Rentokil Initial Regulatory News (RTO)

2023 Interim Results

Strong operational and financial performance: Organic Revenue¹ growth of 5.9%; excellent momentum in bolt-on M&A with increased spend expectation for full year

Effective delivery on Terminix integration plan; cost synergies firmly on track

2023 Interim Highlights (Unless otherwise stated, all financials are presented at constant exchanges rates and Organic Revenue growth figures exclude COVID disinfection.)

"Rentokil Initial has delivered a strong overall first half performance. Our results show sustained trading momentum, with organic growth of 5.9%. The Group enjoyed growth in every region and continued to benefit from effective pricing to manage inflationary costs. Revenue growth was further supported by another excellent period of M&A with 24 high-quality businesses acquired for a total consideration of £202m. I am especially pleased with our progress in integrating Terminix. We are seeing clear evidence of density benefits with the start of the pilot programme and we remain firmly on track to deliver synergies. We start the second half of the year with continued confidence in our plans, both operational and strategic."

2023 Outlook

Rentokil Initial has a clear strategy to deliver growth and margin expansion. Alongside the delivery of the Terminix integration, we expect continued good underlying trading in the remainder of the year, underpinned by our resilient business model and supportive, structural growth drivers. Despite the continuing evolution of our US Pest business, we expect to deliver H2 23 Organic Revenue growth in North America broadly in line with our H1 performance.

Executing on our disciplined integration plan, we remain firmly on course to capture the benefits of the Terminix deal, including both our FY 23 pre-tax net cost synergy guidance of $60m year over year and total annual pre-tax net cost synergies of at least $200m by the end of FY 25.

We also remain confident in our strong margin discipline. The majority of headwinds to Hygiene & Wellbeing's margin performance are limited to H1, and we therefore expect the category's Adjusted Operating Margin in H2 to be in excess of 19.0%. Overall, with effective margin protection from proactive cost inflation management and margin accretion from strategy execution and synergy delivery, we reiterate our current year guidance to grow Group Adjusted Operating Margin to c.16.5% and North America Adjusted Operating Margin to c.19.5%.

The recent strengthening of GBP against USD leads to a revision in our FX guidance from a tailwind in FY 23 of £15m-£25m to a headwind of £15m-£20m.

Notwithstanding enduring inflationary pressures, we remain confident in achieving the operational and financial progress in FY 23 that we have previously signposted. Furthermore, in view of our successful deleveraging, net debt to EBITDA is anticipated to be approximately 3x by the end of FY 23, one year ahead of schedule.

A presentation for investors and analysts will be held today, 27 July at 9.15am at Goldman Sachs, 25 Shoe Lane, London EC4 4AU. To register attendance please email investor@rentokil-initial.com. The event will also be available via a live audio webcast. Dial-in details will be provided on the Company's IR website (https://www.rentokil-initial.com/investors.aspx). A recording will be made available following the conclusion of the presentation.

Notes

1 Non GAAP Measures - Organic Revenue (including and excluding disinfection) growth represents the growth in Revenue excluding the effect of businesses acquired during the year. Acquired businesses are included in organic measures in the year following acquisition, and the comparative period is adjusted to include an estimated full year performance for growth calculations (pro forma revenue). The Terminix acquisition is treated differently to other acquisitions for Organic Revenue growth purposes. The full pre-acquisition results of the Terminix business are included for the comparative period and Organic Revenue growth is calculated as the growth in Revenue compared to the comparative period. This differing treatment for Terminix will expire at the end of 2023 when we will have full year Terminix comparatives. Organic Growth has no equivalent GAAP measure, and is presented to help understand the element of revenue growth that does not relate to acquisition activity.

This statement presents certain further non-GAAP measures, which should not be viewed in isolation as alternatives to the equivalent IFRS measure, rather they should be viewed as complements to, and read in conjunction with, the equivalent IFRS measure. These include revenue and profit measures presented at actual exchange rates ("AER" - GAAP) and constant full year 2022 exchange rates ("CER" - Non-GAAP). Non-GAAP measures include Adjusted Operating Profit, Adjusted Profit Before Tax, Adjusted Profit After Tax, Adjusted EBITDA, Adjusted Interest, Free Cash Flow, Adjusted Free Cash Flow, Adjusted Cash Flow (previously named Operating Cash Flow), and Diluted Adjusted Earnings Per Share. Adjusted Operating Profit and Adjusted Profit Before Tax exclude certain items that could distort the underlying trading performance. These measures may not be calculated in the same way as similarly named measures reported by other companies. Management believes that these measures provide valuable additional information for users of Rentokil Initial's Financial Statements in order to better understand the underlying trading performance in the year from activities and businesses that will contribute to future performance. Adjusted Operating Profit represents the performance of the continuing operations of the Group (including acquisitions) and enables the users of the accounts to focus on the performance of the businesses retained by the Group, and that will therefore contribute to the future performance. The Group's internal strategic planning process is also based on these measures, and they are used for incentive purposes. Revenue and Adjusted Operating Profit are presented at CER unless otherwise stated. An explanation of the measures used along with reconciliation to the nearest IFRS measures is provided in Notes 4,5 and 12.

