Rollins, Inc.

Q3 2022 Earnings Conference Call

10/26/2022

spk01: Greetings. Welcome to Rawlings' third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the former presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Joe Calabrese. Thank you. You may begin.
spk04: Thank you. By now, you have all received a copy of the press release. However, if anyone is missing a copy and would like to receive one, 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 one hour after the call and run for one week. The replay can be accessed by dialing 877-660-6853 with the passcode 137. 33118. Additionally, the call is being webcast at www.rollins.com, and a replay will be available for 90 days. The company is also offering investors a supporting slide presentation, which can be found on Rollins' website at www.rollins.com. We will be following that slide presentation on a 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 of John Wilson, Vice Chairman, Gary J. Love, Jr., President and Chief Operating Officer, Kenneth Krause, Executive Vice President, Chief Financial Officer and Treasurer, and Julie Berman, Group Vice President, Finance and Investor Relations. Management will make some opening remarks and we'll open your line for questions. Gary, would you like to begin?
spk07: Yes, thank you, Joe, and good morning. We appreciate all of you joining us for our third quarter of 2022 investor call. Julie will read our forward-looking statement, disclaimer, and then we'll begin.
spk03: 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, 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-K for the year ended December 31st, 2021, for more information and the risk factors that could cause actual results to differ.
spk07: Thank you, Julie. I'm pleased to report that Rollins' third quarter performance was highlighted by continued growth and solid financials. As we look ahead, the company remains well-positioned to continue accomplishment in our long-term business objectives. I'm also proud to welcome Rollins' new Chief Financial Officer, Kenneth Grouse. Ken is a highly regarded business executive with more than two decades of financial and accounting experience. Ken is already contributing to our success. We welcome him to our team. Jerry, will you share more about Kim later? Let me now turn the call over to John Wilson, our Vice Chairman, who will provide some business updates. John?
spk02: Thank you, Gary. Good morning, everyone. Rollins delivered another strong performance this quarter, reflecting solid execution of our operating strategies. I want to continue to emphasize that Rollins' success is a direct result of the efforts of the dedicated and caring people that work for our company. This incredible team works hard every day to achieve our objectives and take great care of our customers. At Rollins, our people are our most valuable asset. Pursuant to that, we are always looking to improve our employee training and benefit offerings as well as providing a workplace where they are respected and able to grow professionally. Last quarter, we announced a new partnership with Eversight Health to offer an on-site health center providing primary care at our Atlanta home office and virtually nationally. This new program offers free or reduced cost primary care for all employees. We're pleased to share that since its opening four months ago, this effort has registered over 500 employee visits and filled over 300 prescriptions. We are very focused on enabling our employees to live healthier lives at home and at work while enjoying multiple benefits within this effort. With same-day and next-day appointments, this health center handles everything from routine screenings to chronic disease management. It also offers on-site lab draws, medication prescriptions, immunizations, mental health services, as well as the ability to reach a care team 24-7 for urgent needs. Further, we plan to expand this free primary care offering to the covered dependents of our team members starting January 1st. Feedback to date has been extremely positive with a very high satisfaction rate. Ultimately, we believe that by providing easier access to these kinds of services, we are facilitating better health outcomes and happier, healthier employees. We also recently expanded our employee stock purchase plan. This plan allows employees the option to purchase shares of Rollins common stock at a 10% discounted price through payroll deductions. Since we launched the plan in July, 2022, we are pleased that over 2,200 employees have enrolled. This represents greater than 130% growth in employee stock ownership participants compared to our previous program. Most importantly, we want to encourage employee ownership in Rollins as we want everyone to think and act like owners in our company. In summary, guided by our commitment to employees and our culture, we feel these types of benefit programs and improvement are important to our long-term success, not only by retaining and incentivizing our valued employees at all levels, and for them to have a vested interest in our performance, but also to effectively position Rollins Brands as a leading contender for top talent. Last, I would like to discuss Hurricane Ian. Thank goodness all of our employees in the Ian's path are safe, but they have needed assistance. Through our Rollins Employee Relief Fund, our team provided over 170 emergency grants to impacted employees within the first 10 days following the hurricane to enable team members to address essential needs. Since then, the relief team has been processing multiple full grants to address employees who have endured even greater hardship. Our hearts go out to those affected by the hurricane, but I must acknowledge how excited we were about all our team members who have jumped in to assist those impacted in various ways. They quickly volunteered their time and energy, often after work hours, to gather, load, and deliver supplies to those most in need. This was a total team effort, and we are tremendously proud of their care, compassion, and commitment to help one another. Overall, while Ian shut down a total of 28 branch offices, 18 were only closed for a day or two, while the remainder opened by the end of the following week. between these few location closures and the loss of several vehicles within our fleet, the impact to our employees in the days following the storm was far worse than the impact to our business. I'd like to now turn the call over to Jerry, who will provide more details on our quarter.
