Rentokil Initial Regulatory News (RTO)

23 Feb 2006 07:02

Rentokil Initial PLC23 February 2006 23 February 2006 RENTOKIL INITIAL PLC PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2005£m Q4 05 Q4 04 % change FY 05 FY 04 % changeContinuing Operations(1)At 2004 constant exchange rates:(2) Revenue 616.5 570.0 8.2% 2,286.1 2,181.4 4.8% Operating profit(3) 78.8 91.0 (13.4%) 306.1 356.4 (14.1%) Adjusted operating profit(4) 88.9 89.3 (0.4%) 325.9 359.7 (9.4%) Profit before income tax(3) 65.6 75.1 (12.6%) 252.9 304.6 (17.0%) Adjusted profit before income tax(4) 75.7 73.4 3.1% 272.7 307.9 (11.4%) Continuing Operations(1)At actual exchange rates: Revenue 623.3 574.6 8.5% 2,301.2 2,181.4 5.5% Operating profit 67.9 60.8 11.7% 243.3 308.5 (21.1%) Operating profit analysed as:- Operating profit (beforeamortisation of customer list &exceptional items) 79.6 92.1 (13.6%) 308.5 356.4 (13.4%)- Amortisation of customer lists (5.5) (5.6) 1.8% (23.0) (22.2) (3.6%)- Exceptional items (6.2) (25.7) 75.9% (42.2) (25.7) (64.2%) Share of profit from associates (net 0.5 0.5 - 2.2 1.8 22.2%of tax)Net interest payable (13.7) (16.3) 16.0% (55.4) (53.6) (3.4%) Profit before income tax 54.7 45.0 21.6% 190.1 256.7 (25.9%) Profit after income tax 138.6 186.9 (25.8%) Free cash flow(5) 160.4 241.0 (33.4%) Basic earnings per share (continuing) 7.52p 10.24p (26.6%) Dividends per share (paid and proposed) 7.38p 6.71p 10.0% (1) All figures are for continuing operations and are unaudited. Style Conferences and seven other smaller businesses have been treated as discontinued businesses and their results, including a profit on disposal of £171.3m, have been excluded from the current and prior year figures above. Profit for the year including discontinued operations was £324.4m (2004: £192.1m). (2) Results at constant exchange rates have been translated at the full yearaverage exchange rates for the year ended 31 December 2004. (3) Operating profit and profit before tax (PBTA) is before amortisation ofcustomer lists of £22.7m (2004: £22.2m) and exceptional items of £42.2m (2004:£25.7m). (4) Adjusted operating profit and adjusted profit before tax (adjusted PBTA) isbefore amortisation of customer lists of £22.7m (2004: £22.2m) and exceptionalitems of £42.2m (2004: £25.7m) but before items of a one-off nature of £19.8m(2004: £3.3m). See appendix 4 for further details. (5) See note 12 for reconciliation of net cash flows generated from operatingactivities to free cash flow. HIGHLIGHTS • Q4 revenue up 8.2% over same period last year and up 4.8% for the fullyear at constant exchange rates; revenue up in all business segments • Operating profit (before amortisation of customer lists andexceptional items) down 13.4% in Q4 versus last year at constant exchange ratesand 14.1% lower for the full year. Rate of profit deterioration slowing -adjusted operating profit down 0.4% in Q4 compared with 8.3% in Q3 and 14.4% inH1 • Portfolio up 5.1% (annualised rate) in Q4 with better revenue growthand lower terminations than H1 • Full year profit before income tax down 25.9% • Full year dividend per share of 7.38p, up 10.0% • Right structure and senior team established • Turnaround plan on track • Active management of business portfolio - Sale of Style conferences - Acquisition of JC Ehrlich, fourth largest US pest control company - Buying back City Link franchises - Closure of loss-making UK linen and workwear activities - Exploring possible sale of Manned Guarding • Clarification of capital structure, steps being taken to eliminatepension deficit Commenting on the preliminary results, Doug Flynn, CEO of Rentokil Initial,said: "In 2005 we set out to determine the causes of the deep-set problems facingRentokil Initial and to develop a clear plan to address them. This has beendone and the plan is now being implemented. Our strategic objectives arefocused on the businesses within the group that have the potential to createmost shareholder value. We have created a clear organisational structurealigned with these objectives and put in place a leadership team with the skillsand capabilities to deliver them. "Whilst we anticipate the turnaround being a difficult process, there are someclear signs of progress. We expect to see improving revenue growth and contractretention in 2006, despite unhelpful trading conditions in our main markets.There will be significant organic investment and one-off costs in the first halfof the year which will impact prior year comparisons. Although we do not expectto achieve full year adjusted PBTA growth before 2007, we do expect to exit 2006on a rising trend in the second half." OVERVIEW OF THE YEAR The first half of the year focused on analysing the extent and nature of theproblems the Company faces. A comprehensive review of all the Company'sbusinesses was detailed at the time of the interim results in August. Anextensive programme of initiatives to address these problems was developed andin the second half of 2005 management's focus has been on executing theseinitiatives. These fall into three categories: strategy; people and structure;and operations. The focus is on the businesses with the potential to createmost shareholder value, identified as those that enjoy or can build leadershippositions in their markets, can sustain profitable growth and add value as agroup. Strategy The aim is to provide clear strategic focus and investment priorities and tobuild stronger strategic positions in priority businesses. Initiativescompleted in 2005 include the disposal of Style Conferences, a review of thegroup's capital structure which included measures to address the deficit in theUK defined benefit pension scheme, the announcement of the intention to ceasefranchising in City Link and the merger of the two continental European washroombusinesses. Forty acquisitions were made in 2005 for a total consideration of£49.7 million. Since the end of the year, further progress has been made. The acquisition of JC Ehrlich, the largest independently-owned and fourthlargest overall pest control company in the USA, was announced on 24 January2006 for a consideration of $141.8 million (£80.1 million). Ehrlich has anexcellent reputation and a strong market position in the growing US pest controlindustry and provides a platform for growth in this important market. After extensive exploration of all options, it was decided to close theloss-making UK linen and workwear activities on 30 April 2006. It had beenhoped that it would be possible to sell this business to one or more parties butthe serious risk of regulatory intervention and the consequent uncertainty interms of timing, costs and eventual exit led to the conclusion that a thirdparty sale was not feasible and that closure was the only viable option. Most recently, it has been confirmed that the Company is exploring the possibledisposal of its Manned Guarding activities. People and Structure It is essential to have the right people and structure in place to support theturnaround initiatives and much progress was made in this area in 2005. Inaddition to the CEO, a number of key senior appointments were made including anew CFO, MDs of the Pest Control/Plants and Asia Pacific divisions, HR Directorand Head of the Change Programme Office. The operating structure was reorganised on 1 September 2005 into six newdivisions. This and all future results announcements will be based on this newdivisional structure. Operations In this area, work has focused on implementing turnarounds in some of thegroup's most important operations. These are: UK Pest Control: this business had been losing customers, principally due todissatisfaction with service levels as a result of underinvestment in servicepersonnel and processes. Customer terminations negatively affect the economicsof route-based businesses, impacting margins and profitability, as well as aloss of market share. In 2005 additional service personnel were recruited andnew scheduling processes introduced. Ongoing work includes initiatives toimprove service consistency, customer responsiveness and staff churn. UK Washrooms: historically, the operations of UK Washrooms had been integratedwith the loss-making Linen and Workwear business. As a precursor to exiting thelatter, a complex and lengthy process of separating the plant and deliverymechanisms associated with the two activities had to be effected. This wascompleted in December 2005 and has enabled the detailed plan to integrate theRentokil and former BET washroom businesses to commence. French Textiles: this is the group's largest single business but its flawedorganisational structure has restricted development. Restructuring wascompleted during 2005 and the business is now organised around core processesrather than on a geographical basis. Recruitment of key management posts iscontinuing, as is a systems integration programme. European Washrooms: as in the UK, the Rentokil and former BET washroombusinesses had yet to be fully integrated. The majority of this work wascompleted by the end of the year and full