Q1 2024 Rollins Inc Earnings Call
Breathing flocking to Rollins, Inc. First quarter 'twenty 'twenty four earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
Operator: Greetings. Welcome to Rollins Inc.'s first quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Lyndsey Burton, Vice President of Investor Relations. Thank you. You may begin.
Please note. This conference is being recorded I will now turn the conference over to Lindsey Burke Vice President of Investor Relations. Thank you you may begin.
Lyndsey Burton: Thank you and good morning, everyone. And addition to the earnings release that we issued yesterday. The company has also prepared to supporting slide presentation. The earnings release and presentation are available on our website.
Lyndsey Burton: Thank you 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.rollins.com. We have included certain non-GAAP financial measures as part of our discussion this morning. The non-GAAP reconciliations are available in the appendix of today's presentation, as well as in our earnings release. The company's earnings release discusses its business outlook and contains certain forward-looking statements.
Lyndsey Burton: Www Dot Rollins dotcom we.
Speaker Change: We have included certain non-GAAP financial measures as part of our discussion.
Speaker Change: The non-GAAP reconciliations are available in the appendix of today's presentation as well as in our earnings release.
Speaker Change: The company's earnings release discusses our business outlook and contains certain forward looking statements.
Lyndsey Burton: 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.
Speaker Change: 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.
Lyndsey Burton: 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, 2023. On the line with me today and speaking are Jerry Gahlhoff, President and Chief Executive Officer, and Ken Krause, Executive Vice President, Chief Financial Officer, and Treasurer. Management will make some opening remarks, and then we'll open the line for your questions. Before I turn it over to Jerry, I want to remind everyone of our upcoming Investor Day on May 17 in New York City. We're looking forward to hosting the investment community and discussing our strategies for growing our business and driving value for our stakeholders. Jerry, would you like to begin? Thank you, Lyndsey.
Speaker Change: 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 2023.
Speaker Change: On the line with me today are speaking, our Cherokee off President and Chief Executive Officer, and Ken Krause Executive Vice President Chief Financial Officer and Treasurer.
Speaker Change: Management will make some opening remarks, and then we will open the line for your questions before I turn it over to Gerry.
Speaker Change: Wanted to remind everyone of our upcoming Investor day on May 17th in New York City, We're looking forward to hosting the investment community and discussing our strategy for growing our business and driving value for our stakeholders. Jerry would you like to begin thank.
Jerry E. Gahlhoff: Thank you, Lyndsey. Good morning, everyone.
Jerry: Thank you Lindsey and good morning, everyone.
Jerry E. Gahlhoff: 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 first quarter was highlighted by an increase in revenue of nearly 14% to $748 million. We delivered healthy organic growth of 7.5% in the quarter, despite some unfavorable and erratic weather in January compared to last year, which Kim will discuss in more detail.
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.
Jerry: Our financial performance for the first quarter was highlighted by an increase in revenue of nearly 14% to $748 million.
Jerry: We delivered healthy organic growth of seven 5% in the quarter. Despite some unfavorable and erratic weather in January compared to last year, which Ken will discuss in more detail.
Jerry: Overall, we continued to see double digit revenue growth across all major service lines as total residential revenue increased 16, 5% commercial rose 11, 4% and termite was up 11, 7% this quarter.
Jerry E. Gahlhoff: Overall, we continue to see double-digit revenue growth across all major service lines, as total residential revenue increased 16.5%, commercial revenue rose 11.4%, and termite revenue was up 11.7% this quarter. We continue to invest in and grow our business. As you would expect, we invested in incremental sales staffing and marketing activities ahead of peak season to ensure that we are well positioned and top of mind for the consumer as pest season begins. We are well-staffed on the technician and customer support front, so their people are onboarded, extensively trained, and ready to provide an exceptional level of service for our customers.
Jerry: We continue to invest in growing our business as you would expect we invested in incremental sales staffing and marketing activities ahead of peak season to ensure that we're well positioned and top of mind for the consumer that's past season began.
Jerry: We're well staffed on the technician and customer support front. So there are people are on boarded extensively trained and ready to provide an exceptional level of service for our customers.
Jerry: On the commercial side of the business, we are leveraging analytics to identify areas in the market where opportunity warrants additional resources and this continues to pay dividends as evidenced by another quarter of double digit commercial growth.
Jerry E. Gahlhoff: On the commercial side of the business, we are leveraging analytics to identify areas in the market where opportunity warrants additional resources, and this continues to pay dividends as evidenced by another quarter of double-digit commercial growth. We continue to strategically add feet on the street to our sales force and are leveraging our training and sales tools to better enable their success as well. Investments to drive organic growth are complemented by strategic M&A.
Jerry: We continue to strategically add feet on the street to our sales force and are leveraging our training and sales tools to better enable their success as well.
Jerry: Investments to drive organic growth complemented by strategic M&A.
Jerry: April one marked the one year anniversary of closing the Fox acquisition and that team has performed exceptionally well we.
Jerry: We anticipate that box will continue to positively impact organic growth and profitability as we go forward.
Jerry E. Gahlhoff: April 1st marked the one-year anniversary of closing the Fox acquisition, and that team has performed exceptionally well. We anticipate that Fox will continue to positively impact organic growth and profitability as we go forward. We closed 12 tuck-in deals in the first three months of the year, and the M&A pipeline remains healthy. We're actively evaluating acquisition opportunities both domestically and internationally and remain on track to deliver at least 2% of growth from M&A activity in 2024.
Jerry: We closed 12 towards tuck in deals in the first three months of the year and the M&A pipeline remains healthy.
Jerry: We're actively evaluating acquisition opportunities, both domestically and internationally and remain on track to deliver at least 2% of growth from M&A activity in 2024.
