Rentokil Initial Regulatory News (RTO)

RENTOKIL INITIAL PLC (RTO)

INTERIM RESULTS FOR SIX MONTHS ENDED 30 JUNE 2014

1 August 2014

· Revenue, profit and cash performance for H1 are all in line with expectations.

· Interim dividend of 0.77p declared, increase of 10% on prior year.

· Strategy being executed at pace.

Revenue (at CER)Revenue from ongoing operations increased by 2.7% in H1 comprising organic growth of 0.7% and growth from acquired businesses of 2.0%. Growth in Q2 increased to 3.9% compared to 1.5% in Q1, driven by both improved organic performance (1.2%) and acquisitions (2.7%).

Growth in H1 in the Emerging (18.7%) and Growth (4.3%) quadrants was strong, offset by small declines in the Protect and Enhance (-0.2%) and Manage for Value (-0.5%) quadrants.

Divestments in the Manage for Value quadrant of our Belgian Flat Linen business and our Korean JV in 2013, and our Spanish Medical business in H1 2014, reduced revenue growth by 1.2% in the half, resulting in total revenue growth of 1.5%.

Profit (at CER)Adjusted operating profit increased by 7.7% in H1, reflecting growth in North America, Asia, France and Germany, as well as lower central and divisional overheads, partly offset by lower profits in Benelux.

Adjusted profit before tax at actual exchange rates has been negatively impacted by £6.2m due to the continued strengthening of Sterling. Based on current exchange rates the impact of currency movements would be around £17m for the full year, up £3m from previous guidance.

In line with our commitment, reorganisation costs and one-off items for continuing operations were significantly lower in H1 at £2.4m versus £20.4m last year, contributing to an increase in profit before tax of 55.5% in H1. After taking into account currency movements, profit before tax at AER increased by 38.9%. We continue to expect reorganisation costs and one-off items to be in the region of £10m for the year.

Cash (at AER)5One of our core strategic objectives is to improve free cash flow. Operating cash flow from continuing operations of £51.5m in H1 was £27.7m ahead of the prior year driven by reductions in reorganisation costs, capex and working capital outflows and we remain on track to deliver a significant improvement in free cash flow in the full year. After taking into account the cash outflow on discontinued operations (£35.5m), expenditure on current and prior year acquisitions (£41.7m), and the net impact of the sale of Initial Facilities (£250m proceeds less £16.3m of transferred restricted cash relating to Private Finance Initiative (PFI) contracts), net debt was £262.9m lower, at £859.2m at 30 June 2014 compared to £1,122.1m at 30 June 2013.M&AIn line with our strategy, we have accelerated our M&A programme to pursue targets in higher growth markets and in areas which add local density to our existing operations. We have acquired 15 bolt-ons in pest control along with one small acquisition in hygiene and one in plants. The integration of all acquisitions is progressing well. In North America we have expanded our presence with the purchase of six pest bolt-ons in Indiana, Connecticut, Virginia, West Virginia, Mississippi and Washington. In addition, we have acquired businesses in India, Mozambique, the Netherlands, the Republic of Ireland, Spain and Italy. We have completed the acquisition of Bestway, a pest control, hygiene and business services company based in Chile. Combined annual revenues of the above businesses totalled £34.7m in the 12 months immediately prior to acquisition. 

As noted above we completed the sale of the Initial Facilities business to Interserve Plc on 18 March 2014. Within our Manage for Value quadrant, we also disposed of our Spanish Medical business in the first half (2013 revenue £2.3m).

Commenting on the H1 results Andy Ransom, CEO of Rentokil Initial plc, said:

"I am pleased to report that six months in, our new strategy is on track, with revenue, profit and cash performance in the first half of the year in line with expectations. Revenue growth was particularly strong in our Pest Control category reflecting good growth in our Emerging and Growth quadrants, supported by improved organic performance and a number of pest control acquisitions. As expected, challenging trading conditions persist in our European businesses.

"Profit growth in H1 reflects the benefit of more effective businesses and reduced overheads and has been achieved despite a decline in Benelux profits. With the actions we are taking to implement our strategy at pace, to drive improved revenue, profit and cash performance, we remain confident in making further progress for the remainder of the year; our outlook for the year remains unchanged."

AER - actual exchange rates; CER - constant 2013 exchange rates

1ongoing revenue represents revenue with disposals removed and includes revenue from acquisitions.

