Rentokil Initial Regulatory News (RTO)

22 Feb 2007 07:02

Rentokil Initial PLC22 February 2007 22 February 2007 RENTOKIL INITIAL PLC (RTO) PRELIMINARY RESULTS FOR YEAR ENDED 31 DECEMBER 2006 Financial Highlights • Revenue up in all divisions: Q4 up 17.5%, full year up 13.2% • Organic revenue: Q4 up 2.2%; full year up 3.1% • Contract portfolio up in all divisions • Further progress in contract retention, at 88.5% for full year vs. 87.1% last year • Q4 adjusted operating profit and adjusted profit before tax up 4.3% and 1.0% • Full year adjusted operating profit and adjusted profit before tax both down 6.2% • Profit for year from continuing operations £154.3m (2005: £158.0m) • Dividend for year maintained at 7.38p Operating and Strategic Highlights • Good operational progress with major restructuring in UK Pest Control and Washroom • Economic conditions continue to challenge European Textiles & Washroom Services • Continued investment in strong growth markets - particularly in Pest Control, Parcel Delivery and Asia Pacific • 71 acquisitions completed in year for total spend of £418m; disposal proceeds of £144m • Integration of Target Express on track and Parcel business performing strongly • Strategic review of Electronic Security: formal sale process commenced January 2007 Doug Flynn, Chief Executive Officer of Rentokil Initial plc, said: "In 2006 we made good progress against our stated objectives. We have improvedcustomer retention rates in all our divisions which in turn has helped drivestrong revenue growth. Our profitability is starting to improve in manybusinesses and the full year results were in line with expectations. "We are seeking to rebalance the portfolio towards future growth and I ampleased with the progress we have made in building leadership positions inmarkets around the world through a combination of acquisitions and operationalimprovements. "We are seeing good momentum across large parts of the group and overall weexpect 2007 to be a year of stabilisation. However, there remains much to do.In particular, we are focused on our Textiles and Washroom Services operationsin general and especially in the UK and France. I am confident that the changesintroduced will deliver results in all our businesses. This will not happenovernight but the right team is now in place and the right actions are beingtaken." Financial Summary Fourth Quarter Full Year £million 2006 2005 change 2006 2005 change Pro forma Continuing Operations1 At 2005 constant exchange rates2 Revenue 598.7 509.5 17.5% 2,134.4 1,885.2 13.2% Operating profit before amortisation of 72.4 72.4 - 277.4 290.3 (4.4%)intangibles3 Add back: one-off items 16.7 13.0 28.5% 23.6 30.5 (22.6%) Adjusted operating profit4 89.1 85.4 4.3% 301.0 320.8 (6.2%) Share of profit from associates (net of tax) 0.4 0.5 (20.0%) 2.1 2.2 (4.5%) Interest (16.4) (13.5) (21.5%) (51.7) (54.9) 5.8% Profit before income tax3 56.4 59.4 (5.0%) 227.8 237.6 (4.1%) Adjusted profit before income tax4 73.1 72.4 1.0% 251.4 268.1 (6.2%) Continuing Operations1 At actual exchange rates Revenue 590.2 509.5 15.8% 2,124.7 1,885.2 12.7% Operating profit before customer list 70.8 72.4 (2.2%) 275.0 290.3 (5.3%)amortisation Amortisation of intangible assets5 (8.8) (4.7) (87.2%) (25.9) (20.2) (28.2%) Operating profit 62.0 67.7 (8.4%) 249.1 270.1 (7.8%) Share of profit from associates (net of tax) 0.4 0.5 (20.0%) 2.0 2.2 (9.1%) Net interest payable (16.6) (13.5) (23.0%) (52.0) (54.9) 5.3% Profit before income tax 45.8 54.7 (16.3%) 199.1 217.4 (8.4%) Free cash flow6 128.6 160.4 (19.8%) Basic earnings per share (continuing operations) 8.43p 8.60p (2.0%) Dividend per share (proposed) 5.25p 5.25p - 1All figures are for continuing operations and are unaudited. The UK linen andworkwear business has been treated as discontinued along with the UK, Canadian,Belgian and US manned guarding businesses. See note 6 2Results at constant exchange rates have been translated at the full yearaverage exchange rates for the year ended 31 December 2005. £/$ average rates:FY 2006 1.8469; FY 2005 1.8217. £/• average rates: FY 2006 1.4659; FY 20051.4598. 3Before amortisation of intangible assets (excluding computer software anddevelopment costs) of £25.9m (2005: £20.2m). 4Before amortisation of intangible assets (excluding computer software anddevelopment costs) of £25.9m (2005: £20.2m) and items of a one-off nature of£23.6m (2005: £30.5m). See appendix 4 for further details. In 2005, the costsof defending the approach from Raphoe amounting to £10.9m were treated as anexceptional item. In order to improve comparability, these costs have beenreclassified as a one-off item. This treatment will be adopted in the 2006financial statements. 5All intangible assets (excluding computer software and development costs). 6Cash flow before acquisitions, disposals, equity dividend payments and specialpension contribution. For further information Shareholder/analyst enquiries:Andrew Macfarlane, Chief Financial Officer Rentokil Initial plc 020 7866 3000Lisa Williams, Head of Investor Relations Media enquiries:Malcolm Padley, Head of Corporate Communications Rentokil Initial plc 07788 978 199John Sunnucks, Kate Holgate Brunswick Group 020 7404 5959 A presentation for analysts and shareholders will be held on Thursday 22 February at 9:45am. This will be available viaa live audio webcast at http://www.rentokil-initial.com/. This announcement contains statements that are, or may be, forward-lookingregarding the group's financial position and results, business strategy, plansand objectives. Such statements involve risk and uncertainty because theyrelate to future events and circumstances and there are accordingly a number offactors which might cause actual results and performance to differ materiallyfrom those expressed or implied by such statements. REVIEW OF THE YEAR 2006 was an important year in the company's journey towards recovery. Prioritieswere to generate growth in revenue and customer retention, build organicrevenue, strengthen market positions, create the right management team andstructure, address deep-seated operational problems in some specific businesses,embed a more customer focused culture and improve productivity. It was a largeagenda, designed to build a platform from which to create sustainable value. During the year, the company made over 70 acquisitions at a net cost of £418million. Of these, over 50 were small deals of less than £1 million each whichwere immediately bolted on to existing operations to secure benefits of densityand scale, complementing organic growth within those businesses. MannedGuarding and a number of smaller businesses were exited generating net disposalproceeds of £144 million. These transactions were based on our commitment toenhance shareholder value by building on strong market positions while exitingbusinesses which are worth more to others. In March the company acquired JC Ehrlich, the fourth largest pest controlcompany in the USA. It has now fully integrated the existing US Rentokilbusinesses and is performing well in the world's largest pest control market. The transformation of City Link into an integrated parcel delivery businesscontinued throughout the year. Good progress was made in the franchise buy backprogramme, which we expect to complete ahead of schedule. Target Express,acquired in November for £212 million, will be integrated with City Link tocreate a leading overnight parcel delivery business with a number two positionin the UK market. Target Express and City Link are highly complementaryoperations and have maintained reliability rates of over 98%. Their merger isproceeding smoothly and to plan. In Asia Pacific, the division is undergoing an acquisition-led transformation.25 acquisitions were completed in 2006 for a net consideration of £45 million.These deals enabled the business to consolidate its market positions (such asPink Healthcare in Australia) and enter new markets (such as textiles and matsin China and washroom services in Vietnam). The business exited the year in afar stronger position, better able to play a more dynamic role in this highgrowth region. Textiles and Washroom Services continued to face challenges in both continentalEurope and the UK. In Europe, soft demand and overcapacity has impeded thedivision's ability to raise prices despite higher costs. The UK suffered from ahigh level of terminations from washroom customers who had previously also takenlinen and workwear services. Actions are being taken to address these issues. In the UK, Initial Facilities Services has been an important contributor to thecross-selling of other company services and has provided the infrastructure formuch of the new Shared Service Centre in Dudley. UK Cleaning continues toperform well and the acquisition of Insitu provided additional expertise withinthe large scale shopping centre and leisure markets. Operationally the company continued to work on fixing the deep-seated problemsin a number of specific businesses and progress was made during the year. Forexample, Washroom and Pest Control in the UK have put in place neworganisational structures. These are major reorganisations which move thebusinesses away from the traditional branch-based business model to one which iscloser to customers, whilst reducing the cost base. Productivity and process improvement remains an important on-going operationaltheme. There is considerable scope throughout the company to improve processesand introduce more efficient structures. Current business processes are beingchallenged and where necessary smarter ways of working introduced. This includesa wider roll-out of technology, such as handheld PDA devices for servicepersonnel, and centralised customer service and back office functions in the UK.Laptops integrated with central contract services are progressively beingintroduced for sales personnel. At the group's head office, certain functionshave been rationalised and headcount reduced. Responsibility for activities suchas R&D and health & safety has been transferred to the divisions. Across the company, far greater attention is being focused on meeting customerneeds with detailed market segmentation research leading progressively to betterdifferentiated service offerings. For example, Rentokil has developed a 'highdependency' pest control unit in the UK which specialises in meeting the pestcontrol needs of customers within the food and pharmaceutical industries. Throughout the year, the company delivered an improving trend in customerretention rates. This continues to be a major focus, particularly in thosebusinesses which have an historically poor record such as UK Pest Control. InAsia Pacific, following the success of a retention initiative called Destinasi100 in Malaysia, the programme is being extended to other countries across theregion. Strategic Review of Initial Electronic Security In November, the company announced that it was undertaking a strategic review ofthe Electronic Security division in Europe and the USA. Following thatannouncement, strong interest in purchasing the business was expressed by arange of credible potential purchasers. Accordingly a formal sale processcommenced in January 2007. This process is ongoing and second roundparticipants have been selected, with resolution expected by June. Net proceedswould be used to pay down debt. Outlook for 2007 The company expects to