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Edited Transcript of ROL earnings conference call or presentation 24-Oct-18 2:00pm GMT

Q3 2018 Rollins Inc Earnings Call

Atlanta Oct 25, 2018 (Thomson StreetEvents) -- Edited Transcript of Rollins Inc earnings conference call or presentation Wednesday, October 24, 2018 at 2:00:00pm 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

* 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

* Paul James Fanelli

G. Research, LLC - Research Analyst

* Sean Michael Kennedy

Instinet, LLC, Research Division - Research Analyst

* Timothy Michael Mulrooney

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

* Marilyn Meek

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Presentation

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Operator [1]

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

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

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Marilyn Meek, [2]

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Thank you, Stephanie. 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 (2120 827-3746, and we will send you a release and make sure you're 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 2143746. 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 third quarter 2018 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 earnings release discusses our business outlook and contains certain forward-looking statements. These particular forward-looking statements and all other statements that have been made on this call, excluding historical facts, are subject to a number of risks and uncertainties, and actual risks may differ materially from any statement we make today. Please refer to today's press release and our SEC filings, including the Risk Factors section of our Form 10-K for the year ended December 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. Well, we're very pleased to report our 50th consecutive quarter of improved revenue and earnings. Revenues for the quarter grew 8.3% to $487.8 million compared to $450.4 million for the same period last year. Net income increased 29.6% to $52.9 million or $0.31 per diluted share compared to $51.4 million or $0.24 per diluted share for the same quarter last year.

Revenues for the first 9 months rose 9.3% to $1.376 billion compared to $1.259 billion for the same period last year. Net income increased 24.3% to approximately $180.7 million, with earnings per diluted share of $0.83 compared to $105.4 million or $0.67 per diluted share for the same period last year.

We experienced good growth in all of our business lines in the quarter, with residential up 9.2%, commercial pest control rose 55.7% and termite and ancillary grew 11%. Eddie will provide greater detail on our financial results in a few moments.

On August 10, we were privileged to celebrate a historic milestone for Rollins, a 50th anniversary of our company's trading on the New York Stock Exchange. Anniversary was significant in both the business and personal level. To celebrate the occasion, our Chairman, Randall Rollins, and Lead Director, Henry Tippie rang the closing bell and, in doing so, made history of the exchange. They hold the distinction of being the only 2 directors present for our company's initial listing in its 50th anniversary on the New York Stock Exchange. We are fortunate to have your contribution in leadership for that period as well.

As many of you know, we've also hosted an Analyst Day as well as an exhibit in Experience Square in front of the Stock Exchange. This exhibit showcased historical items from our Rollins' heritage center, such as the World War II era horse-drawn wagon and a bicycle that Orkin technicians used to provide service when gasoline was rationed. We also displayed our current trucks from the various brands like, Western, Waltham, Critter Control, HomeTeam, Northwest and Orkin that are used today. In addition, we unveiled some of our new field technology that we're rolling out and provided more detail on this week our commercial iPad application.

We're proud of our heritage and the achievements that we made over the past 50 years. Since acquiring Orkin in 1964, we have grown from the few U.S. operations to a premier global consumer commercial services company, with more than 700 operations in 57 countries.

In the early '90s, recognizing how good Orkin in the pest control industry were, Rollins narrowed its focus on pest control and sold all of our non-pest control businesses. We then began to open new Orkin branches, create Orkin franchises, both domestic and international, and initiated an acquisition strategy, all of which remains the same today.

Our goal was also to purchase other leading pest control companies, which at the time started with the acquiring of PCO Services, which is now Orkin Canada and Canada's largest pest control company. This purchase would be followed by Western, Waltham and the 2008 HomeTeam Pest Defense, which at the time was the fourth largest pest control company in the United States. These were followed by many others, all of which we were able to grow and improve.

Other acquired international companies followed in Australia, the United Kingdom and recently Singapore. During this time, we also realized that there were segments of the pest control industry in the U.S. that will complement our growth strategy. We added to our portfolio, Industrial Fumigation, the largest commercial pest control fumigation company in the United States, Trutech, and later acquiring the master franchise or the best known U.S. wildlife brand, Critter Control. By the way, today, we're the country's largest wildlife control company. Our acquisition strategy has continued most recently with the purchase of Northwest Exterminating and Kentucky's OPC pest control company.

