Rollins Inc Conviction on Growth May Take Some Time

Research evidence excerpt

Rollins Inc Conviction on Growth May Take Some Time

Our Thoughts on Key Considerations from Here

What happened conceptually? Given management track record, when the

company indicates that the May/early June softness was difficult to explain, we

tend to believe this is true especially when intra-quarter adjustments to marketing

did not materially yield better results. To us, the pest control business has enough

lumpiness (one-time mix, residential churn, weather) that occasional

"inexplicable" quarters can conceptually make sense. We do think Rentokil's

competitive activity (which is consistent with our checks - why we didn't upgrade

in June) can be having some impact on Rollins, though it likely didn't account for

the entire magnitude of softness in our view.

What happened quantitatively? In Figure 1, we mapped out a potential

quantitative view on the slowdown, with ROL growth slower in Q2 across each of

Recurring (75% of total), Ancillary (10%), and One-Time (15%). Due to the higher

mix, we believe Recurring slowing from low-7% growth normally to < 6% in Q2

had the largest absolute impact on Q2 organic growth. This is the result of the

impact from lower leads. Importantly, we think one-time growth can rebound

quickly, but recurring revenue growth may take longer to recover (below).

Leads recovering is a good sign, but growth may take longer. ROL disclosed

that by end of June and into July, consolidated leads returned to flat yoy levels

(from negative in Q2). This is encouraging because lead volumes being flat, when

combined with higher conversion (ROL indicated higher-quality leads) plus pricing

(~4%), would support new business growth of +4-5%. However, a return to

normalized lead levels still would not compensate for the lower recurring revenue