Exhibit 99.1
ROLLINS, INC.
Fourth Quarter Conference Call
February 17, 2004,10:00 a.m., ET
Financial Relations Board
Chairperson: Marilyn Meek
Operator Good morning, ladies and gentlemen, and welcome to the Rollins
fourth quarter conference call. At this time all participants are
in a listen-only mode. Following today's presentation
instructions will be given for the question and answer session.
If anyone needs assistance at any time during the conference,
please press the star followed by the zero. As a reminder, this
conference is being recorded on Tuesday, February 17, 2004. I
would now like to turn the conference over to Ms. Marilyn Meek
with Financial Relations Board. Please go ahead, ma'am.
M. Meek Thank you. Good morning, everyone, and thank you for joining us
today for Rollins conference call to discuss fourth quarter and
year end results for 2003. By now you should have all received a
copy of the press release. However, if anyone is missing a copy
and would like one, please contact our offices at 212-445-8453.
We will send one to you and make sure you are on the company's
distribution list.
There will be a replay of the call which will begin one hour
after the call and run for one week. The replay can be accessed
by dialing 1-800-405-2235 passcode 567293. Additionally the call
is being webcast live over www.viavid.net and a replay will be
available for 90 days following the call.
On the line with us today for the call are Gary Rollins,
President and Chief Executive Officer and Harry Cynkus, Chief
Financial Officer and Treasurer. Management will make some
opening remarks and then we'll open the line for questions. Gary,
would you like to begin?
G. Rollins Yes. Thank you, Marilyn. Good morning and welcome to our fourth
quarter conference call. Harry Cynkus is going to read our
forward-looking statement disclaimer and then we'll begin.
H. Cynkus Thanks, Gary. In order to help you understand the company and its
results we may make certain forward-looking statements. It is
possible our actual results might differ from any statements we
make today. Additional information regarding factors that could
cause such differences appear in the company's SEC filings
including its 2002 10-K as well as today's press release.
In the question and answer portion of today's call we will only
be responding to financial questions from analysts and portfolio
managers relating to the historical information for the fourth
quarter and year. Gary will now comment on the quarter and our
full year results.
G. Rollins We are pleased to have reported another strong quarter and year.
This is our 16th consecutive quarter of improved earnings and our
sixth consecutive year of improved earnings growth which reflects
the positive actions that we have taken to improve Rollins'
performance. The results that we've achieved in our forth quarter
were particularly noteworthy given that this has traditionally
been the company's slowest quarter.
In terms of revenue growth and net income year-over-year it was
our strongest quarter in 2003. The improvement overall that we
have experienced is primarily the result of improved productivity
and improved employee and customer retention.
Let me take a few minutes to highlight some of our programs and
what we're doing to expand our business and improve revenue and
profitability going forward.
As most of you are aware, we began our Every Other Month or EOM
service in 2000. This program continues to gain acceptance among
both existing and new clients. Thanks to improved and longer
lasting chemicals, we can now provide effective pest control
service while satisfying our customers' busy lifestyles with less
service frequency.
As of December 31st 55% of our residential customers had opted
for EOM. We expect to see further growth of this service offering
this year and beyond. In addition this has resulted in improved
technician earnings and productivity, lower fleet cost among
other efficiencies.
Recently mosquitoes have become a much more visible health risk.
The spread of West Nile Virus has made the public highly aware of
the potential deadly disease that these insects can transmit.
This past Summer, Orkin began test marketing a mosquito control
program in the Northern United States and Canada. While working
to address the threat of mosquitoes in select residential areas
in the U.S., a highly successful West Nile Virus prevention
program was implemented through government agencies in Ontario,
Canada. Two provinces were provided with thousands of larvicide
treatments to mosquito breeding grounds reducing the population
of adult mosquitoes and their eggs.
The company intends to expand the mosquito program in Canada and
other U.S. markets in the Spring of this year.
On the commercial pest control side of our business, Orkin
introduced the Gold Medal Protection Program in 2003. This custom
designed pest control service program is targeted specifically to
high-end customers, primarily in the food manufacturing and
processing industry. The program provides a comprehensive
reporting system that meets federal and state regulatory
requirements. Our technical reporting capabilities are augmented
by our guarantee of free retreatment if the customer's not
satisfied plus our commitment to pay any regulatory agency
penalties as a result of a shortfall in our service.
