Rollins, Inc. ($ROL)

Okay. We're going to get started here. Thank you, everybody, for joining us today and on the webcast. Yes. My name is Tim Mulrooney, and I'm the research analyst here at William Blair that covers Rollins. I'm required to inform you that for a complete list of research disclosures and conflicts of interest to visit our website at williamblair.com. Very excited to have Rollins here. We have a lot of folks. We got CEO, Jerry. So thanks for coming all the way out. I appreciate it. CFO, Ken Krause, Chief Accounting Officer, Will Harkins, who was recently named as the incoming CFO, very excited. And of course, Head of IR, Lyndsey Burton. So thank you all for joining today. We've covered Rollins for a long time. And it's no secret that I think that the pest control industry is a very interesting and exciting and attractive market from a long-term perspective. I think of Rollins as a high-quality, long-term compounder of free cash flow, and I think that's borne out in the data. But every once in a while, you get these situations where there's a weather issue. I remember this happened in the second quarter of 2019. Spring didn't come as fast as expected. But of course, you ramp up on investments ahead of time because you don't want to be caught not having the people in place. And so you ramp up in investments and then spring doesn't come and the quarter is a little bit below what you expect and these high multiple stocks, they kind of -- they'll pull back on even minor misses. And so we've had 2 quarters of a row here where they're hitting -- where they've gone below their organic growth target because of weather-related issues and the stock has pulled back. And we'll dig into that as -- in addition to some other potential reasons why the stock has pulled back. And I just think it's a very, very interesting time to look at the company because from my perspective, these are the types of situations that creates opportunity. This is a going to be more of a fireside chat, but I ask Jerry, since this is a generalist conference to spend just a couple of minutes providing an overview on the business, and then we can get into a conversation.

Nice job. Well, good afternoon, everybody. Thanks for coming and hearing our story. Here at Rollins, we have a fantastic story to tell. Recently, just a couple of weeks ago, we were in New York doing our every other year Investor Day, very successful event. Hopefully, in preparation for this, if you have some time, go pull those slides and a lot of -- to prevent us from going back through all those details, you can really get caught up to speed very quickly by looking at that. As we've talked about our past, we also talked about the present. And then we also continued to reinforce how optimistic and how much opportunity that we have across Rollins. For those of you who don't know, Rollins is a pure-play pest control company. We operate throughout North America. We have operations also in the United Kingdom, Singapore and in Australia. When I talk about pest control, I mean commercial, residential as well as termite and other ancillary services. We stay pretty focused on things that are inside around -- inside or around the home or business that are direct pest control or directly related to pest control. So for example, things like exclusion, which could involve light construction work that may keep rodents or wildlife or other animals or even pests from entering your home in the first place. So the field of pest control covers all of that. We're in a great market. We operate in great markets. The demand for our services has been there, and I suspect always will be. If you've studied us for a long time, one of the legends in our company is Gary Rollins. Obviously, that's the Rollins diamond that you see here. Gary Rollins has a saying -- it's actually 2 sayings, I think I'll use. He says, first and foremost, roaches and rats don't read the Wall Street Journal. So they don't know when the economy is struggling or what's going on because they're going to keep coming. And then he also said, "Hey, the roaches and other pests survived the ice age. right? " They're going to outlast us in everything that we do. So there's always going to be this need in the future for pest control. It's just one of the fantastic attributes of our industry. And when you couple that with people don't want to live with pest anymore. And our tolerance levels as humans of our living conditions over the last, call it, 100 years has changed dramatically about what we're willing to share our living space with. So these are examples of some, but not all of the tailwinds that we continue to have and success at Rollins. I'm going to turn it back over to Tim, he's got some great questions, and I think you guys are going to have some great questions that I think it will be a better use of our time to talk about that give you some greater context and detail aside from what may be obvious to you through our Investor Day or other context. Tim?

Thank you, Jerry. Thanks for the overview, too. That was great. So I wanted to start out. Maybe we could start out with the big news that came out last week, Ken. I mean you announced your decision to leave and pursue another opportunity. I think that, that's had an impact on the stock. I alluded to the weather-related issues, but I think this is another issue that's maybe impacting the stock, which I guess is a complement to your tenure here at Rollins, but I was hoping you can provide a little more detail around your decision to leave, where you're going, et cetera?

