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

In the first session here, we have Rollins. I have Ken Krause, the CFO. He'll be talking a little bit on the company and let's start out. I guess just maybe just give a quick kind of overview of Rollins. I mean this is a wide group of investors, kind of a quick overview, and then maybe we'll talk about kind of trends in the market.

Certainly. Great to be here again this year representing Rollins. Business continues to be very strong. We continue to operate and compete in an incredibly attractive, very large, growing and fragmented market space. And our strategy is certainly working. We continue to see robust levels of organic growth. We're continuing to be very acquisitive. As I said earlier, the market is incredibly fragmented. So it enables us to be very acquisitive and add a few points of growth just about every year. And so we're continuing to target additional M&A opportunities to bring into this model that continues to compound revenue at a very healthy clip. Earnings continue to grow at a much higher rate than our revenue. Earnings -- or I'm sorry, cash flow also is exceptionally strong with negative working capital because customers oftentimes pay us in advance for our service and very strong returns. So again, strong market, strategy is working, focused on execution and making a tremendous amount of positive change across the organization.

When you think about maybe the start of this year and kind of the seasonality that you normally see, let's talk, first quarter was warmer than expected. How has that played into the second quarter when you think about. Was anything pulled into the first quarter from the second quarter? How is the seasonal ramp up to the busy periods kind of working out?

Certainly. We started the year pretty slow. January was a tough month. We had tough weather conditions in areas across the South Central region of the country where we were shutting branches down because of the weather pattern that we were seeing, and that's challenging. We saw improvement in February and in March. And so very strong improvement across those months. April was a very healthy month for us, continues to give us confidence in our ability to deliver 7% to 8% organic growth in the business here again in 2024. So the markets continue to be very healthy. Weather patterns are relatively favorable for us. It's been pretty warm in Florida. I was just in Florida not too long ago and it was exceptionally warm there. It took a little bit of time, though. It's interesting. In April, Georgia and Florida took a little bit of time to really come online but they've since come online, and we're seeing some pretty good results coming through the southeastern market of the country. Our brands are positioned well, and we're seeing good results across the portfolio.

And when you think about the different, I guess, segments across in that kind of benefiting of the seasonal difference, maybe talk about just residential, commercial termite. What's the impact?

Yes, I'm glad you asked that. It's interesting on the resi business continues to be pretty healthy. We -- it's a choppy market in some of our onetime business. It's been choppy for a while. But overall, it's -- we're positioned well on the resi market. The termite market is healthy. We're seeing pretty good results actually in some of the new housing markets with our HomeTeam business. Our partnership with new homebuilders and large homebuilders actually is seeing some nice improvement here as we started 2024. The ancillary business is following on very much what we saw last year and the year that preceded that where we're seeing good demand for that ancillary business. The house ultimately has 9 opportunities for us to do business with a homeowner and not just your traditional pest control, but your mosquito, your ticks, your ridge guard, your insulation, your encapsulation of your crawl space. We're seeing good demand for all of those services as people stay in their homes longer, they want to take care of their homes and we're seeing good demand there. And on the commercial side, at our recent Investor Day, we talked about commercial as a really big focus of ours. When we think about the future. And we've seen good demand there. I think in the first quarter, we had 10% organic growth in commercial and that was followed after -- that was following on at 2023, but also had really robust levels of organic growth. And we're starting to do more around the commercial business. We've set up a focus -- have a strong focus on setting up and standing up our commercial enterprise. We've been in commercial for a long time, but oftentimes, commercial has been part of our residential branches. And so we've started to pull that commercial business out, splitting that out, providing management and leadership and accountability on the commercial area while investing in new sales resources and efforts to drive demand and it's having a positive impact. So all in all, it's a pretty good market we're in currently.

Right. I mean you talked about that on your Investor Day, kind of that 6 commercial division and piecing that out and when you think about the commercial, you talked -- on residential you talked about 9 kind of like services. How does that look in commercial? I mean when you talk about maybe the penetration of services to the commercial? And how does that evolve under the new kind of commercial division?

