Rollins Q2 2022 Earnings Call Transcript

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July 26, 2022

Key Takeaways

  • Rollins reported 11.9% revenue growth in Q2 2022 to $714 million and net income of $100.3 million (EPS $0.20), driven by double-digit gains in residential (11%), commercial (11.2%) and termite services (15%).
  • The Board approved a leadership transition effective January 1, 2023, elevating Jerry Galoff to CEO while founder Gary Rollins remains Chairman to ensure a smooth handover.
  • Inflationary headwinds from fuel and vehicle repair costs rose by $8.5 million, cutting gross margin by 0.9 points, but routing technology saved 5.8 million miles (≈$1.3 million) and hybrid/battery fleet pilots aim to reduce future expenses and emissions.
  • Rollins completed 22 strategic acquisitions year-to-date—including EuroPest in Wales for full UK coverage—and its early aggressive price increases more than doubled typical net rate growth.
  • To enhance talent attraction and retention, Rollins partnered with Everside Health to offer on-site and virtual primary care services for Atlanta HQ employees and expanded access across 37 states.
AI Generated. May Contain Errors.
Earnings Conference Call
Rollins Q2 2022
00:00 / 00:00

There are 9 speakers on the call.

Operator

Welcome to

Speaker 1

the Rollings Inc. 2nd Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.

Speaker 1

It is now my pleasure to introduce Joe Calabrese. Thank you. You may begin.

Speaker 2

Thank you. By now, you should have all received a copy of the press release. However, if anyone is missing a copy and would like to receive 1, please contact our office at 212-827-3746, and we'll send you a release and make sure you're on the company's distribution list. There will be a replay of the call, which will begin 1 hour after the call and run for 1 week. The replay can be accessed by dialing 877-660-6853 with the passcode 1,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000 and a replay will be available for 90 days.

Speaker 2

The company is also offering investors a supporting slide presentation, which can be found on Rollins' website atwww.rollins.com. We'll be following that slide presentation on our call this morning and encourage you to view that with us. On the line with me today and speaking are Gary Rollins, Rollins' Chairman and Chief Executive Officer John Wilson, Vice Chairman Kerry J. Lipp, Jr, President and Chief Operating Officer and Julian Riverman, Interim Chief Financial Officer, Group Vice President and Treasurer. Management will make some opening remarks and we'll open the line for your questions.

Speaker 2

Gary, would you like to begin?

Speaker 3

Yes. Thank you, Joe, and good morning. We appreciate all of you joining us for our Q2 2022 investor call. Julie will read our forward looking statement disclaimer and then we'll begin.

Speaker 4

Our earnings release discusses our business outlook and contains certain forward looking statements. These particular forward looking statements and all other statements that have been made on this call, excluding historical facts, and are subject to a number of risks and uncertainties, and actual results may differ materially from any statement we make today. Please refer to today's press release and our SEC filings, including the Risk Factors section of our Form 10 ks for the year ended December 31,

Speaker 3

Thank you, Julie. I'm very pleased to report that Rollins delivered a very strong financial performance in the 2nd quarter and remains well positioned to deliver on our long term business objectives. On today's call, I'm excited to share our strategic management succession plan that has been unanimously approved by our Board of Directors. We firmly believe that this is the right time to initiate this important leadership transition. Effective January 1, 2023, Jerry Galoff, the Rollins' Chief Operating Officer and President will be elevated to the position of Chief Executive Officer or CEO.

Speaker 3

I will remain Chairman of the Board and Jerry will continue in his current role as President of Rollins. The following 5 months will be transitional while Jerry becomes more familiar with the areas involving his future responsibilities. The company is well positioned financially and operationally. We have a proven management team, Leading brands in a very strong culture. I'm extremely confident in the future of Rollins and look forward to working closely with Jerry to ensure a smooth transition of responsibilities.

Speaker 3

While I'll be moving away from the day to day operations As I continue serving as our company Chairman of the Board, I will remain active and focused on our business goals and strategic plans. As many of you know, Jerry has been with Rollins since the 2008 acquisition of HomeTeam, And he's been instrumental in our success. What most don't know is that Jerry grew up in an Orkin household As his father worked for the company for 26 years. His dad was a great employee. Jerry is an exceptional leader with great vision and a deep understanding of our industry and our customers.