make good progress in Pest Control, Parcel Delivery andAsia Pacific but market conditions in continental Europe will continue to impactTextiles & Washroom Services. Overall, the company expects 2007 to be a year of stabilisation, building on theprogress made in 2006 in revenue growth - particularly organic growth - andimprovements in contract retention rates. At this time, profits for the yearare expected to be in line with 2006. Some regression is expected in the first quarter of 2007 due to a number ofspecific factors not least the declining trends in Textiles & Washroom Serviceswhich were still apparent in the fourth quarter. However, we have recentlybegun to see some improvement in portfolio development in this division and ifthese trends continue, we would expect to improve on the position for the year. The dividend policy is unchanged; the company will continue to take a cautiousapproach to dividend growth until the recovery in the businesses is wellestablished. OPERATING REVIEW In all cases, references to operating profit are for continuing businessesbefore amortisation of intangible assets (other than computer software anddevelopment costs). References to adjusted operating profit and adjusted profitbefore tax and amortisation (PBTA) also exclude items of a one-off nature,totalling a net cost of £23.6 million (2005: £30.5 million) that have impactedthe results for the period. They primarily relate to the group's restructuringprogrammes and consist of the profit on the sale of the former head office,consultancy, reorganisation and redundancy costs and a pension curtailmentcredit. These have been separately identified because they are not considered tobe "business as usual" expenses and, although they are small, they are numerousand have a varying impact on different businesses and reporting periods. Ananalysis of these costs by division is provided in appendix 4. This commentaryreflects the management divisional structure and not the statutory segmentalinformation (see note 1c). All comparisons are at constant 2005 full yearaverage exchange rates. Fourth Quarter Revenue for continuing businesses was 17.5% higher than last year at £598.7million. Organic revenue growth was 2.2%. All divisions reported higherrevenue other than the small South African business. The greatest progress wasmade by Pest Control, Parcel Delivery and Asia Pacific. Excluding the impact ofacquisitions, Textiles & Washroom Services, Parcel Delivery, Facilities Servicesand Asia Pacific all achieved organic revenue growth. The quarterly portfoliogain of 3.4% or £53.5 million was made up of new business wins of £46.0 million,acquisitions of £30.7 million and net additions/reductions of £15.7 millionoffset by terminations of £38.9 million, implying a customer retention rate of89.5% (2005: 87.3%). Adjusted operating profit grew by 4.3% versus the samequarter a year ago to £89.1 million with solid growth in Parcel Delivery,Facilities Services and Asia Pacific. Adjusted profit before tax rose 1.0% to£73.1 million. Net margin declined to 14.9% (2005: 16.8%). Profit beforeincome tax was £45.8 million (2005: £54.7 million). Full Year Full year revenue of £2,134.4 million was 13.2% higher than 2005 with allsegments increasing their revenue. Organic revenue growth was reported by allbusinesses except Electronic Security. Total organic growth for the year was3.1%. Over the year the contract portfolio expanded by £158.8 million or 11.6%.New business wins contributed £178.0 million, acquisitions £93.6 million andnet additions/reductions £45.4 million whilst terminations were £158.2 million.The group's overall customer retention rate was 88.5% compared to 87.1% for2005. Adjusted operating profit fell by 6.2% with gains in Pest Control,Electronic Security, Parcel Delivery and Asia Pacific offset by the otherdivisions. Adjusted profit before tax of £251.4 million was a 6.2% decline onlast year. Net margin was 14.1% for the year, compared with 17.0% last year.Profit for the year from continuing operations was £154.3 million (2005: £158.0million). DIVISIONAL PERFORMANCE Textiles and Washroom Services £ million Fourth Quarter Full Year 2006 2005 change 2006 2005 change At 2005 constant exchange rates: Portfolio - net movement (appendix 1) 6.6 (2.5) 9.5 14.2 Revenue 153.4 148.2 3.5% 597.4 593.7 0.6% Operating profit (before amortisation of intangible 23.8 23.5 1.3% 92.5 122.3 (24.4%)assets1) One-off items 2.9 7.7 (62.3%) 16.3 11.6 40.5% Adjusted operating profit (before one-off items andamortisation of intangible assets1) 26.7 31.2 (14.4%) 108.8 133.9 (18.7%) 1 Other than computer software and development costs The Textiles and Washroom Services division had a difficult year with adjustedoperating profit down 18.7% on broadly flat revenue. The UK business, whichaccounts for 14% of divisional revenue, is being restructured and tough marketconditions in the major countries in western Europe combined with a sizeableincrease in sales investment had a significant adverse effect on margins. The UK business underwent a number of fundamental changes in the year which,although impacting on performance in 2006, will create a platform for thedevelopment of a much stronger and more profitable business going forward. Theloss-making linen and workwear activities were closed on 30 April and have beentreated as discontinued. The structure of the remaining washroom business wascompletely overhauled as the two legacy washroom businesses were integrated, aprocess which could not commence until linen and workwear had been separatedout. At the start of the year the combined business operated from 50 branches.By year end, this had transitioned to 25 multi-service centres with some keyfunctions previously carried out at branch level being transferred tocentralised customer handling and back office facilities. The action taken inthe UK business in 2006 will reduce its cost base by £3 million per annum andthe restructuring is expected to be completed by the end of 2007. The one-offcosts incurred in 2006 in the UK were £5.1 million. Inevitably, such a highlevel of change negatively affected performance of the UK business. Inparticular, a high level of terminations was recorded in the second and thirdquarters from washroom customers who had previously also taken linen andworkwear services, although this began to stabilise in the fourth quarter. As aresult, revenue declined by 5.7% in the UK compared with the prior year andadjusted operating profit fell by £13.8 million. In France, the industrial sector of the textiles business BTB was reorganisedwhereby processing is run centrally whilst sales, service and delivery remainlocal functions. The reorganisation aims to facilitate the development of amore coherent approach to plant investment and capacity utilisation and a moreactive and professional sales management. However, the difficult marketenvironment of soft demand and aggressive price competition prevented thebusiness from realising the full benefits of the structural change in 2006.Consequently although revenue in France grew by 1.3% in 2006, adjusted operatingprofit fell by 15.9%. During 2006, BTB received a formal complaint from theFrench Competition Council alleging that certain activities in a period between1997 and 2002 infringed French competition law. After taking appropriate legaladvice, the group has made a provision in respect of the possible regulatoryfine to be imposed by the French authorities. While the provision representsour current best estimate of the liability that may arise, it is possible thatthe ultimate liability may be different from the amount of the provisioncurrently recorded. The amount of the provision is not disclosed to avoidprejudicing the group's position in this matter. Revenue in the Netherlands fell by 3.1% compared with last year because strongcompetitive pressure in the second half of 2005 and first half of 2006 resultedin a net loss of portfolio. Our ability to control costs due to greater routedensity in this market limited the impact of lower revenue on adjusted operatingprofit, which declined by 3.6%. In Germany, revenue increased by 3.4% in 2006. However, adjusted operatingprofit was 7.1% lower as a result of continuing losses in the hospital servicesbusiness and cost inflation in excess of the price increases we could achieve inthe market. Closure and restructuring costs of £5.8 million were recognised in2006 as one-off items. A plant review programme commenced during the yearreflecting our desire to exit low margin activities in the south of Germany. Itis anticipated that this will be implemented by the fourth quarter of 2007. Theestimated saving is £2 million per year which will be achieved in 2008. Revenue increased in the division's business in Belgium by 1.2% over last yearbut again higher costs resulted in a decline in adjusted operating profit of2.6%. A new plant will come on stream in Lokeren in the middle of 2007 whichwill improve productivity in 2008. Most of the division's smaller European businesses recorded higher revenue in2006, including strong double digit growth in Austria, Spain, Finland, Portugaland the Czech Republic and mid to high single digit growth in Denmark andSwitzerland. Operating profit came under pressure due to rising costs -principally investment in sales and service capacity - and competitive pressurewith only Austria, Portugal, Switzerland and Spain making progress against lastyear. The integration of the two legacy washroom businesses moved forward during 2006in the majority of the European markets. As well as creating a more efficientstructure and improving service performance, the aims of the integrationincluded changing the focus of these operations from selling products to sellingservices and introducing the full range of washroom services and mats to allmarkets. A number of capital investment programmes were underway in this division in2006, several of which will complete in 2007. These will either upgradeexisting facilities or provide market entry. They include Amstetten in Austria,Lokeren in Belgium, Brie-Comte Robert in France and Prague in the CzechRepublic. The total investment associated with these projects is estimated tobe £24 million of which £10 million was spent in 2006 with the balance to followin 2007. Pest Control £ million Fourth Quarter Full Year 2006 2005 change 2006 2005 change At 2005 constant exchange rates: Portfolio - net movement (appendix 1) 1.0 0.9 54.0 3.9 Revenue 70.4 52.3 34.6% 280.0 209.4 33.7% Operating profit (before amortisation of intangible 10.7 17.2 (37.8%) 61.6 67.2 (8.3%)assets1) One-off items 4.6 (1.7) - 6.8 (1.7) - Adjusted operating profit (before one-off items andamortisation of intangible assets1) 15.3 15.5 (1.3%) 68.4 65.5 4.4% 1 Other than computer software and development costs Improving the performance of the UK pest control business, which had revenue of£66 million in 2006, is an important part of the group's overall strategy. Anew management team - largely recruited from outside the group - took charge inthe UK in the first half of the year and major changes to the structure of thisbusiness are now underway with a focus on creating a customer-centricorganisation. The old 26 branch structure is being replaced by a large number offield based sales and service teams focused on the smaller local customer base,a team of technicians dedicated to meeting the