Rollins (NYSE:ROL) released second-quarter financial results and hosted an earnings call on Thursday. Read the complete transcript below.

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Summary

Rollins Inc. reported slower-than-expected growth in Q2 2026, mainly due to reduced demand in the residential pest control segment, particularly affecting brands like Orkin.

Despite the slowdown, certain brands like HomeTeam and Fox achieved significant organic growth by leveraging direct sales and door-to-door models, highlighting the effectiveness of the company's multi-brand strategy.

Total revenue increased by 7.9%, with organic growth at 5.7%, below expectations. Residential revenues grew by 6.6%, commercial pest control by 8.6%, and termite and ancillary by 10.5%.

Gross margin decreased by 100 basis points to 52.8% due to lower-than-expected volume, higher medical-related costs, and fuel headwinds.

The company implemented organizational changes, including promoting Scott Weaver to oversee both residential and commercial operations in North America to improve execution and resource alignment.

Rollins expects organic growth of at least 6% for the full year 2026, with M&A contributing 2% to 3% of revenue growth.

Management remains confident in the long-term market opportunity, citing a strong customer base and recession-resilient business model.

Despite challenges, the company generated strong cash flow, with free cash flow conversion above 115% for the quarter.

Rollins plans to continue its disciplined capital allocation strategy, focusing on reinvestment in the business and M&A opportunities.

Full Transcript

OPERATOR

Greetings and welcome to Rollins Inc. Second Quarter 2026 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 requires operator assistance during the conference, please press Star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lindsey Burton, Vice President of Investor Relations.

Thank you. Please go ahead.

Lindsey Burton, Vice President of Investor Relations

Thank you, Donna, and good morning, everyone. In addition to the earnings release that we issued yesterday, the company has also prepared a supporting slide presentation. The earnings release and presentation are available on our website at www.rollins.com. We have included certain non-GAAP financial measures as part of our discussion this morning. The non-GAAP reconciliations are available in the appendix of today's presentation as well as in our earnings release.

The company's earnings release discusses the business outlook and contains certain forward-looking statements. These particular forward-looking statements and all other statements that have been made on this call, excluding historical facts, are subject to a number of risks and uncertainties, and actual results may differ materially from any statement we make today. Please refer to yesterday's press release and the company's SEC filings, including the Risk Factors section of our Form 10-K for the year ended December 31, 2025.

On the line with me today and speaking are Jerry Gahlhoff, President and Chief Executive Officer, and Will Harkins, Executive Vice President and Chief Financial Officer. Management will make some opening remarks and then we'll open the line for your questions. Jerry, would you like to begin?

Jerry Gahlhoff, Chief Executive Officer & President

Thank you, Lindsey. Good morning, everyone. Our second quarter results did not meet our expectations, driven primarily by slower growth within certain portions of our residential pest control business. The pressure was concentrated in brands such as Orkin that rely more heavily on consumer-initiated demand through search, digital media, and inbound calls. The lead environment got progressively worse as we moved through the quarter before showing signs of improvement at the very end of June.

Our experience with respect to a slowdown in underlying residential demand was not broad-based across the portfolio. Brands that generate customers through relationship-based channels like direct sales, door-to-door models, and relationships with home builders delivered organic growth above our targeted 7% to 8% range for the quarter. For example, HomeTeam experienced double-digit residential growth, as did Fox, who leveraged their door-to-door sales force to grow in the high teens organically during the quarter.

This is a testament to the importance of our diversified multibrand approach, and beyond residential, our termite and ancillary business delivered solid double-digit growth while commercial grew high single digits, demonstrating that strategic investments we have made in support of these service areas continue to pay off. We spent a great deal of time evaluating the drivers of the slowdowns in parts of our residential business and, candidly, we don't believe there is a single explanation.

It's important to note that the underlying health of our customer base remains strong, and there were no notable shifts or deterioration in customer retention trends. While precise drivers are difficult to isolate, what we do know is that customer demand patterns have been more variable to start peak season than we've experienced in the better part of a decade. Regardless of the underlying drivers, our focus is on the actions needed to drive improved performance.

We have implemented organizational and operational changes designed to strengthen accountability, improve execution, and better align our resources with current demand conditions. At Orkin, for example, we recently promoted Scott Weaver, the Chief Operating Officer of Orkin North America. Scott most recently had responsibility for all Orkin's commercial operations in the U.S. His newly expanded role expands his scope of responsibility to include both residential and commercial operations for the U.S. as well as Canada. This will provide a better span of control, with all division presidents now reporting to Scott, who will continue to report to Pat Chernowski. We are focused on improving customer acquisition results, sales productivity, local market execution, and labor efficiency, while maintaining the customer service standards that have differentiated us as the leader in the market. Although we're cautious with respect to near-term trends, we were encouraged that inbound lead flow and call center volumes improved towards the end of June and have continued a positive trajectory through the first few weeks of July.

Stepping back, our confidence in the long-term opportunity remains unchanged. We operate in a large and fragmented market with a diversified portfolio of leading brands, strong customer relationships, a significant recurring revenue base, and a team that has the experience needed to successfully navigate near-term market conditions and improve performance. I'd like to thank our 20,000-plus teammates around the world for their hard work and dedication to serving our customers every day.

I'm now pleased to turn the call over to Will. This marks his first earnings call as CFO. We're excited to have his leadership at Rollins and I'm personally grateful for the partnership we're building. Will, take it away.

Will Harkins, Executive Vice President and Chief Financial Officer

Thanks, Jerry, and good morning, everyone. I'm pleased to join you today for my first earnings call as CFO. I look forward to providing a clear view of our second quarter results, our updated outlook, and the actions we are taking to improve performance. I will begin with our quarterly financial results, starting with revenue. Total revenue increased 7.9%, while organic growth was 5.7%, both below our expectations for the quarter. As Jerry mentioned, the primary driver was slower growth in portions of our residential business.