None of these successes would have been possible without our people, who have been the central part of Rollins' past and present accomplishments. I never grow tired of saying and recognizing that our employees are our company's most precious assets. Our team's dedication and experience shape not only who we are today, but will direct what we do in the future. We have a tremendous opportunity to improve all of our existing businesses, while at the same time, expanding our global footprint through new locations and acquisitions.

Let me now 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 you all know, in September, 2 were the large hurricanes hit the U.S. mainland. Hurricane Florence, in the middle of the month, came to shore near Wrightsville Beach, North Carolina. The storm stalled and most of the damage there was done by flooding. Hurricane Michael was the larger Category 4 storm that destroyed Mexico Beach and parts of Panama City Beach, Florida. I'm happy to report that all our team members are accounted for and our office facilities came through mostly okay. Hurricane Michael was the most impactful as it relates to our team. I know 4 families that have lost everything, and at least 6 others with significant loss due to the storm.

I spoke with our Orkin region manager for that area on Thursday. He was on-site and working to help both our team and their customers get back on their feet. Of course, we have also engaged our Rollins' Employee Relief Fund team in support of these folks and others.

You may recall on our second quarter conference call, I discussed the tight labor market and how competition for employees was impacting us. At that time, our brands were handling it fairly well. Since then, with the unemployment rate having declined to 3.7% in September, we are experiencing some hiring pressures. We still maintain high retention rates for our industry, but it has become even more important for our people to recruit for new talent consistently in order to maintain a viable pipeline of new team member candidates.

As Gary just mentioned, we regard our employees as our most important asset, and we continue to assess and act upon what is working. What we need to do to adjust and any additional steps we can take to ensure we remain the employer of choice. A good step directed towards retaining our employees was the decision to share a portion of the U.S. tax savings in the form of stock grants and an improved 401(k) match for our U.S.-based employees. To further support our hiring efforts, we have beefed up our recruiting initiatives and we'll be rolling out our first ever Human Resource or HRIS system in 2019.

Our President of Specialty Brands and Human Resources, Jerry Gahlhoff, is the Executive sponsor and lead to this initiative. This will enable us to better track training, performance and career development for all employees around the globe in one seamless location. One of the groups that will benefit greatly from this would be our current and future leaders as people development is an important part of this effort. Our focus on hiring veterans and females continues to provide significant opportunity to add talent. Our industry has not historically attracted many females, and we can't afford to ignore nearly half of the population when considering this talent source, plus we know they make excellent employees.

As we continue to grow, add new branches and split existing ones in all our brands as well as make acquisitions, our efforts with talent acquisition and management development enables us to continue to prepare for that growth. We know talented people have choices, and we want the Rollins' brands to be a leading contender for that talent.

As is reflected in our third quarter results, we are continuing to experience good organic growth across our business service lines, including growth in our termite and ancillary services. One of the areas of emphasis in 2018 has been the growth of our mosquito service. While on a relatively low base, we have grown this service line over 30% on Q3 and year-to-date. This service line expansion has been largely driven by increased concern and raise public awareness around disease borne issues related to mosquitoes, including the Zika and West Nile, and other diseases are major contributors to this growth as customers come to us seeking answers to this threat.

We believe the growth rate of our mosquito business can and will continue strongly for many years to come. We have the largest residential base of customers in the industry, and this is a straightforward cross-sell offering for many of our customers from someone they already trust. In fact, this is the service our customers give their highest customer satisfaction rate. From an efficiency standpoint, it is also helpful when we can have the same technician that performed the pest control service also do the mosquito service at the same time.

We recognized that customers must have a way to know all of the pest and wildlife services that we offer, and our marketing group did a great job of getting that message to those customers. As you are aware, there are a wide variety of ways consumers use to make their decisions. Our Digital Marketing team and their efforts continue to differentiate us from our competition. Probably, and maybe most importantly from a connectivity standpoint, it's providing to our customers platform that works best for them. Only a few short years ago, mobile made up less than 25% of our consumer connection, and now that number is over 70%.

Our priority is to design mobile first and anything that we do. More recently, we have done a better job of proactively supporting our customers' needs and concerns through our online reputation management effort. Customers today want to communicate issues and share compliments more readily, so we have responded in a variety of ways, mostly through the various online forums, resolving those customer issues, and in many cases, turning a potentially damaging situation into a positive because of how quickly and efficiently things are handled.

