Operator:

Greetings and welcome to Rollins, Inc. Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. And it is now my pleasure to introduce your host Lyndsey Burton, Vice President of Investor Relations. Thank you, Ms. Burton. You may begin.

Jerry Gahlhoff:

Thank you, Lyndsey. 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 second quarter was highlighted by an increase in revenue of 8.7% to $892 million and we delivered healthy organic growth of 7.7% in the quarter. Overall, we continue to see solid revenue growth across all major service lines as total residential revenue increased 6.3%, commercial rose 9.9%, and termite and ancillary was up 11.8% this quarter. We continue to invest in growing our business. As you would expect, we made strategic investments in incremental sales, staffing and marketing activities during the quarter. We will continue to invest throughout Q3 to ensure that we remain top of mind and well-positioned for share gains as peak pest season continues. We are well staffed on the technician and customer support front so that our people are on boarded, extensively trained and ready to provide an exceptional level of service for our customers. This also means that we are positioned to convert our marketing and sales investments into new customer growth. Our team continuously challenges itself to think of new and different ways to enhance the relevance the relevance of our brands with current and future customers. Earlier in the summer, our creative team at Orkin partnered with Emmy nominated composer, Bryan Rheude, to compose a seven-act symphony crafted entirely around the historic emergence of two broods of cicadas. We hosted the Orkinstra symphony live in Springfield, Illinois, with curated music composed to accompany the recorded songs and rhythms of trillions of cicadas. The event garnered hundreds of millions of impressions for the Orkin brand, and support for this unique initiative continues as the symphony is currently available on all streaming platforms. In fact, I listened to it again just the other day on a flight and found it to be very relaxing. I encourage you to check it out. On the commercial side of the business, investments we've made to capitalize on a multibillion-dollar growth opportunity in the B2B space continue to pay dividends. Our new 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. Investments to drive organic growth are complemented by strategic M&A. We closed 26 tuck-in deals in the first six 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. Beyond growth, our dedication to operational efficiency and continuous improvement is an important part of our strategy and culture. 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. Safety remains an important area of focus. In Q2, we enhanced our onboarding program for new teammates by providing more robust safety training, with an emphasis on how we equip our new drivers with the technical skills, awareness and courtesy needed to be safe on our roads and in the neighborhoods we serve. Our efforts continue to yield solid driver safety scores and further reinforce the culture of safety we strive to promote throughout our company. We continue to look for ways to modernize our company, and to that end, our Board of Directors recently amended and restated our bylaws to transition from a classified board structure to a declassified one. Going forward, board members that are up for reelection will be elected to one year terms. This step aligns with corporate governance best practices. In closing, we're excited about where our business stands today. Demand from our customers remained strong with over 7% organic growth in the quarter, and for the first half of the year. 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 20,000 plus teammates around the world for their ongoing commitment to our customers. I'll now turn the call over to Ken.

Jerry Gahlhoff:

Thank you, Ken. We're happy to take any questions at this time.

Tim Mulrooney:

Jerry, Ken, good morning.

Kenneth Krause:

Morning.

Kenneth Krause:

Thank you for the question, Tim. Appreciate that. And it's a great question, something that we certainly took a close look at as we prepared for the call and reviewed the quarter. And what we found was business -- the performance continues to be exceptional. The margin performance was incredibly healthy. We saw leverage across gross margin. We also saw improvements in SG&A. As you indicated, our quarterly incremental margin approached 40%. If you exclude some of those non-operational items, I would call it our incremental margins were still at or above 30%. And that's the pace that we like to see. And in fact, if we go back a couple of years, we've seen some great improvement on those margins. So, it's good to see those margins coming in, even without the benefit of some of those non-operational items at or above the 30% range.

Kenneth Krause:

Thank you.

Ashish Sabadra:

Thanks for taking my question. Really strong momentum in the business. But if I had to nitpick on consumer, we did see improvement in the organic growth compared to first quarter, but it's trending slightly below what we've seen historically. So, I was just wondering if you could provide some more color on that front. What are we seeing on recurring versus ad hoc services. And also, was there any impact of the two fewer working days in June? Thanks.

Kenneth Krause:

The only thing I would say is we had, what was it, 5.4% residential growth. And so when you look at the one-time or the recurring business was at or above 6% in the quarter. And when you take into consideration some of those factors you described, I mean, they certainly had an -- they have a potential of having an impact on the overall growth rate. So, we feel good about the level of growth we saw in the quarter, the level of activity around customers and the demand levels we continue to see going into the third quarter.

Jerry Gahlhoff:

We -- I don't think we've seen necessarily a stronger demand in certain verticals. What -- where we're getting our results is by building the biggest and best salesforce on the commercial side that we can -- that is possible out there. We continue to add to our salesforce, invest in their training, invest in development and building a very strong cohesive team on the commercial sales side. That's really what's paying dividends, not necessarily one vertical or another. I think we're out there just trying to capture new business through the new people that we're adding to our team.

Jerry Gahlhoff:

Thank you, Ashish.

George Tong:

Hi. Thanks. Good morning. Is there any way to estimate -- morning. Any way to estimate how much impact the two fewer working days in June affected organic growth in each of your segments. Was the impact greater in certain segments than others?

Kenneth Krause:

And it can probably impact both one time as well as recurring business because we don't have the opportunity to get out and maybe start the recurring business because we're losing those days. And we're also just not seeing the calls from the one-time because we don't have those days, right? You don't get as much one-time in the very -- in the peak of the peak season.

Kenneth Krause:

Yeah. I wouldn't want to say that we're seeing acceleration in the Q3, but we continue to see just consistent levels of demand for our services and very much giving us confidence in our ability to deliver on the range of growth that we provided at Investor Day of roughly 7% to 8% organic growth. I mean, through the first six months were 7.6% and in the quarter we were at the high end of the range. So, we feel good about this business and the ability to drive value for all of our stakeholders when we're seeing demand levels like we saw here in Q2.

Operator:

Our next question comes from Toni Kaplan from Morgan Stanley. Please proceed.

Kenneth Krause:

The trends have been positive. Demand remains healthy, and both resi as well as commercial, all giving us confidence in our ability to continue to deliver that 7% to 8% of organic growth that I just spoke about. And so, generally, as Jerry indicated, it was unfortunate the way the calendar fell where you lose a couple of days in peak season, but we certainly continue to see the things that are in our control give us confidence in our ability to deliver on our goals that we've set for ourselves.

Hilary Lee:

Got it. And just to kind of dovetail off that, it's been kind of a -- not unusually, but warmer July than in recent memory. Do you expect that to kind of help out with the peak season this year, and any indication on what you guys do with taking care of the cicada issue, or is that not really an issue for you guys to handle, even though regarding the symphony as well?

Hilary Lee:

Great. Thanks guys.

Heather Balsky:

Hi, thanks for taking my question. I was hoping to drill down on commentary around investing in marketing and customer acquisition. Just how your -- just the pace of it this quarter, how you're thinking about it in the back half and what you're seeing from the competition as well.

Jerry Gahlhoff:

Yes, dynamic. And to the point of, like when you look at this quarter and you try to understand the impact of that, you saw a little bit less, you saw some leverage in our selling and marketing costs. And some of that was in the advertising area, as we had pointed out in our presentation that's posted online. What we're seeing, though, is we're ramping that investment here into Q3, and so to take advantage of that longer shoulder season. And so, we're expecting to see a bit of an uptick in these advertising efforts here as we go throughout July because the markets are very healthy for us.

Operator:

Our next question comes from Josh Chan from UBS. Please proceed.

Jerry Gahlhoff:

I don't think any of the channels are necessarily any better or any worse. I think we're doing well in all of them. And it's really about having a balanced approach, balance of how you spend, making sure that we're spending our money wisely, getting the return on investment that we want. We don't want to just drive leads for the sake of driving leads where we don't have the capacity to fulfill the demand and all those things come into play. So, I think our brands and our businesses have done a pretty good job of ensuring that what we do, we're disciplined about, we execute to it and we measure our results and we measure our return on investment. So, it's been pretty solid across all those channels.

Jerry Gahlhoff:

I think -- Ken, we've seen pretty solid growth across the business. Geographically, I wouldn't say there's been any significant difference where there's some market that's radically lagging another market or part of the country or even international. So, I would say generally across the board, it tends to be fairly healthy.

Jerry Gahlhoff:

Yeah. And usually if you see those differences, it usually comes on the edges, the back edges of those shoulder seasons, or in the wintertime when extreme weather may impact it more is usually when we see more of those differences geographically.

Jerry Gahlhoff:

Thank you, Josh.

Aadit Shrestha:

Hi, Jerry and Ken. Thanks for taking my questions. Just going back to gross profit, it was up 80 basis points this quarter. So, it's another strong quarter. But could you maybe break out how much of that was driven by overall price cost spread versus the tailwind from insurance and claims and fleet?

Aadit Shrestha:

Great. And just to follow up, not really a follow up, completely not related. The 11% organic growth that seemed to have accelerated within termite and ancillary services, how did that split out between the two? Was one better than the other?

Jerry Gahlhoff:

Yes, they've both been really good performance for us here, especially in the quarter. Continue to see good demand levels.

Jerry Gahlhoff:

Thank you.

Stephanie Moore:

Hi. Good morning. Thank you.

Stephanie Moore:

I wanted to touch -- morning. I wanted to touch on maybe acquisitions quickly here, maybe any heightened competition for deals that you're seeing. And then from a strategic standpoint, maybe any areas within pest that are particularly attractive to you guys at the moment. Thanks.

Stephanie Moore:

Got it. Thank you. And then just as my follow up, sorry if I missed it. But did you say how July organic growth has trended?

Stephanie Moore:

Understood. Thanks so much.

Operator:

This concludes our question-and-answer session. I would like to turn the floor back over to management for closing comments.

Jerry Gahlhoff:

Thank you everyone for joining us today. We appreciate your interest in our company and look forward to speaking with you on our third quarter earnings call later this year. Thanks a lot.

Operator:

Greetings. Welcome to Rollins, Inc. First Quarter 2024 Earnings Conference Call. [Operator Instructions] 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.

Jerry Gahlhoff:

Thank you, Lyndsey. 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 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 Ken will discuss in more detail.

Kenneth Krause:

Thanks, Jerry, and good morning, everyone. The first quarter reflects continued strong execution by the Rollins team. A few highlights to start. Growth was robust at the start of the year. We delivered revenue growth of 13.7% year-over-year. Organic growth was 7.5%, and we saw significant improvement moving throughout the quarter as organic revenue growth accelerated to over 10% for February and March.

Jerry Gahlhoff:

Thank you, Ken. We're happy to take any questions at this time.

Kenneth Krause:

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. But one quarter is certainly not a long-term trend. We are continuing to remain very confident in our outlook, and that outlook is really anchored around 7% to 8% sort of growth rate that we've consistently talked about. That stepped up, as you all know, since COVID, and we continue to benefit from that higher growth rate and more favorable operating environment. But yes, I think 7% to 8% is kind of how we think about the business from an organic basis going forward.

Jerry Gahlhoff:

Tim, this is Jerry. A lot of that cost really lied on the heavier side on the selling expense as it relates to us staffing up. Let me give you a couple of examples, a couple of data points. Just looking at Orkin alone, when we looked compared to 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.

Operator:

Our next question is from George Tong with Goldman Sachs.

Kenneth 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 and ancillary. Across that portfolio, the business continues to perform very well. Onetime business can be choppy. It continues to be choppy. But generally, demand for our services remains very healthy.

Jerry Gahlhoff:

I would add to that, George, that when we think about some of the onetime business as well, as Ken 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 service. But we also continue to see really strong health in our onetime ancillary business that really shows that a consumer side of it is strong and the consumers continue to be willing to invest in protecting their homes.

Kenneth Krause:

Certainly, when you unpack the termite business, there's 2 components to the termite and ancillary. There is your normal recurring termite business, your pretreat business, and then you have ancillary business in there as well. 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 services.

Jerry Gahlhoff:

I look at it from a productivity standpoint. We continue to -- the sales are there, the working the backlog can be a challenge. And in the quarter -- and that goes back to a January type of phenomenon, where we had more branches and operations closed for multiple days compared to the prior year. And that affects productivity and ability to get the work done, even if our sales force is out there selling and they're out there continuing to do what they do and building that backlog of work to get done.

Operator:

Our next question is from Stephanie Moore with Jefferies.

Jerry Gahlhoff:

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 being successful. That B2B sales process is a relationship type of sale. 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 supporting those new account managers when they're brought up to get them ramped up and brought to speed just as fast as possible.

Kenneth Krause:

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 is spot on, sales salaries continues to be an area that we continue to invest disproportionately in. We're saving money in 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 perspective on our business.

Jerry Gahlhoff:

We haven't seen any significant change from a retention issue one way or the other. So that remains pretty solid and any color on April...

Operator:

Our next question is from Ashish Sabadra with RBC Capital Markets.

Kenneth Krause:

When we look at the pipeline, it's very healthy. It's very balanced. There's opportunities across the spectrum with respect to M&A. 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.

Operator:

[Operator Instructions] Our next question is from Josh Chan with UBS.

Kenneth Krause:

It's interesting when you start to put a fine point on that, but we do think that probably commercial and termite and ancillary will 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. It doesn't mean that we're not bullish in residential, but I just think that, that's generally how the growth profile has unfolded over time for us.

Joshua Chan:

Yes. Okay. That helps [indiscernible] color there. And then on your decision 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 you're seeing and what opportunities you expect to realize?

Operator:

Our next question is from Ollie Davies with Redburn Atlantic.

Kenneth Krause:

So looking at your questions, thank you for your questions. The first question with respect to pricing, it's interesting. When we 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 service is certainly an essential service and should command CPI-plus level pricing. So 3% to 4% this year is certainly -- it's something we passed along, and we're seeing it stick. We just feel like the service is just too valuable, not to price it at those levels.

Ashish Sabadra:

Sorry, [indiscernible] again. Apologies if I missed this one, but what was the exit growth for residential? I believe the 10% was for the entire company, but what was it for resi?

Jerry Gahlhoff:

For February and March.

Operator:

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.

Operator:

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.

Operator:

Good day, ladies and gentlemen. Thank you for standing by. Welcome to Rollins, Inc. Fourth Quarter and Full-Year 2023 Earnings Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. [Operator Instructions]. This conference is being recorded today, Thursday, February 15, 2024. I'd now like to hand the call over to Lyndsey Burton, Vice President of Investor Relations. Please go ahead.

