Rollins Inc Q3 FY2025 Earnings Call

Greetings, and welcome to the Rollins, Inc. Third Quarter 2025 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lyndsey Burton. Thank you. You may begin.

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 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 today and speaking are Jerry Gahlhoff, President and Chief Executive Officer; and Ken 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 exceptional third quarter results. Overall, we continue to see solid growth across all major service lines with total revenue growth of 12% and organic growth of 7.2%. Growth from acquisitions was bolstered by the performance of Saela, which continues to exceed our expectations. The integration of Saela has progressed very smoothly, thanks to the efforts of our collective teams. As you know, we believe in 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. We've made a number of investments on the commercial side of the business and remain encouraged by the momentum we are seeing as a result. 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 third quarter. As a reminder, while commercial takes a little more upfront investment to drive growth, it's also the highest retention business amongst our service lines, making the lifetime value of these customer relationships very attractive. 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 are pleased with our margin performance in the quarter, which was supported by some favorability related to insurance and claims as well as leverage in other key cost areas. Encouragingly, we continue to see tremendous improvements in teammate retention as a result of our ongoing initiatives, which benefits us from a people cost perspective. We also leveraged sales and marketing expenses despite ongoing investments we continue to make in support of long-term growth objectives. We're also proud of the significant investments we're making in our people to support the future growth of our company and establish consistent leadership behaviors across the enterprise. Our talent and development team has designed a program called the Collab, a 3.5-day experience for all people managers. Our teammates meet in cross-branded groups for best practice sharing and networking. Servant leadership is the foundation of these sessions, which are designed to help leaders enhance skills for personal development, team development and business growth. After the initial session, leaders participate in additional guided practice, peer coaching and ongoing learning. Our efforts here are intended to create a marketplace of cross-brand, cross-functional talent where teammates can seamlessly transfer between brands, divisions, our home office and field operations. This will further enhance career opportunities for our teammates and create a robust pipeline of future leaders that will not only sustain our growth, but also help us reach our full potential. The Collab initiative began this summer and will continue well into next year as we put over 2,000 additional people leaders through this development experience. In closing, we're excited about where our business stands today. As we look to close out 2025, we remain well positioned for continued growth, both organically and through acquisitions, and are focused on continuous improvement initiatives to develop our people and enhance profitability throughout our business. I want to thank each of our teammates for their ongoing commitment to their customers. I'll now turn the call over to Ken.

