Rentokil Initial Regulatory News (RTO)

RENTOKIL INITIAL PLC (RTO)

INTERIM RESULTS FOR SIX MONTHS TO 30 JUNE 2013

14 August 2013

First Half Highlights (at CER)  

§ Good progress made in Q2, momentum expected to continue in H2

§ Adjusted operating profit +5.2%, revenue up 3.7%

o Strong acceleration of profit growth in Q2

o Recent acquisitions performing well, contributing 6.0% (£65.6m) of revenue growth

o Underlying organic revenue growth3 down 1.6% year on year reflecting portfolio change in Initial Facilities and poor weather in US

§ Strong performance in core businesses outside continental Europe

o Integration of Western Exterminator proceeding to plan

o UK core business capitalising on integrated country operating model to deliver strong profit growth

o Asia profit +43.5% - notably strong performances from China, India and Vietnam

o Six further pest acquisitions in Brazil, French Guyana, Portugal, Canada and the US

§ Conditions in continental Europe continue to be challenging

o France & Benelux experiencing pricing pressure. Belgian flat linen sale completed end Q1

§ Initial Facilities transition out of low profitability single service contracts largely complete

o 2.9% decline in revenue reflecting catering contract losses and withdrawal from certain selected single service cleaning contracts in the UK & Spain. Margins to improve as sector mix evolves toward total facilities management

§ City Link disposed in Q2

o £14.2m trading loss and £39.0m one-off loss on disposal; reported in discontinued operations

§ Cost savings of £21.1m on track to exceed full year target of £40m

o £24.6m investment in reorganisation costs to achieve this

§ Cash flow impacted by increased investment in capex and restructuring

o Reorganisation costs now forecast at £50m reflecting increased investment in Integrated Country Operating Model

o Significant improvement in cash flow expected in H2 reflecting business seasonality and working capital phasing

§ Interim dividend of 0.70p per share declared, an increase of 4.5% on prior year

Alan Brown, Chief Executive Officer of Rentokil Initial plc, said:

AER - actual exchange rates; CER - constant 2012 exchange rates

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

2 cash flow before interest, tax, acquisitions, disposals, foreign exchange adjustments and discontinued operations (see note 8)

3 revenue growth adjusted to remove revenue from current and prior year acquisitions and disposals

* restated as a result of IAS 19R. Please refer to note 3 for further details

Financial Summary

1 all figures are for continuing operations and are unaudited

2 results at constant exchange rates have been translated at the full year average exchange rates for the year ended 31 December 2012. £/$ average rates: H1 2013 1.5488; FY 2012 1.5898, £/€ average rates: H1 2013 1.1806; FY 2012 1.2320

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

4 see note 4 for further details

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

net interest credit from pensions

6 cash flow before interest, tax, acquisitions, disposals, foreign exchange adjustments and discontinued operations (see note 8)

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.

Investors / Analysts enquiries:

Katharine Rycroft, Head of Investor Relations Rentokil Initial plc 01293 858 166

Media enquiries:

Malcolm Padley, Corporate Communications Rentokil Initial plc 07788 978 199

Justine McIlroy, Oliver Hughes Brunswick Group 020 7404 5959

Interim Results Presentation - The Grange Tower Bridge Hotel, 45 Prescot Street, London

Rentokil Initial plc is presenting its interim results today in the Sydney Suite of the Grange Tower Bridge Hotel, 45 Prescot Street, London. The event will be web cast live on the Rentokil Initial web site and will commence at 9.15am. The complete web cast will be available after the event via a replay facility.

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 changes made in 2013 with the pest control and plants business units in France, Benelux and Germany (including Austria, Switzerland and Czech Republic) transferring from the West region to the East region; the UK other category business units transferring from the East region to the West region and East and West region overhead business units transferring to Central costs. The segmental information also reflects changes made in 2012 with Pacific business units transferring from the Asia region to the East region and the integration of Ambius into the West region. 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 reorganisation costs and one-off items, totalling a net cost of £26.9m (2012: £13.4m) that have had a significant impact on the results of the group. Details of reorganisation costs and one-off items incurred in the period, for which adjustments have been made, are set out in note 4. All comparisons in commentaries are at constant 2012 full year average exchange rates unless otherwise stated.