integration will be achieved by theend of the first half of 2006. To support these programmes and all the group's activities, improvement is beingmade to IT and other business systems, replacing the myriad of customer-builtand paper-based processes which have been used historically. OUTLOOK Market conditions in 2006 are unlikely to be helpful in the group's majorEuropean markets and the UK is expected to weaken. Revenue growth and contract retention are both expected to improve in 2006 asthe operational turnarounds take effect and the investment made in sales andservice begins to bear fruit. There will be significant organic investment andone-off costs in the first half of the year which will impact prior yearcomparisons. Although we do not expect to achieve full year adjusted PBTA growth before 2007,we do expect to exit 2006 on a rising trend in the second half. We are unlikely to increase the dividend in 2006. Beyond 2006, we expect totake a cautious approach to dividend growth until a recovery is wellestablished. For further information: Shareholder/analyst enquiries:Doug Flynn, Chief Executive Officer Rentokil Initial plcAndrew Macfarlane, Chief Financial Officer Tel: 020 7866 3000Lisa Williams, IR Manager Media enquiries:John Sunnucks Brunswick GroupKate Miller Tel: 020 7404 5959 GROUP PERFORMANCE Basis of Preparation In all cases, unless otherwise stated, references to operating profit and profitbefore tax are for continuing businesses before amortisation of customer listsand exceptional items. References to adjusted operating profit and adjustedprofit before tax also exclude items of a one-off nature totalling a net cost of£19.8m (2004: £3.3m) that, in addition to exceptional items and amortisation ofcustomer lists, have impacted the results for the year. These principallyrelate to reorganisation and redundancy costs, other asset impairments, profiton the sale of land and buildings and professional and other costs in the groupcentre. A further analysis of these costs by division is provided in appendix4. The group management structure was reorganised as of 1 September 2005 and thediscussion of the results for the year has been presented in line with the newdivisional structure based upon the way the businesses are now managed. Thishas principally resulted in separate Asia Pacific and South Africa (Other)divisions. For statutory purposes the businesses within these geographicdivisions have been reallocated back to the relevant business segments in linewith the requirements of International Financial Reporting Standards (IFRS) -see appendix 4. Central costs directly attributable to divisional managementhave been included with the relevant divisions and statutory segments.Previously these were included within central overheads. Prior reported periodshave been restated accordingly. Please refer to appendices 1,2,3 and 4 for divisional analysis of portfolio,revenue, operating profit and one-off items for the fourth quarter and full yearat both constant and actual exchange rates. Appendices A and B attached showthe restated analysis by quarter for 2005. Capex is stated on an accruals basis and represents amounts capitalised in fixedassets. In the commentary, all comparisons, unless otherwise stated, are at constant2004 exchange rates. Fourth Quarter Revenue for continuing businesses in the fourth quarter was 8.2% higher thanlast year at constant exchange rates and 8.5% higher at actual exchange rates.All divisions recorded revenue growth over the prior year. Operating profitfell by 13.4% compared with the fourth quarter of 2004 at constant exchangerates and by 13.6% at actual exchange rates. Pest Control, Tropical Plants,City Link and Manned Guarding each had higher operating profit than last yearbut this was offset by declines in other businesses. Profit before tax,exceptional items and amortisation (PBTA) fell by 12.6% at constant exchangerates and 13.0% at actual exchange rates. Adjusted operating profit, whichexcludes one-off items, fell by 0.4%. Profit before tax at actual exchangerates for the fourth quarter was £54.7 million, representing an increase of21.6%. Full Year For the full year, group revenue for continuing businesses grew by 4.8% atconstant exchange rates, 2.8% of which was organic. At actual exchange rates,revenue grew by 5.5%. Again, revenue was higher across all divisions. Despitethis, operating profit was down in all divisions, resulting in group operatingprofit falling by 14.1% at constant exchange rates and 13.4% at actual exchangerates. Profit before tax, exceptional items and amortisation fell by 17.0% atconstant exchange rates and 16.2% at actual exchange rates. Adjusted operatingprofit fell by 9.4%. Profit before tax at actual exchange rates for the yearwas £190.1 million, representing a fall of 25.9%. DIVISIONAL PERFORMANCE Textiles and Washroom Services £m % change % change Q4 05 Q4 04 FY 05 FY 04 At 2004 constant exchange rates: Portfolio - net movement (3.5) 5.1 11.4 11.2 Revenue 159.8 158.5 0.8% 639.8 628.2 1.8% Operating profit (before amortisation ofcustomer lists & exceptional items) 22.7 32.1 (29.3 %) 114.7 135.7 (15.5%) Adjusted operating profit (beforeamortisation of customer lists &exceptional items) 30.4 32.4 (6.2%) 126.3 136.9 (7.7%) Capex 122.4 122.4 0.0% Depreciation 115.6 113.9 1.5% The Textiles and Washroom Services division comprises the washroom, linen hire,garment rental, floorcare and wipers activities in the UK and continentalEurope. In 2005 the division accounted for 28% of group revenue and 39% ofgroup adjusted operating profit. Revenue for the year was up 1.8% at £639.8 million. Operating profit fell by15.5% to £114.7 million. Excluding one-off items, adjusted operating profit fellby 7.7% to £126.3 million. The portfolio grew by 1.9% during the course of theyear with new business wins broadly equivalent to terminations and a smallincrease from acquisitions. Performance of the UK business continued to be impacted by the process ofexiting the linen and workwear activities. The complex and lengthy programme toseparate linen and workwear from the washroom and dustmat activities, which arebeing retained, was completed in December. This programme resulted inoperational inefficiencies, due particularly to adverse route economics, andadditional costs. The closure of linen and workwear was announced in January2006 and an exceptional impairment charge of £31.3 million has been recognisedto write down the assets held in the business to their recoverable amount. Itis envisaged that additional cash closure costs of £13 to £18 million will beincurred in 2006. These will be significantly offset by the sale of surplusproperty during 2006 and 2007. Overall, UK revenue declined by 5.2%year-on-year in 2005 and adjusted operating profit fell by 27.9%. Revenue forlinen and workwear was essentially unchanged but the operating loss increased to£9 million. The revenue and operating profit of the retained activities fellafter being impacted by substantial investment in these activities to build afuture platform for growth by integrating and restructuring the Rentokil andformer BET washroom businesses. In continental Europe, market conditions remain challenging with the dualpressures of competition and weak economic performance in most marketsconstraining growth. In spite of this background, revenue growth was achievedand for the year as a whole increased by 4.1%. Continued investment in the salesforce is generating revenue growth in a number of businesses, notably thetextiles businesses in Germany, Spain and the Czech Republic as well as thewashroom units in Spain, Denmark, Finland and Portugal. In French textiles -the group's largest single business unit - revenue grew by 1% for the year.Continental European operating profit declined by 9.7% year-on-year, resultswere adversely impacted by the costs of reorganising the business and an assetimpairment in Germany. The Austrian textiles business acquired during the firsthalf of 2005 continues to perform well. The integration of the washroom activities in continental Europe into themanagement structure of the textiles business has now been substantiallycompleted. The expected benefits from a greater opportunity to cross sell ourproducts as well as an enhanced range of products and services in most marketsshould become apparent in the second half of 2006. Pest Control £m % change % Q4 05 Q4 04 FY 05 FY 04 Change At 2004 constant exchange rates: Portfolio - net movement 1.2 0.9 3.9 2.8 Revenue 51.8 50.5 2.6% 208.2 203.8 2.2% Operating profit (before amortisation ofcustomer lists & exceptional items) 17.0 14.8 14.9% 66.7 70.9 (5.9%) Adjusted operating profit (beforeamortisation of customer lists &exceptional items) 15.3 14.8 3.4% 65.0 70.9 (8.3%) Capex 13.3 11.3 17.7% Depreciation 10.2 9.6 6.3% In 2005, Pest Control accounted for 9% of group revenue and 20% of groupadjusted operating profit. Revenue increased by 2.2% over the prior year to £208.2 million. Operatingprofit fell by 5.9% year-on-year to £66.7 million. Stripping