Rollins, Inc. (ROL) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you for joining us today. Welcome to JPMorgan U.S. All Stars Conference in London. And my name is Tomo Sano from JPMorgan. We're very pleased to host Rollins this afternoon. Joining us today, Jerry Gahlhoff, CEO and President, as well as William Harkins, Chief Financial Officer. And, well, before we get started, congratulations on the new CFO role. And I think this may be one of the first conference for investor conference in London in the new position. So congratulations, and we're delighted to have you with us today. And it's been an interesting year for the company. Investors have spent a lot of time trying to better understand the unusual demand volatilities experiences during the second quarter and while also evaluating the long-term opportunities around the commercial growth, technology investment and M&A. So today, I'd like to spend some time discussing what happened in the second quarter, also and what you're seeing as we move forward to the back half of the year and then why you remain confident in the long-term growth outlook for the business. So with that, let's jump right in. So Jerry, maybe we can start with the big topic on everyone's mind. It's been roughly 60 days after second quarter results, which came with a lot of the demand volatilities. And could you take a step back and give us your key takeaways from second quarter and also what you learned and where you think business stands today as we move forward to the back half of the year?

Right. So thank you, Tomo. So it has been quite a saga for us. And I think to help give some context to this discussion, it may help to even go back further briefly into late last year and early this year because there's been a lot of noise there's been a lot of, I guess, speculation about what's going on, and there's -- I hear things and -- but yet I'm also living it. So I live it each and every day. And so when I hear things, I'm like, well, that's not quite -- that's not at all what we're seeing or what we're experiencing. So I thought I'd give you my perspective on how this has all played out. So if you go back to the fourth quarter of last year and actually most of last year, go back to, say, March or April of 2025, I think I've been -- I had talked about softening lead generation coming through the business from about March on of 2025. We were seeing a single-digit kind of mid-single-digit 5% kind of lead declines throughout the performance marketing kind of driven brands like in Orkin. And that was fairly consistent through the year. We still grew really well, achieved great results because the lead volume that we were getting was higher quality leads that were converting at a higher rate and also starting at a higher rate. So our volumes were good, and we're dealing with that. Fast forward through 2025 to about November. November, we actually, in much of the United States had kind of an early winter and that seem to have like halted the pest pressure a little bit early. It was by weeks. Normally, it's end of November, beginning of December, instead it was that first week of November that was really quite different. And so in some ways, like winter just kind of started early, Tomo. And so we reported fourth quarter and it's a lot of our onetime business that was impacted. And then people were wondering, well, is it really the weather or is somebody else taking share? Or what else is going on in the market? There's a lot of speculation. We're like, no, we knew exactly what that was. And then you go into January, January was really tough, and we had ice storms that affected much of the South. We had branch closures, branches that couldn't drive and operate safely. And it really was a challenge operationally. But then as you -- as we move through the quarter, we saw similar kind of lead changes like we saw in 2025. As we move through the quarter, we exited March with an 8% organic growth rate. So things were looking good and things look healthy. April was fine. It wasn't a record-setting month, but it was solid. And then we move into May. And as we moved over the course of May, especially as we move towards the back half of May, it just -- things started to deteriorate. And those are times in our business. When you get close to June, when the lead volume and the activity in this space is really typically quite high, and that separation really started. You really started to feel it as we move through the back half of May. June had some highs and lows. The end of June was decent, and we started out July good, and then it seemed to drop again. And I talked about that on the earnings call that at times, there were glimmers of hope and sometimes when things didn't go strong. And then you move forward into -- as we talk about the current environment, it remained -- this softness has really remained with us this entire time. This extra softness in the lead where we're talking about double-digit lead declines instead of 4%, 5% lead decline. So made for a really challenging environment. So looking back on the Q2 earnings call, we talked about, is it the consumer? Is it the LLMs? Is it pest pressure or all these things. And so we really started doing a deep dive into what are the things that are driving some of this change. And we were working on that as we ended the quarter and doing some of the look back on there. Where we land today is we tested a lot of things. We looked at the data, and there may be some degree of it that's tied back to the consumer and the consumer health. We don't think that's a lot because we tested -- we looked at our income bands. We looked at lead volume by income band. And you would have suspected that the lower income bands may have seen steeper reduction in lead volume from. And that really wasn't the case. It was proportional across all of our income bands that we're aware of. So that really didn't seem to be -- it was -- it just wasn't significant enough to represent a significant change. We looked at test pressure. We did see some change in certain, what I call, bellwether tests like mosquitoes and things that were down single digits and looking at the reservice rate that for us is an indication of pest pressure. So we started -- and then you had the LLMs, which is the unknown. And we also learned that March 19 is when Google went to AI overviews and all their default search, which May 19. what did I say? March May 19 is when they went to this -- the AI overview is default search. And that's also when we started to see that gap start to really begin to widen as well. So certainly, if I had to name it, I would say, certainly at least 50% to 60% of what we experienced is probably related to the shift in the LLMs. And there's probably also a few other factors that are involved there, probably at a much less level. But we're -- so since then, we've been focused rather aggressively, our marketing teams. We've navigated changes like this before. We've navigated when it went from Google to Google LSA and some other challenges over the years. We'll navigate this one, too. But we've engaged some other outside help with our team. We have a great fantastic team that I believe in that I know can help us navigate this. But rather than playing one game like we used to play or just a couple of digital acquisition methods, now we have to play and how do we deal with Gemini, how do we deal with ChatGPT, how do I deal with Claude. So there's all these things that all value certain things differently. So we have to look at our content online, what we do on our websites, how we feel making sure that our brands feel like we're local companies in the markets that we serve, we have 400 branch web pages that all have to make sure we have the local feel. We have to do things like increasing our price transparency. We have to start talking about things like same-day service, next-day service as part of our value propositions, maybe more pricing transparency in our business so that when we're searched, a consumer has a range of what that to compare us to competitors in the market. So these are things that we're out there doing right now and learning quickly if you think about the shape, the steep learning curve of this and AI, how that is, and we're having to do much the same. But I remain optimistic. What I can't tell you is, are we going to have this kind of fixed in the next 2 or 3 months? Or is it going to go on to next year? I really don't know. But -- that's what makes Rollins so great. We have lots of different brands, lots of different ways we acquire customers. For example, our Fox brand continues to be very healthy, driving through the door-to-door space, driving new growth, and they're growing great organically in the residential space, which also demonstrates that the market is still there and the appetite for our services is still there. Our home team business, which is also mostly residential through the homebuilding channel is doing -- is really strong. We also have opportunities to continue to focus on our commercial growth. That's a great opportunity for us to drive as well. So we're excited about it. A lot has changed. And -- but yet, I feel like if there's any team that's going to survive this and drive this level of consistency, it's us. You think back 25 years of every quarter of organic growth. not one quarter have we not grown organically for 25 years. And we ought to be able to continue that. That's a winning streak. And so while it might soften or where it comes from, might shift over time, but we can -- we're going to still be that resilient strong -- with a strong resilient company with a strong customer base that's always going to be there for us. So that's how it's really shaped up over recent months.

