Q2 2023 Rollins Inc Earnings Call
Greetings and welcome to the Rollins, Inc. Second quarter 2023 earnings Conference call. At this time, all participants are in a listen only mode.
And answer session will follow the formal presentation.
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Please note. This conference is being recorded I will now turn the conference over to your host Joe Calibration you may begin.
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Following the slide presentation on our call this morning.
And encourage you to view that with US we have included certain non-GAAP financial measures.
Part of our discussion this morning.
non-GAAP reconciliations are available in the appendix of today's presentation.
As well as in our press release presentation and press release are available on our Investor Relations website.
Companys earnings release discusses the business outlook and contains certain forward looking statements. These particular forward looking statements and all other statements that have been made on this call exclude gooding historical facts are subject to a number of risks and uncertainties and actual results may differ materially from any statement, we make today.
Please refer to yesterday's press release, and the company's SEC filings, including the risk factors section of our Form 10-K for the year ended December 31 2022.
More information.
And the risk factors that could cause actual results to differ.
On the line with me today, and speaking of Jerry Gallup Junior President and Chief Executive Officer, John Wilson, Vice Chairman and Kenneth Crouse, Executive Vice President Chief Financial Officer and Treasurer.
What will make some opening remarks, and then we will open the line for your questions John would you like to begin.
Yes, Thank you Joe and good morning, we appreciate all of you joining us today for our second quarter 2023 earnings call.
We posted very strong revenue and earnings growth for both our second quarter and first six months of 2023.
We've continued to deliver solid performance across most all of our brands and achieved healthy levels of customer growth.
Before I turn the call over to Jerry I want to comment briefly on the results of our recent acquisition of Fox Pest control.
We closed on the Fox acquisition in April just prior to the ramp up of their selling season and they have performed exceptionally well as they achieve solid growth in the first quarter of our ownership.
In addition, we have been pleased with their earnings contribution as they achieved over 2 million of GAAP earnings in the first quarter of ownership. This is inclusive of a $1 million charge associated with our earn out of the deal.
Our transition with Fox is going quite well and we are expect we're excited to have their great team and the Fox brand as part of problems.
Now, let me turn the call over to Jerry who will provide more details on our quarter. Thank.
Thank you John and good morning, everyone.
I'm pleased to report that Rollins delivered another good quarter of growth and profitability.
Collecting consistent execution of our operating strategies and continuous improvement in our business.
Our financial performance for the second quarter was highlighted by an increase in revenue of approximately 15% to $821 million I'm very pleased to report that we continue to see organic growth of approximately 8%.
Further this reflects a solid performance across all major service lines commercial pest control rose approximately 11% residential increased over 18% and termite was up approximately 14% this quarter.
Revenue performance in the quarter was healthy, although a little uneven due to past seasonality on a month to month basis organic growth was very robust at 10% in may before slowing a bit in June we're back on a good trajectory now in July in line with what we saw in met.
Importantly, our frontline team members staffing levels are better than we've seen in several years and that is providing us with an opportunity to capitalize on demand for our services.
I'm also quite pleased with the progress, we're making thus far with the Fox Pest control acquisition, the second largest acquisition in the history of our company.
Taking a closer look the integration of Fox has gone smoothly over the past few months. The Fox teams are executing and doing very well the transat transaction was accretive to our second quarter earnings. This continues to be an exciting highly complementary addition, and we believe the revenue growth achieved this quarter is reflective of the team's focus.
On execution.
The team at Fox was not distracted by the shift in ownership to Ross, who is focused on their customers and growing their business.
Making for a smooth transition is a key tenant of our acquisition integration strategy and our collective teams. We're diligent about not disrupting these efforts of our frontline team members post close.
I'd like to express my thanks to the Fox team and all our teammates that have worked hard to make this happen and we're very excited about the growth opportunities ahead for the Fox brand.
Next we continue to have an enhanced capital structure and a robust acquisition pipeline as we're actively evaluating acquisition opportunities both domestically and internationally.
As I've highlighted in the past acquisitions are an important component in helping us expand our market position. While also complementing efforts to accelerate recurring organic growth, we remain disciplined in evaluating evaluating M&A opportunities and feel very good about our continued ability to invest in strategic acquisitions, while delivering strong organic growth.
Across the business.
Another important part of our culture is our dedication to continuous improvement.
