Rentokil Initial : Preliminary Results Transcript

As I just mentioned, our second half Organic Revenue performance in North America was below our expectations at 2 per cent and at 3.5 per cent for the full year. At the heart of this was a reduction in inbound sales leads, contributed to by a range of factors, including the performance of our own digital marketing channels, the impact of our ongoing integration activities, increasing spend by a number of competitors and a softer consumer market - and I'll come on to explain this in greater detail shortly.

Having analysed our organic growth performance in the second half, we've created a detailed plan and put in place a very talented and experienced sales and marketing leadership team, ahead of this year's pest season.

We're calling this our RIGHT WAY 2 Growth Plan and it aims to enhance our performance across all aspects of organic growth in North America - from both new and existing customers, and, in particular, to increase our inbound lead flow.

We are investing for growth, with around 25 million dollars being put to work to support our growth ambitions, with investments into the team, into sales leads from technicians and into our digital channels. This also includes our first advertising campaign to exploit Terminix's position, as the most recognised pest control brand in the United States.

Whilst we've got a very clear action plan which we are beginning to execute now, it will take some time to get the business to the levels of organic growth that we expect. And as such, we are expecting Organic Growth in North America to be between 2 and 4 per cent in 2024, with around 2 per cent expected in the first quarter.

Touching very briefly on the excellent progress we are making on the integration: we have now completed Phase One, and we've exceeded our 2023 synergy target by 9 million dollars; our branch co-locations are going very well with around 100 fewer branch properties, and with a further 75 or so to be exited this year; and we have announced today that we are increasing our gross synergy target by 50 million dollars to around 325 million dollars; we're investing 25 million of that into sales and marketing; which results in our total net synergy target increasing from 200 million dollars to around 225 million dollars. We are also extending the branch integration phase into 2026, to derisk the programme and to deliver these greater synergies.

As a reminder, our original plan was to deliver net cost synergies of 150 million dollars by the end of 2025; and our latest plan takes us to 187 million dollars by that point, and then onto the 225 million by the end of 2026.

So, a good overall performance, a plan in place to reinvigorate organic growth in North America, and an increase in our gross synergy target of 50 million dollars.

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So with that let me hand over to Stu.

Stuart Ingall Tombs: Thank you Andy and good morning, everyone. I'll run through the financial highlights of what has been another good year. I'll start with the Group level numbers, and then as usual I'll move through the regions and then look at cash and the balance sheet. Unless I state to the contrary, all numbers are at constant rates of exchange.

The business delivered a good topline performance in the year. Revenue was up 45.8% to

5.4 billion pounds. Organic Revenue was up 4.9% supported by performances in Europe, Asia, Pacific, and the UK & LATAM. This translates to an adjusted operating profit of eight hundred and ninety seven million pounds, a year-on-year increase of 57%.

Free cash flow in the year of five hundred million pounds, up 34% on 2023, flows from the good profit performance. This represents about 89.4% adjusted free cash flow conversion. It's inclusive of legacy termite warranty claims, but excludes the impact of one-off cash flows mostly related to the Terminix transaction. These factors, combined with the continued success of our bolt-on M&A programme and the dividend payment resulted in a net debt to adjusted EBITDA ratio at year end of 2.8x, achieving our target of below 3 times one year ahead of our initial guidance. Excluding one offs we achieved just under 2.6x, so only just in excess of our medium term target of 2 to 2.5 times.

At AER, Diluted Adjusted EPS was up 8.8% to 23.08p but at CER, Diluted Adjusted EPS was actually up 12.9%. Based on a good full-year performance, the Board has recommended a final dividend for the year of 5.93 pence per share to bring the total dividend for 2023 to

8.68 pence per share, a 15% rise year on year and in line with our progressive dividend policy.

So, looking now at our performance by region, starting with North America.

Our North American business grew revenues by 79.2% in the year, of which 3.1% was organic. This was achieved alongside significant progress in the Terminix integration. Organic Revenue growth in Pest Control was 3.1% and 3.5% for Pest Control Services for our commercial, residential, and termite customers. This result was below our expectations, largely owing to lower new business lead generation in H2.

As anticipated, the weaker Q3 2023 growth performance continued into the low season of Q4 at 1.2% for pest services, however, Q1 2024 is expected to be at about 2%. We expect full year Organic Revenue growth in North America to be in the range of 2 to 4%. We've put in a plan, RIGHT WAY 2, to reinvigorate organic growth in North America, and Andy and Brad will take you through this later in the presentation.

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Adjusted Operating Profit in North America was up 95.9% to £618m reflecting the combined impact of higher revenues and the Terminix acquisition. Strong price realisation continued to successfully offset expected inflationary pressures. Adjusted Operating Margins were up 160bps year on year to 18.7%. We've continued to make good progress in colleague retention in the region. Total retention, including Terminix was up by more than 5 percentage points.

