Good day, and welcome to the Rollins Incorporated First Quarter 2020 Earnings Conference Call. Today's conference is being recorded. And at this time, I would now like to turn the conference over to Marilyn Meek of MWW Group. Please go ahead.

Thank you. By now, you should have all received a copy of the press release. However, if anyone is missing a copy and would like to receive one, please contact our office at 212-827-3746 and we will send you a release and make sure you are on the company's distribution list. There will be a replay of the call, which will begin one hour after the call and run for one week. The replay can be accessed by dialing 1-844-512-2921 with the passcode of 3596058. 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, 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?

Yes, Marilyn. Thank you and good morning. We appreciate all of you joining us for our first quarter 2020 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 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 31st, 2019 for more information and the risk factors that could cause actual results to differ.

Thank you, Eddie. We find ourselves in a place that none of us could have ever imagined when we last spoke. Needless to say, in our over 50 years as a public company, we have never encountered anything close to this pandemic. Many refer to the economic crisis of 2008 as the closest example that we've had. But from my perspective, this virus is a totally different animal. Its impact is multifaceted, and we found ourselves in unchartered waters. Prior to the last two weeks of March, our pest control service and sales were very positive and on track. However, as the virus began to expand, we started to see a reduction in the demand for our services. Initially, California shut down early, and we saw our business affected immediately. Further impacted by the hardest hit state, New York, and other states shut down randomly until the end of the quarter. As you would expect, we were not able to cut our expenses enough during those final two weeks to adjust for the revenue drop. Revenues for the first quarter grew 13.7% to $487.9 million compared to $429.1 million for the same quarter in 2019. Net income was approximately $43.3 million or $0.13 per diluted share compared to $44.2 million or $0.14 per share for the first quarter last year. On the positive side, we experienced growth in all of our business lines in the quarter: residential up 18.6%, commercial pest control rose 8%, and termite and ancillary services grew 17.4%. A couple of other bright spots during the quarter, mosquito sales and service began as the weather warmed. As a result, we saw record-setting growth in that business line. We also saw a strong revenue increase in our wildlife business, which increased double-digits over last year. Eddie will provide greater detail on this as well as other financial results shortly. You're entering what is traditionally the high pest season. All of our domestic and global facilities remain operational. However, commercial account retention and commercial sales results have been negatively impacted. Residential pest control demand remains positive, and with termites, it's too early to judge the season. Overall, commercial pest control has been the most negatively impacted by the virus. Commercial spans multiple verticals, including healthcare, food processing, logistics, grocery, retail, hospitality, and others. Each of these industries is being impacted differently due to COVID-19. The hospitality, retail, and restaurant business has been the most adversely affected, whereas we continue to see improved demand in healthcare, food processing, logistics, and grocery. The business is facing an all-time concern about the transmission of germs. We're pleased to announce last month that Orkin began offering a new disinfectant service called Orkin VitalClean. This new service will help businesses quickly and thoroughly suppress a number of serious pathogens that could endanger their employees and customers. The VitalClean service has the potential to positively contribute to revenue and profit this year. John will provide more details on this new service. Our company has implemented numerous proactive and defensive actions to address the current business challenges and the impact of a pandemic. While there are uncertainties regarding the duration and total effect of COVID-19, we anticipate our business will generally mirror the economy, which will be across the nation as regions, states, counties, and cities begin to open up. The actions that we have implemented take into consideration both the short-term impact and longer-term effects to follow. As the pandemic situation evolves, we will continue to evaluate our actions, their impact and adjust the business accordingly. Before turning the call over to John, I want to acknowledge our employees and their importance. Our people are our greatest asset, and we couldn't be prouder of them as they have quickly adjusted to the pandemic. We're experiencing an unprecedented time in our history, and our people are rising to the occasion in extraordinary ways. We're taking our responsibilities seriously as we've been deemed an essential service provider by the Department of Homeland Security. With this distinction and as the world's largest pest control company, we have an extremely important role during this critical time. Protecting people's health and property and the public's well-being is an essential assignment. I'll now turn the call over to John for more details.