out the impact ofa one-off credit for the sale of surplus property, adjusted operating profitfell by 8.3% to £65.0 million. The portfolio ended the year 2.4% higher thanthe start, with some 25% of this due to acquisitions. The UK business, which is the subject of one of the group's major operationalturnaround programmes as described above, saw revenue fall by 1.3%. Operatingprofit declined by 15.9% due to lower revenue and, more particularly, higherinvestment in both sales and service as the business addresses customertermination levels and implements its turnaround. There was some improvement inretention during the year, although customer terminations in the UK remain wellabove the division's average. Overall, the UK portfolio fell by 0.5%. Revenue in continental Europe was 2.2% higher than last year. Growth wasrecorded in many of the European markets, including France, Belgium, Spain andPortugal. Revenue growth was achieved in Germany for the first time in fouryears. However, revenue fell year-on-year in Norway, Italy, Switzerland andSweden. Operating profit grew overall in Europe by 0.4% over the prior year.Revenue growth and solid cost control resulted in operating profit growth inPortugal, Belgium, the Netherlands, Ireland and Finland. Operating profit fellin France and Germany, the region's largest countries of operation, despiterevenue growth. In France this was due to margin pressure arising out ofgreater competitor activity and increased investment in service expenditureaimed at reducing customer terminations and in direct selling. Although higherinvestment in service in Germany impacted operating profit year-on-year, it ishaving a positive effect on termination rates which fell during 2005. Theportfolio grew in the European markets as a whole during the year, withparticularly strong growth in Spain due to acquisitions. North America performed well in 2005. Revenue was 16.5% higher than last year,aided in part by the full year impact of a 2004 acquisition in the USA whichalso helped to deliver a 24.0% increase in operating profit year-on-year. Thesmall Caribbean businesses grew in terms of both revenue and operating profit. Tropical Plants £m % change % Q4 05 Q4 04 FY 05 FY 04 change At 2004 constant exchange rates: Portfolio - net movement 0.6 (0.2) 7.1 (0.1) Revenue 30.9 28.3 9.2% 101.6 95.4 6.5% Operating profit (before amortisation ofcustomer lists & exceptional items) 4.6 4.3 7.0% 9.4 9.8 (4.1%) Adjusted operating profit (beforeamortisation of customer lists &exceptional items) 4.6 4.3 7.0% 9.4 9.8 (4.1%) Capex 9.9 11.6 (14.7%) Depreciation 8.5 8.2 3.7% The smallest of the group's businesses, Tropical Plants represented 4% of grouprevenue in 2005 and 3% of adjusted operating profit. Revenue for 2005 of £101.6 million was 6.5% ahead of last year. Operatingprofit fell by 4.1% to £9.4 million. Adjusted operating profit was 4.1% lowerat £9.4 million. Acquisitions helped the portfolio to grow by 9.1% during thecourse of 2005. North America is the largest region accounting for over 58% of revenue. Here,revenue grew strongly in 2005, up 10.3% year-on-year, largely due to the impactof acquisitions which added some £5.5 million to the contract portfolio.Operating profit also grew with higher revenue and was 5.6% above last year.The seasonally important fourth quarter was up on last year. Margins weremaintained, despite an increase in sales and marketing costs designed to promotefurther growth. The portfolio grew due to acquisitions and a reduction intermination levels. In the UK, there was a marginal decline in revenue. The portfolio grew slightlybut customer terminations increased over the prior year and are now the subjectof a turnaround initiative. Performance in continental Europe was mixed. Overall, revenue was 2.7% higheryear-on-year largely due to acquisition-led growth in Belgium and theNetherlands. In contrast, France, Germany, Norway, Greece and Denmark reportedlower revenue. Operating profit for the region fell by 29.0% despite growth inBelgium and the minor businesses in Ireland and Finland. This was largely aresult of declines in Sweden and, in particular, Norway where lower revenue anda drop in margins due to competitor activity caused a 50% drop in operatingprofit compared to last year. Operating profit also fell in France due to lowerrevenue and increased investment in sales capacity, although this business isshowing positive signs of a turnaround; margins have improved as a result oftight cost control and the portfolio has stabilised following a prolonged periodof decline. Electronic Security £m % change % Q4 05 Q4 04 FY 05 FY 04 change At 2004 constant exchange rates: Portfolio - net movement 4.9 2.3 10.6 8.7 Revenue 74.3 67.8 9.6% 262.7 242.4 8.4% Operating profit (before amortisation ofcustomer lists & exceptional items) 9.6 10.5 (8.6%) 35.8 38.5 (7.0%) Adjusted operating profit (beforeamortisation of customer lists &exceptional items) 10.8 10.5 2.9% 37.2 38.5 (3.4%) Capex 10.9 9.4 16.0% Depreciation 7.3 6.1 19.7% Representing 11% of both group revenue and adjusted operating profit in 2005,Electronic Security revenue grew by 8.4% in 2005 to £262.7 million. Operatingprofit fell by 7.0% to £35.8 million and adjusted operating profit, whichexcludes one-off items, of £37.2 million was 3.4% lower than last year. Theportfolio grew by 11.9% over the year largely due to acquisitions. In the UK, revenue was 6.6% higher than last year with increases recorded byboth the Fire & Security and Systems sectors. Operating profit for the Fire &Security sector grew in line with higher revenue but for the Systems sector wascurtailed by a shift in mix towards lower margin activity which depressedmargins and by reorganisation costs. Additional investment in sales andmarketing also had a negative impact on profitability. As a result, UKoperating profit fell by 4.0%. Revenue was up 5.7% in the Netherlands. However, downward margin pressure,coupled with the costs of a productivity improvement programme and theimplementation of a new IT system, resulted in operating profit falling by 20.8%compared to last year. In France, revenue grew by 10.3% over last year. However, margins fell due to ashift in revenue mix and competitive pressures on pricing. In addition,infrastructure investment resulted in higher costs and as a result operatingprofit fell by 9.3% year-on-year. The USA, the division's smallest location, performed strongly with revenue up57.6% over the prior year. Operating profit rose by 14.4% despite increasedinvestment in infrastructure and post-acquisition reorganisation costs. City Link £m % change % Q4 05 Q4 04 FY 05 FY 04 change At 2004 constant exchange rates: Portfolio - net movement - - - - Revenue 41.0 33.1 23.9% 125.5 113.4 10.7% Operating profit (before amortisation ofcustomer lists & exceptional items) 10.5 10.3 1.9% 29.1 30.4 (4.3%) Adjusted operating profit (beforeamortisation of customer lists &exceptional items) 10.9 9.3 17.2% 29.8 29.4 1.4% Capex 4.7 4.5 4.4% Depreciation 4.3 3.2 34.4% City Link, the parcels delivery division, accounted for 5% of group revenue and9% of adjusted operating profit in 2005. The division performed well in 2005.Revenue was 10.7% higher than last year, aided by the introduction of enhancedmarketing and sales activity. In addition, changes in practices in thedistribution hub and system have secured enhanced quality and performancecapabilities. Operating profit was affected by substantial pressure on pricingwithin the market and by the impact of taking back loss-making franchises and asa result was 4.3% lower than 2004 at £29.1 million. Excluding one-off items,however, adjusted operating profit grew by 1.4% over last year. In October, it was announced that the division will over time cease to operateon a franchise basis. Facilities Services £m % change % Q4 05 Q4 04 FY 05 FY 04 change At 2004 constant exchange rates: Portfolio - net movement 19.1 (2.2) 82.7 1.5 Revenue 228.1 202.5 12.6% 829.4 785.8 5.5% Operating profit (before amortisation ofcustomer lists & exceptional items) 13.2 14.6 (9.6%) 48.8 53.2 (8.3%) Adjusted operating profit (beforeamortisation of customer lists &exceptional items) 14.0 14.8 (5.4%) 49.8 53.4 (6.7%) Capex 21.7 17.7 22.6% Depreciation 15.4 14.8 4.1% The Facilities Services division is chiefly comprised of two types of activity,manned guarding and other facilities services including cleaning, catering andhospital services. Manned Guarding A steady performance in all regions resulted in an 8.5% increase in revenue overthe prior year to £359.9 million. Operating profit was flat year-on-year at£14.0 million. Adjusted operating profit of £14.2 million was up 1.4%. InNorth America, the results for the USA include two bolt-on acquisitions whichpartially offset increased state unemployment insurance and healthcare costs.Canada benefited from a significant temporary work win and the positive impactof price increases in the Eastern region of the country. The UK gained sizeablenew business in the second half of the year and customer