Q3 2023 Rollins Inc Earnings Call

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

A reminder, this conference is being recorded I would now like to turn the conference over to your host Mr. Ken Kraft. Thank you you may begin.

Good day, ladies and gentlemen, thank you for standing by and welcome to the Rollins third quarter 2023 earnings Conference call. During today's presentation. All parties will be in a listen only mode. Following the presentation. The conference will be opened for questions. If you have a question. Please press star followed by the one on your Touchtone phone.

If you would like to withdraw your question. Please press star followed by the two and if you are using speaker equipment. Please lift the handset before making your selection. This conference is being recorded today Thursday October 26 2023.

Good morning, everyone and welcome to our third quarter call. This is Ken Kraus before we begin I'd like to take just a moment to formally introduce Lyndsey Burton Lindsay as our new VP of Investor Relations joining us most recently from the home depot. She brings a very strong background in Investor Relations and we're excited to have her join our team at <unk>.

I look forward to introducing her to many of you in Q4 as we attend several investor conferences welcome Lindsay. Thank you, Ken and good morning, everyone.

In addition to the earnings release that we issued yesterday. The company has also prepared a supporting slide presentation.

The earnings release and presentation are available on our website at Www Dot Rollins dotcom.

We have included certain non-GAAP financial measures as part of our discussions with the.

The non-GAAP reconciliations are available in the appendix of today's presentation as well as in our earnings release. The Companys earnings release discusses our business outlook and contains certain forward looking statements. These particular forward looking statements and all other statements 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.

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 31st 2022, and our Form 10-Q for the quarterly period ended September 30th 2023, which will be filed later today.

On the line with me today are speaking are Jerry <unk>, President and Chief Executive Officer, and Ken Crouse, Executive Vice President Chief Financial Officer and Treasurer.

Management will make some opening remarks, and then we'll open the line for your questions. Jerry would you like to begin.

Lindsey good morning, everyone I'm pleased to report that Rollins delivered another good quarter of growth and profitability, reflecting consistent execution of our operating strategies and continuous improvement in our business our financial performance for the third quarter was highlighted by an increase in revenue of over 15% to 800.

40 million I'm pleased to report that we continued to see organic growth of over 8%.

Further this reflects a solid performance across all major service lines as residential increased approximately 20% commercial pest control rose approximately 12% and termite was up 11% this quarter.

Revenue performance in the quarter was robust following the slower June activity that we discussed on the last quarter.

We saw consistent growth in the mid teens each month of the third quarter.

We have observed continued underlying strength in the pest control markets year to date, particularly within North America.

Additionally, our addressable markets are large fragmented and supported by a number of key secular trends, including but not limited to one a shift from DIY to do it for me two population migration to warmer climates, three changing weather patterns and for the <unk>.

Stickiness of hybrid work schedules, leading to people spending more time at home.

As we look at our competitive position in these attractive markets. We believe we continue to benefit from several key elements of our business model.

If you look back over the last 15 years or so we've consistently grown revenues through the great recession in 2009 and on through the industrial slowdown in the mid teens, we reliably grew mid single digits year N and you're out.

Revenue growth accelerated pre COVID-19 and that has generally continued we delivered high single digit organic growth in each of the last 11 quarters let.

Let me highlight four key areas that we believe have differentiated us in the market and position us well to continue outpacing a market where secular trends should support mid single digit growth over the next several years.

First our leading portfolio of pest control companies gives us a unique position in our markets. The combination of Oregon, and our strong group of regional brands gives us multiple bites at the Apple with potential customers and additional cross sell opportunities.

Second we use a variety of methods to acquire new residential customers and add to the depth of our relationships with existing customers.

Digital marketing cross selling service bundling and door to door sales methods all help us reach new customers will drive further engagement with existing customers.

We also have important relationships within the homebuilding and real estate market communities through brands like home team in northwest.

We're able to capitalize on this multichannel approach to drive residential customer growth.

Third we're investing in commercial customer acquisition targeting key strategic verticals that are the most profitable this is paying off with 12% growth in the quarter.

And last but not least we have a clarity of focus and have been consistently executing our strategy in our core market for a very long time.

This focus and clarity insurers, we don't make unnecessary changes and enables us to continue to successfully grow our share and theyre very attractive pest control market.

These points of differentiation have positioned rollins to achieve a healthy level of organic growth.

Our further complimented by strategic M&A.

Looking at the recent acquisition of Fox Pest control. The integration remains on track. The Fox teams are executing and doing well and we continue to be excited about the growth opportunities ahead for the Fox brand.

Additionally, through the first nine months of this year, we closed 18 tuck in deals in addition to box the.

The M&A pipeline remains healthy and 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 M&A opportunities and are confident in our continued ability to invest in the right strategic acquisitions, while delivering strong organic growth across the business.

Our dedication to continuous improvement is an important part of our strategy and culture.

As you've heard us discuss previously we're constantly looking to improve our service level levels and operating efficiencies in August we took an important step towards increased efficiencies in our Atlanta support center to accelerate our growth goals for the first time in about 20 years, we executed a restructuring program that was designed to <unk>.

Support our modernization efforts and flattened our overhead structure.

We plan to reinvest cost savings initiatives that further enable our growth priorities and allow us to serve our frontline operations more efficiently.

We continue to see opportunities for margin expansion as we move forward and execute our strategy.

Ken will provide more detail and address the margins in the quarter shortly.

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 and the onboarding the right people and both support functions and the customer facing side of our business.

Effective sales and service staffing helped us capitalize on continued strength in demand and to achieve high levels of organic growth both in the quarter as well as your year to date.

We remain focused on safety and I am pleased to report that we have seen our average mentored driver safety score increase over 25% since the beginning of the year.

Youll recall that this driving score is derived from an app that we have implemented to monitor driving behaviors when our vehicles are in motion.

Improving our safety culture isn't something that's done overnight, but we are making strides and we are encouraged that our claims activity had less of a negative impact to our financial results versus a year ago.

We're working hard in the field to increase safety awareness and training, while recognizing and rewarding those that are the safest.

We believe these efforts will keep our people safe and mitigate negative financial impacts to our business.

We continue to focus on creating value and returning capital to our shareholders. We're pleased to be in a position to increase our dividend by 15% and we remain committed to a growing and sustainable dividend.

Additionally, in the third quarter, we completed $300 million in share repurchases.

The moves we made earlier this year and modernizing our capital structure by refinancing and expanding our revolver gave us the flexibility to be opportunistic and participate in a repurchase at a very attractive price.

Ken will share some additional details on this in a moment.

Our modernization efforts continue to progress well, but we're not done yet and we look forward to sharing additional developments on this front over the coming quarters.

In closing before I turn the call over to Ken We're excited about where our business stands today, we're very well positioned for the remainder of the year and repeat and remain focused on robust organic growth delivering healthy incremental margins and continuing to attract hire and retain top talent across across the business.

I'll now turn the call over to Ken.

Thanks, Jerry and good morning, everyone.

Third quarter reflects continued strong execution by the Rollins team. Let me begin with a few highlights first we delivered robust revenue growth of over 15% year over year, we saw good growth across each of our service offerings organic revenue was up over 8%.

Acquisitions drove the other 7% of the total revenue growth.

Second our gross margins were healthy approaching 54%. This quarter, we continue to be positive on the price cost equation and saw good performance across several key cost categories.

<unk> EBITDA margin of 24, 8% with strong improving 150 basis points driven by leverage across the P&L.

Our GAAP earnings were <unk> 26 cents per share and excluding certain expenses related to the Fox acquisition.

And severance costs for the restructuring that Gerry just mentioned adjusted earnings per share were up 27% to <unk> 28 per share.

And last but not least we delivered operating cash flow of $127 million and free cash flow of $121 million, both up slightly versus last year cash flows were impacted by the timing of certain payables the payment of payables at quarter end.

Let's look at the quarterly results in a little bit more detail quarterly revenue was $840 million up 15% on a reported basis.

Currencies reduced revenue growth by 10 basis points.

Organic revenue growth was very healthy at about 8% this quarter improving from the second quarter levels.

We continue to see good demand for our services and our acquisitions, most notably Fox <unk>.

We need to deliver value in the third quarter.

Turning to profitability, we realized 150 basis point improvement in gross profit margin as pricing more than offset inflationary pressures, while Fox was accretive to gross margins by about 30 basis points, we saw 120 basis points of improvement in organic margins in the quarter.

