Rentokil Initial Regulatory News (RTO)

RENTOKIL INITIAL PLC (RTO)

PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2014

27 February 2015

· Strong revenue, profit and cash performance in Q4

· £93m improvement in free cash flow at £129m at AER

· Accelerated M&A execution: 30 bolt-ons (23 in pest), combined annualised revenues of £66m at AER

· Proposed 12.1% increase in dividend year on year

· £260m reduction in net debt - lowest net debt in 15 years; net debt to EBITDA 1.9x

· Strong pension fund position - in actuarial surplus by over £50m

· Solid first year performance towards medium-term targets despite ongoing market challenges in parts of Europe

Commenting on the results for 2014 Andy Ransom, CEO of Rentokil Initial plc, said:

"This time last year we set out our new differentiated strategy and introduced medium-term targets for mid-single digit revenue growth, high-single digit profit growth and a significant improvement in cash generation. We have implemented our strategy with pace and one year on we have delivered ongoing revenue growth of 3.6%, ongoing profit growth of 6.5% and a £93m improvement in free cash flow. I am encouraged by our performance in 2014 and by the progress we are making towards these targets.

"While prospects in the majority of our key markets are good, conditions in parts of Europe remain challenging. Notwithstanding this, we are confident of making further progress in the coming year."

Revenue (at CER)

Revenue from ongoing operations increased by 3.6% in 2014 comprising organic growth of 1.2% and growth from acquired businesses of 2.4%. Growth in Q4 increased to 5.0% compared to 3.8% in Q3, driven by both improved organic performance (+2.0%) and acquisitions (+3.0%).

Growth in 2014 in the Emerging (+21.7%) and Growth (+5.7%) quadrants was strong, with a marginal increase in the Manage for Value quadrant (+0.5%) offset by a flat performance year on year in the Protect and Enhance segment

(-0.1%). Divestments in the Manage for Value quadrant reduced revenues by 0.9% during the year, resulting in total growth of 2.7%.

Profit (at CER)

Adjusted operating profit increased by 5.5% in 2014, reflecting growth in North America, Asia, Pacific, Germany and Latin America, supported by lower central and divisional overheads, but partly offset by lower profits in Benelux. Excluding divested businesses, ongoing adjusted operating profit increased by 6.5% in the year.

Adjusted profit before tax (at AER) was negatively impacted by £16m in 2014 due to the continued strength of Sterling.

In line with our stated commitment, restructuring costs were significantly lower than in the prior year at £9.3m versus £47.4m in 2013, contributing to an increase in profit before tax of 45.5% at AER. One-off items for continuing operations netted out to £nil (2013: £4.6m).

Cash (at AER)

One of our core strategic objectives is to improve free cash flow (FCF). In 2014 we delivered a £92.6m improvement in FCF to £128.9m driven by reductions in restructuring costs, capex and working capital outflows. Cash spend on restructuring costs and provisions was £29.7m lower year on year. Net capex of £178.6m was £49.2m lower than 2013 reflecting our more focused approach to capital allocation and the phasing of investment. Working capital outflow of £4.4m (some £15.6m better than our £20m target for 2014) was supported by an asset backed financing initiative in our French business.

M&A (at AER)

In line with our strategy we have accelerated our M&A programme to pursue targeted acquisitions that meet our returns criteria in higher growth markets and in areas which add local density to our existing operations. We acquired 30 companies during the year, 23 in pest control, with combined annualised revenues in the 12 months prior to acquisition of £66m. Cash spend on acquisitions in the year amounted to £68m. Acquisitions are being integrated successfully and performing well.

A presentation for investors and analysts will be held at 8.45am on Friday 27 February 2015 at the offices of Bank of America Merrill Lynch, 2 King Edward Street, London, EC1.

This will be available via a live audio web cast at www.rentokil-initial.com.

