Greetings, and welcome to Rollins Incorporated Q3 2021 Earnings Conference Call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Joe Calabrese. Thank you. You may begin.
Thank you. By now, you have all received a copy of the press release. However, if anyone is missing a copy and would like to receive one, please contact our office at 212-827-3746, and we will send you a release and make sure you're on the company's distribution list. There will be a replay of the call, which will begin one hour after the call and run for one week. The replay can be accessed by dialing 844-512-2921 with the passcode 13723477. Additionally, the call is being webcast at www.viavid.com, and a replay will be available for 90 days.
On the line with me today and speaking are John Wilson, Vice Chairman, Jerry Gahlhoff Jr., President and Chief Operating Officer, and Julie Bimmerman, Interim Chief Financial Officer, Vice President and Treasurer. Management will make some opening remarks, and then we'll open the line for your questions. John, would you like to begin?
Thank you, Joe, and good morning. We appreciate all of you joining us for our Third Quarter 2021 Conference Call. Julie will read our forward-looking statement and disclaimer, and then we will begin.
Our earnings release discusses our business outlook and contains certain forward-looking statements. These particular forward-looking statements and all other statements that will be made on this call, excluding historical facts, are subject to a number of risks and uncertainties, and actual results may differ materially from any statement we make today. Please refer to today's press release and our SEC filings, including the Risk Factors section of our Form 10-K for the year ended December 31, 2020 for more information and the risk factors that could cause actual results to differ.
Thank you, Julie. Before we begin, I am sure you have noticed that Gary is not on today's conference call. He is actively rehabbing from a knee replacement operation, and while he is recovering quickly, he is doing very well. He's just not in a position to physically join us today. We wish Gary well with his physical therapy and look forward to having him rejoin us on future calls. During the third quarter, we achieved some very strong business results, and Jerry will go over those with you shortly. In the interim, I wanted to share news of the latest addition to our Rollins Board of Directors. As you already know, over the previous year, we have enhanced and diversified that group with several new members. I am very pleased to announce our latest addition is Rollins President and Chief Operating Officer, Jerry Gahlhoff.
This is in recognition of his strong leadership and his deep commitment to the company's long-term success. We are proud to have Jerry serving on our board moving forward. Jerry is an important part of the Rollins leadership team and his in-depth knowledge of our business and experience gained from working in our industry since 1991 adds perspective. We're fortunate to have him assume a greater role in the direction and future of our company. Before turning the call over to Jerry, I have two items to first update you on. The first will represent a recent development in Rollins' environmental, social, and governance commitment. We take very seriously the responsibility that we have to the communities in which we work and live.
As a recent example, we're pleased to share that Rollins made an in-kind donation, originally costing $4.6 million worth of personal protective equipment or PPE items during the third quarter. Working with the Federal Emergency Management Agency and several philanthropic organizations, including the Friends of Disabled Adults and Children, the Foundation of HOPE Food Bank, as well as Cope Preparedness in Los Angeles, we donated 27 pallets or 6.8 million pieces of masks, gloves, and other items. In addition to achieving the successful execution of our strategies as well as solid business results, we also have a responsibility to the communities in which we work and live. ESG is a facet of our business that is becoming more and more important to us. We are proud to support these initiatives.
Last, as we have previously disclosed, the company has been responding to an investigation by the U.S. Securities and Exchange Commission. In accordance with accounting standard ASC 450, we have established a reserve related to this matter, which we consider immaterial. Given that the investigation is ongoing, we cannot answer any questions during our Q&A, but we remain focused on resolving this inquiry. With that, I will turn our call over to Jerry.
Thank you, John. Good morning, everybody. We're very pleased with our third quarter results. Revenue increased 11.4% to $650.2 million, compared to $583.7 million for the third quarter of last year.
