Rentokil Initial Regulatory News (RTO)

RENTOKIL INITIAL PLC (RTO)

INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2015

30 July 2015

· Strong growth in revenue and profit in H1

· Positive organic growth trend continues into H1: +1.9% year on year (FY 2014: +1.2%)

· Pest control particularly strong: revenue growth +9.6% (+4.8% organic)

· Free cash flow of £55.4m, on track to meet £100m+ target for the full year

· Continued M&A execution: 14 bolt-ons (12 in pest) with combined annualised revenues of £21m

· Further reduction in net debt to £730m, £129m lower than H1 2014

· Interim dividend increased by 13% to 0.87p

· Expectations for the full year are unchanged

Commenting on the 2015 interim results Andy Ransom, CEO of Rentokil Initial plc, said:

"In February 2014 we set out our new differentiated strategy and introduced medium-term targets for mid-single digit revenue growth, high-single digit profit growth and a significant improvement in cash generation.

"We have continued to implement our strategy at pace and made further good progress in the first half of 2015, delivering ongoing revenue growth of 5.2%, profit growth of 8.0% and free cash flow of £55m.

"While prospects in the majority of our key markets are good, conditions in certain parts of Europe remain challenging, particularly in France and the Netherlands. We are nonetheless on track to achieve our 2015 revenue, profit and cash expectations. 

"Overall I am encouraged by the progress that we have made over the last eighteen months and I am confident of delivering further value for shareholders as we enter the next phase in the execution of our plan."

Revenue (at CER)

Revenue from ongoing operations increased by 5.2% in H1, comprising organic growth of 1.9% and growth from acquired businesses of 3.3%.

Revenue in the pest control category grew particularly strongly, at 9.6% in H1, 4.8% of which was organic.

Growth in H1 in the Emerging (+17.5%) and Growth (+9.2%) quadrants was strong with good performances from North America, UK, Germany, Latin America, Asia and Pacific. This was partially offset by declines in the Protect & Enhance quadrant (-1.0%), largely driven by France and Benelux and by a small decline in the Manage for Value quadrant (-0.7%).

During the period we closed our Austrian and Northern Ireland flat linen businesses in Manage for Value which, together with other businesses divested in 2014, reduced revenue growth by 0.7%, resulting in total revenue growth of 4.5%.

Profit (at CER)

Adjusted operating profit from ongoing operations increased by 8.0% in H1, reflecting growth in North America, the UK, Germany, Asia and Pacific, offset by lower profits in France and Benelux.

Adjusted profit before tax (at AER) was negatively impacted by £6.6m due to the continued strengthening of Sterling against the Euro. Based on current exchange rates the impact of currency movements would be around £19m for the full year (£5m higher than previous guidance).

Restructuring costs were a net charge of £2.5m and one-off items were a net credit of £0.2m. We continue to expect restructuring costs to be less than £10m for the year. Profit before tax increased by 15.9% in H1. After taking into account currency movements, profit before tax increased by 5.1%.

Cash (at AER)

Free cash flow from continuing operations of £55.4m in H1 was £50.7m ahead of the prior year, driven by reductions in capex and working capital outflows (in part due to foreign exchange and phasing) as well as a reduction in interest payments and the beneficial settlement of a legacy legal claim. After taking into account the expenditure on current and prior year acquisitions (£32.7m) and the benefit of exchange rate movements, net debt reduced by £129.4m to £729.8m (30 June 2014: £859.2m).

M&A (at AER)

In line with our strategy we have continued our M&A programme to pursue targets in higher growth markets and in areas which add local density to our existing operations. We acquired 12 bolt-ons in pest control in H1, along with two small acquisitions in Ambius. In North America we have continued to expand our presence with the purchase of six pest control bolt-ons. In addition, we have acquired small businesses in the UK, Australia, Korea, South Africa and Poland. We have also expanded our presence in Latin America with a small bolt-on acquisition in Colombia and with the acquisition of Sagrip which gives us access to the main cities in Guatemala and El Salvador. Combined annual revenues of the above businesses totalled £21m in the 12 months immediately prior to acquisition. The integration of all acquisitions is progressing well and the pipeline remains strong with opportunities to create value, particularly in pest control. Cash spend on M&A for the full year is likely to be in excess of £50m given the level of cash spent on acquisitions in H1.

