Rentokil Initial : Preliminary Results - Form 6-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16

UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of March 2024

Commission File Number: 001-41524

Rentokil Initial plc

(Registrant's name)

Compass House

Manor Royal

Crawley

West Sussex RH10 9PY

United Kingdom

(Address of principal executive office)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

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Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):☐

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2023 Preliminary Results

Good overall operational and financial performance

RIGHT WAY 2 Plan launched to reinvigorate growth in North America

Terminix gross synergy target increased by $50m

Financial Highlights(Unless otherwise stated, all financials are presented at constant exchange rates. Organic Revenue growth figures exclude COVID disinfection.)

Strategic Highlights

Andy Ransom, Chief Executive of Rentokil Initial plc, said:

"The Group overall delivered a good operational and financial performance in 2023, despite weaker growth in North America, achieving 4.9% organic revenue growth and 16.6% margin. We have continued to benefit from our diversified, global footprint and resilient business model, in addition to our sustained focus on customer service and investment in people, technology and innovation.

We're taking action to reinvigorate organic growth in the North American business. In our RIGHT WAY 2 plan, we have created a clear and comprehensive roadmap to reinvigorate growth in North America with the right team in place to execute on that.

We have made strong progress in the integration of Terminix to create a powerhouse business in the world's largest pest control market. This has been achieved alongside significant improvement in colleague retention, with Terminix service technician retention up more than 8 percentage points since the deal closed. The combination with Terminix continues to create significant value and we have upgraded expectations for total gross cost synergies by $50m to $325m to be delivered by 2026."

Outlook

We start 2024 with confidence in our plans. Notwithstanding continuing macroeconomic headwinds, for the full year, we expect good underlying trading momentum, supported by our RIGHT WAY 2 plan to reinvigorate organic growth in North America. Increased Terminix synergies enables the plan to be accompanied by an additional c.$25m of investment in sales and marketing. We expect Organic Revenue growth in North America to be c.2% in Q1 and between 2-4% in the full year.

Based on good progress to date, we are raising our expectations for annual pre-tax synergies from the Terminix integration by a further $50m to c $325m gross, c.$225m net. The enlarged plan is scheduled to be completed in 2026 with net synergies of c.$40m in 2024, c.$65m in 2025 and c.$38m in 2026.

We expect modest North America margin progression in 2024, with improvement weighted towards H2, owing to the region's expected organic growth trajectory and additional investment in sales and marketing. The medium term Group margin target of greater than 19% is expected to be achieved in 2026.

Our pipeline of bolt-on prospects remains strong and we expect to invest £250m in 2024. Adjusted free cash flow conversion is forecast between 80-90%, as previously guided, with further modest deleveraging of the balance sheet.

Enquiries:

A management presentation and Q&A for investors and analysts will be held today, 7 March from 9.15am at the Leonardo Royal London St Paul's Hotel, 10 Godliman Street, London EC4V 5AJ. The event will also be available via a live webcast. Dial-in details will be provided on the website (https://www.rentokil-initial.com/investors.aspx). A recording will be made available following the conclusion of the presentation.

Notes

1 Non-IFRS measures. This statement includes certain financial performance measures which are non-IFRS measures as defined under International Financial Reporting Standards (IFRS). These metrics include Adjusted Operating Profit, Adjusted Profit Before Tax, Adjusted Profit After Tax, Adjusted EBITDA, Adjusted Interest, Adjusted Earnings Per Share, Free Cash Flow, Adjusted Free Cash Flow, Adjusted Free Cash Flow Conversion, Adjusted Effective Tax Rate and Organic Revenue. Management believes these measures provide valuable additional information for users of the financial statements in order to understand the underlying trading performance. Adjusted Operating Profit represents the performance of the continuing operations of the Group (including acquisitions), and enables the users of the accounts to focus on the performance of the businesses retained by the Group, and that will therefore contribute to the future performance. Adjusted Operating Profit and Adjusted profit before tax exclude certain items that could distort the underlying trading performance. Revenue and Adjusted Operating Profit are presented at CER unless otherwise stated. An explanation of all the above non-IFRS measures used along with reconciliation from the nearest IFRS measures is provided on page 16.

2 Includes net synergy benefit but excludes costs to achieve which are one-off by nature.

AER - actual exchange rates; CER - constant 2022 exchange rates

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 Guidance 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.

Summary of financial performance (at CER)

Regional Performance

Category Performance

Note: Hygiene & Wellbeing year on year performance reflects the anticipated decrease in COVID disinfection revenues from £21m in FY 22 to £2m in FY 23.

In order to help understand the underlying trading performance, unless otherwise stated, figures below are presented at constant exchange rates and Organic Revenue growth figures exclude the COVID disinfection business.

Revenue

The Group delivered a good topline performance, with Revenue rising 45.8% to £5,414m. Organic Revenue grew 4.9%. Statutory Revenue was up 44.7% to £5,375m at AER. Revenue growth in North America was up 79.2%, benefiting from the Terminix acquisition. Europe, the Group's second largest region, was up strongly by 14.6%, while the Asia & MENAT region was up 11.2%. Group Organic Revenue growth including COVID disinfection was 4.5%.

Our Pest Control category grew Revenue by 60.6% (4.5% Organic) to £4,321m, underpinned by continued effective pricing and resilient customer retention. Hygiene & Wellbeing Revenue increased by 5.4% (4.8% Organic) to £866m, led by continued demand for washroom services. Strong new business sales performance was reflected in the contribution from our France Workwear business, with Revenue up by 13.2% to £217m (13.2% Organic).

Profit

Adjusted Operating Profit rose by 57.0% during the year to £897m, reflecting a full year of Terminix profit and core business growth across major regions, in addition to effective ongoing capture of synergies from the Terminix transaction. This led to a 120bps increase year on year in Group Adjusted Operating Margin to 16.6%. Synergies from the Terminix transaction contributed 100bps to Group margin. Statutory Operating Profit at AER was up 96.9% to £625m. We have continued to deliver on our strategy of driving density improvements and M&A integration. Price increases have also been successfully implemented over the course of the year to offset the impacts of inflation on our cost base. The ability of the Group overall to offset inflationary pressures for another year demonstrates the resilience of the business model and the essential nature of our core products and services.

Within business categories, Adjusted Operating Margin for Pest Control was up by 70bps year on year to 19.2% (FY 22: 18.5%). Hygiene & Wellbeing Adjusted Operating Margin decreased by 130bps year on year to 18.5% (FY 22: 19.8%). However, Hygiene & Wellbeing margin was 20.2% for H2, in line with the guidance of above 19.0% for H2, issued at the Interim Results. The half year and full year 2024 margin profile of Hygiene & Wellbeing is expected to be similar to 2023.

Adjusted Profit before Tax (at AER) of £766m, which excludes one-off and adjusting items and amortisation costs, increased by 43.8%. Adjusted interest of £141m at actual exchange rates was higher year on year, partly reflecting £86m of annualised interest charges relating to the financing of the Terminix transaction, £15m of lease interest charges and a £7m offsetting reduction from the impacts of hyperinflation and net interest received. In the year, hyperinflation of £11m at AER in 2023 was £11m lower than the prior year (FY 22: £22m) due to devaluation of the Argentinian peso. Full year restructuring costs of £9m at CER (£7m at AER) were down £3m on the prior year, consisting mainly of costs in respect of initiatives focused on our North American and Argentinian transformation programmes. One-off and adjusting items (operating) at AER of £98m includes £1m of deal costs and £81m of integration costs related to the Terminix acquisition ("Costs to Achieve'') and £17m of other M&A costs. Statutory profit before tax at AER was £493m, an increase of 66.9% on the prior year (FY 22: £296m) reflecting a full year of Terminix profits net of one-off and adjusting items/Costs to Achieve and increased interest costs relating to the Terminix transaction.

Cash (at AER)

Net cash flows from operating activities have risen by 22.8% to £737m in 2023. Free Cash Flow of £500m was £126m higher than in FY 22. Higher trading profits resulted from organic and acquisitive growth. Adjusted EBITDA was £1,228m, up 43.0% versus 2022. One-off and adjusting items (non-cash) of £11m inflow (FY 22: £77m) represent Terminix related one-time share incentive schemes and asset impairments.

