Q3 2022 Rollins Inc Earnings Call
Greetings and welcome to <unk> 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 formal 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 thank.
Thank you bye now.
All received the copy of the press release. However, if anyone is missing a copy and would like to receive one please contact our office at Q1 two.
Eight to seven three.
3746, and we're saying you really.
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The replay can be accessed by dialing 8776606853 with the pass code 13733118.
Additionally, the call is being webcast at Www Dot Rollins Dot com and a replay will available for 90 days.
The company is also offering investors a supporting slide presentation, which can be found in Rollins website at www Dot Rollins Dot com.
We will be following the slide presentation on our call. This morning.
Courage, you to view that with us.
On the line with me today N speaking are Gary Rollins, Rollins', Chairman and Chief Executive Officer, John Wilson, Vice Chairman, Gerry Gel Junior President and Chief Operating Officer, Kenneth Crouse, Executive Vice President Chief Financial Officer, and Treasurer, and Julia Vermont.
<unk>, Vice President Finance and Investor Relations.
Management will make some opening remarks, and we'll open the line for questions Gary would you like to begin.
Yes, Thank you Joe and good morning, we.
We appreciate all of you joining us for our third quarter 2022 investor call.
Julia will read our forward looking statement disclaimer and then we'll begin.
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.
Hey.
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.
Thank you Julie.
So schmidt and our long term business objectives.
I'm also proud to welcome Rollins's, New Chief Financial Officer, Kenneth Graff.
Ken is a highly regarded business executive with more than two decades of financial and accounting experience.
Ken has already contributing to our success.
We welcome them to our team.
Sure I will share more about him later.
Let me now turn the call over to John Wilson, Orange, Vice Chairman, who will provide some business updates John .
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 as 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.
Ed Rollins R 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 enable to grow professionally.
Last quarter, we announced a new partnership with adverse side health to offer on on site Health Center, providing primary care at our Atlanta home office and virtually national 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 help sooner handles everything from routine screenings to chronic disease management.
It also offers on site lab draws.
Medications prescriptions immunizations mental health services as well as the ability to reach a care team 24, seven 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 of 2022, we are pleased that over 2200 employees have enrolled this.
This represents greater than 130 per cent growth and employee stock ownership participants compared to our previous program.
Most importantly, we want to encourage employee ownership and Rollins as we want everything everyone to think and act like owners in our company.
In summary, guided by our commitment to employees in our culture, we feel these types of benefit programs and improvement.
Are important to our long term success, not only by retaining and and incentivizing our valued employees at all levels.
And for them to have a vested interest in our performance.
But also to effectively position rawls brands as a leading contender for top talent.
Last I would like to discuss hurricane Ian.
Thank goodness all of our employees and the Aeons 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 Heaven, who have endured in great even greater hardship.
Our hearts go out to those affected by the hurricane but must acknowledged how excited we were about all our team members who have jumped in to assist those impacted in various ways.
That 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 close for a day or two while the remainder open by the end of the following week.
Between these few location closures and the loss of several vehicles with 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.
Thank you John good morning, everyone.
In early August we announced that can't Crouse would be joining Rollins is 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 speaking with them yet.
He is passionate about business very experienced and is unique combination of strategic operational and financial expertise.
We are extremely pleased to have him as a member of our leadership team.
I would now like to walk through our 2022 third quarter performance focusing on items that directly impacted our operations during the period King.
Ken will address the financials in more detail in a moment.
Looking at our financial results Rollins third quarter of 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.19 per diluted share for the same period in 2021.
Operationally during the quarter Olive Rollins business lines continued to experience solid growth.
Residential pest control increased nine 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.
Immaterial 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.
On the fleet side as we discussed previously previously we're keeping our trucks longer horsing 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 or less than what we historically received by this point in the year.
Looking ahead, we're told by our manufacturers at 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 were certainly keeping a watchful eye on this and we will keep you updated on future conference calls.
On the labor side.
Even through the tight labor market, Rollins remains well positioned and effectively attracting retaining and deploying talent.
By prioritizing employee wellbeing 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 perspective team members.
To explore open positions on our career portals and apply for open positions and just a few minutes and.
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 35000 job applicant some middles per month for the third quarter.
And over the last five months, we have almost match the total year 2021 applications to Middles.
In short by offering candidates and 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 Bug House Pest control.
Doug House Pest control was founded by Mike, Mike Prestbury, and 1993 and has grown to be one of the largest pest control companies in Georgia.
Bughouse serves residential and commercial customers throughout central and South Georgia.