AER - actual exchange rates; CER - constant 2014 exchange rates

1ongoing revenue and profit exclude the financial performance of disposed and closed businesses but include results from acquisitions

2 before amortisation and impairment of intangibles (excluding computer software), restructuring costs and one-off items, and net interest credit from pensions

3 cash flow before acquisitions, disposals, foreign exchange adjustments and discontinued operations

4 earnings per share before the after tax effects of amortisation and impairment of intangibles (excluding computer software), restructuring costs and one-off items and net interest credit from pensions

This announcement contains statements that are, or may be, forward-looking regarding the group's financial position and results, business strategy, plans and objectives. Such statements involve risk and uncertainty because they relate to future events and circumstances and there are accordingly a number of factors which might cause actual results and performance to differ materially from those expressed or implied by such statements. Forward-looking statements speak only as of the date they are made and no representation or warranty, whether expressed or implied, is given in relation to them, including as to their completeness or accuracy or the basis on which they were prepared. Other than in accordance with the Company's legal or regulatory obligations (including under the Listing Rules and the Disclosure and Transparency Rules), the Company does not undertake any obligation to update or revise publicly any forward-looking statement, whether as a result of new information, future events or otherwise. Information contained in this announcement relating to the Company or its share price, or the yield on its shares, should not be relied upon as an indicator of future performance. Nothing in this announcement should be construed as a profit forecast.

FINANCIAL SUMMARY

Basis of preparation

Segmental information has been presented in accordance with IFRS 8 "Operating Segments" and reflects internal organisation changes made in 2014. Unless otherwise stated references to 'revenue' are for ongoing businesses and references to 'profit' and 'operating profit' are for ongoing businesses before amortisation, impairment of intangible assets (excluding computer software) and restructuring costs and one-off items (totalling a net cost of £2.3m) that have had a significant impact on the results of the group. These costs have been separately identified as they are not considered to be "business as usual" expenses and have a varying impact on different businesses and reporting periods. Ongoing revenue and profit is from continuing operations excluding the results from disposed and closed businesses but includes the results from acquisitions. All references to revenue and profit are at constant 2014 full year average exchange rates (CER) unless otherwise stated.

REGIONAL PERFORMANCE

In the North America region revenue grew by 8.3% in H1, driven by organic revenue growth (+2.7%) and the continuing acquisition programme (+5.6%). Organic revenue growth from pest control was 2.9%. Strong profit growth of 19.5% was driven by acquisitions, the leverage impact from higher revenues as well as further margin improvement from back office and property rationalisation and lower fuel prices. This has improved margins by 1% point.

In the Europe region revenue rose by 0.4% in H1, but organic revenue declined by 0.8%. Good revenue growth in Germany (+3.0%), Southern Europe (+5.2%) and Latin America (which is managed out of the European Region and which grew by 52.8%) was offset by declines in France (-3.1%) and Benelux (-0.8%). Profit was down 2.9% in H1, primarily driven by the revenue reductions and pricing pressure in France. We see opportunities to support margins through service productivity and branch and back office rationalisation.

Trading conditions remain challenging in certain parts of Europe, in France and the Netherlands in particular. Overall we expect trading performance in the region in H2 to be in line with H1.

In the UK & Rest of World region revenue increased by 13.2% in H1, reflecting organic growth of 5.5% and acquisition growth of 7.7%, largely from the Peter Cox acquisition made at the end of 2014. The region delivered continued growth from the UK pest and hygiene categories, with pest control benefitting from increased jobbing work in particular. The Rest of World operations delivered good revenue growth driven by the Caribbean and South Africa. H1 profit grew by 6.8%. Margins declined by 1.2% points in the period, partly reflecting the impact of the Peter Cox acquisition and the phasing of certain costs in the Rest of World operations.

In the Asia Region revenue increased by 13.3% in H1 (+9.0% organic) with both the pest control and hygiene categories performing well. Our operations in the emerging markets of India, China and Vietnam continue to grow well, delivering combined revenue growth of 28%. High single digit revenue increase was delivered in the more mature markets of Indonesia and Malaysia. Profit in the region grew by 51.6% in the first half, reflecting leverage from higher revenues and the ongoing benefit from back office rationalisation, with margins higher by 2.2% points on H1 2014. Acquisitions in Asia account for 11.3% of profit growth.

In the Pacific region revenue grew by 4.3% in H1 (+3.8% organic), reflecting increased contracts in the pest and hygiene categories and more jobbing work in pest control. First half profit grew by 7.9%, reflecting higher revenues and also supported by a programme of procurement savings and branch administration rationalisation.

DIVIDEND

The Board has declared an interim dividend of 0.87p per share, amounting to £15.8m, payable on 16 September 2015 to shareholders on the register at the close of business on 14 August 2015. This is an increase of 13% on the interim dividend for 2014.