Setting aside improvements associated with the more favorable claims experience and the contribution of Fox, We saw 50 basis points of improvement in gross margin as leverage from people cost as well as materials and supplies more than offset pressure from fleet due to lower gains on the sales of leased vehicles versus a year.

We are pleased with our ability to leverage our cost of services provided as we continue to benefit from a more consistent pricing discipline across all of our brands this year.

SG&A cost as a percentage of revenue decreased by 20 basis points in the quarter, excluding the earn out adjustment for the Fox acquisition SG&A cost as a percentage of revenue decreased by 30 basis points in the quarter.

Peeling back the SG&A layers are bit more people cost advertising and selling costs, along with insurance and claims make up the bulk of our SG&A spend.

<unk> benefited year over year associated with improved claims experience and we saw leverage on our people costs, but were negatively impacted by increased advertising and selling expenses as we invested to drive growth in our business.

As Jerry mentioned for the first time in 20 years, we executed a restructuring program and our Atlanta support center to further support our modernization efforts.

15% of our back office employee population was impacted and we intend to reinvest associated cost savings in both people and systems that can drive further change and increased productivity as we work to become a better more efficient provider of shared services for our frontline operations as I mentioned earlier.

We had non-GAAP adjustments this quarter for restructuring cost and for Fox acquisition related items. These totaled approximately $10 million on a pretax basis and were related primarily to the Atlanta support center severance costs, along with purchase accounting amortization and the fair value of contingent consideration on the Fox.

Acquisition.

GAAP operating income was $177 million up 22% year over year adjusted operating income was $187 million up approximately 29% versus the prior year on 15% total revenue growth.

EBITDA was $202 million up 19% year over year, and EBITDA margin was a healthy 24, 1%.

Our adjusted EBITDA was $208 million up over 22% and representing a 24, 8% margin margins were up 150 basis points versus a year ago, primarily related to the improvements in gross margin discussed previously Fox.

Fox was neutral to EBITDA margins in the quarter.

Year to date, our adjusted EBITDA margins improved 90 basis points versus a year ago with 20 basis points of that improvement coming from the Fox acquisition.

Excluding this 70 basis points was driven across the remainder of the business as we have consistently indicated we 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.

<unk> of over 29% and excluding the restructuring costs and the additional costs associated with the earn out on our recent acquisition incremental margins were almost 35%.

Year to date, we generated incremental margins on an as reported basis of over 27% on an adjusted basis incremental margins were almost 30%.

Quarterly GAAP net income was $127 million or 26 cents per share increasing from 22 per share in the same period a year ago.

Adjusted net income was $136 million or 28 cents per share.

The effective tax rate was approximately 26% in the quarter and for the first nine months. The ETR was 26% as well up over 100 basis points compared with 2022, driven by higher foreign income taxes.

Turning to cash flow and the balance sheet quarterly free cash flow remains healthy we generated $121 million of free cash flow in the quarter versus $119 million a year ago. As previously discussed quarterly free cash flow was impacted by the timing of certain payables, primarily related to our door to door sales year to date free cash flow was.

$354 million, an increase of 11% versus last year.

Unknown Executive: will follow the formal presentation.

During the quarter, we made acquisitions totaling $21 million, we paid $64 million in dividends and we completed a share repurchase of $300 million at below $35 a share we repurchased eight 7 million shares and used our revolver to fund. This purchase we expect this to be less than 1% Duluth.

<unk> to results in the first year and minimally accretive in the second year that remains negligible and debt to EBITDA is below one times on a gross and net level.

Unknown Executive: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.

Unknown Executive: I would now like to turn the conference over to your host, Mr. Ken Krause. Thank you. You may begin.

Unknown Executive: Good day ladies and gentlemen. Thanks for standing by.

Unknown Executive: Welcome to the Rollins third quarter, 2023 earnings conference call. During today's presentation, all parties will be in a listen only mode. Following the presentation, the conference will be open for questions. If you have a question, please press star, followed by the one on your touchstone phone. If you would like to withdraw your question, please press star, followed by the two. And if you are using speaker equipment, please lift the handset before making your selection. This conference is being recorded today, Thursday, October 26, 2023.

Our strong cash flow profile has enabled us to execute a very balanced capital allocation strategy. This year year to date, we have invested approximately $350 million in acquisitions repurchased $300 million of our shares and paid $192 million in dividends, a 30% increase year to date.

<unk>, we just announced another 15% increase to our dividend earlier. This week. This marks over two decades of consecutive increases and annual cash dividend payments.

Ken Krause: Good morning, everyone. And welcome to our third quarter call.

We remain active in pursuing additional acquisitions and looking at multiples. We remain very disciplined year to date, we have invested approximately $350 million and acquisitions and the market remains highly fragmented and we continue to be an acquirer of choice and a very active participate and participate in our markets.

In closing our performance this quarter continues to demonstrate the strength of our business model and the engagement level of our team.

Our family of brands are driving profitable growth and we are focused on continuous improvement across the business. We remain focused on providing our customers with the best customer experience and driving growth both organically and through disciplined acquisitions with that I'll turn the call back over to Gerry.

Ken we're happy to take any questions at this time.

Ken Krause: This is Ken Krause.

Thank you if you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question you May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the.

Ken Krause: Before we begin, I'd like to take just a moment to formally introduce Lindsey Burton. Lindsey is our new VP of investor relations, joining us most recently from the Home Depot. She brings a very strong background in investor relations, and we're excited to have her join our team at Rollins. I look forward to introducing her to many of you in Q4 as we attend several investor conferences.

Lyndsey Burton: Welcome, Lindsey. Thank you, Ken.

Starkey.

Ken Krause: Good morning, everyone. In addition to the earnings release that we issued yesterday, the company is also prepared a supporting flag presentation. The earnings release and presentation are available on our website. We have included certain non-gap financial measures as part of our discussions this morning. The non-gap reconciliations are available in the appendix of today's presentation, as well as in our earnings release. The company's earnings release discusses the business outlook and contains certain forward-looking statements.

And answers of time, we ask that you each keep to one question and one follow up thank you.

Our first question comes from the line of a niche sabedra with RBC capital markets. Please proceed with your question.

Ken Krause: 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.

Thanks for taking my question, it's great to see the strong momentum in the business.

Ken Krause: Please refer to yesterday's press release and the company's SEC filings, including the risk factor section of our form 10K for the year ended December 31st, 2022, and our form 10Q for the quarterly period ended September 30th, 2023, which will be filed later today.

And just wanted to go back I understand can you you obviously talked about multiple different.

Ken Krause: On the line with me today and speaking are Jerry Gailoff, President and Chief Executive Officer, and Ken Kraus, Executive Vice President, Chief Financial Officer, and Treasurer. Management will make some opening remarks and then we'll open the line for your questions.

Avenue to attract new customers and I was just wondering if you could comment on the underlying business.

Ken Krause: Jerry, would you like to begin? Thank you, Lindsey.

Underlying demand environment have you seen any slowdown in the demand environment.

And.

You, obviously talked about month to month being.

Jerry Gahlhoff: Good morning, everyone. I'm pleased to report that Ron's delivered another good core of growth and profitability, reflecting consistent execution of our operating strategies, and continuous improvement in our business. Our financial performance for the third core was highlighted by an increase in revenue of over 15% to 840 million. I'm pleased to report that we continue to see organic growth of over 8%. Further, this reflects a solid performance across all major service lines.

Our consistently strong but have you seen better focus on certain selling strategies versus another thanks a lot.

Jerry Gahlhoff: As residential increased approximately 20%, commercial pest control rose approximately 12% and termite was up 11% this quarter. Revenue performance in the quarter was robust following the slower June activity that we discussed on the last quarter. We saw consistent growth in the mid teens each month of the third quarter. We have observed continued underlying strength in the pest control markets year to day, particularly within North America.

I think this is Jerry thanks for the question I think some people think the entire market demand is driven by whatever someone's, saying in digital and that's not always the case.

Jerry Gahlhoff: Additionally, our addressable markets are large, fragmented and supported by a number of key secular trends, including, but not limited to, one, a shift from DIY to do it for me, two, population migration to warmer climates, three, changing weather patterns, and four, the stickiness of hybrid work schedules leading to people spending more time at home. As we look at our competitive position in these attractive markets, we believe we continue to benefit from several key elements of our business model.

For our business.

<unk>.

When you look at the digital.

Side it was relatively flat.