Thanks, Jerry, and good morning, everyone. The third quarter shows our team's continued strong execution, resulting in outstanding financial performance. To highlight a few points, we achieved revenue growth of 12% year-over-year with organic growth of 7.2% across our services. Our adjusted EBITDA margin rose by 120 basis points to 25.2%, driven by leverage in our financials with incremental margins around 35%. GAAP earnings climbed over 21% to $0.34 per share, and earnings, excluding certain purchase accounting expenses mainly tied to larger acquisitions like Fox and Saela, were $0.35 per share. Additionally, we saw over a 30% improvement in operating cash flow, while free cash flow increased by 31% compared to the same time last year, allowing us to raise our dividend significantly for the fourth quarter. In terms of performance, we experienced double-digit growth across all service lines. Residential revenues rose by 11.2%, commercial pest control increased by 11.8%, and termite and ancillary services grew by 15.2%. Organic growth was strong across our portfolio, with rates of 5.2% in residential, 8.3% in commercial, and 10.8% in termite and ancillary services. We ended September strongly and are entering Q4 with a healthy backlog. When looking at profitability, our gross margins were solid at 54.4%, which is a 40 basis point improvement from last year. We also saw cost improvements in materials, insurance and claims, and fleet expenses, although people costs remained stable, impacted by increased medical-related claim reserves. Our SG&A costs as a percentage of revenue improved by 60 basis points year-over-year, with leverage gained in key cost areas including sales and marketing, administrative costs, and insurance and claims. Third-quarter GAAP operating income reached $225 million, an increase of 17.3% year-over-year, while adjusted operating income was $232.1 million, up 18.4%. EBITDA for the third quarter was $257.6 million, growing 17.1% and reflecting a margin of 25.1%. Our adjusted EBITDA was $258.3 million, marking just under an 18% increase with a 25.2% margin, achieving incremental margins of 35.4% for the quarter due to direct cost leverage. Furthermore, we recognized a net $5 million from favorable adjustments related to auto and medical claims, and even without these adjustments, our incremental margins were approximately 31%. We had anticipated improvement in the second half, and due to Q3 performance, year-to-date incremental margins are nearing 25%. The effective tax rate for the quarter stood at 24.8%, down from last year's rate of 26.1%, reflecting the positive impact of our tax planning efforts, which we expect to continue benefiting from in the long run. Quarterly GAAP net income amounted to $163.5 million or $0.34 per share, up from $0.28 per share a year ago. For Q3, we incurred non-GAAP pretax adjustments predominantly related to the Fox and Saela acquisitions, totaling about $7 million in pretax expense for the quarter. After these adjustments, our adjusted net income was $168.5 million or $0.35 per share, representing a greater than 20% increase from the same period last year. Regarding cash flow and our balance sheet, operating cash flow rose by 30% to $191 million, while we generated $183 million in free cash flow, up roughly 31%. Cash flow conversion, measuring the percentage of income converted into operating cash flow, was strong at 112% for the quarter, and over the first nine months, we converted 120%. We completed acquisitions totaling $35 million and paid $80 million in dividends during the quarter, with dividend payments up 10% from the prior year, maintaining a sustainable payout rate of around 44% of free cash flow in Q3 and 49% year-to-date. We also recently announced an 11% increase to our quarterly dividend. Since early 2022, we have raised our regular dividend by over 80%. Year-to-date, we have undertaken nearly $300 million in acquisitions, paid around $250 million in dividends, invested close to $25 million in CapEx, and borrowed approximately $100 million. Our cash flow performance has been exceptional this year, facilitating a balanced capital allocation strategy. As part of our modernization efforts, we accessed public debt markets earlier this year and established a $1 billion commercial paper program. Despite increased debt linked to the Saela acquisition, our interest costs have decreased by around 7% year-to-date, and our leverage ratio is at 0.8x. We are well-positioned with access to cost-effective capital for business growth, allowing us to maintain a balanced capital allocation approach, reinvest in the business, enhance our dividend as earnings and cash flow grow, and pursue opportunistic share buybacks. We successfully closed the Saela acquisition in April, which has provided strong strategic growth opportunities, as Saela has performed exceptionally since the acquisition, showing double-digit growth year-to-date and contributing positively to both our margins and EPS on a GAAP basis. Looking ahead to 2025, we remain optimistic about the strength of our markets and growth opportunities and the execution of our teams. We are witnessing healthy growth, expanding margins, improving tax rate, and strong earnings and cash flow compounding. We are positioned very well to meet our financial objectives and still anticipate organic growth in the range of 7% to 8% for the year, along with M&A growth of 3% to 4%. Our focus is on driving double-digit growth in earnings, improving incremental margins, and making growth-oriented investments. We expect cash flow to continue converting at a rate above 100% for 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 comes from Tim Mulrooney with William Blair.

Congrats on a nice quarter. I wanted to just talk about the performance in residential. You talked about accelerating trends coming out of June and into July. Was that momentum largely sustained through the rest of the quarter? And can you talk about how things look in October?

Yes. We exited well when we go back to Q2, Tim, and we continue to execute well throughout the quarter. In fact, we actually saw even more improvement here in the month of September. It's too early to tell in October. Early indications are that it continues to be a healthy pace of growth. But we feel really good about that 5.2% residential revenue number because when you unpack that number and you look at the more recurring business that we have, it's approaching 6%. And those are really good metrics. Those are metrics that will enable us to continue to deliver on our financial commitments.

Got it. Yes, that recurring piece being at 6% does sound healthy. So that's good to hear. I also wanted to switch gears real quick and just ask about Saela. I heard you say that the business is performing ahead of your expectations. I was hoping you could dig into that in just a little more detail here, what that actually means? Are they growing faster than you expected? Did they have a stronger summer selling season than what you expected when you acquired them this past April? Or were the margins higher than what you were expecting? Is it just a smoother integration? What is it about this acquisition that's made it so accretive to EPS so quickly?