2 Includes net synergy benefit but excludes costs to achieve which are one-off by nature.

Summary of financial performance (at CER)

Regional Performance

Business Category Performance

Note: Hygiene & Wellbeing performance partly reflects the anticipated decrease in COVID disinfection revenues from £14.2m in H1 22 to £1.6m in H1 23.

Group Overview

In order to help understand the underlying trading performance, unless otherwise stated, the figures below are presented at constant exchanges rates and Organic Revenue growth figures exclude the COVID disinfection business.

Revenue

The Group delivered strong topline momentum in H1, with Revenue rising 65.3% to £2,666m and Organic Revenue up 5.9%, ahead of medium-term Organic Revenue guidance. Statutory Revenue was up 69.9% to £2,671m at AER. Revenue growth in North America was up 127.3%, benefiting from the Terminix acquisition. Europe (inc. LATAM), the Group's second largest region, was up strongly by 18.7%. Revenue in the Pacific region increased by 16.5% while Asia & MENAT was up 11.9% and the UK & Sub Saharan Africa was up 6.7%. Group Organic Revenue growth including COVID disinfection was 5.4%. As expected, COVID disinfection revenue in H1 reduced significantly to £1.6m (H1 22: £14.2m)

Our Pest Control category grew Revenue by 91.5% (5.6% Organic) to £2,141m, underpinned by strong price progression and good customer retention, albeit impacted by softer US Pest Control services due to lower industry-wide lead flow from residential and termite customers. Hygiene & Wellbeing Revenue increased by 3.8% (5.2% Organic) to £414m. This was supported by resilient demand for washroom services, offset by the anticipated reduction in COVID disinfection and related services, and the non-repeat of UK COVID credit note releases. Robust market demand was reflected in the continued strong contribution from our France Workwear business with Revenue up by 16.3% to £106m (16.3% Organic).

Profit

Adjusted Operating Profit rose by 81.7% during the first six months to £434m, reflecting the benefit of topline growth across all major regions and categories, in addition to the contribution from the Terminix transaction. Adjusted PBT at AER increased 67.3%, despite a £6m FX headwind. Group Adjusted Operating Margin increased year on year by a total of 150bps to 16.3%. Adjusted Operating Margin for Pest Control increased 130bps to 19.2%. There was a net benefit of 110bps to Group margin from the delivery on Terminix synergies, partially offset by short-term margin dilution from increased bolt-on M&A activity, predominantly in Europe. Hygiene & Wellbeing Adjusted Operating Margin decreased 310bps to 16.5% impacted by the anticipated reduction in COVID disinfection and related services, the non-repeat of UK COVID credit note releases, and the transfer of Ambius management from North America Pest Control.

We have continued to deliver on our strategy of driving density improvements including through M&A integration to create long-term efficiencies. Price increases have also been successfully implemented over the course of the half year. The extent to which the Group has been able to offset inflationary pressures demonstrates the resilience of the business model and the essential nature of our core products and services.

Restructuring costs excluding Terminix of £6m (at CER and AER) were up £1m on the prior year (H1 22: £5m at CER and AER), consisting mainly of costs in respect of initiatives focused on our ongoing North America transformation programme. The Company reports these restructuring costs within Adjusted Operating Profit. Adjusted profit before tax (at AER) of £377m, which excludes one-off and adjusting items and amortisation costs, increased by 67.3%. Adjusted interest of £67m at actual exchange rates was higher year on year by £55m, driven by £57m of higher interest costs from Terminix related financing, partially offset by a £2m higher impact from hyperinflation accounting. One-off and adjusting items (operating) at AER of £46m includes £35m of Terminix integration costs and £8m of other M&A and integration costs. Statutory profit before tax at AER was £240m, an increase of 48.1% on the prior year (H1 22: £162m).

Cash (at AER)

Adjusted Cash Flow of £401m was up from £202m in H1 22. Higher trading profits resulted from organic and acquisitive growth. Adjusted EBITDA was £602m, up 72.0% from £350m. One-off and adjusting items totalled £78m, reflecting P&L items of £46m and a net c.£32m movement in one-off accruals since December 2022, as presented at the Preliminary Results. The Group had a £26m working capital outflow in the first six months of the year.

Capital expenditure of £102m was incurred in the period (H1 22: £83m), reflecting the inclusion of Terminix capital expenditure. Lease payments were up 80.0% to £81m.

