Greetings and welcome to Rollins, Inc. Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. And it is now my pleasure to introduce your host Lyndsey Burton, Vice President of Investor Relations. Thank you, Ms. Burton. 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. 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 and Chief Financial Officer. 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. I'm pleased to report that Rollins delivered another good quarter of growth and profitability, reflecting the consistent execution of our operating strategies and continuous improvement in our business. Our financial performance for the second quarter was highlighted by an increase in revenue of 8.7% to $892 million, and we delivered healthy organic growth of 7.7% in the quarter. Overall, we continue to see solid revenue growth across all major service lines as total residential revenue increased 6.3%, commercial rose 9.9%, and termite and ancillary was up 11.8% this quarter. We continue to invest in growing our business. As you would expect, we made strategic investments in incremental sales, staffing and marketing activities during the quarter. We will continue to invest throughout Q3 to ensure that we remain top of mind and well-positioned for share gains as peak pest season continues. We are well staffed on the technician and customer support front so that our people are onboarded, extensively trained and ready to provide an exceptional level of service for our customers. This also means that we are positioned to convert our marketing and sales investments into new customer growth. Our team continuously challenges itself to think of new and different ways to enhance the relevance of our brands with current and future customers. Earlier in the summer, our creative team at Orkin partnered with Emmy-nominated composer, Bryan Rheude, to compose a seven-act symphony crafted entirely around the historic emergence of two broods of cicadas. We hosted the Orkinstra symphony live in Springfield, Illinois, with curated music composed to accompany the recorded songs and rhythms of trillions of cicadas. The event garnered hundreds of millions of impressions for the Orkin brand, and support for this unique initiative continues as the symphony is currently available on all streaming platforms. In fact, I listened to it again just the other day on a flight and found it to be very relaxing. I encourage you to check it out. On the commercial side of the business, investments we've made to capitalize on a multibillion-dollar growth opportunity in the B2B space continue to pay dividends. Our new commercial division continues to strategically add feet on the street to our salesforce, and we are leveraging data analytics and training to better enable their success. Investments to drive organic growth are complemented by strategic M&A. We closed 26 tuck-in deals in the first six 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 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. In Q2, we enhanced our onboarding program for new teammates by providing more robust safety training, with an emphasis on how we equip our new drivers with the technical skills, awareness and courtesy needed to be safe on our roads and in the neighborhoods we serve. Our efforts continue to yield solid driver safety scores and further reinforce the culture of safety we strive to promote throughout our company. We continue to look for ways to modernize our company, and to that end, our Board of Directors recently amended and restated our bylaws to transition from a classified board structure to a declassified one. Going forward, board members that are up for reelection will be elected to one-year terms. This step aligns with corporate governance best practices. In closing, we're excited about where our business stands today. Demand from our customers remains strong with over 7% organic growth in the quarter, and for the first half of the year. 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 20,000 plus teammates around the world for their ongoing commitment to our customers. I'll now turn the call over to Ken.