Jerry: Beyond growth, our dedication to operational efficiency and continuous improvement is an important part of our strategy and culture.
Jerry: Ken will discuss in more detail, but we saw healthy margin improvement in the quarter as we executed our pricing strategy leveraged our cost structure and drove efficiencies throughout the business.
Kenneth D. Krause: Thank you remains an important area of focus for us and efforts to enhance safety coaching training and protocols resulted in higher driving safety scores and fewer recorded safety incidents when compared to a year ago.
Jerry E. Gahlhoff: Beyond growth, our dedication to operational efficiency and continuous improvement is an important part of our strategy and culture. Ken will discuss this in more detail, but we saw healthy margin improvement in the quarter as we executed our pricing strategy, leveraged our cost structure, and drove efficiencies throughout the business. Safety remains an important area of focus for us, and efforts to enhance safety coaching, training, and protocols resulted in higher driving safety scores and fewer recorded safety incidents when compared to a year ago.
Kenneth D. Krause: In closing, we're excited about where our business stands today. This year is off to a solid start and demand from our customers remains strong with over 7% organic growth in the first quarter.
Kenneth D. Krause: Our markets are solid staffing levels are healthy and our team is focused on driving continuous improvement and profitable growth.
Kenneth D. Krause: I want to thank each of our 19000 plus team members around the world for their ongoing commitment to our customers.
Speaker Change: Before I hand, it over to Ken I'd like to announce a few changes to our board of directors.
Speaker Change: First we would like to thank Jerry Nix, who recently retired from our board for his service to our company.
Jerry E. Gahlhoff: In closing, we're excited about where our business stands today. This year is off to a solid start, and demand from our customers remains strong, with over 7% organic growth in the first quarter. Our markets are solid, staffing levels are healthy, and our team is focused on driving continuous improvement and profitable growth. I want to thank each of our 19,000 plus team members around the world for their ongoing commitment to our customers.
Speaker Change: We have been so fortunate to have Jerry as our lead director for the past several years as experience wisdom and guidance helped us navigate uncharted waters for our company and we're incredibly grateful for the significant contributions he has made along the way.
Speaker Change: Second we would like to welcome Dow Jones, Dale Jones, who was elected to our board at our recent shareholder meeting.
Speaker Change: Additionally, Louie Sam's has been appointed as our new lead independent director.
Speaker Change: We're excited about the level of expertise and experience that both Dale and Louise will bring to our board in their new roles.
Speaker Change: Ken I'll now turn the call over to you.
Speaker Change: Thanks, Gerry and good morning, everyone. The first quarter reflects continued strong execution by the Rollins team a few highlights the start growth was robust to start the year. We delivered revenue growth of 13, 7% year over year organic growth was seven 5% and we saw significant improved.
Jerry E. Gahlhoff: Before I hand it over to Ken, I'd like to announce a few changes to our Board of Directors. First, we would like to thank Jerry Nix, who recently retired from our board, for his service to our company. We've been so fortunate to have Jerry as our lead director for the past several years. His experience, wisdom, and guidance have helped us navigate uncharted waters for our company, and we're incredibly grateful for the significant contributions he's made along the way.
Kenneth D. Krause: Moving throughout the quarter as organic revenue growth accelerated to over 10% for February and March adjusted operating margins were 18, 4% up a healthy 130 basis points with strong gross profit performance and solid expense leverage despite incremental.
Kenneth D. Krause: <unk> aimed at growing our business.
Kenneth D. Krause: Cash flow continues to be very strong with free cash flow, increasing 29% and enabling a balanced capital allocation strategy.
Jerry E. Gahlhoff: Second, we would like to welcome Dale Jones, who was elected to our board at a recent shareholder meeting. Additionally, Louise Sams has been appointed as our new Lead Independent Director. We're excited about the level of expertise and experience that both Dale and Louise will bring to our board in their new roles. Ken, I'll now turn the call over to you. Thanks, Jerry. And good morning, everyone.
Kenneth D. Krause: Diving further into the quarter, we saw good growth across each of our service offerings in the first quarter residential revenues increased 16, 5% commercial pest control rose 11, 4% and termite and ancillary increased by 11, 7%.
Kenneth D. Krause: Organic growth was also healthy across the portfolio with growth of four 3% and residential 10, 1% and commercial and nine 3% and termite and ancillary.
Kenneth D. Krause: As Jerry mentioned, our residential organic growth was impacted by a slower start in January to provide context February and March total organic growth was a very strong 10, 8% versus seven 5% for the quarter and looking at residential revenue specifically February and March organic growth was a healthy eight.
Kenneth D. Krause: The first quarter reflects continued strong execution by the Rollins team. A few highlights to start: growth was robust to start the year. We delivered revenue growth of 13.7% year-over-year, and organic growth was 7.5%.
Kenneth D. Krause: Percent versus four 3% for the quarter.
Kenneth D. Krause: We are pleased with the consistent growth, we continue to see across the business.
Kenneth D. Krause: Turning to profitability, our gross margins were healthy at 51, 2% up 90 basis points versus last year, we continued to be positive on the price cost equation and saw good performance across several key cost categories, while Fox was accretive to gross margins for the quarter by about 40 basis points.
Kenneth D. Krause: And we saw significant improvement throughout the quarter, as organic revenue growth accelerated to over 10% for February and March. Adjusted operating margins were 18.4%, up a healthy 130 basis points, with strong gross profit performance and solid expense leverage, despite incremental investment aimed at growing our business. Cash flow continues to be very strong, with free cash flow increasing 29%, enabling a balanced capital allocation strategy. Diving further into the quarter, we saw good growth across each of our service offerings.
Kenneth D. Krause: Organic margin improved 50 basis points as we saw nice leverage from people cost fleet and materials and supplies.
