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

Good afternoon, and thank you for joining us. I'm Jason Haas. I recently started at Wells Fargo as the business services analyst. I'm really fortunate to be joined today by Ken Krause, who is the CFO of Rollins. He's been with the company for about 2 years now. So we're very fortunate to have him here today with fireside chat for 35 minutes. And yes, we'll go right into it. Thank you for being here.

Yes. Thanks for having me. I appreciate it. Always great to be here, be with you, Jason, talk about the Rollins story and share all the exciting things that we're focused on executing around.

Great. Maybe to start, can you talk about some of the changes that you've made since joining the company? What have been the biggest areas of focus for you?

Sure. I joined in August of '22. It's hard to believe it's coming up on almost 2 years now. And over the course of the last 2 years, we've revamped our capital strategy, capital allocation strategy. We historically, before me joining, paid a special dividend. We have priced that special dividend into our regular dividend. We've raised the dividend by almost 45%. And we feel like we're positioned well as we continue to grow the business to continue to grow that dividend and sharing that, and then that grows through the growing dividend with our shareholders. We've changed our auditor. We've moved -- migrated away from Grant Thornton to Deloitte and seen some nice just improvements in modernization. We've greatly improved our talent in our back office. Lyndsey Burton's with me today. She heads up Investor Relations. She joined us just over, I think, 6 months ago now and is bringing a really nice fresh perspective to IR. We had our first Investor Day a couple of weeks back in New York. It was really good to share some of the exciting growth opportunities that we see for the business. We've bought back our stock during the past 2 years, about $300 million of buybacks. We made our second largest acquisition last year with Fox, which has been an exceptional acquisition. The multiple is down almost 4 turns, I want to say, in year 1. So a lot of change, a lot of upgrading of talent, a lot of changes in our talent profile. And modernization has been a big important theme for us. We're looking at new technologies where we're consolidating our financial results, our back office with the hopes of becoming a better acquirer of businesses, a more efficient business model and driving improved profitability profile.

Can you explain the thought process behind your decision to break out a new commercial division for Orkin?

Certainly. At the Investor Day in mid-May, Pat Chrzanowski, our Head of Orkin, our President of Orkin, shared the strategy that we're continuing to execute on around our branch strategy. And he also shared a focused discussion -- and we had a focused discussion on our commercial strategy. For a long time at Rollins and at Orkin, commercial was part of every one of our branches. So we had residential and we had commercial. Over the last couple of years, we started to create a sixth division, our commercial division. And what we're starting to do is provide more accountability into the commercial business. We've essentially carved out the commercial business in certain areas. Not across the entire footprint yet, but we're starting with test markets where we're carving it out. We're pulling it out, and we're placing more emphasis on sales resources and funding growth in commercial. And we've seen good results. I want to say the last 12 or so months, we've seen high single, low double-digit sort of organic growth in commercial. So we see great opportunities to continue to drive continued outsized growth in commercial, nice levels of profitability. Churn is oftentimes lesser in commercial than it is in residential. So your lifetime value of your customer is greater in the commercial setting. So there's a number of things that really make that market very appealing, not to mention the fact that it's really the services that are provided in that market are oftentimes done by the well-established, very reputable large national brands. So that Orkin brand fits perfectly with our strategy to grow the commercial setting with a focus on not only large national brands that you would probably be well aware of but also smaller local brands. Every community that we're in oftentimes has a hospital system. It has government offices. It might have logistics. It might have travel and hospitality, restaurants, all types of different businesses in each of these communities that provide us an opportunity to service these customers. And so those are a few of the reasons why we continue to look at commercial and are excited about it.

Great. During the Investor Day, you also mentioned plans to create a second commercial division. Can you talk about what that would look like? I think that may be a year or so out.

Yes. Great question. And really, what that is, is when we look at our journey across the commercial market, we started with separating certain test markets. And we imagine that as we go -- and we envision as we go through the next 12 to 24 months, this commercial segment and business will get much larger. The focus will be much larger. So what we potentially would do is split the west from the east or the north from the south. So we would split the market into 2 specific geographic regions. What we found in our branch strategies is that focused growth is the best. If we can separate these branches, make them smaller, we oftentimes see more robust growth. So we're following a consistent approach with the commercial business, and we're seeing good results.