Sure, Tim. Thanks for the question. Honored to be here with Rollins and continue to represent the company and work with Will and help transition him into the role. Super excited for Will and all that the company has ahead of it. So as you indicated, I will be leaving the company on June 15. I have a transition arrangement in place where I'm going to help Will from time to time, just from a consulting perspective. And -- but the opportunity that presented itself was one that I just couldn't pass up. It's an AI data center IPO that we're working through. And so came to me very quickly and worked through the process and really, really excited about the opportunity to go over there and make a big impact and really help that management team take that story public and really grow it and help it reach its full potential. But nonetheless, also very heavily invested in Rollins. Rollins is a phenomenal business. And Tim mentioned the fact that the stock was down 15% or 20% in the last week. What I would say is this company has grown for 100 straight quarters. Ken Krause has not been here for 100 straight quarters. And so this business is going to be a great business regardless of any individual and their part in the process. I continue to be a shareholder. I continue to be one as I think about the foreseeable future. And it's a business that I wouldn't have any concern investing in. It's just a great business with a great amount of people in a market that it's just really hard to find. The growth, the margins, the cash flow, just a great business.

Yes. Thanks, Ken. I mean I think that, that's a really good point, too. I mean you and Jerry -- I mean, when did you become CEO, Jerry, 2023?

3.5 years ago.

3.5 years ago and Ken...

Adding a little color to that. It was about 4 years ago that Ken and I started talking because I was still the Chief Operating Officer of Rollins at the time. I worked for Gary. And most people didn't know this, but I was Gary's direct report, but all those functions had reported to me for a couple of years leading up to my transition to CEO. And Ken and I started talking about this business and we had a lot of meetings and a lot of discussions at my office about what we could do together. And Ken has been an absolutely fantastic partner. I'm very fortunate to have had him for as long as I have. And so I think back to how far we've come, and we have done a lot together. I'm very appreciative for that. At the same time, when I look at what's happened with the stock price and what's going on in the market, I sort of scratched my head, like this is odd. This is odd to me. As an insider, it's odd to me, I guess, because I know the whole story. I know everything about the team as an insider. So to give you a little more color on that. I first met Will here about 18 months ago. Will had a great job working for a great company, and we were looking to build bench strength and add to our team. I met Will, the first time I met Will, I walked out of that meeting and because Ken told me, you got to meet this guy. And I walked out meeting and I said, he's going to be a CFO someday. He'll either do it where he's at. He'll do it -- if we can attract him to Rollins, he'll be a CFO here someday or he's going to be a CFO somewhere someday down the line. I just knew that about you, Will, when I first met you. And so -- and then we continued our conversations. It took us a few months to get you were gainfully employed and had a good opportunity. It took us a few months to get the Rollins story and share our vision and create alignment from the get-go 18 months ago, we created alignment with Will. Here's where we're going. Here's how we see the business. Here's how we view the business long term. Will got behind that story, believed in it and what we're coming in and took that leap with us. And I didn't think this was going to happen quite this soon with Ken, but the reality is it did. And over the years, we built a great team. And one thing that Ken that has done exceptionally that a lot of you see the external stuff when we talk about our -- the capital structure and other things that he's brought to the table, what's probably not as evident to most people is the quality of the team we've built. We've got Andrew Light in tax, Brady Knudsen in the treasury side. We brought in Lyndsey. You've continued to will bring add people, add talent to the portfolio. It's a night and day difference today compared to what it was. And then I think back when Ken started, you and I used to meet -- used to give me PowerPoint presentations every 90 days about your observations, the relationships that you were building, the things that you saw, the opportunities that you saw. It was about a year before we really started going forward and doing something. And I look at this transition, I'm like he's got a year head start. He's already out ahead. He's got -- he's come in. He's been here over a year. He's got the relationships. He already sees the vision, has a really strong foundation to work from that Ken and team have built. And so to me, I look at this like this should be just one of the easiest transitions we would ever make. But sometimes the market maybe reads more into it than what.