Kenneth D. Krause: Quarterly SG&A cost as a percentage of revenue decreased by 10 basis points versus last year, excluding the earn out adjustment for the Fox acquisition SG&A cost as a percentage of revenue decreased by 20 basis points in the quarter we.
Kenneth D. Krause: We saw healthy leverage from administrative related costs, which enabled reinvestment and incremental advertising and selling expenses associated with growth initiatives that Jerry discussed.
Kenneth D. Krause: In the first quarter, residential revenues increased 16.5%, commercial pest control rose 11.4%, and termite and ancillary increased by 11.7%. Organic growth was also healthy across the portfolio, with growth of 4.3% in residential, 10.1% in commercial, and 9.3% in termite and ancillary. As Jerry mentioned, our residential organic growth was impacted by a slower start in January.
Kenneth D. Krause: First quarter GAAP operating income was $132 million up 18% year over year adjusted operating income was $138 million up nearly 23% versus prior year on approximately 14% total revenue growth.
Kenneth D. Krause: Adjusted operating margins were 18, 4% up 130 basis points year over year on strong gross margins, coupled with solid expense leverage.
Kenneth D. Krause: First quarter, EBITDA was $160 million up over 14% and representing a 21, 3% margin up 10 basis points versus last year.
Kenneth D. Krause: You'll recall that last quarter, we called out a negative impact to adjusted EBITDA due to lower non operational gains versus the comparable period in the prior year. We saw a similar dynamic in the first quarter as well given that we do from time to time divest non operational assets. We have made the decision to exclude gains and losses on these types of sales.
Kenneth D. Krause: To provide context, February and March total organic growth was a very strong 10.8% versus 7.5% for the quarter. And looking at residential revenue specifically, February and March organic growth was a healthy 8% versus 4.3% for the quarter. We're pleased with the consistent growth we continue to see across the business. Turning to profitability, our gross margins were healthy at 51.2%, up 90 basis points versus last year. We continue to be positive on the price-cost equation and saw good performance across several key cost categories.
Kenneth D. Krause: Adjusted EBITDA adjusted net income and adjusted EPS are measures of operating performance and this change will allow us to better compare our underlying performance more consistently over time.
Kenneth D. Krause: <unk> showing the revised metrics for fiscal 2023 is included in our earnings release.
Kenneth D. Krause: First quarter, adjusted EBITDA was $161 million up 19% versus last year adjusted EBITDA margin of 21, 5% with strong improving 100 basis points driven by leverage across the P&L incur.
Kenneth D. Krause: Incremental adjusted EBITDA margin was 29% a healthy result, considering that Q1 is a slower period and can have a lower profitability profile as we invest ahead of our busier seasons.
Kenneth D. Krause: The effective tax rate was approximately 24% in the quarter in line with the prior year quarter.
Kenneth D. Krause: Quarterly GAAP net income was $94 million or <unk> 19 per share increasing from <unk> 18 per share in the same period a year ago for.
Kenneth D. Krause: For the first quarter, we had non-GAAP pre tax adjustments associated with the Fox acquisition related items totaling approximately $5 million of pre tax expense in the quarter accounting for these expenses adjusted net income for the quarter was $98 million or <unk> 20 per share increasing over 17% from the same peer.
Kenneth D. Krause: While Fox was accretive to gross margins for the quarter by about 40 basis points, organic margin improved 50 basis points, as we saw nice leverage from people cost, fleet, and materials and supplies. Quarterly SG&A cost as a percentage of revenue decreased by 10 basis points versus last year. Excluding the earn-out adjustment for the Fox acquisition, SG&A cost as a percentage of revenue decreased by 20 basis points in the quarter.
Kenneth D. Krause: A year ago, despite the higher level of interest cost on the higher debt balances versus the comparable period.
Kenneth D. Krause: Turning to cash flow and the balance sheet operating cash flow increased 27% in the quarter to $127 million, we generated $120 million of free cash flow of 29% increase versus last year.
Kenneth D. Krause: Cash flow conversion the percent of income that was converted into operating cash flow was well above 100% for the 120% for the quarter.
Kenneth D. Krause: We made acquisitions totaling $47 million and we paid $73 million in dividends, both up versus the same period a year ago that.
Kenneth D. Krause: We saw healthy leverage from administrative-related costs, which enabled reinvestment in incremental advertising and selling expenses associated with growth initiatives that Jerry discussed. First quarter GAAP operating income was $132 million, up 18% year-over-year. Adjusted operating income was $138 million, up nearly 23% versus the prior year on approximately 14% total revenue growth. Adjusted operating margins were 18.4%, up 130 basis points year-over-year on strong gross margins coupled with solid expense leverage. First quarter EBITDA was $160 million, up over 14% and representing a 21.3% margin, up 10 basis points versus last year.
Kenneth D. Krause: Debt to EBITDA leverage is well below one times on a gross and net level and our balance sheet is very healthy and positions us well to continue to execute on our capital allocation priorities.
Kenneth D. Krause: In closing our performance this quarter continues to demonstrate the strength of our business model and the engagement level of our teams demand is healthy and our acquisition pipeline provides us a sense of optimism.
Kenneth D. Krause: 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.
Gerry: Thank you Ken we're happy to take any questions at this time.
Gerry: Thank you if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue and for participants using speaker equipment may be necessary to pick up your handset before pressing the star.
Kenneth D. Krause: You'll recall that last quarter, we called out a negative impact on adjusted EBITDA due to lower non-operating gains versus the comparable period in the prior year. We saw a similar dynamic in the first quarter as well.
