Q1 2024 Earnings Summary
- Strong and accelerating organic growth, with overall organic growth of 10.8% in February and March, and commercial and termite segments expected to grow faster than the overall average.
- Continued investment in sales force, adding over 50 more commercial account managers and 100 more home sales inspectors at Orkin in Q1 compared to prior year, to drive future growth opportunities.
- Healthy M&A pipeline, expecting 2%-3% revenue growth from M&A in 2024, with $45 million to $50 million spent on M&A in Q1, demonstrating the company's commitment to expansion using robust free cash flow.
- Residential segment growth may be slowing down, with management expecting it to grow slower than the overall average, possibly remaining in the 4% range going forward.
- Organic growth in the Termite and Ancillary services segment decelerated to 9% in Q1 2024, down from 11% in Q4 2023.
- Increasing SG&A expenses due to higher investments in sales staff, which could impact profit margins. The company added over 50 commercial account managers and over 100 home sales inspectors, leading to higher sales salaries.
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Organic Growth Outlook
Q: Is 10% organic growth sustainable?
A: Management observed 10% organic growth in February and March but emphasized that one quarter doesn't make a trend. They remain confident in achieving 7% to 8% organic growth going forward. -
Residential Growth Trends
Q: Will residential growth stay around 4%?
A: Residential growth improved from 4.3% for the quarter to nearly 8% in February and March. Management expects residential to grow slightly slower than the overall average, with commercial and termite services growing faster. -
Price Increases
Q: What price hikes are implemented? Pushback?
A: They implemented 3% to 4% price increases this year, viewing their service as valuable and expecting CPI-plus pricing. They are seeing these increases stick without significant pushback. -
Sales and Marketing Investment
Q: Why increase sales and marketing spend?
A: The company ramped up spending to hire over 50 more commercial account managers and over 100 more home sales inspectors at Orkin compared to last year, focusing on offensive sales mobilization for future growth opportunities. -
Commercial Growth Sustainability
Q: Is strong commercial growth sustainable?
A: They continue to invest in their sales staff and the B2B sales process, which has a long selling cycle. Management believes sustained investment in training and sales tools will support continued strong commercial growth. -
Capital Allocation and M&A
Q: What's the M&A pipeline outlook?
A: The M&A pipeline is very healthy and balanced. They anticipate 2% to 3% revenue growth contribution from M&A in 2024 and spent approximately $45 million to $50 million on M&A in Q1, up considerably year-over-year. -
SG&A Improvements
Q: Are SG&A savings sustainable?
A: They saw a 20 basis point improvement in SG&A as a percentage of sales. While investing 50 basis points more on growth-oriented initiatives, they reduced back-office costs by 70 basis points, reflecting efforts to improve productivity, with more improvements expected. -
Customer Churn and Retention
Q: Any increase in residential customer churn?
A: They haven't seen significant changes in retention; customer churn remains stable. It would be difficult to grow at their current rate if churn were increasing. -
Timing of Investments
Q: Why invest ahead of peak season?
A: Early signs of strong growth in February and March prompted them to accelerate investments to capitalize on market opportunities. They are hiring and training staff in advance to meet demand, acknowledging it's harder to find people and that early investment is necessary. -
Termite Growth Deceleration
Q: Why did termite growth slow from 11% to 9%?
A: Demand remains strong across termite services, but productivity was challenged due to January weather impacting operations. Branch closures affected their ability to complete work despite strong sales, causing a temporary slowdown.