The market always reads more into everything. They shoot first and they ask questions later. But the point I think that you're making is that there was an active recruitment of Will. There was an intention to eventually get Will into the CFO role. Maybe it happened a little faster than expected, but this was all basically part of the design. And also I think, yes, you -- I mean, Ken, you've done a lot since you took over alongside Jerry, like you got Rollins, the investment-grade credit and you organize these secondaries and you smooth out the dividend and you built out this great finance team. And I mean wonderful working with Lyndsey, like the professionalism of the finance department is incredible. And I mean there's so much that you've done, but you're not out there killing bugs. Are you driving the 7% to 8% organic...

I haven't killed any bugs lately. Well, I made a few sales. My own home is protected by Northwest and Orkin. So I have made a few internally but those are inside sales.

You don't get commissioned on those.

You don't get commissioned on those.

On top of it, Tim, I look at that. And Ken, when you and I came together 4 years ago, almost 4 years ago, we have this great mix of I'm an insider, I know the business. I've grown up around the business. You came in with this outside perspective that I didn't have. And you said, you know what, we could do this. Well, what if we did this, right? And we -- it was very complementary in that regard. And I get the same thing with this guy. I get the same thing with Will. Background at companies like Coca-Cola has been here a year, it's not ingrained. He's also going to bring that perspective and I think at an accelerated rate, right? Because his learning curve is going to be quite a bit less. So we're -- I'm actually -- I'm excited about it. Ken, you have done wonderful things, and I want to thank you for that. But at the same time, Congratulations, Will. I look forward to you in the future. So we're talking over Will's head here quite a bit...

We're going to jump in there.

That's right...

Listen, I'm trying not to take it personally that we've gone down so much in the last week since I've been announced. I'm really trying not to take that personally. I won't. But thank you for the good words. And it's -- I knew when I joined a year ago, I did not know it's going to be June of 2026, but I certainly appreciated at that time, all the conversation we had around the fact that this was the next step for me, and I saw the opportunity at Rollins. I see the value of Rollins. I never thought I was going to end up in the pest control industry. I'm not an entomologist, so I would not have felt that naturally. But when you look at this business, it's a great, great business. And so we just had the Investor Day. I think a couple of questions that we have received in every single conversation has been, well, gosh, when Ken leaves, is there going to be some shift in strategy? Is there going to be some change in the targets that you put out there? That would assume that Ken was doing all that, like we said, on his own. The finance leadership team that has been developed, we have worked tirelessly to align on this. And so there's not going to be a big shift in what we've already communicated and what we see as the opportunity in the future. And I think that's great. I mean we will...

That environment was created in the beginning.

That's right from the very beginning. And so...

Yes. So 7% to 8% organic growth, long-term incrementals, 30 -- 25% to 30% short term, 30% to 35%, you see no reason to stray from any of that. I mean the strategy is bigger than one person.

That's right. That's right. And then of course, there are going to be times like you saw in the first quarter where we didn't hit some of those targets. But that's going to happen to any business. Long term, those targets are absolutely intact and in what we see for the future of the business.

Yes. Got it. Okay. And I guess the last thing to cover on this topic would be sometimes when CFOs leave, it's because the market is worried that there's some sort of accounting issue or some other thing. That's probably why the market dropped the initial days, they're like, oh, is there some concern over accounting issues? My reaction to that is Will, probably the Chief Accounting Officer is not stepping into the CFO role in that scenario.

That's exactly right. So let's be very clear with everybody, no accounting issues, no financial reporting disagreements, anything like that. I would not be the one stepping in. And if so, I'd be the one that would be leaving. Absolutely. So that is 100% not the case here. We have a great team. I thank you for acknowledging them as well. We've built out a great accounting team. They continue to do good work for us. And so no issues on that front at all.

Well, that's great. And Will, I'm very excited to work with you.

Thank you. Staying here.

Yes. Okay. Let's move on to some other stuff. Growth was 5-point something in the fourth quarter. There was some weather-related issue. It was 6.6% in the first quarter. So you showed that acceleration, though still below your 7% to 8% target. Our pest index didn't show significant movement upward in April, but there's still 2 months left in the quarter. Curious how you're thinking about the long term or the organic growth targets for the full year.

Yes. I think when you look at the business, I'll start, and I'll ask Will to comment too. But what I said at the Investor Day was through the first 4 months of the year, we were growing 6.5% or so percent. And so we had a tough January, a tough start, but the business remains intact. And you're going to have a quarter here that's up, down. But long term, this is a 7% to 8% grower. I don't have any doubt in that, especially in the U.S. International markets might be challenged from time to time, and they might be a headwind to our overall growth. But the U.S. market where we're heavily focused is going to continue to grow at that 7% to 8% growth rate.

