Q1 2023 Rollins Inc. Earnings Call
Greetings welcome to the relevance Inc. First quarter, 2020th Street in a conference call.
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A brief question and answer session would follow the formal presentation.
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It is now my pleasure to introduce you host Joseph <unk>. Thank you and you May proceed sir.
They can call you.
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Be following that slide presentation on a call this morning and.
And encourage you to do that with us.
We have included certain non-GAAP financial measures as part of our discussion this morning.
The non-GAAP reconciliations are available <unk>.
In the appendix of today's presentation as well as in our press release.
The presentation and press release.
Are available on our Investor Relations website.
The company's earnings release discusses the business outlook and contained <unk> 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 rescue <unk>, an actual results may differ materially any statement, we make today. Please.
Please refer to yesterday's press release, and accompanies suse filings, including the risk factor section of our Form 10-K for the year ended December 31st 2022 more information.
And the risk factors that could cause actual results to redecorate.
On the line with me today, and speaking whichever Gallup Junior President and Chief Executive Officer.
John Wilson, Vice Chairman Ken.
Kenneth Crouse Executive Vice President Chief Financial Officer, and Treasurer.
Manager will make some opening remarks, and then we'll open the lawn for your questions Dawn would you like to begin.
Yes, Thank you Joe and good morning.
We appreciate all of you joining us for our first quarter 20 twenty-three earnings call.
I'm pleased to report Rawls delivered solid first quarter results Hollywood about revenue growth of over 11% and earnings per share growth of 20 per cent.
I want to begin by welcoming P. Russell Hardin as Rollins newest board member.
Ross was elected to our board at our recent shareholder meeting and has served as president.
Although Robert W. A wardrobe foundation since 2006.
He serves as a director of genuine parts company as well as a trustee of the northwestern mutual company.
Hardin practice law with the firm up King and Spaulding and as a longtime resident of Atlanta has served this community in ways too numerous to list.
Please help me welcome Rush Harden.
Now turning to the Fox Pest control acquisition I'm very excited about this recent event.
Enjoying a strong reputation in the marketplace, we have long respected boxes history of success.
In fact, I have a relationship with one of their founders, Mike Romney going back close to 20 years as.
As Mike began doing summer sales programs for working prior to co founding Fox.
Fox Pest control was formally established in 2012, initially marketing through the door to door sales effort and historically underserved pest control markets.
Through consistent growth and expansion Fox now provides general pest control services for homeowners from 32 locations in 13 states.
Fox evolved in their growth strategies to include other streams is now about a third of their customers are acquired through digital channels.
Not only does Fox rank is the 13th largest pest management company. According to the P. C. T 100 rankings Fox also receive recognition in 2021 by Inc magazine as one of the fastest growing private companies.
In America.
And many of the markets. They serve Fox has a market leader with a great service reputation.
I cannot stress enough what a great addition, this is to our family of brands and I'll know I'll have to call over to Jerry to recap Rollins first quarter results and talk about the transaction in greater detail. Thank.
Thank you John and thank you all for joining our call today are.
Our partnership with Fox was an 18 month process as we worked on executing this transaction and learn more about the Fox business, we became increasingly impressed with their culture, they're consistent and strong growth rates and their unique operating model.
In early April I had the opportunity to visit with many of the fantastic team members and Fox and was able to witness firsthand the deep fried to have in the Fox brand.
Additionally, as Ken will cover in more detail later, we believe the financial benefits are very compelling.
We expect the transaction to be accretive to earnings and cash flow and the first full year of ownership and will provide meaningful longterm financial benefits as well.
We also believe the complimentary nature of their brand creates opportunities for enhancing rollins's strategic platform for growth in the residential space.
While still operating under the Fox Pest control brand and being led by co founders, Mike Romney and Bryan White.
We see incredible potential for the teams at Fox and home team to learn and share with one another.
There are multiple benefits to tying Fox closely with home team, who have also been utilizing door to door campaigns to activate tax customers and their predominantly residential business for over 20 years.
Furthermore, this alliance will provide home team with an ability to scale markets faster, while we provide the <expletive> the team at Fox with New service offerings and cross sell opportunities along the way.
We're also particularly excited about the strong alignment of their culture and the value of the partnership creates for customers team members and to our shareholders.
Fox has a passionate sense of community and a values driven approach that consistently delivers quality service coupled with the resilient track record a strong customer growth and solid employee retention.
As we've demonstrated in the past acquisitions are a key part of rollins's growth strategy over the years, we've built a very successful playbook for their smooth transitions into our company and we were extremely excited about our path ahead with Fox.