Kenneth D. Krause: Given that we do, from time to time, divest non-operating assets, we have made the decision to exclude gains and losses on these types of sales. Adjusted EBITDA, adjusted net income, and adjusted EPS are measures of operating performance. And this change will allow us to better compare our underlying performance more consistently over time. A table showing the revised metrics for fiscal 2023 is included in our earnings release. First quarter adjusted EBITDA was $161 million, up 19% versus last year.
Gerry: Keith Please ask one question and one follow up question and re queue for additional questions.
Gerry: Our first question is from Tim Mulrooney with William Blair. Please proceed.
Timothy Michael Mulrooney: Ken Jerry good morning.
Timothy Michael Mulrooney: Good morning.
Timothy Michael Mulrooney: So just stepping back here with trends accelerating in February and March I, just wonder if folks are going to extrapolate that 10% organic growth rate.
Timothy Michael Mulrooney: Into the next several months and quarters I mean, 10% to me just sounds let's touch on the strong side. So I wonder if that's how you're thinking about things or if expectations or better level set to kind of what we saw over the last several quarters more in that 7% to 8% range for organic growth.
Kenneth D. Krause: Adjusted EBITDA margin of 21.5% was strong, improving 100 basis points driven by leverage across the P&L. Incremental adjusted EBITDA margin was 29%, a healthy result considering that Q1 is a slower period and can have a lower profitability profile as we invest ahead of our busier season. The effective tax rate was approximately 24% in the quarter, in line with the prior year.
Speaker Change: Thanks for the question, Tim I appreciate that and when looking at the business. We certainly did see some improvements as we went throughout the quarter.
Speaker Change: But one quarter is certainly not a long term trend.
Speaker Change: Our continuing to remain very confident in our outlook and that outlook is really anchored around.
Kenneth D. Krause: Quarterly gap net income was $94 million, or $0.19 per share, increasing from $0.18 per share in the same period a year ago. For the first quarter, we had non-GAAP pre-tax adjustments associated with the FOX acquisition-related items, totaling approximately $5 million of pre-tax expense in the quarter. Accounting for these expenses, adjusted net income for the quarter was $98 million, or $0.20 per share, increasing over 17% from the same period a year ago, despite the higher level of interest costs on the higher debt balances versus the comparable period.
Speaker Change: 7% to 8% sort of growth rate that we've consistently talked about that's stepped up as you all know since COVID-19 and we continue to benefit from that higher growth rate and more favorable operating environment, but.
Speaker Change: But yes, I think I think 7% to 8% is kind of how we think about the business from a from an organic basis.
Speaker Change: Going forward.
Speaker Change: That's really helpful. Thanks. Thank you Ken and this is not a follow up it's a completely separate topic, but I'm going to do it anyway.
Speaker Change: The step up in sales and marketing expense, Okay. Like I think there was like a couple of different ways folks could interpret that either as more of a defensive move.
Kenneth D. Krause: Turning to cash flow and the balance sheet, operating cash flow increased 27% in the quarter to $127 million. We generated $120 million of free cash flow, a 29% increase versus last year. Cash flow conversion, the percent of income that was converted into operating cash flow, was well above 120% for the quarter. We made acquisitions totaling $47 million, and we paid $73 million in dividends. Both are up versus the same period a year ago.
Speaker Change: Because you're having to spend more maybe on digital marketing to win customers or more of an offensive moves hiring more sales folks for future growth. For example, could you just double click into that increase.
Speaker Change: The increase in sales and marketing expense column and help us understand that decision a little better to wrap ups out there. Thank you.
Jerry Nix: Tim This is Jerry.
Jerry Nix: Okay.
Jerry Nix: A lot of that cost really.
Jerry Nix: It lies on the heavier side on the selling expense as it relates to us staffing up let me give you a couple of examples couple of data points, just looking at Oregon alone.
Kenneth D. Krause: Debt to EBITDA leverage is well below one times on a gross and net level, and our balance sheet is very healthy and positions us well to continue to execute on our capital allocation priorities. In closing, our performance this quarter continues to demonstrate the strength of our business model and the engagement level of our team. Demand is healthy, and our acquisition pipeline provides us with a sense of optimism. 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 Jerry. Thank you, Ken. We're happy to take any questions at this time.
Jerry Nix: When we look compared to prior year in the first quarter, we had over 50 more commercial account managers at Oregon alone. We had over 100 more homes sales inspectors at work and in the first quarter of this year than we did the last year. So that's where a lot of our investment continues to be.
Speaker Change: We see that opportunity, that's what I referred to as the feet on the street the opportunities of our sales salaries are up there.
Speaker Change: Not necessarily.
Speaker Change: Some sort of target targeted defensive marketing spend it's an offensive.
Speaker Change: Sales.
Speaker Change: Sales mobilization.
Speaker Change: Really building out your sales team for the for the growth opportunities ahead.
Speaker Change: Okay.
Speaker Change: Got it makes sense. Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question is from George Tong with Goldman Sachs. Please proceed.
Operator: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Please ask one question and one follow-up question and re-queue for additional questions. Our first question is from Tim Mulrooney with William Blair. Please proceed.
Keen Fai Tong: Alright. Thanks, good morning, I wanted to dive into trends that youre seeing in the residential business. It sounds like most of the impact.
Keen Fai Tong: Organic revenue growth in residential was due to unfavorable January weather.
Keen Fai Tong: Leading to the 4% organic growth I wanted to see if there were any other trends you would call out there I know last quarter you highlighted one time sales impact so any changes there and other operating.
Timothy Michael Mulrooney: Ken, Jerry. Good morning. Good morning. So, just stepping back here, you know, with trends accelerating, I just wonder if folks are going to extrapolate that 10% organic growth rate into the next several months and quarters. I mean, 10%, to me, just sounds like a touch on the strong side.
Keen Fai Tong: Items to consider as it relates to the organic growth in residential.