Jerry Gahlhoff:

Thank you, Lyndsey. Good morning, everyone. Fiscal 2023 was an outstanding year for Rollins as we achieved a milestone of $3.1 billion in revenue. Demand from our customers remained strong throughout the year across all major service offerings. While full-year revenue increased 14% versus last year, we grew earnings per share by over 18% and adjusted earnings per share by 20%, reflecting consistent execution of our operating strategies and a commitment to continuous improvement in our business. We finished the year with a strong fourth quarter and observed sustained strength in the pest control markets we serve. We also continue to drive share gains in our markets by leveraging a multi-brand, multichannel approach at scale to differentiate ourselves competitively. Digital marketing, cross-selling, service bundling and door-to-door sales methods help us reach new customers and enhance engagement with existing customers to support organic growth. We have also strategically allocated resources to the commercial side of our business to capitalize on opportunities within key verticals. Most notably, we have grown our sales force and invested in training and tools to enable their success. Our service quality is high, and our offerings are customized, which helps new sales professionals gain confidence and become successful quickly. Additionally, we are leveraging the scale of our Orkin brand across North America to effectively serve commercial customers coast-to-coast in both the U.S. and Canada. While we're still early with respect to our efforts in this area, we see good results as demonstrated by approximately 11% commercial revenue growth for the year. Investments to drive organic growth are complemented by strategic M&A. And in 2023, we welcomed 24 new businesses into our company through acquisition. This includes the addition of Fox Pest Control, which was the second largest acquisition in our company's history. Our synergistic approach to integration has gone well with the Fox team exceeding the financial targets we outlined last April. Additionally, during the fourth quarter, we divested certain non-core businesses, most notably our lawn care business, which includes insect, fertilization, and weed control for turf grafts. We recognized a pretax gain on sales of that transaction of approximately $15 million. The decision to divest this asset aligns with our strategy to focus on profitable growth in core pest control operations. Operationally, we remain committed to developing exceptional talent and investing in our teams. The hiring environment improved in 2023 as we put a lot of energy into onboarding the right people in both support functions as well as the customer-facing side of our business. Effective sales and service staffing levels help us capitalize on continued demand and deliver solid results for the year. 2023 was also an important year with respect to continuous improvement and safety was a key area of focus for us. During the year, we implemented an app that monitors driving behaviors once our vehicle is in motion. The app protects unsafe driving maneuvers associated with acceleration, breaking and speed, then converts data collected into a driver safety score. I'm pleased to report that by year-end, our average driver safety score for drivers that we monitor increased over 30% from the beginning of the year, but we aren't stopping there. Improving the safety culture isn't something that is done overnight. But we are proud of the progress we have made and have set ambitious goals for ourselves to encourage safe behaviors throughout our organization. We believe these efforts will improve our ability to serve customers, help mitigate potentially negative financial impacts on our business and most importantly, ensure our people return home safe every day. Our continuous improvement efforts also set our own initiatives to modernize our back office and support functions. This is a work in progress, but we took some important steps to upgrade talent and systems during the year. These efforts are aimed at further enabling our growth priorities and increasing productivity as we work to become a better, more effective provider of shared services for our brands. In closing, our performance in 2023 demonstrates the strength of our business model and the engagement level of our team. Our family of pest control brands are driving profitable growth and we are focused on continuous improvement throughout the business. We remain committed to providing our customers with the best customer experience and investing meaningfully in our team to drive growth both organically, as well as through disciplined acquisitions. We're pleased with where our business stands today and the momentum we carry into 2024. And I want to thank each of our 19,000 plus associates around the world for their efforts and contribution to our success in 2023. I'll now turn the call over to Ken.

Jerry Gahlhoff:

Thank you, Ken. We're happy to take any questions at this time.

Tim Mulrooney:

Jerry, Ken, good morning.

Kenneth Krause:

Good morning.

Kenneth Krause:

Certainly, Tim, I'll start, and then turn it over to Jerry for additional comments as well. But when we look at the business, the business, as you so well indicate has a high degree of recurring revenue. And so as a result, there is a consistent base to the revenue that we enjoy and we benefit from. The one thing that does have an impact on our business from time-to-time is what we call onetime type of service. And when we look at the quarter in the fourth quarter, we did see a decel and the deceleration in the rate of growth in those areas of our business. That's probably the largest area of impact on the revenue growth in the quarter. We were really encouraged, quite frankly with the level of growth that we continue to see from the recurring business. It was a healthy level of growth for us, despite being stacked up against last October, you may recall was more beneficial because hurricane season was pretty tough in September. And so some of that business pushed into the fourth quarter of last year. There's always puts and takes, of course, in this business with weather. But we continue to be pretty encouraged with respect to our growth, especially in the resi sector.

Tim Mulrooney:

Got it. Okay. So there was a little less gravy in the fourth quarter, which implies that your recurring revenue in that business is above your stated organic growth in the fourth quarter. Am I correct on that?

Tim Mulrooney:

Got it. The other one for me, and thank you for that, is on digital [indiscernible]. You mentioned last quarter that digital marketing [indiscernible] were, I think the language was flat to down slightly. Correct me if I'm wrong about that. But I was just curious if that trend carried through the fourth quarter or if it moves up or down at all?

Kenneth Krause:

Yes. It's interesting, Jerry, just adding on to that. When we look at the business in the fourth quarter and as well as throughout the year, what really proves the point that we're continuing to see good cross-sell, and we always talk about additional ways we access the customer. And one area is the cross-sell and the Termite and Ancillary business is really representative of that. We continue to see really robust levels of demand on the Ancillary side of our business, which is driven a lot by that cross-sell activity that the team continued to execute upon.

Jerry Gahlhoff:

It's a good idea. You should probably get on it yourself, too.

Jerry Gahlhoff:

Thank you.

Jason Haas:

Hey, good morning. And thanks for taking my questions. I'm curious if you could remind us what level of price increase you had put in last year. And I know it's early in the year, but I'm curious if you're seeing any more sensitivity from customers to the price increase you're putting in this year versus last?

Jason Haas:

Got it. That's great to hear. And then as a follow-up question, I'm curious if you could just talk about competitive dynamics in the industry. I'm curious how your growth rates in 4Q compared to the industry? If you feel like you're still gaining share? And just if you see any opportunities for the share gains in the year ahead?

Kenneth Krause:

When we look at our growth, Jason, in the quarter at organic growth, which was north of 7%, and we think about how that fares relative to how we've discussed the business and also how we outperformed. We're pretty happy with the level of growth that we're seeing come through the business. And we also continue to have a high degree of optimism and we're encouraged about the future growth that we continue to see in this business. So we really look at how we're performing relative to our expectations, and we continue to perform at a level that we're pretty pleased with.

Operator:

Our next question is from George Tong with Goldman Sachs. Please proceed with your question.

Kenneth Krause:

Certainly, George. When we look at the growth rates and we look at their recurring revenue growth relative to prior quarters, the business continues to perform pretty well. It continues to hold in there. I mean Q4 always sees a step down and just generally the growth year-over-year. But it's above what we saw a year ago, and it continues to be at a healthy level. So there's nothing that's indicating that there's a significant decel in the growth rates or a different or a change in profile and the growth rates that we're seeing coming through our business.

Kenneth Krause:

Certainly, when you step back and you look at the business, George, we look at it across a number of different priorities. We -- and when we think about our expectations going forward, we talked earlier about our pricing. We're focused certainly on getting the value of our services through strategic pricing management. And we again raised prices and we'll continue to raise prices and manage our rate cards effectively. So that's one side of the equation. And so that rate -- that growth rate associated with pricing is at this point expected to be in line with what we saw a year ago at 3% to 4%. And then secondly, when we look at growth profile across the business, we remain encouraged by our position in our market. We continue to have confidence in our ability to deliver a healthy level of growth going forward that's in line with what we've seen here in the last couple of years. We've all enjoyed the benefit and you've seen the benefit of our growth rate accelerating post-COVID. We continue to operate at a pretty healthy level of growth in our business from an organic perspective. And then, of course, we saw a really robust uptick in growth associated with M&A in the last year. When we look at the initiatives across the business, the cross-sell is certainly really important, going after those customers that may have one service, but trying to add additional services like mosquito and ticks and other services like that. Continuing the focusing on the Termite and Ancillary business is very important. And then last but certainly not least, is the Commercial side. Jerry spoke about the Commercial business in detail, we talked about it in the third quarter as well. We continue to place this portion of focus on the Commercial business and driving growth there. So all of those initiatives are coming together to give us optimism as we think about our growth rates going forward.

George Tong:

Very helpful. Thank you.

Operator:

Thank you. Our next question is from Michael Hoffman with Stifel. Please proceed with your question.

Kenneth Krause:

Good morning.

Kenneth Krause:

Certainly. When we look at M&A, we continue to be focused on M&A. We continue to focus on executing that disciplined strategy. We see roughly 2% carryover coming into 2024 from M&A. A large part of that, of course is here in the first quarter with Fox, we acquired Fox last April. So we still have one quarter of benefit. When we look at the pipeline, we see a healthy pipeline. We were very active to close out the year and then also to start 2024. January activity in deals that we closed are up. So we continue to chart towards that 2% plus level of growth, 2% to 3% plus level of growth associated with M&A as we go forward. But the carryover is around 2%.

Kenneth Krause:

Certainly. When we look at the incremental margin profile, there's no reason -- I mean, we continue to see and have a confidence level in delivering 30% incremental margins. If you look at the incremental margin in the last several years, we've seen it step up. Our focus has been -- we've been laser-focused on incremental margins and driving improvements on the margin profile. And so when we think about that level, that's the range at 30%. We've seen quarters as high as 35% to 40%. So it will jump around from quarter-to-quarter. And you're going to see that. But generally, when we step back and we finished the year at 28% to 30%, we're pretty pleased. That means we're getting 70 basis points as we did of improvement in EBITDA margins. The gains on asset sales will come through. They came through in Q3 -- or I'm sorry, Q4 here. And we saw roughly $3 million lower asset sales that came through other income, about 40 basis points on the margin line and the EBITDA margin line. And that will come through from time-to-time. And we'll try to isolate that as we go forward for you.

Kenneth Krause:

Thank you.

Ashish Sabadra:

Thanks for taking my question. Maybe if I can ask a clarifying question on resi. Obviously, good to hear the recurring revenues within resi continue to do really well and the digital inquiries are also pretty stable. Just a question there is, have you seen any change, particularly from competitor pushing harder on the marketing spend, is that changing anything? Did that change anything in the fourth quarter? But maybe importantly, going into 2024, how should we think about the demand environment? You talked about a pretty solid demand environment. I was wondering if you could provide any color on cicadas and the two groups of cicadas coming or emerging in '24, what do would that mean for the demand environment? Thanks.

Kenneth Krause:

Yes. And the second part of your question, I think, it was around cicadas and new pests. And we continue to monitor new pest activity. Cicadas are one of the many pests that we continue to monitor. Jerry, I don't know if you want to add. I'm certainly not the expert when it comes to cicadas. You're probably much better positioned to answer that?

Ashish Sabadra:

That's very helpful color. And maybe if I can ask a question on the back-office modernization. Ken, if you can just help us understand where you are on that process? And how should we think about that contribution to incremental EBITDA margins in '24, but also midterm? Thanks.

Ashish Sabadra:

Thanks. Very helpful and really strong momentum in commercial and ancillary services. So congrats on that.

Operator:

Our next question is from Josh Chan with UBS. Please proceed with your question.

Kenneth Krause:

Yes. I think there's an opportunity to improve upon the SG&A performance. And we've said that for some time, and we continue to see improvement in SG&A. With that said, we do have a disproportionate investment in securing customers through advertising and door-to-door and other activities. But with that said, our focus is to continue to improve upon the administrative side of the back office and without sacrificing the investments for growth. And so we're hopeful to see improvement as we go forward, just like we've seen in the last couple of years here. In the last year or so, we continue to see improvement despite the investments we're making. But we feel like we're well positioned on that front.

Jerry Gahlhoff:

Yes. Really, what we saw was a slowdown in some of the residential bed bug, onetime work and also on the wildlife side, which often involves some rat type of -- rat and rodent type of work, a slowdown there. Those are the main drivers of that, whether that's seasonal, whether it's something that's changed in the weather or change in demand. We're not completely certain of any of that. But bed bugs, for example, being down has always been something that has fluctuated from quarter-to-quarter and year-to-year on some of the ups and downs. And it was just more significantly down for us in recent months.

Josh Chan:

Great. Thank you both for the real good color. And good luck in 2024.

Operator:

Our next question is from Toni Kaplan with Morgan Stanley. Please proceed with your question.

Jerry Gahlhoff:

Yes. So the labor side of it is we have been very good at hiring onboard and training our sales teams, especially on the -- well, really on the Commercial and Residential side, we're talking specifically a little bit more about the Commercial side. But one of the things that you learn with on the Commercial side, where you typically have a longer sales cycle, it takes longer from the time so you have a lead or create a creative lead to get a deal closed, you really have to get those salespeople productive in selling and finding success early on. And that's what helps you with keeping people in the long term. The more they're successful, the more they're winning. The longer they stay and the more money they earn, they go to our presidents club events, those types of things. And I'm really proud of our -- of the sales team that we've built both on the Commercial and Residential side. It's a team of very high-performing people that we've enabled that through how we hire, how we train, how we invest in them, how we give them those tools to be successful. And that's ultimately what drives retention. That's what makes them want to stay. So we have a lot of momentum in that space that I just feel really good about as we head into 2024.

Jerry Gahlhoff:

I would say we are pretty happy. We have very broad geographic coverage under the Orkin brand in North America. And when you look in the U.S., mainly the area that we don't have the second bite of the apple brand strategy is fully built is really probably in the Midwest where we have some opportunity where we would like to continue to add and invest in M&A. And then when you think about international, we're very happy with our Australian operations growing and healthy, and we're going to continue to build out Australia, the United Kingdom and Singapore where we currently operate, but we really haven't put a lot of upper energy behind expanding outside of those areas. We like where we are, and we're going to continue to build and focus on those countries where we've expanded internationally.

Jerry Gahlhoff:

Thank you.

Stephanie Moore:

Hi, good morning. Thank you.

Stephanie Moore:

I was hoping you could touch a little bit on maybe what you're seeing on the unit cost inflation side, some key areas. You give a little bit about labor, but maybe just across the board, labor, materials, equipment, the likes and kind of expectations for 2024 versus what you saw, experienced in 2023? Thanks.

Jerry Gahlhoff:

And Stephanie, I would add, we do have some concerns about truck prices rising. Some of these fleet vehicles or costs are going up. As Ken mentioned, there's always the wild card as fuel prices and fluctuations we have there. On the M&S side, we just completed an RFP on our insecticides and termiticides, trying to ensure our pricing is in line on that and trying to generate some savings or at least offset the -- as much as we can, some of the price increases that are being passed along to us from some of our suppliers. So those are all things that are top of mind for us that we'll keep focused on through the year.

Jerry Gahlhoff:

That's -- yes, that's what I'm hitting at. There's still -- there's some unknowns, there may be still some costs that we don't know. And you look at the inflation data that demonstrate that it's not necessarily slowing as fast as we all would probably like it to. So we're still -- we're cautiously optimistic there.

Jerry Gahlhoff:

I don't think there's any significant change. There's still good deal flow out there. We -- there's good businesses that are out there for sale. And while -- from a quarter-to-quarter basis, there's some ebbs and flows to that kind of volume that we get to see or look at. But there's still plenty of good business out there that are potentially worth acquiring. So we've gotten off to a good start already in January. We feel good about our pipeline. We're actually a little ahead of where we were last year in that regard. But last year, keep in mind, in January, February, we announced the Fox deal in April, we were heads down working on the Fox deal. So we put a lot of stuff aside to focus on that. So now we're back to kind of business as usual and looking at normal deal flow.