Speaker 3

His years of service to Rollins has been marked by outstanding performance and accomplishments. He was Promoted to Rollins' President and Chief Operating Officer in 2020 and has had unique To be intimately involved in most every facet of our organization. In 2021, Jerry joined the Rollins Board of Directors. His business acumen, leadership experience, strong sense of duty and his devotion to our company make him a natural fit to assume our President and Chief Executive Officer I have the utmost confidence that Jerry will continue to foster our strong company heritage, Let me now turn the call over to John Wilson, our Vice Chairman, who will provide some business updates. John?

Speaker 5

Thank you, and good morning, everyone. On behalf of all of us here at Rollins, I would like to congratulate Gary On his long successful tenure as Ryland's CEO, Gary's 56 year career with our company has been marked by superior achievements and an unrelenting focus on our customers, our shareholders and our employees. He's a tremendous leader And in addition to his impressive business results over the multiple decades, he has been steadfast in leading Rollins' high performance culture. But the best part about this change is that he isn't going anywhere and will continue to be a valuable resource to all of us. Turning to our performance.

Speaker 5

We are pleased with our 2nd quarter financial results with revenue increasing to $714,000,000 and net income totaling $100,000,000 or $0.20 per share. Overall, We experienced solid growth across our numerous pest management brands and continue to achieve strong levels of customer growth. Finally, you've heard me say this many times. We regard our employees as our most important asset. They are an integral part of our success.

Speaker 5

As we continue to grow, we recognize that talented people have choices, And we want the Rollins brands to be a leading contender for that talent. Consistent with that approach, we're continually looking to improve our employee benefits. I'm pleased to announce that Rollins has partnered with Eversight Health to offer an on-site health center located at our Atlanta home office. This new health center offers convenient primary care services for everything from screenings and prevention to chronic disease management and urgent care for several 1,000 of our employees in the area. There are multiple benefits and features to this program, including same day And next day appointments, on-site lab draws, medications and immunizations, mental health services and the ability to reach a care team 20 fourseven for urgent needs.

Speaker 5

In addition to our Atlanta facility, Our U. S. Employees have access to over 70 Everside Health Clinics, and we are live in 37 states for virtual primary care. The safety and well-being of our employees is a top priority, and we believe offering this new benefit will lead to better health Allowing employees to live healthier lives. Now let me turn the call over to Jerry, who will provide more details on our business.

Speaker 5

Congratulations, Jerry.

Speaker 6

Thank you, John. Hello, everyone. Before I get into our Q2 operating review, I would like to say a few words about Gary. As Gary mentioned, I came to Rollins through the HomeTeam acquisition in 2008. As many of you know, those can be tense and uncertain times for those being acquired.

Speaker 6

Gary talked with me personally. His words and subsequent actions reassured me that I had found a home at Rollins and my experience here has been meaningful and worthwhile. Over the past 14 years, I've learned so much from Gary And there's one thing I'm sure of. He has an unwavering commitment to our company, our customers and our employees. The proof of this is in his actions and results.

Speaker 6

It's truly an honor to succeed Gary as CEO and lead this incredible company of more than 17,000 exceptional employees, each of whom brings a commitment to deliver the best for our customers every day. With Gary and John's continued guidance, I look forward to continuing to build on our great success as we begin this new chapter of the company's future. I'd now like to walk through our 2022 Q2 performance focusing on items that directly impacted our operations during the period. Julie will address the non GAAP adjustments a little later. Looking at our financial results, Rollins' 2nd quarter 2020 2 was highlighted by revenue growth of 11.9 percent to $714,000,000 compared to $638,000,000 in last year's Q2.

Speaker 6

Net income was $100,300,000 or $0.20 per diluted share.