retention improvedfollowing a strengthening of the management team with further investment insales resources and training capability. The introduction of guard licensing ison track and price increases have been implemented to recover costs. InBelgium, growth was accelerated by the win of a sizeable prestige new businessaccount. New business wins and acquisitions contributed to portfolio growth of11.5%. As announced on 8 February 2006, the company is exploring the possible disposalof its Manned Guarding businesses as it is believed that there may be otherparties whose strategic focus and/or investment priorities mean they are moreable to realise the full potential of these businesses. Other Facilities Services Revenue for these activities as a whole was £469.5 million, an increase of 3.4%over the prior year. Amongst the larger businesses, Cleaning in the UK andSpain reported revenue up by 10.4% and 4.6% respectively and Hospital Serviceswas up by 11.6%. Revenue for UK Catering was 6.2% lower, largely due to adversepublicity concerning the education meals sector impacting the take-up of schoolmeals. Managed Services recorded a 25% drop in revenue although this regressionwas expected due to the termination of some difficult contracts. For the OtherFacilities Services sector as a whole, operating profit of £34.8 million fell by11.2% compared with last year following the impact of 'Agenda for Change' - thenon-recoverable provision for wage increases within NHS contracts - and the muchreduced volume of school meals impacting on a relatively fixed cost base.Adjusted operating profit fell by 9.6%. Over the year the portfolio grew by12.2% due to strong new business wins, particularly in UK Cleaning. Asia Pacific £m % change % Q4 05 Q4 04 FY 05 FY 04 change At 2004 constant exchange rates: Portfolio - net movement 1.4 1.8 5.7 4.2 Revenue 22.4 21.4 4.7% 86.8 82.3 5.5% Operating profit (before amortisation ofcustomer lists & exceptional items) 6.0 6.4 (6.3%) 22.5 25.2 (10.7%) Adjusted operating profit (beforeamortisation of customer lists &exceptional items) 6.0 6.4 (6.3%) 22.5 25.2 (10.7%) Capex 11.6 10.0 16.0% Depreciation 8.4 7.3 15.1% Asia Pacific is the group's only regionally structured division. In 2005 itaccounted for 4% of group revenue and 7% of group adjusted operating profit. The largest activity in Asia Pacific is Textiles and Washroom Services, whichrepresented 58% of revenue in 2005. Pest Control represented 32%, TropicalPlants 7% and Facilities Services 3%. Australia is the largest country ofoperation at 48% of revenue, followed by New Zealand at 15%, Malaysia at 10% andIndonesia at 8%. The division's revenue of £86.8 million rose 5.5% in 2005 over the previous yearwith increases achieved in most countries of operation. Operating profit fellby 10.7%, largely due to a drop in operating profit in the Australian washroombusiness which faced strong pressure from competitors. Other £m % change % Q4 05 Q4 04 FY 05 FY 04 change At 2004 constant exchange rates: Portfolio - net movement (0.1) - 1.0 2.4 Revenue 8.2 7.9 3.8% 32.1 30.1 6.6% Operating profit (before amortisation ofcustomer lists & exceptional items) 3.3 3.2 3.1% 12.6 12.5 0.8% Adjusted operating profit (beforeamortisation of customer lists &exceptional items) 3.6 3.2 12.5% 12.9 12.5 3.2% Capex 4.1 3.7 10.8% Depreciation 2.8 2.6 7.7% This division predominantly accounts for the group's business in South Africa,which is mostly Pest Control. Revenue increased by 6.6% in 2005 over the prioryear. Operating profit - both reported and adjusted - increased by 0.8% and3.2% respectively. FINANCIAL ITEMS Central Items Fourth quarter central costs were £2.9 million above 2004 due to professionalfees associated with the business review implemented in the first half of theyear coupled with costs associated with organisational changes. Full yearcentral costs were £13.7 million higher than 2004 due to the formation costs ofthe new holding company, costs associated with the business review andadditional, IT, HR, acquisition and IFRS transition costs. Interest Net interest payable for the year at £55.4 million was £1.8 million higher than2004 with the adverse effects of the IAS 19 pension interest increase more thanoffsetting the benefit of lower average debt across the periods. Theyear-on-year impact of the Ashtead Loan note was largely neutral. The £4.6million write-off of the equity option was offset by amortisation of thediscount on the note. Exceptional Items As previously announced, the group incurred considerable expense in relation tothe unwelcome approach by Raphoe. Some £10.9 million defence costs relating tothe potential bid were incurred in 2005 and are shown in the income statement asexceptional costs. These, together with the £31.3 million impairment chargeassociated with the closure of the Linen and Workwear operations of UK Textiles,announced on 25 January 2006, constitute the £42.2 million of exceptional costsshown separately in the income statement. Pensions The group announced on 19 December 2005 that it was proposing to close the UKdefined benefit (DB) pension scheme and had began a period of consultation withthe active members with a view to reducing its exposure to future shortfalls.Final decisions regarding the review will be taken once the consultation periodwith active members has been completed later in 2006. It is planned to offerexisting active members a replacement defined contribution (DC) scheme. It isnot envisaged that the costs of the new DC scheme will be significantlydifferent to the service costs of the DB scheme. It is too early in the consultation process to be able to reliably assess theimpact of the closure on the scheme's liabilities. It has therefore been decidedto continue to reflect the scheme's deficit on the group's balance sheet on acontinuing basis until this review has been substantially completed and theimpact of the closure more reliably assessed. However it is anticipated that anypotential curtailment benefits in the income statement will be largely offset bythe cost of switching the scheme's investments from primarily equities toprimarily bonds. It is hoped to provide further details of the likely impact ofthe closure of the DB scheme in May 2006 at the time of publishing the firsttrading update. Total retirement liabilities of the group as at 31 December 2005 were £182.3million (2004: £311.8 million). This includes £169.8 million in respect of themain UK defined benefit pension scheme which reduced from the £302.5 million atthe end of 2004 following the payment of the £200 million special contributionannounced and paid in December 2005. Dividend An interim divided of 2.13p per share was paid on 28 October 2005 and the Boardis recommending the declaration of a final divided of 5.25p per share, bringingthe full year dividend to 7.38p per share. This represents a 10.0% increase overthe 2004 full year dividend. It is intended that the dividend will be increasedin line with the medium-term trend in earnings provided that cash resources areavailable. However, in the short-term, a more cautious approach to dividendgrowth may be taken until it is clear that the recovery in the business is wellestablished and broadly based Acquisitions The Group acquired 40 businesses in the year, together with the acquisition of aminority interest in the French Textiles business, for a gross consideration of£49.7 million. These acquisitions contributed £36.9 million to revenue, £3.5million to operating profit before amortisation of customer lists and £2.3million to profit before tax and amortisation of customer lists. The group will continue to pursue bolt-on acquisitions actively to increasedensity in existing businesses and provide a complement to organic growth.Acquisitions will only be undertaken when the management capacity to execute apost acquisition plan exists and it is clearly strategically and financiallyattractive to do so. Tax The blended headline tax rate in 2005 was 31.1% (2004: 30.9%). This representsthe weighted headline tax rates appropriate to the countries in which the groupoperates. It exceeds the UK rate of 30% as substantial profits are earned inFrance, Belgium and Germany where tax rates range from 34% to 28%. The actualtax charge for 2005 was 27.1% of profit before tax, down slightly from the rateof 27.2% in 2004. The principal factor that causes the effective tax rate tobe lower than the blended rate is the release of prior year provisions. Cash Flow Free cash flow fell from £241.0 million in 2004 to £160.4 million in 2005 as aresult of the fall in operating cash flow. Free cash flow conversion (beingthe ratio of Free Cash Flow to profit after tax adjusted for non cashexceptional items and amortisation of customer lists) was 83%, down from 103% in2004. This was principally due to a swing in working capital from a £19.1million inflow in 2004 to a £11.1 million outflow in 2005 as a result of strongfourth quarter trading in Manned Guarding and City Link as well as operationalchallenges in UK Catering and UK