Rollins (ROL) Q2 2022 Earnings Call Transcript

Rollins (ROL -2.41%)
Q2 2022 Earnings Call
Jul 27, 2022, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings. Welcome to Rollins Inc. second quarter 2022 earnings conference call. [Operator instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce Joe Calabrese. Thank you. You may begin.

Joe Calabrese -- Investor Relations

Thank you. By now, you should have all received a copy of the press release. However, if anyone is missing a copy and would like to receive one, please contact our office at (212) 827-3746, and we'll send you a release and make sure you're on the company's distribution list. There will be a replay of the call, which will begin one hour after the call and run for one week.

The replay can be accessed by dialing (877) 660-6853 with the pass code 137-31-028. Additionally, the call is being webcast at www.rollins.com and a replay will be available for 90 days. The company is also offering investors a supporting slide presentation, which can be found on Rollins website at www.rollins.com. We'll be following that slide presentation on our call this morning and encourage you to view that with us.

On the line with me today and speaking are Gary Rollins, Rollins chairman and chief executive officer; John Wilson, vice chairman; Jerry Gahlhoff, Jr., president and chief operating officer; and Julie Bimmerman, interim chief financial officer, group vice president, and treasurer. Management will make some operating remarks, and we'll open the line for your questions. Gary, would you like to begin?

Gary Rollins -- Chairman and Chief Executive Officer

Yes. Thank you, Joe, and good morning. We appreciate all of you joining us for our second quarter 2022 investor call. Julie will read our forward-looking statement disclaimer, and then we'll begin.

Julie Bimmerman -- Interim Chief Financial Officer, Vice President and Treasurer

Our earnings release discusses our 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 today's press release and our SEC filings, including the Risk Factors section of our Form 10-K for the year ended December 31, 2021, for more information and the risk factors that could cause actual results to differ.

Gary Rollins -- Chairman and Chief Executive Officer

Thank you, Julie. I'm very pleased to report that Rollins delivered a very strong financial performance in the second quarter and remains well positioned to deliver on our long-term business objectives. On today's call, I'm excited to share our strategic management succession plan that has been unanimously approved by our board of directors. We firmly believe that this is the right time to initiate this important leadership transition.

Effective January 1, 2023, Jerry Gahlhoff, the Rollins chief operating officer and president, will be elevated to the position of chief executive officer or CEO. I'll remain chairman of the board and Jerry will continue in his current role as president of Rollins. The following five months will be transitional while Jerry becomes more familiar with the areas involving his future responsibilities. The company is well positioned financially and operationally.

We have a proven management team, leading brands and a very strong culture. I'm extremely confident in the future of Rollins and look forward to working closely with Jerry to ensure a smooth transition of responsibilities. While I'll be moving away from the day-to-day operations, as I continue serving as our company chairman of the board, I will remain active and focused on our business goals and strategic plans. As many of you know, Jerry has been with Rollins since the 2008 acquisition of HomeTeam.

And he's been instrumental in our success. What most don't know is that Jerry grew up in an Orkin household as his father worked for the company for 26 years. His dad was a great employee. Jerry is an exceptional leader with great vision and a deep understanding of our industry and our customers.

His years of service to Rollins has been marked by outstanding performance and accomplishments. He was promoted to Rollins president and chief operating officer in 2020 and has had a unique opportunity to be intimately involved in most every facet of our organization. In 2021, Jerry joined the Rollins board of directors. His business acumen, leadership experience, strong sense of duty, and his devotion to our company make him a natural fit to assume our president and chief executive officer role.

I have the utmost confidence that Jerry will continue to foster our strong company heritage record of accomplishments and promote the culture of Rollins. Let me now turn the call over to John Wilson, our vice chairman, who will provide some business updates. John?

John Wilson -- Vice Chairman

Thank you, and good morning, everyone. On behalf of all of us here at Rollins, I would like to congratulate Jerry on his long successful tenure as Rollins CEO. Gary's 56-year career with our company has been marked by superior achievements and an unrelenting focus on our customers, our shareholders and our employees. He's a tremendous leader.