GUIDANCE FOR 2015

Central and divisional overheads are anticipated to be in line with 2014. Impact to the P&L of restructuring costs is expected to be no greater than £10m. Interest costs are likely to be in the region of £42m, reflecting the impact of the Company's recent refinancings. Our current estimate for the adjusted effective tax rate is 23.4% (in line with last year) with cash tax payable no more than £40m. Sterling has continued to strengthen in H1 and based on current exchange rates the impact on 2015 adjusted profit before tax would be c.£19m (£5m more than our previous guidance). Working capital outflow is unchanged and estimated to be at or below £20m, with net capex no more than £200m. Cash spend on M&A for the full year is likely to be in excess of £50m given the level of cash spent on acquisitions in H1.

 OUTLOOK

In February 2014 we set out our new differentiated strategy and introduced medium-term targets for mid-single digit revenue growth, high-single digit profit growth and a significant improvement in cash generation.

We have continued to implement our strategy at pace and in the first half of 2015 we have delivered ongoing revenue growth of 5.2%, profit growth of 8.0% and free cash flow of £55m.

While prospects in the majority of our key markets are good, conditions in certain parts of Europe remain challenging particularly in France and the Netherlands. We are nonetheless on track to achieve our 2015 revenue, profit and cash expectations. 

Overall, we are encouraged by the progress that we have made over the last eighteen months and are confident of delivering further value for shareholders as we enter the next phase in the execution of our plan.

DELIVERING PROFITABLE GROWTH

In February 2014 we announced our RIGHT WAY plan to deliver sustainable revenue and profitable growth. The plan is based upon a new, focused model for the Company which includes the introduction of five geographic regions with a low cost operating structure: North America, Europe, UK & Rest of World, Asia and Pacific. Our core competencies are our colleagues as experts, our category leadership, and our lean multi-business model. We manage the business for profitable growth by grouping our categories and geographies into a growth potential and profit contribution matrix to assist capital allocation and by utilising six operational levers to drive growth.

We also announced the following medium-term targets:

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1. Mid-single digit revenue growth, supported by M&A investment and divestment of non-core or poorly performing businesses;

2. High-single digit profit growth, leveraging revenue targets; and

3. Strong and sustainable delivery of free cash flow of £100m+ p.a. to fund M&A, implement a progressive dividend policy and reduce debt.

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Progress in phase one

The group has undergone a significant transformation over the past 18 months and is now delivering strong and sustainable free cash flow. We called to an end the period of large-scale restructuring from 2008 to 2013 and have cut restructuring costs by some £40m compared to the levels in 2013. Central and divisional overheads have been reduced by £12m, working capital is managed more tightly and capex is broadly in line with depreciation. In addition, we have a fully-funded pension scheme, group net debt (at just under £730m) is at its lowest level for 15 years and we have reached our target credit rating of BBB (Stable Outlook).

Within the categories while Pest Control and Hygiene have made solid progress, further work remains to be done in Workwear. We update on our category progress in phase one of our Right Way plan below.

Pest Control:

· We have an outstanding, world-leading pest control business with market leadership positions in 47 of the 60+ countries in which we operate. Pest Control is the growth engine of the group and in H1 overall pest revenues grew by 9.6% (+4.8% organic)

· We have established coast-to-coast coverage in the US and are the third largest market player, servicing a national customer base

· We are accelerating our presence in high growth emerging markets with a refocused strategy for China and India and now establishing a strong position in Latin America

· Building greater density in pest control is our primary M&A focus and we have acquired 35 businesses since January 2014, all of which are performing at or ahead of the required quadrant IRR hurdle rates

· Our innovation pipeline and digital expertise are driving service differentiation, sales and customer engagement:

- Notable product innovations include 'PestConnect' (commercialised remote monitoring), 'RodentGate' (smart external traps that only open to rats) and 'myRentokil' (a risk-based extranet and App for customers)

- Launch of a new performance-enhancing website in 20 markets to drive further digital expertise improvement across our operations

Hygiene:

· Hygiene is a global hygiene services leader - much needed re-investment has been made with new product ranges now fully in place including 'Signature', 'Colour', 'Reflection' and 'No Touch'

- Overall revenue growth of 2.3% in H1

- UK & Ireland hygiene businesses now returned to growth (+3.7% in H1)

- +1.3% revenue growth in France in H1 reflecting roll-out of the 'Signature' range

- +3.9% revenue growth in the Pacific region

· We are building a strong position in Emerging markets (revenue +17.5% in H1):

- 13.3% revenue growth in Asia in H1

· Innovation is beginning to gain traction:

- 'HygieneConnect' - which uses the same technology as 'PestConnect' and which is the world's first integrated wireless monitoring and display system designed to raise hand washing compliance

- Launch of 'myInitial' extranet for better customer engagement.