Linen and Workwear. The group received £129.8 million from the redemption of the Ashtead loan noteand £323.8 million from disposals, including Style conferences. These cash flowstogether with the free cash flow was used to fund a special contribution to theUK DB pension scheme, fund acquisitions and reduce net debt. One-off Items One-off items increased considerably in 2005 to £19.8 million (2004: £3.3million). This excludes exceptional items which are reported separately. Themajority of one-off items relate to reorganisation and redundancy costs, assetimpairments, profits on the sale of real estate and professional and othercosts. Of the £19.8 million, the main components were £11.6 million related tothe Textiles and Washroom Services division and £6.5 million of one-off centralcosts. One-off items have been separately identified because although asindividual items they are small, there is a large number of them and they have avarying impact on different businesses and reporting periods. Although notlarge enough to be classed as exceptional items, in aggregate they make itdifficult to see underlying trends in performance without excluding them.Further details are given in appendix 4. Discontinued Activities Discontinued activities are principally Style, the conferencing business whichwas sold in November 2005. Style had a trading profit of £22.7 million in 2005and a profit on sale of £170.3 million. Other small discontinued activities hadan aggregate trading profit of £0.2 million and profit on sale of £1.0 million.Including the impact of recycled foreign exchange and tax, profit fromdiscontinued activities were £185.8 million in 2005 (2004: £5.2 million). Appendix 1 ANNUAL CONTRACT PORTFOLIO - CONTINUING BUSINESSES 3 Months to 31 December 2005 Net£m at constant 2004 New Additions/exchange rates 1.10.05 Business Terminations Reductions Acquisitions 31.12.05 Textiles & Washroom Services 604.3 13.2 (15.2) (1.5) - 600.8Pest Control 163.0 6.9 (6.9) 1.0 0.2 164.2Tropical Plants 83.9 2.3 (2.4) 0.7 - 84.5 Electronic Security 95.0 2.1 (2.6) 0.9 4.5 99.9 Manned Guarding 325.8 18.5 (12.5) 2.8 2.6 337.2Other 433.2 17.0 (16.2) 6.7 0.2 440.9Facilities Services 759.0 35.5 (28.7) 9.5 2.8 778.1 Asia Pacific 111.7 4.4 (3.9) 0.9 - 113.1 Other 29.9 1.1 (1.5) 0.3 - 29.8TOTAL 1,846.8 65.5 (61.2) 11.8 7.5 1,870.4 12 Months to 31 December 2005 Net£m at constant 2004 New Additions/exchange rates 1.1.05 Business Terminations Reductions Acquisitions 31.12.05 Textiles & Washroom Services 589.4 57.4 (58.7) 1.6 11.1 600.8Pest Control 160.3 27.0 (28.4) 4.3 1.0 164.2Tropical Plants 77.4 9.4 (11.2) 3.3 5.6 84.5 Electronic Security 89.3 9.9 (9.7) 3.6 6.8 99.9 Manned Guarding 302.3 54.4 (43.0) 4.9 18.6 337.2Other 393.1 83.2 (54.8) 19.2 0.2 440.9Facilities Services 695.4 137.6 (97.8) 24.1 18.8 778.1 Asia Pacific 107.4 18.3 (16.4) 3.6 0.2 113.1 Other 28.8 4.2 (5.4) 2.2 - 29.8TOTAL 1,748.0 263.8 (227.6) 42.7 43.5 1,870.4 Notes Contract Portfolio Definition: Customer contracts are usually either "fixedprice", "as-used" (based on volume) or mixed contracts. Contract portfolio isthe measure of the annualised value of these customer contracts. Contract Portfolio Valuation: The contract portfolio value is typically recordedas the annual value from the customer contract. However, in some cases -especially "as-used" (based on volume) and mixed contracts, estimates arerequired in order to derive the contract portfolio value. The key points inrespect of valuation are: "As-used" contracts: These are more typical in Hygiene Services, where elementsof the contract are often variable and based on usage. Valuation is based onhistoric data (where available) or forecast values. Income annualisation: In some instances, where for example the underlyingcontract systems cannot value portfolio, or there is a significant "as-used"element, the portfolio valuation is calculated using an invoice annualisationmethod. Inter-company: The contract portfolio figures include an element ofinter-company revenue. Job Work and Extras: Many of the contracts within the contract portfolioinclude ad hoc and/or repeat job work and extras. These values are excludedfrom the contract portfolio. Rebates: The contract portfolio value is gross of customer rebates. These areconsidered as a normal part of trading and are therefore not removed from theportfolio valuation. New Business: represents new contractual arrangements in the period, which caneither be new contracts with an existing customer, or with a new customer. Terminations: represent the cessation of either a specific existing customercontract, or the complete cessation of business with a customer, in the period. Net Additions / Reductions: represents net change to the value of existingcustomer contracts in the period as a result of changes (either up or down) involume and/or pricing. Acquisitions: represents the valuation of customer contracts obtained fromacquisitions made in the period. Appendix 2 Divisional Analysis (at constant exchange rates)(based upon the way businesses are managed) 3 months to 3 months to Year ended Year ended 31 Dec 31 Dec 31 Dec 31 Dec 2005 2004 2005 2004(at 2004 constant exchange rates) £m £m £m £m (unaudited) (unaudited) (unaudited) (unaudited)Business Analysis Revenue Textiles & Washroom Services 159.8 158.5 639.8 628.2Pest Control 51.8 50.5 208.2 203.8Tropical Plants 30.9 28.3 101.6 95.4Electronic Security 74.3 67.8 262.7 242.4City Link 41.0 33.1 125.5 113.4 Manned Guarding 97.9 87.1 359.9 331.6Other 130.2 115.4 469.5 454.2Facilities Services 228.1 202.5 829.4 785.8 Asia Pacific 22.4 21.4 86.8 82.3Other 8.2 7.9 32.1 30.1Continuing operations at 2004 constantexchange rates 616.5 570.0 2,286.1 2,181.4Exchange 6.8 4.6 15.1 -Continuing operations as reported 623.3 574.6 2,301.2 2,181.4 Operating Profit* Textiles & Washroom Services 22.7 32.1 114.7 135.7Pest Control 17.0 14.8 66.7 70.9Tropical Plants 4.6 4.3 9.4 9.8Electronic Security 9.6 10.5 35.8 38.5City Link 10.5 10.3 29.1 30.4 Manned Guarding 4.9 3.8 14.0 14.0Other 8.3 10.8 34.8 39.2Facilities Services 13.2 14.6 48.8 53.2 Asia Pacific ** 6.0 6.4 22.5 25.2Other 3.3 3.2 12.6 12.5Central Items (8.1) (5.2) (33.5) (19.8)Continuing operations at 2004 constantexchange rates * 78.8 91.0 306.1 356.4Exchange 0.8 1.1 2.4 -Continuing operations as reported 79.6 92.1 308.5 356.4 Geographic Analysis Revenue United Kingdom 288.7 266.1 1,043.1 1,010.2Continental Europe 219.6 207.9 851.1 813.3North America 77.4 66.5 272.1 244.8Asia Pacific 22.4 21.4 86.8 82.3Africa 8.4 8.1 33.0 30.8Continuing operations at 2004 constantexchange rates 616.5 570.0 2,286.1 2,181.4Exchange 6.8 4.6 15.1 -Continuing operations as reported 623.3 574.6 2,301.2 2,181.4 Operating Profit* United Kingdom 30.9 34.9 104.2 137.1Continental Europe 32.1 40.2 151.2 164.2North America 6.2 6.0 14.1 15.9Asia Pacific 6.3 6.7 23.6 26.2Africa 3.3 3.2 13.0 13.0Continuing operations at 2004 constantexchange rates * 78.8 91.0 306.1 356.4Exchange 0.8 1.1 2.4 -Continuing operations as reported 79.6 92.1 308.5 356.4 * Before amortisation of customer lists and items identified as exceptional ** The business analysis for Asia Pacific includes UK Sector costs which areincluded in the UK in the Geographic Analysis. Appendix 3 Divisional Analysis (at actual exchange rates)(based upon the way businesses are managed) 3 months to 3 months to Year ended Year ended 31 Dec 31 Dec 31 Dec 31 Dec 2005 2004 2005 2004(at actual exchange rates) £m £m £m £m (unaudited) (unaudited) (unaudited) (unaudited)Business Analysis Revenue Textiles & Washroom Services 160.1 161.4 643.0 628.2Pest Control 52.3 51.0 209.4 203.8Tropical Plants 31.6 28.2 102.4 95.4Electronic Security 74.5 68.3 263.4 242.4City Link 41.0 33.1 125.5 113.4 Manned Guarding 101.5 87.1 365.2 331.6Other 130.3 115.8 470.0 454.2Facilities Services 231.8 202.9 835.2 785.8 Asia Pacific 23.6 21.4 89.6 82.3Other 8.4 8.3 32.7 30.1Continuing operations as reported 623.3 574.6 2,301.2 2,181.4 Operating Profit* Textiles & Washroom Services 22.8 32.8 115.4 135.7Pest Control 17.2 15.0 67.2 70.9Tropical Plants 4.7 4.3 9.5 9.8Electronic Security 9.6 10.6 35.8 38.5City Link 10.5 10.3 29.1 30.4 Manned Guarding 5.0 3.8 14.2 14.0Other 8.3 10.8 34.8 39.2Facilities Services 13.3 14.6 49.0 53.2 Asia Pacific ** 6.3 6.5 23.3 25.2Other 3.3 3.2 12.7 12.5Central Items (8.1) (5.2) (33.5) (19.8)Continuing operations as reported 79.6 92.1 308.5 356.4 Geographic Analysis Revenue United Kingdom 288.7 266.1 1,043.1 1,010.2Continental Europe 220.3 212.9 856.8 813.3North America 82.0 65.8 277.9 244.8Asia Pacific 23.6 21.4 89.6 82.3Africa 8.7 8.4 33.8 30.8Continuing operations as reported 623.3 574.6 2,301.2 2,181.4 Operating Profit* United Kingdom 30.9 34.9 104.2 137.1Continental Europe 32.4 41.2 152.3 164.2North America 6.5 5.9 14.4 15.9Asia Pacific 6.4 6.8 24.3 26.2Africa 3.4 3.3 13.3 13.0Continuing operations as reported 79.6 92.1 308.5 356.4 * Before amortisation of customer lists and items identified as exceptional. ** The business analysis for Asia Pacific includes UK Sector costs which