spk09: Thank you, John. Good morning, everyone. In early August, we announced that Ken Krause, would be joining Rollins as our new Chief Financial Officer effective September 1st. Ken has many years of finance experience, most recently as a CFO of a large publicly traded global manufacturer. You'll hear from him in a little bit, but for anyone who hasn't had the pleasure of speaking with him yet, he is passionate about business, very experienced, and has a unique combination of strategic, operational, and financial expertise. We are extremely pleased to have him as a member of our leadership team. I'd now like to walk through our 2022 third quarter performance, focusing on items that directly impacted our operations during the period. Ken will address the financials in more detail in a moment. Looking at our financial results, Rollins' third quarter 2022 was highlighted by revenue growth of 12.2% to $730 million compared to $650 million in last year's third quarter. Net income was $108 million or 22 cents per diluted share. This is compared to $94 million or $0.19 per diluted share for the same period in 2021. Operationally during the quarter, all of Rollins' business lines continued to experience solid growth. Residential pest control increased 9.8%, commercial pest control was up 11.4%, and termite increased 18.9%. Overall, organic presented a strong 8.6% total growth for the quarter. Next, I'd like to turn to the expense side. During the last few conference calls, we've discussed various inflationary pressures, primarily fleet-related costs, specifically fuel and vehicle repairs, and materials and supplies. We've also provided insights into the proactive actions we've been implementing to mitigate these pressures. In this context, I'm pleased to note that during Q3, we're beginning to see a gradual improvement in fuel prices. We've also been reducing our overall mileage per service visit through routing and scheduling initiatives. Overall, when compared to last quarter, Q3 presented a 5% reduction in fuel expense. On the fleet side, as we discussed previously, we're keeping our trucks longer, forcing higher than normal costs for items like basic maintenance and tires, as well as some repairs outside of the norm. Recently, a small amount of new fleet vehicles are beginning to arrive from our primary manufacturers, which certainly will help. However, the quantities are less than what we historically receive by this point in the year. Looking ahead, we're told by our manufacturers that the supply environment is improving, and that potentially we could expect an uptick in inflow levels for new vehicles in the coming quarters. As we received similar assurances last year, we're certainly keeping a watchful eye on this and we'll keep you updated on future conference calls. On the labor side, even through the tight labor market, Rollins remains well positioned in effectively attracting, retaining, and deploying talent. By prioritizing employee well-being, workplace inclusion, and professional development opportunities, while also providing attractive employee benefit offerings, we have a track record of being a premier destination for talent. As we headed into peak hiring season this year, we successfully integrated a recruiting software platform to allow our hiring managers to more efficiently recruit and engage with potential new candidates. This talent recruitment platform makes it easier for prospective team members to explore open positions on our career portals and apply for open positions in just a few minutes. And they can do so easily from a mobile device. Our hiring managers can more easily prescreen candidates, communicate with them, and schedule interviews in a more streamlined way. As a result of this new, improved process, we averaged 35,000 job applicant submittals per month for the third quarter. And over the last five months, we have almost matched the total year 2021 application submittals. In short, By offering candidates an enhanced hiring experience, we've been able to successfully source and add qualified talent across the country despite the tight labor market. Next, I'd like to turn to acquisitions. Year to date, we've completed 27 acquisitions. Five of these were completed in the third quarter across Canada, Australia, and the U.S. In August, we announced the acquisition of Bughouse Pest Control. Bug House Pest Control was founded by Mike Prosperi in 1993 and has grown to be one of the largest pest control companies in Georgia. Bug House serves residential and commercial customers throughout Central and South Georgia. We are proud to welcome their more than 220 team members to Rollins. We continue to pursue potential opportunities as we look ahead to the remainder of the year and into 2023. Our pipeline remains strong. Before I turn the call over to Ken, I want to emphasize how pleased we are with Rollins' strong third quarter performance. We're confident in our ability to continue driving growth and improving profitability in the business. I'll now turn the call over to Ken.