Cash interest payments of £114m were £95m higher than in the prior year, reflecting the payment in arrears of coupon interest on bonds issued in 2022 in relation to the Terminix transaction. Cash tax payments for the period were £58m, an increase of £26m compared with the corresponding period last year, largely related to the inclusion of Terminix trading results. Free Cash Flow was £229m (H1 22: £151m), with Adjusted Free Cash Flow Conversion of 83.0% due to the timing of interest payments.

Update on the Terminix Integration Process

The Terminix transaction adds valuable scale and capabilities and we have been focused on delivering the deal's significant benefits. We are in the first year of a three year integration programme, yet strong progress has already been made. The delivery of synergies is firmly on track, and we continue to expect $60m incremental pre-tax net P&L cost synergies in FY 23 and total synergies of at least $200m in FY 25.

As anticipated, the large majority of gross cost synergies in the current year are being delivered by Selling, General and Administrative (SG&A) initiatives, in particular in regard to procurement and support functions:

In FY 23, we expect $12m of gross cost synergies from field operations (of the total $125m recurring gross cost synergies from field operations by FY 25). In H1, 44 branch locations were exited as part of the consolidation of the legacy network and co-location of colleagues. This brings the total number of branch locations exited since closing the deal to 64, and, by the end of H2 we would expect this to exceed 100. In addition to executing branch co-locations that deliver early property synergies, the focus for most of the current year is planning and preparation as we approach the more complex task in 2024 of fully integrating Terminix and Rentokil North America branches, consolidating routes and aligning the customer offering.

This year we expect to make approximately $30m of investment into the business to enable the success of the integration. Important planning and investment have been made in HR to underpin synergy delivery and to ensure the quality of the enhanced operations going forward. All functions and roles in the combined business have been through an organisation design process. We have completed job descriptions with pay and grading, and talent selection has been finalised. The 3,500 role offers extended have been met with a 97% acceptance rate. We have also concluded the harmonisation of benefits and paid time off between legacy Terminix and Rentokil North America positions. The design of harmonised pay plans is expected to be finalised in the second half of the current year.

IT infrastructure is another important enabler of administrative and operational efficiencies to be gained from the integration plan. As part of our Best of Breed strategy we have now identified the most appropriate IT solutions for functions and processes across the combined organisation, from HR and Finance applications through to service planning and service delivery platforms. These have been selected principally from either Rentokil North America or Terminix, but also externally where the ideal future state solution was not already present. The chosen IT solutions will replace a number of composite legacy systems. They are expected to deliver improved overall performance and resilience, better enabling both our employees and customers.

In H1 23 we began the first phase of our programme of pilot integrations, undertaking two branch integrations within the Rentokil North America legacy network. These covered locations that previously had each generated revenues of c.$65m and c.$97m, and entailed the consolidation of a total of 40 branches into 23 branches. Locations had each been serviced by several different brands, service protocols, operating systems and pay plans. Our approach in these market pilots showed that the migration, while demanding, was successful and we are seeing clear evidence of density benefits. The combination of larger branches with higher network density drove an approximately 5 percentage point margin expansion in the pilot areas. We will continue to monitor the pilots for any impact on organic growth.

As previously stated, we anticipate that our average annual branch revenue post-integration will increase to approximately $8m to $10m. We have recently conducted a detailed analysis of our North America branch network that shows a clear link between branch size and margin, such that branches with annual revenue of more than $8m deliver Adjusted Operating Profit margin that is about 10% higher than branches with revenue of less than $3m. Across our network of 600+ branches, we currently have 100+ branches operating at more than $8m annual revenue and around 200+ operating at less than $3m annual revenue.

Looking forward to the remainder of 2023, we will pilot test projects in relation to HR information systems and a single pay plan, data migration and data mapping, and technology applications. Our pilot programme provides a platform to test our implementation approach, manage risk and prove value. Contingent on the evaluation outcome of the pilot programme, the branch integration phase will be deployed at scale across North America beginning January 2024.

The integration of the two businesses is a large, complex programme with many interrelated parts. We are taking a disciplined and measured approach, with rigorous project governance and risk management procedures in place. We have set clear expectations and goals throughout the business, and this is already helping to deliver results.

We remain confident in the value creation opportunity of the Terminix acquisition and integration. These initiatives - and the key enablers that underpin our strategy - will allow us to build the organisational capability to deliver our ambition of organic growth of 1.5x the North America industry rate, post integration.

Regional performance review

Due to the international nature of the Group, foreign exchange movements can have a significant impact on regional performance. Unless otherwise stated, percentage movements in Revenue and Adjusted Operating Profit are presented at constant exchange rates.

