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Edited Transcript of ROL earnings conference call or presentation 23-Jan-19 3:00pm GMT

Q4 2018 Rollins Inc Earnings Call

Atlanta Jan 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Rollins Inc earnings conference call or presentation Wednesday, January 23, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gary W. Rollins

Rollins, Inc. - Vice Chairman & CEO

* John F. Wilson

Rollins, Inc. - President, COO & Director

* Paul Edward Northen

Rollins, Inc. - Senior VP, CFO & Treasurer

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Conference Call Participants

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* Christopher Paul McGinnis

Sidoti & Company, LLC - Special Situations Equity Analyst

* Dan Dolev

Nomura Securities Co. Ltd., Research Division - Executive Director of Business Services

* James Martin Clement

The Buckingham Research Group Incorporated - Analyst

* Michael Edward Hoffman

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research

* Timothy Michael Mulrooney

William Blair & Company L.L.C., Research Division - Analyst

* Marilynn Meek

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Presentation

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Operator [1]

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Good day, and welcome to the Rollins Incorporated Fourth Quarter 2018 Earnings Conference Call. Today's conference is being recorded. (Operator Instructions)

I would now like to introduce your host for today's call, Marilyn Meek. Ms. Meek, you may begin.

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Marilynn Meek, [2]

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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 1 hour after the call and run for 1 week. The replay can be accessed by dialing 1 (888) 203-1112, with the passcode 793-9620. Additionally, the call is being webcast at www.viavid.com, and a replay will be available for 90 days.

On the line with me today and presenting are Gary Rollins, Vice Chairman and Chief Executive Officer; John Wilson, Rollins' President and Chief Operating Officer; and Eddie Northen, Senior Vice President, Chief Financial Officer and Treasurer. Management will make some opening remarks, and then we'll open the line for your questions.

Gary, would you like to begin?

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Gary W. Rollins, Rollins, Inc. - Vice Chairman & CEO [3]

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Yes, Marilyn. Thank you, and good morning. We appreciate all of you joining us for our fourth quarter and year-end 2019 conference call. Eddie will read our forward-looking statement and disclaimer and then we'll begin.

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [4]

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Our conference call 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. This conference call also includes certain non-GAAP financial measures of performance. These non-GAAP measures should be used as a supplement and not a substitute for net income, loss, computed in accordance with GAAP.

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 31, 2017, for more information and the risk factors that could cause actual results to differ.

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Gary W. Rollins, Rollins, Inc. - Vice Chairman & CEO [5]

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Thank you, Eddie. We're pleased to report our 51st consecutive quarter of improved revenue and earnings. Revenues for the quarter grew 7.2% to $444.6 million compared to $414.7 million for the fourth quarter last year. Net income increased 51.1% to $51 million or $0.16 per diluted share compared to $33.7 million or $0.10 per diluted share for the same quarter of 2017.

Revenues for the full year rose 8.8% to $1.822 billion compared to $1.674 billion for the same period last year. Net income increased 29.3% to approximately $231.7 million, with earnings per diluted share of $0.71 compared to net income of $179.1 million or $0.55 per diluted share for the full year 2017.

We experienced good growth in all of our service lines for the quarter, with residential up 7.8%, commercial pest control rose 5.9%, and termite and ancillary rose 8.2%. 2018 was a good year for Rollins as we continued to build our global presence through acquisitions, both domestically and overseas.

In the U.K., we expanded our footprint with the acquisition of 3 prime companies: Guardian Pest Control, AMES Group and Kestrel Pest Control. We also achieved an important milestone for the company when we acquired Aardwolf Pestkare. This is Rollins' first company-owned operation in Singapore.

In the U.S., we acquired OPC Pest Control, a premier pest control company in Kentucky, and we also made small tuck-in acquisitions. And at year-end, we had added a total of 38 companies to our roster. We also continued to expand the Orkin brand internationally with the addition of franchises in South America, Europe, the Middle East, Latin America and other locations. The Orkin brand is now represented in 57 countries throughout 86 international franchises.

As we enter 2019, strategic acquisitions will remain a focus of our growth strategy. We're extremely pleased to have announced earlier this month our agreement to acquire Clark Pest Control. Headquartered in Lodi, California, Clark has operations in over 20 locations in California and Nevada. Founded by Charlie Clark in 1950, the company has grown to be the eighth largest pest control provider in the U.S. Clark recorded revenues of $130 million in 2017. The company is also growing at a faster rate than we are as well as a faster rate than the overall pest control industry.