As you've heard US discussed previously we're constantly looking to improve our service levels and operating efficiencies as a result, we continue to see opportunities for margin expansion as we move forward and execute our strategy.
We are currently evaluating several streamlining efforts, Ken will provide more detail and address the margins in the quarter shortly.
In addition to the unrelenting focus on productivity and improving our margin profile. We're also more strongly focused on safety.
Our experience was disappointing in this area in Q2, as we continue to see higher settlements associated primarily with auto accidents. This was a one cent per share drag on earnings this quarter versus a year ago.
We have ramped up efforts to significantly reduce automobile accidents moving forward our drivers now utilizing app that begins monitoring driving behaviors once our vehicle is emotion.
This app to tax unsafe driving maneuvers, such as acceleration braking distractions and speed and then converts these data into an industry accepted FICO driving score from 100 to 850 with 850 being the best.
The data indicate the drivers with scores below 710, or 30% more likely to have a collision than those with higher scores.
We're working hard in the field to increase driver safety awareness and get these scores up by coaching and training those with lower scores, while recognizing and rewarding doses score the highest.
We believe these efforts will help us keep people safe and mitigate negative potential financial impact to our business.
On the investment side, we proactively increased customer acquisition related efforts during the second quarter and strategically invested more heavily on advertising spend when compared with the same quarter, a year ago and sequentially versus the first quarter of 2023.
While these costs were a one cent drag on second quarter earnings we saw meaningful opportunities to go after and acquire new customers. During the start of the busier spring and summer seasons.
Given that approximately 80% of our business is recurring I want to emphasize that the opportunity for us to attract potential new customers is very important.
And as a strategic investment over the long term.
To date, we're extremely pleased with our targeted marketing and advertising efforts, which we believe is reflected in our strong organic growth performance for the quarter and we expect this momentum to continue into the third quarter of 2023.
Next we continue to focus on modernizing our business, our capital structure and our organization as.
As you May recall in February we enhanced our capital structure by refinancing our revolver, increasing it from $175 million and two banks up to $1 billion in apex, providing us with investment grade flexibility more recently are approximately one $5 billion of Universal shelf facility was declared effective by the SEC.
This facility.
<unk> provides additional financial capital and flexibility to the company and Ken will share. Some additional details on this in a moment.
Operationally, we're committed to developing great talent and investing in our teams hiring has been healthy and we've put a lot of energy into Onboarding. The right people in both the support functions and the customer facing side of our business.
As we look ahead to the improvement opportunity in front of US we're focused on upgrading and realigning key areas in our home office support functions, you've heard us talk about opportunities in this area and we are evaluating several several initiatives that we used to as we start the second half of 2023.
We believe that driving this type of change will provide opportunities to accelerate our growth goals and enable our home office to become a better more efficient provider of shared services to our frontline operations.
Our modernization efforts are progressing well, but we're not done yet and we look forward to sharing additional developments on this front later.
In closing before I turn the call over to Ken We're pleased about where our business stands today, we're well positioned for the remainder of the year and remain focused on robust organic growth delivering healthy incremental margins and continuing to attract higher and retain top talent across the business I'll now turn the call.
Over to Ken.
Thanks, Jerry and good morning, everyone. The second quarter reflects strong execution by the Rollins team. Let me begin with a few highlights first we delivered strong revenue growth of approximately 15% year over year.
We saw good growth across each of our service offerings organic revenue was up approximately 8% in the quarter and finished the first half.
Acquisitions drove the other 7% of the total revenue growth in the quarter.
The integration of the Fox acquisition is progressing well and we have a growing sense of optimism around this recent investment sector.
Second our gross margins were healthy exceeding 53%. This quarter, we were positive on the price cost equation and saw good performance across several key cost categories and.
And adjusted EBITDA margin of 22, 3% was pressured primarily by higher insurance premiums and casualty loss developments on for legacy audio cases.
Our GAAP earnings were 22 per share and excluding certain expenses related to the Fox acquisition adjusted earnings or <unk> 23 per share.
And last but not least we delivered approximately 16% improvement in operating cash flow our free cash flow was up approximately 18% versus the same period a year ago.
Let's look at the quarterly results in a little bit more detail.
Quarterly revenue was $821 million up 15% on a reported basis currencies reduced revenue growth by 30 basis points as the Canadian dollar and the Australian dollar weakened relative to the U S dollar.