North America

Alongside the Terminix integration process, the North America business has driven sustained trading momentum. In the first six months of the year, Revenue was up 127.3%, benefiting from the Terminix acquisition. Organic Revenue grew 4.1%, achieved despite the planned exit of 64 branches since October 2022 as part of the integration process. The business delivered Organic Revenue growth of 4.2% in North America Pest Control and 4.8% in North America Pest Control services for our commercial, residential, and termite customers. Q2 Organic Revenue growth of 4.0% for Pest Control services was impacted by lower inbound lead flow for residential and termite services, which mirrored trends observed in digital search demand for the Pest Control industry as whole. General search demand for pest control and termite terms was down year on year, while search for commercial, mosquito and bed bugs has shown more resilience. We have remained disciplined in our marketing spend, with a focus on lead quality over quantity. The revenue generated per lead has increased substantially with this strategy, leading to a higher quality mix and positively impacting margins. Growth in the products distribution business was impacted from customer destocking due to high inventory levels. However, underlying demand in products distribution bounced back toward the end of H1 and is expected to return to historic levels in H2.

Our planned cessation of Terminix's door to door selling programme in Canada, as well as the anticipated impacts of our early branch integration pilots across 40 branches, together contributed to a temporary reduction of organic growth in North America in the half year of an estimated 32 basis points. We are very pleased with our learnings from the pilots, which will inform the implementation of additional pilots planned for the next few months, ahead of the commencement of our full branch integration programme planned for 2024.

Adjusted Operating Profit growth of 163.2% in North America reflects the combined impact from higher revenues and the Terminix acquisition. Strong price realisation has continued to successfully offset expected inflationary pressures. We closely monitor labour, fuel and direct cost inflation to adjust our pricing strategy on a regular basis. Adjusted Operating Margins in North America were up 250bps year on year to 18.5%. There was a net benefit of 190bps from the delivery on Terminix synergies.

In the Terminix termite business, we have continued to see a number of improved year on year trends in H1, including a 12% reduction in total filed warranty claims and a 24% reduction in open warranty claims. Total filed warranty claims in the Mobile Bay area decreased by 51%. These data points support provisions for termite claims at the half year being in line with previous expectations.

Total North America colleague retention, including Terminix, increased to 72.4% (FY 22: 70.1%). Terminix colleague retention has seen continued improvement, up to 67.7% (FY 22: 63.8%), with particular progress in technician roles. Terminix has seen an increase of 5.3 percentage points in colleague retention since the close of the deal in October 2022. The Group continued to make investments in being an Employer of Choice. We are seeing ongoing success with our recruiting initiatives, with time-to-fill rates decreasing over the half year. Despite price increases, total customer retention in North America increased to 83.5% (FY 22: 83.3%).

Notwithstanding the considerable focus required for the Terminix integration, our North American bolt-on M&A programme continued apace, with the purchase of 6 businesses with combined annualised revenues of £37m in the year prior to purchase. As we integrate Terminix, we continue to selectively pursue high quality M&A assets in the North America region.

Europe (incl. LATAM)

The region enjoyed another period of strong revenue performance, with Revenue up by 18.7% in the first six months of the year to £522m. The business delivered double-digit Organic Revenue growth of 11.1%, driven by both effective price increases and resilience in overall demand. Revenue growth in Pest Control was 30.0%, with a strong contribution from larger markets like France and Benelux. Hygiene & Wellbeing grew Revenue by 6.2% in the period driven by continued momentum in the core washrooms business. In premises and enhanced environments, Ambius sustained a good performance, partially offset by Specialist Hygiene and Dental, which both continue to experience some post-COVID disruption. Strong demand has continued to drive a supportive market for France Workwear, which delivered Revenue growth of 16.3%. Adjusted Operating Profit in the region grew by 12.4% to £95m. Adjusted Operating Margin reduced by 100bps to 18.2%, impacted by short-term margin dilution from increased M&A activity, predominantly acquisitions in Sweden (Terminix) and Israel (Eitan Amichai IPM). The movement also reflects a reduction in COVID disinfection business. These factors, the impact of which will fall away in H2, were partly offset by the strong performance in France Workwear.

Customer retention has remained strong at 88.3% (FY 22: 88.5%.) While labour markets throughout the region remain tight, colleague retention rates have remained relatively stable across the region at 89.4% (FY 22: 89.1%), with both service and sales colleagues trending well.

M&A continued strongly in Europe and Latin America. 8 business acquisitions were completed in total with annualised revenues of £7m in the year prior to purchase.

