罗林斯 (ROL) 2026财年第三季度业绩电话会：AI搜索致客源承压，业绩展望被修正lg...

核心要点

• 罗林斯（Rollins）第三季度营收同比增长6.2%，其中包括4.4%的有机增长。管理层表示，业绩低于预期，主要是由于住宅客户拓展乏力。
• 住宅业务营收增长4.9%，商业害虫防治业务增长7.7%，白蚁及辅助业务营收增长6.5%。三者的有机增长率分别为2.3%、6.6%和5.3%。
• 调整后EBITDA同比下降0.7%至2.57亿美元，利润率为23.5%。保险、理赔和车队成本增加对盈利能力造成压力。
• 管理层将其2026年有机增长预期下调至4%-6%，目前预计增量利润率在微增至10%之间。
• 罗林斯将数字潜在客户导流量减弱归因于AI和大语言模型（LLM）驱动的搜索所引发的客户触达结构性变化。公司正在增加本地化内容、提高价格透明度、增加点评展示，并提升在各大AI平台上的可见度。
• 管理层表示，经常性住宅客户群保持健康。客户数量持续增长，留存率保持强劲，采用上门推销和房屋建造商合作模式的品牌表现优异。

关键财务数据

罗林斯在该季度完成了七项收购，总金额为2700万美元。公司还支付了8700万美元的股息，并回购了1.20亿美元的股票。杠杆率为1倍。公司宣布将每季度现金股息进一步提高10%。

业务与经营表现

住宅客户拓展仍是主要的短板。管理层表示，AI和大型语言模型搜索工具正在推荐更广泛且更多样化的害虫防治服务商，使数字端的客户触达分散化，从而减少了流向罗林斯旗下品牌的潜在客户量。

这一压力并非全面性的。HomeTeam和Fox凭借直销、上门营销和房屋建造商合作等关系型渠道继续保持良好表现。Fox实现了两位数增长，管理层报告上门营销渠道未出现明显的疲软现象。

罗林斯的应对策略是拓展与本地相关的内容、优化商家信息列表和客户评价、增加价格透明度，并突出当日与次日可提供服务。公司还开始测试在ChatGPT和Google Gemini上的付费广告机会。管理层强调，其策略是将预算重新分配至投资回报率更高的渠道，而非盲目增加总体营销开支。

商业业务有机增长率达到6.6%。疲软主要集中在非Orkin品牌以及部分一次性熏蒸工作的入账时间上。得益于此前对商业服务能力的投资，Orkin的核心商业业务增长超过8%。

白蚁及辅助业务有机增长率为5.3%。业绩受到进入交叉销售渠道的新住宅客户减少，以及部分市场人员和产能受限的影响。罗林斯在本季度末创下了今年最高的未结订单量，表明需求依然存在，但未能完成服务转化。

毛利率压力主要反映在保险和理赔成本上（拖累利润率100个基点），以及车队成本（造成40个基点的逆风）。员工费用改善了30个基点，而材料和耗材带来了10个基点的积极贡献。燃料费用约占销售额的1.9%。

管理层业绩指引

罗林斯目前预计2026年有机增长为4%-6%，而此前预期为6%。管理层概述了三种情境：

• 若潜在客户量仍低于上年水平但稳定在第三季度水平，则增长约5%。
• 若潜在客户量趋势进一步恶化，则增长4%。
• 若潜在客户量较第三季度水平出现明显改善，则增长6%。

公司预计2026年增量利润率在微增至10%之间。公司对并购驱动的2%-3%增长以及100%以上的自由现金流转化率的预期保持不变。

管理层继续预计燃料成本占销售额的比重将低于2%，全年有效税率低于25%。产品组合的整体涨幅预计保持在3%-4%的区间，其中商业服务占比更高；公司预计全年价格涨幅将覆盖成本上涨。

罗林斯未提供2027年的展望。管理层保留了长期目标，即逐步恢复至7%-8%的有机增长并实现30%-35%的增量利润率，但强调具体时间点仍存在不确定性。

风险与关注领域

• 由AI和LLM驱动的搜索可能代表着客户触达方式的永久性转变，而非暂时的冲击。
• 9月份数字指标的早期改善尚未构成住宅潜在客户量的稳定复苏。
• 11月和12月是季节性低谷月份，届时住宅需求对天气和短周期变化可能更为敏感。
• 保险、理赔、燃料和车队费用的增加继续对利润率构成压力。
• 尽管未结订单强劲，但人员和产能受限可能会推迟白蚁及辅助业务的完成。
• AI搜索中更高的价格透明度可能会加剧全国性与本地服务商之间的比较，从而使传达服务质量、响应速度和可靠性变得更加重要。

分析师问答环节点评

管理层表示，第三季度住宅潜在客户量趋势持续疲软，不过9月份有所改善。网站自然流量的同比降幅从8月的13%收窄至9月的4%，而自然搜索潜在客户量较7月增长了5%。管理层警告称，这一改善趋势可能不会持续。

罗林斯将价格透明度列举为快速运营调整的范例。增加价格区间有助于其信息更有效地出现在LLM生成的回复中，该项调整在几周内即已落实。针对特定害虫的本地化内容以及关于快速提供服务的更清晰信息，也提升了公司的曝光度。

管理层不打算通过盲目增加营销开支来进行应对。公司计划对不同渠道进行测试，衡量潜在客户转化率和投资回报，并相应地重新分配资源。高管表示，随着搜索平台的演变，公司的规模、多品牌组合和财务灵活性为其提供了多种选择。

公司还重申，经常性住宅业务的表现好于一次性业务，且与历史趋势保持一致。管理层将留存率、交叉销售、转化率、定价和渠道多元化视为最终恢复更强劲有机增长的重要抓手。

业绩电话会议完整文字记录

---

完整财报电话会议逐字稿

管理层陈述

Operator

Greetings, and welcome to the Rollins, Inc. Third Quarter 2026 Earnings Conference Call. [Operator Instructions]. Please note, this conference is being recorded. I will now turn the conference over to Lyndsey Burton. Thank you, Lyndsey. You may begin.

