Rollins - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 delivered double‑digit top‑line growth and strong operating leverage: revenue $1.03B (+12% YoY), GAAP EPS $0.34 (+21% YoY), adjusted EPS $0.35 (+21% YoY); gross margin expanded 40 bps to 54.4% and operating margin rose 100 bps to 21.9%.
• Results modestly beat Wall Street: EPS $0.34 vs $0.329 consensus (+3%), revenue $1.026B vs $1.019B (+0.7%), EBITDA $258.3M vs $249.8M (+3%); adjusted EBITDA margin 25.2% (+120 bps YoY) as incremental margins approached mid‑30s on cost leverage. Values retrieved from S&P Global.*
• Cash generation accelerated: operating cash flow $191.3M (+30% YoY), FCF $182.8M (+31% YoY); leverage remains low at 0.8x, supporting balanced capital allocation.
• Dividend raised ~11% to $0.1825 per share for the December payment, extending >80% dividend growth since 2022; management reiterated FY organic growth of 7–8% and M&A contribution of 3–4%.

What Went Well and What Went Wrong

What Went Well

• Broad‑based growth across service lines: Residential +11.2%, Commercial +11.8%, Termite & Ancillary +15.2%; organic growth healthy at 7.2% overall, with Commercial +8.3% and Termite +10.8%.
• Margin execution: adjusted EBITDA margin up 120 bps to 25.2%; management cited “leverage across the income statement” and insurance & claims favorability as drivers. “We delivered a strong third quarter with record revenue and an improving margin profile…” — CEO Jerry Gahlhoff.
• Cash flow strength: operating cash flow +30% YoY and FCF conversion 112% in the quarter; CFO highlighted a “balanced capital allocation program enabled by compounding cash flow”.

What Went Wrong

• Fleet and vehicle gains remained a headwind; while moderating into Q4, management cautioned some residual impact persists.
• People costs were neutral overall but saw higher reserves for medical‑related claims vs last year, partially offset by insurance/claims favorability elsewhere.
• Franchise & other revenue declined 4.3% YoY, the only sub‑line item down; a small portion of the mix.

Transcript

Operator (participant)

Greetings and welcome to the Rollins, Inc. third quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press Star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lyndsey Burton. Thank you. You may begin.

Lyndsey Burton (VP of Investor Relations)

Thank you and good morning everyone. In addition to the earnings release that we issued yesterday, the company has also prepared a supporting slide presentation. The earnings release and presentation are available on our website at rollins.com. We have included certain non-GAAP financial measures as part of our discussion this morning. The non-GAAP reconciliations are available in the appendix of today's presentation as well as in our earnings release. The company's earnings release discusses the business outlook and contains certain forward-looking statements. These particular forward-looking statements and all other statements that have been made on this call, excluding historical facts, are subject to a number of risks and uncertainties, and actual results may differ materially from any statement we make today. Please refer to yesterday's press release and the company's SEC filings, including the Risk Factors section of our Form 10-K for the year ended December 31st, 2024.

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

Jerry Gahlhoff (President and CEO)

Thank you, Lyndsey.

Good morning, everyone.

I'm pleased to report Rollins delivered exceptional third quarter results. Overall, we continue to see solid growth across all major service lines with total revenue growth of 12% and organic growth of 7.2%. Growth from acquisitions was bolstered by the performance of Saela, which continues to exceed our expectations. The integration of Saela has progressed very smoothly thanks to the efforts of our collective teams. As you know, we believe the combination of Orkin and our strong group of regional brands is a competitive differentiator for Rollins, giving us multiple bites at the apple with potential customers while also providing some balance and diversification with respect to customer acquisition. The addition of Saela further strengthens these competitive advantages for us. Our investments in strategic M&A opportunities are also complemented by ongoing investments to drive organic growth.

We've made a number of investments on the commercial side of the business and remain encouraged by the momentum we're seeing.

As a result.

