Rentokil Initial Regulatory News (RTO)

24 Aug 2006 07:00

Rentokil Initial PLC24 August 2006 24 August 2006 RENTOKIL INITIAL PLC (RTO) INTERIM RESULTS FOR SIX MONTHS TO 30 JUNE 2006 Financial highlights • Q2 revenue up 11.1%. H1 revenue up 10.5%; organic revenue growth 3.5%. • Statutory operating profit down 10.0% in H1. Operating profit before amortisation down 2.5% in Q2; down 9.7% in H1. • Statutory profit before income tax down 6.8% in H1. Q2 profit before tax and amortisation up 8.8%; H1 down 6.7%. • Adjusted Q2 profit before tax (before one-off items and amortisation) up 3.0%; down 6.8% in H1. • Contract portfolio up 5.4% in H1; 1.2% organic growth. • Interim dividend maintained at 2.13p. Note: All comparisons at constant exchange rates and before amortisation ofcustomer lists except statutory numbers which are at actual exchange rates andafter amortisation of customer lists. Operating and strategic highlights • Customer retention continues to improve, particularly in European Washroom, European Pest Control and parts of Asia Pacific. • Performance improvement initiatives in key businesses progressing. • City Link transformation, including franchise buy back and integration, ahead of schedule. • Platform for growth in US pest control following acquisition of JC Ehrlich. • Developments across Asia Pacific include investment in management, acquisition of Pink Healthcare and, announced today, agreement to acquire CWS branded Asia Pacific washroom and dust mat business. • Manned guarding businesses sold; UK linen and workwear closed. Doug Flynn, Chief Executive Officer of Rentokil Initial, said: "The financial results for the first half are in line with our expectations. Wehave made progress against our priorities to drive top line growth and improvecustomer retention. We continue to improve our strategic position in a numberof markets. "In addition, we are giving much greater attention to productivity and processimprovement. This will take us further to achieving our sequential goals offirstly restarting revenue growth, then stabilising and increasing profits andfinally working towards margin expansion. "As a result of current market and trading conditions in the textiles andwashroom services division, we have reduced our full year profit expectationsfor that business. We expect the second half performance for textiles andwashroom services to be broadly flat with the first half. We still expect ourother divisions to demonstrate improving profit trends during the second half(before one-off items). As a result of the initiatives taken in 2005 and 2006,we anticipate that the group will return to modest profit growth in 2007." Results highlights £m % change % change Q2 06 Q2 05 H1 06 H1 05 Continuing Operations(1) At 2005 constant exchange rates(2) Revenue 522.9 470.5 11.1% 1,014.9 918.5 10.5% Operating profit(3) 71.0 72.8 (2.5%) 131.9 146.0 (9.7%) Adjusted operating profit(4) 74.1 79.0 (6.2%) 138.5 153.2 (9.6%) Profit before income tax(3) 61.6 56.6 8.8% 112.1 120.1 (6.7%) Adjusted profit before income tax(4) 64.7 62.8 3.0% 118.7 127.3 (6.8%) Continuing Operations(1) At actual exchange rates Revenue 523.6 467.8 11.9% 1,018.6 917.1 11.1% Operating profit 65.4 67.4 (3.0%) 121.9 135.5 (10.0%) Operating profit analysed as:Operating profit (before amortisation ofcustomer lists) 71.1 72.2 (1.5%) 132.3 145.8 (9.3%)- Amortisation of customer lists (5.7) (4.8) (18.8%) (10.4) (10.3) (1.0%) Share of profit from associates (net of 0.5 0.7 (28.6%) 1.1 1.3 (15.4%)tax) Net interest payable (10.0) (16.9) 40.8% (20.9) (27.2) 23.2% Profit before income tax 55.9 51.2 9.2% 102.1 109.6 (6.8%) Operating cash flow 85.2 156.3 (45.5%) Free cash flow(5) 44.0 94.4 (53.4%) Basic earnings per share (continuing 4.09p 4.39p (6.8%)operations) Dividend per share (proposed) 2.13p 2.13p - (1) All figures are for continuing operations and are unaudited. The UK linenand workwear business has been treated as discontinued along with the UK,Canadian, Belgian and US manned guarding businesses. (2) Results at constant exchange rates have been translated at the full yearaverage exchange rates for the year ended 31 December 2005. £/$ average rates:H1 2006 1.7907; H1 2005 1.8763; FY 2005 1.8217. £/• average rates: H1 20061.4526; H1 2005 1.4573, FY 2005 1.4598 (3) Before amortisation of customer lists of £10.3m (2005: £10.4m). (4) Before amortisation of customer lists of £10.3m (2005: £10.4m) and items ofa one-off nature of £6.6m (2005: £7.2m). See appendix 4 for further details. (5) Cash flow before acquisitions, disposals, equity dividend payments andspecial pension contribution (see note 18). 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, Jon Rhodes Brunswick Group 020 7404 5959 A presentation for analysts and shareholders will be held on 24 August at8:30am. This will be available via a live audio webcast at www.rentokil-initial.com. The highlights of this report will appear in The Times newspaper on 25 August2006 and the full version can be downloaded from www.rentokil-initial.com. Aprinted interim statement will not be sent to shareholders but copies areavailable from the company secretary at the registered office. 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. OVERVIEW OF THE SECOND QUARTER AND FIRST HALF OF THE YEAR Operations Our operational priorities since the interim results last year have been toregenerate revenue growth and improve customer retention. Significant progresshas been made against these goals in some areas; customer retention incontinental European pest control has improved considerably and similarimprovements were achieved by European washroom and some parts of Asia Pacific,particularly Malaysia. The performance improvement programmes in criticalbusinesses continued in the first half and comments on progress will be found inthe divisional review sections below. Investment in sales and marketing continued in the first half. We areparticularly pleased with the new pest control on-line presence, rentokil.com.This has already become an important generator of new sales leads in the UK andis now being rolled out around the world. During the half we acquiredinitial.com and plans are well advanced to enhance the Initial brand's webpresence and drive sales enquiries. In parallel with operational performance improvement, focus is now turningtowards generating productivity and process improvements and reducing the costbase of the group. This involves changing the way we work to make us moreefficient. Work is progressing in a number of important areas, includingimproving administrative efficiency through the "Work Smarter" project. Otherareas of focus include management efficiency, service optimisation and saleseffectiveness through investment in customer relationship management, callcentre capability and enhanced web presence. We are also undertaking a reviewof the number of sites from which we operate and will merge and/or closefacilities as appropriate. In addition, head office costs are being reviewed andsome group head office functions were rationalised in the first half. Strategic Development In the first half we continued to provide clear strategic focus and investmentpriorities within the group and to build stronger strategic positions within ourbusinesses. We have created a platform for growth in pest control in the USA following theacquisition of JC Ehrlich on 1 March 2006. A further eighteen companies andbusinesses were also acquired during the first half. The total considerationduring the period for all acquisitions, including City Link franchises, was £120million. The four manned guarding businesses were sold for a gross consideration of £150million. The transformation of City Link progressed well during the half and is now aheadof schedule. This programme involves the buy-back and integration offranchisee-owned businesses and the introduction of a new business model as wechange from primarily a franchisor to a fully integrated parcels business. Fourfranchises were acquired during the half at a total cost of £14.8 million. At30 June 2006 we owned 41 territories out of the total of 70. City Linkperformed well with parcel volumes increasing ahead of market growth. In Asia Pacific, a strong core management team is now in place which is allowingus to play a bigger and more dynamic role in this high growth region. PinkHealthcare was acquired at the end of June, consolidating our position in theAustralian washroom market. Other first half acquisitions includeLease-a-plant, Akarana and Pest Free Service in New Zealand and Oki Dust Mat inChina. Today we have announced an agreement to acquire the CWS branded washroomand dust mat businesses in Australia, Hong Kong, South Korea, Malaysia, thePhilippines and Singapore. This is expected to complete by the end of thismonth. People and Structure Good progress has been made in the recruitment of senior management at businessunit head level. Work continued in the first half to develop and upgrademanagement at the next levels. We have attracted some strong management talentinto the group and are introducing programmes to retain, develop and motivateour best people. Work continues to create a more performance-driven, customer-focused culture butmuch more remains to be done to embed this throughout the company. The new long-term incentive plan was approved by shareholders at the AGM on 18May. Two new non-executive directors have been appointed to the board since thebeginning of the year. In May, Mr Alan Giles, chief executive of HMV Group plc,joined the board and the audit and remuneration committees. Mr Peter Bamford,who joined the board in July, was until recently an executive director ofVodafone Group plc where he served on the board from 1998 to 2006. Mr Bamfordwill serve as a member of the audit committee. Outlook As a result of current market and trading conditions in the textiles andwashroom services division, we have reduced our full year profit expectationsfor that business. We expect the second half performance for textiles andwashroom services to be broadly flat with the first half. We still expect ourother divisions to demonstrate improving profit trends during the second half(before one-off items). As a result of the initiatives taken in 2005 and 2006,we anticipate that the group will