Rollins, Inc. (ROL) Earnings Call Transcript & Summary

Okay. Thank you, everyone, for joining us, and on behalf of JPMorgan, I'm Cameron Kissel, who run -- I run our U.S. into Europe equities business. I'm delighted to have Jerry and Ken from Rollins. I think over the years -- we don't actually cover the stock, full disclosure, but over the years, I think there's been a big fan base in London and in Europe. And actually, over the last 2 decades, if you've been a shareholder, it's been one of the best places to hide. So from a total return perspective, it's been a great little business.

I think that's a great place to start. For some of you that might not know the business, it's just at the secular drivers. This is a really unique business. It's a $20 billion TAM. They've got 20,000 customers, 80% recurring revenues. And if we think about elements like weather in the U.S., big mass moves to the Sunbelt markets, continued population growth in the U.S. that continues to outpunch the rest of the [ DM ], those are some of the elements we hear about. But maybe if you just, in your seat, with your eyes, in the flesh, we'd love to hear your own view of the secular drivers. We could start there and then drill down.

Why don't you start, Ken?

Sure. No, thanks for having us. Great to be here and talk about Rollins. Jerry and I are relatively new in our roles. I've been with the company for a little over a year now as CFO. And Jerry, of course, has been CEO since January, officially. And so -- but no, it's a great business, great market and it continues to grow at an accelerated pace. It's helped by secular trends from a number of -- on a number of fronts, starting with the DIY, the do-it-yourselfers. They do not want to do it themself. If you think about do-it-yourselfers in pest control or do-it-yourselfers in landscaping or do-it-yourselfers in the pool service area, a completely different set of characteristics and attributes. So you don't see much do-it-yourselfer risk with respect to pest control. You've got the -- you talk about migration, migration to warmer states, Florida, Texas, Tennessee, the Carolinas, Georgia, a lot of port states in very warm climates that are seeing a net positive migration with population. And so that certainly is helping. Jerry and I have debates all the time around weather, but not sure where you sit in terms of climate change, but warmer climates are generally better, and so warmer nights, especially. If the low temperature -- I'm doing the math in my head now, being an American, but if the low temperature is, call it, above 20 degrees Celsius, normally, that's a really good sign. 70 degrees Fahrenheit nights are really good evenings for pest activity. And we're seeing it. I mean we continue to see -- another area is just new pests. Mosquito growth continues to accelerate, ticks in the Northeast of the country. Mid-Atlantic, Midwest continue to be a grower for our business. So the pest evolution cycle, you continue to see new types of pests that are impacting people's lives.

Think about the erratic weather that we've had, where Southern California gets a hurricane and all of that rain sweeps across there and into Arizona. What's that leave behind it? Standing water. What's that breed? Levels of mosquitoes that we haven't seen in Southern California forever, right? And the teams there are doing a lot of mosquito control work in a market that was typically a dryer type of environment that didn't have quite as much breeding ground for disease-carrying mosquitoes. We just saw the first couple of reports in the U.S. on encephalitis, some form, whether it's West Nile virus or something like that or Eastern equine encephalitis. That's something nobody wants to get. So those are all things that help awareness to the need for our services and what we do. And whether it's climate change, global warming, whatever you want to call it, these really erratic weather patterns have been also generally pretty good for business.

Second question is really around the competitive landscape and fragmentation. Maybe if you could just elaborate on what scale does for you. How has the business scaled over time? There's a couple of scale competitors. There's a big M&A deal that you may want to comment on or not. I believe you guys have been pretty cautious on it in the past. But maybe just talk about fragmentation and what scale has done for you guys?

