Rollins Inc (ROL) March 12, 2026 Conference Transcript

Good morning, everyone. Thanks for joining us. Kurt Nagel, the senior information and business service analyst here at BFA. This session's Rollins. Very pleased to welcome TFO Ken Krause. Ken, thanks for joining. Fireside discussion. If there's any time left, we'll open up the audience. But with that, again, welcome, Ken.

Yeah, great to be here. Thanks for having me.

Glad to have you, and thank you for coming. So maybe starting at the top, we're not going to with ai as i have with most of these uh conversations we'll maybe dip into that a little bit but um employee retention uh among you know a handful of things i think pretty important strategic focus um already starting to see uh you know some improvement i think you called up maybe 18 percent or so uh retention versus past couple years um at a high level just you know from like an operational or kind of a cultural uh perspective you know what what's driving or you know uh how you're implementing this you know pretty important change sure um excuse me if you recall uh we finished last year we had an event at the new york stock exchange where we introduced the rollins way

and that was a important topic to discuss because it really just emphasizes the culture that we have at rollins and what we're all all that we're doing at rollins around our culture um when we think about a technician and we think about turnover we lose way too many technicians in the first year so you join uh and within the first year our turnover is higher than it is once you get beyond year one and year into year two people tend to stay for 10 15 20 plus years yeah but that first year turnover can be challenging so to combat that there's a couple of things we're doing but one one thing that we're doing is culturally introducing the rollins way and what we're trying to do is create this essential together culture uh with our technicians because it's a tough job it's a challenging job and for somebody new coming in um having somebody that can support them and onboard them and and integrate them into the business i think is is starting to pay dividends and and what we estimate is there's tens of millions of dollars of opportunity if we can cut or reduce the amount of turnover in those in those short-term employees we'll have to hire less in fact last year we estimate to be saved between five and ten million dollars and so so that's a that's one of many areas uh under the modernization brand that we or the title that

we continue to to execute around and it's having a big impact okay uh maybe just a follow-up one you know seems like you're starting to see an immediate effect um but you know the tens of millions in terms of realization right you know how should we how should we think about that yeah Yeah.

I mean, if you look at it and we have roughly, let's call it 20,000 plus people that we employ across our business. And, you know, our customer churn might be 20 percent or 25 percent total. And we've talked about that. And and so if you just rep rep turn. Yeah. But if we just assume that our reps are turning at roughly the same pace. Yeah. OK. Yeah. That means we're probably hiring upwards of six to seven thousand people a year. And if we're losing half of those people, that's 3,500 people. And it's costing us upwards of $15,000 per tech to onboard them. So if you think about that, 3,500 times 15,000, that's a $40 or $50 million opportunity. Now, that's not all going to go away. But if we can make small improvements like we made last year, that goes a long ways in improving the margin profile. Okay, fair enough. and then maybe second order effects uh operationally i mean fairly clear but in terms of service levels maybe even retention you know how should we think about certainly yeah no when we lose customer or when we lose technicians uh that's when we stand the risk of of potentially losing customers yeah and so if we can keep people in their jobs and and invest in them and enable them to be uh the best tech possible we stand a higher likelihood of keeping customers And so there certainly is a high degree of relationship and correlation between when we lose technicians and when we lose customers.

Maybe kind of a higher level, you know, question just staying on labor. In terms of maybe just kind of the pool, right, you're drawing from, you know, I guess what is, you know, what a hiring looks like, you know, in terms of, you know, the available pool. you know are you having to uh you know raise wages or uh again just kind of all things we talked about in terms of just a better working environment getting people on and just getting them into the system you know um availability of of talent is not an issue not an issue um we have been able to find and and bring on really uh strong individuals to join our team and uh we're seeing good good progress there and so uh no real issue there uh we're getting the right amount of

