Paul Giannamore: Rentokil cratered and lost about $7 billion in enterprise value, which is more than the Terminix-Rentokil transaction.
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Patrick Baldwin: Aloha. Mahalo. That's all I know.
Paul Giannamore: Fat Pat, what does mahalo even mean?
Patrick Baldwin: Thank you.
Paul Giannamore: Is that what it means?
Patrick Baldwin: Yeah but it might mean more.
Paul Giannamore: Did you pick up any other Hawaiian words while you were out there?
Patrick Baldwin: Uber.
Paul Giannamore: That's about it.
Patrick Baldwin: That's all I know. I would say Mahalo when I got out of the Uber. I hope I wasn't saying it misappropriately. What did you learn?
Paul Giannamore: I didn't learn any. It was interesting to me that they made announcements at the airport in Hawaiian. I did spend some time with some locals. I know John Speed is not a Hawaiian local but he's certainly been out there for decades. He was telling me that the Hawaiian language has faded into the background now. It seems like there are a lot of non-Hawaiians living there. A lot of Filipinos are living there.
Patrick Baldwin: I don't know if we've talked about that or not on The Buzz. We went in March for spring break and had a great time but learned a lot about Hawaiian culture and history. John had told me back then to go to the Polynesian Cultural Center. When I was out at PestWorld, he was like, “If you have extra time, go to the PCC, BYU, Hawaii. A lot of the students run that and it's been around for ages.” It was a great time. As far as learning about the history and the language, I learned more than on this trip. There was a lot of work to get done on this trip.
Paul Giannamore: I didn't even realize there was a BYU in Hawaii. I spent a little bit of time with Andreas Olsson if you remember Andreas from the Atlanta Sessions. I saw him out for some drinks and he had some of his Danish colleagues with him. He's Swedish but he had some Danes that he does business with and they told me that they were in a dry hotel surrounded by dry restaurants. No alcohol. They were on the BYU Hawaii campus as it turns out.
Patrick Baldwin: That was a long drive. Were they doing that the whole week?
Paul Giannamore: I guess. That's what happens.
Patrick Baldwin: That's over an hour.
Paul Giannamore: Maybe they stayed there for another purpose. They were coming from Denmark. Maybe they were exploring the island but they stayed out at BYU. I don't even know where that is.
Patrick Baldwin: Past John's house.
Paul Giannamore: That's quite a distance. We haven't published this session that we did with John but we did go out to John's beautiful home. He's got a ridiculously beautiful place on a mountain. It's a big hill, for sure, but it overlooks the water. When we get done with the video, which I should refer to as a film because that's what it will look like from his home, I wanted to do an LDS Cribs episode because he is a member of the LDS church. I thought this was an opportunity to go in here and make sure he's got all the LDS stuff that he should have in the house.
Patrick Baldwin: A dry house.
Paul Giannamore: He had a dry house and he did have high-class water. John Speed provided big bottles of high-end stuff, which I was impressed with. Thank you, John.
Patrick Baldwin: John is a class act guy. I love every time I talk to him, a stand-up guy, does a lot, and I'm sure you all got into that.
Paul Giannamore: He's an interesting character because on the one hand, you meet him in the street and you're like, “This guy is like some surfer dude.” He's sophisticated. He focuses on self-education. He's involved in a lot of things. He's an interesting guy. I was super excited to spend some time with him in person. I met him in person for the first time when we did the U Group thing some years ago. His business is either the largest or the second largest privately held business in Hawaii. He doesn't do fume. The biggest one there does a lot of dry wood termite fume, which I don't view as a great line of business to be in to begin with. That's on the John Speed outing.
Patrick Baldwin: You mentioned he looks like a surfer, did you meet Rob Greer?
Paul Giannamore: I did meet Rob Greer. I was with the Mexican when I met Rob Greer.
Patrick Baldwin: What was the Mexican's perception?