There's just an absolute ton of pest control companies. The barriers to entry are not -- to start -- to buy a pickup truck and some equipment and some materials and supplies to get started is not hard. It is really hard to scale. So if you're going to service a national client, if you're going to service even a large regional client on the commercial side, that's a challenge to somebody that's just kind of a mom-and-pop startup. So scale is important, and we certainly have that scale across, in particular, North America and between Canada and the U.S. to handle all those types of commercial customers and then even some residential opportunities where you have property management companies, community management companies, those types of things that may spread across wide geographies. We certainly have that scale and the ability to service anyone in just about any state in the U.S. and from coast to coast in Canada. So that really isn't kind of a concern of ours. And I guess you can make the case that Rentokil, through their acquisition of Terminix, probably picked up some scale and their ability to do that because Rentokil had some spots where they didn't have very good coverage. So they probably picked up some opportunities there to be of the same size scale, but Terminix already had those opportunities. Terminix, their footprint very much layered, very similar to ours already. But my sense of it is that, in particular, we've done a pretty strong job of growing organically at a pretty rapid -- much more rapid pace than they have been able to. I think that's evidence that we've taken share in the market as they've been probably a little more internally focused.

And then maybe just sticking with that theme of M&A, you guys executed the company's second largest M&A deal ever with the Fox transaction. And so I think you're at $300 million year-to-date or something like that. But is integration there proved any different than historically at all? And I guess as we think about the rest of the year, is it likely to be quieter, given you're already at that level? And how should we think about M&A going forward from here for you guys?

When you think about M&A with us, when we acquire a brand, when we acquire tuck-in acquisitions, those are truly tuck-ins where we incorporate them into the existing business. And that's where integration, so to speak, really happens at its peak. With a brand like Fox, when we acquire a Fox, we're not focused on "integration" in the first year. We're focused on building a partnership, building something for the future because we take a long -- we're taking a long-term view of the brand and what they're capable of doing and how big that business is capable of growing 5 years from now. So our first strategies and during year 1 always are the -- some of the easiest because we spend our time doing quick wins. It's how do we help them on some of their cost structures. I can get them -- I can probably put a truck in there to their branch a lot cheaper and more efficiently that's already equipped and ready to go than they could do that themselves. I can help them buy materials and supplies at a Rollins scale, not at a Fox scale. So I'm going to go find those quick wins that aren't really integrations. They may have some slight systems changes or instead of buying from this -- using this supplier, they're going to use that supplier in order to get those kinds of immediate efficiencies. And so during that first year, we're in our honeymoon stage, and we're just getting to know everybody and building a relationship and getting quick wins, finding ways that we win. By the time we get into year 2, it maybe gets a little more challenging. We'd start pressing a little bit more on things like margin and pricing and some of the things that Rollins does very well and has a lot of maturity behind, and we begin integrating those things in. Usually, we do that through creating a positive kind of a peer culture around our brands by comparing them to one another and challenging them into, well, this brand is doing this and achieving these goals, and they're doing so a little bit better. What is it that you could learn from them to be able to move the needle and do a little better job yourselves? And so we start through competition amongst our brands and sharing a best practice, beginning to leverage that. So our brand strategy is a little different from an integration. I was talking to Ken earlier. It's like we use that word a lot, integration. And with our big brands that are part of our second bite at the apple brands, it's -- integration is probably the wrong word. It's kind of a -- it's really kind of a long-term partnership that we create instead of that.

And then just sticking with M&A, is there -- has competition for assets fluctuated at all? Are you starting to see private equity sniff around? I thought I'd read maybe there was private equity involved in the Anticimex deal. I wonder if they are starting to compete for assets or if the rate backdrop keeps private equity out of this. It would sound like a great business for private equity, given the return profile and capital-light nature of just -- just wondering if competition has changed at all?

Private equity is around the space. They love the space. We don't really see a lot of competition from private equity. The brands that we like to acquire normally are brands that are focused on realizing value, but they're also focused very heavily on their brand as well as their people. And we've become known as an acquirer of choice with respect to some of those brands. For example, on a recent deal, we feel like we were able to secure an acquisition without paying the highest price. And that's a very consistent theme for us. We're very disciplined when we go and we look at opportunities. And when somebody looks to sell their business to us, they realize that we're going to take care of their brand. When they drive down the highway in their community, they're going to still see that brand on the billboard of their community. When they go to have breakfast in the local restaurant, they're going to see people that they previously employed. And so they know how important it is to take care of those 2 areas of their business during an acquisition. And we have a great history and a track record of doing just that.