Our net income totaled $93.9 million or $0.19 per diluted share, compared to $79.6 million or $0.16 per diluted share for the same period in 2020. Julie will review the GAAP and non-GAAP results shortly. Revenues for the first nine months of 2021 were $1.824 billion, an increase of 12.2% compared to $1.625 billion for the same period last year. Net income for the first nine months increased 44% to $285.3 million or $0.58 per diluted share, compared to $198.2 million or $0.40 per diluted share for the comparable period last year.
For the quarter, we experienced solid growth in all our business lines, with residential increasing 11.7% and termite presenting 15% growth over the third quarter of 2020. Additionally, commercial, excluding fumigation, delivered an impressive 10.1% growth over the third quarter last year. This is also an improvement of 7.9% growth over two years ago when we were not experiencing COVID-related shutdowns. Overall, we are pleased with our performance. Rollins remains well positioned for the remainder of the year and into 2022. Looking deeper at our operating results, we're attracting customers to all our services and brands. One area I'd like to focus on today is our continued strong growth in our wildlife service offerings. TruTech Wildlife joined the Rollins family in 2010, followed by Critter Control in 2015.
Since 2010, the business has grown 800%. Day-to-day operations of operating a wildlife control business is quite different than running a typical pest and termite business, and we are proud to have a dedicated team focused on this much-needed service. Originally concentrated in the Southeastern United States, the business has expanded across the nation as well as into Canada. With Critter Control's expansion into Canada, it's Rollins's first brand to enter an international country without acquiring another business as a platform. The wildlife division also operates a thriving franchise system. There are currently 84 franchises, with the most recent franchise launching in Mansfield, Ohio. We anticipate finishing the year with 12 new franchises, one of our strongest years in adding franchisees. We have also been fortunate to add nine former corporate employees as franchisees.
Employees who have an entrepreneurial drive and a passion for nuisance wildlife and customer service have multiple career path opportunities, be it ownership of a franchise or growth within our company. We believe there is meaningful opportunity for continued growth in our wildlife business and look forward to updating you in the quarters ahead. I'd now like to discuss Hurricane Ida. Our hearts go out to our Gulf Coast region and those that were affected by the hurricane. I must admit, we were inspired by our team in that area. They implemented an amazing plan that helped our team members and alleviate the negative impact of the storm. Ida shut down several of our branches for days, but two locations were shut down for about two weeks.
The impact to our employees in the days following the storm was far worse than the impact to our business in the quarter. Thankfully, all of our employees in the area were safe, yet they did need assistance. Through the Rollins Employee Relief Fund, we granted 137 emergency grants to impacted employees within the first week following the hurricane to enable employees to address their personal essential needs. Since then, another seven employees who endured greater hardships received full grants to address their more significant needs. Additionally, our Orkin South Central division, led by Leland Morris, quickly initiated a preparedness and mitigation plan to assist our team members. This included immediate procurement of much needed supplies for our employees and their families, such as generators, fuel, portable air conditioners, fans, water, and other essential emergency provisions that were not readily accessible to them locally.
Our team members in adjacent areas that were fortunate to avoid the brunt of Ida's force volunteered their time and energy, often after work hours, to load these supplies into box trucks and drive them to those most in need. For weeks, they continued to shuttle fuel to these employees to keep their generators up and running. This was a total team effort and we are tremendously proud of their care, compassion, and commitment to one another. In fact, we're so pleased with their effort that we plan to expand and formalize this program in other areas of the country so that we can rapidly respond in case of a natural disaster or emergency. Now let me turn the call over to Julie to discuss our financials.
Thank you, Jerry. As we measure our performance and think about how to best articulate Rollins's business in the future, along with what routine questions we receive from the investment community, we will now be presenting three additional measurements quarterly moving forward. The first is a measure we have referred to periodically, and that is EBITDA or earnings before interest, taxes, depreciation, and amortization. Due to our consistent high volume of acquisitions and hence high amortization expense related to these acquisitions, presenting EBITDA regularly will provide a clearer picture of our operations' ongoing financial performance. Think about this: Over the last three years, we have averaged 30 acquisitions per year. Next, we will begin presenting our revenue growth through both constant exchange rate and actual exchange rate.
