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Thank you, <UNK>, and good morning.
We appreciate all of you joining us for our first quarter 2018 conference call.
Eddie will read our forward-looking statement and disclaimer, and then we'll begin.
Our earnings release discusses our business outlook and contains certain forward-looking statements.
These particular forward-looking statements and all other statement 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.
Thank you, Eddie.
For the quarter, revenues grew 8.9% to $408.7 million, compared to $375.2 million for the same period last year.
Net income increased 20.5% to $48.5 million, or $0.22 per diluted share, compared to $40.3 million or $0.18 per diluted share for the same quarter last year.
Eddie will provide greater detail on the impact of our recently announced enhanced employee benefits, the tax rate changes and the other financial numbers in a few minutes.
All of our business lines experienced good growth in the quarter, with residential up 8.4%, commercial pest control grew 5.6% and termite and ancillary rose 16.2%.
We are continuing to expand our global footprint and are extremely pleased with the growing international presence for the Orkin brand.
We're accomplishing this through both company-owned acquisitions and our extensive and expanding franchise network.
During the quarter, we announced the addition of 4 international franchises in South America, Europe, the Middle East and Latin America.
All of these locations will offer commercial and residential pest control as well as termite service, where applicable.
The Orkin brand is now represented in 53 countries through 83 international franchises.
In the first quarter, we're also pleased to have acquired 2 additional fine companies in the United Kingdom, AMES Group and Kestrel Pest Control.
AMES, located in Birmingham, has a rich history of providing superior pest control, bird control and specialty services to the commercial customers throughout the Midlands as well as London.
Kestrel, located in the Eastleigh, Hampshire provides commercial pest control services to customers in Southampton and the surrounding areas of Southwest England.
Kestrel will ultimately merge with our Safeguard company.
Important to us is both of these companies share our commitment to continuous improvement in making an ongoing investment in training and employee development.
We're also pleased that the founders and the leaders of these 2 new companies will remain with AMES and Kestrel.
As we continue to expand globally, we look for external opportunities to promote our brand.
To that end, last month, we were privileged to be a gold sponsor of the Global Food Safety Initiatives, GFSI, at the Global Food Safety Conference in Tokyo.
This is a unique annual event and brings together the leading food safety specialists from over 50 countries dedicated to advance food safety practices.
The organization addresses the entire food chain from production to consumption, or as they like to say, from farm to fork.
This year's event had over 1,200 attendees, which was a record, and a number of our existing U.S. customers were represented with our international affiliates: Nestl\u0102\u0160, ADM and Land O'Lakes, to name a few.
We were representing 2 of our brands at the conference, Orkin and IFC, both leading providers of pest management services to the food industry.
We believe that customer engagement is paramount to our success, and this event provided a good opportunity in this regard.
Our presence in GFSI conference provided us with a great opportunity to strengthen relationships with existing customers and future prospects.
We believe that through participation in events such as this, we will continue to elevate our brand awareness around the globe.
Shifting our focus to the U.S. now, we are also pleased to have announced the acquisition of Louisville, Kentucky-based OPC Pest Services.
This leading pest control company was founded in 1972 by the late Lamon Blake and his sons, Donnie and Terry Blake.
I have known Donnie for a long time and have long admired the company he and his family have built.
As a result of their hard work, strong customer values and appreciation for every employee's contribution to their company, they are recognized as Kentucky's premier pest management company.
We're very excited to partner with them and look forward to working together to grow our business while sharing best practices.
We were especially pleased to announce last week, as a result of the U.S. tax legislation, <UNK> will be using part of these tax rate savings to improve our employee benefits.
<UNK> will review some of these details in a minute.
Additionally, we further strengthened our management team during the quarter with a promotion of 3 of our team members, who will be expanding their responsibilities with our company.
In January, Tom Luczynski was elevated to the position of President of Orkin Global Development and International Franchises as well as Assistant Corporate Secretary.
Since 2007, Tom has presided over the Orkin International Franchising Group and has led the company's expansion to over 53 countries.
In January, we also announced that Beth Chandler, <UNK>' General Counsel, has been appointed to the position of Corporate Secretary.
Beth joined <UNK> in 2013 as Vice President and General Counsel.
In 2016, she assumed responsibility for the Risk Management Group.
And last year, the internal audit group was added to Beth's responsibilities.
These moves will provide dynamics between risk, legal and internal audit.