Speaker 5

This is compared to

Speaker 6

$98,900,000 or 0.20 and answer session for the same period in 2021. As mentioned, Julie will review GAAP and non GAAP results as well as organic revenue growth numbers shortly. Operationally during the quarter, all our business lines continued to experience solid growth. In fact, we grew double digits in all service lines. Residential Pest Control increased 11%, commercial pest control was up 11.2% and termite increased 15%.

Speaker 6

Keep in mind that this level of growth came on top of our company's highest historical recorded growth in Q2 last year of 15.3%. On the expense side, we continue to feel inflationary pressures during the Q2 from fleet related costs like Fuel and Vehicle Repairs and Materials and Supplies. I'll give insight on these as well as provide an update on the actions we've been implementing to mitigate these pressures. While we're efficiently navigating through this period and believe that our proactive initiatives have helped, we're keeping a watchful eye on inflationary pressures, Fuel costs and supply and chain costs and how they may affect Rollins. Management of fuel expense is a notable example.

Speaker 6

As we grow, we improve customer density and when coupled with our routing and scheduling technology initiatives, we continue to reduce our overall mileage Between service visits, which lowers our fuel requirements. We saved over 5,800,000 miles driven in the quarter or $1,300,000 This savings was slightly offset by increased average price per gallon over Q2, 2021 of over $400,000 equating to net fuel savings of $875,000 This has also helped manage labor costs as our technicians Have less unproductive windshield time, plus we've created a better job for them along the way. As we move through the second half of twenty twenty two, we expect we'll see the ongoing benefits of these improvements. Furthermore, looking ahead, we're committed to enhancing the overall efficiency of our fleet, while also reducing carbon emissions. In June, we announced that BMW Group ranked Rollins 15th out of the top 50 green fleets in the United States.

Speaker 6

This primarily reflects Rollins' use of hybrid sedans that are being driven by our sales and management personnel. However, We recently began testing the use of light duty hybrid trucks. Given their excellent fuel economy, we are focused on having Sizable uptick in our hybrid truck fleet by 2024. Additionally, given recent technology advancements, we've been testing the use of Battery powered application equipment going from gas powered to battery provides us with a compelling opportunity to reduce emissions without sacrificing the effectiveness of our service. We look forward to updating you on these initiatives in the quarters ahead.

Speaker 6

As you may recall from prior conference calls, we've been proactively addressing increased supply chain costs in our residential and commercial pest control materials and supplies. This includes termite and ancillary service offerings as well. We have solid long term working relationships with our manufacturers and have deep visibility into the supply process, often a few levels up in the supply chain. In doing so, We're often able to achieve greater operational efficiencies and overall flexibility by not only having materials shipped quickly, but also having real time insights advising us when we need to order materials. We continue to seek opportunities to diversify through alternative suppliers and actively seek shipping and freight efficiencies.

Speaker 6

On the subject of pricing, we successfully implemented our annual Price increased programs earlier this year. As mentioned on our last conference call, aggressive service price increases were initiated within all our brands during April May as compared to historical timing of this early summer months and prior years. We are already realizing a notable benefit from this initiative, more than doubling our traditional 1% to 2% net growth levels from our past price increase programs. Overall, we saw little resistance from our customers on the higher price increases put into place, which is a confirmation of service satisfaction. Next on our acquisition pipeline, it remains strong and we have plenty of potential opportunities that we are actively pursuing.

Speaker 6

So far in 2022, we have completed 22 strategic acquisitions within the U. S, United Kingdom and Australia. In the UK, We achieved an important milestone during the quarter with the acquisition of EuroPest. In addition to expanding our geographic footprint within the UK, It is also our first location in Wales. Strategically, we now have full coverage within the United Kingdom as this tuck in transaction comes on the heels of another recent UK acquisition, NBC Environment, which provided our first locations within Scotland.

Speaker 6

Moving forward, strategic acquisitions will continue to be an important component in our initiatives to further grow and expand our business. Before I turn it over to Julie, I want to emphasize how pleased we are of Rallon's 2nd quarter results and that we remain well positioned for 2022. I'll now turn the call over to Julie. Julie?

