Greetings, and welcome to the Rollins Second Quarter 2020 Earnings Conference Call. It is now my pleasure to introduce your host, Marilynn Meek. 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 1 hour after the call and run for 1 week. The replay can be accessed by dialing 1-844-512-2921 with a pass code 13705813. 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, Marilynn. Thank you, and good morning. We appreciate all of you joining us for our second 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 results 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, 2019, for more information and the risk factors that could cause actual results to differ.

Thank you, Eddie. Before talking about our results, I want to express how concerned and focused we are regarding the spread of COVID-19. We know many of you are experiencing the expansion of the virus in your communities, and we hope you and your family are doing well and remain safe. Now back to our second quarter. Revenues for the quarter grew 5.6% to $553.3 million compared to $524 million for the same quarter in 2019. Net income rose approximately 17.2% to $75.4 million or $0.23 per diluted share compared to $64 million or $0.20 per diluted share for the second quarter of last year. Revenues for the first 6 months of the year were $1.04 billion, an increase of 9.3% compared to $953 million for the same period last year. Net income for the first 6 months increased 8.9% to $118.6 million or $0.36 per diluted share compared to $0.33 per diluted share for the comparable period last year, a 9% increase. Turning to our business lines results in the quarter. Residential pest control grew an outstanding 14.8%. Commercial, however, excluding fumigation, was down 5.2%. We have offset some of those commercial revenue shortfalls with termite and ancillary services, which was up 7.3%. Eddie will provide greater detail around these numbers. During what we consider the most challenging time in our company's history, our employees' efforts and contributions have been exceptional in every regard. We couldn't be more grateful and proud of them in what they've done. They truly are our most valuable asset. We continue to be aware and involved to ensure their safety and good health. They are provided with personal protection as needed as they go about servicing our customers. Most of our technicians are working remotely and avoiding spacing issues that would exist if they were coming into our branch offices. The majority of our home office and call center employees are also working remotely. Our commitment to safe practices involves our valued customers as well. On the plus side, most of our residential customers have been at home 24/7, and they are becoming even more conscious of their home, and in some cases, the need to protect their family and property from unwanted pests. Additionally, as families self-quarantine, many are spending more time in their yards, recognizing the need for mosquito control. We are benefiting from the high regard, trust, and confidence that our customers have in our brands, which is, in part, responsible for our fast-growing pest control revenue and our gain in new customers, all at record-setting rates. Before turning the call over to John, I want to note, while we were pleased with our results for the quarter, we continue to face the challenges of the pandemic and the unknowns that go with it. As a result, we review and adjust our activities and policies routinely to help us better address the impact of COVID-19. As I mentioned, commercial pest control unfortunately has been more impacted by the virus and its related economic circumstances. However, we've been narrowing the revenue shortfall gap each month since March. Anecdotally, we are seeing a growing realization at many businesses that they can't shut down pest control services for an extended period of time without having infestation consequences. A worthwhile offset to these commercial pest control challenges has been our other brands and the introduction of our disinfectant service, VitalClean. As a result of this new service development prior to the pandemic, we had the ability to roll out related sales and service protocols quickly. VitalClean is gaining traction, and we would expect it to be a more significant contributor to our commercial revenue going forward. Let me now turn the call over to John, who will provide more details on these aspects of our business.