Lyndsey Burton

Thank you, Sam, 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 and presentation contains certain forward-looking statements and discuss the business outlook. 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 the cautionary statements in yesterday's press release, today's presentation and the company's SEC filings, including the Risk Factors section of our Form 10-K for the year ended December 31, 2025, and subsequent filings.

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

Jerry Gahlhoff

Thank you, Lyndsey. Good morning, everyone. I want to begin with saying that our third quarter performance did not meet our expectations, and we are not satisfied with these results. The primary challenge continues to be pressure on residential customer acquisition. We now have a clearer understanding of what is driving this pressure and are working with urgency to address it.

The pattern has become clear. AI and LLM driven search are meaningfully changing the way customers discover service providers. With additional data through the third quarter, we clearly see the impact of the changing search landscape, which drove continued deceleration in digital lead flow.

Ultimately, LLMs are recommending a wider range of pest control providers. Unlike with traditional search, these recommendations vary significantly across platforms, markets and can even yield different results for the same search run on different days. The result is a more fragmented variable and dynamic customer discovery environment.

Importantly, moderating organic growth trends have not been broad-based across our portfolio. Brands that utilize relationship-driven customer acquisition channels, including direct sales, door-to-door marketing and homebuilder partnerships delivered stronger organic growth. HomeTeam and Fox, for example, continued to perform well, leveraging their door-to-door sales forces to deliver growth well above the overall company.

These results highlight the strength of our diversified multi-brand approach and the benefits of having multiple channels to reach customers. Additionally, our recurring residential customer base is healthy, with customer count continuing to grow in the third quarter and retention remaining strong. The relationships our frontline teammates build with customers are an important source of resilience, creating loyalty and increasing retention over time.

This underscores our confidence that pest control continues to be a large, growing and highly attractive market and we believe that the current pressure is a customer acquisition and discovery challenge, not a deterioration in underlying demand for our services. While the slowdown was most pronounced in residential customer acquisition, we also experienced softer performance in portions of our termite ancillary and commercial businesses.

The impact on our commercial businesses was fairly isolated to non-Orkin brands and timing in certain -- of certain onetime business. That being said, Orkin's commercial business continued to grow high single digits, reflecting the investments we have made there in expanding our commercial capabilities.

In our termite and ancillary business, growth was impacted to some degree by lower acquisition of new residential customers as these customers provide a source of future cross-sell opportunities within termite and ancillary categories. We also faced staffing and capacity constraints in certain markets that limited our ability to fully capitalize on available opportunities.

We have a large and attractive base of existing customers that provides runway for continued cross-sell within these categories. We're also taking targeted steps to address staffing and capacity constraints in affected markets so that we can better capitalize on those opportunities over time. We remain confident in the underlying demand and growth potential of these services.

We're focused on controlling what we can control and are taking concrete steps to optimize our approach with respect to digital customer acquisition. Our plan is centered around 3 priorities. First, we're ensuring our brands show up where customers are looking. This starts with evaluating how our brands are surfaced across traditional and LLM driven search and identifying opportunities to strengthen our presence by market and service category.

We're strengthening our visibility across traditional search and AI-driven discovery by expanding locally relevant content, improving local business listings and customer reviews and strengthening our presence in the sources LLM platforms use to generate recommendations. This targeted data-driven approach enables us to translate the strength of our national brands into greater local visibility, more qualified leads and ultimately, new customers.

Second, we are making it easier for customers to understand what differentiates us and ultimately choose our brands. We're improving local content, increasing pricing transparency and more clearly highlighting the service attributes that make Rollins brands stand out, including same-day and next-day availability and the quality of our customer service. We're also working to ensure customers receive accurate relevant information about our services whenever and wherever they are searching.

And third, we are continuously testing, learning and reallocating resources accordingly. We are improving lead attribution, testing different approaches and shifting investment towards the channel and tactics that generate qualified leads, convert them into new customers and deliver the strongest returns. Importantly, this is not simply about spending more, but continuously evaluating where our marketing dollars generate the strongest returns and investing behind those opportunities.

For example, we've begun taking advantage of new paid advertising opportunities on AI search platforms, including ChatGPT and Google Gemini to improve our visibility. In this highly dynamic environment, our ability to be nimble and shift resources to keep pace with change is an important source of strength. We believe the companies that will be most successful in this changing environment are those with the resources, expertise and organizational agility to continuously test, learn and adapt as these technologies evolve.

This is not about finding a single solution and moving on. It requires ongoing optimization and our scale, diversified portfolio and financial flexibility position us particularly well to navigate these changes over time. At the same time, we are always focused on providing exceptional service to our existing customers and maintaining the strong relationships that underpin our recurring business. We are seeing some early but encouraging signs of progress from our efforts as we close the quarter.

That said, we have not reached stabilization, and there is more work ahead to translate improving search visibility into new customers and sustained growth. We recognize that the customer discovery landscape may be changing structurally, and we are not assuming a return to historical patterns. We're moving quickly to adapt and our resources, scale and flexibility will give us multiple ways to respond as the environment evolves.

Our long-term confidence in Rollins has not changed. Our highly recurring business model, strong customer relationships, diversified portfolio and experienced and committed team position us well to navigate evolving market conditions and drive long-term success. We faced challenges before, and our team has consistently demonstrated the ability to adapt, execute and emerge stronger.