The Group had a £47m working capital outflow in FY 23. Working capital was driven higher by revenue growth, predominantly in North America and Europe, across receivables and contract cost assets. Capital expenditure of £211m was incurred in the period (FY 22: £190m), reflecting a more normal pattern of spend post pandemic and the inclusion of Terminix capital expenditure. Lease payments were up 45.2%.

Cash interest payments of £166m were £127m higher than in the prior year, reflecting the timing of interest charge payments relating to financing of the Terminix transaction. Cash tax payments for the period were £100m, an increase of £23m compared with the corresponding period last year. Adjusted Free Cash Flow Conversion was 89.4%.

Regional performance review

Due to the international nature of the Group, foreign exchange movements can have a significant impact on regional performance. Unless otherwise stated, percentage movements in Revenue and Adjusted Operating Profit are presented at constant exchange rates.

North America

In North America, Revenue was up 79.2%, benefiting from a full year of the Terminix acquisition. Regional Organic Revenue grew 3.1%, achieved alongside the full programme of the Terminix integration. Organic Revenue growth in Pest Control Services for our commercial, residential, and termite customers was below our expectations at 3.5%, owing to lower new business lead generation in a softer consumer market in H2. The Pest Control category as a whole, which includes the Products Distribution and Lake Management businesses, recorded Organic Revenue growth of 3.1%. Weaker Q3 2023 growth in North America continued into the low season of Q4 at 1.2%, however Q1 2024 is expected to be c.2%. The company has conducted an in-depth review to fully examine the drivers of the underperformance and formulate a strategy to reinvigorate growth, resulting in THE RIGHT WAY 2 plan detailed below.

Adjusted Operating Profit growth of 95.9% to £618m reflects the combined impact from higher revenues and the Terminix acquisition. Statutory Operating Profit was up 158.4% to £489m at AER. Strong price realisation across all channels has successfully offset expected inflationary pressures. Adjusted Operating Margins in North America were up 160bps year-on-year to 18.7%. The full-year impact of lower Terminix margins reduced the overall North America margin by 70bps. However, Terminix synergies delivered a benefit of 140bps, while trading improvements, including density from growth and prudent cost management, contributed 90bps of margin.

Total North America colleague retention, including Terminix, increased to 75.2% (FY 22: 70.1%), driven by improvement in retention of technician roles. Sales colleague retention was flat. Terminix colleague retention has seen continued improvement, up to 69.7% (FY 22: 64.0%). Since the close of the deal in October 2022, colleague retention at Terminix has increased by 8.1ppts. The Group continued to make investments in being an Employer of Choice, and we are seeing ongoing success with our recruiting, onboarding, and training initiatives. Despite price increases, total customer retention in North America slightly increased to 79.5% (FY 22: 79.3%) and included an improvement at Terminix. Customer satisfaction was also positive, with an excellent Terminix Net Promoter Score of 64.9, up 1.5 on the prior year.

Notwithstanding the considerable focus required to complete the Terminix transaction, our North American bolt- on M&A programme continued apace, with the purchase of 13 businesses with combined annualised revenues of c.£46m in the year prior to purchase. This included the acquisition in the second half of the year of Action Pest Control, a large Midwest provider. As we integrate Terminix, we will continue to selectively pursue high-quality M&A assets in the North America region.

In the year, there was further good progress on legacy termite warranty claim volumes, with significantly fewer filed warranty claims. Total filed warranty claims reduced by 14% on the prior year and by 44% since 2019. Open warranty claims further reduced by 29% on the prior year and by 65% since 2019. Total filed warranty claims in the Formosan termite-heavy Mobile Bay reduced by 48% on the prior year and by 80% since 2019. Largely as a result of our plan to accelerate the resolution of legacy claims, particularly focused on complex litigated long-standing cases, and a shift in the mix of claim resolutions, the blended average settled cost per claim, including inflationary impacts, was up c.32%. Going forward, we have also successfully introduced a termite residential sales warranty cap for new customers for the lifetime of the agreement of $250,000 for new customers with qualifying homes.

Organic Growth in H2 2023

An in-depth review was conducted into the reasons for the slowdown in regional organic growth experienced in the second half of 2023.

We have confirmed that service technician retention was further significantly improved and customer retention remained resilient throughout the period. The pricing strategy also continued to be effective, with cost input inflation recovered, as expected.

Organic growth is generated from both existing and new customers. Trends in upselling to the existing customer base did not see a material change from prior trends. Notwithstanding this, we believe technician leads represent an important growth opportunity in the US with the potential for sizeable upside in the medium term. This is based on evidence of the Group's success in other markets. For example, in 2023, c.88% of UK pest control technicians participated in submitting leads with a c.32% close rate. This compared to a US participation rate of c.50% and estimated c.20% close rate. Our 'Trusted Advisor' programme (empowering technician leads and sales) already underway in Terminix will be rolled out across Rentokil US branches.

The main challenge to new business growth in the second half of the year was lower acquisition of new residential, termite and SME customers. The largest adverse change was observed in inbound sales leads and sales enquiries from prospective customers to our call centres and websites. In H2, in-bound sales leads were down 2-3% in the region. We estimate that the US pest control market grew at approximately 4% in 2023, reflecting lower growth in the residential, termite and SME sectors, particularly in H2. This is about 1% lower than the recent historical average. Nevertheless, we recognise that the business was not sufficiently effective in attracting and closing sales leads. In 2023, integration planning focused attention on organisational change. Our marketing and sales leadership underwent considerable change, which in part affected our marketing performance to generate leads and convert sales (close rate in H2 was flat with prior year). Increased digital marketing spend by the competition and flat sales colleague retention (c.60% in Terminix and c.77% in Rentokil) compounded the overall impact. There was also a slightly disruptive influence felt from branch closures and pilots.

THE RIGHT WAY 2 Plan

We have taken action to strengthen the North America management team and fully resource the senior marketing and sales teams ahead of the 2024 pest season. In addition to Brad Paulsen, recently appointed to the position of North America CEO, we have in place new and experienced leadership for Residential Marketing, Digital Marketing, and Sales. We've also seconded our UK Operations Director to North America to take charge of technician sales leads.

Following the review of H2, the team has now defined THE RIGHT WAY 2 plan to reinvigorate organic growth in North America. The core components of this plan are:

Rentokil Initial has a proven long term track record of operating very successfully through economic cycles. We are confident the team has the skills, know-how and insights to get growth back on track.

Europe (incl. LATAM)

The region has enjoyed strong performance in 2023. Topline momentum in the first half of the year carried into the second half, driven by both effective price increases and resilience in overall demand. Revenue grew by 14.6% in the year to £1,078m (9.2% Organic). Revenue growth in Pest Control was 21.8%, with a strong contribution from key markets including France, Benelux, and Germany. Hygiene & Wellbeing grew Revenue by 5.8% in the period, driven by broad-based strength across the region and continued momentum in the core washrooms business. Ambius, part of the Enhanced Environments business, sustained a good performance through the year. As anticipated, there was an improvement in Specialist Hygiene and Dental in the second half of the year, after a period of post-COVID disruption. France Workwear Revenue was up 13.2%. Strong new business sales performance was reflected in its contribution, which was also supported by robust pricing.

Adjusted Operating Profit in the region grew by 12.5% to £210m. Statutory Operating Profit was up 15.6% to £182m at AER. In Europe, as expected, short-term H1 margin pressure from increased M&A activity reversed in H2. The H1 headwind plus continued hyperinflation in Argentina in the aggregate resulted in full-year Adjusted Operating Margin down slightly by 40bps to 19.5%. While inflationary pressures have persisted throughout the period, in Europe and most of LATAM we have been successful at protecting margins with pass-through pricing. Customer retention has remained strong at 88.4% (FY 22: 88.5%.) A focus on sales retention, including recruitment, onboarding and early days retention led to excellent colleague retention rates of 90.4% (FY 22: 89.1%), with the business recording some of its best months on record in the second half of the year.

In Europe and LATAM, 11 business acquisitions (5 in Europe and 6 in LATAM) were completed in total with annualised revenues of c.£12m in the year prior to purchase.

