So I'm excited to have Rollins here today. You know, if you, if you go back and you look at the historical performance of, of this company, I mean, if you go back pre-pandemic, like the last 20 years, organic growth has kind of been, you know, 4%-5% range-ish, for a long, long time. And what we've seen over the last couple of years is actually that's accelerated. And I think that that intuitively makes sense to a lot of investors, right? COVID, pandemic, work from home, halo, bugs, everyone's noticing spiders on the wall, people dropping crumbs on the floor, blah, blah, blah, like, kids are all at home. So, like, this work from home halo, that makes sense. But it's 4 years later, and that growth is still way above the historical average.
I mean, what we've seen is a structural step up in organic growth at the company. I don't know how well this is understood. I think people can look at the numbers and, and see it, but to really, like, step back and look at what's happened for the last 20 years and what's happening now, something's happening. I also think it's interesting, like, what industries do you know that are out there that have been around for 100 years, and like now, "Okay, we've been around for 100 years, now is when the organic growth starts to... Like, now is when we're entering our growth phase"? I think that's interesting, right? It's a, it's an interesting dynamic. I think it's an interesting time for the company. We're pleased to have with us this morning, CFO Ken Krause.
Ken's been a great addition to the team for the last two years, came over from MSA Safety. I think the analysts that covered MSA Safety regarded that as a pretty big loss for the company. So their loss was Rollins's gain. And yeah, I mean, I'll leave it there. Thank you very much for joining us this morning, Ken. After this, we'll have a breakout in a different room. But good morning, Ken.
Good morning. Be careful not to step off the back of the stage. Good morning, everybody. Great to be here. Thanks for the introductory comments there, Tim. It is such a great industry. It's great to be here with you all again here at the William Blair Conference to speak about Rollins and all the fantastic things the team is doing to really execute so well across our business. Just a couple of comments here on the forward-looking statements. We're all aware of the forward-looking statements, but also the Non-GAAP measures that I'll reference throughout the day. We've got reconciliations, both in our deck as well as on our webpage. Starting with a look at our focus, you know, we compete in a very attractive, highly fragmented, large and growing space.
Some measure it as $20+ billion, and it's got exceptional secular tailwinds that continue to propel us forward. Our focus is really protecting the health, the property, and the brands of our customer. And over the last two decades, we've seen exceptional results. We've compounded revenue at 7%, we've compounded earnings at roughly two times that level, at 14%. Operating cash flow is compounded at 18%, and our average annual total shareholder return has been approximately 21%. If you go back to our Investor Day deck, we had an Investor Day 2-3 weeks ago. Lyndsey Burton, who's here with me, did an exceptional job putting together material and helping shepherd the team. But if you go back to the Investor Day materials, see we've far outpaced the broader industry and the S&P 500 over the same time frame.
Not only have we consistently compounded revenue and earnings and provided exceptional returns for our shareholders, but we've done it through various economic cycles. You often get the question, "Well, how has the business or how did the business perform during the great financial crisis, or during the industrial slowdown in 2015, when oil went from roughly $125 a barrel to under $25 a barrel, or more recently during the COVID pandemic?" And you can see, no matter what economic cycle you look at over the last two decades, we've seen exceptional growth. During the great financial crisis, we've seen revenue compounding and growing at 6%, with earnings growing at a multiple of that.
We've seen during the industrial slowdown, another period where we saw 6% growth, and as Tim so well indicated and pointed out, during COVID, we've seen a step up in our growth rate. And we'll talk about that here as we go throughout the course of the day, but we certainly saw a step up, and we've continued to see good, robust level of organic growth, but also M&A growth as we look across the portfolio. We've done a significant amount of acquisitions over the last 5-6 years, and those acquisitions have helped catalyze significant growth and a step change in our overall growth profile.
When we look at our capital deployment, not only do we see a really strong business model when we think about revenue growth and earnings growth, but we've also driven exceptional cash flow improvement. And so over the last 5 years, our cash flow has compounded, our free cash flow has compounded at roughly 13%. I think last year, for the full year, our cash, free cash flow was up almost 14%. So we continue to see robust levels of cash flow. We enjoy and we benefit from a business model where we oftentimes have negative working capital. Customers oftentimes pay us in advance of us providing the service and this essential service to our customers. And in addition, it's not a capital-intensive business. It doesn't take a lot of CapEx to really grow your business.
