Good morning again. Let's keep this rolling before lunch. For those of you just walked in, my name is Manav Patnaik. I cover business and information services for Barclays. And we're pleased to have today with us Kenneth Krause, who's the CFO of Rollins. First appearance for Rollins here in America Select. So thank you for being here. Appreciate it. Since it is your first, Ken, I figured we'd just start a little bit high level just for the benefit of the audience, how you would describe kind of the Rollins business mix and the overall just strategy. Sure. No, thank you. Thanks for having me and having Rollins here. It's great to be here and to represent such a great business. It continues to perform. We continue to see great demand for our services. We're focused in one specific area. We're focused on pest control, 93% of our business is in the U.S., 7% of our business is outside the borders of the U.S., notably Canada, the U.K., Singapore, and Australia. We continue to operate a very successful business. Some call it a defensive business, but it's hard to find defensive businesses that are growing at 10%. We continue to compound revenue, earnings, and cash flow at double-digit rates. We see an opportunity to continue to execute upon that and deliver solid results as we think about the future. It's interesting. There's a lot of challenges on the macro and the macroeconomy today. We feel very well positioned as many others navigate a very highly uncertain environment. We feel good about where we are. We feel good about how we're executing, and we're excited for the future. Just to the point on the macro, I guess, just to start there, I think on the call, you aren't seeing any impacts really at the moment. Is that correct? Right. Right. It's a fair question. When we look at the macro, I work with our board and others, and I look at it through six or seven different lenses. One lens that I look at it through is what's the impact on liquidity for us to grow our business? We were really successful back in February with our inaugural bond offering, very tight spread, investment-grade bonds. We've got adequate liquidity to grow our business. The second area is tariffs. Everybody's talking about tariffs. We don't see a major issue with tariffs. When we look at the cost structure of our business, we've got people, which is our largest, by far largest category. That's not impacted by tariffs. When we look at fleet and material, not as big of an issue either. It's roughly 3% of sales on fleet and 3% of sales on our material area. Not an overall big impact from a tariffs perspective. In fact, materials, a lot of the materials we're using are procured in the U.S. We're not seeing and we're not reliant upon a lot of other regions to supply us with the chemicals. We're buying those chemicals and sourcing those locally. Material availability, again, we're not seeing issues with material availability, no supply chain challenges. Labor markets are healthy, and labor availability continues to be healthy. The FX environment, we had about a 40 basis point headwind on FX in the first quarter. We think that dissipates as we go throughout the year. Again, with 7% of your business outside the borders of the U.S., you'd have to see a major change in FX to have a significant impact on us. Inflation and M&A continue to be positioned well. Pricing is healthy, CPI plus pricing, and our M&A pipeline is very, very, very strong. Got it. Just for some historical context, for most companies, this is not a softball question, but for you, it is. How has Rollins performed in prior recessions? I love softball questions like that. No, we've been very successful. There's a chart in our investor material from the quarter that shows our business over 20 plus years. Over 20 plus years, we're compounding revenues at a very attractive pace, not only in strong cycles, but during the great financial crisis. I want to say we grew at 6% in industrial recession, similarly, and then COVID. We grew through all three of those, and we continue to grow through what we're dealing with now. We're forecasting 7% to 8% growth this year in organic, 3% to 4% M&A, which is up from 2% to 3% in terms of our longer-term guides. We feel good, and our track record, I think, is just an example and reflective of how good the market is that we operate, but also how good the execution has been with the company. That chart obviously showed the resiliency of the years, but also Rollins has been around for a long time, but there have been some changes over the last three to four years. Maybe we can start with the CEO change and perhaps what some of the changes from that level have happened so far. Sure. Jerry Gahlhoff assumed the CEO position January 1, 2023, from Gary Rollins. Gary Rollins, his father founded the company, bought out Orkin back in 1963. Him and Randall ran the company for years. Randall passed, unfortunately, back in 2020. Gary's 81 years old, I want to say. He's transitioned out of the business, and he's now our chairman emeritus. He turned over the chairman role to John Wilson recently. Jerry is as much pest control as Gary Rollins is. He knows the business. He's been around the business. He grew up in the business. His dad worked for Orkin. He's been in a Rollins-oriented business for his entire life. He's making changes. He's open to changes. I came to the company in 2022, and he hired me in from MSA