Q2 2022 Rollins Inc Earnings Call
Greetings and welcome to Rollins, Inc. Second 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. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded its now my pleasure to introduce Joe Calabrese. Thank you you may begin.
By now you should have all received the copy of the press release. However, if anyone is missing a copy and when.
I'd like to receive one please contact our office that you want to.
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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 87766 Euro 6853 with the pass code 13731028. Additionally, the call is being webcast at Www Dot Rollins Dot com and a replay will be available for 90 days. The company has also.
Offering investors, a supporting slide presentation, which can be found on its website at www Dot Rollins dot com will be following that slide presentation on our call. This morning, and encourage you to view that with US on the line with me today in speaking of Gary Rollins Rollins, Chairman and Chief Executive Officer, John Wilson, Vice Chairman Gerry Jails Junior.
<unk>, President and Chief operating Officer, and Julian Government interim Chief Financial Officer Group, Vice President and Treasurer.
Management will make some opening remarks, and we'll open the line for your questions Gary would you like to begin.
Yeah. So thank you Joe and good morning.
We appreciate all of you joining us for our second quarter 2022 investor call.
Julie will read our forward looking statement disclaimer and then move again.
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.
Yes.
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, 2021 for more information and the risk factors that could cause actual results to differ.
Thank you Julie.
Very pleased to report that Rollins has delivered a very strong financial performance in the second quarter in a row.
<unk> is 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.
We firmly believe that this is the right time to initiate this important leadership transition.
Effective January one 2023, Jerry gave off the Rollins Chief operating officer, and President will be elevated to the position of Chief Executive Officer or C. E O.
I will remain chairman of the board.
And Jerry will continue in his current role as president of Roberts.
The following five months will be transitional while jewelry becomes more familiar with the area that's involving us future responsibilities.
The company is well positioned financially and operationally.
We have a proven management team, leading brands and a very strong culture.
I'm extremely confident in the future of Rollins and look forward to working closely with Gerry to ensure a smooth transition of responsibilities.
Well I'll be moving away from the day to day operations as I continue serving as our company's 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 was Rollins since the 2008 acquisition of home team.
And he's been instrumental in our success what most don't know is it Jerry grew up in Oregon and household.
As his father work 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.
As yours are serviced Rollins has been marked by outstanding performance and accomplishments. He was promoted to Rollins President and Chief operating officer in 2020.
And has had a unique opportunity 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 role.
I have the utmost confidence that Jerry will continue to foster our strong company heritage record of Kashi accomplishments.
And for most of the culture of Roberts.
Let me now turn the call over to John Wilson, Our Vice Chairman, who will provide some business updates John .
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 10 years Rollins C E O.
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 it didn't and then in addition to his impressive business results over multiple decades, he has been steadfast and leading Rollins high performance culture.
But the best part about this changes that he isn't going anywhere and we will continue to be a valuable resource to all of us.
Turning to our performance we are pleased with our second quarter financial results with revenue increasing to $714 million and net income totaling $100 million or <unk> 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.
As we continue to grow we recognize the 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 and I am pleased to announce that Rollins has partnered with ever Sidehill 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 thousand of our employees in the area.
There are multiple that benefits and features to this program, including same day and next day appointments onside lab draws medications and immunizations mental health services and the ability to reach a care team 24 seven for urgent needs.
In addition to our Atlanta facility, our U S employees have access to over 70, Airside health clinics and we are live in 37 states for virtual primary care.
The safety and wellbeing of our employees is a top priority.
And we believe offering this new benefit will lead to better health outcomes, allowing employees to live healthier lives.
Now, let me turn the call over to Jerry who will provide more details on our business congratulations Jerry.
Thank you John and Hello, everyone.
Before I get into our second quarter operating review I would like to say a few words about Gary.
As Gary mentioned I came to Rollins through the home team acquisition in 2008.
As many of you know those can be tenths in uncertain times for those being acquired.
Gary talked with me personally.
His words and subsequent actions reassured me that I have found a home at Rollins and my experience here is that 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 isn't as actions and results.
It's truly an honor to succeed Gary as CEO and lead this incredible company of more than 17000 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 second quarter performance focusing on items that directly impacted our operations during the period.
<unk> will address the non-GAAP adjustments a little later.
Looking at our financial results Raw <unk> second quarter 2022 was highlighted by revenue growth of 11, 9% to $714 million compared to $638 million in last year's second quarter.
Net income was $100 3 million or <unk> 20 per diluted share. This is compared to $98 9 million or <unk> 20 per diluted share for the same period in 2021 as true as mentioned Julian will review GAAP and non-GAAP results as well as organic revenue growth number 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%.
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 second quarter 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 chain costs and how they may affect Rollins.
Management of fuel expenses. A notable example, as we grow we improved 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 8 million miles driven in the quarter or $1 $3 million.
This savings was slightly offset by increased average price per gallon over Q2 2021 of over $400000 equating to net fuel savings of $875000. This has also helped manage labor costs as our technicians have less unproductive windshield time, plus we've created.
I did a better job for them along the way.
As we move through the second half of 2022, we expect we will 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. 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 a 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 or 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.
