I'm the Group Head of Diversified Industrials Research at Stifel. It's my pleasure to welcome with us Rollins, Inc. Our first time on stage together in your new role as the CFO, Ken. This is Ken Krause, CFO at Rollins. Many of you may remember him. He was the CFO for a long time at MSA. So welcome to your new job in the last year. It's been almost a year, and thank you for being here. Well, thank you, Michael. I appreciate it. Great to be here. Great to be back at the Stifel conference, and just to share a little bit about Rollins. Terrific. I'd like to sort of ask the question in the pest control business, weather matters. Mm-hmm. Last year we had a very cold and wet spring, and this year we kind of started off, like, I mean, I have a farm. We started mowing the fields a month early, and then it got cold again. Mm-hmm. How would you frame the first five months, six months, well, five months of the year, weather? Is it better relative to last year, but are we a little softer seasonal start 'cause it's been not cold and wet, but chilly? Great question. You know, I oftentimes say, this business is more correlated to weather cycles than economic cycles. That's probably a good thing, just coming out of a very recent discussion over lunch. You know, it sounds like- Did he scare the hell out of you? It's gonna be a really tough decade. No, all joking- Did you understand him? I don't understand him, so. I had to ask Casey. He was with me. My Head of VP, FP&A, who's here with me, I had to ask him for some interpretation of those charts. No, all joking aside, you know, the business is certainly a strong business, it definitely is correlated to the weather patterns. We're seeing a very solid start to the year. You know, we finished Q1 with just about 9% organic revenue growth. We saw an uptick in our Residential sector of our business. We're continuing to see really robust levels of demand and services. You know, we entered this period in the current year from a period, from a point of strength. What I mean by that is our labor levels were very healthy. You know, if you go back to the Q3 time period of last year, we talked about record number of applicants coming into the business, and we certainly saw that, and the benefits of that came through in Q1, and they're continuing to come through as we enter the busy season of the pest control market here in Q2, with the warmer climates that we're all seeing. So we're staffed very well, and the demand level, I think, which is somewhat correlated to the weather pattern, is certainly helping us drive some nice, solid results for our shareholders. 2022 is an interesting labor year for direct workforces. Everybody basically described it was really tough in the beginning, and it got a little bit better in the back end. Is part of yours that the housing, rate of change in housing starts had compressed enough that? 'Cause isn't that, typically a pool of candidates, that somebody comes out of construction and might come in and do, be a technician? That Do you think there's a correlation there? certainly could be a part of the correlation. I also do think that, you know, we talked last year in Q3 about a new software that we were employing from the standpoint of recruiting, and so I think that also combined with maybe a better availability in the talent pool, was beneficial in us being able to recruit new people coming into the business. This is a sourcing software? This is sort of, giving you access to a broader pool? That's right. It also makes it easier for applicants to apply for roles at Rollins. You know, we all know that, you know, not only do you need a pool of available talent, but we got to make it easy for people to apply and to be eligible for participation for employment at Rollins, and so that certainly was helpful. The other thing that's been helpful for us, Michael, is coming out of COVID. You know, during COVID, we all remember those tough days where you had to social distance, and coming out of COVID, we've been able to get techs back and to do ride-alongs. What does that mean? That means that we were able to, as part of our hiring practices, when we hire a tech, we have a requirement that they do a ride-along, a day in the life of a tech. Understand what you're signing up for. We've been able to employ that again, as we've come out of COVID, helping our retention rates with new techs, knowing what they sign up for, helping them get back in, and we're having less loss when it comes to new techs that are coming on to the job, which is very helpful. That early turnover happens when? How fast does that happen? That can happen as soon as the first week. You know, if somebody comes in and they haven't had the opportunity to do a ride-along, and they don't know really what they're signing up for, that's not helpful or beneficial for them or for Rollins or our customers. Okay. We certainly, you know, during COVID, we saw robust levels or higher levels of turnover earlier on. We started to see that moderate. That's helped us as well from a staffing perspective. A couple of years ago, before you got there, Rollins had found itself in a scenario where they had onboarded a lot of the seasonal techs early, then got caught in Mm-hmm ... a tough, seasonal period. This sounds like you all onboarded early again. Mm-hmm. Has there been a change of thinking about the timing of this, or is it there was such a good pool that you were taking advantage of, don't, you know, the cookie jar is going by, grab a cookie while it's there? No, you know, I think you got to be opportunistic, but also you got to be strategic and think about demand levels in your business. You know, we look at demand levels on a daily basis. We have the opportunity to see into a bulk of our business and monitor our backlog levels. 