In early March, we're pleased to announce that Julie Bimmerman was promoted to Vice President of Finance and Investor Relations.
Julie joined <UNK> in 2015 as Managing Director of <UNK>' Specialty Brands Accounting and was promoted in 2016 to manage the <UNK>' Finance Department.
Previously, she had worked at HomeTeam Pest Defense, where she served as Vice President of Finance and Corporate Controller.
In Julie's new role, she has added Investor Relations and the <UNK>' payroll group to her areas of responsibility.
Her ascension is a good example of <UNK>' benefiting talent-wise from these acquisitions.
Our congratulations and thanks go to these 3 individuals for the contributions they've made and will continue to make to our company.
I'll now turn the call over to <UNK> <UNK>.
Thank you, <UNK>.
Over the past few months, we have undertaken an extensive review of what actions other companies have taken as a result of the recent U.S. tax code changes.
Many companies chose to give employees onetime bonus ---+ bonuses or similar items that provide a onetime benefit to employees.
As a service company though, we have long recognized that our employees are our most important asset, and we wanted to do something that would have a longer-term effect for them and their families.
We believe our benefit improvements realize that goal.
Effective January 1, 2018, we improved the employee match to our 401(k) program.
Previously, we matched employee contributions 50%, on up to 6% of their contribution.
We now match 100% on the first 3% of their contribution and 50% for contributions above 3%, up to 6%.
As a result of benchmarking with other service companies as well as feedback from our employee survey process, we concluded that an improvement to our paid time off policies was warranted.
Adding one more floating holiday for our team members to use any way they wish was determined to be the best way to make improvements there.
<UNK> has always maintained a strong commitment to education.
And in that spirit, we are increasing the number of scholarship opportunities by 50% for our team members' children.
Each scholarship has a value of $12,000 over 4 years.
Last, we will reward our U.S.-based team members with a onetime stock grant of stock in <UNK>.
These grants recognized tenure and are being given on a tiered basis to employees of 2 to 10 years or more of service.
The stock is expected to be granted in May and will vest in 1 year.
During the quarter, we were also pleased to have announced that <UNK> and Northwest Pest Control were awarded the 2018 Top Workplaces honored by The Atlanta Journal-Constitution.
This was the second consecutive year that <UNK> has received this award and the seventh such award for Northwest.
This honor is based solely on employee satisfaction and engagement feedback gathered through a third-party survey.
The survey measures several aspects of workplace culture, including alignment, execution, leadership and connection.
At our core we are a customer service company, so our track record of success is a direct result of the efforts of the dedicated and caring people that work at <UNK>.
To quote Jerry Gahlhoff, VP of Human Resources and President of <UNK> Specialty Brands, this recognition challenges us to continually raise the bar.
We must strive to improve the work environment and reinforce our culture as we continue to build on our tradition of success.
We were also pleased for <UNK> to have been recognized by Training Magazine as a Top 125 Training Company.
For 12 years, <UNK> has been recognized ---+ excuse me, for 12 years, Orkin has been recognized with this honor.
This latest award recognizes all of the <UNK> Corporation for the quality, commitment and investment in training our people.
According to Training Magazine, the training top 125 ranking is based on a number of benchmarking statistics and is determined by assessing a range of qualitative and quantitative factors, including financial investment in employee development, the scope of development programs and how closely such development efforts are linked to the business goals and objectives.
Thank you, and I will now turn the call over to Eddie.
Thank you, <UNK>.
This is truly a transformational time for our company as we see technology continue to mature, achieve record revenue growth and, as <UNK> reviewed, we're making industry-leading investments in our employees through enhanced benefits as we recognize the difference they make each and every day.
The quarters' organic growth have been in line with our historical norm, but our overall revenue improvements have been strongly fueled by good quality acquisitions.
During the first quarter alone, we had 16 acquisitions for a total of over $40 million.
These acquisitions enable us to continue to become more efficient in our business model and will produce sustained growth for years to come.
There are only 2 other times in our company's history that we have seen M&A play such a critical part of our growth, the acquisition of Orkin in 1964 and the acquisition of HomeTeam in 2008.
I think we would all agree that these have been ---+ that these have worked out extremely well for <UNK>.
For the quarter, all of our service lines showed growth and highlights included: enhancements to our employee benefits program that <UNK> discussed, a significant increase in amortization as a result of multiple acquisitions and the strongest commercial revenue growth in the past 5 years.