Over the last year, we have strategically added resources to support our dedicated commercial division within Orkin. These resources are paying off as Orkin Commercial delivered double-digit recurring growth in the third quarter. As a reminder, while Commercial takes a little more upfront investment to drive growth, it's also the highest retention business amongst our service lines, making the lifetime value of these customer relationships very attractive. Beyond growth, our dedication to operational efficiency and continuous improvement is an important part of our strategy and culture. Kim will discuss in more detail, but we were pleased with our margin performance in the quarter, which was supported by some favorability related to insurance and claims as well as leverage in other key cost areas. Encouragingly, we continue to see tremendous improvements in teammate retention as a result of our ongoing initiatives, which benefits us from a people cost perspective.

We also leverage sales and marketing expenses. Despite ongoing investments we continue to make in support of long-term growth objectives, we're also proud of the significant investments we're making in our people to support the future growth of our company and establish consistent leadership behaviors across the enterprise. Our talent and development team has designed a program called the CO Lab, a three and a half day experience for all people managers. Our teammates meet in cross-branded groups for best practice sharing and networking. Servant leadership is the foundation of these sessions, which are designed to help leaders enhance skills for personal development, team development, and business growth. After the initial session, leaders participate in additional guided practice, peer coaching, and ongoing learning. Our efforts here are intended to create a marketplace of cross-brand, cross-functional talent where teammates can seamlessly transfer between brands, divisions, our home office, and field operations.

This will further enhance career opportunities for our teammates and create a robust pipeline of future leaders that will not only sustain our growth, but also help us reach our full potential. The CO Lab initiative began this summer and will continue well into next year as we put over 2,000 additional people leaders through this development experience.

In closing, we're excited about where our business stands today as we look to close out 2025. We remain well positioned for continued growth both organically and through acquisitions, and are focused on continuous improvement initiatives to develop our people and enhance profitability throughout our business.

I want to thank each of our teammates for their ongoing commitment to their customers. I'll now turn the call over to.

Ken Krause (EVP and CFO)

Thanks Jerry and good morning everyone. The third quarter reflects continued strong execution by our team. The team delivered exceptional financial performance throughout. A few highlights to start, growth was robust again this quarter. We delivered revenue growth of 12% year-over-year with organic growth of 7.2% versus last year across our service offerings. Adjusted EBITDA margin improved 120 basis points to 25.2% driven by leverage across the P&L with incremental margins of approximately 35%. Our GAAP earnings were up over 21% to $0.34 per share and excluding certain purchase accounting expenses primarily associated with larger acquisitions like Fox from 2023 and Saela Pest Control this year, earnings were $0.35 per share. Finally, we delivered over 30% improvement in operating cash flow while free cash flow was up 31% versus the same period a year ago.

This is enabling another strong increase in our dividend here in the fourth quarter. Diving further into the quarter, we saw double-digit growth across each of our service offerings in the third quarter. Residential revenues increased 11.2%, commercial pest control rose 11.8%, and termite and ancillary increased by 15.2%. Organic growth was also healthy across the portfolio with growth of 5.2% in residential, 8.3% in commercial, and 10.8% in termite and ancillary. Organic growth remained healthy in the quarter across our service offerings with growth rates that were in line or ahead of the first half. We finished with a strong September and are heading into Q4 with a healthy backlog. Turning to profitability, our gross margins were healthy at 54.4%, a 40 basis point increase versus last year. We saw improvements in materials and supplies, insurance and claims, and fleet expenses excluding vehicle gains, while people costs were neutral.

People costs were negatively impacted by increased reserves for medical-related claims compared to a year ago. Quarterly SG&A costs as a percentage of revenue improved by 60 basis points versus last year. We saw leverage across most key cost categories including sales and marketing, administrative costs, and insurance and claims, while fleet was neutral. Third quarter GAAP operating income was $225 million, up 17.3% year-over-year. Adjusted operating income was $232.1 million, up 18.4% versus prior year. Third quarter EBITDA was $257.6 million, up 17.1% and representing a 25.1% margin. Our adjusted EBITDA was $258.3 million, up just under 18% and representing a 25.2% margin. Incremental margins were 35.4% for the quarter, driven by our direct cost leverage. As previously mentioned, we benefited from a net $5 million of favorable adjustments related to auto and medical related claims. Excluding these adjustments, incremental margins still approximated 31%.

