Apr 23, 2014
Executives
-
Gary Rollins - Vice Chairman, CEO, Treasurer Harry Cynkus - SVP, CFO
Analysts
Jamie Clement - Sidoti & Company Joe Box - KeyBanc Capital Markets Sean Kim - RBC Capital Markets
Operator
Good day, ladies and gentlemen and thank you for standing by. Welcome to the Rollins Incorporated First Quarter 2014 Earnings Conference Call.
At this time, all participants are in a listen-only mode. Later we will be conducting a question-and-answer session and instructions will be given at that time.
(Operator Instructions) I’d now like to turn the conference over to our host, Ms. Marilynn Meek.
Please go ahead.
Marilynn Meek
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 1-800-406-7325 with the passcode 4678054. 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 is Gary Rollins, Vice Chairman and Chief Executive Officer; and Harry Cynkus, Senior Vice President, Chief Financial Officer and Treasurer. Management will make some opening remarks and then we’ll open up the line for your questions.
Gary, would you like to begin?
Gary
Yes. Thank you, Marilynn and good morning.
We appreciate all you joining us for our first quarter 2014 conference call. Harry will read our forward-looking statement and the disclaimer and then we’ll begin.
Rollins
Yes. Thank you, Marilynn and good morning.
We appreciate all you joining us for our first quarter 2014 conference call. Harry will read our forward-looking statement and the disclaimer and then we’ll begin.
Harry
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 in 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, 2013 for more information and the risk factors that could cause actual results to differ.
Cynkus
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 in 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, 2013 for more information and the risk factors that could cause actual results to differ.
Gary
Yes, thank you Harry. Our earnings release discusses our business outlook and contains -- oops I’ve got your part, Harry.
I’m pleased to note that unlike our last call, Harry and I are both in the same room today. As you may recall on our year-end visit in late January, we were each at our respective homes due to the snowstorm that caught Atlanta off guard.
I’m sure we’re all happy that spring has come following two consecutive years of bitter winter from much of North America. Incidentally, this past March was the coldest it has been for over a decade, 12 years.
A number of people in other areas have weighed in recently on this winter weather and its impact on business, even our new Federal Reserve Chair, Janet Yellen, commented on the issue and said that the harsh winter weather may have had an impact on recent economic data. Despite what some referred to as the new normal weather pattern, we are pleased to have overcome this negative impact on our business.
And we’re proud to report another quarter of both improved revenue and profit. I think the key to our strategy has been to have enough business improvement initiatives in the works, so we’re not devastated by abnormal weather.
We can do something about developing and implementing those programs, but nothing about the latter. Revenue for the quarter grew 4.6% which was somewhat disappointing to $313.4 million, compared to $299.7 million in the first quarter of last year.
Net income increased 11.2% to $25.8 million with EPS of $0.18 per diluted share, compared to $23.1 million or $0.16 per diluted share for the first quarter of last year. We’re definitely pleased with our conversion of profit improvement from our revenue increase.
Our business historically has been built on increasing our recurring revenue. Almost 80% of the revenue we recognize each month is for scheduled services that are on the books as of the first of the month.
I’d like to think of this as the gift that keeps on giving. In a sense, we’re much like the phone company or cable TV business.
We worked hard last year to continue building our commercial revenue business and we saw the strength this quarter. Of this improvement, with the 6.6% growth, as Harry will explain shortly once you factor out the unfavorable impact of foreign currency exchange, the commercial percent revenue improvement was almost unchanged from last quarter.
Our commercial customers be it large national company or a local-owned restaurant can afford to defer retaining their pest control services regardless of whether it’s a mild or severe winter. Residential sequential growth slowed similar to what we saw last year.
We don’t have a lot of new customers coming into the sales funnel in the first quarter, especially with the weather we had, but still residential pest control grew a respectable 3.9%. The snow and cold weather doesn’t kill the termites but it does drive them deeper in the ground until the temperature warms.
As a result, termite revenue was almost a breakeven, up 0.1%. On a positive note, it was obvious that bed bugs don’t care about the outside temperature because it’s always warm where they live.
Our bed bug business continues to grow and was up 15% for the quarter. As noted in the past our strong customer retention provides us with excellent recurring revenue and profits.
These two factors coupled with our growing brand recognition, have enabled us to expand our business and allowed us to meet our financial objectives from year-to-year. In fact, this quarter represents our 32nd quarter of improved revenue and profitability, 8 years.
We also believe that we have several competitive advantages. By virtue of our size we are able to reach out to existing and potential customers, nationally, locally, and internationally through traditional and social media and Internet marketing.
Most of our competitors don’t benefit in this regard. Our public relations team is a major contributor to our communications effort and focus on building our brands.
Last year, this team’s outreach generated approximately 264 million local and national media impressions, while positioning our company as the pest expert. These means however is just one piece of our ongoing programs to connect with the customer.
Providing education to the consumer has always been at the forefront of what we do. From the 1950s, we have been routinely providing science education by sharing our perspective on insects with young students throughout North America.
Recently we created our new school pest control presentation website, which makes it easier for teachers to schedule and track the status of their presentation request. We also continue to partner with the National Science Teachers Organization, NSTA, to promote our Orkin Man school presentation program which has been highly popular and successful.
Last summer we again teamed up with the Center for Disease Control and Prevention and produced a pest control and prevention tips for mosquitoes and ticks. The sound bites from this effort generated more than 5.3 million media impressions.
We are partnered with the CDC since 2004 and look forward to working with them again this year on important projects. To better build stronger relationships with our customers we are generating a quarterly e-news letter, which inform recipients about Orkin, pest-related illnesses, year-around pest control and other pertinent subjects.
In 2013 more than 400,000 newsletters were distributed. We’re continuing this program again this year.
We believe another competitive advantage that sets our company apart is our Atlanta learning center and Tempo, our internal training and education website. The ever revolving pest related training that we provide or employees resulted on us being recognized again by Training Magazine for the 12th consecutive year is one of the top training companies in America.
This year we’ve ranked 55 among the group of 125 companies, joining a very select few companies that they can say that they’ve been so recognized with this award for more than a decade. This training publication indicates that their ranking was determined by assessing a range of qualitative and quantitative factors, including financial investment and employee development, the scope of the development programs and how closely such development efforts are linked to business goals and objectives.
