Q3 2021 Rollins Inc Earnings Call
Greetings and welcome to Rollins incorporated third quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded I would now.
I'd like to turn the conference over to your host Joe Calabrese. Thank you you may begin.
Yeah.
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Additionally, coal is being webcast at www.
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On the line with me today, and speaking of John Wilson, Vice Chairman, Gerry Gil Junior President and Chief operating Officer and.
Julie Bowerman.
Chief Financial Officer, Vice President and Treasurer.
Management will make some opening remarks, and then we'll open the line for your questions John would you like to begin.
Thank you Joe and good morning, we appreciate all of you joining us for our third quarter 2021 conference call.
Julie will read our forward looking statement and disclaimer and then we will begin.
Our earnings release discussion.
Alright discusses our business outlook and contains certain forward looking statements.
These particular forward looking statements and all other statements that will be made on this call. Excluding historical facts are subject to a number of risks and uncertainties and actual risks 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 31, 2020 for more information and the risk factors that could cause actual results to differ.
Thank you Julie.
Before we begin I am sure you have noticed that Gary is not on today's conference call.
He is actively rehabbing from a knee replacement operation and while he is recovering quickly. He is doing very well. He is just not in a position to physically join us today.
We wish Gerry well with his physical therapy, and look forward to having him rejoin us on future calls.
During the third quarter, we achieved some very strong business results and Jeremy will go over those with you shortly in the interim.
Wanted to share news of the latest addition to our Rollins board of directors.
As you already know over the previous year, we have enhanced and diversified that group with several new members.
I am very pleased to announce our latest addition is rollins' president and Chief operating Officer Jerry Law.
This is in recognition of his strong leadership and his deep commitment to the company's long term success.
We are proud to have Jerry serving on our board moving forward.
Jerry is an important part of the Rollins leadership team and his in depth knowledge of our business and experience gained from working in our industry since 1991 adds perspective.
We're fortunate to have him assume a greater role in the direction and future of our company.
Before turning the call over to Jerry I have two items to first update you on the first will represent a recent development and Rollins environmental social and governance commitment.
We take very seriously the responsibility that we have to the communities in which we work and live.
As a recent example, we're pleased to share that Rollins made in in kind donation originally costing $4 $6 million worth of personal protective equipment or PPE items during the third quarter.
Working with the federal Emergency management agency, and several philanthropic organizations, including the friends of disabled adults and children.
Foundation of hope food bank as well as coup preparedness in Los Angeles, We donated 27 pallets or $6 8 million pieces of masks gloves and other items.
In addition to achieving a successful execution of our strategies as well as solid business results. We also have a responsibility to the communities in which we work and live.
ESG is a facet of our business is becoming more important more and more important to us.
We are proud to support these initiatives.
Last as we have previously disclosed the company has been responding to an investigation by the U S Securities and Exchange Commission.
In accordance with accounting standard ASC 450, we have established a reserve related to this matter, which we consider immaterial gear.
Given that the investigation is ongoing we cannot answer any questions during our Q&A, but we remain focused on resolving this inquiry.
With that I'll turn our call over to Jerry.
Thank you John Good morning, everybody, we're very pleased with our third quarter results revenue increased 11, 4% to $650 2 million compared to $583 7 million for the third quarter of last year.
Our net income totaled $93 9 million or <unk> 19 per diluted share compared to $79 6 million or 16 cents per diluted share for the same period in 2020.
Julie will review, the GAAP and non-GAAP results shortly.
Revenues for the first nine months of 2021 were 182 4 billion an increase of 12, 2% compared to 162 5 billion for the same period last year.
Net income for the first nine months increased 44% to $285 3 million or <unk> 58 per diluted share compared to $198 2 million or <unk> 40 per diluted share for the comparable period last year.
For the quarter, we experienced solid growth in all our business lines with residential increasing 11, 7% and termite presenting 15% growth over the third quarter 2020.