Yes. When we analyzed the Saela transaction, we projected revenue for the first year of ownership to be in the mid-60s range, but they are actually exceeding that significantly, likely reaching the mid-70s instead. We're very pleased with their performance. They are effectively running a strong business. Regarding customer acquisition, they have a diverse strategy; while they do engage in some door-to-door sales, only about a third of their growth comes from that method. The rest of their growth mirrors ours, coming from cross-selling to existing customers, as well as offering additional pest control and related services. They also utilize digital marketing in their markets. Overall, they have a balanced growth approach similar to our portfolio. They are excited to be part of Rollins, and we provide them with the autonomy necessary to perform their roles effectively. In terms of integration, we mainly assist with back-office tasks, like HRIS systems, without interfering in their daily operations. Our goal is to let them operate independently because that's how you maximize the potential of a well-performing business, and we’re seeing excellent results from the Saela team.

The only thing I would add, Jerry, to that is that the Saela and Fox acquisitions are giving us some new geographies and exposure to very favorable regions of the country. And we're seeing really good benefits associated with that, one. Two, when you think about earnings accretion, to have an acquisition to be neutral or slightly accretive to GAAP earnings in the first 6 months is really very uncommon these days with the cost of borrowing around 4%. And so it's really good to see that. The margin profile is really strong. We're not seeing any significant changes in churn, churn is healthy. And so we feel like we've got a really good business with a great team, and we're excited about the future.

Our next question comes from the line of Manav Patnaik with Barclays.

This is Ronan Kennedy on for Manav. Can you please talk about the investments in commercial and further elaborate on the timing of an impact to the demand drivers? I think you had alluded to double-digit recurring in Orkin. And then anything to note on competitive dynamics within the commercial space, please?

Yes. We continue to see good results there. We've made investments. If you go back to our Investor Day in 2024 in the spring, we had talked about commercial being an area of focus. And Scott and the team are doing exceptional. We've made significant investments. We've pulled commercial branches out of residential branches. We've placed a disproportionate focus on that business, and we've made investments with feet on the street and other sorts of areas, and it's helping us drive very strong levels of growth. For the quarter, we were just north of 8%. It accelerated from where it was in the second quarter and in the first half and also from where it finished last year. And so we feel really good about the investments we're making. We're getting productivity from the investments. We're seeing benefits, and we're continuing to grow in a very attractive space.

Yes. One of the investments we made about a year ago was increasing our commercial sales efforts. This requires training and a longer sales process compared to residential sales, so these investments typically take some time to yield results. However, we are beginning to see the benefits of this as the productivity of our additional staff is improving. Specifically, at Orkin, we're experiencing double-digit growth in recurring revenue, driven by our marketing teams aligning with salespeople to enhance their success. Everything is running smoothly, and our team is performing exceptionally well.

It's interesting, Ronan, last year when we finished and even in the first half of this year, we discussed incremental margins. We noted that we needed some time for our new staff to become more productive, and that’s exactly what we've observed. As we enter the third quarter and conclude it, we’re seeing incremental margins exceeding 30%, which aligns with our expectations. It's encouraging to see the margin profile improving in the second half.

And there's still room for improvement.

And that's a good segue to my second question. Just to unpack the incremental margin a little further, please, I think 31% ex insurance, auto and medical. You just touched on it now. Can you just dive a little deeper on whether it's pricing or productivity, where you are seeing the greatest leverage across SG&A categories? And how we should think about how that will trend in the trajectory over the coming quarters, please?

Certainly. Both pricing and productivity are contributing factors. Pricing consistently contributes to the incremental margin and margin improvement. We are optimistic about price-cost across the business, which is beneficial. Productivity is also yielding positive results as we gain leverage in nearly all areas of SG&A. When we look at the business, our incremental gross margin this quarter is in the high 50s, reaching 58%. This positions us to achieve a profile of over 30 percent, driven by productivity and leverage in SG&A, where the incremental SG&A is around 23 percent. Overall, we are seeing strong performance throughout the P&L due to price-cost dynamics and productivity, which positively impacts both gross and SG&A results.

