Greetings, and welcome to the Rawlings Inc. First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Joe Calabrese.
Thank you, Brock.
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 The replay can be accessed by dialing 844-512-2921 with the passcode 1,000,000,000 1,700,965. Additionally, the call is being webcast at www.viabid.com A replay will be available for 90 days. On the line with me today and presenting are Gary Rollins, Rollins' Chairman and Chief Executive Officer John Wilson, Rollins' Vice Chairman, sir Gillif, Jr. President and Chief Operating Officer Eddie Nolan, Senior Vice President, Chief Financial Officer and Treasurer and Joe Bimmerman, Vice President, Finance and Investor Relations.
Management will make some opening remarks, And then we'll open the line for your questions. Gary, would you like to begin?
Yes. Thank you, Joe, and good morning. We appreciate all of you joining us for our Q1 2021 conference call. Julie will read our forward looking statement and
Thank you, Gary. 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, 2020 for more information and the risk factors that could cause actual results to differ.
Thank you, Julie. I'd like to start by taking a moment on behalf of our Board, Our entire team and myself to recognize Henry Tippey for everything he's done for our organization over the last 68 years. As many of you are aware, Mr. Tippie recently retired from our Board, leaving behind an incredible Legacy of leadership and service to Rollins, its employees and customers. Henry's financial knowledge and guidance helped shape Rollins to become the world's best and largest pest control company.
During his distinguished career, not only was Henry our longest serving CFO Through a period for over 17 years, he was the architect of Ryland's purchase of Orkin in 1964. Incidentally, this is considered to be the country's first ever leverage buyout and was studied for years at the Harvard Business School. Henry, along with Randall Rollins, our Chairman at the time, were the only 2 Rollins Directors Present during our initial stock exchange listing in 1968 and again on our 50th year New York Stock Exchange anniversary. Additionally, in recognition of his broader impact to the business The New York Stock Exchange inducted HENRY in 2018 into their exclusive Wall of leaders. Randall Rollins was inducted as well.
Rollins would not be the company it is today without Henry's numerous Contributions. On behalf of the entire Rollins family of employees, thank you, Henry. We will continue to honor your legacy and the example of hard work and dedication that you provided. I'd also like to acknowledge Lee Krumpe's recent retirement from Rollins as Chief Information Officer. Throughout his 12 year career with Rollins, Lee helped guide the company through several important technology advancements, while building a fantastic IT team.
He selected and developed a team to not only improve the company's performance He's earned it. In the end, it all comes down to the many positive contributions of our employees Continue to make every day. They have risen again to the occasion, going above and beyond what they've ever accomplished before. We're grateful for their extraordinary dedication and adaptability during the past year. They truly are our most valuable asset.
While we faced many challenges over the past year, we continued to successfully improve our operations, And we are greatly encouraged by our Q1 performance. I think we are benefiting from our technology investments and overall business momentum and are looking forward to another successful year. Let me now turn the call over to Sean.
Thank you and good morning everyone. As Gary mentioned, we are pleased with our Q1 results. Revenue grew 9.8 percent to $535,600,000 compared to $487,900,000 for the same quarter In 2020, debt income rose to $92,600,000 or $0.19 per diluted share compared to $43,300,000 or $0.09 per diluted share for the Q1 of last year. Eddie will review the GAAP and non GAAP results shortly because there was one adjustment impacting our financials. It is not just the results we are pleased with, but the trends we are seeing in the business, highlighted by strong performance in our residential and termite service lines, growing 14.9% and 12.2% respectively.
Further, our commercial business has improved every single quarter during Next, I too would like to acknowledge the notable impact Mr. Tippie has made not only on our company, but with me as well. I am grateful greatly appreciative of his many years of leadership as part of our management team and as a board member. While it's never easy to follow in the footsteps of someone who made that type of impact, we are pleased with the distinguished executives that have agreed to join our Board of Directors over the past several months. Many of you may recall that we have enhanced an already experienced and strong Board With the recent additions of Jerry Nicks, Susan Bell, Patrick Gunning and Harry Cinkas, they each bring a wealth of knowledge and diverse announced the appointment of several new committee chairs and committee designations.
Jerry Nicks was appointed as our new Lead Director and was selected to chair our compensation committee as well as chair our nominating and governance committee. He is also now serving as a member on our Audit Committee and will be joining our Chairman, Gary Rollins on our Executive Committee. Additionally, Susan Bell was selected to chair our Rollins Audit Committee and to chair our diversity committees. Patrick Gunning was also appointed to be a member of our audit committee. As Gary just mentioned, Lee Crump has Succeeding Lee as our new Chief Information Officer is Thomas Tesh.