Or maybe even slightly down on the digital side, and that's really where our strategy to have.

Lots of approaches for how we acquire customers.

It plays a differentiating factor for us so.

While the digital segment was certainly I think on the flattish to slightly downside.

Jerry Gahlhoff: If you look back over the last 15 years or so, we've consistently grown revenues through the Great Recession in 2009, and on through the industrial slowdown in the mid teens, we reliably grew mid single digits year in and year out. Revenue growth accelerated pre-COVID, and that has generally continued. We delivered high single digit organic growth in each of the last 11 quarters.

Our diversified strategy is really what's paying off for US yes. The only thing I would add there is just two points one.

The growth across the business is quite impressive when I look at the business in the quarter. We saw broad based growth not only on a quarterly basis, we saw consistent growth, but broad based growth across all of our family of brands.

So that was really good to see first and second as we exited the quarter and went into October we continue to see really healthy demand level and if you might recall a year ago. We saw a lot of business from a really tough hurricane season in September get pushed into the into October so to see good momentum into October also gives us.

Jerry Gahlhoff: Let me highlight four key areas that we believe have differentiated us in the market, in position as well to continue outpacing a market where secular trends should support mid single digit growth over the next several years. First, our leading portfolio of pest control companies gives us a unique position in our markets. The combination of Orkin and our strong group of regional brands gives us multiple bites de apple with potential customers and additional to acquire new residential customers and add to the depth of our relationships with existing customers.

A bit of optimism as we think about the future.

I think it's also important to mention that what we see what we've seen across.

The U S and Canada in particular across North America is that all of our businesses are doing well and done geographically.

Not only from a brand individual brand strategy, but also from a geographic strategy, they're really all doing quite well.

Jerry Gahlhoff: Digital marketing, cross selling, service bundling, and door-to-door sales methods all help us reach new customers or drive further engagement with existing customers. We also have important relationships within the home building and real estate market communities through brands like home team and northwest. We're able to capitalize on this multi-channel approach to drive residential customer growth. Third, we're investing in commercial customer acquisition, targeting key strategic verticals that are the most profitable. This is paying off with 12% growth in the quarter.

That's great color and just maybe on my follow up I wanted to talk about the solid incremental margins that we've seen a 35% as we think about.

The modernization efforts. Thank you.

Don how should we think about incremental margins going forward is that 30% to 40% sustainable going forward, but.

Yes, it's a great question Ashish and thank you for that question. What I would say is our focus is to continue to deliver a very healthy incremental margin profile.

This quarter.

You're correct in saying that we were at 35%.

Jerry Gahlhoff: And last but not least, we have a clarity of focus and have been consistently executing our strategy in our core market for a very long time. This focus in clarity ensures we don't make unnecessary changes and enables us to continue to successfully grow our share in the very attractive pest control market. These points of differentiation have position reliance to achieve a healthy level of organic growth and are further complemented by strategic M&A.

We continue to see an opportunity to deliver 30% incremental margins upwards of 35 to 40, depending on a multitude of factors, but we certainly continue to have a confidence level in our ability to deliver that 30% incremental margin and continue to see EBIT.

Margins lift as we go into the future. It's a great business, it's an essential service and its got pricing and we're focused on continuous improvement in our across our business not just in our back office. So so with all of those those points. We continue to focus on delivering a very healthy incremental margin profile.

Jerry Gahlhoff: Looking at the recent acquisition of Fox pest control, the integration remains on track. The Fox teams are executing and doing well and we continue to be excited about the growth opportunities ahead for the Fox brand. Additionally, through the first nine months of this year, we closed 18 tuck-in deals in the distant above. Fox. The M&A pipeline remained healthy and were 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 M&A opportunities and are confident in our continued ability to invest in the right strategic acquisitions while delivering strong organic growth across the business.

That's great color.

Solid quarter. Thank you.

Thank you. Our next question comes from the line of <unk> with Bank of America. Please proceed with your question.

Hi, Good morning, and thank you for taking my question. This is <unk> on for Jason Hart.

To turn off I'm, just curious have you seen any pushback from the 4% price increase or is it more business as usual RBC.

Price increases been it's been a very healthy environment as what we've seen from a standpoint of price increase.

You may see certain ZIP codes that you might see challenges in but you see other ZIP codes, where you don't see much challenge at all so but overall, we see it as a very healthy environment for our essential services.

Jerry Gahlhoff: Our dedication to continuous improvement is an important part of our strategy and culture. As you've heard us discuss previously, we're constantly looking to improve our service levels and operating efficiencies. In August, we took an important step towards increased efficiencies in our Atlanta Support Center to accelerate our growth goals. For the first time in about 20 years, we executed a restructuring program that was designed to support our modernization efforts and flatten our overhead structure.

Yes. Thank you and then to follow up do you think your customers to take another price increase or Mr. Louis go in 2024.

We're going to have about this is Jerry we're going to evaluate that work here in the fourth quarters. When we start really taking a look at our price increase data the results from.

Over the last nine nine or 10 months and say what happened what did we learn in.

Jerry Gahlhoff: We plan to reinvest cost savings and initiatives that further enable our growth priorities and allow us to serve our frontline operations more efficiently. We continue to see opportunities from margin expansion as we move forward and execute our strategy.

Create our strategies for for next year, and I guess my best advice to you would be to stay tuned well probably update you on that at some point in the first quarter.

Yes. Thank you so much.

Jerry Gahlhoff: Kim will provide more detail and address the margins in the quarter shortly. Operationally, we're committed to developing great talent and investing in our teams. Hiring has been healthy and we put a lot of energy into onboarding the right people in both support functions and the customer facing side of our business. Effective sales and service staffing helped us capitalize on continued strength and demand and to achieve high levels of organic growth both in the quarter as well as year to date.

Thank you. Our next question comes from the line of Tim Mulrooney with William Blair. Please proceed with your question.

Yeah.

Ken Jerry good morning good.

Alright, good morning, Tim.

Thank you for taking my questions two quick ones so on customer acquisition.

Jerry I think.

Your response to another question you said the digital channel was.

Kind of flat to down in the third quarter.

My question on that is there.

Jerry Gahlhoff: We remain focused on safety and I'm pleased to report that we have seen our average mentor driver safety score increase over 25% since the beginning of the year. You'll recall that this driving score is derived from an app that we have implemented to monitor driving behaviors when our vehicles are in motion. Improving safety cultures isn't something that's done overnight but we are making strides and we're encouraged that our claims activity had less of a negative impact to our financial results versus a year ago.

At Nu.

It also in the first and second quarters of this year, just trying to get a sense for how consumer demand.

Particular channel has trended through the year.

Sure.

I would characterize it.

In the first five months of the year as somewhat up.

I wouldn't say it was something that we didn't see some sort of double digit increases very consistently.

It may have had better some better months than others, but it wasn't.

Jerry Gahlhoff: We're working hard in the field to increase safety awareness and training while recognizing and rewarding those that are the safest. We believe these efforts will keep our people safe and mitigate negative financial impacts to our business.

Sure.

It wasn't up.

And at a higher a significant higher level than prior year, there are ups and downs and then it was.

Really June is where we saw that.

Jerry Gahlhoff: We continue to focus on creating value and returning capital to our shareholders. We're pleased to be in a position to increase our dividend by 15% and we remain committed to a growing and sustainable dividend. Additionally in the third quarter we completed 300 million in share repurchases. The moves we made earlier this year in modernizing our capital structure by refinancing and expanding our revolver gave us the flexibility to be opportunistic and participate in a repurchase at a very attractive price.

Almost that double digit decrease for those three weeks in June that was.

So sort of out of character, but then it just rebounded in July so I would say, it's been dynamic and maybe maybe the word is a little volatile.

Over the summer a little bit, but then it's an hour seem to stabilize pretty consistently over the past few months in terms of flat year over year. So I don't know if that helps but.

I think thats the story of the last nine or 10 months.

No that's extremely helpful. Theres, a lot of folks out there trying to figure it out on their own and looking at your trends and so just hearing it from you directly as it is very helpful.

Jerry Gahlhoff: Ken will share some additional details on this in a moment. Our modernization efforts continue to progress well but we're not done yet and we look forward to sharing additional developments on this front over the coming quarter, and Closing.

And fully appreciate that you have many different channels in which you acquire customers, but thanks for the detail on that.

Jerry Gahlhoff: Before I turn the call over to Ken, we're excited about where our business stands today. We're very 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.