Total customer retention in North America increased slightly to 79.5%. Despite the attention given to the Terminix transaction, we've had another good year for bolt-on M&A in North America, acquiring 13 businesses with combined annualised revenues of around £46m in the year prior to the purchase.

The next slide takes a look at the strong progress in North American Margins.

To look at the underlying margin improvement, here we've used the proforma baseline in 2022 of 16.3% including the annualised standalone Terminix margin of 14.7% we disclosed at 2022 prelims. On this basis, we see that North America margin has increased by 240 basis points in the year. This progress was driven by two key factors. Firstly, trading activities including growth and density improvements, contributed about 100 basis points of margin. Secondly, synergies delivered 56m dollars - that's about 45m pounds - adding about 140 basis points to margin. And you can also see that once we exclude the distribution business, adjusted operating margins are already in excess of 20%.

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.

Turning now to the European region. A really strong performance across the board here. Driven by both effective price increases and good demand, Revenue rose by 14.6%, passing 1 billion pounds, a significant milestone. Organic Revenue growth was 9.2%. All three business in Europe posted strong numbers. Pest Control Revenue was up 21.8%. Hygiene and Wellbeing grew by 5.8%. France Workwear, which continued to exceed pre-COVID performance levels and was supported by new business sales was up 13.2%.

Adjusted Operating Profit rose by 12.5%. In Europe, as expected, short-term H1 margin pressure reversed in H2. The H1 impact and hyperinflation in Argentina saw a slight reduction in the Adjusted Operating Margin for the year 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

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remained strong and the region has delivered some really impressive numbers in colleague retention, now over 90%.

There was a total of 11 business acquisitions made last year, with annualised revenues of around £12m in the year prior to purchase.

Turning to the UK and Sub-Saharan Africa. The region delivered good results against a difficult macro backdrop. Revenue was up by 7.9%, with organic growth of 3.5%. Within this, Pest Control was up 8%. Hygiene and Wellbeing increased 7.7%, despite lapping COVID boosted comparators in the medical waste business. There was a good 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 property market slowdown.

Regional Adjusted Operating Profit was down slightly by 0.5% to £95m, with a margin reduction to 24.1%. As previously stated, margin performance in the first half of the year was affected 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, as expected these factors mostly fell away in H2.

Inflationary pressures have been significant, but the region's long-established pricing and margin management controls have delivered a price performance that mitigates these cost increases. These price increases have been delivered alongside an improved customer retention rate. Colleague retention was also up strongly. The region completed 2 business acquisitions in the year, with annualised revenues of about £18m.

Looking now at Asia and MENAT. The year saw a good performance led by the region's largest markets, India, Indonesia, Malaysia and Singapore. Markets overall remained structurally supportive and there was a more positive contribution from China. Regional Revenues rose by 11.2%, of which 10.2% was organic. Adjusted Operating Profit in Asia increased by 4.0% to £47m and Adjusted Operating Margin was down 100bps to 13.1%, affected by the anticipated reduction in COVID disinfection revenues.

Customer retention was slightly down on the prior year, while colleague retention was considerably improved. The region acquired 7 businesses with total annualised revenues of around £8m.

And finally, turning to the Pacific region. Another strong trading performance here. Regional Revenue increased by 15% of which 6.8% was organic. Pest Control was up 25.2%, with notable strength in commercial services. Hygiene and Wellbeing was up 6.4%. We've had continued good demand in the region for Ambius services.

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Regional Adjusted Operating Profit was up by 19.8%, with an increase in Adjusted Operating Margin of 90bps to 21.7%. The customer retention rate remained strong. And colleague retention in the region saw a marked improvement. The region acquired 8 businesses with total annualised revenues of around £22m.

So that's a rundown of our regions, which as you can see have performed well overall in the year and evidence the benefit of our group's worldwide presence.

The next slide looks at our Group margin development through 2023. Overall, Group Adjusted Operating Margin increased by 120 basis points. Execution on our strategy - densifying routes and products, M&A, optimising overheads, and leveraging technology - as well as active cost management, continues to effectively support margin expansion.

Our overall trading performance contributed a net 90 basis points and in the first full year of the Terminix integration, synergy delivery added 100 basis points to Group margin. As can be seen from the chart on the right hand side, that more than offset the 70 basis point proforma underlying impact of the inherited lower margin Terminix business.

Across our geographies, we've the persistence of inflationary cost pressures, most notably, wage inflation. But we continue to be very successful and remain focused on our ability to mitigate increases through pricing.

In line with the updated integration timetable, about which Andy will speak in a moment, the medium term Group margin target of greater than 19% is now expected to be achieved in 2026.