people um but if we had it our way we'd hire less people okay and in terms of if we can improve the churn and the turnover on the employee side we will have it'll result in us hiring less people like it did last year uh when we look at the uh the technician side maybe uh be a little more selective perhaps it could be more selective more strategic you certainly can and and so it certainly should help bring on and just improve the overall relationship because what we find is is once those technicians get to a year or two we're really changing lives you know when we think about pay you mentioned pay earlier and inflation it's not been an issue inflationary pressures on on payroll have not been an issue because of how we structured our compensation programs our technicians are not only paid a fixed base comp but they also get paid through variable incentive and you'll see it's it's not unreasonable to to see a technician who might be making near near near or upwards of six hundred thousand dollars and so if if our high performing technicians who some of them are going to be with us in a few short weeks at our president's club out in scottsdale arizona um those people are doing exceptional and it's not only do they do exceptional and see benefits in their paycheck, but they also invest in our stock. And so when I walk into a room and I talk about Rollins, and I ask the question, I always ask the question, how many of you are shareholders? Undoubtedly, 90 to 95% of the room's hands go up. People buy the stock, people invest in it, people believe in the mission, and they stay for a very long period of time. But you got to get into that one year mark. Once you get into that one year mark, you're you're you're you're not freaking clear you have to continue to invest in new people but you you stand the risk of keeping them for a very long time and what happens is they create long tenured customer relationships these technicians know the dog's name they know the kids they know the life events that are occurring in the home they become part of the household and so uh so that's an important thing for us to continue to focus yeah all the weird quirks in the house that you know mine certainly has certainly all of ours do um so yeah so incentivization ownership right how do you incentivize or what is it based on there's a number of targets you got productivity incentives um but for example when we raise prices our technicians get the benefit of that uh when we do cross sale um so we've oftentimes talked about having nine shots on goal when we go to the home and that's from insulation to ridge vents to uh mulch to to encapsulating crawl space uh exclusion work around the house to keep the pest out yeah if if we're technicians have an opportunity to sell that or they have an opportunity to identify when that opportunity exists and then bring in somebody that can help sell that that to the to the homeowner and explain the benefits and the value of that to the homeowner and when they do that they receive a part of that okay and they receive a commission yeah and so uh so those are the kind

of things it's productivity initiatives but it's also growth initiatives that they're tied to that they can they can receive benefits from okay fair enough um definitely want to go back to the some of the adjacent uh opportunities in a bit but uh sticking with the concept of uh margins right so you know fairly clear goals right um near term kind of 25 or just defined by your guide it's 25 up to 30 medium target is higher right 30 to 35 um i guess in terms of you know specific internal you know levers or just kind of what you see need to see to kind of get confidence to more clearly and more immediately you know kind of target that range for what what needs to happen

you know this business is very much capable of delivering 30 to 35 percent incremental margins and and the way the math works and the business model works is our incremental gross margin our reported gross margins are in the low to mid 50s and our incremental gross margins are in the mid to high 50s because a large part of our cost structure is variable about 10 we would say is probably more fixed 90 is more variable so as a result 55 to 60 on the gross and then on the sgna if we're spending 29 similarly 90 and 10 90 is variable and 10 is fixed so that means about 25 percent is in the contribution margin so that means if you take 57 minus 25 that gets you to 30 roughly 32 percent incremental margins the reason that we would not deliver that and we have delivered that from court on a quarterly basis from time to time but reasons why we wouldn't deliver that are we're making investments we see growth opportunities we're going after and acquiring customers when there's an opportunity because those customers stay in the in the in the business and the relationship um forms where we have a customer for three four five plus years that's the lifetime value is enormous sure and and so so we're focused on we're focused on that and and we're excited about that um but but the but the investments have to be made from time to time um and then on the flip side not only are we making investments but from time to time we'll see casualty losses so claims that come into our business trucks on the highway get into an unfortunate accident somebody gets hurt and litigation ensues and and so we'll see that from time to time and that'll add volatility to the the pnl last year we had some gains on fleet vehicles we were turning back in we're lapping that now but really it comes down to two things investments that we're making to acquire customers and two claims that we may face from time to time in the business unfortunate claims that we sure yeah fair enough um i guess customer acquisition Maybe talk on that a little bit in terms of I think maybe making some changes, you know.

But in terms of where you're investing most, you know, maybe think about brand strategy and you've got a lot of brands. But just the framework, you know, for customer acquisition and maybe, you know, potential leverage or not.