Can we double-click on that? Can you talk about your general strategy of splitting branches once they reach a certain size? And why not go the other way like some are doing the market and create more -- consolidate and create more like mega branches?

So we think it's more of a growth mindset. When we look at our branch strategy, what our data has told us is that when branches get to a certain size, say, $5 million, $6 million or $7 million in annual revenue, the growth will slow. You're focused on managing a very dense route. You're not focused on the growth opportunity that might be around that geography. And so if we can split that branch and create 2 branches, oftentimes, what you'll see is you'll see new markets being accessed by that branch footprint. Your digital leads might see an uptick because you now are accessing new areas with digital leads. So you're tapping into new markets, you're creating new market opportunity to grow that business. And so that's been a really important part of the strategy, I think, for some time at Rollins. But we're continuing to be more intentional and, quite frankly, a little bit more aggressive when it comes to that branch strategy because of the results that we've seen when we split these branches. This is hard work. It doesn't happen overnight. It's not easy. So as a result, we take our time. We take a very pragmatic approach and a targeted approach where we see the biggest market opportunity for us.

What inning are you in, in terms of leveraging and investing in the technology across the organization? When you look at technology, what areas in particular you get most excited about?

So when we look at that journey, Renee Pearson joined us, oh, gosh, just under 2 years ago. Just after I joined, Renee joined. And she's been a wonderful addition to the team. She spoke at our Investor Day a few weeks ago, and she showed a slide that was really illustrative and really demonstrated the -- what we call technology debt we have across the organization. We have all these brands. We have all these systems, and that all yields opportunity to consolidate. And so whether it be on our CRM platform, whether it be our routing and scheduling, whether it be the way we've consolidated our financial statements or just our general ERP, there's a whole host of different opportunities. And I kind of talked about them in those -- in that order intentionally because even though ERP represents an opportunity, we're not going to be super aggressive when it comes to ERP implementation. We're going to be very measured if and when we do go down that road. But what we're looking at currently is our consolidation of our financial statements, the software we can use there to streamline the back office. We're looking at our routing and scheduling. You might be well aware of our BOSS system, where we're continuing to evaluate that BOSS system for enhancements that we can make. And then our CRM platform, how we interact with our customers, how we interact across our brands. We're continuing to look at how we leverage that back office and that technology investment more effectively.

Can you talk about what sort of data you collect on your customers and if there's an opportunity there to leverage that data more efficiently?

So it's interesting you bring up that point. We, a week or 2 ago, as a team have really started to proactively look at our position with our customers from a data perspective. We're starting to take a more proactive approach at looking at what data we have and what data might be most important and most valuable to us that we can start to monetize or start to inform our decisions. The one piece of data that's really important for us is we have such a broad breadth of brands. And if we can continue to identify and monitor when customers might leave brand A so that we can manage brand B, C, D, E and F to realize that potential growth opportunity, that's an important part of the strategy as we go forward. But there's a number of other things we're evaluating. We're very early on when it comes to our data strategy as many companies are. But as a result of having such a strong position with our consumers, with the consumer and with our customers, we feel like there's a natural opportunity to continue to leverage all of that data we have.

One thing I've noticed from covering pest control is that people don't appreciate how much of a relationship-driven business it is and how important the people are. Can you talk about how you run the company to ensure you're hiring the right people, you're incentivizing them appropriately, keeping the routes consistent where possible?