Thank you, Gary, and good morning. I would like to echo the commentary Gary made earlier about our team members. A common theme worldwide was their unbelievable response to this pandemic and their commitment to their customers throughout this event. As the pandemic started, we saw firsthand the trust that our customers have in our highly reputable brands and service professionals. Additionally, we quickly moved to outfit our field teams with personal protective gear that helps keep them safe, as well as give our customers confidence in our ability to service their pest needs responsibly. Without the response we received from our outstanding team members, our customers would have been left unprotected from many insect and rodent-caused health threats. Thank you all very much for what you do. As we noted last quarter, Orkin and many of our other brands are now offering a disinfection service, which quickly and thoroughly eliminates a wide variety of serious pathogens. Comprehensive disinfection is imperative to keeping an establishment as sterile as possible and disease-free. During the second quarter, we were very delighted to see the positive reception this service is receiving from our commercial customers. I was especially pleased at a wide-ranging movement from our field teams to provide this service proactively to hundreds of first-responder locations: police stations, firehouses, and hospitals. As the economy slowly opens and more commercial businesses begin welcoming back their patrons for indoor dining, shopping, or as guests in their hotels, and as their employees go back to the various workplaces, we expect the demand for VitalClean services to continue to grow. We are pleased with the progress thus far and very excited about the potential for this opportunity. Our call centers were very busy during the second quarter as reflected in our increased residential sales. The record book for performance was completely rewritten as our inbound telephone sales effort replaced 7 of the top 10 sales days in our history. From what we are currently experiencing, we are optimistic that these results will continue into the third quarter as July performance certainly reflects that as the remaining 3 top 10 sales days have been replaced. Last, we continue to expand our company's presence both in the U.S. and globally, having made second-quarter acquisitions in Australia and the U.K. On July 1, we announced one of our Australian subsidiaries had acquired the largest independent pest control company in Australia, Adams Pest Control. This acquisition solidifies Rollins' national coverage in Australia. Adams Pest, founded by John Adams and established in 1944, has expertise in all aspects of general pest and wildlife control and is the market leader in the Greater Melbourne and Adelaide areas. In the United Kingdom, we also acquired 2 environmentally friendly companies: Albany Environmental Services based in Central London and Van Vynck Environmental Services in Essex. These latest acquisitions bring our presence to 7 companies covering all of the U.K. We are very pleased to welcome these very fine companies and their teams to the Rollins portfolio of best businesses. I will now turn the call over to Eddie.

Thank you, John. Our press release on July 7 gave you some insight as to what we knew at that time related to the impact of COVID-19 on our business. Today, I'll share some details on our Q2 actual results and some additional insight into what we know today that will impact the future. During the entirety of the second quarter, our operations have remarkably navigated all that we, as a society, have dealt with related to the economic and health impacts of the virus. Additionally, our non-field operation group successfully switched to a remote work model and did not miss a beat with their support. As you can see from the outcome, their collective results and efforts have been outstanding. From a reporting perspective, please also keep in mind that we lapped our initial Clark acquisition on May 1, and we will see much more normalized financial results for the quarter and the foreseeable future. For the quarter, our residential pest control and termite services lines showed growth, and keys to the quarter included higher materials and supplies costs, which included the purchase of personal protective equipment, successful cost containment implemented to drive margin improvements year-over-year, and provision set up for potential commercial customer bad debt. Looking at the numbers, the second quarter revenue of $553.3 million was an increase of 5.6% over the prior year's second quarter revenue of $524 million. Income before income taxes was $103.5 million, or 19% above 2019. Net income was $75.4 million, up 17.2% compared to last year. Our GAAP earnings per share were $0.23 per diluted share. EBITDA was $126.9 million and rose 16.4% compared to 2019. Our Q2 numbers have begun to normalize again as we lapped the initial Clark acquisition in the quarter. The first six months revenue of $1.041 billion was an increase of 9.3% over the prior year's first six months revenue of $953 million. Income before income taxes was $158.9 million or 11.1% above last year. Net income was $118.6 million, up 9.3% compared to 2019. Our GAAP earnings per share were $0.36 per diluted share. EBITDA was $206.1 million and rose 13.6% compared to 2019. As we stated on our Q1 call, we began aggressively purchasing PPE in March and April. This, along with the transition to new, more diversified vendors impacted our materials and supplies costs between $2 million and $3 million in Q2 and will impact the business in a similar manner for the remainder of the year. Let's take a look through the Rollins revenue by service lines for the second quarter. As Gary reviewed, our total revenue increase of 5.6% included 3.1% from Clark and other acquisitions, and the remaining 2.5% was from pricing and organic growth. In total, residential pest control, which made up 47% of our revenue, was up 14.8%; commercial pest control excluding fumigation, which made up 33% of our revenue, was down 5.2%; and termite and ancillary services, which made up approximately 20% of our revenue, was up 7.3%. Also of note, our wildlife services were up strong double digits yet again this quarter. Again, total revenue less acquisitions was up 2.5%. And from that, residential was up 10.3%, commercial excluding fumigation decreased 7.8%, and termite and ancillary grew by 5.5%. As John mentioned in his remarks, but I also want to recognize our call centers that made the transition to working remotely and then went on to set numerous revenue and sales records which helped drive our residential growth. Both Gary and John discussed the trust of our customers during the quarter. Our investment in PPE also helped our customers to show trust in our well-known brands. Seeing their technicians or salespeople in full PPE provided comfort that we also had the customer safety top of mind. Our feedback from customers shared on our NPS score for our residential product showed 2.4 percentage points higher than last year, which included a new COVID-19 category. This data was further supported by significantly better Google reviews and Facebook recommendations. Marketing has supported our operations very well to gain these insights. In total, gross margin increased to 53.8% from 51.7% in the prior year's quarter. The quarter was positively impacted by our lower salary expense in the areas of company furloughs, layoffs, and salary reductions as well as lower fuel expense and continued improvements from our routing and scheduling initiatives. Additionally, materials and supplies were up, as discussed earlier. Depreciation and amortization expenses for the quarter increased $1.8 million to $21.9 million, an increase of 8.9%. Depreciation increased $1 million due to acquisitions, vehicles acquired and equipment purchases, while amortization of intangible assets increased $754,000 due to the amortization of customer contracts from several acquisitions, including Clark. Sales, general and administrative expenses for the second quarter increased $9.4 million or 5.8% to $171.3 million or 30.9% of revenues, which was flat to last year. The quarter produced savings in salaries and benefits, lower fuel, discretionary savings, but was offset with a higher reserve set for our anticipated bad debt, primarily from our commercial customers due to COVID-19. Our commercial business is a mirror to the general economy around the world. While many of our commercial pest control customers are paying at a slower rate than normal, they are still paying. Based on what we know at this time, we feel that we have adequately reserved for those customers that may not be in business on the other side of the pandemic. Our cash flow continues to be strong, and at this time, we have no changes to our capital allocation plans. As our top priority, we've continued with our M&A activity around the globe. As John mentioned, we completed several acquisitions in the quarter and have plans for more in the future. During the quarter, we more aggressively paid down our debt and are now on track to have this retired in late 2021. As for our cash position for the period ended June 30, 2020, we spent $56 million on acquisitions compared to $410.1 million in the same period last year, which included Clark. We paid $65.5 million on dividends and had $12.4 million of CapEx, which were slightly lower compared to 2019. We ended the period with $134.8 million in cash, of which $73.2 million is held by our foreign subsidiaries. Before I close, I want to share that we have released our first-ever sustainability report for 2019. We've taken the opportunity to highlight some of the things that we have going on in the areas of the environment, social, and governance. The report has been posted on our website, and we look forward to building on these areas as a company as we move through 2020 and beyond. Yesterday, the Board of Directors approved a temporary reduction of the regular cash dividend to $0.08 per share that will be paid on September 10, 2020, to stockholders of record at the close of business on August 10, 2020.

