The operator welcomes listeners to the Rollins, Inc. Third Quarter 2023 Earnings Call and introduces the host, Ken Krause. The call is being recorded and a question-and-answer session will follow the presentation. Ken Krause introduces the new VP of Investor Relations, Lyndsey Burton, and mentions her background in Investor Relations. Lyndsey mentions that the earnings release and presentation are available on the company's website and that certain non-GAAP financial measures will be discussed. The company's earnings release also contains forward-looking statements.

Rollins, a pest control company, reported a 15% increase in revenue for the third quarter, with organic growth of over 8%. This was driven by strong performance in all major service lines, including Residential, Commercial Pest Control, and Termite. The company saw consistent growth each month of the quarter, following a slower June. There has been continued strength in the pest control market, particularly in North America.

The company's addressable markets are large and supported by several key trends, leading to consistent revenue growth. They have a strong competitive position due to their portfolio of pest control companies and use of various methods to acquire and retain customers. These methods include digital marketing, cross-selling, service bundling, and door-to-door sales, as well as relationships with homebuilding and real estate communities. This multi-channel approach has helped drive residential customer growth.

Rollins is investing in commercial customer acquisition, targeting profitable verticals and maintaining a focus on their core market. Their recent acquisition of Fox Pest Control is on track and they have closed 18 other deals in addition to Fox. They are actively evaluating more acquisition opportunities. Rollins remains dedicated to continuous improvement and recently executed a restructuring program to support their modernization efforts and flatten their overhead structure.

The company plans to reinvest cost savings into initiatives that will support their growth priorities and make their frontline operations more efficient. They are also focused on developing talent and have seen success in hiring and onboarding new employees. Safety is a top priority and they have seen improvements in their average driver safety score. The company is committed to creating value for shareholders through increasing dividends and completing share repurchases.

In the third quarter, Rollins saw strong revenue growth of over 15%, driven by both organic growth and acquisitions. Gross margins were healthy at 54%, and adjusted EBITDA margin improved by 150 basis points. GAAP earnings were $0.26 per share, and adjusted earnings per share increased by 27% to $0.28 per share. Operating cash flow and free cash flow were slightly up compared to last year. The company also made moves to modernize their capital structure and is focused on continued growth and attracting top talent.

The quarterly results for the company showed a 15% increase in revenue, with a 10 basis point reduction due to currency fluctuations. Organic revenue growth was over 8%, with good demand for services and acquisitions contributing to this growth. Gross profit margin improved by 150 basis points, with pricing offsetting inflationary pressures. SG&A costs decreased by 20 basis points, with people costs, advertising, and insurance making up the bulk of the expenses. A restructuring program was also implemented at the Atlanta Support Center to support modernization efforts.

In this paragraph, the speaker discusses the impact of back-office employee layoffs and cost savings on the company's operations. They also mention non-GAAP adjustments for restructuring costs and Fox acquisition-related items, which totaled $10 million. The company's operating income and EBITDA have increased significantly year-over-year, with margins also improving. The Fox acquisition had a neutral effect on EBITDA margins in the quarter. Incremental margins, or the percentage of additional revenue converted to EBITDA, were high for both the quarter and year-to-date.

In the third quarter, the company saw an increase in GAAP net income and adjusted net income. The effective tax rate also increased compared to last year due to higher foreign income taxes. Free cash flow remained healthy, with an 11% increase year-to-date. The company made acquisitions, paid dividends, and completed a share repurchase. Debt levels are low and the company has a balanced capital allocation strategy. They have also announced a 15% increase in their annual cash dividend payments for over two decades. The company remains disciplined in pursuing acquisitions.

The company has invested $350 million in acquisitions this year and remains a strong player in the market. Their performance this quarter shows the strength of their business model and their focus on customer experience and growth. The demand environment has not seen any slowdown and the company's various customer acquisition strategies have been successful in driving growth.

The digital segment may have seen a slight decline, but the company's diversified strategy is paying off with broad-based growth across all brands and regions. The company is also seeing strong demand and expects continued momentum. The incremental margins of 35% are impressive and the company aims to maintain a healthy margin profile in the future.