Speaker 4

Thank you, Jerry. First, I would like to Congratulate both Gary and Jerry on reaching the next pinnacles in their careers. Gary, your extraordinary impact on Rollins has been legendary. Jerry, you definitely have a large shoes to fill as CEO. Jerry, also watching your career grow from our early days to home team President of Rollins has been exciting and I have no doubt that you will excel in this new role.

Speaker 4

I appreciate your trust and leadership through the years and cannot wait to see what the future holds. So now on to the numbers. We delivered a strong second quarter, highlighted by significant growth across many key financial metrics. As a reminder, we are including a slide deck on our website, which presents the numbers we discussed during today's earnings presentation.

Speaker 1

To view the deck, please go to

Speaker 4

rollins.com, click on News and Events, then Presentation. Our 2nd quarter revenues of $714,000,000 represented an increase of 11.9 percent actual exchange rate, 8.7 percent organic. For the constant exchange rate, the total revenue growth totaled 10.7% with 7.5% organic. As Jerry mentioned, residential, commercial and termite all presented strong double digit growth for the quarter. Residential grew excuse me, 11%, 7% organic.

Speaker 4

Commercial grew 11.2%, 9.3 percent organic. Lastly, we have termite, which grew 15% with 11.2% organic. Now on to our income. For the Q2 year to date, we are presenting adjusted EBITDA for 2021 for comparison Due to the impact of our gain on sale of several of our Clark properties of $450,000 in Q2 of last year and $31,500,000 year to date 2021. 2nd quarter EBITDA 2022 was $159,200,000 or 1.2 percent over 2021 adjusted EBITDA of 157 $300,000 2nd quarter 2022 EPS was $0.20 per diluted share, equal to 20.21 adjusted EPS.

Speaker 4

2nd quarter 2022 gross margin decreased to 52.8 percent We're 5 tenths of a point below last year. As mentioned, fleet created another quarter of strong headwinds in Q2 2022, primarily from fuel presenting an increase of $6,800,000 and vehicle repairs of $1,700,000 over last year. Fuel increases were driven by over a 50% increase in our average price paid per gallon in Q2 2022 over 2021. Vehicle repairs were up due to the continued delay in receipt of new Vehicles from the manufacturers. We keep our trucks longer, forcing repairs outside of our norm.

Speaker 4

Combined, these fleet expense increases equated to 0.9 point in additional cost. Taking these fleet related increases out of the equation, gross margin increased over last year. Sales, general, administrative or SG and A as a percentage of revenue for Q222 increased over 2021 by 2.1 to 30.8%. Travel was a contributor as this increased 65.7% over Q2 2021. This was due to a return to normalized levels for leadership travel to branch locations, along with overall increased cost in air travel and rental cars.

Speaker 4

We also saw an increase in advertising from a combination of an increase in our advertising campaign to counteract the late arrival of spring, along with the impact of a change in our process for estimating and accruing our advertising expenses. Aligning these costs With our high Q2 sales equated to an increase in advertising of 2% of revenues over Q2, 2021. For the full year, we expect overall normalized historical spend levels for advertising. Now for a few notes regarding our cash flow. Our dividends Q2 2022 totaled $49,200,000 or an increase of 22% over 2021, while cash used for acquisitions increased 218.7% to $36,400,000 for 2022.

Speaker 4

We ended the current period with $221,000,000 in cash, of which $62,900,000 was held by our foreign subsidiaries. Our free cash flow for Q2 was 100 $400,000 or an increase of 26.6 percent over last year. This increase was primarily driven by timing of income tax payments. Last time, pleased to share that yesterday, our Board of Directors approved a regular cash dividend of $0.10 per share that will be paid on September 9, 2022 to shareholders of record at the close of business August 10, 2022. This represents a 25% increase over the dividend paid in September 2021.

Speaker 4

The dividend increase reflects our strong In the Q2 of 2022 accentuates our financial strength and the Board's confidence in our continued growth. Gary, I'll turn it back over to you.

Speaker 3

Thank you, Julie. We're happy to take any questions at this time.

Speaker 1

Thank you. Our first question is from Tim Mulrooney with William Blair. Please proceed.