Additionally, commercial excluding fumigation delivered an impressive 10, 1% growth over the third quarter last year.
This is also an improvement of seven 9% growth over two years ago, when we were not experiencing COVID-19 related shutdowns.
Overall, we're pleased with our performance Rollins remains well positioned for the remainder of the year and into 2022.
Looking deeper at our operating results were attracting customers to all our services and brands and one area I'd like to focus on today is our continued strong growth in our wildlife service offerings.
True Tech Wildlife joined the Rollins family in 2010, followed by Critter control in 2015.
Since 2010, the business has grown 800%.
Day to day operations of operating a wildlife control business is quite different than running a typical pest and termite business and we are proud to have a dedicated team focused on this much needed service.
Originally concentrated in the south eastern United States, the business has expanded across the nation as well as into Canada.
And with and with Critter control is expansion into Canada, It's Rollins as first brand to enter an international country without acquiring another business as a platform.
The Wildlife Division also operates a thriving franchise system. They are currently 84 franchises with the most recent franchise launching in Mansfield, Ohio.
We anticipate finishing the year with 12, new franchises, one of our strongest years and adding franchisees.
We've also been fortunate to add nine former corporate employees as franchisees.
Employees, who have an entrepreneurial drive and a passion for NUCYNTA wildlife and customer service have multiple career path opportunities be it ownership of a franchise or growth within our company.
We believe there is meaningful opportunity for continued growth in our wildlife business and look forward to updating you in the quarters ahead.
Yeah.
I would now like to discuss Hurricane Idaho.
Our Hearts go out to our Gulf Coast region, and those that were affected by the hurricane.
But I must admit we are inspired by our team in that area.
They implemented an amazing plan that helped our team members and alleviate the negative impact of the storm.
Either shut down several of our branches for days, but two locations were shut down for about two weeks.
The impact to our employees in the days following the storm was far worse than the impact to our business in the quarter.
Thankfully all of our employees in the area, where safe yet they did need assistance.
Through the Rollins employee relief fund, we granted a 137 emergency grants to impacted employees within the first week following the hurricane to enable employees to address their personal essential needs. Since then another seven employees, who endured greater hardships received full grants to address their more significant needs.
Additionally.
Our Orkin South Central Division led by Leland Morris quickly initiated our preparedness and mitigation plan to assist our team members.
This included a immediate procurement of much needed supplies for our employees and their families such.
Such as generators fuel portable air conditioners fans water and other essential emergency provisions that were not readily accessible to them locally.
Our team members in adjacent areas that we're fortunate to avoid the brunt of Itis force.
Onto their time and energy often after work hours to load these supplies into box trucks and drive them to those most in need.
For weeks that continued to shuttle fuel to these employees to keep their generators up and running.
This was a total team effort and we are tremendously proud of their care compassion and commitment to one another and.
In fact, we're so pleased with our effort that we plan to expand and formalize. This program in other areas of the country. So that we can rapidly respond in case of a natural disaster or emergency.
Now, let me turn the call over to Julie to discuss our financials.
Jerry.
As we measure our performance and think about how best articulate relative business in the future.
With what we're taking questions. We've received from the investment community. We will now be presenting three additional measurements quarterly moving forward.
The first is a measure we have referred to periodically and that is EBITDA or earnings before interest taxes depreciation and amortization.
Due to our consistent high volume of acquisitions enhance high amortization expense related to these acquisitions presenting EBITDA regularly will provide a clear picture of our operations ongoing financial performance.
Think about that over the last three years, we have averaged 30 acquisitions per year.
Next we will began presenting our revenue growth through both constant exchange rate and actual exchange rate.
By utilizing historical baseline revenues for acquisitions better through the due diligence process. We are able to include all acquisitions within the calculations are standalone and Tokyo.
This will bring clarity and consistency to both our acquisition and our organic revenue growth measurements.
Third we will be providing you with our free cash flow. We believe that this will profit properly illustrate rollins's strong ability to generate cash.