spk08: Thanks, Jerry, and good morning, everyone. It's great to be here, and I look forward to working with Jerry and the team across Rollins as we continue to drive value for all of our stakeholders. During my first 60 or so days, I've had the opportunity to spend time with several of our key stakeholders. I've spoken with investors and attended investor conferences. I've spent time at industry trade shows and visited with our teams in the field. It has been beneficial to interact with our investors, employees, vendors, and customers. As I reflect on my experiences thus far, I want to highlight two key observations. First, Rollins has a strong commitment to doing what is right and best for all of our stakeholders. Our commitment to our customers and employees is second to none. The company places a tremendous amount of effort on promoting a culture that is focused on solving our customers' problems the first time and providing our employees with a workplace where they can build a long and rewarding career. Second, our strategy is driving strong results. We have a very valuable business model well-recognized brands, and a strong financial position by which we can drive profitable growth. Let me start by highlighting a few key accomplishments in the quarter. First, revenue growth was strong, with organic revenue growing just under 9% on an as reported basis. Second, EBITDA margins were healthy at 23.3%, up 10 basis points versus the same period a year ago, despite incurring higher casualty reserve charges. These charges weighed down EBITDA margins by approximately 140 basis points in the quarter. I will spend more time on the casualty reserve in a bit, but it was good to see the strong margin performance in this challenging inflationary period. Earnings per share improved 15% to 22 cents per share, and free cash flow was very healthy, with operating cash flow growing over 60% versus the same period a year ago. Let's now dive into the quarterly results in more detail. Quarterly revenue was $730 million, up just over 12% on a reported basis. This includes approximately 4% of growth from acquisitions. Currencies reduced sales growth by 50 basis points on the stronger dollar, notably versus the Canadian dollar, the Australian dollar, and the British pound. It was good to see strong organic growth across our service lines. All services, commercial, residential, and termite services grew at a double-digit growth rate with very strong organic growth in commercial and termite businesses. Residential revenues increased approximately 10% with growth stemming from both acquisitions and organic activity. We also had strong growth across substantially all of our brands. We are not seeing any significant signs of slowing, and retention rates are not changing materially. Overall, demand for our services remains robust to start the fourth quarter. Turning to profitability, gross profit was 52.3% of sales in the quarter, down 70 basis points from the same quarter a year ago. The decline is driven primarily by an increase in our casualty reserve related to auto claims. As I said earlier, this increase drove EBITDA margins down by 140 basis points in the quarter, with the most significant impact on gross profit. This expense in the quarter was driven by a number of auto-related claims that matured in the quarter. These claims tend to change from time to time, and we either reached resolution or received additional information about the nature of the claim that provided for a better estimation of the total liability associated with the claim in the quarter. Excluding this, we saw improvement in gross profit as pricing more than offset inflationary pressures and increases associated with people, fleet, and other areas. Pricing and managing our margins remains at the top of our agenda. SG&A expense in the quarter was just under $214 million, were 29.3% of sales, up approximately $20 million from the prior year. As a percent of revenue, we realized 60 basis points of leverage in SG&A on the double-digit sales growth, which helped offset the gross profit headwinds. GAAP operating income was $145 million, or 19.7% of revenue, up 20 basis points from the year-ago period. EBITDA margin was 23.3%, up 10 basis points over the prior year. As I indicated, the increased expense associated with claims activity negatively impacted EBITDA margins by 140 basis points. I like to look at the business using incremental margins, or what percent of every additional dollar of revenue growth is converted to EBITDA. And in the quarter, on an as-reported basis, we generated 24% incremental margins