Q3 2024 Rollins Inc Earnings Call
Speaker Change: [music].
Greetings and welcome to the Rollins, Inc. Third 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.
Anyone should require operator assistance. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it.
Speaker Change: It is now my pleasure to introduce your host Lindsay Bergmann, Vice President of Investor Relations.
Speaker Change: Thank you you may begin.
Lindsay Bergmann: Thank you and good morning, everyone. And addition to the earnings release that we issued yesterday. The company has also prepared a supporting slide presentation there.
Lindsay Bergmann: The earnings release and presentation are available on our website at Www Dot Rollins dotcom.
Speaker Change: 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 our business outlook and contains certain forward looking statements.
Speaker Change: Despite some operational disruptions caused by hurricane Helene, which occurred during the last week of the quarter.
Speaker Change: Our.
Speaker Change: <unk> performance for the third quarter was highlighted by an increase in revenue of 9% to $916 million and we delivered healthy organic growth of seven 7% in the quarter.
Speaker Change: Overall, we continue to see solid revenue growth across all major service lines.
Speaker Change: We continue to invest in growing our business and add into our customer base at the markets. We serve remain strong we.
Speaker Change: We invested significantly in incremental sales staffing and marketing activities in Q3, and we're well staffed to convert quality leads and sales efforts into new customer growth.
Speaker Change: Which our results in the quarter reflect.
Speaker Change: On the commercial side of the business, we continue to make long term investments to capitalize on the growth opportunities in a multibillion dollar <unk> market.
Speaker Change: Our commercial division continues to strategically add feet on the street to our Salesforce and we are leveraging data analytics and training to better enable their success.
Speaker Change: Investments to drive organic growth complemented by strategic M&A.
Speaker Change: We closed 32 tuck in deals in the first nine months of the year and the M&A pipeline remains healthy.
Speaker Change: 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.
Speaker Change: Beyond growth, our dedication to operational efficiency and continuous improvement is an important part of our strategy and culture.
Speaker Change: Kim will discuss in more detail, but investments we've made to support long term growth objectives did tempur margins a bit in the quarter.
Speaker Change: But we remain on track to deliver healthy margin improvement and profitability for the year.
Speaker Change: In Yesterdays release, we also announced the planned leadership transition at our board of directors.
Speaker Change: In accordance with the company's long term leadership succession plan.
Speaker Change: Gary Rollins will transition from executive Chairman to executive Chairman Emeritus and John Wilson will succeed him as executive Chairman of the board.
Speaker Change: Yeah.
Speaker Change: Looking closer at the third quarter, our team executed exceptionally well and delivered Q3 revenue growth of 9% year over year with organic growth of seven 7% at the high end of the 7% to 8% range. We've discussed this year.
Speaker Change: We delivered good growth across each of our service offerings in the third quarter residential revenues increased six 4% commercial pest control rose nine, 4% and termite and ancillary increased by 14, 5%.
Organic growth was also healthy across the portfolio with growth of four 9% in residential eight 1% and commercial and 13, 7% in the termite and ancillary area of our business.
Speaker Change: Turning to profitability, our gross margins were 54% up 20 basis points versus last year, we continue to be positive on the price cost equation.
Speaker Change: Pressures from incremental people investments were offset by leverage in materials and supplies as well as fleet.
Speaker Change: Quarterly adjusted SG&A cost as a percentage of revenue increased by 100 basis points versus last year. This was primarily driven by incremental investments in people to support our growth initiatives and the uptick in advertising spend that we expected and previously discussed during our Q2 earnings call.
Speaker Change: Third quarter GAAP operating income was $192 million up eight 3% year over year operating margins were 29% down 20 basis points year over year.
Speaker Change: Third quarter, adjusted EBITDA was $219 million up over 5% and representing a 24% margin.
Speaker Change: Margins were down 80 basis points versus last year and adjusted incremental EBITDA margins were 15 grew 15, 1% in the quarter, reflecting incremental investments in people and growth programs during the quarter.
Speaker Change: The effective tax rate was approximately 26, 1% in the quarter and we continue to expect an ETR of approximately 26% for the year, which implies a rate that is just over 27% for the fourth quarter.
Speaker Change: At this time.
Speaker Change: Thank you we will now be conducting a question and answer session.
Speaker Change: I'd like to ask a question. Please press star one on your telephone keypad.
Speaker Change: Confirmation tone will indicate your line is in the question Keith.
