We're going to get started here. Thank you everybody for joining us today and on the webcast. My name's Tim Mulrooney, I'm the research analyst here at William Blair, that covers Rollins. I'm required to inform you that for a complete list of research disclosures and conflicts of interest, to visit our website at williamblair.com. I'm very excited to have Rollins here. We have a lot of folks. We got the CEO, Jerry. Thanks for coming all the way out. I appreciate it. CFO, Ken Krause. Chief Accounting Officer, Will Harkins, who was recently named as the incoming CFO, very excited, of course, Head of IR, Lyndsey Burton. Thank you all for joining today. We've covered Rollins for a long time, it's no secret that I think that the pest control industry is very interesting and exciting and attractive market from a long-term perspective.
I think of Rollins as a high-quality, long-term compounder of free cash flow, and I think that's borne out in the data. Every once in a while, you get these situations where there's a weather issue. I remember this happened in the second quarter of 2019. Spring didn't come as fast as expected, but of course, you ramp up on investments ahead of time because you don't want to be caught not having the people in place. You ramp up in investments, and then spring doesn't come, and the quarter's a little bit below what you expect, and these high multiple stocks, they'll pull back on even minor misses. We've had two quarters of a row here, where they've gone below their organic growth target because of weather-related issues, and the stock has pulled back.
We'll dig into that as in addition to some other potential reasons why the stock's pulled back. I just think it's a very interesting time to look at the company, because, from my perspective, these are the types of situations that creates opportunity. This is going to be more of a fireside chat, but I asked Jerry, since this is a generalist conference, to spend just a couple of minutes providing an overview on the business, and then we can get into a conversation.
Sure.
All right, thanks.
Thank you, Tim.
Yeah.
Nice job. Well, good afternoon, everybody. Thanks for coming and hearing our story. Here at Rollins, we have a fantastic story to tell. Recently, just a couple of weeks ago, we were in New York doing our every other year Investor Day. Very successful event. Hopefully, in preparation for this, if you have some time, go pull those slides. To prevent us from going back through all those details, you can really get caught up to speed very quickly by looking at that. As we've talked about our past, we also talked about the present, and then we also continued to reinforce how optimistic and how much opportunity that we have across Rollins. For those of you who don't know, Rollins is a pure play pest control company. We operate throughout North America. We have operations also in the United Kingdom, Singapore, and in Australia.
When I talk about pest control, I mean commercial, residential, as well as termite and other ancillary services. We stay pretty focused on things that are inside or around the home or business, that are direct pest control or directly related to pest control. For example, things like exclusion, which could involve light construction work that may keep rodents or wildlife or other animals, or even pests from entering your home in the first place. The field of pest control covers all of that. We're in great market. We operate in great markets. The demand for our services has been there and, I suspect, always will be. If you've studied us for a long time, the legend in our company is Gary Rollins. Obviously, thus, the Rollins diamond that you see here. Gary Rollins has a saying, actually two sayings I think I'll use.
He says, first and foremost, "Roaches and rats don't read The Wall Street Journal." They don't know when the economy is struggling or what's going on, because they're going to keep coming. Then he also said, "Hey, the roaches and the other pests survived the Ice Age." They're going to outlast us and everything that we do. There's always going to be this need in the future for pest control. It's just one of the fantastic attributes of our industry. When you couple that with people don't want to live with pests anymore, and our tolerance levels as humans of our living conditions over the last, call it 100 years, has changed dramatically about what we're willing to share our living space with. These are examples of some, but not all, of the tailwinds that we continue to have and success at Rollins.
I'm going to turn it back over to Tim. He's got some great questions. I think you guys are going to have some great questions, that I think it'd be a better use of our time to talk about, that give you some greater context and detail, aside from what may be obvious to you through our Investor Day or other contexts. Tim?
Thank you Jerry, thanks for the overview too. That was great. I wanted to start out, maybe we could start out with the big news that came out last week, Ken. You announced your decision to leave and pursue another opportunity. I think that that's had an impact on the stock. I alluded to the weather-related issues, but I think this is another issue that's maybe impacting the stock, which I guess is a compliment to your tenure here at Rollins, but I was hoping you could provide a little more detail around your decision to leave, where you're going, et cetera.