We delivered growth across each of our service offerings in the second quarter. Residential revenues increased 6.6%, commercial pest control increased 8.6%, and termite and ancillary increased 10.5%. Organic growth across the portfolio was 3.6% in residential, 7.2% in commercial, and 8.9% in termite and ancillary. Turning to profitability, as demand trends softened in certain areas of the business during the quarter, our cost structure remained aligned with the stronger growth outlook we anticipated entering peak season.

Gross margin was 52.8%, a decrease of 100 basis points. Lower-than-expected volume in the quarter, coupled with higher medical-related costs and fuel headwinds, pressured quarterly margins. The primary drivers were higher people-related costs, including medical plan expenses and service salary deleverage, which together represented 70 basis points of pressure. Fleet represented an additional 20 basis points of headwind driven primarily by fuel. Fuel costs represented approximately 1.8% of sales in the second quarter and are expected to remain below 2% of sales for 2026.

Customer response to our recent price increase has been favorable, and we continue to expect to be positive on price/costs for the year. Quarterly SG&A cost as a percentage of revenue increased 30 basis points compared with the prior year. Incremental selling investments represented a 10 basis point headwind, while higher fleet costs contributed an additional 10 basis points of headwind. The remaining pressure was attributable to other general and administrative expenses.

Second quarter GAAP operating income was $201 million, an increase of 1.5% year over year. Adjusted operating income was $210 million, an increase of 2% compared with the prior year, and second quarter adjusted EBITDA was $236 million, an increase of 2.2% versus last year, which represented a 21.9% margin. The effective tax rate was 24.2% in the quarter compared with an even 26% last year. Reflecting the work our tax team has done to improve our ETR, we expect our effective tax rate to come in under 25% for the year, down approximately 100 basis points from historical levels.

Quarterly GAAP net income was $144 million, or $0.30 per share. For the second quarter, we had non-GAAP pretax adjustments associated with acquisition-related costs and other items totaling approximately $10.8 million in the quarter. Accounting for these expenses, adjusted net income for the quarter was $152 million, or $0.32 per share, an increase of 6.7% from the same period a year ago. Turning to cash flow and the balance sheet, we generated operating cash flow of $173 million and free cash flow of $166 million.

Free cash flow conversion, which is measured as the percentage of income converted into cash flow, was above 115% for the quarter. Cash flow growth was negatively impacted by the timing of tax payments associated with our tax credit planning strategy. This strategy continues to deliver meaningful benefits and is contributing to significant improvements in our ETR. We expect the timing-related headwinds to cash flow growth that we have experienced year to date to reverse as we move through the remainder of the year, particularly in the fourth quarter, resulting in a neutral impact on full-year cash flow growth.

During the second quarter, we completed acquisitions totaling $117 million and paid $88 million in dividends. We continue to expect M&A to contribute 2% to 3% of revenue growth for 2026. Our leverage ratio stands at 1x, and our balance sheet remains strong and positions us well to continue executing against our growth priorities while returning capital to shareholders. As we look to the remainder of 2026, we remain encouraged by the strength of our markets, our recession-resilient business model, and the engagement and execution of our teams.

At the same time, we recognize that our performance fell short of our targets, and our immediate focus is on improving the trajectory of the business through disciplined execution and operational improvement. We are approaching the balance of the year with discipline, transparency, and a clear focus on the controllable actions that will improve performance. Given our first half results and the visibility we have today, we are updating our full-year outlook.

We now expect organic growth of at least 6% for the year and incremental margins of at least 10% for 2026, with implied margin improvement in the back half of the year to be Q4-weighted. Our expectation for 2% to 3% of growth from acquisitions, as well as our expectation that cash flow will continue to convert at a rate above 100%, remain unchanged for the year. Importantly, the revision to our 2026 expectations reflects our current assessment of near-term operating conditions rather than any change to the medium-term algorithm we outlined at our Investor Day in May.

We continue to believe this business is capable of generating organic growth of at least 7% while delivering meaningful margin expansion. The operational opportunities that underpin our longer-term margin framework remain ahead of us, and we maintain conviction in our ability to achieve incremental margins of at least 30% over time. Our priorities are improve customer acquisition, increase productivity, align resources by demand, and demonstrate consistent operational improvement quarter by quarter.

We believe the actions we are taking, together with the growth and productivity initiatives outlined at our recent Investor Day, position us to deliver profitable growth and attractive shareholder returns that have been the hallmark of our financial performance for decades. We are focused on execution, accountability, and consistent improvement, and I look forward to updating you on our progress in the quarters ahead. With that, I'll turn the call back over to Jerry.

Lindsey Burton, Vice President of Investor Relations

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

OPERATOR

Thank you. Thank you. The floor is now open for questions. If you would like to ask a question, please press Star one on your telephone keypad at this time. A confirmation tone will indicate that your line is in the question queue. You may press Star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. We do ask that you please limit yourself to one question and one follow up.

Again, that is Star one to register a question at this time. Today's first question is coming from Tim Mulrooney of William Blair. Please go ahead.

Tim Mulrooney, Analyst at William Blair

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

Jerry Gahlhoff, Chief Executive Officer & President

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

Tim Mulrooney, Analyst at William Blair

I thought that was the case, Jerry. I just wanted to make sure. So I appreciate that. So it sounds like it is just the top of the funnel issue. So maybe we could dig into that a little bit. Curious why you think digital leads are slowing so much right now. I mean, I know they've been under pressure for a while. Sounds like though something really shifted in April and May. So I was just curious, have there been any changes in SEO or from the LLM overviews that are impacting leads?

Do you think this is an AI thing or do you think it's a softer consumer? Just curious what you think is going on here.