Long before social media, we referred to those events as a golden opportunity to satisfy and strengthen the customer relationship. As you all know, in business, things change rapidly, and that change moves us forward. Advancing our technology effort helps with that, as getting our service reps to the right place at the right time is critical to improving the satisfaction of our customers.

Technology is the platform for our customers to find us, but it is also key to the success of our employee support and the resulting customer experience.

I'll now turn the call over to Eddie.

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

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Thank you, John. We are fortunate to be in an industry that is minimally impacted by trade talk or tariffs, where it's also now strongly tied to interest rates or fluctuating oil prices. While we do have our own challenges, such as continued talent, acquisition and development, as John mentioned, and evolving our offerings for a changing consumer base via technology enhancements, we do tackle these requirements on a daily basis.

I mentioned this as we had multiple opportunities to celebrate both the past and the present of Rollins during the quarter. In addition to the celebration that Gary mentioned of our 50th anniversary on the New York Stock Exchange, we also had the opportunity to celebrate 1 year with Northwest Exterminating, which I will talk about in more detail, and the acquisition of Aardwolf Pestkare in the country of Singapore. These celebrations show the historic development of our company as the leader in the pest control industry, and our ability to find and acquire top-notch U.S. and international companies continues.

For the quarter, all of our service lines showed significant growth and key to the quarter included entry into Singapore with the acquisition of Aardwolf Pestkare that I just mentioned, profit gains through increased recurring revenue from previous quarters and cost increases from fleet expense increase, which was impacted by lease costs and an increase in fuel price per gallon.

Looking at the numbers. The third quarter revenues of $487.7 million was an increase of 8.3% over the prior year's third quarter revenue of $450.4 million. 2017 Q3 included 2 months of Northwest revenue. Income before income taxes increased 8.9% to $89.9 million from $82.6 million in 2017. We are beginning to reap the benefits as anticipated from the historically high recurring revenue growth that we saw in Q2. Net income rose 29.6% to $66.6 million, and earnings per share increased 29.2% to $0.31 per diluted share compared to $0.24 per diluted share in the third quarter of 2017.

As we have discussed over the past few quarters, there were 2 unusual items that affected the profit numbers compared to historic prior quarters, as they will for the remainder of 2018.

The first was the enhanced employee benefits, which impacted the third quarter EPS by 0.01. As a reminder, and as John just mentioned, we improved our 401(k) match and provided onetime stock grants to many of our U.S.-based employees. These enhancements continue to be received very positively by our employees.

Additionally, the significant recent acquisitions increased our amortization of intangible assets for the quarter by 17.8%. Over the past 5 years, our average increase of amortization of intangible assets year-over-year has been 9.5%. Compared to last year, the significant increase also impacted the earnings per share by just over $0.005. And like our benefits enhancements, we believe is a tremendous investment for our future.

Moving forward, we will begin reporting EBITDA since that will be a more meaningful measurement at this time. For Q3, EBITDA was $106.7 million, up 10.2% over 2017. One of the key acquisitions that has caused the increase in amortization of intangibles is Northwest Exterminating. On August 1 of this year, we celebrated our 1-year anniversary with Northwest and it has been a great year. Financially, Northwest continues to grow revenue at level significantly better than our overall Rollins' average. Their unique advertising, which features the pesky mouth that many of you were able to meet at our recent Analyst Day, combined with their incredible service execution enables them to continue to gain market share.

One of the great byproducts of acquiring good quality companies is the fact that we learn from them, and we are also able to share things that we learned from other Rollins' companies in the past. An example of this is Northwest has grown their business with the Green Elite program, this industry-leading service offering combines green solutions for pest, mosquito and termite for those customers that prefer this type of treatment. These unique offerings have been shared with our other specialty brands to consider based on their geography and needs. One of the benefits that Northwest has obtained during the past year has been access to our talented IT group. Recent negotiations have enabled our Rollins' IT group to upgrade Northwest CRM and receive a healthy cost savings. This is one area of margin improvement that helps Northwest and all of us.