Sure, Tim. Thanks for the question. Honored to be here with Rollins and continue to represent the company and work with Will and help transition him into the role. Super excited for Will and all that the company has ahead of it. As you indicated, I will be leaving the company on June 15th. I have a transition arrangement in place where I'm going to help Will from time to time, just from a consulting perspective. The opportunity that presented itself was one that I just couldn't pass up. It's an AI data center IPO that we're working through. Came to me very quickly and worked through the process and really excited about the opportunity to go over there and make a big impact and really help that management team take that story public and really grow it and help it reach its full potential.
Nonetheless, also very heavily invested in Rollins. Rollins is a phenomenal business. Tim mentions the fact that the stock was down 15% or 20% in the last week. What I would say is this company has grown for 100 straight quarters. Ken Krause has not been here for 100 straight quarters. This business is going to be a great business regardless of any individual and their part in the process. I continue to be a shareholder. I'll continue to be one as I think about the foreseeable future. It's a business that I wouldn't have any concern investing in. It's a great business with a great amount of people in a market that it's just really hard to find. The growth, the margins, the cash flow, just a great business.
Yeah. Thanks, Ken. I think that's a really good point, too. You and Jerry, when did you become CEO, Jerry? June 2023?
Three and a half years ago.
Three and a half years ago.
Adding a little color to that, it was about four years ago that Ken and I started talking because I was still the Chief Operating Officer of Rollins at the time. I worked for Gary, and most people didn't know this, but I was Gary's direct report, but all those functions had reported to me for a couple of years leading up to my transition to CEO. Ken and I started talking about this business, and we had a lot of meetings and a lot of discussions at my office about what we could do together.
Right.
Ken has been an absolutely fantastic partner. I'm very fortunate to have had him for as long as I have. I think back to how far we've come, and we have done a lot together, and I'm very appreciative for that. At the same time, when I look at what's happened with the stock price and what's gone on in the market, I sort of scratch my head. I'm like, this is odd. This is odd to me. As an insider, it's odd to me, I guess, because I know the whole story. I know everything about the team as an insider. Giving a little more color on that. I first met Will here about 18 months ago. Will had a great job working for a great company, and we were looking to build bench strength and add to our team. I met Will.
The first time I met Will, I walked out of that meeting because Ken told me, "You got to meet this guy." Right? I walked out of that meeting, I said, "He's going to be a CFO someday. He'll either do it where he's at.
Yep.
He'll do it if we can attract him to Rollins, he'll be a CFO here someday.
Yep.
He's going to be a CFO somewhere someday down the line. I just knew that about you, Will, when I first met you. We continued our conversations. You were gainfully employed and had a good opportunity. It took us a few months to get the Rollins story and share our vision and create alignment. From the get-go 18 months ago, we created alignment with Will. Here's where we're going. Here's how we see the business. Here's how we view the business long term. Will got behind that story, believed in it, and what we were coming in and took that leap with us.
I didn't think this was going to happen quite this soon with Ken, the reality is it did. Over the years, we built a great team. One thing that Ken has done exceptionally, that a lot of you see the external stuff when we talk about the capital structure and other things that he's brought to the table. What's probably not as evident to most people is the quality of the team we've built. Got Andrew Light in tax.
Brady Knudsen in the treasury side. We've brought in Lyndsey. You've continued to, Will, add people, add talent to the portfolio. It's a night and day difference today—
Right.
Compared to what it was. I think back when Ken started, you and I used to give me PowerPoint presentations every 90 days about your observations, the relationships that you were building, the things that you saw, the opportunities that you saw. It took us about a year before we really started going forward and doing something. I look at this transition, I'm like, "He's got a year head start."
He's already out ahead. He's come in, he's been here over a year, he's got the relationships. He already sees the vision, has a really strong foundation to work from that Ken and team have built. To me, I look at this like, this should be just one of the easiest transitions we would ever make. Sometimes the market maybe reads more into it than what I—
The market always reads more into everything.
Okay.
They shoot first, they ask questions later. The point I think that you're making is that there was an active recruitment of Will. There was an intention to eventually get Will into the CFO role. Maybe it happened a little faster than expected, this was all basically part of the design. Also, I think Ken, you've done a lot since you took over alongside Jerry. You got Rollins the investment-grade credit, and you organized these secondaries, and you smoothed out the dividend, and you built out this great finance team. It's wonderful working with Lyndsey. The professionalism of the finance department is incredible. There's so much that you've done, but you're not out there killing bugs.