Turning to profitability, we realized a 40 basis point improvement in gross margin gross profit margin, where we saw good performance on gross profit as pricing more than offset inflationary pressures. We continue to see the benefit of a more consistent pricing discipline across all our brands this year.
Looking at our four major buckets of service cost people fleet materials and supplies and insurance and claims we saw improvements in margins associated with materials and supplies as well as fleet cost while insurance and claims were a headwind people costs were also somewhat favorable to margins, even as we added a significant level.
All of pest control and termite control technicians to support strong demand trends as Jerry said earlier staffing levels for our frontline team members are the best they've been in years. This timing sets up well as we see strong customer demand to start the third quarter.
SG&A cost as a percentage of revenue increased by 30 basis points in the quarter.
Filling back the SG&A elaborate layers a bit more people cost advertising and selling costs, along with insurance and claims make up the bulk of our SG&A spend we.
We saw headwinds to margins from higher insurance and automobile related claim costs as previously mentioned.
There were there were settlement developments on a few auto claims cases, this quarter and we're seeing higher costs in general for auto insurance and related claims due to inflationary pressures, we continue to invest heavily in advertising efforts in the quarter and that has helped US go after and capture healthy levels of growth.
As I mentioned earlier, we had non-GAAP adjustments this quarter for Fox acquisition related items. These totaled approximately $5 million on a pre tax basis and were related to purchase accounting amortization and the fair value of contingent consideration on this material acquisition.
GAAP operating income was $155 million up almost 15% year over year.
Adjusted operating income was $160 million up almost 19% versus the prior year.
EBITDA was $182 million up over 14% year over year and EBITDA margin was a healthy 22, 2%, our adjusted EBITDA was $183 million up over 15% and representing a 22, 3% margin.
And for the first half EBIT margins were just under 22%. It is good to see EBITDA compounding at 16% in the first half.
As I have consistently indicated I like to look at the business using incremental margins are meaning what percentage of every additional dollar of revenue growth is converted to EBITDA.
On an as reported basis, we generated incremental margins in line with our overall EBITDA margin. However, excluding the headwinds I mentioned from insurance and auto claim developments and the additional costs associated with the earn out on our recent acquisition incremental margins were accretive to our margin profile.
Quarterly GAAP net income was $110 million or 22 per share increasing from 21 per share in the same period, a year ago. Adjusted net income was $114 million or 23 per share.
The effective tax rate was 27% in the quarter up 200 basis points versus the prior year driven by higher foreign income taxes, we expect the rate to normalize at approximately 26% over the second half of this year.
Turning to cash flow and the balance sheet quarterly free cash flow remained very strong we generated $141 million of free cash flow on $110 million of earnings quarterly free cash flow increased by almost 18% and is compounding at just under 18% in the first.
Six months of this year.
Cash flow conversion the percent of income that was converted to cash was also a bright spot coming in well above 100%.
We made acquisitions totaling $312 million and we paid $64 million in dividends.
It remains a negligible and debt to EBITDA is well below one times on a gross level.
We continue to be active in pursuing additional tuck in acquisitions and remain very well positioned to continue to maintain a balanced capital allocation strategy.
As Jerry mentioned previously we are excited about the strategic growth opportunities that Fox provides so far the Fox team and business have exceeded our expectations from a growth perspective, and we see continued opportunity and momentum in their door to door model.
Quick update on financial details in April we shared our expectations that Fox would add between 90 and $100 million of revenue in $18 million to $22 million of EBITDA to our 2023 results. We now expect to deliver financial performance at the high end of both of those ranges.
We continue to make progress on a number of general financial housekeeping items that will help position us best as we continue to grow our business of note we filed a shelf with the SEC on June 3rd this filing allows for up to $1 5 billion of primary securities and while we have no immediate need for this capital.
It provides flexibility for long term fixed rate financing and other options that complement the bank revolver that we put in place earlier. This year. Additionally, the shelf allows the company to work proactively with the family should they decide to divest a portion of their holdings at some point in the future.
In summary, our performance this quarter continues to demonstrate the strength of our business model and the engagement level of our team we remain focused on providing our customers with the best customer experience and driving growth organically and through disciplined acquisitions with that I'll turn the call back over to Gerry.
Thank you Ken we're happy to take any questions at this time.
At this time, we will be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad.