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 a 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 have a material shift 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.
On the subject of pricing, we successfully implemented our annual price increase price increase programs earlier this year.
As mentioned on our last conference call aggressive service price increases were initiated within all of our brands during April and May as compared to historical timing of this early summer months in 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 a 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're actively pursuing.
So far in 2022, we've completed 22 strategic acquisitions within the U S United Kingdom and Australia.
In the U K, we achieved an important milestone during the quarter with the acquisition of Euro past.
In addition to expanding our geographic footprint within the U K. 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 U K acquisition, NBC environment, which provided our first locations within Scotland.
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 wrong on second quarter results and that we remain well positioned for 2022, I'll now turn the call over to Julie Julie.
Thank you Jerry.
First I would like to congratulate both Gary and Jerry on reaching the next pinnacle's in their careers.
Gary your extraordinary impact on Rollins has been legendary.
Gerry you definitely have a large shoes to fill.
Jerry also watching your career growth from our early days time team to president and so it's been exciting and I have no doubt, but you will excel in this new role I appreciate your trust and leadership through the years and cannot wait to see what the future holds.
So now onto 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 todays earnings presentation.
To view the deck. Please go to Rollins dot com click on news and events and presentations.
Our second quarter revenues of $714 million represented an increase of 11, 9% actual exchange rate eight 7% organic.
The constant exchange rate the total revenue growth totaled 10, 7% with seven 5% organic.
As Jerry mentioned residential commercial and termite all presented strong double digit credits for the quarter.
Residential grew seven excuse me, 11%, 7% organic.
Commercial grew at 11, 2% nine 3% organic.
Lastly, we have termite, which grew 15% with 11, 2% organic.
Now onto our income.
For the second quarter and year to date, we are presenting adjusted EBITDA for 2021 for comparison purposes due to the impact of our gain on sale at several of our Clark properties at $450000 in Q2 of last year, and 331 $5 million year to date 2021.
Yeah.
Second quarter, EBITDA, 2022 was $159 2 million or one 2% over 2021, adjusted EBITDA of $157 3 million.
Second quarter 2022, EPS was <unk> 20 per diluted share equal to 2021 adjusted EPS.
Second quarter 2022, gross margin decreased to 52, 8% or five 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 $8 million and vehicle repairs of one 7 million over last year.
The 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 Fortunately repairs outside of our norm.
Combined these fleet expenses increase you'd be split expense increases equated to nine tenths of a point and the additional cost taking these fleet related increases out of the equation gross margin increased over last year.
Sales general and administrative or SG&A as a percentage of revenue for Q2 2022 increased over 2021 by two 1% to 38%.
Travel was a contributor as this increased 65, 7% over Q2 2021. This was due to a return to normalized levels for leadership traveled breaks locations along with overall increased cost in air travel and rental cars.
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 of creating our advertising expenses.
Aligning these cost with our high Q2 cells 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 or dividends Q2, 2022 totaled $49 $2 million or an increase of 22% over 2021, while cash used for acquisitions increased 218, 7% to $36 $4 million.
For 2022.
We ended the current period with $221 million in cash of which $62 9 million was held by our important subsidiaries.
Our free cash flow for Q2 was $119 4 million or an increase of 26, 6% over last year.
This increase was primarily driven by timing of income tax payments.
Last I am pleased to share that yesterday, our board of directors approved a regular cash dividend of 10 cents per share that will be paid on September 19, 2022 to shareholders of record at the close of business August 10th 2022.
This represents a 25% increase over the dividend paid in September 2021.
The dividend increase reflects our strong performance in the second quarter of 2022, accentuates, our financial strength and the boards confidence in our continued growth.
Gary I'll turn it back over to you.
Thank you Julie.
Happy to take any questions at this time.
Thank you if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Our first question is from Tim Mulrooney with William Blair. Please proceed.
Okay.
Yeah, good morning, everybody.
Sure.
First one I just wanted.
Gary Congratulations very few Ceos can boast the same level of tenure and success, but.
But you can and I look forward to staying in touch with them.
<unk>.
The first one your EBITDA margins were down a little bit more this quarter than I was expecting and what was helpful. Last quarter you guys bucket. It these things for us the primary buckets being you are yeah, I don't know if you want to call it suite.
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 theres any way to quantify it I think that would be really helpful. For investors. It certainly was very helpful for us last quarter.
Sure Tim This is Julie so I'll jump in so I would say that our largest impact was getting back to the advertising expenses, we said which is.
Gain or excuse me, an increase of 2% of our revenues and I do want to go ahead and go over this this is where we updated our quarterly processes for estimating and Crewing, 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 8 million dollar.
The increase over last year. So that was you know significant over Q2 of last year.
I would add that from a labor standpoint, you know we did a pretty good job of keeping server service wages in particular relatively flat year over year that that really wasn't a significant driver of everything is.
Heavily on what Julie mentioned.
Okay. So I mean, that's very consistent with what you said last quarter I guess labor had more disruption in January .
But you you were saying that that wouldn't be as much of an issue going forward. It sounds like it's not it's mostly fleet and and advertising expense. So that's really helpful. Thank me in January it was driven by the the Covid.