In summary.
We are confident that Fox is business perfectly aligns to our strategy for sustainable profitable growth and I'm incredibly proud to add them to our impressive family a pest control brands.
Transitioning to a recent financial performance I'm pleased to report that Rollins delivered solid first quarter results and realized strong year over year growth and many key performance areas.
Chemical address the financials in more detail in a moment, but I'd like to highlight three key areas of progress in the quarter.
First we delivered 11% revenue growth.
What was especially encouraging was our organic growth.
Organic growth was more than 9% for the quarter with strong growth across all major service lines.
Secondly margins were very healthy to start to start to the year, we delivered approximately 32% incremental margins and group GAAP earnings per share 20%.
The focus on pricing selling new business and productivity is paying off.
On our year end call, we discussed our intention to initiate an earlier price increase this year and that certainly helped us particularly of March.
We will continue to focus on this area to ensure that we were effectively pricing the value of our essential services.
And last but not least we reported strong growth in cash flow for the quarter, we remain well positioned to continue to invest in acquisitions and maintain a balance capital allocation strategy.
As we move into spring and summer months, we expect a good business environment and strong demand for our services. When you consider recent weather patterns, resulting in wet outdoor conditions.
April is off to a favourable start and our teams in the field are well staffed and trained as we head into our traditional peak season.
We're also continuing to add to our sales force and emphasizing bundling of mosquitoes multiple services like pests and mosquito through our call Center operations.
I want to emphasize how pleased we are with Rollins a strong first quarter performance and looking ahead, we remain well positioned for 2023 and confident in our ability to continue to drive strong operating results I'll now turn the call over to Ken.
Thank you Jerry and good morning, everyone.
The team delivered a strong start to the year, let me begin with a few financial highlights for the first quarter of 2023.
First we delivered over 11% revenue growth in the first quarter with robust growth across all our service offerings Act.
Acquisitions drove approximately 2% of the total revenue growth in the quarter we.
We expect to see meaningful improvement and growth from acquisitions for for the remainder of the year stemming from the acquisition of Fox, We announced earlier this month <unk>.
Second our continued emphasis on margin improvements drove 130 basis point improvement and EBITDA margins in the corner.
I will speak about incremental margins shortly but as Jerry indicated they were a bright spot.
GAAP earnings per share increased 20% to 18 cents per share and last but not least we deliver at a 15% improvement in operating cash flow and a 17% improvement in free cash flow let's.
Let's look at the corner quarterly results in more detail.
Starting off with revenue it was up 658 million it was $658 million up just over 11% on a reported basis currencies reduced quarterly revenue growth by 60 basis points on the stronger dollar, notably versus the Canadian dollar the British pound and the Australian dollar.
Turning to profitability, we realized 30 basis points improvement and gross profit margin.
Gross profit margins were 50.3% of revenue in the quarter. We saw good performance on gross profit as pricing more than offset inflationary pressures, we were more consistent and raising prices across all of our branch. This year, we discussed our intent to do this on our your and call and it was good to see the.
Impact of the steps, we took on revenue and profitability.
Looking at four major buckets of cost people fleet materials and supplies and insurance and claims these comprise approximately 90% of cost of services in the corner.
We saw improvements in margins associated with people costs as well as fleet cost material and supplies were neutral on the margins, while insurance and claims where a headwind to margins.
We delivered improvements in SG&A expense as well SG&A improved 40 basis points when stated as a percentage of revenue during the most recent quarter.
Let's dive into the major categories of SG&A, a bit more people costs advertising and selling cost and insurance and claims make up a majority of our spend an S. G N a.
Margins benefited and the people cost area advertising and selling related costs were relatively neutral to margins, while insurance and claims was a headwind to margins.
As the case in the prior year, we expect to see SG&A pick up slightly in queue too as we invest more heavily in customer acquisition related costs across the business during the start of our more busy season and the second quarter.
We did not have any non-GAAP adjustments to operating income or even at this year.
Operating income was $112 million or 17.1% of revenue, increasing 130 basis points from the same quarter a year ago.
EBIT margin was 21.2% up a strong 130 basis points over the prior year EBIT margin.
As I have consistently indicated I liked to look at the business using incremental margins are meeting what percent of every additional dollar of revenue growth is converted to EBITDA.
On an as reported basis, we generated incremental margins of approximately 32% and the most recent period.
Orderly GAAP net income was $88 million or 18.
Sense in in earnings per share increasing from 15 cents per share in the same period a year ago.
Turning to cash flow and the balance sheet quarterly free cash flow was very strong in the corner, we generated $93 million a free cash flow on $88 million of earnings free cash flow increased by over 17% and the most recent period cash.