Adding a little color to the PE space, we've seen -- there's well over a dozen PE firms that are that are trying to play in the space, either through acquiring a platform that already had some size or scale or piecing together a bunch of $3 million to $4 million, $5 million businesses and trying to flip it. I'm not sure where the value is in that because they're paying higher prices than what we would ever pay for those. So I don't know -- and we're certainly not an acquirer of some of those -- at those kinds of valuations that they're putting onto it. So I don't know what the game is there. We've also seen a number of PE deals, some big offers that have come through, and they're not making it to close. So they're not getting the deal done. Usually within the last week, they find out they don't have -- the money is not there to fund it or they're asking the owner to roll a very sizable portion of that ownership back into it and these deals aren't getting done. So that may serve in the long run to bring multiples down and some of the valuations down as some of these deals aren't getting closed at some pretty high valuations.

And I think the high interest rate environment certainly isn't a friend to high valuations. It's hard to justify that pricing or that valuation with the rates that we're seeing in today's -- especially in today's market and especially in PE space.

You mentioned something earlier on the word people, and one of the mainstays from this conference has been a lack of ability to secure service staff. And I know you guys have mentioned on a couple of the call transcripts that I listened to, a number of new hires in different functions. So it feels like there's some people changes in leadership roles, obviously below you guys and on the service side. But just maybe just talk about staffing and some of the new people functions.

I'll address like kind of the service side. Why don't you talk on the other part? So we're better staffed today than we've been in the last 3 or 4 years. We always have a staffing to plan and we measure our sales people, our customer service people that are in the office or in the call center as well as our service technicians, both termite technicians and pest technicians. And we're better staffed to plan than we've been in since 2019. So things have eased up there on us a bit. I think in the -- 18 months ago, it was certainly our biggest pain point that our managers in the field complained about the most. Now it's not. And I don't think just because they're numb to it, I just think that -- I think it's just gotten a little bit better. And we've always had challenges in that regard, just attracting people into our industry and what we do. So we feel pretty good about that. We try to make sure that we pay our people in the top quartile kind of in the blue-collar space. And as long as we're -- we continue to maintain discipline about thinking about the long term and taking care of our people, I think we've been rewarded for that.

Yes. We've taken the time to invest in our people. We have an incredible investment or a training program for people coming into the ranks. And we do not pay a minimum wage and we pay a fair wage for what people are doing. And it's interesting, our technicians, our frontline workers receive, as part of their compensation, a partial amount of salary, but they also have an incentive-based compensation structure so that when they do cross-sell, they improve productivity, they are able to earn an even higher amount of earnings. So that makes it a compelling opportunity for many. When we look at some of the other changes in the organization, we're continuing to build out the talent. 2 or 3 weeks ago, we executed our first restructuring program in our back office in roughly 2 decades. And that was a success. And that's enabling even more change in the back office functions as well as in some of the leadership functions in those back offices. We've brought in people from a number of different backgrounds. I have recently hired a head of FP&A. Comes to us from some really large conglomerates that are out there. Great experience, new VP of Tax. Renee Pearson joined us 6 to 9 months ago as a Head of Technology. She joins us and brings a wealth of knowledge on that front. And we continue to make more changes across the back office. We think those people will drive further change, further productivity improvements and improvement in overall margin profile as we think about the future.

It's a great place to add on the restructuring and margins. And I know you guys mentioned on the last call, SG&A being a bucket you could continue to sort of pick at and an opportunity set for you. Margins right now are a hair below 23% or something on the EBITDA line. How should we think about the scope for those to lift?

Sure. When we look at the margin improvement programs, this is a multiyear journey. This is not something that will change in the next 1, 2, 3 or even 4 quarters. You're going to continue to see evolution in the company. When Jerry and I look at the business, we very much are aligned in some of our takeaways. And one takeaway is at 30% or 31% of sales, SG&A seems a little rich and a little high versus what many of our peers report. And so we do think there's an opportunity. As we make the changes to bring new talent in, we're charging them with the responsibility to improve what we do, to become a better back office, better shared service function. And if we are a better shared service function, I think we can become a better -- have a better profitability profile, be a better acquirer of choice, realize synergies across the back office. So there's a whole host of things that certainly come to mind as I think about the future with respect to improving our profitability profile, improving SG&A performance as a percentage of sales. But I have to continue to emphasize, it's a multiyear journey that we're on. This is not something that's going to change in the near term. And we just executed that first restructuring program. That gives us a sense of optimism about our ability to invest in some additional resources, additional process change, additional technology that will help us leverage that into the future.

