Rentokil Initial plc

Good morning ladies and gentlemen and thank you all for joining us today online. In a few moments Paul will provide you with details of our financial and regional performance for the six months ended 30th of June. I'll then come back to provide a brief update on our markets and businesses before we focus on North America and then take any questions. Please do note that to ask a question today, you will need to dial the separate conference call number shown on the right hand side of this chart. Details are also in today's R&S. So let me just start with a high level summary of the first half. Our performance was in line with expectations, with revenues at a group level increasing by 3.1% to $3.36 billion, and with organic growth of 1.6%. Our international region delivered organic growth of 2.7%, and in North America, organic growth was 1.1%, increasing from 0.7% in the first quarter to 1.4% in the second. We delivered group-adjusted PBT of $418 million and a group operating margin of 15.2%, 120 basis points lower than in the same period last year, reflecting the anticipated year-on-year reduction in North America. Cash flow conversion was healthy and the divestment of our French workwear operations remains on track for around the end of Q3. Now, Paul will cover all of this in more detail shortly. Moving on to North America, on the right-hand side, at the time of our prelims in March, we outlined a number of priorities for this year aimed at improving our inbound lead flow. In particular, we've adjusted our marketing tactics to put greater emphasis on non-paid or organic lead generation. And in the second quarter, we began to use a fuller suite of marketing tactics. We continued to enhance our customer proximity and local visibility. For example, to get improved results from local searches like pest control near me. through the opening of our new satellite branches. And we've now increased the number of these low-cost satellites from 36 at the end of the first quarter to now 100 at the end of Q2. Our brand awareness has also continued to improve up by three percentage points. And importantly, as you can see, we delivered inbound lead growth in our residential and termite business of 6.6% in June, returning to year-on-year lead growth for the first time this year. On the door-to-door sales pilot, while still early days, this is also off to an encouraging start and I'll provide more details later. In the first half, we also continued to improve our data analytics and insights and we now have a more granular branch-level assessment which we're using to support our plan for targeted growth initiatives and for future integration planning. Our focus for the second half is therefore to continue to deliver our Right Way To growth plan focusing on customer retention, on pricing, on trusted advisor leads, on broader marketing, execution, and branding, and on the door-to-door pilot, all with the aim of continuing to build our lead flow, and in particular, to focus on the key area of growing our customer contract portfolio through improved contract sales, customer retention, and pricing. We'll focus on further optimising our satellite branches and rolling out our new locations towards the 150 mark by the year end. And we plan to resume integration in the second half with our commercial branches, as well as deliver a detailed programme of work to make further process system and execution improvements ahead of the 2026 planned branch migrations. Importantly, While our refined timelines may mean not all branches are fully integrated by the end of next year, our expectations of the $100 million cost reduction opportunity from the integration and attaining an operating margin in North America above 20% post-2026 remain unchanged. So with that, now let me hand over to Paul.

Thank you, Andy, and good morning, everyone. I'll run through the key financials of the first half, then move through our regional performance, then explain how our improving data analytics are helping shape our plans to improve our North American performance. Unless I state otherwise, all numbers are on a continuing operations basis, i.e. excluding our France workwear business, which we announced the sale of at the end of May. I will talk more about that later. Any comparative performance will be on a constant currency basis. With the move to dollar reporting, we've also taken the opportunity to simplify and update our constant currency reporting to a more conventional basis. Overall, we've delivered a solid performance, in line with our expectations for the first half. Revenue was up 3.1% to $3,364,000,000, with organic revenue up 1.6%. North America was up 2% or 1.1% on an organic basis as pricing more than offset reduced volumes. Adjusted operating profit was $511 million, a decrease of 4.5%, with the decline in North America more than offsetting higher profits in international. Our group adjusted operating margin was 15.2%. I'm pleased with our free cash flow performance with cash conversion at 93% ahead of our 80% guidance. This was driven principally by improved working capital performance and this remains an absolute priority. Net debt to adjusted EBITDA stands at 2.8 times, up slightly since the year end, reflecting approximately $175 million of adverse foreign exchange impact on period end net debt. We've maintained our half one dividend per share at 4.15 cents, payable on the 22nd of September to shareholders on the register on the 15th of August. Looking now at our performance in North America, where we saw revenue up 2.0% to 2,106,000,000. Organic revenue grew 1.1%, with quarter two at 1.4%, up from quarter one, which was 0.7%. Adjusted operating profit was $356 million, down 7.3%, bringing the adjusted operating margin to 16.9%. This principally reflects cost inflation and lower volumes, despite continued good price