Thanks, Jerry, and good morning, everyone. The second quarter reflects continued strong execution by the Rollins team. A few highlights to start: we delivered Q2 revenue growth of 8.7% year-over-year with organic growth of 7.7%. That was at the high end of the 7% to 8% range we discussed in our recent Investor Day. Despite having two fewer business days in June relative to the prior year, through the first half of the year, the team delivered total revenue growth of 10.9% and solid organic revenue growth of 7.6%. Incremental EBITDA margins were over 30% for the first half of the year and approached 40% in the second quarter, ahead of the metrics we discussed in our recent Investor Day, driven by strong leverage throughout the P&L. And last but not least, our team delivered operating cash flow of $145 million and free cash flow of $136 million. Year-to-date, operating cash flow approximates $273 million and free cash flow approximates $257 million, both growing 10% with very healthy conversion. Driving further into the quarter, we saw good growth across each of our service offerings. Residential revenues increased 6.3%, commercial pest control rose 9.9%, and our termite and ancillary services increased by 11.8%. Organic growth was also healthy across the portfolio, with growth of 5.4% in residential, 8.6% in commercial, and 11.1% in termite and ancillary services. Turning to profitability, our gross margins were 54%, up 80 basis points versus last year. We continue to be positive on the price-cost equation. We realized improvements across several cost categories, with the most notable contributions coming from fleet and insurance and claims. Quarterly adjusted SG&A cost as a percentage of revenue decreased by 60 basis points versus last year. While we saw improvements in insurance claims activity, we also saw leverage across several cost categories. We did see some leverage from customer acquisition costs in the quarter, but we continue to focus on driving demand for our services and expect to make additional investments in these areas during the third quarter. Second quarter GAAP operating income was $182 million, up approximately 18% year-over-year on 8.7% revenue growth. Operating margins were 20.4%, up 150 basis points year-over-year on strong gross margins and solid expense leverage. Second quarter adjusted EBITDA was $210 million, up over 15% and representing a 23.6% margin. Margins were up 140 basis points versus last year, and adjusted incremental EBITDA margins were approaching 40%, supported by benefits from more favorable claims activity as well as underlying leverage in more traditional operating expense categories. I'm pleased with the strong improvements in profitability in the quarter and for the first half of 2024. We delivered solid growth with an improving margin profile and remain focused on investing in our business and capturing growth in our very attractive end markets. The effective tax rate was approximately 26.1% in the quarter. Our ETR was 25.3% for the first half, and we expect this rate to approximate 26% for the year. Quarterly GAAP net income was $129 million or $0.27 per share, increasing approximately 23% from $0.22 per share in the same period a year ago. For the second quarter, we had non-GAAP pretax adjustments associated primarily with the Fox acquisition-related items totaling approximately $4 million of pretax expense in the quarter. Accounting for these expenses, adjusted net income for the quarter was $132 million, or $0.27 per share, increasing over 17% from the same period a year ago despite the higher level of interest costs. Speaking of interest costs, we expect a similar run rate in these costs for the second half relative to the first half. Turning to cash flow and the balance sheet, operating cash flow was $145 million and we generated $136 million of free cash flow. This is slightly down versus last year, driven by working capital timing. With that said, I'm pleased with the 10% growth in first half cash flow. Our business remains very well-positioned to continue to deliver healthy cash flow performance, enabling a balanced capital allocation strategy. Cash flow conversion, the percent of income that was converted into operating cash flow, was over 100% for the quarter, as well as for the first six months. We made acquisitions totaling $35 million, and we paid $73 million in dividends in the quarter. Debt to EBITDA leverage is well below one-time on a gross and net level. Our balance sheet is very healthy and positions us well heading into the second half of the year. In closing, our performance this quarter and throughout the first half of 2024 continues to demonstrate the strength of our business model and the engagement level of our team. We continue to focus on driving growth while executing on our continuous improvement and modernization initiatives. We are starting the second half with healthy organic demand, and we remain committed to investing in our people and providing our customers with the best customer experience. 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 will now be conducting a question-and-answer session. Our first question comes from Tim Mulrooney from William Blair. Please proceed.

Jerry, Ken, good morning.

Good morning.

Morning.

Just one from me on the profitability. Strong profitability seems to be the theme of the quarter here, so I wanted to dig in a little bit on this. Ken, as you highlighted in your prepared remarks, your incremental margins were very strong in the quarter, approaching 40%. But I know there were some elevated claims activity in the prior year period, if I'm remembering correctly. So, if we exclude that, then how did your incremental margins look? Were they still above that historical average range of 25% to 30%?

Thank you for the question, Tim. I appreciate it. It's a great question and one we closely examined while preparing for the call and reviewing the quarter. We found that the performance continues to be exceptional. The margin performance was incredibly strong, showing leverage across gross margin, along with improvements in SG&A. Our quarterly incremental margin approached 40%. When excluding some non-operational items, our incremental margins remained at or above 30%, which is the pace we aim for. In fact, looking back over the past couple of years, we've seen significant improvement in those margins, so it's encouraging to see them coming in at or above the 30% range even without the impact of some non-operational items.

Got it. Thank you very much. Nice quarter, guys.

Thank you.

Our next question comes from Ashish Sabadra from RBC Capital Markets. Please proceed.