Looking at the numbers, the first quarter revenues of $408.7 million was an increase of 8.9% over the prior year's first quarter revenue of $375.2 million.
Income before income taxes increased 3.4% to $59.2 million from $57.3 million in 2017.
Net income rose 20.5% to $48.5 million, and earnings per share increased 22.2% to $0.22 per diluted share, compared to $0.18 per diluted share in the first quarter of 2017.
There are 2 unusual items that impacted the profit numbers compared to the average quarter.
As we noted in our press release last week, the enhanced employee benefits impacted the first quarter by roughly $0.01 and was equated to about $2.3 million, and we would anticipate a similar impact in quarters to come for the remainder of the year.
This is a tremendous use of our portion of our tax savings.
As <UNK> stated, we invest in our greatest asset, our people.
Additionally, the significant number of recent acquisitions increased our amortization for intangible assets for the quarter by 40.8%, which is the highest percent increase since we purchased HomeTeam in 2008.
As a comparison, over the past 5 years, our average increase of amortization of intangible assets year-over-year has been about 5.1%.
Compared to last year, this significant increase also impacted the earnings per share by $0.01, or roughly $2 million after tax, and importantly, indicates a tremendous investment for our future.
If you exclude these 2 items that are unusual, our income before taxes would have been 10.9% improvement year-over-year and income after taxes would have risen 31.2%.
Let's take a look through the revenue by service line for the first quarter.
Our total revenue increase of 8.9% included 4.2% from several acquisitions, of which Northwest was the largest, and the remaining 4.7% was from pricing and organic growth.
In total, residential pest control, which made up 40% of our revenue, was up 8.4%; commercial pest control, which made up 40% of our revenue, was up 5.6%; and termite and ancillary services, which made up approximately 19% of our revenue, was up 16.2%.
Our commercial growth has trended higher over more than the last 5 years, but this first quarter displayed the fastest growth that has occurred during this recent time period.
Our commercial sales team continues to improve through a better selection process of people, enhanced training and continued improvements to our key technology, namely Biz Suite, our customer-facing presenting iPad presentation tool.
Our commercial operations are performing at the highest levels in the industry, and we see this through retention and new sales, especially in the areas ---+ the segment areas of hospitality, property management and restaurants.
We look forward to continued success in this area.
Again, total revenue less acquisitions was up 4.7%.
And from that, residential was up 4.2%, commercial increased 4.5% and termite improved 4.2%.
When you take a look at the quarter, taking out the impact of the foreign companies in currency, in total we grew 8.8%, residential grew 8.3%, commercial pest control was up 4.5% and termite and ancillary improved 16.8%.
In total, gross margin for the quarter was flat to last year at 49.6% for the quarter.
The costs related to the enhanced employee benefits impacted the first quarter by 1 percentage point.
Additionally, administrative expense was higher with the addition of our multiple acquisitions as well as increasing fleet expenses as gasoline costs were up an average of $0.25 per gallon compared to last year.
The quarter benefited from improved efficiencies and routing and scheduling technology, which reduced miles per vehicle by 5%, and also helped to lower service salaries as a percent of revenue.
Insurance and claims were lower than prior year as a percent of revenue as we reduced our litigated exposure.
Depreciation and amortization expenses for the first quarter increased $3.1 million to $16.9 million, an increase of 22.8%.
Depreciation increased $300,000 due to acquisitions and equipment purchases.
And as mentioned before, amortization of intangible assets increased $2.8 million related to customer contracts included in various acquisitions, which reduced our earnings per share by approximately $0.01 after taxes.
Sales, general and administrative expenses for the quarter increased $11.1 million or 9.8% to 30.9% of revenues, up 0.2 percentage point from 30.7% for the first quarter last year.
The increase in the percent of revenue is due to higher administrative salaries and personnel-related expenses due to acquisitions and fleet costs due to increased gasoline prices.
The increases were partially offset by lower insurance and claims expense due to reduced exposure in litigation.
As for our cash position.
For the quarter ended March 31, 2018, we spent $43.1 million on acquisitions, compared to $3 million for the same quarter last year and $30.6 million on dividends, an increase of 22%.
We had $6.1 million of capital expenditures, which was up 12.5% from 2017, primarily from planned IT upgrades and the Northwest acquisition.
We ended the quarter with $84.3 million in cash, down 48.1% from last year.