demanding service needs of thehigh dependency segment (such as food manufacturers and national food retailers)and new business development via sector-specific sales teams. Customer servicefunctions have moved to a new national customer contact centre in Dudley andadministration support has been regionalised. The business has been de-layeredto improve responsiveness with some 25% of management and administrative postseliminated. The restructuring will be completed by the end of 2007. Theone-off costs for this programme are £4-5 million and were largely incurred inthe fourth quarter. They are expected to be recovered in less than three yearson cost savings alone. Revenue in the UK fell by 3.9% in 2006 versus the prioryear. The portfolio declined as the high - but improving - termination rate wasoffset by a weaker sales performance during a year of substantial organisationalchange. Lower revenue impacted adjusted operating profit, which fell by £4.5million for the year. There was a marked improvement in customer retentionrates, from 76.3% at the start of the year to 80.3% at the end. The division's operations in continental Europe continued to build on theprogress made in 2005. Customer retention rates improved from 85.4% to 86.0%during the course of the year. Service performance increased and staff churnimproved, particularly for technicians. Revenue for the European operationsgrew by 6.1% over the previous year with increases achieved by almost allcountries. The key European markets of France, Germany and Netherlands achievedhigh single digit revenue growth with Spain and Italy recording double digitgrowth. Adjusted operating profit was 8.8% higher than last year in continentalEurope with all of the large operations coming in ahead of 2005. In North America, 2006 was dominated by the acquisition of JC Ehrlich, which wascompleted at the beginning of March and established the division's US businessas the fourth largest in its market. The assimilation of Ehrlich is nowcomplete with integration costs of £0.9 million incurred in 2006. Costsynergies of some £0.8 million a year are anticipated and these will start tocome through in the first half of 2007. The scale of the Ehrlich acquisitioncompared to our pre-existing business makes revenue and operating profitcomparisons with the previous year meaningless. However, the North Americanbusiness performed well in 2006 and in line with our expectations; Ehrlich's2006 revenues were 8% up on 2005. Tropical Plants £ million Fourth Quarter Full Year 2006 2005 change 2006 2005 change At 2005 constant exchange rates: Portfolio - net movement (appendix 1) 2.0 0.5 4.0 7.1 Revenue 32.3 31.6 2.2% 106.6 102.4 4.1% Operating profit (before amortisation of intangible 4.3 4.7 (8.5%) 7.5 9.5 (21.1%)assets1) One-off items 0.3 - - 0.6 - - Adjusted operating profit (before one-off items andamortisation of intangible assets1) 4.6 4.7 (2.1%) 8.1 9.5 (14.7%) 1 Other than computer software and development costs The division's largest operation, representing 58% of 2006 revenues, is in theUSA and 2006 was another strong year for the US business, which is the onlyplayer in the market able to offer a national service to large, multi-siteorganisations. US revenue increased by 4.6% in 2006 and adjusted operatingprofit increased by 4.1%. The portfolio grew by over 5.4% with improvedcustomer retention and a solid Holiday/Christmas performance in Q4. Tropical Plants' performance outside North America has generally disappointed.Although a relatively small business in group terms, it has the potential to dobetter and management changes were made in 2006 to facilitate this. Thebusiness will be rebranded to improve its market profile and to help driverevenue growth. In the UK, revenue declined by 3.9% which had a significant impact on theprofitability of the business with adjusted operating profit down 18.5%. Theportfolio was affected by high terminations and weak sales performance,compounded by high sales headcount churn. Continental Europe recorded revenue5.5% higher than last year with increases achieved by many of the largerbusinesses including the Netherlands, Belgium, Sweden and Norway. Despitehigher revenue, adjusted operating profit declined overall in continental Europewith all markets behind last year. Electronic Security £ million Fourth Quarter Full Year 2006 2005 change 2006 2005 change At 2005 constant exchange rates: Portfolio - net movement (appendix 1) 3.6 3.8 4.8 9.5 Revenue 78.5 74.5 5.4% 282.1 263.4 7.1% Operating profit (before amortisation of intangible 14.0 9.6 45.8% 39.4 35.8 10.1%assets1) One-off items - 1.2 - 1.0 1.4 (28.6%) Adjusted operating profit (before one-off items andamortisation of intangible assets1) 14.0 10.8 29.6% 40.4 37.2 8.6% 1 Other than computer software and development costs The division performed well in 2006. In the UK, revenue was 6.9% higher thanlast year with increases for both Fire & Security and Systems. Adjustedoperating profit was also higher for both businesses resulting in an increase of9.4% for the UK as a whole. UK Systems was impacted in the first half of theyear by a delay in the start-up of business already won but this reversed to acertain extent in the second half. The portfolio increased, largely as a resultof the two acquisitions made during the year but also due to higher retention.Specific programmes aimed at tackling terminations introduced in the second halfhelped to increase retention by one percentage point to 90%. Revenue and adjusted operating profit increased by 9.9% and 8.5% respectively inthe French business. Portfolio growth of £2.2 million came from organic netgain through the branch network and from acquisitions, of which five were madein 2006. Retention remained at a solid 91%. The Netherlands, which has been the subject of a performance improvementprogramme for the past year, saw revenue fall by 4.1% as less profitable workwas shed. Despite lower revenue, adjusted operating profit increased by 10.9%due to gross margin improvements and cost base reductions achieved by theperformance improvement programme. The portfolio grew due to net gain andretention is the highest in the division at 93%. In the small US business, strong revenue and operating profit increases wererecorded, mostly as a result of acquisitions. Revenue was 63% higher andadjusted operating profit almost tripled. Parcel Delivery £ million Fourth Quarter Full Year 2006 2005 change 2006 2005 change At 2005 constant exchange rates: Revenue 86.9 41.0 112.0% 213.3 125.5 70.0% Operating profit (before amortisation of intangible 14.3 10.5 36.2% 34.8 29.1 19.6%assets1) One-off items 1.3 0.4 225.0% 1.3 0.7 85.7% Adjusted operating profit (before one-off items andamortisation of intangible assets1) 15.6 10.9 43.1% 36.1 29.8 21.1% 1 Other than computer software and development costs Parcel Delivery volumes and revenue grew well above market rates, despite adecline in revenue per consignment experienced by the UK express parcelsindustry in general. Organic revenue growth was 9.7%. Adjusted operatingprofit performance was ahead of expectations as the business performed verystrongly, despite the potential for disruption with the integration of acquiredfranchises and the acquisition of Target Express. 2006 saw the beginning of the transformation of City Link from a hub andtrunking operation to a fully integrated parcel delivery service. There weretwo important strategic developments: the buy back of franchise businessesduring the course of the year and the acquisition of Target Express in November. Nine franchise businesses were acquired during 2006, representing 33territories. The total acquisition spend on franchises during the year was£50.1 million. By the end of the year, City Link owned 80% of its network,representing 57 of the 69 territories. Target Express was acquired for £212 million in November. Target Express andCity Link are highly complementary businesses with similar operating models andstrong cultures based on customer service and operational excellence. Bringingthem together will create a leading UK overnight parcels operator able to meetthe increased demands of current and prospective customers in a dynamicmarketplace. The integrated business is expected to continue to grow parcelvolumes and revenues at an above-market rate. In addition, City Link managementbelieves that synergies at an annual run rate of at least £10 million will beachieved by the end of 2008. These synergies will be realised throughoperational integration and investment in IT, resulting in improved networkefficiencies and back office support functions. Around half of the £12 millionintegration cost will be incurred in 2007, although synergy benefits will not berealised until 2008. Facilities Services £ million Fourth Quarter Full Year 2006 2005 change 2006 2005 change At 2005 constant exchange rates: Portfolio - net movement (appendix 1) 32.5 6.6 63.0 40.8 Revenue 138.8 130.3 6.5% 519.6 470.0 10.6% Operating profit (before amortisation of intangible 5.7 8.3 (31.3%) 27.4 34.8 (21.3%)assets1) One-off items 2.4 0.8 200.0% 3.8 0.8 375.0% Adjusted operating profit (before one-off items andamortisation of intangible assets1) 8.1 9.1 (11.0%) 31.2 35.6 (12.4%) 1 Other than computer software and development costs In Cleaning, solid revenue performance was achieved in all countries withoverall revenue increasing by 20.9%. Adjusted operating profit for the Cleaningbusinesses fell marginally below last year reflecting continued margin pressurein a very competitive sector and infrastructure investment to support theincreased size of the business. In the UK, the portfolio increased by 30% dueto significant growth in the banking and transport sectors combined with theInsitu acquisition which strengthened our presence in the shopping centre andleisure sectors. In Spain and the Netherlands, the portfolio grew by 11%,mainly in the transportation and office cleaning sectors. The Catering business continued to suffer from problems in the education segmentand also some contracts in the business and industry segment. As a result,revenue and operating profit both fell, revenue by 10.5% and adjusted operatingprofit by £1.2 million. We were able to exit some unprofitable contracts in2006 but remain committed to others. Hospital Services, which provides cleaning, catering and porterage services toNHS hospitals in the UK, recorded flat revenue but with an increase in adjustedoperating profit, as 2006 was less severely affected than 2005 by theGovernment's Agenda for Change initiative. Specialist Hygiene, which comprises a number of different activities, recordedrevenue at a similar level to last year but adjusted operating profit fell dueto the impact of anti-smoking legislation which has undermined the air qualitybusinesses in a number of countries. Medical Services revenue showed moderate growth but adjusted operating profitdeclined due to margin pressure and the cost of growth initiatives. Priorities for 2007 are to deliver a range of productivity initiatives to offsetmargin erosion in Cleaning, to improve Catering performance and to grow theSpecialist Hygiene and Medical businesses. Asia Pacific £ million Fourth Quarter Full Year 2006 2005 change 2006 2005 change At 2005 constant exchange rates: Portfolio - net movement (appendix 1) 7.7 1.3 22.2 3.9 Revenue 30.5 23.6 29.2% 103.6 89.6 15.6% Operating profit (before