Paul Giannamore: The Mexican had comments on his hair. I had a few comments on his hair. Lenny and McKay and I go back a long time and Rob Greer is their COO who runs Rove. I've dealt with Rob over the years but this is the first time I was able to meet him and one of his colleagues in person. It was great to be able to spend some time with them.
Patrick Baldwin: Juan was a JAG in the military. That's what I love about PestWorld, this is a wonderful industry. I had a great time in Hawaii but the people and getting to see them. I met a lot of new people and saw a lot of old faces and it was awesome. I know you were busy.
Paul Giannamore: Fat Pat, this is my fourth PestWorld in years. I don't go to a lot of them. It was the first time I went to a Hawaii PestWorld. I liked it a lot because it was a smaller crowd and it was intimate and collegial more so than some of the bigger ones in main cities. Everyone was stuck in that area of Honolulu as opposed to being spread out in Boston or Baltimore. It had a good vibe to it. I thought it was great.
Patrick Baldwin: I saw you there.
Paul Giannamore: We did a lot of Potomac TV videos, which were purely entertaining.
Patrick Baldwin: All these episodes are already on YouTube, Jerry Gahlhoff, Cassie Krejci, Spenser Morgan, Mike Bullert, Nick Bartolo, and Mat Rogers.
Paul Giannamore: Mat Rogers wasn't even planned. When everything was done, we just hopped on and picked up from the Puerto Rico sessions We also had Phil Taylor. He's a Briton but he lives in Australia. He had written in some weeks back.
Patrick Baldwin: Andrew Barrows and David Giannetto. I know you were all busy. Dylan had a vision and pulled all that together. He even surprised you with what he accomplished there.
Paul Giannamore: I did hear some comments from some folks, particularly Phil Taylor mentioned Fat Pat is really not fat. He’s like, “I thought he was going to be fat and he's not fat.” As we know what the Mexican says, Fat Pat is a state of mind as opposed to a physical.
Patrick Baldwin: It also sets a very low bar. Expectations are to see one thing and then they're like, “I pretty much over delivered on that.”
Paul Giannamore: Before we forge our way into this interview, which is going to be more of a relaxing interview, Fat Pat, your parents showed up out of the blue in Puerto Rico as you're well aware.
Patrick Baldwin: I am well aware. I was not expecting that.
Paul Giannamore: I got an errant text saying, “Hi, Paul. It's Fat Pat's mom. I'm here in Puerto Rico. Her greetings from San Juan.” Of course, the Mexican and I needed to take this opportunity to go see your parents who were exiting a cruise ship. When you discovered we were going to rendezvous with them, were you a little bit nervous that your mother was going to be meeting the Mexican?
Patrick Baldwin: Yeah. I did text my mom that she opened Pandora's box. I was nervous. It was enough for her to try to get her way out of it. I had to call and get you on the phone and her on the phone and say, “Mom and dad, Paul and the Mexican are coming and you need to put up with the Mex.”
Paul Giannamore: He was a high class Mexican though.
Patrick Baldwin: Who was that guy?
Paul Giannamore: He was quite diplomatic with your parents. He did ask them if they dropped you on your head and your mother did confirm that was the case multiple times.
Patrick Baldwin: That is true.
Paul Giannamore: He did tell them that you're not particularly smart.
Patrick Baldwin: That's true.
Paul Giannamore: He told them that you suck at life.
Patrick Baldwin: That's true.
Paul Giannamore: He said that you're a jolly, happy, and lovable doofus, and a variety of other things that he said to them and they got a real kick out of him.
Patrick Baldwin: I'm glad somehow I'll now be related to the Mexican.
Paul Giannamore: By the way, those were all great things compared to what he could have said.
Patrick Baldwin: It's true, he is a little high class. I'm worried about what you did to the Mexican because the Mexican that showed up in Hawaii was not the Mexican I've known for years. I still couldn't understand a word he said but he seemed nicer. Is he getting a little soft in his old age?
Paul Giannamore: According to him, he's no longer a Mexican, he's a new Mexican. I'm not sure if he means he's from the state of New Mexico now or if he's just out with the old and with the new but here we have it, we've got a new Mexican on our hands.
