Good day, ladies and gentlemen. Thank you for joining us. Welcome to Rollins, Inc. Fourth Quarter and Full-Year 2023 Earnings Call. During today's presentation, all participants will be in a listen-only mode. After the presentation, we will open the floor to questions. This conference is being recorded today, Thursday, February 15, 2024. I would now like to turn the call over to Lyndsey Burton, Vice President of Investor Relations. Please proceed.

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, which will be filed later today. 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. Jerry, would you like to begin?

Thank you, Lyndsey. Good morning, everyone. Fiscal 2023 was an outstanding year for Rollins as we achieved a milestone of $3.1 billion in revenue. Demand from our customers remained strong throughout the year across all major service offerings. While full-year revenue increased 14% versus last year, we grew earnings per share by over 18% and adjusted earnings per share by 20%, reflecting consistent execution of our operating strategies and a commitment to continuous improvement in our business. We finished the year with a strong fourth quarter and observed sustained strength in the pest control markets we serve. We also continue to drive share gains in our markets by leveraging a multi-brand, multichannel approach at scale to differentiate ourselves competitively. Digital marketing, cross-selling, service bundling, and door-to-door sales methods help us reach new customers and enhance engagement with existing customers to support organic growth. We have also strategically allocated resources to the commercial side of our business to capitalize on opportunities within key verticals. Most notably, we have grown our sales force and invested in training and tools to enable their success. Our service quality is high, and our offerings are customized, which helps new sales professionals gain confidence and become successful quickly. Additionally, we are leveraging the scale of our Orkin brand across North America to effectively serve commercial customers coast-to-coast in both the U.S. and Canada. While we're still early with respect to our efforts in this area, we see good results as demonstrated by approximately 11% commercial revenue growth for the year. Investments to drive organic growth are complemented by strategic M&A. And in 2023, we welcomed 24 new businesses into our company through acquisition. This includes the addition of Fox Pest Control, which was the second largest acquisition in our company's history. Our synergistic approach to integration has gone well with the Fox team exceeding the financial targets we outlined last April. Additionally, during the fourth quarter, we divested certain non-core businesses, most notably our lawn care business, which includes insect, fertilization, and weed control for turf grafts. We recognized a pretax gain on sales of that transaction of approximately $15 million. The decision to divest this asset aligns with our strategy to focus on profitable growth in core pest control operations. Operationally, we remain committed to developing exceptional talent and investing in our teams. The hiring environment improved in 2023 as we put a lot of energy into onboarding the right people in both support functions as well as the customer-facing side of our business. Effective sales and service staffing levels help us capitalize on continued demand and deliver solid results for the year. 2023 was also an important year with respect to continuous improvement and safety was a key area of focus for us. During the year, we implemented an app that monitors driving behaviors once our vehicle is in motion. The app protects unsafe driving maneuvers associated with acceleration, braking, and speed, then converts data collected into a driver safety score. I'm pleased to report that by year-end, our average driver safety score for drivers that we monitor increased over 30% from the beginning of the year. But we aren't stopping there. Improving the safety culture isn't something that is done overnight. But we are proud of the progress we have made and have set ambitious goals for ourselves to encourage safe behaviors throughout our organization. We believe these efforts will improve our ability to serve customers, help mitigate potentially negative financial impacts on our business, and most importantly, ensure our people return home safe every day. Our continuous improvement efforts also set our own initiatives to modernize our back office and support functions. This is a work in progress, but we took some important steps to upgrade talent and systems during the year. These efforts are aimed at further enabling our growth priorities and increasing productivity as we work to become a better, more effective provider of shared services for our brands. In closing, our performance in 2023 demonstrates the strength of our business model and the engagement level of our team. Our family of pest control brands is driving profitable growth, and we are focused on continuous improvement throughout the business. We remain committed to providing our customers with the best customer experience and investing meaningfully in our team to drive growth both organically, as well as through disciplined acquisitions. We're pleased with where our business stands today and the momentum we carry into 2024. And I want to thank each of our 19,000 plus associates around the world for their efforts and contribution to our success in 2023. I'll now turn the call over to Ken.