The company is confident in their ability to deliver a 30% incremental margin and see EBITDA margins increase in the future. They believe their business is essential and have a focus on continuous improvement. The 4% price increase has been successful overall, with some challenges in certain areas. The company will evaluate the possibility of another price increase in 2024 and will provide updates in the first quarter.

The paragraph features a Q&A session with an unidentified analyst asking questions to Ken Krause and Jerry Gahlhoff. The analyst asks about the performance of the digital channel in customer acquisition and the trend of consumer demand throughout the year. Jerry responds that the channel was somewhat up in the first five months of the year but saw a double-digit decrease in June before stabilizing in the past few months. The analyst also asks about customer acquisition costs.

The speaker discusses the rising trend of customer acquisition costs in the digital channel and the narrowing gap between digital and door-to-door costs. They also mention the potential benefits of the door-to-door model, such as selling density and long-term efficiencies.

Jerry Gahlhoff and Ken Krause from the company are answering a question from Josh Chan about customer acquisition. They do not disclose the exact breakdown of customers by channel, but they mention that a larger portion now comes from digital channels rather than door-to-door. They also mention the importance of word of mouth and technician sales, and the need to have enough staff to support these efforts.

In paragraph 16, the speaker discusses the increase in technician sales and activities due to improved staffing levels. They also mention the ways in which they acquire customers. On the restructuring side, there is an expected payback period of one year for the $5 million spent, with a possibility for a six-month payback. The company is also looking to reinvest in new talent and modernize their operations. In terms of cost inflation, it is still primarily related to fleet, and the price/cost spread has remained positive by 50 basis points compared to previous quarters.

Ken Krause explains that the company's focus for the remainder of the year and into 2024 is to positively manage the price/cost equation. They have been successful in leveraging and improving efficiency in people costs, materials, and fleet. In the second quarter, they saw improved margins, and in the third quarter, they saw outsized improvement due to lower insurance and claims costs. The only headwind was in fleet, but they were able to offset it and see overall improvements in margins. As for free cash flow conversion, they had a big payment in the third quarter that brought it down to 94%, but year-to-date they are tracking at 110% and historically it averages at 120%. They expect to pick up in the fourth quarter and reach 120% conversion for the year.

In the long term, the company expects to continue compounding cash flow and converting net income at high rates. The third quarter saw a decrease in payables, but the company plans to improve this in the future. Weather was favorable in the quarter, and the company has been successful in hiring sales professionals.

The company's recent commercial growth is attributed to investments in sales teams and efficiency. They have added over 60 commercial account managers in the past year and see potential for further growth in this area. The company is still actively seeking acquisitions and is open to various types of businesses that fit their model. They do not compete on price and have been successful in being the acquirer of choice.

The company has been successful in acquiring businesses that prioritize brand preservation and their employees. They have invested $350 million in acquisitions this year, paying below the long-term average multiples. The company has a targeted strategy for specific verticals in the commercial sector, such as hospitality and healthcare, and has hired additional account managers to focus on these areas.

The speaker discusses the tools and strategies used by the company, including Marketo, to generate warmer leads and increase productivity for outside sales. They mention a long-term approach to the business and the payoff of their efforts. They also mention the use of technology and automation in marketing campaigns. There has been no significant change in the competitive landscape.

The speaker asks for clarification on the company's organic growth and cross-selling strategy. The company does not track the margin profile of customers but focuses on cross-selling multiple services to one customer. July had a strong organic growth, but the rest of the quarter remained in line with historical averages. The speaker also suggests that some business from Q2 may have been pushed into Q3, potentially contributing to the strong growth in July.

During a conference call, an analyst asks for a breakdown of organic growth between new customers and cross-selling. The company's CFO, Ken Krause, apologizes and explains that they do not track that level of detail, but reassures that the growth is healthy in both areas. Another analyst asks about the impact of a casualty reserve increase on the previous year's adjusted EBITDA margin. Ken Krause explains that while the casualty reserve impact has decreased, insurance costs have remained high, offsetting some of the improvement in underlying margins. He also mentions that the company saw a 50 basis points improvement in underlying margins in the current quarter. The call concludes with the management thanking everyone for joining.

The company is grateful for the listener's interest and will provide updates on their fourth quarter earnings call in the near future. The operator then thanks everyone for participating and ends the call.

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