UK & Sub-Saharan Africa

The region delivered a resilient trading performance against a challenging macro backdrop and strong prior year comparators. Overall, Revenue for UK & Sub-Saharan Africa increased by 6.7% to £192m with a positive contribution from both business categories, Pest Control and Hygiene & Wellbeing. Organic Revenue growth was up 3.9%. The Pest Control business grew strongly with Revenue up 10.4% to £98m. Hygiene & Wellbeing revenue increased 3.2% to £94m, despite lapping COVID boosted comparators in the medical waste business from the same period last year.

Adjusted Operating Profit was down 1.1% to £46m with Adjusted Operating Margin reduced by 190bps to 23.8%. The Pest Control category sustained strong margins. However, the region's margin performance was dampened by the anticipated reduction in COVID disinfection and related services, and the non-repeat of UK COVID credit note releases. The impact of these factors will fall away in H2. The region continued to face well publicised inflationary headwinds. However, significant cost increases have been well managed by our long-established pricing and margin management systems, process and controls.

Price increases have been delivered alongside a customer retention rate that has slightly improved to 86.7% (FY 22: 86.6%). Owing to sustained investment in our people and training programmes as well as some recent loosening of the UK labour market, colleague retention strengthened to 83.7% for the first six months (FY 22: 77.9%).

The region acquired 1 business in the Hygiene & Wellbeing category with annualised revenues in the year prior to purchase of £17m. This acquisition was of the company Urban Planters, a leading UK service provider of planting schemes for business premises.

Asia & MENAT

Asia & MENAT delivered another strong performance in the first six months of 2023. Revenue rose by 11.9%, of which 11.3% was Organic, underpinned by contractual activity. The positive performance was led by the Pest Control business and the region's largest markets, including Indonesia, Malaysia and Singapore. While Hong Kong continued to be challenged by a subdued economic environment, there was slightly improved trading in China.

Adjusted Operating Profit in the region increased 6.4% to £24m and Adjusted Operating Margin was down slightly by 70bps to 13.4%. The period lapped stronger COVID disinfection revenues with the headwind set to materially reduce in the second half of the current year. Customer retention was 80.6% (FY 22: 81.3%). Regional operations have benefited from an improved, high colleague retention rate of 89.3% (FY 22: 86.1%), while the average time to fill vacancies has remained steady year on year.

Asia acquired 4 businesses in the year with annualised revenues in the year prior to purchase of £6m.

Pacific

The Pacific region delivered an excellent first half performance. Revenue accelerated by 16.5% to £128m. Organic Revenue grew 7.4% as pricing was complemented with volume growth. Pest Control delivered 30.4% Revenue growth, with notable strength in commercial services. Good sales and customer retention were also evident in the Hygiene & Wellbeing business, where Revenue growth was 5.2%. The region saw good demand for Ambius services.

Adjusted Operating Profit in the Pacific grew strongly by 22.3% to £29m and Adjusted Operating Margins rose by 110bps to 22.9%, supported by effective mitigation of cost inflation. The customer retention rate remained in the high 80s at 88.1% (FY 22: 88.8%). Colleague retention in the region has improved to 75.3% (FY 22: 72.9%), despite continued tight labour markets.

The region acquired 5 businesses, with 3 in Australia and 2 in New Zealand. These acquisitions had total annualised revenues in the year prior to purchase of £12m.

Category performance review

Pest Control

Our Pest Control business, now including Terminix, is the largest operator in both the US, the world's biggest pest control market, and the world overall. Rentokil Initial is a leading global player in a resilient and non-cyclical industry characterised by positive and strong long-term structural growth drivers. We have strengthened our position through organic growth and by establishing stronger market positions, through the introduction of innovative products and services, acquisitions to build scale and density, and our determination to be an Employer of Choice across our global operations.

Our Pest Control business delivered strong growth in the first half of the year, underpinned by the critical nature of our services. Revenue was up by 91.5% to £2,141m, benefiting from Organic Revenue growth of 5.6% and M&A, including the Terminix transaction.

Overall performance has been supported by both pricing and volumes, led by the Commercial Pest Control business, which has a high proportion of contractual activity and benefited from continued good customer retention rates. North America Organic Revenue growth was 4.2%, achieved alongside the integration pilot programme and despite lower industry-wide lead flow from residential and termite customers. Revenue in growth markets, representing 91% of the Pest Control business, was up 100.8%, while revenue in emerging markets was up 28.1%. Adjusted Operating Profit was up by 105.1% to £412m and Adjusted Operating Margin increased 130bps to 19.2%. There was an uplift to the resilient underlying margin performance from Terminix synergies of 140bps, partly offset by short-term margin dilution from increased M&A activity, predominantly in Europe. For H1 23, Pest Control represented 80.4% of Group Revenue and 82.7% of Group Adjusted Operating Profit (excluding central and restructuring costs). M&A has continued to be strong this year, and we have acquired 19 pest control businesses in the period with annualised revenues in the year prior to acquisition of £54m.