UK & Sub-Saharan Africa

The region delivered a good trading performance against a challenging macro backdrop and strong prior year comparators, especially in the first half of the year. Performance in the mature UK market was supported by strong service innovation and a record performance from technician sales leads. Revenue for the region overall increased by 7.9% (3.5% Organic). Pest Control grew by 8.0%. Hygiene & Wellbeing increased by 7.7%, lapping COVID-boosted comparators in the medical waste business. There was a positive contribution from the recently acquired Urban Planters business, which supplies plants to retail properties, offices, and restaurants. This was accompanied by an improved performance year on year in the UK Property Care business despite the cooler property market.

Regional Adjusted Operating Profit decreased by 0.5% to £95m. Statutory Operating Profit was down 6.6% to £84m at AER. Adjusted Operating Margins decreased by 200bps to 24.1%. As previously stated, margin performance in the first half of the year was dampened by the anticipated reduction in COVID disinfection and related services, such as needle and PPE disposal, and the non-repeat of UK COVID credit note releases. However, these factors substantially fell away in H2. Cash performance has been strong in the year with debtor days finishing the year ahead of pre-COVID levels. Inflationary pressures have been significant, but the region's long-established pricing and margin management systems, process, and controls have delivered a price performance that mitigates these cost increases. These price increases have been delivered alongside a further improved customer retention rate of 86.9% (FY 22: 86.6%) and world class customer experience scores. Colleague retention for the full year was up strongly to 83.3% (FY 22: 77.9%).

In the UK & SSA two business acquisitions, both in the Hygiene & Wellbeing category, were completed with annualised revenues of c.£18m in the year prior to purchase.

Asia & MENAT

The region delivered a good 2023 performance. Revenue rose by 11.2%, of which 10.2% was Organic, underpinned by contractual activity. Pricing was complemented with volume growth, as markets overall remained structurally supportive. The performance was led by the region's largest markets: India, Indonesia, Malaysia, and Singapore. Hong Kong continued to be challenged by a subdued economic environment, however there was a more positive contribution from China.

Adjusted Operating Profit in Asia increased 4.0% to £47m and Adjusted Operating Margin was down 100bps to 13.1%, lapping stronger COVID disinfection revenues. Operating Profit was up 40.3% to £33m at AER. Customer retention was 78.7% (FY 22: 81.3%). Regional operations have benefited from an increased colleague retention rate of 92.0% (FY 22: 86.1%), while the average time to fill vacancies has remained stable year on year. The region acquired seven businesses with total annualised revenues in the year prior to purchase of c.£8m.

Pacific

The Pacific region delivered an excellent full year performance. Revenue increased by 15.0% to £261m. Organic Revenue grew 6.8% as pricing was complemented with volume growth. Pest Control delivered 25.2% Revenue growth, with notable strength in commercial services. Good sales and customer retention were also evident in the Hygiene & Wellbeing business, where Revenue growth was 6.4%. The region saw good demand for Ambius services.

Adjusted Operating Profit in the Pacific grew strongly by 19.8% to £57m and Adjusted Operating Margins rose by 90bps to 21.7%, with year-on-year improvement across both Pest and Hygiene & Wellbeing categories, supported by effective mitigation of cost inflation. Operating Profit was up 19.5% to £47m at AER. The customer retention rate remained strong at 86.5% (FY 22: 88.8%). Colleague retention in the region has significantly improved to 77.5% (FY 22: 72.9%), despite continued tight labour markets. The region acquired 8 businesses with total annualised revenues in the year prior to purchase of c.£22m.

Category performance review

Pest Control

Our Pest Control business, now including Terminix, is the largest operator in both the US, the world's biggest pest control market, and the world. Overall, the business delivered good growth in the year, underpinned by the critical nature of its services. Revenue was up by 60.6% (4.5% Organic) to £4,321m. Performance has been supported by both pricing and volumes, led by the Commercial Pest Control business, which has a high proportion of contractual activity. Both Commercial and Residential Pest Control businesses have benefited from resilient customer retention rates. Adjusted Operating Profit was up by 66.7% to £828m, resulting in an Adjusted Operating Margin of 19.2%, up 70bps on the prior year, including a benefit from Terminix integration synergies of 130bps. Operating Profit was up by 107.5% to £649m at AER. For FY 23, Pest Control represented 80% of Group Revenue and 81% of Group Adjusted Operating Profit.

In 2023, new contracts for global accounts (multinational customers) were signed in the pharma and hotel, restaurant and catering sectors. Global Accounts now oversee revenues of over £100m. 91% of total revenues in the Pest Control category were delivered by Growth markets and 9% by Emerging markets.

M&A has continued to be strong this year, and we have acquired 34 pest control businesses in the period, with annualised revenues in the year prior to acquisition of c.£76m.

Hygiene & Wellbeing

Rentokil Initial offers a wide range of hygiene and wellbeing services. Inside the washroom we provide hand hygiene (soaps and driers), air care, in-cubicle (feminine hygiene units), no-touch products, and digital hygiene services. In addition to core washroom hygiene, we deliver specialist hygiene services such as clinical waste management. We're also improving the customer experience through premium scenting, plants, air quality monitoring, and green walls.

Hygiene & Wellbeing Revenue increased by 5.4% to £866m. In addition to supportive pricing, continued good levels of demand across service sectors such as offices, shops, schools, and hospitality supported performance. Organic Revenue growth was 4.8%. In 2023, COVID disinfection services generated £2m of revenues (FY 22: £21m) reducing category Organic Revenue growth by 240bps and Group Organic Revenue growth by 40bps. We see the main opportunities for future growth in our Hygiene & Wellbeing category as being core washrooms, premises hygiene, including air care, and enhanced environments. In 2023, Organic Revenue growth in core washrooms was 4.5%, while organic growth in premises hygiene and enhanced environments was 5.3%. Adjusted Operating Profit was down by 1.5% to £161m due to COVID-boosted prior year comparators in H1 (Operating Profit was down by 4.9% to £149m at AER). Adjusted Operating Margin was 18.5%.

We have acquired seven hygiene companies this year with annualised revenues of c.£30m in the year prior to purchase.

France Workwear

Strong new business sales performance, including key account gains and upselling, resulted in another strong contribution from our France Workwear business, where Revenue, all of which was organic, rose by 13.2% to £217m. High customer retention of over 94% supported France Workwear's strong volumes. Inflation was successfully mitigated with price increases. Adjusted Operating Profit growth increased by 23.6%. Operating Profit was up 23.9% to £37m at AER.

Integration of Terminix

Strong progress on the integration; gross synergy target raised by $50m to $325m

The Terminix integration continues to make very good progress. We have completed the first phase of the integration and in 2023 we delivered $69m of net synergies, ahead of our target of $60m. Overall, we have delivered pre-tax net P&L cost synergies of $82m to date.

We have announced a second increase in the target for the total value of integration cost synergies from the integration of Terminix - the gross synergies target is increased by $50m to $325m and the net synergies target is increased by $25m to $225m. $106m gross and $40m net cost synergies are expected to be delivered in 2024.

The timetable for integration is now set to be completed in 2026, rather than 2025, in order to de-risk the branch integrations and achieve greater synergy targets.

Phase One (Foundations) Complete

Phase One of the integration completed at the end of 2023 and has delivered the foundations for success. Further to the Selling, General and Administrative (SG&A) initiatives, large integration pilots and initial branch co-locations communicated at the Interim Results, substantial headway continued to be made in H2, in preparation for the frontline route and branch integration that is set to commence mid 2024.

An additional 44 branch locations were exited in the second half of the year as part of the consolidation of the legacy network and co-location of colleagues. This brings the total number of branch locations exited since closing the deal to 108. With 11 new sites, there has been a net reduction in the branch network of 97 branches.

Strong progress was also made in effectively positioning HR and IT. These are key enablers of administrative and operational efficiencies to be gained from the overall integration plan, as well as critical levers for improving the colleague and customer experience.

Key HR initiatives realised in the year include:

There has been substantial work on IT systems and products. Google Apps have now been rolled out to 13,000 colleagues and there have been 71 foundation IT system enhancements. There have been important advances to the Group's digitally enabled products and processes, drawing on Best of Breed from across the organisation and with direct input from colleagues in the back office and field services. Key initiatives realised in the year include:

Phase Two

Following completion of Phase One of the integration programme in 2023, we have embarked on Phase Two - full preparedness for branch integrations. Phase Two is scheduled to be largely delivered in approximately the first six months of 2024, with a number of clearly defined legal, IT and operational goals, including:

Throughout 2024 we will also continue to co-locate branches ahead of integration, with approximately an additional 75 properties to be exited during the year.