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

Our first question comes from Tim Mulrooney with William Blair.

Congrats on a nice quarter in these difficult times.

Thank you for that.

Given how much is going on lately, I have plenty of questions about the quarter, but something else came up recently that I wanted to get your perspective on. So here it goes. A major lawn care provider recently announced that they're getting into the residential exterior pest services. Given how well residential pest has held up during the pandemic, are you seeing that more often service providers encroaching into the pest control space? Do you view this as a competitive threat? Are you not concerned? Any thoughts you have on this issue would be greatly appreciated.

Yes. So I guess what I would say is that we've seen through the years, and Gary can share his 50-plus years of what he's seen getting in and out of this space over time, residential continues to grow at a very hefty rate. But at the same time, it's a very fragmented market, as you know. We have a very healthy market share, and other large players also have a very healthy market share. But there are a lot of other regional and mom-and-pop players that are part of this market as well. I know John has had some interaction with different companies as well. So John, I don't know if you want to share something and maybe Gary share what you've seen in the past.

Yes, sure. Thank you, Eddie. Tim, we've seen sort of an evolution with TruGreen as their noncompete with Terminix has sort of expired, going from lawn to offering tick-and-flea services to mosquito to now what their offering is, is essentially outdoor residential pest control, outdoor only. And so the relationship with the technician and the customer is a struggle. And cross-selling those customers is a real struggle. I think if that were easy to do, ServiceMaster would still own both brands and they would have been more successful at cross-selling those services. So while it certainly bears watching, it's a tough sled. So we'll see what they do.

Many of you may know that we were like the number three lawn care company in the country. And we had the decision kind of moving in the other way. Just felt like the lawn care business would be under more scrutiny, the fact that more regulatory pressures were existing. And we just didn't see the growth pattern and margin pattern equaling pest control. So what we did is when we got out of the business, we just ramped up our acquisitions and ramped up the speed in our revenue. It's going to be a challenge for them to do. Well, they say nothing's hard for the guy that doesn't have to do it. That may apply to us, Eddie, but we welcome them. Anytime a competitor comes in that has big prices, it just makes our job easier.