Hygiene & Wellbeing

Rentokil Initial offers a wide range of hygiene and wellbeing services. Inside the washroom we provide hand hygiene (soaps and driers), air care, in-cubicle (feminine hygiene units), no-touch products and digital hygiene services. In addition to core washroom hygiene, we deliver specialist hygiene services such as clinical waste management. We're also improving the customer experience through premium scenting, plants, air quality monitoring and green walls. Customer sectors range from public sector (schools, government buildings) and facilities management through to hotels, bars and restaurants, industrials and retail.

Hygiene & Wellbeing Revenue increased by 3.8% to £414m. This was supported by resilient demand for washroom services, offset by the anticipated reduction in COVID disinfection and related services, and the non-repeat of UK COVID credit note releases. COVID disinfection revenues decreased from £14.2m in H1 22 to £1.6m in H1 23. Organic Revenue growth in the category was 5.2%. Organic Revenue growth in core washrooms was 6.1%, while Organic Revenue growth in premises and enhanced environments was 3.5%. Adjusted Operating Profit was down by 12.6% to £68m and Adjusted Operating Margin decreased 310bps to 16.5%. Hygiene & Wellbeing margin was impacted by the anticipated reduction in COVID disinfection and related services, the non-repeat of UK COVID credit note releases, and the transfer of Ambius management from North America Pest Control. The H2 impact of these headwinds to Hygiene & Wellbeing margin is expected to be c.100bps or one-third of the H1 impact. They are anticipated to be offset by underlying operational improvements, with H2 margin expected to be in excess of 19.0%.

We have acquired 5 hygiene businesses in the first six months with annualised revenues of c.£24m in the year prior to purchase.

France Workwear

Strong demand has continued to drive a supportive market for France Workwear, which delivered Revenue growth of 16.3% to £106m, all of which was organic. Robust volumes have been aided by ongoing market recovery in the hospitality sector in particular, and driven by both strong new business sales and upselling. The category's performance has been supported by effective price progression. Inflation was fully covered with successful price increases, while our investment in plant and machinery has enabled us to deliver more efficient and sustainable operations. In the first six months of the year, Adjusted Operating Profit increased by 34.1% to £18m, translating to a step up in Adjusted Operating Margin of 220bps to 16.9%.

Continued excellent execution on bolt-on M&A

Bolt-on M&A activity continued at pace in the first half of the year. The Group acquired 24 new businesses across both our growth and emerging markets. An aggregate consideration of £202m was paid for these acquired businesses with total annualised revenues of £79m in the year prior to purchase. In North America, 6 new businesses were added. This included the acquisition of RK Environmental/Comprehensive Food Safety, a specialist in pest management services and food safety audit consulting to the commercial food industry operating in 31 US states. RK had annualised revenues of c.£16m in the year prior to purchase, ranking #44 on the Pest Control Technology 2022 Top 100 list. 5 acquisitions were made in both Europe and the Pacific. Building on prior year success, 3 deals were made in Spain, creating the market leader. In our emerging markets of Asia, MENAT and LATAM, 7 deals were completed with total annualised revenues of £8m in the year prior to purchase.

We will continue to seek attractive bolt-on deals, both in Pest Control and with an increased focus on Hygiene & Wellbeing, to build density in existing markets, and pursue acquisitions in new markets and the major Cities of the Future. Our pipeline of prospects remains very strong and our guidance on spend on M&A for FY 23 is raised from c.£250m to c.£300m.

Employer of Choice

Rentokil Initial is committed to being a world-class Employer of Choice, with colleague safety and the attraction, recruitment and retention of the best people from the widest possible pool of talent being key business objectives globally. As an organisation, we strongly believe that creating a diverse and inclusive workforce that reflects the business environment in which we operate will increase colleague engagement and customer satisfaction, as well as drive increased innovation, enhance our reputation and therefore boost our financial performance.

The global labour market remained tight through the course of the first half of the year. Nevertheless, we are seeing good results from our sustained investment in recruitment and training, with 6 consecutive months of improvement in colleague retention. Total Group colleague retention, restated to include Terminix, was up 2.6 percentage points to 82.0% (FY 22: 79.5%). Terminix colleague retention has seen ongoing improvement, up from 63.8% for FY 22 to 67.7%.

Innovation and Technology

The Company's investment in innovation and technology continues to drive profitable growth in the business. It strengthens our brand and cements our leadership position, enabling us to provide enhanced service to customers and target key growth sectors, while lowering our operating costs and improving our sustainability credentials.