Cash flow conversion the percent of income that was turned into cash was also a bright spot coming in at above 100% for the quarter, we made acquisitions totaling $15 million and we paid $64 million in dividends that remains negligible in debt to EBITDA as well below one times on a gross level.
We closed it announced the Fox acquisition earlier in April we are excited about the strategic growth opportunities. This acquisition will provide us a few financial details. We expect this acquisition to add between 90 and $100 million of revenue in 2023, the acquisition should at 18 to 20.
The million dollars $22 million of EBITDA for the remainder of the year we.
We used a combination of existing cash balances and borrowings to pay for this strategic acquisition, we continue to be very active in pursuing additional acquisition opportunities.
We expect the Fox acquisition to be creative the earnings and the first full year with more meaningful contributions to EPS. During the latter part of this year and into the first quarter of next year. We are in the process of finalizing our purchase accounting and will provide an update on this on our queue to call in July after we complete that process.
Yes.
During the quarter, we refinanced our credit facilities that were set to expire in April of 2024, we closed on our new facility before the banking crisis in March and we were able to successfully secure more modernized facility that in addition to other benefits provides us with the opportunity to incorporate sustainability metro.
Mix into the revolver in the future.
Additionally, we conducted an RFP for our external audit service provider and engaged Deloitte as our new auditor in place of grant Thornton, who had been our auditor for the previous 19 years, we are making good progress on a number of general financial housekeeping issues that will help position as best as we continue to grow our business.
We remain very well positioned to continue to fund our dividend and grow through acquisitions.
In summary, or quarter performance continues to demonstrate the strengths of our business model and the engagement level of our team will remain focused on providing our customers with the best customer experience and driving growth through acquisition.
Organic demand remains robust and we are very well positioned to continue to use our strong balance sheet to grow our business.
Acquisition pipeline is 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 longterm profitable growth for our shareholders with that I'll turn the call back over to Jerry.
Thank you can we are happy to take any questions at this time.
Thank you very much you will now be conducting a Christian and on suspicion.
He would like to ask a question Keith <unk> and then one on your telephone keypad.
A confirmation turn will indicate your line is in the Christian Q.
His name is real Christians to one Christian and one final question.
<unk> and then two if you would like to remove your question from the queue.
Full participants using speaker equipment, it may be necessary for you to pick up your handset before taking this stocky.
One moment, please while we postal <unk>.
The first question comes from <unk> can you move your knee from William <unk> can you proceed with your question.
Jerry John can good morning.
Good morning to me.
Thanks for taking my questions that I was gonna ask about the strategic rationale on Fox, but you guys did a great job about that in the prepared remarks, so I think I'm gonna skip that and just jumped to the strong organic growth.
The commercial past business that organic growth was was basically double what we were expecting in the first quarter.
That's a significant margin of error [laughter], particularly for predictable business like yours. So is there is there anything you can highlight here large customer wins, new programs, you've established to pick up and cross selling anything you can highlight is what contributed to that unexpected strength and that commercial peace.
Damn. This is Jerry to me is pretty simple it's about the investments we've made in our <unk> and hiring and staffing on the commercial side, the commercial front with our commercial account managers.
We have considerably.
Considerably larger staff than we did even a year ago and and far more than we did two years ago. So their efforts feed on the street every single day, bringing new business then the volume they're bringing in that's what's making the difference is not it's not about individual wins, a big customers or anything.
Like that it's the collective efforts of everything that they've done.
Okay that sounds broad based thank you and then.
Just switching gears from organic growth to capital allocation and now that you've already spent.
More than $300 million all ready in 2023.
Should we expect a slowdown in M&A spend for the remainder of the year.
Are are are we still going to see you acquire 30 to 40 bolton's that you'd normally do in a given year and could you also discuss your plans for that leverage ratio. I mean do you do you intend to drive it back to zero over the next several years like typically do or Ken might we.
Are we potentially looking at a different capital structure. It we're all gonna go forward basis. Thank you.
Tim This is Jerry I'll handle the first part of that will continue to.
Look for tuck in acquisitions bolt on acquisitions will continue that path.
And of course continue to evaluate even larger acquisitions, if they're there for us to get in the timing is right, but at the same time. We're also fairly cautious we like to ensure that what we've the the most recent deal is handled well in our time and attention and focus is put on that to me.
Make sure that goes smoothly that transition goes smoothly, we don't want to jump in anything with too much of a distraction for our team or for them in the in the short run. So we're we'll probably a little bit cautious there on really large deals in a in a very short term, but will continue to do the bolt ons and I'll, let Ken address question.
