Thank you everyone for joining us, and on behalf of J.P. Morgan, I'm Cameron Kissel, I run our U.S. into Europe Equities business. I'm delighted to have Jerry and Ken from Rollins. I think over the years, we don't actually cover the stock, full disclosure, but over the years, I think there's been a big fan base in London and in Europe, and actually over the last two decades, if you've been a shareholder, it's been one of the best places to hide. So, from a total return perspective, it's been a great little business. I think that's a great place to start for some of you that might not know the business, is just at the secular drivers. This is a really unique business. It's a $20 billion TAM.
They've got 20,000 customers, 80% recurring revenues, and if we think about elements like, you know, weather in the U.S., big mass moves to the Sun Belt markets, continued population growth in the U.S. that continues to outpunch the rest of DM. Those are some of the elements we hear about, but maybe if you just, in your seat, with your eyes, in the flesh, we'd love to hear, your own view of the secular drivers. We could start there and then, you know, drill down.
Why don't you start, Ken?
Sure. No, thanks for having us. Great to be here, and to talk about Rollins. Jerry and I are relatively new in our roles. I've been with the company for a little over a year now as CFO, and Jerry, of course, has been CEO since January, officially. And so, but no, it's a great business, great market, and it continues to grow at an accelerated pace. It's helped by secular trends from a number of, on a number of fronts, starting with the DIY, the do-it-yourselfers. They do not want to do it themselves. If you think about do-it-yourselfers in pest control, or do-it-yourselfers in landscaping, or do-it-yourselfers in the pool service area, a completely different set of characteristics, and attributes. So you don't see much do-it-yourselfers risk with respect to pest control.
You talk about migration, migration to warmer states, Florida, Texas, Tennessee, the Carolinas, Georgia, a lot of port states in very warm climates that are seeing a net positive migration with population. And so that certainly is helping. Jerry and I have debates all the time around weather, but not sure where you sit in terms of the climate change, but warmer climates are generally better. And so warmer nights, especially if the low temperature, I'm doing the math in my head now being an American, but if the low temperature is, call it, you know, above 20 degrees Celsius, normally that's a really good sign. 70 degrees Fahrenheit nights are really good evenings for pest activity, and we're seeing it.
I mean, we continue to see, you know, another area is just new pests. Mosquito growth continues to accelerate. Ticks in the Northeast of the country, Mid-Atlantic, Midwest continue to be a grower for our business. So the pest evolution cycle, you continue to see new types of pests that are impacting people's lives.
Think about the erratic weather that we've had, where, you know, Southern California gets a hurricane and all that rain that sweeps across there and into Arizona. What's that leave behind it? Standing water. What's that breed? Levels of mosquitoes that we haven't seen in Southern California forever, right? And the teams there are doing a lot of mosquito control work in a market that was typically a drier type of environment that didn't have quite as much breeding, breeding ground for, disease-carrying mosquitoes.
We just saw the first, couple reports in the U.S. on, encephalitis, some form, whether it's West Nile virus or something like that, or Eastern equine encephalitis. That's something nobody wants to get. So those are all things that help awareness to the need for our services and what we do. And, you know, whether it's climate change or global warming, whatever you want to call it, these really erratic weather patterns, have been also generally pretty good for business.
Second question is really around the competitive landscape and, and fragmentation. You know, maybe if you could just elaborate on what scale does for you. How has the business scaled over time? There's a couple of scale competitors. There's a big M&A deal that you may want to comment on or, or not. I believe you guys have been pretty cautious on it in the past, but maybe just talk about fragmentation and what scale has done for you guys.
There's just an absolute ton of pest control companies. The barriers to entry are not to start—you know, to buy a pickup truck and some equipment and some materials and supplies to get started is not hard. It is really hard to scale. So if you're going to service a national client, if you're going to service even a large regional client on the commercial side, that's a challenge to somebody that's just kind of a mom-and-pop start-up. So scale is important, and we certainly have that scale across, in particular, North America and between Canada and the U.S., to handle all those types of commercial customers. And then even some residential opportunities, where you have property management companies, community management companies, those types of things that may spread across wide geographies.
