Greetings. Welcome to Rollins, Inc. fourth quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now like to turn the conference over to Lindsay Burton, Vice President of Investor Relations. Thank you.
You may begin. thank you 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-gap financial measures as part of our discussion this morning the non-gap 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 will be 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 31st, 2025, which will be filed later today. On the line with me Today and speaking are Jerry Galoff, 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, Lindsay. Good morning, everyone. In detail, we delivered double-digit revenue to the year and made it difficult for us to service the demand that did come through. Over 80% of total revenue was above 7% for both the quarter and the year. Nothing has fundamental profitability for peak season so that new teammates at the same time. This can impact productivity in the short term as it did in the fourth quarter. Right decision for the business long term on peak season demand for our teammates and enhance our customer company and establish consistent leadership for all people managers where teammates can seamlessly transfer between brands, divisions, or home office and create a robust pipeline of future leaders who can not only sustain but put significant energy into onboarding the right people, customer-facing side of our business. We're proud of the tenure and experience of our team, as well as their engagement level and commitment to both our company. It's been consistently healthy in improving retention of our newer teammates. Specifically, work to be done here, we saw teammate retention in this category improved nearly 18% since 2023. 26 additional tokens of CELA has continued to exceed our expectations, and integration has progressed very smoothly thanks to the efforts of our collective teams. Ahead to 2026, we are encouraged by the opportunities that are in front of us across all aspects of our business. We remain committed to disciplined acquisition where our business stands in 2026. Each of our 22,000-plus teammates around the world for their efforts and contribution to our success in 2025.
For the quarter and the year reflect continued, solid execution by the Rollins team. Let me begin with a few highlights for the year with strong growth across each of our service offerings, Organic growth was 6.9% for the year, while acquisitions continued to be a meaningful part of our growth. Making significant growth investments adjusted EBITDA grew by 10.8% to $854 million. And finally, we delivered operating cash flow of $678 million and free cash flow of $650 million, up 11.6% and 12.1% respectively versus last year. Cash flow was negatively impacted by an out-of-period tax payment of $22 million associated with the disaster relief measures that allowed us to defer our payment in the fourth quarter of last year to the first half of this year. Excluding this, free cash flow growth was approximately 20% for the year. Performance enabled us to execute a balanced capital allocation strategy, deploying over $880 million of capital in 2025 with a focus on investing for growth while returning cash to shareholders and share repurchase. 0.7%, and organic growth was 5.7% versus last year. In the fourth quarter, residential revenue increased 9.7%, control increased 8.7%, and termite and ancillary was up 11.9%. It was 5.7% in the quarter across all services, 4% in residential, 6.4% in commercial, and and 7.6% in the termite and ancillary area. Growth across each category was negatively impacted by softer, one-time revenues. It is important to look at the recurring time business. Recurring revenue is 80% of our business spent organically in the first nine months of the This business has more recently grown at approximately 1% to 2% annually. Weather was a demand for this service, this related demand, in November and December due to early winter weather in the eastern half of the United States, where we have significant location density. We see their slower growth than one time as transitory, while the stability of growth in our recurring and ancillary areas gives us confidence in our outlook, which continues to be anchored to 7% to 8% organic growth, a decrease of 30 basis points. Looking at our four major buckets of service costs, people, fleet, materials and supplies, and insurance and claims, fleet expenses were higher than vehicle gains compared to last year. This represented 80 basis points of headwind in the quarter. De-leverage from people costs was driven by lower volume in the quarter. These pressures were partially offset by improvement in margins associated with insurance and claims, as well as materials and supplies. Percentage of revenue increased by 50 basis points versus last year. We continue to be bullish on our marketing investments in our business that will enable long-term value creation, despite the lower volumes we realized in the quarter. This had a fourth-quarter GAAP operating income with $160 million, up 6.3% year-over-year. adjusted operating income was $167 million, up 8.1% versus last year. $94 million and EBITDA margin was 21.2%. The effective tax rate was 24.7% for the quarter versus 27.3% last