Operator:

Thank you. Our next question is from John Mazzoni with Wells Fargo. Please proceed with your question.

Kenneth Krause:

It's a hard thing to predict, John, when you look at that trend line because it does take quite a while to work its way through. The last 12 months or so year-over-year, insurance and claims costs were negative for us despite not having large payouts, large claims that we settled like we did a year or so ago. But with that said, we're hopeful that it will improve. When we look at safety, it's not just about the financials either, it's about our people. And so when we think about our people-first culture, we want people to be safe. We want them to return home each and every night and that's really the focus here. It's how we make sure our drivers are safe and the communities that they continue to work and remain very safe, and they can get home each and every day. So we're focused on the people side. By doing the right thing, ultimately, the financials will improve. And that's the focus here. As we think about the future in the next several years, that we'll continue to see improvements on safety. People will be safe and we'll see the benefits of that come through our financial statement.

Kenneth Krause:

Yes. I would say, stay tuned, but we're really excited to get back to New York and to spend time with our investment community, talking about our growth prospects, our strategic priorities for the future, talking about how we will continue to expect the investments and growth initiatives. We're just really excited to spend the day talking about the future of this great company.

Kenneth Krause:

Thank you, John.

Operator:

Thank you. This concludes the Q&A portion of the call. I will now hand the call back to management for any closing comments.

Operator:

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

Operator:

Greetings and welcome to the Rollins, Inc. Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. I would now like to turn the conference over to your host, Mr. Ken Krause. Thank you. You may begin.

Lyndsey Burton :

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.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 the business outlook and contains certain forward-looking statements. These particular forward-looking statements and all other statements that have been made on this call 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 31, 2022 and our Form 10-Q for the quarterly period ended September 30, 2023, which will be filed later today. On the line with me today on 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. Jerry, would you like to begin?

Ken Krause:

Thanks, Jerry, and good morning, everyone. The 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. Adjusted EBITDA margin of 24.8% was strong improving 150 basis points driven by leverage across the P&L. Our GAAP earnings were $0.26 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 $0.28 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 above 8% this quarter, improving from the second quarter levels. We continue to see good demand for our services and our acquisitions, most notably Fox, continue to deliver value in the third quarter. Turning to profitability. We realized a 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 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 costs 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 ago. 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 costs as a percentage of revenue decreased by 20 basis points in the quarter. Excluding the earn-out adjustment for the Fox acquisition, SG&A costs as a percentage of revenue decreased by 30 basis points in the quarter. Peeling back the SG&A layers a bit more, people costs advertising and selling costs along with insurance and claims, make up the bulk of our SG&A spend. Margins 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 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 cost 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-GAAP adjustments this quarter for restructuring costs and for Fox acquisition-related items. These totaled approximately $10 million on a pretax basis and were related primarily to 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 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 or meaning what percentage of every additional dollar of 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 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%. And on an adjusted basis, incremental margins were almost 30%. Quarterly GAAP net income was $127 million or $0.26 per share increasing from $0.22 per share in the same period a year ago. Adjusted net income was $136 million or $0.28 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 remained 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. 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 8.7 million shares and used our revolver to fund this purchase. We expect this to be less than 1% dilutive to results in the first year and minimally accretive in the second year. Debt remains negligible and debt-to-EBITDA is below one time 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-date. Additionally we just announced another 15% increase to our dividend earlier this week. This marks over two decades of consecutive increases in annual cash dividend payments. 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 acquirer of choice and a very active participant 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 Jerry.

Operator:

Thank you. [Operator Instructions] Our first question comes from the line of Ashish Sabadra with RBC Capital Markets.

Jerry Gahlhoff:

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 plays a differentiating factor for us. So while the digital segment was certainly, I think on the flattish to slightly downside, our diversified strategy is really what's paying off for us.

Jerry Gahlhoff:

I think it's also important to mention that what we've seen across say the US and Canada in particular across North America is that all of our businesses are doing well and geographically not only from a brand individual brand strategy, but also from a geographic strategy they're really all doing quite well.

Ken Krause:

Yeah, 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 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 a 30% incremental margin and continue to see EBITDA margins lift as we go into the future. 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.

Jerry Gahlhoff:

Thank you.

Unidentified Analyst:

Hi, good morning. Thank you for taking my question. This is Vicki on for Jason Haas. To start 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?

Unidentified Analyst:

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

Unidentified Analyst:

Yes, thank you so much.

Tim Mulrooney:

Ken, Jerry, good morning.

Jerry Gahlhoff:

Good morning, Tim.

Jerry Gahlhoff:

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. We may have had better – some better months than others but it wasn't up 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 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 the word is a little volatile over the summer a little bit but then it's now seemed 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 that's the story of the last nine or 10 months.

Jerry Gahlhoff:

So yes that is something – 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 pay-per-click things along those lines. So you see that rise. And I also want to point out just because demand is flat through say Google search data or something like that or it's down 1% year-over-year or something along those lines, doesn't mean you as a company can't perform or take a larger share of that demand through – 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 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 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 a dense more dense populations than say onesie-twosie stuff coming in from all over a 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 be it's a really strong offering from a long-term standpoint as well.

Jerry Gahlhoff:

You're welcome.

Josh Chan:

Hi, good morning Jerry and Ken. Congrats on a good quarter. I guess I wanted to ask about the customer acquisition split I guess. You mentioned digital and door-to-door mostly on this call but I guess of the ways that you acquire customers could you just give us like a rough ballpark on how what channels they typically come through in?

Josh Chan:

Yes exactly.

Ken Krause:

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.

Josh Chan:

Right. thanks Jerry. And then I guess on the restructuring side of things is there a way to think about the payback period of the cost? And what kind of savings you expect to generate from those efforts?

Josh Chan:

Sure. That makes a lot of sense. Thanks Ken. Thank you both for your time.

Operator:

Thank you. Our next question comes from the line of Aadit Shrestha with Stifel. Please proceed with your question.

Ken Krause:

So, it's 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 costs in our business, a large percentage on a cost of services provided are people costs 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. If I go back to Q2, for example, we saw improvements in margin 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 in the third quarter we were very transparent in talking about a very unfavorable headwind associated with insurance and claims. 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 sale of leased 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. And so that's the focus continued improvement in margins as we go forward.

Ken Krause :

Yes. 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 this investing 7% to 8% and working capital 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 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 in the ranges I previously discussed.

Operator:

Thank you. [Operator Instructions] Our next question comes from the line of Stephanie Moore with Jefferies. Please proceed with your question.

Jerry Gahlhoff :

So on the -- this is Jerry, Harold. On the weather side, we had a pretty good weather quarter. Last year as Ken mentioned we had a hurricane that came through at the end of September it affected south in particular Southwest Florida. So we didn't have that type of event. So I would generally categorize it as favorable. And then as it relates to hiring of 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 and our termite and ancillary is the result of the effectiveness and the efficiencies that 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 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 that's an investment we make in the business. It's 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.

Jerry Gahlhoff :

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 accretive to our margins that are going to help us grow in a healthy positive way. So that side of it still seems very positive. What would you add to that, Ken?

Operator:

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

Jerry Gahlhoff:

So, on the commercial side with targeted verticals, we've talked about this 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 and service into and things like hospitality or health care, hospitals, logistics, warehouses, distribution centers 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 Marketo that help us from a -- on a B2B standpoint that have helped us get our outside sales people on the commercial side warmer leads and make them more productive and make them more productive quicker. That's a relationship sell. It takes some time. So we've been very deliberate about that since we started this program, probably midway through COVID seeing this as an opportunity coming once we are on the backside of COVID that would be a great opportunity for us to capitalize on. And we're again a long-term view and a long-term approach to our business and that's -- you're 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's campaigns that we run where we're using technology where we're using some automation. The marketing teams are certainly innovative 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 creating that organic demand.

Jerry Gahlhoff:

Competitively, it's -- I mean, 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 or remarkable still competitive out there.

Jerry Gahlhoff:

Thank you.

Oliver Davies:

Yes. Good morning, guys. Just a couple of questions for me. You mentioned on the Q2 call 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 gross before margin. Are you able to give a split of organic growth between kind of new customers and cross-selling into the existing customer base?

Jerry Gahlhoff:

Yes. 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 remained strong too. It was more in line with our historical averages. It was strong organic growth to close out the quarter as well.

Ollie Davies:

Thanks. Sorry, I mean just can you give a split of organic growth between new customers and cross-selling.

Ollie Davies:

Okay. Thanks. And then just on adjusted EBITDA last year. I think it was negatively impacted by 140 basis points on 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% delivered this quarter. So can you just talk about the moving parts? And is that still a pretty big drag on margin?

Ollie Davies:

Okay. Thanks, very much.

Operator:

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to management for any final comments.

Operator:

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

Operator:

Greetings. Welcome to the Rollins, Inc. Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Joe Calabrese. You may begin.

John Wilson :

Yes. Thank you, Joe, and good morning. We appreciate all of you joining us today for our second quarter 2023 earnings call. We posted very strong revenue and earnings growth for both our second quarter and first 6 months of 2023. We continued to deliver solid performance across most -- all of our brands and achieved healthy levels of customer growth. Before I turn the call over to Jerry, I want to comment briefly on the results of our recent acquisition of Fox Pest Control. We closed on the Fox acquisition in April, just prior to the ramp-up of their selling season, and they have performed exceptionally well as they achieved solid growth in the first quarter of our ownership. In addition, we have been pleased with their earnings contribution as they achieved over $2 million of GAAP earnings in the first quarter of ownership. This is inclusive of a $1 million charge associated with our earn-out of the deal. Our transition with Fox has gone quite well, and we're excited to have their great team and the Fox brand as part of Rollins. Now let me turn the call over to Jerry, who will provide more details on our quarter.

Kenneth Krause:

Thanks, Jerry, and good morning, everyone. The second quarter reflects strong execution by the Rollins team. Let me begin with a few highlights. First, we delivered strong revenue growth of approximately 15% year-over-year. We saw good growth across each of our service offerings. Organic revenue was up approximately 8% in the quarter and to finish the first half. Acquisitions drove the other 7% of the total revenue growth in the quarter. The integration of the Fox acquisition is progressing well, and we have a growing sense of optimism around this recent investment. Second, our gross margins were healthy, exceeding 53% this quarter. We were positive on the price/cost equation and saw good performance across several key cost categories. An adjusted EBITDA margin of 22.3% was pressured primarily by higher insurance premiums and casualty loss developments on 4 legacy auto cases. Our GAAP earnings were $0.22 per share and excluding certain expenses related to the Fox acquisition, adjusted earnings were $0.23 per share. And last but not least, we delivered approximately 16% improvement in operating cash flow while free cash flow was up approximately 18% versus the same period a year ago. Let's look at the quarterly results in a little bit more detail. Quarterly revenue was $821 million, up 15% on a reported basis. Currencies reduced revenue growth by 30 basis points as the Canadian dollar and the Australian dollar weakened relative to the U.S. dollar. Turning to profitability. We realized a 40-basis point improvement in gross profit margin, where we saw good performance on gross profit as pricing more than offset inflationary pressures. We continue to see the benefit of a more consistent pricing discipline across all our brands this year. Looking at our 4 major buckets of service costs, people, fleet, materials and supplies and insurance and claims, we saw improvements in margins associated with materials and supplies as well as fleet costs, while insurance and claims were a headwind. People costs were also somewhat favorable to margins even as we added a significant level of pest control and termite control technicians to support strong demand trends. As Jerry said earlier, staffing levels for our frontline team members are the best they've been in years. This timing sets up well as we see strong customer demand to start the third quarter. SG&A costs as a percentage of revenue increased by 30 basis points in the quarter. Peeling back the SG&A layers a bit more, people cost, advertising and selling costs, along with insurance and claims make up the bulk of our SG&A spend. We saw headwinds to margins from higher insurance and automobile-related claim costs, as previously mentioned, there were settlement developments on a few auto claims cases this quarter, and we're seeing higher costs in general for auto insurance and related claims due to inflationary pressures. We continue to invest heavily in advertising efforts in the quarter, and that has helped us go after and capture healthy levels of growth. As I mentioned earlier, we had non-GAAP adjustments this quarter for Fox acquisition-related items. These totaled approximately $5 million on a pretax basis and were related to purchase accounting amortization and the fair value of contingent consideration on this material acquisition. GAAP operating income was $155 million, up almost 15% year-over-year. Adjusted operating income was $160 million, up almost 19% versus the prior year. EBITDA was $182 million, up over 14% year-over-year and EBITDA margin was a healthy 22.2%. Our adjusted EBITDA was $183 million, up over 15% and representing a 22.3% margin. And for the first half, EBITDA margins were just under 22%. It is good to see EBITDA compounding at 16% in the first half. As I have consistently indicated, I'd like to look at the business using incremental margins or meaning what percentage of every additional dollar of revenue growth is converted to EBITDA. On an as-reported basis, we generated incremental margins in line with our overall EBITDA margin. However, excluding the headwinds I mentioned from insurance and auto claim developments and the additional costs associated with the earn-out on our recent acquisition incremental margins were accretive to our margin profile. Quarterly GAAP net income was $110 million or $0.22 per share, increasing from $0.21 per share in the same period a year ago. Adjusted net income was $114 million or $0.23 per share. The effective tax rate was 27% in the quarter, up 200 basis points versus the prior year, driven by higher foreign income taxes. We expect the rate to normalize at approximately 26% over the second half of this year. Turning to cash flow and the balance sheet. Quarterly free cash flow remained very strong. We generated $141 million of free cash flow on $110 million of earnings. Quarterly free cash flow increased by almost 18% and is compounding at just under 18% in the first 6 months of this year. Cash flow conversion, the percent of income that was converted to cash, was also a bright spot coming in well above 100%. We made acquisitions totaling $312 million, and we paid $64 million in dividends. That remains negligible and debt-to-EBITDA is well below 1x on a gross level. We continue to be active in pursuing additional tuck-in acquisitions and remain very well positioned to continue to maintain a balanced capital allocation strategy. As Jerry mentioned previously, we are excited about the strategic growth opportunities that Fox provides. So far, the Fox team and business have exceeded our expectations from a growth perspective and we see continued opportunity and momentum in their door-to-door model. A quick update on financial details. In April, we shared our expectations that Fox would add between $90 million and $100 million of revenue and $18 million to $22 million of EBITDA to our 2023 results. We now expect to deliver financial performance at the high end of both of those ranges. We continue to make progress on a number of general financial housekeeping items that will help position us best as we continue to grow our business. Of note, we filed a shelf with the SEC on June 3. This filing allows for up to $1.5 billion of primary securities. And while we have no immediate need for this capital, it provides flexibility for long-term fixed rate financing and other options that complement the bank revolver that we put in place earlier this year. Additionally, the shelf allows the company to work proactively with the family should they decide to divest a portion of their holdings at some point in the future. In summary, our performance this quarter continues to demonstrate the strength of our business model and the engagement level of our team. We remain focused on providing our customers with the best customer experience and driving growth organically and through disciplined acquisitions. With that, I'll turn the call back over to Jerry.