And in addition to his impressive business results over the multiple decades, he has been steadfast in leading Rollins' high-performance culture. But the best part about this change is that he isn't going anywhere and will continue to be a valuable resource to all of us. Turning to our performance. We are pleased with our second quarter financial results with revenue increasing to $714 million and net income totaling $100 million or $0.20 per share.

Overall, we experienced solid growth across our numerous pest management brands and continue to achieve strong levels of customer growth. Finally, you've heard me say this many times, we regard our employees as our most important asset. They are an integral part of our success. As we continue to grow, we recognize the talented people have choices, and we want the Rollins brands to be a leading contender for that talent.

Consistent with that approach, we're continually looking to improve our employee benefits and I'm pleased to announce that Rollins has partnered with Everside Health to offer an on-site health center located at our Atlanta home office. This new health center offers convenient primary care services for everything from screenings and prevention to chronic disease management and urgent care for several thousand of our employees in the area. There are multiple benefits and features to this program, including same-day and next-day appointments, on-site lab draws, medications and immunizations, mental health services, and the ability to reach a care team 24/7 for urgent needs. In addition to our Atlanta facility, our U.S.

employees have access to over 70 Everside Health clinics, and we are live in 37 states for virtual primary care. The safety and well-being of our employees is a top priority. And we believe offering this new benefit will lead to better health outcomes, allowing employees to live healthier lives. Now let me turn the call over to Jerry, who will provide more details on our business.

Congratulations, Jerry.

Jerry Gahlhoff -- President and Chief Operating Officer

Thank you, John. Hello, everyone. Before I get into our second quarter operating review, I would like to say a few words about Gary. As Gary mentioned, I came to Rollins through the HomeTeam acquisition in 2008.

As many of you know, those can be tensed in uncertain times for those being acquired. Gary talked with me personally. His words and subsequent actions reassured me that I had found a home at Rollins and my experience here has been meaningful and worthwhile. Over the past 14 years, I've learned so much from Gary, and there's one thing I'm sure of, he has an unwavering commitment to our company, our customers and our employees.

The proof of this is in his actions and results. It's truly an honor to succeed Gary as CEO and lead this incredible company of more than 17,000 exceptional employees, each of whom brings a commitment to deliver the best for our customers every day. With Gary and John's continued guidance, I look forward to continuing to build on our great success as we begin this new chapter of the company's future. I'd now like to walk through our 2022 second quarter performance, focusing on items that directly impacted our operations during the period.

Julie will address the non-GAAP adjustments a little later. Looking at our financial results. Rollins second quarter 2022 was highlighted by revenue growth of 11.9% to $714 million compared to $638 million in last year's second quarter. Net income was $100.3 million or $0.20 per diluted share.

This is compared to $98.9 million or $0.20 per diluted share for the same period in 2021. As mentioned, Julie will review GAAP and non-GAAP results as well as organic revenue growth numbers shortly. Operationally, during the quarter, all our business lines continued to experience solid growth. In fact, we grew double digits in all service lines.

Residential pest control increased 11%, commercial pest control was up 11.2% and termite increased 15%. Keep in mind that this level of growth came on top of our company's highest historical recorded growth in Q2 last year of 15.3%. On the expense side, we continue to feel inflationary pressures during the second quarter from fleet-related costs like fuel and vehicle repairs and materials and supplies. I'll give insight on these as well as provide an update on the actions we've been implementing to mitigate these pressures.

While we're efficiently navigating through this period and believe that our proactive initiatives have helped, we're keeping a watchful eye on inflationary pressures, fuel costs, and supply chain costs, and how they may affect Rollins. Management of fuel expense is a notable example. As we grow, we improved customer density. And when coupled with our routing and scheduling technology initiatives, we continue to reduce our overall mileage between service visits, which lowers our fuel requirements.