I first visited with the company over 20 years ago and I was fortunate enough to meet Charlie Clark, an icon in our industry. We have admired the company throughout all of this time. The Clark acquisition will be the largest in our company's history. John will provide more details on this acquisition, but I wanted to express our enthusiasm in acquiring this fine company and personally welcome their team to the Rollins' family.

I'd now like to turn the call over to John.

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John F. Wilson, Rollins, Inc. - President, COO & Director [6]

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Thank you, Gary. As Gary noted, we are very pleased to have Clark Pest Control join our family. The Clark team is a natural fit for Rollins, sharing the same values that we do, more on that later.

They service customers through more than 20 branch location in North and Southern California and Nevada. Clark Pest Control is stronger in the upper central valley in Northern California areas than Orkin and our other brands. It was very interesting to learn during our due diligence process how closely linked Clark and our biggest brand, Orkin, are in their history. As you may know, Orkin was founded by Otto Orkin in 1901 but didn't expand to the West Coast prior to the Rollins' purchase in 1964. Meanwhile, Charlie Clark founded Clark Pest Control in California in 1950 and patterned Clark on some of the foundational principles of quality customer service delivered by well-trained people just as Otto Orkin did. Both companies have certainly retained those principles of quality service, delivered by well-trained team members today. Clark has long been recognized as a premier pest control company in residential, commercial and termite services in the markets it serves. Their strong culture of customer service has been aided by very high employee retention rates and has resulted in a loyal and expanding customer base.

We are aware that owners have a choice when they look to sell their business, and there are 4 very important factors that come into play. What is best for their family, their employees and their customers as well as receiving value for the company? We take each of those into account and customize our acquisition plan to fit those factors. What was apparent in our discussions with Clark from the beginning is how deeply they care about what would happen to their employees and customers following the sale. They, like us, recognize how important their people are to their success and also, like us, are dedicated to continually improving both the employee and the customer experience.

Over time, we have distinguished ourselves with our acquisitions where key management and employees remain on afterward. And it is one reason why Rollins has gained a reputation of being the industry's acquirer of choice. Sellers know they can trust us to live up to our word once we have closed on a purchase. We even invite potential targets to reach out to the brands we have acquired as well as the ones we have lost out on to see if they're happy or not.

In addition to Clark Pest Control, expanding our presence in California and Nevada, we believe the company provides significant opportunities for Rollins and Clark to learn from each other, which we have repeatedly expressed as one of our primary objectives with our acquisitions.

Potential opportunities we have encountered previously include materials and supplies purchasing, better vehicle-leasing arrangements, training, employee benefits, and lower technology and communication expenses to name a few. Rollins will fund the acquisition using a combination of cash and debt. Eddie will go into further financial details related to this acquisition in a few minutes. Clark Pest Control, under the leadership of long-term Clark team member Robert Baker, will join our Specialty Brands group led by Jerry Gahlhoff. Brands in this group include HomeTeam, Western, Waltham, Northwest Exterminating and OPC Services.

Jerry and I have had the privilege of visiting every Clark operation to meet with their employees and personally welcome them to Rollins. We wanted them to know that they are valued and how much we look forward to working with them to further advance their great brand.

I will now turn the call back over to Eddie.

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [7]

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Thank you, John. Before I get into our quarterly and year-end numbers, I wanted to reiterate the positive impact of our enhanced employee benefits. Our people are so pleased with the investments that we made in 2018. And looking back, this was absolutely the right decision and have been reinforced by the positive results that they have produced for the year. As you may recall, in April, we increased our 401(k) match and provided stock grants to our employees, which added about $10 million to our expense for the year. But this recognition of their impact on our business is rippling through our results.

Our recent leadership meeting in Atlanta was the first that we have had -- first that we've held since rolling this announcement out last April. The comments of many of the over 100 participants were overwhelmingly positive and appreciated.

I want to share a few of the positive changes that we have seen. All employees want to work for an employer of choice. Our employee retention rate had the best year-over-year improvement in the fourth quarter in 2018 since 2016. As you know, during that same time period, the unemployment rate has fallen from 4.7% down to 3.9% in December of 2018.