We certainly have that scale and the ability to service anyone in just about any state in the U.S., and from coast to coast in Canada. So, that really isn't kind of a concern of ours, and I guess you could make the case that Rentokil, through their acquisition of Terminix, probably picked up some scale in their ability to do that, 'cause Rentokil had some spots where they didn't have very good coverage. So they probably picked up some opportunities there to give the same size scale, but Terminix already had those opportunities. Terminix, their footprint very much layered, very similar to ours already.
But you know, my sense of it is that in particular, we've done a pretty strong job of growing organically at a pretty much more rapid pace than they have been able to. I think that's evidence that we've taken share in the market as they've been probably a little more internally focused and recent.
Maybe just sticking with that theme of M&A, you guys executed the company's second largest M&A deal ever with the Fox transaction. I think you're at $300 million year to date or something like that. Is integration there proved any different than historically at all? I guess as we think about the rest of the year, is it likely to be quieter, given you're already at that level? How should we think about M&A going forward from here for you guys?
You know, and, when, when you think about M&A with us, when we acquire a brand, when we acquire tuck-in acquisitions, those are truly tuck-ins, where we incorporate them into the existing business, and that's where integration, so to speak, really happens at its peak. With a brand like Fox, when we acquire a Fox, we're not focused on, quote, integration in the first year. We're focused on building a partnership, building something for the future, 'cause we're taking a long-term view of the brand and what they're capable of doing, and how, how big that business is capable of growing five years from now. So, our first strategies during year one always are some of the easiest, because we spend our time doing quick wins. It's how do we help them on some of their cost structures?
I can probably put a truck in there to their branch a lot cheaper and more efficiently that's already equipped and ready to go than they could do that themselves. I can help them buy materials and supplies at a Rollins scale, not at a Fox scale. So I'm going to go find those quick wins that aren't really integrations. They may have some slight systems changes, or instead of buying from this, using this supplier, they're going to use that supplier in order to get those kinds of immediate efficiencies. And so during that first year, we're in our honeymoon stage, and we're just getting to know everybody and building a relationship and getting quick wins, finding ways that we win.
By the time we get into year two, it maybe gets a little more challenging. We start pressing a little bit more on things like margin and pricing and some of the things that Rollins does very well and has a lot of maturity behind, and we begin integrating those things in. Usually, we do that through creating a positive kind of a peer culture around our brands by comparing them to one another and challenging them into, "Well, this brand is doing this and achieving these goals, and they're doing so a little bit better. You know, what is it that you could learn from them to be able to move the needle and do a little better job yourselves?" And so we start through competition amongst our brands and sharing a best practice, begin to leverage that.
Our brand strategy is a little different from integration. I was talking to Ken earlier, it's like we use that word a lot, integration, and with our big brands that are part of our second bite at the Apple brands, integration is probably the wrong word. It's kind of a, it's really kind of a long-term partnership that we create instead of that.
Thank you for that. Just sticking with M&A, is competition for assets fluctuated at all? Are you starting to see private equity sniff around? I thought I'd read maybe there was private equity involved in the Anticimex deal. I wonder if they are starting to compete for assets or if the rate backdrop keeps private equity out of this. It would sound like a great business for private equity, given the return profile and capital-light nature of it. Just wondering if competition has changed at all.
Private equity is around the space. They love the space. We don't really see a lot of competition from private equity. The brands that we like to acquire normally are brands that are focused on realizing value, but they're also focused very heavily on their brand as well as their people. We've become known as an acquirer of choice with respect to some of those brands. For example, in a recent deal, you know, we feel like we were able to to secure an acquisition without paying the highest price. That's a very consistent theme for us. We're very disciplined when we go and we look at opportunities. When somebody looks to sell their business to us, they realize that we're going to take care of their brand.
When they drive down the highway in their community, they're going to still see that brand on the billboard of their community. When they go to have breakfast in the local restaurant, they're going to see people that they previously employed. They know how important it is to take care of those two areas of their business during an acquisition, and we have a great history and a track record of doing just that. Adding a little color to the PE space, we've seen. There's well over a dozen PE firms that are trying to play in this space, either through acquiring a platform that already has some size or scale, or piecing together a bunch of $3 million-$4 million or $5 million businesses trying to flip it.