We have taken a simpler approach to defining free cash flow, which is calculated as net cash provided by operating activities less purchases of equipment and property.
Our hope is that these measurements will enable investors to better assess our operating performance in the future and provide a deeper view of our business.
We have included GAAP to non-GAAP reconciliation on each of these metrics on our earnings press release published this morning.
So onto the numbers.
Our third quarter revenue of $650 2 million with an increase of 11, 4% over last year.
Of the 11, 4% actual exchange rate revenue growth acquisition growth was two 2%.
Inorganic equated to nine 8%.
For the constant exchange rate the growth percentages calculated within the 100 and the actual exchange growth rate therefore presented the St.
For the nine months ended September 2021 revenues of $1 824 billion with an increase of 12 point, 12% over a year to date 2020.
Of this actual exchange rates total revenue growth of two point excuse me up 12, 2%.
Two 7% was related to acquisitions.
And nine 5% organic growth.
The constant year to date exchange rates total revenue growth for 2021.
11, 6%.
Two 7% represented acquisitions and eight 9% organic revenue growth.
As Jerry pointed out residential commercial and termite all grew double digits this quarter over the same quarter last year.
So in determining my focus for today, I decided to take Jerry's lead and discuss wildlife.
Yes, I am discussing specifically company owned wildlife operation.
For the third quarter in 2021 wildfire revenues grew 24, 1% over last year.
And year to date Wildlife has presented an overt and overall revenue growth of 27, 6%.
What makes us, particularly impressive is that this is after they are stronger at the 24% last year.
So similar to our residential pest control wildlife did not fill and negative impact to revenue.
During the pandemic so way to go to the wildlife team.
Now onto our income.
For the third quarter and year to date, we are presenting adjusted EBITDA for comparison purposes due to the onetime Super Best thing of our late Chairman stock grants in the third quarter of 2020.
And the impact of our gain on sale of several of our properties in the first six months of 2021.
The third quarter 2021, EBITDA was $150 9 million or eight 7% over 2023rd quarter adjusted EBITDA of $138 9 million.
Third quarter 2021, EPS was <unk> 19 per diluted share or five 6% improvement over the 2023rd quarter adjusted EPS.
For the nine months ended September 2021, our adjusted EBITDA was $421 2 million or 22, 1% over last year's adjusted EBITDA of $344 9 million.
Yeah.
Year to date 2021, adjusted EPS was <unk> 53 per diluted share or 26, 2% over last year.
For the third quarter 2021 gross margin increased to 53.
53% or 4% over last year.
Improvements in our materials and supplies were negatively offset by high overall fleet costs, primarily from an increase in fuel up approximately $4 million over third quarter of 2020, and lower vehicle gains of 900000 compared to last year.
Sales general and administrative third quarter margin increase over last year, which strongly impacted by the PPE donations in the SEC accrual previously mentioned by Caroline.
Travel expenses have also increased $1 3 million in the third quarter as we have begun to lift our company travel restrictions.
Amortization expenses for the third quarter 2021 increased $1 4 million due to the amortization of customer contracts from multiple acquisitions.
This was offset by a decrease in depreciation of 201000 is the sale of owned vehicles and centralizing functions. Overall this equated to a five 1% increase in depreciation and amortization over the third quarter 2020.
Our dividends paid year to date 2021 was $119 7 million or an increase of 34% over last year. We ended the current period with $117 7 million in cash of which $73 6 million was held by our foreign subsidiaries.
So this brings us to the final of our new three measurement.
Free cash flow.
The third quarter of 2021, our free cash flow of $72 9 million or decrease of 27, 5% over the same quarter last year for the for the nine months ended 2021, our free cash flow equals $278 9 million or 13, 6% decrease over a year to date 2020.
Fluctuation occurred did it differ.
Oral <unk> 30.
$33 million in FICA taxes payable in 2020 as allowed under the cares Act. These associated taxes were then remitted in September of 2021.