Patrick Baldwin: Hawaii was great. You stayed busy. I was busy with FRAXN. I saw lots of clients and lots of people talking about FRANX. It's been awesome. We've added tax compliance, so business and personal tax return so a lot of people asking about that, stay at sales, used tax, and keep people out of trouble there. It's been awesome.
The first meeting I sat down with, a couple of things came out of the meeting, it's exciting to talk to other owners, but the ones that are on FRANX are understanding their business in a whole new way. I know you know who I'm talking about here but the brothers pretty much took most of their advice from running their business from The Buzz. If you looked at their business and everything that we've talked about or you've talked about on The Buzz taking your advice, even with all your disclaimers, they have built a heck of a business. It's awesome to get together and celebrate that.
Paul Giannamore: I got to meet those dudes that you're talking about and I liked them. As a matter of fact, they had great personalities, those brothers. Overall, it was a great experience. I met a lot of great people. PestWorld 2023 is now in the bag. We should talk about what's going on here in Q4 and we talked a little bit about it while we were out there at PestWorld. Rentokil reported earnings. Rentokil cratered, shaving off more in enterprise value, lost about $7 billion in enterprise value, which is more than the Terminix-Rentokil transaction. It evaporated.
It was largely due to a little bit of guy down on margins as well as organic growth suffered in Q3. That was further compounded when Rollins announced earnings and showed strong organic growth in Q3. The distinction between Rentokil performance and Rollins performance, of course, were exasperated. I typically do not trade in pest control stock as a matter of practice. Fat Pat, I'm not going to lie to you, I could not resist the temptation to back up the leverage truck and buy Rentokil shares because I do believe this is entirely overblown.
Patrick Baldwin: When you said it was down 15% or 20%, you said it was overblown and now it's even further.
Paul Giannamore: I can't see how this is not a good buy opportunity. This thing has cratered. Yeah, I picked up some RTO.
Patrick Baldwin: For me, not knowing nearly as much as you as far as all the ins and outs, Rentokil has a lot more global exposure than Rollins does from my understanding. One says, “We have a strong customer demand,” or Rentokil says they have soft demand, and Rollins says that they have strong demand, two different messages. What do you make of that between the two narratives?
Paul Giannamore: The issue that Rentokil has is the long-only funds began dumping that stock and one of the concerns that they had is, “It is Andy Ransom and the team pointed fingers at the market in general as opposed to integration. The institutions and the research analysts are constantly focused on Rentokil’s integration with Terminix.” When they pointed to the market as being the problem as opposed to integration and then Rollins came out with strong performance, it casted doubt on the integration of Terminix and Rentokil. Now they're saying, “It isn't the market because Rollins is performing.”
On the one hand, I do know that demand is softening so that's an actual fact. Rollins has helped performed as of recently. In general, consumer demand in the United States for pest control services is softening. This is the post-COVID slowdown and spiking yields are finally starting to slow things down in the general economy. We're seeing a result of that, just take something like auto loans. We've got the highest default rates in 30 years and those things. We're hearing a lot of those statistics.
I do know that some of the other large players, when you look at the top ten of the not reporting, non-publicly traded companies but large performers there, in the top ten, a handful of them said that this third quarter here was their worst quarter since pre-COVID. We're seeing growth rates that are much closer to 3% or 4% rather than 8% to 10% or above. We're still talking about a GDP-plus business. Things are naturally going to slow down. A lot of these equities were priced for perfection.
If we looked at Rollins, I don't know if we talked about this on The Buzz, but Spruce Point made a short attack on Rollins. I read the report and a lot of it was nonsensical. It's not that I don't think Rollins tends to be overvalued but I do think that the report from the activist fund that I read was nonsensical. PCT reached out to me and I said, “Don't even waste any ink on writing on this because it's nonsensical.”
Patrick Baldwin: What makes it nonsensical?