We are proud to welcome them 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.
[laughter] before I turn the call over to Ken I want to emphasize how pleased we are with Rollins a strong third quarter performance and we're confident in our ability to continue driving growth and improving profitability in the business I will now turn the call over to Ken.
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.
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 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 experience is 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, where healthy at 23.3% up 10 basis points versus the same period, a year ago, Despite incurring higher casualty reserve charges. These charges.
His way down EBITDA margins by approximately 140 basis points and the quarter I will spend more time on the casually reserve and 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 with $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 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 and commercial and termite businesses residential revenues increased approximately 10% with gross stemming from both acquisition.
<unk> and organic activity.
We also had strong growth across substantially all of our brands, we're 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 <unk> our related to auto claims as I said earlier. This increase drove EBIT margin 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 or 29.3% of sales up approximately $20 million from the prior year as.
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.
<unk> 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 are what percent of every additional dollar of revenue growth is converted to EBITDA and in the quarter on and as reported basis, we generated 24% incremental margins, but over 35%. When you consider the quarter included the higher expenses suited associated with the claims.
Activity.
GAAP net income was $108 million or 22 and 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, a free cash flow on $108 million of earnings and 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 in debt to EBITDA as well below one times on a gross level <unk>.
Cash balances approximated that balance is two and a quarter.
Year to date, we have made acquisitions totalling just over $110 million and paid dividends of approximately $148 million debt.
That balances are down 30 million since the beginning of the year and caches 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 per share an increase of 30% versus the third quarter a year ago with this announcement this will enable us to realize and 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.
Acquisition pipeline is very healthy and are 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.
Thank you can.
We're happy to take any questions at this time.
Thank you if you would like to ask a question. Please press.
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Confirmation tell indicate your line of questioning him you May press dark too if you would like to remove your question finally here and for a participant.
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Please ask one question and one follow up question.
Our first question comes from Tim Mallrat Rooney with William Blair. Please proceed.
Yes, good morning, everybody good morning warning warning.
So first I wanted to ask on the residential business well first I should say congratulations on a on a great quarter.
But.
I wanted to dig into the residential business for.
Just a second <unk>.
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 and you're ready business. Specifically are you starting to see any slowdown as we move from August September October given the increase macro uncertainty and could you maybe comment on how lead generation.
These days compares to maybe to last year.
Tim This is Jerry.
The residential businesses as.
Remains strong.
Certainly leads her down a little bit it's hard to always you don't know if it's economic as it whether driven 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.
And the quarter and and when you also look at the core on the residential side. We were 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 we were impacted the worst possible time for that Hurricane was the end of the month at the end of the quarter.
And.
That was a revenue drag in southwest, Florida, and parts of Florida, where we're very heavily weighted on the residential side.
And so that to end of quarter that was that was a bit challenging but.
And that.
That certainly had more of a drag on residential revenue than than necessarily some some change in demand John or anybody you have anything to add there [noise].
Thing I would add Tim.
<unk> is that leads for residential have been down for some time quality of lead lead closure has been up leading to increased sales and increasing organic revenue, but lead closed our leaves receives excuse me as a measure of.
Strength of the residential business.
Not really unnecessarily.
Good yardstick.
We continue to close at a high rate.
And are and where where we can given given some labour challenges. Our teams are getting to the work. So we're still seeing strength and as strong as it was over the last couple of years.
Maybe not but.
But.
We're very stopped domestic still about residential the only thing I would add as well as from a revenue perspective as Jerry 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-19 exposures and some challenges with Covid, but August was exceptionally strong in 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 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.
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 transfer lying down in residential but it seems like that might be much more related to the hurricane that that'd be anything else and it's still a very strong results. So it sounds like demand remains strong there.
My last question is maybe for Canada, Julie It's just a quick one 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 with organic growth have been more like 9.1% for the quarter.
You're thinking about that correct him, we had a 50 basis point headwind on revenues. The eight six as an as reported organic number so adding back the currency headwind organic growth would have been just north of 9%.
Thank you everybody.
Take care of you.
Our next question is from <unk>.
Drink with IPC capital markets. Please proceed.
Thanks for taking my question and again, let me add my congrats is about to the Sonic Walker I just wanted to focus more on the cross selling a bunch unities I was wondering if you could talk about how much traction are you getting on cross sending it to get existing customer base and old says the technician's automotive appropriately staffed how is that helping drive bedroom <unk>.
<unk> among your existing but also new customer <unk>.
So.