Thank you, Jerry, and good morning, everyone. Our results for the quarter and the year reflect continued strong execution by the team. Let me begin with a few highlights for 2023. First, we delivered robust revenue growth of 14% for the year with double-digit growth across each of our service offerings. It was encouraging to see organic growth of 8% for the year, while acquisitions continue to be a meaningful part of our growth profile, accounting for approximately 6% of our total revenue growth. Second, we made good progress on profitability improvement in 2023. Full-year gross margins were healthy as we were positive on the price cost equation and saw improvement across several key cost categories. Adjusted operating margin finished the year at 19.7%, improving 140 basis points driven by leverage across the P&L. This translated into GAAP EPS of $0.89 per share, up over 18% for the year, and adjusted earnings per share of $0.90, up 20% for the year. On an as-reported basis, we generated incremental margins of almost 30% for the year and on an adjusted basis, incremental margins were almost 28% for the year. And last but not least, we delivered operating cash flow of $528 million and free cash flow of $495 million, both up over 13% versus last year. Our strong cash flow performance enabled us to execute a balanced capital allocation strategy, deploying nearly $1 billion of capital in 2023 with a focus on investing for growth, while returning cash to shareholders through a growing dividend and share repurchases. Turning to our fourth quarter performance. The team delivered a strong quarter with revenue up 14% to $754 million. Currencies had a negligible impact on quarterly revenue growth. We saw a good balance of growth between organic and inorganic activities as organic revenue was up over 7% with acquisitions accounting for the other 7% of growth. Jerry mentioned that we divested certain non-core businesses in the quarter, most notably our lawn care business. The purchase price for the transaction was $18 million. We received $15 million in proceeds during 2023 and recorded a pretax gain of $15 million on the sale. This business doesn't provide the growth or profitability profile of our core pest control business. Going forward, we don't anticipate any significant divestitures associated with portfolio rationalization in the foreseeable future. In the fourth quarter, Residential revenues increased approximately 18%, Commercial Pest Controls rose nearly 11%, and Termite and Ancillary was up over 13%. Organic growth was healthy across the portfolio with growth of nearly 5% in Residential, approximately 9% in Commercial, and over 11% in Termite and Ancillary. We normally see a step down in revenue as well as growth in Q4 along with Q1 due to seasonality. Comparing Q4 this year to last year, we saw an acceleration in organic growth across all service lines. Gross margin improved 40 basis points to 50.9% in the quarter. While Fox was accretive to gross margins for the quarter by about 30 basis points, we saw 10 basis points of improvement in organic margins as leverage from people costs and fleet offset pressure from materials and supplies and higher insurance-related costs. Gross profit also steps down in Q4 and Q1, primarily due to lower volume levels associated with the seasonality of our business I previously discussed. With that said, I'm pleased with the fourth quarter performance as we saw improvement year-over-year and recorded our highest Q4 gross margin level in the last several decades. Quarterly SG&A costs as a percentage of revenue increased by 10 basis points versus last year. Excluding the earnout adjustment for the Fox acquisition, SG&A costs as a percentage of revenue decreased by 10 basis points in the quarter. We saw nice leverage on people costs, which offset increased advertising and selling expenses associated with the growth initiatives that Jerry discussed previously. Fourth quarter GAAP operating income was $139 million, up 16% year-over-year. Adjusted operating income was $144 million, up over 20% versus the prior year on 14% total revenue growth. Quarterly EBITDA was $181 million, up 24% versus last year, and EBITDA margin was a healthy 24%, up 190 basis points versus last year. Fourth quarter adjusted EBITDA was $167 million, up 14% and representing a 22.1% margin, flat versus last year. While we saw nice leverage with respect to both gross profit and SG&A, adjusted EBITDA margins were negatively impacted by about 40 basis points in the quarter due to lower non-operational gains on property and vehicle sales that were included in other income when compared to the fourth quarter of last year. This impacted incremental EBITDA margins in the quarter as well. The effective tax rate was 25.8% for both the quarter and the full-year period. And for 2024, we're expecting an effective tax rate of approximately 26%. Quarterly GAAP net income was approximately $109 million or $0.22 per share, an increase of nearly 30% from $0.17 per share in the same period a year ago. For the fourth quarter, we had non-GAAP pretax adjustments associated with the Fox acquisition-related items that I mentioned earlier, totaling approximately $5 million of pretax expense in the quarter. We also recognized the $15 million pretax benefit associated with a gain on the sale of our non-core business. Taking into account these adjustments, adjusted net income for the quarter was $101 million or $0.21 per share, increasing over 23% from the same period a year ago. Turning to cash flow and the balance sheet. Operating cash flow increased 24% in the quarter to $153 million. We generated $142 million of free cash flow on $109 million of GAAP earnings, a 22% increase versus last year. Cash flow conversion, the percent of income that was converted into operating cash flow was well above 100% for the quarter. Debt remains low, and debt-to-EBITDA is well below 1x on a gross and net level. We continued to fund our dividend in the quarter. Going back to the fourth quarter of 2022, we have increased our dividend 45% and we remain committed to funding our growing dividend as cash flow improves. As we look to 2024, we remain encouraged by the strength of our markets and the execution by our team. We are focused on delivering another year of robust growth and healthy incremental margins, further complemented by a strategic and disciplined approach to M&A. From a pricing perspective, we remain focused on effectively pricing the value of our services to remain positive on the price cost equation. And we have begun to raise prices for 2024 in the first quarter at a rate that is consistent with 2023 levels. We also continue to be active in managing our rate cards. Our focus remains on driving consistent growth, delivering healthy incremental margins and compounding cash flow that will enable a balanced capital allocation strategy focused on investing in growth initiatives in our core market. Before I turn the call back to Jerry, I wanted to announce that we will be holding an investor and analyst conference on the morning of May 17th in New York City, where we will share more about our strategic priorities and how we are positioning ourselves for continued success in the future. We're looking forward to sharing more details in the coming weeks and months. But for now, please hold the date. With that, I'll turn the call back over to Jerry.