Jerry Gahlhoff, Chief Executive Officer & President

Tim, if you could be in the room to hear the number of hours and the amount of time and the research and the amount of effort that's gone into trying to explain that. That's why I called out that I think it's truly a multitude of factors. April was okay, April wasn't. April wasn't far off. It was really, we were expecting by mid May that it would have made a turn. May did not start out great. And we thought, oh well, it's coming, it's coming, it's coming.

We looked at lots of factors. You think, okay, May is when gas prices spiked and maybe consumers are tightening their belts. Maybe there's a little lack of consumer confidence. But yet at the same time we were still able to drive termite and ancillary with our existing customer base and those close rates weren't impacted. So we felt like maybe the consumer is still healthy. Then you look at, you know, is it regional weather or is it just pest pressures?

And we started diving into what's going on, especially in the one-time space. We look at data that shows there are certain categories of pests that we measure a lot of different pests and the reasons we get calls for, and things like mosquitoes. Mosquito calls were significantly down year over year. And other kind of one-time services like residential rodent and residential carpenter ant were down fairly significantly. Which leads you to believe, well, maybe there's something going on with pest pressure in the month.

And we look at the mosquito and that's kind of a bellwether, a bellwether to say what's going on from a pest pressure standpoint. And it seemed like mosquito season started really late. We also tested the search environment. We looked across the competitive space. We pulled a lot of different levers to see, hey, can we change? Can we juice this? Can we create more demand? And we were doing that, testing a variety of things and adjustments to how you play in the digital space.

None of those things really moved the needle a lot. And it led us to believe quite heavily that we just had fewer people year over year actively searching the digital channel for pest control needs. That's the conclusion that we came to, that it just seemed fewer. And I think if we thought it was the LLM or the AI, it doesn't explain we didn't do something radically different at the end of June to change our approach, and suddenly it just picked back up again.

And then through the first few weeks of July we saw that we were seeing the same thing again. So it's not like our strategy changed. It's that pest pressure and consumer-driven demand was the part that was off there. I know I'm going long here, Tim. But like I said, we've spent a lot of time analyzing this, and this whole scenario hearkened back for me to the second quarter of 2017 — the last time I remember seeing this kind of a start in the season.

And I'll never forget it because it was my first time having to go represent our operations in front of Randall Rollins and Gary Rollins, and we had a rough Q2 and it was like the season just never started. That was a very difficult first-time operating meeting with Randall Rollins, and it was just like it just didn't come much later. And trust me, I'd rather have conversations with you about this than I would have with Gary and Randall at that period.

And you know, so that's exactly what this felt like. It just felt like a really super late start. What we attribute it to, I think it's all kinds of things. I think in all these things it's a confluence of all these things likely. And we also look at brands like Orkin and you think, oh, it's the consumer. Orkin drives a lot more diversity in terms of income bands that they get customers from. And we've checked across those income bands and there's likely some impact from lower income bands, but affordability maybe gets a little tougher.

So we're seeing those things. But it's really not one thing that we can put our finger on. There are a lot of factors. We're encouraged by what we're seeing now and we're going to continue to make adjustments. We're also going to be disciplined about our spend and make sure we don't overspend, especially in the back half of the year on driving customer acquisition. So we're going to be focused on efficiency, focused on making sure we're efficient through the right lead channels and making the best decisions we can to add customers to the customer base.

Tim Mulrooney, Analyst at William Blair

Okay, thank you, Jerry. I appreciate all that extra color. Good luck in the back half of the year.

OPERATOR

Thank you. The next question is coming from Manav Patnaik of Barclays. Please go ahead.

Manav Patnaik, Analyst at Barclays

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

Jerry Gahlhoff, Chief Executive Officer & President

Yeah, thanks for the question, Manav. I mean, obviously Orkin has a large residential customer base. Other brands like HomeTeam and Fox are primarily residential. A lot of our other brands are not quite as focused — the larger ones are not quite as focused just on residential. They may do a lot of termite ancillary. They may also do a lot of commercial. And so the vast majority of the residential sit in between Orkin, Fox, HomeTeam on the residential pest control space and to some degree also Northwest Exterminating.

And the Orkin piece of that is very sizable in the whole, whereas they are able to grow a little more rapidly right now than Orkin. But the headwinds in volume and what Orkin is getting that effect volume-wise is dragging that number down — that 3.6% range — just because they are more sizable than those other brands. That helps add a little color because we don't go across the other — the specialty brands. That business performs quite well.

Lindsey Burton, Vice President of Investor Relations

Right. Where there's proactive, protection-focused sales relationships at the doorstep, for example, totally different business model.

Jerry Gahlhoff, Chief Executive Officer & President

Yes, that's right, Lindsey. And some of those brands are much less dependent and spend very little marketing dollars. Like a HomeTeam brand spends almost nothing in the digital channel. It's just not what they do. So they're much more insulated from those kinds of what I would call consumer-driven demand channels, where they're going and creating through selling prevention to home buyers.

Manav Patnaik, Analyst at Barclays

Got it. And then, you know, the 2Q17 analogy that you pointed out, maybe you could just help us with, you know, kind of were there some of the similar — you know, what caused that, I guess, back then and then kind of how long perhaps it took you guys to come out of that.

Jerry Gahlhoff, Chief Executive Officer & President

Yeah, so that was one of those. I remember it because our Q2 close meeting was in early July, just like we had the same kind of meeting here. It's kind of like déjà vu. What happened in that situation was that July came back and we ended up in pretty decent shape in Q3. It wasn't like a long recovery because once you got into the heat and the peak season again, it just sort of took back off and it was a really awkward sort of pregnant pause of waiting for that, as though we thought it was never going to come.

But then it finally did. It happened around the 4th of July that year — it hit and then all of a sudden we were off and running again. But it was pretty painful. I have scars. It was a pretty painful Q2, but we came right out of it in Q3.