return to modest profit growth in 2007. OPERATING REVIEW In all cases references to operating profit are for continuing businesses beforeamortisation of customer lists. References to adjusted operating profit andadjusted profit before tax and amortisation (PBTA) also exclude items of aone-off nature, totalling a net cost of £6.6 million (2005: £7.2 million) thathave impacted the results for the period. These costs principally relate toreorganisation and redundancy costs, profit on the sale of land and buildingsand professional and other costs in the group centre. An analysis of thesecosts by division is provided in appendix 4. All comparisons are at constant2005 full year average exchange rates. Second Quarter Revenue for continuing businesses in the second quarter was 11.1% higher thanlast year. All divisions recorded revenue growth over the prior year other thantextiles and washroom services, where revenue was marginally below last year,reflecting restructuring activity in the UK and difficult conditions in some ofour major continental European markets. Excluding the impact of acquisitions,the group's organic revenue growth was 1.9% compared with 4.7% in the firstquarter. The second quarter performance reflects difficult trading in textilesand washroom services, UK pest control and customer delays in commencingelectronic security systems work. Operating profit before amortisation fell by2.5% compared with the second quarter of 2005. The pest control, City Link andfacilities services divisions had higher operating profit than last year butthis was offset by declines in other divisions. Adjusted operating profit,which excludes one-off items, was down by 6.2%. Profit before tax andamortisation of customer lists was 8.8% up on last year as a result of lowercentral costs and interest. Half Year For the half year, revenue from continuing businesses grew by 10.5%, 3.5% ofwhich was organic. Revenue was higher across all divisions other than textilesand washroom services where it was flat. Despite this, operating profit wasdown in all divisions other than pest control and City Link, resulting in groupoperating profit falling by 9.7%. Adjusted operating profit fell by 9.6% atconstant rates. Profit before tax and amortisation of customer lists fell by6.7%, benefiting from a lower interest charge. Statutory revenue (at actualexchange rates) increased by 11.1% in the half to £1,018.6 million. Statutoryoperating profit fell by 10.0% to £121.9 million and statutory profit beforeincome tax of £102.1 million was 6.8% lower than last year. DIVISIONAL PERFORMANCE Textiles and Washroom Services £m % change % change Q2 06 Q2 05 HY 06 HY 05 At 2005 constant exchange rates: Portfolio - net movement 0.5 1.6 0.7 16.9 Revenue 148.3 150.1 (1.2%) 296.2 296.4 (0.1%) Operating profit (before amortisation of customer 26.0 32.8 (20.7%) 53.1 65.4 (18.8%)lists) Adjusted operating profit (before one-off items andamortisation of customer lists) 27.9 35.3 (21.0%) 55.3 68.1 (18.8%) The UK linen and workwear business, which was closed on 30 April 2006, has beentreated as discontinued in the first half numbers. Revenue from the division's continuing business in the half year was essentiallyunchanged at £296.2 million. Operating profit fell by 18.8% to £53.1 million.Excluding one-off items, adjusted operating profit also fell 18.8% to £55.3million. There was a marginal net increase in portfolio at the half year. For the retained washroom and mats business in the UK, revenue declined by 8.2%in the first half versus last year. This was largely due to the loss ofwashroom business from joint washroom/linen and workwear customers during thesecond half of last year and the first half of this year. Lower revenuecontributed to a £6.2 million decline in adjusted operating profit in theretained business, which was also impacted by the additional costs of runningthe business as a separate entity and the inefficient infrastructure which hadto be maintained up to the point of exit of the linen and workwear activities.Year-on-year comparisons are also impacted by the additional operating costsrequired to separate the washroom activities from linen and workwear which werenot significant in the first half of last year. In July 2006, the second phaseof the rationalisation of the UK business was announced which will involve areduction in the number of branches we operate from 35 to 20 by the end of thisyear. Transition costs of some £6 million are likely to be incurred in thesecond half to implement this change. In continental Europe, the trading environment in some of our major marketscontinued to be challenging. Overall, revenue for the region increased by 2%year-on-year in the first half. Sales were up 3.4% in Germany and growth inFrance and Belgium was 0.9% but revenue declined 4.4% in the Netherlands. Goodprogress was recorded in the division's newer markets of Spain, Austria, CzechRepublic and Slovakia. Portfolio growth has recently improved in theNetherlands, France, Germany and a number of the smaller markets. The organicnet gain in the portfolio is now running at the same level as last year, havingbeen behind last year for most of the first half, although it is too early tosay whether this signals an improving trend. Operating profit in continental Europe fell by 7.8% compared to the first halfof last year. This reflects the very competitive pricing environment in France,Belgium, the Netherlands and Germany and the increase in fuel and energy coststhat were absorbed in the first half. These accounted for £1.8 million of thedecline in profits. The reorganisation of the French textiles business to the "core process" modelhas been completed, although the full benefits of the new structure have yet tobe achieved in tough trading conditions. Commercial management has been put inplace which will enhance the focus on winning and keeping customers. We continue to seek an exit from the loss-making hospital services business insouthern Germany. The integration of the two European washroom businesses has been completed. Newlines of business and products are being introduced with the aim of increasingthe number of customers these activities serve. Some markets have beenreorganised to simplify management structures and reduce branches. Pest Control £m % change % change Q2 06 Q2 05 HY 06 HY 05 At 2005 constant exchange rates: Portfolio - net movement 2.3 1.6 50.0 2.3 Revenue 76.0 53.3 42.6% 133.2 103.4 28.8% Operating profit (before amortisation of customer 18.1 16.7 8.4% 31.8 31.8 -lists) Adjusted operating profit (before one-off items andamortisation of customer lists) 19.1 16.7 14.4% 33.4 31.8 5.0% Revenue for the half year increased by 28.8% over the prior year to £133.2million. Much of this increase was due to the acquisition of Ehrlich, withorganic revenue growth running at 1.1%. Operating profit remained at lastyear's level of £31.8 million, again boosted by Ehrlich. Excluding one-offitems, principally redundancy and reorganisation costs, adjusted operatingprofit increased by 5.0% to £33.4 million for the half year. The portfolioincreased by £50.0 million in the half year with £46.9 million of this comingfrom acquisitions. Revenue and operating profit both fell at UK pest control, which is the subjectof a major performance improvement programme. The management team was replacedin the first half and the new team will be making major changes to reinvigoratethis programme. Customer terminations remain unacceptably high in the UK. Performance in continental Europe was generally good with revenue and operatingprofit increases recorded in many of the larger markets including France,Germany, the Netherlands, Spain and Portugal. Particular progress was made inimproving customer retention rates in continental Europe in the first half as aresult of management focus on this area. In the USA, revenue and operating profits were in line with expectationsfollowing the acquisition of JC Ehrlich on 1 March. Integration of Ehrlich andRentokil is on track and will be completed during the second half. Ehrlich'ssales are up 9% on last year. The second and third quarters are the strongestseasonally in this business. Tropical Plants £m % change % change Q2 06 Q2 05 HY 06 HY 05 At 2005 constant exchange rates: Portfolio - net movement (0.3) 1.0 0.1 4.8 Revenue 25.2 24.5 2.9% 49.8 47.4 5.1% Operating profit (before amortisation of customer 1.4 1.9 (26.3%) 2.2 3.0 (26.7%)lists) Adjusted operating profit (before one-off items andamortisation of customer lists) 1.4 1.9 (26.3%) 2.2 3.0 (26.7%) Half year revenue increased by 5.1% over the same period last year. Organicrevenue growth was 1.9%. Operating profit fell by 26.7% to £2.2 million.Portfolio increased marginally over the period to £85.1 million. In the USA, which accounted for nearly 55% of divisional revenue in the firsthalf, revenue increased by 6.6% as a result of acquisitions and strong jobsales. However, operating profit was flat due to higher marketing costs and anincrease in plant replacement costs resulting from last year's hurricane seasonin Florida from where most of our plants are sourced. Customer terminationsshowed some improvement but a shortfall in sales headcount impacted new contractsales. The UK recorded lower revenue and operating profit reflecting structuralchallenges faced by the business. The performance improvement programme toreturn the UK business to growth is now underway with the principal aims ofreducing customer terminations through better service and customer care andimproving sales, marketing and cost performance. Continental Europe saw revenue moving ahead in many markets in the first half.However, increased investment in sales resources and higher divisional costs hadan adverse effect on operating profit. In July, a global head of tropical plants was appointed - the first suchappointment. Jeff Mariola previously ran the North American tropical plantsbusiness. Electronic Security £m % change % change Q2 06 Q2 05 HY 06 HY 05 At 2005 constant exchange rates: Portfolio - net movement 0.3 1.2 1.0 2.9 Revenue 68.1 66.1 3.0% 136.9 127.3 7.5% Operating profit (before amortisation of customer 8.5 9.3 (8.6%) 15.5 17.3 (10.4%)lists) Adjusted operating profit (before one-off items andamortisation of customer lists) 8.7 9.5 (8.4%) 16.3 