The other thing I want to ask about customer acquisition costs.

Customer acquisition costs and the digital channel.

I know it has risen over time, just like they have for everybody.

Curious if youre seeing a narrowing I guess in the gap of.

Customer acquisition costs between digital and door to door.

Ken Krause: I'll now turn the call over to Ken. Thanks Jerry and good morning everyone. The third quarter reflects continued strong execution by the Rollins team.

And if so do you do you plan to expand the usage of that DVD channel more extensively in future periods.

Ken Krause: Let me begin with a few highlights. First, we delivered robust revenue growth of over 15% year over year. We saw good growth across each of our service offerings. Organic revenue was up over 8%. Acquisitions drove the other 7% of the total revenue growth. Second, our gross margins were healthy, approaching 54% this quarter. We continued to be positive on the price cost equation and saw good performance. Across several key cost categories. Adjusted EBITDA margin of 24.8% was strong, improving 150 basis points driven by leverage across the P&L.

Okay.

So yes that is something that is a trend that we've seen is as more and more and more pest control companies have gotten more mature in the digital space.

We have seen say the googles of the world.

Be able to pass along higher cost to us in terms of.

Especially for things like pay per click things along those lines. So you see that that ryzen.

I also want to point out just because demand is flat through through say, Google search data or something like that or its down a percent year over year something along those lines doesn't mean, you as a company can't perform or take a larger share of that demand.

Ken Krause: Our gap earnings were 26 cents per share and excluding certain expenses related to the FOX acquisition and severance costs for the restructuring that Jerry just mentioned. Adjusted earnings per share were up 27% to 20% per share. And last but not least, we delivered operating cash flow of $127 million and free cash flow of $121 million, both up to slightly versus last year. Cash flows were impacted by the timing of certain payables, the payment of payables at quarter end.

Through.

We have great marketing teams, certainly at Oregon and throughout some of our other brands as well that do some of the digital activity and they they can.

Achieve more with the dollar spent in that market, but back to your original question. We certainly have seen over time over the last several years an increase in digital cost of customer acquisition that makes that gap between door to door and digital.

Certainly narrower and so when you look at the door to door model than you think.

Ken Krause: Let's look at the quarterly result in a little bit more detail. Quarterly revenue was $840 million, up 15% on a reported basis. Currencies reduced revenue growth by 10 basis points. Organic revenue growth was very healthy at above 8% this quarter, improving from the second quarter levels. We continued to see good demand for our services and our acquisitions, most notably FOX, continued to deliver value in the third quarter. Turning to profitability, we realized 150 basis point improvement in gross profit margin as pricing more than offset inflationary pressures.

That can be a pretty good model, if you sell it right and especially when you consider that door to door selling your density.

Because theyre working neighborhoods and Youre picking up.

Dense pop more dense populations than say onesie twosies stuff coming in from all over our metropolitan area on the digital side. So when you factor the efficiencies that door to door bakes in long term, even though it's a little bit more money upfront. It may it may be.

It's a it's a really strong offering from a long term standpoint as well.

Ken Krause: While FOX was accreted to gross margins by about 30 basis points, we saw 120 basis points of improvement in organic margins in the quarter. Setting aside improvement associated with the more favorable claims experience and the contribution of FOX, we saw 50 basis points of improvement in gross margin as leverage from people cost, as well as materials and supplies, more than offset pressure from fleet due to lower gains on the sales of least vehicles versus a year ago.

Got it thank you.

Youre welcome.

Yes.

Thank you. Our next question comes from the line of Josh <unk> with <unk>.

Please proceed with your question.

Hi, Good morning, Gary and Ken Congrats on a good quarter.

I guess I wanted to ask about the customer acquisition split I guess, you know you mentioned digital and door to door.

<unk> on this call, but one of the ways that you acquire customers could you just give us like a rough ballpark on on how what channels. They typically come through in <unk>.

Ken Krause: We are pleased with our ability to leverage our cost of services provided as we continue to benefit from a more consistent pricing discipline across all of our brands this year. S-GNA cost as a percentage of revenue decreased by 20 basis points in the quarter, excluding the urn out adjustment for the FOX acquisition, S-GNA cost as a percentage of revenue decreased by 30 basis points in the quarter. Peeling back the SGNA layers a bit more, people cost advertising and selling costs, along with insurance and claims, make up the bulk of our SGNA spend. Margins benefited year-over-year associated with improved claims experience and we saw a leverage on our people costs, but were negatively impacted by increased advertising and selling expenses as we invested to drive growth in our business.

Got it.

Asking like what percent of customers come through which channel, yes, exactly yes.

Yeah, we really don't disclose that information.

But I would say that today much larger portion comes through a digital.

Channel.

Or more comes outside of door to door, then comes from door to door.

Yes, there is.

Digital theirs.

Consumer awareness that makes the phone rang or when they call our customers customer agents, where they know our brands. They know our name and they call us automatically and never have to go to Google to do research because they see our name and phone number they see our vehicle in the neighborhood and they make a phone call right. So the word of mouth is still up.

Ken Krause: As Jerry mentioned for the first time in 20 years, we executed a restructuring program at our Atlanta Support Center to further support our modernization efforts. Roughly 15% of our back office employee population was impacted and we intend to reinvest associated class savings in both people and systems that can drive further change and increase productivity as we work to become a better. More efficient provider of shared services for our frontline operations. As I mentioned earlier, we had non-GAP adjustments this quarter for restructuring costs and for FOX acquisition related items.

<unk> channels. So it's really all of those things that come into play to drive that but certainly digital is an important part.

But we also don't like to over rely on it as well.

Right right that makes sense, okay. Thanks for the color there.

I also think about technician sales, we've put a great deal of emphasis.

And one of the things that you learned in this business is when youre not staffed your technicians don't sell so if they are if they are to swamp with too much work to do they're not going to go out and when that.

Ken Krause: These pulled out approximately $10 million on a pre-tax basis and were related primarily to Atlanta Support Center severance costs, along with perks of accounting amortization and the fair value of contingent consideration on the FOX acquisition. GAP operating income was $177 million up 22% year-over-year adjusted operating income was $187 million up the approximately 29% versus the prior year on 15% total revenue growth. EBITDA was $202 million up 19% year-over-year and EBITDA margin was a healthy 24.1%.

Somebody down the road talks to them, they're going to be a little less hesitant to want to sell that new job because it's just more work for them, but when you are staffed and your staff to healthy levels of your technicians get engaged so we see increases in our our technician sales in their activities as a result of our better better staffing levels as well. So it is all of these ways that we can acquire customers.

Yeah.

Right.

Thanks, Gary and then I guess on the restructuring side of things.

Is there a way to think about the payback period of the costs and what kind of savings you expect to generate.

Ken Krause: Our adjusted EBITDA was $208 million up over 22% and representing a 24.8% margin, margins were up 150 basis points versus a year ago primarily related to the improvements in gross margin discussed previously. FOX was neutral to EBITDA margins in the quarter. Year-to-date our adjusted EBITDA margins improved 90 basis points versus a year ago with 20 basis points of that improvement coming from the FOX acquisition. Excluding this 70 basis points was driven across the remainder of the business.

From that from those efforts.

Yes, that's an attractive payback Josh thanks for the question when you look at the spend five or so million dollars of spend there is probably close to $8 million to $10 million of compensation associated with that so my experience has been a one year payback is very acceptable you can see six months payback and spend associated with restructuring.

With that said I think if you look at the prepared commentary, we're focused on reinvesting as well and so there is an opportunity to reinvest in new talent and new talent like Lindsay she kicked off the call today, our new head of IR.

New folks across all of our finance and accounting.

Ken Krause: As we have consistently indicated, we like to look at the business using incremental margins or meaning what percentage of every additional dollar or revenue growth is converted to EBITDA. On an as reported basis, we generated incremental margins of over 29% and excluding the restructuring costs and the additional costs associated with the earnout on our recent acquisition, incremental margins were almost 35%. Year-to-date we generated incremental margins on an as reported basis of over 27% and on an adjusted basis, incremental margins were almost 30%.

We're making significant changes in as well and other back office functions. So so we're looking at how do we upgrade the talent how do we improve how do we modernize what we do and some of that is going to take some reinvestment of that $8 million to $10 million.

Sure that makes sense. Thanks, Dan Thanks, Jay Thank.

Thank you both for your time.

Thank you.

Okay.