You've got to keep in mind, 1964 is when Rollins acquired Orkin. And it remained Rollins as the -- basically the parent -- Rollins, Inc. as the parent company of Orkin for 50 years. And then really, in the last 15 years, 12 years or so, we've added to our portfolio of brands with the stand-alone brands that have been very good for our long-term growth. And as -- and size and scale and our ability today, I fully believe, to capitalize on the volume increases that we're getting and taking share through our brand strategy. But at the same time, in the last 8, 9, 10 years, we haven't evolved as much as we probably should have to be a parent company to a family of brands compared to just being Rollins and Orkin, right? So there's changes that we've got to make to how we monitor, how we govern, how we handle back office efficiency type stuff. There's opportunities there that Ken kind of walking in has, and now he's been here a little over a year, has helped us kind of really put a microscope on and see those opportunities.

Wanted to shift gears and talk about pricing in this backdrop. It's a business that's allowed you to take price at a reasonable clip every year. I think it's been 4% this year and 4% the year prior. We're also in a world of elevated costs. How do you balance this backdrop and how is the customer responding? How should we think about price elasticity?

There's 2 things that come to mind and describe the business with respect to pricing: essential service and a very low purchase price for the service. So when you look at the business, we're protecting people's brands. Jerry talked about some horrible diseases earlier with respect to protecting health, protecting property with termite damage. So that's -- those are all very essential services. And the amount of money that people are paying for those is a really low portion of their overall budget. So when they sit down and they think about if you're going into a recession, what are you going to cut, well, one of the things you normally don't see cut is pest control because there's -- it's such a small purchase price. And furthermore, when we look at price, on the inverse of that, if we look at price increases, a 4% price increase on a $100 service that occurs every quarter is $4. It's really not a big increase. It's not a big sticker price. It's not a big item that people take notice of. And so we do think there's an opportunity to continue to -- and I wouldn't even use the word to be aggressive, but to continue to be proactive when it comes to pricing. During the recent -- I come from a background of manufacturing, global manufacturing. And we were talking about 6%, 7%, 8%, 10% price increase. We're talking about a 4% price increase on a $100 purchase. It's a really small increase. So when we think about the future, and our focus is to continue to maintain that 4%. We don't have to pare it back from 8% or 10%. But if we can continue to hold that 3% or 4% price increase, we feel like we can continue to leverage that through the P&L. For example, this year, in the second quarter, we posted a gross margin of 53%, one of the highest gross margins we've posted in some time. I think we may have hit that mark 1 time over the last 5 years. But we're able to leverage our increasing cost structure with that 3% to 4% price increase and see leverage at the gross margin line. So we feel like if we can continue to do that where we are today, then a 3% to 4% price increase would make sense going forward.

Back to something I said kind of in the early stages, we talked about the opportunities that we have, especially as we get into years 2, years 3 with some of our family of brands. Pricing is another one of those opportunities that we ease our way into with them, and we're able to capitalize on that where we -- Orkin has always been the price leader in the market. They've always been one of the highest-priced companies to do business with and they have the image and the reputation to go along with it. Other brands, regional brands, they brag about their service and how good they are, but they may be only getting 75% or 80% of what Orkin gets from a price standpoint. And so we begin challenging them on, well, why is that? And when they come in for quarterly reviews and they're seeing the entire -- all the operating divisions of the business and seeing the pricing differential, we start challenging them, can you come in and raise those prices? Can you get more aggressive? So some of the lift that we'll also see, I think, over the coming years is as we ease their way into being more aggressive with pricing, both in price -- how they price new customers as well as how they go to market with their annual price increases, if you're an Orkin customer, you're used to getting increased every single year. We acquired Fox. Fox has never done a price increase, right? So we've mentioned price increase to them from the get-go, and they're like, "Oh, that scares us." We're going to tell them, you have nothing to be worried about. But sometimes it helps to show them the data and see, look, it's going to be okay. You're not going to have phones ringing off the hook with customers canceling. If your service is good, your customers will go along with it, right? So there's plenty of opportunity for us on our kind of non-Orkin brands also to get more disciplined, a little more structured about pricing.