We remain committed to continuous improvement within all of those training metrics. And each year we’re challenged to take our training up another notch.
In the first quarter, usage of the Rollins management system consisted of over 42,000 log-ins and over 100,000 core selections. Our employees are benefiting professionally and most often financially from this commitment to training.
I should also add that Texas A&M University announced during the quarter that Rollins employees passed the milestone of participation by completing over 10,000 online courses on termite biology and control. Texas A&M has created the industry’s best online termite control training courses.
Another area we take very seriously is risk management and specifically, the safety of our employees. Recently, we have been made aware of the dangers of talking or texting while driving.
Some states have a ban on handheld talking or texting, and the list is growing. On most days of the year we have over 8,000 company vehicles on the road servicing our customers around the country.
Most of the drivers of these vehicles have a company cell phone and many also have a personal cell phone. We believe that there’s nothing so important that it can’t wait for one to pull over and stop to make a returning call.
Rollins has therefore adopted this year a total ban on texting or talking on a cell phone while driving a company car, our personal car, while on company business. Statistics indicated distracting driving accidents have increased 100% over the last five years.
And with cell phone, work-related vehicle deaths up over 35,000 individuals in the U.S. annually.
We felt that this was an issue that needed to be addressed to ensure the safety of our employees and the public. As you can imagine it was not necessarily a popular decision initially, but much like enforcing seatbelt use, it’s the right thing to do.
This year we have created the Rollins marketplace or what we refer to internally as our procure-to-pay initiative. The objective is to have all of our operations and brands ordering supplies online, exclusively through our marketplace.
We’re already benefiting from improved efficiency and it's helping us to obtain better national contracts and improved pricing, ultimately reducing our cost. We’re continuing to advance our goal of establishing international footprint via franchises and select acquisitions.
We were pleased to announce last week an agreement in principal to acquire Statewide Pest Management headquartered in Shepparton, Australia, our second acquisition in that country. This company was established in 1997 and provides services to both commercial and residential accounts in the State of Victoria, which includes metropolitan Melbourne, and reaches up into the New South Wales area.
Statewide would do approximately $5 million in annual revenue. And we’re expecting to close at the end of this month and are excited to have Statewide join our company.
We also established two new global franchises during the quarter, adding to our growing roster of international franchises, our first in Uruguay and our third in China. We remain committed to adding to both our international and domestic franchises.
This is an exciting time for Rollins. And we’re expecting to have a good 2014.
We have many opportunities to expand and improve our company. And we look forward to sharing our progress with you each quarter.
I’ll now turn the call over to Harry. Harry?
Rollins
Yes, thank you Harry. Our earnings release discusses our business outlook and contains -- oops I’ve got your part, Harry.
I’m pleased to note that unlike our last call, Harry and I are both in the same room today. As you may recall on our year-end visit in late January, we were each at our respective homes due to the snowstorm that caught Atlanta off guard.
I’m sure we’re all happy that spring has come following two consecutive years of bitter winter from much of North America. Incidentally, this past March was the coldest it has been for over a decade, 12 years.
A number of people in other areas have weighed in recently on this winter weather and its impact on business, even our new Federal Reserve Chair, Janet Yellen, commented on the issue and said that the harsh winter weather may have had an impact on recent economic data. Despite what some referred to as the new normal weather pattern, we are pleased to have overcome this negative impact on our business.
And we’re proud to report another quarter of both improved revenue and profit. I think the key to our strategy has been to have enough business improvement initiatives in the works, so we’re not devastated by abnormal weather.
We can do something about developing and implementing those programs, but nothing about the latter. Revenue for the quarter grew 4.6% which was somewhat disappointing to $313.4 million, compared to $299.7 million in the first quarter of last year.
Net income increased 11.2% to $25.8 million with EPS of $0.18 per diluted share, compared to $23.1 million or $0.16 per diluted share for the first quarter of last year. We’re definitely pleased with our conversion of profit improvement from our revenue increase.
Our business historically has been built on increasing our recurring revenue. Almost 80% of the revenue we recognize each month is for scheduled services that are on the books as of the first of the month.
I’d like to think of this as the gift that keeps on giving. In a sense, we’re much like the phone company or cable TV business.
We worked hard last year to continue building our commercial revenue business and we saw the strength this quarter. Of this improvement, with the 6.6% growth, as Harry will explain shortly once you factor out the unfavorable impact of foreign currency exchange, the commercial percent revenue improvement was almost unchanged from last quarter.
Our commercial customers be it large national company or a local-owned restaurant can afford to defer retaining their pest control services regardless of whether it’s a mild or severe winter. Residential sequential growth slowed similar to what we saw last year.
We don’t have a lot of new customers coming into the sales funnel in the first quarter, especially with the weather we had, but still residential pest control grew a respectable 3.9%. The snow and cold weather doesn’t kill the termites but it does drive them deeper in the ground until the temperature warms.
As a result, termite revenue was almost a breakeven, up 0.1%. On a positive note, it was obvious that bed bugs don’t care about the outside temperature because it’s always warm where they live.
Our bed bug business continues to grow and was up 15% for the quarter. As noted in the past our strong customer retention provides us with excellent recurring revenue and profits.
These two factors coupled with our growing brand recognition, have enabled us to expand our business and allowed us to meet our financial objectives from year-to-year. In fact, this quarter represents our 32nd quarter of improved revenue and profitability, 8 years.
We also believe that we have several competitive advantages. By virtue of our size we are able to reach out to existing and potential customers, nationally, locally, and internationally through traditional and social media and Internet marketing.
Most of our competitors don’t benefit in this regard. Our public relations team is a major contributor to our communications effort and focus on building our brands.
Last year, this team’s outreach generated approximately 264 million local and national media impressions, while positioning our company as the pest expert. These means however is just one piece of our ongoing programs to connect with the customer.
Providing education to the consumer has always been at the forefront of what we do. From the 1950s, we have been routinely providing science education by sharing our perspective on insects with young students throughout North America.
