Kenneth Krause: Certainly. When we look at M&A, we continue to be focused on M&A. We continue to focus on executing that disciplined strategy. We see roughly 2% carryover coming into 2024 from M&A. A large part of that, of course is here in the first quarter with Fox, we acquired Fox last April. So we still have one quarter of benefit. When we look at the pipeline, we see a healthy pipeline. We were very active to close out the year and then also to start 2024. January activity in deals that we closed are up. So we continue to chart towards that 2% plus level of growth, 2% to 3% plus level of growth associated with M&A as we go forward. But the carryover is around 2%.
Michael Hoffman: Okay. And then it’s shared with us that incremental margins on an adjusted basis for 2029, both on an adjusted and adjusted 28%, 29%. What is the target for this year? And how does non-operating gains influence that? And maybe can you isolate what those gains were in ’22 and ’23, so we can understand how to think about them in ’24. There’s my creative question with four [indiscernible]?
Kenneth Krause: Certainly. When we look at the incremental margin profile, there’s no reason — I mean, we continue to see and have a confidence level in delivering 30% incremental margins. If you look at the incremental margin in the last several years, we’ve seen it step up. Our focus has been — we’ve been laser-focused on incremental margins and driving improvements on the margin profile. And so when we think about that level, that’s the range at 30%. We’ve seen quarters as high as 35% to 40%. So it will jump around from quarter-to-quarter. And you’re going to see that. But generally, when we step back and we finished the year at 28% to 30%, we’re pretty pleased. That means we’re getting 70 basis points as we did of improvement in EBITDA margins.
The gains on asset sales will come through. They came through in Q3 — or I’m sorry, Q4 here. And we saw roughly $3 million lower asset sales that came through other income, about 40 basis points on the margin line and the EBITDA margin line. And that will come through from time-to-time. And we’ll try to isolate that as we go forward for you.
Michael Hoffman: Okay. Thanks.
Kenneth Krause: Thank you.
Operator: Our next question is from Ashish Sabadra with RBC Capital Markets. Please proceed with your question.
Ashish Sabadra: Thanks for taking my question. Maybe if I can ask a clarifying question on resi. Obviously, good to hear the recurring revenues within resi continue to do really well and the digital inquiries are also pretty stable. Just a question there is, have you seen any change, particularly from competitor pushing harder on the marketing spend, is that changing anything? Did that change anything in the fourth quarter? But maybe importantly, going into 2024, how should we think about the demand environment? You talked about a pretty solid demand environment. I was wondering if you could provide any color on cicadas and the two groups of cicadas coming or emerging in ’24, what do would that mean for the demand environment? Thanks.
Jerry Gahlhoff: Ashish, I’ll — this is Jerry. I’ll kind of try to take the first part of that statement. I asked our marketing team what was going on in the fourth quarter from a digital spend standpoint. It was a time when we’d like to invest a little earlier in the year in some of the marketing. And it did appear anecdotally that there was a pretty significant uptick in competitive spend in the fourth quarter at a time when we were backing, winding down some of our marketing spend that there was some pretty significant investment in the market there in the fourth quarter. So we certainly saw the competitive environment pick up in that regard where there was more spend into there. Now how that equated to sales and starts to new customers or onetime work on the residential side, we don’t really know. But — so that’s on your first question, that’s…
Kenneth Krause: Yes. And the second part of your question, I think, it was around cicadas and new pests. And we continue to monitor new pest activity. Cicadas are one of the many pests that we continue to monitor. Jerry, I don’t know if you want to add. I’m certainly not the expert when it comes to cicadas. You’re probably much better positioned to answer that?
Jerry Gahlhoff: Yes. Well, cicadas typically are not a household pest control problem. They are a nuisance because when they come out and the volumes as they did a couple of years ago, they wreak havoc from a noise standpoint, I know — I have a house in the mountains that you couldn’t sleep at night, and it was very annoying. But they tend to just go away over time, but it probably will create some awareness about pests in general and things that bother humans, but it’s not as though our pest control companies are going to be out there attempting to eradicate cicadas. So that’s seemingly an impossible feat. We’re really just out there waiting for them to die off and go away and start the whole process over again. So it will probably create some buzz in the marketplace, and that’s always good for business.
Ashish Sabadra: That’s very helpful color. And maybe if I can ask a question on the back-office modernization. Ken, if you can just help us understand where you are on that process? And how should we think about that contribution to incremental EBITDA margins in ’24, but also midterm? Thanks.
Kenneth Krause: Yes. We continue to be very early on in our journey with respect to modernization, making good progress. We’ve added a number of new team members across our back office, we’ve made some significant changes. But we’re pretty excited about what’s to come. With that said, when we look at the SG&A performance over time, we’ve continued to see that improve. Going back a couple of years, it was almost 31%. It’s come down under 29% here in the quarter. So we continue to leverage that and despite having investments and growth initiatives associated with the commercial business as well as other parts of our business. And so we’re early on in the journey. We feel like there’s some opportunities as we go forward to continue to improve the business.