Sure. It's a people-based business. 50% of roughly every dollar we generate in revenue is spent in people. And we employ 20,000 plus people across the country, many of which are technicians on the front line. And so part of our journey and -- when we focus on our customers is -- very much starts with our focus on our employees. In fact, we have a very robust training program that we have in place that we feel like we can continue to improve upon with new technicians because when we look at employee turnover, for example, employee turnover in that first 6 months is the highest. Once we get technicians beyond that first 6 months into a year or 2, they oftentimes stay with us for several years. And so that's an opportunity for us, doing more around ride-alongs. Before employees come to work with us, they spend a day in the life of a technician to try to understand and appreciate what all the job is, and it entails. And so we're doing more around that. But continuing to ramp up the intensity of which we invest in training and learning, development of all of our people is incredibly important. When we look at the incentives, we have a -- what I feel like is a unique position with our employees and that clear down into the text, there's some form of variable compensation. And so even though a tech is a lower level in our organization, it's an incredibly important level in our organization because it interacts with our customer. And as that close relationship with the customer, that has an opportunity to drive growth from time to time. And so as a result, we incentivize technicians on growth. We incentivize technicians on pricing. When we get pricing, they get benefit from the pricing. So as that customer relationship grows, the technician will certainly be rewarded for that growth. And that helps us. That helps us manage our inflation associated with wages but also provides upside opportunity to our employees as we grow our business, as they grow, and they enjoy the growth as well. So it's a really important part of our strategy, Jason.

How has the hiring environment been recently for technicians?

It's been healthy. We haven't seen a significant challenge with hiring technicians. It's been a healthy market. And that goes back -- I know when I joined in '22 in the fall and early '23 -- in the fall of '22 and early into '23, we talked about all of our hiring practices and the supply of candidates we were seeing. We started to see a really nice supply of candidates during that time period. We've continued to see a nice supply of candidates as we've executed on our strategy. And that's important because we continue to see very healthy demand. We continue to see good growth prospects in our markets, but we have to have the people to do it. And so we're continuing to add people here as we go throughout the second quarter and providing investments in salespeople but also technicians.

At your recent Investor Day, you issued guidance. I believe you had the first time. Can you just talk about the thought process behind introducing that guidance, if that's something we should expect going forward?

Sure. I think when I think about what we call the guidance that we issued, it kind of goes back to April. In April, in our first quarter call, we talked about 7% to 8% organic growth. And you might ask yourself, well, why in April did you do that? Well, I think it was important because so many times, so oftentimes, people are so focused on residential pest control. And they lose sight of the fact that termite and ancillary in commercial continues to grow at such a robust clip. So we feel like when we look across the portfolio, there's an opportunity to provide more transparency into the growth opportunities not only in the residential business but also across the wide spectrum of services that we're offering. And we feel like that guidance that we provided provides our investors or potential investors with better insight into what the drivers of business are at Rollins. And so we did that for the first time in April. And then at Investor Day, we felt like it was important to show how we look at the business, how we're managing the business. And that mid-single-digit plus sort of growth, that mid-single digit to high single-digit sort of organic growth profile is something we're continuing to think that based upon all the strategies we have that we're optimistic and confident in our ability to continue to go after and drive towards. And we also feel like that margin profile, all the things we're doing on pricing, all the things we continue to do in the back office, all the things we're doing in our cost of services, we feel like should give us an opportunity to continue to drive our margins higher and improve our profitability profile.

Can you talk about what gives you confidence in that organic growth profile, both in terms of the industry drivers and then also what you're doing internally?

Sure. When you look at this industry, it has always been a very attractive space. This is an incredibly essential service. And when you look at the secular tailwinds, it's hard to find industries that have as strong a secular tailwind. So weather, people relocating from the north to the south, all of the pest evolution. You're always hearing about new pests. I think in the Wall Street Journal today, they talked about cicadas. Not that we provide services for cicadas, but it just drives awareness, and it drives a sensitivity to pest. And so as a result, you continue to see a very robust market for this service. And then when you couple all that we're doing with that robust market, we have a sense of optimism for the future. And those things that we're doing are -- they range from the commercial strategy that I spoke about. You talked about the branch strategy. When you look at a home, you have essentially 9 opportunities with the homeowner. If you go back to our Investor Day deck, there's a slide in there that shows, I want to say, 9 opportunities to engage with a homeowner. Incredible amount of cross-sell opportunity with existing customers. Then when you look at the penetration rate in pest control, oftentimes, people look at that and say it's underpenetrated at the home. There's not as many homeowners using it as there could be. And so that provides a sense of optimism. And then our brand strategy. We have multiple brands, both national and local brands. And what we have with that is what Jerry oftentimes calls the second bite of the apple. You may have worked with Orkin or you may not have. And you may have worked with Northwest but not Orkin. So there's all these different ways that we're accessing the customer through all these various brands, national, local and different ways through advertising channels, digital, cross-sell, billboards, performance marketing, brand awareness, television ads. I mean there are so many different ways we're actually seeing the customer in this attractive market. So all of that comes together to provide us a sense of optimism when we think about the future growth.