areincluded in the UK in the Geographic Analysis. Appendix 4 One-Off Items 3 months to 3 months to Year ended Year ended 31 Dec 31 Dec 31 Dec 31 Dec 2005 2004 2005 2004(at 2004 constant exchange rates) £m £m £m £m (unaudited) (unaudited) (unaudited) (unaudited) Textiles & Washroom Services (7.7) (0.3) (11.6) (1.2) Pest Control 1.7 - 1.7 - Tropical Plants - - - - Electronic Security (1.2) - (1.4) - City Link (0.4) 1.0 (0.7) 1.0 Manned guarding - - (0.2) - Other facilities services (0.8) (0.2) (0.8) (0.2) Facilities Services (0.8) (0.2) (1.0) (0.2) Asia Pacific - - - - Other (0.3) - (0.3) - Central items (1.4) 1.2 (6.5) (2.9) (10.1) 1.7 (19.8) (3.3) Reconciliation of Divisional Analysis to Statutory Segmental Analysis Customer Lists & exceptional items Management Asia Pacific and Statutory other Basis Basis(at actual exchange rates) £m £m £m £m (unaudited) (unaudited) (unaudited) (unaudited) Textiles & Washroom Services 115.4 21.6 (42.7) 94.3 Pest Control 67.2 8.2 (1.5) 73.9 Tropical Plants 9.5 1.8 (4.1) 7.2 Electronic Security 35.8 - (3.0) 32.8 City Link 29.1 - - 29.1 Manned Guarding 14.2 - (3.0) 11.2 Other 34.8 5.7 - 40.5 Facilities Services 49.0 5.7 (3.0) 51.7 Asia Pacific 23.3 (23.3) - - Other 12.7 (12.7) - - Central Items (33.5) (1.3) (10.9) (45.7) Continuing operations as reported 308.5 - (65.2) 243.3 Consolidated Income Statement FOR THE YEAR ENDED 31 DECEMBER 2005 2004 Notes £m £m (unaudited) (unaudited) Continuing operations:Revenue 1 2,301.2 2,181.4Operating expenses (2,057.9) (1,872.9)Operating profit 243.3 308.5 Analysed as:Operating profit before amortisation of customer lists and 308.5 356.4exceptional itemsAmortisation of customer lists (23.0) (22.2)Exceptional items 2 (42.2) (25.7)Operating profit 1 243.3 308.5 Interest payable and similar charges 3 (115.0) (109.0)Interest receivable 4 59.6 55.4Share of profit from associates (net 2.2 1.8of tax)Profit before income tax 190.1 256.7Income tax expense 5 (51.5) (69.8)Profit for the year from continuing 138.6 186.9operations Discontinued operations:Profit for the year from discontinued 6 185.8 5.2operations Profit for the year (including discontinued) 324.4 192.1 Attributable to:Minority interest 2.9 1.7Equity holders of the Company 321.5 190.4 324.4 192.1 Basic earnings per share:- Continuing operations 7 7.52p 10.24p- Discontinued operations 10.30p 0.29p- Continuing and discontinued operations 7 17.82p 10.53p Diluted earnings per share:- Continuing operations 7.51p 10.24p- Discontinued operations 10.30p 0.29p- Continuing and discontinued operations 7 17.81p 10.53p An interim dividend of 2.13p per share was paid on 28 October 2005 (total£38.5m) and the Board is recommending the declaration of a final dividend of5.25p per share, bringing the full year dividend to 7.38p per share (total£133.3m). Statement of Recognised Income and Expense FOR THE YEAR ENDED 31 DECEMBER 2005 2004 £m £m (unaudited) (unaudited) Profit for the year (including discontinued operations) 324.4 192.1 Net exchange adjustments offset in reserves (0.6) (0.8)Actuarial loss on defined benefit pension plans (60.6) (103.8)Revaluation of available for sale investments (0.8) -Tax on items taken directly to reserves 1.0 31.1Net loss not recognised in income statement (61.0) (73.5) Total recognised profit for the year 263.4 118.6 Attributable to:Minority interest 2.9 1.7Equity holders of the Company 260.5 116.9 263.4 118.6 The Group took advantage of IFRS 1 transitional provisions and adopted IAS 39(Financial Instruments: Recognition and Measurement) and IFRS 4 (InsuranceContracts) prospectively. Accordingly, the 2004 comparatives have not beenrestated in accordance with IAS 39 and IFRS 4. The opening balance sheet on 1January 2005 has been restated for IAS 39 (£17.4m debit) and IFRS 4 (£0.3mcredit). These adjustments have been reflected within reserves. Consolidated Balance Sheet AT 31 DECEMBER Notes 2005 2004 £m £m (unaudited) (unaudited) ASSETSNon-current assetsIntangible assets 180.3 150.1Property, plant and equipment 8 497.5 661.7Investments in associated undertakings 9.2 9.5Other investments 6.8 6.7Deferred tax assets 74.0 74.0Trade and other receivables* 28.3 169.8Derivative financial instruments 16.9 - 813.0 1,071.8Current assetsInventory 43.8 40.4Trade and other receivables 460.5 458.9Derivative financial instruments 0.4 -Cash and cash equivalents 240.3 199.5 745.0 698.8 LIABILITIESCurrent liabilitiesTrade and other payables (533.8) (552.7)Current tax liabilities (115.1) (138.4)Provisions for other liabilities and charges (31.1) (24.8)Bank and other short term borrowings (108.5) (207.5)Derivative financial instruments (1.0) - (789.5) (923.4) Net current liabilities (44.5) (224.6) Non-current liabilitiesTrade and other payables (12.0) (10.8)Bank and other long term borrowings (1,072.1) (1,147.1)Deferred tax liabilities (43.3) (43.4)Retirement benefits 9 (182.3) (311.8)Provisions for other liabilities and charges (116.9) (118.1)Derivative financial instruments (1.5) - (1,428.1) (1,631.2) Net liabilities (659.6) (784.0) EQUITYCapital and reserves attributable to the Company's equity holdersCalled up share capital 18.1 18.1Share premium account 5.3 49.5Capital redemption reserve - 19.7Treasury shares (11.1) (11.1)Other reserves ** (1,714.1) 8.4Retained profit/(losses) ** 1,035.2 (878.7) (666.6) (794.1)Minority interest 7.0 10.1Total equity (659.6) (784.0) * Trade and other receivables reduced from the prior period primarily as aresult of the repayment of the Ashtead Loan Note. ** Reserves changed mainly following the creation of a new holding company undera court approved scheme of arrangement. Further details are contained in theInterim Report. Consolidated Cash Flow Statement FOR THE YEAR ENDED 31 DECEMBER 2005 2004 Notes £m £m (unaudited) (unaudited) Cash flows from operating activitiesCash generated from operating activities beforespecial pension contribution 476.5 566.3Special pension contribution (200.0) -Cash generated from operating activities 10 276.5 566.3Interest received 19.8 15.5Interest paid (63.4) (59.7)Income tax paid (80.5) (98.1)Net cash generated from operating activities 152.4 424.0 Cash flows from investing activitiesPurchase of property, plant and equipment (PPE) (183.8) (176.1)Purchase of intangible fixed assets (9.2) (4.7)Proceeds from sale of PPE 21.9 12.0Proceeds from sale of intangibles 0.1 -Acquisition of companies and businesses, net of cash (42.0) (27.5)acquiredProceeds from disposal of companies and businesses 323.3 6.7Dividends received from associates 1.0 3.8Net cash flows from investing activities 111.3 (185.8) Cash flows from financing activitiesIssue of ordinary share capital 5.7 0.3Purchase of own shares - (24.2)Dividends paid to equity shareholders (124.7) (113.5)Dividends paid to minority interests (2.6) (0.7)Interest element on finance lease payments (2.5) (2.4)Capital element of finance lease payments (19.1) (18.7)Proceeds on disposal of Ashtead loan note 129.8 -Net loan repayments (226.7) (197.0)Net cash flows from financing activities (240.1) (356.2) Net increase/(decrease) in cash and bank overdrafts 11 23.6 (118.0)Cash and bank overdrafts at beginning 145.2 247.3of yearExchange gains on cash and bank overdrafts 1.9 16.0Cash and bank overdrafts at end of the financial year 170.7 145.3 Notes to the accounts 1. Segmental Analysis 2005 2004(at actual exchange rates) £m £m (unaudited) (unaudited)Business Analysis Revenue Textiles & Washroom Services 705.3 686.2Pest Control 246.9 237.5Tropical Plants 112.9 105.1Electronic Security 263.4 242.4City Link 125.5 113.4 Manned Guarding 365.2 331.6Other 482.0 465.2Facilities Services 847.2 796.8 Continuing operations as reported 2,301.2 2,181.4 Operating Profit Textiles & Washroom Services * 94.3 145.7Pest Control 73.9 78.8Tropical Plants 7.2 7.9Electronic Security 32.8 36.4City Link 29.1 30.3 Manned Guarding 11.2 11.3Other 40.5 44.5Facilities Services 51.7 55.8 Central Items* (45.7) (46.4)Continuing operations as reported 243.3 308.5 Geographic Analysis Revenue United Kingdom 1,043.1 1,010.2Continental Europe 856.8 813.3North America 277.9 244.8Asia Pacific 89.6 82.3Africa 33.8 30.8Continuing operations as reported 2,301.2 2,181.4 Operating Profit United Kingdom 59.4 114.1Continental Europe 138.1 148.8North America 8.4 6.8Asia Pacific 24.2 26.0Africa 13.2 12.8Continuing operations as reported 243.3 308.5 * Includes exceptional items of £31.3m (2004: nil) in Textiles & WashroomServices and £10.9m (2004:25.7m) in Central Items Notes to the accounts 2005 2004 £m £m (unaudited) (unaudited) 2. Exceptional items Impairment of assets in UK Textiles business (a) 31.3 -Bid defence costs (b) 10.9 -Additional vacant property and environmental provisions - 19.7 (c)Potential uninsured loss on a discontinued business (d) - 6.0 42.2 25.7 (a) The linen and workwear business within the UK has been written down to its recoverable amount. (b) Costs incurred in defending potential take-over bid by Raphoe. (c) Increase in vacant property and environmental provisions in the UK and the US in respect ofspecific properties relating to businesses disposed of in prior years. (d) Provision for the potential uninsured loss made in respect of product supply by a discontinuedbusiness. 