Recently we created our new school pest control presentation website, which makes it easier for teachers to schedule and track the status of their presentation request. We also continue to partner with the National Science Teachers Organization, NSTA, to promote our Orkin Man school presentation program which has been highly popular and successful.
Last summer we again teamed up with the Center for Disease Control and Prevention and produced a pest control and prevention tips for mosquitoes and ticks. The sound bites from this effort generated more than 5.3 million media impressions.
We are partnered with the CDC since 2004 and look forward to working with them again this year on important projects. To better build stronger relationships with our customers we are generating a quarterly e-news letter, which inform recipients about Orkin, pest-related illnesses, year-around pest control and other pertinent subjects.
In 2013 more than 400,000 newsletters were distributed. We’re continuing this program again this year.
We believe another competitive advantage that sets our company apart is our Atlanta learning center and Tempo, our internal training and education website. The ever revolving pest related training that we provide or employees resulted on us being recognized again by Training Magazine for the 12th consecutive year is one of the top training companies in America.
This year we’ve ranked 55 among the group of 125 companies, joining a very select few companies that they can say that they’ve been so recognized with this award for more than a decade. This training publication indicates that their ranking was determined by assessing a range of qualitative and quantitative factors, including financial investment and employee development, the scope of the development programs and how closely such development efforts are linked to business goals and objectives.
We remain committed to continuous improvement within all of those training metrics. And each year we’re challenged to take our training up another notch.
In the first quarter, usage of the Rollins management system consisted of over 42,000 log-ins and over 100,000 core selections. Our employees are benefiting professionally and most often financially from this commitment to training.
I should also add that Texas A&M University announced during the quarter that Rollins employees passed the milestone of participation by completing over 10,000 online courses on termite biology and control. Texas A&M has created the industry’s best online termite control training courses.
Another area we take very seriously is risk management and specifically, the safety of our employees. Recently, we have been made aware of the dangers of talking or texting while driving.
Some states have a ban on handheld talking or texting, and the list is growing. On most days of the year we have over 8,000 company vehicles on the road servicing our customers around the country.
Most of the drivers of these vehicles have a company cell phone and many also have a personal cell phone. We believe that there’s nothing so important that it can’t wait for one to pull over and stop to make a returning call.
Rollins has therefore adopted this year a total ban on texting or talking on a cell phone while driving a company car, our personal car, while on company business. Statistics indicated distracting driving accidents have increased 100% over the last five years.
And with cell phone, work-related vehicle deaths up over 35,000 individuals in the U.S. annually.
We felt that this was an issue that needed to be addressed to ensure the safety of our employees and the public. As you can imagine it was not necessarily a popular decision initially, but much like enforcing seatbelt use, it’s the right thing to do.
This year we have created the Rollins marketplace or what we refer to internally as our procure-to-pay initiative. The objective is to have all of our operations and brands ordering supplies online, exclusively through our marketplace.
We’re already benefiting from improved efficiency and it's helping us to obtain better national contracts and improved pricing, ultimately reducing our cost. We’re continuing to advance our goal of establishing international footprint via franchises and select acquisitions.
We were pleased to announce last week an agreement in principal to acquire Statewide Pest Management headquartered in Shepparton, Australia, our second acquisition in that country. This company was established in 1997 and provides services to both commercial and residential accounts in the State of Victoria, which includes metropolitan Melbourne, and reaches up into the New South Wales area.
Statewide would do approximately $5 million in annual revenue. And we’re expecting to close at the end of this month and are excited to have Statewide join our company.
We also established two new global franchises during the quarter, adding to our growing roster of international franchises, our first in Uruguay and our third in China. We remain committed to adding to both our international and domestic franchises.
This is an exciting time for Rollins. And we’re expecting to have a good 2014.
We have many opportunities to expand and improve our company. And we look forward to sharing our progress with you each quarter.
I’ll now turn the call over to Harry. Harry?
Harry
Thank you, Gary. What is it lately with drama in our conference calls?
Last quarter snow kept us out of the office for the call. This time, my daughter was wheeled into the delivery room about 10 minutes ago.
I’m expecting the arrival of a granddaughter any minute. I may need to talk fast.
Looking at the numbers, the company reported first quarter revenues of 313.4 million, an increase of 4.6% over the prior year’s first quarter revenue of 299.7 million. We experienced that growth across all of our family of brands but one, not surprisingly one based in the northeast.
Overall net income increased 11.2% to 25.8 million compared to 23.2 million with EPS up 12.5% to $0.18 versus $0.16 per diluted share last year in the first quarter. A good start to New Year in less than ideal conditions.
As Gary has already stressed, it is especially important for us to add recurring revenue customers to our base. I don’t want to get into any debate on global warming.
However, we did see it in the first quarter again this year. With spring appearing to come later, our anticipated lead did occur as planned with slow demand.
Fortunately, improved closure per set and higher average price enabled us to overcome the decreases in pest control lead, allowing us to achieve a modest growth in sales. Our termite sales team gave us a good old college try, achieved higher closure and higher average price but could not quite overcome the double digit decrease in termite lead.
Overall we continue to see improved customer satisfaction and retention, key indicators over the long-term health of our service. Strategically, Rollins decided to focus on our commercial pest control business back in the 90s after selling off all of our non-pest control businesses, home security, maid service, lawn care.
Today, we have become the largest commercial pest control provider in North America, representing nearly 43% of our business. In total, commercial pest control grew 6.6% in the first quarter, 7.3% excluding fumigation.
Fumigation was up 8.4% in the quarter. That was mostly due to the large grain operators who typically schedule their fumigations over long weekend.
Easter this year falls in April versus March last year. We closed the Australian Allpest acquisition in late February, which contributed some revenue to the quarter.
However, it was offset by a significant weaker Canadian dollar this year. Our residential pest control business, having long been the cornerstone of our company and represents almost 39% of our business, had nearly 4,000 less calls in the first quarter this year.
But thanks to the recurring revenue base built over the last year, still grew 3.9%. The sequential decrease in growth from the fourth quarter was a drop of 1.9% versus 2.5% last year.
The residential business is the most pest-problem-dependent as a potential customer usually waits till they have a sighting, picks up the phone or goes to the computer and contacts us. Fortunately, not all of our brands are as dependent on leads.
