Greetings, and welcome to the Rollins, Inc. Second Quarter 2025 Earnings Conference Call. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to your host, Lyndsey Burton, Vice President, Investor Relations. Lyndsey, please go ahead.

Thank you, 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, 2024. On the line with me and speaking today are Jerry Gahlhoff, President and Chief Executive Officer; and Kenneth Krause, 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. I'm pleased to report Rollins delivered strong second quarter results. Overall, we continue to see solid growth across all major service lines with total revenue growth of 12.1% and organic growth of 7.3%. The growth was healthy, but a little choppier moving through the quarter due to some seasonality, particularly in parts of the country where we saw a cold and wet start to peak season. Demand picked up in June, resulting in a strong backlog of work going into July, which made for a busy start to Q3 for our team. I'm thrilled with the progress we're making thus far with the Saela acquisition that we announced in April. The integration has gone smoothly and their performance is exceeding our expectations, thanks to the efforts of our collective teams. We've ensured that Saela can remain focused on their customers and teammates without disruption. I'd like to express my gratitude to the Saela team and to all of our Rollins teammates who have worked so hard to make this happen. As you know, we believe the combination of Orkin and our strong group of regional brands is a competitive differentiator for Rollins, giving us multiple bites at the apple with potential customers, while also providing some balance and diversification with respect to customer acquisition. The addition of Saela further strengthens these competitive advantages for us. Our investments in strategic M&A opportunities are also complemented by ongoing investments to drive organic growth. As expected, we continued our investments in incremental sales staffing and marketing activities ahead of peak season to ensure that we are positioned top of mind for the consumer as the season began. We are well staffed on the sales, technician, and customer support front with our teammates onboarded, extensively trained, and ready to provide an exceptional level of service for our customers. On the commercial side of our business, we are encouraged by our momentum. Over the last year, we have strategically added resources to support our dedicated commercial division within Orkin. These resources are paying off as Orkin Commercial delivered double-digit recurring growth in the second quarter. As a reminder, while commercial takes a little more upfront investment to drive growth, it's also the highest retention business among our service lines, making the lifetime value of these customer relationships very attractive. And I'm excited to announce that we recently promoted Scott Weaver to Chief Operating Officer of Commercial Operations for Oregon. Scott has been incremental in leading our commercial efforts over the past few years and will help to drive further alignment and focus in this elevated role. Beyond growth, our dedication to operational efficiency and continuous improvement is an important part of our strategy and culture. Ken will discuss in more detail, but we did see some headwinds to our margin performance in the quarter, most notably from insurance claims and less vehicle gains in our fleet versus last year. Encouragingly, we did leverage our people costs despite ramping up staffing to align with our peak season. Our team also made tremendous improvements in teammate retention, especially with new hires, which helped as well. We also leveraged sales and marketing expenses despite the ongoing investments we continue to make in support of our long-term growth objectives. In closing, we're excited about where our business stands today. The year is off to a solid start, and demand from our customers remains strong. Our teams in the field are ready to support our customers through the peak season, and I want to thank each of our teammates around the world for their ongoing commitment to our customers. I'll now turn the call over to Ken.