realisation. It was pleasing to see colleague retention increased 1.4 percentage points to 80.7%, and customer retention also improved to 80.5%. And as Andy will talk about more, lead flow returned to growth in June for the first time this year, up 6.6%. We acquired eight businesses with combined revenues of approximately $18 million in the year prior to purchase. One of our team's priorities has been to improve our data analysis so we can get to the heart of our recent performance issues. And we're starting to see the benefit of the work we've been doing. We now have better data on a branch by branch basis, which will allow us to drive improvement in underperforming branches and also refine our integration activities as we move forwards. As we analyse our branches, the sales performance differentials are characterised by wide variations in lead flow and customer retention. Pricing performance, however, is very consistent across the portfolio. We can see clearly that where our lead generation and customer retention processes are working well, we're delivering strong and sustained organic growth, well ahead of market growth. In terms of driving lead growth, we are refocusing our marketing budgets towards organic lead generation. We now have 100 satellite branches in operation, up from 32 at quarter one, and we expect an additional 50 by year end. and our summer door-to-door sales pilot is showing encouraging early progress. In terms of integration, in the second half we will restart with standalone, mainly commercial branches, and complete a detailed program of work to make process, system and execution improvements in previously migrated branches, where lead flow and customer retention are not yet at their required levels. Our expectations of the circa $100 million cost reduction opportunity from the integration and attaining an operating margin in North America above 20% post-2026 remain unchanged, but our refined timelines may mean not all branches are fully integrated by that time. Moving to our international business, which encompasses all regions outside North America. International revenue was $1,251,000,000, a 5.1% increase year on year. Organic revenue grew by 2.7%. Pest control organic growth was strong at 3.8%, while hygiene and wellbeing grew slightly more steady at 1.1%, as the UK and Pacific businesses saw more challenging market conditions. We saw our strongest performance in Europe and Asia MENAT, driven by pricing and growth in southern Europe, India and Indonesia. In the UK, a strong core pest control performance was negatively impacted by UK property services, which was impacted by the slowdown of the UK commercial property market and tightening local authority spending. Adjusted operating profit for international increased by 4.6% to $242 million. The adjusted operating margin remained broadly unchanged at 19.3%, reflecting strong pass-through pricing. Europe and Asia MENA delivered solid profit growth, aided by pricing and scale in India and Indonesia. The UK and Sub-Saharan Africa saw strong margins despite a challenging macro backdrop. We achieved excellent colleague retention rates of 90.4% and customer retention remained strong at 85.2%. We continued our bolt-on M&A program, acquiring 10 businesses with total annualized revenues of approximately $17 million. At the end of May, we announced an agreement with HIG Capital for the sale of our France workwear business. Strategically, it reinforces our focus on our core pest control and hygiene and wellbeing sectors, and financially it increases our cash generation going forward. The transaction values French workwear at a gross enterprise value of approximately €410 million, including an earn-out mechanism of up to €30 million, linked to the business's performance in 2026. Total net cash proceeds are expected to be approximately €370 million, and completion of the sale is expected to occur later in Q3 or early in Q4. From an accounting perspective, the business has been classified an asset for sale since the 31st of May 2025, and as you will see, it is reported as a discontinued operation in our half-year 25 financials. Assets held for sale are not depreciated, so this will reduce depreciation by approximately $50 million to $60 million this year within discontinued operations, depending on when the transaction completes, and by approximately $80 million annually. In the half year, there was around an $8 million depreciation benefit. The sale will add approximately 100 basis points to our cash conversion ratio and reduce capital expenditure by approximately $100 million on an annual basis. Turning now to group cash flow. There was a strong performance with free cash flow conversion of 93% ahead of our guidance of 80%. The main driver was the working capital performance with an improvement of $64 million year on year as we focus on managing creditors, debtors and inventory levels more tightly. The movement on provisions of $40 million predominantly reflects the increase in the provision for termite damages claims, which I will cover in a moment. Cash costs in relation to claims in the half year were similar to last year. Net capital expenditure was $88 million for the period in line with last year. Lease payments amounted to $90 million, also very similar to last year. On the financing side, cash interest payments of $106 million decreased by $25 million compared to the previous year. This was driven by a change in the timing of some of our bond interest payments. Cash tax payments were $43 million, an increase of $7 million year on year. M&A remains an important part of our growth strategy, and cash spent on current and prior year acquisitions totalled $83 million. Dividend payments amounted to $198 million. The cash impact of one-off and adjusting items was $48 million compared to $52 million in the first half of last year, largely