Phase Three

The next phase of our integration plan is focused on the migration of Terminix regions and branches. The first Terminix colleagues will begin to migrate onto standard systems, data and processes in mid 2024, with rerouting and technician pay plans introduced approximately three months later.

We have seven pest control Regions in the US and each integration will be executed over approximately 10 months from planning to rerouting. The first six to seven months will be used to develop a specific plan for the branches being integrated, based upon our best practice playbook. We anticipate that this will become increasingly standardised as Terminix markets use similar technologies and systems. The planning stage includes three test data migrations. This leads up to integration where the branch systems and data are migrated. There then follows a three-month period of evaluation leading up to the final part of the branch integration with branding, rerouting and technician pay plan and contracts being standardised as appropriate.

Phase Four

The fourth and final phase in 2026 onwards will see the final Terminix markets and branches complete their integrations.

This will mark the completion of the branch integration programme and the delivery of our new synergy target in 2026. Post integration, our ambition is to deliver Organic Revenue Growth in pest control services of 1.5x the market over the medium term.

Synergies and Approximate Phasing

There has been strong delivery on cost synergies in 2023 with $69m of pre-tax P&L net cost synergies achieved, ahead of the guided $60m. This takes the cumulative P&L benefit from net synergies to $82m since completion of the transaction.

Continued progress on delivery has validated our assumptions and given us heightened confidence in the overall opportunity, allowing us to increase our estimate of synergies achievable from the acquisition. We now expect to achieve approximately $325m of annual pre-tax gross cost synergies ($225m net cost synergies) by the end of 2026.

Investments relate to salary and benefits harmonisation, SHE, innovation centre, IT and branding, as well as additional SOX, audit and listing costs. They are expected to be incurred 100% in cash.

Total one-time cash cost to achieve synergies are expected to be c.$250m. Phasing of $131m in 2022-2023, $85m in 2024, $28m in 2025 and c.$5m in 2026. In addition to the $131m of cash synergies in 2022-2023, we also incurred non-cash costs to achieve of c.$42m relating to the impairment of the Terminix head office and share-based integration incentive costs.

Paragon Distribution Business

As part of the Terminix merger, Rentokil acquired a small product distribution business, Paragon, with revenue of c.$68m and profit of c.$4m in 2023. This business is largely dependent upon a single, partially exclusive supplier relationship, which will be discontinued with effect from 1 April 2024. As a consequence, the decision has been taken to close this business. North America regional Revenue and Adjusted Operating Profit in 2024 will be reduced by approximately $61m and $4m respectively.

Continued strength of Bolt-on M&A

We acquired 41 new businesses, comprising 34 in Pest Control and 7 in Hygiene & Wellbeing. A total consideration of c.£261m was agreed for these acquired businesses with total annualised revenues of c.£106m in the year prior to purchase. We have added 13 new businesses in North America during the period with c.£46m revenues acquired. This included the acquisition in the second half of the year of Action Pest Control, a Midwest provider ranking #62 on the Pest Control Technology Top 100 list. There was also a good performance in the Pacific region with 8 deals (annualised revenues of c.£22m), Asia and MENAT with 7 deals (annualised revenues of c.£8m), Europe (inc. LATAM) with 11 deals (annualised revenues of c.£12m) and 2 deals in the UK & SSA region (annualised revenues of c.£18m). In addition, the Group acquired a further 8% of the share capital of the Rentokil PCI business in India to take ownership to 65%. The Rentokil PCI business is already 100% consolidated in the Group accounts.

M&A remains central to our strategy for growth. We will continue to seek attractive bolt-on deals, both in Pest Control and Hygiene & Wellbeing, to build density in growth and emerging markets (Cities of the Future). Our pipeline of prospects remains strong and our current guidance on spend on M&A for FY 24 is c.£250m.

Employer of Choice (EOC)

Rentokil Initial is committed to being a world-class Employer of Choice, with colleague safety and the attraction, recruitment and retention of the best people from the widest possible pool of talent, being key business objectives globally.

In 2023, colleague retention increased globally by 4.7ppts to 84.2%. All Regions improved year on year. Our North American region increased colleague retention by 5.0ppts. This has been achieved through a wide-ranging programme including: the launch of a retention dashboard and manager training; monitoring for potential issues before escalation; additional mentoring resources; and an enhanced new hire and onboarding experience.

Our Career Plus app has seen continued success across Rentokil Initial and has been successfully launched in Terminix. The app provides colleagues with a tool to share job vacancies externally on social media and to view roles across the organisation, allowing them to seek out potential opportunities for progression or roles more suitable for their needs. In 2023, Career Plus delivered more than 20,000 job applications - 16,480 external and 5,719 from existing colleagues - with no advertising or recruitment fees.

In the second half of the year, the Company undertook Your Voice Counts (YVC), a global, confidential survey, which provides every colleague with the chance to give feedback on workplace culture, leadership, customer focus, development, and line manager performance. The survey is undertaken every two years and saw a 90% participation rate. We maintained our strong levels of engagement (79%, in line with the Global Company Norm) and enablement (83%, which was 5ppts ahead of the Global Company Norm). We received excellent feedback on the questions relating to Safety, Health, and Environment (SHE), 'My Manager' and Diversity, Equity and Inclusion. The survey results also demonstrated that colleagues support the Company's approach and focus on safety - a key ESG factor - which continues to be our highest performing category. Areas recognised for improvement as measured by the Global Company Norm include satisfaction with benefits and manager support for development.

Innovation and Technology

Digital innovation in pest control is necessary to meet the needs of an evolving world. We lead our industry in the use of digital technologies, and we are continuing to build this competitive advantage. Our smart technology is providing more remote monitoring solutions and increased transparency of data.

356,000 PestConnect devices, which offer 24/7 monitoring, are now operating in customers' premises. We have five countries where connected devices account for more than 10% of the commercial portfolio, including the Netherlands (38%) and France and the UK (both 23%). At the heart of our PestConnect system has been our award-winning RADAR device, and that accounts for around two thirds of connected units in customers' premises. In 2024 we will launch its replacement - called RADAR X - a new dual catch unit with enhancements not only for operational efficiency but also for sustainability. New research from our operations in the Netherlands and the UK shows us that PestConnect can typically resolve rodent infestations twice as fast as traditional non-connected pest control services. In 2024, we will begin the phased rollout of PestConnect in North America.

North America will also see the launch in H1 2024 of our proprietary EcoCatch fly control solution as well as the continued rollout of our Lumnia LED flying insect control range. Lumnia, which generates energy savings of up to 79%, has now sold 445,000 units worldwide since its launch in 2017.

In 2024 we will launch our first dedicated pest control innovation centre in the US based in Dallas, Texas which will focus on innovation and technology for the residential and termite sectors.

Management changes

The following management changes will take effect from 1 April 2024.

Alain Moffroid, currently Regional Management Director for Europe Region, will become Chief Commercial Officer. As part of this new role, Alain will lead the central Marketing and Innovation function, focusing on the end to end customer experience and service productivity. Fabrice Quinquenel, currently Managing Director, France, Nordics and Poland, will succeed Alain in the role of Regional Managing Director for Europe and will become a member of the Executive Leadership Team. Rachel Canham, currently Group General Counsel, will become Group General Counsel and Company Secretary. Gary Booker, Chief Marketing, Innovation and Strategy Officer, will be leaving the Company in mid-April to take up an external appointment.

Financial review

Central and regional overheads

Central and regional overheads of £121m (at CER and AER) were up £14m on the prior year (FY 22: £107m at CER and AER) driven by Terminix related central investments including higher share based payment charges for the larger combined organisation.

Restructuring costs

The Company reports restructuring costs within Adjusted Operating Profit. Costs associated with significant acquisitions are reported as one-off items and are excluded from Adjusted Operating Profit. Restructuring costs of £9m at CER (£7m at AER) were down £3m on the prior year (FY 22: £12m at CER and AER). They consisted mainly of costs in respect of initiatives focused on our North American and Argentinian transformation programmes.