We saved over 5.8 million miles driven in the quarter or $1.3 million. This savings was slightly offset by increased average price per gallon over Q2 2021 of over $400,000, equating to net fuel savings of $875,000. This has also helped manage labor costs as our technicians have less unproductive windshield time, plus we've created a better job for them along the way. As we move through the second half of 2022, we expect we'll see the ongoing benefits of these improvements.

Furthermore, looking ahead, we're committed to enhancing the overall efficiency of our fleet while also reducing carbon emissions. In June, we announced that BMW Group ranked Rollins 15th out of the top 50 green fleets in the United States. This primarily reflects Rollins use of hybrid sedans that are being driven by our sales and management personnel. However, we recently began testing the use of light-duty hybrid trucks.

Given their excellent fuel economy, we are focused on having a sizable uptick in our hybrid truck fleet by 2024. Additionally, given recent technology advancements, we've been testing the use of battery-powered application equipment going from gas power to battery provides us with a compelling opportunity to reduce emissions without sacrificing the effectiveness of our service. We look forward to updating you on these initiatives in the quarters ahead. As you may recall from prior conference calls, we've been proactively addressing increased supply chain costs in our residential and commercial pest control materials and supplies.

This includes termite and ancillary service offerings as well. We have solid long-term working relationships with our manufacturers and have deep visibility into the supply process, often a few levels up in the supply chain. In doing so, we're often able to achieve greater operational efficiencies and overall flexibility by not only having materials shipped quickly but also having real-time insights advising us when we need to order materials. We continue to seek opportunities to diversify through alternative suppliers and actively seek shipping and freight efficiencies.

On the subject of pricing, we successfully implemented our annual price increase programs earlier this year. As mentioned on our last conference call, aggressive service price increases were initiated within all our brands during April and May as compared to historical timing of the early summer months and prior years. We are already realizing a notable benefit from this initiative more than doubling our traditional 1% to 2% net growth levels from our past price increase programs. Overall, we saw little resistance from our customers on the higher price increases put into place, which is a confirmation of service satisfaction.

Next, on our acquisition pipeline, it remains strong, and we have plenty of potential opportunities that we are actively pursuing. So far in 2022, we have completed 22 strategic acquisitions within the U.S., United Kingdom and Australia. In the U.K., we achieved an important milestone during the quarter with the acquisition of Europest. In addition to expanding our geographic footprint within the U.K., it is also our first location in Wales.

Strategically, we now have full coverage within the United Kingdom, as this tuck-in transaction comes on the heels of another recent U.K. acquisition, NBC Environment, which provided our first locations within Scotland. Moving forward, Strategic acquisitions will continue to be an important component in our initiatives to further grow and expand our business. Before I turn it over to Julie, I want to emphasize how pleased we are with Rollins second quarter results and that we remain well positioned for 2022.

I'll now turn the call over to Julie. Julie?

Julie Bimmerman -- Interim Chief Financial Officer, Vice President and Treasurer

Thank you, Jerry. First, I would like to congratulate both Gary and Jerry on reaching the next pinnacles in their careers. Gary, your extraordinary impact on Rollins has been legendary. Jerry, you definitely have large shoes to fill as CEO.

Jerry, also watching your career grow from our early days at HomeTeam to President of Rollins has been exciting, and I have no doubt that you will excel in this new role. I appreciate your trust and leadership through the years and cannot wait to see what the future holds. So now onto the numbers. We delivered a strong second quarter highlighted by significant growth across many key financial metrics.

As a reminder, we are including a slide deck on our website, which presents the numbers we discussed during today's earnings presentation. To view the deck, please go to rollins.com, click on news and events and presentation. Our second quarter revenues of $714 million represented an increase of 11.9% actual exchange rate, 8.7% organic. For the constant exchange rate, the total revenue growth totaled 10.7% with 7.5% organic.

As Jerry mentioned, residential, commercial and termite all presented strong double-digit growth for the quarter. Residential grew 11%, 7% organic. Commercial grew 11.2%, 9.3% organic. Lastly, we have termite, which grew 15% with 11.2% organic.

