ROLLINS INC(ROL)Q2 2026 法說會逐字稿

Greetings, and welcome to Rollins, Inc. Second Quarter 2026 Earnings Conference Call. Operator Instructions. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lyndsey Burton, Vice President of Investor Relations. Thank you. Please go ahead.

Thank you, Donna, and good morning, everyone. In addition to the earnings release that we issued yesterday, the company has also prepared a supporting slide presentation. The earnings release and presentation are available on our website at www.rollins.com. We have included certain non-GAAP financial measures as part of our discussion this morning. The non-GAAP reconciliations are available in the appendix of today's presentation as well as in our earnings release. The company's earnings release discusses the business outlook and contains certain forward-looking statements. These particular forward-looking statements and all other statements that have been made on this call, excluding historical facts, are subject to a number of risks and uncertainties, and actual results may differ materially from any statement we make today. Please refer to yesterday's press release and the company's SEC filings, including the Risk Factors section of our Form 10-K for the year ended December 31, 2025. On the line with me today speaking are Jerry Gahlhoff, President and Chief Executive Officer; and Will Harkins, Executive Vice President and Chief Financial Officer. Management will make some opening remarks, and then we'll open the line for your questions. Jerry, would you like to begin?

Thank you, Lyndsey. Good morning, everyone. Our second quarter results did not meet our expectations, driven primarily by slower growth within certain portions of our residential pest control business. The pressure was concentrated in brands such as Orkin that rely more heavily on consumer-initiated demand through search, digital media and inbound calls. The lead environment got progressively worse as we moved through the quarter before showing signs of improvement at the very end of June. Our experience with respect to a slowdown in underlying residential demand was not broad-based across the portfolio. Brands that generate customers through relationship-based channels like direct sales, door-to-door models, and relationships with homebuilders delivered organic growth above our targeted 7% to 8% range for the quarter. For example, Home Team experienced double-digit residential growth as did Fox, who leverage their door-to-door sales force to grow in the high teens organically during the quarter. This is a testament to the importance of our diversified multi-brand approach. And beyond residential, our termite and ancillary business delivered solid double-digit growth, while commercial grew high single digits demonstrating that strategic investments we have made in support of these service areas continue to pay off. We spent a great deal of time evaluating the drivers of the slowdown in parts of our residential business. And candidly, we don't believe there is a single explanation. It's important to note that the underlying health of our customer base remains strong, and there were no notable shifts or deterioration in customer retention trends. While precise drivers are difficult to isolate, what we do know is that customer demand patterns have been more variable to start peak season than we've experienced in the better part of a decade. Regardless of the underlying drivers, our focus is on the actions needed to drive improved performance. We have implemented organizational and operational changes designed to strengthen accountability, improve execution and better align our resources with current demand conditions. At Orkin, for example, we recently promoted Scott Weaver to Chief Operating Officer of Orkin North America. Scott most recently had responsibility for all Orkin commercial operations in the U.S. This newly expanded role expands his scope of responsibility to include both residential and commercial operations for the U.S. as well as Canada. This will provide a better span of control with all division presidents now reporting to Scott, who will continue to report to Patrick Chrzanowski. We are focused on improving customer acquisition results, sales productivity, local market execution and labor efficiency while maintaining the customer service standards that have differentiated us as the leader in the market. Although we're cautious with respect to near-term trends, we were encouraged that inbound lead flow and call center volumes improved towards the end of June and have continued a positive trajectory through the first few weeks of July. Stepping back, our confidence in the long-term opportunity remains unchanged. We operate in a large and fragmented market with a diversified portfolio of leading brands, strong customer relationships, a significant recurring revenue base and a team that has the experience needed to successfully navigate near-term market conditions and improve performance. I'd like to thank our 20,000-plus teammates around the world for their hard work and dedication to serving our customers every day. I'm now pleased to turn the call over to Will. This marks his first earnings call as CFO. We're excited to have his leadership at Rollins, and I'm personally grateful for the partnership we're building. Will, take it away.