Interest (at AER)

Adjusted interest of £141m at actual exchange rates was higher year on year, partly reflecting £86m of annualised interest charges relating to financing of the Terminix transaction, £15m of lease interest charges and a £7m offsetting reduction from the impacts of hyperinflation and net interest received. In the year, hyperinflation of £11m at AER in 2023 was £11m lower than the prior year (FY 22: £22m) due to devaluation of the Argentinian peso. Cash interest in FY 23 was £166m (FY 22: £39m) reflecting both higher interest on debt raised for the Terminix acquisition and the phasing of coupon payments annually in arrears.

In Appendix 1 we have shown a summary P&L interest table demonstrating how the components of our financing drive interest costs and incomes and the expected range for 2024 at average exchange rates. Changes in variable interest rates, exchange rates and CPI rates in hyper-inflationary economies during 2024 will impact the reporting of interest costs for 2024.

Tax

The income tax charge for the period at actual exchange rates was £112m on the reported profit before tax of £493m, giving an effective tax rate (ETR) of 22.7% (FY 22: 21.6%). The Group's ETR before amortisation of intangible assets (excluding computer software), one-off and adjusting items and the net interest adjustments for FY 23 was 23.8% (FY 22: 19.7%). This compares with a blended rate of tax for the countries in which the Group operates of 25.1% (FY 22: 23.7%).

Net debt* and cash flow

*Net debt is defined and explained in Note C2 to the Consolidated Financial Statements in the Annual Report 2023

**Excludes £20m of one-off and adjusting items flowing through working capital in 2023

Net cash flows from operating activities have risen by 22.8% to £737m in 2023. Free Cash Flow of £500m was £126m higher than in FY 22. Higher trading profits resulted from organic and acquisitive growth. Adjusted EBITDA was £1,228m, up 43.0% versus 2022. One-off and adjusting items (non-cash) of £11m inflow (FY 22: £77m) represent Terminix related one-time share incentive schemes and asset impairments.

The Group had a £47m working capital outflow in FY 23. Working capital was driven higher by revenue growth, predominantly in North America and Europe, across receivables and contract cost assets. Capital expenditure of £211m was incurred in the period (FY 22: £190m), reflecting a more normal pattern of spend post pandemic and the inclusion of Terminix capital expenditure. Lease payments were up 45.2%.

Cash interest payments of £166m were £127m higher than in the prior year, reflecting the timing of interest charge payments relating to financing of the Terminix transaction.

Cash tax payments for the period were £100m, an increase of £23m compared with the corresponding period last year. Adjusted Free Cash Flow Conversion was 89.4%.

Cash spend on current and prior year acquisitions was £242m, dividend payments were £201m and the cash impact of one-off and adjusting items was £107m (largely related to the Terminix acquisition). Foreign exchange translation and other items of £169m is primarily due to the weakening of the US Dollar against Sterling. Overall, this led to a change in net debt of £133m and closing net debt of £3,146m.

Going Concern

The Board continues to adopt the going concern basis in preparing the accounts on the basis that the Group's strong liquidity position and its demonstrated ability to manage the level of capital expenditure, dividends or expenditure on bolt-on acquisitions are sufficient to meet the Group's forecast funding needs, including those modelled in a severe but plausible downside case. Details of the scenarios modelled are explained in the Material Accounting Policies section of the Annual Report.

Funding

As at 31 December 2023, the Group had liquidity headroom in the region of £1,600m, including £785m ($1.0bn) of undrawn revolving credit facility (RCF), with a maturity date of October 2028. The net debt to Adjusted EBITDA ratio was 2.6x at 31 December 2023 (31 December 2022: 3.2x). The net debt to EBITDA ratio was 2.8x at 31 December 2023 (31 December 2022: 4.6x). In July 2023, S&P Global reaffirmed the Group's BBB investment grade credit rating; and in October 2023 the Group got a second rating (BBB with a stable outlook) from Fitch Ratings. The interest rate on approximately 81% of the Group's debt including leases is fixed. The Group has no debt maturities until November 2024.

Dividend

The Board is recommending a final dividend in respect of 2023 of 5.93p per share, payable to shareholders on the register at the close of business on 5th April 2024, to be paid on 15th May 2024. This equates to a full-year dividend of 8.68p per share, an increase of 15.0% compared to 2022. The last day for DRIP elections is 23rd April 2024.

Technical guidance update for FY 24

Expected P&L Outcomes

Expected Cash Outcomes

* Reported as one-off and adjusting items and excluded from Adjusted Operating Profit and Adjusted PBTA

** Interest costs will be impacted by refinancing decision taken around the maturity of the €400m bond with a maturity date of November 2024

*** Based on maintenance of current FX rates

Appendix 1 - Adjusted Interest Summary1

2023 average FX rate for £/€: 1.1503 and £/$: 1.2441

1. For a full reconciliation of statutory interest measures to adjusted interest, please see non-IFRS measures section on page 16 below.

2. 2023 Finance Costs totalled £189m. See note 3.

3. 2023 Finance Income totalled £(48)m See note 4.

Use of Non-IFRS Measures

Reconciliation of non-IFRS measures to the nearest IFRS measure

The Group uses a number of non-IFRS measures to present the financial performance of the business. These are not measures as defined under IFRS, but management believe that these measures provide valuable additional information for users of the Financial Statements, in order to better understand the underlying trading performance in the year from activities that will contribute to future performance. The Group's internal strategic planning process is also based on these measures and they are used for management incentive purposes. They should be viewed as complements to, and not replacements for, the comparable IFRS measures. Other companies may use similarly labelled measures which are calculated differently to the way the Group calculates them, which limits their usefulness as comparative measures. Accordingly, investors should not place undue reliance on these non-IFRS measures.

The following sets out an explanation and the reconciliation to the nearest IFRS measure for each non-IFRS measure.

Constant exchange rates (CER)

Given the international nature of the Group's operations, foreign exchange movements can have a significant impact on the reported results of the Group when they are translated into sterling (the presentation currency of the Group). In order to help understand the underlying trading performance of the business, revenue and profit measures are often presented at constant exchange rates. CER is calculated by translating current-year reported numbers at the full-year average exchange rates for the prior year. It is used to give management and other users of the accounts clearer comparability of underlying trading performance against the prior period by removing the effects of changes in foreign exchange rates. The major exchange rates used for 2023 are £/$ 1.2441 (2022: 1.2421) and £/€ 1.1503 (2022: 1.1717). Comparisons are with the year ended 31 December 2022 unless otherwise stated.

Organic Revenue Growth

Acquisitions are a core part of the Group's growth strategy. The Organic Revenue Growth measures (absolute and percentage) are used to help investors and management understand the underlying performance, positive or negative, of the business, by identifying Organic Revenue Growth excluding the impact of Acquired Revenue. This approach isolates changes in performance of the Group that take place under the Company's stewardship, whether favourable or unfavourable, and thereby reflects the potential benefits and risks associated with owning and managing a professional services business.

Organic Revenue Growth is calculated based on year-over-year revenue growth at CER to eliminate the effects of movements in foreign exchange rates.

Acquired Revenue represents a 12-month estimate of the increase in Group revenue from each business acquired. Acquired Revenue is calculated as: a) the revenue from the acquisition date to the year end in the year of acquisition in line with IFRS 3; and b) the pre-acquisition revenues from 1 January up to the acquisition date in the year of acquisition. The pre-acquisition revenue is based on the previously reported revenues of the acquired entity and is considered to be an estimate.

In the year a business is acquired, all of its revenue reported under a) above is classified as non-organic growth. In the subsequent first full financial year after acquisition, Organic Revenue Growth is calculated for each acquisition as the reported revenue less Acquired Revenue.

At a Group level, calculating Organic Revenue Growth therefore involves isolating and excluding from the total year-over-year revenue change: i) the impacts from foreign exchange rate changes, ii) the growth in revenues that have resulted from completed acquisitions in the current period, and iii) the estimate of pre-acquisition revenues from each business acquired. The sum of ii) and iii) is equal to the total Acquired Revenues for all acquisitions. The calculated Organic Revenue is expressed as a percentage of prior year revenue. Prior year revenue is not 'pro-forma' adjusted in the calculation, as any such estimated adjustments would have an immaterial impact..