Thank you. As Gary noted, we are certainly in very challenging times, and we are quickly responding to the impact that COVID-19 is having on our businesses, employees, and customers. Our people on the front lines of this pandemic have performed heroically, taking care of their customers and each other during this time. The services we provide are considered essential, so we are continuing to service our residential and commercial customers where possible. This holds true for our global operations as well, and we are continuing to do business in accordance with each country's guidelines. Our focus over the past weeks has been on ensuring that our employees around the globe are safe and that we are providing them with the protection they need to service their customers responsibly. Rollins has purchased and provided our technicians and other employees that interact with customers with disposable personal protective equipment, including masks, gloves, shoe covers, and protective outerwear. This is an ongoing investment that we believe we will continue to make in order to keep our employees and customers safe, in line with this new normal we are all facing. The highest priority during this difficult time is and always will be the safety and security of our team, especially on the front line. To help ensure this, we have provided a companywide increase to our paid time-off program for all full and part-time employees. Full-time employees will receive up to 80 hours of PTO for emergency leave during this coronavirus pandemic, and our part-time team will receive 40 hours if they should need it. Our people can use this time for their own personal care or for a member of their immediate family who has tested positive or has been quarantined for a suspected case of the virus. We believe these measures will provide our team with the help and support they need while protecting their health and the safety of those around them. Given current business conditions, we have temporarily furloughed a number of employees in both field operations and our home offices. The furloughs will allow us to rehire these employees as demand improves, and in the meantime, we are providing full employee benefits for those affected. Additionally, Rollins has suspended merit increases for the corporate staff, along with management salary reductions in both field and home office positions. Front-line team members have not been impacted by these salary reductions. As Gary noted, Orkin and many of our other brands are now offering a new disinfection service that will quickly and thoroughly eliminate a wide variety of serious pathogens. Large-scale disinfection is imperative to keeping establishments where people shop, eat, and work as sterile as possible and disease-free. Orkin's VitalClean is an effective option for reducing risk and helping restore a safer and healthier business environment. The Orkin program trademarked as VitalClean uses an EPA registered disinfectant labeled for use against a wide variety of pathogens and is included on the EPA's list of approved products that meet their criteria for use against SARS-CoV-2, the coronavirus that causes COVID-19. When applied in accordance with the product label by trained service professionals, this powerful disinfectant will kill 100% of bacteria and viruses on hard, non-porous surfaces and will sanitize soft porous surfaces. We are very excited about the potential for this service for both our existing and potential customers. And now, I'll turn the call over to Eddie.