There's been some headlines about the consumer recently that may be starting to crack a little bit. Have you seen any signs of that in your business?

No, we haven't. I mean there's no real signs on -- and there's no real demand warning signs that we're seeing. In fact, the one area that I'll oftentimes look at is our ancillary, our onetime business. It was healthy in the first quarter, provides us -- and that's usually the bigger-ticket items. And that provides a sense of optimism that the consumer is relatively healthy. Or said another way, I can't maybe comment on the health of the consumer overall, but the demand for our business -- demand for our business remains healthy. And we're not seeing any major changes from the consumer that indicate that there's any sort of waning in demand for our services for our customers.

What was the consumer reception like to the 3% to 4% price increase that you put in this year? And is that a sustainable level?

Yes, I feel like it is. I mean we're monitoring that. We continue to monitor that. We continue to look at rollbacks and cancellations and customer activity that demonstrates the receptivity or lack of receptivity by the customer. And so we continue to monitor that. To date, we haven't seen anything that's significant or concerning, but we'll continue to monitor the pricing actions. We feel like -- we very much feel like this is a CPI+ business. So if CPI, consumer price inflation regresses back 2% to 3%, we feel like 3% to 4% for pest control is certainly very reasonable and falls within the realm of expectations for us.

So switching over to margins. Your guidance for this year calls for a 30% incremental EBITDA margins. But longer term, you're hoping to be more in the 30% to 35% range. Can you just talk about either what's pressuring margins this year relative to that long-term target or what you're doing to get up to that 30% to 35% range?

Sure. It's a range, and it's how we look at the business. We feel like we're -- we should deliver that sort of margin profile over the long term. And we have. I mean when you look at the business, it has the opportunity to do that. With that said, from time to time, we will make investments that might weigh down the incremental margin. We might invest disproportionately in sales resources or technicians. When we see a very healthy demand environment, we're going to be proactive at going after and investing in resources to go after and attract and retain people that can help us realize the growth in those attractive markets. And so that has an opportunity or that potentially has an impact on margins in the short term. But the long term, it certainly is the right decision. And so we're going to continue to do that. The other thing that has the opportunity to weigh on margins from time to time are insurance and claims, auto accidents, things like that. That has an opportunity from time to time. And we're doing a lot around behavior-based safety with our technicians and with our folks that are out in the field. We've implemented new software in our trucks that monitors driving and provides driver scores, very much like a credit rating. And we're seeing good improvement there. But this is a trend that takes time to shift. There's a macro aspect of it that at times can be out of your control. But with that said, we feel like we're doing all the right things to try to influence this in a very positive manner.

The long-term framework that you put out includes 2% to 3% of growth from M&A. As the business gets larger, it implies that you'll need to do -- you have to get more dollars from M&A. Can you just talk about the strategy there? Are you expecting to do more large deals? Is it going to be more -- larger volume of smaller deals?

Yes. So we will continue to be very thoughtful. You'll see us do smaller deals, but you'll also see us do bigger deals. I mean we've -- just the other day, Jerry and I and our Head of Corporate Development sat down and looked at the deal pipeline, and it's incredibly healthy. You're seeing a larger amount of smaller deals this year, but we also are very proactive in looking at the larger deals. And there's a number of larger deals we're continuing to evaluate to execute upon in the future. We expect to continue to use our balance sheet, also continue to use our very strong cash flow profile. Our focus for our balance sheet when it comes to these deals is to continue to be an investment-grade company, continue to deliver investment-grade credit profile and continue to grow the business. So we're positioned incredibly well. Pipeline is healthy. A lot of good activity there, and the balance sheet remains very flexible.