By utilizing historical baseline revenues for acquisitions vetted through the due diligence process, we are able to include all acquisitions within the calculations, both standalone and tuck-ins. This will bring clarity and consistency to both our acquisition and our organic revenue growth measurements. Third, we'll be providing you with our free cash flow. We believe that this will properly illustrate Rollins' strong ability to generate cash. We have taken a simple approach to defining free cash flow, which is calculated as net cash provided by operating activities less purchase of equipment and property. Our hope is that these measurements will enable investors to better assess our operating performance in the future and provide a deeper view of our business. We have included GAAP to non-GAAP reconciliations on each of these metrics on our earnings press release published this morning. On to the numbers.
Our third quarter revenues of $650.2 million was an increase of 11.4% over last year. Of the 11.4% actual exchange rate revenue growth, acquisition growth was 2.2% and organic equated to 9.2%. For the constant exchange rate, the growth percentage is calculated within the hundredths of the actual exchange growth rate, therefore presented the same. For the nine months ended September 2021, revenues of $1.824 billion was an increase of 12.12% over year-to-date 2020. Of this actual exchange rate, total revenue growth of 12.2%, 2.7% was related to acquisitions and 9.5% organic growth.
The constant year-to-date exchange rate total revenue growth for 2021 equaled 11.6%. 2.7% represented acquisitions and 8.9% organic revenue growth. As Jerry pointed out, residential, commercial, and termite all grew double digits this quarter over the same quarter last year. In determining my focus for today, I decided to take Jerry's lead and discuss wildlife. Yet I'm discussing specifically company-owned wildlife operations. For the third quarter in 2021, wildlife revenues grew 24.1% over last year. In year-to-date, wildlife has presented an overall revenue growth of 27.6%. What makes this particularly impressive is that this is after their strong growth of 20.4% last year.
Similar to our residential pest control, wildlife did not feel a negative impact to revenue growth during the pandemic. Way to go to the wildlife team. Now on to our income. For the third quarter and year-to-date, we are presenting Adjusted EBITDA for comparison purposes due to the one-time super vesting of our late chairman's stock grants in the third quarter of 2020 and the impact of our gain on sale of several of our Clarke properties in the first six months of 2021. The third quarter 2021 EBITDA was $150.9 million or 8.7% over 2020 third quarter Adjusted EBITDA of $138.9 million.
Q3 2021 EPS was $0.19 per diluted share or 5.6% improvement over the 2020 third quarter adjusted EPS. For the nine months ended September 2021, our Adjusted EBITDA was $421.2 million or 22.1% over last year's Adjusted EBITDA of $344.9 million. Year-to-date 2021 adjusted EPS was $0.53 per diluted share or 26.2% over last year. For the third quarter 2021, gross margin increased to 53% or 0.4% over last year.
Strong improvements in our materials and supplies were negatively offset by high overall fleet costs, primarily from an increase in fuel of approximately $4 million over third quarter 2020 and lower vehicle gains of $900,000 compared to last year. SG&A third quarter margin increase over last year was strongly impacted by the PPE donations and the SEC accrual previously mentioned by John. Travel expenses have also increased $1.3 million in the third quarter as we have begun to lift our company travel restrictions. Amortization expenses for the third quarter 2021 increased $1.4 million due to amortization of customer contracts from multiple acquisitions. This was offset by a decrease in depreciation of $201,000 due to the sale of owned vehicles and centralizing of IT functions.
Overall, this equated to a 5.1% increase in depreciation and amortization over the third quarter 2020. Our dividends paid year-to-date 2021 was $119.7 million or an increase of 30.4% over last year. We ended the current period with $117.7 million in cash, of which $73.6 million was held by our foreign subsidiaries. This brings us to the final of our new three measurements, free cash flow.