Thanks, Jerry, and good morning, everyone. I'm pleased to join you today for my first earnings call as CFO. I look forward to providing a clear view of our second quarter results, our updated outlook and the actions we are taking to improve performance. I will begin with our quarterly financial results, starting with revenue. Total revenue increased 7.9%, while organic growth was 5.7%, both below our expectations for the quarter. As Jerry mentioned, the primary driver was slower growth in portions of our residential business. We delivered growth across each of our service offerings. In the second quarter, residential revenues increased 6.6%. Commercial pest control increased 8.6% and termite and ancillary increased 10.5%. Organic growth across the portfolio was 3.6% in residential, 7.2% in commercial and 8.9% in termite and ancillary. Turning to profitability. As demand trends softened in certain areas of the business during the quarter, our cost structure remained aligned with the stronger growth outlook we anticipated entering peak season. Gross margin was 52.8% and a decrease of 100 basis points. Lower-than-expected volume in the quarter, coupled with higher medical-related costs and fuel headwinds pressured quarterly margins. The primary drivers were higher people-related costs, including medical plan expenses and service salary deleverage, which together represented 70 basis points of pressure. Fleet represented an additional 20 basis points of headwind, driven primarily by fuel. Fuel costs represented approximately 1.8% of sales in the second quarter and are expected to remain below 2% of sales for 2026. Customer response to our recent price increase has been favorable, and we continue to expect to be positive on price/cost for the year. Quarterly SG&A cost as a percentage of revenue increased 30 basis points compared with the prior year. Incremental selling investments represented a 10 basis point headwind, while higher fleet costs contributed an additional 10 basis points of headwind. The remaining pressure was attributable to other general and administrative expenses. Second quarter GAAP operating income was $201 million, an increase of 1.5% year-over-year. Adjusted operating income was $210 million, an increase of 2% compared with the prior year and second quarter adjusted EBITDA was $236 million, an increase of 2.2% versus last year, which represented a 21.9% margin. The effective tax rate was 24.2% in the quarter compared with an even 26% last year, reflecting the work our tax team has done to improve our ETR. We expect our effective tax rate to come in under 25% for the year, down approximately 100 basis points from historical levels. Quarterly GAAP net income was $144 million or $0.30 per share. For the second quarter, we had non-GAAP pretax adjustments associated with acquisition-related costs and other items totaling approximately $10.8 million in the quarter. Accounting for these expenses, adjusted net income for the quarter was $152 million or $0.32 per share, an increase of 6.7% from the same period a year ago. Turning to cash flow and the balance sheet. We generated operating cash flow of $173 million and free cash flow of $166 million. Free cash flow conversion, which is measured as the percentage of income converted into cash flow, was above 115% for the quarter. Cash flow growth was negatively impacted by the timing of tax payments associated with our tax credit planning strategy. This strategy continues to deliver meaningful benefits and is contributing to significant improvements in our ETR. We expect the timing-related headwinds to cash flow growth that we have experienced year-to-date to reverse as we move through the remainder of the year, particularly in the fourth quarter, resulting in a neutral impact on full year cash flow growth. During the second quarter, we completed acquisitions totaling $117 million and paid $88 million in dividends. We continue to expect M&A to contribute 2% to 3% of revenue growth for 2026. Our leverage ratio stands at 1x, and our balance sheet remains strong and positions us well to continue executing against our growth priorities while returning capital to shareholders. As we look to the remainder of 2026, we remain encouraged by the strength of our markets, our recession-resilient business model and the engagement and execution of our teams. At the same time, we recognize that our performance fell short of our targets and our immediate focus is on improving the trajectory of the business through disciplined execution and operational improvements. We are approaching the balance of the year with discipline, transparency and a clear focus on the controllable actions that will improve performance. Given our first half results and the visibility we have today, we are updating our full year outlook. We now expect organic growth of at least 6% for the year and incremental margins of at least 10% for 2026 with implied margin improvement in the back half of the year to be Q4 weighted. Our expectation for 2% to 3% of growth from acquisitions as well as our expectation that cash flow will continue to convert at a rate above 100% remain unchanged for the year. Importantly, the revision to our 2026 expectations reflects our current assessment of near-term operating conditions rather than any change to the medium-term algorithm we outlined at our Investor Day in May. We continue to believe this business is capable of generating organic growth of at least 7% while delivering meaningful margin expansion. The operational opportunities that underpin our longer-term margin framework remain ahead of us, and we maintain conviction in our ability to achieve incremental margins of at least 30% over time. Our priorities are clear: improved customer acquisition, increase productivity, align resources by demand and demonstrate consistent operational improvement quarter-by-quarter. We believe the actions we are taking together with the growth and productivity initiatives outlined at our recent Investor Day, position us to deliver profitable growth and attractive shareholder returns that have been the hallmark of our financial performance for decades. We are focused on execution, accountability and consistent improvement, and I look forward to updating you on our progress in the quarters ahead. With that, I'll turn the call back over to Jerry.