Now on to our income. For the second quarter and year to date, we are presenting adjusted EBITDA for 2021 for comparison purposes due to the impact of our gain on sale of several of our Clark properties of $450,000 in Q2 of last year, and $31.5 million year to date in 2021. Second quarter EBITDA of 2022 was $159.2 million or 1.2% over 2021 adjusted EBITDA of $157.3 million. Second quarter 2022 EPS was $0.20 per diluted share equal to 2021 adjusted EPS.

Second quarter 2022 gross margin decreased to 52.8% or 0.5 point below last year. As mentioned, fleet created another quarter of strong headwinds in Q2 2022 primarily from fuel presenting an increase of $6.8 million and vehicle repairs of $1.7 million over last year. Fuel increases were driven by over a 50% increase in our average price paid per gallon in Q2 2022 over 2021. Vehicle repairs were up due to the continued delay in receipt of new vehicles from the manufacturers.

We keep our trucks longer, forcing repairs outside of our norm. Combined, these fleet expense increases equated to 0.9 point in additional cost, taking these fleet-related increases out of the equation, gross margin increased over last year. Sales, general, administrative, or SG&A, as a percentage of revenue for Q2 2022 increased over 2021 by 2.1% to 30.8%. Travel was a contributor as this increased 65.7% over Q2 2021.

This was due to a return to normalized levels for leadership travel to branch locations along with overall increased cost in air travel and rental cars. We also saw an increase in advertising from a combination of an increase in our advertising campaign to counteract the late arrival of spring along with the impact of a change in our process for estimating and accruing our advertising expenses. Aligning these costs with our high Q2 sales equated to an increase in advertising of 2% of revenues over Q2 2021. For the full year, we expect overall normalized historical spend levels for advertising.

Now for a few notes regarding our cash flow. Our dividends Q2 2022, totaled $49.2 million or an increase of 22% over 2021, while cash used for acquisitions increased 218.7% to $36.4 million for 2022. We ended the current period with $221 million in cash, of which, $62.9 million was held by our foreign subsidiaries. Our free cash flow for Q2 was $119.4 million or an increase of 26.6% over last year.

This increase was primarily driven by timing of income tax payments.,Last, I'm pleased to share that yesterday, our board of directors approved a regular cash dividend of $0.10 per share that will be paid on September 9, 2022, to shareholders of record at the close of business August 10, 2022. This represents a 25% increase over the dividend paid in September 2021. The dividend increase reflects our strong performance in the second quarter of 2022, it situates our financial strength and the board's confidence in our continued growth. Gary, I'll turn it back over to you.

Gary Rollins -- Chairman and Chief Executive Officer

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

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question is from Tim Mulrooney with William Blair. Please proceed.

Tim Mulrooney -- William Blair and Company -- Analyst

Yeah. Good morning, everybody. First, I just want to say to Gary, congratulations. Very few CEOs can boast the same level of tenure and success that you can and I look forward to staying in touch regardless.

Gary Rollins -- Chairman and Chief Executive Officer

Thank you.

Tim Mulrooney -- William Blair and Company -- Analyst

First one, EBITDA margins were down a little bit more this quarter than I was expecting. And what was helpful last quarter as you guys bucketed these things for us. The primary buckets being fuel or I don't know if you want to call it, fleet, another major cost bucket is labor and another one is materials, if you were going to rank those headwinds in terms of the things that impacted your EBITDA margins the most and if there's any way to quantify it. I think that would be really helpful for investors, it certainly was very helpful for us last quarter.

Julie Bimmerman -- Interim Chief Financial Officer, Vice President and Treasurer

Sure. Tim, this is Julie. So I'll jump in. So I would say our largest impact was getting back to the advertising expenses we said, which was gain -- or excuse me, an increase of 2% of our revenues.

And I do want to go ahead and go over this. This is where we updated our quarterly processes for estimating and accruing our advertising expenses to better reflect our shift to digital advertising. I do want to make a point on this though, and this is the key point, is this, we will maintain the normalized historical percentage of revenue spend for the advertising when you look at the year as a whole. So we are dealing with timing there.