17.5 (6.9%) Revenue grew by 7.5% in the first half to £136.9 million. Excludingacquisitions, however, revenue declined by 0.7%. Operating profit fell by 10.4%to £15.5 million and adjusted operating profit, which excludes the year-on-yeareffect of one-off items, fell by 6.9% to £16.3 million. The portfolio grew at anannualised rate of 2% to £100.2 million. In the UK, first half revenue increased in line with the division as a wholewith positive contributions from both Fire & Security and Systems. However,organic revenue was flat compared to last year. Operating profit for the UK wasbelow last year due to the mix of non-contract work in Fire & Security, whichsaw a bias towards lower margin CCTV and access work, and a continued mix shifttowards lower margin work in Systems. The Systems business is also sufferingfrom customer delays in calling off work that has already been won. Initiativesunderway in the UK include a review of national account structure, further workto reduce terminations and preparation for new fire legislation which takeseffect in the fourth quarter. Revenue in the Netherlands was broadly flat against a market backdrop of staticGDP. However, operating profit fell due to investment and costs associated withperformance improvement initiatives. Follow-on action is now underway toimprove the productivity of sales, service and administration. Adjustedoperating profit for the first half was flat. The French business, Delta, recorded higher revenue but lower operating profitdue to acquisition integration and infrastructure costs. In the USA, which represented 5% of divisional revenue, market conditions aremore encouraging. Revenue almost doubled compared to the first half of lastyear, mostly due to acquisitions which had a similarly positive impact onoperating profit. City Link £m % change % change Q2 06 Q2 05 HY 06 HY 05 At 2005 constant exchange rates: Revenue 47.7 32.1 48.6% 81.8 57.5 42.3% Operating profit (before amortisation of customer 8.0 7.2 11.1% 13.7 12.4 10.5%lists) Adjusted operating profit (before one-off items andamortisation of customer lists) 8.0 7.2 11.1% 13.7 12.4 10.5% The division continues its good performance with half year revenue increasingyear-on-year by 42.3% to £81.8 million, assisted by the continued acquisition offranchises. Excluding acquisitions, organic revenue growth was 11.1% in thefirst half. Operating profit, both normal and adjusted, was 10.5% higher in thehalf year at £13.7 million. Network parcel volume increased by 10.7% in the half against market growth inour segment estimated at 4%. However, price competition remained strong andrevenue per consignment was slightly lower than last year. The process to transform City Link from a 'hub and trunking' service to a fullyintegrated national parcels business progressed well during the half and isahead of schedule. This programme involves the buy-back and integration offranchisee-owned businesses and the introduction of a new business model, at theheart of which is a customer-focused structure built around a network ofregional centres with customer relationship management and call centrecapability. Four franchises were acquired during the half at a total cost of £14.8 million.At 30 June 2006 we owned 41 territories out of the total of 70. Facilities Services £m % change % change Q2 06 Q2 05 HY 06 HY 05 At 2005 constant exchange rates: Portfolio - net movement 3.6 2.4 10.0 6.1 Revenue 125.9 114.3 10.1% 254.2 227.0 12.0% Operating profit (before amortisation of customer 7.5 7.4 1.4% 15.0 16.8 (10.7%)lists) Adjusted operating profit (before one-off items andamortisation of customer lists) 7.6 7.4 2.7% 15.1 16.8 (10.1%) The combined revenues for this division as a whole increased at the half year by12.0% to £254.2 million with operating profit falling by 10.7% to £15.0 million.Excluding the year-on-year effect of one-off items the reduction in operatingprofit was 10.1%. The portfolio increased at an annualised rate of 5.7% to£361.7 million. Second quarter operating profit improved over the first quarterdue to higher profits in our UK cleaning business and reduced wage provisions inhospital services. In the cleaning businesses, revenue increased by £25.5 million and operatingprofit by £1.4 million over the prior year, in part attributable to somesubstantial contract wins in the UK in the second half of last year. Revenue for the catering business was flat on last year but operating profitfell by 33%, largely due to reduced meal take-up in the education sector.Hospital services recorded a modest increase in revenue but the delayed ornon-start up of some contracts and NHS cost pressure impacted operating profit. Asia Pacific £m % change % change Q2 06 Q2 05 HY 06 HY 05 At 2005 constant exchange rates: Portfolio - net movement 10.7 1.3 13.3 2.6 Revenue 23.7 22.3 6.3% 46.8 44.0 6.4% Operating profit (before amortisation of customer 4.9 5.9 (16.9%) 9.8 11.4 (14.0%)lists) Adjusted operating profit (before one-off items andamortisation of customer lists) 5.6 5.9 (5.1%) 10.6 11.4 (7.0%) Revenue at the half year increased by 6.4% to £46.8 million. Excludingacquisitions, organic revenue growth was 5.3%. Half year operating profitdecreased by 14.0% to £9.8 million and, after one-off restructuring costs,adjusted operating profit fell by 7.0% to £10.6 million. The portfolio increasedby £13.3 million to £128.4 million primarily through the acquisition of PinkHealthcare. Increases in revenue were achieved in almost every market in the first half,with a number achieving double digit revenue growth including New Zealand,Malaysia, Singapore and Thailand. However, operating profit was impacted bystrong competition and customer terminations - principally in Australia - andactions have been taken to improve the quality of our operations in the region.Outside Australia, some markets made good progress in improving retentionfollowing the introduction of programmes specifically focusing on this area. A number of acquisitions were made during the half. The largest of these isPink- an Australian washroom business - which was acquired on 30 June and hadrevenues of A$22.5 million in 2005. Other acquisitions included two pestcontrol and one tropical plants business in New Zealand and a dustmat businessin China. Agreement has also been reached to acquire the CWS branded washroomand dustmat activities in Australia, Hong Kong, South Korea, Malaysia, thePhilippines and Singapore. The CWS branded business had revenues of £8.3million in 2005 and completion of the acquisition is expected on 31 August 2006. Other £m % change % change Q2 06 Q2 05 HY 06 HY 05 At 2005 constant exchange rates: Portfolio - net movement 0.3 0.3 1.1 1.3 Revenue 8.0 7.8 2.6% 16.0 15.5 3.2% Operating profit (before amortisation of customer 2.9 3.2 (9.4%) 5.8 6.3 (7.9%)lists) Adjusted operating profit (before one-off items andamortisation of customer lists) 3.1 3.2 (3.1%) 6.0 6.3 (4.8%) The division predominantly comprises our South African operations. Revenueincreased in the half year by 3.2% to £16.0 million. Operating profit fell atthe half year by 7.9% to £5.8 million. Adjusted operating profit fell by 4.8% to£6.0 million. Central Costs Central costs of £15.0 million for the half year were £3.4 million below 2005,primarily as a result of the year-on-year effect of one-off items. Excludingthese one-off items, central costs were held at £14.1 million, the same level as2005, as the cost of the new long-term incentive plan offset savings achievedelsewhere. One-off Items Details of the one-off items incurred in the second quarter and first half ofthe year are set out in appendix 4. They relate to the profit on the sale of theformer head office, consultancy, reorganisation and redundancy costs. These havebeen separately identified because, although as individual items they are small,there are a large number of them and they have a varying impact on differentbusinesses and reporting periods. Although not large enough to be classified asexceptional items, in aggregate they make it difficult to understand underlyingtrends in performance unless they are separately identified. Interest Total net interest payable of £20.9 million was £6.3 million lower than 2005.Hedged interest on bank and bond debt was £22.1 million (2005: £23.9 million)primarily as a result of lower average debt over the period. In addition, thefair value adjustment on derivatives that are not considered hedges foraccounting purposes reduced the year-on-year interest charge by £2.6 million andthere was a further benefit of £3.7 million relating to changes in the fundingof the UK defined benefit pension scheme. Exceptional Items No exceptional items were recorded by the continuing businesses in the secondquarter. Those recorded in the first quarter relating to the closure of the UKlinen and workwear business in April 2006 have now been transferred todiscontinued operations. Pensions In December 2005, the group announced that it was proposing to close the UKdefined benefit (DB) pension scheme to future accrual with a view to reducingexposure to future shortfalls and that it had entered into a period ofconsultation with the scheme's active members. This consultation is nowsubstantially complete and the changes to pension arrangements are beingcommunicated to staff. With the exception of a protected group transferred fromthe public sector, future accrual will cease as from 31 August 2006. Existingactive members are being invited to participate in a replacement definedcontribution (DC) scheme, the costs of which are expected to be broadly similarto the service costs of the DB scheme. As the changes will not be effective until 31 August and are still beingcommunicated to scheme members, the scheme's deficit at 30 June 2006 has beenreported on a continuing basis. On closure to future accrual, there will be asmall reduction in scheme liabilities, currently estimated at £14.9 million,which will be recognised in the income statement. The trustees changed the asset mix of the fund's investments from 80% equities/20% fixed income to approximately 20% equities/80% fixed income in April 2006.They have also entered into a series of hedges designed to reduce the scheme'sexposure to future changes in interest and inflation rates. The principalfinancial risks to