Rentokil Initial Regulatory News (RTO)

25 Jul 2008 07:00

25 July 2008

RENTOKIL INITIAL PLC (RTO)

TRADING UPDATE 

In our Q1 trading statement issued on 2 May 2008, we stated that while a number of our businesses made good progress in growing the top line, developing customer portfolios and reducing termination rates, our difficulty in implementing major change programmes continued to affect the performance of key businesses within the group. While City Link has made good progress in improving service levels, the problems associated with the restructuring of our UK washrooms business and the integration of our washrooms and pest control acquisitions in Australia have continued throughout the second quarter.

In addition, trading has deteriorated in our Textiles & Washrooms division during the quarter. Although the bulk of these problems are due to serious operational issues in the UK, our businesses in Europe are also facing a number of cost or growth challenges. We expect these problems to continue for at least the remainder of the year.

In light of these factors, the group's internal forecast adjusted profit before tax and amortisation for the full year 2008 is now approximately £35 million lower than at the time of the first quarter trading update.

Textiles & Washroom Services 

The profitability of our UK Washroom business has deteriorated in the quarter. Customer retention rates remain an issue as we recover from a long period of disrupted service. As a result, revenue has fallen year on year and customer receivables and associated provisions have increased sharply. This has resulted in a small loss being incurred in the quarter by UK Washrooms. A new Managing Director has been appointed and now reports to the UK Facilities Services division with a brief to focus on restoring customer service and reducing Accounts Receivable to acceptable levels.  It is unlikely that profitability will improve in 2008 

In continental Europe higher service expenses in the French and Belgian textiles operations relating to rising labour costs, a back-dated property tax assessment and in particular energy costs have impacted financial performance. In the Netherlands retention has remained strong in an increasingly tough pricing environment. These businesses represent approximately three quarters of our European profit in this division. While profits from these operations grew in Q1, they declined in Q2 versus prior year and we are cautious about the outlook for the remainder of the year.

Pest Control 

The Pest Control division performed broadly in line with plan during the quarter, although our UK and North American businesses experienced some sales slow down during the quarter. Service in the UK has improved significantly and is currently at 95.4% (2007: 83.3%) although its first half profitability is impacted by credits issued to customers to deal with legacy service issues. It is unclear the degree to which June's slow down relates to poor weather conditions for pest control and/or to the weakening UK economy. The rate of contract terminations in the US residential business has increased somewhat, which we believe reflects conditions in the US economy.

City Link 

Implementation of the seven-point recovery plan has had a positive impact on service performance. Customer relationships have improved, attrition has slowed and overall service levels have been restored to a very high level - now consistently above 98.5%. Despite the service improvement, the revenue trend has weakened as the quarter progressed. This was not due to customer losses but is indicative of weakening demand generally. 

We have identified substantial cost saving opportunities that should deliver payback within 12 to 18 months, though with limited impact on 2008 results. The business also faces significant infrastructure opportunities and challenges but these will take some time to address and implementation will not commence before 2009.

Internal forecasts of losses at City Link for 2008 have stabilised, with positive developments on service, retention rates and new business being offset by slowing demand.

Asia Pacific 

Profit in our Asia Pacific division was significantly lower than last year in both Q2 and the first half as a whole. In our Asian markets profit was ahead in all territories but the performance of the division has been undermined by Australia. Problems within our washrooms business in Australia following the acquisition of Pink are more deep-seated than initially thought. A new management team has been appointed. Recovery is unlikely before next year. Also in Australia, the Campbell's residential pest acquisition is not performing well. A plan to improve the performance of our combined residential and commercial pest businesses is being piloted at present and if successful should lead to performance improvement in 2009.

Initial Facilities Services 

Initial Facilities Services has produced profit in line with its budget in the first half despite tough trading conditions. The Lancaster acquisition is performing well.

Ambius

Ambius, our tropical plants division, delivered a solid performance from its European businesses during the quarter but is suffering in North America from increasing terminations and poor new business, influenced somewhat by the poor US economy. The outlook for the year is dependent on performance during the US Holiday season.

Further information will be provided in the Company's interim results which will be announced on Friday 22 August 2008.

Commenting on the statement, Alan Brown, Chief Executive of Rentokil Initial, said: 

"We continue to experience operational problems in a number of our businesses, virtually all of which originate from poorly executed restructuring or acquisition integration programmes initiated between 2005 and 2007. The transfer of accountability from branches and depots to regional or central teams has been a major problem when coupled with significant change programmes.  We are moving quickly to restore accountability to branch level whilst instilling robust operational procedures and systems.

"The challenges we face are considerable, but we are making progress on achieving our primary objective of delivering on customer service and focusing on operational excellence. This will form the foundation for the recovery of the business. I am particularly encouraged by the operational improvements at City Link. 

"I remain robust in my belief that this is the correct agenda to pursue and that Rentokil Initial has significant potential over the medium to long term."

Enquiries: 

Shareholder/analyst enquiries:

Andrew Macfarlane, Chief Financial Officer Rentokil Initial plc  020 7592 2700

Katharine Rycroft, Head of Investor Relations  07811 270734

Media enquiries:

Kate Holgate, Tom Williams Brunswick Group  020 7404 5959

A conference call for analysts and investors will be held today at 8.15am. To join this call, please dial 020 7806 1966 giving participant code 4173782.