H1 PERFORMANCE OVERVIEW

Revenue in the East region declined by 1.8% in H1. Trading conditions in continental Europe have been difficult with France and Benelux experiencing pricing pressure. Germany has been more resilient aided by growth in its Cleanroom operations. Divisional performance was held back by poor pest job sales in Australia and France due to adverse weather conditions. H1 profit was in line with 2012 with good performances from France and Germany (supported by the move to the Integrated Operating Model) offset by profit declines in Benelux and the Pacific. Restructuring is progressing well in the major workwear markets of France, Benelux and Germany.

Revenue in the West region rose by 18.4%, reflecting strong growth in North America, coming from the acquisition of Western Exterminator. Revenue in the UK and Ireland was adversely impacted by continued challenging market conditions and poor weather. The Rest of World operations grew by 3.3% overall, with good performances from East Africa, the Nordics and the Caribbean, as well as our more recently acquired business in the developing markets of Central and South America and the Middle East, North Africa and Turkey, all of which are trading in line with expectations. This growth has been partially offset by poor conditions in Southern Europe. H1 profit grew by 14.6%.

Revenue in the Asia region grew by 6.6%. Both the Pest Control and Hygiene categories performed well, benefiting from further market development. Our operations in the emerging markets of India, China and Vietnam delivered combined revenue growth of 35%, albeit from a low base. Growth in the mature market of Malaysia was in mid-single digits building on 2012's strong performance. Profit grew by 43.5% reflecting revenue growth and productivity improvements.

Revenue in Initial Facilities declined by 2.9% reflecting the loss of a number of low margin catering contracts and the business's planned withdrawal from a number of single service based contracts in order to de-risk the portfolio and improve profitability. New contract pipeline of some £30m will support revenue in H2. Profit declined by 3.3% reflecting reduced revenue.

As previously announced, the group's parcels division, City Link, was disposed in Q2. The division incurred trading losses prior to disposal of £14.2m (H1 2012: £19.7m). A one-off loss on disposal was incurred of £39.0m of which £30m related to a non-cash write down of assets. These are reported within discontinued operations. As previously reported the group has retained certain parent company guarantees, including approximately £20m relating to leasehold properties. We anticipate that the contingent leasehold liabilities will significantly reduce over the next three years and in the event that any of these guarantees were called the group would seek to mitigate its liability through finding an alternative tenant.

STRATEGY UPDATE

1. Customer Service & Care

Group state of service remains high at 97.7%, an improvement of 10 basis points year on year. Customer Voice Counts ("CVC"), the Company's survey of customer satisfaction, continues to trend positively across all categories, with Hygiene showing particularly strong improvement on the back of new product launches. The group continues to roll out proactive customer account management processes following pilots in the UK in 2011 and on driving material improvements in colleague behaviour and handling of customer enquiries.

Specific care initiatives include the launch of 'myRentokil', an updated version of 'PestNetOnLine', the group's customer extranet. Launched in the Netherlands in July to over 4,000 customers it is available to customers on both desktop and iPad. This will be followed in H2 by a 'myRentokil' smart phone app, providing customers with a slimmed down view of their site focusing on pest activity and open recommendations. The app is the first of its kind in the European pest control market.

2. Developing capability

We continue to develop the capability of our people, systems and processes. 'Workday', our new people management system, was successfully piloted in Singapore during the period with further roll out planned for H2. Capital expenditure on IT (excluding City Link) increased from £9.4m in H1 2012 to £15.2m in H1 2013 as we continue our roll out of Programme Olympic initiatives and replace 35-year old systems in our Benelux workwear and hygiene operations.