While we have spent the last 6 months working to ensure a seamless transition, Thomas has been a key part of the Rollins family since 2012, previously serving as the Vice President of Information Technology. Thomas is extremely qualified, having led our technology improvement journey through several major rollouts over the years. And we believe his deep experience and solid track record makes him uniquely qualified for this important position. Now let me turn the call over to Jerry, who will provide more details on our businesses.
Thanks, John, and good morning, everybody. The Q1 business environment was extremely solid across all of our business lines and our total revenue less significant acquisitions grew 7.9 11.2% respectively. These growth levels have exceeded anything we've recently experienced. Commercial ex fume revenue less significant acquisitions presented positive growth for the first time Since Q1 2020, this segment has enjoyed sequential improvement since last April, reaching 1.3% growth over Q1 of 2020. Our team's continued dedication in serving our commercial customers and their recovery has been outstanding.
We're pleased with the steady progress achieved over the past 12 months in this segment. Turning to our mosquito service, as families spend more time outdoors recreationally And with the continued threat of mosquito borne disease, we're realizing significant growth in this segment of our business. For the quarter, Our mosquito revenue experienced growth of over 30%. Additionally, the strength of our termite business remains solid and we expect continued growth in the future. Looking deeper at our results, we continue to attract customers to all of our services and brands.
We're particularly pleased with our international performance in the UK And Australia. Domestically, Northwest Exterminating, which joined the Rollins family in 2017, continues to realize strong growth in the Southeastern U. S. HomeTeam has continued their consistent high growth levels as they capitalize on a thriving residential home construction industry. Similar to last quarter, we experienced tremendous growth in wildlife service offerings through our TruTek and Critter Control brands.
Also, we continue to selectively purchase Critter Control franchises and combine them together with our growing wholly owned wildlife operations. Operationally, we remain focused on ensuring our residential and commercial customers receive the highest quality of services. As part of our approach in 2015, we began the rollout of a new branch operating system BOSS at our largest brand Orkin U. S. During 2020, we successfully deployed BOSS in 2 additional brands, Orkin Canada and Western Pest Services.
With this new system in place, we are able to add virtual route management software to improve our routing and scheduling processes. Even though we're still in the early stages, for Orkin Canada, we've achieved routing improvements of over 20% at this time. Over the next few years, we expect additional improvements as the system gains maturity within these brands. Looking ahead, we remain committed to investing and implementing technology improvements to other brands in order to improve operational efficiencies as well as enhance our customers' trust by continuing to deliver a worthwhile experience. Overall, we are pleased with the progress we've made during the Q1 And as the economy continues to recover, we're encouraged about our prospects for further improvements for the rest of 2021.
Now let me turn the call over to Eddie to discuss our financials.
Thank you, Jerry. I too have greatly benefited from Mr. Tippie's vast experience, Wisdom and knowledge. His guidance on cost containment, mergers and acquisitions and managing the balance sheet have been invaluable to me. The results of this quarter are in part a testament to his steady guidance throughout his 68 year involvement with the company.
For the quarter, our residential pest control, commercial pest control, termite and ancillary service lines showed growth And keys to the quarter included cost containment across all major categories throughout the organization, overall good weather conditions that helped with demand and customer retention rates improving across the board. As John referenced, I will be reporting both GAAP and non GAAP financials for the quarter, which were Positively impacted by our gain on the sale of several of our Clark properties. As a reminder, when we purchased the initial Clark business in 2019, We bought their pest control, distribution businesses and their owned properties. Real estate is not a core competency of ours and we decided to make the properties available to the market and secure branch leases. The 1st group that sold netted a $31,000,000 gain included in our numbers this quarter.
Looking at the numbers, the 1st quarter revenues of $535,600,000 increased 9.8% Over the prior year's Q1 revenue of $487,900,000 our GAAP income before income taxes was $119,900,000 We're 116.3 percent above 2020. Our GAAP net income was 92,600,000 114.1% compared to 2020. And our GAAP earnings per share were $0.19 per diluted share. When removing the positive impact of the property gain on the sale of $31,000,000 our non GAAP income before income taxes was $88,800,000 compared to $55,400,000 in 2020 or up 60.3%. Our non GAAP net income was 69,800,000 up 61.2% compared to Q1 of 2020.