Yes. We have multiple services. We don't certainly have 9 services to offer a commercial enterprise, but we have multiple services that we oftentimes offer a commercial enterprise. And not only are we offering multiple services, but we also very similar to residential, we've got different types of pests that we're certainly helping customers respond to. Whether it be your traditional pests, your rodents, your bed bugs, other sorts of pests that we certainly see from time to time. So we're certainly very active there. The thing that is interesting about commercial is it's a really important purchase by our customers. When you think about protecting the brand, there's nothing that will destroy the brand faster than when a customer comes into a restaurant setting and sees a pest or opens up the box that they just received at their home and there's a pest in the home or -- I'm sorry, in the box. So there's -- it's really important for -- when we're in the market at least when we're dealing with our commercial customers, what they say to us is we want a strong brand that we can get behind. We want a strong brand that will help protect our brand. And so that makes it a very attractive market for companies that are well established with very strong brand profiles. And we're seeing good demand for that. And so we continue to double down and invest disproportionately in that commercial area of the business as we think about the future.

Right, culture and brand was a big piece of the Investor Day as well. Maybe we could just kind of, I guess, review some of that in the perspective of how does culture and brand really kind of help you outgrow the competition when you think about growth rates within the segments?

Certainly. When you look at the culture, when we think about acquisitions, we've been very acquisitive over the course of the last 5 to 10 years, especially the last 5 to 6 years, we've done more and more acquisitions like Northwest and Clark and others. But when we go and look at an acquisition, the first question we ask ourselves at times is, does the culture fit? Are we buying a similar culture? And if we check the box on that, it gives us the confidence to move forward. And that culture needs to be built on what we call the servant leadership. We're in a customer service market and industry. We've got to have a business and our brands need to focus on serving our customers. Our people need to be focused on serving our customers. And so that's a really important part of the M&A equation when we go after and acquire some of these businesses, but the culture is certainly paramount.

And how -- I guess, how different is that from a lot of your competition, whether it be larger ones or smaller? I mean is that -- is it hard to find a lot of smaller acquisitions or M&A that kind of fit that mantra because it seems somewhat of a unique structure.

No, it's interesting. As you see data on our market and our industry, you see that it's a very long tail of competitors, a very large market, continues to grow. The thing that we do different at Rollins that maybe you don't see as often at other companies is the relationships that we have across the industry. It's not just Ken or Jerry that's going out and identifying opportunities, we're seeing opportunities flow from the ground up. So people know these businesses, and they've known these businesses for a long period of time and they know how they're built. And so getting in early and developing those relationships and getting those relationships from the ground up is a really big part of the reason why we're so successful in acquiring. And so it hasn't been a challenge. It hasn't been difficult for us to find those opportunities. And oftentimes, people come to us because they know our reputation for acquiring. We take care of people, we take care of brands. Where there's a value in the brand, we're going to make sure that brand stays intact. And so people sell to us because they know they can still live in that community because the people that they employed previously are being taken care of. They can still be active and see their brand in the community. It makes them -- it gives them a sense of -- and a source of pride and as a result, we're oftentimes their acquirer of choice where others maybe take a different or a more aggressive approach. And so oftentimes, we'll see where we might be the only party at the table with a potential seller because the seller equation that they have disproportionately really values the employee and the brand side.

Right. And I was going to say, when you acquire, how often do you keep on like the management, and...

It's very common. I mean one of the questions we ask in the due diligence phase is what do you intend to do after we buy you? Do you intend to stay involved? Do you want to phase out of the business? And we've been accommodative in a number of different scenarios to different approaches. But we really do like to buy businesses where people want to stay in it, and they want to partner with us to grow that business. Northwest is a great example. We bought Northwest in 2017. We paid over $100 million -- $150 million roughly for that business. We bought about [ $50 million ] of revenue. The Phillips family owned that business for a long time. The father was ready to phase out and the sons were going to stay in the business, Stanford and Steve Phillips. They still are in the business 7 years later. In fact, Stanford Phillips was just promoted to a role at Rollins that's more broad. And we've provided growth capital to it that it didn't have coming into the fold. So we've grown it from $50 million to $150 million in 7 years, half of that $100 million of growth is M&A. The other half is organic growth. And so having that balance is important. And that's a great, that Northwest example is an example I use all the time for how we buy businesses. There are some people that phase out. There are some people that stay in and we provide growth capital to help it reach its full potential.