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

3 cash flow before interest, tax, 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), reorganisation costs and one-off items and net interest credit from pensions

5 Full details of the impact of the disposal of Initial Facilities can be found in note 5 to the financial statements.

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

1 all figures are for continuing operations

2 results at constant exchange rates have been translated at the full year average exchange rates for the year ended 31 December 2013. £/$ average rates: H1 2014 1.7106; FY 2013 1.5713, £/€ average rates: H1 2014 1.2492; FY 2013 1.1820

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

4 see Note 4 for further details

5 cash flow before interest, tax, acquisitions, disposals, foreign exchange adjustments and discontinued operations

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

Basis of preparation

Segmental information has been presented in accordance with IFRS 8 "Operating Segments" which the group has implemented with effect from 1 January 2009. This statement reflects internal organisation changes made in 2014. In 2013 our core businesses were run on a day-to-day basis by one manager per country, each responsible for the core activities in his/her region, and the countries were grouped into three geographic regions, East, West and Asia. In 2014 the East and West regions ceased to exist and have been replaced by regional clusters. Prior year comparisons have been restated. In all cases references to operating profit are for continuing businesses before amortisation and impairment of intangible assets (excluding computer software). References to adjusted operating profit and adjusted profit before tax also exclude operating reorganisation costs and one-off items, totalling a net cost of £2.4m (2013: £20.4m) 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. All comparisons are at constant 2013 full year average exchange rates.

H1 PERFORMANCE OVERVIEW

In the Asia Region, ongoing revenue grew by 6.1% in H1. Both the Pest Control and Hygiene categories performed well. Our operations in the emerging markets of India, China and Vietnam delivered combined revenue growth of 26%, albeit from a low base. High single digit revenue growth was delivered in the more mature markets of Indonesia and Malaysia. In the Region, profit (APBITA) grew by 12.9% reflecting the leverage from revenue growth and the benefit of back office rationalisation, with margins up 0.8%.

In the North America Region, ongoing revenue grew by 5.0% in H1, driven primarily by the continuing acquisition programme. Organic revenue (+0.7%) was impacted by adverse weather conditions on the East and West coast, performance was stronger in Central areas. Strong profit growth of +19.1% was driven by acquisitions, as well as further margin improvement from back office and property rationalisation.

In the UK & Rest of the World Region, ongoing revenue grew 4.5% in H1, with organic growth up 2.4%. The region delivered continued growth from UK pest and hygiene categories, and increased pest control job work in particular. The Rest of World operations delivered good revenue growth, although offset by lower revenue in South Africa, which was impacted by industrial action within customer businesses in the mining sector. H1 profit grew by 4.2%.

In the Europe Region, ongoing revenue grew by 1.4% in H1. Despite, trading conditions which remained challenging, revenue growth was delivered in Germany (+1.2%) and France (+1.3%), however, offset by a decline in Benelux (-2.6%). H1 profit in the Region declined by 3.3%, due to the performance in Benelux which continued to be impacted by poor service levels in 2013 and ongoing economic conditions, resulting in contract terminations and pricing pressure. Profit growth in France was supported by a focus on yield management and branch administration rationalisation. Ongoing revenue growth of 16.3% and profit growth of 15.4% in Other Europe was primarily driven by good progress in Latin America which is managed out of the European Region.

In the Pacific Region, ongoing revenue declined slightly at -0.6% in H1. The decline in revenue was driven by reduced pest control job work and lower pest product sales. H1 profit grew by 4.5%, supported by a programme of procurement savings and branch administration rationalisation.

CENTRAL AND DIVISIONAL OVERHEADS

Central and divisional overheads decreased by £5.4m in H1, reflecting the implementation of a programme designed to reduce annual central and divisional overheads by £10m in 2014.

REORGANISATION COSTS AND ONE-OFF ITEMS - OPERATING

Our strategy to reduce restructuring costs resulted in net reorganisation costs and one-off items (operating) at actual exchange rates in H1 of £2.3m (2013: £20.5m). £3.1m (2013: £19.1m) of these related directly to the group's major reorganisation programme and consisted mainly of redundancy costs, consultancy and plant and office closure costs. One-off items (operating) show a credit of £0.8m (2013: cost £1.4m); these include costs and income relating to acquisitions and disposals and movements in vacant property provisions.

INTEREST

Net interest payable was £24.9m at actual exchange rates compared to £28.0m in the prior year, a decrease of £3.1m. The decrease is predominantly due to the carry cost resulting from raising funds ahead of the maturity of our €500m bond in March 2014. Following the maturity of the March 2014 bond the average cost of gross debt for the group is 3.94%.