· Our premium scenting business is currently growing at over 30% p.a., albeit from a low base

Workwear:

· Progress over the past 18 months includes:

- Launch of new product ranges in main European countries

- Steady performance from our German workwear operations

- Continued growth in the higher-margin Cleanroom business

- Exit of our lower-margin flat linen operations in Austria and Northern Ireland

· However, overall category performance continues to be held-back by France and the Netherlands

· Acceptable service levels are in place but the opportunity for differentiation is through providing the highest product and service quality

Our capital allocation model is working well, with M&A and capex allocated in line with quadrant strategies. We have established a high quality pipeline of acquisitions and have acquired 44 businesses over the past 18 months (36 of which have been in the Growth and Emerging markets) with combined annual revenues of £78.6m. All are performing at or ahead of their quadrant IRR hurdle rates. We have acquired 17 businesses in North America, building greater density in this important region and have entered new high growth markets including Chile and Colombia. The Growth and Emerging quadrants now account for almost 60% of group revenue. In the Manage for Value quadrant we have disposed of a number of non-core operations (notably the Initial Facilities, Spanish Medical and Austrian products businesses and more recently our flat linen operations in Austria and Northern Ireland) leaving the remaining businesses comprising just 4% of group revenue.

Overview of the next phase

Below we summarise our priorities for the next phase of execution of our Right Way plan:

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1. Increasing our exposure to Growth and Emerging markets particularly in North America and Asia;

2. Accelerating and prioritising Pest Control with upside to go for in Hygiene through "Execute Now" and Workwear's quality-focused improvement plan;

3. Greater exploitation of our digital expertise - to drive sales and customer engagement;

4. Further differentiation through innovation - delivery of pipeline of innovations to market;

5. Delivering enhanced margins where possible through city density and local share (for example North America and Asia);

6. Boosting sales and service productivity;

7. Greater sharing of best practice - further roll-out of the 'Project Speed' programme for greater sharing of operational best practices; and

8. Value-creating M&A programme - continuing to use our differentiated approach with clear strategies for growth and capital allocation.

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Pest Control - 'Acceleration'

Our pest control business is set to become our majority category and we plan to deliver continued acceleration for the business through:

· deployment of new pest products and services from innovation pipeline;

· roll-out of our performance-enhancing web presence across the group;

· our leadership in the 'Internet-of-Things' for pest control, for example monitoring devices covering a range of pests and risk-based reporting through extranets/apps;

· leverage of our North America position and growth and share growth in Emerging markets; and

· continued M&A programme to build greater density.

Hygiene - 'Execute Now'

Within the hygiene category we will pursue an 'Execute Now' growth strategy to leverage our strengths across our 40+ markets of operations by:

· building on the strength of our leading hygiene brand and strong market positions;

· selling with confidence - including new product ranges such as 'Reflection', 'Signature', 'Colour' and 'No Touch' and Premium Scenting;

· leading on innovation through 'Internet-of-Things' for hygiene, for example sensing, hand hygiene compliance, particularly in the food and health market sectors; and

· building city density and extend our footprint through organic growth and continued M&A.

Workwear - 'Quality of Service'

Our aim is to create a workwear business that has clear market differentiation through the highest level of product and service quality, thus driving greater customer satisfaction and in turn generating improved revenue and margins. The plan includes:

· rigorous application of KPIs to measure quality of service;

· improved product visibility through the entire service process;

· best-in-class processing - highest standards in washing and repair quality; new higher quality detergents;

· greater responsiveness to customer needs - shorter lead time between contract and deployment (for example web-based size taking pilot);

· smarter selling - "selling a service rather than a product";

· creation of product and service innovation action group; and

· leveraging European scale and best practice - to create a more effective organisation through best practice sharing in supply chain, R&D, processing, sales and marketing.

FINANCIAL REVIEW

Central and regional overheads (at CER)

Central and regional overheads decreased by £2.4m in H1 to £32.3m, partly reflecting the lapping impact of the cost reduction programme in 2014 and continued cost discipline.

Restructuring costs and one-off items - operating (at CER)

Restructuring costs of £2.5m were in line with the prior year. These consisted mainly of redundancy costs and plant and office closure costs. One-off costs in the first half netted to a credit of £0.2m (2014: credit of £0.8m) with the costs associated with the closure of our Austrian and Northern Ireland flat linen businesses (£11.0m) offset by the income (£10.8m) from the settlement of a legacy legal claim.