year and 24.9% for the full year period versus 26% in 2024. Primarily due to the great work our tax team has done to continue to improve $0.24 per share. Investments associated with acquisition-related and other items. Operating cash flow decreased 12.4% in the quarter to $165 million. Before 2024 benefited from a disaster relief measure granted to those with operations impacted by Hurricane Aline that allowed us to defer an estimated $22 million tax payment. Cash flow conversion, the percent of income that was converted into free cash flow, was 137% for the quarter. We generated $159 million of free cash flow on $116 million of earnings. We made acquisitions totaling $21 million, and we paid $88 million in dividends in the fourth quarter. Dividend payments increased 11% from the prior year and are at a healthy and very sustainable rate. Including the recent increase announced in Q4, we've raised our regular dividend by more than 80% since the beginning of 2020. to approximately $200 million in share repurchases in the quarter, affirming our long-term view on the value of our company. We're at .9 times, very healthy, and positions as well to continue to execute our investing in the business, growing our dividend as earnings and cash flow compound, and pursuing share repurchases opportunistically. Investment-grade lens, and we'll continue to do so in the future. We are committed to maintaining a strong investment-grade rating with leverage well under two times. We are encouraged as we look to 2026 and are focused of double-digit rent. We continue to expect organic growth in the range of while investing in growth opportunities. We anticipate that cash flow will continue to convert at a rate that is above 100% again in 2026.
Any questions at this time?
Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue, and for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Please ask one question and one follow-up question and re-queue for additional questions. Our first question is from Tim Mulrooney with William Blair. Please proceed.
And Jerry, good morning.
Good morning, Tim.
Thanks for all the detail around the one-time sales and the recurring base of business. It's all very helpful to understand how the underlying business is performing. But I'm curious if you could expand a little bit more on that 7% growth that you're seeing in the recurring and ancillary business. How do you get comfortable that that level of growth is sustainable heading into 2026? Like, can you provide any details on retention rate or net gains or customer wins? You know, any of these underlying metrics that might help shed some additional light for us?
Tim, this is Jerry. I'll give you a price increase data as a lever as we move into 2026. So we're very comfortable there. If you look at the customer retention side, it's very stable. and we've also had some areas that have improved. For example, the net gain of the customer at the end of the year, but compared to the beginning of the year, customer base. COVID was we look at things, look at the leads and our closure rates. The closure rates, it's up. For example, on Ansel, we're not overly price sensitive, and we have financing options that give them the ability to get the much-needed work that they need done, to give them peace of mind and allow them to pay over. look at every single day. Comfort, that's why I said the most important part of our business is the recurring piece and our marketing dollars is creating recurring base. We want to continue to invest in our business.
If you look at the recurring, seeing that business hold in, if anything, it's strengthened a little bit between Q3 and Q4. The ancillary business normally grows in that 20% range when you can't get people on the roof safely and you can't get them out into feel the pain and you'll feel the impact there. But that business, again, growing at mid to high teens, very healthy. And that's the big ticket. That's the nine shots on goal that I've talked about quite frequently with investors is that we have all these opportunities and we continue to see good demand there. So I think those two things, I think, especially that recurring revenue, which is 75% of our business strengthening by 10 or so basis points between Q3 and Q4, I think gives us a sense that the business is holding in there.
And I think, too, Ken, you think about Q4 of 2024 was our best quarter of 2024, and we were having to lap that, right, in some a little more challenging conditions. And we knew starting the year that was going to be a tougher comparable for us year over year.
Yeah, tough comps, definitely. That's definitely another aspect of this whole thing. So that's all great color. Thank you. And I think you're more comfortable with the fact that the underlying business is fine. This is all weather related. Can you dive into this weather disruption by segment? Like, was it more on the – I'm thinking about it more like, hey, it would be on the resi and termite side more, but your resi business actually held in better than what I was expecting given the comp situation. But then I look at the commercial side, and I saw Ecolab's fourth quarter results. Their commercial pest business was fine in the fourth quarter. It doesn't seem like they saw that disruption that you saw.