Much of HomeTeam’s new business is driven by new home construction. Though the new home housing start slowdown has been widely reported, we are fortunate that we are located in stronger housing markets.
It’s hard to think a 7.7% growth in installs start was a slow quarter, but it was far better than the industry at large. We were pleased with our almost 19,000 new installs this quarter.
HomeTeam was able to overcome the smaller incremental installs and had some nice margin improvement. Let’s not forget termite, which is the most seasonal of our service lines and represents less than 17% of our business.
While 50% of the revenue from the service offering is recurring, i.e. the annual renewal payments, the other 50% is not, and whether in the termite reproduction cycle has a definite impact on the annual swarm season.
I’m not an entomologist, but I do know that termites like warm weather to get amorous, grow wings and reproduce. This quarter, we saw a large double digit decrease in leads.
But fortunately, our termite sales force has some ancillary services, installation, dry zone, et cetera, to sell. Termite revenues were up one-tenth of 1% aided by Australia.
Without the first time revenues of termite from Australia, our termite revenues actually fell domestically 1.1%. You have to go back to the first quarter of 2008 to see a more disappointing quarter for termites.
For those interested in our bed bug business, it was up 15% to $11.6 million. 35% of that business today is residential, 65% commercial.
Bed bugs do tend to be more active as the year goes, so be on the lookout and remember, they have no preference on spread count. Gross margin for the quarter improved to 48.5% for the first quarter versus 48.1% in the prior year.
The quarter benefited from lower fleet costs due to gains and disposal of vehicles and good cost control spread across most expense line. This more than offsets from productivity losses, as we geared up our termite technicians for a spring that was delayed.
Frankly, you can wait and see what happens in the first quarter before staffing and training. Depreciation and amortization expense for the quarter increased slightly, 320,000 totaling 10.2 million.
Depreciation was 3.3 million and amortization of intangible was 6.9 million. For the full year amortization of intangibles typically from the value assigned to acquire customer contract will represent a significant after tax non-cash charge of $0.12 this year.
Sales, general and administrative expenses for the first quarter increased 1.5 million or 1.5% to 32.1% of revenues decreasing from 33.1% from last year. The decrease in cost as a percent of sales is due to reductions made in administrative salaries reflecting realignment of some of our operations and cost containment programs initiated at the corporate offices late last year.
Income before income taxes was up 17.7% in the quarter, but unfortunately the tax rate for the quarter climbed over last year coming in at 37.7% for the quarter, where I expect it to remain for the time being. As a result, our net income was up only 11.2%.
Our balance sheet remains strong. Despite our best efforts to reinvest more heavily in our business, spending 53.6 million on acquisition of companies in the quarter, we still ended the quarter with 83 million in cash and no debt.
We’re confident that there are other great pest control companies to pursue. The deal pipeline is the strongest we have seen in some time.
Another interesting facet of this business was working capital, which remain negative despite our strong cash position. We continue to have more customers prepay us for services, $98.5 million in current unearned revenue than those who owe us for current services 72.7 million in trade receivable.
What a great business. On another note, we were pleased to have been advised last week that Rollins has once again been selected to the Barron’s 400 Index.
This marks the seventh time we have been chosen to the index since its conception in 1997. According to Barron, only about 6% of all North American publicly listed companies are selected to the Barron’s 400 on the basis of their fundamental standing.
This underscores the overall strength of our company’s financial result and its great prospect. Before I turn the call back to Gary, let me express our appreciation and thank you to all our associates and others whose hard work and dedication contributed to a challenging quarter and are committed to producing another record year.
We also thank our customers, suppliers and shareholders for their continued support. Global warming or not, spring has arrived, the phones are ringing, and we’re very excited about our prospects for the balance of 2014.
With that, I’ll now turn the call back to Gary.
Cynkus
Thank you, Gary. What is it lately with drama in our conference calls?
Last quarter snow kept us out of the office for the call. This time, my daughter was wheeled into the delivery room about 10 minutes ago.
I’m expecting the arrival of a granddaughter any minute. I may need to talk fast.
Looking at the numbers, the company reported first quarter revenues of 313.4 million, an increase of 4.6% over the prior year’s first quarter revenue of 299.7 million. We experienced that growth across all of our family of brands but one, not surprisingly one based in the northeast.
Overall net income increased 11.2% to 25.8 million compared to 23.2 million with EPS up 12.5% to $0.18 versus $0.16 per diluted share last year in the first quarter. A good start to New Year in less than ideal conditions.
As Gary has already stressed, it is especially important for us to add recurring revenue customers to our base. I don’t want to get into any debate on global warming.
However, we did see it in the first quarter again this year. With spring appearing to come later, our anticipated lead did occur as planned with slow demand.
Fortunately, improved closure per set and higher average price enabled us to overcome the decreases in pest control lead, allowing us to achieve a modest growth in sales. Our termite sales team gave us a good old college try, achieved higher closure and higher average price but could not quite overcome the double digit decrease in termite lead.
Overall we continue to see improved customer satisfaction and retention, key indicators over the long-term health of our service. Strategically, Rollins decided to focus on our commercial pest control business back in the 90s after selling off all of our non-pest control businesses, home security, maid service, lawn care.
Today, we have become the largest commercial pest control provider in North America, representing nearly 43% of our business. In total, commercial pest control grew 6.6% in the first quarter, 7.3% excluding fumigation.
Fumigation was up 8.4% in the quarter. That was mostly due to the large grain operators who typically schedule their fumigations over long weekend.
Easter this year falls in April versus March last year. We closed the Australian Allpest acquisition in late February, which contributed some revenue to the quarter.
However, it was offset by a significant weaker Canadian dollar this year. Our residential pest control business, having long been the cornerstone of our company and represents almost 39% of our business, had nearly 4,000 less calls in the first quarter this year.
But thanks to the recurring revenue base built over the last year, still grew 3.9%. The sequential decrease in growth from the fourth quarter was a drop of 1.9% versus 2.5% last year.
The residential business is the most pest-problem-dependent as a potential customer usually waits till they have a sighting, picks up the phone or goes to the computer and contacts us. Fortunately, not all of our brands are as dependent on leads.