As we previously discussed, we expected to see an improvement in the second half of the year as a result of the improved performance in Q3 year to date. Incremental margins are now approaching 25%. The effective tax rate was 24.8% in the quarter, below our rate a year ago of 26.1%. Our tax planning efforts are paying off and are helping reduce our effective rate. We expect our effective tax rate to continue to benefit from this longer term. Quarterly GAAP net income was $163.5 million, or $0.34 per share, increasing from $0.28 per share in the same period a year ago. For the third quarter, we had non-GAAP pre-tax adjustments primarily associated with the Fox and Saela acquisition related items totaling approximately $7 million of pre-tax expense in the quarter.

Accounting for these expenses, adjusted net income for the quarter was $168.5 million, or $0.35 per share, increasing over 20% from the same period a year ago. Turning to cash flow and the balance sheet, operating cash flow increased 30% to $191 million. We generated $183 million of free cash flow, increasing approximately 31%. Cash flow conversion, the percent of income that was converted into operating cash flow, was strong at 112% for the quarter and for the nine months. First nine months of the year, we converted 120% of income into operating cash flow. We made acquisitions totaling $35 million, and we paid $80 million in dividends in the quarter. Dividend payments increased 10% from the prior year and are at a healthy and sustainable rate at approximately 44% of free cash flow in Q3 and 49% of free cash flow year to date.

We also just announced another 11% increase to our quarterly cash dividend earlier this week. Including this recent increase, we have raised our regular dividend by more than 80% since the beginning of 2022. Year-to-date, we have made acquisitions of almost $300 million. We paid dividends of approximately $250 million. We've invested in CapEx of almost $25 million and have only borrowed approximately $100 million. Cash flow performance has been exceptional this year and is enabling a very attractive and balanced approach to capital allocation. As part of our modernization efforts, we accessed the public debt markets earlier this year and established a $1 billion commercial paper program. Despite higher debt balances associated with the Saela acquisition, our interest costs have declined by approximately 7% on a year-to-date basis. Our leverage ratio stands at 0.8x.

We are positioned well and have access to cost efficient capital to grow our business. This enables us to continue to execute our balanced approach to capital allocation, reinvest in the business, grow our dividend as earnings and cash flow compound, and pursue share repurchases opportunistically. As Jerry mentioned, we closed the Saela acquisition earlier in April and are excited about the strategic growth opportunities this acquisition provides us. Saela has performed exceptionally well since the acquisition, growing double digits year-to-date versus last year. While margins were accretive to our margin profile and slightly accretive to EPS on a GAAP basis, as we look to the remainder of 2025, we remain encouraged by the strength of our markets, our opportunities for growth, and the execution of our teams.

We are seeing healthy levels of growth, margins are expanding, our tax rate is improving while earnings and cash flow continue to compound at very healthy rates. We are positioned extremely well to deliver on our financial objectives and continue to expect organic growth in the 7%-8% range for the year with growth from M&A of 3%-4%. We remain focused on driving double digit growth in earnings, improving our incremental margin profile while investing in growth opportunities, and we anticipate the cash flow will continue to convert at a rate that is above 100% for 2025. With that, I'll turn the call back over to Jerry.

Jerry Gahlhoff (President and CEO)

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

Operator (participant)

Thank you.

We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing these star keys. To allow everyone in the queue to ask a question, we ask that everyone limit themselves to only one question and one follow up. Our first question comes from the line of Tim Mulrooney with William Blair. Please proceed with your question.

Tim Mulrooney (Equity Research Analyst)

Ken, Jerry, good morning. Congrats on a nice quarter.

Jerry Gahlhoff (President and CEO)

Morning, Tim.

Ken Krause (EVP and CFO)

Good morning, Tim. Thank you.

Tim Mulrooney (Equity Research Analyst)

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

Ken Krause (EVP and CFO)

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

Those are metrics that will enable us to continue to deliver on our financial commitments.