Now looking at our cash performance. Adjusted EBITDA was one point two eight billion pounds, up 43% year on year. Non-cashone-off and adjusting items represent Terminix related one-time share incentive schemes and asset impairments.

The working capital outflow was largely attributable to growth and the movements in provisions relate to termite warranty claim settlements which were at the expected levels. Net capital expenditure of £197m was incurred in the period, reflecting growth and the inclusion of Terminix capital expenditure. Lease payments were up by 45.2% reflecting a full year of Terminix.

Cash interest payments of £166m were £127m higher than in prior year, reflecting the timing of interest charge payments relating to the financing of the Terminix transaction with phasing as described at the interims and to be repeated each year. The increase in cash tax payments reflects higher profits. Free Cash Flow of £500m was £126m higher than in Full Year 22. This resulted in Adjusted Free Cash Flow Conversion of 89.4%, at the upper range of our guidance.

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There was a £242m cash spend on acquisitions in the year. Dividends account for £200m of cash spend and the £107m cash impact of one-off and adjusting items largely related to Terminix.

Net debt reduced by £133m to £3.146bn. This resulted in a Net debt to EBITDA ratio of 2.8x at year end, achieving our target of below 3 times one year ahead of schedule, and that included a marginal benefit from USD FX rates at year end. Note that excluding integration costs to achieve, leverage would have been less than 2.6x. Our next debt maturity is a 400m euro bond due in November. About 81% of the Group's interest costs are fixed, providing good visibility in a volatile rate environment.

In July 2023, S&P Global reaffirmed the Group's BBB investment grade rating and in October 2023 the Group received a second BBB rating from Fitch.

Moving to technical guidance. On this slide, we update some technical guidance to help you with your models in relation to the full year. I'll let you read these in your own time but will draw your eyes to a few items.

On the P&L, we expect Terminix integration costs to be between $90-$100m. Interest is expected to be in the range of £135-£145, that's net of a non-cash hyperinflation credit of £10-15m. Our full year FX guidance reflects the strengthening of the pound against the dollar. We anticipate a headwind of between £25-£35m, which appears to be already largely reflected in market consensus forecasts.

And as shown on the slide, please do note the impact on 2024 of the planned closure of our Paragon distribution business in North America. As already stated, due to the uplifted expected synergies we expect to achieve a group margin of greater than 19% in 2026.

At this point I'll hand back to Andy who will take us through the business category performance.

Andy Ransom: Thanks Stuart.

Right, I want to give the North America section as much time as possible this morning, and so in the interests of time, I'm going to turn the pages on our usual Employer of Choice and business categories at some pace - but I'm delighted at the excellent progress being made, and I'll be obviously happy to take questions later.

Our tried and tested operating model continues to perform very well, and if we start with Employer of Choice, you can see that colleague retention has improved globally by 4.7 per cent - with all regions improving - that equates to around 1,900 more colleagues choosing to stay and therefore fewer roles needing to be recruited for. North America increased

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colleague retention by 5 per cent in the year, and that' really great progress, and I'll come back to that later.

You know how important safety is in our company, and in 2023 we delivered further improvements on our world class safety standards, and we were again recognised by ROSPA with their prestigious Gold Award, for the sixth year running.

Customer service levels were high. Customer satisfaction, which we measure at branch level using the net promoter score, is now approaching world class levels in many parts of the Group, including, indeed, in Terminix.

In ESG, we have made continued good progress on emissions in 2023 and we are again ranked amongst the leaders in our sector - something that's very important to us. As I know

If l now turn to Pest Control, the global market remains very healthy with independent market analysts forecasting growth of around 5 to 6 per cent per annum, through to 2028, which, given our global footprint in around 90 countries, we are ideally positioned to exploit.

Indeed, our focus here has delivered revenue and profit CAGRs of over 20 per cent since 2015, and last year our global pest control business continued its growth journey to around

4.3 billion pounds of revenue, organic growth of 4.5 per cent, and we delivered margin expansion of 70 basis points.

For those of you who operate in US dollars, you can see on the chart here the scale of our global pest control business where we are the number one in all regions around the world, with 5.4 billion dollars of revenue and profits of just over one billion dollars.

Now as you know, innovation in Pest Control is very important to our customers, it's a key growth driver, so let me give you just a few examples of why Rentokil is the global leader in innovation. We now have over 350,000 'Internet of Things' PestConnect units operating in customers' premises, and that's an increase of around 23 per cent year on year; we are launching EcoCatch - that's our new proprietary outdoor fly control solution, which in our innovation centre tests was 60% more effective at catching flies than the current market- leading fly trap; and we've got Lumnia, Lumnia's for indoor flying insect control, and we've sold around 445,000 units since its launch in 2017 - and we are now developing the next generation devices using cameras and AI-based technologies.