We hope that the discussion of these needs with new measurement, you will receive a greater clarity, while reviewing our financial performance.
Lastly, I wanted to discuss it yesterday, we were extremely pleased to announce that our board has approved a 25% increase to our dividend. The quarterly dividend increased 10 210 per share from <unk> <unk> per share and will be paid on December 10th 2021 to stockholders of record at the close of business on that.
<unk> 2021. Additionally.
Additionally, the board also approved a special dividend of eight to be paid on December <unk> 2021 as well.
The dividend increase reflects our strong performance in the first nine months of the year and underscores our financial strength, our solid capital position and the board's confidence in our outlook for continued growth.
John I'll turn it back to you.
Thank you Julie we are happy to take any questions at this time.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
We ask that you please limit to one question and one follow up.
A confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from Tim Mulrooney with William Blair. Please proceed with your question.
John Gerry and Julie good morning.
Good morning, Ryan.
Hum.
Thanks for taking my questions and sending my best to Gary on a quick recovery.
So.
Yes.
Just two questions from me the first one Julie I apologize if I missed it but did you give organic growth by segment in the prepared remarks.
No. We did not we just gave the organic on the overall.
Okay.
Is it a change in policy for the company now that you won't be providing that that's been pretty critical in terms of us understanding how the company is performing.
At this point with our change we're trying to give you additional clarity by giving you a very clean organic and.
Alright, and the acquisition growth numbers that we will be stained for here for now.
Okay, and I did want to confirm that because I know that's been an area of focus.
The organic number this quarter excludes all acquisitions, both large and bolt ons.
Yes, 100% all acquisitions are excluded.
Okay, that's great.
My next my next question is on <unk>.
Margins EBITDA margin contracted I think about 60 basis points year over year, and 140 basis points sequentially.
Can you talk about the primary factors that could cause that 140 basis point contraction from the second quarter to the third quarter of this year.
I have to imagine that it's probably labor related because I don't think of materials and supplies or are large enough component of your cogs to really cause as much of a headwind, but I wanted to get your thoughts on that.
Yeah.
I'm going to go ahead and take this first to Gerry and I'll see if I want to add anything on to that the biggest headwind. We had Tim. This is Jerry in the quarter was fuel fuel prices fuel expense was up very significantly we were able to manage the labor part pretty well.
From a as in.
As a percentage of revenue labor labor wasn't as big of a deal. So we just had.
Fleet fleet expenses, probably more than anything.
John what would you add anything.
Second the labor part I mean.
Our labor increase as a percentage of revenue was one of the ways. We track. It Tim is as is our expenses growing less fast than our revenue and that's always a focus for our operations and labor was.
<unk> grew less than that 11% revenue increase.
No that's really good color I appreciate that could you remind me what percentage of your sales typically fuel represents.
Well, we don't break out the field, specifically, we keep that buried into our fleet and embrace you will know so also think about it is not only the feel increasing.
He said the $4 million, but we're also talking about the increase because we had fewer vehicle gains this quarter as well just under $1 million on that as well.
Yes.
As of March Julie said $4 million in it.
Increased fuel cost him and.
As you know we've been we've had active routing and scheduling effort for.
For several years.
With a million stops per month or more.
Without that effort and the reduced miles per stop that our field teams are achieving.
It would have been worse.
Got it Okay makes sense. Thank you for taking my question.
Thanks, Tim.
Okay.
Our next question comes from Mario <unk> with Jefferies. Jefferies. Please proceed with your question.
Hi, Thank you for the time.
Just kind of piggybacking off of the margin part of it maybe you can just give us a sense for how pricing is running right now I think last quarter. You guys said that you can flex it up above.
One 2% historical range up to help offset some of the cost pressures, but is there is there any lagging.
Thanks, Mike.
<unk> side of the equation.
Or the fleet side of equation or is it pricing running high and just helping offset maybe some of the labor pressures.