Thanks for taking my question. Really strong momentum in the business. But if I had to nitpick on consumer, we did see improvement in the organic growth compared to the first quarter, but it's trending slightly below what we've seen historically. So, I was just wondering if you could provide some more color on that front. What are we seeing on recurring versus ad hoc services? And also, was there any impact of the two fewer working days in June? Thanks.

So, Ashish, this is Jerry. So, when we look at the quarter, I'll start with the two fewer working days in June. I mean, that was a pretty significant impact for us in the quarter. You're in the thick of your peak season right in the middle of the year to have two or fewer workdays. More than anything, even though we had a bit of a softer June last year, it affected productivity fairly significantly about ability to get work done and things along those lines. So, I would much rather have those two extra days in a June than I would in an April very early, very early in the quarter. So that's interesting. And there was some impact there. The recurring business is the additions to our new customer growth are actually outpacing our organic revenue growth. So that's healthy. So, when you think about the consumer side of it, the one-time business, while it's still there, it may be a little softer on some of the residential pest control, but we still see a very strong consumer in the marketplace. That consumer, when you look at our termite and ancillary growth in the double-digit range, that tells you, you still have a healthy consumer that really is staying in their home. There's a lot less relocation going on. People are staying at home, investing in their homes and certainly buying things like pest control and adding that to their home services. That is still remaining very, very healthy. So, we haven't really seen any shift from a consumer side in that regard either. Would you add anything to that, Ken?

The only thing I would say is we had, what was it, 5.4% residential growth. And so when you look at the one-time or the recurring business was at or above 6% in the quarter. And when you take into consideration some of those factors you described, I mean, they certainly had a potential of having an impact on the overall growth rate. So, we feel good about the level of growth we saw in the quarter, the level of activity around customers and the demand levels we continue to see going into the third quarter.

That's great information. For my follow-up, could you briefly discuss the commercial side? You mentioned investments to capitalize on growth. Are there specific sectors where you're observing stronger demand? Thank you.

I don't think we've necessarily observed stronger demand in specific verticals. Our results are coming from our efforts to build the largest and most effective salesforce on the commercial side. We are continuously increasing our salesforce, investing in their training and development, and creating a strong cohesive team in commercial sales. This approach is what is yielding positive results, rather than focusing on one particular vertical. We are primarily aiming to capture new business through the new team members we are adding.

That's very helpful. Thanks and congrats on a solid quarter.

Thank you, Ashish.

Our next question comes from George Tong from Goldman Sachs. Please proceed.

Hi. Thanks. Good morning. Can you estimate how much the two fewer working days in June impacted organic growth in each of your segments? Was the effect more significant in certain segments compared to others?

Yeah. I don't think it was greater in certain segments than others, necessarily. Although, my intuition tells me it affected us more in the residential pest and then maybe a little bit on the termite and ancillary because those are often larger jobs that take time to get, take time to complete. And when you talk about having two fewer days in a month, in a month like June, it will result in some of that work carrying over, not being completed into July. That last year would have been completed in June. So, it's really that kind of impact, more probably on the residential, both pest, and termite and ancillary than on the commercial side.

It can affect both one-time and recurring business because we miss the opportunity to initiate recurring business due to lost days. We're also not receiving as many one-time service requests during this period. There tends to be less one-time business during the peak season.

Got it. That's helpful. On the residential side, you also mentioned that you're seeing healthy demand levels heading into 3Q. What kind of acceleration would be possible given the exit rates that you've been seeing for the residential business?

Yeah. I wouldn't want to say that we're seeing acceleration in the Q3, but we continue to see just consistent levels of demand for our services and very much giving us confidence in our ability to deliver on the range of growth that we provided at Investor Day of roughly 7% to 8% organic growth. I mean, through the first six months were 7.6% and in the quarter we were at the high end of the range. So, we feel good about this business and the ability to drive value for all of our stakeholders when we're seeing demand levels like we saw here in Q2.

Got it. That's helpful. Thank you.

Our next question comes from Toni Kaplan from Morgan Stanley. Please proceed.