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

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

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

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

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

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

FINANCIAL SUMMARY

1 all figures are for continuing operations unless otherwise stated

2 results at constant exchange rates have been translated at the full year average exchange rates for the year ended 31 December 2013. £/$ average rates: FY 2014 1.6465; FY 2013 1.5713, £/€ average rates: FY 2014 1.2438; FY 2013 1.1820

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

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

5 see Note 2 for further details

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

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

8 prior year figures have been restated to show the Initial Facilities business that was disposed in March 2014 as a discontinued operation

Basis of preparation

Segmental information has been presented in accordance with IFRS 8 "Operating Segments" which the group has implemented with effect from 1 January 2009. This statement reflects internal organisation changes made in 2014. In 2013 our core businesses were run on a day-to-day basis by one manager per country, each responsible for the core activities in his/her region, and the countries were grouped into three geographic regions, East, West and Asia. In 2014 the East and West regions ceased to exist and have been replaced by regional clusters. Prior-year comparisons have been restated. Unless otherwise stated references to 'revenue' are for continuing businesses and references to 'profit' and 'operating profit' are for continuing businesses before amortisation, impairment of intangible assets (excluding computer software) and restructuring costs and one-off items (totalling a net cost of £9.3m) that have had a significant impact on the results of the group. These costs have been separately identified as they are not considered to be "business as usual" expenses and have a varying impact on different businesses and reporting periods. Ongoing revenue is revenue from continuing operations excluding revenue from disposed businesses but includes revenue from acquisitions. Ongoing profit is operating profit from continuing operations before amortisation, impairment of intangible assets (excluding computer software), restructuring costs and one-off items and excludes profit from disposed businesses but includes profit from acquisitions. All references to profit are at CER unless stated otherwise. All comparisons are at constant 2013 full year average exchange rates unless otherwise stated.

INTRODUCTION

2014 has been a year of tangible progress at Rentokil Initial. In February we announced the divestment of the Initial Facilities business and the creation of a new differentiated strategy to drive profitable growth. The sale of Initial Facilities has allowed us to focus on our core categories of pest control, hygiene and workwear. Our new strategy, which we presented in February, is focused on delivering medium-term improvements in revenue and profit and a sustainable improvement in free cash flow, which enables us to execute and accelerate our acquisition plans, implement a progressive dividend policy and pay down debt. In addition, our strategy utilises a quadrant analysis to group categories and geographies into a growth potential and profit contribution matrix and to focus resources on delivering improved levels of growth and to prioritise capital allocation for investment and M&A.

We have implemented our strategy at pace in 2014 and in the year achieved total revenue growth from ongoing operations of 3.6% (at CER), a 6.5% increase in ongoing profit (at CER) and a significant enhancement in free cash flow, which improved by £93m to £129m at AER. Restructuring costs fell by £38m year on year, working capital outflows improved by £17m and net capex of £178.6m was £49.2m lower than 2013 reflecting our more focused approach to capital allocation and the phasing of investment. With a significant reduction in restructuring costs and with capital expenditure now in line with depreciation, we anticipate achieving over £100m per annum in free cash flow on a sustainable basis and expect to make further progress towards our medium-term revenue and profit targets in 2015. In addition, we made 30 acquisitions during the year (of which 77% are in the Emerging and Growth quadrants) generating some £66m of annualised revenue (at AER).

REGIONAL PERFORMANCE OVERVIEW

In the North America region revenue grew 6.6% for the full year. Revenue growth was stronger in Q4 (8.4%) supported by acquisitions. Organic revenue growth of 1.7% for the year was held back by adverse weather conditions on the East and West coast during H1 but strengthened in H2 (up 3.3% in Q4). Profit rose by 15.6%, again supported by acquisitions and by back office and property rationalisation delivering margin expansion of 0.9%. Further margin improvement opportunities exist through acquisitions, scale efficiencies and service productivity.

Despite economic weakness ongoing revenue growth in the Europe region was 1.7% in 2014 (2.1% in Q4). Ongoing revenue growth in Germany (up 2.3%), France (up 0.3%) and Latin America (managed out of the Europe region and up 308%), was offset by a decline in Benelux (down 2.0%). Profit in Europe declined by 3.7% due to the performance of our Benelux hygiene and workwear business which was impacted by the continued effect of poor service levels in 2013 and tough economic conditions resulting in both contract terminations and pricing pressure.