3. Interest payable and similar charges Interest payable on bank loans and overdrafts 27.0 27.5Interest payable on medium term notes issued 38.5 40.1Net interest receivable on fair value hedges (6.9) (6.5)Interest on defined benefit plan liabilities 46.8 41.3Interest payable on finance leases 2.5 2.5Foreign exchange (loss)/gain on translation of foreign denominated loans (0.8) 4.1Amortisation of discount on provisions 2.0 -Fair value loss on write off of Ashtead option 4.6 -Net ineffectiveness of fair value hedges (0.8) -Fair value loss on derivatives not designated in a hedge relationship 2.1 - 115.0 109.0 4. Interest receivable Bank interest 8.6 7.4Other interest 11.3 7.5Return on defined benefit plan assets 39.7 40.5 59.6 55.4 5. Income tax expense Analysis of charge in the year UK Corporation tax at 30% (2004: 30%) 12.3 30.7Double tax relief (5.4) (2.4) 6.9 28.3Overseas taxation 55.7 63.9Adjustment in respect of previous periods (13.0) (20.7)Total current tax 49.6 71.5 Deferred tax 1.9 (1.7)Total income tax expense 51.5 69.8 Notes to the accounts 2005 2004 £m £m (unaudited) (unaudited) The tax on the Group's profit before income tax differs from thetheoretical amount that would arise using the weighted average taxrate applicable to profits of the consolidated companies as follows: Profit before income tax (continuing operations) 190.1 256.7 Tax calculated at domestic tax rates applicable to profits in the 59.2 79.2respective countriesAdjustment in respect of previous periods (11.5) (20.6)Expenses not deductible for tax purposes - other 6.6 3.4Non-deductible exceptional items 1.2 9.3Income not subject to tax (1.8) (1.4)Goodwill deduction for which no deferred tax asset was recognised (1.9) (0.7)Utilisation of previously unrecognised tax losses (2.7) (2.1)Deferred tax on unremitted profits 1.5 2.7Other 0.9 - Total income tax expense (continuing operations) 51.5 69.8 6. Profit for the year from discontinued operations Style Other 2005 2004 £m £m £m £m (unaudited) (unaudited) (unaudited) (unaudited) Revenue 82.9 18.4 101.3 141.8Operating expenses (59.8) (18.3) (78.1) (123.8) Operating profit 23.1 0.1 23.2 18.0Finance costs - net (0.4) 0.1 (0.3) (0.4)Share of profit from associates disposed (net of tax) - - - -Profit before income tax 22.7 0.2 22.9 17.6Taxation (6.4) (0.4) (6.8) (9.1)Profit / (loss) after income tax from discontinued 16.3 (0.2) 16.1 8.5operations Profit / (loss) on disposal of subsidiary net assets 170.3 1.0 171.3 (3.3)Taxation - - - -Cumulative translation exchange loss* - (1.6) (1.6) - Total profit after income tax on disposal ofsubsidiary net assets 170.3 (0.6) 169.7 (3.3) Profit / (loss) on disposal of discontinued operations 186.6 (0.8) 185.8 5.2 * The cumulative translation exchange loss of £1.6m relating to discontinuedoperations has been recycled out of exchange reserves to the consolidated incomestatement. 7. Earnings per share 2005 2004 £m £m (unaudited) (unaudited) 2005 2004 Continuing operations Profit attributable to equity holders 135.7 185.2Weighted average number of shares 1,803.7 1,807.8Basic earnings per share 7.52p 10.24p Continuing and discontinued operations Profit attributable to equity holders 321.5 190.4Weighted average number of shares 1,803.7 1,807.8Basic earnings per share 17.82p 10.53p Weighted average number of ordinary shares in issue 1,803.7 1,807.8Adjustment for share options and deferred 1.1 -sharesWeighted average number of ordinary shares for diluted earnings per share 1,804.8 1,807.8 Diluted earnings per share from continuing and discontinued 17.81p 10.53poperations Notes to the accounts 8. Property, Plant and Equipment and and Plant and Vehicles and Rental Office Land & Equipment Equipment Total Buildings £m £m £m £mAt 1 January 2004Cost 310.0 745.9 248.8 1,304.7Accumulated depreciation and impairment (49.5) (461.3) (141.1) (651.9)Net book amount 260.5 (*) 284.6 (*) 107.7 652.8 Year ended 31 December 2004Opening net book amount 260.5 284.6 107.7 652.8Exchange differences (0.3) 1.2 (0.3) 0.6Additions 10.8 133.2 45.5 189.5Disposals (1.4) (2.3) (4.5) (8.2)Acquisition of subsidiaries 1.7 1.7 0.3 3.7Disposal of subsidiaries (2.9) (0.4) (1.1) (4.4)Reclassification (0.3) 0.6 (0.3) -Impairment charge (9.3) - - (9.3)Depreciation charge (5.2) (118.6) (39.2) (163.0)Closing net book amount 253.6 300.0 108.1 661.7 At 31 December 2004Cost 316.1 778.8 254.0 1,348.9Accumulated depreciation and impairment (62.5) (478.8) (145.9) (687.2)Net book amount 253.6 300.0 108.1 661.7 Year ended 31 December 2005Opening net book amount 253.6 300.0 108.1 661.7Exchange differences (1.2) (3.8) 0.3 (4.7)Additions 14.4 127.7 54.2 196.3Disposals (2.5) (2.1) (5.3) (9.9)Acquisition of subsidiaries 4.1 7.0 1.8 12.9Disposal of subsidiaries (140.9) (16.1) (2.2) (159.2)Reclassification - 0.8 (0.8) -Impairment charge (0.1) (30.6) (0.5) (31.2)Depreciation charge (5.3) (122.6) (40.5) (168.4)Closing net book amount 122.1 260.3 115.1 497.5 At 31 December 2005Cost 166.3 739.2 263.9 1,169.4Accumulated depreciation and impairment (44.2) (478.9) (148.8) (671.9)Net book amount 122.1 260.3 115.1 497.5 *On transition to IFRS, some assets have been reclassified from office equipmentto plant and equipment. Notes to the accounts 9. Retirement benefit obligations The principal scheme in the Group is the Rentokil Initial Pension Scheme ('RIPS') in the United Kingdom, which has anumber of defined benefit sections which are now closed to new entrants. On 19 December 2005, a detailedconsultation began between the Company and the members of the RIPS on the freezing of the future accrual of benefitsfor active members. The RIPS valuation was performed on the existing basis and therefore excludes the proposal tofreeze future accrual of pension benefits to active members. These defined benefit schemes are re-appraised annually by independent actuaries based upon actuarial assumptions inaccordance with IAS 19 requirements. The principal assumptions (based on a weighted average % of all defined benefit schemes) are shown below. 2005 2004 UK RIPS UK RIPSWeighted average %Discount rate 4.7% 5.3% Expected return on plan assets 6.3% 7.0%Future salary increases 3.6% 3.5%Future pension increases 2.8% 2.7% The amounts recognised in the balance sheet are determined as follows: 2005 2004 UK RIPS Other* Total UK RIPS Other Total Present value of funded obligations (1,029.2) (20.6) (1,049.8) (872.0) (18.4) (890.4) Fair value of plan assets 859.4 15.4 874.8 569.5 15.4 584.9 (169.8) (5.2) (175.0) (302.5) (3.0) (305.5)Present value of unfunded obligations - (7.3) (7.3) - (6.3) (6.3)(Liability) in the balance sheet (169.8) (12.5) (182.3) (302.5) (9.3) (311.8) The fair value of plan assets at the balance sheet date is invested as follows: Equity instruments 531.5 7.9 539.4 453.5 7.7 461.2 Debt instruments 129.2 6.8 136.0 116.0 7.0 123.0Property - 0.5 0.5 - 0.5 0.5Cash 198.7 0.2 198.9 - 0.2 0.2Total plan assets 859.4 15.4 874.8 569.5 15.4 584.9 The amounts recognised in the income statement are as follows: Current service cost ** 12.6 1.2 13.8 11.9 1.2 13.1Interest cost ** 45.8 1.0 46.8 40.7 0.6 41.3Amount charged to pension liability 58.4 2.2 60.6 52.6 1.8 54.4 Expected return on plan assets (39.1) (0.6) (39.7) (39.9) (0.6) (40.5)Total pension cost 19.3 1.6 20.9 12.7 1.2 13.9 * Other retirement benefit plans are predominantly made up of defined benefitplans situated in Ireland, Germany, Australia and Belgium. ** Service costs are charged to operating expenses and interest cost to interestpayable and receivable. Notes to the accounts 2005 2004 £m £m (unaudited) (unaudited)10. Cash generated from operations Profit for the year 324.4 192.1Adjustments for:- (Profit)/loss on disposal of companies and (169.7) 3.3businesses- Discontinued operation's tax and interest 7.1 9.5- Tax 51.5 69.8- Share of profit from associates (2.2) (1.8)- Interest income 115.0 109.0- Interest expense (59.6) (55.4)- Depreciation 168.4 163.0- Amortisation of customer lists 23.0 22.2- Amortisation of other intangible assets 3.6 3.5- Major non-cash items* 38.2 36.0- Profit on sale of property, plant and equipment (12.1) (4.0)Changes in working capital (excluding the effects of acquisitions andexchange differences on consolidation):- Inventories (3.6) 0.6- Trade and other receivables (37.9) (0.4)- Trade and other payables 30.4 18.9Cash generated from operations before special pension 476.5 566.3contributionSpecial pension contribution (200.0) -Cash generated from operating activities 276.5 566.3 * Major non-cash items include £31.3m asset impairment charges relating to UKTextiles, other impairment charge of £3.8m and share option charges. 