So I'm just trying to reconcile all that. can you talk a little bit about impact uh by segments um uh from from that weather yeah uh i'll take that and then jerry will add on just starting with commercial and looking at the commercial business the commercial recurring business grew at 7.3 percent um and so so again we continue to see good demand there the challenge was again one-time business even in the commercial setting which is roughly 15 percent of that business and so you certainly saw the one-time impact on the commercial you saw it in the residential i mean our residential recurring business is holding in there and it's strong and we feel good about it uh but the one-time business the wildlife business and things like that uh certainly felt the impact of the slower uh the the challenging weather patterns um and then on the termite you're you're spot on the termite the pre-treat, that sort of work, you saw some weakness. The recurring, the base in the recurring business continues to do very well. It continues to be a very healthy growth pace for us. But some of the pre-treat, one-time termite, you saw a little bit of weakness. And so I think when you frame it, we feel good about, again, all of the businesses and the recurring businesses coming through. We feel like the fact that we couldn't get out, we couldn't service, we couldn't get that work done, that caused the most significant impact on our revenue growth in the quarter.
And, Tim, looking at the commercial side in particular, necessarily selling to our existing customer base, adding the residential side, a lot of that is seasonal things that come up that we kind of rely on and get those one-time calls for shelter. That season was not in some of those other markets that remain very strong. so again it just tells us that it's it's a commodity fume I hadn't even considered that that fully explains that on the commercial side as well so
thank you for all the color guys this is very helpful great thank you our next question is from Manav Paknik with Barclays please proceed thank you yeah I was hoping you could just put some numbers by segment as well you know how you gave us the plus 4% year to date and then down three for fourth quarter, just by segment as well. And also, what's the margin profile of this one-time business, just to consider that as well?
Yeah, that's a great question. One-time business is oftentimes better than the customer knowing you're going to risk that you might be getting $150 or $200 for, for example. So you see a much better margin profile on the one-time business, that has an impact on the overall results. Only 15% of the business, so I don't want to overstate how much of an impact that had on margins, but it certainly is margin accretive to our overall business.
And I would say there's some impact in every category. I think the residential side was probably heard a little bit more, especially in things like wildlife and road those lines. and the ancillary and termite side, some of that softness we're able to get back because that just creates a workload right into January, things along those lines on some of that kind of work. But some of it you just – Got it.
And then just so we're not surprised in the next quarter as well, I mean I know your full year guide is 7 to 8, but just you talked about spillover into January. Just thoughts on what 1Q might look like relative to the rest of the year?
Yeah, it's always hard. It's such a short cycle business, which can change on a dime. But what I would say is we still are firmly anchored in a 7% to 8% organic growth for the year. I would not be surprised if it's a little bit slower to start the year, because January, we had more branches closed in January than we did a year ago because of some of the weather that we, but I do firmly believe the business still is going to be at that for the year at that seven to eight percent pace of growth. Okay, thank you.
Our next question is from Anish Sabhadra with RBC Capital Markets. Please proceed.
Hi, thanks for taking my question. So maybe just a question on the margins. Are there any percent takes to be cognizant of as we think about the incremental margins in 26 and those margins of 25 to 30 are still below the midterm targets so how should we think about the tailwinds not just in 26 but going forward to drive it closer to the midterm targets thanks uh when i look in profile i i think about 2026 uh i'll take you through a few thoughts one pricing remains very four percent pricing is services are really doing
a a lot better job at onboarding and training and turnover and new hire is really expensive and we're seeing improvements there that will be because we go into 2026. third fleet cost second another large item on cost of services you know when we think about fleet in the 2025 financials there was about a 17 million dollar headwind with the sale of leased vehicles, not be as much of a concern for 2026 as it was in 2025. And so when I think about the gross margin, I think there's a lot of reasons to be optimistic in our ability to lift margins and improve margins in 2026. And then when I go down the P&L and I look at SG&A and back office and all the work there, continues to be great opportunities there. We're launching a company-wide systems implementation around our financial processes in 2026 uh we'll start to see some benefits of that as we go throughout the year and into next year um so so we're we're we remain very optimistic and confident in our ability to deliver that 25 to 30 percent uh margin profile that's great color and then maybe just on the uh competitive environment the question that we get quite often is have you seen any change from a competitive perspective obviously the strength and recurring revenue seems to suggest that things are trending really well but any color on that front will be helpful thank you uh this is jerry uh we haven't seen uh i mean we we continue to invest in the business in q4 you saw that and it's not that we're out um allocating large amounts of capital to the digital side but we continue to put more feet on the street we continue to fund our door-knocking areas, which are our fastest growing areas. And so we continue to be bullish about our position in our overall market.