That's helpful context, Jerry. So well, maybe building on that, if we look at the share price over the past 3 months, the stock is down 25% and as a CFO, like how do you translate this to capital allocation, reinvestment, M&A and then some share repurchase? And like what's the capital allocation here?

Yes. Thank you, so much. Every meeting we've had starts with what Jerry just said about -- tell me a little bit about the industry, the market, what's going on with residential sales and organic growth. And then it always ends with capital allocation. So I'm really happy that you're hitting this second. And some of you in this room have heard us have this very same conversation. But the one thing that I can tell you is that we have an authorization with our Board. As we think about capital allocation, there are a couple of different components to it. First and foremost is always going to be M&A. We want to reinvest in the business through M&A. Second is we're going to continue to grow the dividend. And then third, which is what most people are asking about this time, is what do you do with share repurchases because that's a component of the strategy as well. And so we have an authorization from our Board. We've had it for years that we can repurchase shares up to 11 million of them. And you've seen us play in our shares when the family has gone -- we've gone to a secondary and the family has sold down. You've seen that over the last 2 times. And then earlier this year, we started talking about the fact that we were going to repurchase $40 million worth of shares just to really offset the dilutive effect of our stock compensation program. But we see the same share price that everybody is seeing out there. We absolutely believe that the company is undervalued at the moment. And so one thing that we have done in the third quarter is we have repurchased $100 million worth of shares in the third quarter. And so that is something that will continue to be something that we discuss at the Board level. That doesn't mean that it's 100% and done. Like I said, we have a much larger authorization that's out there, but we do want to deploy a very -- we want to be very intentional about how we reinvest in the business. And while that is one leg of the stool, there are others as well. I think the second component that I would want to just share with you is that people often ask, well, if you do X, can you also do Y? And so it's not an either/or story. It is we can certainly continue to go after strategic M&A opportunities. We can continue to grow that dividend, and we can also repurchase our shares because our balance sheet is incredibly healthy. As many of you know, we are only at 1x leverage. And so there's opportunity for us to do more. So thank you for that question, not waiting until the end and kind of book ending it.

And going back to you, Jerry, maybe just to unpack that a bit, like what happened in the second quarter and what's happening. So you described this situation as a multitude of factors. And like which hypothesis did you explore that didn't like fully explain the patterns, whether regional mix, competitive dynamics and competitive pressures and macro, a lot of things going on. And how would you respond that actually questions?