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Our first question comes from the line of Jan with UBS. Please proceed with your question.
Hi, Good morning, guys. Thanks for taking my question.
Good morning, good morning.
Good morning, I wanted to ask about the comments that you made regarding the trends in May and June and July .
What do you make of the fluctuation and I guess based on that how do you see the.
The trends going forward.
Yes, the quarter. This is gerry the quarter was a little different than we've seen in the past.
If you'll recall back in April at our call.
With everyone. We talked about April was off to a really strong start and it was an April finished strong.
May was good as well and then we saw a pretty significant.
Shift in.
<unk>.
And some of the demand, especially in the back half of June were just slid.
We have since gotten some of the.
The data from Google on Google search query data that showed there was a pretty significant decline in the back half of June and that's really what drove the volume down overall in the quarter, but similarly right when we.
We got near the end of June the very beginning of July get close to the fourth of July .
Popped it just came back again.
The temperatures rose considerably and the number of.
Unique visitors to our website just in the first couple of weeks in July improved by over 18% year over year. So it was.
It was a little weird normally you see that kind of seasonality earlier in the quarter not not later, but it was a little different than we've ever seen in the past.
Okay, that's really helpful color and that makes sense.
Then I guess my follow up you also mentioned advertising, increasing certainly makes sense to invest in that given your business model. I was just wondering what causes you to ramp up or down the advertising spend you know I'm curious what you saw in Q2 that made you. This.
Side to do more advertising versus less.
Well when we started we had good signs in April that that the.
The environment was good.
And plus we were staffed for it. So when you are better staffed and you've got the people to service the customers and get the new customers coming in the door. That's when it's there to take there to take advantage of it in.
And our business and you look at the fiscal year.
Selling recurring revenue there earlier in the year you get the more revenue you get and so.
We just thought the conditions were right and I think that's worked out well for us as is evidenced by the organic growth levels that we saw in the quarter. That's great commentary Gerry Josh just one additional item with respect to advertising. If you go back and you look at our results say for the fourth quarter of last year, we were conscientious and.
<unk> that advertising was down and so.
So what you saw was during the winter season during the fourth quarter advertising was certainly lower because demand levels are generally lower but as you go throughout the year you generally we will see a ramping of the advertising in Q2 and Q3.
Before it starts to recede a bit in Q4. So I think we will continue to follow that same trajectory. When we think about demand season for our business.
Alright, thanks, Thanks, Gary and Ken and then congrats on the good quarter.
Thank you Joe.
Our next question comes from the line of Luke Mcfadden with William Blair.
Proceed with your question.
Hey, good morning, guys.
Known for Tim Mulrooney.
I am curious with inflation beginning to ease.
As youre above average pricing had any effect on new customer growth and retention.
Other words are you seeing any pushback on pricing from customers on pricing from customers.
Should investors think about pricing more broadly as you head into the second half of this year. Thanks.
I would say we've had.
A little more pushback than we've had in prior years, but nothing thats insurmountable.
It's still early.
To truly judge as we go through the year get further into the year, we'll look closer at our.
Our roll back data and exclusion data.
Really get an effect of what happened and whether or not customers cancelled over it will have all our metrics as we move through the year.
I would say it hasnt.
It hasnt been.
Significant issue for us thus far this year.
<unk>.
As you move through the year, we watch that further depending on the economic environment will have to moderate that Ken will.
Our plan is to evaluate pricing.
Towards the latter part of this year once all the data and we'll go from there.
As we think about our future.
That's correct and antibody.
I also want to add that we continue to believe that our services are essential we do believe that there is definitely value in our pricing model and but but we are conscientious of price and what impact that has on our customer base and so we will continue to monitor that will continue to monitor the economic economic trends, but we won't lose sight of the essential.
<unk> value of our services, so stay tuned on that but that's I think how we think about it Josh.
Luke.
Great and if I can follow up just with one more maybe on gross margins here. It looks like gross margins were up 40 basis points year over year in the second quarter.
We know Fox.
Pretty high gross margins just given the nature of that business how much of that gross margin expansion do you think could be attributed to the contribution from from Fox and.
And can you touch on the other factors just helping to drive that gross margin expansion in the second quarter I know you mentioned it in your prepared remarks, but.
Any any further commentary there would be helpful. Thanks again.
Yes, its Ken look and I'll take that question.
