Rollins Inc at William Blair Growth Stock Conference Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Tim Mulrooney - William Blair & Co. - Analyst : All right, 15 minutes to hit you with questions. Let's go. I think where I'd like to start is on the commercial pest business that you mentioned, because you talk about 10% organic growth in the most recent quarter, 10% organic growth last year. But if you look back, again, this historical context -- if you look back at that 4% to 5% growth that Rollins generated for a long time, it was actually like residential was slightly above commercial because there's a penetration story in residential that there's not in commercial. You're required by law to have commercial pest. So I always thought of commercial as the higher maybe return business. We tend to see valuations and commercial go for more -- commercial pest is a very valuable business, and there's a scarcity value probably. But growth is slightly slower. That's not happening now. I mean, commercial is firing on all cylinders. It's also firing on all cylinders, honestly, at Ecolab. Their commercial pest business is doing awesome. And then there may be some others in the space that are not doing so well. So is this a market thing? Is there something happening in the market that I'm not aware of on the commercial side that's helping fuel this growth? Or is it a competitive thing when you all have just put in a lot of investment in the space? Just curious on why you think this growth -- help us understand this a little bit better.

Question: Tim Mulrooney - William Blair & Co. - Analyst : That's very exciting. And I knew about some of that stuff that you guys touched on at the Investor Day about standing up the commercial business. I think it's interesting too. Not only will that benefit commercial, but I got to think you've got a branch with a branch manager who's maybe spending 25% of their time managing the commercial folks. Now they don't have to. They can spend 100% of the time on the residential.

Question: Tim Mulrooney - William Blair & Co. - Analyst : Just sticking on that topic for just a sec because I definitely want to talk about brand strategy, which is something that Lindsey and I were talking about the other day. By the way, I didn't mention at the beginning, several upgrades of the company, also [Lindsey and Brad] Miller, who started -- came over from Home Depot, right, and has significantly -- already significantly improved the Investor Relations at Rollins too. So they're making upgrades across the board these days. But back to this, before we go to brand strategy, I want to talk about -- or I wanted to ask nine shots on goal. I think Jerry's says nine bites at the apple, however want to put it.

Question: Tim Mulrooney - William Blair & Co. - Analyst : That's where that comes from.

Question: Tim Mulrooney - William Blair & Co. - Analyst : That's where it came from. Some of the best hockey I've watched in a long time, by the way. This hockey playoffs is amazing. So what one of those shots on goal do you think is low that you think there's a -- if you were to pick one that stands out as this one we really could do better at and we think that we will -- or if you think five years from now, the penetration rate would look really different. If you were going to pick one, which one do you think that would be?

Question: Tim Mulrooney - William Blair & Co. - Analyst : That's fair enough.

Question: Tim Mulrooney - William Blair & Co. - Analyst : And if I look at Terminix, how they did it, is they would cross sell insulation and encapsulation, crawl spaces and attics. They would cross sell that to their termite folks. So that was like a termite cross sell. Is this -- is insulation a termite cross sell? Or do you guys approach it differently as any pest control operator to cross sell that?

Question: Tim Mulrooney - William Blair & Co. - Analyst : Got it. Maybe we could touch on the brand strategy while we got five minutes left here. And of course, this was meant to be a fireside, but please join us at the breakout afterwards if you guys all have questions as well. But the branch strategy, could you talk a little bit about what you meant by that? I'll leave it there and let you go.

Question: Tim Mulrooney - William Blair & Co. - Analyst : I think this is really important because there are others out there that are taking the exact opposite strategy. And so we talked to a lot of folks in the pest space that utilize this branch-splitting technique. I've had others say $5 million. They split it $5 million, but it almost seems like an industry adage that you split branches to drive growth for various reasons, whether it's reaching the customer -- I thought that that was an interesting comment, reaching the customer. So do you think from a digital marketing perspective, there's a benefit to splitting the branch? It's not just the growth aspect.

Question: Tim Mulrooney - William Blair & Co. - Analyst : Yeah. I mean, that's interesting. It's easy for me to look at your SG&A as a percentage of sales and be like, oh, yeah, it's 500 basis points higher than your typical route-based services business or 200 basis points, whatever you said at the Investor Day. It's higher, but I actually don't know what that means. I don't like when you look at -- when you peel back the onion and you look at how well how much is S, how much is G, how much is A? Where are you high relative to the competitors? What would be your comment on it? Where do you think most of the opportunity is if you're willing to say it?

Question: Tim Mulrooney - William Blair & Co. - Analyst : And that's contributing to the fact that you raised your incremental margin target from 25% to 30% to 30% to 35%. I know pricing is a component, but perhaps that back-end opportunity is the other piece to that puzzle?