There was a slide at your recent Investor Day that showed the multiple when you acquired Fox. I think it was 13, 14x and how -- and within 1 year dropped down to, I believe, below 10x. Is that typical for the deals? Can you just talk about what you do to drive that expansion in EBITDA?

I'll tell you. It's exceptional. I mean that Fox deal, it's hard to find deals that are -- they're seeing that level of improvement in 1 year. I've done a lot of deals, and it's hard for me to find any deal that showed that type of improvement in the first year. So it's hard to measure it against others. We do see improvements, though, in deals from year 0 to year 1. That's natural. But what we're seeing in Fox is very good growth, good demand. As we said when we acquired it, this is a great door-knocking business. And when we acquired it, we talked about churn being at a healthy level. We talked about a well-respected brand, great people and an absolutely fantastic culture. And it's lived up to all of those. And it's delivered very strong results. So that growth profile, we're continuing to fund it. It's not a cost takeout story. It's very much that margin -- or that multiple improvement is very much enabled through growth, and that's an exciting environment to be a part of.

Does that -- does the success of that acquisition leads you to focus more on doing door-to-door or acquiring door-to-door sales business or doing more door-to-door in your existing businesses?

I wouldn't say that it leads us to do more of those at the cost of doing less of some of those other deals. I think we're open to doing all of those types. Like whether it be door knocking or whether it be our more traditional pest control, we're open to doing all of them. And we've talked from time to time that there's a sizable market opportunity on both ends of that. So we're going to continue to be acquisitive across the spectrum of deals and across the spectrum of opportunities.

After you acquire a business, what do you do to ensure that the integration goes smoothly? And how do you get the target company's operations up to the Rollins standards?

It's a great question. And what we do with it is -- it's an important question. When we look at Fox, for example, when we acquired Fox, we put Brady Camp in charge of the integration. And we call it onboarding, the onboarding of Fox. Brady Camp oversaw Home Team. And so there's this natural synergy between those 2 brands. And so we gave Brady the opportunity to oversee that integration. We put together a valuation model. We granted performance shares in connection with that valuation model. And so there's an incentive to deliver the valuation model that was put in front of our Board and put in front of our management team when we did the deal. And so that integration, that onboarding, that culture, managing the culture and managing the growth profile, incredibly important. So that's important for us. Our focus is not to disrupt the channel, not disrupt the customer relationship. And so -- but with that said, we're starting to become more focused on the back office and how do we create more synergies in the back office. As we do a better job at building out a much improved back office and corporate shared service function for Rollins, we look -- we're looking to leverage that through some of these acquisitions. And that should also catalyze improved results as we go forward.

How do you determine, after making an acquisition, whether you keep that brand intact or whether you'll roll it into one of your existing brands?

We look at customer data. We look at customer and metrics associated with that brand, Net Promoter Score amongst a number of other metrics that we measure. We also look at size. We look at growth opportunity. So not all brands remain. Some brands, you have a business that's less than $5 million or less than $3 million or $4 million or $5 million. Those brands oftentimes get what we call tucked in to Orkin or tucked into others. A great example is Northwest. Northwest, I showed at the Investor Day, we bought that business in '17. We kept that brand intact. That was a $50 million business of revenue in 2017 that we acquired. And since 2017, we went after and grown the business organically but also went after and pursued additional acquisitions. So that business went from $50 million in 2017 to $150 million more recently. And $50 million of that $100 million of growth is organic. The other $50 million is acquisitions. And many of the brands that we acquired were tucked in. They were just tapped into the Northwest brand. And so we follow different approaches. There's not a one size fits all, but we really -- we do look at a lot of customer data when it comes to that brand.

Has there been any change in the level of PE interest in some of these acquisition targets? Are multiples going up, multiples going down in there?