Thank you, Will. We're happy to take any questions at this time.

Today's first question is coming from Tim Mulrooney of William Blair.

Just a couple of questions about top line growth here real quick. The first one is just on the components of organic growth. Have you seen any changes in retention or pricing? Or is this primarily just new sales that are pressured right now?

We've not seen any hesitancy from our customers on pricing. And as I mentioned in the remarks, our customer retention remains strong. We have also seen slight improvements in customer retention in the second quarter in some parts of the business. So those two elements aren't drivers of anything that gives us any pause or any cause for concern.

I thought that was the case, Jerry. I just wanted to make sure — so I appreciate that. So it sounds like it is just the top of the funnel issue. So maybe we can dig into that a little bit. Curious why you think digital leads are slowing so much right now? I mean, I know they've been under pressure for a while. It sounds like though something really shifted in April and May. So I was just curious, have there been any changes in SEO or from the LLM overviews that are impacting leads? Like do you think this is an AI thing or do you think it's a softer consumer? Just curious what you think is going on here?

Tim, if you would have been in the room to hear the number of hours and the amount of time and the research and the amount of effort that's gone into trying to explain that, you would appreciate how much we've dug into it. That's why I called out that I think it's truly a multitude of factors. April was okay. April wasn't far off. It was really we were expecting by mid-May that it would have made a turn. And May did not start out great. We thought, well, it's coming, it's coming. It's coming. We looked at lots of factors. You think, okay, May is when gas prices spiked, and maybe consumers are sizing their belts. Maybe there's a little lack of consumer confidence. But yet, at the same time, we were still able to drive termite and ancillary with our existing customer base and those close rates weren't impacted. So we felt like maybe the consumer is still healthy. Then you look at regional weather or is it just pest pressures, and we started diving into what's going on, especially in the onetime space. We look at data that show certain categories of pests that we measure a lot of different pests and what the reasons we get calls for. And things like mosquito — mosquito calls were significantly down year-over-year and other kinds of onetime services like residential rodent and residential carpenter ant were down fairly significantly, which leads you to believe maybe there's something going on with pest pressure in the month. And we look at the mosquito and that's kind of a bellwether as to say what's going on from a pest pressure standpoint. And it seemed like mosquito season started really late. We also tested the search environment. We looked across the competitive space. We pulled a lot of different levers to see, hey can we juice this? Can we create more demand? Can we — and we were doing that testing a variety of things and adjustments to how you play in the digital space. None of those things really moved the needle a lot and it led us to believe quite heavily that we just had fewer people year-over-year actively searching the digital channel for pest control needs. That's the conclusion that we came to that it just seemed fewer. And I think if we thought it was the LLM or the AI, it doesn't explain everything: we didn't do something radically different at the end of June to change our approach and suddenly, it just picked back up again. Then through the first few weeks of July, we saw the same thing again. So it's not like our strategy change is what made it vary. Pest pressure and consumer-driven demand was the part that was off there. I know I'm going on a bit here, Tim. Like I said, we've spent a lot of time analyzing this. The whole scenario harkened back for me to second quarter of 2017 — that was the last time I remember seeing this kind of a start in the season, and I'll never forget it because it was my first time having to go represent our operations in front of Randall Rollins and Gary Rollins, and we had a rough Q2. It felt like the season just never started. It was a very difficult period. And so that's exactly what this felt like. It just felt like a really super late start. What we attribute it to, I think it's all kinds of things. I think in all these things, it's a confluence of all these things likely. We also look at brands like Orkin and you think, oh, it's the consumer, there's probably some impact from lower income bands, but affordability maybe gets a little tougher. So we're seeing those things, but it's really not one thing that we can put our finger on. There are a lot of factors. We're encouraged by what we're seeing now, and we're going to continue to make adjustments. We're also going to be disciplined about our spend and make sure we don't overspend, especially in the back half of the year on driving customer acquisition. We're going to be focused on efficiency, focused on using the right lead channels and making the best decisions we can to add customers to the customer base.

