Rollins Q1 2024 Earnings Call Transcript

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Provided by Quartr
April 25, 2024

Key Takeaways

  • Rollins delivered 13.7% revenue growth in Q1 to $748 million, with 7.5% organic growth and double‐digit gains across residential (+16.5%), commercial (+11.4%) and termite (+11.7%).
  • Adjusted operating margin expanded by 130 basis points to 18.4%, driven by 90 bp gross margin improvement, SG&A leverage, and 29% growth in free cash flow with 120% cash conversion.
  • Strategic M&A remains robust, with 12 tuck‐in deals closed in Q1, the one‐year anniversary of the Fox acquisition, and a pipeline supporting at least 2% revenue growth from acquisitions in 2024.
  • Residential organic growth was pressured to 4.3% by unfavorable January weather, but accelerated to 8% in February–March, supporting the company’s 7–8% medium‐term organic growth target.
  • Rollins refreshed its board, nominating new Lead Independent Director Louise Sams and adding director Dale Jones while thanking retiring director Jerry Nicks for his service.
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Earnings Conference Call
Rollins Q1 2024
00:00 / 00:00

There are 9 speakers on the call.

Operator

Greetings. Welcome to the Rawlings Inc. First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.

Operator

Please note this conference is being recorded. I will now turn the conference over to Lindsay Burton, Vice President of Investor Relations. Thank you. You may begin.

Speaker 1

Thank you, and good morning, everyone. In addition to the earnings release that we issued yesterday, the company has also prepared a supporting slide presentation. The earnings release and presentation are available on our website at www.rollins.com. We have included certain non GAAP financial measures as part of our discussion this morning. The non GAAP reconciliations are available in the appendix of today's presentation as well as in our earnings release.

Speaker 1

The company's earnings release discusses the 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, are subject to a number of risks and uncertainties, and actual results may differ materially from any statement we make today. Please refer to yesterday's press release and the company's SEC filings, including the Risk Factors section of our Form 10 ks for the year ended December 31, 2023. On the line with me today and speaking are Jerry Gayloff, President and Chief Executive Officer and Ken Krause, Executive Vice President, Chief Financial Officer and Treasurer. Management will make some opening remarks and then we'll open the line for your questions.

Speaker 1

Before I turn it over to Jerry, I want to remind everyone of our upcoming Investor Day on May 17 in New York City. We're looking forward to hosting the investment community and discussing our strategies for growing our business and driving value for our stakeholders. Jerry, would you like to begin?

Speaker 2

Thank you, Lindsay. Good morning, everyone. I'm pleased to report that Rollins delivered another good quarter of growth and profitability reflecting consistent execution of our operating strategies and continuous improvement in our business. Our financial performance for the Q1 was highlighted by an increase in revenue of nearly 14% to $748,000,000 We delivered healthy organic growth of 7.5% in the quarter despite some unfavorable and erratic weather in January compared to last year, which Ken will discuss in more detail. Overall, we continue to see double digit revenue growth across all major service lines as total residential revenue increased 16.5%, commercial rose 11.4% and termite was up 11.7% this quarter.

Speaker 2

We continue to invest in growing our business. As you would expect, we invested in incremental sales staffing and marketing activities ahead of peak season to ensure that we are well positioned and top of mind for the consumer as pet season begins. We are well staffed on the technician and customer support front so their people are onboarded extensively trained and ready to provide an exceptional level of service for our customers. On the commercial side of the business, we are leveraging analytics to identify areas in the market where opportunity warrants additional resources and this continues to pay dividends as evidenced by another quarter of double digit commercial growth. We continue to strategically add feet on the street to our sales force and are leveraging our training and sales tools to better enable their success as well.

Speaker 2

Investments to drive organic growth are complemented by strategic M and A. April 1 marked the 1 year anniversary of closing the Fox acquisition and that team has performed exceptionally well. We anticipate that Fox will continue to positively impact organic growth and profitability as we go forward. We closed 12 tuck in deals in the 1st 3 months of the year and the M and A pipeline remains healthy. We're actively evaluating acquisition opportunities both domestically and internationally and remain on track to deliver at least 2% of growth from M and A activity in 2024.

Speaker 2

Beyond growth, our dedication to operational efficiency and continuous improvement is an important part of our strategy and culture. Kim will discuss in more detail, but we saw healthy margin improvement in the quarter as we executed our pricing strategy, leveraged our cost structure and drove efficiencies throughout the business. Safety remains an important area of focus for us and efforts to enhance safety coaching, training and protocols resulted in higher driving safety scores and fewer recorded safety incidents when compared to a year ago. In closing, we're excited about where our business stands today. This year is off to a solid start and demand from our customers remains strong with over 7% organic growth in the Q1.