Tim Mulrooney (Equity Research Analyst)

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

Jerry Gahlhoff (President and CEO)

Yeah, Tim, when we did our analysis of the Saela transaction, we actually expected revenue in the first 12 months of ownership to be in the probably mid-$60 million range. They're outpacing that really well. They're probably year one looking in the mid-$70 million kind of range instead of the mid-$60 million. We're really happy with what they've done. It's everything that you just talked about. We bought a really good business. They were firing on all cylinders. They also, like we talk about the diversity amongst our brands, acquire customers different ways as well. While they do some door to door, they're not relying on door to door. Only about a third of their growth comes from the door to door segment. The others, like us, comes from cross selling their existing customers additional pest and termite and ancillary services.

They also do some digital marketing in the markets that they're in. They, like our overall portfolio, have a very balanced approach in terms of how they grow the business. They were really excited about the opportunity to be part of Rollins and we give them the freedom and autonomy to execute and do their jobs. When we talk about integration, there's not a lot of quote, aside from maybe some back office stuff with things like maybe helping them with HRIS systems and things like that. We're not interfering with the day-to-day operations of the business. We want to let them run and we want to let them go. That's our approach to when you buy good businesses, that's exactly what you want out of them. That's exactly what we're getting out of this. The team at Saela, they've done a great job.

Ken Krause (EVP and CFO)

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

Tim Mulrooney (Equity Research Analyst)

All sounds great. Thanks for the color, guys.

Operator (participant)

Thank you. Our next question comes from the line of Manav Patnaik with Barclays. Please proceed with your question.

Ronan Kennedy (VP)

Hi, good morning. This is Ronan Kennedy. I'm from Manav. Thank you for taking my questions. Can you please talk about the investments in commercial and further elaborate on the timing of an impact to the demand drivers.

I think you had alluded to demand.

Double digit recurring in Orkin, and then anything to note on competitive dynamics within the commercial space, please.

Ken Krause (EVP and CFO)

Yeah, we continue to see good results there.

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

Jerry Gahlhoff (President and CEO)

Yes.

So.

One of the investments we made about a year ago was continuing to ramp up in the commercial sales side. When you do that, there's training time. It's a longer sales process in commercial compared to residential. Those kinds of investments take a little longer to pan out. We're seeing some of that leverage when we talk about getting leverage in the sales side this quarter because productivity of those additional staff is ramping up. We're getting the benefits of that. We have, particularly at Orkin, I mentioned growing double-digit recurring revenue growth on that side that is being driven by feet on the street, getting our marketing teams aligned to help those salespeople be successful in their jobs. That's just really going. All the engines are firing, or all the cylinders in the engine are firing, and they're just doing a great job there.

Ken Krause (EVP and CFO)

That's what we said. It's interesting, Ronan, last year when we finished and even the first half of this year we talked about incremental margins and we said that we needed some time for those folks to become more productive. That's exactly what we've seen here. As we start the third quarter, we finish the third quarter and start the fourth quarter, incremental margins coming in well above 30% is indicative of what we had indicated would happen. It's really good to see the margin profile inflecting higher here in the second half and there's still room for improvement. Right?

Ronan Kennedy (VP)

Thank you very much. That's a good segue to my second question. Just to unpack the incremental margin a little further, please. I think 31% insurance, auto and medical, you just touched on it.

Now, can you just dive a little deeper on whether it's pricing or productivity where you are seeing the greatest leverage across SG&A categories and how we should think about how that will trend and the trajectory over the coming quarters, please?

Ken Krause (EVP and CFO)

Certainly pricing and productivity are both having a part. Pricing always has a part in the incremental margin and in the margin improvement. We are positive on price cost across the business and that's certainly helping. The productivity is certainly paying off as well.

When you start to see leverage across all, substantially all aspects of SG&A, when you think about the business and I've talked about it a few times, but incremental gross margin, when you're in the high 50s like we are this quarter with 58% incremental gross margin, you expect to deliver a 30+% sort of profile because you're getting productivity, you're getting leverage on SG&A. The incremental SG&A is only roughly 23% or so. You're seeing really good performance up and down the P&L from price cost, from productivity, and it's paying off in both gross and SG&A.

Ronan Kennedy (VP)

Thank you very much. Appreciate it.