That's great. Thank you. Thanks.
Our next question is from Greg Parrish with Morgan Stanley. Please proceed.
Hey, good morning. Thanks for taking our question. I just want to double click on 1Q, and apologies for that. But just given many of us have been snowed in here for a few weeks, I know you said slower start, but will the weather impact be kind of similar to what you saw in fourth quarter? Will it be worse? I don't know. It's like a similar pace to fourth quarter. Is that a decent way to think about 1Q? I guess any further color I think would be helpful for us.
Our weather forecaster can't get the forecast tomorrow right. You know, we try not to manage our business around that. It's our job to get our work done and continue to move forward and do everything we can despite that. And what I can assure you is that our team is going to work really hard. It's really hard to say because just as we saw, you look at November, December, frigid cold, and then next thing you know, Thanksgiving, you know, you're wearing shorts. And you're just, you know, so these things just surprise us. And that same thing can happen here. it could be really bad for longer for we could have a two weeks of can't predict I think it's really hard for us to think about those impacts what I what I can tell you though is that our team fight through that okay that's helpful oh yeah yeah I appreciate it I had to try um maybe just for my follow-up maybe talk about some of the ancillary opportunities I know you have you know a lot of shots on goal a lot of things you're excited about maybe in 26 what are you most
excited about in terms of gaining traction or maybe picking up a little bit versus the prior year? Thanks.
I think when you look at that business, what I consistently say, Greg, is that we've got a number of opportunities. We're not necessarily excited about just one opportunity. We've got so many different opportunities that we avail ourselves to with our customer base, and it continues to be a very low penetration rate. You know, we estimate that less than 3% or 4% of our customers are using those ancillary services, and quite frankly, it's predominantly all in our Orkin brand. It's not in our specialty brand. And so we're doing a lot of work to really get out and, as Jerry indicated in his prepared commentary, improve collaboration across the brand portfolio to enable us to see some improvements in this area with some of our specialty brands. Really important area of growth for us. Growing, you know, for the year, growing at 20%. You need to invest in because we're seeing great results coming out of that area.
There's just so much upside. And, say, like a home team that maybe they don't do, but they're sister companies. There's so much opportunity for that, and we're getting more and more mature in that space, using both with technology and really just bringing people together. Watching that come together and come to life is great.
That's helpful, Colin. Thank you, Greg.
Our next question is from Tomo Sano with J.P. Moore again. Please proceed.
Good morning, everyone. Thank you for taking my questions. Could you give us more colors on sailors' revenue margin, EPS contribution in Q4, And if you could give us some more color on pipeline for M&A in 2026, it would be great.
Certainly. Thanks for the question, Tomo. CELA is performing exceptionally well, just like Fox did two years ago. CELA contributed upwards of $16 million in the quarter of revenue in the year-to-date. We bought it in April of last year, and year-to-date it's contributed $55 million. We've actually seen two cents of non-GAAP or adjusted EPS where it is, albeit our team's doing an exceptional job with our commercial paper program and bond market. So with that said, continues to perform well, really an organization. Thank you.
And any callers on the M&A pipeline in 2026 to get to 2% to 3%, please?
Yeah, thanks for that question. Missed that. But the M&A continues to be very healthy. We firmly believe at this point that 2% to 3% is very realistic and reasonable to expect. We're carrying over a point or so, slightly above that, of growth from M&A, and we've got a very full pipeline that we're continuing to evaluate. We've invested over the last three years, we've invested almost $900 million in acquisitions and bringing new teammates and new brands into the portfolio. we expect to continue to invest in 2026 and add 2% to 3% of revenue growth from acquisitions again in 2026.