Safety. We had a great track record and a great run at MSA Safety. He attracted me. He hired me and recruited me. I think we have a great partnership. It's a unique partnership. I'm learning about pest control. He's well attuned to pest control. I'm bringing new ideas, new modernization efforts, whether it be the dividend strategy, the bond deal, the secondary offering, auditors. I can go through a number of different things that we've executed. I think it's been successful over the last two and a half years. We're excited for the future. It's not a business that's broke. It's a business that we're trying to just make better. Maybe just from our perspective to all the things that you've done, you mentioned, maybe just elaborate a little bit on that more. For background, what was it that the company finally realized that needed to change from the CFO and IR perspective? You know, it's interesting. I think, you know, I think that coming in, I tried to just paint a vision of what the business could do. With a roughly, at that point, a $15 billion to $20 billion market cap, with such strong financials, there was a great opportunity to tell the story. I was able to hire Lyndsey and bring her on, in addition to a number of other folks on my team. We completely changed the team. My team is completely different from where it was on September 1, 2022. I think the company was just, I think it was just at the point in the history. That's what I saw. It was very similar to where I came from. This company was at a point in its history where it was open to making the change. If it wasn't open to making the change, I probably wouldn't be sitting here. They were. We've begun this evolution where we brought in more sell-side analysts like yourself. It's great to have Barclays following us. We went through a sell-down with the family, and our liquidity and our volume has increased significantly. The shareholder base has evolved. There are a lot of shareholders that have been there for a very long time. It's a hard stock to sell once you see the performance. It's also nice to see new investors coming in that are hearing the story for the first time, going to our investor day last May, hearing about how we're looking at the business through a new lens. It's an exciting time. It really is. Just to follow up on a couple of the things. The secondary that you talked about, how much does the family still own? What should we think about that ownership plan going forward? Sure. The family owns roughly 40% today. I have no idea what their investment horizon looks like. It's just like I wouldn't have any idea what your investment horizon looks like. What I can tell you is we have a very healthy relationship with the family office and the head of the family office. We worked with the family office as we put in place the shelf filing back in June of 2023 and going through the secondary. When I joined the company, the family was selling down through block trades and 144s. At that point, they owned over 50% of the company. You can imagine the challenges that you have when you have a shareholder of that size selling into the market through blocks and 144s. That's challenging. We decided to work with the family to put in place the shelf and then to do the secondary and then for us to use our balance sheet because we saw a very attractive valuation. They locked up their shares for a full 365 days. I think we've got a great relationship. I have, like I say, as I started this, I have no idea what their investment horizon looks like, but I think they're very much like you. As the stock continues to perform, they want to hold on to it. Another big milestone was, I think for you at least, in February the IG ratings from S&P and Fitch. Can you just help us appreciate why that was so important? Certainly. You know, it's interesting. When we look at the journey the last three years, it started, I joined the company in 2022, and they had a two-bank revolver for a $16 billion company. It didn't have any leverage. In fact, I think they were in a net cash position. At that point, I decided that we as a company had the opportunity to use our balance sheet more effectively and more efficiently, probably better said. We put a billion-dollar revolver in place. That was in January of 2023. We went through and we did that shelf filing that we talked about, and we did the secondary sell-down. After that, we decided, on my horizon, I wanted to modernize the capital structure. There was an opportunity after the sell-down to put together a timeline where we could get an investment-grade rating, hopefully get an investment-grade rating. At $3 billion to $4 billion, that's not always a sure thing. When you look at the business and you look at the markets that we're in and you look at our performance, we were able to secure that investment-grade rating and then do that bond deal. In addition to doing the bond deal and getting a very attractive spread of 90 basis points above the 10-year at that point, which was the tightest going back a number of years in the industrial space, we also put in a commercial paper program. No longer are we using the revolver. We're using the commercial paper program that's saving us real dollars from an interest cost perspective and then also using the bond market to term out some of our longer-term debt. I think we've completely transitioned the capital structure to something