Okay. I appreciate all that extra color, and good luck in the back half of the year.

The next question is coming from Manav Patnaik of Barclays.

I was hoping you could just help us size Orkin and maybe all the other brands that collectively make up this — what you said was brands more reliant on consumer initiated demand. And I guess even within that, how much is kind of self-help on your part versus you're just waiting for the consumer to reach out to?

Yes. Thanks for the question, Manav. Orkin has a large residential customer base. Other brands like Home Team and Fox are primarily residential. A lot of our other brands are not quite as focused — the larger ones are not quite as focused just on residential; they may do a lot of termite ancillary, they may also do a lot of commercial. The vast majority of the residential sits in Orkin, Fox, Home Team and to some degree also Northwest Exterminating. The work and piece of that is very sizable in the whole. Those other brands are able to grow a little more rapidly right now than Orkin, but the headwinds in volume that Orkin is getting are dragging that overall residential number down into the 3.6% range just because Orkin is more sizable than those other brands. That helps add a little color because we don't.

And across the other specialty brands, that business performed quite well, especially where there's proactive protection-focused sales relationships at the doorstep, for example, with big-box retailers and homebuilder partnerships.

Totally different business model, yes, that's right, Lyndsey. And some of those brands are much less dependent on the digital channel and spend very little marketing dollars in digital. Home Team, for example, spends almost nothing in the digital channel. It's just not what they do. So they're much more insulated from those consumer-driven demand channels where customers are calling because they see a problem.

Got it. And then the 2Q '17 analogy that you pointed out, maybe you could just help us with kind of were there some of the similar. What caused that, I guess, back then? And then kind of how long perhaps would take you guys to come out of that?

Yes. So I remember that because our Q2 close meeting was in early July, just like we had the same kind of meeting here. It's kind of deja vu. What happened in that situation was that July came back and we ended up in pretty decent shape in Q3. It wasn't like a long recovery because once you got into the heat and the peak season again, it just sort of took back off. It was a really awkward sort of pregnant pause of waiting for that shift. We thought it was never going to come, but then it finally did — it happened around the Fourth of July that year, it hit, and then all of a sudden, we were off and running again. But it was pretty painful. I have scars. It was a pretty painful Q2, but we came right out of it in Q3.

The next question is coming from Greg Parrish with Morgan Stanley.

So you talked about the improvement in late June and that persisting into July here. Maybe can you give us a sense of kind of what that exit rate was and where you're at here in July to start?

We basically saw the gap narrow back to being very similar to the prior year rather than being down versus the prior year. That's the narrowing we saw.

We're talking about lead flow there, right? In terms of the volume of inbound leads, that was more comparable to where we were a year ago by the end of June.