What we're-- I'm not sure where the value is in that, because they're paying higher prices than what we would ever pay for those. I don't know, and we're certainly not an acquirer of some of those at those kinds of valuations that they're putting onto it. I don't know what the game is there. We've also seen a number of PE deals, some big offers that have come through, they're not making it to close. They're not getting the deal done. Usually, within the last week, they find out they don't have the money to fund it, or they're asking the owner to roll a very sizable portion of that ownership back into it, and these deals aren't getting done.
So that may serve in the long run to bring multiples down and some of the valuations down, as some of these deals aren't getting closed at some pretty high valuations.
I think the high interest rate environment certainly isn't a friend to the high valuations. It's hard to justify that pricing or that valuation with the rates that we're seeing in today's market, and especially in PE space. So.
Very fair point. You, you mentioned something earlier on the word people, and one of the mainstays from this conference has been the lack of ability to secure service staff. And I know you guys have mentioned, on a couple of the call transcripts, scripts that I listened to, a number of new hires in different functions. So it feels like there's some people changes, in leadership roles, obviously, below you guys, and on the service side. But just maybe just talk about staffing and some of the new people functions.
I'll address the kind of service side-
Yeah, sure.
As you talk about the other part. So, we're better staffed today than we've been in the last three or four years. We always have a staffing to plan, and we measure our sales people, our customer service people that are in the office or in a call center, as well as our service technicians, both termite technicians and pest technicians, and we're better staffed to plan than we've been since 2019. So things have eased up there on us a bit. I think in the last 18 months ago, it was certainly our biggest pain point that our managers in the field complained about the most. Now, it's not. And I don't think just 'cause they're numb to it, I just think that I think it's just gotten a little bit better.
And we've always had challenges in that regard, just attracting people into our industry and what we do. So, you know, we feel pretty good about that. We try to make sure that we pay our people in the top quartile, kinda in the blue-collar space. And as long as we continue to maintain discipline about thinking about the long term and taking care of our people, I think we've been rewarded for that.
Yeah, we've taken the time to invest in our people. We have an incredible investment or training program for people coming into the ranks, and we do not pay a minimum wage, we pay a fair wage for what people are doing. It's interesting, our technicians, our frontline workers, receive, as part of their compensation, a partial amount of salary, but they also have an incentive-based compensation structure so that when they do cross-sell, they improve productivity, they are able to earn an even higher amount of earnings. That makes it a compelling opportunity for many. When we look at some of the other changes in the organization, we're continuing to build out the talent.
Two or three weeks ago, we executed our first restructuring program in our back office, in roughly two decades, and that was a success, and that's enabling even more change in the back office function, functions, as well as in some of the leadership functions in those back offices. We've brought in people from a number of different backgrounds. I've recently hired a head of FP&A, comes to us from some really large conglomerates that are out there. Great experience, new VP of tax. Renee Pearson joined us, six to nine months ago as a head of technology. She joins us and brings a wealth of knowledge on that front, and we continue to make more changes across the back office.
We think those people will drive further change, further productivity improvements, and improvement in overall margin profile as we think about the future.
It's a great place to add on the restructuring and margins. I know you guys mentioned on the last call, SG&A being a bucket you could continue to sort of pick at and an opportunity set for you. Margins right now are a hair below 23% or something on the EBITDA line. How should we think about the scope for those to lift?
Sure. When we look at, when we look at the margin improvement programs, this is a multi-year journey. This is not something that will change in the next one, two, three, or even four quarters. You're gonna continue to see evolution in the, in the company. When Jerry and I look at the business, we very much are aligned in some of our takeaways. One takeaway is at 30% or 31% of sales, SG&A seems a little rich and a little high versus what many of our peers report. We do think there's an opportunity. As we make the changes to bring new talent in, we're charging them with the responsibility to improve what we do, to become a better back office, better shared service function.
And if we are a better shared service function, I think we can become a better, have a better profitability profile, be a better acquirer of choice, realize synergies across the back office. So there's a whole host of things that certainly come to mind as I think about the future with respect to, to improving our profitability profile, improving SG&A performance as a percentage of sales. But I have to continue to emphasize, it's a multi-year journey, that we're on. This is not something that's gonna change in the near term. And we just executed that first restructuring program. That gives us some a sense of optimism about our ability to invest in some additional resources, additional process change, additional technology that will help us leverage that into the future.