Much of HomeTeam’s new business is driven by new home construction. Though the new home housing start slowdown has been widely reported, we are fortunate that we are located in stronger housing markets.
It’s hard to think a 7.7% growth in installs start was a slow quarter, but it was far better than the industry at large. We were pleased with our almost 19,000 new installs this quarter.
HomeTeam was able to overcome the smaller incremental installs and had some nice margin improvement. Let’s not forget termite, which is the most seasonal of our service lines and represents less than 17% of our business.
While 50% of the revenue from the service offering is recurring, i.e. the annual renewal payments, the other 50% is not, and whether in the termite reproduction cycle has a definite impact on the annual swarm season.
I’m not an entomologist, but I do know that termites like warm weather to get amorous, grow wings and reproduce. This quarter, we saw a large double digit decrease in leads.
But fortunately, our termite sales force has some ancillary services, installation, dry zone, et cetera, to sell. Termite revenues were up one-tenth of 1% aided by Australia.
Without the first time revenues of termite from Australia, our termite revenues actually fell domestically 1.1%. You have to go back to the first quarter of 2008 to see a more disappointing quarter for termites.
For those interested in our bed bug business, it was up 15% to $11.6 million. 35% of that business today is residential, 65% commercial.
Bed bugs do tend to be more active as the year goes, so be on the lookout and remember, they have no preference on spread count. Gross margin for the quarter improved to 48.5% for the first quarter versus 48.1% in the prior year.
The quarter benefited from lower fleet costs due to gains and disposal of vehicles and good cost control spread across most expense line. This more than offsets from productivity losses, as we geared up our termite technicians for a spring that was delayed.
Frankly, you can wait and see what happens in the first quarter before staffing and training. Depreciation and amortization expense for the quarter increased slightly, 320,000 totaling 10.2 million.
Depreciation was 3.3 million and amortization of intangible was 6.9 million. For the full year amortization of intangibles typically from the value assigned to acquire customer contract will represent a significant after tax non-cash charge of $0.12 this year.
Sales, general and administrative expenses for the first quarter increased 1.5 million or 1.5% to 32.1% of revenues decreasing from 33.1% from last year. The decrease in cost as a percent of sales is due to reductions made in administrative salaries reflecting realignment of some of our operations and cost containment programs initiated at the corporate offices late last year.
Income before income taxes was up 17.7% in the quarter, but unfortunately the tax rate for the quarter climbed over last year coming in at 37.7% for the quarter, where I expect it to remain for the time being. As a result, our net income was up only 11.2%.
Our balance sheet remains strong. Despite our best efforts to reinvest more heavily in our business, spending 53.6 million on acquisition of companies in the quarter, we still ended the quarter with 83 million in cash and no debt.
We’re confident that there are other great pest control companies to pursue. The deal pipeline is the strongest we have seen in some time.
Another interesting facet of this business was working capital, which remain negative despite our strong cash position. We continue to have more customers prepay us for services, $98.5 million in current unearned revenue than those who owe us for current services 72.7 million in trade receivable.
What a great business. On another note, we were pleased to have been advised last week that Rollins has once again been selected to the Barron’s 400 Index.
This marks the seventh time we have been chosen to the index since its conception in 1997. According to Barron, only about 6% of all North American publicly listed companies are selected to the Barron’s 400 on the basis of their fundamental standing.
This underscores the overall strength of our company’s financial result and its great prospect. Before I turn the call back to Gary, let me express our appreciation and thank you to all our associates and others whose hard work and dedication contributed to a challenging quarter and are committed to producing another record year.
We also thank our customers, suppliers and shareholders for their continued support. Global warming or not, spring has arrived, the phones are ringing, and we’re very excited about our prospects for the balance of 2014.
With that, I’ll now turn the call back to Gary.
Gary
Thank you, Harry. We’re now ready to open the call for any questions that you might have.
Rollins
Thank you, Harry. We’re now ready to open the call for any questions that you might have.
Question
and
Operator
Ladies and gentlemen, at this time we’ll begin our question-and-answer session. (Operator Instructions) And our first question comes from the line of Jamie Clement with Sidoti.
Please go ahead.
Jamie Clement
Can you hear me?
Sidoti & Company
Can you hear me?
Gary
Yes.
Rollins
Yes.
Jamie Clement
Okay. Good morning.
Sidoti & Company
Okay. Good morning.
Gary Rollins
Hey, Jamie. Welcome back.
Jamie Clement
I appreciate it. I appreciate it.
Thank you very much. The warm weather will help me.
Although we have not seen it yet, although I did see some ads recently. Anyway, I wanted to ask about the -- another new partnership you announced with the CDC, there’ve been a couple over the years.
Mosquito is obviously a real problem in this country, particularly with respect to West Nile virus. I think the city of Dallas obviously had a real rough situation last summer.
Are there better protocols in place from a mosquito control perspective that you feel you can offer the public? Or is it a little too early to really comment on that sort of thing, and the outcome of any kind of relationship with CDC?
Sidoti & Company
I appreciate it. I appreciate it.
Thank you very much. The warm weather will help me.
Although we have not seen it yet, although I did see some ads recently. Anyway, I wanted to ask about the -- another new partnership you announced with the CDC, there’ve been a couple over the years.
Mosquito is obviously a real problem in this country, particularly with respect to West Nile virus. I think the city of Dallas obviously had a real rough situation last summer.
Are there better protocols in place from a mosquito control perspective that you feel you can offer the public? Or is it a little too early to really comment on that sort of thing, and the outcome of any kind of relationship with CDC?
Gary Rollins
Jamie, the protocols have not improved or changed to a great degree. I guess the application equipment of the blowers have improved, I think which has helped improve productivity.
And then really the application process, but there’s new, no new wonder chemical that’s come out that’s drastically changed mosquito control.
Jamie Clement
Gary, I mean, would you – in years past, and I’m going to rely on your experience here, is awareness caused by, last summer’s mosquito situation. Is that something would tend to help a company like yours the following year?
Sidoti & Company
Gary, I mean, would you – in years past, and I’m going to rely on your experience here, is awareness caused by, last summer’s mosquito situation. Is that something would tend to help a company like yours the following year?