Yes, it's a great business. It continues to -- we continue to see pricing opportunities. And we're not facing the headwind of that mid- to high single-digit price increase that a lot of others are facing as you think about a post inflationary sort of cycle.

And I would also add, usually people think in our business is, "Oh, if fuel goes up, you should raise the price." The way we explain it to customers is usually about our technicians. Ken mentioned earlier, we have a lot of variable pay components for our frontline. Our salespeople and our technicians have variable comp based on productivity, and price is a key lever in that. It's how our people also get pay increases. And when we explain that, that your technician Johnny gets his pay increase when you pay more of that, a lot of time, that customer that's even calling to complain, well, I like Johnny. I don't want to Johnny to not get his pay increase, right? And Johnny shares in that -- the benefit of that rate increase as well. So it makes it much more palatable from a consumer standpoint.

All right. And I wanted to touch on customer acquisition costs. I think you mentioned in Q1 on the call potentially elevated acquisition costs for the balance of the year. I'm just wondering, I think the business is -- does about 1/3 of that in digital. Wondering if Fox has an impact at all. And then I guess more broadly, how should we think about customer acquisition costs through the rest of the year and beyond?

Second and third quarter are always the high points for customer acquisition costs. That's traditionally peak pest season in the Northern Hemisphere. And that's in the time when you want to be investing. And so that's what led to the comments earlier in the year around that. And the other side of it is the door-to-door business that we've talked about with Fox is more expensive. It's a more expensive marketing effort and customer acquisition activity. But with that said, it's very much justified when you look at the lifetime value of a customer and the fact that a lot of customers stay with you 3, 4 or 5 years. And so the recurring revenue stream is incredibly attractive with those customers. But that's really -- when I talk about customer acquisition costs and I talk about it stepping up in the second and third quarter, it's primarily related to those activities I just discussed.

And when we look at customer acquisition costs, these days, this wasn't even the case 5 years ago. These days, digital is one of the least expensive ways that we can acquire customers aside from word of mouth and customer referrals and the obvious things. Digital is on the lower side. But I also can't just say, I'm going to go spend 20% more in digital and get 20% increase in sales. It doesn't work that way. You get a diminished returns on some -- there's a balancing act that you got to play there on the digital side. If we look at door-to-door back 20 years ago, that was, by far, the most expensive. When Orkin and -- company I came from used to deploy door-to-door, it was a very -- compared to Yellow Pages, which is what we used back then, it was very, very expensive like cost per lead sold. By today's standards, when you look at the multiples being paid, even right now with private equity and some of the others, for customer -- for buying an existing company, door-to-door is actually cheaper than that. So it's made door-to-door much more attractive to us. And when you package that, in door-to-door, unlike digital, what are you -- when somebody is working in a neighborhood going door-to-door selling, what are they building? Density. This customer said, yes, they went down 8 houses and got 6 more noes and then suddenly got another yes. Well, our truck is then building the density kind of like a home team business model of density as you sell door-to-door. So we get that added benefit. Yes, it costs us a little bit more but it's still cheaper than going through acquisition.

I still have a soft spot for the Yellow Pages, so thank you for that walk down memory lane. Wanted to touch on insurance premium. And I know you talked about this being a poor experience in '22. Just for clarity's sake, is that newbies coming on to the platform working for you guys who are potentially new drivers and get in car accident and it takes a while to work through that? But just any clarity on how to think about that.

Two components to that. One is related to premiums. Insurance premiums, I think for everybody it's safe to say, insurance premiums have done nothing but go up since COVID. And so insurance premiums are certainly a headwind, what we pay to ensure our workers and our drivers and the like. We are self-funded up to a certain level. And so we do have unfortunate situations where people get in auto wrecks and damages, injuries occur, and we ultimately are pursued for those damages. And so we've seen a step-up in claims activity last year and a step-up in settlement values. Inflation market hit -- inflation hit just about everything and claims weren't certainly an area that they didn't hit. So we saw more expensive claims and more frequent claims with some more adverse impact. And so we dealt with that through the course of the last 12 months, and you've heard us talk about that last year in the third quarter. We talked about it again here in the second quarter of this year. We're making some changes on our safety programs that are focused on improving the safety of our drivers. And so we're hopeful that those changes will take place and take hold, and we'll start to see some benefits on those initiatives as we think about the next several years here. But there's certainly -- it's been a balance between the insurance premiums as well as the claims and the negative adverse claims that we've faced over the last 12 months.