These guarantees in part are supported by the fact that we have
the first commercial pest control program of its kind in North
America to receive the ISO 9002 certification.
This past year we also introduced and have benefited from a
commercial pest control quality assurance program. This program
helps insure consistent service while improving our personnel and
build stronger customer relations. The program utilizes floor
level inspections by Orkin QA inspectors while accompanied by
branch, region and on occasion, division management staff. This
initiative is supported by a new commercial pest control
expectations manual that was developed for our branches to
clearly understand the company's commercial service commitment.
Our locations and people who provide this service are audited
against this manual.
The counterpart of this commercial pest control quality assurance
program was introduced for termite control in 1997 and has proven
very successful in improving our termite service and customer
retention.
We believe that our commercial business represents the greatest
potential for long term growth for Rollins through increased
market penetration and longer customer relationships. Many of our
new sales and technical initiatives, including a handheld
computer application as well as this quality control program that
I mentioned, have been developed with that objective in mind.
The Orkin franchise program has continued to expand in the U.S.
and internationally. During 2003 we added our second
international franchise in Panama and now have 44 Orkin
franchises. We expect this program to continue to grow and look
forward to repurchasing the mature businesses in the future.
Orkin continues to be one of the most highly recognizable brand
names in the United States where seven out of 10 people surveyed
mentioned Orkin first when asked to name a pest control company.
We are committed to preserving and building this brand awareness.
I'll share with you some of the work that we've been doing in
this regard.
This past year we introduced our "If it bugs you, bug me"
integrated radio and local point of sales advertising campaign.
This program was supplemented by creative point of sales pieces
for the company's service technician. This material was used for
clover leafing for new prospects to build route density in
neighborhoods where they have existing clients. Orkin is also
reaching out in big metro cities to the largest minority group in
the U.S., the Hispanic market, with its new Spanish radio spots
and collateral material.
In order to better understand our customers and prospects during
the past year, Rollins initiated market research efforts to help
identify specific residential pest control market segments. Three
segments were determined to be ideal new customer groups for
Orkin.
These are sectors that the company believes offers the best
opportunity to create long and prosperous relationships. All of
these groups were willing to pay a higher price for a pest
control service that meets their needs. These prospects indicated
a desire for a company with a strong positive reputation and one
with the most professional and knowledgeable technicians. They
also want to do business with a company whose service will be
safe for their children and pets and a firm that is responsive to
their requests. These are all attributes that Orkin delivers
every day; however, we must do a better job communicating them to
our prospective customers.
Our new local expert television and radio advertising campaign is
a refinement from last year and conveys a message that our people
are members of your community and your neighbors. With Orkin you
get all the benefits of a highly professional company with your
service performed by people who live where you live.
To effectively and efficiently achieve sales goals in today's
highly competitive environment, sales representatives have a
greater need for new technology to help them improve their
productivity. Orkin began testing automated sales management
software this past year and will continue to work in this area in
the new year. This software is currently being used to track the
sales process, allowing the sales pipelines to be easily reviewed
by management and to capitalize on opportunities that are readily
identified.
Account information, sales statistics, contact information,
future tasks and events are tracked by location with upward flow
to the sales management organization. The reporting and
forecasting features also enable management to have a better
overview and expectation of the entire sales network.
The company has also reorganized its marketing department to
include business development managers, BDMs, for our operating
division. Each BDM is responsible for linking sales activity to
our sales plan creating a market development plan for future
customer growth and retention for their specific divisions. They
will provide an advocacy, if you will, by working with local
management to ensure the success of their divisions as it relates
to sales training, new customer marketing and sales plan
achievement.
Last year we successfully launched our new intranet which
provides for quick and efficient communications between the field
and home office. Significant cost savings are being realized by
providing material safety data sheets and product labels to our
My Orkin intranet. This is a very important requirement that
enables instantaneous compliance with state and federal product
use regulations.
The Orkin training department now has a state-of-the-arts means
to better communicate the availability of a comprehensive array
of training tools and reference materials through the My Orkin
training site.
The My Orkin Marketplace was created for our branches to more
efficiently order promotion materials.
Lastly, company technician and technical forums are available to
create a method of sharing knowledge on our new website.
In 2003 Orkin began to outsource some of its pesticide and
material distribution by utilizing a new branch internet system
that simplifies ordering. Test branch sites are now receiving
shipments from a source near their location more frequently and
timely which reduces the carrying cost of excess inventory and
shipping costs.