Really, it's about trucks, it's about materials and supplies, and we always talk about our focus on people. It's really a people-based business. But when we look at the last 5 years, we've generated a significant amount of free cash flow. We've reinvested roughly 40% or 50% of that cash flow in M&A, about $1.2 billion in M&A. We've also returned a significant amount of that capital to our shareholders through dividends, as well as share repurchase. If we go back to the fourth quarter of 2022, I joined in the summer of 2022. After joining, one of the first steps we did was to change our dividend policy. We had been paying special dividends for a number of years.
What we started to do in the fourth quarter of 2022 was price in the special dividend to a regular dividend. So since 2022, our dividend is up, as you see here on the slide, about 45%. And so we've seen a robust improvement, and we have planned to continue to increase that dividend as cash flow continues to compound. In addition, late last year in the, in the third quarter, in September of 2023, we participated in a secondary offering, and we bought back $300 million of our stock at roughly $32 or $34 a share. That has an internal rate of return of almost 40%, and so we've seen significant returns on share repurchase in addition to the other aspects of our capital allocation strategy.
When we think about our growth both today but also into the future, we look at our strategy through a three-pronged focus. And first and foremost, it's organic revenue growth. How do we continue to drive organic revenue, whether it be through the Orkin brand, which is so prominent and well known, or through some of our specialty brands? How do we capitalize and continue to compound and grow our business from an organic perspective? We benefit from having a unique compensation structure where our technicians, our frontline employees, are paid on growth. They're just not paid a fixed salary, but they're actually paid on the growth of our business. So oftentimes, they're focused on cross-selling.
They're focused on not only selling the service and taking care of the customer, on the service that they're contracted with, but they're also looking at how we can continue to expand the share of wallet with our existing customer base. We also continue to look at opportunities to continue to expand that portfolio, expand into new services. We have a very robust level of services with our customer. Not only do we provide the traditional pest control, but we also provide termite control. We provide a number of what we call shots on goal, when we look at the residential consumer. But we also have continued to step up our focus on commercial. Commercial is an incredibly attractive business for us. We've seen organic growth inflect higher in that business as well.
I think in the first quarter, we saw roughly 10% organic growth in commercial. That's followed from last year of roughly the same pace of growth in commercial. So we continue to see that, and we also have international expansion opportunities as we continue to build out our footprint in the UK, Singapore, Australia, and other international regions. We're focused on continuing to deploy capital. Last year, we deployed roughly $400 million of capital for M&A. In the first quarter of this year, we deployed roughly $50 million. I think we deployed—we acquired roughly 30 or 40 businesses in the first quarter of this year. So we continue to drive growth in this very fragmented market. When we transition in to look at margins, we're focused on both gross margin, but also SG&A.
From a gross margin perspective, we've stepped up our focus on pricing the last couple of years. Our focus is to get CPI plus pricing. We feel like we have an essential service, and it's also a very small portion of our customers' budget. So as a result of that, we see pricing opportunities in the portfolio. We also are continuing to look at SG&A. As Tim had indicated, I joined in the summer of 2022. We've continued to add a significant amount of new talent and new resources. We went through our first restructuring program last summer in almost a decade or two, where we unfortunately had to make changes to the organization.
We brought in a number of new folks and new people that are driving valuable change across the portfolio and across the back office. If you benchmark our SG&A, you'll see that our SG&A is a bit higher than most route-based businesses. It's certainly higher than industrial businesses. So we see an opportunity to continue to take cost out of the model, but also to reinvest some of those savings back into sales and growth initiatives in this very attractive market that we continue to compete in. When we look at the first quarter of the year here, we saw roughly 14% growth. Seven and a half percent of that 14% was organic growth. We've talked about a target of 7%-8% this year for organic growth.
As Tim indicated, that's stepped up from pre-COVID levels, and we're about 4 years post-COVID. We continue to see very healthy levels of demand on the organic side. We also continue to focus on driving earnings growth, earnings growth that outpaces revenue growth. And as you can see here, earnings grew at roughly 18%. Operating margins were up, adjusted operating margins were up 130 basis points in the first quarter alone as we focus on driving improvements in pricing, but also back-office modernization. And free cash flow. Free cash flow grew at almost 30% in the first quarter, converting at about 127%, converting net income at about 127%. So a couple of key takeaways here as we transition into the conversation. First and foremost, we're a scale player.