These are just three examples of our innovations that differentiate Rentokil from the competition, and each of these will start to be rolled out in North America this year.

Moving onto Pest Control's sister category of Hygiene and Wellbeing. Here, we operate in a resilient market, which we're expecting to grow by around 4 to 5 per cent through to 2028.

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Since 2015, this business has delivered revenue and profit CAGRs of 6.5 and 8.1 per cent, respectively, and during the year, the business delivered revenue growth of 7.8 per cent, of which 4.8 per cent was organic; profits grew by 4.1 per cent and full year margins were 18.4 per cent.

Our core services inside the washroom delivered organic growth of 4.5 per cent last year, and we continued to develop new products which support the increase in the number of 'service lines per premise' - which increased over the last 12 months from 1.83 to 1.92.

Outside of the washroom we delivered organic growth of 5.3 per cent with increased focus on wellbeing services, such as air and surface hygiene, scenting and plants. Whilst M&A in Hygiene and Wellbeing performed well in 2023, with seven deals delivering annualised revenues of 30 million pounds, and that's ahead of our medium-term target to deliver annualised revenues from acquisitions of at least 25 million pounds.

In France, our Workwear business benefited from excellent colleague and customer retention, and delivered Revenue growth of 13.2 per cent; Adjusted Operating Profit grew by 23.6 per cent; and the business delivered margins of 17.5 per cent - which were the highest for at least a decade.

Turning to our bolt-on M&A programme, we delivered 41 deals in 2023 with annualised revenues of 106 million pounds and our M&A programme continues to perform well, at or above our required hurdle rates. We've got a good pipeline in place for 2024, and our current view of M&A spend this year is around 250 million pounds. So, a good overall performance - and now let's move the focus to North America.

Clearly, we're disappointed with Organic Growth delivery in the Second Half, and I am now going to take a few minutes to explain to you how our organic growth model works - both the elements that under performed in 2023, but also the elements that performed well.

Brad will then take you through the plan to reinvigorate growth in a little bit more detail.

So let me start with the US pest control market, that's the world's largest pest control market, and it represents around half of global pest control demand.

Based on our own internal estimations, we believe that the US pest control market grew by around four per cent in 2023, and whilst this is around a one percentage point reduction against the historical average of around 5 per cent, the current consensus of third-party commentators calls for a return to average growth rates of around the five per cent mark, in the period to 2028. And as we think about the future growth of the US pest control market, it is perhaps worth noting that third party estimates suggest that - in residential and termite

• the unserved market is nearly 7 times the current served market, so this represents a significant potential future growth opportunity to expand the size of the market.

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So - here's our model for Organic Growth in pest control and it starts at the top, with strong colleague retention and expertise in our frontline techs and in our sales colleagues. You then have sources of organic growth coming from existing customers, they're running down the left-hand side of the chart there, and sources of organic growth coming from new customers and they're running down the right of the chart.

In short - happy, engaged, well trained, experienced technicians will deliver a high-quality service to our customers, which then, over time, drives up customer retention. Happy customers are accepting of our annual price increases but they are also willing to purchase additional services from us, with our frontline technicians making recommendations to our customers and submitting those as sales leads, to then be sold by the sales team.

Once the sales team has sold the lead, it is important that the technician gets the work order completed quickly, as an urgent response is often very important to our customers. As I'll explain in a moment, revenue from existing customers was not our issue in '23. That said, it is nonetheless clear that we have got an outstanding opportunity to generate improved growth from our very large, existing customer base.

So, what about the right-hand side of the chart - and new customers? Growth from new customers was undoubtedly weaker in the second half of last year, primarily because of lower in-bound sales leads in residential and termite and in our high street business customers. And why was that? Well, our analysis is that there was not a single major cause, but rather a range of contributing factors, collectively impacting on our execution.

As I've mentioned, growth in the market was down, reflecting the tougher economic environment; the performance of our own digital marketing channels was disappointing, at a time when our marketing and sales leadership teams were undergoing considerable change; whilst our service technician retention showed excellent improvement, our frontline sales colleague retention, was flat year on year, and in Terminix, it remains well below where we need it to be; at the same time, some of our competitors were increasing their spend in digital channels; and, in addition, we were clearly very focused on the integration programme, perhaps more than the external market.

So, we've analysed each part of that model that but I've just showed you, but let me put a little more meat on the bones, before I hand it to Brad to take you through THE RIGHT WAY 2 growth plan.

So, let's go back to the model. Was our lower growth caused by colleague retention? Well, no, it wasn't. In fact, colleague retention was up by 5 percentage points in North America last year and, since the deal closed, we have delivered an impressive eight-percentage point improvement in Terminix technician retention. In 2024, as Brad will come on to highlight, there will be no letting up on our focus on this, but we will have a far greater emphasis now

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