You are exactly right. The Fox acquisition is a very valuable acquisition and the gross margin reflects the value of their business model. It is accretive to the overall margin profile of Rollins.
But it only contributed about $39 million of revenue in the quarter. So so it's not that meaningful it did have a positive impact on the gross margin, but we also saw a positive impact across our organic business.
Primarily through better leveraging of fleet costs better leveraging of people costs.
In materials and supplies.
It's interesting when I step back and I look at the fleet cost you would expect fleet cost to improve with gasoline prices, but the thing I think people are missing at times is the fact that used car prices arent as attractive so when we turn in lease vehicles or when we sell lease vehicles, we're not seeing as much of a gain as we did last year at this time so.
So we're seeing good improvement in our organic business. Despite that headwind and we also are seeing improvement associated with the Fox acquisition coming through our gross profit margin.
Thanks again guys.
Our next question comes from the line of Stephanie Moore with Jefferies. Please proceed with your question.
Yes.
Hey, this is <unk> on for Stephanie War.
So you talked about.
Productivity initiatives. So just wanted to get an idea what investments that youre, making the company.
We came a little more productive.
Yes, I would I would add.
I would say to that point.
Like most other companies have a.
A list of a number of opportunities that we continue to evaluate across the restructuring.
Area, we're looking at all areas of the business and as Jerry had talked about as well as myself continuous improvement is a big focus of our of our of our company and so when we look at for example, our home office. We are continuing to look at ways, we can enhance and improve the home office, but we're also looking more.
Widely across the business so.
Can't give you one specific initiative, but it's really across all of our footprint that we're really evaluating opportunities to improve the business from a productivity perspective.
Okay.
Thank you and then just on the residential deceleration, let's say resi slowdown in.
Sequentially and year over year. So if you could give us any puts and takes on revenue growth ratio organic growth and how should we think about ratio organic growth looking forward to the back half of the year. Thank you.
Yes.
When we look at when we look back at the quarter and compare it to other recent quarters.
We look at it.
As though June was a bit of an anomaly.
June was a really weird month that affected that.
Sure.
April and May organic growth was in that double digit range.
That we were expecting in June kind of threw us for a loop with what went on there. So we've started the quarter out.
Back on track with more in line with what we expected.
Don't see any signs of course, you don't have a crystal ball, but certainly we will make every attempt to continue to drive higher levels of on the organic residential growth side.
Thank you.
Our next question comes from the line of Jason Haas with Bank of America. Please proceed with your question.
Hey, good morning, and thanks for taking my questions just following up on that monthly sales cadence. It sounds like maybe it was some cold spring weather, maybe pushed themselves out into July .
As in prior years, where you've had.
<unk>.
Spring do you see the business shifts.
Into July and maybe even further into August and September just trying to think about that 10% organic growth number you said in July and if theres anything to be cognizant of in terms of the compares whether they get easier and harder through the quarter in August and September .
Again, you think about seasonality in net.
As I said this last quarter was different because normally when we talk about cooler spring cooler early summer that's usually happening in March and April .
And usually it hit this.
This quarter. It was just it was really different than what I would say we've seen in many many years.
Now is that to say there is some pent up demand.
Certainly have seen that in July .
There once once temperatures got too.
A few weeks ago, we were in California, Ken and when we arrived that day.
In the middle of the day. It was like 75 degrees, but then by the by the weekend. It was 110 degrees in Northern California, and the phones were ringing off the hook.
So.
Was very so we had some very unseasonably cool weather in June which is kind of an anomaly. So.
<unk>.
I don't know what else to say.
Just adding on their weather always has an impact across the business.
What really helps us too is those warm evenings.
One evening stay above a certain level.
The low temperature doesn't get too low and so when you see that you certainly have a benefit in the business and so it certainly does continue to have a nice positive impact on the business as we think about comparable I don't see anything year over year that has a huge impact on comparable from a from a weather or from a revenue performance perspective.
Jason.
But we feel as we said in our prepared comments, we feel very good about how we're positioned to deliver a strong second half in 2023.
That's great and then for a follow up I was going.
To ask on the incremental EBITDA margins.
I know you had said previously and we're seeing it play out.
Plan was to invest more in customer acquisition costs. So.
A little bit below the 30% target this quarter.
Is that a fair framework I think you are in the low 20% range or so this quarter is that a fair assumption to use for the near term or.