Thank you. Our next question comes from the line of Eddie <unk> with Stifel. Please proceed with your question.

Good morning, Thank you for taking my questions and congratulations on a strong quarter again.

So what was the internal cost inflation is it still predominantly fleet related.

Ken Krause: Quarterly gap net income was $127 million or 26 cents per share increasing from 22 cents per share in the same period a year ago. Adjust the net income was $136 million or 28 cents per share. The effective tax rate was approximately 26% in the quarter and for the first nine months the ETR was 26% as well, up over 100 basis points compared with 2022 driven by higher foreign income tax.

How do we how has this trying to actually through the year.

Just just kind of related to that you talked about price cost spread it remains positive I think it was about 50 basis points, how has that trended versus <unk> and how do we think about the remainder of the year and into 2024.

So it's Ken I think I'll take that question.

Ken Krause: 30 cash flow and the balance sheet quarterly free cash flow remained healthy. We generated $121 million a free cash flow in the quarter versus $119 million a year ago. As previously discussed, quarterly free cash flow was impacted by the timing of certain payables primarily related to our door to door sales. Year-to-date free cash flow was $354 million and increased with 11% versus last year. During the quarter we made acquisitions totaling $21 million and we paid $64 million in dividends and we completed a share repurchase of $300 million at below $35 a share.

Focus is to continue to.

Have a positive.

Positively manage the price cost equation.

If you look at the input cost in our business.

A large percentage on.

On our cost of services provided our people cost materials and fleet.

For the most part we've done a really good job leveraging and improving the efficiency over those costs throughout 2023.

If I go back to Q2 for example.

We saw improvements in margin.

All of that was related to Fox. We also had headwinds if you remember from the casualty reserve, but when you separate those two in the second quarter, we saw improved margin.

Ken Krause: We repurchased 8.7 million shares and used our revolver to fund this purchase. We expect this to be less than 1% dilutive to result from the first year and minimally accrued in the second year. That remains negligible and death the EBITDA is below one times on a gross and net level. Our strong cash flow profile has enabled us to execute a very balanced capital allocation strategy this year. Year-to-date, we have invested approximately $350 million in acquisitions, repurchased $300 million of our shares and paid $192 million in dividends a 30% increase year-to-day.

<unk> to what we saw this quarter, what we saw this quarter was outsized improvement associated with the casualty claims and insurance costs. If you go back to last year in the third quarter, we were very transparent in talking about.

Very unfavorable headwind associated with insurance and claims so we were able to see improvement from what we saw last year.

Our focus is to continue to be positive on the price cost equation.

Really the only headwind we saw in the quarter within our organic costs are within fleet, which specifically was related to lower gains on the sale of leased vehicles.

Ken Krause: Additionally, we just announced another 15% increase to our dividend earlier this week. This marks over two decades of consecutive increases. We remain active in pursuing additional acquisitions and looking at multiples, we remain very disciplined. Year-to-date, we have invested approximately $350 million in acquisitions and the market remains highly fragmented and we continue to be an acquire of choice and a very active participant in our markets.

We actually talked about that in Q2 and highlighted that we would be seeing some of that here in Q3, we did see it but we were able to fully offset that and see improvements and so that's the focus continued improvement in margins as we go forward.

Alright, Thank you so much and just as.

Follow up I think free cash flow conversion and you pointed out there was a sort of a payment a big payment to make it <unk> brought it down to 94% conversion.

Ken Krause: In closing, our performance this quarter continues to demonstrate the strength of our business model and the engagement level of our team. Our family of brands are driving profitable growth and we are focused on continuous improvement across the business. We remain focused on providing our customers with the best customer experience and driving growth both organically and through disciplined acquisitions.

Year to date, you're tracking around 110 historically.

The average is around 120, so do you expect <unk> sort of picks up and you actually can get back to that 120% conversion for the year.

How do we think about the long term.

Beyond 2023, and maybe into 2024, how much more candidates.

Jerry Gahlhoff: With that, I'll turn the call back over to Jerry. Thank you, Ken.

Unknown Executive: We're happy to take any questions this time. Thank you. If you'd like to ask your question, please press start one on your telephone keypad. A confirmation tone will indicate your line and then question two. You may press start two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start key. In each of the time we ask that you each keep to one question and one follow up. Thank you.

Yeah, you know, it's a business that's very capital light and so when you look at the cash flow profile, it's hard to find the business.

Investing 7% to 8% in working capital.

It has very little Capex and enjoys the benefits of that and has been compounding cash flow at 10% to 15%. So our focus is just that how do we continue to compound cash flow in that teen range. How do we continue to convert our net income and earnings at above 100% of net income.

Ashish Sabadra: Our first question comes from a line of Anish Sabadra with RBC Capital Markets. Please proceed with your question. Thanks for taking my question.

The third quarter had an impact we saw payables come down considerably we paid.

Some payables as we closed out the third quarter and our focus is to improve that as we go into Q4 and beyond.

Jerry Gahlhoff: It's good to see the strong momentum in the business and just wanted to better understand. Can you, you obviously talked about multiple different avenues to attract new customers? I was just wondering if you could comment on the underlying demand environment. Have you seen any slowdown in the demand environment? You obviously talked about month to month being consistently strong, but have you seen better focus on certain selling strategies versus another?

And so that continues to be our focus will continue to focus on driving high levels of cash flow performance and compounding and the range as I previously discussed.

Thanks, a lot.

Thank you as a reminder, if you'd like to join the question queue. Please press star one on your telephone keypad. Our next question comes from the line of Stephanie Moore with Jefferies. Please proceed with your question.

Hello This is Harold.

And for Steffan anymore.

Jerry Gahlhoff: I think this is Jerry. Thanks for the question. I think some people think the entire market demand is driven by whatever someone's seeing in digital. And that's not always the case, especially for our business. When you look at the digital side, it was relatively flat, or maybe even slightly down on the digital side. And that's really where our strategy to have lots of approaches for how we acquire customers, it plays a differentiating factor for us. So while the digital segment was certainly, I think, on the flatish to slightly downside, our diversified strategy is really what's paying off for us.

So I guess quick question.

The weather trends in the quarter.

Hi, There Hi, this question Jos.

So 2000.

Tony.

Increase.

The hiring of sales professionals so.

Are those individuals are full productivity.

Got it and no organic growth in the quarter. Thank you.

So on the this is Jerry.

On the weather side, we had a pretty good weather quarter.

Last year as Ken mentioned, we had a.

Our hurricane that came through at the end of September effect itself in particular southwest Florida.

So we didn't have that type of event.

Jerry Gahlhoff: The only thing I would add there, just two points. One, the growth across the business is quite impressive. When I look at the business in the quarter, we saw a broad-based growth, not only on a quarterly basis, we saw a consistent growth, but broad-based growth across all of our family of brands. So that was really good to see first and second, as we exited the quarter and went in October, we continued to see a really healthy demand level.

So I would generally.

<unk> horizon.

Favorable.

And then as it relates to hiring of salespeople, we've been very effective and when you look at our commercial growth.

Lot of the investments we've made both in commercial and to some degree and certainly the residential side and our termite and ancillary as a result of the effectiveness and the efficiencies that we're getting from a sales productivity standpoint of those sales.

Jerry Gahlhoff: And if you might recall, a year ago, we saw a lot of business from a really tough hurricane season in September get pushed into October. So to see good momentum in October also gives us a bit of optimism as we think about the future. I think it's also important to mention that what we see, what we've seen across the US and Canada in particular across North America is that all of our businesses are doing well and don't geographically, not only from a brand, individual brand strategy, but also from a geographic strategy. They're really all doing quite well. That's a great color.

Sales teams that we've added and you look at our commercial growth.

Looking back over over the third quarter of 2022, we've added over 60 more commercial account managers into the Orkin brand alone over the past year, that's really helping us as an investment we make in the businesses is helping us drive that growth, we see a great opportunity in.

The commercial space.

And those are the investments that we've been making over the last 12 months.

Thank you and then I guess just on.

M&A.

Ken Krause: And just maybe on my follow-up, I wanted to talk about the solid incremental margins that we've seen of 35%. As we think about the modernization efforts that you've worked on, how should we think about the incremental margins going forward? Is that 30 to 40% sustainable going forward?

Given where interest rates are in that certain macro are you seeing more willing.

Sellers.

How much Tvs in the market and then I guess.

Alright for acquisition strategy.

Are you acquiring.

Traditional companies are more accompany some of that effect.