No.
Are you driving the 7%-8% organic?
I'm not.
How many sales do you make?
I haven't killed any bugs lately.
Right?
Well, I made a few sales.
Okay.
My own home is protected by Northwest and Orkin. I have made a few internally, but those are inside sales.
Yeah. Those, you don't get commission on those.
You don't get commission on those.
On top of it, Tim, I look at that, and Ken, when you and I came together four years ago, almost four years ago, we had this great mix of, I'm an insider, I know the business.
Right.
I've grown up around the business. You came in with this outside perspective that I didn't have, and you say, "We could do this. Well, what if we did this?" Right? It was very complimentary.
Very much.
in that regard. I get the same thing with this guy. I get the same thing with Will.
Right.
Background at companies like Coca-Cola. He's been here a year.
He's not ingrained. He's also going to bring that perspective, and I think at an accelerated rate, right? His learning curve is going to be quite a bit less. I'm excited about it.
I am as well.
Ken you have done—
Yeah
Wonderful things. I want to thank you for that.
Thank you.
At the same time, congratulations, Will. Look forward to partnering—
Thank you.
With you in the future.
We're talking over Will's head here quite a bit. Maybe Will can add a little bit. Go jump in there.
Yeah. That's right.
Yeah.
I'm trying not to take it personally that we've gone down so much in the last week since I've been announced.
Do not.
I'm really trying not to take that personally. I won't. I thank you for the good words. I knew when I joined a year ago, I did not know it was going to be June of 2026, but I certainly appreciated at that time all the conversation we had around the fact that this was the next step for me, and I saw the opportunity at Rollins. I see the value of Rollins. Never thought I was going to end up in the pest control industry.
Sure.
I'm not an entomologist. I would not have felt that naturally. When you look at this business, it's a great business. We just had the Investor Day. I think a couple of questions that we have received in every single conversation has been, well, gosh, when Ken leaves, is there going to be some shift in strategy? Is there going to be some change in the targets that you put out there? That would assume that Ken was doing all of that, like we said, on his own. The finance leadership team that has been developed, we have worked tirelessly to align on this. There's not going to be a big shift in what we've already communicated and what we see as the opportunity in the future. I think that's great. We will start—
That alignment was created in the beginning.
That's right.
That's right.
From the very beginning.
Yeah. 7%-8% organic growth, long-term incrementals are 30%, 25%-30% short-term, 30%-35%. You see no reason to stray from any of that?
No.
That's a strategy is bigger than one person.
That's right. Of course, there are going to be times, like you saw in the first quarter where we didn't hit some of those targets. That's going to happen to any business.
Right.
Long term, those targets are absolutely intact and in what we see for the future of the business.
Yep. Got it. Okay. I guess the last thing to cover on this topic would be, sometimes when CFOs leave, it's because the market is worried that there's some sort of accounting issue or some other thing. That's probably why the market dropped at the initial days. They're like, "Oh, is there some concern over accounting issues?" My reaction to that is, well, probably the Chief Accounting Officer is not stepping into the CFO role in that scenario.
That's exactly right. Let's be very clear with everybody. No accounting issues, no financial reporting disagreements, anything like that. I would not be the one stepping in. If so, I'd be the one that would be leaving.
Also leaving.
Yeah, absolutely. That is 100% not the case here. We have a great team. I thank you for acknowledging them as well. We built out a great accounting team. They continue to do good work for us. No issues on that front at all.
Well, that's great. Will, I'm very excited to work with you.
Thank you. Same here.
Yep. Okay. Let's move on to some other stuff. Growth was five-point-something in the fourth quarter. There was some weather-related issue. It was 6.6% in the first quarter. You showed that acceleration, though, still below your 7%-8% target. Our pest index didn't show significant movement upward in April, but there's still two months left in the quarter. Curious how you're thinking about the long-term or the organic growth targets for the full year.
You want to?
Yeah. I think when you look at the business, I'll start, and I'll ask Will to comment, too, but what I said at the Investor Day was through the first four months of the year, we were growing six and a half or so percent.
Yeah.