Thank you, Ken. We're happy to take any questions at this time.

Thank you. We'll now move into the question-and-answer session. Our first question is from Tim Mulrooney with William Blair. Please go ahead with your question.

Jerry, Ken, good morning.

Good morning.

Good morning.

I have a couple of questions. Ken, regarding the residential organic growth, it decreased from 7% to 5% between the third and fourth quarters. Historically, I notice there’s often a slight seasonal deceleration from the third to the fourth quarter. Could you explain what those seasonal factors are, such as any one-time revenue? Also, could you provide insights on how your residential recurring revenue stream performed in the fourth quarter?

Certainly, Tim, I'll start, and then turn it over to Jerry for additional comments as well. But when we look at the business, the business, as you so well indicate has a high degree of recurring revenue. And so as a result, there is a consistent base to the revenue that we enjoy and we benefit from. The one thing that does have an impact on our business from time-to-time is what we call one-time types of service. And when we look at the quarter in the fourth quarter, we did see a deceleration in the rate of growth in those areas of our business. That's probably the largest area of impact on the revenue growth in the quarter. We were really encouraged, quite frankly, with the level of growth that we continue to see from the recurring business. It was a healthy level of growth for us, despite being stacked up against last October, you may recall was more beneficial because the hurricane season was pretty tough in September. And so some of that business pushed into the fourth quarter of last year. There's always puts and takes, of course, in this business with weather. But we continue to be pretty encouraged with respect to our growth, especially in the residential sector.

I want to emphasize, Ken, that in residential pest control, the recurring service frequency of every other month is our core offering. This is the best indicator of our business health as we grow and increase our volumes. We concluded the year positively with net new customers at the start of the year. This quarterly and every other month pest control service is essential to our business, while one-time services are an additional benefit. However, we don't always secure those one-time services, which has contributed to the slowdown, along with the lawn care divestiture that affected our residential segment by around $1 million this quarter, Tim.

Got it. Okay. So there was a little less gravy in the fourth quarter, which implies that your recurring revenue in that business is above your stated organic growth in the fourth quarter. Am I correct on that?

Yes. Absolutely. Our recurring quarterly every other month service definitely outpaced our organic overall number.

Got it. The other one for me, and thank you for that, is on digital marketing. You mentioned last quarter that digital marketing efforts were, I think the language was flat to down slightly. Correct me if I'm wrong about that. But I was just curious if that trend carried through the fourth quarter or if it moves up or down at all?

As we analyze the digital queries in the fourth quarter, we observed slight increases compared to the previous year. This led to some healthy growth in lead starts and sales, both digitally and overall in our business. We experienced a lift, which was certainly better than remaining flat. While it wasn't an exceptional performance, it did represent a year-over-year improvement. We believe our diverse approach helps us avoid being overly reliant on the digital space, which is a crucial element of our organic growth strategy.