Ken Krause: Thanks. Yeah, that's a great question, Ashish. Thank you for that question. What I would say is our focus is to continue to deliver a very healthy incremental margin profile. This quarter, you're correct in saying that we were at 35%. We continue to see an opportunity to deliver 30% incremental margins upwards of 35 to 40 depending on a multitude of factors. But we certainly continue to have a confidence level in our ability to deliver that 30% incremental margin and continue to see even a margin's lift as we go into the future.

Bob's first control got it.

Our daughter door like.

Thank you.

We're seeing everything still in the market.

Businesses are still.

The owners are still interested in selling their businesses and the pipeline flow remains good and we're open to looking at all types of businesses that fit our model that.

Help us continue the growth pattern that that.

That we strive to achieve.

Help us that are accretive to our margins that are going to help us grow in a healthy positive way.

Ken Krause: It's a great business. It's an essential service. It's got pricing and we're focused on continuous improvement in our across our business, not just in our back office. So with all those points, we continue to focus on delivering a very healthy incremental margin profile. That's great color. We're focused on the solid question.

Unknown Executive: Thank you.

So.

That side of it still seems very positive what would you add to that Ken yes. The only thing I would add is pricing, which everybody is always focused on what are we paying for acquisitions two points I want to.

Raised with respect to that one is we don't compete on price.

Our focus is to be the acquirer of choice and we've been very successful being the acquirer of choice for a very long period of time when people are ready to sell their business and they're focused on brand preservation and there are people they sell to our business and we've been very successful we're being the acquirer of choice for <unk>.

Vicki Liu: Our next question comes from Line, Evike Liu with Bank of America. Please continue with your question. Hi, good morning. Thank you for taking my question.

Jerry Gahlhoff: This is Vicki on very Jason Haas. To turn off, I'm just curious, have you seen any pushback from the 4% price increase or is it more business as usual as you see? Price increase has been a very healthy environment as well. We've seen from a standpoint a price increase. You know, you may see certain zip code that you might be challenges in, but you see other zip codes where you don't see much challenge at all. So, but overall, we see it as a very healthy environment for our central services.

Long period of time, when we look at the business. This year, we've invested $350 million in acquisitions I would say that the multiples that we've paid for that $350 million investment is probably below the overall long term average from a from a multiples perspective. So so we feel.

Good about what we're spending how we're competing and and the success that we're driving through acquisition.

Jerry Gahlhoff: Thank you. And then to follow up, do you think your customers can take another price increase on a similar scale in 2024?

Jerry Gahlhoff: We're going to evaluate this is Jerry. We're going to evaluate that we're into here in the fourth quarters when we start really taking a look at our price increase data, the results from the last nine or 10 months and say, what happened? What did we learn and create our strategies for for next year?

Thank you. Our next question comes from the line of John Mcdonald with Wells Fargo. Please proceed with your question.

Hey, good morning, Thanks for squeezing me in maybe just to double click quickly on the commercial side could you maybe just talk more about the targeted vertical strategy as well as anything on technology that really is accelerating the kind of organic growth profile and maybe also just again to 60.

Jerry Gahlhoff: And I guess my best advice to you would be to stay tuned will probably update you on that at some point in the in the first quarter. Thank you so much. Thank you.

Added reps have been helpful, but just to talk about the sustainability of that growth going forward.

Tim Mulrooney: Our next question come to my line of Tim Mulroney with William Blair, please proceed with your question. Can Jerry, good morning. All right, good morning, Tim. Thank you for taking my questions. Two quick one. So I'm customer acquisition. Jerry, I think I think in your response to another question, you said the digital channel was kind of flat to down in the third quarter. My question on that is, is that new? Like, was it often the first and second quarters of this year?

So on the commercial side with targeted verticals.

<unk> talked about this over the over the last few years, especially as we are kind of coming out of the tail end of Covid and the investments that we've made there.

We know that.

Our research on our customer database shows there are certain.

Much more highly desirable verticals that we like to sell into in service into things like hospitality.

Our health care hospitals logistics warehouses distribution centers not that we don't want everything commercial but we have really targeted at our focus on certain verticals and when we bring on new sales.

Tim Mulrooney: Just trying to get a sense for how consumer demand in this particular channel has trended through the year? I would characterize that in the in the first five months of the year as somewhat up, I wouldn't say it was something that we didn't see some sort of double digit increases very consistently. We may have had better some better months than others, but it wasn't it wasn't up at a higher significant higher level than prior year.

Say, a commercial account managers that Oregon were really getting them focused and targeted on working that type of material.

And going after those types of customers from a <unk> standpoint, so it's really.

All right.

Ive also discussed some of our tools like Mark Caddo that help us from a <unk> standpoint that have helped us get get R. R outside salespeople on the commercial side the warmer leads in.

Tim Mulrooney: There were ups and downs. And then it was really June is where we saw that that almost that double digit decrease for those three weeks in June. That was sort of out of character. But then it just rebounded in July. So I would say it's been dynamic and maybe maybe the word is a little volatile over the summer a little bit, but then it's now seem to stabilize pretty consistently over the past few months in terms of flat year over year.

Make them more productive and make them more productive quicker.

That's a relationship so it takes some time so we've been very delivered about that.

Since.

We started this program probably midway through Covid seeing this as an opportunity come in once we are on the backside of Covid.

That would be great opportunity one capitalize on it.

Tim Mulrooney: So I don't know if that helps, but I think that's the story of the last nine or 10 months. No, that's extremely helpful. There's a lot of folks out there trying to figure it out on their own and looking at your, you know, trends. And so we get just hearing it from you directly is very helpful and fully appreciate that you have many different channels of which you acquire customers, but thanks for the detail on that.

Again long term view.

Our long term approach to our business and Thats, where youre seeing the results and the payoff of that now so and then on the technology side.

Certainly our marketing teams in particular, when we talk about accelerating organic growth.

There are technologies, there as campaigns that we run where we're using technology, where we're using.

Tim Mulrooney: The other thing I want to ask about customer acquisition cost, you know customer acquisition costs in the digital channel. I know it's written over time, just like they have for everybody. I'm curious if you're seeing a narrowing, I guess, in the gap of customer acquisition costs between digital and door to door. And if so, you know, do you plan to expand the usage of that D to D channel more expensively in future periods?

Some automation the marketing teams are certainly innovative at looking at strategies along those lines.

I don't like to get into specifics, but I can assure you that they are very creative and.

Very helpful to our sales teams in terms of great creating that organic demand.

Great color. Thank you and then maybe just to quickly touch on competition have you seen any change in the competitive landscape and perhaps has there been any pullback in either smaller regional players or.

Tim Mulrooney: So, yeah, that is a trend that we've seen as more and more pest control companies have gotten more mature in the digital space. We have seen, say, the Googles of the world be able to pass along higher cost to us in terms of, especially for things like paper click, things along those lines. So, you know, you see that rise. And, you know, I also want to point out, just because demand is flat through, say, Google search data or something like that.

A large national players.

Competitively I mean, it's.

Still it's still a healthy competitive market highly fragmented and lots of players out there.

So no we haven't seen any significant change from a competitive standpoint.

That's probably noteworthy are our remarkable.

It's still competitive out there. Thank you.

Perfect. Thanks, guys. Congratulations on the strong results. Thank you. Thank you.

Tim Mulrooney: It's down a percent year over year, something on those lines. Doesn't mean you as a company can't perform or take a larger share of that demand through, you know, we have great marketing teams. Certainly at Orkin and throughout some of our other brands as well that do some of the digital activity and they can achieve more with the dollars spent in that market. But back to your original question, we certainly have seen over time over the last several years an increase in digital cost to customer acquisition that makes that gap between door to door and digital certainly narrower.

Thank you. Our next question comes from the line of Oliver David with Wedbush. Please proceed with your question.

Yeah morning, guys. Just a couple of questions for me you mentioned on the key to cool that we've got at Grace is running at about 10% in July where it sort of implies that the rest of the quarter is about seven 5%. So can you just talk tree. The sequential movement, you sort of witnessed through the months of integral threatened and then just another one on grace the full margin be able to give a split.

Organic growth between kind of new customers and cross selling into the existing customer base.

So on the second point with respect to the margin profile of customers. We Unfortunately do not track that and have that enjoy that level of detail in the business, but I can tell you is.