but over 35% when you consider the quarter included the higher expenses associated with the claims activity. GAAP net income was $108 million, or 22 cents in earnings per share, increasing 15% versus the same period a year ago on the 12% increase in reported revenue. Turning to cash flow and the balance sheet, quarterly free cash flow was very strong in the quarter. We generated over $120 million of free cash flow on $108 million of earnings in the quarter. Free cash flow increased by over 60% in the quarter. We made acquisitions totaling approximately $60 million in the third quarter, and we paid just under $50 million of dividends. That remains negligible, and debt to EBITDA is well below one times on a gross level. Cash balances approximated debt balances to end the quarter. Year-to-date, we have made acquisitions totaling just over $110 million and paid dividends of approximately $148 million. Debt balances are down $30 million since the beginning of the year, and cash is up over $16 million, finishing at $122 million to finish the third quarter. Speaking of dividends, we increased our regular quarterly dividend last night to 13 cents per share, an increase of 30% versus the third quarter a year ago. With this announcement, this will enable us to realize an increasing dividend again in 2022. We are well positioned to continue to maintain our balanced approach to capital allocation. Our focus is to consistently fund a regular dividend that increases as our business grows while continuing to use our balance sheet to fund additional acquisition related growth. Our third quarter performance demonstrated the strength of our business model. Organic demand remains robust and we are well positioned to continue to use our balance sheet to grow our business. The acquisition pipeline is very healthy and our strong cash flow and balance sheet positions us well to invest in our business. We continue to focus on execution and driving a long-term, profitable growth for our shareholders. With that, I'll turn the call back over to Gary for closing remarks. Gary? Thank you, Ken.
spk07: We're happy to take any questions at this time.
spk01: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Please ask one question and one follow-up question. Our first question comes from Tim Mulrooney with William Blair. Please proceed.
spk05: Yes. Good morning, everybody. Good morning. Good morning. So, um, first I wanted to ask on the residential business. Well, first I should say congratulations on a, on a great quarter. Um, but you know, I wanted to dig into the residential business for just a second, because there is some concern right now about the state of the consumer. And I was hoping that you could comment on the trends that you're seeing with respect to volumes in your resi business specifically. Are you starting to see any slowdown as we move from August to September to October, given the increased macro uncertainty? And could you maybe comment on how lead generation these days compares to maybe to last year?
spk09: Tim, this is Jerry. The residential business remains strong. certainly leads are down a little bit. It's hard to always, you don't know if it's economic, is it weather driven, you know, those kinds of things. It's hard to attribute it. Despite that, we still have our challenges keeping up with the lead volume that we get in the quarter. And when you also look at the quarter on the residential side, we were impacted at the end of the quarter. If you see it, kind of dragging a little lower than the other two categories, we were impacted. The worst possible time for that hurricane was the end of the month at the end of the quarter. That was a revenue drag in southwest Florida and parts of Florida where we're very heavily weighted on the residential side. To end the quarter, that was a bit challenging. That certainly had more of a drag on residential revenue than necessarily some change in demand. I don't know, John or anybody, you have anything to add there?
spk02: Well, the only thing I would add, Tim, is that leads for residential have been down for some time. Quality of lead and lead closure has been up, leading to increased sales and increasing organic revenue. But leads received as a measure of the strength of the residential business is not really necessarily a good yardstick. We continue to close at a high rate, and where we can, given some labor challenges, our teams are getting to the work. So we're still seeing strength in it. Is it as strong as it was over the last couple years? Maybe not, but. But we're very optimistic still about residential.