Manav Patnaik, Analyst at Barclays

Thank you.

Jerry Gahlhoff, Chief Executive Officer & President

Thanks, Manav.

OPERATOR

Thank you. The next question is coming from Greg Parish of Morgan Stanley. Please go ahead.

Greg Parish, Analyst at Morgan Stanley

Hey, guys, good morning. Thanks for taking my question. Maybe — thanks. Good morning. So you talked about the improvement in late June and that persisting into July here. Maybe can you give us a sense of kind of what that exit rate was and where you're at here in July to start?

Jerry Gahlhoff, Chief Executive Officer & President

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

Greg Parish, Analyst at Morgan Stanley

And you're talking about lead flow there, right? In terms of the volume of inbound leads was more on par from where we were a year ago.

Jerry Gahlhoff, Chief Executive Officer & President

That's right. Very much in comparison. And look, we still are getting better quality leads. I think the team is driving better quality leads. So we're making some of it up in closure and start rate and still managing to get price in that. So that seems fairly healthy. So we can deal with — if regionally, if there's some pockets where the lead volume is down, we can usually still make that up by lead closure. But in months like maybe in parts of June where there was just a massive gap, we can't make that up through pricing and closing efficiency.

Greg Parish, Analyst at Morgan Stanley

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

Will Harkins, Executive Vice President and Chief Financial Officer

Yeah, Greg, we, you know, as we look through the back half of this year, so through the first half, we're sitting at, you know, just below 8% of incremental margins. And so, you know, all those things that we outlined at Investor Day, talking through improvements with our fleet, talking about how we can better utilize, you know, our procurement function from an M&S perspective, talking about customer or, you know, employee retention, all those things still remain fully intact.

But we're also really cautious because we realized Q3 of last year had a lot of favorability in the numbers. And so we've got a pretty difficult number to hurdle as we go into Q3 of this year. We think we've got some good benefits that we may be able to pull through in the fourth quarter, but we're just trying to be cautious with what we know today. What we're seeing today, we didn't expect to be posting an incremental margin of 6.5% in the second quarter.

So that certainly changes our outlook for the full year. But we still think all the things that we talked about, there's plenty of opportunity sitting here.

Jerry Gahlhoff, Chief Executive Officer & President

Yes, there's opportunity that we have in the back half to greatly improve sales efficiency. We have no intention of staffing up the way we staffed up last year. So there's some opportunity there. In the SG&A side, we just entered into a great new agreement with our fleet supplier Wheels that will help us continue to manage our fleet costs considerably better as we move forward. We have opportunities in the procurement side. Will pointed out in his remarks about some of the headwinds that we're having in medical.

We're going to be doing our best to push our people to use lower-cost options like our telehealth option and our on-site clinics that we have available for people to use because they can drive, we can drive cost savings just through education and a more convenient way for our people to get medical care. There's been a lot of challenges in the medical cost side and so we've got some efforts that we need to make towards continuing to drive those costs down.

We've identified those and we're going to be working on those.

Greg Parish, Analyst at Morgan Stanley

Okay, great. Thank you.

OPERATOR

Thank you. The next question is coming from Curtis Nagel of Bank of America. Please go ahead.

Curtis Nagel, Analyst at Bank of America

Great. Thanks so much for taking the question, and apologies if I just missed this. Any commentary on recurring sales within residential — what did that look like?

Jerry Gahlhoff, Chief Executive Officer & President

Could you restate that question, Curtis?

Curtis Nagel, Analyst at Bank of America

Yeah, of course, Jerry. Yeah, just recurring revenue versus one-time within residential. What did that look like in the quarter? And, you know, how is that trending so far to start 3Q?

Jerry Gahlhoff, Chief Executive Officer & President

Yeah, the recurring has been healthier. We've been able to sell and convert and retain better on the recurring side. The one-time — when we started looking at the one-time categories — that has been the brunt of it, of the miss. So there were some parts of the second quarter where, for example, residential rodent could be down. Was that kind of demand, which is often one-time — you know, see a rat, catch a rat, kill a rat — is down, could be, you know, 30% to 50%.

And it's just like some of that kind of call volume, and for what we would call occasional invaders and one-time type of pests like stinging insects, just down. So whereas we did see much better growth on the residential recurring and the interest from the consumer was still there, the one-time actually went negative throughout a large part of the quarter. And that's a significant drag to organic growth because especially brands like Orkin that are more pest-pressure driven versus prevention driven, they're the ones that are going to have a larger impact from that.

And that also affects things in the digital space as well.

Curtis Nagel, Analyst at Bank of America

Okay, maybe just to put a kind of final point and then I'll follow up. Just if you could quantify that. I think recurring in resi was somewhere around 7% 1Q — what did that look like in 2Q? And then just it sounds like, you know, for the remainder of the year, I think fuel costs supposed to be around, I think under 2%. But, you know, I guess, you know, with costs, you know, rising even today, right? You know, I guess how is that contemplated? And anything you're seeing on chem costs — is that, you know, are we seeing any pressure there?

Is that in the guide? A lot of questions.

Will Harkins, Executive Vice President and Chief Financial Officer

Yeah. So on the one-time volume, it went negative, like mid-single digits. It wasn't steep in total, but it was. But it's still also, in the Orkin brand, a pretty sizable piece of their business. It went negative low- to mid-single digits. When we think about fuel, I think the guide there is still towards under 2%. Under 2% we experienced in the second quarter. Fuel costs were up 30% in total. And I think we managed that pretty well. One of the metrics I look at is: fuel was up 30% but our miles driven per vehicle per month improved 8%.