When addressing our company's geographic footprint, we have found opportunities to combine our Northwest business with other of our company's brands to streamline the customer offerings and become more efficient. We will continue to see these types of opportunities as our companies continue to grow.

Let's take a look through the revenue by service line for the third quarter. As discussed earlier, our total revenue increase of 8.3% included -- and included 3.2% from several acquisitions and the remaining 5.1% was from pricing and organic growth.

In total, residential pest control, which made up 42% of our revenue, was up 9.2%; commercial pest control, which made up 38% of our revenue, was up 5.7%; and termite and ancillary services, which made up approximately 20% of our revenue, was up 11%. Both residential and the termite segment benefited from Northwest and OPC acquisitions. Again, total revenue, less acquisitions, was up 5.1%, and from that, residential was up 6.7%, commercial increased 2.5% and termite improved by 6.5%, but residential growth rate is the fastest since Q1 2017 and was positively impacted by the mosquito growth that John mentioned.

In total, gross margin for the quarter was 51.6%, up from 51.4% prior year's quarter. The quarter benefited from improved efficiency in routing and scheduling technology as stops per mile improved by over 5% in September, even as we have lapped our routing and scheduling efforts from a year ago. This helped alleviate the increased fleet expenses that we saw for the quarter. Fleet expenses increased $1.8 million or 10.7% for the quarter, driven by higher price per gallon cost and increased lease vehicle expense. Personnel-related costs were up to the 401(k) plan match and the stock grants that we announced earlier.

Depreciation and amortization expenses for the third quarter increased $2.6 million to $16.9 million, an increase of 17.8%. Depreciation increased $900,000 due to acquisitions and equipment purchases, while amortization of intangible assets increased $1.7 million, due to amortization of customer contracts included in several acquisitions.

Sales, general and administrative expenses for the third quarter increased $10.1 million or 7.5% to $145.1 million or 29.7% of revenues, down 0.3 of a percentage point from $134.9 million or 30% of revenues for the third quarter of 2017. A decrease in the percent of revenue is due to lower administrative salaries and sales salaries, which increased lower than revenue as well as lower advertising as a percent of revenue and reduced professional expenses as we wrap up various projects.

As for our cash position, for the period ending September 30, 2018, we spent $77.7 million on acquisitions compared to $127.9 million the same period last year, as we continue to find good quality pest control companies and continue to buy back Critter Control franchises. We also had $91.7 million on dividends, an increase of 22%.

We have $19.6 million of CapEx, which was up 14.1% from 2017, primarily from planned IT investments, such as our BOSS Canada rollout and the Northwest acquisition. We ended the period with $118.7 million in cash, of which $53.6 million is held by our foreign subsidiaries.

Last night, the Board of Directors approved a 3-for-2 stock split of the company's common shares. The split will be affected by issuing 1 additional share of common stock for every 2 shares of common stock held. The additional shares will be distributed on December 10, 2018, to shareholders of record at the close of business on November 9, 2018. Fractional share amounts resulting from the split will be paid to shareholders in cash.

In addition, the board declared a regular quarterly cash dividend of $0.14 per share, plus a special year-end dividend of $0.14 per share, both payable December 10, 2018, to shareholders of record at the close of business November 9, 2018. Dividends will be paid on pre-split shares.

Before I turn the call back over to Gary, I'd like to thank those of you that made the time to join us for our 50th New York Stock Exchange event. We truly enjoyed spending time with you and hope that you found value in the time spent with our team.

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

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

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Thank you, Eddie. Well, 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) Your first question comes from Michael Hoffman with Stifel.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [2]

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When we think about the organic growth and you shared a little bit of this with us in prior quarters, how we should think about margin pressure from, you add new customers, you're not profitable initially then they get incrementally -- increasingly more profitable. So can you frame your organic growth, how much was new customer versus outright price? And also, talk about where we are in renewals or retention because those are the 2 sort of points leverage into the margins going forward?

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

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Yes, Michael, thanks for the question. So we don't break out the specifics of the price and the new customer by quarter. We just -- we'll kind of talk about that at a high level. I will tell you that retention -- we had a really good retention quarter. John and team continued to make improvements in the area of reducing cancel customers. The service levels continue to be improved, and I think that as well as the communication we have through our technology is helping to make that overall customer experience better. So retention definitely a positive for us. We continue to add new customers, and our pricing has probably stayed relatively intact with what we've seen in previous quarters somewhere between that 1% and 2% range.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [4]

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Okay. And when you frame retention good, did it get better in 3Q versus a year ago, or Q2? I mean, so...

