Rollins, Inc. (ROL) Q2 2026 Earnings Report, Transcript and Summary

Greetings, and welcome to Rollins, Inc. Second Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lyndsey Burton, Vice President of Investor Relations. Thank you. Please go ahead.

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 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?

Thank you, Lyndsey. 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 homebuilders delivered organic growth above our targeted 7% to 8% range for the quarter. For example, Home Team experienced double-digit residential growth as did Fox, who leverage 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 multi-brand 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 slowdown 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, a Chief Operating Officer of Orkin North America. Scott most recently had responsibility for all Harkins commercial operations in the U.S. This 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 Patrick Chrzanowski. 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.

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% and 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/cost 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 improvements. 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 clear: improved 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.

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

[Operator Instructions] Today's first question is coming from Tim Mulrooney of William Blair.

Just a couple of 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?

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 improvement -- slight improvements in customer retention in the second quarter. So those 2 elements aren't drivers of anything that gives us any pause or any cause for concern.

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 can 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. It sounds like though something really shifted in April and May. So I was just curious, have there been any -- any changes in SEO or from the LLM overviews that are impacting leads? Like 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?

Tim, if you would -- 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. And May was not -- did not start out great. And we thought, 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 sizing their belts. Maybe there's -- 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 regional weather or is it just pest pressures, and we started diving into what's going on, especially in the onetime space. We look at data that show certain -- there are certain categories of pests that we measure a lot of different pests and what the reasons we get calls for. And things like quite mosquito, mosquito calls were significantly down year-over-year and other kind of onetime 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 as 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 juice this? Can we create more demand? Can we -- 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 that 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 the -- it was saying the same thing again. So it's not like our strategy change is like pest pressure and consumer-driven demand was the part that was off there. And it was -- I know I'm going on along here, Tim. Like I said, we've spent a lot of time analyzing this. And all -- this whole scenario harkened back for me and second quarter of 2017 was 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 looks like the season just never started. And that was a very difficult first time operating meeting with Randall Rollins and it was just like -- just didn't come too 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 of time. And 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, there's probably -- 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 1 thing that we can put our finger on. It is -- there's 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 over spend, especially in the back half of the year on driving customer acquisition. So we're going to be focused on efficiency, focused on having -- making sure we're efficient through the right lead channels and making the best decisions we can to add customers to the customer base.

Okay. I appreciate all that extra color, and good luck in the back half of the year.

The next question is coming from Manav Patnaik of Barclays.

I was hoping you could just help us size 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?

Yes. Thanks for the question, Manav. I mean, obviously, Orkin has a large residential customer base. Other brands like a HomeTeam and a Fox or primarily residential. A lot of our other brands are not quite as focused at 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 sits in between Orkin, Fox, HomeTeam on the residential pest control space and to some degree also Northwest Exterminating. And the work and piece of that is very sizable in the whole. So. Whereas they are able to grow a little more rapidly right now than Orkin, but the headwinds and 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.

And across the other -- the specialty brands, that business performed quite well, right, where there's proactive protection-focused sales relationships at the doorstep, for example, with the big Box [indiscernible].

Totally different business model, yes, that's right, Lyndsey. 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.

Got it. And then the 2Q '17 analogy that you pointed out, maybe you could just help us with kind of were there some of the similar. What caused that, I guess, back then? And then kind of how long perhaps would take you guys to come out of that?

Yes. 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 deja vu. What happened in that situation was that July came back and we ended up -- 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 a waiting for that. As though we thought it was never going to come, but then it finally did, it happened around the fourth of July that year, it hit. And then all of a sudden, we were off and running again. But it was pretty painful. It was from -- I have scars. It was a pretty painful Q2, but we came right out of it in Q3.

The next question is coming from Greg Parrish with Morgan Stanley.

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?

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

We're talking about lead flow there, right? In terms of the volume of inbound leads was more in far from where we were year ago.

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 very healthy. So we can deal with it regionally, if there are some pockets where the lead volumes down, we usually still make that up by lead closure. But in months like May and parts of June, where there was just a massive gap, we can't make that up through pricing and closing efficiency.

Yes. Okay. That's helpful. And then maybe just to turn to margin. Your updated incremental margin guide is plus 10%, you did 8% in the first half. So it doesn't imply a whole ton of improvement in second half. You talked a lot about margin, focused on margin efficiency efforts. So just trying to reconcile those 2 kind of what's in your control, what could lead to upside in the second half?

Yes, Greg, we -- as we look through the back half of this year, so through the first half, we're sitting at just below 8% of incremental margins. And so all those things that we outlined at Investor Day talking through improvements with our fleet, talking about how we can better utilize our procurement function from an M&S perspective, talking about our 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.