Got it. Thank you for that perspective, everybody. That's very helpful. As my follow-up, I'll ask one question about commercial pest. Gary, you mentioned something that I thought was interesting. You said you're narrowing the revenue shortfall gap each month since March. Is another way for me to interpret that is to say, as you move through the quarter, the declines became smaller each month? So April was down the most, May was down less, June was down less, and July is down even less than June. Am I reading that right?

Tim, I'll start, and I'll let Gary share, obviously, what he wants to say. But I mean, we're really going to be the mirror of the economy in general. So I think in March, going into early April is when the majority of the economy was completely shut down. And I think as you saw pockets begin to open up and you began to see commerce and hiring begin and some of the stimulus checks get into people's hands, I think that made people make different decisions on things. And I think you've kind of seen the ebb and flow, of course, of that as some things are starting to kind of tighten up again. But I think incrementally, as things got a little bit better and a little better, we saw that on the commercial side as well. Do you want to say anything else on that?

Yes, I would like to add something. As I mentioned earlier, we believe that the growth patterns in lawn care differ from those in pest control. What we are noticing is that many of our commercial clients, particularly in the food-related sectors, understand that they cannot postpone pest control indefinitely. This realization is prompting them to return for services. They often have experienced significant infestations in the past, and they recognize that ongoing pest control is essential, especially with health department regulations involved. We anticipate that they will continue to return for these services.

Our next question comes from Seth Weber with RBC Capital Markets.

This is Emily McLaughlin on for Seth this morning. My first question is on the margins. They were clearly very strong this quarter. Can you frame for us how much that reflected the temporary cost actions? And what will come back with volumes as they improve? And I know you called out routing and scheduling enhancements as a benefit. Any way to quantify that?

I want to highlight a couple of points. Firstly, if the virus had to happen, from a business perspective, it was the best timing for us as an organization. We hadn't hired for our peak season yet, which was just beginning at that time. This allowed us to align our payroll effectively. Additionally, John and the team, along with our home office, made some tough decisions and cuts to prepare ourselves. So if this situation were to worsen beyond what we've experienced so far, we believe we are ready in terms of payroll and discretionary spending. As time has progressed and we've seen some areas of the business rebound, particularly in residential, we have adjusted our payroll accordingly. We are closely managing discretionary expenses and will continue to do so, monitoring the situation closely. I’ve borrowed my boss’s phrase that there are still more unknowns than knowns at this stage, so maintaining a strong focus on cost management remains a priority. John and the team across all brands have been diligent in this regard, although our predominantly commercial brands have faced the most impact. However, we also have many brands that operate in both residential and commercial sectors, including termite services.

We observed a significant indication in the last two weeks of March that our commercial business would be the most affected, while our residential and termite sectors remained robust. Our team focused intently on the commercial aspect and responded very swiftly. Additionally, while we furloughed some employees, we kept their benefits active, allowing us to recall them and quickly reintegrate them into productive roles as circumstances changed. Our field teams did an excellent job in their response. As Eddie mentioned, we had not yet ramped up hiring for the season, which influenced our situation.

Okay. That's helpful. And just a quick follow-up on VitalClean. I know it's still early days, but is there any way to think about the revenue and the margin contribution in the quarter? And what the take rate of that offering is with the clients that are reopening? And if it's helping you win new customers?

We won't provide a breakdown of that information, as we don't typically disclose details like that. However, we are pleased with the growth we've experienced in a short time. We’ve noticed a couple of trends: customers tend to be more willing to move forward quickly when they encounter incidents at their locations. Additionally, as more restaurants transition from takeout and delivery to offering indoor seating, we've observed an increased need for our services. As the economy continues to evolve in this direction, we anticipate good opportunities ahead. It has also been a successful cross-sell for us. Kudos to John and the team for their efforts in launching the product, training our salespeople and technicians, and ensuring our procurement team efficiently gets the product to our team in a short timeframe. This enhances our customers' trust in us, allowing them to focus on running their business while we handle this aspect, thus reducing their worries.

Our next question comes from Mario Cortellacci with Jefferies.