Thanks, Jerry, and good morning, everyone. The second quarter reflects continued strong execution by the team. A few highlights to start. Growth was robust for the second quarter. We delivered revenue growth of 12.1% year-over-year with organic growth of 7.3% versus last year. Gross margins remain very healthy. Gross margin of 53.8% is one of the highest quarterly gross margins that we've reported despite some meaningful headwinds from insurance claims and less vehicle gains, which are included in fleet costs versus a year ago. Our GAAP earnings were $0.29 per share, and excluding certain purchase accounting expenses, primarily associated with larger acquisitions like Fox and Saela, earnings were $0.30 per share. Finally, we delivered a 21% improvement in operating cash flow, while free cash flow was up over 23% versus the same period a year ago. Diving further into the quarter, we saw double-digit growth across each of our service offerings. In the second quarter, residential revenues increased 11.6%. Commercial pest control rose 11.4%, and termite and ancillary increased by 13.9%. Organic growth was also healthy across the portfolio, with growth of 4.9% in residential, 8.4% in commercial, and 10.3% in termite and ancillary. Turning to profitability, our gross margins were healthy at 53.8%, but down 20 basis points versus last year. We saw improvements in margins associated with direct costs, which represent over 85% of our cost of services and include our people, materials, supplies, and fleet expenses, excluding our vehicle gains. This was offset by the headwinds from insurance and claims that we previously discussed. Quarterly SG&A costs as a percentage of revenue increased by 40 basis points versus last year. We saw leverage on sales and marketing costs while fleet and administrative costs were neutral, and insurance and claims were a headwind. Second quarter GAAP operating income was $198 million, up 8.7% year-over-year, while adjusted operating income was $206 million, up 10.3% versus the prior year. Second quarter EBITDA was $230 million, up 9.4% and representing a 23% margin. Our adjusted EBITDA was $231 million, up 10% and representing a 23.1% margin. As previously mentioned, we made an adjustment of approximately $6 million to our reserve at the end of the quarter to account for developments on a handful of legacy auto claim cases, which weighed on incremental margins in the quarter. Excluding this, our incremental margins would have approximated 25%. On a sequential basis, incremental margins from Q1 to Q2 were north of 30%, and we continue to anticipate an improving margin profile as we move through the back half of the year. The effective tax rate was 26% in the quarter, in line with our rate from a year ago. The quarterly GAAP net income was $141 million or $0.29 per share, increasing from $0.27 per share in the same period last year. For the second quarter, we had non-GAAP pretax adjustments primarily associated with the Fox and Saela acquisition-related items, totaling approximately $7 million of pretax expense in the quarter. Accounting for these expenses, adjusted net income for the quarter was $147 million or $0.30 per share, increasing 11.1% from the same period a year ago. Turning to cash flow and the balance sheet. Operating cash flow increased 21% in the quarter to $175 million. We generated $168 million of free cash flow, a 23% increase versus the same period a year ago. Cash flow conversion, the percent of net income that was converted into operating cash flow was strong at 119% for the quarter. For the first half of 2025, we converted 125% of income into operating cash flow. We made acquisitions totaling $226 million, and we paid $79 million in dividends in the second quarter. Dividends increased 10% from the prior year and are at a very healthy and sustainable rate of approximately 45% of operating cash flow in Q2 and less than 50% of operating cash flow year-to-date. Earlier in the year, we accessed the public debt markets and established a $1 billion commercial paper program despite higher debt balances associated with the Saela acquisition our interest costs have declined by approximately 15% on a year-to-date basis. Our leverage ratio stands at a healthy 0.9x, and our balance sheet remains very healthy, and it positions us well to continue to execute on our capital allocation priorities. As Jerry mentioned, we closed the Saela acquisition earlier in April and are very excited about the strategic growth opportunities this acquisition will provide us. Saela performed exceptionally well in the second quarter, growing double digits versus last year, while margins were accretive to our margin profile. Looking to the remainder of 2025, we remain encouraged by the strength of our markets, our exceptionally resilient business model, and the execution by our teams. We are positioned extremely well to deliver on our financial objectives despite uncertainty in the current macroeconomic environment. We continue to expect organic growth in the 7% to 8% range for the year, with growth from M&A of 3% to 4%. We remain focused on improving our incremental margin profile while investing in growth opportunities. We anticipate that cash flow will continue to compound and convert at a rate that is above 100% in 2025. With that, I'll turn the call back over to Jerry.

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

Our first question today is coming from Tim Mulrooney from William Blair.

I was hoping you could unpack the residential performance a little bit in the quarter. It looks like organic growth was 4.9%. Can you maybe unpack that between the recurring component and one-time services? And maybe touch on residential lead volumes as you were moving through the second quarter, exiting the second quarter and the first couple of weeks here in the third quarter?

Certainly, Tim. Thank you for the question. Overall, as Jerry had indicated in the prepared commentary, it was a little bit choppy. We started the quarter, and April was pretty healthy. May was weak, but then June came back very strongly. In fact, we exited June with a very strong backlog. We had a number of high points for us as we think about the quarter. Our growth, quite frankly, was accretive in June to the overall quarter. We continue to see a robust level of demand that provides us with a sense of optimism as we start the second half. When I step back and I look at the growth that we posted in the first half of this year, we posted 5.2% residential revenue growth, and I compare that to what we saw for the full year last year; we delivered 5.2% in the full year last year. So it gives you a sense that things aren't really falling off; things are holding in there. We feel like at that level, we can continue to deliver on our financial commitments and our growth profile.