We had a tough January, a tough start. The business remains intact. You're going to have a quarter here that's up, down, but long-term, this is a 7%-8% grower. I don't have any doubt in that, especially in the U.S. International markets might be challenged from time to time, and they might be a headwind to our overall growth.
Yeah.
The U.S. market, where we're heavily focused, is going to continue to grow at that 7%-8% growth rate.
Yeah. I agree. There's no secret about why certain of your large strategic competitors have invested so much money in the United States over the last decade, right?
Yeah.
They know where the growth is.
Right.
They know where the opportunity is.
They know.
You still see that 7%-8% as a good thing to anchor to. We talked about shooting first and asking questions later, why you shouldn't take offense. Is because also when Rollins' organic growth slowed down, you heard others that maybe don't understand the industry as well, or others just coming out of the woodwork saying, "Oh, well, this is because of some change in the competitive dynamic. It's not weather-related." What do you guys say to that? I'd be very interested in, Jerry, too, how you think about that. Do you run into one company in every market a lot, or just how do you think about this competitive conversation?
Yeah. We have so many competitors. At the same time, we have all this competition, but yet so much of the market is still underserved, especially on the residential side, when so few U.S. households still take residential pest control on a recurring basis. There's tons of opportunity out there. If I had to say who are the more formidable competitors out there, it's some of the large regional competitors that have been in business for 60, 70 years.
Doing very well.
They are doing well. They're the ones that we look to, and when we think about competition, we have to look at it very regionalized. That's why.
Yeah.
It's because if you're in Florida, you got these two or three that are super strong, but then at the same time, you got 3,000 others that are also there nipping at you, too. It's always been that way in this industry. Frankly, I think it always will be that way in this industry. This idea that we somehow have two or three big competitors that lock horns on things just really isn't the case.
Right.
It's further evidence amongst our brands, because we have brands that compete with Orkin in some of the same markets, and they don't even go head-to-head because there's just so much opportunity out there for all of us. We're often thinking about those regional competitors that are out there. There's really good competition out there. They're the ones that carry a lot of the weight.
Yeah. Some of those are growing quite a bit faster than some of the large ones and are run by some really good teams, and I know you know them well.
Yeah, we estimate the market penetration rate in the U.S. for residential at around 13%. Just to your point, it seems like the runway is significant, and I think that's up from 10% a decade or so ago. When you're talking about 85 million homes, 3%—
The rate of home growth.
Is like a serious—
Yeah.
Is there any reason that you don't think that 13% could go to 16% over the next decade?
Absolutely not. I want it to go to 20%.
All right. Yep. Okay. Things change. One thing that we're seeing changing right now is the digital channel. You got AI in here with the AI overview that's maybe impacting digital leads a little bit and maybe impacting your competitors more than you because of the way you go to market. Can you just talk a little bit about, A, how you go to market differently than your competitors, and B, more importantly, what you're seeing in terms of changes in the digital channel, and is that impacting your business?
Absolutely. The changes in the digital channel have impacted our business. It's not all necessarily on the negative side. For example, we can drive efficiencies in a sales model if leads are softer and it appears demand's less, but the quality of those leads and our close rate and the long-term value, because you're retaining those higher- quality leads for a longer period of time, you get a better return on your ad spend. Right? That's not necessarily all bad. You can't just look at one number and say what's going on with leads. You get a lot of leads, that's a lot of window shoppers, tire kickers, people that are just curious that may not be real buyers. That puts noise in your system.
That takes efficiency out of our call center operations for them to be able to be as efficient as they could. If by driving higher- quality leads, we can do that. Our marketing team has done a really good job making adjustments to the LLM and adjustments in LSA and all those kinds of things. That's a constantly changing environment. These guys are making changes every single day, every single week, to be able to adjust to that. I think, though, more importantly, what's critical to anchor to is that performance in digital marketing, we're not a one-trick pony. We don't rely on that. We don't put all our eggs in that basket. Across our portfolio of brands, we have lots of ways to acquire customers on the residential space. We have door-to-door, real estate, real estate inspections, the home builder channel.