TAX

The income tax expense on continuing operations for H1 was 22.2% on reported profit before tax compared with 22.9% in H1 2013 (as restated). 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 23.6%, compared with 25.9% in H1 2013 (as restated). This compares with a blended rate of tax for the countries in which the group operates of 26.5% (27.0% in H1 2013 as restated). The reduction is principally due to the increase in the recognition of the deferred tax asset in relation to certain UK tax losses carried forward as at 30 June 2014.

NET DEBT AND CASH FLOW

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

Operating cash inflow of £51.5m at actual exchange rates for continuing operations was £27.7m favourable to 2013 mainly due to reductions in restructuring costs, working capital outflows and capex in 2014.

Interest payments (including finance lease interest) were £4.1m higher than last year at £34.4m, principally due to the phasing of interest payments on the recent bond issuance. Total tax payments were £12.4m compared with £17.6m in 2013. Free cash inflow of £4.7m was £40.0m favourable compared to the prior year.

The cash spent on acquisitions in H1 totalled £41.7m with disposals being an inflow of £253.1m. This figure includes the impact of the disposal of the Initial Facilities business, with proceeds of £250m. Included in the sale were £16.3m of transferred restricted cash balances relating to PFI contracts. The Company paid a dividend of £29.2m in 2014, £3.3m more than 2013.

Foreign exchange translation and other items reduced net debt by £40.5m, leaving an overall reduction in net debt of £262.9m compared to 30 June 2013 and a closing net debt of £859.2m.

CAPITAL EXPENDITURE

Net capital expenditure from continuing operations of £98.1m was £15.8m lower than in the first half of 2013 reflecting reduced levels of investment in restructuring programmes and IT. We expect capital expenditure to be around £210m for the full year.

PENSIONS

At 30 June the group's UK defined benefit pension scheme, which is closed to new members, was valued at an accounting surplus of £94.4m on the group's balance sheet. The group has recognised the pension surplus as an asset because the group has an unconditional right to a refund. The scheme Trustees value the scheme on a different basis and based on the valuation of 31 March 2013 the plan is 99% funded with an estimated deficit of £18m. This deficit is anticipated to be met by the investment return on pension assets over the period of the recovery plan. In order to mitigate the risk that it does not, annual contributions of c.£3m over the next six years will be paid into a joint escrow account by the group. 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 30 June 2014 the group had net debt of £859.2m and a strong liquidity position, comprising over £110m of funds and £270m of available undrawn committed facilities. 

Standard & Poor's upgraded the group's investment grade credit rating from BBB- to BBB in June 2014, reflecting the group's concentration on high margin core businesses following the sale of Initial Facilities and the group's strong funding position with no maturities until March 2016 and well spread maturities thereafter.

The directors continue to adopt the going concern basis in preparing the accounts 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.

DIVIDEND

The Board has declared an interim dividend of 0.77p per share, amounting to £14.0m, payable on 16 September 2014 to shareholders on the register at the close of business on 15 August 2014. This is an increase of 10% on the interim dividend for 2013.

OUTLOOK

Six months in, our new strategy is on track, with revenue, profit and cash performance in the first half of the year in line with expectations. Revenue growth was particularly strong in our Pest Control category reflecting good growth in our Emerging and Growth quadrants, supported by improved organic performance and a number of pest control acquisitions. As expected, challenging trading conditions persist in our European businesses.

Profit growth in H1 reflects the benefit of more effective businesses and reduced overheads and has been achieved despite a decline in Benelux profits. With the actions we are taking to implement our strategy at pace, to drive improved revenue, profit and cash performance, we remain confident in making further progress for the remainder of the year; our outlook for the year remains unchanged.

THE DIFFERENTIATED PLAN TO DRIVE SHAREHOLDER VALUE

On 28 February 2014, the Company announced its plan to deliver sustainable revenue and profitable growth. The plan is based upon a new, more focused model for the company which includes the introduction of five geographic regions, a focus on three core categories of pest control, hygiene and workwear, the sharing of best practice within a lean operating model and delivering the highest standards of customer service through colleagues who are technical experts.

As part of this new model, the Company has also begun to manage the business by grouping its country operations and categories into a four-quadrant matrix - based upon their growth potential and profit contribution. Each quadrant has a different strategy, designed to maximise their performance.