The next largest item would have been our fuel and the fuel itself was a $6.8 million increase over last year. So that was significant over Q2 of last year.

Jerry Gahlhoff -- President and Chief Operating Officer

I would add that from a labor standpoint, we did a pretty good job of keeping service wages, in particular, relatively flat year over year. That really wasn't a significant driver of everything. It's heavily on what Julie mentioned.

Tim Mulrooney -- William Blair and Company -- Analyst

OK. So I mean that's very consistent with what you said last quarter. I guess, labor had more disruption in January. But you were saying that, that wouldn't be as much of an issue going forward.

It sounds like it's not, it's mostly fleet and advertising expense. So that's really helpful.

Jerry Gahlhoff -- President and Chief Operating Officer

January, it was driven by the COVID situation, which is just seems to be ramping back up again, but we're managing through it a little better right now.

Operator

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

Ashish Sabadra -- RBC Capital Markets -- Analyst

Thanks for taking my question, and congrats to both of you, Gary and Jerry. My first question would be on the revenue growth, pretty strong momentum there across all businesses. I was wondering if you could help parse out, you obviously talked about a more aggressive price increase, but also if you can talk about the improved retention as well as on the sales momentum side, can you talk about how the improved ad campaign helped you more on the inbound, but also the technicians being appropriately staffed? How is that helping you drive sales momentum. So if you could just parse out some of the growth drivers and quantify some of those tailwinds?

Jerry Gahlhoff -- President and Chief Operating Officer

Well, I think, Julie, on the revenue growth side, we certainly got some additional lift from the price increase part that helped us quite a bit. We were lapping a pretty big second quarter last year, in particular, the month of April and in 2021 was really difficult to lap from a growth standpoint, but we managed through it pretty well, and things picked up quite a bit in May and June to help recover from there. Retention remains, customer retention remains strong, and our team is doing a pretty good job on service delivery. We're staffed better than we were a year ago from a technician standpoint, being able to get to new customers, service our existing customers.

So that's all good. We've gotten a lot of positive response to, in particular, Orkin's transition to -- with their new ad campaigns. Especially with the Orkin Pro, we've received a lot of very strong feedback. The people that work at Orkin, our team members at Orkin really like it.

It's getting a lot of attention. I know it's good when I hear about it from my children because they're seeing it on TikTok. And so they see those ads on TikTok and seem to have a lot of fun with them.

Julie Bimmerman -- Interim Chief Financial Officer, Vice President and Treasurer

Yes. And then to add on to that, just as a reminder, I think Jerry commented on his section of the script is our price increase that brought in over double what we typically see from our annual price increase. So that was a part of that growth as well.

Operator

Our next question is from Hamza Mazari with Jefferies. Please proceed.

Hans Hoffman -- Jefferies -- Analyst

Hi. This is Hans Hoffman filling in for Hamza. Could you just give us a sense of how much capacity you have in your sales force and what your hiring plans are going forward?

Jerry Gahlhoff -- President and Chief Operating Officer

We're pretty well staffed on the sales side, both in the commercial and residential side. We can always -- there's always room for improvements to drive -- when you have a salesperson at full capacity or selling high levels monthly, the next step to do is hire another and build them back up and continue to drive that incremental growth and get improvements. So there's always a little bit of capacity there to do better. But as we get closer to capacity, we look to add staffing where it makes sense.

And we're always -- that's just kind of a numbers game and math game that we play.

Julie Bimmerman -- Interim Chief Financial Officer, Vice President and Treasurer

Yes. And that's where we really worked hard at the end of last year is when we started doing the heavy staff up on our commercial side of our sales force just so that we could be prepared for this year and be able to honestly be able to close the deals that we're closing today.

Jerry Gahlhoff -- President and Chief Operating Officer

And certainly, the commercial results that we're getting are a result of the increased staffing and the increased productivity for sales rep that we're seeing.

Operator

[Operator instructions] Our next question comes from Seth Weber with Wells Fargo Securities. Please proceed.