Yes. It's interesting, Jerry, just adding on to that. When we look at the business in the fourth quarter and as well as throughout the year, what really proves the point that we're continuing to see good cross-sell, and we always talk about additional ways we access the customer. And one area is the cross-sell and the Termite and Ancillary business is really representative of that. We continue to see really robust levels of demand on the Ancillary side of our business, which is driven a lot by that cross-sell activity that the team continued to execute upon.

Got it. Thank you, Jerry and Ken. When my kids turn 16, I might try to hit you off from one of those driver monitoring systems.

It's a good idea. You should probably get on it yourself, too.

Thank you.

Thank you.

Our next question is from Jason Haas with Bank of America. Please proceed with your question.

Hey, good morning. And thanks for taking my questions. I'm curious if you could remind us what level of price increase you had put in last year. And I know it's early in the year, but I'm curious if you're seeing any more sensitivity from customers to the price increase you're putting in this year versus last?

As we mentioned earlier, we implemented a 3% to 4% price increase last year. We have done the same this year in the first quarter, just before our busy pest market season begins later this quarter. We closely monitor customer responses, examining factors like churn, cancellations, and rollbacks. We analyze various metrics and believe that the price increase we are applying is reasonable and reflects the value of our services.

Got it. That's great to hear. And then as a follow-up question, I'm curious if you could just talk about competitive dynamics in the industry. I'm curious how your growth rates in Q4 compared to the industry? If you feel like you're still gaining share? And just if you see any opportunities for the share gains in the year ahead?

I mean we continue to have a highly fragmented market in this industry. It remains very competitive. I wouldn't necessarily characterize any significant shifts or changes in that competitiveness, it's always been that way. And while there are some ebbs and flows in here and there, we just keep doing what we do, focusing on our business and trying to win at what we do so.

When we look at our growth, Jason, in the quarter at organic growth, which was north of 7%, and we think about how that fares relative to how we've discussed the business and also how we outperformed. We're pretty happy with the level of growth that we're seeing come through the business. And we also continue to have a high degree of optimism and we're encouraged about the future growth that we continue to see in this business. So we really look at how we're performing relative to our expectations, and we continue to perform at a level that we're pretty pleased with.

Got it. That's great. Thank you.

Our next question is from George Tong with Goldman Sachs. Please proceed with your question.

Hi, thanks. Good morning. Following up on the Residential business. Can you talk about what recurring revenue growth trends were? How did it perform relative to your earlier quarters? And what you see as the key drivers of growth acceleration going forward?

Certainly, George. When we look at the growth rates and we look at their recurring revenue growth relative to prior quarters, the business continues to perform pretty well. It continues to hold in there. I mean Q4 always sees a step down and just generally the growth year-over-year. But it's above what we saw a year ago, and it continues to be at a healthy level. So there's nothing that's indicating that there's a significant deceleration in the growth rates or a different or a change in profile in the growth rates that we're seeing coming through our business.

Got it. And you talked about earlier, making good progress with bundling, cross-selling in door-to-door sales. Can you talk a little bit about your priorities for 2024 with respect to these areas and how you expect that to drive volume performance?

Certainly, when we examine the business, we consider a variety of priorities. We are particularly focused on obtaining value for our services through strategic pricing management. We have raised prices and will continue to do so while effectively managing our rate cards. As a result, we expect the growth rate associated with pricing to align with last year’s rate of 3% to 4%. Additionally, we are optimistic about our growth profile in the market and are confident in our ability to maintain a healthy level of growth, similar to what we have experienced in recent years. The growth rate has accelerated post-COVID, and we continue to see strong organic growth. We also experienced significant growth related to mergers and acquisitions over the past year. Our initiatives include targeting customers for cross-selling additional services such as mosquito and tick control and enhancing our termite and ancillary business. Moreover, we remain focused on our commercial segment, which Jerry discussed in detail previously, and we are committed to driving growth in that area. All of these initiatives together give us a positive outlook for our growth rates moving forward.

George, I'll add. This is Jerry. When we think about one of the ways I just love our business model is the diversity that we get from our brand strategy. Each of our brands has various different ways to acquire customers, whether it be, say, Northwest and Home Team that rely heavily on the homebuilding market or Fox doing door-to-door. And now, for example, we have Home Team doing door-to-door and expanding that offering in their business by things they learn from the Fox team. These are all things that we can deploy across and due to the diversity of our brands and what each one brings to the table that we think continues to help us with this solid growth profile for the future.

Very helpful. Thank you.

Thank you, George.