Operator (participant)

Thank you. Our next question comes from the line of Toni Kaplan with Morgan Stanley. Please proceed with your question.

Yehuda Silverman (Equity Research Analyst)

Hi, good morning, this is Yehuda Silverman online for Toni Kaplan. Just had a question about how conversations with customers have been going regarding pricing heading into next year. Have some customers been more or less willing to accept any price increases?

Do you see typically an increase more?

Or less in one segment versus another?

Ken Krause (EVP and CFO)

When you look at pricing, we are currently meeting right now, we've been meeting for the last month or two internally looking at all of the data that we benefit from. We feel like our pricing strategy is working, and we feel like it will continue to work as we head into 2026. Our focus, we've said it consistently, is consumer price inflation plus, so CPI-plus, and that's kind of what we're targeting. We're thinking about how as we go into next year, and so this year it's at 3%-4%, and we're evaluating that same sort of level as we go into next year. We're not ready to talk about exactly what level, but we feel like it'll continue to be a contributor to margins as we think about 2026.

Yehuda Silverman (Equity Research Analyst)

Got it. Just a quick follow up on lead conversion. I was curious how you're focusing on targeting this younger demographic of customer base. I was also wondering if you've been able to convert leads faster than a typical season or if it's going as expected with this newer staff you've brought on.

Jerry Gahlhoff (President and CEO)

Yeah, our lead closure is up, so we're very, very happy with the performance, whether it's on the residential side, through the call center, creative leads, those kinds of things. It's a testament to not only good sales processes, the training, everything that we invest in ramping up our new teammates that we add to our brands. If you take a look at what Orkin does and the messaging, the marketing.

Where they place their ads, the way.

Our media look, who we're trying to appeal to, is exactly that. We're looking at how do we target the 30-something-year-old, possibly first-time home buyer, maybe they're the second-time homebuyer that's in a 40 year-45 year range. When you look at how we design our ads, the messages that we are portraying, and where we place those ads, whether it's on TikTok and Facebook and those kinds of things, we're 100% targeted towards those kinds of folks as we know that those are the folks that are buying homes and will need pest control in the future. Rather than doing it themselves, we know they're also the ones that want to use a professional. We hope to make sure that we're positioned to fulfill that need for them.

Yehuda Silverman (Equity Research Analyst)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of George Tong with Goldman Sachs. Please proceed with your question.

George Tong (Business Services Senior Research Analyst)

Hi. Thanks.

Good morning. As you look at exit rates and comps from the prior year, could you?

Discuss which segments have the most opportunity for organic growth, acceleration in 4Q.

What the primary drivers are?

Ken Krause (EVP and CFO)

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

George Tong (Business Services Senior Research Analyst)

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

Jerry Gahlhoff (President and CEO)

What do you think, Ken? I can't think of anything that we, you know, it was, look, it was a really great quarter. I'm super proud of our team's performance. I think they knocked it out of the park.

So.

All that said, there's still opportunities that we have to continuously improve and make things better. I wouldn't think there was any expense issues that were there. Fleet overall still continues to be a little bit of a tailwind when you factor in the vehicle gains, but we're continuing to make some strides there.

Yeah, no.

Ken Krause (EVP and CFO)

I feel really good, George, about the Q4 numbers. I always point to here in the quarter: 7%, 12%, 20%, and 37% organic plus organic growth, 12% total growth, 20% earnings growth, and 30% cash flow growth. Really exceptional. Not only do you see those types of growth, but we still see opportunities from a price-cost perspective. We see opportunities on the SG&A front as we benchmark that. You can't help but notice the tax rate, you know, and all the things that our tax team is doing, really driving improvements in our effective tax rate. It's down 120, 130 basis points in the quarter. We're hopeful that we'll start to see that more long term and coming through. We think there's a plan there. There's just a lot that we feel good about and there's very little.

Jerry talked about the headwind on fleet with respect to vehicle gains. We feel like that's transitory. It's temporary. We're not seeing that impact our business longer term. We feel good about where we sit exiting Q3.

George Tong (Business Services Senior Research Analyst)

Very helpful. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Tomo Sano with JPMorgan. Please proceed with your question.