'Cause we realize if we go out and sell a service, but we don't perform the service in a short order... there's a risk of that service getting canceled. It's important for us to monitor that backlog, and we feel like our staffing levels are appropriate and healthy based upon the demand level we're seeing in our business today. Can we talk a little bit about organic growth and sort of frame how you see the underlying structure of the market growth? What your potential is to either match or exceed it, and then what are the mixes of the pieces between price, new customer and cross-selling? Mm-hmm. If we frame North American pest, because this is 90%+. Yeah, sure. of the company. We frame North American pest, how would you frame what Rollins's perspective on the market growth is? Yeah, you know, industry research and, a lot of public information indicates that this market is growing in that 3%-5% sort of range, that low to mid-single digit sort of range, on an ongoing basis. We feel like that's probably about the right level of market growth. We feel like we're in a very attractive market, I mean, a very large market. You look at the market globally, it's about $20+ billion. In the U.S. alone, it's $10+ billion and growing at 3%-5%. It's really hard to find a market as attractive as the pest control market. As a result, we are certainly focused in on that core market. We're not ready to make a student body shift right or left away from that market, but we really are focused in on being the best pest control company out there. From that perspective, what do you think makes up the 3-5? It's actually new customers coming into the market? Because you know, the same data we're probably both reading is, I think it's a little bit bigger today. I think it's closer to $12 billion. Yeah. $22. but it also is suggesting out of 120 million households, only about half of those are truly addressable market, and only about half of those are actually buying a service. Mm-hmm. Is part of this that, you know, that 30 million that's not buying the service is starting to buy it, or that there's more services being added within the 30, or a combination of those two? I think it's a combination of not only the new households that are signing up for the service, because for whatever secular trend that's occurring, the weather or the warming of the climate or what have you. You also have an element of just the overall market growing from the standpoint of a number of other secular trends. It's really hard to put a fine point of what percent of the 3%-5% is new customers coming in. We do know, based upon some of the, some of our experience, that it is certainly new customers coming into the fold, a new customer base that we don't do business with today. Okay. incrementally adding. Sure mosquito and tick and things of that. No doubt about it. No doubt about it. That's part of it. I mean, you see, you know, a couple of months ago, there was a story run in the Wall Street Journal around ticks. Sent it to Jerry, our CEO. Talked a little bit about our work in that area. We do work in that area. I think that story was run again yesterday in the Wall Street Journal. Actually, as an investor pointed that out to me earlier this morning. You know, that's interesting. Pests, ticks are interesting. The mosquito business, you talk about mosquito, that business is growing significantly. It's far outpacing the rate of growth in our overall business. It's been pacing that in that manner for a number of years now. Right. We have the opportunity not only to go in and to sell our customers the traditional pest control, but to bolt on that additional service, that additional mosquito service, additional tick service. The Critter Control business is a really attractive business for us. If you're in an area where you have a raccoon that would enter your home, your fireplace, we're able to deploy our Critter Control business and franchise to go out after and help you respond to that need. That's a really attractive business as well. Yeah, we certainly are seeing, you know, the new customers come in, but also an expansion in the share of wallet of our existing customer base. When you think of total revenues, I mean, Critter Control strikes me as that's a one-time event. Mm-hmm. where mosquito, tick, traditional pest, termite at the resident are recurring. Yes. The combinations of what it would be applicable in Commercial. I mean, the Critter Control is a nice business, it's but a small base. It's not, I mean, it's not 10% or 15% of revenues. No, it's a nice business. It's not 10%-15% of business. The thing about Critter Control that maybe we're missing is that you're right, that it could be more of a transactional sort of business. When we go in and we're called in for the Critter Control franchise, we're able to tap into a customer potentially that we don't have today. There's an opportunity to, when they call upon our services for Critter Control, to sell additional pest control in that market. They may not have a mosquito service, or they may not have a tick service, or they may not have other sorts of services. That opens up a potentially new customer for Rollins when we're not supplying the traditional pest control. You have talked about since your arrival, that you think that Rollins ought to be able to sustain at least slightly better than the underlying market growth. Share with the market or share with the room, what are you all doing structurally, whether it's your go-to-market strategy, customer acquisition, the speed at which you service, the nature of the service, what is it you're doing that's allowing you to take that incremental share gain? We're doing a number of things. If you look at, you know, if you look at the business through two or three different lenses, one is our M&A strategy. You know, we continue to take and make significant investments in our M&A strategy, bringing new brands into the fold, new potential