Our focus is North America, but we certainly do have other markets that we continue to compete in and continue to invest in. But we have distinct competitive advantages that really enable us to extend and continue to grow our, our position with our customers. We operate in a very large, very fragmented, and growing market. This business continues to grow, and we see demand, we see opportunities for the market to continue to grow higher from secular tailwinds. Secular tailwinds like weather, we're seeing much warmer climates than we have historically. We're seeing relocation into southern regions. That certainly has helped us, amongst a number of other factors. We continue to invest for growth.
We're focused on organic growth, but we also are focused on buying good businesses, businesses that continue to accrete to our organic growth, much like the Fox acquisition from a year ago. We continue to focus on continuous improvement. You know, good is not good enough at Rollins. Our focus is to continue to get top quartile and top decile performance, and we feel like our strategy provides us an opportunity to continue to deliver those types of improvements. And then last, but certainly not least, we talk about ourselves very much and describe ourselves very much as a compounder. We focus on compounding revenue, compounding earnings, and compounding cash flow. With that, I'll turn it over to Tim for any questions that we might want to walk through.
Yeah, thanks, Ken. You mind if I pop up there-
Sure.
Since you have the mic? All right, 15 minutes to hit you with questions. Let's go. I think where I'd like to start is on the commercial pest business that you mentioned. Because you, you talk about, you know, 10% organic growth in the most recent quarter, 10% organic growth last year. But if you look back, again, this historical context, like, if you look back at that 4%-5% growth that Rollins generated for a long time, it's actually like residential was slightly above commercial. 'Cause there's a penetration story in residential that there's not in commercial. You're required by law to have commercial pests. So I always thought of commercial as like the higher maybe return business. We, we tend to see valuations in commercial go for more, right?
Commercial pest is a very valuable business, and there's a scarcity value, probably. But growth slightly slower. That's not happening now. I mean, commercial is firing on all cylinders. It's also firing on all cylinders, honestly, at Ecolab. Their commercial pest business is doing awesome. And then there may be some others in the space that are not doing so well. So is this a market thing? Is there something happening in the market that I'm not aware of on the commercial side that's helping fuel this growth? Or is it a co-competitive thing where y'all have just put in, like, a lot of investment in the space? Just curious on why you think this growth. Help us understand this a little bit better.
Yeah, to answer the question, because the commercial business is such an important part of our growth story as we think about 2024 and beyond. It's, as you indicated, an incredibly attractive market. We see others that are performing exceptionally well as well, and just like we are. So it continues to be a very attractive market. But maybe what we've done over the last couple of years is provide a disproportionate focus on commercial. And so if you go back a week or two ago to our Investor Day, there's a slide in there that talks about our focus on commercial. For so many years, commercial was just part of the residential branch. It was just part of everything we did. There was really no focus on commercial. There was no ownership at a more senior level in the organization.
It was managed at the branch level or maybe a level or 2 above that. Over the last 3 or 4 years, what we've started to do is to take a closer look at that with more focus in the last, say, 1-2 years. Scott Weaver was put in charge of that recently, a long-term employee of Rollins, but also a long-term individual that's been in the industry for decades, and so tremendous experience. What we've started to do, we put him in charge. We started to pull out our commercial business from our residential business and provide more focus, and we've also provided more investment. We've added more feet on the street, more resources, more sales folks.
When you look back over some of our transcripts the last several quarters, we've talked about all the investment we're making in sales and marketing in commercial. And so those investments, that focus on leadership, is really helping us deliver even more returns. And we're really, quite frankly, I think, just getting started. When you look at the journey, you know, if you look at it through the lens of a baseball game, in a nine-inning baseball game, we're probably a third of the way to the through that, through the course of that game. We've provided the focus, we've provided the emphasis, but we're continuing to start to pull out and continue to pull out that business from other regions to provide the focus and the growth.
We're using data analytics to start to target certain markets where we see bigger opportunities. And so we're pretty excited about all the opportunities we have ahead of us for the commercial space.
That's very exciting. I knew about some of that stuff that you guys touched on at the Investor Day about standing up the commercial business. I think it's interesting, too, not only will that benefit commercial, but I gotta think, you know, you've got a branch with a branch manager who's maybe spending 25% of their time managing the commercial folks. Now they don't have to.
That's right.
They can spend 100% of the time on the residential.
That's exactly right. And you look at the residential side. You've got two aspects to the residential side. Oftentimes, people parse out termite from residential pest control. I kind of look at it all in the same, but what I parse out is ancillary business.
