Arctic Weather Weighs on Rollins' Earnings

Rollins (ROL 2.03%) reported first-quarter financial results on April 24. The owner of popular pest control brands -- such as Orkin, HomeTeam Pest Defense, and Critter Control -- saw its profits fall due in part to extraordinarily cold weather. But management says business should rebound later in the year.

Rollins' results: The raw numbers

Data source: Rollins Q1 2019 earnings release.

What happened with Rollins this quarter?

Rollins saw balanced growth across its major service lines. Revenue in its residential pest control, commercial pest control, and termite and ancillary businesses increased by 4.9%, 4.6%, and 4.8%, respectively. 

However, several factors weighed on Rollins' profits in the first quarter.

Two such factors were historically cold weather and severe storms. "Between the much-publicized polar vortex and the substantial rain in all of California and the Midwest, pest demand did not materialize in a normal fashion," CFO Paul Northen said during a conference call with analysts.

Winter storms took a toll on Rollins' first-quarter results. Image source: Getty Images.

Yet CEO Gary Rollins said that these conditions should abate in the current quarter.

"Although we rarely talk about the impact of weather on the business, this year Mother Nature was particularly unkind, unleashing what some refer to as the polar vortex, delivering some of the coldest temperatures to parts of the country in over two decades," Rollins said. "But as we say around here, spring always comes ... and with it comes higher pest activity."  

The company also incurred higher expenses related to recent enhancements to its employee benefits program. Yet these human capital investments are already bearing fruit; Gary Rollins said the company "achieved major improvements in both employee and customer retention" in the first quarter.

President and Chief Operating Officer John Wilson highlighted just how significant an impact these investments are having on Rollins's business. 

"For the Orkin brand alone, we saw a 33% improvement in our most important metric, employee retention. This meant that we separated from Orkin 224 fewer people. This saves time spent searching for replacement team members, as well as dollars spent on training those new hires."

By investing in its people, Rollins is positioning itself for success in the future.

Looking forward

Rollins expects to receive regulatory clearance for its recent acquisition of Clark Pest Control in the coming days. Clark is the eighth-largest pest control company in the U.S. It will represent the largest acquisition in Rollins' history upon closing. 

Rollins intends to finance the deal via a combination of cash and debt, which it plans to pay off within two years. And while Clark is not expected to add to Rollins' earnings per share in the first year post-closing, it is expected to have a positive impact on the company's cash flow. 

All told, the purchase of Clark Pest Control is likely to further Rollins' proven growth-through-acquisition strategy, which has helped the extermination specialist generate returns of more than 600% for investors over the past decade.