So we're helping to mitigate some of that through routing efficiencies and efficiencies in the fleet. We're helping to mitigate that. And our procurement team — it's great. I get a monthly report from our procurement team about how they're looking through our materials and supplies spend and continue to try to drive savings every single month. I think we have continued upside there to leverage our size, leverage our brands, make Rollins-wide decisions about some of the products that we use that continue to be a potential help to us down the road.

And hey, Curtis, I would just say that, you know, we continue to anticipate those pressures from the ones that we're seeing today from fuel and from medical. And then we don't really know where insurance and claims will go as well. I mean, we continue to see that, you know, as we are talking through some of the claim activity that we've had from years ago where we're encouraged by the benefits that we're receiving from our safety programs and thinking about what's going to come in the future.

But today, what we see in our insurance and claims and certainly what we may see in the future months, we still have that as headwinds, but they're all contemplated in that 10% incremental story or outlook that we provided. Maybe one thing to also add, just from a residential recurring perspective, you know, we see it as relatively consistent with our overall recurring growth. And so what we didn't do was we didn't add value because of the lead environment that Jerry talked about in his prepared remarks.

You know, so we just didn't add them at the same pace as we have been. And the one-time was just volatile. I mean, back to the comment around, we have seen negative one-time performance in a few of the months that we've had so far this year. So, and certainly within the quarter. But hopefully that provides enough color, or a little bit of color, around that.

Curtis Nagel, Analyst at Bank of America

Right. So recurring somewhat, it sounds a little bit lower, but I guess somewhere around 7%. Is that fair?

Will Harkins, Executive Vice President and Chief Financial Officer

Relatively consistent with our overall organic growth rate.

Curtis Nagel, Analyst at Bank of America

Organic growth. Okay. Okay, thank you.

Will Harkins, Executive Vice President and Chief Financial Officer

Thanks, Curtis.

OPERATOR

Thank you. The next question is coming from George Tong of Goldman Sachs. Please go ahead.

George Tong, Analyst at Goldman Sachs

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

Jerry Gahlhoff, Chief Executive Officer & President

Yeah, you know, we do our best to monitor what's going on in the space as a whole. We try to monitor everything from our competitors that are direct and national competitors, regional competitors, mom and pops and the activities that they're driving. And then we also try to monitor what's going on in the DIY space as well to see if there's factors there that could drive people towards that side of things. But we did not notice anything competitively that stuck out to us, that somehow we're getting beat or somebody's taking more share.

Again, we just went right back to it feels like the consumer for the better part of six, maybe eight weeks, was just not seeing a problem and needing to solve a problem. It was just a little different there. And we heard it — we have heard it from others, friends of mine in the industry — that it felt softer. I don't want to speak for all of them and just say that that's the truth, but that's been the pulse that I've gotten, is that it's softer across, which also validates some of our research that it seems like it was a different consumer for a period of time.

George Tong, Analyst at Goldman Sachs

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

Jerry Gahlhoff, Chief Executive Officer & President

Yeah. So that's again what points us back to the consumer because we tried a lot of things and it pointed to not being able to move the needle very much. So you could take off limits, you could move dollars into other channels — experimented with a lot of things — and it did not make much move to volume. Even if you wanted to increase your spend, didn't move volume. So again it came back to, it would move it incrementally because maybe I'm taking a little bit from a competitor, but it perhaps wouldn't have been worth the investment that we made in it. So this is also the reason why when we think about our multibrand strategy, what we do, that's where we want to put dollars into door-to-door. Door-to-door can build more efficient routes, and the way we're running door-to-door, we get nice, sticky customers and we can reallocate some resources and do a better job in door-to-door because that's where the better opportunity was.

We're not hoping the consumer is going to call us because they see a pest problem. We're out there knocking on doors and selling prevention.

George Tong, Analyst at Goldman Sachs

Got it. Very helpful. Thank you.

OPERATOR

Thank you. Our next question is coming from Josh Chan of UBS. Please go ahead.

Josh Chan, Analyst at UBS

Hi, good morning, Jerry and Will. Thanks for taking my questions. I guess on the channels, does it make sense to you that the consumer would slow down only on the digital side but not the other side? Is it because the digital side kind of overwhelmingly skews one-time as well? Is that the alignment for why that channel particularly is softer?

Jerry Gahlhoff, Chief Executive Officer & President

So I look at it like a lot of digital is see a problem, solve a problem, and you have something that you need to get taken care of — I've got ants in my pantry and I've tried to do it myself, it didn't work. Now I'm going to call a pro. I'm going to call the Orkin pro. And that's why we do a lot of the brand spend in Orkin, to invest in name recognition, the power of that brand. That's very responsive. When you're out selling door-to-door or we're selling through the homebuilder channel, those other things — that is 100% a protect-your-asset, protect-your-home type of a sale.

You may not see any bugs. Well, we want to stop you from ever seeing any bugs. We want to be the people that protect your home from all the residential pests as well as termites and whatever, mosquitoes, whatever else. And we sell that as a prevention if you're a new homeowner. And we also index — and door-to-door indexes a little more on the higher-end side of household income bands in terms of where they want to sell to. So you're talking about a consumer — the same consumer — but both are being met at a different place in time, fulfilling a different need.

Does that make sense?

Josh Chan, Analyst at UBS

Okay, yeah, yeah, absolutely. That makes a lot of sense. Okay, thanks for—

Jerry Gahlhoff, Chief Executive Officer & President

And it's not that digital is necessarily more than one-time, but it is more see something, see something, deal with something.

Josh Chan, Analyst at UBS

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

Jerry Gahlhoff, Chief Executive Officer & President

Yeah, so the termite ancillary was a little slower as well, and primarily in May. It was strong in April, strong in June. May was just miserable. And it was even a little bit, a tad bit softer in the commercial side. But commercial, everything we see in commercial, all the lead indicators, when we're looking at sales efficiencies, we're looking at new accounts, we're landing things—nothing but positive there. And that's one of the reasons we're so positive on our outlook in the second half is I know the commercial and the investments we make there are going to pay off.

