Rollins, Inc. (NYSE:ROL) Q4 2023 Earnings Call Transcript
Rollins, Inc. (NYSE:ROL) Q4 2023 Earnings Call Transcript February 15, 2024
Rollins, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
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.
Lyndsey Burton: Thank you, and good morning, everyone. In addition to the earnings release that we issued yesterday, the company has also prepared a supporting slide presentation. The earnings release and presentation are available on our website at www.rollins.com. We have included certain non-GAAP financial measures as part of our discussion this morning. The non-GAAP reconciliations are available in the appendix of today's presentation as well as in our earnings release. The company's earnings release discusses 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, 2023, which will be filed later today. On the line with me today and speaking are Jerry Gahlhoff, President and Chief Executive Officer; and Ken Krause, Executive Vice President, Chief Financial Officer and Treasurer. Management will make some opening remarks, and then we'll open the line for your questions. Jerry, would you like to begin?
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.
Kenneth Krause: Thank you, Jerry, and good morning, everyone. Our results for the quarter and the year reflect continued strong execution by the team. Let me begin with a few highlights for 2023. First, we delivered robust revenue growth of 14% for the year with double-digit growth across each of our service offerings. It was encouraging to see organic growth of 8% for the year, while acquisitions continue to be a meaningful part of our growth profile, accounting for approximately 6% of our total revenue growth. Second, we made good progress on profitability improvement in 2023. Full-year gross margins were healthy as we were positive on the price cost equation and saw improvement across several key cost categories. Adjusted operating margin finished the year at 19.7%, improving 140 basis points driven by leverage across the P&L.
This translated into GAAP EPS of $0.89 per share, up over 18% for the year and adjusted earnings per share of $0.90, up 20% for the year. On an as-reported basis, we generated incremental margins of almost 30% for the year and on an adjusted basis, incremental margins were almost 28% for the year. And last but not least, we delivered operating cash flow of $528 million and free cash flow of $495 million, both up over 13% versus last year. Our strong cash flow performance enabled us to execute a balanced capital allocation strategy, deploying nearly $1 billion of capital in 2023 with a focus on investing for growth, while returning cash to shareholders through a growing dividend and share repurchases. Turning to our fourth quarter performance.
The team delivered a strong quarter with revenue up 14% to $754 million. Currencies had a negligible impact on quarterly revenue growth. We saw a good balance of growth between organic and inorganic activities as organic revenue was up over 7% with acquisitions accounting for the other 7% of growth. Jerry mentioned that we divested certain non-core businesses in the quarter, most notably our lawn care business. The purchase price for the transaction was $18 million. We received $15 million in proceeds during 2023 and recorded a pretax gain of $15 million on the sale. This business doesn't provide the growth or profitability profile of our core pest control business. Going forward, we don't anticipate any significant divestitures associated with portfolio rationalization in the foreseeable future.
In the fourth quarter, Residential revenues increased approximately 18%, Commercial Pest Controls rose nearly 11%, and Termite and Ancillary was up over 13%. Organic growth was healthy across the portfolio with growth of nearly 5% in Residential, approximately 9% in Commercial, and over 11% in Termite and Ancillary. We normally see a step down in revenue as well as growth in Q4 along with Q1 due to seasonality. Comparing Q4 this year to last year, we saw an acceleration in organic growth across all service lines. Gross margin improved 40 basis points to 50.9% in the quarter. While Fox was accretive to gross margins for the quarter by about 30 basis points, we saw 10 basis points of improvement in organic margins as leverage from people costs and fleet offset pressure from materials and supplies and higher insurance-related costs.
Gross profit also steps down in Q4 and Q1, primarily due to lower volume levels associated with the seasonality of our business I previously discussed. With that said, I'm pleased with the fourth quarter performance as we saw improvement year-over-year and recorded our highest Q4 gross margin level in the last several decades. Quarterly SG&A costs as a percentage of revenue increased by 10 basis points versus last year. Excluding the earnout adjustment for the Fox acquisition, SG&A costs as a percentage of revenue decreased by 10 basis points in the quarter. We saw nice leverage on people costs, which offset increased advertising and selling expense associated with the growth initiatives that Jerry discussed previously. Fourth quarter GAAP operating income was $139 million, up 16% year-over-year.
Adjusted operating income was $144 million, up over 20% versus the prior year on 14% total revenue growth. Quarterly EBITDA was $181 million, up 24% versus last year, and EBITDA margin was a healthy 24%, up 190 basis points versus last year. Fourth quarter adjusted EBITDA was $167 million, up 14% and representing a 22.1% margin, flat versus last year. While we saw nice leverage with respect to both gross profit and SG&A, adjusted EBITDA margins were negatively impacted by about 40 basis points in the quarter due to lower non-operational gains on property and vehicle sales that were included in other income when compared to the fourth quarter of last year. This impacted incremental EBITDA margins in the quarter as well. The effective tax rate was 25.8% for both the quarter and the full-year period.
And for 2024, we're expecting an effective rate -- tax rate of approximately 26%. Quarterly GAAP net income was approximately $109 million or $0.22 per share, an increase of nearly 30% from $0.17 per share in the same period a year ago. For the fourth quarter, we had non-GAAP pretax adjustments associated with the Fox acquisition-related items that I mentioned earlier, totaling approximately $5 million of pretax expense in the quarter. We also recognized the $15 million pretax benefit associated with a gain on the sale of our non-core business. Taking into account these adjustments, adjusted net income for the quarter was $101 million or $0.21 per share, increasing over 23% from the same period a year ago. Turning to cash flow and the balance sheet.
Operating cash flow increased 24% in the quarter to $153 million. We generated $142 million of free cash flow on $109 million of GAAP earnings, a 22% increase versus last year. Cash flow conversion, the percent of income that was converted into operating cash flow was well above 100% for the quarter. Debt remains low and debt-to-EBITDA is well below 1x on a gross and net level. We continued to fund our dividend in the quarter. Going back to the fourth quarter of 2022, we have increased our dividend 45% and we remain committed to funding our growing dividend as cash flow improves. As we look to 2024, we remain encouraged by the strength of our markets and the execution by our team. We are focused on delivering another year of robust growth and healthy incremental margins, further complemented by a strategic and disciplined approach to M&A.
From a pricing perspective, we remain focused on effectively pricing the value of our services to remain positive on the price cost equation. And we have begun to raise prices for 2024 in the first quarter at a rate that is consistent with 2023 levels. We also continue to be active in managing our rate cards. Our focus remains on driving consistent growth, delivering healthy incremental margins and compounding cash flow that will enable a balanced capital allocation strategy focused on investing in growth initiatives in our core market. Before I turn the call back to Jerry, I wanted to announce that we will be holding an investor and analyst conference on the morning of May 17th in New York City, where we will share more about our strategic priorities and how we are positioning ourselves for continued success in the future.
We're looking forward to sharing more details in the coming weeks and months. But for now, please hold the date. 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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