Joe Calabrese welcomes everyone to the Rollins, Inc. Second Quarter 2023 Earnings Conference Call. He informs the participants that a press release has been distributed, and a replay of the call will be available for 180 days. He also encourages the participants to follow the slide presentation. Additionally, the company is offering non-GAAP financial measures and reconciliations, which are available in the press release and presentation. He reminds the participants that the company's earnings release contains forward-looking statements and encourages them to refer to the Risk Factors section of the company's Form 10-K. Jerry Gahlhoff Jr., John Wilson, and Kenneth Krause are also on the call.

Management opened the second quarter 2023 earnings call by thanking those present and discussing their strong revenue and earnings growth. They also mentioned the successful acquisition of Fox Pest Control, which has contributed $2 million of GAAP earnings in the first quarter of ownership. Jerry Gahlhoff then reported that revenue had increased by 15%, with organic growth of 8% across all major service lines, such as commercial pest control, residential, and termite.

Revenue performance in the quarter was healthy, and organic growth was very robust in May. The Fox Pest Control acquisition was successful and accretive to second quarter earnings. The integration of Fox has gone smoothly, and the team at Fox was focused on their customers and growing their business. Rollins has an enhanced capital structure and a robust acquisition pipeline, and acquisitions are an important component in helping them expand their market position and accelerate recurring organic growth.

The company is focused on M&A opportunities, continuous improvement, and margin expansion. They are also implementing a new app to monitor and improve driver safety, which is a priority due to higher settlements associated with auto accidents in the second quarter. The app assigns a FICO driving score from 100 to 850, with drivers with scores below 710 being more likely to have a collision. The company is working hard to increase driver safety awareness and get these scores up through coaching and training.

In the second quarter, the company invested heavily in customer acquisition and advertising, which had a small impact on earnings. However, they have seen positive results in terms of organic growth. They have also taken steps to modernize their capital structure, refinancing their revolver and establishing a $1.5 billion universal shelf facility. Lastly, they have been investing in their teams and onboarding new personnel to improve their home office support functions.

In the second quarter of 2023, Rollins saw strong revenue growth of 15%, with organic growth of 8%. Gross margins exceeded 53%, and adjusted EBITDA margin was 22.3%, with GAAP earnings of $0.22 per share and adjusted earnings of $0.23 per share. The Fox acquisition is progressing well and the team is focused on robust organic growth, delivering healthy incremental margins, and continuing to attract, hire, and retain top talent.

In the quarter, revenue was up 15%, with gross profit margins improving by 40 basis points. Costs associated with people, fleet, materials and supplies, and insurance and claims were all factors in the profitability, with people costs being favorable, and insurance and claims being a headwind. SG&A costs as a percentage of revenue increased by 30 basis points, with headwinds from higher insurance and automobile-related claim costs.

In the quarter, the company invested heavily in advertising, resulting in a 15% increase in GAAP operating income and a 19% increase in adjusted operating income. EBITDA was $182 million, up 14% from the prior year, and the EBITDA margin was 22.2%. For the first half, EBITDA margins were just under 22%. GAAP net income was $110 million, and adjusted net income was $114 million. The effective tax rate was 27%, up 200 basis points from the prior year, and is expected to normalize at 26% over the second half of the year. Free cash flow was strong, with $141 million generated on $110 million of earnings.

This paragraph discusses the company's financial performance, which has been strong with increased quarterly free cash flow and cash flow conversion, acquisitions totaling $312 million, and dividends paid of $64 million. The company has also filed a shelf with the SEC allowing for up to $1.5 billion of primary securities, and they expect Fox to add between $90 million and $100 million of revenue and $18 million to $22 million of EBITDA to their 2023 results.

Kenneth and Jerry discussed the trends they saw in the quarter, noting that April started off strong, May was good, and then June saw a significant decline in demand. However, when temperatures rose and the 4th of July approached, the demand returned and the number of unique visitors to their website increased by 18% year-over-year. They also mentioned that they were increasing their advertising investments to take advantage of their business model.

Jerry Gahlhoff and Kenneth Krause discussed how the company decided to increase their advertising spend in Q2 due to the favorable environment and because they were staffed for it. They also mentioned that advertising is generally lower in Q4 due to lower demand levels and that it usually ramps up in Q2 and Q3. Finally, Luke McFadden asked if the company's above-average pricing was affecting new customer growth or retention, and if there was any pushback on pricing from customers.

Jerry Gahlhoff and Kenneth Krause discussed the pushback from customers regarding their services and pricing model. They believe their services are essential and have value, and they will continue to monitor economic trends and the impact of their pricing on their customer base. Gross margins were up 40 basis points year-over-year in the second quarter, and much of that was attributed to the contribution from Fox. Other factors such as economic trends also helped drive the gross margin expansion.

Rollins is making investments in productivity initiatives in order to become more productive. This includes evaluating opportunities for restructuring across all areas of the business, as well as enhancing and improving the home office. Additionally, they are leveraging fleet costs, people costs, and materials and supplies better in order to have a positive impact on their organic business, despite headwinds such as lower used car prices. The Fox acquisition also contributed to the gross profit margin.

Jerry Gahlhoff discussed the anomalous June and how it affected the organic growth of the residential sector. He noted that April and May had seen double-digit growth, and that July was back on track with more in line with expectations. He also mentioned that in previous years, a cold spring would push sales into July, August, and September, and that seasonality should be taken into consideration.

Kenneth Krause explains that weather has an impact on their business, and that warm evenings are particularly beneficial. He also states that there is no huge impact on year-over-year comparables from a weather or revenue performance perspective. He then addresses Jason Haas' question about incremental EBITDA margins, noting that they are almost at their 30% target.

The company is investing in acquiring customers, and the investments are accretive to their EBITDA margin. The company is aiming for a 30% incremental margin profile in the long term, and they feel confident in achieving this due to the pricing, essential nature of their services, and customer experience. There were 4 claims in the quarter that had a 40-basis point drag, and the accruals at June 30 are complete and accurate.

Kenneth Krause and Jerry provide insight into the liability associated with auto claims and how it has changed due to COVID. They explain that you can focus on the controllables to mitigate these exposures in the future, and they discuss the return on ad spend and customer acquisition cost. They note that their organic growth is 8%, which is much higher than the expected market growth.

Kenneth Krause is pleased with the performance of the company's free cash flow conversion in Q2 and the first half of the year. He expects to continue to drive compounding of free cash flow in the mid-teen range and is optimistic about the future. He is comfortable with compounding cash flow at 14-15% over the last 20 years. There is nothing specific driving cash flow improvement in the quarter.

Jerry Gahlhoff and Kenneth Krause discuss the trend in deal valuations, noting that there has been a slight softening in the market but that private equity deals are still transacting at high valuations. They emphasize that Rollins remains disciplined in their acquisition strategy and prioritize the right fit for the company, regardless of the valuation.

Kenneth Krause discussed the split of organic growth between cross-selling into the existing customer base and the ability to add new customers in the residential side. He stated that they are seeing good growth from a number of different services such as pest control, mosquito control, termite control, insulation work, and cross space work. On the commercial side, the demand remains very strong.

Jerry Gahlhoff of Commercial reported that there has been no slowdown in the ability to sell and bring on new commercial customers, and that they are focused on certain verticals such as logistics, health care, and hospitality. They have also continued to invest in their sales force and feel positively about the future of the commercial business. The call ended with Jerry thanking everyone for their interest and looking forward to the next earnings call in October.

This summary was generated with AI and may contain some inaccuracies.