That's what makes the business so special is it's such a diversified manner in which we acquire customers. We've got 10, 15, 20 plus brands across the business. And Orkin, we all know Orkin, but you may not know Northwest if you don't live in Atlanta, Georgia, or in the southeast. Or you may not know Clark if you're not in California, or even Home Team if you're not in the Sun Belt. So what we do is we go to market across all of those brands. And not only are those brands different in terms of what the logo is on the truck, but how they acquire the customers so different. Fox and Salo we just acquired the last two to three years. Door knocking, great businesses. some of our fastest-growing business, quite frankly, and very healthy business, good business coming in, or home team with relationship with home builders, or Northwest in Atlanta with billboards, or Orkin through the digital means. And so there's so many different ways we're acquiring customers that allows us to efficiently bring on new customers. And when the cost associated with digital advertising may be escalating, we can shift dollars elsewhere and capitalize in alternative ways of acquiring our customers.

Maybe it's just not a point in terms of, you know, very specific, you know, marketing strategies, you know, fit to market, fit to brand. And I don't recall if it's something you've talked about, but in terms of, you know, maybe leveraging kind of best practices or maybe not because you don't want to upset the apple cart and if it's working, it's working.

Yeah, no, I mean, we do that all the time. And, you know, it's interesting when I think about one of our untapped opportunities, it's the sharing and it gets into the Rollins way, the collaboration, the sharing of information across the brands. um so many for so many years it's been very much siloed every brand is unique and but what we've started to do is to share in communication and share in best practices across the portfolio and it's having an impact you know when when i look at it one area that that is an opportunity for us is the cross sell so when we talk about ancillary nine shots on goal nine shots on the house uh that's really has been historically an orkin led initiative but what we're doing right now is starting to train our folks over in the brand portfolio uh with some of the tools and tricks and and and areas that that orkin have has invested in over the years to create a very valuable business so we have a huge amount of untapped opportunity over in those brands associated with that ancillary business which which should help us continue to deliver that seven to eight percent organic growth just remind me the relative split between orkin and sub brands roughly half of the business is orkin and roughly half the business is is the brand portfolio and that's been built through acquisitions right orkin was acquired in 1963 but over the last 10 to 15 we've really stepped up the acquisition area and and made significant investments and and that's you You know, oftentimes people ask me, why do you think you trade for 30 or 35 times? And there's a number of reasons, the market, there's so many different reasons. But one thing that I always point out is individual brands may be bought and sold for 10 to 15 or even eight times. And they're not as valuable by themselves as they are together. And so the sum of the parts at Rollins is much greater than any individual component because of that broad way that we're acquiring and accessing customers and growing our business.

Yeah, I guess the point I was trying to make is, you know, if 50% of your business is non-Organ and there's an opportunity from under-indexed, right, adjacencies.

Yeah, it's interesting. That's a great, great point, Kurt. You know, when I look at the ancillary business, that's roughly 10% of our business. And the average ticket price on that is upwards of $6,000. So it's upwards of 10 to 12 times what our average pest control contract is. But it represents less than 10% of our business. So that means on an absolute customer count basis, it has to be well below 5%. And that's just in Orkin. So when you think about Orkin has untapped opportunity, and then the brands haven't done really anything when it comes to it. So there is so much untapped opportunity on the ancillary side, which is one of the reasons why we continue to make investments and we're excited about it.

Maybe it's more like the margin profile.

It's a great margin profile. Not dilutive at all to the pest control business, the more traditional pest control business. It's relatively neutral to the overall margin profile. Just higher ticket, higher ticket, some more costs, more material costs that come into there than what you would see maybe in some of the more traditional pest control business. Maybe more labor too, right? A little bit more labor, but it's a great business.

Economic sensitivity?