Do you think the next few quarters, you can get back to that 30% level that you target. So it's interesting Jason if you look at the LTM number as of June 30, the LTM incremental margin is 29, 3%. So it's almost 30% thats up strongly from the prior year.
And so when we look over a long period of time, a 12 month period were certainly trending at those levels that we talked about this one quarter. What we saw in the first in the second quarter, you might see it a bit in the third quarter is youre investing it's time to invest is time to go after and acquire those customers that youre going to keep for years to come.
And so youll see EBIT, our incrementals, maybe weighed down a little bit by that but the fact that the incrementals were accretive to our actual margin profile that provides me a sense of optimism. We're in an investment period, and we're actually still seeing incrementals that are accretive to our EBITDA margin. That's a good thing to see.
And so we're hopeful that that will continue as we go into the third quarter.
But our goal long term is that 30% incremental margin profile. There's no reason this business shouldnt get to those levels based upon the pricing that we get based upon the.
Essential nature of our services.
Based upon our customer experience that our service technicians and our associates are providing our customers and so we feel good about that incremental margin target longer term.
Great to hear thank you.
And then just as a reminder, if anyone has any questions. You May press star one on your telephone keypad to join the question and answer queue.
Our next question comes from the line of John <unk> with Wells Fargo Securities.
Sure.
Hey, good morning, guys. Thanks for taking my question, maybe just following up on this insurance issue.
I think you believe you mentioned four claims in the quarter and about a 40 basis point drag could you maybe just quantify if theres any other.
Kind of a legacy settlements in the pipeline that could hit in the future quarters and also how should we think about higher insurance costs as we move through the year should they maybe stepped down as the driver safety improves or our higher insurance costs more of a function of just the environment. We're currently in.
Yes, first and foremost what I would say is.
Our accruals at June 30, if they are complete and accurate and so when we look at the liability associated for example, with auto claims we feel like it's complete.
We do know that things change and so as facts and circumstances change estimates change and Thats, what we would do as we move forward you really started to see this tick up last year in the third quarter, we had around $10 million of claims that came through that settlements came through.
Interesting when you look at what happened during Covid claims of certainly they certainly trended down quite a bit courts close the bed settlement activity went down and then coming out of Covid you start to start to ramp we're hopeful that we'll see that turn down as we go into the future.
But youre just not sure what's going to happen on that front. What you can do however is focus on the controllable and what Jerry talked about in his comments was focusing on putting systems and processes and our focus behind behavioral based safety into the business that will mitigate these exposures as we move forward and so.
We're doing just that and we're hopeful that that activity will have a positive impact on our experience in this our unfortunate experience in this area.
Got it great color. Thank you and maybe also just following up on this investment period could you just quantify the kind of return on AD spend or maybe even at a high level just your kind of.
Customer acquisition.
Cost adds kind of either digital or linear we've seen kind of a lower TV upfront market and potentially others pulling back so could that be potential upside. If you can get these kind of AD dollars in your customer acquisition cost down.
What I would say and I would ask <unk> to comment too was if I look at our organic growth profile and I compare it to our overall market growth.
Organic growth as we said in our prepared commentary is roughly 8%.
The markets, what we expect the markets to be growing at or much below 8%. So when we think about the organic growth profile and we think about the share that we are gaining in our markets.
We feel good about the return levels, knowing that incremental margins can be around that 30% and a customer might stay with us for three five or even seven years. So we feel really good about the returns that we're getting on those AD dollars, yes just.
Factor in the lifetime value of a customer and what that what that customer means to us over the long term those are worthy spends and we do a very good job of.
Monitoring cost of customer acquisition cost to lead and we're very comfortable with what we're spending.
To generate that long term recurring revenue stream.
Great. Thanks again.
And our next question comes from the line.
Schrader with Stifel.
Please proceed with your question.
Hi, Good morning. This is Adam <unk> from Stifel filling in for Michael Hoffman today. Thank.
Thank you for taking my questions.
So I'm just going to your cash flow you had a very strong free cash flow conversion in <unk>.
Were there any specific factors influencing the periods and would you expect the conversion.
Lower in the second half.
When we look at the cash flow conversion, we're really happy with the performance that we saw in Q2, but also the first half of the year.
<unk>.