customers into the fold, which continues to allow us to sell additional services to that customer base. We certainly are doing a lot on that front. We're doing a lot on the advertising front. You know, it's important to be top of mind at the right time. What do I mean by that? Well, it's important to deploy your advertising dollars when there's a demand for the service, so in the peak seasons of the year. We've certainly started to do more of that. We've also, you know, going back to the M&A strategy, the recent acquisition of Fox. You know, we're not a door-to-door business. We haven't traditionally been a door-to-door business. The Fox business brings in a new way of reaching potential customers. Just to help everybody, door-to-door is literally hiring college kids and what have you, to go knock on the door. Knock on doors. Yeah. It's interesting, that industry, you know, Jerry did some work a couple years back prior to my joining, and he went out, and he did some research on the door-to-door business and how big that business might be, how big that market might be. He quickly determined that there's a very significant opportunity in that business. As a result, we started to go down the road to evaluate what opportunity would be most appealing, and we determined that Fox had a great culture. The churn is not any greater than what we have in our traditional business, and it felt like an opportunity to be able to leverage that business model in our existing business. Let me give an example. Well, HomeTeam business, which has Tubes in the Wall. HomeTeam is a pest control business we bought well over a decade ago. Incredibly successful. It's been a great acquisition. Just for the room, they're installing infrastructure inside the frame of the house to, you know, sort of introduce the pest controls. That's right. It's a proprietary technique for providing pest control to customers. Very strong position. It goes into a new home, a customer has it, they use it, and as we all know, customers move from one home to another, maybe every five, six, or seven years. When a customer leaves a home, sometimes those tubes go dead. They're legacy tubes, they're not being utilized. We know where those tubes are, and we're able to then deploy the resources at a company like Fox to go after and engage in that customer, the potentially new customer. There's a real opportunity there, and we're excited to have Fox in. We're excited to have that culture, have that business, have that team as part of Rollins as we think about the future. Okay, if I pulled on that thread a little bit, and I don't wanna run down too big of a rabbit hole. If I pulled on that thread, I mean, you know, you have a whole customer service group. Why couldn't that sales force have done the same thing? Because you have the same data. What's the difference in somebody knocking on the door versus, "Hey, I know this house had a customer, it doesn't have a house, had HomeTeam in it. Why aren't you-? Yeah, we just haven't, quite frankly, we haven't prioritized it. I mean, we haven't made it a priority until late. It's an opportunity, an upside opportunity, to drive our revenue growth a bit higher as we think about the future. It was really one of those opportunities we just didn't get to. Now with the resources we have with Fox, it enables us to get to that opportunity and to really realize some of the growth potential that might be in that market. Okay. Back to the 6%, saying that that's better than the market, and I'm thinking about this as just organic, and the M&A would be incremental to that. Sure. How would you break that out in new customer add price versus a cross-sell within the existing customer? Mm-hmm. To the latter, if I think of the number of services you could offer, particularly in Residential, where are you in the, if pest is the core, you know, there's the incremental add? Sure. I mean, when I look at it, you know, you're using a 6% number. I'll go to the more recent quarter at 9%. That's organic growth. I'll go to last year, where we, I think, delivered something in the levels of 7%-8% of organic growth. We've seen an uptick in our organic growth. It's been a great market. You know, with people moving in some of the more warmer climates of the country, with the winters being much more mild than they've been, we're seeing an uptick in our organic growth. If I look at the 9%, I unpack the 9%, in our more recent quarter, we talked about a 4% price increase a year ago. We raised prices again this year at around 4%. About, you know, just under half of that 9%, 3%-4% is probably price. That means the remainder, that 5%-6% is volume growth. We know that, you know, based upon research and based upon what we just talked about, our markets are growing in that 3%-5%. So you can see that we certainly are successful at gaining share, and we're gaining share across our market, but also, in addition to gaining share, our focus is reducing churn, reducing the churn we have in our business. We're focused on reducing churn because the less customers we lose, the less customers we need to add. That's certainly a focus for us. Last but not least, this cross-sell opportunity. You know, we're incentivizing our techs, we're incentivizing our sales folks to go after the cross-sell in those existing customer relationships that we have. there's a combination of things that are really driving that 5%-6% of volume or nominal growth that we're seeing in our business. If you thought about the installed base, and we'll stick to the Residential side as the example, you know, what's the one point, what number of services that installed base of Residential has today? Yeah. We haven't disclosed it publicly, but it's less than two. It's and it's a real opportunity for us as we think about the future. You had a peer company that, before it was acquired, talked about that