Rollins, Inc. (NYSE:ROL) Q4 2022 Earnings Call Transcript

Rollins, Inc. (NYSE:ROL) Q4 2022 Earnings Call Transcript February 16, 2023

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. 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.

Joe Calabrese: Thank you. By now, you should have all received a copy of the press release. However, if anyone is missing a copy, and would like to receive one, please contact our office at 212-827-3746, and we’ll send you a release and make sure you’re on the company’s distribution list. There will be a replay of the call, which will begin one hour after the call and run for one week. The replay can be accessed by dialing 201-612-7415 with the passcode 13735127. Additionally, the call is being webcast at www.rollins.com and a replay will be available for 180 days. The company is also offering investors, a supporting slide presentation which can be found on Rollins’ website at www.rollins.com. We will be following that slide presentation on our call this morning, and encourage you to view that with us.

On the line with me today and speaking Jerry Gahlhoff Jr. President and Chief Executive Officer; John Wilson, Vice Chairman; Kenneth Krause, Executive Vice President, Chief Financial Officer and Treasurer; and Julie Bimmerman, Group Vice President Finance and Investor Relations. Management will make some opening remarks, and then we’ll open the line for your questions. John, would you like to 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.

Julie Bimmerman: Our earnings release discusses our business outlook and contain 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 our SEC filings, including the Risk Factors section of our Form 10-K for the year ended December 31, 2021 for more information and the risk factors that could cause actual results to differ.

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.

Jerry Gahlhoff: Thank you, John, and thank you all for joining our call today. Let me begin by saying that, we’re extremely pleased with our fourth quarter and full year results, and I’m also equally proud of the hard-working men and women of our company that continue to drive our growth through great customer service. I’d like to provide my comments on our 2022 fourth quarter performance. Ken will then address the financials in more detail in a moment. Reflecting solid execution of our operating strategies, Rollins delivered another strong performance in the fourth quarter, highlighted by total revenue growth of over 10% in the fourth quarter, and over 11% for the full year. Operationally, we have strong momentum in our markets.

The company remains well positioned to achieve our long-term objectives, and we’re seeing solid levels of growth in the business. As many of you are aware, Rollins has a long-standing company-wide focus on personal safety. Complementing our existing guidelines and protocols we continue to implement new initiatives designed to empower our employees and enable an accountable, safety-driven culture. First training remains crucial for keeping our customers out of harm’s way. Second, we’re updating incentive metrics and our compensation programs to emphasize safety down to the branch level. A branch manager’s bonus plan will now have stronger ties to safety metrics for their operation. We’re also working on a new employee-level program to incentivize the highest levels of safe-driving behaviors.

We began to pilot this program later this year €“ or we plan to pilot this program later this year for our 10000-plus drivers at Rollins. We believe these initiatives will help ensure our workforce returns home to their family, safely each and every day. Looking closer at the financial results and the growth we delivered. Organic growth came in at 6.9% compared with 7.8% for the full year. While still strong, we realized slower growth in the residential sector. While market data indicates this to be consistent across the industry, we started 2023 with strong residential revenue performance in January. While a month is not a long-term trend it was good to see solid demand to start the year. We also continue to succeed in our other service lines particularly within our termite and ancillary, which grew 15.4% year-over-year.

Rollins remains very well-positioned to drive ancillary growth within this business. We’ve taken on the responsibility to educate homeowners on termite prevention and treatment along with other ancillary offerings. And from the customer perspective these service offerings are from a trusted partner. We remain focused on driving revenue growth from cross-selling activities across our large and growing customer base. Our team continues to do a tremendous job here. Our commercial line has also presented a strong year for us with 10.3% growth over the prior year. The sales teams continue to perform very well on both locally sold and national account sales efforts across all our commercial brands. We’re seeing strong results in this area with solid performance with customers in the retail, restaurant and office building segments.

Across all the service lines I just discussed, a key driver of growth is pricing. During 2022 in light of the ongoing inflationary challenges, we brought forward our annual price increase program to earlier in the year. In 2023, we are bringing this forward even earlier. Most of these price increases will be initiated beginning in early March and some were already implemented in January. Furthermore, our non-Orkin brands are ramping up their focus on pricing the value of our services. Additionally, all our brands are increasing their rate cards. We expect the inflationary environment to persist into 2023 and are focused on managing the price/cost equation. Acquisitions remain a major focus as we start 2023. During 2022 we successfully completed 31 acquisitions representing a total of $119 million invested.

This compares with 39 acquisitions and $146 million invested in 2021. While we successfully completed four acquisitions during the fourth quarter we proactively remain on the sidelines during the last few months of 2022 and turned our attention to 2023 deals in our pipeline. We’re very optimistic about what’s in store for the New Year as leveraging strategic acquisitions remains a focus of our growth strategy. Next, we remain committed to investing in our business to drive efficiency. As part of this we continue to leverage technology by adding a number of new applications to our portfolio of brands. For example, building off our successes with routing and scheduling technology at Orkin and Western Pest Services, we’re rolling out routing and scheduling technology initiatives at Clark and HomeTeam.

Each of these brands are making meaningful progress at improving efficiency. Clark expects to be at full utilization by the end of this quarter and is very excited about the results to-date. Robert Baker Clark’s President went so far as to comment that this initiative is proving to be the best thing for Clark in many years. HomeTeam should complete their implementation and be at full utilization by the end of the second quarter. Both brands have seen an improvement in their on-time delivery metrics since implementation started. In addition to enabling us to reach our customers in a more efficient and productive manner, we found these initiatives can meaningfully reduce both our overall mileage between service visits and drive time for the technician.

Not only does this lower our fuel requirements it also has a direct impact on our labor costs. With that, I look forward to answering your questions in a few moments. However, before I turn the call over to Ken I want to emphasize that our team at Rollins had a successful year in 2022 and we are confident in our ability to continue driving growth and improving profitability in our business. I’ll now turn the call over to Ken.

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?

Jerry Gahlhoff: Thank you, Ken. We’re happy to take any questions at this time.

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Q&A Session

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

Tim Mulrooney: Jerry, Ken, John, Julie good morning.

Jerry Gahlhoff: Good morning.

Kenneth Krause: Good morning.

Julie Bimmerman: Good morning.

John Wilson: 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.

Kenneth Krause: Thanks for the question, Tim. This is Ken. I’ll take this question. But I would agree with you. We had really good performance in the fourth quarter with respect to our cost control programs and SG&A. As I’d indicated in my prepared commentary, we had an advertising benefit of about $7 million. So that’s about 120 basis points of the improvement. However, we certainly continue to look at a number of opportunities to continue to improve our cost structure going forward. We certainly did leverage it with the higher growth rates that we were able to deliver in the quarter, but we also are very actively evaluating and continue to contemplate cost changes and cost reduction measures across our business.

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.

Tim Mulrooney: Ken’s cracking the whip?

Jerry Gahlhoff : Yes.

Tim Mulrooney: Okay. Thanks Jerry, and thanks Ken. One more just a question on pricing. I mean it sounds like you’re pulling forward the pricing increases even earlier this year which was surprising. But how should we think about that level of pricing increase? I know it was higher than historical levels last year, which makes sense. But with the consumer outlook may be a little bit murkier as we turn the corner into 2023 I’m curious how you’re thinking about the level of pricing this year. Do you expect it to be more in line with the historical average, or still above that historical average level? Thank you.

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.

Tim Mulrooney: Got it. Thank you.

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