The global positioning system, GPS technology, first introduced
three years ago has resulted in improved driver safety and
service productivity. Now newer generation GPS units are being
installed that allow 24/7 monitoring and reporting of speed,
location and seatbelt usage as well as allowing remote updating
of mapping software. This new technology also details the route a
service technician takes rather than just noting stops. These new
units create reports that are easier to read and allow data to be
sent directly to a server with no removable chip to be taken out
at the end of the day.
Although this new equipment is being utilized in just some of our
locations, we are optimistic that it will be a building block to
create a comprehensive routing and scheduling system in the
future.
In the Spring of 2003 Orkin was recognized by Training Magazine
as one of the top 100 companies to excel in training and employee
development. In addition, Orkin was one of only five companies
selected for the magazine's Editor's Choice award. The award is
given to select companies that have created positive learning
environments for their workforce.
Orkin attained further recognition this year for its training
achievements by winning first place honors for the Best award
given by the American Society for Training and Development. The
Orkin Training Center located in Atlanta was specifically
referenced as evidence of the company's dedication to employee
improvement.
The Orkin Training Center has a full sized house and several
other real examples of building structures where technicians can
see the relationship between pest and home construction. They can
also simulate pest treatments under the supervision of qualified
instructors. In the classrooms technicians acquire guidance in
customer relations, pest problem solving and advanced technical
skills through highly interactive instructor led training.
In 2004 the company plans to expand the training center to
include hands-on instructional areas that represent actual
customer account facilities with additional classroom space and a
media production facility.
To summarize, we have many programs introduced in 2003 that will
only get stronger in the new year. I'd like to now turn the call
over to Harry who will walk you through our financial performance
for the quarter and year. Harry?
H. Cynkus Thank you, Gary. In the fourth quarter of 2003, we grew our net
income by 60.6% to $6 million, or 13 cents per diluted share
compared to net income of $3.7 million, or 8 cents per diluted
share for the fourth quarter of 2002. Net income for the fourth
quarter 2003 included gains from the sale of assets of
approximately $1 million net of tax, or 2 cents per share. This
gain was partially offset by a year-to-date adjustment in the
effective income tax rate of $300,000.
In terms of revenue growth, the fourth quarter was our best for
2003. Total revenue was up 3% to $158.5 million. For the same
period in 2002 we reported revenue of $153.9 million. We saw
growth across all of our business with higher growth in termite
and commercial.
Gross margin for the quarter was 45.3% compared to 44.0% for the
fourth quarter of 2002. The improvement in gross margin reflects
ongoing improvement in technician productivity as well as
reduction in material and supply costs.
We enjoyed some improvement in our insurance and claims costs as
well. We continue to see reductions in the number of new as well
as open termite claims.
Sales, general and administrative expenses as a percent of
revenue in the quarter increased from 36.6% to 37%, all due to
the true-up of some sales program costs.
Taking a look at results for the full year, net income for the
year increased 36.2% to $36.9 million, or 80 cents per diluted
share compared to net income of $27.1 million, or 60 cents per
diluted share for 2002. Revenues increased by $11.6 million to
$677 million over revenues of $665.4 for the full year 2002.
The 1.7% increased revenue for the full year and 3% in our fourth
quarter were primarily the result of our continued emphasis on
customer retention and building recurring revenues.
Commercial and residential pest control had modest growth this
year. Termite revenue decreased slightly for the full year
primarily as a result of the cold and wet weather in the majority
of the U.S. in the Spring of last year.
Gross margin for the year was 46.5% compared to 45.7% for 2002.
The improvement in gross margin reflects continued improvement in
technician productivity and reduction in material and supply
costs. While improving technician productivity, we have been able
to increase average pay which leads to better employee retention
and, in management's opinion, improved customer retention.
For the full year sales, general and administrative expenses
decreased .7% margin points, declining to 34.9% of total revenues
compared to 35.8% for the prior year. This improvement was the
result of the home office process improvement initiative started
in 2002, lower field administrative costs as a result of
technology and organizational investments and lower sales payroll
due to lower staffing. The formation of inbound call centers and
lower bad debt expenses resulting from better collections and
improvement in receivables aging statistics also contributed to
this improvement. These were partially offset by an increase in
our sales program costs.