Keen Fai Tong: Certainly when we look at the residential business, we look at the residential business very broadly across our residential services as well as our termite and ancillary across that portfolio. The business continues to perform very well.
Keen Fai Tong: One time business can be choppy it continues to be choppy, but generally demand for our services remains very healthy as I indicated on the on my in my prepared commentary what we saw when we look just at the residential business alone. We saw an improvement for 3% growth for the quarter, but close to eight.
Kenneth D. Krause: So I wonder if that's how you're thinking about things or if expectations are better set to kind of what we saw over the last several quarters, more in that 7 to 8% range for organic growth. Thanks for the question, Tim. And when looking at the business, we certainly did see some improvements as we went throughout the quarter. But one quarter is certainly not a long-term trend.
Keen Fai Tong: Percent growth as we look at February and March. So we continue to see really good demand levels for for our business.
Speaker Change: I would add to that that George that when we think about some of the onetime business as well as Ken mentioned, it's usually a chop here in the shoulder seasons when weather.
Keen Fai Tong: That's an area of the business that whether it can can impact.
Keen Fai Tong: More so than anything but you still have your recurring customer base. That's there to service, but we also continue to see really strong health and our our onetime ancillary business that really shows that the consumer side of it is strong and the consumers continued.
Kenneth D. Krause: We are continuing to remain very confident in our outlook, and that outlook is really anchored around the 7% to 8% sort of growth rate that we've consistently talked about. And that has stepped up, as you all know, since COVID.
Keen Fai Tong: It can be willing to invest in protecting their homes.
Speaker Change: Got it that's helpful context.
Kenneth D. Krause: And we continue to benefit from that higher growth rate and more favorable operating environment. But yeah, I think 7% to 8% is kind of how we think about the business on an organic basis going forward. That's really helpful. Thank you, Ken. And this is not a follow-up. It's a completely separate topic, but I'm going to do it anyway.
Speaker Change: And then within the termite and ancillary services business organic growth it seems to have a <unk>.
Keen Fai Tong: Celebrated two 9%, 11% and <unk> can you talk about some of the puts and takes that could have led.
Keen Fai Tong: Led to that performance.
Keen Fai Tong: Certainly when you unpack the termite business Theres two components, the termite and ancillary there is your normal recurring termite business Youre pre treat business and then you have ancillary business in there as well, we're seeing really good demand across the spectrum of our business. Our recurring base monitoring business continues to grow at a very healthy.
Timothy Michael Mulrooney: The step up in sales and marketing. I think there are a couple different ways folks could interpret that, either as more of a defensive move, you know, because you're having to spend more maybe on digital marketing to win customers, or more as an offensive move. Tim, this is Jerry. A lot of that cost really lies on the heavier side of the selling expense as it relates to us staffing up. Let me give you a couple of examples, a couple of data points.
Keen Fai Tong: Level, but also our ancillary business and that area continues to grow as well at a nice rate. So so it's really a broad base growth that we're seeing in demand for our services.
Speaker Change: Okay got it.
Keen Fai Tong: Factors that could have caused the deceleration in organic revenue growth there.
Keen Fai Tong: Okay.
Keen Fai Tong: No.
Keen Fai Tong: I look at it I look at it from a productivity standpoint, we continue to sales or they're working the backlog can be a challenge.
Jerry E. Gahlhoff: Just looking at Orkin alone, when we looked compared to the prior year in the first quarter, we had over 50 more commercial account managers at Orkin alone. We had over 100 more home sales inspectors at Orkin in the first quarter of this year than we did the last year. So that's where a lot of our investment continues to be. We see that opportunity. That's what I referred to as the feet on the street, the opportunity.
Keen Fai Tong: And in the quarter and that goes back to January type of phenomenon that where we had we had more branches and operations closed for multiple days.
Keen Fai Tong: Compared to the prior year and that affects productivity and an ability to get the work done even if our our sales forces out there selling.
Keen Fai Tong: And they are out there continuing to do what they do and building that backlog.
Jerry E. Gahlhoff: So our sales salaries are up there. It's not necessarily a, quote, some sort of targeted defensive marketing spend. It's an offensive sales mobilization and really building out your sales team for the growth opportunities ahead. Got it. Makes sense. Thank you.
Keen Fai Tong: Work to get done and so the work is there for us to get done. So we're optimistic about that it's not a it's not a selling issue.
Keen Fai Tong: <unk>.
Keen Fai Tong: Getting all the workload done in a given period of time, so when you carry a backlog over into the second quarter.
Keen Fai Tong: Things still look healthy if that helps you add any color.
Keen Fai Tong: Our next question is from George Tong with Goldman Sachs. Please proceed.
Speaker Change: Got it very helpful. Thank you.
Keen Fai Tong: Our next question is from Stephanie Miller with Jefferies. Please proceed.
Kenneth D. Krause: I wanted to see if there were any other trends you would call out there. I know last quarter you highlighted the one-time sales impact. So any changes there and other operating items to consider as it relates to the organic growth in residential?
Stephanie Lynn Benjamin Moore: On first that anymore.
Stephanie Lynn Benjamin Moore: Wanted to touch on commercial organic growth.
Stephanie Lynn Benjamin Moore: Been pretty strong over the last few quarters and I know you mentioned leveraging analytics and things like that but it's.
Kenneth D. Krause: Certainly, when we look at the residential business, we look at the residential business very broadly across our residential services as well as our termite ancillary. Across that portfolio, the business continues to perform very well. One-time business can be choppy. It continues to be choppy, but, generally, demand for our services remains very healthy. As I indicated in my prepared commentary, when we looked just at the residential business alone, we saw an improvement, 4.3% growth for the quarter, but close to 8% growth as we look at February and March. We continue to see really good demand levels for residential.