And so when you look at the residence and the residential customer, oftentimes the termite is that first step into that residential customer. If you build a new home, and you're in a region like Georgia or Florida or Texas or a number of regions across the country, you've got to have some termite protection on your property. That's oftentimes the first step in, and then we continue to go in, and we have. If you go back to our Investor Day slide, there's nine shots on goal. There's everything from insulation to encapsulation, a crawl space, to a number of other services that we offer our customer. And we've consistently talked about having, on average, less than two services for every customer. When you have nine shots on goal, that's a really low penetration rate.
So if we can free up our resources and provide the focus at the branch level, we think there's an opportunity to continue to grow that share of wallet with our customers and also expand our customer base. Another aspect of, and I'm sure we'll get there, is our branch strategy. You know, looking at our branches and how we organize our branches, our branch of the future, we're doing a lot on that side, too. But you're right. I mean, residential business is incredibly valuable and should benefit from this focus as well.
Just sticking on that topic for just a sec, 'cause I definitely want to talk about the branch strategy, which is something that Lyndsey and I were talking about the other day. By the way, I didn't mention at the beginning, several upgrades of the company. Also, Lyndsey, Byrd Miller, who restaffed, came over from Home Depot, right? And has significantly, already significantly improved the investor relations at Rollins, too. So they're making upgrades across the board these days. But back to this, before we go to branch strategy, I want to talk about or I wanted to ask, why 9 shots on goal. I think Jerry says 9 bites at the apple.
Yeah.
However you want to put it.
Jerry's from the South, and he doesn't watch hockey as much as you and I do.
That's where that comes from.
I'm from Pittsburgh, actually, originally, and so, so yeah, that's where it came from.
That's where it came from. Some of the best hockey I've watched in a long time, by the way.
Yeah.
This hockey playoffs-
Oh, yeah
... has been amazing. So, what one of those shots on goal do you think is low, that you think there's a, like, real... If you were, if you were to pick one that stands out as, like, this one we really could do better at and we think that we will, or you think five years from now, the penetration rate would look really different. If you were gonna pick one, which one do you think that that would be?
It's hard to say that there's one, but if you push me-
That's fair enough.
... if you, if you push me, I mean, that's the benefit of the business. It's so broad, and there's so many tools in the toolbox. There's so many opportunities, but, you know, you look at mosquito, like-
Yeah
... you look at the mosquito business, and people talk about that all the time. Mosquito business continues to grow at a very healthy pace. And mosquitoes are incredibly dangerous. The blood-borne illness that they carry, if you don't understand, do some research, you'll see it. It's a really, it's a horrible pest. So if you want to be outside in Atlanta, Georgia, in the summer, you need to have mosquito. Or if you, any part of the country, quite frankly, you see it—you just see it continuing to expand. So that mosquito business is incredibly attractive. The recurring revenue on it is incredibly attractive.
But then, if I pivot, and I go to the other side of it, you know, we've seen exceptional growth in insulation, you know, pest-free insulation. Oftentimes, you get into an attic, and there's pests. Well, you go in, and you put new types of insulation into that attic, and we're active with doing that, and we're seeing great demand on that as well. So, it's really, you know, it's across the spectrum where we see the opportunities to continue to grow the business.
If I look at, like, Terminix, how they did it, is they would cross-sell insulation and encapsulation you know, crawl spaces and attics. They would cross-sell that through their termite folks, so that was like a termite cross-sell.
Is this insulation a termite cross-sell, or do you guys approach it differently? Is it-
Yes-
Any pest control operator can cross-sell that.
Yeah, that's a good question. So the way it's reported, when you look at the financials, is that it is in the termite and ancillary business.
Yep.
And so just because termite can be... You know, I think the reason and the rationale between that, for that is because sometimes termite can be called one time because you've got this go-in, pre-treat service, and sometimes you don't get that customer. You have to go back and capture that customer and get the recurring work on that termite. And so sometimes the insulation can be one time, but that doesn't mean that just termite techs are selling insulation. We're seeing that insulation growth from residential techs, in addition to just termite techs that are selling that.
Got it.
Yep.
Maybe we could touch on the branch strategy while we got five minutes left here. And of course, this was meant to be a fireside, but, you know, please join us at the breakout afterwards if you guys all have questions as well. But the branch strategy. Could you talk a little bit about what you meant by that? I just,
Yeah.
I'll leave it there and let you go.