I have every confidence in our ability to rise to this challenge as well. 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'll now turn the call over to Will.

William Harkins

Thanks, Jerry, and good morning, everyone. I'll walk through our third quarter financial results and discuss the key drivers of performance, along with our priorities for improvement.

Total revenue increased 6.2%, including organic growth of 4.4%, which was below our expectations for the quarter. As Jerry discussed, continued pressure on residential customer acquisition was the primary challenge during the quarter. We also experienced softer performance in portions of our termite and ancillary businesses as well as our commercial business.

Performance was affected by fewer new residential customers entering the cross-sell pipeline, along with staffing and capacity constraints in certain markets that limited conversion of available demand. In the third quarter, residential revenues increased 4.9%. Commercial pest control increased 7.7% and termite and ancillary increased 6.5%. Organic growth across the portfolio was 2.3% in residential, 6.6% in commercial and 5.3% in termite and ancillary.

Turning to profitability. We continue to focus on managing factors within our control, taking steps to align our cost structure with current demand while continuing to invest in the people and capabilities that support service quality and long-term growth. In an environment where customer acquisition trends remain dynamic, maintaining an appropriately aligned cost structure is particularly important. We are focused not only on restoring stronger organic growth but also on ensuring that our operating expenses reflect current business volumes, allowing us to protect profitability while preserving the flexibility to invest over the long term.

Gross margin was 53.5%, a decrease of 90 basis points year-over-year, primarily reflecting higher insurance and claims costs as well as fuel-related headwinds. Following the lower volumes in the second quarter, we took proactive steps to better align staffing with demand, resulting in a 30 basis point year-over-year improvement in employee expenses.

Materials and supplies contributed an additional 10 basis points of leverage. Insurance and claims costs drove 100 basis points of deleverage, primarily reflecting higher claims costs against a favorable prior year comparison. And fleet costs represented 40 basis points of headwind, driven primarily by fuel and lower gains on vehicles. Fuel costs represented approximately 1.9% of sales in the third quarter, and we continue to expect fuel costs to remain below 2% of sales for 2026. Customer response to our recent price increase has been favorable and we expect to be positive on price/cost for the year.

Quarterly SG&A costs as a percentage of revenue increased 60 basis points compared with the prior year as higher insurance and fuel costs were partially offset by our continued focus on cost management and improvements in employee expenses. We saw 10 basis points of leverage in selling and marketing expenses and administrative employee expenses also improved by 10 basis points.

Insurance and claim costs represented a 60 basis point headwind, primarily reflecting higher claims expenses against a favorable prior year comparison while higher fleet costs contributed an additional 20 basis points.

Third quarter GAAP operating income was $223 million, a decrease of 1% year-over-year. Adjusted operating income was $231 million, a decrease of 0.6% compared with the prior year. Third quarter adjusted EBITDA was $257 million, a decrease of 0.7% versus last year, representing a margin of 23.5%. Our adjusted incremental EBITDA margin was negative 2.8%. Normalizing for the benefit we saw in insurance and claims in the third quarter of last year and the unfavorable impacts this quarter, the company's incremental margin would have exceeded 25%.

The effective tax rate was 25.7% in the quarter compared with 24.8% last year. Despite the slight increase in the quarter, we continue to expect our full year ETR to come in under 25% for the year, down approximately 100 basis points from historical levels. Quarterly GAAP net income was $158 million or $0.33 per share.

For the third quarter, we had non-GAAP pretax adjustments associated with acquisition-related costs and other items, totaling approximately $7.3 million of pretax expenses in the quarter. Accounting for these expenses, adjusted net income for the quarter was $163 million or $0.34 per share a decrease of 2.9% from the same period a year ago.

Turning to cash flow and the balance sheet. We generated operating cash flow of $242 million and free cash flow of $235 million. Cash flow performance during the quarter did benefit from the receipt of a $63 million tax refund that is associated with our tax credit planning strategy, which continues to provide meaningful cash flow and tax rate benefits.

Free cash flow conversion measured as a percentage of income converted into cash flow was 149% for the quarter. Excluding the $63 million tax benefit during the quarter, free cash flow conversion would have been 19%. This reflects our strength in cash generation and gives us flexibility to continue investing in the business while returning capital to shareholders.

During the third quarter, we completed 7 acquisitions totaling $27 million, paid $87 million in dividends and repurchased $120 million of shares. Our financial flexibility and conviction in the intrinsic value of our business supported more meaningful share repurchase activity in the quarter, and we will continue to evaluate future share repurchases given the health of our balance sheet.

Our leverage ratio stands at 1x, and our balance sheet remains strong. Our capital allocation priorities are clear: investing in the business through accretive M&A continuing to grow our dividend and opportunistically repurchasing shares. Earlier this week, we announced another 10% increase in our quarterly cash dividend. With this increase, we had doubled our regular dividend since the beginning of 2022.

Our healthy balance sheet provides us the flexibility to pursue all these priorities when appropriate, while also investing in organic growth opportunities. We are approaching the balance of the year with discipline, transparency and a clear focus on the actions that will improve performance.

Given our performance during the first 9 months of the year and the visibility we have today, we are updating our full year outlook. We now expect organic growth of 4% to 6% for the year and corresponding incremental margins ranging from slightly positive to 10% for 2026. This is a highly dynamic environment, and this updated organic growth range reflects that.

We want to be as clear as possible with you while being mindful about how the environment could evolve. When we provided our 6% organic growth outlook in Q2, we assumed residential lead declines would remain broadly consistent with the levels we were experiencing at that time with neither meaningful improvement nor further deterioration. Instead, volatility persisted throughout Q3 and lead volumes weakened further from Q2 levels.