Speaker 7

Yes. Good morning, everybody.

Speaker 3

Good morning.

Speaker 7

First, I just want to say to Gary, congratulations. Very few CEOs can boast the same level of tenure and success that you can. And I look forward to staying in touch regardless.

Speaker 8

Thank you.

Speaker 7

First one, EBITDA margins were down a little bit more this quarter than I was And what was helpful last quarter as you guys bucketed these things for us, the primary buckets being fuel or I don't know if you want to call it fleet. Another major cost bucket is labor and another one is materials. If you were going to rank those headwinds in terms of the things that impacted your EBITDA margins the most and if there's any way to quantify it, I think that would be really helpful for investors. It certainly was very helpful for us last quarter.

Speaker 4

Sure. Tim, this is Julie. So I'll jump in. So I would say the our largest impact was getting back to the advertising expenses we said, which was Gain or excuse me, an increase of 2% of our revenues. And I do want to go ahead and go over this.

Speaker 4

This is where we updated our quarterly processes for Meeting and accruing our advertising expenses to better reflect our shift to digital advertising. I do want to make a point on this though, and this is the key point is this, We will maintain the normalized historical percentage of revenue spend for the advertising when you look at the year as a whole. So we are dealing with timing there. The next largest item would have been our fuel and the fuel itself was a $6,800,000 Increase over last year. So that was significant over Q2 of last year.

Speaker 6

I would add that from a labor standpoint, We did a pretty good job of keeping service wages in particular relatively flat year over year. That really wasn't a Significant driver of everything. It's heavily on what Julie mentioned.

Speaker 7

Okay. So I mean, that's very consistent with what you said last quarter. I guess labor had more disruption in January. But you were saying that, that wouldn't be as much of an Going forward, it sounds like it's not. It's mostly fleet and advertising expense.

Speaker 7

So that's really helpful. Thank you.

Speaker 6

In January, it was driven by The COVID situation, which is it seems to be ramping back up again, but we're managing through it a little better right now.

Speaker 1

Our next question is from Ashish Sabadra with RBC Capital Markets. Please proceed.

Operator

Thanks for taking my question and congrats to both of you, Gary and Jerry. My first question would be on the revenue growth, Pretty strong momentum there across all businesses. I was wondering if you could help parse out, you obviously talked about a more aggressive price increase, But also if you can talk about the improved retention as well as on the sales momentum side, can you talk about how the improved ad campaign helped you More on the inbound, but also the technicians being appropriately staffed, how is that helping you drive sales momentum? So if you could just parse out some of the growth drivers and quantify some of those deal wins. Thanks.

Speaker 3

Goodness, sir. Well,

Speaker 6

I think on the Julie, on the revenue growth side, we certainly got in some additional lift from the price increase Part that helped us quite a bit. We were lapping a pretty big Q2 last year. In Particular, the month of April in 2021 was really difficult to lap From a growth standpoint, but we managed through it pretty well and things picked up quite a bit in May June to help recover from there. Retention remain customer retention remains strong and our team is doing a pretty good job On service delivery, we're staffed better than we were a year ago from a technician standpoint being able to Get to new customers, service our existing customers. So that's all good.

Speaker 6

We've gotten a lot of positive response to, in particular, Orkin's transition to With their new ad campaigns, especially with the Orkin Pro, we've received a lot of very strong feedback. The people that work at Orkin, our team members at Orkin really like it. It's getting a lot of attention. I know it's good when I hear about it from my children because they're seeing it on TikTok. And so they see those ads on TikTok and seem to have a lot of fun

Speaker 4

Yes. And then to add on to that, just as a reminder, I think Jerry commented on his specter of the script, is our price increase That brought in over double what we typically see from our annual price increase. So that was a part of that growth as well.

Speaker 1

Our next question is from Hamzah Mazari with Jefferies. Please proceed.

Speaker 6

Hi. This is Hans Hoffman filling in for Hamzah. Could you just give us a sense of how much capacity you have in your sales And what your hiring plans are going forward? We're pretty well staffed on the sales side both in the commercial and residential side. We can always there's always room for improvements to drive.