Operator:

[Operator Instructions] Our first question comes from the line of Josh Chan with UBS.

Jerry Gahlhoff :

Yes. This is Jerry. The quarter was a little different than we've seen in the past. If you'll recall, back in April at our call with everyone, we talked about April was off to a really strong start, and it was, and April finished strong. May was good as well. And then we saw a pretty significant shift in and some of the demand, especially in the back half of June where it just slid. We've since gotten some of the data from Google on Google search query data that showed there was a pretty significant decline in the back half of June, and that's really what drove the volume down overall in the quarter. But then right when we got near the end of June, very beginning of July, get close to the 4th of July, it really popped. It just came back again. I think the temperatures rose considerably and the number of unique visitors to our website, just in the first couple of weeks in July improved by over 18% year-over-year. So it was it was a little weird. Normally, you see that kind of seasonality earlier in the quarter, not later, but it was a little different than we've ever seen in the past.

Jerry Gahlhoff :

Well, when we started, we had good signs in April that the environment was good. And plus, we were staffed for it. So when you're better staffed and you've got the people to service the customers and get the new customers coming in the door, that's when it's there to take there to take advantage of it. And in our business, and if you look at the fiscal year, selling recurring revenue, the earlier in the year, you get it the more revenue you get. And so we just thought the conditions were right. And I think that's worked out well for us as evidenced by the organic growth levels that we saw in the quarter.

Operator:

Our next question comes from the line of Luke McFadden with William Blair.

Jerry Gahlhoff:

I would say we've had a little more pushback than we've had in prior years, but nothing that's insurmountable. It's still early to truly judge as we go through the year and get further into the year, we'll look closer at our rollback data and exclusion data, this really get an effect of what happened and whether or not customers canceled over. We'll have all our metrics as we move through the year. I would say it hasn't, it hasn't been a significant issue for us thus far this year. Now the questions as you move through the year, we watch that further depending on the economic environment. We have to moderate that. Ken will -- our plan is to evaluate pricing towards the latter part of this year once all the data and we'll go from there as we think about a futuristic...

Jerry Gahlhoff:

That was Luke.

Kenneth Krause:

Yes. It’s Ken, Luke, and I’ll take that question. You’re exactly right. The Fox acquisition is a very valuable acquisition and the gross margin reflects the value on their business model. It is accretive to the overall margin profile of Rollins. But it only contributed about $39 million of revenue in the quarter. So it’s not that meaningful. It did have a positive impact on the gross margin, but we also saw a positive impact across our organic business, primarily through better leveraging of fleet costs, better leveraging of people costs and materials and supplies. It's interesting, when I step back and I look at the fleet cost, you would expect fleet costs to improve with gasoline prices. But the thing I think people are missing at times is the fact that used car prices aren’t as attractive. So when we turn in lease vehicles or when we sell lease vehicles, we’re not seeing as much of a gain as we did last year at this time. So we’re seeing good improvement in our organic business despite that headwind. And we also are seeing improvement associated with the Fox acquisition coming through our gross profit margin.

Harold Antor:

This is Harold Antor on for Stephanie Moore. So you talked about productivity initiatives. So I just want to get an idea of what investments that you're making out of the company becoming a little bit more productive.

Harold Antor:

And then just on the residential deceleration. It looks like resi slowed down. And sequentially on year-over-year. So if you could give us any puts and takes on resi growth, resi organic growth? And how should we think about resi organic growth looking forward to the back half of the year?

Operator:

Our next question comes from the line of Jason Haas with Bank of America.

Jerry Gahlhoff :

Again, you think about seasonality, and sorry to say this last quarter was different because normally, when we talk about cooler spring, cooler early summer, that's usually happening in March and April. And usually, it hits. So this quarter, it was just -- it was really different than one I'd say we've seen in many, many years. Now is that to say there's some pent-up demand. We certainly have seen that in July, where once temperatures got to -- I don't know, a few weeks ago, we were in California, Ken, and when we arrived that day, in the middle of the day, it was like 75 degrees. But then by the weekend, it was 110 degrees in Northern California and the phones were ringing off the hook. So it was very -- So we had some very unseasonably cool weather in June, which is kind of an anomaly. So I don't know what else to say...

Jason Haas:

That's great. And then for a follow-up, I was going to ask on the incremental EBITDA margins. I know you said previously, and we're seeing it play out that the plan was to invest more in some customer acquisition costs. So you're a little bit below the 30% target this quarter. Is that a fair framework? I think you're in the low 20% range or so this quarter. Is that a fair assumption to use for the near term? Or do you think in the next few quarters, you can get back to that 30% level that you target?

Operator:

[Operator Instructions] Our next question comes from the line of John Mazzoni with Wells Fargo Securities.

Kenneth Krause :

Yes. First and foremost, what I would say is our accruals at June 30 are complete and accurate. And so when we look at the liability associated, for example, with auto claims, we feel like it's complete. We do know that things change. And so as facts, as circumstances change, estimates change. And that's what we would do as we move forward. you really started to see this tick up last year in the third quarter. We had around $10 million of claims that came through that settlements came through. And it's interesting when you look at what happened during COVID, claims have certainly -- they've certainly trended down quite a bit, courts closed a bit, settlement activity went down. And then coming out of COVID, you start to ramp. We're hopeful that we'll see that turn down as we go into the future. But you're just not sure what's going to happen on that front. What you can do, however, is focus on the controllables. And what Jerry had talked about in his comments, was focusing on putting systems and processes and the focus behind behavioral-based safety into the business that will mitigate these exposures as we move forward. And so we're doing just that. And we're hopeful that, that activity will have a positive impact on our experience in this -- our unfortunate experience in this area.

Kenneth Krause:

What I would say and I would ask Jerry to comment, too, was if I look at our organic growth profile and I compare it to our overall market growth, our organic growth, as we said in our prepared commentary, is roughly 8%. The markets, what we expect the markets to be growing at are much below 8%. So when we think about the organic growth profile and we think about the share that we are gaining in our markets, we feel good about the return levels knowing that incremental margins can be around that 30% and a customer might stay with us for 3, 5 or even 7 years. So we feel really good about the returns that we're getting on those ad dollars.

Operator:

And our next question comes from the line of Aadit Shrestha with Stifel.

Kenneth Krause:

When we look at the cash flow conversion, we're really happy with the performance that we saw in Q2, but also the first half of the year. Our focus is to continue to drive compounding of free cash flow in that mid-teen range. And the fact that we saw free cash flow compound at roughly 17%, 18% in the quarter, it provides us a sense of optimism heading into the future. I don't know that we're ready to increase our expectations in the 18% or 20% compounding of cash flow. But if we can continue to see compounding of cash flow in that 14% to 15% or so percent, which is in line with what we've compounded cash flow at over the last 20 or so years. I think we would be happy with that performance. Nothing really jumps off the page at me in terms of what's driving cash flow improvement in the quarter. I know the FOX business has a bit of a different business model when you look at the door-to-door side. And so payables stepped up a little bit with respect to that business model, that actually had a positive impact on cash flow. But overall, we feel good about cash flow and we feel good about the generation of cash that we're seeing.

Jerry Gahlhoff:

Sure. I completely heard or understood the question. Were you asking more about the PE space and what we're seeing from a...

Jerry Gahlhoff:

I wouldn't necessarily say it's come down significantly. I've seen some PE deals that have transacted at pretty high valuations early this year. I would say there's also been maybe some PE deals out there that haven't made it to closing. So it seems to be it's still a pretty rich environment. It may have softened a little bit, Ken. We measure that pretty closely and kind of watch all of our transactions. I don't necessarily think it means we're going to go more aggressive or try to bite off more than we can choose. We will always remain disciplined about picking the right -- the right acquisitions, the companies with the right culture, the people that care about the business and have the right type of fit for Rollins. And that no matter what the valuation is, that's the biggest thing we look. That's where we start. Ken, what would you add?

Operator:

And our next question comes from the line of Ollie Davies with Redburn Partners.

Kenneth Krause:

The focus on cross-sell, the focus on ancillary is a key part of the strategy. We don't necessarily provide the detailed growth levels for ancillary or for cross-sell or multiple services with any one customer. But what I can tell you is we're seeing really good growth from a number of different services. Like, for example, you might have an individual that signs up for pest control and they're adding mosquito because mosquito demand is incredibly strong or you might see a termite customer or another pest control customer that is signing up for cross space work or insulation work. And so we're still seeing continued good demand for those ancillary and additional services across the business.

Jerry Gahlhoff :

We haven't seen any slowdown in our ability to sell and bring on new commercial customers. We are more focused on certain verticals that we really like to sell into -- logistics, health care, hospitality, things along those lines where we try to be pretty fairly disciplined about the customers that we're really proactively targeting. But we have a very effective sales force. We've continued to invest in that sales force and ramp up those sales efforts, and we feel very positively about the future of the commercial business.

Jerry Gahlhoff :

Thank you, everyone, for joining us today. We appreciate your interest in our company, and we look forward to updating you on the third quarter earnings call in October. Thanks again.

Operator:

Greetings, and welcome to the Rollins Inc. First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joseph Calabrese. Thank you, and you may proceed, sir.

John Wilson:

Yes, thank you Joe, and good morning. We appreciate all of you joining us for our first quarter 2023 earnings call. I'm pleased to report, Rollins delivered solid first quarter results, highlighted by revenue growth of over 11%, and earnings per share growth of 20%. I want to begin by welcoming P. Russell Hardin as Rollins newest board member. Russ was elected to our Board at our recent shareholder meeting, and has served as President of the Robert W. Woodruff Foundation since 2006. He serves as a Director of Genuine Parts Company, as well as a trustee of the Northwestern Mutual Company. Hardin practiced law with the firm of King & Spalding, and as a long-time resident of Atlanta, has served this community in ways too numerous to list. Please help me welcome Russ Hardin. Now turning to the Fox Pest Control acquisition, I'm very excited about this recent event. Enjoying a strong reputation in the marketplace, we have long respected Fox's history of success. In fact, I have a relationship with one of their founders, Mike Romney, going back close to 20 years, as Mike began doing summer sales programs for Orkin prior to co-founding Fox. Fox Pest Control was formally established in 2012, initially marketing through the door-to-door sales effort in historically underserved pest control markets. Through consistent growth and expansion, Fox now provides general pest control services for homeowners from 32 locations in 13 States. Fox evolved in their growth strategies to include other streams, as now about a third of their customers are acquired through digital channels. Not only does Fox rank as the 13th largest pest management company, according to the PCT 100 rankings, Fox also received recognition in 2021 by Inc. Magazine as one of the fastest-growing private companies in America. In many of the markets they serve, Fox is a market leader with a great service reputation. I cannot stress enough what a great addition this is to our family of brands, and I'll now hand the call over to Jerry to recap Rollin's first quarter results, and talk about the transaction in greater detail.

Ken Krause:

Thank you, Jerry, and good morning, everyone. The team delivered a strong start to the year. Let me begin with a few financial highlights for the first quarter of 2023. First, we delivered over 11% revenue growth in the first quarter, with robust growth across all our service offerings. Acquisitions drove approximately 2% of the total revenue growth in the quarter. We expect to see meaningful improvement in growth from acquisitions for the remainder of the year, stemming from the acquisition of Fox we announced earlier this month. Second, our continued emphasis on margin improvements drove 130 basis-point improvement in EBITDA margins in the quarter. I will speak about incremental margins shortly, but as Jerry indicated, they were a bright spot. GAAP earnings per share increased 20% to $0.18 per share. And last, but not least, we delivered a 15% improvement in operating cash flow, and a 17% improvement in free cash flow. Let's look at the quarterly results in more detail. Starting off with revenue, it was $658 million, up just over 11% on a reported basis. Currencies reduced quarterly revenue growth by 60 basis points on the stronger dollar, notably versus the Canadian dollar, the British pound, and the Australian dollar. Turning to profitability, we realized 30 basis points improvement in gross profit margin. Gross profit margins were 50.3% of revenue in the quarter. We saw good performance on gross profit, as pricing more than offset inflationary pressures. We were more consistent in raising prices across all of our brands this year. We discussed our intent to do this on our year-end call, and it was good to see the impact of the steps we took on revenue and profitability. Looking at four major buckets of costs, people, fleet, materials and supplies, and insurance and claims. These comprise approximately 90% of cost of services in the quarter. We saw improvements in margins associated with people costs, as well as fleet costs. Material and supplies were neutral to margins, while insurance and claims were a headwind to margins. We delivered improvements in SG&A expense as well. SG&A improved 40 basis points when stated as a percentage of revenue during the most recent quarter. Let's dive into the major categories of SG&A a bit more. People costs, advertising and selling costs, and insurance and claims, make up a majority of our spend in SG&A. Margins benefited in the people cost area. Advertising and selling-related costs were relatively neutral to margins, while insurance and claims was a headwind to margins. As the case in the prior year, we expect to see SG&A tick up slightly in Q2 as we invest more heavily in customer acquisition-related costs across the business during the start of our more busy season in the second quarter. We do not have any non-GAAP adjustments to operating income or EBITDA this year. GAAP operating income was $112 million or 17.1% of revenue, increasing 130 basis points from the same quarter a year ago. EBITDA margin was 21.2%, up a strong 130 basis points over the prior year EBITDA margin. As I have consistently indicated, I like to look at the business using incremental margins or meaning, what percent of every additional dollar of revenue growth is converted to EBITDA. On an as-reported basis, we generated incremental margins of approximately 32% in the most recent period. Quarterly GAAP net income was $88 million or $0.18 in an earnings per share, increasing from $0.15 per share in the same period a year ago. Turning to cash flow and the balance sheet, quarterly free cash flow was very strong in the quarter. We generated $93 million of free cash flow on $88 million of earnings. Free cash flow increased by over 17% in the most recent period. Cash flow conversion, the percent of income that was turned into cash, was also a bright spot, coming in and above 100% for the quarter. We made acquisitions totaling $15 million, and we paid $64 million in dividends. Debt remains negligible, and debt to EBITDA is well below 1x on a gross level. We closed and announced the Fox acquisition earlier in April. We are excited about the strategic growth opportunities this acquisition will provide us. A few financial details. We expect this acquisition to add between $90 million and $100 million of revenue in 2023. The acquisition should add $18 million to $22 million of EBITDA for the remainder of the year. We used a combination of existing cash balances and borrowings to pay for this strategic acquisition. We continue to be very active in pursuing additional acquisition opportunities. We expect the Fox acquisition to be accretive to earnings in the first full year, with more meaningful contributions to EPS during the latter part of this year and into the first quarter of next year. We are in the process of finalizing our purchase accounting, and we'll provide an update on this on our Q2 call in July after we complete that process. During the quarter, we refinanced our credit facilities that were set to expire in April of 2024. We closed on our new facility before the banking crisis in March, and we were able to successfully secure a more modernized facility, that, in addition to other benefits, provides us with the opportunity to incorporate sustainability metrics into the revolver in the future. Additionally, we conducted an RFP for our external audit service provider, and engaged Deloitte as our new auditor in place of Grant Thornton, who had been our auditor for the previous 19 years. We are making good progress on a number of general financial housekeeping issues that will help position us best as we continue to grow our business. We remain very well positioned to continue to fund our dividend and grow through acquisitions. In summary, our quarter performance continues to demonstrate the strength of our business model and the engagement level of our team. We remain focused on providing our customers with the best customer experience and driving growth through acquisition. Organic demand remains robust, and we are very well positioned to continue to use our strong balance sheet to grow our business. The acquisition pipeline is healthy, and our strong cash flow and balance sheet positions us well to invest in our business. We continue to focus on execution and driving long-term profitable growth for our shareholders. With that, I'll turn the call back over to Jerry.