'Project Speed' - Our UK operations have launched a programme to use Cloud computing and social media tools through the Google Apps platform to significantly reduce support costs and improve communication with front line colleagues. 'Project Speed' provides a range of tools and processes to improve management efficiency and colleague effectiveness. It is quick and cost effective to deploy and has delivered a 50% reduction in front line management costs in UK Pest Control while maintaining support, training and leadership. In addition, time spent with customers by front line colleagues has increased by 33%. Examples of 'Speed' initiatives include: the sharing of new business leads through a social media platform, using camera phones to photograph and email proof of work carried out to speed up payment processing, automating HR and sales processes, using Google 'Hang Outs' for team meetings and training sessions to keep colleagues on the road and close to customers. 'Speed' has been rolled out to our UK Property Care, Specialist Hygiene and Ambius businesses in the first half of 2013, with pilots underway in the UK Hygiene and Initial Medical businesses and also in the Netherlands and Singapore.

3. Operational excellence

Key priorities this year include establishment of an Asian Shared Services Centre based in Malaysia and the roll out of a consistent Target Operating Model (TOM) across the group. The TOM will bring greater consistency and efficiency to our Shared Service Centre operations and will allow us to regionalise support functions such as customer care.

During the first half we also moved to an Integrated Country Operating Model, established a Central European Warehouse for improved supply chain and appointed a new Group Operational Excellence Director. This has driven an increased level of restructuring costs as we downsize our sales and administrative functions through the integration of businesses under one managing director.

The integration of Western Exterminator is proceeding in line with plan and the business is performing well against our 2013 synergy profit targets. Although revenue growth remains a challenge, we are confident the investments we are making in capability and process will return the business to growth after over three years of largely unchanged performance.

4. Cost & Cash

The group generated £21.1m of cost savings (excluding City Link) in H1 through a combination of branch administration / back office rationalisation and efficiencies, service and IT productivity and direct materials procurement. We are on track to exceed our target of £40m for the full year following the acceleration of restructuring activity noted above. Particular focus has been on the Netherlands, France, Germany, Australia and North America, as we realise the benefits of the structural and operational integration that we are implementing across the group.

5. Growth

Our strategy for growth is summarised below:

§ We have made clear choices on our core categories:

- Pest control is our lead category seeking presence in any metropolitan, politically stable area with temperate to tropical climate

- Hygiene will follow Pest Control into new territories

- Workwear will focus on continental Europe

- Plants will focus on 11 existing markets where we have leadership positions

- Initial Facilities will run as a stand alone business focusing primarily on the UK FM market

§ We have increasing exposure to high growth markets

§ Our organisation is designed to leverage global scale and capitalise on local density

§ We are building differentiating capability in operational excellence, technology and innovation to drive growth

§ Our model lends itself to acquisitions - and we are good at executing them

In 2013 we moved to an Integrated Country Operating Model, disposed of City Link, launched the Signature hygiene product range and developed seven new ranges of proprietary workwear in continental Europe, and made nine further acquisitions in Pest Control and Hygiene. In addition, we have introduced an On Site Service proposition in a number of hygiene markets, continued the roll out of the Advantage sales tablet in Pest Control, and developed a new Sensing as a Service initiative for pest control and hygiene customers. A range of further initiatives are being developed to improve sales productivity. Further details are set out below:

- The launch of the Signature range of hygiene products follows extensive research and development in 2012. In parallel with launch, we have introduced a new customer-focused sales approach incorporating new sales tools, training methods and sector targets. Signature will be launched in all major hygiene markets during H2 2013.

- Following the design of seven new ranges of workwear in 2012, the group will launch its new Universal collection across all markets in H2. This will be followed with launch of the Knitwear, High Visibility, Welding and Multi-risk collection later in the year.

- The On Site Service proposition for cleaning female hygiene units has been developed to provide customers with increased hygiene levels and has been deployed across Australia and South Africa with other markets to follow in H2. Customer response has been very positive with both countries showing increases in CVC scores, particularly in South Africa where satisfaction has risen by 36%.

- The roll out of Advantage has continued, giving pest control sales colleagues a professional tool to conduct thorough surveys and produce comprehensive reports and proposals for customers in the field. Advantage is now in use with surveyors in the UK, Netherlands, and Portugal with deployments underway in Spain and Belgium and further countries planned. A hygiene version of the tool has been developed and is being piloted in the UK before roll out to further countries.