Thank you very much.
Our next question is from Josh Chan with UBS. Please proceed.
Hi. Good morning, Jerry and Ken. I guess maybe on the quarter, you mentioned that most of the weather effects were in the eastern side of the U.S. So is it true that the west and the south or basically the non-impacted regions grew at a similar rate as Q3, just some ways to maybe kind of ballpark or ring fence the weather issues, I guess?
Yeah, they absolutely did. So they had strong performances in the fourth quarter.
Yeah, that makes sense. And then on that Q1 kind of comment, I know that, you know, freezes are typically not the greatest thing, and there seems to be more freezes in this Q1 than normal, I guess. So is that a potential concern when it comes to spring selling season? Like, how are you thinking about that?
Of the heat and things like that, that's what shuts down branches. And, you know, we can't safely drive on the roads. You can't safely access customers' homes. that in January, we have to be as productive as we can possibly be because you don't know what's going to happen two days from now. There's just working weekends and things along those lines, but we have to do our best to get ahead of that.
The weather is always sometimes, but we're not giving up. You know, in the first quarter, we have a lot of reasons to be optimistic because I think the team is focused on delivering exceptional results again here in 2026.
Great. That's good color, and thank you, Bo.
Our next question is from Jason Haas with Wells Fargo. Please proceed.
Hey, good morning, and thanks for taking my questions. I'm curious if you could talk about how digital leads have been trending and if you plan to make any changes to your marketing strategy.
We make changes to our marketing strategy every day, every week. Digital leads increases. We don't necessarily allocate resources to jolts we can to drive new recurring customers into our portfolio of brands. That continues to be the focus in lots of different ways, so we're not overly reliant on that. We love that about our business. But that evolving, and I think our team does a really good job adjusting to that.
I think the broad diversification of the brand portfolio is certainly a competitive advantage. As I had mentioned earlier, the door-knocking business, but also Fox, if you go back to Fox in 23, that business is growing exceptionally well. And so our ability to pivot and maneuver and market conditions change and helping us continue to deliver some solid financial results.
Got it. Thank you. Makes sense. And then as a follow-up, are you able to talk about when you get a one-time business, how often does that translate into a recurring relationship with a customer? Is that like a source of new customers and you're able to build that recurring relationship from those one-time calls?
Sometimes, certainly that happens. What you don't want to do is sell something, particularly at Orkin. We have a lot of what we call recurring one-time customers. These are customers that come back to us year after year. They get one or two services a year, and they're willing to pay more for those one or two services a year, but they don't want to get, say, four to six services. It's just not their model. Trust Orkin. They trust the brand. They know they've got results, and they come back. so we know there's a certainly a portion there but you we also have to have a balance of not not providing something to someone that they don't really got it very helpful that makes sense thank you our next question is from peter keith with piper sandler please proceed okay thanks good morning everyone um i wanted to just dig into the incremental ebitda margin uh which was below uh 20 and make sure i understand it so i guess uh the weaker sales
came in but is it that you were still hiring and training and investing in those people costs and then if that's right just how does that inform your you're thinking around you know budgeting and and those costs in q1 uh with also some potential for sales weakness yeah certainly continue to invest markets continue to be very healthy recurring business continues to come in uh new customers continue to come in uh peter and so we continue to see really good demand for our services.
When I unpacked the margin in Q4, certainly the volume had an impact. When you look at that volume, call it $12 to $15 million of additional volume, probably $7 to $8 million of additional profitability from an incremental perspective because that business is a little bit more profitable than our other business. Then the other thing that I called out, which should help us here as we go into 26 is the fleet costs and the gain on vehicle sales we had we had a headwind of i believe six million dollars in q4 associated this roughly 80 basis point i think those two items are certainly impacting they impacted the q4 results i certainly expect fleet to be uh to improve and i also expect that that one time this gone through a season as we get into February, March, April, as we turn the corner and get into
season, it's a much better experience to be able to serve our customers.
