Rollins, Inc. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
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.
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.
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.
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.
Thank you, Ken. We're happy to take any questions at this time.
[Operator Instructions]
So just stepping back here, with trends accelerating in February and March. I just wonder if folks are going to extrapolate that 10% organic growth rate into the next several months and quarters. I mean 10% to me just sounds like touch on the strong side. So I wonder if that's how you're thinking about things or if expectations are better level set to kind of what we saw over the last several quarters, more in that 7% to 8% range for organic growth.
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.
That's really helpful. Thank you, Ken. And this is not a follow-up. It's a completely separate topic, but I'm going to do it anyway. The step-up in sales and marketing expense, okay? I think there's a couple of different ways folks could interpret that, either as more of a defensive move, because you're having to spend more, maybe on digital marketing to win customers or more as an offensive move, hiring more sales folks for future growth, for example. Could you just double click into that increase in sales and marketing expense column? And help us understand that decision a little better to ramp up spend there?
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.
Our next question is from George Tong with Goldman Sachs.
I wanted to dive into trends that you're seeing in the residential business. It sounds like most of the impact to organic revenue growth in residential was due to unfavorable January weather, leading to the 4% organic growth. I wanted to see if there were any other trends you would call out there? I know last quarter, you highlighted onetime sales impact. So any changes there and other operating items to consider as it relates to the organic growth in residential?
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.
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.
Got it. That's helpful. And then within the termite and ancillary services business, organic growth seems to have decelerated a bit to 9% compared to 11% in 4Q. Can you talk about some of the puts and takes that could have led to that performance?
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.
Okay. Got it. Any factors that could have caused the deceleration in organic revenue growth there?
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.
Our next question is from Stephanie Moore with Jefferies.
On for Stephanie Moore. I just wanted to touch on commercial organic growth that's been pretty strong over the last few quarters. And I know you mentioned leveraging analytics and things like that, but I was just curious if there's anything else to call out? And if you could kind of talk about the sustainability of growth there?
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.
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.
Just on the resi side, have you guys seen any slowdown? Anything that's meaningful related to the new business wins or a sort of meaningful pickup in customer churn and maybe lower household income areas? And then just anything you could share around how April is kind of shaping up so far?
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...
It would be very difficult to grow our business at the rate we're growing if we saw [ chiding ] in customer churn. And so customer churn, although it is not [ chiding ], it still remains an opportunity for us to continue to improve. When we look at April, we continue to see healthy levels of demand. We're starting April strongly. But again, we continue to think about a 7% to 8% sort of organic growth rate across the business as we think about the future.
Our next question is from Ashish Sabadra with RBC Capital Markets.
This is [ David Pedron ] for Ashish. In terms of capital allocation, now that you've lapped the Fox acquisition, how should we think about I guess, your M&A pipeline in terms of larger deals or smaller deals going forward, especially given this robust free cash flow that you keep generating?
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 Instructions] Our next question is from Josh Chan with UBS.
So I guess you mentioned that 7% to 8% is sustainable growth rate. And given how strong commercial and termite is, does that imply that you expect residential to kind of remain in this 4% range going forward? Just curious how you're thinking about how the different businesses contribute to that 7% to 8%.
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.
Yes, I agree with you, Ken. I think it's hard to predict that. I mean, there's going to be movement in any of those categories potentially based on a number of factors and where it all comes out in that 7% to 8% total.
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?
Yes. As we had talked about, I mean, the business started to grow pretty nicely on a year-over-year basis, organic basis in February and into the March. And so we saw that, and we saw an opportunity to pull forward some investments. It doesn't mean that we're going to invest any lighter in Q2. In fact, we're going to continue to invest in Q2 and drive further growth.
We had a lot more carrying costs from people side in late fourth quarter and certainly in the first quarter than I think we've ever had. The reality is it's certainly harder to find people and then with the level of intensity that we put and the time and energy that we put into training and development upfront, that takes time to have people ready. And so our strategy has been to get ahead of that.
Our next question is from Ollie Davies with Redburn Atlantic.
Just 2 for me. So firstly, can you just talk about the level of price increases you're putting through? And if you're seeing any pushback on the residential side, just given the level of volume growth in the first quarter. And then secondly, in terms of -- probably one for Ken just in terms of the SG&A. I mean, obviously, the admin expenses, I guess some of that is coming from the modernization that you did last year. So how sustainable are they going forward through this year, and I guess, your ability to reinvest that?
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.
And our next question is from Ashish Sabadra with RBC Capital Markets.
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?
Yes, it was 10.8% to put a fine point on it for the entire company. And for residential, it was 8%.
For February and March.
Yes, for February and March. Yes.
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.
Thank you, everyone, for joining us today. We appreciate your interest in our company and look forward to speaking with you all at our upcoming investor conference. Thanks again.
Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.