Thank you. Our next question is from Michael Hoffman with Stifel. Please proceed with your question.

So the challenge is how creative can I be to ask four questions in two. Good morning, everybody.

Good morning.

So things that would help the model, Ken, are specifics that I think you can share like the three to four and 1Q pricing. What is the dollar amount of the M&A rollover from '23, so everybody just gets that right? And how do you think about the cadence of it in the calendar year, so we just don't get that wrong?

Certainly. When we look at M&A, we continue to be focused on M&A. We continue to focus on executing that disciplined strategy. We see roughly 2% carryover coming into 2024 from M&A. A large part of that, of course, is here in the first quarter with Fox; we acquired Fox last April. So we still have one quarter of benefit. When we look at the pipeline, we see a healthy pipeline. We were very active to close out the year and then also to start 2024. January activity in deals that we closed are up. So we continue to chart towards that 2% plus level of growth, 2% to 3% plus level of growth associated with M&A as we go forward. But the carryover is around 2%.

Okay. And then it's shared with us that incremental margins on an adjusted basis for 2029, both on an adjusted and adjusted 28%, 29%. What is the target for this year? And how does non-operating gains influence that? And maybe can you isolate what those gains were in '22 and '23, so we can understand how to think about them in '24. There's my creative question with four parts.

Certainly. When we examine the incremental margin profile, we remain confident in achieving 30% incremental margins. Over the past several years, we've observed an increase in incremental margins. Our focus has consistently been on improving these margins. As we consider this target, we maintain a range around 30%, with some quarters reaching as high as 35% to 40%. There will be fluctuations from quarter to quarter, but overall, concluding the year with margins between 28% and 30% is satisfactory for us, reflecting a 70 basis points improvement in EBITDA margins. Gains from asset sales are expected to materialize, as they did in Q4, where we recorded approximately $3 million lower asset sales that influenced other income and contributed about 40 basis points to both the margin line and the EBITDA margin line. These gains will occur periodically, and we will strive to clarify their impact as we move forward.

Okay. Thanks.

Thank you.

Our next question is from Ashish Sabadra with RBC Capital Markets. Please proceed with your question.

Thanks for taking my question. Maybe if I can ask a clarifying question on residential. Obviously, good to hear the recurring revenues within residential continue to do really well and the digital inquiries are also pretty stable. Just a question there is, have you seen any change, particularly from competitors pushing harder on the marketing spend, is that changing anything? Did that change anything in the fourth quarter? But maybe importantly, going into 2024, how should we think about the demand environment? You talked about a pretty solid demand environment. I was wondering if you could provide any color on cicadas and the two groups of cicadas coming or emerging in '24, what do would that mean for the demand environment? Thanks.

Ashish, this is Jerry. I'll address the first part of your statement. I consulted with our marketing team about the digital spending in the fourth quarter. We were hoping to invest earlier in the year, and it seemed there was a noticeable increase in competitive spending during the fourth quarter, coinciding with our reduction in marketing spending. This indicated that there was significant investment in the market at that time. Thus, we observed a heightened competitive environment due to increased spending. However, we do not know how this translated into sales, new customers, or one-time work in the residential sector. So that's in response to your first question.

Yes. And the second part of your question, I think, it was around cicadas and new pests. And we continue to monitor new pest activity. Cicadas are one of the many pests that we continue to monitor. Jerry, I don't know if you want to add. I'm certainly not the expert when it comes to cicadas. You're probably much better positioned to answer that?

Cicadas are generally not considered a household pest control issue. They can be a nuisance, especially when they appear in large numbers, creating significant noise. I have a house in the mountains where the noise made it hard to sleep at night. Although cicadas will eventually go away, their presence may increase awareness about various pests that can irritate people. However, our pest control companies are not focused on trying to eliminate cicadas, as that would be quite challenging. Instead, we wait for them to die off and for the cycle to start again. This situation may generate some interest in the marketplace, which is beneficial for our business.

That's very helpful color. And maybe if I can ask a question on the back-office modernization. Ken, if you can just help us understand where you are on that process? And how should we think about that contribution to incremental EBITDA margins in '24, but also midterm? Thanks.