ACQUISITIONS & DISPOSALS

The Company continues to pursue a strategy of growth through carefully targeted acquisitions and purchased a number of bolt-ons in the Pest Control, Workwear and Hygiene categories in the first half. In Pest Control we acquired six businesses in Brazil, French Guyana, Portugal, Canada and the United States with combined annual revenues of £1.6m. In Workwear we swapped our Belgian Hospital linen business (which generated revenue of £27.5m in 2012) for a cash payment and the garments contract portfolio of Blanca Linnenservice NV, thereby building our customer base in this important segment. This business generated revenue of £5.1m last year. In Hygiene we acquired a medical waste business in France and a washrooms vending machine business in the UK to support our current offering in these areas. Combined annual revenue from these two transactions amounts to £2.0m. As noted above, we announced the disposal of City Link to Better Capital, a private equity investor, for the nominal purchase price of £1 on 29 April 2013.

FUNDING

At 30 June 2013 the group had net debt of £1,122.1m and a strong liquidity position, comprising over £100m of funds and £510m of available undrawn committed facilities.

The group has £464.2m of bond maturities in the next twelve months, which were funded at least 12 months in advance, in accordance with the group's policy and with Standard and Poor's liquidity requirements for investment grade companies.

£240m of the £510m of available undrawn committed facilities matures in December 2014.

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 needs, including those modelled in a downside case.

PENSIONS

At 30 June 2013 the Company's UK defined benefit pension scheme, which is closed to new members, was valued at an accounting surplus of £124.6m on the Company's balance sheet. The trustees value the scheme on a different basis and a deficit at 31 March 2010 of £80m was agreed. An annual contribution of £12.5m for eight years were agreed to fund the deficit and the Company made its first annual contribution of £12.5m in January 2012 and second contribution in January 2013. A triennial valuation will take place this year, effective from 31 March 2013. The Company and the trustees will discuss the results and provide an update on the finalised valuation in due course.

DIVIDEND

The Board has declared an interim dividend of 0.70p per share, amounting to £12.7m, payable on 24 September 2013 to shareholders on the register at 23 August 2013. This is calculated at exactly 1/3rd of the total 2012 dividend, an increase of 4.5% on the interim dividend for 2012.

OUTLOOK FOR H2

The business has performed strongly during Q2 despite adverse weather in Central and Eastern US and economic pressures in France and the Netherlands in particular. The introduction of our Integrated Country Operating Model is delivering cost and implementation benefits. The integration of Western Exterminator is proceeding to plan. Our major innovations in Hygiene and Workwear are being rolled out during Q3.

While we remain mindful of continuing challenging market conditions in Europe, we expect the momentum achieved in Q2 to be maintained in the second half.

OTHER FINANCIALS

Net debt and cash flow

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

Operating cash outflow in H1 of £24.1m at actual exchange rates was £45.1m adverse to 2012 mainly due to increased restructuring costs, working capital outflows and capex in 2013.

Interest payments (including finance lease interest) were £7.3m lower than last year at £30.3m relating to the cancellation of the £75m bond and historic swaps related to the £300m bond. Total tax payments were £17.6m compared with £17.3m last year. Free cash outflow of £70.7m was £38.8m adverse compared to the prior year.

The acquisition/disposal outflow of £3.8m was £0.1m higher than last year. The Company paid a dividend of £25.9m and made a pension funding payment of £12.5m at the beginning of the year. Foreign exchange translation and other items reduced cash flow by a further £19.7m, leaving an overall outflow of £132.6m and net debt of £1,122.1m.

Reorganisation costs and one-off items

Net reorganisation costs and one-off items in the first half of the year amounted to £26.9m (2012: £13.4m). £25.4m (2012: £11.2m) of these related directly to the group's major reorganisation programme and consisted mainly of redundancy costs, consultancy and plant and office closure costs net of the profit on sale of certain properties. One-off items of £1.5m (2012: £3.5m) include costs relating to acquisitions and disposals and movements in vacant property provisions. Details of reorganisation costs and one-off items incurred in the period, for which adjustments have been made, are set out in note 4.