In the Pest Control category, technology-enabled innovations have been especially important in helping to differentiate us from our industry competitors. Rentokil has developed the world's leading digital pest control platform providing an unmatched level of reporting and insight for our customers. In the first half of the year, we rolled out an additional 29,000 units of our award-winning PestConnect solution, which provides a real-time, early warning digital system for monitoring and controlling rodents. We now have 319,000 units in operation across 18,000 sites, and six countries where more than 10% of the commercial portfolio benefits from connected devices. This includes the Netherlands that is approaching 30% of the commercial portfolio. The PestConnect product range has also been expanded with the introduction of Radar X for businesses, which has successfully completed customer trials and is set for market launch later this year. This is our most sustainable connected device to date, using carbon dioxide gas rather than rodenticides and benefiting from a longer battery life and more recyclable parts.

In the Hygiene & Wellbeing category, our product initiatives for both the core washroom and enhanced environments are delivering benefits. The global roll-out of our Luna Dry range has supported a 17% increase in hand dryer unit sales, which notably included an airport contract in the Nordics for Luna units. In the period, we installed another 120,000 hygiene units from our popular Signature colour range. The Group sustained its focus on the high-growth air care market, already with a product range that features air purification, air sterilisation and air scenting products. In H1 23 there was a 10.9% year on year increase in the sale of new air care dispensers, led by a 50% increase in dispensers for air scenting. This was accompanied by the recent launch of our new premium scenting product, the AQ890 freestanding tower that has 50 intensity levels to cater for peak business hours and traffic flow. Led by the Asia region, we also secured our first truly global premium scenting agreement with a premier hotel group across 21 countries.

In line with our commitment made at the time of the Terminix transaction announcement, the Group will be opening a new North American Innovation Centre focused on residential, termite, vector control and sustainable fumigation. Housing a combination of entomologists, vector scientists, fumigation chemists and residential product owners, the centre will conduct research aimed at providing transformative solutions to pest control challenges, as well as delivering training for frontline colleagues. As part of this programme, we are pleased to have appointed Dr Cassie Krejci as Head of Science & Innovation North America.

Financial review

Central and regional overheads of £58m (at CER and AER) were up £9m on the prior year (H1 22: £49m at CER and £48m at AER) driven by higher share based payment charges for the larger combined organisation.

With the exception of integration costs for significant acquisitions, the Company reports restructuring costs within Adjusted Operating Profit. Costs associated with significant acquisitions are reported as one-off items and excluded from Adjusted Operating Profit. Restructuring costs of £6m (at CER and AER) were up £1m on the prior year (H1 22: £5m at CER and AER). They consisted mainly of costs in respect of initiatives focused on our ongoing North America transformation programme.

Adjusted interest of £67m at actual exchange rates was higher year on year by £55m, driven by £57m of higher interest costs from Terminix related financing, partially offset by £2m higher impact from hyperinflation of £8m (H1 22: £6m). Cash interest in H1 2023 was £114m (H1 22: £19m) reflecting both higher interest on debt raised for the Terminix acquisition and the phasing of coupon payments annually in arrears.

In Appendix 1 we have shown a summary P&L interest table demonstrating how the components of our financing drive interest costs and incomes and the expected range for 2023 at average exchange rates. Changes in exchange rates during the balance of 2023 will also impact the reporting of interest costs for 2023.

The income tax charge for the period at actual exchange rates was £55m on the reported profit before tax of £240m, giving an effective tax rate (ETR) of 22.9% (H1 22: 23.2%). The Group's ETR before amortisation of intangible assets (excluding computer software), one-off and adjusting items and the net interest adjustments for H1 23 was 23.4% (H1 22: 21.8%). This compares with a blended rate of tax for the countries in which the Group operates of 25% (H1 22: 24%).

Adjusted Cash Flow of £401m was up from £202m in H1 22. Higher trading profits resulted from organic and acquisitive growth. Adjusted EBITDA was £602m, up 72.0% from £350m. One-off and adjusting items totalled £78m, reflecting P&L items of £46m and a net c.£32m movement in one-off accruals since December 2022, as presented at the Preliminary Results. The Group had a £26m working capital outflow in the first six months of the year.

Capital expenditure of £102m was incurred in the period (H1 22: £83m), reflecting the inclusion of Terminix capital expenditure. Lease payments were up 80.0% to £81m.

Cash interest payments of £114m were £95m higher than in the prior year, reflecting the payment in arrears of coupon interest on bonds issued in 2022 in relation to the Terminix transaction. Cash tax payments for the period were £58m, an increase of £26m compared with the corresponding period last year, largely related to the inclusion of Terminix trading results. Free Cash Flow was £229m (H1 22: £151m), with Adjusted Free Cash Flow Conversion of 83.0% due to the timing of interest payments.

Cash spend in H1 on current and prior year acquisitions was £175m, dividend payments were £131m and the cash impact of one-off and adjusting items was £78m (largely related to the Terminix acquisition). Foreign exchange translation and other items of £136m is primarily due to the weakening of the Dollar against Sterling. Overall, this led to a change in net debt of £26m and closing net debt of £3,270m.