The tax provision of $23.1 million at December 31, 2003 reflects
higher pretax income and a higher effective tax rate versus prior
year periods. Prior to the fourth quarter of 2003 the effective
tax rate was 38%. In the fourth quarter we had to adjust the rate
to bring 2003's effective tax rate to 38.5%. The higher rate
reflects an increase in state income taxes. This increased the
tax rate for the fourth quarter to 41%. We expect the effective
tax rate will approximate 38.5% in 2004 as well.
During 2003 we continued to strengthen the company's already
strong balance sheet. At December 31, 2003 Rollins had cash and
short term investments of $59.5 million and marketable securities
of $21.9 million for a total of cash and marketable securities of
$81.4 million compared to $38.3 million at the end of December
2002, 112.5% increase. This strong cash position gives us the
ability to pursue opportunities to acquire select pest control
acquisitions.
We ended the year with $46 million in unearned revenues, up
approximately 7% at the end of the year. Since the company
recognizes revenue at the time services are performed, this
balance represents customers who have paid us in advance. This
includes pest control customers who take advantage of our year in
advance discount program and base monitoring customers who are
required to pay a year in advance.
Our accrual for termite contracts that represents the estimated
cost of re-applications, repair claims and associated labor,
chemicals and other costs relative to termite control services
performed prior to the balance sheet date totaled $43.9 million
at year end, a decrease of $2.6 million from last year. The
decline reflects the approximately 10% fewer claims opened in
2003 versus the prior year as well as a 30 plus percent decline
in the number of open claims.
Also of note, we choose to make a $9.8 million voluntary
contribution to our pension plan in the fourth quarter. Due to
the combination of the contribution and improved investment
returns, the year end fair value of pension assets now exceed the
plan's accumulated benefit obligations requiring us to reverse
the last two years of additional minimum pension liability that
had been recorded through retained earnings as comprehensive
expense. This increased our retained earnings by $16.1 million in
the fourth quarter but had no P&L impact.
On December 31, 2003 we had total assets of $353 million and
stockholder's equity of $140 million. We are almost debt free,
with $1.7 million in debt.
Lastly, in 2003 the company paid a total of $9 million in cash
dividends, or 5 cents per quarter. On January 27th of this year
the Board of Directors approved a 20% increase in the dividend to
6 cents a quarter. This is the second consecutive year in which
the Board has approved an increase in the dividend.
Gary, I will now turn the discussion back over to you.
G. Rollins Thanks, Harry. I hope I conveyed earlier that we are continuing
to invest in our business in order to provide the very best
customer service available at a reasonable cost. At the same
time, we remain committed to increasing sales growth and
profitability through our sales and service programs all of which
should translate into increasing value for our shareholders.
We're now ready to open the call to any questions that you might
have.
Operator Thank you, sir. Ladies and gentlemen, at this time we will begin
the question and answer session. If you have a question, please
press the star followed by the one on your pushbutton phone. If
you'd like to decline from the polling process, please press the
star followed by the two. You will hear a three-tone prompt
acknowledging your selection. Your questions will be polled in
the order they are received. If you are using speaker equipment
you will need to lift the handset before pressing the numbers.
One moment please for our first question.
Our first question comes from Steve Benault with Craig-Hallum
Capital. Please go ahead with your question, sir.
S. Benault Good morning, everybody.
G. Rollins Good morning.
S. Benault Would you mind providing a little bit more color on the true-up
of the sales program costs in the fourth quarter?
H. Cynkus We, at the end of each year, estimate our marketing costs as well
as some of our sales program costs. Last year we had a small net
credit of under half a million dollars. This year we had a small
net charge that was a little more than a half million in the
other direction. It was actually a little more than a half
million dollar expense versus the credit we had last year, so you
have a swing in comparing the quarters.
S. Benault A swing of a million. Although is there anything else going on
within that line item because on an absolute basis you guys were
sort of realizing year-over-year declines on an absolute basis in
terms of dollars and it was a little bit of an uptick. Is there
any incremental spending related to anything that we should be
aware of?
H. Cynkus No. I think the fourth quarter is somewhat higher because of the
true-up and the lower revenue that falls in the fourth quarter
and we would expect it to continue as it has in the past.
S. Benault Do you feel comfortable providing detail regarding the segments
if you talk in terms of residential, commercial and termite, what
sales did in the quarter?