As a result, our updated guidance reflects a range of outcomes based on how lead trends could evolve for the remainder of the year. The midpoint of approximately 5% growth assumes lead volumes remain below the prior year but stabilized at Q3 levels. While the low end of 4% assumes lead trends [indiscernible] further from Q3 levels, and the high end of 6% assumes lead volumes meaningfully improve from Q3 levels.

We also recognize that we are entering a seasonally lower volume period, particularly in November and December. When our short-cycle residential business can be more sensitive to changes in demand and weather-related disruptions. Our updated range is intended to reflect that uncertainty and provide a transparent view of the range of potential outcomes based on the trends we are seeing today.

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. Given the current landscape, we are going to hold off on sharing any thinking on 2027. We are currently focused on taking concrete steps to strengthen residential customer acquisition, and we will discuss 2027 when we release our Q4 and full year results.

Importantly, the revision to our 2026 expectations reflects our current assessment of near-term operating conditions rather than any change in our confidence in the long-term growth potential of our business. Our immediate priority is taking the right steps to successfully navigate through this dynamic environment and establishing a more stable foundation for customer acquisition.

As we make progress towards that, we continue to believe the business has the potential to return to the organic growth algorithm of 7% to 8%, as outlined at our Investor Day. In addition, we are confident in the operational opportunities that underpin our longer-term margin framework and we believe the business has potential to achieve incremental margins in the 30% to 35% range over time.

We recognize that our results have fallen short of expectations, and we are taking steps to improve performance through disciplined execution and a focus on the factors within our control. As Jerry outlined, we have a clear path to strengthen residential customer acquisition centered on 3 priorities: one, making sure our brands show up where customers are looking; two, making it easier for customers to choose Rollins' brands; and three, determining what works and investing behind it.

At the same time, we remain focused on improving productivity, aligning costs with current demand and continuing to invest in our people and capabilities that support long-term growth. We remain confident in Rollins' long-term growth opportunity. Our scale, financial flexibility and focus on disciplined execution position us well to adapt to changes in customer discovery while continuing to invest in the capabilities that support long-term growth.

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

Jerry Gahlhoff

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

Operator

[Operator Instructions] Our first question is from Tim Mulrooney with William Blair.

分析师问答

Timothy Mulrooney

I've got a couple of questions here. So first unsurprisingly on lead flow. Can you talk about how residential lead flow trended through the quarter? One of your competitors this morning said that resi lead flow actually improved in September. So I'm wondering how that compares to what you saw. Will, in your prepared remarks, I think you said lead flow deteriorated in the third quarter. So -- but I'm wondering, was September worse than August, was August worse than July? Or was it more just a continuation of what you saw in the back half of last quarter? Just any comments on trends would be helpful.

Jerry Gahlhoff

Yes. So thanks, Tim, for your question. So coming out of Q2 and early Q3, we saw some signs of improvement. They really weren't as consistent as we would have liked. We had a lot of data in front of us in those early days and we just have a much clearer view now. So as we think about that change from Q2 and Q3, you have in April, that was a fairly normalized April in the quarter, basically 1/3 of the second quarter was fairly normal then it started again to deteriorate.

The big difference was, for us, Q3 was consistently weak, steadily weak. Even though once in a while, we get some high spots, but the way you ended each month was pretty similar throughout the entire third quarter. However, that said, we did see some signs of life, so to speak, when you look in September when we saw year-over-year decline in our organic website, traffic had been 13%. Decline in August that moved to only a 4% decline in September. And that, as you know, that organic website traffic is a great predictor or indicator of leads that could come into the business.

And also, we saw in September, our organic search leads in the organic channel improved 5% since July. So we saw some of that in September as well. However, I want to caution you. This is -- we've said this is dynamic. And in the second quarter, we saw positive signs of life. And so that's where our outlook reflects that we don't know if the things that we saw in September, improvements that we saw is that going to sustain us through the rest of the year. So we're just really cautious in how we're speaking about this at this time.

Timothy Mulrooney

Understood, Jerry. So like you're being appropriately conservative given the uncertainty in the situation. And thanks for the detail on the lead flow, so it sounds like it did improve in September. Could you also comment on how lead flow trended across your specialty brands in residential? I know you have Orkin, you have your specialty brands, the specialty brands, given their lower dependence on the digital channel. I'm curious about the performance there.

Jerry Gahlhoff

So generally speaking, and I think this is where that question when we talk about it going to a wide variety of pest control companies, I wouldn't necessarily are kind of our smaller, more localized brands didn't appear to be some major benefactor just as they weren't necessarily hurt by these shifts as much as, say, an Orkin was because they go to market different and they acquire, they don't spend as much of their time and attention in the digital channel. So I would say, if anything, it was probably more of a neutral type of impact on our non-Orkin brands compared to anything else.

Operator

Our next question is from Manav Patnaik with Barclays.

Unknown Analyst

This is [ Roni Kennedy ] on for Manav. Kind of as a follow-up to some of the points discussed on [ TIM], but also go back at a more high level. You repeatedly referenced early but encouraged signs of progress, but also that the business has not yet reached stabilization and continue to describe this as transitory disruption in a permanently changed environment.

What specifically is improving today? How far are you from the level that can make you conclude that customer acquisition trend have truly stabilized and what makes you confident that the adaptation and your priorities ultimately restore growth rather than simply make the disruption more manageable?

Jerry Gahlhoff

Well, look, there's a lot of lead indicators that we can look at when we -- there's many lead sources and many sources of driving the residential business. We'll continue to monitor those lead indicators to tell us where we should invest, where we should put our dollars. And as we begin to see the lag indicator, which would be actual lead volumes increasing as a result of those, that's when we'll know that things are -- things have adjusted and things are stabilizing.