The outlook for our European businesses is mixed. Our German, Belgian and Italian businesses are experiencing more positive trading conditions and are expected to make good progress during the year. However, the outlook for our businesses in the Netherlands and France is more uncertain with these regions continuing to face challenging economic conditions and competitive markets. Overall, we expect profitability in our Europe region to be broadly in line with last year. Our strategy to protect margins in this region includes a focus on yield management, service productivity, customer density and further back office rationalisation.

In the UK & Rest of World region, ongoing revenue rose by 5.6% in 2014 (8.3% in Q4), with organic growth for the year of 3.2%. The UK operations saw good revenue growth, aided by increased pest jobbing work, but margins were held back by national contract wins with large multi-premise set ups and the integration of the previously loss making Green Compliance acquisition in December 2013. The Rest of World operations also delivered good revenue growth, particularly in the Middle East and the Caribbean, but this was offset by lower revenues in South Africa, impacted by customer industrial action in the mining sector and pricing pressures in this high inflationary market. Margin improvement in the UK is expected in 2015 as new contracts and acquisitions mature.

Our Asia region had another good year with ongoing revenue growing by 8.1% in 2014 (11.9% in Q4). Both the pest control and hygiene categories performed well. The emerging markets of India, China and Vietnam delivered combined revenue growth of 29.1%. Combined high single digit revenue growth of 8.5% was delivered in our more established businesses in Indonesia and Malaysia. Profit grew by 18.2% in 2014, reflecting leverage from rising revenues and back office rationalisation with margins higher by 1.2%. There are further opportunities to grow margins in the region through operational leverage from revenue growth and back office rationalisation.

In the Pacific region revenue increased by 0.9% for the full year (2.5% in Q4), reflecting growth in contract revenue across pest and hygiene offset by a decline in pest jobbing revenue and contract revenue in Ambius. Profit grew by 5.9% in 2014 supported by business efficiencies, cost savings and branch administration rationalisation. Further margin improvement opportunities will be sought through improved service productivity and targeted acquisitions.

THE DIFFERENTIATED PLAN TO DRIVE SHAREHOLDER VALUE

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

We also announced the following medium-term targets:

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

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

3. Improved free cash flow: significant improvement in sustainable free cash flow to fund M&A, implement a progressive dividend policy and reduce debt

Implementation of the Company's strategic plan began at pace in 2014. An update on our progress in year one is outlined below by revenue, profit and cash, and by quadrant.

1. Driving higher revenue

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

Progress Report:

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

o Good ongoing revenue growth in pest control of 8.5% which accelerated to 10.4% during H2

o Improved ongoing revenue performance in hygiene up 1.0% (+1.8% excluding Benelux)

o Marginal revenue decline of 0.3% in workwear (+0.3% excluding Benelux)

· Targeting our offer (where to play) through innovation

o Strong pipeline of pest control product innovation including:

- Pathogenic fungi - highly effective cockroach control, pilots in UK, Malaysia and USA

- 'RodentGate' - a new rodent control unit which uses sensors to contain poisoned bait behind a gate, safe from non-target species, until activated

- 'CageConnect' - a cage trap for small vertebrates (e.g. squirrels) that alerts technician via SMS when triggered

- UK launch of bedbug monitoring device using chemical pheromones

- Completion of successful pilot amongst 80 customers across 200 locations in Netherlands and Belgium of 'PestConnect', our remote monitoring system; further roll out planned for other markets

o Significantly improved hygiene product range:

- 'Signature' and 'Reflection' hygiene ranges now fully rolled out in all markets

- Launch of 'Signature' colour range in nine colours and three finishes

- Development of full range of 'No Touch' hygiene products

- Launch of 'Initial HygieneConnect', the world's first integrated wireless monitoring and display system designed to raise hand washing compliance

o Ongoing service development and innovation in workwear:

- Seven new garment ranges in Europe

- 3D body scanner providing perfect fit for workwear garments live in Belgium

- Online size taking and ordering service developed for pilot in 2015

- Launch of new 'CleanVision' suit (with integrated hood & visor to minimise contamination)