spk08: The only thing I would add as well is from a revenue perspective, as Jerry had pointed out, we had good revenue growth throughout the quarter. It was interesting. When we look at the revenue growth by month throughout the quarter in the residential area, we saw a little bit of weakness in July associated with just some COVID exposures and some challenges with COVID. But August was exceptionally strong, and September was – very healthy as well but unfortunately our ability to deliver services was hampered by the hurricane which hit us late in the quarter so overall business remains pretty well intact on the residential side and let's not forget that that hurricane also impacted south carolina as well went through there which is another area where we have a large a very large presence on a residential standpoint
spk05: Okay, that's really helpful. Thanks for all the color, everybody. So it sounds like, yeah, and Jerry, you're right. That's exactly what I was looking at. I was looking at the trend slowing down in residential, but it seems like that might be much more related to the hurricane than anything else. And it's still a very strong result. So it sounds like demand remains strong there. My last question is maybe for Ken or Julie, it's just a quick one. You know, that 8.6% organic growth figure, does that just exclude acquisitions? In other words, if I exclude the 50 basis points of foreign currency headwind, would organic growth have been more like 9.1% for the quarter?
spk08: You're thinking about that correct, Tim. We had a 50 basis point headwind on revenues. The 8.6 is an as-reported organic number. So adding back the currency headwind, your organic growth would have been just north of 9%.
spk07: Thank you, everybody.
spk08: Thank you. Thank you.
spk01: Our next question is from Ashish Savradhra with RBC Capital Markets. Please proceed.
spk00: Thanks for taking my question. And again, let me add my congrats as well to the solid quarter. I just wanted to focus more on the cross-selling opportunities. I was wondering if you could talk about how much traction are you getting on cross-selling into your existing customer base? And also as the technicians are more appropriately staffed, how is that helping drive better sales momentum among your existing but also new customers? Thanks.
spk09: So a lot of what you see in the termite ancillary growth is a result of cross-selling to your existing customer base. So that's where we get a lot of the lift is on the termite ancillary side is directly through cross-sell opportunities. So that continues to remain strong and continues to be a great opportunity for us certainly for years to come. We have seen a nice uptick this year also in technician sales. That has, in some ways, offset our, a little bit of the lead decline. And the better we know, the better staffed we are with technicians, the more technicians will actively sell. So getting that formula right is good. And we have certainly seen an uptick in technician involvement. sales, what could be upgrades on the commercial side, but as well as on the residential side as well. We do see sales productivity ticking up with technicians.
spk00: That's great. And maybe if I can just have a follow-up question on the margins. The incremental margins of 35% excluding the one-time item looks like a very strong margin growth profile. As we think about going forward, not necessarily from a guidance perspective, but as we think about some of the puts and takes and inflation rolling over and revenue momentum being strong, is that the right way to think about the incremental margins going forward? Thanks.
spk08: You know, Ashish, I don't want to commit to something too early here. It's only 60 days or so in. But what I'll tell you is gross margin profile of 50 plus percent is certainly an appealing gross margin profile and provides me a sense of confidence in our ability to generate that type of margin profile. But what I'd ask for is a little bit of time to better understand the business and some of the drivers that we have in the business. But nonetheless, that gross margin profile that we do have and the pricing opportunities we have in our business gives me some confidence in our ability to continue to improve our margins going forward.
spk00: That's great. Congrats once again on such a good quarter.
spk08: Thank you.
spk02: Thank you.
spk01: As a reminder, this is Star 1 on your telephone keypad if you would like to ask a question. Our next question is from Seth Weber with Wells Fargo Securities. Please proceed.