Interest (at AER)

Net interest payable was £19.9m compared to £24.9m in H1 of the prior year, a decrease of £5.0m. The decrease is predominantly due to the reduced interest rate following the repayment of a €500m bond in March 2014.

Tax (at AER)

The income tax expense on continuing operations for H1 was 20.5% on reported profit before tax compared with 22.2% in H1 2014. After adjusting profit for the amortisation and impairment of intangible assets (excluding computer software), reorganisation costs and one-off items and net pension credit from pensions, the effective tax rate is 23.4%, compared with 23.6% in H1 2014. This compares with a blended rate of tax for the countries in which the group operates of about 26% (26.5% in H1 2014). The reduction is principally due to the offset of the group's UK profits by brought forward tax losses. 

Net debt and cash flow

1 before amortisation and impairment of intangibles (excluding computer software), restructuring costs and one-off items

Operating cash inflow of £93.6m at AER for continuing operations was £42.1m favourable to 2014 mainly due to reductions in working capital outflows and capital expenditure in 2015 and helped by the favourable settlement of a legacy legal claim.

Interest payments (including finance lease interest) were £10.9m lower than last year at £23.5m, principally due to the re-phasing of interest payments to the second half of the year following the bond refinancing in 2014. 

Free cash inflow from continued operations of £55.4m was £50.7m favourable compared to the prior year. The cash spent on acquisitions in H1 totalled £32.7m and the Company made a dividend payment of £33.1m in 2015.

Foreign exchange translation and other items reduced net debt by £56.2m, leaving an overall reduction in net debt of £129.4m compared to 30 June 2014 and closing net debt of £729.8m.

Capital expenditure (at AER)

Net capital expenditure from continuing operations of £84.9m was £13.2m lower than in the first half of 2014 due to exchange rate movements and phasing. We expect capital expenditure to be no more than £200m for the full year.

Pensions (at AER)

At 30 June 2015 the Company's UK defined benefit pension scheme, which is closed to new members, was valued at an accounting surplus of £203.9m on the Company's balance sheet. The Company has recognised the pension surplus as an asset because the group has an unconditional right to a refund of the surplus at the end of the Scheme's life. 

The trustees value the scheme on a different basis. The most recent formal actuarial valuation showed that at 31 March 2013 the Scheme was 98.7% funded with a deficit of £17.8m. However, based on movements since 31 March 2013 the Scheme was estimated to have an actuarial surplus in excess of £20m at 30 June 2015.

It is anticipated that the Scheme will remain in surplus but in order to mitigate the risk that it does not, annual contributions of £3.2m per annum over the six-year period will be paid into a joint escrow account by the Company. The first payment was made in October 2014. In the event that the deficit is not cleared by the time of the 31 March 2019 valuation, it will be funded from the escrow account.

Funding (at AER)

At 30 June 2015 the group had net debt of £730m and a strong liquidity position, comprising over £225m of centrally held funds and £270m of available undrawn committed facilities.

During Q1 the group refinanced its £270m Revolving Credit Facility and £40m Letter of Credit Facility, both maturing December 2016 combining the two facilities into a single facility, a £315m cash and letter of credit facility maturing in January 2020, of which a maximum of £270m may be used for cash drawings. 

The group has a £300m bond maturing in March 2016. It is envisaged that the bond will be refinanced substantially through existing cash balances and facilities. However, we will continue to review our funding position and will provide an update in due course.

The Directors continue to adopt the going concern basis in preparing the interim statement on the basis that the group's strong liquidity position and ability to reduce operating capital expenditure or expenditure on bolt-on acquisitions are sufficient to meet the group's forecast funding needs, including those modelled in a downside case.

Appendix 1

Regional Analysis - ongoing operations

Appendix 2

Category Analysis - ongoing operations

1 excluding computer software

2 taxation includes £13.3m (HY 2014: £11.9m) in respect of overseas taxation

3 earnings per share before the after tax effects of amortisation and impairment of intangibles (excluding computer software), restructuring costs and one-off items and net interest credit on pensions

Consolidated statement of changes in equity

Treasury shares of £7.0m (HY 2014: £11.1m) have been netted against retained earnings. Treasury shares represent 3.8m (HY 2014: 6.0m) shares held by the Rentokil Initial Employee Share Trust. The market value of these shares at 30 June 2015 was £5.6m (HY 2014: £6.7m). Dividend income from, and voting rights on, the shares held by the Trust have been waived.