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. Phil or Will pointed out in his remarks about some of the headwinds that we're having in medical. We're going to be -- are 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 -- we can drive cost savings through -- 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 continue to drive those costs down. We've identified those, and we're going to be working on those.

The next question is coming from Curtis Nagle of Bank of America.

One, and apologies if I just missed this. Any commentary on recurring sales within residential? What did that look like?

Could you restate that question, Curtis?

Yes. Of course, Jerry, just recurring revenue versus onetime within residential. What did that look like in the quarter? And how is that trending so far to start 3Q?

Yes. 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 start looking at the onetime categories, that's -- that has been the brunt of it of the mid. 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 onetime [indiscernible] down -- could be 30% to 50%. And it's just like some of that kind of call volume and for what we would call occasional [indiscernible] and onetime type of pest like spinning 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 onetime 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.

Okay. And maybe just to put a kind of follow-up point and then a 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 for the remainder of the year, I think fuel costs is supposed to be around, I think, under 2%. But I guess with cost rising even today, right? I guess how is that contemplated? And anything you're seeing on chem costs? Is that -- are we seeing any pressure there? Is that in the guide?

Yes. On the onetime volume, it went negative like mid-single digits. It wasn't steep in total, but it was -- but it's still also an 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% [indiscernible] 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 stop -- we're helping to mitigate some of that through our 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 supply spend and continue to try to drive savings every single month. And I think we have continued upside there to leverage our size, leverage our brand, make Rollins wide decisions about some of the products that we use that we -- that continue to be a potential help to us down the road.

And Curtis, I would just say that 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 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 entrance and claims and certainly what we may see in the future months. We still have that 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, we see it as relatively consistent with our overall recurring growth. And so what we didn't do is we didn't add value because of the lead environment that Jerry talked about in his prepared remarks, so we just didn't have them at the same pace as we have been. And the onetime was just volatile. I mean back to the comment around we have seen negative onetime performance and 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.

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

But relatively consistent with our overall organic growth rate.

Organic growth. Okay.

The next question is coming from George Tong of Goldman Sachs.

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?

Yes. 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 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 -- 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 is taking more share. Again, we just went right back to it feels like the consumer for the better part of 6, maybe 8 weeks was just not seeing a problem and needing to solve the problem. It was just a little different there. We had -- we have heard it from others of friends of mine in the industry that it's 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 cost, which also validates the some of our research that it seems like the -- it was a different consumer for a period of time.

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?

Yes. So that's again what points us back to the consumer because we tried a lot of things and importance of not being able to move the needle very much. So you could take off limits, you could move dollars into other channels. You could -- we 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, right? So again, it came back to -- it would move it incrementally because maybe I'm taking a little bit from a competitor -- competitor, but it perhaps wouldn't have been worth the investment that we made in it. So -- that is [indiscernible] more -- they are -- in 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.

Our next question is coming from Josh Chan of UBS.

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 onetime as well? Like is that the alignment for why that channel particularly is softer?

So I look at it like a lot of digital is, we see a problem, we 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 is -- and that's why we do -- a lot of the brand, 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 pest as well as termites and whatever and mosquitoes, whatever else, and we sell that as a prevention. If you're a new homeowner or -- and we also index in 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 it's -- you're talking about it consumer -- the same consumer, but both are being met at a different place in time, fulfilling a different need. Does that make sense?

Yes, yes, absolutely. That makes a lot of sense.

It's not that digital is necessarily more than 1 time, but it is more see something deal with something.

Okay. Yes. That makes more sense. Okay. And then I guess my other question is, I know a lot of attention is being paid today on residential, but it looks like the commercial and maybe Home and 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?

Yes. So the termite ancillary was a little slower as well in -- 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.

The next question is coming from Jason Haas of Wells Fargo.

Are you able to give us any sense of like 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 going to 6% organic revenue growth. So like are you running the 6% range? Or yes, what to make of that?

Jason, 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 we've got -- we've seen now, a couple of quarters of this -- and we've had a quick shift. We've seen quick ships. That's right. But certainly, we're pleased with what we're seeing so far, but we are only 2 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. To remind you that it's for the full year, yes.

Okay. Great. 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 like weighing on the business, do you think that's because they're able to resolve it with like a DIY method by getting like advice from an LLM on how to resolve it. And therefore, there's less like pick up the phone and call and get a professional in there to help diagnose the problem. But do you think the issue would be more of that like you're using an LLM and that LM is routing them to like a local provider rather than like an Orkin professional. And I guess, like what's the -- like how do you resolve that problem, like what can you do to change your, like, I guess, SEO to like show up better in those LLM results, if that is the case, curious like how you're thinking that through. I know it's pretty early, but I want to your thoughts on that.