But as a reminder, we used all cash for our acquisition of both Northwest Exterminating and OPC.
As we mentioned on our Q4 call, we anticipate a significantly lower tax rate for 2018.
Our Q1 rate of 18% will be the lowest of the year, and we anticipate a rate in the mid-20s for the remainder of the year.
As a reminder, the Q1 rate is lower due to the impact of the stock-based compensation plan.
Last night, the Board of Directors declared a regular cash dividend of $0.14 per share that will be paid on June 11, 2018, to stockholders of record at the close of business, May 10, 2018.
This is a 22% increase over the prior year and marks the 17th consecutive year the board has increased our dividend by a minimum of 12%.
I will now turn the call back over to <UNK>.
Thank you, Eddie.
We're happy to take your questions at this time.
We were ---+ certainly, we were impacted primarily due to the snowfall.
The National Weather Service measures snowfall in the top 35 markets, and it was up over 30%.
So the snowfall and weather also affect demand, but they affect our ability to get around and service our customers.
So certainly, we're impacted.
Certainly, I can't say anything about the quarter ---+ the second quarter other than I've been in the business for 50 years and we always have a season [that can] drive you crazy when it starts off like this, but we have no doubt that the pest season will arrive.
This is Eddie.
So just to add on to that.
We try our best.
I mean, you're spot on as far as it impacting actually what's going on, but we try our best to take that away.
And <UNK> and team do a tremendous job continuing to hold the sales folks and the operations accountable to just find other ways to grow and to make sure you're retaining your customers and you're servicing them, even above and beyond the great service that they normally get, to make sure that we don't have ---+ and we reduce our turnover the best that we can to take that out of the picture.
But obviously, when the weather does get better, and it is going to get warm to <UNK>'s point, we hope to benefit from that as well.
So miles driven per vehicle is the measure that we reviewed.
So we've got the Orkin brands on our virtual route management tool, as I think that you know.
And this was part of an offset for our increase of the fleet expense overall.
By reducing our miles, we were able to reduce our gallons used and improve our time in front of the customer, for our technicians.
So we're seeing the maturity come to bear some good fruit for us.
Yes.
I'm not sure if we can use the previous quarter and this quarter and kind of extrapolate out from there.
I would just say that the maturity continues to pay dividends for us.
We've really concentrated on making sure that we're improving our on-time delivery, and part of that has been the use of the routing and scheduling and optimizing these routes.
And our operations have really done a tremendous job really, really almost throughout the entire U.S. I mean we've got ---+ we have over 500 branches and almost everyone is at the market we want to be at or significantly higher.
So we're reaping the benefits of that, and we know we've got more opportunities as this moves forward
One benefit that we have to look forward to is putting our routing and scheduling on all of our brands.
Currently, we don't have it in all of the brands.
And I guess Canada is the next one up, so we should be able to have similar benefits as we roll it out to other brands.
And Tim, the other byproduct that we see of this, as we continue to have a better on-time delivery of service as <UNK>'s group continues to do that, our customers are going to respond more positively to that.
So having the right technician on the right day at the right time at the customer's location because they're running this route correctly, saves us miles but also puts that right technician in the right spot, and we have a better customer experience because of that.
Well, I'll say that ---+ I'm sure <UNK> can talk about the operational side of that.
But from the sales side of that, the 3 keys that I talked about, the continual improvement of the individuals that we're bringing on from a sales perspective, having them use the technology almost without exception, is helping us in front of the customer.
And then the service that <UNK> and team are providing to the customer, they're not turning over, they're staying with us at a higher rate and it's giving something for our sales force to be able to sell better.
And as we talk about the industry in whole ---+ as a whole, unequivocally, we have, by far, the best commercial service that's out there.
And I think that some of our customers are seeing that, that may have had service with someone else that is out there, they're seeing the difference in the service that <UNK> and team are providing.
Yes.
<UNK>, thank you for the question.
The only thing I would add to what Eddie had to say would be that our national account sales team just had a terrific quarter with a 60% sales increase year-over-year.
And so the question is, will that sustain.
That's hard to keep doing quarter-over-quarter.
But I think with the added emphasis and focus those guys have on getting out and hunting up customers has helped tremendously.
So in addition to the field-based sales effort that Eddie referenced, our national account sales group did a great job, and a shout-out to them for that.
And <UNK>, <UNK> opened with talking about some of the international piece of our business, and we know today that's not a big part of our business that's growing.