Investing in our people is one of the components that has helped us in this area. We've also often talked about how important our technicians are in their relationship with our customers. Our improved employee retention has translated directly to higher customer retention in Q4 and for all of 2018. Our organic growth rates, again, ticked to historic highs as a result of better technician and customer retention. Enhancing our employee benefits will continue to drive improvements in employee and customer retention for years to come.

For the quarter, all of our service lines showed significant growth, and keys to the quarter included record organic growth rates, piloting testing of the BOSS rollout in Canada, and as I just mentioned, improvements in our employee retention rate tied to our enhanced employee benefits.

Looking at the numbers, the fourth quarter revenues of $444.6 million was an increase of 7.2% over the prior year's fourth quarter revenue of $414.7 million. Income before income taxes increased 4.3% to $71.5 million from $68.5 million in 2017. Expense and depreciation increased during the quarter as we continued to roll out and began testing BOSS in Canada. Net income rose 51.1% to $51 million, and EPS increased 60% to $0.16 per diluted share compared to $0.10 per diluted share in the fourth quarter of 2017. EBITDA was $87.8 million, up 5.1% over Q4 of 2017. As we move forward, we will speak more to EBITDA as we continue to make sizable acquisitions that will impact our depreciation and amortization.

For the 12 months that ended December 31, we produced record revenues of $1.822 billion, which was an increase of 8.8% over the same time period last year. Income before income taxes increased 5.5% to $310.7 million, and net income rose 29.3% to $231.7 million compared to 2017. EPS increased 29.1% to $0.71 per share compared to $0.55 per share in 2017. EBITDA was $377.3 million in 2018 compared to $350.8 million in 2017, up 7.5%.

Our financial health enables us to be -- I'm sorry, enables us to continue to be nimble and improve our business. Companies that did not anticipate change and take advantage of market opportunities and seek ways to make it easier for your customers to do business with you do not drive, and in some cases, do not survive. The past 50 years have shown that Rollins has successfully managed for the long-term, and the impending acquisition of Clark Pest Control is a great example of that.

John gave some good color on the Clark's impending purchase based on his time working on this acquisition and spending a lot of time visiting their employees. But let's shift our attention to what we know about the financial impact of the impending acquisition of Clark Pest Control. We anticipate closing sometime in Q1 of 2019, subject to obtaining regulatory clearance.

For all of you that have asked would we be willing to leverage our balance sheet, this is your deal. While we plan to use cash for a portion of the purchase, we will be taking on debt in the form of a term loan tied to LIBOR to supplement the rest. This deal makes taking on debt worthwhile for us, and again, is investing in our future for decades to come.

The company is very profitable, but with the goodwill amortization, Clark will not add to EPS in year 1 but will be generating significant additional cash flow. Once we close on the deal, we will share more related to the anticipated impact of this acquisition on our total Rollins results moving forward.

Let's take a look through the Rollins revenue by service line for the fourth quarter. As discussed earlier, our total revenue increased 7.2% and included 1.6% from several acquisitions, and the remaining 5.6% was from pricing and organic growth. In total, residential pest control, which made up 42% of our revenue, was up 7.8%. Commercial pest control, which made up 39% of our revenue, was up 5.9%. And termite and ancillary services, which made up approximately 18% of our revenue, was up 8.2%. Both residential and termite benefit from our OPC acquisition. Again, total revenue less acquisitions was up 5.6%, and from that, residential was up 6.8%, commercial increased 3.2%, and termite improved by 7.5%.

Back to my earlier point on employee and customer retention, for the full year, total organic revenue grew 5.3% and is the fastest organic growth rate in over 5 years. When you take a look at the quarter, taking out the impact of foreign companies and currency, in total, we grew 7.1%, residential grew 8%, commercial pest control was up 5%, and termite improved 8.5%.

In total, gross margin for the quarter was 50.2%, up slightly from 50% prior year's quarter. The quarter benefited from improved efficiency and routing and scheduling, even as we have last efforts that began 18 months ago. Average miles driven per vehicle in our Orkin fleet were down an additional 2.6% year-over-year. Fleet expenses increased $3 million or 13.6% for the quarter, driven by moderated but still higher price per gallon costs and increased leased vehicle expense. Personnel-related costs were up due to the 401(k) plan company match and onetime employee stock grants.