This surge in customer demand again tested our new technology to see how we would be able to handle higher levels of both existing and new customer starts. As we move from what we would call stage 2 to stage 3 and give the customer a better experience. Specifically, our latest updates are helping to maximize our ability to be proactive with our customers instead of reactive. Our operations support has added the use of a planning board, which enables them in real time to adjust for openings in the technician schedule. If a customer needs to reschedule service for some reason that opens up a time slot during the day, our support group is quickly able to fill that slot with a new customer or to support the changing needs of an existing customer.
This enables our technicians to be more efficient and our customers to have a better experience with their service needs. These changes positively impacted our margins and our customer retention rates for the quarter.
Let's take
a look through the Rollins revenue by service line for the Q1. Our total revenue increase of 9.8% included 1.9% from significant acquisitions and the remaining 7.9% was from pricing and new customer growth. In total, residential pest control, which made up 44% of our revenue, was up 14.9% In commercial, excluding fumigation, pest control, which made up 35% of our revenue, was up 3.6%. Termite and ancillary services, which made up approximately 20% of our revenue, were up 12.2%. Also as Jerry mentioned, our wildlife service continued to see Strong double digit growth.
Again, total revenue less significant acquisitions were up 7.9% And from that residential was up 12.8%, commercial ex fumigation increased 1.3% and termite and ancillary grew by 11.2 Our residential business continues to perform well and our commercial pest control business has seen steady improvements each month since April 2020. We anticipate a continued steady improvement in our commercial pest control business for the remainder of 2021. In total, gross margins increased to 51.2% from 49.5% in the prior year's quarter. The quarter was positively impacted by lower service salary expense as well as a lower fleet expense through continued improvements from our routing and scheduling efficiencies. Depreciation and amortization expenses for the quarter increased $2,000,000 to $23,600,000 an increase of 9.3%.
Depreciation increased $920,000 due to acquisitions and planned IT upgrades, while amortization of intangible assets Increased $1,100,000 due to several acquisitions including McCall Pest Control in December of 2020. Sales, general and administrative expenses for the Q1 increased $4,300,000 or 2.8 percent to 162,200,000 or 30.3 percent of revenues. This was down 6.5% compared to 2020 And the quarter produced savings in administrative salaries and benefits, travel and telephone savings from better negotiated contracts. There's been a lot of inflation discussion related to the economy and what impact companies are seeing or will see as we move through 2021. At this point, we do not see major inflation exposure that would materially impact our margins.
As you probably know, payroll, fleet and materials and supplies are our largest three expense areas. At this time, payroll margins are mainly improving due to enhanced technology and efficiency. Our fleet has been positively impacted by lower fuel costs and a mid single digit percentage reduction in our miles driven. Finally, our materials and supply costs are lower as a percent of revenue even with our continued personal protective equipment use by our customer facing employees. As for our cash, for the period ended March 31, 2021, we spent $17,000,000 on acquisitions compared to $47,600,000 during the same period last year.
We paid $39,400,000 on dividends and had $7,800,000 of capital expenditures, which was slightly higher compared to 2020. We ended the period with $117,300,000 in cash, of which $71,300,000 held by our foreign subsidiaries. Yesterday, the Board of Directors approved a regular cash dividend of $0.08 per share that will be paid on June 10, 2021 to stockholders of record at the close of business on May 10, 2021. Gary, I'll turn the call back over to you.
Thank you, Eddie. We're happy to take your questions at this time.
And then re queue for additional questions. Our first question today is from Tim Mulrooney of William Blair. Please proceed with your question.
Good morning, everybody.
Good morning. Good morning.
So you had a really strong year last year on the residential side. And Yes, I think one of the big questions on everyone's mind is how that might translate to organic growth in 2021. You've got some difficult comparisons coming up over the next several quarters in residential pest. But as I sit back, I'm thinking then again, We're still largely in a work from home environment and I have to think that a lot of the accounts that you signed up last year are probably Now finally turning profitable after the 3rd or 4th visit. So taking all that into account, I'm just curious how you're thinking about The residential side of the business as we continue to emerge from this pandemic?
Yes. So Tim, this is Eddie. So we're seeing continued good demand. I mentioned in my prepared remarks, We did have overall good weather in the Q1. Don't know what that will look like as we move throughout the remainder of the year.
But I think one of the things that we're seeing and I think we're all living this in real time is we're seeing more of this hybrid work environment. So it's not only people necessarily working from home, they're not only working from the office, but we're seeing more of this hybrid environment, which we believe is still going to have some eyes that's going to create that demand that we've seen As we move through 2020, you see the numbers here. Our lead generation as we go into Q2 is still very strong For us and that's starting to lap some of those numbers that you already talked about. So I don't know that any of us know exactly what this Look like as the entire year plays out, but I think there are things that are positive for us To be able to continue to see demand as we're moving forward.