Thank you, John. Our press release on April 20 gave you some insights as to what we knew at that time related to the impact of COVID-19 on our business. Today, we will report on our Q1 actual results and add some insights to what we know today. Before I begin, I would also like to thank our over 15,000 employees that have adapted to a new way to work and support our customers, as well as those that have helped and supported our impacted employees and our communities. We want to thank them for their efforts. We will truly be getting through this together. As I go through the results of Q1, there are some items that were already being felt in our numbers. As Gary mentioned, the slowing of our commercial pest control revenue, and as John highlighted, an increased expense related to protective personal equipment or PPE for all customer-facing employees. While we patiently stood in line for PPE behind those first responder groups at the most critical need to ensure they receive first, we began accumulating masks and other items to ensure the safety of our employees. For the quarter, all of our service lines showed growth, and key to the quarter included higher material costs and supplies as mentioned with the personal protective equipment, the launch of our new commercial disinfectant service Orkin VitalClean and our initial round of cost containment in our field operations and home office locations. In addition to reporting our Q1 numbers, my focus today will be to share what we know at this time related to Q2. Looking at the numbers, the first quarter revenue was $487.9 million, an increase of 13.7% over the prior year's first-quarter revenue of $429.1 million. Income before income taxes was $55.4 million, or 1.2% below 2019. Net income was $43.3 million, down 2.2% compared to 2019. Our GAAP earnings per share were $0.13 per diluted share. EBITDA was $79.2 million and rose 9.2% compared to 2019. Our Q2 numbers will begin to normalize as we lock Clark in May of this year. The impact of the initial Clark acquisition to our net income for the quarter includes depreciation of $1.4 million, mostly due to buildings and added vehicles, amortization of intangibles of $3.1 million, and interest expense of $2.4 million. As we've mentioned earlier, we began aggressively purchasing PPE in Q1 along with the equipment and supplies needed for our new disinfectant service VitalClean. These two items along with the transition to new more diversified pest product suppliers impacted our materials and supply costs for Q1 and will impact the business for the remainder of the year. Let's take a look at the Rollins revenue by service line for the first quarter. Our total revenue increase of 13.7% included 8.6% from Clark and other 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 18.6%. Commercial pest control, which made up 38% of our revenue, was up 8%; and termite and ancillary services, which made up approximately 20% of our revenue, was up 17.4%. Also of note, as Gary mentioned, our wildlife services were up strong double-digits. Again, total revenue less acquisitions was up 5.1%, even with the slowdown during March. From that, residential was up 6.1%, commercial ex-fumigation increased 2.1%, and termite and ancillary grew 11%. There are two items that I'd like to note. As Gary mentioned, the continued growth of our mosquito service at record levels continues to drive our residential revenue. This quarter eclipsed last quarter with double-digit increases as we also experienced the fastest termite and ancillary growth in the past six years. In total, gross margin reduced to 48.5% from 49.4% in the prior year's quarter. The quarter experienced increases in several categories, mostly driven by Clark in the categories of service salaries, administrative salaries, and personnel related for our 401(k) match. Additionally, materials and supplies were up as discussed earlier. But moving the impact of Clark, gross margin improved to 49.3% in 2020. Depreciation and amortization expense for the quarter increased $4.9 million to $21.6 million, an increase of 29.5%. Depreciation increased $2 million due to acquisitions, vehicles acquired, and equipment purchases as mentioned earlier, while amortization of intangible assets increased $2.9 million due to the amortization of customer contracts from several acquisitions including Clark. Sales, general, and administrative expenses for the first quarter increased $18.3 million or 13.1% to $157.9 million, or 32.4% of revenues, down one-tenth of a percentage point from $139.5 million, or 32.5% of revenues for the first quarter of 2019. The decrease in the percent of revenue was primarily due to administrative salaries, sales salaries, and personnel related all growing at a slower rate than our revenue growth, offset by higher insurance claims and maintenance and repairs due to scheduled IT projects. Our cash flow continues to remain strong at this time. Our conservative move in reducing our dividend will further improve our balance sheet and will add flexibility as needed for the future. There are currently more unknowns than knowns around the economic impact of the virus, and this step along with the others that we have taken will further prepare us to come out of this time in even stronger financial shape for the future. Finally, related to cash, as our top priority, we have continued with our M&A activity around the globe with completed acquisitions in March and plans for more in the second quarter. As for our cash position for the period ended March 31, 2020, we spent $47.6 million on acquisitions compared to $7 million at the same period last year. We paid $39.3 million on dividends and had $6.7 million of capital expenditures, which was slightly higher compared to 2019. We ended the period with $92.6 million in cash, of which $64.2 million is held by our foreign subsidiaries. Before I wrap up, I want to share the pandemic-related impacts that we are aware of that will be ongoing. As most of you know, our payroll and benefits are just over 50% of our costs and are extremely variable based on our revenue levels. The two other major cost categories are fleet at about 7.5%, which is slightly less variable than payroll, and materials and supplies, which is also about 7.5% and variable based on revenue. Here are a few items and approximate impacts to consider for the second quarter. First, the cost items for the quarter. We'll have additional materials and supply expense, which will be between $2 million and $3 million for the PPE for our customer-facing employees, and this will be ongoing for the foreseeable future. Costs for the benefits for furloughed employees will be between $300,000 and $500,000, and we will update as we know more in future quarters. The cost of additional paid sick and leave time related to COVID-19 will be between $350,000 and $600,000, and we would anticipate that amount reducing in future quarters. Offsetting these higher costs for Q2, we have cost containment or reductions implemented in April, which will impact Q2 between $18 million and $22 million. These include discretionary cuts in payroll, some of which John mentioned. Capital expenditure cuts to only essential products to run our business. This will reduce our historical percent to revenue by about one-tenth of a percentage point or $700,000. We're moving into our mosquito and termite seasons, as Gary mentioned, which will help improve our route density and improve efficiency. Finally, the launch of VitalClean with early wins around the globe in industries such as food, housing, hospitality, fitness, and transit. As a specific example, we just signed the British Columbia Transit system in Canada. As shelter-in-place rules change in the coming months, we anticipate demand for our pest services and the new disinfectant to rise, and we are well-positioned to adapt as those changes occur. Until that time, we will continue to study and adjust our cost structure as needed. Finally, the Board of Directors approved the temporary reduction through our cash dividend to $0.08 per share that will be paid on June 10th, 2020, to stockholders of record at the close of business on May 11th, 2020.