11. Reconciliation of net increase/(decrease) in cash and bank overdrafts to net debt Net increase/ (decrease) in cash and bank 23.6 (118.0)overdraftsMovement on finance leases 2.3 3.8Movement on loans 226.7 197.0Decrease in debt resulting from cash flows 252.6 82.8Acquisitions (13.8) (0.4)Disposals 0.5 2.7Revaluation of net debt 8.1 -Net debt translation differences 1.4 (2.6)Movement on net debt in the year 248.8 82.5 Opening net debt (1,155.1) (1,237.6)Adoption of IAS 39 at 1 January (34.0) -2005 Revised opening net debt (1,189.1) (1,237.6) Closing net debt (940.3) (1,155.1) Closing net debt comprises: Cash and cash equivalents 240.3 199.5Bank and other short term borrowings (108.5) (207.5)Bank and other long term borrowings (1,072.1) (1,147.1)Total net debt (940.3) (1,155.1) 12. Free cash flow Net cash flows generated from operating activities 152.4 424.0Add back: special pension contribution 200.0 - 352.4 424.0Purchase of property, plant and equipment (PPE) (183.8) (176.1)Purchase of intangible fixed assets (9.2) (4.7)Leased property, plant and equipment (16.9) (14.9)Proceeds from sale of PPE and intangible assets 22.0 12.0Dividends received from associates 1.0 3.8Dividends paid to minority interests (2.6) (0.7)Interest element on finance lease payments (2.5) (2.4) Free cash flow 160.4 241.0 Notes to the accounts 13. The financial information in this statement is not audited and does not constitute statutory accounts within the meaning of s.240 of the Companies Act 1985 (as amended). Full accounts for Rentokil Initial plc for the year ended 31 December 2004 have been delivered to the Register of Companies. The auditors' report on these accounts was unqualified and did not contain a statement under Section 237(2) or Section 237(3) of the UK Companies Act 1985. 14. The financial information in this statement contains extracts from the 2005 Annual Report, which will be issued in April 2006 and prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted for use in the European Union. The Accounting Policies (that comply with IFRS and IAS) adopted by Rentokil Initial plc (the "Group") are set out in the 2005 Interim Report and will be presented in our 2005 Annual Report. Under the transitional rules of IFRS 1, most IFRS standards have been applied fully retrospectively. The significant exemptions under IFRS 1 that have not been adopted include business combinations and fair value as deemed costs. The Group has elected to adopt IFRS 3 retrospectively to business combinations made since 1 January 1998. As a result, goodwill arising from past business combinations from 1 January 1998 has been restated under IFRS at 1 January 2004 ("Transition Date"). In addition, the option to fair value Property, Plant and Equipment at Transition Date has not been adopted. The Group has adopted the amendments to IAS 19 and elected to recognise all cumulative actuarial gains and losses in relation to employee benefit schemes on Transition Date. From 1 January 2005 the Group has applied IAS 32, IAS 39, IFRS 4 and IFRS 5. The impact of the restatement of previously published financial information under UK GAAP (on an IFRS basis) was publicly disclosed on 20 July 2005. The restated results have been fully adopted in these financial statements, except that the UK defined benefit pension fund deficit under IAS 19 has been restated after the Group's actuary finalised their work on the April 2005 triennial valuation for the fund. The deficit under IAS 19 as at 31 December 2004 was £35.5m higher than what was previously reported. This change has now been reflected in the comparative balance sheet in these financial statements. In accordance with IFRS 5, the restated consolidated income statements previously disclosed have been updated to reflect the impact of current period discontinued businesses on the comparatives. 15. There will be a presentation to analysts at 9:45am today at the offices of UBS at 1 Finsbury Avenue, London EC2M 2PP. A copy of the slides and a live webcast of the presentation will be available via the Company's website (www.rentokil-initial.com) as well as a playback as soon as practicable after the presentation closes. 16. Copies of the Annual Report will be dispatched to shareholders and will also be available from the company's registered office at Belgrave House, 76 Buckingham Palace Road, London SW1W 9RF. 17. Financial Calendar Final dividend to be paid on 2 June 2006 to shareholders on the register on 5 May 2006. Annual Report expected to be dispatched to shareholders in April 2006. Annual General Meeting at No. 4 Hamilton Place, London W1 on 18 May 2006 at 11.00am. Appendix A SUPPLEMENTARY INFORMATION Divisional Analysis - 2005 on a quarterly basis (at constant exchange rates)(based upon the way businesses are managed) 3 months to 3 months to 3 months to 3 months to Year to 31 Mar 30 Jun 30 Sep 31 Dec 31 Dec 2005 2005 2005 2005 2005(at 2005 constant exchange rates) £m £m £m £m £m (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)Business Analysis Revenue Textiles & Washroom Services 158.7 162.7 161.1 160.5 643.0Pest Control 50.0 53.4 53.8 52.2 209.4Tropical Plants 22.9 24.5 23.9 31.1 102.4Electronic Security 61.2 66.1 61.7 74.4 263.4City Link 25.4 32.1 27.0 41.0 125.5 Manned Guarding 82.8 90.7 92.3 99.4 365.2Other 112.8 114.3 112.6 130.3 470.0Facilities Services 195.6 205.0 204.9 229.7 835.2 Asia Pacific 21.6 22.3 22.5 23.2 89.6Other 8.0 8.2 8.1 8.4 32.7Continuing operations at 2005 constantexchange rates 543.4 574.3 563.0 620.5 2,301.2Exchange (0.5) (3.8) 1.5 2.8 -Continuing operations as reported* 542.9 570.5 564.5 623.3 2,301.2 Operating Profit* Textiles & Washroom Services 30.2 31.1 31.0 23.1 115.4Pest Control 15.3 16.7 18.1 17.1 67.2Tropical Plants 1.2 1.9 1.8 4.6 9.5Electronic Security 7.9 9.3 9.0 9.6 35.8City Link 5.1 7.4 6.1 10.5 29.1 Manned Guarding 2.5 3.4 3.4 4.9 14.2Other 9.4 7.3 9.8 8.3 34.8Facilities Services 11.9 10.7 13.2 13.2 49.0 Asia Pacific** 5.5 5.9 5.7 6.2 23.3Other 3.1 3.2 3.1 3.3 12.7Central Items (6.9) (11.6) (6.9) (8.1) (33.5)Continuing operations at 2005 constantexchange rates 73.3 74.6 81.1 79.5 308.5Exchange 0.4 (0.6) 0.1 0.1 -Continuing operations as reported* 73.7 74.0 81.2 79.6 308.5 Geographic Analysis Revenue United Kingdom 245.3 262.7 246.4 288.7 1,043.1Continental Europe 206.5 216.1 213.1 221.1 856.8North America 61.5 64.8 72.6 79.0 277.9Asia Pacific 21.7 22.3 22.5 23.1 89.6Africa 8.4 8.4 8.4 8.6 33.8Continuing operations at 2005 constantexchange rates 543.4 574.3 563.0 620.5 2,301.2Exchange (0.5) (3.8) 1.5 2.8 -Continuing operations as reported* 542.9 570.5 564.5 623.3 2,301.2 Operating Profit* United Kingdom 26.2 23.2 23.9 30.9 104.2Continental Europe 36.4 39.0 44.6 32.3 152.3North America 1.8 2.8 3.4 6.4 14.4Asia Pacific 5.7 6.2 5.9 6.5 24.3Africa 3.2 3.4 3.3 3.4 13.3Continuing operations at 2005 constantexchange rates* 73.3 74.6 81.1 79.5 308.5Exchange 0.4 (0.6) 0.1 0.1 -Continuing operations as reported* 73.7 74.0 81.2 79.6 308.5 * Before amortisation of customer lists and items identified as exceptional ** The business analysis for Asia Pacific includes UK Sector costs which areincluded in the UK in the Geographic Analysis. Appendix B Divisional Analysis - 2005 on a quarterly basis (at actual exchange rates)(based upon the way businesses are managed) 3 months to 3 months to 3 months to 3 months to Year to 31 Mar 30 Jun 30 Sep 31 Dec 31 Dec 2005 2005 2005 2005 2005(at actual exchange rates) £m £m £m £m £m (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)Business Analysis Revenue Textiles & Washroom Services 160.1 161.7 161.1 160.1 643.0Pest Control 50.2 53.0 53.9 52.3 209.4Tropical Plants 22.4 24.2 24.2 31.6 102.4Electronic Security 61.4 65.8 61.7 74.5 263.4City Link 25.4 32.1 27.0 41.0 125.5 Manned Guarding 81.1 89.5 93.1 101.5 365.2Other 112.9 114.2 112.6 130.3 470.0Facilities Services 194.0 203.7 205.7 231.8 835.2 Asia Pacific 21.2 22.1 22.7 23.6 89.6 Other 8.2 7.9 8.2 8.4 32.7Continuing operations as reported 542.9 570.5 564.5 623.3 2,301.2 Operating Profit* Textiles & Washroom Services 30.8 30.8 31.0 22.8 115.4Pest Control 15.2 16.6 18.2 17.2 67.2Tropical Plants 1.1 1.9 1.8 4.7 9.5Electronic Security 8.0 9.2 9.0 9.6 35.8City Link 5.1 7.4 6.1 10.5 29.1 Manned Guarding 2.4 3.3 3.5 5.0 14.2Other 9.4 7.4 9.7 8.3 34.8Facilities Services 11.8 10.7 13.2 13.3 49.0 Asia Pacific** 5.3 5.9 5.8 6.3 23.3Other 3.2 3.1 3.1 3.3 12.7Central Items (6.8) (11.6) (7.0) (8.1) (33.5)Continuing operations as reported* 73.7 74.0 81.2 79.6 308.5 Geographic Analysis Revenue United Kingdom 245.3 262.7 246.4 288.7 1,043.1Continental Europe 209.0 214.2 213.3 220.3 856.8North America 58.9 63.3 73.7 82.0 277.9Asia Pacific 21.2 22.1 22.7 23.6 89.6Africa 8.5 8.2 8.4 8.7 33.8Continuing operations as reported* 542.9 570.5 564.5 623.3 2,301.2 Operating Profit* United Kingdom 26.2 23.2 23.9 30.9 104.2Continental Europe 36.7 38.6 44.6 32.4 152.3North America 1.7 2.8 3.4 6.5 14.4Asia Pacific 5.7 6.2 6.0 6.4 24.3Africa 3.4 3.2 3.3 3.4 13.3Continuing operations as reported* 73.7 74.0 81.2 79.6 308.5 *Before amortisation of customer lists and items identified as exceptional ** The business analysis for Asia Pacific includes UK Sector costs which areincluded in the UK in the Geographic Analysis. 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