For the third quarter of 2021, our free cash flow is $72.9 million or a decrease of 27.5% over the same quarter last year. For the nine months ended 2021, our free cash flow equals $278.9 million or 13.6% decrease over year-to-date 2020. This fluctuation occurred due to the deferral of $30.3 million in FICA taxes payable in 2020 as allowed under the CARES Act. These associated taxes were then remitted in September of 2021. We hope that the discussion of these new measurements, you will receive a greater clarity while reviewing our financial performance.
Lastly, I wanna discuss that yesterday we were extremely pleased to announce that our board has approved a 25% increase to our dividends. The quarterly dividend increased to 0.10 cents per share from 0.08 cents per share, and will be paid on December 10th, 2021 to stockholders of record at the close of business on November 10th, 2021 . Additionally, the board also approved a special dividend of 0.08 cents to be paid on December 10th, 2021 as well. The dividend increase reflects our strong performance in the first nine months of the year and underscores our financial strength, our solid capital position, and the board's confidence in our outlook for continued growth. John, I'll turn it back to you.
Thank you, Julie. We are happy to take any questions at this time.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. We ask that you please limit to one question and one follow-up. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question comes from Tim Mulrooney with William Blair. Please proceed with your question.
John, Jerry, and Julie, good morning.
Good morning, Tim.
Good morning.
Thanks for taking my questions and sending my best to Gary on a quick recovery.
Thank you.
Just two questions for me. The first one, Julie, I apologize if I missed it, but did you give organic growth by segment in the prepared remarks?
No, we did not. We just gave organic on the overall.
Is it a change in policy for the company now that you won't be providing that? That's been pretty critical in terms of us understanding how the company is performing.
At this point with our change, we're trying to give you additional clarity by giving a very clean organic and, you know, the acquisition growth numbers. We will be staying, you know, here for now.
Okay. I did wanna confirm that because I know that's been an area of focus. The organic number this quarter excludes all acquisitions, both large and bolt-on?
Yes, 100%. All acquisitions are excluded.
Okay, that's great. My next question is on margins. You know, EBITDA margin contracted, I think about 60 basis points year-over-year and a 140 basis points sequentially. Can you talk about the primary factors that caused that a 140 basis point contraction from the second quarter to the third quarter of this year? You know, I have to imagine that it's probably labor related because I don't think materials and supplies are a large enough component of your COGS to really cause this much of a headwind, but I wanted to get your thoughts on that.
I'm gonna go ahead and kick this first to Jerry, and then I'll see if I want to add anything onto that.
The biggest headwind we had, Tim, this is Jerry, in the quarter was fuel prices. Fuel expense was up very significantly. We were able to manage the labor part pretty well from a percentage of revenue. Labor wasn't as big of a deal, so we just had higher fleet expenses probably more than anything. John, what would you add to that? Anything?
Yeah. I would second the labor part. I mean, our labor increase as a percentage of revenue was less. You know, one of the ways we track it, Tim, is our expenses growing less fast than our revenue, and that's always a focus for our operations, and labor grew less than that 11% revenue increase.
Nope, that's really good color. I appreciate that. Can you remind me what percentage of your sales typically fuel represents?
Well, we don't break out the fuel specifically. We keep that buried into our fleet number, as you well know. Also think about it's not only the fuel increasing, you know, as you said, the $4 million, but we're also talking about the increase because we had fewer vehicle gains this quarter as well, just under $1 million on that as well.
I think our prepared remarks. Julie said $4 million-
Yep.
increased fuel cost, Tim. As you know, we've had an active routing and scheduling effort for, you know, for several years. With 1 million stops per month or more, without that effort and the reduced miles per stop that our field teams are achieving, it would have been worse.
Got it. Okay. All makes sense. Thank you for taking my questions.
Thanks, Tim.
Our next question comes from Mario Cortellacci with Jefferies. Please proceed with your question.
Hi, thank you for the time. Just kind of piggybacking off of the margin part of it. Maybe you can just give us a sense for how pricing is running right now. I think last quarter, you guys said that you could flex it up above the 1%-2% historical range to help offset some of the cost pressures. Is there any lag in there on the fuel side of the equation or the people or the fleet side of the equation? Or is the pricing running hot and just helping offset maybe some of the labor pressures?