Our focus is to continue to drive compounding of free cash flow in that mid teen range and the fact that we saw free cash flow compound at roughly 17, 18% in the quarter. It provides us a sense of optimism heading into the future I don't know that we're ready to increase our.
<unk> into 18, or 20% compounding our cash flow, but if we can continue to see compounding our cash flow in that 14 to 15 or so percent, which is in line with what we've compounded cash flow at over the last 20 or so years.
I think we would be happy with that performance nothing really jumps off the page at me in terms of what's driving cash flow improvement in the quarter.
No the Fox business has a bit of a different business model. When you look at the door to door side, and so payable stepped up a little bit with respect to that business model that actually had a positive impact on cash flow, but overall, we feel we feel good about cash flow and we feel good about the generation of cash that we're seeing.
Thank you.
To follow up your largest customer mentioned that the deal valuations have come down.
Private equity is paying less for deals are you seeing similar trend and this is driving like an outsize year deals excluding the contract position.
Okay.
Yes.
I'm not sure I completely understood. The question are you asking more about the <unk> space.
What we're seeing from a from a just overall sort of.
Multiples are being paid through acquisitions are lower now.
They are seeing.
If you are seeing sort of similar type of trend.
With this sort of mean, you do more M&A than usual.
I wouldn't necessarily say, it's come down significantly I have seen some <unk> deals that have transacted at pretty high valuations.
Early this year.
<unk>.
I would say Theres also been some maybe some deals out there that haven't haven't made it to closing.
So.
It seems to be.
It's still a pretty rich environment.
May is softening a little bit Ken.
We measure that pretty closely and kind of watch all of our transactions I don't necessarily think that think it means we're going to go more aggressive or try to bite off more than we can chew.
We will always remain disciplined about picking the right.
The right acquisitions the companies with the right culture, the people that care about the business.
And have the right.
A fit for Rollins.
<unk>.
<unk>.
No matter what the valuation is that's the biggest thing we look that's where we start.
Tim what would you add the only thing I would add is I mean, we can speak about our experience and our experienced business, we've been investing at very healthy multiples not necessarily aggressive levels.
We are getting deals at fair values.
But it's interesting the one thing that certainly has an impact on the M&A markets as interest rates and as interest rates tick up ultimately some buyers.
<unk> business is at a much lower level, you just can't get there.
With certain levels of interest rates. So so thats certainly has potentially an impact on the M&A environment, but what Jerry said is spot on we're going to continue to focus on buying good businesses paying fair values and businesses that align with our culture and our focus and value their team members value their brand.
That's the kind of business, we want to bring into the fold and we felt like we got that with Fox.
And our next question comes from the line of Ali Davis with Redburn Partners. Please proceed with your question.
Yes, good morning.
On the residential side can you just talk about the split of organic growth between kind of cross selling into the existing customer base.
Your ability to add new customers given the macro environment.
The focus on cross sell the focus on ancillary as a key part of the strategy.
We don't necessarily provide the detail growth levels for ancillary or for cross sell our multiple services with any one customer but I can tell you is is we're seeing really good growth from a number of different services. Like for example, you might have a individual that signs up for pest control and theyre, adding musca.
<unk> because mosquito demand is incredibly strong.
Or you might see a termite customer.
Or another pest control customer that is signing up for crawl space work or installation work and so we're still seeing continued good demand for those ancillary and additional services across the business.
Great. Thanks, and then as a follow up on the commercial book remains very strong.
Just sort of typical types of commercial venues that youre, adding.
And do you think this can continue given.
I guess, the kind of historical volume great commercial delivered before the pandemic.
We haven't seen any slowdown.
Our ability to sell and bring on new commercial customers we are.
More focused on.
On certain verticals that we really like to sell sell into.
Logistics healthcare hospitality things along those lines.
We try to be on.
Pretty fairly disciplined.
About the customers that were really proactively targeting.
But we have a <unk>.
Very effective sales force, we've continued to invest in that sales force ramp up those sales efforts.
We feel very positively about the future of the commercial business.
Yeah.
Great. Thanks.
Thank you.
And we have reached the end of the question and answer session and I will now turn the call back over to management for closing remarks.
Thank you everyone for joining us today, we appreciate your interest in our company and we look forward to updating you on third quarter earnings call in October Thanks again.
And this concludes today's conference and you may disconnect your lines at this time.
Thanks for your participation.
Okay.
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Yes.
Okay.
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