This is -- yes, yes, I agree with. I mean, there's no secret about why certain of your large strategic competitors have invested so much money in the United States over the last decade, right? They know where the growth is. They know where the opportunity is. So you still see that 7% to 8% as a good thing to anchor to. We talked about shooting first and asking questions later, why you shouldn't take offense, Will, is because also like when Rollins' organic growth slowed down, you heard others that maybe don't understand the industry as well or others just coming out of the woodwork saying, "Oh, well, this is because of some change in the competitive dynamic. It's not weather related. What do you guys say to that? And I'd be very interested in Jerry, too, how you think about that? Do you run into one company in every market a lot? Or just what do you think about -- how do you think about this competitive conversation?

Yes. We have so many competitors. And -- and at the same time, we have all this competition, but yet so much of the market is still underserved when you -- especially on the residential side, when so few U.S. households still take residential pest control on a recurring basis. There's tons of opportunity out there. And I don't -- there's no one -- I would say, if you -- if I had to say who are the more formidable competitors out there, it's some of the large regional competitors that have been in business for 60, 70 years.

Doing very well.

And they are doing well. They're the ones that we look to. And when we think about competition, we have to look at it very regionalized. And that's why. It's because if you're in Florida, you got these 2 or 3 that are super strong. But then at the same time, you got 3,000 others that are also there nipping at you, too. And it's always been that way in this industry. And frankly, I think it always will be that way in this industry. This idea that we somehow have 2 or 3 big competitors that lock horns on things, just really isn't the case. I mean it's further evidence amongst our brands because we have brands that compete with Orkin in some of the same markets, and they don't even go head-to-head because there's just so much opportunity out there for all of us. And so we're often thinking about those regional competitors that are out there that are really -- there's really good competition out there. They're the ones that carry a lot of the weight.

Yes. Yes. Some of those are growing quite a bit faster than some of the large ones and are run by some really good teams that I know you know them well. And yes, we estimate the market penetration rate in the U.S. for residential at around 13%. So just to your point, like it seems like the runway is significant. And I think that's up from 10% a decade or so ago. So -- but when you're talking about 85 million homes, [indiscernible] like a serious, is there any reason that you don't think that 13% could go to 16% over the next decade?

Absolutely not. I mean I wanted to go to 20%, all right.

Okay. So -- but things change. And so one thing that we're seeing changing right now is the digital channel. And you got AI in here with the AI overview that's maybe impacting digital leads a little bit and maybe impacting your competitors more than you because of the way you go to market. But can you just talk a little bit about, a, how you go to market differently than your competitors; and b, more importantly, what you're seeing in terms of changes in the digital channel? And is that impacting your business?

Absolutely. The changes in the digital channel have impacted our business. And it's not all necessarily for -- on the negative side. So for example, we can drive efficiencies in the sales model if leads are softer and it appears demand is less, but the quality of those leads and our close rate and the long-term value because you're retaining those higher quality leads for a longer period of time, you get a better return on your ad spend, right? So that's not necessarily all bad. You can't just look at one number and say, what's going on with leads? Because you get a lot of leads, that's a lot of window shoppers, tire kickers, people that are just curious that may not be real buyers. And that puts noise in your system. That takes efficiency out of our call center operations for them to be able to be as efficient as they could. So by driving higher quality leads, we can do that. And our marketing team has done a really good job making adjustments to the LLM and adjustments in LSA and all those kinds of things. And that's constantly changing environment. I mean these guys are making changes every single day, every single week to be able to adjust to that. I think, though, more importantly, what's critical to anchor to is that performance in digital marketing isn't our only -- we're not a one-trick pony. We don't rely on that. We don't put all our eggs in that basket. We -- across our brands, across our portfolio of brands, we have lots of ways to acquire customers on the residential space. They have door-to-door real estate, real estate inspections, the homebuilder channel. There's all these ways that we can continually grow the business. And we just have to look at it from a capital allocation standpoint, where do we want to put our dollars to maximize our investment. And maybe that means that we shouldn't be putting as much in performance marketing, and we're going to get a better return in something else. We're going to make those decisions real time because we can and we have the levers to pull across our business to be able to do that. And I think that's one of the things that differentiates us a great deal is that we don't have to rely on that. We have lots of different channels. And I think it's what makes our organic growth more sustainable for a longer period of time. The fact that we're not just tied to one way to acquire customers.