The Company also announced in February the following medium-term targets:

1. Driving higher revenue: mid-single digit revenue growth, supported by M&A investment and divestment of non-core or poorly performing businesses

2. Sustainable profit growth: high single digit profit growth, leveraging revenue ambitions

3. Improved free cash flow: significant improvement in sustainable free cash flow which will be used to fund: M&A, progressive dividend policy, incremental reduction in debt

Strategy into Action (at CER)

Implementation of the Company's strategic plan began at pace in H1. An update on progress made in the first half of 2014 is outlined below by Revenue, Profit and Cash, and by Quadrant.

1. Driving higher revenue

Focus: Core categories of pest control, hygiene and workwear, six operational levers and M&A to build leadership positions, boost density, enter new markets or divest non-core businesses.

Progress Report:

· Focus on core categories of pest control, hygiene and workwear

o Good ongoing revenue growth in Pest Control category in H1 (+6.7%), accelerated in the second quarter (+8.5%); the category continues to deliver good profit growth.

o Improved ongoing revenue performance in hygiene (+1.3%) and workwear (+0.9%) categories in second quarter, however, profit impacted by Benelux.

· Targeting our Offer (where to play) through Innovation

o The Company continued the roll out of Signature and Reflection hygiene ranges in H1 while developing additional range items including no-touch, compact and a range of new colours including gloss or metallic finishes.

o A new Workwear range was launched in Germany to target customer-facing employees in supermarkets, stores, hotels and restaurants.

o An innovative 3D body scanner was trialled in H1 to provide the perfect fit for workwear.

o A new 'CleanVision' suit (with integrated hood and visor to minimise contamination) and website were launched in Cleanrooms.

o In Pest we now have 80 customers across 200 locations in Netherlands and Belgium using PestConnect, our remote monitoring system. Following the success of this large-scale pilot, we are preparing for its roll-out to other markets.

· Mastering our Markets (customer density and new markets) through M&A

o As reported earlier in this statement, the Company has accelerated its M&A programme to pursue targets in growth markets and to add local density to our existing operations. 17 deals completed with £34.7m annualised revenues

· Sales effectiveness (Building the pipeline) through Digital excellence

o Following extensive customer research and development, the Company launched a new web presence for Rentokil in the UK in H1 which maximises search performance and adds local contacts. It contributed to a 15% increase in non-paid search traffic to the UK site in Q2 and an improved conversion rate. This will begin to roll out in H2.

o H1 saw increased PR coverage driving web traffic and brand awareness.

2. Sustainable profit growth

Focus: Revenue growth, pricing and margin growth with significant reduction in central and divisional overheads and restructuring costs, and by improving service productivity.

Progress Report:

· Sales force to focus on yield management

o The Company made good progress in France in H1, while opportunities remain across the Group, especially Benelux, Germany and Asia

· Service productivity

o The Company has identified further opportunities across the Group, combined with increased density from M&A.

· Reduction in central and divisional overheads in 2014

o Reduction in central and divisional overheads of £5.4m in H1. The Company remains on track to deliver this significant reduction in overheads of £10m in 2014.

· Branch admin rationalisation

o The Company has driven significant margin improvements in France, Australia and North America in H1.

3. Improved free cash flow

Focus: Managing working capital, bringing capex in line with depreciation and significantly reducing restructuring costs. Balanced use of cash to invest in M&A, pursue a progressive dividend policy and incremental reduction in debt (as outlined earlier in this statement).

Progress Report:

· Lower capex

o The Company made good progress in H1 delivering a reduction of £15m

· IT Capex

o The Company delivered half-year spend of £7m; full year investment estimated at £20m.

· Significant reduction in reorganisation costs and one off items

o The Company's P&L charge reduced significantly in H1 at £2.4m versus £20.4m last year - with full year P&L estimated at £10m - cash cost of c£15m - (vs P&L impact of £60m in 2013).

· Reduced working capital outflows

o The Company reduced working capital outflows by £13m in H1.

4. Implementation of differentiated quadrant matrix

Over the last six months, the Company's country operations, which have each been mapped against the four quadrants, began to implement differential strategies for the different quadrants. An update on progress is outlined below with examples of how the strategies are being put into action.

Emerging Quadrant

H1 revenue (ongoing) rose 18.7% in the Emerging quadrant, while profit (ongoing) was up 13.9% as the countries in this quadrant focused on building leading positions in pest control and hygiene, creating a pipeline of leads, mastering local markets and driving customer density.

In China, the Company continued to grow revenues, particularly in the food retail and food processing sectors, while a new focus on route density has begun to drive profitability. As part of the focus on targeting our offer (Mastering our Markets operational lever), this focus on route density has resulted in an increase in gross margin of 7.4% pts year on year. In India, the Company is now the third largest pest control company and accelerated growth with entry into Gujarat through a small acquisition in June.