H. Cynkus Typically the stock in general terms, in the commercial and
termite we had positive gains (I don't have the numbers in front
of me here). The residential you're not going to have typically
many customers in your fourth quarter. Termite I think was
stronger in the fourth quarter than we've seen previous but
that's a result of we've been selling now for five plus years
contracts that expire and what we're now doing is we're cycling
the first expiring contracts this year. We have the opportunity
to resell termite customers that we didn't see in previous years.
That has both a positive and a negative impact; i.e., you lose
the customers and the contract expired but it does give you an
opportunity to resell valuable protection that they need for
their home.
S. Benault But if we say residential was down and I understand there's some
downward suppression on the residential.
H. Cynkus I didn't say residential was down. I'm just saying we saw the
growth primarily as I mentioned in the termite and commercial
side, the stronger growth there. We had 3% growth in the quarter.
Those two sectors were over 3 and residential was under 3.
S. Benault Okay. The mosquito control you reference in the press release
you're working with various health and government officials.
What's the nature of those working relationships?
G. Rollins Are you referring to the comment I made about the label
requirements and so forth? Canadian, I'm sorry. Canada has a
little bit different situation than we have in the U.S. in that
the government takes a more active role in pest control and
there's greater funds that are available to provide pest control.
PCO Services, our company in Canada, has responded and cultivated
relationships with two provinces up there where the government
has funded in those areas a proactive approach to mosquito
control. We would love to think that would happen down here but
the nature of just the way that the government works in Canada is
different than it is down here.
What we're doing down here is we're going to be targeting some
local municipalities and seeing if we can create that kind of
interest in more affluent local municipalities.
S. Benault So in Canada it appears as if there's an opportunity to work on
it from a commercial perspective with your mosquito control
program?
G. Rollins Right. Canada just has a lot more relationships with the private
sector as far as pest control service in general and I think it's
just the nature of the country more than anything else.
We were encouraged with the residential testing that we did and
we also think there's some affluent municipalities in the United
States that might take that type of interest. As far as going
into any broad territorial areas, a state or a big metropolitan
area, we really don't think that we have that same opportunity
from a government perspective in the United States.
S. Benault Thank you.
Operator Thank you. Our next question comes from James Clement with Sidoti
& Company. Please go ahead with your question.
J. Clement Good morning, guys, how are you?
H. Cynkus Fine, Jaimie.
J. Clement A quick question for you. I know that over the last I don't know
12 to 18 months, perhaps even longer, you've talked about in
reasonably specific terms some sales initiatives that you have in
place and that you commented on in the beginning. I would assume
that it would take a little while for the initiatives and the
training involved in those initiatives to actually get to the
branch level, get to the technicians, that kind of thing. If you
could talk about residential and termite and commercial and give
us a sense of whether the people that you need to be up and
running on those initiatives are up and running or are we only in
the third inning of this process? Is that a fair question?
G. Rollins I think it's a good question. And I think you're right, we have
been playing defense for a long time and only recently have
really gotten into a sales growth mode and one that the company
has done successfully in the past but not more recently.
The BDMs that I referred to earlier are certainly for the most
part new. There's a couple of more experienced individuals that
are involved, but the majority of them are new and so it's going
to take them a while to build relationships and start making an
impact.
I think you've got probably a different situation.
Commercial-wise we're a little bit more nimble there because we
don't have as many people to influence so I would expect that we
could see some more positive movement there a little bit quicker.
Harry alluded to the expired termite contracts. I would expect to
see some good progress made in that area just by the phenomena of
the fact that we have a fairly significant number of customers
whose guarantee and coverage has run out. This is the first time
that we've had that kind of a situation. Pest control is going to
be probably the most challenging because it's the bigger number
to move but we had a very good December. We saw a lot of the
results of these programs that I've mentioned and I would imagine
that our progress will just continue to build throughout the year
but it's certainly not going to leap off the starting block, so
to speak, as far as the first quarter is concerned.
J. Clement Thanks. Harry, let me ask you a quick question. I know that in
your press release you lumped your long term accrued liabilities.
If I look back at the balance sheet as of the end of the third
quarter, it looks like that number is down reasonably
substantially. Are the two things going on there the voluntary
pension contribution and the lower accrual for termite clients or
is there something else there?
H. Cynkus No, that's primarily it, the pension payment. Last year we had a
liability recorded for the minimum pension liability. Because of
the funding now, that has to be reversed. The decrease in
pension, there's some reclasses between short term and long term
on the termite but there's nothing else really substantial
happening.