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

o 30 companies acquired in 2014 (23 in Emerging and Growth markets), with £66m of combined annualised revenues (at AER)

· Sales effectiveness (building the pipeline) through digital excellence

o Introduction of new web presence for Rentokil in the UK, North America, Germany, France and Spain designed to maximise search performance and add local contacts:

- Q4 2014 vs. Q4 2013: North America website delivered 52% growth in total website enquiries from a 16% increase in traffic; UK website delivered 64% growth in total website enquiries from a 60% increase in visitors to the sites

Medium-term target: mid-single digit revenue growth, supported by M&A

Progress in year one: ongoing revenue +3.6% (organic revenue +1.2%, +2.4% acquisitions)

2. Sustainable profit growth

Focus: revenue growth, pricing and margin improvement with significant reduction in central and divisional overheads and restructuring costs, and service productivity

Progress Report:

· Sales force to focus on yield management

o Development of detailed profitability analysis tool - by sector, service line, branch, manager and sales rep - for improved price management; European roll out in 2015

· Service productivity

o Branch optimisation

- Launch of a new scheduling tool across 12 countries, 45 branches and 750 technicians in Europe, South Africa and Pacific; further roll out in 2015

o Route optimisation

- Launch of route planning tool in France and Benelux hygiene; plan to optimise over 50% of the 1,000+ routes across Europe in 2015

· Reduction in central and divisional overheads in 2014

o Reduction in central and divisional overheads of £11.4m in 2014

· Branch admin rationalisation

o Driving significant margin improvements in France, Australia and North America

Medium-term target: high single digit profit growth

Progress in year one: ongoing profit growth of +6.5%

3. Improved free cash flow

Focus: managing working capital, bringing capex in line with depreciation and significantly reducing restructuring costs. Balanced use of cash to invest in M&A, pursue a progressive dividend policy and incremental reduction in debt

Progress Report:

· 2014 target - £20m reduction in capex versus 2013

o £42m reduction in capital expenditure reflecting more focused capital allocation

· 2014 target - IT Capex no greater than £25m

o IT capex of £17m reflecting tighter control and phasing of spend

· 2014 target - restructuring costs less than £20m

o 80% reduction vs. 2013 with P&L charge of £9.3m

· Reduced working capital outflows

o Working capital outflow of £4.4m, a £17m reduction on last year, reflecting asset backed financing initiative

Targeting significant improvement in free cash flow in 2014

£93m improvement in free cash flow at £129m (2014 target £80m)

4. Implementation of differentiated quadrant matrix

As outlined above we execute our strategy by grouping our country operations and categories into a four-quadrant matrix based upon growth potential and profit contribution (chart below updated following 2015 review). Each quadrant has a different strategy, designed to maximise performance. An update on progress is outlined below:

Emerging quadrant

Percentage of group revenue: 7.4% (2013: 6.3%)

Percentage of operating profit: 5.9% (2013: 4.8%)

2014 financial performance: ongoing revenue growth 21.7%, ongoing profits +22.6%

Strategy: build leading market positions in the key cities across those markets which we identify as the best opportunities for our pest and hygiene businesses

Key developments in 2014:  sales capability upgrade in Asia, focus on building density in top 15 cities in China, sales and service productivity initiatives in Malaysia

M&A strategy: pest control-led market entry, focus on acquiring local management capabilities, bolt-ons for density. IRR ~15%

M&A in 2014: eight acquisitions contributing £16.9m annualised revenues (Chile, Colombia, India, Mozambique, Korea, Brazil, Brunei, and Singapore) 

Changes in 2015: inclusion of Fiji pest control (from Protect & Enhance)

Growth quadrant

Percentage of group revenue: 41.1% (2013: 40.3 %)

Percentage of operating profit: 40.2% (2013: 38.2 %)

2014 financial performance: ongoing revenue growth +5.7%, ongoing profits +6.3%

Strategy:  focus on growing market share and on developing existing customers, whilst filling gaps in our geographic footprint through organic and acquisitive growth