Speaker 6

When you have a salesperson at full capacity or selling High levels monthly, the next step to do is hire another and then build them back up and continue to drive that incremental growth and get improvement. So we always there's always a little bit of capacity there To do better, but as we get close to capacity, we look to add staffing where it makes sense. And we're always That's just kind of a numbers game, a math game that we play.

Speaker 4

Yes. And that's where we really worked hard. At the end of last year is when we started doing the heavy staff up On our commercial side of our sales force, just so that we can be prepared for this year and be able to Honestly, be able to close the deals that we're closing today.

Speaker 6

And certainly, the commercial results that we're getting are a result Of those, the increased staffing and the increased productivity for sales rep that we're seeing.

Speaker 1

Our next question comes from Seth Weber with Wells Fargo Securities. Please proceed.

Speaker 8

Hi, good morning. Congratulations, guys. I just had a question on, I think fuel prices started picking up Last June, June 2021, so is it so now that we have Kind of an apples to apples compare going forward. Should we expect gross margin to be up year over year The rest of the year, is that the right way to think about it? Thanks.

Speaker 4

I'll start and then I'm sure Jerry will want to jump in as well. Everything we're all reading the same thing when it comes to fuel is we a lot of things in one Area say that the fuel prices are going to be going down, but then we see things that are happening on the other side of the globe that gives the impression that it could go up. So, so much depends on that. So if you're assuming that fuel does not keep on having that variability, we'll definitely that's one thing to keep in mind. But I also want to address materials and supplies.

Speaker 4

Jerry commented on this as well. And I'm going to jump in and use a phrase that Jerry has commented on in the board meeting yesterday, he said that sometimes we feel like we're playing whack a mole with the materials and supplies because we have different vendors and different that are Looking at they have to make increases to cover either their shipping or cover their supply costs themselves and we keep on having to jump and We're having to look every single day and see and our purchasing group is saying where do we need to go, where should we be Purchasing and really monitoring these relationships. It's a long way of saying it depends what's going to happen with Our vendors, it depends what's going to happen with our suppliers and honestly, the fuel prices. All of that being said, if that calms down, And yes, margins would improve. Do you want to add to that?

Speaker 6

I would agree that those are the two main variables. It's going to be what happens with fuel And fleet and can we get our trucks, the trucks on time that we're expecting to be delivered to us, can we get They can get delivered and we can start heading off some of these repair expenses that we're having. And then Plus we have the ongoing benefit of offsetting some of these costs over the coming months with routing and scheduling, More of the technology adoption and advancement that we can get out there and increase usage of the tools that we have, Especially during busy season that will help us with those offsets. Not too concerned about the labor side. I think we'll manage the labor, but Certainly, the fuel and vehicle repairs and material supplies, those are the wildcards that we're basically managed through.

Speaker 6

It seems like every week we're getting notified about some other price increase that we're having to make adjustments to from suppliers. So That's why Julie said it's like playing whack a mole. So as long as we remain vigilant on that and we'll see what happens From a fuel standpoint, that's the wild card.

Speaker 1

Our final question is from Brian Butler with Stay full. Please proceed.

Speaker 7

Good morning. Thanks for taking my question. Just to follow-up, I guess, on Pricing and inflation, if inflation continues

Operator

to move

Speaker 7

higher or even accelerate, is there a potential another rate increase In the back half of twenty twenty two or maybe a surcharge that would be used to offset that or would Rollins wait until maybe next year To catch up and then address the higher costs.

Speaker 3

We've done quite a bit of research as far as our price increases are concerned And certainly, we would be opposed to having another price increase this year. We really study the frequency and amount very carefully. And It's been our experience that you really need to have some time in between and don't really get don't get greedy.

Speaker 1

Thank you. I would like to turn the conference back over to management for closing comments.

Speaker 3

Okay. Well, thank you all for joining us today. We appreciate your interest in our company and we look forward to updating you next quarter on our progress. And thanks again.

Speaker 1

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.

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