amortisation of intangible 5.9 6.3 (6.3%) 20.8 23.3 (10.7%)assets1) One-off items 2.2 - - 3.4 - - Adjusted operating profit (before one-off items andamortisation of intangible assets1) 8.1 6.3 28.6% 24.2 23.3 3.9% 1 Other than computer software and development costs All the division's businesses increased revenue in 2006, with strong doubledigit growth achieved in the largest markets of Australia, New Zealand,Indonesia, Singapore, Malaysia and Thailand, assisted by acquisition activity.Organic revenue growth for the division was 5.7%. Adjusted operating profitperformance also improved in most markets including Australia, New Zealand,Singapore, Malaysia, Thailand, Indonesia and Hong Kong. 2006 saw a great deal of activity in Asia Pacific in terms of both building themanagement team and acquisitions. The division welcomed a number of new seniormembers of the team, which is now at full strength. A total of 25 acquisitions were completed in the region during 2006 and totalacquisition spend amounted to £45.4 million. The largest transactions were PinkHealthcare (an Australian washroom business) and the pan-regional CWS brandedwashroom and dustmat business. Other notable acquisitions included the numberone pest control player in Taiwan, various pest control and tropical plantsbusinesses in New Zealand and market entry acquisitions in Vietnam andelectronic security in Singapore. The one-off items incurred in 2006 reflected significant management and businessrestructuring activities in Australia, New Zealand, Indonesia, Singapore,Malaysia, Hong Kong and Thailand, from which benefits are already comingthrough. Other (South Africa) £ million Fourth Quarter Full Year 2006 2005 change 2006 2005 change At 2005 constant exchange rates: Portfolio - net movement (appendix 1) (0.1) (0.1) 1.3 1.2 Revenue 7.9 8.0 (1.2%) 31.8 31.2 1.9% Operating profit (before amortisation of intangible 3.3 3.3 - 12.9 12.7 1.6%assets1) One-off items 0.4 0.3 33.3% (0.4) 0.3 - Adjusted operating profit (before one-off items andamortisation of intangible assets1) 3.7 3.6 2.8% 12.5 13.0 (3.8%) 1 Other than computer software and development costs This segment is now comprised of the group's activities in South Africa,predominantly pest control, washroom services and tropical plants. During theyear, the healthcare and hygiene businesses were combined to create a singlewashroom division, approaching the market as a single proposition and consistentwith the approach in other parts of the group. Customer retention improved during the year from 77.4% to 80.6%. The contractportfolio overall grew at 4.9% with strong growth in the pest control andwashroom businesses which offset a small reduction in the tropical plantsbusinesses. Revenue was ahead of last year despite the impact of the disposalof the timber preserving business in September. The decline in adjustedoperating profit was due to weaker trading in tropical plants combined with theadditional cost of strengthening the local management team. The business alsolost the final quarter trading in timber preserving when compared with 2005. FINANCIAL ITEMS Central Costs £ million Fourth Quarter Full Year 2006 2005 change 2006 2005 change At 2005 constant exchange rates: Central costs (9.6) (11.0) 12.7% (19.5) (44.4) 56.1% One-off items 2.6 4.3 39.5% (9.2) 17.4 - Central costs before one-off items (7.0) (6.7) (4.5%) (28.7) (27.0) (6.3%) Central costs, before one-off items, increased by 6.3% over the year. Thisprimarily reflects inflation and the accounting costs of the new long termincentive plan. Savings have been implemented in a number of head officefunctions although these will be offset in 2007 by the initial set-up costs of aUK Shared Service Centre and other initiatives. Over the medium-term, theseoffer the prospect of improved administrative efficiency in many of our UKbusinesses. In 2006, the principal one-off item was a £14.0 million curtailment creditarising out of the closure to future accrual of the UK defined benefit pensionscheme at the end of August. In 2005, one-off costs largely related to defenceof the approach from Raphoe. This had been treated as an exceptional cost butwas reclassified this year as a one-off item to improve comparability. One-offitems also included redundancy and restructuring charges in both years. One-off Items Details of the one-off items incurred in the year are set out in Appendix 4.They primarily relate to the group's restructuring programme and consist of theprofit on the sale of the former head office, consultancy, reorganisation andredundancy costs and a pension curtailment credit. These have been separatelyidentified because they are not considered to be "business as usual" expensesand, although many of them are small, they are numerous and have a varyingimpact on different businesses and reporting periods. Whilst not large enough tobe classified as exceptional items, in aggregate they make it difficult tounderstand underlying trends in performance unless they are separatelyidentified. Across the group, the net cost of one-off items in 2006 was £23.6 millioncompared with £30.5 million in 2005. In 2006, the closure of the UK definedbenefit scheme to future accrual resulted in a reduction of the scheme'sliabilities by approximately 1.4% with the resultant non-cash credit of £14million taken to operating profit in the second half of 2006 and treated as aone off item. Excluding this credit, one-off items in 2006 totalled a netcharge of £37.6 million, the bulk of which were incurred in the Textiles andWashroom Services division. This relates primarily to restructuring activitiesin UK Washroom and German Textiles. In addition, the Pest Control divisionincurred one-off costs of £6.8 million in 2006, mostly relating to redundancyand reorganisation activity in the UK. Rationalisation costs of up to £10 million may be incurred during 2007 oninitiatives under way or under consideration. This includes £1.5 million forthe completion of the changes underway in UK Washroom and UK Pest Control. Inaddition, around half of the £12 million Target Express integration costs willbe incurred in 2007, although synergy benefits will not be realised until 2008. Interest The group's net interest charge for 2006 was £52.0 million compared with £54.9million in 2005. Net interest on bank and bond debt and finance leases was£50.2 million compared with £52.0 million for the prior year. Average net debtin 2006 was £149 million lower than 2005 reflecting the sale of StyleConferences at the end of 2005 and the sale of Manned Guarding in the first halfof 2006, although these proceeds were offset by the £200 million specialcontribution into the pension fund in December 2005. The purchase of TargetExpress for £212 million in November 2006 had only a limited impact on theinterest charge for the year, although it will have a more significant effect in2007. The effect of lower average net debt was offset by an increase in averageinterest rates as a result of the ten year sterling bond issue in March 2006 andthe general upward trend in interest rates over the course of the year. Thislatter effect was, however, mitigated by the interest rate hedges that were inplace during the year but the cost of debt is expected to rise in 2007. Thebalance of the P&L interest charge reflects the notional net interest on pensionscheme assets and liabilities and various mark-to-market adjustments on treasurytransactions. Further details are given in notes 3 and 4 to the incomestatement. Exceptional Items Exceptional items recorded in the first quarter relating to the closure of theUK linen and workwear business in April 2006 have now been transferred todiscontinued operations. In the year ended 31 December 2005, the costs ofdefending the takeover approach from Raphoe amounting to £10.9 million weretreated as an exceptional item. This and other items shown in 2005 asexceptional items have also been transferred to discontinued items or includedas continuing operations and reclassified as one-off items as appropriate inorder to improve comparability. Pensions The IAS19 pension deficit was £118.8 million at the end of 2006 compared with£182.3 million in December 2005. The group has a number of small definedbenefit schemes but the principal liability relates to the UK Scheme (the "Scheme") which had a deficit of £108 million at December 2006 compared with £170million a year ago. The principal reason for the reduction in the deficit isthe £14 million reduction in the Scheme's liabilities following the cessation ofaccrual and favourable market movements in the early part of the year. During2006, a series of interest and inflation rate hedges were executed by the Schemeand its investment mix changed from approximately 80% equities/20% fixedinterest to the new asset allocation of 20% equities/80% fixed interest. Theeffect of the hedging will be to reduce the exposure of the pension schemesassets and liabilities to market movements by linking the cash flow profile ofthe bond investments to the scheme's liabilities. In addition, an interimreview by the Scheme's actuaries resulted in an £11 million increase in theScheme's liabilities to reflect the differences between some valuationassumptions made previously and recent experience. At 30 June 2006, we estimated that the UK Scheme's IAS19 liabilities were £76million. The £32 million increase in the deficit since that date reflects theimpact of updated actuarial assumptions following the interim review performedin the second half, the scheme closure effects and changes to IAS 19 interestand inflation assumptions. Tax The income statement tax charge for the year was £44.8 million (2005 £59.4million) representing an effective tax rate of 22.5% compared with 27.3% for2005. However, the reported tax charge for both years was affected by therelease of tax provisions in respect of previous periods which are no longerrequired following agreement of the relevant liabilities with fiscalauthorities. The underlying effective tax rate, before such provision releases,was 29.9% in 2006 compared with 32.7% in 2005, the decrease mainly due to areduction in disallowable costs. The weighted headline tax rates appropriate to the countries in which the groupoperated was 30.7% for 2006 compared with 30.9% in 2005. It exceeds the UK rateof 30% as substantial profits are earned in France, Belgium and Germany wheretax rates range from 34% to 38%. Discontinued Operations Discontinued operations primarily represent the UK linen and workwear businesstogether with the UK, Canadian, Belgian and US Manned Guarding businesses.Trading from these operations, together with a small adjustment for prior yeardisposals, produced losses after taxation of £3.1 million in the year. Thesewere offset by profits on disposal of £95.9 million, leaving profit for the yearfrom discontinued operations at £92.8 million (2005:£166.4 million). UK linen and workwear was closed on 30 April 2006. The discontinued businessincurred a trading loss of £3.8 million in the year net of profit on sale ofsurplus properties. The 2006 loss was reduced by some £3 million as a result ofthe asset impairment charge recognised at 31 December 2005. The sales of the four Manned Guarding businesses were completed during the yearfor a gross consideration of £150 million. These businesses made operatinglosses of £7.2 million up to the dates of disposal and produced