But let me go back and say the world has completely changed in this space. This is going to be -- to say somehow that 3 months from now, we think we've arrived, we have to adjust every single day going forward. So some idea that we somehow solved this problem 6 months from now and everything is back to normal. I don't want to give anybody the impression that, that's exactly how this works -- or this will shape out. It's just going to be a constant test, learn, adjust, going back and doing that over and over and over again and trying to be as nimble as we can as we go.

William Harkins

And Jerry, I think the team that's got the most resources has the most agility is able to really win at the end of the day, and we're best prepared for that.

Jerry Gahlhoff

We've done this before.

Unknown Analyst

Yes. And then as a follow-up, with the laid out 4% to 6% range, that's a function of 3 scenarios. Is there a way to think of probability weighting those 3 scenarios based on the answer to the question thus far and the data you're seeing so far? And then how should we think of potential implications for the revenue base for '27? Cognizant your comments that you're not really going to be guiding, but at a high level, how should we think of the implications for revenue for '27?

William Harkins

Thanks, [ Roman]. I'll just -- let me reiterate a little bit about how we got to the 4% to 6% outlook range. And so essentially, remember that when we issued 6% back at the end of Q2, we said that we assumed that really we were not going to see further deterioration in the business or any improvement in the business that was just going to stay steady. And so that's how we really got to the full year 6% number.

And then as we've gone through the quarter, the third quarter, we did see that continue to deteriorate. So our assumptions now, what's underlying that range is that if things continue in the fourth quarter, just as they did in the third quarter, we will be in the 5% at the midpoint of that range.

If things meaningfully improve, we're going to -- we still 6% is on the table. And if things deteriorate even further, that's when the 4% to 5% range comes into the mix. So that's how the Q4 outlook is. And I'll tell you that that's where we're putting the most focus. We just want to make sure we finish this year strong, but it's really too early for us to talk about anything in 2027 until we see how we finish Q4.

Jerry Gahlhoff

And [ Ronan ], coming back to your questions related to the customer base, 2027, how we start. As I mentioned, our customer base is growing. Across our organization in total, our customer base is growing. It's healthy. And so -- and at the same time, we're working hard while all this is going on, we're also working hard at improving our customer retention. And we've made that -- we're beginning to make those improvements. We're seeing positivity there. I expect that to continue with the intense focus that we're putting on that, and that's another lever that we have to pull on that as well.

Operator

Our next question is from Greg Parrish with Morgan Stanley.

Gregory Parrish

So you talked about the need for being nimble. I just wanted to ask, so how does it take to really drive change in how your brands show up in AI search adding reviews on different sites, localizing all of your sites, Orkin sites nationally. It seems like it could take time. So maybe just help us understand the dynamic and your ability to be nimble here and how you show up.

Jerry Gahlhoff

I'll give you a great example of how nimble -- in some ways how easy this can be. So for example, at Orkin, Orkin typically wanted someone -- we wanted you to engage with us through a web lead or somehow engaged with us on the phone through our call center. And that's where we typically would talk about price these days. And very quickly, we were able to add pricing transparency that was not being picked up on the LLM a few months ago that is being picked up today.

So really quick, easy types of adjustments that you could make where working a few months ago wasn't even seen as being relevant if someone -- especially if someone was curious about price and then when you what we learned is that when you don't talk about price, it gives some price ranges. People that LLMs don't give any credit and they assume the worse and they may go to other sources that aren't accurate about your price.

So doing something as simple as that has made a big impact on it. And it -- we were able to do that literally in weeks. So that's an example of what we can do. So -- but that's also constantly changing, constantly evolving, and that's again where test, learn, reallocate resources, adjust, test, learn, reallocate resources, adjust. That's just going to be the norm going forward.

Gregory Parrish

Okay. Great. That's helpful color. And then maybe just to touch on marketing. Just given the changing customer acquisition landscape, how are you viewing marketing spend sort of at a holistic level and maybe more granular, I mean it seems like you might have to you might have more areas to attack here and spread your dollars out. So just how are you thinking about that into 2027?

William Harkins

Greg, from that perspective, it's really not about us spending more in our mind. It is truly about -- Jerry just talking about testing different things. We are going to follow put our money where we see the greatest returns. And so it really is about reallocating based on where we see our returns improving. And so there's a lot of tests that we're doing. We are certainly not being shy about putting money where we need to, but I would not assume that we are going to spend more in this environment. It is truly just making sure that we're seeing where we're getting the greatest benefit.

Jerry Gahlhoff

Greg, importantly here, we have choices. We have a lot of choices we can make across our portfolio of brands. That's the advantage of our model. That's where our multi-brand approach, especially in residential, which is where a lot of the -- a lot of our other brands are heavily engaged in the residential space is really such an advantage for us. That's just a strong suit of ours.

Operator

Our next question is from Curtis Nagle with Bank of America.

Curtis Nagle

I just wanted to maybe quickly go through just some of the puts and takes on the [indiscernible] 4Q guide. Low end it seems to imply, I think, kind of 0 growth. Is that wholly based in resi, could that, I guess, potentially turn negative? And I guess what are you assuming in terms of kind of the ranges for commercial and termite and ancillary? And then I have a follow-up.

Unknown Executive

Curtis, I would say, from all of our -- everything that we've done as we evaluated and we based our assumptions for that guide, it was that things continue exactly as you see them in Q3 to get to that 5% growth rate. So I would just say, if we continue in the same trajectory, you're at 5%. If that goes down, you're going to be at 4% and it's got to meaningfully improve to get to that 5% to 6% range. So that is how we built the guide, and that's really all we're -- all I can tell you now.

Curtis Nagle

Okay. Fair enough. And then just maybe focusing on termite and ancillary, just in terms of like what specifically was driving those we hear customer acquisition trends, is it, I guess, proliferation of LLM impact? And then I guess on some of these, I think, labor shortages, just sort of what's driving that when that could that be resolved?