Yes. We continue to be very early on in our journey with respect to modernization, making good progress. We've added a number of new team members across our back office, we've made some significant changes. But we're pretty excited about what's to come. With that said, when we look at the SG&A performance over time, we've continued to see that improve. Going back a couple of years, it was almost 31%. It's come down under 29% here in the quarter. So we continue to leverage that and despite having investments and growth initiatives associated with the commercial business as well as other parts of our business. And so we're early on in the journey. We feel like there's some opportunities as we go forward to continue to improve the business.

Thanks. Very helpful and really strong momentum in commercial and ancillary services. So congrats on that.

Thank you.

Our next question is from Josh Chan with UBS. Please proceed with your question.

Hi, good morning. Thanks for taking my questions. Maybe bridging from the prior question on SG&A. I guess, you've done a really good job improving gross margin over the last several years. I guess from an SG&A perspective, is there an expectation that the leverage there can increase a little bit over time as some of your initiatives get more traction?

Yes. I think there's an opportunity to improve upon the SG&A performance. And we've said that for some time, and we continue to see improvement in SG&A. With that said, we do have a disproportionate investment in securing customers through advertising and door-to-door and other activities. But with that said, our focus is to continue to improve upon the administrative side of the back office and without sacrificing the investments for growth. And so we're hopeful to see improvement as we go forward, just like we've seen in the last couple of years here. In the last year or so, we continue to see improvement despite the investments we're making. But we feel like we're well positioned on that front.

Okay. Thank you. That makes a lot of sense. And on the Residential side, you mentioned that the one-time service slowed down a little in Q4 and maybe a little slower in Q1 as well. Is there anything to interpret from that from perhaps a macro perspective or any other reasons that would drive that to be a little slower for the upcoming quarter as well?

Yes. We observed a decline in some of the residential bed bug services and also in wildlife services, particularly those related to rats and rodents. These factors are the main reasons for the slowdown, though we are uncertain whether this is seasonal, due to changes in weather, or a shift in demand. Bed bug cases, for instance, have always varied from quarter to quarter and year to year, and we experienced a more significant drop recently.

When we look at that question, Josh, because we've looked at that as well because we deal with consumers, homeowners. And when we look at the business and we assess more of a macro level, we look across our business. We look not only in the Residential pest control that Jerry just spoke about, well we also look at the Termite Ancillary. And that Ancillary business is normally some high-ticket items. And if that continues to grow, the pace it's growing, it's indicative that the consumer is pretty healthy. With that said, we were proactive in the end of last year at tightening credit down in a number of different areas just to ensure that we don't run into any issues from a credit perspective. And so in our acceptance score, we raised the minimum level per credit, just trying to be proactive in today's market. But from a demand perspective, we're certainly not seeing any major deterioration in growth profile with our customers.

Great. Thank you both for the real good color. And good luck in 2024.

Thank you.

Our next question is from Toni Kaplan with Morgan Stanley. Please proceed with your question.

Thanks so much. I was hoping you could give us an update on labor, namely your salespeople. Are you seeing higher employee retention right now versus normal? And I know you mentioned deploying some sales tools and wondering if you could talk about other initiatives as well.

Yes. We have been very effective in hiring, onboarding, and training our sales teams, particularly in the Commercial sector. On the Commercial side, where the sales cycle is typically longer, it's crucial to make salespeople productive early in the process. Their early success helps with retention; the more they succeed, the longer they stay, and the more they earn. They are motivated by incentives like our presidents club events. I'm really proud of the high-performing sales team we've built in both the Commercial and Residential sectors. Through our hiring practices, training, and investment in their tools for success, we drive retention. This momentum gives me confidence as we move into 2024.

Terrific. I wanted to ask a big picture around footprint. Are you happy with the current coverage and portfolio of geographies that you're in? Or are there other geographies that you'd like to gain further density in? Thanks.

I would say we are pretty happy. We have very broad geographic coverage under the Orkin brand in North America. And when you look in the U.S., mainly the area that we don't have the second bite of the apple brand strategy is fully built is really probably in the Midwest where we have some opportunity where we would like to continue to add and invest in M&A. And then when you think about international, we're very happy with our Australian operations growing and healthy, and we're going to continue to build out Australia, the United Kingdom, and Singapore where we currently operate, but we really haven't put a lot of upper energy behind expanding outside of those areas. We like where we are, and we're going to continue to build and focus on those countries where we've expanded internationally.

Terrific. Thank you.

Thank you.

Our next question is from Stephanie Moore with Jefferies. Please proceed with your question.

Hi, good morning. Thank you.

Good morning.