Gary
Well, I think to some degree. I think you really got the big lift last year.
I think what changed is that the reason -- my interpretation of the data is that you have satisfied customers and they tell their neighbor. And we are -- automatically we assume that the last year’s customer’s going to continue and have a very-very high retention rate of the customers.
But I think it works. I mean, and people talking at parties and so forth that they got their backyard back.
And I think it’s a very effective and beneficial service. I think that’s more -- you’re going to have publicity as a result of West Nile virus but our experience is, I think been more just the general knowledge of the consumer and the fact that it really works well.
Rollins
Well, I think to some degree. I think you really got the big lift last year.
I think what changed is that the reason -- my interpretation of the data is that you have satisfied customers and they tell their neighbor. And we are -- automatically we assume that the last year’s customer’s going to continue and have a very-very high retention rate of the customers.
But I think it works. I mean, and people talking at parties and so forth that they got their backyard back.
And I think it’s a very effective and beneficial service. I think that’s more -- you’re going to have publicity as a result of West Nile virus but our experience is, I think been more just the general knowledge of the consumer and the fact that it really works well.
Harry Cynkus
It is one service – I think it has the highest retention numbers of any of our service offerings. So, we have proven to our customers over and over again that we provide a very effective mosquito service but there’s still high skepticism and I think it’ll make up less than 2% of our business last year, probably under 20 million in revenue or around 20 million in revenue.
Gary
And one other good aspect of it is it helps us get pest control, ongoing pest control.
Rollins
And one other good aspect of it is it helps us get pest control, ongoing pest control.
Jamie Clement
Sure. Free advertising.
Sidoti & Company
Sure. Free advertising.
Gary
Yeah. It gives us a nose in the tent, so to speak.
And it’s the only service that I can ever remember where people make speeches on your behalf at a neighborhood barbeque. I think it’s just the customers just really love it and it works.
Rollins
Yeah. It gives us a nose in the tent, so to speak.
And it’s the only service that I can ever remember where people make speeches on your behalf at a neighborhood barbeque. I think it’s just the customers just really love it and it works.
Harry Cynkus
We don’t like to brag, but we got rid of their bed bugs.
Jamie Clement
Okay.
Sidoti & Company
Okay.
Harry
I always mention about that.
Cynkus
I always mention about that.
Jamie Clement
I will get back in the queue and allow others to ask questions. Thanks very much for your time as always.
Sidoti & Company
I will get back in the queue and allow others to ask questions. Thanks very much for your time as always.
Operator
(Operator Instructions) And our next question comes from the line of Joe Box with KeyBanc Capital Markets. Please go ahead.
Joe Box
Good morning, Gary, and...
KeyBanc Capital Markets
Good morning, Gary, and...
Gary Rollins
Good morning.
Joe Box
Congrats, Harry, on the birth of your second grandchild.
KeyBanc Capital Markets
Congrats, Harry, on the birth of your second grandchild.
Harry Cynkus
Yes, still waiting here for the text. It should be coming soon.
Joe Box
Great, good for you. Just a question for you on the operating margin.
Obviously, pretty solid, up 140 basis points year-over-year. And then up 40 basis points from 1Q '12 which I know is exceptionally strong.
Can you maybe just give us a sense of some of the bigger drivers that were behind the leverage in the quarter?
KeyBanc Capital Markets
Great, good for you. Just a question for you on the operating margin.
Obviously, pretty solid, up 140 basis points year-over-year. And then up 40 basis points from 1Q '12 which I know is exceptionally strong.
Can you maybe just give us a sense of some of the bigger drivers that were behind the leverage in the quarter?
Harry Cynkus
Yeah. In analyzing it, we saw just about every expense item as a percentage of revenue actually decreased a little.
I mean, we I think put in some good -- and have always had good cost controls. But everyone was certainly focused on it in the first quarter with the revenue not coming on with the cold weather.
So, I think people were conscious about not getting free with the spending. I think that the one that was a little more significant that I mentioned was on the fleet side, 3 years ago we switched from being primarily closed end leases to open end leases.
And so, we’re starting to turn over some of those, the higher-mileage vehicles. And quite frankly, we’ve had some nice gains and the sales -- the used small pickup truck market is strong.
And that probably was the only thing that really popped out noteworthy. And then -- going the opposite direction our termite service wages were high simply because the termite revenue didn’t come in, and you start adding the people because we have to find them, hire them, and train them.
So we expect -- we’ll continue to focus on cost containment and the fleet can be somewhat variable, but more and more vehicles will be coming off, open-end leases where we’ll have the opportunity if the market stays strong.
Joe Box
Understood, thanks for that. One last one, then I’ll turn it over.
Gary, I think you said earlier that you’re a bit disappointed with the revenue growth that you saw in 1Q. I know that this is going to be tough to measure, but is there some way you could try to quantify the weather impact?
And then going forward, did you see a nice snap back as the weather broke. And maybe if you could just give some commentary on where leads are trending by business to give us a sense of that snap back.
KeyBanc Capital Markets
Understood, thanks for that. One last one, then I’ll turn it over.
Gary, I think you said earlier that you’re a bit disappointed with the revenue growth that you saw in 1Q. I know that this is going to be tough to measure, but is there some way you could try to quantify the weather impact?
And then going forward, did you see a nice snap back as the weather broke. And maybe if you could just give some commentary on where leads are trending by business to give us a sense of that snap back.
Gary Rollins
The best way -- and we’ve tried to chase this weather situation for decades. But I think we have the best impact now in using Google’s word searches that you can see.
You’ve got a relatively stable data and that can tell you how many hits that they have on termites, how many they had on roaches, how many, the key pest. And I think that’s probably the best way we have of measuring demand.
And then it’s been very helpful because without some way of trying to determine this, you could discontinue a winning advertising campaign or you could stick with a not too effective advertising campaign because you had great weather. So, we’re feeling better about using that as a barometer.
We used to look at retail sales of aerosols and things like that. So, Nielsen had statistics on how well Raid sold and Decon and those kind of things.
But that was kind of -- certainly there was a big lag, time lies with that. And compared to the Google approach I think it was just not as effective.
Harry Cynkus
Yeah. We’ve looked at, and I don’t know how accurate this is.