You got to keep in mind, 1964 is when Rollins acquired Orkin, and it remained Rollins as basically the parent company. Rollins, Inc. is a parent company of Orkin for 50 years. Really in the last 15 years, 12 years or so, we've added to our portfolio of brands with these standalone brands that have been very good for our long-term growth, and has, and size and scale, and our ability today, I fully believe, to capitalize on the volume increases that we're getting and taking share through our brand, through our brand strategy. At the same time, in the last eight or nine, 10 years, we haven't evolved as much as we probably should have to be a parent company to a family of brands, compared to it just being Rollins and Orkin.
Yeah.
Right? So there's changes that we've got to make, how we monitor, how we govern, how we handle back office efficiency, efficiency type stuff. There's opportunities there that Ken kind of walking in is, and now he's been here a little over a year, has helped us, you know, kind of really put a microscope on and see those opportunities.
Want to shift gears and talk about pricing in this backdrop. It's the business that's allowed you to take price, you know, at a reasonable clip every year. I think it's been 4% this year and 4% the year prior. We're also in a world of elevated costs. How do you balance, you know, this backdrop? And how is the customer responding? How should we think about price elasticity?
You know, there's two things that come to mind to describe the business with respect to pricing: essential service and a very low purchase price for the service. So when you look at the business, we're protecting people's brands. Jerry talked about some horrible diseases earlier with respect to protecting health, protecting property with termite damage. So that's those are all very essential services, and the amount of money that people are paying for those is a really low portion of their overall budget. So when they sit down, and they think about if you're going into a recession, what are you going to cut? Well, one of the things you normally don't see cut is pest control because there's it's such a small purchase price.
Furthermore, when we look at price on the inverse of that, if we look at price increases, a 4% price increase on a $100 service that occurs every quarter is $4. It's really not a big increase. It's not a big sticker price. It's not a big item that people take notice of. We do think there's an opportunity to continue to, and I won't even use the word be aggressive, but to continue to be proactive when it comes to pricing. You know, during the recent—you know, I come from a background of manufacturing, global manufacturing, and, you know, we were talking about 6%, 7%, 8%, 10% price increase. We're talking about a 4% price increase on a $100 purchase. It's a really small increase.
When we think about the future, and our focus is to continue to maintain that 4%, we don't have to pare it back from 8% or 10%, but if we can continue to hold that 3%-4% price increase, we feel like we can continue to leverage that through the P&L. For example, this year in the second quarter, we posted a gross margin of 53%, one of the highest gross margins we've posted in some time. I think we may have hit that mark one time in the last five years. But we're able to leverage our increasing cost structure with that 3%-4% price increase and see leverage at the gross margin line.
So we feel like if we can continue to do that where we are today, then a 3%-4% price increase would make sense going forward.
Back to something I said kind of in the early stages, we talked about the opportunities that we have, especially as we get into years two, years three, with some of our family of brands. Pricing is another one of those opportunities that we ease our way into with them, and we're able to capitalize on that, where Orkin has always been the price leader in the market. They've always been one of the highest-priced companies to do business with, and they have the image and the reputation to go along with it. Other brands, regional brands, they brag about their service and how good they are, but they may be only getting 75% or 80% of what Orkin gets from a price standpoint.
We begin challenging them on, "Well, why is that?" When they come in for quarterly reviews, and they're seeing the entire, all the operating divisions of the business and seeing the pricing differential, we start challenging them: "Can you, can you come in and raise those prices? Can you get more aggressive?" Some of the lift that we'll also see, I think, over the coming years is as we ease their way into being more aggressive with pricing, both in price, how they price new customers, as well as how they go to market with their annual price increases. If you're an Orkin customer, you're used to getting increased every single year. We acquired Fox. Fox has never done a price increase, right?
Mm-hmm.
So we mentioned price increase to them from the get-go, and they're like, "Oh, that scares us." Well, we're going to tell them, "You have nothing to be worried about," but sometimes it helps to show them the data and see, look, it's going to be okay. You're not going to have the phones ringing off the hook with customers canceling. Your service is good. Your customers will go along with it, right? So there's plenty of opportunity for us on our kind of non-Orkin brands also to get more discipline and a little more structure about pricing.
Yeah, it's a great business. It continues to—we continue to see pricing opportunities, and we're not facing the headwind of that mid- to high single-digit price increase that a lot of others are facing as you think about a post-inflationary sort of cycle.