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

And we'll take our first question from Mario Cortellacci with Jefferies. Please go ahead.

Thank you. Hi, everyone. I hope you are all doing well and staying safe. I think the most important thing for investors to understand is the exit rates at the end of March. Can you provide more details and quantify the organic growth for residential and commercial at that time? Additionally, how has that trended throughout April? Do you believe we have reached the bottom at this point? What expectations do you have for the rest of the quarter based on April's trends?

Yes. Mario, I’m reluctant to pass on the first question. It's difficult. On the residential side, as mentioned in our press release, we are still experiencing strong demand. For the commercial side, we are aware that some of our customers have been affected. We have either suspended some customers or they have suspended services with us due to a lack of need. The reason I am hesitant to answer your question is that we cannot predict which of these customers will return. We have some insight regarding larger customers, but we are uncertain about the smaller businesses. Their return will depend on their individual economic situations. It's too early for us to provide any predictions on this. As Gary mentioned regarding termites, that aspect remains stable as well. However, the residential sector is certainly showing the most promise, and we will offer more details as we observe developments in the coming months. At this point, we are still unsure of what the commercial side will look like.

Okay. And then, even during, say, the exit in March, can you share any color on that?

Well, you look at the end of March and then you look at what that flowed into April. So, by the end of March, New York was shut down, California was shut down, a few other major states were shut down, but then you had other states that were beginning that shutdown process or shutting down portions of what they had going on. So, I just don't think that it's going to be fair for us to be able to even share that because I don't really know what that's going to look like. I know it's anecdotal. And if you need to go bowling, you can come here to Georgia because we have bowling alleys open, but we also have restaurants that are opened up. I know it's anecdotal, but we took a little poll this morning of my folks here and I said, okay, how many folks went to a sit-down restaurant since we've opened back up, and no one raised their hand. So, we just don't really know what the impact is going to be even as we're opening back up and what the impact is going to be longer term for these businesses to be able to stay in business.

Got you. Okay. And then just one more and I'll turn it over. On the disinfectant business, it's a very interesting idea, and I'm just wondering if you can share some of the success that you might have seen. I've heard that you believe there has been more success in Europe compared to the U.S. in the early days, probably due to COVID impacting Europe earlier. What do you think this business looks like in the long-term? Considering that people tend to have a very short memory, do you think this business will accelerate in a year from now, or do you think that because people have short attention spans, they might forget about the COVID situation, causing it to lose traction or relevance in a year or two? What’s your take on that?