Depreciation and amortization expense for the fourth quarter increased $1.7 million to $16.6 million, an increase of 11.3%. Depreciation increased $790,000 due to acquisitions, equipment purchases and continued BOSS rollout. While amortization of intangible assets increased $900,000 due to amortization of customer contracts included in several acquisitions.

Sales, general and administrative expense for the fourth quarter increased $12.1 million or 9.8% to $135.8 million or 30.5% of revenues, up 0.7% from $123.7 million or 29.8% of revenues for the fourth quarter 2017. The increase in the percent of revenue is primarily driven to higher sales salaries of $3.1 million due to higher sales commissions, which is tied to our record organic growth rate; $3 million additional expense in administrative salaries, attributable to amortization of restricted stock grants and expense associated with acquisitions; personnel-related increase of $1.9 million from the enhanced 401(k) benefits. In Q4, we saw an increase in the 401(k) match as more employees benefited from these enhancements.

The full year SG&A number increased 9.4% and came in at 30.2% of revenue compared to 30.1% of revenue in 2017. As for our cash position for the period ended December 31, 2018, we spent $76.7 million on acquisitions compared to $130.2 million the same period last year, which included Northwest Exterminating, and as we continued to find good quality pest control companies and continue to buy back Critter Control franchises. We paid $152.7 million on dividends, which included a special dividend for the seventh consecutive year, which was an increase of 25.2%. We have $27.1 million of capital expenditures, which was up 9.7% from 2017, primarily from planned IT upgrades, such as our BOSS Canada rollout and the Northwest acquisition.

We ended the period with $115.5 million in cash, of which $53.6 million is held by our foreign subsidiaries. Yesterday, the Board of Directors declared a regular cash dividend of $0.105 per share that will be paid on March 11, 2019, to stockholders of record at the close of business February 11, 2019. The cash dividend is a 12.5% increase over the prior year. This marks the 17th consecutive year the board has increased our dividend by a minimum of 12%.

Gary, I'll turn the call back over to you.

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Gary W. Rollins, Rollins, Inc. - Vice Chairman & CEO [8]

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Thank you, Eddie. We're happy to take your questions at this time.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will take our first question from Dan Dolev from Nomura.

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Dan Dolev, Nomura Securities Co. Ltd., Research Division - Executive Director of Business Services [2]

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So I have 2 questions, one question and then a follow-up. So it looks like organic growth was actually really, really strong and impressive and definitely ahead of what we were modeling. Can you maybe give us a little sense about how -- what -- how the weather impacted? And I know it was a little colder in the first -- at least in the first 2 months, it was colder in key areas like Florida. Is the execution getting better? Is this share gains? What is driving this strength in organic growth? And then I have a follow-up.

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [3]

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So Dan, I would point back to my opening comments. We see our employee retention improve. We know there is a direct correlation with the retention of our customers, we saw our customer retention improve. And while there was, to your point, there were weather issues in pockets of the country. I think we saw better retention of our existing customers as well as additional better sales in some different areas, which caused part of our increase in our sales commission. And I think those key items really helped us continue to move that in the right direction.

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Dan Dolev, Nomura Securities Co. Ltd., Research Division - Executive Director of Business Services [4]

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Got it. That makes sense. And then my follow-up is...

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Operator [5]

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We will now take our next question from Jamie Clement from Buckingham Asset Management.

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [6]

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John, I think it was John or maybe it was Eddie, but I think you all mentioned that Clark historically has outrun the industry, and I think you might have even said outgrown you all. Is that a function of the geography? Is it there in California and Nevada? Or is there something extra special about their special sauce?

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [7]

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They've been there since 1950. So I think it's probably fair to say they have been the premier provider in that greater area for a lot of years. And I think they've figured it out from a customer experience and employee perspective, and one of the reasons why they're a great cultural fit for us. But I know John spent a lot of time out there, I know John probably has something to add to that.

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John F. Wilson, Rollins, Inc. - President, COO & Director [8]

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Yes, Jamie, I would say that comparable to our operations out there, our growth has been fairly similar. That area over the last 10 years or so for us has been led really well. And so our growth out there has been fairly similar. It's other areas where the -- maybe the pest control markets a little more mature that have growth lag. But no, there's no doubt they're a special company with a special group of people that really -- they really care about the family that has led them so well for so many years, and their brand living on, and we're intent on helping them do that.

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [9]

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And Eddie, you want to defer talking intangible amortization and interest expense until the next quarter?