Okay. Thanks, Eddie. Appreciate those comments and good color on the lead generation. If I could pivot, I know I think it was Jerry that was talking about the technology that you're implementing BOS In or in Canada, I know that's not new news, but I'm not sure I heard about Western before.
So I'm just curious if
you could give us an update on maybe your Technology rollout plans this year, are there any other specialty brands that you're planning to roll out BOSS or VRM to? Any incremental, I guess technology investments to keep in mind as we model out your expenses for 2021?
Yes, I'll answer and then let Jerry follow-up from there. So, yes, Orkin, we're a little bit further down the path As far as getting things moving more towards maturity, we've added Western to that queue. They're moving down the path of maturity. We'll take a pause at this point in time, make sure that we work through and that we get the benefits from those 2 units or those 2 brands Before we were to make a decision or anything else, and we would let you know ahead of time if there was going to be anything significant to change our CapEx as a percent of revenue or anything else like that. But we I would say from a modeling standpoint within the historic range of what we've seen over the last few years is what our plans are right now.
And if we make a decision to change that, we'll let you know what we know about that moving forward.
One thing I'd Add to that, Eddie. There's technology improvements when we buy another company Because typically they don't have the best phone systems, they're not paying the best rates for communications and There are some products available within the industry that in some cases are upgrades from what they currently have. So Although BOS is certainly important, it's going to be critical to our future. We are able to help these Newly acquired companies with something short of BOS and of course that will be on their plate in the future.
The next question is from Mario Cortellacci of Jefferies. Please proceed with your question.
Hi, everyone. Thanks for the time. I actually just wanted to ask about organic growth. You guys are using the significant acquisitions Verbiage, when you're referring to, I guess, organic growth now, are you able to provide what organic growth looks like less All acquisitions in resi, commercial and in termite?
Yes. This is yes, thanks for that question. So We didn't mean to add confusion here. This is the same way that we've measured it every quarter, probably for the last 15 years. We were just trying to give a little bit of clarity around that part.
If we were to or when we acquire A small tuck in acquisition, let's just say 5 technicians. We acquired them on a Thursday. On Monday, they have new uniforms, they're in new vehicles and they're embedded into that Orkin branch. And we really don't have a way for that very small piece to be able to kind of parse that out. So this is again, this is Same way that we've looked at it every quarter, again, at least for the last 15 years.
So we really don't look at it because it's such an insignificant Number from that perspective.
Just and then maybe a follow-up to that. With those types of acquisitions, is it are those like $1,000,000 in revenue or like $500,000,000 is it that insignificant that it's not even worth mentioning?
That's absolutely correct. So again, we didn't mean to add confusion to this by wording that we have here. But again, this is the same way we've looked at it Throughout time and nothing else would be a part of it that would be material significant at all.
Okay, great. Thanks for clarifying. And then just my follow-up would be on the labor You guys actually said that you're seeing labor efficiencies and you're seeing, I guess, maybe savings there or coming in better than expected. I think commentary from other companies is that they're seeing difficulty in hiring new labor, essentially competing with the government For people looking for jobs, with stimulus and unemployment checks, are you seeing anything Similar to that within your new hires, and we've also heard that I guess smaller pest companies are even offering Bonuses to new hires that they sign and then they work for the 1st 30 days or 60 days or whatever it is, they'll get an additional bonus for staying with them. Are you doing something similar or is that really not in
the cards for you? Well, when we had demand levels that we've seen this And even if you go back to last quarter that are significantly higher than what we would see on average. In any times, It would always be a challenge to ensure that we're finding hiring and retaining the right employees. The good news for us and then I'll kind of move to specifically your question. The good news for us is as our technology continues to Mature on the routing and scheduling part, it enables us to automatically be more efficient.
So during my prepared remarks, I talked about, Let's just say a technician that maybe went out with 9 stops in a day and then at 10 o'clock in the morning someone called and said, well they're not going to be available and not be home at 2 o'clock. In our old world, that 2 o'clock slot basically would have gone empty and the technician would not have had anything to do. In this new world, the branch can see that in real time. Our call center can see that in real time. So now when we have a new customer, we can Slot a new customer into that time slot.
So it's enabling us to continue to be more efficient with that, which is helping with that demand with the new customer And also being able to move that existing customer as well. So with all that being said, with this with the demand levels, We are absolutely having issues to be able to go through and make sure that we're finding and hiring the folks that we need to be able to keep the business moving forward. And HR Group and the operations groups are doing a tremendous job with that. But it is a battle with the other companies that are out there that are offering some of the things that you've talked about.