Speaker 2

Our markets are solid, staffing levels are healthy and our team is focused on driving continuous improvement and profitable growth. I want to thank each of our 19,000 plus team members around the world for their ongoing commitment to our customers. Before I hand it over to Ken, I'd like to announce a few changes to our Board of Directors. First, we would like to thank Jerry Nicks, who recently retired from our Board for his service to our company. We've been so fortunate to have Jerry as our Lead Director for the past several years.

Speaker 2

His experience, wisdom and guidance helped us navigate uncharted waters for our company and we're incredibly grateful for the significant contributions he's made along the way. 2nd, we would like to welcome Dale Jones who was elected to our Board at a recent shareholder meeting. Additionally, Louise Sams has been appointed as our new Lead Independent Director. We're excited about the level of expertise and experience that both Dale and Louise will bring to our Board in their new roles. Ken, I'll now turn the call over to you.

Speaker 2

Thanks, Jerry, and good morning, everyone. The Q1 reflects continued strong execution by the Rollins team. A few highlights to start. Growth was robust to start the year. We delivered revenue growth of 13.7% year over year.

Speaker 2

Organic growth was 7.5% and we saw significant improvement moving throughout the quarter as organic revenue growth accelerated to over 10% for February March. Adjusted operating margins were 18.4%, up a healthy 130 basis points with strong gross profit performance and solid expense leverage despite incremental investments aimed at growing our business. Cash flow continues to be very strong with free cash flow increasing 29% enabling a balanced capital allocation strategy. Diving further into the quarter, we saw good growth across each of our service offerings. In the first quarter, residential revenues increased 16.5%, commercial pest control rose 11.4% and termite and ancillary increased by 11.7%.

Speaker 2

Organic growth was also healthy across the portfolio with growth of 4.3% in residential, 10.1% in commercial and 9.3% in termite and ancillary. As Jerry mentioned, our residential organic growth was impacted by a slower start in January. To provide context, February March total organic growth was a very strong 10.8% versus 7.5% for the quarter. And looking at residential revenue specifically, February March organic growth was a healthy 8% versus 4.3% for the quarter. We are pleased with the consistent growth we continue to see across the business.

Speaker 2

Turning to profitability, our gross margins were healthy at 51 point 2%, up 90 basis points versus last year. We continue to be positive on the price cost equation and saw good performance across several key cost categories. While Fox was accretive to gross margins for the quarter by about 40 basis points, organic margin improved 50 basis points as we saw nice leverage from people cost, fleet and materials and supplies. Quarterly SG and A costs as a percentage of revenue decreased by 10 basis points versus last year. Excluding the earn out adjustment for the Fox acquisition, SG and A cost as a percentage of revenue decreased by 20 basis points in the quarter.

Speaker 2

We saw healthy leverage from administrative related costs, which enabled reinvestment and incremental advertising and selling expenses associated with growth initiatives that Jerry discussed. 1st quarter GAAP operating income was $132,000,000 up 18% year over year. Adjusted operating income was $138,000,000 up nearly 23% versus prior year on approximately 14% total revenue growth. Adjusted operating margins were 18.4%, up 130 basis points year over year on strong gross margins coupled with solid expense leverage. 1st quarter EBITDA was $160,000,000 up over 14% and representing a 21.3% margin, up 10 basis points versus last year.

Speaker 2

You'll recall that last quarter we called out a negative impact to adjusted EBITDA due to lower non operational gains versus the comparable period in the prior year. We saw a similar dynamic in the Q1 as well. Given that we do from time to time divest non operational assets, we have made the decision to exclude gains and losses on these types of sales. Adjusted EBITDA, adjusted net income and adjusted EPS are measures of operating performance and this change will allow us to better compare our underlying performance more consistently over time. A table showing the revised metrics for fiscal 2023 is included in our earnings release.

Speaker 2

First quarter adjusted EBITDA was $161,000,000 up 19% versus last year. Adjusted EBITDA margin of 21.5% was strong, improving 100 basis points driven by leverage across the P and L. Incremental adjusted EBITDA margin was 29%, a healthy result considering that Q1 is a slower period and can have a lower profitability profile as we invest ahead of our busier seasons. The effective tax rate was approximately 24% in the quarter in line with the prior year. Quarterly GAAP net income was $94,000,000 or $0.19 per share increasing from $0.18 per share in the same period a year ago.