You broke up a little bit on part of that. We've not taken any real extraordinary pricing action as a whole. As we talked about previously, the vast majority of our people are paid on a productivity pay plan. You know, any sort of impact to wage inflation doesn't really reflect. What we do is use our call center team and our close rates in our branches to sort of evaluate, do we have room in pricing? Then that's been a historic sort of effort that we've always looked at.
If our close rates in a particular market are trending well above the norm, then that tells us we have room for pricing increasing no matter the economic or concerns that are going on, right? Conversely, if it goes the other way, we have the same, you know, then we would take maybe a different action.
Yeah. The call center has a lot of ability to look at data real time and make those adjustments to what they're selling, how they're selling it, you know, what the demand is like, and adjusting price based on that. You know, we also did implement our annual price increase this summer, just as our core price increase that helps offset some of those costs. Certainly the fuel is certainly the most impacted component of that this past quarter.
Got it. Just more of a housekeeping issue, I guess, with the new organic growth disclosure. Are you guys gonna provide any historical so that we have some context in how things have trended? Also, I guess within the quarter, can you give us any context within how resi and commercial trended relative to the corporate average? Was it resi slowing? Is commercial slowing? Is resi continuing to pick up or commercial accelerating? Just any kind of context there would be helpful.
Well, basically, when we're getting down to the new numbers, we put these new measurements in place from this point on, and we'll be going forward. As of today, we told you how this growth relates to, you know, obviously Q3 of last year, so we gave you from that perspective. We are not planning at this point to go back and give historical numbers. Hopefully that makes sense from that standpoint.
Sure. Can you help with the resi and commercial trend within the quarter, just so that we can gauge how each is performing?
I would say this is Jerry. Residential remains strong. I mean, it's been real consistent through you know all the way from the pandemic to now. It remains strong. The commercial function appears to have completely rebounded and again is doing well. We probably see some acceleration on the termite side. There's really a lot of positive things going on in our termite and ancillary services across the board. That's been probably a more important growth driver for us in the third quarter. All are really strong and continue to trend in positive directions.
Understood. Thank you so much.
Our next question comes from Ashish Sabadra with RBC Capital Markets. Please proceed with your question.
Thanks for taking my question. Just to follow up on the resi side, I was wondering if you can talk about the sales momentum coming out of the key summer selling season. Maybe a related question is also on the retention side, how retention has been tracking, particularly again, on the resi side with the relocate, like, as people relocating post-summer as well as return to office. Thanks.
I'll jump in, and then you can add anything if you want to. On the residential side, still very strong. As we said, we were sitting there with an 11.7% increase over Q3 of last year. Just to bring you around to that, if you think about it, last summer, we still had a 10.5 increase on our resi. Residential we did not see a decline last year like many businesses did or like we did on our commercial side. The level, that double-digit increase was on top of the double-digit increase of last year. You know, from that standpoint, it is still running very strong. We have not seen any strong fluctuations on our, you know, retention this quarter.
Is there anything else, John or Jerry, you'd like to add to that?
No, frankly, Ashish, I've been a little bit surprised and pleased at our team's field team's ability to handle the load that we've put on them with the new customer influx over the summer and the increase in customers that we added, you know, over this last year. Our two primary measurements are customer sat for the near term or the immediate term, and then our customer retention is more of a lagging indicator, and both have remained relatively steady.
That's very helpful color and good to hear that. Maybe if I can just ask a question on the technology rollout. I was wondering if you could provide an update on how the phase one and two are progressing, and as well as the timing of the launch for phase three and four. Thanks.
You wanna handle that?
I can. This is Jerry. We are very heavily focused on adoption in the field of the phases that we're in and you know different operations in the field or different phases or different I guess maturity levels of adoption. You know John often describes it like a baseball game and what inning we're in and we're you know still. There's still an awful lot of upside there for us to drive utilization. With this increase that we're seeing in fuel there's a lot more you know desire to get that done and increase the adoption along the way.