I would also add, you know, usually people think of in our business as, "Oh, if fuel goes up, you should raise the price." The way we explain it to customers is usually about our technicians. Ken mentioned earlier, we have a lot of variable pay components for our frontline, our salespeople and our technicians have variable comp based on productivity, and price is a key lever in that. It's how our people also get pay increases. And when we explain that, you know, your technician, Johnny, gets his pay increase when you pay more, that a lot of time that customer that's even calling and complaining, "Well, I like Johnny. I don't want Johnny to not get his pay increase," right?
Johnny shares in that, the benefit of that, that rate increase as well, you know. So, it makes it much more palatable from a consumer standpoint.
Great. I wanted to touch on customer acquisition costs. I know, I think you mentioned in Q1 on the call, potentially elevated acquisition costs through the balance of the year. I'm just wondering, I think the business does about a third of that in digital. Wondering if Fox has an impact at all, and then I guess more broadly, how should we think about customer acquisition costs through the rest of the year and beyond?
Second and third quarters are always the high points for customer acquisition costs. That's traditionally peak pest season in the northern hemisphere, and that's in the time when you want to be investing. And so that's what led to the comments Orkin earlier in the year around that. And the other side of it is the door-to-door business that we've talked about with Fox is more expensive. It's a more expensive marketing effort and customer acquisition activity. But with that said, it's very much justified when you look at the lifetime value of a customer, and the fact that a lot of customers stay with you three, four, or five years. And so the recurring revenue stream is incredibly attractive with those customers.
But that's really when I talk about customer acquisition costs, and I talked about it stepping up in the second and third quarter. It's primarily related to those activities I just discussed.
When we look at customer acquisition costs these days, this wasn't even the case five years ago. These days, you know, digital is one of the least expensive ways that we can acquire customers, aside from word of mouth, and customer referrals, and, you know, the obvious things. Digital's one on the lower side, but I also can't just say, "I'm going to go spend 20% more in digital and get 20% increase in sales." It doesn't work that way. You get diminished returns on some. There's a balancing act that you got to play there on the digital side.
If we look at door to door, back 20 years ago, that was by far the most expensive, when Orkin and the company I came from used to deploy door to door, it was a very. Compared to Yellow Pages, which is what we used back then, it was very, very expensive, like, cost per lead sold. By today's standards, when you look at the multiples being paid, you know, even right now with private equity and some of the others, for customer acquisition, for buying an existing company, door to door is actually cheaper than that. So, it's made door to door much more attractive to us. And when you package that in door to door, unlike digital, what are you, when somebody's working in a neighborhood, going door to door selling, what are they building? Density.
This customer said, "Yes," they went down eight houses and got six more no's, and then suddenly got another yes. Well, our truck is then building the density, kind of like a HomeTeam business model of density, as you sell door to door. So we get that added benefit. Yeah, it costs us a little bit more, but it, but it's still cheaper than going through acquisition.
I still have a soft spot for the Yellow Pages, so thank you for that walk down memory lane. I wanted to touch on insurance premium, and I know you talked about this being a poor experience in 2022. Just for clarity's sake, is that newbies coming onto the platform, working for you guys, who are potentially new drivers and it takes a while to work through that, but just any clarity on how to think about-
Two components to that. One is related to premiums. Insurance premiums, I think for everybody, it's safe to say, insurance premiums have done nothing but go up since COVID. And so insurance premiums are certainly a headwind, what we pay to insure our workers and our drivers, and the like. We are self-funded up to a certain level, and so we do have unfortunate situations where people get in auto wrecks, and damages, injuries occur, and we ultimately are pursued for those damages. And so we've seen a step up in claims activity last year and a step up in settlement values. Inflation market hit, and inflation hit just about everything, and claims weren't certainly an area that they didn't hit.
So we saw more expensive claims and more frequent claims with some more adverse impact. And so we dealt with that through the course of the last 12 months, and you've heard us talk about that last year in the third quarter. We talked about it again here in the second quarter of this year. We're making some changes on our safety programs that are focused on improving the safety of our drivers. And so we're hopeful that those changes will take place and take hold, and we'll start to see some benefits on those initiatives as we think about the next several years here. But there's certainly... It's been a balance between the insurance premiums, as well as the claims and the negative adverse claims that we've faced over the last 12 months.