that looks more like a modernized structure and allows us and affords us the opportunities to continue to be acquisitive and grow the business as we think about the future. You were clearly not having any issues with doing acquisitions already. The comment on IG rating, acquisitive, does that mean we should anticipate bigger deals down the road or not necessarily? You know, I think today and for the foreseeable future, I think the focus is bolt-ons, incremental tuck-ins, Saela-like deals, Fox-like deals. You know, we have a track record of every 18 months or two years doing a larger deal and then having smaller tuck-ins in between those. I think as I think about three or four years down the road, you know, I think the important thing to measure this is the pace of our modernization. Are we able to put the back-office technologies and processes and standardization in place? If we're able to do that, I think you could see us do larger, more impactful deals in the future. Again, we don't need to. We don't need to rush down that road just yet. I think what we want to do is be pragmatic and put the processes and the structure in place that will allow us to be a better acquirer of businesses as we think about the future and then hopefully afford us the opportunity to do that. Got it. Shifting to another topic, pricing. I think that's also an area I think where you and Jerry have really focused in on. Just for some perspective, what was historical pricing like? What's current pricing? What are some of the changes around there? Historical pricing was in the range of 1% to 2%. Over the last couple of years, we've taken a fresh look at the pricing structure. Pricing has always been an important part of the equation here. It's an essential service. It's a very low ticket for our customers, and they value the service that they're getting. It's one of those things that, as our performance indicates, it's one of those things that people struggle canceling even in an economic downturn because the last thing they want to do is live with pests, whether it be protecting their health, protecting their property, or just general standard of living. They just don't want to live with pests. They just don't cancel those pest control services. As a result, we've got pricing opportunities. If we're charging roughly $500 for an annual contract, a 3% price increase is $15. It's less than $1.50 a month in terms of price increase on those services. As long as we're providing the service, as long as the customer's happy, we're showing up when we say we're going to show up, we have the right to charge. We feel like we've earned the right to charge a CPI plus rate of price increase. When we think about the services and everything that goes into CPI, we think this is a valuable service, very small ticket in terms of purchase price. As a result, we should be charging slightly ahead of what CPI is. If CPI is at 2%, 3% to 4% is not unrealistic to think about when it comes to pricing our services. Of your 7% to 8% organic growth, 3% to 4% is pricing. How do you break out the other 3% to 4%? Yeah, the other 3% to 4% is just volume. When you look at the volume, it's inclusive of new services. We have a chart in our investor material that talks about all the different opportunities with our customer base. And so if we have 9% or 10% opportunities, we're growing there. That's in our ancillary number, in our termite ancillary. Seeing great demand, great growth there, continuing to see performance there. You're seeing market growth, maybe a 2% to 3%, 2% market growth or so. And then you're seeing some more share gain. And so we continue to outpace a number of our competitors and gain shares. So it's inclusive of new services, a broader share of wallet, share gain, and then underlying market growth. Maybe on that market growth, maybe the first question would be, at Invest Today, you guys attempted to size the TAM. So maybe just for the audience, if you can help with that TAM size and what that market should grow for, see you believe. Yeah, globally, it's a very large business or very large market, $20 billion plus. We see the opportunity for that inflect significantly higher, multiples higher. The adoption rate of pest control in the U.S. is very low. Some estimate it to be roughly 15% of households. If you imagine that and you imagine that changing, the size of the pest control market has an opportunity to continue to expand significantly. You see secular tailwinds that are behind it, weather, warmer weather, certainly more favorable for pests. I've seen people move to more southern regions, very favorable for pests. Pest activities continue to evolve. You see new pests every year. You have so many different secular tailwinds. You have a low adoption rate. You have the essential nature of the service. All those things make it interesting and provide me optimism for market growth just from the base of the business. You mentioned share gains as part of your growth vertical. Can you just talk about how fragmented the market is and perhaps maybe where some concentrations are? Certainly. The market remains incredibly fragmented. We looked at a statistic recently from the PCT Top 100 from 10 years ago. That number of companies has expanded greatly from 2014 to 2024. Even though there has been a lot of consolidation, you continue to see the fragmentation. You see new parties and new entrants