J. Clement Thanks. Let me ask just one quick question. I know that going
back a year or so people had asked you questions as to whether
you would consider an Orkin brand of home pest control products,
that kind of thing. I don't think we've heard much about that
from you in the last couple of quarters. Is that something that's
still being considered?
G. Rollins Yes, it's still being considered. We really couldn't make the
numbers work. If you looked at a royalty kind of situation, we
just couldn't find a situation that economically made that much
sense for us. We have to be very careful that we don't
cannibalize the service that we offer. One of our ideas was that
we would go into the flying insect product line which you really
wouldn't be competing with your service.
When we really peeled the onion back, so to speak, we did not see
the economics that offered us the kind of benefit that would
warrant some of the other problems it would create as far as
marketing our service.
One of the things that we are very much interested in is some
type of couponing and we have talked with some of the major
manufacturers as far as an alliance that would position us as far
as acquiring a new customer as a result of the consumer's
inability to get the desired results.
Our research has indicated that our typical customer has a couple
of cans of products under their sink and what that tells you is
that they try it but they just can't make it work because they
don't have the discipline and they don't really know exactly what
to do with it. We really think that we may have some
opportunities in the future working with some of the leading
manufacturers in offering work in coupons as far as a package and
be able to get the leads and convert those to new customers.
J. Clement Thanks very much. I will let other people have some questions.
Thanks.
H. Cynkus Thank you.
Operator Thank you. Our next question comes from Michael Freedman with
RBC. Please go ahead with your question.
M. Freedman Good morning.
G. Rollins Good morning.
M. Freedman I had a couple of questions for you. Looking back over the past
five years, you all have obviously done a phenomenal job of
increasing your operating income margin, it looks like from
negative to 8.6% on a kind of slow, less than 3% revenue growth.
Just a couple of questions around that.
First, where do you think your operating income margin can
ultimately go? How much more room is there on this front? Second,
you talked about the decrease in termite claims but is there any
way you could give me additional comfort that we're not skimping
at all on our accruals, because obviously both accrued insurance
and termite accrual have gone down significantly over time which
has helped the margins.
Lastly, is there any additional warranty cost that Every Other
Month service creates in terms of people thinking they see bugs
in the second month and causing a truck roll or also is there any
warranty accrual for the Gold Medal Guarantee? Thanks.
G.Rollins Let me take the first one here, operating margin. I believe that
our operating margins can return to the 14% plus level that we
experienced in the early '90s, '93, '94 and I think '95 before we
got into the termite wars. Harry talked about the trends as far
as the claims were concerned and of course I touched briefly on
our quality assurance efforts there. So we really think that
we've got this termite thing behind us and that we can return to
historic margins.
H. Cynkus In terms of whether we're skimping on accruals, and I can assure
you I feel very confident that the accruals are properly set. We
do a lot of work with actuaries to develop estimates. They have
now well over seven, eight years of claim history. They work on
development factors, they look as to how the claims are building
by year that they were originally sold. It's audited extensively
by our auditors, Ernst & Young. And the reduction in the reserve
is really a reduction, reflects all the work that we've done
since 1997 to reduce our liability in that area and to bring the
costs within control.
I think it portends well for the business going forward because
it means that as I mentioned, we're seeing less new claims and
less open claims and if we can continue to reduce our claims
expense, it will certainly have a big factor on profitability.
Last year our termite provision was in excess of just over $20
million so it does have a big impact on earnings.
As to any additional warranty cost on Every Other Month service,
with the efficacy of the chemicals we moved from monthly to Every
Other Month, we look at the number of call backs because if the
bugs come back, we guarantee we'll come back. We have not seen
substantially any higher numbers on call backs with Every Other
Month versus the monthly service. I don't know if that's true if
we went to quarterly or not but we look at our allowances and
credits that we issue on the guarantees each month and those have
trended down over the last several years as well.
We don't see anything particularly at risk there. The customer
satisfaction as we measure it by retention is better on Every
Other Month than we saw with other service frequencies.
M. Freedman Great, thank you.
Operator Our next question comes from Louis Corrigan with The Cypress
Funds. Please go ahead with your question, sir.
L. Corrigan Harry, I've got two questions. The asset sale in the quarter, I
didn't hear what was sold. The second question, you have gotten
amazing efficiencies out of your GPS service. I'm wondering what
inning are we in, in terms of that in helping to drive margins?