You know, it's interesting when you look at it. We don't really see it. You know, when you look at the last 20, 25 years, whether it be the pest control or whether it be the ancillary business, people are finding ways to buy this valuable service. It's a valuable service. I mean, the home is the largest investment many of us have. And people want to invest in that home. Even, you know, and so we benefit with when people are staying in homes longer. We also benefit when people change and they move. and so so i think from an economic sensitivity it's it's we're neutral you know when it comes to the impact on our business who wants pest control right well yeah no and it's nobody the question i always get to around pest control is is what diy forces are there and the way i describe it or what ai forces are there how can people learn how to do pest control yeah and i would say people don't do pest control because they don't know how to do pest control they don't do it because they don't want to do it yeah um it might be therapeutic to cut the lawn or take care of the swimming pool i did that once but to take care of the pest yeah it's a it's it's a tough job and you can't just do that once you have to do that on a regular basis or the pests are going to come back well just look at the relative pricing right which is it's demonstrably different hills in comparison which you know proof proves your point in the value and you know who wants to spray for bugs every yeah and deal with you know it's there there are standards around it there's regulation yeah there's and and so we focus on employee safety we invest in the safety of our employees when they're dealing with this sort of thing and i think people don't want to they don't want to expose themselves to those risks yeah for sure and just who wants to do it yeah who wants to do it uh pricing right that's been i think a very consistent part of uh the growth framework you know helping margins um organic growth of course has helped but i guess in terms of uh just thinking about uh pricing i don't want to say sensitivity pricing power this year uh any different where are you seeing kind of um you know ads flows increases you know well it all gets down to if you're doing the work for the customer you're taking care of the customer the customer is going to take care of you and they're going to value the service and And so for us, we've recently spent a lot of time in the last three or four years talking about our CPI plus approach. And so this is a valuable service. It's not a commodity. People aren't competing on price. People are competing on service. And if you do that, you get the right to charge a CPI plus sort of approach. And so this year we talked about 3% to 4% pricing. CPI, I think I saw 2.5% to 3%. So a little bit above, not a huge amount, not an umbrella or a pricing umbrella that might be forming, but a healthy amount for the service we're providing our customers.

Yeah, certainly not egregious. And pricing sounds like pretty rational for competitors that matter.

It certainly is. You always have an irrational competitor from time to time. That's just what makes a market.

But generally, it's a very rational market, and people aren't competing on price. they're competing on the relationship very much how we compete with m&a they're competing on the relationship they have with the customers sure okay um rollins way would like to spend a little more time on that um yeah i lined you know in december to me it seems like you know a pretty pretty big opportunity right you've you've got this huge organization it's executing well yet you know you've got a cost base that you know maybe is a little more full you know than you'd like so we've talked uh you know about the retention side that that's pretty clear but in terms of any other whether you want to find it low-hanging fruit or um you know larger opportunities and the flow through that we could see um you know any any way you could you know

size or dimensionalize that i think would be really helpful you know there's so many different opportunities when you think about the rollins way or you think about the modernization journey we've got growth initiatives we talked about the ancillary sale uh across the portfolio using our credit extension arm that we're using and working across the brands to help enable customers to buy these services also is a big growth option or opportunity for us. But there's tons of, and there's a significant amount of untapped opportunity when it comes to those cross-sell. On average, our customers have less than two services. And so there's an opportunity to bolster that and improve that as we go forward. There's an opportunity on margins. You know, how do we procure? How do we do a better job of procuring material? It's very much left up to branches or regions or brands. And so how do we leverage the purchasing activity? Because the purchasing activity is no different, quite frankly, between brands. They're using the same materials. They're using the same insulation. They're using the same product. How do we leverage that? How do we take advantage of our economies of scale when it comes to the procurement side? How do we do a better job? I talked about earlier about onboarding and keeping people, but also the back office. You know, we've invested in a lot of great new talent in our back office and brought a lot of new folks on. That talent's having an impact. They're putting new technologies in place, new tools, helping us take out costs from the back office and be a better acquirer of some of these businesses as we think about synergies. And so there's a tremendous amount of growth opportunities, productivity opportunities, profitability improvement opportunities.

You know, last year I started talking about our tax rate.

You know, our tax team is doing an exceptional job there. We saw over 100 basis point improvement in tax rate last year. And we think that's sustainable as we think about the future. So we're looking at our state tax profile now and evaluating that. So tons of opportunities that we continue to evaluate.

Okay, fair enough. And then in terms of, you know, so again, companies operating, you know, very, very smoothly, you know, steady, high growth rates. As we maybe centralize or consolidate, however you want to define it, you know, how do you think about, I guess I'd say like the risks in, you know, kind of maintaining the autonomy. like maybe it's just we're talking about mostly back office stuff but you know that must be a consideration in terms of again just keeping keeping things you know as they are and not upsetting operations from yeah some of those changes it certainly is um when we look at um our business this is a decentralized business model and that won't change we want to be close to the customer we want to be close to the communities we we work in uh we live work and play in the same community and so that's important to us for the relationship side of this business