Jerry Gahlhoff

Yes. So the -- certainly, as we mentioned, the slower residential customer volumes did reduce some of the opportunities to some degree. But some of the challenges there were really impacted more by staffing and capacity constraints in some markets where we had to get the work done.

We exited the quarter with backlog that was at our high watermark for the year, which -- that's both good and bad. So that tells us there's plenty of work to be done, but we just didn't get it all completed in the third quarter. And some of that staffing capacity could be related to adjustments that we made in the business. Could also be just -- some markets are more challenged from a labor environment or various things happen and that comes back to leadership and strong operational execution that we tend to be pretty strong in.

But our struggle was really towards the end of the quarter. We had -- termite and ancillary was really strong in the first part of Q3 and it was September that was really disappointing. Again, we got -- we have strong backlog there, and there's plenty of work for us to get done in the fourth quarter. So I'm not overly concerned about that. We really remain quite confident in the underlying demand and the need for these services. Our customers see a great deal of value in it. We still see that there's meaningful opportunities to drive growth through that large customer base that we have.

Operator

Our next question is from Tomo Sano with JPMorgan.

Tomohiko Sano

Could you be composed of the quarter's organic growth into price versus volumes? If you could give us any color overall and then by segment. And then also as LLM driven search increased its pricing transparency and simplifies comparisons, has your view of CPIs price realization change in any way?

William Harkins

Tomo, I would -- when we think about the price versus volume equation, what I would tell you is that we do continue to see ourselves as a CPI+ business. We're an essential business, and so that is going to be in the 2% to 3% range of -- or 3% to 4% range for pricing. And that's the only thing I want to make sure that you have color there is that, that is across the entire portfolio.

When we talk about that 3% to 4% of pricing that's across the full portfolio that is more heavily weighted towards commercial than residential, so it doesn't apply evenly across everything. But we do still see that being kind of where we will play in this space. And so -- and we don't see any indications that, that is creating trouble.

I mean we are regularly evaluating our pricing -- we meet -- we just met 2 weeks ago actually about this topic. And so we don't see any meaningful change in the number of customers that are either trying to roll their prices back that are canceling with us. So we feel like we still have room to go there. And then your second question, I feel like there was -- was there another part to your question, Tomo?

Tomohiko Sano

Yes, that's a good answer. And just one follow-up to Jerry, if I may. On the customer acquisition landscape change, the AI LLM search simplified price with the local providers, how do you assess the risk that the [indiscernible] and premium value message, like such a service quality and guarantees and reliabilities like gets diluted?

Jerry Gahlhoff

Yes. And that's where I think you have to be careful in this space because you cannot stop spending on your brand and your brand messaging and who you are and what you're all about. So this idea that we should just stop spending and building our brand and the reputation in the mind of the consumer is [indiscernible] the best thing that we -- the main thing we want you to do instead of going to an LLM and asking about pest control. We want you to type in Orkin.com and we want you to just think Orkin or one of our brands as the top of mind investment.

And so we have to continue to send the messaging on our website and all of our content about the value of our service and ensure that our service quality is strong, and the value proposition and the things that our customers are asking about when they are in the LLMs, that content is there on our website that they can see the clear value in using us compared to anyone else.

Operator

Our next question is from Seth Weber with BNP Paribas.

Christina Johanna Bettink

This is Christina Bettink on for Seth. So I guess first up for me is over the summer, the FTC actually brought a large case [ stems ] Rollins over the use of noncompete clauses across its workforce. And we were kind of wondering if this has any impact on competition, and additionally, if this could actually be contributing to the local competition that's kind of been weighing on lead flow and residential growth.

Jerry Gahlhoff

No. That is a -- I think we've talked about this in the past degree, that has been pretty much a nonissue across our industry. In fact, if you look back at the details of that, we had some pieces and parts of our business that -- where are non-solicit agreements that are designed to stop to discourage people from taking customers or recruiting our people were extended into non-compete and all we did was roll those non-competes back in the parts of our business that still have those in there.

At the end of the day, these were agreements that were never enforced very rarely enforced to begin with. So it was really a nonevent in our business. So we have had -- if you think about the fact that there are 19,000 estimated 19,000 pest control companies, and the people I know in the industry had started at usually the family tree goes somewhere back to Orkin or Terminix or somewhere back in the day.

There's a reason for that is because people have freely moved for many, many years between and amongst companies. So we don't really see that as any sort of a change in the environment at all.

Christina Johanna Bettink

Okay. That's super helpful. And then I guess, back at the Investor Day that you guys hosted in May, you guys framed that the pest control market was growing around 6% a year. And I know at a recent conference, you guys said that lead declines were fairly proportional across all income bands which kind of suggested that consumer health wasn't the main driver.

Is this still the case? And given what you've seen up until this point, do you think that industry growth has changed at all? Or do you think it's more of a Rollins specific shift in how customers find you?

Jerry Gahlhoff

When we think about the consumer health, I think what we're really saying is we're an essential service if you need -- if you have a problem, you're going to want to solve it. I think from a consumer standpoint, the consumer is trying to make sure that if they are going to spend their money, they're getting the value and they're choosing the right provider.

And that goes back to, I think, to Tomo's question about ensuring that price and value, responsiveness and reliability, all those factors that drive value are more important. So there's lots of data out there about the consumer, and it certainly is something that we've dug into. I just think at this point in time, we have a more discerning consumer, but we certainly have a consumer is willing to spend the money on pest control services.

Operator

Our next question is from Connor Cerniglia with Bernstein.