I'd add too that we certainly -- the average age of our, say, technician in the last 10 years has changed significantly. It used to be in 35-year-old range, and now it's like in the 25-, 27-year-old range. I think we've kind of missed the opportunity to see that we have a lot more younger, more inexperienced drivers that maybe also don't know the geography where they're going in. So if you're new with that, one of the ahas for us was we've got to do a much better job training. We train you on how to kill bugs and do the mechanics and customer service and all that kind of stuff. We train the heck out of you and that kind of stuff. But we probably assumed a little too much when how efficient were you at not being distracted, for example, while you're driving down the road with your cell phone because you've done that your whole life in your personal car, right? And so those kinds of shifts have kind of caught up with us and we've kind of had a blind spot for that. But we're trying to get that fixed back up.

Just a couple more and then we'll open it up to questions. But I meant to ask this during the M&A period. What's the right way to think about leverage? And if you continue on the acquisitive path, how much gearing should we...

There's really no target that would say, hey, we're going to be at 2 turns or 2.5 turns or even 1 turn. I mean this year, we've used our balance sheet more than we have probably over the last 40 years. We've invested almost $350 million to $400 million in acquisitions. We've bought back stock of $300 million as part of the secondary offering, which I'm sure we'll talk about here in a bit. And then we also have paid dividends. We've raised the regular dividend a year ago, prioritized that over the special dividend. And I think we're on track this year to pay about $250 million of dividends. So deploying about $1 billion of capital across all those various elements. For us, it's about maintaining balance, investing for growth, pursuing growth, being active in the M&A market. Having meaningful contributions from M&A in our growth profile is really important to us. Driving improved cash flow performance, and we've had a great track record of generating strong cash returns, and that will enable us to maintain that dividend, continue to grow that dividend with our shareholder base, which today, we're paying out about 50% of cash flow, and then making -- taking the opportunity to be opportunistic when we can on share repurchase. We were -- it was great to be able to participate at the level we participated a week or 2 or so ago on the share repo program.

So just one of my last ones and then we'll open it up. You guys are -- you talked about the opportunity set in the U.S. and some of the big trends and secular drivers and people moving to sunnier states and you talked about population growth. You're over 90% exposed to the U.S. Is the future so bright that you don't have to consider the rest of the opportunities globally in other developed markets? Or do you think about this sometimes? And if so, how should we consider that?

I think we're certainly focused on the U.S. The market is the largest -- single largest market that we operate in and compete in and it's the market where we're strongest. And so we're going to continue to double down on that market and invest disproportionally in that market while remaining open to opportunities outside the borders of the U.S. And we've built a nice franchise or a nice business here in the U.K. We've also built a nice business in Singapore, Australia and in Canada. And we're opportunistic. We're continuing to look at other opportunities outside of those geographies. But what you won't see us do is chase and plant flags. It's all about finding that geography and investing in that geography to build a business that can be scaled. You're not going to see us buy 1 or 2 little pieces in, per se, Germany or in France. If we decide to invest in those regions, we're going to build a platform in those regions. And so that's kind of the approach. But we do -- we are fortunate to have our strongest position in the single largest market that we compete in.

I'm going to turn it over to the crowd.

In fact, I've used your pest control service in the U.K., so thank you very much.

Which brand?

Safeguard.

Yes, Safeguard, yes.

So thank you for killing that mouse. Saved my marriage, I think. Essential, yes. I mean that speaks to the business, incredibly recession-resistant, a business that's shown pricing power over many years as well. Particularly on the commercial side of your business, I suppose, where it is used in essential service, often regulatory driven. But if you look at the residential side, we're in a bit of a stickier environment now. Might potentially you see the number of repeat visits throttle back? And if you combine that with maybe some cooler weather in this wild world that we're in, could that potentially be a road bump for you?