a profit ondisposal of £95.9 million. Dividends An interim dividend of 2.13 pence per share was paid on 27 October 2006. A finaldividend of 5.25 pence per share will be proposed at the Annual General Meetingin May 2007 maintaining the full year dividend at 7.38 pence per share. This isin line with the statement made in the 2005 preliminary results announcement andsubsequently that a cautious approach would continue to be taken to dividendgrowth until it was clear that the recovery in the businesses was wellestablished. Cash Flow Operating cash flow for the year of £209.1 million (2005: £287.0 million) was£77.9 million below last year with operating profit before depreciation,amortisation, impairment charges and non-cash items accounting for £97.1 millionof the reduction. Working capital outflows accounted for another £11.0 millionwith a large part of this due to the higher level of business in the lastquarter. Capex was £30.2 million below last year, reflecting the disposal ofthe Manned Guarding businesses earlier in the year, the relatively capitalintensive Style Conferences business sold in the fourth quarter of last year andthe disposal of surplus properties following the closure of the UK linen andworkwear business. Lower tax cash flows, as a result of lower profits and pension payments, partlycompensated for the lower operating cash flows to leave free cash flow £31.8million below last year at £128.6 million. Net debt increased by £247.9 millionover the year reflecting the relatively high acquisition spend primarily forTarget Express, JC Ehrlich, the Asia Pacific division and the acquisition ofCity Link franchises. Appendix 1 ANNUAL CONTRACT PORTFOLIO - CONTINUING BUSINESSES 3 Months to 31 December 2006 Net£m at constant 2005 New Additions/exchange rates 1.10.06 Business Terminations Reductions Acquisitions 31.12.06 Textiles & Washroom Services 566.9 13.4 (13.2) 6.4 - 573.5Pest Control 214.7 7.7 (8.5) 1.2 0.6 215.7Tropical Plants 87.0 1.9 (2.4) 0.9 1.6 89.0 Electronic Security 100.3 1.7 (2.0) 0.7 3.2 103.9Facilities Services* 382.3 16.9 (8.1) 5.8 17.9 414.8Asia Pacific** 96.8 3.3 (3.3) 0.3 7.4 104.5 Other 29.1 1.1 (1.4) 0.4 - 29.2TOTAL 1,477.1 46.0 (38.9) 15.7 30.7 1,530.6 12 Months to 31 December 2006 Net£m at constant 2005 New Additions/exchange rates 1.1.06 Business Terminations Reductions Acquisitions 31.12.06 Textiles & Washroom Services 564.0 53.6 (56.8) 11.1 1.6 573.5Pest Control 161.7 31.4 (32.1) 6.9 47.8 215.7Tropical Plants 85.0 8.6 (10.9) 3.3 3.0 89.0 Electronic Security 99.1 8.1 (10.1) 2.5 4.3 103.9Facilities Services* 351.8 60.0 (31.1) 16.6 17.5 414.8Asia Pacific 82.3 12.2 (12.6) 3.2 19.4 104.5 Other** 27.9 4.1 (4.6) 1.8 - 29.2TOTAL 1,371.8 178.0 (158.2) 45.4 93.6 1,530.6 * Includes net adjustment of £89.6 million at 1 January 2006 for the removal ofcatering, which is no longer considered to be a portfolio business. ** Excludesour share of associate in Japan. 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 Textiles and Washroom Services,where elements of the contract are often variable and based on usage. Valuationis based on historic 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 2Divisional Analysis (at constant exchange rates)(based upon the way businesses are managed) 3 months to 3 months to Year ended Year ended 31 December 31 December 31 December 31 December 2006 2005 2006 2005(at 2005 constant exchange rates) £m £m £m £m (unaudited) (audited) (unaudited) (audited)Business Analysis Revenue Textiles & Washroom Services 153.4 148.2 597.4 593.7Pest Control 70.4 52.3 280.0 209.4Tropical Plants 32.3 31.6 106.6 102.4Electronic Security 78.5 74.5 282.1 263.4Parcel Delivery 86.9 41.0 213.3 125.5Facilities Services 138.8 130.3 519.6 470.0Asia Pacific 30.5 23.6 103.6 89.6Other 7.9 8.0 31.8 31.2Continuing operations at 2005 constant exchangerates 598.7 509.5 2,134.4 1,885.2Exchange (8.5) - (9.7) -Continuing operations at actual exchange rates 590.2 509.5 2,124.7 1,885.2 Operating profit* Textiles & Washroom Services 23.8 23.5 92.5 122.3Pest Control 10.7 17.2 61.6 67.2Tropical Plants 4.3 4.7 7.5 9.5Electronic Security 14.0 9.6 39.4 35.8Parcel Delivery 14.3 10.5 34.8 29.1Facilities Services 5.7 8.3 27.4 34.8Asia Pacific 5.9 6.3 20.8 23.3Other 3.3 3.3 12.9 12.7Central costs (9.6) (11.0) (19.5) (44.4)Continuing operations at 2005 constant exchangerates 72.4 72.4 277.4 290.3Exchange (1.6) - (2.4) -Continuing operations at actual exchange rates 70.8 72.4 275.0 290.3 Adjusted operating profit** Textiles & Washroom Services 26.7 31.2 108.8 133.9Pest Control 15.3 15.5 68.4 65.5Tropical Plants 4.6 4.7 8.1 9.5Electronic Security 14.0 10.8 40.4 37.2Parcel Delivery 15.6 10.9 36.1 29.8Facilities Services 8.1 9.1 31.2 35.6Asia Pacific 8.1 6.3 24.2 23.3Other 3.7 3.6 12.5 13.0Central costs (7.0) (6.7) (28.7) (27.0)Continuing operations at 2005 constant exchangerates 89.1 85.4 301.0 320.8Exchange (1.6) - (2.4) -Continuing operations at actual exchange rates 87.5 85.4 298.6 320.8 * Before amortisation of intangible assets other than computer software anddevelopment costs ** Before amortisation of intangible assets other than computer software anditems of a one-off nature (see appendix 4 for further details). 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 December 31 December 31 December 31 December 2006 2005 2006 2005(at actual exchange rates) £m £m £m £m (unaudited) (audited) (unaudited) (audited)Business Analysis Revenue Textiles & Washroom Services 151.2 148.2 595.4 593.7Pest Control 68.5 52.3 278.3 209.4Tropical Plants 31.3 31.6 105.8 102.4Electronic Security 77.8 74.5 281.5 263.4Parcel Delivery 86.9 41.0 213.3 125.5Facilities Services 138.4 130.3 519.2 470.0Asia Pacific 29.6 23.6 102.1 89.6Other 6.5 8.0 29.1 31.2Continuing operations at actual exchange rates 590.2 509.5 2,124.7 1,885.2 Operating profit* Textiles & Washroom Services 23.5 23.5 92.2 122.3Pest Control 10.4 17.2 61.3 67.2Tropical Plants 4.1 4.7 7.4 9.5Electronic Security 14.0 9.6 39.4 35.8Parcel Delivery 14.3 10.5 34.8 29.1Facilities Services 5.7 8.3 27.4 34.8Asia Pacific 5.7 6.3 20.2 23.3Other 2.7 3.3 11.8 12.7Central costs (9.6) (11.0) (19.5) (44.4)Continuing operations at actual exchange rates 70.8 72.4 275.0 290.3 Adjusted operating profit** Textiles & Washroom Services 26.4 31.2 108.5 133.9Pest Control 15.0 15.5 68.1 65.5Tropical Plants 4.4 4.7 8.0 9.5Electronic Security 14.0 10.8 40.4 37.2Parcel Delivery 15.6 10.9 36.1 29.8Facilities Services 8.1 9.1 31.2 35.6Asia Pacific 7.9 6.3 23.6 23.3Other 3.1 3.6 11.4 13.0Central costs (7.0) (6.7) (28.7) (27.0)Continuing operations at actual exchange rates 87.5 85.4 298.6 320.8 * Before amortisation of intangible assets other than computer software anddevelopment costs. ** Before amortisation of intangible assets other than computer software anddevelopment costs and items of a one-off nature (see appendix 4 for furtherdetails). Appendix 4 One-off Items 3 months to 3 months to Year ended Year ended 31 December 31 December 31 December 31 December 2006 2005 2006 2005 £m £m £m £m (unaudited) (audited) (unaudited) (audited) Textiles & Washroom Services (2.9) (7.7) (16.3) (11.6)Pest Control (4.6) 1.7 (6.8) 1.7Tropical Plants (0.3) - (0.6) -Electronic Security - (1.2) (1.0) (1.4)Parcel Delivery (1.3) (0.4) (1.3) (0.7)Facilities Services (2.4) (0.8) (3.8) (0.8)Asia Pacific (2.2) - (3.4) -Other (0.4) (0.3) 0.4 (0.3)Central costs (2.6) (4.3) 9.2 (17.4) (16.7) (13.0) (23.6) (30.5) Note: All numbers at both actual and constant exchange rates. Consolidated Income StatementFor the year ended 31 December 2006 2005 £m £m Notes (unaudited) (audited)Continuing operations:Revenue 1 2,124.7 1,885.2Operating expenses (1,875.6) (1,615.1)Operating profit 249.1 270.1 Analysed as:Operating profit before amortisation of intangible assets* 275.0 290.3Amortisation of intangible assets* (25.9) (20.2)Operating profit 249.1 270.1 Interest payable and similar charges 3 (113.2) (114.5)Interest receivable 4 61.2 59.6Share of profit from associates (net of tax) 2.0 2.2Profit before income tax 199.1 217.4Income tax expense 5 (44.8) (59.4)Profit for the year from continuing operations 154.3 158.0 Discontinued operations:Profit for the year from discontinued operations 6 92.8 166.4 Profit for the year (including discontinued operations) 247.1 324.4 Attributable to:Minority interest 2.0 2.9Equity holders of the company 245.1 321.5 247.1 324.4Basic earnings per share - Continuing operations 7 8.43p 8.60p - Discontinued operations 7 5.14p 9.22p - Continuing and discontinued operations 7 13.57p 17.82p Diluted earnings per share - Continuing operations 7 8.43p 8.59p - Discontinued operations 7 5.14p 9.22p - Continuing and discontinued operations 7 13.57p 17.81p * Excluding computer software and development costs. An interim dividend of 2.13p per share was paid on 27 October 2006 (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). See note 8. Consolidated Statement of Recognised Income and ExpenseFor the year ended 31 December 2006 2005 £m £m (unaudited) (audited) Profit for the year (including discontinued operations) 247.1 324.4 Net exchange adjustments offset in reserves (10.1) (0.6)Actuarial gain/(loss) on defined benefit pension plans 44.6 (60.6)Revaluation of available-for-sale investments 0.1 (0.8)Tax on items taken directly to reserves (13.1) 1.0Net profit/(loss) not recognised in income statement 21.5 (61.0) Total recognised income for the year 268.6 263.4 Attributable to:Minority interest 2.0 2.9Equity holders of the company 266.6 260.5 268.6 263.4 Consolidated Balance SheetAt 31 December 2006 2005 £m £m Notes (unaudited) (audited)AssetsNon-current assetsIntangible assets 9 559.1 180.3Property, plant and equipment 10 513.1 497.5Investments in associated undertakings 8.6 9.2Other investments 6.8 6.8Deferred tax assets 7.1 74.0Trade and other receivables 24.7 28.3Derivative financial instruments - 16.9 1,119.4 813.0 Current assetsInventory 46.9 43.8Trade and other receivables 482.6 460.5Derivative financial instruments 8.0 0.4Cash and cash equivalents 11 135.1 240.3 672.6 745.0 LiabilitiesCurrent liabilitiesTrade and other payables (553.2) (533.8)Current tax liabilities (103.6) (115.1)Provisions for other liabilities and charges (22.3) (31.1)Bank and other short-term borrowings 12 (446.0) (108.5)Derivative financial instruments (4.6) (1.0) (1,129.7) (789.5) Net current liabilities (457.1) (44.5) Non-current liabilitiesTrade and other payables (15.8) (12.0)Bank and other long-term borrowings 12 (877.3) (1,072.1)Deferred tax liabilities (45.0) (43.3)Retirement benefits 13 (118.8) (182.3)Provisions for other liabilities and charges (128.6) (116.9)Derivative financial instruments (10.4) (1.5) (1,195.9) (1,428.1) Net liabilities (533.6) (659.6) EquityCapital and reserves attributable to the company's equity holdersCalled up share capital 14 18.1 18.1Share premium account 14 6.2 5.3Capital redemption reserve 14 - -Other reserves 14 (1,728.6) (1,714.1)Retained profits 14 1,164.3 1,024.1 (540.0) (666.6)Minority interest 14 6.4 7.0Total equity (533.6) (659.6) Consolidated Cash Flow StatementFor the year ended 31 December 2006 2005 £m £m Notes (unaudited) (audited)Cash flows from operating activities Cash generated from operating activities before special 15 367.6 476.5pension contributionSpecial pension contribution - (200.0)Cash generated from operating activities 367.6 276.5Interest received 13.1 19.8Interest paid (54.7) (63.4)Income