Speaker 2

For the Q1, we had non GAAP pre tax adjustments associated with the Fox acquisition related items totaling approximately $5,000,000 of pre tax expense in the quarter. Accounting for these expenses, adjusted net income for the quarter was $98,000,000 or $0.20 per share, increasing over 17% from the same period a year ago, despite the higher level of interest costs on the higher debt balances versus the comparable period. Turning to cash flow and the balance sheet. Operating cash flow increased 27% in the quarter to $127,000,000 We generated $120,000,000 of free cash flow, a 29% increase versus last year. Cash flow conversion, the percent of income that was converted into operating cash flow was well above 100% for the 120% for the quarter.

Speaker 2

We made acquisitions totaling $47,000,000 and we paid $73,000,000 in dividends both up versus the same period a year ago. Debt to EBITDA leverage is well below one times on a gross and net level And our balance sheet is very healthy and positions us well to continue to execute on our capital allocation priorities. In closing, our performance this quarter continues to demonstrate the strength of our business model and the engagement level of our teams. Demand is healthy and our acquisition pipeline provides us a sense of optimism. We remain focused on providing our customers with the best customer experience and driving growth both organically and through disciplined acquisitions.

Speaker 2

With that, I'll turn the call back over to Jerry. Thank you, Ken. We're happy to take any questions at this time.

Operator

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

Speaker 3

So just stepping back here with trends accelerating in February March, I just wonder if folks are going to extrapolate that 10% organic growth rate into the next several months quarters. I mean, 10% to me just sounds like touch on the strong side. So I wonder if that's how you're thinking about things or if expectations are better level set to kind of what we saw over the last several quarters more in that 7% to 8 percent range for organic growth?

Speaker 2

Thanks for the question Tim. I appreciate that. And when looking at the business we certainly did see some improvements as we went throughout the quarter. But 1 quarter is certainly not a long term trend. We are continuing to remain very confident in our outlook and that outlook is really anchored around 7% to 8% sort of growth rate that we've consistently talked about.

Speaker 2

That's stepped up as you all know since COVID and we continue to benefit from that higher growth rate and more favorable operating environment. But yes, I think 7% to 8% is kind of how we think about the business from an organic basis going forward.

Speaker 3

That's really helpful. Thank you, Ken. And this is not a follow-up. It's a completely separate topic, but I'm going to do it anyway. The step up in sales and marketing expense, okay, like I think there's like a couple of different ways folks could interpret that, either as more of a defensive move because you're having to spend more maybe on digital marketing to win customers or more as an offensive move hiring more sales folks for future growth for example.

Speaker 3

Could you just double click into that increase in sales and marketing expense column and help us understand that decision a little better to wrap up spend there? Thank you.

Speaker 2

Tim, this is Jerry. A lot of that cost really was light on the heavier side on the selling expense as it relates to us staffing up. Let me give you a couple of examples, a couple of data points. Just looking at Orkin alone, when we looked compared to prior year in the Q1, we had over 50 more commercial account managers inspectors at Orkin in the Q1 of this year than we did the last year. So that's where a lot of our investment continues to be.

Speaker 2

We see that opportunity. That's what I referred to as the feet on the street, the opportunity. So our sales salaries are up there. It's not necessarily a quote some sort of targeted defensive marketing spend. It's an offensive sales mobilization and really building out your sales team for the growth opportunities ahead.

Speaker 2

Got it. Makes sense. Thank you. Thank you.

Operator

Our next question is from George Tong with Goldman Sachs. Please proceed.

Speaker 4

Hi, thanks. Good morning. I wanted to dive into trends that you're seeing in the residential business. It sounds like most of the impact to organic revenue growth in residential was due to unfavorable January weather leading to the 4% organic growth. I wanted to see if there were any other trends you would call out there.

Speaker 4

I know last quarter you highlighted one time sales impact. So, any changes there and other operating items to consider as it relates to the organic growth in residential?

Speaker 2

Certainly. When we look at the residential business, we look at the residential business very broadly across our residential services as well as our termite ancillary. Across that portfolio, the business continues to perform very well. One time business can be choppy. It continues to be choppy.

Speaker 2

But generally demand for our services remains very healthy. As I indicated on my in my prepared commentary, what we saw when we look just at the residential business alone, we saw an improvement 4.3% growth for the quarter, but close to 8% growth as we look at February March. So we continue to see really good demand levels for our business.