I heard it in a hallway conversation yesterday that one of the things as Gary just said is we look at Google searches and use that as a barometer for how we’re doing. And I think the number I heard that termite Google searches were down 25% in the first quarter, and we were down 25%.
So, I guess I should feel good about that, but a double-digit decrease is always hard to overcome. We haven’t really put numbers, I can’t tell you if it’s 1% or 2%, that our revenue would have been better off if the weather was XYZ.
But it had an impact, but the beauty and the strength of this business comes from the recurring revenue. And the business -- largest service line is commercial business and if you have a restaurant, it doesn’t matter if it’s January or June.
You don’t want the cockroach going across the dining room floor. So, I would say from a commercial standpoint, maybe there was some specials we didn’t do because it was cold, certainly impacted the fumigation business.
That costs us probably half a point. Could have been -- termite could have been up 2%, 3% instead of down way percent.
So, it could have added up 1% to 2%.
Gary
Well there is one positive about cold weather and that’s that the rats move in. So, there’s a lot of moving parts in this business and we just try to interpret to data as well as we can, but the rodent calls do go up as it gets colder.
Rollins
Well there is one positive about cold weather and that’s that the rats move in. So, there’s a lot of moving parts in this business and we just try to interpret to data as well as we can, but the rodent calls do go up as it gets colder.
Joe Box
Understood. Thanks guys, and nice job on a tough weather environment.
KeyBanc Capital Markets
Understood. Thanks guys, and nice job on a tough weather environment.
Gary
Thank you.
Rollins
Thank you.
Operator
(Operator Instructions)
Gary
Okay, I don’t think we've got any other people who want to ask questions.
Rollins
Okay, I don’t think we've got any other people who want to ask questions.
Operator
I do apologize, I am showing we do have some.
Harry Cynkus
Yes, we do.
Gary
Okay.
Rollins
Okay.
Operator
Our next question comes from the line of Jamie Clement with Sidoti. Please go ahead.
Jamie
Hey, Gary and Harry. Hello again.
Gary, I wanted to -- you mentioned new home starts with respect to HomeTeam. Obviously, my understanding is that you don’t make a heck of a lot of money installing the Taexx tubes into the walls, but it’s really about fundamentally those homes being sold and moved into and those customers becoming recurring revenue customers.
So, how has that process looked as housing construction started in earnest, let’s say, two years ago or so? A lot of those, some of those homes have been sold, some of them haven’t yet.
How has that HomeTeam business playing out from a timing perspective and are you pleased?
Clement
Hey, Gary and Harry. Hello again.
Gary, I wanted to -- you mentioned new home starts with respect to HomeTeam. Obviously, my understanding is that you don’t make a heck of a lot of money installing the Taexx tubes into the walls, but it’s really about fundamentally those homes being sold and moved into and those customers becoming recurring revenue customers.
So, how has that process looked as housing construction started in earnest, let’s say, two years ago or so? A lot of those, some of those homes have been sold, some of them haven’t yet.
How has that HomeTeam business playing out from a timing perspective and are you pleased?
- Sidoti & Company
Hey, Gary and Harry. Hello again.
Gary, I wanted to -- you mentioned new home starts with respect to HomeTeam. Obviously, my understanding is that you don’t make a heck of a lot of money installing the Taexx tubes into the walls, but it’s really about fundamentally those homes being sold and moved into and those customers becoming recurring revenue customers.
So, how has that process looked as housing construction started in earnest, let’s say, two years ago or so? A lot of those, some of those homes have been sold, some of them haven’t yet.
How has that HomeTeam business playing out from a timing perspective and are you pleased?
Gary
I think the telling orders will be Q2, Q3. Last year, we did 81,000 new installs spread across during the year.
Whether you’ve installed, with the system installed, typically when the house is sold, it doesn’t necessarily automatically get turned on.
Rollins
I think the telling orders will be Q2, Q3. Last year, we did 81,000 new installs spread across during the year.
Whether you’ve installed, with the system installed, typically when the house is sold, it doesn’t necessarily automatically get turned on.
Jamie
Right.
Clement
Right.
- Sidoti & Company
Right.
Gary
Just like our regular customers who usually is an event (ph), that will drive them to the phone. So, they didn’t see the pest pressure in those homes in the first quarter.
I think their -- I don’t have the number in front of me, I want to say their growth of new customers in Q1 might have been about 6%. But last year, their installs were up 30%.
So, but we again, we didn’t have the pest pressure in January, February and March. So I would -- we would expect to see some very strong new customer acquisition in Q2 and Q3 at HomeTeam.
They have a pretty much lock in that customer. If that customer wants pest control and someone else calls on them, they don’t have the key to the box.
So, we’re waiting for them. We’re reaching out to them, and I think it pretends well for HomeTeam’s future with the growing customer base that they've built.
Rollins
Just like our regular customers who usually is an event (ph), that will drive them to the phone. So, they didn’t see the pest pressure in those homes in the first quarter.
I think their -- I don’t have the number in front of me, I want to say their growth of new customers in Q1 might have been about 6%. But last year, their installs were up 30%.
So, but we again, we didn’t have the pest pressure in January, February and March. So I would -- we would expect to see some very strong new customer acquisition in Q2 and Q3 at HomeTeam.
They have a pretty much lock in that customer. If that customer wants pest control and someone else calls on them, they don’t have the key to the box.
So, we’re waiting for them. We’re reaching out to them, and I think it pretends well for HomeTeam’s future with the growing customer base that they've built.
Harry Cynkus
One other good aspect about HomeTeam is the retention is greater of those people that take the pest control service, because they’ve made an investment. I mean they feel like they own, and they do.
I mean they own the system. So, I think that makes a stickier customer, and then also the fact that you can apply the materials from the outside and you don’t -- if there’s not a problem inside, this is just more convenient.
So, this is really a very good customer for us when they do sign up.
Jamie
Okay. Thank you very much for the additional color.
Appreciate it.
Clement
Okay. Thank you very much for the additional color.
Appreciate it.
- Sidoti & Company
Okay. Thank you very much for the additional color.
Appreciate it.
Harry Cynkus
Thank you.