That's right. Very much in comparison. And look, we are getting better quality leads. The team is driving better quality leads, so we're making some of it up in closure and start rate and still managing to get price in that. That seems healthy. We can often manage regionally if there are pockets where lead volumes are down; we usually make that up by lead closure. But in months like May and parts of June, where there was just a large gap, we couldn't make that up through pricing and closing efficiency alone.

Okay. That's helpful. And then maybe just to turn to margin. Your updated incremental margin guide is plus 10%, you did 8% in the first half. So it doesn't imply a whole ton of improvement in second half. You talked a lot about margin, focused on margin efficiency efforts. So just trying to reconcile those two — what's in your control, what could lead to upside in the second half?

Greg, as we look through the back half of this year — through the first half, we're sitting just below 8% of incremental margins. All those things we outlined at Investor Day — improvements with our fleet, better utilize our procurement function from a materials and supplies perspective, improve employee retention — those remain fully intact. But we're also really cautious because Q3 of last year had a lot of favorability in the numbers, so we've got a difficult comp to hurdle going into Q3 this year. We think we have some good benefits we may be able to pull through in the fourth quarter, but we're trying to be cautious with what we know today. We didn't expect to be posting an incremental margin of 6.5% in the second quarter. That certainly changes our outlook for the full year. But we still think all the things we talked about represent plenty of opportunity.

Yes, there's opportunity in the back half to greatly improve sales efficiency. We have no intention of staffing up the way we staffed up last year, so there's some opportunity in SG&A. We just entered into a new agreement with our fleet supplier Wheels that will help us manage fleet costs better as we move forward. We have opportunities in procurement. Will pointed out some of the headwinds we're having in medical. We're going to push our people to use lower-cost options like telehealth and our on-site clinics because they provide convenient care and can drive cost savings. Medical costs have been challenging, and we have efforts underway to reduce those costs.

The next question is coming from Curtis Nagle of Bank of America.

One, and apologies if I just missed this. Any commentary on recurring sales within residential? What did that look like? And how is that trending so far to start 3Q?

Could you restate that question, Curtis?

Yes. Of course, Jerry. Just recurring revenue versus onetime within residential. What did that look like in the quarter? And how is that trending so far in early Q3?

The recurring business has been healthier. We've been able to sell, convert and retain better on the recurring side. The onetime categories bore the brunt of the slowdown. There were parts of the second quarter where, for example, residential rodent demand, which is often a onetime category demand, was down — it could be down 30% to 50% in some months. Some occasional pests and onetime types of pests like stinging insects were also down. We saw much better growth in residential recurring and consumer interest remained, but the onetime demand went negative throughout a large part of the quarter, and that was a meaningful drag to organic growth, especially for brands like Orkin that are more pest-pressure driven versus prevention-driven. That also affects performance in the digital space.

Okay. And maybe just to follow up. If you could quantify that, I think recurring in residential was somewhere around 7% in Q1. What did that look like in Q2? And then on fuel costs, you mentioned under 2% for the year. With fuel costs rising today, how is that contemplated? Anything on chemical costs? Is that in the guide?

Onetime volume went negative low- to mid-single digits overall. It wasn't steep in total but given Orkin's size, it had a larger impact. Fuel in the quarter was up about 30% year-over-year, and we managed that through routing efficiencies — miles driven per vehicle per month improved about 8% — and other operational improvements. Fuel costs were about 1.8% of sales in the second quarter and we expect them to remain under 2% of sales for the year. Our procurement team continues to look at materials and supply spend each month to drive savings and leverage our size and scale on product purchasing. We believe there is continued upside to drive savings on procurement and other cost areas.

Curtis, I'd add that we continue to anticipate the pressures we're seeing today from fuel and medical costs, and we don't yet know where insurance and claims will go. We're encouraged by the benefits from our safety programs but continue to factor those headwinds into our outlook. All of these are contemplated in the 10% incremental margin outlook we provided. From a residential recurring perspective, we see it relatively consistent with our overall recurring growth. What we didn't have was the expected volume from the lead environment, so we didn't add customers at the same pace. The onetime piece was the volatile component which went negative in a few months within the quarter.