and it's all about people and relationships but there's things that our home office and in other areas that can do to better serve our field operations and that's exactly what we're doing when it comes to the epm initiatives around technology or the procurement initiatives or the real estate initiatives i haven't even talked about that but we're looking at a real estate footprint thinking about the branch of the future the branch of today is different than the branch we needed five or six years or pre-COVID. People aren't going into the branch any much. So do we really need that footprint? And how do we go about improving that? So there's a tremendous amount of back office things that'll help enable our field to serve the customer more effectively. That's what it's about. How do we serve the field to ensure they're serving the customer? Maybe touch a little bit more on the real estate opportunity in terms of, I don't know, you think your footprint could be 20 10 15 percent in a low i mean we're evaluating that right now and so so there's there's an opportunity to to do more around that uh we'll have an investor day i believe in in may and i'm sure that'll be one initiative of many that we'll talk about uh that you know but but there's an opportunity there's really an opportunity to to improve the use of that footprint um maybe uh uh take an opportunity to uh to just generally improve uh uh the profile okay well stay tuned i guess um just quickly touching back on the um jason services um so i think you said on average

one to two or so call it two right uh average um products per customer you know if we were to look at maybe not necessarily high marks but you know if it's you know by brand or within organ or particular services where you're really starting to see traction or maybe even within a demographic or market you know what does that look like what's the north star yeah um well where we're at right now is certainly not the the number we want to be at you know it's less than two and i mean if we look at it three to four services per customer would not be unrealistic okay um there's you know not only do you have the basic pest control but how do you get termite control you want pest control

and termite or you might have termite how do you convert it into a recurring termite and then also bring on the pest control that's two services there uh then you got wildlife um right now you know you you you're seeing squirrels that are getting into homes the last thing that i am sure maybe you don't want to assume you curtis that that you would want to do it but i don't want to go in and try to remove a squirrel really attic and and and so we're seeing calls for stuff like that so wildlife control adding that into it mosquito control um you know believe it or not in new york city today it's not 80 degrees but when i left atlanta yesterday it was 80 degrees and we were seeing mosquitoes and mosquito is a huge amount of growth opportunity for us it's it's a it's one of the leading causes uh of illness from from pests and and we're doing more work around improving that so mosquito can easily be added and we've got sustainable solutions in northwest and other brands that that are really appealing to some of our customer set um you've got ticks in the yard lyme's disease is a horrible disease out of control and so how do you prevent that from occurring well you treat your lawn for for ticks um and and and so there's there's four or five services there alone not to mention the ancillary with with the attic and keeping pests out once you once you have a pest infestation you'll do anything to get that pest out of your house remediate it and make sure it doesn't come back so if we can add those services to help our customers that's going to add additional revenue for us as well and help help provide the customer with the solution they're desiring so so as you see there's you know we're not where we want to be but there's a lot of opportunity to continue to make headway on this okay very good um weather right that was uh yeah so you know you know recurring business seems like yeah totally fine in shape but drove a little bit of uh you know volatility in your your non-recurring business um i guess as we're going into the into the the spring selling season you know how were you feeling about kind of being past those headwinds and kind of getting back to more sure uh stable uh we're not we're certainly not giving up on the seven to eight percent organic growth that's that's intact pricing is still intact three to four markets are still very healthy uh we're seeing good good opportunities there you're right weather can impact it from time to time and when weather impacts it what you oftentimes see is it's in that last month or so of the quarter because you don't have time to make up the one-time business the recurring business doesn't change but the one-time business has an ability to impact a quarter worth of revenue and so what you saw in the fourth quarter is november december really tough weather months carried over into january but we have sequentially improved from january to february we saw improvement march is a make or break month for us um it's hard to say how march will turn out we feel like we're positioned well uh in march but it's the start of the busy season it's the start of peak season for pests and that's the core that's the month where it'll give us a really good sense as to how good the year is going to be okay um as we think about march so so we're looking at that closely we'll evaluate that we'll be reporting that of course in april uh but but what we've seen is improvement As we went through the quarter, February was better than January. January is a tough month. I think we had more closures in the month of January than we had a year ago because of some of the really tough weather conditions that were out there. But we started to see some improvement into February, and we're hopeful that March will continue that positive trend.