as a true opportunity as well, and framed it as a tenth of a point of improvement with $60 million in revenue. Mm-hmm. At that time, their size was slightly smaller than you. Mm-hmm. Does that math hold up if I, you know, sort of proportion it to a Rollins size? Is that the way to think about it? It's hard to, you know, to correlate the peer company that was there previously to Rollins. What I can tell you is, give us a little bit of time. You know, I think we're looking at potentially doing a more widely communicated investor day as we go throughout the year, later in the year. As we get through the next, say, six to nine months, we might be willing to share a little bit more around that. Today, let's just give us a little bit of time just to think about that a little bit more. Okay. I get, this is what I do for a living, so I gotta tease this out a little bit. I get less than two, it's more than one, less than two. Mm-hmm. I'll pick, you know, we'll pick whatever. Is it practical to talk about that this can be a two integrator, or is it more like it's somewhere, it's a good, strong one to two? Yeah. It's hard to say. You know, my more optimistic side would say we'd like to be above two. I also am realistic in saying that, you know, small changes are impactful in this area. That's important. The other thing that we're missing in the conversation is the fact that there's this Ancillary aspect, which can be transactional, can be one time in nature. We've consistently, the last 12-18 months, have seen really a nice uptick in our Termite and Ancillary business. Some of that's Termite. A lot of that is our ancillary, crawl space, gutters, insulation. You know, that's another area that's really producing some strong results for us when we think about the revenue growth. Is there an explanation for why the rate of change improved there? I think we're just deploying a lot of focus, we're intentionally focusing in on incentivizing our teams to focus in on that area. It's a real opportunity. You know, when we go in and we see an issue related to pests, we wanna help prevent that issue and help our customers not have to deal with that issue in the future. We can take care of the pest, but unless we prevent the pest from entering the home, or we take care of it in that manner, we're gonna be back. We wanna try and help our customers provide a longer-term sustainable solution. Okay. M&A is part of the growth story, has been for a long time. If we're agreeing we're a $12 billion domestic business, you're, you know, something in the mid-twenties. Mm-hmm -ish share. One, have you run into issues where Justice is starting to scrutinize you more, given that you're approaching that magic 30% number they like to focus on? Is that becoming more of a challenge? Secondarily, are there fewer chunky bits to buy, and therefore you're not bumping up against that anyway, and there's a lot of little? No, you know, it's interesting. We're not seeing any constraints with respect to that to date. Not to say we won't in the future, but to date, we certainly haven't saw any constraints related to a regulatory compliance with respect to acquisitions. It's a very fragmented market. 20,000 competitors are oftentimes referred to as 20,000 competitors across this space. They range in scale from very small to more significant, more meaningful competitors. We're gonna continue to be active in this area. We feel like it's a very competitive market. We've got a number of formidable competitors in our space, and we feel like it's a very competitive dynamic. We did. I alluded to a merger earlier. The, you know, Terminix- Rentokil transaction, Rentokil- Terminix transaction's done. You know, it, when it was initially announced, there was speculation they would have divestments, they didn't. The then follow-on speculation was, well, things like this have to be disruptive. Mm-hmm ... in many ways. From your perspective, sitting in your seat, has it resulted in opportunities or is it just now a better run, bigger competitor? You know, it's anytime you're around. I've been around transformational mergers and acquisitions in my former life and this life, and anytime you go through a transformational acquisition, there's always opportunities in the market. There's disruption. We're seeing opportunities in the market. We feel like, you know, we don't feel like it's hindering our ability to grow our business, and we're seeing additional opportunities for growth coming through. I wouldn't say as a result of the acquisition, but we certainly continue to see our fair share of opportunities for growth. Okay. Labor is your biggest cost. It's over 50% of the cost. If you're trying to find points of utilization leverage, it would be around labor. Mm-hmm. You've introduced different forms of technology to drive better, vehicle miles traveled. Mm-hmm sort of reducing routing. You know, where are we in that transition, if you will, around use of technology on just, literally just around the driving aspect, windshield time, get the tech in front of the customer often? Yeah. We have got a really nice internally generated and developed software. Our BOSS system continues to be a really nice route-based sort of system that we use to manage that. We're conscientious of windshield time. We know windshield time is the enemy of productivity and the enemy of improvement in profitability, and so we're trying to do everything we can with that system, as well as other systems, to really manage the windshield time. You know, 50% of every dollar we generate is normally spent in labor, and so people are our biggest cost. For that reason, we're not only focused on our techs and our folks that are servicing our customers, but we're looking across the spectrum of all of our costs. You probably have heard me talk about recently, our aspiration around going after and taking costs out