Connor Cerniglia

Heading into this quarter, third-party data suggests organic traffic for Orkin was down pretty materially year-on-year. You think a very similar picture for [ MACI], very similar picture for [ active], Terminix seemed to be the outlier, which was actually up in the quarter, but for the top 4 players, organic traffic was down more than double digits. So corroborating your claim that LLM seems to be the issue. And that -- I guess that one competitor was more of an outlier than the trend. Can you talk about the early findings in your process to adapt into LLMs? Has the biggest success so far has been third-party content? Is it improving business reviews? Any color on that would be really helpful.

Jerry Gahlhoff

Initially beginning to appear better was easy steps like the one -- the example I gave you earlier on pricing and transparency helped tremendously. When we start talking about service offerings and our ability to respond and offering same-day, next-day service windows and how we communicate that. Things that we've always done, we've just never put it in words and it's not been key in our messaging.

But those types of things that talk about the value, they talk about how we can quickly fulfill customer needs seem to get picked up a lot faster and a lot easier. And then when you think about local content, where we have -- while we're a national company, we have national locations. We have local people that understand local needs and taking that information in, I give you a great example is here in Atlanta, there's this spider called the Joro Spider. And if you're talking about the Joro Spider and the local content, and it's hot on people's minds here.

Those are the -- and if your branches here I'd say, at Orkin and the Atlanta area have local content about the Joro Spider, that's going to get picked up. So those are the types of things that we're focused on that we find to be getting the bigger return on investment, and they're quick wins.

William Harkins

Jerry, one of the other things that we've actually seen here recently, as you see ChatGPT, you see Google, they're starting to run pilots where they're allowing kind of the monetization of that platform where you can start to put some ads. And so we're starting to play in that space as well. It's early. We'll see what's going to happen as we go through the quarter, but at least we're starting to see that they're playing in that space.

Connor Cerniglia

Very helpful color. As a follow-up, I know you've talked about LLM. ChatGPT is about 70% of the shares. So I think that's probably the biggest maybe I won't say issue, but that's probably the most focused target should be. It seems like Yelp reviews are probably some clear low-hanging fruit here. ChatGPT [indiscernible] Yelp as recommendation rates. You all have about 13 reviews per store, so about a baker's dozen. Your competitors have about 25, 30.

And it seems just like companies have long ignored Yelp as a review platform. And part of the solution here is just refocusing efforts to improve Yelp recommendation rates. Can you talk about any examples of steps you're taking to improve? Are there QR codes, you can add to the side of your trucks, incentive comps to kind of get those business reviews up? Can you just give us any examples on that front would be helpful.

Jerry Gahlhoff

Yes. The Yelp model for reviews is a very different model of what they allow and how that works compared to compared to, say, Google reviews where we have a very strong -- a much stronger presence. So yes, that's one of the areas that you have to, again, test, learn, decide whether or not -- and how much to reallocate resources to try to drive meaningful, can you drive meaningful impact on that. We're very -- we're acutely aware of that but that is also something that will take a lot more time to be able to effectively impact.

So you have to weigh those investments and say, hey, within -- yes, Yelp is weighted, but so are these other things within ChatGPT, how do I position us better on these other things that are going to -- that are also going to get us more visibility there that I might be able to move faster. And so those are all the things that we're weighing and trying to make better decisions on.

Operator

Our next question is from George Tong with Goldman Sachs.

Keen Fai Tong

The digital lead pressure is greatest in residential, but can you also talk about the lead gen mix in your other segments? So ballpark the new customer acquisition makes by channel across termite and commercial as well in resi?

Jerry Gahlhoff

So our termite and ancillary business as well as our commercial business is not heavily lead driven in terms of digital lead driven. They are -- they get called because that's again where the brand comes into top of mind and say the Orkin brand and commercial people are just going to call Orkin. And that is a very organic type of lead gen. And so we're not very reliant on digital customer acquisition, digital marketing spend type of efforts in that space at all.

Keen Fai Tong

Got it. And then as a follow-up, you still believe that the business can get back to 7% to 8% organic growth does getting back there require residential digital leads to return to prior levels? Or can panel mix conversion and cross-selling offset a structurally more fragmented digital search environment?

William Harkins

George, that's a good question. We -- our view is that we can absolutely get back to 7% to 8%. We don't know when that's going to happen. We've got to see this through. But certainly, we're able to get back there. And what we're focused on mostly now is how do you make sure that every one of those leads we do get that we convert it and that it turns into a sale.

So there are a lot of things that we're able to do to affect that 7% to 8%. There are levers we can pull. And so there's no reason to think that the long-term guidance would -- that we need to come off of that.

Jerry Gahlhoff

Generally speaking, I think for us to get to the 7% to 8% range, we are going to need to have residential healthy, commercial healthy and termite ancillary healthy.

And I think there's some different algorithms within there, how you get there. I think we have to do better on residential, obviously. But again, that goes back to the multi-brand strategy, where we invest, the decisions that we have to make, moving resources around to get us back there. So certainly, as Will said, it's possible, but I believe we've really got to be executing on all those cylinders.

Operator

Our next question is from Stephanie Moore with Jefferies.

Stephanie Benjamin Moore

First question here, maybe just -- I'd love to get your opinion higher level -- higher level question here. You talked about not necessarily ramping up marketing spend or changing that. But I'd almost pushback on that and thought, why not just given the magnitude in which the industry and your go-to-market strategy has -- effectiveness has changed, why not use this period of time to step up marketing to really solidify your position across kind of all go-to-market strategies, LLMs, for example, making sure that you're in the top position there, doubling down on door-to-door. I mean why not use this period of disruption to leverage your size, scale and quite frankly, financial position to really tackle and take meaningful share? Just again, high level thought here.