Speaker 4

I would add

Speaker 2

that George that when we think about some of the one time business as well as Ken mentioned it's usually choppier in the shoulder seasons when weather that's an area of the business that weather can impact more so than anything, but you still have your recurring customer base that's there to serve us. But we also continue to see really strong health in our one time ancillary business that really shows that the consumer side of it is strong and the consumers continue to be willing to invest in protecting their homes.

Speaker 4

Got it. That's helpful context. And then within the termite and ancillary service business, organic growth seems to have decelerated a bit to 9% compared to 11% in 4Q. Can you talk about some of the puts and takes that could have led to that performance?

Speaker 2

Certainly. When you unpack the termite business there's 2 components to the termite ancillary. There's your normal recurring termite business, your pretreat business and then you have ancillary business in there as well. We're seeing really good demand across the spectrum. Our business, our recurring bait monitoring business continues to grow at a very healthy level, but also our ancillary business in that area continues to grow as well at a nice rate.

Speaker 2

It's really a broad based growth that we're seeing in demand for our services.

Speaker 4

Okay. Got it. Any factors that could have caused the deceleration in organic revenue growth there?

Speaker 2

I look at it from a productivity standpoint. We continue to sales are there. Working the backlog can be a challenge and in the quarter and that goes back to January type of phenomenon that where we had more branches and operations closed for multiple days compared to the prior year. And that affects productivity and ability to get the work done even if our sales force is out there selling it and they're out there continuing to do what they do and building that backlog of work to get done. And so the work is there for us to get done.

Speaker 2

So we're optimistic about that. It's not a selling issue. It's us getting all the workload done in a given period time. So when you carry a backlog over into the Q2, things still look healthy, if that helps, if you add any color.

Speaker 4

Got it. Very helpful. Thank you.

Operator

Our next question is from Stephanie Moore with Jefferies. Please proceed.

Speaker 5

On for Stephanie Moore. Just wanted to touch on commercial organic growth. It's been pretty strong over the last few quarters. And I know you mentioned leveraging analysts and things like that. But I was just curious, is there anything else to call out and if you could just kind of talk about the sustainability of growth there?

Speaker 2

And I know it sounds like a broken record and we've said this now for a few years. We just continue to invest in our sales staff, getting them ramped up and being successful. That is a that B2B sales process is a relationship type of sale. It's got a long selling cycle and you got to be patient. You got to invest.

Speaker 2

You got to invest in training and sales tools and supporting those new account managers when they're brought up to get them ramped up and brought to speed just as fast as possible. That it's the more you add in the sales force and the more investments you make to make them successful, we just continue to see that opportunity there. So I wouldn't say if there's anything magical about it other than being committed to continue to add incrementally to our sales force. It's interesting when I step back and I look at the financials and I look at the trend in spend across different categories of SG and A, Jerry is spot on. Sales salaries continues to be an area that we continue to invest disproportionately in.

Speaker 2

We're saving money in some of the back office costs and admin areas, but we continue to invest pretty heavily on the front end of our business and taking a very offensive perspective on our business.

Speaker 5

Just on the resi side, have you guys seen any slowdown, anything that's meaningful related to the new business wins or any sort of meaningful pickup in customer churn and maybe lower household income areas? And then just anything you could share around how April is kind of shaping up so

Speaker 2

far? We haven't seen any significant change in from a retention issue one way or the other. So that remains pretty solid and you want to make sure on April. Yes, it would be very difficult to grow our business at the rate we're growing if we saw kiting and customer churn. And so customer churn although it is not kiting, it still remains an opportunity for us to continue to improve.

Speaker 2

When we look at April, we continue to see healthy levels of demand. We're starting April strongly. But again, we continue to think about a 7% to 8% sort of organic growth rate across the business as we think about the future.

Operator

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

Speaker 6

Hi, good morning. This is David Page on for Ashish. In terms of capital allocation, now that you've lapped the POS acquisition, how should we think about, I guess, your M and A pipeline in terms of larger deals or smaller deals going forward, especially given this robust free cash flow that you keep generating? Thank you.

Speaker 2

When we look at the pipeline, it's very healthy. It's very balanced. There's opportunities across the spectrum with respect to M and A. Something that we have consistently said however for 2024 is that we do think that 2% to 3% of revenue growth is probably a realistic expectation of contribution from M and A. We continue to look at deals.