of the business, upgrading our talent, making investments in our talent. We are certainly focusing on that, not only on the front end, but also in the back office. When we look at our business, there's a real opportunity to continue to look at our back office, improve our processes across finance, HR, IT, legal, which will make us a better, more efficient company. Not only make us a better, more efficient company, will make us better and more prepared to do acquisitions and generate the synergies that we think we can create by reducing back office cost in some of these acquisitions. Let me take that to the next piece. I wanna come back a little bit to what we were talking about. You know, historically, the industry participants would talk about low 20s margins for 21, 22, combination of Residential and Commercial. You all have been running it better than that, more like 22 +. Mm-hmm. What I'm hearing you talk about is, you know, are we removing that sort of artificial ceiling that used to exist and that, you know, is it 23, 24? You know, when I look at the business, my focus is to continue to improve the business. One of our core values at Rollins is continuous improvement, and when I apply that value to margin opportunities, I oftentimes look across the entire P&L. If I start at the top, our gross margins are roughly 50%-52%. Our EBITDA margins, as you so well indicate, is around 22%. That means there's about 28% of cost in between the gross and the EBITDA line. When I think about that, you know, that sounds like and feels like a pretty significant number. You know, when I compare that to top quartile or top decile, it seems like it's a little bit strong. 30% of cost of revenue as a percentage for SG&A, feels a little bit high. When I look at it, I do think it's on improving some of our talent and the pipeline we have in our talent, especially in our back offices. I think there's an opportunity. When you have a business that generates an incremental margin of 30%-40%, and we've done that, you should have opportunities to lift margins higher than 20% or 22%. Right. Okay, back to my technology question, now moving it over towards commercial and labor, 'cause that's a different windshield conversation. Mm-hmm. 'cause the tech might go into one location and be there all day, for example. Is there again, this competitors, predominantly on the international scene, where the marketplace is more Commercial than it is Residential, talk often about a technology deployment to try and find that labor utilization. Is that something that the North American market, one, is receptive to, and two, what are you all doing in regards to sort of addressing moves in that direction? We're early on in that, in that space. We're certainly evaluating it. We feel like there's potentially opportunities to improve what we do with respect to that. We're not where we need to be, but we certainly are evaluating opportunities for improvement around that. We always wanna improve the technician's experience, because if we're able to reduce windshield time, reduce inefficiencies with the tech, the tech's gonna service the customer more effectively. That's what it all gets back to, servicing your customer. If you service that customer, you earn the right to keep that customer and enjoy the benefits of a long-term relationship with your customer base. Okay. Inflation was an issue. Actually, it was surfacing its head before you got there, but something you've seen, is predominantly around fleet. Mm-hmm. It's a combination of availability and then obviously fuel. There's a couple pieces to this. One, has the fleet availability begun to improve, that your aging is coming down there for the repair and maintenance. Mm-hmm. numbers coming in? Two, industry hasn't historically embraced a fuel surcharge. Mm-hmm. While lots of routed businesses have. Is that something that should be explored? There's getting at the inflation question that it was around fleet. Let me start at a high level on that, and what I've talked about in the first quarter was, we've been able to recently see benefits with respect to fleet cost and materials and people cost as a percentage of sales. We're seeing our price increases helping us offset some of that inflation that we're seeing in our business. What also helps offset the inflation is, we have an incentive-based compensation structure for a lot of our techs, which is different than maybe what others do. As a result, we're not so heavily dependent upon a fixed base salary for our techs, and that helps us manage that inflationary experience a little bit more effectively. I think that's also... That's an interesting thing to think about when it comes to the inflationary cycle and how it impacts our business. Okay, what I'm hearing is, you're getting more trucks, so that's lowering the age... Mm-hmm. that's lowering repair and maintenance. Where are we philosophically around a fuel surcharge? From a fuel surcharge perspective, you know, if you ask me about surcharges, I'm never a supporter of surcharges. Surcharges come, and they go. I wanna be in a business where I can price, I can pass along price that's based upon the value of the service that we're providing our customers, and we've been able to successfully do that. I think the focus for us at Rollins going forward, is to maintain that strong focus on pricing and effectively pricing the value of our services for our customer. We're not in that rollback period around surcharges and having that kind of conversation with our customer base. We'd rather just charge an appropriate value for the service based upon the cycle that we're in. All right. Well, we're at the end of our time. I wanna thank you, Ken. Thank you. For one, congratulations on your new position here, coming up to your first anniversary, and thank you for being here. Thank you, Michael. Appreciate it.