every year, entrants that are here in 2024 that were not even around in 2014 and are very significant players. We continue to see a very fragmented market with thousands of competitors, opportunities. Not every one of them is an opportunity. That is the great thing about this business. The fragmentation provides optionality for us as we think about acquisitions. We do not have to have any one opportunity. We can remain disciplined and take a pragmatic approach as it relates to the M&A environment. Got it. The concentration question where I was heading to is, obviously, out here in the U.K. in particular, we get a lot of questions around Rentokil and Terminix acquisition. Does a particular player like that not doing well directly show up in better numbers of yours or not necessarily? You know. I wouldn't say that our success is on the backs of our competitor. I don't envy the position they're in. They certainly have a lot going on. I think when I look at our performance, our performance has not been better just the last couple of years, but I think it's been better over a very long sustained period. I think that outperformance relates to our brand strategies with all of our various brands using different approaches to customer acquisition. Jerry likes to say we have multiple bites at the apple. If you do business here and you don't like it or you're dissatisfied, we have this brand that can step in and provide a different level of service, maybe something that you're expecting. We've got all of that, and that's been built over a very long period of time. During that time, we've consistently outperformed. We feel like we're positioned extremely well as we think about the future to continue on that outperformance trajectory. Got it. You briefly referred to your multi-brand strategy. If you could just elaborate on that because quite often you're like, "Oh, that looks like a Rollins competitor," and the next thing you know, it's under your umbrella. How did that develop? It seems a little bit unique to some of the other larger scale industrial services companies we cover. You know, it's more like a consumer services company. It's not really, I know a lot of people compare us to an industrial services company, but we're really more of a consumer services company. When you look at some of the leading consumer services companies, I think our brand strategy looks more like them. We have a portfolio of brands, a house of brands. We're not a branded house. We're not just Rollins. If you're looking for pest control, you're not going to know about Rollins. You're going to know Orkin. You're in Northwest if you're in the Southeast. Northwest was an acquisition we made in 2017, $50 million of revenue back in 2017. Today, it's approaching $200 million. Continues to be performing well. That growth is enabled through roll-ups. We're rolling up the Southeast market and putting that into the Northwest business. Or Clark in California, we bought in 2019. Fox out in Utah and Salem more recently. HomeTeam that we bought back in 2008. It's a home builder. It has a lot of relationships with home builders, especially in the Southeastern United States. It's a, and they're all different. All their marketing strategies are very different from brand to brand. They're reaching customers differently, opening up that opportunity and helping us build out that already very strong customer base of almost 3 million customers. When you look at your acquisition pipeline, let's put the returns and stuff to the side for a second, but strategically, are you going after geographies? Is that the primary target that you're looking for, or is there something more with some of these deals? No. When we look at these deals, we're looking at it through a number of different lenses. First and foremost, looking at the services. There are certain types of services we really like. There are other services that maybe aren't as attractive. Geography is certainly an opportunity. The Salem deal gave us the Mountain West, gave us the Pacific Northwest and Midwest areas that we weren't as strong. It built out that. Customer access is important. Every time we buy these businesses, we're trying to understand how they're accessing their customer base. Are they reliant on one form of marketing, or are they using multiple forms of marketing? That is important. Customer access and marketing access, geographic exposures, and then general composition of services. Is it general pest control? Is it termite ancillary? Does it have commercial in it? Looking at it through those three broad lenses. Got it. Maybe looking at your most recent acquisition, the Salem acquisition, can you just remind us of the size, contribution metrics, and maybe use that as an example of the financial criteria you use, like the returns you need on investment, in how many years does it need to be accreted, those kinds of things? Sure. When I look at acquisitions and when we at Rollins look at acquisitions, we look at them through five lenses. One is growth. When we buy businesses, we want to make sure that it's going to help improve our organic growth as we get into year two, three, and four. When you look at that, Fox was probably our most recent acquisition. It's being measured in that manner. Fox is accretive. It's growing faster than our 7.4% growth in the first quarter. It's adding to organic growth. The second area that I look at, and