A lot of what you see in the termite an ancillary growth as a result of cross selling to your existing customer base. So that's where we get a lot of the lift is on the on the termite ancillary side is directly through cross sell opportunities that that continues to remain strong and continues to be a great opportunity for us for.
Certainly for years to come.
We have seen in.
Ah nice uptick this year also in technician sales that has in some ways offset or.
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 giving.
Giving that Formula rights is good and we have certainly seen an uptick in technician.
Technician involved sales what could be upgrades on the on the commercial side as well as on the on the residential side as well, we see we do see sales productivity picking up with the technicians.
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. It looks like a very strong much include profile as we think about going forward not mislead foot from a guidance perspective, but as we think about some of the <unk> and inflation drooling.
<unk> and <unk>, if you have any momentum being strong is that the right me to think about being connected margins going forward. Thanks.
Sheesh I don't want to commit to something too early here only 60 days or so in but what I will 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 would 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 in the pricing opportunities we have in our business.
Gives me some confidence in our ability to continue to improve our margins going forward.
That's great Congrats once again I'm such a good corner.
Thank you. Thank you.
Dar one on your telephone keypad.
Our next question.
With Wells Fargo Securities. Please proceed.
Good morning, everybody and welcome Ken.
I guess I wanted to ask you a question on pricing can you just kind of.
Catch us up on where you're at with pricing I think you're pushed through increases in April may and I think on the last call you talked about it that was gonna be it for the for the year, but you're just maybe talk to us about.
Your thoughts on pricing going forward, whether you if the inflationary environment continues whether you might take another another shot at raising pricing.
And you know just whether it sounds like maybe there has been a little bit of pushback on it you know maybe some maybe attrition picked up a little bit it is what it sounded like from your messaging, but if there's if you're seeing any kind of.
Customer churn based on on the pricing actions you've taken thanks.
So we feel like our price our price increase program was very successful this year and and.
Certainly is Ken noted it distributed some of ours.
Success here in the third quarter to to pricing not only to our through rate increases, but also increasing our rate cards in our new sales pricing is rather significantly.
That's been helpful. Our strategy will be to.
To get through the rest of this this fiscal year in January we'll we'll all meet again and we will have a discussion about our price increase strategy for 2023.
And.
Assess what the economic environment looks like what's going on it and make some determinations at that point, we need to have those discussions and 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.
Depends on what levels, we go out so.
And and and part of that process in January we will also be a very lengthy look back detailed look back into our price increase campaign. This year, what the impact on rural Rollbacks in customer retention was and we will use those data to help us help us determine what what what our plan will look like in 2023.
We've monitored that.
We haven't noticed any real significant jump in and retention due to due to pricing so.
We feel pretty good about where we are right now.
Okay. That's 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 and trends internationally versus UX. Thanks.
I guess.
Internationally.
We see some of the feeling a little bit of some of the impact in the UK of of.
They're inflationary pressures, there, but that our business in the United Kingdom is doing quite well of that team there is thriving.
Same in Australia there.
Performing very well so we're very happy with the results that we're getting internationally.
Singapore is a little down.
They've had some a little more challenges on the revenue growth side and that's been largely.
They they were engaged during the peak of Covid with a lot of disinfection services and some of those disinfection services.
Have disappeared and so they've struggled a little bit more not necessarily.
Because of any economic conditions more just to shift and what's going on in the market from a pest control and disinfection standpoint, but overall.
Internationally.
When you think of Canada as well our Canadian operations are are doing fantastic in there and they are growing well so.
It's all very positive on that front.
Great. Okay, well. Thank you very much guys appreciate it.
Yeah.
Our next question is from Stephanie more with caffeine.
[noise] 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 you know a dive in a bid on kind of what drove the strength and the the commercial into my business.
I I didn't quite catch what you asked for.
<unk> could you repeat your question for me Yeah could you just talk a little bit sort of what drove the strength and the commercial and turn my business.
A lot of that is having feet on the street and staff 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 staff to handle demand and drive.
Drive those drive the sales results that we get.
You look at our head count of commercial account managers an R V.
Volume of home inspectors that we've added over the last 12 to 18 months.
That's by far the largest driver of of the growth that we're seeing those 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 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 haven't haven't feet on the street not by not by its not Lee driven I guess and I'm trying to say like like like the residential side. So [noise].
You Gotta have those bodies.
In front of those customers.
Got it thanks.
Mhm.
We have reached that never a question and answer.
Turn the conference back over to management.
And.
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.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
<unk>.
[music].