H. Cynkus We had some surplus assets and we had a gain on one and some
losses on others. It wasn't really any ... we broke it out
separately because we don't expect them to be recurring.
In terms of GPS we're at, I wouldn't say at the front end of the
game but we're now actually rolling out the second generation. We
first put in GPS equipment three or four years ago. The
technology has gotten better with more and more capabilities so I
think today we're seeing a refinement.
We will continue to dial down and use the information to improve
service frequencies. Today the ability to actually map out the
route that the technician is taking versus what we would like him
to see and have a visual map of will certainly help.
I think it's an important part of our continuing to drive
productivity, it's one more tool in the toolbox. The big savings
that we saw in reduction of insurance cost and in accident claims
we're hoping to see continued incremental improvements there. We
can now monitor usage 24 hours a day but I think we're looking at
incremental and not huge steps.
L. Corrigan I guess that would mean getting to the 14% operating margin
becomes more and more a function of driving revenue. Is that the
right way to look at it?
H. Cynkus Yes. We believe we have a lot of gains still to come from
productivity. Almost half our cost is labor. The whole name of
the game here is managing that labor. Route density, we don't
make any money driving between stops and the more we can reduce
that drive time, the higher we can improve that productivity.
The sell-through of Every Other Month will continue. We've
mentioned a number of times consistently since the program was
started, 70% of all new sales have been Every Other Month. The
customer base is now up to just around 55% so we still have some
gains as the customer base continues expanding to Every Other
Month. But to continue to drive margins, we recognize we need to
grow revenue.
L. Corrigan Great, thank you.
Operator Thank you. Our next question comes from Thomas DiBella with
Turner Investment Partners. Please go ahead with your question.
T. DiBella Thank you. I have a question on the margins that you're talking
about. You were about 11.5 this year I think on operating margins
and it looks like historically you've been as high as over 14. Am
I correct in that?
G. Rollins Yes.
T. DiBella The question, also you had some added costs to supplies. Was that
mostly chemicals or was that fuel?
H. Cynkus We said our material cost was actually down.
G. Rollins We had a slight increase in fleet expense because of converting
to a new vendor and we had overlap. We had vehicles that were in
and vehicles that were coming, so there was some overlap of
vehicles in the transition.
H. Cynkus That was in the first quarter of the year. It affected us for the
total year but that fell in the first quarter.
T. DiBella What percent is materials, chemicals, fuel and that relative to
labor after you put it all together?
H. Cynkus It's typically, and it varies by type of whether it's a
commercial customer or a residential or whatnot, but in total
it's approximately 6% of revenue. It's a small component.
T. DiBella Thank you.
Operator Thank you. Our next question comes from Ryan Robinson with
Farallon Capital. Please go ahead with your question.
R. Robinson Good morning, gentlemen.
G. Rollins Good morning, Ryan.
R. Robinson Congratulations on a great quarter. You've done a great job
generating cash the past couple of years. I was wondering if you
could give us a little color on your plans for the cash and
specifically what we can expect in 2004 from the acquisitions and
stock buyback lines in comparison with the past couple of years?
G. Rollins I think from an acquisition perspective we're willing. One thing
that we learned over the last couple of years is that buying
small companies, really you spend a lot of effort but you don't
get a lot of benefit. The good news is that there's probably a
dozen $20, $50, $70 million companies out there. These are
typically good regional competitors, third generation ownership.
Some of them are going through a thought process about whether
they really want to stay in the business and we have done our
best to stay near these people and participate with them on
industry events.
We very much would like, that would be our first priority as far
as our cash is concerned and we would hope to be successful with
our endeavors but you just can't make them sell. We're trying to
encourage them to sell.
As you've seen in the past we have purchased our stock and we
have the authorization, what Harry?
H. Cynkus We still have authorization for about 650,000 shares in our share
buyback program.
G. Rollins And I think depending on the price of the stock and so forth,
that is certainly an option that we would consider, but our
number one priority would be to acquire some of these good
businesses.
T. DiBella Good, thank you very much.
Operator Thank you. Management, at this time there are no further
questions. Please continue with any further remarks that you
would like to make.
H. Cynkus That concludes our remarks. We thank everyone for participating
and we'll speak with you next quarter.
G. Rollins Thank you for your interest in Rollins.
Operator Thank you, gentlemen. Ladies and gentlemen, this concludes the
Rollins fourth quarter conference call. If you would like to
listen to a replay of today's conference, please dial in to
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