Can I add to that? We certainly are—the average age of o ur, say, technician in the last 10 years has changed significantly. It used to be in the 35-year-old range, and now it's in, like, the 25-27 year-old range. I think we, we've kind of missed the opportunity to see that we have a lot more younger, more inexperienced drivers, that maybe also don't know the geography where they're going in. So, if you're new with that, one of the ah-has for us was we, we've got to do a much better job training. We train you on how to kill bugs and do the mechanics and customer service, and all that kind of stuff. We, we train the heck out of you on that kind of stuff.
But we probably assumed a little too much when, how efficient were you at not being distracted, for example, while you're driving down the road with your cell phone? Because you've done that your whole life in your personal car, right? And so those kinds of shifts have kind of caught up with us, and we've kind of had a blind spot for that. But we're trying to get that fixed back up.
Just a couple more, and then we'll open it up to questions. But, I meant to ask this during the M&A period. What's the right way to think about leverage? And if you continue on the acquisitive path, how much gearing should we expect?
You know, there's really no target that would say, "Hey, we're going to be at 2.0 turns or 2.5 turns, or even 1.0 turn." I mean, this year we've used our balance sheet more than we have probably over the last 40 years. We've invested almost $350 million-$400 million in acquisitions. We've bought back stock of $300 million as part of the secondary offering, which I'm sure we'll talk about here in a bit. And then, we also have paid dividends. We've raised the regular dividend a year ago, prioritized that over the special dividend, and I think we're on track this year to pay about $250 million of dividends. So deploying about $1 billion of capital across all those various elements. You know, for us, it's about maintaining balance.
Investing for growth, pursuing growth, being active in the M&A market, having meaningful contributions from M&A in our growth profile is really important to us. Driving improved cash flow performance, and we've had a great track record of generating strong cash returns. And that will enable us to maintain that dividend, continue to grow that dividend with our shareholder base, which today we're paying out about 50% of cash flow. And then taking the opportunity to be opportunistic when we can on share repurchase. It was great to be able to participate at the level we participated, a week or two or so ago on the share repo program.
So, just one of my last ones, and then we'll open it up. You talked about the opportunity set in the U.S., some of the big trends and secular drivers, and people moving to sunnier states, and we talked about population growth. You're over 90% exposed to the U.S.. Is the future so bright that you don't have to consider the rest of the opportunities globally in other developed markets, or do you think about those sometimes? And if so, how should we consider that?
I think we're, we're certainly focused on the U.S. The market is the largest, single largest market that we operate in and compete in, and it's the market where we're strongest. We're going to continue to double down on that market and invest disproportionately in that market, while remaining open to opportunities outside the borders of the U.S. We've built a nice franchise or a nice business here in the U.K. We've also built a nice business in Singapore, Australia, and in Canada, and we're opportunistic. We're continuing to look at other opportunities outside of those geographies. What you won't see us do is chase and plant flags. It's all about finding that geography and investing in that geography to build a business that can be scaled.
You're not going to see us buy one or two little pieces in, per se, Germany or in France. If we decide to invest in those regions, we're going to build a platform in those regions. So that's kind of the approach. But we are fortunate to have our strongest position in the single largest market that we compete in.
I'm going to turn it over to the crowd.
In fact, I've used your pest control service in the U.K., so, thank you very much for-
Good. Which brand?
Uh, Safeguard.
Yeah, Safeguard, yeah.
Thank you for killing that-
Awesome.
... that mouse. It saved my marriage, I think.
It's essential.
Yeah, essential, yes. I mean, that, that speaks to the business, incredibly recession-resistant-
A business that's shown pricing power over many years as well. Particularly on the commercial side of your business, I suppose, where it is viewed as an essential service, often regulatory-driven. But if you look at the residential side, we're in a bit of a stickier environment now. Might potentially you see the number of repeat visits throttle back, and if you combine that with maybe some cooler weather in this wild world that we're in, could that potentially be a road bump for you?
You know, the weather is one of those funny things. You know, if we're going to have another ice age or something, sure, I think that would affect us. Cooler weather, in general, isn't going to, you know, radically erode much of anything, and I think if I had to put my money on it, I would say it'll probably be warmer, not cooler. So, you know, we really hadn't thought too much about that. I, you know, where we see the variance and some of that is really at the quarter level, where did season start in March or did season start in April?