I wanted to drill a little further into the commercial business. And just, I guess, what you're seeing from commercial customers right now? Have you seen any bankruptcies from that business that could potentially impair a part of it? Obviously, I know you have the disinfectant business that is going to offset some of the lost revenue there, and hopefully, the commercial comes back. But I just wanted to see, I guess, what do you expect longer term? Is there going to be a partial impairment of the commercial business longer term? And obviously, you'll gain some new commercial customers as the economy rebounds, but would love to get your thoughts there.

Well, I don't think anybody has the full crystal ball on exactly what the economy is going to look like for Q3, Q4 moving into next year. I think there's no question that there will be bankruptcies that will come out of this. We've seen some of those already. We have the same headlines that you have, having to do with major franchise groups that have gone bankrupt, restaurant chains, some retail stores, and things like that when you don't have foot traffic and you're shutting down, of course they're having to deal with everything dealing with that. So we're dealing with that. We're staying close to those customers. I did mention in my prepared remarks that we have set aside a reserve for what we feel is appropriate based predominantly on our commercial customers. And that's really where we're seeing the impact at this point. Residential, we're not seeing an impact at this time, having to do with the concern with that. But we're staying close to those large customers to try to help mitigate whatever we can and also work with our long-term customers that we've had relationships with. We want to help them to survive this as best we can, and we're going to work with them as appropriate. But then we'll take the needed steps from there.

Great. And then just one more before I turn it over. Obviously, you have experienced strong performance in the residential sector, and congratulations on that. However, I'm curious if you are noticing any underlying factors that we might not be aware of. Is there anything that could potentially indicate a change or an increase in the long-term growth rate of residential demand?

I want to highlight two key points. First, our mosquito product has shown continued growth. Two to three years ago, it accounted for about 1.7% of our total revenue, and now it's increased to 2.8%. While this isn't a significant figure at the moment, the growth rate over the past four years has been impressive. Our team believes there's substantial potential to expand this product line for years to come. It's a valuable addition to our offerings and has the highest customer retention of any service we provide. Once customers experience it, they realize how much it enhances their lifestyle. This is crucial for driving our growth in the residential market. When customers use multiple services from us, their loyalty doubles. For example, if someone starts with pest control and then adds mosquito control, their average retention period with us increases significantly. Lower customer turnover supports our growth moving forward. Secondly, we're noticing a shift among new homeowners, particularly millennials, who seem to prefer services like food delivery and similar offerings. We believe the services we provide will resonate with this demographic, and we're seeing a positive response from newly established homeowners.

Eddie, if I could add one thing. We've been investing quite heavily in technology. And one of those areas, in particular, is to provide customers with more ways that they can pay us. Before we had quarterly payment plans, and they paid at the end of the previous quarter. Now they can pay monthly. So there are other ways that they can pay, and that's been highly acceptable. And I think Eddie made a real good comment about, if our customer has multiple services, and we call it bundling, so typically that starts when they're sold. And that's helped a lot as far as customer satisfaction is concerned.

Our next question comes from Michael Hoffman with Stifel.

I appreciate the time. I want to address some of the previous questions and seek a bit of clarity, while trying to combine two questions into ten. Gary, about your remark on VitalClean, I understand you were suggesting that even if a location isn't open yet, it's wise to start pest services because it prepares them for when they do open. Is that correct? Are some commercial clients opting for pest services even before they open, anticipating their opening? That seems to align with your comment.

The part of VitalClean that is happening right now is that more companies are returning. They are aware of the risks and understand more about the dangers of the virus. Additionally, from a public relations and human resources perspective, they want to communicate to their employees what steps they are taking to ensure good health practices. This has been a significant factor for us in the past quarter and will continue in the future. If the experts are correct, we should expect to see a sustained group of customers.

And some customers restarted pest without being back open again because of your infestation comment?

Yes. I think that's what we've seen as the time has gone by is that our current customer base is realizing it's important to maintain pest control to avoid issues when they reopen. That has indeed been a trend. There was no material change. This has been updated multiple times throughout the years and just an update that was needed for the most recent setup that they have.

I want to thank you for participating. Unfortunately, there's still more that we don't know than what we do know. I believe many of you will agree after observing the monthly discussions and the fluctuations in various factors affecting the disease. We meet weekly or biweekly with our key management team to assess our successes in both our defensive and offensive strategies. I wasn't aware that you would emphasize that there is more known than unknown.

All right. It's so good. I have to borrow it.

I'm the copyright person here. But thank you for your support during these challenging times and look forward to speaking with you on the next call. Thank you, again.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.