Yahoo Finance Rollins, Inc. (NYSE:ROL) Q1 2024 Earnings Call Transcript
Rollins, Inc. (NYSE:ROL) Q1 2024 Earnings Call Transcript April 25, 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: 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.
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. 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. Before I turn it over to Jerry, I want to remind everyone of our upcoming Investor Day on May 17 in New York City. We're looking forward to hosting the investment community and discussing our strategies for growing our business and driving value for our stakeholders. Jerry, would you like to 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. Overall, we continued to see double-digit revenue growth across all major service lines as total Residential revenue increased 16.5%, Commercial rose 11.4% and Termite was up 11.7% this quarter.
We continue to invest in growing our business. As you would expect, we invested in incremental sales staffing and marketing activities ahead of peak season to ensure that we are well positioned and top of mind for the consumer as pet season begins. We are well staffed on the technician and customer support front, so that people are onboarded, extensively trained and ready to provide an exceptional level of service for our customers. On the commercial side of the business, we are leveraging analytics to identify areas in the market where opportunity warrants additional resources. And this continues to pay dividends as evidenced by another quarter of double-digit commercial growth. We continue to strategically add feet on the street to our sales force and are leveraging our training and sales tools to better enable their success as well.
Investments to drive organic growth are complemented by strategic M&A. April 1 marked the 1-year anniversary of closing the Fox acquisition and that team has performed exceptionally well. We anticipate that Fox will continue to positively impact organic growth and profitability as we go forward. We closed 12 tuck-in deals in the first 3 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 a 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 for us and efforts to enhance safety coaching, training and protocols resulted in higher driving safety scores and fewer recorded safety incidents when compared to a year ago. In closing, we're excited about where our business stands today. This year is off to a solid start and demand from our customers remains strong with over 7% organic growth in the first quarter. 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 19,000-plus team members around the world for their ongoing commitment to our customers. Before I hand it over to Ken, I'd like to announce a few changes to our Board of Directors.
First, we would like to thank Jerry Nix, who recently retired from our Board, for his service to our company. We've been so fortunate to have Jerry as our Lead Director for the past several years. His experience, wisdom and guidance helped us navigate uncharted waters for our company and we're incredibly grateful for the significant contributions he's made along the way. Second, we would like to welcome Dale Jones, who was elected to our Board at a recent shareholder meeting. Additionally, Louise Sams has been appointed as our new Lead Independent Director. We're excited about the level of expertise and experience that both Dale and Louise will bring to our Board in their new roles. Ken, I'll now turn the call over to you.
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. Adjusted operating margins were 18.4%, up a healthy 130 basis points with strong gross profit performance and solid expense leverage despite incremental investments aimed at growing our business. Cash flow continues to be very strong with free cash flow increasing 29%, enabling a balanced capital allocation strategy.
Diving further into the quarter, we saw good growth across each of our service offerings. In the first quarter, residential revenues increased 16.5%, commercial pest control rose 11.4% and termite and ancillary increased by 11.7%. Organic growth was also healthy across the portfolio, with growth of 4.3% in residential, 10.1% in commercial and 9.3% in termite and ancillary. As Jerry mentioned, our residential organic growth was impacted by a slower start in January. To provide context, February and March total organic growth was a very strong 10.8% versus 7.5% for the quarter. And looking at residential revenue specifically, February and March organic growth was a healthy 8% versus 4.3% for the quarter. We are pleased with the consistent growth we continue to see across the business.
Turning to profitability. Our gross margins were healthy at 51.2%, up 90 basis points versus last year. We continue to be positive on the price cost equation and saw good performance across several key cost categories. While Fox was accretive to gross margins for the quarter by about 40 basis points, organic margin improved 50 basis points as we saw nice leverage from people cost, fleet and materials and supplies. Quarterly SG&A costs as a percentage of revenue decreased by 10 basis points versus last year. Excluding the earnout adjustment for the Fox acquisition, SG&A cost as a percentage of revenue decreased by 20 basis points in the quarter. We saw healthy leverage from administrative-related costs which enabled reinvestment and incremental advertising and selling expenses associated with growth initiatives that Jerry discussed.
First quarter GAAP operating income was $132 million, up 18% year-over-year. Adjusted operating income was $138 million, up nearly 23% versus prior year on approximately 14% total revenue growth. Adjusted operating margins were 18.4%, up 130 basis points year-over-year on strong gross margins, coupled with solid expense leverage. First quarter EBITDA was $160 million, up over 14% and representing a 21.3% margin, up 10 basis points versus last year. You'll recall that last quarter, we called out a negative impact to adjusted EBITDA due to lower non-operational gains versus the comparable period in the prior year. We saw a similar dynamic in the first quarter as well. Given that we do from time to time, divest non-operational assets, we have made the decision to exclude gains and losses on these types of sales.
Adjusted EBITDA, adjusted net income and adjusted EPS are measures of operating performance and this change will allow us to better compare our underlying performance more consistently over time. A table showing the revised metrics for fiscal 2023 is included in our earnings release. First quarter adjusted EBITDA was $161 million, up 19% versus last year. Adjusted EBITDA margin of 21.5% was strong, improving 100 basis points driven by leverage across the P&L. Incremental adjusted EBITDA margin was 29%, a healthy result considering that Q1 is a slower period and can have a lower profitability profile as we invest ahead of our busier seasons. The effective tax rate was approximately 24% in the quarter, in line with the prior year. Quarterly GAAP net income was $94 million or $0.19 per share, increasing from $0.18 per share in the same period a year ago.
For the first quarter, we had non-GAAP pre-tax adjustments associated with the Fox acquisition-related items totaling approximately $5 million of pre-tax expense in the quarter. Accounting for these expenses, adjusted net income for the quarter was $98 million or $0.20 per share, increasing over 17% from the same period a year ago despite the higher level of interest cost on the higher debt balances versus the comparable period. Turning to cash flow and the balance sheet. Operating cash flow increased 27% in the quarter to $127 million. We generated $120 million of free cash flow, a 29% increase versus last year. Cash flow conversion, the percent of income that was converted into operating cash flow was well above 120% for the quarter. We made acquisitions totaling $47 million and we paid $73 million in dividends, both up versus the same period a year ago.
Debt-to-EBITDA leverage is well below 1x on a gross and net level and our balance sheet is very healthy and positions us well to continue to execute on our capital allocation priorities. In closing, our performance this quarter continues to demonstrate the strength of our business model and the engagement level of our teams. Demand is healthy and our acquisition pipeline provides us a sense of optimism. 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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