This kind of the shoulder, the shoulder season, affecting things like that. So I, I don't know that there's, we hadn't thought about or, or, those kinds of risks. We see, we see all the secular data is all just being very positive for the most part, so,
You know, we have a term for that called allowances. An allowance is a customer gets quarterly service or every other month service, and they say: "Oh, I want to skip it 'cause I don't think I need it." We run allow-- our allowance rate, it runs around 1%, right? That's it. Actually, this year, our allowances are pretty cons-- are considerably better than they were a year, a year ago. They've actually gotten better year over year. In part that's 'cause of staffing, 'cause we've been better staffed than we were a year ago. Others, just that we're-- the consumers are taking, accepting, and paying for service.
Mm-hmm.
So if a customer is not paying us, and they're in arrears with us, like, that's another indicator. So if we saw what was going on with the receivables was starting to float up, that's going to eventually affect your allowances, because I'm not going to go service again a customer that already owes me from 60 days ago, right? So then that affects my allowances. And we're not seeing any of those kinds of trends on the consumer side, with them not paying, paying for the service. The vast majority of our services these days are being sold on auto pay, credit card on file, or ACH bank drafts. So it's almost like they don't even see it.
You know, I imagine if they got a bill and had to write that check all the time, maybe that changes, but these days, it's we just don't do business that way. So that's, it's, I think, I think we're in a really good place.
Yeah. I think if you try to manage a situation by hiring somebody to take care of the issue and then deciding, you know, one time's enough, I think that's the wrong solution. Because ultimately, Jerry's a trained entomologist, but I'm learning under one of the best entomologists in the business. I think what you'll learn is, you try to treat it one time, and it'll eradicate it for a period of time, but they're going to come back. In most-
Until there was something there-
Yeah.
Something was, some way they were getting in.
Yeah.
or some environmental issue around the house
Yeah.
that's causing... There's a reason that they were there.
There's a reason they were there.
Yeah.
So, that's why the business is so sticky. You know, you even have this one-time, repeat one-time customers, you know? So I mean, it's—it's really a great business model.
Other questions from the crowd? Knut, over here.
Get to you in a second, Cole.
What kind of financial metrics do you use when making acquisition in terms of payback time or IRR, et cetera? Also, when you make acquisition, typically, what kind of margin uptick do you see once it's under the fold or once you have used your magic?
You know, I always look at businesses, like when I think about acquisitions, and I'll let Jerry answer, too, but from a financial perspective, I like to buy businesses that ultimately are going to grow faster than my business. Forget about year one. Everybody accretes the sales growth in year one. What's that organic growth of the business you're buying, and can you accelerate it? Like, Northwest is a platform. Jerry talked about acquisitions earlier, and a partnership in acquisitions. Well, we've funded acquisitions of Northwest that they've made since we bought them. Can we buy a business that has growth aspirations, that needs financial and funding to grow? The growth profile is important. The margin profile, are we buying businesses that are going to be dilutive or accretive to our margins?
Earnings per share, it's become more focused recently with interest rates where they're at. Can we be accretive to GAAP earnings in the first year? Fox, heck, we were accretive in the first quarter on GAAP earnings. Incredible acquisition. Cash flow, the last thing I'd want to do is go out and buy a business that has uses more cash in its business than we use. So you want to have an accretive cash flow business you're bringing into the fold. Return on capital. You know, we enjoy some of the best returns on capital in our business. So again, I don't want to dilute that, and I want to buy businesses where I can accrete in excess of my cost to capital by year three.
And so those are some of the things that I think about when I'm looking at an acquisition and the lens at which I look at acquisitions through.
Yeah, you know, when we get books from, say, a broker, broker side with their pro forma and their add backs and all that kind of stuff, we have so much work that we have to do because a lot of their stuff, we don't see it. And we know that because we take a longer-term approach in how we go through, again, we'll call it that integration on a, on a larger brand, we're slow and methodical, and we're thinking long term. We're, we don't want to, we don't want to do anything that's going to cause any harm, that is going to disrupt the long-term prospects of that business. So when we do a pro forma, we're very conservative in year one, like ultra-conservative, probably.