Yes. I mean I think that that's probably part of the Rollins story that's maybe underappreciated or less appreciated is I spend a lot of my time speaking to private players in the industry. I know that a lot of them are shoot 80%, 90% dependent upon the digital channel. And I think Rollins is well below that. So I think that that's an interesting part of the story. You being -- you are not a Google company in the same way that some of the others that folks might know about that are highly dependent upon that channel. And if there's better efficacy there, you're doing well. But if not, it can be a real challenge. And that challenge doesn't leak into your business in the same way.

Right. And we're still focused on efficiency. And can you get the right return on ad spend and spend your marketing dollars wisely to maximize long-term return on investment.

Yes. And have you had to change your marketing strategy significantly for this -- the dawn of AI?

There's tactics within the marketing strategy that have changed. There's changes that you make, for example, Cam in Orkin marketing is take -- we have tons of video content and you'll take -- and it's really important in the LLM models to be able to convert that video to text. So it can be translated over and consolidated over and then you get cited because video is one of the main ways they do. So we have these resources that are taking a lot of our video content and converting it also to text and have it narrated that way. These models, these AI models can pick that up, and cite you and get you near the top. So tricks and tools like that, that you can deploy to make your position yourself better, and those are the kinds of things that we're focused on.

Got it. Okay. That's helpful. And I mean, we have a couple of minutes left. I have a lot more questions that we can hit in the breakout. Is there any burning question from the audience, raise your hand to ask. Otherwise, I'll keep going. But I just want to make sure there wasn't anything that anyone was -- that I missed that you think is critical. Okay. Great. Just wanted to make sure because the other thing that I think is interesting is on the commercial business. I mean that business used to grow 3%, 4% organic pre-pandemic. And then it was screaming fast 10%, but it's still settled in this mid- to high single-digit organic growth rate. It's clearly accelerated. Curious what you think is the sustainability of that type of growth because there isn't the penetration story in commercial or there shouldn't be if everyone is complying with the law that there is on the residential side, yet you guys have been able to show good growth there. Can you talk a little bit about the growth strategy and how you think about growth from a longer-term perspective on that one?

We just see this as a huge opportunity. The competitive landscape in this side has shifted dramatically over the last 5 to 10 years. And you have fewer scaled players that are able to cover large commercial accounts across a large geographic territory. Whereas years ago, I can list off a number of competitors that could say that they could do that, but through consolidation and other things, that has changed. So when you position Orkin as this truly national brand that can service anyone anywhere in the U.S. and Canada, it offers a really nice competitive advantage in that space, coupled with the fact that we see great opportunity to -- when you see in the commercial space, people want to protect their brands and they want to protect their brands through relationships with other brands that are also really good. Orkin this year celebrates 125 years in business. 125 years, Orkin has been around. So when you talk about trust, that's more critical than ever on the commercial space. And so we see that as another great opportunity. So we've been deliberately investing a little bit. We've talked to it some, but we have been very deliberate. We probably haven't outpaced investment. If you look at it as a percent of revenue on residential versus commercial, which is smaller than residential. We've invested significantly more in the marketing and sales teams to drive commercial growth. And that has very long-term return on investment. They're stickier customers than the residential side, lasting on average 8 to 10 years instead of 4 to 5 years. And so you get a much better return. So in the short run, it's something that has affected our incremental margins. But in the long run, we know that, that's an investment that will pay off for us.

Because there's a productivity ramp associated with those commercial folks, but that's something that you make these investments now and then there's a ramp, so you should see the benefit or the leverage on that as we move through 2027.

The residential side, if we hire a home sales inspector, they can be ready to be productive in 2 to 3 months. On a commercial account manager, that can take 6 to 12 months before that payoff is there and before they get really capable and confident in their jobs.

Got it. Well, thank you very much for your time today, Jerry. It was very helpful seeing Will and Ken and Ken, congratulations on the new role. I'm really excited for you. And Will, congratulations to you, too. Thank you very much.