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [5]

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It did get better. And we've seen incremental improvements in our retention over the last, probably 8 quarters now, but Q3 was -- took even a little bit of a better positive step there for us.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [6]

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Both year-over-year and Q-on-Q, so it was a sequential improvement as well as year-over-year?

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

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Correct.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [8]

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Okay. And then ASC 842. Given that you leased lots of equipment, how do we think about what that means to the business model from us modeling in 2019? What are the things that you should be telling us to think about today?

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [9]

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So we don't have any numbers at this point in time to share with everyone. We have leases of vehicles. We have leases of facilities, and we also have some other outlined leases, such as things like uniforms and different things like that. So we're still working through that process. We'll be prepared as we're moving forward in future calls. At this time, we don't anticipate there being anything materially different, but as we have more information, we'll share that with you.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [10]

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Okay. And then one last question is there something organic growth...

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [11]

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Michael, let someone else take a question. And if you could, we'll get you back into the queue. Thank you.

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Operator [12]

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Our next question comes from James Clement with Buckingham Research.

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [13]

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Gary, it seems to me -- I mean, I just reading some industry stuff, it seems like the pace of merger activity among -- even smaller players in the industry, just local players, seems to me to have accelerated. Does that have any ramifications on your acquisition strategy going forward? And what do you think might be explaining some of that? I mean, some of it is just demographic like people just getting ready to retire or something -- it doesn't have -- those second Tier or third-generation to take over the business, what's going on there?

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Gary W. Rollins, Rollins, Inc. - Vice Chairman & CEO [14]

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Well, I think the last case is certainly there that you have aging owners, and in some cases, with no heir that's really particularly interested in the business. I think that's one of the motivations. There's a lot of interest and activity in the acquisition area. There is -- some of the international companies are realizing what a good market that North America is, and that's probably accelerated some of our efforts in energy. But the great thing is, is the last couple of deals that we made, we were the only suitor because of the reputation that we have in an absorbing these new companies versus the other guys. In fact, one of the things that we do is give them the phone numbers and say, call these other acquired companies and see if they're happy or not. So we just kind of stepped on the gas a little bit, and we're particular though -- I mean, we don't want just anything, we -- it's foolish to buy a very low-price company when one of the things that drives our success is the fact that we charge good rates for the business that we do. So we have to find the right individual, the right company and we're working hard at it.

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [15]

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Okay. John, I think you were the one making the comments around unemployment rate being low and recruiting and all of that kind of stuff. I think you mentioned your retention rate among technicians is still very high. How has your message in recruiting changed over the years? How do you convince the millennial that the pest control industry is right one for them?

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John F. Wilson, Rollins, Inc. - President, COO & Director [16]

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That's -- Jamie, that's a great question that we're always working on that. I don't know how you would answer that as far as millennials go. I mean, that is the largest group that we hire today than long. So we're still continuing to -- or we are continuing to attract a good many of them. So our retention is slightly up. It's a little pressure. We just have to turn over a lot of rocks and keep looking harder and harder.

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Operator [17]

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Our next question comes from Chris McGinnis with Sidoti & Company.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [18]

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Can you maybe just talk a little bit more about the growth in mosquito, maybe how penetrated that is throughout the network itself? And it sounds like you feel pretty confident going forward with the strength of growth. Maybe just a little bit more around that, why is that rate or at a pretty high rate?

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

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Yes. Chris, thanks. This is Eddie. So we've offered the mosquito product for several years, but it's not been one that we really had put a lot of time and effort into from a coordinated basis on the marketing and the operation side. And -- so those that were kind of on the forefront were out there trying to work and win the mosquito business. But now that we have marketing that has really put a good push on, the operators are on the same page. 2018, we saw a really good first step forward. We saw it in several of our brands, Orkin, Northwest, HomeTeam as well as other brands that were out there that had good growth. And I think that we'll continue to see that as we've seen this momentum start in 2018. I think we'll continue to see this as we move forward in time. John, I don't know if anything else you want to add as far as that's concerned?