Operator
And our next question comes from the line of Sean Kim with RBC Capital Markets. Please go ahead.
Sean Kim - RBC Capital Markets
Hi, good morning. Thanks for taking my questions.
Gary
Good morning.
Rollins
Good morning.
Sean Kim - RBC Capital Markets
Two questions, first -- over the past few years you’ve implemented new pricing tools for both the residential and the commercial side. Should we expect anything in terms of new pricing actions this year, whether for residential or commercial?
And can you quantify what that impact might potentially be?
Harry Cynkus
Well, as we do every year, we test the pricing in January and February and analyze it in March and April to determine what kind of price increase we may be passing along. The initial results I’m told from this year’s test has shown no change in elasticity.
So, the executive team will be meeting here shortly to determine the actual pricing action that we will take. Sure there will be a price increase that will be rolled out in June and July.
The pricing tools on the commercial side already have been rolled out. The initial numbers I’ve seen this first quarter, we’ve seen improved pricing, average pricing.
We haven’t really I haven’t seen any deep dive analytics out of the analytic team as yet, but on a very top level basis, our average price has gone up. So we’re encouraged that the -- there’s no reason why those tools, if we use them and keep the discipline in place, forcing people to use them and manage them that shouldn’t yield stronger results.
I don’t see really any, directionally any change in what we’ve been able to do historically when it comes to pricing.
Gary
One of the things that you have a second facet when you make that new sale and we do have pricing tools that are very helpful, especially commercial wise, especially to the new employees that it just gives them a better perspective as to how to price properly. But the other side of the equation is closure.
And that works both for the commercial, as well as the residential through our call centers. And with a zip plus four, we really have a better way of analyzing the demographics.
And in some instances, if we get the kind of closure lift that we want, you might have a 5% price decrease, but we’ve got a wonderful situation with our call center because we can measure closure and average price and all. I mean, it’s like a laboratory.
We don’t have to rely on the data being passed down the line from 400 branches. So, we’re very -- we’re as excited about closure improvement as we are average price improving.
Rollins
One of the things that you have a second facet when you make that new sale and we do have pricing tools that are very helpful, especially commercial wise, especially to the new employees that it just gives them a better perspective as to how to price properly. But the other side of the equation is closure.
And that works both for the commercial, as well as the residential through our call centers. And with a zip plus four, we really have a better way of analyzing the demographics.
And in some instances, if we get the kind of closure lift that we want, you might have a 5% price decrease, but we’ve got a wonderful situation with our call center because we can measure closure and average price and all. I mean, it’s like a laboratory.
We don’t have to rely on the data being passed down the line from 400 branches. So, we’re very -- we’re as excited about closure improvement as we are average price improving.
Harry Cynkus
One of the tools, I’m not sure everyone is aware of it that we did roll out in the first quarter in the residential side, we’ve been pricing by zip code. I think that goes back five, six years.
And we took that to the next level where it’s zip code plus four, so we can drill down into better data by -- within a large zip code, the demographics can change pretty dramatically. So, we think we can better price, come up with a better price per neighborhood than we have in the past.
And I think that could very well be one of the things that are helping us in our closure that we’re pricing it more accurately into the neighborhood.
Gary Rollins
You don’t like to have an answer that we don’t know. Certainly, it doesn’t make me feel very comfortable in my position.
But closure is impacted. We know that our use of HomeSuite and BizSuite on our iPads and all is improving closure, because we’re making a more professional presentation and especially for new employees, again, that it just gives them a roadmap to make a very professional presentation.
So, it’s kind of hard to decide how much is HomeSuite and BizSuite have to do with closure, how much is better more finite pricing during the closure. And when I made the comment in the presentation, our idea is to keep coming out with these new programs that we know will make a contribution and not be weather dependent.
And I think part of the reason we have such a good quarter was with a big lead decrease is that these individual initiatives are working.
Sean Kim - RBC Capital Markets
Thank you, that’s really helpful. Just one last first question regarding acquisitions, it seems like the pipeline is building.
You just bought two companies in Australia. Can you talk about -- going forward are you focusing in terms of M&A in Australia, in the U.S.?
Where are you focusing on and when can we sort of see, I guess the next wave of acquisitions?
Harry Cynkus
I think the pipeline is strong here in the states as well. Healthcare cost continues to rise for everyone.
It certainly has a bigger impact on the regional and smaller pest control companies. And I think they’re seeing that, and that higher cost comes directly out of that owner’s pocket.
And they don’t necessarily know how to – or don’t feel they can necessarily pass it along. But in addition to that, I think something else that we are seeing or realizing and feeling is that the larger companies that can take advantage of the Internet are gaining an advantage, I had someone recently tell me that the business has changed, and a lot of the pest control companies have been in are late second-generation companies.
And the way you acquire customers has changed. And the smaller company isn’t keeping up with social media and Twitter and LinkedIn and search engine optimization and all the other buzzwords.
And I think they’re getting -- some of them are coming to a realization that times have changed and it might be better, it might be a good time to move on. So, we shall see, but we’re encouraged with the number of inquiries and us reaching out and touching people that we might see a pickup in acquisitions here in the States.
Gary Rollins
I think you make a good point, Harry. Yellow Pages just doesn’t do the same job it did five years ago, the conventional media, radio and television.
People are buying different, people are shopping differently than they were before. And I think what happens to these smaller companies is they try to get involved in the internet and they find out it’s very expensive.
And they don’t see a lot of improvement and they leave. So there's a quite a bit of churn in the internet as far as these small to medium sized companies.
So I think, Harry, you hit it on the head. Things are just different than they were before and it’s very difficult for them to compete with social media.
Sean Kim - RBC Capital Markets
All right, great. Thanks for the color.
Thanks, both of you.
Operator
And I’m showing no further questions in the queue. Please continue.
Gary
Okay. No more questions.
Well, we’d like to thank you again for joining us. And we’re excited about having another good year and we look forward to sharing with you our results next quarter.
So, thanks again.
Rollins
Okay. No more questions.
Well, we’d like to thank you again for joining us. And we’re excited about having another good year and we look forward to sharing with you our results next quarter.
So, thanks again.
Operator
Ladies and gentlemen, that does conclude our conference for today. You may now disconnect.