Central costs

Central costs increased by £1.5m in H1 reflecting further investment in capability.

Interest

Net interest payable was £28.1m at actual exchange rates compared to £22.4m in the prior year, an increase of £5.7m. The increase is predominantly due to the net cost of pre-funding the maturity of the March 2014 Euro notes.

Tax

The income statement tax charge on continuing operations for H1 2013 was 23.1% of profit before tax from continuing operations, compared with 22.1% in H1 2012 (as restated). The effective tax rate after adjusting for the amortisation and impairment of intangibles (excluding computer software), reorganisation costs and one-off items and net interest credit from pensions was 25.6% for H1 2013 compared with 24.6% in H1 2012 (as restated). This compares with a blended rate of tax for the countries in which the group operates of 26.6% (28.4% in H1 2012). The principal factor that causes the effective tax rate to be lower than the blended tax rate is the release of prior-year provisions for tax no longer considered necessary as various issues were either settled or became statute barred in the period albeit the impact is lower than prior years.

Appendix 1

Regional Analysis - continuing operations

3 months to 30 June 2013

1 excluding computer software

Regional Analysis - continuing operations (continued)

6 months to 30 June 2013

1 excluding computer software

Appendix 2

Category Analysis - continuing operations

3 months to 30 June 2013

6 months to 30 June 2013

Appendix 3

ANNUAL CONTRACT PORTFOLIO - CONTINUING BUSINESSES

3 Months to 30 June 2013

6 Months to 30 June 2013

1restated to include additional portfolio acquired with Western Exterminator in December 2012

Notes

Contract portfolio definition: Customer contracts are usually either "fixed price", "as-used" (based on volume) or mixed contracts. Contract portfolio is the measure of the annualised value of these customer contracts.

Contract portfolio valuation: The contract portfolio value is typically recorded as the annual value from the customer contract. However, in some cases - especially "as-used" (based on volume) and mixed contracts - estimates are required in order to derive the contract portfolio value. The key points in respect of valuation are:

"As-used" contracts: These are more typical in workwear, hygiene and catering, where elements of the contract are often variable and based on usage. Valuation is based on historic data (where available) or forecast values.

Income annualisation: In some instances, where for example the underlying contract systems cannot value portfolio or there is a significant "as-used" element, the portfolio valuation is calculated using an invoice annualisation method.

Inter-company: The contract portfolio figures include an element of inter-company revenue.

Job work and extras: Many of the contracts within the contract portfolio include ad hoc and/or repeat job work and extras. These values are excluded from the contract portfolio.

Rebates: The contract portfolio value is gross of customer rebates. These are considered as a normal part of trading and are therefore not removed from the portfolio valuation.

New business/Additions: Represents new contractual arrangements in the period with a new or existing customers and additional business added to existing contracts.

Terminations/Reductions: Represent the cessation or reduction in value of an existing customer contract or the complete cessation of business with a customer.

Net Price Increases: Represents the net change in portfolio value as a result of price increase and decreases.

Acquisitions/Disposals: Represents the net value of customer contracts added or lost as a result of businesses acquired or disposed in the period. Also includes the net volume related changes for the workwear businesses, where it is common practice for customers to increase or decrease service volumes according to their daily operational requirements.

Retention rates: Retention rates are calculated on total terminations (terminations and reductions).

Appendix 4

Reorganisation costs and one-off items - continuing operations

Net reorganisation costs and one-off items in the first half of the year amounted to £26.9m (2012: £13.4m). £25.4m (2012: £11.2m) of these related directly to the group's major reorganisation programme, including Olympic, and consisted mainly of redundancy costs, consultancy and plant and office closure costs net of the profit on sale of certain properties. One-off items of £1.5m (2012: £3.5m) include costs relating to acquisitions and disposals and movements in vacant property provisions. Details of reorganisation costs and one-off items incurred in the period, for which adjustments have been made, are set out in note 4.

1 excluding computer software

2 taxation includes £9.1m (HY 2012: £11.0m, FY 2012: £19.6m) 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 as a result of IAS 19R. Please refer to note 3 for further details

Condensed consolidated statement of changes in equity