Operator:

Thank you very much. [Operator Instructions] The first question comes from Tim Mulrooney from William Blair. Please proceed with your question. Tim.

Jerry Gahlhoff:

Tim, this is Jerry. To me, it's pretty simple. It's about the investments we've made in hiring and staffing on the commercial side, the commercial front with our commercial account managers. We have a considerably larger staff than we did even a year ago and far more than we did two years ago. So, their efforts feed on the Street every single day. Bringing new business in at the volume they're bringing in, that's what's making the difference. It's not about individual wins or big customers or anything like that, it's the collective efforts of everything that they've done.

Jerry Gahlhoff:

Yes, so, Tim, this is Jerry. I'll handle the first part of that. We'll continue to look for tuck-in acquisitions, bolt-on acquisitions. We'll continue that path, and of course, continue to evaluate even larger acquisitions if they're there for us to get and the timing is right. But at the same time, we're also fairly cautious. We like to ensure that what we've - the most recent deal is handled well and our time and attention and focus is put on that to make sure that goes smoothly, that transition goes smoothly. We don't want to jump in anything with too much of a distraction for our team or for them in the short run. So, we're probably a little bit cautious there on really large deals in the very short term, but we'll continue to do the bolt-ons. And I'll let Ken address the question about capital.

Operator:

Thank you. The next question comes from Stephanie Moore from Jefferies. Please proceed with your question, Stephanie.

Ken Krause:

Thank you, Harold. I appreciate the question. This is Ken. I had mentioned in my prepared comments that advertising and marketing-related costs were relatively neutral to margins. So, that means that we were spending at just about the rate of growth of revenue in the first quarter. With that said, as we enter the second quarter, we are continuing to ramp up our investment in customer acquisition-related cost. And so, as we go into the second quarter, it's important for us to procure those new customers, which have an incredibly valuable long-term relationship with our business. As you know, approximately 80% of our business is recurring. And so, it's important for us to go after and get those new customers into the fold. And so, we'll continue to tick that up in the second quarter, as we have in past years. And so, I think that's an important point to remember as you think about modeling out, say, the second and third quarter of the year.

Operator:

Thank you. The next question comes from David Paige from RBC. Please proceed with your question, David.

Jerry Gahlhoff:

I don't know that we've gotten that deep into the analysis. We want Fox to - we want to make for a smooth transition, have Fox settled into what they're doing. Certainly, they have - the team at Fox has had a - themselves gone through this transition over time, ramping up on the digital side. And we’ll help them and continue to support their efforts to do that, give them some of our expertise and knowledge along the way to help them mature in that area and convert leads to sales and starts and those types of things that we feel like we can help them with over time. But at this point, I wouldn't give you any insight in terms of long-term what that may look like a year from now or two years from now. It’s still premature

David Paige:

Thank you.

Unidentified Analyst:

Hi. This is actually John filling in for Seth. Congratulations on the strong quarter. Just maybe quickly on the insurance and claims, could you give us some more color on really kind of how the headwind progressed in the quarter, as well as how we should think about the cost going forward this year? Thanks.

Unidentified Analyst:

Got it. That's great color. Thank you. And maybe quickly, just as we think about the cadence of residential, especially with advertising and customer acquisition spend ramping in the second quarter for the kind of peak season, can you just give us a sense at a high level how you're thinking about the kind of pacing of residential? And would it be fair to assume we could kind of see an acceleration from these levels, or are you thinking more of a kind of steady-state, high single-digit on an organic basis? Thanks.

Jerry Gahlhoff:

Yes, this is Jerry. I would add, we're in a really good position to take advantage of strong demand in the marketplace as it's there. So, we feel strong about our position to be able to capitalize on the potential for growth in the market, so.

Grant Slade:

Hi, Jerry. Hi, Ken. Thank you both very much for the additional detail on the Fox acquisition. It's very helpful. Just a point of clarification, however, if I may. I was just curious, the $18 million to $22 million in EBITDA contribution for this year, does that include the full extent of cost synergies that you're expecting to realize from the deal? Or are there perhaps further synergies we should be expecting in 2024 or later? And I guess if so, the quantum of those and the timing would be helpful, if you're able to share that detail with us.

Grant Slade:

Great. Thank you very much.

Aadit Shrestha:

Hi, good morning. This is Aadit from Stifel. Thank you for taking my questions, and congratulations on the strong quarter. So, my first question is just really the Fox Pest acquisition. How should the annual $90 million to $ 100 million in sales, how should that be allocated across the lines of businesses? And what are the drivers that would get you to $100 million versus that low end of $90 million? What are you actually building in?

Ken Krause:

Sure. Yes. And so, when we look at that business, the breakdown is highly focused on residential. A large percentage of that business is resi sector. And so, that'll come through our residential segment of our business. We feel like that $90 million to $100 million would probably come into our business very similarly to how our business is reported. So, Q2, you'll see a ramping from Q1, and then Q3 you'll see a further ramping. That's just the seasonality of our business. We feel like there's opportunities to drive some outsized growth there, but I also feel like this $90 million to $100 million is a very realistic estimate, and is reflective of the growth trajectory, strong growth trajectory that the business is already on. And so, we feel like it's very realistic in achieving that $90 million to $100 million this year as we think about the remainder of the year.

Aadit Shrestha:

All right. Thank you for that. And I have a follow-up regarding incremental margins, pretty healthy, 32%. How should we think about it for the remain of the year? Can you maybe exceed that 32% with sort of the pricing actions and the cost-cutting initiatives that you've put in? Plus like, what's the impact of Fox Pest on that?

Operator:

Thank you very much. There are no further questions at this time. I'd like to turn the floor back to management for closing remarks. Thank you.

Operator:

Thank you very much. Ladies and gentlemen, that does conclude today's conference. You may disconnect your lines at this time, and thank you very much for your participation.

Operator:

Greetings, and welcome to the Rollins Inc. Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Joe Calabrese. Thank you. You may begin.

John Wilson:

Yes. Thank you, Joe, and good morning. We appreciate all of you joining us for our fourth quarter 2022 earnings call. Julie will read our forward-looking statement disclaimer and then we'll begin.

John Wilson:

Thank you, Julie. I'm pleased to report that, Rollins closed out last year with continued strong revenue growth and solid financial performance. In the fourth quarter, we report revenue improved 10.2% to $661 million, and net income improvement of 26.1% to $84 million. For all of 2022, we achieved revenue growth of more than 11%, with net income improving as well. Jerry and Ken will provide greater detail, but all credit goes to our tremendous team, who continue to overcome many obstacles. As we begin 2023, the company remains well positioned to deliver on our long-term business objectives. Now, let me turn the call over to Jerry.

Kenneth Krause:

Thank you, Jerry and good morning, everyone. We had a strong quarter and finish to the year. Let me start with a few highlights. First, revenue growth was healthy with total revenue growing approximately 10% in the quarter and 11% for the full year. Acquisitions drove 3% of revenue growth in the quarter and for the year. We continue to see tremendous opportunities that will enable us to continue to drive growth through acquisition in the quarters and years to come. Second, quarterly adjusted EBITDA margins were a healthy 22.1%, up approximately 180 basis points versus the same period a year ago. We saw strong results throughout the income statement. GAAP earnings per share were $0.17, up from $0.14 in the same period a year ago. It was good to see the strong growth in earnings on the healthy revenue growth. And last but not least, quarterly free cash flow was very healthy with operating cash flow growing over 20% versus the same period a year ago. We finished off another strong year with free cash flow growing over 16%. Let's look at the quarterly results in more detail. Quarterly revenue was $661 million, up just over 10% on a reported basis. Currencies reduced quarterly revenue growth by 70 basis points on the stronger dollar notably versus the Canadian dollar, the Australian dollar and the British pound. Quarterly revenues were strong and it was good to see healthy growth across all of our service lines. Turning to profitability. Gross profit was 50.5% of revenue in the quarter, up 10 basis points from the same quarter a year ago. We saw a good performance on gross profit as pricing more than offset inflationary pressures. Pricing remains at the top of our agenda and we are evaluating opportunities to implement further price increases in the first quarter of 2023. For the year, we saw elevated costs associated with casualty reserves up $12 million for the year with $10 million of that in the third quarter alone. We discussed these charges with you back in October and continue to focus on implementing a number of key programs that Jerry mentioned previously, that are aimed at improving in this area. Additionally, people costs, most notably medical costs, were up about $7 million for the year. We saw higher costs in this area throughout the year. This wasn't necessarily as impactful in the quarter but was something that gradually got worse throughout the year. SG&A expense in the quarter was $191 million or just under 29% of revenues, up $3 million from the prior year, but improving 230 basis points when stated as a percentage of revenue. It was good to see the improvements in SG&A as a percentage of revenue to finish the year. While lower advertising expense due to timing drove 120 basis points of the leverage, it was good to see cost control carried across a number of categories. Management of SG&A represents a key focus area of ours as we start 2023. At just under 30% of revenue, we feel there are opportunities to drive improvement. Stay tuned on this front but know we are focused on taking action that will help improve performance in this area in years to come. Looking closer at profitability. We did not have any non-GAAP adjustments to operating income or EBITDA this year. GAAP operating income was $120 million or 18.1% of revenue. Adjusted EBITDA margin was 22.1%, up a strong 180 basis points over the prior year adjusted EBITDA margin. As I indicated previously, we did not have any adjustments this year to EBITDA margin. If you recall, we adjusted the prior year quarterly EBITDA margin by the impact of the non-recurring SEC matter. As we discussed on the last call, I like to look at the business using incremental margins or meaning what percent of every additional dollar of revenue growth is converted to EBITDA. In the quarter, on an as-reported basis, we generated incremental adjusted EBITDA margins that we're approaching 40%. When you take out the lower advertising spend I mentioned previously, incremental adjusted EBITDA margins were approximately 30% for the quarter. And even with incurring the higher casualty charges in the second half, incremental adjusted EBITDA margins for the second half were approaching 30%. This is certainly good to see. Quarterly non-GAAP net income was $84 million or $0.17 in adjusted earnings per share, increasing from $0.15 per share in the same period a year ago. Turning to cash flow and the balance sheet. Quarterly free cash flow was very strong to finish the year. We generated $116 million of free cash flow on $84 million of earnings in the quarter. Free cash flow increased by over 20% in the quarter and was up a very healthy 16% for the entire year. Cash flow conversion, the percent of income that was turned into cash was well above 100% for the quarter and the full year. We made acquisitions totaling $9 million and we paid $64 million in dividends during the quarter. Debt remains negligible and debt-to-EBITDA is well below 1x on a gross level. We were in a net cash position to finish the year. Year-to-date we have made acquisitions totaling just over $119 million and paid dividends of approximately $212 million. Debt balances are down $100 million since the beginning of the year and cash is down $10 million finishing at $95 million at the end of 2022. We are actively evaluating options to refinance our credit facilities that are set to expire in April of 2024. We expect to make progress on this in the first quarter. Also during the quarter, we corrected immaterial misstatements in the financial statements. Our press release and our 10-K that we expect to file later today will include more information on these changes. But in summary these are non-cash-related items that reduced what we originally reported for earnings by an immaterial amount. By making this change historical earnings increased by $0.01 per share per year. Let me repeat we understated historical reported earnings by $0.01 per share per year. The immaterial changes are related to purchase accounting for acquisitions. The short of it is that the company allocated too much of the acquired asset value to amortizable intangible assets in the past and this adjustment corrects for this. In closing, our fourth quarter performance continues to demonstrate the strength of our business model. We remain focused on providing our customers with the best customer experience and driving growth through acquisition. Organic demand remains robust and we are very well positioned to continue to use our balance sheet to grow our business. The acquisition pipeline is very healthy and our strong cash flow and balance sheet positions us very well to invest in our business. We continue to focus on execution and driving long-term profitable growth for our shareholders. With that, I'll turn the call back over to Jerry for closing remarks. Jerry?

Operator:

Thank you. [Operator Instructions] Our first question comes from the line of Tim Mulrooney with William Blair. Please proceed with your question.

Jerry Gahlhoff:

Good morning.

Julie Bimmerman:

Good morning.

Tim Mulrooney:

Just a couple of quick ones for me. So your SG&A as a percentage of sales, it was below 29% in the fourth quarter and it's been coming down every year by a couple of call it 10, 20, 30 sometimes 40 basis points every year. But the fourth quarter below 29% that was below what most folks were anticipating and what we'd typically see from you guys. Are there deliberate cost savings programs happening here, or is it primarily just the leverage that you would expect to get on higher volumes and the savings from advertising expense? What I'm trying to get at is, there was a surprise here at the level of cost savings that you had and you had a nice EBITDA beat primarily because of it. Is it fair to expect to see continued leverage on your fixed costs like this as we move through 2023, or would you expect maybe them to come up a little bit as you layer investments back in the business? Thank you.

Jerry Gahlhoff :

Yes, Tim, this is Jerry. Since Ken's been here it's one of the hot topics on his radar screen is our SG&A and how can we get better and how can we improve and Ken has challenged us and brought that equation to the table. And as you know we're always looking to get better. And so we're -- and Ken's finding some ways to help us do that.

Jerry Gahlhoff :

Yes.

Jerry Gahlhoff :

So, Tim this is Jerry. So on the -- really on the Orkin side, we are looking to very similar levels to what we did in prior year, where we've actually gotten more aggressive in our other brands than we were at prior year. So if anything on the whole the net result of that is what we expect is better performance out of pricing going forward in 2023.

Operator:

Thank you. Our next question comes from the line of Ashish Sabadra with RBC Capital Markets. Please proceed with your question.

Jerry Gahlhoff :

We -- you got to keep in mind that as we wound down 2022 November, December, we reduced marketing -- some of our marketing spend or advertising spend in the back half of the year and so that softened the end of the fourth quarter of last year. And we began turning our advertising and marketing efforts back on in January. Across the board, I think, we had pretty good weather. We had a pretty good business environment. We had a lot less of the impact of COVID than we did the prior year in January. It was just an overall better environment not necessarily something about technology or anything along those lines. It was just an overall better environment that helped with demand. I don't know John you have anything to add to that?

Jerry Gahlhoff :

Post-COVID, yes.

Ashish Sabadra:

That's great. And then maybe just a broader question on organic growth. If we look at over the last three years organic growth has improved materially compared to the pre-pandemic level. And so as we look into 2023, but also with the mid-term not looking from a guidance perspective but just as we think about the organic growth trajectory, should we think about it more being in line with the recent history particularly the organic growth being more in line with the recent history? Thanks.