Our next question comes from the line of Toni Kaplan with Morgan Stanley.

This is Yehuda Silverman on the line for Toni Kaplan. Just had a question about how conversations with customers have been going regarding pricing heading into next year. Have some customers been more or less willing to accept any price increases? And do you see typically an increase more or less in one segment versus another?

When it comes to pricing, we've been internally reviewing all the data for the past month or two. We believe our pricing strategy is effective and will remain so as we approach 2026. Our focus has consistently been on consumer price inflation plus, and that's our target as we look to next year. This year, we are at a level of 3% to 4%, and we are considering maintaining that range for the upcoming year. While we aren’t ready to specify the exact level, we are confident it will continue to support our margins as we plan for 2026.

Got it. And just a quick follow-up on like lead conversion. I was curious, how you're focusing on targeting this younger demographic of customer base and just an update on if you've been able to convert leads faster than a typical season or if it's going as expected with this newer staff you brought on?

Yes. Our lead closure is up. So we're very, very happy with the performance, whether it's on the residential side through the call center, creative leads, those kinds of things. So it's a testament to not only good sales processes, the training, everything that we invest in ramping up our new teammates that we add to our brands. If you take a look at what Orkin does and the messaging, the marketing, where they place their ads, the way our media look; who we're trying to appeal to is exactly that. We're looking at how do we target the 30-something year-old, possibly first-time homebuyer, maybe they're the second-time homebuyer that's in the 40- to 45-year range. So when you look at how we design our ads, the messages that we are portraying and where we place those ads, whether it's on TikTok and Facebook and those kinds of things, we're 100% targeted towards those kinds of folks because we know that those are the folks that are buying homes and will need pest control in the future. And rather than doing it themselves, we know they're also the ones that want to use a professional. So we hope to make sure that we're positioned to fulfill that need for them.

Our next question comes from the line of George Tong with Goldman Sachs.

As you look at exit rates and comps from the prior year, can you discuss which segments have the most opportunity for organic growth acceleration in 4Q and what the primary drivers are?

Thanks for the question, George. This is Ken. We feel good about our exit rate with respect to our business. We're reluctant to talk too much about Q4 just yet. But what I would say is we feel really good about how we left the quarter from two fronts: One, backlog, really good demand level, especially in some of the termite and ancillary business, but also in some of the other areas; and then just general growth. I commented earlier around the recurring revenue in residential, and we exited Q3 very strongly there as well. So all fronts, we feel really good about it as we start the fourth quarter and really excited as we think about all the opportunities we have ahead of us.

Got it. That's helpful. And then you mentioned several areas of the business that surprised the upside in the quarter relative to expectations. Were there any parts of the business that perhaps surprised to the downside compared to what you were expecting heading into the quarter?

Ken, it was a really great quarter, and I'm incredibly proud of our team's performance. They truly excelled. However, there are still opportunities for us to continuously improve and enhance our efforts. I don't see any expense issues. Overall, the fleet continues to provide a bit of a boost when considering vehicle gains, and we are making progress in that area.

I feel really good about the quarter. The four key numbers I want to highlight are 7, 12, 20, and 30. We achieved 7% organic growth, 12% total growth, 20% earnings growth, and 30% cash flow growth, which is truly exceptional. Alongside this growth, we still see opportunities regarding pricing and costs, as well as on the SG&A side. Additionally, we've seen a notable improvement in our effective tax rate, which has decreased by 120 to 130 basis points this quarter. We're optimistic that this trend will continue in the long term. There's a solid plan in place, and we have a lot to feel positive about. While Jerry mentioned some temporary headwinds in fleet related to vehicle gains, we don't believe this will have a lasting impact on our business. Overall, we're confident as we exit Q3.

Our next question comes from the line of Tomo Sano with JPMorgan.

Could you provide an update on the current competitive landscape in the pest control industry? How have your modernization efforts helped to differentiate Rollins from competitors? And what are your expectations for these initiatives and maintaining or expanding your market position going forward, please?