Tim, this is Jerry. I'm certainly not concerned about what we saw on the residential side because it's still pretty strong. As Ken mentioned, May was a tougher month since it was just rainy and cold, productivity was hard; it was definitely a challenge. The second part of your question, you asked about lead volumes and what we're seeing in terms of lead volumes. When you think about Orkin, which is lead-volume driven, especially in the digital channel, the team at Orkin did a fantastic job navigating some changes. You think about what's happened with Google and Google's AI agent and AI overviews and the shift that's occurred. Our marketing team has had to make some adjustments in this environment. The reality of what happens is we start seeing some softening on the lead side; however, we do see that our adjustments have allowed us to get higher-quality leads. Those higher-quality leads result in a lot fewer, what we noticed, a lot fewer window shoppers, and we get more real serious buyers. When you have that, you're driving higher close rates and some efficiency in the process by closing more, which also translates into higher start rates. For example, by the second week of June, we were setting daily sales records over and over again. The marketing team's adjustments have resulted in a fantastic performance even amidst the perceived softening of lead volumes. Regarding the components of recurring versus one-time services, both were similar and trended similarly through the quarter. One-time was good, and we've noted a significant pickup, but I think because of the slightly cooler May, some of the stain pests and those kinds of things are really starting to peak now, whereas in the past, they may have started to peak earlier in June. It seems like we're maybe 3 to 4 weeks off from what I would say a normal cycle would be. Does that help, Tim?

Yes. That's all great color. And I do want to dig in a little bit more on one thing you mentioned there, Jerry, about generative AI and its impact on your business, both on the revenue and cost side. On the revenue side, I'm wondering if you're taking any steps to optimize how Rollins appears on generative AI searches for pest control solutions. I know today, SEO is standard practice in the industry, but at one point, that was a novel approach, right? So it sort of feels like generative AI search optimization might be that at some point. Also, on the cost side, I'm curious if you're seeing areas where you could leverage this technology, particularly as it relates to chatbots and AI voice over the last couple of years.

Yes, if you wanted to address the cost side, Ken. On the sales side, I don't want to get into the specifics of what we do for competitive reasons, but I will say that our teams have certainly made some adjustments, and these adjustments have caused us to shift where we allocate our marketing dollars. It has shifted how we think about the sales process. Our marketing team, particularly on the Orkin side that specializes in performance marketing on the digital side, has navigated these changes exceptionally well. I would leave it at that.

On the growth side, the only thing I would add is that if we over-index too much on the digital or the AI aspect, we might miss the bigger part of the story. The diversification across our portfolio is key. For example, when you consider some of the brands that performed exceptionally well, such as Fox and Saela, which are relatively new to the portfolio and employ different marketing strategies, they provide optimism and confidence that we've positioned the portfolio correctly to capitalize on growth trends regardless of external influences. Regarding the cost side, yes, there are opportunities to leverage technology, and we're actively examining our cost structure across the board, challenging ourselves on how we can do better, which is a core value at Rollins. We're executing on that continuously.

Our next question is coming from Manav Patnaik from Barclays.

I don't think you typically quantify contributions from the organic growth algorithm, but could you please provide context or some color on the contribution from pricing volume and your momentum from the multi-brand strategy?

Certainly, Ron, and thank you for the question. It's Ken. When you look at the pricing strategy, we continue to price at a CPI plus level. CPI recently printed just south of 3%. We're targeting price at the 3% to 4% range. This isn't consistent across every one of our brands or geographies, but generally, that's the type of growth we're looking for. The remainder is volume. It's hard to quantify how much of that volume is from additional services or cross-selling, but I can tell you the volume we're seeing on the organic side is outpacing the underlying market. We feel good about that 7.3% organic growth we posted, especially considering that June growth was north of that. So we have confidence in our ability to deliver on our financial algorithm.

If I may, a multifaceted question on margins please. You talked about the benefit of pricing productivity, leverage across key cost categories for peak season spend, the legacy auto claims, what was the impact of investments? What would the adjusted incremental margins have been? Can you provide context on the update to the guided incrementals approaching 25% to 30%?