Seth Weber -- Wells Fargo Securities -- Analyst

Hi. Good morning, and congratulations, guys. I just had a question on, I think fuel prices started picking up last June, June 2021. So is it -- so now that we have kind of an apples to apples compare going forward, should we expect gross margin to be up year over year for the rest of the year or is that the right way to think about it?

Julie Bimmerman -- Interim Chief Financial Officer, Vice President and Treasurer

I'll start, and then I'm sure Jerry will want to jump in as well. Everything -- we're all reading the same thing when it comes to fuel is we -- a lot of things -- areas say that the fuel prices are going to be going down, but then we see things that are happening on the other side of the globe that gives the impression that it could go up. So, so much depends on that. So if you're assuming that fuel does not keep on having that variability, we'll definitely -- that's one thing to keep in mind.

But I also want to address materials and supplies. Jerry commented on this as well. And I'm going to jump in and use the phrase that Jerry has commented on in the Board meeting yesterday. He said that sometimes we feel like we're playing whack-a-mole with the materials and supplies because we have different vendors and different that are looking at -- they have to make increases to cover either their shipping or cover their supply costs themselves.

And we keep on having to jump in. We're having to look every single day and see in our purchasing group is saying, where do we need to go. Where should we be purchasing. And really monitoring these relationships.

It's a long way of saying it depends what's going to happen with our vendors. It depends what's going to happen with our suppliers. And honestly, the fuel prices. All of that being said, if that calms down, then yes, margins would improve.

Do you want to add to that?

Jerry Gahlhoff -- President and Chief Operating Officer

I would agree that those are the two main variables. It's going to be what happens with fuel and fleet and can we get our -- the trucks on time that we are expecting to be delivered to us. Can we get -- they can get delivered and we can start heading off some of these repair expenses that we're having. And then plus we have the ongoing benefit of offsetting some of these costs over the coming months with routing and scheduling, more of the technology adoption and advancement that we can get out there and increase usage of the tools they have, especially during busy season, that will help us with those offsets.

Not too concerned about the labor side. I think we'll manage the labor. But certainly, fuel and vehicle repairs and materials supplies. Those are the wildcards that were basically managed through a very -- it seems like every week, we're getting notified about some other price increase that we're having to make adjustments to from suppliers.

So that's why Julie said it's like playing whack-a-mole. So as long as we remain vigilant on that, and we'll see what happens from a fuel standpoint. That's the wildcard.

Operator

Our final question is from Brian Butler with Stifel. Please proceed.

Brian Butler -- Stifel Financial Corp. -- Analyst

Good morning. Thanks for taking my question. Just to follow up, I guess, on pricing and inflation. If inflation continues to move higher or even accelerate, is there a potential another rate increase the back half of 2022 or maybe a surcharge that would be used to offset that? Or would Rollins wait until maybe next year to catch up and then address the higher costs?

Gary Rollins -- Chairman and Chief Executive Officer

We've done quite a bit of research as far as our price increases are concerned. And certainly, we would be opposed to having another price increase this year. We really studied the frequency and the amount very carefully. And it's been our experience that you really need to have some time in between and don't get greedy.

Operator

Thank you. I would like to turn the conference back over to management for closing comments.

Gary Rollins -- Chairman and Chief Executive Officer

OK. Well, thank you all for joining us today. We appreciate your interest in our company, and we look forward to updating you next quarter on our progress. And thanks again.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Joe Calabrese -- Investor Relations

Gary Rollins -- Chairman and Chief Executive Officer

Julie Bimmerman -- Interim Chief Financial Officer, Vice President and Treasurer

John Wilson -- Vice Chairman

Jerry Gahlhoff -- President and Chief Operating Officer

Tim Mulrooney -- William Blair and Company -- Analyst

Ashish Sabadra -- RBC Capital Markets -- Analyst

Hans Hoffman -- Jefferies -- Analyst

Seth Weber -- Wells Fargo Securities -- Analyst

Brian Butler -- Stifel Financial Corp. -- Analyst

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