Tomo Sano (Managing Director)

Hello everyone.

Ken Krause (EVP and CFO)

Hello.

Jerry Gahlhoff (President and CEO)

Hello.

Tomo Sano (Managing Director)

Thank you for taking my questions. Could you provide an update on the current competitive landscape in the pest control industry? How have your modernization efforts helped the.

Differentiated Rollins from competitors and what are your expectations for these initiatives and maintaining or expanding your market position going forward? Please.

Jerry Gahlhoff (President and CEO)

We have a very healthy competitive landscape, and I wouldn't say anything has changed materially in that regard over the last couple years. We still have large regional competitors that do a fantastic job and make us.

All better.

As well as local, call them mom and pops. There's lots of them in this really healthy industry. Not much there has changed. We are continually trying to take share. Our approach is to do that through our multiple brands, multiple bites at the apple, lots of different ways to acquire new customers, whether it's HomeTeam Pest Defense, Inc. acquiring through the builder channel or Fox heavy in door to door, or Orkin and their brand, the power of their brand name and doing performance marketing to supplement that. We have those strategies for ensuring that we continue to grow our business units, and I think that's reflected in our numbers. At the end of the day, you see the power of our brands, you see the power of our business model, what we're able to do. To me, it speaks for itself. Ken.

Ken Krause (EVP and CFO)

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

I feel great about it.

I feel great about our position and excited to be a part of this team.

Tomo Sano (Managing Director)

Thank you.

Jerry and Ken, congrats on the quarter.

Ken Krause (EVP and CFO)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Peter Keith with Piper Sandler. Please proceed with your question.

Peter Keith (Managing Director and Senior Research Analyst)

Hi, good morning and nice results, guys. I wanted to dig into the cash flow, which the accelerating growth is rather impressive, and I was hoping you could.

Just unpack the drivers to that improvement. Are those drivers sustainable?

Ken Krause (EVP and CFO)

Thanks for the question, Peter. It's Ken. When we look at the growth in free cash flow, I think it's around 24% year-to-date. There are some benefits there. When you look at the cash paid for taxes, for example, that's down about $20 million, $22 million. If you set that aside, we still are growing cash flow and it's compounding at roughly 18%. What we're seeing there is a better focus on receivables. Receivables aren't growing nearly as fast as maybe they were a year ago. As a result, that's certainly having some benefit in the portfolio and in the cash flow results. We feel, though, we certainly feel like a mid-teens sort of growth in cash flow and compounding cash flow is.

Not out of question, not out of.

The question, continuing to do more around that. That level of growth is, I think, sustainable. It gives us the opportunity to continue to invest in our business, grow the dividend, participate in share repurchase from time to time, and grow the business.

Peter Keith (Managing Director and Senior Research Analyst)

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

Ken Krause (EVP and CFO)

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

Peter Keith (Managing Director and Senior Research Analyst)

Okay, very helpful. Thanks so much.

Operator (participant)

Thank you. Our next question comes from the line of Jason Haas with Wells Fargo. Please proceed with your question.

Jenny Lee (Senior Lead Digital Product Manager)

Hi guys, this is Jenny on for Jason Haas. Maybe we can talk about the strength in termite and ancillary.

You saw a bit of an acceleration.

There on an organic basis, and it was on a tougher comp as well. Curious if there's anything driving that momentum, what the sales environment is like, and if that momentum is sustainable. Thank you.

Jerry Gahlhoff (President and CEO)

This is Jerry. I think that's the performance that we continue to see in termite. Ancillary is also a sign that the residential consumer is healthy and they're willing to buy and spend for these types of essential services. They're both preventative services as well as, and oftentimes termite is preventative. Some maybe exclusion work is preventative and sometimes it's also remedial treatments that need to be done. That continues to go well. Those investments we make in people, adding people and cross selling to our existing customer base is one of the least expensive, if you call it lead gen opportunities that you have, is cross selling to your existing customers. We know that when they have more than one service with us, they're stickier and they're more loyal to the brand. It's just such a wonderful business model, great opportunity.