Paul Giannamore: They talked about things like we are in an era now of secular decline of insect populations. A lot of the research that they pointed to and I looked at the primary documents were related to pollinating insects and other sorts of insects that their populations are in decline due to the decline of biomass around the world, which is not particularly germane to a company that focuses on urban entomology or basically household pests in suburbs and cities in North America.
When we talk about the loss of biomass in South America and Africa, moths are dying. In North America, with the population of pollinating insects, we don't see changes in ant populations and things like that. That's what your wife gets pissed about and that's why she wants you to call a pest control company. I don't see that. They had a lot of good points on M&A in general saying that the M&A market has got extremely competitive and there are a lot of private equity firms.
If I compare Rollins's acquisition spend to their peers, Rollins tends to do the least amount of M&A out of all of the peers, whether publicly traded or not. That would turn to affect Rollins less than it would Rentokil, Terminix, Anticimex, and so forth. There were a few what I believe to be straw man arguments in the document. I look at this and say to myself that Rollins may be overvalued on a fundamental basis but for none of the reasons that they're talking about will we see a decline in Rollins share price and largely be related to the fact of yields continue to spike. Valuations as a whole will decrease.
There are plenty of short opportunities out there. Why would I short Rollins when I can short things that I'm almost certain are going to go down? I'm not buying Rollins at these valuations but I'm certainly not shorting that stock. This is not financial advice. If you've read past episodes, you know what you'll have to do from my disclaimer perspective if in fact you do take financial advice. I'm not saying you should buy Rentokil. I'm not advising anyone to buy Rentokil. I'm being extremely transparent as to what I've done. I'm not saying anyone should or should not transact in Rollins stock. I think that the Spruce Point report was nonsense and Rollins continues to demonstrate that they can perform.
Patrick Baldwin: Do you want to give your full disclaimer for those that haven't heard it before?
Paul Giannamore: My full disclaimer is if you act on anything I say and then you subsequently try to sue me for it, you're required to stand in a court of law and declare publicly without reservation or without qualification that you have a microphallus. In plain English, you have a itty bitty little tiny peepee.
Patrick Baldwin: Where does your disclaimer come from? Twenty years of investment banking? You always wanted to tell people this.
Paul Giannamore: When we had that episode we were talking about, I needed to come up with a disclaimer and that's what I came up with on the spot because I thought it would entertain me.
Patrick Baldwin: Back to Hawaii for a second, Paul. Seth's shindig was my big take away from Hawaii because it was awesome. Maybe you had something other than food. You walked away from Hawaii with some good takeaways there.
Paul Giannamore: The first PestWorld that I went to was years ago. When I think about the attendees at this PestWorld versus many moons ago, the industry feels younger to me. Maybe I'm getting older but I feel like there are younger people. I feel like businesses are definitely getting more sophisticated, for sure. Every time I go to a PestWorld, I continue to be more amazed at the variety of different software, packages, and programs there, a lot of which are competitive with each other.
We've got a proliferation now of a lot of CRMs and all sorts of other things. The other thing that strikes me is years ago, almost everyone that ran a pest control business was technical meaning that they understood how to kill bugs. There are a lot of owners right now that are owners and business managers who are focusing on growing a business and they're more focused on building a team customer service. They themselves are like me, they don't know how to kill a bug other than with the heel of their shoe.
We're starting to see the industry more and more sophisticated, which is a great thing. I also love to go to these things now because The Buzz has had a tremendous impact. We sat down with Phil Taylor and we got an opportunity to have a drink with him. He talked about The Buzz has made the single biggest impact on his firm and I heard that from a lot of folks. You're talking about the brothers who closed their eyes and did whatever we talked about or whatever some of our super sharp guests have talked about. That's great and we need to continue to do that here, Patrick. We've got to continue to raise the bar.
Patrick Baldwin: Going back to Rentokil and Rollins, you're seeing softening demand. What does that look for if you had a prediction for 2024. We've got more going on overseas. The yield curve, is this thing going to start going back the other direction? You talked about interest rates are at a 30 year high. Is 2024 going to be abysmal? How's this going to affect M&A? Do people need to plan on scaling back and cutting back on expenses because the top line revenue is not going to be there like it was?