Yes. Luckily, we have a pretty good data team that -- and we have good rich data. And so we could pull data from looking at geographies, various organ divisions. And we've played with weather data and kind of backing our way into our history on weather, analyzing -- look, analyzing our income band to see what's going on. It somebody -- something fundamentally changed in the market, which doesn't appear to be the case that there's not something fundamentally different in the consumer. But one of the questions, and we still don't know this answer, it deserves more research is if our leads are down and demand is still there, where is it going? So there's this debate about is it going to DIY? Is it going hyperlocal down to 1 or 2 person operators in the space. And we don't yet have a really good sense of where that lead volume is going or what consumers are choosing to do. But I think that will reveal itself over time as we do more research in that space. And the pest pressure side of it is something we're continuing to -- we continue to monitor and see if there's something going on there. We have seen -- it's interesting, too, that -- and this is where you lead more towards LLM side is when it dropped, it dropped the same kind of percentages everywhere. It just suddenly, no matter if you were in California or in Virginia, those kinds of declines just were spread out equally and weren't necessarily across certain geographics with certain weather or maybe certain types of consumer heavy. So we investigate all those kinds of things really went -- were things we look at. And we also began trying a lot of things. We tried -- and this idea that you learn fast by failing fast. And we put a lot of things into place trying to make adjustments. And look, the reality is a lot of them didn't work. a lot of them -- a lot of those adjustments that we attempted to make across June and July, they just didn't work. And so there were a couple that did, but that was rare. But we have to encourage our teams. You got to keep trying these things, you got to keep learning. The faster we learn, the faster we adapt, the faster we'll get through this. So partnering with other people is going to continue to help us drive that, partnering with people that are experts in this field will help us. But it's -- I think Sami said it earlier, it's a brave new world out there. And we're not the only ones experiencing it, but I know that we can -- we'll figure it out. We'll get past it.

And investors are debating like whether LLM and AI-driven search is changing the lead generations. How are you framing that risk opportunities today? And how are you measuring and monitoring it?

Yes. It's -- we think there are a lot of opportunities. And some of the -- basically, over the last several months, to put it in a nutshell, the customer journey is shifting a lot. How you discover us, how you discover our brands is shifting a lot. And that means how we track lead generation and that customer journey, we have to adapt a lot of the tracking so that we know where things are going and how to allocate resources. So that's a really high priority. It's tracking that customer journey, how are they finding us and how we've been catering to them, meeting them where they are, so that we're top of mind. So that's probably the biggest thing we're challenged with is making sure we get that lead attribution part worked out. So that way, we know exactly what's going on and then can continue to adapt as things change moving forward.

Jerry, if you could talk -- explain us the how or differences between Google Search era versus like where we are today, having like 4 to 5 or 6 tools that the customers actually can explore to get to Rollins.

Old school Google search, whether it was buying keywords or doing Google Ads or paper-click and all those kinds of things that I think most of you know how all that work has evolved -- and at that point in time, Google Ratings or your Google reviews were the key driver of a lot of that search and how you appear in a lot of that search. Today, you have ChatGPT that, of course, Chat is not going to use Google's reviews. They're going to use someone else, and they partnered with Yelp. And so now you have to also have the Yelp reviews or they're using the Better Business Bureau or they're using Reddit to feed their content and their responses. And different ones are all doing different things. So now that shift from us understanding and knowing Google and maybe a couple of others on a smaller scale, has really shifted into now I've got to run 5 or 6 of these things, understand what makes them all tick and then how do we adjust to them over time. And that's really what the marketing team is focused on is first learning, understanding. And then you have to stay involved with how they evolve and how things change over time because you can get the result today typing in the same query that next week, you might get a different result, right? So we're going to have to stay top of mind really managing that on a day-to-day basis moving forward.

Thank you. And let's talk about the second half outlook and updated 2026 framework. You updated 2026 expectation to 6% organic growth and 10% incremental margins. with the improvement more weighted to fourth quarter. What gives you confidence in a back half setup? And then why the Q4 weighting this year?