attributable to Terminix integration costs. We issued two inaugural dollar bonds in April, raising $1.25 billion, significantly extending the tenure of our debt. We used $700 million of the proceeds to repay a corporate bond due to expire later this year. The significant movement in the euro to dollar exchange rate between the year end and this period end added approximately $175 million to our net debt, based on the rate at the end of June. As I mentioned earlier, maximising our cash and cost efficiency is very much a priority for the team. We have made good progress in working capital through focusing on disciplined execution and we will continue to focus on this. Full year working capital outflow expectations continue to be in line with our previous guidance of a 75 to 85 million dollar outflow, albeit we will aspire to do better than this. The sale of France workwear will mean around $100 million less annual capex going forwards. M&A remains a key growth enabler and we now expect to invest a total of $200 million this year. We continue to look to improve efficiency in our cost base. We have multiple programs underway including headcount reductions, procurement initiatives and some offshoring. We are continuing to see significantly fewer filed termite warranty claims. Our open termite claims have also reduced by 23% compared to half one 2024. However, in the first half of this year, we saw an increase in the number of complex litigated claims outside of the Mobile, Alabama area and a 9% increase in the cost per termite warranty claim in the period. as our proactive strategy to solve customer problems and reduce litigation continues, and as we resolve several large legacy claims. As a result, the provision in relation to such claims has increased from $236 million at the period end to $276 million at half one 2025. I won't go through this slide in detail, but to note, this is on a continuing operations basis for the full year, compared to our previous guidance which was for the whole group. In summary, we have delivered an in-line performance in the first half with a strong conversion of profit into cash. We continue to improve our data analytics, which will help us drive North American performance going forwards. It's early days, but we're seeing encouraging recent lead flow from our growth initiatives, which Andy will talk more about shortly. We continue to make progress on our cost efficiency programs and in optimizing our working capital, while the sale of France Workwear makes us a more focused cash-generative business. As we look at the remainder of the year, we expect to perform in line with market expectations. Thank you, I'll now hand you back to Andy.

Thank you Paul. Over the next few minutes, I'm going to cover off a few important topics. First, I'm going to remind everyone what excellent markets we're in and take a look at their long-term growth rates. After that, I'll show that we've got an excellent opportunity in our international region, which now accounts for 37% of the group, before shining a light on North America. Whilst around 80% of our North American business is our pest business, the other 20%, which rarely gets a mention, is our excellent business services companies, and they're all performing well. That will then leave us with our US pest business, which is 25% made up of one-off jobs, but 75% of which is our contract portfolio. Getting the contract portfolio into consistent and healthy growth is our core challenge and our core opportunity. So I'll spend a fair amount of time discussing the three areas that we have to win in to achieve that contract portfolio growth. And those being customer retention, pricing, and vitally important, winning new customer contracts. So let's get underway, and I'll start with pest control, which accounted for 83% of group revenues in the first half. Over the past decade, the global pest control industry is estimated to have virtually doubled from $14.4 billion in 2014 to $27.3 billion in 2024, a CAGR of 6.6%. And in North America, market growth has broadly matched that of the international region at around 6.5%. This global growth was driven by key factors such as increased regulation and legislation, urbanization, the rise of the middle classes, consumer demand for higher hygiene standards, and the impacts of climate change. Now, encouragingly, The forecast growth for the next 10 years remains very healthy, with the latest independent market forecasts projecting market growth levels will broadly double again in line with the past 10 years at a CAGR of around 6.2%. We therefore expect the value of this incredible global industry to reach approximately $50 billion by around 2034. In hygiene and wellbeing, which accounted for 17% of group revenue in the first half, we hold a global leadership position in core hygiene services across 70 markets. We offer industry-leading products in hand, air and in-cubicle hygiene, and we're increasing our focus on washroom dignity and services for an ageing population. As well as shared operational and functional overheads, this business shares operational efficiency opportunities with pest control, deploying the same technologies, aggregating its procurement purchases, and often cross-selling services across the combined customer base. With future market growth expected at around 4%, the business is also well placed for long-term growth above expected GDP levels. So we're operating in two very healthy global markets. So now let's drill down a level and look at our reporting regions. And I'm going to start with international. The international region accounted for 37% of our group revenues in the first half. and it comprises high-quality businesses in largely non-cyclical markets across 87 countries in Europe, the United Kingdom, Asia, MENA, Latin America and the Pacific. And we're a leader in pest control in