When we look at allocating capital to grow our business, that's an area that makes all the sense in the world to keep driving.

Jenny Lee (Senior Lead Digital Product Manager)

Great.

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

Ken Krause (EVP and CFO)

Yeah, it's hard to. It's hard to say. We're going to see stronger margin expansion in Q4 than 35%+ or so incremental margins. Our focus is to improve margins. You know, we'll continue to focus on that as we go forward. We still see a little bit of vehicle gains coming through the P&L in Q4, maybe not at the same level as Q3, but we certainly still see some of that headwind in the P&L. The focus is growing revenue, as I said earlier, double-digit revenue, double-digit earnings growth. That's the focus as we think about this business, and we also do feel like the price that we're charging is providing the opportunity to get some leverage through the P&L.

Jerry Gahlhoff (President and CEO)

Just remember this is a short cycle business, especially on the residential side.

All right.

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

Jenny Lee (Senior Lead Digital Product Manager)

Got it. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Stephanie Moore with Jefferies. Please proceed with your question.

Stephanie Moore (Senior VP Equity Research)

Hi, good morning. Thank you. I wanted to touch on the M&A pipeline and overall environment. If you could talk a little bit about your current pipeline and expectations kind of to end 2025 and into 2026. Also, if you could just touch on maybe the competitiveness of the M&A environment, especially as you look at, I think there's within pest some opportunities, whether it's door to door and some other interesting aspects to the industry that have emerged. If you're seeing any increased competition within some of those certain aspects. Thanks.

Jerry Gahlhoff (President and CEO)

As evidenced by our performance in the third quarter, we closed, was it seven deals in the third quarter, Ken, and that's following Saela. Usually, we slowed down a little bit after a large deal. We actually didn't. I think that's a testament that the pipeline is still strong. There's still opportunities out there. Certainly, there are more PE entrants into the market space and more people interested in that, which is fine. We've always had a number of competitors out there looking for similar opportunities as we are. Keep in mind, what's there, 19,000 pest control companies in North America. There's still a lot out there. It's still a lot of opportunity to continue both on the tuck-in side as well as the platform side. We see lots of opportunities out there.

We also recognize that as we grow, we talk about how do we continue to get 2 to 3% of revenue from M&A. That means as we grow, we're going to have to build some capacity to do more deals over time. We're working on our own infrastructure so that we can process deals, do performance quickly, analyze them, choose the best ones that are the best fit for us, and go into our portfolio well. That's an investment that we've been making in our business over the last 12 months and are going to continue to do so to build that capacity so that we're even more competitive in that space as we grow.

Ken Krause (EVP and CFO)

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

Jerry Gahlhoff (President and CEO)

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

Ken Krause (EVP and CFO)

Exactly.

Stephanie Moore (Senior VP Equity Research)

Thank you. That's very helpful. I had one question. When it comes to overall investments and customer acquisitions, various forms of marketing expenses, one aspect that I know gets utilized would be search engine optimization. I think just the obvious, kind of being at the top of the list when it comes to, within search engines. Have you seen any impact to your business just from some of these AI initiatives where you're starting to see AI kind of take over in the search engine optimization and seeing fewer clicks or maybe less conversion within the search engine optimization? I don't know if that was clear or not.

Jerry Gahlhoff (President and CEO)

Yeah, no, we know it's a common question that we get, especially our marketing teams get. It has caused some disruption in that space. Early this year we saw that shift of impact more. As I mentioned earlier, we talked about close rates being higher. Close rates are higher because we're actually getting higher quality leads, fewer window shoppers coming in, looking around, price shopping, things like that. Our close rate has actually improved. Our marketing team continues to make adjustments for the AI side and whether it's Google's AI agent, those kinds of things. We're continuing to make adjustments so that we can hopefully capitalize on those things. Every once in a while, the game changes there and we're amidst another one of those game changers where we're having to make adjustments.