Key developments in 2014: strong pipeline of new pest and hygiene products and services, investment in new enhanced digital capability

M&A strategy: extend geographic reach into new cities and build out sub-scale regions, IRR (>15%) as platform for growth

M&A in 2014: 15 acquisitions contributing £41.7m annualised revenues (UK, Bahamas, NA, and Lithuania)

Changes in 2015: inclusion of seven businesses from Protect & Enhance, including France pest and cleanrooms, Netherlands cleanrooms and Nordics, South Africa, Australian and New Zealand pest control businesses

Protect & Enhance quadrant

Percentage of group revenue: 44.6% (2013: 46.3 %)

Percentage of operating profit: 48.3% (2013: 51.0%)

2014 financial performance: ongoing revenue down 0.1%, ongoing profits down 4.4%

Strategy: focus on customer service, pricing, productivity and cash

Key developments in 2014: appointment of new Benelux management team to improve performance, rising customer satisfaction levels in South Africa, Nordics and Benelux, branch and route optimisation tools to enhance productivity, customer profitability tool to improve price management

M&A strategy: consolidate regional and local strengths, acquire new capabilities in adjacent service areas, above average IRR (~25%)

M&A in 2014: three acquisitions contributing £2.9m annualised revenues 

Changes in 2015: inclusion of four businesses from Manage for Value, including France Technivap, Italy pest control and Ireland pest and hygiene businesses

Manage for Value quadrant

Percentage of group revenue: 6.9% (2013: 7.1%)

Percentage of operating profit: 5.6% (2013: 6.0%)

2014 financial performance: ongoing revenue growth up 0.5%, ongoing profits down 4.5%

Strategy:focus on customer service, profitability, cost management, productivity and efficiency

Key developments in 2014: focus on productivity improvements in Southern European operations, stronger than expected performance from Italy pest control and Ireland pest and hygiene

M&A strategy: acquire bolt-ons for density - requires high IRR (~30%), divesting sub-scale unprofitable businesses

M&A in 2014: three disposals, four acquisitions contributing £4.2m annualised revenues

Changes in 2015: movements to Protect & Enhance as noted above

ACQUISITIONS AND DISPOSALS

In line with our stated strategy, this year we accelerated our M&A programme to pursue targets in higher growth markets and in areas which add local density to our existing operations. In 2014 we acquired 30 businesses in the UK, US, Spain, Ireland, Italy, Netherlands, India, Brunei, Singapore, Sweden, Brazil, Lithuania and Korea and entered new markets in Chile, Bahamas, Mozambique and Colombia to exploit under-served and increasingly affluent markets. Combined annual revenues of the above prior to acquisition were approximately £66m (at AER)

In pest control we acquired 23 businesses with revenues of £44m, 17 of which are in the Emerging or Growth quadrants of our capital allocation approach. In hygiene we re-entered the Korean washrooms market through the acquisition of a small business in Seoul. In plants we acquired five small bolt-ons generating annual revenues of approximately £2m. In December we acquired UK property care business Peter Cox Limited which generated revenues approaching £20m in its last financial year.

Building density in the North American pest market continues to be a priority and during the year we expanded our geographic presence with seven bolt-ons in Indiana, Connecticut, Virginia, West Virginia, Mississippi, Washington and Oregon.

In the Manage for Value quadrant we completed the sale of Initial Facilities to Interserve Plc in March for a total consideration of £250m and also sold the Spanish Medical and Austrian Products businesses. Combined annual revenues from these operations in 2013 were £547m.

To date in 2015 we have completed three pest acquisitions in North America, Colombia and Australia. Buffalo Exterminating represents an important strategic bolt on, giving us a market leading position in New York State and building density in markets in which we are already active, as do the acquisitions of Fumighar pest control in Colombia and the Neil Younger pest business in Australia. Combined annualised revenues prior to acquisition of the three businesses totalled £6.8m.