Okay, fair enough. Maybe shifting to M&A and, you know, bolt-on is a really important part of the story. um i guess any changes in terms of you know look you have a very specific strategy right you're not going to overpay right about family business integration but i guess just what what does the mna uh landscape look like i mean more competitive less competitive how are you adapting no you know um 30 i think we say 30 000 or so competitors across the the space and uh we meet once a week as an ELT on M&A, and we're looking at that.

Pipeline's healthy. Our target is 2% to 3% this year. I don't think we're going to be below 2%. We're going to be in that 2% to 3%. There's a chance to be above that if we see some other deals come through. But there's a good, healthy pipeline. We're seeing good activity in Q1. We've got the benefits of SELA carrying over this year in the first quarter, but we also have a really good pipeline of activities we're executing on as we think about 2026. So 2% to 3% revenue growth associated with M&A is still very much intact. And we're continuing to, the pipeline's good and we see great opportunities there.

So maybe not so much on velocity of acquisition, right? That can be market dependent or whatever. But thinking about some of all the process and operational controls that we've been talking about, the opportunity to maybe integrate quicker, maybe more efficiently. Is that a focus?

Yeah, it is. I mean, many of the things that I spoke about earlier on the modernization side apply in the acquisitions. We have bought countless numbers of businesses and partnered with so many over the years, but so many are on their own system. So many are following their own approach. It's very much a decentralized portfolio sort of approach to the investments. But as we make more progress in the back office, as we get better on procurement, as we get better in some of those functions, we're going to improve the realization of synergies on some of those deals that we're executing on here in the future. Have you given numbers in terms of, you know, getting to, you know, from, you know, day one of integration to, you know, I guess, you know, maybe end of year or just the, how quickly, you know, it takes it to, you know, ramp the margins or, you know, is that not really a consideration? no it definitely is a consideration um especially a consideration when we think about some of our bigger deals like selah and fox yeah yeah um fox i want to say we purchased fox for 13 or 14 times and after year one i think we were below 10 and so for for us um four three four turns a multiple pretty good yeah is is good yeah um you know on some of the smaller deals we might be buying them for six seven or eight times we're immediately getting a pretty healthy return but we're not happy with that and we're focused on improving that and so um so generally we're seeing a two three turn improvement over the first 12 to 18 months in in the business and and it's allowing us to get a return on capital that's in excess of 10 percent um here in the u.s and so we're continuing to evaluate that but but that's uh there's there's definitely opportunities to continue to make that better but it certainly is a is a big target of mine i mean when i look at acquisitions i want to buy businesses that are going to grow faster than us organically because i don't want to jeopardize our organic growth that's so valuable i want to buy businesses that are going to be accretive the margins or there's a path to become accretive the margins i want to buy businesses that are cash flow positive meaning their their cash flow and capital intensity is no greater than our business because you know as well as i do what drives the valuation of the company is oftentimes the compounding of free cash flow 100 and and so so us buying these businesses and investing in them we want to make sure that they're they're they're an equivalent cash flow compounder uh we want to accrete to earnings in the first year we did that with selah uh even with cost of debt at four or five percent we still saw accretion to earnings in the first 12 months. And then return on capital is certainly a big part of what we do.

Okay. Running short of time, one really quick one, just AI utilization, how important that in terms of improving eternal efficiencies, procurement, stuff like that?

Yeah. Yeah. I mean, it is. I mean, we're looking at that. We continue to evaluate that. I think there's opportunities on growth and productivity when it comes to AI. When it comes to AI, when I think about AI in this business, you know oftentimes i think about the data we have across the brand portfolio and we lose too many customers every year from the portfolio but if we can do a better job at predicting when a customer is going to leave us and then if we could use that to redeploy those brands to proactively pursue those customers before they leave us guess what they're never going to leave the portfolio the family of brands yeah they might leave orkin or they might leave northwest but they won't leave the entire portfolio so i think there's that's something we're evaluating um and something i think it's an opportunity for us as we think about the future when it comes to ai there's all the other back office and call centers and things like that but i think that's a unique one that might be very um attractive for us as we think about the future okay quick late round uh we're association uh rollins way together working or um whatever comes to mind first great brand uh weather neutral neutral okay margins uh opportunity mna exciting growth opportunities yeah very good all right thank you so much really enjoyed it