Kenneth Krause:

We have no intention to take the foot off the gas and slow it down. So our goal is always to try to get better and maintain or beat those rates year-over-year. So that's our aim. We're going to keep going.

Jerry Gahlhoff:

Thank you.

Hans Hoffman:

Hi. This is Hans on for Stephanie. Congrats on the strong quarter. Just wanted to dig in a bit more on the resi business in Q4. Obviously, realize a bit slower growth there and in your prepared remarks you kind of referenced it's kind of been consistent across the industry. I just wondered if you could talk about some of those trends in the industry more broadly? Thanks.

Hans Hoffman:

Got it. That's helpful. Thanks. And then just maybe I want to dig in a bit more on sort of cost inflation. Could you talk a bit about what you're seeing – where you're seeing cost inflation a bit more sticky in your business and then maybe where it's moderating a bit? And then just kind of your ability to price in excess of cost inflation given some of the pull forward in pricing for 2023?

Jerry Gahlhoff:

And Ken, while the fleet is – we're seeing some improvement largely driven by fuel. Where we haven't seen any relief is in repairs and maintenance. The cost of replacing just a single tire remains sky high. Basic service on a vehicle is – continues to climb. And we've just got no relief there. That's one element within fleet. But as Ken said, on the M&S side, we've got those margins back in line. Our teams have fought to help us do that in the procurement side. Those have seemed to have come back to normalized levels. So that's good news for us.

Operator:

Thank you. [Operator Instructions] Our next question comes from the line of Oliver Davies with Redburn. Please proceed with your question.

Kenneth Krause:

Those markets continue to be very attractive for us. We continue to grow our business. And in fact last year we made significant acquisitions in the UK market. We build out our platform of businesses and services that we're providing in the UK because we view that as a very attractive market. We'll continue to deploy capital internationally, but I have to remind you also that the US is our largest market it's our fastest growing market and it's highly fragmented. So it provides us tremendous amount of growth opportunities as we go forward. So we're pretty bullish, we're pretty optimistic and we feel like we've got a great growth plan that spans the globe.

Kenneth Krause:

We don't break out the termite business from the ancillary, so it's hard to report that. But what I would say is we continue to see demand for the termite business. A lot of people look at the non-residential -- or the residential housing market and get concerned about a slowdown in new housing starts and such. And while we are managing through the challenges associated with higher interest rates, we're seeing good growth come through that business.

Oliver Davies:

Thanks so much.

Operator:

Thank you. Our next question comes from the line of Brian Butler with Stifel. Please proceed with your question.

Jerry Gahlhoff:

Yeah, we can.

Kenneth Krause:

It's hard to parse it down into that level of detail. But what I can tell you is when we look at the overall growth rate of roughly 10 or so percent, you back off just over 3% of that for acquisitions so you arrive at about 7% or so of total growth. As Jerry indicated, last year we pulled the price increase forward a bit. So we actually saw a little bit more of pricing not only from pulling it forward, but because we were passing along a higher pricing -- price inflation to our customers. And so if you -- if -- we had talked previously about passing along roughly a 4% price increase, we probably realized something in the 2% to 3%. So you could see that our underlying real growth rate is in that 4% to 5% is what we estimate. And it's just an estimation, but that's what we're estimating that our underlying growth rate is without price.

John Wilson:

And Jerry if I may add as it relates to cross-selling, a critical aspect of that is being well-staffed in both your sales management arena and your sales team. And currently we are well-staffed. That's why we believe that cross-selling will continue to increase. Without the staff you can't -- you're having to offer those services proactively. And so without a staff out there to do it, it just doesn't happen.

Brian Butler:

Okay. Great. That's helpful. And then when you think about that pricing kind of pulling it forward again in 2023, how much – I mean, I think you stated it was fully offsetting inflation? So does that continue to drive those incremental margins of 30% through 2023, or is it even better than that?

Brian Butler:

Okay. And if I could slip maybe one last one. On the M&A kind of rollover into 2023, any color on what's already embedded in there from deals that you closed in 2022?

Brian Butler:

Great. Thank you very much for taking the questions.

Operator:

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to management for final comments.

Operator:

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

Operator:

Greetings. Welcome to Rollins' Third Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Joe Calabrese. Thank you. You may begin.

Gary Rollins:

Yes. Thank you, Joe, and good morning. We appreciate all of you joining us for our third quarter 2022 investor call. Julie will read our forward-looking statement disclaimer and then we'll begin.

Gary Rollins:

Thank you, Julie. I'm pleased to report that Rollins' third quarter performance was highlighted by continued growth and solid financials. As we look ahead, the company remains well positioned to continue accomplishment of our long-term business objectives. I'm also proud to welcome Rollins' new Chief Financial Officer, Kenneth Krause. Ken is a highly regarded business executive with more than two decades of financial and accounting experience. Ken is already contributing to our success. We welcome him to our team. Jerry will share more about Ken later. Let me now turn the call over to John Wilson, our Vice Chairman, who will provide some business updates. John?

Jerry Gahlhoff:

Thank you, John. Good morning, everyone. In early August, we announced that Ken Krause will be joining Rollins as our new Chief Financial Officer effective September 1st. Ken has many years of finance experience, most recently as the CFO of a large publicly-traded global manufacturer. You'll hear from him in a little bit, but for anyone who hasn't had the pleasure of speaking with him yet, he is passionate about business, very experienced and has a unique combination of strategic, operational and financial expertise. We are extremely pleased to have him as a member of our leadership team. I'd now like to walk through our 2022 third quarter performance, focusing on items that directly impacted our operations during the period. Ken will address the financials in more detail in a moment. Looking at our financial results, Rollins' third quarter 2022 was highlighted by revenue growth of 12.2% to $730 million compared to $650 million in last year's third quarter. Net income was $108 million or $0.22 per diluted share. This is compared to $94 million or $0.19 per diluted share for the same period in 2021. Operationally during the quarter, all of Rollins business lines continue to experience solid growth. Residential pest control increased 9.8%, commercial pest control was up 11.4%, and termite increased 18.9%. Overall, organic presented a strong 8.6% total growth for the quarter. Next, I'd like to turn to the expense side. During the last few conference calls, we have discussed various inflationary pressures, primarily fleet-related costs, specifically fuel and vehicle repairs and materials and supplies. We've also provided insights into the proactive actions we've been implementing to mitigate these pressures. In this context, I'm pleased to note that during Q3, we're beginning to see a gradual improvement in fuel prices. We've also been reducing our overall mileage per service visit through routing and scheduling initiatives. Overall, when compared to last quarter, Q3 presented a 5% reduction in fuel expense. On the fleet side, as we discussed previously, we're keeping our trucks longer forcing higher than normal cost for items like basic maintenance and tires, as well as some repairs outside of the norm. Recently, a small amount of new fleet vehicles are beginning to arrive from our primary manufacturers, which certainly will help. However, the quantities are less than what we historically received by this point of the year. Looking ahead, we're told by our manufacturers that the supply environment is improving and that potentially we could expect an uptick in inflow levels for new vehicles in the coming quarters. As we've received similar assurances last year, we're certainly keeping a watchful eye on this and we'll keep you updated on future conference calls. On the labor side, even though the tight labor market, Rollins remain well positioned in effectively attracting, retaining and deploying talent by prioritizing employee well-being, workplace inclusion and professional development opportunities, while also providing attractive employee benefit offerings. We have a track record of being a premier destination for talent. As we headed into peak hiring season this year, we successfully integrated a recruiting software platform to allow our hiring managers to more efficiently recruit and engage with potential new candidates. This talent recruitment platform makes it easier for prospective team members to explore open positions on our career portals and apply for open positions in just a few minutes and they can do so easily from a mobile device. Our hiring managers can more easily pre-screen candidates, communicate with them and schedule interviews in a more streamlined way. As a result of this new improved process, we averaged 35,000 job applicant submittals per month for the third quarter. And over the last five months, we have almost matched the total year 2021 application submittals. In short, by offering candidates an enhanced hiring experience, we've been able to successfully source and add qualified talent across the country despite the tight labor market. Next, I'd like to turn to acquisitions. Year-to-date, we have completed 27 acquisitions. Five of these were completed in the third quarter across Canada, Australia and the U.S. In August, we announced the acquisition of Bug House Pest Control. Bug House Pest Control was Founded by Mike Prosperi in 1993, and has grown to be one of the largest pest control companies in Georgia. Bug House serves residential and commercial customers throughout Central and South Georgia. We are proud to welcome their more than 220 team members to Rollins. We continue to pursue potential opportunities as we look ahead to the remainder of the year and into 2023, our pipeline remains strong. Before I turn the call over to Ken, I want to emphasize how pleased we are with Rollins' strong third quarter performance. We are confident in our ability to continue driving growth and improving profitability in the business. I'll now turn the call over to Ken.

Gary Rollins:

Thank you, Ken. We're happy to take any questions at this time.

Tim Mulrooney:

Yes. Good morning, everybody.

Jerry Gahlhoff:

Good morning.

Tim Mulrooney:

So, first I wanted to ask on the residential business. Well, first I should say congratulations on a great quarter, but I wanted to dig into the residential business for just a second, because there is some concern right now about the state of the consumer, and I was hoping that you could comment on the trends that you're seeing with respect to volumes in your resi business specifically. Are you starting to see any slowdown as we move from August to September to October, given the increased macro uncertainty, and could you maybe comment on how lead generation these days compares to maybe to last year?

John Wilson:

Well, the only thing I would add Tim is that leads for residential have been down for some time. Quality of lead and lead closure has been up, leading to increased sales and increasing organic revenue but lead closure or leads receives excuse me as a measure of the strength of the residential business is not really unnecessarily a good yardstick. We continue to close at a higher rate and our - and where we can give some labor challenges, our teams are getting to the work. So we're still seeing strength in it. Is it as strong as it was over the last couple of years? Maybe not, but we're very optimistic still about residential.

Jerry Gahlhoff:

And let's not forget that hurricane also impacted South Carolina as well, went through there, which is another area where we have a large - a very large presence on the residential standpoint.

Kenneth Krause:

You're thinking about that correct, Tim. We had a 50 basis point headwind on revenues. The 8.6% is an as reported organic number. So adding back the currency headwind, your organic growth would have been just north of 9%.

Kenneth Krause:

Thank you.

Operator:

Our next question is from Ashish Sabadra with RBC Capital Markets. Please proceed.

Jerry Gahlhoff:

So a lot of what you see in the termite ancillary growth is a result of cross-selling to your existing customer base, so that's where we get a lot of the lift - is on the termite ancillary side is directly through cross-sell opportunity. So that continues to remain strong and continues to be a great opportunity for us for certainly for years to come. We have seen a nice uptick this year also in technicians sales that has in some ways offset our - a little bit of the lead decline, and the better we know the better staffed we are with technicians, the more technicians will actively sell. So getting that formula right is good and we have certainly seen an uptick in technician involved sales, where it could be upgrades on the commercial side but as well as on the residential side as well. We see - we do see sales productivity ticking up with technicians.

Kenneth Krause:

Ashish, I don't want to commit to something too early here. I am only 60 days or so in, but what I'll tell you is the gross margin profile of 50 plus percent is certainly an appealing gross margin profile and provides me a sense of confidence in our ability to generate that type of margin profile, but what I'd ask for is a little bit of time to better understand the business and some of the drivers that we have in the business. But nonetheless, that gross margin profile that we do have and the pricing opportunities we have in our business gives me some confidence in our ability to continue to improve our margins going forward.

Kenneth Krause:

Thank you.

Operator:

[Operator Instructions] Our next question is from Seth Weber with Wells Fargo Securities. Please proceed.

Jerry Gahlhoff:

So we feel like our price increase program was very successful this year and certainly, as Ken noted, it attributed some of our success here in the third quarter to pricing, not only to our - through rate increases, but also increasing our rate cards and our new sales pricing is up rather significantly, that's been helpful. Our strategy will be to get through the rest of this fiscal year. In January, we'll all meet again, and we'll have a discussion about our price increase strategy for 2023 and assess what the economic environment looks like, what's going on and make some determinations at that point. We need to have those discussions in - fairly early in the year if we're going to keep it on the same cycle to be able to deploy that price increase by March and April timeframes, should we - depend on what levels we go at. So - and part of that process in January will also be a very lengthy look back - detailed look back into our price increase campaign this year, what the impact on rollbacks and customer retention was, and we'll use those data to help us determine what we will - what our plan will look like in 2023. We've monitored that. We haven't noticed any real significant jump in retention due to pricing, so we feel pretty good about where we are right now.

Jerry Gahlhoff:

I guess, internationally, we see some of the - feeling a little bit of some of the impact in the U.K. of their inflationary pressures there, but our business in the United Kingdom is doing quite well, that team there is thriving. Same in Australia. They're performing very well. So we're very happy with the results that we're getting internationally. Singapore is a little down. They've had some a little more challenges on the revenue growth side and that's been largely - they were engaged during the peak of COVID with a lot of disinfection services and some of those disinfection services have disappeared. And so they've struggled a little bit more, not necessarily because of any economic conditions more just a shift in what's going on in the market from a pest control and disinfection standpoint. But overall, internationally, you think of Canada as well, our Canadian operations are doing fantastic and they're growing well. So it's all very positive on that front.

Operator:

Our next question is from Stephanie Moore with Jefferies. Please proceed.

Jerry Gahlhoff:

I didn't quite catch what you asked for. So, could you repeat your question for me?

Jerry Gahlhoff:

A lot of that is having feet on the street and staff and having the staffing and the quality team on both the commercial and the number of home inspectors we have in the field. It's really about being staffed to handle demand and drive those - drive the sales results that we get. You look at our headcount of commercial account managers and our head - the volume of home inspectors that we've added over the last 12 to 18 months. That's by far the largest driver of the growth that we're seeing. Those folks have been very successful given - with the tools and infrastructure that we give them to be successful in their sales jobs. And by far, I think that's been the biggest driver. John, do you have any other opinion on that?

Hans Hoffman:

Got it. Thanks.

Gary Rollins:

Okay. Well, thank you for joining us today. We appreciate your interest in our company and we look forward to updating you in February for our fourth quarter earnings. Thanks again.

Operator:

Greetings. Welcome to Rollins Inc. Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Joe Calabrese. Thank you. You may begin.

Gary Rollins:

Yes. Thank you, Joe, and good morning. We appreciate all of you joining us for our second quarter 2022 investor call. Julie will read our forward-looking statement disclaimer, and then we'll begin.