tax paid (36.6) (80.5)Net cash generated from operating activities 289.4 152.4 Cash flows from investing activities Purchase of property, plant and equipment (PPE) (176.3) (183.8)Purchase of intangible fixed assets (6.3) (9.2)Proceeds from sale of PPE 42.5 21.9Proceeds from sale of intangibles - 0.1Acquisition of companies and businesses, net of cash 18 (406.5) (42.0)acquiredProceeds from disposal of companies and businesses 6 134.9 323.3 Dividends received from associates 1.0 1.0Net cash flows from investing activities (410.7) 111.3 Cash flows from financing activities Issue of ordinary share capital 0.9 5.7Dividends paid to equity shareholders 8 (133.3) (124.7)Dividends paid to minority interests (1.8) (2.6)Interest element on finance lease payments (2.3) (2.5)Capital element of finance lease payments (19.5) (19.1)Proceeds on disposal of Ashtead loan note - 129.8New loans/(repayments) 221.0 (226.7)Net cash flows from financing activities 65.0 (240.1) Net (decrease)/increase in cash and bank overdrafts 16 (56.3) 23.6Cash and bank overdrafts at beginning of year 170.7 145.3Exchange gains on cash and bank overdrafts 4.4 1.8Cash and bank overdrafts at end of the financial year 11 118.8 170.7 Notes to the accounts 1. Segmental information (a) Primary reporting format - business segments Operating Operating Revenue Revenue profit profit 2006 2005 2006 2005 £m £m £m £m (unaudited) (audited) (unaudited) (audited)Continuing operationsTextiles & Washroom Services 671.4 661.8 106.8 136.3Pest Control 319.3 246.9 61.9 73.9Tropical Plants 116.5 112.9 6.6 7.2Electronic Security 281.5 263.4 34.6 32.8Parcel Delivery 213.3 125.5 32.6 29.1Facilities Services 522.7 474.7 28.7 36.5 Central items - - (22.1) (45.7) 2,124.7 1,885.2 249.1 270.1 Interest payable and similar charges - - (113.2) (114.5)Interest receivable - - 61.2 59.6Share of profit from associates (net of tax)- Textiles and Washroom Services - - 2.0 2.2Profit before income tax - - 199.1 217.4Income tax expense - - (44.8) (59.4)Total for the year from continuing operations 2,124.7 1,885.2 154.3 158.0 Discontinued operations (after income tax)Textiles & Washroom Services 13.6 52.1 3.0 (26.0)Facilities Services1 121.9 381.5 88.3 5.8Discontinued business segments2 - 83.7 1.5 186.6 Total for the year from discontinued 135.5 517.3 92.8 166.4operations Total for the year (including discontinued operations) 2,260.2 2,402.5 247.1 324.4 1Profit from the Facilities Services segment for the year to 31 December 2006 includes profit ondisposal (after tax) of £95.9m. 2Discontinued business segments predominantly consists of the conferencing segment, which was discontinuedin the second half of 2005. Profit for the year to 31 December 2005 in this segment includes profit ondisposal (after tax) of the conferencing segment of £170.3m. Notes to the accounts (continued) 1. Segmental information (continued) (b) Secondary reporting format - geographical segments Revenue Revenue 2006 2005 £m £m (unaudited) (audited)Continuing operationsUnited Kingdom 994.9 863.7Continental Europe 829.5 804.2North America 166.4 93.9Asia Pacific 102.1 89.6Africa 31.8 33.8Total from continuing operations 2,124.7 1,885.2 Discontinued operationsUnited Kingdom 35.6 263.7Continental Europe 17.9 55.3North America 82.0 197.5Asia Pacific - -Africa - 0.8Total from discontinued operations 135.5 517.3 Total (including discontinued operations) 2,260.2 2,402.5 (c) Reconciliation of statutory segmental analysis to management divisionalanalysis The commentary in the Operating Review reflects the management divisionalstructure and not the segmental information presented above. For statutorypurposes, the businesses within the geographic divisions of Asia Pacific andSouth Africa (Other) have been reallocated back to the relevant business segmentin line with the requirements of IAS 14, "Segmental Reporting". In addition,the commentary in the Operating Review is presented at constant exchange ratesand before the amortisation of customer lists and exceptional items. The tablesthat follow reconcile the segmental information presented above to thedivisional performance referred to in the Operating Review. Statutory Asia Pacific Foreign Management Management basis and Other exchange basis basis 2006 2006 2006 2006 2005 £m £m £m £m £m (unaudited) (unaudited) (unaudited) (unaudited) (audited)Revenue from continuing operations Textiles & Washroom Services 671.4 (76.0) 2.0 597.4 593.7Pest Control 319.3 (41.0) 1.7 280.0 209.4Tropical Plants 116.5 (10.7) 0.8 106.6 102.4Electronic Security 281.5 - 0.6 282.1 263.4Parcels Delivery 213.3 - - 213.3 125.5Facilities Services 522.7 (3.5) 0.4 519.6 470.0 Asia Pacific - 102.1 1.5 103.6 89.6 Other - 29.1 2.7 31.8 31.2 2,124.7 - 9.7 2,134.4 1,885.2 Amortis-ation of intangible assets* Statutory Asia Pacific Foreign Management Management basis and Other exchange basis basis 2006 2006 2006 2006 2006 2005 £m £m £m £m £m £m (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (audited)Operating profit from continuingoperationsTextiles & Washroom Services 106.8 (24.4) 9.7 0.4 92.5 122.3Pest Control 61.9 (7.2) 6.7 0.2 61.6 67.2Tropical Plants 6.6 (1.3) 2.1 0.1 7.5 9.5Electronic Security 34.6 - 4.8 - 39.4 35.8Parcels Delivery 32.6 - 2.2 - 34.8 29.1Facilities Services 28.7 (1.7) 0.4 - 27.4 34.8Asia Pacific - 20.2 - 0.6 20.8 23.3Other - 11.8 - 1.1 12.9 12.7Central items (22.1) 2.6 - - (19.5) (44.4) 249.1 - 25.9 2.4 277.4 290.3 *Excluding computer software and development costs. Notes to the accounts (continued) 2. Exceptional itemsIn the year ended 31 December 2005, the costs of defending the takeover approach from Raphoe amounting to £10.9m weretreated as an exceptional item. In order to improve comparability, these costs have been reclassified as a one-offitem and are included within operating expenses on the face of the income statement. 3. Interest payable and similar charges 2006 2005 £m £m (unaudited) (audited)Interest payable on bank loans and overdrafts 18.8 26.6Interest payable on medium term notes issued 49.6 38.5Net interest receivable on fair value hedges1 (6.7) (6.9)Interest on defined benefit plan liabilities 48.4 46.8Interest payable on finance leases 2.3 2.4Foreign exchange gain on translation of foreign denominated loans (0.3) (0.8)Amortisation of discount on provisions 2.0 2.0Fair value loss on write off of Ashtead option - 4.6Net ineffectiveness of fair value hedges (0.1) (0.8)Fair value (gain)/loss on derivatives not designated in a hedge (0.8) 2.1relationship1Total interest payable and similar charges (continuing operations) 113.2 114.5 1The fair value (gain)/loss on derivatives not designated in a hedge relationship includes fair value gainsrelating to forward rate agreements of £2.0m (2005: £0.5m). 4. Interest receivable 2006 2005 £m £m (unaudited) (audited)Bank interest 13.8 8.6Other interest* - 11.3Return on defined benefit plan assets 47.4 39.7Total interest receivable (continuing operations) 61.2 59.6 *Other interest income represents interest income from the Ashtead loan receivable. 5. Income tax expense 2006 2005 £m £m (unaudited) (audited)Analysis of charge in the period UK Corporation tax at 30% (2005: 30%) 23.9 13.1Double tax relief (17.6) (5.4) 6.3 7.7Overseas taxation 38.9 53.1Adjustment in respect of previous periods (17.3) (13.1)Total current tax 27.9 47.7 Deferred tax 16.9 11.7Total income tax expense (continuing operations) 44.8 59.4 Notes to the accounts (continued) 6. Discontinued operations and disposalsIncluded within discontinued operations are the UK linen and workwear business, which was closed on 30 April 2006,and the manned guarding businesses in the United Kingdom, Canada, Belgium and the USA, which were disposed on 7 March2006, 10 March 2006, 21 April 2006 and 20 July 2006 respectively, for gross proceeds of £156.9m, £151.7m after costspaid of £5.2m. The group also disposed of four smaller businesses and a portfolio of vacant properties for gross proceeds of £6.6m,£4.8m after costs paid of £1.8m, the results of which are included within continuing operations. Details of net assets disposed and disposal proceeds are as follows: Discontinued Other operations disposals 2006 2006 2006 £m £m £m (unaudited) (unaudited) (unaudited)Non-current assets - Intangible assets 13.6 - 13.6 - Property, plant and equipment 6.5 2.2 8.7Current assets 81.7 16.1 97.8Current liabilities (41.5) (12.7) (54.2)Non-current liabilities (7.1) (0.3) (7.4)Net assets disposed 53.2 5.3 58.5 Profit on disposal 98.5 (0.5) 98.0Consideration 151.7 4.8 156.5Consideration deferred to future periods (0.5) (0.3) (0.8)Consideration deferred from prior periods 0.2 - 0.2Costs deferred to future periods 0.4 0.2 0.6Costs deferred from prior periods (2.9) - (2.9)Cash disposed (8.0) (10.7) (18.7)Cash inflow from disposal of companies and 140.9 (6.0) 134.9businesses The profit on disposal above of £98.0m excludes translation exchange gains of £5.7m, which are recycled tothe income statement and taxation of £8.5m, giving a total post-tax profit on disposal of subsidiary netassets of £95.2m. Financial performance of discontinued operations UK linen and workwear Manned guarding Other2 2006 2005 £m £m £m £m £m (unaudited) (unaudited) (unaudited) (unaudited) (audited) Revenue 121.9 13.6 - 135.5 517.3Operating expenses (129.1) (17.4) 1.5 (145.0) (520.9) Operating (loss)/profit (7.2) (3.8) 1.5 (9.5) (3.6)Finance costs - net (0.1) - - (0.1) (0.8)(Loss)/profit before income tax (7.3) (3.8) 1.5 (9.6) (4.4)Taxation (0.3) 6.8 - 6.5 1.1(Loss)/profit after income tax fromdiscontinued operations (7.6) 3.0 1.5 (3.1) (3.3) Profit/(loss) on disposal of subsidiary net 98.5 - - 98.5 171.3assetsTaxation (8.5) - - (8.5) -Cumulative translation exchange gain/(loss)1 5.9 - - 5.9 (1.6)Total profit/(loss) after income tax ondisposal of subsidiary net assets 95.9 - - 95.9 169.7 Profit/(loss) on disposal of discontinued 88.3 3.0 1.5 92.8 166.4operations 1The cumulative translation exchange gain of £5.9m (2006: £1.6m loss) relating to discontinued operations hasbeen recycled out of exchange reserves to the consolidated income statement. 2Release of provision in respect of prior period disposals. Notes to the accounts (continued) 7. Earnings per share Basic Basic earnings per share is calculated by dividing the profit attributable to equity holders of thecompany by the weighted average number of shares in issue during the year, excluding those held in theRentokil Initial Employee Share Trust for UK employees, which are treated as cancelled. 2006 2005 £m £m (unaudited) (audited)Profit from continuing operations attributable to equity holders of the 152.3 155.1companyProfit from discontinued operations attributable to equity holders of the 92.8 166.4company Weighted average number of ordinary shares in issue 1,806.5 1,803.7 Basic earnings per share from continuing 8.43p 8.60poperationsBasic earnings per share from discontinued operations 5.14p 9.22pBasic earnings per share from continuing and discontinued operations 13.57p 17.82p Diluted Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares inissue to assume conversion of all dilutive potential ordinary shares. The company has two categoriesof dilutive potential ordinary shares, being those share options granted to employees where theexercise price is less than the average market price of the company's shares during the year anddeferred shares granted to senior executives that will vest in the future. 