Paul Giannamore: I would certainly be prepared for that. We're experiencing that slow down. There's no doubt that residential demand is deteriorating. I got a myriad of emails on one guy who says, “US macro seems relatively stronger than rest of the world. Certainly, Europe and Asia Pacific where things are tougher and consumers are feeling the squeeze from higher mortgage rates getting instantly passed through.
It's odd that Rentokil is still growing great guns and delivering good pest numbers everywhere else yet the weakness in the US where things in theory have been more resilient. How do I reconcile this?” He's right, Europe is a train wreck. In many countries around the world, mortgage rates work differently than they do here in the United States. In the United States, there's a lot of fixed rate mortgages, whereas in the rest of the world, they tend to be shorter tenors, meaning that they're shorter duration mortgages and they're adjustable rate.
When he says that's instantly passed through to the borrower, that's correct. Rentokil is pretty diversified. As you mentioned earlier, they have a lot more exposure to rest of world than Rollins does, for instance. The rest of world, from a commercial side, has continued to be resilient. Unless you get into cascading bankruptcies in commercial real estate and commercial enterprise, you tend to see more fluctuation in residential pest control spend than you do in commercial. Particularly outside of the United States, it tends to be pretty steady Eddie, whereas the residential will gyrate more.
How you would ultimately reconcile that is Rentokil bought Terminix and we had the one-year anniversary. Terminix is largely a residential business, general household pest, and termite. Of course, they also had a commercial division but that's quite small compared to Rentokil’s business as well as Rollins’ business. The emphasis is largely on the decline in residential demand. By the way, we're still above trend line here. It's not like things have tanked and demand has disappeared. Things have rolled over from the massive boom to the pest control industry and that was COVID.
We're still growing at above trend line and I suspect that will continue for quite some time. I don't think things are going to fall off. It's more likely that there'll be margin pressure. Rentokil did talk about declining margins. We'll see margin pressure impact pest control businesses more than just declining sales in the near term. By margin pressure, it's the labor costs, fuel costs, costs of materials, and those things will strain margins. I don't think demand is going to suddenly disappear.
Patrick Baldwin: Based on what you just read in that email, are you saying Rentokil is struggling in North America?
Paul Giannamore: They're not struggling in North America. When we talked about demand, they were specifically talking about North America demand, not rest of world.
Patrick Baldwin: Thinking about Rollins being like North America heavy, I don't know why Rollins would say great demand. Customer demands at Rentokil would say they're not. What you're saying is, is that the story? I'm not trying to call anyone a liar. I'm trying to understand between why Rollins would say one and Rentokil said the other.
Paul Giannamore: What the market saying is why is Rollins growing at 8.4% organically and Rentokil is growing at a substantially lower rate?
Patrick Baldwin: Do they report acquisitions the same?
Paul Giannamore: We're talking about organic growth. I understand what you're saying. Is Rollins doing deals like they used to and baking them right into revenue?
Patrick Baldwin: Can they still do that?
Paul Giannamore: They cannot.
Patrick Baldwin: Is there anything prohibiting from doing that?
Paul Giannamore: Yes. They're not doing that. That's a great question. This is real organic. My gut tells me that this is largely related to the integration. It is complicated to integrate cultures and pay plans and all this sort of stuff. When managers are not driving frontline growth because they have to focus on a lot of things that they never had to focus before, they will naturally take their eye off the ball.
With Rentokil, their stock rolled over because the management probably didn't do a great job saying, “This integration is a lot of work and it's going to take us time. Our managers have been bogged down. Things will grow slower while we're doing this but that's to be expected. Here are the synergies we're getting from the deal. Here's how we're on track and all these other great things about integration but it'll certainly impact us.” My gut tells me that's probably what took place.