We still have plenty of runway in that regard to doing that, and we're continuing to see incremental improvements, and that's what we're all about is continuous improvement and getting better all the time. We still have a long way to go.
Okay. I'll jump back to John's analogy that Jerry referred to on the baseball is we say that we're still in the early innings of the game.
The early sides of the game?
Sorry, the early innings, yes.
You must think we're playing football or something.
Well, okay, I'll go with
It's an inning. It's okay.
Yeah. What I might
Thanks.
Go ahead.
Sorry, go ahead.
What I might add to that, our field leaders have adopted a sort of a mantra of, you bought it, now utilize it. We've got a ton of technology that our IT team has done a great job in delivering to our field end users, and we've really kind of pushing the mindset if you bought it, you're paying for it, now let's use it. That's what we're really working on in 2021.
Thanks. Thanks, John, Jerry, and Julie. Thank you very much.
As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. One moment, please, while we poll for questions. Our next question comes from Michael Hoffman with Stifel. Please proceed with your question.
Thank you very much, John, Jerry, Julie, and to pass on my best to Gary. Rehab of a knee is challenging.
Yeah, we'll do.
On the organic growth, can you help us understand what's in it, as you think about if you took 9.2% and said approximately X is new customers, X is price, X is cross-selling?
It's very similar to what it was in the past. I think, just on very broad average, 1%-2% would be the price increase. Then we do say the rest is a combination of, you know, new customers with, you know, additional sales to existing customers. We don't break out that part, but just take out your price increase.
Okay. On price, you've historically had a fuel surcharge, if I remember correctly. Are you-
Michael, this is.
In the process of-
Michael, this is John. We've never added a fuel surcharge. Well, I say never. We may have at one time and found out that it really ticked our customers off. What do you do when it goes down and you have to give that back? I shouldn't say never, but we may have at one time, but we found out really quickly how that made our customers feel.
Okay. I stand corrected. How are you going to offset this inflation then?
The inflation of, fuel, additional fuel?
Yeah. Yeah.
Yeah.
You know, the fleet cost pressure, how are you gonna offset it?
Well, we'll keep pursuing the same mission we have with reducing our miles per stop, and routing our people more efficiently. As we add new customers, then we of course improve density.
Okay.
So-
Last one for me. Okay, go ahead. Sorry. Just wondering.
Michael, yeah, I was just gonna expand on what John said. It just gets back to what we were talking about a few minutes ago is literally, I mean, think about it. If we are in the early innings, did I say that correctly, guys?
Mm-hmm.
Early innings on the you know, on our routing and scheduling and what we can bring in and lowering those miles, you know, per stop. I mean, we have, you know, now I'm gonna change analogies here. I was gonna say a long runway. That would totally kill it, wouldn't it?
Yeah.
We have a long way to go on that. This will definitely help offset, as John was saying, the fuel increases.
Okay. Lastly, where does wildlife exist in the three line items? Just so we understand what it's influencing.
It will be in whichever line item it occurs. The majority of the wildlife would be on the residential. It's
Right. If it was a commercial customer that needed that service, say a grocery store, it would hit commercial.
Yes.
If it was a residential homeowner, it would hit residential.
I'm just very familiar with it because I've used our wildlife service before. Flying squirrels.
It's gonna be a mix of those. You know, the majority of their business is certainly residential.
Yes.
Right.
Okay. Thank you.
Michael, I just do wanna make one comment, just so you know. That is the way we have always presented the wildlife. That is nothing new on how we do split that.
Fair, fair enough. Just needed to understand, since you were emphasizing it, which part was being influenced by it.
Okay, we've reached the end of the question and answer session. I'd now like to turn the call back over to management for closing comments.
Thank you all for joining us today. We appreciate your interest in our company. As you've heard during the past calls, we have several programs underway that will make our company better, as well as improve our customers' experience and our financial results. We look forward to giving you an update on our fourth quarter and year-end call. Thanks again.
This concludes today's conference. You may disconnect your lines at this time, and we