Yeah, when I joined, you know, Jerry talked to me a little bit about, you know, looking at the business. And when we look at the business, when a branch gets to a certain level, what we see is oftentimes it will slow in growth because your penetration increases significantly, and you're not able to expand your routes. You're focused on taking care of the customers that are in your route system. And so, what we've started to embark upon is this strategy where we, when branches get to a certain level, call it $7-$8 million that we're running through a branch, we'll split it. And what that does is it opens up an opportunity to extend our reach into new communities. You know, oftentimes when people go online and search for pest control, the location matters.
And so, if you can continue to expand your footprint and focus on that, you can reach a wider customer set and grow. There was a case study that we put out a few weeks ago that showed, I think it was the Michigan-Ohio region, where we split it, and growth accelerated to double digits. And so it's interesting. It's not uncommon either. I mean, when you look at other businesses we buy, oftentimes, when a business gets to a certain level, their growth will stall. It's just hard to break through that ceiling of $8-$10 million. And so what we see oftentimes is they'll come to us and say, "Hey, we're looking to partner with you to help grow our business. We know you take care of our brands. We know you take care of our people.
You're an acquirer of choice, and so we want to sell our business to you." And so oftentimes, we're the acquirer of choice when it comes to those smaller businesses and also some of the larger businesses. But I tell you that because it's not uncommon in our business, but other businesses to see growth stall when it gets to a certain level. And if you split it, you create more of an entrepreneurial spirit, culture, and broader access to customers. And so we've continued to invest and execute on that branch strategy.
I think this is really important because there are others out there that are taking the exact opposite strategy. And so, we talked to a lot of folks in the pest space that utilize this branch-splitting technique. I've had others say $5 million.
Yeah.
They split at $5 million, but it almost seems like an industry adage that you split branches to drive growth-
Yeah
For what? For various reasons, whether it's reaching the customer. I thought that that was an interesting comment, reaching the customer.
So you think from a digital marketing perspective, there's a benefit to splitting the branch.
It's not just the growth aspect.
Yeah, there definitely is. And, you know, it's. I look at it. This is a good point, Tim. I look at it, the difference between a growth mindset and a value mindset. You know, it's easy to sit up here as a CFO and say, larger operations, you can scale the business, and you've got less back office supporting all of that revenue. And, I believe there's an opportunity to do that, but I don't know that it's at the branch level. I think when you look at Rollins, the opportunity is more in our home office and how we service our brands in the field.
And so we can look at our corporate costs more closely, as opposed to the costs that are in the field, which I think are more in line with driving growth with for our customers, then that's where I think we should focus our resources.
Yeah, I mean, that's interesting. You know, it's easy for me to look at your SG&A as a percentage of sales and be like: Oh, yeah, it's 500 basis points higher than your typical route-based services business, or 200 basis points-
Yeah
... whatever you said at Investor Day.
Yeah, yeah.
It's higher, but I actually don't know what that means.
Okay.
Like, when you look at, when you peel back the onion, and you look at how... Well, how much is S? How much is G?
Yeah.
How much is A? Where are you high relative to the competitors? What, what would be your comment on that? Where do you think the most of the opportunity is-
Yeah
... if you're willing to say, like?
Yeah, it's hard to put a fine point on it because I can't see specifically into a competitor on their S, their G, and their A-
Yeah, it's not public.
... on a route-based business. This is not public. But I know from running businesses and looking at businesses, you know, we're spending. I think we talk about 20% of sales and sort of back office cost, 18%-20% of sales. And so if we can move the needle by just a little bit, it's meaningful. And so that's. I just think from my history, from benchmarking, look at other businesses, looking at other pest control businesses, there's an opportunity to maybe become more efficient in the back office. I'm not saying that this is a 5 or a 100 or a 1,000 basis point opportunity, but there's opportunities to drive improvements in the back office, and in turn, help drive the growth in earnings.
That's contributing to the fact that you raised your incremental margin target from 25-30 to 30-35. I know pricing is a component, but perhaps that back-end opportunity is the other piece to that puzzle.
Yeah, there is. I mean, the pricing is certainly a component, and our focus on pricing, but also back office and managing back-office costs, managing our supply chain, you know, our direct materials, our cost of services is also an opportunity. So we're looking at all opportunities across the P&L to drive that incremental margin higher. It was good to see it come in at 29% in the first quarter. I think for the full year, it was in the high 20s last year. So we see it. It's within reach and an opportunity to get to that 30% clip as we think about the future.
Got it. Well, Ken, thanks so much for joining us. We'll see you all at the breakout session. Thank you.