In Latin America, Rentokil Initial made its first market entry into Chile with the acquisitions of Bestway and Chileno Allemena, which is particularly focused on the urban area of Santiago. In Brazil (Rentokil Initial is number two, currently focused on Rio and São Paulo) organic growth of 40% reflected the attractive market and the successful integration of the acquisitions.

Growth Quadrant

H1 revenue (ongoing) grew 4.3% in the Growth quadrant, while profit (ongoing) was up 7%. Countries in this quadrant are typically seeing good GDP and sector growth. Our businesses in this quadrant are focused on deploying a full range of operational levers to growth as well as using M&A to add density.

The Company's UK operations had an excellent first half. The business introduced new digital channels to build customer enquiries and boost colleague lead generation. New websites for Rentokil and Initial were launched and the company promoted the use of internal social media (Google+) as a way of sharing new sales leads. This has been successful with a 30% increase in leads helping to build the pipeline of new business.

Protect & Enhance Quadrant

H1 revenue (ongoing) fell 0.2% in the Protect & Enhance quadrant, while profit (ongoing) was down 4.1%. Countries in this quadrant are typically our higher margin, higher market share operations but in countries with low GDP growth. As expected, challenging trading conditions persist in our Protect & Enhance markets. A full range of operational levers are being applied with particular focus on service, retention, productivity and pricing. 

In France, the company has undertaken a major review of pricing with actions grounded in detailed financial analysis - by customer, sector, branch, sales area. The business also introduced a focus on yield management with different pricing strategies for high and low margin customers. This was linked to a sales colleague incentivisation programme, covering both new sales and contract renewals. As a result, net margins in France rose 1.0% in H1, despite the difficult economic environment.

As the Company has highlighted for some time, the operational and financial performance of the Workwear and Hygiene categories in Benelux has been unacceptable. A combination of very tough economic conditions, highly competitive markets and disruption caused by workwear plant and system changes, led to levels of service in 2013 which were not to the high standards we expect, and this in turn led to a number of contract terminations.

In H1 2014, the Company put in place a new management team, stopped the change programme and focused the business on customer service in line with the company's retention and growth levers, as well as account management and sharper yield management. Performance of the Benelux business is a key priority.

Manage for Value Quadrant

H1 revenue (ongoing) fell 0.5% in the Manage for Value quadrant, while profit (ongoing) was up 3.7% as the country operations in this quadrant focused on retaining customers, aggressive cost management and enhancing productivity.

In Southern Europe, the strategy has been put into action through the introduction of a productivity improvement programme and divestment of a sub-scale operation.

The Company's Italian Hygiene business introduced a programme to improve service scheduling by re-zoned technicians to better fit with the density of its customer base. At the same time, a targeted up-sell programme supported the increase in density. As a result, the Hygiene business in Italy is now operating at a 6% improvement in productivity per technician and operating margins increased by 300bps in H1.

In the first half, the Company also divested its Medical services business in Spain. This business had market share of just 2% and annualised revenues of £2.3m. It operated in a highly competitive market, was sub-scale and had limited growth prospects. In line with the quadrant strategy, the proceeds have been reinvested in the quadrants of higher growth.

Appendix 1

Regional Analysis - continuing operations

1 excluding computer software

Appendix 2

Category Analysis - continuing operations

Appendix 3

ANNUAL CONTRACT PORTFOLIO - CONTINUING BUSINESSES

3 Months to 30 June 2014

6 Months to 30 June 2014

Definition of the above can be found on the Rentokil Initial website: www.rentokil-initial.com

1 excluding computer software

2 taxation includes £11.9m (HY 2013: £9.1m, FY 2013: £32.5m) in respect of overseas taxation

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

*restated for the sale of the Initial Facilities business. Please refer to note 5 for further details

Condensed consolidated statement of changes in equity

Treasury shares of £11.1m (HY 2013: £11.1m, FY 2013: £11.1m) have been netted against retained earnings. Treasury shares represent 6.0m (HY 2013: 6.1m, FY 2013: 6.0m) shares held by the Rentokil Initial Employee Share Trust. The market value of these shares at 30 June 2014 was £6.7m (HY 2013: £5.4m, FY 2013: £6.9m). Dividend income from, and voting rights on, the shares held by the Trust have been waived.

Condensed consolidated statement of changes in equity (continued)