So you broke up a little bit on on part of that.
We've not taken any taken any real extraordinary pricing action as a whole as.
As we talked about previously many of our the vast majority of our people are paid on a productivity pay plan. So so.
Any sort of impact of wage inflation doesn't really reflect.
What we do do is use our.
Our call Center team.
And our and our close rates in our branches to sort of evaluate do we have room in proxy and then that's been a historic.
Sort of effort.
We've always looked at but if our close if our close rates in a particular market.
Are trending well above the norm then that tells US we have room for pricing increasing no matter the economic or concerns that are going on right and commercially if it goes the other way.
We have the same.
Then we would take maybe a different action.
The call Center has a lot of ability to look at data real time and make those adjustments to what they are selling how they're selling at what the demand is like in adjusting price.
Based on that but we also did implement our annual price increase this summer just as our core price increase that helps offset some of those costs, but.
Certainly the fuel is certainly the most impacted comp.
A component of that.
Last quarter.
Got it and then just more of a housekeeping.
Issue I guess.
New organic growth exposure are you guys going to provide any historical so that we have some context and how things have trended.
And then also like I said within the quarter.
Give us any context within commercial.
Commercial trended relative to the corporate average was.
Randy slowing.
Commercial slowing is continuing to pick up or commercial accelerating just any kind of context, there would be helpful.
Yeah.
Well basically it's Glenn we're getting down to the new numbers, we're going to put these new measurements in place.
From this point on and we will be going forward. So as of today. We told you. How this growth relates to obviously Q3 of last year. So we gave you from that perspective, but we are not planning at this point to go back and get to historical numbers.
Hopefully that makes sense from that standpoint.
Sure.
Can you help with the resident commercial trend within the quarter, just so that we can gauge how each is performing.
I would say this is Jerry.
Residential remains strong I mean, it's been real consistent.
All the way from the pandemic to now it remains strong.
The commercial function appears to have completely rebounded and again is doing well I would probably see some acceleration on the termite side and so there's really a lot of positive thing things going on in our termite and ancillary services.
Across the board and that's been a probably a more important growth driver for us in the third quarter.
But all are all are really strong and continued continue to trend in positive directions.
Yeah.
Understood. Thank you so much.
Our next question comes from Ashish Sabra with RBC capital markets. Please proceed with your question.
Thanks for taking my question just a follow up on the E side I was wondering if you can talk about the sales momentum coming out of the key summer selling season.
And maybe a related question is also on the retention side, how retention has been tracking.
Particularly again on that as he decided to relocate.
Keep in relocating pull some art as well as the return to office.
I'll jump in and then you can add anything if you want to sale on the residential side still very strong as we said we were sitting there with a 11, 7% increase over Q3 of last year and just to bring you around that if you think about it last summer we still had a 10, 5% increase on our revenue.
Residential was we did not see a decline last year like many businesses did or like we did on a commercial side. So the.
The level that double digit increase was on top of the double digit increase last year.
So from that standpoint, it is still running very strong.
On the we didn't have not seen any strong fluctuations on our retention this quarter.
So anything else, John or very you'd like to add to that.
No.
Frankly, ashish I've been a little bit surprised and pleased at our team's still team's ability to handle the load that we've put on them with the new customer influx over the summer and the increase in customers that we added.
Over this last year.
Our two primary measurements our customer sat.
For the for the near term or the immediate term and then our customer retention is more of a lagging indicator and both have remained relatively steady.
That's very helpful color and good to hear that maybe if I can just ask a quick question on the technology rollout I was wondering if you could provide an update on how the phase one and two are progressing and as well as the timing of the launch for phase three and four.
You want to handle that.
Hi, Ken this is Jerry.
So we are very heavily focused on adoption in the field.
The phases that we're in in different operations in the field are different phases of.
Or different I guess maturity levels of adoption.
John John often describes it as like a baseball game and what inning, we're in and we're still there's still an awful lot of upside there for us to to drive utilization.