And I think we have opportunity to execute better and leverage returns on those commercial investments even better as we move into the back half and into next year.

OPERATOR

Thanks, Josh. Thank you. The next question is coming from Jason Haas of Wells Fargo. Please go ahead.

Jason Haas, Analyst at Wells Fargo

Hey, good morning and thanks for taking my questions. Are you able to give us any sense of what the exit rate was in June or what you're seeing in July? I'm just trying to reconcile the comments that it sounds like things got better, but then the guidance is calling for 6% organic revenue growth. So, like, are you running in the 6% range or—yeah—what to make of that?

Will Harkins, Executive Vice President and Chief Financial Officer

We, you know, we were pleased with what the end of June showed us in our results and we're pleased with what we're seeing so far in July. But we're trying to be cautious because I would say that, you know, we've got, you know, we've seen now, you know, a couple of quarters of this and we've had a quick shift. We've seen quick shifts. And so, but certainly we're pleased with what we're seeing so far, but we are only two weeks into the quarter. And so it's just—we've tried to make sure that we are going to, with the visibility we have today, we tried to factor all of that in.

And given that 6 plus organic growth expectation for the full year, I would remind you that it's for the full year. But—yeah.

Jerry Gahlhoff, Chief Executive Officer & President

That's right.

Jason Haas, Analyst at Wells Fargo

Okay, great, thanks. That makes sense. And then sticking with the idea that maybe customers are, I guess, using an LLM first to try to solve their problem, if that is weighing on the business, do you think that's because they're able to resolve it with a DIY method by getting advice from an LLM on how to resolve it and therefore they're less likely to pick up the phone and call and get a professional in there to help diagnose and fix the problem?

Or do you think the issue would be more that they're using an LLM and that LLM is routing them to a local provider rather than an Orkin professional? And I guess, how do you resolve that problem? What can you do to change your SEO to show up better in those LLM results if that is the case? Curious, how are you thinking that through? I know it's pretty early, but want to hear your thoughts on that. Thanks.

Jerry Gahlhoff, Chief Executive Officer & President

Yeah. So I have seen for myself in the LLMs about how they kind of help you—direct you to do it yourself. And is that having an impact, especially in a tighter economy, or somebody figuring out, can I do this myself? Look, as an expert myself in that space, I know firsthand that there are a lot of problems that you may think you can control yourself, but you can't. So I look at that as I may—you know, I have ants in my pantry, and yeah, I can find something and kill them there today.

But it doesn't mean that they're not going to be back because you didn't find the source or you're not doing it quite the right way, that in three weeks they're not just going to be back, and you're going to be calling us at some point because you can't do it yourself. And so we also—you know, the data also show that a lot of people don't want to do it themselves. But you're right, the LLMs can lead them that way. I don't know if that's a significant impact.

We haven't seen that. But we are working and we have some metrics that tell us how we show up in the LLM space and the things that we're working on there. And we're continuing to put effort and energy behind how we show up in those spaces. There's also coming a time here, I think really soon, as Google's going to start and all of them are going to start monetizing that. And so that'll be a whole different shift, probably within a matter of months or weeks, that we'll be faced with as well to see on those changes.

And we continue to monitor it. I have a great deal of confidence in our team that we're doing everything that we can in that regard. But is it possible—and that is amongst all the variables—and when Tim asked his question of all those things, that's another one of those things that could possibly be coming together in a confluence on the residential space. I can't quantify it. I can't say it's this percent. Or is it possible? Yeah, but I don't know exactly.

Jason Haas, Analyst at Wells Fargo

Okay, that's very fair. Thank you.

OPERATOR

Thank you. Our next question is coming from Peter Keith of Piper Sandler. Please go ahead.

Peter Keith, Analyst at Piper Sandler

Hey, thanks. Good morning, everyone. So you're not the only company to talk about weakness in May. Like Tractor Supply out today—they had a tough May as well in lawn and garden. One thing we've been looking at is a significant uptick in drought conditions throughout much of the East Coast. We think drier conditions would prevent the spread of mosquitoes. I guess you did talk a bit about weather, but how do you feel about the drier ground conditions this year as a potential headwind on the business?

Jerry Gahlhoff, Chief Executive Officer & President

Peter, it's a great question and I promise you we have dug into that one. We went really deep both regionally. We looked at top 50 markets and weather conditions and we tried to do a lot of attribution to what was going on, saying I had a lot of hypotheses, most of which couldn't be proven as real. And so what we do know is that—and I believe—the pest pressure wasn't there. Now, is that weather driven? Is it somehow weather driven from something that got experienced four or five months ago?

Did harsh winter knock down some populations? It didn't overwinter—all these kinds of variables that are out there. It does have me more interested these days in predictive weather models, especially with AI. This is something we tried years ago, trying to forecast demand in the future. But it does make me wonder if we have an opportunity for better models given the processing power and the data that we have today. Those are things that we're looking at.

But the month of May completely baffled me, and I had the same hypothesis that you did about—I said weather—and it may just be pest pressure and we don't know what pest pressure was driven by. It may have been weather, or it could have been weather months ago that affected it, that came to fruition in May and just some year-over-year change there. It's odd. That's the best I can do for you, Peter.

Peter Keith, Analyst at Piper Sandler

Okay, that's fair. I guess I think we were saying too is there wasn't really much regional variability in the business where weather could have had an impact.

Jerry Gahlhoff, Chief Executive Officer & President

That was the other side of it is the volume challenges we saw were across the entire United States. There wasn't one place that just stood out as exceptionally well. And that's not normal. It's like the entire U.S., and that's why again, I think, why our weather hypothesis did not hold up.