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [10]

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I'm sorry, Jamie, I didn't quite understand what you said?

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [11]

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Oh, I'm sorry. Eddie, I was saying do you want to defer discussing intangible amortization and borrowing costs until the next quarter related to Clark?

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [12]

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Yes, we haven't closed on the deal. So we -- this is still a pending deal, so we want to work through those issues and then we'll be ready to talk more about some of the specifics from there.

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Operator [13]

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We will now take our next question from Tim Mulrooney from William Blair.

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Timothy Michael Mulrooney, William Blair & Company L.L.C., Research Division - Analyst [14]

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So I want to talk about operating margin. You know they contracted 50 basis points for the full year. How much of this was the temporary impact from onboarding more recurring customers? Something you guys have been talking about, which I know negatively impacts margin in the near term. And do you expect this dynamic to have the reverse impact on operating margins in 2019?

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [15]

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Yes. That's a very intuitive question, and we talked about that a lot in I believe it was our Q2 call. And we have continued to see sales that have been impressive, recurring revenue sales that have been impressive in Q3 and in Q4. So I think to your point, there is definitely some cost that is associated and in there. And typically, what we see is when that's lowered or at some point in time when those recurring sales kind of trail off a little bit is when we really see the overall positive impact on the margin side. And it's a good thing for the long term to not see that because the recurring sales continue to be strong. And if you remember back to the discussion we had in Q2, we talked about those being almost right at double-digit numbers. And for some of our products, we still continue to see extremely strong recurring sales. So that's definitely impacted in that number.

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Gary W. Rollins, Rollins, Inc. - Vice Chairman & CEO [16]

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And I think -- if I may add something. I think one of the other drivers behind our progress in this area is our enhanced use of the internet. I mean, I have to give our marketing folks credit that they just continue to work on how to buy better and how to use our presence in the internet. And fortunately, those leads the question was brought up earlier about Mother Nature. Mother Nature certainly can put a damper on things. But that was more than offset, I believe, by the efficiency that we gained from the internet.

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [17]

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Tim, does that help with your question?

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Timothy Michael Mulrooney, William Blair & Company L.L.C., Research Division - Analyst [18]

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Yes. It does help, Eddie. And thank you, Gary. I'm curious, were there any other major factors that you highlighted as what drove that 50 basis point contraction? I guess, the employee benefit program, is that the other big one?

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [19]

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The employee benefits program is -- and of course, that's not going to be recurring. We'll lap that. This is the last quarter we'll talk about that. So that's -- the 401(k) piece as well as the stock piece. We know that on the vehicle side that, well, fuel prices have moderated somewhat compared to previous quarters, they're still up year-over-year, has been an impact. And then we had other factors outside of that.

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Gary W. Rollins, Rollins, Inc. - Vice Chairman & CEO [20]

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I think one other thing that is noteworthy is, we've been very aggressive as far as our IT expenditures. The enhancement to BOSS, the pace of the rollout of BOSS and so forth. And of course, that's going to moderate itself. But we've never spent that kind of money that we spent last year.

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [21]

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Yes. Just one last thing, Tim, on that point having to do with the benefit, is we did see an acceleration in the fourth quarter as far as people taking advantage of this new enhanced benefit that we've rolled out with more 401(k) dollars. So I think the word continues to spread and people continue to understand this is a great opportunity and that number ticked a little bit higher than what we've seen in the previous quarters.

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Operator [22]

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We will now take our next question from Chris McGinnis from Sidoti & Company.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [23]

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Can you just -- Eddie, I think there was -- you maybe just commented on just even more acquisitions to come on the year. Can you maybe just talk a little bit about the landscape now? Obviously, you had a very strong year in '18. And just what you see ahead for the opportunities in '19, obviously, outside of Clark.

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [24]

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Yes, so Chris, I think if you look back over the last 3 years, you'll see the dollars and/or the numbers continuing to increase. I think a little bit of that is going to be attributable to our team here, just continue to develop the relationships and being ready to go when companies are ready to go. Good quality companies are coming to the table, which, of course, we want to be a part of. We continue to expand our look into different geographies to find the right fit. As you know, Singapore this year, in 2016, the U.K. we entered, and we added some more into the U.K. this year. But I think a lot of it also has to do with the actual industry itself. It's an industry that started after World War II. Some of the original owners are having to make life decisions on what they want to do with their company. And John talked a little bit about that on how different companies make those different decisions. So I would say, we're still probably 2 to 3 -- in the next few years, I would say, we'd still be in that type of a cycle, having to deal with different companies making different decisions on what they want to do. Whether it is to hand it off and keep it within their family or whether it is to do something different and be able to pass it along. But I think there's going to continue to be opportunity. With this pending acquisition for us, it'll be our largest in our history. So it's hard to sit here and say today how active we will be. But when the right opportunity presents itself, we're still absolutely going to be at the table. But we're going to have a lot of good work to do, having to do with this, depending on what we have.