Gary Rollins:

Thank you, Julie. I'm very pleased to report that Rollins delivered a very strong financial performance in the second quarter and remains well positioned to deliver on our long-term business objectives. On today's call, I'm excited to share our strategic management succession plan that has been unanimously approved by our Board of Directors. We firmly believe that this is the right time to initiate this important leadership transition. Effective January 1, 2023, Jerry Gahlhoff, the Rollins Chief Operating Officer and President, will be elevated to the position of Chief Executive Officer or CEO. I'll remain Chairman of the Board, and Jerry will continue in his current role as President of Rollins. The following five months will be transitional while Jerry becomes more familiar with the areas involving his future responsibilities. The Company is well positioned financially and operationally. We have a proven management team, leading brands and a very strong culture. I'm extremely confident in the future of Rollins and look forward to working closely with Jerry to ensure a smooth transition of responsibilities. While I'll be moving away from the day-to-day operations, as I continue serving as our company Chairman of the Board, I will remain active and focused on our business goals and strategic plans. As many of you know, Jerry has been with Rollins since the 2008 acquisition of HomeTeam. And he's been instrumental in our success. What most don't know is that Jerry grew up in an Orkin household as his father worked for the Company for 26 years. His dad was a great employee. Jerry is an exceptional leader with great vision and a deep understanding of our industry and our customers. His years of service to Rollins has been marked by outstanding performance and accomplishments. He was promoted to Rollins President and Chief Operating Officer in 2020 and has had a unique opportunity to be intimately involved in most every facet of our organization. In 2021, Jerry joined the Rollins Board of Directors. His business acumen, leadership experience, strong sense of duty and his devotion to our company make him a natural fit to assume our President and Chief Executive Officer role. I have the utmost confidence that Jerry will continue to foster our strong company heritage record of accomplishments and promote the culture of Rollins. Let me now turn the call over to John Wilson, our Vice Chairman, who will provide some business updates. John?

Jerry Gahlhoff:

Thank you, John. Hello, everyone. Before I get into our second quarter operating review, I would like to say a few words about Gary. As Gary mentioned, I came to Rollins through the HomeTeam acquisition in 2008. As many of you know, those can be tensed in uncertain times for those being acquired. Gary talked with me personally. His words and subsequent actions reassured me that I had found a home at Rollins and my experience here has been meaningful and worthwhile. Over the past 14 years, I've learned so much from Gary, and there's one thing I'm sure of, he has an unwavering commitment to our company, our customers and our employees. The proof of this is in his actions and results. It's truly an honor to succeed Gary as CEO and lead this incredible company of more than 17,000 exceptional employees, each of whom brings a commitment to deliver the best for our customers every day. With Gary and John's continued guidance, I look forward to continuing to build on our great success as we begin this new chapter of the Company's future. I'd now like to walk through our 2022 second quarter performance, focusing on items that directly impacted our operations during the period. Julie will address the non-GAAP adjustments a little later. Looking at our financial results. Rollins second quarter 2022 was highlighted by revenue growth of 11.9% to $714 million compared to $638 million in last year's second quarter. Net income was $100.3 million or $0.20 per diluted share. This is compared to $98.9 million or $0.20 per diluted share for the same period in 2021. As mentioned, Julie will review GAAP and non-GAAP results as well as organic revenue growth numbers shortly. Operationally, during the quarter, all our business lines continued to experience solid growth. In fact, we grew double digits in all service lines. Residential pest control increased 11%, commercial pest control was up 11.2% and termite increased 15%. Keep in mind that this level of growth came on top of our company's highest historical recorded growth in Q2 last year of 15.3%. On the expense side, we continue to feel inflationary pressures during the second quarter from fleet-related costs like fuel and vehicle repairs and materials and supplies. I'll give insight on these as well as provide an update on the actions we've been implementing to mitigate these pressures. While we're efficiently navigating through this period and believe that our proactive initiatives have helped, we're keeping a watchful eye on inflationary pressures, fuel costs and supply chain costs and how they may affect Rollins. Management of fuel expense is a notable example. As we grow, we improved customer density. And when coupled with our routing and scheduling technology initiatives, we continue to reduce our overall mileage between service visits, which lowers our fuel requirements. We saved over 5.8 million miles driven in the quarter or $1.3 million. This savings was slightly offset by increased average price per gallon over Q2 2021 of over $400,000, equating to net fuel savings of $875,000. This has also helped manage labor costs as our technicians have less unproductive windshield time, plus we've created a better job for them along the way. As we move through the second half of 2022, we expect we'll see the ongoing benefits of these improvements. Furthermore, looking ahead, we're committed to enhancing the overall efficiency of our fleet while also reducing carbon emissions. In June, we announced that BMW Group ranked Rollins 15th out of the top 50 green fleets in the United States. This primarily reflects Rollins use of hybrid sedans that are being driven by our sales and management personnel. However, we recently began testing the use of light-duty hybrid trucks. Given their excellent fuel economy, we are focused on having a sizable uptick in our hybrid truck fleet by 2024. Additionally, given recent technology advancements, we've been testing the use of battery-powered application equipment going from gas power to battery provides us with a compelling opportunity to reduce emissions without sacrificing the effectiveness of our service. We look forward to updating you on these initiatives in the quarters ahead. As you may recall from prior conference calls, we've been proactively addressing increased supply chain costs in our residential and commercial pest control materials and supplies. This includes termite and ancillary service offerings as well. We have solid long-term working relationships with our manufacturers and have deep visibility into the supply process, often a few levels up in the supply chain. In doing so, we're often able to achieve greater operational efficiencies and overall flexibility by not only having materials shipped quickly but also having real-time insights advising us when we need to order materials. We continue to seek opportunities to diversify through alternative suppliers and actively seek shipping and freight efficiencies. On the subject of pricing, we successfully implemented our annual price increase programs earlier this year. As mentioned on our last conference call, aggressive service price increases were initiated within all our brands during April and May as compared to historical timing of the early summer months and prior years. We are already realizing a notable benefit from this initiative more than doubling our traditional 1% to 2% net growth levels from our past price increase programs. Overall, we saw little resistance from our customers on the higher price increases put into place, which is a confirmation of service satisfaction. Next, on our acquisition pipeline, it remains strong, and we have plenty of potential opportunities that we are actively pursuing. So far in 2022, we have completed 22 strategic acquisitions within the U.S., United Kingdom and Australia. In the U.K., we achieved an important milestone during the quarter with the acquisition of Europest. In addition to expanding our geographic footprint within the U.K., it is also our first location in Wales. Strategically, we now have full coverage within the United Kingdom, as this tuck-in transaction comes on the heels of another recent U.K. acquisition, NBC Environment, which provided our first locations within Scotland. Moving forward, Strategic acquisitions will continue to be an important component in our initiatives to further grow and expand our business. Before I turn it over to Julie, I want to emphasize how pleased we are with Rollins second quarter results and that we remain well positioned for 2022. I'll now turn the call over to Julie. Julie?

Gary Rollins:

Thank you, Julie. We're happy to take any questions at this time.

Tim Mulrooney:

First, I just want to say to Gary, congratulations. Very few CEOs can boast the same level of tenure and success that you can and I look forward to staying in touch regardless.

Tim Mulrooney:

First one, EBITDA margins were down a little bit more this quarter than I was expecting. And what was helpful last quarter as you guys bucketed these things for us. The primary buckets being fuel or I don't know if you want to call it, fleet, another major cost bucket is labor and another one is materials, if you were going to rank those headwinds in terms of the things that impacted your EBITDA margins the most and if there's any way to quantify it. I think that would be really helpful for investors, it certainly was very helpful for us last quarter.

Jerry Gahlhoff:

I would add that from a labor standpoint, we did a pretty good job of keeping service wages, in particular, relatively flat year-over-year. That really wasn't a significant driver of everything. It's heavily on what Julie mentioned.

Jerry Gahlhoff:

January, it was driven by the COVID situation, which is just seems to be ramping back up again, but we're managing through it a little better right now.

Ashish Sabadra:

Congrats to both of you, Gary and Jerry. My first question would be on the revenue growth, pretty strong momentum there across all businesses. I was wondering if you could help parse out -- you obviously talked about a more aggressive price increase, but also if you can talk about the improved retention as well as on the sales momentum side, can you talk about how the improved ad campaign helped you more on the inbound, but also the technicians being appropriately staffed? How is that helping you drive sales momentum. So if you could just parse out some of the growth drivers and quantify some of those tailwinds?

Julie Bimmerman:

Yes. And then to add on to that, just as a reminder, I think Jerry commented on his section of the script is our price increase that brought in over double what we typically see from our annual price increase. So that was a part of that growth as well.

Hans Hoffman:

This is Hans Hoffman filling in for Hamza. Could you just give us a sense of how much capacity you have in your sales force and what your hiring plans are going forward?

Julie Bimmerman:

Yes. And that's where we really worked hard at the end of last year is when we started doing the heavy staff up on our commercial side of our sales force just so that we could be prepared for this year and be able to honestly be able to close the deals that we're closing today.

Operator:

[Operator Instructions] Our next question comes from Seth Weber with Wells Fargo Securities.

Julie Bimmerman:

I'll start, and then I'm sure Jerry will want to jump in as well. Everything -- we're all reading the same thing when it comes to fuel is we -- a lot of things -- areas say that the fuel prices are going to be going down, but then we see things that are happening on the other side of the globe that gives the impression that it could go up. So, so much depends on that. So if you're assuming that fuel does not keep on having that variability, we'll definitely -- that's one thing to keep in mind. But I also want to address materials and supplies. Jerry commented on this as well. And I'm going to jump in and use the phrase that Jerry has commented on in the Board meeting yesterday. He said that sometimes we feel like we're playing whack-a-mole with the materials and supplies because we have different vendors and different that are looking at -- they have to make increases to cover either their shipping or cover their supply costs themselves. And we keep on having to jump in. We're having to look every single day and see in our purchasing group is saying, where do we need to go. Where should we be purchasing. And really monitoring these relationships. It's a long way of saying it depends what's going to happen with our vendors. It depends what's going to happen with our suppliers. And honestly, the fuel prices. All of that being said, if that calms down, then yes, margins would improve. Do you want to add to that?

Operator:

Our final question is from Brian Butler with Stifel.

Gary Rollins:

We've done quite a bit of research as far as our price increases are concerned. And certainly, we would be opposed to having another price increase this year. We really studied the frequency and the amount very carefully. And it's been our experience that you really need to have some time in between and don't get greedy.

Gary Rollins:

Okay. Well, thank you all for joining us today. We appreciate your interest in our company, and we look forward to updating you next quarter on our progress. And thanks again.

Operator:

Greetings, and welcome to Rollins Inc. First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the call over to Joe Calabrese. Thank you. You may begin.

Gary Rollins:

Yes. Thank you, Joe and good morning. We appreciate all of you joining us for our first quarter 2022 investor call. Julie will read our forward-looking statement, disclaimer, and then we will begin.

Gary Rollins:

Thank you, Julie. I'm pleased to report that Rollins delivered solid first quarter results and realized strong year-over-year growth in many key performance areas. We remain well positioned to deliver on our short-term and long-term objectives. And we look forward to sharing our progress in the quarters ahead. I would now like to give an update on our SEC investigation. Rollins reached a settlement agreement with the U.S. Security and Exchange Commission on April 18th. The settlement fully resolves the SEC's investigation into certain adjustments to accruals and reserves and their impact on reported earnings per share in the first quarter of 2016 and the second quarter of 2017. Rollins paid a $8 million civil penalty, which was fully accrued in a third and fourth quarters of 2021. Under terms of the settlement Rollins, neither admits or denies the SEC's findings in this matter. The settlement completes the SEC's investigation and there will be no restatement of Rollins financials related to this matter. I want to take a moment to highlight the actions that we've taken to strengthen Rollins controls and procedures to prevent something like this from happening in the future. From the beginning, we took this matter very seriously and hired outside consultants to evaluate and strengthen our financial reporting. This included improving processes, procedures, and supporting documentation, that impact financial results. We also hired a Chief Accounting Officer, Traci Hornfeck, last October and added two retired E&Y partners to our audit committee, Susan Bell and Pat Gunning. Susan currently serves as Chair of that committee. We have also hired and added several experienced accounting personnel to further strengthen our team. Jerry will share with you details of our active CFO search to further improve this area. It is noteworthy that the SEC recognizes within the order that Rollins "cooperation and the remedial acts were promptly undertaken to prevent and detect the type of misconduct described in the order". Out of respect for the process, we will not answer any questions during our Q&A on this matter. I assure you that integrity is at the core of who we are as a company. And we remain committed to doing the right thing for our employees, investors, and customers. And finally, we are pleased that this matter is resolved. With that, let me turn the call over to John who will provide some business updates. John?

Jerry Gahlhoff:

Thank you, John and hello everyone. I'd now like to walk through our 2022 first quarter financial results, focusing on items that directly impacted our operations during the quarter. Julie will address the non-GAAP adjustments a little later. Looking at our numbers. Rollins first quarter 2022 was highlighted by revenue growth of 10.3% to $590.7 million compared to $535.6 million in last year's first quarter. Net income was $72.4 million or $0.15 per diluted share. This is compared to $92.6 million or $0.19 per diluted share for the same period in 2021. This decline in EPS was primarily the result of last year's gain on the sale of Clark properties. As mentioned, Julie will review GAAP and non-GAAP results as well as organic revenue growth numbers shortly. Operationally, all our business lines experience good growth during the quarter, with residential pest control up 10.2%, commercial pest control rising 9.1% and termite increasing 13.3%. On the expense side, in the first quarter, we felt significant inflationary pressures in fleet and pest control materials and supplies. I'll give insight on these and an overview of the actions we've been implementing to mitigate these expense pressures. As you may recall from last quarter, we've been proactively addressing supply chain issues and our termite and ancillary service offerings. With our procurement team seeking alternate products and suppliers, while our operation teams have been successfully initiated increases in our rate card pricing where needed to counteract the rise in some of these material costs. We believe we've struck the right balance and these efforts are helping to bring material costs back in line for our termite and ancillary business. In the first quarter, we began experiencing similar inflationary headwinds within our residential and commercial pest control materials and supplies. Given the successes we've achieved, mitigating M&S costs in termite, we're implementing a proactive approach within our pest control business by adjusting our rate cards and diversifying through alternative suppliers and also by seeking shipping and freight efficiencies. Most important to improve our profit margin, we're also implementing our annual price increase programs earlier this year. These more aggressive price increases were initiated within all our brands in late spring as compared to typical timing of the early summer months in prior years. In short, we're proactive managing through this. Our fuel expense is an important example. We gave up seven tenths of a point in margin to increases in fleet expense in Q1. Through extensive routing and scheduling initiatives, we have reduced our overall mileage necessary, which lowers our fuel requirements. For our first quarter of 2022, our fuel would've been approximately $700,000 higher if we had not begun these routing and scheduling processes. This equates to an estimated addition of over 3.2 million miles driven if our miles between stops had not been reduced using our routing and scheduling technologies. We expect that we will see ongoing benefits of these improvements as we move throughout the remainder of the year. Furthermore, we continue to increase the number of hybrid and electric vehicles in our fleet, as we now have over 800 currently deployed. Next for a quick update on our acquisition pipeline. Fortunately, it's full. We have plenty of potential opportunity that we're actively engaged with. Our acquisition team has been busy, both domestic and internationally. One of our latest acquisitions highlighted in a recent press release NBC Environment, headquartered in the U.K., closed April 1st and now gives us full coverage within the U.K., including multiple locations within Scotland. Before closing, I'd like to provide an update on our Chief Financial Officer search. While we don't have an announcement to make today, we have engaged an executive search firm to assist with identifying an exceptional candidate to join our leadership team. We are focused on getting a seasoned, talented financial executive as our CFO. The search is progressing well, and we look forward to providing an update this summer. Julie has been filling in remarkably as our Interim CFO, and you can all rest assure that Julie will be remaining with Rollins as our Group Vice President of Finance and Investor Relations. I know that I sleep better at night knowing that. Before I turn it over to Julie, I want to emphasize how pleased we are of our first quarter results, given the inflationary pressures we faced and remain well positioned for 2022. I'll now turn the call over to Julie.