There's all these ways that we can continually grow the business, and we just have to look at it from a capital allocation standpoint. Where do we want to put our dollars to maximize our investment? Maybe that means that we shouldn't be putting as much in performance marketing, and we're going to get a better return in something else. We're going to make those decisions real-time because we can, and we have the levers to pull across our business to be able to do that. I think that's one of the things that differentiates us a great deal, is that we don't have to rely on that. We have lots of different channels, and I think it's what makes our organic growth more sustainable for a longer period of time, the fact that we're not just tied to one way to acquire customers.
Yeah. I think that that's probably part of this Rollins story that's maybe underappreciated or less appreciated is, I spend a lot of my time speaking to private players in the industry.
I know that a lot of them are, shoot, 80%, 90% dependent upon the digital channel.
Yeah.
I think Rollins is well below that. I think that that's an interesting part of the story. You are not a Google company in the same way that some of the others that folks might know about, that are highly dependent upon that channel. If there's better efficacy there, you're doing well, but if not, it can be a real challenge, and that challenge doesn't leak into your business in the same way.
Right. We're still focused on efficiency, and can you get the right return on the ad spend, and spend your marketing dollars wisely, to maximize long-term return on investment.
Yep. Have you had to change your marketing strategy significantly for the dawn of AI?
There's tactics within the marketing strategy that have changed. There's changes that you make. For example, Cam in Orkin marketing, we have tons of video content, and it's really important in the LLM models to be able to convert that video to text, so it can be translated over and consolidated over, and then you get cited, because video is one of the main ways they do it. We have these resources that are taking a lot of our video content and converting it also to text and have it narrated. That way, these AI models can pick that up and cite you and get you near the top. It's tricks and tools like that you can deploy to position yourself better, and those are the kinds of things that we're focused on.
Got it. Okay. That's helpful. We have a couple minutes left. I have a lot more questions that we can hit on the breakout. Is there any burning question from the audience, raise your hand, to ask? Otherwise, I'll keep going, but I just want to make sure there wasn't anything that I missed that you think is critical. Okay, great. Just wanted to make sure, because the other thing that I think is interesting is on the commercial business. That business used to grow 3%, 4% organic pre-pandemic, and then it was screaming fast 10%, but it still settled in this mid to high single-digit organic growth rate. It's clearly accelerated.
Curious what you think is the sustainability of that type of growth, because there isn't the penetration story in commercial, or there shouldn't be if everyone's complying with the law, that there is on the residential side, yet you guys have been able to show good growth there. Can you talk a little bit about the growth strategy and how you think about growth from a longer term perspective on that one?
We just see this as a huge opportunity. The competitive landscape in this side has shifted dramatically over the last 5- 10 years. You have fewer scaled players that are able to cover large commercial accounts across a large geographic territory. Whereas years ago, I can list off a number of competitors that could say that they could do that, through consolidation and other things, that has changed. When you position Orkin as this truly national brand that can service anyone anywhere in the U.S. and Canada, it offers a really nice competitive advantage in that space. Coupled with the fact that we see great opportunity. When you see in the commercial space, people want to protect their brands, they want to protect their brands through relationships with other brands that are also really good. Orkin this year celebrates 125 years in business.
Wow.
125 years Orkin has been around. When you talk about trust, that's more critical than ever on the commercial space. We see that as another great opportunity. We've been deliberately investing a little bit. We talked to it and some.
Yep.
We probably have an outpaced investment, if you look at it as a percent of revenue on residential versus commercial, which is smaller than residential.
Yeah.
We've invested significantly more in the marketing and sales teams, to drive commercial growth. That has very long-term return on investment. They're stickier customers than the residential side, lasting on average 8-10 years instead of four to five years. You get a much better return. In the short run, it's something that has affected our incremental margins, but in the long run, we know that that's an investment that will pay off for us.
Because there's a productivity ramp associated with those commercial folks, but that's something that you make these investments now, and then there's a ramp, so you should see the benefit or the leverage on that as we move through 2027.
The residential side, if we hire a home sales inspector, they can be ready to be productive in two to three months.
Yep.
On the commercial account manager—
Yeah.
That can take 6-12 months—
Okay.
Before that payoff is there and before they get really capable and competent in their jobs.
Got it. Well, thank you very much for your time today, Jerry. It was very helpful. Same with Will and Ken. Ken, congratulations—
Thank you.
On the new role. I'm really excited for you. Will, congratulations to you too.
Thank you.
Thank you very much.