Certainly. Looking at the business and the incremental margin in the quarter, excluding the insurance and claims, it was roughly 25%. If you recall, we ramped up investments in selling and marketing last year in the second half. In Q2 of this year, we began to see some leverage of about 10 basis points associated with selling and marketing costs. If you set aside that increase in selling and marketing, it's reasonable to think that incremental margins were around 28% to 30%. This business should ideally be in the 30% incremental margin range. Thus, we provided a range of 25% to 30%. But importantly, in the second quarter, we delivered 7.3% organic growth in revenue, an 11% increase in adjusted earnings per share, and over 20% growth in cash flow, aligning with historical trends.

Your next question is coming from Toni Kaplan from Morgan Stanley.

I had a quick question on M&A in the quarter. There were several transactions, including Saela headlining. Just curious how you're seeing valuations and the competitive market in general?

It's still a competitive marketplace. There's still a lot of private equity in the space, particularly for smaller tuck-in size deals, which leads to more competition. I wouldn't characterize anything radically different in terms of valuations as a result of that. However, there are different geographies that certain investors are willing to invest in, and we're actively looking at strategic deals that make sense for us. The pipeline for acquisitions continues to be very healthy, and we haven't seen any significant shift in that regard.

To add, Saela is an outstanding example of a recent acquisition that continues to achieve all five key metrics we reference. The business is growing strong double digits organically year-over-year and is accretive to our margin profile in its first quarter of ownership. When considering the non-GAAP basis, it generated about $0.01 in earnings, remaining neutral to GAAP earnings. This achievement is particularly commendable in the current interest rate environment. We continue to see strong cash flow, and we expect to exceed our cost of capital in a relatively near time frame. Thus, we're confident in the multiples we are investing in and the attractive returns on these investments.

Great. Just one follow-up regarding the stronger demand in June flowing into July. Is that mainly in residential or across all segments?

It's really across all segments. Each aspect of our business saw a strong uptick in June, and there was no shortage of work that carried over into the first week of July.

Our next question is coming from George Tong from Goldman Sachs.

Can you elaborate on the legacy auto claims that impacted margins this quarter? How predictable are these? And do you expect future margins to be affected?

Thank you, George, for the question. It's a really difficult area. We do our best. We work with an outside actuary and specialists involved in providing our best view each time we close the books on a quarterly basis. However, things change, as we saw this quarter. Some of these claims can be 3, 4, or 5 years old, and they may mature during the course of a quarter, necessitating adjustments to our financials. We're making significant strides in vehicle and driver safety, skills that impact the overall number of claims we're experiencing. Yet, this liability can take several years to fully settle, and we may continue to face these situations going forward. Our approach is comprehensive, ensuring we maintain adequate reserves with the help of specialists.

Our next question is coming from Ashish Sabadra from RBC Capital Markets.

I was curious about trends in commercial and how you're executing against your midterm targets there? It seems like solid growth in the quarter? Additionally, are there any tariff issues to call out in material supplies or demand?

Commercial has proven to be a strong opportunity. We continue to invest in staffing and growing our sales force while identifying opportunities and underserved markets. Our playbook remains consistent but is intensified with a focus on better alignment between marketing efforts and commercial leadership. This commitment remains strong, and we see significant long-term customer value in commercial services.

Yes, the commercial business is excellent, and it has a slightly higher margin profile. Regarding tariffs, we don't see any impact, particularly in materials and supply. This quarter, we leveraged our material and supply spend. There was some deleveraging in fleet costs, but that's primarily due to gains we recognized last year when turning in vehicles. Overall, the cross-border flow and tariffs are not a significant concern for us.

Just a quick follow-up about balancing debt repayment with M&A activities and capital returns.

Certainly, we feel well-positioned in terms of our financial policies. We maintain flexibility with an adjusted leverage ratio of around 0.9x, and we are currently at 0.6 to 0.7x. But we've added some debt in the last couple of years and will maintain discipline moving forward. We do have opportunities to enter the investment-grade bond market, reinforcing that we're investment-grade rated now. We're committed to remaining disciplined, balanced, and executing our growth strategies while also returning value to shareholders.

Our next question is coming from Peter Keith from Piper Sandler.

I wanted to ask about growth investments. I believe you started this about four quarters ago. Are you now lapping those investments, leading to a reduction in the pace of spending? How do you feel about these investments now driving returns and possibly increasing sales?