we're hopeful that Salem will do the same. Salem, we bought in April, roughly $65 million of revenue. Margins that are relatively neutral to our margins. We don't see a big headwind on margins or even a tailwind at this point. I think as we get into year one, year two, see more growth, help provide some support in a number of areas, we think those margins can accrete higher. Margins are the second area. Margins accretion within the first year is certainly important to us. Earnings accretion, EPS accretion. We expect to see Salem accretive to the first year earnings. Probably will be more as we get into the third or fourth quarter of that deal, of owning that deal. We are hopeful to see that in cash flow, making sure that we are not buying businesses that are going to dilute our cash flow. We are growing cash flow at 15% to 17%. We want to make sure that we are not buying businesses that are going to take a large amount of CapEx or working capital. Then return on capital. Within the first three years, we should see a return on capital that exceeds our cost of capital by the third year. We have done that with Fox. Fox, we bought 13.4 times, I want to say. After year one, it was trading at 9.7. You can see that we made considerable progress with our return on capital hurdle when it comes to that acquisition. We are hopeful that Salem will follow a consistent and a similar trend. Got it. The Fox acquisition, you remind me, just a quick follow-up on pricing. The 3% to 4% is the company average, correct? Right. Depending on the brand or the demographic, it's higher in different places? Yeah, certainly it is. 3% to 4% is how it all shakes out. It might be 8% or 10% here in this one area for whatever reason, and it might be lower in another region. It'll even out to that 3% to 4%. Even just broadly, commercial versus residential, you're probably going to see a higher price increase than 3% to 4% on the commercial side. You might see a little bit lower on the residential side, not much, but it could follow a trend in a composition similar to that. Got it. Since you mentioned commercial, let's jump there. I mean, for the most part, I think we think residential when we think Rollins, but obviously, it's been a greater focus for you guys. Maybe if you can just give us a sense of what mix commercial is today of the business and then the change in strategy. Sure. Commercial is roughly 35% of our business today. It is meaningful. It is roughly a third or so of our business. It is a great market. We put together a strategy where we decided to pull out the commercial branches from the residential branches. The services are different. The customers are different. How you interact, what you are providing, it is just a different approach. We decided to separate them too, not that we are building more bricks and mortar. We still have them in the same location, but the ownership and the responsibility for the commercial business falls under Scott Weaver, who runs that business for us at Orkin. It is really an Orkin-based business. When you are in a commercial setting, you want to have the power of the Orkin brand behind you. Not to say our other brands are not strong. They are very strong, but the brand Orkin is widely recognized. And there's a quality associated with it. On a commercial side, there's zero risk of failure or there's zero tolerance for failure. They got to rely on a strong brand like Orkin, provide them the peace of mind that they need when it comes to pest control in the commercial area. It continues to be a good business. In the commercial side, you'll see customers stay for quite some time. Retention might be 90+%. It's not unusual to see retention for commercial at 90+%. We like that business. We're investing in that business, and we're excited for the future. How about the growth and margin profile commercial versus residential? Yeah, the margin profile is a little bit higher in the commercial. It's not that much higher. If it were, I'd probably have to break it out and report it separately. But it's not. It's a similar margin profile to the margin profile that we have on the residential side. It's a little bit more attractive on the pricing, but it's not 400 or 500 basis points. It's much smaller than that in terms of pricing as well as the margins. Got it. In terms of the competitive dynamics, fragmentation, TAM, anything to call out there versus the residential? What I would say on the commercial business is that it's more consolidated. There's less players to acquire. As I said earlier, normally, you're wanting to do business on the commercial side with large, well-known brands. As a result, you're seeing concentration with Rentokil, Ecolab, Rollins, or Orkin. It's more consolidated. We do see it in regionals. I mean, there are regionals out there, and there's even brands that we have that do commercial pest control. It's more heavily dominated or heavily related to some of the larger brands that we all know. Got it. Residential, commercial, and the other ancillary, can you just help us with what fits into the other stuff there? Yeah, termite and ancillary. It is termite, Centricon, and other sorts of baiting that we use for termites protecting the house. In a lot of regions of the country in the U.S., you have to have a termite bond to close on your house. We certainly have that business. We have a very exciting business in there. It is called