So this is Jerry. We've got a very healthy competitive landscape. And I wouldn't say anything has changed materially in that regard over the last couple of years. We still have large regional competitors that do a fantastic job and make us all better and as well as local, call them, mom-and-pops, there's lots of them in this really healthy industry. So not much there has changed. We are continually trying to take share. Our approach is to do that through our multiple brands, multiple bites at the apple, lots of different ways to acquire new customers, whether it's HomeTeam acquiring through the builder channel or a Fox heavy and door-to-door or Orkin and the power of their brand name and doing performance marketing to supplement that. So we have those strategies for ensuring that we continue to grow our business units. And I think that's reflected in our numbers at the end of the day. You see the power of our brands. You see the power of our business model, what we're able to do. To me, it speaks for itself. Ken?

I would agree. I was at PestWorld last week, and it's an honor to represent the company in that setting because I really do feel we have a great competitive landscape and competitor set. It's great to interact with all of the various competitors that we have out there. But it's great also to be a leader in growth and really helping set the tone and all the teammates we have around our business. I feel great about it. I feel great about our position and excited to be a part of this team.

Our next question comes from the line of Peter Keith with Piper Sandler.

Nice results, guys. I wanted to dig into the cash flow, which the accelerating growth is rather impressive. And I was hoping you could just unpack the drivers to that improvement? And are those drivers sustainable?

Thank you for the question, Peter. It's Ken. Looking at our growth in free cash flow, it's approximately 24% year-to-date. There are some contributing factors. For instance, cash paid for taxes has decreased by about $20 million to $22 million. Even if we exclude that, we're still experiencing cash flow growth at around 18%. This improvement is due to better management of receivables, which are not growing as quickly as they were last year. Consequently, this has positively impacted our portfolio and cash flow results. We believe that mid-teens growth in cash flow and compounding cash flow is achievable. We're actively working on this, and I think this growth rate is sustainable. It allows us to keep investing in our business for dividends, engage in share repurchases occasionally, and grow the business.

Okay. Very good. And then I wanted to follow up on an earlier question regarding the incremental margin. So it was quite impressive in Q3, particularly with the quantification that was 31% when you adjust for the claims. So it seems like you've had a step-up as you've moved past the growth investments from the last 12 months. I guess the heart of my question is you've kind of guided for a range of 25% to 30%, and you've stair stepped up above 30%. Is this something you think is now sustainable for at least the foreseeable future?

I think when you're post the 35% number, it validates what the business can do. I don't know that the business is going to do that every quarter. We're going to make investments. We're a growth business, and our focus is growing double-digit revenue and growing double-digit earnings, converting that into compounding cash flow at the pace I just mentioned. And so you're going to see that jump around from time to time, but we do certainly focus on expanding margins. This year, we've talked about 25% to 30% incremental margin targets for the year. We're approaching that year-to-date. And so as we go through the fourth quarter, we'll continue to evaluate that, but we feel good about where our current level of incremental margins are.

Our next question comes from the line of Jason Haas with Wells Fargo.

This is Jean on for Jason Haas. Maybe we can discuss the strength in termite and ancillary services. There was a noticeable acceleration on an organic basis, and it occurred against a tougher comparison. I'm curious if there is anything contributing to that momentum, what the sales environment looks like, and whether that momentum can be maintained.

This is Jerry. So I think that's the performance that we continue to see in termite and ancillary is also a sign that the residential consumer is healthy, and they're willing to buy and spend for these types of essential services. And they're both preventative services as well as oftentimes termite is preventative, some maybe exclusion work is preventative. And sometimes it's also remedial treatments that need to be done. So that continues to go well. Again, those investments we make in people, adding people and cross-selling to our existing customer base is one of the least expensive, if you call it lead-gen opportunities that you have is cross-selling to your existing customers. We know that when they have more than one service with us, they're stickier and they're more loyal to the brand. So it's just such a wonderful business model, a great opportunity. And when we look at allocating capital to grow our business, that's an area that makes all the sense in the world to keep driving.