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John F. Wilson, Rollins, Inc. - President, COO & Director [20]

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Yes, I do. Our technicians have always -- we've always relied on them offering that service for our customers as opposed to advertising, Eddie touched on that. And so penetration has been not that great in many markets, but probably, Northeast is where we started with it first. And so that's probably the greatest as well as Southeast. So those are the 2 areas to answer your question about what's our market penetration. We just have a ton of opportunity both -- still in those 2 markets as well as elsewhere.

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Gary W. Rollins, Rollins, Inc. - Vice Chairman & CEO [21]

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Nice answer. And I think the health risk has also created greater demand. I think you read about these articles almost every other week that there's been more mosquito-related health problems. We don't really see that. Even the CDC has not given us any attention or assurance that, that's going to change. I think it will -- we think it will just continue to pick up, plus the customers are highly satisfied with this service. I mean, we're really giving them their backyard back, if they can barbecue and enjoy a better lifestyle when the mosquitoes are not keeping them in the house.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [22]

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Okay. Appreciate that color. And then one other question, just on the organic growth rate and the new customer wins. Do you have any color in terms of where they customer beforehand or they not have a solution prior to you coming in? You said you will give a little color on that offhand.

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [23]

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Yes, Chris, this is Eddie. So we'll have some of both. We'll have share of wallet and a piece of that can be exactly what we're just talking about with the mosquito. So they're an existing pest control customer of ours. We cross sell them mosquito, and so we pick up new revenue at that point in time. But we also are incrementally taking some market share. I talked about this specifically in Northwest and the gains that they are seeing in the markets that they're in. But we're seeing that with some of the other companies as well. So both -- I think it's really both that are going out for us.

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Operator [24]

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Our next question comes from Sean Kennedy with Nomura.

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Sean Michael Kennedy, Instinet, LLC, Research Division - Research Analyst [25]

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I've got 2 quick questions. First, could you comment on the deceleration in commercial? Is that -- does that have anything to do with the hurricanes or in general?

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

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Yes, so we -- I don't think we know if it's impacted by the hurricanes. The second hurricane would have probably the more impacted in the current quarter. The Q3 that we had this year, we're comping the biggest growth that we had in 2017 of any other quarters. South has a little bit of it. And then we're also going to -- always have a little bit of lumpiness kind of in between the quarters as well. When you look at the full year, it's absolutely in line with what we've seen over the previous, probably, 3 years now.

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Sean Michael Kennedy, Instinet, LLC, Research Division - Research Analyst [27]

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Okay, great. And then I was also wondering if you could comment on the recent revenue trends for HomeTeam, especially if you've seen any near-term deceleration due to recent slowing in housing economic data?

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [28]

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We've not seen any slowing at all with HomeTeam. They have over 1 million customers that we put the -- or they put system the tape system in. So even if housing does slow, which, of course, we know it will at some point in time, they have a database to be able to go and win new customers even without new homes being built. So they're constantly working on that. They also have a very robust mosquito business. And then also, in the termite business, that we've talked about before, the pretreating for the termites as well as the recurring termite service. So the Taexx is what they're known for and they are the big thing that they do, but they also have other revenues that they've been very successful with.

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Operator [29]

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Our next question comes from Tim Mulrooney with William Blair.

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Timothy Michael Mulrooney, William Blair & Company L.L.C., Research Division - Analyst [30]

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Can you give us a quick update on your tech initiatives, where are you at in terms of deployment of VRM, Orkin 2.0 and maybe the BOSS system and Orkin Canada?

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [31]

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Yes. So I guess, we can start with the last one first. So BOSS system and Orkin Canada, they're on track for us to be able to see something early 2019. So we've gone through -- we're going through the development, going through the adjustments that need to be made for currency, for frequency of services, for some different service lines. But we feel like we'll be able to see something rolled out pretty well early '19, which means we should be able to see some type of benefits towards the end of '19 for Canada. As far as the other initiatives are concerned, we continue to test and roll out the new visibility that we're going to have for our customers, that we talked about when we were at the Stock Exchange Analyst Day. We're continuing to get good feedback from customers with that, that are feeling better about the communication that we're giving them and kind of giving them a better overall customer experience. The virtual route management, I talked a little bit about the improvements that we saw in September having to do with our miles. And that's even after lapping this over another year. So over 5% gain in September alone on top of what we had seen in the previous year. So all the initiatives continue to move forward well. The IT team is staying on top of the request from the operation side to make sure that we are using BOSS most efficiently and most effectively. And I think, on average, the IT group gets and implements 100 small upgrades on a monthly basis. So they're constantly just fine-tuning and tweaking it just to make it a little bit better and a little bit easier to use and a little bit more customer-friendly for us, so continued positive momentum in those areas.