2006 2005 £m £m (unaudited) (audited)Profit from continuing operations attributable to equity holders of the 152.3 155.1companyProfit from discontinued operations attributable to equity holders of the 92.8 166.4company Weighted average number of ordinary shares in issue 1,806.5 1,803.7 Adjustment for share options and deferred - 1.1sharesWeighted average number of ordinary shares for diluted earnings per share 1,806.5 1,804.8 Diluted earnings per share from continuing operations 8.43p 8.59p Diluted earnings per share from discontinued operations 5.14p 9.22pDiluted earnings per share from continuing and discontinued operations 13.57p 17.81p 8. Dividends 2006 2005 £m £m (unaudited) (audited)2004 final dividend paid - 4.78p per share - 86.22005 final dividend paid - 5.25p per share 94.8 -2005 interim dividend paid - 2.13p per share - 38.52006 interim dividend paid - 2.13p per share 38.5 - 133.3 124.7 A dividend in respect of 2006 of 5.25p (2005: 5.25p) per 1p share amounting to £94.8m (2005: £94.8m) isto be proposed at the Annual General Meeting on 3 May 2007. These financial statements do not reflectthis dividend payable. Notes to the accounts (continued) 9. Intangible assets Brands, patents and reacquired franchise rights Customer Computer Development Goodwill lists software costs Total £m £m £m £m £m £m At 1 January 2005 (audited) Cost 69.7 181.6 - 29.8 2.1 283.2Accumulated amortisation and impairment - (113.6) - (18.1) (1.4) (133.1)Net book amount 69.7 68.0 - 11.7 0.7 150.1 Year to 31 December 2005 (audited) Opening net book amount 69.7 68.0 - 11.7 0.7 150.1Exchange differences 1.0 1.0 - 0.5 - 2.5Additions - - - 8.7 0.7 9.4Disposals - - - (0.1) - (0.1)Acquisition of companies and businesses 10.1 37.7 0.3 - 0.2 48.3Disposal of companies and businesses - - - (0.4) - (0.4)Impairment charge - - - (2.9) - (2.9)Amortisation charge - (23.0) - (3.3) (0.3) (26.6)Closing net book amount 80.8 83.7 0.3 14.2 1.3 180.3 At 31 December 2005 (audited) Cost 80.8 221.6 0.3 35.1 3.2 341.0Accumulated amortisation and impairment - (137.9) - (20.9) (1.9) (160.7)Net book amount 80.8 83.7 0.3 14.2 1.3 180.3 Year ended 31 December 2006 (unaudited) Opening net book amount 80.8 83.7 0.3 14.2 1.3 180.3Exchange differences (10.1) (4.7) (0.9) (0.1) - (15.8)Additions - - - 6.0 0.4 6.4Disposals - - - (1.2) - (1.2)Acquisition of companies and businesses 269.6 135.6 29.9 0.1 - 435.2Disposal of companies and businesses (3.9) (8.5) - (1.2) - (13.6)Reclassifications - - - 0.1 (0.1) -Amortisation charge - (25.2) (2.3) (3.7) (1.0) (32.2)Closing net book amount 336.4 180.9 27.0 14.2 0.6 559.1 At 31 December 2006 (unaudited) Cost 336.4 322.6 29.4 35.0 0.8 724.2Accumulated amortisation and impairment - (141.7) (2.4) (20.8) (0.2) (165.1)Net book amount 336.4 180.9 27.0 14.2 0.6 559.1 Notes to the accounts (continued) 10. Property, plant and equipment Plant, equipment & tropical Vehicles & Land & plants office buildings equipment Total £m £m £m £m At 1 January 2005 (audited) Cost 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 to 31 December 2005 (audited) Opening net book amount 253.6 300.0 108.1 661.7Exchange differences (1.2) (3.8) 0.2 (4.8)Additions 14.4 127.7 54.2 196.3Disposals (2.5) (2.1) (5.2) (9.8)Acquisition of companies and businesses 4.1 7.0 1.8 12.9Disposal of companies and businesses (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 2005 (audited) Cost 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 Year ended 31 December 2006 (unaudited) Opening net book amount 122.1 260.3 115.1 497.5Exchange differences (2.3) (7.4) (4.0) (13.7)Additions 12.8 123.2 56.1 192.1Disposals (10.3) (2.3) (8.9) (21.5)Acquisition of companies and businesses 7.7 5.1 13.0 25.8Disposal of companies and businesses (1.7) (2.0) (5.0) (8.7)Depreciation charge (3.6) (110.8) (44.0) (158.4)Closing net book amount 124.7 266.1 122.3 513.1 At 31 December 2006 (unaudited) Cost 168.0 639.1 264.3 1,071.4Accumulated depreciation and impairment (43.3) (373.0) (142.0) (558.3)Net book amount 124.7 266.1 122.3 513.1 11. Cash and cash equivalents 2006 2005 £m £m (unaudited) (audited)Cash at bank and in hand 90.2 134.0Short-term bank deposits 44.9 106.3 135.1 240.3 Cash and bank overdrafts include the following for the purposes of the cash flow statement:Cash and cash equivalents 135.1 240.3Bank overdrafts (note 12) (16.3) (69.6) 118.8 170.7 Notes to the accounts (continued) 12. Bank and other borrowings 2006 2005 £m £m (unaudited) (audited)Non-current Bank borrowings 254.1 409.9Other loans 603.1 640.4Finance lease liabilities 20.1 21.8 877.3 1,072.1Current Bank overdrafts 16.3 69.6Bank borrowings 30.5 6.8Other loans 383.3 15.3Finance lease liabilities 15.9 16.8 446.0 108.5 Total bank and other borrowings 1,323.3 1,180.6 The group operated the following medium term notes under its €2.5bn Euro MediumTerm Note programme for the years ended 31 December 2006 and 31 December 2005: Currency/Amount IAS 39 Interest Coupon Maturity date hedgingY2,000m FV Fixed rate - 0.40%pa Matured€20m NH Floating rate - 3 month EURIBOR +0.20% Matured$10m NH Floating rate - 3 month USD LIBOR +0.24% Matured€150m NH Floating rate - 3 month EURIBOR +0.35% Matured£15m NH Floating rate - 6 month GBP LIBOR +0.35% MaturedY3,000m FV Fixed rate - 0.60% pa 13.04.07$10m NH Floating rate - 3 month USD LIBOR +0.35% 17.05.07€500m FV, NIH Fixed rate - 5.75% pa 21.05.07£250m FV Fixed rate - 6.125% pa 19.11.08£300m FV Fixed rate - 5.75% pa 31.03.16€100m NH Floating rate - 3 month EURIBOR +0.28% 03.07.08 Key: FV - Fair value hedge accounting applied NH - Hedge accounting not applied NIH - Designated for Net Investment Hedging 13. Retirement benefit obligations Apart from the legally required social security state schemes, the groupoperates a number of pension schemes around the world covering many of itsemployees. The major schemes are of the defined benefit type with assets heldin separate trustee administered funds. The principal scheme in the group is the Rentokil Initial Pension Scheme ('RIPS') in the United Kingdom, which has a number 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 thefreezing of the future accrual of benefits for active members. Following thisconsultation, future accrual ceased as from 31 August 2006 and defined benefitmembers moved into new defined contribution arrangements, resulting in acurtailment credit of £14.0m. The RIPS valuation was performed on the existingbasis and therefore excludes the proposal to freeze future accrual of pensionbenefits to active members. Actuarial valuations of the UK scheme are carriedout every three years. The most recent valuation was at 31 March 2005. These defined benefit schemes are re-appraised annually by independent actuariesbased upon actuarial assumptions in accordance with IAS 19 requirements. The principal assumptions used for the UK RIPS scheme are shown below. 2006 2005 £m £m (unaudited) (audited)Weighted average % Discount rate 5.1% 4.7%Expected return on plan assets 5.5% 6.3%Future salary increases 3.8% 3.6%Future pension increases 3.1% 2.8% The amounts recognised in the balance sheet for the total of the UK RIPS andother1 schemes are determined as follows: Present value of funded obligations (1,033.8) (1,049.8) Fair value of plan assets 921.1 874.8 (112.7) (175.0)Present value of unfunded obligations (6.1) (7.3)Liability in the balance sheet (118.8) (182.3) Notes to the accounts (continued) 13. Retirement benefit obligations (continued) The fair value of plan assets at the balance sheet date for the total of the UKRIPS and other1 schemes is analysed as follows: 2006 2005 £m £m (unaudited) (audited)Equity instruments 185.7 539.4 Debt instruments 704.8 136.0Property 0.8 0.5Cash 3.9 198.9Swaps 25.9 - 921.1 874.8 The amounts recognised in the income statement for the total of the UK RIPS andother1 schemes are as follows: Current service cost2 8.9 13.8 Prior service cost (3.0) -Curtailment (16.2) -Interest cost2 48.4 46.8Amount charged to pension liability 38.1 60.6Expected return on plan assets2 (47.4) (39.7)Total pension cost (9.3) 20.9 1 Other retirement benefit plans are predominantly made up of defined benefitplans situated in Ireland, Germany, Australia, Belgium, Norway and New Zealand. 2 Service costs are charged to operating expenses and interest cost and returnon plan assets to interest payable and receivable respectively. 14. Statement of changes in equity Called up Share Capital share premium redemption Other Retained Minority Total capital account reserve reserves earnings interest equity £m £m £m £m £m £m £m At 1 January 2005 (audited) 18.1 49.5 19.7 8.4 (906.9) 10.1 (801.1) Total recognised income for the year - - - (1.4) 264.8 - 263.4 Dividends paid to ordinary shareholders - - - - (124.7) - (124.7) Cost of share options - - - - 3.2 - 3.2 New share capital issued - - - - - 5.7 5.7 Minority interest share of profit - - - - (2.9) 2.9 - Cumulative exchange recycled to incomestatement on disposal of foreignsubsidiary - - - 1.6 - - 1.6 Currency translation difference on - - - - - - -minority interest Dividends paid to minority interests - - - - - (2.6) (2.6) Purchase of minority interest in French - - - - (1.7) (3.4) (5.1)textiles business Capital re-organisation* - (49.9) (19.7) (1,722.7) 1,792.3 - - At 31 December 2005 (audited) 18.1 5.3 - (1,714.1) 1,024.1 7.0 (659.6) At 1 January 2006 (audited) 18.1 5.3 - (1,714.1) 1,024.1 7.0 (659.6) Total recognised income for the period - - - (10.0) 278.6 - 268.6 Dividends paid to ordinary shareholders - - - - (133.3) - (133.3) New share capital issued - 0.9 - - - - 0.9 Cost of share options and long term - - - - (1.9) - (1.9)incentive plan Transfer to other reserves - - - 1.2 (1.2) - - Minority interest share of profit - - - - (2.0) 2.0 - Cumulative exchange recycled to incomestatement on disposal of foreignsubsidiary - - - (5.7) - - (5.7) Currency translation difference on - - - - - (0.8) (0.8)minority interest Dividends paid to minority interests - - - - - (1.8) (1.8) At 31 December 2006 (unaudited) 18.1 6.2 - (1,728.6) 1,164.3 6.4 (533.6) Notes to the accounts (continued) 14. Statement of changes in equity (continued) Other reserves Capital reduction reserve Legal Translation Available-for-sale reserve Total £m £m £m £m £m At 1 January 2005 (audited) - 9.2 (0.8) - 8.4 Net exchange adjustments offset in reserves - - (0.6) - (0.6)Available-for-sale investments marked to market - - - (0.8) (0.8)Total recognised expense for the year - - (0.6) (0.8) (1.4) Capital re-organisation* (1,722.7) - - - (1,722.7)Cumulative exchange recycled on disposal of foreign - - 1.6 - 1.6subsidiaryAt 31 December 2005 (audited) (1,722.7) 9.2 0.2 (0.8) (1,714.1) At 1 January 2006 (audited) (1,722.7) 9.2 0.2 (0.8) (1,714.1) Net exchange adjustments offset in reserves - - (10.1) - (10.1)Available-for-sale investments marked to market - - - 0.1 0.1Total recognised income/(expense) for the period - - (10.1) 0.1 (10.0) Cumulative exchange recycled on disposal of foreign - - (5.7) - (5.7)subsidiaryTransfer from retained reserves - 1.2 - - 1.2At 31 December 2006 (unaudited) (1,722.7) 10.4 (15.6) (0.7) (1,728.6) *On 20 June 2005, the High Court (the 'Court') approved the scheme of arrangement (the 'Scheme') of Rentokil Initialplc ('Old Rentokil Initial') under section 425 of the Companies Act 1985 to introduce a new listed group holdingcompany, Rentokil Initial 2005 plc ('New Rentokil Initial'). The Scheme became effective on 21 June 2005 and NewRentokil Initial changed its name to Rentokil Initial plc and Old Rentokil Initial changed its name to RentokilInitial 1927 plc at that time. Under the terms of the Scheme, holders of Old Rentokil Initial shares received oneNew Rentokil Initial share for each Old Rentokil Initial share. On 22 June 2005, the Court approved the reduction of capital of Rentokil Initial plc, whereby the nominal value ofeach ordinary share was reduced from 100 pence to 1 penny. The reduction of capital became effective on 23 June2005. As shown above, the effect of the scheme of arrangement and the subsequent reduction in capital has increaseddistributable reserves by £1,792.3m. The capital re-organisation transaction has been treated as a reverseacquisition in the consolidated financial accounts. 