Yes. So we -- I have seen for myself and the LLM about how they kind of help you direct you to do it yourself. And is that having an impact and especially in a tighter economy, if somebody is figuring out kind of do this myself. Look, as an expert myself in that space, I know firsthand that you -- there are a lot of problems that you may think you can control yourself, but you can't. So I look at that as a, I have ants in my pantry and yes, I can find something and kill them there today, but it doesn't mean that they're not going to be back because we didn't -- you didn't find the source or you're not doing it quite the right way. That in 3 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 -- and we -- the data also shows that a lot of people don't want to do it themselves. But you're right, the LLM 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 is going to start and all of them are going to start monetizing that. And so that will 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? Yes, but I don't know exactly.

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

So you're not the only company to talk about weakness in May. [indiscernible] 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?

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 try to do a lot of attribution to what was going on. Saying, "I had a lot of hypotheses, most of which -- it 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 4 or 5 months ago, that harsh winter knockdown some populations that didn't over winter. All these kinds of variables that are out there, it does have me more interested these days than 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 and that you did about -- I said weather and it may not -- 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 hot. That's the best I can do for you, Peter.

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

That was the other part of it is the volume -- 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. But the entire -- the entire U.S., and that's why -- and it's again, I think why our weather hypothesis did not hold up.

Our next question is coming from Tomo Sano of JPMorgan.

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

Yes. 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 Ecolab. I mean, we -- 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.

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 multibrand, multi go-to-market approach, so.

And in some situations, for example, if the business isn't as great in 1 market and it's better than 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.

Well, just one follow-up. We understand they 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 something like we should think about floor like when we think about the scenarios of more downside of the demand in some of the areas in residentials or anything like you're thinking about stop low, continue to protect near-term margins on this level?

So Tomo, when we thought about that 10% incremental margin piece, that is really related to the fact that we've got to -- we've got to get our cost structure corrected for the demand that we're seeing right now. And so we are -- and again, outlining all the things that we've 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. 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 the part in my comments around the fact that it will be weighted into the fourth quarter. we are expecting to have a difficult cycle for Q3 or a number that we need to cycle. But...

Perfect Q3.

Great Q3 last year.

It's going to be challenging to [indiscernible], but we're going to work on it. We're actually going to try our darndest to get there. It's a more difficult quarter to lap, but Q4 certainly prevents -- presents some upside.

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

The next question is coming from Ashish Sabadra of RBC Capital Markets.

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 making 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, thanks for the question. As we look at it, we didn't feel like we needed to come off of it from a 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 just with -- 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 these...

And Ashish, 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. We've identified those things, and we're taking some actions.

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

Ashish, we -- I mean our capital allocation strategy is still very much the same as it has been for the past several years. And so 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 Q that we file later today that we have done some pretty nominal repurchases related to -- we're trying to offset the dilution that comes from a stock comp -- the burn rate for our stock expense. As far as 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.

And cash flow generation is really strong.

Absolutely, yes. Still above 100%, 115% in the quarter. But we do -- 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 I think -- but we feel comfortable with where we are, where we have been and...

Continue that way.

Continue to keep going.

The next question is coming from Stephanie Moore of Jefferies.

This is Harold Antor on for Stephanie Moore. So I guess you, on the margin front, you discussed people cost in a part of the headwind. So I guess just on the -- I guess, on the hiring side, which in are we in the hiring side? Could you talk about retention in the hiring that you've seen, do you associate a $50 million opportunity to improve margins? And then just, I guess, anything on the salaries to were a headwind. Anything that would be helpful.

Yes, thank you for the question. Maybe to just point out one thing. So we definitely see opportunities 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're not -- 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, I mean, medical is certainly up 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.

We still have upside. Our seasonal hiring amounts as slow as Q2 was on the residential side, resulted in some slightly less hiring volumes, some 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 say that continues to be an opportunity for improvement that -- we know that there's a cost to that, what we call churn in those people, and so we're mindful of that. I also would say that continues to be an opportunity for us. And we -- our team is continuing to focus and do a good job on that.

Our next question is coming from Connor Cerniglia of Bernstein.

Could you 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, like 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?

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. And so -- but we know in Q3 that we definitely -- everything went in our favor in Q3. I mean our -- our [indiscernible]. I mean it was a really wonderful Q3 last year. So we just -- we -- our crystal ball is a little bit fuzzy, but we certainly hope that the -- the rest of the year, we will kind of 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.

Okay. Great. I just want to make sure expectations are correct there. That's it for me.

Our final question today is coming from Anthony Chukumba of Loop Capital Markets.

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.

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. And...

Yes, 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 -- our 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 between the fee 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.

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

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

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.