And this is Terry. John and I recently had a meeting with Branch managers in the field at Orkin about your number one job, your number one priorities as a branch leader is recruiting and building your team. We put a high emphasis that that's 1st and foremost the most important thing you can do. So We place a lot of emphasis and have good processes and procedures behind that. But as Eddie said, it is getting tougher.
We do offer Roll bonuses, there's a lot of activities on friend and family referrals for new employees, that also incentivize people if they get referred and they stay longer, we pay Referral bonuses over time, things along those lines. So we take advantage of everything that we can Get our hands on to help keep a competitive advantage in the search for talent. But again, this is nothing that's new. I mean, It might
be a little bit more heightened at this moment right here, but this is nothing new for us in the service industry. We've gone just in my time period that I've been here in 6 years, This is something that we're constantly focused on. John set the tone as far as the importance of that. Jerry set the tone as far as the importance of that over time. And we've been able to be successful with that and we'll find ways to continue to be successful with it as we're moving forward as well.
And the other piece
of the staffing situation is retention. And we have created In Oregon and in Western and in Canada, we've created a better job. It was very frustrating for that Pest Control Tech, to have that cancellation that Eddie just described and really not Beginning to unravel the day's route. And now we have the tools that we can Move a customer to that slot, a new customer to that slot typically. And he doesn't have or she doesn't have that frustration That how am I going to get through?
How am I going to get it done? This has created a mess that Ratchets all the way down through the day, etcetera. So it's going to be interesting to see what this does to retention. It has to make a better job for the pest
Our next question is from Michael Hoffman of Stifel. Please proceed with your question.
Thank you very much. I met Henry Kippie Almost at the very beginning of my career, 33 years ago, when I was covering Rollins Environmental and he gave me sage advice then, which I've always followed And my modeling, so I wish them the best of luck. Thanks for sharing, Mike. So the conversation about growth and I get you're not doing anything different in the language of significant, Double digit or very high single digit organic growth in residential relative to the underlying market growth It's phenomenal. So what are you doing different that you're producing that type of organic growth Versus anybody else in the business because you're clearly gaining share and you're a well run company, but what are you doing different do you think that Allows even if the comps have to come down because it's so strong last year, you're still gaining share.
So what are you doing different?
Michael, I think that's a very intuitive question to ask. And trust me, as we've gone through this time of these higher demand levels, We've continued to really drill down into that to get a better understanding. I talked again in my prepared remarks, we did have good weather that we were were up against that they created. But I think the essential worker status and the seriousness that we took with that, especially as the pandemic To me, I think is one of the things that separated us, for sure in the service industry and I would say Separated us within our pest control industry as well. So we already had a very professional technician.
As we've talked about previously, we invested in PPE very early on. And when you combine that together With that trusted person that you already have, we believe that that separated us potentially from others that are out there. We've all had people in different service industries that maybe showed up to do some sort of work that looked disheveled, didn't look professional. And they could have been the best person to be able to do that job that you would hope, but the impression didn't come across positively. And we believe that our technicians across the board in all of our brands come across professionally and we believe that essential worker status Really translated into a trusted brand.
And as people have felt more comfortable opening their homes Over this last, I'll say, 3, 4, 5 months, we believe that's translated more into a trusted brand, a trusted name. I'm open to them coming into my home and it's really been a reflection of this demand that we've seen that we've been able to go through and grow our business with. So We think that those are a few things. When you couple that with these continued enhancements in the routing and scheduling and how our communication with our customers continues to We believe those are things that continue to separate us from the competition that's out there and enabling us to win on high demand and to retain it at a high rate.
Okay, fair enough. You all updated your corporate presentation recently. By the way, it was a nice change. I have to admit it took me a moment to realize I was clicking through a book, just trying to make it rotate a different way. But you put in there about a $12,000,000,000 domestic market And yet the major trade associations defining it as $9,600,000,000 growing a little bit less than 3% last year.
Can you bridge the gap between your market size and PCT's market size?
Michael, I'll have to get those numbers from you. I'm sure we'll get a chance to talk to you probably later today or tomorrow. Let us talk to our marketing group and let's See what we can do to help out with the difference between those 2.
Okay. That'd be very helpful. Thank you.
Yes. Thanks.
There are no additional questions at this time. I would like to turn the call back to management for closing remarks.
Okay. Well, thank you for joining us today. We're optimistic about Rollins' opportunities ahead and appreciate your interest in our company. We look forward to updating you next quarter on our progress. Thanks again.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.