key future growth markets such as India, China and Indonesia. Pest control accounts for around 60% of the revenues in international. This is a region with strong core markets, and here we're focused on driving growth through global accounts, through our industry-leading innovations, the rollout of our connected technologies, and through our excellent M&A program. Our second reporting region is, of course, North America, which delivered 63% of our group revenues. As you can see on the right hand side, 81% of our $2.1 billion of revenue in the first half came from pest control and 19% from business service operations. Our North America region has strong fundamentals. The continued improvement in colleague retention up by a further 2.9 percentage points, good progress on customer satisfaction with customer retention now at 80.3% ahead of the 79.3% for the same period last year and a combination of powerful national, regional and specialist brands. So let's drop down the level again and I start with business services. These are strong, well-run businesses that are operated independently of our US pest control business and they each have deep expertise in their respective specialist areas. Ambious for interior planting, VDCI for public sector mosquito vector control, Solitude for lake management, Steritec for food hygiene and brand standards auditing, Target, which is our pest control and turf and ornamental products distribution business, and our Canadian pest control operations. And in the first half, These businesses generated revenues of around $400 million with an organic growth rate of 5.8%. So a very encouraging first half in business services. These are excellent businesses. They're operating in strong markets and they've got good future growth prospects as noted on the slide. So turning now to U.S. pest control. And let me start with one-time jobbing revenues. In our US pest control business, roughly one quarter of our revenues come from one-time jobs. Now, these could be something straightforward, such as a residential wasp nest job for a new residential customer, or it could be something like a significant bird-proofing job for an existing commercial customer. One-time jobs are typically easier to sell than contracts, and in the first half, our jobbing revenues were up 3.6%, 1% being organic growth. Over 40% of our jobbing revenues typically come from upselling services to existing contracted customers, which is why our Trusted Advisor Technician Lead program is so important, with the other 60% of jobbing revenues coming from new customers who do not currently have a contract with us yet. Looking at our trusted advisor technician lead program, we've driven technician participation rates from around 40% in 2023 to around 50% in 2024. And now, as at the end of June, rates have reached 64%. with all five US markets now operating at or over the 60% level. On Internet leads, we refocused our marketing spend and we've supported SEO with new digital content, improved local web pages, as well as with direct mail and email campaigns to new and existing customers. Whilst on job pricing, our focus is on improving the basics in areas such as new product launches, as we introduced innovations for both upselling to existing customers and targeting new customers, rate card harmonisation across our brands and readiness to support seasonal promotions and campaigns. Whilst we're far from satisfied with our level of job sales so far this year, we believe we have a solid plan focused on better leads from digital marketing and from our trusted advisor program, together with the better use of our pricing lever. So let's drill down again and focus on what I see as our main challenge, and that is growing our contract portfolio. The benefits of our subscription style contract business are significant, with a certainty of having around 75% of revenues on contract, unlike many other business models which start with zero revenue on the 1st of January. We can also apply our annual price increases and we can plan our operational routes more effectively. In the first half, we delivered contract revenue of around $1.3 billion. But as you can see, this declined very slightly year on year by 0.2% if we remove acquisitions. So clearly, contract revenue is our biggest challenge, but it's also our biggest opportunity. And our focus here is on three key drivers, on customer retention, on annual pricing, and on new contract sales. On customer retention, our Drive to 85 program is designed to transform our customer retention capability over time. And in the first half, we saw an overall improvement in retention of 100 basis points, now sitting at 80.3%. Whilst we're pleased to see progress made, our overall ambition for customer retention over time is to drive it up towards 85%, closer to the average for the rest of the group. In terms of the Drive to 85 program, our team is focused on getting the basics right, on service adherence, on speed of sale to install, on customer communications, and on billing and scheduling. We've invested in our customer saves team and this has been instrumental in our efforts with the team improving its performance now for six months in a row and with saves up from 20% in January to 26% in June. And we're also developing a predictive churn model which will assign a customer risk score to each customer and so enable us to take a more proactive approach to potential future churn. So in summary, we're making progress in customer retention, we've got a clear ambition, and we've got a clear plan to achieve it over time. Turning now to the second leg of achieving contract portfolio growth, that of pricing. And here we're making good progress with strong pricing discipline to both new and existing customers, achieving price increases in the first half above the rate of inflation. However, we've got an opportunity