us an update?
Yes. So that number of 50 percent Joan has moved closer to 75% of the routes being optimized on a daily basis. And again, this is just us going through and getting everybody more comfortable with not only the technology itself, but with the use of the
technology and have that become part of the
daily routine. So as we're able to continue to do that, we'll be able to get more of the routes optimized upfront. And then the next step from there is to take the steps that we can to not disrupt those optimized routes as best as possible. So we're going to continue to see incremental gains that are going to occur, I think, quarter by quarter by quarter with that as the branches learn and understand better ways of being able to keep those routes that have been optimized run-in the best way that they can.
I see.
Joan, if I may add, so the savings there was optimizing is a 20% to 25% reduction in miles driven. So benefit of the company will show up with our improved fuel cost and wear and tear on our fleet. The big bang for the buck we feel is an improved customer service and attention to our customers. And what we're really working with our teams in the field now is to improve the amount of service time they spend and quality time
they spend with that customer.
So that's what that's all about.
Right, right, right. I'm just wondering is there any way to sort of like seeing some sort of if you can talk about any tangible like results like how we measure customer service. And Gary, obviously, you mentioned the positive like promotions for and that's one thing. And also the 300 customer 360 yen maybe you can incorporate some of those survey results back to the analytics you have and drive better improvement a customer like experience going forward. Can you just give us a little bit more color?
Yes. So that's exactly right. The Liston 360 survey scores really we see that correlating with our customer retention metric and improving that can be big for our company. No question.
Got it. Got it. And then obviously very strong like operating margin, if you exclude that $9,000,000 onetime item there, you talked about 16% like operating margin for a seasonally weak quarter, very strong results. And then Eddie, you mentioned that some of the reason behind that other than top benefit, but also you get some reduction or some gain in the group health insurance cost and all that. Can you sort of quantify like how much of that expansion margin expansion is related to healthcare costs coming down and how much is more sort of the benefit that we are actually seeing from the bar system?
Yes. So, Joe, Q3, we saw an expansion of about 90 basis points. We think that we're continuing to see maturity in the BOS and the VRM. We think that's to continue to get
a little bit
better, which is helping with that total net margin number, operating margin number that you see. Those are dollars that really arguably can be pushed back in the previous quarters. So when you look at the full year margin of the 70 bps, I think that is really representative of where we are with it. So I think that Q3 and we had a little bit more maturity in the BAWS and the VRM and improved that 90 basis points, I think that's probably more representative of where the quarter would be outside of the casualty of the medical.
Got it. I see. Got it. I got it. And then finally for next year, I would say for 2017, I think in the past you mentioned that you would continue to spend in technology to stay ahead of the competitors and making sure good customer experience and all that.
And just wanted to see if you have any like initiatives you can call out that you are planning for 2017 in terms of technology spending And maybe you can quantify that in terms of maybe the impact to operating expense?
Thank you.
Yes, Joan, thanks. That's a good question. And we're still getting down the path of that. From a strategy perspective, we've kind of narrowed down about 3 or 4 items that we want to continue to spend our time and our energy on and ultimately our dollars on. Part of that is focused on customer experience, but we've not finalized exactly what that is going to be, the timing or the dollar amount at this point.
So we'll keep you informed as we kind of talk through this and as we kind of figure out next steps. The good news is we feel like we have some good opportunities in a few different areas and we've got some good folks with some great expertise that I think can help us get down these paths. So we'll share more once we get that kind of narrowed down.
All right. Thank you, guys.
Thanks,
And we will take our next question from Sean Kennedy with Instinet.
My question also concerns growth. How are you finding the current current environment in terms of attracting enough quality employees necessary to sustain your growth? Has it become more difficult since we've been hearing that's been challenging for other companies as employment has gotten tighter generally? Thanks.
Yes, Sean, this is John Wilson. It is difficult, but it always has been. I don't think our industry jumps out at whether it's college graduates, recent college graduates or people seeking to leave where they are today to go to come work in our industry. So what we try to do is have a very defined process around the hiring process. And our operations and our branches are taught to follow that pretty rigorously and they turn over a lot of rocks to find those good quality people.
And I think the final thing I would say is our greatest source of new employees has been our current employees. We get somewhere near 40% or so of our new employees from referrals of our current employees. We have a reward system that in place that pays them for bringing forward those good people. But that's our
best source. Got it. Yes, thanks. But have you has it been more difficult lately? Have you seen that just as employment has gotten tighter or has it just generally been the same?
No, I think it's generally the same. We still have to turn over our lives to find the ones we want, but I think it's still the same.
Sean, I will get
to that. When we take a look at our retention, our employee retention rates and how they have trended and we compare that to the overall unemployment rate, we've trended better in the overall employment rate unemployment rate. So I think to John's point, we're having to work a little bit harder. But once we're finding those employees, we're able to retain at least better than the overall unemployment rate has been moving. I think I could add
one thing to that as far as VRM. We're creating a better job for a service technician. There has been a tremendous amount of frustration for the technician to get himself organized and quite often he's in an unfamiliar area. You know, he didn't he doesn't live in his territory. He has more capacity because of being better organized.
Most of our technicians are on a productivity pay plan, so they can make more money. And if you have a more satisfied employee with a better work experience earning more, then you're going to have less turnover.
Great. I got it. Thanks for the detail guys.
We have a question from Alex Carnely with SM Investors.
Yes. Hi. Thank you. I have only one question left at this point, which
is just
modeling related. You're talking about an $9,000,000 charge for the Canadian entity as in SG and A. I'm assuming that the contra so the credit that is in provision for income taxes, is that correct?
Yes, that would that's correct. It would impact the overall tax rate, which was lowered and ultimately had no impact on the net income. So that's exactly right.
Okay. Thank you so much.
And at this time, we have no further questions. I will turn it back over to management for closing remarks.
Well, thank you for joining us today. We look forward to our New Year and we'll continue to work hard to grow and improve our business. Thanks again.