our ancillary business. That ancillary business is additional cross-sell on a lot of the residential area. When you look at that, it is insulation in the attic. It is exclusion work. What you are trying to do is treat for the damage the pests made on the house. You are also trying to restrict access of the pest from the house. Because oftentimes, you can treat the pest. You can take care of the issue, but you need to take care of the long-term issue associated with it. The ancillary business is growing. I mean, we're adding resources. Every time we have a new customer come in, we have an opportunity to expand the ancillary service offering with our customers. It's a great business growing at a very healthy rate with what we feel like is a lot of potential ahead. Got it. I wanted to shift to margins. Obviously, with the top line growing 8% plus, that helps give you a lot of leverage to show margins. What is the new kind of incremental margin target or margin targets, and how did that compare to before? Yeah, no, this business should be a 30% incremental margin business. 25% to 30% should be very realistic. I mean, if gross margins are where they are currently, if you're seeing an incremental gross margin of 55% to 60%, and then you look at our SG&A spend at roughly 29% to 30% of sales, you should be, and then you consider that out of that 30, you've got fixed costs that you can leverage. You should certainly see an incremental margin that would be nearing or approaching or around 30%. We've seen it. You're not going to see it every quarter. We're going to have timing things, investments that we make. We don't look at this business through a quarterly lens. We look at it through a long-term lens. Investing in these customers is a long-term investment. We are looking at it through that lens. What you saw in the first quarter was 8%, roughly 7.4% organic growth, and you saw roughly a 15% incremental. Now, what you may not have seen is in that 15% incremental, we had a significant investment in selling and marketing, and we also had a significant investment in what we call advertising. There were two aspects of the advertising. One was we were shooting new television advertisements that we do every two years, and that was a period expense. The other half is in just general advertising, pull forward. We were pulling some of that forward into March as we saw demand continue to be strong. Investments will be there. If you set those investments aside, though, you had an incremental margin that was approaching 30%. It is certainly a 30% business. We're excited about it. We think there's opportunity to improve that going forward. What are some of those opportunities to improve that going forward? I mean, obviously, you have the scale. You have the route density. Is it technology? What is the extra juice there? I think the extra juice is the extension of the modernization journey where we look at our back office. Right now, we've got a lot of it's very decentralized. I would not say I'd be remiss if I said to you that everything needs to be centralized. That's not the case. There are a lot of things that need to be in the field that need to be with our operators. There are other things like fleet and other types of services that we can centralize. If we can become a better support function for finance, accounting, HR, IT, legal, I think we'll be a better acquirer of businesses. We'll take some cost out and improve the margin profile. I think that's what we're seeing. If you look at our earnings presentations each quarter, we have a waterfall in there. You can see for every quarter for quite some time, administrative costs are coming down. Our focus is how do we continue to accelerate that. We've hired so much new talent in the business, completely different business today than it was in 2022. We're excited about what that new talent's doing to bring new technologies, new ideas, process simplification, standardization in the business. It is an exciting time to be at Rollins. Got it. Maybe let's just end with a broader capital allocation question. We've talked a lot about M&A, but help us with how you guys see your priorities with organics, or buybacks, dividends, those kinds of things. Growth, growth, growth is how I would start it. We want to invest in growth. Our capital allocation starts with investing in our business and growing our business, whether it be organic, which is an incredibly attractive growth, or through M&A. This year, we've raised our guidance on M&A from 2% to 3%, to 3% to 4% because of our Salem acquisition. The growth is paramount. Secondly, when we look at the business, when we create growth, when we invest in growth, and we realize the investments, we then share that increase in cash flow through the use of the dividend. I joined in 2022. We raised the dividend, I think, over 60% between then and now. We essentially priced in a special dividend. We've got a very sustainable dividend, growing it as we continue to grow the business. Then share buybacks. We bought shares back in that secondary offering I referred to earlier. I think we invested roughly $300 million in 2023 in share buyback. We will do that from time to time. Our priority is growth followed by the dividend and then share repurchase. Got it. All right, Ken, let's leave it there. Thank you so much. Thank you. Appreciate it. Thank you, everybody. Thank you. All right, thanks.