which the scheme remains exposed are the future value of itsequity investments and potential improvements in longevity. Total net retirement liabilities of the group as at 30 June 2006 were £87.2million (30 June 2005: £329.9 million) which includes £76.1 million in respectof the main UK DB scheme. The deficit on this scheme was £169.8 million at theend of 2005 but reduced during the first half as a result of favourablemovements in equity prices in the first quarter, movements in implied inflationand interest rates prior to the hedges being put in place and movements indiscount rates. Discontinued Operations The UK linen and workwear business has been treated as discontinued along withthe UK, Canadian, Belgian and US manned guarding businesses. UK linen and workwear was closed on 30 April 2006. The discontinued businessincurred a trading loss of £2.6 million in the first half, compared with a lossof £3.9 million in the first half of 2005. The 2006 loss was reduced by some £3million as a result of the asset impairment charge recognised at 31 December2005. Exceptional costs of £16.2 million associated with the exit were incurredin the first half before the offset of surplus property and asset sales. Wehave agreed to sell the property for £21 million, which will result in a profiton sale of some £16 million. The transaction is expected to complete during thethird quarter. The sales of the UK, Canadian and Belgian manned guarding businesses werecompleted during the first half for a gross consideration of £105 million. Thesale of the US manned guarding business was announced on 12 June 2006 and wascompleted on 20 July 2006 for a gross consideration of £45 million. Tax The blended headline tax rate for 2006 was 31.0% (2005: 32.4%). This representsthe weighted headline tax rates appropriate to the countries in which the groupoperates. It exceeds the UK rate of 30% as substantial profits are earned inFrance, Belgium and Germany where tax rates range from 34% to 37%. The incomestatement tax charge for 2006 for continuing businesses was 26.3% of profitbefore tax, the same level as the first half of 2005. The principal factor thatcaused the effective tax rate to be lower than the blended rate is the releaseof prior year provisions relating to matters now agreed with the taxauthorities. Dividends A final dividend for 2005 of 5.25 pence per share was paid on 2 June 2006 andthe board has declared an interim dividend for 2006 of 2.13 pence per share(2005: 2.13 pence per share) payable on 27 October 2006 to shareholders on theregister on 29 September 2006. This is in line with the statement made in the2005 preliminary results announcement, and subsequently, that a cautiousapproach would be taken to dividend growth until it was clear that the recoveryin the businesses was well established. Cash Flow Operating cash flow for the half year of £85.2 million (2005: £156.3 million)was £71.1 million below the same period last year with operating profit beforedepreciation, amortisation and impairment charges accounting for £53.6 millionof the reduction and working capital outflows accounting for another £24.2million (2005: £8.6 million inflow). Capex in the first half was £15.3 millionbelow the prior year reflecting the disposal of the UK and Belgian guardingbusinesses earlier this year and the relatively capital intensive StyleConferences business sold in the fourth quarter of last year. Working capitaloutflow of £3.8 million in the half year came from businesses divested duringthe year and a further £3.5 million through a build up of working capital inEhrlich, with the balance of £16.9 million outflow coming mainly from Europeantextiles. This was largely due to temporary credit control issues following theintegration of some washroom and textiles businesses. Lower tax cash flows, as a result of lower profits and pension payments, partlycompensate for the lower operating cash flows to leave free cash flow £50.4million below last year at £44.0 million. This represents a conversion rate onprofit before tax and exceptional items of 72% (2005: 99%). Net debt increasedby £44.4 million in the first half. Appendix 1 ANNUAL CONTRACT PORTFOLIO - CONTINUING BUSINESSES 3 Months to 30 June 2006 Net£m at constant 2005 New Additions/exchange rates 1.4.06 Business Terminations Reductions Acquisitions 30.6.06 Textiles & Washroom Services 564.3 13.1 (14.9) 1.9 0.4 564.8Pest Control 209.4 8.8 (8.7) 2.2 - 211.7Tropical Plants 85.4 2.1 (3.4) 0.9 0.1 85.1 Electronic Security 99.9 2.1 (2.6) 0.4 0.4 100.2Facilities Services* 358.1 9.1 (8.0) 2.5 - 361.7Asia Pacific 117.7 4.9 (5.2) 0.9 10.1 128.4 Other 28.6 1.0 (1.1) 0.4 - 28.9TOTAL 1,463.4 41.1 (43.9) 9.2 11.0 1,480.8 6 Months to 30 June 2006 Net£m at constant 2005 New Additions/exchange rates 1.1.06 Business Terminations Reductions Acquisitions 30.6.06 Textiles & Washroom Services 564.1 27.7 (30.4) 3.0 0.4 564.8Pest Control 161.7 15.1 (15.9) 3.9 46.9 211.7Tropical Plants 85.0 4.4 (6.2) 1.8 0.1 85.1 Electronic Security 99.2 4.5 (5.5) 1.6 0.4 100.2Facilities Services* 351.7 18.5 (16.1) 7.6 - 361.7Asia Pacific 115.1 8.7 (8.5) 2.1 11.0 128.4 Other 27.8 1.9 (2.0) 1.2 - 28.9TOTAL 1,404.6 80.8 (84.6) 21.2 58.8 1,480.8 * 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. 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 2 Divisional Analysis (at constant exchange rates)(based upon the way businesses are managed) 3 months to 3 months to 6 months to 6 months to 30 June 30 June 30 June 30 June 2006 2005 2006 2005(at 2005 constant exchange rates) £m £m £m £m (unaudited) (unaudited) (unaudited) (unaudited)Business Analysis Revenue Textiles & Washroom Services 148.3 150.1 296.2 296.4Pest Control 76.0 53.3 133.2 103.4Tropical Plants 25.2 24.5 49.8 47.4Electronic Security 68.1 66.1 136.9 127.3City Link 47.7 32.1 81.8 57.5Facilities Services 125.9 114.3 254.2 227.0Asia Pacific 23.7 22.3 46.8 44.0Other 8.0 7.8 16.0 15.5Continuing operations at 2005 constant exchangerates 522.9 470.5 1,014.9 918.5Exchange 0.7 (2.7) 3.7 (1.4)Continuing operations at actual exchange rates 523.6 467.8 1,018.6 917.1 Operating Profit* Textiles & Washroom Services 26.0 32.8 53.1 65.4Pest Control 18.1 16.7 31.8 31.8Tropical Plants 1.4 1.9 2.2 3.0Electronic Security 8.5 9.3 15.5 17.3City Link 8.0 7.2 13.7 12.4Facilities Services 7.5 7.4 15.0 16.8Asia Pacific 4.9 5.9 9.8 11.4Other 2.9 3.2 5.8 6.3Central Items (6.3) (11.6) (15.0) (18.4)Continuing operations at 2005 constant exchangerates 71.0 72.8 131.9 146.0Exchange 0.1 (0.6) 0.4 (0.2)Continuing operations at actual exchange rates 71.1 72.2 132.3 145.8 Adjusted Operating Profit** Textiles & Washroom Services 27.9 35.3 55.3 68.1Pest Control 19.1 16.7 33.4 31.8Tropical Plants 1.4 1.9 2.2 3.0Electronic Security 8.7 9.5 16.3 17.5City Link 8.0 7.2 13.7 12.4Facilities Services 7.6 7.4 15.1 16.8Asia Pacific 5.6 5.9 10.6 11.4Other 3.1 3.2 6.0 6.3Central Items (7.3) (8.1) (14.1) (14.1)Continuing operations at 2005 constant exchangerates 74.1 79.0 138.5 153.2Exchange 0.1 (0.6) 0.4 (0.2)Continuing operations at actual exchange rates 74.2 78.4 138.9 153.0 * Before amortisation of customer lists. ** Before amortisation of customer lists and items of a one-off nature (seeappendix 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 6 months to 6 months to 30 June 30 June 30 June 30 June 2006 2005 2006 2005(at actual exchange rates) £m £m £m £m (unaudited) (unaudited) (unaudited) (unaudited)Business Analysis Revenue Textiles & Washroom Services 149.2 148.9 297.6 296.8Pest Control 76.5 53.0 134.2 103.2Tropical Plants 25.2 24.2 50.5 46.6Electronic Security 68.1 65.8 137.2 127.2City Link 47.7 32.1 81.8 57.5Facilities Services 125.9 114.2 254.3 227.1Asia Pacific 23.4 22.1 47.0 43.3Other 7.6 7.5 16.0 15.4Continuing operations at actual exchange rates 523.6 467.8 1,018.6 917.1 Operating Profit* Textiles & Washroom Services 26.3 32.4 53.4 65.4Pest Control 18.2 16.6 32.0 31.8Tropical Plants 1.5 1.9 2.2 3.0Electronic Security 8.5 9.3 15.5 17.3City Link 8.0 7.2 13.7 12.4Facilities Services 7.5 7.4 15.0 16.8Asia Pacific 4.7 5.9 9.7 11.2Other 2.7 3.1 5.8 6.3Central Items (6.3) (11.6) (15.0) (18.4)Continuing operations at actual exchange rates 71.1 72.2 132.3 145.8 Adjusted Operating Profit** Textiles & Washroom Services 28.2 34.9 55.6 68.1Pest Control 19.2 16.6 33.6 31.8Tropical Plants 1.5 1.9 2.2 3.0Electronic Security 8.7 9.5 16.3 17.5City Link 8.0 7.2 13.7 12.4Facilities Services 7.6 7.4 15.1 16.8Asia Pacific 5.4 5.9 10.5 11.2Other 2.9 3.1 6.0 6.3Central Items (7.3) (8.1) (14.1) (14.1)Continuing operations at actual exchange rates 74.2 78.4 138.9 153.0 * Before amortisation of customer lists. ** Before amortisation of customer lists and items of a one-off nature (seeappendix 4 for further details). Appendix 4 One-off Items 3 months to 3 months to 6 months to 6 months to 30 June 30 June 30 June 30 June 2006 2005 2006 2005 £m £m £m £m (unaudited) (unaudited) (unaudited) (unaudited) Textiles & Washroom Services (1.9) (2.5) (2.2) (2.7)Pest Control (1.0) - (1.6) -Tropical Plants - - - -Electronic Security (0.2) (0.2) (0.8) (0.2)City Link - - - -Facilities Services (0.1) - (0.1) -Asia Pacific (0.7) - (0.8) -Other (0.2) - (0.2) -Central Items 1.0 (3.5) (0.9) (4.3) (3.1) (6.2) (6.6) (7.2) Note: All numbers at both actual and constant exchange rates. Independent review report to Rentokil Initial plc Introduction We have been instructed by the company to review the financial information forthe six months ended 30 June 2006 which comprises a consolidated interim balancesheet as at 30 June 2006 and consolidated interim statements of income, cashflows and recognised income and expense for the six months then ended andrelated notes. We have read the other information contained in the interimreport and considered whether it contains any apparent misstatements or materialinconsistencies with the financial information. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The ListingRules of the Financial Services Authority require that the accounting policiesand presentation applied to the interim figures should be consistent with thoseapplied in preparing the preceding annual accounts except where any changes, andthe reasons for them, are disclosed. This interim report has been prepared in accordance with the basis set out innote 1. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4issued by the Auditing Practices Board for use in the United Kingdom. A reviewconsists principally of making enquiries of group management and applyinganalytical procedures to the financial information and underlying financial dataand, based thereon, assessing whether the disclosed accounting policies havebeen applied. A review excludes audit procedures such as tests of controls andverification of assets, liabilities and transactions. It is substantially lessin scope than an audit and therefore provides a lower level of assurance.Accordingly we do not express an audit opinion on the financial information.This report, including the conclusion, has been prepared for and only for thecompany for the purpose of the Listing Rules of the Financial Services Authorityand for no other purpose. We do not, in producing this report, accept or assumeresponsibility for any other purpose or to any other person to whom this reportis shown or into whose hands it may come save where expressly agreed by ourprior consent in writing. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 June 2006. PricewaterhouseCoopers LLPChartered AccountantsLondon24 August 2006 Consolidated Income Statement 6 months to 6 months to Year to 31 30 June 2006 30 June 2005 December 2005 £m £m £m restated Notes (unaudited) (unaudited) (audited)Continuing operations: Revenue 3 1,018.6 917.1 1,885.2Operating expenses (896.7) (781.6) (1,615.1)Operating profit 121.9 135.5 270.1 Analysed as: Operating profit before amortisation of customer lists and 132.3 145.8 301.2exceptional itemsAmortisation of customer lists (10.4) (10.3) (20.2)Exceptional items 4 - - (10.9)Operating profit 121.9 135.5 270.1 Interest payable and similar charges 5 (56.4) (62.4) (114.5)Interest receivable 6 35.5 35.2 59.6Share of profit from associates (net 1.1 1.3 2.2of tax)Profit before income tax 102.1 109.6 217.4Income tax expense 7 (26.9) (28.8) (59.4)Profit for the period from continuing 75.2 80.8 158.0operations Discontinued operations: Profit/(loss) for the period from discontinued 8 59.5 (16.8) 166.4operations Profit for the period (including discontinued operations) 134.7 64.0 324.4 Attributable to: Minority interest 1.4 1.6 2.9Equity holders of the company 133.3 62.4 321.5 134.7 64.0 324.4 Basic earnings per share - Continuing operations 9 4.09p 4.39p 8.60p - Discontinued operations 9 3.29p (0.93)p 9.22p - Continuing and discontinued 9 7.38p 3.46p 17.82poperations Diluted earnings per share - Continuing operations 9 4.09p 4.39p 8.59p - Discontinued operations 9 3.29p (0.93)p 9.22p - Continuing and discontinued 9 7.38p 3.46p 17.81poperations A final dividend in respect of 2005 of 5.25p per share was paid on 2 June 2006(total £94.8m) and the board is declaring an interim dividend of 2.13p (2005:2.13p) per share (total £38.5m). Consolidated Statement of Recognised Income and Expense 6 months to 6 months to Year to 31 30 June 2006 30 June 2005 December 2005 £m £m £m restated (unaudited) (unaudited) (audited)Profit for the period (including discontinued 134.7 64.0 324.4operations) Net exchange adjustments offset in (2.5) (4.3) (0.6)reservesActuarial gain/(loss) on defined benefit pension 89.6 (19.7) (60.6)plansRevaluation of available-for-sale (0.1) (0.5) (0.8)investmentsTax on items taken directly to reserves (26.9) 5.8 1.0Net profit/(loss) not recognised in income 60.1 (18.7) (61.0)statement Total recognised income for the period 194.8 45.3 263.4 Attributable to: Minority interest 1.4 1.6 2.9Equity holders of the company 193.4 43.7 260.5 194.8 45.3 263.4 Consolidated Balance Sheet At 31 At 30 June At 30 June December 2006 2005 2005 £m £m £m restated Notes (unaudited) (unaudited) (audited)AssetsNon-current assetsIntangible assets 273.4 163.9 180.3Property, plant and equipment 11 493.6 631.2 497.5Investments in associated 9.9 9.5 9.2undertakingsOther investments 6.8 6.8 6.8Deferred tax assets 47.7 96.2 74.0Trade and other receivables 25.0 26.7 28.3Derivative financial instruments 3.0 23.3 16.9 859.4 957.6 813.0 Current assetsInventory 47.3 42.2 43.8Trade and other receivables 398.8 559.4 460.5Derivative financial instruments 2.2 0.3 0.4Cash and cash equivalents 12 120.5 170.8 240.3Held-for-sale assets 8 36.3 2.6 - 605.1 775.3 745.0 LiabilitiesCurrent liabilitiesTrade and other payables (482.5) (518.9) (533.8)Current tax liabilities (118.3) (128.7) (115.1)Provisions for other liabilities and (28.5) (36.1) (31.1)chargesBank and other short-term borrowings 13 (432.5) (206.4) (108.5)Derivative financial instruments (4.5) (5.7) (1.0)Held-for-sale liabilities 8 (20.6) (0.2) - (1,086.9) (896.0) (789.5) Net current liabilities (481.8) (120.7) (44.5) Non-current liabilitiesTrade and other payables (15.2) (11.7) (12.0)Bank and other long-term borrowings 13 (672.7) (1,173.5) (1,072.1)Deferred tax liabilities (46.9) (54.7) (43.3)Retirement benefits 14 (87.2) (329.9) (182.3)Provisions for other liabilities and (108.1) (111.0) (116.9)chargesDerivative financial instruments (10.3) (0.6) (1.5) (940.4) (1,681.4) (1,428.1) Net liabilities (562.8) (844.5) (659.6) EquityCapital and reserves attributable to the company's equity holdersCalled up share capital 15 18.1 18.1 18.1Share premium account 15 5.3 - 5.3Capital redemption reserve 15 - - -Treasury shares 15 (11.1) (11.1) (11.1)Other reserves 15 (1,717.7) (1,717.0) (1,714.1)Retained profits 15 1,135.6 858.0 1,035.2 (569.8) (852.0) (666.6)Minority interest 15 7.0 7.5 7.0Total equity (562.8) (844.5) (659.6) Consolidated Cash Flow Statement 6 months to 6 months to Year to 31 30 June 2006 30 June 2005 December 2005 £m £m £m restated Notes (unaudited) (unaudited) (audited)Cash flows from operating activities Cash generated from operating activities before special 16 166.5 252.7 476.5pension contributionSpecial pension contribution - - (200.0)Cash generated from operating activities 166.5 252.7 276.5Interest received 9.9 8.1 19.8Interest paid (29.8) (27.5) (63.4)Income tax paid (20.1) (41.3) (80.5)Net cash generated from operating activities 126.5 192.0 152.4 Cash flows from investing activities Purchase of property, plant and equipment (PPE) (84.2) (91.6) (183.8)Purchase of intangible fixed assets (2.5) (2.3) (9.2)Proceeds from sale of PPE 13.7 5.1 21.9Proceeds from sale of intangibles - - 0.1Acquisition of companies and businesses, net of cash 19 (114.7) (25.6) (42.0)acquiredProceeds from disposal of companies and 8 98.1 2.2 323.3businessesDividends received from associates - - 1.0Net cash flows from investing (89.6) (112.2) 111.3activities Cash flows from financing activities Issue of ordinary share capital - 0.4 5.7Dividends paid to equity 10 (94.8) (86.2) (124.7)shareholdersDividends paid to minority (0.7) (0.5) (2.6)interestsInterest element on finance lease (1.2) (1.2) (2.5)paymentsCapital element of finance lease (9.5) (9.3) (19.1)paymentsProceeds on disposal of Ashtead - - 129.8loan noteLoan repayments (30.2) (31.5) (226.7)Net cash flows from financing (136.4) (128.3) (240.1)activities Net (decrease)/increase in cash and 17 (99.5) (48.5) 23.6bank overdraftsCash and bank overdrafts at beginning of year 170.7 145.3 145.3Exchange gains on cash and bank 6.0 7.2 1.8overdraftsCash and bank overdrafts at end of the financial period 12 77.2 104.0 170.7 Notes to the consolidated interim financial statements 1. Basis of preparation of financial statements These financial statements are the interim consolidated financial statements ofRentokil Initial plc, a company registered in England, and its subsidiaries (the"group") for the six month period ended 30 June 2006 (the "Interim Report").They should be read in conjunction with the Annual Report for the year ended 31December 2005 (the "Annual Report"). The accounting policies used areconsistent with those used in the Annual Report, except that amendments to IAS21, "The effects of changes in foreign exchange rates", IAS 39, "FinancialInstruments: Recognition and Measurement" and IFRIC 4, "Determining whether anarrangement contains a lease" have been implemented in 2006 with no materialeffect on either the current or prior periods. The presentation of the InterimReport is consistent with the Annual Report. Where necessary, the comparativeshave been reclassified or extended from the previously reported interim resultsto take into account any presentational changes made in the Annual Report or inthis Interim Report. The June 2005 balance sheet has been restated to reflect apension adjustment made in the second half of 2005 (see note 14). The preparation of the Interim Report requires management to make estimates andassumptions that affect the reported amounts of revenues, expenses, assets,liabilities and disclosure of contingent liabilities at the date of the InterimReport. If in the future such estimates and assumptions, which are based onmanagement's best judgement at the date of the Interim Report, deviate from theactual circumstances, the original estimates and assumptions will be modified asappropriate in the year in which the circumstances change. Significant seasonal or cyclical variations in the group's total revenues arenot experienced during the financial year. 2. Significant events impacting the consolidated interim financial statements There were no significant changes in the nature and amount of estimates andcontingent assets reported since the published Annual Report. 