But things like this Global Food Safety Conference, it puts us in a position to be able to have a wider or more global approach.
And as more customers come to us and they're looking for a global solution, we're in 53 countries and we have opportunities to be able to service from a global perspective.
So in some cases, from an RFP perspective, that's going to knock out a lot of others that don't have that global reach.
So as we continue to spend time and energy there, I think that's going to pay more positive dividends for us and give us more opportunity.
So I'll break that question down.
So when we talk about ---+ when we think about tuck-in acquisitions, we think about 10 to 12 to 15 technicians that we are able to take and put into an existing, say, Orkin brand or an existing HomeTeam brand, based on whatever and wherever they are.
And at that point in time, we were able to tremendously positively improve the efficiency, the density becomes better overnight.
So all of those things get better when we have a tuck-in acquisition.
For us in total, this quarter, with 16 total acquisitions, and I would say 12 to 13 of those were relatively tuck-in acquisitions.
However, the others, the names that you've mentioned there, such as a Northwest or an OPC, we run those as standalone brand.
We see the value in the company that we bought.
And we typically buy companies that are growing at a faster rate than our overall growth rate, which both Northwest and OPC are.
And frankly, they're doing a good job doing what they're doing.
So we're just going to share with them the benefits of opportunities and services, the buffet of opportunities and services that we have as an organization.
We want to learn from them.
We want to steal their good people like we've done with Julie, bringing her onto our team, such as we have with Jerry Gahlhoff, bringing him onto our team to do more.
So there's a lot of other things that happened with that.
But as far as density and efficiency and improvement of margin, the tuck-in acquisitions are going to continue to be able to provide that opportunity.
Did that answer your question.
Yes.
I think that's absolutely ---+ on the radar as we move forward in time.
And we'll go through each one of those.
We'll see what they have in place and see what makes sense as far as routing and scheduling in their individual ---+ company.
And if they have a product that is already working well for them, and then figure out what makes sense as far as the use of cash from there.
As <UNK> and <UNK> just mentioned, Orkin Canada is next for us and we've already started down that path with that, which is going to make a lot of sense for us, and we think we're going to have a good opportunity there.
But these other brands that you mentioned, we'll continue to assess those and we'll figure out where the best place is for us to spend our time and energy and see improvement.
Yes.
If there are no other questions, we'll go ahead and we'll wrap up.
I'm sorry.
We have one.
We have one more, okay.
Yes.
Well, I think that the ---+ if we just looked over our shoulder, the most recent ones, there's family dynamics that are involved.
Some of the family members want the money and some want to continue to work.
We've been very fortunate that we've been able to keep a lot of the principals and the leaders with the company ---+ their company.
Business has gotten more complicated as far as heavy investment in IT, a heavy investment in digital and the Internet.
And some of the companies are really kind of frightened by that.
As they become more sophisticated, you've got to rely more on technology.
And I think that's the turning point for them.
I think the values that they're getting today versus 2 years ago, they're getting more [multiples].
So that's been motivating some of the people that when they see the market improve as far as values are concerned, if they're on the fence, that's kind of the nudge that takes place to cause them to consider disposing of the business.
And we've got a wonderful reputation and that the people stay with us, and that's not the case in most of the other folks that we're competing with.
The retention of our people we acquired ---+ the promotions that the acquired are getting has really, I think, driven a lot of these great companies in our direction, and we're fortunate with that.
I would agree with your statement.
I think <UNK>'s point is, as companies hear about multiples that some other companies are paying, it's getting them think about, okay, maybe this is time, maybe this is something for us to think about.
And then as they learn more about do I go after that biggest check or do I go after an opportunity to be able to take my business and partner with somebody who has done this for a long time and lives up to their word, and that's when we win.
It's the latter one.
We're not going to necessarily be the one to write that biggest check, but we are going to live up to our word and we're going to keep people on that we say we're going to keep on and we're going to have them continue to run the business.
And <UNK> and ---+ Mr.
<UNK> have a track record of that for 50 years.
And I think that's the reason why people continue to come back to us over and over again and say you're the choice for us.
And for us, this quarter, 16 acquisitions, I think that's just a testament to exactly how companies look at that.
Okay.
Well, I'd like to thank you for joining us today.
We appreciate your interest in our company and look forward to updating you on our second quarter and our progress on the next call.
Thank you.