About about capital sure just adding onto what Jerry had mentioned you know the integration efforts are certainly really important to us and so so we want to make sure that that we integrate these businesses as much as we can while not disrupting the customer facing aspect of these businesses, which are so strong.
That the EBIT perspective, Tim I believe you were asking when we look at our capital structure, we have an incredibly strong balance sheet. It does not mean that we're going to love her up two or three times to go after transformational acquisitions, we quite frankly don't need to the businesses. So strong, but we we will do is use our balance sheet.
<unk> and a strategic manner to grow this business and so that's the focus I can't commit to a debt to EBITDA leverage ratio, but what I can tell you is we will remain very much investment grade, we will very much from Maine to the playbook that we've executed for a very long time, which is certainly paid off.
Off for our investors.
Thank you. The next question comes from Stephanie more from Tiffany's can you proceed with your questions Stephanie.
Good morning. This is harold onto on for stuff anymore last quoting the reduced marketing experience for the quote on here over here how to market and it's been charged this quarter and how does the tracking for two 223. Thank you.
Thank you Harold I. Appreciate the question. This is Ken I had mentioned in my prepared comments that advertising and marketing related costs were relatively neutral to margins. So that means that we were spending at just about the rate of growth of revenue in the first quarter with that sad as we enter the second quarter we are.
Continuing to ramp up our invest their investment in customer acquisition related costs and so as we go into the second quarter, it's important for us to procure those new customers whichever an incredibly valuable longterm relationship with our business is you know approximately 80% of our business is recurring and so it's important for us to go out.
<unk> and and get those new customers into the fold and so we'll continue to pick that up in the second quarter as we have in past years and so that's I think that's an important point to remember is you think about modeling out say, the second and third quarter of the year.
Thank you that'll be all.
Thank you. The next question comes from David Peak from our D. C. Please proceed with your question David.
Hi, Good morning, Thank you for taking my call I'm actually on for <unk> and <unk>.
You mentioned Fox pest control about one third of the customers are acquire through digital channels do you have an outlook for the customer acquisition through a digital channel host fully integrated Fox and maybe at a home team and overall Rollins. Thank you.
I don't know that we've gotten that that deep into the analysis, we want Fox too we want to make for a smooth transition hatbox settled into what they're doing certainly they have the team at boxes had a.
Themselves gone through this transition over time ramping up on the digital side, and we will help them and continue to support their efforts to do that give them some of our expertise.
And knowledge, along the way to help them mature in that area and convert.
Lead to sales and starts in those types of things that were we feel like we can help them with over time, but at this point I wouldn't give you any insight in terms of long term what that may look like a year from now or two years from now.
Premature what I would add to that Jerry is that Fox does a really exceptional job in their marketing efforts and there might be an opportunity to leverage Fox and the Rollins family of brands and so I think that's really important to think about as you go forward. They do a really good job and we certainly want to leverage.
All the work that they do across their business to benefit us through this combination.
Thank you.
Thank you. The next question comes from <unk>. Please proceed with your question.
Hi, This is actually John filling process congratulations on the strong quarter, just maybe quickly on the insurance and claims could you give us some more color on really kind of how the headwind progressed in the quarter as well as how we should think about the costs going forward. This year. Thanks.
Certainly can do that for you and I appreciate the comments.
Insurance and claims has been a bit of a headwind here for a period of time and believe going back to last year and the third in the third quarter, we talked about that this year. When we look at the experienced an insurance claim and claims there's two two aspects to that experience one or just higher insurance premiums as you know we had poor experience last year.
So unfortunately, we saw that come through with higher insurance premiums in the first quarter that'll carry through for the for the remainder of the year. The second part of it is we continue to see just some unfavorable experience in that area. We're ramping up our focus on behavioral base safety across the company and shoring.
That we're making the right investments in the areas that will help improve our performance in that in that area, but it's a it's an area of focus for the company and we continue to focus on a driving some improvements. Unfortunately, we do fill the negative impact of a tighter insurance market. However.
Got it that's a great color. Thank you and may be quickly just as we think about the cadence of residential, especially with advertising and customer acquisition spend wrapping in the second quarter for the kind of peak season could you just give us a sense at a high level. How you were thinking about the kind of pacing of the presidential and would it be fair to assume.
<unk> kind of scene acceleration from these levels are are you thinking more of a kind of study state high single digit on an organic basis. Thanks.
It's hard to provide an estimate on that as we think about the next quarter or two however, we felt like the investments, we're making in our people and our and our technicians in our sales folks to focus were making on cross selling and and driving cross sell and a wider share.