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Timothy Michael Mulrooney, William Blair & Company L.L.C., Research Division - Analyst [32]

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Got it. Moving on, maybe one more. Eddie, a lot of services-related industries are highlighting higher labor costs and lower labor availability as key issues to consider, particularly when forecasting margins. So maybe can you just remind us what your total labor costs are as a percentage of sales? And maybe what has been the increase in labor costs this year? Or maybe how much -- did you quantify how much it's pressured gross margin in the quarter, just any other detail?

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [33]

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Yes, I'll say it's not enough for us to highlight that as a headwind. So it's really -- it's kind of stayed intact based on our revenue growth overall. And as you know, a lot of our operations are working kind of on a productivity basis. So it makes more sense for them to use this technology that we have in place for them to be more efficient to drive less and to be able to work more, and they're getting a little bit of a benefit -- where they're getting the benefit of that from the pay perspective when they get an opportunity to do more jobs. So we're really not seeing that as a headwind at this point, but we'll continue to manage that. The thing that we got to make sure that we're staying ahead of is retaining the employees best we can because, of course, there are costs that are related to hiring -- to finding and hiring new employees. But again, it's not something that we would be even listed out as a top 3 or 4 item on any of our cost-related areas.

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Gary W. Rollins, Rollins, Inc. - Vice Chairman & CEO [34]

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Can I add to that?

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [35]

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Please.

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Gary W. Rollins, Rollins, Inc. - Vice Chairman & CEO [36]

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One of the reasons that we increased our benefits, people hold benefits certainly equal if not higher than compensation or their pay -- take-home pay. So we made a pretty big move as far as improving the 401(k) and scholarships and stock to our North American employees, which we think will make a big difference both in recruiting and retaining our employees. The other thing that we're proud of is how well the stocks done. We have about -- well, 85% to 90% of our employees are in the 401(k) plan. So when the stock goes up, their assets go up and their retirement benefits go up. So we think we've got a lot of things working for us that some of the others really don't. It was amazing how a few people really took the tax money and spent it, invested with their employees.

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Operator [37]

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Our next question comes from Paul Fanelli with Gabelli Research.

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Paul James Fanelli, G. Research, LLC - Research Analyst [38]

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So on the second quarter call, you called out some higher startup costs associated with the growth in recurring revenue. Has that been -- has that trend continued in Q3? Or have those sort of recurring revenue started to mature at all?

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [39]

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Yes. So we did see -- if you take a look at the income before taxes and the income after, you'll see we had a little bit of an acceleration compared to Q2 in the year-to-date number. So we are seeing some of the benefits from the historically high Q2 recurring revenue growth that we saw, but we did see our recurring revenue growth in Q3 grow at a higher-than-average rate. So we're continuing to see positive in that area, not -- again, not to the same degree we saw in Q2. So we saw a little bit of benefits that have -- of the maturity of that, that have started. And our anticipation would be, we'll continue to see that as we move into Q4 and as we move into next year.

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Paul James Fanelli, G. Research, LLC - Research Analyst [40]

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Okay, great. And then just as a follow-up, you discussed sort of the continued trends with the Boss systems and VRM being able to offset some fuel costs, I think you said 5% improved in mileage. Can you put -- give any color around how much decrease in leasing costs and fuel costs that has been able to offset?

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [41]

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So we didn't -- so we haven't broken that out. It did not offset 100% of it. We had -- our price per gallon was up $0.56 year-over-year, which is a significant increase. So we did not offset that, but it offset more than half of it, I'll say that.

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Operator [42]

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(Operator Instructions) We do have a follow-up question from Michael Hoffman with 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 I would like to follow up on one of the questions that was asked earlier on this margin. You're investing margin in growth, but we saw that compression in the first half, we're starting to see some margin expansion in the second half. How do you frame? How we should see the end of the year? Do we end up flat with a slightly positive bias an EBITDA? Or does this accelerate? I'm trying to just understand where we gain some of this operating leverage as you benefit from some of the growth?