We monitor the integration and performance of acquired businesses closely and, in aggregate, profits across all acquisitions made over the last two years are in line with the business plans for those transactions. The group will continue to seek further acquisitions in 2015 particularly within the Growth and Emerging quadrants. We estimate our targeted spend to be in the region of £50m but this dependent on finding acquisition opportunities that meet our financial hurdles and resourcing abilities.

DIVIDEND

Following a strong performance in 2014, and in anticipation of further progress in 2015, the Board is recommending a final dividend in respect of 2014 of 1.82p per share, payable to shareholders on the register at the close of business on 17 April 2015 to be paid on 20 May 2015. This equates to a full year dividend of 2.59p per share, an increase of 12.1% compared to 2013.

BOARD CHANGES

On 22 July 2014 the Company announced the appointment of Julie Southern to the Board as a Non-executive Director and Chairman of the Audit Committee. Julie succeeds Duncan Tatton-Brown who, after nine years on the Board, also stood down as a Non-executive Director at the conclusion of the AGM on 14 May 2014. Peter Long, who joined the Board in 2002, stood down as a Non-executive Director on 31 December 2014. The Board thanks Peter and Duncan for their significant contributions to the Company over the years and wishes them the very best for the future.

GUIDANCE FOR 2015

Central and divisional overheads are anticipated to be in line with 2014. Impact to the P&L of restructuring costs is expected to be no greater than £10m. Interest costs are likely to be in the region of £43m reflecting the impact of the Company's recent refinancings (cash impact will be slightly higher than P&L impact). Our current estimate for adjusted effective tax rate is 23.5% (vs. 23.5% for last year) with cash tax payable in the region of £40m. During 2014 adjusted profit before tax at actual exchange rates was negatively impacted by £16m due to the continued strength of Sterling. This trend has continued into 2015 and based on current exchange rates the estimated impact on 2015 adjusted profit before tax would be c. £14m. Working capital outflow is estimated to be at or below £20m, with net capex rising slightly to c. £200m.

OUTLOOK

This time last year we set out our new differentiated strategy and introduced medium-term targets for mid-single digit revenue growth, high-single digit profit growth and a significant improvement in cash generation. We have implemented our strategy with pace and one year on we have delivered ongoing revenue growth of 3.6%, ongoing profit growth of 6.5% and a £93m improvement in free cash flow. We are encouraged by our performance in 2014 and by the progress we are making towards these targets.

While prospects in the majority of our key markets are good, conditions in parts of Europe remain challenging. Notwithstanding this, we are confident of making further progress in the coming year.

FINANCIAL REVIEW

Central and divisional overheads (at CER)

Central and divisional overheads decreased by £11.4m in the year, beating our original target of £10m by £1.4m, reflecting the successful implementation of a programme which included implementation of our low cost country operating model, cost reductions at head office and the sale of the Initial Facilities business in March 2014.

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

Greater operational discipline resulted in a significant reduction in restructuring and one-off operating items. Restructuring costs in the year amounted to £9.3m (2013: £47.4m) representing a reduction of over £38m on 2013. These consisted mainly of redundancy costs, consultancy and plant and office closure costs.

One-off items in the current year netted out to £nil (2013: £4.6m). These costs included acquisition costs, disposal costs, impairment of computer software and profits or losses on the sale of continuing businesses and property.

Details of restructuring costs and one-off items (operating) incurred in the period are set out in Note 2 to the accounts.

Interest (at AER)

Net interest payable was £45.3m at actual exchange rates compared to £59.6m in the prior year, a decrease of £14.3m. The decrease is due to the refinancing of the group's €500m 4.625% bond which matured in March 2014 and lower net debt levels following the sale of the Initial Facilities business. The average cost of gross debt for the group is now less than 4%.

Tax (at AER)

The income tax expense for the year was £37.1m at actual exchange rates on the reported profit before tax of £163.2m. After adjusting profit for the amortisation of intangible assets (excluding computer software), restructuring costs and one-off items and the net pension credit from pensions, the effective tax rate for the year was 23.5% (2013: 25.4% as restated). This compares with a blended rate of tax for the countries in which the group operates of 26% (2013: 27% as restated). The reduction is principally due to the benefit of tax losses brought forward being offset against UK profits and an increase in the deferred tax asset recognised on the UK tax losses.