So when we came up with that guidance and we're looking at the models that we had in -- at the end of the second quarter and as we were preparing for our earnings call, it was looking at the company's forecast of revenue growth and then trying to look at what we were going to be hurdling in the third quarter and the fourth quarter. And so certainly, part of the revenue story that we were thinking is through the first half of the year, we had 6.1% of organic revenue growth. And so we said we don't expect it to meaningfully decline from there. We expect it to be more of the same as we go through the end of the year. We also don't expect it to meaningfully improve in the back half of the year with everything that we had seen as we were looking at the different hypotheses that we had about what was going on in the business and then the market. And so that's how we arrived at our 6% organic growth for the year. The one thing that you just mentioned and that we wanted to make sure people walked away with, and I'm grateful to be able to reiterate that here on the public webcast is the fact that it is weighted towards the fourth quarter. We certainly have seen just more turbulence as we've gone through the third quarter even. And so that has not -- I mean, greatfully, that's what we were also forecasting in the sense that we knew it was going to be a choppier third quarter as well, we assumed. But we believe when we get to the fourth quarter, we've got a slightly better hurdle that we're going to be overcoming. Last year in the third quarter was all the stars aligned. It was an amazing quarter, and we're lapping that. That's tough comparison. Certainly, when you get down to the operating margin. So when I get down to the margin side of it, that was where we came up with our 10% incremental margin story because the third quarter really was one where every metric down the P&L, you would just check all the boxes in the third quarter of '25. So we still continue to have the medical headwinds that we've experienced so far this year. That will continue to be seen in the third quarter and also in the fourth quarter. We've got gains from a fleet perspective that we're lapping in the third quarter. We had a lot of -- you've heard us talk about our auto liability claims. And so in the third quarter of '25, almost everything went in our favor. We had some favorable settlements that we went through. There were just some positive results that were coming through on that line item. We're not expecting that to happen in the third quarter of 2026. So definitely something -- even though we say 6% organic revenue growth, 10% incremental margins, I would not evenly weight those between the third and the fourth quarter. I would put those more heavily on the -- the weighting more heavily on the fourth quarter. to get to that full year number.

And if you could talk about how should investors reconcile the improvement like the trends you've referenced in late June and early July with a cautious like full year guidance, if you can talk about that point.

That's a good question as well. So you would have heard us on that second quarter call talk about the fact that we did towards the end of July and the very end of July -- or sorry, the end of June, see some positive results, especially when we were looking at leads and things that at the end of June, the very beginning of July, we felt like things were starting to trend more favorably. We also tried to make sure that we were being very cautious, and we shared with everybody, we've seen this before. So just because the end of June, the beginning of July, we're showing some positivity and some green shoots. We didn't want to forecast that and extrapolate it into the third quarter and the fourth quarter because like Jerry mentioned earlier, we finished Q1 with the best month that we've had so far this year in March. We finished Q2, not with the best month we've had, but it was certainly more favorable than the trough that we experienced in May. So we just knew that there were a number of head fakes that we've experienced throughout the year, and we wanted to tame that a bit and make sure that we were being very prudent with our guidance. And I think that that's exactly what we've experienced. So we saw some positive green shoots at the end of June, beginning of July. That doesn't mean -- I don't want anybody to take away from this conversation that July and August have continued that trend. I mean as we have continued to see that volatility, there are days that look better than others, weeks that look better than others, but still a continuation of what we saw in the first half of the year.

Sure. And then shifting gear to cost management in terms of protecting margins while staying true to people fast cultures and initiatives. In 2Q, what were the biggest cost headwinds? Investors are actually asking like medical service, labor deleverage and fleet and fuel we talk about. We also talk about the importance of spending more cost to analyzing like what's happening in the market and the marketing operating expenses and so on. So could you talk about how you manage the cost versus like protecting margins and more people first on the culture?

That's right. Maybe I'll start with just some of the things we've done to protect the margins and then let Jerry talk a little more about people first and culture. But I -- as far as -- I mean, so the biggest things are what you just mentioned, medical claims, fleet, we have seen fuel prices increase. The good part for us is that we've always said that they are less than 2% of sales, fuel at least, and it continues to be less than 2% of sales. It's more than last year. So we're seeing 30 basis points of -- it's getting worse, but at a pretty small level. We still have not gotten to the 2% of sales level. We're still below that. And some of the things that we're doing there is that we've got more hybrid vehicles in our fleet. So we're trying to protect ourselves from fuel there. We also have -- we went out to RFP with our vendor for fleet. And so we're seeing some favorability just in our fleet cost overall as a result of that RFP. So we're trying to protect where we can. We certainly -- what you would have seen in the second quarter from a people-related cost, not just medical expenses, but we were staffed for 7% to 8% growth. And so if you're staffed at the north end of that because we kept thinking the season was coming. I mean we were going to eventually get the demand that we had planned for. We -- you're going to -- that has been pulled back. So we are no longer staffed at that level. We've rightsized the business. We started doing that at the end of May going into June. And so third quarter won't have that necessarily against it. But those were things that were within our control that we were able to take action on pretty quickly. As far as marketing spend, we're reallocating those dollars. We've had a couple of questions in the meetings we've had today just around how do you shift that? Will you increase your marketing spend? And so we're not -- that is not what we're planning to do. We're just reallocating what we're investing in and where we're deploying those dollars to the channels that are more advantageous to us and also continuing to do the research to figure out how do we better play in a brave new world. So maybe I'll let you, Jerry, if you want to talk through some of the kind of the culture.