Great. And you guys lapped over some vehicle sale gains this quarter, which you guys called out would be a peak headwind in 3Q, and that should alleviate a bit in 4Q. So assuming insurance and claims hold up, could we see similar, if not stronger margin expansion in 4Q? Or is that not how we should think about it?

It's difficult to predict that we'll experience greater margin expansion in Q4 than the current expectation of over 35 percent in incremental margins. Our goal remains to improve margins, and we will continue to prioritize that moving forward. We anticipate some vehicle gains appearing in the P&L for Q4, although not at the same scale as Q3, and we still recognize some challenges in the P&L. Ultimately, our focus is on increasing revenue, aiming for double-digit growth in both revenue and earnings. This is the direction we are pursuing for the business. Additionally, we believe that the prices we are setting will allow us to leverage the P&L effectively.

And just remember, this is a short-cycle business, especially on the residential side, alright? That commercial side is a little less vulnerable to that. But when you look at weather impacts, early storms, hurricanes, all those kinds of things can affect our business in the short cycle. Usually it doesn't affect it for a long term. Usually, there's a recovery. And we tend to recover quickly from those types of events. You just never know what can happen. So I want to temper any of your thoughts because we just never know what can happen, especially this time of year while you're still in hurricane season.

Our next question comes from the line of Stephanie Moore with Jefferies.

I would like to discuss the M&A pipeline and the overall market conditions. Could you share your current pipeline and expectations through the end of 2025 and into 2026? Also, could you comment on the competitiveness of the M&A landscape, particularly regarding pest control opportunities, such as door-to-door services and other emerging trends in the industry? Are you noticing any increased competition in these specific areas?

Our performance in the third quarter was strong, and we successfully closed seven deals, even after a large acquisition like Saela. Typically, we experience a slowdown following such significant deals, but that wasn't the case this time. This indicates that our pipeline remains robust, with ongoing opportunities available. There is an increase in private equity interest in our sector, which is acceptable, as we have always faced competition for similar opportunities. It's important to note that there are about 19,000 pest control companies in North America, offering plenty of opportunities for both tuck-in acquisitions and platform growth. Additionally, we aim to generate 2% to 3% of our revenue through mergers and acquisitions, which means we need to enhance our capacity to handle more deals as we expand. We are investing in our infrastructure to enable us to process transactions efficiently, perform rapid analyses, and select the most suitable acquisitions for our portfolio. This investment over the past year will allow us to strengthen our competitiveness in the market as we continue to grow.

And what I would add, Stephanie, as we've talked about a number of times, it is competitive, it's an incredibly attractive market and space. But what we enjoy is being the acquirer of choice oftentimes because of our willingness to pay a fair price, but also to take care of the employees and the teammates we're acquiring, the brands we're acquiring. And so that's a really important part of the equation and has helped us compete and successfully closed a number of the deals that we've closed so far and expect to close going forward.

Recent deals with Fox and Saela are perfect examples of continuing to build our reputation as an acquirer of choice.

Exactly.

I have a question regarding overall investments in customer acquisitions and various marketing expenses. One aspect I’m interested in is search engine optimization and being at the top of search engine results. Have you noticed any effects on your business from the AI initiatives, specifically in terms of AI taking over aspects of search engine optimization, leading to fewer clicks or conversions? I'm not sure if that was clear.

Yes, it's a common question, especially for our marketing teams. It has caused some disruption in that area. Earlier this year, we noticed a significant impact from that shift. However, as I previously mentioned, our close rates have improved. We are receiving higher-quality leads, which means fewer window shoppers who are merely comparison shopping. Our marketing team is actively adjusting our strategies related to AI, including Google's AI tools, to better take advantage of these developments. Occasionally, the landscape shifts, and we're currently navigating another one of these changes that require us to adapt. Nevertheless, we are cautious about relying solely on performance marketing. Our diverse approach to customer acquisition allows us to avoid dependency on just Google or search engines. We can allocate our budget across various channels for customer growth, including termite control, ancillary cross-selling, and focusing more on commercial opportunities. We are assessing all these options to determine where to best invest our marketing budget for optimal results.