Stephanie Lynn Benjamin Moore: Just curious if there's anything else to call out I think you can kind of talk about the sustainability of growth there.
Stephanie Lynn Benjamin Moore: Yes.
Stephanie Lynn Benjamin Moore: And I know it sounds like a broken record and we've said this now for a few years, we just continue to invest in our our sales staff and getting them ramped up and being successful.
Stephanie Lynn Benjamin Moore: Deb.
Stephanie Lynn Benjamin Moore: <unk> cel sales process is a relationship type of cell, it's got a long selling cycle and you've got to be patient and you got to invest you've got to invest in training and sales tools and supporting those those new account managers when they're brought up to get them ramped up and broth speeds as fast as possible.
Stephanie Lynn Benjamin Moore: The more you add in our sales force and the more investments you make to make them successful.
Kenneth D. Krause: I would add to that, George, that when we think about some of the one-time business, as Kim mentioned, it's usually choppier in the shoulder seasons when weather, that's an area of the business that weather can impact more so than anything, but you still have your recurring customer base that's there to be served and is willing to invest in protecting their home.
Stephanie Lynn Benjamin Moore: We just continue to see that opportunity there so.
Stephanie Lynn Benjamin Moore: I'd say there is anything magical about it other than being committed to continue to add incrementally to our sales force. It's interesting when I step back and I look at the financials and I look at the trend in spend across different categories of SG&A.
Stephanie Lynn Benjamin Moore: Jerry is spot on sales salaries continues to be an area that we continue to invest disproportionately in we're saving money and some of the back office costs and admin areas, but we continue to invest pretty heavily on the front end of our business and taking a very offensive offensive.
Kenneth D. Krause: Got it. That's helpful context. Um, and then within the termite and ancillary services business, organic growth seems to have decelerated a bit to 9% compared to 11% 4Q. Can you talk about some of the push and pull that could have led to that performance?
Stephanie Lynn Benjamin Moore: Perspective.
Stephanie Lynn Benjamin Moore: On our business.
Stephanie Lynn Benjamin Moore: And just on the resi side have you guys seen any slowdown.
Kenneth D. Krause: Certainly, when you unpack the termite business, there are two components to the termite ancillary business. There's your normal recurring termite business, your pre-treat business, and then you have the ancillary business in there as well.
Speaker Change: I think its meaningful related to new business wins.
Stephanie Lynn Benjamin Moore: Any sort of meaningful pickup in customer churn and maybe lower.
Stephanie Lynn Benjamin Moore: Household income areas and then just anything you can share around how April is kind of shaping up so far.
Kenneth D. Krause: We're seeing really good demand across the spectrum. Our business, our recurring bait monitoring business, continues to grow at a very healthy level. But also, our ancillary business in that area continues to grow as well at a nice rate. So it's really a broad-based growth that we're seeing in demand for our service.
Stephanie Lynn Benjamin Moore: We haven't seen any significant change.
Stephanie Lynn Benjamin Moore: And from a retention issue one way or the other so that remains pretty solid.
Stephanie Lynn Benjamin Moore: Yes, it would be lower on April it would be very difficult to grow our business at the rate. We're growing if we saw tightening in customer churn and so customer churn. Although it is not cutting it still remains an opportunity for us to continue to improve when we look at April we continue to see healthy levels of them.
Kenneth D. Krause: Okay, got it. Are there any factors that could have caused the deceleration in organic revenue growth there?
Kenneth D. Krause: You know, I look at it, I look at it from a productivity standpoint, you know, we continue to sell, the working the backlog can be a challenge. And in the quarter, and this goes back to a January type of phenomenon that where we had more branches and operations closed for multiple days. So when you carry a backlog over into the second quarter, things still look healthy. That helps add new color.
Matt: Matt We're starting April.
Matt: Strongly but again.
Stephanie Lynn Benjamin Moore: We continue to think about a 7% to 8% sort of organic growth rate across the business as we think about the future.
Stephanie Lynn Benjamin Moore: Our next question is from Ashish <unk> with RBC capital markets. Please proceed.
ashish: Hi, Good morning, This is David John.
ashish: Yes.
Stephanie Lynn Benjamin Moore: Okay.
David John: Good morning.
ashish: Capital allocation now that you've lapped the acquisition after we think about.
Kenneth D. Krause: Got it. Very helpful.
Stephanie Lynn Benjamin Moore: Our next question is from Stephanie Moore with Jeffries. Please proceed.
David John: I guess your M&A pipeline in terms of larger deals smaller deals going forward, especially given its robust free cash flow that you can generate great. Thank you.
Unknown Executive: on behalf of Stephanie Moore. Um, you know, just wanted to touch on, you know, commercial organic growth. It's, you know, been pretty strong, you know, over the last few quarters. And I know you mentioned leveraging analysts and things like that, but, you know, I was just curious if there was anything else to call out, and if you could kind of talk about the sustainability of growth there.
David John: Okay.
David John: When we look at the pipeline its very healthy its very balanced there's opportunities across the spectrum with respect to M&A.
David John: Something that we have consistently said however for 2024 is that we do think that 2% to 3% of revenue growth is probably a realistic expectation of contribution from M&A.
David John: Continue to look at deals we continue to evaluate deals and in fact in Q1, we spent roughly $45 million to $50 million on M&A and that was up considerably year over year of course last year, we were preparing for Fox, but I think it just shows that there continues to be a very healthy pipeline of M&A in a very fragmented market that we can.
Jerry E. Gahlhoff: You know, and I know it sounds like a broken record. And we've said this now for a few years, we just continue to invest in our sales staff, getting them ramped up and successful. That is because the B2B sales process is a relationship type sell; it's got a long selling cycle. And you got to be patient, you got to invest, you got to invest in training and sales tools, and support those new account managers when they're brought up to get them ramped up and brought to speed just as fast as possible.