It was a failure in communication from Rentokil to the institutional investors. The reason why I purchased Rentokil stock is because it hit the skids because it wasn't communicated appropriately. I don't think demand is drying up. I don't think the market is going to hell in a handbasket. The fundamentals still remain relatively strong both in rest of world and as well as North America. It's going to take Rentokil some time to realize this integration. I have faith that they're going to be able to pull this off.
Patrick Baldwin: Strong words, Paul. Another Rentokil and Terminix news we haven't talked about is Brett Ponton left Rentokil. He's the CEO of ServPro. Any comments? John Myers is now going to be running Rentokil and Terminix North America.
Paul Giannamore: That's correct. It was probably slightly surprising and yet not entirely unexpected that he would do that. When this merger first took place, we had some conversations either offline or online and we talked about it online that it was surprising that the two of them were around. Quite frankly, I thought if Brett was staying around, I thought John Myers was going to say, “I've been doing this for a long time. I want to do something else before I retire,” and Brett would stick around and run it, or Brett would say, “We don't need two cooks in the kitchen. John, good luck on integration, I'm out of here.” To see him subsequently leave, I wasn't entirely surprised, and I don't think many people at Rentokil were.
Patrick Baldwin: That was good separating Rollins and Rentokil performance and all that in the demand. That was helpful.
Paul Giannamore: Fat Pat, I know we didn't have a guest. We kicked out a ton of episodes on Potomac TV. We'll be getting back into interviews. I'm excited for some of the guests that we have coming down the line. We've got a few authors here that we'll be talking to here soon. I’m looking forward to that. I know that you're on the road, you're in Tampa, and then you are going to be at the FieldRoutes User Conference in Las Vegas.
Patrick Baldwin: I’ll be out in Seth Garber land and I’m taking Cameron with me. It's FieldRoutes’ first user conference but it's called Inspire. I'll be going around shaking hands, kissing babies, and hopefully not shaking babies and kissing hands.
Paul Giannamore: I saw that presentation that you guys did. FRAXN now has been around for a year. Your pest control clients now do well over $100 million in revenue. That's great growth in one year.
Patrick Baldwin: Thank you. It was a year ago at PestWorld. It's incredible to think a year ago, what was going on and where it's come and where it's continues to go. I don't know if it's self-selection or what but our clients are all great leaders who want to grow and thinking about the future and we're helping them get there. It's rewarding. You know this about me, I love to be a connector. Tell me about a problem, I’ll help you solve it, or put you in touch with the right person to help you solve that problem. It's fulfilling or satisfying as far as being part of FRAXN, being around our clients, I love it.
Paul Giannamore: Congrats to you and the team. Best of luck here in the fourth quarter. Now that you guys are doing tax, I would imagine the workload is ramping up. It looks like you got some great tax folks. I'm looking forward to getting an opportunity to chat with them here in the coming week or so to get an idea of the capabilities that you guys are building on the tax side.
Patrick Baldwin: Paul, I appreciate it. Great seeing you. Glad that you made it back from Hawaii in one piece.
Paul Giannamore: Sounds good, Patrick. I'll talk to you next week. Safe travels.
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Dylan Seals: Thank you so much as always for supporting us at The Boardroom Buzz. We know your time is valuable and the fact that you spend 45 minutes or an hour with us means the world. All the media that we put out from Potomac is meant to honor and celebrate you, the service industry owner. As Paul would say, “Yee who toil in the pest control vineyards.”
As part of giving back, we have this podcast, but more than that, Paul and I have been working our tails off over at POTOMAC TV. We've spent a tremendous amount of time, energy, and resources to build out that platform to bring you market updates, to bring you visual breakdowns of the merger acquisition process, and to tell stories and present information in ways that, frankly, it's not possible for us to do on The Boardroom Buzz.
Adding the visual element takes it to the next level. I want to invite you to go to YouTube and find us, it's POTOMAC TV. Potomac.tv will get you there. Go there and subscribe. Check out some videos and leave some comments. Let us know what you like and let us know what you don't like. Let us know what you want to see more of and we'll see you over there.
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