Right. And I guess I mean growth capital maybe is a good segue into. When you think about -- when you talked about, again, on Investor Day, digital and the investment instead being made in digital. I mean how much one, just digital, let's talk about what's that doing for Rollins, but how much of that is an opportunity in the M&A that you can do exactly like the Northwest, where many smaller players, is that a big hurdle for them to overcome putting in a digital platform and those kind of things that you can then help with?

Yes, it can be. It can be a barrier. And -- but the digital platform that we talked about so much at the Investor Day was related to our commercial business. And in the commercial business, we've got a digital platform where we interact with our commercial customers. It's kind of a rule of the game. And so in order to be successful in that space, you've got to have that way to interact with that customer set. We have it. So that creates a little bit of a barrier for smaller players to enter that commercial area and compete more extensively with people like ourselves. And so we certainly see an advantage there. And coming into the fold, people benefit from they having access to that digital footprint that we have.

Right. And has that helped M&A on the commercial side?

Certainly. I mean, well, I don't know that it's helped the M&A. It's helped us fuel our growth. I don't know that it's necessarily been a big part of the reason why we've been successful in M&A, but it certainly has helped to grow our business. Once we get businesses into the fold, it's helped us reach the growth potential that we otherwise didn't have in the business. This doesn't necessarily apply to that specific question. But when talking about growth in the realm of M&A, we acquired Fox a year or so ago, Fox Pest Control. We paid a healthy valuation for it. 13.4x is what I think we paid for it. And at year-end, we're trading at 9.7x of multiple of EBITDA. So you saw a really big improvement in that multiple in year 1. A big reason why we improved so much is because we've seen so much growth, that business is continuing to grow. We're fueling more growth. We're putting more feet on the street. We're fueling the door knocking. We're really putting some support behind it. It's partnering with our HomeTeam business. The onboarding and integration work is led by Brady Camp, who heads up HomeTeam. And when you spend more time and understand HomeTeam, you'd see the benefit of the door knocking with the HomeTeam business. So we're starting to do and continuing to do more on that side of it.

So I guess that's an interesting just kind of growth on a broader picture. But when you think about acquiring companies and, let's say, they're growing kind of at the market growth rate. How much can you accelerate that when you pick them up and you're able to kind of put the Rollins process behind it. I mean, what's kind of the typical gain you think about organic? I mean maybe an exact number is not out there. But clearly, there's something above the -- just the cost savings and the integration, there's definitely a revenue growth opportunity.

Yes, it's not -- it's interesting. I'm glad you mentioned that because it's not really a -- today, at least, it hasn't been really a cost takeout program. It's really a growth mindset. It's really buy these businesses, invest in them and grow them because those incremental margins on that growth is -- are very attractive. And so it's been -- and the market is growing and it's attractive, and there's opportunities to grow. And so it's really been that angle. And when we buy businesses, our focus is to buy businesses that will accrete to our organic growth after year 1. And so it's obviously easy to accrete the growth in year 1. You're buying the business is brand new to your business. But the organic growth, how does it inflect or change your organic growth in year 2, 3, 4 and oftentimes, what we're seeing, we're seeing contribution and accretion to organic growth coming through from these acquisitions. It's hard to put a precise number, and we don't necessarily have a target for how much organic growth should come through and accrete to our organic growth after year 1, but we certainly are trying to buy businesses where we're seeing organic growth that's higher than that 7% to 8% and will add to the organic growth profile. The last thing we want to do is water that down and pull that back. Our focus is to how do we continue to sustain and improve that profile.

Yes. And I think -- well, let's talk about growth, again, I guess, maybe through the segments. I mean you've kind of delineated this before, but I think it might be useful to review just kind of what's the market growth rates within the segments and kind of that incremental that Rollins is able to achieve above that because, I mean, that's part of what we're talking about right here on the M&A and the other projects. So let's kind of maybe walk through them.