Covid situation, which as you know because it seems to be ramping back up again, but you know where we were managing through it a little better right now.
Our next question is from Ashish <unk>.
<unk> with RBC capital markets. Please proceed.
Thanks for taking my question and congrats to both a few Gary and Jay.
My first question would be on the revenue growth pretty strong momentum there across all the businesses I was wondering if you could help parse out you obviously talked about a more aggressive price increase but I'll see if he 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.
Modern day inbound, but also the technetium being approved P. T stop how is that helping you drive sales momentum. So if you could just parse out some of the group travelers and quantify some of those fields.
Yes, that's correct.
Well I think on the Giulia on the revenue growth side.
We've certainly got some additional lift from the from the price increase.
That that helped us quite a bit we were lapping a pretty pretty big second quarter last year in particular.
In the month of April and in 2021 was was really difficult to lap is from a growth standpoint, but we managed through it pretty well and things picked up quite a bit in may and June to help adult recover from there.
Our retention remains with customer retention remains strong.
And our team is doing a pretty good job on this on service delivery, where staff better than we were a year ago from a from a technician standpoint, and being able to get to new customer service our existing customers. So that's all good we've got a lot of positive response to in particular Oregon's transition too.
With their new AD campaigns, especially with the with the Orkin Pro had we've received a lot of very strong feedback or are the people that work at Oregon. Our team members at Oregon are really like it it's getting a lot of attention I know I know, it's good when I hear about it from my children, because they're seeing at all.
Tick tock and so they see those ads on tick tock and and seem to have a lot of phone with them and then to add on to that just as a reminder, I think Jerry commented on his section of the script is our price increase you know that brought in over double what we typically see from our annual price increase so that was a part of that.
For us as well.
Our next question is from HIMSS at Missouri with Jefferies. Please proceed.
Hi, This is Hans Hoffman filling in for Hamzah could you just give us a sense of how much capacity you have in yourself sports and you know what your hiring plans are going forward.
How much are you know where.
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.
When you have a salesperson at full capacity or selling hi, hi.
<unk> monthly the next step to do is hire another and then build them back up.
And continue to to drive that incremental growth and get improvements. So we always.
Theres always a little bit of capacity there to do better but.
As we get closer to capacity, we look to add staffing.
Where it makes sense and we're always.
That's just kind of a numbers game math game that we play and that's where we've really worked hard on them at the end of last year. So when we started doing the heavy staff up on our commercial side side of our sales force just so that we can be prepared for this year and be able.
Build it.
Honestly be able to close the deals that were closing today and certainly the commercial results that we're getting are a result of.
Those are the increased staffing and the increased productivity for.
Our sales rep that we're saying.
As a reminder, it is star one on your telephone keypad, if he would like to ask a question. Our next question comes from Seth Weber with Wells Fargo Securities. Please proceed.
Yes.
Oh, hi, good morning.
Congratulations guys.
I just had a question on I think I think.
Fuel prices started picking up.
Last last June June 2021, so it is it so now that we have a kind of an apples to apples compare going forward what should we expect gross.
Gross margin too.
Up year over year, the rest of the year or is that the right way to think about it. Thanks.
I'll I'll start and then I'm sure Jerry will want to jump in as well.
Everything we're we're all reading the same thing when it comes to appeal is weak you know, there's a lot of things in one.
Area state 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 you know feel does not keep on having that variability.
Definitely that's one thing to keep in mind, but I also want to address materials and supplies are Jerry come to you on this as well.
And I'm going to jump in and use that phrase that Jerry has commented on in the board meeting yesterday. He said, sometimes we feel like we're playing whack a mole with the materials and supplies because we have different vendors and different you know that are looking at they have to make increases to cover either theyre shipping or cover their supply cost himself and we keep on hand.
And to jump in.
We're having to look every single day and see you know in our purchasing group is saying what do we need to go where should we be purchasing and really monitoring these relationships and 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.
And honestly the fuel prices.
All of that being said if that comes down and yes margin split I'm afraid you have to add to that 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 these repair expenses that we're having.
And then <unk>.
We have the 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 increased usage.
The tools that we have especially during busy season that.
That will help us with those offsets not too concerned about the labor side I think we will manage the labor, but certainly the fuels and fuel and vehicle repairs and material suppliers. Those are the wildcards that were basically manage through and every it seems like every week, we're getting notified about some other price increase that we're having to make adjustments to.
From 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 wildcard.
Our final question is from Brian Butler with Stifel. Please proceed.
Hi, good morning, Thanks for taking my question.
Yes.
Follow up I guess on on.
Pricing and inflation if inflation continues to move.
Move IRR or even accelerate is there a potential another rate increase in the back half of 2022, or maybe a surcharge that would be used to offset that or would round wait until maybe next year to catch up and then address the higher costs.
We've done quite a bit of research as far as our price increases are concerned and.
And certainly.
It would be opposed to having another price increase this year.
We really studied the frequency and amount very carefully.
And.
It's been our experience that you really need to have some time in between.
And and don't really get don't get greedy.
Thank you.
I would like to turn the conference back over to management for closing comments.
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.
Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Yeah.
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Okay.
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