The Board continues to adopt the going concern basis in preparing the accounts on the basis that the Group's strong liquidity position and its demonstrated ability to manage the level of capital expenditure, dividends or expenditure on bolt-on acquisitions are sufficient to meet the Group's forecast funding needs, including those modelled in a severe but plausible downside case.

As at 30 June 2023, the Group had liquidity headroom in the region of £1,403m, including £787m ($1.0bn) of undrawn RCF, with a maturity date of October 2027. The pro forma net debt to Adjusted EBITDA ratio was 2.8x at 30 June 2023 (31 December 2022: 3.2x). The pro forma net debt to EBITDA ratio was 3.4x at 30 June 2023 (31 December 2022: 4.6x). In July 2023, S&P Global reaffirmed the Group's BBB investment grade credit rating.

The interest rate on approximately 81% of the Group's debt including leases is fixed. The Group has no debt maturities until November 2024.

In view of our performance in the first half of 2023 and our confidence for H2, the Board is declaring an interim dividend payment of 2.75p, a 14.6% increase on the prior year period, payable to shareholders on the register at the close of business on 4 August 2023 and to be paid on 11 September 2023. The last day for DRIP elections is 18 August 2023.

Brett Ponton, CEO of our North America Region, is stepping down later this year to take up the position of CEO of SERVPRO, a privately-owned property cleanup, restoration, and construction franchisor. We wish him well and thank him for his commitment and dedication to bringing together our pest control businesses following the Terminix transaction. John Myers, CEO of US Pest Control, continues to lead the Pest Control business in North America and Brett's successor will be confirmed in due course.

Restructuring costs ex Terminix: c.£10m (previously c.£7m)

Deal related costs and costs to achieve*: c.£80-£100m (previously c.£75-£90m) due to the 24 deals in H1

Pre-tax net cost synergies of $60m year over year

Central and regional overheads: c.£150m including Terminix related investments

P&L adjusted interest costs: c.£125m-£135m incl. £20-£25m of hyperinflation

Estimated Adjusted Effective Tax Rate: 25-26%

Share of Profits from Associates: £9m (previously £8m)

Impact of FX**: within range of -£15m to -£20m (previously +£15m to £25m)

Intangibles amortisation: £160-£170m due to more M&A (previously £155-£165m)

Overall exceptional items: c.£135-£145m***

Working Capital: c.-£60m (previously -£40m) excluding prior year exceptionals

Capex: £230-£240m (previously £235-£245m)

Cash interest: c.£160-£170m (previously c.£150-£160m), due to higher US interest rates on $700m loan and North America variable rate leases

Cash tax payments: £115-£125m

Anticipated spend on M&A in 2023 of c.£300m (previously c.£250m)

* Reported as one-off and adjusting items and excluded from Adjusted Operating Profit and Adjusted PBT

** Based on maintenance of current FX rates. All technical items are also subject to FX

*** c.£40m of 2022 exceptional items remained in creditors at December 2022

Appendix 1

AER FX rate for £/€: 1.1437 and £/$: 1.2357

Appendix 2

Summary of financial performance (at AER)

Regional Performance

Category Performance

Consolidated Statement of Profit or Loss and Other Comprehensive Income (unaudited)

For the period ended 30 June 2023

1. Taxation includes £55m (2022: £27m) in respect of overseas taxation.

All profit is from continuing operations.

The weighted average number of ordinary shares in issue is 2,513m (HY 2022: 1,860m). For the diluted EPS calculation the adjustment for share options and LTIPs is 14m (HY 2022: 6m).

Consolidated Balance Sheet (unaudited)

1. Non-current other payables includes £33m put option liability related to the PCI India acquisition (2022: £43m).

Consolidated Statement of Changes in Equity (unaudited)

1. £49m net gain on cash flow hedge includes £nil gain/loss (2022: £7m gain) from the effective portion of changes in fair value offset by reclassification to the income statement of £49m gain (2022: £14m gain) due to changes in foreign exchange rates.

Shares of £nil (2022: £nil) have been netted against retained earnings. This represents 14.5m (2022: 12.3m) shares held by the Rentokil Initial Employee Share Trust. The market value of these shares at 30 June 2023 was £89m (2022: £58m). Dividend income from, and voting rights on, the shares held by the Trust have been waived.

Analysis of other reserves (unaudited)

1. £49m net gain on cash flow hedge includes £nil gain/loss (2022: £7m gain) from the effective portion of changes in fair value offset by reclassification to the income statement of £49m gain (2022: £14m gain) due to changes in foreign exchange rates.

Consolidated Cash Flow Statement (unaudited)