Certainly, when you look at the overall market and we talk about the overall market quite a bit. The overall market $20 billion-plus or so global market we compete in. We see an opportunity for it to grow and continue to expand a lot of secular tailwinds around it, whether it be weather patterns, whether it be more dense or populations in certain regions of the country that are more favorable for pest or how pest evolve. But overall, when you look at the growth, it's a mid-single-digit sort of market growth all in. You have pricing, of course, that's in there. So you might be a 3-or-so percent growth in the market, plus a point or two of price and then what we've been seeing is 7% to 8% organic growth. So we're seeing some share gain when we look at our overall portfolio. When we look at our growth profile and we think about the future, we think the resi market is probably going to be at or slightly below that organic growth of 7% to 8%. The commercial should be a little bit above and the termite and ancillary should continue to be a healthy contributor to growth as well. Oftentimes, people segment and we have segmented residential from termite and ancillary. But those markets, in my mind, should be viewed very similarly because we're servicing a homeowner. We're servicing our residents. And those 9 shots on goal that I gave earlier are all at the residents even though some are in the termite and ancillary and some are in the residential market. So you should look at those together, but when we look at the growth profile in termite and ancillary, you should continue to see if we're separating it and reporting it separate, the termite and ancillary should be accretive to the overall growth profile because of all the opportunity on the onetime business that we have and we continue to see in the portfolio. So that's generally how we look at the growth across the various segments.

Beyond growth and when you think of margins, how should we think about margins across the segments? I know you don't really break it out in great detail and there's some similarity, but maybe just some color on how to think about it.

Yes, they're pretty similar. There's not a lot of disparity in margins across the various segments of the businesses. It's a -- all the businesses are very attractive from a margin profile. When you look at pricing and you look at the markets for pricing, there might be a little different between certain residential markets. It also might be a little different between residential and commercial. When you look at the size of the wall of the customer, just naturally, you see bigger opportunities in certainly the commercial area. But generally speaking, the margin profile is pretty similar. It's pretty attractive. If you force me to pick any one business over the other, I'd be really challenged to do that. I'll take resi, I'll take commercial. I'll take termite and ancillary. But that commercial business is more sticky. What makes it attractive is the commercial business comes into the fold and it oftentimes stays with us for 7, 8, 10 years. The churn is much lower there than you see in the residential homeowner. And -- so for that reason, I probably would default and say, let's go with the commercial business because there's a longer life with that business than what you traditionally see on the residential side.

So yes. So I guess from a customer like return perspective, maybe commercial ends up being a little bit higher while the margins don't necessarily.

Exactly. Exactly. And it's just because of the life, the term that you have and the life you have with a customer is naturally longer. They're less prone to cancel a service than a homeowner is. It's just a much, much smaller portion of the overall budget.

Is there any easy metric out there when you think about the life of a commercial versus the average life of a residential? Is it twice as long, 3x.

It's -- I'll tell you, it's probably -- I mean the churn is probably -- it's hard to put a number on it, but the churn is probably twice the level of churn in the resi side than it is on the commercial side. Just in general round numbers. So it's -- there's much more churn. Certain zips and certain regions have much more churn than average. Some have less churn than average. And so it varies dependent upon a number of different factors, but you see -- there's a sizable gap between the commercial and the residential side.

Okay. And then we've talked a lot about growth and those opportunities. How about on the cost side when you think about opportunities to take costs out maybe across the segments, where does that happen maybe at a higher level, back office? Where are some of the opportunities there?