Tim Mulrooney: And so, when you look at the door to door model, you think that can be a pretty good model if you sell it right and especially when you consider the door to door is selling you density. Because they're working neighborhoods and you're picking up more dense populations than, say, onesy, twosy stuff coming in from all over a metropolitan area on the digital side.

Cross sell is certainly always a big part of our strategy. When you look at the strategy its important to sell multiple services to one customer for a multitude of reasons. So it's certainly continuing to be a focus for us and we're continuing to see.

Jerry Gahlhoff: So when you factor the efficiencies that door to door based in long term, even though it's a little bit more money upfront, it may, it may be a, it's a, it's a really strong offering from a long term standpoint as well. Got it.

Good momentum in that part of our business, yes, when you look sequentially between.

July August September from a growth rate Youre right July was pretty big month, where we saw.

Our higher levels of organic but then as we move through the quarter. It remained strong too. It was it was more more in line with our historical averages.

Unknown Executive: Thank you.

There was strong organic growth.

Josh Can: Our next question comes in line of Josh can, would you be, please, for sure, be your question. Hi, good morning, Jury and Ken congrats on a good quarter. I guess I wanted to ask about the customer acquisition split, I guess, you know, you mentioned digital and door to door, mostly on this call, but I guess, you know, of the ways that you acquire customers, could you just give us like a rough ballpark on on how what channels they typically come through in?

To close out the quarter as well yeah. The only thing that you would add on that is.

And I don't want to start to split hairs, but when you look at Q2, we talked at the end of Q2 about a weak June and so it's not out of the question.

Thanks.

Out of the realm of reason to think that some of that business. In Q2 may have pulled into Q Q3 in July and pushed that number up a bit and so but theyre looking.

Josh Can: Got your, your asking like what percent of customers come through which channel? Yeah, exactly. Yeah, we really don't just, don't disclose that information. But, but I would say that today, much larger portion comes through a digital channel or more comes outside of door to door than comes from door to door. Yeah, there's, there's digital, there's, you know, the consumer awareness that makes the phone ring when they call our customers, customer agents where they know our brands, they know our name and they call us automatically and never have to go to Google to do a search because they see our name phone number, they see our vehicle in the neighborhood and they make the phone call.

Looking at Gerry there's nothing other than that that was really out of the ordinary with respect to growth it was healthy throughout.

Thanks, and then just can you give a split of organic growth between new customers and cross selling.

No we don't.

We don't Unfortunately, we don't we don't track that level of detail to a point, where I can provide that to you right now.

But I can tell you that the gross healthy I mean, the growth is healthy across both of those areas, it's been healthy for us.

Okay. Thanks, and then just on adjusted EBITDA last year I think it was negatively impacted by 140 basis points in the casualty reserve increase so I guess, if you add that back to Lockheed Martin you sort of get $24 seven versus the $24 eight delivered this quarter. So can you just talk about the moving parts and it's still a pretty big.

Josh Can: Right, so the word amount is still a powerful channel, so it's really all those things that come into play to drive that, but it's certainly digital is an important part, but we also don't like to over rely on it as well. Right. That makes sense. Okay. Thanks for the color there.

Drag on margin.

The big point, you're missing with that is the fact that the insurance market has been really challenging and so claims are one thing, but insurance is continuing to tighten up on us and so when you look at last year, you did have that negative impact on the claims that came through but unfortunately in those.

Jerry Gahlhoff: And we also think about technician sales. We've put a great deal of emphasis. And one of the things that you learn in this business is when you're not staffed, your technicians don't sell. So if they are, if they're too swamp with too much work to do, they're not going to go out and when that when somebody down the road talks to them, they're going to be a little less hesitant to want to sell that new job because it's just more work for them.

Jerry Gahlhoff: But when your staff and your staff to healthy levels, your technicians get engaged. So we see increases in our technician sales and their activities as a result of our better, better staffing levels as well. So it's all these ways that we can acquire customers. Right. Thanks. Thanks, Jerry.

Come down this year in Q3, but the insurance costs have not come down and so so you're seeing really good improvement in the underlying business.

It's not a 150 basis points and Thats why we were transparent in saying that in the quarter. When you set the improvement on the on the casualty reserve Aside you set the Fox improvement aside we saw 50 basis points of improvement in the underlying margins in the quarter alone. So, but we feel pretty good about our ability to continue to improve margins as we.

Ken Krause: And then I guess on the restructuring side of things, is there a way to think about the payback period of the costs and what kind of savings you expect to generate from those efforts? Yeah, I think a track to payback, Josh. Thanks for the question. When you look at the spend, the five or so million dollars of spend, there's probably close to eight to ten million dollars of compensation associated with that.

Go forward.

Okay. Thanks very much.

Thank you.

Thank you, ladies and gentlemen that concludes our question and answer session I will turn the floor back to management for any final comments.

Thank you everyone for joining us today, we appreciate your interest in our company and we look forward to updating you on our fourth quarter earnings call early next year. Thanks again.

Ken Krause: So my experience has been one year payback is very acceptable. You can see a six month payback and a spend associated with restructuring here. With that said, I think if you look at the prepared commentary, we're focused on reinvesting as well. And so there is an opportunity to reinvest in new talent, a new talent like Lindsey, you know, she kicked it off the call today, a new head of IR, new folks across all of finance and accounting, IT, we're making significant changes in as well and other back office functions.

Thank you. This concludes today's conference call you may disconnect. Your lines at this time. Thank you for your participation.

Ken Krause: So, so we're looking at how do we upgrade the talent? How do we improve? How do we modernize what we do? And some of that is going to take some reinvestment of that eight to ten million. Sure, that makes sense. Thanks. Thank you both for your time. Thank you.

Sureshtha: Our next question comes from line of the Sureshtha with default. Please proceed with your question.

Ken Krause: Good morning. Thanks for taking my questions and congratulations on strong quarter again. So what was the internal cost inflation? Is it still predominantly fleet related and how do we, how has this trend actually through the year? And just kind of related to that, you talked about price, cost, bread, the remains positive. I think it was around 50 basis points. How has that trended, you know, versus 2Q or 1Q? And how do we think about it for remainder of the year and then to 2024?

Ken Krause: So with Ken, I think I'll take that question. Our focus is to continue to have a positive, positively manage the price cost equation. If you look at the input cost in our business, a large percentage on, on a cost of services provided are people cost materials and fleet. For the most part, we've done a really good job at leveraging and improving the efficiency over those costs throughout 2023. As I go back to Q2, for example, we saw improvements in margin.

Ken Krause: Some of that was related to Fox. We also had headwinds, if you remember, from the casualty reserve. But when you separate those two in the second quarter, we saw improved margin similar to what we saw this quarter. What we saw this quarter was outsized improvement associated with the casualty claims and insurance costs. If you go back to last year and a third quarter, we were very transparent in talking about a very unfavorable headwind associated with insurance and claims.

Ken Krause: So we were able to see improvement from what we saw last year. But our focus is to continue to be positive on the price cost equation. Really, the only headwind we saw in the quarter within our organic cost was in fleet, which specifically was related to lower gains on the cell of least vehicles. We actually talked about that in Q2 and highlighted that we would be seeing some of that here in Q3. We did see it, but we were able to fully offset that and see improvements.

Ken Krause: And so that's the focus, continued improvement in margins as we go forward. All right. Thank you so much. And just to follow up, I think three cash flow conversions, and you pointed out there was a sort of a payment, a big pay me to make a three shoot, brought it down to 94% conversion. I think you're the day you're tracking around 110. Historically, it averages around 120. So do you expect four or two sort of picks up and you actually get back to that 120% conversion for the year?

Ken Krause: And how do we think about it long term? Like a beyond 2023 and maybe into 2024? How much more can this improve? Yeah, you know, it's a business that's very capital light. And so when you look at the cash flow profile, it's hard to find a business. It's investing 78% and working capital has very little capex and enjoys the benefits of that and has been compounding cash flow at 10 to 15%.

Ken Krause: So our focus is just that. How do we continue to compound cash flow in that teen range? How do we continue to convert net income and earnings at above 100% of net income? The third quarter had an impact. We saw payables come down considerably. We paid some payables as we closed out the third quarter. And our focus is to improve that as we go into Q4 and beyond. And so that continues to be our focus. We're continuing to focus on driving high levels of cash flow performance and compounding and the ranges I previously discussed. Thanks a lot. Thank you.

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Harold Antor: Our next question comes from a line of Stephanie Moore with Jeffries. Please proceed with your question.