Jerry Gahlhoff

Yes, I understand where you're coming from. Our -- we are perhaps more disciplined than that. If I knew that I could invest rapidly in the marketing. And I could accurately predict what return I would get on that in this dynamic environment where I don't know that -- what a dollar spend would necessarily yield.

I could do that, but I would also probably be spending a lot of money in responsibly. And so our -- we have leaned towards let's protect our margin, let's rightsize our business, let's do the right things and let's learn test, be responsible about our decisions and adjust as we go. But because we got some sort of a sugar high off of just going in and spending marketing dollars, you can do that, but that doesn't necessarily -- it's not necessarily sustainable and it could potentially change your business model and your discipline that you bring to the business.

It's just fundamentally not how we approach the business. But it's hard to underestimate how dynamic this environment is right now. And so it keeps changing. I mean, we talked about the fact that we've gone to external parties to help us through this from a marketing perspective. And they don't even necessarily always agree. Nobody has a silver bullet. So it's how much would you spend on -- in this current environment?

Unknown Executive

We don't know if that's some infinite number and the other side of it is just spending marketing dollars doesn't necessarily create demand where demand isn't there. So you have to know the limit to what you'd be willing to go. So our focus has been on making sure we rightsize our business. In my mind, those are actually tougher decisions than just going and spending more in marketing. We have our choices that we have to make about how we structure our business, and I'm really proud of our team for what they've done in that regard.

Stephanie Benjamin Moore

Understood. One quick follow-up kind of along the same ones here. Does this dynamic change your M&A strategy? I mean, is there a greater focus that you'll place on door-to-door just given that part of the business continues to hold well, holding strong?

William Harkins

Stephanie, there's -- we've got a great pipeline of M&A opportunities that are still out there. It does not change what we've see in value is a good business that we want to go and purchase. We're going to continue to look for opportunities where it's accretive businesses are, quite frankly, better than ours and that's what helps us continue to grow organically longer term. And so this does not we've been in the door-to-door space. We've been in the traditional space. It doesn't change our philosophy.

Jerry Gahlhoff

We're interested in lots of businesses that help our -- that can help and be accretive to our growth and we'll continue to take a balanced approach there. I still think this is a risk right now is hopefully a short-term dislocation and we'll see how this pans out over time. But we'll continue to be disciplined in our acquisition and look for businesses that are a good fit for us and bring the right balance to us.

Operator

Our next question is from Peter Keith with Piper Sandler.

Peter Keith

On the -- follow-up on the door knocking question. Within residential, you did cite that those areas of door knocking, direct sales home continue to outperform. I guess I'm curious, are those areas running in line with historical averages? Or are those also outperforming, but maybe seeing a little bit of weakness?

Jerry Gahlhoff

We've not seen any sign of weakness in those spaces. They have just gone gangbusters. So double-digit growth at Fox. And so that continues to be a great business, growing. It's very helpful to our overall growth profile in the residential space. So we've not seen any real softness there at all.

Peter Keith

Okay. Good. And then I just want to pivot over to commercial. I think you had cited some weakness in onetime business. Maybe could you unpack that for me a little bit more on where the slowdown in commercial occurred?

Jerry Gahlhoff

Yes. So the softness in the commercial side was really driven by some timing related to fumigation services at non-Orkin brands. So as we go through as you go through the quarter, we -- there's -- in the commercial space, there's a lot of there's a decent amount of commodity fumigation that goes on that can be cyclical timing around holidays, things along those lines.

Just gets kind of dislocated from time to time. The good news in that is Orkin's commercial business, their core grew -- still grew over 8%, reflecting -- or very reflective of the investments that we've made there and expanding on the commercial side, not something I'm very concerned about.

Operator

Our last question will be from Josh Chan with UBS.

Joshua Chan

Maybe on the residential side, on the organic growth of 2.3%. I know that within residential, there's recurring and there's onetime business in there. So I guess, could you give some color in terms of whether the recurring business trended above or below the total?

Jerry Gahlhoff

Josh, this is Jerry. I hope you have -- I heard you're at [ Pets world], and I hope you're having a good time there with all of our all of our friends. Meeting some great people while you're there, aren't you?

Joshua Chan

I am. Yes, yes.

Jerry Gahlhoff

Yes. So when we look at the organic growth and onetime, I would categorize those as being down very equal proportions, very, very similar. But the recurring portion was actually better. So the -- we are still in line with what we have seen historically from a recurring perspective.

Joshua Chan

Both of them?

Jerry Gahlhoff

Yes.

Joshua Chan

That makes sense. Okay. All right. And then, I guess, on the customer acquisition side, do you feel like you have a handle on what tactics work and don't work and that you're just kind of focusing on executing to those tactics now? Or do you feel like you still need a better handle on exactly what tactics to use?

Jerry Gahlhoff

I think we have a strong handle on some of the basics and some of the most fundamentals that we've been able to execute on. What's interesting in this space is you can ask 5 different experts and get different answers. And so that's, again, what gives us that lack of clarity, say, where do you invest? Which is why, again, I sound like a broken record when I say test, learn, reallocate resources, adjust.

That is what we're going to have to do. And so we're doing a lot of that with different agencies and specialists that are helping us navigate that. So again, that's why we described this as this dynamic environment. And it's -- and the things -- we don't know that the things we fix today are also going to be the right things that are most important 3 months from now, right?

So that's when I say this world has changed probably forever in this space is so important. And we're just going to have to continue to test, learn, reallocate resources, but I don't think we'll ever be able to say we're done and we've arrived.

Operator

We have reached the end of the question-and-answer session. I would like to turn the floor back over to Jerry for closing comments.

Jerry Gahlhoff

Thank you, everyone, for joining us today. We look forward to speaking with you again on our Q4 earnings call in February.

Operator

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

原文链接