Hi, everyone. This is Hilary Lee standing in for Toni Kaplan. I wanted to discuss the trends you've been observing in both residential and commercial sectors. Have you noticed any changes throughout the months in the second quarter, and what have you observed in July so far?

The trends have been positive. Demand remains healthy, and both resi as well as commercial, all giving us confidence in our ability to continue to deliver that 7% to 8% of organic growth that I just spoke about. And so, generally, as Jerry indicated, it was unfortunate the way the calendar fell where you lose a couple of days in peak season, but we certainly continue to see the things that are in our control give us confidence in our ability to deliver on our goals that we've set for ourselves.

That's exactly right, Ken. We don't really see any headwinds that could have some significant impact on what we continue to see.

Got it. Just to add to that, July has been warmer than usual in recent memory. Do you think this will benefit the peak season this year? Also, can you provide any updates on how you're addressing the cicada issue, or is that not a concern for you despite its relation to the symphony?

I've long stopped trying to predict the weather and how it affects bugs and pests. Generally, warmer weather benefits our business, but changes can happen unexpectedly. Last June, for example, we experienced a cold spell that lasted a few weeks before July brought a surge in activity again. Regarding cicadas, they're not typically seen as a major pest by consumers, and while they may be perceived as a problem, there's little we can do about it. Instead, we take the opportunity to create consumer interest and enhance our brand recognition related to the attention cicadas receive. On the weather front, while warmer climates and trends are discussed, hurricane season can be unpredictable. As we approach August and September, there are predictions for a challenging hurricane season, which could lead to some temporary disruptions, but overall, we're confident in the demand we're experiencing across our business.

Great. Thanks guys.

Our next question comes from Heather Balsky from Bank of America. Please proceed.

Hi, thank you for taking my question. I wanted to delve into the discussion about investing in marketing and customer acquisition. Specifically, I'd like to understand the pace of these investments this quarter, your plans for the second half of the year, and what you're observing from the competition as well.

From a competitive perspective, we don't focus heavily on external factors. We concentrate on our own business needs and assess performance on a market-to-market basis. It's important to note that our industry is highly fragmented with significant regional competitors, making it very localized. This aspect of our business is highly dynamic, changing week to week or even day to day. Philosophically, if we compare the digital marketplace from five to ten years ago to now, there has been a notable shift. In the past, we allocated a lot of our advertising budget, particularly in digital performance, mainly from late April to September, resulting in a spike during the middle of the season. Currently, with the emergence of shoulder seasons for pest activity and generally warmer conditions, we've noticed that spending curve has flattened. More of our advertising budget is now spread across the beginning and end of the season, with many of our digital marketing initiatives starting in March and extending through October, possibly even early November if the weather and demand remain favorable. We've adjusted our strategy accordingly due to climatic changes. However, even within the nine-month marketing period, our decision-making process remains quite dynamic.

Yes, dynamic. And to the point of, like when you look at this quarter and you try to understand the impact of that, you saw a little bit less, you saw some leverage in our selling and marketing costs. And some of that was in the advertising area, as we had pointed out in our presentation that's posted online. What we're seeing, though, is we're ramping that investment here into Q3, and so to take advantage of that longer shoulder season. And so, we're expecting to see a bit of an uptick in these advertising efforts here as we go throughout July because the markets are very healthy for us.

Thank you very much.

Our next question comes from Joshua Chan from UBS. Please proceed.

Hi. Good morning, Jerry and Ken. Maybe sticking with marketing, I know that across your brand you do a variety of different channels of marketing. Are there certain channels that are more successful this particular year than other channels that you've noticed?

I don't think any of the channels are necessarily any better or any worse. I think we're doing well in all of them. It's really about having a balanced approach, balance of how you spend, making sure that we're spending our money wisely, getting the return on investment that we want. We don't want to just drive leads for the sake of driving leads where we don't have the capacity to fulfill the demand and all those things come into play. So, I think our brands and our businesses have done a pretty good job of ensuring that what we do, we're disciplined about, we execute to it and we measure our results and we measure our return on investment. So, it's been pretty solid across all those channels.