Jerry, I think that's the most important part of this business, is the diversification we have in the brands and the ability to acquire customers, especially in an era that we're in with the changing dynamics around AI and technology, to be able to pivot into different areas is certainly paying off and driving significant results for our business.

Our next question comes from the line of Brian McNamara with Canaccord Genuity.

This is Madison Callinan on for Brian. A large competitor of yours in North America appears to be finally finding its footing with a new strategy, but their volumes remain negative. At the same time, this is the smallest gap we've seen in terms of your relative outperformance in a while. I know an earlier question you mentioned the current competitive intensity in North America, but does this change anything you're doing? If this revival has legs, who would you expect to lose share in that scenario?

We feel really good about our business. We are delivering in excess of 7% organic revenue growth. It's not changing. In fact, it's getting better in Q3. Commercial is up, termite and ancillary is up, residential is hanging in there. So we feel really good about our position. We enjoy a very favorable position across the landscape. We don't see any shifts in share impacting us, and we're focused on executing our strategy, which has worked for the last 2 or 3 decades.

Yes. We are focused on our operations, strategies, and market approach. This has been a long-standing principle for Rollins. We do not react to the actions of individual competitors or the competition as a whole. Our experienced management team understands the industry and the market, and they are empowered to manage the business as we know best.

Our next question comes from the line of Josh Chan with UBS.

Can you share your insights on the cost inflation situation? What trends are you observing regarding materials and equipment, particularly in terms of labor? Also, what are your expectations for 2026?

We are not observing any significant changes in inflation regarding materials, supplies, labor, or other cost inputs. Our pricing strategy of 3% to 4% is proving effective, and our focus on CPI is yielding results. We are achieving leverage in our profit and loss statement, making inflation a less pressing issue compared to a year or two ago. In fact, we are witnessing a slight moderation in inflation across the economy, which is reflected in recent statements from the Federal Reserve. Therefore, we continue to anticipate margin improvement with our 3% to 4% pricing strategy.

And the only thing that's the hardest for us to control is likely fleet, right, if gas prices move up or down or next year, the price of a vehicle or something like that or something changes at the auction market for vehicles. But other than that, things appear to be relatively stable.

Got it. That's helpful. And maybe as my follow-up, I think you kind of alluded to this in one of your previous answers, but just curious on your plans for sales and marketing investment going into Q4 and in 2026 as well. I know that you've generated around like 10 basis points of leverage for 2 consecutive quarters now. So just wondering if like more room for leverage over there going forward.

I believe your question was about our investments in marketing and sales, and the leverage we're achieving from those. What we're observing is that we're gaining leverage across our portfolio from past investments. We will continue to assess opportunities for additional investments. As I mentioned earlier, we are operating in a growth market and experiencing significant growth. Achieving high single-digit organic growth on a constant currency basis is challenging for many, but we're successfully executing in a market that allows for that level of growth. Therefore, we plan to keep making investments to acquire customers, increase our market share, and strengthen our position.

I would add that from a marketing standpoint, we will continue to spend our marketing dollars. We have a budget allocated for it and we utilize those funds based on our knowledge of the market, ensuring appropriate allocation. Typically, we focus our spending in the marketing channel and plan to invest a certain percentage of our revenue there. We find the most opportunities for leverage in sales productivity. When looking at SG&A, it's the selling side where we make investments; sometimes this leads to cycles where we must evaluate the next level of investment as productivity increases. This may create short-term challenges on the sales side, but we understand that in the long term, this investment results in accelerated growth in a strong margin business. Balancing these aspects is something we continually assess.

Right. As you achieve incremental gross margins of around 58 percent, you gain leverage on the general and administrative expenses, which encourages you to make those investments. You want to expand and that's our primary focus. Jerry and I are fully aligned in our desire to continue investing in and growing the business, as growth is an exciting endeavor.

And we have reached the end of the question-and-answer session. I would like to turn the floor back to management for closing remarks.

Thank you, everyone, for joining us today. We appreciate your interest in our company and look forward to speaking with you on our Q4 earnings call.

Thank you. And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.