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Gary W. Rollins, Rollins, Inc. - Vice Chairman & CEO [25]

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And Chris, I would -- if I may add, reputation is big with this. And how you deal with and how you treat these companies as you bring them in. And we worked really hard on that aspect. I like to tell our team, you get 2 things in this deal, employees and customers, and neither has to stay. And so we work really hard on making sure we keep both.

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [26]

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And Chris, we're making sure -- yes, so just one more thing. I mean, that really is a great point and just one more thing to add in Gary's comments at the beginning. He sat down with Charlie Clark 20 years ago, and there's not a lot of other people that are out there that are sitting down with these owners and have the history that Gary has and that our Chairman have with these folks. And so when it comes time for them to make a decision, guess who got a phone call? When you have a long-term relationship, that's part of what's going to be the decision point there. So I think as long as we continue to see that and we have folks that have decisions to make, that'll be to our benefit.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [27]

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Yes, I guess, just one follow-up on that. I guess, out of all the acquisitions last year, were they all privately negotiated? Or was there may be a percentage that were maybe auction based?

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Gary W. Rollins, Rollins, Inc. - Vice Chairman & CEO [28]

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I don't know any off the top of my head that were...

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John F. Wilson, Rollins, Inc. - President, COO & Director [29]

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On auction based, there were certainly some offered up as -- by brokers, if that's what you're referring to. I don't know the percentage off the top of my head, but certainly -- and a lot of the bigger ones are typically brought to us by brokers. But there's quite a few too that we're bringing to the table through our relationships in the industry.

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Operator [30]

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We will now take our next question from Michael Hoffman from Stifel.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [31]

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I'd like to talk about costs, both the OpEx as well as SG&A and how to think about what your trend should look like in '19 in comparison to '18? Would we expect to be proportional to sales -- percent of sales similar numbers or is there a little uptick? Because you've mentioned 401(k) sort of accelerated absorption by the employee base, I'm assuming that hasn't peaked. How to think that through the model, ex any influences from deals?

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [32]

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Yes. Thanks for that question. A majority of the employee benefits related expense is going to be behind us as far as the year-over-year look is concerned. We did have -- to your point, we did have a little bit of an uptick in Q4. More folks are continuing to be able to take advantage of that. But if you take a look at the total, total numbers, there won't be anywhere near the significance of the impact from a year-over-year perspective. The sales, our commission piece, we just don't know what's going on with that. As long as we continue to find ways to be able to grow, and we continue to hit these new highs as far as our organic growth rates are concerned and our sales folks are executing, we may continue to see dollars that are in that area. On the fleet side, we're all seeing the price of fuel that continues to kind of stabilize now and when we start lapping a year-over-year, there should be less of a headwind or maybe even possibly a benefit with that. So I would say that a lot of the items that we have are onetime items on the expense side from the employee benefits. But then we also have other things that, I think, intuitively we will all see that are kind of moving in the right direction. So I would say, we would be moving in a positive direction with that as far as that particular question is concerned.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [33]

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So just so I'm clear, you would expect some operating leverage?

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [34]

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Yes.

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Operator [35]

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(Operator Instructions) We will now take our next question from Dan Dolev from Nomura.

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Dan Dolev, Nomura Securities Co. Ltd., Research Division - Executive Director of Business Services [36]

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So my follow-up was this. Look, I look at the stock today, it's down 6%. I think this is a little bit of an unforced error. It has to do more with expectations and not -- in my view, not having guidance. Does a day like this make you want to think maybe it is time to start offering guidance? I strongly believe it could avoid such things because the organic growth was so strong, and I feel like people are missing in. Any views on that?