Right. So recurring somewhat consistent with overall organic growth. Okay.

The next question is coming from George Tong of Goldman Sachs.

In terms of the reasons behind the slowdown in areas of residential relying on search, digital media and inbound calls, you mentioned looking at competitive trends. To what extent did your competitors also face this issue? In other words, what market share changes did you observe?

We do our best to monitor activity across the competitive landscape — national competitors, regional competitors and mom-and-pop activities. We also monitor the DIY space to see if people are being driven that way. We did not notice any clear competitive activity that stood out as someone taking significant share from us. The pulse we've heard from others in the industry is that it's felt softer broadly, which validates some of our research that suggested a softer consumer period. But I won't speak for all competitors — just that we didn't see clear evidence of share loss driven by competition.

Got it. That's helpful. And then you mentioned testing and experimenting with various strategies to try to counter the slowdown in the quarter. How much did your actions move the needle? Or is this purely exogenous and not responsive to changes that you've tried?

That points us back to the consumer because we tried a lot of things and were not able to move the needle meaningfully. You can shift dollars into other channels or make tactical changes, but the experiments did not materially increase volume. You might take a little from a competitor, but often it wouldn't be worth the investment. On the other hand, our door-to-door approach is generating sticky customers — we can reallocate resources there because prevention-focused sales continue to work well. We're not simply waiting for the consumer to call; we're proactively selling prevention where that model fits.

Our next question is coming from Josh Chan of UBS.

I guess on the channels, does it make sense to you that the consumer would slow down only on the digital side, but not the other side? Is it because the digital side overwhelmingly skews to onetime as well? Like is that the alignment for why that channel particularly is softer?

A lot of digital leads are problem-driven: you see a problem and you want it solved. For example, you have ants in the pantry, you tried DIY, it didn't work, so you call a pro. Orkin invests in brand recognition because that brand solves problems when people see them. Door-to-door and homebuilder channels are prevention-driven: sell protection before a problem is visible. Those sales are different consumer touchpoints serving a different need and may skew higher-income for door-to-door in some markets. So yes, digital can skew more toward see-a-problem, fix-a-problem behavior, which is more one-time in nature, while relationship-driven channels skew prevention and recurring revenue.

Yes, yes, absolutely. That makes a lot of sense.

It's not that digital is necessarily exclusively one-time, but it is often more reactive and problem-focused.

Okay. And then I guess my other question is, I know a lot of attention is being paid today on residential, but it looks like the commercial and maybe termite and ancillary growth were both a little slower than Q1. Is that just normal fluctuations? Or do you make anything out of those movements in those businesses?

The termite and ancillary business was a bit softer in May — strong in April and strong in June — but May was tougher. The commercial side was a tad softer in the quarter but the lead indicators in commercial are positive. We're landing new accounts and seeing good activity in commercial sales, and we remain very positive about investments in that area. We believe we have opportunities to execute better and to leverage those commercial investments into the back half of this year and next year.

The next question is coming from Jason Haas of Wells Fargo.

Are you able to give us any sense of like what the exit rate was in June or what you're seeing in July? I'm just trying to reconcile the comments that it sounds like things got better, but then the guidance is going to 6% organic revenue growth. So like are you running the 6% range? Or what should we make of that?

Jason, we were pleased with what the end of June showed us in our results, and we're pleased with what we're seeing so far in July, but we're trying to be cautious. We have seen quick shifts before where the environment changed rapidly. We're only a couple of weeks into the quarter, so given the visibility we have today, we factored what we see into our outlook and have set the full-year organic growth expectation at least 6%. That said, we remain cautious as we monitor trends closely.

Okay. Great. That makes sense. And then sticking with the idea that maybe customers are using an LLM first to try to solve their problem. If that is weighing on the business, do you think that's because they're able to resolve it with a DIY method by getting advice from an LLM, and therefore there's less pickup of the phone and calling a professional? Or do you think the LLM is routing them to local providers rather than an Orkin professional? And what can you do to change SEO to show up better in those LLM results if that's the case? Curious how you're thinking that through.