Ashish Sabadra: Thanks. Very helpful and really strong momentum in commercial and ancillary services. So congrats on that.
Kenneth Krause: Thank you.
Operator: Our next question is from Josh Chan with UBS. Please proceed with your question.
Josh Chan: Hi, good morning. Thanks for taking my questions. Maybe bridging from the prior question on SG&A. I guess, you’ve done a really good job improving gross margin over the last several years. I guess from an SG&A perspective, is there an expectation that the leverage there can increase a little bit over time as some of your initiatives get more traction?
Kenneth Krause: Yes. I think there’s an opportunity to improve upon the SG&A performance. And we’ve said that for some time, and we continue to see improvement in SG&A. With that said, we do have a disproportionate investment in securing customers through advertising and door-to-door and other activities. But with that said, our focus is to continue to improve upon the administrative side of the back office and without sacrificing the investments for growth. And so we’re hopeful to see improvement as we go forward, just like we’ve seen in the last couple of years here. In the last year or so, we continue to see improvement despite the investments we’re making. But we feel like we’re well positioned on that front.
Josh Chan: Okay. Thank you. That makes a lot of sense. And on the Residential side, you mentioned that the onetime service slowed down a little in Q4 and maybe a little slower in Q1 as well. Is there anything to interpret from that from perhaps a macro perspective or any other reasons that would drive that to be a little slower for the upcoming quarter as well?
Jerry Gahlhoff: Yes. Really, what we saw was a slowdown in some of the residential bed bug, onetime work and also on the wildlife side, which often involves some rat type of — rat and rodent type of work, a slowdown there. Those are the main drivers of that, whether that’s seasonal, whether it’s something that’s changed in the weather or change in demand. We’re not completely certain of any of that. But bed bugs, for example, being down has always been something that has fluctuated from quarter-to-quarter and year-to-year on some of the ups and downs. And it was just more significantly down for us in recent months.
Kenneth Krause: When we look at that question, Josh, because we’ve looked at that as well because we deal with consumers, homeowners. And when we look at the business and we assess more of a macro level, we look across our business. We look not only in the Residential pest control that Jerry just spoke about, well we also look at the Termite Ancillary. And that Ancillary business is normally some high-ticket items. And if that continues to grow, the pace it’s growing, it’s indicative that the consumer is pretty healthy. With that said, we were proactive in the end of last year at tightening credit down in a number of different areas just to ensure that we don’t run into any issues from a credit perspective. And so in our acceptance score, we raised the minimum level per credit, just trying to be proactive in today’s market. But from a demand perspective, we’re certainly not seeing any major deterioration in growth profile with our customers.
Josh Chan: Great. Thank you both for the real good color. And good luck in 2024.
Jerry Gahlhoff: Thank you.
Operator: Our next question is from Toni Kaplan with Morgan Stanley. Please proceed with your question.
Toni Kaplan: Thanks so much. I was hoping you could give us an update on labor, namely your salespeople. Are you seeing higher employee retention right now versus normal? And I know you mentioned deploying some sales tools and wondering if you could talk about other initiatives as well.
Jerry Gahlhoff: Yes. So the labor side of it is we have been very good at hiring onboard and training our sales teams, especially on the — well, really on the Commercial and Residential side, we’re talking specifically a little bit more about the Commercial side. But one of the things that you learn with on the Commercial side, where you typically have a longer sales cycle, it takes longer from the time so you have a lead or create a creative lead to get a deal closed, you really have to get those salespeople productive in selling and finding success early on. And that’s what helps you with keeping people in the long term. The more they’re successful, the more they’re winning. The longer they stay and the more money they earn, they go to our presidents club events, those types of things.
And I’m really proud of our — of the sales team that we’ve built both on the Commercial and Residential side. It’s a team of very high-performing people that we’ve enabled that through how we hire, how we train, how we invest in them, how we give them those tools to be successful. And that’s ultimately what drives retention. That’s what makes them want to stay. So we have a lot of momentum in that space that I just feel really good about as we head into 2024.
Toni Kaplan: Terrific. I wanted to ask a big picture around footprint. Are you happy with the current coverage and portfolio of geographies that you’re in? Or are there other geographies that you’d like to gain further density in? Thanks.
Jerry Gahlhoff: I would say we are pretty happy. We have very broad geographic coverage under the Orkin brand in North America. And when you look in the U.S., mainly the area that we don’t have the second bite of the apple brand strategy is fully built is really probably in the Midwest where we have some opportunity where we would like to continue to add and invest in M&A. And then when you think about international, we’re very happy with our Australian operations growing and healthy, and we’re going to continue to build out Australia, the United Kingdom and Singapore where we currently operate, but we really haven’t put a lot of upper energy behind expanding outside of those areas. We like where we are, and we’re going to continue to build and focus on those countries where we’ve expanded internationally.