Peter Keith, Analyst at Piper Sandler

Okay, thank you very much. I appreciate the insights.

OPERATOR

Thank you. Our next question is coming from Tomo Sano of JP Morgan. Please go ahead.

Tomo Sano, Analyst at JP Morgan

Hi, good morning everyone.

Jerry Gahlhoff, Chief Executive Officer & President

Good morning.

Tomo Sano, Analyst at JP Morgan

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

Jerry Gahlhoff, Chief Executive Officer & President

Yeah. So one thing I want to make crystal clear is that we are a very people-oriented organization and we want to continue to invest in our people. We'll continue to invest in training, continue to invest in doing all the right things. And the reality is we need to execute better. At the end of the day, we need to be very internally focused to execute and execute better as we move through the rest of this year and into next. And I think we're not going to approach this in a shortsighted way and make irrational adjustments that are going to affect our business for the long term.

And that is rooted in our people-focused culture. And we continue to invest in our programs like colab. I mean, you could have a debate that some of the training that is costing us a lot of money and the investments we're making in the business could be halted in the meantime. But we're not willing to discontinue those investments in our future and investments in our people. So if you have any concerns about that, please don't. We're going to continue to do the right thing, to have the right culture and invest in our people.

Will Harkins, Executive Vice President and Chief Financial Officer

And Tomo, maybe just to mention one thing—you talked about the slowdown in residential, but we just want to remind you that it's not uniform across our business. So we saw a slowdown in certain parts of residential in the business, but not across all of our brands, which is why we feel confident in our multi-brand, multi go-to-market approach.

Jerry Gahlhoff, Chief Executive Officer & President

That's right. And in some situations, for example, if the business is great in one market and it's better in another and they have more demand, for example, we moved some folks from Orkin into the Fox brand where they needed more help and we had capacity in Orkin to move people around. We can do those kinds of things when we invest in our people, invest in their training. We do our best to try to make sure they can remain part of Rollins.

Tomo Sano, Analyst at JP Morgan

Thank you, Jerry. Well, just one follow-up. We understand and appreciate the company's long-term operating philosophy which has been a key driver of its success over time. If you could give us, like, 10% updated incremental EBITDA margins, is that something we should think about as a floor when we think about the scenarios of more downside of the demand in some of the areas in residential? Or anything you're thinking about—stop, slow, continue—to protect near-term margins on this level?

Will Harkins, Executive Vice President and Chief Financial Officer

So Tomo, when we thought about that 10% incremental margin piece, that is really related to the fact that we've got to get our cost structure corrected for the demand that we're seeing right now. And so we are again outlining all the things that were already put out there at investor day. There are a number of actions we are going to take over the course of the back half of this year and that we've been taking, but that will drive even further, you know, 10%.

The reason we said greater than 10%, we believe that's going to be the floor. So you just should make sure if you're trying to model this out—I hope you caught, pardon my comments, around the fact that it will be weighted to the fourth quarter. We are expecting to have a difficult cycle for Q3, or a number that we need to cycle.

Jerry Gahlhoff, Chief Executive Officer & President

But yeah, we had a perfect Q3 last year.

Will Harkins, Executive Vice President and Chief Financial Officer

We had a great Q3 last year.

Jerry Gahlhoff, Chief Executive Officer & President

It's going to be challenging to lap, but we're going to work on it. We're absolutely going to try our darndest to get there.

Will Harkins, Executive Vice President and Chief Financial Officer

That's right.

Jerry Gahlhoff, Chief Executive Officer & President

It's a more difficult quarter to lap, but Q4 certainly presents some upside.

Will Harkins, Executive Vice President and Chief Financial Officer

That's right. But for the full year, 10% is the number we felt confident in or, you know, comfortable being able to guide for as a floor.

Tomo Sano, Analyst at JP Morgan

Thank you. Appreciate it.

OPERATOR

Thank you. Thank you. The next question is coming from Ashish Sabhadra of RBC Capital Markets. Please go ahead.

Ashish Sabadra, Analyst at RBC Capital Markets

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

Will Harkins, Executive Vice President and Chief Financial Officer

Thanks for the question. As we look at it, we didn't feel like we needed to come off of it from the medium-term perspective because we still feel really confident in our ability to drive revenue growth. And so what we haven't seen in the last couple of quarters is the revenue to come through. And if you don't get that 7 to 8% revenue, it's going to be much more difficult to be able to see the flow-through, down through the P&L from a margin perspective.

And so we again feel comfortable with the 10% for the year. I think we tried to model in the headwinds that we're already expecting, but also some offsets. We expect offsets in our fleet as we start to cycle the gains that we had in the prior couple of years with the used car market. But from a medium-term perspective, when we think about that 30% plus, it really does feel like something that we have seen in the past and something that we will get back to because we've got so many things that are in the pipeline right now from a procurement perspective.

I mean, Jerry outlined a couple of—

Jerry Gahlhoff, Chief Executive Officer & President

—these and sitting in my shoes, I just know from an operational standpoint, I don't think we were at our best. We have opportunity in the back half of the year and leading into early next year to operate more efficiently and do better on a day-to-day basis in our operations. There are some things we left on the table in the second quarter that I just know that there's opportunity to do better. Yeah, we've identified those things and we're taking some actions.

Ashish Sabadra, Analyst at RBC Capital Markets

Very, very helpful color, and maybe just a quick follow-up. With the stock dislocation here, are there things from a capital allocation perspective that you can do, like take advantage of this market dislocation? Thanks.

Will Harkins, Executive Vice President and Chief Financial Officer

You know, Ashish, our capital allocation strategy is still very much the same as it has been for the past several years. And so, you know, we're reinvesting in the business. We will continue to think about M&A opportunities. That's where we see great use of our capital. Certainly there is this dislocation that's going on right now. You'll see in our 10-Q that we file later today that we have done some pretty nominal repurchases. We're trying to offset the dilution that comes from stock comp, the burn rate from our stock expense.