I have seen how LLMs can direct people to DIY solutions, and it's possible that this is having some impact, particularly in tighter economic times where people try to solve problems themselves. But as an expert, I know many DIY attempts are temporary solutions; people often call a pro after efforts fail because they didn't find the source or didn't treat it correctly. Data also shows many people prefer not to do it themselves. We are monitoring how we show up in LLM-driven searches and have metrics and initiatives to improve visibility in that space. Additionally, the search providers are moving quickly and will likely monetize those results in various ways, which could change the landscape in months or weeks. It's possible LLMs are one of multiple factors in the confluence affecting demand, but we can't quantify its exact impact today.

The next question is coming from Peter Keith of Piper Sandler.

So you're not the only company to talk about weakness in May. One thing we've been looking at is a significant uptick in drought conditions throughout much of the East Coast. We think drier conditions would prevent the spread of mosquitoes. I guess you did talk a bit about weather, but how do you feel about the drier ground conditions this year as a potential headwind on the business?

Peter, it's a great question. We dug into that very deeply, looking regionally across our top markets and weather conditions to try to attribute what happened. I had many hypotheses, most of which couldn't be proven definitively. What we do know is that pest pressure appeared lower in certain categories, and that could be weather-driven, possibly from conditions months prior that affected populations. It may be something like a harsh winter leading to lower pest populations the following spring. All of these variables are in play, and it makes me more interested in predictive models. We tried demand forecasting previously, but with today's data and processing power there's an opportunity to develop better models. The month of May completely baffled us from a pure attribution standpoint.

Okay. That's fair. I guess what we're saying too is there wasn't much regional variability in the business where weather could have had an impact, correct?

Correct. The volume challenges we saw were across the entire United States. There wasn't one region that stood out as exceptionally different, and that's not normal. That is another reason why the weather hypothesis didn't fully hold up in our analysis.

The next question is coming from Tomo Sano of JPMorgan.

So given the recent headwinds and analysis you've conducted around the slowdown in residential, just curious, how are you thinking about the strength of the organization going forward, particularly with respect to demand forecasting and the design of your cost structure, please?

One thing I want to make crystal clear is that we are a very people-oriented organization, and we want to continue to invest in our people. We'll continue to invest in training and in the right programs. The reality is we need to execute better. We will focus internally on execution and not make shortsighted or irrational adjustments that hurt the business long-term. That is rooted in our people-focused culture. We will continue to invest in programs like Ecolab and other training that help our long-term capability even as we manage short-term performance.

Tomo, one thing to add: the slowdown in residential was not uniform across our business, which is why we feel confident in our multibrand, multi go-to-market approach. Some brands and channels held up better than others.

In some situations, if the business isn't as strong in one market and is stronger in another, we can redeploy people where they are needed. For example, we moved some folks from Orkin into the Fox brand where they had more demand and we had capacity. When we invest in our people and their training, we work to retain them as Rollins teammates.

Well, just one follow-up. If you could give us like 10% updated incremental EBITDA margins, is that something we should think about as a floor when modeling scenarios of more downside in residential demand? Or is there downside below that given operating leverage dynamics?

When we thought about the greater-than-10% incremental margin piece, that's related to correcting the cost structure for the demand we see today and taking actions over the back half of the year. The items we outlined at Investor Day remain in play, and we have actions that will drive further improvement. We believe greater than 10% is a reasonable floor for this year. It will be weighted into the fourth quarter, and Q3 will be a difficult comp relative to last year.

Yes, Q3 is a tough comp. We're going to work hard to improve performance and capture the opportunities we see.

But to reiterate, for the full year we felt comfortable guiding to at least 10% incremental margins as a floor given the actions we can take and the timing of expected benefits.

The next question is coming from Ashish Sabadra of RBC Capital Markets.

