Rollins, Inc. (NYSE:ROL) Q3 2023 Earnings Call Transcript
Rollins, Inc. (NYSE:ROL) Q3 2023 Earnings Call Transcript October 26, 2023
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.
Ken Krause: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Rollins third quarter 2023 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. [Operator Instructions] This conference is being recorded today Thursday October 26, 2023. Good morning everyone and welcome to our third quarter call. This is Ken Krause. Before we begin, I'd like to take just a moment to formally introduce Lyndsey Burton. Lyndsey is our new VP of Investor Relations joining us most recently from the Home Depot. She brings a very strong background in Investor Relations and we're excited to have her join our team at Rollins. I look forward to introducing her to many of you in Q4 as we attend several investor conferences. Welcome Lindsey.
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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?
Jerry Gahlhoff: Thank you, Lindsey. Good morning everyone. I'm pleased to report that Rollins delivered another good quarter of growth and profitability, reflecting consistent execution of our operating strategies and continuous improvement in our business. Our financial performance for the third quarter was highlighted by an increase in revenue of over 15% to $840 million. I'm pleased to report that we continue to see organic growth of over 8%. Further, this reflects a solid performance across all major service lines, as Residential increased approximately 20%, Commercial Pest Control rose approximately 12% and Termite was up 11% this quarter. Revenue performance in the quarter was robust following the slower June activity that we discussed on the last quarter.
We saw consistent growth in the mid-teens each month of the third quarter. We have observed continued underlying strength in the pest control markets year-to-date, particularly within North America. Additionally, our addressable markets are large fragmented and supported by a number of key secular trends including, but not limited to: one a shift from DIY to do-it-for-me; two, population migration to warmer climates; three, changing weather patterns; and four, the stickiness of hybrid work schedules leading to people spending more time at home. As we look at our competitive position in these attractive markets, we believe we continue to benefit from several key elements of our business model. If you look back over the last 15 years or so, we've consistently grown revenues through the great recession in 2009 and on through the industrial slowdown in the mid-teens.
We reliably grew mid-single digits year-in and year-out. Revenue growth accelerated pre-COVID and that has generally continued. We delivered high single-digit organic growth in each of the last 11 quarters. Let me highlight four key areas that we believe have differentiated us in the market and position us well to continue outpacing a market where secular trends should support mid single-digit growth over the next several years. First, our leading portfolio of pest control companies gives us a unique position in our markets. The combination of Orkin and our strong group of regional brands gives us multiple bites at the apple with potential customers and additional cross-sell opportunities. Second, we use a variety of methods to acquire new residential customers and add to the depth of our relationships with existing customers.
Digital marketing, cross-selling, service bundling and door-to-door sales methods all help us reach new customers or drive further engagement with existing customers. We also have important relationships within the homebuilding and real estate market communities through brands like HomeTeam and Northwest. We're able to capitalize on this multi-channel approach to drive residential customer growth. Third, we're investing in commercial customer acquisition targeting key strategic verticals that are the most profitable. This is paying off, with 12% growth in the quarter. And last but not least, we have a clarity of focus and have been consistently executing our strategy in our core market for a very long time. This focus and clarity ensures we don't make unnecessary changes and enables us to continue to successfully grow our share in a very attractive pest control market.
These points of differentiation have positioned Rollins to achieve a healthy level of organic growth and are further complemented by strategic M&A. Looking at the recent acquisition of Fox Pest Control, the integration remains on track. The Fox teams are executing and doing well and we continue to be excited about the growth opportunities ahead for the Fox brand. Additionally, through the first nine months of this year, we closed 18 tuck-in deals in addition to Fox. The M&A pipeline remains healthy and we're actively evaluating acquisition opportunities both domestically and internationally. As I've highlighted in the past acquisitions are an important component in helping us expand our market position, while also complementing efforts to accelerate recurring organic growth.
We remain disciplined in evaluating M&A opportunities and are confident in our continued ability to invest in the right strategic acquisitions, while delivering strong organic growth across the business. Our dedication to continuous improvement is an important part of our strategy and culture. As you've heard us discuss previously, we're constantly looking to improve our service levels and operating efficiencies. In August, we took an important step towards increased efficiencies in our Atlanta Support Center to accelerate our growth goals. For the first time in about 20 years, we executed a restructuring program that was designed to support our modernization efforts and flatten our overhead structure. We plan to reinvest cost savings and initiatives that further enable our growth priorities and allow us to serve our frontline operations more efficiently.
We continue to see opportunities for margin expansion as we move forward and execute our strategy. Ken will provide more detail and address the margins in the quarter shortly. Operationally, we're committed to developing great talent and investing in our teams. Hiring has been healthy and we put a lot of energy into onboarding the right people in both support functions and the customer-facing side of our business. Effective sales and service staffing helped us capitalize on continued strength in demand and to achieve high levels of organic growth both in the quarter as well as year-to-date. We remain focused on safety and I'm pleased to report that we have seen our average mentor driver safety score increase over 25% since the beginning of the year.
You'll recall that, this driving score is derived from an app that we have implemented to monitor driving behaviors when our vehicles are in motion. Improving the safety culture isn't something that's done overnight, but we are making strides and we're encouraged that our claims activity had less of a negative impact to our financial results versus a year ago. We are working hard in the field to increase safety awareness and training, while recognizing and rewarding those that are the safest. We believe these efforts will keep our people safe and mitigate negative financial impacts to our business. We continue to focus on creating value and returning capital to our shareholders. We're pleased to be in a position to increase our dividend by 15%, and we remain committed to a growing and sustainable dividend.
Additionally in the third quarter, we completed $300 million in share repurchases. The moves we made earlier this year in modernizing our capital structure by refinancing and expanding our revolver gave us the flexibility to be opportunistic and participate in a repurchase at a very attractive price. Ken will share some additional details on this in a moment. Our modernization efforts continue to progress well but we're not done yet. And we look forward to sharing additional developments on this front over the coming quarters. In closing, before I turn the call over to Ken we are excited about where our business stands today. We're very well positioned for the remainder of the year and remain focused on robust organic growth delivering healthy incremental margins and continuing to attract hire and retain top talent across the business.
I'll now turn the call over to Ken.
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.
Jerry Gahlhoff: Thank you Ken. We're happy to take any questions at this time.
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