to go further and we've added leadership with our first Vice President of Pricing, who is now assembling a small team dedicated to a smarter and more sophisticated approach to pricing. Having identified that price increases are stickier with customers who pay us by bank autopay, we've now successfully tested new autopay adoption tactics, increasing penetration from around 52% to 60%. The third leg of achieving contract portfolio growth is is to win more new contract customers. And to do this, as I've explained previously, we need to improve our inbound lead generation through a broader range of marketing and brand initiatives. Historically, we've been overly reliant on paid for digital channels, which whilst effective in many respects, has limited our overall lead generation potential and has incurred higher associated cost per lead. Our renewed focus is on a broader range of full funnel lead growth activities. In the second quarter, spend has been refocused on awareness channels like Meta and YouTube. This shift is designed to maximize the benefits of our marketing spend and drive an increased volume of inbound new customer leads. We've also launched a comprehensive program to bolster our local online presence. In the first half, we've added around 200 local web pages of new content, significantly increasing our local share of voice in key markets. Overall, we've implemented 20 initiatives to target a broader channel mix to support both national and regional brands and ultimately to drive increased lead flow. We also recognised a historic underinvestment in building our brands, which is critical for long-term sustainable growth. This shift is already yielding positive results with our June brand health report showing Terminix's top-of-mind awareness up 4% to 32% and a total unaided awareness up 3% to 54%. Now let's turn to the rollout of our satellite branches. This is a key component of our local market penetration strategy and is proving to be an important part of our paid and organic search strategy. We launched the first wave of pilot satellite branches late last year and in the first quarter of this year. Obviously, it takes time for these new branches to be effective. I'm pleased to report that this first 25% of these satellite branches are fully optimized, are generating good lead flow, and importantly, they're also profitable. By the end of June, we had 100 satellite branches operational, and we're making good progress towards having around 150 satellite branch locations by year end. The performance of these locations continues to increase as they mature and build their number of local five-star reviews. So branches that have been live for 90 days or more significantly outperform new locations, averaging approximately three times more leads per month and demonstrating the importance of establishing a strong local presence and building brand awareness. And here you can see the outcome of our targeted actions taken in the second quarter. with residential and termite inbound lead generation up by 6.6% in the month of June and so delivering positive lead flow growth for the first time this year. Whilst it's too early to be certain that this encouraging performance will continue throughout the third and fourth quarters, we are certainly encouraged by what we're seeing. As well as actions to drive inbound digital leads, we launched our door-to-door pilot in the second quarter, operating across 23 branches. And this program is off to an encouraging start. The pilot is primarily focused on residential contract sales, specifically our pest-free 365 plans, which offer comprehensive protection from the main pest types, along with targeted upselling of services for ticks and mosquitoes, for example. As of June 30th, the pilot had already generated approximately $12 million in annualized sales and contributed about $2.2 million in revenues during the period. The pilot will continue throughout the summer with a planned full-scale deployment being in scope for next year. So a quick recap here. We operate in highly attractive structural growth markets with healthy 10-year outlooks. We have an unrivalled footprint in the markets outside of the US and in the US we have an excellent portfolio of standalone operations in business services which are performing well. In the US pest control market, the long-term growth trends look set to continue. We're the largest operator in that market, but we've been underperforming over the last two years. We've got a plan to improve our one-time jobbing performance, which accounts for about a quarter of those revenues. However, the foundational need here is for us to get our contract portfolio into healthy long-term growth. And to do this, we need to be successful in three key areas. Firstly, in customer retention. where we have a plan to get from 80% towards 85% over time and where we've seen progress over recent months. Secondly, on pricing, where we're also making good progress. But most importantly, on sales of new customer contracts. where we've seen some areas of progress in the second quarter, but where we need to continue to execute more effectively to drive up more leads and to convert more of those leads into sales over the coming quarters. So I'll finish with this final summary slide. There's no change to our four-year guidance. We remain very focused on growth. The integration restarts shortly, starting with our more straightforward commercial branches. And we're confident that our North American business will be operating at a 20% plus margin post 2026. Thank you very much. We will now open it up for questions. As I said at the beginning, please submit your questions via the questions tab online or join the conference call using the numbers provided and the access code. We'll pause just for a moment for the operator to line up the questions. Thank you very much.