Given the recent choppiness in revenue and margin, my question is more around the medium-term outlook philosophy. Why maintain that current guidance rather than lowering the bar and embedding some conservatism to make it easier to meet those in a tough environment, but also beating those expectations in a good market? So just a question on the philosophy there.

Ashish, thanks. We didn't feel the need to change our medium-term guidance because we remain confident in our ability to drive revenue growth over time. What we've seen in the last couple of quarters was a pause in revenue flow that we didn't expect, and when revenue is below our expectation it makes margin expansion more difficult. We continue to believe in the medium-term targets — particularly the 30%-plus incremental margin over time — because there are many initiatives in procurement, fleet, and sales productivity that still underpin that thesis. So we maintained the guidance while being cautious on near-term execution and visibility.

Operationally, I don't think we were at our best in the second quarter. We have identified areas where we left value on the table, and we have concrete actions to improve execution in the back half of the year and into next year.

Very helpful color. And maybe just a quick follow-up on — with the stock dislocation here, are there things from a capital allocation perspective that you can do to take advantage of this market dislocation?

Our capital allocation strategy remains the same as in prior years: reinvest in the business, pursue M&A opportunities that fit strategically, and return capital to shareholders. There has been some repurchase activity in the market to offset dilution from stock-based compensation; we did not participate meaningfully in the buyback secondary last November but have done nominal repurchases more recently. We remain disciplined and will continue to engage the Board on capital allocation decisions.

And our cash flow generation is really strong, which supports the flexibility to deploy capital where it creates the best value.

Absolutely — cash conversion remains robust.

The next question is coming from Harold Antor on for Stephanie Moore of Jefferies.

On the margin front, you discussed people cost being part of the headwind. On the hiring side, where are you in hiring? Could you talk about retention and hiring that you've seen, and is there a $50 million opportunity to improve margins? Also, anything on salaries which were a headwind?

Thank you. We see opportunities in retention — fewer hires due to improved retention would be beneficial. This quarter and in our forecast the more pronounced pressure was from medical expense rather than core salaries. Medical costs were an important driver of margin degradation, and that is where we saw the majority of the headwind. Employee retention remains an opportunity that we continue to work on.

We continue to focus on retention, particularly for teammates in their first year on the job where churn is costly. Seasonal hiring volumes were lower in Q2 due to the weaker residential lead environment, especially at Orkin. We will continue to invest in retention and training to reduce churn and the associated costs.

The next question is coming from Connor Cerniglia of Bernstein.

Could you speak a little bit about some of the difficult comparables you're lapping next quarter from last year? I know you commented that Q4 is where you'll really see the improvement. But looking at insurance and claims last year, it was a pretty big tailwind. More recently, it's been the 3% to 3.5% range. Am I right in thinking there's a pretty stark difference in margins between Q3 and Q4? Or is my math wrong?

You're not wrong. Q3 of last year had a lot of favorable items, so Q3 this year will be a difficult comp. We expect a more favorable Q4 relative to that. Our comps in Q3 last year were strong and make year-over-year comparisons more difficult this year.

Okay. Great. I just wanted to make sure expectations are correct there. That's it for me.

Our final question today is coming from Anthony Chukumba of Loop Capital Markets.

I had a question on M&A. Could you provide some color on the acquisitions you did in the second quarter?

Anthony, in the quarter we acquired Romex; that was the largest acquisition we completed. Romex is performing well and is already providing good results. We remain disciplined in how we evaluate M&A targets, but our pipeline is healthy.

Yes, we closed several other tuck-in deals in the quarter — all nice companies and good cultural fits. Our pipeline remains strong, and we expect M&A to continue contributing 2% to 3% of revenue growth without changing our strategic approach.

Thank you. At this time, I would like to turn the floor back over to Mr. Gahlhoff for closing comments.

Thank you, everyone, for joining us today. We look forward to speaking with you again on our Q3 call later this fall. See you.

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.