The weather is one of those funny things. If we're going to have another Ice Age or something, sure, I think that would affect us. Cooler weather, in general, isn't going to radically erode much of anything. And I think if I had to put my money on it, I would say it will probably be warmer, not cooler. So we really hadn't thought too much about that. Where we see the variance in some of that is really at the quarter level, where did season start in March or did season start in April? Kind of the shoulder season affecting things like that. So I don't know that there's -- we hadn't thought about or those kinds of risks we see. We see all the secular data all just being very positive for the most part. So we have a term for that called allowances. So an allowance is a customer gets quarterly service or every other month service, and they say, "Oh, I want to skip it because I don't think I need it." And we run -- our allowance rate runs around 1%, right? That's it. And actually, this year, our allowances are pretty -- are considerably better than they were a year ago, actually gotten better year-over-year. So in part, that's because of staffing because we've been better staffed than we were a year ago other than -- others, just the consumers are taking, accepting and paying for service. So if a customer is not paying us and they're in arrears with us, like that's another indicator. So if we saw what was going on with receivables was starting to float up, that's going to essentially affect your allowances because I'm not going to go service again a customer that already owes me from 60 days ago, right? So then that affects my allowances. And we're not seeing any of those kinds of trends on the consumer side with them not paying for the service. The vast majority of our services these days are being sold on autopay, credit card on file or ACH bank drafts. So it's almost like they don't even see it. And I imagine if they got a bill and had to write that check all the time, maybe that changes. But these days, we just don't do business that way. So that's -- I think we're in a really good place, yes.

And I think if you try to manage a situation by hiring somebody to take care of the issue and then deciding one time is enough, I think that's the wrong solution because ultimately, Jerry is a trained entomologist but I'm learning under one of the best entomologists in the business. I think what you'll learn is you try to treat it one time and it will eradicate it for a period of time, but they're going to come back.

Unless there was something there, some way they were getting in, there's some environmental issue around the house that's causing -- there's a reason that they were there.

There's a reason they were there. So that's why the business is so sticky. You even have this onetime -- repeat onetime customers. So I mean it's really a great business model.

Other questions from the crowd? Coming through right here? Get to the second call.

What kind of financial metrics do you use when making an acquisition in terms of payback time or IRR, et cetera? And also, when you make acquisitions, typically, what kind of margin uptick do you see once it's under the fold or once you have used your magic?

I always look at businesses, like when I think about acquisitions, and I'll let Jerry answer too, but from a financial perspective, I like to buy businesses that ultimately are going to grow faster than my business. Forget about year 1. Everybody accretes sales growth in year 1. But what's that organic growth of the business you're buying? And can you accelerate it? Like Northwest is a platform. Jerry talked about acquisitions earlier in a partnership and acquisitions. Well, we funded acquisitions of Northwest that they've made since we bought them. So can we buy a business that has growth aspirations that needs financial and funding to grow? So the growth profile is important. The margin profile, are we buying businesses that are going to be dilutive or accretive to our margins? Earnings per share, it's become more focused recently with interest rates where they're at. Can we be accretive to GAAP earnings in the first year? Fox, heck, we were accretive in the first quarter on GAAP earnings. Incredible acquisition. Cash flow, the last thing I want to do is go out and buy a business that has the -- uses more cash in its business than we use. So you want to have an accretive cash flow business you're bringing into the fold. Return on capital, we enjoy some of the best returns on capital in our business. So again, I don't want to dilute that. And I want to buy businesses where I can accrete in excess of my cost of capital by year 3. And so those are some of the things that I think about when I'm looking at an acquisition and the lens at which I look at acquisitions through.