Speaker Change: You May press star two if to remove yourself from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the Scott stockings.
Speaker Change: We also ask that you do.
Speaker Change: Do you do.
Speaker Change: All participants asking the question to limit yourself to one question and one follow up only four time.
Speaker Change: Our first question comes from the line of Tim Mulrooney William Blair.
Speaker Change: Please proceed with your question.
Tim Mulrooney: Yeah, Ken Jerry Good morning, greetings from past World.
Speaker Change: Good morning, I wish we were there.
Speaker Change: You guys are out here too don't worry, we're not having any fun without yet.
Speaker Change: Uh huh.
Speaker Change: So the residential organic I wanted to ask about that.
Speaker Change: Five.
Speaker Change: Five 5% year to date.
Speaker Change: Still indicative of a healthy market you know I recognize that but maybe slightly below what we've seen over the last several years. So I'm just curious.
How would you characterize the health of the consumer today and could you maybe break that growth down between your recurring revenue stream and onetime sales.
Speaker Change: Sure Tim Thanks for the question we appreciate that.
Speaker Change: When we dive in and we look at the overall growth of the business we continue to remain.
Speaker Change: Very optimistic very confident in our outlook, we talked about 7% to 8% we delivered seven 7% here in the quarter and seven 7% organic growth year to date.
Speaker Change: When you look closer at the residential business. It's an area that we're also pretty pleased with the performance, especially when we look at the recurring revenue in the business.
Speaker Change: Gross margins of 54%, we feel like the contribution or the incremental margins should be approximating that 30% level and in fact, when you look at the quarter and you Peel back.
Speaker Change: The performance you unpack the performance a little bit and look at it a little bit closer.
Speaker Change: What you see is that we spent we spent more in selling and marketing we saw an opportunity and a very attractive growth market to invest and grow our business.
Speaker Change: Alluding to what Jerry just spoke about so we spent a little bit more of their if you set that aside along with some of the investments we made on the tech side to accelerate that start rate that we have in our business you.
Speaker Change: You'd see an incremental margin that would be right around 30% here in the quarter. So we continue to remain confident in our ability to deliver a 30% plus incremental margins longer term. Yeah. This quarter is more of a timing issue more than anything as we indicated at the end of Q2.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Toni Kaplan with Morgan Stanley. Please proceed with your question.
Toni Kaplan: Thank you so much I also wanted to ask about margin.
Toni Kaplan: You mentioned, the gross investments and hiring more people should we expect further investment in future quarters or was this more of a catch up to where you want to be.
Toni Kaplan: And just if you could talk about which segments, you're investing in and most of that would be great.
Speaker Change: Sure. Thanks for the question Tony.
Toni Kaplan: When we look at the investments this is.
Toni Kaplan: This is a growth business, it's a growth market, we continue to see great growth opportunities. So we're going to continue to invest in the business when I pull back and unpack. The investments. We made this quarter I would look at them through two or three lenses. One is on our service side and our service technicians.
Toni Kaplan: Because we know the importance of getting out and starting our lease getting our leads converted into starts.
Toni Kaplan: This year.
Toni Kaplan: There's not been anything in there that in the data from what we see and what we understand about the consumer then that scares us off of continuing to.
Toni Kaplan: Get a fair price for our service and if we're doing a good job we should reward will be rewarded for that in our technicians in the field should be rewarded for that as well. So we've not seen anything in the data.
Toni Kaplan: That would cause us to change course from anything that we've already indicated to you both.
Toni Kaplan: Internally, but also externally when you look at CPI, we've consistently talked about CPI plus level of pricing and CPI coming back roughly two 5% recently.
Gives us no reason to step back on the pricing and pair that back and we feel like this is an essential service and we should be able to.
Toni Kaplan: Be rewarded and we should be able to reward our service technicians with the pricing that we've seen the last couple of years.
Very clear thank you.
Speaker Change: Thank you. Our next question comes from the line of Jason <unk> with Wells Fargo. Please proceed with your question.
Speaker Change: Hey, guys. This is <unk> on for Jason Haas, Thanks for taking our questions.
Speaker Change: I wanted to ask on the commercial side, just any update there in terms of the strategy around splitting the brands and adding to the sales force I think theres a bunch of plans to create a second division and the can you just remind us there at the margin opportunity being able to capitalize on multiple franchise across a single digital media channel. Thank you.