Okay. That's great to hear. And for my follow up, is there any geographic differences in growth within the country that is notable, or are the regions growing pretty similarly this quarter? Thank you.

I think we've seen pretty solid growth across the business. I wouldn't say there's been any significant difference in market performance, whether in different parts of the country or internationally. Generally, it tends to be fairly healthy across the board.

No, I tend to agree as well. I mean, sure, we have things we're doing in certain brands and I'm trying to drive improved performance in certain areas, but overall, the market seems pretty healthy, whether it be the western United States, the southeastern United States. I mean, what we saw earlier in the quarter was, there was maybe a slower start in certain parts of the southeast, but they came right online as we went throughout the quarter and saw some good demand levels. Canada and our commercial business up there continues to do well. So, generally, we're seeing really good performance in the business.

Yeah. And usually if you see those differences, it usually comes on the edges, the back edges of those shoulder seasons, or in the wintertime when extreme weather may impact it more is usually when we see more of those differences geographically.

That's great color. Thanks for the time, and congrats on a good quarter.

Thank you, Josh.

Our next question comes from Aadit Shrestha from Stifel. Please proceed.

Hi, Jerry and Ken. Thanks for taking my questions. Just going back to gross profit, it was up 80 basis points this quarter. So, it's another strong quarter. But could you maybe break out how much of that was driven by overall price cost spread versus the tailwind from insurance and claims and fleet?

Yeah. Thanks for the question. I want to say the 80 basis points of gross margin leverage, roughly 30 of that is your insurance and claims activity, and the remainder is just good leverage across the gross margin categories, the cost categories. So, fleet, for example, we saw some good leverage there. And so just generally we're seeing combination. As I said earlier, a good combination of some of the more favorable experience on the claims in the quarter, coupled with some operational leverage and prices certainly contributed to that as well.

Great. And just to follow up, not really a follow up, completely not related. The 11% organic growth that seemed to have accelerated within termite and ancillary services, how did that split out between the two? Was one better than the other?

So, I can give you a little color on that. Both those service lines continue to grow very well. Some of the ancillary business does tend to be sort of a higher dollar amount, higher ticket price, and is a little easier to grow at a somewhat faster rate than just pure termite. But generally both are growing quite well. Both are in the double-digit range, and both have been very healthy for us.

Yes, they've both been really good performance for us here, especially in the quarter. Continue to see good demand levels.

Great. Thanks. And congratulations on a great quarter.

Thank you.

Our next question comes from Stephanie Moore from Jefferies. Please proceed.

Hi. Good morning. Thank you.

Morning.

I wanted to briefly discuss acquisitions and any increased competition for deals that you might be experiencing. Additionally, from a strategic perspective, are there specific areas within pest control that you find particularly appealing at this time? Thank you.

We continue to be very acquisitive. I think we closed 26 deals in the first half. If you go back a few years, you were seeing 30, 35 deals on a full year basis. So, we continue to see good demand levels, certainly always going to be competition. This is an incredibly attractive market space and a lot of people are interested in it. But we feel like our brand of acquirer of choice that we talked about in May and at Investor Day and how we take care and invest in our people and preserve brands is certainly paying off for us. We continue to be very active in evaluating additional opportunities. Jerry and I have spent some time on the road the last month or so, and we continue to look for new and interesting ideas. And it's not just looking at new and interesting ideas, but it's about also investing in relationships with people that might consider selling their business in the future. This is a long-term approach. It's not really focused on an auction or anything like that. It's about how do you develop the relationships with people so they're comfortable turning the keys over to something that is incredibly important and valuable to them. And so, we're trying to take the time to continue to develop that and we think we're seeing some good results.

Got it. Thank you. And then just as my follow up, sorry if I missed it. But did you say how July organic growth has trended?

We haven't. We've consistently stated that we are seeing business coming in that gives us confidence in our ability to meet the targets we have set for ourselves. Therefore, we feel optimistic about our capability to achieve that.

Understood. Thanks so much.

Thank you.

This concludes our question-and-answer session. I would like to turn the floor 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 on our third quarter earnings call later this year. Thanks a lot.

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