Okay, that's very good feedback. Thank you for that. And I wanted to circle back on one of the comments about what you're most excited about for 2026 and driving that cross-collaboration amongst your brands. And there's also potential for maybe a CRM database upgrade. And I'm wondering just on the IT front, are there any investments that need to be made or any sort of structural changes to the CRM infrastructure to help drive that collaboration?
I've had a lot of recent meetings talking about the use of AI because most of these CRMs are heavily driven which CRM they're on and making some decisions around strictly making. We'll have some brands and some places that may need some CRM changes to help us make this work.
Yeah, major change in capital outlay with respect to CapEx in 2026. We're making investments. I mean, I commented earlier, but not... Very good. Thanks so much.
Our next question is from George Tong with Goldman Sachs. Please proceed.
Hi, thanks. You mentioned that you expect one-time revenue performance to be similar to four-Q. Can you talk about what you expect for one-time revenues for the rest of the year and how that will be supportive of your overall 7% to 8% organic revenue growth outlook?
Yeah, you know, we haven't put a number out there in terms of what we expect in Q1 with one-time revenue. What I did say in my prepared comments is this business is growing. it, if you go back over time, 1% to 2%. It might have a quarter where it jumps up to 2% to 3%, but then you have a quarter like Q4 where it was declining 2% to 3% or so. And so you really, the business does jump around a little bit. It's 15% or so percent of our business. But I think if we get, when I think about the growth algorithm, if I can get 7% plus percent, 2% from this other business, just to get that, and that's what.
That's helpful. And then related to that, are there certain indicators or metrics that you can use to track how one-time revenue performance is performing? Any leading indicators or KPIs that can give you confidence or visibility into performance in the coming quarters?
That's a good question. I think the one thing that, you know, as we look at it, again, it's such a small business. Like, it's not a major business. It doesn't move with economic cycles. So it's hard to pull a macro factor and say, hey, when this does this, if industrial production does this, we do this. That's just not the case. We're not tied to purchase managers. We're not tied to industrial production. It's very much one-off business. But when you look at weather patterns, you look at the average temperature. I mean, when you look at the Northeast, you look at the Midwest in November and December, the weather was much colder than it was a year ago. It's that simple. If you can't get out on the roads, if you can't get safely on a building to a house, we're not going to send our people out. And so that certainly has an impact on the business.
But, again, it's such a small business in terms of overall portfolio size that it's hard to tie that to any macro factor and then all of a sudden there could be a year where it's soft and instead something else is there types of various pests in our business will continue to be that way to predict that measure to
determine that that how healthy our businesses yeah that's because it comes and it goes it's just it's just extra business or that it comes in and so our measure and our metric for determining how healthy our business is, is our revenue from recurring contracts and recurring arrangements with customers, and then the nine shots on goal, the ancillary business. I mean, that's what the business, I believe, is valued upon, and that's how we measure the health of our business.
Thank you.
Thank you.
Our next question is from Brian McNamara with Canaccord Genuity. Please proceed.
Hey, good morning, guys. Thanks for taking the question um so i'm curious uh about the the new tech uh retention you guys had mentioned that you outlined that in new york uh in early december um and you mentioned newer teammate retention improved i think eight percent in the repair mark so i'm assuming that's first year techs does that mean you had to hire eight percent fewer new techs or what does that eight percent specifically measure. And then I think you mentioned in December, you had mentioned that kind of a five to $10 million in savings number expected for the year. I'm curious where that landed and what's embedded in your 2026 expectation there. Thank you.
Yeah, the approaching managers, we had 250 people in the room and this was driving these best through our business because this continues to be such an opportunity for upside to not only to improve our retention. We know this will be a direct correlation to help us improve our customer retention in the end.
Yeah, I mean, when we look at it, you know, 600 people, $10,000 to $15,000 of onboarding costs. For technicians, this is tied to turnover in customers. And so if we can do a better job at onboarding and keeping people, we're going to do a better job at keeping customers.
Helpful. Thank you.
We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing remarks.
Thank you everyone for joining us today. We appreciate your interest in our company and we look forward to speaking with you on our first quarter earnings call in just a few months.
Thank you. That will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.