As far as, you know, we played meaningfully when we had the secondary last November. So we certainly have gone into the market. But as of now, I would not expect to see us deviate from the allocation strategy that we've had over the past several years.

Ashish Sabadra, Analyst at RBC Capital Markets

And cash flow generation is really strong.

Will Harkins, Executive Vice President and Chief Financial Officer

Absolutely, yes. Still at, you know, above 100%, 115% in the quarter. But we do, you know, we always are—we talk with our board. We'll have our board meeting next week. So we talk to the board regularly about this very topic. So, you know, I think we feel comfortable with where we are, where we have been, and continue that way. Continue to keep going. Thanks, Ashish.

Ashish Sabadra, Analyst at RBC Capital Markets

Thanks, Will. Thanks, Jerry.

OPERATOR

Thank you. The next question is coming from Stephanie Moore of Jefferies. Please go ahead.

Heralanto, Analyst at Jefferies (for Stephanie Moore)

Good morning. This is Heralanto on for Stephanie Moore. So I guess on the margin front, you discussed people cost being a part of the headwind. So I guess just on the hiring side, which inning are we in on the hiring side? Could you talk about retention? In the hiring that you've seen, do you still see a $50 million opportunity to improve margins? And then just anything on the salaries that were a headwind—anything that would be helpful. Thank you.

Will Harkins, Executive Vice President and Chief Financial Officer

Yeah, thank you for the question. Maybe to just point out one thing. We definitely see opportunity still for our retention—our employee retention—and the fewer people we have to hire because we keep the employees that we currently have, that's going to be a great opportunity for us in the future. We do not think that that has gone anywhere. This quarter in particular, and what we're even forecasting in our 10% incrementals for the remainder of the year, it really was more around medical expense.

So not so much just our core salaries, but around the additional expense we're seeing from a medical perspective. We've heard that in our industry and other industries—medical is certainly a significant headwind for a lot of companies. And so that's where you heard us speak about the margin degradation related to medical, not so much employee retention.

Jerry Gahlhoff, Chief Executive Officer & President

Yeah, we still have upside. Our seasonal hiring amounts—as slow as Q2 was on the residential side—resulted in some slightly lower hiring volumes across Rollins, and certainly within Orkin there were a lot fewer hires. But we continue to focus on our short-term retention and making sure that it's those teammates in the first year on the job that are trying to stay. That continues to be an opportunity for improvement. We know that there's a cost to that, what we call churn of people, and so we're mindful of that.

I also would say that continues to be an opportunity for us, and we and our team are continuing to focus and do a good job on that.

Heralanto, Analyst at Jefferies (for Stephanie Moore)

Go ahead. Thank you. That's all for me today.

Jerry Gahlhoff, Chief Executive Officer & President

Thanks, Cheryl.

OPERATOR

Thank you. Our next question is coming from Connor Sonelia of Bernstein. Please go ahead.

Connor Sonelia, Analyst at Bernstein

Great, thank you for having me. Could you all speak a little bit about some of the difficult comparables you're lapping next quarter from last year? I know you commented that Q4 is where you'll really see the improvement, but just looking at insurance and claims, last year it was a pretty big tailwind—I think it was 1.8% of sales. More recently it's been the 3 to 3.5% range. Am I right in thinking that there's a pretty stark difference in margins between Q3 and Q4, or is my math wrong on that front?

Will Harkins, Executive Vice President and Chief Financial Officer

You have not done your math wrong. That is exactly right, Connor. I would just say that, yes, we hope that we're going to have a more favorable Q4, but we know in Q3 that everything went in our favor in Q3. I mean, our insurance claims—everything aligned. It was a really wonderful Q3 last year. So our crystal ball is a little bit fuzzy. But we certainly hope that the rest of the year we will be at the numbers that we've told you and we'll be continuing to progress.

But Q3 is going to be the more difficult comp by far.

Connor Sonelia, Analyst at Bernstein

Okay, great. Just wanted to make sure expectations are correct there. That's it from me. Thanks for your time.

Will Harkins, Executive Vice President and Chief Financial Officer

Thanks, Connor.

Jerry Gahlhoff, Chief Executive Officer & President

Thank you, Connor.

OPERATOR

Thank you. Our final question today is coming from Anthony Chacomba of Loop Capital Markets. Please go ahead.

Anthony Chacomba, Analyst at Loop Capital Markets

Good morning. Thank you so much for taking my question. So actually I had a question on M&A specifically. If you could just provide some color on the acquisitions that you did in the second quarter. Thank you.

Will Harkins, Executive Vice President and Chief Financial Officer

So, Anthony, thanks for the question. We acquired Romex in the quarter. That was the largest of the acquisitions that we had. And I would tell you that we find our pipeline to still be very healthy as we look towards the future. I mean, Romex is doing well in the quarter already, providing good results for us, but we remain disciplined in how we evaluate our M&A targets. And so we have a really healthy pipeline for the future.

Jerry Gahlhoff, Chief Executive Officer & President

Yeah, we closed several other tuck-in M&A deals in the quarter. All nice deals, really good companies. We have a—as Will said—we have a good pipeline and there's still plenty of companies out there that are good culture fits and that we would like to add to our family of brands here at Rollins. So nothing fundamentally has changed or shifted, both in between the PE space or anything else there, that gives us any pause that we can't continue to drive 2 to 3% of revenue from the M&A side.

Anthony Chacomba, Analyst at Loop Capital Markets

That's helpful. Thank you so much.

Will Harkins, Executive Vice President and Chief Financial Officer

Thanks, Anthony.

OPERATOR

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

Jerry Gahlhoff, Chief Executive Officer & President

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

OPERATOR

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

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