3. Segmental information (a) Primary reporting format - business segments Operating Operating Operating profit profit profit Revenue Revenue Revenue 6 months to 6 months to Year to 6 months to 6 months to Year to 30 June 30 June 31 30 June 30 June 2005 31 2006 2005 December 2006 December 2005 2005 £m £m £m £m £m £m (unaudited) (unaudited) (audited) (unaudited) (unaudited) (audited)Continuing operations Textiles & Washroom Services 328.6 326.6 654.5 58.7 70.2 132.3 Pest Control 154.9 121.1 246.9 33.3 34.9 73.9Tropical Plants 55.9 51.8 112.9 1.7 1.7 7.2Electronic Security 137.2 127.2 263.4 13.2 15.7 32.8City Link 81.8 57.5 125.5 13.7 12.4 29.1Facilities Services 260.2 232.9 482.0 17.5 19.6 40.5 Central items - - - (16.2) (19.0) (45.7) 1,018.6 917.1 1,885.2 121.9 135.5 270.1 Interest payable and similar charges - - - (56.4) (62.4) (114.5)Interest receivable - - - 35.5 35.2 59.6Share of profit from associates (net oftax) - Textiles and Washroom Services - - - 1.1 1.3 2.2Profit before income tax - - - 102.1 109.6 217.4Income tax expense - - - (26.9) (28.8) (59.4)Total for the period from continuing 1,018.6 917.1 1,885.2 75.2 80.8 158.0operations Discontinued operations (after income tax) Textiles & Washroom Services 14.8 26.3 52.1 (11.1) (22.8) (26.0)Facilities Services(1) 115.5 184.4 381.5 68.1 1.8 5.8Discontinued business segments(2) - 44.9 83.7 2.5 4.2 186.6Total for the period from discontinued 130.3 255.6 517.3 59.5 (16.8) 166.4operations Total for the period (includingdiscontinued operations) 1,148.9 1,172.7 2,402.5 134.7 64.0 324.4 (1) Profit from the facilities services segment for the six months to 30 June2006 includes profit on disposal (after tax) of £72.6m. (2) Discontinued business segments predominantly consists of the conferencingsegment, which was discontinued in the second half of 2005. Profit for the yearto 31 December 2005 in this segment includes profit on disposal (after tax) ofthe conferencing segment of £170.3m. Notes to the consolidated interim financial statements (continued) 3. Segmental information (continued) (b) Secondary reporting format - geographical segments Revenue Revenue Revenue 6 months to 6 months to Year to 31 30 June 2006 30 June 2005 December 2005 £m £m £m (unaudited) (unaudited) (audited)Continuing operations United Kingdom 466.0 418.5 863.7Continental Europe 412.1 398.0 804.2North America 76.1 40.7 93.9Asia Pacific 47.0 43.2 89.6Africa 17.4 16.7 33.8Total from continuing operations 1,018.6 917.1 1,885.2 Discontinued operations United Kingdom 36.7 135.2 263.7Continental Europe 18.1 28.0 55.3North America 75.5 91.6 197.5Asia Pacific - - -Africa - 0.8 0.8Total from discontinued operations 130.3 255.6 517.3 Total (including discontinued operations) 1,148.9 1,172.7 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 Management basis and Other exchange basis basis basis 6 months to 30 6 months to 6 months to 6 months to 6 months Year to 31 June 2006 30 June 2006 30 June 2006 30 June 2006 to 30 June December 2005 2005 £m £m £m £m £m £m (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (audited)Revenue from continuing operations Textiles & Washroom Services 328.6 (31.0) (1.4) 296.2 296.4 593.7Pest Control 154.9 (20.7) (1.0) 133.2 103.4 209.4Tropical Plants 55.9 (5.4) (0.7) 49.8 47.4 102.4Electronic Security 137.2 - (0.3) 136.9 127.3 263.4City Link 81.8 - - 81.8 57.5 125.5Facilities Services 260.2 (5.9) (0.1) 254.2 227.0 470.0Asia Pacific - 47.0 (0.2) 46.8 44.0 89.6Other - 16.0 - 16.0 15.5 31.2 1,018.6 - (3.7) 1,014.9 918.5 1,885.2 Customer Statutory Asia lists and basis Pacific and exceptional Foreign Management Management Management Other items exchange basis basis basis 6 months 6 months to 6 months to 6 months to 6 months to 6 months Year to 31 to 30 June 30 June 30 June 2006 30 June 2006 30 June 2006 to 30 June December 2006 2006 2005 2005 £m £m £m £m £m £m £m (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (audited)Operating profit fromcontinuing operations Textiles & Washroom 58.7 (9.5) 4.2 (0.3) 53.1 65.4 122.3ServicesPest Control 33.3 (4.1) 2.8 (0.2) 31.8 31.8 67.2Tropical Plants 1.7 (0.5) 1.0 - 2.2 3.0 9.5Electronic Security 13.2 - 2.3 - 15.5 17.3 35.8City Link 13.7 - - - 13.7 12.4 29.1Facilities Services 17.5 (2.6) 0.1 - 15.0 16.8 34.8Asia Pacific - 9.7 - 0.1 9.8 11.4 23.3Other - 5.8 - - 5.8 6.3 12.7Central items (16.2) 1.2 - - (15.0) (18.4) (33.5) 121.9 - 10.4 (0.4) 131.9 146.0 301.2 Notes to the consolidated interim financial statements (continued) 4. Exceptional items 6 months to 6 months to Year to 31 30 June 2006 30 June 2005 December 2005 £m £m £m (unaudited) (unaudited) (audited)Bid defence costs* - - 10.9 *Costs incurred in defending the take-over approach by Raphoe. 5. Interest payable and similar charges 6 months to 6 months to Year to 31 30 June 2006 30 June 2005 December 2005 £m £m £m restated (unaudited) (unaudited) (audited)Interest payable on bank loans and overdrafts 12.8 15.0 26.6Interest payable on medium term notes issued 22.1 19.2 38.5Net interest receivable on fair value hedges(1) (4.3) (2.6) (6.9)Interest on defined benefit plan liabilities 24.5 22.3 46.8Interest payable on finance leases 1.2 1.2 2.4Foreign exchange gain on translation of foreign denominated loans(1) (0.1) (0.5) (0.8)Amortisation of discount on provisions 1.1 1.0 2.0Fair value loss on write off of Ashtead option(1) - 4.6 4.6Net ineffectiveness of fair value hedges(1) (0.1) (0.4) (0.8)Fair value (gain)/loss on derivatives not designated in a hedge (0.8) 2.6 2.1relationship(1&2)Total interest payable and similar charges (continuing operations) 56.4 62.4 114.5 (1) These interest categories have been restated for the 6 months to June 2005to net gross balances previously classified as interest receivable forcomparability purposes in line with reporting in later periods. This has noeffect on net interest. (2) The fair value gain on derivatives not designated in a hedge relationshipincludes fair value gains relating to forward rate agreements of £0.8m. 6. Interest receivable 6 months to 6 months to Year to 30 June 2006 30 June 2005 31 December 2005 £m £m £m restated (unaudited) (unaudited) (audited)Bank interest 9.7 5.4 8.6Other interest* - 9.9 11.3Return on defined benefit plan assets 25.8 19.9 39.7Total interest receivable (continuing operations) 35.5 35.2 59.6 *Other interest income represents interest income from the Ashtead loan receivable. 7. Income tax expense 6 months to 6 months to Year to 31 30 June 2006 30 June 2005 December 2005 £m £m £m (unaudited) (unaudited) (audited)Analysis of charge in the period UK Corporation tax at 30% (HY 2005: 30%, FY 2005: 30%) 11.1 17.4 13.1Double tax relief (5.8) (5.1) (5.4) 5.3 12.3 7.7Overseas taxation 20.0 26.7 53.1Adjustment in respect of previous periods (4.3) (8.5) (13.1)Total current tax 21.0 30.5 47.7 Deferred tax 5.9 (1.7) 11.7Total income tax expense (continuing operations) 26.9 28.8 59.4 Notes to the consolidated interim financial statements (continued) 8. Discontinued operations (a) Disposals The group disposed of its manned guarding businesses in the United Kingdom,Canada and Belgium on 7 March 2006, 10 March 2006 and 21 April 2006 respectivelyduring the period ended 30 June 2006, for gross proceeds of £105.6m, £100.0mafter costs paid of £5.6m. Details of net assets disposed and disposal proceeds are as follows: 2006 £m (unaudited)Non-current assets - Intangible assets 6.3 - Property, plant and equipment 5.7Current assets 58.4Current liabilities (34.9)Non-current liabilities (7.1)Net assets disposed 28.4Profit on disposal 71.6Consideration 100.0Consideration deferred to future periods (0.5)Costs deferred to future periods 4.0Cash disposed (5.4)Cash inflow from disposals 98.1 The profit on disposal above of £71.6m excludes translation exchange gains of£1.0m, which are recycled to the income statement, giving a total post-taxprofit on disposal of subsidiary net assets of £72.6m. (b) Businesses held-for sale The group announced that it had signed an agreement for the sale of its USmanned guarding business on 12 June 2006 and the sale was completed on 20 July2006 for gross proceeds of £45.0m. The UK linen and workwear business wasclosed on 30 April 2006. The balance sheets for these businesses have beencollapsed into two lines within current assets and current liabilities,described as "held-for-sale assets" and "held-for-sale liabilities"respectively, and are held at the lower of cost and fair value less costs tosell. The assets and liabilities associated with the disposal of surplusproperties are also held within held-for-sale assets and liabilities. Details ofheld-for-sale assets and held-for-sale liabilities are shown below: US manned UK linen guarding and Surplus workwear properties 2006 £m £m £m £m (unaudited) (unaudited) (unaudited) (unaudited)Non-current assets 9.1 5.5 0.6 15.2Current assets 19.1 - 2.0 21.1Held-for-sale assets 28.2 5.5 2.6 36.3Current liabilities (7.8) - (12.8) (20.6)Held-for-sale liabilities (7.8) - (12.8) (20.6) Net held-for-sale assets 20.4 5.5 (10.2) 15.7 (c) Financial performance of discontinued operations (on disposals andbusinesses held-for-sale) UK linen and 6 months to 6 months to Year to workwear 30 June 2006 30 June 2005 31 Manned December guarding Other** 2005 £m £m £m £m £m £m (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (audited)Revenue 115.5 14.8 - 130.3 255.6 517.3Operating expenses (119.2) (29.5) 2.5 (146.2) (272.4) (520.9)Operating (loss)/profit (3.7) (14.7) 2.5 (15.9) (16.8) (3.6)Finance costs - net (0.1) - - (0.1) (0.3) (0.8)(Loss)/profit before income tax (3.8) (14.7) 2.5 (16.0) (17.1) (4.4)Taxation (0.7) 3.6 - 2.9 3.2 1.1(Loss)/profit after income taxfrom discontinued operations (4.5) (11.1) 2.5 (13.1) (13.9) (3.3) Profit/(loss) on disposal of subsidiary 71.6 - - 71.6 0.9 171.3net assetsCumulative translation exchange gain/ 1.0 - - 1.0 (1.4) (1.6)(loss)*Total profit/(loss) after income tax ondisposal of subsidiary net assets 72.6 - - 72.6 (0.5) 169.7 Asset write-down in held-for-sale - - - - (1.7) -businessCumulative translation exchange loss* - - - - (0.7) -Total held-for-sale businesses statedat fair value less costs to sell - - - - (2.4) - Profit/(loss) on disposal ofdiscontinued operations 68.1 (11.1) 2.5 59.5 (16.8) 166.4 \* The cumulative translation exchange gain of £1.0m relating to discontinuedoperations has been recycled out of exchange reserves to the consolidated incomestatement. **Release of provision in respect of prior period disposals. Notes to the consolidated interim financial statements (continued) 9. Earnings per share Basic Basic earnings per share is calculated by dividing the profit attributable toequity holders of the company by the weighted average number of shares in issueduring the period, excluding those held in the Rentokil Initial Employee ShareTrust for UK employees, which are treated as cancelled. 