Well, prior to 9/11, we could always walk through an airport and we could just go get on a plane. And then after 9/11, that changed for all of us, forever probably. And I don't think we know exactly what the outcome of this will be at this point in time. I think in the near term, I think all of the things we've seen from the different states that are opening up have some form of a recommendation for cleanliness. We're trying to go through and talk about what makes sense for the verticals, where to spend our time from a sales perspective with that. Some are going to need that just to be able to get customers back in the door and feel comfortable. Now, what I think is the question that we don't know is, what's going to be mandated as we move forward in time as far as cleanliness.

Yes. This is John Wilson, by the way, if I may add. I think Eddie hit the nail on the head with the mandated portion. I think there’ll be certain industries, maybe hospitals, healthcare, and food processing that may well be mandated, and there are some others that it's strongly recommended by the various government entities, health departments, maybe most especially. So, it's hard to say, but I do think it can be fairly significant for us where the early returns are terrific in terms of what our people are managing to add to their customers with.

Okay. Thank you so much.

Our next question will come from Tim Mulrooney from William Blair. Please go ahead.

Good morning, everybody.

Good morning, Tim.

Good morning, Tim.

Can you shed some light on your end market exposure in the commercial parts business? I understand you don't want to give any insight into the growth rates through April, but what would help me and others maybe model because we have to model something, right? Specifically, I'm curious what percent of your commercial business is restaurants and hotels, which are likely under significant pressure right now?

Yes, we've never broken that out. We're not going to break that out by vertical, and a lot of that's just going to be from a competitive standpoint. We don't want to put ourselves in the crosshairs of other competitors being able to step into those areas, but we have a good strong cross-section of all the different verticals. If you'll go back to previous calls that we've had having to do with this topic, we've talked a lot about moving into verticals such as healthcare, food processing, and logistics, and we've discussed that over the past couple of years. So, we've had a strong concentration in those areas. But there's no question that we have a very strong cross-section of all those different ones as well as a decent amount of large customers with a large performance of small and medium-sized customers as well.

I understand that you don't want to share specific details for competitive reasons. I'm just trying to find out if any sector makes up more than 25% of your commercial business or if you can confirm that no sector exceeds a certain percentage of your business. Any information in that regard would provide investors with assurance that you're not overly reliant on any particular market.

I think your last statement is spot on. We are not overweight in any individual vertical that is out there. We have a relatively diversified set of verticals and have percentages in those relatively diversified as well.

Okay. Because I read an article recently from specialty consultants, which does market sizing. I think in there, it said something like 40% of the commercial business is restaurants. So, it's fair to say that your end market mix does not necessarily match that of the broader market?

Your statement is correct. And I would be interested to understand the data behind what you read there. That's what I understand about what's out there in the industry. But your statements correct.

Okay, cool. Thank you very much. I'll get back in the queue.

Okay. Thanks.

And we will take our next question from Seth Weber with RBC Capital Markets. Please go ahead.

Hi. Good morning. Hope everybody's well. I guess maybe a question for Eddie. Can you just talk about what you're seeing on the collection side? Are you seeing customers delay payments? Are you doing anything to ensure just the quality of your receivables or anything like that? And then I just had a follow-up on the M&A comment. Thanks.

Yes. So we shored up our reserves a little bit on that side, just to make sure. We do have a pretty healthy diversified customer base as well, and we really concentrated on higher income to be able to not only sell a product that sells more than one product. We're seeing that band or income band of customers not being as impacted from a collection standpoint. So I think it's still a little too early to be able to say one way or another on that, you know, we're just three or four weeks into the unemployment checks and people still having relatively full income. But we're being a little cautious with that and we're putting more resources into that area to do the best that we can at this point.

Okay. Thanks. And then just going back to your comment on.

Just one more thing, just one more thing with that, you may or may not know, there are certain states that have put mandates in place where you are not allowed to collect, and we're complying as we should for all of those states.

Right.

So you probably already know about all those and we're complying as we should for all of those states.

Okay. Thank you. And then just following up on your M&A comment, can you just characterize if valuations have started to come down across the group here, over the last couple of months relative to where they were?