[noise] wallet with each and every individual customers paying off and we feel very optimistic and bullish about our opportunity to continue to grow our position with are really important residential customers into the future. Yeah. This is Jerry I would add we're in a really good position to take advantage of of.
Strong demand in the marketplace as it's there. So we we feel strong about our position to be able to capitalize on the potential for growth in the market. So.
Thank you <unk>.
<unk> just another reminder, if you'd like to ask a question Keith <unk> and being plan, if you'd like to ask a question Keith <unk> and the one and can you give me your question to one question and one for the Christian.
The next question comes from current slate from Morningstar, Keith cause he'd with your question <unk>.
Hi, Jerry Hi, Ken. Thank you both very much the additional detail on the folks acquisition. It's very helpful. Just a point of clarification. However, if I may I was just curious to 18 to 22 million and EBITDA contribution.
D C or does that include the full extent of cost synergies that you're expecting to realize from the deal or are they perhaps for the <unk>, we should be expecting in 2024 or later and I guess, if so you know the quantum of those and the timing would be helpful. If you're able to shed.
That detail with us.
Yeah. Thank you for the question, we feel like that when we think about synergies and we think about integration as we started the call. We certainly are taking a pragmatic approach with respect to synergies and synergy capture.
We do think that this business will accrue be accretive to our margins in the next two to three years, but the first year is all about getting in and trying to understand what makes the business. So valuable we don't want to move too quickly, but we also don't want to move too slowly, but we do feel like that $18 million to $22 million.
Is our best expectation or estimate of what we can deliver on the acquisition this year.
Great. Thank you very much.
Thank you. The next question comes from <unk> from Stifle. Please proceed with your question <unk>.
Hi, Good morning, this is Stifel.
Thank you for taking my questions and congratulations on the strong quarter. So my first question is just really the Fox that's acquisition.
How should the annual 90 million 200 million sales, how should that'd be allocated across the lines of businesses and.
What are the drivers that would get you to $100 million versus the low end of the $90 billion, whether you're actually building and.
Why don't you don't Wanna you to handle this campus for and so when we look at that business to breakdown is highly focused on residential.
Large percentage of that businesses frenzy sector, and so that'll come through our residential segment of of our business.
You know, we feel like that $90 million to $100 million would probably come into our business very similarly to how it how our business is reported so Q too you'll see a ramping from Q1, and then Q3, you'll see a further ramping that's just the seasonality of our business.
We feel like we felt like there's opportunities to drive some outsize growth there, but I also feel like just $90 million to $100 million is a very realistic estimate and is reflective of the growth trajectory strong growth trajectory that the business is already on and so we feel like we felt like it's it's very realistic.
And achieving that $90 million to $100 million. This year as we think about the remainder of the year.
Kenneth I'm a yeah. This is John Wilson, but if I may add retention. This critical and so that's why with these acquisitions, we don't go into looking to rock their world and and and go so carefully on the integration an indoor assimilation, but.
Fox continuing their current path on on the way they retained their customers and retain their employees, which are so important to keep it in those customers will determine whether we get get to the hundred million versus the 90.
Alright. Thank you for that I have a follow up regarding the incremental margins pretty healthy 32% how should we think about it for the remainder of the year <unk>, maybe <unk>, maybe cause see that 32 per cent it would sort of the pricing actions.
Cost cutting initiatives that you put in place like what's the impact of bark box based on that.
Certainly thanks for the question you know if you look at the last nine months. The last three quarters. If you will going back to the second half of the last year, we've consistently delivered and incremental margin. That's approaching 30 per cent. So we feel like we're position very well to deliver that 30% sort of.
Incremental margin as we move forward. There's always challenges is always puts in their steaks and there might be one quarter, where you might be below that but you might have one corner, where you exceed that as I said in my prepared comments, the second quarter, you're gonna see a little bit more investment in customer acquisition cost, we see an opportunity to go after and get customers that are gonna create long.
Long term value for our business and so so so so you'll probably see a little bit more investment little heavier investment come through in that area. As we think about the second quarter, but we feel very good about long term value creation from those customers that will help us deliver that incremental margin profile of 30 plus.
Percent.
Thank you very much no further questions at this time I'd like to <unk> back to management, Okay <unk>. Thank you.
Well, thanks, everyone for joining our call today, we look forward to giving you an update and at the end of the second quarter on our next call. We will see you then thank you. Thank you.
Thank you very much ladies and canceling that does conclude today's conference you may disconnect. Your lines at this time and thank you very much for your participation.
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