Net debt and cash flow

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

Operating cash inflow of £209.5m at actual exchange rates for continuing operations was £72.4m higher than 2013 mainly due to reductions in restructuring costs, working capital outflows and capex in 2014.

Interest payments (including finance lease interest) were £1.7m lower than last year at £49.5m. Total tax payments were £30.1m compared with £37.2m in 2013 and the Company made pension funding payments of £1.0m during the year compared to £13.6m in 2013. Free cash inflow of £128.9m was £92.6m higher than in the prior year.

Cash spent on acquisitions totalled £68.1m, proceeds from disposals totalling £256.0m including the disposal of the Initial Facilities business. Included in the sale were £16.7m of transferred restricted cash balances relating to Private Finance Initiative (PFI) contracts. The Company made dividend payments of £43.2m in 2014, £4.6m (11.9%) higher than 2013.

Free cash flow from continuing operations of £128.9m more than covered total investment in acquisitions (£68.1m) and dividend payments (£43.2m) in the year.

Foreign exchange translation and other items reduced net debt by £44.0m, leaving an overall reduction in net debt of £259.8m and closing net debt of £775.0m.

Capital expenditure (at AER)

Gross capital expenditure from continuing operations of £191.6m was £42.4m lower than 2013, broadly in line with depreciation. The lower level of expenditure reflects more rigorous prioritisation towards capital investment including reduced levels of investment in restructuring activities and IT, as well phasing of spend on 2014 projects.

Pensions (at AER)

At 31 December 2014 the Company's UK defined benefit pension scheme, which is closed to new members, was valued at an accounting surplus of £192.2m on the Company's balance sheet. The trustees value the scheme on a different basis. The most recent formal actuarial valuation showed that at 31 March 2013 the Scheme was 98.7% funded with a deficit of £17.8m. However, based on movements since 31 March 2013 the Scheme was estimated to have a surplus in excess of £50m at 31 December 2014. It is anticipated that the Scheme will remain in surplus over the period of the recovery plan. In order to mitigate the risk that it does not, however, annual contributions of £3.2m per annum over the six-year period will be paid into a joint escrow account by the Company. The first payment was made in October 2014. In the event that the deficit is not cleared by the time of the 31 March 2019 valuation, it will be funded from the escrow account. The Company has recognised the pension surplus as an asset because the group has an unconditional right to a refund of the surplus at the end of the Scheme's life.

Funding (at AER)

At 31 December 2014 the group had net debt of £775m and a strong liquidity position, comprising over £190m of centrally held funds and £270m of available undrawn committed facilities. Net debt to EBITDA at the year end was 1.9x.

The group has since refinanced its Revolving Credit Facility, replacing a £270m December 2016 maturity with a £270m facility maturing in January 2020. The group has two options (both at zero cost) to extend the maturity date to January 2022, exercisable in January 2016 and January 2017.

The group has a £300m bond maturing in March 2016 which can be repaid using the group's cash balances and available credit facilities. The group will review funding requirements during 2015 to provide additional headroom following repayment of the bond and will provide an update in due course.

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

Appendix 1

Regional Analysis - continuing operations

1 excluding computer software

2 includes revenue of £9.8m and profit of £0.4m from businesses disposed in 2014. Excluding these businesses ongoing revenue was £1,830.5m and ongoing adjusted profit was £248.7m

Appendix 2

Category Analysis - continuing operations

1 excluding computer software

2 taxation includes £37.1m (2013: £30.6m as restated) in respect of overseas taxation

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

*restated as a result of discontinued operations. Please refer to note 1 for further details

Consolidated statement of changes in equity

Treasury shares of £10.9m (2013: £11.1m) have been netted against retained earnings. Treasury shares represent 5.9m (2013: 6.0m) shares held by the Rentokil Initial Employee Share Trust. The market value of these shares at 31 December 2014 was £7.1m (2013: £6.9m). Dividend income from, and voting rights on, the shares held by the Trust have been waived.

Consolidated statement of changes in equity (continued)