spk10: Hey, good morning, everybody, and welcome, Ken. I guess I wanted to ask a question on pricing. Can you just kind of catch us up on where you're at with pricing? I think you pushed through increases in April and May, and I think on the last call you talked about that was going to be it for the year, but can you just maybe talk to us about – know your thoughts on pricing going forward whether you you know if the inflationary environment continues whether you might take another another shot at raising pricing and um you know just whether it sounds like maybe there's been a little bit of pushback on you know maybe some maybe attrition ticked up a little bit is what it sounded like from your messaging but if there's if you're seeing any kind of you know customer churn based on on the pricing actions you've taken thanks
spk09: So we feel like our price increase program was very successful this year, and certainly as Ken noted, it attributed some of our success here in the third quarter to pricing, not only through rate increases, but also increasing our rate cards and our new sales pricing is up rather significantly. That's been helpful. Our strategy will be – to get through the rest of this fiscal year in January. We'll all meet again, and we'll have a discussion about our price increase strategy for 2023 and, you know, assess what the economic environment looks like, what's going on, and make some determinations at that point. We need to have those discussions fairly early in the year if we're going to keep it on the same cycle to be able to deploy that price increase by, March and April timeframes should we, you know, depend on what levels we go at. So, you know, and part of that process in January will also be a very lengthy look back, detailed look back into our price increase campaign this year, what the impact on rollbacks and customer retention was. And we'll use those data to help us determine what our plan will look like in 2023. We've monitored that. We haven't noticed any real significant jump in retention due to pricing, so we feel pretty good about where we are right now.
spk10: Okay, that's helpful. Thanks. And then just maybe, can you just touch on what you're seeing in the international markets. I know it's not a big part of your business, but if there's any notable changes in trends internationally versus U.S., thanks.
spk09: I guess, you know, internationally, you know, we see some of the – a little bit of some of the impact in the U.K. of – their inflationary pressures there, but our business in the United Kingdom is doing quite well. That team there is thriving. Same in Australia. They're performing very well, so we're very happy with the results that we're getting internationally. Singapore is a little down. They've had a little more challenges on the revenue growth side, and that's been largely They were engaged during the peak of COVID with a lot of disinfection services, and some of those disinfection services have disappeared. So they've struggled a little bit more, not necessarily because of any economic conditions, more just a shift in what's going on in the market from a pest control and disinfection standpoint. But overall, internationally, you think of Canada as well, our Canadian operations are doing fantastic, and they're growing well. So it's all very positive on that front.
spk10: Great. Okay. Thank you very much, guys. Appreciate it.
spk01: Our next question is from Stephanie Moore with Jefferies. Please proceed.
spk06: Hi, this is Hans Hoffman filling in for Stephanie. Thanks for taking my question and congrats on the quarter. I was just wondering, could you maybe dive in a bit on kind of what drove the strength in the commercial and termite business?
spk09: I didn't quite catch what you asked for specifically. Could you repeat your question for me?
spk06: Yeah. Could you just talk a little bit sort of what drove the strength in the commercial and termite business?
spk09: A lot of that is having feet on the street and having the staffing and the quality team on both the commercial and the number of home inspectors we have in the field. It's really about being staffed to handle demand and drive the sales results that we get. You look at our head count of commercial account managers and the volume of home inspectors that we've added over the last 12 to 18 months. That's by far the largest driver of the growth that we're seeing. Those folks have been very successful. given with the tools and infrastructure that we give them to be successful in their sales jobs. And by far, I think that's been the biggest driver. John, do you have any other opinion on that?
spk02: Yeah, I think you hit the nail on the head, Jerry. It's all about having the right amount of people to handle the production of the sales needed to grow those service lines. That only grows by having feet on the street, not by It's not lead-driven, I guess is what I'm trying to say, like the residential side. So you've got to have those bodies in front of those customers.
spk06: Got it. Thanks.
spk01: We have reached the end of our question and answer session. I'd like to turn the conference back over to management for closing comments.
spk07: Okay. Well, thank you for joining us today. We appreciate your interest in our company, and we look forward to updating you in February for our fourth quarter earnings. Thanks again.
spk01: Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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