And then in year two, we can start getting a little more aggressive, and we really model out majority of our returns, years three, four, five, six, seven, eight, and we're like: How big is this business going to be? And, and how much cash is it going to generate when we get it there, right? So we just take this really long, a long view of M&A. We're not there to, what you call it, the sugar high.
Yeah.
We don't. We're not the. We get a little bit of the sugar high from tuck-in acquisitions, where we're just slam dunking them into the existing business. But we just were really disciplined about the big deals and how we approach it for the long term.
The nice thing is, we don't have to have any one single deal. We can, and we have, you can walk away from deals. You see others maybe don't have that luxury. When they go after acquisitions, they have to be successful, so they bid up the price, and sometimes they'll bid up the price against themselves, unbeknownst to who else is in the process. We don't. I mean, we'll walk. When we set a number, I marvel sometimes when I'm speaking to Jerry, and we're like $5 million apart, but we're going to walk away 'cause we just don't see the value. We're not going to chase it, and then, in the end, we end up getting it or we end up, you know, feeling good about the outcome of that process.
So, I mean, it's a really good business because the pipeline is so strong, it's so long. So it affords you the luxury of being able to say no.
Can I just ask a question on management and the changes at the top? Gary Rollins, is he still as involved as he always has been? And Jerry, if I might ask, why was Kenneth the right man for the job? And Kenneth, why were you attracted to the job?
I'm going to leave the room while he answers this.
No, no.
First part, Gary. Gary is still pretty active in that he's in the office most days. He's our Executive Chairman, and still just loves this business. I mean, he's been at it for 57, 58 years now in pest control. He'd probably tell you, like I do, it's the only thing—my wife will say, "It's the only thing I know anything about." You know, he just absolutely has a passion for it. He'll send me notes. He sends me questions. "Hey, hey, hey, did you see this on the DOR report today? You know, what's going on in Pacific Division with leads?" Right? He still just—he just pays attention, and he's had to apologize to me a couple times earlier in the year.
He goes, "I'm not really prying in your business. I'm just curious." He just wants to know, "What, what's going on?" At first, I took it like he wanted to make sure I knew he was still looking. At the end of the day, he is-- he's just, he just loves this business. From that standpoint, you know, I, I personally enjoy that he is around because I meet with him usually about every seven to ten days, we spend time together, and he's just a tremendous mentor and an advisor to me. On the Kenneth side, you know, Ken, Ken and I, we dated for a couple of months, didn't we?
Yeah, it took a while.
It took a while. Ken would come in, and he'd sit in my office, and we'd look at the numbers, and he's like: "How does this business trade at this multiple? What is, what is the matter?" I don't know, he just had a really hard time, and I'm like, "I don't-- we're just awesome. I don't-- you know, it, it kind of is what it is." We would-- when we started talking through the numbers, you know, for me, Ken had a background where he'd come from MSA, that was, at one point, also a family-controlled company, and he had seen some of the changes there, so that appealed to me.
He had also gone during that same period of time and changed certain things about the business to make it better and bring more value to shareholders. So I knew that I had done my research on the track record that he had in that role. And then, you know, we just kind of felt like we had to jive, that we were in alignment on where we thought the business could go, how we could maybe grow a little faster, put a mark on the business without changing fundamentally who we are and what we're all about. And we're still true to our roots. We believe, you know, and what we do, and we'll continue to always think long term about the business, and those are things that are just never going to change.
Yeah, three things here on Jerry, 'cause we're running over time, but I can do it real quick. Three things. One is, he knows the industry, like no other. He's got relationships everywhere, affords us so much growth opportunity. It's great to partner with somebody that has that level of respect across this really attractive industry. I came from a great, an attractive industry, but I'll tell you, this one, this one's really attractive, and he's got great relationships. He's a trained entomologist. I didn't even, I didn't know something existed like that before I joined. He knows bugs, he knows the science behind it, and there really is a science behind bugs, and that makes this business even more special, is the fact that there is a science behind actually pests.
Last but not least, I mean, for a CEO, in my perspective or in my opinion, and I've worked with a few good ones, one of the most important thing a CEO can do is lead people and interact with people and create a followership. I think Jerry does a really nice job doing just that. Those are the three things that I would point out on Jerry.
That's sweet, Ken. Thank you.
Oh, you're welcome. I think I'm going to leave it there.
Yeah.
Jerry and Ken, it's been such a fantastic hour. Huge thank you.