If an acquisition is considered to be a material transaction, such as the Terminix acquisition in October 2022, the above calculation is amended in order to give a 'pro-forma' view of any Organic Revenue Growth for the full financial year in the year of acquisition, as if the acquisition had been part of the Group from the beginning of the prior year. The pro-forma calculation is completed using pre-acquisition revenues to normalise current and prior periods as shown in the table below. These revenue normalisations are considered estimates, and ensure that the potentially larger Organic Revenue Growth is measured over a denominator that includes the material acquisition. The same adjustments are made to our North America and Pest Control segment revenues for 2022 and 2023 as a result of the material Terminix acquisition.

While the management believes that the methodology used in the calculation of Organic Revenue is representative of the performance of the Group, the calculations may not be comparable to similarly labelled measures presented by other publicly traded companies in similar or other industries.

1. The adjustment brings in 2022 pre-acquisition revenue back to the first day of the prior financial period for the acquired Terminix entities.

2. Revenue from completed acquisitions in the current period.

3. Revenue from each business acquired by the Group in the previous financial year through to the 12-month anniversary of the Group's ownership.

4. Organic Revenue Growth includes Organic Revenue Growth for all entities in the Group as at 31 December 2022.

1.The adjustment brings all 12 months of 2021 pre-acquisition revenue for the acquired Terminix entities.

2.Revenue that has resulted from completed acquisitions in the current period.

3.Revenue from each business acquired by the Group in the previous financial year through to the 12-month anniversary of the Group's ownership.

4.Organic Revenue Growth includes Organic Revenue Growth for all entities in the Group as at 31 December 2021 and for Terminix in the period since acquisition on 12 October 2022.

5.Removal of the acquired entities of Terminix 2022 revenue pre-acquisition revenues at current-year exchange rates from the first day of the period to the anniversary of acquisition.

Adjusted expenses and profit measures

Adjusted expenses and profit measures are used to give investors and management a further understanding of the underlying profitability of the business over time by stripping out income and expenses that can distort results due to their size and nature. Adjusted profit measures are calculated by adding the following items back to the equivalent IFRS profit measure:

Intangible assets (such as customer lists and brands) are recognised on acquisition of businesses which, by their nature, can vary by size and amount each year. Capitalisation of innovation-related development costs will also vary from year to year. As a result, amortisation of intangibles is added back to assist with understanding the underlying trading performance of the business and to allow comparability across regions and categories (see table on page 35).

One-off and adjusting items are significant expenses or income that will have a distortive impact on the underlying profitability of the Group. Typical examples are costs related to the acquisition of businesses, gain or loss on disposal or closure of a business, material gains or losses on disposal of fixed assets, adjustments to legacy environmental liabilities, and payments or receipts as a result of legal disputes. An analysis of one-off and adjusting items is set out on the next page.

Net interest adjustments are other non-cash or one-off accounting gains and losses that can cause material fluctuations and distort understanding of the performance of the business, such as net interest on pension schemes and interest fair value adjustments.

Adjusted expenses are one-off and adjusting items, and Adjusted Interest. Adjusted profit measures used are Adjusted Operating Profit, Adjusted Profit Before and After Tax, and Adjusted EBITDA. Adjusted Earnings Per Share is also reported, derived from Adjusted Profit After Tax.

One-off and adjusting items

An analysis of one-off and adjusting items is set out below.

Adjusted Interest

Adjusted Interest is calculated by adjusting the reported finance income and costs by net interest adjustments (amortisation of discount on legacy provisions, and foreign exchange and hedge accounting ineffectiveness).

Adjusted Operating Profit

Adjusted Operating Profit is calculated by adding back one-off and adjusting items, and amortisation and impairment of intangible assets to operating profit.

1. Excluding computer software.

Adjusted Profit Before and After Tax

Adjusted Profit Before Tax is calculated by adding back net interest adjustments, one-off and adjusting items, and amortisation and impairment of intangible assets to profit before tax. Adjusted Profit After Tax is calculated by adding back net interest adjustments, one-off and adjusting items, amortisation and impairment of intangible assets, and the tax effect on these adjustments to profit after tax.

1. Excluding computer software.

Adjusted EBITDA

Adjusted EBITDA is calculated by adding back finance income, finance cost, share of profit from associates net of tax, income tax expense, depreciation, one-off and adjusting items, and amortisation, impairment of intangible assets and other non-cash expenses to profit for the year.

1. Excluding computer software.

Adjusted Earnings Per Share

Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of shares in issue during the year, and is explained in Note 6 to the Financial Statements. Adjusted Earnings Per Share is calculated by dividing adjusted profit from continuing operations attributable to equity holders of the Company by the weighted average number of ordinary shares in issue and is shown below.

For Adjusted Diluted Earnings Per Share, the weighted average number of ordinary shares in issue is adjusted to include all potential dilutive ordinary shares. The Group's potentially dilutive ordinary shares are explained in Note 6 to the Financial Statements.

1. Excluding computer software.

2. The tax effect on add-backs is as follows: one-off and adjusting items £24m (2022: £20m); amortisation and impairment of intangibles £44m (2022: £25m); and, net interest adjustments £2m (2022: £(3)m).

Adjusted cash measures

The Group aims to generate sustainable cash flow in order to support its acquisition programme and to fund dividend payments to shareholders. Management considers that this is useful information for investors. Adjusted cash measures in use are Free Cash Flow, Adjusted Free Cash Flow, and Adjusted Free Cash Flow Conversion.

Free Cash Flow

Free Cash Flow is measured as net cash flows from operating activities, adjusted for cash flows related to the purchase and sale of property, plant, equipment and intangible assets, cash flows related to leased assets, cash flows related to one-off and adjusting items and dividends received from associates. These items are considered by management to be non-discretionary, as continued investment in these assets is required to support the day-to-day operations of the business. Free Cash Flow is used by management for incentive purposes and is a measure shared with and used by investors. A reconciliation of net cash flows from operating activities in the Consolidated Cash Flow Statement to Free Cash Flow is provided in the table below.

Adjusted Free Cash Flow and Adjusted Free Cash Flow Conversion

Adjusted Free Cash Flow Conversion is provided to demonstrate to investors the proportion of Adjusted Profit After Tax that is converted to cash. It is calculated by dividing Adjusted Free Cash Flow by Adjusted Profit After Tax, expressed as a percentage. Adjusted Free Cash Flow is measured as Free Cash Flow adjusted for product development additions and net investment hedge cash interest through Other Comprehensive Income. Product development additions are adjusted due to their variable size and non-underlying nature. Net investment hedge cash interest through Other Comprehensive Income is adjusted because the cash relates to an item that is not recognised in Adjusted Profit After Tax.

The nearest IFRS-based equivalent measure to Adjusted Free Cash Flow Conversion would be Cash Conversion, which is shown in the table below to provide a comparison in the calculation. Cash Conversion is calculated as net cash flows from operating activities divided by profit attributable to equity holders of the Company, expressed as a percentage. Management considers that this is useful information for investors as it gives an indication of the quality of profits, and ability of the Group to turn profits into cash flows.

Adjusted Effective Tax Rate (Adjusted ETR)

Adjusted Effective Tax Rate is used to show investors and management the rate of tax applied to the Group's Adjusted Profit Before Tax. The measure is calculated by dividing Adjusted Income Tax Expense by Adjusted Profit Before Tax, expressed as a percentage.

1. Excluding computer software.

The Group's effective tax rate (ETR) for 2023 on reported profit before tax was 22.7% (2022: 21.6%). The Group's Adjusted ETR before amortisation of intangible assets (excluding computer software), one-off and adjusting items, and the net interest adjustments for 2023 was 23.8% (2022: 19.7%). This compares with a blended rate of tax for the countries in which the Group operates of 25.1% (2022: 23.7%). The Group's low tax rate in 2023 is primarily attributable to net prior-year tax credits of £12m (2022: £9m).

The Group's tax charge and Adjusted ETR will be influenced by the global mix and level of profits, changes in future tax rates and other tax legislation, foreign exchange rates, the utilisation of brought-forward tax losses on which no deferred tax asset has been recognised, the resolution of open issues with various tax authorities, acquisitions and disposals.

Consolidated Statement of Profit or Loss and Other Comprehensive Income

For the year ended 31 December

1. Taxation includes £106m (2022: £58m; 2021: £50m) in respect of overseas taxation.

All profit is from continuing operations.