Yes. When we get books from, say, a broker side with their pro forma and their add-backs and all that kind of stuff, we have so much work that we have to do. Because a lot of their stuff, we don't see it. And we know that because we take a longer-term approach in how we go through -- well, call it that integration on a larger brand, we're slow and methodical when we're thinking long term. We don't want to do anything that's going to cause any harm, that is going to disrupt the long-term prospects of that business. So when we do a pro forma, we're very conservative in year 1, like ultra conservative, probably. And then in year 2, we could start getting a little more aggressive. And we really model out majority of our returns, years 3, 4, 5, 6, 7, 8. And we're like, how big is this business going to be and how much cash is it going to generate when we get it there, right? So we just take this really long -- a long view of M&A. We're not there to, what you call it, the sugar high. We don't -- we're not -- we get a little bit of a sugar high from tuck-in acquisitions where we're just slam-dunking them into the existing business. But we just are really disciplined about the big deals and how we approach it for the long term.

The nice thing is we don't have to have any one single deal. We can, and we have, you can walk away from deals. You see others maybe don't have that luxury. When they go after acquisitions, they have to be successful, so they bid up the price and sometimes they'll bid up the price against themselves, unbeknownst to who else is in the process. We don't. I mean we'll walk. When we set a number, I marvel sometimes when I'm speaking to Jerry and we're like $5 million apart, but we're going to walk away because we just don't see the value. We're not going to chase it. And then in the end, we end up getting it or we end up feeling good about the outcome of that process. So I mean it's a really good business because the pipe is so long on acquisitions. The pipeline is so strong. It's so long. It's a -- affords you the luxury of being able to say no.

Can I just ask a question on management and the changes at the top? Gary Rollins, is he still as involved as he always has been? And Jerry, if I might ask what -- why was Kenneth the right man for the job? And Kenneth, why were you attracted to the job?

I'm going to leave the room while he answers this.

So first part, Gary. Gary is still pretty active in that he's in the office most days. He's our Executive Chairman and still is -- still just loves this business. I mean he's been at it for 57, 58 years now in pest control. And he'd probably tell you, like I do, it's the only thing -- my wife will say it's the only thing I know anything about. He just absolutely has a passion for it. And he'll send me notes. He sends me questions. Hey, did you see this on the DOR report today? What's going on in Pacific division with leads, right? He still just -- he just pays attention and he's had to apologize to me a couple of times earlier in the year. He goes, "I'm not really prying in your business. I'm just curious." He just wants to know what's going on. At first, I took it like he wanted to make sure I knew he was still looking. But at the end of the day, he just loves this business. So from that standpoint, I personally enjoy that he is around because I meet with him usually about every 7 to 10 days. We spend time together, and he's just a tremendous mentor and adviser to me. And then on the Kenneth side, Ken and I, we dated for a couple of months, didn't we?

Yes, it took a while.

It took a while. And Ken would come in and he'd sit in my office and we'd look at the numbers, and he's like, how does this business trade at this multiple? What is the -- he just had a really hard time. We're just awesome. I don't -- it kind of is what it is. And we -- when we started talking through the numbers, for me, Ken had a background where you come from MSA that was, at one point, also a family-controlled company. And he had seen some of the changes there, so that appealed to me. He had also gone during that same period of time and changed certain things about the business to make it better and bring more value to shareholders. So I knew that I had done my research on the track record that he had in that role. And then we just kind of felt like we had a jibe, that we were in alignment on where we thought the business could go, how we could maybe grow it a little faster, put a mark on the business without changing fundamentally who we are and what we're all about. And we're still true to our roots. We believe in what we do. And we'll continue to always think long term about the business. And those are things that are just never going to change.

Yes, 3 things here on Jerry because we're running over time, but I can do it real quick, 3 things. One is he knows the industry like no other. He's got relationships everywhere, affords us so much growth opportunity. So it's great to partner with somebody that has that level of respect across this really attractive industry. I came from an attractive industry. But I'll tell you, this one is really attractive and he's got great relationships. He's a trained entomologist. I didn't know something existed like that before I joined. And he knows bugs. He knows the science behind it. And there really is a science behind bugs. And that makes this business even more special is the fact that there is a science behind actually pests. And last but not least, I mean for a CEO, in my perspective or in my opinion, and I've worked with a few good ones, one of the most important thing a CEO can do is lead people and interact with people and create a followership. And I think Jerry does a really nice job doing just that. So those are the 3 things that I would point out on Jerry.

That's sweet, Ken. Thank you.

I think I'm going to leave it there. Jerry and Ken, it's been such a fantastic hour. Huge thank you.