Speaker Change: Yes, we still continue to have a pretty long runway on the commercial side and how we structure that business, how we open new branches.
Speaker Change: And to your point about <unk>.
Speaker Change: <unk> another division those types of things.
Speaker Change: We're still in.
Speaker Change: Probably in the first two years or three innings of what's possible. There on the commercial side, we're going to continue to invest invest in those opportunities and even from a.
Speaker Change: Positions that we bring into the fold and how we treat the teams and the brands and that's a that's a meaningful difference for us in our markets.
Speaker Change: In terms of new markets, we see so much opportunity, it's such a fragmented it's such a large and growing market. The pest control market that we're going to continue to remain committed to that area.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of George Tong with Goldman Sachs. Please proceed with your question.
Speaker Change: Alright, thanks, good morning.
Speaker Change: You mentioned seeing disruptions to operations from Hurricane Helene during the last week of the quarter can you discuss which parts of the business. This impacted the most and whether you expect any spillover effect in <unk>.
Speaker Change: So it was really a this.
Speaker Change: Obviously, the southeast United States.
Speaker Change: The coastal areas of Florida, where we have a strong presence both in the Oregon brands as well as brands.
Like home team in northwest.
Speaker Change: The West Coast of Florida parts of the East Coast of Florida to that storm kind of pushed through and add tornadoes.
Speaker Change: The southeast and central part of.
Speaker Change: Although the eastern coast of Florida. So there was a there was a lot going on there we had a lot of branch closures for several days, we focus on making sure. We are prepared for the storms as they are coming.
Speaker Change: And letting our people prepare we know that the more people prepare the faster.
Speaker Change: We can respond and get back to work.
Speaker Change: If people are in a good place themselves. So we had a lot of branch closures for several days when we got back up on our feet.
Speaker Change: After Helane and then Wham.
Speaker Change: Im going to get another one.
Speaker Change: That.
Speaker Change: Cause.
Speaker Change: Significantly more challenges talking to our people.
Speaker Change: The technician front.
Speaker Change: It sounds like you had invested in both by so would be curious your thoughts on kind of hiring people in the third quarter as opposed to maybe in the spring something like that.
Speaker Change: So if you have the right amount of growth and you have routes splits and branch openings and things like that that were and you are trying to maintain the right balance of.
Speaker Change: The number of customers on say a service technicians route things like that will always.
Speaker Change: <unk>.
Speaker Change: And usually thats that could occur towards more towards the indices and in the third quarter, where we do routes splits and things along those lines and that's the right time to add those customers or add those technicians on the sales side.
Speaker Change: We have over the last several years.
Speaker Change: Taken in and hired really year round.
Speaker Change: And continuing to.
Speaker Change: We're cognizant of it.
Speaker Change: One of the things I mentioned is like how fast can you scale. How fast can you can you train the right amount. So we're trying to take a balanced approach rather than hiring a bunch of onetime a year trying to train, let's say it's easier too.
Speaker Change: Train 20 people in a class that you have four or five classes a year, you're adding 100.
Speaker Change: Then it is to try to add 60 in a quarter and ramp it up and so because your success rate of hiring 60 versus hiring 20, and putting the time and attention to them and that you need.
Speaker Change: <unk>.
Speaker Change: A little more challenging so we've taken a more balanced approach to how we onboard how we time those hires and add strategically over time.
Speaker Change: And that means we will be making hires throughout the year.
Speaker Change: I will say generally speaking, though when we get into the fourth quarter, we do tend to especially on the home sales inspectors on the residential side. There is a lot less of that hiring and they'll usually begin again in the January February time timeframe before we hadn't seasons on the commercial side, it's a little bit more of a year round type of event.
Speaker Change: Do you think that you've finished with that Jerry because if you just look at the quarter. What we saw was we gained leverage in those areas in September and so more of our significant more significant investments were made in July and August we didn't see as much investment coming through in September as you did earlier.
Speaker Change: In the third quarter.
Speaker Change: Good point Ken.
Speaker Change: Lot of that in the quarter was very front end loaded in the early part of Q3, and then we began to wind it down yes.
Speaker Change: Okay that makes a lot of sense I really appreciate that color there.
Speaker Change: And then on the on the advertising spending.
Speaker Change: Do you track kind of the returns on advertising.
Speaker Change: Turns metric related to advertising spend and could you talk about whether those metrics.
Speaker Change: Change over the last call it.
Speaker Change: [music].