David John: To compete and compete in.
David John: As a reminder, this star one on your telephone keypad. If you would like to ask a question. Our next question is from Josh Chan with UBS. Please proceed.
Joshua K. Chan: Hi, Good morning, Jerry can Lindsay my question Alright good.
Joshua K. Chan: Good morning, Hey, good morning.
Joshua K. Chan: Yes.
Joshua K. Chan: Amit at 7% to 8% sustainable growth rate and given how strong commercial and termite is does that imply that you expect residential to kind of remain in this 4% range going forward just curious how youre thinking about how the different businesses contribute to that 7% to 8%. Thank you.
Jerry E. Gahlhoff: That it's the more you add to the sales force and the more investments you make to make them successful. We just continue to see that opportunity there. So I wouldn't say there's anything magical about it other than being committed to continue to add incrementally to our sales force. It's interesting, when I step back, and I look at the financials, and I look at the trend in spend across different categories of SG&A, Jerry's spot on sales salaries continues to be an area that we continue to invest disproportionately in.
Amit: It's interesting when you try to put a fine point on that but we do think we do think that probably commercial and termite and ancillary will probably grow a little bit faster than the overall average and <unk> and resi might grow a little bit slower.
Joshua K. Chan: You just have puts and takes across the portfolio doesn't mean that we're not bullish on residential but I just think that that's generally how the growth profile has unfolded over time for us.
Jerry E. Gahlhoff: We're saving money on some of the back office costs and admin areas, but we continue to invest pretty heavily on the front end of our business and taking a very different, offensive perspective on our business.
Speaker Change: Agree with you Ken I think it's hard to predict that there's going to be movement in any of those categories potentially based on a number of factors and we will.
Joshua K. Chan: That's where it all comes out in that 7% to 8%.
Unknown Executive: Just on the Resi side, have you guys seen any...
Joshua K. Chan: Yes.
Unknown Executive: We haven't seen any significant change from a retention issue one way or the other. So that remains pretty solid. Yeah, it would be in April. It would be very
Speaker Change: Yes. Thank you.
Speaker Change: The color there.
Joshua K. Chan: And then on yogurt.
Joshua K. Chan: Vision to accelerate investment during the off season, sometimes you focus on the peak season to invest sometimes you invest ahead of the season. So could you just talk about the rationale for investing ahead of the season. This year, what youre seeing and what opportunities you expect to realize thank you.
Operator: Our next question is from Ashish.
ashish: Hi, good morning. This is David Page on behalf of Ashish.
David Page: Good morning. In terms of capital implementation, now that you've left the prospect position, how should we think about your M&A pipeline in terms of larger deals or smaller deals going forward, especially given this robust free cash flow that you keep generating. Thank you.
Speaker Change: Yes, as we had talked about the business started to grow pretty nicely on a year over year basis organic.
Speaker Change: Our basis in February and in March and so we saw that and we saw an opportunity.
Speaker Change: To pull forward some investments doesn't mean that we're going to invest any lighter in Q2. In fact, we're going to continue to invest in Q2 and and drive further growth of the market opportunities there and you've got to invest when that market opportunities. There. This is a very short cycle business and when you see weather patterns that improve or the.
Kenneth D. Krause: When we look at the pipeline, it's very healthy. It's very balanced.
Kenneth D. Krause: There are opportunities across the spectrum with respect to M&A. Something that we have consistently said, however, for 2024, is that we do think that two to 3% of revenue growth is probably a realistic expectation of contribution from M&A. We continue to look at deals. We continue to evaluate them. In fact, in Q1, we spent roughly $45 to $50 million on M&A. That was up considerably year over year. Of course, last year, we were preparing for FOX, but I think it just shows that there continues to be a very healthy pipeline of M&A in a very fragmented market that we continue to compete in.
Joshua K. Chan: <unk> trends that might change you have to be ready to invest in so I think that's just it's just reflective of our.
Joshua K. Chan: Investment in our interest in investing in and growth across our portfolio, we have a lot more carrying cost.
Joshua K. Chan: From the people side.
Joshua K. Chan: <unk> fourth quarter and certainly in the first quarter than I think we've ever had.
Joshua K. Chan: The reality is it's certainly harder to find people.
Joshua K. Chan: And then with the level of intensity that we put in the time and energy that we put into training and development upfront that takes time to have people ready.
Joshua K. Chan: And so our strategy has been to get ahead of that.
Speaker Change: Absolutely. Thank you so much for your time and congrats on a good quarter.
Speaker Change: Thank you Josh.
Unknown Executive: Hi, good morning, Jerry, Ken, and Lyndsey. Thank you for asking my question.
Speaker Change: Our next question is from Alan Davis with Redburn Atlantic. Please proceed.
Kenneth D. Krause: You know, it's interesting when you sort of put a fine point on that, but, you know, we do think that probably commercial and termite and ancillary probably grow a little bit faster than the overall average, and resi might grow a little bit slower. You just have puts and takes across the portfolio.
Alan Davis: Yes, good morning.
Alan Davis: Just two from me.
Alan Davis: Firstly can you just talk about the level of price increases you're putting through and if youre seeing any pushback on the residential side just given the level of volume growth in the first quarter.
Alan Davis: And then secondly in terms of probably one for Ken just in terms of.
Kenneth D. Krause: Doesn't mean that we're not bullish and residential. But I just think that that's generally how the growth profile has unfolded over time for us. Yeah, I agree with you, Ken.
Alan Davis: The SG&A I mean, obviously the admin expenses I guess some of that is coming from the modernization that you did last USA, how sustainability going forward through this year.