Consolidated Balance Sheet

At 31 December

1. Goodwill, right-of-use assets, investments in associated undertakings, contract costs, accrued income, accruals, loans, long-term liabilities, lease liabilities, deferred tax liabilities, and provisions have been retrospectively adjusted in 2022, in accordance with IFRS 3, to reflect measurement period adjustments made relating to the Terminix acquisition (see note 8).

Consolidated Statement of Changes in Equity

For the year ended 31 December

1. £3m net gain (2022 £6m net loss; 2021: £13m net gain) on cash flow hedge includes £28m loss (2022: £137m gain; 2021: £15m loss) from the effective portion of changes in fair value offset by reclassification to the cost of acquisition of £nil (2022: £118m gain; 2021: £nil) and reclassification to the income statement of £31m loss (2022: £25m gain; 2021: £28m loss) due to changes in foreign exchange rates.

Shares of £nil (2022: £nil; 2021: £nil) have been netted against retained earnings. This represents 13.0m (2022: 19.6m; 2021: 9.4m) shares held by the Rentokil Initial Employee Share Trust, which is not consolidated. The market value of these shares at 31 December 2023 was £57m (2022: £100m; 2021: £55m). Dividend income from, and voting rights on, the shares held by the Trust have been waived.

Analysis of other reserves

1. £3m net gain (2022 £6m net loss; 2021: £13m net gain) on cash flow hedge includes £28m loss (2022: £137m gain; 2021: £15m loss) from the effective portion of changes in fair value offset by reclassification to the cost of acquisition of £nil (2022: £118m gain; 2021: £nil) and reclassification to the income statement of £31m loss (2022: £25m gain; 2021: £28m loss) due to changes in foreign exchange rates.

The capital reduction reserve arose in 2005 as a result of the scheme of arrangement of Rentokil Initial 1927 plc, under section 425 of the Companies Act 1985, to introduce a new holding company, Rentokil Initial plc, and the subsequent reduction in capital approved by the High Court whereby the nominal value of each ordinary share was reduced from 100p to 1p.

The legal reserve represents amounts set aside in compliance with local laws in certain countries in which the Group operates. An assessment of this reserve was completed during 2021 and determined that these amounts are no longer required to be set aside. Accordingly, the balance of £10m was transferred back to the retained earnings reserve.

The excess of the fair value of shares issued to fund the acquisition of Terminix over their par value gave rise to a new reserve called a Merger Relief Reserve. Under section 612 of the Companies Act 2006, merger relief is available if certain circumstances are met when a business is acquired by issuing shares to replace already issued shares. This reserve is unrealised (and therefore not distributable), but it may become realised at a later date, for example on disposal of the investment to which it relates or on impairment of that investment (which may occur after payment of a dividend by the investment).

Consolidated Cash Flow Statement

For the year ended 31 December

1. Cash flows from operating activities has been revised in 2023 to show a reconciliation from operating profit to net cash flows from operating activities - part of this reconciliation was previously shown in a separate table in the notes to the financial statements.

2. Interest paid includes the interest element of lease payments of £25m (2022: £10m; 2021: £6m).

Notes to the financial statements

1. Changes in accounting policies

Except as described below, the accounting policies applied in these Financial Statements are the same as those applied in the Group's Consolidated Financial Statements for the year ended 31 December 2022.

The Group has adopted the following new standards and amendments to standards, including any consequential amendments to other standards, with effect from 1 January 2023:

The application of these amendments has had no material impact on the disclosures of the amounts recognised in the Group's Consolidated Financial Statements. Consequently, no adjustment has been made to the comparative financial information at 31 December 2022.

Certain new accounting standards, amendments to accounting standards and interpretations have been published that are not mandatory for 31 December 2023 reporting periods and have not been early adopted by the Group. These standards, amendments or interpretations are not expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions.

Retrospective adjustments to prior year comparatives

In accordance with the requirements of IFRS 3 Business Combinations, 2022 comparative information has been retrospectively adjusted to show the effect of measurement period adjustments arising on the Terminix acquisition during 2023. Further details can be found in note 8.

2. Revenue recognition and operating segments

Revenue recognition

Revenue represents the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Group expects to be entitled. All revenue is considered revenue from contracts with customers as defined by IFRS 15, including job work and sales of goods. Under IFRS 15, revenue is recognised when a customer obtains control of goods or services in line with identifiable performance obligations. In the majority of cases the Group considers that the contracts it enters into are contracts for bundled services which are accounted for as a single performance obligation. Accordingly the majority of revenue across the Group is recognised on an output basis evenly over the course of the contract because the customer simultaneously receives and consumes the benefits provided by the Group's performance as it performs. Job work is short-term contract revenue whereby the period of service is typically less than one month in duration. The performance obligations linked to this revenue type are individual to each job due to their nature, with revenue being recognised at a point in time on completion. Where consumables are supplied separately from the service contract, revenue is recognised at the point the goods transfer.

The transaction price reported for all contracts is the price agreed in the contract and there are no material elements of variable consideration, financing component or non-cash consideration. The Group applies the practical expedient in paragraph 121 of IFRS 15 and does not disclose information about remaining performance obligations because the Group has a right to consideration from customers in an amount that corresponds directly with the value to the customer of the performance obligations completed to date.

Disaggregation of revenue into category, region and major type of revenue stream is shown below under segmental reporting.

Contract costs

Contract costs are mainly incremental costs of obtaining contracts (primarily sales commissions directly related to contracts obtained), and to a lesser extent costs to fulfil contracts which are not within the scope of other standards (mainly incremental costs of putting resources in place to fulfil contracts).

It is anticipated that these costs are recoverable over the life of the contract to which they relate. Accordingly, the Group capitalises them as contract costs and amortises them over the expected life of the contracts. Management takes a portfolio approach to recognising contract costs, and the expected length of contracts across the Group and associated amortisation periods are between three and seven years.

The contract costs recognised in the balance sheet at the period end amounted to £224m (2022 retrospectively adjusted: £215m; 2021: £75m). The amount of amortisation recognised in the period was £121m (2022: £39m; 2021: £30m) and impairment losses were £nil (2022: £nil; 2021: £nil).Applying the practical expedient in paragraph 94 of IFRS 15, the Group recognises the incremental costs of obtaining contracts as an expense when incurred if the amortisation period of the assets that the Group otherwise would have recognised is one year or less.

Contract liabilities

Contract liabilities relate to advance consideration received from customers where the performance obligations have yet to be satisfied. All opening balances have subsequently been satisfied in the year. In most business categories where revenue is recognised over time, customers are invoiced in advance or simultaneously with performance obligations being satisfied.

Segment reporting

Segmental information has been presented in accordance with IFRS 8 Operating Segments. The Group's operating segments are regions and this reflects the internal management reporting structures and the way information is reviewed by the chief operating decision maker (the Chief Executive). Each region is headed by a Regional Managing Director who reports directly to the Chief Executive and is a member of the Group's Executive Leadership Team responsible for the review of Group performance. The businesses within each operating segment operate in a number of different countries and sell services across three business segments.

The LATAM region is combined with Europe in the Group's segment reporting. It is the Group's smallest region and not considered reportable under the quantitative thresholds in IFRS 8. It is combined with Europe as they are similar with respect to economic characteristics, the nature of services provided, the type of customers, methods used to provide services, and language and cultural similarities.

Disaggregated revenue under IFRS 15 is the same as the segmental analysis below. Restructuring costs, one-off and adjusting items, amortisation and impairment of intangible assets (excluding computer software), and central and regional costs are presented at a Group level as they are not targeted or managed at reportable segment level. The basis of presentation is consistent with the information reviewed by internal management.

Revenue and profit from continuing operations

1. Central and regional overheads revenue relates to the wholesale of metalwork and consumables including hygiene and pest control products. It is managed centrally rather than in any region. During 2023, internal management reporting structures changed and revenue and profit have been represented for 2022 and 2021 under the new structure. As a result of this change revenue of £5m and operating profit of £1m was moved from UK & Sub-Saharan Africa - Pest Control to central and regional overheads for each year..

2. During 2023 there were impairment losses recognised in North America related to ROU assets of £nil (2022: £17m; 2021: £nil) and related to property, plant and equipment of £nil (2022: £8m; 2021: £nil).