6 months to 6 months Year to 30 June to 30 June 31 2006 2005 December 2005 £m £m £m (unaudited) (unaudited) (audited)Profit from continuing operations attributable to equity holders of the 73.8 79.2 155.1companyProfit from discontinued operations attributable to equity holders of 59.5 (16.8) 166.4the company Weighted average number of ordinary shares in issue 1,806.5 1,803.5 1,803.7 Basic earnings per share from continuing 4.09p 4.39p 8.60poperationsBasic earnings per share from discontinued operations 3.29p (0.93)p 9.22pBasic earnings per share from continuing and discontinued operations 7.38p 3.46p 17.82p Diluted Diluted earnings per share is calculated by adjusting the weighted averagenumber of ordinary shares in issue to assume conversion of all dilutivepotential ordinary shares. The company has two categories of dilutive potentialordinary shares, being those share options granted to employees where theexercise price is less than the average market price of the company's sharesduring the period and deferred shares granted to senior executives that willvest in the future. 6 months to 6 months Year to 30 June to 30 June 31 2006 2005 December 2005 £m £m £m (unaudited) (unaudited) (audited)Profit from continuing operations attributable to equity holders of the 73.8 79.2 155.1companyProfit from discontinued operations attributable to equity holders of 59.5 (16.8) 166.4the company Weighted average number of ordinary shares in issue 1,806.5 1,803.5 1,803.7Adjustment for share options and deferred 0.8 - 1.1sharesWeighted average number of ordinary shares for diluted earnings per 1,807.3 1,803.5 1,804.8share Diluted earnings per share from continuing operations 4.09p 4.39p 8.59pDiluted earnings per share from discontinued operations 3.29p (0.93)p 9.22pDiluted earnings per share from continuing and discontinued operations 7.38p 3.46p 17.81p 10. Dividends 6 months to 6 months to Year to 31 30 June 2006 30 June 2005 December 2005 £m £m £m (unaudited) (unaudited) (audited)2004 final dividend paid - 4.78p per share - 86.2 86.22005 final dividend paid - 5.25p per share 94.8 - -2005 interim dividend paid - 2.13p per share - - 38.5 94.8 86.2 124.7 The directors have declared an interim dividend of 2.13p per share amounting to£38.5m payable on 27 October 2006 to shareholders on the register at 29September 2006. These interim financial statements do not reflect this dividendpayable. Notes to the consolidated interim financial statements (continued) 11. Property, plant and equipment Plant, equipment & tropical Vehicles & plants office Land & equipment buildings 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 Six months to 30 June 2005 (unaudited)Opening net book amount 253.6 300.0 108.1 661.7Exchange differences (2.9) (8.1) (1.9) (12.9)Additions 5.8 63.4 22.8 92.0Disposals (0.5) (0.6) (2.2) (3.3)Acquisition of companies and businesses 4.3 6.7 0.6 11.6Disposal of companies and businesses - (0.2) (0.5) (0.7)Held-for-sale assets (1.9) (0.3) (0.1) (2.3)Asset write down in held-for-sale (1.7) - - (1.7)businessReclassification - 0.3 (0.3) -Impairment charge - (28.0) - (28.0)Depreciation charge (2.6) (62.7) (19.9) (85.2)Closing net book amount 254.1 270.5 106.6 631.2 At 30 June 2005 (unaudited)Cost 309.2 784.2 252.0 1,345.4Accumulated depreciation and impairment (55.1) (513.7) (145.4) (714.2)Net book amount 254.1 270.5 106.6 631.2 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 Six months to 30 June 2006 (unaudited)Opening net book amount 122.1 260.3 115.1 497.5Exchange differences - (1.3) (2.1) (3.4)Additions 4.8 57.0 25.1 86.9Disposals (3.6) (1.5) (3.7) (8.8)Acquisition of companies and businesses 2.9 1.4 7.3 11.6Disposal of companies and businesses (1.0) (1.2) (3.5) (5.7)Held-for-sale assets (6.3) (0.2) (1.4) (7.9)Depreciation charge (1.6) (53.3) (21.7) (76.6)Closing net book amount 117.3 261.2 115.1 493.6 At 30 June 2006 (unaudited)Cost 161.0 730.0 256.7 1,147.7Accumulated depreciation and impairment (43.7) (468.8) (141.6) (654.1)Net book amount 117.3 261.2 115.1 493.6 12. Cash and cash equivalents 31 December 30 June 2006 30 June 2005 2005 £m £m £m (unaudited) (unaudited) (audited)Cash at bank and in hand 109.5 129.4 134.0Short-term bank deposits 11.0 41.4 106.3 120.5 170.8 240.3 Cash and bank overdrafts include the following for the purposes of the cash flow statement: Cash and cash equivalents 120.5 170.8 240.3Bank overdrafts (note 13) (43.3) (66.8) (69.6) 77.2 104.0 170.7 Notes to the consolidated interim financial statements (continued) 13. Bank and other borrowings 31 December 30 June 2006 30 June 2005 2005 £m £m £m (unaudited) (unaudited) (audited)Non-currentBank borrowings 98.7 509.1 409.9Other loans 553.1 641.7 640.4Finance lease liabilities 20.9 22.7 21.8 672.7 1,173.5 1,072.1CurrentBank overdrafts 43.3 66.8 69.6Bank borrowings 2.8 2.3 6.8Other loans 371.1 122.5 15.3Finance lease liabilities 15.3 14.8 16.8 432.5 206.4 108.5 Total bank and other borrowings 1,105.2 1,379.9 1,180.6 The group operated the following medium term notes under its €2.5bn Euro MediumTerm Note programme for the six months ended 30 June 2006: Currency/Amount IAS 39 Interest Coupon Maturity date hedging£15m NH Floating rate - 6 month GBP LIBOR +0.35% 13.02.06Y3,000m 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 Key: FV - Fair value hedge accounting applied NH - Hedge accounting not applied NIH - Designated for Net Investment Hedging 14. 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 will cease as from 31 August 2006 and definedbenefit members will move into new defined contribution arrangements. The RIPSvaluation was performed on the existing basis and therefore excludes theproposal to freeze future accrual of pension benefits to active members. Seepension note in commentary for further details. These defined benefit schemes are re-appraised annually by independent actuariesbased upon actuarial assumptions in accordance with IAS 19 requirements. On 3 November 2005, the group announced that the UK RIPS deficit under IAS 19had been restated after the group's actuary finalised their work on the April2005 triennial valuation for the fund. Following the review, the UK RIPSdeficit was increased by £40.0m at 30 June 2005. The deferred tax adjustmentrelating to this was £12.0m. A reclassification of £3.4m has also been made asat 30 June 2005 between non-current other payables and retirement benefitobligations for comparability purposes with later periods. The principal assumptions used for the UK RIPS scheme are shown below. 31 December 30 June 2006 30 June 2005 2005 £m £m £m restated (unaudited) (unaudited) (audited)Weighted average % Discount rate 5.2% 5.0% 4.7%Expected return on plan assets 5.1% 7.0% 6.3%Future salary increases 3.7% 3.4% 3.6%Future pension increases 3.0% 2.7% 2.8% The amounts recognised in the balance sheet for the total of the UK RIPS andother* schemes are determined as follows: Present value of funded obligations (971.1) (941.8) (1,049.8)Fair value of plan assets 889.4 618.1 874.8 (81.7) (323.7) (175.0)Present value of unfunded obligations (5.5) (6.2) (7.3)Liability in the balance sheet (87.2) (329.9) (182.3) Notes to the consolidated interim financial statements (continued) 14. Retirement benefit obligations (continued) The fair value of plan assets at the balance sheet date for the total of the UKRIPS and other* schemes is analysed as follows: 31 December 30 June 2006 30 June 2005 2005 £m £m £m (unaudited) (unaudited) (audited)Equity instruments 178.3 483.1 539.4Debt instruments 696.5 130.0 136.0Property 0.5 0.5 0.5Cash 8.2 4.5 198.9Swaps 5.9 - - 889.4 618.1 874.8 The amounts recognised in the income statement for the total of the UK RIPS andother* schemes are as follows: Current service cost** 7.2 6.9 13.8Interest cost** 24.5 22.3 46.8Amount charged to pension liability 31.7 29.2 60.6Expected return on plan assets** (25.8) (19.9) (39.7)Total pension cost 5.9 9.3 20.9 *Other retirement benefit plans are predominantly made up of defined benefitplans situated in Ireland, Germany, Australia and Belgium. **Service costs are charged to operating expenses and interest cost and returnon plan assets to interest payable and receivable respectively. 15. Statement of changes in equity Attributable to equity holders of the company Called Share Capital up premium redemption share account reserve Treasury Other Retained Total capital shares reserves earnings Minority equity restated interest restated £m £m £m £m £m £m £m £m At 1 January 2005 18.1 49.5 19.7 (11.1) 8.4 (895.8) 10.1 (801.1) Total recognised income for the - - - - (4.8) 50.1 - 45.3period (restated) Dividends paid to ordinary - - - - - (86.2) - (86.2)shareholders Cost of share options - - - - - 0.9 - 0.9 New share capital issued - 0.4 - - - - - 0.4 Minority interest share of - - - - - (1.6) 1.6 -profit Cumulative exchange recycled toincome statement on disposal offoreign subsidiary - - - - 2.1 - - 2.1 Currency translation difference - - - - - - (0.3) (0.3)on minority interest Dividends paid to minority - - - - - - (0.5) (0.5)interests Purchase of minority interest in - - - - - (1.7) (3.4) (5.1) French textiles business Capital re-organisation* - (49.9) (19.7) - (1,722.7) 1,792.3 - - At 30 June 2005 (restated) 18.1 - - (11.1) (1,717.0) 858.0 7.5 (844.5) At 1 January 2005 18.1 49.5 19.7 (11.1) 8.4 (895.8) 10.1 (801.1) Total recognised income for the - - - - (1.4) 264.8 - 263.4year Dividends paid to ordinary - - - - - (124.7) - (124.7)shareholders Cost of share options - - - - - 3.2 - 3.2 New share capital issued - 5.7 - - - - - 5.7 Minority interest share of - - - - - (2.9) 2.9 -profit Cumulative exchange recycled toincome statement on disposal offoreign subsidiary - - - - 1.6 - - 1.6 Currency translation difference - - - - - - - -on minority interest Dividends paid to minority - - - - - - (2.6) (2.6)interests Purchase of minority interest in - - - - - (1.7) (3.4) (5.1) French textiles business Capital re-organisation* - (49.9) (19.7) - (1,722.7) 1,792.3 - - At 31 December 2005 18.1 5.3 - (11.1) (1,714.1) 1,035.2 7.0 (659.6) At 1 January 2006 18.1 5.3 - (11.1) (1,714.1) 1,035.2 7.0 (659.6) Total recognised income for the - - - - (2.6) 197.4 - 194.8period Dividends paid to ordinary - - - - - (94.8) - (94.8)shareholders Cost of share options and long - - - - - (0.8) - (0.8)term incentive plan Minority interest share of - - - - - (1.4) 1.4 -profit Cumulative exchange recycled toincome statement on disposal offoreign subsidiary - - - - (1.0) - - (1.0) Currency translation difference - - - - - - (0.7) (0.7)on minority interest Dividends paid to minority - - - - - - (0.7) (0.7)interests At 30 June 2006 18.1 5.3 - (11.1) (1,717.7) 1,135.6 7.0 (562.8) Notes to