Sure. When you look at the P&L, we have an incredibly strong P&L, a great incremental margin that we benefit and we have benefited from for years. But when you look at the cost structure, there's opportunities in gross margin, there's opportunities in SG&A. We're looking at it from a gross margin perspective, of course, pricing. We're focused on CPI plus pricing. This is a service that people should be willing to pay for. And so our focus is to get above CPI. So we're at 3% to 4% price now. If CPI gets back to 2% to 3%, we're hopeful to be able to hold the line. We'll see and we'll manage and monitor data, but we're hopeful to be able to hold the line on that 3% to 4% price increase. We're working with our vendors. We're looking at our vendors. We're evaluating vendors. We're working closely with our vendor community to manage the cost of our materials, so as our supplies, of our fleet, fleet availability. We're looking at our back office, our SG&A a bit higher than what you see in other route-based businesses. It's also higher than industrial businesses. So we're looking at how we can continue to rightsize that. But I'll tell you, if you gave me the opportunity to save money in the back office, but invest it in growth. I'm going to do it all day long. This business has such an attractive margin profile that I want to go after and I want to get that additional revenue dollar in the door. And so if I can like -- so for example, we finished last year, we started this year. We saw this year, I want to say, 20 basis points of improvement in SG&A. But if you unpack that, you'll see that 50 basis points was invested in selling and marketing, and 70 basis points was saved in the admin side. So that's the kind of thing that, I'd like to see savings as we move forward. But boy, if I can continue to get that 7% to 8% sort of organic growth, I'm going to go after investing that because those incrementals at 30% or so are really attractive.

Right. And I guess that's an important point. It's -- I just kind of wanted to highlight that incremental margin. When you think about that incremental margin versus where your average margin is, that differential? And then maybe can that incremental margin get higher. I mean, how does that go?

I think -- I mean I'm hopeful it can get higher. And any business needs to consistently focus on improving the incremental margin. Because if you improve the incremental margin, you're improving the business model. And so when we look at that incremental margin, whether it be through a pricing lens, a mix lens, I mean there are certain brands that are more value -- more profitable than other brands. So that certainly is important. Taking cost out, both gross margin and cost of services as well as SG&A., all really important to helping inflect that incremental margin higher. So if we can continue to take some cost out, be focused on continuous improvement, we're hopeful that, that incremental margin will get to that 30% to 35% on a more consistent basis. If you go back to the third quarter of last year, it was a really clean quarter. We didn't have a lot of one-offs that came through. And I want to say that incremental margin was 35% or 37%. It was in the mid- to high 30% range. It showed what the business was really capable of doing longer term. And so that, I think, gives me confidence and some optimism for the future and how we could expand the incremental margin.

Okay. And then with the last few minutes here, let's talk about capital allocation. Maybe how do you guys think about that from a deployment of capital, whether that be M&A, dividends, share buybacks or -- and then also maybe leveraging the balance sheet, how that would work or what that might look like.

So great question. And we really are focused on maintaining balance across the capital allocation pendulum. We -- when I joined in '22, we had the past practice of paying a special dividend. We've moved away from that, we've priced that in. We've raised the dividend, the regular dividend by 45% in the last 2 years. We're paying out 40% to 50% of cash flow, very sustainable level of dividend because we continue to compound cash flow at a mid-teens sort of range. In the first quarter, we grew cash flow at 29% and so we continue to see really good robust levels of cash flow, helping us service and grow that dividend. But I'll tell you, the focus here is growth. How do we continue to expand and improve and increase our business, our position in our marketplace. And so we've continued to be acquisitive. Last year, we deployed, I want to say almost $1 billion of capital, $300 million to $400 million was in acquisitions, $200 million, $250 million or so was in dividends. The remainder was share repurchase. So we were active last year in buying our shares back. In September, we had a secondary offering. We participated. We bought $300 million back as part of that secondary offering at a very attractive price and have seen great returns on that. So we're going to continue to deploy capital. We're going to continue to be open to all aspects of our capital allocation strategy. And you mentioned debt, you mentioned leverage. We have a very strong balance sheet. We have about half a turn of debt on our balance sheet. When I joined I think it was neutral or there was -- it was net cash positive. And so we've started to deploy more capital and deploy the balance sheet more. We're going to continue to look at that. We're going to continue to be active there. We're not rushing to do that, but we realize it's an option, and we're going to continue to leverage that option as we move forward. And so we'll continue to evaluate it. But the focus is to remain investment grade. This company will always -- our focus is to maintain investment grade and investment grade flexibility as we think about the future.

Okay. Well, I think I'm -- right now, we're just about on time. I got a minute left. I want to thank you very much for participating. This was great. Hope to have you back again.

Brian. I appreciate it, and thanks, everybody, for attending. Thank you.