I was hoping you could touch a little bit on maybe what you're seeing on the unit cost inflation side, some key areas. You give a little bit about labor, but maybe just across the board, labor, materials, equipment, the likes and kind of expectations for 2024 versus what you saw, experienced in 2023? Thanks.

When we assess our cost structure, we consider employee costs, material supplies, and our fleet as the three primary cost drivers, along with insurance and claims, which can be somewhat less controllable. However, we are satisfied with the leverage we achieved on the organic side of our business in these three areas. We are benefiting from slightly lower gas and oil prices, which is advantageous for our fleet operations. The current interest rate environment is not as favorable for leasing, but we are concentrating on pricing our services effectively to enhance our gross margins. We were pleased to see a 50 basis point improvement in our organic gross margin this past year, and we plan to continue leveraging our cost structure in a similar way moving forward.

And Stephanie, I would add that we have some concerns about the rising prices of trucks. The costs for some of these fleet vehicles are increasing. As Ken mentioned, there is always the unpredictable factor of fuel price fluctuations. On the M&S side, we recently completed a request for proposal regarding our insecticides and termiticides to ensure our pricing is competitive and to generate some savings or at least mitigate some of the price increases being passed on to us by our suppliers. These issues are important to us, and we will remain focused on them throughout the year.

Great. That’s helpful. As a follow-up, I'm trying to understand the potential for similar price increases in 2024 compared to 2023. It seems like inflation is expected to decrease in 2024. So, are you suggesting that it might still be a bit premature to determine if the inflationary pressures will ease significantly in 2024? Is that the correct interpretation?

That's what I'm referring to. There are still some unknowns, and there may be additional costs that we haven't anticipated. Looking at the inflation data, it shows that it's not necessarily slowing as quickly as we would prefer. So we remain cautiously optimistic.

Great. And then just lastly, on M&A and kind of M&A activity, any changes in terms of pipeline or willingness of sellers that you've seen as of late? Thanks.

I don't think there's any significant change. There’s still good deal flow out there, and there are solid businesses available for sale. While we notice some fluctuations in volume from quarter to quarter, there are still many viable acquisition opportunities. We have made a good start in January and feel positive about our pipeline, which is actually ahead of where we were last year at this time. However, remember that last year in January and February we focused on the Fox deal, which we announced in April, so we set aside other opportunities to concentrate on that project. Now, we're returning to business as usual and looking at our typical deal flow.

Great. Thank you guys so much.

Thank you. Our next question is from John Mazzoni with Wells Fargo. Please proceed with your question.

Quickly, yes. So maybe quickly, just to touch on the price/cost spread. Looking at the kind of improvements in the driver safety score and that KPI, could you just help us understand how that can flow through to kind of lower insurance-related costs going forward? And what's the typical timing or delay? I mean, this is probably not going to be a kind of near-term item, but could we expect in the back half of the year? Or would it be something that has a longer variable lag? Thanks.

It's a hard thing to predict, John, when you look at that trend line because it does take quite a while to work its way through. The last 12 months or so year-over-year, insurance and claims costs were negative for us despite not having large payouts, large claims that we settled like we did a year or so ago. But with that said, we're hopeful that it will improve. When we look at safety, it's not just about the financials either; it's about our people. And so when we think about our people-first culture, we want people to be safe. We want them to return home each and every night, and that's really the focus here. It's how we make sure our drivers are safe and the communities that they continue to work remain very safe, and they can get home each and every day. So we're focused on the people side. By doing the right thing, ultimately, the financials will improve. And that's the focus here. As we think about the future in the next several years, that we'll continue to see improvements in safety. People will be safe, and we'll see the benefits of that come through our financial statement.

Great color. And then maybe just the last one is around kind of a preview of the Investor Day. Anything that we could kind of look forward to, maybe around technology or capital allocation? Or should we just stay tuned? Thanks.

Yes. I would say, stay tuned, but we're really excited to get back to New York and to spend time with our investment community, talking about our growth prospects, our strategic priorities for the future, talking about how we will continue to expect the investments and growth initiatives. We're just really excited to spend the day talking about the future of this great company.

Sounds great. Looking forward to it.

Thank you, John.

Thanks, John.

Thank you. This concludes the Q&A portion of the call. I will now hand the call back to management for any closing comments.

Thank you, everyone, for joining us today. We appreciate your interest in our company, and we look forward to speaking with you on our first quarter earnings call in a few months. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.