No. I mean it's an attractive space. It's been an attractive market for a long time. I imagine it will remain a very attractive market for years to come. And so as a result, there's a lot of interest from strategic to financial buyers, a lot of interest in this market. And so it has not had an outsized impact on multiples. We look at -- and oftentimes, it's interesting when we look at deals, we try to leverage our relationship in the industry. We know just about every major player in the industry. We have some form of relationship, whether it be through Jerry, whether it be through our corporate development area, whether it be through Pat Chrzanowski who heads up Orkin or Stanford Phillips who comes through -- to us through the Northwest acquisition. So we've got leverage, and we've got relationships that we leverage across the spectrum. And so as a result, those relationships oftentimes enable us to have opportunity to sit down with a potential buyer that others don't have because they know of our reputation when we acquire. We take care of brands. We take care of people. You sell your business to us, you can still feel comfortable about remaining as a very active member of your community because you don't to have to be concerned about what we're going to do with your business. We take care of your business. We fuel it with capital to grow the business. And so as a result, it's very much a win-win. And sellers value that. Some -- certain sellers, when they sell their equation, certainly look at price, but they also look at how we're going to take care of their business, their brand, their people. And it becomes important and oftentimes provides us exclusive opportunities on certain acquisitions.

To what extent do you control pricing and other decisions at the corporate level versus how much do you let [indiscernible] brands and local branches to determine things like prices or what sort of services they'll offer?

It's a push and a pull. We start centrally. Every year, we sit down in November and December. And we start to look at data across our industry, economic factors, customer activity centrally. And we start to identify what we feel like should be an acceptable budget for price. And we then start to look at it on a market-by-market basis, a ZIP code plus 4 basis. We look at it at a very granular level. And once we pass that price along, we also measure the receptivity of the price increase through customer callbacks, customer cancellations, churn, other form of data that we look at from time to time. So it's certainly -- a goal is set at a very high level in the organization, but we also are mindful of what's occurring in each of the markets. So for example, we'll see price increase that might be high single digit in certain markets, but we might see a flat sort of price in other markets. It's all very much market and ZIP plus 4 dependent.

Can you talk about what the key margin drivers are for the businesses in terms of what could create some volatility to margins and where the potential opportunity is longer term to expand those margins?

Sure. I mean I'll go through the P&L. Pricing certainly is first and foremost, and we're focused on continuing to get paid for the essential nature of our service. We continue to look at our cost of services, our fleet, our materials and supplies, our people. Certainly, that could have an impact from time to time. We've been fortunate 3% to 4% price is yielding nice margin improvement. The thing that -- where you might see more volatility from time to time is in SG&A. We're going to continue to invest in going after and getting the best and the brightest salespeople and going after and hiring the techs and training the techs. And at times, when demand is favorable, we might become more aggressive on hiring people because we want to be able to go after and acquire those customers. Those customers have an exceptional long-term value. And so you'll see that happen from time to time. We've been successful at taking some cost out so that we don't have pressure on margins. But we certainly, at times, could see pressure on margins associated with staffing of our people. On the flip side of it, we are very active at going after, identifying cost savings in our corporate office and in our home office. We're looking at all of our brands. We continue to look at the acquisitions on the cost side of it as well. And so we're continuing to do more proactively. And in fact, last year, first time in well over a decade or so that we did our first restructuring activity. We did that at the home office. And so we're being more proactive. We're being more intentional. We're being more focused on continuous improvement and productivity.

Great. So we're nearing the end of time, so maybe one last question just to wrap this up. Curious where you're spending the most amount of your time right now. What areas are you most focused on?

So it's interesting. There's a couple of things that I definitely spend time on. And one is acquisitions. I mentioned earlier that we continue to be very acquisitive. So I'm continuing to look at our processes in our M&A area and asking ourselves how might we become more intentional, how might we become more structured, how might we just improve what we do. So we're doing -- I'm doing a lot more work there. I'm also doing a lot more -- we've hired a lot of people. And when you bring new people into an environment, you have to onboard them effectively. And so how do we bring our talent together to get the right results and the right outcome? And so that certainly is a big part of what we're doing. And so as I started the conversation, we're a people business. And so as a result, we're spending a lot of time with our people and investing disproportionately in our people because we know they make a huge difference on our potential and our opportunities.

Great. So we're out of time. Thank you very much for joining us.

Thank you.