15. Cash generated from operating activities 2006 2005 £m £m (unaudited) (audited)Profit for the year 247.1 324.4 Adjustments for:- (Profit)/loss on sale of discontinued (98.5) (171.3)operations- Taxation on (profit)/loss on sale of discontinued operations 8.5 -- Cumulative translation exchange (gain)/loss recycled on discontinued (5.9) 1.6operations- Loss on sale of continuing operations 0.5 -- Cumulative translation exchange loss recycled on continuing operations 0.2 -- Discontinued operations tax and interest (6.4) (0.3)- Tax 44.8 59.4- Share of profit from associates (2.0) (2.2)- Interest income (61.2) (59.6)- Interest expense 113.2 114.5- Depreciation 158.4 168.4- Amortisation of intangible assets* 27.5 23.0- Amortisation of computer software and 4.7 3.6development costs- Pension curtailment and past pension (19.2) -credits- Other major non-cash items (1.9) 38.3- Profit on sale of property, plant and (21.3) (12.1)equipment- Loss on disposal of intangible assets 1.2 -Changes in working capital (excluding the effects of acquisitions andexchange differences on consolidation):- Inventories (2.8) (3.6)- Trade and other receivables (47.6) (37.9)- Trade and other payables and provisions 28.3 30.3Cash generated from operating activities before special pension 367.6 476.5contributionSpecial pension contribution - (200.0)Cash generated from operating activities 367.6 276.5* Excluding computer software and development costs. Non-cash transactions Major non-cash items relate to share option and long term incentive plan charges of £1.9m (2005: £31.3masset impairment charges relating to UK textiles, other impairment charge of £3.8m and share option chargesof £3.2m). Notes to the accounts (continued) 16. Reconciliation of net (decrease)/increase in cash and bank overdrafts to netdebt 2006 2005 £m £m (unaudited) (audited)Net (decrease)/increase in cash and bank overdrafts (56.3) 23.6Movement on finance leases 1.9 2.2Movement on loans (221.0) 226.7(Increase)/decrease in debt resulting from (275.4) 252.5cash flowsAcquisition of companies and (11.3) (13.8)businessesDisposal of companies and 9.3 0.5businessesRevaluation of net debt 11.3 8.1Net debt translation differences 18.2 1.5Movement on net debt in the year (247.9) 248.8Opening net debt (940.3) (1,189.1)Closing net debt (1,188.2) (940.3) Closing net debt comprises:Cash and cash equivalents 135.1 240.3 Bank and other short-term borrowings (446.0) (108.5)Bank and other long-term borrowings (877.3) (1,072.1)Total net debt (1,188.2) (940.3) 17. Free cash flow 2006 2005 £m £m (unaudited) (audited)Net cash generated from operating activities 289.4 152.4 Add back: special pension - 200.0contribution 289.4 352.4 Purchase of property, plant and equipment (176.3) (183.8)(PPE)Purchase of intangible fixed (6.3) (9.2)assetsLeased property, plant and (17.6) (16.9)equipmentProceeds from sale of PPE and intangible 42.5 22.0assetsDividends received from associates 1.0 1.0Dividends paid to minority (1.8) (2.6)interestsInterest element on finance lease payments (2.3) (2.5)Free cash flow 128.6 160.4 18. Business combinations The group purchased 100% of the share capital of Target Express Ltd ("Target"), a large parcels delivery companyin the UK, on 30 November 2006, J.C. Ehrlich Co. Inc. ("Ehrlich"), a large pest control company in the USA, on 1March 2006, Pink Healthcare, a washroom services company in Australia, on 30 June 2006 and CWS, a washroomservices company with activities in Australia, Hong Kong, South Korea, Malaysia, the Philippines and Singapore on1 September 2006. The group also purchased 100% of the share capital or the trade and assets of 67 smallercompanies and businesses. The total consideration for all acquisitions during the year was £428.8m and the cashoutflow from current year acquisitions, net of cash acquired, was £401.9m. Details of goodwill and the fair value of net assets acquiredare as follows: Target Ehrlich Pink CWS Other 2006 £m £m £m £m £m £m (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)Purchase consideration:- Cash paid 210.7 68.4 22.9 12.3 91.2 405.5- Direct costs relating to the 0.4 2.3 1.4 0.4 3.4 7.9acquisition- Consideration deferred to future - 4.3 0.9 0.2 7.7 13.1periods- Direct costs deferred to future 2.2 - 0.1 - - 2.3periodsTotal purchase consideration 213.3 75.0 25.3 12.9 102.3 428.8Fair value of net assets acquired 52.8 30.2 9.9 5.0 61.3 159.2Goodwill 160.5 44.8 15.4 7.9 41.0 269.6 Goodwill represents the synergies, workforce and other benefits expected as a result of combining the respectivebusinesses. Notes to the accounts (continued) 18. Business combinations (continued) The book value of assets and liabilities arising from acquisitions are asfollows: Target Ehrlich Pink CWS Other 2006 £m £m £m £m £m £m (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)Non-current assets - Intangible assets1 - - - - - - - Computer software 0.1 - - - - 0.1 - Property, plant and equipment 5.8 3.2 1.8 2.6 12.6 26.0 - Other investments - 0.2 - - - 0.2Current assets 25.0 10.4 0.3 0.7 41.2 77.6Current liabilities (18.5) (12.0) (1.9) (0.3) (25.9) (58.6)Non-current liabilities (2.8) (6.8) - - (4.5) (14.1)Fair value of net assets acquired 9.6 (5.0) 0.2 3.0 23.4 31.2 The provisional fair value adjustments to the book value of assets and liabilities arising from acquisitions areas follows: Target Ehrlich Pink CWS Other 2006 £m £m £m £m £m £m (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)Non-current assets - Intangible assets1 61.7 35.2 12.6 3.6 52.4 165.5 - Computer software - - - - - - - Property, plant and equipment - - 0.5 - (0.7) (0.2) - Other investments - - - - - -Current assets - - - - (0.3) (0.3)Current liabilities - - (0.4) - (1.7) (2.1)Non-current liabilities (18.5) - (3.0) (1.6) (11.8) (34.9)Fair value of net assets acquired 43.2 35.2 9.7 2.0 37.9 128.0 The provisional fair value2 of assets and liabilities arising from acquisitions are as follows: Target Ehrlich Pink CWS Other 2006 £m £m £m £m £m £m (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)Non-current assets - Intangible assets1 61.7 35.2 12.6 3.6 52.4 165.5 - Computer software 0.1 - - - - 0.1 - Property, plant and equipment 5.8 3.2 2.3 2.6 11.9 25.8 - Other investments - 0.2 - - - 0.2Current assets 25.0 10.4 0.3 0.7 40.9 77.3Current liabilities (18.5) (12.0) (2.3) (0.3) (27.6) (60.7)Non-current liabilities (21.3) (6.8) (3.0) (1.6) (16.3) (49.0)Fair value of net assets acquired 52.8 30.2 9.9 5.0 61.3 159.2 1Excluding computer software and development costs. 2The provisional fair values will be finalised in the 2007 financial statements. Target Ehrlich Pink CWS Other 2006 £m £m £m £m £m £m (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)Total purchase consideration 213.3 75.0 25.3 12.9 102.3 428.8 Consideration payable in future - (4.3) (0.9) (0.2) (7.7) (13.1)periodsDirect costs deferred to future periods (2.2) - (0.1) - - (2.3)Purchase consideration (paid in cash) 211.1 70.7 24.3 12.7 94.6 413.4Cash and cash equivalents in acquiredcompanies (5.8) (0.3) - - (5.4) (11.5)and businessesCash outflow on current year 205.3 70.4 24.3 12.7 89.2 401.9acquisitionsDeferred consideration from prior - - - - 4.6 4.6periods paidCash outflow on current and past 205.3 70.4 24.3 12.7 93.8 406.5acquisitions From the dates of acquisition to 31 December 2006 these acquisitions contributed £139.2m to revenue and £8.0m tooperating profit (after amortisation of customer lists acquired of £7.8m). If these acquisitions had occurred on 1 January 2006, they would have contributed £375.2m to revenue and £24.0mto operating profit (after amortisation of customer lists acquired of £19.6m). 19. Contingent liabilities Litigation proceedings have been initiated against our former manned guardingbusiness in the USA by former employees in respect of certain employmentpractices of that business. The group has indemnified the acquirers of thatbusiness against any potential settlement arising from these proceedings. Thegroup has taken legal advice and does not believe that the action will succeed.However as the outcome of the case is uncertain a potential obligation existsand no provision has been made for this contingent liability in accordance withIAS 37. If the claim were successful the potential exposure is in the range of$0m to $40m. Notes to the accounts (continued) 20. Post balance sheet events Since the end of the year the group has acquired a further nine companies andbusinesses for a gross consideration of £39 million, including the acquisitionof Campbell Bros. in Australia for a gross consideration of £20 million. 21. Legal statements The financial information in this statement is not audited and does notconstitute statutory accounts within the meaning of s.240 of the Companies Act1985 (as amended). Full accounts for Rentokil Initial plc for the year ended 31December 2005 have been delivered to the Registrar of Companies. The auditors'report on these accounts was unqualified and did not contain a statement underSection 237(2) or Section 237(3) of the UK Companies Act 1985. The financial information in this statement contains extracts from the 2006Annual Report, which will be issued in April 2007 and prepared in accordancewith International Financial Reporting Standards ("IFRS") as adopted for use inthe European Union. The accounting policies (that comply with IFRS) used byRentokil Initial plc (the "group") are consistent with those set out in the 2005Annual Report except that amendments to IAS 21, "The effects of changes inforeign exchange rates", IAS 39, "Financial Instruments: Recognition andMeasurement" and IFRIC 4, "Determining whether an arrangement contains a lease"have been implemented in 2006 with no material effect on either the current orprior periods. A full list of policies will be presented in the 2006 AnnualReport. In accordance with IFRS 5, the restated consolidated income statementspreviously disclosed have been updated to reflect the impact of current perioddiscontinued operations on the comparatives. 22. 2006 Annual Report Copies of the 2006 Annual Report will be despatched to shareholders and willalso be available from the company's registered office at Belgrave House, 76Buckingham Palace Road, London, SW1W 9RF. 23. Financial calendar Final dividend to be paid on 18 May 2007 to shareholders on the register on 13April 2007. The Annual Report for 2006 will be mailed to shareholders on 29 March 2007. Annual General Meeting at No. 4 Hamilton Place, London W1 on 3 May 2007 at11.00am. This information is provided by RNS The company news service from the London Stock Exchange