Speaker 2

We continue to evaluate deals. And in fact in Q1, we spent roughly $45,000,000 to $50,000,000 on M and A and that was up considerably year over year. Of course, last year we were preparing for Fox. But I think it just shows that there continues to be a very healthy pipeline of M and A in a very fragmented market that we continue to compete in.

Speaker 7

My question.

Speaker 2

Good morning.

Speaker 7

Hi, good morning. So I guess you mentioned that 7% to 8% is sustainable growth rate and given how strong commercial and termite is, does that imply that you expect residential to kind of remain in this 4% range going forward? Just curious how you're thinking about how the different businesses contribute to that 7% to 8%. Thank you.

Speaker 2

It's interesting when you try to put a fine point on that, but we do think that probably commercial and termite and ancillary probably grow a little bit faster than the overall average and resi might grow a little bit slower. You just have puts and takes across the portfolio. It doesn't mean that we're not bullish in residential, but I just think that that's generally how the growth profile has unfolded over time for us. Yes. I agree with you, Ken.

Speaker 2

I think it's hard to predict that. I mean there's going to be movement in any of those categories potentially based on a number of factors and we'll that's where it all comes out in that 7% to 8% total.

Speaker 7

Yes. Thank you. Okay. That helps. And then on your decision to accelerate investment during the off season, sometimes you focus on the peak season to invest, sometimes you invest ahead of the season.

Speaker 7

So could you just talk about the rationale for investing ahead of the season this year? What you're seeing and what opportunities you expect to realize? Thank you.

Speaker 2

Yes. As we had talked about, I mean the business started to grow pretty nicely on a year over year basis organic basis in February into March. And so we saw that and we saw an opportunity to pull forward some investments. It doesn't mean that we're going to invest any lighter in Q2. In fact, we're going to continue to invest in Q2 and drive further growth.

Speaker 2

The market opportunity is there and you've got to invest when that market opportunity is there. This is a very short cycle business. And when you see weather patterns that improve or demand trends that might change, you have to be ready to invest. And so I think that's just it's just reflective of our investment and our interest in investing in growth across our portfolio. We have a lot more carrying costs from people side in late Q4 and certainly in the Q1 than I think we've ever had.

Speaker 2

The reality is it's certainly harder to find people. And then with the level of intensity that we put and the time and energy that we put into training and development upfront that takes time to have people ready. And so our strategy has been to get ahead of that.

Speaker 7

Absolutely. Yes. Thank you so much for your time and congrats on a good quarter.

Speaker 2

Thank you, Josh.

Operator

Our next question is from Ali Davis with Redburn Atlantic. Please proceed.

Speaker 8

Yes, good morning. Just 2 for me. So firstly, can you just talk about the level of price increases you're putting through and if you're seeing any pushback on the residential side, just given the level of volume growth in the Q1? And then secondly, in terms of probably one for Ken, just in terms of the SG and A, I mean, obviously the admin expenses, I guess some of that's coming from the modernization that you did last year. So how sustainable are they going forward through this year?

Speaker 8

And I guess your ability to reinvest that?

Speaker 2

So looking at your questions, thank you for your questions. The first question with respect to pricing, it's interesting when we look step back and we look at this business, I think recently you've heard me start to talk about this as a CPI plus type of business. So we think this service is certainly an essential service and should command CPI plus level pricing. So 3% to 4% this year is certainly it's something we passed along and we're seeing that stick. We just feel like the service is just too valuable not to price it at those levels.

Speaker 2

And then secondly, when you look at the SG and A levels across the business, we're it's good to see the improvements that we're seeing in our cost structure. I think in the quarter we talked about a 20 basis point improvement in SG and A as a percentage of sales. But when you unpack that you see that we spent roughly 50 basis points more on growth oriented investments, but 70 basis points less of back office costs. And I think that's representative of the work we're doing to improve the

Speaker 7

Okay. Thanks.

Speaker 8

Okay. Thanks.

Operator

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

Speaker 6

Hey, sorry, it's David again. Apologies if I missed this one, but what was the exit growth for residential? I believe the 10% was for the entire company, but what was it for resi?

Speaker 2

Yes. It was 10.8% to be to put a fine point on it for the entire company. And for residential, it was 8%. Thank you. For February March.

Speaker 2

Yes, for February March. Yes. Thank you everyone for joining us today. We appreciate your interest in our company and look forward to speaking with you all at our upcoming investor conference. Thanks again.

Operator

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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