I would say the number of sellers are much less than what we've seen in previous times. I would say that valuations for those that are still in the market are probably coming down as well, with fewer players in the market. Some of our direct competitors have said publicly that they are not in the market. While we're not necessarily aggressively going out there and looking, we're absolutely being open and opportunistic.

Yes, I would agree with all of those statements. I do see valuations maybe coming down a bit, simply because there aren't as many buyers in the market at least right now.

Okay. It's very interesting. Thank you, thank you guys. Appreciate it.

Our next question will come from Michael Hoffman with Stifel. Go ahead.

Hi. Thank you all for taking the questions, and I'm glad everybody is safe and you all have done the right thing by your employees. Can I ask a clarification question first, if I may? I'm scribbling the numbers down as fast as I could when you were talking, but when you said $18 million to $22 million cost containment, is that an annualized number or is that for the quarter savings?

That's for the quarter. That's for the quarter. And that's going to include some of the categories that John talked about having to do with payroll. We really didn't go into a lot of the details on the discretionary cuts that we've made, but that would include those two categories, discretionary and payroll.

So, just so I'm clear. If I took the high end of materials and furloughs, and PTO, I mean, that's kind of a $4 million headwind, and I got an $18 million offset.

If that's just the math, yes. I don't have that, that's transcribed.

I just want to make sure I understood correctly. My question has two parts, but I’ll try to keep it as one. Residential lead generation seems to be performing well, and when this lead starts, do you anticipate receiving calls from commercial clients? For example, they might reach out to ask for what I would refer to as an additional service, specifically a restart service-related activity.

Yes. I'm sure John can weigh in with a lot more specifics to that, but I'll just start by saying. I think we see customers in a few different buckets. One is they're doing their normal service that they would have, either because they are fully in business or they're in some sort of partial business. I think we have another bucket that have completely stopped at this point in time because they don't have anything at all going on. And I think we have a third bucket, which is kind of a hybrid, which let's just say they maybe received a service once a week, they might now be receiving a service every other week or every three weeks just to keep things relatively intact at this point. By customer, we're trying to accommodate as best as makes sense for them, especially for those that know they're going to be opening up relatively soon, they don't want to make a decision that they're going to open up on, let's just say, May 1st, they haven't done anything for four weeks, and now they have an infestation that they have to go through and deal with. They don't want to have that situation. So, I think those are kind of the buckets of what we're seeing by the customers.

And Michael, we've seen a wide array of tactics by our customers to maybe defray costs. Some have chosen to suspend altogether, some have chosen to reduce frequency, and some have continued with their service even though they may be shut down knowing that they don't want an outbreak of a pest problem. We've had one of our big retailers that had put us on suspend but has already notified us to re-begin or begin service in May. I would suspect that we will have quite a few that as we're coming back on, we'll get us in there before they open.

Okay. That's what I thought, giving a little pop from that and then back on to a normal trend.

Yes. Thank you.

And there are no further questions at this time.

Okay. No other questions?

I would like to add a comment. We understand that there are many uncertainties, and I know you are all aware of them as well. However, I believe we have responded swiftly. We have three promising areas for growth: our termite season, our mosquito season, and the VitalClean initiative. It is difficult to gauge the potential of VitalClean, but the initial 30 days have been quite promising, and our residential pest control leads remain robust. There are numerous factors at play, making it challenging to predict outcomes. One reason we decided to take action regarding our dividend was to ensure we are prepared for the future. Those who have followed the company know we typically adopt a conservative approach, and I believe we are positioned better than anyone in the industry to navigate this situation. We will continue to work diligently and improve, and hopefully, we will witness a positive turn soon. I’d like to express my gratitude to all of you for joining us today. We appreciate your interest in our company. We hope you and your loved ones stay safe and well, and we look forward to providing updates in our second quarter call. Thank you.

And this concludes today’s conference. Thank you for your participation. And you may now disconnect.