3. Excluding computer software.

Other segment items included in the consolidated income statement are as follows:

1. Excluding computer software.

3. Finance cost

1. Interest expense on financial liabilities held at amortised cost.

2. Interest payable on foreign exchange swaps including coupon interest payable for the year was £55m (2022: £26m). £12m has been reported in other comprehensive income due to hedge accounting (2022: £8m).

4. Finance income

5. Income tax expense

Analysis of charge in the year:

The income tax expense for the period comprises both current and deferred tax. Current tax expense represents the amount payable on this year's taxable profits and any adjustment relating to prior years. Deferred tax is an accounting adjustment to provide for tax that is expected to arise in the future due to differences between accounting and tax bases. Deferred tax is determined using tax rates that are expected to apply when the timing difference reverses based on tax rates which are enacted or substantively enacted at the balance sheet date. Tax is recognised in the income statement, except to the extent that it relates to items recognised in other comprehensive income or equity. In this case the tax is also recognised in other comprehensive income or equity as appropriate.

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Group's subsidiaries and associates operate and generate taxable income.

Deferred income tax is provided on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the Consolidated Financial Statements. The following temporary differences are not provided for: the initial recognition of goodwill; the initial recognition of assets or liabilities in transactions other than a business combination that at the time of the transactions affect neither the accounting nor taxable profit or loss; and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred income tax is determined using tax rates (and laws) that have been enacted (or substantively enacted) at the balance sheet date, and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax balances are not discounted.

Deferred tax assets and liabilities are offset against each other when the timing differences relate to income taxes levied by the same tax authority on an entity or different entities which are part of a tax consolidation and there would be the intention to settle on a net basis.

Deferred income tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. The amount of deferred tax assets recognised at each balance sheet date is adjusted to reflect changes in management's assessment of future taxable profits that will enable the tax losses to be recovered. In recognising the deferred tax asset in respect of losses, management has estimated the quantum of future taxable profits over the next ten years as this is the period over which it is considered that profits can be reasonably estimated.

A deferred tax asset of £38m has been recognised in respect of losses (2022: £23m), of which £28m (2022: £18m) relates to UK losses carried forward at 31 December 2023. This amount has been calculated by estimating the future UK taxable profits, against which the UK tax losses will be utilised, progressively risk weighted, and applying the tax rates (substantively enacted as at the balance sheet date) applicable for each year. Remaining UK tax losses of £34m (2022: £120m) have not been recognised as at 31 December 2023 as it is not considered probable that future taxable profits will be available against which the tax losses can be offset. Deferred tax assets are expected to be substantially utilised in the next 10 years.

At the balance sheet date the Group had tax losses of £169m (2022: £230m) on which no deferred tax asset is recognised because it is not considered probable that future taxable profits will be available in certain jurisdictions to be able to benefit from those tax losses. Of the losses, £95m (2022: £74m) will expire at various dates between 2024 and 2040.

The cash tax paid for the year was £100m (2022: £77m, 2021: £69m). The cash tax paid is expected to increase in future periods due to the acquisition of Terminix.

6. Earnings per share

Basic earnings per share is calculated by dividing the profit after tax attributable to equity holders of the Company by the weighted average number of shares in issue during the year, excluding those held in the Rentokil Initial Employee Share Trust (see note at the bottom of the Consolidated Statement of Changes in Equity) which are treated as cancelled, and including share options for which all conditions have been met.

For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to include all potential dilutive ordinary shares. The Group's potentially dilutive ordinary shares relate to the contingent issuable shares under the Group's long-term incentive plans (LTIPs) to the extent that the performance conditions have been met at the end of the period. These share options are issued for nil consideration to employees if performance conditions are met.

For the calculation of diluted earnings per share, 18,422 share options were anti-dilutive and not included in the calculation of the dilutive effect as at 31 December 2023 (31 December 2022: 1,290,294; 31 December 2021: nil).

Details of the calculation of earnings per share are set out below:

7. Dividends

Dividend distribution to the Company's shareholders is recognised as a liability in the Group's Financial Statements in the period in which the dividends are approved by the Company's shareholders. Interim dividends are recognised when paid.

An interim dividend of 2.75p per share was paid on 11 September 2023 amounting to £70m. A final dividend in respect of 2023 of 5.93p per share is to be proposed at the Annual General Meeting on 8 May 2024.

The aggregate amount of the proposed dividend to be paid out of retained earnings at 31 December 2023, but not recognised as a liability at year end, is £150m (2022: £130m; 2021: £80m).

8. Business combinations

During the year the Group purchased 100% of the share capital or trade and assets of 41 companies and businesses (2022: 53). The total consideration in respect of these acquisitions was £261m (2022: £4,369m) and the cash outflow from current and past period acquisitions net of cash acquired, was £242m (2022: £1,018m).

During the year, measurement period adjustments have been made in relation to the Terminix acquisition. These have been reflected as a retrospective adjustment of 2022 comparatives in accordance with IFRS 3 as follows:

1. Includes ROU assets

Goodwill on all acquisitions represents the synergies and other benefits expected to be realised from integrating acquired businesses into the Group, such as improved route density, expansion in use of best-in-class digital tools and back office synergies. Details of goodwill and the fair value of net assets acquired in the year are as follows:

1. Goodwill (decrease £16m), contract costs (increase £36m), investments in associates (increase £11m), ROU assets (decrease £5m), provisions (increase £24m), lease liabilities (decrease £8m), loans (decrease £11m), long-term liabilities (increase £11m), deferred tax liabilities (increase £2m), accrued income (decrease £3m) and accruals (increase £5m) have been retrospectively adjusted in 2022, in accordance with IFRS 3, to reflect measurement period adjustments made relating to the Terminix acquisition.

Deferred consideration of £15m and contingent consideration of £43m are payable in respect of the above acquisitions (2022: £22m and £23m respectively). Contingent consideration is payable based on a variety of conditions including revenue and profit targets being met. Amounts for both deferred and contingent consideration are payable over the next five years. The Group has recognised contingent and deferred consideration based on fair value at the acquisition date. A range of outcomes for contingent consideration payments cannot be estimated due to the variety of performance conditions and the volume of businesses the Group acquires. During the year there were releases of contingent consideration liabilities not paid of £nil (2022: £10m).

The fair values7 of assets and liabilities arising from acquisitions in the year are as follows:

1. Contract costs (increase £36m), investments in associates (increase £11m), ROU assets (decrease £5m), provisions (increase £24m), lease liabilities (decrease £8m), loans (decrease £11m), long-term liabilities (increase £11m), deferred tax liabilities (increase £2m), accrued income (decrease £3m) and accruals (increase £5m) have been retrospectively adjusted in 2022, in accordance with IFRS 3, to reflect measurement period adjustments made relating to the Terminix acquisition.

2. Includes £69m (2022: £778m) of customer lists, £nil (2022: £1,292m) of indefinite-lived brands and £11m (2022: £31m) of other intangibles.

3. Includes £1m (2022: £195m) of right-of-use assets.

4. Includes cash acquired of £8m (2022: £322m), inventory of £2m (2022: £48m) and trade and other receivables of £12m (2022: £357m).

5. Includes trade and other payables of £10m (2022: £326m).

6. Includes £12m of deferred tax liabilities relating to acquired intangibles (2022: £447m), £nil of debt that was acquired with the Terminix business and repaid in November 2022 (2022: £749m), lease liabilities of £1m (2022: £207m), termite damage claims provisions of £nil (2022: £353m) and other provisions of £1m (2022: £144m).

7. The fair values of assets and liabilities from acquisitions in the current year will be finalised in the 2024 Financial Statements. These fair values are provisional as the acquisition accounting has not yet been finalised, primarily due to the proximity of many acquisitions to the year end.

The cash outflow from current and past acquisitions is as follows:

From the dates of acquisition to 31 December 2023, new acquisitions contributed £75m to revenue and £10m to operating profit (2022: £422m and £3m respectively).

If the acquisitions had occurred on 1 January 2023, the revenue and operating profit of the combined Group would have amounted to £5,414m and £628m respectively (2022: £5,109m and £444m respectively).

9. Intangible assets

A breakdown of intangible assets is as shown below: