ROLLINS INC Q1 FY2025 earnings call

• Rollins delivered strong first quarter results with total revenue growth of nearly 10% and organic growth of 7.4% despite 1 less business day.
• Announced acquisition of Saela Pest Control, which is a good addition due to its strong culture, scaled operation, and presence in key geographies.
• Continued investments in incremental sales staffing and marketing activities ahead of peak season.
• On the commercial side, delivered solid double-digit commercial growth despite softness in some onetime special services, with Orkin Commercial showing double-digit recurring revenue growth.
• Gross margin was strong at 51.4%, up 20 basis points versus last year, though strategic growth investments tempered EBITDA margins.
• Operating cash flow was $147 million, free cash flow was $140 million, up 15% and 17% respectively versus last year.
• Welcomed Paul Donahue to the Board of Directors.

In the first quarter, residential revenue increased 8.2%, commercial pest control rose 10.2%, and termite and ancillary increased by 13.2%. Organic growth was healthy across the portfolio, with 5.7% growth in residential, 7.4% in commercial, and 11.1% in the termite and ancillary area. The organic growth rate on the recurring base of commercial business grew at nearly 10%.

• Expect Saela acquisition to add between $45 million to $50 million of revenue in 2025, approximately $15 million in Q2.
• Anticipate the Saela deal to be accretive to earnings in the first full year of ownership.
• Expect organic growth in the 7% to 8% range for the year, with the addition of Saela taking anticipated growth from M&A to 3% to 4% versus previous 2% to 3%.
• Anticipate cash flow will continue to convert at a rate above 100% in 2025.
• Interest expense for the remainder of the year expected to be slightly elevated due to higher debt levels from M&A, with Q2 interest expense expected to be $8 million to $10 million.

• Macro-economic uncertainty which could impact demand.
• Fleet costs, with automobile lease costs representing roughly 3% of the income statement and potential exposure to increased repair and maintenance costs.
• Tariffs, with greatest potential impact on fleet.
• Labor market softening which could affect employee retention.

Q: Tim Mulrooney asked about demand trends in consumer-facing businesses and if there were signs of slowing.

A: Jerry Gahlhoff said January and February were tougher but March improved, and no pause was seen. Kenneth Krause added residential, commercial, and termite/ancillary businesses are performing well and remain recession resilient.

Q: Tim Mulrooney asked about commercial business growth and if it's due to investments.

A: Kenneth Krause said it's correlated to investments in Orkin commercial, and they're bullish on the segment. Jerry Gahlhoff added commercial sales cycle is longer, and investments take time but will focus on sales force productivity.

Q: Ronan Kennedy asked about top line growth drivers, margin drivers in downturn, and resiliency by segment.

A: Kenneth Krause said drivers include pricing, volume growth, and M&A. In downturn, labor-intensive business with high variable cost model is a lever. Jerry Gahlhoff mentioned multi-brand strategy as a key difference maker.

Q: Keen Fai Tong asked about organic growth moderation in residential and termite.

A: Kenneth Krause said factors include 1 less business day and 40 basis point currency headwind. Jerry Gahlhoff added onetime business in termite and ancillary is affected by 1 less day.

Q: Ronan Kennedy asked about M&A pipeline and potential pressure on competitors.

A: Kenneth Krause said M&A pipeline is healthy but pragmatic approach to integration is taken, with no urgency to chase assets.

Q: Jason Haas asked about Saela acquisition synergies.

A: Kenneth Krause said pragmatic approach to integration, helping with fleet, materials, etc. Jerry Gahlhoff mentioned sharing technologies like BizSuite and HomeSuite apps.

Q: Toni Kaplan asked about marketing strategy and termite growth drivers.

A: Kenneth Krause said marketing is diversified across channels. Jerry Gahlhoff said termite growth is due to customer relationships and cross-selling, with trust and good net promoter scores driving it.

Q: Joshua Chan asked about incremental margins and their trend.

A: Kenneth Krause said excluding certain impacts, margins were in target range, and expect improvement as growth continues.

Q: David Paige asked about fleet refresh and nonrecurring revenue during downturns.

A: Kenneth Krause said fleet refresh hard to precise, but confident in position. Jerry Gahlhoff said considered repair costs vs. truck costs and lighter vehicles. Kenneth Krause said onetime business like termite performs well during downturns due to essential service nature.

Q: Stephanie Moore asked about client retention in recession and M&A strategy in challenging environment.

A: Jerry Gahlhoff said client retention via relationships, cross-selling, and market-by-market adjustments. Kenneth Krause said M&A targets are family-owned, multi-generation businesses with long-term lens.

Q: Brian McNamara asked about industry growth and employee retention.

A: Jerry Gahlhoff said wait for pest index report. Kenneth Krause said market is healthy and growing. Jerry Gahlhoff said made improvements in first year retention, with double-digit improvements in short-term retention.