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [37]

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Yes, so I guess, my view and, of course, it's the person sitting at the end of the table here ultimately gets to make that decision. But my view on that would be, I would think that you as well as the others on the call and our investors would much rather me and John and Gary and others be spending their time on running the business and making decisions on how we're going to make this better as we have for the last lots of years as opposed to answering questions on somebody's guidance or filling in a blank or reconciling something or something else like that, letting us have the autonomy to continue to execute. I think when take a look at the items that drove the "disappointment" that might be out there, based on what you said, having to do with the stock price. And we go through and we kind of parse through that. We look at an investment in our employees, the 401(k) benefits, we look at IT spend, rolling out enhancements in Canada where we've already seen improvements in the U.S. when we did that. Our largest acquisition and the costs that are related to that largest acquisition that's impending in our company's history and the costs that are related to that. And I think if you look at all those different pieces, and to your point, if you kind of break down into that and look and see what's onetime versus what's recurring, I think you'll see that we're running the business at a very good level. And rather than taking the time to go through and reconcile all of that, I would think that you all would want us to continue to make those decisions to make the company better. I can easily be overruled by the person at the end of the table here.

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Gary W. Rollins, Rollins, Inc. - Vice Chairman & CEO [38]

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That's not likely.

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Dan Dolev, Nomura Securities Co. Ltd., Research Division - Executive Director of Business Services [39]

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Yes. No, I totally agree with you. I mean, it's a great quarter and the organic growth looks fantastic. And I'm surprised that -- of the stock reaction.

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [40]

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We'll see how the rest of the day goes. How about that?

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Dan Dolev, Nomura Securities Co. Ltd., Research Division - Executive Director of Business Services [41]

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I'll be watching.

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Operator [42]

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We will now take our next question from Michael Hoffman of Stifel.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [43]

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So my next one is about retention. Can you talk about the rate of change in the retention? I get you don't like to talk about the absolute number, but how does that rate of change look in 4Q and relative trend through the year?

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [44]

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So I'll start with employee retention. Our employee retention had the best improvement we've seen since 2016, and we believe that a large contributing part of that is the enhanced employee benefits. I don't want to take anything at all away from how John and his group are managing the overall operations. Our employee opinion scores continue to go in the right direction. Gary talks a lot about the enhancements in our technology and how that makes our job almost easier for our technicians. It just makes it more straightforward. It takes a lot of the stress out of it when we have a very clear day for them to be able to go through and manage, and we start taking away issues and problems that the customer might have through better communication and things like that. So I think all of those things are making the employee retention number. But again, we feel as though the enhanced benefits are a key part of that. And then that's directly tied to improvements in the customer attention, and that's been a clear focus of John and his operations group over the last 2 years. But I can tell you unequivocally that we've seen the best improvements in Q4 and really kind of trending the right way throughout the year as far as the customer retention is concerned.

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Gary W. Rollins, Rollins, Inc. - Vice Chairman & CEO [45]

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You might mention podium?

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [46]

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Yes, yes, sure, that's fine. So we've really done a better job reacting -- that's what Gary's bringing up here. We've done a better job reacting to our customers that have issues or concerns that give us that information online. Historically, we did not do a very good job communicating back with customers as far as issues and concerns, and we've done a better job with that. And we've seen the scores that have improved because of that. So we had scores that, in some areas, were not acceptable because we weren't necessarily communicating with our customers that have problems or issues. And those numbers now -- the average rating is up to about 4.7 out of 5. So in a lot of markets, we're seeing enhancements and improvements just simply in the communication, and of course, the great execution of John and his team are having from an operations' perspective. So lots of different moving parts that are all trending in the right direction, and we feel extremely good about this continuing to move as we move into 2019.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [47]

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May I ask one subtle interpretation of that? Is there a difference between residential and commercial in this conversation?

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [48]

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There is not a substantial difference between those two. There really is not. I would say that our technology enhancements, if you take a look at the customer communication piece on the residential side, has been enhanced and has been a very positive thing. But I think on the commercial side when we take a look at what we've offered as far as data and information to our commercial customers, that has been a significant technology improvement as well. And I think we've seen good improvements on both sides of the coin there.

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Operator [49]

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There are no further questions over the telephone at this time.

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Gary W. Rollins, Rollins, Inc. - Vice Chairman & CEO [50]

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Okay. Well, thank you so much for being here or being on the call. We appreciate your interest in our company, and we look forward to reporting our first quarter results. Thank you.

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Operator [51]

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Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.