Jerry Gahlhoff: Hello, this is Harold. I'm Tom on for Stephanie Moore. So yes, quick question. Did how did weather trend in the water and how did how did it impact this question? And also in 2021, and they increase the hiring that sales professionals. So, you know, auto individuals are full productivity. And how does that impact more organic growth in the quarter? Thank you.

Jerry Gahlhoff: So on the, this is Jerry. On the weather side, we had a pretty good weather quarter. The last year as Ken mentioned, we had a hurricane that came through at the end of September. In fact, in particular, Southwest Florida. So we didn't have that type of event. So I would generally categorize as favorable. And then as it relates to, you know, hiring a salespeople, we've been very effective. And when you look at our commercial growth, a lot of the investments we've made both in commercial and to some degree, certainly the residential side in our termite and ancillary is a result of the effectiveness and the effectiveness.

Jerry Gahlhoff: And we're getting from a sales productivity standpoint of those sales, the sales teams that we've added. And you look at our commercial growth looking back over over the third quarter of 2022, we've added over 60 more commercial account managers into the working brand alone over the past year. That's really helping us. That's an investment we make in the business is helping us drive that growth. We see a great opportunity in the commercial space. And those are the investments that we've been making over the last 12 months. Thank you.

Jerry Gahlhoff: And then I just just on M&A, you know, given where interest rates are, and I said, Michael, are you seeing more willing sellers? How much TV is in the market? And then I guess I, for your acquisition strategy, are you acquiring more traditional companies or more companies similar to the fact that folks' personal growth are daughter-door like?

Ken Krause: Thank you. We're seeing everything still in the market. Businesses are still, owners are still interested in selling their businesses, and the pipeline flow remains good. And we're open to looking at all types of businesses that fit our model, that help us continue the growth pattern, that we strive to achieve, help us, that are creative to our margins, that are going to help us grow in a healthy, positive way. So, you know, that side of it still seems very positive.

Ken Krause: What would you add to that, Ken? Yeah, the only thing I would add is pricing, which everybody's always focused on, what are we paying for acquisitions? Two points I want to raise with respect to that. One is, we don't compete on price. Our focus is to be the acquirer of choice, and we've been very successful being the acquirer of choice for a very long period of time. When people are ready to sell their business, and they're focused on brand preservation and their people, they sell to our business.

Ken Krause: And we've been very successful being the acquirer of choice for a very long period of time. When we look at the business this year, you know, we've invested $350 million in acquisitions, I would say that the multiples that we've paid for that $350 million investment is probably below the overall long-term average from a multiple's perspective. So, we feel good about what we're spending, how we're competing, and the success that we're driving through acquisition.

John Mazzoni: Thank you. Our next question comes from the line, so John Mazzoni with Wells Fargo. Please pursue with your question. Hey, Morgan, thanks for squeezing me in. Maybe just to double-click quickly on the commercial side. Could you maybe just talk more about the targeted vertical strategy as well as anything on technology that really is accelerating the kind of organic growth profile? And maybe also just, again, the 60 added reps have been helpful, but just to talk about the sustainability of that growth going forward, thanks.

Jerry Gahlhoff: So, on the commercial side with targeted verticals, we've talked about this over the last few years, especially as we're kind of coming out of the tail into COVID and the investments that we've made there. We know that, you know, our research on our customer database shows that there are certain much more highly desirable verticals that we like to sell into and service into, and things like hospitality, or healthcare, hospitals, logistics, warehouses, distribution centers.

Jerry Gahlhoff: Not that we don't want everything commercial, but we have really targeted our focus on certain verticals. And when we bring on new, say, commercial account managers at Orkin, we're really getting them focused and targeted on working that type of material and going after those types of customers from a B2B standpoint. So it's really, I've also discussed some of our tools like Marquetto that help us from a B2B standpoint that have helped us get our outside salespeople in the commercial side, the warmer leads and makes them more productive and make them more productive quicker.

Jerry Gahlhoff: That's a relationship sell. It takes some time. So we've been very delivered about that. Since we started this program, probably midway through COVID, seeing this as an opportunity coming once we were on the backside of COVID that would be a great opportunity for us to capitalize on. And we're, again, long-term view and a long-term approach to our business and that's what you see in the results and the pay off of that now.

Jerry Gahlhoff: And then on the technology side, Certainly, our marketing teams, in particular, when we talk about accelerating organic growth, there are technologies. There's campaigns that we run where we're using technology, we're using some automation. The marketing teams are certainly innovative at looking at strategies along those lines. I don't like to get into specifics, but I can assure you that they're very creative and very helpful. It's helpful to our sales teams in terms of great creating that organic demand. Great color, thank you.

Jerry Gahlhoff: And then maybe just a quickly touch on competition. Have you seen any change in the competitive landscape? And perhaps have there been any pullback in either smaller regional players or large national players? Competitively, it's still a healthy competitive market, highly fragmented and lots of players out there. So we haven't seen any significant change from a competitive standpoint that's probably noteworthy or remarkable. It's still competitive out there. Thank you. Perfect. Thanks again.

Unknown Executive: Congratulations on the strong results. Thank you.

Oliver Davies: Our next question comes from the line of Oliver David with Red Merit Atlantic. Please proceed with your question. Yeah, morning, guys. There's a couple of questions for me. You mentioned on the key to cool that organic growth is running at about 10% in July, which sort of implies that the rest of the quarter is about 7.5%. So can you just talk through the sequential movement? You sort of witnessed through the months and into quarter end and then just another one on growth before margin.

Oliver Davies: Are you able to give a split of organic growth between kind of new customers and cross selling into the existing customer base? So on the second point with respect to the margin profile of customers, we unfortunately do not track that and have that enjoy that level of detail in the business. But what I can tell you is, you know, cross sell is certainly always a big part of our strategy. You know, when you look at the strategy, it's important to sell multiple services to one customer for a multitude of reasons.

Oliver Davies: And so it's certainly continuing to be a focus for us and we're continuing to see good momentum in that part of our business. Yeah, when you look sequentially between July, August, September, from a growth rate, you're right, July was a pretty big month where we saw higher levels of organic. But then as we move through the quarter, it remains strong too. It was more in line with our historical averages. It was strong organic growth to close out the quarter as well.

Oliver Davies: The only thing you would add on that is, you know, and I don't want to start to split hairs, but when you look at Q2, we talked at the end of Q2 about a week June. And so it's not out of the question to think or out of the realm of reason to think that some of that business in Q2 may have pulled in the Q3 in July and pushed that number up a bit.

Oliver Davies: But I don't, you know, looking at Jerry, there's nothing other than that that was really out of the ordinary with respect to growth. It was healthy throughout. Thanks. Sorry, I mean, just can you give a split of organic growth between new customers and cross-selling? No, we don't, I mean, there's, there's, we don't, unfortunately, we don't, we don't track that level of detail to a point where I could provide that to you right now.

Oliver Davies: But I can tell you that the growth is healthy. I mean, the growth is healthy across both of those areas. It's been healthy for us. Okay, thanks. And then just on a jotted EBITDA last year, I think it was negatively impacted by 140 basis points from the casualty reserve increase. So I guess if you add that back to last year's margin, you sort of get 24.7 versus the 24.8 deliver this quarter.

Oliver Davies: So can you just talk about the moving parts? And is that still a pretty big drag on margin? The big point you're missing with that is the fact that the insurance markets have been really challenging. And so claims are one thing, but insurance is continuing to kite on us. And so when you look at last year, you did have that negative impact on the claims that came through. But unfortunately, and those have come down this year in Q3, but the insurance costs have not come down.

Oliver Davies: And so you're seeing really good improvement in the underlying business. It's not 150 basis points. And that's why we were transparent and saying that in the quarter, when you step the improvement on the casualty reserve aside, you step the fox improvement aside, we saw 50 basis points of improvement in the underlying margins in the quarter alone. But we feel pretty good about our ability to continue to improve margins as we go forward. Okay. Thanks very much. Thank you.

Unknown Executive: Ladies and gentlemen, that concludes our question and answer session.

Unknown Executive: I'll turn the floor back to management for any final comments. Thank you, everyone, for joining us today. We appreciate your interest in our company, and we look forward to updating you on our fourth quarter earnings call early next year.

Unknown Executive: Thanks again.

Unknown Executive: Thank you.

Unknown Executive: This concludes today's conference call. You may disconnect your lines at this time. Thank you for your...