Gary Rollins:

Thank you, Julie. We're happy to take any questions at this time.

Tim Mulrooney:

Gary, Julie, Jerry, John, good morning.

Gary Rollins:

Good morning.

Tim Mulrooney:

Thanks for taking my questions. So, I just had a couple about pricing, and I appreciate the color that Jerry gave. But the first one is, pricing is typically, call it, 1% to 2%. How much do you expect it to be this year? I mean, we've spoken to several regional providers who are talking about price increases of more than 5% this year. So, we're wondering if Orkin is thinking along the same lines.

Jerry Gahlhoff:

Yeah. Tim, this is Jerry. We took a hard look and as we said, we've been more aggressive than we probably ever have been in the future. And we looked at it as to from a standpoint of what will the market bear and we've just been considerably more aggressive than we have in prior years with our percentage increases.

John Wilson:

Tim, yeah. This is John. I'll take that. I guess, the easy answer is it depends. It depends entirely on that that customer, the contract arrangement and where we are in terms of service duration. Most of our commercial customers sort of equate service duration to the price they pay. And so, if -- we get some pretty robust reporting out of our systems to provide our managers and field sales folks with the information they need to then kind of have that conversation if service durations are exceeding kind of what our revenue per hour goal might be. So, it just depends entirely on the customer and where they are relative to all that.

Jerry Gahlhoff:

I would add, Tim. This is Jerry, that we were just as aggressive within our brands if not in some brands, more aggressive on the commercial side than residential even. So, we were -- we definitely touched the commercial business in a great way as it relates to price increase.

Operator:

Thank you. Our next question comes from the line of Ashish Sabadra of RBC Capital Markets. Please proceed with your questions.

Julie Bimmerman:

I'll start on that and then let everyone else jump in. So, basically, yes. On the service salaries we were talking -- we do believe that that is something that we have overcome, because we do believe that that is related to the COVID experience that we had in the early part of the year. So, unless as I say another wave of COVID comes through, we believe that we're done with that. Also as Jerry commented, as far as the pest control M&S, yes, we're taking care of that and going through and adjusting through our procurement group. And then, also through our rate cards to make sure that we take care of that, that leaves our fuel cost from that 10 point. And so, that's where our price increase will definitely be beneficial in helping cover that. And then also as our fleet group -- I think Jerry had commented that is shifting and looking at the type of vehicles that we're using and the ones that are coming into our fleet in the future. So, most of these or half of these expenses that we're talking about, we are -- we do believe are -- were beyond those. Jerry, do you want to jump in on anything?

Julie Bimmerman:

And let me add one last thing is the fact that Jerry had commented is keep in mind with our price increase coming in, we've actually brought that forward to where it is going in earlier as well to help mitigate those costs.

Ashish Sabadra:

That's great color. Thank you very much. And maybe if I can ask a quick follow-up on the M&A pipeline. As you mentioned, M&A pipeline is pretty solid. I was just wondering if you could comment on the valuation. And also, on the last call, there was a comment made around restructuring foreign entities to make cash available from foreign operations more readily. So, would it be fair for us to assume that we could potentially see bigger M&A in the international markets as well? Any comments on that front? Thanks.

Jerry Gahlhoff:

And I would add on the valuation part. We really haven't seen a significant change in valuation in the market. I think, it's still a very competitive acquisition market. There's probably more private equity players involved now than there were even two years ago. There's still plenty of competition there on the valuation side that's keeping the prices of some of these businesses fairly well propped up.

Operator:

Thank you. Our next question comes from the line of Mario Cortellacci with Jefferies. Please proceed with your question.

John Wilson:

So, Mario, this is John. I'll start and then maybe Jerry might have something to add. So, I think, when you look at the -- with the -- our business by the kind of the service line, the residential after two years of really pretty explosive growth, we'll -- I think we saw it soften in the first quarter and I think that will continue, especially given some of the weather challenges in the first four months or so of the year. But I think where the Salesforce's expansion that you mentioned will help us is on the commercial and the termite side. And I would expect our organic growth there to remain in that high single digit that you mentioned.

Mario Cortellacci:

Got it. I appreciate it. And then, just for my follow-up, I haven't asked you guys about this in a while. Just around technology and kind of connected technology or connected tools. How penetrated are you within your customer base on that connected technology front? I'm assuming it's probably more weighted towards the commercial customer base and the residential customer base. But any kind of quantification there would be extremely helpful. And maybe where do you think that could go over time? I mean, we're seeing in other industries where automation is helping reduce headcount or at least allow headcount to be used more efficiently. I'm just wondering if you guys have kind of thought about it internally about potential cost savings or efficiency through using kind of a connected products or Internet of Things type of tools.

Mario Cortellacci:

Understood. Thank you very much.

Michael Hoffman:

Thank you very much everybody for taking the question. So, I'd like to come back to price with a little different angle and clarity. The -- if I understand the way you're describing the timing of it, first quarter 2022 does not reflect the benefit of being more aggressive. And therefore, that's in front of us coming into 2Q, 3Q and 4Q.

Michael Hoffman:

Okay. And on the commercial growth, can you help us understand -- I'm trying to get a feel for the macro. So, this is as much as about your businesses that is a read through just given all the things that are going on a geopolitical basis. I have this sense that there's been a trend of new business formation happening in North America, but really began to ramp in the second half of last year. And that has not peaked. Do you think your commercial organic growth reflects that there is new business formation, meaning you're adding incremental new customers as opposed to upselling existing?

Michael Hoffman:

So, you would support the idea that there's new business formation going on still that we have -- that has not peaked. So, whatever fears about slowing consumer demand and recessions and what have, you haven't seen that come through on somebody starting a business in the empty storefront that needs a pest service.

Michael Hoffman:

No. Okay. All right. Thank you.

Gary Rollins:

Okay. Well, thank you all for joining us today. We're optimistic about our opportunities ahead and appreciate your interest in our company. We look forward to updating you next quarter on our progress. Thank you again.

Operator:

Greetings, and welcome to Rollins Inc. Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Joe Calabrese. Please go ahead.

Gary Rollins:

Yes. Thank you, Joe, and good morning. We appreciate all of you joining us for our fourth quarter and yearend 2021 investor call. Julie will read our forward-looking statement and disclaimer, and then we will begin.

John Wilson:

Thank you, Julie. First of all, I regret missing last quarter's call discussion. Nonetheless, my knee replacement therapy has been going well and it's great to be on the call with you this morning. I'm pleased to report that we experienced a very successful year, both financially and operationally, especially with our revenue and EPS growth. As we began 2022, we believe that Rollins is poised to deliver on our short term and long term objectives. We look forward to sharing our progress with you as the New Year unfolds. As we previously disclosed, the company is in discussion with the staff at the US Security and Exchange Commission to resolve our SEC investigation. During the fourth quarter, we increased the accrual related to this matter to $8 million for a potential settlement. Given that the investigation is ongoing and out of respect for the process, we cannot answer any questions during our Q&A, but we are focused on resolving this inquiry in the very near future. With that, let me turn the call over to John who will provide some of our business updates. John?

Jerry Gahlhoff:

Thank you, John. Good morning, everybody. This morning, I'm going to focus on items that directly impacted our operations in the fourth quarter and then Julie will address the non-GAAP adjustments, most notably the SEC accrual that impacted the year. 2021 was a strong and productive year for Rollins' family of pest control brands. Q4 revenues increased 11.9% to $600.3 million compared to $536.3 million the previous year. Net income rose to $65.3 million or $0.13 per diluted share compared to $62.6 million or $0.13 per diluted share for the same period in 2020. Our revenues for the full year were $2.424 billion, an increase of 12% compared to $2.161 billion for the same period last year. Net income for the full year increased 34.5% to $350.7 million or $0.71 per diluted share compared to $260.8 million or $0.53 per diluted share for the comparable period last year. Again, Julie will review our full year GAAP and non-GAAP results shortly. All our business lines experienced solid growth with residential pest control up 11.9% and termite realizing growth of 13.6%. Additionally, commercial pest control delivered an impressive 11.4% growth over the fourth quarter of last year. Julie will give you a more detailed breakdown on organic revenue growth by service line in a few moments. Before I move on from revenue and address expenses, I want to emphasize how proud we are of the growth rates we achieved in the fourth quarter and for the year. During the year coincidentally, Orkin reached their 120 anniversary and celebrated by putting up one of their best performances in years. All our brands grew and contributed greatly to our operating results. On the expense side, payroll, materials and supplies and fleet are three largest expense areas and I'll give you some additional color on how each of these items impacted margin in Q4. Let's start with labor. Remarkably, we've been able to achieve above average revenue growth rates while keeping our service payroll expense margins below last year in Q4. On a year to date basis, that expense margin is flat to 2020. Our administrative payroll margins also improved over 2020 as we continue to improve productivity. However, we did experience a slight increase in our sales payroll margin. The sales payroll expense trend is reflective of the planned investment we made in upstaffing our residential and commercial sales teams over the last 12 months. This investment yielded the high levels of growth I mentioned a few minutes ago. If there's an area I do not mind giving up margin to, it's sales payroll so long as we are growing revenue faster than the sales payroll expense. I'm proud of our team's ability to manage payroll expense despite recruiting challenges caused by labor shortages. Last week, we held our virtual will Rollins leadership meeting with over 175 of our top leaders. Most of our topics were about best practices in recruiting and retaining our people. This is a huge focus item for us in 2022. Let's move to materials and supplies costs, or M&S. Our M&S cost were a slight headwind in the quarter, particularly for our termite and ancillary service offerings where we've had more supply chain issues in the latter part of the year. Our, procurement team is working hard in this area by seeking alternate products while our operations team has analyzed the impact of these increases in adjusting our rate card pricing upward, where needed to counteract the rise in materials cost. Probably most impactful to us in Q4 is fleet expense, particularly fuel. Compared to Q4 of 2020 our fuel cost were up 56.5% in Q4 of 2021. That equated to over $4.5 million in increased fuel costs for the quarter. In addition, increases in fleet repair costs for items like tires and basic maintenance, also rose double digits. As we've discussed in the past, we're making significant progress with our BOSS operating systems routing and scheduling technologies, which help us mitigate some of these fuel cost increases. Since reducing miles driven between services saves not only fuel, but also time. This technology contributed in an either even bigger way to helping us manage our service payroll expense by enabling us to reach our customers in a more efficient and productive manner. We began to feel the first significant impacts of the fuel increases in Q2 of 2021. So we anticipate that fleet costs will continue to be a significant headwind for us in the first quarter of this year. Related to expenses is one other item I'd like to mention. Most are familiar with the cybersecurity attacks experience by solar winds and colonial pipeline and others that recently put a spotlight on cybersecurity threats. Due to concerns about these types of cybersecurity issues, in Q4, we fast tracked our multiyear strategy to enhance our protections against cybersecurity threats by accelerating a $3 million expenditure. We have a dedicated cyber team implementing enhanced cybersecurity controls for domestic and international operations to protect our employees, our customers and our brands. Shifting briefly to the acquisition landscape, we continue to successfully execute our acquisition strategy of identifying and acquiring high quality companies with shared culture and values. Last year ended strong with over 70% of our trailing 12 months revenue acquired occurring in the fourth quarter. We're very pleased to welcome these companies and their teams to the Rollins family of brands and looking ahead, we expect that strategic acquisitions will continue to be an important component in our initiatives to further grow our business. I'll now turn the call over to Julie. Julie?

Gary Rollins:

Thank you, Julie. We're happy to take any questions at this time.

Tim Mulrooney:

John. Thanks for that excellent history of your termite service.

Tim Mulrooney:

A couple questions on organic growth. So, the first one, on your commercial pests organic growth, it picked up in the fourth quarter, despite a more difficult comparison with last year. Can you talk a little bit more about your commercial pest business, what's maybe helping drive that acceleration? All else equal, we kind of expected your commercial business to continue to normalize back towards your historical range, but instead it picked up a little bit here. So just curious, what's going on?

John Wilson:

Yeah, Tim, and this is John. I might add that our commercial sales success was driven by both categories. And when I say both, I mean, local sales efforts, that's our local branches with feed on the street, adding accounts, but also our national accounts and I'm going off of memory. So forgive me if I'm off a little bit, but our national account sales effort for December was up some 50% or close to it. That indicates a lot of business being let out forbid to start the new year. But we were up in that one little month for by 50%. So pretty pleased with that.

Julie Bimmerman:

I'd say that yes, I'd agree to your numbers and what you're saying on that front. A lot of it, as far as typical, it honestly depends on the, how many acquisitions are closing. When are they closing? What are the sizes of the acquisitions closing? So know it is not always, the 1% there's many times when it is lower. The only time when we see anything that would be high would be a large acquisition, like, Clark.

Operator:

Thank you. Our next question is coming from Mario Cortellacci of Jefferies. Please go ahead.

John Wilson:

So Mario, let me take a stab at it first. And maybe Jerry will have something to add. So you'll recall in previous quarters as this was maybe a building issue. We talked about most of our pay plans are productivity driven. So the more work they produce, the more they earn. And so while we're certainly turning over more than our norm our people are still pretty well paid and we are getting the more placed. And so getting to the lion share of our work, we have very little of it that's fallen through the cracks. So no doubt, it's a tough environment. Our people, I've used the term turnover, a lot of rocks before our people are having to turn over a lot of rocks to find new people. But as we talked about in our leadership meeting, that Jerry referenced week, the best course of action is not to lose them in the first place, right? Keep them engaged, keep them happy and not lose them. And then you're not bearing that cost of replacing them. So we are seeing some inflation pressure on a few of our jobs, and most notably our termite service technicians, those are, are typically hourly and we've had to up our pay rates in some markets, but, but we're still getting people and we're getting to, to the line, share of our work.

Mario Cortellacci:

Yeah. And I think you guys have done a good job with managing cost and seeing margin expansion through different points in the cycle. But I guess just for 2022 and I understand that you guys don't guide, but just thinking about 2022, do you guys think you can continue the same type of historical performance with margin expansion?

Mario Cortellacci:

Got it. And then just the,

Mario Cortellacci:

Okay. And then just the last one from me you guys have obviously heard about the large deal going on in the space whether it gets completed or it doesn't get completed, but if it go through and I guess just maybe how are you guys thinking about the impact, the competition within the space? I don't know if execution on their side creates opportunity for you, does a larger player impact your ability to win new business. Obviously you guys have invested in your Salesforce heavily over the past year, but and that probably sets you up better, but any thoughts around kind of the competitive dynamics and how they shift if the deal goes through?

Jerry Gahlhoff:

Yeah. Mr. Rollins at the end of the, we haven't spent a lot of time talking about it, have we? It's -- it is not been high on our radar screen. We focus on what we do and getting the results that we get, and that's where we put our efforts.