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

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Michael, I think, flat to slightly positive is what we'll see as we finish out the year. And then I think as we go into 2019, we'll see a little bit more acceleration from that. The time that we see the benefits from this recurring revenue is after the third to fourth service. So based on service frequency that the customer has, it will depend on when we will see the benefits from that. So again historically, high growth rates in Q2, if you look at in every other month, that customer, you can do the math as far as when we would really see the benefits. And then, again, in Q3, like I just mentioned, we saw above average recurring revenue growth, which will -- which we will see positive improvements from as we move forward as well, so...

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [45]

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Okay. And then tying that margin story to your 401(k) investment, the intention was you do it in '18 at that level and then it stays at that level in '19. So I should see -- I get a benefit of that in the '19, all else being equal?

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

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Yes, that will be correct. Yes, the stock option as well. So the stock options were a onetime event. But incrementally, you're right, we will have already lapped that on the 401(k).

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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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Right. And am I -- did we calculate it correct? It's about 60 basis points of pressure on margins, was the benefit of that?

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

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I think it was a little bit more than that, but I don't have that number on the top of my head. We can take a look and see what that is.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [49]

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Okay. And one last one, thank you for your patience. Where are you able to use technology and the things like bait traps seems like that where you're -- to help this labor and leverage thing, particularly in commercial, where instead of having to look at all 25 bait traps, you only have to look it before something went in and chewed on the bait. And where are we in the progress? And you bringing technology there to help drive labor utilization, helping hiring issues as well as the people?

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [50]

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Yes, Michael, we'll take this as the last call for you -- or I'm sorry, the last question for you. We continue to look at the opportunities from a technology perspective. We continue to look at all the different opportunities that are out there. We've tested, I believe, probably every single opportunity that's out there. We want to make sure that we are understanding what the best opportunities are. This is just a human business at the same time, making sure that we have the right connection with our customers is an extremely important part. So we're going to continue to make sure that we understand what technology benefits exist, and where that would make sense, we will go through and we put those in place. We really only had the most opportunity, where we have the Boss operating system, but we don't have that at all places as well, but we will positioned when and if there is a need from a market perspective to be able to put that in place.

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Operator [51]

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Our next question comes from James Clement with Buckingham Research.

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James Martin Clement, The Buckingham Research Group Incorporated - Analyst [52]

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Eddie, my recollection is, I -- excluding the noise from the Tax Cuts and Jobs Act in the fourth quarter of last year -- your fourth quarter of last year, my recollection was very, very strong. Is there anything we need to think about as we model the fourth quarter from a year-over-year perspective that hasn't come out on the call yet?

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [53]

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I don't believe there's anything that hasn't come out in the call. I think the last question when we just talked about the recurring revenue and where we'll see the improvements on the profitability side, I think we'll continue to see that help us in Q4 and moving into next year. I think based on everything we know right now, those are probably the most impactful items. We still don't have a full view of everything from the hurricane. We don't anticipate it being anything material based on what we know right now.

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Operator [54]

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(Operator Instructions) Our next question comes from Tim Mulrooney with William Blair.

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Timothy Michael Mulrooney, William Blair & Company L.L.C., Research Division - Analyst [55]

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Eddie, I think, maybe you said this in the prepared remarks, but how many companies have you acquired year-to-date? And what was the total cash paid?

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Paul Edward Northen, Rollins, Inc. - Senior VP, CFO & Treasurer [56]

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The number is 34. I'm looking to see if we have the number here. I don't think we said the number of companies, but we can take a look real quick and dollars we do have. I believe it's $77 million -- that's right, yes, it's $77 million this year. It was $127 million last year because we had Northwest that we purchased last year. So $77 million so far this year, and we'll take a look to see if we have the companies, but of course, that will be made available once we have our 10-Q available, the number of companies will be available.

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Operator [57]

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There are no additional questions at this time.

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Gary W. Rollins, Rollins, Inc. - Vice Chairman & CEO [58]

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Okay. Well, thank you all for joining us today. We appreciate your interest in our company, and we look forward to reporting our fourth quarter and year-end results in January.

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Operator [59]

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Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.