We feel good about the investments we're making and the returns we're seeing. As Jerry mentioned about commercial investments, we're also seeing robust levels of growth in residential and ancillary services. As we go into the third quarter, we’re lapping those investments, so we expect to see improvements in margin profiles. We will continue to invest and pursue growth in this resilient market. If we can maintain double-digit earnings growth and 15% to 20% cash flow compounding, that will be our focus moving forward.

SG&A leverage was not as significant as in previous quarters, indicating improved expense control. Can you unpack that a little?

Certainly. In the administrative cost area, we continue to see improvements. While SG&A costs were neutral this quarter, we're ramping up focus and productivity within the selling and marketing areas. We’re attacking our cost structure and pursuing continuous improvement, with the executive leadership team aligned around this initiative. We're analyzing our spending on various fronts; examining event costs, meeting expenses, back-office staffing, and optimizing processes.

Our next question is coming from Jason Haas from Wells Fargo.

Incremental margins seem to be guided at 25% to 30% for the full year. Based on our calculations, this might indicate incremental margins in the mid-30% range for the second half. Just want to confirm if that's an accurate assumption as it suggests a notable increase given the recent figures.

What we're looking at is that the incremental margin profile should reflect last year's performance. We saw healthy incrementals in the first half, and parked around 17% in the second half. We're targeting mid-20% incrementals for this year. It’s crucial to drive consistent double-digit earnings growth. These metrics should help maintain positive cash compounding results.

As a follow-up, could you comment on how the ancillary services performed? It's a good indicator of consumer health.

Yes, the ancillary business has been performing excellently. We’re adding staff and seeing productivity improvements among our sales teams. This sector remains strong, and we provide customers options to finance larger items, which aids in closing deals and enhances customer service. We have not observed any struggles from customers in deciding on our ancillary services.

The 10.3% organic growth in the quarter is healthy, in fact June was several hundred basis points higher than that, so we maintain vigilance here regarding consumer health. Importantly, we’re not seeing a slowdown.

Next question is coming from Josh Chan from UBS.

Jerry mentioned some weather impacts in the quarter. Could you specify the geographies affected? Given the strength of the backlog rolling into July, do you believe the weather situation has normalized?

May had spotty weather in many areas. Locally, in Atlanta, we typically enjoy swimming by early May, but this year it was only possible in June due to the unusually cold and rainy weather. The Southeast, where most of our business operates, particularly faced challenges early in the month. However, by the end of the first week of June, we experienced a considerable uptick and returned to strong demand.

Yes, indeed. The colder start in various regions was notable, but June saw strong continuity in growth across all service offerings, which gives us confidence heading into the summer months.

Our next question is coming from Harold Antor from Jefferies.

On Investor Day, you discussed moving SG&A as a percentage of sales from 30% to below that. What’s your current perspective on the progress made in that regard?

Our SG&A is roughly 30% of sales. The bulk comprises selling and marketing costs, an area we're willing to invest in further. However, the remaining segment presents substantial improvement opportunity. With our value creation program aimed at enhancing our cost structure, we aim to enhance both operational efficiency and margin profile.

Any comments about regulatory changes on pest control products?

We've faced regulatory changes at the state level for as long as I can remember. States like California, New York, and Massachusetts have active rules. However, we have a strong technical team, including entomologists and industry relations specialists, who are prepared to tackle these challenges. Our adaptability allows us to respond proactively to necessary changes.

Our last question is from Brian McNamara from Canaccord Genuity.

I wondered if you could give a brief update on your retention efforts with first-year staff. Jerry, I think you mentioned previously seeing a double-digit improvement in short-term retention in Q1. How did Q2 perform?

Thanks for asking, Brian. I'm incredibly proud of our substantial improvements regarding short-term turnover, which has long been a challenge for us since COVID. We've achieved double-digit improvements in that area. The leverage in service wages reflects our efforts in hiring and training, thus allowing us to invest more in retaining employees who stay with us longer. We're focusing on sharing best practices among our teams for ongoing improvement. We've made significant strides, and I'm very proud of the team for their accomplishments. We've reached the end of our question-and-answer session. I’d like to turn the call back over for any further or closing comments.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.