And with this increase that we're seeing in fuel there is a lot more.
Desire to get that done and increase the adoption along the way. So we still have plenty of runway in that regard to doing that and we're continuing to see incremental improvements and that's what we're all about is continuous improvement and getting better all the time, but we still have a long way to go and I'll jump back to Johnson <unk> Johnson.
Analogy that Jerry referenced to you on the baseball as we say that we're still in the early signs of the game.
Early early sides of the game.
Alright, well, thanks, we're playing football.
Well good.
Okay.
Yes.
Yes.
Thanks.
Got it.
Sorry again.
Well I might add to that.
Our field leaders have adopted him sort of our mantra.
You bought it now utilize it.
So we've got a ton of technology that our it team has done a great job in delivering to our field and users.
And we've really kind of pushing the mindset of you bought it you are paying for it now let's use it and so that's what we're really working on.
2021.
Thanks, Thanks, John <unk>, Julie Thank you Matt.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad one moment, please while we poll for questions.
Our next question comes from Michael Hoffman with Stifel. Please proceed with your question.
Thank you very much.
John Gerry.
It's really to pass on my best Gary rehab of an east challenging.
Yes.
On the organic growth can you help us understand what's in it then.
As you think about if you took 92 instead of approximately <unk>, new customers excellence price <unk> cross selling.
That's very similar to what it was in the past, but I think just on very broad averaged 1% to 2% would be the price increase and then we do say the rest is a combination of.
New customers with.
Additional sell to existing customers and we don't break out that part, but just take out your price increase.
Yeah.
Okay, and then on price.
Historically had a fuel surcharges if I remember correctly so are you.
Michael.
Yes.
Michael This is John we've never added a fuel surcharge well I'll say never we may have a one time, we found out that it really took our customers off and so then what do you do when it goes down you have to give that back so so.
I Shouldnt say never but we may have a one time, but we found out really quickly how that made our customers too.
Okay.
<unk> corrected.
And so how are you going to offset that inflation.
The inflation of fuel additional fuel.
So the fleet cost pressure, how are you going to offset it.
Well, we will keep pursuing the same mission, we have with with reducing our miles per stop.
In routing our people more efficiently and as we add new customers. Then we then we of course improved density.
Okay and last one for me awareness, while Okay. Go ahead, sorry, just wondering Mike what.
Yeah, I was just going to expand on what John said is just gets back to what we were talking about a few minutes ago with literally I mean think about it. If we are in the early innings did I say that correctly guys early.
Earnings on the.
On our routing and scheduling and what we can bring in and lowering those miles per stop I mean, we have a long right now I'm going to change nowadays here I can say long runway that would totally kill it with that yes, we have a long way to go on that so this will definitely help offset as John was saying they fuel increases.
Okay, and then lastly, where does wildlife exist in the three line items, just so we understand what it is influencing.
It will it will be in whichever line item. It occurred the majority of the wildlife would be on the residential.
Right, but if it was a commercial customer that needed that service say a grocery store it would hit commercial but if it was a residential homeowner it would hit residential.
I'm, just very familiar with it because I have to use our wildlife service at the Port.
Flying squirrels, so it's going to be it's going to be a mix of those but.
<unk>.
The majority of their business is certainly residential yes right.
Okay.
Yes.
And Michael I would say, we want to make one comment just so you know that is the way we've always presented the wildlife.
That is nothing new on how would you split that.
Okay fair enough just needed to understand since you are emphasizing what's part was being influenced by it.
Yeah.
Okay. We have reached the end of the question and answer session I would now like to turn the call back over to management for closing comments.
Thank you all for joining US today, we appreciate your interest in our company as you've heard during the past calls we have several programs underway that will make our company better as well as improve our customers experience and our financial results. We look forward to giving you update on our fourth quarter and year end call. Thanks again.
Yes.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.
Yeah.
Yeah.