Also keep in mind that it still goes back to we don't ever want all our eggs in a performance marketing basket. Our differentiated kind of broad-based methods of acquiring customers means that we don't have to be beholden just to Google or just some search, only that we can acquire customers and allocate dollars to different streams of generating new customer growth. Whether that's, as I mentioned, termite ancillary cross selling or devoting resources more to commercial. We're looking at all those opportunities and deciding where it makes sense for us to allocate our marketing dollars across the business and where we can get the biggest bang for our buck in that regard.

Ken Krause (EVP and CFO)

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

Stephanie Moore (Senior VP Equity Research)

Super interesting. Thank you, guys. Appreciate it.

Ken Krause (EVP and CFO)

Thanks.

Operator (participant)

Thank you. Our next question comes from the line of Brian McNamara with Canaccord Genuity. Please proceed with your question.

Madison Callanan (Equity Research Associate)

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

Thanks.

Ken Krause (EVP and CFO)

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

Jerry Gahlhoff (President and CEO)

We are internally focused on what we do, how we do it, how we go to market. This has been true for Rollins for many, many years. We're not reactive to what one competitor does, much less a whole bunch of them. We have a very experienced management team in the field that know this industry, know this market, and we are there empowered to run the business.

Way we know how.

Madison Callanan (Equity Research Associate)

Great. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Josh Chan with UBS. Please proceed with your question.

Ananya Das (Managing Director)

Hi, good morning, this is Anaya on Free. Josh, thanks for taking our question. Can you just touch a little bit on maybe what you're seeing on the cost inflation side, what you're seeing just across the board with material and equipment, but especially with labor, and any thoughts and expectations for 2026 as well?

Ken Krause (EVP and CFO)

Yeah, we're not seeing any really significant changes with inflation on materials and supplies, people, or other cost inputs. Our 3%-4% pricing is paying off, our CPI-plus focus is paying off. We're getting leverage through the P&L, and it's not as big of an issue as maybe it was a year or two ago. We're seeing, you know, if anything, you're seeing inflation moderate slightly here across the economy. That's kind of what you saw most recently in some of the Fed statements that were made around inflation. We continue to see at 3%-4% price, we continue to expect to get margin improvement.

Jerry Gahlhoff (President and CEO)

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

Ananya Das (Managing Director)

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

Ken Krause (EVP and CFO)

I think your question was around marketing investments and selling investments and leverage there, if I heard you correctly. I think what we're seeing is we're seeing leverage across the portfolio with some of those investments we made in the past. We're going to continue to evaluate making additional investments. Again, as I said earlier, we're in a growth market. We're seeing great growth. Getting high single digit sort of growth organically on a constant currency basis is really hard to come by for a lot of folks. We're continuing to execute in a market where we can get that kind of growth. We're going to continue to make investments to go out and acquire customers and grow our share and improve our position.

Jerry Gahlhoff (President and CEO)

I would add, Ken, that from a marketing standpoint, as I've said over the years, we'll continue to spend our marketing dollars. We allocate a budget for it, we use those dollars, and then based on what we know about the market, we allocate those dollars appropriately. We will typically tend to spend into the marketing channel and continue to invest there as we plan as kind of the range of a percentage of revenue. Where we find the most leverage opportunities is really in productivity on the sales side. When you look at SG&A, it's the S part of that, the selling productivity. As you make those investments, that's where, you know, occasionally we'll go through some cycles where as productivity rises, we have to then weigh what's the next level investment that we need to make.

That may cause some short term challenges on the S side, but long term, we also know that that pays off through accelerated growth in a relatively high margin, a nice margin business. That's the balancing act that we're constantly evaluating.

Ken Krause (EVP and CFO)

As you produce incremental gross margins of 58% or so, high 50s, you get leverage on the G and the A. You want to make those investments, you.

Want to go out and grow.

That is our focus. I think Jerry and I are completely aligned that we want to continue to invest in the business and grow the business. Growth is fun.

Ananya Das (Managing Director)

Makes sense. Very helpful. Thank you.

Operator (participant)

Thank you. We have reached the end of the question and answer session. I would like to turn the floor back to management for closing remarks.

Jerry Gahlhoff (President and CEO)

Thank you, everyone, for joining us today.

We appreciate your interest in our company and look forward to speaking with you.

On our Q4 earnings call, thank you.

Operator (participant)

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.