the consolidated interim financial statements (continued) 15. Statement of changes in equity (continued) Other reserves Capital reduction reserve Translation Available-for- reserve sale Legal Total £m £m £m £m £m At 1 January 2005 - 9.2 (0.8) - 8.4 Net exchange adjustments offset in reserves - - (4.3) - (4.3)Available-for-sale investments marked to market - - - (0.5) (0.5)Total recognised expense for the period - - (4.3) (0.5) (4.8) Capital re-organisation* (1,722.7) - - - (1,722.7) Cumulative exchange recycled on disposal of foreign - - 2.1 - 2.1subsidiaryAt 30 June 2005 (1,722.7) 9.2 (3.0) (0.5) (1,717.0) At 1 January 2005 - 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 (1,722.7) 9.2 0.2 (0.8) (1,714.1) At 1 January 2006 (1,722.7) 9.2 0.2 (0.8) (1,714.1) Net exchange adjustments offset in reserves - - (2.5) - (2.5)Available-for-sale investments marked to market - - - (0.1) (0.1)Total recognised expense for the period - - (2.5) (0.1) (2.6) Cumulative exchange recycled on disposal of foreign - - (1.0) - (1.0)subsidiaryAt 30 June 2006 (1,722.7) 9.2 (3.3) (0.9) (1,717.7) *On 20 June 2005, the High Court (the 'Court') approved the scheme ofarrangement (the 'Scheme') of Rentokil Initial plc ('Old Rentokil Initial')under section 425 of the Companies Act 1985 to introduce a new listed groupholding company, Rentokil Initial 2005 plc ('New Rentokil Initial'). The Schemebecame effective on 21 June 2005 and New Rentokil Initial changed its name toRentokil Initial plc and Old Rentokil Initial changed its name to RentokilInitial 1927 plc at that time. Under the terms of the Scheme, holders of OldRentokil Initial shares received one New Rentokil Initial share for each OldRentokil Initial share. On 22 June 2005, the Court approved the reduction of capital of Rentokil Initialplc, whereby the nominal value of each ordinary share was reduced from 100 penceto 1 penny. The reduction of capital became effective on 23 June 2005. Asshown above, the effect of the scheme of arrangement and the subsequentreduction in capital has increased distributable reserves by £1,792.3m. Thecapital re-organisation transaction has been treated as a reverse acquisition inthe consolidated financial accounts. 16. Cash generated from operating activities 6 months to 6 months Year to 30 June 2006 to 30 June 31 2005 December 2005 £m £m £m (unaudited) (unaudited) (audited)Profit for the year 134.7 64.0 324.4 Adjustments for:- (Profit)/loss on disposal of companies and (72.6) 2.9 (169.7)businesses- Discontinued operations tax and interest (2.8) (2.9) (0.3)- Tax 26.9 28.8 59.4- Share of profit from associates (1.1) (1.3) (2.2)- Interest income (35.5) (35.2) (59.6)- Interest expense 56.4 62.4 114.5- Depreciation 76.6 85.2 168.4- Amortisation of customer lists 11.8 11.5 23.0- Amortisation of other intangible assets 2.0 1.6 3.6- Major non-cash items (0.8) 28.9 38.3- Profit on sale of property, plant and (4.9) (1.8) (12.1)equipmentChanges in working capital (excluding the effects of acquisitions andexchange differences on consolidation):- Inventories (3.3) (2.2) (3.6)- Trade and other receivables 3.2 3.2 (37.9)- Trade and other payables and provisions (24.1) 7.6 30.3Cash generated from operating activities before special pension 166.5 252.7 476.5contributionSpecial pension contribution - - (200.0)Cash generated from operating activities 166.5 252.7 276.5 Non-cash transactions Major non-cash items include share option and long term incentive plan creditsof £0.8m (HY 2005: £28.0m asset impairment charges relating to UK linen andworkwear and share option charges of £0.9m, FY 2005: £31.3m asset impairmentcharges relating to UK linen and workwear, other impairment charge of £3.8m andshare option charges of £3.2m). Notes to the consolidated interim financial statements (continued) 17. Reconciliation of net (decrease)/increase in cash and bank overdrafts to netdebt 6 months to 6 months to Year to 31 30 June 2006 30 June 2005 December 2005 £m £m £m (unaudited) (unaudited) (audited)Net (decrease)/increase in cash and bank overdrafts (99.5) (48.5) 23.6Movement on finance leases 1.9 2.2 2.2Movement on loans 30.2 31.5 226.7(Increase)/decrease in debt resulting from (67.4) (14.8) 252.5cash flowsAcquisition of companies and (9.6) (13.4) (13.8)businessesDisposal of companies and 8.7 0.2 0.5businessesRevaluation of net debt 17.4 - 8.1Net debt translation differences 6.5 8.0 1.5Movement on net debt in the period (44.4) (20.0) 248.8Opening net debt (940.3) (1,189.1) (1,189.1)Closing net debt (984.7) (1,209.1) (940.3) Closing net debt comprises:Cash and cash equivalents 120.5 170.8 240.3Bank and other short-term borrowings (432.5) (206.4) (108.5)Bank and other long-term borrowings (672.7) (1,173.5) (1,072.1)Total net debt (984.7) (1,209.1) (940.3) 18. Free cash flow 6 months to 6 months to Year to 31 30 June 2006 30 June 2005 December 2005 £m £m £m (unaudited) (unaudited) (audited)Net cash generated from operating activities 126.5 192.0 152.4Add back: special pension contribution - - 200.0 126.5 192.0 352.4 Purchase of property, plant and equipment (PPE) (84.2) (91.6) (183.8)Purchase of intangible fixed assets (2.5) (2.3) (9.2)Leased property, plant and equipment (7.6) (7.1) (16.9)Proceeds from sale of PPE and intangible assets 13.7 5.1 22.0Dividends received from associates - - 1.0Dividends paid to minority interests (0.7) (0.5) (2.6)Interest element on finance lease payments (1.2) (1.2) (2.5)Free cash flow 44.0 94.4 160.4 19. Business combinations The group purchased 100% of the share capital of J.C. Ehrlich Co. Inc.("Ehrlich"), a large pest control company in the USA, on 1 March 2006 and PinkHealthcare, a washroom services company in Australia, on 30 June 2006. Thegroup also purchased 100% of the share capital or the trade and assets of 17smaller companies and businesses as detailed below. The total consideration forall acquisitions during the period was £119.7m and the cash outflow from currentperiod acquisitions, net of cash acquired was £112.9m. Name of business acquired Country Business DateSanctum Transport Ltd UK City Link 01.01.06Hollstern Germany Pest Control 01.01.06Plantedekor Norway Tropical Plants 20.02.06Speedlink Express Ltd UK City Link 21.02.06Kidwell Pest Control USA Pest Control 28.02.06Lease-A-Plant New Zealand Tropical Plants 08.03.06Yingst Pest Control USA Pest Control 30.03.06A&K UK City Link 18.04.06Pest Free Service Ltd New Zealand Pest Control 20.04.06Siemens France Electronic Security 28.04.06Tampereen Mattopesupalvelu Finland Textiles & Washroom Services 30.04.06FinpestControl Finland Pest Control 05.05.06Poulter UK City Link 15.05.06Oki Dust Mat China Textiles & Washroom Services 31.05.06Gantner Germany Pest Control 01.06.06Sanitensia Sweden Textiles & Washroom Services 05.06.06Akarana New Zealand Pest Control 19.06.06 Notes to the consolidated interim financial statements (continued) 19. Business combinations (continued) Details of goodwill and the fair value of net assets acquiredare as follows: Pink Ehrlich Other 2006 £m £m £m £m (unaudited) (unaudited) (unaudited) (unaudited)Purchase consideration:- Cash paid 23.2 72.3 16.3 111.8- Direct costs relating to the acquisition - 2.2 0.3 2.5- Consideration deferred to future periods 1.1 1.1 2.4 4.6- Direct costs deferred to future periods 0.8 - - 0.8Total purchase consideration 25.1 75.6 19.0 119.7Fair value of net assets acquired 9.7 31.1 10.0 50.8Goodwill 15.4 44.5 9.0 68.9 Goodwill represents the synergies and other benefits expected as a result ofcombining the respective businesses. The provisional fair values* of assets and liabilities arising from acquisitionsare as follows: Non-current assets - Intangible assets (customer lists) 10.4 28.3 3.4 42.1 - Intangible assets (other) 2.6 8.1 - 10.7 - Property, plant and equipment 1.8 3.3 6.5 11.6 - Other investments - 0.2 - 0.2Current assets 0.3 11.0 9.5 20.8Current liabilities (2.3) (12.1) (7.5) (21.9)Non-current liabilities (3.1) (7.7) (1.9) (12.7)Fair value of net assets acquired 9.7 31.1 10.0 50.8 \* The provisional fair values will be finalised in the 2006 annual financialstatements. Total purchase consideration 25.1 75.6 19.0 119.7 Consideration payable in future periods (1.1) (1.1) (2.4) (4.6)Direct costs payable in future periods (0.8) - - (0.8)Purchase consideration (paid in cash) 23.2 74.5 16.6 114.3Cash and cash equivalents in acquired companies and - (0.3) (1.1) (1.4)businessesCash outflow on current period acquisitions 23.2 74.2 15.5 112.9Deferred consideration from prior periods - - 1.8 1.8paidCash outflow on current and past 23.2 74.2 17.3 114.7acquisitions From the dates of acquisition to 30 June 2006 these acquisitions contributed£42.6m to revenue and £2.6m to operating profit (after amortisation of customerlists acquired of £1.7m). If these acquisitions had occurred on 1 January 2006, they would havecontributed £71.3m to revenue and £4.3m to operating profit (after amortisationof customer lists acquired of £3.8m). 20. Post-balance sheet events On 3 July 2006 the company issued, under its €2.5bn Euro Medium Term Noteprogramme, a €100m floating rate note maturing 3 July 2008. The sale of the US manned guarding business was completed on 20 July 2006 for atotal consideration of £45.0m. The disposal of a portfolio of vacant properties for payment of £10m wascompleted on 18 August 2006. Contracts for the sale of surplus properties arising out of the closure of theUK linen and workwear business have been exchanged and are expected to completeduring the third quarter. Agreement has been reached to acquire CWS branded washroom and dustmatactivities in Australia, Hong Kong, South Korea, Malaysia, the Philippines andSingapore. 21. 2005 Annual Report The latest 2005 Annual Report has been filed with the Registrar andPricewaterhouseCoopers, the group's auditors, have provided an unqualified auditopinion thereon. Copies of the 2005 Annual Report are available from thecompany's registered office at Belgrave House, 76 Buckingham Palace Road,London, SW1W 9RF. 22. Section 240 of the Companies Act 1985 (as amended) The financial information in this interim statement does not constitutestatutory accounts within the meaning of section 240 of the Companies Act 1985(as amended). This information is provided by RNS The company news service from the London Stock Exchange