Kenneth D. Krause: I think it's hard to predict that. I mean, there's going to be movement in any of those categories, potentially based on a number of factors. And we'll, you know, we'll, that's where it all comes out on that. 7 to 8 percent.
Alan Davis: And I guess your ability to reinvest that.
Speaker Change: So looking at your questions. Thank you for your questions. The first question with respect to pricing. It's interesting when we look step back and we look at this business I think recently you've heard me start to talk about this as a CPI plus type of business. So we think this this this service is certainly an essential service and should.
Jerry E. Gahlhoff: On your decision to accelerate investment during the offseason, sometimes you focus on the peak season to invest, and sometimes you invest ahead of the season. So could you just talk about the rationale for investing ahead of the season this year, what you're seeing, and what opportunities you expect to realize? Thank you.
Speaker Change: Command CPI plus level pricing, so 3% to 4%. This year is certainly it's something we passed along and we're seeing that stick.
Speaker Change: We just feel like the services just too valuable not to price it at those levels.
Jerry E. Gahlhoff: Yeah, as we had talked about, the business started to grow pretty nicely on a year-over-year basis, organically, in February and into March. And so we saw that, and we saw an opportunity to pull forward some investments. It doesn't mean that we're going to invest any less in Q2. In fact, we're going to continue to invest in Q2 and drive further growth. The market opportunity is there, and you've got to invest when that market opportunity is there.
Speaker Change: And then secondly, when you look at the SG&A levels across the business.
Speaker Change: It's good to see the improvements that we're seeing in our cost structure I think in the quarter, we talked about a 20 basis point improvement in SG&A as a percentage of sales, but when you unpack that you see that we spent roughly 50 basis points more on growth oriented investments, but 70 basis points less.
Speaker Change: Back office costs, and I think Thats representative of of the work, we're doing to improve the effectiveness and the productivity of our of our business. We feel like there's more to come but we certainly are happy with the progress we're making there.
Speaker Change: Okay. Thanks.
Speaker Change: And our next question is from Ashish <unk>.
Jerry E. Gahlhoff: We're a very short-cycle business, and when you see weather patterns that improve or demand trends that might change, you have to be ready to invest. And so I think that's just reflective of our investment and our interest in investing and growth across our portfolio. We have a lot more carrying costs from the employees' side in late the fourth quarter and certainly in the first quarter than I think we've ever had.
ashish: RBC capital markets. Please proceed.
Speaker Change: Hey, sorry, it's David again.
David John: If I missed this but what was the exit.
Speaker Change: Growth.
David John: Sure residential I believe the 10% was for the entire company but.
David John: What was it for etsy.
Speaker Change: Yes, it was 10, 8% to be.
Speaker Change: To put a fine point on it for the entire company and for residential it was 8%.
Jerry E. Gahlhoff: The reality is it's certainly harder to find people. And then with the level of intensity that we put into training and development up front, that takes time to have people ready. And so our strategy has been to get ahead of that.
Speaker Change: Thank you.
Speaker Change: For February and March for February and March.
Speaker Change: We have reached the end of our.
Speaker Change: A question and answer session I would like to turn the conference back over to management for closing comments.
Unknown Executive: Absolutely. Thank you so much for your time and congratulations on a good quarter.
Speaker Change: Thank you everyone for joining us today, we appreciate your interest in our company and look forward to speaking with you all at our upcoming Investor Conference. Thanks again.
Unknown Executive: Our next question is from Allie Davis with Redburn Atlantic. Please proceed.
Unknown Executive: Good morning. Just two for me. So firstly, can you just talk about the level of price increases you're putting through and if you're seeing any pushback on the residential side, just given the level of volume growth in the first quarter? And then secondly, on behalf of Ken, just in terms of the SG&A, I mean, obviously the admin expenses, you know, I guess some of that's coming from the modernization that you did last year. So, you know, how sustainable are they going forward through this year? And I guess your ability to reinvest that. So, I'm looking at your questions.
Speaker Change: Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
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Kenneth D. Krause: So looking at your questions, thank you for your questions. The first question with respect to pricing, you know, it's interesting. When we step back and we look at this business, I think recently you heard me start to talk about this as a CPI plus type of business. So we think this service is certainly an essential service and should command CPI plus level pricing. So three to 4% this year is certainly, it's something we passed along, and we're seeing it stick.
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Kenneth D. Krause: We just feel like the service is just too valuable not to price it at those levels. And then, secondly, when you look at the SG&A levels across the business, it's good to see the improvements that we're seeing in our cost structure. I think in the quarter we talked about a 20 basis point improvement in SG&A as a percentage of sales, but when you unpack that, you see that we spent roughly 50 basis points more on growth-oriented investments but 70 basis points less on back office costs.
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Kenneth D. Krause: And I think that's representative of the work we're doing to improve the effectiveness and the productivity of our business. We feel like there's more to come, but we certainly are happy with the progress we're making there.
Ashish Sabadra: And our next question is from Ashish Sabadra with RBC Capital Markets. Please proceed.
Speaker Change: Yeah.
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David: Hey, sorry, it's David again. Apologies if I missed this one, but what was Karolyi's exit from Residential? 10%. I believe the 10% was for the entire company, but What was it for Reggie? Yeah, it was 10.
Unknown Executive: Yeah, it was 10.8% to put a fine point on it for the entire company, and for residential, it was 8%.
Unknown Executive: For February and March. Yeah. For February and March.
Speaker Change: Okay.
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Speaker Change: Okay.
Jerry E. Gahlhoff: We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing comments.
Speaker Change: [music].
Unknown Executive: Thank you everyone for joining us today. We appreciate your interest in our company and look forward to speaking with you all at our upcoming investor conference. Thanks again.
Operator: Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
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